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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 1997 or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________ to ____________
Commission file number 0-28748
Closure Medical Corporation
(Exact name of registrant as specified in its charter)
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Delaware 56-1959623
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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5250 Greens Dairy Road, Raleigh, North Carolina
(Address of principal executive offices)
27616
(Zip Code)
Registrant's telephone number, including area code: (919) 876-7800
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class Name of each exchange on which registered
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None None
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of March 18, 1998, the aggregate market value of the Common Stock held by
non-affiliates of the registrant was $131,721,000. Such aggregate market value
was computed by reference to the closing sale price of the Common Stock as
reported on the Nasdaq National Market of The Nasdaq Stock Market on such date.
For purposes of making this calculation only, the registrant has defined
affiliates as including all directors and beneficial owners of more than five
percent of the Common Stock of the Company.
As of March 18, 1998, there were 13,255,680 shares of the registrant's Common
Stock outstanding.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy statement incorporated
by reference in Part III of this Annual Report on Form 10-K or any amendment to
this Annual Report on Form 10-K. [ ]
The following documents are incorporated by reference into Part III, Items 10,
11, 12 and 13 of this Annual Report on Form 10-K: the registrant's definitive
proxy materials for its 1998 Annual Meeting of Stockholders.
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TABLE OF CONTENTS
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PART I ............................................................................... 3
ITEM 1. BUSINESS .................................................................. 3
ITEM 2. PROPERTIES ................................................................ 16
ITEM 3. LEGAL PROCEEDINGS ......................................................... 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ....................... 16
PART II .............................................................................. 17
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS ...................................................................... 17
ITEM 6. SELECTED FINANCIAL DATA ................................................... 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ................................................................ 19
ITEM 8. FINANCIAL STATEMENTS ...................................................... 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES ........................................................ 22
PART III ............................................................................. 23
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ....................... 23
ITEM 11. EXECUTIVE COMPENSATION ................................................... 23
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ........... 23
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ........................... 23
PART IV .............................................................................. 24
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K ......... 24
</TABLE>
Unless the context indicates otherwise, the terms "Closure" and "Company"
refer to Closure Medical Corporation. References in this Annual Report on Form
10-K ("Annual Report") to Closure or the Company also include, unless the
context indicates 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.
"Octyldent" and "Nexaband" are federally registered trademarks of the
Company. "Nexacryl" is a trademark of the Company. "DERMABOND" is a trademark
of Ethicon, Inc., the Company's marketing partner for the product. All other
trade names and trademarks appearing in this Annual Report are the property of
their respective holders. Prior to the selection of the trademark "DERMABOND"
by Ethicon, Inc., DERMABOND was referred to as TraumaSealTM by the Company.
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PART I
ITEM 1. Business.
Forward-Looking Statements
In this Annual Report on Form 10-K or the Exhibits hereto, the statements
contained or incorporated by reference herein that are not historical facts or
statements of current conditions are forward-looking statements. Such forward-
looking statements may be identified by, among other things, the use of
forward-looking terminology such as "believes," "expects," "forecasts,"
"estimates," "plans," "continues," "may," "will," "should," "anticipates" or
"intends" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy or intentions. These forward-looking
statements, such as statements regarding present or anticipated scientific
progress, development of potential products, future revenues, capital
expenditures and research and development expenditures, future financings and
collaborations, management, manufacturing development and capabilities, and
other statements regarding matters that are not historical facts, involve
predictions. The Company's actual results, performance or achievements could
differ materially from the results expressed in, or implied by, these
forward-looking statements. Potential risks and uncertainties that could affect
the Company's actual results, performance or achievements include, but are not
limited to, the "Risk Factors" set forth below. Given these uncertainties,
current or prospective investors are cautioned not to place undue reliance on
any such forward-looking statements. Furthermore, the Company disclaims any
obligation or intent to update any such factors or forward-looking statements
to reflect future events or developments.
Risk Factors
In addition to the other information in this Annual Report on Form 10-K,
the following risk factors should be carefully considered.
Continuing Operating Losses. The Company has incurred net losses in each
year since its inception, including net losses of approximately $6.8 million
for the year ended December 31, 1997. 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
and selling and administrative expenses to increase in order to develop new
products, manufacture in commercial quantities and fund additional clinical
trials. The Company expects to incur a loss in 1998 and may incur losses in
subsequent 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, DERMABOND, 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 "Item 7 -- 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 submitted a premarket approval
application ("PMA") to market DERMABOND in the United States and the General
and Plastic Surgery Devices Panel, an advisory committee of the U.S. Food and
Drug Administration (the "FDA"), unanimously recommended approval with
conditions of the Company's PMA for DERMABOND in January 1998. The Company has
several additional 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
DERMABOND 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.
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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 "Products" and "Manufacturing."
Uncertainty of Regulatory Approval for DERMABOND. Although the General and
Plastic Surgery Devices Panel, an FDA advisory committee, unanimously
recommended approval with conditions of the Company's PMA for DERMABOND, the
regulatory process is lengthy, expensive and uncertain. The panel recommended
two labeling conditions: a statement to remind physicians to adequately cleanse
wounds using appropriate techniques and a statement that DERMABOND is not
intended to replace sutures beneath the skin when sutures are clinically
indicated. A PMA for DERMABOND is anticipated after the Company passes an
inspection by the FDA for compliance with the Good Manufacturing Practices
("GMPs") described in the FDA's Quality System Regulation (QSR), including
validation of its manufacturing process, and receives FDA approval of labeling
and approval of the Company's color additive petition ("CAP") for use of a
color additive in DERMABOND. The FDA has advised the Company that it will have
to demonstrate adequate control of its manufacturing process for DERMABOND. The
Company is completing the validation of its manufacturing process, which it
believes will demonstrate this control. The Company's CAP for DERMABOND is
subject to independent review and approval by the FDA's Center for Food Safety
and Applied Nutrition. There can be no assurance that the Company will be able
to obtain the necessary approvals from the FDA to market and manufacture
DERMABOND 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 approvals would have a
material adverse effect on the Company's results of operations and financial
condition. Although the Company has received authorization to display the CE
mark for DERMABOND, which allows the product to be marketed throughout the
European Union, additional authorizations may be required in other foreign
jurisdictions where DERMABOND will be marketed. A delay in receipt of or
failure to receive such approvals could have a material adverse effect on the
Company's results of operations and financial condition. See " -- Effects of
FDA and other Government Regulation" and "Government Regulations."
Limited Manufacturing Experience. The Company has limited manufacturing
capacity and has limited experience in manufacturing its products. The
Company's future success is dependent on its ability to manufacture its
products in commercial quantities, in compliance with regulatory requirements,
at an acceptable cost and with sufficient stability. The Company currently
manufactures all of its products in a 15,000 square foot facility in Raleigh,
North Carolina. The Company recently relocated its corporate offices to a new
50,000 square foot facility in Raleigh and is in the process of relocating its
manufacturing operations to the same facility. 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 sufficient
manufacturing capabilities to enable it to satisfy demand if DERMABOND is fully
commercialized, 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 its manufacturing capacity sufficiently to meet the
requirements for DERMABOND of Ethicon, Inc. ("Ethicon"), the Company's
marketing partner for DERMABOND, as set forth under their agreement, Ethicon
may itself then manufacture DERMABOND and only pay the Company royalties on
sales. The resulting loss of payments from Ethicon for the purchase of
DERMABOND from the Company would have a material adverse effect on the
Company's results of operations and financial condition.
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
current GMPs, as well as equivalent requirements and inspections by state and
foreign regulatory authorities. There can be no assurance that the Company will
satisfy these requirements for DERMABOND. In addition, 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, FDA refusal to grant premarket approvals
or clearances for pending or future products, issuances of Warning Letters,
injunctions, civil penalties, fines, recalls or seizures of products, total or
partial suspensions of production and criminal prosecution. Additionally,
future modifications of the Company's manufacturing facilities and processes
may subject the Company to further FDA inspections and review prior to
implementation of such modifications. 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 " -- Effects of FDA and Other
Government Regulation," "Marketing Partners" and "Manufacturing."
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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. The Company derived all of its fiscal
1997 revenues from the sale of products to its marketing partners. 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 may
establish a sales force to market certain future products. 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.
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. There can be no assurance that DERMABOND will be
launched in the manner and on the timetable expected by the Company, as such
determinations are entirely within the control of Ethicon, the Company's
marketing partner. 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 "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"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. In the worldwide wound closure market, the Company believes that
DERMABOND will compete with the suture products of Ethicon, the world leader in
the wound closure market, and Tyco International Ltd., as well as the staple
products of Ethicon Endo-Surgery, Inc., a subsidiary of Johnson & Johnson, and
United States Surgical Corporation. In addition, there are currently two other
cyanoacrylate-based topical adhesives with which DERMABOND may compete, neither
of which is approved for sale in the United States. B. Braun GmbH markets
Histoacryl(R) as a topical closure adhesive for small lacerations and incisions
in low skin tension areas of the body. Sherwood-Davis & Geck has test marketed
a similar adhesive, Indermil, in the United Kingdom. Any future products of the
Company may compete with a variety of wound closure products currently on the
market or in development.
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 "Competition and Technological Change."
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
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supply in the future could have a material adverse effect on the Company's
ability to manufacture its products, including DERMABOND, and, consequently,
could have a material adverse effect on the Company's results of operations and
financial condition. See " -- Dependence on Marketing Partners," "Marketing
Partners" and "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 ten U.S. patents with expiration dates ranging
from 2004 to 2014 and one foreign patent, and has filed applications for nine
additional U.S. patents in addition to certain corresponding patent
applications outside the United States. 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
efforts 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 efforts
by the Company, even if the eventual outcome is favorable to the Company.
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 "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 preclinical and 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 include,
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 frequently
must obtain FDA clearance or approval through either the 510(k) premarket
notification
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("510(k)") 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 DERMABOND, often must be obtained through the CAP process. The 510(k), PMA
and CAP processes can be expensive, uncertain and lengthy, and there is no
guarantee of ultimate clearance or approval. 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 preclinical and 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 refusals to approve or clear
new applications or notifications, withdrawals of existing product approvals or
clearances, issuances of Warning Letters, application integrity proceedings,
injunctions, civil penalties, fines, recalls or seizures of products, total or
partial suspensions of production 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
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 medical devices for human use are at different
stages of FDA review. There can be no assurance that the Company will be able
to obtain necessary 510(k) clearances or PMAs 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 " -- Uncertainty of Regulatory Approval for DERMABOND," " -- Limited
Manufacturing Experience" and "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 Company must
obtain required market authorizations and otherwise comply with extensive
regulations regarding safety, manufacturing processes and quality. These
regulations, including the requirements for authorizations to market, may
differ from the FDA regulatory scheme. There can be no assurance that the
Company will obtain market authorizations in such countries or that it will not
be required to incur significant costs in obtaining or maintaining its foreign
market authorizations. Delays in receipt of authorizations to market the
Company's products in foreign countries, failure to receive such authorizations
or the future loss of previously received authorizations 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 DERMABOND 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 "Marketing Partners" and "Government
Regulations."
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 existing products and
future products in development and to establish commercial-scale manufacturing
facilities. The Company believes that existing cash and cash equivalents and
short-term investments, which totaled $21.7 million as of December 31, 1997,
will be sufficient to finance its capital requirements for at least 18 months.
There can be no assurance that the Company will not be required to seek
additional capital to finance its operations in the future. Other than the
Company's equipment financing line of credit and term loan, 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 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
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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 "Item 7 -- Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
Business Overview
Closure develops, manufactures and commercializes 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.
Closure's medical tissue cohesive products align and seal 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
use than sutures or staples.
The Company's lead product, DERMABOND, is a nonabsorbable tissue cohesive
that can be used to replace sutures and staples for certain topical wound
closure applications. On January 30, 1998, the General and Plastic Surgery
Devices Panel, an advisory committee of the FDA, unanimously recommended
approval with conditions of the Company's PMA for DERMABOND. Assuming the
receipt of necessary regulatory approvals, DERMABOND is expected to be marketed
in the United States, Brazil, Japan and Canada by the end of 1998. The
Company's marketing partner for DERMABOND, Ethicon, launched DERMABOND on a
limited basis in 23 countries outside the United States in late 1997 after the
Company received authorization to display the CE mark.
The Company has two other nonabsorbable products for human use and a
product line for veterinary uses. Octyldent, which received 510(k) clearance
from the FDA, is a topical sealant currently used in conjunction with
Actisite(R), a site-specific drug delivery system manufactured by ALZA
Corporation ("ALZA"), to treat adult periodontal disease. Octyldent is marketed
with Actisite(R) 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 and is awaiting PMA approval. 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 marketed by Farnam Companies,
Inc. ("Farnam") and used in veterinary wound closure and management.
The Company is currently developing additional nonabsorbable tissue
cohesive products. These future products require further development, clinical
trials and regulatory clearance or approval prior to commercialization.
Closure is also developing absorbable cyanoacrylate products for internal
applications. In January 1998, Closure established the Absorbable Cohesive
Technology Division, which has separate personnel and a separate research and
development facility, in order to develop and commercialize its absorbable
cohesive products. Any future absorbable 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. 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 slough off naturally as new skin
cells are produced and the wound bed heals. Absorbable formulations may be used
to close or seal internal wounds and degrade, in a predictable, biocompatible
manner, into components that are eliminated from the body naturally.
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. The Company's current products perform
consistently and reproducibly, do not require special preparation or
refrigeration and have shelf-lives of at least 18 months.
Closure has developed applicator and packaging technology to deliver
DERMABOND and other products to wound sites in order to enhance the utility of
its products. The current DERMABOND applicator contains a catalyst that
controls the rate of polymerization and allows the cohesive film to be applied
in multiple layers, which enhances bond strength.
During the years ended December 31, 1995, 1996 and 1997, the Company spent
$652,000, $861,000 and $1,639,000, respectively, on research and development
activities.
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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, require anesthetics, are time-consuming to apply, and generally 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 for removal.
DERMABOND
The Company's lead product, DERMABOND, is a topical tissue cohesive used
to close wounds from skin lacerations and incisions, minimally invasive surgery
and plastic surgery. DERMABOND is used as a replacement for sutures or staples
or in conjunction with subcuticular sutures or staples. DERMABOND is intended
to be used topically for wound closure on low skin tension areas of the body
and is not intended for use on the hands, feet or across joints. Although the
purchase cost of DERMABOND is expected to be greater than sutures or staples,
the Company believes that the use of DERMABOND will result in lower overall
material and 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.
On January 30, 1998, the General and Plastic Surgery Devices Panel, an FDA
advisory committee, unanimously recommended approval with conditions of the
Company's PMA for DERMABOND. The panel recommended two labeling conditions: a
statement to remind physicians to adequately cleanse wounds using appropriate
techniques and a statement that DERMABOND is not intended to replace sutures
beneath the skin when sutures are clinically indicated.
The Company completed an 818-patient controlled, randomized clinical trial
of DERMABOND at ten sites throughout the United States. The clinical trial
compared wound closure utilizing DERMABOND with wound closure utilizing sutures
or staples. The clinical trial demonstrated DERMABOND to be at least comparable
to topical nonabsorbable U.S.P. size 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 DERMABOND substantially
reduced procedure time and inflammation.
A PMA for DERMABOND is anticipated after the Company passes a GMP
inspection by the FDA, including validation of its manufacturing process, and
receives FDA approval of labeling and approval of the Company's CAP for use of
a color additive in DERMABOND. There can be no assurance as to the timing of
these events. See "Risk Factors--Uncertainty of Regulatory Approval for
DERMABOND."
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 DERMABOND. The Company received authorization to
display the CE mark for DERMABOND in the European Union in August 1997, which
allows DERMABOND to be marketed throughout the European Union. Ethicon launched
DERMABOND on a limited basis in 23 countries outside the United States in late
1997. Assuming the receipt of necessary regulatory approvals, product launch of
DERMABOND is expected in the United States, Brazil, Japan and Canada by the end
of 1998.
Other Products
Octyldent, the Company's first product for human use, is a topical sealant
used in conjunction with site-specific sustained release antibacterial drug
therapy to treat adult periodontal disease. Octyldent seals the pocket of a
diseased gum where Actisite-, 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 is marketed with Actisite- by the Procter &
Gamble/ALZA Partnership in the United States 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 approvable letter from the FDA for its
PMA application for Nexacryl and PMA approval is contingent upon sterilization
validation studies and FDA approval of labeling. The Company's marketing
partner for Nexacryl is Chiron. The Company has five topical tissue cohesive
products sold under the Nexaband trade name used in veterinary wound closure
and management procedures. 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 is currently developing additional nonabsorbable tissue
cohesive products. These future products require further development, clinical
trials and regulatory clearance or approval prior to commercialization. See
"Government Regulations."
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In January 1998, Closure established the Absorbable Cohesive Technology
Division, which has separate personnel and a separate research and development
facility, in order to develop and commercialize its absorbable cohesive
products. The Division will be responsible for developing absorbable
cyanoacrylate products for internal applications. The Company presently has two
products in development, a surgical tissue cohesive to be used to close
internal surgical incisions and traumatic wounds and a surgical sealant to be
used to control post-surgical leakage at suture closure sites. Any future
absorbable products require further development, clinical trials and regulatory
clearance or approval prior to commercialization. See "Government Regulations."
Ethicon and Other Marketing Agreements
The Company's strategy for its current nonabsorbable products is to enter
into marketing agreements with marketing partners to sell its products. The
Company is dependent on its marketing partners to market and distribute these
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. Any future products of
the Company may be sold through marketing partners or a direct sales force. See
"Risk Factors--Dependence on Marketing Partners."
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
DERMABOND, the Company's lead nonabsorbable product. 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 DERMABOND in the United States within two years from
the date of submission of the Company's 510(k) notification or PMA. Upon
certain events of default, including failure to provide an adequate supply of
product, Ethicon may terminate its arrangement to purchase DERMABOND from the
Company, and Ethicon may itself then manufacture DERMABOND and only pay the
Company royalties based on sales. See "Risk Factors -- Limited Manufacturing
Experience," "Risk Factors -- Dependence on Marketing Partners," "Products --
DERMABOND" and "Manufacturing."
The Company entered into a supply agreement with the Procter & Gamble/ALZA
Partnership which grants it non-exclusive worldwide rights to market and
distribute Octyldent with Actisite(R), a product manufactured by ALZA. The
Company entered into a supply agreement with ALZA which grants it 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 agreements guarantee the Company minimum purchases annually and
provide for specified prices per unit. The agreements have automatic renewals
for additional one-year periods and are terminable upon specified events,
including, among others, certain breaches and revocation or suspension of the
Company's 510(k) clearance for Octyldent.
The Company entered into a supply and distribution agreement with Chiron
which provides it with the exclusive rights to market, sell and distribute
certain human ophthalmic products on a worldwide basis and provides Chiron with
an option to expand its coverage to include new products. The Company 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 and 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, among others, certain breaches or upon 30
days' notice from Chiron as to any product for which FDA clearance or approval
is then pending or 180 days' notice from Chiron 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.
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. The agreement provides
for minimum purchases which increase annually and 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.
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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 ten U.S. patents with
expiration dates ranging from 2004 to 2014 and one foreign patent, and has
filed applications for nine additional U.S. patents in addition to certain
patent applications outside the United States. The issued U.S. patents relate
to the Company's tissue cohesive formulations and delivery technology. The
pending U.S. patent applications relate to the Company's formulations,
sterilization, processes and delivery 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 impact on the Company's results of operations and
financial condition.
Litigation, which could result in substantial costs to and diversion of
efforts 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 efforts
by the Company, even if the eventual outcome is favorable to the Company.
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 preclinical and 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
include, among other things, establishment registration and inspection, medical
device listing, prohibitions against misbranding and adulteration, labeling and
postmarket reporting. The regulatory
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process is lengthy, expensive and uncertain. Securing FDA approvals and
clearances may require the submission of extensive preclinical and clinical
data and supporting information to the FDA. Failure to comply with applicable
requirements can result in refusal to approve or clear new applications or
notifications, withdrawals of existing product approvals or clearances,
issuances of Warning Letters, application integrity proceedings, injunctions,
civil penalties, fines, recalls or seizures of products, total or partial
suspensions of production and criminal prosecution. See "Risk Factors --
Effects of FDA and Other Government Regulation."
Under the FDC Act, medical devices are classsified into one of three
classes (Class I, II or III) on the basis of the controls necessary to
reasonably ensure their safety and effectiveness. Before any new medical device
may be introduced to the market, the manufacturer frequently 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 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. DERMABOND and
Nexacryl are Class III medical devices. 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. Prior to granting a PMA, the
FDA will generally conduct an inspection of the manufacturer's facilities to
ensure compliance with GMPs and the FDA must approve final labeling. 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,
future modifications of the Company's manufacturing facilities and processes
may subject the Company to further FDA inspections and review prior to
implementation of such modifications.
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 medical devices for human use are at different
stages of FDA review. In January 1998, the General and Plastic Surgery Devices
Panel, an FDA advisory committee, unanimously recommended approval with
conditions of the Company's PMA for DERMABOND. The panel recommended two
labeling conditions: a statement to remind physicians to adequately cleanse
wounds using appropriate techniques and a statement that DERMABOND is not
intended to replace sutures beneath the skin when sutures are clinically
indicated. A PMA for DERMABOND is anticipated after the Company passes a GMP
inspection by the FDA, including validation of its manufacturing process, and
receives FDA approval of labeling and approval of the Company's CAP for use of
a color additive in DERMABOND. Octyldent, the Company's product sold in
conjunction with Actisite(R), received 510(k) clearance in 1990, and is subject
to GMP, postmarket reporting and other FDA requirements. Nexacryl has received
an approvable letter from the FDA and PMA approval is anticipated following
sterilization validation studies and FDA approval of labeling.
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 -- Uncertainty of Regulatory Approval for DERMABOND," "Risk Factors --
Limited Manufacturing Experience" and "Risk Factors -- Effects of FDA and Other
Government Regulation."
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Foreign Regulatory Matters
In order for the Company to market its products in Europe, Australia,
Canada and certain other foreign jurisdictions, the Company must obtain
required market authorizations and otherwise comply with extensive regulations
regarding safety, manufacturing processes and quality. These regulations,
including the requirements for authorizations to market, may differ from the
FDA regulatory scheme. The time required to obtain authorization for marketing
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 market
authorizations. There can be no assurance that the Company will obtain market
authorizations in such countries or that it will not be required to incur
significant costs in obtaining or maintaining its foreign market
authorizations. Delays in receipt of authorizations to market the Company's
products in foreign countries, failure to receive such authorizations or the
future loss of previously received authorizations could have a material adverse
effect on the Company's results of operations and financial condition.
Pursuant to the FDC Act, a non-FDA approved medical device may be exported
to any country, provided that the device complies with the laws of that country
and 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. Generally, export of unapproved
devices (i.e., those requiring a PMA in the U.S.) that do not have marketing
authorization in a listed country will continue to require prior 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"). As of June 14, 1998, compliance with the MDD
requires that manufacturers of devices covered by the MDD must obtain the right
to display the CE mark, which allows the device to be marketed, put into
service and circulated freely within the European Union. The Company received
authorization to display the CE mark in the European Union for DERMABOND and
other topical and ophthalmic tissue cohesive applications in August 1997 and
for Octyldent in August 1995. The Company plans to pursue the right to display
the CE mark on future products for human use that the Company may develop.
There can be no assurance that the Company will be successful in obtaining the
right to display the CE mark on any additional medical devices. Failure to
obtain the right to display 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."
Upon receipt of the CE mark, every six months for two years and annually
thereafter, the Company must demonstrate that its quality management system
meets the requirements of the MDD and its technical documentation for products
displaying the CE mark is accurate and reflects the current manufacturing
process. See "Manufacturing."
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.
Manufacturing
The Company has devoted considerable resources to the development of
manufacturing processes and technologies capable of providing its products with
clinical efficacy, safety, 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 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 in Raleigh, North Carolina. This facility integrates production,
bottling, labeling and packaging capabilities for products currently being
marketed. The
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Company recently relocated its corporate offices to a new 50,000 square foot
facility in Raleigh and is in the process of relocating its manufacturing
operations to the same facility. The Company expects that its manufacturing
operations in the new facility will be validated and fully operational by the
fourth quarter of 1998 and believes that this facility will be sufficient to
meet Ethicon's worldwide market demand for DERMABOND. See "Item 2 --
Properties."
The Company is implementing a multiphase plan for additional expansion of
its manufacturing capabilities in conjunction with the launch of DERMABOND in
Europe and the future launch of the product in the United States. Part of this
expansion is the integration of all the operations associated with the filling
and packaging of DERMABOND, which currently are completed by outside providers.
Such expansion and scale-up is expected to occur over the next three years and
will provide for sufficient capacity for all current products, including
DERMABOND, as well as planned new product introductions. 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 DERMABOND as set
forth under their agreement, Ethicon may itself then manufacture DERMABOND and
only pay the Company royalties based on sales. See "Risk Factors -- Limited
Manufacturing Experience" and "Marketing Partners."
In June 1997, in connection with the Company's application for its CE mark
to market DERMABOND in the European Union, the Company was registered by its
notified body, British Standards Institution ("BSI"), to certify that the
Company's quality management system complies with the requirements of the ISO
9002 international quality assurance standard issued by the International
Organization of Standardization of Geneva, Switzerland. In January 1998, BSI
expanded the scope of the Company's quality system certification to include
compliance with ISO 9001, a comprehensive international standard for
manufacturing and servicing firms for quality assurance in design, development,
production, installation and servicing.
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 is its process control equipment. See "Risk Factors --
Dependence on Sole Source Supplier."
The Company presently hires filling and packaging employees on a temporary
basis, and the Company expects that a 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
believes that DERMABOND will compete with the suture products of Ethicon, the
world leader in the wound closure market, and Tyco International Ltd., as well
as the staple products of Ethicon Endo-Surgery, Inc., a subsidiary of Johnson &
Johnson, and United States Surgical Corporation. In addition, there are
currently two other cyanoacrylate-based topical adhesives with which DERMABOND
may compete, neither of which is approved for sale in the United States. B.
Braun GmbH markets Histoacryl(R) as a topical closure adhesive for small
lacerations and incisions in low skin tension areas of the body. Sherwood-Davis
& Geck has test marketed a similar adhesive, Indermil, in the United Kingdom.
Any future products of the Company may compete with a variety of wound closure
products currently on the market or in development. 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 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
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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.
Employees
As of March 18, 1998, the Company had 61 full-time employees, of whom 48
were dedicated to research, development, manufacturing, quality control and
regulatory affairs and 13 were dedicated to administrative activities. Nine
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.
Executive Officers of the Company
The table below sets forth the names, ages and titles of the persons who
are the executive officers of the Company as of March 18, 1998.
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------- ----- -----------------------------------------------------------
<S> <C> <C>
Robert V. Toni ................ 57 President and Chief Executive Officer and Director
J. Blount Swain ............... 41 Vice President of Finance and Chief Financial Officer
Joe B. Barefoot ............... 47 Vice President of Regulatory Affairs and Quality Assurance
Dennis D. Burns ............... 52 Vice President/General Manager, Absorbable Cohesive
Technology Division
Jeffrey G. Clark .............. 44 Vice President of Research and Development
William M. Cotter ............. 47 Vice President of Manufacturing and Operations
Anthony J. Sherbondy .......... 44 Vice President of New Business Generation
</TABLE>
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.
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.
15
<PAGE>
Dennis D. Burns has served as Vice President/General Manager of the
Company's newly-formed Absorbable Cohesive Technology Division since February
1998. From 1994 to 1997, Mr. Burns was principal of The Delta Group, a
healthcare consulting company he founded in 1994, through which he functioned
as President of EpiGenesis Pharmaceuticals. From 1992 to 1994, he was President
and Chief Executive Officer of Macronex, Inc., an immunotherapy company. From
1979 to 1992, Mr. Burns held various executive positions at Johnson & Johnson,
most recently from 1988 to 1992 as Vice President, Business Development of
Ortho Biotech, Inc. Mr. Burns holds a B.S. degree in Biology from Manhattan
College.
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.
William M. Cotter has served as Vice President of Manufacturing and
Operations of the Company since June 1997. From 1989 to 1997, Mr. Cotter was
Vice President of Operations (North America) of Sanofi Diagnostics Pasteur,
Inc., a company involved in the design, manufacturing and marketing of in vitro
diagnostics instrumentation and biological reagents. From 1984 to 1988, he
worked at Genetic Systems Corporation, a subsidiary of Bristol Myers Company,
where he was involved in the commercialization of one of the first diagnostic
test kits for the HIV virus. Prior to that time, Mr. Cotter worked at Advanced
Technology Laboratories, Inc., a division of E.R. Squibb Company, from 1980 to
1984. Mr. Cotter holds a B.A. degree from Ohio University.
Anthony J. Sherbondy has served as Vice President of New Business
Generation of the Company since January 1998. Prior to that time, Mr. Sherbondy
served as Director of Marketing of the Company from October 1996. From 1995 to
1996, he was the principal executive and founder of MedNet Market Research,
LLC, a healthcare market research company. From 1992 to 1995, Mr. Sherbondy
served as Director of Sales and Marketing Operations for
Pasteur-Merieux-Connaught, a Rh-ne-Poulenc company. From 1983 to 1992, he held
various positions at IOLAB Corporation, a Johnson & Johnson company. Mr.
Sherbondy holds a B.A. degree from California State University and an M.B.A.
from The Claremont Graduate School.
ITEM 2. Properties.
In February 1997, the Company entered into a ten-year lease for
approximately 50,000 square feet of office, laboratory and manufacturing space
in Raleigh, North Carolina for, among other things, the corporate headquarters
of the Company and the expansion of manufacturing capacity. The term of this
lease began in September 1997. The Company recently relocated its corporate
offices to this new facility and is in the process of relocating its
manufacturing operations to the same facility. The Company expects that its
manufacturing operations in the new facility will be validated and fully
operational by the fourth quarter of 1998. The Company also leases
approximately 15,000 square feet of office, laboratory and manufacturing space
in Raleigh and presently manufactures all of its products in this facility, and
leases a 5,800 square foot facility in Raleigh in which the Company's recently
formed Absorbable Cohesive Technology Division conducts its research and
development activities and other operations. The Company recently negotiated
lease extensions for these two facilities through November 1998 and March 2001,
respectively.
ITEM 3. 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 assumed the defense of
this lawsuit. This case is in the process of being settled. The Company has
paid a nominal amount in full payment of its share of the settlement,
The Company is currently not a party to any material legal proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders.
The Company did not submit any matters to a vote of security holders
during the fourth quarter of fiscal year 1997.
16
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters.
Price Range of Common Stock and Dividend Policy
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 ................................... $ 21.50 $ 12.50
Second Quarter .................................. 23.75 14.25
Third Quarter ................................... 38.75 18.00
Fourth Quarter .................................. 35.13 21.88
</TABLE>
As of March 18, 1998, there were approximately 256 holders of record of
the Company's Common Stock. 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.
Use of Proceeds from Initial Public Offering
The Company's Registration Statement on Form S-1 (Registration Statement
No. 333-5425) for the Company's initial public offering (the "IPO") of
3,000,000 shares of Common Stock, of which 2,550,000 shares were sold by the
Company, was declared effective by the Commission on September 25, 1996 (the
"Effective Date"). The net proceeds to the Company from the IPO were
approximately $17,926,000.
For the period beginning on the Effective Date through December 31, 1997,
reasonable estimates of the uses of proceeds from the IPO are as follows:
<TABLE>
<CAPTION>
(millions)
--------------
<S> <C>
Working capital ................................ $ 3.4
Research and development and regulatory affairs 4.6 (a)
Capital expenditures ........................... .3 (b)
Obtain and protect patents ..................... .1
------
Total .......................................... 8.4
</TABLE>
Of the above uses of proceeds attributed to working capital, approximately
$116,000 represented direct payments to directors for annual board compensation
and meeting fees and expenses and approximately $1,276,000 represented payments
to officers of the Company for compensation. Included in the payments to
directors was approximately $38,000 to two individuals beneficially owning ten
percent of more of the Common Stock of the Company. Additionally, reflected in
the working capital is approximately $150,000 paid to a consultant who provides
services to the Company.
(a) Regulatory affairs expenses primarily consist of clinical trials expenses.
(b) Of the Company's capital expenditures of approximately $3.2 million for
this period, approximately $2.9 million has been financed through a
capital lease agreement (see "Item 7 -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources").
17
<PAGE>
ITEM 6. Selected Financial Data.
The selected financial data set forth below for each year in the five year
period ended December 31, 1997 have been derived from financial statements
audited by Price Waterhouse LLP, independent accountants. The balance sheets as
of December 31, 1996 and 1997 and the related statements of operations and of
cash flows for the years ended December 31, 1995, 1996 and 1997 and notes
thereto appear elsewhere in this Annual Report. This data should be read in
conjunction with "Item 7 -- 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 Annual Report.
