<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
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 NUMBER: 000-23265
--------------------------
SALIX PHARMACEUTICALS, LTD.
(Exact name of Registrant as specified in its charter)
BRITISH VIRGIN ISLANDS 94-3267443
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3600 WEST BAYSHORE ROAD, SUITE 205
PALO ALTO, CALIFORNIA 94303
(Address of principal executive offices, including zip code)
(650) 856-1550
(Registrant's telephone number, including area code)
--------------------------
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 [ ]
The number of shares of the Registrant's Common Stock outstanding as of
July 31, 1999 was 10,208,837.
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SALIX PHARMACEUTICALS, LTD.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
<S> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999
(unaudited) and December 31, 1998 ............................ 1
Condensed Consolidated Statements of Operations for the Three and
Six Months Ended June 30, 1999 and 1998 (unaudited) .......... 2
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and 1998 (unaudited) .............. 3
Notes to Condensed Consolidated Financial Statements ............ 4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ........................................... 5
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......... 15
PART II OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ........................... 15
Item 4. Submission of Matters to a Vote of Security Holders ................. 16
Item 6. Exhibits and Reports on Form 8-K .................................... 17
Signatures .................................................................. 18
</TABLE>
<PAGE> 3
SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- --------
(unaudited) (Note 1)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 836 $ 2,763
Short term investments ............................................. 3,500 4,500
Accounts receivable ................................................ 60 --
Inventory, net ..................................................... 360 615
Prepaids and other current assets .................................. 214 105
-------- --------
Total current assets .......................................... 4,970 7,983
Property and equipment, net ................................................. 182 222
Other assets ................................................................ 51 51
-------- --------
$ 5,203 $ 8,256
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and other current liabilities ..................... $ 1,480 $ 1,430
-------- --------
Commitments ................................................................. -- --
Shareholders' equity:
Preferred stock, issuable in series, no par value;
5,000,000 shares authorized; none outstanding ................. -- --
Common stock, no par value; 40,000,000 shares authorized; 10,208,837
shares issued and outstanding at June 30, 1999
and December 31, 1998 ........................................ 27,626 27,626
Accumulated deficit ................................................ (23,903) (20,800)
-------- --------
Shareholders' equity .......................................... 3,723 6,826
-------- --------
$ 5,203 $ 8,256
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
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SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Product revenue ..................................... $ 64 $ 146 $ 138 $ 146
Revenue from collaborative agreements and other ..... 1,000 -- 1,484 --
-------- -------- -------- --------
Total revenues ................................. 1,064 146 1,622 146
-------- -------- -------- --------
Expenses:
Cost of products sold ............................... 302 242 563 288
License fees ........................................ 100 76 297 76
Research and development ............................ 1,679 1,787 2,850 3,367
General and administrative .......................... 536 722 1,119 1,488
-------- -------- -------- --------
Total expenses ................................. 2,617 2,827 4,829 5,219
-------- -------- -------- --------
Loss from operations ......................................... (1,553) (2,681) (3,207) (5,073)
-------- -------- -------- --------
Interest and other income (expense), net ..................... 67 170 104 340
-------- -------- -------- --------
Net loss ....................................... $ (1,486) $ (2,511) $ (3,103) $ (4,733)
======== ======== ======== ========
Net loss per share, basic and diluted ........................ $ (0.14) $ (0.25) $ (0.30) $ (0.46)
======== ======== ======== ========
Shares used in computing net loss per share, basic and diluted 10,209 10,182 10,209 10,182
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 5
SALIX PHARMACEUTICALS, LTD.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
Six months ended
June 30,
----------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ...................................................... $ (3,103) $ (4,733)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ............................ 47 42
Changes in assets and liabilities:
Accounts receivable, inventory and other current assets . 86 (329)
Accounts payable and other current liabilities ........... 50 (48)
-------- --------
Net cash used in operating activities ................ (2,920) (5,068)
CASH FLOWS FROM INVESTING ACTIVITIES
Sale and maturity of short term investments ................... 1,000 --
Purchases of property and equipment ........................... (7) (90)
-------- --------
Net cash provided by (used in) investing activities ...... 993 (90)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock ........................ -- 72
-------- --------
Net cash provided by financing activities ................ -- 72
Net decrease in cash and cash equivalents .............................. (1,927) (5,086)
Cash and cash equivalents at beginning of period ....................... 2,763 15,173
-------- --------
Cash and cash equivalents at end of period ............................. $ 836 $ 10,087
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 6
SALIX PHARMACEUTICALS, LTD.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. Organization and Basis of Presentation
Salix Pharmaceuticals, Ltd. (the "Company") was incorporated in the
British Virgin Islands in December 1993 for the purpose of acquiring all
of the outstanding capital stock of Salix Pharmaceuticals, Inc., a
California corporation ("Salix California"), and Glycyx Pharmaceuticals,
Ltd., a Bermuda corporation ("Glycyx"). Salix California was incorporated
in California in 1989 and Glycyx was incorporated in Bermuda in 1992. The
Company is developing new pharmaceuticals, primarily focused in the area
of gastrointestinal disease. The Company conducts its business within one
industry segment.
The condensed consolidated financial statements include the accounts
of the Company and its wholly owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. These
statements are stated in United States dollars.
The accompanying unaudited condensed consolidated financial
statements include all adjustments (consisting only of normal recurring
items) which, in the opinion of management, are necessary for a fair
presentation of financial position, results of operations and cash flows.
These financial statements should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results
of Operations included elsewhere in this Report and with the audited
financial statements for the fiscal year ended December 31, 1998 included
in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 filed with the Securities and Exchange Commission. The
results of operations for interim periods are not necessarily indicative
of results to be expected for a full year.
These statements have been prepared in accordance with accounting
principles generally accepted in the United States. The application of
these principles conforms in all material respects with financial
statements prepared using accounting principles generally accepted in
Canada. The Company's Common Shares are traded on The Toronto Stock
Exchange.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
2. Net Loss Per Common Share
Basic and diluted net losses per common share have been computed
using the weighted-average number of common shares outstanding during
each period. Options and warrants were outstanding during both quarters
ended June 30, 1999 and June 30, 1998 but have been excluded from the
computation, as their effect is anti-dilutive.
3. Commitments
At June 30, 1999, the Company had a binding purchase order commitment
for inventory purchases aggregating approximately $1.0 million to be
delivered in 1999.
4. Inventory
All inventories at December 31, 1998 and June 30, 1999 have been
classified as raw materials.
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<PAGE> 7
SALIX PHARMACEUTICALS, LTD.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward looking statements are subject to certain
risks and uncertainties that could cause actual results to differ materially
from historical results or anticipated results, including those set forth under
"Factors that May Affect Future Results" under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in, or
incorporated by reference into, this report. The following discussion should be
read in conjunction with the Company's Condensed Consolidated Financial
Statements and notes thereto included elsewhere in this report.
Unless otherwise indicated, all references to "dollars" or "$" refer to
United States dollars. The Company's Common Shares trade on The Toronto Stock
Exchange and are quoted in Canadian dollars.
OVERVIEW
The Company's principal focus is to identify and acquire
gastrointestinal products that have near-term commercial potential and to apply
its product development expertise to commercialize these products. The Company
selects products that it believes serve a gastrointestinal disease in need of
new treatments, have the potential for rapid regulatory approval, and are
marketable to a small group of specialized physicians. The Company believes this
strategy will reduce the expense, time and risk normally associated with
pharmaceutical development. The Company believes that its first two products,
balsalazide disodium, presently marketed in the United Kingdom under the brand
name Colazide and in Sweden as Colazid, and rifaximin will demonstrate the
Company's ability to execute this strategy.
The Company has generated limited revenues to date from the sales of
products, and it has been unprofitable since inception. The Company expects to
continue to incur substantial losses and expects its operating expenses to
remain at current levels or increase as the Company continues its balsalazide
disodium commercialization efforts and continues its product development and
clinical programs for other products. As of June 30, 1999, the Company had
accumulated losses of approximately $23.9 million. Furthermore, the Company
currently expects operating losses to continue at least through 2002. Since
1992, the Company has financed its operations principally through reimbursement
payments, license fees and milestone revenues, totaling approximately $18.3
million under collaborative research and licensing agreements, and sales of
equity and convertible debt securities totaling approximately $27.6 million.
Over the same period, the Company has recorded expenses totaling $34.6 million,
of which $20.6 million were in research and development expenses and $1.6
million in license fees to licensors. The Company's alliances with Astra AB
("Astra") and a division of Menarini Pharmaceutical Industries s.r.l.
("Menarini") have allowed it to fund the development of balsalazide disodium, to
in-license other gastrointestinal products, and to help establish itself with a
relatively small amount of outside capital.
In October 1998, the Company signed an agreement with Astra under which
the Company will receive additional research and development funding of $3.0
million from Astra related to a recently completed clinical trial comparing
balsalazide disodium to mesalamine, the current leading treatment for ulcerative
colitis and Crohn's disease. Under the agreement the Company will receive the
funds in three installments: $1.0 within 15 days of signing the agreement, $1.0
million upon completion of treatment of the last patient in the trial, and $1.0
million upon delivery of the study results report. The Company received the
first payment in October 1998 and the second payment in April 1999. The Company
anticipates that the last event will occur in the second half of 1999.
In exchange for the $3.0 million payment, Astra will receive rights to
the trial results for use throughout the territories in which it has a license
to market balsalazide disodium. In addition, the Company will transfer to Astra
the New Drug Application ("NDA") for balsalazide disodium, which the Company
filed in June 1997 with the United States Food and Drug Administration ("FDA"),
although the transfer will occur only after FDA approval is received, if
5
<PAGE> 8
at all. Depending on the outcome of the trial, the results may be useful for
obtaining additional approvals in Europe and enhancing US labeling for
balsalazide disodium.
The Company's collaborative research and licensing agreements provide
for payments in support of the Company's research activities, as well as
additional payments for licensing fees and upon the attainment of specified
milestones. Research reimbursements under these agreements are recorded when
earned based on contract costs incurred to date compared with total estimated
contract costs. License fees and milestone revenues are recognized according to
contract terms. Amounts received in advance of the applicable research
activities are deferred as unearned revenue. Amounts received that are
refundable until the milestones are achieved are deferred as advances from
licensees until earned.
The Company licensed balsalazide from Biorex Laboratories Limited
("Biorex") in exchange for participation in future milestone revenues and
profits. The Company will sell balsalazide disodium, the disodium salt of
balsalazide, which is manufactured by third parties under contract with the
Company, to its distribution partners, Astra and Menarini, at a formula price.
The Company received approval in July 1997 to market balsalazide disodium in the
United Kingdom for the treatment of acute ulcerative colitis. Astra began the
commercial launch of balsalazide disodium under the brand name Colazide in
October 1997 in the United Kingdom. In May 1998, the Company received
notification of additional approvals for balsalazide disodium in Austria,
Belgium, Denmark, Italy, Luxembourg, and Sweden, through the mutual recognition
process of the European Union ("EU"). Astra and Menarini withdrew marketing
applications from other EU countries that had questions that could not be
addressed within the time constraints of the review period required by the
mutual recognition process. These countries are Finland, France, Germany,
Greece, Ireland, Netherlands, Portugal, and Spain. The application process for
approval in these countries is the responsibility of Astra and Menarini and
there can be no assurance that they will pursue such applications or, if they
do, that they will be successful. In December 1998, Astra received approval to
market balsalazide disodium in Switzerland and Argentina. In March 1999, Astra
launched balsalazide disodium in Sweden, under the brand name Colazid. The
Company expects Astra and Menarini to undertake additional commercial launches
of balsalazide disodium in approved countries throughout 1999. In January 1999,
Astra and Menarini submitted an application to market balsalazide disodium for
the maintenance of remission of ulcerative colitis in the seven EU countries for
which marketing approval for the acute indication had been received. This
application was approved in July 1999 allowing Astra and Menarini to promote
balsalazide disodium for the additional indication. The Company recognized its
initial product revenues from Astra's sales of balsalazide disodium in the
United Kingdom in 1997 and will recognize product revenues from sales of
balsalazide disodium outside the United Kingdom in 1999. The selling price of
balsalazide disodium to Astra outside the United Kingdom and Sweden has not been
determined, and the Company will be obligated to pay to Biorex, the original
licensor of the product, a portion of any gross profit on balsalazide disodium
sales to Astra and Menarini outside the United States. In addition, the Company
anticipates product costs to remain high due to manufacturing scale-up.
In June 1997, the Company submitted an NDA to the FDA for balsalazide
disodium as a therapy for acute ulcerative colitis. In June 1998, the FDA issued
an "approvable" letter for the Company's balsalazide disodium NDA. The FDA's
letter and subsequent correspondence have indicated that the application might
be approved upon the satisfaction of specific issues relating to the
manufacturing process and other technical issues, as well as product labeling.
To the extent necessary, the Company has re-focused part of its management's
efforts to concentrate fully on the resolution of the remaining issues, as
outlined in the approvable letter, as it seeks to fulfill the FDA requirements
and obtain final approval. While the Company believes that it can successfully
fulfill the FDA requirements and obtain marketing approval, there can be no
assurance that its efforts in this regard, in whole or in part, will be
successful. In addition, certain of the issues raised in the FDA letter require
the cooperation of the Company's third-party contract manufacturers to meet the
conditions of the approvable letter. There can be no assurance that the
Company's third-party contract manufacturers will fully comply with the
conditions of the approvable letter. If any issue contained in the approvable
letter is not resolved to the satisfaction of the FDA, there can be no assurance
that approval will be granted. Failure to obtain marketing approval for
balsalazide disodium from the FDA could have a material adverse impact on the
Company's financial condition and future results of operations.
The Company's second product, rifaximin, is currently under
development. The Company obtained the rights to develop, make, use and sell
rifaximin in Canada and the United States from Alfa Wassermann S.p.A. ("Alfa
Wassermann") in exchange for future royalties and milestone payments. Alfa
Wassermann has also agreed to supply Salix with bulk active ingredient rifaximin
at a fixed price. If regulatory approvals are obtained, the Company intends
6
<PAGE> 9
to establish its own direct sales force to market rifaximin. This strategy for
rifaximin represents the business model that the Company intends to adopt for
future product development and commercialization. Although the creation of an
independent sales organization will require a substantial investment by the
Company, the Company anticipates that the financial results from rifaximin and
future products will be more favorable to the Company than those anticipated
from the sale of balsalazide disodium by Astra and Menarini since the Company
has retained the distribution rights to rifaximin, whereas Astra and Menarini
have the distribution rights for balsalazide. In the case of balsalazide
disodium, the Company granted exclusive distribution rights in certain
territories in exchange for funding needed to complete late-stage development of
balsalazide disodium, to in-license other gastrointestinal products and to help
establish the Company as a viable gastrointestinal pharmaceutical company. The
Company is currently unable to provide a meaningful estimate of the investment
required to create an independent sales organization because such investment is
dependent on a number of contingencies, including receipt of necessary
regulatory approvals for specific indications.
The Company intends to pursue development of rifaximin for bacterial
infections of the lower gastrointestinal tract. The Company recently started
recruiting patients in a multi-center placebo controlled phase III trial for the
treatment of bacterial infectious diarrhea in travelers. It is currently
anticipated that this trial will be completed during the first half of 2000. The
Company plans to develop rifaximin for other possible indications, including
antibiotic associated colitis and hepatic encephalopathy as financial resources
will allow. In February 1998, the Company received Orphan Drug Designation from
the FDA for rifaximin to treat hepatic encephalopathy. Orphan Drug Designation
can entail certain possible advantages in the testing and approval process for
the drug. See "Factors That May Affect Future Results".
In February 1999, the Company signed a letter of intent with Fujirebio
Inc. of Tokyo, Japan to negotiate a license agreement under which the Company
would obtain exclusive rights to lafutidine, a third generation anti-ulcer
treatment, throughout the world, excluding Japan, Taiwan, Korea, Brazil and
Argentina. See "Factors That May Affect Future Results".
RESULTS OF OPERATIONS
Three and Six Month Periods Ended June 30, 1999 and 1998
For the three month period ended June 30, 1999, the Company recognized
product revenue of $64,000 and received revenue from collaborative agreements of
$1.0 million in relation to the October 1998 agreement with Astra. During the
corresponding three month period in 1998 the Company had product sales of
$146,000. For the six month period ended June 30, 1999 the Company had product
sales of $138,000 and revenue from collaborative agreements of $1,484,000.
During the corresponding six month period in 1998 the Company had product sales
of $146,000 and no revenue from collaborative agreements.
Operating expenses for the three months ended June 30, 1999 and 1998
were $2.6 million and $2.8 million, respectively. Operating expenses for the six
months ended June 30, 1999 and 1998 were $4.8 million and $5.2 million,
respectively. The decreases were the result of lower general and administrative
costs and lower research and development costs partially offset by higher cost
of goods and license fees paid to licensors as noted below.
Cost of products sold for the three and six month periods ended June
30, 1999 were $302,000 and $563,000 respectively, compared with $242,000 and $
288,000 in the corresponding three and six month periods in 1998. In the six
month period ended June 30, 1999, the Company suffered manufacturing losses of
approximately $0.2 million due to the quality of an active ingredient supplied
by one of the Company's active ingredient suppliers. Product costs are expected
to remain high for the near term due to manufacturing scale-up and validation of
additional vendors.
License fee expense totaled $100,000 and $297,000 for the three and six
month periods ended June 30, 1999, compared with $76,000 in both the
corresponding three and six month periods in 1998. The current year license fees
were due to the Company's recognition of revenue resulting from the approval of
balsalazide disodium for sale in Sweden and an annual payment relating to
rifaximin. The license fees paid in 1998 related to rifaximin.
7
<PAGE> 10
Research and development expense was $1.7 million and $2.9 million for
the three and six month periods ended June 30, 1999, respectively, compared with
$1.8 million and $3.4 million for the comparable periods in 1998. The decrease
in research and development expenses in 1999 is due primarily to reduced
spending related to a balsalazide disodium clinical trial initiated in late 1997
in the United States and management initiatives to reduce overall expenditures,
offset by increased expenditures on rifaximin and lafutidine. Management expects
research and development spending to remain constant or decrease as the Company
focuses on completing it's response to the balsalazide approvable letter in the
U.S. and submitting an NDA for the first indication for rifaximin.
General and administrative expenses were $536,000 and $1.1 million for
the three and six months ended June 30, 1999, respectively, compared with
$722,000 and $1.5 million in the corresponding three and six month periods in
1998. The decreases over 1998 are due mainly to cost reduction initiatives,
including a reduction in headcount.
Interest and other income was $67,000 and $104,000 in the three and six
month periods ended June 30, 1999 respectively, down from $170,000 and $340,000
in the three and six month periods ended June 30, 1998. The reduction was mainly
attributable to lower average cash balances in 1999. See "Liquidity and Capital
Resources".
