-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RNrVBB3VgjCvWmON7g9O+xL6KaJqvT7GUoFEqnp9266S3Z4OItuirMfF+LuTU6zH +Xx7orq8SrRrDQ/zF8FgtQ== 0000950134-97-001609.txt : 19970311 0000950134-97-001609.hdr.sgml : 19970311 ACCESSION NUMBER: 0000950134-97-001609 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970310 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ATRIX LABORATORIES INC CENTRAL INDEX KEY: 0000809875 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 841043826 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-18231 FILM NUMBER: 97553115 BUSINESS ADDRESS: STREET 1: 2579 MIDPOINT DR CITY: FORT COLLINS STATE: CO ZIP: 80525 BUSINESS PHONE: 3034825868 MAIL ADDRESS: STREET 1: 2579 MIDPOINT DR CITY: FORT COLLINS STATE: CO ZIP: 80525 FORMER COMPANY: FORMER CONFORMED NAME: VIPONT RESEARCH LABORATORIES INC DATE OF NAME CHANGE: 19891218 10-K 1 FORM 10-K FOR YEAR ENDED DECEMBER 31, 1996 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission File No. December 31, 1996 0-18231 ATRIX LABORATORIES, INC. ---------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 84-1043826 - ------------------------ ----------------- (State of Incorporation) (I.R.S. Employer Identification Number) 2579 Midpoint Drive Fort Collins, Colorado 80525 - ---------------------- -------------- (Address of principal (Zip Code) executive offices) Registrant's Telephone No., including Area Code: (970) 482-5868 Securities Registered pursuant to Section 12(b) of the Act: None Securities Registered pursuant to Section 12(g) of the Act: Common Stock $.001 par value ---------------------------- (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 2 The aggregate market value of voting stock held by non-affiliates of the Registrant as of March 3, 1997 was $140,318,341. The number of shares of the Registrant's $.001 par value Common Stock outstanding as of March 3, 1997 was 11,114,324. DOCUMENTS INCORPORATED BY REFERENCE Part III, Items 10, 11, 12 and 13 are incorporated by reference to the definitive proxy statement for the Registrant's Annual Meeting of Shareholders scheduled to be held on April 27, 1997. 2 3 PART I ITEM 1. BUSINESS GENERAL Atrix Laboratories, Inc. (the "Company"), originally named Vipont Research Laboratories, Inc., was formed in August 1986 as a Delaware corporation. The Company is engaged in the research and development of a broad range of medical, dental and veterinary products based on its proprietary biodegradable polymer system for drug delivery and biomaterial applications. This patented drug delivery system, trade-named ATRIGEL(R), consists of biodegradable polymers dissolved in biocompatible solvents that can be injected or inserted into the target site as flowable compositions (e.g. solutions, gels, pastes, and putties) and that solidify upon contact with body fluids to form an implant. The ATRIGEL(R) drug delivery system can incorporate various pharmaceutical compounds and is designed to release the compounds at targeted rates and over predetermined periods of time. The Company believes that the ATRIGEL(R) drug delivery system has the potential to enhance the therapeutic benefits of a broad range of drugs through one or more of the following means: sustained release of drug, ease of application, improved safety and efficacy, reduced costs and greater patient compliance. The Company also believes that the ATRIGEL(R) drug delivery system when used without the incorporation of a drug affords the same benefits as a biomaterial for a range of medical device applications. The Company's drug delivery strategy is to combine the patented ATRIGEL(R) drug delivery system with drugs whose therapeutic effectiveness may be enhanced when administered in a sustained-release form or through increased patient compliance. The Company conducts research activities on its own behalf and performs contract research for third parties. The Company also conducts research for the United States government and its agencies through government grants. The Company has initiated early stage research programs with several pharmaceutical companies and is evaluating the use of the ATRIGEL(R) drug delivery system with drugs having various human and animal health applications. In addition the Company is pursuing human medical device applications in conjunction with other pharmaceutical and health care companies. There can be no assurance that these programs will result in commercial products or that the Company will ultimately enter into other funded research programs. In the past the Company has been awarded government grants (including grants by the Department of Defense and The National Institutes of Health) to conduct research utilizing the ATRIGEL(R) drug delivery system. Such research continues to be directed toward the development of products in the orthopedic and periodontal disease areas. See - "Company's Products." During 1996, the Company began marketing its ATRISORB(R) GTR Barrier for guided tissue regeneration. This product utilizes the ATRIGEL(R) drug delivery system without an active agent to aid in the selective and enhanced regeneration of the periodontal tissue following gum surgery. The Company is nearing commercialization of its second product, the ATRIDOX(TM) subgingival antibiotic therapy, which uses the ATRIGEL(R) drug delivery system containing 1 4 doxycycline to provide localized sustained delivery of an antibiotic non-surgically to diseased periodontal tissue. CERTAIN RECENT DEVELOPMENTS BLOCK DRUG COMPANY. In December 1996, the Company and Block Drug Corporation ("Block") entered into an agreement (the "Block Agreement") whereby Block acquired North American and certain European marketing rights to the Company's first three products and improvements thereto for the treatment of periodontal disease, as follows: (i) the ATRISORB(R) GTR Barrier; (ii) ATRIDOX(TM), and (iii) ATRISORB(R) with doxycycline. The Block Agreement provides for potential milestone payments in excess of $50 million to the Company over the next three to five years, as well as manufacturing margins and royalties on sales. Block will have responsibility for the sales and marketing of the products and will advise, consult and financially support various aspects of the Company's dental research and development program. PHASE 3 TRIALS FOR ATRIDOX(TM). The Company commenced pivotal Phase 3 clinical trials on ATRIDOX(TM) in January 1995. The pivotal Phase 3 trials consisted of two studies which were conducted at twenty sites and included approximately 800 patients. In August 1996, the Company announced that the two pivotal Phase 3 clinical trials demonstrated that while standard scaling and root planing therapy was more effective than oral hygiene alone, treatment with the ATRIDOX(TM) product was clinically and statistically equivalent to scaling and root planing and is superior to vehicle control. Based on the results of these clinical studies, the Company plans to file a New Drug Application ("NDA") with the U.S. Food and Drug Administration ("FDA") during the first half of 1997 and will file for European approval shortly thereafter. See - "Company's Products-The ATRIDOX(TM) Product." MANUFACTURING FACILITY. In July 1996, the Company acquired a 25,000 square foot fully operational pharmaceutical and biotechnological manufacturing facility in Fort Collins, Colorado for a total purchase price of approximately $3.4 million. The building contains several Class 100 suites for manufacturing sterile products, laboratory and office areas, cold storage and warehousing. The building will be used to produce the ATRISORB(R) GTR Barrier beginning in 1997 and the Company's future products. COMMON STOCK OFFERING. The Company completed a public offering of its common stock in May 1996. The offering provided gross proceeds of $30,080,000 to the Company to further fund research of its products, commercialize its dental products in the United States and Europe, and expand its manufacturing capabilities. ATRISORB(R) GTR BARRIER 510(K) FILING AND FDA CLEARANCE. On December 21, 1995, the Company filed a 510(k) notification with the FDA to market the ATRISORB(R) GTR Barrier for guided tissue regeneration applications during periodontal surgery. On March 21, 1996, the Company received notification that the ATRISORB(R) GTR Barrier had been cleared for marketing in the United States. Additionally, as of December 31, 1996, the Company had 2 5 received clearance to market the ATRISORB(R) GTR Barrier in several European countries. See - "Company's Products-The ATRISORB(R) GTR Barrier." PERIODONTAL DISEASE Periodontal disease is characterized by progressive, chronic infection and inflammation of the gums and surrounding tissue, resulting in the formation of periodontal pockets (spaces between the gum and tooth) resulting from loss of the tooth's supporting structure (bone and periodontal ligament). It begins when plaque builds up on teeth and gums causing inflammation. If left untreated, the disease progresses and can lead to tooth loss. Periodontal disease is not curable, but continuous maintenance can prevent and/or delay flare-ups and further deterioration. The severity of the disease varies from the mildest cases, clinically termed gingivitis (bleeding gums), to the more severe cases, clinically termed periodontitis. When gingivitis is not controlled, the condition can progress into periodontitis. Periodontal disease is most prevalent after the age of 35. It has been reported by the American Dental Association that over 45 million people in the United States currently have some form of the disease, and the Company believes that only a small percentage are now being treated. Progression of the disease is usually painless, allowing the condition to become advanced before treatment is sought by the patient. Periodontal disease has no known cure, and effective treatment is possible only through periodic professional intervention to arrest further tissue deterioration. The most common treatment, scaling and root planing, requires the dental professional to scrape away accumulated plaque and calculus above and below the gumline. For more serious cases, various forms of gum surgery are the primary treatment. The Company believes that many individuals diagnosed with the disease do not seek treatment due to a number of factors, including cost, pain and potential medical complications associated with currently available periodontal treatment. COMPANY'S PRODUCTS ATRIGEL(R) DRUG DELIVERY SYSTEM. The ATRIGEL(R) drug delivery system offers a unique approach to drug delivery. This patented drug delivery system is comprised of a biodegradable polymer formulation that is administered as flowable compositions (e.g., solutions, gels, pastes, and putties), which then solidify in situ upon contact with body fluids to form biodegradable implants. It is designed to provide extended localized or systemic drug delivery in a single application, without the need for surgical implantation or removal. Depending on the intended use or the specific drug to be delivered via the ATRIGEL(R) drug delivery system, the degradation rate of the system can be custom-tailored. The Company believes that the unique properties of the drug delivery system create the potential for a wide variety of medical and veterinary applications. There can be no assurance, however, that the ATRIGEL(R) drug delivery system will be successfully developed for commercial use. 3 6 The Company believes that the ATRIGEL(R) drug delivery system may provide benefits over traditional methods of drug administration such as oral tablets and capsules, injections and continuous infusion as a result of the following properties: * Versatility. The ATRIGEL(R) drug delivery system may be used with a wide variety of pharmaceutical compounds. * Ease of Application. The ATRIGEL(R) drug delivery system can be injected or inserted as flowable compositions (e.g., solutions, gels, pastes, and putties) by means of ordinary needles and syringes, or can be sprayed or painted onto tissues. * Biodegradability. The ATRIGEL(R) drug delivery system will biodegrade and thus is not expected to require removal when the drug is depleted. * Site Specificity. The ATRIGEL(R) drug delivery system can be delivered directly to the target area, thus potentially achieving higher drug concentrations at the desired site of action and minimizing systemic side effects. * Systemic Drug Delivery. The ATRIGEL(R) drug delivery system can be used to provide sustained drug release into the systemic circulation in those applications where the entire body requires treatment, and the drug is not active when taken by mouth. Protein/Peptide Stability. The ATRIGEL(R) drug delivery system can be used to deliver proteins, peptides and other compounds having formulation instability or short in-vivo half-lives. * Customized Continuous Release. The ATRIGEL(R) drug delivery system can be designed to provide continuous release of incorporated pharmaceuticals over a targeted time period so as to reduce the frequency of drug administration. * Custom Designed Degradation Rates. The ATRIGEL(R) drug delivery system can be designed to degrade over weeks, months, or even one year. * Low Cost and Ease of Manufacture. The ATRIGEL(R) drug delivery system is manufactured using a simple and inexpensive process relative to available sustained-release drug delivery systems. * Increased Patient Compliance. Because the drug is implanted and released over time, patient compliance is virtually assured. * Safety. All current components of the ATRIGEL(R) drug delivery system are biocompatible and have independently-established safety and toxicity profiles. In 4 7 addition, the polymers used in the system are members of a class of polymers some of which have previously been approved by the FDA for human use in other applications. The Company has also conducted toxicological studies on the ATRIGEL(R) drug delivery system to develop a safety and toxicological profile. The Company believes that the ATRIGEL(R) drug delivery system without a drug has potential uses as a biomaterial, in which case the ATRIGEL(R) drug delivery system has all of the properties described above except those dependent on the release of a drug. THE ATRIDOX(TM) PRODUCT. The ATRIDOX(TM) product combines the ATRIGEL(R) drug delivery system and an antibiotic (doxycycline) to form a product designed to control the bacteria that cause periodontal disease. The ATRIDOX(TM) product is intended to add a new chemotherapeutic maintenance procedure to current periodontal treatment. The ATRIDOX(TM) product is administered by a periodontist or a general dentist by inserting the ATRIDOX(TM) product into the periodontal pocket through a cannula that is similar in design to a periodontal probe. The Company has conducted clinical trials which indicate that administration will be rapid, require a minimal amount of patient chair time, and involve minimal discomfort compared to conventional methods of therapy. In January, 1995 the Company commenced pivotal Phase 3 trials on the ATRIDOX(TM) product. The pivotal Phase 3 trials consisted of two studies which were conducted at twenty sites and include approximately 800 patients. These studies were completed in May, 1996 and the Company announced favorable results in August, 1996. The studies demonstrated that while standard scaling and root planing therapy was more effective than oral hygiene alone, treatment with the ATRIDOX(TM) product was clinically and statistically equivalent to scaling and root planing and superior to its vehicle control. Based on these favorable results, the Company intends to submit an NDA to the FDA and foreign regulatory agencies in the first half of 1997. THE ATRISORB(R) GTR BARRIER. The ATRISORB(R) GTR Barrier is a biodegradable, liquid polymer product that utilizes the ATRIGEL(R) drug delivery system to aid in the regeneration of the tooth's support following osseous flap surgery or other periodontal procedures. Osseous flap surgery, a common treatment for severe cases of periodontal disease, involves reflecting gum tissue to expose and debride areas not reachable by conventional scaling and root planing procedures. The Company estimates that there are currently over 3 million flap surgeries performed each year in the United States. Published research has shown that to obtain optimal healing following flap surgery, it is necessary to isolate the wound healing site from the adjacent gum tissue. The placement of a barrier that isolates the surgical site from the gum tissue has been shown to selectively facilitate growth of the periodontal ligament cells, leading to connective tissue and bone regeneration at the base of the periodontal defects. The ATRISORB(R) GTR Barrier is formed outside of the mouth using a sterile, single-use barrier forming kit. Once placed in the mouth over the periodontal defect, the semi-solid ATRISORB(R) GTR Barrier further solidifies upon contact with oral fluids to form a solid barrier that isolates the healing site in order to promote guided tissue regeneration. Sutures are not 5 8 required to hold the barrier in place. For these reasons, the ATRISORB(R) GTR Barrier can be placed in a shorter time relative to existing guided tissue regeneration barrier products. In addition, the periodontists have the potential for treatment of multiple diseased sites in one surgical session. Since the ATRISORB(R) GTR Barrier is biodegradable, a second surgery to remove the barrier is unnecessary. Results from pre-clinical and clinical trials have been presented at a number of scientific meetings and published in a number of referenced scientific journals. The Company completed human clinical trials on the ATRISORB(R) GTR Barrier during 1995 and filed a 510(k) notification with the FDA on December 21, 1995 to market the ATRISORB(R) GTR Barrier in guided tissue regeneration applications during periodontal surgery. On March 22, 1996 the Company received clearance to market the ATRISORB(R) GTR Barrier in the United States from the FDA. As of December 31, 1996 the Company had received clearance to market the ATRISORB(R) GTR Barrier in Denmark, France, Ireland, Israel, Italy, Luxembourg, the Netherlands, Saudi Arabia, Spain, and Switzerland. The Company expects to market the product in additional foreign countries; however, there can be no assurance that additional regulatory approvals or clearances will be obtained. OTHER ATRIGEL(R) DRUG DELIVERY SYSTEM APPLICATIONS. The Company continues to evaluate the ATRIGEL(R) drug delivery system for health care applications other than periodontal disease. These include uses as biomaterials and drug delivery matrices. Some of these applications are funded by joint development agreements with other pharmaceutical and health care companies. The Company typically seeks to retain rights to any inventions, discoveries, and technology that arise in connection with such joint development projects. In addition to joint development projects co-funded by other companies, the Company conducts, at its own expense, programs to establish proof-of-concepts for a number of medical products. The specific products under development were selected from a list compiled by a health care consulting company hired by the Company to determine the most appropriate product opportunities for the ATRIGEL(R) drug delivery system. The Company hopes to enter into joint development projects with other companies relating to such products; however, no assurance can be given that any such development agreements can be negotiated or that any of the products developed by the Company alone or in joint development projects with other companies will be successfully developed for commercial use. The following is a discussion of research programs that were ongoing or initiated during 1996 by the Company itself or jointly with other companies. GROWTH FACTORS. Since 1990, the Company has been pursuing the use of its ATRIGEL(R) drug delivery system to deliver tissue growth factors for a variety of product applications. These include the regeneration of tissue lost as a result of periodontal disease, the healing of bone fractures and defects, and the treatment of dermal ulcers and other soft tissue wounds. In 1996, 6 9 the Company continued to conduct pre-clinical trials which showed that a combination of tissue growth factors could be incorporated into the ATRIGEL(R) drug delivery system and released at controlled rates for extended times. When the ATRIGEL(R) formulation was applied to a bone defect in pre-clinical studies it demonstrated biological response. The amount of new bone formed was increased significantly over that obtained in control groups. Similarly, the ATRIGEL(R) drug delivery system demonstrated that certain growth factors could be delivered during periodontal osseous flap surgery to regenerate periodontal attachment in a manner superior to controls. During 1995 and 1996, the Company completed several preclinical trials which demonstrated the effectiveness of the product and also lent direction to further development of the product in order to obtain the maximum benefit in periodontal tissue regeneration or guided bone regeneration. The Company continues to evaluate a number of different growth factors in its drug delivery system and to modify the system for better efficacy. The Company expects to continue these pre-clinical trials to select the best factors and matrix for periodontal tissue regeneration as well as healing of bone fractures. SOLID TUMORS. In 1996, the Company continued research on a project initiated in 1993 to evaluate its ATRIGEL(R) drug delivery system to deliver chemotherapeutic agents locally at the sites of solid tumors. The sustained release of these agents at the tumor site is expected to provide higher concentrations of the agent at the site of action and fewer side effects than systemic administration of the same drug. Preclinical studies have shown that a number of antitumor agents can be delivered from the ATRIGEL(R) drug delivery system directly in a tumor site and cause a reduction in the rate of tumor growth with a resultant increase in survival time. In 1995 and 1996, preliminary trials were conducted to test the biocompatibility of the ATRIGEL(R) drug delivery system by direct injection into liver tissue with a view towards evaluating the system to treat liver cancer. During 1996, the Company completed an assessment of solid tumor applications including clinical, marketing and technology parameters. The purpose of the assessment was to organize the Company's research and development effort towards identifying lead compound opportunities to be exploited. In 1996, the Company continued pharmacokinetic trials in collaboration with the Colorado State University Veterinary School to evaluate the efficacy of several ATRIGEL(R) drug delivery system formulations containing an antitumor agent to treat osteosarcoma in dogs. The pharmacokinetic trials showed that sustained release of cisplatin could be obtained for 30 days with the ATRIGEL(R) drug delivery system. These trials are still in progress to determine the maximum dose of drug that can be given without toxic effects. THE UPJOHN COMPANY. The Company has collaborated with The Upjohn Company ("Upjohn") since 1991 to evaluate its ATRIGEL(R) drug delivery system for the development of animal treatment products. During the past three years, a number of different product applications have been studied, and in 1994, Upjohn exercised its option for an exclusive license for the ATRIGEL(R) drug delivery system technology for the delivery of animal vaccines. This decision was based upon the successful results of a number of trials with the ATRIGEL(R) drug delivery system containing animal vaccines. During 1995, Upjohn initiated a number of pivotal trials in animals to evaluate the ATRIGEL(R) vaccine product for efficacy, which trials continued 7 10 in 1996. The Company intends to continue to work with Upjohn as needed to optimize these products and to obtain regulatory approval for their use in animals. ELI LILLY AND COMPANY. In 1994, the Company signed a research and development agreement with Eli Lilly and Company ("Lilly") to evaluate the potential use of the ATRIGEL(R) drug delivery system with an antipsychotic drug under development by Lilly. Atrix completed the feasibility program in 1995 and conducted additional development work in 1996. In late 1996, Lilly notified the Company that in order to expedite development of a depot delivery system for its antipsychotic drug, it intends to use a delivery system that it felt had a shorter development time to obtain approval by the FDA. GENSIA LABORATORIES, LTD. In 1995, the Company signed an exclusive worldwide license agreement to develop a product to be sold by Gensia Laboratories, Ltd ("Gensia") for the treatment of solid tumor cancers using the ATRIGEL(R) drug delivery system. Under the terms of the license, the Company initiated feasibility studies during 1995 and 1996 to characterize release rates of leuprolide acetate, an anti-cancer drug, incorporated into the ATRIGEL(R) drug delivery system. The results of preclinical trials have been encouraging and the program has moved to the next stage of pre-clinical development. A report summarizing the feasibility program was submitted to Gensia's management in December of 1996, and the Company is awaiting Gensia's decision to proceed to the next phase of development. HESKA, INC. (FORMERLY PARAVAX, INC.) In 1995, the Company signed an exclusive worldwide license agreement to develop a product to treat periodontal disease in companion animals. Under the terms of the license, the Company will develop a subgingival therapy for periodontal disease in dogs and cats, comprised of the antibiotic doxycycline and the ATRIGEL(R) drug delivery system. Heska's management expects to receive FDA permission to market this product in the United States in 1997 and in Europe in 1998. RESEARCH AND DEVELOPMENT The Company conducts the majority of its research and development activities through its own staff and facilities. The Company's research and development program encompasses the early stage of product development through the receipt of FDA clearance or approval, and the expansion of new product uses and applications. The Company has assembled a team of scientists, clinical, regulatory and quality assurance personnel with a variety of complementary skills and experiences, and conducts a broad-based research program in its facilities. The Company also employs contract research organizations, academic laboratories, independent consultants and clinical research professionals to aid in the product development process. The Company anticipates incurring significant research and development expenses in the coming years as the Company initiates commercial sales, continues its efforts to develop its present technologies, begins to move other products to the clinical testing stage and identifies future products for development. The Company's aggregate research and development expenses totaled approximately $6,667,000, $9,589,000 and $10,092,000 for calendar years 1994, 1995 8 11 and 1996, respectively. The Company expects to continue to incur substantial research and development expenses in future periods. GOVERNMENT REGULATION The research and development, manufacturing and marketing of the Company's products are subject to regulation by the FDA in the United States and by comparable authorities in other countries. These national