-----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, OfJkyUuImiPCDgmgNjoiWp+s+H0mte2sZj0WpdI1Nrc0vEv0at0pEYDqz0DCnZBX F/uPEOmM7ZZDFZWOPe3aOw== 0001035704-99-000146.txt : 19990325 0001035704-99-000146.hdr.sgml : 19990325 ACCESSION NUMBER: 0001035704-99-000146 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 17 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990324 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: SEC FILE NUMBER: 000-18231 FILM NUMBER: 99571050 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 FISCAL YEAR END DECEMBER 31, 1998 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------- FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) --- OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1998 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) --- OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period From __________ to ____________ ----------------- Commission File Number 0-18231 ATRIX LABORATORIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 84-1043826 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2579 MIDPOINT DRIVE FORT COLLINS, COLORADO 80525 (Address of principal executive office) (Zip Code) Registrant's telephone number, 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) Series A Preferred Stock Purchase Rights ---------------------------------------- (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. |_| The aggregate market value of voting stock held by non-affiliates of the Registrant as of February 19, 1999 was $144,102,697. The number of shares outstanding of the registrant's common stock as of February 19, 1999 was 11,414,075. 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 25, 1999. ================================================================================ 2 PART I ITEM 1. BUSINESS. OVERVIEW Atrix Laboratories, Inc. (the "Company"), originally named Vipont Research Laboratories, Inc., was formed in August 1986 as a Delaware corporation. The Company is engaged primarily in the research, development and commercialization of a broad range of dental, medical and veterinary products based on its proprietary biodegradable polymer drug delivery systems. The Company's primary focus to date has been the ATRIGEL(R) sustained release system. With the recent acquisition of ViroTex Corporation (see "Recent Developments"), the Company is also engaged in the research, development and commercialization of complementary proprietary drug delivery systems that provide topical and transmucosal delivery of medications requiring fast onset of action. Both ATRIGEL(R) and the topical and transmucosal drug delivery systems can be engineered for either local or systemic delivery of a variety of small molecules and peptides, proteins and vaccines. ATRIGEL(R) System The Company's patented ATRIGEL(R) system is comprised of biodegradable polymer formulations that are administered as flowable compositions (e.g., solutions, gels, pastes and putties), which solidify in situ upon contact with body fluids to form biodegradable implants. The ATRIGEL(R) system 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) system, the release and degradation rates of the system can be customized. The Company's business strategy is to develop and commercialize its proprietary ATRIGEL(R) system in dental, medical and veterinary applications. Key elements of the Company's business strategy are (i) to focus on the development and commercialization of periodontal products, (ii) to leverage its proprietary technology, (iii) to enhance development and commercialization efforts through third party collaborations, (iv) to expand its product portfolio through the acquisition of complementary technologies and/or products and (v) to retain manufacturing control of the Company's proprietary ATRIGEL(R) system. The Company currently markets two medical device products and two drug products. The ATRISORB(R) GTR Barrier, a biodegradable film utilizing the ATRIGEL(R) system, is a medical device used to aid in the guided tissue regeneration ("GTR") of a tooth's support following periodontal surgery. An improved version of the GTR barrier, the ATRISORB(R) FreeFlow GTR Barrier, was introduced in 1998. The Company is also developing the ATRISORB(R)-DOXY product, a second-generation GTR barrier that combines the benefits of the ATRISORB(R) GTR Barrier with the antibiotic doxycycline for improved clinical outcomes following periodontal surgery. The Company commenced pivotal trials for the ATRISORB(R)-DOXY product in July 1998 and expects to file for regulatory clearance in 1999. In September 1998, the Company received approval for its ATRIDOX(R) product, a