-----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, LY/SQM95Z5Uiv+sPq7bROqE+fpG53ONLfD5jFpk+EYURTFRMGFQrtYsPeto+xLTw 4Cb90Gdui1F4RwA8SGRDJg== 0000912057-01-506270.txt : 20010409 0000912057-01-506270.hdr.sgml : 20010409 ACCESSION NUMBER: 0000912057-01-506270 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENCHIRA BIOTECHNOLOGY CORP CENTRAL INDEX KEY: 0000895677 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 043078857 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-21130 FILM NUMBER: 1590215 BUSINESS ADDRESS: STREET 1: 4200 RESEARACH FOREST DR CITY: THE WOODLANDS STATE: TX ZIP: 77381 BUSINESS PHONE: 2813646142 MAIL ADDRESS: STREET 1: 4200 RESEARCH FOREST DR CITY: THE WOODLANDS STATE: TX ZIP: 77381 FORMER COMPANY: FORMER CONFORMED NAME: ENERGY BIOSYSTEMS CORP DATE OF NAME CHANGE: 19940204 10-K 1 a2043676z10-k.txt 10-K ================================================================================ 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, 2000 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to ________ Commission File No. 0-21130 ---------------------- ENCHIRA BIOTECHNOLOGY CORPORATION (Exact name of registrant as specified in its charter) Delaware 04-3078857 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) Enchira Biotechnology Corporation 4200 Research Forest Drive The Woodlands, Texas 77381 (Address of principal executive offices) (zip code) (281) 419-7000 (Registrant's telephone number, including area code) ---------------------- Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Title of Class Common Stock, par value $.01 per share Preferred Stock Purchase Rights 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 by 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. | | The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $16,553,700 as of March 8, 2001, based on the closing sales price of the registrant's common stock on the Nasdaq National Market on such date of $3.50 per share and assuming full conversion of the registrant's Series B Convertible Preferred Stock. For purposes of the preceding sentence only, all directors, executive officers and beneficial owners of ten percent or more of the common stock are assumed to be affiliates. As of March 8, 2001, 9,079,313 shares of common stock were outstanding and 387,700 shares of Series B Convertible Preferred Stock (convertible into 1,156,622 shares of common stock) were outstanding. Certain sections of the registrant's definitive proxy statement relating to the registrant's 2001 annual meeting of stockholders, which proxy statement will be filed under the Securities Exchange Act of 1934 within 120 days of the end of the registrant's fiscal year ended December 31, 2000, are incorporated by reference into Part III of this Form 10-K. ================================================================================ When used in this document, the words "anticipate," "believe," "expect," "estimate," "project" and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, believed, expected, estimated or projected. For additional discussion of such risks, uncertainties and assumptions, see "Item 1. Business--Risk Factors" included elsewhere in this report. Part I. Item 1. Business Overview Enchira Biotechnology Corporation ("Enchira" or the "Company") is developing high throughput in vitro DNA recombination technologies to accelerate development of improved proteins for pharmaceuticals, agricultural and a broad range of industrial applications. However, on March 6, 2001, Enchira received an unfavorable ruling in an arbitration proceeding with Maxygen Inc. ("Maxygen") with respect to certain of its gene shuffling RACHITT(TM) and high throughput screening technologies which could result in costly licensing or royalty fees to Enchira, an outright prohibition of Enchira's use of such technologies or other remedies. Please see "--Enchira's Technology--Gene Shuffling Technology," "--Competition" and "Risk Factors--We Have an Arbitration Proceeding with Maxygen Regarding Our RACHITT(TM) Technology in which We Have Received an Unfavorable Ruling" for a more detailed description of the arbitration and its possible consequences. Enchira is actively pursuing satisfactory resolution of this dispute with Maxygen, pursuant to the arbitrator's ruling, as well as exploring its other alternatives. As a result, at the present time, no assurance can be given that we will continue to be able to use our RACHITT(TM) technology for pharmaceutical or other applications. DNA recombination is a central aspect of sexual reproduction and is the process that enables variation of offspring from parents. It is the reason brothers and sisters within a family can vary so greatly while coming from the same parents and parental DNA. Recombination is the basis for evolution. Enchira believes that the harnessing of this technology will lead to extraordinary improvements in man's ability to alter DNA to address un-met medical needs and many other problems. Traditional molecular methods of altering proteins rely on random mutations (termed "random mutagenesis") or directed mutations (termed "site-directed mutagenesis"), both of which have significant limitations in their ability to alter protein structure. Random mutagenesis typically relies on screening through immense libraries for limited and rare gains in activity. Site-directed mutagenesis can only be applied to limited areas within a DNA sequence, and therefore, produces limited gains in protein activity. Also, there is often inadequate structural knowledge to effectively apply site-directed mutagenesis for most proteins. In contrast, DNA recombination combines genes from parents such that the recombined (or chimeric) DNA molecules code for altered but active protein molecules. It is the basis of the exquisite selectivity of the immune system. Through recombination, the immune system can produce highly specific antibodies and T cells to ward off attack from a vast array of pathogens. Enchira's recombinant DNA technologies can be applied at the molecular level to individual genes, or can be used to extend DNA recombination to gene families, and clusters of genes within operons. This allows Enchira to conduct controlled, directed evolution experiments to change DNA and proteins in previously unfeasible ways and to accomplish the change on an accelerated timescale. Enchira has demonstrated the application of its technology in enzyme improvement for biodesulfurization enzyme pathways and in the alteration of enzymes involved in fluorescence and antibiotic resistance. As a result, Enchira entered into a licensing agreement with Genencor International, Inc. ("Genencor") in May 2000 to use Enchira's directed evolution capabilities to improve the properties of specified industrial proteins. Enchira also collaborates with researchers at The University of Texas M. D. Anderson Cancer Center ("M. D. Anderson Cancer Center") in Houston to alter the binding properties of certain human growth factors that may lead to creation of new therapeutic proteins for treatment of breast cancer. 2 In 2001, Enchira is committed to applying its high throughput in vitro DNA recombination technologies to pharmaceutical applications. Genetic information and other scientific knowledge arising from the human genome project forms the basis for many opportunities to utilize the technology in drug development. Enchira's long-term strategic plan includes both collaborative arrangements in drug discovery applications as well as internal pharmaceutical product development. Enchira seeks to augment its technology platform in the area of bioinformatics, as well as other areas of strategic importance through in-house development and acquisition as such opportunities become available. Enchira's executive offices and laboratories are located at 4200 Research Forest Drive, The Woodlands, Texas 77381. Enchira can be contacted by phone 281-419-7000, fax 281-364-6112, or by e-mail (info@enchira.com). Enchira's website is located at www.enchira.com. Enchira's Technology Gene Shuffling Technology Enchira has developed high throughput DNA recombination technologies for "directed evolution." These technologies harness the power of genetic recombination, which is largely the basis for evolution of all species. This technology enables directed changes of DNA encoded materials to desired genotypes and characteristics in ways previously unfeasible. The power of DNA recombination lies with its ability to recombine DNA in ways that lead to functionally modified but active proteins. Because genes encode an extremely broad array of proteins, the application of this technology is also broad -- ranging from industrial proteins to altered agricultural products to improved therapeutics and gene therapies. Each of these applications varies with respect to the speed with which products can be developed, the technical challenges required for successful commercial development, and the profit margins on commercialized products. With Enchira's recombinant DNA technologies, different genes and gene fragments from diverse sources with similar characteristics are recombined in a controlled laboratory setting. This process generates combinatorial libraries of new chimeric genes that will direct the synthesis of novel proteins. The term "chimeric" refers to a gene composed of fragments from multiple sources. Enchira's technology platform for directed evolution and product development includes proprietary methods of creating genetic diversity, a suite of recombinant DNA methods, expertise in developing sophisticated, high throughput screens, biocatalysis and metabolic engineering experience, and expertise in protein-based therapeutics for oncology, bioinformatics, proteomics, and molecular modeling. The Enchira toolbox of recombinant DNA methods includes techniques appropriate for differing conditions of gene size (single gene, gene famility, operon) and the desired degree of chimeragenesis. Enchira has demonstrated the application of its technology in oxygenase enzyme improvement and in alteration of enzymes involved in fluorescence and antibiotic resistance. One element of the current technology platform is the RACHITT(TM) gene shuffling method. The RACHITT(TM) name is derived from RAndom CHImeragenesis on Transient Templates. A schematic diagram of the RACHITT(TM) method is available at www.enchira.com/gene_shuffling. In the first step, a single strand of one gene is chosen as the scaffolding (or "template") for the construction of a new gene. This hybridization-based method then involves annealing (binding) a population of short, single-stranded DNA donor fragments onto the intact, full-length single-stranded scaffold or template. The small, single-stranded fragments of other genes are called Chimerons(TM). These fragments can be recruited from different but related genes or can be similar fragments recruited from other (uncharacterized) genes in the cell. In fact, the "donor" DNA need not be characterized at all, but can be DNA extracted from cells, clinical samples or the environment. After the hybridization step, a complete double-stranded DNA molecule is prepared by using enzymes to trim the overlapping or unbound flaps, fill in gaps, and seal the nicks. In this process, the template aligns DNA fragments such that a library of contiguous chimeric molecules is generated. The transience of the "template" strand is achieved by its specific removal in the next step. This key 3 feature ensures that the final population is composed of only the new, variant genes, free from contamination by the parentals, which would increase the task of subsequent screening and analysis. The last steps involve duplex formation and cloning of the chimeric strands using well-established genetic engineering techniques. Since a large number of possible combinations exist, the resulting pool of molecules represents a large "library" of genetic variants, numbering from the thousands to millions of candidate genes. This procedure can be repeated in a matter of hours after the conditions for particular templates are determined. The candidates are then screened using automation, robotics and robust and predictive micro-assays in a process referred to as "high throughput screening" (HTS), a process which Enchira has used for many years. Successful use of the RACHITT(TM) technique is described in the paper "DNA Shuffling Method for Generating Highly Recombined Genes and Evolved Enzymes," by W.M. Coco et al to be published in Nature Biotechnology, April 2001 edition. On March 6, 2001 Enchira received a ruling in its arbitration proceeding with Maxygen in which the arbitrator found that Enchira breached several provisions of its License and Development Agreement with Maxygen dated May 19, 1997 (the "Collaboration Agreement") with respect to the RACHITT(TM) technology and HTS. As a result, Enchira may be required to pay a cross license fee, royalties or other remedies in order to continue using its RACHITT(TM) technology, or it may be prohibited from further use of and rights in the technology. Please see "--Competition" and "Risk Factors--We Have an Arbitration Proceeding with Maxygen Regarding Our RACHITT(TM) Technology in which We Have Received an Unfavorable Ruling" for further discussion of the arbitration. Enchira believes that its suite of high throughput DNA recombination technologies has significant advantages over other methods of DNA recombination, and that its methods offer faster and less costly means of creating libraries of chimeric genes. These advantages include: 1. Control on the frequency of recombination such that high frequency, high-resolution recombination is possible. For example, RACHITT(TM) has been demonstrated to produce frequencies of recombination events (crossovers) that are at least 5 to 10 fold greater than the published results given for other competitive methods. As such, these libraries contain a substantially greater diversity. 2. Elimination of parental sequences from the recombined libraries. Competing methods of recombination produce libraries that consist of typically 30% to 70% parental DNA. In all directed evolution efforts, a library of recombinant DNA molecules is produced and these libraries are expressed and screened. The screening segment of the directed evolution effort is the most costly and time-consuming segment since the libraries may contain 100,000 to several million recombined DNA molecules that are subsequently expressed to chimeric proteins. By eliminating parental DNA from entering the libraries, screening libraries are smaller, thus reducing waste. 3. Greater control over location of recombination with the RACHITT(TM) hybridization-based method. Hybridization enables more precise control of the locations where recombination may be allowed to occur. If one is working with a target protein that contains sites that one desires to leave unchanged (such as the active site of an enzyme), RACHITT(TM) can facilitate this by limiting recombination to specific regions. 4. Very little DNA preparative work is required before gene shuffling. In the RACHITT(TM) technique, Chimerons(TM) are recruited directly from genomic DNA and introns (intervening sequences that interrupt the coding sequence of a gene) do not need to be excised. Other methods require time-consuming isolation of mRNA and re-creation of the complementary DNA (cDNA) sequence in order to generate fragments for shuffling or reassembly. 5. It is a non-random process that "shuffles" genetic domains that have already demonstrated their relevance. Some conventional methods of creating diversity rely on chemical or other means to randomly create changes (mutations) in the target genes. The mutations in the genes from the Enchira protocols are the result of recombining related sequences to create new permutations. 4 6. Reactions are conducted in a test tube, which allows precise control over the conditions of recombination. In this way, researchers can customize each reaction based on the particular sequences that are to be recombined and the number of "crossovers" (recombination events) that are desired per gene. Other methods do not offer this level of control. Enchira's gene shuffling technologies have provided a robust and versatile platform for expansion of its capabilities, expertise and technologies into areas strongly aligned with healthcare, including protein therapeutics and oncology, industrial proteins, anti-infectives, bioinformatics, and proteomics. Enchira plans to strengthen its platform in these key areas. The Company also plans to apply its directed evolution technologies to development of Enchira's discovery products as well as in an opportunistic fashion to other development projects. Protein therapeutics and oncology Enchira currently collaborates with Professor Mien-Chie Hung, Chairman of the Department of Molecular and Cellular Oncology and Director of the Breast Cancer Basic Research Program at The University of Texas M.D. Anderson Cancer Center. The objective of this effort is to combine Enchira's directed evolution capabilities with Dr. Hung's experience in the molecular biology of breast cancer to create variants of protein ligands that have been evolved to bind cell surface receptors implicated in the most severe cases of breast cancer. A specific objective of this project is to create new variants that bind to a particular growth factor receptor and block signal transduction, thus blocking the proliferation of cancerous cells. Anti-infectives and other products Enchira has a strong historical background in metabolic engineering and has used recombinant DNA technology to create orders-of-magnitude improvements in metabolic flux through microbial pathways. Using the tools of directed evolution, Enchira is working on projects to alter the metabolic flux in an antibiotic synthesis pathway. Enchira believes that these projects may lead to improved antibiotics and more cost effective processes of manufacturing existing antibiotics as well as other products that are produced using microorganisms. Industrial proteins In August 2000, Enchira entered into a collaboration with Genencor International to apply Enchira's directed evolution technology to improvement in certain industrial enzymes. This program utilizes not only Enchira's technology in directed evolution but also its extensive collective experience in developing selections and screens for improved enzyme activity and in the subsequent purification and characterization of the kinetic properties of the variants. Improved versions of industrial enzymes face a relatively short approval process, and Enchira believes such versions could be in the marketplace in 3 to 4 years. Bioinformatics & Proteomics Analysis of the large numbers of improved genes and proteins can lead to a better understanding of the underlying relationships between structure and function. Dr. Tony Gorry, Friedkin Professor of Management and Professor of Computer Science at Rice University, has recently joined Enchira's Board of Directors to strengthen its efforts in this area. Other capabilities and equipment Enchira's technology platform includes sophisticated analytical and high throughput screening capabilities that are used to identify the improved genes that are created through its proprietary processes. Enchira also has a fully equipped fermentation pilot plant that can serve, if necessary, for the production of kilogram quantities of developmental recombinant proteins. 5 Market Overview Enchira believes that its high throughput DNA recombination technologies will be an effective means to improve protein-based therapeutics as well as to improve the biocatalytic routes to prepare a variety of small-molecule drugs and vitamins. Worldwide sales of pharmaceuticals are estimated to be $120 billion, which includes protein-based pharmaceuticals of approximately $20 billion and drugs produced through biocatalysis comprising approximately $10 billion. Enchira's strategy involves a two-prong approach. In the short-term, Enchira plans to apply its recombinant DNA technologies and HTS capabilities to product discovery and development in the pharmaceutical sector through R&D agreements with established companies in the pharmaceutical industry. These projects will provide the shorter-term cash flow necessary to build the company for the achievement of longer-term goals. In the longer term, Enchira plans to utilize its capabilities in directed evolution and drug development to create new drug leads internally for licensing to the pharmaceutical industry. Therapeutic proteins Protein therapeutics represents one of the largest selling classes of therapeutics. Many products within this category address unmet therapeutic needs, and, as such, experience rapid adoption and growth. The high sales potential is evidenced by the $4 billion combined annual sales of erythropoetin by Amgen as Epogen(R), which is used to treat anemia in renal dialysis and by Johnson and Johnson as Procrit(R), which is used to treat cancer chemotherapy patients. Another example is the $650 million sales of Immunex's Embrel(R), a certain inhibitor for treatment of rheumatoid arthritis. Protein therapeutics fall into four broad categories -- hormones, cytokines, serum proteins, and enzymes. Examples in each class illustrate the potential market size and therapeutic importance of these compounds. 1. Hormones. Hormones control many aspects of human development and regulation of the reproductive system. For example, human growth hormone is a 191 amino acid protein that is used to treat children who lack adequate endogenous growth hormone secretion, patients with chronic renal insufficiency, and patients with Turner syndrome. Human growth hormone is a $1.5 billion product developed by eight companies in the U.S. Interleukin-11 (IL-11) is a thrombopoietic growth factor comprising 177 amino acids that acts to increase blood platelet production. IL-11 is indicated for the prevention of severe thrombocytopenia (low platelets) and the reduction of the need for platelet transfusions following myelosuppressive chemotherapy in patients with nonmyeloid malignancies. 2. Cytokines. Cytokines are proteins secreted by cells to regulate immune system inflammatory responses. Interferons, a large class of cytokines, are a family of naturally occurring small proteins and glycoproteins with molecular weights of approximately 15,000 to 27,600 daltons that are produced and secreted by cells in response to viral infections and to synthetic or biological inducers. Once bound to the cell membrane, interferons initiate a complex sequence of intracellular events, which in vitro studies have demonstrated include (i) induction of certain enzymes, (ii) suppression of cell proliferation, (iii) immunomodulating activities (e.g. enhancement of the phagocytic activity of macrophages and augmentation of the specific cytotoxicity of lymphocytes for target cells), and (iv) inhibition of virus replication in virus-infected cells. Specifically, interferon-(beta), a 165 amino acid protein, is indicated for use in patients with relapsing-remitting multiple sclerosis to reduce the frequency of clinical exacerbations. Year 2000 sales of Biogen's 165 amino acid protein product, Avonex(R), were $761 million. Sales of (alpha)- interferon, which is used to treat a variety of viral and neoplastic diseases, were in excess of $2 billion in 2000. 3. Serum proteins. Serum proteins are proteins contained in the plasma component of blood. Factor VIII and IX are specific clotting factors that are deficient in patients with hemophilia A and B, respectively. The administration of Factor VIII and IX provides an increase in plasma levels of these 6 proteins and can temporarily correct the coagulation defect in these patients. Collective sales of these products exceed $1 billion annually. 4. Enzymes. Enzymes comprise the majority of proteins within cells and will represent a vast opportunity for directed evolution, as the function of many newly identified enzymes are determined. Enzymes are particularly amenable to molecular evolution efforts based on recombination, since the structure of most enzymes is complex and optimization with traditional methods is extremely difficult. Genzyme's Cerezyme(R)is a 497 amino acid protein that is an analogue of the human enzyme, (beta)-glucocerebrosidase that is used to treat Gaucher disease. Gaucher disease is characterized by a deficiency of (beta)-glucocerebrosidase activity, resulting in accumulation of glucocerebroside in tissue macrophages that become engorged and are typically found in the liver, spleen, and bone marrow and occasionally in the lungs, kidneys, and intestines. Genzyme had sales in 2000 of approximately $470 million for Cerezyme(R)for Gaucher disease. Antibodies Monoclonal antibodies comprise one of the fastest growing segments of the protein-related therapeutic market, and, with the advent of recent humanization technology, hundreds of antibodies have entered development. It is estimated that one quarter of all biotech drugs in development are antibody-based. As with other protein therapeutics, it appears likely that directed evolution can be used to improve the affinity, specificity, potency, shelf life, and other attributes of antibodies. To date, the highest affinity antibody ever developed was developed using high throughput DNA recombination. To date, the FDA has approved nine monoclonal antibody-based products for sale such as Rituxan(R) (IDEC). The majority of these antibodies have been on the market for less than three years. A large number of companies are developing monoclonal antibody-based products. The estimated 2000 revenues for the two highest selling of these antibodies are in excess of $1.5 billion. Vaccines Worldwide sales of vaccines exceeded $4 billion in 1999. The Company believes that high throughput DNA recombination may be useful in many aspects of vaccine development. Vaccines can be divided into three classes: inactivated, subunit vaccines, and live attenuated vaccines. An inactivated virus vaccine is prepared by killing the virus using chemical agents (e.g. hepatitis A vaccine). In contrast, the subunit vaccine is prepared by purifying and concentrating surface proteins of the virus, called subunits. Preparation of a subunit vaccine requires knowledge of specific surface antigens and the potential of blocking these antigens to prevent infection. Merck and Glaxo SmithKline have subunit vaccines for Hepatitis B with sales over $500 million in the aggregate. Inactivated and subunit vaccines have little or no risk of infection from the vaccine itself if the virus has been adequately inactivated, but these vaccines may not trigger a sufficient immune response to provide protection against the wild-type (naturally-occuring) virus. Also, subunit and inactivated vaccines can produce antibodies in the bloodstream, but are less able to produce antibodies in mucous membranes where the wild-type virus enters the body. Live virus vaccines are a weakened form of the virus that is infectious enough to trigger a lasting immune response to the wild-type virus. Examples of live virus vaccines include those for polio, yellow fever, measles, mumps, rubella, and chicken pox. These vaccines are developed by multiplying the viruses sequentially in non-human cells wherein the viruses gradually change in activity towards humans. The weakened virus is then tested in animal models for safety and effectiveness, followed by tests in humans in small- and large-scale trials. The primary advantage of live virus vaccines is their ability to activate a complete immune response, including development of antibodies at the infection site and within the blood as well as cell-mediated immunity. 7 Consequently, live virus vaccines are often considered to be more effective in providing immunity than subunit or inactivated vaccines. Live virus vaccines also offer attractive routes for administration through the nose or mouth. In persons with weakened immune systems however, the live vaccine has the potential to produce a disease resembling the wild-type infection. Additional potential risks have been recognized for live virus vaccines. First, live virus strains can continue to change as they multiply in human hosts, so it is possible that the modified virus could revert to the wild-type strain - a recognized potential problem with the polio vaccine. Second, a weakened vaccine virus may exchange genetic information with wild-type strains after the vaccine has been administered, again creating the potential for a disease similar to that caused by the wild-type strain. Recombination of the viral DNA with human DNA of the patient is another potential theoretical concern. High throughput DNA recombination may offer new opportunities for vaccine development. With conventional methods, live attenuated vaccines are produced through rounds of growth under defined conditions, as described above. For example, cold-adapted influenza vaccine technology developed at the University of Michigan created weakened influenza strains by growing the virus under progressively colder conditions until the viruses lost their ability for sufficient growth at human body temperature. High throughput DNA recombination may offer approaches to accelerate this process of evolving whole vaccines to desired phenotypes. Likewise, many subunit vaccine candidates are not sufficiently immunogenic. Shifting the presentation of these antigens using recombination may induce immunogenicity. Advantages include development of vaccines for indications that are currently unavailable on the market and improved versions of existing vaccine products. Anti-infectives and Biocatalysis Biocatalysis is a process whereby an enzyme or a series of enzymes from microorganisms are used to produce molecules that cannot be produced or are uneconomical to produce by traditional synthetic chemistry methods. In many instances the DNA sequence for these enzymes is available as well as the sequence for an entire operon encoding a series of enzymes that are required for a biocatalytic conversion. These enzymes and their operons are amenable to high throughput DNA recombination and directed evolution, providing potential opportunities for Enchira's technology. The majority of anti-infective agents and traditional cancer chemotherapeutics are produced by biocatalysis. Polyketide pharmaceuticals represent an important subgroup of these products, and this class of compound is used in antibiotics, anticancer drugs, cholestrol-lowering drugs, immuno-suppressants, and applications in animal health and agricultural products. Examples are listed in the table below. Currently, 20 polyketide products are available commercially with annual aggregate sales of more than $10 billion. Two broad-spectrum antibiotics, clarithromycin, and azithromycin, accounted for sales of approximately $2.3 billion in 2000. The emergence of antibiotic-resistant organisms has recently spurred new interest in development of improved or novel anti-infectives. By employing Enchira's high throughput recombination technologies to the genes coding for polyketide synthase complexes, improved versions of these antibiotics active against resistant strains may be developed. 8 ----------------------------------------------------------------------- Compound Action ----------------------------------------------------------------------- azithromycin (Zithromax(R)). Antibacterial ----------------------------------------------------------------------- clarithromycin (Biaxin(R)) Antibacterial ----------------------------------------------------------------------- erythromycin Antibacterial ----------------------------------------------------------------------- rifamycin (Rifampin(R)) Antibacterial ----------------------------------------------------------------------- tetracyclines Antibacterial ----------------------------------------------------------------------- doxorubicin (Adriamycin(R)) Anticancer ----------------------------------------------------------------------- amphotericin B Antifungal ----------------------------------------------------------------------- lovastatin (Mevacor(R)) Cholesterol-lowering ----------------------------------------------------------------------- pravastatin (Pravacol(R)) Cholesterol-lowering ----------------------------------------------------------------------- simvastatin (Zocor(R)) Cholesterol-lowering ----------------------------------------------------------------------- tacrolimus (FK506, Prograf(R)) Immunosuppressant ----------------------------------------------------------------------- sirolimus (Rapamycin(R)) Immunosuppressant ----------------------------------------------------------------------- spinosad Insecticide ----------------------------------------------------------------------- avermectin Veterinary product -----------------------------------------------------------------------
Business Strategy Enchira's strategy involves a two-prong approach. In the short-term, Enchira plans to apply its recombinant DNA technologies and HTS capabilities to product discovery and development in the pharmaceutical sector through R&D agreements. These projects will provide the shorter-term cash flow necessary to build the company for the achievement of longer-term goals. In the longer term, Enchira plans to utilize its capabilities in directed evolution and drug development to create new drug leads internally for licensing to the pharmaceutical industry. Research and Development Progress Enchira's technical efforts have focused on expanding the scope of its intellectual property position in the directed evolution field and applying the technology to commercially relevant targets identified by Enchira and its collaborators. One of Enchira's objectives in 2000 was to demonstrate utility of the RACHITT(TM) technology in a model system that would be recognized by experts in the field. The manuscript, "DNA Shuffling Method for Generating Highly Recombined Genes and Evolved Enzymes," which describes the successful application of this technology, will be published in Nature Biotechnology (a prestigious, peer reviewed scientific journal) in the April 2001 edition. In addition to this external affirmation, Enchira's scientists conducted a number of internal demonstrations to explore the potential for the RACHITT(TM) technology as well as to develop new ways to "shuffle" larger and larger sections of DNA, to use less well-characterized sources of donor DNA, and to shuffle DNA by other methods. These projects confirmed the ability to recruit DNA (Chimerons(TM)) directly from uncharacterized environmental extracts, to "shuffle" multi-gene operons, and to create large libraries of recombinant human growth factor genes. Another objective is to automate the gene shuffling processes, thereby increasing its precision and further increasing the rate of product development. Enchira has been applying its directed evolution platform to a number of important targets. These include an industrial enzyme target identified by Genencor in its collaboration with Enchira, an oncology target as part of the collaboration with the MD Anderson Cancer Center, an antibiotic synthesis system that may create antibiotics with improved properties, and a human growth factor. Other targets may be added in future potential collaborations. Enchira also received funding from the United States Department of Energy for the third and final year of a three-year program to develop a biocatalyst for gasoline desulfurization through application of its directed evolution technologies. 9 Collaborations and Licenses In May 2000, Enchira licensed the RACHITT(TM) technology to Genencor for use in the field of industrial proteins for cleaning, textiles, grain processing, animal feed, and food ingredients. The license agreement included an upfront fee, milestone payments, and product royalties. In August 2000, Enchira executed a follow-on R&D collaboration agreement for directed evolution of certain industrial enzymes, which represents a $1.5 billion market. In October 2000, Enchira established a joint collaboration with the M. D. Anderson Cancer Center to apply its directed evolution technologies to the development of more effective cancer therapies targeted toward epidermal growth factor receptors. In this collaboration, Enchira will provide directed evolution and robotic screening research. While Enchira plans to remain opportunistic with respect to directed evolution programs with corporate and academic collaborators, the primary focus, and the focus of its internal programs, is aimed toward the therapeutic sector since this sector has historically produced substantially higher margin products. Competition Enchira has applied the principles of directed evolution for over 10 years to improvements in the metabolic flux through its biodesulfurization system. The field of directed evolution has become increasingly popular in the last 2-3 years, and a number of companies have arisen promoting "gene shuffling" technologies, most notably Maxygen, Diversa, and Applied Molecular Evolution. Maxygen's technology, based on the Stemmer or "sexual PCR" and "staggered extension" methods, involve fragmentation and reassembly of related genes using PCR (polymerase chain reaction). Diversa creates diversity by isolating whole, active genes from environmental samples. If necessary, they can create diversity at targeted regions in the gene using site-saturation mutagenesis or they can "reassemble" related genes into novel combinations. Applied Molecular Evolution identifies certain critical regions of proteins and then creates a library of randomly generated variants at this region. Enchira believes that its technologies represent unique and rapid methods of directed evolution. The RACHITT(TM) gene shuffling method does not rely on either PCR reassembly of genes, isolation of active genes from nature, or randomization of particular gene segments. Instead, a transient template is used as a scaffold to gather related gene segments, and retains only the relevant DNA through flap-trimming. It is not a random process. As described earlier, the process is completed by fill-in of the unpaired portions of the scaffold, ligation of the fragments, and destruction of the template. Other distinguishing features include 1) the ability to use immediately complex DNA as a source of fragments, 2) a larger number of recombinations per gene than reported by other methods and 3) no requirement for an understanding of structure/function relationships in order to target particular regions of the gene. Enchira is currently involved in arbitration proceedings with Maxygen. On March 6, 2001, retired Federal Judge Charles Renfrew, the arbitrator in Enchira's arbitration proceeding with Maxygen, issued a ruling in which he sided with Maxygen on three of their four arguments that Enchira breached the Collaboration Agreement between the two parties. He directed the parties to meet in an attempt to reach an agreement for an appropriate remedy which could result in the requirement that Enchira cross license its RACHITT(TM) technology from Maxygen or an outright prohibition of Enchira's use of and rights in the RACHITT(TM) technology. See "Risk Factors--We Have an Arbitration Proceeding with Maxygen Regarding Our RACHITT(TM) Technology in which We Have Received an Unfavorable Ruling" for a more complete description of such arbitration. Patents and Proprietary Technology A provisional patent application for Enchira's RACHITT(TM) technology was filed at the US Patent and Trademark Office (the "PTO") on October 19, 1999, and an updated regular application was filed at the PTO on February 29, 2000. The Company filed a worldwide patent application on the RACHITT(TM) technology under the Patent Cooperation Treaty ("PCT") on October 19, 2000. In addition to the RACHITT(TM) patent applications, Enchira filed a number of other patent applications involving other recombinant DNA technologies. These 10 applications included 11 Provisional Patent applications and four regular applications filed with the PTO as well as one additional PCT application. Enchira continues to maintain its core patents in biodesulfurization technologies. In total, Enchira has rights to 33 U.S. patents (including cell recombinant DNA and fundamental process patents) and 35 foreign patents related to biodesulfurization. Biodesulfurization-related patents issued to or licensed by Enchira begin to expire in the year 2010. See "--Risk Factors--Any inability to adequately protect our proprietary technologies could harm our competitive position." Employees and Consultants Enchira believes that its success will be based, among other things, on achieving and retaining scientific and technological superiority and on identifying and retaining capable management. Enchira has assembled a highly qualified team of scientists as well as executives with experience in the biotechnology industry. As of December 31, 2000, Enchira employed 33 people, 14 of whom hold Ph.D. degrees. Enchira's employees represent collective expertise in molecular biology, microbiology, biochemistry, chemistry and chemical engineering. Government Regulation Certain of Enchira's current and planned operations are, or may be, subject to regulation under various federal and state laws pertaining to protection of the environment and employee health and safety. In the course of its current research and development activities, Enchira generates small quantities of solid and hazardous wastes that are subject to regulation under the Resource Conservation and Recovery Act ("RCRA") and various other federal and state regulations. The research and development activities of Enchira are also subject to the Occupational Safety and Health Act ("OSHA") and similar state laws and regulations. Enchira believes that it is in compliance with all such material federal and state laws. Risk Factors Enchira may be referred to as "we," "us," or "our" in the Risk Factors below. o WE HAVE AN ARBITRATION PROCEEDING WITH MAXYGEN REGARDING OUR RACHITT(TM) TECHNOLOGY IN WHICH WE HAVE RECEIVED AN UNFAVORABLE RULING. On April 27, 2000, we received notice from Maxygen that they had elected to seek arbitration under the Collaboration Agreement. Maxygen claims that we used their confidential information, which they allege was provided to us under the Collaboration Agreement to develop our own RACHITT(TM) directed evolution technology. We continue to deny all of Maxygen's allegations and believe that our technology was independently developed after the collaboration terminated. The arbitration hearing was held in November 2000. On March 6, 2001, we received an unfavorable ruling in our arbitration proceeding with Maxygen from Judge Renfrew, the arbitrator. His opinion found that Enchira breached several provisions of the Collaboration Agreement with Maxygen with respect to Enchira's RACHITT(TM) and high throughput screening technologies, but Judge Renfrew did not specify a remedy for such breaches in his ruling. Judge Renfrew directed that the parties meet to see if they can arrive at an agreement for an appropriate remedy. If the parties cannot reach an agreement, we will again appear before Judge Renfrew who will issue a decision on the appropriate remedies. While we will work with Maxygen and the arbitrator to reach a conclusion to this proceeding, we also intend to investigate alternative actions that will permit us to continue to develop the RACHITT(TM) technology that we believe is our independent technology. 11 We cannot assure that Maxygen will agree to cross license the RACHITT(TM) technology to us or that we will otherwise be able to enter into a settlement that allows us to continue to develop the RACHITT(TM) technology on terms favorable to us or at all. In addition, the uncertainty surrounding the outcome of the arbitration and the delay in bringing such matter to conclusion could materially and adversely affect our ability to secure additional capital on a timely basis or at all. Further, should the settlement or other remedies imposed by the arbitrator be adverse to us and we are not otherwise able to overcome the arbitrator's decision, our ability to continue as a going concern may be limited. - WE HAVE A HISTORY OF OPERATING LOSSES AND WE MAY NOT BE PROFITABLE IN THE FUTURE. We have incurred net losses since our inception and expect losses to continue in the foreseeable future as we continue to expense capital for the ongoing development and commercialization of our high throughput in vitro DNA recombination technology. We have received a limited amount of revenue to date from the use or sale of such technology. At December 31, 2000, we had an accumulated deficit of $83 million. We remain uncertain about the amount of time required for us to become profitable. We cannot ensure that we will achieve sustained profitability, if at all. - IF WE DON'T ESTABLISH AND MAINTAIN COLLABORATIONS WITH OTHER PARTIES, THE DEVELOPMENT OF OUR PRODUCTS MAY BE DELAYED OR STOPPED. Because we do not currently possess the financial and other resources necessary to develop potential products that may result from our technologies, or the financial and other resources to complete any approval processes, which may be required for these products, we must enter into collaborative arrangements to develop our products. If we do not maintain our current collaboration with Genencor, which is contingent upon the ultimate resolution of the Maxygen arbitration, or if we do not enter into new collaborative agreements, then our revenues will be reduced, and products utilizing our technologies may not be developed, manufactured or marketed. We have limited or no control over the resources that any collaborator may devote to our products. Any of our present or future collaborators may not perform their obligations as expected. These collaborators may breach or terminate their agreements with us or otherwise fail to conduct their collaborative activities successfully and in a timely manner. Further, our collaborators may elect not to develop products arising out of our collaborative arrangements or devote sufficient resources to the development, manufacture, marketing or sale of these products. As a result of the current status of our arbitration proceeding with Maxygen, our current collaborators may delay development under our collaborations with them until there is a conclusion to the arbitration proceeding. Also, the recent ruling will make it more difficult for us to enter into new collaborations until a favorable conclusion is reached. If any of these events occur, we may not be able to develop our technologies or commercialize our products. - BECAUSE WE ARE A DEVELOPMENT STAGE COMPANY DEVELOPING AND DEPLOYING NEW TECHNOLOGIES, WE MAY NOT BE ABLE TO COMMERCIALIZE OUR TECHNOLOGIES OR PRODUCTS, WHICH COULD CAUSE US TO BE UNPROFITABLE OR CEASE OPERATIONS. You must evaluate our business in light of the uncertainties and complexities affecting a development stage biotechnology company. Our existing proprietary technologies are new and in the early stage of development. We may not be successful in the commercial development of these or any further technologies or products. Successful products require significant development and investment to demonstrate their cost-effectiveness prior to regulatory approval and commercialization. To date, we have not commercialized any biotechnology products, and we have no strategic partners who have yet incorporated our technologies or inventions into their own commercial products from which we can generate royalties. Because of these uncertainties, our discovery process may not result in the identification of product candidates that our strategic partners or we will commercialize. If we are not able to use our technologies to discover new materials or products with significant commercial potential, we will not be able to achieve our objectives or build a sustainable or profitable business. 