authorities and other Federal, state and local entities regulate, among other things, research and development activities and the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of the Company's products. The Federal Food, Drug and Cosmetic Act (the "Act"), the Public Health Services Act, the Controlled Substance Act and other Federal statutes and regulations govern or influence all aspects of the Company's business. Noncompliance with applicable requirements can result in fines, criminal prosecution, recall, seizure of products, injunctions, total or partial suspension of production and refusal of the government to approve product license applications or to allow the Company to enter into government supply contracts. In addition, administrative remedies can involve the recall of products as well as the refusal of the government to approve pending applications or supplements to approved applications. The FDA also has the authority to withdraw approval of drugs in accordance with statutory due process procedures. In order to obtain FDA approval or clearance of a new product, the Company must submit proof of safety and efficacy, and demonstrate that it is capable of manufacturing the product in compliance with current Good Manufacturing Practices. In most cases, such proof entails extensive pre-clinical, clinical and laboratory tests, as well as inspections of manufacturing facilities and records. The testing, preparation of necessary applications and processing of those applications by the FDA, including site inspections of the Company's manufacturing facilities, is expensive and may take several years to complete. There can be no assurance that the FDA will act favorably or quickly in making such reviews, and significant difficulties or costs may be encountered by the Company in its efforts to obtain FDA approvals that could delay or preclude the Company from marketing any products it may develop. There can also be no assurance that the FDA will not request the submission of additional safety data. With regard to the submission of efficacy data, the FDA may at any time request the development of additional data. Based upon the data, the FDA may also limit the scope of the labeling of the product or deny the NDA. With respect to patented products or technologies, delays imposed by the governmental approval process may materially reduce the period during which the Company will have the exclusive right to exploit such patented products. The Company's products, as presently anticipated, will be regulated as either drugs (drug delivery products) or medical devices (biomaterials). Each type of product is regulated by different provisions of the Act. The FDA's authority over medical devices derives from the 1976 Medical Device Amendments, the Safe Medical Device Act of 1990 and the regulations promulgated thereunder. At least 90 days prior to commencing commercial distribution, a 9 12 pre-market notification under Section 510(k) of the law must be filed with the FDA with respect to a medical device intended for commercial distribution. After receipt of the pre-market notification, the FDA will determine whether the device is "substantially equivalent" to a device already lawfully marketed and whether the device is otherwise subject to a pre-market approval ("PMA") requirement. Devices for which pre-market notifications have been filed may not be marketed until the FDA issues an order finding the device to be substantially equivalent to an already legally marketed device which is not otherwise subject to a requirement of pre-market approval under Section 515 of the Act. Devices which are found by the FDA to be not substantially equivalent to a legally marketed device, and devices which are substantially equivalent to a device that requires pre-market approval before marketing, must submit and receive approval of a PMA before commercialization may commence. Review of a PMA is complex, typically includes both animal and human trials and may take several years to complete. Such trials must be conducted under an Investigational Device Exemption and must be monitored by an Institutional Review Board ("IRB"). In 1996, the FDA determined that the ATRISORB(R) GTR Barrier was safe and "substantially equivalent" to an already legally marketed device for its intended use, and granted a 510(k) clearance allowing the Company to market the ATRISORB(R) GTR Barrier in the United States. The regulatory requirements for marketing medical devices in the European Community (the "EC") are currently in transition as the EC's new Medical Device Directive is being implemented. Some countries do not currently require pre-market approval or notification for this type of product, while other countries do not distinguish between medical devices and drug products. The EC's Medical Device Directive transition period will end in June 1998, after which time all medical devices will require a Communaute Europeene (a "CE Mark") before they can be marketed in any EC member states. Obtaining the CE Mark requires information similar to that which is submitted to the FDA in the 510(k) notification, plus additional manufacturing and quality assurance documentation (and inspections) mandated by the International Standards Organization 9000 standards. These quality assurance programs are being implemented, and the Company intends to apply for the CE mark in 1997. Products such as the Company's ATRIDOX(TM) drug delivery system are generally regulated under the new drug and related provisions of the Act. The process required by the FDA before a drug delivery system may be marketed in the United States depends on whether the drug has existing approval for use in other dosage forms. If the drug is a new chemical entity that has not been approved, then the process includes (i) pre-clinical laboratory and animal tests, (ii) an investigational new drug ("IND") exemption which has become effective, (iii) adequate and well controlled human clinical trials to establish the safety and efficacy of the drug in its intended application and (iv) FDA approval of an NDA. If the drug has been previously approved, then the approval process is similar, except that certain toxicity tests normally required for the IND are frequently not required. Clinical trials are conducted in accordance with protocols that detail the objectives of the study, the parameters to be used to monitor safety and the efficacy criteria to be evaluated. Each protocol is submitted to the FDA as part of the IND. Each clinical study is conducted 10 13 under the auspices of an independent IRB at the institution at which the study will be conducted. The IRB will consider, among other things, ethical factors, the safety of human subjects, the protection of patient confidentiality and the possible liability of the institution. Clinical trials are typically conducted in three sequential phases, but these phases may overlap. During Phase 1, the initial introduction of the drug into healthy human subjects, the product is tested for safety, dosage tolerance, absorption, distribution, metabolism and excretion. Phase 2 involves trials in a limited patient population to (i) determine the efficacy of the product for specific, target indications, (ii) determine dosage tolerance and optimal dosage and (iii) identify possible adverse effects and safety risks. If Phase 2 evaluations demonstrate that a drug has promising therapeutic benefits and has an acceptable safety profile, Phase 3 trials are undertaken to further evaluate clinical efficacy and to further test for safety within an expanded patient population at geographically dispersed clinical study sites. A clinical plan, or "protocol," must be submitted to the FDA prior to the commencement of each clinical trial. All patients involved in the clinical trials must provide informed consent prior to their participation. The results of the clinical trials are submitted to the FDA as part of the NDA to establish the safety and effectiveness of the drug for its intended indications. The FDA may order the temporary or permanent discontinuation of clinical trials at any time if it believes that clinical subjects are being exposed to an unacceptably high safety risk or the design of the trial will not meet its stated objectives. The results of product development, pre-clinical trials and clinical trials are submitted to the FDA in an NDA for approval of the marketing and commercial shipment of the product. Although the Prescription Drug User Fee Act of 1992 requires that the FDA complete the review of 90% of NDAs submitted in 1997 within 12 months, prosecution of an NDA can take several years to complete if additional data is required. The FDA may deny an NDA if applicable regulatory criteria, including compliance with current Good Manufacturing Practices ("cGMP"), are not satisfied. The FDA may require additional clinical testing or other types of testing, or manufacturing or quality control changes. Even if such data are submitted or such changes are made, the FDA may ultimately decide that the NDA does not satisfy the criteria for approval. Following approval of an NDA, the FDA may withhold authorization to commence marketing of the drug subject to FDA inspection and clearance of records and manufacturing processes relating to the production and laboratory testing of the finished drug product. Product approvals may be withdrawn by the FDA if compliance with regulatory standards is not maintained or if new evidence demonstrating that the drug is unsafe or lacks efficacy for its intended uses becomes known after the product reaches the market. The FDA may require testing and surveillance programs to monitor the effect of proprietary drug delivery systems which have been commercialized, and has the power to prevent or limit further marketing of the product based on the results of these post-marketing surveillance programs. Each domestic drug product manufacturing establishment must be registered with, and achieve a satisfactory inspection from, the FDA. Establishments handling controlled substances 11 14 must be licensed by the United States Drug Enforcement Administration ("DEA"). Domestic manufacturing establishments are routinely subject to inspection by the FDA prior to the approval of an NDA and to biennial inspections by the FDA for cGMP compliance after an NDA has been approved. The Prescription Drug User Fee Act of 1992, enacted to expedite drug approval by providing the FDA with resources to hire additional medical reviewers, also imposes three kinds of user fees on manufacturers of NDA-approved prescription drugs. ADDITIONAL REGULATORY ISSUES Under the Drug Price Competition and Patent Term Restoration Act of 1984, a patent which claims a product, use or method of manufacture covering drugs and certain other products may be extended for up to five years to compensate the patent holder for a portion of the time required for research and FDA review of the product. This law also establishes a period of time following approval of a drug during which the FDA may not accept or approve applications for certain similar or identical drugs from other sponsors unless those sponsors provide their own safety and effectiveness data. There can be no assurance that the Company will be able to take advantage of either the patent term extension or marketing exclusivity provisions of this law. The National Institutes of Health has been requested by the Department of Health and Human Services to submit proposals for addressing potential conflicts of interest in the federally-funded biomedical research sector. Although the proposal request is aimed at establishing rules to treat potential abuses in the system without imposing unnecessary burdens and disincentives, there can be no assurance that any rules adopted will not adversely affect the Company's ability to obtain research grants. Various aspects of the Company's business and operations are regulated by a number of other governmental agencies including the Occupational Safety and Health Administration and the Securities and Exchange Commission. THIRD PARTY REIMBURSEMENT The cost of a significant portion of medical care in the United States is funded by government and private insurance programs, such as Medicare, Medicaid, health maintenance organizations and private insurers, including Blue Cross/Blue Shield plans. Governmental imposed limits on reimbursement of hospitals and other health care providers (including dental practitioners) have significantly impacted their spending budgets. Under certain government insurance programs, a health care provider is reimbursed a fixed sum for services rendered in treating a patient, regardless of the actual charge for such treatment. Private third-party reimbursement plans are also developing increasingly sophisticated methods of controlling health care costs through redesign of benefits and exploration of more cost-effective methods of delivering health care. In general, these government and private cost-containment measures have caused health care providers to be more selective in the purchase of medical products. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and there can be no assurance that adequate third-party coverage will be available. Limitations imposed by government and private insurance programs and the failure of certain 12 15 third-party payers to fully or substantially reimburse health care providers for the use of the products could have a material adverse effect on the Company. COMPETITION The biotechnology and pharmaceutical industries are characterized by rapidly evolving technology and intense competition. The Company's competitors include major pharmaceutical, chemical and specialized biotechnology companies, many of which have financial, technical and marketing resources significantly greater than those of the Company. In addition, many specialized biotechnology companies have formed collaborations with large, established pharmaceutical companies to support research, development and commercialization of products that may be competitive with those of the Company. Moreover, from time to time, there have been research reports from various sources describing other sustained release drug delivery systems for use in treating periodontal disease. Further, the Company is aware that other companies are developing products that may compete with the Company's products. There can be no assurance that product introductions or developments by others will not render the Company's products or technologies obsolete or place them at a competitive disadvantage. Products utilizing the Company's proprietary drug delivery systems are expected to compete with other products for specified indications, including drugs marketed in conventional and alternative dosage forms. New drugs or further developments in alternative drug delivery methods may provide greater therapeutic benefits for a specific drug or indication, or may offer comparable performance at lower cost, than those offered by the Company's drug delivery systems. The Company expects proprietary products approved for sale to compete primarily on the basis of product efficacy, safety, patient convenience, reliability, availability, price and patent position. There can be no assurance that product introductions or developments by others will not render the Company's expected products or technologies noncompetitive or obsolete. MARKETING AND SALES In 1996, the Company launched its first commercial product, the ATRISORB(R) GTR Barrier in certain European countries and the United States and began to develop a marketing and sales organization to market the ATRISORB(R) GTR Barrier in the United States. On December 17, 1996, the Company entered into the Block Agreement pursuant to which Block acquired North American and certain European marketing rights to the Company's first three products and improvements thereto for the treatment of periodontal disease, as follows: (i) the ATRISORB(R) GTR Barrier; (ii) ATRIDOX(TM), and (iii) ATRISORB(R) with doxycycline. As a result of the Block Agreement, the Company eliminated its marketing and sales force devoted to the United States, but will continue to develop its marketing and sales capabilities for the ATRISORB(R) GTR Barrier in Europe and for both ATRISORB(R) GTR Barrier and ATRIDOX(TM) in other worldwide markets. 13 16 MANUFACTURING The Company has limited experience in manufacturing its products on a commercial scale, although certain of its officers have had extensive experience in similar activities for other companies. The Company recently expanded and upgraded its pilot manufacturing facility. In addition to producing supplies at pilot scale for clinical trials, this facility is now producing the first commercial quantities of the ATRISORB(R) GTR Barrier. In July 1996, the Company purchased a 25,000 square foot commercial production facility and is in the process of renovating and validating the facility for the production of the ATRISORB(R) GTR Barrier, the ATRIDOX(TM) product, the Heska veterinary product and clinical study supplies for additional products in development. In connection with its research and development activities, the Company may seek to enter into collaborative arrangements with pharmaceutical or biotechnology companies to assist in funding development costs. It is anticipated that some of these collaborators are capable of and may also be responsible for commercial scale manufacturing of certain potential products. In addition, these arrangements may involve the grant by the Company of the exclusive or semi-exclusive right to sell specific products to specified market segments in particular geographic territories in exchange for up-front payments, royalties, milestone payments or other financial arrangements. The Company believes that these arrangements could be more effective in promoting and distributing certain therapeutic products, due to the extensive marketing networks and large advertising budgets of large pharmaceutical and biotechnology companies. The Company may ultimately determine to establish its own manufacturing capability for certain products, in which case it will require substantial additional funds and personnel. As an alternative to establishing its own manufacturing capabilities or entering into collaborative agreements, the Company may contract its manufacturing to an independent third party. There can be no assurance that the Company will be able to enter into any such arrangements with a collaborative partner or independent third parties on favorable terms, or at all. PATENTS AND TRADEMARKS The Company considers patent protection and proprietary position to be materially significant to its business. Since its formation, the Company has submitted one hundred and seven patent applications, of which thirty-eight were filed in the U.S. and sixty-nine were filed in foreign national or Patent Cooperation Treaty ("PCT") countries. The Company maintains eleven U.S. patents and ten foreign national or PCT patents for a total of twenty-one. In addition, the Company currently has seventeen U.S. and fifty foreign patent applications pending for various improvements and technologies. Based on its own research, seven of the submitted U.S. and eight of the foreign patent applications have been granted thus far. These issued patents relate to the purification and use of benzophenanthridine alkaloids such as sanguinarine, methods and compositions for treating periodontal diseases, polymeric systems for use in guided tissue regeneration of periodontal 14 17 tissues, and the liquid polymeric delivery systems. These patents provide protection for the Perio Product and the ATRISORB(R) GTR Barrier currently under development. In 1996, the Company had two new patents issued. These patents relate to the biodegradable in situ forming implants and the biodegradable polymer composition and process for periodontal tissue. The Company also has exclusive rights, under Amendment No. 3 to the Master Technology Transfer Agreement (the "Revised Agreement"), to patents relating to benzophenanthridine alkaloid products, including sanguinarine, and methods in all fields other than that of human oral care. These rights are based upon thirteen U.S. and a number of foreign patents owned by Vipont Pharmaceutical, Inc. These patents relate to compositions that include benzophenanthridine alkaloid and methods for potentially promoting oral hygiene and tissue health as well as methods for preparation of benzophenanthridine or sanguinaria extracts. Notwithstanding the Company's pursuit of patent protection, there is no assurance that others will not develop delivery systems, compositions and/or methods that infringe the Company's patent rights resulting from outright ownership or non-revocable exclusive licensure of patents which relate to the Company's delivery systems, composition and/or methods. In that event, such delivery systems, compositions and methods may compete with the Company's systems, compositions and methods and may adversely affect the operations of the Company. Further, there is no assurance that patent protection will afford adequate protection against competitors with similar systems, composition or methods, nor is there any assurance that the patents will not be infringed or circumvented by others. Moreover, it may be costly to pursue and to prosecute patent infringement actions against others, and such actions could hamper the business of the Company. The Company also relies on its unpatented proprietary know-how. No assurance can be given that others will not be able to develop substantially equivalent proprietary know-how or otherwise obtain access to the Company's know-how, or that the Company's rights under any patents will afford sufficient protection. In 1995, the Company registered two U.S. trademarks for use in designating its products and compositions, the ATRIGEL(R) drug delivery system and ATRISORB(R) GTR Barrier. As part of the Block Agreement, the Company transferred ownership of the ATRISORB(R) trademark in the United States and Canada to Block. In addition, in 1996 the ATRISORB(R) GTR Barrier mark was registered in Germany, and U.S. trademarks were registered for the Company name and logo. The Company has also submitted and maintains several U.S. and numerous foreign trademark and service applications for registrations of its name, logo, products and compositions. The Company expects that the Trademark Office examinations of these applications will be successful and registrations granted. 15 18 PRODUCT LIABILITY INSURANCE The Company currently has in force general and professional liability insurance with coverage limits of $3 million per year in the aggregate and $1 million per occurrence. The Company's product liability coverage limit is $5 million per year. The Company's insurance policies provide coverage on a claims made basis and are subject to annual renewal. Such insurance may not be available in the future on acceptable terms or at all. There can be no assurance that the coverage limits of such policies will be adequate. EMPLOYEES As of December 31, 1996, the Company employed ninety employees on a full-time basis and three people on a part-time basis. Of the ninety full-time employees, seventy-six are engaged in research and clinical testing and the remaining fourteen are in administrative capacities. Twenty-three employees have earned advanced degrees, including nine doctorate designations. None of the Company's employees are represented by a union or collective bargaining unit and management considers relations with employees to be good. ADDITIONAL INFORMATION Compliance with federal, state and local law regarding the discharge of materials into the environment or otherwise relating to the protection of the environment has not had, and is not expected by the Company to have, any adverse effect upon capital expenditures, earnings or the competitive position of the Company. The Company is not presently a party to any litigation or administrative proceeding with respect to its compliance with such environmental standards. In addition, the Company does not anticipate being required to expend any funds in the near future for environmental protection in connection with its operations. The Company does not believe that any aspect of its business is significantly seasonal in nature. No significant portion of the Company's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the United States Government. The Company currently obtains supplies of the polymer used in the polymer delivery system from two separate sources. Supplies of doxycycline are obtained from both domestic and foreign sources. The Company believes that, in the event that it should lose any of its suppliers of raw materials, it could locate and obtain such raw materials from other available sources without substantial adverse delay or increased expense. ITEM 2. PROPERTIES. The Company leases approximately 25,200 square feet of office and research laboratory space located in Fort Collins, Colorado, pursuant to a lease that expires on June 1, 1998. In 16 19 addition, the Company leases an additional 4,000 square feet of space at the same location for pre- clinical and initial manufacturing activities, pursuant to a lease which expires on December 1, 1999. The Company owns a 25,000 square foot manufacturing facility in Fort Collins which it acquired in July 1996. As part of the building acquisition, the Company acquired two acres of vacant land, directly adjacent to the building. This land could be used for possible future development or expansion. The Company owns substantially all of its laboratory and manufacturing equipment, which it considers to be adequate for its research, development and testing requirements for the foreseeable future. ITEM 3. LEGAL PROCEEDINGS. The Company is not a party to any legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matter was submitted to a vote of the Company's security holders through the solicitation of proxies during the fourth quarter of the Company's most recent fiscal year. 17 20 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The common stock is traded on The Nasdaq Stock Market under the symbol "ATRX." The following table sets forth, for the fiscal periods indicated, the range of high and low sales price per share of the common stock, as reported on The Nasdaq Stock Market:
High Low ---- --- 1996: First Quarter $15 1/2 $6 1/4 Second Quarter 15 1/2 8 1/4 Third Quarter 12 5/8 6 7/8 Fourth Quarter 12 3/4 8 3/4 1995: First Quarter $ 7 $5 3/8 Second Quarter 8 1/8 6 3/8 Third Quarter 8 5 1/2 Fourth Quarter 7 3/4 4 7/8
As of March 3, 1997, there were approximately 3,397 holders of record of common stock. The Company has never paid cash dividends. The Company currently anticipates that it will retain all available funds for use in the operation of its business and does not anticipate paying any cash dividends in the foreseeable future. 18 21 ITEM 6. SELECTED FINANCIAL DATA. The financial data presented below is derived from the financial statements of the Company, which has been audited and reported upon by Deloitte & Touche LLP, independent auditors. The selected financial information set forth in the table below is not necessarily indicative of the results of future operations of the Company and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the financial statements, related notes and independent auditors' report, included herein.