The Company experienced net losses of $1.5 million and $3.1 million for
the three and six month periods ended June 30, 1999, respectively, compared with
$2.5 million and $4.7 million in the three and six month periods ended June 30,
1998 respectively. The lower net loss for the current three and six month
periods is attributable to higher revenues and lower expenses as noted above.
Year 2000 Compliance
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field. Beginning in the
year 2000, these date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. The Company has
transitioned its primary operating systems during the previous two years and
does not anticipate to incur any material costs throughout the remainder of 1999
to complete any aspect of its compliance. The Company's internal operating
systems, including its phone system, rely exclusively on software products of
third party vendors, who have provided assurance to the Company that such
products are year 2000 compliant. The Company has had discussions with its
financial institutions regarding the status of their systems' compliance with
the year 2000 date capability and all have provided assurances to the Company
that all such systems and software have been or are in the process of being
remedied. The Company has conducted a survey of its key vendors, inquiring as to
the compliance of their systems with year 2000 requirements. The Company has
been provided assurances from its key vendors and business partners that those
systems of the vendors and partners upon which the Company's research and
commercial efforts rely are compliant with year 2000 requirements. The Company
has undertaken and completed a year 2000 readiness program and that based upon
information presently available, the Company does not believe that issues
relating to year 2000 compliance will result in a material adverse effect on its
financial condition or results of operations. The Company has made no
contingency plans with respect to potential adverse events resulting from the
failure of its business partners and vendors to be year 2000 compliant, as the
Company believes that such an adverse event is unlikely based on the steps it
has taken and assurances it has received, and that any such event would not have
a materially negative impact on its operations. The Company has inquired and is
not presently aware of any potential adverse event relating to its
computer-based systems and those of its partners which would prevent the
delivery of its products to the customer. If the information provided by its
vendors or its partners were to prove incorrect, however, there can be no
assurance that the costs and disruption associated with implementing new or
corrected software would not have an adverse effect on the Company's business,
financial condition or results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Since 1992 and through June 30, 1999, the Company has financed its
operations principally through reimbursement payments, license fees and
milestone revenues, totaling approximately $18.3 million under collaborative
research and licensing agreements, and sales of equity and convertible debt
securities totaling approximately $27.6 million.
8
<PAGE> 11
At June 30, 1999, the Company had approximately $4.3 million in cash,
cash equivalents, and short-term investments as compared to $7.3 million at
December 31, 1998. The decrease of $3.0 million from December 31, 1998 was due
to cash used in operating activities (see "Results of Operations").
As of June 30, 1999, the Company had no long-term obligations. The
Company has non-cancelable purchase order commitments for inventory purchases of
approximately $1.0 million to be delivered in 1999. The Company does not
anticipate any significant capital expenditures during the remainder of 1999.
The Company's purchases of raw materials and its product sales to its
European distribution partners are denominated in British Pound Sterling.
Translation into the Company's reporting currency, the United States dollar, has
not historically had a material impact on the Company's financial position.
Additionally, the Company's net assets denominated in currencies other than the
functional currency have not exposed the Company to material risk associated
with fluctuations in currency rates. Given these facts, the Company has not
considered it necessary to use foreign currency contracts or other derivative
instruments to manage changes in currency rates.
The Company has sustained continuing operating losses and expects to
incur further substantial losses until product approvals are obtained and
product revenues reach a sufficient level to support ongoing operations. The
Company believes that the Company's cash reserves at June 30, 1999 and the
projected milestones from Astra and Menarini should be sufficient to satisfy the
cash requirements of the Company's product development programs through at least
the end of 1999. The Company's actual cash requirements may vary materially from
those now planned because of a number of factors, including the results of
research and development activities, FDA and foreign regulatory processes,
establishment of and changes in relationships with strategic partners,
technological advances by the Company and other pharmaceutical companies, the
terms of the Company's collaboration arrangements with strategic partners, and
the status of competitive products. The Company's ability to execute its
business plan, fund future development efforts, and secure future licensing
arrangements, as well as fund the commercialization of rifaximin and other new
potential products will require the Company to raise additional funds. The form,
timing and amount of such funding is dependent upon both internal and external
factors. The Company may also enter into collaborative arrangements with
corporate partners that could provide the Company with additional funding in the
form of equity, debt, licensing, milestone and/or royalty payments. The Company
is also investigating other strategic options including mergers and acquisitions
as a means of securing funding for the Company's operations. There can be no
assurance that the Company will be able to enter into such arrangements or raise
any additional funds on terms favorable to the Company, if at all.
FACTORS THAT MAY AFFECT FUTURE RESULTS
This report, including this Management's Discussion and Analysis of
Financial Condition and Results of Operations, contains forward-looking
statements and other prospective information relating to future events. These
forward-looking statements and other information are subject to certain risks
and uncertainties that could cause actual results to differ materially from
historical results or anticipated results, including the following:
Dependence on Currently Licensed Products; Uncertainty of Regulatory
Approval of Company's Products. The Company's future success will depend, among
other factors, on its ability to in-license, develop, and commercialize new
pharmaceutical products. The Company currently licenses two pharmaceutical
products, balsalazide and rifaximin, and the Company's prospects over the next
three to five years are substantially dependent on regulatory approval and
successful commercialization of these products. The Company has in-licensed
certain rights to balsalazide and rifaximin in certain markets from Biorex and
Alfa Wassermann, respectively. In addition, the Company has entered into
agreements relating to the development, commercialization, manufacture, and
marketing of balsalazide disodium with Astra and Menarini. In February 1999, the
Company signed a letter of intent with Fujirebio Inc. of Tokyo, Japan to
negotiate a license agreement under which the Company would obtain exclusive
rights to lafutidine, a third generation anti-ulcer treatment, throughout the
world, excluding Japan, Taiwan, Korea, Brazil and Argentina.
Development, manufacture, and marketing of balsalazide, rifaximin and
lafutidine are subject to extensive regulation by governmental authorities in
the United States and other countries. The FDA has not approved either
balsalazide, rifaximin or lafutidine for use in the United States. In June 1997,
the Company submitted an NDA to the
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FDA for balsalazide disodium as a therapy for acute ulcerative colitis. In June
1998, the FDA issued an "approvable" letter to the Company for the balsalazide
disodium NDA. The FDA's letter and subsequent correspondence have indicated that
the application might be approved upon the satisfaction of specific issues
relating to manufacturing and other technical issues, as well as product
labeling. To the extent necessary, the Company has re-focused part of its
management's efforts to concentrate fully on the resolution of the remaining
issues, as outlined in the approvable letter, as it seeks to fulfill the FDA
requirements and obtain final approval. While the Company believes that it can
successfully comply with the issues raised by the approvable letter and obtain
FDA approval for balsalazide disodium, there can be no assurance that its
efforts in this regard, in whole or in part, will be successful. In addition,
certain of the issues raised in the FDA letter require the cooperation of the
Company's third-party contract manufacturers to meet the conditions of the
approvable letter. There can be no assurance that the Company's third-party
contract manufacturers will be able to fully comply with the conditions of the
approvable letter. If any issue contained in the approvable letter is not
resolved to the satisfaction of the FDA, there can be no assurance that approval
will be granted. If regulatory approval of balsalazide disodium or any other
product is granted, such approval will be limited to those disease states and
conditions for which the product has been shown to be safe and effective, as
demonstrated to the FDA's satisfaction through well controlled clinical studies.
Furthermore, approval may entail ongoing requirements for post-marketing
studies. Even if such regulatory approval is obtained, a marketed product,
promotional activities for the product, its manufacturer and its manufacturing
facilities are subject to continual review and periodic inspections. In
addition, identification of certain side effects after a drug is on the market
or the occurrence of manufacturing problems could cause subsequent withdrawal of
approval, reformulation of the drug, additional preclinical testing or clinical
trials and changes in labeling of the product.
In July 1997, the Medicines Control Agency in the United Kingdom
approved balsalazide disodium under the brand name Colazide as a treatment for
acute ulcerative colitis in the United Kingdom. The Company and its partners,
Astra and Menarini, received in May 1998 notification of approval of balsalazide
disodium as a treatment for acute ulcerative colitis in Austria, Belgium,
Denmark, Italy, Luxembourg, and Sweden through the mutual recognition process of
the EU. Astra and Menarini withdrew marketing applications from certain other EU
countries that had questions that could not be addressed within the time
constraints of the review period required by the mutual recognition process.
These countries are Finland, France, Germany, Greece, Ireland, Netherlands,
Portugal, and Spain. The application procedure for approval in these countries
is the responsibility of Astra and Menarini and there can be no assurance that
they will pursue such applications, or if they do, that they will be successful.
In July 1999 Astra and Menarini received approval to market balsalazide disodium
for maintenance of remission of ulcerative colitis in the seven European
countries for which marketing approval for the acute indication had previously
been received. There can be no assurance that balsalazide disodium will receive
approval in any other member country of the European Union. Even if such
approvals are ultimately received, there can be no assurance as to the timing of
such approvals or market acceptance of balsalazide disodium for the approved
indications, or that the Company's marketing partners will launch balsalazide
disodium in the countries where the marketing application has been approved.
With respect to rifaximin, Alfa Wassermann recently completed a clinical
trial in Spain relating to the drug as a therapy for hepatic encephalopathy. The
Company determined through discussions with the FDA that this study is not
sufficient support for the filing of an NDA with the FDA. Therefore, the Company
has initiated a Company-sponsored trial for the indication of bacterial
infectious diarrhea in travelers and will continue to pursue its completion as
financial resources allow. There can be no assurance that this new clinical
trial for rifaximin will demonstrate that the drug is safe and effective for the
indication tested, that such clinical trial will support the filing of an NDA
for rifaximin as a therapy for infectious diarrhea, that in the event an NDA is
filed with the FDA, the Company will be successful in obtaining regulatory
approval in the United States, or that the Company will obtain regulatory
approval for rifaximin from authorities in any other foreign jurisdiction.
With respect to lafutidine, there can be no assurance that the Company
will successfully conclude a license agreement with Fujirebio Inc., nor that
even if the Company is successful in obtaining a license to lafutidine it will
be successful in obtaining marketing approval in the United States or any other
country.
The Company expects that a significant portion of its potential revenues
for the next few years will depend on regulatory approval and sales of
balsalazide disodium and rifaximin. Failure to obtain regulatory approvals,
delays in obtaining regulatory approvals, obtaining regulatory approvals in only
limited markets or for limited uses, or lack of market acceptance for either
product, to the extent regulatory approvals are obtained, would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
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Limited Operating History; History of Operating Losses; Expectation of
Future Losses. The Company has only a limited history of operations consisting
primarily of development of its products and sponsorship with third parties of
research and clinical trials. The Company has had no earnings to date and has
not realized any material operating revenues from product sales, either directly
by the Company or indirectly through its development and distribution partners.
Substantially all of the Company's revenues to date have been derived from
milestone payments from the Company's collaborative partners related to the
development of balsalazide disodium and limited product sales of Colazide. As of
June 30, 1999, the Company had incurred cumulative losses since inception of
approximately $23.9 million. Furthermore, the Company currently expects
operating losses to continue at least through 2002. The Company's future
operating performance will depend on the timing of regulatory approvals of
balsalazide disodium and rifaximin, particularly the timing of FDA approval,
and, if such approvals can be obtained, the level of market acceptance.
Dependence on Collaborative Partners. The initial commercialization of
balsalazide disodium in the United Kingdom and, to the extent regulatory
approval is obtained, in other countries in which the Company has commercial
rights to balsalazide disodium, is entirely dependent on Astra and Menarini, in
their respective territories. Under its agreements with Astra, the Company has
granted Astra exclusive rights to distribute and sell balsalazide disodium on a
worldwide basis with the exception of Italy, Spain, Portugal, and Greece, where
the Company has granted exclusive distribution rights to Menarini, and with the
exception of Japan, Taiwan, and Korea, where the Company does not have rights to
balsalazide disodium. Although Astra has agreed to use its best endeavors to
promote, market, and sell balsalazide disodium in its exclusive markets, there
are no specified financial thresholds that must be achieved for Astra to
maintain its exclusivity. The Company's agreements with Astra provide for, with
respect to Europe, a term of 15 years and, with respect to the United States, a
term ending on the later to occur of the expiration date of the last expiring
patent and the date nine years from the first commercial launch date of
balsalazide disodium but, in either event, the agreements may be terminated
earlier by either party upon the occurrence of specified events, including a
material breach.
The Company received marketing approval for balsalazide disodium in the
United Kingdom from the Medicine Controls Agency in July 1997 and Astra launched
balsalazide disodium commercially in the United Kingdom in October 1997, based
on a selling price set by Astra. Following regulatory approval of balsalazide
disodium in each country in Europe where Astra has exclusive distribution
rights, the balsalazide disodium sales price set on a country by country basis
may be less than the selling price in the United Kingdom. The sales price for
balsalazide disodium will directly affect the Company's revenues because the
parties' agreement obligates Astra to purchase balsalazide disodium from the
Company, and the Company to supply balsalazide disodium to Astra, at a transfer
price equal to a percentage of Astra's selling price. The Company does not
anticipate significant margins from balsalazide disodium sales to Astra in the
United Kingdom or Sweden, or in other European Union countries, where pricing
has not yet been determined. In addition, while the Company and its partners,
Astra and Menarini, received in May 1998 notification of approval of balsalazide
disodium as a treatment for acute ulcerative colitis in Austria, Belgium,
Denmark, Italy, Luxembourg and Sweden, Astra and Menarini withdrew marketing
applications from countries that had questions that could not be addressed
within the time constraints of the review period. Although the Company has been
advised by both Astra and Menarini that they intend to seek approval in those
countries for which marketing applications were withdrawn, including Finland,
France, Germany, Greece, Ireland, Netherlands, Portugal and Spain, the decision
as to which additional approvals to seek, the order in which to seek them and
the responsibility to complete the approval process lies with Astra and Menarini
and not the Company. There can be no assurance that Astra and Menarini will seek
such additional approvals, or if they do that the approvals will be granted.
Also, while Astra and Menarini received in July 1999 notification of approval of
balsalazide disodium as a treatment for the maintenance of remission of
ulcerative colitis in the seven European countries that had previously granted
approval for the acute indication, there can be no assurance that this will
influence either the decision to seek additional approvals nor the outcome of
such applications should they be filed.
There can be no assurance that the Company will be able to negotiate
acceptable collaborative arrangements in the future, or that its current or
future collaborative arrangements, including the agreements with Astra or
Menarini, will be successful or will not be terminated by the other party.
Although the Company believes that parties to any collaborative arrangements
would have an economic motivation to succeed in performing their contractual
responsibilities, the amount and timing of resources to be devoted to these
activities in most instances will not be within the control of the Company.
Failure of the Company and its collaborative partners to develop, commercialize,
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manufacture or market products, including balsalazide disodium, would have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Dependence on Third Parties for Manufacturing. The Company currently
does not manufacture its potential pharmaceutical products, including
balsalazide disodium and rifaximin, and, therefore, is dependent on contract
manufacturers for the production of such products for development and commercial
purposes. In the event that the Company is unsuccessful in obtaining or
retaining third-party manufacturing or if the Company's manufacturers experience
production difficulties, delays or disruptions or fail to comply with regulatory
requirements, the Company may not be able to obtain adequate supplies of
products in a timely fashion or at acceptable quality, quantity, timing or
prices, or to commercialize its potential products as planned. To date, the
Company has experienced difficulties in supplying finished product to Astra due
to disruptions in supply from its contract manufacturers. No assurances can be
given that the Company, or its contract manufacturers, will be able to
manufacture balsalazide disodium (or other future developed products) in
commercial quantities that would enable the Company to meet its future supply
obligations. Under the terms of the Company's distribution agreements with Astra
and Menarini, the obligations of such companies to purchase product will
terminate under certain circumstances in which the Company is unable or
unwilling to adequately supply them with product. In such circumstances, Astra
or Menarini, as the case may be, is granted a temporary license to manufacture
balsalazide disodium. Under certain situations, such manufacturing licenses may
become permanent, in which case the Company's revenues from the arrangements
could be, depending on the circumstances, severely reduced or eliminated.
Moreover, the contract manufacturers that the Company may use must adhere to
current Good Manufacturing Practices, which are regulations strictly enforced by
the FDA through its facilities inspection program. If these facilities cannot
pass a pre-approval plant inspection, the likelihood of the FDA's pre-market
approval of balsalazide disodium would be adversely affected. In its
"approvable" letter relating to the NDA for balsalazide disodium, the FDA
identified certain manufacturing deficiencies that need to be addressed by the
Company and its manufacturers if the NDA is to be approved. There can be no
assurance that the Company or its manufacturers will be able to the address the
FDA's concerns. Certain material manufacturing changes that may occur after
approval are also subject to FDA review and approval. There can be no assurance
that the FDA or other regulatory agencies will approve the processes or the
facilities by which any of the Company's products may be manufactured. In
addition, if the facilities cannot pass regular post-approval inspections,
manufacturing and distribution may be disrupted, recalls of distributed products
may be necessary, and other sanctions could be applied. Any disruption in the
supply in manufacturing and marketing of the Company's proposed products would
have a material adverse effect on the Company's business, financial condition,
and results of operations.
Dependence on In-Licensing and Acquisition of New Products for Future
Growth. Whether or not balsalazide disodium or rifaximin receives regulatory
approvals and is successfully marketed, the Company's ability to grow in the
future will depend on its success in in-licensing or acquiring additional
pharmaceutical products. The Company seeks to in-license or acquire
pharmaceutical products that have been developed beyond the initial discovery
phase and for which late-stage human clinical data is already available. There
can be no assurance that such pharmaceutical products will be available on
attractive terms for in-licensing or acquisition by the Company.
Uncertainty of Market Acceptance. The Company's future success will
depend in part on its ability to develop and commercialize new products,
including balsalazide disodium and rifaximin, or new formulations of, or
indications for current products. Assuming the Company can successfully develop
such products and obtain regulatory approvals, their future success will depend
upon their acceptance by the medical community and third-party payors as useful
and cost-effective. Market acceptance will depend upon several factors,
including the establishment of the safety, effectiveness, patient tolerance, and
cost of the Company's products relative to those of competitors. The Company and
its collaborative partners may be required to engage in extensive advertising,
educational programs or other means to market its products. Failure of any of
the Company's products to achieve market acceptance would have a material
adverse effect on the Company's business, financial condition, and results of
operations.
Lack of Sales and Marketing Experience. The Company has no experience
marketing and selling its products either directly or through distributors. The
Company's sales and marketing strategy for balsalazide disodium relies on its
third-party distributors, Astra and Menarini, to whom the Company has granted
exclusive marketing rights. There can be no assurance that either Astra or
Menarini will market balsalazide disodium successfully in any country in which
they have exclusive rights. The Company intends to establish its own direct
sales force for the purpose of achieving direct sales of rifaximin and other
future products. There can be no assurance that the Company's marketing and
direct sales efforts will be successful.