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ------------ -----------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Product sales ...................................................... $ 1,048 $ 1,478 $ 1,380 $ 496 $ 1,551
License and product development revenues ........................... 162 25 -- 3,500 --
-------- -------- -------- --------- --------
Total revenues .................................................. 1,210 1,503 1,380 3,996 1,551
Cost of products sold .............................................. 366 528 531 460 1,398
-------- -------- -------- --------- --------
Gross profit and license and product development revenues .......... 844 975 849 3,536 153
-------- -------- -------- --------- --------
Research, development and regulatory affairs expenses .............. 863 1,231 1,637 3,167 3,594
Selling and administrative expenses ................................ 1,037 1,366 1,589 2,879 4,752
Charges related to Partnership capital changes (1) ................. -- -- 3,500 14,210 --
Payments to CRX Medical, Inc. and Caratec, L.L.C. .................. 150 150 250 293 --
-------- -------- -------- --------- --------
Total operating expenses ........................................ 2,050 2,747 6,976 20,549 8,346
-------- -------- -------- --------- --------
Loss from operations ............................................... (1,206) (1,772) (6,127) (17,013) (8,193)
Interest expense ................................................... -- -- -- -- (72)
Investment and interest income ..................................... -- 2 2 337 1,436
Interest expense to Sharpoint Development Corporation .............. (342) (445) (847) (138) --
-------- -------- -------- --------- --------
Net loss ........................................................... $ (1,548) $ (2,215) $ (6,972) $ (16,814) $ (6,829)
======== ======== ======== ========= ========
Net loss per common share -- basic and diluted (2) ................. $ (0.16) $ (0.23) $ (0.73) $ (1.63) $ (0.53)
========= ========= ========= ========= ========
Shares used in computation of net loss per common share -- basic
and diluted (2) .................................................. 9,600 9,600 9,600 10,285 12,966
========= ========= ========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
----------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ------------ ---------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents and short-term investments .............. $ 11 $ 30 $ 20 $17,651 $21,694
Working capital (deficit) ......................................... (392) (10) (395) 15,175 18,034
Total assets ...................................................... 764 784 908 19,512 30,419
Long-term debt and capital lease obligations, less current portion 5,232 7,851 10,088 14 2,400
Total partners' capital (deficit) and stockholders' equity ........ (5,163) (7,378) (10,850) 16,455 22,419
</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. Immediately prior to the Company's initial public
offering, on September 25, 1996, the Company consummated an exchange of
obligations of and interests in the Partnership for 9,600,000 shares of
Common Stock. In connection with this exchange, 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 Note 1 to Notes to Financial Statements.
(2) See Note 2 to Notes to Financial Statements for a discussion of the basis
for reported net loss per common share.
18
<PAGE>
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The statements set forth below that are not historical facts or statements
of current conditions are forward-looking statements. Such forward-looking
statements may be identified by, among other things, the use of forward-looking
terminology such as "believes," "expects," "forecasts," "estimates," "plans,"
"continues," "may," "will," "should," "anticipates" or "intends" or the
negative thereof or other variations thereon or comparable terminology, or by
discussions of strategy or intentions. These forward-looking statements, such
as statements regarding present or anticipated scientific progress, development
of potential products, future revenues, capital expenditures and research and
development expenditures, future financings and collaborations, management,
manufacturing development and capabilities, and other statements regarding
matters that are not historical facts, involve predictions. The Company's
actual results, performance or achievements could differ materially from the
results expressed in, or implied by, these forward-looking statements.
Potential risks and uncertainties that could affect the Company's actual
results, performance or achievements include, but are not limited to, the "Risk
Factors" set forth in Item 1 of this Annual Report. Given these uncertainties,
current or prospective investors are cautioned not to place undue reliance on
any such forward-looking statements. Furthermore, the Company disclaims any
obligation or intent to update any such factors or forward-looking statements
to reflect future events or developments.
The following discussion should be read in conjunction with the Company's
financial statements, including the notes thereto, included elsewhere in this
Annual Report.
Overview
Since its inception in May 1990, the Company has been developing,
manufacturing and commercializing 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 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. On April
2, 1997, the Company completed a follow-on public offering, issuing 1,025,000
shares of Common Stock and generating net proceeds of approximately
$12,020,000.
The Company has been unprofitable since its inception and has incurred net
losses in each year, including a net loss of approximately $6,829,000 for the
year ended December 31, 1997. The Company anticipates that its recurring
operating expenses will increase for the next several years, as it expects its
research and development and selling and administrative expenses to increase in
order to develop new products, manufacture in commercial quantities and fund
additional clinical trials. The Company also expects to incur additional
capital expenditures to expand its manufacturing capabilities. The Company
expects to incur a loss in 1998 and may incur losses in subsequent 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 DERMABOND, 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.
Immediately prior to the Company's initial public offering, on September
25, 1996, the Company consummated an exchange of obligations of and interests
in the Partnership for an aggregate of 9,600,000 shares of Common Stock (the
"Exchange"). 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. 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.
19
<PAGE>
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, but none have been paid due to losses generated
for tax purposes.
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 and $304,000 for the
years ended December 31, 1996 and 1997, respectively, 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 $304,000 per year in the next two years and $88,000 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.
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Total revenues for 1997 decreased 61% to $1,551,000 from $3,996,000 for
1996. This decrease was primarily the result of the receipt of $3,500,000 in
March 1996 in license and product development revenues under the supply and
distribution agreement for DERMABOND. Product sales increased to $1,551,000 for
1997 from $496,000 for 1996.
Cost of products sold for 1997 increased to $1,398,000 from $460,000 for
1996. Cost of products sold as a percentage of product sales decreased to 90%
for 1997 from 93% for 1996. This decrease in cost of products sold as a
percentage of product sales was primarily a result of the increased sales
volume of DERMABOND, Nexaband and Octyldent, resulting in the fixed portion of
cost of products sold being allocated over higher sales.
Operating expenses for 1997 decreased to $8,346,000 from $20,549,000 for
1996. 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. Excluding this non-cash charge, total operating expenses
for 1996 were $6,339,000 compared to $8,346,000 for 1997, representing a 32%
increase for 1997. This increase was primarily attributable to the addition of
personnel in research and development, new business generation and
administrative departments reflecting the growth of the Company. In addition,
in 1997 the Company incurred additional administrative costs associated with
supporting a public company, such as directors' and officers' liability
insurance, investor relations and other professional fees. These increases were
offset by decreases in costs associated with the conduct of clinical trials for
DERMABOND.
Interest expense for 1997 was $72,000 as a result of debt incurred during
the year associated with a new lease line and a term loan entered into during
March and November 1997, respectively. See " -- Liquidity and Capital
Resources."
Investment and interest income for 1997 increased to $1,436,000 from
$337,000 in 1996. This increase was a result of interest earned from higher
average cash and investment balances resulting from the proceeds of the
Company's public offerings in September 1996 and April 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Total revenues were $3,996,000 for 1996 compared to $1,380,000 for 1995.
This increase resulted from the receipt of $3,500,000 in March 1996 in license
and product development revenues under the supply and distribution agreement
for DERMABOND. Product sales decreased to $496,000 for 1996 from $1,380,000 for
1995. 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.
Cost of products sold for 1996 decreased to $460,000 from $531,000 for
1995. Cost of products sold as a percentage of product sales increased to 93%
for 1996 from 38% for 1995. This increase in cost of products sold as a
percentage of product sales was primarily a result of the decreased sales
volume of Octyldent, resulting in the fixed portion of cost of products sold
being allocated over lower sales, and additional costs associated with the
expansion of the Company's manufacturing capabilities in anticipation of future
DERMABOND production.
20
<PAGE>
Operating expenses for 1996 increased 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 described above. Included in operating expenses for 1995 was a one-
time non-cash charge of $3,500,000 representing the estimated fair value of the
partnership interest of certain employee limited partners admitted into the
Partnership on December 31, 1995. Excluding these non-cash charges, total
operating expenses increased 82% to $6,339,000 for 1996 from $3,476,000 for
1995. These increases related to costs associated with the conduct of clinical
trials for DERMABOND, 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 compared to $847,000
for 1995. This decrease was primarily a result of the related debt being
converted to capital as of March 29, 1996.
Investment and interest income for 1996 increased to $337,000 from $2,000
in 1995. This increase was a result of interest earned from higher average cash
and investment balances resulting from the proceeds of the Company's initial
public offering.
Liquidity and Capital Resources
The Company has financed its operations to date primarily through the sale
of equity securities, borrowings from Sharpoint and other lenders, license and
product development revenues and product sales. Through December 31, 1997, the
Company has raised approximately $30.0 million in equity financing. Through
March 29, 1996, the Partnership had borrowed approximately $9,571,000 from
Sharpoint, which excludes accrued interest of $931,000 converted to long-term
debt on December 31, 1994. As of March 29, 1996, all such long-term debt,
including accrued interest, was contributed as partners' capital to the
Partnership. During 1997, the Company entered into and received approximately
$3.0 million from a new lease line and a term loan. Subsequently, in February
1998, the Company received an additional $1.5 million under its $3.0 million
term loan, representing the balance issuable under the term loan. In addition,
the Company received $5.5 million related to the supply and distribution
agreement for DERMABOND entered into with Ethicon in March 1996, of which $2.0
million has been classified as deferred revenue and will be credited against
future royalties and product purchases expected to be paid by Ethicon.
Cash used by operating activities was $5,585,000 for 1997 as compared to
cash provided by operating activities of $287,000 during 1996. Operating
activities used cash of $2,113,000 during 1995. These changes in cash from
operations were primarily due to the receipt during 1996 of $3,500,000 from
Ethicon under the supply and distribution agreement for DERMABOND.
Cash used for investing activities was $14,052,000 during 1997, up from
$5,637,000 and $104,000 for 1996 and 1995, respectively. These increases in
1997 and 1996 were primarily to purchase investments, acquire capital equipment
and to obtain and establish patents. During 1995, cash was used primarily to
acquire capital equipment.
Cash provided by financing activities was $13,890,000 and $18,354,000 for
1997 and 1996, respectively. The Company's primary financing activities during
these periods were the Company's public offerings. In addition, the Company has
commitments from lenders, including an equipment lease line and a term loan, to
borrow up to $4.5 million for equipment financing and leasehold improvements.
As of December 31, 1997, the Company had borrowed approximately $3.0 million
under these agreements.
The Company believes that existing cash and cash equivalents and
short-term investments, which totaled $21.7 million as of December 31, 1997,
will be sufficient to finance its capital requirements for at least 18 months.
The Company expects to incur a loss in 1998 and may incur losses in subsequent
years, although the amount of future net losses and time required by the
Company to reach profitability are highly uncertain. The Company anticipates
that its recurring operating expenses will increase for the next several years,
as it expects its research and development and selling and administrative
expenses to increase in order to develop new products, manufacture in
commercial quantities and fund additional clinical trials. The Company also
expects to incur additional capital expenditures to expand its manufacturing
capabilities.
The Company's future capital requirements, however, will depend on
numerous factors, including (i) the Company's ability to manufacture and
commercialize successfully its lead product, DERMABOND, (ii) the progress of
its research and product development programs for future nonabsorbable and
absorbable products, including clinical studies, (iii) the effectiveness of
product commercialization activities and marketing agreements for its future
products, including additional scale-up of manufacturing capability in
anticipation of product commercialization and development and progress of sales
and marketing efforts, (iv) the ability of the Company to maintain existing
marketing agreements, including its agreement with Ethicon for DERMABOND, and
establish and maintain new marketing agreements, (v) the costs involved in
preparing,
21
<PAGE>
filing, prosecuting, defending and enforcing intellectual property rights and
complying with regulatory requirements, (vi) the effect of competing
technological and market developments and (vii) general economic conditions.
There can be no assurance that the Company will not be required to seek
additional capital to finance its operations in the future. If 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 line of credit
and term loan, 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."
The Company is aware of the issues associated with the year 2000 situation
in existing computer systems and continues to evaluate appropriate courses of
corrective actions, if any. The Company believes that the year 2000 issue will
not significantly impact the financial position of the Company or pose
significant operational problems.
ITEM 8. Financial Statements.
The financial statements of the Company required by this item are attached
to this Annual Report beginning on page F-1.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures.
None.
22
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant.
The information required by this item concerning directors and compliance
with Section 16(a) of the Securities Exchange Act of 1934, as amended, is
incorporated herein by reference to the Company's definitive 1998 Proxy
Statement to be filed with the Commission not later than 120 days after the end
of the fiscal year ended December 31, 1997. The required information as to
executive officers is set forth in Part I hereof and incorporated herein by
reference.
ITEM 11. Executive Compensation.
The information required by this item is incorporated herein by reference
to the Company's definitive 1998 Proxy Statement to be filed with the
Commission not later than 120 days after the end of the fiscal year ended
December 31, 1997.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this item is incorporated herein by reference
to the Company's definitive 1998 Proxy Statement to be filed with the
Commission not later than 120 days after the end of the fiscal year ended
December 31, 1997.
ITEM 13. Certain Relationships and Related Transactions.
The information required by this item is incorporated herein by reference
to the Company's definitive 1998 Proxy Statement to be filed with the
Commission not later than 120 days after the end of the fiscal year ended
December 31, 1997.
23
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. Financial Statements.
The financial statements listed in the accompanying Index to Financial
Statements at page F-1 are filed as part of this Annual Report.
2. Financial Statement Schedules.
All financial statement schedules have been omitted because they are not
applicable, or not required, or the information is shown in the financial
statements or notes thereto.
3. Exhibits. (See (c) below)
(b) Reports on Form 8-K
The Company did not file a report on Form 8-K during the quarter ended
December 31, 1997.
(c) Exhibits.
The following is a list of exhibits filed as part of this Annual Report.
Where so indicated by footnote, exhibits which were previously filed are
incorporated by reference. For exhibits incorporated by reference, the location
of the exhibit in the previous filing is indicated in parentheses.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ---------------------- --------------------------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation. (Exhibit 3.1)(1)
3.2 Amendment to Restated Certificate of Incorporation. (Exhibit 3.2)(2)
3.3 By-Laws. (Exhibit 3.2)(1)
10.1 Office-Warehouse Lease Agreement, dated as of November 7, 1995, between AP Southeast Portfolio
Partners, L.P. and the Company. (Exhibit 10.1)(1)
10.2 + Supply and Distribution Rights Agreement, dated as of March 20, 1996, between Ethicon, Inc. and the
Company. (Exhibit 10.8)(1)
10.3(double dagger)* Amended and Restated 1996 Equity Compensation Plan of the Company.
10.4(double dagger) Employment Agreement, dated as of May 31, 1996, between Robert V. Toni and the Company.
(Exhibit 10.10)(1)
10.5(double dagger) Employment Agreement, dated as of May 31, 1996, between J. Blount Swain and the Company.
(Exhibit 10.11)(1)
10.6(double dagger) Employment Agreement, dated as of May 31, 1996, between Jeffrey G. Clark and the Company.
(Exhibit 10.12)(1)
10.7(double dagger) Employment Agreement, dated as of May 31, 1996, between Joe B. Barefoot and the Company.
(Exhibit 10.13)(1)
10.8(double dagger) Consulting Agreement, dated as of May 31, 1996, between Steven A. Kriegsman and the Company.
(Exhibit 10.14)(1)
10.9 Registration Rights Agreement, dated as of May 31, 1996, between Caratec, L.L.C. and the Company.
(Exhibit 10.15)(1)
10.10 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 Company. (Exhibit 10.16)(1)
10.11 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 Company. (Exhibit 10.17)(1)
10.12 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 Company. (Exhibit 10.18)(1)
10.13 Lease, dated February 14, 1997, between AP Southeast Portfolio Partners, L.P. and the Company.
(Exhibit 10.19)(2)
10.14 Master Lease Agreement, dated as of January 29, 1997, between Transamerica Business Credit
Corporation and the Company. (Exhibit 10.20)(2)
10.15 * Loan Agreement, dated November 14, 1997, between NationsBank, N.A. and the Company.
10.16 * Promissory Note, dated November 14, 1997, issued by the Company to NationsBank, N.A.
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------------------- --------------------------------------------------------------------------------------------------
<S> <C>
10.17* Security Agreement, dated November 14, 1997, between the Company and NationsBank, N.A.
10.18* Pledge Agreement, dated November 14, 1997, between the Company and NationsBank N.A.
10.19(double dagger)* Employment Agreement, dated as of June 9, 1997, between William M. Cotter and the Company.
10.20(double dagger)* Employment Agreement, dated as of January 1, 1998, between Anthony J. Sherbondy and the
Company.
10.21(double dagger)* Employment Agreement, dated as of February 18, 1998, between Dennis D. Burns and the Company.
10.22* Amendment, dated August 15, 1997, to Lease, dated February 14, 1997, between AP Southeast
Portfolio Partners, L.P. and the Company.
10.23* Representative and Manufacturing Facility Agreement, dated January 1, 1998, between Innocoll GmbH
and the Company.
11* Statement re: Computation of Per Share Earnings.
23.1* Consent of Price Waterhouse LLP.
24.1* Power of Attorney (included on signature page to this Annual Report).
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 Company's application for confidential treatment filed pursuant to Rule
406 under the Securities Act.
(double dagger) Compensation plans and arrangements for executives and
others.
(1) Filed as an exhibit to the Company'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.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-22981) filed with the Commission on March 7, 1997,
and incorporated herein by reference.
(d) Financial Statement Schedules.
None.
25
<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, 1996 and 1997 .............................. F-3
Statement of Operations for the years ended December 31, 1995, 1996 and 1997 F-4
Statement of Cash Flows for the years ended December 31, 1995, 1996 and 1997 F-5
Statement of Partners' Deficit and Stockholders' Equity for the years ended
December 31, 1995, 1996 and 1997 .......................................... 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, 1996 and 1997, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1997, 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
January 29, 1998
F-2
<PAGE>
CLOSURE MEDICAL CORPORATION
BALANCE SHEET
(In thousands, except per share data)
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1997
------------ ------------
<S> <C> <C>
Assets
Cash and cash equivalents ............................................... $ 13,024 $ 7,277
Short-term investments .................................................. 4,627 14,417
Accounts receivable ..................................................... 67 1,226
Inventories ............................................................. 112 347
Prepaid expenses ........................................................ 388 367
--------- ---------
Total current assets ................................................... 18,218 23,634
Furniture, fixtures and equipment, net .................................. 672 3,694
Restricted investments .................................................. -- 1,517
Long-term investments ................................................... 409 1,298
Intangible assets, net .................................................. 213 276
--------- ---------
Total assets ........................................................... $ 19,512 $ 30,419
========= =========
Liabilities and Stockholders' Equity
Accounts payable ........................................................ $ 566 $ 478
Accrued expenses ........................................................ 396 2,598
Deferred revenue ........................................................ 2,069 2,019
Capital lease obligations ............................................... 12 155
Current portion of long-term debt ....................................... -- 350
--------- ---------
Total current liabilities .............................................. 3,043 5,600
Capital lease obligations ............................................... 14 1,250
Long-term debt less current portion ..................................... -- 1,150
--------- ---------
Total liabilities ...................................................... 3,057 8,000
--------- ---------
Preferred Stock, $.01 par value. Authorized 2,000 shares; none issued
or outstanding ......................................................... -- --
Common Stock, $.01 par value. Authorized 35,000 shares; issued and
outstanding 12,150 and 13,242 shares, respectively ..................... 122 132
Additional paid-in capital .............................................. 33,579 46,058
Accumulated deficit ..................................................... (16,246) (23,075)
Deferred compensation on stock options .................................. (1,000) (696)
--------- ---------
Total stockholders' equity ............................................. 16,455 22,419
--------- ---------
Total liabilities and stockholders' equity ............................. $ 19,512 $ 30,419
========= =========
</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,
------------------------------------
1995 1996 1997
----------- ------------ -----------
<S> <C> <C> <C>
Product sales .................................................................... $ 1,380 $ 496 $ 1,551
License and product development revenues ......................................... -- 3,500 --
-------- --------- --------
Total revenues .................................................................. 1,380 3,996 1,551
Cost of products sold ............................................................ 531 460 1,398
-------- --------- --------
Gross profit and license and product development revenues ....................... 849 3,536 153
-------- --------- --------
Research, development and regulatory affairs expenses ............................ 1,637 3,167 3,594
Selling and administrative expenses .............................................. 1,589 2,879 4,752
Charges related to partnership capital changes ................................... 3,500 14,210 --
Payments to Caratec, L.L.C. ...................................................... 250 293 --
-------- --------- --------
Total operating expenses ........................................................ 6,976 20,549 8,346
-------- --------- --------
Loss from operations ............................................................. (6,127) (17,013) (8,193)
Interest expense ................................................................. -- -- (72)
Investment and interest income ................................................... 2 337 1,436
Interest expense to Sharpoint Development Corporation ............................ (847) (138) --
-------- --------- --------
Net loss ......................................................................... $ (6,972) $ (16,814) $ (6,829)
======== ========= ========
Shares used in computation of net loss per common share -- basic and diluted ..... 9,600 10,285 12,966
Net loss per common share -- basic and diluted ................................... $ (0.73) $ (1.63) $ (0.53)
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CLOSURE MEDICAL CORPORATION
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------
1995
--------------
<S> <C>
Cash flows from operating activities:
Net loss ................................................................................. $(6,972)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Amortization expense ..................................................................... 31
Depreciation expense ..................................................................... 51
Changes related to partnership capital changes ........................................... 3,500
Amortization of deferred compensation on stock options ................................... --
Net loss on disposals of fixed assets .................................................... 55
Net loss on disposals of intangible assets ............................................... 14
Change in accounts receivable ............................................................ (137)
Change in inventories .................................................................... --
Change in prepaid expenses ............................................................... (4)
Change in accounts payable and accrued expenses .......................................... 303
Change in deferred revenue ............................................................... 78
Change in accrued payable to Caratec, L.L.C. ............................................. 125
Change in accrued interest due to Sharpoint Development Corporation ...................... 843
---------
Net cash provided (used) by operating activities ......................................... (2,113)
---------
Cash flows from investing activities:
Additions to furniture, fixtures and equipment ........................................... (57)
Additions to intangible assets ........................................................... (47)
Purchases of investments ................................................................. --
Proceeds from the sale of investments .................................................... --
---------
Net cash used by investing activities .................................................... (104)
---------
Cash flows from financing activities:
Proceeds from notes payable to Sharpoint Development Corporation ......................... 2,216
Proceeds from borrowings ................................................................. --
Net proceeds from sale of common stock ................................................... --
Payments under capital lease obligations ................................................. (9)
----------
Net cash provided by financing activities ................................................ 2,207
---------
Increase (decrease) in cash and cash equivalents ......................................... (10)
Cash and cash equivalents, beginning of year ............................................. 30
---------
Cash and cash equivalents, end of year ................................................... $ 20
=========
<CAPTION>
Year Ended December 31,
--------------------------
1996 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss ................................................................................. $ (16,814) $ (6,829)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Amortization expense ..................................................................... 11 11
Depreciation expense ..................................................................... 85 184
Changes related to partnership capital changes ........................................... 14,210 --
Amortization of deferred compensation on stock options ................................... 500 304
Net loss on disposals of fixed assets .................................................... 38 4
Net loss on disposals of intangible assets ............................................... 58 50
Change in accounts receivable ............................................................ 199 (1,159)
Change in inventories .................................................................... 7 (235)
Change in prepaid expenses ............................................................... (361) 21
Change in accounts payable and accrued expenses .......................................... 420 2,114
Change in deferred revenue ............................................................... 1,991 (50)
Change in accrued payable to Caratec, L.L.C. ............................................. (195) --
Change in accrued interest due to Sharpoint Development Corporation ...................... 138 --
--------- ---------
Net cash provided (used) by operating activities ......................................... 287 (5,585)
--------- ---------
Cash flows from investing activities:
Additions to furniture, fixtures and equipment ........................................... (519) (1,732)
Additions to intangible assets ........................................................... (82) (124)
Purchases of investments ................................................................. (5,494) (33,369)
Proceeds from the sale of investments .................................................... 458 21,173
--------- ---------
Net cash used by investing activities .................................................... (5,637) (14,052)
--------- ---------
Cash flows from financing activities:
Proceeds from notes payable to Sharpoint Development Corporation ......................... 440 --
Proceeds from borrowings ................................................................. -- 1,500
Net proceeds from sale of common stock ................................................... 17,926 12,489
Payments under capital lease obligations ................................................. (12) (99)
--------- ---------
Net cash provided by financing activities ................................................ 18,354 13,890
--------- ---------
Increase (decrease) in cash and cash equivalents ......................................... 13,004 (5,747)
Cash and cash equivalents, beginning of year ............................................. 20 13,024
--------- ---------
Cash and cash equivalents, end of year ................................................... $ 13,024 $ 7,277
========= =========
</TABLE>
Non-Cash Transactions:
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 and related accrued interest of
$981 was converted to partners' capital.
Cash payments for interest expense during 1997 were approximately $68.
Property, plant and equipment acquired under capital lease was approximately
$1,478.
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, 1995, 1996 and 1997
(In thousands)
<TABLE>
<CAPTION>
Deferred
Partners' Additional Compensation Total
Capital Common Stock Paid-in Accumulated on Stock Stockholders'
(deficit) Shares Amount Capital deficit Options Equity
----------- -------- -------- ----------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 ....... $ (7,378) $ (7,378)
Capital contribution ............... 3,500 3,500
Net loss ........................... (6,972) (6,972)
--------- ---------
Balance at December 31, 1995 ....... (10,850) (10,850)
Conversion of debt and accrued
interest to partners' capital ..... 11,483 11,483
Net loss for the period January 1,
1996 through September 25,
1996 .............................. (568) (568)
Conversion of partners' capital to
common stock ...................... (65) 9,600 $ 96 $14,179 14,210
Issuance of common stock, net of
issuance costs of $1,046........... 2,550 26 17,900 17,926
Grant of compensatory stock
options ........................... 1,500 $ (1,500)
Amortization of deferred compen-
sation on stock options ........... 500 500
Net loss for the period September
26, 1996 through December 31,
1996 .............................. $ (16,246) (16,246)
--------- ---------
Balance at December 31, 1996 ....... 12,150 122 33,579 (16,246) (1,000) 16,455
Issuance of common stock, net of
issuance costs of $1,737........... 1,025 10 12,010 12,020
Amortization of deferred compen-
sation on stock options ........... 304 304
Exercise of stock options .......... 67 469 469
Net loss ........................... (6,829) (6,829)
--------- ---------
Balance at December 31, 1997 ....... $ 13,242 $132 $46,058 $ (23,075) $ (696) $ 22,419
========= ====== ==== ======= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1996 and 1997
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 to be used 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 its predecessor,
Tri-Point Medical, L.P. (the "Partnership"). Unless the context otherwise
requires, references herein to the Company or Closure also include the
Partnership. 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. Sharpoint Development Corporation
("Sharpoint"), the general partner, contributed $350,000 in cash for its
general partner interest. 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 Sharpoint, were transferred to
the Company in exchange for one share of Common Stock. Subsequently, on March
29, 1996, notes payable and related accrued interest to Sharpoint in the
amounts of $10,502,000 and $981,000, respectively, were contributed to
partners' capital.
On May 31, 1996, a contribution and exchange agreement was executed
whereby Sharpoint, assignees of Sharpoint's economic interest in the
Partnership, Caratec and the employee limited partners agreed to exchange their
Partnership interests for 5,453,750, 1,776,250 and 2,370,000 shares of Common
Stock of the Company, respectively, upon the completion of an initial public
offering by the Company. The exchange (the "Exchange") was consummated on
September 25, 1996, the effective date of the registration statement filed in
connection with the Company's initial public offering of Common Stock (the
"IPO"). In conjunction with the issuance to Caratec of Common Stock of the
Company in the Exchange, 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 30, 1996, the Company sold 2,550,000 shares of Common Stock
in its IPO. On April 2, 1997, the Company completed a public offering selling
1,025,000 shares of Common Stock. The net proceeds from the IPO and follow-on
offering, approximately $17.9 million and $12.0 million, respectively, 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.
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 consist of short-term money market funds, commercial paper and
U.S. Government 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 greater than one year. Such investments have been classified as
available for sale securities. Restricted investments
F-7
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
serve as collateral securing the Company's outstanding debt. 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
Costs incurred to secure patents are capitalized until either the related
patent is accepted, in which case they are amortized over the shorter of its
remaining economic or useful life, or it is rejected, in which case they are
written off.
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.
The Company recognizes revenue for sales of DERMABOND to its marketing
partner, Ethicon, Inc. ("Ethicon"), at an agreed-upon amount per unit at the
time the products are shipped. Thirty days after the end of each calendar
quarter, ninety days for foreign sales, Ethicon provides a summary of its sales
of DERMABOND, and at that time the Company recognizes the effect of both an
additional royalty and any purchase price adjustment to its previously
recognized sales revenue.
Revenues from customers representing 10% or more of total revenue during
fiscal 1995, 1996 and 1997 were as follows:
<TABLE>
<CAPTION>
Customer 1995 1996 1997
- ---------- ------ ------ -----
<S> <C> <C> <C>
A 73% 3% 13%
B 0% 0% 53%
C 27% 10% 34%
</TABLE>
During 1997, approximately 95 percent of the Company's revenues were from
domestic sales; the remaining 5 percent was earned from the Western European
market.
Income Taxes
Income taxes are computed using the asset and liability approach that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's financial statements or tax returns. In estimating future tax
consequences, the Company generally considers all expected future events other
than enactment of changes in tax law or rates. If it is "more likely than not"
that some portion or all of a deferred asset will not be realized, a valuation
allowance is recorded.
No provision for federal or state income taxes was necessary in the
financial statements of the Partnership for the year ended December 31, 1995 or
the two months ended 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.
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.
F-8
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Significant differences between the Partnership's financial statement
basis and the tax basis are as follows:
The financial statement basis loss exceeds the tax basis loss by
approximately $3,900,000 for the year ended December 31, 1995, which is
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.
The Partnership's net assets on a tax basis exceed those reported under
the financial statement basis by approximately $200,000 at December 31,
1995. The difference can be attributed 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, Sharpoint, until
March 29, 1996. Details of the debt agreements are summarized in Note 5.
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. For 1995 and 1996, such payments to Caratec were not to be less
than $250,000. Upon the effectiveness of the Company's IPO on September 25,
1996, Caratec surrendered its rights to receive these sales-based payments and
a percentage of capital transaction proceeds in accordance with the
contribution and exchange agreement entered into on 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 1995, the Partnership paid a consulting fee to an individual who is
also a shareholder of Caratec amounting to $21,000. No such fee was paid in
1996 and 1997.
Fair Value of Financial Instruments
The estimated fair value of financial instruments approximates the
financial statement carrying value at December 31, 1996 and 1997.
Accounting for Stock-Based Compensation
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 the intrinsic value
method as outlined under Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Consequently, the adoption of SFAS
123 does not have any impact on the financial position or results of operations
of the Company but pro forma disclosures of net income and net income per
common share have been provided in Note 9 as if the fair value method had been
applied.
F-9
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- Continued
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 128, "Accounting for
Earnings Per Share" ("EPS") ("SFAS 128"), was issued in February 1997. SFAS 128
establishes and simplifies the standards for computing earnings per share
previously found in APB Opinion No. 15, "Earnings Per Share," and makes them
comparable to international EPS standards. The Company adopted SFAS 128
effective December 31, 1997; the adoption of this statement did not have a
material impact on its financial position or results of operations and, as
required, prior periods have been retroactively restated.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" ("SFAS 130"), was issued in June 1997. SFAS 130
establishes standards for reporting and display of comprehensive income and its
components in a full set of general-purpose financial statements. The Company
will adopt SFAS 130 in 1998 and believes it will not have a material impact on
the Company's financial position or results of operations.
Statement of Financial Accounting Standards No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS 131"), was issued in
June 1997. SFAS 131 specifies revised guidelines for determining an entity's
operating segments and the type and level of financial information to be
disclosed. The Company will adopt SFAS 131 in 1998 and believes it will not
have a material impact on the Company's financial position or results of
operations.
Net Loss Per Share
Basic net loss per common share is computed using the weighted average
number of shares of common stock outstanding during the period.
Diluted net loss per common share is computed using the weighted average
number of shares of common and common equivalent shares outstanding during the
period. 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.
Pursuant to the requirements of SFAS 128, the effect of the exchange of
Partnership interests for 9,600,000 shares of Common Stock of the Company has
been included in net loss per common share computations from January 1, 1995
through the effective date of the Company's IPO on September 25, 1996.
3. ACCOUNTS RECEIVABLE
Accounts receivable included the following:
<TABLE>
<CAPTION>
December 31,
----------------
1996 1997
------ ---------
(in thousands)
<S> <C> <C>
Trade ................................ $67 $ 341
Other--Tenant Allowance Reimbursement -- 885
--- ------
$67 $1,226
=== ======
</TABLE>
F-10
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
4. FURNITURE, FIXTURES AND EQUIPMENT
Furniture, fixtures and equipment included the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1996 1997
--------- ---------
(in thousands)
<S> <C> <C>
Furniture and equipment ..................... $ 279 $ 348
Machinery and equipment ..................... 435 1,218
Leasehold improvements ...................... 43 47
Construction-in-progress .................... 94 2,442
------ ------
851 4,055
Accumulated depreciation and amortization ... (179) (361)
------ ------
$ 672 $3,694
====== ======
</TABLE>
5. DEBT AND RELATED ACCRUED INTEREST
On November 14, 1997, the Company entered into a financing arrangement to
borrow up to $3,000,000 to finance leasehold improvements and equipment related
to the Company's planned expansion into a 50,000 square foot manufacturing,
research and administration facility. As of December 31, 1997, $1,500,000 had
been borrowed under this agreement. Borrowings will be payable monthly in
interest-only payments through May 31, 1998 and principal and interest for the
next twelve months. Borrowings under this agreement bear interest at the 30-day
LIBOR rate plus 167 basis points and are secured by the related equipment and
leasehold improvements plus an assignment, equal to 50 percent of the
outstanding balance, in an investment account of the lender. The agreement
requires the Company to comply with certain financial covenants including
minimum liquidity and tangible net worth.
At December 31, 1997, future maturities of long-term debt are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
- -------------------------
<S> <C>
1998 .................. $ 350,000
1999 .................. 1,150,000
----------
Total ................. 1,500,000
Less current portion .. 350,000
----------
Long-term debt ........ $1,150,000
==========
</TABLE>
The Company had notes payable to Sharpoint which bore interest at various
rates ranging from 9.5% to 9.75%. These notes were secured by substantially all
of the Partnership assets. On March 29, 1996, notes payable of $10,502,000 and
accrued interest of $981,000 were converted to partners' capital by Sharpoint.
On May 31, 1996, a contribution and exchange agreement was executed whereby
Sharpoint agreed to exchange its partners' capital for 5,453,750 shares of
Common Stock upon the effectiveness of the Company's IPO on September 25, 1996.
6. LEASES
The Company leases office and manufacturing space and equipment under
operating leases which expire at various dates through 2007. Rent expense
related to these leases was approximately $93,000, $136,000 and $316,000 for
1995, 1996 and 1997, respectively.