Three Year Ended Year Ended Year Ended Months Year Ended Year Ended Dec. 31, Dec. 31, Dec. 31, Ended Dec. Sept. 30, Sept. 30, 1996 1995 1994 31, 1993 1993 1992 ---------- ---------- ---------- ---------- ---------- ---------- (In thousands, except share data) SUMMARY OF OPERATIONS: Total revenue $ 2,896 $ 1,562 $ 1,815 $ 539 $ 3,092 $ 3,161 Total expenses 14,328 14,220 7,355 1,546 6,791 10,061 Net loss (11,432) (12,658) (5,540) (1,007) (3,698) (6,900) Net loss per common share (1.13) (1.58) (0.72) (0.13) (0.48) (0.94) Weighted average shares 10,147 8,002 7,741 7,721 7,695 7,340 outstanding BALANCE SHEET DATA: Working capital $ 24,669 $ 10,913 $ 12,616 $ 13,478 $ 9,372 $ 17,779 Total assets 38,463 14,894 22,006 27,912 29,074 36,515 Long-term obligations -- -- -- -- -- 4,000 Shareholders' equity 30,284 12,807 21,191 26,978 28,118 31,529
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW The statements contained in this report, if not historical, are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and involve risks and uncertainties that could cause actual results to differ materially from the financial results described in such forward looking statements. These risks and uncertainties include, among others, whether the Company will receive regulatory approval to market any products besides the ATRISORB(R) GTR Barrier product, the results of current and future clinical trials, the time, costs and expenses associated with the regulatory approval process for products. The success of the Company's business operations is in turn dependent on factors such as the effectiveness of the Company's marketing strategies to market its current and any future products, the 19 22 Company's ability to manufacture products on a commercial scale, the appeal of the Company's mix of products, the Company's success at entering into and collaborating with others to conduct effective strategic alliances and joint ventures, general competitive conditions within the biotechnology and drug delivery industry and general economic conditions. Further, any forward looking statement or statements speak only as of the date on which such statement or statements were made, and the Company undertakes no obligation to update any forward looking statement or statements to reflect events or circumstances after the date on which such statement or statements were made. Since its inception, the Company has devoted its efforts and resources primarily to the research and development of periodontal products. Prior to 1996, the Company's revenues have been derived from interest income and payments from unaffiliated third parties for contract research. In March, 1996, the Company received clearance from the FDA to market its first dental product, the ATRISORB(R) GTR Barrier. Shortly thereafter, the Company commenced sales of the ATRISORB(R) GTR Barrier in the United States and certain European countries and began recording sales revenues. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Total revenue for the year ended December 31, 1996, was approximately $2,896,000 compared to approximately $1,562,000 for the year ended December 31, 1995, representing an 85.3% increase. The increase in total revenue was primarily due to increases in sales, contract revenue and interest income. The Company had sales of approximately $636,000 during the year ended December 31, 1996, primarily representing sales of the ATRISORB(R) GTR Barrier during 1996. The Company had no product sales during 1995. Contract revenue was approximately $1,004,000 for the year ended December 31, 1996, compared to approximately $580,000 for the year ended December 31, 1995, representing a 73% increase. Contract revenue represents revenue the Company received from grants and from unaffiliated third parties for performing contract research and development activities utilizing the ATRIGEL(R) drug delivery system. The increased revenues are primarily due to the Company being awarded two federal research grants during the current year. Interest income for the year ended December 31, 1996, was approximately $1,204,000 compared to approximately $987,000 for the year ended December 31, 1995, representing a 22% increase. The increase in interest income was due to an increase in principal investments during 1996 as a result of the receipt of approximately $27,844,000 in proceeds from the Company's common stock offering completed in May 1996. 20 23 Cost of goods sold were $364,000, for the year ended December 31, 1996 were primarily associated with the launch of the Company's first dental product, the ATRISORB(R) GTR Barrier product in the United States and certain European countries. The Company did not record cost of goods sold for the year ended December 31, 1995. Research and development - ATRIDOX(TM) product expenses for the year ended December 31, 1996, were approximately $5,268,000 compared to approximately $5,684,000 for the year ended December 31, 1995, representing a 7% decrease due to the completion of Phase 3 clinical trials on ATRIDOX(TM) in May 1996. Research and development - other expenses, which included activities for the ATRISORB(R) GTR Barrier product and other research activities for the year ended December 31, 1996, were approximately $4,824,000 for the year ended December 31, 1996 compared to approximately $3,905,000 for the year ended December 31, 1995, representing a 24% increase. The increase was primarily a result of hiring additional personnel in the Manufacturing and Quality Assurance/Quality Control departments, and expenses related to federal grants received in 1996. Administrative and marketing expenses were approximately $3,872,000 for the year ended December 31, 1996, compared to $830,000 for the year ended December 31, 1995, representing a 367% increase. The primary reasons for this increase were expenses related to the initiation of marketing and sales efforts related to the ATRISORB(R) GTR Barrier product. This expense is expected to decrease in future years with the signing of the Block Agreement. During 1996, the Company recorded a one-time non-cash charge of approximately $585,000 for compensation expense associated with the cancellation of certain employee incentive stock options with a five year term and the issuance of new non-qualified stock options which extended the term to ten years. The Company recorded a net loss of approximately $11,432,000 for the year ended December 31, 1996, compared to a net loss of $12,658,000 for the year ended December 31, 1995, representing a 10% decrease. However, exclusive of a one-time charge of approximately $3,802,000 associated with the acquisition of Vipont Royalty Income Fund, Ltd. (the "Acquisition"), the prior year loss would be approximately $8,856,000. Therefore, the loss for the year ended December 31, 1996 actually represents a 29% increase over the year ended December 31, 1995. The increased loss was primarily due to expenses associated with the commencement of marketing and manufacturing activities related to the ATRISORB(R) GTR Barrier product. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Contract revenue represented revenue the Company received from grants and from unaffiliated third parties for performing contract research and development activities for the 21 24 ATRIGEL(R) drug delivery system, and was approximately $558,000 for the year ended December 31, 1995, compared to approximately $713,000 for the year ended December 31, 1994. The decrease in contract revenue was a result of the Company completing a number of contracts that were in progress in the comparable period, while contracts initiated in the period ended December 31, 1995 generated less revenue. Interest income for the year ended December 31, 1995, was approximately $987,000 compared to approximately $1,320,000 for the year ended December 31, 1994. Interest income decreased due to a reduction in principal balances of investments as a result of the funds being used in general operations. The majority of the funds were invested in U.S. government bond funds, long-term U.S. government and government agency investments. The remaining cash and cash equivalents were invested in interest bearing accounts to fund the Company's short-term operations. A loss on sale of marketable securities for the year ended December 31, 1995, was approximately $5,000 compared to a loss of approximately $218,000 for the year ended December 31, 1994. The loss for the year ended December 31, 1995 was substantially less than the comparable period due to improved market conditions at the time at which the securities were sold. The prior period loss resulted from the sale of securities, available-for-sale at a time when the bond market had substantially declined compared to the period when the securities were purchased. The proceeds from the sale of marketable securities were used to fund normal operations. Research and development - ATRIDOX(TM) product expenses for the year ended December 31, 1995, were approximately $5,684,000 compared to approximately $2,765,000 for the year ended December 31, 1994. The increase was significant and resulted from the continuation of two Phase 3 clinical trials which began in January 1995. Administrative and marketing expenses increased to approximately $830,000 during the year ended December 31, 1995, from approximately $688,000 for the year ended December 31, 1994. The increase resulted primarily from expenses associated with efforts to obtain a corporate marketing partner, legal fees and expenses associated with the recruitment and hiring of new employees. Acquisition of rights for approximately $3,802,000 for the year ended December 31, 1995 represented (i) the issuance of 550,868 shares of common stock valued at approximately $6.40 per share in the Acquisition and (ii) approximately $278,000 in expenses related to the Acquisition. The Company recorded a net loss of approximately $12,658,000 for the year ended December 31, 1995, compared to a net loss of approximately $5,540,000 for the year ended December 31, 1994. The loss for the year ended December 31, 1995 was higher primarily due to a one-time charge of $3,802,000 associated with the Acquisition. The current period loss was further increased due to decreased revenues from research contracts, increased expenses 22 25 associated with the continuation of two, Phase 3 clinical trials for the ATRIDOX(TM) product, and additional research and development on the ATRISORB(R) GTR Barrier and the ATRIGEL(R) drug delivery system. LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1996, the Company had cash and cash equivalents of approximately $18,368,000, marketable securities available-for-sale of approximately $6,040,000, $7,000,000 in restricted cash, and other current assets of approximately $1,441,000, for total current assets of approximately $32,849,000. Current liabilities were approximately $8,180,000, which resulted in working capital of approximately $24,669,000. Restricted cash represents $7,000,000 received by the Company from Block as a payment under the Block Agreement for the sale of marketing rights to the ATRISORB(R) GTR Barrier, which was placed in escrow until February 1, 1997. Accordingly, the Company deferred recognition of the revenue until 1997, and the $7,000,000 payment is included in restricted cash equivalents as of December 31, 1996. During the year ended December 31, 1996, the Company used net cash from operating activities of approximately $11,516,000. This was primarily a result of a net loss of approximately $11,432,000. Net cash provided by investing activities was approximately $517,000 during the year ended December 31, 1996. The principal reason for the increase was from the sale of marketable securities and the proceeds from maturities of marketable securities to fund normal operating activities reduced by the acquisitions of property, plant and equipment. Net cash provided by financing activities was approximately $28,442,000 from the issuance and sale of 2,587,500 shares of common stock which was completed in May 1996. The Company's long-term capital expenditure requirements will depend on numerous factors, including the progress of the Company's research and development programs, the time required to file and process regulatory approval applications, the development of the Company's commercial manufacturing facilities, the ability of the Company to obtain additional licensing arrangements, and the demand for the Company's products, if and when approved. The Company expended approximately $4,353,000 for property, plant and equipment and leasehold improvements and approximately $221,000 for patent development in the year ended December 31, 1996 compared to $715,000 and $167,000, respectively, for the year ended December 31, 1995. The increase is a result of the purchase of the new manufacturing facility and equipment during 1996. The Company expects to continue to incur substantial expenditures for research and development, testing, regulatory compliance and to hire additional management, scientific, manufacturing and administrative personnel. The Company will also continue to expend a 23 26 significant amount of funds in its ongoing clinical studies. These expenses will be partially offset by a decrease in sales and marketing expenses as a result of the Block Agreement and potential fees and royalties. Further, the Company expects to continue to incur substantial operating losses for the foreseeable future. Depending on the results of the Company's research and development activities, the Company may determine to accelerate or expand its efforts in one or more of its proposed areas and may therefore require additional funds earlier than presently anticipated. Management believes that under the current operating plan its existing capital resources will be sufficient to meet its operating expenses and capital expenditure requirements for the foreseeable future. Management currently has no commitments for raising additional capital. The Company's long-term success depends on sales of products that must undergo an extensive regulatory approval process. There can be no assurance that regulatory agency approvals will be obtained for any products or drugs developed or discovered by the Company, or that the Company will be successful in developing any products or drugs. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The financial statements of the Company required by Regulation S-X are attached to this Report. Reference is made to Item 14 below for an index to the financial statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information contained in the Company's definitive proxy statement for the Company's Annual Meeting of Shareholders scheduled to be held on April 27,1997 regarding directors and officers of the Company and compliance with Section 16(a) of the Exchange Act is incorporated herein by reference in response to this item. ITEM 11. EXECUTIVE COMPENSATION. The information contained in the Company's definitive proxy statement for the Company's Annual Meeting of Shareholders scheduled to be held on April 27,1997 regarding executive compensation is incorporated herein by reference in response to this item. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information in the Company's definitive proxy statement for the Company's Annual Meeting of Shareholders scheduled to be held on April 27,1997 regarding security ownership 24 27 of certain beneficial owners and management is hereby incorporated herein by reference in response to this item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information in the Company's definitive proxy statement for the Company's Annual Meeting of Shareholders scheduled to be held on April 27,1997 regarding certain relationships and related transactions is hereby incorporated herein by reference in response to this item. 25 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents of the Company are filed as part of this Report: 1. Financial Statements Report of Independent Auditors Balance Sheets - December 31, 1996 and 1995 Statements of Operations - Years Ended December 31, 1996, 1995 and 1994 Statements of Changes in Shareholders' Equity - Years Ended December 31, 1996, 1995 and 1994 Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994 Notes to the Financial Statements 2. Financial Statement Schedules Schedules for which provision is made in the applicable regulations of the Securities and Exchange Commission have been omitted because they are not required under the related instructions or the information related is contained elsewhere in the financial statements. 3. Exhibits Exhibit No. Description 3.1 Amended and Restated Certificate of Incorporation(1) 3.2 Amended and Restated Bylaws(2) 4.1 Form of Common Stock Certificate(3) 10.1 Employment Agreement between Registrant and John E. Urheim dated June 4, 1993(3) 10.2 Amendment No. 3 and Restatement of Master Technology Transfer Agreement between Registrant and Vipont Pharmaceutical, Inc.(2) 10.3 Incentive Stock Option Agreement(2) 26 29 10.4 Agreement between Registrant and Vipont Pharmaceutical, Inc.(2) 10.5 Termination Agreement dated September 27, 1995 between Registrant and Atrix, L.P.(4) 10.6 Lease Agreement dated May 11, 1991 between the Registrant and GB Ventures* 10.7 Agreement of Purchase and Sale dated June 11, 1996 between the Registrant and D.C. Pitcairn Holdings, Inc.* 10.8 Agreement dated December 16, 1996 between the Registrant and Block Drug Corporation(5) 23 Consent of Deloitte & Touche LLP* 27 Financial Data Schedule* - ------------------- (1) Incorporated by reference to Registrant's Current Report on Form 8-K, dated December 1, 1989, as filed with the Securities and Exchange Commission on December 15, 1989. (2) Incorporated by reference to the Registrant's Registration Statement on Form S-1, file number 33-34882. (3) Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1993 as filed with the Securities and Exchange Commission. (4) Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 as filed with the Securities and Exchange Commission. (5) Incorporated by reference to Registrant's Current Report on Form 8-K dated December 16, 1996, as filed with the Securities and Exchange Commission. * Filed herewith. (b) Reports on Form 8-K: 1. A Current Report on Form 8-K, dated December 17, 1996, was filed with the Securities and Exchange Commission under Item 5 regarding an agreement between Atrix Laboratories, Inc. and Block Drug Corporation. No other reports on Form 8-K were filed during the period ended December 31, 1996. 27 30 SIGNATURES Pursuant to the requirements of Section 13 and 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. ATRIX LABORATORIES, INC. (Registrant) March 7, 1997 By: /s/ John E. Urheim ------------------------ John E. Urheim Vice Chairman of the Board 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. /s/ David R. Bethune Director March 7, 1997 - -------------------------- David R. Bethune /s/ H. Stuart Campbell Director March 7, 1997 - -------------------------- H. Stuart Campbell /s/ Dr. D. Walter Cohen Director March 7, 1997 - -------------------------- Dr. D. Walter Cohen /s/ Dr. Charles P. Cox Vice President of New March 7, 1997 - -------------------------- Business Development Dr. Charles P. Cox /s/ Michael R. Duncan Vice President of March 7, 1997 - -------------------------- Manufacturing Michael R. Duncan /s/ Dr. Richard L. Dunn Vice President of Drug March 7, 1997 - -------------------------- Delivery Research Dr. Richard L. Dunn /s/ Dr. J. Steven Garrett Vice President of Dental March 7, 1997 - -------------------------- Clinical Research Dr. J. Steven Garrett /s/ Elaine M. Gazdeck Vice President of Regulatory March 7, 1997 - ---------------------------- Affairs & Quality Assurance Elaine M. Gazdeck 31 /s/ Dr. Jere E. Goyan Director March 7, 1997 - ---------------------------- Dr. Jere E. Goyan /s/ Dr. R. Bruce Merrifield Director March 7, 1997 - ---------------------------- Dr. R. Bruce Merrifield /s/ C. Rodney O'Connor Director March 7, 1997 - ---------------------------- C. Rodney O'Connor /s/ William C. O'Neil, Jr. Chairman of the Board of March 7, 1997 - ---------------------------- Directors William C. O'Neil, Jr. /s/ Rees M. Orland Vice President of Marketing March 7, 1997 - ---------------------------- and Sales Rees M. Orland /s/ Brian G. Richmond Corporate Controller and March 7, 1997 - ---------------------------- Assistant Secretary Brian G. Richmond /s/ Dr. G. Lee Southard President, Chief Scientific March 7, 1997 - ---------------------------- Officer and Director Dr. G. Lee Southard /s/ John E. Urheim Vice Chairman of the Board March 7, 1997 - ---------------------------- of Directors and Chief John E. Urheim Executive Officer 32 FINANCIAL STATEMENT INDEX Page ---- INDEPENDENT AUDITORS' REPORT F-2 FINANCIAL STATEMENTS: Balance Sheets - December 31, 1996 and 1995 F-3 Statements of Operations - Years Ended December 31, 1996, 1995 and 1994 F-4 Statements of Changes in Shareholders' Equity - Years Ended December 31, 1996, 1995 and 1994 F-5 Statements of Cash Flows - Years Ended December 31, 1996, 1995 and 1994 F-6 NOTES TO THE FINANCIAL STATEMENTS F-7 - F-16 F-1 33 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Atrix Laboratories, Inc. Fort Collins, Colorado We have audited the accompanying balance sheets of Atrix Laboratories, Inc. (the "Company") as of December 31, 1996 and 1995, and the related statements of operations, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1996 and 1995, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Denver, Colorado January 24, 1997 F-2 34 ATRIX LABORATORIES, INC. BALANCE SHEETS ASSETS
December 31, December 31, 1996 1995 ----------------------------- CURRENT ASSETS: Cash and cash equivalents $ 18,368,472 $ 925,487 Restricted cash equivalents 7,000,000 -- Marketable securities, at fair value 6,040,389 10,996,847 Accounts receivable, net of allowance for doubtful accounts of $10,000 in 1996 and $0 in 1995 681,290 190,665 Interest receivable 154,128 112,303 Inventories 303,505 202,264 Prepaid expenses and deposits 301,321 572,751 ----------------------------- Total current assets 32,849,105 13,000,317 ----------------------------- PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment 5,888,007 1,847,164 Leasehold improvements 565,608 506,190 ----------------------------- Total 6,453,615 2,353,354 Accumulated depreciation and amortization (1,687,056) (1,133,864) ----------------------------- Property, plant and equipment, net 4,766,559 1,219,490 ----------------------------- OTHER ASSETS: Intangible assets, net of accumulated amortization of $69,624 and $52,240 847,830 674,116 ----------------------------- TOTAL $ 38,463,494 $ 14,893,923 ============================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable - trade $ 933,147 $ 1,862,850 Accrued salaries and payroll taxes 88,868 72,199 Other accrued liabilities 155,657 152,108 Deferred revenue 7,002,192 -- ----------------------------- Total current liabilities 8,179,864 2,087,157 ----------------------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, $.001 par value; 5,000,000 shares authorized, none issued or outstanding Common stock, $.001 par value; 25,000,000 shares authorized; 11,113,624 and 8,433,296 shares issued and outstanding 11,114 8,433 Additional paid-in capital 72,913,274 43,889,473 Unrealized holding loss on marketable securities (152,641) (35,176) Accumulated deficit (42,488,117) (31,055,964) ----------------------------- Total shareholders' equity 30,283,630 12,806,766 ----------------------------- TOTAL $ 38,463,494 $ 14,893,923 =============================
See notes to the financial statements F-3 35 ATRIX LABORATORIES, INC. STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1996 1995 1994 --------------------------------------------- REVENUE: Sales $ 635,517 $ -- $ -- Contract revenue 1,004,201 580,164 713,112 Interest income 1,204,352 986,995 1,320,258 Gain (loss) on sale of marketable securities 36,419 (4,895) (218,043) Other income 15,036 -- -- --------------------------------------------- Total revenue 2,895,525 1,562,264 1,815,327 --------------------------------------------- EXPENSES: Cost of goods sold 363,517 -- -- Research and development - ATRIDOX(TM)product 5,268,070 5,683,805 2,764,587 - Other 4,823,666 3,904,730 3,902,480 Administrative and marketing 3,872,425 829,509 688,122 Acquisition of rights -- 3,802,491 -- --------------------------------------------- Total expenses 14,327,678 14,220,535 7,355,189 --------------------------------------------- NET LOSS $(11,432,153) $(12,658,271) $(5,539,862) ============================================= NET LOSS PER COMMON SHARE $ (1.13) $ (1.58) $ (0.72) ============================================= WEIGHTED AVERAGE SHARES OUTSTANDING 10,146,703 8,001,985 7,740,981 =============================================
See notes to the financial statements. F-4 36 ATRIX LABORATORIES, INC. STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Additional Unrealized Total Paid-in Capital Holding Gain Accumulated Shareholders' Shares Amount (Loss) Deficit Equity ----------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1993 7,721,023 $ 7,721 $39,902,248 $ (74,003) $(12,857,831) $ 26,978,135 Exercise of stock options 14,080 14 35,340 -- -- 35,354 Issuance of common stock for warrants 7,975 8 39,867 -- -- 39,875 Unrealized holding loss -- -- -- (322,962) -- (322,962) Net loss for the year -- -- -- -- (5,539,862) (5,539,862) ----------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1994 7,743,078 7,743 39,977,455 (396,965) (18,397,693) 21,190,540 Exercise of stock options 139,350 139 391,611 -- -- 391,750 Acquisition of rights 550,868 551 3,520,407 -- -- 3,520,958 Unrealized holding gain -- -- -- 361,789 -- 361,789 Net loss for the year -- -- -- -- (12,658,271) (12,658,271) ----------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 8,433,296 8,433 43,889,473 (35,176) (31,055,964) 12,806,766 Exercise of stock options 92,828 93 597,824 -- -- 597,917 Issuance of common stock for cash 2,587,500 2,588 27,841,389 -- -- 27,843,977 Unrealized holding loss -- -- -- (117,465) -- (117,465) Compensation-stock options -- -- 584,588 -- -- 584,588 Net loss for the year -- -- -- -- (11,432,153) (11,432,153) ----------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1996 11,113,624 $11,114 $72,913,274 $(152,641) $(42,488,117) $ 30,283,630 ===================================================================================