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Dependence on Exclusive Licenses. The Company's rights to balsalazide
and rifaximin are derived from its license agreements with Biorex and Alfa
Wassermann, respectively. The Company's rights under these licenses are subject
to early termination by Biorex or Alfa Wassermann, as the case may be, under
certain circumstances, including material breach by the Company, the bankruptcy
or insolvency of the Company, or the Company's failure to satisfy its
manufacturing obligations under its agreements with distribution partners. In
the event that Biorex or Alfa Wassermann terminate their respective license
agreements, the Company would have no further rights to utilize their respective
patents or trade secrets to manufacture and market products based on balsalazide
or rifaximin, as the case may be. The Company's licenses for balsalazide and
rifaximin provide that the Company's royalty obligations may extend beyond the
expiration date of the underlying patents, which could have a material adverse
effect on the Company's business, financial condition, and results of operations
in the event a generic version of balsalazide or rifaximin, as the case may be,
were introduced. In addition, the Company's license agreement with Alfa
Wassermann also provides that the Company may not promote, distribute or sell
any antibiotic products that compete with rifaximin in its licensed territory
(the United States and Canada) for a period of five years after the first
commercial sale of rifaximin under the agreement, thereby limiting the Company's
ability to in-license, develop, or market such products.
Patents and Proprietary Rights; Expiration of Patents. Because of the
substantial length of time and expense associated with bringing new products
through development and regulatory approval to the marketplace, the
pharmaceutical industry places considerable importance on obtaining patent and
trade secret protection for new technologies, products and processes. Because
the Company's strategy is to in-license or acquire pharmaceutical products which
typically have been discovered and initially researched by others, such products
may have limited or no remaining patent protection due to the time elapsed since
their discovery. The patents for the balsalazide disodium composition of matter
and method of treating ulcerative colitis with balsalazide expire in July 2001
in the United States, February 2002 in the United Kingdom, May 2002 in France,
July 2001 in Italy, and April 2002 in Germany. The patents for the method of
treating colon cancer using balsalazide expire in January 2014 in the United
States and, assuming patents issue from pending applications, in January 2015 in
various countries in Europe, Asia, and North America. The Company has received a
Supplemental Protection Certificate from the United Kingdom Patent Office
extending the United Kingdom patent from February 2002 until July 2006. The
patents for the rifaximin composition of matter (also covering a process of
making rifaximin and using rifaximin to treat gastrointestinal infectious
diseases) expire in May 2001 in the United States and Canada. The patents for
another process of making rifaximin expire in April 2005 in both the United
States and Canada. Patents for the use of rifaximin for H. pylori infections
expire in June 2013 in the United States and February 2014 in Canada.
Notwithstanding the receipt of the Supplemental Protection Certificate in the
United Kingdom, although the Company believes it may be granted additional
extensions of up to five years in certain circumstances, based on patent term
restoration procedures established in Europe and under the Waxman-Hatch Act in
the United States for products that have received regulatory approval, there is
no assurance that such extensions will be granted. The Company has filed
applications for use patents for additional indications using balsalazide and
related chemical substances. There can be no assurance that any patents will be
issued. There can be no assurance that competitors will not develop products
based on the same active ingredients for marketing as soon as the applicable
patents expire or at any time thereafter or that competitors will not design
around existing patents. Sales of such generic versions could have an adverse
effect on the Company's business, financial condition, and results of
operations. The Company's success will depend in part on its ability to obtain
United States and foreign patent protection for its products and processes,
preserve its trade secrets, and operate without infringing on the proprietary
rights of third parties. There can be no assurance that patents will issue with
respect to, or that the claims allowed will provide sufficient protection to,
the Company's present or future technology.
There can be no assurance that any other patents will be issued on any
of the Company's patent applications or on patent applications licensed from
third parties. Moreover, there can be no assurance that claims allowed in the
patents or patent applications are or will be sufficiently broad to protect the
Company's technology or that the patents will provide protection against
competitive products or otherwise be commercially valuable.
Furthermore, as with any pharmaceutical company, the Company's patent
and other proprietary rights are subject to uncertainty. The Company's patent or
other proprietary rights related to its products might conflict with current or
future rights of others. For instance, there is no assurance that the use of the
Company's technology will not infringe the patent rights of others. For the same
reasons, the products of others could infringe the patent or other proprietary
rights of the Company. Litigation or patent interference proceedings, either of
which could result in substantial cost to the Company, may be necessary to
enforce any patents issued to and other proprietary rights of the
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Company or to determine the scope and validity of other parties' proprietary
rights. The defense and prosecution of patent and intellectual property claims
are both costly and time-consuming, even if the outcome is favorable to the
Company. Any adverse outcome could subject the Company to significant
liabilities to third parties, require disputed rights to be licensed from third
parties, or require the Company to cease selling its products.
In addition to patent protection, the Company also relies on trade
secrets, proprietary know-how and technological advances which it seeks to
protect, in part, through confidentiality agreements with its collaborative
partners, employees and consultants. There can be no assurance that these
agreements will not be breached, that the Company will have adequate remedies
for any breach, or that the Company's trade secrets and proprietary know-how
will not otherwise become known or be independently developed by others.
There can be no assurance that the Company will be able to obtain a
license to any third-party technology that it may require to conduct its
business or that, if obtainable, such technology can be licensed at a reasonable
cost. Failure by the Company to obtain a license to any technology that it may
require for commercialization of its technologies or products will have a
material adverse effect on the Company. In addition, there can be no assurance
that others will not independently develop substantially equivalent proprietary
information or obtain access to the Company's know-how, or that others will not
be issued patents which prevent the manufacture or sale of Company products or
require licensing and the payment of significant fees or royalties by the
Company in order for it to be able to carry on its business. Litigation, which
could result in substantial cost to the Company, may be necessary to enforce or
defend the Company's patents or proprietary rights.
Intense Competition. Competition in the pharmaceutical industry is
intense and characterized by extensive research efforts and rapid technological
progress. The Company believes that there are numerous pharmaceutical and
biotechnology companies, both public and private and including large well-known
pharmaceutical companies, as well as academic research groups throughout the
world engaged in research and development efforts with respect to pharmaceutical
products targeted at gastrointestinal diseases and conditions addressed by the
Company's current and potential products. In particular, the Company is aware of
products in research or development by competitors that address the diseases
being targeted by the Company's products. There can be no assurance that
developments by others will not render the Company's current and potential
products obsolete or non-competitive. Competitors may be able to complete the
development and regulatory approval process sooner and, therefore, market their
products earlier than the Company. Many of the Company's competitors have
substantially greater financial, marketing and personnel resources and
development capabilities than the Company. For example, many large, well
capitalized companies already offer products in the United States and Europe
that target the proposed indications for balsalazide disodium, including
mesalamine (SmithKline Beecham plc, Dr. Falk Pharma GmbH, Pharmacia & Upjohn,
Inc., Solvay S.A., The Procter & Gamble Company, and Hoechst Marion Roussel,
Inc.), sulfasalazine (Pharmacia & Upjohn, Inc.), and olsalazine (Pharmacia &
Upjohn, Inc.). Technological developments by competitors, earlier regulatory
approval for marketing competitive products, or superior marketing capabilities
possessed by competitors could adversely affect the commercial potential of the
Company's products, including balsalazide disodium, and could have a material
adverse effect on the Company's business, financial condition, and results of
operations. In addition, manufacturers of generic drugs may seek to compete
directly with the Company's products in the absence of effective patent
protection or non-patent exclusivity protection.
Currency Fluctuations. A significant portion of the company's business
is conducted in currencies other than the United States dollar. Foreign currency
transaction gains and losses arising from normal business operations are
credited to or charged against earnings in the period incurred. As a result,
fluctuations in the value of the currencies in which the Company conducts its
business relative to the United States dollar have caused and will continue to
cause currency transaction gains and losses. Although translation into the
Company's reporting currency has not historically had a material impact on the
Company's financial position, due to the substantial volatility of currency
exchange rates, among other factors, the Company cannot predict the effect of
exchange rate fluctuations upon future operating results. There can be no
assurance that the Company will not experience currency losses in the future.
The Company has not previously undertaken hedging transactions to cover its
currency exposure but may hedge a portion of its currency exposure in the future
as management deems appropriate.
Management of Growth. If the Company is successful in developing and
commercializing its products the Company expects to experience significant
growth in the number of its employees and the scope of its operations. This
growth could place a significant strain on the Company's management and
operations. The Company's ability to
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<PAGE> 17
manage such growth effectively will depend upon its ability to broaden its
management team and its ability to attract, hire, and retain skilled employees.
The Company's success will also depend on the ability of its officers and key
employees to continue to implement and improve its operational, management
information and financial control systems and to expand, train and manage its
employee base. The Company's inability to manage growth effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Dependence on Key Personnel; Ability to Recruit Personnel. The Company
is dependent upon a number of key management and technical personnel. The loss
of the services of one or more key employees could have a material adverse
effect on the Company. The Company's success will also depend on its ability to
attract and retain additional highly qualified management and technical
personnel. The Company faces intense competition for qualified personnel, many
of whom are often subject to competing employment offers. In the event the
Company obtains regulatory approvals for rifaximin, it intends to sell rifaximin
through a small direct sales force. New employees, particularly new sales and
marketing employees, will require substantial training and education concerning
the Company's products. There can be no assurance that the Company will be
successful in attracting and retaining qualified personnel as necessary, and the
failure to do so could have a material adverse effect on the Company's business,
operating results, and financial condition.
Price Volatility; Limited Trading Volume; Foreign Exchange Risk. The
securities markets have from time to time experienced significant price and
volume fluctuations that may be unrelated to the operating performance of
particular companies. In addition, the market prices of the common stock of many
publicly traded pharmaceutical and biotechnology companies have in the past and
can in the future be expected to be especially volatile. Announcements of
technological innovations or new products by the Company or its competitors,
developments or disputes concerning proprietary rights, publicity regarding
actual or potential medical results relating to products under development by
the Company or its competitors, regulatory developments in both the United
States and other countries, public concern as to the safety of pharmaceutical
products and economic and other external factors, as well as period-to-period
fluctuations in the Company's financial results, may have a significant impact
on the market price of the Company's Common Shares. The Company's Common Shares
have traded on The Toronto Stock Exchange since May 1996 and no public trading
market exists for the Common Shares in the United States. Trading volume in the
Common Shares on The Toronto Stock Exchange has been low and there can be no
assurances that an active trading market will develop or be sustained on The
Toronto Stock Exchange or any other exchange or dealer quotation system. In
addition, the performance of the Company's stock on The Toronto Stock Exchange
may increase the difficulty of raising capital and there can be no assurance
that the Company will be able to access the public capital markets in the event
it needs to raise capital.
The Common Shares trade on The Toronto Stock Exchange in Canadian
dollars. In addition to the general market risks associated with ownership of
equity securities and the more specific risks of ownership of the Common Shares
of the Company, U.S. holders of the Common Shares also bear exchange rate risks
resulting from fluctuations in the relative values of the Canadian dollar and
the U.S. dollar. The value of the Canadian dollar has fluctuated substantially
in the past relative to the United States dollar and other currencies and may
continue to do so in the future. As a result, for U.S. investors and other
non-Canadian investors, the value of the Common Shares in United States dollars
or other currencies may vary independently of changes in the trading price of
the Common Shares on The Toronto Stock Exchange and for reasons unrelated to the
Company or its business, results of operations, or financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Due to the nature and maturity of the Company's short term investments
the Company does not believe such investments present significant market risk.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
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In October 1997, the Company completed the sale of 3,000,000 Common
Shares at a per share price of Cdn. $7.00 (U.S. $4.98) in a firm commitment
underwritten public offering. The offering was effected in Canada pursuant to
final receipts issued by each of the provincial securities commissions and in
the United States pursuant to a Registration Statement on Form S-1 (Registration
No. 333-33781), which the United States Securities and Exchange Commission
declared effective on October 14, 1997. Levesque Beaubien Geoffrion Inc.,
Yorkton Securities Inc., Marleau, Lemire Securities Inc., and Midland Walwyn
Capital Inc underwrote the offering. In the United States, the offering was made
by the United States broker-dealer affiliates of the underwriters, NBC Levesque
International Ltd., Yorkton Capital Inc., Marleau Lemire (USA), Inc., and
Midland Walwyn Capital Corporation, respectively. On October 16, 1997, the date
of the effectiveness of the Registration Statement covering the public offering,
the Bank of Canada noon rate of exchange for United States dollars into Canadian
dollars was Cdn. $1.3866 per U.S. $1.00.
Of the Cdn. $21,000,000 in aggregate proceeds raised in connection with
the October 1997 offering, (i) approximately Cdn. $1,365,000 was paid to the
underwriters in connection with underwriting discounts, and (ii) approximately
Cdn. $1,403,000 was paid by the Company in connection with offering expenses,
including legal, printing, and filing fees. There were no direct or indirect
payments to directors or officers of the Company or any other person or entity.
None of the offering proceeds have been used for the construction of plant,
building or facilities or the purchase or installation of machinery or equipment
or for purchases of real estate or the acquisition of other businesses. The
Company is currently investing the net offering proceeds for future use as
additional working capital. Such remaining net proceeds have been invested in
short-term, interest-bearing, investment grade securities. A portion of the net
proceeds may be used for the acquisition of technologies, businesses or products
that are complementary to those of the Company.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1999 Annual Meeting of Shareholders was held on May 25,
1999. The following is a brief description of each matter voted upon at the
meeting and a statement of the number of votes cast for, against or withheld and
the number of abstentions with respect to each matter.
(a) The shareholders elected the following directors to serve for the ensuing
year and until their successors are elected:
<TABLE>
<CAPTION>
NAME FOR WITHHELD
---- --- --------
<S> <C> <C>
Randy W. Hamilton 5,983,599 373,319
Lawrance A. Brown, Jr. 6,278,545 78,373
John F. Chappell 5,158,704 1,198,214
Nicholas M. Ediger 5,167,799 1,189,119
Lorin K. Johnson 6,278,545 78,373
David E. Lauck, Sr. 5,983,599 373,319
</TABLE>
(b) The shareholders ratified the appointment of Ernst & Young LLP as
independent accountants of the Company for the fiscal year ending
December 31, 1999.
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C>
6,347,841 9,067 0
</TABLE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.18 Employment Agreement effective May 6, 1999 between Salix
Pharmaceuticals, Ltd and Randy W. Hamilton
16
<PAGE> 19
10.19 Employment Agreement effective May 6, 1999 between Salix
Pharmaceuticals, Ltd and Dr. Lorin K. Johnson
10.20 Employment Agreement effective May 6, 1999 between Salix
Pharmaceuticals, Ltd and Robert P. Ruscher
10.21 Employment Agreement effective May 6, 1999 between Salix
Pharmaceuticals, Ltd and John Brough
27.1 Financial Data Schedule
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the three month period
ended June 30, 1999.
17
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SALIX PHARMACEUTICALS, LTD.
Date: August 13, 1999 By: /s/ Randy Hamilton
--------------------------------
Randy Hamilton, President and
Chief Executive Officer
Date: August 13, 1999 By: /s/ Robert Ruscher
--------------------------------
Robert Ruscher, Executive Vice
President and Chief Financial
Officer
18
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.18 Employment Agreement effective May 6, 1999 between Salix
Pharmaceuticals, Ltd and Randy W. Hamilton
10.19 Employment Agreement effective May 6, 1999 between Salix
Pharmaceuticals, Ltd and Dr. Lorin K. Johnson
10.20 Employment Agreement effective May 6, 1999 between Salix
Pharmaceuticals, Ltd and Robert P. Ruscher
10.21 Employment Agreement effective May 6, 1999 between Salix
Pharmaceuticals, Ltd and John Brough
27.1 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("AGREEMENT") shall be effective as of the 6th day of
May, 1999 between Salix Pharmaceuticals, Ltd., a British Virgin Islands
International Business Company having an office at 3600 W. Bayshore Road, Suite
205, Palo Alto, CA 94303 (together with its subsidiaries, affiliates and
successors hereafter referred to as "EMPLOYER"), and Randy W. Hamilton who is an
individual having a residence at 245 Del Monte, Los Altos, CA 94200
("EMPLOYEE").
RECITALS
WHEREAS, Employee currently is employed by Employer as President, Chief
Executive Officer and Chairman of the Board, and
WHEREAS, the Board of Directors of Employer believes it is in the best
interests of Employer and its shareholders to ensure the continued employment of
Employee in the position set forth above and to dissuade Employee from pursuing
other employment opportunities outside of Employer; and
WHEREAS, the Board of Directors of Employer believes it is imperative to
provide the Employee with certain benefits upon termination of Employee's
employment under certain circumstances, which benefits are intended to provide
the Employee with incentive to remain with the Employer.
NOW THEREFORE, in consideration of the recitals above and the mutual
promises, covenants, and undertakings set forth below, Employer and Employee
agree as follows:
OBLIGATIONS
ARTICLE I
EMPLOYMENT
1.1 Employer hereby agrees to continue to employ Employee as an
executive in the position(s) set forth above with such duties as are reasonably
assigned by the Board of Directors (or its designee) from time to time that are
consistent with such position(s). Such employment shall continue until
terminated in accordance with the terms of this Agreement.
1.2 Employee accepts employment with Employer as set forth herein.
Employee agrees to perform fully, faithfully, competently, and effectively such
duties as shall be reasonably assigned by the Board of Directors (or its
designee) and to devote Employee's best efforts to the business of Employer.
Employee shall be specifically obligated to work to maximize the success of
Employer's business throughout the world.
<PAGE> 2
ARTICLE II
TERM OF EMPLOYMENT
2.1 The term of Employee's employment at Employer shall continue unless
and until Employee's employment terminates pursuant to Article VI of this
Agreement.
ARTICLE III
COMPENSATION
3.1 During the term of this Agreement, Employer shall pay to Employee
for services which Employee may render to Employer an annual salary to be
determined by the Employer in its sole discretion (subject to the terms of this
Agreement, with the initial Base Salary set forth in Appendix A) and subject to
periodic adjustment. For purposes of this Agreement, the term "BASE SALARY"
shall mean the annual salary referred to above, but shall exclude all
reimbursements for medical, professional, or transportation expenses, excess
group-term life insurance coverage, or other "fringe benefits." Employee's Base
Salary shall be paid in equal installments on Employer's regular payroll dates,
but shall be computed pro-rata in any partial year or other partial period of
employment. Employer shall also pay Employee an annual bonus (the "BONUS") to be
determined by the Board of Directors or its designee in its sole discretion and
subject to periodic adjustment. Employer shall withhold from all of Employee's
compensation, including without limitation the Base Salary and Bonus, such sums
as are required by federal, state and local laws, including, but not limited to,
federal, state, and local income taxes, FICA and Medicare, and such other sums
on which Employer and Employee may agree from time-to-time in writing.
3.2 In addition to any compensation paid to Employee pursuant to Section
3.1 of this Agreement, Employer shall provide Employee during the period of
Employee's employment with Employer with benefits consistent with those
generally provided to similarly situated executives at Employer (the
"BENEFITS").