new minimally invasive pharmaceutical treatment for periodontitis that employs the ATRIGEL(R) system containing the antibiotic doxycycline. In the veterinary field, the Company developed a product utilizing the ATRIGEL(R) system to treat periodontal disease in companion animals, which is being marketed by Heska Corporation ("Heska"). In December 1996, the Company entered into a commercialization agreement with Block Drug Corporation ("Block"), a leading marketer of oral healthcare products. Under the current terms of the agreement (the "Block Agreement"), Block has acquired the exclusive North American rights to market the ATRIDOX(R) product, the ATRISORB(R) GTR Barrier and the ATRISORB(R)-DOXY product. 3 Non-ATRIGEL(R) Systems The proprietary drug delivery systems obtained in the acquisition of ViroTex Corporation ("ViroTex") include three polymer-based drug delivery systems, a solvent/microparticle drug delivery system and a topical anesthetic depot delivery system. The polymer based drug delivery systems are the Bioerodible Mucoadhesive (BEMA(TM)) film, which adheres to the mucosal tissue of the mouth or vagina and allows the rapid or controlled delivery of medication through the tissue as the film dissolves away; the Mucocutaneous Absorption (MCA(TM)) system, a moisture resistant, film-forming gel or aerosol that binds drugs to the skin or mucosal tissue for more efficient drug delivery; and the Biocompatible Polymer ("BCP(TM)") system, which delivers drug to a wound and dries to a protective film to create an ideal moist environment for healing. The Solvent/Microparticle (SMP(TM)) system combines dissolved drug compounds with a microparticle suspension of the drug in a single formulation, allowing the medication to be delivered in two stages to improve the absorption of relatively insoluble active compounds. The Topical Anesthetic Depot ("TAD(TM)") delivery system is an anesthetic depot that enhances antiviral efficacy to provide prolonged relief from numbing, pain and itching through sustained delivery of a local anesthetic. ViroTex's first product, Viractin(R) Cold Sore & Fever Blister Medicine ("Viractin(R)"), launched in 1996, was developed using this system. ViroTex subsequently sold all of the rights to Viractin(R) to CEP Holdings, Inc. in July 1997. RECENT DEVELOPMENTS Acquisition of ViroTex Corporation. On November 24, 1998, the Company acquired ViroTex through the merger of its wholly owned subsidiary, Atrix Acquisition Corporation, with and into ViroTex. Upon consummation of the transaction, ViroTex became a wholly owned subsidiary of the Company. ViroTex commenced operations in May 1988 and developed over-the-counter and prescription products based on its proprietary drug delivery systems. Under the Agreement and Plan of Reorganization dated November 24, 1998 (the "Merger Agreement"), the stockholders of ViroTex received $6,351,867 in cash and 37,860 shares of the Company's common stock, $.001 par value (the "Common Stock"), valued at $389,958. In addition, the ViroTex stockholders are entitled to receive additional consideration of up to $3,000,000, payable in shares of Common Stock or cash, upon satisfaction of certain earn-out events set forth in the Merger Agreement related to the performance of certain products of ViroTex. The Company also issued a warrant to purchase 6,750 shares of Common Stock in replacement of a warrant to purchase shares of ViroTex common stock, and issued 113,229 stock options to purchase shares of Common Stock to replace certain options held by employees of ViroTex who became employees or consultants of the Registrant. Only stockholders of ViroTex who beneficially owned more than 1% of the total outstanding shares of ViroTex, on a fully diluted basis, as of November 24, 1998, are entitled to receive Common Stock. All other stockholders received cash in lieu of Common Stock. The consideration paid under the Merger Agreement was determined through arms-length negotiations between the parties and the cash portion of the purchase price was funded through the Company's cash on hand. In February 1999, the Company completed the transfer of certain equipment and personal property from ViroTex's facilities in The Woodlands, Texas to the Company's facilities in Fort Collins, Colorado. The Company closed the Woodland facility in March 1999. The foregoing summary of the Merger Agreement does not purport to be complete and is subject to, and qualified in its entirety by reference to, the provisions of the Merger Agreement filed as an exhibit to this Report. New Drug Application. On September 4, 1998, the United States Food and Drug Administration (the "FDA") approved the Company's New Drug Application ("NDA") for its lead product ATRIDOX(R), a minimally invasive subgingival antibiotic therapy for chronic adult periodontitis employing the ATRIGEL(R) system with the antibiotic doxycycline. 