12 - ETHICAL, LEGAL AND SOCIAL CONCERNS ABOUT GENETICALLY ENGINEERED PRODUCTS COULD LIMIT OR PREVENT THE USE OF OUR PRODUCTS AND TECHNOLOGIES AND LIMIT OUR REVENUE. Some of our products are genetically engineered. If we are not able to overcome the ethical, legal and social concerns relating to genetic engineering, our products may not be accepted. Any of the risks discussed below could result in expenses, delays or other impediments to our programs or the public acceptance and commercialization of products dependent on our technologies or inventions. Our ability to develop and commercialize one or more of our technologies and products could be limited by the following factors: 1. Public attitudes about the safety and environmental hazards of, and ethical concerns over, genetic research and genetically engineered products, which could influence public acceptance of our technologies and products; 2. Public attitude regarding, and potential changes to laws governing, ownership of genetic material which could harm our intellectual property rights with respect to our genetic material and discourage strategic partners from supporting, developing or commercializing our products and technologies; and 3. Governmental reaction to negative publicity concerning genetically modified organisms, which could result in greater government regulation of genetic research and derivative products, including labeling requirements. The subject of genetically modified organisms has received negative publicity, which has aroused public debate. The adverse publicity could lead to greater regulation and trade restrictions on imports and exports of genetically altered products. - MANY POTENTIAL COMPETITORS WHO HAVE GREATER RESOURCES AND EXPERIENCE THAN WE DO MAY DEVELOP PRODUCTS AND TECHNOLOGIES THAT MAKE OURS OBSOLETE. The biotechnology industry is characterized by rapid technological change, and the area of gene research is a rapidly evolving field. Our future success will depend on our ability to maintain a competitive position with respect to technological advances. Rapid technological development by others may result in our products and technologies becoming obsolete. We face, and will continue to face, intense competition. There are a number of companies who compete with us in various steps throughout our technology process. Many of these competitors have significantly greater financial and human resources than we do. These organizations may develop technologies that are superior alternatives to our technologies. Further, our competitors may be more effective at implementing their gene-related technologies to develop commercial products. Any products that we develop through our high throughput in vitro DNA recombination technology will compete in multiple, highly competitive markets. Many of our potential competitors in these markets have substantially greater financial, technical and marketing resources than we do, and we cannot assure you that they will not succeed in developing products that would render our products or those of our strategic partners obsolete or noncompetitive. In addition, many of these competitors have significantly greater experience than we do in their respective fields. o ANY INABILITY TO ADEQUATELY PROTECT OUR PROPRIETARY TECHNOLOGIES COULD HARM OUR COMPETITIVE POSITION. Our success will depend in part on our ability to obtain patents and maintain adequate protection of our other intellectual property for our technologies and products in the United States and other countries. If we do not adequately protect our intellectual property, competitors may be able to practice our technologies and erode or negate our competitive advantage. The laws of some foreign countries do not protect our proprietary rights to the 13 same extent as the laws of the United States, and we may encounter significant problems in protecting our proprietary rights in these foreign countries. We may fail to apply for patents on important technologies or products in a timely fashion or at all, and in any event, the applications we do file may be challenged and may not result in issued patents. Our existing patents and any future patents we obtain may not be sufficiently broad to prevent others from practicing our technologies or from developing competing products. Furthermore, others may independently develop similar or alternative technologies or design around our patented technologies. In addition, others may challenge or invalidate our patents, or our patents may fail to provide us with any competitive advantages. If the use or validity of any of our patents is ever challenged, it would result in litigation costs and the diversion of management in defending the patent. In addition, we generally do not control the patent prosecution of technology that we license from others. Accordingly, we are unable to exercise the same degree of control over this intellectual property as we would over technology we own. We rely upon trade secret protection for our confidential and proprietary information. We have taken measures to protect our proprietary information. These measures may not provide adequate protection for our trade secrets or other proprietary information. We seek to protect our proprietary information by entering into confidentiality agreements with employees, collaborators, and consultants. Nevertheless, employees, collaborators, or consultants may still disclose our proprietary information, and we may not be able to meaningfully protect our trade secrets. In addition, others may independently develop substantially equivalent proprietary information or techniques or otherwise gain access to our trade secrets. o LITIGATION OR OTHER PROCEEDINGS OR THIRD PARTY CLAIMS OF INTELLECTUAL PROPERTY INFRINGEMENT COULD REQUIRE US TO SPEND TIME AND MONEY AND COULD SHUT DOWN SOME OF OUR OPERATIONS. Our commercial success depends in part on not infringing the patents and proprietary rights of third parties and not breaching any licenses that we have entered into with regard to our technologies and products. The biotechnology industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may have been issued relevant patents or may have filed relevant patent applications that could affect our ability to obtain patents or to operate as we would like to in our research, development, and commercialization efforts. If we wish to use technologies claimed by third parties in issued and unexpired patents, then we may need to obtain license(s) from the owner(s) of such patent(s), enter into litigation, or incur the risk of litigation. Litigation or failure to obtain necessary licenses may impede our ability to obtain collaborations or to develop our products and could prevent us or our collaborators from developing or commercializing our products. As a result of our arbitration proceeding with Maxygen, we may be required to obtain a license or cross license from Maxygen for the RACHITT(TM) technology or we may otherwise not be allowed to continue to use or have rights in the technology. Other biotechnology companies have filed patent applications and obtained patents, and in the future will likely continue to file patent applications and obtain patents, claiming directed evolution technologies similar to our RACHITT(TM) technology. If these patents are valid or if these applications issue into valid patents, we will have to either circumvent the claims in these patents, or obtain licenses to use the patented technology in order to use these genes or technologies in the research, development and commercialization of our products and technologies. If we are unsuccessful in circumventing or acquiring licenses to these patents (including the possible license or cross license for the RACHITT(TM) technology from Maxygen), our ability to research, develop or commercialize products may be blocked. - LAWS MAY LIMIT OUR PROVISION OF GENETICALLY ENGINEERED PRODUCTS IN THE FUTURE, WHICH COULD REDUCE OUR ABILITY TO SELL THESE PRODUCTS. All phases in the development of our potential products are subject to significant federal, state, local and/or foreign governmental regulation. Regulatory agencies may not allow us to produce and/or market our products in a timely manner or under technically or commercially feasible conditions, or at all, which could harm our business. 14 In the United States, products for our target markets are regulated based on their application, by either the FDA, the Environmental Protection Agency, or EPA, or, in the case of plants and animals, the United States Department of Agriculture, or USDA. The FDA regulates drugs, food and feed, as well as food additives, feed additives and substances generally recognized as safe that are used in the processing of food or feed. In the future we may pursue strategic alliances for further research and development of drug products for humans that would require FDA approval before they could be marketed in the United States. In addition, any product candidates must also be approved by the regulatory agencies of foreign governments before any products, or products of our strategic partners incorporating our technologies or inventions, to the extent that they come within the FDA's jurisdiction, may be subject to lengthy FDA reviews and unfavorable FDA determinations if they raise safety questions which cannot be satisfactorily answered, if results from pre-clinical or clinical trials do not meet regulatory requirements or if they are deemed to be food additives whose safety cannot be demonstrated. An unfavorable FDA ruling could be difficult to resolve and could prevent a product from being commercialized. Even after investing significant time and expenditures, we may not obtain regulatory approval for any of our products. We have not submitted an investigational new drug application for any product candidate, and no product candidate developed with our technologies has been approved for commercialization in the United States or elsewhere. The EPA regulates biologically derived chemical substances not within the FDA's jurisdiction. An unfavorable EPA ruling could delay commercialization or require modification of the production process resulting in higher manufacturing costs, thereby making the product uneconomical. In addition, the USDA may prohibit genetically engineered plants from being grown and transported except under an exemption, or under controls so burdensome that commercialization becomes impracticable. The USDA may not exempt our future products. - WE MAY BE SUED FOR PRODUCT LIABILITY. We may be held liable if any product we develop, or any product, which is made with the use of any of our technologies, causes injury or is found otherwise unsuitable during product testing, manufacturing, marketing or sale. We currently have no product liability insurance. When we attempt to obtain product liability insurance, this insurance may be prohibitively expensive, or may not fully cover our potential liabilities. Inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or inhibit the commercialization of products developed by us or our strategic partners. If we are sued for any injury caused by our products, our liability could exceed our total assets. - WE WILL NEED ADDITIONAL FUNDS. WE MAY NEED TO ENTER INTO FINANCING ARRANGEMENTS WITH UNFAVORABLE TERMS OR WHICH COULD ADVERSELY AFFECT YOUR OWNERSHIP INTEREST AND RIGHTS AS COMPARED TO OUR OTHER STOCKHOLDERS. IF SUCH FINANCING IS NOT AVAILABLE, WE MAY NEED TO CEASE OPERATIONS. We currently anticipate that our available cash resources and receivables and committed funding from strategic partners will be sufficient to meet our capital requirements for at least the next two years. However, our capital requirements depend on several factors, including: 1. Whether we will be able to acquire a cross license from Maxygen for the RACHITT(TM) technology or otherwise conclude the arbitration proceeding in a manner and at a cost which allows us to continue development of the RACHITT(TM) technology; 2. Legal fees associated with pursuing a satisfactory resolution to the dispute with Maxygen, pursuant to the arbitrator's ruling, as well as costs of exploring other alternatives; 15 3. The level of research and development investment required to maintain our technology leadership position; 4. Our ability to enter into new agreements with strategic partners or to extend the terms of our existing collaborative agreements and the terms of any agreement of this type; 5. The success rate of our discovery efforts to achieve milestones and receive royalties; 6. Our ability to successfully commercialize products developed independently and the demand for such products; and 7. Costs of recruiting and retaining qualified personnel. As additional capital is required to operate our business, we cannot assure you that additional financing will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, our ability to fund our operations, take advantage of opportunities, develop products or technologies or otherwise respond to competitive pressures could be significantly limited. In addition, if financing is not available, we may need to cease operations. If we raise additional funds through the issuance of equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities may provide for rights, preferences or privileges senior to those of the holders of our common stock. If we raise additional funds through the issuance of debt securities, such debt securities would have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on our operations. - WE RELY HEAVILY ON A FEW KEY EMPLOYEES FOR MANAGEMENT AND PRODUCT DEVELOPMENT EFFORTS. We depend on the efforts of our executive officers, scientists and other key employees, the loss of any one of whom could materially and adversely affect us. Shortages of qualified scientists within certain disciplines may occur and competition for the services of qualified scientists may intensify. We may not succeed in recruiting or retaining these personnel in the future. - WE USE HAZARDOUS MATERIALS IN OUR BUSINESS. ANY CLAIMS RELATING TO IMPROPER HANDLING, STORAGE OR DISPOSAL OF THESE MATERIALS COULD BE TIME CONSUMING AND COSTLY. Our research and development processes involve the controlled use of hazardous materials, including chemical, radioactive and biological materials. Our operations also produce hazardous waste products. We cannot eliminate entirely the risk of accidental contamination or discharge and any resultant injury from these materials. Federal, state and local laws and regulations govern the use, manufacture, storage, handling and disposal of these materials. We may be sued for any injury or contamination that results from our use or the use by third parties of these materials, and our liability may exceed our total assets. In addition, compliance with applicable environmental laws and regulations may be expensive, and current or future environmental regulations may impair our research, development or production efforts. - SOME OF OUR EXISTING STOCKHOLDERS CAN EXERT CONTROL OVER US, AND MAY NOT MAKE DECISIONS THAT ARE IN THE BEST INTERESTS OF ALL STOCKHOLDERS. Our officers, directors and principal stockholders (greater than 5% stockholders) together control approximately 65% of our outstanding common stock. As a result, these stockholders, if they act together, will be able to exert a significant degree of influence over our management and affairs and over matters requiring stockholder approval, 16 including the election of directors and approval of significant corporate transactions. In addition, this concentration of ownership may delay or prevent a change in control of us and might affect the market price of our common stock, even when a change may be in the best interests of all stockholders. In addition, the interests of this concentration of ownership may not always coincide with our interests or the interests of other stockholders and accordingly, they could cause us to enter into transactions or agreements which we would not otherwise consider. - OUR STOCK PRICE IS VOLATILE. The market price of our common stock, like other emerging technology companies, has been highly volatile. In the future, the market price of our common stock could fluctuate substantially due to a variety of factors, including the results of our arbitration with Maxygen, our ability to secure additional collaborative programs relating to our RACHITT(TM)- directed evolution technology, governmental regulation, developments in patent or other proprietary rights of us or our competitors, fluctuations in our operating results and fluctuations in the market prices of emerging technology stocks and market conditions in general. - DIVIDENDS ON OUR PREFERRED STOCK DILUTE OWNERSHIP IN OUR COMMON STOCK AND CREATE A DEFICIENCY IN BOTH FIXED CHARGES AND IN PREFERRED STOCK DIVIDEND COVERAGE. In the past, we have from time to time elected to pay dividends on our preferred stock with our common stock, although we may pay dividends in cash or a combination of common stock and cash. Dividends will be payable on the preferred stock only when, as and if declared by our Board of Directors as permitted under Delaware law although we do incur an obligation to pay such dividends in a manner to be determined at our sole discretion until they become payable. We have incurred net losses since our inception, and we expect our losses to increase in the foreseeable future. While we intend to pay dividends on the preferred stock in common stock, we anticipate that we will continue to incur losses and thus will continue to have a deficiency in fixed charges and preferred stock dividend coverage. Preferred stock dividends may be paid only out of capital surplus (within the meaning of the Delaware General Corporation Law) or out of our net profits for the fiscal year in which the dividend is declared and the preceding fiscal year. We have issued a total of 509,451 shares of common stock to date as dividends on the preferred stock. The Company has not declared a dividend payment since November 1998, and since that date, has not paid dividends on Series B Preferred Stock except on conversion of Series B Preferred Stock to common stock - CERTAIN CHARTER AND BYLAW PROVISIONS AND OUR STOCKHOLDER RIGHTS PLAN MAY NEGATIVELY AFFECT THE STOCKHOLDERS. Certain provisions of our charter, bylaws and rights plan may discourage proposals by third parties to acquire a controlling interest in us, which could deprive stockholders of the opportunity to consider an offer that would be beneficial to them. - FUTURE SALES OF COMMON STOCK MAY NEGATIVELY AFFECT THE STOCKHOLDERS. On December 31, 2000, 9,067,700 shares of our common stock were outstanding, 1,156,622 shares of common stock were issuable upon conversion of shares of our preferred stock and 905,492 shares of common stock were issuable upon the exercise of outstanding options and warrants. Future sales of substantial amounts of our common stock in the public market could have an adverse effect on prevailing market prices of the common stock and the marketability of and price obtainable for shares of the common stock. - OUR COMMON STOCK COULD BE DELISTED FROM NASDAQ. Although our common stock meets the current listing requirements of, and presently lists on, the Nasdaq National Market, we must maintain certain minimum financial requirements for continued inclusion on Nasdaq. If we cannot satisfy Nasdaq's maintenance requirements, Nasdaq may delist our common stock. In such event, trading in 17 our common stock would thereafter be conducted in the over-the-counter markets in the so-called "pink sheets" or the NASD's "Electronic Bulletin Board." Consequently, the liquidity of our common stock could be impaired, not only in the number of shares which could be bought and sold, but also through delays in the timing of the transactions, reductions in security analysts' and the news media's coverage of us, and lower prices for our common stock than it might otherwise attain. - STOCKHOLDERS FACE THE RISKS OF HOLDING "PENNY STOCKS." If Nasdaq delisted our common stock, it could become subject to Rule 15g-9 under the Securities and Exchange Act of 1934, as amended, (the "Exchange Act"), which imposes additional sales practice requirements on broker-dealers which sell such securities to persons other than established customers and "accredited investors" (generally, individuals with net worth in excess of $1,000,000 or annual incomes exceeding $200,000, or $300,000 together with their spouses). For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written consent to the transaction prior to sale. Consequently, the rule may adversely affect the ability of the holders of our common stock to sell their shares in the secondary market. Regulations of the Securities and Exchange Commission, or the Commission, define a "penny stock" to be any non-Nasdaq equity security that has a market price (as therein defined) of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the Commission relating to the penny stock market. The Commission also requires disclosure about commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, the Commission requires monthly statements to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. These penny stock restrictions will not apply to our common stock if Nasdaq continues to list it and has certain price and volume information provided on a current and continuing basis or meets certain minimum net tangible assets or average revenue criteria. We cannot ensure that our common stock will qualify for exemption from these restrictions. Even if our common stock were exempt from such restrictions, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the Commission the authority to prohibit any person engaged in unlawful conduct while participating in a distribution of a penny stock from associating with a broker-dealer or participating in a distribution of a penny stock, if the Commission finds that such a restriction would be in the public interest. If our common stock were subject to the rules on penny stocks, the market liquidity for our common stock could be severely and adversely affected. Item 2. Properties Facilities The Company's corporate offices and laboratories are situated in a 25,000 square-foot leased building located at 4200 Research Forest Drive in The Woodlands, Texas, a suburb of Houston, Texas. Pursuant to the lease, monthly payments of $33,678 are required for base rent. The lease for this facility expires in 2003. Approximately 20,500 square feet of this space is devoted to research and development. The facility includes two laboratories designed for molecular biology/microbiology/microbial physiology, a biochemistry laboratory, a high throughput screening laboratory with robotics, a media preparation laboratory, two analytical laboratories which provide DNA sequencing, gel documentation, GC/MS and LC/MS and other analyses, a fermentation laboratory, and microbiology laboratory. Item 3. Legal Proceedings On April 27, 2000, Enchira received notice from Maxygen that they had elected to seek arbitration under the Collaboration Agreement. Maxygen claims that Enchira used their confidential information to develop the 18 RACHITT(TM) technology, which they allege was provided to Enchira under the Collaboration Agreement. Enchira continues to deny all of Maxygen's allegations and believes that its technology was independently developed after the collaboration terminated. The arbitration hearing was held in November 2000. On March 6, 2001, Enchira received an unfavorable ruling from the arbitrator in its arbitration proceeding with Maxygen. His opinion found that Enchira breached several provisions of the Collaboration Agreement with Maxygen with respect to Enchira's RACHITT(TM) and HTS technologies, but he did not specify a remedy for such breaches in his ruling. The arbitrator directed that the parties attempt to arrive at an agreement for an appropriate remedy. If the parties cannot reach an agreement, they will again appear before the arbitrator who will issue a decision on damages or some other remedy. While Enchira will work with Maxygen and the arbitrator to reach a conclusion to this proceeding, it also intends to investigate alternative actions that will permit Enchira to continue to develop the RACHITT(TM) technology that Enchira believes is its independent technology. Please see "Risk Factors--We Have an Arbitration Proceeding with Maxygen Regarding Our RACHITT(TM) Technology in which We Have Received an Unfavorable Ruling" for a more complete discussion. 19 Part II. Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The Company's common stock (symbol: ENBC) is traded on the Nasdaq National Market. The following table sets forth the range of high and low sales prices for each calendar quarter in the two years ended December 31, 2000 as reported on the Nasdaq National Market:
Year Ended December 31, 2000 High Low ---- --- First Quarter ................................. $30.63 $ 3.75 Second Quarter ................................ 15.50 5.00 Third Quarter ................................. 10.81 5.31 Fourth Quarter ................................ 8.94 3.06
Year Ended December 31, 1999 High Low ---- --- First Quarter ................................. $ 4.63 $ 0.38 Second Quarter ................................ 6.50 1.25 Third Quarter ................................. 4.75 1.81 Fourth Quarter ................................ 4.63 2.03
As of March 5, 2001, 9,079,313 shares of common stock were outstanding and Enchira had approximately 161 shareholders of record. Dividends Enchira has never paid cash dividends on its common stock. Enchira currently intends to retain any earnings to finance the growth and development of its business and does not anticipate paying cash dividends on its common stock in the foreseeable future. For a discussion of dividends paid or payable on the Series B Redeemable Convertible Preferred Stock, see "Item 1. Business -- Risk Factors -- Dividends on Preferred Stock Dilute Ownership in our Common Stock and Create a Deficiency in Both Fixed Charges and Preferred Stock Dividend Coverage." Item 6. Selected Financial Data The selected financial data set forth below with respect to the Company's statements of operations for each of the five years in the period ended December 31, 2000 and with respect to the Company's balance sheets as of December 31, 1996, 1997, 1998, 1999 and 2000 are derived from the audited financial statements of Enchira. The financial data should be read in conjunction with the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's Financial Statements and Notes thereto included elsewhere in this report. 20
Year Ended December 31, ----------------------- 1996 1997 1998 1999 2000 ----------- ----------- ----------- ----------- ----------- (in thousands, except share and per share data) Statements of Operations Data: Revenues: Sponsored research revenues ... $ 1,778 $ 1,652 $ 689 $ 1,415 $ 841 ----------- ----------- ----------- ----------- ----------- Costs and expenses: Research and development ...... 9,210 9,087 7,706 4,848 4,195 General and administrative .... 2,608 2,754 2,188 1,906 2,934 ----------- ----------- ----------- ----------- ----------- Total costs and expenses .. 11,818 11,841 9,894 6,754 7,129 ----------- ----------- ----------- ----------- ----------- Interest and investment income ...... 807 650 394 214 308 Loss on disposal of fixed assets .... -- -- (34) (140) (43) ----------- ----------- ----------- ----------- ----------- Net loss ............................ $ (9,233) $ (9,539) $ (8,845) $ (5,265) $ (6,023) =========== =========== =========== =========== =========== Net loss per common share - basic and diluted ....................... $ (7.29) $ (7.64) $ (5.20) $ (1.78) $ (1.10) =========== =========== =========== =========== =========== Shares used in computing net loss per common share - basic and diluted ....................... 1,606,861 1,681,351 1,875,414 4,635,930 7,576,121 =========== =========== =========== =========== ===========
Net loss per common share has been computed by dividing the net loss, which has been increased for periodic accretion and dividends on the Series A Preferred Stock issued in October 1994 and the Series B Preferred Stock issued in February and March 1997, by the weighted average number of shares of common stock outstanding during the period.
December 31, ------------ 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- (in thousands) Balance Sheet Data: Cash and cash equivalents ........... $ 3,106 $ 9,661 $ 2,795 $ 2,510 $ 7,524 Working capital ..................... 8,770 10,102 2,488 5,591 11,357 Total assets ........................ 13,711 14,965 6,127 8,064 15,858 Accumulated deficit ................. (42,713) (55,204) (67,200) (75,079) (82,973) Total stockholders' equity ......... 12,715 13,698 5,306 7,557 14,257
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Overview Enchira has devoted substantially all of its efforts to research and development. There have been no revenues from operations other than sponsored research revenues and one site license fee in 1998 and there is no assurance of future revenues. Enchira has an accumulated deficit since inception of approximately $83 million and believes that it can conserve its existing financial resources to fund operations through 2002. As of March 9, 2001, Enchira had approximately $13.3 million in cash, cash equivalents and investments and approximately $1.6 million in liabilities. On April 27, 2000, Enchira received notice from Maxygen that they had elected to seek arbitration under the Collaboration Agreement. Maxygen claims that Enchira used their confidential information to develop the RACHITT(TM) technology, which they allege was provided to Enchira under the Collaboration Agreement. Enchira continues to deny all of Maxygen's allegations and believes that its technology was independently developed after the collaboration terminated. The arbitration hearing was held in November 2000. 21 On March 6, 2001, Enchira received an unfavorable ruling from the arbitrator in its arbitration proceeding with Maxygen. The arbitrator's opinion found that Enchira breached several provisions of the Collaboration Agreement with Maxygen with respect to Enchira's RACHITT(TM) and HTS technologies, but remedies for such breaches were not specified in the ruling. The arbitrator directed that the parties attempt to arrive at an agreement for an appropriate remedy. If the parties cannot reach an agreement, they will again appear before the arbitrator who will issue a decision on damages or some other remedy. While Enchira will work with Maxygen and the arbitrator to reach a conclusion to this proceeding, it also intends to investigate alternative actions that will permit Enchira to continue to develop the RACHITT(TM) technology that Enchira continues to believe is its independent technology. The ultimate resolution of the arbitrator's ruling could require Enchira to pay costly licensing or royalty fees or result in an outright prohibition of Enchira's use of such technology. Please see "Risk Factors--We Have an Arbitration Proceeding with Maxygen Regarding Our RACHITT(TM) Technology in which We Have Received an Unfavorable Ruling" for a more complete discussion. Results of Operations Enchira had sponsored research revenues for the years ended December 31, 1998, 1999 and 2000 of, $688,882, $1,415,177 and $840,552, respectively. Sponsored research revenues increased by $726,295 from 1998 to 1999 resulting from an increased funding from a grant from the Department of Energy ("DOE"). From 1999 to 2000 sponsored research revenues decreased by $574,625 reflecting a decrease in funding from the DOE grant. Enchira had research and development expenses for the years ended December 31, 1998, 1999 and 2000 of $7,706,490, $4,847,641 and $4,195,043, respectively. The decrease from 1998 to 1999 of $2,858,849 is primarily a result of a reduction in workforce at the end of the first quarter of 1999 and a decrease in the use of consultants and outside services. The decrease of $652,598 from 1999 to 2000 is primarily a result of a reduction in research and development personnel. Enchira had general and administrative expenses for the years ended December 31, 1998, 1999 and 2000 of $2,187,668, $1,905,815 and $2,934,150, respectively. The decrease of $281,853 from 1998 to 1999 resulted from a decrease in insurance costs, cost of consultants, recruiting expenses and professional fees. The increase of $1,028,335 from 1999 to 2000 resulted primarily from increased legal costs associated with the arbitration with Maxygen and an increase in the use of consultants. Interest and investment income decreased by $180,306 in 1999 as a result of a decrease in cash and cash equivalents and related investments in marketable securities in the first half of the year. Interest and investment income increased from 1999 to 2000 by $94,954 as a result of as increase in cash, cash equivalents and related investments resulting from cash proceeds from issuance of common stock. Liquidity and Capital Resources Since its inception in December 1989, Enchira has devoted substantially all of its resources to research and development. To date, all of the Company's revenues have resulted from interest and investment income and sponsored research payments from collaborative agreements. Enchira has incurred cumulative losses since inception and expects to incur continued losses for at least the next several years, due primarily to continued research and development activities and acceleration of the development of its directed evolution technology platform and analytical and high throughput screening capabilities. Enchira expects that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. As of December 31, 2000, the Company's accumulated deficit was approximately $83 million. The Company completed a private placement of its common stock during September 2000. The Company offered and sold 2,000,000 shares of its common stock at $6.4325 per share. Net proceeds from the offering were approximately $12.5 million. In connection with the closing, warrants to purchase 600,000 shares of the Company's common stock were issued at an exercise price of $7.44. In addition, warrants to purchase 31,375 shares of the 22 Company's stock at an exercise price of $7.44 per share were issued to The Trout Group, LLC, one of the Company's placement agents, in partial payment of their placement fees. The warrants expire in two years and have been recorded at an aggregate estimated fair value of $2,522,094, which was computed using the Black-Scholes option pricing model and the following assumptions: risk free rate of 6.19 percent; expected dividend yield of zero; expected life of two years; and a weighted-average expected volatility at an average weight of 125 percent. For the year ended December 31, 2000, Enchira used $4,762,169 of funds in operating activities. At December 31, 2000, Enchira had cash, cash equivalents and short-term investments totaling $11,999,870 and working capital of $11,357,129. Enchira believes that it can conserve its existing financial resources to fund operations through 2002. Enchira expects to incur substantial additional research and development expenses, including expenses associated with its directed evolution technology platform and analytical and high throughput screening capabilities. Enchira is subject to cost sharing arrangements under various collaborative agreements, as discussed below. Enchira also expects its general and administrative expenses to increase as it increases its business development efforts and continues to pursue a satisfactory resolution to the dispute with Maxygen. Enchira has experienced negative cash flow from operations since its inception and has funded its activities to date primarily from equity financings and sponsored research revenues. Enchira will continue to require substantial funds to continue its research and development activities and to market, sell and commercialize its technology. Enchira will need to raise substantial additional capital to fund its future operations. The Company's capital requirements will depend on many factors, including the cost of resolving the arbitration with Maxygen or obtaining a cross license if ultimately unsuccessful; the problems, delays, expenses and complications frequently encountered by companies developing and commercializing new technologies; the progress of the Company's research and development activities; timing of environmental regulations; the rate of technological advances; determinations as to the commercial potential of the Company's technology under development; the status of competitive technology; the establishment of collaborative relationships; the success of the Company's sales and marketing programs; the cost of filing, prosecuting and defending and enforcing patents and intellectual property rights; and other changes in economic, regulatory or competitive conditions in the Company's planned business. Estimates about adequacy of funding for the Company's activities are based upon certain assumptions, including assumptions that the research and development programs relating to the Company's technology can be conducted at projected costs and that progress towards the commercialization of its technology will be timely and successful. There can be no assurance that changes in the Company's research and development plans, acquisitions or other events will not result in accelerated or unexpected expenditures. To satisfy its capital requirements, Enchira may seek additional financing through equity financing, government funding and through alliances with pharmaceutical companies and corporate partners. There can be no assurance that any such fundings will be available to Enchira on favorable terms or at all. If adequate funds are not available when needed, Enchira may be required to delay, scale back or eliminate some or all of its research and product development programs. If Enchira is successful in obtaining additional financings, the terms of such financings may have the effect of diluting or adversely affecting the holdings or the rights of the holders of the Company's common and preferred stock. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. None Item 8. Financial Statements. The financial statements required by this Item are incorporated under Item 14 in Part IV of this report. 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None. 24 Part III. Item 10. Directors and Executive Officers of the Registrant. The information required by this Item as to the directors and executive officers of Enchira is hereby incorporated by reference from the information appearing under the captions "Election of Directors" and "Executive Officers" in the Company's definitive proxy statement which involves the election of directors and is to be filed with the Securities and Exchange Commission ("Commission") pursuant to the Securities Exchange Act of 1934 within 120 days of the end of the Company's fiscal year on December 31, 2000. Item 11. Executive Compensation. The information required by this Item as to the management of Enchira is hereby incorporated by reference from the information appearing under the captions "Executive Compensation" and "Election of Directors - Director Compensation" in the Company's definitive proxy statement which involves the election of directors and is to be filed with the Commission pursuant to the Securities Exchange Act of 1934 within 120 days of the end of the Company's fiscal year on December 31, 2000. Notwithstanding the foregoing, in accordance with the instructions to Item 402 of Regulation S-K, the information contained in the Company's proxy statement under the sub-heading "Report of the Compensation Committee of the Board of Directors" and "Performance Graph" shall not be deemed to be filed as part of or incorporated by reference into this Form 10-K. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item as to the ownership by management and others of securities of Enchira is hereby incorporated by reference from the information appearing under the caption "Security Ownership of Certain Beneficial Owners and Management" to the Company's definitive proxy statement which involves the election of directors and is to be filed with the Commission pursuant to the Securities Exchange Act of 1934 within 120 days of the end of the Company's fiscal year on December 31, 2000. Item 13. Certain Relationships and Related Transactions. The information required by this Item as to certain business relationships and transactions with management and other related parties of Enchira is hereby incorporated by reference to such information appearing under the captions "Certain Transactions" and "Compensation Committee Interlocks and Insider Participation" in the Company's definitive proxy statement which involves the election of directors and is to be filed with the Commission pursuant to the Securities Exchange Act of 1934 within 120 days of the end of the Company's fiscal year on December 31, 2000. 25 Part IV. Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) Documents Filed as a Part of this Report 1. Financial Statements: Page ---- Report of Independent Public Accountants.............................. F-1 Balance Sheets as of December 31, 1999 and 2000....................... F-2 Statements of Operations for the Years Ended December 31, 1998, 1999 and 2000.............................................................. F-3 Statements of Stockholders' Equity for the Years Ended December 31, 1998, 1999 and 2000................................................... F-4 Statements of Cash Flows for the Years Ended December 31, 1998, 1999 and 2000.............................................................. F-5 Notes to Financial Statements......................................... F-6 All other schedules are omitted because they are not applicable, not required, or because the required information is included in the financial statements or notes thereto. 2. Exhibits: Exhibits to the Form 10-K have been included only with the copies of the Form 10-K filed with the Commission and the Nasdaq Stock Market. Upon request to EBC and payment of a reasonable fee, copies of the individual exhibits will be furnished. Exhibit No. Description - ----------- ----------- 3.1(a) EBC's Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 2 to Post Effective Amendment No. 1 to EBC's Registration Statement on Form 8-A as filed with the Commission on March 15, 1993). 3.1(b) Certificate of Amendment to EBC's Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to EBC's Current Report on Form 8-K dated June 8, 2000). *3.1(c) EBC's Certificate of Designation of Series One Junior Participating Preferred Stock. 3.1(d) EBC's Certificate of the Powers, Designation, Preferences and Rights of the Series B Convertible Preferred Stock (incorporated by reference to Exhibit 3.1(d) to EBC's Annual Report on Form 10-K for the year ended December 31, 1997). 3.2 EBC's Bylaws (incorporated by reference to Exhibit 3 filed with Post-Effective Amendment No. 1 to EBC's Registration Statement on Form 8-A as filed with the Commission on March 15, 1993). 4.1 Form of Stock Purchase Agreement, dated as of February 21, 1997, by and between EBC and the Purchasers of the Series B Convertible Preferred Stock (incorporated by reference to Exhibit 4.2 to EBC's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 Form 10-K")). 26 Exhibit No. Description - ----------- ----------- 4.2 Form of Stock Exchange Agreement, dated as of February 21, 1997, by and between EBC and the Exchanging Holders of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 4.3 to the 1996 Form 10-K). *4.3 Stockholder Rights Agreement dated as of March 8, 1995 between EBC and Computershare Investor Services LLC (as successor in interest to Society National Bank and Harris Trust & Savings Bank). 4.4 First Amendment to Stockholder Rights Agreement dated as of April 30, 1997 between EBC and Computershare Investor Services LLC (as successor in interest to Society National Bank and Harris Trust & Savings Bank) (incorporated by reference to Exhibit 4.3 to Post Effective Amendment No. 2 to EBC's Registration Statement on Form 8-A as filed with the Commission on June 23, 2000 (the "2000 8-A Amendment")). 4.5 Second Amendment to Stockholder Rights Agreement dated as of June 23, 2000 between EBC and Computershare Investor Services LLC (as successor in interest to Society National Bank and Harris Trust & Savings Bank) (incorporated by reference to Exhibit 4.4 to the 2000 8-A Amendment). 4.6 Form of Subscription Agreement for EBC's June 1999 private placement (incorporated by reference to Exhibit 4.1 to EBC's Current Report on Form 8-K dated June 11, 1999). *4.7 Form of Warrant for EBC's June 1999 private placement. 4.8 Form of Subscription Agreement for EBC's September 2000 private placement (incorporated by reference to Exhibit 4.1 to EBC's Current Report on Form 8-K dated September 8, 2000 (the "September 2000 Form 8-K")). 4.9 Form of Warrant for EBC's September 2000 private placement (incorporated by reference to Exhibit 4.2 to the September 2000 Form 8-K). 10.1+ License Agreement dated May 17, 2000 between EBC and Genencor International Inc. (incorporated by reference to Exhibit 10.1 to Amendment No. 1 to EBC's Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2000). 10.2+ Collaboration Agreement dated August 25, 2000 between EBC and Genencor International Inc. (incorporated by reference to Exhibit 10.1 to EBC's Quarterly Report on Form 10-Q for the quarter ended September 30, 2000 (the "Third Quarter 2000 Form 10-Q")). *10.3+ Sponsored Laboratory Study Agreement dated October 4, 2000 between EBC and The University of Texas M.D. Anderson Cancer Center. *10.4 Site License Agreement dated March 6, 1998 between EBC and Petro Star Inc. 10.5 Registration Agreement dated April 29, 1991 between EBC and Gryphon Ventures II, Limited Partnership (incorporated by reference to Exhibit 10.7 to EBC's Registration Statement on Form S-1 (No. 33-56718)). 10.6 Registration Agreement dated January 30, 1992 among EBC, The Travelers Indemnity Company and Gryphon Ventures II, Limited Partnership (incorporated by reference to Exhibit 10.6 to EBC's Registration Statement on Form S-1 (No. 33-56718)). *10.7 Lease Agreement dated May 24, 1993 between EBC and Woodlands Office Equities - 27 Exhibit No. Description - ----------- ----------- '95 Limited (as successor in interest to The Woodlands Corporation). *10.8 Lease Agreement dated January 24, 1994 between EBC and Woodlands Office Equities - '95 Limited (as successor in interest to The Woodlands Corporation). 10.9 Extension, Modification and Ratification of Lease dated March 23, 1998 between EBC and Woodlands Office Equities - '95 Limited (as successor in interest to The Woodlands Corporation) (incorporated by reference to Exhibit 10.36 to EBC's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the "1998 Form 10-K")). Management Contracts and Compensatory Plans 10.10 EBC 1997 Stock Option Plan, as amended (incorporated by reference to Exhibit A to EBC's Definitive Proxy Statement as filed with the Commission on April 27, 1999 (the "1999 Proxy Statement")). 10.11 EBC 1992 Stock Compensation Plan (incorporated by reference to Exhibit 10.10 to EBC's Registration Statement on Form S-1 (No. 33-56718)). 10.12 EBC Non-Employee Director Option Plan, as amended (incorporated by reference to Exhibit B to the 1999 Proxy Statement). 10.13 Simplified Employee Pension Plan Retirement Plan Adoption Agreement (incorporated by reference to Exhibit 10.15 to EBC's Registration Statement on Form S-1 (No. 33-56718)). 10.14 Employment Agreement dated December 4, 1998 between EBC and Peter P. Policastro (incorporated by reference to Exhibit 10.35 to the 1998 Form 10-K). 10.15 Employment Agreement dated January 31, 1996 between EBC and Daniel J. Monticello (incorporated by reference to Exhibit 10.10 to the 1996 Form 10-K). 10.16 Employment Agreement dated July 18, 1995 between EBC and Paul G. Brown, III (incorporated by reference to Exhibit 10.10 to EBC's Registration Statement on Form S-1 (No. 33-96096)). 10.17 Employment Letter dated August 30, 2000 between EBC and David Carpi (incorporated by reference to Exhibit 10.2 to the Third Quarter 2000 Form 10-Q). *11.1 Computation of earnings per share. *23.1 Consent of Arthur Andersen LLP. - ---------- * Filed herewith + Portions of this exhibit have been omitted based on a request for confidential treatment pursuant to Rule 24b-2 of the Exchange Act. Such omitted portions have been filed separately with the Commission. - ---------- (b) Reports on Form 8-K None. 28 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, EBC has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. ENCHIRA BIOTECHNOLOGY CORPORATION By: /s/ Peter P. Policastro ----------------------------------------- Peter P. Policastro Chief Executive Officer and President DATED the 29th day of March 2001. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of EBC and in the capacities and on the dates indicated: Name Title Date ---- ----- ---- /s/ Peter P. Policastro Chief Executive Officer and March 29, 2001 - --------------------------- President (Principal Peter P. Policastro executive officer) /s/ Paul G. Brown III Chief Financial Officer and March 29, 2001 - --------------------------- Vice President--Finance and Paul G. Brown, III Administration (Principal financial and accounting officer) /s/ William E. Nasser Chairman of the Board March 29, 2001 - --------------------------- William E. Nasser /s/ Daniel J. Monticello Vice President--Science and March 29, 2001 - --------------------------- Technology and Director Daniel J. Monticello, Ph.D. /s/ R. James Comeaux Director March 29, 2001 - --------------------------- R. James Comeaux /s/ Nancy T. Chang Director March 29, 2001 - --------------------------- Nancy T. Chang /s/ Thomas E. Messmore Director March 29, 2001 - --------------------------- Thomas E. Messmore /s/ Ramon Lopez Director March 29, 2001 - --------------------------- Ramon Lopez /s/ G. Anthony Gorry Director March 29, 2001 - --------------------------- G. Anthony Gorry /s/ William D. Young Director March 29, 2001 - --------------------------- William D. Young 29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Enchira Biotechnology Corporation: We have audited the accompanying balance sheets of Enchira Biotechnology Corporation ("the Company") (a Delaware corporation), as of December 31, 1999 and 2000, and the related statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company'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. 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 Enchira Biotechnology Corporation as of December 31, 1999 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Houston, Texas March 9, 2001 F-1 ENCHIRA BIOTECHNOLOGY CORPORATION BALANCE SHEETS