The Company leases equipment under capital leases with lease terms of four
to five years. At the expiration of the lease term, the Company is required to
purchase primarily all of the equipment for the fair market value of the
equipment and related taxes. The fair market value is to be equal to no less
than 5% or no more than 10% of the equipment cost.
F-11
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
6. 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, 1997:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ----------
(in thousands)
<S> <C> <C>
1998 .............................. $ 404 $ 534
1999 .............................. 394 476
2000 .............................. 392 484
2001 .............................. 392 490
2002 .............................. 321 500
Later years ....................... -- 2,430
------ ------
Total minimum lease payments ...... 1,903 $4,914
======
Less amount representing interest . (498)
------
Present value of minimum lease payments 1,405
Less current portion .............. (155)
------
Long-term portion ................. $1,250
======
</TABLE>
7. MAJOR CUSTOMERS AND COMMITMENTS
On March 20, 1996, the Company entered into an eight-year exclusive supply
and distribution rights agreement with Ethicon, 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, 1997,
Ethicon had advanced the Company $1,000,000 for direct costs of these clinical
studies which has been classified as deferred revenue. With the receipt of
authorization to display the CE mark in the European Union countries in August
1997, which allows the product to be marketed in the European Union, Ethicon
became obligated to purchase certain minimum quantities annually at a
predetermined price based on average selling prices. Upon U. S. approval of the
product, Ethicon will be obligated to purchase additional quantities.
A seven-year marketing agreement with Farnam Companies, Inc. ("Farnam")
was signed in December 1992. This agreement gives Farnam exclusive rights to
market, sell and distribute the Company's veterinary products in North America.
The Company has a non-exclusive supply agreement with Procter &
Gamble/ALZA, Partners for Oral Health Care for an adhesive used in conjunction
with a periodontal drug delivery product. 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 1995, 1996 and 1997 were
$51,000, $5,000 and $12,000, respectively.
In May 1996, the Company entered into a five-year agreement with a
consultant which provides for annual compensation of $120,000.
8. INCOME TAXES
There is no provision or benefit for current or deferred income taxes
during 1995 or the two months ending February 29, 1996 because, as a
partnership, the Partnership was not subject to income taxes and the tax effect
of its activities accrued to the partners. There is no current provision or
benefit for income taxes recorded for the ten months ended December 31, 1996 or
in 1997 as the Company has generated net operating losses for income tax
purposes for which there is no
F-12
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
8. INCOME TAXES -- Continued
carryback potential. There is no deferred provision or benefit for income taxes
recorded for the ten months ended December 31, 1996 or in 1997 as the Company
is in a net deferred tax asset position for which a full valuation allowance
has been recorded due to uncertainty of realization.
The tax effects of significant items comprising the Company's deferred
taxes are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------
1996 1997
--------- -----------
(in thousands)
<S> <C> <C>
Net operating loss carryforwards ........... $ 44 $ 3,291
Research and development carryforwards ..... 39 237
Temporary differences, net ................. 385 24
------ --------
468 3,552
Valuation allowance ........................ (468) (3,552)
------ --------
Net deferred tax asset ..................... $ -- $ --
====== ========
</TABLE>
At December 31, 1996 and 1997, a valuation allowance for all of the
deferred tax assets has been recorded because, 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.
At December 31, 1997, the Company had net operating loss carryforwards for
income tax reporting purposes of approximately $7,866,000 expiring beginning in
the year 2011. The Company also had research and development tax credit
carryforwards of approximately $237,000 which will begin to expire in the year
2011.
9. EMPLOYEE BENEFIT PLANS
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 on September 24, 1996, December 11, 1996 and March 11, 1997. The Plan
provides that a maximum of 1,000,000 stock options may be granted to officers,
employees, independent contractors and consultants, and non-employee directors
of the Company. In addition, the Plan provides for grants of restricted stock
and stock appreciation rights (herein, together with grants of stock options,
collectively, "Grants") 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 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 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 and 1997 generally vest within four to five
years.
F-13
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
9. EMPLOYEE BENEFIT PLANS -- Continued
The following table summarizes stock option activity under the Plan for
the year ended December 31, 1997:
<TABLE>
<CAPTION>
Weighted- Weighted-
Average Average
Price Remaining
Shares Per Share Contractual Life
------------ ----------- -----------------
<S> <C> <C> <C>
Options outstanding at January 1, 1996 ........... -- $ --
Granted
With discount exercise price ................... 550,000 5.27 8.41
With market exercise price ..................... 29,602 8.00 8.75
Exercised ........................................ -- --
Expired or canceled
With discount exercise price ................... (6,996) 5.27
-------
Options outstanding at December 31, 1996 ......... 572,606
Granted .......................................... 245,600 24.33 9.51
Exercised ........................................ (67,530) 6.94
Canceled ......................................... (31,139) 9.63
-------
Options outstanding at December 31, 1997 ......... 719,537
=======
</TABLE>
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------ -------------------------------
Weighted-
Average
Weighted- Remaining Weighted-
Range of Number Average Contractual Number Average
Exercise Price Outstanding Exercise Price Life Exercisable Exercise Price
- ----------------------------- ------------- ---------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$5.00-$8.00 ................ 488,209 $ 5.38 8.43 194,314 $ 5.56
$14.75-$22.00 .............. 133,088 18.75 9.37 17,794 22.00
$27.00-$34.50 .............. 98,240 32.42 9.70 13,620 27.00
Available for grant at
December 31, 1997 ......... 212,933
</TABLE>
During 1996 and 1997, the Company recognized approximately $500,000 and
$304,000, respectively, of compensation cost related to the Plan. Had
compensation expense for 1996 and 1997 awards, assuming it was recognized on a
straight-line basis over the vesting period, been determined based on the fair
value at the grant date, consistent with the provisions of SFAS No. 123, the
Company's results of operations would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1997
------------- ------------
<S> <C> <C>
Net loss--as reported ............................ $ (16,814) $ (6,829)
Net loss--pro forma .............................. (17,414) (8,244)
Loss per share--basic and diluted--as reported ... (1.63) (0.53)
Loss per share--basic and diluted--pro forma ..... (1.69) (0.64)
</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 1997
- -------------------------------------------- --------- ---------
<S> <C> <C>
Average expected life (years) ............ 6 5
Average interest rate .................... 6.5% 6.5%
Volatility ............................... 70.0% 73.1%
Dividend yield ........................... 0.0% 0.0%
</TABLE>
F-14
<PAGE>
CLOSURE MEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- Continued
9. EMPLOYEE BENEFIT PLANS -- Continued
The Company maintains a 401(k) Retirement Plan and Trust (the "401(k)
Plan") available to all full-time, eligible employees. Employee contributions
are voluntary and are limited to the maximum amount allowable under federal tax
regulations. Effective January 1, 1997, the 401(k) Plan was amended to make
one-half of the matching contribution in the form of cash and one-half in the
form of shares of Common Stock of the Company ("participant shares").
Participant shares are based on the matching contributions during the fiscal
year divided by the Company's closing stock price on December 31, with
fractional shares paid in cash. At December 31, 1997, the 401(k) Plan had a
receivable from the Company in the amount of 873 shares based on the closing
stock price of $25.875. Amounts contributed to the 401(k) Plan during 1995,
1996 and 1997 were immaterial.
10. SUBSEQUENT EVENTS
On January 1, 1998, the Company entered into an agreement with Innocoll
("Innocoll"), of Saal-Donau, Germany, which provides for fees of $180,000 per
year for five years. Innocoll is to act as Closure's authorized representative
in Europe under the Medical Device Directive, as well as provide alternative
manufacturing space. The Chairman of the Company and another board member are
owners of Innocoll.
F-15
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
CLOSURE MEDICAL CORPORATION
Date: March 26, 1998
By: /s/ ROBERT V. TONI*
------------------------------------
Robert V. Toni
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
EACH PERSON IN SO SIGNING ALSO MAKES, CONSTITUTES AND APPOINTS ROBERT V.
TONI, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF CLOSURE MEDICAL CORPORATION, AND
J. BLOUNT SWAIN, VICE PRESIDENT OF FINANCE AND CHIEF FINANCIAL OFFICER OF
CLOSURE MEDICAL CORPORATION, AND EACH OF THEM ACTING ALONE, HIS TRUE AND LAWFUL
ATTORNEYS-IN-FACT, WITH FULL POWER OF SUBSTITUTION, IN HIS NAME, PLACE AND
STEAD, TO EXECUTE AND CAUSE TO BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION ANY OR ALL AMENDMENTS TO THIS REPORT, 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 March 26, 1998
---------------------------------- (principal executive officer) and
Robert V. Toni Director
/s/ J. BLOUNT SWAIN Vice President and Chief Financial March 26, 1998
---------------------------------- Officer (principal financial and
J. Blount Swain accounting officer)
/s/ ROLF D. SCHMIDT Chairman of the Board and Director March 26, 1998
----------------------------------
Rolf D. Schmidt
/s/ F. WILLIAM SCHMIDT Director March 26, 1998
----------------------------------
F. William Schmidt
/s/ DENNIS C. CAREY Director March 26, 1998
----------------------------------
Dennis C. Carey
/s/ RICHARD W. MILLER Director March 26, 1998
----------------------------------
Richard W. Miller
/s/ RANDY H. THURMAN Director March 26, 1998
----------------------------------
Randy H. Thurman
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------------------- --------------------------------------------------------------------------------------
<S> <C>
3.1 Restated Certificate of Incorporation. (Exhibit 3.1)(1)
3.2 Amendment to Restated Certificate of Incorporation. (Exhibit 3.2)(2)
3.3 By-Laws. (Exhibit 3.2)(1)
10.1 Office-Warehouse Lease Agreement, dated as of November 7, 1995, between AP
Southeast Portfolio Partners, L.P. and the Company. (Exhibit 10.1)(1)
10.2 + Supply and Distribution Rights Agreement, dated as of March 20, 1996, between
Ethicon, Inc. and the Company. (Exhibit 10.8)(1)
10.3(double dagger)* Amended and Restated 1996 Equity Compensation Plan of the Company.
10.4(double dagger) Employment Agreement, dated as of May 31, 1996, between Robert V. Toni and the
Company. (Exhibit 10.10)(1)
10.5(double dagger) Employment Agreement, dated as of May 31, 1996, between J. Blount Swain and
the Company. (Exhibit 10.11)(1)
10.6(double dagger) Employment Agreement, dated as of May 31, 1996, between Jeffrey G. Clark and
the Company. (Exhibit 10.12)(1)
10.7(double dagger) Employment Agreement, dated as of May 31, 1996, between Joe B. Barefoot and
the Company. (Exhibit 10.13)(1)
10.8(double dagger) Consulting Agreement, dated as of May 31, 1996, between Steven A. Kriegsman
and the Company. (Exhibit 10.14)(1)
10.9 Registration Rights Agreement, dated as of May 31, 1996, between Caratec, L.L.C.
and the Company. (Exhibit 10.15)(1)
10.10 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 Company. (Exhibit 10.16)(1)
10.11 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 Company. (Exhibit 10.17)(1)
10.12 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
Company. (Exhibit 10.18)(1)
10.13 Lease, dated February 14, 1997, between AP Southeast Portfolio Partners, L.P. and
the Company. (Exhibit 10.19)(2)
10.14 Master Lease Agreement, dated as of January 29, 1997, between Transamerica
Business Credit Corporation and the Company. (Exhibit 10.20)(2)
10.15* Loan Agreement, dated November 14, 1997, between NationsBank, N.A. and the
Company.
10.16* Promissory Note, dated November 14, 1997, issued by the Company to
NationsBank, N.A.
10.17* Security Agreement, dated November 14, 1997, between the Company and
NationsBank, N.A.
10.18* Pledge Agreement, dated November 14, 1997, between the Company and
NationsBank N.A.
10.19(double dagger)* Employment Agreement, dated as of June 9, 1997, between William M. Cotter and
the Company.
10.20(double dagger)* Employment Agreement, dated as of January 1, 1998, between Anthony J.
Sherbondy and the Company.
10.21(double dagger)* Employment Agreement, dated as of February 18, 1998, between Dennis D. Burns
and the Company.
10.22* Amendment, dated August 15, 1997, to Lease, dated February 14, 1997, between
AP Southeast Portfolio Partners, L.P. and the Company.
10.23* Representative and Manufacturing Facility Agreement, dated January 1, 1998,
between Innocoll GmbH and the Company.
11* Statement re: Computation of Per Share Earnings.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------------ ----------------------------------------------------------------------
<S> <C>
23.1* Consent of Price Waterhouse LLP.
24.1* Power of Attorney (included on signature page to this Annual Report).
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 Company's application for confidential treatment filed pursuant to Rule
406 under the Securities Act.
(double dagger) Compensation plans and arrangements for executives and
others.
(1) Filed as an exhibit to the Company'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.
(2) Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-22981) filed with the Commission on March 7, 1997,
and incorporated herein by reference.
Exhibit 10.3
CLOSURE MEDICAL CORPORATION
AMENDED AND RESTATED 1996 EQUITY COMPENSATION PLAN
As Amended Effective as of March 11, 1997
The purpose of the Closure Medical Corporation 1996 Equity Compensation
Plan (the "Plan") is to provide (i) designated officers (including officers who
are also directors) and other employees of Closure 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.
The Committee may consist of "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.
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,
<PAGE>
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.
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
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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 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.
(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 after 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.
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(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
after 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 after 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 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. 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 initial 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, except as provided in Section 6(b) below.
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(b) Pre-IPO Initial Grants. An initial grant made pursuant to Section 6(a)
to a Non-Employee Director who first becomes a member of the Board on or after
the initial 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. 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. 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.
(c) Annual Grants. On each date on which 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 7,500 shares of Company Stock.
The date of grant of such annual Grants shall be the date of such annual meeting
of stockholders.
(d) Election to Receive Annual Retainer in the Form of Stock Options.
(i) Before the beginning of each Plan Year (as defined below) that
commences on or after June 4, 1997, each Non-Employee Director may elect to
receive part or all of his or her Annual Retainer (as defined below) for the
Plan Year in the form of Nonqualified Stock Options. The election shall be made
by filing a written election with the Secretary of the Company before the
beginning of the Plan Year. The election shall be irrevocable as of the first
day of the Plan Year. If a Non-Employee Director makes no election under this
Section 6(d) for a Plan Year, the Non-Employee Director's Annual Retainer shall
be paid in cash.
(ii) The term "Annual Retainer" shall mean the annual retainer fee
paid by the Company to a Non-Employee Director for his or her services as a
director, and shall not include meeting fees. The term "Plan Year" shall mean
the approximately 12-month period beginning on the day after each annual meeting
of the Company's stockholders and ending on the date of the next following
annual meeting of the Company's stockholders.
(iii) Each Non-Employee Director at the beginning of a Plan Year who
has elected to receive Stock Options for the Plan Year pursuant to Subsection
(d)(i) above shall have his or her Annual Retainer for the Plan Year converted
into a Nonqualified Stock Option to purchase shares of Company Stock pursuant to
the formula described below. The Committee shall grant the Stock Option on the
date of the annual shareholders meeting that immediately precedes the beginning
of the Plan Year. Each Stock Option shall be evidenced by a Grant Letter in such
form as the Committee shall approve. If a Non-Employee Director elects to have
only a portion of his or her Annual Retainer for a Plan Year converted into a
Stock Option, references to the "Annual Retainer" shall be deemed to refer to
the portion of the Annual Retainer that is to be converted into a Stock Option.
The Committee shall determine the number of shares of Company Stock for which
the Non-Employee Director shall receive a Stock Option for the Plan Year based
on the following formula:
The Committee shall multiply the Annual Retainer by three and shall divide
that product by the Fair Market Value of a share of Company Stock on the
date of grant. The number of shares subject to the Stock Option shall be
rounded down to the nearest whole share. Any portion of an Annual Retainer
that is not converted into a Stock Option shall be paid in cash.
(iv) If an individual becomes a Non-Employee Director during a Plan
Year, the Non-Employee Director may elect to receive his or her Annual Retainer
for the Plan Year in the form of Stock Options by filing a written election with
the Secretary of the Company on or before the date on which the individual
becomes a Non-Employee Director. The election shall be irrevocable as of the
date on which the individual becomes a Non-
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Employee Director. If the Non-Employee Director elects to receive a Stock
Option, the Non-Employee Director shall receive such Stock Option as of the
first day on which he or she serves as a Non-Employee Director. The Committee
shall grant the Non-Employee Director a Stock Option based on the Non-Employee
Director=s Annual Retainer multiplied by a fraction, the numerator of which is
the number of days remaining in the Plan Year from and after the date the
individual becomes a Non-Employee Director and the denominator of which is the
number of days in the Plan Year. The number of shares subject to the Stock
Option shall be computed according to the formula described in Subsection
(d)(iii) above, based on the Fair Market Value of shares of Company Stock on the
date of grant.
(e) Exercisability. Stock 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 Stock Option
is fully exercisable, if the Non-Employee Director remains a member of the Board
through the applicable vesting date.
(f) 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, except as provided in
Section 6(b) above.
(g) Option Term. The term of each Stock Option granted pursuant to this
Section 6 shall be ten years.
(h) 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.
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
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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 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.
(e) Certain Restrictions. An SAR is exercisable only during the period
when the Stock Option to which it is related is also exercisable.
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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 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.
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(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 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 interests accounting
treatment 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
interests accounting treatment 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
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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.
(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.
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.
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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 1996 amendment and
restatement was effective as of November 1, 1996. The 1997 amendment and
restatement shall be effective as of June 4, 1997.
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 10.15
LOAN AGREEMENT
This Loan Agreement (the "Agreement") dated as of November 14, 1997, by
and between NationsBank, N.A., a national banking association ("Bank") and the
Borrower described below.
In consideration of the Loan or Loans described below and the mutual
covenants and agreements contained herein, and intending to be legally bound
hereby, Bank and Borrower agree as follows:
1. DEFINITIONS AND REFERENCE TERMS. In addition to any other terms defined
herein, the following terms shall have the meaning set forth with respect
thereto:
A. Borrower: Closure Medical Corporation
a(n) Delaware Corporation
B. Borrower's Address: 5265 Capital Boulevard
Raleigh, NC 27616
C. Current Assets. Current Assets means the aggregate amount of all
of Borrower's assets which would, in accordance with GAAP, properly be defined
as current assets, but excluding the following items: N/A.
D. Current Liabilities. Current Liabilities means the aggregate
amount of all current liabilities as determined in accordance with GAAP, but in
any event shall include all liabilities except those having a maturity date
which is more than one year from the date as of which such computation is being
made.
E. Hazardous Materials. Hazardous Materials include all materials
defined as hazardous materials or substances under any local, state or federal
environmental laws, rules or regulations, and petroleum, petroleum products, oil
and asbestos.
F. Loan. Any loan described in Section 2 hereof and any subsequent
loan which states that it is subject to this Loan Agreement.
G. Loan Documents. Loan Documents means this Loan Agreement and any
and all promissory notes executed by Borrower in favor of Bank and all other
documents, instruments, guarantees, certificates and agreements executed and/or
delivered by Borrower, any guarantor or third party in connection with any Loan.
H. Tangible Net Worth. Tangible Net Worth means the amount by which
total assets exceed total liabilities in accordance with GAAP, less leasehold
improvements.
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I. Accounting Terms. All accounting terms not specifically defined
or specified herein shall have the meanings generally attributed to such terms
under generally accepted accounting principles ("GAAP"), as in effect from time
to time, consistently applied, with respect to the financial statements
referenced in Section 3.H. hereof.
2. LOANS.
A. Loan. Bank hereby agrees to make (or has made) one or more loans
to Borrower in the aggregate principal face amount of $3,150,000.00. The
obligation to repay the loans is evidenced by a promissory note or notes dated
November 1, 1997 (the promissory note or notes together with any and all
renewals, extensions or rearrangements thereof being hereafter collectively
referred to as the "Note") having a maturity date, repayment terms and interest
rate as set forth in the Note.
Borrowing Base. The Line is subject to the Borrowing Base Agreement
attached hereto as Exhibit "A" and by reference made a part hereof.
3. REPRESENTATIONS AND WARRANTIES. Borrower hereby represents and warrants
to Bank as follows:
A. Good Standing. Borrower is a C-Corporation duly organized,
validly existing and in good standing under the laws of Delaware and has the
power and authority to own its property and to carry on its business in each
jurisdiction in which Borrower does business.
B. Authority and Compliance. Borrower has full power and authority
to execute and deliver the Loan Documents and to incur and perform the
obligations provided for therein, all of which have been duly authorized by all
proper and necessary action of the appropriate governing body of Borrower. No
consent or approval of any public authority or other third party is required as
a condition to the validity of any Loan Document, and Borrower is in compliance
with all laws and regulatory requirements to which it is subject.
C. Binding Agreement. This Agreement and the other Loan Documents
executed by Borrower constitute valid and legally binding obligations of
Borrower, enforceable in accordance with their terms.
D. Litigation. There is no proceeding involving Borrower pending or,
to the knowledge of Borrower, threatened before any court or governmental
authority, agency or arbitration authority, except as disclosed to Bank by the
Borrower in its most recent Form 10Q filed with the Securities and Exchange
Commission by Bank prior to the date of this Agreement.
E. No Conflicting Agreements. There is no charter, bylaw, stock
provision, partnership agreement or other document pertaining to the
organization, power or authority of
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Borrower and no provision of any existing agreement, mortgage, indenture or
contract binding on Borrower or affecting its property, which would conflict
with or in any way prevent the execution, delivery or carrying out of the terms
of this Agreement and the other Loan Documents.
F. Ownership of Assets. Borrower has good title to its assets, and
its assets are free and clear of liens, except those granted to Bank and as
disclosed to Bank in writing prior to the date of this Agreement.
G. Taxes. All taxes and assessments due and payable by Borrower have
been paid or are being contested in good faith by appropriate proceedings and
the Borrower has filed all tax returns which it is required to file.
H. Financial Statements. The financial statements of Borrower
heretofore delivered to Bank have been prepared in accordance with GAAP applied
on a consistent basis throughout the period involved and fairly present
Borrower's financial condition as of the date or dates thereof, and there has
been no material adverse change in Borrower's financial condition or operations
since June 30, 1997. All factual information furnished by Borrower to Bank in
connection with this Agreement and the other Loan Documents is and will be
accurate and complete on the date as of which such information is delivered to
Bank and is not and will not be incomplete by the omission of any material fact
necessary to make such information not misleading.
I. Place of Business. Borrower's chief executive office is located
at
5265 Capital Boulevard
Raleigh, NC 27616
J. Environmental. The conduct of Borrower's business operations and
the condition of Borrower's property does not and will not violate any federal
laws, rules or ordinances for environmental protection, regulations of the
Environmental Protection Agency, any applicable local or state law, rule,
regulation or rule of common law or any judicial interpretation thereof relating
primarily to the environment or Hazardous Materials.
K. Continuation of Representations and Warranties. All
representations and warranties made under this Agreement shall be deemed to be
made at and as of the date hereof and at and as of the date of any advance under
any Loan.
4. AFFIRMATIVE COVENANTS. Until full payment and performance of all
obligations of Borrower under the Loan Documents, Borrower will, unless Bank
consents otherwise in writing (and without limiting any requirement of any other
Loan Document):
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A. Financial Condition. Maintain Borrower's financial condition as
follows, determined in accordance with GAAP applied on a consistent basis
throughout the period involved except to the extent modified by the following
definitions:
i. Maintain a minimum liquidity of $7,000,000.00 at all times while the
loan is outstanding.
ii. Have a Tangible Net Worth of not less than $18,400,000.00 at closing.
At each fiscal year end thereafter, the Bank, based upon its review of the
Borrower's audited financial statements, will have the right to reset the
Tangible Net Worth covenant.
B. Financial Statements and Other Information. Maintain a system of
accounting satisfactory to Bank and in accordance with GAAP applied on a
consistent basis throughout the period involved, permit Bank's officers or
authorized representatives to visit and inspect Borrower's books of account and
other records at such reasonable times and as often as Bank may desire, and pay
the reasonable fees and disbursements of any accountants or other agents of Bank
selected by Bank for the foregoing purposes. Unless written notice of another
location is given to Bank, Borrower's books and records will be located at
Borrower's chief executive office set forth above. All financial statements
called for below shall be prepared in form and content acceptable to Bank and by
independent certified public accountants acceptable to Bank.
In addition, Borrower will:
i. Furnish to Bank Audited financial statements of Borrower for each
fiscal year of Borrower, within 120 days after the close of each such
fiscal year.
ii. Furnish to Bank Company-Prepared financial statements (including a
balance sheet and profit and loss statement) of Borrower for each quarter
of each fiscal year of Borrower, within 30 days after the close of each
such period.
iii. Furnish to Bank a compliance certificate for (and executed by an
authorized representative of) Borrower concurrently with and dated as of
the date of delivery of each of the financial statements as required in
paragraphs i and ii above, containing (a) a certification that the
financial statements of even date are true and correct and that the
Borrower is not in default under the terms of this Agreement, and (b)
computations and conclusions, in such detail as Bank may request, with
respect to compliance with this Agreement, and the other Loan Documents,
including computations of all quantitative covenants.
C. Insurance. Maintain insurance with responsible insurance
companies on such of its properties, in such amounts and against such risks as
is customarily maintained by similar businesses operating in the same vicinity,
specifically to include fire and extended coverage
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insurance covering all assets, business interruption insurance, workers
compensation insurance and liability insurance, all to be with such companies
and in such amounts as are satisfactory to Bank and providing for at least 30
days prior notice to Bank of any cancellation thereof. Satisfactory evidence of
such insurance will be supplied to Bank prior to funding under the Loan(s) and
30 days prior to each policy renewal.
D. Existence and Compliance. Maintain its existence, good standing
and qualification to do business, where required and comply with all laws,
regulations and governmental requirements including, without limitation,
environmental laws applicable to it or to any of its property, business
operations and transactions.
E. Adverse Conditions or Events. Promptly advise Bank in writing of
(i) any condition, event or act which comes to its attention that would or might
materially adversely affect Borrower's financial condition or operations or
Bank's rights under the Loan Documents, (ii) any litigation filed by or against
Borrower, (iii) any event that has occurred that would constitute an event of
default under any Loan Documents.
F. Taxes and Other Obligations. Pay all of its taxes, assessments
and other obligations, including, but not limited to taxes, costs or other
expenses arising out of this transaction, as the same become due and payable,
except to the extent the same are being contested in good faith by appropriate
proceedings in a diligent manner.
G. Maintenance. Maintain all of its tangible property in good
condition and repair and make all necessary replacements thereof, and preserve
and maintain all licenses, trademarks, privileges, permits, franchises,
certificates and the like necessary for the operation of its business.
H. Environmental. Immediately advise Bank in writing of (i) any and
all enforcement, cleanup, remedial, removal, or other governmental or regulatory
actions instituted, completed or threatened pursuant to any applicable federal,
state, or local laws, ordinances or regulations relating to any Hazardous
Materials affecting Borrower's business operations; and (ii) all claims made or
threatened by any third party against Borrower relating to damages,
contribution, cost recovery, compensation, loss or injury resulting from any
Hazardous Materials. Borrower shall immediately notify Bank of any remedial
action taken by Borrower with respect to Borrower's business operations.
Borrower will not use or permit any other party to use any Hazardous Materials
at any of Borrower's places of business or at any other property owned by
Borrower except such materials as are incidental to Borrower's normal course of
business, maintenance and repairs and which are handled in compliance with all
applicable environmental laws. Borrower agrees to permit Bank, its agents,
contractors and employees to enter and inspect any of Borrower's places of
business or any other property of Borrower at any reasonable times upon three
(3) days prior notice for the purposes of conducting an environmental
investigation and audit (including taking physical samples) to insure that
Borrower is complying with this covenant and Borrower shall reimburse
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Bank on demand for the costs of any such environmental investigation and audit.
Borrower shall provide Bank, its agents, contractors, employees and
representatives with access to and copies of any and all data and documents
relating to or dealing with any Hazardous Materials used, generated,
manufactured, stored or disposed of by Borrower's business operations within
five (5) days of the request therefore.
I. Intentionally Deleted.
5. NEGATIVE COVENANTS. Until full payment and performance of all
obligations of Borrower under the Loan Documents, Borrower will not, without the
prior written consent of Bank (and without limiting any requirement of any other
Loan Documents):
A. Intentionally Deleted.
B. Intentionally Deleted.
C. Intentionally Deleted.
D. Transfer of Assets or Control. Sell, lease, assign or otherwise
dispose of or transfer any assets, except in the normal course of its business,
or transfer control or ownership of the Borrower.
E. Intentionally Deleted.
F. Intentionally Deleted.
G. Intentionally Deleted.
H. Intentionally Deleted.
I. Character of Business. Change the general character of business
as conducted at the date hereof, or engage in any type of business not
reasonably related to its business as presently conducted.
J. Management Change. Make any substantial change in its present
executive or management personnel.
K. Additional Covenants. The Borrower shall comply with those
additional covenants set forth on Exhibit "N/A" attached hereto and by reference
made a part hereof.
6. DEFAULT. Borrower shall be in default under this Agreement and under
each of the other Loan Documents if there exists an event of default as defined
in the Promissory Note.
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7. REMEDIES UPON DEFAULT. If an event of default shall occur, Bank shall
have all rights, powers and remedies available under each of the Loan Documents
as well as all rights and remedies available at law or in equity.
8. NOTICES. All notices, requests or demands which any party is required
or may desire to give to any other party under any provision of this Agreement
must be in writing delivered to the other party at the following address:
Borrower:
Closure Medical Corporation
5265 Capital Boulevard, Raleigh, NC 27616
Attn: J. Blount Swain, CFO
Fax. No. (919) 876-7874
Bank: NationsBank, N.A.
One Hannover Square, Suite 201
Raleigh, NC 27601
Fax No. (919) 829-6604
or to such other address as any party may designate by written notice to the
other party. Each such notice, request and demand shall be deemed given or made
as follows:
A. If sent by mail, upon the earlier of the date of receipt or five
(5) days after deposit in the U.S. Mail, first class postage prepaid;
B. If sent by any other means, upon delivery.
9. COSTS, EXPENSES AND ATTORNEYS' FEES. Borrower shall pay to Bank
immediately upon demand the full amount of all costs and expenses as outlined
below:
$30 for 2 UCC filings @ $15 each
$30 for 2 UCC Searches @ $15 each
25 bp per annum on the total commitment amount,
including reasonable attorneys' fees (to include outside counsel fees and all
allocated costs of Bank's in-house counsel if permitted by applicable law),
incurred by Bank in connection with (a) negotiation and preparation of this
Agreement and each of the Loan Documents, and (b) all other costs and attorneys=
fees incurred by Bank for which Borrower is obligated to reimburse Bank in
accordance with the terms of the Loan Documents.
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<PAGE>
10. MISCELLANEOUS. Borrower and Bank further covenant and agree as
follows, without limiting any requirement of any other Loan Document:
A. Cumulative Rights and No Waiver. Each and every right granted to
Bank under any Loan Document, or allowed it by law or equity shall be cumulative
of each other and may be exercised in addition to any and all other rights of
Bank, and no delay in exercising any right shall operate as a waiver thereof,
nor shall any single or partial exercise by Bank of any right preclude any other
or future exercise thereof or the exercise of any other right. Borrower
expressly waives any presentment, demand, protest or other notice of any kind,
including but not limited to notice of intent to accelerate and notice of
acceleration. No notice to or demand on Borrower in any case shall, of itself,
entitle Borrower to any other or future notice or demand in similar or other
circumstances.
B. Applicable Law. This Loan Agreement and the rights and
obligations of the parties hereunder shall be governed by and interpreted in
accordance with the laws of North Carolina and applicable United States federal
law.
C. Amendment. No modification, consent, amendment or waiver of any
provision of this Loan Agreement, nor consent to any departure by Borrower
therefrom, shall be effective unless the same shall be in writing and signed by
an officer of Bank, and then shall be effective only in the specified instance
and for the purpose for which given. This Loan Agreement is binding upon
Borrower, its successors and assigns, and inures to the benefit of Bank, its
successors and assigns; however, no assignment or other transfer of Borrower's
rights or obligations hereunder shall be made or be effective without Bank's
prior written consent, nor shall it relieve Borrower of any obligations
hereunder. There is no third party beneficiary of this Loan Agreement.
D. Documents. All documents, certificates and other items required
under this Loan Agreement to be executed and/or delivered to Bank shall be in
form and content satisfactory to Bank and its counsel.
E. Partial Invalidity. The unenforceability or invalidity of any
provision of this Loan Agreement shall not affect the enforceability or validity
of any other provision herein and the invalidity or unenforceability of any
provision of any Loan Document to any person or circumstance shall not affect
the enforceability or validity of such provision as it may apply to other
persons or circumstances.
F. Indemnification. Notwithstanding anything to the contrary
contained in Section 10(G), Borrower shall indemnify, defend and hold Bank and
its successors and assigns harmless from and against any and all claims,
demands, suits, losses, damages, assessments, fines, penalties, costs or other
expenses (including reasonable attorneys' fees and court costs) arising from or
in any way related to any of the transactions contemplated hereby, including but
not limited to actual or threatened damage to the environment, agency costs of
investigation, personal injury or death, or property damage, due to a release or
alleged release of Hazardous Materials, arising from
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Borrower's business operations, any other property owned by Borrower or in the
surface or ground water arising from Borrower's business operations, or gaseous
emissions arising from Borrower's business operations or any other condition
existing or arising from Borrower's business operations resulting from the use
or existence of Hazardous Materials, whether such claim proves to be true or
false. Borrower further agrees that its indemnity obligations shall include, but
are not limited to, liability for damages resulting from the personal injury or
death of an employee of the Borrower, regardless of whether the Borrower has
paid the employee under the workmen's compensation laws of any state or other
similar federal or state legislation for the protection of employees. The term
"property damage" as used in this paragraph includes, but is not limited to,
damage to any real or personal property of the Borrower, the Bank, and of any
third parties. The Borrower's obligations under this paragraph shall survive the
repayment of the Loan and any deed in lieu of foreclosure or foreclosure of any
Deed to Secure Debt, Deed of Trust, Security Agreement or Mortgage securing the
Loan.