3.3 Employee's Base Salary, Bonus, and Benefits are set forth in
APPENDIX "A" to this Agreement as may be amended from time-to-time at the sole
discretion of the Board of Directors or its designee in accordance with the
terms of this Agreement.
ARTICLE IV
SECRET, CONFIDENTIAL AND/OR PROPRIETARY INFORMATION
4.1 Employee will hold for the benefit of Employer, its affiliates,
subsidiaries, related entities, and designees, and shall not disclose to any
person or entity other than Employer or persons or entities designated by
Employer, all secret, confidential or proprietary information, knowledge,
computer data and/or information, patents, trade
2
<PAGE> 3
secrets, customer identities, marketing and other business methods, techniques,
processes, practices, procedures, plans and strategies regarding Employer, its
subsidiaries and affiliated corporations or business enterprises, and their
customers obtained by Employee during Employee's employment with Employer, and
any other secret, confidential or proprietary information pertaining to
Employer, its subsidiaries and affiliated corporations or business enterprises,
and their customers, during the term of this Agreement and at all times after
Employee's termination of employment with Employer, unless the Board in writing
consents to the contrary.
4.2 Immediately upon notice of termination of employment, Employee shall
give to Employer the originals and all copies of all documents, correspondence,
memoranda, records, notes, manuals, materials, customer and prospective customer
lists and information, including without limitation computer data, and other
things relating, either directly or indirectly, to Employer's business,
including, but not limited to, secret, confidential or proprietary information,
in Employee's possession, custody or control, unless otherwise agreed to by the
Board in writing.
ARTICLE V
AGREEMENT NOT TO SOLICIT EMPLOYEES
5.1 In recognition and consideration of Employee's employment,
compensation and benefits, the training in and information regarding Employer's
business which Employer will give Employee, Employee's introduction to
Employer's customers, and the carefully guarded methods of doing business which
Employer utilizes and deems crucial to the success of its business, Employee
shall not during the term of this Agreement, and for a period of one (1) year
following the termination of Employee's employment by Employer, regardless of
the reason for termination, either directly or indirectly, solicit the
employment of any person who was employed by the Employer or any of its
affiliates on a full time basis at the time of Employee's termination of
employment, unless such person (a) was involuntarily discharged by the Employer
or such affiliate or (b) voluntarily terminated his or her relationship with
Employer or such affiliate prior to contact by Employee.
5.2 Employee acknowledges that any breach of any obligation contained in
this Article and the preceding Article is not adequately compensable by monetary
damages, and Employee agrees that any such breach shall cause Employer
irreparable harm for which Employer shall be entitled to a temporary restraining
order and preliminary injunction without prior notice to Employee. Any and all
attorneys' fees, costs and expenses incurred by Employer in enforcing the terms
of this Article and the preceding Article shall be reimbursed to Employer by
Employee.
5.3 In the event that any body of competent jurisdiction shall determine
that any of the restrictive covenants in this Article V is inequitably broad, it
is the intention and agreement of the parties that the decision-maker shall
equitably adjust the obligations of Employee under this Agreement rather than
entirely eliminate any such obligations. In
3
<PAGE> 4
the event that the decision-maker shall equitably adjust or eliminate any of the
restrictive covenants in this Agreement, all other aspects of this Agreement
shall remain in full force and effect.
5.4 The enumeration of remedies in this Agreement to which Employer is
entitled does not limit any rights Employer otherwise possesses, including, but
not limited to, the right to monetary damages.
ARTICLE VI
TERMINATION
6.1 This Agreement and Employee's employment with Employer may be
terminated by Employer only upon the occurrence of any of the following events
(each of which shall constitute "REASONABLE CAUSE" for termination):
(i) Employee commits any act of gross negligence, fraud,
dishonesty, or willful violation of any law or material violation of any
significant written policy of Employer, that causes material harm to Employer;
(ii) Conviction of the Employee of (a) a felony or (b) a serious
crime involving moral turpitude;
(iii) Willful or gross failure by Employee to substantially
perform the duties reasonably assigned to Employee, or any intentional refusal
without compelling reason by Employee to discharge Employee's job
responsibilities and/or respond to Employer's legitimate job-related requests,
insofar as such duties, responsibilities and/or requests do not contravene law
and are consistent with Employee's position(s);
(iv) Failure to cooperate in an investigation conducted and/or
undertaken by Employer or a governmental agency which has reasonable and
legitimate objectives; and
(v) Any act of intentional conflict of interest by Employee
related to Employer which results in material economic and/or other material
damage to Employer;
provided, however, that Employee shall not be deemed to have been terminated for
Reasonable Cause unless and until there shall have been delivered to Employee a
Notice of Termination (as defined below) and a resolution adopted by the Board
of Directors of Employer at a meeting held for such purpose (after reasonable
notice to Employee and an opportunity for Employee, together with Employee's
counsel, to be heard before the Board), finding that, in the good faith opinion
of the Board, Employee has engaged in the conduct set forth above and specifying
the particulars thereof in reasonable detail. "Notice of Termination" shall mean
a written notice of termination of Employee's employment with Employer, which
notice indicates the specific termination provision in
4
<PAGE> 5
this Section 6.1 relied upon and which sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for such termination.
6.2 This Agreement and Employee's employment with Employer may be
terminated by Employee at any time for any or no reason upon prior written
notice to Employer. This Agreement shall also terminate in the event of the
death or incapacitating disability of Employee. This provision, by itself, shall
not be interpreted to effect the eligibility, if any, of Employee under any
disability policy maintained by Employer under which Employee is entitled to
disability benefits. Subject to the provisions of Subsection 6.4 and Appendix B
(with respect to termination by Employee for Good Reason), termination of this
Agreement under this Subsection 6.2 shall excuse Employer from any and all
future payments of cash under this Agreement, provided, however, Employee (or a
personal representative) shall be entitled to all compensation and benefits
earned hereunder to the date of termination of employment.
6.3 Subject to the provisions of Section 6.4 and Appendix B, this
Agreement and Employee's employment with Employer may be terminated by Employer
at any time upon one (1) month written notice to Employee without Reasonable
Cause and at Employer's sole discretion.
6.4 In the event that (1) this Agreement and/or Employee's employment
with Employer is terminated by Employer without Reasonable Cause, or (2)
Employee terminates this Agreement and/or Employee's employment with Employer
for Good Reason (as defined below), in any of those instances and only then
Employer shall pay Employee severance pay as set forth in the Schedule of
Severance Benefits attached hereto as APPENDIX "B." For purposes of this
Agreement, "GOOD REASON" shall mean the occurrence of any of the following
events or conditions: (A) a material adverse change in, or the assignment to
Employee of any duties or responsibilities which are inconsistent with,
Employee's status, title, position or responsibilities (including reporting
responsibilities) with Employer, (B) a reduction in Employee's salary and/or
benefits except to the extent such reduction is comparable to percentage
reductions in salary and/or benefits of all other employees of Employer, or any
failure to pay Employee any compensation or benefits to which Employee is
entitled within five (5) days of the date due, (C) Employer or its successor
requires Employee to relocate beyond a twenty-five (25) mile radius from
Employee's current residence, (D) any purported termination of this Agreement or
Employee's employment by Employer without grounds therefor or any material
breach by Employer of any provision of this Agreement, and/or (E) the failure of
Employer to obtain an agreement in writing delivered to Employee, satisfactory
to the Employee, from any successor or assignee of the Employer to assume and
agree to perform this Agreement.
5
<PAGE> 6
ARTICLE VII
GENERAL PROVISIONS
7.1 Employee represents and warrants that Employee is not currently
subject to any restrictive covenant, any other restriction on employment, or any
confidentiality agreement with any prior employer or other party except as
already disclosed to Employer. Employee shall indemnify and hold Employer
harmless with respect to any and all claims, causes of action, damages and
liability of any kind whatsoever, including reasonable attorneys' fees and
costs, successfully brought by a third-party arising out of any acts taken by
Employee which violate any such restrictive covenant, other restriction on
employment, or confidentiality agreement. Employee shall be entitled to
indemnification, in accordance with the applicable provisions of Employer's
charter documents and indemnification agreement, against all expense, liability
and loss (including reasonable attorneys' fees and settlement payments) that
Employee may incur by reason of any action, suit or proceeding arising from or
relating to the performance of Employee's duties as an officer or director of
Employer or any affiliate.
7.2 All material furnished to Employee by Employer during the course of
employment shall remain the property of Employer and shall be returned by
Employee to Employer at any time upon demand and upon termination of employment.
7.3 Neither this Agreement nor any right or interest hereunder shall be
assignable by Employee without Employer's prior written consent.
7.4 This Agreement shall be deemed automatically assigned by Employer
(and assumed by the successor) in the event of any sale, transfer, merger,
and/or similar disposition of its business (whether direct or indirect and
whether by purchase, lease, merger, consolidation, liquidation or otherwise),
and shall inure to the benefit of and bind Employer's successors and assigns.
For purposes of this Agreement, the term "Employer" shall include the party
acquiring the business/assets of Employer upon any sale, transfer, merger,
and/or similar disposition of its business.
7.5 The validity, interpretation, performance and enforcement of this
Agreement shall be governed by and construed in accordance with the laws of the
State of California. All actions brought under Paragraph 7.10 or otherwise shall
be brought and occur in Palo Alto, California. The parties agree that service of
notice of arbitration or any other process may be made as set forth in Paragraph
7.8 below and that service so made shall be as effective as if personally made.
7.6 The waiver by a party of any breach by the other party of any
provision of this Agreement shall not operate or be construed as a waiver of any
other breach by the other party.
7.7 In the event that any provision of this Agreement is determined by
any body of competent jurisdiction to be unenforceable, illegal or contrary to
public policy,
6
<PAGE> 7
that body shall modify such provision to conform to public policy, or to
interpret it in such a way as to render it enforceable and legal, in accordance
with the intent of the parties as expressed herein. In the event that a body of
competent jurisdiction decides that any provision of this Agreement is
unenforceable, illegal or contrary to public policy and cannot be reformed, only
such provision shall be affected and all other provisions of this Agreement
shall remain in full force and effect.
7.8 Any notice given to Employee pursuant to this Agreement shall be
sufficiently given if sent to Employee by registered or certified mail addressed
to Employee's address set forth at the beginning of this Agreement or such other
address as Employee shall have designated in writing to Employer. Any notice
given to Employer pursuant to this Agreement shall be sufficiently given if sent
to Employer by registered or certified mail to Employer's address set forth at
the beginning of this Agreement or such other address as Employer shall have
designated in writing to Employee.
7.9 This Agreement and Appendices "A" and "B" set forth the entire
understanding of the parties and the agreement they desire to reach relating to
the subject matter hereof. This Agreement supersedes all prior agreements of the
parties hereto on the subject matter hereof (excluding confidentiality and
invention agreements between or effecting the parties) including, but not
limited to, any prior negotiations, correspondence, agreements, proposals, or
understandings. Negotiations, correspondence, agreements, proposals, or
understandings not expressly incorporated into this Agreement shall be deemed to
be of no force or effect. There are no representations, warranties, or
agreements, whether express or implied, or oral or written, with respect to the
subject matter hereof, except as set forth herein. No modification, waiver or
agreement of termination of this Agreement shall be binding upon either party
unless made in writing and signed for or on behalf of each party. Any such
signature of the Employer must be that of the representative duly authorized by
the Board. In the event of any inconsistency between this Agreement and any
benefit plan of the Employer, the language of this Agreement shall control both
documents. This Agreement may be signed in counterparts.
7.10 Any controversy or claim arising out of or relating to this
Agreement, or breach thereof, shall be finally settled under the Arbitration
Rules and Procedures of JAMS/Endispute ("JAMS"), as modified below, by a neutral
arbitrator appointed by the JAMS in accordance with said rules.
(a) the arbitration shall be conducted before one (1) arbitrator
selected by mutual agreement of the Employer and Employee; if no agreement is
made within ten (10) business days from the date a demand for arbitration was
filed with the JAMS, then the arbitrator shall be selected according to the JAMS
rules;
(b) the arbitration hearing shall take place no later than
thirty (30) days following the JAMS' notice of the selection of an arbitrator;
(c) the arbitration hearing shall last no more than one day;
7
<PAGE> 8
(d) no discovery shall be permitted, including depositions,
interrogatories, requests for admissions, or production of documents, except in
the case of extreme hardship as determined by the arbitrator;
(e) the arbitrator shall give his/her decision at the conclusion
of the arbitration proceeding if possible, but no later than two business days
following the conclusion of the proceeding;
(f) any arbitration proceeding under this Agreement shall (1) be
conducted in such a manner that the proprietary or confidential information of
the Employer remains protected, and (2) occur in Palo Alto, California, and
(g) the decision of the arbitrator is final, binding,
non-reviewable, and non-appealable, and may be entered as a final judgment in
any court having jurisdiction.
7.11 Employee shall not be required to mitigate the amount of any
payment contemplated by this Agreement (whether by seeking new employment or in
any other manner), nor shall any such payment be reduced by any earnings that
Employee may receive from any other sources.
7.12 In the event that Employee is required to institute action against
Employer to enforce this Agreement or any term of provision thereof, and such
action results in a finding in whole or in part in favor of Employee, then
Employer hereby agrees Employer shall pay immediately all legal fees and other
costs reasonably incurred by Employee in implementing and maintaining such
action.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the day and year first above written.
"EMPLOYER"
By: /s/ LAWRANCE BROWN
------------------------------------
Lawrance Brown, Chairman of
The Compensation Committee of
The Board of Directors
"EMPLOYEE"
/s/ RANDY W. HAMILTON
- ------------------------------------
Randy W. Hamilton
8
<PAGE> 9
APPENDIX "A"
Employee's Base Salary and Benefits shall be as set forth in Paragraphs "A"
through "G" below:
A. Base Salary. Employer shall pay Employee an initial annual salary in
the gross amount of Two Hundred Fifteen Thousand Dollars ($215,000.00) per annum
as Employee's base salary ("BASE SALARY"). The Base Salary may be changed from
time-to-time in accordance with the normal business practices of the Employer,
however, in no instance shall the Base Salary be decreased below the initial
annual salary set forth above during the term of this Agreement except for
decreases to Base Salary applied on a equal percentage basis to all employees of
the Employer.
B. Bonus. In addition to the Base Salary and in the sole discretion of
the Board of Directors (or its designee), the Employee may be given an annual
bonus of up to thirty percent (30%) of the Base Salary (the "BONUS"). If
Employee has not been discharged for Reasonable Cause as that term is defined in
Article VI of this Agreement, then Employer shall pay to Employee on or before
ninety (90) days following December 31 of the relevant year the Bonus, if any,
as determined by the Employer.
C. Paid Vacation. During each twelve (12) month calendar period of
Employee's employment, Employee shall be entitled to twenty (20) days of paid
vacation (in addition to customary holidays, sick days and personal days in
accordance with the Employer's normal personnel policies). Unused vacation days
during any calendar year can be carried forward to the next calendar year.
D. Other Employee Benefits. Employee shall be entitled to participate
and receive any and all other benefits that are generally available to other
executives of Employer pursuant to any benefit programs existing during the term
of this Agreement, including, among other things, participation in group life
insurance, hospital, vision, dental, medical or other group health and accident
benefit plans. In addition, Employee shall be entitled to participate in all
401(k), bonus, profit sharing, pension or retirement plans as may be in
existence during the term of this Agreement in accordance with their respective
terms and provisions; provided, however, that to the extent participation or the
amount of participation is in the discretion of the Board or any committee
thereof, then Employee's participation shall likewise be solely in such
discretion.
E. Benefits Solely from General Assets. The benefits provided hereunder
shall be paid solely from the general assets of Employer. Nothing herein shall
be construed to require Employer to maintain any fund or segregate any amount
for the benefit of Employee, and neither Employee nor any other person shall
have any claim against, right to, or security or other interest in, any fund,
account or asset of Employer from which any payment under this Agreement may be
made.
F. Withholding for Taxes. Employer makes no commitment that any amounts
paid to or for the benefit of Employee under Paragraphs A through E above will
9
<PAGE> 10
be excluded from Employee's gross income for federal, state, and local income
tax purposes, or that any other federal, state, or local tax treatment will
apply to such payments or be available to Employee. Employer may make such
provisions as it deems appropriate for the withholding of any taxes which
Employer determines it is required to withhold in connection with this Agreement
and the payments contemplated hereby.
G. Effect on Computation of Benefits. Any reimbursement of expenses
payable under this Agreement shall not be deemed salary or other compensation to
Employee for purposes of computing benefits to which Employee may be entitled
under any 401(k) plan, bonus, deferred compensation plan, or other arrangement
of Employer for the benefit of its employees.
10
<PAGE> 11
APPENDIX "B"
SCHEDULE OF SEVERANCE BENEFITS
A. Entitlement to Severance Benefit. In the event that the provisions of
Subsection 6.4 apply, then in addition to any other benefits payable under this
Agreement the Employer shall provide to the Employee the severance benefits set
forth in Sections B, C and D below. No such severance benefits shall be payable
under the Agreement for the Employee's termination of employment for any other
reason, including, but not limited to, voluntary termination of employment by
Employee (for other than Good Reason) or termination of employment by Employer
for Reasonable Cause, death or incapacitating disability.
B. Term of Benefits. The Employer shall provide to Employee the
severance benefits described in Paragraph C below commencing on termination of
the Employee's employment with Employer or termination of this Agreement that
qualifies under the terms of Paragraph 6.4 of this Agreement for severance
benefits, with such severance benefits continuing for a period of twelve (12)
months (the "BENEFIT PERIOD").
C. Amount of Benefits. Severance benefits shall consist of the
following:
1. Base. The Employer shall pay to Employee a monthly cash
payment in an amount that is equivalent to one-twelfth of the Base Salary of
Employee that is then in effect (or if a new, higher Base Salary has been set by
the Employer in a signed writing given to employee for an upcoming year, or if
the Base Salary for any period during the prior 24 month period was greater,
than by that higher Base Salary). The monthly cash payment above shall also
include an amount that is equivalent to one-twelfth of any cash Bonus that was
paid to Employee for the last full calendar year prior to the termination of
employment. Payment shall commence in the first regular pay period following the
date of termination. The monthly cash payments may be made monthly or otherwise
(e.g., on a two week or semi-monthly cycle) under the then existing regular
payroll payments dates of Employer.
2. Non-Compensation Benefits. The Employer shall continue to
cover the Employee and Employee's dependents for the Benefit Period under all
benefit plans covering other employees in positions similar to that of Employee.
Employee's and Employee's dependents continued participation in such plans shall
be at no greater cost to Employee than the cost Employee bore for such
participation immediately prior to the date of termination.