December 31, ------------ 1999 2000 ------------ ------------ ASSETS Current assets: Cash and cash equivalents ............................................. $ 2,510,274 $ 7,524,191 Short term investments ................................................ 3,445,199 4,475,679 Prepaid expenses and other current assets ............................. 143,014 900,266 ------------ ------------ Total current assets ............................................. 6,098,487 12,900,136 ------------ ------------ Long term investments .................................................... -- 1,280,937 Furniture, equipment and leasehold improvements, net ..................... 926,684 638,865 Intangible and other assets, net ......................................... 1,038,927 1,038,175 ------------ ------------ Total assets ..................................................... $ 8,064,098 $ 15,858,113 ============ ============ LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued liabilities .............................. $ 327,150 $ 544,836 Capital lease, short term ............................................. -- 12,304 Deferred revenue ...................................................... 180,000 730,000 Note payable .......................................................... -- 255,867 ------------ ------------ Total current liabilities ........................................ 507,150 1,543,007 ------------ ------------ Capital lease, long term ................................................. -- 57,991 Commitments and contingencies Stockholders' equity: Series B convertible preferred stock $0.01 par value (liquidation value $24,077,081; 760,000 shares authorized; 519,400 and 387,700 shares issued and outstanding, respectively) .................................................... 28,100,250 23,512,474 Common stock, $0.01 par value (30,000,000 shares authorized, 6,572,135 and 9,067,700 shares issued and outstanding, respectively) ............................ 65,721 90,677 Additional paid-in capital ............................................ 54,470,252 73,626,674 Accumulated deficit ................................................... (75,079,275) (82,972,710) ------------ ------------ Total stockholders' equity ....................................... 7,556,948 14,257,115 ------------ ------------ Total liabilities and stockholders' equity ....................... $ 8,064,098 $ 15,858,113 ============ ============
The accompanying notes are an integral part of these financial statements. F-2 ENCHIRA BIOTECHNOLOGY CORPORATION STATEMENTS OF OPERATIONS
Year Ended December 31, ----------------------- 1998 1999 2000 ----------- ----------- ----------- Sponsored research revenues ................... $ 688,882 $ 1,415,177 $ 840,552 ----------- ----------- ----------- Costs and expenses: Research and development ................... 7,706,490 4,847,641 4,195,043 General and administrative ................. 2,187,668 1,905,815 2,934,150 ----------- ----------- ----------- Total costs and expenses .............. 9,894,158 6,753,456 7,129,193 ----------- ----------- ----------- Interest and investment income ................ 393,764 213,458 308,412 Loss on disposal of fixed assets .............. (33,855) (139,641) (43,311) ----------- ----------- ----------- Net loss ...................................... $(8,845,367) $(5,264,462) $(6,023,540) =========== =========== =========== Net loss per common share - basic and diluted $ (5.20) $ (1.78) $ (1.10) =========== =========== =========== Shares used in computing net loss per common share -- basic and diluted ............... 1,875,414 4,635,930 7,576,121 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. F-3 ENCHIRA BIOTECHNOLOGY CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY
Preferred Stock Common Stock --------------- ------------ Shares Amount Shares Amount ------ ------ ------ ------ Balance at December 31, 1997 ..... 702,100 $ 33,853,380 1,750,204 $ 17,502 Exercise of common stock options -- -- 4,286 43 Warrants issued .................. -- -- -- -- Dividends on series B preferred stock paid in common stock .... -- (3,144,825) 417,203 4,172 Accretion and dividends on series B preferred stock ...... -- 3,531,611 -- -- Conversion of series B preferred stock to common stock ......................... (5,700) (285,000) 5,615 56 Fractional shares paid in cash at one-for-seven reverse split ... -- -- (54) (1) Common stock issued to consultant .................... -- -- 1,888 19 Net loss ......................... -- -- -- -- -------- ------------ ---------- -------- Balance at December 31, 1998 ..... 696,400 33,955,166 2,179,142 21,791 Accretion and dividends on series B preferred stock ...... -- 2,995,084 -- -- Conversion of series B preferred stock to common stock ......................... (177,000) (8,850,000) 174,379 1,744 Common stock issued to consultant .................... -- -- 1,549 16 Issuance of common stock and warrants ...................... -- -- 4,214,820 42,148 Exercise of common stock warrants ...................... -- -- 2,245 22 Net loss ......................... -- -- -- -- -------- ------------ ---------- -------- Balance at December 31, 1999 ..... 519,400 28,100,250 6,572,135 65,721 Accretion and dividends on series B preferred stock ...... -- 2,312,556 -- -- Conversion of series B preferred stock to common stock ......................... (131,700) (6,585,000) 328,261 3,283 Dividends on series B preferred stock paid in common stock .... -- (199,810) 39,025 390 Dividends on series B preferred stock paid in cash ............ -- (115,522) -- -- Common Stock issued to consultant .................... -- -- 12,820 128 Issuance of common stock and warrants, net ................. -- -- 2,000,000 20,000 Exercise of common stock warrants and options .......... -- -- 115,459 1,155 Net loss ......................... -- -- -- -- -------- ------------ ---------- -------- Balance at December 31, 2000 ..... 387,700 $ 23,512,474 9,067,700 $ 90,677 ======== ============ ========== ======== Additional Paid-in Accumulated Capital Deficit Total ------- ------- ----- Balance at December 31, 1997 ..... $ 35,031,606 $(55,204,265) $ 13,698,223 Exercise of common stock options 42,557 -- 42,600 Warrants issued .................. 404,500 -- 404,500 Dividends on series B preferred stock paid in common stock .... 3,140,601 -- (52) Accretion and dividends on series B preferred stock ...... (381,648) (3,149,963) -- Conversion of series B preferred stock to common stock ......................... 284,944 -- -- Fractional shares paid in cash at one-for-seven reverse split ... (195) -- (196) Common stock issued to consultant .................... 6,732 -- 6,751 Net loss ......................... -- (8,845,367) (8,845,367) ------------ ------------ ------------ Balance at December 31, 1998 ..... 38,529,097 (67,199,595) 5,306,459 Accretion and dividends on series B preferred stock ...... (379,866) (2,615,218) -- Conversion of series B preferred stock to common stock ......................... 8,848,256 -- -- Common stock issued to consultant .................... 5,984 -- 6,000 Issuance of common stock and warrants ...................... 7,461,415 -- 7,503,563 Exercise of common stock warrants ...................... 5,366 -- 5,388 Net loss ......................... -- (5,264,462) (5,264,462) ------------ ------------ ------------ Balance at December 31, 1999 ..... 54,470,252 (75,079,275) 7,556,948 Accretion and dividends on series B preferred stock ...... (442,661) (1,869,895) -- Conversion of series B preferred stock to common stock ......................... 6,581,697 -- (20) Dividends on series B preferred stock paid in common stock .... 199,420 -- -- Dividends on series B preferred stock paid in cash ............ -- -- (115,522) Common Stock issued to consultant .................... 84,872 -- 85,000 Issuance of common stock and warrants, net ................. 12,425,853 -- 12,445,853 Exercise of common stock warrants and options .......... 307,241 -- 308,396 Net loss ......................... -- (6,023,540) (6,023,540) ------------ ------------ ------------ Balance at December 31, 2000 ..... $ 73,626,674 $(82,972,710) $ 14,257,115 ============ ============ ============
The accompanying notes are an integral part of these financial statements. F-4 ENCHIRA BIOTECHNOLOGY CORPORATION STATEMENTS OF CASH FLOWS
Year Ended December 31, ---------------------------------------------- 1998 1999 2000 ----------- ----------- ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(8,845,367) $(5,264,462) $ (6,023,540) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 1,243,100 1,015,754 750,351 Issuance of common stock for services 6,751 6,000 85,000 Research and development expense recorded for warrant issuance 404,500 -- -- Net loss on disposal of fixed assets 33,855 139,641 43,311 Changes in assets and liabilities: Decrease (increase) in prepaid expenses and other assets 501,385 369,472 (384,977) Increase (decrease) in accounts payable and accrued liabilities (351,001) (186,523) 217,686 Increase in deferred revenue -- -- 550,000 ----------- ----------- ------------ Net cash used in operating activities (7,006,777) (3,920,118) (4,762,169) ----------- ----------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (208,691) (152,157) (134,595) Patent expenditures (290,496) (164,282) (285,407) Sale of fixed assets -- 14,263 -- Sale (purchase) of investments held to maturity 693,279 (3,445,199) (2,311,417) ----------- ----------- ------------ Net cash provided by (used in) investing activities 194,092 (3,747,375) (2,731,419) ----------- ----------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Payments on note payable (91,993) (126,613) (118,087) Payments on capital lease obligations (3,556) -- (13,135) Proceeds from exercise of stock options and warrants 42,353 5,388 308,396 Dividends paid -- -- (115,522) Issuance of common stock -- 7,503,563 12,445,853 ----------- ----------- ------------ Net cash provided by (used in) financing activities (53,196) 7,382,338 12,507,505 ----------- ----------- ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,865,881) (285,155) 5,013,917 ----------- ----------- ------------ CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 9,661,310 2,795,429 2,510,274 ----------- ----------- ------------ CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,795,429 $ 2,510,274 $ 7,524,191 =========== =========== ============ Supplemental information of noncash financing activities: Note payable issued for prepaid insurance $ 126,613 $ -- $ 255,867 =========== =========== ============
The accompanying notes are an integral part of these financial statements. F-5 ENCHIRA BIOTECHNOLOGY CORPORATION NOTES TO FINANCIAL STATEMENTS December 31, 2000 1. Description of the Company Enchira Biotechnology Corporation ("Enchira" or the "Company"), formerly Energy BioSystems Corporation, was incorporated in the State of Delaware on December 20, 1989, and commenced operations in January 1990. EBC is a biotechnology company incorporating genetic recombination, high throughput screening and bioprocessing in an integrated, directed evolution technology platform. The Company believes that its proprietary platform technology can be used to generate libraries of novel genes for the creation of improved enzymes for a broad range of applications, such as protein-based pharmaceuticals, agricultural crop enhancement and protection products, and industrial enzymes for the manufacture of specialty chemicals, fine chemicals and pharmaceutical intermediates. On April 27, 2000, Enchira received notice from Maxygen Inc. ("Maxygen") that they had elected to seek arbitration under the Collaboration Agreement between Enchira and Maxygen. Maxygen claims that Enchira used their confidential information to develop the RACHITT(TM) technology, which they allege was provided to Enchira under the Collaboration Agreement. Enchira continues to deny all of Maxygen's allegations and believes that its technology was independently developed after the collaboration terminated. The arbitration was held in November 2000. On March 6, 2001, Enchira received an unfavorable ruling from the arbitrator in its arbitration proceeding with Maxygen. The arbitrator's opinion found that Enchira breached several provisions of the Collaboration Agreement with Maxygen with respect to Enchira's RACHITT(TM) and HTS technologies, but remedies for such breaches were not specified in the ruling. The arbitrator directed that the parties attempt to arrive at an agreement for an appropriate remedy. If the parties cannot reach an agreement, they will again appear before the arbitrator who will issue a decision on damages or some other remedy. While Enchira will work with Maxygen and the arbitrator to reach a conclusion to this proceeding, it also intends to investigate alternative actions that will permit Enchira to continue to develop the RACHITT(TM) technology that Enchira continues to believe is its independent technology. The ultimate resolution of the arbitrator's ruling could require Enchira to pay costly licensing or royalty fees or result in an outright prohibition of Enchira's use of such technology. Enchira has devoted substantially all of its efforts to research and development. There have been no revenues from operations other than sponsored research revenues and one site license fee in 1998 and there is no assurance of future revenues. During 2000, Enchira used $4,762,169 in cash for operating activities. As of December 31, 2000, Enchira had $11,999,870 in cash, cash equivalents and short-term investments and $1,600,998 in liabilities. Enchira has an accumulated deficit since inception of approximately $83 million and expects that its existing financial resources, exclusive of any financial settlement that may be a remedy in the Maxygen arbitration case, will fund operations through 2002. Enchira may seek additional financing through various alternatives that include: an equity financing, government funding and alliances with pharmaceutical companies and corporate partners. Adequate funds for these purposes, whether obtained through financial markets or collaborative or other arrangements with corporate partners or from other resources, may not be available when needed or on terms acceptable to Enchira. Enchira's inability to raise funds when needed may require Enchira to delay, scale back or eliminate some or all of its research and product development programs. Enchira shall also have increased expenses as a result of its ongoing arbitration with Maxygen. These expenses and any fees associated with any license, cross licenses or other remedies that Enchira may be required to enter into with Maxygen may significantly deplete our existing capital and cause Enchira to seek additional capital, which may not be available on favorable terms, if at all. F-6 ENCHIRA BIOTECHNOLOGY CORPORATION Notes to Financial Statements (Continued) 2. Accounting Policies Cash, Cash Equivalents and Short-Term Investments Enchira considers short-term investments with original maturities of 90 days or less to be cash equivalents. Debt and equity securities that Enchira has the intent and ability to hold to maturity are classified as "held to maturity" and reported at amortized cost, which approximates fair value. At December 31, 1999 and 2000, Enchira held cash and cash equivalents in excess of the federally insured amounts. Furniture, Equipment and Leasehold Improvements Furniture and equipment consists of office furniture and equipment, computers and laboratory equipment and are carried at cost, which approximates fair value. Depreciation is calculated on the straight-line method using a five-year estimated useful life. Leasehold improvements are amortized on the straight-line method over the term of the lease or over the useful life of the assets whichever is shorter. Maintenance and repairs that do not improve or extend the life of assets and expenditures for research and development equipment for which there is no future alternative use are expensed as incurred. Expenditures that improve or extend the life of assets are capitalized. Intangible and Other Assets Intangible and other assets mainly consist of patent costs, which are primarily legal fees. These costs are being amortized over 20 years. Accumulated amortization at December 31, 1999 and 2000 amounted to $684,997 and $973,135, respectively. Note Payable Enchira has recorded a note payable in the accompanying balance sheet for insurance premiums financed pursuant to a promissory note as of December 31, 2000. The note has an outstanding balance of $255,867 at December 31, 2000, matures in 9 months and is subject to interest at 7.55 percent. Revenue Recognition The Company recognizes revenue in accordance with Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"), as its method of accounting for revenue recognition. Revenue from non-refundable sponsored research and development payments is recognized as services are performed, provided a contractual arrangement exists, the contract price is fixed or determinable, and the collection of the resulting receivable is probable. Sponsored research and development and licensing payments received that are refundable or for which service obligations remain are reflected as deferred revenue. Research and Development All research and development costs, both generated internally and from research and development contracts, are expensed as incurred. Enchira allocates certain indirect costs to research and development expenses, which consist primarily of overhead related to the administration of research and development activities. F-7 ENCHIRA BIOTECHNOLOGY CORPORATION Notes to Financial Statements (Continued) Net Loss Per Common Share Net loss per common share has been computed by dividing the net loss, which has been increased for periodic accretion and accrued dividends on the Series B Convertible Preferred Stock by the weighted average number of shares of common stock outstanding during the periods. In all applicable years, common stock equivalents were anti-dilutive and, accordingly, were not included in the computation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses and the disclosure of contingent assets and liabilities during the reporting period. Enchira has not recorded any impairment of capitalized intangibles related to patents on its technologies. Actual results could differ from those estimates. 3. Furniture, Equipment and Leasehold Improvements A summary of furniture, equipment and leasehold improvements is as follows:
December 31, ------------ 1999 2000 ----------- ----------- Office furniture and equipment .......................... $ 344,537 $ 344,537 Laboratory equipment .................................... 3,846,187 3,929,569 Computer equipment ...................................... 640,887 238,445 Leasehold improvements .................................. 1,734,011 1,734,011 Equipment under capital lease ........................... -- 83,410 Automobiles ............................................. 23,670 23,670 ----------- ----------- 6,589,292 6,353,642 Less--Accumulated depreciation and amortization ......... (5,662,608) (5,714,777) ----------- ----------- $ 926,684 $ 638,865 =========== ===========
4. Stockholders' Equity In December 1998, Enchira declared a one-for-seven reverse stock split, which was effective December 18, 1998. All references to earnings per share, number of shares and share amounts prior to December 18, 1998 have been retroactively restated to reflect the reverse stock split for all periods presented. Series B Convertible Preferred Stock Shares of Series B Preferred Stock are convertible into shares of common stock at an adjusted conversion price currently equal to $16.76 per share, subject to certain adjustments. The Series B Preferred Stock may be redeemed by the Company under certain circumstances after February 26, 1999 and is required to be redeemed, subject to certain limitations, on February 26, 2002 at a redemption price of $50.00 per share, plus accrued and unpaid dividends. The redemption price is payable in cash or common stock at the option of the Company. It is the Company's present intent, however, to redeem the Series B Preferred Stock for common stock, subject to certain requirements. Accordingly, the Series B Preferred Stock is included in stockholders' equity. During the year ended December 31, 2000, 131,700 shares of Series B Preferred Stock were converted to 328,261 shares of common stock. As of December 31, 2000, 314,400 aggregate shares of Series B Preferred Stock have been converted to 508,255 shares of common stock. The remaining 387,700 shares of Series B Preferred Stock are convertible into 1,156,622 shares of common stock. F-8 ENCHIRA BIOTECHNOLOGY CORPORATION Notes to Financial Statements (Continued) Dividends on the Series B Preferred Stock are cumulative from the date of the initial closing, February 27, 1997, and are payable, at the Company's election, in cash or common stock of the Company, or a combination thereof, at an annual rate equal to (i) $4.00 per share to the extent the dividend is paid in cash and (ii) $4.50 per share to the extent the dividend is paid in common stock. The Company has not declared a dividend payment since November 1998, and since that date, has not paid dividends on Series B Preferred Stock except on conversion of Series B Preferred Stock to common stock. As of December 31, 2000, Enchira has paid common stock dividends of 509,451 shares of common stock and cash dividends of $115,522 on Series B Preferred Stock. Common Stock The Company completed a private placement of its common stock during September 2000. The Company offered and sold 2,000,000 shares of its common stock at $6.4325 per share. Net proceeds from the offering were approximately $12.5 million. In connection with the closing, warrants to purchase 600,000 shares of the Company's common stock were issued at an exercise price of $7.44. In addition, warrants to purchase 31,375 shares of the Company's common stock at an exercise price of $7.44 per share were issued to The Trout Group, LLC, one of the Company's placement agents, in partial payment of their placement fees. The warrants expire in two years and have been recorded at an aggregate estimated fair value of $2,522,094, which was computed using the Black-Scholes option pricing model and the following assumptions: risk free rate of 6.19 percent; expected dividend yield of zero; expected life of two years; and a weighted-average expected volatility at an average weight of 125 percent. During March 1998, Enchira issued a warrant in connection with a license agreement (see Note 7). The warrant entitles the purchaser to purchase 28,571 shares of common stock at an exercise price of $21.77 per share over a four-year term. In March 1995, Enchira adopted a Stockholder Rights Plan (the "Rights Plan") in which Preferred Stock Purchase Rights (the "Rights") were distributed for each share of common stock held as of the close of business on March 27, 1995 and are distributed to each share of common stock issued thereafter until the earlier of (i) the Distribution Date (as defined in the Rights Plan), (ii) the date Rights are redeemed or (iii) March 8, 2005. The Rights Plan is designed to deter coercive takeover tactics and to prevent an acquirer from gaining control of Enchira without offering a fair price to all of Enchira's stockholders. The Rights Plan was amended in June 2000. The Rights will expire on March 8, 2005. Each Right entitles stockholders to buy one-hundredth of a share of a new series of Junior Preferred Stock of Enchira at an exercise price of $50.00 per one-hundredth of a share. The Rights are exercisable only if a person acquires beneficial ownership of 20percent or more of Enchira's outstanding common stock. The Rights Plan grandfathers certain stockholders who beneficially owned more than 20percent of the outstanding shares of Enchira's common stock on the effective date of the Rights Plan from triggering the exercisability of the Rights. The amendment excludes persons who are registered investment companies or advisers from triggering the exercisability of the Rights. In 1999 and 2000, the Company paid consultants 1,549 and 12,820 shares of common stock, respectively, at a fair market value on the date of issuance between $3.00 and $4.38 per share in 1999 and between $5.56 and $12.32 per share in 2000. 5. Stock Options In January 1997, Enchira's Board of Directors adopted the 1997 Stock Option Plan (the "1997 Plan"). Under the 1997 Plan, Enchira may issue options for and sell up to 14,285 shares of Common Stock to employees and consultants of Enchira. The options granted under this plan may not have an exercise price per share less than the fair market value on the date of grant and are limited to a term not to exceed ten years. In May 1999, the 1997 Plan was amended to increase the number of shares available for grant to 1,200,000. F-9 ENCHIRA BIOTECHNOLOGY CORPORATION Notes to Financial Statements (Continued) Enchira maintains a Stock Compensation Plan (the "1992 Plan"), which is composed of non-qualified stock options, incentive stock options, year-end stock bonuses and restricted and non-restricted stock grants. Under the 1992 Plan, 290,147 shares of common stock are reserved for issuance upon the exercise of stock options. Under a 1994 Non-Employee Director Option Plan, composed of non-qualified stock options, 25,000 shares of common stock are reserved for issuance upon the exercise of stock options. In May 1999, the Non-Employee Director Option Plan was amended to increase the number of shares available for grant to 200,000. At December 31, 2000, options to purchase 705,383 shares of common stock were outstanding pursuant to the 1992 and 1997 Plans. Additionally, as of December 31, 2000 consultants and directors had outstanding options to purchase 226,860 shares of common stock that were not issued under the 1992 or 1997 Plans (35,617 options were not issued under any plan). Options generally vest over a three-year period and upon the earlier of the completion of the specified performance milestones, or over a four-year period, or nine years and ten months from the date of grant. The options expire ten years from the date of grant. The following table summarizes information about fixed-price stock options outstanding at December 31, 2000:
Options Outstanding Options Exercisable - ---------------------------------------------------------------- ---------------------------- Weighted Average Remaining Contractual Weighted Weighted Range of Outstanding Life Average Exercisable Average Exercise Prices Shares (In Years) Exercise Price Shares Exercise Price - --------------- ------ ---------- -------------- ------ -------------- $2.06 - $7.25 814,323 8.0 $ 3.60 338,651 $ 3.52 $9.63 - $35.88 70,707 6.5 $25.21 36,592 $24.96 $40.25 - $84.00 47,213 4.0 $58.97 30,470 $59.22
A summary of the status of Enchira's stock options at December 31, 1998, 1999 and 2000, and changes during the years then ended is presented in the table and narrative below:
1992 and 1997 Plans Options not issued under Plan ------------------- ----------------------------- Number Weighted Average Number Weighted Average of Options Exercise Price of Options Exercise Price ---------- ---------------- ---------- --------------- Balance at December 31, 1997 231,029 35.84 35,617 26.11 Granted ............................ 49,956 18.52 -- -- Exercised .......................... (4,286) 9.94 -- -- Forfeited .......................... (110,118) 35.99 -- -- -------- ------ Balance at December 31, 1998 166,581 31.21 35,617 26.11 Granted ............................ 453,200 2.11 -- -- Exercised .......................... -- -- -- -- Forfeited .......................... (51,384) 36.05 -- -- -------- ------ Balance at December 31, 1999 568,397 7.80 35,617 26.11 Granted ............................ 176,200 6.01 -- -- Exercised .......................... (13,813) 4.67 -- -- Forfeited .......................... (25,401) 9.22 -- -- -------- ------ Balance at December 31, 2000 705,383 7.20 35,617 26.11 ======== ====== Exercisable at December 31, 1998 97,158 $27.86 35,617 $26.11 Exercisable at December 31, 1999 120,977 $19.04 35,617 $26.11 Exercisable at December 31, 2000 204,567 $11.66 35,617 $26.11
F-10 ENCHIRA BIOTECHNOLOGY CORPORATION Notes to Financial Statements (Continued) The weighted average fair value of the options issued under the 1992 and 1997 Plans for the years ended December 31, 1998, 1999 and 2000 was $9.09, $1.92 and $5.72, respectively. During the years ended December 31, 1998, 1999 and 2000, Enchira granted 17,714, 83,100 and 88,000 options respectively, under the Non-Employee Director Option Plan. These options are fully vested upon issuance. The weighted average exercise price per share on these grants was $13.15, $2.29 and $6.66, respectively. As of December 31, 1998, 1999 and 2000, Enchira had 67,045, 150,128 and 191,243 options exercisable, respectively, under this plan with a weighted-average exercise price of $26.26, $12.99 and $7.86, respectively. The weighted average fair market value of the options issued under this plan during the years ended December 31, 1998, 1999 and 2000 was $7.13, $1.89 and $6.38, respectively. Enchira accounts for its stock options under APB Opinion No. 25. Enchira records deferred compensation for the difference between the exercise price and the fair market value on the measurement date. During 1998, 1999 and 2000, Enchira issued all options at fair market value and no compensation cost has been recognized. Had compensation cost for these options been determined consistent with SFAS. 123, Enchira's net loss and loss per share would have been increased to the following pro forma amounts:
1998 1999 2000 ---- ---- ---- Net Loss: As Reported $ (8,845,367) $ (5,264,462) $ (6,023,540) -------------- -------------- -------------- Pro Forma (10,183,481) (8,562,311) (9,106,624) -------------- -------------- -------------- Net Loss Per Common Share: As Reported $ (5.20) $ (1.78) $ (1.10) -------------- -------------- -------------- Pro Forma (5.43) (1.85) (1.20) -------------- -------------- --------------
Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that expected in future years. The fair market value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1998, 1999 and 2000, respectively: risk-free interest rates of 5.8, 6.4 and 6.1 percent for all the Plans; expected dividend yields of zero for all the Plans; expected lives of nine years and ten months for all options; and expected volatility of 71.4, 100.8 and 112.7 percent for all the Plans. 6. Federal Income Taxes Enchira has had losses since inception and, therefore, has not been subject to federal income taxes. As of December 31, 2000, Enchira had accumulated net operating losses ("NOL") and research and development tax credit carryforwards for income tax purposes of approximately $69.1 million and $1.8 million, respectively. These carryforwards begin to expire in 2005. The Tax Reform Act of 1986 provided for an annual limitation on the use of NOL and tax credit carryforwards following certain ownership changes that limit Enchira's ability to utilize these carryforwards. In April 1991, October 1994 and July 2000, Enchira underwent a "more than 50 percent change in ownership" as defined by Internal Revenue Code Section 382. Additionally, because U.S. tax laws limit the time during which NOL and tax credit carry forwards may be applied against future taxable income and tax liabilities, Enchira may not be able to take full advantage of its NOL and tax credits for federal income tax purposes. F-11 ENCHIRA BIOTECHNOLOGY CORPORATION Notes to Financial Statements (Continued) Significant components of Enchira's net deferred tax asset at December 31, 1999 and 2000 are as follows:
1999 2000 ------------ ------------ Deferred tax assets relating to: Federal net operating loss carryforwards ................. $ 21,402,906 $ 23,512,630 Research and development credit carryforwards ............ 1,707,190 1,815,159 Capital and Texas business loss carryforwards ............ 950,282 1,107,717 Book/tax differences on depreciable, amortizable and other assets and accrued liabilities ..................... 175,573 (3,296) Deferred revenue and unrealized gains .................... 61,200 248,200 Deferred tax valuation allowance ......................... (24,297,151) (26,680,410) ------------ ------------ Net deferred tax asset ................................... $ -- $ -- ============ ============
Beginning January 1, 1993, Enchira adopted SFAS 109, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Since Enchira has incurred losses since inception and there is no assurance of future taxable income, a valuation allowance has been established to fully offset the deferred tax assets. Enchira's effective income tax rate differs from the statutory federal income tax rate because of the increase in the deferred tax valuation allowance. 7. License and Research Agreements To finance its research and development budgets, Enchira intends to seek additional collaborative research and development agreements with corporate partners. In August 2000, the Company entered into a collaboration agreement with Genencor International, Inc. ("Genencor") for research and development work on improved industrial proteins. Under the agreement, Genencor will provide $1 million of funding over the next two years. In May 2000, the Company entered into a licensing agreement with Genencor involving Enchira's proprietary gene shuffling technology for directed evolution. Under the agreement, Genencor will use the Company's proprietary RACHITT(TM) technology to develop gene-based products for the cleaning, textiles, grain processing, animal feed and food ingredients industries. Genencor paid an initial licensing fee and an additional fee for an option to expand the licensing field in June 2000. In the event that Genencor's rights to the RACHITT(TM) technology are materially and adversely affected as a result of the arbitration with Maxygen, the payments received from Genencor are refundable. Payments received under the licensing and collaboration agreements during 2000 have been recorded as deferred revenue on the balance sheet In October 2000, the Company established a joint collaboration with The University of Texas M. D. Anderson Cancer Center to apply its directed evolution technologies to the development of more effective cancer therapies targeted toward epidermal growth factor receptors. In this collaboration, Enchira will provide directed evolution and robotic screening research and has retained rights to developments that come out of the relationship. The agreement may be terminated by either party with 30 days advanced written notice. In March 1998, Enchira entered into a site license agreement with Petro Star Inc. ("Petro Star") regarding the design and installation of a BDS unit at Petro Star's Valdez, Alaska refinery. The agreement involves several stages of work, the first of which, involving the completion of scoping economics, is completed. In addition, the agreement provides Enchira with certain rights to conduct development work and demonstrations of its BDS technology at Petro Star's refinery. The agreement calls for the payment of staged license fees and royalties to Enchira, including a $200,000 initial site license fee upon execution of the agreement. As is customary in such arrangements in the petroleum refining industry, the agreement provides certain approval and termination rights to Petro Star at the completion of each stage prior to commercialization. In connection with the execution of the agreement, Enchira issued a four-year warrant entitling Petro Star to purchase 28,571 shares of Enchira Common Stock at an exercise F-12 ENCHIRA BIOTECHNOLOGY CORPORATION Notes to Financial Statements (Continued) price of $21.77 per share. The warrant was recorded as research and development expense at an estimated fair value of $404,500, which was computed using the Black-Scholes option-pricing model. The successful implementation of a commercial BDS unit will be dependent upon Enchira's ability to achieve additional improvements in the productivity of the biocatalyst (e.g., reaction rates, specificity and stability) and process technology (e.g., bioreactor and separations technology). In September 2000, Enchira notified Petro Star that it will not continue to pursue development of BDS technology at the Petro Star refinery. The parties are in discussions concerning a licensing arrangement and termination of the relationship. In August 1997, Enchira was awarded funding by the U.S. Department of Energy ("DOE") for a $2.9 million, as amended and extended to May 2001, program dedicated to the development of a BDS application for gasoline. Through December 31, 2000, Enchira had recognized $2,604,380 in sponsored research revenue from the grant. Enchira continues to pursue the development of this technology and expects to receive the remaining grant funds in 2001. In December 1994, Enchira was awarded a $2 million federal grant under the Advanced Technology Programs administered by the National Institute of Standards and Technology ("NIST"). The three-year program funded by this grant was dedicated to the development of a biotechnology-based method of removing sulfur from crude oil. During 1998, the final year of the program, Enchira recognized $34,000 in sponsored research revenue relating to this grant. 8. Commitments and Contingencies Enchira is currently pursuing remedies for the arbitration ruling relating to its arbitration with Maxygen. Additionally, Enchira is subject to other legal proceedings and claims, which arise in the ordinary course of its business. Management believes, based on discussions with its legal counsel, that the outcome of these other legal actions and claims will not have a material adverse effect upon the financial position and results of operations of Enchira. Enchira maintains a Simplified Employee Pension Plan (the "Plan") for all employees. Under the terms of the Plan, employees are eligible to participate after completion of six months of service. Enchira contributes an amount equal to 8percent of the employees' annual compensation to the Plan. Employees are vested immediately and there is presently no employee contribution. Total expenses under the Plan were approximately $284,000, $195,000 and $159,000 for the years ended December 31, 1998, 1999 and 2000, respectively. Enchira has recorded a capital in the accompanying balance sheet for laboratory equipment financed pursuant to a promissory note as of January 1, 1999. The note has an outstanding balance of $70,295 at December 31, 2000, matures in 4 years and is subject to interest at 10.38 percent. Future minimum payments under a non-cancelable operating lease consist of the following at December 31, 2000:
Fiscal Year 2001.................................. $ 409,617 2002.................................. 436,998 2003.................................. 364,165 ---------- Total minimum lease payments.... $1,210,780 ==========
F-13 ENCHIRA BIOTECHNOLOGY CORPORATION Notes to Financial Statements (Continued) Enchira incurred rent expense of $399,724, $382,829 and $308,056 during 1998, 1999 and 2000, respectively. Rent expense in 2000 is net of sublease income of approximately $84,000. 9. Quarterly Information (Unaudited)
Fiscal Year Quarters -------------------- First Second Third Fourth Total ----- ------ ----- ------ ----- Year ended December 31, 2000 Revenues ...................... $ 287,697 $ 70,468 $ 135,157 $ 347,230 $ 840,552 Costs and expenses ............ 1,478,051 1,522,741 1,780,661 2,347,740 7,129,193 ----------- ----------- ----------- ----------- ----------- Net loss ...................... $(1,119,378) $(1,397,810) $(1,577,064) $(1,929,288) $(6,023,540) =========== =========== =========== =========== =========== Loss per common share -- Basic and diluted ......... $ (0.27) $ (0.28) $ (0.28) $ (0.27) $ (1.10) =========== =========== =========== =========== =========== Year ended December 31, 1999 Revenues ...................... $ 510,873 $ 514,063 $ 390,241 $ -- $ 1,415,177 Costs and expenses ............ 2,148,424 1,533,277 1,437,294 1,634,461 6,753,456 ----------- ----------- ----------- ----------- ----------- Net loss ...................... $(1,616,405) $ (999,017) $ (957,216) $(1,691,824) $(5,264,462) =========== =========== =========== =========== =========== Loss per common share -- Basic and diluted ......... $ (1.15) $ (0.56) $ (0.25) $ (0.36) $ (1.78) =========== =========== =========== =========== ===========