G. Survivability. All covenants, agreements, representations and
warranties made herein or in the other Loan Documents shall survive the making
of the Loan and shall continue in full force and effect so long as the Loan is
outstanding or the obligation of the Bank to make any advances under the Line
shall not have expired.
H. Updated Appraisals and Maintenance of Collateral Value. Bank may
at its option obtain at Borrower's expense, an appraisal of any real property
securing payment of the Loan (the "Real Property") prepared in accordance with
applicable bank regulatory agency regulations and the written instructions from
Bank by a third party appraiser engaged directly by Bank. The costs of each such
appraisal shall be payable by Borrower to Bank on demand. If such appraisal
shows the market value of the Real Property has declined, Borrower agrees that
upon demand of Bank it will immediately either pledge additional collateral in
form and substance satisfactory to Bank or make such payments as shall be
necessary to reduce the principal balance outstanding under the Loan, so that in
either case the principal amount outstanding under the Loan shall not exceed 2
Times the market value of the collateral.
11. INTENTIONALLY DELETED.
12. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES
HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR
DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL
BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION
ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND
PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR
ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN
THE EVENT OF ANY INCONSISTENCY, THE SPECIAL
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RULES SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY
COURT HAVING JURISDICTION. ANY PARTY TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT
MAY BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL
ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY
COURT HAVING JURISDICTION OVER SUCH ACTION.
A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY
OF ANY BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT,
AGREEMENT OR DOCUMENT OR IF THERE IS REAL OR PERSONAL PROPERTY COLLATERAL, IN
THE COUNTY WHERE SUCH REAL OR PERSONAL PROPERTY IS LOCATED, AND ADMINISTERED BY
J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY
PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION
ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90
DAYS OF THE DEMAND FOR ARBITRATION; FURTHER , THE ARBITRATOR SHALL ONLY, UPON A
SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP
TO AN ADDITIONAL 60 DAYS.
B. RESERVATIONS OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION
SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE
STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT,
AGREEMENT OR DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO
IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III)
LIMIT THE RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT
NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL
PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY
REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR
THE APPOINTMENT OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS,
FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES
BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT
PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF
SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR
FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF
THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE
THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
13. NO ORAL AGREEMENT. THIS WRITTEN LOAN AGREEMENT AND THE OTHER LOAN
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE
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<PAGE>
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed under seal by their duly authorized representatives as of the date
first above written.
Closure Medical Corporation
By: /s/ J. Blount Swain (Seal)
- -----------------------------------------
Name: J. Blount Swain
Title: Secretary
NationsBank, N.A.
By: /s/ Kari C. Howe
- -----------------------------------------
Name: Kari C. Howe
Title: Vice President
If the Borrower is a corporation, the signature should be attested by the
Secretary or Assistant Secretary of the corporation and the corporate seal
affixed.
/s/ J. Blount Swain
- -----------------------------------------
Attest (If Applicable)
[Corporate Seal]
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<PAGE>
Exhibit "A"
Loan Agreement
NationsBank(R) Borrowing Base Agreement
1. Borrowing Base The aggregate principal amount of all amounts from time
to time advanced pursuant to the terms of that promissory note dated November
14, 1997, in the principal amount of $3,150,000.00 (the ANote") shall not exceed
the Maximum Amount.
"Maximum Amount" shall at all times mean two times the total value of the
collateral held in the NationsBank Institutional Investment Sales safekeeping
account #841781.
2. Mandatory Payment In the event the aggregate principal outstanding
balance of advances under the Note exceed the Maximum Amount, Borrower shall
immediately and without notice or demand of any kind, make such payments as
shall be necessary to reduce the principal balance of the Note below the Maximum
Amount.
Borrower: Closure Medical Corporation
By: /s/ J. Blount Swain (Seal)
- -----------------------------------------
Name: J. Blount Swain
Title: CFO, Secretary
Attest:
By: (Seal)
--------------------------------------
Name:
------------------------------------
Title:
-----------------------------------
Bank:
NationsBank, N.A.
By: /s/ Kari C. Howe
--------------------------------------
Kari C. Howe
<PAGE>
Exhibit 10.16
NationsBank, N.A.
Customer #976547
Promissory Note
Date November 14, 1997 [X] New [ ] Renewal Amount $3,150,000.00 Maturity Date
May 31, 1999
================================================================================
Bank: Borrower:
NationsBank, N.A. Closure Medical Corporation
Banking Center: 5265 Capital Blvd.
Raleigh, NC 27616
Commercial Banking
One Hannover Square
Raleigh, NC 27601
County: Wake County: Wake
================================================================================
FOR VALUE RECEIVED, the undersigned Borrower unconditionally (and jointly and
severally, if more than one) promises to pay to the order of Bank, its
successors and assigns, without setoff, at its offices indicated at the
beginning of this Note, or at such other place as may be designated by Bank, the
principal amount of Three Million One Hundred Fifty Thousand and No/100 Dollars
($3,150,000.00), or so much thereof as may be advanced from time to time in
immediately available funds, together with interest computed daily on the
outstanding principal balance hereunder, at an annual interest rate, and in
accordance with the payment schedule, indicated below.
[This Note contains some provisions preceded by boxes. If a box is marked, the
provision applies to this transaction; if it is not marked, the provision does
not apply to this transaction.]
1. Rate.
Other. Wall Street Journal LIBOR Rate
The Rate shall be the Wall Street Journal one month LIBOR Rate, plus 1.67
percent, per annum. The "Wall Street Journal LIBOR Rate" is a fluctuating rate
of interest equal to the one month London Interbank Offered Rate as published in
the "Money Rates" section of the Wall Street Journal on the immediately
preceding business day as adjusted from time to time for then applicable reserve
requirements, deposit insurance assessment rates and other regulatory costs.
Interest will accrue on any non-business day at the rate in effect on the
immediately preceding business day.
Notwithstanding any provision of this Note, Bank does not intend to charge and
Borrower shall not be required to pay any amount of interest or other charges in
excess of the maximum permitted by the applicable law of the State of North
Carolina; if any higher rate ceiling is lawful, then that higher
-1-
<PAGE>
rate ceiling shall apply. Any payment in excess of such maximum shall be
refunded to Borrower or credited against principal, at the option of Bank.
2. Accrual Method. Unless otherwise indicated, interest at the Rate set forth
above will be calculated by the 365/360 day method (a daily amount of interest
is computed for a hypothetical year of 360 days; that amount is multiplied by
the actual number of days for which any principal is outstanding hereunder).
3. Rate Change Date. Any Rate based on a fluctuating index or base rate will
change, unless otherwise provided, each time and as of the date that the index
or base rate changes. In the event any index is discontinued, Bank shall
substitute an index determined by Bank to be comparable, in its sole discretion.
4. Payment Schedule. All payments received hereunder shall be applied first to
the payment of any expense or charges payable hereunder or under any other loan
documents executed in connection with this Note, then to interest due and
payable, with the balance applied to principal, or in such other order as Bank
shall determine at its option.
Principal Plus Accrued Interest. Interest shall be payable monthly commencing on
December 15, 1997. Principal shall be paid in consecutive equal installments of
$50,000.00, plus accrued interest, payable monthly, commencing on June 15, 1998,
and continuing on the same day of each successive month, quarter or other period
(as applicable) thereafter, with a final payment of all unpaid principal and
accrued interest due on May 31, 1999.
5. Revolving Feature.
[X] Borrower may borrow, repay and reborrow hereunder at any time, up to a
maximum aggregate amount outstanding at any one time equal to the principal
amount of this Note, provided, that Borrower is not in default under any
provision of this Note, any other documents executed in connection with this
Note, or any other note or other loan documents now or hereafter executed in
connection with any other obligation of Borrower to Bank, and provided that the
borrowings hereunder do not exceed any borrowing base or other limitation on
borrowings by Borrower. Bank shall incur no liability for its refusal to advance
funds based upon its determination that any conditions of such further advances
have not been met. Bank records of the amounts borrowed from time to time shall
be conclusive proof thereof.
6. Automatic Payment.
[ ] Borrower has elected to authorize Bank to effect payment of sums due under
this Note by means of debiting Borrower's account number ___________________.
This authorization shall not affect the obligation of Borrower to pay such sums
when due, without notice, if there are insufficient funds in
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<PAGE>
such account to make such payment in full on the due date thereof, or if Bank
fails to debit the account.
7. Waivers, Consents and Covenants. Borrower, any indorser, or guarantor hereof
of any other party hereto (individually an "Obligor" and collectively
"Obligors") and each of them jointly and severally: (a) waive presentment,
demand, protest, notice of demand, notice of intent to accelerate, notice of
acceleration of maturity, notice of protest, notice of nonpayment, notice of
dishonor, and any other notice required to be given under the law to any Obligor
in connection with the delivery, acceptance, performance, default or enforcement
of this Note, any indorsement or guaranty of this Note, or any other documents
executed in connection with this Note or any other note or other loan documents
now or hereafter executed in connection with any obligation of Borrower to Bank
(the "Loan Documents"); (b) consent to all delays, extensions, renewals or other
modifications of this Note or the Loan Documents, or waiver of any term hereof
or of the Loan Documents, or release or discharge by Bank of any of Obligors, or
release, substitution or exchange of any security for the payment hereof, or the
failure to act on the part of Bank, or any indulgence shown by Bank (without
notice to or further assent from any of Obligors), and agree that no such
action, failure to act or failure to exercise any right or remedy by Bank shall
in any way affect or impair the obligations of any Obligors or be construed as a
waiver by Bank of, or otherwise affect, any of Bank's rights under this Note,
under any endorsement or guaranty of this Note or under any of the Loan
Documents; and (c) agree to pay, on demand, all costs and expenses of collection
or defense of this Note or of any endorsement or guaranty hereof and/or the
enforcement or defense of Bank's rights with respect to, or the administration,
supervision, preservation, protection of, or realization upon, any property
securing payment hereof, including, without limitation, reasonable attorney's
fees, including fees related to any suit, mediation or arbitration proceeding,
out of court payment agreement, trial, appeal, bankruptcy proceedings or other
proceeding, in the amount of 15% of the outstanding balance due under this Note.
8. Prepayments. Intentionally deleted.
9. Delinquency Charge. To the extent permitted by law, a delinquency charge may
be imposed in an amount not to exceed four percent (4%) of the unpaid portion of
any payment that is more than fifteen days late. Unless the terms of this Note
call for repayment of the entire balance of this Note (both principal and
interest) in a single payment and not for installments of interest or principal
and interest, the 4% delinquency charge may be imposed not only with respect to
regular installments of principal or interest or principal and interest, but
also with respect to any other payment in default under this Note (other than a
previous delinquency charge), including without limitation a single payment of
principal due at the maturity of this Note. In the event any installment, or
portion thereof, is not paid in a timely manner, subsequent payments will be
applied first to the past due balance (which shall not include any previous
delinquency charges), specifically to the oldest maturing installment, and a
separate delinquency charge will be imposed for each payment that becomes due
until the default is cured.
-3-
<PAGE>
10. Events of Default. The following are events of default hereunder: (a) the
failure to pay or perform any obligation, liability or indebtedness of any
Obligor to Bank, or to any affiliate or subsidiary of NationsBank Corporation,
whether under this Note or any Loan Documents, as and when due (whether upon
demand, at maturity or by acceleration); (b) the failure to pay or perform any
other obligation, liability or indebtedness of any Obligor to any other party in
a maximum aggregate amount of $500,000.00 on an annual basis with a sixty (60)
day cure period before it becomes an event of default; (c) the commencement of a
proceeding against any Obligor for dissolution or liquidation, the voluntary or
involuntary termination or dissolution of any Obligor or the merger or
consolidation of any Obligor with or into another entity; (d) the insolvency of,
the business failure of, the appointment of a custodian, trustee, liquidator or
receiver for or for any of the property of, the assignment for the benefit of
creditors by, or the filing of a petition under bankruptcy, insolvency or
debtor's relief law or the filing of a petition for any material adjustment, as
determined by the Bank, of indebtedness, composition or extension by or against
any Obligor; (e) the determination by Bank that any representation or warranty
made to Bank by any Obligor in any Loan Documents or otherwise is or was, when
it was made, untrue or materially misleading; (f) the failure of any Obligor to
timely deliver such financial statements, including tax returns, other
statements of condition or other information, as Bank shall request from time to
time; (g) the entry of a judgment against any Obligor in a maximum aggregate
amount of $500,000.00 on an annual basis with a sixty (60) day cure period
before it becomes an event of default; (h) the seizure or forfeiture of, or the
issuance of any writ of possession, garnishment or attachment, or any turnover
order for any property of any Obligor; (i) the determination by Bank that it is
insecure for any reason; (l) the determination by Bank that a material adverse
change has occurred in the financial condition of any Obligor; or (j) the
failure of Borrower's business to comply with any law or regulation controlling
its operation.
11. Remedies upon Default. Whenever there is a default under this Note (a) the
entire balance outstanding hereunder and all other obligations of any Obligor to
Bank (however acquired or evidenced) shall, at the option of Bank, become
immediately due and payable and any obligation of Bank to permit further
borrowing under this Note shall immediately cease and terminate, and/or (b) to
the extent permitted by law, the Rate of interest on the unpaid principal shall
be increased at Bank's discretion up to the maximum rate allowed by law, or if
none, 25% per annum (the "Default Rate"). The provisions herein for a Default
Rate and a delinquency charge shall not be deemed to extend the time for any
payment hereunder or to constitute a "grace period" giving Obligors a right to
cure any default. At Bank's option, any accrued and unpaid interest, fees or
charges may, for purposes of computing and accruing interest on a daily basis
after the due date of the Note or any installment thereof, be deemed to be a
part of the principal balance, and interest shall accrue on a daily compounded
basis after such date at the Default Rate provided in this Note until the entire
outstanding balance of principal and interest is paid in full. Bank is hereby
authorized at any time to set off and charge against any deposit accounts of any
Obligor, as well as any money, instruments, securities, documents, chattel
paper, credits, claims, demands, income and any other property, rights and
interests of any Obligor which at any time shall come into the possession or
custody or under the control of Bank or any of its agents, affiliates or
correspondents, without notice or demand, any
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<PAGE>
and all obligations due hereunder. Additionally, Bank shall have all rights and
remedies available under each of the Loan Documents, as well as all rights and
remedies available at law or in equity.
12. Non-Waiver. The failure at any time of Bank to exercise any of its options
or any other rights hereunder shall not constitute a waiver thereof, nor shall
it be a bar to the exercise of any of its options or rights at a later date. All
rights and remedies of Bank shall be cumulative and may be pursued singly,
successively or together, at the option of Bank. The acceptance by Bank of any
partial payment shall not constitute a waiver of any default or of any of Bank's
rights under this Note. No waiver of any of its rights hereunder, and no
modification or amendment of this Note, shall be deemed to be made by Bank
unless the same shall be in writing, duly signed on behalf of Bank; each such
waiver shall apply only with respect to the specific instance involved, and
shall in no way impair the rights of Bank or the obligations of Obligor to Bank
in any other respect at any other time.
13. Applicable Law, Venue and Jurisdiction. This Note and the rights and
obligations of Borrower and Bank shall be governed by and interpreted in
accordance with the law of the State of North Carolina. In any litigation in
connection with or to enforce this Note or any indorsement or guaranty of this
Note or any Loan Documents, Obligors, and each of them, irrevocably consent to
and confer personal jurisdiction on the courts of the State of North Carolina or
the United States located within the State of North Carolina and expressly waive
any objections as to venue in any such courts. Nothing contained herein shall,
however, prevent Bank from bringing any action or exercising any rights within
any other state or jurisdiction or from obtaining personal jurisdiction by any
other means available under applicable law.
14. Partial Invalidity. The unenforceability or invalidity of any provision of
this Note shall not affect the enforceability or validity of any other provision
herein and the invalidity or unenforceability of any provision of this Note or
of the Loan Documents to any person or circumstance shall not affect the
enforceability or validity of such provision as it may apply to other persons or
circumstances.
15. Binding Effect. This Note shall be binding upon and inure to the benefit of
Borrower, Obligors and Bank and their respective successors, assigns, heirs and
personal representatives, provided, however, that no obligations of Borrower or
Obligors hereunder can be assigned without prior written consent of Bank.
16. Controlling Document. To the extent that this Note conflicts with or is in
any way incompatible with any other Loan Document concerning this obligation,
the Note shall control over any other document, and if the Note does not address
an issue, then each other document shall control to the extent that it deals
most specifically with an issue.
17. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES HERETO
INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR
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<PAGE>
RELATING TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS,
AGREEMENTS OR DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED
TORT, SHALL BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL
ARBITRATION ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF
PRACTICE AND PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF
J.A.M.S./ENDISPUTE OR ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL
RULES" SET FORTH BELOW. IN THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES
SHALL CONTROL. JUDGMENT UPON ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT
HAVING JURISDICTION. ANY PARTY TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY
BRING AN ACTION, INCLUDING A SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL
ARBITRATION OF ANY CONTROVERSY OR CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY
COURT HAVING JURISDICTION OVER SUCH ACTION.
A. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY OF ANY
BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT, AGREEMENT
OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN ARBITRATOR; IF
J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE ARBITRATION, THEN
THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL ARBITRATION HEARINGS WILL
BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR ARBITRATION; FURTHER, THE
ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE PERMITTED TO EXTEND THE
COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60 DAYS.
B. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION SHALL BE
DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE STATUTES OF
LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT, AGREEMENT OR
DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO IT BY 12
U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III) LIMIT THE
RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT NOT LIMITED
TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY
COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY REMEDIES SUCH
AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR THE APPOINTMENT
OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS, FORECLOSE UPON SUCH
PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR
AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS
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<PAGE>
EXERCISE OF SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION
FOR FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER
OF THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO
ARBITRATE THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH
REMEDIES.
Borrower represents to Bank that the proceeds of this loan are to be used
primarily for business, commercial or agricultural purposes. Borrower
acknowledges having read and understood, and agrees to be bound by, all terms
and conditions of this Note and hereby executes this Note under seal as of the
date here above written.
NOTICE OF FINAL AGREEMENT. THIS WRITTEN PROMISSORY NOTE REPRESENTS THE FINAL
AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Closure Medical Corporation
By: /s/ J. Blount Swain (Seal)
- ----------------------------------------
Name: J. Blount Swain
Title: Secretary
- ----------------------------------------
Attest (If Applicable)
[Corporate Seal]
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<PAGE>
Customer # 976547
NationsBank, N.A. Date: November 14, 1997
Security Agreement
================================================================================
Bank/Secured Party: Debtor(s)/Pledgor(s):
NationsBank, N.A. Closure Medical Corporation
Banking Center: 5265 Capital Blvd.
One Hannover Square Raleigh, NC 27616
Raleigh, NC 27601
County: Wake County: Wake
================================================================================
Debtor/Pledgor is: Corporation
Address is Debtor's: Place of Business
Collateral (hereinafter defined) is located at: 5250 Green's Dairy Rd., Raleigh,
NC 27616
================================================================================
1. Security Interest. For good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Debtor/Pledgor (hereinafter referred
to as "Debtor") assigns and grants to Bank (also known as "Secured Party"), a
security interest and lien in the Collateral (hereinafter defined) to secure the
payment and the performance of the Obligation (hereinafter defined).
2. Collateral. A Security interest is granted in the following collateral
described in this Item 2 (the "Collateral"):
A. Types of Collateral
Furniture and Fixtures:
Specific Fixtures: Limited to any and all of Debtor's goods held as
furniture and fixtures, as described in Exhibit "B" attached; provided, however,
the Debtor does not grant a security interest in, or a lien on those items
leased by the Debtor from Transamerica Business Credit Technology Finance
Division pursuant to that lease dated January 29, 1997. These goods are or will
become fixtures on the following described real estate in: Wake, North Carolina,
owned by: Highwoods Properties more particularly described as follows: 5250
Green's Dairy Rd., Raleigh, NC 27616.
B. Substitutions, Proceeds and Related Items. Any and all substitutes and
replacements for, accessions, attachments and other additions to, tools, parts
and equipment now or hereafter added to or used in connection with, and all cash
or non-cash proceeds and products of, the Collateral (including, without
limitation, all income, benefits and property receivable, received or
Approved: 07/01/95
Revised: 05/29/96
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<PAGE>
distributed which results from any of the Collateral, such as dividends payable
or distributable in cash, property or stock; insurance distributions of any kind
related to the Collateral, including, without limitation, returned premiums,
interest, premium and principal payments; redemption proceeds and subscription
rights; and shares or other proceeds of conversions or splits of any securities
in the Collateral); any and all choses in action and causes of action of Debtor,
whether now existing or hereafter arising, relating directly or indirectly to
the Collateral (whether arising in contract, tort or otherwise and whether or
not currently in litigation); all certificates of title, manufacturer's
statements of origin, other documents, accounts and chattel paper, whether now
existing or hereafter arising directly or indirectly from or related to the
Collateral; all warranties, wrapping, packaging, advertising and shipping
materials used or to be used in connection with or related to the Collateral;
all of Debtor's books, records, data, plans, manuals, computer software,
computer tapes, computer systems, computer disks, computer programs, source
codes and object codes containing any information, pertaining directly or
indirectly to the Collateral and all rights of Debtor to retrieve data and other
information pertaining directly or indirectly to the Collateral from third
parties, whether now existing or hereafter arising; and all returned, refused,
stopped in transit, or repossessed Collateral, any of which, if received by
Debtor, upon request shall be delivered immediately to Bank.
C. Balances and Other Property. The balance of every deposit account of
Debtor maintained with Bank and any other claim of Debtor against Bank, now or
hereafter existing, liquidated or unliquidated, and all money, instruments,
securities, documents, chattel paper, credits, claims, demands, income, and any
other property, rights and interests of Debtor which at any time shall come into
the possession or custody or under the control of Bank or any of its agents or
affiliates for any purpose, and the proceeds of any thereof. Bank shall be
deemed to have possession of any of the Collateral in transit to or set apart
for it or any of its agents or affiliates.
3. Description of Obligation(s). The following obligations ("Obligation" or
"Obligations") are secured by this Agreement: (a) All debts, obligations,
liabilities and agreements of Debtor to Bank, now or hereafter existing, arising
directly or indirectly between Debtor and Bank whether absolute or contingent,
joint or several, secured or unsecured, due or not due, contractual or tortious,
liquidated or unliquidated, arising by operation of law or otherwise, and all
renewals, extensions or rearrangement of any of the above; (b) All costs
incurred by Bank to obtain, preserve, perfect and enforce this Agreement and
maintain, preserve, collect and realize upon the Collateral; (c) All debt,
obligations and liabilities of Debtor to Bank of the kinds described in this
Item 3., now existing or hereafter arising; (d) All other costs and attorney's
fees incurred by Bank, for which Debtor is obligated to reimburse Bank in
accordance with the terms of the Loan Documents (hereinafter defined), together
with interest at the maximum rate allowed by law, or if none, 25% per annum; and
(e) All amounts which may be owed to Bank pursuant to all other Loan Documents
executed between Bank and any other Debtor. If Debtor is not the obligor of the
Obligation, and in the event any amount paid to Bank on any Obligation is
subsequently recovered from Bank in or as a result of any bankruptcy, insolvency
or fraudulent conveyance proceeding, Debtor shall be liable to Bank for the
amounts so recovered up to the fair market value of the Collateral whether or
not the
Approved: 07/01/95
Revised: 05/29/96
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<PAGE>
Collateral has been released or the security interest terminated. In the event
the Collateral has been released or the security interest terminated, the fair
market value of the Collateral shall be determined, at Bank's option, as of the
date the collateral was released, the security interest terminated, or said
amounts were recovered.
4. Debtor's Warranties. Debtor hereby represents and warrants to Bank as
follows:
A. Financing Statements. Except as may be noted by schedule attached
hereto and incorporated herein by reference, no financing statement covering the
Collateral is or will be on file in any public office, except the financing
statements relating to this security interest, and no security interest, other
than the one herein created, has attached or been perfected in the Collateral or
any part thereof.
B. Ownership. Debtor owns, or will use the proceeds of any loans by Bank
to become the owner of, the Collateral free from any setoff, claim, restriction,
lien, security interest or encumbrance except liens for taxes not yet due and
the security interest hereunder.
C. Fixtures and Accessions. None of the Collateral is affixed to real
estate or is an accession to any goods, or will become a fixture or accession,
except as expressly set out herein.
D. Claims of Debtors on the Collateral. All account debtors and other
obligors whose debts or obligations are part of the Collateral have no right to
setoffs, counterclaims or adjustments, and no defenses in connection therewith.
E. Environmental Compliance. The conduct of Debtor's business operations
and the condition of Debtor's property does not and will not violate any federal
laws, rules or ordinances for environmental protection, regulations of the
Environmental Protection Agency and any applicable local or state law, rule,
regulation or rule of common law and any judicial interpretation thereof
relating primarily to the environment or any materials (defined as hazardous
materials or substances under any local, state or federal environmental laws,
rules or regulations, and petroleum, petroleum products, oil and asbestos
("Hazardous Materials").
F. Power and Authority. Debtor has full power and authority to make this
Agreement, and all necessary consents and approvals of any persons, entities,
governmental or regulatory authorities and securities exchanges have been
obtained to effectuate the validity of this Agreement.
5. Debtor's Covenants. Until full payment and performance of all of the
Obligation and termination or expiration of any obligation or commitment of Bank
to make advances or loans to Debtor, unless Bank otherwise consents in writing:
A. Obligation and This Agreement. Debtor shall perform all of its
agreements herein and in any other agreements between it and Bank.
Approved: 07/01/95
Revised: 05/29/96
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<PAGE>
B. Ownership and Maintenance of the Collateral. Debtor shall keep all
tangible Collateral in good condition. Debtor shall defend the Collateral
against all claims and demands of all persons at any time claiming any interest
therein adverse to Bank. Debtor shall keep the Collateral free from all liens
and security interests except those for taxes not yet due and the security
interest hereby created.
C. Insurance. Debtor shall insure the Collateral with companies acceptable
to Bank. Such insurance shall be in an amount not less than the fair market
value of the Collateral and shall be against such casualties, with such
deductible amounts as Bank shall approve. All insurance policies shall be
written for the benefit of Debtor and Bank as their interests may appear,
payable to Bank as loss payee, or in other form satisfactory to Bank, and such
policies or certificates evidencing the same shall be furnished to Bank. All
policies of insurance shall provide for written notice to Bank at least thirty
(30) days prior to cancellation. Risk of loss or damage is Debtor's to the
extent of any deficiency in any effective insurance coverage.
D. Bank's Costs. Debtor shall pay all costs necessary to obtain, preserve,
perfect, defend and enforce the security interest created by this Agreement,
collect the Obligation, and preserve, defend, enforce and collect the
Collateral, including but not limited to taxes, assignments, insurance premiums,
repairs, rent, storage costs and expenses of sales, legal expenses, reasonable
attorney's fees and other fees or expenses for which Debtor is obligated to
reimburse Bank in accordance with the terms of the Loan Documents. Whether the
Collateral is or is not in Bank's possession, and without any obligation to do
so and without waiving Debtor's default for failure to make any such payment,
Bank at its option may pay any such costs and expenses, discharge encumbrances
on the Collateral, and pay for insurance of the Collateral, and such payments
shall be a part of the Obligation and bear interest at the rate set out in the
Obligation. Debtor agrees to reimburse Bank on demand for any costs so incurred.
E. Information and Inspection. Debtor shall (i) promptly furnish Bank any
information with respect to the Collateral requested by Bank; (ii) allow Bank or
its representatives to inspect the Collateral, at any time and wherever located,
and to inspect and copy, or furnish Bank or its representatives with copies of,
all records relating to the Collateral and the Obligation; (iii) promptly
furnish Bank or its representatives such information as Bank may request to
identify the Collateral, at the time and in the form requested by Bank; and (iv)
deliver upon request to Bank shipping and delivery receipts evidencing the
shipment of goods and invoices evidencing the receipt of, and the payment for,
the Collateral.
F. Additional Documents. Debtor shall sign and deliver any papers deemed
necessary or desirable in the judgment of Bank to obtain, maintain, and perfect
the security interest hereunder and to enable Bank to comply with any federal or
state law in order to obtain or perfect Bank's interest in the Collateral or to
obtain proceeds of the Collateral.
Approved: 07/01/95
Revised: 05/29/96
-4-
<PAGE>
G. Parties Liable on the Collateral. Debtor shall preserve the liability
of all obligors on any Collateral, shall preserve the priority of all security
therefor, and shall deliver to Bank the original certificates of title on all
motor vehicles or other titled vehicles constituting the Collateral. Bank shall
have no duty to preserve such liability or security, but may do so at the
expense of Debtor, without waiving Debtor's default.
H. Records of the Collateral. Debtor at all times shall maintain accurate
books and records covering the Collateral. Debtor immediately will mark all
books and records with an entry showing the absolute assignment of all
Collateral to Bank, and Bank is hereby given the right to audit the books and
records of Debtor relating to the Collateral at any time and from time to time.
The amounts shown as owed to Debtor on Debtor's books and on any assignment
schedule will be the undisputed amounts owing and unpaid.
I. Disposition of the Collateral. If disposition of any Collateral gives
rise to an account, chattel paper or instrument, Debtor immediately shall notify
Bank, and upon request of Bank shall assign or indorse the same to Bank. No
Collateral may be sold, leased, manufactured, processed or otherwise disposed of
by Debtor in any manner without the prior written consent of Bank, except the
Collateral sold, leased, manufactured, processed or consumed in the ordinary
course of business.
J. Accounts. Each account held as Collateral will represent the valid and
legally enforceable obligation of third parties and shall not be evidenced by
any instrument or chattel paper.
K. Notice/Location of the Collateral. Debtor shall give Bank written
notice of each office of Debtor in which records of Debtor pertaining to
accounts held as Collateral are kept, and each location at which the Collateral
is or will be kept, and of any change of any such location. If no such notice is
given, all records of Debtor pertaining to the Collateral and all Collateral of
Debtor are and shall be kept at the address marked by Debtor above.
L. Change of Name/Status and Notice of Changes. Without the written
consent of Bank, Debtor shall not change its corporate status or engage in any
business not reasonably related to its business as presently conducted. Without
prior written notice to the Bank, Debtor shall not change its name or use any
trade name. Debtor shall notify Bank immediately of (i) any material change in
the Collateral, (ii) a change in Debtor's residence or location, (iii) a change
in any matter warranted or represented by Debtor in this Agreement, or in any of
the Loan Documents or furnished to Bank pursuant to this Agreement, and (iv) the
occurrence of an Event of Default (hereinafter defined).
M. Use and Removal of the Collateral. Debtor shall not use the Collateral
illegally. Debtor shall not, unless previously indicated as a fixture, permit
the Collateral to be affixed to real or personal property without the prior
written consent of Bank. Debtor shall not permit any of the
Approved: 07/01/95
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<PAGE>
Collateral to be removed from the locations specified herein without the prior
written consent of Bank, except for the sale of inventory in the ordinary course
of business.
N. Possession of the Collateral. Debtor shall deliver all investment
securities and other instruments, documents and chattel paper which are part of
the Collateral and in Debtor's possession to Bank immediately, or if hereafter
acquired, immediately following acquisition, appropriately indorsed to Bank's
order, or with appropriate, duly executed powers. Debtor waives presentment,
notice of acceleration, demand, notice of dishonor, protest, and all other
notices with respect thereto.
O. Consumer Credit. If any Collateral or proceeds includes obligations of
third parties to Debtor, the transactions giving rise to the Collateral shall
conform in all respects to the applicable state or federal law including but not
limited to consumer credit law. Debtor shall hold harmless and indemnify Bank
against any cost, loss or expense arising from Debtor's breach of this covenant.
P. Power of Attorney. Debtor appoints Bank and any officer thereof as
Debtor's attorney-in-fact with full power in Debtor's name and behalf to do
every act which Debtor is obligated to do or may be required to do hereunder;
however, nothing in this paragraph shall be construed to obligate Bank to take
any action hereunder nor shall Bank be liable to Debtor for failure to take any
action hereunder. This appointment shall be deemed a power coupled with an
interest and shall not be terminable as long as the Obligation is outstanding
and shall not terminate on the disability or incompetence of Debtor.
Q. Waivers by Debtor. Debtor waives notice of the creation, advance,
increase, existence, extension or renewal of, and of any indulgence with respect
to, the Obligation; waives presentment, demand, notice of dishonor and protest;
waives notice of the amount of the Obligation outstanding at any time, notice of
any change in financial condition of any person liable for the Obligation or any
part thereof, notice of any Event of Default, and all other notices respecting
the Obligation; and agrees that maturity of the Obligation and any part thereof
may be accelerated, extended or renewed one or more times by Bank in its
discretion, without notice to Debtor. Debtor waives any right to require that
any action be brought against any other person or to require that resort be had
to any other security or to any balance of any deposit account. Debtor further
waives any right of subrogation or to enforce any right of action against any
other Debtor until the Obligation is paid in full.
R. Other Parties and Other Collateral. No renewal or extension of or any
other indulgence with respect to the Obligation or any part thereof, no release
of any security, no release of any person (including any maker, indorser,
guarantor or surety) liable on the Obligation, no delay in enforcement of
payment, and no delay or omission or lack of diligence or care in exercising any
right or power with respect to the Obligation or any security therefor or
guaranty thereof or under this Agreement shall in any manner impair or affect
the rights of Bank under the law, hereunder, or under any other agreement
pertaining to the Collateral. Bank need not file suit or assert a claim for
personal judgment against any person for any part of the Obligation or seek to
realize upon any other
Approved: 07/01/95
Revised: 05/29/96
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<PAGE>
security for the Obligation, before foreclosing or otherwise realizing upon the
Collateral. Debtor waives any right to the benefit of or to require or control
application of any other security or proceeds thereof, and agrees that Bank
shall have no duty or obligation to Debtor to apply to the Obligation any such
other security or proceeds thereof.