See notes to the financial statements. F-5 37 ATRIX LABORATORIES, INC. STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1996 1995 1994 ============================================= CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(11,432,153) $(12,658,271) $(5,539,862) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 554,595 369,663 277,075 (Gain) on sale of equipment (3,017) -- -- Amortization of patents 17,384 15,175 13,632 Amortization of bond premiums 39,239 241,623 360,763 Gain loss on sale of marketable securities (36,419) 4,895 218,043 Write-off of patents 29,579 5,506 134,380 Acquisition of rights through issuance of common stock -- 3,520,958 -- Compensation - stock options 584,588 -- -- Net changes in current assets and liabilities: Restricted cash equivalents (7,000,000) -- -- Accounts receivable (490,625) (97,196) (62,176) Interest receivable (41,825) 28,545 17,035 Inventories (101,241) (202,264) -- Prepaid expenses and deposits 271,430 (453,649) 43,199 Accounts payable - trade (929,703) 1,381,583 (18,134) Accrued salaries and payroll taxes 16,669 9,199 10,412 Other accrued liabilities 3,549 (43,707) (32,106) Deferred revenue 7,002,192 (75,000) (79,357) --------------------------------------------- Net cash used in operating activities (11,515,758) (7,952,940) (4,657,096) --------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment (4,293,064) (577,342) (312,294) Acquisition of leasehold improvements (59,418) (137,339) (27,055) Investment in intangible assets (220,677) (167,157) (157,829) Proceeds from sale of property, plant, and equipment 253,835 -- -- Proceeds from maturity of marketable securities 1,000,000 5,185,800 5,000,000 Proceeds from sale of marketable securities 4,070,501 2,533,283 4,848,194 Investment in marketable securities (234,328) (230,843) (3,478,191) --------------------------------------------- Net cash provided by investing activities 516,849 6,606,402 5,872,825 --------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock and exercise of stock options 28,441,894 391,750 75,229 --------------------------------------------- Net cash provided by financing activities 28,441,894 391,750 75,229 --------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,442,985 (954,788) 1,290,958 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 925,487 1,880,275 589,317 --------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,368,472 $ 925,487 $ 1,880,275 =============================================
See notes to the financial statements. F-6 38 ATRIX LABORATORIES, INC. NOTES TO THE FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Atrix Laboratories, Inc. (the "Company") was incorporated in 1986. Its principal business is the research and development of a broad range of medical, dental and veterinary products based upon a biodegradable release drug delivery system. The majority of its products are in either the research, development, or clinical stage. The Company commenced sales of its first product, the ATRISORB(R) GTR Barrier in both the United States and Europe during 1996. CASH AND CASH EQUIVALENTS Cash equivalents include highly liquid investments with an original maturity of three months or less. RESTRICTED CASH EQUIVALENTS Restricted cash equivalents consists of highly liquid investments with an original maturity of three months or less. MARKETABLE SECURITIES Marketable securities are classified as available-for-sale and carried at fair value with the unrealized holding gain or loss included in shareholders' equity. Premiums and discounts associated with bonds are amortized using the effective interest rate method. INVENTORIES Inventories are stated at the lower of cost, determined by the first-in, first out method, or market. The components of inventories as of December 31, 1996 and 1995 are as follows:
1996 1995 ---- ---- Raw Materials $228,533 $155,632 Work In Progress 13,435 46,632 Finished Goods 61,537 -- -------- -------- $303,505 $202,264 ======== ========
PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful life of the assets. Leasehold improvements are amortized over the term of the related lease. F-7 39 Betterments, renewals and extraordinary repairs that extend the life of an asset are capitalized; other repairs and maintenance are expensed. Repairs and maintenance expense was $93,072, $83,106 and $72,865 for the years ended December 31, 1996, 1995 and 1994 respectively. INTANGIBLE ASSETS Certain technology rights acquired from the Company's former parent, Vipont Pharmaceutical, Inc., a wholly owned subsidiary of Colgate-Palmolive Company, were transferred at cost less accumulated amortization and are being amortized on a straight-line basis over their estimated useful life. Also included in intangible assets are the legal costs incurred to obtain patents. Upon receiving a determination that the Company's claims have been approved, these costs are amortized over the patent's estimated useful life commencing with the approval of the patent. Costs associated with patents are expensed upon the determination that such costs are not recoverable. REVENUE RECOGNITION The Company recognizes revenue on sales at the time of shipment. Revenue is recognized on research contracts as research work is performed and costs are incurred. Deferred revenue is recorded with respect to payments received that relate to research activities to be performed in subsequent periods. RESEARCH AND DEVELOPMENT Costs incurred in connection with research and development activities are expensed as incurred. These costs consist of direct and indirect costs associated with specific projects as well as fees paid to various entities that perform certain research on behalf of the Company. LOSS PER COMMON SHARE Net loss per common share is computed by dividing net loss by the weighted average number of shares outstanding during the period. The computation of fully diluted net loss per share was antidilutive in each of the periods presented; therefore, the amounts reported for primary and fully diluted loss per share are the same. 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. F-8 40 STOCK OPTION PLANS The Company accounts for stock-based compensation to employees and directors using the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. The Company accounts for stock-based compensation to non-employees in accordance with Statements of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." INCOME TAXES The Company accounts for income taxes in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between the financial statement basis and the income tax basis of assets and liabilities that will result in taxable or deductible amounts in the future. Such deferred income tax liability computations are based on enacted tax laws and rates applicable to the years in which the differences are expected to affect taxable income. A valuation allowance is established when necessary to reduce deferred income tax assets to the amounts expected to be realized. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform with the current year's presentation. 2. MARKETABLE SECURITIES As of December 31, 1996 marketable securities consist of the following:
Estimated Number of shares/ Fair Principal Amount Cost Value ----------------- ---------- --------- U.S. Government and Agency Bond Funds Thornburg Fund 38,450 $ 486,327 $ 472,936 Pimco Fund 386,542 3,676,706 3,544,584 --------- ---------- ---------- Total 424,992 4,163,033 4,017,520 U.S. Government and Agency Bonds 2,025,000 2,030,000 2,022,872 --------- ---------- ---------- Total 2,449,992 $6,193,033 $6,040,392 ========= ========== ==========
F-9 41 As of December 31, 1995 marketable securities consist of the following:
Estimated Number of shares/ Fair Principal Amount Cost Value ----------------- ----------- ----------- U.S. Government and Agency Bond Funds Thornburg Fund 36,161 $ 458,151 $ 453,461 Pimco Fund 363,720 3,470,553 3,422,601 --------- ----------- ----------- Total 399,881 3,928,704 3,876,062 U.S. Government and Agency Bonds 7,025,000 7,103,319 7,120,785 --------- ----------- ----------- Total 7,424,881 $11,032,023 $10,996,847 ========= =========== ===========
As of December 31, 1996 gross unrealized gains and losses pertaining to marketable securities are $0 and $152,641, respectively. 3. ACQUISITION OF RIGHTS The Company was the sole general partner of Vipont Royalty Income Fund, Ltd., a Colorado limited partnership (the "Partnership"). The primary asset of the Partnership was its right to receive payments from the Company based on royalties and/or proceeds from the sale of rights relating to the ATRIDOX(TM) product, if any, pursuant to certain agreements (the "Agreements") between the Company and the Partnership. On September 27, 1995, the limited partners (the "Limited Partners") of the Partnership approved the merger (the "Merger"), of the Partnership with and into Atrix, L.P., a Colorado limited partnership ("Atrix, L.P."). The Company was the sole limited partner of Atrix, L.P. AtrixSub, a Colorado corporation and a wholly-owned subsidiary of the Company, was the sole general partner of Atrix, L.P. The Company determined the value of the Partnership using an income valuation approach based on projected royalty payments from projected sales of the ATRIDOX(TM) product. The Company issued 550,868 shares of common stock, valued at $6.40 per share for purposes of the Merger, for a total consideration of $3,524,000. Additional expenses related to the Merger of approximately $278,000 were paid by the Company. The total cost of acquiring the Partnership rights of approximately $3,802,000 was considered a research and development cost and accordingly, was expensed in 1995. Immediately following the Merger, the Agreements were terminated pursuant to a Termination Agreement dated September 27, 1995 entered into between the Company and Atrix, L.P. Subsequent to the Merger, Atrix, L.P. and AtrixSub were dissolved. F-10 42 4. STOCK OPTION PLANS As of December 31, 1996, the Company has two stock-based compensation plans, which are discussed below. Performance Stock Option Plan The 1987 Performance Stock Option Plan, as amended and restated in 1992 (The "Plan") permits the granting of both incentive stock options, as defined under Section 422 of the Internal Revenue Code, and non-qualified stock options to employees, officers and directors. The exercise price of each option, which have a maximum ten year life, is equal to the market price of the Company's common stock on the date of grant. The Company accounts for the Plan using the intrinsic value method in accordance with APB No. 25 and has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation expense has been recognized for the Plan. Had compensation cost for the Plan been determined based on the fair value at the grant dates of awards under the Plan consistent with SFAS No. 123, the Company's net loss and loss per share would have been reduced to the pro forma amounts indicated below:
1996 1995 -------------- -------------- Net income - as reported $ (11,432,153) $ (12,658,271) ============== ============== - pro forma (12,188,993) (12,858,329) ============== ============== Earnings per share - as reported (1.13) (1.58) - pro forma (1.20) (1.61)
The Company has reserved 1,500,000 of its authorized but unissued common stock for stock options to be granted under the Plan. Under the terms of the Plan, options are not exercisable for a period of one to three years from the date of grant. The exercise price of all options is the closing bid price of the stock on the date of grant. There are 71,973 shares which remain available under the plan for future employee stock option grants. The fair value of options granted under the Plan was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used for grants in 1996 and 1995: no dividend yield, expected volatility of 37.8% for 1996 and 66.1% for 1995, risk free interest rate of 7.0%, and expected life of 5 years. F-11 43 The following table summarizes information on stock option activity for the Plan:
Weighted Number of Exercise Price Average Shares Per Share Exercise Price --------- -------------- -------------- Options outstanding, December 31, 1993 845,792 $ .50 - 20.75 $ 6.35 Options granted 19,000 6.13 - 9.13 6.96 Options canceled or expired (58,850) 5.88 - 14.00 10.24 Options exercised (14,080) .50 - 3.75 2.51 -------- Options outstanding, December 31, 1994 791,862 .50 - 20.75 6.15 Options granted 153,088 6.63 - 6.88 5.05 Options canceled or expired (45,345) 5.88 - 15.88 7.95 Options exercised (139,350) .50 - 5.88 2.81 -------- Options outstanding, December 31, 1995 760,255 .50 - 20.75 6.64 Options granted 602,574 .50 - 14.00 8.64 Options canceled or expired (408,580) 5.88 - 20.75 8.58 Options exercised (92,828) .50 - 9.88 6.44 -------- Options outstanding, December 31, 1996 861,421 .50 - 14.00 7.14 ======== Options outstanding are available for exercise as follows: Currently Exercisable 546,657 $ 6.20 1997 125,090 8.46 1998 118,924 8.52 1999 70,750 9.74 -------- Total 861,421 7.14 ========
On November 18, 1996, the Company canceled certain incentive and non-qualified stock options with a five year term and issued new non-qualified stock options which extended the original term to ten years. The effect of this cancellation and reissuance was a $584,588 charge to compensation expense during 1996. F-12 44 The following table summarizes information about stock options outstanding under the Plan as of December 31, 1996:
WEIGHTED WEIGHTED NUMBER WEIGHTED AVERAGE AVERAGE NUMBER AVERAGE EXERCISE RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE AT PRICE EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE PRICE 12/31/96 EXERCISABLE ==================================================================================================== $0.50 72,200 2 years $ 0.50 72,200 $ 0.50 0.50 56,000 3 years 0.50 56,000 0.50 6.13 1,000 3 years 6.13 667 6.13 6.63 - 6.88 144,523 8 years 6.74 48,174 6.74 10.00 - 12.38 63,955 9 years 11.62 -- -- 6.50 - 14.00 482,975 4 years 8.54 328,847 8.38 5.88 40,768 9 years 5.88 40,769 5.88 - ---------------------------------------------------------------------------------------------------- $0.50 to 14.00 861,421 5.05 years $ 7.14 546,657 $ 6.20 ====================================================================================================
Non-qualified Stock Option Plan The Company has reserved 100,000 of its authorized but unissued common stock for stock options to be granted to outside consultants under its Non-qualified Stock Option Plan (the "Non-qualified Plan"). The option price and exercisability of options granted under the Non-qualified Plan are set by the Compensation Committee. The exercise price of all options granted under the Non-qualified Plan currently outstanding is the closing market price at the date of grant. There are 43,020 shares which remain available under the Non-qualified Plan for future stock option grants. The fair value of options granted under the Non-qualified Plan was estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions used in 1996 and 1995: no dividend yield, expected volatility of 37.79% for 1996 and 66.1% for 1995, risk free interest rate of 7.0%, and expected lives of 5 years. The following table summarizes information on stock option activity for the Nonqualified Plan. F-13 45
Weighted Number of Exercise Price Average Shares Per Share Exercise Price ------------------------------------------------ Options outstanding, December 31, 1993 30,000 $ 3.75 $3.75 Options granted 7,500 6.50 6.50 Options canceled or expired 0 --------- Options outstanding, December 31, 1994 37,500 3.75 - 6.50 4.30 Options granted 10,360 5.13 - 6.63 5.45 Options canceled or expired 0 Options outstanding, December 31, 1995 47,860 3.75 - 6.63 4.55 Options granted 9,120 6.63 - 9.50 7.78 Options canceled or expired 0 Options outstanding, December 31, 1996 56,980 3.75 - 9.50 5.07
The following table summarizes information about stock options outstanding under the Non-qualified Plan as of December 31, 1996:
WEIGHTED WEIGHTED NUMBER WEIGHTED AVERAGE AVERAGE NUMBER AVERAGE EXERCISE RANGE OF OUTSTANDING REMAINING EXERCISE EXERCISABLE AT PRICE EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE PRICE 12/31/96 EXERCISABLE ==================================================================================================== $ 3.75 30,000 3 years $3.75 30,000 $ 3.75 6.50 7,500 7 years 6.50 7,500 6.50 5.13 - 6.63 10,360 8 years 5.62 10,360 11.76 6.63 - 9.50 9,120 9 years 7.78 6,373 7.37 - ---------------------------------------------------------------------------------------------------- $ 3.75 to 9.50 56,980 5.40 years $5.10 54,233 $ 5.35 ====================================================================================================
5. MAJOR CUSTOMERS Contract revenue for three major unrelated customers during 1996 was $198,000, $235,000 and $270,000. Contract revenue for two unrelated customers was $225,000 and $227,000 for 1995 and $210,000 and $335,357 for 1994. 6. INCOME TAXES Net deferred tax assets and the valuation allowance at December 31, 1996 and 1995, consist of: F-14 46
1996 1995 ----------- ------------ Deferred tax assets (liabilities): Net operating loss carry forwards $11,065,000 $ 9,941,000 Amortization of intangibles 2,685,000 2,881,000 Marketable securities 13,000 Depreciation 90,000 60,000 Other items 295,000 (50,000) ----------- ------------ Net deferred tax assets 14,135,000 12,845,000 ----------- ------------ Less valuation allowance 14,135,000 (12,845,000) ----------- ------------ Total $ 0 $ 0 =========== ============
At December 31, 1996 and 1995, the Company has approximately $37,894,000 and $26,652,000 of federal income tax net operating loss carry forwards which expire through 2010. 7. LEASE COMMITMENTS As of December 31, 1996, minimum rental commitments under non-cancelable operating leases of one year or more are as follows:
Year Ending December 31, - ------------ 1997 $283,729 1998 146,586 1999 42,507 2000 6,585 -------- Total $479,407 ========
Other accrued liabilities include deferred rent of $96,802 as of December 31, 1996 and $152,108 as of December 31, 1995. Rent expense was $205,583 for 1996, $202,503 for 1995 and $179,204 for 1994. 8. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair values of the Company's financial instruments as of December 31, 1996 and 1995 are follows: F-15 47
1995 1995 1996 1996 Carrying Estimated Carrying Estimated Amount Fair Amount Fair Value Value ----------------------------------------------------------------------- Cash and cash equivalents $ 925,487 925,487 18,368,472 18,368,472 Restricted cash -- -- 7,000,000 7,000,000 equivalents Marketable securities 10,996,847 10,996,847 6,040,389 6,040,389
The following methods and assumptions were used to estimate the fair value of financial instruments: Cash and cash equivalents - The carrying amount approximates fair value. Restricted cash equivalents - The carrying amount approximates fair value. Marketable securities - The fair value is based on quoted market prices or dealer quotes. F-16 48 9. SAVINGS AND RETIREMENT PLAN The Company has an employee savings plan (the "Savings Plan") which qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. This Savings Plan allows eligible employees to contribute from 1% to 17% of their income to this Savings Plan. The Company matches 50% of the first 6% of the employee's contributions which are immediately vested. The Company's matching contributions to the Savings plan were approximately $48,461, $43,597 and $44,060 for 1996, 1995, 1994 respectively. 10. BLOCK DRUG COMPANY AGREEMENT On December 17, 1996, the Company entered into an agreement with Block Drug Company ("Block"). Under the terms of the agreement, Block acquired the North American and certain European marketing rights to the first three Company products for the treatment of periodontal disease. The Company received an advance payment of $7,000,000 for the sale of the marketing rights to the ATRISORB(R) GTR Barrier. The funds were deposited in an escrow account until February 1, 1997, at which time substantially all of the initial services required by the agreement were performed. Accordingly, the Company deferred recognition of the initial payment as revenue until 1997. The $7,000,000 initial payment is included in restricted cash equivalents as of December 31, 1996. F-17 49 EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 3.1 Amended and Restated Certificate of Incorporation(1) 3.2 Amended and Restated Bylaws(2) 4.1 Form of Common Stock Certificate(3) 10.1 Employment Agreement between Registrant and John E. Urheim dated June 4, 1993(3) 10.2 Amendment No. 3 and Restatement of Master Technology Transfer Agreement between Registrant and Vipont Pharmaceutical, Inc.(2) 10.3 Incentive Stock Option Agreement(2) 10.4 Agreement between Registrant and Vipont Pharmaceutical, Inc.(2) 10.5 Termination Agreement dated September 27, 1995 between Registrant and Atrix, L.P.(4) 10.6 Lease Agreement dated May 11, 1991 between the Registrant and GB Ventures* 10.7 Agreement of Purchase and Sale dated June 11, 1996 between the Registrant and D.C. Pitcairn Holdings, Inc.* 10.8 Agreement dated December 16, 1996 between the Registrant and Block Drug Corporation(5) 23 Consent of Deloitte & Touche LLP* 27 Financial Data Schedule* - ------------------- (1) Incorporated by reference to Registrant's Current Report on Form 8-K, dated December 1, 1989, as filed with the Securities and Exchange Commission on December 15, 1989. (2) Incorporated by reference to the Registrant's Registration Statement on Form S-1, file number 33-34882. (3) Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1993 as filed with the Securities and Exchange Commission. 50 (4) Incorporated by reference to Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995 as filed with the Securities and Exchange Commission. (5) Incorporated by reference to Registrant's Current Report on Form 8-K dated December 16, 1996, as filed with the Securities and Exchange Commission. * Filed herewith. EX-10.6 2 LEASE AGREEMENT 1 EXHIBIT 10.6 LEASE AGREEMENT OFFICE AND INDUSTRIAL SPACE THIS LEASE AGREEMENT is made and entered into as of the 11th day of May 1991, by and between GB Ventures ("Landlord"), whose address is 4875 Pearl East Circle, Suite 300, Boulder, CO 80301, and Atrix Laboratories, Inc. ("Tenant"), whose address is 1625 Sharp Point Drive, Fort Collins, CO 80525. In consideration of the covenants, terms, conditions, agreements and payments as herein set forth, the Landlord and Tenant hereby enter into the following Lease: 1. DEFINITIONS. Whenever the following words or phrases are used in this Lease, said words or phrases shall have the following meanings: A. "Area" shall mean the parcel of land depicted on Exhibit "A" attached hereto and commonly known and referred to as Plum Tree Plaza, 2579 Midpoint Dr., Ft. Collins, Colorado. The Area includes the Leased Premises and one or more buildings. The Area may include Common Areas. B. "Building" shall mean a building located in the Area. C. "Common Areas" shall mean all entrances, exits, driveways, curbs, walkways, hallways, parking areas, landscaped areas, rest rooms, loading and service areas, and like areas or facilities which are located in the Area and which are designated by the Landlord as areas or facilities available for the nonexclusive use in common by persons designated by the Landlord. D. "Leased Premises" shall mean the premises herein leased to the Tenant by the Landlord. E. "Tenant's Prorata Share" as to the Building in which the Leased Premises are located shall mean an amount (expressed as a percentage) equal to the number of square feet included in the Leased Premises divided by the total number of leasable square feet included in said Building. The Tenant's Prorata Share as to Common Areas shall mean an amount (expressed as a percentage) equal to the number of square feet included in the Leased Premises divided by the total number of leasable square feet included in all Buildings located in the Area. The Tenant's Prorata Share for Common Areas may change from time to time as the leasable square footage in all Buildings located in the Area is increased or decreased. F. "Lease term" shall mean the period of time as defined in Paragraph 3.A. and shall also mean the period of time as defined in Paragraph 3.B., should Tenant exercise its rights to extend the Lease. 2 2. LEASED PREMISES. The Landlord hereby leases unto the Tenant, and the Tenant hereby leases from the Landlord, the following described premises: Space F in Building 3, and all of Building 4 consisting of 23,200 square feet, all as depicted on Exhibit "B" attached hereto. 3. TERM. A. Base Term. The term of this Lease shall commence at (i) the later of 12:00 noon on June 1, 1991, or (ii) 12:00 noon on the date upon which the Leased Premises are ready for occupancy (as defined in Paragraph 4.B. of this Lease), and, unless sooner terminated as herein provided for, shall end at 12:00 noon on June 1, 1998. Except as specifically provided to the contrary herein, and except for damages caused by fire or other casualty or other damage which is to be repaired by or at the expense of Landlord, the Leased Premises shall, upon the termination of this Lease, by virtue of the expiration of the Lease Term or otherwise, be returned to the Landlord by the Tenant in as good or better condition than when entered upon by the Tenant, ordinary wear and tear excepted. 4. RENT. Tenant shall pay the following rent for the Leased Premises: A. Base Monthly Rent. Tenant shall pay to Landlord, without notice and without setoff, at the address of Landlord as herein set forth, the following Base Monthly Rent ("Base Monthly Rent"), said Base Monthly Rent to be paid in advance on the first day of each month during the term hereof. In the event that this Lease commences on a date other than the first day of a month, the Base Monthly Rent for the first month of the Lease Term shall be prorated for said partial month. Below is a schedule of Base Rental payments as agreed upon: DURING LEASE TERM