F-14 EX-3.1(C) 2 a2043676zex-3_1c.txt EXHIBIT 3.1(C) EXHIBIT 3.1(c) CERTIFICATE OF DESIGNATION OF SERIES ONE JUNIOR PARTICIPATING PREFERRED STOCK Of ENERGY BIOSYSTEMS CORPORATION Pursuant to Section 151 of the General Corporation Law of the State of Delaware ENERGY BIOSYSTEMS CORPORATION, a corporation organized and existing under the laws of the State of Delaware (the "Company"), DOES HEREBY CERTIFY that, at a meeting of the Company's Board of Directors duly called and held on March 8, 1995 at which a quorum was present and acting throughout, the following resolutions were adopted pursuant to Section 151 of the Delaware General Corporation Law (the "Delaware Act"): WHEREAS, Article Four of the Company's Amended and Restated Certificate of Incorporation (the "Charter"), authorizes 35,000,000 shares of capital stock, consisting of 5,000,000 shares of preferred stock, par value $0.01 per share (the "Preferred Stock"), issuable from time to time in one or more series, and 30,000,000 shares of common stock, par value $0.01 per share (the "Common Stock"), issuable from time to time; and WHEREAS, in accordance with Section 151 of the Delaware Act and pursuant to Article Four of the Charter, the Company's Board of Directors is authorized to fix the designations, powers, preferences and relative, participating, optional or other special rights, if any, and qualifications, limitations or restrictions thereof, of any wholly unissued series of Preferred Stock, and to fix the number of shares constituting such series, and to increase or decrease the number of shares of any such series (but not below the number of shares thereof then outstanding); and WHEREAS, it is the desire of the Board of Directors of this Corporation, in accordance with the authority conferred upon it as described above, to issue a series of Preferred Stock and to fix the rights, preferences, restrictions and other matters relating thereto; NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby establish a series of Preferred Stock of this Company and does hereby fix and determine the rights, preferences, restrictions and other matters relating to said series of Preferred Stock, as follows: Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be designated as "Series One Junior Participating Preferred Stock" ("Series One Preferred Stock") and the number of shares constituting such series shall be 300,000. Such number of shares may be adjusted by appropriate action of the Board of Directors. Section 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the provisions for adjustment hereinafter set forth, the holders of shares of Series One Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, (i) cash dividends in an amount per share (rounded to the nearest cent) equal to 100 times the aggregate per share amount of all cash dividends contemporaneously declared on the Common Stock, and (ii) a preferential cash dividend ("Preferential Dividends"), if any, on the tenth day of March, June, September and December of each year (each a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series One Preferred Stock, in an amount equal to $1.00 per share of Series One Preferred Stock less the per share amount of all cash dividends declared on the Series One Preferred Stock pursuant to clause (i) of this sentence since the immediately preceding Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series One Preferred Stock. In the event the Company shall, at any time after the issuance of any share or fraction of a share of Series One Preferred Stock, make any distribution on the shares of Common Stock, whether by way of a dividend or a reclassification of stock, a recapitalization, reorganization or partial liquidation of the Company or otherwise, which is payable in cash or any debt security, debt instrument, real or personal property or any other property (other than cash dividends subject to the immediately preceding sentence and other than a distribution of shares of Common Stock or other capital stock of the Company and other than a distribution of rights or warrants to acquire any such share, including any debt security convertible into or exchangeable for any such share, at a price less than the Current Market Price (as hereinafter defined) of such share), then and in each such event the Company shall simultaneously pay on each then outstanding share of Series One Preferred Stock a distribution, in like kind, of 100 times (subject to the provisions for adjustment hereinafter set forth) such distribution paid on a share of Common Stock. The dividends and distributions on the Series One Preferred Stock to which holders thereof are entitled pursuant to clause (i) of the first sentence of this paragraph and pursuant to the second sentence of this paragraph are hereinafter referred to as "Participating Dividends" and the multiple of such cash and non-cash dividends on the Common Stock applicable to the determination of the Participating Dividends, which shall be 100 initially but shall be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Dividend Multiple." In the event the Company shall at any time after March 8, 1995 declare or pay any dividend or make any distribution on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then in each such case the Dividend Multiple thereafter 2 applicable to the determination of the amount of Participating Dividends which holders of shares of Series One Preferred Stock shall be entitled to receive shall be the Dividend Multiple applicable immediately prior to such event multiplied by a fraction, of which the numerator is the number of shares of Common Stock outstanding immediately after such event and of which the denominator is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Company shall declare each Participating Dividend at the same time it declares any cash or non-cash dividend or distribution on the Common Stock in respect of which a Participating Dividend is required to be paid. No cash or non-cash dividend or distribution on the Common Stock in respect of which a Participating Dividend is required to be paid shall be paid or set aside for payment on the Common Stock unless a Participating Dividend in respect of such dividend or distribution on the Common Stock shall be simultaneously paid, or set aside for payment, on the Series One Preferred Stock. (C) Preferential Dividends shall begin to accrue on outstanding shares of Series One Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issuance of any shares of Series One Preferred Stock. Accrued but unpaid Preferential Dividends shall cumulate but shall not bear interest. Preferential Dividends paid on the shares of Series One Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. Section 3. VOTING RIGHTS. The holders of shares of Series One Preferred Stock shall have the following voting rights: (A) Subject to the provisions for adjustment hereinafter set forth, each share of Series One Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of the stockholders of the Company. The number of votes which a holder of Series One Preferred Stock is entitled to cast, as the same may be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Vote Multiple." In the event the Company shall at any time after March 8, 1995 declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then in each such case the Vote Multiple thereafter applicable to the determination of the number of votes per share to which holders of shares of Series One Preferred Stock shall be entitled after such event shall be the Vote Multiple immediately prior to such event multiplied by a fraction, of which the numerator is the number of shares of Common Stock outstanding immediately after such event and of which the denominator is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series One Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Company. 3 (C) In the event that the Preferential Dividends accrued on the Series One Preferred Stock for six or more quarterly dividend periods, whether consecutive or not, shall not have been declared and paid or set apart for payment, the holders of record of preferred stock of the Company of all series (including the Series One Preferred Stock), other than any series in respect of which the right is expressly withheld by the Charter or the authorizing resolutions included in the Certificate of Designation therefor, shall have the right, at the next meeting of stockholders called for the election of directors, to elect two members to the Board of Directors, which directors shall be in addition to the number required by the Company's bylaws as in effect prior to such event, to serve until the next annual meeting of the stockholders and until their successors are elected and qualified or their earlier resignation, removal or incapacity or until such earlier time as all accrued and unpaid Preferential Dividends upon the outstanding shares of Series One Preferred Stock shall have been paid (or set aside for payment) in full. The holders of shares of Series One Preferred Stock shall continue to have the right to elect directors as provided by the immediately preceding sentence until all accrued and unpaid Preferential Dividends upon the outstanding shares of Series One Preferred Stock shall have been paid (or set aside for payment) in full. Such directors may be removed and replaced by such stockholders, and vacancies in such directorships may be filled only by such stockholders (or by the remaining director elected by such stockholders, if there be one) in the manner permitted by law; provided, however, that any such action by stockholders shall be taken at a meeting of stockholders and shall not be taken by written consent thereof. (D) Except as otherwise required by law or set forth herein, holders of Series One Preferred Stock shall have no special voting rights and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for the taking of any corporate action. Section 4. CERTAIN RESTRICTIONS. (A) Whenever Preferential Dividends or Participating Dividends are in arrears or the Company shall be in default of payment thereof, thereafter and until all accrued and unpaid Preferential Dividends and Participating Dividends, whether or not declared, on shares of Series One Preferred Stock outstanding shall have been paid or set aside for payment in full, and in addition to any and all other rights which any holder of shares of Series One Preferred Stock may have in such circumstances, the Company shall not: (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to, the Series One Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity as to dividends with the Series One Preferred Stock, unless dividends are paid ratably on the Series One 4 Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) except as permitted by sub-clause (iv) of this Section 4(A), redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series One Preferred Stock, provided that the Company may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Company ranking junior (both as to dividends and upon liquidation, dissolution or winding up) to the Series One Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series One Preferred Stock, or any shares of stock ranking on a parity with the Series One Preferred Stock (either as to dividends or upon liquidation, dissolution or winding up), except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Company shall not permit any subsidiary of the Company to purchase or otherwise acquire for consideration any shares of stock of the Company unless the Company could, in accordance with Section 4(A), purchase or otherwise acquire such shares at such time and in such manner. (C) The Company shall not issue any shares of Series One Preferred Stock except upon exercise of rights issued pursuant to that certain Rights Agreement dated as of March 8, 1995 between the Company and Society National Bank, a copy of which is on file with the Secretary of the Company at its principal executive office and shall be made available to stockholders of record without charge upon written request therefor addressed to the Secretary. Notwithstanding the foregoing sentence, nothing contained in the provisions hereof shall prohibit or restrict the Company from issuing for any purpose any series of preferred stock with rights and privileges similar to, different from, or greater than, those of the Series One Preferred Stock. Section 5. REACQUIRED SHARES. Any shares of Series One Preferred Stock purchased or otherwise acquired by the Company in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. The Company shall cause all such shares upon their retirement and cancellation to become authorized but unissued shares of Preferred Stock, without designation as to series, and such shares may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors. 5 Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any voluntary or involuntary liquidation, dissolution or winding up of the Company, no distribution shall be made (i) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series One Preferred Stock unless the holders of shares of Series One Preferred Stock shall have received, subject to adjustment as hereinafter provided, (A) $1.00 per share plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment, or (B) if greater than the amount specified in clause (i)(A) of this sentence, the amount equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, or (ii) to the holders of stock ranking on a parity upon liquidation, dissolution or winding up with the Series One Preferred Stock, unless simultaneously therewith distributions are made ratably on the Series One Preferred Stock and all other shares of such parity stock in proportion to the total amounts to which the holders of shares of Series One Preferred Stock are entitled under clause (i)(A) of this sentence and to which the holders of such parity shares are entitled, in each case upon such liquidation, dissolution or winding up. The amount to which holders of Series One Preferred Stock may be entitled upon liquidation, dissolution or winding up of the Company pursuant to clause (i)(B) of the immediately preceding sentence is hereinafter referred to as the "Participating Liquidation Amount" and the multiple of the amount to be distributed to holders of shares of Common Stock upon the liquidation, dissolution or winding up of the Company applicable pursuant to such clause to the determination of the Participating Liquidation Amount, as such multiple may be adjusted from time to time as hereinafter provided, is hereinafter referred to as the "Liquidation Multiple." In the event the Company shall at any time after March 8, 1995 declare or pay any dividend on Common Stock payable in shares of Common Stock, or effect a subdivision or split or a combination, consolidation or reverse split of the outstanding shares of Common Stock into a greater or lesser number of shares of Common Stock, then in each such case the Liquidation Multiple thereafter applicable to the determination of the Participating Liquidation Amount to which holders of Series One Preferred Stock shall be entitled after such event shall be the Liquidation Multiple applicable immediately prior to such event multiplied by a fraction, of which the numerator is the number of shares of Common Stock outstanding immediately after such event and of which the denominator is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. CERTAIN RECLASSIFICATIONS AND OTHER EVENTS. (A) In the event that holders of shares of Common Stock of the Company receive after March 8, 1995 in respect of their shares of Common Stock any share of capital stock of the Company (other than any share of Common Stock), whether by way of reclassification, recapitalization, reorganization, dividend or other distribution or otherwise ("Transaction"), then and in each such event the dividend rights, voting rights and rights upon the liquidation, dissolution or winding up of the Company of the shares of Series One Preferred Stock shall be adjusted so that after such event the holders of Series One Preferred Stock shall be entitled, in respect of each share of Series One Preferred Stock held, in addition to such rights in respect thereof to which such holder was entitled 6 immediately prior to such adjustment, to (i) such additional dividends as equal the Dividend Multiple in effect immediately prior to such Transaction multiplied by the additional dividends which the holder of a share of Common Stock shall be entitled to receive by virtue of the receipt in the Transaction of such capital stock, (ii) such additional voting rights as equal the Vote Multiple in effect immediately prior to such Transaction multiplied by the additional voting rights which the holder of a share of Common Stock shall be entitled to receive by virtue of the receipt in the Transaction of such capital stock and (iii) such additional distributions upon liquidation, dissolution or winding up of the Company as equal the Liquidation Multiple in effect immediately prior to such Transaction multiplied by the additional amount which the holder of a share of Common Stock shall be entitled to receive upon liquidation, dissolution or winding up of the Company by virtue of the receipt in the Transaction of such capital stock, as the case may be, all as provided by the terms of such capital stock. (B) In the event that holders of shares of Common Stock of the Company receive after March 8, 1995 in respect of their shares of Common Stock any right or warrant to purchase Common Stock (including as such a right, for all purposes of this paragraph, any security convertible into or exchangeable for Common Stock) at a purchase price per share less than the Current Market Price of a share of Common Stock on the date of issuance of such right or warrant, then and in each such event the dividend rights, voting rights and rights upon the liquidation, dissolution or winding up of the Company of the shares of Series One Preferred Stock shall each be adjusted so that after such event the Dividend Multiple, the Vote Multiple and the Liquidation Multiple shall each be the product of the Dividend Multiple, the Vote Multiple and the Liquidation Multiple, as the case may be, in effect immediately prior to such event multiplied by a fraction, of which the numerator shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the maximum number of shares of Common Stock which could be acquired upon exercise in full of all such rights or warrants and of which the denominator shall be the number of shares of Common Stock outstanding immediately before such issuance of rights or warrants plus the number of shares of Common Stock which could be purchased, at the Current Market Price of the Common Stock at the time of such issuance, by the maximum aggregate consideration payable upon exercise in full of all such rights or warrants. (C) In the event that holders of shares of Common Stock of the Company receive after March 8, 1995 in respect of their shares of Common Stock any right or warrant to purchase capital stock of the Company (other than shares of Common Stock), including as such a right, for all purposes of this paragraph, any security convertible into or exchangeable for capital stock of the Company (other than Common Stock), at a purchase price per share less than the Current Market Price of such shares of capital stock on the date of issuance of such right or warrant, then and in each such event the dividend rights, voting rights and rights upon liquidation, dissolution or winding up of the Company of the shares of Series One Preferred Stock shall each be adjusted so that after such event each holder of a share of Series One Preferred Stock shall be entitled, in respect of each share of Series One Preferred Stock held, in addition to such rights in respect thereof to which 7 such holder was entitled immediately prior to such event, to receive (i) such additional dividends as equal the Dividend Multiple in effect immediately prior to such event multiplied, first, by the additional dividends to which the holder of a share of Common Stock shall be entitled upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction (as hereinafter defined) and (ii) such additional voting rights as equal the Vote Multiple in effect immediately prior to such event multiplied, first, by the additional voting rights to which the holder of a share of Common Stock shall be entitled upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction and (iii) such additional distributions upon liquidation, dissolution or winding up of the Company as equal the Liquidation Multiple in effect immediately prior to such event multiplied, first, by the additional amount which the holder of a share of Common Stock shall be entitled to receive upon liquidation, dissolution or winding up of the Company upon exercise of such right or warrant by virtue of the capital stock which could be acquired upon such exercise and multiplied again by the Discount Fraction. For purposes of this paragraph, the "Discount Fraction" shall be a fraction, of which the numerator shall be the difference between the Current Market Price of a share of the capital stock subject to a right or warrant distributed to holders of shares of Common Stock as contemplated by this paragraph immediately after the distribution thereof and the purchase price per share for such share of capital stock pursuant to such right or warrant and of which the denominator shall be the Current Market Price of a share of such capital stock immediately after the distribution of such right or warrant. (D) For purposes of this Section 7, the "Current Market Price" of a share of capital stock of the Company (including a share of Common Stock) on any date shall be deemed to be the average of the daily closing prices per share thereof over the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that, in the event that such Current Market Price of any such share of capital stock is determined during a period which includes any date that is within 30 Trading Days after the ex-dividend date for (i) a dividend or distribution on stock payable in shares of such stock or securities convertible into shares of such stock, or (ii) any subdivision, split, combination, consolidation, reverse stock split or reclassification of such stock, then, and in each such case, the Current Market Price shall be appropriately adjusted by the Board of Directors of the Company to reflect the Current Market Price of such stock to take into account ex-dividend trading. The closing price for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the shares are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the shares are listed or admitted to trading or, if the shares are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices as reported by the Nasdaq Stock Market or such other system then in use, or if on any such date the shares are not quoted by any such organization, the average of the closing bid 8 and asked prices as furnished by a professional market maker making a market in the shares selected by the Board of Directors of the Company. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the shares are listed or admitted to trading is open for the transaction of business or, if the shares are not listed or admitted to trading on any national securities exchange, a day on which the New York Stock Exchange or such other national securities exchange as may be selected by the Board of Directors of the Company is open. If the shares are not publicly held or not so listed or traded on any day within the period of 30 Trading Days applicable to the determination of Current Market Price thereof as aforesaid, "Current Market Price" shall mean the fair market value thereof per share as determined in good faith by the Board of Directors of the Company. In either case referred to in the foregoing sentence, the determination of Current Market Price shall be described in a statement filed with the Secretary of the Company. Section 8. CONSOLIDATION, MERGER, ETC. In case the Company shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case each outstanding share of Series One Preferred Stock shall at the same time be similarly exchanged for or changed into the aggregate amount of stock, securities, cash and/or other property (payable in like kind), as the case may be, for which or into which each share of Common Stock is changed or exchanged multiplied by the highest of the Vote Multiple, the Dividend Multiple or the Liquidation Multiple in effect immediately prior to such event. Section 9. EFFECTIVE TIME OF ADJUSTMENTS. (A) Adjustments to the Series One Preferred Stock required by the provisions hereof shall be effective as of the time at which the event requiring such adjustment occurs. (B) The Company shall give prompt written notice to each holder of a share of Series One Preferred Stock of the effect of any adjustment to the voting rights, dividend rights or rights upon liquidation, dissolution or winding up of the Company of such shares required by the provisions hereof. Notwithstanding the foregoing sentence, the failure of the Company to give such notice shall not affect the validity of or the force or effect of or the requirement for such adjustment. Section 10. NO REDEMPTION. The shares of Series One Preferred Stock shall not be redeemable at the option of the Company or any holder thereof. Notwithstanding the foregoing sentence of this Section, the Company may acquire shares of Series One Preferred Stock in any other manner permitted by law, the provisions hereof and the Charter. Section 11. RANKING. Unless otherwise provided in the Charter or a Certificate of Designation relating to a subsequent series of Preferred Stock, the Series One Preferred Stock shall rank junior to all other series of the Preferred Stock as to the payment of 9 dividends and the distribution of assets on liquidation, dissolution or winding up and senior to the Common Stock. Section 12. AMENDMENT. The provisions hereof and of the Charter shall not be amended in any manner which would materially affect the rights, privileges or powers of the Series One Preferred Stock without, in addition to any other vote of stockholders required by law, the affirmative vote of the holders of two-thirds or more of the outstanding shares of Series One Preferred Stock, voting together as a single class. IN WITNESS WHEREOF, we have executed and subscribed this Certificate of Designation and do affirm the foregoing as true under the penalties of perjury this 24th day of March, 1995. ---------------------------- John H. Webb Chairman, President and Chief Executive Officer Attest: /s/ PAUL G. BROWN, III - ------------------------------------------ Paul G. Brown, III Secretary 10 EX-4.3 3 a2043676zex-4_3.txt EXHIBIT 4.3 EXHIBIT 4.3 ENERGY BIOSYSTEMS CORPORATION And SOCIETY NATIONAL BANK Rights Agent STOCKHOLDER RIGHTS AGREEMENT Dated as of March 8,1995 Table of Contents Section 1. Certain Definitions................................... 1 Section 2. Appointment of Rights Agent........................... 5 Section 3. Issue of Rights Certificates.......................... 5 Section 4. Form of Rights Certificates........................... 7 Section 5. Countersignature and Registration..................... 8 Section 6. Transfer, Split Up, Combination and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates.......................................... 8 Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights............................. 9 Section 8. Cancellation and Destruction of Rights Certificates... 11 Section 9. Reservation and Availability of Capital Stock......... 11 Section 10. Preferred Shares Record Date.......................... 12 Section 11. Adjustment of Purchase Price, Number of Shares or Number of Rights...................................... 12 Section 12. Certificate of Adjusted Purchase Price or Number of Shares............................................. 19 Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power...................................... 20 Section 14. Fractional Rights and Fractional Shares............... 21 Section 15. Rights of Action...................................... 22 Section 16. Agreement of Right Holders............................ 22 Section 17. Rights Certificate Holder Not Deemed a Stockholder.... 23 Section 18. Concerning the Rights Agent........................... 23 Section 19. Merger or Consolidation or Change of Name of Rights Agent.......................................... 24 Section 20. Duties of Rights Agent................................ 24 Section 21. Change of Rights Agent................................ 26 Section 22. Issuance of New Rights Certificates................... 27 Section 23. Redemption............................................ 27 Section 24. Notice of Certain Events.............................. 28
Section 25. Notices............................................. 29 Section 26. Supplements and Amendments.......................... 30 Section 27. Successors.......................................... 31 Section 28. Benefits of this Agreement.......................... 31 Section 29. Severability........................................ 31 Section 30. Governing Law....................................... 31 Section 31. Counterparts........................................ 31 Section 32. Descriptive Heading................................. 31 Signatures .................................................... 32
Exhibit A - Form of Certificate of Designation of Series One Junior Participating Preferred Stock of Energy BioSystems Corporation Exhibit B - Form of Rights Certificate Exhibit C - Summary of Rights to Purchase Preferred Stock STOCKHOLDER RIGHTS AGREEMENT This Agreement, dated as of March 8, 1995, between Energy BioSystems Corporation, a Delaware corporation (the "Company"), and Society National Bank, a national banking corporation, as Rights Agent (the "Rights Agent"). RECITALS WHEREAS, on March 8, 1995 (the "Rights Dividend Declaration Date"), the Board of Directors of the Company authorized and declared a dividend of one preferred share purchase right (a "Right") for each Common Share (as defined herein) of the Company outstanding at the close of business on March 27, 1995 (the "Record Date"), each Right representing the right to purchase one one-hundredth of a share of Series One Junior Participating Preferred Stock, par value $0.01 per share, of the Company, having the rights, powers and preferences set forth in the form of Certificate of Designation attached hereto as Exhibit A, upon the terms and subject to the conditions set forth herein, and authorized and directed the issuance of one Right with respect to each Common Share that shall become outstanding between the Record Date and the earlier of the Distribution Date, the Redemption Date and the Final Expiration Date (as defined herein). Accordingly, in consideration of the premises and the mutual agreements herein set forth, the parties hereby agree as follows: Section 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms have the meanings indicated: (a) " ACQUIRING PERSON " shall mean any Person (as such term is hereinafter defined) who or which, together with all Affiliates and Associates (as such terms are hereinafter defined) of such Person, shall be the Beneficial Owner (as such term is hereinafter defined) of 20% or more of the Common Shares of the Company then outstanding, but shall not include (i) the Company, (ii) any Subsidiary (as such term is hereinafter defined) of the Company, (iii) any employee benefit plan of the Company or of any Subsidiary of the Company or any Person or entity holding shares of capital stock of the Company for or pursuant to the terms of any such plan, in its capacity as an agent or trustee for any such plan, (iv) Ethyl Corporation, a Delaware corporation ("Ethyl"), (v) Gryphon Ventures II, Limited Partnership, a Massachusetts limited partnership ("Gryphon") and (vi) William M. Haney, III ("Haney"). Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of an acquisition of Common Shares by the Company which, by reducing the number of shares outstanding, increases the proportionate number of shares beneficially owned by such Person to 20% or more of the Common Shares of the Company then outstanding; provided, however, that if a Person shall become the Beneficial Owner of 20% or more of the Common Shares of the Company then outstanding by reason of share purchases by the Company and shall, after such share purchases by the Company, become the Beneficial Owner of any additional Common Shares of the Company, then such Person shall be deemed to be an "Acquiring Person." (b) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations, as in effect on the date of this Agreement, under the Exchange Act. (c) A Person shall be deemed the "Beneficial Owner" of and shall be deemed to "beneficially own" any securities: (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly, except as provided in Section l(c)(ii)(A)hereof; (ii) which such Person or any of such Person's Affiliates or Associates has (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities), or upon the exercise of conversion rights, exchange rights, rights (other than the Rights), warrants, options or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for payment, purchase or exchange; or (B) the right to vote pursuant to any agreement, arrangement or understanding; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security if the agreement, arrangement or understanding to vote such security (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations under the Exchange Act and (2) is not also then reportable on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (other than customary agreements with and between underwriters and selling group members with respect to a bona fide public offering of securities) for the purpose of acquiring, holding, voting (except to the extent contemplated by the proviso to Section l(c)(ii)(B)) or disposing of any securities of the Company. Notwithstanding anything in this definition of Beneficial Ownership to the contrary, the phrase "then outstanding," when used with reference to a Person's Beneficial Ownership of securities of the Company, shall mean the number of such securities then issued and outstanding together with the number of such securities not then actually issued and outstanding which such Person would be deemed to own beneficially hereunder. {d) "Board Approval" means the adoption or approval by the Company's Board of Directors {including the affirmative vote or approval of a majority of Continuing Directors) at a meeting duly called and held at which a quorum was present and acting throughout, provided that at the time of such adoption or approval there are not less than three Continuing Directors. (e) "Business Day" shall mean any day other than a Saturday, Sunday, or a day on which banking institutions in the State of Texas are authorized or obligated by law or executive order to close. (f) "Close of Business" on any given date shall mean 5:00 p.m., Houston, Texas time, on such date; provided, however, that if such date is not a Business Day it shall mean 5:00 p.m., Houston, Texas time, on the next succeeding Business Day. (g) "Common Shares" when used with reference to the Company shall mean the shares of common stock, par value $0.01 per share, of the Company and, to the extent that at the time Rights are exercised there are not a sufficient number of Company Common Shares authorized to permit the full exercise of the Rights, shares of any other class or series of the Company designated for such purpose containing terms substantially similar to the terms of the Company Common Shares. "Common Shares" when used with reference to any Person other than the Company shall mean the capital stock (or equity interest) with the greatest voting power of such other Person or, if such Person is a Subsidiary of another Person, the Person or Persons which ultimately control such first-mentioned Person. (h) "Continuing Director" shall mean (i) any member of the Board of Directors of the Company, while such Person is a member of the Board, who is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or a representative of any Acquiring Person or of any such Affiliate or Associate, and who was a member of the Board prior to the date of this Agreement, or (ii) any Person who subsequently becomes a member of the Board, while such Person is a member of the Board, who is not an Acquiring Person, or an Affiliate or Associate of an Acquiring Person, or a representative of an Acquiring Person or of any such Affiliate or Associate, if such Person's nomination for election or election to the Board is recommended or approved by a majority of the Continuing Directors. (i) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, as in effect on the date of this Agreement. (j) "Person" shall mean any individual, partnership, firm, corporation or other entity, and shall include any successor (by merger or otherwise) of such entity, as well as any syndicate or group deemed to be a person under Section 14(d)(2) of the Exchange Act. (k) "Preferred Share" shall mean a share of Series One Junior Participating Preferred Stock, par value $0.01 per share of the Company and, to the extent that at the time the rights are exercised there are not a sufficient number of shares of Series One Junior Participating Preferred Stock authorized to permit the full exercise of the Rights, shares of any other series of Preferred Stock of the Company designated for such purpose containing terms substantially similar to the terms of the Series One Junior Participating Preferred Stock. (l) "Preferred Share Fraction" shall mean one one-hundredth of a Preferred Share. (m)"Record Date" shall have the meaning set forth in the preamble hereto. (n)"Right" shall have the meaning set forth in the preamble hereto. (o) "Rights Dividend Declaration Date" shall have the meaning set forth in the preamble hereto. (p) "Section 13 Event" shall mean any event described in clauses (i), (ii) or (iii) of Section 13(a) hereof. (q) "Shares Acquisition Date" shall mean the first date of public announcement (which for purposes of this definition shall include, without limitation, a report filed pursuant to Section 13(d) under the Exchange Act) by the Company or an Acquiring Person that an Acquiring Person has become such. (r) "Subsidiary" of any Person shall mean any other Person of which a majority of (i) the voting power of the voting securities or (ii) the equity interest is owned, directly or indirectly, by such Person. (s) The following terms are defined herein in the Sections set forth below:
Term Section ---- ------- "Adjustment Shares"......... 11 "common stock equivalents".. 11 "current market prlce"...... 11 "Current Value"............. 11 "Distribution Date"......... 3 "equivalent preferred shares"................... 11 "Ethyl"..................... 1(a) "Final Expiration Date"..... 7 "Gryphon" .................. 1(a) "Haney" .................... 1(a) "Purchase Price"............ 4 "Redemption Date"........... 7 "Redemption Price".......... 23 "Rights Certificate"........ 3 "Section 11(a)(ii) Trigger Date"..................... 11 "Security".................. 11 "Spread".................... 11 "Substitution Period"....... 11 "Summary of Rights"......... 3 "Trading Day"............... 11
Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3 hereof, shall prior to the Distribution Date also be the holders of the Common Shares) in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such Co-Rights Agents as it may deem necessary or desirable. Contemporaneously with such appointment, if any, the Company shall notify the Rights Agent thereof. In the event the Company appoints one or more Co-Rights Agents, the respective duties of the Rights Agent and any Co-Rights Agents shall be as the Company shall determine. Section 3. ISSUE OF RIGHTS CERTIFICATES. (a) Until the earlier of (i) the close of business on the 30th day after the Shares Acquisition Date and (ii) the close of business on the 3Oth day after the date that a tender or exchange offer by any Person (other than the Company, any Subsidiary of the Company, any employee benefit plan of the Company or of any Subsidiary of the Company, or any entity holding shares of capital stock of the Company for or pursuant to the terms of any such plan, in its capacity as an agent or trustee for any such plan, Ethyl, Gryphon or Haney) is first published or sent or given within the meaning of Rule 14d-2(a) (or any successor rule) of the General Rules and Regulations under the Exchange Act, the consummation of which would result in any Person becoming the Beneficial Owner of Common Shares aggregating 20% or more of the then outstanding Common Shares (including any such date which is after the date of this Agreement and prior to the issuance of the Rights; the earlier of such dates being herein referred to as the Distribution Date"), (x) the Rights will be evidenced (subject to the provisions of paragraph (b) of this Section 3) by the certificates for Common Shares registered in the names of the holders thereof (which certificates for Common Shares shall also be deemed to be certificates for the Rights) and not by separate certificates, and (y) the Rights and interests therein will be transferable only in connection with the transfer of the associated Common Shares. As soon as practicable after the Distribution Date, the Company will prepare and execute, the Rights Agent will countersign, and the Company will send or cause to be sent (and the Rights Agent will, if requested, send) by first-class, insured, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Distribution Date, at the address of such holder shown on the records of the Company, one or more Rights certificates, in substantially the form of Exhibit B hereto (a "Rights Certificate"), evidencing one Right for each Common Share so held, subject to adjustment as provided herein. In the event that an adjustment in the number of Rights per Common Share has been made pursuant to Section 11(n) hereof, then at the time of distribution of the Rights Certificates, the Company shall make the necessary and appropriate rounding adjustments (in accordance with Section 14(a) hereof) so that Rights Certificates representing only whole numbers of Rights are distributed and cash is paid in lieu of any fractional Rights. As of and after the Distribution Date, the Rights will be evidenced solely by such Rights Certificates. (b) As promptly as practicable following the Record Date, the Company will send or cause to be sent a copy of a Summary of Rights to Purchase Preferred Stock, in substantially the form attached hereto as EXHIBIT C (the "Summary of Rights"), by first-class, postage-prepaid mail, to each record holder of Common Shares as of the close of business on the Record Date at the address of such holder shown on the records of the Company. With respect to certificates for Common Shares outstanding as of the close of business on the Record Date, until the Distribution Date, the Rights will be evidenced by such certificates for Common Shares registered in the names of the holders thereof (together with a copy of the Summary of Rights). Until the earliest of the Distribution Date, the Redemption Date and the Final Expiration Date, the transfer of any certificate for Common Shares outstanding at the close of business on the Record Date with or without a copy of the Summary of Rights attached thereto, shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. (c) Rights shall, without any further action, be issued in respect of all Common Shares that are issued (including any Common Shares held in treasury) after the Record Date but prior to the earlier of the Distribution Date, the Redemption Date and the Final Expiration Date. Certificates issued for Common Shares (including, without limitation, certificates issued upon transfer or exchange of Common Shares, certificates evidencing an original issuance and certificates for reacquired Common Shares referred to in the last sentence of this subsection (c)) after the Record Date but prior to the earliest of the Distribution Date, the Redemption Date or the Final Expiration Date shall have impressed on, printed on, written on or otherwise affixed to them the following legend: This certificate also evidences and entitles the holder hereof to certain Rights as set forth in a Stockholder Rights Agreement between Energy BioSystems Corporation (the "Company") and Society National Bank dated as of March 8, 1995 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of the Company. Under certain circumstances, as set forth in the Rights Agreement, such Rights will be evidenced by separate certificates and will no longer be evidenced by this certificate. The Company will mail to the holder of this certificate a copy of the Rights Agreement, as in effect on the date of mailing, without charge after receipt of a written request therefore. Under certain circumstances described in the Rights Agreement, Rights issued to, or held by, any person who is, was or becomes an Acquiring Person or any Affiliate or Associate thereof (as defined in the Rights Agreement), whether currently held by or on behalf of such Person or by any subsequent holder, may become null and void. With respect to such certificates containing the foregoing legend, until the earlier of (i) the Distribution Date and (ii) the Final Expiration Date, the Rights associated with the Common Shares represented by such certificates shall be evidenced by such certificates alone and registered holders of Common Shares shall also be the registered holders of the associated Rights, and the transfer of any such certificate shall also constitute the transfer of the Rights associated with the Common Shares represented thereby. In the event that the Company purchases or acquires any Common Shares after the Record Date but prior to the Distribution Date, any Rights associated with such Common Shares shall be deemed cancelled and retired so that the Company shall not be entitled to exercise any Rights associated with the Common Shares which are no longer outstanding. Section 4. FORM OF RIGHTS CERTIFICATES. (a) The Rights Certificates (and the form of election to purchase shares and certification of status and form of assignment and certification of status to be printed on the reverse thereof) shall be substantially the same as Exhibit B hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law or with any rule or regulation made pursuant thereto or with any rule or regulation of any stock exchange on which the Rights may from time to time be listed, or to conform to usage. The Rights Certificates shall be in machine printable form and in a format reasonably satisfactory to the Rights Agent. Subject to the provisions of Section 22 hereof, the Rights Certificates, whenever issued, shall be dated as of the Record Date and shall show the date of countersignature by the Rights Agent, and on their face shall entitle the holders thereof to purchase such number of Preferred Share Fractions as shall be set forth therein at the price set forth therein (such exercise price per Preferred Share Fraction being hereinafter referred to as the "Purchase Price"), but the number of such Preferred Share Fractions and the Purchase Price shall be subject to adjustment as provided herein. (b) Any Rights Certificate issued pursuant to Section 3(a) or Section 22 hereof that represents Rights that the Company knows are beneficially owned by: (i) an Acquiring Person or any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom such Acquiring Person has any continuing oral or written plan, agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer that the Board of Directors of the Company has determined is part of an oral or written plan, agreement, arrangement or understanding that has as a primary purpose or effect avoidance of Section 7(e) hereof, and any Rights Certificate issued pursuant to Section 6 or Section 11 hereof upon transfer, exchange, replacement or adjustment of any other Rights Certificate referred to in this sentence, shall contain (to the extent feasible) the following legend: The Rights represented by this Rights Certificate are or were beneficially owned by a Person who was or became an Acquiring Person or an Mfiliate or Associate of an Acquiring Person (as such terms are defined in the Rights Agreement) . Accordingly, this Rights Certificate and the Rights represented hereby may become null and void in the circumstances specified in Section 7(e) of the Rights Agreement. Section 5. Countersignature and Registration. (a) The Rights Certificates shall be executed on behalf of the Company by its Chairman of the Board of Directors, President or any Vice President and attested by its Secretary or an Assistant Secretary, either manually or by facsimile