S. Collection and Segregation of Accounts and Right to Notify. Bank hereby
authorizes Debtor to collect the Collateral, subject to the direction and
control of Bank, but Bank may, without cause or notice, curtail or terminate
said authority at any time. Upon notice by Bank, whether oral or in writing, to
Debtor, Debtor shall forthwith upon receipt of all checks, drafts, cash, and
other remittances in payment of or on account of the Collateral, deposit the
same in one or more special accounts maintained with Bank over which Bank alone
shall have the power of withdrawal. The remittance of the proceeds of such
Collateral shall not, however, constitute payment or liquidation of such
Collateral until Bank shall receive good funds for such proceeds. Funds placed
in such special accounts shall be held by Bank as security for all Obligations
secured hereunder. These proceeds shall be deposited in precisely the form
received, except for the indorsement of Debtor where necessary to permit
collection of items, which indorsement Debtor agrees to make, and which
indorsement Bank is also hereby authorized, as attorney-in-fact, to make on
behalf of Debtor. In the event Bank has notified Debtor to make deposits to a
special account, pending such deposit, Debtor agrees that it will not commingle
any such checks, drafts, cash or other remittances with any funds or other
property of Debtor, but will hold them separate and apart therefrom, and upon an
express trust for Bank until deposit thereof is made in the special account.
Bank will, from time to time, apply the whole or any part of the Collateral
funds on deposit in this special account against such Obligations as are secured
hereby as Bank may in its sole discretion elect. At the sole election of Bank,
any portion of said funds on deposit in the special account which Bank shall
elect not to apply to the Obligations, may be paid over by Bank to Debtor. At
any time, whether Debtor is or is not in default hereunder, Bank may notify
persons obligated on any Collateral to make payments directly to Bank and Bank
may take control of all proceeds of any Collateral. Until Bank elects to
exercise such rights, Debtor, as agent of Bank, shall collect and enforce all
payments owed on the Collateral.
T. Compliance with State and Federal Laws. Debtor will maintain its
existence, good standing and qualification to do business, where required, and
comply with all laws, regulations and governmental requirements, including
without limitation, environmental laws applicable to it or any of its property,
business operations and transactions.
U. Environmental Covenants. Debtor shall immediately advise Bank in
writing of (i) any and all enforcement, cleanup, remedial, removal, or other
governmental or regulatory actions instituted, completed or threatened pursuant
to any applicable federal, state, or local laws, ordinances or regulations
relating to any Hazardous Materials affecting Debtor's business operations; and
(ii) all claims made or threatened by any third party against Debtor relating to
damages, contribution, cost recovery, compensation, loss or injury resulting
from any Hazardous Materials. Debtor shall immediately notify Bank of any
remedial action taken by Debtor with respect to Debtor's business
Approved: 07/01/95
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<PAGE>
operations. Debtor will not use or permit any other party to use any Hazardous
Materials at any of Debtor's places of business or at any other property owned
by Debtor except such materials as are incidental to Debtor's normal course of
business or at any other property of Debtor at any reasonable times upon three
(3) days prior notice for the purposes of conducting an environmental
investigation and audit (including taking physical samples) to insure that
Debtor is complying with this covenant and Debtor shall reimburse Bank on demand
for the costs of any such environmental investigation and audit. Debtor shall
provide Bank, its agents, contractors, employees and representatives with access
to and copies of any and all data and documents relating to or dealing with any
Hazardous Materials used, generated, manufactured, stored or disposed of by
Debtor's business operations within five (5) days of the request therefor.
6. Rights and Powers of Bank.
A. General. Bank, before or after default, without liability to Debtor
may: obtain from any person information regarding Debtor or Debtor's business,
which information any such person also may furnish without liability to Debtor;
require Debtor to give possession or control of any Collateral to Bank; indorse
as Debtor's agent any instruments, documents or chattel paper in the Collateral
or representing proceeds of the Collateral; contact account debtors directly to
verify information furnished by Debtor; take control of proceeds, including
stock received as dividends or by reason of stock splits; release the Collateral
in its possession to any Debtor, temporarily or otherwise; require additional
Collateral; reject as unsatisfactory any property hereafter offered by Debtor as
Collateral; set standards from time to time to govern what may be used as after
acquired Collateral; designate, from time to time, a certain percent of the
Collateral as the loan value and require Debtor to maintain the Obligation at or
below such figure; take control of funds generated by the Collateral, such as
cash dividends, interest and proceeds or refunds from insurance, and use same to
reduce any part of the Obligation and exercise all other rights which an owner
of such Collateral may exercise, except the right to vote or dispose of the
Collateral before an Event of Default; at any time transfer any of the
Collateral or evidence thereof into its own name or that of its nominee; and
demand, collect, convert, redeem, receipt for, settle, compromise, adjust, sue
for, foreclose or realize upon the Collateral, in its own name or in the name of
Debtor, as Bank may determine. Bank shall not be liable for failure to collect
any account or instruments, or for any act or omission on the part of Bank, its
officers, agents or employees, except for its or their own willful misconduct or
gross negligence. The foregoing rights and powers of Bank will be in addition
to, and not a limitation upon, any rights and powers of Bank given by law,
elsewhere in this Agreement, or otherwise. If Debtor fails to maintain any
required insurance, to the extent permitted by applicable law Bank may (but is
not obligated to) purchase single interest insurance coverage for the Collateral
which insurance may at Bank's option (i) protect only Bank and not provide any
remuneration or protection for Debtor directly and (ii) provide coverage only
after the Obligation has been declared due as herein provided. The premiums for
any such insurance purchased by Bank shall be a part of the Obligation and shall
bear interest as provided in 3(d) hereof.
Approved: 07/01/95
Revised: 05/29/96
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<PAGE>
B. Convertible Collateral. Bank may present for conversion any Collateral
which is convertible into any other instrument or investment security or a
combination thereof with cash, but Bank shall not have any duty to present for
conversion any Collateral unless it shall have received from Debtor detailed
written instructions to that effect at a time reasonably far in advance of the
final conversion date to make such conversion possible.
7. Default.
A. Event of Default. An event of default ("Event of Default") shall occur
if: (i) there is a loss, theft, damage or destruction of any material portion of
the Collateral for which there is no insurance coverage or for which, in the
opinion of Bank, there is insufficient insurance coverage; (ii) Debtor or any
other obligor on all or part of the Obligation shall fail to timely and properly
pay or observe, keep or perform any term, covenant, agreement or condition in
this Agreement or in any other agreement between Debtor and Bank or between Bank
and any other obligor on the Obligation, including, but not limited to, any
other note or instrument, loan agreement, security agreement, deed of trust,
mortgage, promissory note, guaranty, certificate, assignment, instrument,
document or other agreement concerning or related to the Obligation
(collectively, the "Loan Documents"); (iii) Debtor or such other obligor shall
fail to timely and properly pay or observe, keep or perform any term, covenant,
agreement or condition in any agreement between such party, and any affiliate or
subsidiary of NationsBank Corporation; (iv) Debtor or such other obligor shall
fail to timely and properly pay or observe, keep or perform any term, covenant,
agreement or condition in any lease agreement between such party and any lessor
pertaining to promises at which any Collateral is located or stored; or (v)
Debtor or such other obligor abandons any leased premises at which any
Collateral is located or stored and the Collateral is either moved without the
prior written consent of Bank or the Collateral remains at the abandoned
premises.
B. Rights and Remedies. If any Event of Default shall occur, then, in each
and every such case, Bank may, without presentment, demand, or protest; notice
of default, dishonor, demand, non-payment, or protest; notice of intent to
accelerate all or any part of the Obligation; notice of acceleration of all or
any part of the Obligation; or notice of any other kind, all of which Debtor
hereby expressly waives, (except for any notice required under this Agreement,
any other Loan Document or applicable law); at any time thereafter exercise
and/or enforce any of the following rights and remedies at Bank's option:
i. Acceleration. The Obligation shall, at Bank's option, become
immediately due and payable, and the obligation, if any, of Bank to permit
further borrowings under the Obligation shall at Bank's option immediately cease
and terminate.
ii. Possession and Collection of the Collateral. At its option: (a)
take possession or control of, store, lease, operate, manage, sell, or instruct
any Agent or Broker to sell or otherwise dispose of, all or any part of the
Collateral; (b) notify all parties under any account or contract forming all or
any part of the Collateral to make any payments otherwise due to Debtor
Approved: 07/01/95
Revised: 05/29/96
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<PAGE>
directly to Bank; (c) in Bank's own name, or in the name of Debtor, demand,
collect, receive, sue for, and give receipts and releases for, any and all
amounts due under such accounts and contract rights; (d) indorse as the agent of
Debtor any check, note, chattel paper, documents, or instruments forming all or
any part of the Collateral; (e) make formal application for transfer to Bank (or
to any assignee of Bank or to any purchaser of any of the Collateral) of all of
Debtor's permits, licenses, approvals, agreements, and the like relating to the
Collateral or to Debtor's business; (f) take any other action which Bank deems
necessary or desirable to protect and realize upon its security interest in the
Collateral; and (g) in addition to the foregoing, and not in substitution
therefor, exercise any one or more of the rights and remedies exercisable by
Bank under any other provision of this Agreement, under any of the other Loan
Documents, or as provided by applicable law (including, without limitation, the
Uniform Commercial Code as in effect in North Carolina (hereinafter referred to
as the "UCC")). In taking possession of the Collateral, Bank may enter Debtor's
premises and otherwise proceed without legal process, if this can be done
without breach of the peace. Debtor shall, upon Bank's demand, promptly make the
Collateral or other security available to Bank at a place designated by Bank,
which place shall be reasonably convenient to both parties.
Bank shall not be liable for, nor be prejudiced by, any loss, depreciation or
other damages to the Collateral, unless caused by Bank's willful and malicious
act. Bank shall have no duty to take any action to preserve or collect the
Collateral.
iii. Receiver. Obtain the appointment of a receiver for all or any
of the Collateral, Debtor hereby consenting to the appointment of such a
receiver and agreeing not to oppose any such appointment.
iv. Right of Set Off. Without notice or demand to Debtor, set off
and apply against any and all of the Obligation any and all deposits (general or
special, time or demand, provisional or final) and any other indebtedness, at
any time held or owing by Bank or any of Bank's agents or affiliates to or for
the credit of the account of Debtor or any guarantor or indorser of Debtor's
Obligation.
Bank shall be entitled to immediate possession of all books and records
evidencing any Collateral or pertaining to chattel paper covered by this
Agreement and it or its representatives shall have the authority to enter upon
any premises upon which any of the same, or any Collateral, may be situated and
remove the same therefrom without liability. Bank may surrender any insurance
policies in the Collateral and receive the unearned premium thereon. Debtor
shall be entitled to any surplus and shall be liable to Bank for any deficiency.
The proceeds of any disposition after default available to satisfy the
Obligation shall be applied to the Obligation in such order and in such manner
as Bank in its discretion shall decide.
Debtor specifically understands and agrees that any sale by Bank of all or part
of the Collateral pursuant to the terms of this Agreement may be effected by
Bank at times and in manners which could result in the proceeds of such sale as
being significantly and materially less than might have
Approved: 07/01/95
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<PAGE>
been received if such sale had occurred at different times or in different
manners, and Debtor hereby releases Bank and its officers and representatives
from and against any and all obligations and liabilities arising out of or
related to the timing or manner of any such sale.
If, in the opinion of Bank, there is any question that a public sale or
distribution of any Collateral will violate any state or federal securities law,
Bank may offer and sell such Collateral in a transaction exempt from
registration under federal securities law, and any such sale made in good faith
by Bank shall be deemed "commercially reasonable".
8. General.
A. Parties Bound. Bank's rights hereunder shall inure to the benefit of
its successors and assigns. In the event of any assignment or transfer by Bank
of any of the Obligation or the Collateral, Bank thereafter shall be fully
discharged from any responsibility with respect to the Collateral so assigned or
transferred, but Bank shall retain all rights and powers hereby given with
respect to any of the Obligation or the Collateral not so assigned or
transferred. All representations, warranties and agreements of Debtor if more
than one are joint and several and all shall be binding upon the personal
representatives, heirs, successors and assigns of Debtor.
B. Waiver. No delay of Bank in exercising any power or right shall operate
as a waiver thereof; nor shall any single or partial exercise of any power or
right preclude other or further exercise thereof or the exercise of any other
power or right. No waiver by Bank of any right hereunder or of any default by
Debtor shall be binding upon Bank unless in writing, and no failure by Bank to
exercise any power or right hereunder or waiver of any default by Debtor shall
operate as a waiver of any other or further exercise of such right or power or
of any further default. Each right, power and remedy of Bank as provided for
herein or in any of the Loan Documents, or which shall now or hereafter exist at
law or in equity or by statute or otherwise, shall be cumulative and concurrent
and shall be in addition to every other such right, power or remedy. The
exercise or beginning of the exercise by Bank of any one or more of such rights,
powers or remedies shall not preclude the simultaneous or later exercise by Bank
of any or all other such rights, powers or remedies.
C. Agreement Continuing. This Agreement shall constitute a continuing
agreement, applying to all future as well as existing transactions, whether or
not of the character contemplated at the date of this Agreement, and if all
transactions between Bank and Debtor shall be closed at any time, shall be
equally applicable to any new transactions thereafter. Provisions of this
Agreement, unless by their terms exclusive, shall be in addition to other
agreements between the parties. Time is of the essence of this Agreement.
D. Definitions. Unless the context indicates otherwise, definitions in the
UCC apply to words and phrases in this Agreement; if UCC definitions conflict,
Article 9 definitions apply.
Approved: 07/01/95
Revised: 05/29/96
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<PAGE>
E. Notices. Notice shall be deemed reasonable if mailed postage prepaid at
least five (5) days before the related action (or if the UCC elsewhere specifies
a longer period, such longer period) to the address of Debtor given above, or to
such other address as any party may designate by written notice to the other
party. Each notice, request and demand shall be deemed given or made, if sent by
mail, upon the earlier of the date of receipt or five (5) days after deposit in
the U.S. Mail, first class postage prepaid, or if sent by any other means, upon
delivery.
F. Modifications. No provision hereof shall be modified or limited except
by a written agreement expressly referring hereto and to the provisions so
modified or limited and signed by Debtor and Bank. The provisions of the
Agreement shall not be modified or limited by course of conduct or usage of
trade.
G. Applicable Law and Partial Invalidity. This Agreement has been
delivered in the State of North Carolina and shall be construed in accordance
with the laws of that State. Wherever possible each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition or invalidity, without invalidating the remainder of such
provisions or the remaining provisions of this Agreement. The invalidity or
unenforceability of any provision of any Loan Document to any person or
circumstance shall not affect the enforceability or validity of such provision
as it may apply to other persons or circumstances.
H. Financing Statement. To the extent permitted by applicable law, a
carbon, photographic or other reproduction of this Agreement or any financing
statement covering the Collateral shall be sufficient as a financing statement.
I. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES
HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR
DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL
BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION
ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND
PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR
ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN
THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON
ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY
TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A
SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR
CLAIM TO WHICH THIS
Approved: 07/01/95
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<PAGE>
AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH ACTION.
i. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY
OF ANY BORROWER'S DOMICILE AT THE TIME OF THE EXECUTION OF THIS INSTRUMENT,
AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S. WHO WILL APPOINT AN
ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM ADMINISTERING THE
ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL SERVE. ALL
ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND FOR
ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE
PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60
DAYS.
ii. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION
SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE
STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT,
AGREEMENT OR DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO
IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III)
LIMIT THE RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT
NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL
PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY
REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR
THE APPOINTMENT OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS,
FORECLOSE UPON SUCH PROPERTY, OR OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES
BEFORE, DURING OR AFTER THE PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT
PURSUANT TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF
SELF HELP REMEDIES NOR THE INSTITUTION OR MAINTENANCE OF AN ACTION FOR
FORECLOSURE OR PROVISIONAL OR ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF
THE RIGHT OF ANY PARTY, INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE
THE MERITS OF THE CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
J. Controlling Document. To the extent that this Security Agreement
conflicts with or is in any way incompatible with any other Loan Document
concerning the Obligation, any promissory note shall control over any other
document, and if such note does not address an issue, then each other document
shall control to the extent that it deals most specifically with an issue.
K. Execution Under Seal. This Agreement is being executed under seal by
Debtor(s).
Approved: 07/01/95
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<PAGE>
L. Additional Provisions. See Schedule, "_" attached hereto and
incorporated hereunder for all purposes.
M. NOTICE OF FINAL AGREEMENT. THIS WRITTEN SECURITY AGREEMENT AND THE
OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Security Agreement to be
duly executed under seal by their duly authorized representatives as of the date
first above written.
Bank/Secured Party:
NationsBank, N.A.
By: /s/ Kari C. Howe
-------------------------
Name: Kari C. Howe
Title: Vice President
Corporate or Partnership Debtor/Pledgor
Closure Medical Company
By: /s/ J. Blount Swain (Seal)
-------------------------
Name: J. Blount Swain
Title: Secretary
/s/ J. Blount Swain
- -----------------------------
Attest (If Applicable)
[Corporate Seal]
Approved: 07/01/95
Revised: 05/29/96
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<PAGE>
Exhibit "B"
CLOSURE Medical Corporation
New Facility Summary
23-Sep-97
Estimated Completion Date: February 15, 1998
Total Square Footage: 49,150 sf
New Facility Cost Breakdown:
General Conditions 181,000
Site 8,100
Demolition 17,488
Concrete 41,078
Masonry 6,720
Steel 25,440
Wood & Plastic 45,322
Thermal & Moisture 26,886
Doors & Windows 127,204
Finishes 485,108
Specialty 21,822
Equipment 305,890
Mechanical 1,111,816
Electrial 664,800
Permits/Misc. 22,201
---------
Building Subtotal $3,090,875
Contractor Fee (3.1%) 95,817
Engineering & Architects 245,000
---------
Fees Subtotal $ 340,817
Office Furniture/Equipment 250,000
Telephone System 100,000
Conference Room 75,000
---------
Add-ons Subtotal $ 425,000
Less Tenant Allowance ($18sf) $ (884,700)
----------
Grand Total $2,971,992
==========
Approved: 07/01/95
Revised: 05/29/96
NationsBank, N. A. Customer #976547
Date: November 14, 1997
Pledge Agreement
================================================================================
BANK/SECURED PARTY: PLEDGOR(S)/DEBTOR(S):
NationsBank, N.A. Closure Medical Corporation
Banking Center: 5265 Capital Blvd.
Raleigh, NC 27616
One Hannover Square
Raleigh, NC 27601
County: Wake County: Wake
(Street address including county) (Name and street address including county)
===============================================================================
Pledgor/Debtor is: Corporation
Address is Pledgor's/Debtor's: Place of Business
================================================================================
1. Security Interest. For good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, Pledgor/Debtor (hereinafter referred
to as "Pledgor") pledges, assigns and grants to Bank a security interest and
lien in the Collateral (hereinafter defined) to secure the payment and the
performance of the Obligation (hereinafter defined).
2. Collateral. The security interest is granted in the following collateral (the
"Collateral"):
A. Description of Collateral.
Specific Investment Property/Securities: The following investment property
and/or securities, together with all investment property and/or securities
hereafter delivered to Bank in substitution therefor or in addition thereto:
Commercial Paper of NationsBank Corporation in safekeeping account #841781 of
Closure Medical Corporation with NationsBank, N.A., Institutional Investment
Sales, as securities intermediary.
It is contemplated by the parties that Pledgor may provide additional collateral
from time to time hereunder as additional security for the Obligation, and may
from time to time with the prior written consent of Bank sell or otherwise
dispose of any Collateral provided that Pledgor provides Bank with substitute
collateral. At the time of each addition or substitution of Collateral, the
securities added or substituted shall be identified on a Pledge Certificate,
substantially in the form of Schedule II attached hereto (the "Pledge
Certificate"), and delivered to Bank. Bank has no obligation to make any
advances requested in connection therewith unless (i) such additional and/or
substituted Collateral is
Approved: 05/01/96
Revised: 05/28/96
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<PAGE>
satisfactory to Bank and (ii) the perfected security interest granted to Bank
therein is completed to the satisfaction of Bank. All such additional and/or
substituted Collateral shall be Collateral for purposes of this Agreement, and
shall secure the Obligation in the same manner as the Collateral for which it is
added to and/or substituted.
B. Proceeds. All additions, substitutes and replacements for and proceeds
of the above Collateral (including all income and benefits resulting from any of
the above, such as dividends payable or distributable in cash, property or
stock; interest, premium and principal payments; redemption proceeds and
subscription rights; and shares or other proceeds of conversions or splits of
any securities in the Collateral). Any investment property and/or securities
received by Pledgor, which shall comprise such additions, substitutes and
replacements for, or proceeds of, the Collateral, shall be held in trust for
Bank and shall be delivered immediately to Bank. Any cash proceeds shall be held
in trust for Bank and upon request shall be delivered immediately to Bank.
C. Deposit Accounts. The balance of every deposit account of Pledgor
maintained with Bank and any other claim of Pledgor against Bank, now or
hereafter existing, liquidated or unliquidated, and all money, instruments,
investment property, securities, documents, chattel paper, credits, claims,
demands, income, and any other property, rights and interests of Pledgor which
at any time shall come into the possession or custody or under the control of
Bank or any of its agents or affiliates, for any purpose, and the proceeds of
any thereof. Bank shall be deemed to have possession of any of the Collateral in
transit to or set apart for it or any of its agents or affiliates.
3. Obligation.
A. Description of Obligation. The following obligations ("Obligation") are
secured by this Agreement:
i. All Debt: All debts, obligations, liabilities and agreements of
Pledgor and/or N/A to Bank, now or hereafter existing, arising directly or
indirectly between Pledgor and Bank whether absolute or contingent, joint or
several, secured or unsecured, due or not due, liquidated or unliquidated,
arising by operation of law or otherwise, and all renewals, extensions and
rearrangements of any of the above;
ii. All costs and expenses incurred by Bank, including attorney's
fees, to obtain, preserve, perfect, enforce and defend this Agreement and
maintain, preserve, collect and realize upon the Collateral, together with
interest thereon at the highest rate allowed by law, or if none, 25% per annum;
iii. All amounts which may be owed to Bank pursuant to all other
loan documents executed in connection with the indebtedness described in subpart
i. above.
Approved: 05/01/96
Revised: 05/28/96
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<PAGE>
In the event any amount paid to Bank on any Obligation is subsequently recovered
from Bank in or as a result of any bankruptcy, insolvency or fraudulent
conveyance proceeding involving an obligor of the Obligation other than Pledgor,
Pledgor shall be liable to Bank for the amounts so recovered up to the fair
market value of the Collateral whether or not the Collateral has been released
or the security interest terminated. In the event the Collateral has been
released or the security interest terminated, the fair market value of the
Collateral shall be determined, at Bank's option, as of the date the Collateral
was released, the security interest terminated, or said amounts were recovered.
B. Use of Proceeds. The proceeds of any indebtedness or obligation secured
by the Collateral will not be used directly or indirectly to purchase or carry
any "margin stock" as that term is defined in Regulation U of the Board of
Governors of the Federal Reserve System, or extend credit to or invest in other
parties for the purpose of purchasing or carrying any such "margin stock," or to
reduce or retire any indebtedness incurred for such purpose or otherwise in a
manner which would violate Regulations G, T or U.
4. Pledgor's Warranties. Pledgor hereby represents and warrants to Bank as
follows:
A. Financing Statements. Except as may be noted by schedule attached
hereto and incorporated herein by reference, no financing statement covering the
Collateral is or will be on file in any public office, except the financing
statements relating to this security interest, and no security interest, other
than the one herein created, has attached or been perfected in the Collateral or
any part thereof.
B. Ownership. Pledgor owns, or will use the proceeds of any loans by Bank
to become the owner of, the Collateral free from any setoff, claim, restriction,
lien, security interest or encumbrance except liens for taxes not yet due and
payable and the security interest hereunder.
C. Power and Authority. Pledgor has full power and authority to make this
Agreement, and all necessary consents and approvals of any persons, entities,
governmental or regulatory authorities and securities exchanges have been
obtained to effectuate the validity of this Agreement.
5. Pledgor's Covenants. Until full payment and performance of all of the
Obligation and termination or expiration of any obligation or commitment of Bank
to make advances or loans to Pledgor, unless Bank otherwise consents in writing:
A. Obligation and This Agreement. Pledgor shall perform all of its
agreements herein and in any other agreements between it and Bank.
B. Ownership of Collateral. Pledgor shall defend the Collateral against
all claims and demands of all persons at any time claiming any interest therein
adverse to Bank. Pledgor shall keep the Collateral free from all liens and
security interests except those for taxes not yet due and payable and the
security interest hereby created.
Approved: 05/01/96
Revised: 05/28/96
-3-
<PAGE>
C. Bank's Costs. Pledgor shall pay all costs necessary to obtain,
preserve, perfect, defend and enforce the security interest created by this
Agreement, collect the Obligation, and preserve, defend, enforce and collect the
Collateral, including but not limited to taxes, assessments, reasonable
attorney's fees, legal expenses and expenses of sales. Whether the Collateral is
or is not in Bank's possession, and without any obligation to do so and without
waiving Pledgor's default for failure to make any such payment, Bank at its
option may pay any such costs and expenses and discharge encumbrances on the
Collateral, and such payments shall be a part of the Obligation and bear
interest at the rate set out in the Obligation. Pledgor agrees to reimburse Bank
on demand for any costs so incurred.
D. Information and Inspection. Pledgor shall (i) promptly furnish Bank any
information with respect to the Collateral requested by Bank; (ii) allow Bank or
its representatives to inspect and copy, or furnish Bank or its representatives
with copies of, all records relating to the Collateral and the Obligation; and
(iii) promptly furnish Bank or its representatives with any other information
Bank may reasonably request.
E. Additional Documents. Pledgor shall sign and deliver any papers
furnished by Bank which are necessary or desirable in the judgment of Bank to
obtain, maintain and perfect the security interest hereunder and to enable Bank
to comply with any federal or state law in order to obtain or perfect Bank's
interest in the Collateral or to obtain proceeds of the Collateral.
F. Notice of Changes. Pledgor shall notify Bank immediately of (i) any
material change in the Collateral, (ii) a change in Pledgor's residence or
location, (iii) a change in any matter warranted or represented by Pledgor in
this Agreement, or in any of the loan documents relating to the Obligation or
furnished to Bank pursuant to this Agreement, and (iv) the occurrence of an
Event of Default as defined herein.
G. Possession of Collateral. Pledgor shall deliver a copy of this
Agreement (or other notice acceptable to Bank) to any Broker, financial
intermediary, or any other person in possession of any of the Collateral or on
whose books the interest of Pledgor in the Collateral appears, and such delivery
shall constitute notice to such person of Bank's security interest in the
Collateral and shall constitute Pledgor's instruction to such person to note
Bank's security interest on their books and records, or deliver to Bank
certificates or other evidence of the Collateral promptly upon Bank's request.
Pledgor shall deliver all investment securities and other instruments and
documents which are a part of the Collateral and in Pledgor's possession to Bank
immediately, or if hereafter acquired, immediately following acquisition, in a
form suitable for transfer by delivery or accompanied by duly executed
instruments of transfer or assignment in blank with signatures appropriately
guaranteed in form and substance suitable to Bank.
H. Change of Name/Status. Pledgor shall not change its name, change its
corporate status, use any trade name or engage in any business not reasonably
related to its business as presently conducted.
Approved: 05/01/96
Revised: 05/28/96
-4-
<PAGE>
I. Power of Attorney. Pledgor appoints Bank and any officer thereof as
Pledgor's attorney-in-fact with full power in Pledgor's name and on Pledgor's
behalf to do every act which Pledgor is obligated to do or may be required to do
hereunder; however, nothing in this paragraph shall be construed to obligate
Bank to take any action hereunder nor shall Bank be liable to Pledgor for
failure to take any action hereunder. This appointment shall be deemed a power
coupled with an interest and shall not be terminable as long as the Obligation
is outstanding and shall not terminate on the disability or incompetence of
Pledgor. Without limiting the generality of the foregoing, Bank shall have the
right and power to receive, indorse and collect all checks and other orders for
the payment of money made payable to Pledgor representing any dividend, interest
payment or other distribution payable in respect of the Collateral or any part
thereof.
J. Other Parties and Other Collateral. No renewal or extensions of or any
other indulgence with respect to the Obligation or any part thereof, no
modification of the document(s) evidencing the Obligation, no release of any
security, no release of any person (including any maker, indorser, guarantor or
surety) liable on the Obligation, no delay in enforcement of payment, and no
delay or omission or lack of diligence or care in exercising any right or power
with respect to the Obligation or any security therefor or guaranty thereof or
under this Agreement shall in any manner impair or affect the rights of Bank
under any law, hereunder, or under any other Agreement pertaining to the
Collateral. Bank need not file suit or assert a claim for personal judgment
against any person for any part of the Obligation or seek to realize upon any
other security for the Obligation, before foreclosing or otherwise realizing
upon the Collateral. Pledgor waives any right that can be waived to the benefit
of or to require or control application of any security or proceeds thereof, and
agrees that Bank shall have no duty or obligation to Pledgor to apply to the
Obligation any such other security or proceeds thereof.
K. Waivers by Pledgor. Pledgor waives notice of the creation, advance,
increase, existence, extension or renewal of, and of any indulgence with respect
to, the Obligation; waives presentment, demand, notice of dishonor, and protest;
waives notice of the amount of the Obligation outstanding at any time, notice of
any change in financial condition of any person liable for the Obligation or any
part thereof, notice of any Event of Default, and all other notices respecting
the Obligation; and agrees that maturity of the Obligation and any part thereof
may be accelerated, extended or renewed one or more times by Bank in its
discretion, without notice to Pledgor. Pledgor waives any right to require that
any action be brought against any other person or to require that resort be had
to any other security or to any balance of any deposit account. Pledgor further
waives any right of subrogation or to enforce any right of action against any
other pledgor until the Obligation is paid in full.
L. Additional Provisions. If one or more Riders to this Agreement are
executed by Pledgor, the covenants and provisions of each such Rider shall be
incorporated by reference into this Agreement.
6. Maintenance of Collateral. At all times during the term of the Agreement,
Pledgor agrees to maintain as security for the Obligation Collateral of a type
described on Schedule I with a value of
Approved: 05/01/96
Revised: 05/28/96
-5-
<PAGE>
no less than fifty percent (50%) of the principal amount outstanding on the Note
based on the most recent closing bid price for such Collateral obtained from the
Wall Street Journal.
A. Breach of Collateral Maintenance. Pledgor agrees that the failure to
maintain Collateral as set forth above shall constitute an Event of Default
under this Agreement. In such event, the Pledgor shall have two business days
from the date Pledgor is notified by Bank (in writing or orally) of such
noncompliance, to either pledge additional Collateral satisfactory to Bank, in
its sole discretion, or reduce the unpaid principal balance of the Obligations
such that, in either case, the value of the Collateral (determined as set forth
above) should be no less than fifty percent (50%) of the principal amount
outstanding on the Note. Any reduction in unpaid principal of the Obligation
shall not affect or reduce any future principal payments due except to the
extent such reductions are applied in accordance with the documents evidencing
or securing the Obligation. In the event Pledgor fails to comply with the terms
hereof, Bank may, without any further notice of any kind, exercise any of the
following rights and remedies, at Bank's option:
(a) The rights and remedies set out in Section 8.B. of this Agreement,
including without limitation the right to accelerate the Obligation and
liquidate the Collateral.
(b) Sell all or any part of the Collateral and apply the proceeds of such
sale to the Obligation to bring the Obligation back into compliance.
If an Event of Default exists hereunder and the Collateral is declining in value
or threatens to decline speedily in value, Bank shall have no obligation to
notify Pledgor of the failure to maintain Collateral with a value as set forth
above or to provide Pledgor with an opportunity to cure such noncompliance, and
in such case Pledgor agrees that Bank may immediately at Bank's sole option (i)
declare amounts due under the Obligation to be immediately due and payable,
and/or (ii) sell all or any part of the Collateral and apply the proceeds of
such Collateral to the Obligation.
B. Sale or Substitution of Collateral. If no Event of Default has occurred
under this Agreement or would result from such action, Pledgor may (i) sell,
trade, or withdraw any part of the Collateral; or (ii) substitute new Collateral
for existing Collateral, provided that, in either event, the new Collateral
shall be acceptable to Bank in its sole discretion and the value of the
Collateral (determined as set forth above) should be no less than fifty percent
(50%) of the principal amount outstanding on the Note.
7. Rights and Powers of Bank.
A. General. Bank, before or after default, without liability to Pledgor
may: take control of proceeds, including stock received as dividends or by
reason of stock splits; release the Collateral in its possession to any Pledgor,
temporarily or otherwise; require additional Collateral; reject as
unsatisfactory any property hereafter offered by Pledgor as Collateral; take
control of funds generated by the Collateral, such as cash dividends, interest
and proceeds, and use same to reduce any part of
Approved: 05/01/96
Revised: 05/28/96
-6-
<PAGE>
the Obligation and exercise all other rights which an owner of such Collateral
may exercise, except the right to vote or dispose of the Collateral before an
Event of Default; and at any time transfer any of the Collateral or evidence
thereof into its own name or that of its nominee. Bank shall not be liable for
failure to collect any account or instruments, or for any act or omission on the
part of Bank, its officers, agents or employees, except for its or their own
willful misconduct or gross negligence. The foregoing rights and powers of Bank
will be in addition to, and not a limitation upon, any rights and powers of Bank
given by law, elsewhere in this Agreement, or otherwise.
B. Convertible Collateral. Bank may present for conversion any Collateral
which is convertible into any other instrument or investment security or a
combination thereof with cash, but Bank shall not have any duty to present for
conversion any Collateral unless it shall have received from Pledgor detailed
written instructions to that effect at a time reasonably far in advance of the
final conversion date to make such conversion possible.