(a) Legal Continuation Restrictions. If Employee's
participation in any such plan or program is barred or limited, Employer shall
arrange upon comparable terms, and at no greater cost to Employee than the cost
Employee bore for such plans and programs prior to the date of termination, to
provide Employee and
11
<PAGE> 12
Employee's dependents with benefits substantially similar to those which
Employee was entitled to receive under any such plan or program
(b) COBRA Continuation. Any benefits provided under this
Paragraph 2 following the Employee's termination of employment shall count
against the continuation period the Employee is otherwise entitled to under the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), or
any similar federal or state statute, as a result of the termination of
employment.
D. Stock Option Vesting. In the event that the provisions of Subsection
6.4 apply, the shares subject to each stock option for the Employer's (or its
affiliate or successor) Common Stock held by Employee shall become fully and
immediately vested. Each stock option shall be exercisable to the extent so
vested in accordance with the provisions of the Option Agreement and related
stock option plan pursuant to which such stock option was granted.
E. Consulting Relationship. In the event that Employee's employment with
Employer and/or this Agreement is terminated for any reason other than for Good
Reason (by Employee), Reasonable Cause (by Employer) or Employee's death or
disability, Employer (or its successor) and Employee (to the extent Employee is
so allowed by any new employer of Employee) shall immediately enter into a
consulting arrangement (the "CONSULTING AGREEMENT") pursuant to which (a) to the
extent not already vested pursuant to Clause D above, all options granted to
Employee by Employer (or any affiliate or successor entity) shall continue to
vest and be exercisable in accordance with the terms thereof (without any
interruption or termination in Employee's continuous status as an employee or
consultant); and (b) Employee shall agree to provide up to an average of 16
hours per month of consulting services to Employer as reasonably requested by
Employer during the term of the Consulting Agreement in order to ensure the
smooth transition of Employee's duties and responsibilities. Employer shall pay
Employee for such services monthly at an hourly rate equal to (1) the Base
Salary of Employee that is then in effect (or if a new, higher Base Salary has
been set by the Employer for an upcoming year, or if the Base Salary for any
period during the prior 24 month period was greater, than by that higher Base
Salary), (2) divided by 1350) The Consulting Agreement will terminate on the
date twelve (12) months from the date of such employment termination, unless
terminated earlier by the mutual written agreement of Employer and Employee.
Employer agrees to reimburse Employee for all reasonable out-of-pocket expenses
incurred by Employee in providing services to Employer at the request of
Employer pursuant to the Consulting Agreement.
12
<PAGE> 1
EXHIBIT 10.19
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("AGREEMENT") shall be effective as of the 6th day of
May, 1999 between Salix Pharmaceuticals, Ltd., a British Virgin Islands
International Business Company having an office at 3600 W. Bayshore Road, Suite
205, Palo Alto, CA 94303 (together with its subsidiaries, affiliates and
successors hereafter referred to as "EMPLOYER"), and Lorin K. Johnson who is an
individual having a residence at 7910 Sawgrass Court, Pleasanton, CA 94588
("EMPLOYEE").
RECITALS
WHEREAS, Employee currently is employed by Employer as Vice President,
Research and Development (Salix Pharmaceuticals, Inc.) and a member of the Board
of Directors; and
WHEREAS, the Board of Directors of Employer believes it is in the best
interests of Employer and its shareholders to ensure the continued employment of
Employee in the position set forth above and to dissuade Employee from pursuing
other employment opportunities outside of Employer; and
WHEREAS, the Board of Directors of Employer believes it is imperative to
provide the Employee with certain benefits upon termination of Employee's
employment under certain circumstances, which benefits are intended to provide
the Employee with incentive to remain with the Employer.
NOW THEREFORE, in consideration of the recitals above and the mutual
promises, covenants, and undertakings set forth below, Employer and Employee
agree as follows:
OBLIGATIONS
ARTICLE I
EMPLOYMENT
1.1 Employer hereby agrees to continue to employ Employee as an
executive in the position(s) set forth above with such duties as are reasonably
assigned by the Board of Directors (or its designee) from time to time that are
consistent with such position(s). Such employment shall continue until
terminated in accordance with the terms of this Agreement.
1.2 Employee accepts employment with Employer as set forth herein.
Employee agrees to perform fully, faithfully, competently, and effectively such
duties as shall be reasonably assigned by the Board of Directors (or its
designee) and to devote
<PAGE> 2
Employee's best efforts to the business of Employer. Employee shall be
specifically obligated to work to maximize the success of Employer's business
throughout the world.
ARTICLE II
TERM OF EMPLOYMENT
2.1 The term of Employee's employment at Employer shall continue unless
and until Employee's employment terminates pursuant to Article VI of this
Agreement.
ARTICLE III
COMPENSATION
3.1 During the term of this Agreement, Employer shall pay to Employee
for services which Employee may render to Employer an annual salary to be
determined by the Employer in its sole discretion (subject to the terms of this
Agreement, with the initial Base Salary set forth in Appendix A) and subject to
periodic adjustment. For purposes of this Agreement, the term "BASE SALARY"
shall mean the annual salary referred to above, but shall exclude all
reimbursements for medical, professional, or transportation expenses, excess
group-term life insurance coverage, or other "fringe benefits." Employee's Base
Salary shall be paid in equal installments on Employer's regular payroll dates,
but shall be computed pro-rata in any partial year or other partial period of
employment. Employer shall also pay Employee an annual bonus (the "BONUS") to be
determined by the Board of Directors or its designee in its sole discretion and
subject to periodic adjustment. Employer shall withhold from all of Employee's
compensation, including without limitation the Base Salary and Bonus, such sums
as are required by federal, state and local laws, including, but not limited to,
federal, state, and local income taxes, FICA and Medicare, and such other sums
on which Employer and Employee may agree from time-to-time in writing.
3.2 In addition to any compensation paid to Employee pursuant to Section
3.1 of this Agreement, Employer shall provide Employee during the period of
Employee's employment with Employer with benefits consistent with those
generally provided to similarly situated executives at Employer (the
"BENEFITS").
3.3 Employee's Base Salary, Bonus, and Benefits are set forth in
APPENDIX "A" to this Agreement as may be amended from time-to-time at the sole
discretion of the Board of Directors or its designee in accordance with the
terms of this Agreement.
ARTICLE IV
SECRET, CONFIDENTIAL AND/OR PROPRIETARY INFORMATION
4.1 Employee will hold for the benefit of Employer, its affiliates,
subsidiaries, related entities, and designees, and shall not disclose to any
person or entity other than
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<PAGE> 3
Employer or persons or entities designated by Employer, all secret, confidential
or proprietary information, knowledge, computer data and/or information,
patents, trade secrets, customer identities, marketing and other business
methods, techniques, processes, practices, procedures, plans and strategies
regarding Employer, its subsidiaries and affiliated corporations or business
enterprises, and their customers obtained by Employee during Employee's
employment with Employer, and any other secret, confidential or proprietary
information pertaining to Employer, its subsidiaries and affiliated corporations
or business enterprises, and their customers, during the term of this Agreement
and at all times after Employee's termination of employment with Employer,
unless the Board in writing consents to the contrary.
4.2 Immediately upon notice of termination of employment, Employee shall
give to Employer the originals and all copies of all documents, correspondence,
memoranda, records, notes, manuals, materials, customer and prospective customer
lists and information, including without limitation computer data, and other
things relating, either directly or indirectly, to Employer's business,
including, but not limited to, secret, confidential or proprietary information,
in Employee's possession, custody or control, unless otherwise agreed to by the
Board in writing.
ARTICLE V
AGREEMENT NOT TO SOLICIT EMPLOYEES
5.1 In recognition and consideration of Employee's employment,
compensation and benefits, the training in and information regarding Employer's
business which Employer will give Employee, Employee's introduction to
Employer's customers, and the carefully guarded methods of doing business which
Employer utilizes and deems crucial to the success of its business, Employee
shall not during the term of this Agreement, and for a period of one (1) year
following the termination of Employee's employment by Employer, regardless of
the reason for termination, either directly or indirectly, solicit the
employment of any person who was employed by the Employer or any of its
affiliates on a full time basis at the time of Employee's termination of
employment, unless such person (a) was involuntarily discharged by the Employer
or such affiliate or (b) voluntarily terminated his or her relationship with
Employer or such affiliate prior to contact by Employee.
5.2 Employee acknowledges that any breach of any obligation contained in
this Article and the preceding Article is not adequately compensable by monetary
damages, and Employee agrees that any such breach shall cause Employer
irreparable harm for which Employer shall be entitled to a temporary restraining
order and preliminary injunction without prior notice to Employee. Any and all
attorneys' fees, costs and expenses incurred by Employer in enforcing the terms
of this Article and the preceding Article shall be reimbursed to Employer by
Employee.
5.3 In the event that any body of competent jurisdiction shall determine
that any of the restrictive covenants in this Article V is inequitably broad, it
is the intention
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<PAGE> 4
and agreement of the parties that the decision-maker shall equitably adjust the
obligations of Employee under this Agreement rather than entirely eliminate any
such obligations. In the event that the decision-maker shall equitably adjust or
eliminate any of the restrictive covenants in this Agreement, all other aspects
of this Agreement shall remain in full force and effect.
5.4 The enumeration of remedies in this Agreement to which Employer is
entitled does not limit any rights Employer otherwise possesses, including, but
not limited to, the right to monetary damages.
ARTICLE VI
TERMINATION
6.1 This Agreement and Employee's employment with Employer may be
terminated by Employer only upon the occurrence of any of the following events
(each of which shall constitute "REASONABLE CAUSE" for termination):
(i) Employee commits any act of gross negligence, fraud,
dishonesty, or willful violation of any law or material violation of any
significant written policy of Employer, that causes material harm to Employer;
(ii) Conviction of the Employee of (a) a felony or (b) a serious
crime involving moral turpitude;
(iii) Willful or gross failure by Employee to substantially
perform the duties reasonably assigned to Employee, or any intentional refusal
without compelling reason by Employee to discharge Employee's job
responsibilities and/or respond to Employer's legitimate job-related requests,
insofar as such duties, responsibilities and/or requests do not contravene law
and are consistent with Employee's position(s);
(iv) Failure to cooperate in an investigation conducted and/or
undertaken by Employer or a governmental agency which has reasonable and
legitimate objectives; and
(v) Any act of intentional conflict of interest by Employee
related to Employer which results in material economic and/or other material
damage to Employer;
provided, however, that Employee shall not be deemed to have been terminated for
Reasonable Cause unless and until there shall have been delivered to Employee a
Notice of Termination (as defined below) and a resolution adopted by the Board
of Directors of Employer at a meeting held for such purpose (after reasonable
notice to Employee and an opportunity for Employee, together with Employee's
counsel, to be heard before the Board), finding that, in the good faith opinion
of the Board, Employee has engaged in the conduct set forth above and specifying
the particulars thereof in reasonable detail. "Notice of Termination" shall mean
a written notice of termination of Employee's
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<PAGE> 5
employment with Employer, which notice indicates the specific termination
provision in this Section 6.1 relied upon and which sets forth in reasonable
detail the facts and circumstances claimed to provide a basis for such
termination.
6.2 This Agreement and Employee's employment with Employer may be
terminated by Employee at any time for any or no reason upon prior written
notice to Employer. This Agreement shall also terminate in the event of the
death or incapacitating disability of Employee. This provision, by itself, shall
not be interpreted to effect the eligibility, if any, of Employee under any
disability policy maintained by Employer under which Employee is entitled to
disability benefits. Subject to the provisions of Subsection 6.4 and Appendix B
(with respect to termination by Employee for Good Reason), termination of this
Agreement under this Subsection 6.2 shall excuse Employer from any and all
future payments of cash under this Agreement, provided, however, Employee (or a
personal representative) shall be entitled to all compensation and benefits
earned hereunder to the date of termination of employment.
6.3 Subject to the provisions of Section 6.4 and Appendix B, this
Agreement and Employee's employment with Employer may be terminated by Employer
at any time upon one (1) month written notice to Employee without Reasonable
Cause and at Employer's sole discretion.
6.4 In the event that (1) this Agreement and/or Employee's employment
with Employer is terminated by Employer without Reasonable Cause, or (2)
Employee terminates this Agreement and/or Employee's employment with Employer
for Good Reason (as defined below), in any of those instances and only then
Employer shall pay Employee severance pay as set forth in the Schedule of
Severance Benefits attached hereto as APPENDIX "B." For purposes of this
Agreement, "GOOD REASON" shall mean the occurrence of any of the following
events or conditions: (A) a material adverse change in, or the assignment to
Employee of any duties or responsibilities which are inconsistent with,
Employee's status, title, position or responsibilities (including reporting
responsibilities) with Employer, (B) a reduction in Employee's salary and/or
benefits except to the extent such reduction is comparable to percentage
reductions in salary and/or benefits of all other employees of Employer, or any
failure to pay Employee any compensation or benefits to which Employee is
entitled within five (5) days of the date due, (C) Employer or its successor
requires Employee to relocate beyond a twenty-five (25) mile radius from
Employee's current residence, (D) any purported termination of this Agreement or
Employee's employment by Employer without grounds therefor or any material
breach by Employer of any provision of this Agreement, and/or (E) the failure of
Employer to obtain an agreement in writing delivered to Employee, satisfactory
to the Employee, from any successor or assignee of the Employer to assume and
agree to perform this Agreement.
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<PAGE> 6
ARTICLE VII
GENERAL PROVISIONS
7.1 Employee represents and warrants that Employee is not currently
subject to any restrictive covenant, any other restriction on employment, or any
confidentiality agreement with any prior employer or other party except as
already disclosed to Employer. Employee shall indemnify and hold Employer
harmless with respect to any and all claims, causes of action, damages and
liability of any kind whatsoever, including reasonable attorneys' fees and
costs, successfully brought by a third-party arising out of any acts taken by
Employee which violate any such restrictive covenant, other restriction on
employment, or confidentiality agreement. Employee shall be entitled to
indemnification, in accordance with the applicable provisions of Employer's
charter documents and indemnification agreement, against all expense, liability
and loss (including reasonable attorneys' fees and settlement payments) that
Employee may incur by reason of any action, suit or proceeding arising from or
relating to the performance of Employee's duties as an officer or director of
Employer or any affiliate.
7.2 All material furnished to Employee by Employer during the course of
employment shall remain the property of Employer and shall be returned by
Employee to Employer at any time upon demand and upon termination of employment.
7.3 Neither this Agreement nor any right or interest hereunder shall be
assignable by Employee without Employer's prior written consent.
7.4 This Agreement shall be deemed automatically assigned by Employer
(and assumed by the successor) in the event of any sale, transfer, merger,
and/or similar disposition of its business (whether direct or indirect and
whether by purchase, lease, merger, consolidation, liquidation or otherwise),
and shall inure to the benefit of and bind Employer's successors and assigns.
For purposes of this Agreement, the term "Employer" shall include the party
acquiring the business/assets of Employer upon any sale, transfer, merger,
and/or similar disposition of its business.
7.5 The validity, interpretation, performance and enforcement of this
Agreement shall be governed by and construed in accordance with the laws of the
State of California. All actions brought under Paragraph 7.10 or otherwise shall
be brought and occur in Palo Alto, California. The parties agree that service of
notice of arbitration or any other process may be made as set forth in Paragraph
7.8 below and that service so made shall be as effective as if personally made.
7.6 The waiver by a party of any breach by the other party of any
provision of this Agreement shall not operate or be construed as a waiver of any
other breach by the other party.
7.7 In the event that any provision of this Agreement is determined by
any body of competent jurisdiction to be unenforceable, illegal or contrary to
public policy,
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<PAGE> 7
that body shall modify such provision to conform to public policy, or to
interpret it in such a way as to render it enforceable and legal, in accordance
with the intent of the parties as expressed herein. In the event that a body of
competent jurisdiction decides that any provision of this Agreement is
unenforceable, illegal or contrary to public policy and cannot be reformed, only
such provision shall be affected and all other provisions of this Agreement
shall remain in full force and effect.
7.8 Any notice given to Employee pursuant to this Agreement shall be
sufficiently given if sent to Employee by registered or certified mail addressed
to Employee's address set forth at the beginning of this Agreement or such other
address as Employee shall have designated in writing to Employer. Any notice
given to Employer pursuant to this Agreement shall be sufficiently given if sent
to Employer by registered or certified mail to Employer's address set forth at
the beginning of this Agreement or such other address as Employer shall have
designated in writing to Employee.
7.9 This Agreement and Appendices "A" and "B" set forth the entire
understanding of the parties and the agreement they desire to reach relating to
the subject matter hereof. This Agreement supersedes all prior agreements of the
parties hereto on the subject matter hereof (excluding confidentiality and
invention agreements between or effecting the parties) including, but not
limited to, any prior negotiations, correspondence, agreements, proposals, or
understandings. Negotiations, correspondence, agreements, proposals, or
understandings not expressly incorporated into this Agreement shall be deemed to
be of no force or effect. There are no representations, warranties, or
agreements, whether express or implied, or oral or written, with respect to the
subject matter hereof, except as set forth herein. No modification, waiver or
agreement of termination of this Agreement shall be binding upon either party
unless made in writing and signed for or on behalf of each party. Any such
signature of the Employer must be that of the representative duly authorized by
the Board. In the event of any inconsistency between this Agreement and any
benefit plan of the Employer, the language of this Agreement shall control both
documents. This Agreement may be signed in counterparts.
7.10 Any controversy or claim arising out of or relating to this
Agreement, or breach thereof, shall be finally settled under the Arbitration
Rules and Procedures of JAMS/Endispute ("JAMS"), as modified below, by a neutral
arbitrator appointed by the JAMS in accordance with said rules.
(a) the arbitration shall be conducted before one (1) arbitrator
selected by mutual agreement of the Employer and Employee; if no agreement is
made within ten (10) business days from the date a demand for arbitration was
filed with the JAMS, then the arbitrator shall be selected according to the JAMS
rules;
(b) the arbitration hearing shall take place no later than
thirty (30) days following the JAMS' notice of the selection of an arbitrator;
(c) the arbitration hearing shall last no more than one day;
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(d) no discovery shall be permitted, including depositions,
interrogatories, requests for admissions, or production of documents, except in
the case of extreme hardship as determined by the arbitrator;
(e) the arbitrator shall give his/her decision at the conclusion
of the arbitration proceeding if possible, but no later than two business days
following the conclusion of the proceeding;
(f) any arbitration proceeding under this Agreement shall (1) be
conducted in such a manner that the proprietary or confidential information of
the Employer remains protected, and (2) occur in Palo Alto, California, and
(g) the decision of the arbitrator is final, binding,
non-reviewable, and non-appealable, and may be entered as a final judgment in
any court having jurisdiction.
7.11 Employee shall not be required to mitigate the amount of any
payment contemplated by this Agreement (whether by seeking new employment or in
any other manner), nor shall any such payment be reduced by any earnings that
Employee may receive from any other sources.