signature, and shall have affixed thereto the Company's seal or a facsimile thereof. The Rights Certificates shall be manually or by facsimile signature countersigned by an authorized signatory of the Rights Agent, but it shall not be necessary for the same signatory to countersign all of the Rights Certificates hereunder. No Rights Certificate shall be valid for any purpose unless so countersigned. In case any officer of the Company who shall have signed any of the Rights Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Rights Certificates, nevertheless, may be countersigned by the Rights Agent, and issued and delivered by the Company with the same force and effect as though the person who signed such Rights Certificates had not ceased to be such officer of the Company; and any Rights Certificate may be signed on behalf of the Company by any person who, at the actual date of the execution of such Rights Certificate, shall be a proper officer of the Company to sign such Rights Certificate, although at the date of the execution of this Rights Agreement any such person was not such an officer. (b) Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its principal office in Cleveland, Ohio, books for registration and transfer of the Rights Certificates issued hereunder. Such books shall show the names and addresses of the respective holders of the Rights Certificates, the number of Rights evidenced on its face by each of the Rights Certificates and the date and certificate number of each of the Rights Certificates. Section 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHTS CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES. (a) Subject to the provisions of Section 4(b), Section 7(e) and Section 14 hereof, at any time after the close of business on the Distribution Date, and at or prior to the close of business on the earlier of the Redemption Date or the Final Expiration Date, any Rights Certificate or Rights Certificates may be transferred, split up, combined or exchanged for another Rights Certificate or Rights Certificates, entitling the registered holder to purchase a like number of Preferred Share Fractions as the Rights Certificate or Rights Certificates surrendered then entitled such holder to purchase. Any registered holder desiring to transfer, split up, combine or exchange any Rights Certificate shall make such request in writing delivered to the Rights Agent, and shall surrender the Rights Certificate or Rights Certificates to be transferred, split up, combined or exchanged at the principal office of the Rights Agent. Thereupon the Rights Agent shall countersign and deliver to the person entitled thereto a Rights Certificate or Rights Certificates, as the case may be, as so requested. The Company may require payment from the holders of Rights Certificates ofa sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer, split up, combination or exchange of such Rights Certificates. (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Rights Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Rights Certificate if mutilated, the Company will make and deliver a new Rights Certificate of like tenor to the Rights Agent for delivery to the registered owner in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated. Section 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF RIGHTS. (a) The registered holder of any Rights Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein) in whole or in part at any time after the Distribution Date upon surrender of the Rights Certificate, with the form of election to purchase and certification of status on the reverse side thereof duly executed, to the Rights Agent at the office of the Rights Agent designated for such purpose together with payment of the Purchase Price for each Preferred Share Fraction as to which the Rights are exercised, at or prior to the earliest of (i) the close of business on March 8, 2005 (the "Final Expiration Date") or (ii) the time at which the Rights are redeemed as provided in Section 23 hereof (the "Redemption Date"). (b) The Purchase Price for each Preferred Share Fraction issuable pursuant to the exercise of a Right shall initially be $50.00, shall be subject to adjustment from time to time as provided in Sections 11 and 13 hereof and shall be payable in lawful money of the United States of America in accordance with paragraph (c) below. (c) Upon receipt of a Rights Certificate representing exercisable Rights, with the form of election to purchase and certification of status duly executed, accompanied by payment of the Purchase Price for such Preferred Share Fraction or Preferred Share Fractions (or other shares, securities or property, as the case may be) to be purchased and an amount equal to any applicable transfer tax required to be paid by the holder of such Rights Certificate in accordance with Section 9 hereof by certified or cashier's check or money order payable to the order of the Company, the Rights Agent shall, subject to Section 20(k) hereof, thereupon (i)(A) promptly requisition from any transfer agent of the Preferred Shares (or make available, if the Rights Agent is the transfer agent) certificates for the number of Preferred Share Fractions to be purchased and the Company hereby irrevocably authorizes its transfer agent to comply with all such requests, or (B) if the Company shall have elected to deposit the total number of Preferred Share Fractions issuable upon exercise of the Rights hereunder with a depositary agent, requisition from the depositary agent depositary receipts representing such number of Preferred Share Fractions as are to be purchased (in which case certificates for the Preferred Share Fractions represented by such receipts shall be deposited by the transfer agent with the depositary agent) and the Company hereby directs the depositary agent to comply with such request, (ii) when appropriate, requisition from the Company the amount of cash to be paid in lieu of issuance of fractional shares in accordance with Section 14 hereof, (iii) promptly after receipt of such certificates or depositary receipts, cause the same to be delivered to or upon the order of the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder and, (iv) when appropriate, after receipt, promptly deliver such cash to or upon the order of the registered holder of such Rights Certificate. In the event that the Company is obligated to issue other securities (including Common Shares} of the Company, pay cash and/or distribute other property pursuant to Section 11 (a) hereof, the Company will make all arrangements necessary so that such other securities, cash and/or property are available for distribution by the Rights Agent, if and when appropriate. (d) If the registered holder of any Rights Certificate shall exercise less than all the Rights evidenced thereby, a new Rights Certificate evidencing Rights equivalent to the Rights remaining unexercised shall be issued by the Rights Agent and delivered to the registered holder of such Rights Certificate or to his duly authorized assigns, subject to the provisions of Section 14 hereof. (e) Notwithstanding anything in this Agreement to the contrary, from and after the date that a Person shall become an Acquiring Person, any Rights beneficially owned by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person to holders of equity interests in such Acquiring Person or to any Person with whom the Acquiring Person has any continuing oral or written plan, agreement, arrangement or understanding regarding the transferred Rights or (B) a transfer which the Board of Directors of the Company has determined is part of an oral or written plan, agreement, arrangement or understanding which has as a primary purpose or effect the avoidance of this Section 7(e), shall become null and void without any further action and no holder of such Rights shall have any rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise. The Company shall use all reasonable efforts to ensure that the provisions of this Section 7(e) and Section 4(b) hereof are complied with, but shall have no liability to any holder of Rights Certificates or other Person as a result of its failure to make any determinations with respect to an Acquiring Person or its Affiliates, Associates or transferees hereunder. (f) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder upon the occurrence of any purported exercise as set forth in this Section 7 unless the certification of status contained following the appropriate form of election to purchase set forth on the reverse side of the Rights Certificate surrendered for such exercise shall have been completed and signed by the registered holder thereof and the Company shall have been provided with such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Section 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All Rights Certificates surrendered for the purpose of exercise, transfer, split up, combination or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in cancelled form, or, if surrendered to the Rights Agent, shall be cancelled by it, and no Rights Certificates shall be issued in lieu thereof except as expressly permitted by any of the provisions of this Rights Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall so cancel and retire, any other Rights Certificate acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all cancelled Rights Certificates to the Company, or shall, at the written request of the Company, destroy such cancelled Rights Certificates, and in such case shall deliver a certificate of destruction thereof to the Company. Section 9. RESERVATION AND AVAILABILITY OF CAPITAL STOCK. (a) The Company covenants and agrees that it will cause to be reserved and kept available out of its authorized and unissued Preferred Shares, or any authorized and issued Preferred Shares held in its treasury (and, following the occurrence of a Distribution Date, out of its authorized and unissued Common Shares and/or other securities or out of its authorized and issued shares held in its treasury) the number of Preferred Shares (and, following the occurrence of a Distribution Date, Common Shares and/or other securities) that will be sufficient to permit the exercise in full of all outstanding Rights. (b) If hereafter the Preferred Shares issuable upon the exercise of Rights are listed on any national securities exchange or included in the Nasdaq Stock Market, the Company shall use its best efforts to cause, from and after such time as the Rights become exercisable (but only to the extent that it is reasonably likely that the Rights will be exercised), all shares reserved for such issuance to be so listed on such exchange or included in the Nasdaq Stock Market upon official notice of issuance upon such exercise, as the case may be. (c) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all Preferred Share Fractions (and, following the occurrence of a Distribution Date, Common Shares and/or other securities) delivered upon exercise of Rights shall, at the time of delivery of the certificates for such shares (subject to payment of the Purchase Price), be duly and validly authorized and issued and fully-paid and nonassessable shares. (d) The Company further covenants and agrees that it will pay, when due and payable, any and all Federal and state original issue and transfer taxes and charges which may be payable in respect of the issuance or delivery of the Rights Certificates or of any Preferred Shares (or Common Shares and/or other securities, as the case may be) upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax which may be payable in respect of any transfer or delivery of Rights Certificates to a person other than, or the issuance or delivery of certificates or depositary receipts for the Preferred Shares (or Common Shares and/or other securities, as the case may be) in a name other than that of, the registered holder of the Rights Certificate evidencing Rights surrendered for exercise or to issue or deliver any certificates or depositary receipts for Preferred Shares or Common Shares upon the exercise of any Rights until any such tax shall have been paid (any such tax being payable by the holder of such Rights Certificate at the time of surrender) or until it has been established to the Company's satisfaction that no such tax is due. Section 10. PREFERRED SHARES RECORD DATE. Each person in whose name any certificate for a number of Preferred Share Fractions (or Common Shares and/or other securities, as the case may be) is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of the Preferred Share Fractions (or Common Shares and/or other securities, as the case may be) represented thereby on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes) was made; provided, however, that if the date of such surrender and payment is a date upon which the Preferred Shares (or Common Shares and/or other securities, as the case may be) transfer books of the Company are closed, such person shall be deemed to have become the record holder of such shares (fractional or otherwise) on, and such certificate shall be dated, the next succeeding Business Day on which the Preferred Shares (or Common Shares and/or other securities, as the case may be) transfer books of the Company are open. Prior to the exercise of the Rights evidenced thereby, the holder of a Rights Certificate, as such, shall not be entitled to any rights of a stockholder of the Company with respect to shares for which the Rights shall be exercisable, including, without limitation, the right to vote, to receive dividends or other distributions or to exercise any preemptive rights, and shall not be entitled to receive any notice of any proceedings of the Company, except as provided herein. Section 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER OF SHARES OR NUMBER OF RIGHTS. The Purchase Price, the kind and number of shares or other securities covered by each Right and the number of Rights outstanding are subject to adjustment from time to time as provided in this Section 11. (a)(i) In the event the Company shall at any time after the date of this Agreement (A) declare a dividend on the Preferred Shares payable in Preferred Shares, (B) subdivide the outstanding Preferred Shares, (C) combine the outstanding Preferred Shares into a smaller number of shares or (D) issue any shares of its capital stock in a reclassification of the Preferred Shares (including any such reclassification in connection with a consolidation or merger in which the Company is the continuing or surviving corporation), except as otherwise provided in this Section 11(a) and Section 7(e) hereof, the Purchase Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of Preferred Shares or other shares of capital stock, as the case may be, issuable on such date, shall be proportionately adjusted so that the holder of any Right exercised after such time shall be entitled to receive, upon payment of the adjusted Purchase Price, the aggregate number and kind of Preferred Shares or other shares of capital stock, as the case may be, which, if such Right had been exercised immediately prior to such date and at a time when the Preferred Shares transfer books of the Company were open, such holder would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. If an event occurs which would require an adjustment under both this Section 11(a)(i) and Section 11(a)(ii), the adjustment provided for in this Section 11(a)(i) shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii) hereof. (ii) In the event that any Person (other than (i) the Company, (ii) any Subsidiary of the Company, (iii) any employee benefit plan of the Company or of any Subsidiary of the Company or any Person or entity holding shares of capital stock of the Company for or pursuant to the terms of any such plan, in its capacity as an agent or trustee for any such plan, (iv) Ethyl, (v) Gryphon or (vi) Haney), alone or together with its Affiliates and Associates, shall, at any time after the Rights Dividend Declaration Date, become an Acquiring Person then, promptly following the first occurrence of such event, proper provision shall be made so that each holder of a Right (except as provided in Section 7(e) hereof) shall thereafter have the right to receive, upon exercise thereof at the then current Purchase Price in accordance with the terms of this Agreement and in lieu of Preferred Share Fractions, such number of Common Shares of the Company as shall equal the result obtained by (x) multiplying the then current Purchase Price by the then number of Preferred Share Fractions for which a Right is then exercisable and (y) dividing that product (which shall thereafter be referred to as the "Purchase Price" for each Right and for all purposes of this Agreement) by 50% of the then current market price (determined pursuant to Section 11(d) hereof) per Common Share on the fifth day after the date on which a Person has become an Acquiring Person, or the fifth day after the Shares Acquisition Date, whichever market price shall be less (such number of shares being hereinafter referred to as the " Adjustment Shares"). In the event that any Person shall become an Acquiring Person and the Rights shall then be outstanding, the Company shall not take any action that would eliminate or diminish the benefits intended to be afforded by the Rights. (iii) In the event that the number of Common Shares which are authorized by the Company's Certificate of Incorporation but not outstanding or reserved for issuance for purposes other than upon exercise of the Rights are not sufficient to permit the exercise in full of the Rights in accordance with the foregoing subparagraph (ii) of this Section 11(a), the Company shall: (A) determine the excess of (1) the value of the Adjustment Shares issuable upon the exercise of a Right (the "Current Value"), over (2) the Purchase Price (such excess, the "Spread") and (B) with respect to each Right, make adequate provision to substitute for the Adjustment Shares, upon payment of the applicable Purchase Price, (1) cash, (2) a reduction in the Purchase Price, (3) other equity securities of the Company (including, without limitation, shares, or units of shares, of preferred stock which the Company's Board of Directors in office at the time has determined upon Board Approval have the same value as the Common Shares (such shares or units of shares of preferred stock, the "common stock equivalents")), (4) debt securities of the Company, (5) other assets, or (6) any combination of the foregoing, having an aggregate value equal to the Current Value, where such aggregate value has been determined by Board Approval of the Company's Board of Directors in office at the time based upon the advice of a nationally recognized investment banking firm selected by the Board of Directors of the Company; provided, however, that if the Company shall not have made adequate provision to deliver value pursuant to clause (B) above within 30 days following the later of (x) the first occurrence of the date on which a Person has become an Acquiring Person or the Shares Acquisition Date and (y) the date on which the Company's right of redemption pursuant to Section 23(a) expires (the later of (x) and (y) being referred to herein as the "Section 11(a)(ii) Trigger Date"), then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Purchase Price, Common Shares (to the extent available) and then, if necessary, cash, which shares and/or cash have an aggregate value equal to the Spread. If the Company's Board of Directors shall determine by Board Approval that it is likely that sufficient additional Common Shares could be authorized for issuance upon exercise in full of the Rights, the 30-day period set forth above may be extended to the extent necessary, but not more than 90 days after the Section 11(a)(ii) Trigger Date, in order that the Company may seek stockholder approval for the authorization of such additional shares (such period as it may be extended, the "Substitution Period"). To the extent that the Company determines that some action need be taken pursuant to the first and/or second sentences of this Section 11(a)(iii), the Company (x) shall provide, subject to Section 7(e) hereof, that such action shall apply uniformly to all outstanding Rights, and (y) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek any authorization of additional shares and/or to decide the appropriate form of distribution to be made pursuant to such first sentence and to determine the value thereof. In the event of any such suspension, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended as well as a public announcement at such time as the suspension is no longer in effect. For purposes of this Section 11(a)(iii), the value of the Common Shares shall be the current market price (as determined pursuant to Section 11(d) hereof) per share of the Common Shares on the Section 11(a)(ii) Trigger Date and the value of any "common stock equivalent" shall be deemed to have the same value as the Common Shares on such date. (b) In case the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Preferred Shares entitling them (for a period expiring within 45 calendar days after such record date) to subscribe for or purchase Preferred Shares (or shares having the same rights, privileges and preferences as the Preferred Shares ("equivalent preferred shares">> or securities convertible into Preferred Shares or equivalent preferred shares at a price per Preferred Share or equivalent preferred share (or having a conversion price per share, if a security convertible into Preferred Shares or equivalent preferred shares) less than the current per share market price of the Preferred Shares (as determined pursuant to Section 11(d>> on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the number of Preferred Shares outstanding on such record date plus the number of Preferred Shares which the aggregate offering price of the total number of Preferred Shares and/or equivalent preferred shares to be offered (and/or the aggregate initial conversion price of the convertible securities so to be offered) would purchase at such current market price and the denominator of which shall be the number of Preferred Shares outstanding on such record date plus the number of additional Preferred Shares and/or equivalent preferred shares to be offered for subscription or purchase (or into which the convertible securities so to be offered are initially convertible); provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. In case such subscription price may be paid in a consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent, and shall be binding on the Company, the Rights Agent and the holders of the Rights. Preferred Shares owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such rights, options or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. {c) In case the Company shall fix a record date for the making of a distribution to all holders of the Preferred Shares {including any such distribution made in connection with a consolidation or merger in which the Company is the continuing or surviving corporation) of evidences of indebtedness or assets {other than a regular periodic cash dividend at a rate not in excess of 125% of the rate of the last regular periodic cash dividend theretofore paid or a dividend payable in Preferred Shares) or subscription rights or warrants {excluding those referred to in Section 11{b) hereof), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the current market price of one Preferred Share Fraction {as determined pursuant to Section 11{d) hereof) on such record date, less the fair market value {as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent) of the portion of the assets or evidences of indebtedness so to be distributed or of such subscription rights or warrants applicable to one Preferred Share Fraction and the denominator of which shall be such current market price of one Preferred Share Fraction; provided, however, that in no event shall the consideration to be paid upon the exercise of one Right be less than the aggregate par value of the shares of capital stock of the Company issuable upon exercise of one Right. Such adjustments shall be made successively whenever such a record date is fixed; and in the event that such distribution is not so made, the Purchase Price shall again be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (d)(i) For the purpose of any computation hereunder, the "current market price" per share of any security (a "Security" for the purpose of this Section 11(d)(i>> on any date shall be deemed to be the average of the daily closing prices per share of such Security for the 30 consecutive Trading Days (as such term is hereinafter defined) immediately prior to such date; provided, however, that in the event that the current market price per share of the Security is determined during any period following the announcement by the issuer of such Security of (A) a dividend or distribution on such Security payable in shares of such Security or securities convertible into such shares or (B) any subdivision, combination or reclassification of such Security, and prior to the expiration of the requisite 30 Trading Days after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the "current market price" shall be appropriately adjusted to take into account ex-dividend trading. The closing price for each Trading Day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Security is not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Security is listed or admitted to trading or , if the Security is not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices, as reported by the Nasdaq Stock Market or such other system then in use, or, if on any such date the Security is not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Security selected by the Board of Directors of the Company. If on any such date no market maker is making a market in the Security, the fair value of such shares on such date as determined in good faith by the Board of Directors of the Company shall be used. The term "Trading Day" shall mean a day on which the principal national securities exchange on which the Security is listed or admitted to trading is open for the transaction of business or, if the Security is not listed or admitted to trading on any national securities exchange, a Business Day. (ii) For the purpose of any computation hereunder, the "current market price" per Preferred Share shall be determined in accordance with the method set forth above for the Securities in clause (i) of this Section 11(d). If the current market price per Preferred Share cannot be determined in the manner provided above or if the Preferred Shares are not publicly held or listed or traded in a manner described in clause (i) of this Section 11(d), the "current market price" per Preferred Share shall be conclusively deemed to be an amount equal to the current market price per share of the Common Shares (appropriately adjusted for such events as stock splits, stock dividends and recapitalizations with respect to the Common Shares occurring after the date of this Agreement), multiplied by 100. If neither the Common Shares nor the Preferred Shares are publicly held or so listed or traded, "current market price" per share shall mean the fair value per share as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent. For all purposes of this Agreement, the "current market price" of a Preferred Share Fraction shall be equal to the "current market price" of one Preferred Share divided by 100. (e) No adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent or to the nearest ten-thousandth of a share in the case of Common Shares or other shares or one-millionth of a share in the case of Preferred Shares, as the case may be. Notwithstanding the first sentence of this Section 11(e), any adjustment required by this Section 11 shall be made no later than the earlier of (i) three years from the date of the transaction which requires such adjustment or (ii) the Final Expiration Date. (f) If as a result of an adjustment made pursuant to Section 11 (a) hereof, the holder of any Right thereafter exercised shall become entitled to receive any shares of capital stock of the Company other than Preferred Shares, thereafter the number of such other shares so receivable upon exercise of any Right shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Shares contained in this Section 11 and the provisions of Sections 7,9,10,13 and 14 hereof with respect to the Preferred Shares shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made to the Purchase Price hereunder shall evidence the right to purchase, at the adjusted Purchase Price, the number of Preferred Share Fractions purchasable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Company shall have exercised its election as provided in Section 11(i) hereof, upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c) hereof, each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of Preferred Share Fractions (calculated to the nearest one-millionth of a Preferred Share) obtained by (i) multiplying (x) the number of Preferred Share Fractions covered by a Right immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in substitution for any adjustment in the number of Preferred Share Fractions issuable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercised for the number of Preferred Share Fractions for which a Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights {calculated to the nearest ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, shall be at least ten days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11{i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date Rights Certificates evidencing, subject to Section 14 hereof, the additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Rights Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Rights Certificates to be so distributed shall be issued, executed and countersigned in the manner provided for herein {and may bear, at the option of the Company, the adjusted Purchase Price) and shall be registered in the names of the holders of record of Rights Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of Preferred Share Fractions issuable upon the exercise of the Rights, the Rights Certificates theretofore and thereafter issued may continue to express the Purchase Price and the number of Preferred Share Fractions which were expressed in the initial Rights Certificates issued hereunder. (k) Before taking any action that would cause an adjustment reducing the Purchase Price below one one-hundredth of the then par value, if any, of the Preferred Shares issuable upon exercise of the Rights or below the then par value, if any, of the Common Shares if then issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable Preferred Shares or, if applicable, Common Shares at such adjusted Purchase Price. (l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuing to the holder of any Right exercised after such record date of the Preferred Shares and other capital stock or securities of the Company, if any, issuable upon such exercise over and above the Preferred Shares and other capital stock or securities of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares (fractional or otherwise) upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it in its sole discretion shall determine to be advisable in order that any consolidation or subdivision of the Preferred Shares, issuance wholly for cash of any of the Preferred Shares at less than the current market price, issuance wholly for cash of Preferred Shares or securities which by their terms are convertible into or exchangeable for Preferred Shares, stock dividends or issuance of rights, options or warrants referred to hereinabove in this Section 11, hereafter made by the Company to holders of its Preferred Shares shall not be taxable to such stockholders. (n) Anything in this Agreement to the contrary notwithstanding, in the event that the Company shall at any time prior to the Distribution Date (i) declare or pay any dividend on the outstanding Common Shares payable in Common Shares or (ii) effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares) into a greater or lesser number of Common Shares, then in any such case (A) the number of Preferred Share Fractions purchasable after such event upon proper exercise of each Right shall be determined by multiplying the number of Preferred Share Fractions so purchasable immediately prior to such event by a fraction, the numerator of which shall be the total number of Common Shares outstanding immediately prior to the occurrence of the event and the denominator of which shall be the total number of Common Shares outstanding immediately following the occurrence of such event, (B) the Purchase Price to be in effect after such event shall be determined by multiplying the Purchase Price in effect immediately prior to such event by a fraction, the numerator of which shall be the number of Common Shares outstanding immediately before such event and the denominator of which is the number of Common Shares outstanding immediately after such event, and (C) each Common Share outstanding immediately after such event shall have issued with respect to it that number of Rights which each Common Share outstanding immediately prior to such event had issued with respect to it. The adjustments provided for in this Section 11(n) shall be made successively whenever such a dividend is declared or paid or such a subdivision, combination or consolidation is effected. If an event occurs which would require an adjustment under Section 11(a)(ii) and this Section 11(n), the adjustment provided for in this Section 11(n) shall be in addition to and prior to any adjustment required pursuant to Section 11(a)(ii). Section 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES. Whenever an adjustment is made as provided in Sections 11 and 13 hereof, the Company shall (a) promptly prepare a certificate signed by officers authorized to execute a Rights Certificate in Section 5 setting forth such adjustment, and a brief statement of the facts accounting for such adjustment, (b) promptly file with the Rights Agent and with each transfer agent for the Preferred Shares and the Common Shares a copy of such certificate and (c) mail a brief summary thereof to each holder of a Rights Certificate in accordance with Section 25 hereof. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment therein contained and shall not be deemed to have knowledge of any such adjustment unless and until it shall have received such certificate. Section 13. (a) CONSOLIDATION. MERGER OR SALE OR TRANSFER OF ASSETS OR EARNING POWER. In the event that, following the Shares Acquisition Date, directly or indirectly, (i) the Company shall consolidate with, or merge with and into, any other Person and the Company shall not be the continuing or surviving corporation of such consolidation or merger, (ii) any Person shall consolidate with the Company, or merge with and into the Company, and the Company shall be the continuing or surviving corporation of such consolidation or merger and, in connection with such consolidation or merger, all or part of the Common Shares shall be changed into or exchanged for stock or other securities of any other Person (or the Company) or cash or any other property, or (iii) the Company shall sell or otherwise transfer (or one or more of its Subsidiaries shall sell or otherwise transfer), in one or more transactions, assets or earning power aggregating more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any Person or Persons other than the Company or one or more of its wholly-owned Subsidiaries, then, and in each such case proper provision shall be made so that: (A) each holder of a Right (except as otherwise provided herein) shall thereafter have the right to receive, upon the exercise thereof at a price equal to the then-current Purchase Price multiplied by the number of Preferred Share Fractions for which a Right is then exercisable, in accordance with the terms of this Agreement and in lieu of Preferred Share Fractions, such number of Common Shares of such other Person (including the Company as successor thereto or as the surviving corporation) free and clear of all liens, encumbrances, rights of first refusal or other adverse claims, as shall be equal to the result obtained by (1) multiplying the then-current Purchase Price by the number of Preferred Share Fractions for which a Right is then exercisable and (2) dividing that product by 50% of the then-current per share market price of the Common Shares of such other Person (determined pursuant to Section 11(d) hereof) on the date of consummation of such consolidation, merger, sale or transfer; (B) the issuer of such Common Shares shall thereafter be liable for, and shall assume, by virtue of such Section 13 Event, all the obligations and duties of the Company pursuant to this Agreement; (C) the term "Company" shall thereafter be deemed to refer to such issuer, it being specifically intended that the provisions of Section 11 hereof shall apply only to such issuer following the first occurrence of a Section 13 Event; and (D) such issuer shall take such steps (including, but not limited to, the reservation of a sufficient number of its Common Shares in accordance with Section 9 hereof) in connection with such consummation as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to its Common Shares thereafter deliverable upon the exercise of the Rights. (b) The Company shall not enter into any transaction of the kind referred to in this Section 13 if at the time of such transaction there are any rights, warrants, instruments or securities outstanding or any agreements or arrangements which, as a result of the consummation of such transaction, would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights. The Company shall not consummate any such consolidation, merger, sale or transfer unless prior thereto the Company and such issuer shall have executed and delivered to the Rights Agent a supplemental agreement so providing. The provisions of this Section 13 shall similarly apply to successive mergers or consolidations or sales or other transfers. Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES. (a) The Company shall not be required to issue fractions of Rights or to distribute Rights Certificates which evidence fractional Rights. In lieu of such fractional Rights, there shall be paid to the registered holders of the Rights Certificates with regard to which such fractional Rights would otherwise be issuable an amount in cash equal to the same fraction of the current market value of a whole Right. For the purposes of this Section 14(a) the current market value of a whole Right shall be the closing price of the Rights for the Trading Day immediately prior to the date on which such fractional Rights would have been otherwise issuable. The closing price for any day shall be the last sale price, regular way, or in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the Rights are not listed or admitted to trading on the New York Stock Exchange, as reported in the principal consolidated transaction reporting system with respect to securities listed on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices as reported by the Nasdaq Stock Market or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Rights selected by the Board of Directors of the Company. If on any such date no such market maker is making a market in the Rights, the fair value of the Rights on such date as determined in good faith by the Board of Directors of the Company shall be used, whose determination shall be described in a statement filed with the Rights Agent. (b) The Company shall not be required to issue fractions of shares (other than fractions which are integral multiples of one one-hundredth of a Preferred Share) upon exercise of the Rights or to distribute certificates which evidence fractional shares (other than fractions which are integral multiples of one one-hundredth of a Preferred Share). Fractions of Preferred Shares in integral multiples of one one-hundredth of a Preferred Share may, at the election of the Company, be evidenced by depositary receipts, pursuant to an appropriate agreement between the Company and a depositary selected by it, provided that such agreement shall provide that the holders of such depositary receipts shall have all the rights, privileges and preferences to which they are entitled as beneficial owners of the Preferred Shares represented by such depositary receipts. In lieu of fractional shares that are not integral multiples of one one-hundredth of a Preferred Share, the Company may pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market value of one Preferred Share or one Common Share as the case may be. For purposes of this Section 14(b), the current market value of a Common Share or a Preferred Share shall be the current market price of a Common Share (as determined pursuant to Section 1 l(d)(i) hereof) or a Preferred Share (as determined pursuant to Section 11(d)(ii) hereof), as the case may be, for the Trading Day immediately prior to the date of such exercise. (c} The holder of a Right by the acceptance of the Right expressly waives his right to receive any fractional Rights or any fractional shares (other than fractions which are integral multiples of one one-hundredth of a Preferred Share} upon exercise of a Right (except as provided above}. Section 15. RIGHTS OF ACTION. All rights of action in respect of this Agreement, except the rights of action given to the Rights Agent under Section 18 hereof, are vested in the respective registered holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of the Common Shares); and any registered holder of any Rights Certificate (or, prior to the Distribution Date, of the Common Shares), without the consent of the Rights Agent or of the holder of any other Rights Certificate (or, prior to the Distribution Date, of the Common Shares), may, in his own behalf and for his own benefit, enforce this Agreement, and may institute and maintain any suit, action or proceeding against the Company to enforce this Agreement, or otherwise enforce or act in respect of his right to exercise the Rights evidenced by such Rights Certificate in the manner provided in such Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive relief against actual or threatened violations of the obligations of any Person (including, without limitation, the Company) subject to, this Agreement. Section 16. AGREEMENT OF RIGHT HOLDERS. Every holder of a Right, by accepting the same, consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Shares; (b) after the Distribution Date, the Rights Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office of the Rights Agent, duly endorsed or accompanied by a proper instrument of transfer and with the appropriate forms and certificates fully executed; (c) subject to Section 6(a) and Section 7(f) hereof, the Company and the Rights Agent may deem and treat the Person in whose name the Rights Certificate (or prior to the Distribution Date, the associated Common Share certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Rights Certificates or the associated Common Share certificate made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent, subject to the last sentence of Section 7(e) hereof, shall be affected by any notice to the contrary; and (d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or a beneficial interest in a Right or other Person as a result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority prohibiting or otherwise restraining performance of such obligation; provided, however, the Company must use its best efforts to have any such order, decree or ruling lifted or otherwise overturned as promptly as practicable. Section 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No holder, as such, of any Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the Preferred Shares, the Common Shares or any other securities of the Company which may at any time be issuable upon the exercise of the Rights represented thereby, nor shall anything contained herein or in any Rights Certificate be construed to confer upon the holder of any Rights Certificate, as such, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting stockholders (except as provided in Section 24 hereof), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Rights Certificate shall have been exercised in accordance with the provisions hereof. Section 18. CONCERNING THE RIGHTS AGENT. (a) The Company agrees to pay to the Rights Agent reasonable compensation for all services rendered by it hereunder in accordance with a fee schedule to be mutually agreed upon and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the administration and execution of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement, including the costs and expenses of defending against any claim of liability in the premises. (b) The Rights Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with its administration of this Agreement in reliance upon any Rights Certificate or certificate for the Preferred Shares or Common Shares or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, instruction, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper person or persons, or otherwise upon the advice of counsel as set forth in Section 20 hereof. Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT. (a) Any corporation into which the Rights Agent or any successor Rights Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the corporate trust or stock transfer business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such corporation would be eligible for appointment as a successor Rights Agent under the provisions of Section 21 hereof. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Rights Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of the predecessor Rights Agent and deliver such Rights Certificate so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, any successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. (b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name or in its changed name; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. Section 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Rights Certificates, by their acceptance thereof, shall be bound: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter be proved or established by the Company prior to taking or suffering any action hereunder, such fact or matter (unless other evidence in respect thereof be herein specifically prescribed) may be deemed to be conclusively proved and established by a certificate signed by anyone of the Chairman of the Board of Directors, the President or any Vice President of the Company and delivered to the Rights Agent; and such certificate shall be full authorization to the Rights Agent for any action taken or suffered in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder only for its own negligence, bad faith or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Rights Certificates (except as to its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Rights Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Rights Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Section 7(e) hereof) or any adjustment required under the provisions of Sections 11 or 13 hereof or responsible for the manner, method or amount of any such adjustment or the ascertaining of the existence of facts that would require any such change or adjustment (except with respect to the exercise of Rights evidenced by Rights Certificates after actual notice that such change or adjustment is required); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any Preferred Shares or Common Shares to be issued pursuant to this Agreement or any Rights Certificate or as to whether any Preferred Shares or Common Shares will, when so issued, be validly authorized and issued, fully-paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from anyone of the Chairman of the Board of Directors, the President or any Vice President of the Company, and to apply to such officers for advice or instructions in connection with its duties under this Rights Agreement, and it shall not be liable for any action taken or suffered to be taken by it in good faith in accordance with instructions of any such officer. (h) The Rights Agent and any stockholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other legal entity. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company resulting from any such act, default, neglect or misconduct, provided reasonable care was exercised in the selection and continued employment thereof. (j) At any time and from time to time after the Distribution Date, upon the request of the Company, the Rights Agent shall promptly deliver to the Company a list, as of the most recent practicable date (or as of such earlier date as may be specified by the Company), of the holders of record of Rights. (k) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise or transfer, the certificate of status attached to the form of assignment or form of election to purchase, as the case may be, has either not been completed or indicates an affirmative response to clause l or 2 thereof, the Rights Agent shall not take any further action with respect to the requested exercise or transfer without first consulting with the Company. Section 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' notice in writing mailed to the Company and to each transfer agent of the Preferred Shares or Common Shares by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' notice in writing, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Preferred Shares or Common Shares by registered or certified mail, and to the holders of the Rights Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the resigning, removed, or incapacitated Rights Agent shall remit to the Company, or to any successor Rights Agent designated by the Company, all books, records, funds, certificates or other documents or instruments of any kind then in its possession which were acquired by such resigning, removed or incapacitated Rights Agent in connection with its services as Rights Agent hereunder, and shall thereafter be discharged from all duties and obligations hereunder. Following notice of such removal, resignation or incapacity, the Company shall appoint a successor to such Rights Agent. If the Company shall fail to make such appointment within a period of 30 days after giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights Certificate (who shall, with such notice, submit his Rights Certificate for inspection by the Company), then the registered holder of any Rights Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be either (a) a corporation organized and doing business under the laws of the United States or of the State of New York or Texas (or of any other state of the United States so long as such corporation is authorized to do business as a banking institution in the State of New York or Texas), in good standing, having an office or an affiliate with an office in the State of New York which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by Federal or state authority and which has at the time of its appointment as Rights Agent a combined capital and surplus of at least $50 million or (b) an affiliate of a corporation described in clause (a) of this sentence which is a corporation organized and doing business under the laws of the United States or of the State of New York or Texas (or of any other state of the United States so long as such corporation is authorized to do business as a banking institution in the State of New York or Texas), in good standing, having a principal office in the State of New York, which is authorized under such laws to exercise corporate trust or stock transfer powers and is subject to supervision or examination by federal or state authority. After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment, the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Shares or Preferred Shares, and mail a notice thereof in writing to the registered holders of the Rights Certificates. Failure to give any notice provided for in this Section 21, however, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities or property purchasable under the Rights Certificates made in accordance with the provisions of this Agreement. Section 23. REDEMPTION. (a) The Board of Directors of the Company may, at its option, at any time prior to 5:00 p.m., Houston time on the earlier of(i) the 30th day after the Shares Acquisition Date and (ii) the Final Expiration Date, redeem all but not less than all the then outstanding Rights at a redemption price of $0.01 per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being hereinafter referred to as the "Redemption Price") and the Company may, at its option, pay the Redemption Price either in Common Shares (based on the current per share market price thereof (as determined pursuant to Section 11(d) hereof) or cash; provided, however, that if the Board of Directors of the Company authorizes redemption of the Rights in either of the circumstances set forth in clauses (i) and (ii) below, then such authorization to redeem must be by Board Approval: (i) such authorization occurs on or after the time a Person becomes an Acquiring Person, or (ii) such authorization occurs on or after the date of a change (resulting from a proxy or consent solicitation) in a majority of the directors in office at the commencement of such solicitation if any Person who is a participant in such solicitation has stated (or, if upon the commencement of such solicitation, the Company's Board of Directors has in good faith determined upon Board Approval) that such Person (or any of its Affiliates or Associates) intends to take, or may consider taking, any action which would result in such Person becoming an Acquiring Person or which would cause the occurrence of a Section 13 Event. Notwithstanding anything contained in this Agreement to the contrary, the Rights shall not be exercisable following the time that a Person becomes an Acquiring Person until such time as the Company's right of redemption hereunder has expired. (b) Immediately upon the action of the Board of Directors of the Company ordering the redemption of the Rights, and without any further action and without any notice, the right to exercise the Rights will terminate and the only right thereafter of the holders of Rights shall be to receive the Redemption Price. Within ten days after the action of the Board of Directors ordering the redemption of the Rights, the Company shall give notice of such redemption to the holders of the then outstanding Rights by mailing such notice to all such holders at their last addresses as they appear upon the registry books of the Rights Agent or, prior to the Distribution Date, on the registry books of the transfer agent for the Common Shares. Any notice which is mailed in the manner herein provided shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Neither the Company nor any of its Affiliates or Associates may redeem, acquire or purchase for value any Rights at any time in any manner other than that specifically set forth in this Section 23, and other than in connection with the purchase of Common Shares prior to the Distribution Date. Section 24. NOTICE OF CERTAIN EVENTS. (a) In case the Company shall propose (i) to pay any dividend payable in stock of any class to the holders of its Preferred Shares or to make any other distribution to the holders of its Preferred Shares (other than a regular periodic cash dividend at a rate not in excess of 125% of the rate of the last regular periodic cash dividend theretofore paid), or (ii) to offer to the holders of its Preferred Shares rights or warrants to subscribe for or to purchase any additional Preferred Shares or shares of stock of any class or any other securities, rights or options, or (iii) to effect any reclassification of its Preferred Shares (other than a reclassification involving only the subdivision of outstanding Preferred Shares), or (iv) to effect any consolidation or merger into or with, or to effect any sale or other transfer (or to permit one or more of its Subsidiaries to effect any sale or other transfer), in one or more transactions, of more than 50% of the assets or earning power of the Company and its Subsidiaries (taken as a whole) to any other Person, or (v) to effect the liquidation, dissolution or winding up of the Company, or (vi) to declare or pay any dividend on the Common Shares payable in Common Shares or to effect a subdivision, combination or consolidation of the Common Shares (by reclassification or otherwise than by payment of dividends in Common Shares), then, in each such case, the Company shall give to the Rights Agent and to each holder of a Rights Certificate, in accordance with Section 25 hereof, a notice of such proposed action, which shall specify the record date for the purposes of such stock dividend, distribution of rights or warrants, or the date on which such reclassification, consolidation, merger, sale, transfer, liquidation, dissolution, or winding up is to take place and the date of participation therein by the holders of the Common Shares and/or Preferred Shares, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least ten days prior to the record date for determining holders of the Preferred Shares for purposes of such action, and in the case of any such other action, at least ten days prior to the date of the taking of such proposed action or the date of participation therein by the holders of the Common Shares and/or Preferred Shares, whichever shall be the earlier. (b) In case the event set forth in Section 11(a)(ii) hereof shall occur, then the Company shall as soon as practicable thereafter give to the Rights Agent and to each holder of a Rights Certificate, in accordance with Section 25 hereof, a notice of the occurrence of such event, which shall describe such event and the consequences of same to holders of Rights under Section 11(a)(ii) hereof. Section 25. NOTICES. Notices or demands authorized by this Agreement to be given or made by the Rights Agent or by the holder of any Rights Certificate to or on the Company shall be sufficiently given or made if sent by first-class mail, postage-prepaid, addressed (until another address is filed in writing with the Rights Agent) as follows: Energy BioSystems Corporation 4200 Research Forest Drive The Woodlands, Texas 77381 Attention: President Subject to the provisions of Section 21 hereof, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Rights Certificate to or on the Rights Agent shall be sufficiently given or made if sent by first-class mail, postage-prepaid, addressed (until another address is filed in writing with the Company) as follows: Society National Bank c/o KeyCorp Shareholder Services 700 Louisiana, Suite 2620 Houston, Texas 77002 Attention: Lorraine Rodewald Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Rights Certificate shall be sufficiently given or made if sent by first-class mail, postage-prepaid, addressed to such holder at the address of such holder as shown on the registry books of the Company. Section 26. SUPPLEMENTS AND AMENDMENTS. Prior to the Distribution Date and subject to the penultimate sentence of this Section 26, the Company and the Rights Agent shall, if the Company so directs, supplement or amend any provision of this Agreement without the approval of any holders of Rights. From and after the Distribution Date and subject to the penultimate sentence of this Section 26, the Company and the Rights Agent shall, if the Company so directs, supplement or amend this Agreement without the approval of any holders of Rights in order (i) to cure any ambiguity, (ii) to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (iii) to shorten or lengthen any time period hereunder, or (iv) to change or supplement the provisions hereunder in any manner which the Company may deem necessary or desirable and which shall not adversely affect the interests of the holders of Rights (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person); provided, however, this Agreement may not be supplemented or amended to lengthen, pursuant to clause (iii) of this sentence, (A) subject to Section 29 hereof, a time period relating to when the Rights may be redeemed at such time as the Rights are not then redeemable, or (B) any other time period unless such lengthening is, based upon a determination by the Company's Board of Directors upon Board Approval, for the purpose of protecting, enhancing or clarifying the rights of, and/or the benefits to, the holders of Rights. Upon the delivery of a certificate from an appropriate officer of the Company or, so long as any Person is an Acquiring Person hereunder, from the majority of the Continuing Directors which states that the proposed supplement or amendment is in compliance with the terms of this Section 26, the Rights Agent shall execute such supplement or amendment. Notwithstanding anything contained in this Agreement to the contrary, no supplement or amendment shall be made which changes the Redemption Price, the Purchase Price, the Final Expiration Date or the number of Preferred Share Fractions for which a Right is exercisable without Board Approval. Prior to the Distribution Date, the interests of the holders of Rights shall be deemed coincident with the interests of the holders of Common Shares. Section 27. SUCCESSORS. All the covenants and provisions of this Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 28. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall be construed to give to any person or corporation other than the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, the Common Shares) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, the Common Shares). Section 29. SEVERABILITY. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; provided, however, that notwithstanding anything in this Agreement to the contrary, if any such term, provision, covenant or restriction is held by such court or authority to be invalid, void or unenforceable and a majority of the Continuing Directors determines in its good faith judgment that severing the invalid language from this Agreement would adversely affect the purpose or effect of this Agreement and the Rights shall not then be redeemable, the right of redemption set forth in Section 23 hereof shall be reinstated and shall not expire until the Close of Business on the tenth Business Day following the date of such determination by a majority of the Continuing Directors. Section 30. GOVERNING LAW. This Agreement and each Rights Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Delaware and for all purposes shall be governed by and construed in accordance with the laws of such State applicable to contracts to be made and performed entirely within such State. Section 31. COUNTERPARTS. This Agreement may be executed in any number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument. Section 32. DESCRIPTIVE HEADING. Descriptive headings of the several Sections of this Agreement are inserted for convenience only and shall not control or affect the meaning or construction of any of the provisions hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and their respective corporate seals to be hereto affixed and attested, all as of the day and year first above written. ENERGY BIOSYSTEMS CORPORATION Attest: By: /s/ PAUL G. BROWN III /s/ JOHN H. WEBB --------------------------------------- ------------------------- Paul G. Brown, III John H. Webb Secretary Chairman, President and Chief Executive Officer SOCIETY NATIONAL BANK Attest: By: /s/ BARBARA HUBBARD By: /s/ LORRAINE RODEWALD ---------------------------------------- -------------------------- Name: BARBARA HUBBARD Lorraine Rodewald ----------------------------------- Assistant Vice President Title: TRUST OFFICER EX-4.7 4 a2043676zex-4_7.txt EXHIBIT 4.7 EXHIBIT 4.7 NEITHER THIS WARRANT NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE SOLD OR OTHERWISE DISPOSED OF UNLESS PURSUANT TO A REGISTERED OFFERING OR BY TRANSFER EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. ENERGY BIOSYSTEMS CORPORATION COMMON STOCK PURCHASE WARRANT No. W-99-__ _____ Shares This certifies that, for value received, __________ or registered assigns (the "holder"), upon due exercise of this Warrant, is entitled to purchase from Energy BioSystems Corporation, a Delaware corporation (the "Company"), at any time on or after June 11, 1999 (the "Initial Exercise Date"), and before the close of business on June 11, 2002, or if not a trading date on the New York Stock Exchange, the next following trading date (the "Expiration Date"), all or any part of ________ fully paid and nonassessable Shares (the "Warrant Shares") of the Common Stock, par value $0.01 per share, of the Company ("Common Stock"), at a purchase price of $2.40 per share (the "Purchase Price"), both the Purchase Price and the number of Warrant Shares issuable upon exercise of this Warrant being subject to possible adjustment as provided below. This Warrant is hereinafter called the "Warrant." The holder hereof and all subsequent holders of this Warrant shall be entitled to all rights and benefits provided to the holder or holders hereof pursuant to the terms of this Warrant. SECTION 1. EXERCISE OF WARRANT. (a) The holder of this Warrant may, at any time on or after the Initial Exercise Date and on or before the Expiration Date, exercise this Warrant in whole at any time or in part (but not less than 1,000 Warrant Shares) from time to time for the purchase of the Warrant Shares or other securities which such holder is then entitled to purchase hereunder ("Warrant Securities") at the Purchase Price (as hereinafter defined). In order to exercise this Warrant in whole or in part, the holder hereof shall deliver to the Company (i) a written notice of such holder's election to exercise this Warrant, which notice shall specify the number of Warrant Shares to be purchased, (ii) payment of the aggregate purchase price of the Warrant Shares being purchased by certified or bank cashier's check, unless pursuant to a Cashless Exercise as described in subsection (b) below, and (iii) this Warrant, provided that, if such Warrant Shares or other Warrant Securities have not then been registered under the Securities Act or applicable state securities laws, the Company may require that such holder furnish to the Company a written statement that such holder is purchasing such Warrant Shares or other Warrant Securities for such holder's own account for investment and not with a view to the distribution thereof, that none of such shares will be offered or sold in violation of the provisions of the Securities Act and applicable state securities laws and as to such other matters relating to the holder as the Company may reasonably request to permit the issuance of such Warrant Shares or other Warrant Securities without registration under the Securities Act and applicable state securities laws. Upon receipt thereof, the Company shall, as promptly as practicable, execute or cause to be executed and deliver to such holder a certificate or certificates representing the aggregate number of Warrant Shares (or if applicable, other Warrant Securities) specified in said notice. The stock certificate or certificates so delivered shall be in the denomination of 100 shares each or such other denominations as may be specified in said notice and shall be registered in the name of such holder or such other name as shall be designated in said notice. Page 1 of 8 No fractional Warrant Shares are to be issued upon the exercise of this Warrant, but the Company shall pay a cash adjustment in respect of any fraction of a share which would otherwise be issuable in an amount equal to the same fraction of the fair market value per share of the Warrant Shares on the day of exercise, as reasonably determined by the Company. If this Warrant shall have been exercised only in part, the Company shall, at the time of delivery of said certificate or certificates, deliver to such holder a new Warrant evidencing the rights of such holder to purchase the remaining Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant, or, at the request of such holder, appropriate notation may be made on this Warrant and same returned to such holder. The Company shall pay all expenses, taxes and other charges payable in connection with the preparation, execution and delivery of share certificates under this Section, except that, if such share certificates are requested to be registered in a name or names other than the name of the holder of this Warrant, funds sufficient to pay all stock transfer taxes which shall be payable upon the execution and delivery of such share certificates shall be paid by the holder hereof at the time of delivering the notice of exercise mentioned above. The Company represents, warrants and agrees that all Warrant Shares issuable upon any exercise of this Warrant in accordance herewith shall be validly authorized and issued, fully paid and nonassessable. This Warrant shall not entitle the holder hereof to any of the rights of a stockholder of the Company prior to exercise in the manner herein provided. (b) Notwithstanding anything in subsection (a) to the contrary, the holder of this Warrant may elect to exercise this Warrant in part (but not for less than 1,000 Warrant Shares) or in whole, at any time on or after the Initial Exercise Date and on or before the Expiration Date, by the surrender of this Warrant (with the cashless exercise form at the end hereof duly executed) (a "Cashless Exercise") at the address set forth in subsection 6(a) hereof. Such presentation and surrender shall be deemed a waiver of the holder's obligation to pay the Purchase Price, or the proportionate part thereof if this Warrant is exercised in part. In the event of a Cashless Exercise, the Holder shall exchange its Warrant for that number of Warrant Shares or Warrant Securities, as the case may be, subject to such Cashless Exercise multiplied by a fraction, the numerator of which shall be the difference between the then Current Market Price Per Share of the Common Stock and the Per Share Purchase Price, and the denominator of which shall be the then Current Market Price Per Share of the Common Stock. For purposes of any computation under this subsection, the then Current Market Price shall be based on the trading day prior to the Cashless Exercise. "Current Market Price") shall be deemed to be the last sale price of the Common Stock on the trading day prior to such date or, in case no such reported sales take place on such day, the average of the last reported bid and asked prices of the Common Stock on such day, in either case on the principal national securities exchange on which the Common Stock is admitted to trading or listed, or if not listed or admitted to trading on any such exchange, the representative closing bid price of the Common Stock as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ"), or other similar organization if NASDAQ is no longer reporting such information, or, if the Common Stock is not reported on NASDAQ, the high per share bid price for the Common Stock in the over-the-counter market as reported by the National Quotation Bureau or similar organization, or if not so available, the fair market value of the Common Stock as determined in good faith by the Board of Directors. SECTION 2. TRANSFER, DIVISION AND COMBINATION. The Company shall keep at its principal executive office a register for the registration of, and registration of transfers of, the Warrants. The name and address of each holder of one or more Warrants, each transfer thereof and the name and address of each transferee of one or more Warrants shall be registered in such register. Prior to due presentment for registration of transfer, the person in whose name any Warrants shall be registered shall be deemed and Page 2 of 8 treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. The Company shall give to any holder of a Warrant promptly upon request therefor, a complete and correct copy of the names and addresses of all registered holders of Warrants. Subject to the provisions of Section 3, upon surrender of any Warrant at the principal executive office of the Company for registration of transfer or exchange (and in the case of a surrender for registration of transfer, duly endorsed or accompanied by a written instrument of transfer duly executed by the registered holder of such Warrant or his attorney duly authorized in writing and accompanied by the address for notices of each transferee of such Warrant or part thereof), the Company shall execute and deliver, at the Company's expense, one or more new Warrants (as requested by the holder thereof) in exchange therefor, exercisable for an aggregate number of Warrant Shares equal to the number of shares for which the surrendered Warrant is exercisable and issued to such person or persons as such holder may request, which Warrant or Warrants shall in all other respects be identical with this Warrant. Upon receipt by the Company of evidence reasonably satisfactory to it of the ownership of and the loss, theft, destruction or mutilation of any Warrant, and (a) in the case of loss, theft or destruction, of indemnity reasonably satisfactory to it (provided that if the holder of such Warrant is, or is a nominee for, an original holder, such person's own unsecured agreement of indemnity shall be deemed to be satisfactory), or (b) in the case of mutilation, upon surrender and cancellation thereof, the Company at its own expense shall execute and deliver, in lieu thereof, a new Warrant identical in all respects to such lost, stolen, destroyed or mutilated Warrant. SECTION 3. COMPLIANCE WITH SECURITIES ACT; RESTRICTIONS ON TRANSFER AND SALE. (a) Each certificate for Warrant Shares (or other Warrant Securities) initially issued upon the exercise of this Warrant and each certificate for Warrant Shares (or other Warrant Securities) issued to subsequent transferees of any such certificate shall (unless otherwise permitted by this Section 3) be stamped or otherwise imprinted with legend in substantially the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") OR THE SECURITIES LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE SOLD OR OTHERWISE DISPOSED OF UNLESS PURSUANT TO A REGISTERED OFFERING OR BY TRANSFER EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS." (b) The holder understands that Warrant Shares (or other Warrant Securities) which may be acquired by it upon exercise of this Warrant shall be entitled to certain registration rights provided for in the Subscription Agreement relating to the purchase and issuance of the Shares and this Warrant between the Company and the holder. The holder further acknowledges and agrees that no more than one-third of the Warrant Shares (or other Warrant Securities) which may be acquired upon exercise hereof may be sold by the holder or any transferee in any twelve month period. SECTION 4. ADJUSTMENT OF PURCHASE PRICE. (a) The Purchase Price and the number of Warrant Shares and the number or amount of any other securities and property as hereinafter provided for which this Warrant may be exercisable shall be subject to adjustment from time to time effective upon each occurrence of any of the following events. (b) If the Company shall declare or pay any dividend with respect to its Common Stock payable in shares of Common Stock, subdivide the outstanding Common Stock into a greater number of Page 3 of 8 shares of Common Stock, or reduce the number of shares of Common Stock outstanding (by stock split, reverse stock split, reclassification or otherwise than by repurchase of its Common Stock) (any of such events being hereinafter called a "Stock Split"), the Purchase Price and number of Warrant Shares issuable upon exercise of this Warrant shall be appropriately adjusted so as to entitle the holder hereof to receive upon exercise of this Warrant, for the same aggregate consideration provided herein, the same number of shares of Common Stock (plus cash in lieu of fractional shares) as the holder would have received as a result of such Stock Split had such holder exercised this Warrant in full immediately prior to such Stock Split. (c) If the Company shall merge or consolidate with or into one or more corporations or partnerships and the Company is the sole surviving corporation, or the Company shall adopt a plan of recapitalization or reorganization in which the Common Stock is exchanged for or changed into another class of stock or other security or property of the Company, the holder of this Warrant shall, for the same aggregate consideration provided herein, be entitled upon exercise of this Warrant to receive in lieu of the number of shares of Common Stock as to which this Warrant would otherwise be exercisable, the number of shares of Common Stock or other securities (plus cash in lieu of fractional shares) or property to which such holder would have been entitled pursuant to the terms of the agreement or plan of merger, consolidation, recapitalization or reorganization had such holder exercised this Warrant in full immediately prior to such merger, consolidation, recapitalization or reorganization. (d) If the Company is merged or consolidated with or into one or more corporations or partnerships under circumstances in which the Company is not the sole surviving corporation, or if the Company sells or otherwise disposes of substantially all its assets, and in connection with any such merger, consolidation or sale the holders of Common Stock receive stock or other securities convertible into equity of the surviving or acquiring corporations or entities, or other securities or property after the effective date of such merger, consolidation or sale, as the case may be, the holder of this Warrant shall, for the same aggregate consideration provided herein, be entitled upon exercise of this Warrant to receive, in lieu of the shares of Common Stock as to which this Warrant would otherwise be exercisable, shares of such stock or other securities (plus cash in lieu of fractional shares) or property as the holder of this Warrant would have received pursuant to the terms of the merger, consolidation or sale had such holder exercised this Warrant in full immediately prior to such merger, consolidation or sale. In the event of any consolidation, merger or sale as described in this Section 4(d), provision shall be made in connection therewith for the surviving or acquiring corporations or partnerships to assume all obligations and duties of the Company hereunder or to issue substitute warrants in lieu of this Warrant with all such changes and adjustments in the number or kind of shares of stock or securities or property thereafter subject to this Warrant or in the Purchase Price as shall be required in connection with this Section 4(d). (e) If the Company (other than in connection with a sale described in Section 4(d)) proposes to liquidate and dissolve, the Company shall give notice thereof as provided in Section 5(b) hereof and shall permit the holder of this Warrant to exercise any unexercised portion hereof at any time within the 10 day period following delivery of such notice, if such holder should elect to do so, and participate as a stockholder of the Company in connection with such dissolution. (f) Whenever any adjustment is made as provided in any provision of this Section 4: (i) the Company shall compute the adjustments in accordance with this Section 4 and shall prepare a certificate signed by an officer of the Company setting forth the adjusted number of shares or other securities or property and Purchase Price, as applicable, and showing in reasonable detail the facts upon which such adjustment is based, and such certificate shall forthwith be filed with the Company or its designee; and Page 4 of 8 (ii) a notice setting forth the adjusted number of shares or other securities or property and the Purchase Price, as applicable, shall forthwith be required, and as soon as practicable after it is prepared, such notice shall be delivered by the Company to the holder of record of each Warrant. (g) If at any time, as a result of any adjustment made pursuant to this Section 4, the holder of this Warrant shall become entitled, upon exercise hereof, to receive any shares other than shares of Common Stock or to receive any other securities, the number of such other shares or securities so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions contained in this Section 4 with respect to the Common Stock. SECTION 5. SPECIAL AGREEMENTS OF THE COMPANY. (a) The Company covenants and agrees that it will reserve and set apart and have at all times a number of shares of authorized but unissued Common Stock (and, if applicable, other Warrant Securities) then deliverable upon the exercise of the Warrants or any other rights or privileges provided for therein sufficient to enable it at any time to fulfill all its obligations thereunder; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the exercise of this Warrant at the Purchase Price then in effect, the Company will take such corporate action as may, in the reasonable opinion of its counsel, be necessary to increase its authorized shares but unissued shares of Common Stock (and, if applicable, other Warrant Securities) to such number of shares as shall be sufficient for such purposes. (b) In case the Company proposes (i) to pay any dividend upon the Common Stock or make any distribution or offer any subscription or other rights to the holders of Common Stock, or (ii) to effect any capital reorganization or reclassification of capital stock of the Company, or (iii) to effect the consolidation, merger, sale of all or substantially all of the assets, liquidation, dissolution or winding up of the Company, then the Company shall cause notice of any such intended action to be given to each holder of the Warrants not less than 15 nor more than 60 days prior to the date on which the transfer books of the Company shall close or a record be taken for such dividend or distribution, or the date when such capital reorganization, reclassification, consolidation, merger, sale, liquidation, dissolution or winding up shall be effected, or the date of such other event, as the case may be. SECTION 6. NOTICES. Any notice or other document required or permitted to be given or delivered to holders of Warrants and holders of Common Stock (or other Warrant Securities) shall be in writing and sent (a) by telecopy if the sender on the same day sends a confirming copy of such notice by a recognized overnight delivery service (charges prepaid), or (b) by registered or certified mail with return receipt requested (postage prepaid) or (c) by a recognized overnight delivery service (with charges prepaid). (i) if to the Company, at Energy BioSystems Corporation, 4200 Research Forest Drive, The Woodlands, Texas 77381, Telecopy No.: (281) 364-6110, or such other address as it shall have specified to the holders of Warrants in writing; or Page 5 of 8 (ii) if to a holder, at its address set forth below, or such other address as it shall have specified to the Company in writing. Notices given under this Section 6 shall be deemed given only when actually received. SECTION 7. AMENDMENT. This Warrant may not be amended, modified or otherwise altered in any respect except by the written consent of the registered holder of this Warrant and the Company. SECTION 8. SUCCESSORS AND ASSIGNS. This Warrant shall be binding upon and inure to the benefit of the Company and the holder of this Warrant and their respective successors and permitted assigns. SECTION 9. GOVERNING LAW. This Warrant shall be governed by and construed in accordance with the laws of the State of Delaware, without reference to the conflicts of law principles thereof. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its name by its duly authorized officers and accepted by the holder of this Warrant this 11th day of June, 1999. ATTEST: ENERGY BIOSYSTEMS CORPORATION By: By: -------------------------- ------------------------------- Name: Paul G. Brown, III William E. Nasser Title: Secretary President Address for Notices: - ------------------------------------ - ------------------------------------ - ------------------------------------ Page 6 of 8 SUBSCRIPTION The undersigned, ___________________, pursuant to the provisions of the foregoing Warrant, hereby agrees to subscribe for and purchase ____________________ shares of the Common Stock, par value $.01 per share, of Energy BioSystems Corporation covered by said Warrant, and makes payment therefor in full at the price per share provided by said Warrant. Dated:__________________ Signature:____________________ Signature Guarantee: Address:______________________ ________________________ Social Security No. _____________ CASHLESS EXERCISE The undersigned ___________________, pursuant to the provisions of the foregoing Warrant, hereby elects to exchange its Warrant for ___________________ shares of Common Stock, par value $.01 per share, of Energy BioSystems Corporation pursuant to the Cashless Exercise provisions of the Warrant. Dated:__________________ Signature:____________________ Signature Guarantee: Address:______________________ ________________________ Social Security No.:_____________ ASSIGNMENT FOR VALUE RECEIVED _______________ hereby sells, assigns and transfers unto ____________________ (SS#_________________) the foregoing Warrant and all rights evidenced thereby, and does irrevocably constitute and appoint _____________________, attorney, to transfer said Warrant on the books of Energy BioSystems Corporation. Dated:__________________ Signature:____________________ Signature Guarantee: Address:______________________ - ------------------------ Page 7 of 8 PARTIAL ASSIGNMENT FOR VALUE RECEIVED _______________ hereby assigns and transfers unto ____________________ (SS#________________) the right to purchase _______ shares of the Common Stock, par value $.01 per share, of Energy BioSystems Corporation covered by the foregoing Warrant, and a proportionate part of said Warrant and the rights evidenced thereby, and does irrevocably constitute and appoint ____________________, attorney, to transfer that part of said Warrant on the books of Energy BioSystems Corporation. Dated:_______________ Signature:____________________ Signature Guarantee: Address:______________________ - --------------------- Page 8 of 8 EX-10.3 5 a2043676zex-10_3.txt EXHIBIT 10.3 EXHIBIT 10.3 SPONSORED LABORATORY STUDY AGREEMENT THIS Agreement is made this 4th day of October, 2000, between The University of Texas M.D. Anderson Cancer Center, 1515 Holcombe Boulevard, Houston, Texas 77030 ("Institution"), a component of The University of Texas System ("System"), and Enchira Biotechnology Corporation, 4200 Research Forest Drive, The Woodlands, Texas 77381 ("Sponsor"), to conduct a laboratory study and evaluation ("Study"). Institution and Sponsor agree as follows: 1. PROTOCOL 1.1 Institution agrees to use its best efforts to conduct the Study, as an independent contractor, in accordance with Institutional policy, applicable laws and regulations and the Project, "Directed Evolution of Growth Factors and Receptors" as described in Exhibit A attached hereto and incorporated herein. The Study will be supervised by Mein-Chie Hung, Ph.D., ("Principal Investigator"), at Institution, with assistance from associates and colleagues as required. 1.2 Sponsor agrees to engage the services of Institution to conduct the Study. 2. AWARD 2.1 In consideration for performance of the Study by Institution, Sponsor shall pay Institution Three Hundred Thousand and No/l00 Dollars ($300,000.00) for Study expenses and other related costs. This amount, shown by approximate category of expense in Exhibit B attached hereto for information only, is payable in eight (8) quarterly installments in the amount of Thirty-Seven Thousand Five Hundred and NO/100 Dollars ($37,500.00) each. The first payment is payable within thirty (30) days of written notification from M.D. Anderson that the research has commenced. 2.2 Institution shall provide Sponsor with quarterly written reports summarizing the research done and all results obtained in the Study. 3. TERM 3.1 This Agreement shall continue in force until the earlier of completion of the Study as mutually agreed upon in writing by the parties or twenty-four (24) months from the date set forth above; provided, however, that either party may terminate the Agreement by giving thirty (30) days advance written notice to the other. 3.2 Upon early termination of this Agreement, Sponsor shall be liable for all reasonable costs incurred or obligated by Institution at the time of such termination, subject to the maximum amount specified in Article 2. Sponsor shall pay Institution for such costs within thirty (30) days of receipt of an invoice for same. 3.3 Upon termination of this Agreement, Institution shall return Sponsor's materials and equipment to Sponsor. 4. INDEMNIFICATION 4.1 Institution shall, to the extent authorized under the Constitution and laws of the State of Texas, indemnify and hold Sponsor harmless from liability resulting from the negligent acts or omissions of Institution, its agents or employees pertaining to the activities to be carried out pursuant to the obligations of this Agreement; provided, however, that Institution shall not hold Sponsor harmless from claims arising out of the negligence or willful malfeasance of Sponsor, its officers, agents, or employees, or any person or entity not subject to Institution's supervision or control. 4.2 Sponsor shall indemnify and hold harmless System, Institution, their Regents, officers, agents and employees from any liability or loss resulting from judgments or claims against them arising out of the activities to be carried out pursuant to the obligation of this Agreement, including but not limited to the use by Sponsor of the results of the Study; provided, however, that the following is excluded from Sponsor's obligation to indemnify and hold harmless: the negligent failure of Institution to comply with any applicable governmental requirements or to adhere to the terms of the Protocol; or the negligence or willful malfeasance by a Regent, officer, agent, or employee of Institution or System. 5. PUBLICATION AND CONFIDENTIALITY 5.1 Subject to section 5.3, the Sponsor shall have the option to issue press releases concerning the establishment of the Agreement and scientific publications, presentations and expanded collaborations resulting from the Study. 5.2 The parties reserve the right to publish or otherwise make public the data resulting from the Study. The party so wishing to publish or make public shall submit any such manuscript or release to the other party for comment thirty (30) days prior to submission for publication or release. 5.3 Except as otherwise required by law or regulation, neither party shall release or distribute any press release, materials or information containing the name of the other party or any of its employees without prior written approval by an authorized representative of the non-releasing party, but such approval shall not be unreasonably withheld 5.4 Each party shall hold in confidence during the term of this Agreement and for three (3) years after the termination of this Agreement any confidential information identified as confidential and obtained from the other party during the course of this Study. Nothing herein, however, shall prevent Institution or any other component of System from using any information generated hereunder by Institution for ordinary non-commercial research and educational purposes of a university. 6. INTELLECTUAL PROPERTY 6.1. Title to all inventions and discoveries conceived by Institution resulting from the research performed hereunder shall reside in Institution; title to all inventions and discoveries conceived by Sponsor resulting from the research performed hereunder shall reside in Sponsor; title to all inventions and discoveries conceived jointly by Institution and Sponsor resulting from the research performed hereunder shall reside jointly in Institution and Sponsor. Inventorship shall be determined in accordance with U.S. Patent law. Such inventions solely or jointly conceived by Institution shall be "Institution Inventions". 6.2 After consultation with Sponsor regarding the advisability of filing patent applications, Institution shall file appropriate United States and foreign patent applications for Institution Inventions. Institution will provide Sponsor, on a confidential basis, a copy of any such application to be filed and any documents received or to be filed during prosecution thereof and will provide Sponsor the opportunity to comment thereon. On any application on which an employee of Sponsor is named as a co-inventor, Sponsor will cooperate in obtaining execution of any necessary documents by its employees. 6.3 Institution grants Sponsor a first option to negotiate an exclusive, worldwide, royalty-bearing license under Institution Inventions conceived during the term of this Agreement or within six (6) months thereafter and Patent rights claiming such Institution Inventions. Institution shall promptly notify Sponsor in writing of all Institution Inventions and Sponsor shall have three (3) months from written disclosure of each Institutional Invention to notify Institution of its desire to enter into such a license agreement, and a license agreement shall be negotiated in good faith and on commercially reasonable terms within a period not to exceed six (6) months from Sponsor's written notification to Institution of its desire to enter into a license agreement, or such period of time as to which the parties shall mutually agree. 6.4 Sponsor and Institution fail to enter into an agreement during that period of time, Sponsor shall have a right of first refusal with respect to any terms generally more favorable offered by Institution to a third party. 