8. Default.
A. Event of Default. An event of default ("Event of Default") shall occur
(a) if Pledgor or any other obligor on all or part of the Obligation shall fail
to timely and properly pay or observe, keep or perform any term, covenant,
agreement or condition in this Agreement or in any other agreement between
Pledgor and Bank or between Bank and any other obligor on the Obligation,
including but not limited to any other note or instrument, loan agreement,
security agreement, deed of trust, mortgage, promissory note, assignment or
other agreement or instrument concerning the Obligation; or (b) if Pledgor or
such other obligor shall fail to timely and properly pay or observe, keep or
perform any term, covenant, agreement or condition in any agreement between such
party and any affiliate or subsidiary of NationsBank Corporation.
B. Rights and Remedies. If any Event of Default shall occur, then, in each
and every such case, Bank may, without (a) presentment, demand, or protest, (b)
notice of default, dishonor, demand, non-payment, or protest, (c) notice of
intent to accelerate all or any part of the Obligation, (d) notice of
acceleration of all or any part of the Obligation, or (e) notice of any other
kind, all of which Pledgor hereby expressly waives (except for any notice
required under this Agreement, any other loan document or which may not be
waived under applicable law), at any time thereafter exercise and/or enforce any
of the following rights and remedies, at Bank's option:
i. Acceleration. The Obligation shall, at Bank's option, become
immediately due and payable, and the obligation, if any, of Bank to permit
further borrowings under the Obligation shall at Bank's option immediately cease
and terminate.
ii. Liquidation of Collateral. Sell, or instruct any Agent or Broker
to sell, all or any part of the Collateral in a public or private sale, direct
any Agent or Broker to liquidate all or any part of any Account and deliver all
proceeds thereof to Bank, and apply all proceeds to the payment of any or all of
the Obligation in such order and manner as Bank shall, in its discretion,
choose.
Approved: 05/01/96
Revised: 05/28/96
-7-
<PAGE>
iii. Uniform Commercial Code. All of the rights, powers and remedies
of a secured creditor under the Uniform Commercial Code ("UCC") as adopted in
the jurisdiction to which Bank is subject under this Agreement.
iv. Right of Set Off. Without notice or demand to Pledgor, set off
and apply against any and all of the Obligation any and all deposits (general or
special, time or demand, provisional or final) and any other indebtedness, at
any time held or owing by Bank or by any of Bank's affiliates or correspondents
to or for the credit of the account of Pledgor or any guarantor or indorser of
Pledgor's Obligation.
Pledgor specifically understands and agrees that any sale by Bank of all or part
of the Collateral pursuant to the terms of this Agreement may be effected by
Bank at times and in manners which could result in the proceeds of such sale as
being significantly and materially less than might have been received if such
sale had occurred at different times or in different manners, and Pledgor hereby
releases Bank and its officers and representatives from and against any and all
obligations and liabilities arising out of or related to the timing or manner of
any such sale.
If, in the opinion of Bank, there is any question that a public sale or
distribution of any Collateral will violate any state or federal securities law,
Bank may offer and sell such Collateral in a transaction exempt from
registration under federal securities law, and any such sale made in good faith
by Bank shall be deemed "commercially reasonable."
9. General.
A. Parties Bound. Bank's rights hereunder shall inure to the benefit of
its successors and assigns, and in the event of any assignment or transfer of
any of the Obligation or the Collateral, Bank thereafter shall be fully
discharged from any responsibility with respect to the Collateral so assigned or
transferred, but Bank shall retain all rights and powers hereby given with
respect to any of the Obligation or the Collateral not so assigned or
transferred. All representations, warranties and agreements of Pledgor, if more
than one, are joint and several and all shall be binding upon the personal
representatives, heirs, successors and assigns of Pledgor.
B. Waiver. No delay of Bank in exercising any power or right shall operate
as a waiver thereof; nor shall any single or partial exercise of any power or
right preclude other or further exercise thereof or the exercise of any other
power or right. No waiver by Bank of any right hereunder or of any default by
Pledgor shall be binding upon Bank unless in writing, and no failure by Bank to
exercise any power or right hereunder or waiver of any default by Pledgor shall
operate as a waiver of any other or further exercise of such right or power or
of any further default. Each right, power and remedy of Bank as provided for
herein or in any of the loan documents related to the Obligation, or which shall
now or hereafter exist at law or in equity or by statute or otherwise, shall be
cumulative and concurrent and shall be in addition to every other such right,
power or remedy. The exercise or beginning of the exercise by Bank of any one or
more of such rights, powers or remedies shall not
Approved: 05/01/96
Revised: 05/28/96
-8-
<PAGE>
preclude the simultaneous or later exercise by Bank of any or all other such
rights, powers or remedies.
C. Agreement Continuing. This Agreement shall constitute a continuing
agreement. If the Obligation consists of All Debt, this Agreement shall apply to
all future as well as existing transactions, whether or not of the character
contemplated at the date of this Agreement, and if all transactions between Bank
and Pledgor shall be closed at any time, shall be equally applicable to any new
transactions thereafter. Provisions of this Agreement, unless by their terms
exclusive, shall be in addition to other agreements between the parties. Time is
of the essence of this Agreement.
D. Definitions. Unless the context indicates otherwise, definitions in the
UCC apply to words and phrases in this Agreement; if UCC definitions conflict,
Article 8 and/or 9 definitions apply.
E. Notice. Notice shall be deemed reasonable if mailed postage prepaid at
least 5 days before the related action (or if the UCC elsewhere specifies a
longer period, such longer period) to the address of Pledgor given above. Each
notice, request and demand shall be deemed given or made, if sent by mail, upon
the earlier of the date of receipt or five (5) days after deposit in the U.S.
Mail, first class postage prepaid, or if sent by any other means, upon delivery.
F. Modifications. No provision hereof shall be modified or limited except
by a written agreement expressly referring hereto and to the provisions so
modified or limited and signed by Pledgor and Bank. The provisions of this
Agreement shall not be modified or limited by course of conduct or usage of
trade.
G. Partial Invalidity. The unenforceability or invalidity of any provision
of this Agreement shall not affect the enforceability or validity of any other
provision herein, and the invalidity or unenforceability of any provision of any
loan document related to the Obligation to any person or circumstance shall not
affect the enforceability or validity of such provision as it may apply to other
persons or circumstances.
H. Applicable Law and Venue. This Agreement has been delivered in the
State of North Carolina and shall be construed in accordance with the laws of
that State. It is performable by Pledgor in the county or city of Bank's address
set out above and Pledgor expressly waives any objection as to venue in any such
location. Wherever possible each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement shall be prohibited by or invalid under
applicable law, such provision shall be ineffective to the extent of such
prohibition or invalidity, without invalidating the remainder of such provisions
or the remaining provisions of this Agreement.
I. Financing Statement. To the extent permitted by applicable law, a
carbon, photographic or other reproduction of this Agreement or any financing
statement covering the Collateral shall be sufficient as a financing statement.
Approved: 05/01/96
Revised: 05/28/96
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<PAGE>
J. ARBITRATION. ANY CONTROVERSY OR CLAIM BETWEEN OR AMONG THE PARTIES
HERETO INCLUDING BUT NOT LIMITED TO THOSE ARISING OUT OF OR RELATING TO THIS
INSTRUMENT, AGREEMENT OR DOCUMENT OR ANY RELATED INSTRUMENTS, AGREEMENTS OR
DOCUMENTS, INCLUDING ANY CLAIM BASED ON OR ARISING FROM AN ALLEGED TORT, SHALL
BE DETERMINED BY BINDING ARBITRATION IN ACCORDANCE WITH THE FEDERAL ARBITRATION
ACT (OR IF NOT APPLICABLE, THE APPLICABLE STATE LAW), THE RULES OF PRACTICE AND
PROCEDURE FOR THE ARBITRATION OF COMMERCIAL DISPUTES OF J.A.M.S./ENDISPUTE OR
ANY SUCCESSOR THEREOF ("J.A.M.S."), AND THE "SPECIAL RULES" SET FORTH BELOW. IN
THE EVENT OF ANY INCONSISTENCY, THE SPECIAL RULES SHALL CONTROL. JUDGMENT UPON
ANY ARBITRATION AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. ANY PARTY
TO THIS INSTRUMENT, AGREEMENT OR DOCUMENT MAY BRING AN ACTION, INCLUDING A
SUMMARY OR EXPEDITED PROCEEDING, TO COMPEL ARBITRATION OF ANY CONTROVERSY OR
CLAIM TO WHICH THIS AGREEMENT APPLIES IN ANY COURT HAVING JURISDICTION OVER SUCH
ACTION.
i. SPECIAL RULES. THE ARBITRATION SHALL BE CONDUCTED IN THE COUNTY
OF ANY BORROWER'S DOMICILE, OR IF THERE IS REAL OR PERSONAL PROPERTY COLLATERAL,
IN THE COUNTY WHERE SUCH REAL OR PERSONAL PROPERTY IS LOCATED AT THE TIME OF THE
EXECUTION OF THIS INSTRUMENT, AGREEMENT OR DOCUMENT AND ADMINISTERED BY J.A.M.S.
WHO WILL APPOINT AN ARBITRATOR; IF J.A.M.S. IS UNABLE OR LEGALLY PRECLUDED FROM
ADMINISTERING THE ARBITRATION, THEN THE AMERICAN ARBITRATION ASSOCIATION WILL
SERVE. ALL ARBITRATION HEARINGS WILL BE COMMENCED WITHIN 90 DAYS OF THE DEMAND
FOR ARBITRATION; FURTHER, THE ARBITRATOR SHALL ONLY, UPON A SHOWING OF CAUSE, BE
PERMITTED TO EXTEND THE COMMENCEMENT OF SUCH HEARING FOR UP TO AN ADDITIONAL 60
DAYS.
ii. RESERVATION OF RIGHTS. NOTHING IN THIS ARBITRATION PROVISION
SHALL BE DEEMED TO (I) LIMIT THE APPLICABILITY OF ANY OTHERWISE APPLICABLE
STATUTES OF LIMITATION OR REPOSE AND ANY WAIVERS CONTAINED IN THIS INSTRUMENT,
AGREEMENT OR DOCUMENT; OR (II) BE A WAIVER BY BANK OF THE PROTECTION AFFORDED TO
IT BY 12 U.S.C. SEC. 91 OR ANY SUBSTANTIALLY EQUIVALENT STATE LAW; OR (III)
LIMIT THE RIGHT OF BANK HERETO (A) TO EXERCISE SELF HELP REMEDIES SUCH AS (BUT
NOT LIMITED TO) SETOFF, OR (B) TO FORECLOSE AGAINST ANY REAL OR PERSONAL
PROPERTY COLLATERAL, OR (C) TO OBTAIN FROM A COURT PROVISIONAL OR ANCILLARY
REMEDIES SUCH AS (BUT NOT LIMITED TO) INJUNCTIVE RELIEF, WRIT OF POSSESSION OR
THE APPOINTMENT OF A RECEIVER. BANK MAY EXERCISE SUCH SELF HELP RIGHTS,
FORECLOSE UPON SUCH PROPERTY, OR
Approved: 05/01/96
Revised: 05/28/96
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<PAGE>
OBTAIN SUCH PROVISIONAL OR ANCILLARY REMEDIES BEFORE, DURING OR AFTER THE
PENDENCY OF ANY ARBITRATION PROCEEDING BROUGHT PURSUANT TO THIS INSTRUMENT,
AGREEMENT OR DOCUMENT. NEITHER THIS EXERCISE OF SELF HELP REMEDIES NOR THE
INSTITUTION OR MAINTENANCE OF AN ACTION FOR FORECLOSURE OR PROVISIONAL OR
ANCILLARY REMEDIES SHALL CONSTITUTE A WAIVER OF THE RIGHT OF ANY PARTY,
INCLUDING THE CLAIMANT IN ANY SUCH ACTION, TO ARBITRATE THE MERITS OF THE
CONTROVERSY OR CLAIM OCCASIONING RESORT TO SUCH REMEDIES.
K. Controlling Document. To the extent that this Agreement conflicts with
or is in any way incompatible with any other loan document concerning the
Obligation, any promissory note shall control over any other document, and if
such promissory note does not address an issue, then each other loan document
shall control to the extent that it deals most specifically with an issue.
L. Execution Under Seal. This Agreement is being executed under seal by
Pledgor(s).
M. NOTICE OF FINAL AGREEMENT. THIS WRITTEN AGREEMENT AND ANY OTHER
DOCUMENTS EXECUTED IN CONNECTION HEREWITH REPRESENT THE FINAL AGREEMENT BETWEEN
THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed under seal by their duly authorized representatives as of the date
first above written.
Bank/Secured Party:
NationsBank, N.A.
By: /s/ Kari C. Howe
-------------------------
Name: Kari C. Howe
Title: Vice President
Corporate or Partnership Pledgor:
Closure Medical Corporation
Approved: 05/01/96
Revised: 05/28/96
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By: /s/ J. Blount Swain (Seal)
-------------------------
Name: J. Blount Swain
Title: Secretary
/s/ J. Blount Swain
- -----------------------------
Attest (If Applicable)
[Corporate Seal]
Approved: 05/01/96
Revised: 05/28/96
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SCHEDULE I
TO
PLEDGE AGREEMENT
Collateral Types with NationsBank Approved 100% Advance Rates
1. Commercial Paper of NationsBank Corporation
2. U. S. Government obligations with maturities not in excess of 1 year
3. U. S. Agency obligations with maturities not in excess of 1 year
4. Repurchase Agreements that are 100% collateralized by U. S. Government
obligations of U. S. Agency obligations
Approved: 05/01/96
Revised: 05/28/96
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SCHEDULE II
PLEDGE CERTIFICATE
Reference is hereby made to that certain Pledge Agreement dated as of
November 14, 1997 ("Pledge Agreement"), between Closure Medical Corporation
("Pledgor") and NationsBank, N.A., a national banking association ("Bank"). This
Pledge Certificate is delivered pursuant to Section 2 of the Pledge Agreement.
All capitalized terms used and not otherwise defined herein shall have their
respective meanings as set forth in the Pledge Agreement.
Pledgor hereby certifies that concurrently with the delivery of this
Pledge Certificate,
[] Pledgor is delivering to Bank the following items of Collateral as
additional Collateral for the Obligation (collectively, the "Additional
Collateral"):_____________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
[_] Pledgor is selling or otherwise disposing of the following items of
Collateral:_______________________________________________________________
__________________________________________________________________________
__________________________________________________________________________
and Pledgor is delivering to Bank the following items of Collateral being
substituted therefor:_____________________________________________________
__________________________________________________________________________
__________________________________________________________________________
(collectively, the "Substituted Collateral").
Pledgor hereby acknowledges that Pledgor has granted to Bank a security
interest in the Additional Collateral and/or Substituted Collateral pursuant to
the Pledge Agreement to secure the Obligation and that the Collateral covered by
the Pledge Agreement includes, without limitation, the Substituted Collateral
and Additional Collateral. Pledgor hereby represents and warrants that all of
the representations and warranties contained in the Pledge Agreement are true
and correct in all material respects, including with respect to the Additional
Collateral and Substituted Collateral, on the date hereof as though made as of
the date hereof.
EXECUTED this _____ day of ______________________, 19__.
_________________________________________
J. Blount Swain
_________________________________________
Benny Ward
Approved: 05/01/96
Revised: 05/28/96
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of June 9, 1997,
is by and between Closure Medical Corporation, a Delaware corporation (the
"Company"), and William M. Cotter ("Employee").
WHEREAS, the Company and Employee desire to enter into an agreement to
provide for Employee's employment by the Company, upon the terms and conditions
set forth herein;
NOW, THEREFORE, the parties hereto, intending to be legally bound, agree
as follows:
Terms
1. Employment. The Company hereby employs Employee, and Employee hereby accepts
such employment and agrees to perform his duties and responsibilities hereunder,
in accordance with the terms and conditions hereinafter set forth.
1.1 Employment Term. The term of this Agreement (the "Employment Term")
shall commence as of June 9, 1997 and shall continue until June 8, 1999 (unless
earlier terminated in accordance with this Agreement) or extended in accordance
with the following sentence. The Employment Term shall automatically be extended
for successive one-year terms, subject to the termination provisions hereof,
unless either party notifies the other, in writing, at least sixty (60) days
prior to the end of the then current Employment Term that the Agreement is to be
terminated.
1.2 Duties and Responsibilities.
1.2.1 During the Employment Term, Employee shall serve as Vice
President-Operations of the Company and shall perform all duties and accept all
responsibilities incidental to such position or as otherwise may be reasonably
assigned to him by the Company's Chief Executive Officer or its Board of
Directors (the "Board").
1.2.2 Employee represents to the Company that, he is not subject to,
and agrees that he will not hereafter during the Employment Term become subject
to, any employment agreement, non-competition covenant, non-disclosure agreement
or other agreement, covenant, understanding or restriction which would prohibit
Employee from fully performing his duties and responsibilities hereunder, or
which would otherwise in any manner, directly or indirectly, limit or adversely
affect the duties and responsibilities which may now or in the future be
assigned to Employee by the Company's Chief Executive Officer or the Board.
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1.3 Extent of Service. During the Employment Term, Employee agrees to use
his best efforts to carry out his duties and responsibilities under Section
1.2.1 hereof and, consistent with the other provisions of this Agreement, to
devote his full time, attention and energy thereto during normal business hours.
Except as provided in Section 4 hereof, the foregoing shall not be construed as
preventing Employee from making investments in other businesses or enterprises,
provided that Employee agrees not to become engaged in any other business,
charitable or community activity which may materially interfere with his ability
to discharge his duties and responsibilities to the Company.
1.4 Base Salary. For all the services rendered by Employee hereunder, the
Company shall pay Employee an annual salary at the rate of $150,000 for each
full year of the Employment Term, plus such additional amounts, if any, as may
be approved by the Board or its Compensation Committee (the "Committee") (as
such amount may be increased from time to time hereunder, the "Base Salary"),
payable in installments at such times as the Company customarily pays its other
senior officers (but in no event less often than monthly). Employee's Base
Salary shall be reviewed by the Board or the Committee at the end of each
employment year to determine if an increase is appropriate for the next
employment year pursuant to its normal performance review policies for
executives, taking into account Employee's performance and increases in the cost
of living. The Company shall be entitled to make proper withholdings from
Employee's Base Salary as required by law or agreed to by Employee.
1.5 Benefits. During the Employment Term, Employee shall be (a) entitled
to the benefits described in Exhibit 1.5 and to participate in such retirement,
profit sharing, group insurance, life insurance, long-term disability,
medical/dental and any other fringe benefit plans, if any, as may be authorized
from time to time by the Board in its sole discretion for officers of the
Company generally, and (b) entitled to four weeks of paid vacation, in addition
to customary holidays and personal days in accordance with the Company's normal
personnel policies. Accrued and unused vacation may be carried forward into the
subsequent year only if approved in writing by the Committee, Board or Chief
Executive Officer of the Company.
1.6 Incentive Compensation. Employee shall be entitled to participate in
such incentive compensation or bonus plans, if any, as may be established from
time to time in respect of each complete fiscal year during the Employment Term
by the Board or the Committee in their sole discretion, the terms and provisions
of which shall also be in the sole discretion of the Board or the Committee. In
addition, with respect to each calendar year during the Employment Term,
Employee will be entitled to receive an annual bonus, payable no later than 100
days after the end of such calendar year, in a minimum amount equal to 20% of
his Base Salary and a maximum amount equal to 60% of his Base Salary, based on
performance milestones significant to the progress of the Company to be
established by the Board upon the recommendation of the Committee based upon
criteria to be submitted to the Committee by the end of the first calendar
quarter of each year by the Chief Executive Officer. The current applicable
performance milestones are attached and will be in effect until December 31,
1997.
1.7 Stock Options. In consideration for Employee's execution of this
Agreement, the Committee has granted to Employee, as of the date of execution
hereof ("Execution Date"), subject
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to the execution and delivery of this Agreement, a nonqualified stock option to
purchase 40,000 shares of Common Stock of the Company pursuant to the Company's
Equity Compensation Plan and a stock option agreement in the form used generally
by the Company, a copy of which is attached hereto. Notwithstanding anything
herein to the contrary, Employee's rights and entitlements with respect to such
options will be governed by the terms of such stock option agreement and Equity
Compensation Plan.
1.8 Expenses. The Company shall reimburse Employee on a timely basis for
all ordinary and necessary out-of-pocket business expenses incurred in
connection with the discharge of his duties and responsibilities hereunder
during the Employment Term in accordance with the Company's expense approval
procedures then in effect and upon presentation to the Company of an itemized
account and written proof of such expenses.
2. Confidential Information. Employee recognizes and acknowledges that by reason
of employment by and service to the Company, he has had and will continue to
have access to financial, proprietary and other confidential information of the
Company and its affiliates, including, without limitation, information and
knowledge pertaining to products and services offered, research ideas, methods
and results, innovations, designs, ideas, plans, trade secrets, proprietary
information, distribution and sales methods and systems, sales and profit
figures, customer and client lists, and relationships between the Company and
its affiliates, distributors, customers, clients, suppliers and other who have
business dealings with the Company and its affiliates ("Confidential
Information"). Employee acknowledges that such Confidential Information is a
valuable and unique asset and covenants that he will not, either during or after
the term of this Agreement, disclose any such Confidential Information to any
person for any reason whatsoever without the prior written authorization of the
Board, unless such information is in the public domain through no fault of
Employee or except: (a) as may be required by law with prior notice to the
Company; or (b) in the course of his employment hereunder and solely in
furtherance of the interests of the Company and its affiliates.
3. Developments. All developments, including inventions, whether patentable or
otherwise, trade secrets, discoveries, improvements, ideas and writings which
either directly or indirectly relate to or may be useful in the business of the
Company or any of its affiliates (the "Developments") which Employee, either by
himself or in conjunction with any other person or persons, shall conceive,
make, develop, acquire or acquire knowledge of during the Employment Term or at
any time thereafter during which he is employed by the Company, shall become and
remain the sole and exclusive property of the Company. Employee hereby assigns,
transfers and conveys, and agrees to so assign, transfer and convey, all of his
right, title and interest in and to any and all such Developments and to
disclose fully as soon as practicable, in writing, all such Developments to the
Board. At any time and from time to time, upon the request and at the expense of
the Company, Employee will execute and deliver any and all instruments,
documents and papers, give evidence and do any and all other acts which, in the
opinion of counsel for the Company, are or may be necessary or desirable to
document such transfer or to enable the Company to file and prosecute
applications for and to acquire, maintain and enforce any and all patents,
trademark registrations or copyrights under United States or foreign law with
respect to any such Developments or to obtain any extension, validation,
re-issue, continuance or renewal of any such patent, trademark or
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<PAGE>
copyright. The Company will be responsible for the preparation of any such
instruments, documents and papers and for the prosecution of any such
proceedings and will reimburse Employee for all reasonable expenses incurred by
him in compliance with the provisions of this Section.
4. Non-Competition.
4.1 During the Employment Term and for a period of two years thereafter,
Employee will not, without prior written consent of the Board, directly or
indirectly, own, manage, operate, join, control, finance or participate in the
ownership, management, operation, control or financing of, or be connected as an
officer, director, employee, partner, principal, agent, representative,
consultant or otherwise with or use or permit his name to be used in connection
with, any business or enterprise engaged within any state of the United States,
the District of Columbia or any foreign jurisdiction in any business that
competes with the business of the Company business as in effect either during
the Employment Term or on the date Employee's employment terminates, as
applicable. It is recognized by Employee that the business of the Company and
Employee's connection therewith is or will be international in scope, and that
geographical limitations on this non-competition covenant and the
non-solicitation covenant set forth in Section 5 are therefore not appropriate.
4.2 The foregoing restriction shall not be construed to prohibit the
ownership by Employee of not more than five percent (5%) of any class of
securities of any corporation which is engaged in any of the foregoing
businesses having a class of securities registered pursuant to the Securities
Exchange Act of 1934, provided that such ownership represents a passive
investment and that neither the Employee nor any group of persons including
Employee in any way, either directly or indirectly, manages or exercises control
of any such corporation, guarantees any of its financial obligations, otherwise
takes part in its business, other than exercising his rights as a shareholder,
or seeks to do any of the foregoing.
5. No Solicitation. Employee agrees that during the Employment Term and for a
period of two years thereafter, Employee will not, either directly or
indirectly, (i) call on or solicit any person, firm, corporation or other entity
who or which at the time of the termination of Employee's employment was, or
within one year prior thereto had been, a customer of the Company or any of its
affiliates or (ii) solicit the employment of any person who was employed by the
Company or any of its affiliates on a full or part-time basis at the time of
Employee's termination of employment, unless such person (a) was involuntarily
discharged by the Company or such affiliate, or (b) voluntarily terminated his
relationship with the Company or such affiliate prior to Employee's termination
of employment.
6. Equitable Relief.
6.1 Employee acknowledges that the restrictions contained in Sections 2,
3, 4 and 5 hereof are reasonable and necessary to protect the legitimate
interests of the Company and its affiliates, that the Company would not have
entered into this Agreement in the absence of such restrictions, and that any
violation of any provision of those Sections may result in irreparable injury to
the Company and its affiliates (each of which shall be deemed a third party
beneficiary of such restriction). Employee represents that his experience and
capabilities are such that the restrictions contained in Sections 4 and 5 hereof
will not prevent Employee from obtaining employment or
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<PAGE>
otherwise earning a living at the same general level of economic benefit as
anticipated by this Agreement. Employee represents and acknowledges that (a) he
has been advised by the Company to consult his own legal counsel in respect of
this Agreement, and (b) that he has had full opportunity, prior to execution of
this Agreement, to review thoroughly this Agreement with his counsel.
6.2 Employee agrees that each of the Company and its affiliates shall be
entitled to preliminary and permanent injunctive relief, without the necessity
of proving actual damages, as well as to an equitable accounting of all
earnings, profits and other benefits arising from any violation of Section 2, 3,
4 or 5 hereof, which rights shall be cumulative and in addition to any other
rights or remedies to which the Company or any affiliate may be entitled. In the
event that any provisions of Section 2, 3, 4 or 5 hereof should ever be
adjudicated to exceed time, geographic, service or other limitations permitted
by applicable law in any jurisdiction, then such provision shall be deemed
reformed in such jurisdiction to the maximum time, geographic, service, or other
limitations permitted by applicable law.
6.3 Employee and the Company irrevocably and unconditionally (i) agree
that any suit, action or other legal proceeding arising out of this Agreement,
including without limitation, any action commenced by the Company for
preliminary and permanent injunctive relief and other equitable relief, may be
brought in any court of competent jurisdiction in the State of North Carolina,
provided that any suit, action or other legal proceeding brought against the
Company shall be brought and adjudicated in the United States District Court for
the Eastern District of North Carolina or, if such court will not accept
jurisdiction, in any court of competent civil jurisdiction sitting in Wake
County, North Carolina, (ii) consent to the jurisdiction of any such court in
any such suit, action or proceeding and (iii) waive any objection which Employee
or the Company may have to the laying of venue of any such suit, action or
proceeding in any such court. Employee and the Company also irrevocably and
unconditionally consent to the service of any process, pleading, notices or
other papers in any manner permitted by the notice provisions hereof.
6.4 Employee agrees that he will provide, and that the Company may
similarly provide, a copy of Sections 2, 3, 4, and 5 of this Agreement to any
business or enterprise (i) which he may directly or indirectly own, manage,
operate, finance, join, control or participate in the ownership, management,
operation, financing, control or control of, or (ii) with which he may be
connected with as an officer, director, employee, partner, principal, agent,
representative, consultant or otherwise, or in connection with which he may use
or permit his name to be used; provided, however, that this provision shall not
apply in respect of Sections 4 and 5 of this Agreement after expiration of the
time periods set forth therein.
7. Termination. This Agreement shall terminate prior to the expiration of the
Employment Term upon the occurrence of any one of the following events:
7.1 Disability. The Company may terminate this Agreement if Employee is
unable fully to perform his duties and responsibilities hereunder to the full
extent required by the Board by reason of illness, injury or incapacity for six
(6) consecutive months, or for more than six (6) months in the aggregate during
any period of twelve (12) calendar months, during which time he shall continue
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to be compensated as provided in Section 1 hereof. In such event, the Company
shall have no further liability or obligation to Employee for compensation or
other benefits under this Agreement except (i) as may be provided under any
disability benefit plan or other employee benefit plan and program which may be
in effect and in which he participated, and (ii) Employee shall be entitled to
receive a pro rata portion of the incentive compensation pursuant to Section 1.6
in respect of the year during which Employee first became disabled.. The right
and benefits of Employees under any such employee benefit plans and programs
will be determined in accordance with the terms and provisions of such plans and
programs. Employee agrees, in the event of any dispute under this Section 7.1,
to submit to a physical examination by an independent, licensed physician
selected by the Board.
7.2 Death. This Agreement shall terminate if Employee dies during the
Employment Term. In such event, the Company shall pay to Employee's executors,
legal representatives or administrators an amount equal to the installment of
his Base Salary set forth in Section 1.4.1 hereof for the month in which he
dies, all accrued incentive compensation pursuant to Section 1.6 and a pro rata
portion of the incentive compensation pursuant to Section 1.6 in respect of the
year during which Employee died, and, thereafter, the Company shall have no
further liability or obligation under this Agreement to his executors, legal
representatives, administrators, heirs or assigns or any other person claiming
under or through him, except as may be provided under any employee benefit plan
or compensation program which may be in effect for employees of the Company and
in which he participated. The rights and benefits of Employee under any such
employee benefit plans and programs will be determined in accordance with the
terms and provisions of such plans and programs.
7.3 Cause. The Company may terminate this Agreement, at any time, for
"cause". For purposes of the Agreement, Employee's employment may be terminated
for "cause" if: (a) he engages in gross misconduct, or dishonesty (which in
either case results in material harm to the Company); (b) materially fails to
perform or observe any of the terms or provisions of this Agreement (c) fails to
carry out reasonable directives of the Chief Executive Officer of the Company or
the Board in accordance with Section 1.2; or (d) is convicted of a felony or is
involved in substance abuse; provided, however, that "cause" shall not include
bad judgment or any act or omission reasonably believed by Employee in good
faith to have been in or not opposed to the best interests of the Company, and
provided further, however, that in any event, Employee shall be given written
notice by the Board that the Company intends to terminate Employee's employment
for cause, which written notice shall specify the act or acts on the basis of
which the Company intends so to terminate Employee's employment, and Employee
shall then be given the opportunity, within fifteen (15) days of his receipt of
such notice, to have a meeting with the Board to discuss such act or acts. If
the basis of such written notice is an act or acts other than an act or acts
described in clause (d) of the preceding sentence, Employee will be given seven
(7) days after such meeting within which to cease or correct the performance (or
nonperformance) or to cure the harm giving rise to such written notice and, upon
failure of Employee within such seven (7) day period to cease or correct same,
Employee's employment by the Company shall automatically terminate hereunder for
cause. If Employee ceases or cures to the satisfaction of the Board of
Directors, the Employee's employment agreement shall continue in accordance with
the terms hereof. Upon any such termination or removal, Employee shall be
entitled to receive Base Salary under Section 1.4,
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incentive compensation under Section 1.6 and all other benefits and compensation
as described herein for a period of twelve (12) months thereafter.
7.4 Change in Control Termination.
7.4.1 For purposes of this Agreement, a "Change in 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.W.
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 shareholders, or 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.
7.4.2 After the occurrence of a Change in Control, Employee shall be
entitled to receive payment and benefits pursuant to this Agreement if, after
the occurrence of a Change in Control, his employment with the Company is
terminated under any of the following circumstances: (a) the Company terminates
Employee's employment for reasons other than "Cause," "Disability," or death; or
(b) the Employee terminates his employment with the Company for "Good Reason."
For purposes of this Agreement, "Good Reason" shall mean the occurrence after a
Change in Control of any of the following events or conditions: (i) an adverse
change in the Employee's status, title, position or responsibilities from that
in effect immediately prior to the Change in Control; (ii) a reduction in the
Employee's salary; (iii) the Company's requiring the Employee to relocate beyond
a twenty-five (25) mile radius from Raleigh, North Carolina; (iv) any purported
termination of Employee's employment for cause or disability without grounds
therefor; (v) any material breach by the Company of any provision of this
Agreement; or (vi) the failure of the Company to obtain an agreement,
satisfactory to the Employee, from any successor or assign of the Company to
assume and agree to perform this Agreement.
7.4.3 In the event that Employee's employment with the Company
terminates under any of the circumstances described in Section 7.4.2 above,
Employee shall be entitled to receive all of the following: (a) All accrued
compensation and any pro rata incentive compensation Employee
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may have earned up to the date of termination; (b) A continuation for three
years from date of termination of Employee's then current annual salary, and
incentive compensation and benefits hereunder. The Company shall maintain in
full force and effect, for three (3) years after the date of termination, all
benefit plans and programs in which Employee was entitled to participate
immediately prior to the date of termination, provided that Employee's continued
participation is possible under the general terms and provisions of such plans
and programs. Employee's continued participation in such plans and programs
shall be at no greater cost to Employee than the cost he bore for such
participation immediately prior to the date of termination. If Employee's
participation in any such plan or program is barred, the Company shall arrange
upon comparable terms, and at no greater cost to Employee than the cost he bore
for such plans and programs prior to the date of termination, to provide
Employee with benefits substantially similar to those which he is entitled to
receive under any such plan or program.
7.5 Other Terminations.
7.5.1 Employee may terminate this Agreement upon ten (10) days'
prior written notice to the Company if the Company fails to fulfill any of the
material terms and provisions hereof including the failure to pay Employee any
amounts payable hereunder within ten (10) business days after the same shall be
due and payable. In the event of such termination, Employee shall be entitled to
receive payment of his Base Salary, all incentive compensation pursuant to
Section 1.6 and all other benefits and compensation to which he would have been
entitled under this Agreement until the end of the Employment term.
7.5.2 Employee may voluntarily terminate this Agreement upon thirty
(30) days' prior written notice for any reason; provided, however, that no
further payments shall be due under this Agreement in that event except that
Employee shall be entitled to all accrued compensation and a pro rata portion of
all incentive compensation for the year in which termination occurs, and any
benefits due under any compensation or benefit plan including those listed in
Section 1 hereof provided by the Company for officers generally or otherwise.