7.12 In the event that Employee is required to institute action against
Employer to enforce this Agreement or any term of provision thereof, and such
action results in a finding in whole or in part in favor of Employee, then
Employer hereby agrees Employer shall pay immediately all legal fees and other
costs reasonably incurred by Employee in implementing and maintaining such
action.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the day and year first above written.
"EMPLOYER"
By: /s/ LAWRANCE BROWN
------------------------------------
Lawrance Brown, Chairman of
The Compensation Committee of
The Board of Directors
"EMPLOYEE"
/s/ LORIN K. JOHNSON
- ------------------------------------
Lorin K. Johnson
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<PAGE> 9
APPENDIX "A"
Employee's Base Salary and Benefits shall be as set forth in Paragraphs "A"
through "G" below:
A. Base Salary. Employer shall pay Employee an initial annual salary in
the gross amount of One Hundred Seventy Five Thousand Eight Hundred Seventy Five
Dollars ($175,875) per annum as Employee's base salary ("BASE SALARY"). The Base
Salary may be changed from time-to-time in accordance with the normal business
practices of the Employer, however, in no instance shall the Base Salary be
decreased below the initial annual salary set forth above during the term of
this Agreement except for decreases to Base Salary applied on a equal percentage
basis to all employees of the Employer.
B. Bonus. In addition to the Base Salary and in the sole discretion of
the Board of Directors (or its designee), the Employee may be given an annual
bonus of up to thirty percent (30%) of the Base Salary (the "BONUS"). If
Employee has not been discharged for Reasonable Cause as that term is defined in
Article VI of this Agreement, then Employer shall pay to Employee on or before
ninety (90) days following December 31 of the relevant year the Bonus, if any,
as determined by the Employer.
C. Paid Vacation. During each twelve (12) month calendar period of
Employee's employment, Employee shall be entitled to twenty (20) days of paid
vacation (in addition to customary holidays, sick days and personal days in
accordance with the Employer's normal personnel policies). Unused vacation days
during any calendar year can be carried forward to the next calendar year.
D. Other Employee Benefits. Employee shall be entitled to participate
and receive any and all other benefits that are generally available to other
executives of Employer pursuant to any benefit programs existing during the term
of this Agreement, including, among other things, participation in group life
insurance, hospital, vision, dental, medical or other group health and accident
benefit plans. In addition, Employee shall be entitled to participate in all
401(k), bonus, profit sharing, pension or retirement plans as may be in
existence during the term of this Agreement in accordance with their respective
terms and provisions; provided, however, that to the extent participation or the
amount of participation is in the discretion of the Board or any committee
thereof, then Employee's participation shall likewise be solely in such
discretion.
E. Benefits Solely from General Assets. The benefits provided hereunder
shall be paid solely from the general assets of Employer. Nothing herein shall
be construed to require Employer to maintain any fund or segregate any amount
for the benefit of Employee, and neither Employee nor any other person shall
have any claim against, right to, or security or other interest in, any fund,
account or asset of Employer from which any payment under this Agreement may be
made.
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<PAGE> 10
F. Withholding for Taxes. Employer makes no commitment that any amounts
paid to or for the benefit of Employee under Paragraphs A through E above will
be excluded from Employee's gross income for federal, state, and local income
tax purposes, or that any other federal, state, or local tax treatment will
apply to such payments or be available to Employee. Employer may make such
provisions as it deems appropriate for the withholding of any taxes which
Employer determines it is required to withhold in connection with this Agreement
and the payments contemplated hereby.
G. Effect on Computation of Benefits. Any reimbursement of expenses
payable under this Agreement shall not be deemed salary or other compensation to
Employee for purposes of computing benefits to which Employee may be entitled
under any 401(k) plan, bonus, deferred compensation plan, or other arrangement
of Employer for the benefit of its employees.
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APPENDIX "B"
SCHEDULE OF SEVERANCE BENEFITS
A. Entitlement to Severance Benefit. In the event that the provisions of
Subsection 6.4 apply, then in addition to any other benefits payable under this
Agreement the Employer shall provide to the Employee the severance benefits set
forth in Sections B, C and D below. No such severance benefits shall be payable
under the Agreement for the Employee's termination of employment for any other
reason, including, but not limited to, voluntary termination of employment by
Employee (for other than Good Reason) or termination of employment by Employer
for Reasonable Cause, death or incapacitating disability.
B. Term of Benefits. The Employer shall provide to Employee the
severance benefits described in Paragraph C below commencing on termination of
the Employee's employment with Employer or termination of this Agreement that
qualifies under the terms of Paragraph 6.4 of this Agreement for severance
benefits, with such severance benefits continuing for a period of twelve (12)
months (the "BENEFIT PERIOD").
C. Amount of Benefits. Severance benefits shall consist of the
following:
1. Base. The Employer shall pay to Employee a monthly cash
payment in an amount that is equivalent to one-twelfth of the Base Salary of
Employee that is then in effect (or if a new, higher Base Salary has been set by
the Employer in a signed writing given to employee for an upcoming year, or if
the Base Salary for any period during the prior 24 month period was greater,
than by that higher Base Salary). The monthly cash payment above shall also
include an amount that is equivalent to one-twelfth of any cash Bonus that was
paid to Employee for the last full calendar year prior to the termination of
employment. Payment shall commence in the first regular pay period following the
date of termination. The monthly cash payments may be made monthly or otherwise
(e.g., on a two week or semi-monthly cycle) under the then existing regular
payroll payments dates of Employer.
2. Non-Compensation Benefits. The Employer shall continue to
cover the Employee and Employee's dependents for the Benefit Period under all
benefit plans covering other employees in positions similar to that of Employee.
Employee's and Employee's dependents continued participation in such plans shall
be at no greater cost to Employee than the cost Employee bore for such
participation immediately prior to the date of termination.
(a) Legal Continuation Restrictions. If Employee's
participation in any such plan or program is barred or limited, Employer shall
arrange upon comparable terms, and at no greater cost to Employee than the cost
Employee bore for such plans and programs prior to the date of termination, to
provide Employee and
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Employee's dependents with benefits substantially similar to those which
Employee was entitled to receive under any such plan or program
(b) COBRA Continuation. Any benefits provided under this
Paragraph 2 following the Employee's termination of employment shall count
against the continuation period the Employee is otherwise entitled to under the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), or
any similar federal or state statute, as a result of the termination of
employment.
D. Stock Option Vesting. In the event that the provisions of Subsection
6.4 apply, the shares subject to each stock option for the Employer's (or its
affiliate or successor) Common Stock held by Employee shall become fully and
immediately vested. Each stock option shall be exercisable to the extent so
vested in accordance with the provisions of the Option Agreement and related
stock option plan pursuant to which such stock option was granted.
E. Consulting Relationship. In the event that Employee's employment with
Employer and/or this Agreement is terminated for any reason other than for Good
Reason (by Employee), Reasonable Cause (by Employer) or Employee's death or
disability, Employer (or its successor) and Employee (to the extent Employee is
so allowed by any new employer of Employee) shall immediately enter into a
consulting arrangement (the "CONSULTING AGREEMENT") pursuant to which (a) to the
extent not already vested pursuant to Clause D above, all options granted to
Employee by Employer (or any affiliate or successor entity) shall continue to
vest and be exercisable in accordance with the terms thereof (without any
interruption or termination in Employee's continuous status as an employee or
consultant); and (b) Employee shall agree to provide up to an average of 16
hours per month of consulting services to Employer as reasonably requested by
Employer during the term of the Consulting Agreement in order to ensure the
smooth transition of Employee's duties and responsibilities. Employer shall pay
Employee for such services monthly at an hourly rate equal to (1) the Base
Salary of Employee that is then in effect (or if a new, higher Base Salary has
been set by the Employer for an upcoming year, or if the Base Salary for any
period during the prior 24 month period was greater, than by that higher Base
Salary), (2) divided by 1350) The Consulting Agreement will terminate on the
date twelve (12) months from the date of such employment termination, unless
terminated earlier by the mutual written agreement of Employer and Employee.
Employer agrees to reimburse Employee for all reasonable out-of-pocket expenses
incurred by Employee in providing services to Employer at the request of
Employer pursuant to the Consulting Agreement.
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EXHIBIT 10.20
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("AGREEMENT") shall be effective as of the 6th day of
May, 1999 between Salix Pharmaceuticals, Ltd., a British Virgin Islands
International Business Company having an office at 3600 W. Bayshore Road, Suite
205, Palo Alto, CA 94303 (together with its subsidiaries, affiliates and
successors hereafter referred to as "EMPLOYER"), and Robert P. Ruscher who is an
individual having a residence at 7808 Hardwick Drive, Raleigh, NC 27615
("EMPLOYEE").
RECITALS
WHEREAS, Employee currently is employed by Employer as Executive Vice
President, Chief Financial Officer and Corporate Secretary and
WHEREAS, the Board of Directors of Employer believes it is in the best
interests of Employer and its shareholders to ensure the continued employment of
Employee in the position set forth above and to dissuade Employee from pursuing
other employment opportunities outside of Employer; and
WHEREAS, the Board of Directors of Employer believes it is imperative to
provide the Employee with certain benefits upon termination of Employee's
employment under certain circumstances, which benefits are intended to provide
the Employee with incentive to remain with the Employer.
NOW THEREFORE, in consideration of the recitals above and the mutual
promises, covenants, and undertakings set forth below, Employer and Employee
agree as follows:
OBLIGATIONS
ARTICLE I
EMPLOYMENT
1.1 Employer hereby agrees to continue to employ Employee as an
executive in the position(s) set forth above with such duties as are reasonably
assigned by the Board of Directors (or its designee) from time to time that are
consistent with such position(s). Such employment shall continue until
terminated in accordance with the terms of this Agreement.
1.2 Employee accepts employment with Employer as set forth herein.
Employee agrees to perform fully, faithfully, competently, and effectively such
duties as shall be reasonably assigned by the Board of Directors (or its
designee) and to devote Employee's best efforts to the business of Employer.
Employee shall be specifically obligated to work to maximize the success of
Employer's business throughout the world.
<PAGE> 2
ARTICLE II
TERM OF EMPLOYMENT
2.1 The term of Employee's employment at Employer shall continue unless
and until Employee's employment terminates pursuant to Article VI of this
Agreement.
ARTICLE III
COMPENSATION
3.1 During the term of this Agreement, Employer shall pay to Employee
for services which Employee may render to Employer an annual salary to be
determined by the Employer in its sole discretion (subject to the terms of this
Agreement, with the initial Base Salary set forth in Appendix A) and subject to
periodic adjustment. For purposes of this Agreement, the term "BASE SALARY"
shall mean the annual salary referred to above, but shall exclude all
reimbursements for medical, professional, or transportation expenses, excess
group-term life insurance coverage, or other "fringe benefits." Employee's Base
Salary shall be paid in equal installments on Employer's regular payroll dates,
but shall be computed pro-rata in any partial year or other partial period of
employment. Employer shall also pay Employee an annual bonus (the "BONUS") to be
determined by the Board of Directors or its designee in its sole discretion and
subject to periodic adjustment. Employer shall withhold from all of Employee's
compensation, including without limitation the Base Salary and Bonus, such sums
as are required by federal, state and local laws, including, but not limited to,
federal, state, and local income taxes, FICA and Medicare, and such other sums
on which Employer and Employee may agree from time-to-time in writing.
3.2 In addition to any compensation paid to Employee pursuant to Section
3.1 of this Agreement, Employer shall provide Employee during the period of
Employee's employment with Employer with benefits consistent with those
generally provided to similarly situated executives at Employer (the
"BENEFITS").
3.3 Employee's Base Salary, Bonus, and Benefits are set forth in
APPENDIX "A" to this Agreement as may be amended from time-to-time at the sole
discretion of the Board of Directors or its designee in accordance with the
terms of this Agreement.
ARTICLE IV
SECRET, CONFIDENTIAL AND/OR PROPRIETARY INFORMATION
4.1 Employee will hold for the benefit of Employer, its affiliates,
subsidiaries, related entities, and designees, and shall not disclose to any
person or entity other than Employer or persons or entities designated by
Employer, all secret, confidential or proprietary information, knowledge,
computer data and/or information, patents, trade
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secrets, customer identities, marketing and other business methods, techniques,
processes, practices, procedures, plans and strategies regarding Employer, its
subsidiaries and affiliated corporations or business enterprises, and their
customers obtained by Employee during Employee's employment with Employer, and
any other secret, confidential or proprietary information pertaining to
Employer, its subsidiaries and affiliated corporations or business enterprises,
and their customers, during the term of this Agreement and at all times after
Employee's termination of employment with Employer, unless the Board in writing
consents to the contrary.
4.2 Immediately upon notice of termination of employment, Employee shall
give to Employer the originals and all copies of all documents, correspondence,
memoranda, records, notes, manuals, materials, customer and prospective customer
lists and information, including without limitation computer data, and other
things relating, either directly or indirectly, to Employer's business,
including, but not limited to, secret, confidential or proprietary information,
in Employee's possession, custody or control, unless otherwise agreed to by the
Board in writing.
ARTICLE V
AGREEMENT NOT TO SOLICIT EMPLOYEES
5.1 In recognition and consideration of Employee's employment,
compensation and benefits, the training in and information regarding Employer's
business which Employer will give Employee, Employee's introduction to
Employer's customers, and the carefully guarded methods of doing business which
Employer utilizes and deems crucial to the success of its business, Employee
shall not during the term of this Agreement, and for a period of one (1) year
following the termination of Employee's employment by Employer, regardless of
the reason for termination, either directly or indirectly, solicit the
employment of any person who was employed by the Employer or any of its
affiliates on a full time basis at the time of Employee's termination of
employment, unless such person (a) was involuntarily discharged by the Employer
or such affiliate or (b) voluntarily terminated his or her relationship with
Employer or such affiliate prior to contact by Employee.
5.2 Employee acknowledges that any breach of any obligation contained in
this Article and the preceding Article is not adequately compensable by monetary
damages, and Employee agrees that any such breach shall cause Employer
irreparable harm for which Employer shall be entitled to a temporary restraining
order and preliminary injunction without prior notice to Employee. Any and all
attorneys' fees, costs and expenses incurred by Employer in enforcing the terms
of this Article and the preceding Article shall be reimbursed to Employer by
Employee.
5.3 In the event that any body of competent jurisdiction shall determine
that any of the restrictive covenants in this Article V is inequitably broad, it
is the intention and agreement of the parties that the decision-maker shall
equitably adjust the obligations of Employee under this Agreement rather than
entirely eliminate any such obligations. In
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the event that the decision-maker shall equitably adjust or eliminate any of the
restrictive covenants in this Agreement, all other aspects of this Agreement
shall remain in full force and effect.
5.4 The enumeration of remedies in this Agreement to which Employer is
entitled does not limit any rights Employer otherwise possesses, including, but
not limited to, the right to monetary damages.
ARTICLE VI
TERMINATION
6.1 This Agreement and Employee's employment with Employer may be
terminated by Employer only upon the occurrence of any of the following events
(each of which shall constitute "REASONABLE CAUSE" for termination):
(i) Employee commits any act of gross negligence, fraud,
dishonesty, or willful violation of any law or material violation of any
significant written policy of Employer, that causes material harm to Employer;
(ii) Conviction of the Employee of (a) a felony or (b) a serious
crime involving moral turpitude;
(iii) Willful or gross failure by Employee to substantially
perform the duties reasonably assigned to Employee, or any intentional refusal
without compelling reason by Employee to discharge Employee's job
responsibilities and/or respond to Employer's legitimate job-related requests,
insofar as such duties, responsibilities and/or requests do not contravene law
and are consistent with Employee's position(s);
(iv) Failure to cooperate in an investigation conducted and/or
undertaken by Employer or a governmental agency which has reasonable and
legitimate objectives; and
(v) Any act of intentional conflict of interest by Employee
related to Employer which results in material economic and/or other material
damage to Employer;
provided, however, that Employee shall not be deemed to have been terminated for
Reasonable Cause unless and until there shall have been delivered to Employee a
Notice of Termination (as defined below) and a resolution adopted by the Board
of Directors of Employer at a meeting held for such purpose (after reasonable
notice to Employee and an opportunity for Employee, together with Employee's
counsel, to be heard before the Board), finding that, in the good faith opinion
of the Board, Employee has engaged in the conduct set forth above and specifying
the particulars thereof in reasonable detail. "Notice of Termination" shall mean
a written notice of termination of Employee's employment with Employer, which
notice indicates the specific termination provision in
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this Section 6.1 relied upon and which sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for such termination.
6.2 This Agreement and Employee's employment with Employer may be
terminated by Employee at any time for any or no reason upon prior written
notice to Employer. This Agreement shall also terminate in the event of the
death or incapacitating disability of Employee. This provision, by itself, shall
not be interpreted to effect the eligibility, if any, of Employee under any
disability policy maintained by Employer under which Employee is entitled to
disability benefits. Subject to the provisions of Subsection 6.4 and Appendix B
(with respect to termination by Employee for Good Reason), termination of this
Agreement under this Subsection 6.2 shall excuse Employer from any and all
future payments of cash under this Agreement, provided, however, Employee (or a
personal representative) shall be entitled to all compensation and benefits
earned hereunder to the date of termination of employment.
6.3 Subject to the provisions of Section 6.4 and Appendix B, this
Agreement and Employee's employment with Employer may be terminated by Employer
at any time upon one (1) month written notice to Employee without Reasonable
Cause and at Employer's sole discretion.
6.4 In the event that (1) this Agreement and/or Employee's employment
with Employer is terminated by Employer without Reasonable Cause, or (2)
Employee terminates this Agreement and/or Employee's employment with Employer
for Good Reason (as defined below), in any of those instances and only then
Employer shall pay Employee severance pay as set forth in the Schedule of
Severance Benefits attached hereto as APPENDIX "B." For purposes of this
Agreement, "GOOD REASON" shall mean the occurrence of any of the following
events or conditions: (A) a material adverse change in, or the assignment to
Employee of any duties or responsibilities which are inconsistent with,
Employee's status, title, position or responsibilities (including reporting
responsibilities) with Employer, (B) a reduction in Employee's salary and/or
benefits except to the extent such reduction is comparable to percentage
reductions in salary and/or benefits of all other employees of Employer, or any
failure to pay Employee any compensation or benefits to which Employee is
entitled within five (5) days of the date due, (C) Employer or its successor
requires Employee to relocate beyond a twenty-five (25) mile radius from
Employee's current residence, (D) any purported termination of this Agreement or
Employee's employment by Employer without grounds therefor or any material
breach by Employer of any provision of this Agreement, and/or (E) the failure of
Employer to obtain an agreement in writing delivered to Employee, satisfactory
to the Employee, from any successor or assignee of the Employer to assume and
agree to perform this Agreement.
