<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 7, 1997
REGISTRATION NO. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CLOSURE MEDICAL CORPORATION
(Exact Name of Registrant as Specified in Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 3841 56-1959623
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
5265 CAPITAL BOULEVARD
RALEIGH, NC 27616
(919) 876-7800
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
ROBERT V. TONI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CLOSURE MEDICAL CORPORATION
5265 CAPITAL BOULEVARD
RALEIGH, NC 27616
(919) 876-7800
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
COPIES TO:
<TABLE>
<CAPTION>
<S> <C>
DEBRA J. POUL DAVID J. BEVERIDGE
MORGAN, LEWIS & BOCKIUS LLP SHEARMAN & STERLING
2000 ONE LOGAN SQUARE 599 LEXINGTON AVENUE
PHILADELPHIA, PA 19103 NEW YORK, NY 10022
(215) 963-5000 (212) 848-4000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C>
Common Stock, $.01 par value............ $29,109,375 $8,820.00
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SUCH
SECTION 8(A), MAY DETERMINE.
<PAGE>
(Redherring appears on the left side of page rotated. The language is below.)
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MARCH , 1997
PROSPECTUS
1,500,000 SHARES
(LOGO)
CLOSURE MEDICAL CORPORATION
COMMON STOCK
Of the 1,500,000 shares of Common Stock, par value $.01 per share (the
"Common Stock"), offered hereby, 800,000 shares are being offered by Closure
Medical Corporation ("Closure" or the "Company") and 700,000 shares are being
offered by a stockholder of the Company (the "Selling Stockholder"). See
"Principal and Selling Stockholders." The Company will not receive any of the
proceeds from the sale of Common Stock by the Selling Stockholder.
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "CLSR." On March 6, 1997, the last reported sale price of the Common
Stock was $16.00 per share. See "Price Range of Common Stock."
THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
<S> <C> <C> <C>
Per Share................... $ $ $
Total(3).................... $ $ $
<CAPTION>
PROCEEDS TO
SELLING
STOCKHOLDER
<S> <C>
Per Share................... $
Total(3).................... $
</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting estimated expenses of $295,000 payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
225,000 additional shares of Common Stock on the same terms and conditions
as set forth above, solely to cover over-allotments, if any. If such option
is exercised in full, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Stockholder will be
$ , $ , $ and $ , respectively. See "Underwriting."
The shares of Common Stock offered by this Prospectus are offered by the
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the Underwriters
and to certain further conditions. It is expected that delivery of certificates
representing the shares of Common Stock will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about , 1997.
LEHMAN BROTHERS
OPPENHEIMER & CO., INC.
SANDS BROTHERS & CO., LTD.
, 1997
<PAGE>
TRAUMASEALTM WILL NOT BE COMMERCIALLY AVAILABLE IN THE U.S. UNTIL FDA APPROVAL
IS RECEIVED. THERE IS NO ASSURANCE OF SUCH APPROVAL.
TRAUMASEAL(TM) SIMPLIFIES AND
SPEEDS WOUND CLOSURE.
[PHOTO OF
TRAUMASEAL IN
APPLICATOR] TRAUMASEAL(TM) IS A NONABSORBABLE, LIQUID TISSUE
COHESIVE DESIGNED TO CLOSE WOUNDS CAUSED BY
LACERATIONS, INCISIONS, MINIMALLY
INVASIVE SURGERY AND PLASTIC SURGERY.
FOR MANY EXTERNAL WOUNDS,
TRAUMASEAL(TM) WOULD MEAN NO
MORE NEEDLES, SUTURES,
STAPLES, TAPE OR ANTIBIOTICS.
TOPICAL WOUND CLOSURE
SIDE BY SIDE PHOTOS OF SIMILAR
LACERATIONS CLOSED BY SUTURES ON
LEFT AND TRAUMASEAL(TM) ON RIGHT]
TRADITIONAL TRAUMASEAL(TM)
SUTURE COHESIVE
CLOSURE CLOSURE
DECREASES TREATMENT TIME AND
SCARRING.
TRAUMASEAL(TM) WILL BE DISTRIBUTED
BY ETHICON, A SUBSIDIARY OF
JOHNSON & JOHNSON.
[PHOTO OF CHILD
WITH NURSE]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH
TRANSACTIONS MAY INCLUDE THE PURCHASE OF SHARES OF COMMON STOCK PRIOR TO THE
PRICING OF THE OFFERING FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON
STOCK, THE PURCHASE OF SHARES OF COMMON STOCK FOLLOWING THE PRICING OF THE
OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON STOCK OR FOR THE
PURPOSE OF MAINTAINING THE PRICE OF THE COMMON STOCK. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL STATEMENTS AND
NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS. SEE "RISK FACTORS" FOR A
DISCUSSION OF CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN THE COMMON STOCK.
REFERENCES IN THIS PROSPECTUS TO THE COMPANY OR CLOSURE ALSO INCLUDE, UNLESS THE
CONTEXT REQUIRES OTHERWISE, CLOSURE'S PREDECESSOR, TRI-POINT MEDICAL L.P. (THE
"PARTNERSHIP"). EFFECTIVE JANUARY 13, 1997, THE COMPANY CHANGED ITS NAME FROM
TRI-POINT MEDICAL CORPORATION TO CLOSURE MEDICAL CORPORATION. UNLESS OTHERWISE
INDICATED, ALL INFORMATION PRESENTED IN THIS PROSPECTUS ASSUMES THE UNDERWRITERS
HAVE NOT EXERCISED THE OVER-ALLOTMENT OPTION. "TRAUMASEAL," "NEXACRYL,"
"NEXABAND S/C" AND "NEXABAND QUICKSEAL" ARE TRADEMARKS OF THE COMPANY. ALL OTHER
TRADE NAMES AND TRADEMARKS APPEARING IN THIS PROSPECTUS ARE THE PROPERTY OF
THEIR RESPECTIVE HOLDERS.
THE COMPANY
Closure develops, commercializes and manufactures medical tissue cohesive
products based on its proprietary cyanoacrylate technology. The Company's
medical tissue cohesives can be used to close and seal wounds and incisions
rapidly and stop leakage of blood and other body fluids from injured tissue. The
Company's NONABSORBABLE products can be used to replace sutures and staples for
certain topical wound closure applications, while the Company's ABSORBABLE
products can potentially be used as surgical sealants and surgical tissue
cohesives for internal wound closure and management. Closure's medical tissue
cohesive products align injured tissue without the trauma caused by suturing or
stapling and allow natural healing to proceed. In addition, Closure believes
that its medical tissue cohesive products result in lower overall procedure
costs and are easier and quicker to prepare and use than sutures or staples. The
worldwide market for sutures and staples for topical and internal applications
is currently estimated to be $2.6 billion annually, and the Company expects that
it will compete for a portion of this market.
The Company has three products for human use and has a product line for
veterinary uses, which are described below:
TRAUMASEAL is a topical tissue cohesive used to close wounds
from skin lacerations and incisions. The Company filed a
premarket approval ("PMA") application for TRAUMASEAL with the
U.S. Food and Drug Administration (the "FDA") in December 1996,
which was granted "expedited processing." Product launch of
TRAUMASEAL is expected in France, Italy and Australia in
mid-1997 and in Canada in late 1997. The Company has entered
into a marketing agreement with Ethicon, Inc. ("Ethicon"), a
subsidiary of Johnson & Johnson, for exclusive worldwide
marketing and distribution of TRAUMASEAL.
OCTYLDENT is a topical sealant currently used in conjunction
with Actisite(Register mark), a site-specific drug delivery
system manufactured by ALZA Corporation ("ALZA"), to treat adult
periodontal disease. OCTYLDENT received 510(k) clearance
("510(k)") for use as a cohesive for the temporary fixing of
periodontal fibers to teeth or other hard surface abutments from
the FDA in 1990 and is marketed with Actisite(Register mark) in
the United States by Procter & Gamble/ALZA, Partners for Oral
Health Care (the "Procter & Gamble/ALZA Partnership") and
outside the United States by ALZA.
NEXACRYL is a topical sealant to be used in the repair of
corneal ulcers and lacerations. The Company received an FDA
approvable letter for NEXACRYL in January 1996. If approved, the
Company believes NEXACRYL will be the first cyanoacrylate
cohesive product to receive PMA approval from the FDA. The
Company has entered into a marketing agreement with Chiron
Vision Corporation ("Chiron") for exclusive worldwide marketing
and distribution of NEXACRYL.
NEXABAND is a product line of five topical tissue cohesives
currently used in veterinary wound closure and management.
NEXABAND products have been marketed by Farnam Companies, Inc.
("Farnam") since 1993.
Closure is also developing absorbable products for internal applications.
The Company has two products in development, a surgical sealant to be used to
control post-surgical leakage from coronary artery bypass graft and bowel
resection procedures and a surgical tissue cohesive to be used to close internal
surgical incisions and traumatic wounds. These future products require further
development, clinical trials and regulatory clearance or approval prior to
commercialization.
Closure's medical tissue cohesive products are based on its proprietary
cyanoacrylate technology. Cyanoacrylates are a family of liquid monomers that
react under a variety of conditions to form polymer films with strong adhesive
properties. Using its technology, Closure has overcome several obstacles to
regulatory approval, including demonstrating that its cyanoacrylates are safe
for human use. The Company's ability to manufacture highly purified base
material allows Closure to
3
<PAGE>
satisfy toxicity tests and, the Company believes, to meet biocompatability
standards. Closure has also developed novel assays to demonstrate sterility. In
addition, Closure has patented a "scavenger" process that permits degradation of
cyanoacrylates without a cytotoxic reaction, enabling the Company to develop
absorbable formulations for internal applications. Closure's technology allows
it to customize the physical and chemical properties of cyanoacrylates, such as
viscosity and setting times, to meet specific market needs. Closure's products
perform consistently and reproducibly, do not require special preparation or
refrigeration and have shelf-lives of 18 to 24 months. Closure has also
developed delivery technology to enhance the utility of its products. The
Company's TRAUMASEAL applicator contains a catalyst that controls the
polymerization process and allows the cohesive film to be applied in multiple
layers, which enhances bond strength. The Company is building a strong portfolio
of patent and trade secret protection on its cyanoacrylate technology, delivery
technology and manufacturing processes. The Company has nine U.S. patents with
expiration dates ranging from 2004 to 2013 and has filed applications for five
additional U.S. patents, as well as certain corresponding patent applications
outside the United States.
The Company's objective is to become the leader in the medical tissue
cohesive market by capitalizing on its proprietary cyanoacrylate technology. The
Company's strategy is to focus initially on commercializing and launching
topical tissue cohesive products based on its nonabsorbable formulations.
Initial target markets are topical wound closure in emergency rooms and
operating rooms and for plastic surgery procedures. For its nonabsorbable
products, the Company has entered into agreements with market leaders to market
and distribute the Company's products. The Company is also pursuing the
development and commercialization of absorbable formulations. The Company
intends to implement this strategy by (i) expanding and accelerating its
research and development activities, (ii) expanding manufacturing capacity by
adding facilities, equipment and personnel and continuing to research processes
to improve manufacturing capacity and efficiency, (iii) seeking rapid regulatory
approval by targeting product applications classified as medical devices and
(iv) establishing a focused sales force to market its absorbable products, or,
where appropriate, establishing partnerships with recognized market leaders.
The Company completed its initial public offering of 3,000,000 shares of
Common Stock, of which 2,550,000 shares were sold by the Company, in September
1996, raising net proceeds of approximately $17.9 million. Immediately prior to
the initial public offering, the Company consummated an exchange of obligations
of and interests in Tri-Point Medical L.P., the Company's predecessor, for
9,600,000 shares of Common Stock (the "Exchange"). See "Prior Partnership
Status." The Company's executive offices are located at 5265 Capital Boulevard,
Raleigh, North Carolina 27616, and its telephone number is (919) 876-7800.
RISK FACTORS
The shares of Common Stock offered hereby involve a high degree of risk,
including but not limited to the Company's history of operating losses; early
stage of product commercialization; dependence on new products and technologies;
uncertainty of market acceptance of its products; uncertainty of regulatory
approval for TRAUMASEAL; dependence on marketing partners; potential adverse
effect of competition and technological change; limited manufacturing
experience; dependence on a sole source supplier; dependence on patents, trade
secrets and proprietary rights; effects of FDA and other government regulation;
effects of international sales; future capital needs and uncertainty of
additional financing; dependence upon key personnel; product liability exposure
and potential unavailability of insurance; control by existing stockholders;
anti-takeover provisions; broad discretion in application of proceeds;
volatility of the stock price; dilution; substantial number of shares eligible
for future sale; substantial registration rights; potential adverse impact on
future market price from sales of shares; adverse impact from potential release
of shares subject to lock-up; and absence of dividends. See "Risk Factors" for a
more complete discussion of risk factors which should be considered by potential
investors.
4
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock
offered by:
The Company......................................... 800,000 shares
The Selling Stockholder............................. 700,000 shares
Common Stock to be outstanding after the
Offering (1)........................................ 12,955,029 shares
Use of proceeds....................................... To fund research and development, clinical trials and capital
expenditures, and for working capital and general corporate purposes.
See "Use of Proceeds."
Nasdaq National Market symbol (2)..................... "CLSR"
</TABLE>
(1) Excludes (i) 588,576 shares of Common Stock issuable upon the exercise of
options outstanding as of March 7, 1997 under the Company's Amended and
Restated 1996 Equity Compensation Plan (the "Equity Compensation Plan") at a
weighted average exercise price of $5.90 per share and (ii) 406,395 shares
reserved for future option grants under the Equity Compensation Plan. See
"Management -- Equity Compensation Plan."
(2) Prior to the change of the Company's name on January 13, 1997, the Common
Stock was traded under the symbol "TPMC."
5
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Product sales........................................................... $ 648 $ 1,048 $ 1,478 $ 1,380 $ 496
License and product development revenues................................ 230 162 25 -- 3,500
Total revenues................................................... 878 1,210 1,503 1,380 3,996
Cost of products sold................................................... 386 366 528 531 460
Gross profit and license and product development revenues............... 492 844 975 849 3,536
Research, development and regulatory affairs expenses................... 895 863 1,231 1,637 3,167
Selling and administrative expenses..................................... 912 1,037 1,366 1,589 2,879
Charges related to Partnership capital changes (1)...................... -- -- -- 3,500 14,210
Payments to CRX Medical, Inc. and Caratec, L.L.C........................ 150 150 150 250 293
Total operating expenses......................................... 1,957 2,050 2,747 6,976 20,549
Loss from operations.................................................... (1,465) (1,206) (1,772) (6,127) (17,013)
Interest expense to Sharpoint Development Corporation................... (235) (342) (445) (847) (138)
Investment and interest income.......................................... 1 -- 2 2 337
Net loss................................................................ $(1,699) $(1,548) $(2,215) $(6,972) $(16,814)
Pro forma net loss per common share (2)................................. $ (.69) $ (1.59)
Shares used in computation of pro forma net loss per common
share (2)............................................................. 10,150 10,545
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
ACTUAL AS ADJUSTED (3)
<S> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments............................................... $17,651 $29,260
Working capital.................................................................................... 15,175 26,784
Total assets....................................................................................... 19,512 31,121
Long-term debt and capital lease obligations, less current portion................................. 14 14
Total stockholders' equity......................................................................... 16,455 28,064
</TABLE>
(1) Includes for 1995 a one-time non-cash charge of $3,500,000 which represented
the estimated fair value of the limited partnership interests of certain
employee limited partners admitted to the Partnership on December 31, 1995.
In connection with the Exchange on September 25, 1996, Caratec, L.L.C.
exchanged its right to receive various payments from the Partnership and its
limited partnership interest for 1,776,250 shares of Common Stock. This
transaction resulted in a non-cash expense for 1996 of $14,210,000 which
equaled the difference between the value of the Common Stock issued to
Caratec, L.L.C. and its basis in the Partnership. The resulting charge to
accumulated deficit was offset by a credit to additional paid-in capital.
See "Prior Partnership Status" and Note 1 to Notes to Financial Statements.
(2) See Note 2 to Notes to Financial Statements for a discussion of the basis
for reported pro forma net loss per share.
(3) Adjusted to reflect the sale by the Company of 800,000 shares of Common
Stock (at an assumed public offering price of $16.00 per share) and the
application of the net proceeds therefrom. See "Use of Proceeds."
THIS PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE
SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "RISK
FACTORS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS PROSPECTUS.
6
<PAGE>
RISK FACTORS
THE FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY BY POTENTIAL
INVESTORS BEFORE PURCHASING THE COMMON STOCK OFFERED HEREBY.
HISTORY OF OPERATING LOSSES. The Company has incurred net losses in each
year since its inception, including net losses of approximately $16.8 million
for the year ended December 31, 1996 (including a one-time non-cash charge of
$14.2 million). These losses have resulted primarily from expenses associated
with the Company's research and development activities, including preclinical
and clinical trials and general and administrative expenses. The Company
anticipates that its recurring operating expenses will increase for the next
several years, as it expects its research and development expenses to increase
in order to develop new products and fund additional clinical trials. The
Company expects to continue to incur losses for the next several years, although
the amount of future net losses and time required by the Company to reach
profitability are highly uncertain. The Company's ability to generate
significant revenue and become profitable is dependent in large part on its
success in obtaining regulatory approvals or clearances for its products,
commercializing the Company's lead product, TRAUMASEAL, expanding its
manufacturing capacity, developing and marketing new products and entering into
additional marketing agreements where appropriate and the ability of its
marketing partners to commercialize successfully products incorporating the
Company's technologies. There can be no assurance that the Company will generate
significant revenue or become profitable on a sustained basis, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EARLY COMMERCIALIZATION; DEPENDENCE ON NEW PRODUCTS AND TECHNOLOGIES;
UNCERTAINTY OF MARKET ACCEPTANCE. The Company is in the early stage of product
commercialization and has derived only limited revenue from sales of certain
products to its marketing partners. The Company has submitted a PMA to market
TRAUMASEAL in the United States and has several potential products in
development. The Company believes that its long-term viability and growth will
depend in large part on receiving regulatory clearances or approvals for and the
successful commercialization of TRAUMASEAL and other new products resulting from
its research and development activities. The Company presently is pursuing
product opportunities that will require extensive additional capital investment,
research, development, clinical testing and regulatory clearances or approvals
prior to commercialization. There can be no assurance that the Company's
development programs will be successfully completed or that required regulatory
clearances or approvals will be obtained on a timely basis, if at all. Moreover,
commercial applications of the Company's absorbable formulations are relatively
new and evolving. The successful development and market acceptance of the
Company's proposed products are subject to inherent developmental risks,
including ineffectiveness or lack of safety, unreliability, failure to receive
necessary regulatory clearances or approvals, high commercial cost and
preclusion or obsolescence resulting from third parties' proprietary rights or
superior or equivalent products, as well as general economic conditions
affecting purchasing patterns.
There can be no assurance that the Company and its marketing partners will
be able to commercialize successfully or achieve market acceptance of the
Company's technologies or products, or that the Company's competitors will not
develop competing technologies that are less expensive or otherwise superior to
those of the Company. The failure to develop and market successfully new
products would have a material adverse effect on the Company's results of
operations and financial condition. See "Business -- Products,"
"Business -- Sales and Marketing" and "Business -- Manufacturing."
UNCERTAINTY OF REGULATORY APPROVAL FOR TRAUMASEAL. The Company recently
completed clinical trials for TRAUMASEAL and submitted a PMA application to the
FDA. Although the FDA granted "expedited processing" of the TRAUMASEAL PMA
application, the regulatory process is lengthy, expensive and uncertain. There
can be no assurance that the Company will be able to obtain the necessary
approval from the FDA to market and manufacture TRAUMASEAL in the United States
for its intended use on a timely basis, if at all. A delay in receipt of or
failure to receive such approval would have a material adverse effect on the
Company's results of operations and financial condition. See " -- Effects of FDA
and Other Government Regulation" and "Business -- Government Regulations."
DEPENDENCE ON MARKETING PARTNERS. The Company has limited experience in
sales, marketing and distribution. Therefore, the Company's strategy for
commercialization of its nonabsorbable products has included entering into
agreements with other companies to market current and certain future products
incorporating the Company's technology. To date, the Company has entered into
five such agreements, and the Company derived all of its fiscal 1996 revenues
from the receipt of license and product development fees under the supply and
distribution agreement for TRAUMASEAL and the sale of products to its marketing
partners. The Company intends to establish a sales force to market its
absorbable products as these products progress toward commercialization. There
can be no assurance that the Company will be able to establish marketing,
distribution and sales capabilities or make arrangements with third parties to
perform such activities on acceptable terms, if at all.
7
<PAGE>
There can be no assurance that the Company will be able to enter into additional
marketing agreements on terms favorable to the Company, if at all, or that
current or future agreements will ultimately be beneficial to the Company.
The Company is dependent for product sales revenues for its nonabsorbable
products upon the success of the Company's marketing partners in performing
their responsibilities. The amount and timing of resources which may be devoted
to the performance of their contractual responsibilities by its marketing
partners are not within the control of the Company. There can be no assurance
that such marketing partners will perform their obligations as expected, pay any
additional option or license fees to the Company or market any products under
the marketing agreements, or that the Company will derive any revenue from such
arrangements. Moreover, certain of the agreements provide for termination under
certain circumstances. For example, Ethicon may terminate its agreement to
purchase TRAUMASEAL from the Company should the Company be unable to provide an
adequate supply, and Ethicon may itself then manufacture TRAUMASEAL and only pay
the Company royalties on sales. The resulting loss of payments from Ethicon for
the purchase of TRAUMASEAL from the Company would have a material adverse effect
on the Company's results of operations and financial condition. Certain
agreements also permit the marketing partners to pursue existing or alternative
technologies in preference to the Company's technology. There can be no
assurance that the interests of the Company will continue to coincide with those
of its marketing partners or that the marketing partners will not develop
independently or with third parties products which could compete with the
Company's products, or that disagreements over rights or technology or other
proprietary interests will not occur. To the extent that the Company chooses not
to or is unable to enter into future agreements, it would experience increased
capital requirements to undertake the marketing or sale of its current and
future products. There can be no assurance that the Company will be able to
market or sell its current or future products independently in the absence of
such agreements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business -- Marketing Partners."
POTENTIAL ADVERSE EFFECT OF COMPETITION AND TECHNOLOGICAL CHANGE. The
Company competes with many domestic and foreign competitors in various rapidly
evolving and technologically advanced fields in developing its technology and
products, including medical device, pharmaceutical and biopharmaceutical
companies. For example, in the worldwide wound closure market, the Company's
products will compete with the suture products of Ethicon, the world leader in
the wound closure market, and American Home Products Corporation. In addition,
the Company believes its products will compete with the staple products of
United States Surgical Corporation and Ethicon Endo-Surgery, Inc., a subsidiary
of Johnson & Johnson. The Company's products may also compete with Histoacryl, a
cyanoacrylate-based topical adhesive marketed by B. Braun GmbH, and with a
similar adhesive marketed by Loctite Corporation. In the surgical sealants
market, the Company's products may compete with the fibrin-based sealants of
Immuno AG and Behringwerke AG, and most likely with fibrin-based sealants being
developed by Baxter Healthcare Corporation and Bristol-Myers Squibb Company. The
Company's surgical sealants also may compete with collagen-based hemostatic
products of, among others, Collagen Corporation, Fusion Medical Technologies,
Inc. and MedChem Products Inc., a division of C.R. Bard Inc.
Many of the Company's competitors and potential competitors have
substantially greater financial, technological, research and development,
marketing and personnel resources than the Company. In addition to those
mentioned above, other recently developed technologies or procedures are, or may
in the future be, the basis of competitive products. There can be no assurance
that the Company's competitors will not succeed in developing alternative
technologies and products that are more effective, easier to use or more
economical than those which have been or are being developed by the Company or
that would render the Company's technology and products obsolete and
non-competitive in these fields. These competitors may also have greater
experience in developing products, conducting clinical trials, obtaining
regulatory clearances or approvals, and manufacturing and marketing such
products. Certain of these competitors may obtain patent protection, approval or
clearance by the FDA or product commercialization earlier than the Company, any
of which could materially adversely affect the Company. Furthermore, if the
Company commences significant commercial sales of its products, it will also be
competing with respect to manufacturing efficiency and marketing capabilities,
areas in which it currently has limited experience. Finally, under the terms of
the Company's marketing agreements, the Company's marketing partners may pursue
parallel development of other technologies or products, which may result in a
marketing partner developing additional products that will compete with the
Company's products. See "Business -- Competition and Technological Change."
LIMITED MANUFACTURING EXPERIENCE. The Company has limited manufacturing
capacity and has limited experience in manufacturing its products. The Company's
future success is dependent in significant part on its ability to manufacture
its products in commercial quantities, in compliance with regulatory
requirements and in a cost-effective manner. The Company intends to expand its
manufacturing capabilities by using a portion of the net proceeds from this
Offering to acquire large-scale manufacturing and formulation equipment by the
end of 1997. Production of commercial-scale quantities may involve technical
challenges for the Company and will require significant scale-up expenses for
additions to facilities and personnel. There can be no assurance that the
Company will be able to achieve large-scale manufacturing capabilities or to
manufacture
8
<PAGE>
its products in a cost-effective manner or in quantities necessary to allow the
Company to achieve profitability. If the Company is unable to expand
sufficiently its manufacturing capacity to meet Ethicon's requirements for
TRAUMASEAL as set forth under their agreement, Ethicon may itself then
manufacture TRAUMASEAL and only pay the Company royalties on sales. The
resulting loss of payments from Ethicon for the purchase of TRAUMASEAL from the
Company would have a material adverse effect on the Company's results of
operations and financial condition. See "Business -- Marketing Partners."
In addition, the manufacture of the Company's products will be subject to
periodic inspection by regulatory authorities and certain marketing partners,
and the Company's manufacture of its products for human use is subject to
regulation and inspection from time to time by the FDA for compliance with Good
Manufacturing Practices ("GMPs"), as well as equivalent requirements and
inspections by state and foreign regulatory authorities. There can be no
assurance that the FDA or other authorities will not, during the course of an
inspection of existing or new facilities, identify what they consider to be
deficiencies in GMPs or other requirements and request, or seek, remedial
action. Failure to comply with such regulations or delay in attaining compliance
may adversely affect the Company's manufacturing activities and could result in,
among other things, Warning Letters, injunctions, civil penalties, FDA refusal
to grant premarket approvals or clearances of future or pending product
submissions, fines, recalls or seizures of products, total or partial
suspensions of production and criminal prosecution. Additionally, certain
modifications of the Company's manufacturing facilities and processes, such as
those made in preparation for commercial-scale production of products, will
subject the Company to further FDA inspections and review prior to final
approval of its products for commercial sale. There can be no assurance that the
Company will be able to obtain necessary regulatory approvals or clearances on a
timely basis, if at all. Delays in receipt of or failure to receive such
approvals or clearances or the loss of previously received approvals or
clearances would have a material adverse effect on the Company's results of
operations and financial condition. See " -- FDA and Other Government
Regulation," "Use of Proceeds" and "Business -- Manufacturing."
DEPENDENCE ON SOLE SOURCE SUPPLIER. The Company currently purchases
cyanoacetate, the primary raw material used in manufacturing most of the
Company's products, from a single qualified source. Upon manufacturing scale-up
there can be no assurance that the Company will be able to obtain adequate
increased commercial quantities within a reasonable period of time or at
commercially reasonable rates. Lack of adequate commercial quantities or
inability to develop alternative sources meeting regulatory requirements at
similar prices and terms within a reasonable time or any interruptions in supply
in the future could have a material adverse effect on the Company's ability to
manufacture its products, including TRAUMASEAL, and, consequently, could have a
material adverse effect on the Company's results of operations and financial
condition. See
" -- Dependence on Marketing Partners," "Business -- Marketing Partners" and
"Business -- Manufacturing."
DEPENDENCE ON PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS. The Company's
success depends in large part on whether it can obtain patents, maintain trade
secret protection and operate without infringing on the proprietary rights of
third parties. The Company has nine U.S. patents with expiration dates ranging
from 2004 to 2013 and has filed applications for five additional U.S. patents,
as well as certain corresponding patent applications outside the United States,
relating to the Company's technology. There can be no assurance that any of the
pending patent applications will be approved, that the Company will develop
additional proprietary products that are patentable, that any patents issued to
the Company will provide the Company with competitive advantages or will not be
challenged by any third parties or that the patents of others will not prevent
the commercialization of products incorporating the Company's technology.
Furthermore, there can be no assurance that others will not independently
develop similar products, duplicate any of the Company's products or design
around the Company's patents. Any of the foregoing results could have a material
adverse effect on the Company's results of operations and financial condition.
The commercial success of the Company also will depend, in part, on its
ability to avoid infringing patents issued to others. If the Company were
determined to be infringing any third party patent, the Company could be
required to pay damages, alter its products or processes, obtain licenses or
cease certain activities. If the Company is required to obtain any licenses,
there can be no assurance that the Company will be able to do so on commercially
favorable terms, if at all. The Company's failure to obtain a license for any
technology that it may require to commercialize its products could have a
material adverse effect on the Company's results of operations and financial
condition.
Litigation, which could result in substantial costs to and diversion of
effort by the Company, may also be necessary to enforce any patents issued or
licensed to the Company or to determine the scope and validity of third party
proprietary rights. If competitors of the Company that claim technology also
claimed by the Company prepare and file patent applications in the United
States, the Company may have to participate in interference proceedings declared
by the U.S. Patent and Trademark Office to determine priority of invention,
which could result in substantial costs to and diversion of effort by the
Company, even if the eventual outcome is favorable to the Company. Any such
litigation or interference proceeding, regardless of
9
<PAGE>
outcome, could be expensive and time consuming. Litigation 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 using certain
technology and, consequently, could have a material adverse effect on the
Company's results of operations and financial condition.
In addition to patent protection, the Company relies on unpatented trade
secrets and proprietary technological expertise. There can be no assurance that
others will not independently develop or otherwise acquire substantially
equivalent techniques, or otherwise gain access to the Company's trade secrets
and proprietary technological expertise or disclose such trade secrets, or that
the Company can ultimately protect its rights to such unpatented trade secrets
and proprietary technological expertise. The Company relies, in part, on
confidentiality agreements with its marketing partners, employees, advisors,
vendors and consultants to protect its trade secrets and proprietary
technological expertise. 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 unpatented trade secrets and proprietary technological
expertise will not otherwise become known or be independently discovered by
competitors. Failure to obtain or maintain patent or trade secret protection,
for any reason, could have a material adverse effect on the Company's results of
operations and financial condition. See "Business -- Patents, Trade Secrets and
Proprietary Rights."
EFFECTS OF FDA AND OTHER GOVERNMENT REGULATION. As newly developed medical
devices, the Company's medical tissue cohesives must receive regulatory
clearances or approvals from the FDA and, in many instances, from foreign and
state governments, prior to their sale. In order to obtain such clearances or
approvals, medical tissue cohesives must be shown to be efficacious and safe for
use in humans. The Company's current and future medical tissue cohesives for
humans are subject to stringent government regulation in the United States by
the FDA under the Federal Food, Drug, and Cosmetic Act, as amended (the "FDC
Act"). The FDA regulates the clinical testing, manufacture, safety, labeling,
sale, distribution and promotion of medical devices. Included among these
regulations are premarket clearance and premarket approval requirements and
GMPs. Other statutory and regulatory requirements govern, among other things,
establishment registration and inspection, medical device listing, prohibitions
against misbranding and adulteration, labeling and postmarket reporting.
The regulatory process is lengthy, expensive and uncertain. Before any new
medical device may be introduced to the market, the manufacturer generally must
obtain FDA approval through either the 510(k) premarket notification process or
the lengthier PMA approval process. It generally takes from four to 12 months
from submission to obtain 510(k) premarket clearance, although it may take
longer. Approval of a PMA could take two or more years from the date of
submission of the application. In addition, FDA approval of color additives used
to color a medical device, such as the D & C Violet No. 2 in TRAUMASEAL, often
must be obtained through the color additive petition ("CAP") process. The
510(k), PMA and CAP processes can be expensive, uncertain and lengthy, and there
is no guarantee of ultimate approval. It is expected that most of the Company's
future products under development will be subject to the lengthier PMA process.
There can be no assurance that the Company will obtain the necessary clearances
or approvals to market its products. Securing FDA clearances and approvals may
require the submission of extensive clinical data and supporting information to
the FDA, and there can be no guarantee of ultimate clearance or approval.
Failure to comply with applicable requirements can result in Warning Letters,
application integrity proceedings, fines, recalls or seizures of products,
injunctions, civil penalties, total or partial suspensions of production,
withdrawals of existing product approvals or clearances, refusals to approve or
clear new applications or notifications and criminal prosecution.
Medical devices also are subject to postmarket reporting requirements for
deaths or serious injuries when the device may have caused or contributed to the
death or serious injury, and for certain device malfunctions that would be
likely to cause or contribute to a death or serious injury if the malfunction
were to recur. If safety or efficacy problems occur after the product reaches
the market, the FDA may take steps to prevent or limit further marketing of the
product. Additionally, the FDA actively enforces regulations prohibiting
marketing of devices for indications or uses that have not been cleared or
approved by the FDA.
The Company's current human medical devices are at different stages of FDA
review. There can be no assurance that the Company will be able to obtain the
necessary 510(k) clearances or PMAs and CAP approvals to market and manufacture
its products in the United States for their intended use on a timely basis, if
at all, and delays in receipt of or failure to receive such clearances or
approvals, the loss of previously received clearances or approvals, or failure
to comply with existing or future regulatory requirements could have a material
adverse effect on the Company's results of operations and financial condition.
See " -- Limited Manufacturing Experience" and "Business -- Government
Regulations."
EFFECTS OF INTERNATIONAL SALES. The Company and its marketing partners
intend to market the Company's current and future products outside the United
States as well as domestically. A number of risks are inherent in international
transactions. In order for the Company to market its products in Europe,
Australia, Canada and certain other foreign jurisdictions, the
10
<PAGE>
Company must obtain required regulatory approvals or clearances and otherwise
comply with extensive regulations regarding safety, manufacturing processes and
quality. These regulations, including the requirements for approvals or
clearances to market, may differ from the FDA regulatory scheme. There can be no
assurance that the Company will obtain regulatory approvals or clearances in
such countries or that it will not be required to incur significant costs in
obtaining or maintaining its foreign regulatory approvals or clearances. Delays
in receipt of approvals or clearances to market the Company's products in
foreign countries, failure to receive such approvals or clearances or the future
loss of previously received approvals or clearances could have a material
adverse effect on the Company's results of operations and financial condition.
International sales also may be limited or disrupted by political instability,
price controls, trade restrictions and changes in tariffs. The Company's
royalties from international sales of TRAUMASEAL are based on net sales in
foreign currencies, but payable in U.S. dollars, and thus may be adversely
affected by fluctuations in currency exchange rates. Additionally, fluctuations
in currency exchange rates may adversely affect demand for the Company's
products by increasing the price of the Company's products in the currency of
the countries in which the products are sold. There can be no assurance that the
Company will be able to successfully commercialize its current or future
products in any foreign market. See "Business -- Government Regulations,"
"Business -- Marketing Partners" and "Business -- Sales and Marketing."
FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING. The Company
has expended and expects to continue to expend substantial funds to complete the
research, development and clinical testing of its products and to establish
commercial-scale manufacturing facilities. The Company believes that existing
cash and cash equivalents and short-term investments, which totaled $17.7
million as of December 31, 1996, together with net proceeds of approximately
$11.6 million from this Offering, will be sufficient to finance its capital
requirements for at least 24 months. There can be no assurance that the Company
will not be required to seek additional capital to finance its operations
following the Offering. Other than the Company's equipment financing lines of
credit, the Company currently has no commitments for any additional financing,
and there can be no assurance that adequate funds for the Company's operations
from any such additional financing, the Company's revenues, financial markets,
arrangements with marketing partners or from other sources will be available
when needed or on terms attractive to the Company. The inability to obtain
sufficient funds may require the Company to delay, scale back or eliminate some
or all of its research and product development programs, manufacturing
operations, clinical studies or regulatory activities or to license third
parties to commercialize products or technologies that the Company would
otherwise seek to develop itself, and could have a material adverse effect on
the Company's results of operations and financial condition. See "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
DEPENDENCE UPON KEY PERSONNEL. The Company is highly dependent on the
principal members of its management and scientific staff. The Company does not
maintain key person life insurance for any of its employees. In addition, the
Company believes that its future success in developing marketable products and
achieving a competitive position will depend in large part upon whether it can
attract and retain additional qualified management and scientific personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to continue to attract and retain such personnel. The
loss of services of one or more members of the management or scientific staff or
the inability to attract and retain additional personnel and develop expertise
as needed could have a material adverse effect on the Company's results of
operations and financial condition. See "Management."
PRODUCT LIABILITY EXPOSURE AND POTENTIAL UNAVAILABILITY OF INSURANCE. The
testing, manufacturing, marketing and sale of the products being developed by
the Company involve an inherent risk that product liability claims will be
asserted against the Company, its marketing partners or licensees. There can be
no assurance that the Company's current clinical trial and commercial product
liability insurance in the amount of $3 million per claim with an annual
aggregate limit of $3 million is adequate or will continue to be available in
sufficient amounts or at an acceptable cost, if at all. A product liability
claim, product recall or other claim, as well as any claims for uninsured
liabilities or in excess of insured liabilities, could have a material adverse
effect on the Company's results of operations and financial condition. See
"Business -- Legal Proceedings."
CONTROL BY EXISTING STOCKHOLDERS; ANTI-TAKEOVER PROVISIONS. Upon completion
of this Offering, Rolf D. Schmidt, Chairman of the Board of Directors of the
Company and a co-founder, and F. William Schmidt, a director of the Company and
a co-founder, and their affiliates, will beneficially own approximately 43.6% of
the outstanding Common Stock (or approximately 42.9% of the outstanding Common
Stock assuming exercise in full of the Underwriters' over-allotment option), and
the other directors and officers of the Company will beneficially own
approximately 15.9% of the outstanding Common Stock after the Offering (or
approximately 15.7% of the outstanding Common Stock assuming exercise in full of
the Underwriters' over-allotment option). Accordingly, the Schmidts, either
acting alone or together with the other directors and officers of the Company,
would be able to exert considerable influence over the management and policies
of the Company. Such a concentration of ownership may have the effect of
delaying, deferring or preventing a change of control of the
11
<PAGE>
Company and consequently could adversely affect the market price of the Common
Stock. Additionally, the Company's Restated Certificate of Incorporation, as
amended (the "Certificate of Incorporation"), and By-Laws contain certain
provisions that could prevent or delay the acquisition of the Company by means
of a tender offer, proxy contest or otherwise, or could discourage a third party
from attempting to acquire control of the Company, even if such events would be
beneficial to the interests of the stockholders. These provisions, among other
things, (i) prohibit stockholders of the Company from taking any action required
or permitted to be taken by the stockholders by written consent, (ii) provide
that special meetings of stockholders may only be called by the Board of
Directors or the Chairman of the Board, (iii) do not allow cumulative voting for
directors, (iv) divide the Board of Directors into three classes, each of which
serves for a staggered three-year term, (v) prohibit the removal of directors
without cause by the stockholders and without the approval of at least 75% of
the voting power of the then outstanding shares entitled to vote in the election
of directors, voting as a single class, (vi) provide supermajority voting
requirements with respect to the approval of certain fundamental corporate
changes and transactions, including, among others, amendment of certain
provisions of the Certificate of Incorporation and amendment of the By-Laws by
the stockholders, and (vii) grant the Board of Directors the authority, without
action by the stockholders, to fix the rights and preferences of and issue
shares of preferred stock. The Company is also subject to Section 203 of the
Delaware General Corporation Law which contains certain anti-takeover provisions
which prohibit a "business combination" between a corporation and an "interested
stockholder" within three years of the stockholder becoming an "interested
stockholder" except in certain limited circumstances. The business combination
provisions of Section 203 of the Delaware General Corporation Law may have the
effect of deterring merger proposals, tender offers or other attempts to effect
changes in control of the Company that are not negotiated and approved by the
Board of Directors. See "Management," "Principal and Selling Stockholders" and
"Description of Capital Stock."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. The Company intends to use
approximately $3.6 million, or 31%, of the net proceeds to the Company from the
Offering (or approximately $7.0 million, or 46%, if the Underwriters'
over-allotment option is exercised in full) for working capital and general
corporate purposes, and the Company has not yet finally identified more specific
uses for such net proceeds. In addition, a portion of the $3.6 million of net
proceeds may be used for the acquisition of complementary businesses or
products. Accordingly, the specific uses for the net proceeds will be at the
complete discretion of management of the Company and the Board of Directors and
may be allocated based upon circumstances arising from time to time in the
future. See "Use of Proceeds."
VOLATILITY OF STOCK PRICE; DILUTION. Factors such as announcements
concerning the Company or its competitors, including the results of testing and
clinical trials, technological innovations and the attainment of (or failure to
attain) milestones in the commercialization of new products, government
regulations, developments concerning proprietary rights, including new patents,
changes in existing patents or litigation matters, a change in status of a
marketing partner, investor perception of the Company or the commercial value or
safety of its products, fluctuations in the Company's operating results and
general market conditions in the industry may cause the market price of the
Common Stock to fluctuate significantly. From the Company's initial public
offering on September 25, 1996 through March 6, 1997, the sales price per share
of Common Stock as quoted on the Nasdaq National Market ranged from a low of
$5.75 to a high of $21.50. Furthermore, the stock market has experienced extreme
price and volume fluctuations, which recently have particularly affected the
market prices of the shares of medical technology companies and which have often
been unrelated to the operating performance of such companies. These broad
market fluctuations also may adversely affect the market price of the Common
Stock. Purchasers of Common Stock in this Offering will experience immediate and
substantial dilution of $13.85 per share in the net tangible book value per
share of the Common Stock (based on an assumed public offering price of $16.00
per share and after deducting underwriting discounts and commissions and other
estimated offering expenses). See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS; POTENTIAL ADVERSE
IMPACT ON MARKET PRICE FROM SALES OF SHARES. Sales of substantial amounts of
Common Stock in the public market following this Offering could adversely affect
the market price of the Common Stock and adversely affect the Company's ability
to raise capital at a time and on terms favorable to the Company. Of the
12,955,029 shares to be outstanding after this Offering, the 1,500,000 shares of
Common Stock offered hereby and an additional 3,005,029 shares of Common Stock
will be freely tradeable without restriction in the public market unless such
shares are held by "affiliates" of the Company, as that term is defined in Rule
144(a) under the Securities Act of 1933, as amended (the "Securities Act"). The
remaining 8,450,000 shares of Common Stock to be outstanding after this Offering
are restricted securities under the Securities Act and may be sold in the public
market upon the expiration in September 1997 of the one-year holding period
under Rule 144 subject to the volume, manner of sale and other limitations of
Rule 144. The Securities and Exchange Commission (the "Commission") recently
adopted revisions to Rule 144, the effect of which substantially shortened the
holding periods under Rule 144. In addition, as of March 7, 1997, there were
outstanding options to purchase 588,576 shares of Common Stock, of which 138,420
were fully vested and exercisable. An additional
12
<PAGE>
406,395 shares were reserved for issuance under the Equity Compensation Plan.
All of the shares issued, issuable or reserved for issuance under the Equity
Compensation Plan are covered by an effective registration statement.
Certain holders of 8,820,000 shares of Common Stock, of which 700,000
shares are to be sold by the Selling Stockholder in the Offering, are entitled
to certain rights with respect to the registration of such shares for resale
under the Securities Act. If such holders, by exercising their registration
rights, cause a large number of shares to be registered and sold in the public
market, such sales could have an adverse effect on the market price of the
Common Stock. Such rights may not be exercised prior to the expiration of 180
days from the date of this Prospectus. See "Description of Capital
Stock -- Registration Rights" and "Shares Eligible for Future Sale."
ADVERSE IMPACT FROM POTENTIAL RELEASE OF SHARES SUBJECT TO LOCK-UP. All
directors and executive officers and certain other stockholders of the Company
who will beneficially own an aggregate 8,343,220 shares of Common Stock upon
completion of this Offering, and the Company, with certain limited exceptions,
have agreed with the Underwriters not to offer for sale, sell or otherwise
dispose of, directly or indirectly, any shares of Common Stock for a period of
180 days from the date of this Prospectus without the prior written consent of
Lehman Brothers Inc. The release of such shares from the lock-up prior to the
expiration of the 180-day period could adversely affect the market price of the
Common Stock.
ABSENCE OF DIVIDENDS. The Company has never declared or paid cash dividends
on its Common Stock and does not anticipate paying any cash dividends in the
foreseeable future. The Company currently intends to retain future earnings, if
any, to fund the development and growth of its business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent upon the Company's financial condition,
operating results, capital requirements and such other factors as the Board of
Directors deems relevant. See "Dividend Policy."
USE OF PROCEEDS
The net proceeds to the Company from the sale and issuance of the 800,000
shares of Common Stock offered by the Company hereby, after deducting estimated
expenses payable by the Company in connection with this Offering (at an assumed
public offering price of $16.00 per share), are estimated to be approximately
$11.6 million (or $15.0 million if the Underwriters' over-allotment option is
exercised in full). The Company will not receive any proceeds from the sale of
shares of Common Stock by the Selling Stockholder. See "Principal and Selling
Stockholders."
The Company expects to use approximately $6.0 million of the net proceeds
for research and development and clinical trials related to absorbable products
and approximately $2.0 million for capital expenditures related to laboratories
and manufacturing equipment. The Company expects to use the remaining net
proceeds of approximately $3.6 million for working capital and general corporate
purposes. A portion of the net proceeds may also be used for the acquisition of
complementary businesses or products, although the Company has not entered into
any definitive agreements or letters of intent with respect to any such
transactions and is not in any negotiations with respect to any written or oral
agreements or understandings regarding such transactions. The Company believes
that existing cash and cash equivalents and short-term investments, which
totaled $17.7 million as of December 31, 1996, together with net proceeds of
approximately $11.6 million from this Offering, will be sufficient to finance
its capital requirements for at least 24 months.
Pending application of the net proceeds as described above, the Company
intends to invest the net proceeds of this Offering in short-term,
interest-bearing, investment-grade securities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock
and does not anticipate paying any cash dividends in the foreseeable future. The
Company currently intends to retain future earnings, if any, to fund the
development and growth of its business. Any future determination to pay cash
dividends will be at the discretion of the Board of Directors and will be
dependent upon the Company's financial condition, operating results, capital
requirements and such other factors as the Board of Directors deems relevant.
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<PAGE>
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "CLSR." Prior to the change of the Company's name on January 13,
1997, the Common Stock was traded under the symbol "TPMC." The following table
sets forth, for the periods indicated, the high and low sales price per share of
the Common Stock, as reported on the Nasdaq National Market, commencing with the
Company's initial public offering on September 25, 1996. Prior to that date,
there was no public market for the Common Stock.
<TABLE>
<CAPTION>
HIGH LOW
<S> <C> <C>
1996
Third Quarter (from September 25, 1996).......................................... $ 8.13 $ 8.00
Fourth Quarter................................................................... 17.75 5.75
1997
First Quarter (through March 6, 1997)............................................ $21.50 $13.25
</TABLE>
As of March 6, 1997, there were approximately 126 holders of record of
Common Stock.
CAPITALIZATION
The following table sets forth as of December 31, 1996 (i) the actual
capitalization of the Company and (ii) the as adjusted capitalization of the
Company reflecting the sale of the 800,000 shares of Common Stock offered by the
Company hereby (at an assumed public offering price of $16.00 per share) and
receipt of the proceeds therefrom, after deducting underwriting discounts and
commissions and estimated offering expenses payable by the Company. See "Use of
Proceeds." This table should be read in conjunction with "Selected Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Company's financial statements, including the notes
thereto, included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
ACTUAL AS ADJUSTED (1)
<S> <C> <C>
(IN THOUSANDS)
Long-term debt and capital lease obligations, less current portion................................ $ 14 $ 14
Stockholders' equity:
Preferred Stock, $.01 par value; 2,000,000 shares authorized.................................... -- --
Common Stock, $.01 par value; 35,000,000 shares authorized; 12,150,000 shares issued and
outstanding; 12,950,000 shares as adjusted (2)............................................... 122 130
Additional paid-in capital........................................................................ 33,579 45,180
Accumulated deficit............................................................................... (16,246) (16,246)
Deferred compensation on stock options............................................................ (1,000) (1,000)
Total stockholders' equity...................................................................... 16,455 28,064
Total capitalization......................................................................... $ 16,469 $ 28,078
</TABLE>
(1) Adjusted to reflect the sale by the Company of 800,000 shares of Common
Stock (at an assumed public offering price of $16.00 per share) and the
application of the net proceeds therefrom. See "Use of Proceeds."
(2) Excludes 588,576 shares of Common Stock issuable upon the exercise of
options outstanding as of March 7, 1997 at a weighted average exercise price
of $5.90 per share, of which 138,420 were fully vested and exercisable. See
"Management -- Equity Compensation Plan."
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<PAGE>
DILUTION
As of December 31, 1996, the net tangible book value of the Company was
$16,242,000 or $1.34 per share of Common Stock. "Net tangible book value" per
share represents the amount of total tangible assets of the Company reduced by
the amount of its total liabilities, divided by the number of shares of Common
Stock outstanding. As of December 31, 1996, the as adjusted net tangible book
value of the Company, after giving effect to the estimated net proceeds from the
sale by the Company of the 800,000 shares of Common Stock offered by the Company
hereby (based on an assumed public offering price of $16.00 per share and after
deducting underwriting discounts and commissions and other estimated offering
expenses), would have been approximately $2.15 per share of Common Stock. This
represents an immediate increase of $0.81 per share to existing stockholders and
an immediate dilution of $13.85 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed public offering price per share (1)................................................................. $16.00
Net tangible book value per share before Offering......................................................... $1.34
Increase per share attributable to new investors.......................................................... .81
Net tangible book value per share after Offering............................................................ 2.15
Dilution to new investors................................................................................... $13.85
</TABLE>
(1) Before deduction of underwriting discounts and commissions and other
offering expenses to be paid by the Company.
The above table excludes 588,576 shares of Common Stock issuable upon the
exercise of options outstanding as of March 7, 1997 at a weighted average
exercise price of $5.90 per share, of which 138,420 were fully vested and
exercisable. To the extent that these options are exercised, there will be
further dilution to new investors.
15
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below for each year in the five year
period ended December 31, 1996 have been derived from financial statements
audited by Price Waterhouse LLP, independent accountants. The balance sheets as
of December 31, 1995 and 1996 and the related statements of operations and of
cash flows for the years ended December 31, 1994, 1995 and 1996 and notes
thereto appear elsewhere in this Prospectus. This data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's financial statements, including the
notes thereto, and the other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Product sales.......................................................... $ 648 $ 1,048 $ 1,478 $ 1,380 $ 496
License and product development revenues............................... 230 162 25 -- 3,500
Total revenues....................................................... 878 1,210 1,503 1,380 3,996
Cost of products sold.................................................. 386 366 528 531 460
Gross profit and license and product development revenues.............. 492 844 975 849 3,536
Research, development and regulatory affairs expenses.................. 895 863 1,231 1,637 3,167
Selling and administrative expenses.................................... 912 1,037 1,366 1,589 2,879
Charges related to Partnership capital changes (1)..................... -- -- -- 3,500 14,210
Payments to CRX Medical, Inc. and Caratec, L.L.C....................... 150 150 150 250 293
Total operating expenses............................................. 1,957 2,050 2,747 6,976 20,549
Loss from operations................................................... (1,465) (1,206) (1,772) (6,127) (17,013)
Interest expense to Sharpoint Development Corporation.................. (235) (342) (445) (847) (138)
Investment and interest income......................................... 1 -- 2 2 337
Net loss............................................................... $(1,699) $(1,548) $(2,215) $(6,972) $(16,814)
Pro forma net loss per common share (2)................................ $ (.69) $ (1.59)
Shares used in computation of pro forma net loss per common share
(2).................................................................. 10,150 10,545
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1996
AS OF DECEMBER 31, AS
1992 1993 1994 1995 1996 ADJUSTED (3)
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments $ 26 $ 11 $ 30 $ 20 $17,651 $ 29,260
Working capital (deficit)............................... (181) (392) (10) (395) 15,175 26,784
Total assets............................................ 750 764 784 908 19,512 31,121
Long-term debt and capital lease obligations, less
current portion....................................... 3,942 5,232 7,851 10,088 14 14
Total partners' capital (deficit) and stockholders'
equity................................................ (3,615) (5,163) (7,378) (10,850) 16,455 28,064
</TABLE>
(1) Includes for 1995 a one-time non-cash charge of $3,500,000 which represented
the estimated fair value of the limited partnership interests of certain
employee limited partners admitted to the Partnership on December 31, 1995.
In connection with the Exchange on September 25, 1996, Caratec, L.L.C.
exchanged its right to receive various payments from the Partnership and its
limited partnership interest for 1,776,250 shares of Common Stock. This
transaction resulted in a non-cash expense for 1996 of $14,210,000 which
equaled the difference between the value of the Common Stock issued to
Caratec, L.L.C. and its basis in the Partnership. The resulting charge to
accumulated deficit was offset by a credit to additional paid-in capital.
See "Prior Partnership Status" and Note 1 to Notes to Financial Statements.
(2) See Note 2 to Notes to Financial Statements for a discussion of the basis
for reported pro forma net loss per share.
(3) Adjusted to reflect the sale by the Company of 800,000 shares of Common
Stock (at an assumed public offering price of $16.00 per share) and the
application of the net proceeds therefrom. See "Use of Proceeds."
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Company's
financial statements, including the notes thereto, included elsewhere in this
Prospectus.
OVERVIEW
Since its inception in May 1990, the Company has been developing,
commercializing and manufacturing medical tissue cohesive products for use in
wound closure on humans and animals. The Company's products are based on its
proprietary cyanoacrylate technology, and a substantial portion of the Company's
historical expenses has consisted of research and development and clinical trial
expenses. Through the closing of the Company's initial public offering of Common
Stock on September 30, 1996, the Company funded its operations with cash
borrowed from Sharpoint Development Corporation ("Sharpoint"), sales of the
Company's OCTYLDENT and NEXABAND products and license and product development
revenues from marketing partners. On September 30, 1996, the Company completed
its initial public offering, issuing 2,550,000 shares of Common Stock and
generating net proceeds of approximately $17,926,000.
The Company has been unprofitable since its inception and has incurred net
losses in each year, including a net loss of approximately $16,814,000 for the
year ended December 31, 1996, or $2,604,000 excluding a one-time non-cash charge
of $14,210,000. The Company anticipates that its recurring operating expenses
will increase for the next several years, as it expects its research and
development expenses to increase in order to develop new products and fund
additional clinical trials. The Company also expects to incur additional capital
expenditures to expand its manufacturing capabilities. The Company expects to
continue to incur losses for the next several years, although the amount of
future net losses and time required by the Company to reach profitability are
highly uncertain. The Company's ability to generate significant revenue and
become profitable will depend on its success in commercializing TRAUMASEAL,
including the receipt of all regulatory clearances and approvals, expanding its
manufacturing capabilities, developing new products and entering into additional
marketing agreements and the ability of its marketing partners to commercialize
successfully products incorporating the Company's technologies. No assurance can
be given that the Company will generate significant revenue or become profitable
on a sustained basis, if at all.
In connection with the Exchange on September 25, 1996, obligations of and
interests in the Partnership were contributed to the Company in exchange for an
aggregate of 9,600,000 shares of Common Stock. As of March 29, 1996, the
long-term debt of the Partnership held by Sharpoint, including accrued interest,
was contributed to the Partnership as $11,483,000 of partners' capital. During
the period from May 1990 through the consummation of the Exchange on September
25, 1996, CRX Medical, Inc. ("CRX") and its successor, Caratec, L.L.C.
("Caratec"), as limited partners of the Partnership, received payments of
approximately $993,000 based on net revenues pursuant to the partnership
agreement. These payment obligations ceased upon the consummation of the
Exchange. As part of the Exchange, Caratec exchanged its right to receive
payments based on net revenues and its right to receive, as a limited partner in
the Partnership, a percentage of the proceeds of a sale of all or substantially
all of the assets of the Partnership for 1,776,250 shares of Common Stock. This
transaction resulted in a one-time non-cash charge of $14,210,000 which equaled
the difference between the value of the Common Stock issued to Caratec and its
basis in the Partnership. The resulting charge to accumulated deficit was offset
by a credit to additional paid-in capital. See "Prior Partnership Status."