6.5 If In the event Sponsor elects to exercise its option and enters an exclusive license in accordance with the procedures detailed above, it shall be obligated to pay all expenses, including attorney's fees, incurred in searching prior art, obtaining search opinions, preparing applications, filing, prosecuting, enforcing or maintaining a patent or patent application with respect to the licensed invention in any country in which the patent or application is filed. 7. GENERAL 7.1 This Agreement, including the attached Exhibit A and B, constitutes the entire and only Agreement between the parties relating to the Study, and all prior negotiations, representations, agreements, and understandings are superseded hereby. No agreements altering or supplementing the terms hereof, including the exhibits attached hereto, may be made except by a written document signed by the duly authorized representatives of the parties. 7.2 Any conflicts between the Project and this Agreement are controlled by this Agreement. 7.3 This Agreement shall be construed and enforced in accordance with the laws of the State of Texas. 7.4 This Agreement anticipates educational training and may involve health science postgraduates and other students of the Institution. IN WITNESS WHEREOF, Institution and Sponsor hereby enter into this Agreement, effective as of the date first set forth above, and execute two (2) original counterparts. Enchira Biotechnology Corporation The University of Texas M.D. Anderson Cancer Center By: By: Peter P. Policastro, Ph.D. Leonard A. Zwelling, M.D., M.B.A President and CEO Vice President for Research Administration Date: 10/4/00 Date: 10/5/00 I acknowledge that I have read this Agreement in its entirety and that I shall use reasonable efforts to uphold my individual obligations and responsibilities set forth herein: By: Mien-Chie Hung, Ph.D. Principal Investigator Make Payment to: The University of Texas M.D. Anderson Cancer Center Attn: Manager, Grants & Contracts Accounting P.O. Box 297402 Houston, TX 77297 Tax I.D. 746001118 A1 EX-10.4 6 a2043676zex-10_4.txt EXHIBIT 10.4 EXHIBIT 10.4 PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). THESE OMITTED PORTIONS HAVE BEEN MARKED WITH "***" AND HAVE BEEN FILED SEPARATELY WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION"). SITE LICENSE AGREEMENT This Site License Agreement (the "Agreement") is made and entered into as of the 6th day of March, 1998, by and between Energy BioSystems Corporation, a Delaware corporation ("EBC"), and Petro Star Inc., an Alaska corporation ("Petro Star"). W I T N E S S E T H: WHEREAS, EBC owns or has developed certain proprietary technology and know-how related to the removal of sulfur or other compounds or substances from fossil fuels and their derivatives using genetically engineered microbes as catalysts ("Biocatalysts"), processing performed on fossil fuels and their derivatives using Biocatalysts, and derivatizations of sulfur compounds using Biocatalysts (collectively, "Biorefining"); WHEREAS, EBC desires to grant a license to Petro Star, and Petro Star desires to obtain a license from EBC, for the use of EBC's Biorefining technology for the removal of sulfur from diesel in a 5,000 barrel per day biodesulfurization unit (the "BDS Unit") to be installed at Petro Star's Petro Star Valdez Refinery located in Valdez, Alaska (the "PVSR"); WHEREAS, EBC and Petro Star desire to establish an arrangement pursuant to which EBC and Petro Star will cooperate with respect to the installation, start-up and operation of the BDS Unit, the continued refinement of the BDS Unit and EBC's use of the BDS Unit for the demonstration of EBC's biodesulfurization technology to third parties; NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants, terms and conditions contained herein, the parties agree as follows: ARTICLE I INSTALLATION AND OPERATION OF BDS UNIT Section 1.1 COOPERATIVE EFFORTS. Petro Star and EBC will cooperate with respect to the installation, start-up and operation of the BDS Unit, the continued refinement of the BDS Unit and EBC's use of the BDS Unit for the demonstration of EBC's biodesulfurization technology to third parties in accordance with the plan attached hereto as Exhibit A (the "Installation and Operation Plan") during the term of this Agreement. The Installation and Operation Plan will involve the following five phases of work, which may overlap: *** This portion has been omitted based on a request for confidential treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been separately filed with the Commission. (a) the phase commencing with the execution of this Agreement and ending with the completion of scoping economics (the "Initial Phase"); (b) the phase commencing with the commencement of detailed engineering and ending at the completion of detailed engineering (the "Engineering Phase"); (c) the phase commencing with the commencement of construction of the BDS Unit and ending at the completion of construction of the BDS Unit (the "Construction Phase"); (d) the phase commencing with the completion of construction of the BDS Unit, involving the start-up of the BDS Unit and ending with the completion of the commencement of commercial operations (the "Start-up Phase"); and (e) the phase commencing with the commencement of commercial operations and extending through the remaining term of the Agreement (the "Commercial Phase"). *** Each party shall use its respective diligent commercially reasonable efforts to conduct the work and accomplish the goals of the Installation and Operation Plan as contemplated thereby. Section 1.2 COORDINATION AND COMMUNICATION. Petro Star and EBC acknowledge that the cooperative efforts contemplated by this Agreement will require the coordination of the respective efforts of and communication between the two companies on an ongoing basis. Section 1.3 MANAGEMENT COMMITTEE. Petro Star and EBC shall establish a management committee whose members shall be responsible for managing the respective efforts of the two companies under this Agreement (the "Management Committee"), including but not limited to the coordination (as between the parties) and management of the following matters: (a) planning and implementation of efforts under the Installation and Operation Plan; (b) timely transfer of relevant information and progress reports in connection with the Installation and Operation Plan; (c) changes to the Installation and Operation Plan as may be necessary or appropriate (which changes shall require the consensus of the members of the Management Committee); (d) establishment of the criteria by which the commencement and completion of the various phases of the Installation and Operation Plan (as contemplated by Section 1.1) are to be determined; and -2- *** This portion has been omitted based on a request for confidential treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been separately filed with the Commission. (e) protection of intellectual property developed as a result of the efforts of EBC and Petro Star under this Agreement. Petro Star and EBC shall each appoint one member of its senior management and one member of its senior technical staff to the Management Committee. Section 1.4 COMMITMENT OF PERSONNEL. Petro Star and EBC will commit such personnel to the efforts contemplated by this Agreement as may be necessary or appropriate, as determined by the Management Committee in accordance with the Installation and Operation Plan. In addition, Petro Star and EBC shall each assign a project coordinator (i) to act as a conduit for timely transfer of relevant information and progress reports in connection with the Installation and Operation Plan and (ii) to be responsible for managing its day-to-day efforts under the Installation and Operation Plan. *** Section 1.5 DEMONSTRATION OF BDS UNIT; EVALUATION AND TESTING. Petro Star will permit EBC and its licensees and prospective licensees to visit and observe the operation of the BDS Unit during normal working hours and subject to Petro Star's standard conditions for such visits. EBC shall have the right to employ the BDS Unit for Biorefining evaluation and testing (including, without limitation, during the Commercial Phase)on such terms and conditions as may be negotiated in good faith and agreed upon from time to time by EBC and Petro Star. Section 1.6 NO AUTHORITY TO DIRECT ACTIONS OF THE OTHER PARTY. Although the parties acknowledge and agree that the coordination of their respective efforts under this Agreement is essential, each party shall retain the authority to direct, and the responsibility for, its own efforts under this Agreement. Nothing in this Article I shall be deemed to grant the Management Committee the authority to direct the actions of either EBC or Petro Star. ARTICLE II SITE LICENSE Section 2.1 GRANT OF SITE LICENSE. Subject to the terms and conditions of this Agreement, including Petro Star's payment of the license fees and royalties set forth in Section 2.2, EBC hereby grants to Petro Star during the term of this Agreement, a limited, non-exclusive license to use the Proprietary Technology (as defined herein) in the field of Biorefining that is owned by or licensed to EBC (the "Licensed Technology") to construct and install the BDS Unit at the PVSR, to conduct the development efforts contemplated by the Installation and Operation Plan, to operate the BDS Unit at the PVSR for the removal of sulfur from up to 5,000 barrels of diesel per day, and to make and have made, use, sell and market and otherwise commercially exploit throughout the world products of the PVSR processed by the BDS Unit. Section 2.2 SITE LICENSE FEES; ROYALTIES. In consideration of the license granted herein, Petro Star shall pay EBC the following amounts: (i) a license fee of $200,000 payable upon the commencement of the Initial Phase; -3- *** This portion has been omitted based on a request for confidential treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been separately filed with the Commission. (ii) a license fee of *** (iii) a license fee of *** (iv) a license fee of *** (v) *** Section 2.3 *** Section 2.4 *** ARTICLE III RIGHTS TO INTELLECTUAL PROPERTY Section 3.1 OWNERSHIP AND DISCLOSURE OF EXISTING AND SEPARATELY DEVELOPED PROPRIETARY TECHNOLOGY. Both during and after the term of this Agreement, EBC and Petro Star shall each retain their respective right, title and interest in and to, and shall be the exclusive owner (as between the parties) of, all technology, inventions, patents, patent rights, copyrights, trade secrets and other proprietary rights and information ("Proprietary Technology") owned or conceived by such party prior to the date of this Agreement ("Existing Proprietary Technology") or separately developed by such party during the term of this Agreement ("Separately Developed Proprietary Technology"). Section 3.2 OWNERSHIP OF JOINT PROPRIETARY TECHNOLOGY. All Proprietary Technology jointly developed during the term of this Agreement by EBC and Petro Star ("Joint Proprietary Technology") shall be owned jointly by EBC and Petro Star. Section 3.3 PATENT PROTECTION OF JOINT PROPRIETARY TECHNOLOGY. EBC shall have the authority, in its sole discretion, to decide whether to file, or continue prosecution of, any patent application, or to maintain any patent application or patent regarding the Joint Proprietary Technology. If EBC decides to take such actions with respect to any patent application or patent in any country, EBC will pay all costs incident to such patent applications, patents and like protection in such country regarding the Joint Proprietary Technology, including all costs incurred for filing, prosecution, issuance and maintenance fees, as well as any costs incurred in filing continuations, continuations-in-part, divisionals or related applications and any re-examination or reissue proceedings. Petro Star shall provide EBC with reasonable assistance and cooperation with respect to the foregoing matters. Section 3.4 EBC'S EXCLUSIVE LICENSE TO JOINT PROPRIETARY TECHNOLOGY FOR BIOREFINING. EBC shall have and is hereby granted an exclusive, perpetual, royalty-free, fully paid license to use all Joint Proprietary Technology in the area of Biorefining, with rights to sublicense, and to develop, make and have made, use, sell and market and otherwise commercially exploit products and services throughout the world using such Joint Proprietary Technology in the area of Biorefining. -4- *** This portion has been omitted based on a request for confidential treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been separately filed with the Commission. Section 3.5 EBC'S NON-EXCLUSIVE LICENSE TO PETRO STAR'S EXISTING PROPRIETARY TECHNOLOGY AND SEPARATELY DEVELOPED PROPRIETARY TECHNOLOGY FOR BIOREFINING. Petro Star hereby grants to EBC both during and after the term of this Agreement, a limited, non-exclusive, perpetual, royalty-free, fully-paid license to use all Existing Proprietary Technology and Separately Developed Technology of Petro Star in the area of Biorefining, with rights to sublicense, and to develop, make and have made, use, sell and market and otherwise commercially exploit products and services throughout the world using such Existing Proprietary Technology and Separately Developed Proprietary Technology in the area of Biorefining. Section 3.6 *** Section 3.7 NO REVERSE ENGINEERING. Each party agrees that it will not, either during or after the term of this Agreement, conduct any genetic analysis of or otherwise attempt to reverse engineer any Existing Proprietary Technology or Separately Developed Proprietary Technology of the other party. ARTICLE IV TERM AND TERMINATION Section 4.1 TERM. Unless earlier terminated by either party in accordance with the provisions of this Article IV, the term of this Agreement shall commence on the date of this Agreement and shall terminate on the earlier of (i) the expiration of the last-to-expire patent licensed hereunder and (ii) 20 years from the effective date of this Agreement. Section 4.2 TERMINATION BY PETRO STAR. Petro Star may without liability terminate this Agreement (i) at the conclusion of the Initial Phase or (ii) without cause *** upon the delivery of *** advance written notice to EBC. Section 4.3 TERMINATION BY EITHER PARTY FOR CAUSE. Either party may terminate this Agreement upon the occurrence of any of the following events: (i) the insolvency of the other party, or the making of an assignment for the benefit of creditors by the other party, the institution of voluntary or involuntary bankruptcy proceedings on behalf of or against the other party or the appointment of a trustee or receiver with respect to a substantial portion of the other party's assets; (ii) the failure by the other party to protect and maintain the confidentiality of Confidential Information as required by Article VI; (iii) the failure by the other party to submit to any inspection or audit or the repeated failure by a party to provide any information or report as required by Section 2.2 or 2.4; (iv) the repeated failure of the other party to take such actions over a *** period (prior to the Commercial Phase) as are consistent with the terms of this -5- *** This portion has been omitted based on a request for confidential treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been separately filed with the Commission. Agreement and are commercially reasonable for such party to take and are required to facilitate the success of the Installation and Operation Plan, following the receipt of notice from the other party specifying in detail the nature of such actions; or (v) the other party materially defaults in the performance of any material agreement, condition, covenant, representation or warranty of this Agreement, and such default or noncompliance shall not have been remedied, or steps initiated to remedy the same to the terminating party's reasonable satisfaction, within *** after receipt by the defaulting party of a written notice thereof from the terminating party. Section 4.4 SURVIVAL. Except to the extent expressly provided to the contrary, the following provisions shall survive the termination of this Agreement: ***, the audit rights set forth in Sections 2.2 ***, Articles III, IV, V, VI, VIII, IX, X and XI. Any rights of EBC or Petro Star to payments accrued through termination shall remain in effect following termination. ARTICLE V COSTS Except as provided on Article II of this Agreement, each party shall each bear its own costs and expenses incurred in connection with the performance of its obligations under this Agreement. ARTICLE VI CONFIDENTIALITY Section 6.1 CONFIDENTIAL INFORMATION. For the purposes of this Agreement, "Confidential Information" of a party shall mean (i) all Existing Proprietary Technology of such party, (ii) all Separately Developed Proprietary Technology of such party, and (iii) all other information, whether written, oral or otherwise, containing or otherwise reflecting information directly or indirectly concerning such party which such party will provide or has previously provided to the other party to this Agreement. In addition, the term "Confidential Information" shall mean and include all Joint Proprietary Technology, which shall be deemed to be Confidential Information of both parties to this Agreement. Notwithstanding the foregoing, without granting any right or license, the following will not constitute "Confidential Information" for purposes of this Agreement: (a) Information which is obtained by a party from a third person who is not prohibited from transmitting the information to such party by a contractual, legal or fiduciary obligation to or on behalf of the other party to this Agreement or its affiliates; (b) Information which is or becomes generally available to the public other than as a result of disclosure in violation of a contractual, legal or fiduciary obligation of a party to this Agreement, its employees, agents or representatives; -6- *** This portion has been omitted based on a request for confidential treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been separately filed with the Commission. (c) Information other than Joint Proprietary Technology which was in possession of a party prior to the disclosure thereof by the other party, its employees, agents or representatives; and (d) Information developed by an employee or consultant of the receiving party who did not have access to the Confidential Information of the disclosing party. Section 6.2 TREATMENT OF CONFIDENTIAL INFORMATION. All Confidential Information of a party shall be held and treated by the other party in confidence and shall not, except as hereinafter provided, without the prior written consent of the party providing such Confidential Information, be disclosed by it in any manner whatsoever, in whole or in part, and will not be used by it other than as provided by or as contemplated in this Agreement. Moreover, each of EBC and Petro Star agree (i) to disclose Confidential Information only to its employees who need to know the Confidential Information for the purpose of assisting it in carrying out the purposes and intent of this Agreement and who agree to keep such information confidential and to be bound by the terms of this Agreement to the same extent as if they were parties hereto, (ii) that it will use its diligent efforts to cause all of such persons to act in accordance herewith and be bound by this Agreement and (iii) that, in any event, with respect to any such person that has not agreed in writing to be bound by the terms of this Agreement, it shall be responsible for actions by any such person that would constitute a breach of this Agreement to the same extent as if such person were a party to this Agreement. Section 6.3 REQUIRED DISCLOSURE. In the event that either party to this Agreement is requested or required (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or other process) to disclose any Confidential Information, such party will provide the other party to this Agreement with immediate written notice of any such request or requirement so that the other party to this Agreement at its own expense may seek an appropriate protective order, seek the cooperation of the party from which Confidential Information is requested or required to narrow the request or requirement or waive compliance with the provisions of this Agreement. If, failing the entry of a protective order or the receipt of a waiver hereunder, the party from which Confidential Information is requested or required is, in the opinion of its counsel, compelled to disclose Confidential Information, it may disclose only that portion of the Confidential Information which its counsel advises it in writing that it is compelled to disclose and it will exercise its diligent efforts to obtain assurance that confidential treatment will be accorded such Confidential Information. In any event, it will not oppose action by the other party to obtain an appropriate protective order or other reliable assurance that confidential treatment will be accorded the Confidential Information. Section 6.4 RETURN OF CONFIDENTIAL INFORMATION. In the event that this Agreement is terminated for any reason and in any event within 30 days after being so requested by the other party to this Agreement, each party shall return to the other party all Confidential Information of the other party, except for the portion of the Confidential Information which such party is entitled to use under a continuing license under Article IV hereof or that may be found in analyses, compilations, studies or other documents prepared by the party required to return the Confidential Information. That portion of the Confidential Information which such party is entitled to use under a continuing license under Article III hereof or that may be found in -7- *** This portion has been omitted based on a request for confidential treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been separately filed with the Commission. analyses, compilations, studies or other documents prepared by such party and oral Confidential Information will be held by such party in confidence in accordance with the provisions of this Article VI. Upon request by a party to this Agreement, an authorized officer of such party may supervise such destruction. Section 6.5 REMEDIES FOR BREACH. Each party acknowledges and agrees that due to the unique nature of the other party's Confidential Information, there can be no adequate remedy at law for any breach of its obligations hereunder, that any such breach may allow the breaching party or third parties to unfairly compete with such other party. Accordingly, upon any breach or any threat thereof with respect to the obligations of a party hereunder with respect to the Confidential Information of the other party, such other party shall be entitled to appropriate equitable relief in addition to whatever remedies it might have at law and to be indemnified from any loss or harm, including, without limitation, attorneys' fees, in connection with any breach or enforcement of such party's obligation hereunder or the unauthorized use or release of any such Confidential Information. Section 6.6 DURATION OF CONFIDENTIALITY OBLIGATIONS. The obligations of the parties under this Article VI shall survive the termination of this Agreement for a period of ***; PROVIDED that the termination of such obligations shall not be deemed to constitute the license of any Confidential Information. ARTICLE VII REPRESENTATIONS AND WARRANTIES Section 7.1 REPRESENTATIONS AND WARRANTIES OF EBC. EBC represents and warrants to Petro Star as follows: (a) EBC is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware. (b) EBC has the full corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution, delivery and performance of this Agreement have been duly and validly authorized by EBC, and upon execution and delivery, this Agreement will constitute a valid and binding agreement of EBC. (c) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby does or will violate, conflict with, result in a breach of any material provision of, constitute a default under, or accelerate the performance required on the part of EBC by the terms of any judgment, order, decree or agreement, instrument or contract to or by which EBC or any of its assets is subject or bound. (d) The execution and delivery of this Agreement does not require EBC to obtain any permits, authorizations or consents from any governmental body or from any other person, firm or corporation which have not been obtained, and such execution and -8- *** This portion has been omitted based on a request for confidential treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been separately filed with the Commission. delivery will not result in the breach of or give rise to any termination of any agreement or contract to which EBC may be a party. The consummation of the transactions contemplated hereunder will not result in the breach of or give rise to any termination of any agreement or contract to which EBC may be a party. Section 7.2 REPRESENTATIONS AND WARRANTIES OF PETRO STAR. Petro Star represents and warrants to EBC as follows: (a) Petro Star is a corporation duly organized, validly existing and in good standing under the laws of the State of Alaska. (b) Petro Star has the full corporate power and authority to execute and deliver this Agreement and to perform its obligations hereunder. The execution, delivery and performance of this Agreement have been duly and validly authorized by Petro Star, and upon execution and delivery, this Agreement will constitute a valid and binding agreement of Petro Star. (c) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated hereby does or will violate, conflict with, result in a breach of any material provision of, constitute a default under, or accelerate the performance required on the part of Petro Star by the terms of any judgment, order, decree or agreement, instrument or contract to or by which Petro Star or any of its assets is subject or bound. (d) The execution and delivery of this Agreement does not require Petro Star to obtain any permits, authorizations or consents from any governmental body or from any other person, firm or corporation which have not been obtained, and such execution and delivery will not result in the breach of or give rise to any termination of any agreement or contract to which Petro Star may be a party. The consummation of the transactions contemplated hereunder will not result in the breach of or give rise to any termination of any agreement or contract to which Petro Star may be a party. ARTICLE VIII INDEMNIFICATION Section 8.1 BREACHES OF REPRESENTATIONS, WARRANTIES AND COVENANTS. Each party shall indemnify, defend and hold harmless the other party and its officers, directors and employees from and against any and all liabilities, obligations, fees, including attorneys' fees and costs, expenses and losses resulting from any breach of any representation or warranty or nonfulfillment of any covenant on the part of the indemnifying party contained in this Agreement or other instrument furnished or to be furnished by the indemnifying party pursuant to this Agreement. Section 8.2 ACTIONS AND OMISSIONS. Each party shall indemnify, defend and hold harmless the other party and its officers, directors and employees from and against any and all liabilities, obligations, fees, including attorneys' fees and costs, expenses and losses incurred in -9- *** This portion has been omitted based on a request for confidential treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been separately filed with the Commission. connection with a claim against the indemnified party based on any action or omission of the indemnifying party or its agents or employees related to the obligations of the indemnifying party under this Agreement. Section 8.3 INJURY AND DEATH. Each party shall indemnify, defend and hold harmless the other party and its officers, directors and employees from and against any and all liabilities, obligations, fees, including attorney's fees and costs, expenses and losses arising, or claimed to arise out of, or which resulted from, or are claimed to result from any alleged injury or death, or damage to property arising from or claimed to arise from, or which resulted from, or are claimed to result from products and services of the indemnifying party that incorporate or use Joint Proprietary Technology. ARTICLE IX ARBITRATION In the event of any allegation of breach or question of interpretation relating to this Agreement, EBC and Petro Star shall meet and negotiate in a good faith effort to settle the matter amicably. If the parties are unable to settle the matter within *** after their first meeting, then upon the demand of either EBC or Petro Star the matter shall be submitted to binding arbitration with a single arbitrator, who shall be qualified in the subject matter of the dispute. The arbitration proceeding shall be governed by the rules of arbitration promulgated by the American Arbitration Association and shall be held in San Francisco, California. ARTICLE X NOTICES Any communication, notice, request, consent, demand or statement required or permitted hereunder shall be in writing and be given in person, by express courier service or by means of telex, facsimile, or other wire transmission (with request for assurance of receipt in a manner typical with respect to communications of that type), and shall be deemed to have been given (a) on delivery (if given in person or by express delivery) or (b) on the date of transmission, if sent by telex, facsimile or other wire transmission, addressed to a party at its address set forth below: In the case of EBC: President Energy BioSystems Corporation 4200 Research Forest Drive The Woodlands, Texas 77381 In the case of Petro Star: James F. Boltz Petro Star Inc. 201 Arctic Slope Avenue #200 -10- *** This portion has been omitted based on a request for confidential treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been separately filed with the Commission. Anchorage, Alaska 99518 Each party hereto may change such address by giving prior written notice to the other party as provided herein. ARTICLE XI MISCELLANEOUS PROVISIONS Section 11.1 ASSIGNMENT; SUCCESSORS AND ASSIGNS. Neither party shall assign this Agreement in whole or in part except in connection with the transfer of all or substantially all of the stock or assets of such party or, in the case of Petro Star, in connection with the transfer of a majority interest in Petro Star Valdez, Inc. or the PVSR. Any assignment made or attempted in violation of this Section 11.1 shall be void and of no effect. This Agreement shall be binding on, and shall inure to the benefit of, all successors and assigns of the parties. Section 11.2 GOVERNING LAW. This Agreement shall be construed, governed, interpreted and applied in accordance with the substantive, procedural and arbitration laws of the State of Texas, without regard to the conflicts of law principles thereof. Section 11.3 HEADINGS. The titles and headings given to Articles and Sections of this Agreement are provided only for convenience and shall not be used in interpreting this Agreement. Section 11.4 ENTIRE AGREEMENT. The parties acknowledge that this Agreement sets forth the entire Agreement and understanding of the parties as to the subject matter hereof, and shall not be subject to any change or modification except by the execution of a written instrument subscribed to by the parties. All other previous or currently existing agreements and understandings or other arrangements of any kind with respect to the said subject matter shall be canceled and superseded completely by this Agreement as of the date hereof. Section 11.5 WAIVER. The failure of either party to assert a right hereunder or to insist upon compliance with any term or condition of this Agreement shall not constitute a waiver of that right or excuse a similar subsequent failure to perform any such term or condition by the other party. Section 11.6 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which, when so executed and delivered, shall be deemed to be an original, but all of such counterparts shall together constitute one and the same instrument. Section 11.7 SEVERABILITY. If any clause, paragraph, section, article or part of this Agreement is held or declared to be void, invalid, or illegal for any reason by any court of competent jurisdiction, the ineffectiveness of such provision shall not in any way invalidate or affect any other clause, paragraph, section, article or part of this Agreement, and this Agreement shall be reformed consistent with the original objectives as stated herein or therein. -11- *** This portion has been omitted based on a request for confidential treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been separately filed with the Commission. Section 11.8 NO AGENCY, PARTNERSHIP, ETC. This Agreement shall not constitute either party as a legal representative, joint venturer or agent of the other, nor shall any party have the right or authority to assume, create or incur any liability or any obligation of any kind, expressed or implied, against or in the name or on behalf of any other party, unless otherwise expressly permitted by the other party. Section 11.9 FURTHER ASSURANCES. Each party hereto agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement. Section 11.10 PUBLIC STATEMENTS. The parties shall consult with each other prior to issuing any press release or any written public statement with respect to this Agreement, and shall not issue any such press release or written public statement prior to such consultation. IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the day and year set forth above. ENERGY BIOSYSTEMS CORPORATION By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- PETRO STAR INC. By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- -12- *** This portion has been omitted based on a request for confidential treatment pursuant to Rule 24b-2 of the Exchange Act. The omitted portion has been separately filed with the Commission. EXHIBIT A Installation and Operation Plan *** -13- EX-10.7 7 a2043676zex-10_7.txt EXHIBIT 10.7 EXHIBIT 10.7 LEASE AGREEMENT VENTURE TECHNOLOGY CENTER V BUILDING THE WOODLANDS, MONTGOMERY COUNTY, TEXAS STATE OF TEXAS COUNTY OF MONTGOMERY THIS LEASE AGREEMENT (the "Lease") is made and entered into on this the 24th day of May, 1993, between THE WOODLANDS CORPORATION, a Delaware corporation, whose address for purposes hereof is 2201 Timberloch Place, The Woodlands, Texas 77380 ("Lessor"), and ENERGY BIOSYSTEMS CORPORATION, a Delaware corporation, whose address, for the purposes hereof, is 4200 Research Forest Drive, Bays 1-9, The Woodlands, Texas 77380 ("Lessee"). W I T N E S S E T H: 1. LEASED PREMISES. Lessor hereby leases to Lessee and Lessee hereby takes from Lessor, 23,851 net rentable square feet, together with all appurtenances thereto, as shown outlined in red on a drawing identified by the parties and attached hereto as Exhibit "A" (the "Premises") , in a building known and referred to as Venture Technology Center V Building (the "Building"), located at 4200 Research Forest Drive, The Woodlands, Montgomery County, Texas, and which contains a total of 59,952 net rentable square feet of floor space. The Building is located on that certain 3.5904 acre tract of land in Montgomery County, Texas, described in Exhibit A-1 attached hereto and made a part hereof for all purposes (the "Land"). Lessor reserves the right to change the name and/or street address of the Building whenever it desires without any liability or consent of Lessee. 2. Parking. Lessor shall provide and keep in good condition through the term of this Lease, parking areas for and vehicular access ways to the Premises, which shall be available for the non-exclusive use of Lessee, its employees and invitees. Lessee shall have the right to use up to sixty-five (65) parking spaces. As a part of the sixty-five (65) parking spaces, Lessee shall have the right to reserve for its exclusive use certain parking spaces, in an area shown on Exhibit "A" of this Lease, and Lessor, at Lessee's expense, shall provide twenty (20) marked curbstops designating such parking spaces as reserved for Lessee. The use of such parking and access areas shall at all times be subject to such reasonable rules and regulations as Lessor may promulgate. 3. Term. The term of this Lease (the "Term") shall commence on the earlier of July 1, 1993, or the day upon which Lessee occupies the premises for the purpose of conducting business, and expire on the last day of the sixtieth (60th) full calendar month following the commencement of the Term, subject to earlier termination as hereinafter provided. If Lessor is delayed in delivering possession of the Premises to Lessee on or before the Commencement Date set out above, the Term of this Lease shall begin on the date when Lessor tenders to Lessee possession of the Premises with all work to be performed by Lessor pursuant to the Tenant Improvement Addendum (attached hereto as Exhibit "B") substantially completed and terminate sixty (60) months thereafter. Lessor shall not be liable or responsible for any claims, damages or liabilities of any nature whatsoever in connection with or by reason of any delayed possession. Lessee agrees to execute a recordable memorandum setting forth the commencement date ("Commencement Date") and the date of expiration of the Term of this Lease on or prior to the commencement of the Term. 4. USE. Lessee shall use the Premises solely for biomedical laboratory testing and development activities, and general office use, and for no other use. 5. ACCEPTANCE OF THE PREMISES. Upon taking possession of all or any portion of the Premises, Lessee shall be deemed to have accepted the Premises, to have acknowledged that the same are in the condition called for hereunder and to have agreed that the obligations of the Lessor imposed by Exhibit "B" attached hereto have been fully performed, subject to (i) latent defects, and {ii) a punchlist of improvements not completed, which punchlist shall be prepared in accordance with industry standards and approved by Lessee's architect. Lessee hereby waives any implied warranty of Lessor that the Premises are suitable for their intended commercial purpose and acknowledges and agrees that all of Lessee's obligations hereunder (including without limitation, the obligation to pay rent) are independent of any such implied warranty and agrees to perform all such obligations and pay rent notwithstanding any breach or allegation of breach by Lessor of any such implied warranty (which implied warranty as aforesaid is hereby waived by Lessee). 6. BASE RENT. The Base Rent, which Lessee hereby agrees to pay to Lessor monthly, in advance, at Lessor's address stated above, shall be the sum of Twenty two thousand four hundred fifty nine and 69/100 Dollars ($22,459.69) per month, due and payable on the first day of each calendar month during the Term hereof, without offset or deduction, with a pro-rata portion being due and payable in advance for any partial month occurring at the beginning of the Term. 7. ADDITIONAL RENT. Lessor agrees to pay all operating Expenses (as defined in section 9 below) up to a maximum amount of $3.10 per year for each square foot of rentable floor area in the Building (the "Operating Cost Allowance") .In the event the Operating Expenses shall, in any fiscal year (ending January 31) exceed the Operating Cost Allowance (pro-rated for any partial fiscal year at the beginning or end of the Term), Lessee agrees to pay to Lessor, as Additional Rent, Lessee's pro-rata share of any such excess (the "Excess operating Expenses") .Lessee's pro-rata share shall be determined by multiplying the Excess Operating Expenses by a fraction, the numerator of which shall be the number of rentable square feet in the Premises, and the denominator of which shall be the rentable square footage in the Building (as set out in section 1 above) .Within ninety (90) days following the completion of each fiscal year, Lessor will provide to Lessee a statement showing in reasonable detail the operating Expenses for the preceding fiscal year, the Additional Rent due with regard to Lessee's portion of the Excess Operating Expenses, and Lessor's reasonable estimate of Excess Operating Expenses for the then current fiscal year. Lessee shall, on or before forty-five (45) days following receipt of said statement, pay to Lessor the amount of Additional Rent due as provided herein, less the amount of Additional Rent paid in advance (if any) during the preceding fiscal year. Any overpayment will be credited by Lessor to the next rental payment(s) due. Lessee agrees to pay Additional Rent each month thereafter, in addition to, Base Rent, in an amount reasonably necessary to amortize the estimated Excess Operating Expenses for the then current fiscal year over a period equal to the lesser of (i) the number of months remaining in the lease Term or (ii) the number of months remaining in the current fiscal year. Notwithstanding that the lease Term has expired or been terminated, Lessee shall remain liable for and agrees to pay to Lessor within thirty (30) days following receipt of an invoice therefor, its pro-rata portion of Excess Operating Expenses for the fiscal year (or portion thereof) during which the Term of this lease expired or was terminated. Lessee shall have the right, at its expense and at a reasonable time, to audit Lessor's books relevant to the Additional Rent due under this section. Lessor shall reimburse Lessee for the cost of such audit if the audit reveals an overstatement of operating expense for more than five percent (5%) during the period of the review. 8. PAYMENT OF RENTALS. Lessee covenants to promptly pay all rentals within five (5) days of the date such rentals are due and payable. A late charge of One thousand five hundred and 00/lOO Dollars ($1,500.00) shall be added to any payment of rental or additional rental which is more than ten (10) days past due in order to compensate Lessor for the extra administrative expenses incurred, provided such late charge shall only apply if Lessee has tendered late payment more than one (1) time during the Lease Term. If Lessor shall pay any monies or incur any expenses in correction of violations of the covenants herein set forth, the amounts so paid or incurred shall, on written notice to Lessee, be considered additional rentals payable by Lessee with the first installment of rental thereafter to become due and payable, and may be collected or enforced as by law provided in respect of rentals. 9. OPERATING EXPENSES. The term "Operating Expenses", as used in this Lease, means all of Lessor's reasonable costs to operate and maintain the Land and the Building from time to timc, as determined in accordance with generally accepted accounting principles. Operating Expenses shall include (to the extent and only to the extent same are Lessor's obligation to payor furnish under the other provisions of this Lease), but not be limited to, all sums expended by Lessor, or in the case of major repairs or improvements having a life expectancy in excess of one year, an amortized portion of such sums, whether or not such repair or improvement is properly chargeable to capital expenses or capital improvements under generally accepted accounting principles, in connection with the Building, and the parking and common areas and other improvements on the Land, for general maintenance and repairs, improvements, resurfacing, exterior painting, restriping, cleaning, sweeping, janitorial services, any personnel or services deemed necessary by Lessor, trash removal, planting, landscaping, lighting, water and other utilities paid for by Lessor and directional signs and other markers, bumpers, and personnel to implement such services. Operating Expenses shall also lnclude all ad valorem taxes or assessments and Annual Assessments of The Woodlands Community Association, Inc. ("WCA"), which accrue against the Building or the Land during the Term, all insurance premiums, if any, which Lessor is required to payor deems necessary to pay, with respect to the Building or the Land, and a building management fee equal to five percent (5%) of the full Base Rent without regard to abatement. The current WCA assessment is $0.54 per $100.00 of assessed valuation and is subject to change for each calendar year. Notwithstanding anything contained herein to the contrary, there is expressly excluded from Operating Expenses each of the items set out in Exhibit "D" attached hereto. Further, notwithstanding any other provision herein to the contrary, it is agreed that in the event not more than ninety-five percent (95%) of the rentable area in the Building is occupied during any fiscal year or in the event not more than ninety-five (95%) of the rentable area in the Building is provided with building standard services during any fiscal year, an adjustment shall be made in computing the Operating Expenses for such year so that the Operating Expenses shall be computed for such year as though the Building had been ninety-five percent (95%) occupied during such year and as though ninety-five percent (95%) of the Building had been provided with building standard services during such year. 10. UTILITIES. Lessor shall make available to the Premises gas, electricity and water. Lessee agrees to assume all costs and expenses for water and sewer, gas, electricity, telephone, garbage, and any other service needed for its use at the Premises, including any license or deposit required to establish or maintain such services, and the costs of installation, hook-up and metering. Lessee shall promptly pay for all utility services furnished to the Premises during the term of this Lease. Lessor shall under no circumstances be liable to Lessee in damage or otherwise for any interruption in service of water, electricity, heating, air conditioning or other utilities or services caused by governmental regulation, emergencies, Acts of God, by the making of any necessary repairs or improvements, or by any cause beyond Lessor's reasonable control; provided, however, if such interruption of services is caused by the willful misconduct or gross negligence of Lessor, Lessee shall be entitled to abatement of the Base Rent during the period of such interruption. Lessor shall endeavor in good faith to give at least twenty-four (24) hours notice to Lessee when any necessary interruption in service during normal business hours will be made by Lessor. 11. PEACEFUL ENJOYMENT. Lessee shall and may peacefully have, hold and enjoy the Premises, provided that Lessee pays the rentals and other sums herein recited and performs all of its covenants and agreements herein contained. It is understood and agreed that this covenant and any and all other covenants of Lessor contained in this Lease shall be binding upon Lessor and its successors and assigns, but only with respect to breaches occurring during its and their respective ownership of Lessor's interest hereunder. 