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ARTICLE VII
GENERAL PROVISIONS
7.1 Employee represents and warrants that Employee is not currently
subject to any restrictive covenant, any other restriction on employment, or any
confidentiality agreement with any prior employer or other party except as
already disclosed to Employer. Employee shall indemnify and hold Employer
harmless with respect to any and all claims, causes of action, damages and
liability of any kind whatsoever, including reasonable attorneys' fees and
costs, successfully brought by a third-party arising out of any acts taken by
Employee which violate any such restrictive covenant, other restriction on
employment, or confidentiality agreement. Employee shall be entitled to
indemnification, in accordance with the applicable provisions of Employer's
charter documents and indemnification agreement, against all expense, liability
and loss (including reasonable attorneys' fees and settlement payments) that
Employee may incur by reason of any action, suit or proceeding arising from or
relating to the performance of Employee's duties as an officer or director of
Employer or any affiliate.
7.2 All material furnished to Employee by Employer during the course of
employment shall remain the property of Employer and shall be returned by
Employee to Employer at any time upon demand and upon termination of employment.
7.3 Neither this Agreement nor any right or interest hereunder shall be
assignable by Employee without Employer's prior written consent.
7.4 This Agreement shall be deemed automatically assigned by Employer
(and assumed by the successor) in the event of any sale, transfer, merger,
and/or similar disposition of its business (whether direct or indirect and
whether by purchase, lease, merger, consolidation, liquidation or otherwise),
and shall inure to the benefit of and bind Employer's successors and assigns.
For purposes of this Agreement, the term "Employer" shall include the party
acquiring the business/assets of Employer upon any sale, transfer, merger,
and/or similar disposition of its business.
7.5 The validity, interpretation, performance and enforcement of this
Agreement shall be governed by and construed in accordance with the laws of the
State of California. All actions brought under Paragraph 7.10 or otherwise shall
be brought and occur in Palo Alto, California. The parties agree that service of
notice of arbitration or any other process may be made as set forth in Paragraph
7.8 below and that service so made shall be as effective as if personally made.
7.6 The waiver by a party of any breach by the other party of any
provision of this Agreement shall not operate or be construed as a waiver of any
other breach by the other party.
7.7 In the event that any provision of this Agreement is determined by
any body of competent jurisdiction to be unenforceable, illegal or contrary to
public policy,
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that body shall modify such provision to conform to public policy, or to
interpret it in such a way as to render it enforceable and legal, in accordance
with the intent of the parties as expressed herein. In the event that a body of
competent jurisdiction decides that any provision of this Agreement is
unenforceable, illegal or contrary to public policy and cannot be reformed, only
such provision shall be affected and all other provisions of this Agreement
shall remain in full force and effect.
7.8 Any notice given to Employee pursuant to this Agreement shall be
sufficiently given if sent to Employee by registered or certified mail addressed
to Employee's address set forth at the beginning of this Agreement or such other
address as Employee shall have designated in writing to Employer. Any notice
given to Employer pursuant to this Agreement shall be sufficiently given if sent
to Employer by registered or certified mail to Employer's address set forth at
the beginning of this Agreement or such other address as Employer shall have
designated in writing to Employee.
7.9 This Agreement and Appendices "A" and "B" set forth the entire
understanding of the parties and the agreement they desire to reach relating to
the subject matter hereof. This Agreement supersedes all prior agreements of the
parties hereto on the subject matter hereof (excluding confidentiality and
invention agreements between or effecting the parties) including, but not
limited to, any prior negotiations, correspondence, agreements, proposals, or
understandings. Negotiations, correspondence, agreements, proposals, or
understandings not expressly incorporated into this Agreement shall be deemed to
be of no force or effect. There are no representations, warranties, or
agreements, whether express or implied, or oral or written, with respect to the
subject matter hereof, except as set forth herein. No modification, waiver or
agreement of termination of this Agreement shall be binding upon either party
unless made in writing and signed for or on behalf of each party. Any such
signature of the Employer must be that of the representative duly authorized by
the Board. In the event of any inconsistency between this Agreement and any
benefit plan of the Employer, the language of this Agreement shall control both
documents. This Agreement may be signed in counterparts.
7.10 Any controversy or claim arising out of or relating to this
Agreement, or breach thereof, shall be finally settled under the Arbitration
Rules and Procedures of JAMS/Endispute ("JAMS"), as modified below, by a neutral
arbitrator appointed by the JAMS in accordance with said rules.
(a) the arbitration shall be conducted before one (1) arbitrator
selected by mutual agreement of the Employer and Employee; if no agreement is
made within ten (10) business days from the date a demand for arbitration was
filed with the JAMS, then the arbitrator shall be selected according to the JAMS
rules;
(b) the arbitration hearing shall take place no later than
thirty (30) days following the JAMS' notice of the selection of an arbitrator;
(c) the arbitration hearing shall last no more than one day;
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(d) no discovery shall be permitted, including depositions,
interrogatories, requests for admissions, or production of documents, except in
the case of extreme hardship as determined by the arbitrator;
(e) the arbitrator shall give his/her decision at the conclusion
of the arbitration proceeding if possible, but no later than two business days
following the conclusion of the proceeding;
(f) any arbitration proceeding under this Agreement shall (1) be
conducted in such a manner that the proprietary or confidential information of
the Employer remains protected, and (2) occur in Palo Alto, California, and
(g) the decision of the arbitrator is final, binding,
non-reviewable, and non-appealable, and may be entered as a final judgment in
any court having jurisdiction.
7.11 Employee shall not be required to mitigate the amount of any
payment contemplated by this Agreement (whether by seeking new employment or in
any other manner), nor shall any such payment be reduced by any earnings that
Employee may receive from any other sources.
7.12 In the event that Employee is required to institute action against
Employer to enforce this Agreement or any term of provision thereof, and such
action results in a finding in whole or in part in favor of Employee, then
Employer hereby agrees Employer shall pay immediately all legal fees and other
costs reasonably incurred by Employee in implementing and maintaining such
action.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the day and year first above written.
"EMPLOYER"
By: /s/ LAWRANCE BROWN
- ------------------------------------
Lawrance Brown, Chairman of
The Compensation Committee of
The Board of Directors
"EMPLOYEE"
/s/ ROBERT P. RUSCHER
- ------------------------------------
Robert P. Ruscher
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APPENDIX "A"
Employee's Base Salary and Benefits shall be as set forth in Paragraphs "A"
through "G" below:
A. Base Salary. Employer shall pay Employee an initial annual salary in
the gross amount of Two Hundred Thousand Dollars ($200,000.00) per annum as
Employee's base salary ("BASE SALARY"). The Base Salary may be changed from
time-to-time in accordance with the normal business practices of the Employer,
however, in no instance shall the Base Salary be decreased below the initial
annual salary set forth above during the term of this Agreement except for
decreases to Base Salary applied on a equal percentage basis to all employees of
the Employer.
B. Bonus. In addition to the Base Salary and in the sole discretion of
the Board of Directors (or its designee), the Employee may be given an annual
bonus of up to thirty percent (30%) of the Base Salary (the "BONUS"). If
Employee has not been discharged for Reasonable Cause as that term is defined in
Article VI of this Agreement, then Employer shall pay to Employee on or before
ninety (90) days following December 31 of the relevant year the Bonus, if any,
as determined by the Employer.
C. Paid Vacation. During each twelve (12) month calendar period of
Employee's employment, Employee shall be entitled to twenty (20) days of paid
vacation (in addition to customary holidays, sick days and personal days in
accordance with the Employer's normal personnel policies). Unused vacation days
during any calendar year can be carried forward to the next calendar year.
D. Other Employee Benefits. Employee shall be entitled to participate
and receive any and all other benefits that are generally available to other
executives of Employer pursuant to any benefit programs existing during the term
of this Agreement, including, among other things, participation in group life
insurance, hospital, vision, dental, medical or other group health and accident
benefit plans. In addition, Employee shall be entitled to participate in all
401(k), bonus, profit sharing, pension or retirement plans as may be in
existence during the term of this Agreement in accordance with their respective
terms and provisions; provided, however, that to the extent participation or the
amount of participation is in the discretion of the Board or any committee
thereof, then Employee's participation shall likewise be solely in such
discretion.
E. Benefits Solely from General Assets. The benefits provided hereunder
shall be paid solely from the general assets of Employer. Nothing herein shall
be construed to require Employer to maintain any fund or segregate any amount
for the benefit of Employee, and neither Employee nor any other person shall
have any claim against, right to, or security or other interest in, any fund,
account or asset of Employer from which any payment under this Agreement may be
made.
F. Withholding for Taxes. Employer makes no commitment that any amounts
paid to or for the benefit of Employee under Paragraphs A through E above will
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be excluded from Employee's gross income for federal, state, and local income
tax purposes, or that any other federal, state, or local tax treatment will
apply to such payments or be available to Employee. Employer may make such
provisions as it deems appropriate for the withholding of any taxes which
Employer determines it is required to withhold in connection with this Agreement
and the payments contemplated hereby.
G. Effect on Computation of Benefits. Any reimbursement of expenses
payable under this Agreement shall not be deemed salary or other compensation to
Employee for purposes of computing benefits to which Employee may be entitled
under any 401(k) plan, bonus, deferred compensation plan, or other arrangement
of Employer for the benefit of its employees.
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APPENDIX "B"
SCHEDULE OF SEVERANCE BENEFITS
A. Entitlement to Severance Benefit. In the event that the provisions of
Subsection 6.4 apply, then in addition to any other benefits payable under this
Agreement the Employer shall provide to the Employee the severance benefits set
forth in Sections B, C and D below. No such severance benefits shall be payable
under the Agreement for the Employee's termination of employment for any other
reason, including, but not limited to, voluntary termination of employment by
Employee (for other than Good Reason) or termination of employment by Employer
for Reasonable Cause, death or incapacitating disability.
B. Term of Benefits. The Employer shall provide to Employee the
severance benefits described in Paragraph C below commencing on termination of
the Employee's employment with Employer or termination of this Agreement that
qualifies under the terms of Paragraph 6.4 of this Agreement for severance
benefits, with such severance benefits continuing for a period of ten (10)
months (the "BENEFIT PERIOD").
C. Amount of Benefits. Severance benefits shall consist of the
following:
1. Base. The Employer shall pay to Employee a monthly cash
payment in an amount that is equivalent to one-twelfth of the Base Salary of
Employee that is then in effect (or if a new, higher Base Salary has been set by
the Employer in a signed writing given to employee for an upcoming year, or if
the Base Salary for any period during the prior 24 month period was greater,
than by that higher Base Salary). The monthly cash payment above shall also
include an amount that is equivalent to one-twelfth of any cash Bonus that was
paid to Employee for the last full calendar year prior to the termination of
employment. Payment shall commence in the first regular pay period following the
date of termination. The monthly cash payments may be made monthly or otherwise
(e.g., on a two week or semi-monthly cycle) under the then existing regular
payroll payments dates of Employer.
2. Non-Compensation Benefits. The Employer shall continue to
cover the Employee and Employee's dependents for the Benefit Period under all
benefit plans covering other employees in positions similar to that of Employee.
Employee's and Employee's dependents continued participation in such plans shall
be at no greater cost to Employee than the cost Employee bore for such
participation immediately prior to the date of termination.
(a) Legal Continuation Restrictions. If Employee's
participation in any such plan or program is barred or limited, Employer shall
arrange upon comparable terms, and at no greater cost to Employee than the cost
Employee bore for such plans and programs prior to the date of termination, to
provide Employee and
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Employee's dependents with benefits substantially similar to those which
Employee was entitled to receive under any such plan or program
(b) COBRA Continuation. Any benefits provided under this
Paragraph 2 following the Employee's termination of employment shall count
against the continuation period the Employee is otherwise entitled to under the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), or
any similar federal or state statute, as a result of the termination of
employment.
D. Stock Option Vesting. In the event that the provisions of Subsection
6.4 apply, the shares subject to each stock option for the Employer's (or its
affiliate or successor) Common Stock held by Employee shall become fully and
immediately vested. Each stock option shall be exercisable to the extent so
vested in accordance with the provisions of the Option Agreement and related
stock option plan pursuant to which such stock option was granted.
E. Consulting Relationship. In the event that Employee's employment with
Employer and/or this Agreement is terminated for any reason other than for Good
Reason (by Employee), Reasonable Cause (by Employer) or Employee's death or
disability, Employer (or its successor) and Employee (to the extent Employee is
so allowed by any new employer of Employee) shall immediately enter into a
consulting arrangement (the "CONSULTING AGREEMENT") pursuant to which (a) to the
extent not already vested pursuant to Clause D above, all options granted to
Employee by Employer (or any affiliate or successor entity) shall continue to
vest and be exercisable in accordance with the terms thereof (without any
interruption or termination in Employee's continuous status as an employee or
consultant); and (b) Employee shall agree to provide up to an average of 16
hours per month of consulting services to Employer as reasonably requested by
Employer during the term of the Consulting Agreement in order to ensure the
smooth transition of Employee's duties and responsibilities. Employer shall pay
Employee for such services monthly at an hourly rate equal to (1) the Base
Salary of Employee that is then in effect (or if a new, higher Base Salary has
been set by the Employer for an upcoming year, or if the Base Salary for any
period during the prior 24 month period was greater, than by that higher Base
Salary), (2) divided by 1350) The Consulting Agreement will terminate on the
date twelve (12) months from the date of such employment termination, unless
terminated earlier by the mutual written agreement of Employer and Employee.
Employer agrees to reimburse Employee for all reasonable out-of-pocket expenses
incurred by Employee in providing services to Employer at the request of
Employer pursuant to the Consulting Agreement.
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EXHIBIT 10.21
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("AGREEMENT") shall be effective as of the 6th day of
May, 1999 between Salix Pharmaceuticals, Ltd., a British Virgin Islands
International Business Company having an office at 3600 W. Bayshore Road, Suite
205, Palo Alto, CA 94303 (together with its subsidiaries, affiliates and
successors hereafter referred to as "EMPLOYER"), and John Brough who is an
individual having a residence at 17 Lighthouse Lane, Southampton, Bermuda
("EMPLOYEE").
RECITALS
WHEREAS, Employee currently is employed by Employer as President, Glycyx
Pharmaceuticals, Ltd. and
WHEREAS, the Board of Directors of Employer believes it is in the best
interests of Employer and its shareholders to ensure the continued employment of
Employee in the position set forth above and to dissuade Employee from pursuing
other employment opportunities outside of Employer; and
WHEREAS, the Board of Directors of Employer believes it is imperative to
provide the Employee with certain benefits upon termination of Employee's
employment under certain circumstances, which benefits are intended to provide
the Employee with incentive to remain with the Employer.
NOW THEREFORE, in consideration of the recitals above and the mutual
promises, covenants, and undertakings set forth below, Employer and Employee
agree as follows:
OBLIGATIONS
ARTICLE I
EMPLOYMENT
1.1 Employer hereby agrees to continue to employ Employee as an
executive in the position(s) set forth above with such duties as are reasonably
assigned by the Board of Directors (or its designee) from time to time that are
consistent with such position(s). Such employment shall continue until
terminated in accordance with the terms of this Agreement.
1.2 Employee accepts employment with Employer as set forth herein.
Employee agrees to perform fully, faithfully, competently, and effectively such
duties as shall be reasonably assigned by the Board of Directors (or its
designee) and to devote Employee's best efforts to the business of Employer.
Employee shall be specifically obligated to work to maximize the success of
Employer's business throughout the world.
<PAGE> 2
ARTICLE II
TERM OF EMPLOYMENT
2.1 The term of Employee's employment at Employer shall continue unless
and until Employee's employment terminates pursuant to Article VI of this
Agreement.
ARTICLE III
COMPENSATION
3.1 During the term of this Agreement, Employer shall pay to Employee
for services which Employee may render to Employer an annual salary to be
determined by the Employer in its sole discretion (subject to the terms of this
Agreement, with the initial Base Salary set forth in Appendix A) and subject to
periodic adjustment. For purposes of this Agreement, the term "BASE SALARY"
shall mean the annual salary referred to above, but shall exclude all
reimbursements for medical, professional, or transportation expenses, excess
group-term life insurance coverage, or other "fringe benefits." Employee's Base
Salary shall be paid in equal installments on Employer's regular payroll dates,
but shall be computed pro-rata in any partial year or other partial period of
employment. Employer shall also pay Employee an annual bonus (the "BONUS") to be
determined by the Board of Directors or its designee in its sole discretion and
subject to periodic adjustment. Employer shall withhold from all of Employee's
compensation, including without limitation the Base Salary and Bonus, such sums
as are required by federal, state and local laws, including, but not limited to,
federal, state, and local income taxes, FICA and Medicare, and such other sums
on which Employer and Employee may agree from time-to-time in writing.
3.2 In addition to any compensation paid to Employee pursuant to Section
3.1 of this Agreement, Employer shall provide Employee during the period of
Employee's employment with Employer with benefits consistent with those
generally provided to similarly situated executives at Employer (the
"BENEFITS").
3.3 Employee's Base Salary, Bonus, and Benefits are set forth in
APPENDIX "A" to this Agreement as may be amended from time-to-time at the sole
discretion of the Board of Directors or its designee in accordance with the
terms of this Agreement.
ARTICLE IV
SECRET, CONFIDENTIAL AND/OR PROPRIETARY INFORMATION
4.1 Employee will hold for the benefit of Employer, its affiliates,
subsidiaries, related entities, and designees, and shall not disclose to any
person or entity other than Employer or persons or entities designated by
Employer, all secret, confidential or proprietary information, knowledge,
computer data and/or information, patents, trade
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secrets, customer identities, marketing and other business methods, techniques,
processes, practices, procedures, plans and strategies regarding Employer, its
subsidiaries and affiliated corporations or business enterprises, and their
customers obtained by Employee during Employee's employment with Employer, and
any other secret, confidential or proprietary information pertaining to
Employer, its subsidiaries and affiliated corporations or business enterprises,
and their customers, during the term of this Agreement and at all times after
Employee's termination of employment with Employer, unless the Board in writing
consents to the contrary.
4.2 Immediately upon notice of termination of employment, Employee shall
give to Employer the originals and all copies of all documents, correspondence,
memoranda, records, notes, manuals, materials, customer and prospective customer
lists and information, including without limitation computer data, and other
things relating, either directly or indirectly, to Employer's business,
including, but not limited to, secret, confidential or proprietary information,
in Employee's possession, custody or control, unless otherwise agreed to by the
Board in writing.
ARTICLE V
AGREEMENT NOT TO SOLICIT EMPLOYEES
5.1 In recognition and consideration of Employee's employment,
compensation and benefits, the training in and information regarding Employer's
business which Employer will give Employee, Employee's introduction to
Employer's customers, and the carefully guarded methods of doing business which
Employer utilizes and deems crucial to the success of its business, Employee
shall not during the term of this Agreement, and for a period of one (1) year
following the termination of Employee's employment by Employer, regardless of
the reason for termination, either directly or indirectly, solicit the
employment of any person who was employed by the Employer or any of its
affiliates on a full time basis at the time of Employee's termination of
employment, unless such person (a) was involuntarily discharged by the Employer
or such affiliate or (b) voluntarily terminated his or her relationship with
Employer or such affiliate prior to contact by Employee.