Historically, there was no provision for federal or state income taxes in
the financial statements of the Company's predecessor, Tri-Point Medical L.P.,
because income or loss generated by the Partnership was included by the partners
in their personal income tax returns. Since the Company's incorporation on
February 20, 1996, the Company has been subject to federal and state corporate
income taxes.
The Company was formed on February 20, 1996 and substantially all of the
assets of the Partnership were transferred to the Company as of March 1, 1996.
The net operating losses to March 1, 1996 will not be available to the Company
to offset any future taxable income for federal income tax purposes because it
was a partnership for that period.
The Company incurred compensation expense of $500,000 for the year ended
December 31, 1996 in connection with options for Common Stock granted to
employees, consultants and directors because such options had a weighted average
exercise price of $2.73 per share below the fair market value of the Common
Stock. Such expense will be approximately $300,000 per year in the next three
years and $120,000 in the subsequent year as the options vest. Such expense
could increase during a given year if the vesting of options were to accelerate
upon the occurrence of certain events. See "Management -- Equity Compensation
Plan."
17
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Total revenues for 1996 increased 189% to $3,996,000 from $1,380,000 for
1995. This increase was primarily the result of the receipt of $3,500,000 in
license and product development revenues under the supply and distribution
agreement for TRAUMASEAL entered into with Ethicon in March 1996. This increase
was partially offset by a decrease in product sales from $1,380,000 for 1995 to
$496,000 for 1996. This decrease was attributable to decreased sales volume of
OCTYLDENT as a result of the inventory build-up by the Company's marketing
partner during 1995. The Company is unable to predict future prospects for this
product with the current marketing partner.
Cost of products sold decreased 13% to $460,000 for 1996 as compared to
$531,000 for 1995. This decrease was primarily a result of decreased sales
volume of OCTYLDENT, as discussed above. Cost of products sold as a percentage
of product sales increased to 93% for 1996 from 38% for 1995. This increase was
primarily a result of the decreased sales volume of OCTYLDENT, resulting in the
fixed portion of production costs being allocated over a lower volume of units
produced.
Operating expenses for 1996 increased 195% to $20,549,000 from $6,976,000
for 1995. Included in operating expenses for 1996 was a one-time non-cash charge
of $14,210,000 related to the exchange by Caratec, a former limited partner of
the Company's predecessor, Tri-Point Medical L.P., of its right to receive
various payments from the Partnership and its limited partnership interest for
Common Stock of the Company. See "Prior Partnership Status." Included in
operating expenses for 1995 was a one-time non-cash charge of $3,500,000
representing the estimated fair value of the limited partnership interests of
certain employee limited partners admitted into the Partnership on December 31,
1995. Excluding these non-cash charges, total operating expenses for 1996
increased 82% to $6,339,000 from $3,476,000 for 1995. This increase was
primarily related to costs associated with the conduct of clinical trials for
TRAUMASEAL, as well as financial advisory and professional fees and the
amortization of deferred compensation related to employee and director stock
options.
Interest expense for 1996 decreased 84% to $138,000 from $847,000 for 1995.
This decrease was a result of the related debt being converted into capital as
of March 29, 1996.
Investment and interest income for 1996 increased to $337,000 from $2,000
for 1995. This increase resulted from interest earned from higher average cash
and investment balances resulting from the Company's receipt of the net proceeds
of its initial public offering.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Total revenues for 1995 decreased 8% to $1,380,000 from $1,503,000 for
1994. This decrease in total revenues was the result of a decrease in product
sales revenues, which was primarily due to decreased sales volume of OCTYLDENT
as a result of the initial product launch and the related inventory build-up by
the Company's marketing partner during the year ended December 31, 1994.
Cost of products sold increased 1% to $531,000 for 1995 as compared to
$528,000 for 1994. This increase was primarily a result of decreased
efficiencies and related costs associated with the expansion of the Company's
manufacturing capabilities.
Operating expenses for 1995 increased 154% to $6,976,000 from $2,747,000
for 1994. This increase was primarily a result of a non-cash compensation
expense of $3,500,000 related to the grant of limited partnership interests in
the Partnership to employees of the Company, as well as costs for development
and preparation for clinical trials for TRAUMASEAL and increased financial
advisory and professional fees. Offsetting these increases were reductions in
clinical trial costs upon the completion of such trials for OCTYLDENT and
NEXACRYL. Payments to CRX increased as a result of an increase in the stipulated
minimum amount payable to CRX under the partnership agreement.
Interest expense for 1995 increased 90% to $847,000 from $445,000 for 1994.
This increase resulted primarily from additional long-term borrowings from
Sharpoint during 1995 and 1994 to provide working capital.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date primarily through the sale
of equity securities, borrowings from Sharpoint, license and product development
revenues and product sales revenues. Through March 29, 1996, the Partnership had
borrowed $9,571,000 from Sharpoint, which excludes accrued interest of $932,000
converted to long-term debt on
18
<PAGE>
December 31, 1994. As of March 29, 1996, all such long-term debt, including
accrued interest, was contributed as partners' capital to the Partnership.
The Company believes that existing cash and cash equivalents and short-term
investments, which totaled $17,651,000 at December 31, 1996, together with
estimated net proceeds of approximately $11,609,000 from this Offering, will be
sufficient to finance its capital requirements for at least 24 months.
Cash provided by operating activities was $287,000 for 1996. The Company
used cash of $2,113,000 and $1,533,000 for operating activities during 1995 and
1994, respectively. This decrease in cash used by operations was primarily due
to the receipt of $3,500,000 from Ethicon under the supply and distribution
agreement for TRAUMASEAL discussed above.
Cash used for investing activities was $5,637,000 for 1996, up from
$104,000 for 1995 and $130,000 for 1994, primarily as a result of the receipt of
proceeds from the initial public offering. The increase was primarily used to
purchase short-term investments, as well as to acquire capital equipment and
obtain and protect patents. Although the Company has no material commitments for
capital expenditures, the Company anticipates using approximately $2,000,000 of
the net proceeds from this Offering for capital expenditures related to
laboratories and manufacturing equipment. See "Use of Proceeds."
Cash provided by financing activities was $18,354,000 for 1996, up from
$2,207,000 and $1,682,000 for 1995 and 1994, respectively. The Company's primary
financing activity during 1996 was its initial public offering. During 1995 and
1994, the Company's financing activities primarily were borrowings from
Sharpoint.
The Company has entered into a capital lease agreement with an equipment
finance company that provides for up to $1,500,000 of equipment financing.
The Company expects to incur expenses related to the further research and
development of its technology and the development of current and additional
products, including outside testing and preclinical and clinical trials. See
"Use of Proceeds."
The Company's future capital requirements will depend on numerous factors,
including (i) the progress of its research and product development programs,
including clinical studies, (ii) the effectiveness of product commercialization
activities and marketing agreements, including the development and progress of
sales and marketing efforts and manufacturing operations, (iii) the ability of
the Company to maintain existing marketing agreements and establish and maintain
new marketing agreements, (iv) the costs involved in preparing, filing,
prosecuting, defending and enforcing intellectual property rights and complying
with regulatory requirements, (v) the effect of competing technological and
market developments and (vi) general economic conditions. If the proceeds of
this Offering, together with the Company's currently available funds and
internally generated cash flow, are not sufficient to satisfy its financing
needs, the Company will be required to seek additional funding through bank
borrowings and additional public or private sales of its securities, including
equity securities, or through other arrangements with marketing partners. Other
than the Company's equipment financing lines of credit, the Company has no
credit facility or other committed sources of capital. There can be no assurance
that additional funds, if required, will be available to the Company on
favorable terms, if at all. See "Risk Factors -- Future Capital Needs and
Uncertainty of Additional Financing" and "Use of Proceeds."
19
<PAGE>
BUSINESS
GENERAL
Closure develops, commercializes and manufactures medical tissue cohesive
products based on its proprietary cyanoacrylate technology. The Company's
medical tissue cohesives can be used to close and seal wounds and incisions
rapidly and stop leakage of blood and other body fluids from injured tissue. The
Company's nonabsorbable products can be used to replace sutures and staples for
certain topical wound closure applications, while the Company's absorbable
products can potentially be used as surgical sealants and surgical tissue
cohesives for internal wound closure and management. Closure's medical tissue
cohesive products align injured tissue without the trauma caused by suturing or
stapling and allow natural healing to proceed. In addition, Closure believes
that its medical tissue cohesive products result in lower overall procedure
costs and are easier and quicker to prepare and use than sutures or staples. The
worldwide market for sutures and staples for topical and internal applications
is currently estimated to be $2.6 billion annually, and the Company expects that
it will compete for a portion of this market.
The Company has three products for human use and has a product line for
veterinary uses, which are described below:
TRAUMASEAL is a topical tissue cohesive used to close wounds
from skin lacerations and incisions. The Company filed a PMA
application for TRAUMASEAL with the FDA in December 1996, which
was granted "expedited processing." Product launch of TRAUMASEAL
is expected in France, Italy and Australia in mid-1997 and in
Canada in late 1997. The Company has entered into a marketing
agreement with Ethicon for exclusive worldwide marketing and
distribution of TRAUMASEAL.
OCTYLDENT is a topical sealant currently used in conjunction
with Actisite(Register mark), a site-specific drug delivery
system manufactured by ALZA, to treat adult periodontal disease.
OCTYLDENT received 510(k) clearance for use as a cohesive for
the temporary fixing of periodontal fibers to teeth or other
hard surface abutments from the FDA in 1990 and is marketed with
Actisite(Register mark) in the United States by the Procter &
Gamble/ALZA Partnership and outside the United States by ALZA.
NEXACRYL is a topical sealant to be used in the repair of
corneal ulcers and lacerations. The Company received an FDA
approvable letter for NEXACRYL in January 1996. If approved, the
Company believes NEXACRYL will be the first cyanoacrylate
cohesive product to receive a PMA from the FDA. The Company has
entered into a marketing agreement with Chiron for exclusive
worldwide marketing and distribution of NEXACRYL.
NEXABAND is a product line of five topical tissue cohesives
currently used in veterinary wound closure and management.
NEXABAND products have been marketed by Farnam since 1993.
Closure is also developing absorbable products for internal applications.
The Company has two products in development, a surgical sealant to be used to
control post-surgical leakage from coronary artery bypass graft and bowel
resection procedures and a surgical tissue cohesive to be used to close internal
surgical incisions and traumatic wounds. These future products require further
development, clinical trials and regulatory clearance or approval prior to
commercialization.
TECHNOLOGY OVERVIEW
Closure's medical tissue cohesive products are based on its proprietary
cyanoacrylate technology. Cyanoacrylates are a family of liquid monomers that
react under a variety of conditions to form polymer films with strong adhesive
properties. Industrial adhesives based on cyanoacrylates were first introduced
in 1958 and are widely used in the aerospace and automotive industries, as well
as in consumer products such as super glue.
Medical tissue cohesives have not been widely used because, unlike
industrial adhesives, medical tissue cohesives must be shown to be safe for use
in humans and approved by regulatory authorities. The major obstacles to
achieving regulatory approval have been meeting biocompatibility standards and
demonstrating sterility. Using its proprietary cyanoacrylate technology, Closure
believes it has demonstrated biocompatibility as defined by ISO Toxicology
Testing Standards for the Biological Evaluation of Medical Devices. A key
element in the Company's compliance with these standards is its ability to
manufacture highly purified base material which allows the Company to satisfy
toxicity tests. In addition, Closure's products are synthetic, thereby
eliminating the risk of contamination inherent in products such as fibrin glues
or collagen-based products, which are derived from human blood or animal tissue.
Closure has also developed novel assays to demonstrate sterility, which is
required for regulatory approval and enhances the safety profile of its
products.
20
<PAGE>
Closure's technology enables it to develop NONABSORBABLE formulations for
topical use and ABSORBABLE formulations for internal use. Nonabsorbable
formulations close and seal skin wounds and incisions for the duration of
healing, then fall off naturally as new skin cells are produced and the wound
bed heals. Absorbable formulations can be used to close or seal internal wounds
and degrade, in a predictable manner, into biocompatible components that are
eliminated from the body naturally. Closure has been able to develop absorbable
formulations by controlling biodegradability of cyanoacrylates.
The key obstacle in developing an absorbable formulation has been that
certain byproducts of the degradation process are toxic. In particular,
degradation of cyanoacrylates produces formaldehyde, which is toxic at
relatively low concentrations in the body. Closure has patented a "scavenger"
process that permits degradation without a cytotoxic reaction. In this process,
the Company adds agents to its formulations that reduce formaldehyde to
biologically acceptable levels.
The Company's proprietary technology allows it to customize the physical
and chemical properties of cyanoacrylates to meet specific market needs. These
properties include viscosity, flexibility, bond strength, stability, setting
time, porosity and biodegradation. For example, TRAUMASEAL has been formulated
with the high bond strength of cyanoacrylates, yet has enough flexibility to
adhere and adjust as needed to the tension of the skin on different areas of the
body. Additional formulations of TRAUMASEAL with higher viscosity and varied
setting times may be developed to enhance ease of use in specialized procedures
in cosmetic and dermatologic surgery. The Company's products for the treatment
of moist areas, such as the eyes, mouth and internal tissue, may be formulated
to have faster setting times to control the flow of fluids. The Company's
absorbable products may be formulated with controlled biodegradation rates to
match the healing rates of various tissues. In addition, the Company's products
perform consistently and reproducibly, do not require special preparation or
refrigeration and have shelf-lives of 18 to 24 months.
Closure has also developed delivery technology to deliver TRAUMASEAL and
other products to wound sites in order to enhance the utility of its products.
The current TRAUMASEAL applicator is a small, pen-like instrument that is easy
to use and facilitates the application of the product. This applicator contains
a catalyst that controls the polymerization process and allows the cohesive film
to be applied in multiple layers, which enhances bond strength. The Company has
also developed a spray applicator for equine wound management, which permits
fast delivery of the NEXABAND tissue cohesive to a large surface area of the
animal. Closure intends to continue investigating and developing delivery
technologies as various needs arise.
The Company is building a strong portfolio of patent and trade secret
protection on the basic properties, formulations and medical uses of its
proprietary tissue cohesive and delivery technologies. The Company has been
issued five U.S. patents relating to the Company's scavenger process for its
absorbable formulations. In addition, the Company has four patents directed to
other areas of tissue cohesive and delivery technology. The Company has filed
five U.S. patent applications covering other aspects of the scavenger process,
delivery technology, biodegradation rate control processes, high strength wound
closure tissue cohesives and formulation and delivery additives. Counterparts of
certain of these patents and patent applications have been filed in other
countries. The Company also relies on its trade secrets and technological
expertise in order to protect its proprietary technology.
During the years ended December 31, 1994, 1995 and 1996, the Company spent
$546,000, $652,000 and $861,000, respectively, on Company-sponsored research and
development activities.
BUSINESS STRATEGY
The Company's objective is to become the leader in the medical tissue
cohesive market by capitalizing on its proprietary cyanoacrylate technology. The
Company's strategy is to focus initially on commercializing and launching
topical tissue cohesive products based on its nonabsorbable formulations.
Initial target markets are topical wound closure in emergency rooms and
operating rooms and for plastic surgery procedures. For its nonabsorbable
products, the Company has entered into agreements with market leaders to market
and distribute the Company's products. The Company is also pursuing the
development and commercialization of absorbable formulations.
Implementing this strategy involves the following activities:
EXPAND AND ACCELERATE RESEARCH AND DEVELOPMENT. Closure's
research and development efforts are primarily focused on
developing absorbable tissue cohesives, as well as product line
extensions of its nonabsorbable tissue cohesives. The Company
intends to increase its research and development staff,
significantly expand its research facilities and acquire
additional laboratory and analytical equipment.
21
<PAGE>
EXPAND MANUFACTURING CAPACITY. The Company believes its ability
to manufacture highly purified cyanoacrylate-based medical
tissue cohesives is a key competitive advantage. Closure intends
to retain manufacturing rights to all its products and will
expand its manufacturing capacity by adding facilities,
equipment and personnel. In addition, the Company is researching
other processes to improve manufacturing capacity and
efficiency.
SEEK RAPID REGULATORY APPROVAL. The Company targets product
applications classified as medical devices that are eligible for
regulatory approval under a less time-consuming process than
that required for pharmaceuticals. The Company's laboratory,
animal and human studies have generated an extensive database
which the Company believes will facilitate the regulatory
approval process of current and future products. The Company
engages clinical research organizations to utilize the extensive
experience and technical expertise of such organizations in
planning and managing clinical trials.
ESTABLISH FOCUSED SALES FORCE As the Company's absorbable
surgical sealant and surgical tissue cohesive products progress
toward commercialization, the Company intends to establish a
focused sales force to market these products. In addition, where
appropriate based on the indication for its absorbable products,
the Company may establish partnerships with recognized market
leaders to take advantage of their resources and distribution
channels.
PRODUCTS
The Company's medical tissue cohesive products are an alternative to the
traditional method of closing topical and internal wounds and incisions.
Suturing and stapling involve puncturing healthy tissue in order to align and
close the wound, may cause leakage or additional scarring at the small puncture
sites, may require anesthetics, are time-consuming to apply, and often require
return patient visits and physician time to remove the sutures or staples.
Medical tissue cohesives may be applied quickly, may not require anesthetics, do
not induce trauma to surrounding tissues and do not require return visits to the
physician.
<TABLE>
<CAPTION>
PRODUCT MARKET STATUS MARKETING PARTNER
<S> <C> <C> <C>
NONABSORBABLE
TRAUMASEAL Topical wound PMA pending (granted Ethicon
closure expedited processing);
marketable in France,
Italy, Australia and Canada
OCTYLDENT Periodontal Marketed in U.S. and Procter & Gamble/ALZA
sealant European-Union countries in Partnership; ALZA
conjunction with
Actisite(Register mark)
NEXACRYL Corneal repair PMA pending Chiron
NEXABAND (5 products) Veterinary Marketed in U.S. Farnam
ABSORBABLE
SURGICAL SEALANT Coronary Preclinicals None
artery bypass
graft and
bowel
resection
SURGICAL TISSUE COHESIVES Internal wound Preclinicals None
closure
</TABLE>
TRAUMASEAL
The Company's lead product, TRAUMASEAL, is a topical tissue cohesive used
to close wounds from skin lacerations and incisions, minimally invasive surgery
and plastic surgery. The Company believes, based on market research, that there
are approximately 11 million skin lacerations annually in the United States. In
addition, there were an estimated 7.6 million minimally invasive surgical
procedures in 1995 and approximately 1.4 million plastic surgery procedures in
1994. The Company believes, based on industry sources, that approximately 25
million other surgical procedures are performed annually in
22
<PAGE>
the United States. The Company expects that TRAUMASEAL will compete for a
portion of these markets as a replacement for, or in conjunction with, sutures
or staples. TRAUMASEAL is intended to be used topically for wound closure where
a 5.0 or smaller diameter suture would normally be used and is not intended for
use on the hands, feet or across joints. TRAUMASEAL can also be used topically
for lacerations or incisions requiring subcutaneous sutures or staples. Although
the purchase cost of TRAUMASEAL will be greater than sutures or staples, the
Company believes that the use of TRAUMASEAL will result in lower overall
procedure costs because of reduced treatment time, elimination of the need for
anesthetics, simplification of post-closure wound care and elimination of suture
or staple removal.
The Company submitted a PMA application for TRAUMASEAL in December 1996,
which was granted "expedited processing" and, based on the FDA's initial review,
was determined to be suitable for filing. The Company completed controlled,
randomized clinical trials of TRAUMASEAL at ten sites throughout the United
States with an enrollment of 818 patients. The clinical trials were conducted by
a clinical research organization and compared wound closure utilizing TRAUMASEAL
with wound closure utilizing sutures or staples. The clinical trials
demonstrated TRAUMASEAL to be at least equivalent to nonabsorbable 5.0 or
smaller diameter sutures, staples or adhesive strips/tapes in wound closure,
wound healing, cosmetic outcome and infection rate and also demonstrated that
the use of TRAUMASEAL substantially reduced procedure time. In February 1997,
the Company submitted a CAP to the FDA for use of a color additive, D & C Violet
No. 2, in TRAUMASEAL.
Product launch of TRAUMASEAL is expected in France, Italy and Australia in
mid-1997 and in Canada in late 1997. A controlled, randomized 300-patient
clinical study of TRAUMASEAL conducted in Canada in late 1995 and early 1996
similarly demonstrated TRAUMASEAL to be at least equivalent to nonabsorbable 5.0
or smaller diameter sutures. There were no reports of unanticipated adverse
effects.
In March 1996, the Company entered into an agreement with Ethicon, a
subsidiary of Johnson & Johnson and a world leader in wound closure products, to
market and distribute TRAUMASEAL.
OCTYLDENT
OCTYLDENT, the Company's first human product introduction, is a topical
sealant used in conjunction with site- specific sustained release antibacterial
drug therapy to treat adult periodontal disease. The American Dental Association
estimated that approximately 14 million scaling and planing procedures were
performed in 1990 (the most recent year for which data are available) in the
United States to help prevent the progression of periodontal disease. OCTYLDENT
is currently used to seal the pocket of a diseased gum where
Actisite(Register mark), a therapeutic drug delivery system manufactured by
ALZA, has been inserted, thereby allowing the system to remain in place over a
ten-day period.
OCTYLDENT received FDA marketing clearance in August 1990, and the FDA
issued approval to market Actisite(Register mark) in March 1994. The Company
entered into supply agreements in 1991 and 1993 with the Procter & Gamble/ALZA
Partnership and ALZA to market OCTYLDENT with Actisite(Register mark) in the
United States and outside the United States, respectively. The U.S. product
launch of OCTYLDENT, sold in combination with Actisite(Register mark), commenced
in July 1994. The Actisite(Register mark)/OCTYLDENT product is marketed in
several European countries, where the first launch occurred in May 1993, and
ALZA is pursuing registration and distribution arrangements for
Actisite(Register mark) in a number of other European markets. The Company
received authorization to display the CE mark for OCTYLDENT in the European
Union in August 1995, which allows OCTYLDENT to be marketed throughout the
European Union.
The Company entered into an agreement in March 1994 with On-Site
Therapeutics, Inc. ("On-Site") pursuant to which On-Site provides exclusive
services to identify potential purchasers of OCTYLDENT for use in conjunction
with site- specific sustained release antibacterial drug therapy for adult
periodontal disease. Under the agreement, On-Site receives royalties on sales of
OCTYLDENT.
NEXACRYL
NEXACRYL is a topical sealant to be used in the repair of corneal ulcers
and lacerations. NEXACRYL received orphan device status to treat a condition
known as "melting cornea" for which no FDA-approved product is presently
available. NEXACRYL is applied directly to the cornea to seal fluids and allow
the corneal tissue to heal.
A clinical study of NEXACRYL has been completed in which 262 patients were
treated at 23 clinical study sites with no reports of leakage or infections
attributable to NEXACRYL. Based on this study, the Company filed a PMA
application with the FDA and received an approvable letter from the FDA in
January 1996 for the product. A PMA is anticipated following sterilization
validation studies, FDA inspection of the manufacturing site and FDA labeling
review. If approved, the Company believes NEXACRYL will be the first
cyanoacrylate cohesive to obtain a PMA from the FDA.
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The Company intends to develop an additional formulation of NEXACRYL for
use in cataract and other related corneal procedures. There are approximately
two million cataract procedures performed in the United States each year. If
NEXACRYL receives marketing approval from the FDA, the Company intends to
broaden the indication for NEXACRYL to cover such procedures. The Company
believes this can be accomplished by submitting a PMA Supplement to the FDA,
which may include clinical data to be generated from a limited clinical study.
There can be no assurance that a limited clinical study will be acceptable to
the FDA or that the Company will be able to obtain FDA approval of a PMA
Supplement for this or any additional indication.
The Company's marketing partner for NEXACRYL is Chiron.
NEXABAND VETERINARY PRODUCTS
The Company has five topical tissue cohesive products sold under the
NEXABAND trade name used in veterinary wound closure and management procedures.
There were an estimated 11 million surgical procedures performed on animals in
the United States in 1990 and for which the Company believes NEXABAND products
could have been used. The Company estimates that NEXABAND products were used in
approximately 1.3 million veterinary procedures in the United States in 1996.
NEXABAND products seal the wound and provide a flexible, waterproof barrier
against dirt, fluids and contaminants. The tissue cohesive falls off as the
wound is healed. The products are differentiated by type of applicator, setting
time, viscosity and packaging. NEXABAND S/C is used for the topical closure of
lacerations and spay and neuter incisions. NEXABAND QUICKSEAL is used as a
sealant for minor grooming cuts. NEXABAND PUMP SPRAY is used as a sealant for
large surface area wounds, particularly equine abrasion wounds. NEXABAND LIQUID
is used for wound closure in cat declawing procedures. NEXABAND OPHTHALMIC is
used as a hemostatic agent and for the protection of damaged corneas. The
NEXABAND products are distributed through Farnam, a leader in large animal
over-the-counter products and small and large animal ethical product markets.
PRODUCTS IN DEVELOPMENT
The Company has several absorbable products under development which will
require further development, clinical trials and regulatory clearance or
approval prior to commercialization. See " -- Government Regulation."
SURGICAL SEALANT
The Company is developing an absorbable surgical sealant to be used to
control post-surgical leakage at suture closure sites, a problem that is not
effectively addressed by current medical technology. Closure's surgical sealant
is being developed initially for use in coronary artery bypass graft and bowel
resection surgery, of which approximately 1.2 million procedures were performed
in the United States in 1992. The Company believes its absorbable formulations
could also serve as effective sealants for repairing bladder or spleen defects,
diffusing bleeding from the liver, sealing air leakage from lung defects,
repairing skin graft sites and managing chronic skin ulcers.
The Company is conducting preliminary animal studies to test the
feasibility of using absorbable tissue cohesive sealants to prevent leakage
during coronary artery bypass graft procedures.
A number of major medical firms are seeking to develop blood-based fibrin
products to prevent leakage at suture closure sites. The Company believes that
its surgical sealant has advantages over such products in that it will be
significantly easier to manufacture, control and manipulate than human blood,
which must be harvested, processed and screened for contaminants, and eliminates
the risk of contamination inherent in blood-derived products. In addition,
several companies are seeking to develop collagen-based products, which are
derived from animal tissue, to act as an internal sealant for human tissue. The
Company believes that its surgical sealants have similar advantages over
collagen-based products and that such products will pose many of the same
contamination risks described above. In addition, the Company believes that its
cyanoacrylate-based tissue cohesives have greater bond strength than either
fibrin-based or collagen-based products.
SURGICAL TISSUE COHESIVE
The Company is developing an absorbable surgical tissue cohesive for the
closure of internal surgical incisions and traumatic wounds. There were
approximately 50 million surgical procedures performed globally in 1995, with an
estimated growth rate of 2% to 3% annually. The Company believes that its
absorbable tissue cohesive for surgical closure of soft tissue would be fast,
safe and easy to use, and would provide advantages over sutures and staples such
as cost effectiveness, enhanced wound sealing and closing, maintenance of the
healing environment, reduced trauma, pain and patient discomfort and superior
tissue adherence. In addition, the Company believes that its absorbable surgical
tissue cohesive would be well-suited for internal closure in laparoscopic
procedures.
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The Company has initiated preliminary animal studies to test the
feasibility of absorbable formulations to close internal wounds, including soft
tissue wounds.
ADDITIONAL PRODUCT OPPORTUNITIES
The Company believes that there are other potential medical applications
for its proprietary cyanoacrylate technology. The Company has not yet developed
any programs or committed any funds for research and development of these
potential applications. Moreover, any potential products will be subject to
extensive and rigorous regulatory review. There can be no assurance that any
funds will be available for research programs for such potential products or
that any potential products will be successfully developed, be proven to be safe
and efficacious in clinical trials, meet applicable regulatory standards, be
capable of being produced in commercial quantities at acceptable costs or be
successfully marketed.
The Company believes that many consumers of over-the-counter ("OTC") wound
closure products would prefer the sealing and wound protection characteristics
of a cohesive as compared to the wound covering capabilities of a topical
bandage. The Company believes that incorporating its topical wound closure
product, TRAUMASEAL, into an OTC product could provide a fundamental
differentiating characteristic and marketing advantage over products currently
offered in the OTC market. FDA approval of a PMA Supplement would be required
prior to marketing TRAUMASEAL for OTC use.
The Company also believes that its cohesive technology could be used as a
site-specific drug delivery system to deliver growth factors to stimulate tissue
regeneration, various hormones or pharmaceuticals to promote healing,
antibiotics or antivirals to inhibit infection or chemotherapeutic agents to
slow or stop tumor growth. Based on preliminary analyses, the Company believes
that encapsulations, matrix vehicles, liquids and other formed products may be
developed from its cohesive material.
In addition, the Company believes its technology could be useful for
certain orthopedic repair procedures.
MARKETING PARTNERS
An important element of the Company's strategy for its nonabsorbable
products is to enter into marketing agreements to enable it to take advantage of
the wide range of opportunities created by its technology. To exploit these
opportunities, the Company has entered into the agreements described below for
the supply and distribution of certain products. The Company is dependent on its
marketing partners to market and distribute its products. Although the Company
believes that its marketing partners have an economic motivation to succeed in
performing their contractual responsibilities, the amount and timing of
resources to be devoted to these activities are not within the control of the
Company. See "Risk Factors -- Dependence on Marketing Partners."
ETHICON, INC.
In March 1996, the Company entered into a renewable, eight-year supply and
distribution agreement with Ethicon, a subsidiary of Johnson & Johnson, which
provides Ethicon with exclusive worldwide rights to market, distribute and sell
TRAUMASEAL, the Company's nonabsorbable wound closure tissue cohesive. The
agreement provides for certain up-front and milestone payments to the Company,
provides for the reimbursement of certain expenses associated with clinical
trials, requires Ethicon to make minimum purchases that escalate annually after
receipt of FDA or European Community approval and requires Ethicon to pay
royalties based upon net sales.
Ethicon may renew the agreement for additional one-year periods. The
agreement is terminable upon specified events, including (i) material breach by
either party, (ii) insolvency of either party and (iii) failure to obtain
regulatory approval for TRAUMASEAL in the United States within two years from
the date of submission of the Company's 510(k) notification or PMA. The Company
completed human clinical trials of TRAUMASEAL in late 1996 and submitted a PMA
application in December 1996. The Office of Device Evaluations of the FDA
subsequently notified the Company that the PMA was granted "expedited
processing" by the FDA. Upon certain events of default, including failure to
provide an adequate supply of product, Ethicon may terminate its arrangement to
purchase TRAUMASEAL from the Company, and Ethicon may itself then manufacture
TRAUMASEAL and only pay the Company royalties based on sales. See "Risk
Factors -- Dependence on Marketing Partners," "Risk Factors -- Limited
Manufacturing Experience" and " -- Manufacturing."
PROCTER & GAMBLE/ALZA, PARTNERS FOR ORAL HEALTH CARE AND ALZA CORPORATION
The Company entered into a supply agreement with the Procter & Gamble/ALZA
Partnership in March 1991, which was subsequently amended in April 1992. The
agreement grants the Procter & Gamble/ALZA Partnership the non-exclusive
worldwide rights to market and distribute OCTYLDENT with
Actisite(Register mark), a product manufactured by ALZA. The first shipment
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under this agreement was in May 1994. In March 1993, the Company entered into a
supply agreement with ALZA, which grants ALZA non-exclusive rights to market
OCTYLDENT worldwide, except in the United States, Canada, Mexico and Venezuela,
where the Procter & Gamble/ALZA Partnership has marketing rights. The first
shipment under this agreement was in May 1993. The agreements guarantee the
Company minimum purchases annually and provide for specified prices per unit for
OCTYLDENT, which may be increased annually subject to certain limitations.
The agreements each have a term of three years from the first shipment
date, with automatic renewal for additional one-year periods, and each agreement
is terminable upon specified events, including (i) material breach by either
party, (ii) the publication of a scientific study, undertaken or reported by a
nationally recognized health research agency or government body, that links any
component of OCTYLDENT to any health or safety hazard and (iii) any revocation
or suspension of the Company's 510(k) clearance for OCTYLDENT.
CHIRON VISION CORPORATION
The Company entered into a supply and distribution agreement with Chiron
effective July 1992, and amended in April 1995, which provides Chiron with the
exclusive rights to market, sell and distribute certain human ophthalmic
products on a worldwide basis. The agreement provides Chiron with an option to
expand its coverage to include new products. The Company received a payment upon
the execution of the agreement, and will receive a milestone payment upon FDA
marketing approval of its first ophthalmic product, NEXACRYL. The agreement
guarantees the Company minimum purchases that escalate annually. Pursuant to the
agreement, pricing may be adjusted annually to reflect increases in the U.S.
Department of Labor Producer's Price Index. The agreement has a term of 10 years
from the effective date of U.S. regulatory approval of the last-approved
product. The agreement is terminable upon specified events, including (i)
material breach by either party, (ii) Chiron's providing 30 days' notice as to
any product for which FDA clearance or approval is then pending, or (iii)
Chiron's providing 180 days' notice for products for which FDA clearance or
approval is obtained. In certain circumstances, Chiron may terminate its
arrangement to purchase products from the Company, and may itself then
manufacture such products and only pay the Company royalties based on sales.
FARNAM COMPANIES, INC.
In December 1992, the Company entered into a renewable, seven-year
development and distribution agreement with Farnam. The Company granted Farnam
the exclusive rights to market, sell and distribute its NEXABAND line of
veterinary products to the ethical veterinary market in North America. In
addition to the existing nonabsorbable NEXABAND products covered by this
agreement, Farnam has exclusive rights in North America to any absorbable
veterinary cohesive products developed by the Company. Prices and minimum sales
volumes for new products will be negotiated upon product development completion.
Pursuant to the agreement, the Company received a nonrefundable research,
testing and development fee. The agreement also provides for minimum purchases,
which increase annually, and allows the Company to adjust prices annually, but
not in excess of increases in the U.S. Department of Labor Wholesale Price
Index. The agreement is terminable upon specified events, including material
breach by either party. The agreement will automatically renew for successive
one-year periods contingent on Farnam meeting required levels of purchases.
PATENTS, TRADE SECRETS AND PROPRIETARY RIGHTS
The Company's success depends in large part on its ability to obtain
patents, maintain trade secret protection and operate without infringing on the
proprietary rights of third parties. The Company has nine U.S. patents with
expiration dates ranging from 2004 to 2013 and has filed applications for five
additional U.S. patents, as well as certain patent applications outside the
United States, relating to the Company's technology. Five of the issued U.S.
patents relate to the Company's scavenger process for its absorbable
formulations and pending U.S. patent applications relate to other aspects of the
scavenger process. In addition, the Company has four patents directed to other
areas of tissue cohesive and delivery technology. Other U.S. patent applications
relate to the Company's delivery technology, biodegradation rate control
processes, high strength wound closure tissue cohesives and formulation and
delivery additives.
There can be no assurance that any of the pending patent applications will
be approved, that the Company will develop additional proprietary products that
are patentable, that any patents issued to the Company will provide the Company
with competitive advantages or will not be challenged by any third parties or
that the patents of others will not prevent the commercialization of products
incorporating the Company's technology. Furthermore, there can be no assurance
that others will not independently develop similar products, duplicate any of
the Company's products or design around the Company's patents. Any of the
foregoing results could have a material adverse effect on the Company's results
of operations and financial condition.
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The commercial success of the Company also will depend, in part, on its
ability to avoid infringing patents issued to others. If the Company were
determined to be infringing any third party patent, the Company could be
required to pay damages, alter its products or processes, obtain licenses or
cease certain activities. If the Company is required to obtain any licenses,
there can be no assurance that the Company will be able to do so on commercially
favorable terms, if at all. The Company's failure to obtain a license for any
technology that it may require to commercialize its products could have a
material adverse impact on the Company's results of operations and financial
condition.
Litigation, which could result in substantial costs to and diversion of
effort by the Company, may also be necessary to enforce any patents issued or
licensed to the Company or to determine the scope and validity of third party
proprietary rights. If competitors of the Company that claim technology also
claimed by the Company prepare and file patent applications in the United
States, the Company may have to participate in interference proceedings declared
by the U.S. Patent and Trademark Office to determine priority of invention,
which could result in substantial costs to and diversion of effort by the
Company, even if the eventual outcome is favorable to the Company. Any such
litigation or interference proceeding, regardless of outcome, could be expensive
and time consuming. Litigation 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 using such technology and, consequently,
could have a material adverse effect on the Company's results of operations and
financial condition.
In addition to patent protection, the Company relies on unpatented trade
secrets and proprietary technological expertise. There can be no assurance that
others will not independently develop or otherwise acquire substantially
equivalent techniques, or otherwise gain access to the Company's trade secrets
and proprietary technological expertise or disclose such trade secrets, or that
the Company can ultimately protect its rights to such unpatented trade secrets
and proprietary technological expertise. The Company relies, in part, on
confidentiality agreements with its marketing partners, employees, advisors,
vendors and consultants to protect its trade secrets and proprietary
technological expertise. 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 unpatented trade secrets and proprietary technological
expertise will not otherwise become known or be independently discovered by
competitors. Failure to obtain or maintain patent and trade secret protection,
for any reason, could have a material adverse effect on the Company's results of
operations and financial condition.
GOVERNMENT REGULATIONS
The Company's products and operations are subject to substantial government
regulation in the United States and foreign countries.
FDA REGULATION
Most medical devices, including the Company's medical tissue cohesives for
humans, are subject to stringent government regulation in the United States by
the FDA under the FDC Act, and, in many instances, by foreign and state
governments. The FDA regulates the clinical testing, manufacture, safety,
labeling, sale, distribution and promotion of medical devices. Included among
these regulations are premarket clearance and premarket approval requirements
and GMPs. Other statutory and regulatory requirements govern, among other
things, establishment registration and inspection, medical device listing,
prohibitions against misbranding and adulteration, labeling and postmarket
reporting. The regulatory process is lengthy, expensive and uncertain. Securing
FDA approvals and clearances may require the submission of extensive clinical
data and supporting information to the FDA. Failure to comply with applicable
requirements can result in Warning Letters, application integrity proceedings,
fines, recalls or seizures of products, injunctions, civil penalties, total or
partial suspensions of production, withdrawals of existing product approvals or
clearances, refusal to approve or clear new applications or notifications and
criminal prosecution. See "Risk Factors -- FDA and Other Government Regulation."
Under the FDC Act, medical devices are classified into one of three classes
(Class I, II or III) on the basis of the controls necessary to reasonably ensure
their safety and effectiveness. Class I devices are subject to general controls
(e.g., labeling, premarket notification and adherence to GMPs). Class II devices
are subject to general and special controls (e.g., performance standards,
postmarket surveillance and patient registries). Generally, Class III devices
must receive premarket approval from the FDA (e.g., certain life-sustaining,
life-supporting and implantable devices or new devices which have been found not
to be substantially equivalent to certain legally marketed devices). OCTYLDENT
is a Class II medical device and TRAUMASEAL and NEXACRYL are Class III medical
devices.
Before any new medical device may be introduced to the market, the
manufacturer generally must obtain either premarket clearance through the 510(k)
premarket notification process or premarket approval through the lengthier PMA
process. If a color additive is used to color the medical device, the
manufacturer may be required to submit a CAP and obtain
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FDA approval for use of the color additive in production of the device. A 510(k)
premarket notification will be granted if the submitted data establish that the
proposed device is "substantially equivalent" to a legally marketed Class I or
Class II medical device, or to a Class III medical device for which the FDA has
not called for PMAs. The FDA may request extensive data, including clinical
studies of the device's safety and effectiveness, before a substantial
equivalence determination can be made. It generally takes from four to 12 months
from submission to obtain 510(k) premarket clearance, although it may take
longer. A PMA application must be filed if a product is found to be not
substantially equivalent to a legally marketed Class I or II device or if it is
a Class III device for which the FDA has called for PMAs. A PMA application must
be supported by extensive data, including laboratory, preclinical and clinical
trial data, to demonstrate the safety and efficacy of the device, as well as
extensive manufacturing information. Similarly, a CAP must be supported with
extensive data and information demonstrating the safety of the color additive
under the conditions of intended use in the device. Before initiating human
clinical trials, the manufacturer often must first obtain an Investigational
Device Exemption ("IDE") for the proposed medical device. Toward the end of the
PMA review process, after issuing a preliminary approvable letter, the FDA will
generally conduct an inspection of the manufacturer's facilities to ensure
compliance with GMPs. Additionally, the FDA requires sterility validation and
that final labeling be reviewed by the FDA prior to granting a PMA. Approval of
a PMA or a CAP could take two or more years from the date of submission of the
application or petition. The PMA and CAP processes can be expensive, uncertain
and lengthy, and there is no guarantee of ultimate approval.
Modifications or enhancements to products that are either cleared through
the 510(k) process or approved through the PMA process that could affect safety
or effectiveness or effect a major change in the intended use of the device may
require further FDA review through new 510(k) or PMA submissions. Additionally,
certain modifications of the Company's manufacturing facilities and processes,
such as those made in preparation for commercial-scale production of its
products, will subject the Company to further FDA inspections and review prior
to final approval of such products for commercial sale.
Medical devices also are subject to postmarket reporting requirements for
deaths or serious injuries when the device may have caused or contributed to the
death or serious injury, and for certain device malfunctions that would be
likely to cause or contribute to a death or serious injury if the malfunction
were to recur. If safety or efficacy problems occur after the product reaches
the market, the FDA may take steps to prevent or limit further marketing of the
product. Additionally, the FDA actively enforces regulations prohibiting
marketing of devices for indications or uses that have not been cleared or
approved by the FDA.
The Company's current human medical devices are at different stages of FDA
review. OCTYLDENT, the Company's product sold to the Proctor & Gamble/ALZA
Partnership and ALZA for use as a cohesive in conjunction with
Actisite(Register mark), received 510(k) clearance in 1990, and is subject to
GMP, postmarket reporting and other FDA requirements. NEXACRYL, the Company's
ophthalmic product, has received an approvable letter from the FDA and is
pending FDA review of sterilization validation studies, FDA inspection of the
manufacturing site and FDA labeling review before the product can receive final
FDA approval for commercialization. Clinical trials for TRAUMASEAL were
completed in late 1996. The Company submitted to the FDA a PMA application in
December 1996, which was granted "expedited processing," and a CAP in February
1997. The Company expects that it will need to make significant modifications to
its manufacturing facilities and processes in order to manufacture TRAUMASEAL on
a commercial scale, which will subject the Company to an additional FDA
inspection of its manufacturing facility prior to final approval for commercial
sales of this product.
There can be no assurance that the Company will be able to obtain necessary
510(k) clearances or PMA and CAP approvals to market its products in the United
States for their intended use on a timely basis, if at all, and delays in
receipt of or failure to receive such clearances or approvals, the loss of
previously received clearances or approvals, or failure to comply with existing
or future regulatory requirements could have a material adverse effect on the
Company's results of operations and financial condition. See "Risk
Factors -- Limited Manufacturing Experience" and "Risk Factors -- FDA and Other
Government Regulation."
FOREIGN REGULATORY MATTERS
In order for the Company to market its products in Europe, Canada and
certain other foreign jurisdictions, the Company must obtain required regulatory
approvals or clearances and otherwise comply with extensive regulations
regarding safety and manufacturing processes and quality. These regulations,
including the requirements for approvals or clearances to market, may differ
from the FDA regulatory scheme. The time required to obtain approval or
clearance for sale of the Company's products in foreign countries may be longer
or shorter than that required for FDA clearance or approval, and the
requirements may differ. In addition, there may be foreign regulatory barriers
other than premarket approval or clearance. There can be no
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assurance that the Company will obtain regulatory approvals in such countries or
that it will not be required to incur significant costs in obtaining or
maintaining its foreign regulatory approvals. Delays in receipt of approvals to
market the Company's products in foreign countries, failure to receive such
approvals or the future loss of previously received approvals could have a
material adverse effect on the Company's results of operations and financial
condition.
Previously, the FDC Act provided that the FDA must grant authorization to
export an unapproved device. In April 1996, the FDC Act was amended to allow a
non-FDA approved medical device to be exported to any country, provided that the
device (i) complies with the laws of that country and (ii) has valid marketing
authorization or the equivalent from the appropriate authority in a "listed
country." The listed countries are Australia, Canada, Israel, Japan, New
Zealand, Switzerland, South Africa and countries in the European Union and the
European Economic Area. Export of unapproved devices that do not have marketing
approval or clearance in a listed country will continue to require FDA export
authorization.
Medical devices that are marketed or put into service within the European
Union are required to comply with Council Directive 93/42/EEC, the medical
devices directive ("MDD"). Compliance with the MDD entitles a device to make use
of the CE mark and allows the device to be marketed, put into service and
circulated freely within the European Union. Medical devices that have not
obtained the right to affix the CE mark but which conform with the requirements
in force in an individual Member State on December 31, 1994, may nonetheless be
marketed and put into service in that Member State during a five-year transition
period, expiring June 13, 1998. After the expiration of this transition period,
the Company's medical devices will not be able to be marketed or put into
service anywhere in the European Union without having complied with the MDD and
obtained the right to affix the CE mark.
The Company received authorization to display the CE mark for OCTYLDENT in
the European Union in August 1995. The Company plans to pursue the right to
affix the CE mark on TRAUMASEAL, as well as on future human products that the
Company may develop. There can be no assurance that the Company will be
successful in obtaining the right to affix the CE mark on any additional medical
devices. Failure to obtain the right to affix the CE mark on its medical devices
could have a material adverse effect on the Company's results of operations and
financial condition. See "Risk Factors -- FDA and Other Government Regulation."
ENVIRONMENTAL REGULATIONS
The Company's activities involve the controlled use of hazardous materials
and chemicals. The Company is subject to federal, state and local laws and
regulations governing the use, manufacture, storage, handling and disposal of
such material and certain waste products. Although the Company believes that its
safety procedures for handling and disposing of such materials comply in all
material respects with the standards prescribed by such laws and regulations,
risk of accidental contamination or injury from these materials cannot be
completely eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and such liability could have a material
adverse effect on the Company's results of operations and financial condition
and potentially could exceed the resources of the Company. Environmental
protection has been an area of substantial concern in recent years, and
regulation of activities involving the use and disposal of potentially hazardous
materials has increased. There can be no assurance that such regulation will not
increase in the future or that the Company will not be required to incur
significant costs to comply with environmental laws and regulations in the
future.
SALES AND MARKETING
Currently, the Company's nonabsorbable cohesive products are marketed and
sold by its marketing partners. The Company has entered into marketing
agreements with Ethicon for worldwide distribution of TRAUMASEAL, the topical
tissue cohesive that seals wounds from skin lacerations and incisions, plastic
surgery and skin puncture sites from minimally invasive surgery such as
laparoscopy; with the Procter & Gamble/ALZA Partnership and ALZA for worldwide
distribution of OCTYLDENT, the topical sealant which is sold in conjunction with
Actisite(Register mark), a site-specific sustained release product for adult
periodontal disease; with Chiron for worldwide distribution of NEXACRYL, the
topical sealant for use in repair of corneal ulcers and abrasions; and with
Farnam for distribution in North America of NEXABAND, the Company's veterinary
line of products.
The Company's future products, which will primarily be absorbable
formulations, will be sold through a direct sales force or additional marketing
partners in the United States and through other distributors outside the United
States. The Company intends to develop its own internal sales capacity as its
absorbable surgical sealant and surgical tissue cohesive progress toward
commercialization.
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MANUFACTURING
The Company has devoted considerable resources to the development of
manufacturing processes and technologies capable of providing its products with
clinical efficacy, ease of use and suitable shelf life. The Company has
developed a manufacturing process designed to produce a highly purified base
material which is not achievable by other existing methodologies. The Company
relies heavily on internal trade secrets and technological expertise and expects
to keep aspects of its manufacturing process in-house and, where applicable,
seek patent protection for specific manufacturing applications.
The Company currently manufactures all of its products in a 15,000 square
foot facility located adjacent to its corporate offices in Raleigh, North
Carolina. This facility integrates production, bottling, labeling and packaging
capabilities for products currently being marketed. The Company recently entered
into a new lease for a 40,000 square foot facility in Raleigh for, among other
things, the expansion of manufacturing capacity. Upon completion of this
facility in the second half of 1997, the Company will relocate its manufacturing
and other operations. See " -- Facilities."
As production requirements increase with the receipt of additional product
approvals and clearances and the initiation of new clinical trials, additional
personnel, equipment and space will be necessary in virtually all phases of the
production process. The Company is formulating plans for a significant expansion
of its manufacturing capabilities in conjunction with the anticipated future
launch of TRAUMASEAL in France, Italy, Australia and Canada and, eventually, the
remainder of Europe and the United States, as well as for the manufacture of
additional products which may be commercialized in the future by the Company.
Such expansion and scale-up is expected to occur over the next two years. The
Company expects to invest resources in chemical manufacturing equipment and
packaging machinery. Production of commercial-scale quantities may involve
technical challenges for the Company and will require significant scale-up
expenses for additions to facilities and personnel. There can be no assurance
that the Company will be able to achieve large-scale manufacturing capabilities
or to manufacture its products in a cost-effective manner or in quantities
necessary to allow the Company to achieve profitability. If the Company is
unable to expand sufficiently its manufacturing capacity to meet Ethicon's
requirements for TRAUMASEAL as set forth under their agreement, Ethicon may
itself then manufacture TRAUMASEAL and only pay the Company royalties based on
sales. See " -- Marketing Partners."
The Company presently purchases cyanoacetate, the primary raw material used
in the manufacture of the Company's medical cohesives, from one source. The
Company has the capability of manufacturing cyanoacetate if necessary, and
cyanoacetate may be available from a second supplier. The Company would be
required to qualify the quality assurance systems of an additional supplier
prior to its use as a source of supply. The other raw materials used in
manufacturing and packaging the Company's products are readily available from
multiple sources, as are its process equipment and controls.
The Company presently hires filling and packaging employees on a temporary
basis, and the Company expects that a significant portion of the Company's
future packaging requirements will be completed by outside providers.
COMPETITION AND TECHNOLOGICAL CHANGE
The Company competes with many domestic and foreign competitors in various
rapidly evolving and technologically advanced fields in developing its
technology and products, including medical device, pharmaceutical and
biopharmaceutical companies. In the worldwide wound closure market, the
Company's products will compete with the suture products of Ethicon, the world
leader in the wound closure market, and American Home Products Corporation. The
Company also believes its products will compete with the staple products of
United States Surgical Corporation and Ethicon Endo-Surgery, Inc., a subsidiary
of Johnson & Johnson. In addition, there are two other cyanoacrylate-based
topical adhesives with which the Company's products may compete, neither of
which is approved for sale in the United States. B. Braun GmbH markets
Histoacryl(Register mark) as a topical closure adhesive for small lacerations
and incisions in low skin tension areas of the body. Loctite Corporation has
recently test marketed a similar adhesive in the United Kingdom. In the surgical
sealants market, the Company's products may compete with the fibrin-based
sealants of Immuno AG and Behringwerke AG, and most likely with fibrin-based
sealants being developed by Baxter Healthcare Corporation and Bristol-Myers
Squibb Company. The Company's surgical sealants also may compete with
collagen-based hemostatic products of, among others, Collagen Corporation,
Fusion Medical Technologies, Inc. and MedChem Products Inc., a division of C.R.
Bard Inc. In addition, the Company's surgical sealants may compete with
synthetic products being developed by such biotechnology companies as Protein
Polymer Technologies, Inc. and Focal, Inc. Many of the Company's competitors and
potential competitors have substantially greater financial, technological,
research and development, marketing and personnel resources than the Company. In
addition to those mentioned above, other recently developed technologies or
procedures are, or may in the future be, the basis of competitive products.
30
<PAGE>
There can be no assurance that the Company's competitors will not succeed
in developing alternative technologies and products that are more effective,
easier to use or more economical than those which have been or are being
developed by the Company or that would render the Company's technology and
products obsolete and noncompetitive in these fields. These competitors may also
have greater experience in developing products, conducting clinical trials,
obtaining regulatory approvals, and manufacturing and marketing such products.
Certain of these competitors may obtain patent protection, approval or clearance
by the FDA or foreign countries or product commercialization earlier than the
Company, any of which could materially adversely affect the Company.
Furthermore, if the Company commences significant commercial sales of its
products, it will also be competing with respect to manufacturing efficiency and
marketing capabilities, areas in which it currently has limited experience.
Finally, under the terms of the Company's marketing agreements, the Company's
marketing partners may pursue parallel development of other technologies or
products, which may result in a marketing partner developing additional products
that will compete with the Company's products.
SCIENTIFIC ADVISORS
The Company has established a team of scientific advisors (the "Scientific
Advisors") who provide consulting services to the Company. The Scientific
Advisors consist of independent professionals who meet on an individual basis
with management when so requested. The Scientific Advisors have recognized
expertise in relevant sciences or clinical medicine and advise the Company about
present and long-term scientific planning, research and development.
There is no fixed term of service for the Scientific Advisors. Current
members may resign or be removed at any time, and additional members may be
appointed. Members do not serve on an exclusive basis with the Company, are not
under contract (other than with respect to confidentiality obligations) and are
not obligated to present corporate opportunities to the Company. To management's
knowledge, none of the members is working on the development of competitive
products. Inventions or products developed by a Scientific Advisor who is not
otherwise affiliated with the Company will not become the Company's property,
but will remain the Scientific Advisor's property.
Scientific Advisors who are not affiliated with the Company receive up to
$5,000 per year for their services. All members receive reimbursement for
expenses incurred in traveling to and attending meetings on behalf of the
Company. One of the Scientific Advisors, Anthony V. Seaber, held an interest in
the Partnership that was exchanged for shares of Common Stock in connection with
the Exchange. The current Scientific Advisors and their professional
affiliations are as follows:
<TABLE>
<CAPTION>
NAME AFFILIATION
<S> <C>
Robert E. Clark, M.D., Ph.D................................... Director of the Dermatologic Surgical Unit
Duke University Medical Center
Gary N. Foulks, M.D........................................... Department of Ophthalmology
University of Pittsburgh Medical Center
Robert F. McConnell, D.V.M., P.A.............................. Pathology Consultant
James V. Quinn, M.D., CCCFP................................... Clinical Assistant Professor
University of Michigan Medical Center
Frederick Reno, Ph.D.......................................... Toxicology Consultant
Anthony V. Seaber............................................. Director of Orthopedic Research Laboratories
Duke University Medical Center
Dean M. Toriumi, M.D.......................................... Associate Professor Plastic and Reconstructive Surgery College
of Medicine at University of Illinois-Chicago
</TABLE>
EMPLOYEES
As of March 1, 1997, the Company had 40 full-time employees, of whom 31
were dedicated to research, development, manufacturing, quality control and
regulatory affairs and nine were dedicated to administrative activities. Five
members of the Company's research and development staff have doctoral or
advanced degrees. The Company intends to recruit additional personnel in
connection with the research, development and manufacturing of its products.
None of the Company's employees is represented by a union, and the Company
believes relationships with its employees are good.
FACILITIES
The Company leases and occupies approximately 15,000 square feet of office,
laboratory and manufacturing space in Raleigh, North Carolina. This facility
integrates production, bottling, labeling and packaging capabilities for
products currently being marketed. In addition, the Company leases a 5,800
square foot facility that serves as the Company's research and development
laboratory. These facilities are leased through August 1998 and September 1997,
respectively.
31
<PAGE>
On February 14, 1997, the Company entered into a new ten-year lease for
approximately 40,000 square feet of office, laboratory and manufacturing space
for, among other things, the expansion of manufacturing capacity. Upon
completion, all of the Company's operations will be relocated to and maintained
at this location. The term of this lease will begin upon the Company's occupancy
of the facility, estimated to be September 1997.
LEGAL PROCEEDINGS
In March 1997, the Company was served with a complaint filed in the
Superior Court Department of the Trial Court of the Commonwealth of
Massachusetts alleging personal injury as a result of negligence by the Company
in the design, testing and distribution of Avacryl, an n-butyl cyanoacrylate
used in a medical procedure in 1993 as part of a clinical trial conducted by the
Company pursuant to an IDE. The Company's insurer has assumed the defense of
this lawsuit. The Company has not yet answered the complaint, and discovery in
the case has not yet commenced. Accordingly, the Company is not yet able to
assess its potential exposure in this case. However, based on the limited
information available to it, the Company intends to vigorously defend the
lawsuit and management believes the outcome of this case will not have a
material adverse effect on the Company.
The Company is currently not a party to any other legal proceedings.