8. Working Facilities. The Employee shall be provided with an office,
stenographic and technical help and such other facilities and services as may be
suitable to Employee's position in accordance with manpower plan approved by the
Board.
9. Location. Employee shall not be required, without his consent, to render
services at any place other than the area of Raleigh, North Carolina; however;
Employee may be asked to travel in connection with the Company's business as
reasonably appropriate for the performance of his duties.
10. Professional Dues and Continuing Education. The Company agrees to reimburse
the Employee for reasonable professional dues and continuing education expenses
necessary to maintain applicable certifications upon approval by the Company's
Chief Executive Officer or the Board.
11. Indemnification. The Company shall indemnify the Employee, to the maximum
extent permitted by applicable law, against all costs, charges and expenses
incurred or sustained by him in connection with any action, suit or proceeding
to which he may be a party or in which he may be a
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witness by reason of his being an officer, director or employee of the Company
or of any subsidiary or affiliate of the Company.
12. Survival. Notwithstanding the termination of this Agreement, the Company's
obligations under Sections 1.4, 1.5, 1.6, 1.7, 1.8, 6.3, 7 and 11 and Employee's
obligations under Sections 2, 3, 4, 5, 6, and 7 shall survive and remain in full
force and effect.
13. Governing Law. This Agreement shall be governed by and interpreted under the
laws of the State of North Carolina without giving effect to any conflict of law
provisions.
14. Notices. All notices and other communications hereunder or in connection
herewith shall be in writing and shall be deemed to have been given when
delivered by hand or reputable express delivery service, mailed by certified or
registered mail, return receipt requested, or sent by fax to the party as
follows (provided that notice of change of address shall be deemed given only
when received):
If to the Company, to: Closure Medical Corporation
5265 Capital Boulevard
Raleigh, North Carolina 27604
Fax: (919) 876-7874
Attn: Chairman of the Board
If to Employee, to: William M. Cotter
c/o Closure Medical Corporation
5265 Capital Boulevard
Raleigh, NC 27616
or to such other names or addresses as the Company or Employee, as the
case may be, shall designate by notice to the other person in the manner
specified in this Section.
15. Miscellaneous.
15.1 This Agreement supersedes all prior agreements and sets forth the
entire understanding among the parties hereto with respect to the subject matter
hereof and cannot be changed, modified, extended or terminated except upon
written amendment approved by the Board and executed on the Company's behalf by
a duly authorized officer.
15.2 All of the terms of this Agreement shall be binding upon and inure to
the benefit of and be enforceable by the respective heirs, executors,
administrators, legal representatives, successors and assigns of the parties
hereto, (including without limitation, any person, partnership, company or
corporation which may acquire substantially all of the Company's assets or
business or with or into which the Company may be merged, liquidated,
consolidated or otherwise combined), except that the duties and responsibilities
of Employee hereunder are of a personal nature and shall not be assignable or
delegatable in whole or in part by Employee.
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15.3 If any provision of this Agreement or application thereof to anyone
or any circumstances is held invalid or unenforceable in any jurisdiction, the
remainder of this Agreement, and the application of such provision to such
person or entity or such circumstance in any other jurisdiction or to other
persons, entities or circumstances in any jurisdiction, shall not be affected
thereby, and to this end the provisions of this Agreement are severable.
15.4 No remedy conferred upon the Company or Employee by this Agreement is
intended to be exclusive of any other remedy, and each and every such remedy
shall be cumulative and shall be in addition to any other remedy given hereunder
or now or hereafter existing at law or in equity. No delay or omission by the
Company or Employee exercising any right, remedy or power hereunder or existing
at law or in equity shall be construed as a waiver thereof, and any such right,
remedy or power may be exercised by the Company or Employee from time to time
and as often as may be deemed expedient or necessary by the Company or Employee
in its sole discretion.
15.5 All section headings are for convenience only. This Agreement may be
executed in several counterparts, each of which shall be original. It shall not
be necessary in marking proof of this Agreement or any counterpart hereof to
produce or account for any of the other counterparts.
15.6 If either party should file a lawsuit against the other to enforce
any right such party has hereunder, the prevailing party shall also be entitled
to recover a reasonable attorney's fee and costs of suit in addition to other
relief awarded such prevailing party.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement as of the date first above written.
CLOSURE MEDICAL CORPORATION
By: /s/ Robert V. Toni
-------------------------------------
Robert V. Toni, President and C.E.O.
/s/ William M. Cotter
-----------------------------------------
William M. Cotter
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EXHIBIT 1.5
Employee's Benefits
MEDICAL/DENTAL INSURANCE. The Company will provide, at no charge, medical and
dental insurance for Employee and his dependents.
LIFE INSURANCE. The Company will provide life insurance based upon Employee's
salary or position. The amount of an employee's coverage is four times annual
salary.
ACCIDENTAL DEATH AND DISMEMBERMENT (AD&D) INSURANCE. The Company will provide
AD&D insurance for Employee. This program pays a benefit if Employee dies or is
seriously injured as a direct result of an accident. The benefits received vary
according to the nature of the injury and the Employee's salary or position.
SALARY CONTINUATIONS. Salary continuation takes effect after Employee has been
absent from work for more than three continuous weeks due to medical reasons.
Employee earns one month of salary continuation at normal pay up to a maximum of
six months or until LTD insurance begins, whichever occurs first. Certification
by a physician is required prior to any salary continuation payment.
LONG-TERM DISABILITY. Employee is eligible for long-term disability (LTD) after
being accepted by insurance company. LTD payments begin after six months of
disability and are based on a certain portion of normal pay up to a certain
maximum dollar amount per month.
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of January
1, 1998, is by and between Closure Medical Corporation, a Delaware corporation
(the "Company"), and Anthony J. Sherbondy ("Employee").
WHEREAS, the Company and Employee desire to enter into an agreement
to provide for Employee's employment by the Company, upon the terms and
conditions set forth herein;
NOW, THEREFORE, the parties hereto, intending to be legally bound,
agree as follows:
Terms
1. Employment. The Company hereby employs Employee, and Employee hereby accepts
such employment and agrees to perform his duties and responsibilities hereunder,
in accordance with the terms and conditions hereinafter set forth.
1.1 Employment Term. The term of this Agreement (the "Employment Term")
shall commence as of January 1, 1998 and shall continue until January 1, 2000
(unless earlier terminated in accordance with this Agreement) or extended in
accordance with the following sentence. The Employment Term shall automatically
be extended for successive one-year terms, subject to the termination provisions
hereof, unless either party notifies the other, in writing, at least sixty (60)
days prior to the end of the then current Employment Term that the Agreement is
to be terminated.
1.2 Duties and Responsibilities.
1.2.1 During the Employment Term, Employee shall serve as Vice
President-New Business Generation of the Company and shall perform all duties
and accept all responsibilities incidental to such position or as otherwise may
be reasonably assigned to him by the Company's Chief Executive Officer or its
Board of Directors (the "Board").
1.2.2 Employee represents to the Company that, he is not subject to,
and agrees that he will not hereafter during the Employment Term become subject
to, any employment agreement, non-competition covenant, non-disclosure agreement
or other agreement, covenant, understanding or restriction which would prohibit
Employee from fully performing his duties and responsibilities hereunder, or
which would otherwise in any manner, directly or indirectly, limit or adversely
affect the duties and responsibilities which may now or in the future be
assigned to Employee by the Company's Chief Executive Officer or the Board.
1.3 Extent of Service. During the Employment Term, Employee agrees to use
his best efforts to carry out his duties and responsibilities under Section
1.2.1 hereof and, consistent with the
<PAGE>
other provisions of this Agreement, to devote his full time, attention and
energy thereto during normal business hours. Except as provided in Section 4
hereof, the foregoing shall not be construed as preventing Employee from making
investments in other businesses or enterprises, provided that Employee agrees
not to become engaged in any other business, charitable or community activity
which may materially interfere with his ability to discharge his duties and
responsibilities to the Company.
1.4 Base Salary. For all the services rendered by Employee hereunder, the
Company shall pay Employee an annual salary at the rate of $120,000 for each
full year of the Employment Term, plus such additional amounts, if any, as may
be approved by the Board or its Compensation Committee (the "Committee") (as
such amount may be increased from time to time hereunder, the "Base Salary"),
payable in installments at such times as the Company customarily pays its other
senior officers (but in no event less often than monthly). Employee's Base
Salary shall be reviewed by the Board or the Committee at the end of each
employment year to determine if an increase is appropriate for the next
employment year pursuant to its normal performance review policies for
executives, taking into account Employee's performance and increases in the cost
of living. The Company shall be entitled to make proper withholdings from
Employee's Base Salary as required by law or agreed to by Employee.
1.5 Benefits. During the Employment Term, Employee shall be (a) entitled
to the benefits described in Exhibit 1.5 and to participate in such retirement,
profit sharing, group insurance, life insurance, long-term disability,
medical/dental and any other fringe benefit plans, if any, as may be authorized
from time to time by the Board in its sole discretion for officers of the
Company generally, and (b) entitled to four weeks of paid vacation, in addition
to customary holidays and personal days in accordance with the Company's normal
personnel policies. Accrued and unused vacation may be carried forward into the
subsequent year only if approved in writing by the Committee, Board or Chief
Executive Officer of the Company.
1.6 Incentive Compensation. Employee shall be entitled to participate in
such incentive compensation or bonus plans, if any, as may be established from
time to time in respect of each complete fiscal year during the Employment Term
by the Board or the Committee in their sole discretion, the terms and provisions
of which shall also be in the sole discretion of the Board or the Committee. In
addition, with respect to each calendar year during the Employment Term,
Employee will be entitled to receive an annual bonus, payable no later than 100
days after the end of such calendar year, in a minimum amount equal to 20% of
his Base Salary and a maximum amount equal to 60% of his Base Salary, based on
performance milestones significant to the progress of the Company to be
established by the Board upon the recommendation of the Committee based upon
criteria to be submitted to the Committee by the end of the first calendar
quarter of each year by the Chief Executive Officer. The current applicable
performance milestones are attached and will be in effect until December 31,
1998.
1.7 Stock Options. In consideration for Employee's execution of this
Agreement, the Committee has granted to Employee, as of the date of execution
hereof ("Execution Date"), subject to the execution and delivery of this
Agreement, a nonqualified stock option to purchase an additional 20,000 shares
of Common Stock of the Company pursuant to the Company's Equity
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Compensation Plan and a stock option agreement in the form used generally by the
Company, a copy of which is attached hereto. Notwithstanding anything herein to
the contrary, Employee's rights and entitlements with respect to such options
will be governed by the terms of such stock option agreement and Equity
Compensation Plan.
1.8 Expenses. The Company shall reimburse Employee on a timely basis for
all ordinary and necessary out-of-pocket business expenses incurred in
connection with the discharge of his duties and responsibilities hereunder
during the Employment Term in accordance with the Company's expense approval
procedures then in effect and upon presentation to the Company of an itemized
account and written proof of such expenses.
2. Confidential Information. Employee recognizes and acknowledges that by reason
of employment by and service to the Company, he has had and will continue to
have access to financial, proprietary and other confidential information of the
Company and its affiliates, including, without limitation, information and
knowledge pertaining to products and services offered, research ideas, methods
and results, innovations, designs, ideas, plans, trade secrets, proprietary
information, distribution and sales methods and systems, sales and profit
figures, customer and client lists, and relationships between the Company and
its affiliates, distributors, customers, clients, suppliers and other who have
business dealings with the Company and its affiliates ("Confidential
Information"). Employee acknowledges that such Confidential Information is a
valuable and unique asset and covenants that he will not, either during or after
the term of this Agreement, disclose any such Confidential Information to any
person for any reason whatsoever without the prior written authorization of the
Board, unless such information is in the public domain through no fault of
Employee or except: (a) as may be required by law with prior notice to the
Company; or (b) in the course of his employment hereunder and solely in
furtherance of the interests of the Company and its affiliates.
3. Developments. All developments, including inventions, whether patentable or
otherwise, trade secrets, discoveries, improvements, ideas and writings which
either directly or indirectly relate to or may be useful in the business of the
Company or any of its affiliates (the "Developments") which Employee, either by
himself or in conjunction with any other person or persons, shall conceive,
make, develop, acquire or acquire knowledge of during the Employment Term or at
any time thereafter during which he is employed by the Company, shall become and
remain the sole and exclusive property of the Company. Employee hereby assigns,
transfers and conveys, and agrees to so assign, transfer and convey, all of his
right, title and interest in and to any and all such Developments and to
disclose fully as soon as practicable, in writing, all such Developments to the
Board. At any time and from time to time, upon the request and at the expense of
the Company, Employee will execute and deliver any and all instruments,
documents and papers, give evidence and do any and all other acts which, in the
opinion of counsel for the Company, are or may be necessary or desirable to
document such transfer or to enable the Company to file and prosecute
applications for and to acquire, maintain and enforce any and all patents,
trademark registrations or copyrights under United States or foreign law with
respect to any such Developments or to obtain any extension, validation,
re-issue, continuance or renewal of any such patent, trademark or copyright. The
Company will be responsible for the preparation of any such instruments,
documents and papers and for the prosecution of any such proceedings and will
reimburse Employee for all
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<PAGE>
reasonable expenses incurred by him in compliance with the provisions of this
Section.
4. Non-Competition.
4.1 During the Employment Term and for a period of two years thereafter,
Employee will not, without prior written consent of the Board, directly or
indirectly, own, manage, operate, join, control, finance or participate in the
ownership, management, operation, control or financing of, or be connected as an
officer, director, employee, partner, principal, agent, representative,
consultant or otherwise with or use or permit his name to be used in connection
with, any business or enterprise engaged within any state of the United States,
the District of Columbia or any foreign jurisdiction in any business that
competes with the business of the Company business as in effect either during
the Employment Term or on the date Employee's employment terminates, as
applicable. It is recognized by Employee that the business of the Company and
Employee's connection therewith is or will be international in scope, and that
geographical limitations on this non-competition covenant and the
non-solicitation covenant set forth in Section 5 are therefore not appropriate.
4.2 The foregoing restriction shall not be construed to prohibit the
ownership by Employee of not more than five percent (5%) of any class of
securities of any corporation which is engaged in any of the foregoing
businesses having a class of securities registered pursuant to the Securities
Exchange Act of 1934, provided that such ownership represents a passive
investment and that neither the Employee nor any group of persons including
Employee in any way, either directly or indirectly, manages or exercises control
of any such corporation, guarantees any of its financial obligations, otherwise
takes part in its business, other than exercising his rights as a shareholder,
or seeks to do any of the foregoing.
5. No Solicitation. Employee agrees that during the Employment Term and for a
period of two years thereafter, Employee will not, either directly or
indirectly, (i) call on or solicit any person, firm, corporation or other entity
who or which at the time of the termination of Employee's employment was, or
within one year prior thereto had been, a customer of the Company or any of its
affiliates or (ii) solicit the employment of any person who was employed by the
Company or any of its affiliates on a full or part-time basis at the time of
Employee's termination of employment, unless such person (a) was involuntarily
discharged by the Company or such affiliate, or (b) voluntarily terminated his
relationship with the Company or such affiliate prior to Employee's termination
of employment.
6. Equitable Relief.
6.1 Employee acknowledges that the restrictions contained in Sections 2,
3, 4 and 5 hereof are reasonable and necessary to protect the legitimate
interests of the Company and its affiliates, that the Company would not have
entered into this Agreement in the absence of such restrictions, and that any
violation of any provision of those Sections may result in irreparable injury to
the Company and its affiliates (each of which shall be deemed a third party
beneficiary of such restriction). Employee represents that his experience and
capabilities are such that the restrictions contained in Sections 4 and 5 hereof
will not prevent Employee from obtaining employment or otherwise earning a
living at the same general level of economic benefit as anticipated by this
Agreement. Employee represents and acknowledges that (a) he has been advised by
the Company
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<PAGE>
to consult his own legal counsel in respect of this Agreement, and (b) that he
has had full opportunity, prior to execution of this Agreement, to review
thoroughly this Agreement with his counsel.
6.2 Employee agrees that each of the Company and its affiliates shall be
entitled to preliminary and permanent injunctive relief, without the necessity
of proving actual damages, as well as to an equitable accounting of all
earnings, profits and other benefits arising from any violation of Section 2, 3,
4 or 5 hereof, which rights shall be cumulative and in addition to any other
rights or remedies to which the Company or any affiliate may be entitled. In the
event that any provisions of Section 2, 3, 4 or 5 hereof should ever be
adjudicated to exceed time, geographic, service or other limitations permitted
by applicable law in any jurisdiction, then such provision shall be deemed
reformed in such jurisdiction to the maximum time, geographic, service, or other
limitations permitted by applicable law.
6.3 Employee and the Company irrevocably and unconditionally (i) agree
that any suit, action or other legal proceeding arising out of this Agreement,
including without limitation, any action commenced by the Company for
preliminary and permanent injunctive relief and other equitable relief, may be
brought in any court of competent jurisdiction in the State of North Carolina,
provided that any suit, action or other legal proceeding brought against the
Company shall be brought and adjudicated in the United States District Court for
the Eastern District of North Carolina or, if such court will not accept
jurisdiction, in any court of competent civil jurisdiction sitting in Wake
County, North Carolina, (ii) consent to the jurisdiction of any such court in
any such suit, action or proceeding and (iii) waive any objection which Employee
or the Company may have to the laying of venue of any such suit, action or
proceeding in any such court. Employee and the Company also irrevocably and
unconditionally consent to the service of any process, pleading, notices or
other papers in any manner permitted by the notice provisions hereof.
6.4 Employee agrees that he will provide, and that the Company may
similarly provide, a copy of Sections 2, 3, 4, and 5 of this Agreement to any
business or enterprise (i) which he may directly or indirectly own, manage,
operate, finance, join, control or participate in the ownership, management,
operation, financing, control or control of, or (ii) with which he may be
connected with as an officer, director, employee, partner, principal, agent,
representative, consultant or otherwise, or in connection with which he may use
or permit his name to be used; provided, however, that this provision shall not
apply in respect of Sections 4 and 5 of this Agreement after expiration of the
time periods set forth therein.
7. Termination. This Agreement shall terminate prior to the expiration of the
Employment Term upon the occurrence of any one of the following events:
7.1 Disability. The Company may terminate this Agreement if Employee is
unable fully to perform his duties and responsibilities hereunder to the full
extent required by the Board by reason of illness, injury or incapacity for six
(6) consecutive months, or for more than six (6) months in the aggregate during
any period of twelve (12) calendar months, during which time he shall continue
to be compensated as provided in Section 1 hereof. In such event, the Company
shall have no further liability or obligation to Employee for compensation or
other benefits under this Agreement
-5-
<PAGE>
except (i) as may be provided under any disability benefit plan or other
employee benefit plan and program which may be in effect and in which he
participated, and (ii) Employee shall be entitled to receive a pro rata portion
of the incentive compensation pursuant to Section 1.6 in respect of the year
during which Employee first became disabled.. The right and benefits of
Employees under any such employee benefit plans and programs will be determined
in accordance with the terms and provisions of such plans and programs. Employee
agrees, in the event of any dispute under this Section 7.1, to submit to a
physical examination by an independent, licensed physician selected by the
Board.
7.2 Death. This Agreement shall terminate if Employee dies during the
Employment Term. In such event, the Company shall pay to Employee's executors,
legal representatives or administrators an amount equal to the installment of
his Base Salary set forth in Section 1.4.1 hereof for the month in which he
dies, all accrued incentive compensation pursuant to Section 1.6 and a pro rata
portion of the incentive compensation pursuant to Section 1.6 in respect of the
year during which Employee died, and, thereafter, the Company shall have no
further liability or obligation under this Agreement to his executors, legal
representatives, administrators, heirs or assigns or any other person claiming
under or through him, except as may be provided under any employee benefit plan
or compensation program which may be in effect for employees of the Company and
in which he participated. The rights and benefits of Employee under any such
employee benefit plans and programs will be determined in accordance with the
terms and provisions of such plans and programs.
7.3 Cause. The Company may terminate this Agreement, at any time, for
"cause". For purposes of the Agreement, Employee's employment may be terminated
for "cause" if: (a) he engages in gross misconduct, or dishonesty (which in
either case results in material harm to the Company); (b) materially fails to
perform or observe any of the terms or provisions of this Agreement (c) fails to
carry out reasonable directives of the Chief Executive Officer of the Company or
the Board in accordance with Section 1.2; or (d) is convicted of a felony or is
involved in substance abuse; provided, however, that "cause" shall not include
bad judgment or any act or omission reasonably believed by Employee in good
faith to have been in or not opposed to the best interests of the Company, and
provided further, however, that in any event, Employee shall be given written
notice by the Board that the Company intends to terminate Employee's employment
for cause, which written notice shall specify the act or acts on the basis of
which the Company intends so to terminate Employee's employment, and Employee
shall then be given the opportunity, within fifteen (15) days of his receipt of
such notice, to have a meeting with the Board to discuss such act or acts. If
the basis of such written notice is an act or acts other than an act or acts
described in clause (d) of the preceding sentence, Employee will be given seven
(7) days after such meeting within which to cease or correct the performance (or
nonperformance) or to cure the harm giving rise to such written notice and, upon
failure of Employee within such seven (7) day period to cease or correct same,
Employee's employment by the Company shall automatically terminate hereunder for
cause. If Employee ceases or cures to the satisfaction of the Board of
Directors, the Employee's employment agreement shall continue in accordance with
the terms hereof.
7.4 Change in Control Termination.
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<PAGE>
7.4.1 For purposes of this Agreement, a "Change in 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.W.
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 shareholders, or 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.
7.4.2 After the occurrence of a Change in Control, Employee shall be
entitled to receive payment and benefits pursuant to this Agreement if, after
the occurrence of a Change in Control, his employment with the Company is
terminated under any of the following circumstances: (a) the Company terminates
Employee's employment for reasons other than "Cause," "Disability," or death; or
(b) the Employee terminates his employment with the Company for "Good Reason."
For purposes of this Agreement, "Good Reason" shall mean the occurrence after a
Change in Control of any of the following events or conditions: (i) an adverse
change in the Employee's status, title, position or responsibilities from that
in effect immediately prior to the Change in Control; (ii) a reduction in the
Employee's salary; (iii) the Company's requiring the Employee to relocate beyond
a twenty-five (25) mile radius from Raleigh, North Carolina; (iv) any purported
termination of Employee's employment for cause or disability without grounds
therefor; (v) any material breach by the Company of any provision of this
Agreement; or (vi) the failure of the Company to obtain an agreement,
satisfactory to the Employee, from any successor or assign of the Company to
assume and agree to perform this Agreement.
7.4.3 In the event that Employee's employment with the Company
terminates under any of the circumstances described in Section 7.4.2 above,
Employee shall be entitled to receive all of the following: (a) All accrued
compensation and any pro rata incentive compensation Employee may have earned up
to the date of termination; (b) A continuation for one year from date of
termination of Employee's then current annual salary, and incentive compensation
and benefits hereunder. The Company shall maintain in full force and effect, for
one (1) year after the date of termination, all benefit plans and programs in
which Employee was entitled to participate immediately prior to the date of
termination, provided that Employee's continued participation is
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possible under the general terms and provisions of such plans and programs.
Employee's continued participation in such plans and programs shall be at no
greater cost to Employee than the cost he bore for such participation
immediately prior to the date of termination. If Employee's participation in any
such plan or program is barred, the Company shall arrange upon comparable terms,
and at no greater cost to Employee than the cost he bore for such plans and
programs prior to the date of termination, to provide Employee with benefits
substantially similar to those which he is entitled to receive under any such
plan or program.
7.5 Other Terminations.
7.5.1 Employee may terminate this Agreement upon ten (10) days'
prior written notice to the Company if the Company fails to fulfill any of the
material terms and provisions hereof including the failure to pay Employee any
amounts payable hereunder within ten (10) business days after the same shall be
due and payable. In the event of such termination, Employee shall be entitled to
receive payment of his Base Salary, all incentive compensation pursuant to
Section 1.6 and all other benefits and compensation to which he would have been
entitled under this Agreement until the end of the Employment term.
7.5.2 Employee may voluntarily terminate this Agreement upon thirty
(30) days' prior written notice for any reason; provided, however, that no
further payments shall be due under this Agreement in that event except that
Employee shall be entitled to all accrued compensation and a pro rata portion of
all incentive compensation for the year in which termination occurs, and any
benefits due under any compensation or benefit plan including those listed in
Section 1 hereof provided by the Company for officers generally or otherwise.
8. Working Facilities. The Employee shall be provided with an office,
stenographic and technical help and such other facilities and services as may be
suitable to Employee's position in accordance with manpower plan approved by the
Board.
9. Location. Employee shall not be required, without his consent, to render
services at any place other than the area of Raleigh, North Carolina; however;
Employee may be asked to travel in connection with the Company's business as
reasonably appropriate for the performance of his duties.
10. Professional Dues and Continuing Education. The Company agrees to reimburse
the Employee for reasonable professional dues and continuing education expenses
necessary to maintain applicable certifications upon approval by the Company's
Chief Executive Officer or the Board.
11. Indemnification. The Company shall indemnify the Employee, to the maximum
extent permitted by applicable law, against all costs, charges and expenses
incurred or sustained by him 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 of any subsidiary or
affiliate of the Company.
12. Survival. Notwithstanding the termination of this Agreement, the Company's
obligations under Sections 1.4, 1.5, 1.6, 1.7, 1.8, 6.3, 7 and 11 and Employee's
obligations under Sections 2, 3,
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4, 5, 6, and 7 shall survive and remain in full force and effect.
13. Governing Law. This Agreement shall be governed by and interpreted under the
laws of the State of North Carolina without giving effect to any conflict of law
provisions.
14. Notices. All notices and other communications hereunder or in connection
herewith shall be in writing and shall be deemed to have been given when
delivered by hand or reputable express delivery service, mailed by certified or
registered mail, return receipt requested, or sent by fax to the party as
follows (provided that notice of change of address shall be deemed given only
when received):
If to the Company, to: Closure Medical Corporation
5265 Capital Boulevard
Raleigh, North Carolina 27616
Fax: (919) 876-7874
Attn: Robert V. Toni, CEO
If to Employee, to: Anthony Sherbondy
c/o Closure Medical Corporation
5265 Capital Boulevard
Raleigh, NC 27616
or to such other names or addresses as the Company or Employee, as the
case may be, shall designate by notice to the other person in the manner
specified in this Section.
15. Miscellaneous.
15.1 This Agreement supersedes all prior agreements and sets forth the
entire understanding among the parties hereto with respect to the subject matter
hereof and cannot be changed, modified, extended or terminated except upon
written amendment approved by the Board and executed on the Company's behalf by
a duly authorized officer.
15.2 All of the terms of this Agreement shall be binding upon and inure to
the benefit of and be enforceable by the respective heirs, executors,
administrators, legal representatives, successors and assigns of the parties
hereto, (including without limitation, any person, partnership, company or
corporation which may acquire substantially all of the Company's assets or
business or with or into which the Company may be merged, liquidated,
consolidated or otherwise combined), except that the duties and responsibilities
of Employee hereunder are of a personal nature and shall not be assignable or
delegatable in whole or in part by Employee.
15.3 If any provision of this Agreement or application thereof to anyone
or any circumstances is held invalid or unenforceable in any jurisdiction, the
remainder of this Agreement, and the application of such provision to such
person or entity or such circumstance in any other jurisdiction or to other
persons, entities or circumstances in any jurisdiction, shall not be affected
thereby, and to this end the provisions of this Agreement are severable.
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15.4 No remedy conferred upon the Company or Employee by this Agreement is
intended to be exclusive of any other remedy, and each and every such remedy
shall be cumulative and shall be in addition to any other remedy given hereunder
or now or hereafter existing at law or in equity. No delay or omission by the
Company or Employee exercising any right, remedy or power hereunder or existing
at law or in equity shall be construed as a waiver thereof, and any such right,
remedy or power may be exercised by the Company or Employee from time to time
and as often as may be deemed expedient or necessary by the Company or Employee
in its sole discretion.
15.5 All section headings are for convenience only. This Agreement may be
executed in several counterparts, each of which shall be original. It shall not
be necessary in marking proof of this Agreement or any counterpart hereof to
produce or account for any of the other counterparts.
15.6 If either party should file a lawsuit against the other to enforce
any right such party has hereunder, the prevailing party shall also be entitled
to recover a reasonable attorney's fee and costs of suit in addition to other
relief awarded such prevailing party.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement as of the date first above written.
CLOSURE MEDICAL CORPORATION
By: /s/ Robert V. Toni
-------------------------------------
Robert V. Toni, President and C.E.O.
/s/ Anthony J. Sherbondy
-----------------------------------------
Anthony J. Sherbondy
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EXHIBIT 1.5
Employee's Benefits
MEDICAL/DENTAL INSURANCE. The Company will provide, at no charge, medical and
dental insurance for Employee and his dependents.
LIFE INSURANCE. The Company will provide life insurance based upon Employee's
salary or position. The amount of an employee's coverage is four times annual
salary.
ACCIDENTAL DEATH AND DISMEMBERMENT (AD&D) INSURANCE. The Company will provide
AD&D insurance for Employee. This program pays a benefit if Employee dies or is
seriously injured as a direct result of an accident. The benefits received vary
according to the nature of the injury and the Employee's salary or position.
SALARY CONTINUATIONS. Salary continuation takes effect after Employee has been
absent from work for more than three continuous weeks due to medical reasons.
Employee earns one month of salary continuation at normal pay up to a maximum of
six months or until LTD insurance begins, whichever occurs first. Certification
by a physician is required prior to any salary continuation payment.
LONG-TERM DISABILITY. Employee is eligible for long-term disability (LTD) after
being accepted by insurance company. LTD payments begin after six months of
disability and are based on a certain portion of normal pay up to a certain
maximum dollar amount per month.
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EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated as of February 18,
1998, is by and between Closure Medical Corporation, a Delaware corporation (the
"Company"), and Dennis Burns ("Employee").
WHEREAS, the Company and Employee desire to enter into an agreement to
provide for Employee's employment by the Company, upon the terms and conditions
set forth herein;
NOW, THEREFORE, the parties hereto, intending to be legally bound, agree
as follows:
Terms
1. Employment. The Company hereby employs Employee, and Employee hereby accepts
such employment and agrees to perform his duties and responsibilities hereunder,
in accordance with the terms and conditions hereinafter set forth.
1.1 Employment Term. The term of this Agreement (the "Employment Term")
shall commence as of February 18, 1998 and shall continue until February 18,
2000 (unless earlier terminated in accordance with this Agreement) or extended
in accordance with the following sentence. The Employment Term shall
automatically be extended for successive one-year terms, subject to the
termination provisions hereof, unless either party notifies the other, in
writing, at least sixty (60) days prior to the end of the then current
Employment Term that the Agreement is to be terminated.
1.2 Duties and Responsibilities.
1.2.1 During the Employment Term, Employee shall serve as Vice
President General Manager, Absorbable Cohesive Technology Division and shall
perform all duties and accept all responsibilities incidental to such position
or as otherwise may be reasonably assigned to him by the Company's Chief
Executive Officer or its Board of Directors (the "Board").
1.2.2 Employee represents to the Company that, he is not subject to,
and agrees that he will not hereafter during the Employment Term become subject
to, any employment agreement, non-competition covenant, non-disclosure agreement
or other agreement, covenant, understanding or restriction which would prohibit
Employee from fully performing his duties and responsibilities hereunder, or
which would otherwise in any manner, directly or indirectly, limit or adversely
affect the duties and responsibilities which may now or in the future be
assigned to Employee by the
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Company's Chief Executive Officer or the Board.
1.3 Extent of Service. During the Employment Term, Employee agrees to use
his best efforts to carry out his duties and responsibilities under Section
1.2.1 hereof and, consistent with the other provisions of this Agreement, to
devote his full time, attention and energy thereto during normal business hours.
Except as provided in Section 4 hereof, the foregoing shall not be construed as
preventing Employee from making investments in other businesses or enterprises,
provided that Employee agrees not to become engaged in any other business,
charitable or community activity which may materially interfere with his ability
to discharge his duties and responsibilities to the Company.
1.4 Base Salary. For all the services rendered by Employee hereunder, the
Company shall pay Employee an annual salary at the rate of $140,000 for each
full year of the Employment Term, plus such additional amounts, if any, as may
be approved by the Board or its Compensation Committee (the "Committee") (as
such amount may be increased from time to time hereunder, the "Base Salary"),
payable in installments at such times as the Company customarily pays its other
senior officers (but in no event less often than monthly). Employee's Base
Salary shall be reviewed by the Board or the Committee at the end of each
employment year to determine if an increase is appropriate for the next
employment year pursuant to its normal performance review policies for
executives, taking into account Employee's performance and increases in the cost
of living. The Company shall be entitled to make proper withholdings from
Employee's Base Salary as required by law or agreed to by Employee.
1.5 Benefits. During the Employment Term, Employee shall be (a) entitled
to the benefits described in Exhibit 1.5 and to participate in such retirement,
profit sharing, group insurance, life insurance, long-term disability,
medical/dental and any other fringe benefit plans, if any, as may be authorized
from time to time by the Board in its sole discretion for officers of the
Company generally, and (b) entitled to four weeks of paid vacation, in addition
to customary holidays and personal days in accordance with the Company's normal
personnel policies. Accrued and unused vacation may be carried forward into the
subsequent year only if approved in writing by the Committee, Board or Chief
Executive Officer of the Company.