12. TENANT ALTERATIONS, ADDITIONS AND IMPROVEMENTS. Lessee shall not make or allow to be made any alterations or physical additions in or to the Premises without first obtaining the written consent of Lessor, which consent shall not be unreasonably withheld or delayed. Any and all alterations, additions or improvements, other than that portion of the initial tenant improvements which are to be provided by Lessor pursuant to the terms of Exhibit "8" hereto, shall be made at Lessee's sole expense. All such alterations, additions or improvements shall, upon completion, become the property of Lessor and shall be surrendered to Lessor upon the termination of this Lease by lapse of time or otherwise provided, however, this clause shall not apply to removable equipment or furniture owned by Lessee and which can be removed without damage to the 8uildir.g or the Premises. 13. EXTERIOR REPAIRS. Lessor will keep the exterior of the Building, including any doors, windows, or glass, in repair, pro- vided Lessee shall give Lessor written notice of the necessity for such repairs, and provided that the damage thereto shall not have been caused by the negligence of Lessee, its agents, employees, licensees or invitees, in which event Lessee shall be responsible therefor for the uninsured portion of the cost. Lessor shall be under no liability for repair, maintenance, alteration or any other action with reference to any plumbing, electrical or other mechanical installation within or serving the Premises or any part thereof, except for the service lines leading to the Premises. 14. OPERATION BY LESSEE. Lessee agrees to (a) keep the inside of all glass in the doors and windows of the Premises clean; (b) keep all interior surfaces of the Premises clean; (c) replace promptly, at its expense, any cracked or broken window glass inside the Premises with glass of like kind and quality; (d) maintain the Premises in a clean, orderly and sanitary condition and free of insects, rodents, vermin and other pests; (e) keep any garbage, trash, rubbish or refuse in rat-proof containers within the interior of the Premises until removed from the area; (f) have such garbage, trash, rubbish and refuse removed at its expense on a regular basis from location points and at such times as designated by Lessor; (g) keep all mechanical apparatus free of vibration, noise or pollution which may be transmitted beyond the Premises; (h) comply with all laws, ordinances, rules and regulations of the Fire Underwriters Rating Bureau now or hereafter in affect; and (i) conduct its business in all respects in a dignified manner in accordance with high standards of business operation. In addition, Lessee shall not (a) place or maintain any merchandise or other articles in any vestibule or entry of the Premises, on the footwalks adjacent thereto or elsewhere on the exterior of the Premises or Building without the written consent of Lessor, which consent shall not be unreasonably withheld or delayed; (b) permit undue accumulation of garbage, trash, rubbish or other refuse within or without the Premises; (c) cause or permit objectionable odors to emanate or be dispelled from the Premises; (d) cause or permit the parking of vehicles So as to interfere with the use of any driveway, walk, parking area, dock or other common facility in the area; (e) occupy, use or permit the use or occupancy of any portion of the Premises for any business or purpose which is immoral, disreputable or in violation of any legal direction of any public officer; or (f) occupy, use or permit the use or occupancy of any portion of the Premises for any business or purpose which, in the opinion of Lessor, reasonably formed, constitutes a public or private nuisance or unduly disturbs the business of other tenants in the Building. Lessor shall have the right, upon written notice to Lessee, to provide for rubbish and refuse removal services as required of Lessee above, and Lessee agrees to reimburse Lessor for the reasonable cost incurred in providing such service within thirty (30) days after receipt of a statement setting forth the cost of such service. Lessee agrees to discharge all waste materials from the Premises in compliance with the rules and regulations as set forth in The Woodlands Metro Center Municipal Utility District Policy Manual -Industrial Waste Discharges - -Permits and Charges -No. R&S-50, issued July 12, 1979, with an effective date of July 12, 1979, as it may be amended from time to time. Lessee shall haul away for disposal at its own expense, any waste material not meeting the standards for discharge set forth in the above-referenced manual. Lessee shall promptly comply, at its own expense, with all other present and future laws, ordinances, order, rules and regulations of all state, federal, municipal and other agencies or bodies having jurisdiction over the Premises and Lessee's use thereof. Lessee warrants that the plans for the leasehold improvements being made to the Premises pursuant to Exhibit "B" attached hereto comply with the Americans with Disabilities Act of 1990. Lessee will comply with the Rules and Regulations of the Building, a copy of which are attached hereto as Exhibit "C". Lessor may amend said rules, from time to time, if reasonably necessary for the safety, care or cleanliness of the Building, provided that no amendment shall alter any covenant or provision contained in this Lease. Lessee agrees to comply with any amendment which is made to said Rules and Regulations in compliance with the terms of this paragraph. Lessor shall promptly comply with all present and future laws relating to the Building and the Land, except the Premises and Lessee's use thereof, including without limitation the American with Disabilities Act of 1990. 15. INTERIOR REPAIRS. Lessee will keep the interior of the Premises, together with all electrical, plumbing and other mechanical installations therein, all heating and air conditioning equipment, and all interior windows or doors serving the Premises, in good order and repair, and will make all replacements thereto as its expense. Lessee will surrender the Premises at the expiration or earlier termination of this Lease, in as good condition as when received, excepting depreciation caused by ordinary wear and tear and casualty damage unless caused by Lessee, its agents, employees or contractors. Lessee will not overload the electrical wiring serving the Premises or within the Premises, and will install at its expense, but only after obtaining Lessor's written approval (which approval shall not be unreasonably withheld or delayed), any additional electrical service which may be required in connection with Lessee's use or occupancy. Notwithstanding anything herein to the contrary, Lessor, and not Lessee, shall be liable for any and all interior repairs which may result from any structural failure of the building, unless caused by Lessee, its agents, employees or invitees. Lessee will repair promptly, at its expense, any damage to the Premises caused by bringing into the Premises any property for Lessee's use, or by the installation or removal of such property, regardless of fault or by whom such damage was caused, unless caused by Lessor, its agents, employees or contractors. If Lessee fails to make such repairs, Lessor may make same, and Lessee agrees to pay, as additional rent, the cost thereof to Lessor promptly upon Landlord's demand therefor, provided such costs do not exceed the lowest acceptable bid from qualified contractors. 16. USE OF ROOF. Lessee shall have no right to penetrate or erect improvements on the roof of the Building without the prior written consent of Lessor. Lessee shall be liable in damages to Lessor for any breach of this provision, including damages for loss of any and all warranties. Lessor covenants and agrees to grant to Lessee a license to install and maintain on the roof of the Building an antenna, provided that the plans, specifications and location of the antenna are first approved by Lessor and the Development Standards Committee established pursuant to the Covenants, Restrictions, Easements, Charges and Liens of The 1'l00dlands, covering the Land. The License Agreement shall be in the form attached hereto as Exhibit "E". 17. SIGNS AND ADVERTISING. Lessee will not place or suffer to be placed or maintained on or displaced to the exterior of the Premises, any sign, advertising matter or other thing of any kind, and will not place or maintain any decoration, lettering or advertising matter on the glass of any window or door of the Premises without first obtaining the written approval of Lessor, which approval shall not be unreasonably withheld or delayed. Lessee will maintain any approved sign, decoration, lettering, advertising matter or other thing in good condition and repair at all times. 18. ENTRY BY LESSOR. Lessee shall permit Lessor and any current or prospectiye mortgagee or purchaser, and their agents or representatives, upon reasonable notice, to enter into and upon any part of the Premises, after reasonable notice and during normal business hours, to inspect the Premises, or clean, make repairs, alterations or additions thereto as Lessor may deem necessary or desirable, and Lessee shall not be entitled to any abatement or reduction of rent by reason thereof. 19. LIENS. In the event that any mechanic's, materialmen's, or other lien shall at any time be filed against the Premises, the Building or the Land purporting to be for work, labor, services or materials performed for or furnished to Lessee or anyone holding the Premises through or under Lessee, or arising out of any alleged act or omission of Lessee, Lessee shall forthwith cause the same to be properly bonded or released. If Lessee shall fail to cause such lien to be bonded or released within thirty (30) days after being notified of the filing thereof, then, in addition to any other right or remedy of Lessor, Lessor may, but shall not be obligated to, discharge the same by posting a bond or paying the amount claimed to be due, and the amount so paid by Lessor, and all costs and expenses incurred by Lessor in procuring the discharge of such lien, including reasonable attorney's fees, shall be due and payable by Lessee to Lessor as Additional Rent on the first day of the next succeeding month. Notice is hereby given that Lessor shall not be liable for any labor or materials furnished to Lessee upon credit, and that no mechanics', materialmen's or other liens for any such labor or materials shall attach to or affect the estate or interest of Lessor in and to the Land or Building. 20. SUBORDINATION. Lessee agrees that this Lease is and shall be subordinate to any mortgage or deed of trust which may now or hereafter encumber the Building or the Land, and to all renewals, modifications, consolidations, replacements and extensions thereof, provided, however, that the holder of any such mortgage or deed of trust shall agree that Lessee shall not be disturbed in its possession of the Premises or its rights hereunder terminated or amended by the mortgagee, any purchaser at or in lieu of fore- closure or other party so long as Lessee is not in default under this Lease. In confirmation of such subordination, Lessee shall at Lessor's request execute promptly any appropriate certificate or instrument that Lessor may reasonably request. In the event of the enforcement by the trustee or the beneficiary under a mortgage or deed of trust of the remedies provided for by law or by such mort- gage or deed of trust, Lessee will, upon request of any person or party succeeding to the interest of Lessor as a result of such enforcement, automatically become the lessee of such successor in interest without change in the terms or other provisions of this Lease; provided, however, that such successor in interest shall not be bound by (i) any payment of rent for more than one month in advance except prepayments in the nature of security for the performance by Lessee of its obligations under this Lease; (ii) arty amendment or modifications under this Lease made without the written consent of such trustee, beneficiary or successor In interest; (iii) any default by the prior owner or landlord in the observance or performance of any of its covenants or obligations hereunder; or (iv) any right of offset which Lessee may have had against the prior owner or landlord. Upon request by any successor in interest, Lessee shall execute and deliver an instrument or instruments confirming the attornment herein provided for. Within fifteen days after Lessor's request, Lessee agrees to execute an estoppel certificate or other agreement certifying to Lessor and/or any current or prospective mortgagee or purchaser of the Building such facts with respect to this Lease and agreeing to such reasonable notice provisions and other matters (not affecting Lessee's rights or obligations under this Lease) as such mortgagee or purchaser may request in connection with Lessor's sale or financing, subject, however, to the n9n-disturbance rights of Lessee above described. The estoppel certificate or other document shall be deemed approved after the expiration of the fifteen (15) day period. 21. CONDEMNATION. If the whole or any part of the Premises shall be taken under the power of eminent domain, this Lease shall terminate as to the part so taken on the date Lessee is required to yield possession thereof to the condemning-authority. Lessor shall, with reasonable diligence, make such repairs and alterations as may be necessary in order to restore the part not taken to a useful condition, and the Base Rent and Additional Rent payable hereunder shall be reduced proportionately to the portion of the Premises so taken. If any part of the Land or the Building shall be taken under the power of eminent domain and such taking substantially impairs the usefulness of the Premises for the purposes set forth in section 4, either party may terminate this Lease within 30 days after Lessor is dispossessed, effective as of the date when Lessor is required to yield possession. All compensation awarded for any taking shall belong to and be the property of Lessor. Lessee shall be entitled to any award for Lessee's loss by independently petitioning for same. 22. FIRE AND CASUALTY. In the event of a fire or other casualty in or affecting the Premises, Lessee shall immediately give notice thereof to Lessor. If the Premises, through no fault or neglect of Lessee, its agents, employees, invitees, licensees or visitors, shall be destroyed by fire or other casualty so as to render the Premises untenantable, the rental herein shall cease thereafter until such time as the Premises are made tenantable by Lessor. Within thirty (30) days after the date of the casualty, Lessor shall deter~ine and notify Lessee if Lessor has elected to rebuild and if the Premises can reasonably be repaired within 120 days after the casualty date. If Lessor elects to rebuild but the Premises cannot reasonably be repaired within 120 days after the casualty date, Lessee may terminate this Lease by written notice to Lessor within thirty (30) days after receipt of Lessor's notice. If from such cause the Building shall be so damaged that Lessee shall decide not to rebuild, or if the Premises cannot reasonably be repaired within 120 days after the casualty date and Lessee elects to terminate, then all rent and other sums owed hereunder up to the time of such destruction or casualty shall be paid by Lessee, and thenceforth this Lease shall cease and come to an end. 23. CASUALTY INSURANCE. Lessor shall, at all times during the term of this Lease, maintain a policy or policies of insurance with the premiums thereon fully paid in advance, issued by and binding upon some solvent insurance company, licensed to do business in the State of Texas, insuring Lessor's interest in the Building against loss or damage by fire and other hazards within the coverage of a Texas standard form of fire and extended coverage policy, for the full replacement value thereof, with payments for losses thereunder payable solely to Lessor or its designee. Lessee shall maintain in force a like policy insuring Lessee's interest in any furniture, equipment, machinery, goods or supplies which Lessee may bring or obtain upon the Premises, or any improvements which Lessee may construct thereon. 24. LIABILITY INSURANCE. Lessee shall maintain, at its expense, a policy or policies of comprehensive general liability insurance with the premiums thereon fully paid in advance, issued by and binding upon some solvent insurance company licensed to do business in the State of Texas, such insurance to afford minimum protection of not less than One Million Dollars ($1,000,000) combined single limit bodily injury and property damage per occurrence. Said policy or policies shall name Lessor as an additional insured. Lessee shall provide Lessor a copy of the required policy or a certificate evidencing the required coverage before beginning any work in the Premises or taking occupancy of same. Lessor shall maintain (i) fire and extended coverage insurance on the Building (excluding non-Building standard improvements) and on all Building standard improvements in an amount not less than the full replacement cost thereof, and (ii) comprehensive general liability insurance to afford minimum protection of not less than One Million Dollars ($1,000,000) combined single limit bodily injury and property damage per occurrence, such policies to be issued and binding upon some solvent insurance company licensed to do business in the State of Texas. 25. WAIVER OF SUBROGATION. Anything in this Lease to the contrary notwithstanding, Lessor and Lessee each waive any and all right of recovery, claim, action or cause of action against the other, its agents, officers or employees, for any loss or damage that may occur to such persons or the Premises or any improvements thereto, the Building or any improvements thereto, or any personal property of any party therein, by reason of fire, the elements or any other cause which such party is required to insure against under the terms of this Lease, regardless (",f cause or origin, including negligence of the other party hereto, its agents, officers or employees. Lessor and Lessee covenant that no insurer shall hold any right of subrogation against the other party for losses which must be insured against by the terms of this Lease. This waiver of subrogation provision shall be effective to the full extent, but only to the extent that, it does not impair the effectiveness of insurance policies of Lessor and Lessee. 26. HOLD HARMLESS. Subject to the provisions of Section 25 above, Lessee hereby releases and agrees to defend, indemnify and hold Lessor harmless from and against all claims or causes of action for damage or injury to persons or property arising out of this Lease or Lessee's use or occupancy of the Premises, including attorney's fees and court costs, except to the extent caused by the gross negligence or willful act or omission of Lessor. Subject to the provisions of Section 25, above, Lessor hereby releases and agrees to defend, indemnify and hold Lessee harmless from and against all claims or causes of action for damage or injury to persons or property occurring in or around the Building (excluding the Premises), including attorneys' fees and court costs, except to the extent caused by the gross negligence or willful act or omission of Lessee. 27. HOLDING OVER. In the event of holding over by Lessee after the expiration or termination of the Term and without the written consent of Lessor, Lessee shall pay monthly rent equal to 150% of the amount of all Base Rent, and Additional Rents payable during the last month of the Term. Further, Lessee shall indemnify Lessor against all claims for damages by any other lessee to whom Lessor may have leased all or any part of the Premises. No holding over by Lessee, either with or without the consent and acquiescence of Lessor, shall operate to extend the Lease for a longer period than one (1) month. Any holding over with the consent of Lessor in writing shall thereafter constitute this Lease a lease from month to month. 28. DEFAULT BY LESSEE. If (a) default shall be made in the timely payment of any sum to be paid by Lessee under this Lease, or (b) default shall be made in the performance of any of the other covenants or conditions which Lessee is required to observe and to perform and such default shall continue for twenty (20) days after written notice is delivered to Lessee or deposited in the u. s. Mail addressed to Lessee's address above, or (c) the interest of Lessee under this Lease shall be levied on under execution or other legal process, or any petition shall be filed by or against Lessee to declare Lessee bankrupt or to delay, reduce or modify Lessee's debts or obligations, or any petition under the Bankruptcy Code shall be filed or other action taken to reorganize or modify Lessee's capital structure, or Lessee be declared insolvent according to law, or any general assignment of Lessee's property shall be made for the benefit of creditors, or a receiver or trustee is appointed for Lessee or its property, and provided that Lessee fails to vigorously contest any such levy, execution, legal process or petition filed against Lessee and to cause same to be removed, dismissed or vacated within thirty (30) days from the date of its entry or filing, or (d) Lessee shall vacate or abandon the Premises, and is in monetary default, or (e) if Lessee shall be a corporation and Lessee shall thereafter cease to exist as a corporation in good standing in the State of Texas, or (f) if Lessee shall be a partnership or other entity and Lessee shall be dissolved or otherwise liquidated, then Lessor may treat the occurrence of anyone or more of the foregoing events as a breach of this Lease and thereupon, at Lessor's option, Lessor may have anyone or more of the following described remedies, .in addition to all other rights and remedies provided at law or in equity: A. Lessor may terminate this Lease and forthwith repos-sess the Premises and be entitled to recover (i) the cost of recovering the Premises, including the reasonable cost of the removal and storage of any of Lessee's possessions left within the Premises, (ii) the unpaid rent earned at the time of termination, plus interest thereon at the highest lawful rate from the due date, (iii) the balance of the rent for the remainder of the Term less the present fair market net rental value of the Premises for said period and (iv) any other sum of money and damages owed by Lessee to Lessor. B. Lessor may terminate Lessee's right of possession, and repossess the Premises by forcible entry and detainer suit without demand or notice of any kind to Lessee and without terminating this Lease, in which event Lessor may, but shall have no obligation to, relet the same for the account of Lessee, for such rent and upon such terms as shall be satis- factory to Lessor. For the purpose of such reletting, Lessor is authorized to decorate or make any repairs, changes, alterations or additions in or to the Premises that may be necessary. If (i) Lessor shall fail to relet the Premises, or (ii) the same are relet and a sufficient sum shall not be realized from such rcletting to pay the due and unpaid Base Rent and Additional Rent, the accrued interest thereon, the cost of recovering possession, the costs and expenses of all decorations, repairs, changes, alterations and additions deemed necessary in the reasonable judgment of Lessor and the expense of such reletting and of the collection of the rent accruing therefrom, then Lessee shall pay to Lessor as damages a sum equal to the amount of the rent provided for in this Lease for such period or periods, or if the Premises have been relet, the Lessee shall satisfy and pay any such deficiency upon demand therefor from time to time. Lessee agrees that Lessor may file one or more suits to recover any sums falling due under the terms of this section from time to time. No such re letting shall be construed as an election on the part of Lessor to terminate this Lease unless a written notice of such intention is given to Lessee by Lessor. Notwithstanding any such reletting without termination, Lessor may at any time thereafter elect to terminate this Lease for such previous breach. C. Lessor may change the locks on the Premises and not return the new key to Lessee unless the Lessee cures the default; the Lessor will not have to give the Lessee a new key unless the Lessee cures all defaults; provided, however, that in any such instance, during Lessor's normal business hours and at the convenience of Lessor, and upon the written request of Lessee accompanied by such written waivers and releases as Lessor may require, Lessor will escort Lessee or its authorized personnel to the Premises to retrieve any personal belongings or other property of Lessee; and the new key will only be provided during the Lessor's regular business hours. D. Notwithstanding anything contained in this Section 28 to the contrary, in the event of default by Lessee, Lessor shall use reasonable efforts to mitigate its damage or any losses incurred by Lessor as a result of Lessee's default. 29 WAIVER. Failure of Lessor or Lessee to declare any default immediately upon occurrence thereof, or delay in taking any action in connection therewith, shall not waive such default, but such party Lessor shall have the right to declare any such default at any time and take such action as might be lawful or authorized hereunder, either in law or at equity. 30. LIEN FOR RENT. Notwithstanding anything contained in this Lease to the contrary, Lessor agrees to waive its lien for rent on Lessee's equipment and fixtures not made a permanent part of the Premises. 31. ASSIGNMENT BY LESSOR. Lessor shall have the right to sell, transfer or assign, in whole or in part, all of its rights and obligations hereunder and in the Building and the Land. In such event and upon the assumption by such transferee of Lessor's obligations hereunder, no further liability or obligation shall thereafter accrue against Lessor hereunder. 32. ASSIGNMENT BY LESSEE. Lessee shall not assign this Lease or any interest therein, nor sublet the Premises or any part thereof or any right or privilege appurtenant thereto, nor permit any other person, firm or entity to occupy or use the Premises or any portion thereof without first obtaining the written consent of Lessor. Lessor shall have the right, at its option, to terminate this Lease as to any portion of the Premises covered by a proposed assignment or sublease, or to approve any such assignment or sub- lease only upon the condition that a) all rentals paid by the sublessee in excess of the rentals due from Lessee hereunder shall be shared equally by Lessor and Lessee, b) the proposed sublessee or assignee is financially capable of assuming Lessee's obligations hereunder, in the sole reasonable discretion of Lessor, and c) the proposed sublessee or assignee agrees to use the premises only for the uses permitted of Lessee under this Lease, and to comply with all of the other terms and conditions of this Lease. Otherwise, Lessor's consent to any proposed sublease or assignment shall not be unreasonably withheld or delayed. Consent by Lessor to one assignment, subletting, occupation or use by another person shall not be deemed to be a consent to any subsequent assignment, subletting, occupation or use by the same or another person. Consent to an assignment or sublease shall not release Lessee from liability for the continued performance of the terms and provisions to be kept and performed by Lessee hereunder, unless Lessor expressly and in writing releases Lessee from said liability. Any assignment or subletting by operation of law or otherwise, (including without limitation, a transfer of controlling interest in Lessee to any other person, firm or entity) without theprior written consent of Lessor, shall be void and"shall, at the option of Lessor, terminate this Lease. Lessee covenants and agrees that when the pl-ior written consent of Lessor is obtained, and in the event the subletting or assignment is to be arranged through public advertisement or listing of any kind, Lessee will treat all applications for sublease or assignment in a uniform manner and will award leases according to objective standards. No decision on any application shall be made on the ground of the applicant's race, color, religion, sex or national origin. Notwithstanding the foregoing provisions of this Section 32, Lessee shall have the right to sublease the Premises to an "Affiliate" (as hereinafter defined) of Lessee, subject to Lessor's right to approve the sublease document. "Affiliate" shall mean a corpora- tion or other entity which controls, is Gontrolled by, or is under common control with, Lessee. 33. BINDING EFFECT. This Lease shall be binding upon and inure to the benefit of the heirs, successors or assigns of Lessor and Lessee, subject to the limitation on subleasing and assignment herein contained. 34. TRANSFER OF CONTROL. If at any time during the term of this Lease, corporate shares of Lessee shall be transferred by sale, assignment, bequest, inheritance, operation of law or other disposition so as to result in a change in the present control of said corporation by the person or persons now owning a majority of said corporate shares, and such change in control results in a material reduction of Lessee's financial ability to meet its obligations under this Lease, Lessee shall be in default of this Lease and Lessor may exercise its rights in respect of default hereunder. 35. RIQHT OF FIRST REFUSAL. During the term of this Lease Lessee shall have a right of first refusal to lease all or a portion of the space adjoining the Premises and outlined in blue on the attached Exhibit "A" ("Adjacent Space"), on the following terms and conditions. If Lessor shall receive a bona fide offer to lease all or any portion of the Adjacent Space, which offer Lessor is willing to accept, Lessor shall give Lessee written notice thereof. Lessee shall have the right for five (5) calendar days after receipt of notice of such third party offer, which is acceptable to Lessor, to execute a lease covering such space. Lessee's right of first refusal shall be paramount to any rights of the third party in question. If Lessee shall fail to execute a lease for the portion of the adjacent Space within the time herein specified, Lessor shall be at liberty to make such lease to the third party. The right of Lessee under this section shall apply s1Jccessively to each and every offer to lease all or any portion of the Adjacent Space. It is understood and agreed that Lessee's right of first refusal set forth above is conditioned upon its being in full compliance with all the terms and conditions of this Lease at the time Lessor receives an offer from a third party to lease any portion of the Adjacent Space. Any default or noncompliance with this Lease existing at the time offer shall terminate of the Lessee's first refusal rights hereunder. 36. RENEWAL OPTION. Provided (i) Lessee is not in default in the performance of its covenants under this Lease and (ii) Lessee provides to Lessor a current statement of Lessee's financial condition acceptable to Lessor at the time this renewal option is exercised, Lessee is hereby granted the option to renew the Term of this Lease for one (1) additional term of five (5) years ("Renewal Term"), to commence at the expiration of the initial term of this Lease. Lessee shall exercise this option to renew by delivering written notice of such election to Lessor at least six (6) months prior to the expiration of the Term of this Lease. The renewal of this Lease shall be upon the same terms and conditions of this Lease, except (a) the Base Rent during the Renewal Term shall be the same rate and conditions as that being offered by the Lessor for new leases in the Building; (b) the Operating Cost Allowance shall be the amount being offered by the Lessor for new leases in the Building; (c) Lessee shall have no option to renew this Lease beyond the Renewal Term set out above; (d) Lessee shall not have the right to assign its renewal rights to any non-affiliate sublessee of the Premises or non-affiliate assignee of the Lease; (e) the leasehold improvements will be provided in their then existing condition (on an "as is" basis) at the time the Renewal Term commences, provided that Lessor agrees to reimburse Lessee up to a maximum amount of Three and 00/100 Dollars ($3.00) per net rentable square feet of floor space then included in the Premises, for any costs to refurbish the Premises incurred by Lessee within six (6) months from the commencement of the Renewal Term, and (f) the "Term" as defined in the Lease, shall include any Renewal Term that has been duly exercised by Lessee. 37. EARLY TERMINATION OPTION. Except as hereinafter provided, Lessee shall have the option to terminate this Lease prior to the expiration of the Term if each of the following conditions has been met: (a) The first three expired; and 3 years of the primary Term have (b) Lessee has either (i) submitted to Lessor a written bona fide offer to lease ("Lessee's Offer") additional space in a Lessor-owned building in The Woodlands, Texas, at a location reasonably acceptable to Lessee at the rental rates and upon the terms and conditions then being offered by Lessor to third parties, and designating the net rentable square feet of floor space reasonably required by Lessee for the operation of its business ("Lessee's Offer") and Lessor has not made available to Lessee the space designated in Lessee's Offer or other reasonably similar space upon the terms set forth in Lessee's Offer within a reasonable period of time after the date Lessor received Lessee's Offer; or (ii) Lessee has purchased ("Lessee Purchase") at least three (3) acres of land from Lessor with bona fide plans to construct a building containing at least 23,000 square feet for the operation of its business; and (c) At the time of termination, Lessee pays to Lessor an amount equal to the sum total of (i) all rent and other sums owed hereunder by Lessee up to the time of termination, plus (ii) the then remaining unamortized portion (amortized on a straight line basis over the Term) of the tenant improvements, refurbishing costs, commissions, and all other costs and expenses incurred by Lessor in making the Premises available to Lessor; and (d) Lessee is not in default under this Lease both a) at the time of Lessee's Offer or Lessee Purchase and b) or at the time Lessee elects to terminate pursuant to this Section 37; and (e) Lessee exercises this right of early termination within seven (7) months after Lessor's receipt of Lessee's Offer or the Lessee Purchase, whichever is applicable; and (f) As of both a) the date of Lessee's Offer or the Lessee Purchase, whichever is applicable, and b) the effective date of the termination, no one individual or entity controls more than 50% of the corporate shares of Lessee. It is understood and agreed that Lessee's right to provide the Lessee's Offer provided for in this Section 37 may be exercised only one time; and if Lessee's right of early termination under this Section 37 accrues and Lessee thereafter fails to exercise such right of early termination upon the terms and conditions herein set forth, this right of early termination shall terminate and be of no further force or effect. 38. ENTIRE AGREEMENT. This Lease shall constitute the sole and only agreement of Lessor and Lessee with regard to the Lease of the Premises, and shall supersede any prior or contemporaneous oral or written agreements. This Lease may not be altered, changed or amended, except by an instrument in writing, signed by both parties hereto. 39. PRONOUNS. Pronouns which refer to either Lessor or Lessee shall be construed to mean the appropriate number and gender intended. 40. JOINT AND SEVERAL TENANCY. If more than one person executes this Lease as Lessee, their obligations hereunder are joint and several, and any act or notice of or to, or refund to, or the signature of, anyone or more of them, in relation to the renewal or termination of this Lease, or under or with respect to any of the terms hereof shall be fully binding on each and all of the persons executing this Lease as a Lessee. 41. FORCE MAJEURE. If either party shall be delayed or prevented from the performance of any act required hereunder by reason of acts of God, strikes, lockouts, labor troubles, inability to procure materials, restrictive governmental laws or regulations or other cause without fault and beyond the control of the party obligated (financial inability excepted), performance of such act shall be excused for the period of the delay, and the period for the performance of any such act shall be extended by a period equal to the period of such delay; provided, however, nothing in this Article shall excuse Lessee from the prompt payment of any rental or other charge required of Lessee hereunder, except as may be expressly provided elsewhere in this Lease. 42. GENERAL. Time is of the essence of this Lease. All rights and remedies of Lessor and Lessee under this Lease shall be cumulative and none shall exclude any other rights or remedies allowed by law. This Lease shall be declared to be a Texas lease, and all of the terms hereof shall be construed according to the laws of the State of Texas. Said Lease shall be performable only in Montgomery County, Texas, and venue for any action hereunder shall lie exclusively in Montgomery County, Texas or in the Southern District of Texas, Houston Division, as appropriate. Lessee warrants that this Lease has been duly authorized and executed on behalf of Lessee, and that same is valid and binding upon Lessee. The section headings and numbers herein and the grouping of the provisions of this Lease into separate articles, sections and paragraphs, are for the purpose of convenience only and shall not be considered in construing the meaning of any provision in this Lease. 43. NOTICES: OTHER COMMUNICATIONS. Any notice or other communication given or made pursuant to this Lease (a "Communication") shall be in writing and shall be hand delivered (with written receipt therefor) or sent either (i) through the United States Postal Service, or any official successor thereto, designated as registered or certified mail, return receipt requested, bearing adequate postage, (ii) by means of an express delivery service if it obtains a written receipt to confirm delivery, or (iii) by means of a facsimile transmission if a written acknowledgement of receipt is confirmed by facsimile transmission or otherwise. Each Communication shall be effective upon the receipt thereof by the addressee. Rejection or refusal to accept or inability to deliver because of change of address of which no notice was given as provided herein shall be deemed to be receipt of the Communication sent. By giving to the other party hereto at least ten (10) days notice thereof, any party hereto shall have the right from time to time to change its address for purposes of this Lease to any other address within the continental United States of America. Until notice of change of address as aforesaid, each such Communication shall be addressed, if to Lessor, at 2201 Timberloch Place, The Woodlands, Texas 77380, Attention: Property Management, and if to Lessee, at 3606 Research Forest Drive, suite A-14, The Woodlands, Texas 77380. 44. SEVERABILITY. If any of the provisions "of this Lease shall contravene or be invalid under the laws of the particular state, county, or jurisdiction where applied, such contravention or invalidity shall not invalidate the Lease or any other portions thereof and the remainder of this Lease or the application thereof to other persons or circumstances shall not be affected thereby. 45. CORPORATE AUTHORITY. Each of the persons executing this Lease on behalf of Lessee represents and warrants that Lessee is a duly organized and existing corporation, that Lessee has and is qualified to do business in Texas, that the corporation has full right and authority to enter into this Lease, and that all persons signing on behalf of the corporation were authorized to do so by appropriate corporate actions. 46. NOT AN OFFER. The submission of this Lease to Lessee shall not be construed as an offer, nor shall Lessee have any rights with respect thereto unless Lessor executes a copy of this Lease and delivers the same to Lessee. 47. EXHIBITS, RIDERS AND ADDENDA. This lease also includes and incorporates herein for all purposes all attached Exhibits, Riders, and Addenda, if any. IN TESTIMONY WHEREOF, the parties hereto have executed this Lease in duplicate counterparts, each of which shall constitute an original but collectively shall constitute only one document, such execution to be effective on the date first above written. LESSOR THE WOODLANDS CORPOROTION Date: 6/4/93 By: /s/ Michael H. Richmond Michael H. Richmond Executive Vice President LESSEE ENERGY BIOSYSTEMS CORPORATION Date: 5/24/93 By: /s/ John H. Webb Name: John H. Webb Title: President EX-10.8 8 a2043676zex-10_8.txt EXHIBIT 10.8 EXHIBIT 10.8 EXTENSION, MODIFICATION AND RATIFICATION OF LEASE This Extension, Modification and Ratification of Lease is made and entered into, effective the 27th day of January, 1994, between The Woodlands Corporation ("Lessor") and Energy BioSystems Corporation ("Lessee"), for and in consideration of One Dollar ($1.00), and other good and valuable consideration. W I T N E S S E T H: 1. Lessor and Lessee hereby confirm and ratify (as modified below) all of the terms, conditions and covenants in that certain Lease Agreement between the parties dated May 24. 1993, under which Lessee has leased from Lessor approximately 23.851 square of net rentable area in that building located at 4200 Research Forest Dr., The Woodlands, Montgomery County, Texas. 2. Lessor and Lessee agree that beginning April 1, 1994, the area of the Premises shall be increased by 4.508 square feet of net rentable area ("Expansion Area"), which Expansion Area is outlined Premises to on attached Exhibit "A", changing the size of 28.359 square feet of net rentable area the 3. Lessor and Lessee agree that, beginning April 1, 1994, the Base Rent, as set out in section ~ of the Lease Agreement, shall be increased by Two thousand eiqht hundred seventeen and 50/00 dollars ($2.817.50) per month, so that the total Base Rent shall be twenty five thousand two hundred seventy seven and 19/00 dollars ($25.277.19) per month; and beginning January 1, 1995, the Base Rent, as described in section Q of the Lease Agreement shall be increased by four thousand two hundred forty-five dollars ($4.245.00), so that the total Base Rent shall twenty six thousand seven hundred four and 69/100 dollars ($26.704.69) per month. 4. During the period of April 1, 1994 through December 31, 1994, Lessor agrees to pay all Operating Expenses for the Expansion Area. It is understood that the number of rentable square feet in the Expansion Area will not be used in the calculation of Lessee's prorata share of Excess Operating Expenses until January 1, 1995. 5. Lessor agrees to fund an Allowance for Tenant Improvements of $72,128 ($16.00 per square foot of Expansion Area). The Tenant Improvement Allowance will be funded to Lessee on the later of January 1, 1995, or upon completion of the Tenant Improvements by Lessee in accordance with exhibit "B" attached hereto. 6. Lessee's Right of First Refusal described in paragraph 35 of the Lease is deemed to have been exercised by Lessee in this expansion. Signed this the 27th day of January, 1994 at The Woodlands, Texas. LESSEE: By: /s/ Paul G. Brown III Name: Paul G. Brown III Title: V. P. Finance LESSOR: BY; /s/ Eric Wojner Name: Eric Wojner Title: V. P. Investment Properties EX-11.1 9 a2043676zex-11_1.txt EXHIBIT 11.1 EXHIBIT 11.1 ENCHIRA BIOTECHNOLOGY CORPORATION BASIC AND DILUTED EARNINGS PER SHARE COMPUTATION YEAR ENDED DECEMBER 31, 1998 Weighted Average Shares Outstanding:
TOTAL # DAYS SHARES OUTSTANDING - -------------------------------------------------------- 12,251,434 x 119 = 1,457,920,646 12,281,591 x 1 = 12,281,591 12,970,109 x 40 = 518,804,360 12,995,109 x 50 = 649,755,450 13,006,833 x 6 = 78,040,998 13,011,833 x 88 = 1,145,041,304 15,241,169 x 48 = 731,576,112 --- ------------- 352 4,593,420,461 1:7 Reverse split 656,202,923 2,177,254 x 3 = 6,531,762 2,179,142 x 10 = 21,791,420 --- ------------ 365 684,526,105 / 365 = 1,875,414 === ============ ========= Loss Per Share: Net Loss plus dividend accrual plus accretion of offering costs $ (9,761,067) = $ (5.20) -------------------------------- ------------ ========== Weighted Avg. Shares 1,875,414
ENCHIRA BIOTECHNOLOGY CORPORATION BASIC AND DILUTED EARNINGS PER SHARE COMPUTATION YEAR ENDED DECEMBER 31, 1999 Weighted Average Shares Outstanding:
TOTAL # DAYS SHARES OUTSTANDING 2,179,124 x 19 = 41,403,356 2,179,713 x 30 = 65,391,390 2,180,358 x 20 = 43,607,160 2,180,691 x 54 117,757,314 2,182,661 x 3 = 6,547,983 2,315,663 x 13 = 30,103,619 2,328,667 x 7 = 16,300,669 2,355,070 x 15 = 35,326,050 6,150,401 x 11 = 67,654,411 6,569,890 x 178 = 1,169,440,420 6,572,135 x 15 = 98,582,025 --- ------------- 365 1,692,114,397 === ============= 1,692,114,397 / 365 = 4,635,930 ========= Loss Per Share: Net Loss plus dividend accrual plus accretion of offering costs $ (8,259,546) = $ (1.78) - --------------------------------- -------------- ========== Weighted Avg. Shares 4,635,930
ENCHIRA BIOTECHNOLOGY CORPORATION BASIC AND DILUTED EARNINGS PER SHARE COMPUTATION YEAR ENDED DECEMBER 31, 2000 Weighted Average Shares Outstanding:
TOTAL # DAYS SHARES OUTSTANDING 6,572,135 x 3 = 19,716,405 6,574,135 x 7 = 46,018,945 6,576,135 x 15 = 98,642,025 6,578,135 x 14 = 92,093,890 6,591,135 x 1 = 6,591,135 6,596,135 x 6 = 39,576,810 6,624,189 x 8 = 52,993,512 6,629,189 x 1 = 6,629,189 6,691,762 x 6 = 40,150,572 6,706,762 x 1 = 6,706,762 6,723,424 x 3 = 20,170,272 6,734,224 x 14 = 94,279,136 6,734,917 x 4 = 26,939,668 6,772,512 x 6 = 40,635,072 7,016,029 x 7 = 49,112,203 7,018,059 x 4 = 28,072,236 7,020,039 x 17 = 119,340,663 7,020,342 x 5 = 35,101,710 7,021,002 x 20 = 140,420,040 7,034,921 x 46 = 323,606,366 7,042,398 x 17 = 119,720,766 7,054,860 x 46 = 324,523,560 9,054,860 x 45 = 407,468,700 9,055,285 x 22 = 199,216,270 9,056,285 x 9 = 81,506,565 9,067,075 x 20 = 181,341,500 9,067,700 x 19 = 172,286,300 ---- 366 = 2,772,860,272 ==== ============== 2,772,860,272 / 366 = 7,576,121 =========== Loss Per Share: Net Loss plus dividend accrual plus accretion of offering costs $ (8,336,096) $ (1.10) - --------------------------------- --------------- =========== Weighted Avg. Shares 7,576,121
EX-23.1 10 a2043676zex-23_1.txt EXHIBIT 23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed Registration Statements on Form S-8 dated September 9, 1993, September 13, 1993 and February 20, 2001 and on Form S-3 dated February 13, 1995 and October 31, 2000. Houston, Texas March 27, 2001 -----END PRIVACY-ENHANCED MESSAGE-----