32
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth the names, ages and titles of the persons who
are the executive officers and directors of the Company as of March 1, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Rolf D. Schmidt(1) 64 Chairman of the Board of Directors
Robert V. Toni(1) 56 President and Chief Executive Officer and
Director
J. Blount Swain 40 Vice President of Finance and Chief
Financial Officer
Jeffrey G. Clark 43 Vice President of Research and Development
Joe B. Barefoot 46 Vice President of Regulatory Affairs and
Quality Assurance
Dennis C. Carey, Ph.D.(1)(2)(3) 47 Director
Michael K. Lorelli(3) 45 Director
F. William Schmidt(3) 57 Director
Randy H. Thurman(2) 47 Director
</TABLE>
(1) Member of Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
ROLF D. SCHMIDT, a co-founder of the Company in 1990, has served as
Chairman of the Board of Directors of the Company since February 1996. Mr.
Schmidt has served as Chief Executive Officer and Chairman of Performance Sports
Apparel, Inc. since 1995. In 1986, a significant portion of the business of
Sharpoint, Inc., a developer and manufacturer of surgical needles and sutures
co-founded by Mr. Schmidt and his brother, F. William Schmidt, was sold to its
primary distributor, Alcon Laboratories, Inc. In 1991, the remainder of such
business was sold to a management group. Since 1990, Mr. Schmidt has invested
primarily in and devoted substantial time and attention to healthcare-related
entities, including the Company. Mr. Schmidt is a senior level executive who
brings over 30 years of engineering and management experience to the Company.
ROBERT V. TONI has served as President and Chief Executive Officer of the
Company since June 1994 and as a director of the Company since February 1996.
From 1989 to 1994, Mr. Toni was General Manager and Vice President of Sales and
Marketing for IOLAB Corporation, a Johnson & Johnson company that marketed and
manufactured surgical devices, equipment and pharmaceuticals for the ophthalmic
market. From 1987 to 1989, he served as President of Cooper Vision-CILCO, and
also served as its Executive Vice President of Operations and Chief Financial
Officer from 1984 to 1987. Mr. Toni holds a B.S. degree in Finance from Iona
College.
J. BLOUNT SWAIN has served as Vice President of Finance and Chief Financial
Officer of the Company since September 1992. From 1983 until 1992, Mr. Swain was
Chief Financial Officer and Treasurer of The Record Bar, Inc., a national music
retailing entity. Prior to 1983, Mr. Swain served as a Senior Accountant with
Price Waterhouse in Raleigh, North Carolina. Mr. Swain holds a B.S. degree from
the University of North Carolina at Chapel Hill and is a certified public
accountant.
JEFFREY G. CLARK has served as Vice President of Research and Development
of the Company since 1990. Prior to that time, Mr. Clark spent seven years at
Sharpoint, Inc. and its successor where he developed bioabsorbable and
polypropylene suture technology. From 1977 to 1983, Mr. Clark worked at
Extracorporeal Inc., a division of Johnson & Johnson. Mr. Clark holds a M.S.
degree in Organic Chemistry from Drexel University.
JOE B. BAREFOOT has served as Vice President of Regulatory Affairs and
Quality Assurance of the Company since 1990. From 1986 to 1990, Mr. Barefoot
managed the quality assurance program and regulatory submissions for Sharpoint,
Inc. and its successor. From 1982 to 1986, he was a member of the quality
assurance staff at C.R. Bard Inc. Prior to that time, he was a member of the
quality assurance staff at Becton, Dickinson & Co. Mr. Barefoot holds a B.S.
degree in Microbiology from Emporia State University.
DENNIS C. CAREY, PH.D has served as a director of the Company since May
1996. Mr. Carey has served as a Managing Director of Spencer Stuart, an
executive search firm, since 1988, and oversees the firm's board consulting
practice. Prior to
33
<PAGE>
joining Spencer Stuart, he served as a National Practice Director for The Hay
Group, a global compensation firm, and was Secretary of Labor to former Governor
Pierre S. duPont, IV of Delaware. Mr. Carey holds a Ph.D. in finance and
administration from the University of Maryland. He was a co-founder of The
Director's Institute at The Wharton School of the University of Pennsylvania and
serves on its board of directors.
MICHAEL K. LORELLI has served as a director of the Company since May 1996.
Mr. Lorelli is a partner in Tracey & Company LLC, a Boston-based investment
banking firm. From September 1, 1996 to December 31, 1996, Mr. Lorelli was the
Chief Executive Officer and a director of MobileMedia Corporation, the second
largest provider of paging and personal communications services in the United
States. MobileMedia Corporation filed for protection under Chapter 11 of the
federal bankruptcy code in January 1997. From September 1994 through August
1996, Mr. Lorelli served as President-North/Latin Americas Division for
Tambrands, Inc., a leading feminine protection products company. From 1986 to
1994, Mr. Lorelli held a number of executive positions with PepsiCo., most
recently as President, Pizza Hut International Division and previously as
President, Pepsi-Cola East, and Executive Vice-President, Pepsi-Cola North
America. Mr. Lorelli is a director of Trident International. He also serves as a
trustee of Sarah Lawrence College and the American Health Foundation. Mr.
Lorelli received his M.B.A. from New York University.
F. WILLIAM SCHMIDT, a co-founder of the Company in 1990, has served as a
director of the Company since February 1996. Mr. Schmidt co-founded Sharpoint,
Inc. with his brother, Rolf D. Schmidt, and completed the design work on
production and manufacturing equipment that led to product development within
that company. In 1986, a significant portion of the business of Sharpoint, Inc.
was sold to its primary distributor, Alcon Laboratories, Inc. In 1991, the
remainder of such business was sold to a management group. Since 1990, Mr
Schmidt has primarily invested in and devoted substantial time and attention to
healthcare-related entities, including the Company. Mr. Schmidt brings 25 years
of management and business experience to the Company.
RANDY H. THURMAN has served as a director of the Company since May 1996.
Mr. Thurman is the Chief Executive Officer of Health Care Strategies 2000, a
health care consulting firm that he founded in 1995, and he also serves as a
Director of Spencer Stuart in their worldwide healthcare search practice. From
1993 to 1995, Mr. Thurman held a number of executive positions with Corning
Incorporated, most recently as Chairman and Chief Executive Officer of Corning
Life Sciences, Inc., a company engaged in providing clinical testing and
pharmaceutical services, laboratory products and research software. From 1985 to
1993, he held a number of executive positions with Rhone-Poulenc Rorer, Inc.,
most recently as President of Rhone-Poulenc Rorer Pharmaceuticals, Inc. Mr.
Thurman received his M.A. from Webster University. Mr. Thurman is also a
director of Enzon, Inc.
The Company's Board of Directors is divided into three classes. Members of
one class are elected each year to serve a three-year term and until their
successors have been elected and qualified or until their earlier resignation or
removal. The terms of Dennis C. Carey and F. William Schmidt will expire at the
1997 annual meeting of stockholders, the terms of Michael K. Lorelli and Rolf D.
Schmidt will expire at the 1998 annual meeting and the terms of Randy H. Thurman
and Robert V. Toni will expire at the 1999 annual meeting.
The Board of Directors has standing Executive, Audit and Compensation
Committees. Mr. Rolf D. Schmidt serves as Chair of the Executive Committee, Mr.
Thurman serves as Chair of the Audit Committee and Mr. Carey serves as Chair of
the Compensation Committee. The Executive Committee, to the extent permitted
under Delaware law, exercises all of the power and authority of the Board of
Directors in the management of the business and affairs of the Company between
meetings of the Board. The Audit Committee is responsible for recommending to
the Board of Directors the engagement of the independent auditors of the
Company, for reviewing with the independent auditors the scope and results of
the audits, and for reviewing the accounting controls, operating, capital and
research and development budgets and other financial matters of the Company. The
Compensation Committee is responsible for reviewing and approving compensation
arrangements for the officers of the Company, for recommending to the Board of
Directors the compensation of the Company's chief executive officer and
non-employee directors, for recommending stock option plans in which officers of
the Company are eligible to participate and for determining grants under and
administering the Company's Equity Compensation Plan.
The executive officers are currently elected annually by the Board of
Directors and hold office until their successors have been chosen and qualified,
or until death, resignation or removal by the Board of Directors. See
" -- Employment Agreements."
34
<PAGE>
DIRECTOR COMPENSATION
Directors who are employees of the Company receive no compensation for
serving on the Board of Directors. Non-employee directors of the Company receive
annual compensation of $24,000 and $1,500 for each meeting of the Board of
Directors attended in person or participated in telephonically. In addition,
pursuant to the Company's Equity Compensation Plan, each non-employee director
receives a one-time grant of options to purchase 25,000 shares of Common Stock
upon election to the Board and each non-employee director in office immediately
before and after the annual election of directors receives options to purchase
5,000 shares of Common Stock. See " -- Equity Compensation Plan."
EXECUTIVE COMPENSATION
The following table provides information concerning the annual and
long-term compensation of the Company's Chief Executive Officer and the three
most highly compensated executive officers other than the Chief Executive
Officer who were executive officers as of December 31, 1996 (the "Named
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
NUMBER OF
ANNUAL COMPENSATION SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
COMPENSATION OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) AWARDED ($)(3)
<S> <C> <C> <C> <C> <C> <C>
Robert V. Toni.................................... 1996 215,000 130,000 -- 66,600 1,987
President and Chief Executive Officer 1995 198,000 50,000 64,473(2) -- 1,273
J. Blount Swain................................... 1996 138,450 85,000 -- 43,050 1,552
Vice President of Finance and Chief 1995 130,000 -- 14,481 -- 805
Financial Officer
Jeffrey G. Clark.................................. 1996 127,200 80,000 -- 40,100 1,341
Vice President of Research and 1995 120,000 -- 14,481 -- 719
Development
Joe B. Barefoot................................... 1996 95,850 60,000 -- 30,458 1,022
Vice President of Regulatory Affairs 1995 90,000 -- 10,861 -- 463
and Quality Assurance
</TABLE>
(1) Includes for 1995 the tax value of interests in the Partnership (the
"Partnership Interests") granted on December 31, 1995 to the Chief Executive
Officer and the Named Officers. The aggregate tax value of the Partnership
Interests on the date of grant to the Chief Executive Officer and the Named
Officers totaled $61,545. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations."
(2) Includes payment for relocation expenses and a payment to cover the related
income tax liability in the aggregate amount of $42,751.
(3) Represents Company-paid life insurance premiums and 401(k) retirement plan
matching contributions.
STOCK OPTION INFORMATION
The following table sets forth certain information concerning grants of
stock options made during 1996 to each of the Named Officers. No stock
appreciation rights were granted to any Named Officer during 1996.
35
<PAGE>
OPTION GRANTS IN 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE AT
NUMBER OF % OF TOTAL ASSUMED ANNUAL
SECURITIES OPTIONS/ RATES OF STOCK PRICE APPRECIATION
UNDERLYING SARS MARKET FOR OPTION TERM
OPTIONS/ GRANTED TO EXERCISE PRICE ON
SARS EMPLOYEES OR BASE GRANT 5%($) 0%($) 10%($)
GRANTED IN FISCAL PRICE DATE EXPIRATION EXERCISE MARKET EXERCISE
NAME (#)(1) YEAR(2) ($/SH) ($/SH)(3) DATE PRICE(4) PRICE(4) PRICE(4)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Robert V. Toni 66,600 15.2 5.00 8.00 5/29/06 534,875 335,075 1,048,946
J. Blount Swain 43,050 9.8 5.00 8.00 5/29/06 345,741 216,591 678,035
Jeffrey G. Clark 40,100 9.1 5.00 8.00 5/29/06 322,049 201,749 631,573
Joe B. Barefoot 30,458 6.9 5.00 8.00 5/29/06 244,613 153,239 479,712
<CAPTION>
0%($)
MARKET
NAME PRICE(4)
<S> <C>
Robert V. Toni 849,146
J. Blount Swain 548,885
Jeffrey G. Clark 511,273
Joe B. Barefoot 388,338
</TABLE>
(1) Options granted in 1996 have a ten-year term and vest 20% on the grant date
of May 30, 1996 and 20% annually on the anniversary of the grant date
thereafter.
(2) Based on 439,602 options granted to employees in 1996.
(3) The options were granted on May 30, 1996, to become effective only upon the
effectiveness of the Company's initial public offering of Common Stock, at
an exercise price equal to the price to the public per share of Common Stock
in the Company's initial public offering less $3.00. The Company's initial
public offering commenced on September 25, 1996 at a price to the public of
$8.00 per share.
(4) The potential realizable value is based on the term of the option at its
time of grant (ten years in the case of the options listed above). It is
calculated by assuming that the stock price on the date of grant appreciates
at the indicated annual rate, compounded annually for the entire term of the
option, and that the option is exercised and sold on the last day of its
term for the appreciated stock price. These amounts represent certain
assumed rates of appreciation only, in accordance with the rules of the
Commission, and do not reflect the Company's estimate or projection of
future stock price performance. Actual gains, if any, are dependent on the
actual future performance of the Company's Common Stock and no gain to the
optionee is possible unless the stock price increases over the option term,
which will benefit all stockholders.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
SHARES UNEXERCISED OPTIONS/SARS IN-THE-MONEY OPTIONS/SARS
ACQUIRED VALUE AT FISCAL YEAR-END (#) AT FISCAL YEAR-END ($)
NAME ON EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
Robert V. Toni -- -- 13,320 53,280 129,870 519,480
J. Blount Swain -- -- 8,610 34,440 83,948 335,790
Jeffrey G. Clark -- -- 8,020 32,080 78,195 312,780
Joe B. Barefoot -- -- 6,092 24,366 59,397 237,568
</TABLE>
(1) Calculated on the basis of the closing sale price of $14.75 per share of
Common Stock on December 31, 1996 as quoted on the Nasdaq National Market,
less the exercise price of $5.00 per share.
EMPLOYMENT AGREEMENTS
Messrs. Toni, Swain, Clark and Barefoot each entered into an employment
agreement with the Company in May 1996. The term of each agreement is from May
1, 1996 to May 31, 1999, with automatic one-year extensions unless 60 days'
prior notice is given by either party. The agreements provide for annual base
salaries of not less than $215,000, $138,450, $127,200 and $95,850,
respectively, which salaries may be increased as determined by the Compensation
Committee or the Board of Directors. Each agreement also provides for an annual
bonus ranging from 20% to 60% of base salary to be awarded based on performance
milestones to be established for each calendar year by the Compensation
Committee based on the recommendation of the Chief Executive Officer. In
connection with their employment agreements, in May 1996 the Company granted to
Messrs. Toni, Swain, Clark and Barefoot, respectively, options to purchase
66,600, 43,050, 40,100 and 30,458 shares of Common Stock under the Equity
Compensation Plan at an exercise price of $5.00 per share. The options have a
term of ten years and, provided employment has not been terminated for "cause"
(as defined in the employment
36
<PAGE>
agreements), will vest in five equal annual installments, commencing as of the
date of grant. See " -- Equity Compensation Plan."
If, following a "change in control" (as defined in each agreement), any of
Messrs. Toni, Swain, Clark or Barefoot is terminated other than for "cause" (as
defined in each agreement) or terminates his employment for "good reason" (as
defined in each agreement), he will be entitled to receive all accrued and any
pro rata incentive compensation to the date of termination and a continuation of
his then current annual salary, incentive compensation and benefits for three
years after such termination. In the event of termination for "cause," Messrs.
Toni, Swain, Clark and Barefoot are entitled to a continuation of base salary,
incentive compensation and benefits for a period of eighteen months in the case
of Mr. Toni and one year for the others. The Company has agreed to indemnify
Messrs. Toni, Swain, Clark and Barefoot to the maximum extent permitted by
applicable law against all costs, charges and expenses incurred by each in
connection with any action, suit or proceeding to which he may be a party or in
which he may be a witness by reason of his being an officer, director or
employee of the Company or any subsidiary or affiliate of the Company. Messrs.
Toni, Swain, Clark and Barefoot have each agreed not to compete with the Company
for two years after termination of their employment with the Company.
CONSULTING AGREEMENT
In May 1996, the Company entered into a consulting agreement with Steven A.
Kriegsman to provide consulting services to the Company for an annual
compensation of $120,000, payable monthly. Under the agreement, in May 1996 the
Company granted to Mr. Kriegsman nonqualified stock options to purchase 50,000
shares of Common Stock under the Company's Equity Compensation Plan at an
exercise of $5.00 per share. The options have a term of ten years and, provided
that the agreement has not been terminated for "cause" (as defined in the
agreement), will vest in five equal annual installments commencing as of the
date of grant. Mr. Kriegsman has agreed to provide consultation at the times
requested by the Company in relation to new business development, strategic
planning and assistance with strategic alliances. The consulting term shall be
for five years, unless terminated earlier for "cause," or in the event of Mr.
Kriegsman's death or disability. In the event that Mr. Kriegsman dies or becomes
disabled during the term, the Company must continue to pay his compensation to
his executors, legal representatives or administrators or to him, as applicable,
as if the consulting term were not terminated. The Company is permitted to
obtain life insurance on Mr. Kriegsman's life to fund such obligation.
EQUITY COMPENSATION PLAN
The Company maintains the Amended and Restated 1996 Equity Compensation
Plan (the "Plan"), adopted by the Board of Directors on May 28, 1996 (the
"effective date") and amended and restated effective September 24, 1996 and
November 1, 1996. The Plan provides for grants of stock options to selected
officers (including officers who are also directors) of the Company or its
subsidiaries, other employees of the Company or its subsidiaries and independent
contractors and consultants who perform valuable services for the Company or its
subsidiaries. Non-employee directors of the Company are entitled to receive
formula stock option grants under the Plan. In addition, the Plan provides for
grants of restricted stock and stock appreciation rights ("SARs") (herein,
together with grants of stock options, collectively, "Grants") to participants
other than non-employee directors of the Company. By encouraging stock
ownership, the Company seeks to attract, retain and motivate such participants
and to encourage such participants to devote their best efforts to the business
and financial success of the Company.
GENERAL. Subject to adjustment in certain circumstances as discussed below,
the Plan authorizes up to 1,000,000 shares of Common Stock for issuance pursuant
to the terms of the Plan. If and to the extent Grants under the Plan expire or
are terminated for any reason without being exercised, or the shares subject to
a Grant are forfeited, the shares of Common Stock subject to such Grant will
again be available for grant under the Plan.
ADMINISTRATION OF THE PLAN. The Plan is administered and interpreted by a
committee (the "Committee") of the Board of Directors consisting of not fewer
than two persons appointed by the Board of Directors from among its members,
each of whom may be a "non-employee director" as defined in Rule 16b-3 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and must be an
"outside director" as defined by Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"). The Committee has the sole authority to determine
(i) persons to whom Grants may be made under the Plan, (ii) the type, size and
other terms and conditions of each Grant, (iii) the time when the Grants will be
made and the duration of any applicable exercise or restriction period,
including the criteria for vesting and the acceleration of vesting, and (iv) any
other matters arising under the Plan. The Committee has full power and authority
to administer and interpret the
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Plan, to make factual determinations and to adopt or amend such rules,
regulations, agreements and instruments for implementing the Plan, and for
conduct of its business as it deems necessary or advisable, in its sole
discretion. The Board of Directors has appointed the Compensation Committee to
serve as this Committee.
GRANTS. Grants under the Plan may consist of (i) options intended to
qualify as incentive stock options ("ISOs") within the meaning of section 422 of
the Code or (ii) so-called "nonqualified stock options" that are not intended to
so qualify ("NQSOs"). In addition, Grants under the Plan may also consist of
grants of (i) restricted stock or (ii) SARs.
ELIGIBILITY FOR PARTICIPATION. Grants may be made to any employee
(including officers and directors) of, or independent contractors and
consultants to, the Company or its subsidiaries. Non-employee directors of the
Company are entitled only to formula grants of NQSOs. Independent contractors or
consultants to the Company are not eligible to receive ISOs under the Plan. As
of March 7, 1997, 40 employees were eligible for Grants under the Plan. During
any calendar year, no participant may receive Grants under the Plan for more
than 75,000 shares of Common Stock. As of March 7, 1997, 588,576 options were
outstanding under the Plan and held by all participants as a group, at a
weighted average exercise price of $5.90 per share, of which 138,420 were fully
vested and exercisable. An additional 406,395 shares were reserved for issuance
under the Plan.
OPTIONS. The option price of any ISO granted under the Plan will not be
less than the fair market value of the underlying shares of Common Stock on the
date of grant, except that the option price of an ISO granted to an employee who
owns more than 10% of the total combined voting power of all classes of stock of
the Company or its subsidiaries may not be less than 110% of the fair market
value of the underlying shares of Common Stock on the date of grant. The option
price of a NQSO may be greater than, equal to or less than the fair market value
of the underlying shares of Common Stock on the date of grant. The Committee
will determine the term of each option; provided, however, that the exercise
period may not exceed ten years from the date of grant, and the exercise period
of an ISO granted to an employee who owns more than 10% of the total combined
voting power of all classes of stock of the Company or its subsidiaries may not
exceed five years from the date of grant. A participant may pay the option price
(i) in cash, (ii) with the approval of the Committee, by delivering shares of
Common Stock owned by the participant and having a fair market value on the date
of exercise equal to the option price or (iii) by a combination of the
foregoing. The participant may instruct the Company to deliver the shares of
Common Stock due upon the exercise to a designated broker instead of to the
participant.
FORMULA OPTION GRANTS TO NON-EMPLOYEE DIRECTORS. Non-employee directors are
entitled to receive NQSOs pursuant to the formula grants under the Plan.
According to the formula grants, each non-employee director who first became a
member of the Board of Directors on or after the effective date of the Plan and
before the consummation of the Company's initial public offering of Common Stock
on September 30, 1996 (a "pre-IPO initial grant") received a grant of a NQSO to
purchase 25,000 shares of Common Stock as of the date the non-employee director
first became a member of the Board of Directors (which is the date of grant).
Each non-employee director who first becomes a member of the Board of Directors
after September 30, 1996 will receive a grant of a NQSO to purchase 25,000
shares of Common Stock as of the date the non-employee director first becomes a
member of the Board of Directors. Thereafter, on each date on which the Company
holds its annual meeting of stockholders, each non-employee director in office
immediately before and after the annual election of directors will receive a
grant of a NQSO to purchase 5,000 shares of Common Stock. The option price of a
NQSO granted pursuant to a formula grant under the Plan will be the fair market
value of a share of Common Stock on the date of grant, except that the option
prices of the pre-IPO initial grants were $7.00 per share. The term of each such
option shall be ten years, and each such option shall be exercisable with
respect to 50% of the shares on the date of grant and an additional 25% on each
of the next two anniversaries of the date of the grant.
RESTRICTED STOCK. The Committee may issue shares of Common Stock to
participants other than non-employee directors of the Company pursuant to the
Plan. Shares may be issued for cash consideration or for no cash consideration,
as the Committee determines. The number of shares of Common Stock granted to
each participant shall be determined by the Committee, subject to the maximum
limit described above. Grants of restricted stock will be made subject to such
performance requirements, vesting provisions, transfer restrictions or other
restrictions and conditions as the Committee may determine in its sole
discretion.
STOCK APPRECIATION RIGHTS. The Committee may grant SARs to participants
other than non-employee directors of the Company in tandem with any stock option
pursuant to the Plan. Unless the Committee determines otherwise, the exercise
price of a SAR will be the greater of (i) the exercise price of the related
stock option or (ii) the fair market value of a share of Common Stock on the
date of grant of the SAR. When the participant exercises a SAR, the participant
will receive the amount by which the fair market value of the Common Stock on
the date of exercise exceeds the exercise price of the SAR. The participant may
elect to have such amount paid in cash or in shares of Common Stock, subject to
Committee approval.
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<PAGE>
To the extent a participant exercises a SAR, the related option shall terminate.
Similarly, upon exercise of a stock option, the related SAR, if any, shall
terminate.
AMENDMENT AND TERMINATION OF THE PLAN. The Board of Directors may amend or
terminate the Plan at any time; provided, however, that, the Board of Directors
may not amend the Plan, without stockholder approval, to (i) increase (except
for increases due to the adjustments discussed below) the aggregate number of
shares of Common Stock for which Grants may be made thereunder, or the
individual limit of shares of Common Stock for which Grants may be made to any
single individual under the Plan, (ii) modify the requirements as to eligibility
to participate in the Plan or (iii) make any amendment that requires stockholder
approval pursuant to Section 162(m) of the Code. The Plan will terminate on the
day immediately preceding the tenth anniversary of its effective date, unless
terminated earlier by the Board of Directors or extended by the Board of
Directors with approval of the stockholders.
ADJUSTMENT PROVISIONS. Subject to the change of control provisions
described below, in the event of certain transactions identified in the Plan,
the Committee may appropriately adjust (i) the number of shares of Common Stock
(and the option price per share) subject to the unexercised portion of any
outstanding options or SARs, (ii) the number of shares of Common Stock covered
by outstanding Grants, (iii) the number of shares of Common Stock for which
Grants may be made under the Plan and (iv) the individual limit of shares for
which Grants may be made to any individual under the Plan, and such adjustments
shall be effective and binding for all purposes of the Plan.
CHANGE OF CONTROL OF THE COMPANY. In the event of a change of control,
unless the Committee determines otherwise, all options, restricted stock and
SARs will become fully vested. Unless the Committee determines otherwise, each
participant will be provided with advance written notice by the Company prior to
the change of control (to the extent possible) and will have the right, within a
designated period after such notice, to exercise the options and SARs in full or
to surrender the options and SARs in exchange for a payment by the Company, in
cash or Common Stock as determined by the Committee, in an amount equal to the
excess of the then fair market value of the shares of Common Stock over the
option exercise price. Any options or SARs not timely exercised or surrendered
will terminate unless exchanged or substituted with options or SARs of the
successor corporation.
A change of control is defined as (i) a tender offer, merger or other
transaction as a result of which any person or group (other than Rolf D.
Schmidt, F. William Schmidt or any entity controlled by either or both of them)
becomes the owner, directly or indirectly, of more than 50.1% of the Common
Stock or the combined voting power of the Company's then outstanding securities,
(ii) a liquidation or a sale of substantially all of the Company's assets, or
(iii) if, during any period of two consecutive years, the individuals who, at
the beginning of such period, constituted the Board of Directors cease to
constitute a majority of the Board of Directors, except as otherwise provided in
the Plan.
SECTION 162(M). Under Section 162(m) of the Code, the Company may be
precluded from claiming a federal income tax deduction for total remuneration in
excess of $1,000,000 paid to the chief executive officer or to any of the other
four most highly compensated officers in any one year. Total remuneration
includes amounts received upon the exercise of stock options granted under the
Plan and the value of shares received when shares of restricted stock become
vested (or such other time when income is recognized). An exception does exist,
however, for "performance-based compensation," including amounts received upon
the exercise of stock options pursuant to a plan approved by stockholders that
meets certain requirements. The Plan has been approved by the stockholder and is
intended to allow grants of options thereunder to meet the requirements of
"performance-based compensation." Grants of restricted stock generally will not
qualify as "performance-based compensation."
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<PAGE>
CERTAIN TRANSACTIONS
Immediately prior to the Company's initial public offering on September 25,
1996, in the Exchange, obligations of and interests in the Partnership were
contributed to the Company in exchange for an aggregate of 9,600,000 shares of
Common Stock and the Partnership ceased to exist. See "Prior Partnership
Status."
Rolf D. Schmidt and F. William Schmidt, directors and founders of the
Company, and three partnerships controlled by one or both of them, received, as
successors to Sharpoint's economic interest in the Partnership, 5,453,750 shares
of Common Stock in the Exchange. From the inception of the Partnership until
March 29, 1996, Sharpoint, the general partner of the Partnership, provided the
Company with loans in an aggregate principal amount of $10,502,000, which
accrued interest at rates ranging from 9.5% to 9.75%. On March 29, 1996, in
contemplation of the Exchange, Sharpoint contributed this debt, together with
the accrued interest thereon, in the aggregate amount of $11,483,000, to the
Partnership as partners' capital. The Schmidts are the only stockholders of
Sharpoint.
Under the Partnership agreement, CRX and Caratec, the successor to CRX's
limited partnership interest in the Partnership, were entitled to receive
payments based on net revenues, subject to annual minimum payments of $150,000
in 1992, 1993 and 1994 and $250,000 thereafter. These payments aggregated
approximately $993,000 on the date of the Exchange, at which time the payment
obligations ceased to exist. CRX and Caratec also were entitled as a limited
partner in the Partnership to payment of a percentage of the proceeds of a sale
of all or substantially all of the assets of the Partnership. In connection with
the Exchange, Caratec exchanged its right to receive such payments from the
Partnership and its limited partnership interest for 1,776,250 shares of Common
Stock. This transaction resulted in a non-cash expense of $14,210,000 in 1996
which equaled the difference between the value of the Common Stock issued to
Caratec and its basis in the Partnership. The resulting charge to accumulated
deficit was offset by a credit to additional paid-in capital. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Principal and Selling Stockholders."
PRIOR PARTNERSHIP STATUS
The Company was incorporated in Delaware on February 20, 1996. From May 10,
1990 to February 29, 1996, the business of the Company was conducted by the
Partnership. As of March 1, 1996, substantially all of the assets and
liabilities of the Partnership, except for the indebtedness to Sharpoint, were
transferred to the Company in exchange for one share of Common Stock.
Immediately prior to the Company's initial public offering on September 25,
1996, in the Exchange, obligations of and interests in the Partnership were
contributed to the Company in exchange for an aggregate of 9,600,000 shares of
Common Stock issued to 13 individuals and entities. Upon consummation of the
Exchange, the Partnership ceased to exist. As of March 29, 1996, the long-term
debt, including accrued interest, of the Partnership held by Sharpoint, the
general partner of the Partnership and a corporation controlled by Rolf D.
Schmidt and F. William Schmidt, was contributed to the Partnership as
$11,483,000 of partners' capital. All obligations of and interests in the
Partnership held by Sharpoint and its successors were contributed to the Company
in exchange for shares of Common Stock in connection with the Exchange. Under
the Partnership agreement, CRX and Caratec were entitled to receive payments
based on net revenues, subject to annual minimum payments of $150,000 in 1992,
1993 and 1994 and $250,000 thereafter. These payments aggregated approximately
$993,000 on the date of the Exchange, at which time the payment obligations
ceased to exist. CRX and Caratec also were entitled as a limited partner in the
Partnership to payment of a percentage of the proceeds of a sale of all or
substantially all of the assets of the Partnership. In connection with the
Exchange, Caratec, the successor to CRX's limited partnership interest in the
Partnership, exchanged its right to receive various payments from the
Partnership and its limited partnership interest for 1,776,250 shares of Common
Stock. This transaction resulted in a non-cash expense of $14,210,000 which
equaled the difference between the value of the Common Stock issued to Caratec
and its basis in the Partnership. The resulting charge to accumulated deficit
was offset by a credit to additional paid-in capital. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Certain Transactions" and "Principal and Selling Stockholders."
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of March 1, 1997 and after giving effect
to the Offering by (i) each person known by the Company to own beneficially more
than 5% of the Company's Common Stock, (ii) the Selling Stockholder, (iii) each
of the Named Officers, (iv) each of the Company's directors and (v) all
directors and executive officers of the Company as a group:
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
PRIOR TO OFFERING(1) SHARES AFTER OFFERING
NAME OF BENEFICIAL OWNER NUMBER PERCENT TO BE SOLD NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
Rolf D. Schmidt (2).................................................. 3,126,831 25.7% -- 3,126,831 24.1%
F. William Schmidt (3)............................................... 3,126,831 25.7% -- 3,126,831 24.1%
Caratec, L.L.C. (4).................................................. 1,326,250 10.9% 700,000 626,250 4.8%
Robert V. Toni (5)................................................... 733,320 6.0% -- 733,320 5.7%
J. Blount Swain (5).................................................. 488,610 4.0% -- 488,610 3.8%
Jeffrey G. Clark (5)................................................. 488,020 4.0% -- 488,020 3.8%
Joe B. Barefoot (5)(6)............................................... 367,247 3.0% -- 367,247 2.8%
Dennis C. Carey (5).................................................. 13,500 * -- 13,500 *
Michael K. Lorelli (5)............................................... 32,500 * -- 32,500 *
Randy H. Thurman (5)................................................. 14,720 * -- 14,720 *
All directors and executive officers as a group
(9 persons) (7).................................................... 7,791,667 63.7% -- 7,791,667 59.8%
</TABLE>
* Less than 1%.
(1) Nature of ownership consists of sole voting and investment power unless
otherwise indicated. Includes shares of Common Stock issuable upon the
exercise of stock options exercisable within 60 days of March 1, 1997.
(2) The address of the stockholder is 205 Sweitzer Road, Sinking Springs, PA
19608. Includes (a) 2,246,945 shares held by Cacoosing Partners, L.P., a
limited partnership of which Rolf D. Schmidt is the sole general partner,
for which shares he is deemed to have sole voting and investing power; (b)
599,912 shares held by OMI Partners, L.P., a limited partnership of which
Rolf D. Schmidt and F. William Schmidt are the sole general partners, for
which shares they are deemed to share voting and investment power; and (c)
100,000 shares owned jointly with Rolf D. Schmidt's spouse, for which shares
he is deemed to share voting and investment power.
(3) The address of the stockholder is 534 Ridge Avenue, Ephrata, PA 17522.
Includes (a) 2,246,945 shares held by Triangle Partners, L.P., a limited
partnership of which F. William Schmidt is the sole general partner, for
which shares he is deemed to have sole voting and investing power; (b)
599,912 shares held by OMI Partners, L.P., a limited partnership of which
Rolf D. Schmidt and F. William Schmidt are the sole general partners, for
which shares they are deemed to share voting and investment power; and (c)
50,000 shares held by F. William Schmidt's spouse, for which shares he
disclaims beneficial ownership.
(4) The address of the stockholder is 206 Erskine Court, Cary, NC 27511.
(5) Includes the following shares of Common Stock issuable upon the exercise of
stock options exercisable within 60 days of March 1, 1997: Robert V.
Toni -- 13,320; J. Blount Swain -- 8,610; Jeffrey G. Clark -- 8,020; Joe B.
Barefoot -- 6,092; Dennis C. Carey -- 12,500; Michael K. Lorelli -- 12,500;
and Randy H. Thurman -- 12,500.
(6) Includes 1,155 shares of Common Stock issuable upon the exercise of stock
options exercisable within 60 days of March 1, 1997 by Debra
Genovese-Barefoot. Ms. Genovese-Barefoot is the spouse of Joe B. Barefoot.
Mr. Barefoot disclaims beneficial ownership of such shares.
(7) Includes 74,697 shares of Common Stock issuable upon the exercise of stock
options exercisable within 60 days of March 1, 1997.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 37,000,000 shares,
including 35,000,000 shares of Common Stock, par value $.01 per share, and
2,000,000 shares of Preferred Stock, par value $.01 per share (the "Preferred
Stock"). Immediately after the sale of the 1,500,000 shares of Common Stock
offered hereby, there will be issued and outstanding 12,955,029 shares of Common
Stock and no shares of Preferred Stock.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders and do not have
cumulative voting rights. The election of directors is determined by a plurality
of the votes cast, with the Board of Directors being divided into three classes,
as nearly equal in number as possible, initially of two directors each, each
class of which, after a transitional period, will serve for a term of three
years and until their successors have been elected and qualified. Accordingly,
holders of a majority of the shares of Common Stock entitled to vote in any
election of directors may elect all of the directors standing for election and
may exert considerable influence over the management and policies of the
Company. The Company's Certificate of incorporation (the "Certificate") may
generally be amended as permitted by law. However, certain fundamental
transactions, including the amendment of certain anti-takeover provisions in the
Certificate, amendment of the By-Laws by the stockholders, the sale, lease,
exchange or other disposition of all or substantially all of the assets of the
Company, or the merger, consolidation, division, reorganization,
recapitalization, dissolution, liquidation or winding up of the Company, require
either: (i) the affirmative vote of 75% of the directors then in office and the
minimum affirmative vote of the stockholders entitled to vote thereon required
by law and the express terms of any class or series of shares or (ii) the
affirmative vote of the holders of 75% of the voting power of all then
outstanding shares entitled to vote in the election of directors, voting as a
single class, and, in addition, the affirmative vote of the number of shares of
any class or series, if any, as shall at the time of such approval be required
by law or the express terms of any such class or series of shares. Except as
otherwise required by law, all other matters are determined by a majority of the
votes cast. Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock (none of which is currently outstanding). Upon the
liquidation, dissolution or winding up of the Company, subject to any
preferential liquidation rights of outstanding Preferred Stock, the holders of
Common Stock are entitled to receive ratably the net assets of the Company
available after the payment of all debts and other liabilities. Holders of the
Common Stock have no preemptive, subscription, redemption or conversion rights.
All shares of Common Stock outstanding are, and the shares offered by the
Company in the Offering will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock which the Company may designate and
issue in the future. See "Risk Factors -- Control by Existing Stockholders;
Anti-Takeover Provisions" and " -- Preferred Stock."
PREFERRED STOCK
The Company also has authorized 2,000,000 shares of Preferred Stock which
the Board of Directors has discretion to issue in such series and with such
preferences and rights as it may designate without the approval of the holders
of Common Stock. Such preferences and rights may be superior to those of the
holders of Common Stock. For example, the holders of Preferred Stock may be
given a preference in payment upon liquidation of the Company, or for the
payment or accumulation of dividends before any distributions are made to the
holders of Common Stock. As of the date of this Prospectus, no Preferred Stock
has been designated or issued by the Company, and the Company has no plans,
agreements or understandings for the issuance of any shares of Preferred Stock.
For a description of the possible anti-takeover effects of the Preferred Stock,
see "Risk Factors -- Control by Existing Stockholders; Anti-Takeover Provisions"
and " -- Certain Anti-Takeover Provisions."
LIMITATION OF LIABILITY
The Company's Certificate provides that a director of the Company shall not
be personally liable to the Company or its stockholders for monetary damages for
a breach of fiduciary duty as a director, except for liability (i) for any
breach of such person's duty of loyalty, (ii) for acts or omissions not in good
faith or involving intentional misconduct or a knowing violation of law, (iii)
for the payment of unlawful dividends and certain other actions prohibited by
Delaware corporate law and (iv) for any transaction resulting in receipt by such
person of an improper personal benefit.
The Company maintains directors' and officers' liability insurance to
provide directors and officers with insurance coverage for losses arising from
claims based on breaches of duty, negligence, error and other wrongful acts. At
present, there is
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no pending litigation or proceeding, and the Company is not aware of any
threatened litigation or proceeding, involving any director, officer, employee
or agent where indemnification will be required or permitted under the
Certificate or By-Laws.
CERTAIN ANTI-TAKEOVER PROVISIONS
CLASSIFIED BOARD AND OTHER MATTERS
The Company's Board of Directors is divided into three classes, each of
which, after a transitional period, will serve for three years, with one class
being elected each year. Under the Delaware General Corporation Law and the
provisions of the Certificate, stockholders may remove a director only for cause
and, in accordance with the Certificate, only with the approval of 75% of the
voting power of the then outstanding shares entitled to vote in the election of
directors, voting as a single class. Vacancies on the Board of Directors may be
filled only by a vote of the majority of the directors then in office, though
less than a quorum, or by a sole remaining director. The Certificate and the
By-Laws provide that special meetings of stockholders of the Company may be
called only by the Board of Directors or the Chairman of the Board. The
Certificate and By-Laws also provide that no action required or permitted to be
taken by the stockholders at any annual or special meeting of the stockholders
of the Company may be taken without a meeting. The classification of the Board
of Directors, the limitations on the removal of directors and the filling of
vacancies, and the prohibitions against calling of special meetings by
stockholders and stockholder action without a meeting could have the effect of
making it more difficult for a third party to acquire, or discouraging a third
party from acquiring, control of the Company.
In addition, the Company's supermajority voting provisions for certain
fundamental corporate transactions, including, among others, amendment of
certain anti-takeover provisions in the Certificate and amendment of the ByLaws
by the stockholders, and the ability of the Board of Directors to establish the
rights of, and to issue, substantial amounts of Preferred Stock without the need
for stockholder approval, which Preferred Stock, among other things, may be used
to create voting impediments with respect to changes in control of the Company
or to dilute the stock ownership of holders of Common Stock seeking to obtain
control of the Company, may have the effect of discouraging, delaying or
preventing a change in control of the Company. See "Risk Factors -- Control by
Existing Stockholders; Anti-Takeover Provisions," " -- Common Stock" and
" -- Preferred Stock."
SECTION 203 OF DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law prohibits certain
transactions between a Delaware corporation and an "interested
stockholder,"which is defined as a person who, together with any affiliates or
associates of such person, beneficially owns, directly or indirectly, 15% or
more of the outstanding voting shares of a Delaware corporation. This provision
prohibits certain business combinations (defined broadly to include mergers,
consolidations, sales or other dispositions of assets having an aggregate value
in excess of 10% of the consolidated assets of the corporation, and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation) between an interested stockholder and a
corporation. The prohibition is for a period of three years commencing on the
date the interested stockholder becomes an interested stockholder, unless (i)
the business combination is approved by the corporation's board of directors
prior to the date the interested stockholder becomes an interested stockholder;
(ii) the interested stockholder acquired at least 85% of the voting stock of the
corporation (other than stock held by directors who are also officers or by
certain employee stock plans) in the transaction in which it becomes an
interested stockholder; or (iii) the business combination is approved by a
majority of the board of directors and by the affirmative vote of 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder. See
"Risk Factors -- Control by Existing Stockholders; Anti-Takeover Provisions."
REGISTRATION RIGHTS
The Company has granted to the holders of 8,820,000 shares of Common Stock
(the "Registrable Securities") certain rights with respect to the registration
of the Registrable Securities for resale under the Securities Act.
Pursuant to a registration rights agreement, Caratec, the holder of
1,326,250 shares of Common Stock (the "Caratec Registrable Securities"), may
require, on two occasions during the five-year period commencing March 31, 1997,
that the Company register all or a portion of the Caratec Registrable Securities
for public resale under the Securities Act, provided, among other limitations,
that the anticipated aggregate gross proceeds will not be less than $100,000. Of
the 1,326,250 shares subject to such registration rights, 700,000 shares are to
be sold by Caratec in the Offering. See "Principal and Selling Stockholders."
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<PAGE>
Pursuant to a registration rights agreement with Rolf D. Schmidt, F.
William Schmidt and three partnerships controlled by one or both of them, who
hold 179,974, 2,246,945, 2,246,945 and 599,912 shares of Common Stock subject to
such registration rights agreement, respectively (the "Schmidt Registrable
Securities"), and four employees of the Company who hold 720,000, 480,000,
480,000 and 360,000 shares of Common Stock, respectively (the "Employee
Registrable Securities"), each of the holders of the Schmidt Registrable
Securities may require, on two occasions during the five-year period commencing
March 31, 1997, that the Company use its best efforts to register all or a
portion of the Schmidt Registrable Securities held by such holder for public
resale under the Securities Act, and each of the holders of the Employee
Registrable Securities, subject to certain exceptions and limitations, may
require, on one occasion after the later of (i) March 31, 1997 or (ii) the
termination of such employee's employment, that the Company use its best efforts
to register all or a portion of such holder's Employee Registrable Securities
for public resale under the Securities Act.
In addition, in the event the Company elects to register any Common Stock
under the Securities Act, either for its own account or for the account of any
other stockholders, the Company, during the five-year period commencing March
31, 1997, is required to notify the holders of the Registrable Securities of the
proposed registration and, subject to certain marketing and other limitations,
is required, upon request, to use its best efforts to include in such
registration any Registrable Securities requested to be included.
All registration expenses under the registration rights agreements are to
be borne by the Company and all selling expenses are to be borne by the holders
of the securities being registered.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company, 40 Wall Street, New York, New York 10005.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market following
this Offering could adversely affect the market price of the Common Stock and
adversely affect the Company's ability to raise capital at a time and on terms
favorable to the Company.
Of the 12,955,029 shares to be outstanding after this Offering (assuming
that the Underwriters' over-allotment option is not exercised), the 1,500,000
shares of Common Stock offered hereby and an additional 3,005,029 shares of
Common Stock will be freely tradeable without restriction in the public market
unless such shares are held by "affiliates" of the Company, as that term is
defined in Rule 144(a) under the Securities Act. For purposes of Rule 144, an
"affiliate" of an issuer is a person that, directly or indirectly through one or
more intermediaries, controls, or is controlled by or is under common control
with, such issuer. The remaining 8,450,000 shares of Common Stock to be
outstanding after this Offering are "restricted securities" under the Securities
Act and may be sold in the public market upon the expiration in September 1997
of the one-year holding period under Rule 144 subject to the volume, manner of
sale and other limitations of Rule 144. Of the 8,450,000 shares, 7,493,750
shares of Common Stock will be held by "affiliates" of the Company, as defined
in Rule 144(a).
The Commission recently adopted revisions to Rule 144, the effect of which
substantially shortened the holding periods under Rule 144. In general, under
Rule 144 as will be in effect in April 1997, a person who has beneficially owned
shares for at least one year, including an "affiliate," will be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of one percent of the then outstanding shares of Common Stock
(approximately 129,550 shares after giving effect to this Offering), or the
average weekly trading volume during the four calendar weeks preceding filing of
notice of such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. A person who is not an affiliate at any time
during the 90 days preceding a sale, and who has beneficially owned shares for
at least two years, will be entitled to sell such shares under Rule 144(k)
without regard to the volume limitations, manner of sale provisions or public
information requirements.
In addition, as of March 7, 1997, there were outstanding options to
purchase 588,576 shares of Common Stock, of which 138,420 were fully vested and
exercisable. An additional 406,395 shares were reserved for issuance under the
Equity Compensation Plan. All of the shares issued, issuable or reserved for
issuance under the Equity Compensation Plan are covered by an effective
registration statement.
All directors and executive officers and certain other stockholders of the
Company who will beneficially own an aggregate 8,343,220 shares of Common Stock
upon completion of this Offering, and the Company, with certain limited
exceptions,
44
<PAGE>
have agreed, as described below under "Underwriting," with the Underwriters not
to offer for sale, sell or otherwise dispose of, directly or indirectly, any
shares of Common Stock for a period of 180 days from the date of this Prospectus
without the prior written consent of Lehman Brothers Inc.
Certain holders of 8,820,000 shares of Common Stock, of which 700,000
shares are to be sold by the Selling Stockholder in the Offering, are entitled
to certain registration rights with respect to such shares for resale under the
Securities Act. If such holders, by exercising their registration rights, cause
a large number of shares to be registered and sold in the public market, such
sales could have an adverse effect on the market price for the Common Stock.
Such rights may not be exercised prior to the expiration of 180 days from the
date of this Prospectus. See "Description of Capital Stock -- Registration
Rights."
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement, of which this Prospectus is a part, the Underwriters named below (the
"Underwriters"), for whom Lehman Brothers Inc., Oppenheimer & Co., Inc. and
Sands Brothers & Co., Ltd. are acting as representatives (the
"Representatives"), have severally agreed to purchase from the Company and the
Selling Stockholder, and the Company and the Selling Stockholder have agreed to
sell to each Underwriter, the aggregate number of shares of Common Stock set
forth opposite the name of each such Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Lehman Brothers Inc..............................................................................................
Oppenheimer & Co., Inc...........................................................................................
Sands Brothers & Co., Ltd........................................................................................
Total..................................................................................................... 1,500,000
</TABLE>
The Company and the Selling Stockholder have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public at the public offering price set forth on the cover page
hereof, and to certain dealers at such public offering price less a selling
concession not in excess of $ per share. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of $ per share to
certain other Underwriters or to certain other brokers or dealers. After the
offering to the public, the offering price and other selling terms may be
changed by the Representatives.
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to approval of certain legal matters by counsel and
to certain other conditions, including the condition that no stop order
suspending the effectiveness of the Registration Statement is in effect and no
proceedings for such purpose are pending or threatened by the Commission and
that there has been no material adverse change or any development involving a
prospective material adverse change in the condition of the Company from that
set forth in the Registration Statement otherwise than as set forth or
contemplated in this Prospectus, and that certain certificates, opinions and
letters have been received from the Company and its counsel, the Selling
Stockholder and its counsel and independent auditors. The Underwriters are
obligated to take and pay for all of the above shares of Common Stock if any
such shares are taken.
The Company, the Selling Stockholder and the Underwriters have agreed in
the Underwriting Agreement to indemnify each other against certain liabilities,
including liabilities under the Securities Act.
45
<PAGE>
The Company has granted to the Underwriters an option to purchase up to an
additional 225,000 shares of Common Stock, exercisable solely to cover
over-allotments, at the public offering price, less the underwriting discounts
and commissions shown on the cover page of this Prospectus. Such option may be
exercised at any time until 30 days after the date of the Underwriting
Agreement. To the extent that the option is exercised, each Underwriter will be
committed to purchase a number of the additional shares of Common Stock
proportionate to each Underwriter's initial commitment as indicated in the
preceding table.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and
certain selling group members to bid for and purchase shares of Common Stock. As
an exception to these rules, the Representatives are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions may consist of bids or purchases for the purpose of pegging, fixing
or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Representatives
may reduce that short position by purchasing Common Stock in the open market.
The Representatives may also elect to reduce any short position by exercising
all or part of the over-allotment option described herein.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the
Representatives will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to accounts over which they exercise
discretionary authority.
All directors and executive officers and certain other stockholders of the
Company who will beneficially own an aggregate 8,343,220 shares of Common Stock
upon completion of this Offering have agreed not to offer for sale, sell or
otherwise dispose of (or enter into any transaction that is designed to result
in the disposition of), directly or indirectly, other than to the Underwriters
pursuant to the Underwriting Agreement, shares of Common Stock or any securities
convertible into or exchangeable or exercisable for Common Stock, for a period
of 180 days from the date of this Prospectus without the prior written consent
of Lehman Brothers Inc. Except for the Common Stock to be sold in the Offering,
the Company has agreed, with certain limited exceptions relating to the grant of
options and issuance of Common Stock pursuant to the Equity Compensation Plan,
not to offer for sale, sell or otherwise dispose of (or enter into any
transaction or device which is designed to, or expected to, result in the
disposition at any time in the future of), directly or indirectly, any shares of
Common Stock or other capital stock or any securities convertible into or
exchangeable or exercisable for, or any rights to acquire, Common Stock or other
capital stock, prior to the expiration of 180 days from the date of this
Prospectus without the prior written consent of Lehman Brothers Inc.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Certain
legal matters in connection with the Offering will be passed upon for the
Underwriters by Shearman & Sterling, New York, New York.
46
<PAGE>
EXPERTS
The financial statements as of December 31, 1995 and 1996 and for each of
the three years in the period ended December 31, 1996 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
AVAILABLE INFORMATION
The Company is subject to the reporting requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the offices of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as the following regional offices of the Commission: Seven World Trade Center,
13th Floor, New York, New York 10048; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material can be
obtained from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Such material also may be accessed electronically by means of the
Commission's home page on the Internet (http://www.sec.gov). In addition, such
reports, proxy statements and other information concerning the Company can be
inspected at the National Association of Securities Dealers, Inc., 1735 K
Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are summaries of the material provisions thereof. For
further information with respect to the Company and the Common Stock, reference
is made to the Registration Statement and the exhibits and schedules filed as a
part thereof. Copies of each contract or document referred to herein are filed
as exhibits to the Registration Statement. Copies of the Registration Statement,
including exhibits and schedules thereto, may be inspected without charge at the
Commission's principal office in Washington, D.C. or obtained at prescribed
rates from the Public Reference Section of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549.
47
<PAGE>
CLOSURE MEDICAL CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Accountants...................................................................................... F-2
Financial Statements:
Balance Sheet as of December 31, 1995 and 1996....................................................................... F-3
Statement of Operations for the years ended December 31, 1994, 1995 and 1996......................................... F-4
Statement of Cash Flows for the years ended December 31, 1994, 1995 and 1996......................................... F-5
Statement of Partners' Deficit and Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996.................................................................................. F-6
Notes to Financial Statements........................................................................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of
Closure Medical Corporation
In our opinion, the accompanying balance sheet and the related statements
of operations, of cash flows and partners' deficit and stockholders' equity
present fairly, in all material respects, the financial position of Closure
Medical Corporation (the "Company") at December 31, 1995 and 1996, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Raleigh, North Carolina
February 14, 1997, except as to
Note 9, which is as of March 7, 1997
F-2
<PAGE>
CLOSURE MEDICAL CORPORATION
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
<S> <C> <C>
(IN THOUSANDS)
ASSETS
Cash and cash equivalents.............................................................................. $ 20 $ 13,024
Short-term investments................................................................................. -- 4,627
Accounts receivable.................................................................................... 266 67
Inventories............................................................................................ 119 112
Prepaid expenses....................................................................................... 27 388
Total current assets................................................................................. 432 18,218
Furniture, fixtures and equipment...................................................................... 418 851
Less -- accumulated depreciation and amortization...................................................... (142) (179)
276 672
Long-term investments.................................................................................. -- 409
Intangible assets, net of accumulated amortization..................................................... 200 213
Total assets......................................................................................... $ 908 $ 19,512
LIABILITIES, PARTNERS' DEFICIT AND STOCKHOLDERS' EQUITY
Accounts payable....................................................................................... $ 514 $ 566
Accrued payroll and vacation........................................................................... 28 396
Deferred revenue....................................................................................... 78 2,069
Payable to Caratec, L.L.C.............................................................................. 195 --
Capital lease obligations.............................................................................. 12 12
Total current liabilities............................................................................ 827 3,043
Notes payable to Sharpoint Development Corporation..................................................... 10,062 --
Accrued interest payable to Sharpoint Development Corporation.......................................... 843 --
Capital lease obligations.............................................................................. 26 14
Total liabilities.................................................................................... 11,758 3,057
PARTNERS' DEFICIT AND STOCKHOLDERS' EQUITY
Preferred Stock, $.01 par value. Authorized 2,000,000 shares; none issued or outstanding............... -- --
Common Stock, $.01 par value. Authorized 35,000,000 shares; issued and outstanding 12,150,000 shares... -- 122
Additional paid-in capital............................................................................. -- 33,579
Partners' deficit...................................................................................... (10,850) --
Accumulated deficit.................................................................................... -- (16,246)
Deferred compensation on stock options................................................................. -- (1,000)
Total partners' deficit and stockholders' equity..................................................... (10,850) 16,455
Total liabilities, partners' deficit and stockholders' equity........................................ $ 908 $ 19,512
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CLOSURE MEDICAL CORPORATION
STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
Product sales.......................................................................... $ 1,478 $ 1,380 $ 496
License and product development revenues............................................... 25 -- 3,500
Total revenues....................................................................... 1,503 1,380 3,996
Cost of products sold.................................................................. 528 531 460
Gross profit and license and product development revenues............................ 975 849 3,536
Research, development and regulatory affairs expenses.................................. 1,231 1,637 3,167
Selling and administrative expenses.................................................... 1,366 1,589 2,879
Charges related to partnership capital changes......................................... -- 3,500 14,210
Payments to Caratec, L.L.C............................................................. 150 250 293
Total operating expenses............................................................. 2,747 6,976 20,549
Loss from operations................................................................... (1,772) (6,127) (17,013)
Interest expense to Sharpoint Development Corporation.................................. (445) (847) (138)
Investment and interest income......................................................... 2 2 337
Net loss............................................................................... $(2,215) $(6,972) $(16,814)
Shares used in computation of pro forma net loss per common share...................... 10,150 10,545
Pro forma net loss per common share.................................................... $ (0.69) $ (1.59)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CLOSURE MEDICAL CORPORATION
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
<S> <C> <C> <C>
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................................................... $(2,215) $(6,972) $(16,814)
Adjustments to reconcile net loss to net cash (used) provided by operating activities:
Amortization expense......................................................................... 67 31 11
Depreciation expense......................................................................... 44 51 85
Charges related to partnership capital changes............................................... -- 3,500 14,210
Amortization of deferred compensation on stock options....................................... -- -- 500
Net loss on disposals of fixed assets........................................................ 4 55 38
Net loss on disposals of intangibles......................................................... -- 14 58
Change in accounts receivable................................................................ 58 (137) 199
Change in inventories........................................................................ (23) -- 7
Change in prepaid expenses................................................................... (14) (4) (361)
Change in accounts payable and accrued payroll and vacation.................................. 127 303 420
Change in deferred revenue................................................................... -- 78 1,991
Change in accrued payable to Caratec, L.L.C.................................................. (24) 125 (195)
Change in accrued interest due to Sharpoint Development Corporation.......................... 443 843 138
Net cash (used) provided by operating activities............................................. (1,533) (2,113) 287
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to furniture, fixtures and equipment............................................... (64) (57) (519)
Additions to intangible assets............................................................... (66) (47) (82)
Purchases of investments..................................................................... -- -- (5,494)
Proceeds from the sale of investments........................................................ -- -- 458
Net cash used by investing activities........................................................ (130) (104) (5,637)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable to Sharpoint Development Corporation............................. 1,683 2,216 440
Net proceeds from sale of common stock....................................................... -- -- 17,926
Principal payments under capital lease obligation............................................ (1) (9) (12)
Net cash provided by financing activities.................................................... 1,682 2,207 18,354
Increase (decrease) in cash and cash equivalents............................................. 19 (10) 13,004
Cash and cash equivalents at beginning of period............................................. 11 30 20
Cash and cash equivalents at end of period................................................... $ 30 $ 20 $ 13,024
</TABLE>
NON-CASH TRANSACTIONS:
On December 31, 1994, accrued interest of $931,461 was converted to long-term
debt.