For Period To Period A Base Monthly Starting Ending Rent of -------- ------ ------- June 1, 1991 November 1, 1992 -0- November 1, 1992 June 1, 1993 $11,116.67 NNN June 1, 1993 June 1, 1994 $15,466.67 NNN June 1, 1994 June 1, 1995 $16,433.33 NNN June 1, 1995 June 1, 1996 $17,400.00 NNN June 1, 1996 June 1, 1997 $18,366.67 NNN June 1, 1997 June 1, 1998 $19,333.33 NNN
B. Lease Term Adjustment. If for any reason other than delays caused by or at the request of the Tenant, the Leased Premises are not ready for the occupancy on or before June 1, 1991, Tenant's rental obligations and other monetary obligations (i.e., taxes, utilities, common area maintenance, etc.) shall be abated in direct proportion to the number of days of delay. In such event, Base Monthly Rent due for the period starting October 1, 1992, shall be abated for 3 a total number of days equal to the number of days of such delay. It is hereby agreed that the Leased Premises shall be deemed ready for occupancy on the date that (i) Landlord has received either a temporary certificate of occupancy or a certificate of occupancy from the City of Fort Collins; (ii) Landlord has delivered a true copy of said temporary certificate of occupancy or certificate of occupancy to the Tenant; (iii) Landlord has delivered to Tenant a certificate by Landlord's architect that the Leased Premises have been constructed in accordance with the plans and specifications approved by Tenant and (iv) the walk-through provided for in Paragraph B of Exhibit "C" of this Lease has been completed. The Lease Term may be similarly adjusted in the event that items identified in the walk-through to be conducted pursuant to Paragraph B of Exhibit "C" would unreasonably interfere with Tenant's use and occupancy of the Leased Premises. C. Total Net Lease. The Tenant understands and agrees that this Lease is a total net lease (a net, net, net lease"), whereby the Tenant has the obligation to reimburse the Landlord for Tenant's prorata share (as defined in Paragraph 1.E.) of all costs and expenses, (taxes, insurance, trash removal, Common Area operation and maintenance and like costs and expenses) actually incurred by the Landlord as a result of the Landlord's ownership and operation of the Area. 5. SECURITY DEPOSIT. Landlord acknowledges receipt from the Tenant of the sum of Eleven Thousand One Hundred Sixteen and 67/100 Dollars ($11,116.67) to be retained by Landlord without responsibility for payment of interest thereon, until November 1, 1992 (subject to extension pursuant to the terms of Paragraph 4.B.) as security for performance of all the terms and conditions of this Lease Agreement to be performed by Tenant. Said sum shall be applied against the first installment of base monthly rent when such installment becomes due pursuant to the terms of Paragraphs 4.A. & 4.B. of this lease from and after the date on which said sum is so applied there shall be no security deposit required in connection with this lease. Deductions may be made by Landlord from the amount so retained for the reasonable cost of repairs to the Leased Premises (ordinary wear and tear excepted), and/or for any sum used in any manner to cure any default of Tenant under the terms of this Lease. Nothing herein contained shall limit the liability of Tenant as to any damage to the Leased Premises, and Tenant shall be responsible for the total amount of any damage and/or loss occasioned by actions of Tenant. Landlord may deliver the funds deposited hereunder by Tenant to any purchaser of Landlord's interest in the Leased Premises in the event such interest shall be sold, and thereupon Landlord shall be discharged from any further liability with respect to such deposit. 6. USE OF PREMISES. Tenant shall use the Leased Premises only for general corporate headquarters of Tenant and for Tenant's Research & Development activities & for Manufacture & Distribution of Products and all related purposes and for no other purpose whatsoever except with the written consent of Landlord. Tenant shall not allow any accumulation of trash or debris on the Leased Premises or within any portion of the Area. All receiving and delivery of goods and merchandise and all removal of garbage and refuge shall be made only by way of the rear and/or other service door provided therefore. In the event the Leased Premises shall have no such door, then these matters shall be handled in a manner satisfactory to Landlord. No storage of any material outside of the Leased Premises shall be 3 4 allowed unless first approved by Landlord in writing, and then in only such areas as are designated by Landlord. Tenant shall not commit or suffer any waste on the Leased Premises nor shall Tenant permit any nuisance to be maintained on the Leased Premises or permit any disorderly conduct or other activity having a tendency to annoy or disturb any occupants of any part of the Area and/or any adjoining property. 7. LAWS AND REGULATIONS; TENANT RESPONSIBILITY. Except for such matters relating to the construction, maintenance or for zoning matters or changes in the building code or requirements for occupancy, which matters shall be the responsibility of Landlord, the Tenant shall, at its sole cost and expense, comply with all laws and regulations of any governmental entity, board, commission or agency having jurisdiction over the Leased Premises. Tenant agrees not to install any electrical equipment that overloads any electrical paneling, circuitry or wiring and further agrees to comply with the requirements of the insurance underwriter or any governmental authorities having jurisdiction thereof. 8. LANDLORD'S RULES AND REGULATIONS. Landlord reserves the right to adopt and promulgate rules and regulations applicable to the Leased Premises and from time to time amend or supplement said rules or regulations. Notice of such rules and regulations and amendments and supplements thereto shall be given to Tenant, and Tenant agrees to comply with and observe such rules and regulations and amendments and supplements thereto provided that the same apply uniformly to all Tenants of the Landlord in the Area and that such amendments or supplements do not materially affect Tenant's business or be at the cost of Tenant. 9. PARKING. If the Landlord provides off-street parking for the common use of Tenants, employees and customers of the Area, the Tenant shall park all vehicles of whatever type used by Tenant and/or Tenant's employees only in such areas thereof as are reasonably designated by Landlord for this purpose, and Tenant accepts the responsibility of seeing that Tenant's employees park only in the areas so designated. Tenant shall, upon the request of the Landlord, provide to the Landlord license numbers of the Tenant's vehicles and the vehicles of Tenant's employees. Landlord shall provide Tenant a minimum of 60 employee parking spaces reasonably accessible to the Leased Premises. 10. CONTROL OF COMMON AREAS; EXCLUSIVE CONTROL OF LANDLORD. All Common Areas shall at all reasonable times be subject to the reasonable exclusive control and management of Landlord, notwithstanding that Tenant and/or Tenant's employees and/or customers may have a nonexclusive right to the use thereof. Landlord shale have the right from time to time to establish, modify and enforce reasonable rules and regulations with respect to the use of said facilities and Common Areas in a manner which will not increase the total cost to Tenant or otherwise interfere in any manner with Tenant's business. 11. TAXES. A. Real Property Taxes and Assessments. The Tenant shall pay to the Landlord on the first day of each month beginning with the date Tenant accepts possession of the Leased Premises as additional rent, the Tenant's Prorata Share of all real estate taxes and special 4 5 assessments levied and assessed against the Building in which the Leased Premises are located and the Common Areas. If the first and last years of the Lease Term are not calendar years, the obligations of the Tenant hereunder shall be prorated for the number of days during the calendar year that this Lease is in effect. The monthly payments for such taxes and assessments shall be $1,527.33 until the Landlord receives the first tax statement for the referred-to properties. Thereafter, the monthly payments shall be based upon Tenant's prorata share of 1/12th of the prior year's taxes and assessments. Once each year the Landlord shall determine the actual Tenant's prorata share of Prorata Share of taxes and assessments for the prior year, and if the Tenant has paid less than the Tenant's Prorata Share for the prior year the Tenant shall pay the deficiency to the Landlord with the next payment of Base Monthly Rent, or, if the Tenant has paid in excess of the Tenant's Prorata Share for the prior year the Landlord shall forthwith refund said excess to the Tenant. B. Personal Property Taxes. Tenant shall be responsible for, and shall pay promptly when due, any and all taxes and/or assessments levied and/or assessed against any furniture, fixtures, equipment and items of a similar nature installed and/or located in or about the Leased Premises by Tenant. 12. INSURANCE. A. Landlord's Insurance. The Landlord shall procure and maintain such fire and casualty, loss of rents and liability insurance as it, from time to time, deems proper and appropriate in reference to the Building in which the Leased Premises are located and the Common Areas. Such insurance shall not be required to cover any of the Tenant's property, and the Tenant shall have no interest in any of the proceeds of such insurance. B. Tenant's Insurance. Tenant shall, at its sole cost and expense, insure in an amount consistent with industry standards Tenant's inventory, fixtures, leasehold improvements and betterments located on the Leased Premises against loss resulting from fire or other casualty. Tenant shall procure, pay for and maintain, comprehensive public liability insurance providing coverage from and against any loss or damage occasioned by an accident or casualty on, about or adjacent to the Leased Premises. Said liability policy shall be written on an "occurrence basis" with limits of not less than $1,000,000. combined single limit coverage. Certificates for such insurance shall be delivered to Landlord and shall provide that said insurance shall not be changed, modified, reduced or cancelled without 30 days' prior written notice thereof being given to Landlord. C. Tenant's High Pressure Steam Boiler Insurance. If Tenant makes use of any kind of steam or other high pressure boiler or other apparatus which presents a risk of damage to the Leased Premises or to the Building or other improvements of which the Leased Premises are a part or to the life or limb of persons within such premises, Tenant shall secure and maintain appropriate boiler insurance in an amount satisfactory to Landlord. The Landlord shall be named insured in any such policy or policies. Certificates for such insurance shall be delivered to Landlord and shall provide that said insurance shall not be changed, modified, reduced or cancelled without thirty (30) days' prior written notice thereof being given to Landlord. 5 6 D. Tenant's Share of Landlord Insurance. Tenant shall pay the Landlord as additional rent Tenant's Prorata Share of the insurance secured by the Landlord pursuant to 12.A. above. Payment shall be made on the first day of each month as additional rent. The monthly payments for such insurance shall be $232.00 until changed by Landlord as a result of an increase or decrease in the cost of such insurance. E. Mutual Subrogation Waiver. Landlord and Tenant hereby grant to each other, on behalf of any insurer providing fire and extended coverage to either of them covering the Leased Premises, Buildings or other improvements thereon or contents thereof, a waiver of any right of subrogation any such insurer of one party may acquire against the other or as against the Landlord or Tenant by virtue of payments of any loss under such insurance. Such a waiver shall be effective so long as the Landlord and Tenant are empowered to grant such waiver under the terms of their respective insurance policy or policies and such waiver shall stand mutually terminated as of the date either Landlord or Tenant gives notice to the other that the power to grant such waiver has been so terminated. 13. UTILITIES. Utilities for Tenant shall be separately metered, and Tenant shall be solely responsible for and promptly pay all charges for heat, water, gas, electric, sewer service and any other utility service used or consumed on the Leased Premises. Should Landlord elect to supply (and if, and only if, Tenant agrees to have Landlord supply) all or any of the utility services to be used or consumed on the Leased Premises, Tenant shall, within 10 days from presentation of the statement for such utility service, pay to Landlord, as additional rent under the terms hereof Tenant's prorata share of the amount of said statement if it represents utility service furnished to the Leased Premises only or prorata (___%) percent of said statement if it includes utility service to an area greater than the Leased Premises. Under no circumstances shall Tenant be responsible for duplicate payment of utilities charges. Said proration of utilities shall be reviewed by Landlord and Tenant at the end of the first year of occupancy, at which time Landlord and Tenant shall mutually determine if the present percentage of said total utilities is equitable in relation to the use of total services by all the Tenants and will be adjusted by Landlord, if necessary. The Tenant shall forthwith upon taking occupancy of the Leased Premises make arrangements with the Public Service Company, Mountain Bell or other appropriate utility company to pay the utilities used on the Leased Premises and to have the same billed to the Tenant at the address designated by the Tenant. Should there be a time where the Landlord remains responsible for utilities supplied to the Leased Premises, the Landlord shall bill the Tenant therefore, and the Tenant shall promptly reimburse the Landlord therefore. The parties acknowledge that Tenant's business relies heavily on the supply of the basic utilities, and, if the same are not supplied due to Landlord's negligence, then rent shall abate during such period and, if such continues for longer than 24 hours, the same shall be deemed a default by Landlord hereunder. In the event the utility company supplying water and/or sewer to the Leased Premises determine that an additional service fee, impact fee, and/or assessment, or any other type of payment or penalty is necessary due to Tenants use and occupancy of the Building, nature of operation and/or consumption of utilities, said expense shall be borne solely by the Tenant. Said 6 7 expense shall be paid promptly and any repairs requested by the utility company shall be performed by Tenant immediately and without any delay. 14. MAINTENANCE OBLIGATIONS OF LANDLORD. A. Except as herein otherwise specifically provided for, Landlord shall keep and maintain the roof and exterior of the Building and shall maintain and service the Area of which the Leased Premises are a part in good repair and condition as a Class A Industrial Park Plaza. Tenant shall repair and pay for any damage to roof, foundation and external walls caused by Tenant's action, negligence or fault. B. Heating and Air Conditioning Systems. Landlord shall maintain in good working condition the heating and air conditioning systems for the Leased Premises. Without limiting the foregoing, Landlord shall maintain temperature levels between 66(degree) and 75(degree)F at all times in the laboratory area. Landlord shall contract for the normal maintenance of the heating and air conditioning systems four times per year, on a quarterly basis. The cost for such normal maintenance shall be paid for by the Tenant within fifteen (15) days of written notification by the Landlord. 15. MAINTENANCE OBLIGATIONS OF THE TENANT. Subject only to the maintenance obligations of the Landlord as herein provided for, the Tenant shall, during the entire Lease Term, including all extensions thereof, at the Tenant's sole cost and expense, keep and maintain the Leased Premises in good condition and repair, including specifically the following: A. Electrical Systems. After 270 days from commencement of this Lease, Tenant agrees to maintain in good working order and to make all required repairs and replacements to the electrical systems for the Leased Premises. Tenant upon signing this Lease acknowledges that Tenant has inspected the existing electrical systems and all such systems are in good repair and working order. B. Plumbing Systems. After 270 days from commencement of this Lease, Tenant agrees to maintain in good working order and to make all required repairs or replacements to the plumbing systems for the Leased Premises. Tenant upon signing this Lease acknowledges that Tenant has inspected the existing plumbing systems and all such systems are in good repair and working order. C. Inspections and Service. Upon termination of Lease Agreement, Tenant agrees, before vacating premises, to employ at Tenant's sole cost and expense, a licensed contractor to inspect, service and write a written report on the systems referred to in A, B and C of this Paragraph 15. Landlord shall have the right to order such an inspection if Tenant fails to provide evidence of such inspection, and, to follow the recommendations of such reports and to charge the expense thereof to the Tenant. 7 8 D. Tenant's Responsibility for Building and Area Repairs. Tenant shall be responsible for any repairs required for any part of the Building or Area of which the Leased Premises are a part if such repairs are necessitated by the negligence of Tenant. E. Cutting Roof. Tenant must obtain in writing the Landlord's approval prior to making any roof penetrations after Tenant occupancy. Failure by Tenant to obtain written permission to penetrate a roof shall relieve Landlord of any roof repair obligations as set forth in Paragraph 14 hereof. Tenant further agrees to repair, at its sole cost and expense, all roof penetrations made by the Tenant and to use, if so requested by Landlord, a licensed contractor selected by the Landlord to make such penetrations and repairs. F. Glass and Doors. The repair and replacement of all glass and doors on the Leased Premises shall be the responsibility of the Tenant unless necessitated by the actions or inaction of Landlord or its agents, whereupon Landlord shall be responsible for repair or replacement. Any such replacements or repairs shall be promptly completed at the expense of the Tenant. G. Liability for Overload. Tenant shall be responsible for the repair or replacement of any damage to the Leased Premises, the Building or the Area which result from the Tenant's movement of heavy articles therein or thereon. Tenant shall not overload the floors of any part of the Leased Premises. H. Inspection of Leased Premises. By taking possession of the Leased Premises, Tenant acknowledges that it has inspected the Leased Premises and accepts the Leased Premises in the condition that they exist as of the date of such possession, including but not limited to all mechanical, plumbing and electrical systems and the conditions of the interior except any incomplete or uncorrected items identified on the "punch list" prepared pursuant to the terms of Paragraph B of Exhibit "C" to this Lease. Notwithstanding the foregoing, Landlord warrants all mechanical, plumbing and electrical systems against defects in materials or workmanship for a period of two hundred seventy (270) days, beginning with the commencement of the Lease Term. I. Failure of Tenant to Maintain Premises. Should Tenant neglect to keep and maintain the Leased Premises as required herein, the Landlord shall have the right, but not the obligation, to have the work done and any reasonable costs plus a ten percent (10%) overhead charge therefore shall be charged to Tenant as additional rental and shall become payable by Tenant with the payment of the rental next due. 16. COMMON AREA MAINTENANCE. Tenant shall be responsible for Tenant's Prorata Share of the total costs incurred for the operation, ordinary maintenance and ordinary repair of the Common Areas, including, but not limited to, the costs and expenses incurred for the operation, maintenance and repair of parking areas (including restriping and repaving); removal of snow; utilities for common lighting and signs; insurance; trash removal; security to protect and secure the Area; common entrances, exits and lobbies of building; all common utilities, including water to maintain landscaping; replanting in order to maintain a smart appearance of 8 9 landscape areas; supplies; depreciation on the machinery and equipment used in such operation, maintenance and repair; the cost of personnel to implement such services; and ten percent (10%) of all such operational, maintenance and repair costs to cover Landlord's administrative and overhead costs. These costs shall be estimated on an annual basis by the Landlord and shall be adjusted upward or downward, depending on the actual costs for the preceding twelve (12) months. Tenant shall pay monthly, commencing with the first month of the Lease Term, as additional rent due under the terms hereof, a sum equal to Tenant's Prorata Share of the estimated costs for said twelve (12) month period, divided by 12. The estimated initial monthly costs are $812.00. Once each year the Landlord shall determine the actual costs of the foregoing expenses for the prior year, and if the actual costs are greater than the estimated costs, the Tenant shall pay its Tenant's Prorata Share of the difference between the estimated costs and the actual costs to the Landlord with the next payment of Base Monthly Rent, or, if the actual costs are less than the estimated costs, the Landlord shall forthwith refund the amount of the Tenant's excess payment to the Tenant. In no event shall an upward annual adjustment exceed fifteen (15) percent. 17. INSPECTION OF AND RIGHT OF ENTRY TO LEASED PREMISES-REGULAR, EMERGENCY, RELETTING. Upon reasonable notice, Landlord and/or Landlord's agents and employees shall have the right to enter the Leased Premises at all times during regular business hours and at all times during emergencies to examine the Leased Premises, to make such repairs, alterations, improvements or additions as Landlord deems necessary, and Landlord shall be allowed to take all materials into and upon said Leased Premises that may be required therefore without the same constituting an eviction of Tenant in whole or in part, and the rent reserved shall in no way abate while such repairs, alterations, improvements or additions are being made, by reason of loss or interruption of business of Tenant or otherwise. During the six months prior to the expiration of the term of this Lease or any renewal thereof, Landlord may exhibit the Leased Premises to prospective tenants and/or purchasers and may place upon the Leased Premises the usual notices indicating that the Leased Premises are for lease and/or sale. Any information pertinent to Tenant's business viewed or heard of as the result of any such entry by Landlord will be held in strict confidence by Landlord. 18. ALTERATION-CHANGES AND ADDITIONS-RESPONSIBILITY. Unless the Landlord's approval is first secured in writing, which approval shall not be unreasonably withheld by Landlord, the Tenant shall not install or erect inside Permanent partitions, add to existing electric power service, add telephone outlets, add light fixtures, install additional heating and/or air conditioning or make any other changes or alterations to the interior or exterior of the Leased Premises. Any such changes or alterations shall be made at the sole cost and expense of the Tenant. At the end of this Lease, all such fixtures, equipment, additions, changes and/or alterations (except trade fixtures installed by Tenant) shall be and remain the property of Landlord; provided, however, Landlord shall have the option to require Tenant to remove any or all such fixtures, equipment, additions and/or alterations and restore the Leased Premises to the condition existing immediately prior to such change and/or installation, normal wear and tear excepted, all at Tenant's cost and expense. All such work shall be done in a good and workmanlike manner and shall consist of new materials unless agreed to otherwise by Landlord. Any and all repairs, changes and/or modifications thereto shall be the responsibility and the cost 9 10 Landlord may also of Tenant. Landlord may require adequate security from Tenant assuring no mechanic's liens on account of work done on the Leased Premises by Tenant and may post the Leased Premises, or take such other action as is then permitted by law, to protect the Landlord and the Leased Premises against mechanic's liens. require adequate security to assure Landlord that the Leased Premises will be restored to their original condition upon termination of this Lease. 