1.6 Incentive Compensation. Employee shall be entitled to participate in
such incentive compensation or bonus plans, if any, as may be established from
time to time in respect of each complete fiscal year during the Employment Term
by the Board or the Committee in their sole discretion, the terms and provisions
of which shall also be in the sole discretion of the Board or the Committee. In
addition, with respect to each calendar year during the Employment Term,
Employee will be entitled to receive an annual bonus, payable no later than 100
days after the end of such calendar year, in a minimum amount equal to 20% of
his Base Salary and a maximum amount equal to 60% of his Base Salary, based on
performance milestones significant to the progress of the Company to be
established by the Board upon the recommendation of the Committee based upon
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criteria to be submitted to the Committee by the end of the first calendar
quarter of each year by the Chief Executive Officer. The current applicable
performance milestones are attached and will be in effect until December 31,
1998. (Refer to Exhibit 1.6)
1.7 Stock Options. In consideration for Employee's execution of this
Agreement, the Committee has granted to Employee, as of the date of execution
hereof ("Execution Date"), subject to the execution and delivery of this
Agreement, a nonqualified stock option to purchase an additional 40,000 shares
of Common Stock of the Company pursuant to the Company's Equity Compensation
Plan and a stock option agreement in the form used generally by the Company, a
copy of which is attached hereto. Notwithstanding anything herein to the
contrary, Employee's rights and entitlements with respect to such options will
be governed by the terms of such stock option agreement and Equity Compensation
Plan.
1.8 Expenses. The Company shall reimburse Employee on a timely basis for
all ordinary and necessary out-of-pocket business expenses incurred in
connection with the discharge of his duties and responsibilities hereunder
during the Employment Term in accordance with the Company's expense approval
procedures then in effect and upon presentation to the Company of an itemized
account and written proof of such expenses.
2. Confidential Information. Employee recognizes and acknowledges that by reason
of employment by and service to the Company, he has had and will continue to
have access to financial, proprietary and other confidential information of the
Company and its affiliates, including, without limitation, information and
knowledge pertaining to products and services offered, research ideas, methods
and results, innovations, designs, ideas, plans, trade secrets, proprietary
information, distribution and sales methods and systems, sales and profit
figures, customer and client lists, and relationships between the Company and
its affiliates, distributors, customers, clients, suppliers and other who have
business dealings with the Company and its affiliates ("Confidential
Information"). Employee acknowledges that such Confidential Information is a
valuable and unique asset and covenants that he will not, either during or after
the term of this Agreement, disclose any such Confidential Information to any
person for any reason whatsoever without the prior written authorization of the
Board, unless such information is in the public domain through no fault of
Employee or except: (a) as may be required by law with prior notice to the
Company; or (b) in the course of his employment hereunder and solely in
furtherance of the interests of the Company and its affiliates.
3. Developments. All developments, including inventions, whether patentable or
otherwise, trade secrets, discoveries, improvements, ideas and writings which
either directly or indirectly relate to or may be useful in the business of the
Company or any of its affiliates (the "Developments") which Employee, either by
himself or in conjunction with any other person or persons, shall conceive,
make, develop, acquire or acquire knowledge of during the Employment Term or at
any time thereafter during which he is employed by the Company, shall become and
remain the sole and
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exclusive property of the Company. Employee hereby assigns, transfers and
conveys, and agrees to so assign, transfer and convey, all of his right, title
and interest in and to any and all such Developments and to disclose fully as
soon as practicable, in writing, all such Developments to the Board. At any time
and from time to time, upon the request and at the expense of the Company,
Employee will execute and deliver any and all instruments, documents and papers,
give evidence and do any and all other acts which, in the opinion of counsel for
the Company, are or may be necessary or desirable to document such transfer or
to enable the Company to file and prosecute applications for and to acquire,
maintain and enforce any and all patents, trademark registrations or copyrights
under United States or foreign law with respect to any such Developments or to
obtain any extension, validation, re-issue, continuance or renewal of any such
patent, trademark or copyright. The Company will be responsible for the
preparation of any such instruments, documents and papers and for the
prosecution of any such proceedings and will reimburse Employee for all
reasonable expenses incurred by him in compliance with the provisions of this
Section.
4. Non-Competition.
4.1 During the Employment Term and for a period of two years thereafter,
Employee will not, without prior written consent of the Board, directly or
indirectly, own, manage, operate, join, control, finance or participate in the
ownership, management, operation, control or financing of, or be connected as an
officer, director, employee, partner, principal, agent, representative,
consultant or otherwise with or use or permit his name to be used in connection
with, any business or enterprise engaged within any state of the United States,
the District of Columbia or any foreign jurisdiction in any business that
competes with the business of the Company business as in effect either during
the Employment Term or on the date Employee's employment terminates, as
applicable. It is recognized by Employee that the business of the Company and
Employee's connection therewith is or will be international in scope, and that
geographical limitations on this non-competition covenant and the
non-solicitation covenant set forth in Section 5 are therefore not appropriate.
4.2 The foregoing restriction shall not be construed to prohibit the
ownership by Employee of not more than five percent (5%) of any class of
securities of any corporation which is engaged in any of the foregoing
businesses having a class of securities registered pursuant to the Securities
Exchange Act of 1934, provided that such ownership represents a passive
investment and that neither the Employee nor any group of persons including
Employee in any way, either directly or indirectly, manages or exercises control
of any such corporation, guarantees any of its financial obligations, otherwise
takes part in its business, other than exercising his rights as a shareholder,
or seeks to do any of the foregoing.
5. No Solicitation. Employee agrees that during the Employment Term and for a
period of two years thereafter, Employee will not, either directly or
indirectly, (i) call on or solicit any person, firm, corporation or other entity
who or which at the time of the termination of Employee's employment was, or
within one year prior thereto had been, a customer of the Company or any of its
affiliates or
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(ii) solicit the employment of any person who was employed by the Company or any
of its affiliates on a full or part-time basis at the time of Employee's
termination of employment, unless such person (a) was involuntarily discharged
by the Company or such affiliate, or (b) voluntarily terminated his relationship
with the Company or such affiliate prior to Employee's termination of
employment.
6. Equitable Relief.
6.1 Employee acknowledges that the restrictions contained in Sections 2,
3, 4 and 5 hereof are reasonable and necessary to protect the legitimate
interests of the Company and its affiliates, that the Company would not have
entered into this Agreement in the absence of such restrictions, and that any
violation of any provision of those Sections may result in irreparable injury to
the Company and its affiliates (each of which shall be deemed a third party
beneficiary of such restriction). Employee represents that his experience and
capabilities are such that the restrictions contained in Sections 4 and 5 hereof
will not prevent Employee from obtaining employment or otherwise earning a
living at the same general level of economic benefit as anticipated by this
Agreement. Employee represents and acknowledges that (a) he has been advised by
the Company to consult his own legal counsel in respect of this Agreement, and
(b) that he has had full opportunity, prior to execution of this Agreement, to
review thoroughly this Agreement with his counsel.
6.2 Employee agrees that each of the Company and its affiliates shall be
entitled to preliminary and permanent injunctive relief, without the necessity
of proving actual damages, as well as to an equitable accounting of all
earnings, profits and other benefits arising from any violation of Section 2, 3,
4 or 5 hereof, which rights shall be cumulative and in addition to any other
rights or remedies to which the Company or any affiliate may be entitled. In the
event that any provisions of Section 2, 3, 4 or 5 hereof should ever be
adjudicated to exceed time, geographic, service or other limitations permitted
by applicable law in any jurisdiction, then such provision shall be deemed
reformed in such jurisdiction to the maximum time, geographic, service, or other
limitations permitted by applicable law.
6.3 Employee and the Company irrevocably and unconditionally (i) agree
that any suit, action or other legal proceeding arising out of this Agreement,
including without limitation, any action commenced by the Company for
preliminary and permanent injunctive relief and other equitable relief, may be
brought in any court of competent jurisdiction in the State of North Carolina,
provided that any suit, action or other legal proceeding brought against the
Company shall be brought and adjudicated in the United States District Court for
the Eastern District of North Carolina or, if such court will not accept
jurisdiction, in any court of competent civil jurisdiction sitting in Wake
County, North Carolina, (ii) consent to the jurisdiction of any such court in
any such suit, action or proceeding and (iii) waive any objection which Employee
or the Company may have to the laying of venue of any such suit, action or
proceeding in any such court. Employee and the Company also irrevocably and
unconditionally consent to the service of any process, pleading,
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notices or other papers in any manner permitted by the notice provisions hereof.
6.4 Employee agrees that he will provide, and that the Company may
similarly provide, a copy of Sections 2, 3, 4, and 5 of this Agreement to any
business or enterprise (i) which he may directly or indirectly own, manage,
operate, finance, join, control or participate in the ownership, management,
operation, financing, control or control of, or (ii) with which he may be
connected with as an officer, director, employee, partner, principal, agent,
representative, consultant or otherwise, or in connection with which he may use
or permit his name to be used; provided, however, that this provision shall not
apply in respect of Sections 4 and 5 of this Agreement after expiration of the
time periods set forth therein.
7. Termination. This Agreement shall terminate prior to the expiration of the
Employment Term upon the occurrence of any one of the following events:
7.1 Disability. The Company may terminate this Agreement if Employee is
unable fully to perform his duties and responsibilities hereunder to the full
extent required by the Board by reason of illness, injury or incapacity for six
(6) consecutive months, or for more than six (6) months in the aggregate during
any period of twelve (12) calendar months, during which time he shall continue
to be compensated as provided in Section 1 hereof. In such event, the Company
shall have no further liability or obligation to Employee for compensation or
other benefits under this Agreement except (i) as may be provided under any
disability benefit plan or other employee benefit plan and program which may be
in effect and in which he participated, and (ii) Employee shall be entitled to
receive a pro rata portion of the incentive compensation pursuant to Section 1.6
in respect of the year during which Employee first became disabled.. The right
and benefits of Employees under any such employee benefit plans and programs
will be determined in accordance with the terms and provisions of such plans and
programs. Employee agrees, in the event of any dispute under this Section 7.1,
to submit to a physical examination by an independent, licensed physician
selected by the Board.
7.2 Death. This Agreement shall terminate if Employee dies during the
Employment Term. In such event, the Company shall pay to Employee's executors,
legal representatives or administrators an amount equal to the installment of
his Base Salary set forth in Section 1.4.1 hereof for the month in which he
dies, all accrued incentive compensation pursuant to Section 1.6 and a pro rata
portion of the incentive compensation pursuant to Section 1.6 in respect of the
year during which Employee died, and, thereafter, the Company shall have no
further liability or obligation under this Agreement to his executors, legal
representatives, administrators, heirs or assigns or any other person claiming
under or through him, except as may be provided under any employee benefit plan
or compensation program which may be in effect for employees of the Company and
in which he participated. The rights and benefits of Employee under any such
employee benefit plans and programs will be determined in accordance with the
terms and provisions of such plans and programs.
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7.3 Cause. The Company may terminate this Agreement, at any time, for
"cause". For purposes of the Agreement, Employee's employment may be terminated
for "cause" if: (a) he engages in gross misconduct, or dishonesty (which in
either case results in material harm to the Company); (b) materially fails to
perform or observe any of the terms or provisions of this Agreement (c) fails to
carry out reasonable directives of the Chief Executive Officer of the Company or
the Board in accordance with Section 1.2; or (d) is convicted of a felony or is
involved in substance abuse; provided, however, that "cause" shall not include
bad judgment or any act or omission reasonably believed by Employee in good
faith to have been in or not opposed to the best interests of the Company, and
provided further, however, that in any event, Employee shall be given written
notice by the Board that the Company intends to terminate Employee's employment
for cause, which written notice shall specify the act or acts on the basis of
which the Company intends so to terminate Employee's employment, and Employee
shall then be given the opportunity, within fifteen (15) days of his receipt of
such notice, to have a meeting with the Board to discuss such act or acts. If
the basis of such written notice is an act or acts other than an act or acts
described in clause (d) of the preceding sentence, Employee will be given seven
(7) days after such meeting within which to cease or correct the performance (or
nonperformance) or to cure the harm giving rise to such written notice and, upon
failure of Employee within such seven (7) day period to cease or correct same,
Employee's employment by the Company shall automatically terminate hereunder for
cause. If Employee ceases or cures to the satisfaction of the Board of
Directors, the Employee's employment agreement shall continue in accordance with
the terms hereof. Upon any such termination or removal, Employee shall be
entitled to receive Base Salary under Section 1.4, incentive compensation under
Section 1.6 andall other benefits and compensation as described herein for a
period of twelve (12) months thereafter.
7.4 Change in Control Termination.
7.4.1 For purposes of this Agreement, a "Change in 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.W.
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
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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 shareholders, or 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.
7.4.2 After the occurrence of a Change in Control, Employee shall be
entitled to receive payment and benefits pursuant to this Agreement if, after
the occurrence of a Change in Control, his employment with the Company is
terminated under any of the following circumstances: (a) the Company terminates
Employee's employment for reasons other than "Cause," "Disability," or death; or
(b) the Employee terminates his employment with the Company for "Good Reason."
For purposes of this Agreement, "Good Reason" shall mean the occurrence after a
Change in Control of any of the following events or conditions: (i) an adverse
change in the Employee's status, title, position or responsibilities from that
in effect immediately prior to the Change in Control; (ii) a reduction in the
Employee's salary; (iii) the Company's requiring the Employee to relocate beyond
a twenty-five (25) mile radius from Raleigh, North Carolina; (iv) any purported
termination of Employee's employment for cause or disability without grounds
therefor; (v) any material breach by the Company of any provision of this
Agreement; or (vi) the failure of the Company to obtain an agreement,
satisfactory to the Employee, from any successor or assign of the Company to
assume and agree to perform this Agreement.
7.4.3 In the event that Employee's employment with the Company
terminates under any of the circumstances described in Section 7.4.2 above,
Employee shall be entitled to receive all of the following: (a) All accrued
compensation and any pro rata incentive compensation Employee may have earned up
to the date of termination; (b) A continuation for one year from date of
termination of Employee's then current annual salary, and incentive compensation
and benefits hereunder. The Company shall maintain in full force and effect, for
one (1) year after the date of termination, all benefit plans and programs in
which Employee was entitled to participate immediately prior to the date of
termination, provided that Employee's continued participation is possible under
the general terms and provisions of such plans and programs. Employee's
continued participation in such plans and programs shall be at no greater cost
to Employee than the cost he bore for such participation immediately prior to
the date of termination. If Employee's participation in any such plan or program
is barred, the Company shall arrange upon comparable terms, and at no greater
cost to Employee than the cost he bore for such plans and programs prior to the
date of termination, to provide Employee with benefits substantially similar to
those which he is entitled to receive under any such plan or program.
7.5 Other Terminations.
7.5.1 Employee may terminate this Agreement upon ten (10) days'
prior written
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notice to the Company if the Company fails to fulfill any of the material terms
and provisions hereof including the failure to pay Employee any amounts payable
hereunder within ten (10) business days after the same shall be due and payable.
In the event of such termination, Employee shall be entitled to receive payment
of his Base Salary, all incentive compensation pursuant to Section 1.6 and all
other benefits and compensation to which he would have been entitled under this
Agreement until the end of the Employment term.
7.5.2 Employee may voluntarily terminate this Agreement upon thirty
(30) days' prior written notice for any reason; provided, however, that no
further payments shall be due under this Agreement in that event except that
Employee shall be entitled to all accrued compensation and a pro rata portion of
all incentive compensation for the year in which termination occurs, and any
benefits due under any compensation or benefit plan including those listed in
Section 1 hereof provided by the Company for officers generally or otherwise.
8. Working Facilities. The Employee shall be provided with an office,
stenographic and technical help and such other facilities and services as may be
suitable to Employee's position in accordance with manpower plan approved by the
Board.
9. Location. Employee shall not be required, without his consent, to render
services at any place other than the area of Raleigh, North Carolina; however;
Employee may be asked to travel in connection with the Company's business as
reasonably appropriate for the performance of his duties.
10. Professional Dues and Continuing Education. The Company agrees to reimburse
the Employee for reasonable professional dues and continuing education expenses
necessary to maintain applicable certifications upon approval by the Company's
Chief Executive Officer or the Board.
11. Indemnification. The Company shall indemnify the Employee, to the maximum
extent permitted by applicable law, against all costs, charges and expenses
incurred or sustained by him 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 of any subsidiary or
affiliate of the Company.
12. Survival. Notwithstanding the termination of this Agreement, the Company's
obligations under Sections 1.4, 1.5, 1.6, 1.7, 1.8, 6.3, 7 and 11 and Employee's
obligations under Sections 2, 3, 4, 5, 6, and 7 shall survive and remain in full
force and effect.
13. Governing Law. This Agreement shall be governed by and interpreted under the
laws of the State of North Carolina without giving effect to any conflict of law
provisions.
14. Notices. All notices and other communications hereunder or in connection
herewith shall be in writing and shall be deemed to have been given when
delivered by hand or reputable express
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delivery service, mailed by certified or registered mail, return receipt
requested, or sent by fax to the party as follows (provided that notice of
change of address shall be deemed given only when received):
If to the Company, to: Closure Medical Corporation
Raleigh, North Carolina 27616
Fax: (919) 876-7874
Attn: Robert V. Toni, CEO
If to Employee, to: Dennis Burns
c/o Closure Medical Corporation
5265 Capital Boulevard
Raleigh, NC 27616
or to such other names or addresses as the Company or Employee, as the
case may be, shall designate by notice to the other person in the manner
specified in this Section.
15. Miscellaneous.
15.1 This Agreement supersedes all prior agreements and sets forth the
entire understanding among the parties hereto with respect to the subject matter
hereof and cannot be changed, modified, extended or terminated except upon
written amendment approved by the Board and executed on the Company's behalf by
a duly authorized officer.
15.2 All of the terms of this Agreement shall be binding upon and inure to
the benefit of and be enforceable by the respective heirs, executors,
administrators, legal representatives, successors and assigns of the parties
hereto, (including without limitation, any person, partnership, company or
corporation which may acquire substantially all of the Company's assets or
business or with or into which the Company may be merged, liquidated,
consolidated or otherwise combined), except that the duties and responsibilities
of Employee hereunder are of a personal nature and shall not be assignable or
delegatable in whole or in part by Employee.
15.3 If any provision of this Agreement or application thereof to anyone
or any circumstances is held invalid or unenforceable in any jurisdiction, the
remainder of this Agreement, and the application of such provision to such
person or entity or such circumstance in any other jurisdiction or to other
persons, entities or circumstances in any jurisdiction, shall not be affected
thereby, and to this end the provisions of this Agreement are severable.
15.4 No remedy conferred upon the Company or Employee by this Agreement is
intended to be exclusive of any other remedy, and each and every such remedy
shall be cumulative and shall be in addition to any other remedy given hereunder
or now or hereafter existing at law or in equity.
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No delay or omission by the Company or Employee exercising any right, remedy or
power hereunder or existing at law or in equity shall be construed as a waiver
thereof, and any such right, remedy or power may be exercised by the Company or
Employee from time to time and as often as may be deemed expedient or necessary
by the Company or Employee in its sole discretion.
15.5 All section headings are for convenience only. This Agreement may be
executed in several counterparts, each of which shall be original. It shall not
be necessary in marking proof of this Agreement or any counterpart hereof to
produce or account for any of the other counterparts.
15.6 If either party should file a lawsuit against the other to enforce
any right such party has hereunder, the prevailing party shall also be entitled
to recover a reasonable attorney's fee and costs of suit in addition to other
relief awarded such prevailing party.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Agreement as of the date first above written.
CLOSURE MEDICAL CORPORATION
By: /s/ Robert V. Toni
-------------------------------------
Robert V. Toni, President and C.E.O.
/s/ Dennis Burns
-----------------------------------------
Dennis Burns
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EXHIBIT 1.5
Employee's Benefits
MEDICAL/DENTAL INSURANCE. The Company will provide, at no charge, medical and
dental insurance for Employee and his dependents.
LIFE INSURANCE. The Company will provide life insurance based upon Employee's
salary or position. The amount of an employee's coverage is four times annual
salary.
ACCIDENTAL DEATH AND DISMEMBERMENT (AD&D) INSURANCE. The Company will provide
AD&D insurance for Employee. This program pays a benefit if Employee dies or is
seriously injured as a direct result of an accident. The benefits received vary
according to the nature of the injury and the Employee's salary or position.
SALARY CONTINUATIONS. Salary continuation takes effect after Employee has been
absent from work for more than three continuous weeks due to medical reasons.
Employee earns one month of salary continuation at normal pay up to a maximum of
six months or until LTD insurance begins, whichever occurs first. Certification
by a physician is required prior to any salary continuation payment.
LONG-TERM DISABILITY. Employee is eligible for long-term disability (LTD) after
being accepted by insurance company. LTD payments begin after six months of
disability and are based on a certain portion of normal pay up to a certain
maximum dollar amount per month.
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COMMENCEMENT AGREEMENT AND FIRST AMENDMENT TO LEASE
This COMMENCEMENT AGREEMENT AND FIRST AMENDMENT TO LEASE, dated as of
August 15, 1997 (the "First Amendment"), by and between AP SOUTHEAST PORTFOLIO
PARTNERS, L.P., a Delaware Limited Partnership, with an address at c/o Highwoods
Properties, Inc. 3100 Smoketree Court, Suite 600, Raleigh, North Carolina 27604,
(the "Landlord"), and CLOSURE MEDICAL CORPORATION, a Delaware Corporation, with
offices at 5265 Capital Boulevard, Raleigh, North Carolina 27616, (the
"Tenant").
W I T N E S S E T H :
WHEREAS, Tenant and Landlord entered into that certain Lease Agreement
dated February 14, 1997 (the "Lease") for space designated as 5240 Green's Dairy
Road Building, comprising approximately 40,000 rentable square feet, located at
the following address:
5240 Green's Dairy Road Building, City of Raleigh, County of Wake, State
of North Carolina; and
WHEREAS, said Lease provided for the execution of a Commencement Agreement
establishing the actual date of the commencement of the term of the lease of the
Premises; and
WHEREAS, the parties desire to expand the Premises, amend the term, the
Rent Schedule and further alter and modify said Lease in the manner set forth
below,
NOW, THEREFORE, in consideration of the mutual and reciprocal promises
herein contained, Tenant and Landlord hereby agree that said Lease hereinafter
described be, and the same is hereby modified in the following particulars,
effective as of August 15, 1997:
1. Section 2.3, entitled "Square Footage and Address" is deleted in its entirety
and the following is inserted in its place and stead:
"2.3 Square Footage and Address. The Premises contains approximately
49,145 rentable square feet. The address of the Premises is 5260
Green's Dairy Road, Raleigh, North Carolina 27616."
2. The term of the Lease by and between Landlord and Tenant actually commenced
on August 15, 1997 (the "Commencement Date"). The initial term of said Lease
shall terminate on July 31, 2007 (the "Termination Date"). Section 3.1, entitled
"Lease Term", and all references to the Commencement Date and Termination Date
are hereby amended.
1
<PAGE>
3. Section 4.1, entitled "Base Rent", is amended as follows: The Minimum Base
Rent is amended to the sum of "$5,004,075.65" and the Minimum annual Base Rent
for the first twelve months is amended to the sum of "$457,947.84".
4. Exhibit H shall be deleted in its entirety and the following Exhibit H
attached hereto and by this reference made a part hereof shall be inserted in
its place and stead.
5. Section 4.6, entitled "Tenant's Proportionate Share", is amended, deleting
"43.31%" and inserting "53.21%" in its place and stead.
6. Section 4.7, entitled "Monthly Deposits for Costs and Expenses Payable as
Additional Rent", is amended, deleting the words "the sum of Six thousand one
hundred sixty-six and 67/100 dollars ($6,166.67)" and inserting the following in
its place and stead: "Seven Thousand Five Hundred Seventy-Six and 52/100 dollars
($7,576.52)".
7. Exhibit E, Section 2, entitled "Building Standard Allowance" is deleted in
its entirety and the following shall be inserted in its place and stead:
2. Building Standard Allowance. Landlord shall provide an allowance
not to exceed $884,610.00 to be used to construct the Premises (the
"Building Standard Allowance") payable upon proof of payment and
performance, which Building Standard Allowance shall become a part
of the Improvement Allowance (collectively, the "Improvement
Allowance"). The Building Standard Allowance shall be used to pay
for costs incurred by Tenant constructing the Premises, including,
but not limited to, architectural and engineering fees, signage and
keying. All proof of payment and performance must be submitted
within 60 days after completion of construction. If there are any
funds remaining in the Building Standard Fund after April 1, 1998,
then Tenant shall lose all rights to any such remaining funds.
Landlord agrees to waive all fees associated with Landlord's
oversight, management or supervision of the initial Tenant
Improvements."
8. Pursuant to Exhibit F, entitled "Additional Space Options", subsection
entitled "Expansion Option", the location of the Option Premises is outlined on
Schedule 1 attached hereto and by this reference made a part hereof.
9. Exhibit A is deleted and Exhibit A attached hereto shall be inserted in its
place and stead.
10. Unless otherwise defined herein, all capitalized terms used in this First
Amendment shall have the same definitions ascribed to them in the Lease.
11. Except as modified and amended by this First Amendment, the Lease shall
remain in full force and effect.
2
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have caused this Agreement to be
duly executed, as of the day and year first above written.
Tenant: CLOSURE MEDICAL CORPORATION
a Delaware Corporation
By: /s/ Robert V. Toni
-----------------------------
Name: Robert V. Toni
----------------
Title: President
---------------
Date: November 5, 1997
----------------
Attest: /s/ J. Blount Swain
---------------------------------------
Secretary
------------------------------
Corporate Seal
AP SOUTHEAST PORTFOLIO PARTNERS, L.P.,
a Delaware Limited Partnership
By: Highwoods Properties, Inc., its agent
a Maryland corporation
By: /s/ James A. Ciao
-------------------------------------------
James A. Ciao, Vice President
Date: November 25, 1997
Attest: /s/ Stephanie A. Lucas
---------------------------------------
Stephanie A. Lucas, Assistant Secretary
Corporate Seal
3
<PAGE>
EXHIBIT A
[Floor Plan]
<PAGE>
EXHIBIT H
Base Rent as set forth in Section 4.1 of the Lease, shall be as follows:
- --------------------------------------------------------------------------------
MONTHS TOTAL ANNUAL BASE MONTHLY RENT
RENT
- --------------------------------------------------------------------------------
0 (days 17-31) $ 457,947.84 $20,927.72
- --------------------------------------------------------------------------------
1-12 457,947.84 38,162.32
- --------------------------------------------------------------------------------
13-24 467,162.52 38,930.21
- --------------------------------------------------------------------------------
25-36 476,652.48 39,721.04
- --------------------------------------------------------------------------------
37-48 486,427.44 40,535.62
- --------------------------------------------------------------------------------
49-60 496,497.24 41,374.77
- --------------------------------------------------------------------------------
61-72 506,871.72 42,239.31
- --------------------------------------------------------------------------------
73-84 517,550.88 43,129.24
- --------------------------------------------------------------------------------
85-96 528,554.52 44,046.21
- --------------------------------------------------------------------------------
97-108 539,887.32 44,990.61
- --------------------------------------------------------------------------------
109-119 505,595.64 45,963.27
-------------
- --------------------------------------------------------------------------------
TOTAL BASE RENT $5,004,075.65
- --------------------------------------------------------------------------------
This Exhibit is based on the Premises measuring 49,145 rentable square feet, and
therefore is subject to revision on a pro rata basis pending final measurement
of the Premises pursuant to Section 2.3 of the Lease.
<PAGE>
SCHEDULE 1
[Option Space Floor Plan]
REPRESENTATIVE AND MANUFACTURING FACILITY AGREEMENT
THIS IS A REPRESENTATIVE AND MANUFACTURING FACILITY AGREEMENT dated as of
January 1, 1998 between Closure Medical Corporation, of Raleigh, North Carolina
("Closure"), and Innocoll GmbH, of Saal-Donau, Germany ("Innocoll").
Background
Closure develops, commercializes and manufactures medical tissue cohesive
products based on its proprietary cyanoacrylate technology. Closure is seeking
to market its current and future products in Europe. Innocoll is a collagen/drug
delivery manufacturing entity, and has agreed to act as Closure's representative
in Europe with respect to such products.
Terms
In consideration of the mutual premises herein contained and intending to
be legally bound hereby, the parties agree as follows:
1. Engagement as Representative. Closure hereby retains Innocoll, and
Innocoll hereby agrees to act, as Closure's representative in Europe to provide
the services set forth in Exhibit A hereto.
2. Manufacturing Facility. Innocoll will provide to Closure, on an as
needed basis, up to 20,000 square feet of space at its facility in Saal-Donau,
Germany, for use as an alternative manufacturing facility, including quality
control support services, for Closure's products.
3. Compensation.
3.1 Representative Payments. Closure will pay to Innocoll $120,000
per year for the services provided pursuant to Section 1, payable quarterly.
3.2 Facility Payments. Closure will pay to Innocoll $60,000 per year
for the space provided pursuant to Section 2, payable quarterly.
4. Confidential Information. Innocoll recognizes and acknowledges that by
reason of its engagement by and service to Closure, it has had and will continue
to have access to financial, proprietary and other confidential information of
Closure and its affiliates, including, without limitation, information and
knowledge pertaining to products and services offered, research ideas, methods
and results, innovations, designs, ideas, plans, trade secrets, proprietary
information, distribution and sales methods and systems, sales and profit
figures, customer and client lists, and relationships between Closure and its
affiliates, distributors, customers, clients, suppliers and other who have
business dealings with Closure and its affiliates ("Confidential Information").
Innocoll
<PAGE>
acknowledges that such Confidential Information is a valuable and unique asset
and covenants that it will not, either during or after the term of this
Agreement, disclose any such Confidential Information to any person for any
reason whatsoever without the prior written authorization of the Board, unless
such information is in the public domain through no fault of Innocoll or except
as may be required by law with prior notice to Closure.
5. Notices. All notices and other communications hereunder or in
connection herewith shall be in writing and shall be deemed to have been given
when delivered by hand or reputable express delivery service, mailed by
certified or registered mail, return receipt requested, or sent by fax to the
party as follows (provided that notice of change of address shall be deemed
given only when received):
If to the Company, to: J. Blount Swain, Chief Financial Officer
Closure Medical Corporation
5265 Capital Boulevard
Raleigh, North Carolina 27604
Telefax: 919-876-7874
If to Innocoll, to: Mr. Horst Bosczcyk, Geschaftsfuhrer
INNOCOLL GmbH
Postfach 45 / Donaustrasse 24
D-93342 SAAL / Donau / Germany
Telefax: 011-49-9441-68 60 30
or to such other names or addresses as Closure or Innocoll, as the case may be,
shall designate by notice to the other party in the manner specified in this
Section.
6. Term; Termination. The term of this Agreement shall commence on the
date hereof and end on the fifth anniversary thereof.
7. Miscellaneous. This Agreement (i) constitutes the entire agreement, and
supersedes any prior agreements relating to the subject matter hereof; (ii) may
be modified only in a writing duly executed by the parties hereto and Innocoll
and Closure acknowledge that the effect of this provision is that no oral
modifications of any nature whatsoever to this Agreement shall be permitted; and
(iii) shall be binding upon and inure to the benefit of and be enforceable by
the respective heirs, executors, administrators, legal representatives,
successors and assigns of the parties hereto, except that the duties and
responsibilities of Innocoll as set forth in Section 1 of this Agreement are of
a personal nature and shall not be assignable or delegable in whole or in part
unless mutually agreed by both parties hereto.
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
CLOSURE MEDICAL CORPORATION
BY: /s/ J. Blount Swain
-------------------------------------
INNOCOLL GmbH
BY: /s/ Horst Bosczcyk
-------------------------------------
<PAGE>
EXHIBIT A
1. Act as Closure's representative to obtain CE Mark (and other regulatory
approvals and clearances) which may be required to market the Company's
current and future products (not current) in the European Union.
2. Act as an authorized representative under the Medical Devices Directive
(93/42/EEC) to represent Closure for the purpose of responding to any
inquiry by a Competent Authority.
3. Maintain technical documentation for Closure products to be supplied or
made available to the Notified Body and kept available for the Competent
Authorities, as required by MDD 93/42/EEC.
4. Notify Closure of all complaints and the Competent Authority of all
incidents that involve Closure products which might lead to or might have
led to the death of a patient or user or to a serious deterioration in
their state of health, as described in the vigilance requirements of MDD
93/42/EEC.
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
PER ITEM 601(B)(11) OF REGULATION S-K
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1997
Common Stock outstanding 10,284,658 12,965,990
Common Stock equivalents for options
granted 0 0
Shares used in computing net
loss per common share(1) 10,284,658 12,965,990
Net loss $(16,813,994) $ (6,828,712)
Net loss per common share-basic
and diluted $ (1.63) $ (0.53)
(1) 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. Diluted 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.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-8 (No. 333-17721) of Closure Medical Corporation (formerly
Tri-Point Medical Corporation) of our report dated January 29, 1998, appearing
on page F-2 of the Closure Medical Corporation Annual Report on Form 10-K for
the year ended December 31, 1997.
PRICE WATERHOUSE LLP
Raleigh, North Carolina
March 26, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 7,277,029 13,024,317
<SECURITIES> 17,232,585 5,035,851
<RECEIVABLES> 1,226,416 66,983
<ALLOWANCES> 0 0
<INVENTORY> 346,563 112,794
<CURRENT-ASSETS> 23,633,846 18,218,498
<PP&E> 4,055,267 851,276
<DEPRECIATION> (361,401) (179,249)
<TOTAL-ASSETS> 30,419,720 19,512,289
<CURRENT-LIABILITIES> 5,600,208 3,043,002
<BONDS> 0 0
0 0
0 0
<COMMON> 132,425 121,500
<OTHER-SE> 22,286,491 16,333,381
<TOTAL-LIABILITY-AND-EQUITY> 30,419,720 19,512,289
<SALES> 1,551,470 3,996,471
<TOTAL-REVENUES> 1,551,470 3,996,471
<CGS> 1,397,960 459,921
<TOTAL-COSTS> 1,397,960 459,921
<OTHER-EXPENSES> 8,347,203 20,549,860
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 71,736 138,561
<INCOME-PRETAX> (6,828,712) (16,813,994)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (6,828,712) (16,813,994)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (6,828,712) (16,813,994)
<EPS-PRIMARY> (.53) (1.63)
<EPS-DILUTED> (.53) (1.63)
</TABLE>