On December 31, 1995, the partnership agreement was amended to admit a new class
of limited partners. The fair value of the partnership interest was reflected as
a contribution of partners' capital.
On March 29, 1996, notes payable of $10,502,301 and related accrued interest of
$980,915 was converted to partners' capital.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CLOSURE MEDICAL CORPORATION
STATEMENT OF PARTNERS' DEFICIT AND STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
DEFERRED
TOTAL ADDITIONAL COMPENSATION
PARTNERS' COMMON STOCK PAID-IN ACCUMULATED ON STOCK
DEFICIT SHARES AMOUNT CAPITAL DEFICIT OPTIONS
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Balance at December 31, 1993................ $ (5,163 )
Net loss.................................... (2,215 )
Balance at December 31, 1994................ (7,378 )
Capital contribution........................ 3,500
Net loss.................................... (6,972 )
Balance at December 31, 1995................ (10,850 )
Conversion of debt and accrued interest to
partners' capital......................... 11,483
Net loss for January 1, 1996 through
September 25, 1996........................ (568 )
Conversion of partners' capital to common
stock..................................... (65 ) 9,600 $ 96 $ 14,179
Issuance of 2,550,000 shares of common
stock, net of issuance costs of
$1,046,202................................ 2,550 26 17,900
Grant of 550,000 stock options.............. 1,500 $ (1,500)
Amortization of deferred compensation on
stock options............................. 500
Net loss for the period September 26, 1996
through December 31, 1996................. $ (16,246)
Balance at December 31, 1996................ -- 12,150 $122 $ 33,579 $ (16,246) $ (1,000)
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
<S> <C>
Balance at December 31, 1993................ $ (5,163)
Net loss.................................... (2,215)
Balance at December 31, 1994................ (7,378)
Capital contribution........................ 3,500
Net loss.................................... (6,972)
Balance at December 31, 1995................ (10,850)
Conversion of debt and accrued interest to
partners' capital......................... 11,483
Net loss for January 1, 1996 through
September 25, 1996........................ (568)
Conversion of partners' capital to common
stock..................................... 14,210
Issuance of 2,550,000 shares of common
stock, net of issuance costs of
$1,046,202................................ 17,926
Grant of 550,000 stock options..............
Amortization of deferred compensation on
stock options............................. 500
Net loss for the period September 26, 1996
through December 31, 1996................. (16,246)
Balance at December 31, 1996................ $ 16,455
</TABLE>
F-6
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
1. ORGANIZATION AND OPERATIONS
Closure Medical Corporation (the "Company" or "Closure"), formerly named
Tri-Point Medical Corporation, develops, commercializes and manufactures medical
tissue cohesive products based on its proprietary cyanoacrylate technology
utilized primarily for human and veterinary wound closure. The Company was
incorporated in Delaware on February 20, 1996. From May 10, 1990 to February 29,
1996, the business of the Company was conducted by Tri-Point Medical L. P. (the
"Partnership"). Sharpoint Development Corporation ("SDC"), the general partner,
contributed $350,000 in cash for its general partner interest.
The Partnership purchased the assets and product technology of Caratec,
L.L.C. ("Caratec"), formerly CRX Medical, Inc., in 1990 for $700,000 and a
limited partnership interest. The purchase price was allocated as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Inventory...................................................... $ 37
Property and equipment......................................... 249
Patents and trademarks......................................... 282
Noncompete agreements.......................................... 100
Organization costs............................................. 10
Goodwill....................................................... 15
Prepaid expense................................................ 7
$700
</TABLE>
Caratec contributed $1,000 for its limited partnership interest. The
partnership agreement required that a percentage of the proceeds received by the
Partnership or its successors upon the sale of all or substantially all of the
net assets of the Partnership or its successors be paid to Caratec. The
partnership agreement also stipulated that Caratec receive payments based on net
sales volume and gross margin, subject to annual minimum amounts.
On December 31, 1995, the partnership agreement was amended to admit
certain employee limited partners as a new class of limited partners who were
entitled to receive 28.5% of partnership income after payments to Caratec. The
general partner received the remainder of the income and all losses of the
Partnership. For financial statement purposes, compensation expense and
contributed capital in the amount of $3,500,000 were recognized as of December
31, 1995 representing the estimated fair value of the partnership interest
granted to the employee limited partners.
As of March 1, 1996, substantially all of the assets and liabilities of the
Partnership, except for the indebtedness to SDC, were transferred to the Company
in exchange for its sole share of Common Stock. Subsequently, on March 29, 1996,
notes payable and related accrued interest to SDC in the amounts of $10,502,301
and $980,915, respectively, were contributed to partners' capital.
On May 31, 1996, a contribution and exchange agreement was executed whereby
SDC, assignees of SDC's economic interest in the Partnership, Caratec and the
employee limited partners exchanged their Partnership interests for 5,453,750,
1,776,250 and 2,370,000 shares of Common Stock of the Company, respectively,
contemporaneously with the completion of an initial public offering by the
Company. In conjunction with the issuance to Caratec of Common Stock of the
Company, Caratec surrendered its rights to receive a percentage of sales-based
payments and a percentage of capital transaction proceeds. The Company recorded
a non-cash expense related to this issuance of $14,210,000 which was offset by a
credit to additional paid-in-capital.
On September 25, 1996, the Company sold 2,550,000 shares of Common Stock in
an initial public offering (the "IPO"). The net proceeds from the IPO
(approximately $17.9 million) have been and will continue to be used primarily
for capital expenditures related to laboratories, office space and manufacturing
facilities, research and development, including clinical trials, working capital
and general corporate purposes.
During 1996, approximately 87 percent of the Company's revenues were from
domestic sales; the remaining 13 percent was earned from the Western European
market.
F-7
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
Cash and cash equivalents represent cash in banks and short-term
investments having an original maturity of less than three months.
INVESTMENTS
Investments at December 31, 1996 consisted of short-term money market
funds, bonds and equity securities having maturities as of the purchase date
greater than three months but less than or equal to one year. Long-term
investments have maturities as of the purchase date greater than one year. Such
investments have been classified as available for sale securities. The fair
market value, based on quoted market prices, of all investments approximates
amortized cost.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market.
FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment are stated at cost. Depreciation expense
is computed using the straight-line method over estimated useful lives ranging
between three and ten years. Expenditures for repairs and maintenance are
charged to expense as incurred.
INTANGIBLE ASSETS
Amounts incurred to secure patents and the estimated fair value of
registered patents acquired from Caratec on May 10, 1990 were capitalized and
are amortized over the remaining life of the patent on a straight-line basis.
Costs are capitalized until either the related patent is accepted, in which case
it is amortized, or it is rejected and written off. Other intangible assets
acquired from Caratec were amortized over a five year life on a straight-line
basis.
Costs associated with the organization and formation of the Partnership,
primarily legal costs, were capitalized and amortized over a five year period.
REVENUE RECOGNITION
Revenues from product sales are recognized upon shipment. Advance payments
related to future sales of product or future royalties due on these sales are
deferred and will be recorded as revenue as they are earned over future periods.
INCOME TAXES
No provision for federal or state income taxes was necessary in the
financial statements of the Partnership for the years ended December 31, 1994,
1995 or the two months ending February 29, 1996 because, as a partnership, it
was not subject to federal or state income taxes and the tax effect of its
activities accrued to the partners. For the ten months ended December 31, 1996,
the Company has provided for income taxes using the liability method.
The tax returns of the Partnership are subject to examination by federal
and state tax authorities. If such examinations occur and result in changes with
respect to the Partnership's qualification or to distributable Partnership
income or loss, the tax liability of the respective partners would be changed
accordingly.
Significant differences between the Partnership's financial statement basis
and the tax basis are as follows:
The financial statement basis loss exceeded the tax basis loss by
approximately $3,900,000 for the year ended December 31, 1995, which was
primarily due to the non-deductibility of certain expenses for tax
purposes. Approximately $960,000 of expenses included in December 31,
1996 amounts were recognized on the Partnership's 1996 tax return.
F-8
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
The Partnership's net assets on a tax basis exceeded those reported
under the financial statement basis by approximately $200,000 at
December 31, 1995. The difference was attributable to temporary tax
deduction differences.
The partners' capital account in total is the same for both financial
statement and tax reporting.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RELATED PARTIES
The Partnership had notes payable to its general partner, SDC, until March
29, 1996. Details of the debt agreements are summarized in Note 4.
Beginning in 1992 until the Partnership ceased to exist on September 25,
1996, Caratec, a limited partner, received payments of 4% of adjusted net sales
of veterinary products. Caratec also received a minimum of 2% and a maximum of
8% of adjusted net sales of human products depending on the gross margin on
those sales. At the end of 1994, such percentage-based payments to Caratec were
less than $150,000, the stipulated minimum, and the difference was paid at that
time. For 1995 and 1996, such payments to Caratec were not to be less than
$250,000. Upon the effectiveness of the IPO on September 25, 1996, Caratec
surrendered its rights to receive these sales-based payments and a percentage of
capital transaction proceeds pursuant to the contribution and exchange agreement
dated as of May 31, 1996, whereby Caratec agreed to exchange its Partnership
interests for 1,776,250 shares of Common Stock of the Company.
For tax purposes, Caratec was allocated net income up to the amount of
payments received as described above. The general partner and employee limited
partners were allocated the remainder of any net income after allocation to
Caratec. The general partner was allocated 100% of all losses.
During 1994 and 1995, the Partnership paid a consulting fee to an
individual who is also a shareholder of Caratec amounting to $116,390 and
$20,510, respectively. No such fee was paid in 1996.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of current assets and current liabilities
approximates the financial statement carrying value at December 31, 1996 and
1995. The fair value of short-term investments is based on quoted market prices.
The estimated fair value of the notes payable to SDC at December 31, 1995
can not be readily determined since the notes are payable to a related party who
is also the general partner. These notes and related interest were ultimately
exchanged for shares of Common Stock of the Company in 1996. See Note 4 for the
carrying amount, interest rate and maturity dates of the notes payable.
RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
("SFAS 121"), was issued in March 1995. SFAS 121 requires that long-lived assets
and certain identifiable intangibles to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company adopted
SFAS 121 effective January 1, 1996; the adoption of this statement did not have
a material impact on its results of operation or financial position.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), was issued in October 1995. SFAS 123
gives companies the option to adopt the fair value method for expense
recognition of employee stock options and stock-based awards or, as the Company
has elected, to continue to account for such items using
F-9
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
the intrinsic value method as outlined under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Consequently, the
adoption of SFAS 123 did not have any impact on the financial position or
results of operations of the Company but pro forma disclosures of net loss and
net loss per share have been provided in Note 8 as if the fair value method had
been applied.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current year presentation.
NET LOSS PER SHARE
Net loss per share is computed using the weighted-average number of shares
of common and common equivalent shares outstanding during the periods. Common
equivalent shares consist of stock options using the treasury stock method.
Common equivalent shares from stock options are excluded from the computation if
their effect is antidilutive, except pursuant to the requirements of the
Securities and Exchange Commission. Common and common equivalent shares issued
from January 1, 1995 through the effective date of the Company's IPO on
September 25, 1996 have been included in the computation using the treasury
stock method as if they were outstanding for all periods prior to June 30, 1996.
3. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment includes the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1996
<S> <C> <C>
(IN
THOUSANDS)
Furniture and equipment............................................................... $134 $279
Machinery and equipment............................................................... 208 387
Leasehold improvements................................................................ 28 43
Machinery and equipment under capital leases (Note 5)................................. 48 48
Construction-in-progress.............................................................. -- 94
418 851
Accumulated depreciation and amortization............................................. (142) (179)
$276 $672
</TABLE>
4. NOTES PAYABLE AND RELATED ACCRUED INTEREST
Notes payable to SDC were $10,062,300 at December 31, 1995. Interest was
payable annually on December 31 at various rates ranging from 9.5% to 9.75%.
These notes were secured by substantially all the Partnership assets and
principal was payable on various dates between January and December 1998.
On March 29, 1996, notes payable of $10,502,301 and accrued interest of
$980,915, respectively, were converted to partners' capital by SDC. On May 31,
1996, a contribution and exchange agreement was executed whereby SDC exchanged
its partners' capital for 5,453,750 shares of Common Stock of the Company upon
the effectiveness of the Company's IPO on September 25, 1996.
5. LEASES
The Company leases office and manufacturing space and equipment under
operating leases which expire at various dates through 1998. Rent expense
related to these leases was approximately $98,000, $93,000 and $136,000 for
1994, 1995 and 1996, respectively.
The Company leases equipment under capital leases. The lease terms are four
years and the Company has the option to purchase the equipment at the end of the
leases.
F-10
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
5. LEASES -- Continued
Future minimum lease payments under noncancellable capital leases and
operating leases with initial or remaining terms of one year or more are as
follows at December 31, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
<S> <C> <C>
(IN THOUSANDS)
1997............................................................................. $14 $ 166
1998............................................................................. 12 68
1999............................................................................. 3 --
Total minimum lease payments..................................................... 29 $ 234
Less amount representing interest................................................ 3
Present value of minimum lease payments.......................................... $26
</TABLE>
6. MAJOR CUSTOMERS AND COMMITMENTS
On March 20, 1996, the Company entered into an eight-year exclusive supply
and distribution rights agreement with Ethicon, Inc., a subsidiary of Johnson &
Johnson, whereby Closure will supply Ethicon with a product for human topical
wound closure. In consideration, Ethicon paid Closure $4,500,000 and agreed to
pay additional amounts upon written notification of U.S. regulatory approval for
the product. Of the $4,500,000 total, $3,500,000 was a non-refundable licensing
fee and $1,000,000 will be offset against either future product purchases or
royalties to be paid by Ethicon on product sales and has been classified as
deferred revenue on the accompanying balance sheet. Ethicon also agreed to
advance Closure additional amounts for direct costs incurred in connection with
clinical studies of the product, which amounts will be credited against future
royalties to be paid by Ethicon. As of December 31, 1996, Ethicon had advanced
the Company $1,000,000 for direct costs of these clinical studies which has been
classified as deferred revenue on the accompanying balance sheet of which
$500,000 was advanced during the fourth quarter. Upon U.S. or European Community
approval of the product, Ethicon is obligated to purchase certain minimum
quantities annually at a predetermined price based on average selling prices.
A seven-year marketing agreement with Farnam Companies, Inc. was signed in
December of 1992. This agreement gives Farnam exclusive rights to market, sell
and distribute the Company's veterinary products in North America.
Revenues from Farnam aggregated approximately $400,000 or 27%, $370,000 or
27% and $390,000 or 10% of total revenues for the years ended December 31, 1994,
1995 and 1996, respectively.
The Company has a non-exclusive supply agreement with Procter & Gamble/ALZA
Partnership for Oral Healthcare for a cohesive used in conjunction with a
periodontal drug delivery product. Net revenues under this agreement amounted to
approximately $1,110,000 or 73% of total revenues, $1,010,000 or 73% of total
revenues, and $107,000 or 3% of total revenues during 1994, 1995 and 1996,
respectively. Accounts receivable related to these revenues were approximately
$243,500 and $54,000 at December 31, 1995 and 1996, respectively. In March 1994,
the Company entered into an agreement with On-Site Therapeutics, Inc. (On-Site)
for exclusive services to identify purchasers of Octyldent. Under this
agreement, On-Site receives a 5% royalty on net sales of Octyldent up to a
cumulative maximum royalty amount of $1,500,000. Amounts paid during 1994, 1995
and 1996 were $55,675, $50,686 and $5,046, respectively.
In May 1996, the Company entered into a five-year agreement with a
consultant which provides for annual compensation of $120,000 and included a
grant of options for 50,000 shares of Common Stock under the Equity Compensation
Plan.
The Company has employment agreements with certain key executives that
provide for specified benefits if the executive is terminated other than for
cause, as defined.
F-11
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
7. INCOME TAXES
The Company accounts for income taxes using the liability method, which
generally provides that deferred tax assets and liabilities be recognized for
temporary differences between the financial reporting basis and the tax basis of
the Company's assets and liabilities and expected benefits of utilizing net
operating loss and other carryforwards. At December 31, 1996, the Company had
net operating loss carryforwards for federal income tax reporting purposes of
approximately $140,000 expiring in the year 2011. The Company also has research
and development tax credit carryforwards of approximately $39,000 which will
expire in the year 2011.
The tax effects of significant items comprising the Company's deferred
taxes are as follows (in thousands):
<TABLE>
<CAPTION>
1996
<S> <C>
Net operating losses.......................................................................... $ 44
Research and development carryforwards........................................................ 39
Temporary differences, net.................................................................... 385
468
Valuation allowance........................................................................... (468)
Net deferred tax asset........................................................................ --
</TABLE>
Deferred tax liabilities as of December 31, 1996 were insignificant.
At December 31, 1996, a valuation allowance for deferred tax assets of
$468,000 has been recorded as, due to the Company's history of losses, it is
considered more likely than not that such deferred tax assets will not
ultimately be realized.
No provision for federal or state income taxes was necessary in the
financial statements of the Partnership for the years ended December 31, 1994,
1995 or the two months ending February 29, 1996 because, as a partnership, it
was not subject to federal or state income taxes and the tax effect of its
activities accrued to the partners.
8. STOCK PLAN
The Company maintains the Amended and Restated 1996 Equity Compensation
Plan (the "Plan"), adopted by the Board of Directors on May 28, 1996 and amended
effective as of September 24, 1996 and November 1, 1996. The Plan provides a
maximum of 1,000,000 shares of Common Stock may be issued pursuant to stock
options, restricted stock grants and stock appreciation rights (collectively,
"Grants") granted to officers, employees, independent contractors and
consultants, and non-employee directors of the Company. Grants of restricted
stock and stock appreciation rights may only be made to participants other than
non-employee directors of the Company. The Plan is administered and interpreted
by a committee (the "Committee") of the Board of Directors. Grants under the
Plan may consist of (i) options intended to qualify as incentive stock options
("ISOs") within the meaning of section 422 of the Internal Revenue Code of 1986,
as amended, or (ii) so-called "nonqualified stock options" that are not intended
to so qualify ("NQSOs"). Independent contractors or consultants to the Company
are not eligible to receive ISOs under the Plan. The option price of any ISO
granted under the Plan will not be less than the fair market value of the
underlying shares of Common Stock on the date of grant, except that the option
price of an ISO granted to an employee who owns more than 10% of the total
combined voting power of all classes of stock of the Company or its subsidiaries
may not be less than 110% of the fair market value of the underlying shares of
Common Stock on the date of grant. The option price of a NQSO may be greater
than, equal to or less than the fair market value of the underlying shares of
Common Stock on the date of grant. The Committee will determine the term and
vesting period of each option; provided, however, that the exercise period may
not exceed ten years from the date of grant, and the exercise period of an ISO
granted to an employee who owns more than 10% of the total combined voting power
of all classes of stock of the Company or its subsidiaries may not exceed five
years from the date of grant. Options outstanding at December 31, 1996 generally
vest within five years.
F-12
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
8. STOCK PLAN -- Continued
The following table summarizes stock option activity for the year ended
December 31, 1996:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-AVERAGE
AVERAGE REMAINING CONTRACTUAL EXERCISABLE
SHARES PRICE PER SHARE LIFE AT 12/31/96
<S> <C> <C> <C> <C>
Options outstanding at January 1, 1996........................ -- -- -- --
Granted
With discount exercise price................................ 550,000 $5.27 9.41 132,500
With market exercise price.................................. 29,602 8.00 9.75 5,920
Exercised..................................................... 0 0
Expired or canceled
With discount exercise price................................ (6,997) 5.27
Options outstanding at December 31, 1996...................... 572,605
Weighted-average fair value of options granted................ 8.00
Available for grant at December 31, 1996...................... 427,395
</TABLE>
In October 1995, the Financial Accounting Standards Board issued SFAS 123.
SFAS 123 gives companies the option to adopt the fair value method for expense
recognition of employee stock options and stock-based awards or to continue to
account for such items using the intrinsic value method as outlined under APB
25. Accordingly, compensation expense for stock options is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
grant over the amount of the option price. During 1996, the Company recognized
approximately $500,000 of compensation cost related to the plan. The Company has
adopted the disclosure-only provisions of this statement. Had compensation
expense, assuming it was recognized on a straight-line basis over the vesting
period, for 1996 awards been determined based on the fair value at the grant,
consistent with the provisions of SFAS 123, the Company's results of operations
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996
<S> <C>
Net loss -- as reported........................................................ $(16,814)
Net loss -- pro forma.......................................................... $(17,414)
Loss per share -- as reported.................................................. $ (1.59)
Loss per share -- pro forma.................................................... $ (1.65)
</TABLE>
The pro forma amounts discussed above were derived using the Black-Scholes
option-pricing model with the assumptions indicated below:
<TABLE>
<CAPTION>
ASSUMPTIONS 1996
<S> <C>
Average expected life (years)...................................................... 6
Average interest rate.............................................................. 6.5%
Volatility......................................................................... 70.0%
Dividend yield..................................................................... 0.0%
</TABLE>
F-13
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
9. SUBSEQUENT EVENTS
On January 29, 1997 the Company entered into a five year capital lease
covering laboratory and scientific equipment and computers. Monthly rent
obligation under the lease is equal to 2.19 percent of the total equipment cost
up to a maximum of $1,500,000. At the expiration of the lease term, the Company
is required to purchase all of the equipment for an amount equal to no less than
5% or no more than 10% of the equipment cost.
On February 14, 1997, the Company entered into a ten year operating lease
for approximately 40,000 square feet of office, laboratory and manufacturing
space to, among other things, expand manufacturing capacity. Upon completion,
all of the Company's operations will be maintained at this location and the
Company's current facility leases will be terminated. Rent expense under the
current leases is approximately $170,000 annually. Under the new ten year lease
annual expense will be a minimum of $373,000, with a total minimum expense for
the entire term of $4,100,000.
In March 1997, the Company was served with a complaint filed in the
Superior Court Department of the Trial Court of the Commonwealth of
Massachusetts alleging personal injury as a result of negligence by the Company
in the design, testing and distribution of Avacryl, an n-butyl cyanoacrylate
used in a medical procedure in 1993 as part of a clinical trial conducted by the
Company pursuant to an Investigational Device Exemption. The Company's insurer
has assumed the defense of this lawsuit. The Company has not yet answered the
complaint, and discovery in the case has not yet commenced. Accordingly, the
Company is not yet able to assess its potential exposure in this case. However,
based on the limited information available to it, the Company intends to
vigorously defend the lawsuit and management believes the outcome of this case
will not have a material adverse effect on the Company's financial position or
results of operations.
In March 1997, the Company filed a registration statement with the U.S.
Securities and Exchange Commission for an aggregate of 1,500,000 shares of which
800,000 shares are being offered by the Company and 700,000 shares are being
offered by a stockholder of the Company.
F-14
<PAGE>
NEXACRYL(R) AND ABSORBABLE TISSUE COHESIVES WILL NOT BE COMMERCIALLY
AVAILABLE IN THE U.S. UNTIL FDA APPROVALS ARE RECEIVED. THERE IS NO
ASSURANCE OF SUCH APPROVALS.
DEVELOPING INNOVATIVE PRODUCTS FOR SURGERY
PRODUCTS TO BENEFIT PERIODONTISTS AND
OPHTHALMOLOGISTS
[PHOTO OF APPLICATION
OF NEXACRYL TO EYE]
OCTYLDENT(R) PERIODONTAL COHESIVE IS A TOPICAL
SEALANT USED IN CONJUNCTION WITH A SITE-SPECIFIC
SUSTAINED-RELEASE ANTIBACTERIAL DRUG THERAPY TO
TREAT ADULTS WITH PERIODONTAL DISEASE.
NEXACRYL(R) IS A TOPICAL SEALANT TO BE USED IN THE
REPAIR OF CORNEAL ULCERS AND ABRAISIONS.
ABSORBABLE TISSUE COHESIVES
IN DEVELOPMENT FOR NEW TRENDS
IN MINIMALLY INVASIVE AND
CARDIOTHORACIC
SURGERY
[PHOTO OF
CARDIOTHORACIC SURGERY]
TISSUE COHESIVES ARE BEING
DEVELOPED FOR INTERNAL
APPLICATIONS, TO REPLACE OR
BE USED TOGETHER WITH STAPLES
AND SUTURES TO SEAL INCISIONS
AND PREVENT LEAKAGE.
THESE PRODUCTS WILL BE DESIGNED TO ASSIST CARDIAC
SURGEONS IN PERFORMING PROCEDURES SUCH AS CORONARY
ARTERY BYPASS GRAFTS AND VALVE REPLACEMENTS.
[PHOTO OF OPERATING ROOM]
MAY ALSO PROVE USEFUL IN BOWEL RESECTION AND LUNG
SURGERY
VARIOUS MEDICAL SUPPLIES DEPICTED ARE NOT PRODUCTS
OF THE COMPANY.
CLOSURE
MEDICAL CORPORATION
[LOGO]
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO
WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary................................... 3
Risk Factors......................................... 7
Use of Proceeds...................................... 13
Dividend Policy...................................... 13
Price Range of Common Stock.......................... 14
Capitalization....................................... 14
Dilution............................................. 15
Selected Financial Data.............................. 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 17
Business............................................. 20
Management........................................... 33
Certain Transactions................................. 40
Prior Partnership Status............................. 40
Principal and Selling Stockholders................... 41
Description of Capital Stock......................... 42
Shares Eligible for Future Sale...................... 44
Underwriting......................................... 45
Legal Matters........................................ 46
Experts.............................................. 47
Available Information................................ 47
Index to Financial Statements........................ F-1
</TABLE>
1,500,000 SHARES
(LOGO)
CLOSURE MEDICAL
CORPORATION
COMMON STOCK
PROSPECTUS
, 1997
LEHMAN BROTHERS
OPPENHEIMER & CO., INC.
SANDS BROTHERS & CO., LTD.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses, other than
underwriting discounts and commissions, in connection with the issuance and
distribution of the shares of Common Stock being registered, all of which are
being borne by the Company:
<TABLE>
<CAPTION>
<S> <C>
Registration fee....................................................................... $ 8,820.00
NASD filing fee........................................................................ 3,000.00
Transfer agent and registrar fees...................................................... 2,500.00
Printing and engraving................................................................. 70,000.00
Legal fees............................................................................. 100,000.00
Blue Sky fees and expenses............................................................. 15,000.00
Nasdaq National Market listing fee..................................................... 17,500.00
Accounting fees........................................................................ 75,000.00
Miscellaneous.......................................................................... 3,180.00
Total........................................................................... $295,000.00
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
A. Section 145 of the Delaware General Corporation Law ("Section 145")
permits indemnification of directors, officers, agents and controlling persons
of a corporation under certain conditions and subject to certain limitations.
Section 145 empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director,
officer or agent of the corporation or another enterprise if serving at the
request of the corporation. Depending on the character of the proceeding, a
corporation may indemnify against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
in connection with such action, suit or proceeding if the person indemnified
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to, the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. In the case of an action by or in the right of the
corporation, no indemnification may be made with respect to any claim, issue or
matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the court of chancery or the
court in which such action or suit was brought shall determine that despite the
adjudication of liability such person is fairly and reasonably entitled to
indemnity for such expenses which the court shall deem proper. Section 145
further provides that to the extent a director or officer of a corporation has
been successful in the defense of any action, suit or proceeding referred to
above or in defense of any claim, issue or matter therein, such person shall be
indemnified against expenses (including attorneys' fees) actually or reasonably
incurred by such person in connection therewith.
B. As permitted by the Delaware General Corporation Law, the Company has
included a provision in its Restated Certificate of Incorporation, as amended,
that, subject to certain limitations, eliminates the ability of the Company and
its stockholders to recover monetary damages from a director of the Company for
breach of fiduciary duty as a director. Article VI of the Company's By-Laws
provides for indemnification of the Company's directors and officers and
advancement of expenses to the extent otherwise permitted by Section 145. In
addition, the Company has agreed to indemnify certain executive officers of the
Company pursuant to the terms of their employment agreements to the maximum
extent permitted by applicable law against all costs, charges and expenses
incurred by each in connection with any action, suit or proceeding to which he
may be party or in which he may be a witness by reason of his being an officer,
director or employee of the Company or any subsidiary or affiliate of the
Company.
C. Reference is made to Section 10 of the Underwriting Agreement (Exhibit 1
hereto) which provides for indemnification among the Company, the Selling
Stockholder and the Underwriters. Additionally, reference is made to Section 10
of the Underwriting Agreement contained in Exhibit 1 to the Company's
Registration Statement on Form S-1 (Registration No. 333-5425) filed with the
Securities and Exchange Commission (the "Commission") on June 7, 1996, as
amended, which sets forth certain indemnification provisions.
II-1
<PAGE>
D. As authorized by Section 145 of the Delaware General Corporation Law and
Article VI of the Company's ByLaws, the Company has obtained, on behalf of its
directors and officers, insurance protection against certain liabilities arising
out of the discharge of their duties, as well as insurance covering the Company
for indemnification payments made to its directors and officers for certain
liabilities. The premiums for such insurance are paid by the Company.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Described below are the only transactions within the past three years in
which the Company issued securities which were not registered under the
Securities Act.
On September 25, 1996, obligations of and interests in the Company's
predecessor, Tri-Point Medical L.P., were contributed to the Company in exchange
for an aggregate of 9,600,000 shares of Common Stock. In May 1996, options to
purchase an aggregate of 550,000 shares of Common Stock were granted to
employees, non-employee directors and three consultants. These options expire in
May 2006, vest in five equal annual installments in the case of employees and
consultants beginning on the date of grant, vest 50% on the date of grant and
25% on each successive anniversary of the date of grant in the case of
non-employee directors, and, except for the non-employee director options, have
an exercise price of $5.00 per share. The non-employee director options have an
exercise price of $7.00 per share. In October 1996, options to purchase an
aggregate of 29,602 shares of Common Stock were granted to employees, which
options expire in October 2006, vest in five equal annual installments beginning
on the date of grant and have an exercise price of $5.00 per share.
The Company believes that the issuance of shares and grants of options
described above did not involve a public offering and were exempt from
registration under Section 4(2) of the Securities Act because such issuances and
grants were made to a limited group of persons, each of whom was believed to
have been a sophisticated investor or had a pre-existing business or personal
relationship with the Company or its management and because each such person was
purchasing for investment without a view to further distribution. Restrictive
legends were placed on stock certificates and in stock option agreements
evidencing the securities described above. The shares of Common Stock issued and
issuable upon the exercise of options described above have been registered by
the Company on a Registration Statement on Form S-8 filed with the Commission on
December 12, 1996.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
The following is a list of exhibits filed as part of this Registration
Statement.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
1* Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation. (Exhibit 3.1)(1)
3.2* Amendment to Restated Certificate of Incorporation.
3.3 By-Laws. (Exhibit 3.2)(1)
5* Opinion of Morgan, Lewis & Bockius LLP regarding legality of the shares of Common Stock being registered.
10.1 Office-Warehouse Lease Agreement, dated as of November 7, 1995, between AP Southeast Portfolio Partners, L.P.
and the Registrant. (Exhibit 10.1)(1)
10.2+ Adhesive Supply Agreement, dated as of March 14, 1991, between Procter & Gamble/ALZA, Partners for Oral
Health Care and the Registrant. (Exhibit 10.2)(1)
10.3+ Amendment No. 1, dated as of April 13, 1992, to Adhesive Supply Agreement, dated as of March 14, 1991,
between Procter & Gamble/ALZA, Partners for Oral Health Care and the Registrant. (Exhibit 10.3)(1)
10.4+ Adhesive Supply Agreement, dated as of March 26, 1993, between ALZA Corporation and the Registrant. (Exhibit
10.4)(1)
10.5+ Supply and Distribution Agreement, dated as of July 14, 1992, between Chiron Vision Corporation and the
Registrant. (Exhibit 10.5)(1)
10.6+ First Amendment, dated as of April 25, 1995, to Supply and Distribution Agreement, dated as of July 14, 1992,
between Chiron Vision Corporation and the Registrant. (Exhibit 10.6)(1)
10.7+ Licensing and Distribution Agreement, dated as of December 7, 1992, between Farnam Companies, Inc. and the
Registrant. (Exhibit 10.7)(1)
10.8+ Supply and Distribution Rights Agreement, dated as of March 20, 1996, between Ethicon, Inc. and the
Registrant. (Exhibit 10.8)(1)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
10.9++* Amended and Restated 1996 Equity Compensation Plan.
10.10++ Employment Agreement, dated as of May 31, 1996, between Robert V. Toni and the Registrant. (Exhibit 10.10)(1)
10.11++ Employment Agreement, dated as of May 31, 1996, between J. Blount Swain and the Registrant. (Exhibit
10.11)(1)
10.12++ Employment Agreement, dated as of May 31, 1996, between Jeffrey G. Clark and the Registrant. (Exhibit
10.12)(1)
10.13++ Employment Agreement, dated as of May 31, 1996, between Joe B. Barefoot and the Registrant. (Exhibit
10.13)(1)
10.14++ Consulting Agreement, dated as of May 31, 1996, between Steven A. Kriegsman and the Registrant. (Exhibit
10.14)(1)
10.15 Registration Rights Agreement, dated as of May 31, 1996, between Caratec, L.L.C. and the Registrant. (Exhibit
10.15)(1)
10.16 Registration Rights Agreement, dated as of May 31, 1996, among Cacoosing Partners, L.P., OMI Partners, L.P.,
Triangle Partners, L.P., F. William Schmidt, Rolf D. Schmidt, Robert V. Toni, J. Blount Swain, Jeffrey G.
Clark, Joe B. Barefoot and the Registrant. (Exhibit 10.16)(1)
10.17 Contribution and Exchange Agreement, dated as of May 31, 1996, among Cacoosing Partners, L.P., OMI Partners,
L.P., Triangle Partners, L.P., F. William Schmidt, Rolf D. Schmidt, Caratec, L.L.C., Robert V. Toni, J.
Blount Swain, Jeffrey G. Clark, Joe B. Barefoot, Jeffery C. Basham, Jeffrey C. Leung, Anthony V. Seaber and
the Registrant. (Exhibit 10.17)(1)
10.18 Amendment, dated June 18, 1996, to Office-Warehouse Lease Agreement, dated as of November 7, 1995, between AP
Southeast Portfolio Partners, L.P. and the Registrant. (Exhibit 10.18)(1)
10.19* Lease, dated February 14, 1997, between AP Southeast Portfolio Partners, L.P. and the Registrant.
10.20* Master Lease Agreement, dated as of January 29, 1997, between Transamerica Business Credit Corporation and
the Registrant.
11* Statement re: Computation of Per Share Earnings.
23.1* Consent of Price Waterhouse LLP.
23.2* Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 5 hereto).
24.1* Power of Attorney (included on signature page to this Registration Statement).
27* Financial Data Schedule.
</TABLE>
* Filed herewith.
+ Portions of this exhibit were omitted and filed separately with the Secretary
of the Commission pursuant to an order of the Commission granting the
Registrant's application for confidential treatment filed pursuant to Rule
406 under the Securities Act.
++ Compensation plans and arrangements for executives and others.
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(Registration No. 333-5425) filed with the Commission on June 7, 1996, as
amended, and incorporated herein by reference.
(b) Financial Statement Schedules.
None.
ITEM 17. UNDERTAKINGS.
A. The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement certificates
in such denominations and registered in such names as required by the
Underwriters to permit prompt delivery to each purchaser.
B. Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent,
II-3
<PAGE>
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
C. The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Raleigh, North
Carolina, on March 7, 1997.
CLOSURE MEDICAL CORPORATION
By: /s/ ROBERT V. TONI
ROBERT V. TONI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
EACH PERSON IN SO SIGNING ALSO MAKES, CONSTITUTES AND APPOINTS ROBERT V.
TONI AND J. BLOUNT SWAIN, AND EACH OF THEM ACTING ALONE, HIS TRUE AND LAWFUL
ATTORNEY-IN-FACT, WITH FULL POWER OF SUBSTITUTION, TO EXECUTE AND CAUSE TO BE
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO THE REQUIREMENTS
OF THE SECURITIES ACT OF 1933, AS AMENDED, ANY AND ALL AMENDMENTS AND
POST-EFFECTIVE AMENDMENTS TO THIS REGISTRATION STATEMENT, AND INCLUDING ANY
REGISTRATION STATEMENT FOR THE SAME OFFERING THAT IS TO BE EFFECTIVE UPON FILING
PURSUANT TO RULE 462(B) UNDER THE SECURITIES ACT, WITH EXHIBITS THERETO AND
OTHER DOCUMENTS IN CONNECTION THEREWITH, AND HEREBY RATIFIES AND CONFIRMS ALL
THAT SAID ATTORNEY-IN-FACT OR HIS SUBSTITUTE OR SUBSTITUTES MAY DO OR CAUSE TO
BE DONE BY VIRTUE HEREOF.
<TABLE>
<CAPTION>
NAME CAPACITY DATE
<S> <C> <C>
/s/ ROBERT V. TONI President and Chief Executive Officer (principal March 7, 1997
ROBERT V. TONI executive officer) and Director
/s/ J. BLOUNT SWAIN Vice President and Chief Financial Officer March 7, 1997
J. BLOUNT SWAIN (principal financial and accounting officer)
/s/ ROLF D. SCHMIDT Chairman of the Board and Director March 7, 1997
ROLF D. SCHMIDT
/s/ F. WILLIAM SCHMIDT Director March 7, 1997
F. WILLIAM SCHMIDT
/s/ DENNIS C. CAREY Director March 7, 1997
DENNIS C. CAREY
/s/ MICHAEL K. LORELLI Director March 7, 1997
MICHAEL K. LORELLI
/s/ RANDY H. THURMAN Director March 7, 1997
RANDY H. THURMAN
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIAL
SEQUENTIAL PAGE
NUMBER DESCRIPTION NUMBER
<S> <C> <C>
1* Form of Underwriting Agreement.
3.1 Restated Certificate of Incorporation. (Exhibit 3.1)(1)
3.2* Amendment to Restated Certificate of Incorporation.
3.3 By-Laws. (Exhibit 3.2)(1)
5* Opinion of Morgan, Lewis & Bockius LLP regarding legality of the shares of Common Stock being
registered.
10.1 Office-Warehouse Lease Agreement, dated as of November 7, 1995, between AP Southeast Portfolio
Partners, L.P. and the Registrant. (Exhibit 10.1)(1)
10.2+ Adhesive Supply Agreement, dated as of March 14, 1991, between Procter & Gamble/ALZA, Partners
for Oral Health Care and the Registrant. (Exhibit 10.2)(1)
10.3+ Amendment No. 1, dated as of April 13, 1992, to Adhesive Supply Agreement, dated as of March
14, 1991, between Procter & Gamble/ALZA, Partners for Oral Health Care and the Registrant.
(Exhibit 10.3)(1)
10.4+ Adhesive Supply Agreement, dated as of March 26, 1993, between ALZA Corporation and the
Registrant. (Exhibit 10.4)(1)
10.5+ Supply and Distribution Agreement, dated as of July 14, 1992, between Chiron Vision
Corporation and the Registrant. (Exhibit 10.5)(1)
10.6+ First Amendment, dated as of April 25, 1995, to Supply and Distribution Agreement, dated as of
July 14, 1992, between Chiron Vision Corporation and the Registrant. (Exhibit 10.6)(1)
10.7+ Licensing and Distribution Agreement, dated as of December 7, 1992, between Farnam Companies,
Inc. and the Registrant. (Exhibit 10.7)(1)
10.8+ Supply and Distribution Rights Agreement, dated as of March 20, 1996, between Ethicon, Inc.
and the Registrant. (Exhibit 10.8)(1)
10.9++* Amended and Restated 1996 Equity Compensation Plan.
10.10++ Employment Agreement, dated as of May 31, 1996, between Robert V. Toni and the Registrant.
(Exhibit 10.10)(1)
10.11++ Employment Agreement, dated as of May 31, 1996, between J. Blount Swain and the Registrant.
(Exhibit 10.11)(1)
10.12++ Employment Agreement, dated as of May 31, 1996, between Jeffrey G. Clark and the Registrant.
(Exhibit 10.12)(1)
10.13++ Employment Agreement, dated as of May 31, 1996, between Joe B. Barefoot and the Registrant.
(Exhibit 10.13)(1)
10.14++ Consulting Agreement, dated as of May 31, 1996, between Steven A. Kriegsman and the
Registrant. (Exhibit 10.14)(1)
10.15 Registration Rights Agreement, dated as of May 31, 1996, between Caratec, L.L.C. and the
Registrant. (Exhibit 10.15)(1)
10.16 Registration Rights Agreement, dated as of May 31, 1996, among Cacoosing Partners, L.P., OMI
Partners, L.P., Triangle Partners, L.P., F. William Schmidt, Rolf D. Schmidt, Robert V. Toni,
J. Blount Swain, Jeffrey G. Clark, Joe B. Barefoot and the Registrant. (Exhibit 10.16)(1)
10.17 Contribution and Exchange Agreement, dated as of May 31, 1996, among Cacoosing Partners, L.P.,
OMI Partners, L.P., Triangle Partners, L.P., F. William Schmidt, Rolf D. Schmidt, Caratec,
L.L.C., Robert V. Toni, J. Blount Swain, Jeffrey G. Clark, Joe B. Barefoot, Jeffery C. Basham,
Jeffrey C. Leung, Anthony V. Seaber and the Registrant. (Exhibit 10.17)(1)
10.18 Amendment, dated June 18, 1996, to Office-Warehouse Lease Agreement, dated as of November 7,
1995, between AP Southeast Portfolio Partners, L.P. and the Registrant. (Exhibit 10.18)(1)
10.19* Lease, dated February 14, 1997, between AP Southeast Portfolio Partners, L.P. and the
Registrant.
10.20* Master Lease Agreement, dated as of January 29, 1997, between Transamerica Business Credit
Corporation and the Registrant.
11* Statement re: Computation of Per Share Earnings.
23.1* Consent of Price Waterhouse LLP.
23.2* Consent of Morgan, Lewis & Bockius LLP (included in its opinion filed as Exhibit 5 hereto).
24.1* Power of Attorney (included on signature page to this Registration Statement).
27* Financial Data Schedule.
</TABLE>
* Filed herewith.
+ Portions of this exhibit were omitted and filed separately with the Secretary
of the Securities and Exchange Commission (the "Commission") pursuant to an
order of the Commission granting the Registrant's application for
confidential treatment filed pursuant to Rule 406 under the Securities Act.
++ Compensation plans and arrangements for executives and others.
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(Registration No. 333-5425) filed with the Commission on June 7, 1996, as
amended, and incorporated herein by reference.
---------
CLOSURE MEDICAL CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
March , 1997
LEHMAN BROTHERS INC.
OPPENHEIMER & CO., INC.
SANDS BROTHERS & CO., INC.
As Representatives of the several
Underwriters named in Schedule 1,
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Dear Sirs:
Closure Medical Corporation, a Delaware corporation (the
"Company"), and a stockholder of the Company named in Schedule 2 hereto (the
"Selling Stockholder"), propose to sell an aggregate of [ ] shares (the "Firm
Stock") of the Company's Common Stock, par value $.01 per share (the "Common
Stock"). Of the [ ] shares of the Firm Stock, [ ] are being sold by the Company
and [ ] by the Selling Stockholder. In addition, the Company proposes to grant
to the Underwriters named in Schedule 1 hereto (the "Underwriters") an option to
purchase up to an additional [ ] shares of the Common Stock on the terms and for
the purposes set forth in Section 3 (the "Option Stock"). The Firm Stock and the
Option Stock, if purchased, are hereinafter collectively called the "Stock."
This is to confirm the agreement concerning the purchase of the Stock from the
Company and the Selling Stockholder by the Underwriters.
1. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE
COMPANY. The Company represents, warrants and agrees that:
<PAGE>
(a) A registration statement on Form S-1, and amendments
thereto, with respect to the Stock have (i) been prepared by the
Company in conformity with the requirements of the Securities Act of
1933, as amended (the "Securities Act") and the rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission
(the "Commission") thereunder, (ii) been filed with the Commission
under the Securities Act and (iii) become effective under the
Securities Act. Copies of such registration statement and the
amendments thereto have been delivered by the Company to you as the
representatives (the "Representatives") of the Underwriters. As used in
this Agreement, "Effective Time" means the date and the time as of
which such registration statement, or the most recent post-effective
amendment thereto, if any, was declared effective by the Commission;
"Effective Date" means the date of the Effective Time. The information,
if any, included in the prospectus filed by the Company in accordance
with Rule 430A and Rule 424(b) of the Rules and Regulations that was
omitted from the prospectus included in such registration statement at
the time it became effective but that is deemed, pursuant to paragraph
(b) of Rule 430A, to be part of such registration statement at the time
it becomes effective is referred to herein as the "Rule 430A
Information." Each prospectus used before the time such registration
statement became effective, and any prospectus that omits the Rule 430A
Information that is used after such effectiveness and prior to the
execution and delivery of this Agreement, is herein called a
"Preliminary Prospectus." Such registration statement, as amended at
the time it became effective and including, if applicable, the Rule
430A Information, is herein called the "Original Registration
Statement." Any registration statement filed pursuant to Rule 462(b) of
the Rules and Regulations is herein referred to as the "Rule 462(b)
Registration Statement," and the Original Registration Statement and
any Rule 462(b) Registration Statement are herein referred to
collectively as the "Registration Statement." The prospectus included
in the Original Registration Statement at the time it became effective
is herein called the "Prospectus," except that, if the final prospectus
first furnished to the Underwriters after the execution of this
Agreement for use in connection with the offering of the Stock differs
from the prospectus included in the Original Registration Statement at
the time it became effective (whether or not such prospectus is
required to be filed pursuant to Rule 424(b)), the term "Prospectus"
shall refer to the final prospectus first furnished to the Underwriters
for such use. The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus.
(b) The Registration Statement conforms, and the
Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus will, when they become
effective or are filed with the Commission, as the case may be, conform
in all respects to the requirements of the Securities Act and the Rules
and Regulations and do not and will not, as of the applicable effective
date (as to the Registration Statement and any amendment thereto) and
as of the applicable filing date (as to the Prospectus and any
amendment or supplement thereto) contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
PROVIDED that no representation or warranty is made as to information
contained in or omitted from the Registration Statement or the
Prospectus in reliance upon and in conformity with written information
furnished to the Company through the Representatives by or on behalf of
any Underwriter specifically for inclusion therein.
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction in which
its ownership or lease of property or the conduct of its business
requires such qualification (except where the failure to so qualify
would not have a material adverse effect on the business, prospects,
financial condition or results of operations of the Company,
2
<PAGE>
taken as a whole), and has all power and authority necessary to own or
hold its properties and to conduct the business in which it is engaged.
The Company has no subsidiaries.
(d) The Company has an authorized capitalization as set forth
in the Prospectus, and all of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully
paid and non-assessable and conform to the description thereof
contained in the Prospectus.
(e) The unissued shares of the Stock to be issued and sold by
the Company to the Underwriters hereunder have been duly and validly
authorized and, when issued and delivered against payment therefor as
provided herein, will be duly and validly issued, fully paid and
non-assessable; and the Stock will conform to the description thereof
contained in the Prospectus.
(f) The Company has all necessary corporate power and
authority to execute and deliver this Agreement and perform its
obligations hereunder; all corporate action required to be taken by the
Company for the due and proper authorization, issuance, sale and
delivery of the Stock has been duly and validly taken; and this
Agreement has been duly authorized, executed and delivered by the
Company and constitutes the valid and legally binding agreement of the
Company, enforceable against the Company in accordance with its terms,
except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting
the enforcement of creditors' rights in general and subject to general
principles of equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law) and except as
enforcement of Section 10 of this Agreement may be limited by
applicable law.
(g) The execution, delivery and performance of this Agreement
by the Company and the consummation of the transactions contemplated
hereby will not conflict with or result in a breach or violation of any
of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument to which the Company is a party or by which the Company
is bound or to which any of the property or assets of the Company is
subject, nor will such actions result in any violation of the
provisions of the restated certificate of incorporation or by-laws of
the Company or any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the
Company or any of its properties or assets; and except for the
registration of the Stock under the Securities Act and such consents,
approvals, authorizations, registrations or qualifications as may be
required under the Exchange Act and applicable state securities laws in
connection with the purchase and distribution of the Stock by the
Underwriters, no consent, approval, authorization or order of, or
filing or registration with, any such court or governmental agency or
body is required for the execution, delivery and performance of this
Agreement by the Company and the consummation of the transactions
contemplated hereby.
(h) Except as described in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company owned or to be owned by such person or to
require the Company to include such securities in the securities
registered pursuant to the Registration Statement or in any securities
being registered pursuant to any other registration statement filed by
the Company under the Securities Act.
(i) Except as described in the Prospectus, the Company has not
sold or issued any shares of Common Stock during the six-month period
preceding the date of the
3
<PAGE>
Prospectus, including any sales pursuant to Rule 144A under, or
Regulations D or S of, the Securities Act, other than shares issued
pursuant to employee benefit plans, qualified stock options plans or
other employee compensation plans or pursuant to outstanding options,
rights or warrants.
(j) The Company has not sustained, since the date of the
latest audited financial statements included in the Prospectus, any
material loss or interference with its business from fire, explosion,
flood or other calamity, whether or not covered by insurance, or from
any labor dispute or court or governmental action, order or decree,
otherwise than as set forth or contemplated in the Prospectus; and,
since such date, there has not been any change in the capital stock or
long-term debt of the Company or any material adverse change, or any
development involving a prospective material adverse change, in or
affecting the general affairs, management, financial position,
stockholders' equity or results of operations of the Company, otherwise
than as set forth or contemplated in the Prospectus.
(k) The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or
included in the Prospectus present fairly the financial condition and
results of operations of the entities purported to be shown thereby, at
the dates and for the periods indicated, and have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved.
(l) Price Waterhouse LLP, who have certified certain financial
statements of the Company, whose report appears in the Prospectus and
who have delivered the initial letter referred to in Section 9(i)
hereof, are independent public accountants with respect to the Company
as required by the Securities Act and the Rules and Regulations.
(m) The Company owns no real property and has good and
marketable title to all personal property owned by it, in each case
free and clear of all liens, encumbrances and defects except such as
are described in the Prospectus or such as do not materially affect the
value of such property and do not materially interfere with the use
made and proposed to be made of such property by the Company; and all
real property and buildings held under lease by the Company is held by
it under valid, subsisting and enforceable leases, with such exceptions
as are not material and do not interfere with the use made and proposed
to be made of such property and buildings by the Company.
(n) The Company carries, or is covered by, insurance in such
amounts and covering such risks as is reasonable and customary for the
conduct of its business and the value of its properties and as is
customary for companies engaged in similar businesses in similar
industries, including but not limited to product liability insurance
and business disruption insurance.
(o) The Company owns or possesses adequate rights to use all
material patents, patent applications, trademarks, service marks, trade
names, trademark registrations, service mark registrations, copyrights
and licenses necessary for the conduct of its business and has no
reason to believe that the conduct of its business will conflict with,
and has not received any notice of any claim of conflict with, any such
rights of others.
(p) Except as described in the Prospectus, there are no legal
or governmental proceedings pending to which the Company is a party or
of which any property or assets of the Company is the subject which, if
determined adversely to the Company, might have a material adverse
effect on the financial position, stockholders' equity, results of
operations, business or prospects of the Company; and to the best of
the Company's knowledge, no
4
<PAGE>
such proceedings are threatened or contemplated by governmental
authorities or threatened by others.
(q) There are no contracts or other documents which are
required to be described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules and
Regulations which have not been described in the Prospectus or filed as
exhibits to the Registration Statement or incorporated therein by
reference as permitted by the Rules and Regulations.
(r) No relationship, direct or indirect, exists between or
among the Company on the one hand, and the directors, officers,
stockholders, customers or suppliers of the Company on the other hand,
which is required to be described in the Prospectus which is not so
described.
(s) The Company is in compliance in all material respects with
all presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event"
(as defined in ERISA) has occurred with respect to any "pension
plan" (as defined in ERISA) for which the Company would have any
liability; the Company has not incurred and does not expect to incur
liability under (i) Title IV of ERISA with respect to termination of,
or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of
the Internal Revenue Code of 1986, as amended, including the
regulations and published interpretations thereunder (the "Code"); and
each "pension plan" for which the Company would have any liability that
is intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and nothing has occurred, whether by
action or by failure to act, which would be expected to cause the loss
of such qualification.
(t) The Company has filed all federal, state and local income
and franchise tax returns required to be filed through the date hereof
and has paid all taxes due thereon, and no tax deficiency has been
determined adversely to the Company which has had (nor does the Company
have any knowledge of any tax deficiency which, if determined adversely
to the Company, might have) a material adverse effect on the financial
position, stockholders' equity, results of operations, business or
prospects of the Company.
(u) Since the date as of which information is given in the
Prospectus through the date hereof, and except as may otherwise be
disclosed in the Prospectus, the Company has not (i) issued or granted
any securities, (ii) incurred any liability or obligation, direct or
contingent, other than liabilities and obligations which were incurred
in the ordinary course of business, (iii) entered into any transaction
not in the ordinary course of business or (iv) declared or paid any
dividend on its capital stock.
(v) The Company (i) makes and keeps accurate books and records
and (ii) maintains internal accounting controls which provide
reasonable assurance that (A) transactions are executed in accordance
with management's authorization, (B) transactions are recorded as
necessary to permit preparation of its financial statements and to
maintain accountability for its assets, (C) access to its assets is
permitted only in accordance with management's authorization and (D)
the reported accountability for its assets is compared with existing
assets at reasonable intervals.
(w) The Company is not (i) in violation of its restated
certificate of incorporation or by-laws, (ii) in default in any
material respect, and no event has occurred which, with notice or lapse
of time or both, would constitute such a default, in the due
performance or observance of any term, covenant or condition contained
in any material indenture,
5
<PAGE>
mortgage, deed of trust, loan agreement or other agreement or
instrument to which it is a party or by which it is bound or to which
any of its properties or assets is subject or (iii) in violation in any
material respect of any law, ordinance, governmental rule, regulation
or court decree to which it or its property or assets may be subject or
has failed to obtain any material license, permit, certificate,
franchise or other governmental authorization or permit necessary to
the ownership of its property or to the conduct of its business.
(x) Neither the Company nor any director, officer, agent,
employee or other person associated with or acting on behalf of the
Company, has used any corporate funds for any unlawful contribution,
gift, entertainment or other unlawful expense relating to political
activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the Foreign Corrupt
Practices Act of 1977; or made any bribe, rebate, payoff, influence
payment, kickback or other unlawful payment.
(y) There has been no storage, disposal, generation,
manufacture, refinement, transportation, handling or treatment of toxic
wastes, medical wastes, hazardous wastes or hazardous substances by the
Company (or, to the knowledge of the Company, any of its predecessors
in interest) at, upon or from any of the property now or previously
owned or leased by the Company in violation of any applicable law,
ordinance, rule, regulation, order, judgment, decree or permit or which
would require remedial action under any applicable law, ordinance,
rule, regulation, order, judgment, decree or permit, except for any
violation or remedial action which would not have, or could not be
reasonably likely to have, singularly or in the aggregate with all such
violations and remedial actions, a material adverse effect on the
general affairs, management, financial position, stockholders' equity
or results of operations of the Company; there has been no material
spill, discharge, leak, emission, injection, escape, dumping or release
of any kind onto such property or into the environment surrounding such
property of any toxic wastes, medical wastes, solid wastes, hazardous
wastes or hazardous substances due to or caused by the Company or with
respect to which the Company has knowledge, except for any such spill,
discharge, leak, emission, injection, escape, dumping or release which
would not have or would not be reasonably likely to have, singularly or
in the aggregate with all such spills, discharges, leaks, emissions,
injections, escapes, dumpings and releases, a material adverse effect
on the general affairs, management, financial position, stockholders'
equity or results of operations of the Company; and the terms
"hazardous wastes", "toxic wastes", "hazardous substances" and "medical
wastes" shall have the meanings specified in any applicable local,
state, federal and foreign laws or regulations with respect to
environmental protection.