19. SIGN APPROVAL. Except for signs which are located inside of the Leased Premises and which are not attached to any part of the Leased Premises, the Landlord must approve in writing any sign to be placed in or on the interior or exterior of the Leased Premises, regardless of size or value. Specifically, signs attached to windows of the Leased Premises must be so approved by the Landlord. Landlord agrees to the placement of no more than five exterior signs consistent with the sign criteria shown on Exhibit "D." Tenant shall, during the entire Lease Term, maintain Tenant's signs in a good condition and repair at his sole cost and expense. Tenant shall remove all signs at the termination of this Lease, at Tenant's sole risk and expense and shall in a workmanlike manner properly repair any damage and close any holes caused by the installation and/or removal of Tenant's signs. Tenant shall give Landlord prior notice of such removal, and the representative of landlord shall have the opportunity of being present when the signage is removed, or shall pre-approve the manner and materials used to repair damage and close the holes caused by removal. 20. RIGHT OF LANDLORD TO MAKE CHANGES AND ADDITIONS. Landlord reserves the right at any time to make alterations or additions to the Building or Area of which the Leased Premises are a part. Landlord also reserves the right to construct other buildings and/or improvements in the Area and to make alterations or additions thereto, all as Landlord shall determine; provided, however, such construction costs shall not be passed to Tenant, and Tenant's common area maintenance charges shall not increase thereby. Easements for light and air are not included in the leasing of the Leased Premises to Tenant. Landlord further reserves the exclusive right to the roof of the Building of which the Leased Premises are a part. Landlord also reserves the right at any time to relocate, vary and adjust the size of any of the improvements or Common Areas located in the Area; provided, however, that all such changes shall be in compliance with the requirements of governmental authorities having jurisdiction over the Area which materially affect Tenant's business operations and/or the Leased Premises. 21. DAMAGE OR DESTRUCTION OF LEASED PREMISES. In the event the Leased Premises and/or the Building of which the Leased Premises are a part shall be totally destroyed by fire or other casualty or so badly damaged that, in the opinion of Landlord, it is not feasible to repair or rebuild same, Landlord shall have the right to terminate this Lease upon written notice to Tenant. If the Leased Premises are partially damaged by fire or other casualty, except if caused by Tenant's negligence, and said Leased Premises are not rendered untenantable thereby, as mutually determined by Landlord and Tenant, an appropriate abatement of reduction of the rent shall be allowed for the unoccupied portion of the Leased Premises until repair thereof shall be substantially completed. If Landlord elects to repair or restore the Leased Premises, Landlord shall begin such repair or restoration within 30 days following the occurrence of such damage, or upon the earlier receipt by Landlord of insurance proceeds therefor. If the Landlord elects 10 11 to exercise the right herein vested in it to terminate this Lease as a result of damage to or destruction of the Leased Premises or the Building in which the Leased Premises are located, said election shall be made by giving notice thereof to the Tenant within thirty (30) days after the date of said damage or destruction. Rent shall abate during any such notice period. 22. GOVERNMENTAL ACQUISITION OF PROPERTY. The parties agree that Landlord shall have complete freedom of negotiation and settlement of all matters pertaining to the acquisition of the Leased Premises, the Building, the Area or any part thereof, by any governmental body or other person or entity via the exercise of the power of eminent domain, it being understood and agreed that any financial settlement made or compensation paid respecting the land or improvements to be so taken, whether resulting from negotiation and agreement or legal proceedings, shall be the exclusive property of Landlord, there being no sharing whatsoever between Landlord and Tenant of any sum so paid. In the event of any such taking, this Lease shall terminate as of the earlier of the entry of an order of condemnation by a court of competent jurisdiction or the date possession is taken by the condemning person or authority, and Tenant shall thereupon be absolved from the obligation to pay any further rent under this Lease (except to the extent of any past due rental obligations). In the event of such termination, Tenant shall have a reasonable period of time to vacate the Leased Premises to the extent that Landlord has the right, power and authority to grant such additional time. Such taking of the property shall not be a breach of this Lease by Landlord nor give rise to any claims in Tenant for damages or compensation from Landlord. Nothing herein contained shall be construed as depriving the Tenant of the right to retain as its sole property any compensation paid for any tangible personal property owned by the Tenant which is taken in any such condemnation proceeding, nor shall the foregoing be construed as precluding Tenant from prosecuting any claim directly against the condemning person or authority for the value of its property or for moving, relocation expenses or other claims, provided such claims do not reduce or adversely affect the amount of the Landlord's award or settlement. Notwithstanding the extent of the Landlord's right and authority pursuant to the foregoing provisions, Landlord agrees to provide notice to Tenant, as soon as practicable, of any notification received by Landlord from any governmental agency or other authority of the intent to acquire the Leased Premises or any portion thereof by eminent domain. Landlord furthermore agrees to exercise good faith efforts, with respect to any negotiated settlement, to provide in such settlement for not less than one hundred eighty (180) days' advance notice to Tenant of the termination of this Lease. 23. ASSIGNMENT OR SUBLETTING. Tenant may not assign this Lease, or sublet the Leased Premises or any part thereof, without the written consent of Landlord, which consent shall not be unreasonably withheld. Except as otherwise agreed to by landlord in any consent, no such assignment or subletting if approved by the Landlord shall relieve Tenant of any of the total rental obligations hereunder. Tenant shall have the absolute right to transfer and assign this Lease to any affiliate of Tenant, including, without limitation, any third party which purchases a majority of the stock of the Tenant or a majority of the assets of Tenant's Company. 24. WARRANTY OF TITLE. Subject to the provisions of Paragraphs 25, 26 and 27 hereof, Landlord covenants it has good right to lease the Leased Premises in the manner described 11 12 herein and that Tenant shall peaceably and quietly have, hold, occupy and enjoy the Leased Premises during the term of the Lease. 25. ACCESS. Landlord shall provide Tenant nonexclusive access to the Leased Premises through and across land and/or other improvements owned by Landlord. Landlord shall have the right, during the term of this Lease, to designate, and to change, such nonexclusive access. 26. SUBORDINATION. Tenant agrees that this Lease shall be subordinate to any mortgages, trust deeds or ground leases that may now exist or which may hereafter be placed upon said Leased Premises and to any and all advances to be made thereunder, and to the interest thereon, and all renewals, replacements and extensions thereof. Tenant shall execute and deliver whatever instruments may be required for the above purposes, and failing to do so within ten (10) days after demand in writing, does hereby make, constitute and irrevocably appoint Landlord as its attorney-in-fact and in its name, place and stead so to do. Tenant shall, in the event of the sale or assignment of Landlord's interest in the Area or in the building of which the Leased Premises form a part, or in the event of any proceedings brought for the foreclosure of or in event of exercise of the power of sale under any mortgage made by Landlord covering the Leased Premises, attorn to the purchaser and recognize such purchaser as Landlord under this Lease. 27. EASEMENTS. The Landlord shall have the right to grant any easement on, over, under and above the Area (but not through, over or on the Leases Premises) for such purposes as Landlord determines, provided that such easements do not materially interfere with Tenant's occupancy and use of the Leased Premises. 28. TENANT'S HOLD HARMLESS AND INDEMNIFICATION AGREEMENT. Tenant shall indemnify and hold Landlord harmless from and against any and all claims, losses, expenses, costs, judgments, and/or demands, including court costs and attorney's fees, suffered or incurred by the Landlord, arising from activities of Tenant on the Leased Premises or in the Building or in the Area and/or on account of any operation or action by Tenant and/or from and against all claims arising from any breach or default on the part of Tenant or any act of negligence of Tenant, its agents, contractors, servants, employees, licensees or invitees; or any accident, injury or death of any person or damage to any property in or about the Leased Premises, the Building or the Area. 29. ACTS OR OMISSION OF OTHERS. The Landlord, or its employees or agents, or any of them, shall not be responsible or liable to the Tenant or to the Tenant's guests, invitees, employees, agents or any other person or entity, for any loss or damage that may be caused by the acts or omissions of other tenants, their guests or invitees, occupying any other part of the Area or by persons who are trespassers on or in the Area, or for any loss or damage caused or resulting from the bursting, stoppage, backing up or leaking of water, gas, electricity or sewers or caused in any other manner whatsoever, unless such loss or damage is caused by or results from the negligent acts of the Landlord, its agents or contractors, or negligent failure to act in 12 13 which event Landlord shall indemnify and hold harmless Tenant, its agents and employees from any such loss or damage. 30. INTEREST ON PAST DUE OBLIGATIONS. Any amount due to Landlord not paid when due shall bear interest at two (2%) percent per month from fifteen (15) days after the due date until paid. Payment of such interest shall not excuse or cure any default by Tenant under this Lease. 31. HOLDING OVER-150% LAST MONTH'S RENT. If Tenant shall remain in possession of the Leased Premises for a period of 90 days after the termination of this Lease, whether by expiration of the Lease Term or otherwise, without a written agreement as to such possession, then Tenant shall be deemed a month-to-month Tenant. The rent rate during such holdover tenancy shall be equivalent to the 150% of the monthly rent paid for the last month of tenancy under this Lease, excluding any free rent concessions which may have been made for the last month of the Lease. No holding over by Tenant shall operate to renew or extend this Lease without the written consent of Landlord to such renewal or extension having been first obtained. Tenant shall indemnify Landlord against loss or liability resulting from the delay by Tenant in surrendering possession of the Leased Premises including, without limitation, any claims made with regard to any succeeding occupancy bounded by such holdover period. Nothing contained in this Paragraph 31 shall be construed as an extension of this lease. 32. MODIFICATION OR EXTENSIONS. No modification or extension of this Lease shall be binding upon the parties hereto unless in writing and unless signed by the parties hereto. 33. STATUS STATEMENT OF LEASE. Tenant agrees upon request from time to time from Landlord to execute, acknowledge and deliver to Landlord a statement in writing certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the same are in full force and effect as modified and stating the modifications); that the Tenant has accepted and occupied the Leased Premises; that the Tenant has not paid rent in advance; that Tenant is not aware of prior assignments of this Lease by Landlord; that Tenant has no offsets against the rent or claims against Landlord; the amount of monthly rent due; and, the date to which rent and other charges have been paid. 34. NOTICE PROCEDURE. All notices, demands and requests which may be or are required to be given by either party to the other shall be in writing and such that are to be given to Tenant shall be deemed to have been properly given if served on Tenant or an employee of Tenant or sent to Tenant by United States registered or certified mail, return receipt requested, properly sealed, stamped and addressed to Tenant at 2579 Midpoint Dr, Fort Collins, CO 80525 or at such other place as Tenant may from time to time designate in a written notice to Landlord; and, such as are to be given to Landlord shall be deemed to have been properly given if personally served on Landlord or if sent to Landlord, United States registered or certified mail, return receipt requested, properly sealed, stamped and addressed to Landlord at 4875 Pearl East Circle, Suite 300, Boulder, CO 80301 or at such other place as Landlord from time to time designate in a written notice to Tenant. Any notice given by mailing shall be effective as of the date of mailing. 13 14 35. MEMORANDUM OF LEASE-NOTICE TO MORTGAGEE. The Landlord and Tenant agree not to place this Lease of record, but upon the request of either party to execute and acknowledge so the same may be recorded a short form lease indicating the names and respective addresses of the Landlord and Tenant, the Leased Premises, the Lease Term, the dates of the commencement and termination of the Lease Term and options for renewal, if any, but omitting rent and other terms of this Lease. Tenant agrees to an assignment by Landlord of rents and of the Landlord's interest in this Lease to a mortgagee, if the same be made by Landlord. Tenant further agrees if requested to do so by the Landlord that it will give to said mortgagee a copy of any request for performance by Landlord or notice of default by Landlord; and in the event Landlord fails to cure such default, the Tenant will give said mortgagee a sixty (60) day period in which to cure the same. Said period shall begin with the last day on which Landlord could cure such default before Tenant has the right to exercise any remedy by reason of such default. All notices to the mortgagee shall be sent by United States registered or certified mail, postage prepaid, return receipt requested. 36. CONTROLLING LAW. The Lease, and all terms hereunder shall be construed consistent with the of the State of Colorado. Any dispute resulting in litigation hereunder shall be resolved in court proceedings instituted in Larimer County, Colorado and in no other jurisdiction. 37. LANDLORD NOT A PARTNER WITH THE TENANT. Nothing contained in this Lease shall be deemed, held or construed as creating Landlord as a partner, agent, associate of or in joint venture with Tenant in the conduct of Tenant's business, it being expressly understood and agreed that the relationship between the parties hereto is and shall at all times remain that of Landlord and Tenant. 38. PARTIAL INVALIDITY. If any term, covenant or condition of this Lease or the application thereof to any person or circumstance shall, to any extent, be invalid or unenforceable, the remainder of this Lease or the application of such term, covenant or condition to persons and circumstances other than those to which it has been held invalid or unenforceable, shall not be affected thereby, and each term, covenant and condition of this Lease shall be valid and shall be enforced to the fullest extent permitted by law. 39. DEFAULT-REMEDIES OF LANDLORD. A. The occurrence of any of the following shall constitute a default by Tenant under this Lease: (i) Failure to make due and punctual payment of rent, or any other amounts required to be paid hereunder, and such failure continues for fifteen (15) days following written notice thereof from Landlord to Tenant (provided that failure to make due and punctual payment of rent where abatement thereof is expressly permitted by the terms of this Lease shall not constitute a default); nor shall there be a default when, due to damage or destruction, the Leased Premises are untenantable; or 14 15 (ii) Neglect or failure by Tenant to perform or observe any other term, covenant or condition of this Lease and failure by Tenant to remedy same within thirty (30) days following receipt of written notice from Landlord to Tenant specifying the alleged default; provided that if the default is of such a nature that it cannot reasonably be cured within said thirty (30) day period, Tenant shall not be considered in default under this Lease if Tenant commences to cure such default within said thirty (30) day period and diligently continues thereafter to complete said cure; or (iii) Adjudication of the Tenant as bankrupt or insolvent, or filing by or against Tenant of a petition in bankruptcy or for reorganization or for the adoption of any arrangement under the Bankruptcy Code which is not dismissed within forty-five (45) days after filing; application is made for the appointment of a receiver for the Tenant's business or property; or assignment by Tenant of its property for the benefit of its creditors; or (iv) The abandonment of the Leased Premises by Tenant for a period of time in excess of twenty-one (21) consecutive days. B. If Tenant shall commit any default under the terms of this Lease (as described in subparagraph A, above) to be kept and/or performed by Tenant, Landlord may upon three (3) days' prior written notice to Tenant, or at any time thereafter, reenter the Leased premises, remove all persons and property therefrom, without being liable to indictment, prosecution for damage therefore, or for forcible entry and detainer and repossess and enjoy the Leased Premises, together with all additions thereto or alterations and improvements thereof. Landlord may, at its option, at any time and from time to time thereafter, relet the Leased Premises or any part thereof for the account of Tenant or otherwise, and receive and collect the rents therefore and apply the same first to the payment of such expenses as Landlord may have incurred in recovering possession and for putting the same in good order and condition for rental, and expenses, commissions and charges paid by Landlord in reletting the Leased Premises. Any such reletting may be for the remainder of the Lease Term or for a longer or shorter period, in the discretion of Landlord. In lieu of reletting such Leased Premises, Landlord may occupy the same or cause the same to be occupied by others. Whether or not the Leased Premises or any part thereof be relet, Tenant shall pay the Landlord the rent and all other charges required to be paid by Tenant up to the time of the expiration of this Lease or such recovered possession, as the case may be, and thereafter, Tenant, if required by Landlord, shall pay to Landlord until the end of the term of this Lease, the equivalent of the amount of all rent reserved herein and all other charges required to be paid by Tenant, less the net amount received by Landlord for such reletting, if any, unless waived by written notice from Landlord to Tenant. No action taken by Landlord to obtain possession of the Leased Premises and/or to recover any amount due to action taken by Landlord to obtain possession of the Leased Premises and/or to recover any amount due to Landlord hereunder shall be taken as a waiver of Landlord's right to require full and complete performance by Tenant of all terms hereof, including payment of all amounts due hereunder or as an election on the part of the Landlord to terminate this Lease Agreement. If the Leased Premises shall be reoccupied by the Landlord, then, from and after the date of repossession, the fair market value of such occupancy shall be used to mitigate Landlord's damages hereunder. If the Leased Premises are reoccupied by the Landlord pursuant 15 16 hereto, and regardless of whether the Leased Premises shall be relet or possessed by Landlord, all fixtures, additions, furniture and the like then on the Leased Premises which have been abandoned by Tenant may be retained by Landlord. For purposes hereof any fixtures, additions, furniture and the like remaining on the Leased Premises five (5) days after reletting or possession by Landlord shall be conclusively deemed to have been abandoned by Tenant. In the event Tenant is in default under the terms hereof and, by the sole determination of Landlord, has abandoned the Leased Premises, Landlord shall have the right upon fifteen (15) days' prior written notice to Tenant, to remove all the Tenant's property from the Leased Premises and dispose of said property in such a manner as determined best by Landlord, at the sole cost and expense of Tenant and without liability of Landlord for the actions so taken. C. In the event an assignment of Tenant's business or property shall be made for the benefit of creditors, or, if the Tenant's leasehold interest under the terms of this Lease Agreement shall be levied upon by execution or seized by virtue of any writ of any court of law, or, if application be made for the appointment of a receiver for the business or property of Tenant, or, if a petition in bankruptcy shall be filed by or against Tenant, then and in any such case, at Landlord's option, with or without notice (except as may be required by Colorado law), Landlord may terminate this Lease and immediately retake possession of the Leased Premises without the same working any forfeiture of the obligations of Tenant hereunder. D. In addition to the remedies granted to Landlord by the terms hereof, Landlord shall have available any and all rights and remedies available under the laws of statutes of the State of Colorado. No remedy herein or otherwise conferred upon or reserved to Landlord shall be considered exclusive of any other remedy but shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at all or in equity or by statute. Further, all powers and remedies given by this Lease to Landlord may be exercised, from time to time, and as often as occasion may arise or as Landlord may deem expedient. No delay or omission of Landlord to exercise any right or power arising from any default shall impair any such right or power or shall be considered to be a waiver of any such default or acquiescence thereof. The acceptance of rent by Landlord shall not be deemed to be a waiver of any breach of any other covenants herein contained or of any of the rights of Landlord to any remedies herein given. E. None of the provisions of this Paragraph 39 shall be construed as constituting a waiver by Tenant of any notice to which Tenant may be entitled pursuant to Colorado law. F. Acceleration of Rent. If Tenant shall, for any reason, vacate the Leased Premises for a period of time in excess of twenty-one (21) consecutive days, before the current expiration date, Landlord shall have the right to accelerate rental payments and any and all future rent payments due during the course of the Lease Term shall become immediately payable in full to the Landlord, subject to reduction to reflect a discount to present value (to the date payment is made) of the sums payable and further subject to reduction to reflect a credit for any amounts received by Landlord upon reletting the Leased Premises, but only to the extent that such amount exceed the costs incurred by the Landlord in retaking possession, reletting the Leased Premises and repairing, improving, altering or otherwise making the Leased Premises ready for such 16 17 reletting. Landlord shall make reasonable efforts to relet the Leased Premises if Tenant vacates the Leased Premises before the current expiration date provided that "reasonable efforts" shall not be construed as requiring Landlord to incur costs to repair, improve, alter or otherwise make the Leased Premises ready for such reletting. G. Landlord Defaults. Landlord shall be in default of this Lease (i) if Landlord fails to discharge, as and when due, any obligations imposed by a mortgage or deed of trust to which this Lease is subordinate, or (ii) if Landlord fails to pay any taxes, assessments or utilities affecting the Leased Premises or the Area for which the Landlord is responsible under the terms of this Lease, or (iii) if Landlord fails to make any repairs or undertake any maintenance for which Landlord is responsible under the terms of this Lease, provided that Landlord shall not be so in default unless it fails to cure any such default within thirty (30) days after written notice thereof is given by Tenant to Landlord, or (iv) with respect to defaults of a nature which cannot be reasonably cured within thirty (30) days, Landlord has begun attempts to cure such default and has continued with reasonable diligence to cure such default thereafter). In the event of such default by Landlord, Tenant may (but shall not be obligated to) discharge such obligations by making such payments or accomplishing such repairs or maintenance, as may be appropriate. Any sums so advanced by Tenant (together with interest thereon at the rate of twelve percent (12% per annum)) shall be payable to Tenant by Landlord upon five (5) days' written notice (with supporting documentation). If Landlord fails to reimburse Tenant upon such notice, Tenant shall have the right to withhold from the next rental payment(s) due the same owed to Tenant until Tenant is reimbursed in full for all advances (with interest). Tenant shall also provide written notice of any default to the holder of record of any first mortgage or deed of trust covering the Leased Premises if such holder has provided written notice to Tenant of the existence of its first mortgage or deed of trust, which notice shall be given simultaneously with any notice to Landlord hereunder. In the event Tenant makes any payment on account of Landlord's default in payment of the obligations secured by a mortgage or deed of trust to which this Lease is subordinate, Tenant shall not in such event by subrogated to any lien, interest or right of the holder of any such mortgage or deed of trust unless Tenant pays such mortgage or deed of trust in full and receives an assignment thereof, except under circumstances where Tenant has cured or redeemed the property in connection with foreclosure proceedings (but which cure shall not be deemed to subordinate the lien of the mortgage or deed of trust so cured to any rights of Tenant). 