5.2 Employee acknowledges that any breach of any obligation contained in
this Article and the preceding Article is not adequately compensable by monetary
damages, and Employee agrees that any such breach shall cause Employer
irreparable harm for which Employer shall be entitled to a temporary restraining
order and preliminary injunction without prior notice to Employee. Any and all
attorneys' fees, costs and expenses incurred by Employer in enforcing the terms
of this Article and the preceding Article shall be reimbursed to Employer by
Employee.
5.3 In the event that any body of competent jurisdiction shall determine
that any of the restrictive covenants in this Article V is inequitably broad, it
is the intention and agreement of the parties that the decision-maker shall
equitably adjust the obligations of Employee under this Agreement rather than
entirely eliminate any such obligations. In
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the event that the decision-maker shall equitably adjust or eliminate any of the
restrictive covenants in this Agreement, all other aspects of this Agreement
shall remain in full force and effect.
5.4 The enumeration of remedies in this Agreement to which Employer is
entitled does not limit any rights Employer otherwise possesses, including, but
not limited to, the right to monetary damages.
ARTICLE VI
TERMINATION
6.1 This Agreement and Employee's employment with Employer may be
terminated by Employer only upon the occurrence of any of the following events
(each of which shall constitute "REASONABLE CAUSE" for termination):
(i) Employee commits any act of gross negligence, fraud,
dishonesty, or willful violation of any law or material violation of any
significant written policy of Employer, that causes material harm to Employer;
(ii) Conviction of the Employee of (a) a felony or (b) a serious
crime involving moral turpitude;
(iii) Willful or gross failure by Employee to substantially
perform the duties reasonably assigned to Employee, or any intentional refusal
without compelling reason by Employee to discharge Employee's job
responsibilities and/or respond to Employer's legitimate job-related requests,
insofar as such duties, responsibilities and/or requests do not contravene law
and are consistent with Employee's position(s);
(iv) Failure to cooperate in an investigation conducted and/or
undertaken by Employer or a governmental agency which has reasonable and
legitimate objectives; and
(v) Any act of intentional conflict of interest by Employee
related to Employer which results in material economic and/or other material
damage to Employer;
provided, however, that Employee shall not be deemed to have been terminated for
Reasonable Cause unless and until there shall have been delivered to Employee a
Notice of Termination (as defined below) and a resolution adopted by the Board
of Directors of Employer at a meeting held for such purpose (after reasonable
notice to Employee and an opportunity for Employee, together with Employee's
counsel, to be heard before the Board), finding that, in the good faith opinion
of the Board, Employee has engaged in the conduct set forth above and specifying
the particulars thereof in reasonable detail. "Notice of Termination" shall mean
a written notice of termination of Employee's employment with Employer, which
notice indicates the specific termination provision in
4
<PAGE> 5
this Section 6.1 relied upon and which sets forth in reasonable detail the facts
and circumstances claimed to provide a basis for such termination.
6.2 This Agreement and Employee's employment with Employer may be
terminated by Employee at any time for any or no reason upon prior written
notice to Employer. This Agreement shall also terminate in the event of the
death or incapacitating disability of Employee. This provision, by itself, shall
not be interpreted to effect the eligibility, if any, of Employee under any
disability policy maintained by Employer under which Employee is entitled to
disability benefits. Subject to the provisions of Subsection 6.4 and Appendix B
(with respect to termination by Employee for Good Reason), termination of this
Agreement under this Subsection 6.2 shall excuse Employer from any and all
future payments of cash under this Agreement, provided, however, Employee (or a
personal representative) shall be entitled to all compensation and benefits
earned hereunder to the date of termination of employment.
6.3 Subject to the provisions of Section 6.4 and Appendix B, this
Agreement and Employee's employment with Employer may be terminated by Employer
at any time upon one (1) month written notice to Employee without Reasonable
Cause and at Employer's sole discretion.
6.4 In the event that (1) this Agreement and/or Employee's employment
with Employer is terminated by Employer without Reasonable Cause, or (2)
Employee terminates this Agreement and/or Employee's employment with Employer
for Good Reason (as defined below), in any of those instances and only then
Employer shall pay Employee severance pay as set forth in the Schedule of
Severance Benefits attached hereto as APPENDIX "B." For purposes of this
Agreement, "GOOD REASON" shall mean the occurrence of any of the following
events or conditions: (A) a material adverse change in, or the assignment to
Employee of any duties or responsibilities which are inconsistent with,
Employee's status, title, position or responsibilities (including reporting
responsibilities) with Employer, (B) a reduction in Employee's salary and/or
benefits except to the extent such reduction is comparable to percentage
reductions in salary and/or benefits of all other employees of Employer, or any
failure to pay Employee any compensation or benefits to which Employee is
entitled within five (5) days of the date due, (C) Employer or its successor
requires Employee to relocate beyond a twenty-five (25) mile radius from
Employee's current residence, (D) any purported termination of this Agreement or
Employee's employment by Employer without grounds therefor or any material
breach by Employer of any provision of this Agreement, and/or (E) the failure of
Employer to obtain an agreement in writing delivered to Employee, satisfactory
to the Employee, from any successor or assignee of the Employer to assume and
agree to perform this Agreement.
5
<PAGE> 6
ARTICLE VII
GENERAL PROVISIONS
7.1 Employee represents and warrants that Employee is not currently
subject to any restrictive covenant, any other restriction on employment, or any
confidentiality agreement with any prior employer or other party except as
already disclosed to Employer. Employee shall indemnify and hold Employer
harmless with respect to any and all claims, causes of action, damages and
liability of any kind whatsoever, including reasonable attorneys' fees and
costs, successfully brought by a third-party arising out of any acts taken by
Employee which violate any such restrictive covenant, other restriction on
employment, or confidentiality agreement. Employee shall be entitled to
indemnification, in accordance with the applicable provisions of Employer's
charter documents and indemnification agreement, against all expense, liability
and loss (including reasonable attorneys' fees and settlement payments) that
Employee may incur by reason of any action, suit or proceeding arising from or
relating to the performance of Employee's duties as an officer or director of
Employer or any affiliate.
7.2 All material furnished to Employee by Employer during the course of
employment shall remain the property of Employer and shall be returned by
Employee to Employer at any time upon demand and upon termination of employment.
7.3 Neither this Agreement nor any right or interest hereunder shall be
assignable by Employee without Employer's prior written consent.
7.4 This Agreement shall be deemed automatically assigned by Employer
(and assumed by the successor) in the event of any sale, transfer, merger,
and/or similar disposition of its business (whether direct or indirect and
whether by purchase, lease, merger, consolidation, liquidation or otherwise),
and shall inure to the benefit of and bind Employer's successors and assigns.
For purposes of this Agreement, the term "Employer" shall include the party
acquiring the business/assets of Employer upon any sale, transfer, merger,
and/or similar disposition of its business.
7.5 The validity, interpretation, performance and enforcement of this
Agreement shall be governed by and construed in accordance with the laws of the
State of California. All actions brought under Paragraph 7.10 or otherwise shall
be brought and occur in Palo Alto, California. The parties agree that service of
notice of arbitration or any other process may be made as set forth in Paragraph
7.8 below and that service so made shall be as effective as if personally made.
7.6 The waiver by a party of any breach by the other party of any
provision of this Agreement shall not operate or be construed as a waiver of any
other breach by the other party.
7.7 In the event that any provision of this Agreement is determined by
any body of competent jurisdiction to be unenforceable, illegal or contrary to
public policy,
6
<PAGE> 7
that body shall modify such provision to conform to public policy, or to
interpret it in such a way as to render it enforceable and legal, in accordance
with the intent of the parties as expressed herein. In the event that a body of
competent jurisdiction decides that any provision of this Agreement is
unenforceable, illegal or contrary to public policy and cannot be reformed, only
such provision shall be affected and all other provisions of this Agreement
shall remain in full force and effect.
7.8 Any notice given to Employee pursuant to this Agreement shall be
sufficiently given if sent to Employee by registered or certified mail addressed
to Employee's address set forth at the beginning of this Agreement or such other
address as Employee shall have designated in writing to Employer. Any notice
given to Employer pursuant to this Agreement shall be sufficiently given if sent
to Employer by registered or certified mail to Employer's address set forth at
the beginning of this Agreement or such other address as Employer shall have
designated in writing to Employee.
7.9 This Agreement and Appendices "A" and "B" set forth the entire
understanding of the parties and the agreement they desire to reach relating to
the subject matter hereof. This Agreement supersedes all prior agreements of the
parties hereto on the subject matter hereof (excluding confidentiality and
invention agreements between or effecting the parties) including, but not
limited to, any prior negotiations, correspondence, agreements, proposals, or
understandings. Negotiations, correspondence, agreements, proposals, or
understandings not expressly incorporated into this Agreement shall be deemed to
be of no force or effect. There are no representations, warranties, or
agreements, whether express or implied, or oral or written, with respect to the
subject matter hereof, except as set forth herein. No modification, waiver or
agreement of termination of this Agreement shall be binding upon either party
unless made in writing and signed for or on behalf of each party. Any such
signature of the Employer must be that of the representative duly authorized by
the Board. In the event of any inconsistency between this Agreement and any
benefit plan of the Employer, the language of this Agreement shall control both
documents. This Agreement may be signed in counterparts.
7.10 Any controversy or claim arising out of or relating to this
Agreement, or breach thereof, shall be finally settled under the Arbitration
Rules and Procedures of JAMS/Endispute ("JAMS"), as modified below, by a neutral
arbitrator appointed by the JAMS in accordance with said rules.
(a) the arbitration shall be conducted before one (1) arbitrator
selected by mutual agreement of the Employer and Employee; if no agreement is
made within ten (10) business days from the date a demand for arbitration was
filed with the JAMS, then the arbitrator shall be selected according to the JAMS
rules;
(b) the arbitration hearing shall take place no later than
thirty (30) days following the JAMS' notice of the selection of an arbitrator;
(c) the arbitration hearing shall last no more than one day;
7
<PAGE> 8
(d) no discovery shall be permitted, including depositions,
interrogatories, requests for admissions, or production of documents, except in
the case of extreme hardship as determined by the arbitrator;
(e) the arbitrator shall give his/her decision at the conclusion
of the arbitration proceeding if possible, but no later than two business days
following the conclusion of the proceeding;
(f) any arbitration proceeding under this Agreement shall (1) be
conducted in such a manner that the proprietary or confidential information of
the Employer remains protected, and (2) occur in Palo Alto, California, and
(g) the decision of the arbitrator is final, binding,
non-reviewable, and non-appealable, and may be entered as a final judgment in
any court having jurisdiction.
7.11 Employee shall not be required to mitigate the amount of any
payment contemplated by this Agreement (whether by seeking new employment or in
any other manner), nor shall any such payment be reduced by any earnings that
Employee may receive from any other sources.
7.12 In the event that Employee is required to institute action against
Employer to enforce this Agreement or any term of provision thereof, and such
action results in a finding in whole or in part in favor of Employee, then
Employer hereby agrees Employer shall pay immediately all legal fees and other
costs reasonably incurred by Employee in implementing and maintaining such
action.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the day and year first above written.
"EMPLOYER"
By: /s/ LAWRANCE BROWN
------------------------------------
Lawrance Brown, Chairman of
The Compensation Committee of
The Board of Directors
"EMPLOYEE"
/s/ JOHN BROUGH
- ------------------------------------
John Brough
8
<PAGE> 9
APPENDIX "A"
Employee's Base Salary and Benefits shall be as set forth in Paragraphs "A"
through "G" below:
A. Base Salary. Employer shall pay Employee an initial annual salary in
the gross amount of One Hundred Sixty Five Thousand Three Hundred Seventy-Five
Dollars ($165,375) per annum as Employee's base salary ("BASE SALARY"). The Base
Salary may be changed from time-to-time in accordance with the normal business
practices of the Employer, however, in no instance shall the Base Salary be
decreased below the initial annual salary set forth above during the term of
this Agreement except for decreases to Base Salary applied on a equal percentage
basis to all employees of the Employer.
B. Bonus. In addition to the Base Salary and in the sole discretion of
the Board of Directors (or its designee), the Employee may be given an annual
bonus of up to thirty percent (30%) of the Base Salary (the "BONUS"). If
Employee has not been discharged for Reasonable Cause as that term is defined in
Article VI of this Agreement, then Employer shall pay to Employee on or before
ninety (90) days following December 31 of the relevant year the Bonus, if any,
as determined by the Employer.
C. Paid Vacation. During each twelve (12) month calendar period of
Employee's employment, Employee shall be entitled to twenty (20) days of paid
vacation (in addition to customary holidays, sick days and personal days in
accordance with the Employer's normal personnel policies). Unused vacation days
during any calendar year can be carried forward to the next calendar year.
D. Other Employee Benefits. Employee shall be entitled to participate
and receive any and all other benefits that are generally available to other
executives of Employer pursuant to any benefit programs existing during the term
of this Agreement, including, among other things, participation in group life
insurance, hospital, vision, dental, medical or other group health and accident
benefit plans. In addition, Employee shall be entitled to participate in all
401(k), bonus, profit sharing, pension or retirement plans as may be in
existence during the term of this Agreement in accordance with their respective
terms and provisions; provided, however, that to the extent participation or the
amount of participation is in the discretion of the Board or any committee
thereof, then Employee's participation shall likewise be solely in such
discretion.
E. Benefits Solely from General Assets. The benefits provided hereunder
shall be paid solely from the general assets of Employer. Nothing herein shall
be construed to require Employer to maintain any fund or segregate any amount
for the benefit of Employee, and neither Employee nor any other person shall
have any claim against, right to, or security or other interest in, any fund,
account or asset of Employer from which any payment under this Agreement may be
made.
F. Withholding for Taxes. Employer makes no commitment that any amounts
paid to or for the benefit of Employee under Paragraphs A through E above will
9
<PAGE> 10
be excluded from Employee's gross income for federal, state, and local income
tax purposes, or that any other federal, state, or local tax treatment will
apply to such payments or be available to Employee. Employer may make such
provisions as it deems appropriate for the withholding of any taxes which
Employer determines it is required to withhold in connection with this Agreement
and the payments contemplated hereby.
G. Effect on Computation of Benefits. Any reimbursement of expenses
payable under this Agreement shall not be deemed salary or other compensation to
Employee for purposes of computing benefits to which Employee may be entitled
under any 401(k) plan, bonus, deferred compensation plan, or other arrangement
of Employer for the benefit of its employees.
10
<PAGE> 11
APPENDIX "B"
SCHEDULE OF SEVERANCE BENEFITS
A. Entitlement to Severance Benefit. In the event that the provisions of
Subsection 6.4 apply, then in addition to any other benefits payable under this
Agreement the Employer shall provide to the Employee the severance benefits set
forth in Sections B, C and D below. No such severance benefits shall be payable
under the Agreement for the Employee's termination of employment for any other
reason, including, but not limited to, voluntary termination of employment by
Employee (for other than Good Reason) or termination of employment by Employer
for Reasonable Cause, death or incapacitating disability.
B. Term of Benefits. The Employer shall provide to Employee the
severance benefits described in Paragraph C below commencing on termination of
the Employee's employment with Employer or termination of this Agreement that
qualifies under the terms of Paragraph 6.4 of this Agreement for severance
benefits, with such severance benefits continuing for a period of six (6) months
(the "BENEFIT PERIOD").
C. Amount of Benefits. Severance benefits shall consist of the
following:
1. Base. The Employer shall pay to Employee a monthly cash
payment in an amount that is equivalent to one-twelfth of the Base Salary of
Employee that is then in effect (or if a new, higher Base Salary has been set by
the Employer in a signed writing given to employee for an upcoming year, or if
the Base Salary for any period during the prior 24 month period was greater,
than by that higher Base Salary). The monthly cash payment above shall also
include an amount that is equivalent to one-twelfth of any cash Bonus that was
paid to Employee for the last full calendar year prior to the termination of
employment. Payment shall commence in the first regular pay period following the
date of termination. The monthly cash payments may be made monthly or otherwise
(e.g., on a two week or semi-monthly cycle) under the then existing regular
payroll payments dates of Employer.
2. Non-Compensation Benefits. The Employer shall continue to
cover the Employee and Employee's dependents for the Benefit Period under all
benefit plans covering other employees in positions similar to that of Employee.
Employee's and Employee's dependents continued participation in such plans shall
be at no greater cost to Employee than the cost Employee bore for such
participation immediately prior to the date of termination.
(a) Legal Continuation Restrictions. If Employee's
participation in any such plan or program is barred or limited, Employer shall
arrange upon comparable terms, and at no greater cost to Employee than the cost
Employee bore for such plans and programs prior to the date of termination, to
provide Employee and
11
<PAGE> 12
Employee's dependents with benefits substantially similar to those which
Employee was entitled to receive under any such plan or program
(b) COBRA Continuation. Any benefits provided under this
Paragraph 2 following the Employee's termination of employment shall count
against the continuation period the Employee is otherwise entitled to under the
Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), or
any similar federal or state statute, as a result of the termination of
employment.
D. Stock Option Vesting. In the event that the provisions of Subsection
6.4 apply, the shares subject to each stock option for the Employer's (or its
affiliate or successor) Common Stock held by Employee shall become fully and
immediately vested. Each stock option shall be exercisable to the extent so
vested in accordance with the provisions of the Option Agreement and related
stock option plan pursuant to which such stock option was granted.
E. Consulting Relationship. In the event that Employee's employment with
Employer and/or this Agreement is terminated for any reason other than for Good
Reason (by Employee), Reasonable Cause (by Employer) or Employee's death or
disability, Employer (or its successor) and Employee (to the extent Employee is
so allowed by any new employer of Employee) shall immediately enter into a
consulting arrangement (the "CONSULTING AGREEMENT") pursuant to which (a) to the
extent not already vested pursuant to Clause D above, all options granted to
Employee by Employer (or any affiliate or successor entity) shall continue to
vest and be exercisable in accordance with the terms thereof (without any
interruption or termination in Employee's continuous status as an employee or
consultant); and (b) Employee shall agree to provide up to an average of 16
hours per month of consulting services to Employer as reasonably requested by
Employer during the term of the Consulting Agreement in order to ensure the
smooth transition of Employee's duties and responsibilities. Employer shall pay
Employee for such services monthly at an hourly rate equal to (1) the Base
Salary of Employee that is then in effect (or if a new, higher Base Salary has
been set by the Employer for an upcoming year, or if the Base Salary for any
period during the prior 24 month period was greater, than by that higher Base
Salary), (2) divided by 1350) The Consulting Agreement will terminate on the
date twelve (12) months from the date of such employment termination, unless
terminated earlier by the mutual written agreement of Employer and Employee.
Employer agrees to reimburse Employee for all reasonable out-of-pocket expenses
incurred by Employee in providing services to Employer at the request of
Employer pursuant to the Consulting Agreement.
12
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