(z) The Company is not an "investment company" within the
meaning of such term under the Investment Company Act of 1940 and the
rules and regulations of the Commission thereunder.
(aa) Except as described in the Registration Statement and the
Prospectus, (i) there are no outstanding warrants or options issued by
the Company to purchase any shares of the capital stock of the Company,
(ii) there are no statutory, contractual, preemptive or other rights to
subscribe for or to purchase any Common Stock, and (iii) there are no
restrictions upon transfer of Common Stock pursuant to the Company's
certificate of incorporation or by-laws.
(ab) The Company has not taken, directly or indirectly, any
action designed to cause or result in, or which has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate
the sale or resale of the Shares.
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(ac) The Company believes that it has satisfied all applicable
regulatory requirements for marketing TraumaSeal(TM) in Canada,
Australia, France and Italy.
2. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE SELLING
STOCKHOLDER. The Selling Stockholder represents, warrants and agrees that:
(a) The Selling Stockholder has, and immediately
prior to the First Delivery Date (as defined in Section 5 hereof) the
Selling Stockholder will have, good and valid title to the shares of
Stock to be sold by the Selling Stockholder hereunder on such date,
free and clear of all liens, encumbrances, equities or claims; and upon
delivery of such shares and payment therefor pursuant hereto, good and
valid title to such shares, free and clear of all liens, encumbrances,
equities or claims, will pass to the several Underwriters.
(b) The Selling Stockholder has authorized the placement in
custody of certificates, in negotiable form, representing the shares of
Stock to be sold by the Selling Stockholder hereunder pursuant to a
custody agreement (the "Custody Agreement") with the Company, as
custodian (the "Custodian"), and has authorized the subsequent delivery
of such shares by the Custodian under this Agreement.
(c) The Selling Stockholder has duly and irrevocably executed
and delivered a power of attorney (the "Power of Attorney") appointing
the Custodian and one or more other persons, as attorneys-in-fact, with
full power of substitution, and with full authority (exercisable by any
one or more of them) to execute and deliver this Agreement and to take
such other action as may be necessary or desirable to carry out the
provisions hereof on behalf of the Selling Stockholder.
(d) The Selling Stockholder has full right, power and
authority to enter into this Agreement, the Power of Attorney and the
Custody Agreement; the execution, delivery and performance of this
Agreement, the Power of Attorney and the Custody Agreement by the
Selling Stockholder and the consummation by the Selling Stockholder of
the transactions contemplated hereby and thereby will not conflict with
or result in a breach or violation of any of the terms or provisions
of, or constitute a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument to which the
Selling Stockholder is a party or by which the Selling Stockholder is
bound or to which any of the property or assets of the Selling
Stockholder is subject, nor will such actions result, in the case of a
Selling Stockholder that is a partnership, in any violation of the
provisions of the partnership agreement of the Selling Stockholder or
any statute or any order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Selling
Stockholder or the property or assets of the Selling Stockholder; and,
except for the registration of the Stock under the Securities Act and
such consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and applicable
state securities laws in connection with the purchase and distribution
of the Stock by the Underwriters, no consent, approval, authorization
or order of, or filing or registration with, any such court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement, the Power of Attorney or the Custody
Agreement by the Selling Stockholder and the consummation by the
Selling Stockholder of the transactions contemplated hereby and
thereby.
(e) The Registration Statement and the Prospectus and
any further amendments or supplements to the Registration Statement or
the Prospectus, when they become effective or are filed with the
Commission, as the case may be, do not and will not, as of the
applicable effective date (as to the Registration Statement and any
amendment thereto) and
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as of the applicable filing date (as to the Prospectus and any
amendment or supplement thereto) contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading;
PROVIDED that representation or warranty is made only as to information
contained in or omitted from the Registration Statement or the
Prospectus in reliance upon and in conformity with written information
furnished to the Company by or on behalf of such Selling Stockholder
specifically for inclusion therein.
(f) Without any independent investigation whatsoever, the
Selling Stockholder has no reason to believe that the representations
and warranties of the Company contained in Section 1 hereof are not
materially true and correct and is not prompted to sell shares of
Common Stock by any information concerning the Company which is not set
forth in the Registration Statement and the Prospectus.
(g) The Selling Stockholder has not taken and will
not take, directly or indirectly, any action which is designed to or
which has constituted or which might reasonably be expected to cause or
result in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the shares
of the Stock.
3. PURCHASE OF THE STOCK BY THE UNDERWRITERS. On the basis of
the representations and warranties contained in, and subject to the
terms and conditions of, this Agreement, the Company agrees to sell [ ]
shares of the Firm Stock and the Selling Stockholder hereby agrees to
sell the number of shares of the Firm Stock set opposite its name in
Schedule 2 hereto to the several Underwriters and each of the
Underwriters, severally and not jointly, agrees to purchase the number
of shares of the Firm Stock set opposite that Underwriter's name in
Schedule 1 hereto. Each Underwriter shall be obligated to purchase from
the Company, and from the Selling Stockholder, that number of shares of
the Firm Stock which represents the same proportion of the number of
shares of the Firm Stock to be sold by the Company, and by the Selling
Stockholder, as the number of shares of the Firm Stock set forth
opposite the name of such Underwriter in Schedule 1 represents of the
total number of shares of the Firm Stock to be purchased by all of the
Underwriters pursuant to this Agreement. The respective purchase
obligations of the Underwriters with respect to the Firm Stock shall be
rounded among the Underwriters to avoid fractional shares, as the
Representatives may determine.
In addition, the Company grants to the Underwriters an option
to purchase and agrees to sell up to [ ] shares of Option Stock. Such option is
granted solely for the purpose of covering over-allotments in the sale of Firm
Stock and is exercisable as provided in Section 5 hereof. Shares of Option Stock
shall be purchased severally for the account of the Underwriters in proportion
to the number of shares of Firm Stock set opposite the name of such Underwriters
in Schedule 1 hereto. The respective purchase obligations of each Underwriter
with respect to the Option Stock shall be adjusted by the Representatives so
that no Underwriter shall be obligated to purchase Option Stock other than in
100 share amounts. The price of both the Firm Stock and any Option Stock shall
be $[ ] per share.
The Company and the Selling Stockholder shall not be obligated
to deliver any of the Stock to be delivered on the First Delivery Date or the
Second Delivery Date (as hereinafter defined), as the case may be, except upon
payment for all the Stock to be purchased on such Delivery Date as provided
herein.
4. OFFERING OF STOCK BY THE UNDERWRITERS.
Upon authorization by the Representatives of the release of
the Firm Stock, the
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several Underwriters propose to offer the Firm Stock for sale upon the terms and
conditions set forth in the Prospectus.
5. DELIVERY OF AND PAYMENT FOR THE STOCK. Delivery of and
payment for the Firm Stock shall be made at the offices of Shearman & Sterling,
599 Lexington Avenue, New York, New York, at 10:00 A.M., New York City time, on
the third full business day following the date of this Agreement (fourth, if the
pricing occurs after 4:30 P.M. (New York City time) on any given day) or at such
other date or place as shall be determined by agreement between the
Representatives and the Company. This date and time are sometimes referred to as
the "First Delivery Date." On the First Delivery Date, the Company and the
Selling Stockholder shall deliver or cause to be delivered certificates
representing the Firm Stock to the Representatives for the account of each
Underwriter against payment to or upon the order of the Company and the Selling
Stockholder of the purchase price in immediately available funds. Time shall be
of the essence, and delivery at the time and place specified pursuant to this
Agreement is a further condition of the obligation of each Underwriter
hereunder. Upon delivery, the Firm Stock shall be registered in such names and
in such denominations as the Representatives shall request in writing not less
than two full business days prior to the First Delivery Date. For the purpose of
expediting the checking and packaging of the certificates for the Firm Stock,
the Company and the Custodian shall make the certificates representing the Firm
Stock available for inspection by the Representatives in New York, New York, not
later than 2:00 P.M., New York City time, on the business day prior to the First
Delivery Date.
At any time on or before the thirtieth day after the date of
this Agreement the option granted in Section 3 may be exercised by written
notice being given by the Representatives to the Company. Such notice shall set
forth the aggregate number of shares of Option Stock as to which the option is
being exercised, the names in which the shares of Option Stock are to be
registered, the denominations in which the shares of Option Stock are to be
issued and the date and time, as determined by the Representatives, when the
shares of Option Stock are to be delivered; PROVIDED, HOWEVER, that this date
and time shall not be earlier than the First Delivery Date nor earlier than the
second business day after the date on which the option shall have been exercised
nor later than the fifth business day after the date on which the option shall
have been exercised. The date and time the shares of Option Stock are delivered
are sometimes referred to as the "Second Delivery Date" and the First Delivery
Date and the Second Delivery Date are sometimes each referred to as a "Delivery
Date".
Delivery of and payment for the Option Stock shall be made at
the place specified in the first sentence of the first paragraph of this Section
5 (or at such other place as shall be determined by agreement between the
Representatives and the Company) at 10:00 A.M., New York City time, on the
Second Delivery Date. On the Second Delivery Date, the Company shall deliver or
cause to be delivered the certificates representing the Option Stock to the
Representatives for the account of each Underwriter against payment to or upon
the order of the Company of the purchase price in immediately available funds.
Time shall be of the essence, and delivery at the time and place specified
pursuant to this Agreement is a further condition of the obligation of each
Underwriter hereunder. Upon delivery, the Option Stock shall be registered in
such names and in such denominations as the Representatives shall request in the
aforesaid written notice. For the purpose of expediting the checking and
packaging of the certificates for the Option Stock, the Company and the
Custodian shall make the certificates representing the Option Stock available
for inspection by the Representatives in New York, New York, not later than 2:00
P.M., New York City time, on the business day prior to the Second Delivery Date.
6. FURTHER AGREEMENTS OF THE COMPANY. The Company agrees:
(a) To prepare the Prospectus in a form approved by
the Representatives and to file such
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Prospectus pursuant to Rule 424(b) under the Securities Act not later
than Commission's close of business on the second business day
following the execution and delivery of this Agreement or, if
applicable, such earlier time as may be required by Rule 430A(a)(3)
under the Securities Act; to make no further amendment or any
supplement to the Registration Statement or to the Prospectus except as
permitted herein; to advise the Representatives, promptly after it
receives notice thereof, of the time when any amendment to the
Registration Statement has been filed or becomes effective or any
supplement to the Prospectus or any amended Prospectus has been filed
and to furnish the Representatives with copies thereof; to advise the
Representatives, promptly after it receives notice thereof, of the
issuance by the Commission of any stop order or of any order preventing
or suspending the use of any Preliminary Prospectus or the Prospectus,
of the suspension of the qualification of the Stock for offering or
sale in any jurisdiction, of the initiation or threatening of any
proceeding for any such purpose, or of any request
by the Commission for the amending or supplementing of the Registration
Statement or the Prospectus or for additional information; and, in the
event of the issuance of any stop order or of any order preventing or
suspending the use of any Preliminary Prospectus or the Prospectus or
suspending any such qualification, to use promptly its best efforts to
obtain its withdrawal;
(b) To furnish promptly to each of the
Representatives and to counsel for the Underwriters a signed copy of
the Registration Statement as originally filed with the Commission, and
each amendment thereto filed with the Commission, including all
consents and exhibits filed therewith;
(c) To deliver promptly to the Representatives such
number of the following documents as the Representatives shall
reasonably request: (i) conformed copies of the Registration Statement
as originally filed with the Commission and each amendment thereto (in
each case excluding exhibits other than this Agreement and the
computation of per share earnings) and (ii) each Preliminary
Prospectus, the Prospectus and any amended or supplemented Prospectus;
and, if the delivery of a prospectus is required at any time after the
Effective Time in connection with the offering or sale of the Stock or
any other securities relating thereto and if at such time any events
shall have occurred as a result of which the Prospectus as then amended
or supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made when such Prospectus is delivered, not misleading, or, if for
any other reason it shall be necessary to amend or supplement the
Prospectus in order to comply with the Securities Act, to notify the
Representatives and, upon their request, to prepare and furnish without
charge to each Underwriter and to any dealer in securities as many
copies as the Representatives may from time to time reasonably request
of an amended or supplemented Prospectus which will correct such
statement or omission or effect such compliance.
(d) To file promptly with the Commission any
amendment to the Registration Statement or the Prospectus or any
supplement to the Prospectus that may, in the judgment of the Company
or the Representatives, be required by the Securities Act or requested
by the Commission;
(e) Prior to filing with the Commission (i) any
amendment to the Registration Statement (including any filing under
Rule 462(b)) or supplement to the Prospectus or (ii) any Prospectus
pursuant to Rule 424 of the Rules and Regulations, to furnish a copy
thereof to the Representatives and counsel for the Underwriters and
obtain the consent of the Representatives to the filing;
(f) As soon as practicable after the Effective Date,
to make generally available to the Company's security holders and to
deliver to the Representatives an earnings statement of
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the Company and its subsidiaries (which need not be audited) complying
with Section 11(a) of the Securities Act and the Rules and Regulations
(including, at the option of the Company, Rule 158);
(g) For a period of five years following the
Effective Date, to furnish to the Representatives copies of all
materials furnished by the Company to its shareholders and all public
reports and all reports and financial statements furnished by the
Company to the Nasdaq National Market System or such other national
securities exchange upon which the Common Stock may be listed pursuant
to requirements of or agreements with such exchange or to the
Commission pursuant to the Exchange Act or any rule or regulation of
the Commission thereunder;
(h) Promptly from time to time to take such action as
the Representatives may reasonably request to qualify the Stock for
offering and sale under the securities laws of such jurisdictions as
the Representatives may request and to comply with such laws so as to
permit the continuance of sales and dealings therein in such
jurisdictions for as long as may be necessary to complete the
distribution of the Stock; except that in no event shall the Company be
obligated in connection therewith to qualify as a foreign corporation
or execute a general consent for service of process.
(i) For a period of 180 days from the date of the
Prospectus, not to, directly or indirectly, offer for sale, sell or
otherwise dispose of (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition by any
person at any time in the future of) any shares of Common Stock (other
than the Stock and shares issued pursuant to employee benefit plans,
qualified stock option plans or other employee compensation plans
existing on the date hereof or pursuant to currently outstanding
options, warrants or rights), or sell or grant options, rights or
warrants with respect to any shares of Common Stock (other than the
grant of options pursuant to option plans existing on the date hereof),
without the prior written consent of Lehman Brothers Inc.; and to cause
each officer and director of the Company to furnish to the
Representatives, prior to the First Delivery Date, a letter or letters,
in form and substance satisfactory to counsel for the Underwriters,
pursuant to which each such person shall agree not to, directly or
indirectly, offer for sale, sell or otherwise dispose of (or enter into
any transaction or device which is designed to, or could be expected
to, result in the disposition by any person at any time in the future
of) any shares of Common Stock for a period of 180 days from the date
of the Prospectus, without the prior written consent of Lehman Brothers
Inc.;
(j) Prior to the Effective Date, to qualify the Stock for
quotation and listing on the Nasdaq National Market System; and
(k) To apply the net proceeds from the sale of the Stock being
sold by the Company as set forth in the Prospectus.
7. FURTHER AGREEMENTS OF THE SELLING STOCKHOLDER. The Selling
Stockholder agrees:
(a) To comply with the terms of the lock-up agreement it has
executed that places restrictions on sales of Common Stock in
accordance with the terms thereof.
(b) That the Stock to be sold by the Selling Stockholder
hereunder, which is represented by the certificates held in custody for
the Selling Stockholder immediately upon the issuance of such
certificates in connection with the Exchange, is subject to the
interest of the Underwriters, that the arrangements made by the Selling
Stockholder for such custody are to
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that extent irrevocable, and that the obligations of the Selling
Stockholder hereunder shall not be terminated by any act of the Selling
Stockholder, by operation of law, by the death or incapacity of any
individual Selling Stockholder or, in the case of a trust, by the death
or incapacity of any executor or trustee or the termination of such
trust, or the occurrence of any other event.
(c) To deliver to the Representatives prior to the First
Delivery Date a properly completed and executed United States Treasury
Department Form W-8 (if the Selling Stockholder is a non-United States
person) or Form W-9 (if the Selling Stockholder is a United States
person.)
8. EXPENSES. The Company agrees to pay (a) the costs incident
to the authorization, issuance, sale and delivery of the Stock and any taxes
payable in that connection; (b) the costs incident to the preparation, printing
and filing under the Securities Act of the Registration Statement and any
amendments and exhibits thereto; (c) the costs of distributing the Registration
Statement as originally filed and each amendment thereto and any post-effective
amendments thereof (including, in each case, exhibits), any Preliminary
Prospectus, the Prospectus and any amendment or supplement to the Prospectus,
all as provided in this Agreement; (d) the costs of producing and distributing
this Agreement and any other related documents in connection with the offering,
purchase, sale and delivery of the stock; (e) the fees and expenses, if any, of
the Custodian (and any other attorney-in-fact) and costs of delivering and
distributing the Custody Agreement and the Power of Attorney; (f) the filing
fees and expenses incident to securing any required review by the National
Association of Securities Dealers, Inc. of the terms of sale of the Stock; (g)
any applicable listing or other fees; (h) the fees and expenses of qualifying
the Stock under the securities laws of the several jurisdictions as provided in
Section 6(h) and of preparing, printing and distributing a Blue Sky Memorandum
(including related fees and expenses of counsel to the Underwriters); (j) all
costs and expenses of the Underwriters, including the fees and disbursements of
counsel for the Underwriters, incident to the offer and sale of shares of the
Stock by the Underwriters to employees and persons having business relationships
with the Company, as described in Section 4; and (k) all other costs and
expenses incident to the performance of the obligations of the Company under
this Agreement; PROVIDED that, except as provided in this Section 8 and in
Section 14, the Underwriters shall pay their own costs and expenses, including
the costs and expenses of their counsel, any transfer taxes on the Stock which
they may sell and the expenses of advertising any offering of the Stock made by
the Underwriters, and the Selling Stockholder shall pay the fees and expenses of
its counsel and any transfer taxes payable in connection with its sale of Stock
to the Underwriters.
9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on each Delivery Date, of the representations and warranties of the Company
and the Selling Stockholder contained herein, to the performance by the Company
and the Selling Stockholder of their respective obligations hereunder, and to
each of the following additional terms and conditions:
(a) The Prospectus shall have been timely filed with the
Commission in accordance with Section 6(a) hereof; the Original
Registration Statement shall have become effective and the
Representatives shall have been informed thereof, not later than the
date of this Agreement, or such later date as shall be consented to in
writing by the Representatives; and if the Company has elected to rely
on Rule 462(b), the Rule 462(b) Registration Statement shall have
become effective not later than the earlier of (i) 10:00 P.M. Eastern
Time on the date of this Agreement, and (ii) the time confirmations are
sent or given as specified in Rule 462(b)(2), or with respect to the
Original Registration Statement, or such later date as shall be
consented to in writing by the Representatives; no stop order
suspending the effectiveness of the Registration Statement or any part
thereof shall have
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been issued and no proceeding for that purpose shall have been
initiated or threatened by the Commission; and any request of the
Commission for inclusion of additional information in the Registration
Statement or the Prospectus or otherwise shall have been complied with.
(b) No Underwriter shall have discovered and
disclosed to the Company on or prior to such Delivery Date that the
Registration Statement or the Prospectus or any amendment or supplement
thereto contains an untrue statement of a fact which, in the opinion of
Shearman & Sterling, counsel for the Underwriters, is material or omits
to state a fact which, in the opinion of such counsel, is material and
is required to be stated therein or is necessary to make the statements
therein not misleading.
(c) All corporate proceedings and other legal matters
incident to the authorization, form and validity of this Agreement, the
Custody Agreements, the Powers of Attorney, the Stock, the Registration
Statement and the Prospectus, and all other legal matters relating to
this Agreement and the transactions contemplated hereby shall be
reasonably satisfactory in all material respects to counsel for the
Underwriters, and the Company and the Selling Stockholder shall have
furnished to such counsel all documents and information that they may
reasonably request to enable them to pass upon such matters.
(d) Morgan, Lewis & Bockius LLP shall have furnished to the
Representatives its written opinion, as counsel to the Company,
addressed to the Underwriters and dated such Delivery Date, in form and
substance reasonably satisfactory to the Representatives, to the effect
that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of its jurisdiction of incorporation, is duly qualified
to do business and is in good standing as a foreign
corporation in North Carolina and has all power and authority
necessary to own or hold its properties and to conduct its
business as described in the Prospectus; and to such counsel's
knowledge the Company has no subsidiaries;
(ii) The Company has an authorized capitalization as
set forth in the Prospectus, and all of the issued shares of
capital stock of the Company (including the shares of Stock
being delivered on such Delivery Date pursuant to this
Agreement) have been duly and validly authorized and issued,
are fully paid and non-assessable and conform to the
description thereof contained in the Prospectus;
(iii) There are no preemptive or other rights to
subscribe for or to purchase, nor any restriction upon the
voting or transfer of, any shares of the Stock pursuant to the
Company's Restated Certificate of Incorporation or Bylaws or
any agreement or other instrument known to such counsel;
(iv) To such counsel's knowledge and other
than as described in the Prospectus, there are no legal or
governmental proceedings pending to which the Company is a
party or of which any property or assets of the Company is the
subject which, if determined adversely to the Company, might
have a material adverse effect on the financial position,
stockholders' equity, results of operations, business or
prospects of the Company; and, to the best of such counsel's
knowledge, no such proceedings are threatened or contemplated
by governmental authorities or threatened by others;
(v) Such counsel has been orally advised by
the staff of the Commission that the Original Registration
Statement and the Rule 462(b) Registration Statement, if any,
were declared effective or automatically became effective, as
applicable, under the
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Securities Act as of the date and time specified in such
opinion, and such counsel may assume for purposes of its
opinion that the Underwriters have complied with Rule
462(b)(2) under the Securities Act. The Prospectus was filed
with the Commission pursuant to the subparagraph of Rule
424(b) of the Rules and Regulations specified in such opinion
on the date specified therein, to such counsel's knowledge,
and no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceeding for
that purpose is pending or threatened by the Commission;
(vi) The Registration Statement (including
the Rule 430A Information, if applicable) and the Prospectus
and any further amendments or supplements thereto made by the
Company prior to such Delivery Date (other than the financial
statements and related schedules therein, as to which such
counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act
and the Rules and Regulations;
(vii) To such counsel's knowledge, there are
no contracts or other documents which are required to be
described in the Prospectus or filed as exhibits to the
Registration Statement by the Securities Act or by the Rules
and Regulations which have not been described or filed as
exhibits to the Registration Statement or incorporated therein
by reference as permitted by the Rules and Regulations;
(viii) This Agreement has been duly
authorized, executed and delivered by the Company;
(ix) The statements in the Registration
Statement and the Prospectus under the captions
"Business--Marketing Partners", "Description of Capital
Stock", and "Shares Eligible for Future Sale", insofar as such
statements describe statutes, regulations, legal or
governmental proceedings, contracts or other documents
referred to therein are accurate in all material respects and
fairly summarize the information called for with respect to
such documents and matters and, insofar as such statements
constitute matters of law or legal conclusions, have been
reviewed by such counsel and fairly present the information
disclosed therein in all material respects;
(x) The issue and sale of the shares of
Stock being delivered on such Delivery Date by the Company and
the compliance by the Company with all of the provisions of
this Agreement and the consummation by the Company of the
transactions contemplated hereby will not conflict with or
result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument known to such counsel to which the Company is a
party or by which the Company is bound or to which any of the
property or assets of the Company is subject, nor will such
actions result in any violation of the provisions of the
Restated Certificate of Incorporation or Bylaws of the Company
or any statute or any order, rule or regulation known to such
counsel of any court or governmental agency or body having
jurisdiction over the Company or any of its properties or
assets; and, except for the registration of such Stock under
the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be
required under the Exchange Act and applicable state
securities laws in connection with the purchase and
distribution of such Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration
with, any such court or governmental agency or body is
required for the execution, delivery and
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performance of this Agreement by the Company and
the consummation of the transactions contemplated hereby;
(xi) Except as described in the Prospectus,
to such counsel's knowledge, there are no contracts,
agreements or understandings between the Company and any
person granting such person the right to require the Company
to file a registration statement under the Securities Act with
respect to any securities of the Company owned or to be owned
by such person or to require the Company to include such
securities in the securities registered pursuant to the
Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the
Company under the Securities Act; and
In rendering such opinion, such counsel may state that its
opinion is limited to matters governed by the Federal laws of the
United States of America, the laws of the State of New York, the
Commonwealth of Pennsylvania and the General Corporation Law of the
State of Delaware and that such counsel is not admitted in the State of
Delaware. Such counsel shall also have furnished to the Representatives
a written statement, addressed to the Underwriters and dated such
Delivery Date, in form and substance satisfactory to the
Representatives, to the effect that such counsel has acted as counsel
to the Company in connection with the preparation of the Registration
Statement, and such counsel has participated in conferences with
officers and other representatives of the Company and representatives
of the independent accountants for the Company in which the contents of
the Registration Statement and the Prospectus and related matters were
discussed. While such counsel (i) has no particular expertise with
respect to the technical information contained in the Registration
Statement and Prospectus, (ii) does not represent the Company with
respect to intellectual property matters, (iii) relies as to judgment
in respect of materiality to the Company of any matter on, among other
things, the advice of the Chief Executive Officer and Chief Financial
Officer of the Company and (iv) is not passing upon and does not assume
responsibility for the factual accuracy, completeness or fairness of
the statements contained in the Registration Statement and Prospectus,
no facts have come to such counsel's attention that would cause it to
have reason to believe that the Registration Statement at the Effective
Date contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to
make any statements therein not misleading or that the Prospectus, as
of its issue date or on the date hereof, contained or contains any
untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make statements therein, in light
of the circumstances under which they were made, not misleading; it
being understood that such counsel expresses no opinion or belief as to
the financial statements and other financial information contained
therein or omitted therefrom.
(e) The counsel for the Selling Stockholder shall
have furnished to the Representatives its written opinion, as counsel
to the Selling Stockholder, addressed to the Underwriters and dated the
First Delivery Date in form and substance reasonably satisfactory to
the Representatives, to the effect that:
(i) The Selling Stockholder has full right,
power and authority to enter into this Agreement, the Power of
Attorney and the Custody Agreement; the execution, delivery
and performance of this Agreement, the Power of Attorney and
the Custody Agreement by the Selling Stockholder and the
consummation by the Selling Stockholder of the transactions
contemplated hereby and thereby will not conflict with or
result in a breach or violation of any of the terms or
provisions of, or constitute a default under, any statute, any
indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument known to such counsel to which the
Selling Stockholder is a party or by which the Selling
Stockholder is bound or to
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which any of the property or assets of the Selling Stockholder
is subject, nor will such actions result in any violation of
the articles of organization or operating agreement of the
Selling Stockholder or any statute or any order, rule or
regulation known to such counsel of any court or governmental
agency or body having jurisdiction over the Selling
Stockholder or the property or assets of the Selling
Stockholder; and, except for the registration of the Stock
under the Securities Act and such consents, approvals,
authorizations, registrations or qualifications as may be
required under the Exchange Act and applicable state
securities laws in connection with the purchase and
distribution of the Stock by the Underwriters, no consent,
approval, authorization or order of, or filing or registration
with, any such court or governmental agency or body is
required for the execution, delivery and performance of this
Agreement, the Power of Attorney or the Custody Agreement by
the Selling Stockholder and the consummation by the Selling
Stockholder of the transactions contemplated hereby and
thereby;
(ii) This Agreement has been duly
authorized, executed and delivered by or on behalf of the
Selling Stockholder;
(iii) A Power-of-Attorney and a Custody
Agreement have been duly authorized, executed and delivered by
the Selling Stockholder and constitute valid and binding
agreements of the Selling Stockholder, enforceable in
accordance with their respective terms except as enforcement
may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights in general and subject to
general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or in
law) and except as enforcement of Section 10 of this Agreement
may be limited by applicable law;
(iv) Immediately prior to such Delivery
Date, the Selling Stockholder had good and valid title to the
shares of Stock to be sold by the Selling Stockholder under
this Agreement, free and clear of all liens, encumbrances,
equities or claims, and full right, power and authority to
sell, assign, transfer and deliver such shares to be sold by
the Selling Stockholder hereunder;
(v) Good and valid title to the shares of
Stock to be sold by the Selling Stockholder under this
Agreement, free and clear of all liens, encumbrances,
equities or claims, has been transferred to each of the
several Underwriters; and
In rendering such opinion, counsel to the Selling Stockholder
may (i) state that its opinion is limited to matters governed by the
Federal laws of the United States of America, the laws of the State of
New York and the jurisdiction of the Selling Stockholder and the
limited partnership law of the State of Delaware and that such counsel
is not admitted in the State of Delaware, PROVIDED that if such counsel
is not admitted in the State of New York such counsel may assume that
the laws of the State of New York are the same as the laws of the
jurisdiction of the Selling Stockholder for purposes of its opinion and
(ii) in rendering the opinion in Section 9(e)(iv) above, rely upon a
certificate of the Selling Stockholder in respect of matters of fact as
to ownership of and liens, encumbrances, equities or claims on the
shares of Stock sold by the Selling Stockholder, PROVIDED that such
counsel shall furnish copies thereof to the Representatives and state
that it believes that both the Underwriters and it are justified in
relying upon such certificate.
(f) Oliff & Berridge shall have furnished to the
Representatives its written opinion, as special patent counsel for the
Company, addressed to the Underwriters (and stating that it may be
relied upon by counsel to the Underwriters) and dated such Delivery
Date to the effect that:
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(i) Such counsel has reviewed the statements
set forth in the Registration Statement and the
Prospectus under the captions "Risk
Factors--Dependence on Patents, Trade Secrets and
Proprietary Rights" and "Business--Patents, Trade
Secrets and Proprietary Rights," such statements
accurately summarize the matters described therein
and nothing has come to the attention of such counsel
which leads them to believe that (A) the information
set forth in the Registration Statement, or in any
amendment thereto, under the captions referred to
above as of the time the Registration Statement
became effective under the Securities Act, and as of
Delivery Date, contained an untrue statement of a
material fact or omitted to state a material fact
required to be stated therein or necessary to make
the statements therein not misleading, and (B) the
information set forth in the Prospectus, or in any
supplement thereto, under the captions referred to
above as of its issue date and as of such Delivery
Date, contained an untrue statement of a material
fact or omitted to state a material fact, necessary
in order to make the statements therein, in the light
of the circumstances under which they are made, not
misleading;
(ii) Such counsel has no knowledge of any
facts that would form a basis for the belief that the
Company lacks any rights or licenses to use all
technology and know-how necessary to conduct its
business as described in the Prospectus;
(iii) No facts have come to the attention of
such counsel that would form a basis for the belief
that any of the patents owned by the Company is
unenforceable or invalid. Such counsel is not aware
of any valid patent held by others that is infringed
by the activities of the Company described in the
Prospectus or by the manufacture, use or sale of any
product, device, instrument or other material made
and used by the Company and such counsel is not aware
of any pending or threatened action, suit, proceeding
or claim by others that the Company is infringing or
otherwise violating any patents, trade secrets,
trademarks, service marks or other proprietary
information or materials of others; and
(iv) Such counsel has no knowledge of any
adversarial legal or governmental proceedings or
interference proceedings pending relating to patents,
foreign patents, applications, foreign applications,
trade secrets, trademarks, service marks or other
proprietary information or materials of the Company,
and to such counsel's knowledge no such proceedings
are threatened or contemplated by such governmental
authorities or others.
(g) The Representatives shall have received from
Hyman, Phelps & McNamara, P.C., a written opinion, as Special
FDA Counsel to the Company, dated such Delivery Date, to the
effect that such counsel is not aware of any facts or
information which would lead such counsel to believe that:
(i) The statements set forth in the
Registration Statement and the Prospectus under the
captions "Risk Factors--Effects of FDA and Other
Government Regulation" and "Business--Government
Regulations" insofar as such statements relate to
requirements under the Federal Food, Drug and
Cosmetic Act (the "Act") and implementing regulations
(1) misstate the law in any material respects; or (2)
contain an untrue statement of a material fact or
omit to state a material fact necessary in order to
make such statements, in
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light of the circumstances under which they are made,
not misleading; and
(ii) The Company is not in all material
respects in substantial compliance with the Act and
applicable implementing regulations.
(h) The Representatives shall have received from Shearman &
Sterling, counsel for the Underwriters, such opinion or opinions, dated
such Delivery Date, with respect to the issuance and sale of the Stock,
the Registration Statement, the Prospectus and other related matters as
the Representatives may reasonably require, and the Company shall have
furnished to such counsel such documents as they reasonably request for
the purpose of enabling them to pass upon such matters.
(i) At the time of execution of this Agreement, the
Representatives shall have received from Price Waterhouse LLP a letter,
in form and substance satisfactory to the Representatives, addressed to
the Underwriters and dated the date hereof (i) confirming
that they are independent public accountants within the meaning of the
Securities Act and are in compliance with the applicable requirements
relating to the qualification of accountants under Rule 2-01 of
Regulation S-X of the Commission, (ii) stating, as of the date hereof
(or, with respect to matters involving changes or developments since
the respective dates as of which specified financial information is
given in the Prospectus, as of a date not more than five days prior to
the date hereof), the conclusions and findings of such firm with
respect to the financial information and other matters ordinarily
covered by accountants' "comfort letters" to underwriters in connection
with registered public offerings.
(j) With respect to the letter of Price Waterhouse
LLP referred to in the preceding paragraph and delivered to the
Representatives concurrently with the execution of this Agreement (the
"initial letter"), the Company shall have furnished to the
Representatives a letter (the "bring-down letter") of such accountants,
addressed to the Underwriters and dated such Delivery Date (i)
confirming that they are independent public accountants within the
meaning of the Securities Act and are in compliance with the applicable
requirements relating to the qualification of accountants under Rule
2-01 of Regulation S-X of the Commission, (ii) stating, as of the date
of the bring-down letter (or, with respect to matters involving changes
or developments since the respective dates as of which specified
financial information is given in the Prospectus, as of a date not more
than five days prior to the date of the bring-down letter), the
conclusions and findings of such firm with respect to the financial
information and other matters covered by the initial letter and (iii)
confirming in all material respects the conclusions and findings set
forth in the initial letter.
(k) The Company shall have furnished to the Representatives a
certificate, dated such Delivery Date, of its Chairman of the Board,
its President or a Vice President and its chief financial officer
stating that:
(i) The representations and warranties of
the Company in Section 1 are true and correct as of such
Delivery Date; the Company has complied with all its
agreements contained herein; and the conditions set forth in
Sections 9(a) and 9(m) have been fulfilled; and
(ii) They have carefully examined the
Registration Statement and the Prospectus and, in their
opinion (A) as of the Effective Date, the Registration
Statement and Prospectus did not include any untrue statement
of a material fact and did not omit to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading, and (B) since the Effective
Date no event has occurred which should have been set forth in
a supplement or amendment to the Registration Statement or the
Prospectus.
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<PAGE>
(l) The Selling Stockholder (or the Custodian or one or more
attorneys-in-fact on behalf of the Selling Stockholder) shall have
furnished to the Representatives on the First Delivery Date a
certificate, dated the First Delivery Date, signed by, or on behalf of,
the Selling Stockholder (or the Custodian or one or more attorneys-in
-fact) stating that the representations and warranties of the Selling
Stockholder contained herein are true and correct as of the First
Delivery Date and that the Selling Stockholder has complied with all
agreements contained herein to be performed by the Selling Stockholder
at or prior to the First Delivery Date.
(m) (i) The Company shall not have sustained since the date of
the latest audited financial statements included in the Prospectus any
loss or interference with its business from fire, explosion, flood or
other calamity, whether or not covered by insurance, or from any labor
dispute or court or governmental action, order or decree, otherwise
than as set forth or contemplated in the Prospectus that would, in the
Representatives' sole and exclusive judgment, make the offering or
delivery of the Stock impracticable or (ii) since such date there shall
not have been any change in the capital stock or long-term debt of the
Company or any change, or any development involving a prospective
change, in or affecting the general affairs, management, financial
position, stockholders' equity or results of operations of the Company,
otherwise than as set forth or contemplated in the Prospectus, the
effect of which, in any such case described in clause (i) or (ii), is,
in the judgment of the Representatives, so material and adverse as to
make it impracticable or inadvisable to proceed with the public
offering or the delivery of the Stock being delivered on such Delivery
Date on the terms and in the manner contemplated in the Prospectus.
(n) Subsequent to the execution and delivery of this Agreement
there shall not have occurred any of the following: (i) trading in
securities generally on the New York Stock Exchange or the American
Stock Exchange or in the over-the-counter market, or trading in any
securities of the Company on any exchange or in the over-the-counter
market, shall have been suspended or minimum prices shall have been
established on any such exchange or such market by the Commission, by
such exchange or by any other regulatory body or governmental authority
having jurisdiction, (ii) a banking moratorium shall have been declared
by Federal or state authorities, (iii) the United States shall have
become engaged in hostilities, there shall have been an escalation in
hostilities involving the United States or there shall have been a
declaration of a national emergency or war by the United States or (iv)
there shall have occurred such a material adverse change in general
economic, political or financial conditions (or the effect of
international conditions on the financial markets in the United States
shall be such) as, in each case, to make it, in the judgment of a
majority in interest of the several Underwriters, impracticable or
inadvisable to proceed with the public offering or delivery of the
Stock being delivered on such Delivery Date on the terms and in the
manner contemplated in the Prospectus.
(o) The Nasdaq National Market System shall have approved the
listing of the Stock.
All opinions, letters, evidence and certificates mentioned
above or elsewhere in this Agreement shall be deemed to be in compliance with
the provisions hereof only if they are in form and substance reasonably
satisfactory to counsel for the Underwriters.
10. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company shall indemnify and hold harmless each
Underwriter, its officers and employees and each person, if any, who controls
any Underwriter within the meaning of the Securities Act, from and against any
loss, claim, damage or liability, joint or several, or any
19
<PAGE>
action in respect thereof (including, but not limited to, any loss, claim,
damage, liability or action relating to purchases and sales of Stock), to which
that Underwriter, officer, employee or controlling person may become subject,
under the Securities Act or otherwise, insofar as such loss, claim, damage,
liability or action arises out of, or is based upon, (i) any untrue statement or
alleged untrue statement of a material fact contained (A) in any Preliminary
Prospectus, the Registration Statement or the Prospectus or in any amendment or
supplement thereto or (B) in any blue sky application or other document prepared
or executed by the Company (or based upon any written information furnished by
the Company) specifically for the purpose of qualifying any or all of the Stock
under the securities laws of any state or other jurisdiction (any such
application, document or information being hereinafter called a "Blue Sky
Application"), (ii) the omission or alleged omission to state in any Preliminary
Prospectus, the Registration Statement or the Prospectus, or in any amendment or
supplement thereto, or in any Blue Sky Application any material fact required to
be stated therein or necessary to make the statements therein not misleading or
(iii) any act or failure to act or any alleged act or failure to act by any
Underwriter in connection with, or relating in any manner to, the Stock or the
offering contemplated hereby, and which is included as part of or referred to in
any loss, claim, damage, liability or action arising out of or based upon
matters covered by clause (i) or (ii) above (PROVIDED that the Company shall not
be liable under this clause (iii) to the extent that it is determined in a final
judgment by a court of competent jurisdiction that such loss, claim, damage,
liability or action resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such Underwriter through its gross
negligence or willful misconduct), and shall reimburse each Underwriter and each
such officer, employee or controlling person promptly upon demand for any legal
or other expenses reasonably incurred by that Underwriter, officer, employee or
controlling person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as such
expenses are incurred; PROVIDED, HOWEVER, that the Company shall not be liable
in any such case to the extent that any such loss, claim, damage, liability or
action arises out of, or is based upon, any untrue statement or alleged untrue
statement or omission or alleged omission made in any Preliminary Prospectus,
the Registration Statement or the Prospectus, or in any such amendment or
supplement, or in any Blue Sky Application, in reliance upon and in conformity
with written information concerning such Underwriter furnished to the Company
through the Representatives by or on behalf of any Underwriter specifically for
inclusion therein; PROVIDED FURTHER, that the Company shall not be liable under
clauses (i), (ii) and (iii) above to the extent that any such loss, claim,
damage, or liability of such Underwriter results from the fact that a copy of
the Prospectus was not sent or given to such person by such Underwriter as
required and within the time required by the Securities Act and if the untrue
statement or omission shall have been corrected in the Prospectus, subject to
the following: (a) the burden of showing that a copy of the Prospectus was not
so sent or given shall be on the Company and (b) the failure to deliver a copy
of the Prospectus does not result from non-compliance by the Company with
Section 6(c)(ii) hereof. The foregoing indemnity agreement is in addition to any
liability which the Company may otherwise have to any Underwriter or to any
officer, employee or controlling person of that Underwriter.
(b) The Selling Stockholder shall indemnify and hold harmless
each Underwriter, its officers and employees, and each person, if any, who
controls any Underwriter within the meaning of the Securities Act, from and
against any loss, claim, damage or liability, joint or several, or any action in
respect thereof (including, but not limited to, any loss, claim, damage,
liability or action relating to purchases and sales of Stock), to which that
Underwriter, officer, employee or controlling person may become subject, under
the Securities Act or otherwise, insofar as such loss, claim, damage, liability
or action arises out of, or is based upon, (i) any breach of the Selling
Stockholder's representations and warranties made in Section 2 hereof or (ii)
any untrue statement or alleged untrue statement of a material fact contained in
any Preliminary Prospectus, the Registration Statement or the Prospectus or in
any amendment or supplement thereto or the omission or alleged omission to state
in any Preliminary Prospectus, Registration Statement or the Prospectus, or in
any amendment or supplement thereto, any material fact required to be stated
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<PAGE>
therein or necessary to make the statements therein not misleading (PROVIDED,
HOWEVER, that such indemnification pursuant to Section 10(b)(ii) shall only
apply to the extent that the untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by the Selling Stockholder
specifically for inclusion therein), and shall reimburse each Underwriter, its
officers and employees and each such controlling person for any legal or other
expenses reasonably incurred by that Underwriter, its officers and employees or
controlling person in connection with investigating or defending or preparing to
defend against any such loss, claim, damage, liability or action as such
expenses are incurred; PROVIDED, HOWEVER, that the Selling Stockholder shall not
be liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of, or is based upon, any untrue statement or
alleged untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement or the Prospectus or in any such
amendment or supplement in reliance upon and in conformity with written
information concerning such Underwriter furnished to the Company through the
Representatives by or on behalf of any Underwriter specifically for inclusion
therein; PROVIDED FURTHER, that the Selling Stockholder shall not be liable
under clauses (i) and (ii) above to the extent that any such loss, claim,
damage, or liability of such Underwriter results from the fact that a copy of
the Prospectus was not sent or given to such person by such Underwriter as
required and within the time required by the Securities Act and if the untrue
statement or omission shall have been corrected in the Prospectus, subject to
the following: (a) the burden of showing that a copy of the Prospectus was not
so sent or given shall be on the Selling Stockholder and (b) the failure to
deliver a copy of the Prospectus does not result from non-compliance by the
Company with Section 6(c)(ii) hereof and; PROVIDED STILL FURTHER, that the
liability of the Selling Stockholder shall be limited to the amount of the net
proceeds (after deducting the Underwriters' discount but before deducting
expenses) received by the Selling Stockholder from the sale of its Stock
pursuant to this Agreement. The foregoing indemnity agreement is in addition to
any liability which the Selling Stockholder may otherwise have to any
Underwriter or any officer, employee or controlling person of that Underwriter.
In making a claim for indemnification or contribution under
this Section 10 by the Company or the Selling Stockholder, the indemnified
parties may proceed against either (1) both the Company and the Selling
Stockholder jointly or (2) the Company only, but may not proceed solely against
the Selling Stockholder. The Selling Stockholder shall not be required to
provide indemnification or contribution under this Section 10 until the
indemnified parties shall have first made a demand on the Company with respect
to such loss, claim, damage, liability or expense, and the Company shall have
either rejected such demand or failed to make such requested payment within 60
days after receipt of such demand, PROVIDED that no such prior demand on the
Company need be made if (A) the Company files a petition for relief under the
United States Bankruptcy Code (the "Bankruptcy Code"), (B) an order for relief
is entered against the Company in an involuntary case under the Bankruptcy Code,
(C) the Company makes an assignment for the benefit of its creditors, or (D) any
court order or approves the appointment of a receiver or custodian for the
Company or a substantial portion of its assets. Notwithstanding anything to the
contrary contained herein, the provisions of this paragraph shall not apply to
any claim for indemnity against the Selling Stockholder if the indemnified
parties are entitled to seek indemnity against the Selling Stockholder with
respect to liability resulting from written information concerning the Selling
Stockholder furnished to the Company by or on behalf of the Selling Stockholder.
(c) Each Underwriter, severally and not jointly, shall
indemnify and hold harmless the Company, its officers and employees, each of its
directors, the Selling Stockholder, and each person, if any, who controls the
Company or the Selling Stockholder within the meaning of the Securities Act,
from and against any loss, claim, damage or liability, joint or several, or any
action in respect thereof, to which the Company or any such director, officer,
employee, Selling Stockholder or controlling person may become subject, under
the Securities Act or otherwise, insofar as such loss, claim, damage, liability
or action arises out of, or is based upon, (i) any untrue
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<PAGE>
statement or alleged untrue statement of a material fact contained (A) in any
Preliminary Prospectus, the Registration Statement or the Prospectus or in any
amendment or supplement thereto, or (B) in any Blue Sky Application or (ii) the
omission or alleged omission to state in any Preliminary Prospectus, the
Registration Statement or the Prospectus, or in any amendment or supplement
thereto, or in any Blue Sky Application any material fact required to be stated
therein or necessary to make the statements therein not misleading, but in each
case only to the extent that the untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information concerning such Underwriter furnished to the Company through
the Representatives by or on behalf of that Underwriter specifically for
inclusion therein, and shall reimburse the Company and any such director,
officer or controlling person for any legal or other expenses reasonably
incurred by the Company or any such director, officer or controlling person in
connection with investigating or defending or preparing to defend against any
such loss, claim, damage, liability or action as such expenses are incurred. The
foregoing indemnity agreement is in addition to any liability which any
Underwriter may otherwise have to the Company, or any such director, officer,
employee, Selling Stockholder or controlling person.
(d) Promptly after receipt by an indemnified party under this
Section 10 of notice of any claim or the commencement of any action, the
indemnified party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 10, notify the indemnifying party in
writing of the claim or the commencement of that action; PROVIDED,
HOWEVER, that the failure to notify the indemnifying party shall not relieve it
from any liability which it may have under this Section 10 except to the extent
it has been materially prejudiced by such failure and, PROVIDED FURTHER that the
failure to notify the indemnifying party shall not relieve it from any liability
which it may have to an indemnified party otherwise than under this Section 10.
If any such claim or action shall be brought against an indemnified party, and
it shall notify the indemnifying party thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it wishes, jointly with
any other similarly notified indemnifying party, to assume the defense thereof
with counsel reasonably satisfactory to the indemnified party. After notice from
the indemnifying party to the indemnified party of its election to assume the
defense of such claim or action, the indemnifying party shall not be liable to
the indemnified party under this Section 10 for any legal or other expenses
subsequently incurred by the indemnified party in connection with the defense
thereof other than reasonable costs of investigation; PROVIDED, HOWEVER, that an
indemnified party shall have the right to employ counsel to represent jointly it
and those other indemnified parties who may be subject to liability arising out
of any claim in respect of which indemnity may be sought under this Section 10
if, in the reasonable judgment of such indemnified party, it is advisable for it
and those other indemnified parties be jointly represented by separate counsel,
and in that event the fees and expenses of such separate counsel shall be paid
by the indemnifying parties. No indemnifying party shall (i) without the prior
written consent of the indemnified parties (which consent shall not be
unreasonably withheld), settle or compromise or consent to the entry of any
judgment with respect to any pending or threatened claim, action, suit or
proceeding in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or potential
parties to such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding, or (ii) be liable for any
settlement of any such action effected without its written consent (which
consent shall not be unreasonably withheld), but if settled with the consent of
the indemnifying party or if there be a final judgment of the plaintiff in any
such action, the indemnifying party agrees to indemnify and hold harmless any
indemnified party from and against any loss or liability by reason of such
settlement or judgment.
(e) If the indemnification provided for in this Section 10
shall for any reason be unavailable to or insufficient to hold harmless an
indemnified party under Section 10(a), 10(b) or 10(c) in respect of any loss,
claim, damage or liability, or any action in respect thereof, referred to
therein, then each indemnifying party shall, in lieu of indemnifying such
indemnified party, contribute to the amount paid or payable by such indemnified
party as a result of such loss, claim,
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<PAGE>
damage or liability, or action in respect thereof, (i) in such proportion as
shall be appropriate to reflect the relative benefits received by the Company
and the Selling Stockholder on the one hand and the Underwriters on the other
from the offering of the Stock or (ii) if the allocation provided by clause (i)
above is not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i) above but
also the relative fault of the Company and the Selling Stockholder on the one
hand and the Underwriters on the other with respect to the statements or
omissions which resulted in such loss, claim, damage or liability, or action in
respect thereof, as well as any other relevant equitable considerations. The
relative benefits received by the Company and the Selling Stockholder on the one
hand and the Underwriters on the other with respect to such offering shall be
deemed to be in the same proportion as the total net proceeds from the offering
of the Stock purchased under this Agreement (before deducting expenses) received
by the Company and the Selling Stockholder, on the one hand, and the total
underwriting discounts and commissions received by the Underwriters with respect
to the shares of the Stock purchased under this Agreement, on the other hand,
bear to the total gross proceeds from the offering of the shares of the Stock
under this Agreement, in each case as set forth in the table on the cover page
of the Prospectus. The relative fault shall be determined by reference to
whether the untrue or alleged untrue statement of a material fact or omission or
alleged omission to state a material fact relates to information supplied by the
Company, the Selling Stockholder or the Underwriters, the intent of the parties
and their relative knowledge, access to information and opportunity to correct
or prevent such statement or omission. The Company, the Selling Stockholder and
the Underwriters agree that it would not be just and equitable if contributions
pursuant to this Section were to be determined by pro rata allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, damage or liability, or action in respect
thereof, referred to above in this Section shall be deemed to include, for
purposes of this Section 10(e), any legal or other expenses reasonably incurred
by such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 10(e), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Stock underwritten by it and distributed
to the public was offered to the public exceeds the amount of any damages which
such Underwriter has otherwise paid or become liable to pay by reason of any
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 10(e), the Selling Stockholder
shall not be required to contribute any amount in excess of the amount by which
its total amount of the net proceeds (after deducting the Underwriters' discount
but before deducting expenses) received by the Selling Stockholder from the sale
of its Stock pursuant to this Agreement exceeds the amount of any damages which
the Selling Stockholder has otherwise paid or become liable to pay by reason of
any untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
10(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations to contribute as provided in this Section 10(e) are several in
proportion to their respective underwriting obligations and not joint.
(f) The Underwriters severally confirm that the statements
with respect to the public offering of the Stock by the Underwriters set forth
on the cover page of, the legend concerning over-allotments on the inside front
cover page of and the concession and reallowance figures appearing under the
caption "Underwriting" in, the Prospectus are correct, and the Company
acknowledges that these statements constitute the only information concerning
such Underwriters furnished in writing to the Company by or on behalf of the
Underwriters specifically for inclusion in the Registration Statement and the
Prospectus.
11. DEFAULTING UNDERWRITERS.
If, on either Delivery Date, any Underwriter defaults in the
performance of its
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<PAGE>
obligations under this Agreement, the remaining non-defaulting Underwriters
shall be obligated to purchase the Stock which the defaulting Underwriter agreed
but failed to purchase on such Delivery Date in the respective proportions which
the number of shares of the Firm Stock set opposite the name of each remaining
non-defaulting Underwriter in Schedule 1 hereto bears to the total number of
shares of the Firm Stock set opposite the names of all the remaining
non-defaulting Underwriters in Schedule 1 hereto; PROVIDED, HOWEVER, that the
remaining non-defaulting Underwriters shall not be obligated to purchase any of
the Stock on such Delivery Date if the total number of shares of the Stock which
the defaulting Underwriter or Underwriters agreed but failed to purchase on such
date exceeds 9.09% of the total number of shares of the Stock to be purchased on
such Delivery Date, and any remaining non-defaulting Underwriter shall not be
obligated to purchase more than 110% of the number of shares of the Stock which
it agreed to purchase on such Delivery Date pursuant to the terms of Section 3.
If the foregoing maximums are exceeded, the remaining non-defaulting
Underwriters, or those other underwriters satisfactory to the Representatives
who so agree, shall have the right, but shall not be obligated, to purchase, in
such proportion as may be agreed upon among them, all the Stock to be purchased
on such Delivery Date. If the remaining Underwriters or other underwriters
satisfactory to the Representatives do not elect to purchase the shares which
the defaulting Underwriter or Underwriters agreed but failed to purchase on such
Delivery Date, this Agreement (or, with respect to the Second Delivery Date, the
obligation of the Underwriters to purchase, and of the Company to sell, the
Option Stock) shall terminate without liability on the part of any
non-defaulting Underwriter or the Company or the Selling Stockholder, except
that the Company will continue to be liable for the payment of expenses to the
extent set forth in Sections 8 and 14. As used in this Agreement, the term
"Underwriter" includes, for all purposes of this Agreement unless the context
requires otherwise, any party not listed in Schedule 1 hereto who, pursuant to
this Section 11, purchases Firm Stock which a defaulting Underwriter agreed but
failed to purchase.
Nothing contained herein shall relieve a defaulting
Underwriter of any liability it may have to the Company and the Selling
Stockholder for damages caused by its default. If other underwriters are
obligated or agree to purchase the Stock of a defaulting or withdrawing
Underwriter, either the Representatives or the Company may postpone the Delivery
Date for up to seven full business days in order to effect any changes that in
the opinion of counsel for the Company or counsel for the Underwriters may be
necessary in the Registration Statement, the Prospectus or in any other document
or arrangement.
12. TERMINATION. The obligations of the Underwriters hereunder
may be terminated by the Representatives by notice given to and received by the
Company and the Selling Stockholder prior to delivery of and payment for the
Firm Stock if, prior to that time, any of the events described in Sections 9(m)
or 9(n), shall have occurred or if the Underwriters shall decline to purchase
the Stock for any reason permitted under this Agreement.
13. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the Company or
the Selling Stockholder shall fail to tender the Stock for delivery to the
Underwriters by reason of any failure, refusal or inability on the part of the
Company or the Selling Stockholder to perform any agreement on its part to be
performed, or because any other condition of the Underwriters' obligations
hereunder required to be fulfilled by the Company or the Selling Stockholder is
not fulfilled, the Company and the Selling Stockholder that so fails or is
responsible for such non-fulfillment will reimburse the Underwriters for all
reasonable out-of-pocket expenses (including fees and disbursements of counsel)
incurred by the Underwriters in connection with this Agreement and the proposed
purchase of the Stock, and upon demand the Company and such Selling Stockholder
shall pay the full amount thereof to the Representatives. If this Agreement is
terminated pursuant to Section 11 by reason of the default of one or more
Underwriters, neither the Company nor the Selling Stockholder shall be obligated
to reimburse any defaulting Underwriter on account of those expenses.
24
<PAGE>
14. NOTICES, ETC. All statements, requests, notices and
agreements hereunder shall be in writing, and:
(a) if to the Underwriters, shall be delivered or
sent by mail, telex or facsimile transmission to Lehman Brothers Inc.,
Three World Financial Center, New York, New York 10285, Attention:
Syndicate Department (Fax: 212-526-6588), with copies to Oppenheimer &
Co., Inc., [address][fax], and Sands Brothers & Co., Ltd., 90 Park
Avenue, New York, New York 10016, Attention: Steven Sands (Fax:
212-697-8035), and with a copy, in the case of any notice pursuant to
Section 10(d), to the Director of Litigation, Office of the General
Counsel, Lehman Brothers Inc., 3 World Financial Center, 10th Floor,
New York, NY 10285;
(b) if to the Company, shall be delivered or sent by mail,
telex or facsimile transmission to the address of the Company set forth
in the Registration Statement, Attention: Robert V. Toni (Fax:
919-790-1041);
(c) if to the Selling Stockholder, shall be delivered or sent
by mail, telex or facsimile transmission to the Selling Stockholder at
the address set forth on Schedule 2 hereto;
PROVIDED, HOWEVER, that any notice to an Underwriter pursuant to Section 10(d)
shall be delivered or sent by mail, telex or facsimile transmission to such
Underwriter at its address set forth in its acceptance telex to the
Representatives, which address will be supplied to any other party hereto by the
Representatives upon request. Any such statements, requests, notices or
agreements shall take effect at the time of receipt thereof. The Company and the
Selling Stockholder shall be entitled to act and rely upon any request, consent,
notice or agreement given or made on behalf of the Underwriters by Lehman
Brothers Inc. on behalf of the Representatives and the Company and the
Underwriters shall be entitled to act and rely upon any request, consent, notice
or agreement given or made on behalf of the Selling Stockholder by the
Custodian.
15. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement
shall inure to the benefit of and be binding upon the Underwriters, the Company,
the Selling Stockholder and their respective successors. This Agreement and the
terms and provisions hereof are for the sole benefit of only those persons,
except that (A) the representations, warranties, indemnities and agreements of
the Company and the Selling Stockholder contained in this Agreement shall also
be deemed to be for the benefit of the person or persons, if any, who control
any Underwriter within the meaning of Section 15 of the Securities Act and (B)
the indemnity agreement of the Underwriters contained in Section 10(c) of this
Agreement shall be deemed to be for the benefit of directors of the Company,
officers of the Company who have signed the Registration Statement, any person
controlling the Company or the Selling Stockholder within the meaning of Section
15 of the Securities Act and the Selling Stockholder. Nothing in this Agreement
is intended or shall be construed to give any person, other than the persons
referred to in this Section 16, any legal or equitable right, remedy or claim
under or in respect of this Agreement or any provision contained herein.
16. SURVIVAL. The respective indemnities, representations,
warranties and agreements of the Company, the Selling Stockholder and the
Underwriters contained in this Agreement or made by or on behalf on them,
respectively, pursuant to this Agreement, shall survive the delivery of and
payment for the Stock and shall remain in full force and effect, regardless of
any investigation made by or on behalf of any of them or any person controlling
any of them.
17. DEFINITION OF THE TERMS "BUSINESS DAY" AND "SUBSIDIARY".
For purposes of this Agreement, (a) "business day" means any day on which the
New York Stock Exchange, Inc. is
25
<PAGE>
open for trading and (b) "subsidiary" has the meaning set forth in Rule 405 of
the Rules and Regulations.
18. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF NEW YORK.
Each party irrevocably agrees that any legal suit, action or
proceeding arising out of or based upon this Agreement or the transactions
contemplated hereby ("Related Proceedings") may be instituted in the federal
courts of the United States of America located in the City of New York or the
courts of the State of New York in each case located in the Borough of Manhattan
in the City of New York (collectively, the "Specified Courts"), and irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. The parties further agree that service of
any process, summons, notice or document by mail to such party's address set
forth above shall be effective service of process for any lawsuit, action or
other proceeding brought in any such court. The parties hereby irrevocably and
unconditionally waive any objection to the laying of venue of any lawsuit,
action or other proceeding in the Specified Courts, and hereby further
irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such lawsuit, action or other proceeding brought in any such
court has been brought in an inconvenient forum.
19. COUNTERPARTS. This Agreement may be executed in one or
more counterparts and, if executed in more than one counterpart, the executed
counterparts shall each be deemed to be an original but all such counterparts
shall together constitute one and the same instrument.
20. HEADINGS. The headings herein are inserted for convenience
of reference only and are not intended to be part of, or to affect the meaning
or interpretation of, this Agreement.
If the foregoing correctly sets forth the agreement among the
Company, the Selling Stockholder and the Underwriters, please indicate your
acceptance in the space provided for that purpose below.
Very truly yours,
CLOSURE MEDICAL CORPORATION
By
Title
The Selling Stockholder named in Schedule
2 to this Agreement
By
ATTORNEY-IN-FACT
Accepted:
26
<PAGE>
LEHMAN BROTHERS INC.
OPPENHEIMER & CO., INC.
SANDS BROTHERS & CO., LTD.
For themselves and as Representatives
of the several Underwriters named
in Schedule 1 hereto
By LEHMAN BROTHERS INC.
By
AUTHORIZED REPRESENTATIVE
27
<PAGE>
SCHEDULE 1
Underwriters Shares
Total
<PAGE>
SCHEDULE 2
Number of Shares
Name and address of Selling Stockholder of Firm Stock
<PAGE>
CERTIFICATE OF OWNERSHIP AND MERGER
MERGING
CLOSURE MEDICAL CORPORATION
WITH AND INTO
TRI-POINT MEDICAL CORPORATION
Pursuant to Section 253 of
the Delaware General Corporation Law
Tri-Point Medical Corporation, a corporation organized and
existing under the laws of the State of Delaware (the "Company"),
DOES HEREBY CERTIFY:
FIRST: That the Company was incorporated on February 20,
1996, pursuant to the General Corporation Law of the State of Delaware (the
"DGCL").
SECOND: That the Company owns all of the outstanding capital
stock of Closure Medical Corporation (the "Subsidiary Corporation"), a Delaware
corporation incorporated on December 23, 1996 pursuant to the DGCL.
THIRD: That the Company, by resolutions of its Board of
Directors duly adopted on December 11, 1996, as set forth on Exhibit A hereto,
determined to merge into itself the Subsidiary Corporation (the "Merger").
FOURTH: That upon the effectiveness of the Merger, the name
of the Company as specified in Article I of the Company's RESTATED Certificate
of Incorporation shall be changed to:
Closure Medical Corporation
FIFTH: That this Certificate of Ownership and Merger shall
become effective at 12:01 a.m. on January 13, 1997.
IN WITNESS WHEREOF, the Company has caused this Certificate of
Ownership and Merger to be duly executed in its corporate name on the 2nd day of
January, 1997, in accordance with Sections 103 and 253 of the Delaware General
Corporation Law.
TRI-POINT MEDICAL CORPORATION
By: /s/ Robert V. Toni
Name: Robert V. Toni
Title: President and Chief Executive
Officer
<PAGE>
Morgan, Lewis & Bockius LLP
2000 One Logan Square
Philadelphia, Pennsylvania 19103
March 7, 1997
Closure Medical Corporation
5265 Capital Boulevard
Raleigh, North Carolina 27616
Re: Closure Medical Corporation
Registration Statement on Form S-1
Ladies and Gentlemen:
We have acted as counsel to Closure Medical Corporation, a Delaware corporation
(the "Company"), in connection with the preparation of a Registration Statement
on Form S-1 (the "Registration Statement") to be filed with the Securities and
Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Act"), relating to the offering of up to 1,725,000 shares of the
Company's common stock, par value $0.01 per share (the "Common Stock"), of
which up to 1,025,000 shares of Common Stock (the "Company Shares"), including
shares purchasable by the underwriters upon exercise of their over-allotment
option, are to be newly issued and sold by the Company, and of which 700,000
shares of Common Stock (the "Selling Stockholder Shares") are to be sold by the
selling stockholder (the "Selling Stockholder") listed in the Registration
Statement under "Principal and Selling Stockholders." This opinion is being
furnished pursuant to Item 601(b)(5) of Regulation S-K under the Act.
In rendering the opinion set forth below, we have reviewed (a) the Registration
Statement and the exhibits thereto; (b) the Company's Restated Certificate of
Incorporation, as amended; (c) the Company's By-Laws; (d) certain records of
the Company's corporate proceedings as reflected in its minute books; and (e)
such statutes, records and other documents as we have deemed relevant. In our
examination, we have assumed the genuineness of all signatures, the authenticity
of all documents submitted to us as originals, and conformity with the originals
of all documents submitted to us as copies thereof. In addition, we have made
such other examinations of law and fact as we have deemed relevant in order
to form a basis for the opinion hereinafter expressed. Our opinion set forth
below is limited to the General Corporation Law of the State of Delaware.
<PAGE>
Closure Medical Corporation
March 7, 1997
Page 2
Based upon the foregoing, we are of the opinion that the Selling
Stockholder Shares are validly issued, fully paid and nonassessable,
and the Company Shares, upon issuance by the Company in the manner
and for the consideration contemplated in the Registration
Statement, will be validly issued, fully paid and nonassessable.
We hereby consent to the use of this opinion as Exhibit 5 to the Registration
Statement and to the reference to this Firm under the caption "Legal Matters."
In giving such opinion and consenting to such reference, we do not thereby admit
that we are acting within the category of persons whose consent is required
under Section 7 of the Act and the rules and regulations of the Commission
thereunder.
The opinion expressed herein is solely for your benefit and may be relied upon
only by you.
Very truly yours,
/s/ Morgan, Lewis & Bockius LLP
<PAGE>
TRI-POINT MEDICAL CORPORATION
AMENDED AND RESTATED 1996 EQUITY COMPENSATION PLAN
As Amended Effective as of November 1, 1996
The purpose of the Tri-Point Medical Corporation 1996 Equity
Compensation Plan (the "Plan") is to provide (i) designated officers (including
officers who are also directors) and other employees of Tri-Point Medical
Corporation (the "Company") and its subsidiaries, (ii) non-employee members of
the board of directors of the Company (the "Board"), and (iii) independent
contractors and consultants who perform valuable services for the Company or its
subsidiaries, with the opportunity to receive grants of incentive stock options,
nonqualified stock options, stock appreciation rights and restricted stock. The
Company believes that the Plan will cause the participants to contribute
materially to the growth of the Company, thereby benefitting the Company's
stockholders, and will align the economic interests of the participants with
those of the stockholders.
1. Administration
The Plan shall be administered and interpreted by a committee (the
"Committee"), which shall consist of two or more persons appointed by the Board,
all of whom shall be "outside directors" as defined under section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code") and related Treasury
regulations, and may be "non-employee directors" as defined under Rule 16b-3
under the Securities Exchange Act of 1934 (the "Exchange Act").
The Committee shall have the sole authority to (i) determine the
individuals to whom grants shall be made under the Plan, (ii) determine the
type, size and terms of the grants to be made to each such individual, (iii)
determine the time when the grants will be made and the duration of any
applicable exercise or restriction period, including the criteria for vesting
and the acceleration of vesting and (iv) deal with any other matters arising
under the Plan.
The Committee shall have full power and authority to administer and
interpret the Plan, to make factual determinations and to adopt or amend such
rules, regulations, agreements and instruments for implementing the Plan and for
the conduct of its business as it deems necessary or advisable, in its sole
discretion. The Committee's interpretations of the Plan and all determinations
made by the Committee pursuant to the powers vested in it hereunder shall be
conclusive and binding on all persons having any interests in the Plan or in any
awards granted hereunder. All powers of the Committee shall be executed in its
sole discretion, in the best interest of the Company and in keeping with the
objectives of the Plan and need not be uniform as to similarly situated
individuals.
<PAGE>
2. Grants
Incentives under the Plan shall consist of grants of incentive stock
options, nonqualified stock options, stock appreciation rights and restricted
stock (hereinafter collectively referred to as "Grants"). All Grants shall be
subject to the terms and conditions set forth herein and to those other terms
and conditions consistent with this Plan as the Committee deems appropriate and
as are specified in writing by the Committee to the individual (the "Grant
Letter"). The Committee shall approve the form and provisions of each Grant
Letter to an individual. Grants under a particular Section of the Plan need not
be uniform as among the grantees.
3. Shares Subject to the Plan
(a) Subject to the adjustment specified below, the aggregate number of
shares of common stock of the Company (the "Company Stock") that may be issued
or transferred under the Plan is 1,000,000 shares in the aggregate.
Notwithstanding anything in the Plan to the contrary, the maximum aggregate
number of shares of Company Stock that shall be subject to Grants made under the
Plan to any individual during any calendar year shall be 75,000 shares. The
shares may be authorized but unissued shares of Company Stock or reacquired
shares of Company Stock, including shares purchased by the Company on the open
market for purposes of the Plan. If and to the extent options or stock
appreciation rights granted under the Plan terminate, expire, or are canceled,
forfeited, exchanged or surrendered without having been exercised or if any
shares of restricted stock are forfeited, the shares subject to such Grants
shall again be available for purposes of the Plan.
(b) If there is any change in the number or kind of shares of Company
Stock outstanding by reason of a stock dividend, recapitalization, stock split,
or combination or exchange of shares, or a merger, reorganization or
consolidation in which the Company is the surviving corporation,
reclassification or change in par value or by reason of any other extraordinary
or unusual events affecting the outstanding Company Stock as a class without the
Company's receipt of consideration, or if the value of outstanding shares of
Company Stock is substantially reduced due to the Company's payment of an
extraordinary dividend or distribution, then (i) the maximum number of shares of
Company Stock available for Grants, (ii) the maximum number of shares of Company
Stock which any one individual participating in the Plan may be granted during
the term of the Plan, (iii) the number of shares covered by outstanding Grants,
and (iv) the price per share or the applicable market value of such Grants shall
be proportionately adjusted by the Committee to reflect any increase or decrease
in the number or kind of issued shares of Company Stock to preclude the
enlargement or dilution of rights and benefits under such Grants; provided,
however, that any fractional shares resulting from such adjustment shall be
eliminated. The adjustments determined by the Committee shall be final, binding
and conclusive. Notwithstanding the foregoing, no adjustment shall be authorized
or made pursuant to this Section to the extent that such authority or adjustment
would cause any incentive stock option to fail to comply with section 422 of the
Code.
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<PAGE>
4. Eligibility for Participation
All employees of the Company and its subsidiaries ("Employees"),
including Employees who are officers or members of the Board, shall be eligible
to participate in the Plan. All members of the Board who are not employees of
the Company or any of its subsidiaries ("Non-Employee Directors") shall be
eligible only to receive nonqualified stock options pursuant to Section 6. Any
independent contractors or consultants who perform valuable services to the
Company or any of its subsidiaries ("Consultants") shall be eligible to
participate in the Plan, but shall not be eligible to receive incentive stock
options.
The Committee shall select the Employees and Consultants to receive
Grants and determine the number of shares of Company Stock subject to a
particular Grant in such manner as the Committee determines. Employees,
Consultants, and Non-Employee Directors who receive Grants under this Plan shall
hereinafter be referred to as "Grantees". Non-Employee Directors shall receive
Grants only in accordance with the terms of Section 6.
Nothing contained in this Plan shall be construed to (i) limit the
right of the Committee to make Grants under this Plan in connection with the
acquisition, by purchase, lease, merger, consolidation or otherwise, of the
business or assets of any corporation, firm or association, including options
granted to employees thereof who become Employees of the Company, or for other
proper corporate purpose, or (ii) limit the right of the Company to grant stock
options or make other awards outside of this Plan.
5. Granting of Options
(a) Number of Shares. The Committee, in its sole discretion, shall
determine the number of shares of Company Stock that will be subject to each
Grant of stock options to any Employee or Consultant.
(b) Type of Option and Price. The Committee may grant options intended
to qualify as "incentive stock options" within the meaning of section 422 of the
Code ("Incentive Stock Options") or options which are not intended to so qualify
("Nonqualified Stock Options") or any combination of Incentive Stock Options and
Nonqualified Stock Options (hereinafter collectively the "Stock Options"), all
in accordance with the terms and conditions set forth herein.
The purchase price of Company Stock subject to a Stock Option shall be
determined by the Committee and may be equal to, greater than, or less than the
Fair Market Value (as defined below) of a share of such Stock on the date such
Stock Option is granted; provided, however, that (i) the purchase price of
Company Stock subject to an Incentive Stock Option shall be equal to, or greater
than, the Fair Market Value of a share of such Stock on the date such Stock
Option is granted and (ii) an Incentive Stock Option may not be granted to an
Employee who, at the time of grant, owns stock possessing more than 10 percent
of the total combined voting power of all
-3-
<PAGE>
classes of stock of the Company or any parent or subsidiary of the Company,
unless the option price per share is not less than 110% of the Fair Market Value
of Company Stock on the date of grant.
If the Company Stock is traded in a public market, then the Fair Market
Value per share shall be (i) if the principal trading market for the Company
Stock is a national securities exchange or the National Market segment of the
Nasdaq Stock Market, the last reported sale price thereof on the relevant date
or (if there were no trades on that date) the latest preceding date upon which a
sale was reported, or (ii) if the Company Stock is not principally traded on
such exchange or market, the mean between the last reported "bid" and "asked"
prices thereof on the relevant date, as reported on Nasdaq, or, if not so
reported, as reported by the National Daily Quotation Bureau, Inc. or as
reported in a customary financial reporting service, as applicable and as the
Committee determines. If the Company Stock is not traded in a public market or
subject to reported transactions or "bid" or "ask" quotations as set forth
above, the Fair Market Value per share shall be as determined by the Committee.
(c) Option Term. The Committee shall determine the term of each Stock
Option. The term of any Stock Option shall not exceed ten years from the date of
grant. Notwithstanding the foregoing, an Incentive Stock Option may not be
granted to an Employee who, at the time of grant, owns stock possessing more
than 10 percent of the total combined voting power of all classes of stock of
the Company or any parent or subsidiary of the Company, unless the option term
does not exceed five years from the date of grant.
(d) Exercisability of Options. Subject to Section 6, Stock Options
shall become exercisable in accordance with the terms and conditions determined
by the Committee, in its sole discretion, and specified in the Grant Letter. The
Committee, in its sole discretion, may accelerate the exercisability of any or
all outstanding Stock Options at any time for any reason. In addition, all
outstanding Stock Options automatically shall become fully and immediately
exercisable upon a Change of Control (as defined herein) in accordance with the
provisions of Section 11, unless in cases not covered by Section 11(f), the
Committee in its sole discretion determines not to accelerate such Stock Options
upon a Change of Control. The Committee may make such determination prior to the
Change of Control or, if the Committee making such determination following a
Change of Control is comprised of the same members as served on the Committee
immediately prior to such Change of Control, within five days following such
Change of Control.
(e) Manner of Exercise. A Grantee may exercise a Stock Option which has
become exercisable, in whole or in part, by delivering a notice of exercise to
the Committee with accompanying payment of the option price in accordance with
Subsection (g) below. Such notice may instruct the Company to deliver shares of
Company Stock due upon the exercise of the Stock Option to any registered broker
or dealer designated by the Committee in lieu of delivery to the Grantee. Such
instructions must designate the account into which the shares are to be
deposited.
-4-
<PAGE>
(f) Termination of Employment, Disability or Death.
(i) Except as provided below, a Stock Option may only be
exercised while the Grantee is employed by the Company as an Employee,
Consultant or member of the Board. In the event that a Grantee ceases to be
employed by the Company for any reason other than a "disability", death, or
"termination for cause", any Stock Option which is otherwise exercisable by the
Grantee shall terminate unless exercised within 90 days of the date on which the
Grantee ceases to be employed by the Company (or within such other period of
time as may be specified in the Grant Letter), but in any event no later than
the date of expiration of the option term. Any of the Grantee's Stock Options
which are not otherwise exercisable as of the date on which the Grantee ceases
to be employed by the Company shall terminate as of such date.
(ii) In the event the Grantee ceases to be employed by the
Company on account of a "termination for cause" by the Company, any Stock Option
held by the Grantee shall terminate as of the date the Grantee ceases to be
employed by the Company.
(iii) In the event the Grantee ceases to be employed by the
Company because the Grantee is "disabled", any Stock Option which is otherwise
exercisable by the Grantee shall terminate unless exercised within one year of
the date on which the Grantee ceases to be employed by the Company (or within
such other period of time as may be specified in the Grant Letter), but in any
event no later than the date of expiration of the option term. Any of the
Grantee's Stock Options which are not otherwise exercisable as of the date on
which the Grantee ceases to be employed by the Company shall terminate as of
such date.
(iv) If the Grantee dies while employed by the Company or
within 90 days after the date on which the Grantee ceases to be employed by the
Company on account of a termination of employment specified in Section 5(f)(i)
above (or within such other period of time as may be specified in the Grant
Letter), any Stock Option which is otherwise exercisable by the Grantee shall
terminate unless exercised within one year of the date on which the Grantee
ceases to be employed by the Company (or within such other period of time as may
be specified in the Grant Letter), but in any event no later than the date of
expiration of the option term. Any of the Grantee's Stock Options which are not
otherwise exercisable as of the date on which the Grantee ceases to be employed
by the Company shall terminate as of such date.
(v) For purposes of this Section 5(f), the term "Company"
shall include the Company's subsidiaries, and the following terms shall be
defined as follows: (A) "disability" shall mean a Grantee's becoming disabled
within the meaning of section 22(e)(3) of the Code and (B) "termination for
cause" shall mean, except to the extent otherwise provided in a Grantee's Grant
Letter, a finding by the Committee, after full consideration of the facts
presented on behalf of both the Company and the Grantee, that the Grantee has
breached his or her employment or service contract with the Company, or has been
engaged in disloyalty to the Company, including, without limitation, fraud,
embezzlement, theft, commission of a felony or proven dishonesty in the course
of his or her employment or service, or has disclosed trade secrets or
confidential information of
-5-
<PAGE>
the Company to persons not entitled to receive such information. In such event,
in addition to the immediate termination of the Stock Option, the Grantee shall
automatically forfeit all option shares for any exercised portion of a Stock
Option for which the Company has not yet delivered the share certificates upon
refund by the Company of the option price paid by the Grantee for such shares.
(g) Satisfaction of Option Price. The Grantee shall pay the option
price specified in the Grant Letter in (i) cash, (ii) with the approval of the
Committee, by delivering shares of Company Stock owned by the Grantee (including
Company Stock acquired in connection with the exercise of a Stock Option,
subject to such restrictions as the Committee deems appropriate) and having a
Fair Market Value on the date of exercise equal to the option price or (iii)
through any combination of (i) and (ii). The Grantee shall pay the option price
and the amount of withholding tax due, if any, at the time of exercise. Shares
of Company Stock shall not be issued or transferred upon exercise of a Stock
Option until the option price is fully paid and any required withholding is
made.
(h) Limits on Incentive Stock Options. Each Incentive Stock Option
shall provide that, to the extent that the aggregate Fair Market Value of the
stock on the date of the grant with respect to which Incentive Stock Options are
exercisable for the first time by a Grantee during any calendar year under the
Plan or any other stock option plan of the Company or a parent or subsidiary
exceeds $100,000, then such option as to the excess shall be treated as a
Nonqualified Stock Option. An Incentive Stock Option shall not be granted to any
participant who is not an Employee of the Company or any parent or subsidiary
(within the meaning of section 424(f) of the Code).
6. Formula Option Grants to Non-Employee Directors
A Non-Employee Director shall be entitled to receive Nonqualified Stock
Options in accordance with this Section 6.
(a) Initial Grant. Each Non-Employee Director who first becomes a
member of the Board on or after the effective date of this Plan (as specified in
Section 19) will receive a grant of a Nonqualified Stock Option to purchase
25,000 shares of Company Stock immediately upon the date he or she becomes a
member of the Board; provided, however, that an initial grant pursuant to this
Section 6 to a Non-Employee Director who first becomes a member of the Board on
or after the effective date of this Plan and before the consummation of the
Company's initial public offering of Common Stock (a "Pre-IPO Initial Grant")
shall be made as of the date the Non-Employee Director first becomes a member of
the Board on or after the effective date of this Plan (which is the date of
grant) and shall become effective as of the Effective Time as defined in the
Contribution and Exchange Agreement dated as of May 30, 1996 by and among (1)
Sharpoint Development Corporation, (2) Robert V. Toni, J. Blount Swain, Jeffrey
G. Clark, Joe B. Barefoot, Jeffery C. Basham, Jeffrey C. Leung and Anthony V.
Seaber, (3) Caratec, L.L.C., (4) Cacoosing Partners, L.P., OMI Partners, L.P.,
Triangle Partners, L.P., F. W. Schmidt and Rolf D.
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Schmidt, and (5) the Company; and provided, further, that if such Effective Time
has not occurred on or prior to September 30, 1996, any Pre-IPO Initial Grants
shall be null, void and of no further effect without any additional action
required pursuant to the terms of this Plan.
(b) Annual Grants. On each date that the Company holds its annual
meeting of stockholders, commencing with the 1997 calendar year, each
Non-Employee Director in office immediately after the annual election of
directors (other than directors first elected at such meeting) will receive a
grant of a Nonqualified Stock Option to purchase 5,000 shares of Company Stock.
The date of grant of such annual Grants shall be the date of such annual meeting
of stockholders.
(c) Purchase Price. The purchase price per share of Company Stock
subject to a Stock Option granted under this Section 6 shall be equal to the
Fair Market Value of a share of Company Stock on the date of grant, provided
that the purchase price per share of Company Stock subject to a Stock Option
granted by a Pre-IPO Initial Grant shall be $1 less than the offering price to
the public in the Company's initial public offering.
(d) Option Term. The term of each Stock Option granted pursuant
to this Section 6 shall be ten years.
(e) Exercisability. Options granted under this Section 6 shall be
exercisable with respect to 50% of the shares on the date of grant, and an
additional 25% on each anniversary of the date of grant until such Option is
fully exercisable.
(f) Administration. The provisions of this Section 6 are intended to
operate automatically and not require administration. However, to the extent
that administrative determinations are required, the provisions of this Section
6 shall be made by the members of the Board who are not eligible to receive
grants under this Section 6, but in no event shall such determinations affect
the eligibility of Grantees, the determination of the purchase price, the timing
of the grants or the number of shares subject to Stock Options granted
hereunder.
(g) Applicability of Plan Provisions. Except as otherwise provided in
this Section 6, the Nonqualified Stock Options granted to Non-Employee Directors
shall be subject to the provisions of this Plan applicable to Nonqualified Stock
Options granted to other persons, provided however that (i) with respect to the
termination of Stock Options pursuant to the provisions of Section 5(f), the
Committee shall not have discretion to modify the terms of such provisions in
the Grant Letter and (ii) in the event of a Change of Control (as defined in
Section 10), the provisions of Section 11 shall apply to Stock Options granted
pursuant to this Section 6, except that the Committee shall not have discretion
to modify the automatic acceleration provisions.
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7. Restricted Stock Grants
The Committee may issue or transfer shares of Company Stock to an
Employee or Consultant under a Grant of restricted stock (a "Restricted Stock
Grant"), upon such terms as the Committee deems appropriate. The following
provisions are applicable to Restricted Stock Grants:
(a) General Requirements. Shares of Company Stock issued pursuant to
Restricted Stock Grants may be issued for consideration or for no consideration,
at the sole discretion of the Committee. The Committee shall establish
conditions under which restrictions on the transfer of shares of Company Stock
shall lapse over a period of time or according to such other criteria as the
Committee deems appropriate. The period of years during which the Restricted
Stock Grant will remain subject to restrictions will be designated in the Grant
Letter as the "Restriction Period."
(b) Number of Shares. The Committee shall grant to each Grantee a
number of shares of Company Stock pursuant to a Restricted Stock Grant in such
manner as the Committee determines.
(c) Requirement of Employment. If the Grantee ceases to be employed by
the Company (as an Employee or Consultant) during a period designated in the
Grant Letter as the Restriction Period, or if other specified conditions are not
met, the Restricted Stock Grant shall terminate as to all shares covered by the
Grant as to which restrictions on transfer have not lapsed and those shares of
Company Stock must be immediately returned to the Company. The Committee may,
however, provide for complete or partial exceptions to this requirement as it
deems equitable.
(d) Restrictions on Transfer and Legend on Stock Certificate. During
the Restriction Period, a Grantee may not sell, assign, transfer, pledge or
otherwise dispose of the shares of Company Stock to which such Restriction
Period applies except to a Successor Grantee (as defined below) under Section 9.
Each certificate for a share issued or transferred under a Restricted Stock
Grant shall contain a legend giving appropriate notice of the restrictions in
the Grant. The Grantee shall be entitled to have the legend removed from the
stock certificate covering any of the shares subject to restrictions when all
restrictions on such shares have lapsed.
(e) Right to Vote and to Receive Dividends. During the Restriction
Period, unless the Committee determines otherwise, the Grantee shall have the
right to vote shares subject to the Restricted Stock Grant and to receive any
dividends or other distributions paid on such shares, subject to any
restrictions deemed appropriate by the Committee.
(f) Lapse of Restrictions. All restrictions imposed under the
Restricted Stock Grant shall lapse upon the expiration of the applicable
Restriction Period and the satisfaction of any conditions imposed by the
Committee. The Committee may determine, as to any or all Restricted
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Stock Grants, that all the restrictions shall lapse without regard to any
Restriction Period. All restrictions under all outstanding Restricted Stock
Grants shall automatically and immediately lapse upon a Change of Control,
unless, in cases not covered by Section 10(f), the Committee in its sole
discretion determines that the restrictions shall not lapse upon a Change of
Control. The Committee may make such determination prior to the Change of
Control or, if the Committee making such determination following a Change of
Control is comprised of the same members as served on the Committee immediately
prior to such Change of Control, within five days following such Change of
Control.
8. Stock Appreciation Rights
(a) General Requirements. The Committee may grant stock appreciation
rights ("SARs") to any Grantee in tandem with any Stock Option, for all or a
portion of the applicable Stock Option, either at the time the Stock Option is
granted or at any time thereafter while the Stock Option remains outstanding;
provided, however, that in the case of an Incentive Stock Option, such rights
may be granted only at the time of the Grant of such Stock Option. Unless the
Committee determines otherwise, the base price of each SAR shall be equal to the
greater of (i) the exercise price of the related Stock Option or (ii) the Fair
Market Value of a share of Company Stock as of the date of Grant of such SAR.
(b) Number of SARs. The number of SARs granted to a Grantee which shall
be exercisable during any given period of time shall not exceed the number of
shares of Company Stock which the Grantee may purchase upon the exercise of the
related Stock Option during such period of time. Upon the exercise of a Stock
Option, the SARs relating to the Company Stock covered by such Stock Option
shall terminate. Upon the exercise of the SAR's, the related Stock Option shall
terminate to the extent of an equal number of shares of Company Stock.
(c) Value of SARs. Upon a Grantee's exercise of some or all of the
Grantee's SARs, the Grantee shall receive in settlement of such SARs an amount
equal to the value of the stock appreciation for the number of SARs exercised,
payable in cash, Company Stock or a combination thereof. The stock appreciation
for an SAR is the amount by which the Fair Market Value of the underlying
Company Stock on the date of exercise of the SAR exceeds the base price of the
SAR as described in subsection (a).
(d) Form of Payment. At the time of such exercise, the Grantee shall
have the right to elect the portion of the amount to be received that shall
consist of cash and the portion that shall consist of shares of Company Stock,
which for purposes of calculating the number of shares of Company stock to be
received, shall be valued at their Fair Market Value on the date of exercise of
such SARs. The Committee shall have the right to disapprove a Grantee's election
to receive cash in full or partial settlement of the SARs exercised and to
require that shares of Company Stock be delivered in lieu of cash. If shares of
Company Stock are to be received upon exercise of an SAR, cash shall be
delivered in lieu of any fractional share.
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(e) Certain Restrictions. An SAR is exercisable only during the
period when the Stock Option to which it is related is also exercisable.
9. Transferability of Grants
Only the Grantee or his or her authorized representative may exercise
rights under a Grant. Such persons may not transfer those rights except by will
or by the laws of descent and distribution or, with respect to Grants other than
Incentive Stock Options, if permitted in any specific case by the Committee in
its sole discretion pursuant to a qualified domestic relations order (as defined
under the Code or Title I of the Employee Retirement Income Security Act of
1974, as amended, or the regulations thereunder). When a Grantee dies, the
representative or other person entitled to succeed to the rights of the Grantee
("Successor Grantee") may exercise such rights. A Successor Grantee must furnish
proof satisfactory to the Company of his or her right to receive the Grant under
the Grantee's will or under the applicable laws of descent and distribution.
Notwithstanding the foregoing, the Committee may provide, in a Grant
Letter, that a Grantee may transfer Nonqualified Stock Options to his or her
children, grandchildren or spouse or to one or more trusts for the benefit of
such family members or to partnerships in which such family members are the only
partners (a "Family Transfer"), provided that the Grantee receives no
consideration for a Family Transfer and the Grant Letters relating to
Nonqualified Stock Options transferred in a Family Transfer continue to be
subject to the same terms and conditions that were applicable to such
Nonqualified Stock Options immediately prior to the Family Transfer.
10. Change of Control of the Company
As used herein, a "Change of Control" shall be deemed to have occurred
if:
(a) As a result of a tender offer, stock purchase, other stock
acquisition, merger, consolidation, recapitalization, reverse split, or sale or
transfer of assets, any person or group (as such terms are used in and under
Section 13(d) of the Exchange Act), but excluding Rolf D. Schmidt and F. William
Schmidt or any entity controlled by either or both of them, becomes the
beneficial owner (as defined in Rule 13-d under the Exchange Act), directly or
indirectly, of securities of the Company representing more than 50.1% of the
common stock of the Company or the combined voting power of the Company's then
outstanding securities;
(b) A liquidation or dissolution of the Company, or a
sale (excluding transfers to subsidiaries) of all or substantially all of the
Company's assets occurs; or
(c) During any period of two consecutive years, individuals
who, at the beginning of such period, constitute the Board cease for any reason
to constitute at least a majority thereof, unless the election, or the
nomination for election by the Company's
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stockholders, of at least two-thirds of the directors who were not directors at
the beginning of such period was approved by a vote of at least two-thirds of
the directors then still in office who were either directors at the beginning of
the period or who, in connection with their election or nomination, received the
foregoing two-thirds approval.
11. Consequences of a Change of Control
(a) Notice. Unless the Committee determines otherwise:
(i) If a Change of Control described in Section 10(a) or (b)
will occur, then, not later than 10 days after the approval by the stockholders
of the Company (or approval by the Board, if stockholder action is not required)
of such Change of Control, the Company shall give each Optionee with any
outstanding Stock Options written notice of such proposed Change of Control.
(ii) If a Change of Control described in Section 10(a) may
occur without approval by the stockholders (or approval by the Board) and does
so occur, or if a Change of Control described in Section 10(c) occurs, then, not
later than 10 days after such Change of Control, the Company shall give each
Optionee with any outstanding Stock Options written notice of the Change of
Control.
(b) Election Period. In connection with the Change of Control and
effective only upon such Change of Control, unless the Committee determines
otherwise, each Grantee shall thereupon have the right, within 20 days after
such written notice is sent by the Company (the "Election Period"), to make an
election as described in Subsection (c) with respect to all of his or her
outstanding Stock Options (whether the right to exercise such Stock Options has
then accrued or the right to exercise such Stock Options will occur or has
occurred upon the Change of Control).
(c) Election Right. The Committee shall determine, in its sole
discretion, whether Grantees will have either or both of the rights described
below. During the Election Period, unless the Committee determines otherwise,
each Grantee shall have the right to elect:
(i) To exercise in full any installments of such Stock
Options not previously exercised, or
(ii) To surrender all or part of such outstanding Stock
Options, in exchange for a payment by the Company, in cash or Company Stock as
determined by the Committee, in an amount equal to the excess over the purchase
price of the then Fair Market Value of the shares of Company Stock subject to
the Grantee's outstanding Stock Options.
(d) Termination of Stock Options. If a Grantee does not make a
timely election in accordance with Subsection (c) in connection with a Change
of Control where the Company is
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not the surviving corporation (or survives only as a subsidiary of another
corporation), the Grantee's Stock Options shall terminate as of the Change of
Control. Notwithstanding the foregoing, a Stock Option will not terminate if
assumed by the surviving or acquiring corporation, or its parent, upon a merger
or consolidation and, with respect to an Incentive Stock Option, the assumption
of the Option occurs under circumstances which are not deemed a modification of
the Option within the meaning of sections 424(a) and 424(h)(3)(A) of the Code.
(e) Accounting and Tax Limitations. Notwithstanding the foregoing:
(i) If the right described in Subsection (c)(ii) would make
the applicable Change of Control ineligible for pooling of interest accounting
treatment under APB No. 16 or make such Change of Control ineligible for desired
tax treatment with respect to such Change of Control and, but for those
provisions, the Change of Control would otherwise qualify for such treatment,
the Grantee shall receive shares of Company Stock with a Fair Market Value equal
to the cash that would otherwise be payable pursuant to Subsection (c)(ii) in
substitution for such cash, and
(ii) If the termination of the Stock Options described in
Subsection (d) would make the applicable Change of Control ineligible for
pooling of interest accounting treatment under APB No. 16 and, but for such
provision, the Change of Control would otherwise qualify for such treatment,
each affected Grantee shall receive a replacement or substitute stock option
issued by the surviving or acquiring corporation.
(f) Other Limitations. Notwithstanding any other provision of this
Section 11, if a Change of Control described in Section 10(a) will occur, or if
a Change of Control described in Section 10(b) will occur and the Company will
not be the surviving corporation, then (i) all outstanding Stock Options shall
be exercisable, (ii) the restrictions on all outstanding Restricted Stock shall
lapse, (iii) the Committee notice required by Subsection (a) shall be mandatory
and (iv) the Grantee shall have the right to make the election called for in
Subsection (c), subject to the provisions of Subsections (d) and (e) and further
subject to the Committee's right to permit only the election under Subsection
(c)(i).
12. Amendment and Termination of the Plan
(a) Amendment. The Board may amend or terminate the Plan at any time;
provided, however, that any amendment that increases the aggregate number (or
individual limit for any single Grantee) of shares of Company Stock that may be
issued or transferred under the Plan (other than by operation of Section 3(b)),
or modifies the requirements as to eligibility for participation in the Plan,
shall be subject to approval by the stockholders of the Company and provided,
further, that the Board shall not amend the Plan without stockholder approval if
such approval is required by section 162(m) of the Code.
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(b) Termination of Plan. The Plan shall terminate on the day
immediately preceding the tenth anniversary of its effective date unless
terminated earlier by the Board or unless extended by the Board with the
approval of the stockholders.
(c) Termination and Amendment of Outstanding Grants. A termination or
amendment of the Plan that occurs after a Grant is made shall not materially
impair the rights of a Grantee unless the Grantee consents or unless the
Committee acts under Section 20(b). The termination of the Plan shall not impair
the power and authority of the Committee with respect to an outstanding Grant.
Whether or not the Plan has terminated, an outstanding Grant may be terminated
or amended under Section 20(b) or may be amended by agreement of the Company and
the Grantee consistent with the Plan.
(d) Governing Document. The Plan shall be the controlling
document. No other statements, representations, explanatory materials or
examples, oral or written, may amend the Plan in any manner. The Plan shall be
binding upon and enforceable against the Company and its successors and assigns.
13. Funding of the Plan
This Plan shall be unfunded. The Company shall not be required to
establish any special or separate fund or to make any other segregation of
assets to assure the payment of any Grants under this Plan. In no event shall
interest be paid or accrued on any Grant, including unpaid installments of
Grants.
14. Rights of Participants
Nothing in this Plan shall entitle any Employee, Consultant or other
person to any claim or right to be granted a Grant under this Plan. Neither this
Plan nor any action taken hereunder shall be construed as giving any individual
any rights to be retained by or in the employ of the Company or any other
employment rights.
15. No Fractional Shares
No fractional shares of Company Stock shall be issued or delivered
pursuant to the Plan or any Grant. The Committee shall determine whether cash,
other awards or other property shall be issued or paid in lieu of such
fractional shares or whether such fractional shares or any rights thereto shall
be forfeited or otherwise eliminated.
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16. Withholding of Taxes
(a) Required Withholding. The Company shall have the right to deduct
from all Grants paid in cash, or from other wages paid to the Grantee, any
federal, state or local taxes required by law to be withheld with respect to
such cash awards and, in the case of Grants paid in Company Stock, the Grantee
or other person receiving such shares shall be required to pay to the Company
the amount of any such taxes which the Company is required to withhold with
respect to such Grants or the Company shall have the right to deduct from other
wages paid by the Company the amount of any withholding due with respect to such
Grants.
(b) Election to Withhold Shares. A Grantee may make an election to
satisfy the Company income tax withholding obligation with respect to a Stock
Option, SAR or Restricted Stock by having shares withheld up to an amount that
does not exceed the Grantee's maximum marginal tax rate for federal (including
FICA), state and local tax liabilities. Such election must be in the form and
manner prescribed by the Committee and is subject to the prior approval of the
Committee.
17. Requirements for Issuance of Shares
No Company Stock shall be issued or transferred in connection with any
Grant hereunder unless and until all legal requirements applicable to the
issuance or transfer of such Company Stock have been complied with to the
satisfaction of the Committee. The Committee shall have the right to condition
any Grant made to any Grantee hereunder on such Grantee's undertaking in writing
to comply with such restrictions on his or her subsequent disposition of such
shares of Company Stock as the Committee shall deem necessary or advisable as a
result of any applicable law, regulation or official interpretation thereof and
certificates representing such shares may be legended to reflect any such
restrictions. Certificates representing shares of Company Stock issued under the
Plan will be subject to such stop-transfer orders and other restrictions as may
be applicable under such laws, regulations and other obligations of the Company,
including any requirement that a legend or legends be placed thereon.
18. Headings
Section headings are for reference only. In the event of a conflict
between a title and the content of a Section, the content of the Section shall
control.
19. Effective Date of the Plan.
This Plan shall be effective on May 28, 1996. The amendment and
restatement shall be effective as of November 1, 1996.
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20. Miscellaneous
(a) Substitute Grants. The Committee may make a Grant to an employee of
another corporation who becomes an Employee by reason of a corporate merger,
consolidation, acquisition of stock or property, reorganization or liquidation
involving the Company or any of its subsidiaries in substitution for a stock
option or restricted stock grant made by such corporation ("Substituted Stock
Incentives"). The terms and conditions of the substitute grant may vary from the
terms and conditions required by the Plan and from those of the Substituted
Stock Incentives. The Committee shall prescribe the provisions of the substitute
grants.
(b) Compliance with Law. The Plan, the exercise of Stock Options and
the obligations of the Company to issue or transfer shares of Company Stock
under Grants shall be subject to all applicable laws and to approvals by any
governmental or regulatory agency as may be required. With respect to persons
subject to Section 16 of the Exchange Act, it is the intent of the Company that
the Plan and all transactions under the Plan comply with all applicable
provisions of Rule 16b-3 or its successors under the Exchange Act. The Committee
may revoke any Grant if it is contrary to law or modify a Grant to bring it into
compliance with any valid and mandatory government regulation. The Committee may
also adopt rules regarding the withholding of taxes on payments to Grantees. The
Committee may, in its sole discretion, agree to limit its authority under this
Section.
(c) Ownership of Stock. A Grantee or Successor Grantee shall have no
rights as a stockholder with respect to any shares of Company Stock covered by a
Grant until the shares are issued or transferred to the Grantee or Successor
Grantee on the stock transfer records of the Company.
(d) Governing Law. The validity, construction, interpretation and
effect of the Plan and Grant Letters issued under the Plan shall exclusively
be governed by and determined in accordance with the law of the State of
Delaware.
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Exhibit 10.19
NET LEASE
[ ]
THIS LEASE is made this 14th day of February, 1997, between AP
SOUTHEAST PORTFOLIO PARTNERS, L.P. ("Landlord"), a Delaware Limited
Partnership, whose address is c/o Highwoods Properties, Inc., 3100 Smoketree
Court, Suite 600, Raleigh, North Carolina 27604, and CLOSURE MEDICAL
CORPORATION ("Tenant"), a Delaware Corporation, whose address is 5265
Capital Boulevard, Raleigh, North Carolina 27616.
I. GENERAL.
1.1 Consideration. Landlord enters into this Lease in consideration of
the payment by Tenant of the rents herein reserved and the keeping, observance
and performance by Tenant of the covenants and agreements herein contained.
1.2 Exhibits and Addenda to Lease. The Exhibits and Addenda listed
below shall be attached to this Lease and be deemed incorporated in this Lease
by this reference. In the event of any inconsistency between such Exhibits and
Addenda and the terms and provisions of this Lease, the terms and provisions of
the Exhibits and Addenda shall control. The Exhibits and Addenda to this Lease
are:
Exhibit A - Premises
Exhibit A-1 - Land
Exhibit B - Plans and Specifications for
the Premises (if available)
Exhibit C - Environmental Compliance
Exhibit D - Option to Extend
Exhibit D-1 - Sign Criteria
Exhibit D-2 - List of Recorded Covenants
Exhibit E - Tenant Work Letter
Exhibit F - Additional Space Options
Exhibit G - HVAC Maintenance Agreement
II. DEMISE OF PREMISES.
2.1 Demise. Subject to the provisions, covenants and agreements herein
contained, Landlord hereby leases and demises to Tenant, and Tenant hereby
leases from Landlord, the Premises as hereinafter defined, together with a
non-exclusive right to use the Parking Area, as hereinafter defined, for the
Lease Term as hereinafter defined, subject to existing covenants, restrictions,
easements and encumbrances affecting the same.
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2.2 Premises. The "Premises" shall mean the space to be occupied by
Tenant as depicted on Exhibit A attached hereto. The Premises are within the
Building which is located on the Land, as the terms Building and Land are
hereinafter defined.
2.3 Square Footage and Address. The Premises contains approximately
40,000 rentable square feet. The address of the Premises is, or is expected to
be: 5240 Green's Dairy Road, Raleigh, North Carolina 27616. Landlord shall
verify the square footage by measurement according to ANSI/BOMA 265.1 - 1996
Standard Method for measuring Floor Area in Office Buildings, approved June 7,
1996. The verification of the square footage of the Premises shall be mutually
agreeable and shall be at Landlord's expense. In no event shall the Premises be
less than 30,000 rentable square feet.
2.4 Land. "Land" shall mean the parcel of real property more
particularly described in Exhibit A-1 attached hereto, containing approximately
399,455.20 square feet of land.
2.5 Building. "Building" shall mean the Building constructed or to be
constructed on the Land, containing approximately 92,355 rentable square feet.
2.6 Improvements. "Improvements" shall mean the Building, the Parking
Area (as hereinafter defined), and all other improvements on the Land, including
landscaping thereon.
2.7 Property. "Property" shall mean the Land, the Building and the
Improvements and any fixtures and personal property used in operation and
maintenance of the Land, Building and Improvements, other than fixtures and
personal property of Tenant and other users of space in the Building.
2.8 Common Facilities. "Common Facilities" shall mean all of the
Property except the Premises and other space in the Building leased or held for
lease to other tenants. Common Facilities shall include the Parking Area and any
walks, driveways, lobby areas, halls, stairs and restrooms designated for common
use by Tenant and other users of space in the Building.
2.9 Parking Area. "Parking Area" shall mean that portion of the
Property which is for the parking of motor vehicles. The Parking Area is to be
shared by Tenant in common with other users of space in the Building. Provided,
however, Landlord shall provide Tenant three (3) parking spaces for each one
thousand (1,000) square feet of rentable square feet in the Premises, and shall
designate six (6) of such spaces as "Visitor Parking." The Parking Area shall be
non-exclusive for all tenants in the Building, and the Visitor Parking shall be
at a mutually agreeable location.
2.10 Park. The Property is located in and is part of Landlord's
development commonly known as One North Commerce Center.
2.11 Use of Common Facilities. Tenant is hereby granted the
non-exclusive right to use, in common with other users of space in the Building,
so much of the Common Facilities as are needed for the use of the Premises.
2.12 Covenant of Quiet Enjoyment. If Tenant promptly and punctually
complies with each of its obligations hereunder, it shall peacefully have and
enjoy the possession of the Premises during the Term (including any extension)
hereof, provided that no action of Landlord or other tenants working in other
space in the Building, or in repairing or restoring the Premises, shall be
deemed a breach of this covenant, or give to Tenant any right to modify this
Lease either as to term, rent payable, or other obligations to be performed,
provided that such activity does not materially interfere with Tenant's use and
enjoyment of the Premises.
2.13 Condition of Premises. Tenant covenants and agrees that, upon
taking possession of the
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Premises, it will have accepted the Premises "as-is" subject to latent defects
not readily discoverable by Tenant, and subject to Punch List items given by
Tenant to Landlord, if applicable, following completion of construction; and
Tenant waives any warranty of condition or habitability, suitability for
occupancy, use of habitation, fitness for a particular purpose, or of
merchantability, express or implied, relating to the Premises.
III. TERM OF LEASE.
3.1 Lease Term. "Lease Term" shall mean the period commencing on the
1st day of August, 1997 (the "Commencement Date") and expiring on the 31st day
of July, 2007 (the "Termination Date"); provided, however, that if construction
of the Building has not been substantially completed as of the date hereof, the
provisions of any Addendum hereto with respect to construction and completion of
the Building shall govern with respect to commencement and expiration of the
Lease Term. If Landlord, due to force majeure or Tenant delays, cannot deliver
possession of the Premises to Tenant on the Commencement Date, this Lease shall
not be void or voidable, no obligation of Tenant shall be affected thereby, and
neither Landlord, nor Landlord's agents shall be liable to Tenant for any loss
or damage resulting from the delay in delivery of possession; provided however,
that in such event, the Commencement Date of this Lease, and all other dates
that may be affected by its change, except the Termination Date, shall be
revised to conform to the date of Landlord's delivery of possession to Tenant.
If for any other reason, Landlord is unable to deliver possession of the
Premises to Tenant on or before August 1, 1997, the Lease shall not be void or
voidable, and no obligation of Tenant shall be affected thereby, provided that
Landlord shall provide Tenant with one (1) day's free Base Rent and Additional
Rent for each day delivery is delayed past August 1, 1997 for reasons other than
those due to force majeure or Tenant delays; and provided further that, in such
event, the Commencement Date of this Lease, and all other dates that may be
affected by this change, except the Termination Date, shall be revised to
conform to the date of Landlord's delivery of possession to Tenant.
The above, however, is subject to the provision that the period
permitted for the delay of delivery of possession of the Premises shall not
exceed sixty (60) days from the Commencement Date set forth in the first
sentence of this Section 3.1 (except those delays due to force majeure or caused
by Tenant delays shall be excluded in calculating such period). If possession
exceeds the permitted period, Tenant may terminate this Lease by written notice
to Landlord, in which case neither party shall have any further liability to the
other under this Lease; provided, that written notice shall be ineffective if
given after Tenant takes possession of any part of the Premises, or if given
more than seventy (70) days after the original Commencement Date, plus the time
of any Tenant delays.
During each calendar month during the time that Landlord is preparing
the Premises for delivery, in the event of force majeure or Tenant delay,
Landlord shall provide written notice to Tenant of such delay, the number of
days claimed as delay, and the nature of such delay.
Landlord and Tenant shall execute a Commencement Agreement in
recordable form on the Commencement Date confirming the actual Commencement
Date, the actual square footage of the Premises, Tenant's actual Proportionate
Share of the Building (as provided in Section 4.6 hereof), and a completed
Schedule 1 to be provided pursuant to Exhibit F hereof.
IV. RENT AND OTHER AMOUNTS PAYABLE.
4.1 Base Rent. Tenant covenants and agrees to pay to Landlord, without
prior demand and without offset, deduction or abatement, base rent for the full
ten year Lease Term in the amount (including Base Rent Increases) of
$4,093,284.00 ("Base Rent"), with a Minimum annual Base Rent of $372,732.00 for
the first twelve (12) months of the Lease Term, and with adjustments as
specified in Exhibit H.
4.2 Monthly Rent. Base Rent shall be payable monthly in advance, in
equal installments, adjusted annually, as shown on Exhibit H ("Monthly Rent"),
commencing on the first day of the first month
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of the Lease Term and continuing on the same day of each month thereafter for
the balance of the Lease Term, unless the commencement date of the Lease Term is
other than the first day of a calendar month, in which event rent shall be
payable on the commencement date for the remaining number of days in that month
prorated for such partial month, and thereafter as provided above.
4.3 Place of Payments. Base Rent and all other sums payable by Tenant
to Landlord under this Lease shall be paid to Landlord at P.O. Box 65157,
Charlotte, North Carolina 28265-0157, or such other place as Landlord may, from
time to time, designate in writing. In addition to such remedies as may be
provided under the Default provisions of this Lease, Landlord shall be entitled
to collect a late charge of four percent (4%) of the amount of each monthly
payment not received within ten (10) days of the date when due, and a charge of
the lower of the maximum lawful bad check fee or four percent (4%) of the amount
of any check given by Tenant and not paid when first presented by Landlord.
4.4 Lease a Net Lease and Rent Absolute. It is the intent of the
parties that the Base Rent provided in this Lease shall be a net payment to
Landlord; that the Lease shall continue for the full Lease Term notwithstanding
any occurrence preventing or restricting use and occupancy of the Premises,
including any damage or destruction affecting the Premises, and any action by
governmental authority relating to or affecting the Premises, except as
otherwise specifically provided in this Lease; that the Base Rent shall be
absolutely payable without offset, reduction or abatement for any cause, except
as otherwise specifically provided in this Lease; that Landlord shall not bear
any costs or expenses relating to the Premises or provide any services or do any
act in connection with the Premises, except as otherwise specifically provided
in this Lease; and that Tenant shall pay, in addition to Base Rent, Additional
Rent to cover costs and expenses relating to the Premises, the Common
Facilities, and the Property.
4.5 Additional Rent. Tenant covenants and agrees to pay, as Additional
Rent, its Proportionate Share of: (i) all costs and expenses incurred by
Landlord relating to the Premises; (ii) all costs and expenses relating to the
Common Facilities; and (iii) certain costs and expenses relating to the Property
and the Park, all as hereinafter provided and to pay all other amounts payable
by Tenant under the terms of this Lease ("Additional Rent").
4.6 Tenant's Proportionate Share. "Tenant's Proportionate Share" shall
mean the percentage derived by dividing the rentable square footage of the
Premises, as set forth in Section 2.3, by the rentable square footage within the
Building as set forth in Section 2.5. Tenant's Proportionate Share on the date
of this Lease is 43.31%, subject to revision as a result of measurement of the
Premises. Such percentage shall be appropriately adjusted in the event of
construction of additional building(s) on the Land if such building(s) share the
Common Facilities.
4.7 Monthly Deposits for Costs and Expenses Payable as Additional Rent.
Tenant covenants and agrees to pay to Landlord, monthly in advance, without
notice, on each day that payment of Monthly Rent is due, amounts as hereinafter
specified (the "Monthly Deposits") for: (i) payment of Taxes and Assessments (as
hereinafter defined); (ii) insurance premiums payable with respect to the
Property ("Insurance Premiums"); (iii) the cost and expense of maintaining and
servicing the HVAC unit serving the Premises (the "HVAC Expense"); and (iv)
utility charges, operating expenses and maintenance and repair expenses, as
specified in Article VII below, and other costs and expenses relating to the
Common Facilities and the Park (other than the Premises) (collectively, the
"Expenses"), and, if the Monthly Deposits are insufficient to pay the Expenses,
to pay to Landlord, within ten (10) days after demand by Landlord, amounts
necessary to provide Landlord with funds to pay the same. The Monthly Deposits
shall each be equal to the aggregate of 1/12 of the amount, as reasonably
estimated by Landlord, of the annual HVAC Expense and Tenant's Proportionate
Share of 1/12 of the amounts, as reasonably estimated by Landlord, of the annual
Expenses. Notwithstanding the foregoing, Tenant shall be responsible for placing
a maintenance contract substantially similar to the contract shown on Exhibit G
("HVAC Maintenance Agreement") on the HVAC system serving the Premises, and pay
all costs associated with such maintenance directly to the provider of such
maintenance. Tenant shall provide Landlord with copies of such maintenance
contracts. Landlord shall provide Tenant with copies of all warranty documents
or
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other information in Landlord's possession or control pertaining to any new
or existing HVAC units or systems in the Premises. Beginning on the first day of
the first month of the Lease Term, Tenant agrees to pay a Monthly Deposit of One
and 85/100 dollars ($1.85) per square foot, namely the sum of Six thousand one
hundred sixty-six and 67/100 dollars ($6,166.67) per month. Landlord shall cap
the increase in the cost for its and its property manager's hourly personnel who
work on the Premises at five (5%) per year. To the extent the Monthly Deposits
exceed the Expenses, the excess amount shall, at Landlord's option, except as
may be otherwise provided by law, either be paid to Tenant or credited against
future Monthly Deposits or against Base Rent, or other amounts payable by Tenant
under this Lease. The amount of Expenses payable by Tenant for the years in
which the Lease Term commences and expires shall be subject to the provisions
hereinafter contained in this Lease for proration of such amounts in such years.
Prior to the dates on which payment becomes delinquent for Expenses, Landlord
shall make payment of such amounts to the extent of funds from Monthly Deposits
available therefor and, upon request by Tenant, shall furnish Tenant with a copy
of any receipt for such payments. Except for Landlord's obligation to make
payments out of funds available from Monthly Deposits, the making of Monthly
Deposits by Tenant shall not limit or alter Tenant's obligation to pay any part
of the Expenses, as elsewhere provided in this Lease.