40. LEGAL PROCEEDINGS-RESPONSIBILITIES. In the event of proceeding at law or in equity by either party hereto, the defaulting party shall pay all costs and expenses, including all reasonable attorney's fees incurred by the non-defaulting party in pursuing such remedy, if such non-defaulting party is awarded substantially the relief requested. 41. ADMINISTRATIVE CHARGES. In the event any check, bank draft or negotiable instrument given for any money payment hereunder shall be dishonored at any time and from time to time, for any reason whatsoever not attributable to Landlord, Landlord shall be entitled, in addition to any other remedy that may be available, (i) to make an administrative charge of $100.00 or three times the face value of the check, bank draft or negotiable instrument, 17 18 whichever is smaller, and (ii) at Landlord's sole option, to require Tenant to make all future rental payments in cash or cashier's check. 42. HAZARDOUS MATERIALS AND ENVIRONMENTAL CONSIDERATIONS. A. Tenant covenants and agrees that Tenant and its agents, employees, subcontractors and invitees shall comply with all Hazardous Materials Laws (as hereinafter defined). Tenant furthermore covenants and agrees that it will not use, generate, store or dispose of, nor permit the use, generation, storage or disposal of Hazardous Materials (as hereinafter defined) on, under or about the Leased Premises, nor will it transport or permit the transportation of Hazardous Materials to or from the Leased Premises, except in full compliance with any applicable Hazardous Materials Laws. Landlord expressly acknowledges that Tenant is engaged in the business of research and development which necessarily involves the use of certain organic compounds and chemicals which may themselves be, or may produce certain byproducts which may be considered Hazardous Materials as follows: Methenol (100 liters/month), Acetonitrile (50 liters/month), Ethyl Acetate (10 liters/month), Chloroform (10 liters/month), N-methylpyrrolidone (25 liters/month), Methylene chloride (4 liters/month), Xylene (4 liters/month), Toluene (1 liter/month), Acetone (10 liters/month), Tetrahydrofuron (4 liters/month), Dimethyl sulfoxide (2 liters/month), I-propanol (1 liter/month), and Isopropanol (10 liters/month). None of the provisions of this Lease shall be construed as prohibiting the lawful use by Tenant of said chemicals or compounds in connection with its operations on the Leased Premises. Any Hazardous Materials located on the Leased Premises shall be handled in an appropriately controlled environment which shall include the use of such equipment (at Tenant's expense) as is necessary to meet or exceed standards imposed by any Hazardous Materials Laws and in such a way as not to interfere with any other tenant's use of its premises. Upon breach of any covenant contained herein, Tenant shall, at Tenants's sole expense, cure such breach by taking all action prescribed by and applicable Hazardous Materials Laws or by any governmental authority with jurisdiction over such matter. B. Landlord acknowledges that Tenant has informed Landlord that Tenant intends to use, generate, handle, store or dispose of certain Hazardous Materials, on or about or transport same from, the Leased Premises. Tenant shall inform Landlord of any additional Hazardous Materials that it intends to use, generate, handle, store or dispose of, on or about or transport from, the Leased Premises and of Tenant's discovery of any event or condition which constitutes a violation of any applicable Hazardous Materials Laws. Tenant shall provide to Landlord copies of all communications to or from any governmental authority or any other party relating to Hazardous Materials affecting the Leased Premises. Tenant shall promptly take any and all necessary preventive and/or remedial action in response to the presence, storage, use, disposal, transportation or discharge of any Hazardous Materials on, under, or about the Leased Premises and shall take such preventive or remedial action in good faith so as to minimize any impairment to the Leased Premises and any adjoining premises owned by Landlord. In the event Tenant undertakes any remedial action with respect to any Hazardous Materials on, under or about the Leased Premises, Tenant shall conduct and complete such remedial action (i) in compliance with all applicable Hazardous Materials Laws and (ii) in accordance with the lawful 18 19 orders and directives of all federal, state, and local governmental authorities or political subdivisions asserting jurisdiction over the Leased Premises. C. Tenant shall indemnify and hold Landlord harmless from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities, expenses or losses (including, without limitation, diminution on value of the Leased Premises, damages for loss or restriction on use of all or part of the Leased Premises, conditions, or any cleanup, removal or restoration work required by any federal, state or local governmental agency, attorneys' fees, consultant fees and expert fees) which arise as a result of covenants or any other violation of Hazardous Materials Laws by Tenant. The foregoing indemnification shall also accrue to the benefit of the employees, agents officers, directors and/or partners of Landlord. D. Upon termination of this Lease (unless by purchase of the Leased Premises by Tenant) and/or vacation of the Leased Premises, Tenant covenants and agrees that it shall properly remove and dispose of all Hazardous Materials from the Leased Premises. Landlord shall have the right, but not the obligation, to cause an environmental audit report to be prepared by a professional consultant satisfactory to Landlord in order to determine whether the Leased Premises and surrounding areas have been subjected to environmental contamination or violation of any Hazardous Materials Laws caused by Tenant's use and occupancy of the Leased Premises. Without limiting Tenant's obligations with respect to remediation if Landlord causes such audit to be conducted by the earlier of sixty (60) days following termination of this Lease or occupancy of the Leased Premises by a subsequent Tenant, and if such audit discloses that further remediation is required (the cost of which remediation exceeds Ten Thousand Dollars ($10,000.00)), Tenant shall reimburse Landlord for the actual cost of obtaining such audit report but not to exceed Five Thousand Dollars ($5,000.00). E. "Hazardous Materials" shall mean (a) any chemical, material, substance or pollutant which poses a hazard to the Leased Premises or to persons on or about the Leased Premises or would cause a violation of or is regulated by any Hazardous Materials Laws, and (b) any chemical, material or substance defined as or included in the definitions of "hazardous substances," "hazardous wastes," "hazardous materials," "extremely hazardous waste," "restricted hazardous waste," "toxic substances," "regulated substances," or words of similar import under any applicable federal, state or local law or under the regulations adopted or publications promulgated pursuant thereto, including, but not limited to, the Comprehensive Environmental Response. Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sec. 9601, et seq.; the Hazardous Materials Transportation Act, as amended, 49 U.S.C. Sec. 1801, et seq.; the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Sec. 6901, et seq.; the Solid Waste Disposal Act, 42 U.S.C. Sec. 6991 et seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. Sec. 1251, et seq.; and Sections 25-15-101, et seq., 25-16-101, et seq., 25- 7-101, et seq., and 25-8-101, et seq., of the Colorado Revised Statutes. "Hazardous Materials Laws" shall mean any federal, state or local laws, ordinances, rules, regulations or policies (including, but not limited to, those laws specified above) relating to the environment, health and safety or the use, handling, transportation, production, disposal, discharge or storage or Hazardous Materials, or to industrial hygiene or the environmental conditions on, under or about the Leased Premises. Said term shall be 19 20 deemed to include all such laws as are now in effect or as hereafter amended and all other such laws as may hereafter be enacted or adopted during the term of this Lease. F. With the exception of any holding tanks or barrels required by the City of Fort Collins or other appropriate governmental authority (or as otherwise required by any other applicable Hazardous Materials Laws) (to which Landlord hereby consents), Tenant further covenants and agrees that it shall not install any storage tank (whether above or below the ground) on the Leased Premises without obtaining the prior written consent of the Landlord, which consent may be conditioned upon further requirements imposed by Landlord with respect to, among other things, compliance by Tenant with any applicable laws, rules, regulations or ordinances and safety measures or financial responsibility requirements. G. All obligations of Tenant under this Paragraph 42 shall survive the expiration of this Lease or its earlier termination for any reason. H. Notwithstanding the foregoing, the parties acknowledge and agree that Tenant shall have no liability with respect to Hazardous Materials located in, on or under the Leased Premises prior to commencement of the term of this Lease nor for violations of Hazardous Materials Laws which occurred prior to commencement of this Lease. In addition, Landlord represents and warrants to the Tenant that, to the best of Landlord's knowledge, after inquiry: (i) The Leased Premises are not the subject of any pending or threatened claim, lawsuit, agency proceeding or other legal or administrative action or investigation arising out of or in connection with any Hazardous Materials Laws or purported violation thereof; (ii) no Hazardous Materials have been stored in, on or under the Leased Premises or generated, stored or disposed therein or thereon; and (iii) as of the date of this Lease, the Leased Premises are not in violation of any Hazardous Materials Laws; and no governmental agency has issued any notice claiming that the Leased Premises or any condition therein or thereon violates any Hazardous Materials Laws. 43. ENTIRE AGREEMENT. It is expressly understood and agreed by and between the parties hereto that this Lease sets forth all the promises, agreements, conditions and understandings between Lessor and/or its agents and Lessee relative to the Leased Premises and that there are no promises, agreements, conditions or understandings either oral or written, between them other than are herein set forth. 44. ESTOPPEL CERTIFICATES. Within no more than five days after receipt of written request, the Tenant shall furnish to the owner a certificate, duly acknowledged, certifying, to the intent true: 20 21 A. that this Lease is in full force and effect; B. that the Tenant knows of no default hereunder on the part of the owner, or if it has reason to believe that such a default exists, the nature thereof in reasonable detail; C. the amount of the rent being paid and the last date to which rent has been paid; D. that this Lease has not been modified, or if it has been modified, the terms and dates of such modifications; E. that the term of this Lease has been commenced; F. the commencement and expiration dates; G. whether all work to be performed by the owner has been completed; H. whether the renewal term option has been exercised if applicable; I. whether there exist any claims or deductions from, or defenses to, the payment of rent; and J. such other matters as may be reasonably requested by owner. If the Tenant fails to execute and deliver to the owner a completed certificate as required under this section, the Tenant hereby appoints the owner as its Attorney-In-Fact to execute and deliver such certificate for and on behalf of the Tenant. 45. FINANCIAL STATEMENTS. As requested by the Landlord, Tenant shall provide copies of its most recent financial statements and shall also provide Landlord with up to three (3) prior years of financial statements, if so requested. 46. LEASE EXHIBITS ATTACHED. This Lease includes the following Lease Exhibits which are incorporated herein and made a part of this Lease Agreement: Exhibit "A" - Site Plan Depicting Area Exhibit "B" - Interior Space Plan Exhibit "C" - Landlord and Tenant's Construction Obligations Exhibit "D" - Sign Code Obligations Exhibit "E" - Additional Terms and Conditions 47. MISCELLANEOUS. All marginal notations and paragraph headings are for purposes of reference and shall not affect the true meaning and intent of the terms hereof. Throughout this Lease, wherever the words "Landlord" and "Tenant" are used, they shall include and imply to the singular, plural, persons both male and female, companies, partnerships and corporations, and in reading said Lease, the necessary grammatical changes required to make the provisions hereof mean and apply as aforesaid shall be made in the same manner as though originally included in said Lease. IN WITNESS WHEREOF, the parties have executed this Lease as of the date hereof. WITNESS: LANDLORD: GB VENTURES ________________________________ 21 22 As to Landlord By_________________________ ________________________________ As to Landlord WITNESS: TENANT: ATRIX LABORATORIES, INC. ________________________________ As to Tenant By_________________________ ________________________________ As to Tenant The W.W. Reynolds Companies R. December 3, 1990 22 23 LEASE ADDENDUM This Lease Addendum is made and entered into this ____ day of May 1996, by and between GB Ventures ("Landlord") and Atrix Laboratories, Inc. ("Tenant") as a supplement to the Lease Agreement by and between Landlord and Tenant dated May 11, 1991. PREMISES: The Leased Premises presently consist of approximately 23,200 square feet and are comprised of Suite F of Building 3 and all of Building 4 of Plum Tree Plaza, Fort Collins, Colorado. The new Leased Premises consist of approximately 24,580 square feet and are comprised of Suites E and F of Building 3 and all of Building 4 of Plum Tree Plaza, Fort Collins, Colorado. To further clarify, Tenant shall rent an additional 1,380 square feet adjacent to its present Premises. Tenant shall lease the additional space as is. Tenant shall begin paying for the additional square footage on June 1, 1996 and continue through the end of the original Lease Term, i.e., June 5, 1998. BASE RENTAL RATE: The base monthly rental rate for the additional square footage shall be: June 1, 1996 to June 1, 1997 $948.75 per month NNN June 1, 1997 to June 1, 1998 $977.50 per month NNN NNN: As called for in the original Lease, Tenant shall be responsible for the prorated amount for common area maintenance, insurance, taxes and building water. OTHER TERMS AND CONDITIONS: All other terms and conditions of the Lease Agreement dated May 11, 1991 which is not superseded by this Lease Addendum shall remain the same. CONTINGENCY: This Lease Addendum shall be contingent upon receiving a Lease Termination Agreement by and between Landlord and Christian Chiropractors by May 10, 1996. If such Lease Termination Agreement is not executed this Lease Addendum shall be null and void. 24 LANDLORD: TENANT: GB VENTURES ATRIX LABORATORIES, INC. By______________________________ By_________________________________ ________________________________ ___________________________________ Date Date 2 EX-10.7 3 AGREEMENT OF PURCHASE & SALE 1 EXHIBIT 10.7 AGREEMENT OF PURCHASE AND SALE THIS AGREEMENT OF PURCHASE AND SALE (this "Agreement") is made to be effective as of the date described in Paragraph 8.17 hereof, by and between D.C. PITCAIRN HOLDINGS, INC., a Colorado corporation ("Seller"), having an office at 1018 Center Avenue, Fort Collins, Colorado 80526, and ATRIX LABORATORIES, INC., a Delaware corporation ("Purchaser"), having an office at 2579 Midpoint Drive, Fort Collins, Colorado 80525. W I T N E S S E T H: ARTICLE I PURCHASE AND SALE 1.01. AGREEMENT OF PURCHASE AND SALE. Subject to the terms and conditions hereinafter set forth and for the consideration stated herein, Seller agrees to sell and Purchaser agrees to purchase the following: (a) All that certain tract or parcel of land in Larimer County, Colorado more particularly described in Exhibit A attached and made a part hereof, together with the improvements thereon, with a street address of 701 Centre Drive, Fort Collins, Colorado, together with all rights, title and interest of Seller in and to all rights, tenements, hereditaments, easements, appendages, ways, privileges and appurtenances, if any, pertaining thereto, including any right, title and interest of Seller in and to the adjacent streets, alleys and rights-of-way (the "Real Property and Improvements"); (b) All electrical fixtures, plumbing fixtures, heating fixtures, air conditioning fixtures, and all other improvements and fixtures owned by the Seller and located on or used in connection with the Real Property and Improvements including, without limitation, those certain installed freezer, refrigeration units, autoclave, despatch oven, and steam generators. (the "Fixtures"); (c) All of Seller's right, title and interest in and to all assignable warranties and guaranties, if any, issued to Seller in connection with the Real Property and Improvements and Fixtures (the "Warranties and Guaranties"); and (d) All of Seller's right, title and interest in and so all assignable contracts and agreements relating to the upkeep, repair, maintenance or operation of said property which will extend beyond the Closing Date, as hereinafter defined (the "Operating Agreements"). 1.02. PROPERTY DEFINED. The property and interests described in Sections 1.01(a) through 1.01(d) above are hereinafter sometimes collectively referred to as the "Property." 2 1.03. PERMITTED EXCEPTIONS. The Property shall be conveyed subject to the Permitted Exceptions as defined in Section 2.04. 1.04. EARNEST MONEY. On the Effective Date, as hereinafter defined, Purchaser shall deposit with Transnation Title Insurance Company (the "Title Company") the sum of Twenty-Five Thousand Dollars ($25,000.00) (the "Earnest Money") in cash, or by federal funds wire transfer, cashiers or certified check, to be held in escrow by the Title Company as earnest money in accordance with the terms of this Agreement. The Earnest Money shall be held by Title Company in the highest available interest bearing account at a federally insured depository approved by Seller. The Earnest Money and any interest thereon shall be applied against the Purchase Price, as hereinafter defined, or shall be paid to Seller or Purchaser as otherwise provided for in this Agreement. All references to Earnest Money shall include the interest earned thereon, if any. 1.05. PURCHASE PRICE. (a) Seller shall sell and Purchaser shall purchase the Property for a total of Two Million Nine Hundred Thousand and No/100 Dollars ($2,900,000.00) (the "Purchase Price"). (b) The Purchase Price shall be payable as follows: (i) The Earnest Money shall be applied against the Purchase Price at Closing, as hereafter defined. (ii) Purchaser shall pay Seller Two Million Eight Hundred Seventy Five Thousand and No/100 Dollars ($2,875,000.00) at Closing, in cash or by federal funds wire transfer. Such amount shall be adjusted to reflect customary closing costs, prorations, adjustments and interest earned on the Earnest Money, if any. ARTICLE II INSPECTION PERIOD AND CONTINGENCIES 2.01. REVIEW OF MATERIALS. Within five (5) days from the Effective Date, as hereinafter defined, Seller shall deliver to Purchaser the following documents and information; Seller makes no representations or warranties with respect to such documents or information: (a) a title commitment (the "Title Commitment") issued by the Title Company evidencing title in and to the Real Property and Improvements vested in Seller, evidencing all matters affecting title to the Real Property and Improvements and binding the Title Company to issue to Purchaser at the Closing an ALTA 1992 Owner's Policy of Title Insurance in the amount of the Purchase Price ("Owners Title Policy") for the 2 3 Real Property and Improvements, together with copies of all instruments referenced in Schedule B of the Title Commitment; (b) the most recent survey of the Real Property and Improvements in Seller's possession, if any (the "Survey," which term shall include any update thereof or a new survey) which Survey may, at Purchaser's expense, be recertified to Purchaser and Title Company; and in the event Purchaser cannot obtain a recertification of the Survey, Purchaser may obtain a new Survey at its expense. (c) copies of all Operating Agreements in Seller's possession, including any amendments and letter agreements relating thereto; (d) plans and specifications for the Property in Seller's possession, if any; 2.02. RIGHT OF INSPECTION. During the period commencing on the Effective Date through and including July 19, 1996 (the "Inspection Period"), Purchaser shall have the right to make a physical inspection and conduct such other due diligence as Purchaser deems necessary with respect to the Property and to examine records maintained by Seller relating to the Property at such place or places as said records may be located; provided, however, Purchaser agrees to indemnify and hold Seller harmless from and against any claim for damages or injuries arising therefrom. The physical inspection of the Property and such other due diligence with respect thereto by Purchaser shall include, without limitation, (i) such engineering and structural tests and inspections as Purchaser deems necessary, (ii) obtaining evidence that all permits and licenses necessary for Purchaser's intended use of the Property have been or can be obtained without undue effort or expense and (iii) performing such environmental testing as Purchaser deems appropriate. All inspections shall occur at reasonable times agreed upon by Seller and Purchaser and shall be conducted (a) so as not to unreasonably interfere with use of the Property by Seller or its tenants, and (b) so as not to violate any operating guidelines for the property. A representative of Seller shall accompany Buyer or Buyer's agents on all inspections. 2.03. RIGHT OF TERMINATION. Seller agrees that in the event Purchaser determines that the Property is not suitable for its purposes in the sole and absolute discretion of Purchaser, Purchaser shall have the right to terminate this Agreement by sending written notice thereof (the "Termination Notice") to Seller prior to the expiration of the Inspection Period. Upon delivery by Purchaser of such Termination Notice prior to the expiration of the Inspection Period, this Agreement shall terminate and the Earnest Money shall forthwith be returned to Purchaser. If Purchaser fails to send Seller a Termination Notice prior to the expiration of the Inspection Period, Purchaser's right to terminate this Agreement pursuant to this Section shall expire and the Agreement shall remain in full force and effect and the Earnest Money shall become non-refundable subject to Purchaser's right to terminate this Agreement pursuant to Sections 2.04 or 5.02. Simultaneously with the delivery of the Termination Notice, Purchaser shall deliver to Seller all documents and materials in its possession relating to the Property. 3 4 2.04. TITLE STATUS AND INSURANCE. (a) Title Insurance. Purchaser shall have until June 25, 1996 to examine the Title Commitment and the Survey (as defined and provided for in Section 2.01(b)) and to object in writing to any matters reflected therein. If Purchaser makes any timely objection to either the Title Commitment or the Survey, then Seller, within a reasonable period of time not to exceed five (5) business days from the date of receipt of such objection, may (but Seller shall in no way be obligated to do so) cure such objection and have the Title Commitment or Survey updated to reflect such cure. If Purchaser makes any objection to title or the Survey and Seller elects not to cure the same, or is unable to do so within the period set forth above, Seller shall so notify Purchaser, and Purchaser's remedy shall be to either (i) waive such objection and purchase the Property subject thereto without reduction in the Purchase Price, and matters previously objected to by Purchaser and so waived by Purchaser shall become additional Permitted Exceptions; or (ii) terminate this Agreement by notifying Seller thereof within two (2) days after Seller notifies Purchaser of Seller's inability or election not to cure such objection and receive a refund of the Earnest Money. If Purchaser does not so timely elect to terminate this Agreement, Purchaser shall be deemed to have waived its objection to title and such matters shall become additional Permitted Exceptions. If Purchaser fails to timely notify Seller of any objections to title or to the Survey, it shall be deemed that Purchaser has found the Title Commitment, Survey and all matters reflected therein acceptable. The Title Commitment shall set forth the requirements of the Title Company to delete standard printed exceptions. At the Closing, Seller shall cause the Title Company to issue a new Title Commitment containing only the Permitted Exceptions. Seller shall cooperate with Purchaser to cause the Title Company to delete standard printed exceptions from the Title Commitment, but Seller shall not be obligated to incur any additional expenses or liability to accomplish such deletions. (b) Permitted Exceptions. The "Permitted Exceptions" shall mean (i) those matters set forth on the Title Commitment and approved by Purchaser (or deemed to be waived or approved by Purchaser) and those matters apparent upon an inspection of the Real Property and Improvements; (ii) real property taxes and assessments for the year of Closing and subsequent years; (iii) building, zoning and other applicable ordinances and regulations of the County of Larimer; (iv) taxes, assessments, fees or charges, if any, resulting from the inclusion of the Property in any special district or; and (v) such other matters as are caused by or acquiesced in by Purchaser or its agents. 