Tenant shall be permitted to review Landlord's books and records
concerning all such costs in this Section 4.7. If Tenant disputes the amount of
Additional Rent as set forth in the statement from the Landlord within ninety
(90) days after receipt thereof, and providing Tenant is not then in default
under this Lease, Tenant shall have the right on written notice to have
Landlord's books and records relating to Additional Rent audited by a qualified
professional selected by Tenant or by Tenant itself. If, after such audit,
Tenant still disputes the amount of Additional Rent, a certification as to the
proper amount shall be made by Landlord's independent certified public
accountant in consultation with Tenant's professional, which certification shall
be final and conclusive. If such audit reveals that Additional Rents were
overstated by five percent (5%) or more in the Lease year audited, Landlord
shall reimburse Tenant for its reasonable costs in doing the audit, and Landlord
shall, within thirty days after the certification, pay to Tenant the amount of
any overstatement which it had collected from Tenant. However, if such
certification does not show that Landlord had made such an overstatement, then
Tenant shall pay the costs of its professional. If the certification shows that
Landlord has undercharged Tenant, then Tenant shall, within thirty days, pay to
Landlord the amount of any undercharge.
Books and records necessary to accomplish any audit permitted under
this Section shall be retained for twenty-four (24) months after the end of each
Lease year, and on receipt of notice of Tenant's dispute of the Additional Rent,
shall be made available to Tenant to conduct the audit, which may be either at
the Property, or at Landlord's offices in the Research Triangle Area of North
Carolina.
In the event that the Tenant elects to have a professional audit of
Landlord's Additional Rent as provided in this Lease, such audit must be
conducted by an independent nationally or regionally recognized accounting firm
that is not being compensated by Tenant on a contingency fee basis. All
information obtained through such audit, as well as any compromise, settlement
or adjustment reached as a result of such audit, shall be held in strict
confidence by Tenant and its officers, agents, and employees; and as a condition
to such audit, the Tenant's auditor shall execute a written agreement agreeing
that the auditor is not being compensated on a contingency fee basis, and that
all information obtained through such audit, as well as any compromise,
settlement or adjustment reached as a result of such audit, shall be held in
strict confidence, and shall not be revealed in any manner to any person, except
upon the prior written consent of the Landlord, which consent may be withheld in
Landlord's sole discretion, or if required pursuant to any litigation between
Landlord and Tenant materially related to the facts disclosed by such audit, or
if required by law.
4.8 Park Expenses. In addition to all other amounts payable by Tenant
pursuant to the terms of this Lease, Tenant shall pay, as Additional Rent
payable pursuant to the provisions hereinabove for Monthly Deposits, Tenant's
Proportionate Share of the Park Expenses which are deemed allocated to
the Property. "Park Expenses" shall mean all items referred to in Section 4.5
hereof as Additional Rent which relate to the Park and which are not separately
attributable to the Property or any other portion of the Park.
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4.9 Proration at Commencement and Expiration of Term. Expenses shall be
prorated between Landlord and Tenant for the year in which the Lease Term
commences and for the year in which the Lease Term expires as of, respectively,
the date of commencement of the Lease Term and the date of expiration of the
Lease Term, except as hereinafter provided. Tenant shall be liable without
proration for the full amount of any Taxes and Assessments relating to
improvements, fixtures, equipment or personal property installed by or on behalf
of Tenant which are levied, assessed, or attributable to the Lease Term.
Proration of Expenses shall be made on the basis of the actual Expenses, billed
during the calendar years of the Lease Term. The Tenant's Proportionate Share of
Expenses for the years in which the Lease Term commences and expires shall be
paid and deposited with the Landlord through Monthly Deposits as hereinabove
provided, but, in the event actual Expenses for either year are greater or less
than as estimated for purposes of Monthly Deposits, appropriate adjustment and
payment shall be made between the parties, at the time the actual amounts are
known, as may be necessary to accomplish payment or proration, as herein
provided.
4.10 Security Deposit. At or prior to commencement of the Lease Term,
Tenant shall deposit with Landlord, the sum of $150,000.00, in cash or by letter
of credit drawn upon a financial institution located in North Carolina
reasonably acceptable to Landlord, as a security deposit ("Security Deposit").
Any such letter of credit shall be unconditional; and such letter of credit, or
a substitute thereof, shall continue for the full Lease Term, subject to annual
reduction, as provided below. Each letter of credit shall expressly provide that
it may only be terminated after thirty (30) days prior written notice to
Landlord. The Security Deposit shall be retained by Landlord and may be applied
by Landlord, to the extent necessary, to pay and cover any actual loss, cost,
damage or expense, including attorney's fees sustained by Landlord by reason of
the failure of Tenant to comply with any provision, covenant or agreement of
Tenant contained in this Lease. To the extent not necessary to cover such loss,
cost, damage or expense, the Security Deposit shall be returned to Tenant within
sixty (60) days after expiration of the Lease Term, or as may be otherwise
provided by law. The Security Deposit shall not be considered as an advance
payment of rent or as a measure of the loss, cost, damage or expense which is or
may be sustained by Landlord, and shall not be applied as an offset to the last
month's rent due from Tenant. In the event all or any portion of the Security
Deposit is applied by Landlord to pay any such loss, cost, damage or expense,
Tenant shall, from time to time, promptly upon demand, deposit with Landlord
such amounts as may be necessary to replenish the Security Deposit to its
original amount. Notwithstanding the above, if Tenant is not in default of this
Lease, Landlord agrees to return to Tenant the amount of Ten Percent (10%) of
the initial amount of the Security Deposit noted above, if made in cash, on the
first day of each Lease Year, commencing with the first day of the second Lease
Year. If the Security Deposit is made by letter of credit, Tenant may reduce the
amount of said letter of credit by 10% on the first day of each Lease Year,
commencing with the second Lease Year.
4.11 General Provisions as to Monthly Deposits and Security Deposit.
Landlord shall be free to commingle the Monthly Deposits and Security Deposit
with Landlord's own funds and Landlord shall not be obligated to pay interest to
Tenant on account of the Monthly Deposits and Security Deposit. In the event of
a transfer by Landlord of Landlord's interest in the Premises, Landlord may
deliver the Monthly Deposits and Security Deposit to the transferee of
Landlord's interest, and Landlord shall thereupon be discharged from any further
liability to Tenant with respect to such Monthly Deposits and Security Deposit.
In the event of a transfer by Tenant of Tenant's interest in the Premises
(Tenant's right to do being limited by Section 8.17), Landlord shall be entitled
to deliver the Monthly Deposits and Security Deposit to Tenant's successor in
interest and Landlord shall thereafter have no liability with respect to the
Monthly Deposits and Security Deposit.
V. TAXES AND ASSESSMENTS.
5.1 Covenant to Pay Taxes and Assessments. Tenant covenants and agrees
to pay, as
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Additional Rent, Tenant's Pro Rata Share of Taxes and Assessments, which are
billed during any calendar year falling partly or wholly within the Lease Term,
payable pursuant to the provisions hereinabove for Monthly Deposits. "Taxes and
Assessments" shall mean all taxes, assessments or other impositions, general or
special, ordinary or extraordinary, of every kind or nature, which may be
levied, assessed or imposed upon or with respect to the Property or any part
thereof.
5.2 Special Assessments. In the event any Taxes or Assessments are
payable in installments over a period of years, Tenant shall be responsible only
for installments billed during the calendar years within the Lease Term, with
proration, as above provided, of any installment payable prior to or after
expiration of the Lease Term.
5.3 New or Additional Taxes. Tenant's obligation to pay Tenant's Pro
Rata Share of Taxes and Assessments shall include any Taxes and Assessments of a
nature not presently in effect but which may hereafter be levied, assessed or
imposed upon Landlord or upon the Property if such tax shall be based upon or
arise out of the ownership, use or operation of, or the rents received from, the
Property, other than income taxes of Landlord. For the purposes of computing
Tenant's liability for such new type of tax or assessment, the Property shall be
deemed the only property of Landlord.
5.4 Landlord's Sole Right to Contest Taxes. Landlord shall have the
sole right to contest any Taxes or Assessments. Landlord shall pay to or credit
Tenant with Tenant's Pro Rata Share of any abatement, reduction or recovery of
any Taxes and Assessments attributable to the Lease Term, less Tenant's
Proportionate Share of all actual and reasonable costs and expenses incurred by
Landlord, including attorneys' fees, in connection with such abatement,
reduction or recovery.
VI. INSURANCE.
6.1 Casualty Insurance. Landlord covenants and agrees to obtain and
keep in full force and effect during the Lease Term, Casualty Insurance as
hereinafter defined. "Casualty Insurance" shall mean fire and extended coverage
insurance with respect to the Property, in an amount equal to the full
replacement cost thereof, with coinsurance clauses of no less than 80%, and with
coverage, at Landlord's option, by endorsement or otherwise, for all risks,
vandalism and malicious mischief, sprinkler leakage, boilers, and rental loss
and with a deductible in an amount for each occurrence as Landlord, in its sole
discretion, may determine from time to time. Casualty Insurance obtained by
Landlord shall name Tenant as a certificate holder and may, at Landlord's
option, name any mortgagee or holder of a deed of trust as an insured party as
its interest may appear. Tenant covenants and agrees to pay its Proportionate
Share of the cost of Casualty Insurance obtained by Landlord as Additional Rent,
payable pursuant to the provisions hereinabove for Monthly Deposits. Tenant
shall be responsible for obtaining, at Tenant's cost and expense, insurance
coverage for property of Tenant, and Tenant shall have no claim against Landlord
for damage to its property or interruption of its business, unless caused by
Landlord's negligence or other wrongful act or omission and not covered by the
insurance coverages which Tenant is required to maintain under this Lease.
6.2 Liability Insurance. Tenant covenants and agrees at its expense to
obtain and keep in full force and effect during the Lease Term Liability
Insurance as hereinafter defined. "Liability Insurance" shall mean comprehensive
general liability insurance covering public liability with respect to the
ownership, use and operation of the Premises, with combined single limit
coverage of not less than $2,000,000, with endorsements for assumed contractual
liability with respect to the liabilities assumed by Tenant under Section 8.24
of this Lease, and with a maximum deductible of $10,000.00, unless otherwise
approved in writing by Landlord. Landlord covenants and agrees to obtain and
keep in full force and effect during the Lease Term public liability insurance
with respect to the ownership, use and operation of the Property, and the Common
Facilities, but excluding the Premises and space leased to other tenants, with
combined single limit coverage of not less than $2,000,000. Tenant also
covenants and agrees to pay Tenant's Proportionate Share of the premiums and
costs of such liability insurance as Additional Rent, payable pursuant to the
provisions hereinabove for Monthly Deposits.
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6.3 General Provisions Respecting Insurance. Except as otherwise
approved in writing by Landlord, all insurance obtained by Tenant shall be on
forms and with insurers selected or approved by Landlord, which approval shall
not be unreasonably withheld; shall name Landlord and the holder of any first
mortgage or deed of trust encumbering the Property as insured parties, as their
interests may appear; shall contain a waiver of rights of subrogation as among
Tenant, Landlord and the holder of any such first mortgage or deed of trust; and
shall provide, by certificate of insurance or otherwise, that the insurance
coverage shall not be cancelled or altered except upon thirty (30) days prior
written notice to Landlord and the holder of any such first mortgage or deed of
trust. Certificates of insurance obtained by Tenant shall be delivered to
Landlord, who may deposit the same with the holder of any such first mortgage or
deed of trust. Landlord and Tenant hereby waive any rights each may have against
the other for loss or damage to their respective property where such loss is
caused by a peril of the type covered by the insurance coverages which either
party is required to maintain under the terms of this Lease, and each party, on
behalf of its insurer, waives any right of subrogation that the property insurer
might otherwise have against the other party.
6.4 Cooperation in the Event of Loss. Landlord and Tenant shall
cooperate with each other in the collection of any insurance proceeds which may
be payable in the event of any loss, including the execution and delivery of any
proof of loss or other actions required to effect recovery.
VII. UTILITY, OPERATING, MAINTENANCE AND REPAIR EXPENSES.
7.1 Utility Charges. Tenant covenants and agrees to pay all charges for
water, sewage disposal, gas, electricity, light, heat, power, telephone or other
utility services used, rendered or supplied to or for the Premises and to
contract for the same in Tenant's own name. Tenant also covenants and agrees to
pay to Landlord Tenant's Proportionate Share of any such charges relating to
Common Facilities or which are not separately metered, or billable to premises
in the Building leased or held for lease to tenants, such charges to be payable
pursuant to the provisions hereinabove for Monthly Deposits.
7.2 Tenant's Obligations. Tenant covenants and agrees to pay all costs
and expenses of operations on or relating to the Premises, including costs and
expenses for utilities, janitorial and cleaning services, security services for
Tenant's Premises only, painting within the Premises, replacement of damaged or
broken glass within the Premises and other breakable materials in the Premises
and replacement of lights and light fixtures in the Premises, and to contract
for the same in Tenant's own name. Tenant also covenants and agrees to pay to
Landlord the HVAC Expense, as specified in Section 7.3, and to pay to Landlord,
Tenant's Proportionate Share of any such costs and expenses incurred by Landlord
relating to Common Facilities or which are not separately allocated to premises
in the Building leased or held for lease to tenants, such costs and expenses to
be payable pursuant to the provisions hereinabove for Monthly Deposits.
Notwithstanding the foregoing, Tenant shall be responsible for placing a
maintenance contract on the HVAC system serving the Premises, and pay all costs
associated with such maintenance directly to the provider of such maintenance.
Tenant shall provide Landlord with copies of such maintenance contracts.
7.3 Maintenance and Repair Expenses. Tenant covenants and agrees to
maintain, repair, replace and keep the Premises and all improvements, fixtures
and personal property thereon in good, safe and sanitary condition, order and
repair and in accordance with all applicable laws, ordinances, orders, rules and
regulations (including, without limitation, the Americans with Disabilities Act
"ADA") of governmental authorities having jurisdiction, now existing or
hereafter enacted; to pay all costs and expenses in connection therewith; and to
contract for the same in Tenant's own name; and to pay to Landlord, pursuant to
the provisions hereinabove for Monthly Deposits, Tenant's Proportionate Share of
any such costs and expenses incurred by Landlord relating to Common Facilities
or which are not separately allocated to premises in the Building leased or held
for lease to tenants. Such costs and expenses as to Common Facilities may
include the costs and expenses of maintenance and upkeep of grass, trees, shrubs
and landscaping, including replanting where necessary; keeping parking areas,
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landscaped areas, sidewalks and driveways safe and secure (with guards or
watchmen where Landlord deems necessary) and free from litter, dirt, debris,
snow, and obstructions; and ordinary maintenance and repair of the Property and
Improvements. All maintenance and repairs by Tenant shall be done promptly, in a
good and workmanlike fashion, and without diminishing the original quality of
the Premises or the Property. Landlord shall be responsible for and shall bear
the costs and expenses of replacement of, or extraordinary maintenance and
repairs to, roofs, exterior walls, including the exterior component parts
thereof, the Parking Areas (except that Tenant shall be responsible for any
damage to the Parking Areas caused by Tenant or Tenant's guests', invitees', or
contractors' overloading or misuse of such Parking Areas), and structural
elements of the Building and Improvements. Landlord shall further be responsible
for and shall bear costs and expenses for the repair or replacement of all HVAC
systems serving the Premises in the amounts in excess of $5,000.00 per
occurrence per year, or $10,000.00 per Lease Year in the aggregate, during the
term of this Lease, unless the need for such replacement or repair is caused by
the act or neglect of Tenant.
VIII. OTHER COVENANTS OF TENANT.
8.1 Limitation on Use by Tenant. Tenant covenants and agrees to use the
Premises only for the following use or uses sales, administration, research and
development, manufacturing and distribution, and for no other purposes, except
with the prior written consent of Landlord.
8.2 Compliance with Laws. Tenant covenants and agrees that nothing
shall knowingly or intentionally be done or kept on the Premises in violation of
any law, ordinance, order, rule or regulation of any governmental authority
having jurisdiction, and that the Premises shall be used, kept and maintained in
compliance with any such law, ordinance, order, rule or regulation (now existing
or hereafter enacted) and with the certificate of occupancy issued for the
Building and the Premises. Tenant shall promptly remedy any such condition upon
discovery in accordance with the terms and provisions of this Lease.
8.3 Compliance with Insurance Requirements. Tenant covenants and agrees
that nothing shall knowingly or intentionally be done or kept on the Premises
which might make unavailable or increase the cost of insurance maintained with
respect to the Premises or the Property, which might increase the insured risks
or which might result in cancellation of any such insurance.
8.4 No Waste or Impairment of Value. Tenant covenants and agrees that
nothing shall knowingly or intentionally be done or kept on the Premises or the
Property which might impair the value of the Premises or the Property, or which
would constitute waste. Tenant shall promptly remedy any such condition upon
discovery in accordance with the terms and provisions of this Lease.
8.5 No Hazardous Use. Tenant covenants and agrees that nothing shall
knowingly or intentionally be done or kept on the Premises or the Property and
that no improvements, changes, alterations, additions, maintenance or repairs
shall be made to the Premises which might be unsafe or hazardous to any person
or property. Tenant shall at all times comply with its representations,
warranties and covenants as set forth in Exhibit C. Tenant shall promptly remedy
any such condition upon discovery in accordance with the terms and provisions of
this Lease.
8.6 No Structural or Overloading. Tenant covenants and agrees that
nothing shall knowingly or intentionally be done or kept on the Premises or the
Building and that no improvements, changes, alterations, additions, maintenance
or repairs shall be made to the Premises which might impair the structural
soundness of the Building, which might result in an overload of the weight
capacity of floors or of electricity lines serving the Building, or which might
interfere with electric or electronic equipment in the Building or on any
adjacent or nearby property. In the event of violations hereof, Tenant covenants
and agrees to remedy immediately the violation at Tenant's expense and in
compliance with all requirements of governmental authorities and insurance
underwriters. Tenant shall promptly remedy any such condition
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upon discovery in accordance with the terms and provisions of this Lease.
8.7 No Nuisance, Noxious or Offensive Activity. Tenant covenants and
agrees that no noxious or offensive activity shall knowingly or intentionally be
carried on upon the Premises or the Property; nor shall anything knowingly or
intentionally be done or kept on the Premises or the Property which may be or
become a public or private nuisance or which may cause embarrassment,
disturbance, or annoyance to others in the Building or on adjacent or nearby
property. Tenant shall promptly remedy any such condition upon discovery in
accordance with the terms and provisions of this Lease.
8.8 No Annoying Lights, Sounds or Odors. Tenant covenants and agrees
that no light shall knowingly or intentionally be emitted from the Premises
which is unreasonably bright or causes unreasonable glare; no sound shall
knowingly or intentionally be emitted from the Premises which is unreasonably
loud or annoying; and no odor shall knowingly or intentionally be emitted from
the Premises which is or might be noxious or offensive to others in the Building
or on adjacent or nearby property. Tenant shall promptly remedy any such
condition upon discovery in accordance with the terms and provisions of this
Lease.
8.9 No Unsightliness. Tenant covenants and agrees that no unsightliness
shall knowingly or intentionally be permitted on the Premises or the Property.
Without limiting the generality of the foregoing, all unsightly conditions,
equipment, objects and conditions shall be kept enclosed within the Premises;
hallways adjoining the Premises may not be used for discarding or storing any
materials; no refuse, scrap, debris, garbage, trash, bulk materials or waste
shall be kept, stored or allowed to accumulate on the Premises or the Property
except as may be enclosed within the Premises or which is placed for disposal at
or in the refuse containers serving the Premises; all pipes, wires, poles,
antenna and other facilities for utilities or the transmission or reception of
audio or visual signals or electricity shall be kept and maintained underground
or enclosed within the Premises or appropriately screened from view; and no
temporary structure shall be placed or permitted on the Premises or the Property
without the prior written consent of Landlord. Tenant shall promptly remedy any
such condition upon discovery in accordance with the terms and provisions of
this Lease.
8.10 No Animals. Tenant covenants and agrees that no animals shall
knowingly or intentionally be permitted or kept on the Premises or the Property,
other than seeing eye dogs or laboratory animals. All such laboratory animals
shall be kept and maintained only for use in the normal course of Tenant's
business, and under humane conditions and in a manner which does not produce
noise or odors outside of the Premises or disturb other tenants of the Property.
8.11 Restriction on Signs and Exterior Lighting. Tenant may install
only such exterior signs as comply with Landlord's "Signage Criteria," a copy of
which is attached as Exhibit D-1. Tenant covenants and agrees that no other
signs or advertising devices of any nature shall be erected or maintained by
Tenant on the Premises or the Property and no exterior lighting shall be
permitted on the Premises or the Property except as approved in writing by
Landlord, which shall not be unreasonably withheld, conditioned or delayed.
8.12 No Violation of Covenants. Tenant covenants and agrees not to
knowingly or intentionally commit, suffer or permit any violation of any
covenants, conditions or restrictions affecting the Premises or the Property,
which are recorded with the Wake County Registry, and listed on Exhibit D-2
attached hereto.
8.13 Restriction on Changes and Alterations. Tenant may not make any
structural or interior alterations which change the Premises from the condition
that existed at the time Tenant takes possession thereof without the prior
written approval of Landlord, such approval not to be unreasonably
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withheld or delayed. All such alterations shall be performed by contractors
mutually acceptable to and approved by Landlord and Tenant in writing. Where the
alteration may only be made after issuance of a building permit by the
applicable governmental authority, Tenant shall provide Landlord's managing
agent with two (2) complete sets of construction drawings with the request for
alteration. If Landlord's contractor is chosen to perform the alteration,
Landlord's managing agent shall determine the cost of the work to be done
pursuant to such drawings (such cost to include a construction supervision fee
of 5% of such cost to be paid to Landlord's managing agent), and submit the cost
to Tenant. At the time the alteration in question is approved by Landlord,
Tenant and Landlord shall agree in writing as to whether such alteration shall
be left in place or removed by Tenant at the end of the Lease Term, or Tenant's
vacation of the Premises; and Tenant shall comply with such agreement of the
parties. Except for any such alterations which are to be left in place by
Tenant, at the termination of this Lease or Tenant's vacation of the Premises,
Tenant shall restore (at Tenant's sole cost and expense) the Premises to the
same condition as existed at the commencement of the term, ordinary wear and
tear and damage by insured casualty only excepted.
If Tenant removes any alterations pursuant to the foregoing provisions
of this Section, Tenant, at its expense, shall promptly repair any damage to the
Premises resulting from such removal.
All alterations shall be performed in a good and workmanlike manner, in
compliance with all governmental laws and regulations, and free of mechanics or
other similar liens.
8.14 No Mechanics Liens. Tenant covenants and agrees not to permit or
suffer, and to cause to be removed and released, any mechanics, materialmen or
other lien on account of supplies, machinery, tools, equipment, labor or
material furnished or used in connection with the construction, alteration,
improvement, addition to or repair of the Premises by, through or under Tenant.
Tenant shall have the right to contest, in good faith and with reasonable
diligence, the validity of any such lien or claimed lien, provided that Tenant
shall give to Landlord such security as may be reasonably requested by Landlord
to insure the payment of any amounts claimed, including interests and costs, and
to prevent any sale, foreclosure or forfeiture of any interest in the Property
on account of any such lien and provided that, on final determination of the
lien or claim for lien, Tenant shall immediately pay any judgment rendered, with
interests and costs, and will cause the lien to be released and any judgment
satisfied.
8.15 No Other Encumbrances. Tenant covenants and agrees not to obtain
any financing secured by Tenant's interest in the Premises and not to encumber
the Premises, or Landlord or Tenant's interest therein, without the prior
written consent of Landlord, and to keep the Premises free from all liens and
encumbrances except those created by Landlord.
8.16 Subordination to Landlord Mortgages. Tenant covenants and agrees
that, at Landlord's option, this Lease and Tenant's interest in the Premises
shall be junior and subordinate to any mortgage or deed of trust now or
hereafter encumbering the Property if in any mortgage or deed of trust given
hereunder, the mortgagee or beneficiary under such mortgage or deed of trust
agrees in writing, or adequate provision is made in the mortgage or deed of
trust, that, in the event of foreclosure of any such mortgage or deed of trust,
Tenant shall not be disturbed in its possession of the Premises conditioned only
on Tenant attorning to the party acquiring title to the Property as the result
of such foreclosure. Tenant covenants and agrees, within fifteen (15) days of
request of Landlord, to execute such documents as may be necessary or
appropriate to confirm and establish this Lease as subordinate to any such
mortgage or deed of trust in accordance with the foregoing provisions.
Alternatively, Tenant covenants and agrees that, at Landlord's request, Tenant
shall execute documents as may be necessary to establish this Lease and Tenant's
interest in the Premises as superior to any such mortgage or deed of trust.
8.17 No Assignment or Subletting. Tenant may not assign or encumber
this Lease or its interest in the Premises arising under this Lease, and may not
sublet any part or all of the Premises without the written consent of Landlord
first had and obtained, not to be unreasonably withheld, conditioned or delayed.
Any assignment or sublease to which Landlord may consent (one consent not being
any basis
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that Landlord should grant any further consent) shall not relieve Tenant of any
or all of its obligations hereunder, unless otherwise permitted by Landlord in
writing. For the purpose of the Section 8.17, the word "assignment" shall be
defined and deemed to include the following: (i) if Tenant is a partnership, the
withdrawal or change, whether voluntary, involuntary or by operation of law of
partners owning thirty percent (30%) or more of the partnership, or the
dissolution of the partnership; (ii) if Tenant consists of more than one person,
an assignment, whether voluntary, involuntary, or by operation of law, by one
person to one of the other persons that is a Tenant; (iii) if Tenant is a
corporation, any dissolution or reorganization of Tenant, or the sale or other
transfer of a controlling percentage (hereafter defined) of capital stock of
Tenant other than to an affiliate or subsidiary or the sale of fifty-one percent
(51%) in value of the assets of Tenant; (iv) if Tenant is a Limited Liability
Company, the change of members whose interest in the Company is 50% or more. The
phrase "controlling percentage" means the ownership of, and the right to vote,
stock possessing at least fifty-one percent (51%) of the total combined voting
power of all classes of Tenant's capital stock issued, outstanding and entitled
to vote for the election of directors, or such lesser percentage as is required
to provide actual control over the affairs of the corporation. Acceptance of
Rent by Landlord after any non-permitted assignment shall not constitute
approval thereof by Landlord. Notwithstanding the foregoing provisions of this
Section 8.17, Tenant may assign or sublease part or all of the Premises without
Landlord's consent to: (i) any corporation or partnership that controls, is
controlled by, or is under common control with, Tenant; or (ii) any corporation
resulting from the merger or consolidation with Tenant or to any entity that
acquires all of Tenant's assets as a going concern of the business that is being
conducted on the Premises, as long as the assignee or sublessee is a bona fide
entity and assumes the obligations of Tenant, and continues the same use as
permitted under Section 8.1. However, Landlord must be given prior written
notice of any such assignment or subletting, and failure to do so shall be a
default hereunder. Landlord will never consent to an assignment or sublease that
might result in a use that conflicts with the rights of an existing tenant.
In no event shall this Lease be assignable by operation of any law, and
Tenant's rights hereunder may not become, and shall not be listed by Tenant as
an asset under any bankruptcy, insolvency or reorganization proceedings. Tenant
is not, may not become, and shall never represent itself to be an agent of
Landlord, and Tenant acknowledges that Landlord's title is paramount, and that
it can do nothing to affect or impair Landlord's title.
If this Lease shall be assigned or the Premises or any portion thereof
sublet by Tenant at a rental that exceeds the rentals to be paid to Landlord
hereunder, attributable to the Premises or portion thereof so assigned or
sublet, then one half of any such excess, net of all costs and fees paid by
Tenant in such assignment and subletting, shall be paid over to Landlord by
Tenant.
8.18 Annual Financial Statements. Tenant covenants and agrees to
furnish to Landlord annually, within ninety (90) days after the end of each
fiscal year of Tenant, copies of financial statements of Tenant, audited if
requested by Landlord, by a certified public accountant, and agrees that
Landlord may deliver any such financial statements to any existing or
prospective mortgagee or purchaser of the Property. The financial statements
shall include a balance sheet as of the end of, and a statement of profit and
loss for, the preceding fiscal year of Tenant.
8.19 Payment of Income and Other Taxes. Tenant covenants and agrees to
pay promptly when due all property taxes on personal property of Tenant on the
Premises and all federal, state and local income taxes, sales taxes, use taxes,
Social Security taxes, unemployment taxes and taxes withheld from wages or
salaries paid to Tenant's employees, the nonpayment of which might give rise to
a lien on the Premises or Tenant's interest therein, and to furnish, if
requested by Landlord, written evidence of such payments.
8.20 Estoppel Certificates. Tenant covenants and agrees to execute,
acknowledge and deliver to Landlord, within ten (10) business days of Landlord's
written request, a written statement certifying that this Lease is unmodified
(or, if modified, stating the modifications) and in full force and effect;
stating the dates to which Base Rent has been paid; stating the amount of the
Security Deposit held by Landlord;
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stating the amount of Monthly Deposits held by Landlord for the then tax and
insurance year; and stating whether or not Landlord is in known default under
this Lease (and, if so, specifying the nature of the default). Tenant agrees
that such statement may be delivered to and relied upon by any existing or
prospective mortgagee or purchaser of the Property.
8.21 Landlord Right to Inspect and Show Premises and to Install For
Sale Signs. Tenant covenants and agrees that Landlord and authorized
representatives of Landlord shall have the right to enter the Premises at any
reasonable time during ordinary business hours, given reasonable notice to
Tenant, for the purposes of inspecting or maintaining the same, and making such
repairs, alterations or changes as Landlord deems necessary, or performing any
obligations of Tenant which Tenant has failed to perform hereunder or for the
purposes of showing the Premises to any existing or prospective mortgagee or
purchaser of the Property or the Premises. However, Landlord shall have the
right to enter without notice and during non-business hours in cases of
emergency. Tenant covenants and agrees that Landlord may at any time and from
time to time place on the Property or the Premises a sign advertising the
Property or the Premises for sale or for lease. Landlord may show the Premises
to a prospective lessee of the Premises only during the last nine (9) months of
the Lease Term, including any properly exercised option periods.
8.22 Landlord Title to Fixtures, Improvements and Equipment. Tenant
covenants and agrees that all fixtures and improvements on the Premises and all
equipment and personal property relating to the use and operation of the
Premises (as distinguished from operations incident to the business of Tenant),
including all plumbing, heating, lighting, electrical and air conditioning
fixtures and equipment, whether or not attached to or affixed to the Premises,
and whether now or hereafter located upon the Premises, shall be and remain the
property of the Landlord upon expiration of the Lease Term. Tenant's equipment,
machinery and other personal property shall at all times remain the property of
the Tenant.
8.23 Removal of Tenant's Equipment. Tenant covenants and agrees to
remove, not later than the expiration date of the Lease Term, all of Tenant's
Equipment, as hereinafter defined. "Tenant's Equipment" shall mean all
equipment, apparatus, machinery, signs, furniture, furnishings and personal
property used in the operation of the business of Tenant (as distinguished from
the use and operation of the Premises). If such removal shall injure or damage
the Premises, Tenant covenants and agrees, at its sole cost and expense, at or
prior to the expiration of the Lease Term, to repair such injury and damage in
good and workmanlike fashion and to place the Premises in the same condition as
the Premises would have been in if such Tenant's Equipment had not been
installed. Unless otherwise provided for in writing by Landlord, if Tenant fails
to remove any Tenant's Equipment by the expiration of the Lease Term, Landlord
may, at its option, keep and retain any such Tenant's Equipment or dispose of
the same and retain any proceeds thereof and Landlord shall be entitled to
recover from Tenant any costs or expenses of Landlord in removing the same and
in restoring the Premises in excess of the actual proceeds, if any, received by
Landlord from disposition thereof.
8.24 Indemnification. Subject to the waiver of subrogation provisions
of this Lease, each party (the "Indemnitor"), to the extent caused by
Indemnitor, covenants and agrees to protect, indemnify and save the other party
(the "Indemnitee") harmless from and against all liability, obligations, claims,
damages, penalties, causes of action, costs and expenses, including attorneys'
fees at all tribunal levels, imposed upon, incurred by or asserted against
Indemnitee by reason of (a) any accident, injury to or death of any person or
loss of or damage to any tangible property occurring on or about the Premises;
(b) any act or omission of Indemnitor or Indemnitor's officers, employees,
agents, guests or invitees or of anyone claiming by, through or under
Indemnitor; (c) any use which may be made of, or condition existing upon, the
Premises; (d) any improvements, fixtures or equipment upon the Premises; (e) any
failure on the part of Indemnitor to perform or comply with any of the
provisions, covenants or agreements of Indemnitor contained in this Lease; (f)
any violation of any law, ordinance, order, rule or regulation of governmental
authorities having jurisdiction by Indemnitor or Indemnitor's officers,
employees, agents, guests or invitees or by anyone claiming by, through or under
Indemnitor; and (g) any repairs,
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maintenance or changes to the Premises by, through or under Indemnitor.
Indemnitor further covenants and agrees that, in case any action, suit or
proceeding, is brought against Indemnitee by reason of any of the foregoing,
Indemnitor will, at Indemnitor's sole cost and expense, defend Indemnitee in any
such action, suit or proceeding, with counsel acceptable to Indemnitee.
8.25 Waiver by Parties. Tenant and Landlord waive and release any
claims Tenant or Landlord may have against the first parties' officers, agents
or employees for loss, damage or injury to person or property sustained by the
second parties' officers, agents, employees, guests, invitees or anyone claiming
by, through or under the second party resulting from any cause whatsoever other
than the first parties' gross negligence or willful misconduct.
8.26 Release upon Transfer by Landlord. In the event of a transfer by
Landlord of the Property or of Landlord's interest as Landlord under this Lease,
Landlord's successor or assign shall take subject to and be bound by this Lease
and, in such event, Tenant covenants and agrees that: Landlord shall be released
from all obligations of Landlord under this Lease, except obligations which
arose and matured prior to such transfer by Landlord; that Tenant shall
thereafter look solely to Landlord's successor or assign for satisfaction of the
obligations of Landlord under this Lease; and that Tenant shall attorn to such
successor or assign.
8.27 Compliance with ADA. Landlord, at Landlord's sole cost and
expense, agrees to bring the Building to ADA compliance prior to Tenant's
occupancy of the Premises in accordance with the report prepared by HagerSmith
Design, P.A. dated October 8, 1996. Tenant covenants and agrees that nothing
shall be done or kept by Tenant on the Premises or in the Common Facilities in
violation of ADA, and that Tenant shall maintain, repair, replace, keep and use
the Premises and all improvements, fixtures and personal property therein and
thereon, and conduct its business within the Premises, in accordance with the
requirements of ADA. If any improvements, alterations or repairs to the Premises
are required by governmental authority under ADA or its implementing regulations
or guidelines, Tenant shall be solely responsible for all non-structural items
and any structural items due to Tenant's specific use of the Premises. Tenant
covenants and agrees to pay all costs and expenses in connection with the
performance of its obligations under this Section 8.27. Nothing contained in
this Section 8.27 shall be construed to limit the generality of the provisions
of Section 8.2 respecting Tenant's obligation to comply with applicable laws and
of the provisions of Section 8.13 respecting Tenant's obligation to comply with
ADA and other applicable laws in connection with any Change.
IX. DAMAGE OR DESTRUCTION.
9.1 Tenant's Notice of Damage. If any portion of the Premises shall be
damaged or destroyed by fire or other casualty, Tenant shall give prompt written
notice thereof to Landlord ('Tenant's Notice of Damage").
9.2 Options to Terminate if Damage Substantial. Upon receipt of
Tenant's Notice of Damage, Landlord shall promptly proceed to determine the
nature and extent of the damage or destruction and to estimate the time
necessary to repair or restore the Premises. As soon as reasonably possible,
Landlord shall give written notice to Tenant stating Landlord's estimate of the
time necessary to repair or restore the Premises ("Landlord's Notice of Repair
Time"). If Landlord reasonably estimates that repair or restoration of the
Premises cannot be completed within 150 days from the time of Tenant's Notice of
Damage, Landlord and Tenant shall each have the option to terminate this Lease.
In the event, however, that the damage or destruction was caused by the grossly
negligent act or omission of Tenant or Tenant's officers, employees, agents,
guests or invitees or of anyone claiming by, through or under Tenant, Landlord
shall have the option to terminate this Lease by written notice delivered to
Tenant within 45 days after such casualty if Landlord reasonably estimates that
the repair or restoration cannot reasonably be completed within 150 days from
the time of Tenant's Notice of Damage, but Tenant shall not have the option to
terminate this Lease. Any option granted hereunder shall be exercised by written
notice to the other party given within 10 days after Landlord's Notice of Repair
Time. In the event either Landlord or Tenant
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exercises its option to terminate this Lease, the Lease Term shall expire 10
days after the notice by either Landlord or Tenant exercising such party's
option to terminate this Lease. In the event of termination of this Lease under
the provisions hereof, Landlord shall refund to Tenant such amounts of Base Rent
and Additional Rent theretofore paid by Tenant as may be applicable to the
period subsequent to the time of Tenant's Notice of Damage less the reasonable
value of any use or occupation of the Premises by Tenant subsequent to the time
of Tenant's Notice of Damage.
9.3 Obligations to Repair and Restore. In the event there are
sufficient funds, and such funds are available to Landlord to repair and restore
and repair of the Premises, and restoration can be completed within the period
specified in Section 9.2, in Landlord's reasonable estimation, this Lease shall
continue in full force and effect and Landlord shall proceed forthwith to cause
the Premises to be repaired and restored with reasonable diligence and there
shall be abatement of Base Rent and Additional Rent proportionate to the extent
of the space and period of time that Tenant is unable to use and enjoy the
Premises. In the event of a full casualty, all Rents shall be abated during the
period in which Landlord is restoring the Premises; and in the event of a
partial casualty, all Rents shall be proportionally abated, unless such full or
partial casualty is caused by the negligence or other wrongful act or omission
of Tenant and is not covered by the insurance coverage which Landlord is
required to maintain under this Lease, in which case Rent shall not abate.
9.4 Application of Insurance Proceeds. The proceeds of any Casualty
Insurance maintained on the Premises, other than casualty insurance maintained
by Tenant on fixtures and personal property of Tenant, shall be paid to and
become the property of Landlord, subject to any obligation of Landlord to cause
the Premises to be repaired and restored, which obligation is contingent on
casualty insurance proceeds adequate to complete the repair or restoration being
available to Landlord.
X. CONDEMNATION.
10.1 Taking -- Substantial Taking -- Insubstantial Taking. A "Taking"
shall mean the taking of all or any portion of the Premises as a result of the
exercise of the power of eminent domain or condemnation for public or
quasi-public use or the sale of all or part of the Premises under the threat of
condemnation. A "Substantial Taking" shall mean a Taking of so much of the
Premises that the Premises cannot thereafter be reasonably used by Tenant for
carrying on, at substantially the same level or scope, the business theretofore
conducted by Tenant on the Premises. An "Insubstantial Taking" shall mean a
Taking such that the Premises can thereafter continue to be used by Tenant for
carrying on, at substantially the same level or scope, the business theretofore
conducted by Tenant on the Premises.
10.2 Termination on Substantial Taking. If there is a Substantial
Taking with respect to the Premises, the Lease Term shall expire on the date of
vesting of title pursuant to such Taking. In the event of termination of this
Lease under the provisions hereof, Landlord shall refund to Tenant such amounts
of Base Rent and Additional Rent theretofore paid by Tenant as may be applicable
to the period subsequent to the time of termination of this Lease.
10.3 Restoration on Insubstantial Taking. In the event of an
Insubstantial Taking, this Lease shall continue in full force and effect,
Landlord shall proceed forthwith to cause the Premises to be restored as near as
may be to the original condition thereof and there shall be abatement of Base
Rent and Additional Rent proportionate to the extent of the space so taken.
During the period of restoration, Landlord may, at its option, require Tenant to
arrange for and handle the restoration of the Premises, in which case Landlord
shall furnish Tenant with sufficient funds for such restoration, at the time or
times such funds are needed, utilizing the proceeds of any awards or
consideration received as a result of the Taking and any additional funds
necessary to cover the costs of restoration.
10.4 Right to Award. The total award, compensation, damages or
consideration received or receivable as a result of a Taking ("Award") shall be
paid to and be the property of Landlord, whether the Award shall be made as
compensation for diminution of the value of the leasehold or the fee of the
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Premises or otherwise and Tenant hereby assigns to Landlord, all of Tenant's
right, title and interest in and to any such Award. Tenant may make a claim for
all expenses incurred by Tenant as a result of a taking, so long as such
expenses are covered by a separate Award which does not reduce Landlord's Award.
Tenant covenants and agrees to execute, immediately upon demand by Landlord,
such documents as may be necessary to facilitate collection by Landlord of any
such Award. Tenant, however, shall be entitled to apply for compensation, if
available, for its relocation and for any of its personal property taken.
XI. DEFAULTS BY TENANT.
If Tenant: (i) fails to pay, within ten (10) days after the due date,
any Rent, or any other sum of money which Tenant is obligated to pay, as
provided in this Lease; or (ii) breaches any other agreement, covenant or
obligation herein set forth and such breach shall continue and not be remedied
within thirty (30) days after Landlord shall have given Tenant written notice
specifying the breach, or if such breach cannot, with due diligence, be cured
within said period of thirty (30) days and Tenant does not within said thirty
(30) day period commence and thereafter with reasonable diligence completely
cure the breach within thirty (30) days after notice; or (iii) files (or has
filed against it and not stayed or vacated within sixty (60) days after filing)
any petition or action for relief under any creditor's law (including
bankruptcy, reorganization, or similar action), either in state or federal
court; or (iv) makes any transfer in fraud of creditors as defined in Section
548 of the United States Bankruptcy Code (11 U.S.C. 548, as amended or
replaced), has a receiver appointed for its assets (and appointment shall not
have been stayed or vacated within thirty (30) days), or makes an assignment for
benefit of creditors; then Tenant shall be in default hereunder, and, in
addition to any other lawful right or remedy which it may have, Landlord may do
the following: (i) terminate this Lease; (ii) repossess the Premises, and with
or without terminating, relet the same at such amount as Landlord deems
reasonable; and if the amount for which the Premises is relet is less than
Tenant's Rent and all other obligations of Tenant to Landlord hereunder, Tenant
shall immediately pay the difference or demand to Landlord, but if in excess of
Tenant's Rent, and all other obligations of Tenant hereunder, the entire amount
obtained from such reletting shall belong to Landlord, free of any claim of
Tenant thereto; or (iii) upon obtaining any court authorization, lock the
Premises and deny Tenant access thereto. All reasonable expenses of Landlord in
repairing, restoring, or altering the Premises for reletting as general office
or laboratory space, together with leasing fees and all other expenses in
seeking and obtaining a new tenant, shall be charged to and be a liability of
Tenant. Landlord's reasonable attorneys' fees in pursuing any of the foregoing
remedies, or in collecting any Rent due by Tenant hereunder, shall be paid by
Tenant.
Tenant further agrees that Landlord may obtain an order for summary
ejectment from any court of competent jurisdiction without prejudice to
Landlord's rights to otherwise collect rents from Tenant.
All rights and remedies of Landlord are cumulative, and the exercise of
any one shall not be an election excluding Landlord at any other time from
exercise of a different or inconsistent remedy. No exercise by Landlord of any
right or remedy granted herein shall constitute or effect a termination of this
Lease unless Landlord shall so elect by written notice delivered to Tenant.
No waiver by Landlord of any covenant or condition shall be deemed to
imply or constitute a further waiver of the same at a later time, and acceptance
of Rent by Landlord, even with knowledge of a default by Tenant, shall not
constitute a waiver of such default.
XII. SURRENDER AND HOLDING OVER.
12.1 Surrender Upon Lease Expiration. Upon the expiration or earlier
termination of this Lease, or on the date specified in any demand for possession
by Landlord after any Default by Tenant, Tenant covenants and agrees to
surrender possession of the Premises to Landlord in the same condition as when
Tenant first occupied the Premises, ordinary wear and tear, damage by fully
insured casualty and other conditions deemed acceptable by Landlord, excepted.
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12.2 Holding Over. If Tenant shall hold over after the expiration of
the Lease Term or other termination of this Lease, such holding over shall not
be deemed to be a renewal of this Lease but shall be deemed to create a
tenancy-at-sufferance and by such holding over Tenant shall continue to be bound
by all of the terms and conditions of this Lease except that during such
tenancy-at-sufferance, Tenant shall pay to Landlord (a) Rent at the rate equal
to one hundred fifty percent (150%) of that provided for in the foregoing
Article 4, and (b) any and all Additional Rent and other forms of Additional
Rent payable under the terms of this Lease. The increased Rent during such
holding over is intended to partially compensate Landlord for losses, damages
and expenses, including frustrating and delaying Landlord's ability to secure a
replacement tenant. If: (i) Tenant does not give Landlord written notice of its
intent to hold over after the end of the Lease Term; or (ii) regardless of
whether or not such notice is given, if Tenant shall hold over more than sixty
(60) days after the end of the Lease Term, and if Landlord loses a prospective
tenant because Tenant fails to vacate the Premises on expiration of this Lease,
Tenant will be liable for such damages as Landlord can prove because of Tenant's
wrongful failure to vacate.
XIII. MISCELLANEOUS.
13.1 No Implied Waiver. No failure by Landlord to insist upon the
strict performance of any term, covenant or agreement contained in this Lease,
no failure by Landlord to exercise any right or remedy under this Lease, and no
acceptance of full or partial payment during the continuance of any Default by
Tenant, shall constitute a waiver of any such term, covenant or agreement or a
waiver of any such right or remedy or a waiver of any such Default by Tenant.
13.2 Survival of Provisions. Notwithstanding any termination of this
Lease, the same shall continue in force and effect as to any provisions hereof
which require observance or performance by Landlord or Tenant subsequent to
termination.
13.3 Right to Relocate. If the entire Premises (including without
limitation, all space added thereto pursuant to Exhibit F hereof) comprise
10,000 rentable square feet or less in the Building where located, Landlord, at
its option, may substitute for the Premises other space (hereafter "Substitute
Premises") within the Park before the commencement date or any time during the
Term or any extension of this Lease. Insofar as reasonably possible, the
Substitute Premises shall have a comparable square foot area and a configuration
substantially similar to the Premises. Landlord shall give Tenant at least sixty
(60) days advance written notice of its intention to relocate Tenant,
accompanied by a floor plan of the Substitute Premises. Tenant shall have ten
(10) days after receipt of the notice within which to agree to being relocated
to the Substitute Premises, and if Tenant does not so agree Landlord may
terminate this Lease at the end of the sixty (60) day period following the
giving of the notice. If Tenant agrees to being relocated, Landlord shall at its
expense construct and/or alter the Substitute Premises to where they are in
substantially the same condition as the Premises are immediately before the
relocation. Landlord shall have the right to use in the Substitute Premises
fixtures, improvements and alterations from the Premises, and Tenant shall
occupy the Substitute Premises as soon as Landlord's work is substantially
completed. If the relocation occurs after the Term commences, Landlord shall pay
Tenant's reasonable cost of moving its furnishings and other property to the
Substitute Premises. Upon substantial completion of the Substitute Premises all
the terms and obligations of this Lease shall apply to the Substitute Premises
as if they had been the space originally described in this Lease.
13.4 Covenants Independent. This Lease shall be construed as if the
covenants herein between Landlord and Tenant are independent, and not dependent.
13.5 Covenants as Conditions. Each provision of this Lease performable
by Tenant shall be deemed both a covenant and a condition.
13.6 Tenant's Remedies. Should Landlord fail to perform any of its
material duties or obligations hereunder, Landlord shall have a period of ten
(10) business days, after receipt of written notice from
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Tenant, within which to commence a cure of such failure, and a reasonable period
of time thereafter to complete the cure of such failure. Failure by Landlord to
commence such cure within said ten (10) business day period, or to effect such
cure within a reasonable time thereafter, shall constitute an event of a default
under this Lease; and Tenant, at its option, may provide Landlord with an
additional period of time within which to effect such cure; or Tenant may
commence such cure itself and Landlord shall immediately reimburse Tenant for
its reasonable expenses; or Tenant may bring a separate action against Landlord
for any claim Tenant may have against Landlord under this Lease. In the event of
an emergency, Tenant shall notify Landlord immediately and, in the event
Landlord's response is by reasonable standards deemed insufficient, Tenant may
commence to cure the emergency without further notice to Landlord; provided,
however, that Tenant shall then be responsible for effecting a cure in a safe
and workmanlike manner, and Tenant shall be liable for any damages and/or
injuries resulting from a breach thereof.
Tenant shall send notice of any Landlord default by certified or
registered mail, postage prepaid, or hand carried, to the holder of any mortgage
or deed of trust covering the Premises, the Property, or any portion thereof, of
whose address Tenant has been notified in writing.
13.7 Binding Effect. This Lease shall extend to and be binding upon the
heirs, executors, legal representative, successors and assigns of the respective
parties hereto. The terms, covenants, agreements and conditions in this Lease
shall be construed as covenants running with the Land.
13.8 Notices and Demands. All notices, demands or billings under this
Lease shall be in writing, signed by the party giving the same and shall be
deemed properly given and received when actually given and received or three (3)
business days after mailing, if sent by registered or certified United States
mail, postage prepaid, addressed the party to receive the notice at the address
set forth for such party in the first paragraph of this Lease or at such other
address as either party may notify the other in writing, with copies, in the
case of notices given by Tenant to Landlord, to Highwoods/Forsyth Limited
Partnership, c/o Highwoods Properties, Inc., 3100 Smoketree Court, Suite 600,
Raleigh, North Carolina 27604. Notices on behalf of either party may be given by
such party's respective counsel. Addresses for notices may be changed in the
same manner provided for giving notices but shall not be effective until ten
(10) days elapse after their receipt.
13.9 Time of the Essence. Time is of the essence under this Lease, and
all provisions herein relating thereto shall be strictly construed.
13.10 Captions for Convenience. The headings and captions hereof are
for convenience only and shall not be considered in interpreting the provisions
hereof.
13.11 Severability. If any provision of this Lease shall be held
invalid or unenforceable, the remainder of this Lease shall not be affected
thereby, and there shall be deemed substituted for the affected provisions a
valid and enforceable provision as similar as possible to the affected
provision.
13.12 Governing Law. This Lease shall be interpreted and enforced
according to the laws of the State
of North Carolina.
13.13 Entire Agreement. This Lease and any exhibits and addenda
referred to herein, constitute the final and complete expression of the parties'
agreements with respect to the Premises and Tenant's occupancy thereof. Each
party agrees that it has not relied upon or regarded as binding any prior
agreements, negotiations, representations, or understandings, whether oral or
written, except as expressly set forth herein. Both parties have participated in
the preparation of this Lease and in resolving any ambiguities there shall be no
presumption that they are construed against the drafting party.
13.14 No Oral Amendment or Modifications. No amendment or modification
of this Lease, and no approvals, consents or waivers by Landlord under this
Lease, shall be valid or binding unless in writing and executed by the party to
be bound.
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13.15 Real Estate Brokers. Tenant covenants to pay, hold harmless and
indemnify the Landlord from and against any and all cost, expense or liability
for any compensation, commissions, charges or claims by any broker or other
agent with respect to this Lease or the negotiation thereof other than Highwoods
Properties, Inc. or any of its affiliates, and any other broker here listed as a
Participating Broker: Corporate Realty Advisors.
13.16 Relationship of Landlord and Tenant. Nothing contained herein
shall be deemed or construed as creating the relationship of principal and agent
or of partnership, or of joint venture by the parties hereof, it being
understood and agreed that no provision contained in this Lease nor any acts of
the parties hereto shall be deemed to create any relationship other than the
relationship of Landlord and Tenant.
13.17 Authority of Parties. Each individual executing this Lease on
behalf of each party represents and warrants that such individual is duly
authorized to deliver this Lease on behalf of that party and that this Lease is
binding upon that party in accordance with its terms, and agrees to document
such authorization to the other party's satisfaction if requested to do so.
13.18 Exculpation. Any provision of this Lease to the contrary
notwithstanding Landlord shall have no personal liability for payment of any
damages or performance of any term, provision or condition under this Lease or
under any other instrument in connection with this Lease, and Tenant shall look
for such payment or performance to the Property, the Park, and the rents, issues
and profits thereof, in satisfaction of any claim, order or judgment which
Tenant may, at any time, obtain against Landlord in connection with this Lease.
13.19 Communications System. Tenant may install, or cause to be
installed, a communications systems on the roof of the Building, subject to the
prior written approval of Landlord and Landlord's engineer of Tenant's plans and
specifications, including specific location for mounting, such approval not to
be unreasonably withheld or delayed. Tenant agrees to mount the system on the
roof of the Building in a location and in a manner reasonably acceptable to
Landlord, which shall not be visible from the ground at a distance. Tenant shall
be responsible for all costs associated with the mounting, screening,
maintenance and removal of the system, and the repair of all damages associated
with the installation, operation or removal of said system. Tenant shall also
hold Landlord harmless from any claims, damages, losses, liabilities, lawsuits,
costs and expenses associated with said system. Additionally, Tenant shall
screen the system as reasonably required by Landlord.
13.20 Existing Lease. Upon commence of this Lease, the Minimum Rent
provided in the lease dated November 7, 1995 (the "Prior Lease") for Tenant's
existing space at 5265 Capital Boulevard shall be abated for a period of four
(4) months. However, Tenant shall continue to pay monthly installments of
Additional Rent under the Prior Lease during the four (4) month rent abatement
period . Furthermore, Tenant shall have the right to terminate the Prior Lease,
which is due to expire August 31, 1998, without penalty at any time after said
four (4) month rent abatement period, provided Tenant gives Landlord at least
ninety (90) days prior written notice of its intent to terminate, which notice
may be given to Landlord during the rent abatement period. Any liability or
obligation of Landlord or Tenant arising during or accruing with respect to the
term of the Prior Lease shall survive the expiration or earlier termination of
the Prior Lease, including without limitation, obligations and liabilities
relating to (i) the final adjustment of estimated installments of Additional
Rent to actual Additional Rent owed, (ii) the condition of the Premises or the
removal of Tenant's property, and (iii) indemnity and hold harmless provisions
of the Prior Lease.
13.21 Memorandum of Lease and Non-Disturbance Agreement. Landlord and
Tenant agree to execute a Memorandum of Lease in recordable form which is
acceptable to Landlord and Tenant. Tenant shall be responsible for preparing
such memorandum and recording the document. With respect to this Lease, landlord
shall obtain a non-disturbance agreement in recordable form from any and all
lien holders on the Premises, the Property and the Park which is acceptable to
Landlord, Tenant and such lien
19
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holders.
20
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have executed this lease in duplicate
originals, all as of the day and year first above written.
TENANT:
CLOSURE MEDICAL CORPORATION, a
Delaware corporation
By: /s/ Robert V. Toni
Title: Pres.
Date: 2/14/97
Attest: /s/ S. Blount Swain
_______ Secretary
[CORPORATE SEAL]
LANDLORD:
AP SOUTHEAST PORTFOLIO PARTNERS, L.P.
By: Highwoods Properties, Inc., its agent
a Maryland corporation
By: /s/______________________________
Title: Senior Vice President
Date: 02/28/97
Attest: /s/___________________________
Assistant Secretary
[CORPORATE SEAL]
EXHIBIT A
[Drawing of building diagram goes here]
21
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EXHIBIT A-1
[Description of Land]
1
<PAGE>
EXHIBIT B
PLANS AND SPECIFICATIONS FOR THE PREMISES (IF AVAILABLE)
(To be mutually approved by Landlord and Tenant in writing and then
attached hereto)
1
<PAGE>
EXHIBIT C
ENVIRONMENTAL COMPLIANCE
I. Tenant's Representations, Warranties and Covenants Concerning the Use of
Hazardous Substances/Periodic Notice
(a) Acceptance of Property and Covenant to Surrender. Tenant accepts
the Property as being in good and sanitary order, condition and repair
and accepts all buildings and other improvements in their present
condition, subject to the same conditions and exceptions as are set
forth in Section 2.13 of this Lease. Tenant agrees on the last day of
the term of this Lease, to surrender the Premises to Landlord in good
and sanitary order, condition and repair, except for such wear and tear
as would be normal for the period of the Tenant's occupancy. Landlord
represents that, to the best of Landlord's knowledge, there is no
environmental contamination contained at the Premises and that the
Premises have not been used to store, generate or transport Hazardous
Substances (hereafter defined) in violation of Applicable Laws.
No spill, deposit, emission, leakage or other release of
Hazardous Substances on the Property or the soil, surface water or
groundwater thereof in violation of Applicable Laws shall be deemed to
be "wear and tear that would be normal for the period of the Tenant's
occupancy." Tenant shall be responsible to promptly and completely
clean up any such release caused by Tenant, its officers and employees,
agents, contractors, and invitees as shall occur on the Property during
the term of this Lease and shall surrender the Property free of any
contamination or other damage caused by such occurrences during the
term of the Lease.
(b) Maintenance of Premises. Subject to the Landlord's obligations
contained in the body of the Lease, Tenant shall, at its sole cost and
expense, keep and maintain the Premises in good and sanitary order,
condition, and repair. As part of this maintenance obligation, Tenant
shall promptly respond to and clean up any release or threatened
release of any Hazardous Substance in violation of Applicable Laws into
the drainage systems, soil, surface water, groundwater, or atmosphere,
in a safe manner, in strict accordance with Applicable Law, and as
authorized or approved by all federal, state, and/or local agencies
having authority to regulate the permitting, handling, and cleanup of
Hazardous Substances; provided, however, Tenant shall have no liability
or responsibility under this Paragraph (b) for any release or
threatened release caused by the acts or omissions of the Landlord,
other tenants of the Property, or Landlord's or such other tenants'
agents, employees, guests, invitees, or contractors.
(c) Use of Hazardous Substances. Tenant shall use, store, generate,
treat, transport, or dispose of any Hazardous Substance on the Property
at all times in compliance with Applicable Laws. Tenant's use of a
Hazardous Substance under this paragraph shall not limit or affect
Tenant's obligations under this Lease, including Tenant's duty to
remedy or remove releases or threatened releases; to comply with
Applicable Law relating to the use, storage, generation, treatment,
transportation, and/or disposal of any such Hazardous Substances; or to
indemnify Landlord against any harm or damage caused thereby.
(d) Reports to Landlord. Upon written request by Landlord, but in no
event more than twice in any calendar year during the Lease Term,
unless Landlord has reasonable cause to believe that Tenant is in
default under this Exhibit C, Tenant shall provide Landlord with a
written report listing the Hazardous Substances which are or have been
present on the Property; all releases of Hazardous Substances that
occurred or were discovered on the Property; all compliance activities
related to such Hazardous Substances, including all contacts with
government agencies or private parties of any kind concerning Hazardous
Substances; and all manifests, business plans, consent agreements or
other documents relating to Hazardous Substances executed or requested
during
1
<PAGE>
that time period. The report shall include copies of all
documents and correspondence related to such activities and written
reports of all oral contacts relating thereto, if requested in writing
by Landlord.
(e) Entry By Landlord. Tenant shall permit Landlord and his agents to
enter into and upon the Premises, with notice (except in cases of
emergency), at all reasonable times for the purpose of inspecting the
Premises and all activities thereon, including activities involving
Hazardous Substances, or for purposes of maintaining any buildings on
the Property. Such right of entry and inspection shall not constitute
managerial or operational control by Landlord over any activities or
operations conducted on the Property by Tenant.
II. Tenant's Indemnity and Release
(a) Indemnity
(i) Tenant hereby indemnifies, defends and holds harmless
Landlord from and against any suits, actions, legal or
administrative proceedings, demands, claims, liabilities,
fines, penalties, losses, injuries, damages, expenses or
costs, including interest and attorneys' fees, incurred by,
claimed or assessed against Landlord under any laws, rules,
regulations including, without limitation, Applicable Laws (as
hereinafter defined), in any way connected with any injury to
any person or damage to any property or any loss to Landlord
caused by Tenant, its officers, employees, agents,
contractors, and invitees occasioned in any way by Hazardous
Substances on the Property or the Premises in violation of
Applicable Laws.
(ii) This indemnity specifically includes the direct
obligation of Tenant to perform any remedial or other
activities required, ordered, recommended or requested by any
agency, government official or third party, or otherwise
necessary to avoid or minimize injury or liability to any
person, or to prevent the spread of pollution, however it
came to be located thereon (hereinafter, the "Remedial
Work"). Tenant shall perform all such work in its own name in
accordance with Applicable Laws (as hereinafter defined).
(iii) Without waiving, its rights hereunder, Landlord may, at
its option, perform such remedial or removal work as described
in clause (ii) above, and thereafter seek reimbursement for
the costs thereof in instances in which Tenant has failed to
remediate in a timely manner. Tenant shall permit Landlord
access to the Property to perform such remedial activities. In
the event Landlord performs such remediation, Landlord shall
indemnify Tenant for any faulty work completed by Landlord in
causing remediation.
(iv) Whenever Landlord has incurred costs described in this
section, Tenant shall, within 10 days of receipt of notice
thereof, reimburse Landlord for all such expenses together
with interest from the date of expenditure at the "applicable
federal rate" established by the Internal Revenue Service.
(b) Agency or Third Party Action. Without limiting its obligations
under any other paragraph of this Agreement, Tenant shall be solely and
completely responsible for responding to and complying with any
administrative notice, order, request or demand, or any third party
claim or demand relating to potential or actual contamination on the
Premises. The responsibility conferred under this paragraph includes
but is not limited to responding to such orders on behalf of Landlord
and defending against any assertion of Landlord's financial
responsibility or individual duty to perform under such orders. Tenant
shall assume, pursuant to paragraph (a) above, any liabilities or
responsibilities which are assessed against Landlord in any action
described under this paragraph (b).
2
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(c) Release. Tenant hereby waives, releases and discharges forever
Landlord from all present and future claims, demands, suits, legal and
administrative proceedings and from all liability for damages, losses,
costs, liabilities, fees and expenses, present and future, arising out
of or in any way connected with Tenant's use, maintenance, ownership or
operation of any portion of the Property, any condition of
environmental contamination of the Property, or the existence of
Hazardous Substances in any state on the Property. This paragraph (c)
is limited to those issues and events for which Tenant is liable and
responsible under paragraph I(b) of this Exhibit C.
III. Definitions.
(a) Hazardous Substance. "Hazardous Substance(s)" shall mean any
substance which at any time shall be listed as "hazardous" or "toxic"
under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), 42 U.S.C. 9601 et seq., as amended and the
Resource Conservation and Recovery Act ("RCRA"), 42 U.S.C. 6901 et
seq., as amended, or in the regulations implementing such statutes, or
which has been or shall be determined at any time by any agency or
court to be a hazardous or toxic substance regulated under any other
Applicable Laws (as hereinafter defined). The term "Hazardous
Substance(s)" shall also include, without limitation, raw materials,
building components, the products of any manufacturing or other
activities on the Property, wastes, petroleum products, or special
nuclear or by-product material as defined by the Atomic Energy Act of
1954, 42 U.S.C. 3011, et seq., as amended.
(b) Applicable Law(s). "Applicable Law(s)" shall include, but shall
not be limited to, CERCLA, RCRA, the Federal Water Pollution Control
Act, 33 U.S.C. 1251 et seq., the Clean Air Act, 42 U.S.C. 7401 et
seq., as amended, and the regulations promulgated thereunder, and any
other federal, state and/or local laws or regulations, whether
currently in existence or hereafter enacted or promulgated, that
govern or relate to:
(i) The existence, cleanup and/or remedy of contamination of
property;
(ii) The protection of the environment from spilled,
deposited or otherwise emplaced contamination;
(iii) The control of hazardous or toxic substances or wastes;
or
(iv) The use, generation, discharge, transportation,
treatment, removal or recovery of hazardous or toxic
substances or wastes, including building materials.
3
<PAGE>
EXHIBIT D
OPTION TO EXTEND LEASE TERM
1. Lease. "Lease" shall mean the Lease dated February 14, 1997 to which this
Exhibit is attached between AP SOUTHEAST PORTFOLIO PARTNERS, L.P. ("Landlord")
and CLOSURE MEDICAL CORPORATION ("Tenant").
2. Initial Lease Term. For the purposes of this Addendum, "Initial Lease Term"
shall mean the Lease Term as defined in the Lease.
3. Option to Extend. Provided both at the time Tenant gives Landlord written
notice of its intention to exercise its rights under this Section, as
hereinafter provided, and at the time the Initial Lease term expires, that there
is no outstanding Default by Tenant; that Tenant has a suitable credit standing,
as determined by Landlord in its reasonable judgment; and that Tenant is
occupying the Premises, then Tenant shall have the right and option to extend
the Initial Lease Term (the "Renewal Option") for the "Renewal Lease Term" as
hereinafter defined. Tenant shall exercise said option by giving Landlord
written notice at least 270 days prior to the expiration of the Initial Lease
Term. If such notice shall not be so given by Tenant to Landlord prior to said
270 day period, such right and option to extend this Lease shall thereupon cease
and terminate. If Tenant shall exercise said option as aforesaid, the respective
rights, duties and obligations of Landlord and Tenant shall, during the Renewal
Lease Term, be governed by the terms and conditions of the Lease.
4. Renewal Lease Term. "Renewal Lease Term" shall mean the period
commencing upon the expiration of the Initial Lease Term and expiring five (5)
years thereafter subject to earlier termination upon any termination of this
Lease pursuant to the terms of this Lease.
5. Lease Term. The "Lease Term", as used in the Lease, shall mean the
Initial lease Term and, if the Renewal Option is exercised, the Renewal Lease
Term.
6. Base Rent for Renewal Lease Term. If Tenant exercised the Renewal Option, the
Base Rent shall be adjusted for the Renewal Lease Term to an amount equal to
ninety-five percent (95%) of the then prevailing lease rates for comparable
space in the Spring Forest/Capital Boulevard Submarket in the Raleigh, North
Carolina area.
7. Termination of Renewal Option on Transfer by Tenant. In the event Landlord
consents to a Transfer by Tenant, as defined in the Lease, the Renewal Option
shall automatically terminate unless otherwise agreed in writing by Landlord.
<PAGE>
EXHIBIT D-1
ONE NORTH COMMERCE CENTER
RALEIGH, NORTH CAROLINA
SIGN CRITERIA, JANUARY 4, 1988
I. General Requirements
1. The character, design and layout of all signs shall be subject to the
landlord's approval to the extent that the sign in question complies
with the criteria set forth in this document.
2. All signs shall be in accordance with the following requirements.
a. Signs, symbols, and/or trademarks must have preliminary approval
by the landlord before shop drawings are made.
b. Tenant shall submit four (4) sets of shop drawings to the
landlord for approval. Drawings must show size of all letters,
spacing, material, mounting methods and overall sign dimensions
in relation to lease frontage.
c. Signs previously used by tenants or sign contractors must conform
to the conditions and limitations of this document. Reuse of an
exiting sign must be approved by the landlord.
3. The content of all signs shall be limited to letters designating the
store name, type and specialty. No advertising, symbols or logos
other than the store name shall be used without approval of the
landlord.
4. The fabrication, installation and operation of all signs shall be
subject to the following restrictions:
a. No flashing, moving or blinking illumination shall be permitted.
b. No animation shall be permitted.
<PAGE>
5. The following types of signs are prohibited:
a. Outrigger signs
b. Moving signs
c. Rooftop signs
d. Iridescent signs
e. Painted canopy face signs
6. No signs shall be placed in final position without approval of
landlord's representative.
7. All signs shall be fabricated and installed in compliance with all
applicable building codes and City of Raleigh sign ordinance.
8. Temporary promotional signs require approval of landlord and the City
of Raleigh.
9. The term "sign" shall also apply to balloons, flags, banners, vehicles,
towers, floats, etc.
10. Location and design of traffic control signs shall be at the
discretion of the landlord.
11. The landlord reserves the right to make any variations in this
document as is seen fit in the interest of the tenant or tenants.
Any revisions must be approved by the City of Raleigh.
12. All signs will be limited to the following colors: dark bronze and
white.
13. All signs will meet the new City of Raleigh sign code effective July 1,
1987.
14. No undercanopy signs will be allowed.
15. The cost of fabrication, material, labor, installation, electrical
hookup, illumination, and maintenance of all signs shall be the
responsibility of each tenant.
II. Individual Building Signage
1. Each tenant shall be allowed one (1) sign in the prescribed signage
location per building. Additional signs are subject to landlord's
approval.
<PAGE>
2. The six buildings which compromise One North Commerce Center were
designed and constructed at different times, and all before the new
City of Raleigh sign code (July 1, 1987). This being the case, each
building is designed to accept and display signage differently.
Signage conformity within One North Commerce Center is achieved by
the use of white letters and dark bronze background where applicable.
Individual building standards are as follows:
A. 5225 North Boulevard, Phase I & II
a. Signs shall be surface mounted, cast or custom fabricated
aluminum letters with baked enamel finish.
b. Letter color to be Martin-Senour 99L-22381 warm white.
c. The sign text shall consist of one line. Letter size shall
be 1'4" uppercase and 1'0" lowercase. Length of sign text
shall not exceed 16'8" (long fascia), or 10'0" (short fascia)
for a full bay tenant. Length of sign text shall not exceed
7'8" (long fascia) or 4'6" (short fascia) for a half bay
tenant. The total square footage of the sign shall not exceed
23 square feet.
d. No logos will be allowed unless they are federally or state
registered trademarks or service marks. Application of logos
will be subject to landlord's approval. Logos are limited to
the same material fabrication, installation and color as
letters.
e. Typestyle of all signs to be Helvetica. Other typestyles are
subject to landlord approval.
f. See "Exhibit A" and corresponding construction documents for
location of signs and additional information.
B. 5240 Green's Dairy Road
a. All fascia signs to be single faced cabinets, and shall be
constructed of 100% aluminum with stencil cut aluminum
backgrounds with white 3/16" flat acrylic letters, and
illuminated with 800 mililamp, daylight, high output
fluorescent lamps powered by 110v sign ballasts.
b. Letter color shall be white. Sign background and cabinet shall
be dark bronze.
<PAGE>
c. The sign text shall consist of one line. Letter size shall be
6" high uppercase and 4" lowercase. Length of sign text shall
not exceed 11'0".
d. No logos will be allowed unless they are state or federally
registered trademarks or service marks. Application of logos
will be subject to landlord's approval. Logos are limited to
the same materials, fabrication and color as letters.
e. Typestyle of all signs is set at the discretion of the tenant.
Typestyles are subject to landlord's approval.
f. See "Exhibit B" and corresponding construction documents for
location of signs and additional information.
C. 3641 Trust Dr., 5200 and 5220 Green's Dairy Road
a. Signs will consist of vinyl press-on letters applied to the
dark bronze fascia above the storefronts.
b. Letter color to be white. Sign background shall be dark
bronze.
c. The sign text shall consist of one or two lines. For one line
of copy letter size shall be 8" uppercase and 6" lowercase.
For two lines of copy letter size shall be 8" uppercase and
6" lowercase for the first line and 6" uppercase and 4"
lowercase for the second line. The total square footage of the
sign shall not exceed 54 square feet.
d. No logos will be allowed unless they are federally or state
registered trademarks or service marks. Application of logos
will be subject to landlord's approval. Logos are limited to
the same material, fabrication, installation and color as
letters.
e. Typestyle of all signs to Optima. Other typestyles are subject
to landlord approval.
f. See "Exhibit C" and corresponding construction documents for
location of signs and additional information.
<PAGE>
III. Storefront Signs (Doors, Windows, etc.)
1. Storefront signs shall be limited to signs and/or letters with a
maximum height of 5", and minimum letter size of 1/2". Only one (1)
storefront sign shall be allowed (building tenant signage
excepted - see IIC above).
2. Letters are to be white, vinyl, press-on type.
3. Logos, signs, symbols, and/or trademarks must have preliminary
approval of landlord with final approval based on shop drawings
showing materials, approved color and overall dimensions in
relation to the storefront.
4. All storefront signage is subject to landlord approval.
<PAGE>
[DRAWING OF "EXHIBIT A" GOES HERE]
"EXHIBIT A"
5225 NORTH BLVD.
RALEIGH, NC
<PAGE>
AN OFFICE AND DISTRIBUTION FACILITY
GREEN'S DAIRY ROAD
ONE NORTH COMMERCE CENTER
[DRAWING OF "EXHIBIT B" GREEN'S DAIRY BUILDING GOES HERE]
"EXHIBIT B" GREEN'S DAIRY
5240
RALEIGH, NC
<PAGE>
[DRAWING OF "EXHIBIT C" GOES HERE]
"EXHIBIT C"
3641 TRUST DRIVE
5200, 5220 GREEN'S DAIRY ROAD
EXHIBIT D-2
1. Declaration at Book 5893, Page 40, Wake County Registry.
2. Amendment to Declaration at Book 5893, Page 64, Wake County Registry.
3. Declaration at Book 2736, Page 351, Wake County Registry.
4. Declaration at Book 2830, Page 719, Wake County Registry.
5. Declaration at Book 2892, Page 414, Wake County Registry.
<PAGE>
EXHIBIT E
[WORK LETTER FOR TENANT UPFIT]
<PAGE>
EXHIBIT F
ADDITIONAL SPACE OPTIONS
FIRST RIGHT TO LEASE. Provided Tenant is not in default hereunder and provided
Tenant leases at least 30,000 square feet in the Building, Tenant shall have the
First Right to lease all space in the Building. Landlord shall provide Tenant
with formal notice of its intent to lease said space, and Tenant shall have ten
(10) calendar days within which to notify Landlord in writing of its intent to
lease the Expansion Space. Failure by Tenant to provide written notice within
ten (10) calendar days of Tenant's receipt of Landlord's notice shall be deemed
a waiver by Tenant of its First Right to lease, and Landlord shall be free to
lease the Expansion Space on such terms and conditions as it deems appropriate.
Any waiver by Tenant of Tenant's right, as set forth herein, shall not
constitute a waiver by Tenant of any future first right to lease. Should Tenant
elect to lease the Expansion Space, the following terms shall apply:
(A) Rental rate shall be the same as Tenant is currently paying,
including any escalations and Additional Rent.
(B) Expansion Space shall be leased in "as-is" condition.
(C) Should Tenant lease such Expansion Space on or before the end of
the 90th month of the Lease Term, the expiration date of this
Lease for the Expansion Space shall be coterminous with the
expiration date of the Lease for the initial Premises. In the
event Tenant leases such Expansion Space after the end of the 90th
month of the Lease Term, Tenant shall be deemed to have exercised
its option to extend the Lease Term for both the Expansion Space
and the initial Premises for five (5) years under the terms and
conditions provided in Exhibit D to this Lease.
EXPANSION OPTION. Provided Tenant is not in default hereunder, conditioned on
Tenant's giving Landlord at least 180 days prior written notice, Tenant shall
have the option to expand during the period commencing with the sixtieth (60)
month of the Lease Term through the seventy-second (72nd) month of the Lease
Term, into an additional 5,000 to 10,000 rentable square feet, which expansion
area is hereinafter referred to as the "Option Premises," the location of which
shall be outlined on Schedule 1 to be attached to the Commencement Agreement to
be executed by Landlord and Tenant pursuant to Section 3.1 of this Lease, all
under the following terms and conditions, each of which are independently
material:
(A) the rental rate shall be the same as Tenant is paying at the time
of the expansion, including any escalations and Additional Rent.
(B) Lease Term shall be coterminous with the expiration date of the
Lease Term for the initial Premises.
(C) Landlord shall provide the Option Premises in it's existing
layout, but improved to the equivalent of an office environment in
terms of PME and general finishes, including HVAC and restrooms.
(D) Landlord shall provide Tenant a renovation allowance of one dollar
($1.00) per square foot for the Option Premises per year of the
remaining Lease Term, on a pro rata basis.
EXPANSION OPTION-EXERCISE OF RIGHT TO RELOCATE OTHER TENANTS. Conditioned on
Tenant not being in default hereunder and giving at least 180 days prior written
notice to Landlord, Tenant may expand into space that is at that time occupied
by another tenant ("Relocation Premises") providing each and every one of the
following conditions are satisfied:
(A) Tenant must lease 100% of the space from which the previous tenant is
being relocated.
(B) Rental rate shall be the rent then being paid by the tenant to be
relocated at the time of the expansion until such relocated
tenant's term would have expired, at which time rent shall change
to that then being paid by Tenant.
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(C) The space shall be leased "as-is." No fit-up allowance shall be
provided under this option.
(D) All actual costs that are reasonably associated with relocation of
the tenant (including leasing commissions and tenant improvements)
to be relocated to accommodate Tenant's expansion, including,
without limitation, reasonable attorneys' fees incurred if needed
to enforce the relocation clause, shall be at Tenant's sole cost
and expense, and Landlord may require Tenant to deposit with
Landlord, in cash or acceptable letter of credit, Landlord's
estimate of such costs prior to asking the tenant to be relocated
to move.
(E) Landlord agrees that all subsequent leases in the Building shall
contain relocation clauses that Landlord believes will be
enforceable.
(F) There must be at least three (3) years remaining on the Lease
Term of this Lease at the time of occupancy of the
Relocation Premises.
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EXHIBIT G
[HVAC Maintenance Agreement]
EXHIBIT H
BASE RENT SCHEDULE
Base Rent as set forth in Section 4.1 of the Lease, shall be as follows;
Months Total Annual Base Monthly
Rent Rent
1-12 $372,732.00 $31,061.00
13-24 $380,232.00 $31,686.00
25-36 $387,956.00 $32,329.67
37-48 $395,912.00 $32,992.67
49-60 $404,108.00 $33,675.67
61-72 $412,552.00 $34,379.33
73-84 $421,244.00 $35,103.67
85-96 $430,200.00 $35,850.00
97-108 $439,424.00 $36,618.67
109-120 $448,924.00 $37,410.33
- -------------------------------------------- ------------------------------
TOTAL $4,093,284.00
This Exhibit is based on the Premises measuring 40,000 Rentable Square Feet, and
therefore is subject to revision on a prorata basis pending final measurement of
the Premises pursuant to Section 2.3 of the Lease.
<PAGE>
<PAGE>
Exhibit 10.20
MASTER LEASE AGREEMENT
Lessor: TRANSAMERICA BUSINESS CREDIT CORPORATION
RIVERWAY II
WEST OFFICE TOWER
WEST HIGGINS
ROSEMONT, ILLINOIS 60018
Lessee: CLOSURE MEDICAL CORPORATION
5265 CAPITAL BOULEVARD
RALEIGH, NORTH CAROLINA 27616
The lessor pursuant to this Master Lease Agreement ("Agreement") dated as of
January 29, 1997, is Transamerica Business Credit Corporation ("Lessor"). All
equipment, together with all present and future additions, parts, accessories,
attachments, substitutions, repairs, improvements and replacements thereof or
thereto, which are the subject of a Lease (as defined in the next sentence)
shall be referred to as "Equipment." Simultaneous with the execution and
delivery of this Agreement, the parties are entering into one or more Lease
Schedules (each, a "Schedule") which refer to and incorporate by reference this
Agreement, each of which constitutes a lease (each, a "Lease") for the Equipment
specified therein. Additional details pertaining to each Lease are specified in
the applicable Schedule. Each Schedule that the parties hereafter enter into
shall constitute a Lease. Lessor has no obligation to enter into any additional
leases with, or extend any future financing to, Lessee.
1. LEASE. Subject to and upon all of the terms and conditions
of this Agreement and each Schedule, Lessor hereby agrees to lease to Lessee and
Lessee hereby agrees to lease from Lessor the Equipment for the Term (as defined
in Paragraph 2 below) thereof.
2. TERM. Each Lease shall be effective and the term of each
Lease ("Term") shall commence on the commencement date specified in the
applicable Schedule (but in no event shall any Lease have a commencement date of
later than December 31, 1997) and, unless sooner terminated (as hereinafter
provided), shall expire at the end of the term specified in such Schedule;
provided, however, that obligations due to be performed by Lessee during the
Term shall continue until they have been performed in full. Schedules will only
be executed after the delivery of the Equipment to Lessee or upon completion of
deliveries of items of such Equipment with aggregate cost of not less than
$100,000.00.
3. RENT. Lessee shall pay as rent to Lessor, for use of the
Equipment during the Term rental payments equal to the sum of all rental
payments including, without limitation, security deposits, advance rents and
interim rents payable in the amounts and on the dates specified in the
applicable Schedule ("Rent"). If any Rent or other amount payable by Lessee is
not paid within five days after the day on which it becomes payable, Lessee will
pay on demand, as a late charge, an amount equal to 5% of such unpaid Rent or
other amount but only to the extent permitted by applicable law. All payments
provided for herein shall be payable to Lessor at its address specified above,
or at any other place designated by Lessor.
4. LEASE NOT CANCELABLE; LESSEE'S OBLIGATIONS ABSOLUTE. No
Lease may be canceled or terminated except as expressly provided herein.
Lessee's obligation to pay all Rent due or to become due hereunder shall be
absolute and unconditional and shall not be subject to any delay, reduction,
set-off, defense, counterclaim or recoupment for any reason whatsoever,
including any failure of the Equipment or any representations by the
manufacturer or the vendor thereof. If the Equipment is unsatisfactory for any
reason, Lessee shall make any claim solely against the manufacturer or the
vendor thereof and shall, nevertheless, pay Lessor all Rent payable hereunder.
5. SELECTION AND USE OF EQUIPMENT. Lessee agrees that it shall
be responsible for the selection, use of, and results obtained from, the
Equipment and any other associated equipment or services.
<PAGE>
6. WARRANTIES. LESSOR MAKES NO REPRESENTATION OR WARRANTY,
EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION,
THE DESIGN OR CONDITION OF THE EQUIPMENT OR ITS MERCHANTABILITY, SUITABILITY,
QUALITY OR FITNESS FOR A PARTICULAR PURPOSE, AND HEREBY DISCLAIMS ANY SUCH
WARRANTY. LESSEE SPECIFICALLY WAIVES ALL RIGHTS TO MAKE A CLAIM AGAINST LESSOR
FOR BREACH OF ANY WARRANTY WHATSOEVER. LESSEE LEASES THE EQUIPMENT "AS IS." IN
NO EVENT SHALL LESSOR HAVE ANY LIABILITY FOR, NOR SHALL LESSEE HAVE ANY REMEDY
AGAINST LESSOR FOR, ANY LIABILITY, CLAIM, LOSS, DAMAGE OR EXPENSE CAUSED
DIRECTLY OR INDIRECTLY BY THE EQUIPMENT OR ANY DEFICIENCY OR DEFECT THEREOF OR
THE OPERATION, MAINTENANCE OR REPAIR THEREOF OR ANY CONSEQUENTIAL DAMAGES AS
THAT TERM IS USED IN SECTION 2-719(3) OF THE MODEL UNIFORM COMMERCIAL CODE, AS
AMENDED FROM TIME TO TIME ("UCC"). Lessor grants to Lessee, for the sole purpose
of obtaining necessary repairs and replacement of parts or otherwise prosecuting
a claim, the benefits of any and all warranties made available by the
manufacturer or the vendor of the Equipment to the extent assignable.
7. DELIVERY. Lessor hereby appoints Lessee as Lessor's agent
for the sole and limited purpose of accepting delivery of the Equipment from
each vendor thereof. Lessee shall pay any and all delivery and installation
charges. Lessor shall not be liable to Lessee for any delay in, or failure of,
delivery of the Equipment.
8. PURCHASE OBLIGATION. Lessee shall be obligated to purchase
all items of the Equipment then subject to a Schedule, at the expiration of the
Term for such items of the Equipment for a purchase price, payable in
immediately available funds, equal to the Fair Market Value of such items which
shall not be less than 5% nor more than 10% of the Equipment Cost of such
Equipment specified in the applicable Schedule, plus any sales or other taxes
applicable to the transfer of the Equipment and any other amount payable and
arising hereunder in immediately available funds. Lessor's sale of any item of
the Equipment shall be on an "As Is, Where Is" basis, without any representation
or warranty by or recourse to Lessor and shall be subject to such additional
terms and conditions as may be specified in the Schedule.
9. OWNERSHIP; INSPECTION; MARKING; FINANCING STATEMENTS.
Lessee shall affix to the Equipment any labels supplied by Lessor indicating
ownership of such Equipment. The Equipment is and shall be the sole property of
Lessor. Lessee shall have no right, title or interest therein, except as lessee
under a Lease. The Equipment is and shall at all times be and remain personal
property and shall not become a fixture. Lessee shall obtain and record such
instruments and take such steps as may be necessary to prevent any person from
acquiring any rights in the Equipment by reason of the Equipment being claimed
or deemed to be real property. Lessee shall make the Equipment and its
maintenance records available for inspection by Lessor at reasonable times and
upon reasonable notice. Lessee shall execute and deliver to Lessor for filing
any UCC financing statements or similar documents Lessor may reasonably request.
10. EQUIPMENT USE. Lessee agrees that the Equipment will be
operated by competent, qualified personnel in connection with Lessee's business
for the purpose for which the Equipment was designed and in accordance with
applicable operating instructions, laws and government regulations, and that
Lessee shall use all reasonable precautions to prevent loss or damage to the
Equipment from fire and other hazards. Lessee shall procure and maintain in
effect all orders, licenses, certificates, permits, approvals and consents
required by federal, state or local laws or by any governmental body, agency or
authority in connection with the delivery, installation, use and operation of
the Equipment.
11. MAINTENANCE. Lessee, at its sole cost and expense, shall
keep the Equipment in a suitable environment as specified by the manufacturer's
guidelines or the equivalent and meet all recertification requirements, and
shall maintain the Equipment in its original condition and working order,
ordinary wear and tear excepted. At the reasonable request of Lessor, Lessee
shall furnish all proof of maintenance.
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12. ALTERATION; MODIFICATIONS; PARTS. Lessee may alter or
modify the Equipment only with the prior written consent of Lessor. Upon request
of Lessor, any alteration shall be removed and the Equipment restored to its
normal, unaltered condition at Lessee's expense (without damaging the
Equipment's originally intended function or its value) prior to its return to
Lessor. Any part installed in connection with warranty or maintenance service or
which cannot be removed in accordance with the preceding sentence shall be the
property of Lessor.
13. CASUALTY INSURANCE; LOSS OR DAMAGE. Lessee will maintain,
at its own expense, liability and property damage insurance relating to the
Equipment, insuring against such risks as are customarily insured against on the
type of equipment leased hereunder by businesses in which Lessee is engaged in
such amounts, in such form, and with insurers satisfactory to Lessor; provided,
however, that the amount of insurance against damage or loss shall not be less
than the greater of (a) the replacement value of the Equipment and (b) the
stipulated loss value of the Equipment specified in the applicable Schedule
("Stipulated Loss Value"). Each liability insurance policy shall provide
coverage (including, without limitation, personal injury coverage) of not less
than $1,000,000 for each occurrence, and shall name Lessor as an additional
insured; and each property damage policy shall name Lessor as sole loss payee
and all policies shall contain a clause requiring the insurer to give Lessor at
least thirty days prior written notice of any alteration in the terms or
cancellation of the policy. Lessee shall furnish a copy of each insurance policy
(with endorsements) or other evidence satisfactory to Lessor that the required
insurance coverage is in effect; provided, however, Lessor shall have no duty to
ascertain the existence of or to examine the insurance policies to advise Lessee
if the insurance coverage does not comply with the requirements of this
Paragraph. If Lessee fails to insure the Equipment as required, Lessor shall
have the right but not the obligation to obtain such insurance, and the cost of
the insurance shall be for the account of Lessee due as part of the next due
Rent. Lessee consents to Lessor's release, upon its failure to obtain
appropriate insurance coverage, of any and all information necessary to obtain
insurance with respect to the Equipment or Lessor's interest therein.
Lessee shall bear the entire risk of theft or
destruction of, or damage to, the Equipment including, without limitation, any
condemnation, seizure or requisition of title or use ("Casualty Loss"). No
Casualty Loss shall relieve Lessee from its obligations to pay Rent unless and
until Lessee shall have paid the Stipulated Loss Value as provided in clause (b)
below. When any Casualty Loss occurs, Lessee shall immediately notify Lessor
and, at the option of Lessor, shall promptly (a) place such Equipment in good
repair and working order; or (b) pay Lessor an amount equal to the Stipulated
Loss Value of such Equipment and all other amounts (excluding Rent) payable by
Lessee hereunder, together with a late charge on such amounts at a rate per
annum equal to the rate imputed in the Rent payments hereunder (as reasonably
determined by Lessor) from the date of the Casualty Loss through the date of
payment of such amounts, provided, however, that Lessee shall have no obligation
to pay a late charge to the extent its Rent is current through the date of
payment of the Stipulated Loss Value, whereupon Lessor shall transfer to Lessee,
without recourse or warranty (express or implied), all of Lessor's interest, if
any, in and to such Equipment on an "AS IS, WHERE IS" basis. The proceeds of any
insurance payable with respect to the Equipment shall be applied, at the option
of Lessor, either towards (i) repair of the Equipment or (ii) payment of any of
Lessee's obligations hereunder. Lessee hereby appoints Lessor as Lessee's
attorney-in-fact to make claim for, receive payment of, and execute and endorse
all documents, checks or drafts issued with respect to any Casualty Loss under
any insurance policy relating to the Equipment.
14. TAXES. Lessee shall pay when due, and indemnify and hold
Lessor harmless from, all sales, use, excise and other taxes, charges, and fees
(including, without limitation, income, franchise, business and occupation,
gross receipts, licensing, registration, titling, personal property, stamp and
interest equalization taxes, levies, imposts, duties, charges or withholdings of
any nature), and any fines, penalties or interest thereon, imposed or levied by
any governmental body, agency or tax authority upon or in connection with the
Equipment, its purchase, ownership, delivery, leasing, possession, use or
relocation of the Equipment or otherwise in connection with the transactions
contemplated by each Lease or the Rent thereunder, excluding taxes on or
measured by the income of Lessor. Upon request, Lessee will provide proof of
payment. Unless Lessor elects otherwise, Lessor will pay all property taxes on
the Equipment for which Lessee shall reimburse Lessor promptly upon request.
Lessee
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shall timely prepare and file all reports and returns which are required
to be made with respect to any obligation of Lessee under this Paragraph 14.
Lessee shall, to the extent permitted by law, cause all billings of such fees,
taxes, levies, imposts, duties, withholdings and governmental charges to be made
to Lessor in care of Lessee. Upon request, Lessee will provide Lessor with
copies of all such billings.
15. LESSOR'S PAYMENT. If Lessee fails to perform its
obligations under Paragraph 13 or 14 above, or Paragraph 21 below, Lessor shall
have the right to substitute performance, in which case, Lessee shall
immediately reimburse Lessor therefor.
16. GENERAL INDEMNITY. Each Lease is a net lease. Therefore,
Lessee shall indemnify Lessor and its successors and assigns against, and hold
Lessor and its successors and assigns harmless from, any and all claims,
actions, damages, obligations, liabilities and all costs and expenses,
including, without limitation, legal fees, incurred by Lessor or its successors
and assigns arising out of each Lease including, without limitation, the
purchase, ownership, delivery, lease, possession, maintenance, condition, use or
return of the Equipment, or arising by operation of law, except that Lessee
shall not be liable for any claims, actions, damages, obligations and costs and
expenses determined by a non-appealable, final order of a court of competent
jurisdiction to have occurred as a result of the gross negligence or willful
misconduct of Lessor or its successors and assigns. Lessee agrees that upon
written notice by Lessor of the assertion of any claim, action, damage,
obligation, liability or lien, Lessee shall assume full responsibility for the
defense thereof, provided that Lessor's failure to give such notice shall not
limit or otherwise affect its rights hereunder except to the extent Lessee is
actually prejudiced by such failure. Any payment pursuant to this Paragraph
(except for any payment of Rent) shall be of such amount as shall be necessary
so that, after payment of any taxes required to be paid thereon by Lessor,
including taxes on or measured by the net income of Lessor, the balance will
equal the amount due hereunder. The provisions of this Paragraph with regard to
matters arising during a Lease shall survive the expiration or termination of
such Lease.
17. ASSIGNMENT BY LESSEE. Lessee shall not, without the prior
written consent of Lessor, (a) assign, transfer, pledge or otherwise dispose of
any Lease or Equipment, or any interest therein; (b) (i) sublease or lend any
Equipment to anyone or (ii) permit any Equipment to be used by anyone other than
Lessee, its employees, subcontractors and consultants; or (c) move any Equipment
from the location specified for it in the applicable Schedule, except that
Lessee may move Equipment to another location within the United States provided
that Lessee has delivered to Lessor (A) prior written notice thereof and (B)
duly executed financing statements and other agreements and instruments (all in
form and substance satisfactory to Lessor) necessary or, in the opinion of the
Lessor, desirable to protect Lessor's interest in such Equipment.
Notwithstanding anything to the contrary in the immediately preceding sentence,
Lessee may keep any Equipment consisting of motor vehicles or rolling stock at
any location in the United States.
18. ASSIGNMENT BY LESSOR. Lessor may assign its interest or
grant a security interest in any Lease and the Equipment individually or
together, in whole or in part. If Lessee is given written notice of any such
assignment, it shall immediately make all payments of Rent and other amounts
hereunder directly to such assignee. Each such assignee shall have all of the
rights of Lessor under each Lease assigned to it. Lessee shall not assert
against any such assignee any set-off, defense or counterclaim that Lessee may
have against Lessor or any other person.
19. DEFAULT; NO WAIVER. Lessee or any guarantor of any or all
of the obligations of Lessee hereunder (together with Lessee, the "Lease
Parties") shall be in default under each Lease upon the occurrence of any of the
following events (each, an "Event of Default"): (a) Lessee fails to pay within
five days of when due any amount required to be paid by Lessee under or in
connection with any Lease; (b) any of the Lease Parties fails to perform any
other provision under or in connection with a Lease or violates any of the
covenants or agreements of such Lease Party under or in connection with a Lease
and such failure or violation remains unremedied for fifteen days after the
earlier of the date on which Lessee knew or should have known of such failure or
violation or the date on which Lessor has given Lessee notice thereof; (c) any
material representation made or financial information delivered or furnished by
any of the Lease Parties under or in connection with a Lease shall
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<PAGE>
prove to have been inaccurate in any material respect when made; (d) any of the
Lease Parties makes an assignment for the benefit of creditors, whether
voluntary or involuntary, or consents to the appointment of a trustee or
receiver, or if either shall be appointed for any of the Lease Parties or for a
substantial part of its property without its consent and, in the case of any
such involuntary proceeding, such proceeding remains undismissed or unstayed for
forty-five days following the commencement thereof; (e) any petition or
proceeding is filed by or against any of the Lease Parties under any Federal or
State bankruptcy or insolvency code or similar law and, in the case of any such
involuntary petition or proceeding, such petition or proceeding remains
undismissed or unstayed for forty-five days following the filing or commencement
thereof, or any of the Lease Parties takes any action authorizing any such
petition or proceeding; (f) any of the Lease Parties fails to pay when due an
amount in excess of $150,000 in the aggregate in respect of any indebtedness for
borrowed money or under conditional sales or installment sales contracts or
similar agreements, leases or obligations evidenced by bonds, debentures, notes
or other similar agreements or instruments to any creditor (including Lessor
under any other agreement) after any and all applicable cure periods therefor
shall have elapsed; (g) any judgment in excess of $50,000 individually or in the
aggregate shall be rendered against any of the Lease Parties which shall remain
unpaid or unstayed for a period of sixty days; (h) any of the Lease Parties
shall dissolve, liquidate, wind up or cease its business, sell or otherwise
dispose of all or substantially all of its assets or make any material change in
its lines of business; (i) any of the Lease Parties shall amend or modify its
name, unless such Lease Party delivers to Lessor thirty days prior to any such
proposed amendment or modification written notice of such amendment or
modification and within ten days before such amendment or modification delivers
executed financing statements (in form and substance satisfactory to the
Lessor); (j) any of the Lease Parties shall merge or consolidate with any other
entity or make any material redemption of its outstanding capital, in each case
without Lessor's prior written consent, which shall not be unreasonably
withheld; (k) any of the Lease Parties shall suffer any loss or suspension of
any material license, permit or other right or asset necessary to the profitable
conduct of its business, fail generally to pay its debts as they mature, or call
a meeting for purposes of compromising its debts; or (l) any of the Lease
Parties shall deny or disaffirm its obligations hereunder or under any of the
documents delivered in connection herewith
20. REMEDIES. Upon the occurrence and continuation of an Event
of Default, Lessor shall have the right, in its sole discretion, to exercise any
one or more of the following remedies: (a) terminate each Lease; (b) declare any
and all Rent and other amounts then due and any and all Rent and other amounts
to become due under each Lease (collectively, the "Lease Obligations")
immediately due and payable; (c) take possession of any or all items of
Equipment, wherever located, without demand, notice, court order or other
process of law, and without liability for entry to Lessee's premises, for damage
to Lessee's property or otherwise; (d) demand that Lessee return any or all
Equipment to Lessor, and, for each day that Lessee shall fail to return any item
of Equipment, Lessor may demand an amount equal to the Rent payable for such
Equipment; (e) lease, sell or otherwise dispose of the Equipment in a
commercially reasonable manner, with or without notice and on public or private
bid; (f) recover the following amounts from the Lessee (as damages, including
reimbursement of costs and expenses, liquidated for all purposes and not as a
penalty): (i) all costs and expenses of Lessor reimbursable to it hereunder,
including, without limitation, expenses of disposition of the Equipment, legal
fees and all other amounts specified in Paragraph 21 below; (ii) an amount equal
to the sum of (A) any accrued and unpaid Rent through the later of (1) the date
of the applicable default or (2) the date that Lessor has obtained possession of
the Equipment or such other date as Lessee has made an effective tender of
possession of the Equipment to Lessor (the "Default Date") and (B) if Lessor
resells or re-lets the Equipment, Rent at the periodic rate provided for in each
Lease for the additional period that it takes Lessor to resell or re-let all of
the Equipment; (iii) the present value of all future Rent reserved in the Leases
and contracted to be paid over the unexpired Term of the Leases discounted at
five percent simple interest per annum; (iv) the reversionary value of the
Equipment as of the expiration of the Term of the applicable Lease as set forth
on the applicable Schedule; and (v) any indebtedness for Lessee's indemnity
under Paragraph 16 above, plus a late charge at the rate specified in Paragraph
3 above, less the amount received by Lessor, if any, upon sale or re-let of the
Equipment; and (g) exercise any other right or remedy to recover damages or
enforce the terms of the Leases. Upon the occurrence and continuance of an Event
of Default or an event which with the giving of notice or the passage of time,
or both, would result in an Event of Default, Lessor shall have the right,
whether or not Lessor has made any demand or the obligations of Lessee hereunder
have matured, to appropriate and apply to the payment of the obligations of
Lessee hereunder all security deposits and other deposits
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(general or special, time or demand, provisional or final) now or hereafter held
by and other indebtedness or property now or hereafter owing by Lessor to
Lessee. Lessor may pursue any other rights or remedies available at law or in
equity, including, without limitation, rights or remedies seeking damages,
specific performance and injunctive relief. Any failure of Lessor to require
strict performance by Lessee, or any waiver by Lessor of any provision hereunder
or under any Schedule, shall not be construed as a consent or waiver of any
other breach of the same or of any other provision. Any amendment or waiver of
any provision hereof or under any Schedule or consent to any departure by Lessee
herefrom or therefrom shall be in writing and signed by Lessor.
No right or remedy is exclusive of any other provided herein
or permitted by law or equity. All such rights and remedies shall be cumulative
and may be enforced concurrently or individually from time to time.
21. LESSOR'S EXPENSE. Lessee shall pay Lessor on demand all
costs and expenses in protecting and enforcing Lessor's rights and interests in
each Lease and the Equipment, including, without limitation, legal, collection
and remarketing fees and expenses incurred by Lessor in enforcing the terms,
conditions or provisions of each Lease or, upon the occurrence and continuation
of an Event of Default.
22. LESSEE'S WAIVERS. To the extent permitted by applicable
law, Lessee hereby waives any and all rights and remedies conferred upon a
lessee by Sections 2A-508 through 2A-522 of the UCC. To the extent permitted by
applicable law, Lessee also hereby waives any rights now or hereafter conferred
by statute or otherwise which may require Lessor to sell, lease or otherwise use
any Equipment in mitigation of Lessor's damages as set forth in Paragraph 20
above or which may otherwise limit or modify any of Lessor's rights or remedies
under Paragraph 20. Any action by Lessee against Lessor for any default by
Lessor under any Lease shall be commenced within one year after any such cause
of action accrues.
23. NOTICES; ADMINISTRATION. Except as otherwise provided
herein, all notices, approvals, consents, correspondence or other communications
required or desired to be given hereunder shall be given in writing and shall be
delivered by overnight courier, hand delivery or certified or registered mail,
postage prepaid, if to Lessor, then to Technology Finance Division, 76 Batterson
Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice President,
Lease Administration, with a copy to Lessor at Riverway II, West Office Tower,
9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal Department,
if to Lessee, then to Closure Medical Corporation, 5265 Capital Boulevard,
Raleigh, North Carolina 27616, Attention: J. Blount Swain, Chief Financial
Officer or such other address as shall be designated by Lessee or Lessor to the
other party. All such notices and correspondence shall be effective when
received.
24. REPRESENTATIONS. Lessee represents and warrants to Lessor
that (a) Lessee is duly organized, validly existing and in good standing under
the laws of the State of its incorporation; (b) the execution, delivery and
performance by Lessee of this Agreement are within Lessee's powers, have been
duly authorized by all necessary action, and do not contravene (i) Lessee's
organizational documents or (ii) any law or contractual restriction binding on
or affecting Lessee; (c) no authorization or approval or other action by, and no
notice to or filing with, any governmental authority or regulatory body is
required for the due execution, delivery and performance by Lessee of this
Agreement; and (d) each Lease constitutes the legal, valid and binding
obligations of Lessee enforceable against Lessee in accordance with its terms.
25. FURTHER ASSURANCES. Lessee, upon the request of Lessor,
will execute, acknowledge, record or file, as the case may be, such further
documents and do such further acts as may be reasonably necessary, desirable or
proper to carry out more effectively the purposes of this Agreement. Lessee
hereby appoints Lessor as its attorney-in-fact to execute on behalf of Lessee
and authorizes Lessor to file without Lessee's signature any UCC financing
statements and amendments Lessor deems advisable.
26. FINANCIAL STATEMENTS. Lessee shall deliver to Lessor: (a)
as soon as available, but not later than 120 days after the end of each fiscal
year of Lessee and its consolidated subsidiaries, the consolidated balance
sheet, income statement and statements of cash flows and shareholders equity for
Lessee and
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its consolidated subsidiaries (the "Financial Statements") for such year,
reported on by independent certified public accountants without an adverse
qualification; and (b) as soon as available, but not later than 60 days after
the end of each of the first three fiscal quarters in any fiscal year of Lessee
and its consolidated subsidiaries, the Financial Statements for such fiscal
quarter, together with a certification duly executed by a responsible officer of
Lessee that such Financial Statements have been prepared in accordance with
generally accepted accounting principles and are fairly stated in all material
respects (subject to normal year-end audit adjustments).
27. CONSENT TO JURISDICTION. Lessee irrevocably submits to the
jurisdiction of any Illinois state or federal court sitting in Illinois for any
action or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby, and Lessee irrevocably agrees that all claims
in respect of any such action or proceeding may be heard and determined in such
Illinois state or federal court.
28. WAIVER OF JURY TRIAL. LESSEE AND LESSOR IRREVOCABLY WAIVE
ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT
OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
29. FINANCE LEASE. Lessee and Lessor agree that each Lease is
a "Finance Lease" as defined by Section 2A-103(g) of the UCC. Lessee
acknowledges that Lessee has reviewed and approved each written Supply Contract
(as defined by UCC 2A-103(y)) covering Equipment purchased from each "Supplier"
(as defined by UCC 2A-103(x)) thereof.
30. NO AGENCY. Lessee acknowledges and agrees that neither the
manufacturer or supplier, nor any salesman, representative or other agent of the
manufacturer or supplier, is an agent of Lessor. No salesman, representative or
agent of the manufacturer or supplier is authorized to waive or alter any term
or condition of this Agreement or any Schedule and no representation as to the
Equipment or any other matter by the manufacturer or supplier shall in any way
affect Lessee's duty to pay Rent and perform its other obligations as set forth
in this Agreement or any Schedule.
31. SPECIAL TAX INDEMNIFICATION. Lessee acknowledges that
Lessor, in determining the Rent due hereunder, has assumed that certain tax
benefits as are provided to an owner of property under the Internal Revenue Code
of 1986, as amended (the "Code"), and under applicable state tax law, including,
without limitation, depreciation deductions under Section 168(b) of the Code,
and deductions under Section 163 of the Code in an amount at least equal to the
amount of interest paid or accrued by Lessor with respect to any indebtedness
incurred by Lessor in financing its purchase of the Equipment, are available to
Lessor as a result of the lease of the Equipment. In the event Lessor is unable
to obtain such tax benefits as a result of an act or omission of Lessee, is
required to include in income any amount other than the Rent or is required to
recognize income in respect of the Rent earlier than anticipated pursuant to
this Agreement, Lessee shall pay Lessor additional rent ("Additional Rent") in a
lump sum in an amount needed to provide Lessor with the same after-tax yield and
after-tax cash flow as would have been realized by Lessor had Lessor (i) been
able to obtain such tax benefits, (ii) not been required to include any amount
in income other than the Rent and (iii) not been required to recognize income in
respect of the Rent earlier than anticipated pursuant to this Agreement. The
Additional Rent shall be computed by Lessor, which computation shall be binding
on Lessee absent manifest error. The Additional Rent shall be due immediately
upon written notice by Lessor to Lessee of Lessor's inability to obtain tax
benefits, the inclusion of any amount in income other than the Rent or the
recognition of income in respect of the Rent earlier than anticipated pursuant
to this Agreement. The provisions of this Paragraph 31 shall survive the
termination of this Agreement.
32. GOVERNING LAW; SEVERABILITY. EACH LEASE SHALL BE GOVERNED
BY THE LAWS OF THE STATE OF ILLINOIS. IF ANY PROVISION SHALL BE HELD TO BE
INVALID OR UNENFORCEABLE, THE VALIDITY AND ENFORCEABILITY OF THE REMAINING
PROVISIONS SHALL NOT IN ANY WAY BE AFFECTED OR IMPAIRED.
LESSEE ACKNOWLEDGES THAT LESSEE HAS READ THIS AGREEMENT AND
THE
7
<PAGE>
SCHEDULE HERETO, UNDERSTANDS THEM, AND AGREES TO BE BOUND BY THEIR TERMS AND
CONDITIONS. FURTHER, LESSEE AND LESSOR AGREE THAT THIS AGREEMENT AND THE
SCHEDULES DELIVERED IN CONNECTION HEREWITH FROM TIME TO TIME ARE THE COMPLETE
AND EXCLUSIVE STATEMENT OF THE AGREEMENT BETWEEN THE PARTIES, SUPERSEDING ALL
PROPOSALS OR PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS
BETWEEN THE PARTIES RELATING TO THE SUBJECT MATTER HEREOF.
IN WITNESS WHEREOF, the parties hereto have executed or caused
this Master Lease Agreement to be duly executed by their duly authorized
officers as of this 3rd day of March, 1997.
CLOSURE MEDICAL CORPORATION
By: /s/ J. Blount Swain
Name: J. Blount Swain
Title: Chief Financial Officer
Federal Identification Number ###-##-####
TRANSAMERICA BUSINESS CREDIT CORPORATION
By:
Name:
Title:
8
<
<PAGE>
DRAFT
SCHEDULE TO MASTER LEASE AGREEMENT
Dated: February , 1997
Schedule No. 1
LESSOR NAME & MAILING ADDRESS LESSEE NAME & MAILING ADDRESS
Transamerica Business Credit Corporation Closure Medical Corporation
Riverway II 5265 Capital Boulevard
West Office Tower Raleigh, North Carolina 27616
9399 West Higgins Road, Suite 600
Rosemont, Illinois
Equipment Location (if different than Lessee's address above):
This Schedule covers the following described equipment ("Equipment").
See Exhibit II attached hereto and made a part hereof.
The Equipment is hereby leased pursuant to the provisions of the Master Lease
Agreement between the undersigned Lessee and Lessor dated January 29, 1997 (the
"Master Lease"), the terms of which are incorporated herein by reference
thereto, plus the following additional terms, provisions and modifications.
Lessor reserves the right to adjust the monthly payments in accordance with the
Commitment Letter dated January 17, 1997, between the Lessor and Lessee, if the
Lessor has not received this Schedule executed by the Lessee within five
business days from the date set forth above.
1. Term (Number of Months) 60 months
2. Equipment Cost $100,000.00
3. Commencement Date __________________
4. Rate Factor 2.1931% of Equipment Cost
5. Total Rents
6. Advance Rents (first and last)
7. Monthly rental payments
(including monthly sales/use tax of
$_________ and the second such rental
payment will be due on ____________, _____
and subsequent rental payments will
be due on the same day of each month thereafter
8. Security Deposit NONE
9. In addition to the monthly rental
payments provided for herein, Lessee shall
pay to Lessor, as interim rent, payable on
the commencement date specified above, an
amount equal to 1/30th of the monthly rental
payment (including monthly sales/use tax)
multiplied by the number of days from and
including the commencement date through the
end of the same calendar month. $_____________
Lessee hereby irrevocably authorizes Lessor to insert in this Schedule the
Commencement Date and the due date of the first rental payment.
Except as expressly provided or modified hereby, all the terms and provisions of
the Master Lease Agreement shall remain in full force and effect.
The Purchase Date shall be ____________, ____ The Purchase Price shall be the
Fair Market Value of the Equipment. Lessor and Lessee agree that the Fair Market
Value of the Equipment on the Purchase Date shall be not less than 5% nor more
than 10% of the Equipment Cost.
The Stipulated Loss Value of any items of Equipment shall be an amount equal to
the present value of all future Rent discounted at a rate of 6% per annum plus
the Reversionary Value.
The Reversionary Value of any item of Equipment shall be 10% of Equipment Cost.
In witness whereof, this Schedule is hereby executed and agreed to this ____ day
of _______, __, 1997.
TRANSAMERICA BUSINESS CREDIT CLOSURE MEDICAL CORPORATION
CORPORATION (Lessee)
(Lessor)
By:__________________________ By:_______________________
Title:_____________________ Title:______________________
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
PER ITEM 601(B)(11) OF REGULATION S-K
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996
<S> <C> <C>
Pro forma Common Stock outstanding 9,600,000(1) 10,544,932
Common Stock equivalents for options
granted 550,000 0
Shares used in computing pro forma net
loss per common share(2) 10,150,000 10,544,932
Pro forma net loss $(6,972,041) $(16,814,717)
Pro forma net loss per common share $ (.69) $ (1.59)
</TABLE>
(1) Common Stock outstanding as of the beginning of the period reflects the
exchange of obligations of and interests in the Partnership for an
aggregate of 9,600,000 shares of Common Stock of the Company in the
Exchange.
(2) Shares used in computing pro forma net loss per common share is computed
using the weighted-average number of shares of common and common equivalent
shares outstanding during the periods. Common equivalent shares consist of
stock options using the treasury stock method. Common equivalent shares
from stock options are excluded from the computation if their effect is
antidilutive, except pursuant to the requirements of the Securities and
Exchange Commission. Common and common equivalent shares issued from
January 1, 1995 through the effective date of the Company's Initial
Public Offering on September 25, 1996 have been included in the
computation using the treasury stock method as if they were outstanding
for all periods prior to June 30, 1996.
Exhibit 23.1
Consent of Independent Accountants
We hereby consent to the use in the Prospectus constituting part of
this Registration Statement on Form S-1 of our report dated February
14, 1997, except as to Note 9, which is as of March 7, 1997,
relating to the financial statements of Closure Medical
Corporation, which appears in such Prospectus. We also consent to
the references to us under the headings "Experts" and "Selected
Financial Data" in such Prospectus. However, it should be noted that
Price Waterhouse LLP has not prepared or certified such "Selected
Financial Data."
PRICE WATERHOUSE LLP
Raleigh, North Carolina
March 7, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-END> DEC-31-1995 DEC-31-1996
<CASH> 19,698 13,024,317
<SECURITIES> 0 5,035,851
<RECEIVABLES> 266,253 66,983
<ALLOWANCES> 0 0
<INVENTORY> 119,158 112,794
<CURRENT-ASSETS> 432,027 18,218,498
<PP&E> 417,887 851,276
<DEPRECIATION> (142,083) (179,249)
<TOTAL-ASSETS> 907,995 19,512,289
<CURRENT-LIABILITIES> 826,765 3,043,002
<BONDS> 0 0
0 0
0 0
<COMMON> 0 121,500
<OTHER-SE> 0 16,333,381
<TOTAL-LIABILITY-AND-EQUITY> 907,995 19,512,289
<SALES> 1,380,081 3,996,471
<TOTAL-REVENUES> 1,380,081 3,996,471
<CGS> 530,546 459,921
<TOTAL-COSTS> 530,546 459,921
<OTHER-EXPENSES> 6,976,220 20,549,860
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 847,496 138,561
<INCOME-PRETAX> (6,972,041) (16,813,994)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,972,041) (16,813,994)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,972,041) (16,813,994)
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