2.05. APPROVAL BY BOARD OF DIRECTORS OF PURCHASER. This Agreement and Purchaser's obligations hereunder are expressly contingent upon the approval of the terms and conditions of this Agreement by the Board of Directors of Purchaser (the "Board") on or before ten days from the Effective Date. In the event that Purchaser fails to deliver written notice to Seller, on or before ten days from the Effective Date indicating that the Board has approved of the terms and conditions of this Agreement, this Agreement shall be automatically terminated and upon such 4 5 termination, the parties hereto shall be relieved of all their obligations hereunder and the Earnest Money shall be promptly returned to Purchaser. ARTICLE III CLOSING 3.01. TIME AND PLACE. The closing of this transaction (the "Closing") shall take place at the offices of the law firm of Hasler, Fonfara and Maxwell, LLC, 125 South Howes Street, 6th Floor, Fort Collins, Colorado 80521, on July 29, 1996 or such other date as Purchaser and Seller may mutually agree upon (the "Closing Date"). 3.02. SELLER'S AND PURCHASER'S OBLIGATIONS AT CLOSING. At Closing: (a) Seller shall deliver to Purchaser a duly executed and acknowledged: (i) general warranty deed conveying the Real Property and Improvements, subject to the Permitted Exceptions; (ii) bill of sale conveying the Fixtures; and (iii) assignment of Operating Agreements, Warranties and Guaranties, and Purchaser shall join in the execution of such assignment for the purpose of assuming all of Seller's obligations under the Operating Agreements for all periods subsequent to the Closing Date. (b) Purchaser shall pay to Seller the Purchase Price, less any amount which may be deducted therefrom pursuant to the terms of this Agreement. (c) Seller shall deliver to Purchaser, at Seller's expense, the Owner's Title Policy, or an agreement by the Title Company reasonably acceptable to Purchaser to issue Owner's Title Policy. (d) General real estate taxes for the then current year relating to the Property shall be prorated as of the Closing Date. If the Closing Date shall occur before the tax rate is fixed for the then current year, the apportionment of taxes shall be upon the basis of the tax rate for the immediately preceding year applied to the latest assessed valuation of the Property. All delinquent installments of special taxes or assessments assessed or levied prior to the Closing Date shall be paid in full by Seller and all non-delinquent installments thereof and those assessed or levied after the Closing Date shall be paid by Purchaser. (e) All other income from, and expenses of, the Property, including but not limited to rents, utility charges, maintenance charges and service charges shall be prorated as of the Closing Date with Seller being responsible for the costs thereof through the day before the Closing Date and Purchaser being responsible for such costs thereafter. (f) Seller agrees to pay the costs of the Owner's Title Policy, plus one-half of any escrow or closing fees charged by Title Company. Purchaser agrees to pay one- 5 6 half of any escrow or closing fees charged by the Title Company, and the cost to obtain any recertification of the Survey or a new Survey, if applicable. The Purchaser shall also be responsible for the payment of recording costs, and the documentary fee due upon the transfer of the Property and subsequent recording of documents. Each of the parties hereto do hereby agree to be responsible for their respective attorney's fees incurred in connection with the purchase and sale of the Property. Any and all other expenses or charges in connection with the Closing shall be paid for by the parties in accordance with applicable custom in the State of Colorado. (g) Personal property taxes for the then current year relating to the Property shall be prorated as of the Closing. Purchaser shall each pay all sales and use taxes relating to the Property, if any. (h) Possession of the Property shall be given to Purchaser, subject to the Permitted Exceptions, and the new Montfort Lease, as hereafter defined. (i) Seller shall deliver to Purchaser all keys to all locks on the Property in Seller's possession. (j) Seller shall deliver to Purchaser such documentary and other evidence as may be reasonably required by Purchaser or the Title Company evidencing the status and capacity of Seller and the authority of the person or persons who are executing the various documents on behalf of Seller in connection with this Agreement. (k) Purchaser shall deliver to Seller such documentary and other evidence as may be reasonably required by Seller or the Title Company evidencing the status and capacity of Purchaser and the authority of the person or persons who are executing the various documents on behalf of Purchaser in connection with this Agreement. (l) Seller shall deliver a FIRPTA Affidavit to Purchaser. Notwithstanding anything contained herein to the contrary, in making the foregoing apportionments, Purchaser shall be responsible for taxes and other expenses incurred with respect to the day of Closing. ARTICLE IV REPRESENTATIONS, WARRANTIES AND COVENANTS 4.01. REPRESENTATIONS AND WARRANTIES OF SELLER AND PURCHASER. Purchaser hereby represents and warrants to Seller, which representation and warranty shall be deemed to be restated at Closing, that Purchaser is a duly organized and validly existing under the laws of the State of Delaware and the execution and delivery by Purchaser of and Purchaser's performance under this Agreement are within Purchaser's powers and upon approval of the Board of Directors of Purchaser as provided in Paragraph 2.05, shall be duly authorized by all requisite 6 7 action. Seller hereby represents and warrants to Purchaser, which representation and warranty shall be deemed to be restated as Closing, that Seller is a corporation duly organized and validly existing under the laws of the State of Colorado and the execution and delivery by Seller of and Seller's performance under this Agreement are within Seller's powers and have been duly authorized by all requisite action. 4.02. REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER. Purchaser hereby covenants to Seller, which covenants shall survive Closing, as follows: (a) Purchaser may, in connection with its investigation of the Property during the Inspection Period, inspect the Property for the presence of asbestos, PCB emissions and hazardous waste and any other hazardous substance and if Purchaser conducts such inspections, Purchaser shall notify Seller in writing of the results of such inspection; and (b) Purchaser shall not acquire the Property with the assets of an employee benefit plan as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended. 4.03. REPRESENTATIONS, WARRANTIES, COVENANTS OF SELLER. Seller hereby represents and warrants to Purchaser, which representations and warranties shall be deemed to be restated at Closing, that: (a) There is no pending or, to the best of Seller's knowledge, threatened litigation or condemnation proceeding affecting the Property; (b) To Seller's knowledge, the Real Property and Improvements are not in violation of any Law or Regulation relating to Hazardous Substances or Materials; (c) To Seller's knowledge, there has never been any above ground or underground storage tanks containing materials which are regulated by any Law or Regulation on the Real Property. (d) All Fixtures are owned by Seller and shall be conveyed to Purchaser free and clear of all liens and encumbrances. The representations and warranties set forth herein shall survive the Closing. 4.04. DEFINITIONS. For the purposes hereof, the following definitions shall apply: "Law or Regulation" means and includes the Comprehensive Environmental Response and Liability Act ("CERLA" or the Federal Superfund Act) as amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA") 42 U.S.C., Sections 9601-9675; the Federal Resource Conservation and Recovery Act of 1976 ("RCRA"); the Clean Water Act, 33 U.S.C., Section 1321, et seq.; the Clean Air Act, 42 U.S.C., Section 7401, et seq. all as the same may be from time to time amended and any other federal, state, county, municipal, local 7 8 or other statute, law, ordinance or regulation which may relate to or deal with human health or the environment including, without limitation, all regulations promulgated by a regulatory body pursuant to any such statute, law or ordinance. "Hazardous Substances or Materials" means asbestos, ureaformaldehyde, polychlorinated biphenyls, nuclear fuel or materials, chemical waste, radioactive materials, explosives, known carcinogens, petroleum products or other dangerous, toxic, or hazardous pollutant, contaminant, chemical, material or substance defined as hazardous or as a pollutant or contaminant in, or the release or disposal of which is regulated by, any Law or Regulation. ARTICLE V DEFAULT 5.01. DEFAULT BY PURCHASER. In the event that Purchaser should fail to consummate this Agreement for any reason, except Seller's default or the termination of this Agreement by either Seller or Purchaser as herein expressly provided, Seller shall be entitled to terminate this Agreement and receive the Earnest Money, as liquidated damages for the breach of this Agreement, it being agreed between the parties hereto that the actual damages to Seller in the event of such breach are impractical to ascertain and the amount of the Earnest Money is a reasonable estimate thereof. Seller shall not be entitled to bring an action for specific performance and/or additional damages. 5.02. DEFAULT BY SELLER. In the event that Seller should fail to consummate this Agreement for any reason, except Purchaser's default or the termination of this Agreement by Seller or Purchaser as herein expressly provided, Purchaser shall be entitled, either (a) to recover actual (but not consequential) damages from Seller and to recover the Earnest Money, or (b) to bring an action to enforce specific performance of this Agreement. In no event shall Purchaser be entitled to seek or obtain damages from Seller, except as set forth in the prior sentence. ARTICLE VI RISK OF LOSS 6.01. In the event of any damage, destruction to or condemnation of the Property subsequent to the Effective Date of this Agreement and prior to the date of Closing, the estimated cost of repair to or condemnation proceeds of which is in excess of $5,000.00, Purchaser, at its option, and, as its sole remedy, may either terminate this Agreement, whereupon the Earnest Money shall be returned to Purchaser in full, or Purchaser may elect to consummate the sale, in which event Seller's right to all insurance or condemnation proceeds resulting from such damage, destruction or condemnation shall be assigned in writing by Seller to Purchaser and Seller shall have no further obligation to Purchaser with regard to such damage, destruction or condemnation. In the event of any damage, destruction to or condemnation of the Property subsequent to the Effective Date of this Agreement and prior to 8 9 the date of Closing, the estimated cost of repair of which is equal to or less than $5,000.00, Purchaser shall have no right to terminate this Agreement as a result thereof, provided Seller's right to all insurance proceeds and condemnation proceeds resulting from such damage, destruction or condemnation shall be assigned in writing by Seller to Purchaser. ARTICLE VII COMMISSIONS 7.01. In the event of Closing hereunder, and only in such event, Seller agrees to pay The Land Exchange, Inc. ("Broker"), a real estate commission equal to two and one-half percent (2.5%) (the "Fee") of the Purchaser Price at Closing. In the event the Closing does not take place for whatever reason, neither the Fee nor any portion thereof shall be payable to Broker. Except for the Fee, Seller and Purchaser each hereby warrant and represent to the other that it has not become obligated for the payment of any commission or fee arising out of the sale provided for herein. Except for the Fee each party agrees that should any claim be made for brokerage commissions or finder's fees by any broker or finder by, through or on account of any acts of said party or its representatives, said party will indemnify and hold the other party free and harmless from and against any and all loss, liability, cost, damage and expense, including reasonable attorneys' fees, in connection therewith. The provisions of this paragraph shall survive Closing. Notwithstanding the foregoing, Purchaser expressly acknowledges that Dan Nelson, who is an officer and director of Seller, is a licensed real estate broker in the State of Colorado employed by RE/MAX Advanced, Inc. Dan Nelson is representing the Seller in this transaction and will be separately compensated by Seller. ARTICLE VIII MISCELLANEOUS 8.01. "AS IS, WHERE IS" DISCLAIMER OF WARRANTIES: PURCHASER ACKNOWLEDGES AND AGREES: EXCEPT AS PROVIDED EXPRESSLY HEREIN, NEITHER SELLER NOR ANYONE ACTING FOR OR ON BEHALF OF SELLER, HAS MADE ANY REPRESENTATION, WARRANTY, STATEMENT OR PROMISE TO PURCHASER CONCERNING THE PROPERTY, THE QUALITY, VALUE, PHYSICAL ASPECTS OR CONDITION THEREOF, ANY DIMENSIONS OR SPECIFICATIONS OF THE PROPERTY, THE FEASIBILITY, DESIRABILITY, CONVERTIBILITY OF THE PROPERTY FOR OR INTO ANY PARTICULAR USE, THE CURRENT OR PROJECTED INCOME OR EXPENSES OF THE PROPERTY OR ANY OTHER MATTER WITH RESPECT TO THE PROPERTY; THAT ENTERING INTO THIS AGREEMENT, PURCHASER HAS NOT RELIED UPON ANY REPRESENTATION, STATEMENT OR WARRANTY OF SELLER, EXCEPT AS PROVIDED HEREIN OR ANYONE ACTING FOR OR ON BEHALF OF SELLER, OTHER THAN AS EXPRESSLY CONTAINED IN THIS AGREEMENT, AND THAT ALL MATTERS CONCERNING THE PROPERTY HAVE BEEN INDEPENDENTLY VERIFIED BY PURCHASER AND THAT PURCHASER IS PURCHASING THE PROPERTY BASED UPON ITS OWN INSPECTION AND EXAMINATION THEREOF; THAT 9 10 PURCHASER IS PURCHASING THE PROPERTY "AS IS" AND "WHERE IS"; AND THAT, EXCEPT AS PROVIDED IN THIS AGREEMENT, PURCHASER DOES HEREBY WAIVE AND SELLER DOES HEREBY DISCLAIM ALL WARRANTIES OF ANY KIND OR TYPE WHATSOEVER WITH RESPECT TO THE PROPERTY, WHETHER EXPRESSED OR IMPLIED, INCLUDING BY WAY OF DESCRIPTION BUT NOT LIMITATION, THOSE OF MARKETABILITY, MERCHANTABILITY OF TITLE, FITNESS FOR A PARTICULAR PURPOSE, TENANTABILITY, HABITABILITY, USE AND ALL WARRANTIES RELATING TO COMPLIANCE BY THE PROPERTY WITH ANY APPLICABLE GOVERNMENTAL LAWS AND REGULATIONS INCLUDING, WITHOUT LIMITATION, BUILDING AND ZONING CODES, THE SOIL CONDITIONS OF THE PROPERTY, AND THE COMPLIANCE BY THE PROPERTY WITH ANY ENVIRONMENTAL REQUIREMENTS. FURTHER, PURCHASER HEREBY SPECIFICALLY ASSUMES THE RISK OF CONFIRMING THAT THE PROPERTY IS SERVED BY SUFFICIENT UTILITIES INCLUDING, WITHOUT LIMITATION, WATER, SEWER, GAS, ELECTRIC AND TELEPHONE SERVICE. THE TERMS OF THIS PARAGRAPH WILL SURVIVE THE CLOSING AND CONVEYANCE OF THE PROPERTY TO PURCHASER BY SELLER. 8.02. NON-BUSINESS DAYS. If the Closing Date or any other date set forth in this Agreement is to occur on a holiday or other non-business day or if any period of time set forth in this Agreement expires on a holiday or non-business day, then such closing or other date shall be the next business day thereafter. As used in this paragraph the terms "holiday" or "non-business day" shall mean those dates upon which nationally chartered banks of the United States of America are not required to be open for business. 8.03. JURISDICTION. The parties hereto consent to exclusive venue and jurisdiction in the district court in and for the County of Larimer, Colorado or the United States District Court for the District of Colorado in any action commenced relating to this Agreement or the transactions contemplated hereby. 8.04. RECORDATION. The parties acknowledge and agree that neither this Agreement nor any memorandum hereof shall be recorded in the Office of the Clerk and Recorder of Larimer County, Colorado and in the event of any recordation of this Agreement by Purchaser, this Agreement shall, at Seller's sole option, be rendered null and void and of no further force and effect whatsoever. 8.05. DISCHARGE OF OBLIGATIONS. The acceptance of the deed by Purchaser at Closing shall be deemed to be a full performance and discharge of every agreement and obligation on the part of Seller to be performed pursuant to the provisions of this Agreement, except those, if any, which are herein specifically stated to survive Closing. 8.06. ASSIGNMENT. Purchaser may not assign its right under this Agreement except with the prior written consent of Seller, which consent may be given or withheld in Seller's sole discretion. 10 11 8.07. NOTICES. (a) Any notice to be given by either party to this Agreement shall be given in writing and may be effected by personal delivery or sent by certified, United States Mail, postage prepaid, or sent by nationally recognized overnight courier service, or sent by telecopy confirmed by mailing (by first class or express mail, postage prepaid) written confirmation at substantially the same time as such telecopy transmission. All such communications shall be mailed, sent or delivered, addressed to the party for whom it is intended at its address set forth below: If to Seller: D.C. Pitcairn Holdings Attention: Dan Nelson, Vice President 1018 Centre Avenue Fort Collins, Colorado 80526 Facsimile #(970) 221-5999 With copies thereof to: Timothy W. Hasler, Esq. Hasler, Fonfara and Maxwell, LLP P.O. Box 2267 Fort Collins, Colorado 80522 Facsimile # (970) 493-9703 If to Purchaser: Mr. Michael R. Duncan, Vice President Atrix Laboratories, Inc. 2579 Midpoint Drive Fort Collins, Colorado 80527 Facsimile #(970) 482-9735 With a copy thereof to: Stephen J. Ismert, Esq. Kutak Rock 717 17th Street, Suite 2900 Denver, Colorado 80202 Facsimile #(303) 292-7799 (b) Any notice sent in compliance with the requirements of this Section shall be deemed received on the date the same is either (i) received by the party or parties to whom such notice is addressed, or (ii) deposited in a United States Post Office or other official depository of the United States mail, or (iii) confirmation generated by the sender's facsimile machine that indicates the completion of the facsimile transmission to the recipient, whichever is the first to occur. 8.08. MODIFICATION. This Agreement cannot be changed orally, and no agreement shall be effective to waive, change, modify or discharge it in whole or in part unless such agreement 11 12 is in writing and is signed by the parties against whom enforcement of any waiver, change, modification or discharge is sought. 8.09. TIME OF ESSENCE. Seller and Purchaser agree that time is of the essence with respect to this Agreement. 8.10. SUCCESSORS AND ASSIGNS. The terms and provisions of this Agreement are to apply to and bind the permitted successors and assigns of the parties hereto. 8.11. ENTIRE AGREEMENT. This Agreement, including the Exhibits, contains the entire agreement between the parties pertaining to the subject matter hereof and fully supersedes all prior agreements and understandings between the parties pertaining to such subject matter. 8.12. ATTORNEYS' FEES. In the event of any controversy, claim or dispute between the parties affecting or relating to the subject matter or performance of this Agreement, the prevailing party shall be entitled to recover from the non-prevailing party all of its reasonable expenses, including reasonable attorneys' and accountants' fees. 8.13. COUNTERPARTS. This Agreement may be executed in several counterparts, and all such executed counterparts shall constitute the same agreement. It shall be necessary to account for only one such counterpart in proving this Agreement. 8.14. SEVERABILITY. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid or unenforceable, the remainder of this Agreement shall nonetheless remain in full force and effect. 8.15. PARAGRAPH HEADINGS. Paragraph headings contained herein are for convenience only and shall not be considered in interpreting this Agreement. 8.16. BINDING EFFECT. This Agreement shall not be binding upon any party hereto unless and until both Seller and Purchaser have executed this Agreement. 8.17. EFFECTIVE DATE OF AGREEMENT. Purchaser's agreement to negotiate with Seller for the purchase of the Property shall become void and of no effect unless Purchaser's offer to acquire the Property as evidenced by Seller's execution of this Agreement and delivery thereof to Purchaser occurs on or before 5:00 p.m. on June 10, 1996. The date of delivery to the Purchaser shall be deemed the effective date (the "Effective Date") of this Agreement. 8.18. INTERSTATE LAND SALES ACT. It is the intent of Seller and acknowledged by Purchaser that the sale of the Real Property will be exempt from the provisions of the federal Interstate Land Sales Act under the exemption applicable to the sale or lease of lots (a) to any person who acquires such lots for the purpose of engaging in the business of constructing residential, commercial or industrial buildings or for the purpose of resale of such lots to persons engaged in such business; or (b) which are zoned by the appropriate governmental authority for industrial or commercial developments or which is restricted to such use by a declaration of 12 13 covenants, conditions and restrictions, which are recorded in the official records of the appropriate county. Purchaser hereby represents and warrants that Purchaser is acquiring the Real Property and Improvements for such purposes. 8.19. PRESS RELEASES. Neither Seller nor Purchaser shall issue any press release or other announcement to the general public concerning this Agreement or the transaction contemplated hereby prior to the Closing Date without the prior written consent of the other party. 8.20. CHOICE OF LAW. The Agreement and rights and obligations of the parties shall be governed by Colorado law. 8.21. SELLER'S CONTINGENCY REGARDING MONTFORT LEASE. Purchaser expressly acknowledges that the Building and Improvements are subject to an existing lease with Montfort, Inc. (the "Existing Montfort Lease"). Montfort, Inc. has agreed to terminate the Existing Montfort Lease provided Montfort is able to negotiate a new lease with Purchaser on terms acceptable to Montfort, Inc. (the "New Montfort Lease"). Seller's obligations under this Agreement are contingent upon the termination of the "Existing Montfort Lease" prior to Closing and the release of Seller from all liability in connection therewith. Purchaser shall keep Seller advised as to Purchaser's progress in negotiating the New Montfort Lease. 8.22. PURCHASER'S RIGHT TO TERMINATE AGREEMENT AND CONTINGENCY REGARDING MONFORT LEASE. In the event that Purchaser determines that it will be unable to enter into a lease agreement for a portion of the Real Property and Improvements with Montfort, Inc., with terms and covenants acceptable to Purchaser, in Purchaser's sole and absolute discretion, Purchaser shall have the right to terminate this Agreement by sending written notice thereof to Seller at any time prior to July 25, 1996. Upon the delivery by Purchaser of said notice, this Agreement shall terminate and the Earnest Money shall forthwith be returned to Purchaser. 8.23. TAX-DEFERRED EXCHANGE TRANSACTION. At the request of Seller, Purchaser shall cooperate with Seller in the achievement of a tax-deferred real estate exchange pursuant to Section 1031 of the Internal Revenue Code and the Treasury Regulations promulgated thereunder. A material part of the consideration to Seller is Purchaser's promise of cooperation. Purchaser shall not be required to incur any additional liability or expense in connection with Seller's tax-deferred exchange transaction. IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement effective as of the date set forth in Paragraph 8.17 hereof. [End of Document Text] 13 14 PURCHASER: Executed by Purchaser this ATRIX LABORATORIES, INC., a Delaware 10th day of June, 1996. corporation By:__________________________________________ Name: John E. Urheim Title: Vice-chairman and CEO SELLER: Executed by Seller this D. C. PITCAIRN HOLDINGS, INC., a Colorado 11 day of June, 1996 corporation By___________________________________________ Name:________________________________________ Title:_______________________________________ 14 15 EXHIBIT A Lots 1 and 2 Centre for Advanced Technology Replat of the 8th filing County of Larimer State of Colorado 15 EX-23 4 CONSENT OF DELOITTE & TOUCHE LLP 1 EXHIBIT 23 CONSENT OF DELOITTE & TOUCHE LLP INDEPENDENT AUDITOR'S CONSENT We consent to the incorporation by reference in Registration Statement No. 33-49268 and Registration No. 33-64029 of Atrix Laboratories, Inc. on Form S-8 of our report dated January 24, 1997, appearing in this Annual Report on Form 10-K of Atrix Laboratories, Inc. for the year ended December 31, 1996. Deloitte & Touche LLP Denver, Colorado March 7, 1997 EX-27 5 FINANCIAL DATA SCHEDULE
5 1 U.S. YEAR DEC-31-1996 JAN-01-1996 DEC-31-1996 1 75,368,472 6,040,389 845,418 10,000 303,505 32,849,105 6,453,615 1,687,056 38,463,494 8,179,864 0 0 0 11,114 30,425,157 38,463,494 635,517 2,895,525 363,517 14,327,678 0 10,000 0 (11,432,153) 0 (11,432,153) 0 0 0 (11,432,153) (1.13) (1.13)
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