2 4 ATRIX TECHNOLOGY ATRIGEL(R) System. The Company believes the ATRIGEL(R) system addresses many of the limitations associated with traditional drug delivery technologies. Most drugs are administered orally or by injection at intermittent and frequent doses. These routes of administration are not optimal for several reasons, including difficulty in maintaining uniform drug levels over time, problems with toxicity and side effects, high costs due to frequent administration and poor patient compliance. Furthermore, innovations in biotechnology have led to an increase in the number of protein and peptide drugs under development. These therapeutics, because of their larger molecular size and susceptibility to degradation in the gastrointestinal tract, often are required to be administered by multiple injections, usually in a hospital or other clinical setting. The ATRIGEL(R) system is compatible with a broad range of pharmaceutical compounds, including water soluble and insoluble compounds and high and low molecular weight compounds. In preclinical trials, the Company has demonstrated the ability of the ATRIGEL(R) system to deliver, both systemically and locally, various proteins and peptides, including hormones and growth factors. There can be no assurance, however, that products using the ATRIGEL(R) system will be successfully developed and approved or cleared for commercial use. The Company believes that the ATRIGEL(R) system may provide benefits over traditional methods of drug administration such as tablets or capsules, injections and continuous infusion as a result of the following properties: o Safety. All current components of the ATRIGEL(R) system are biocompatible and have independently established safety and toxicity profiles. 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) system to develop a safety and toxicological profile. o Broadly Applicable. The ATRIGEL(R) system is compatible with a broad range of pharmaceutical compounds, including water soluble and insoluble compounds and high and low molecular weight compounds. In preclinical models, the Company has demonstrated the ATRIGEL(R) system can be used to deliver proteins, peptides and other compounds that have formulation stability issues or short in-vivo half-lives. o Site Specific Drug Delivery. The ATRIGEL(R) system can be delivered directly to a target area, thus potentially achieving higher drug concentrations at the desired site of action and potentially minimizing systemic side effects. For example, the ATRIDOX(R) product delivers high concentrations of the antibiotic doxycycline to periodontal pockets with minimal systemic concentrations of the drug. In preclinical models, the Company has delivered several cancer drugs directly to tumors, achieving high local concentrations of the drugs with minimal systemic toxic side effects. o Systemic Drug Delivery. The ATRIGEL(R) system also can be used to provide sustained drug release into the systemic circulation for certain drugs. In these applications, for example, the entire body requires treatment, and the drug may not be active when given orally. For example, the Company is developing an ATRIGEL(R) formulation containing the hormone peptide leuprolide acetate as a systemic therapy for prostate cancer. In preclinical models, the Company has demonstrated the systemic delivery of peptides at therapeutic levels for up to 110 days from a single depot injection. o Customized Continuous Release and Degradation Rates. The ATRIGEL(R) 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. In addition, the ATRIGEL(R) system can be designed to degrade over weeks, months, or even one year. 3 5 o Biodegradability. The ATRIGEL(R) system will biodegrade and is not expected to require removal when the drug is depleted. o Ease of Application. The ATRIGEL(R) 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. In addition to the delivery of drugs, the ATRIGEL(R) system without a drug has potential uses as a biomaterial for use in medical devices, in which case the ATRIGEL(R) system has all of the properties described above except those dependent on the release of a drug. The Company, through ViroTex, is developing or has developed the following proprietary drug delivery systems not based on the ATRIGEL(R) system. Other Polymer-Based Drug Delivery Systems. The Company is developing three polymer-based drug delivery systems: the Bioerodible Mucoadhesive ("BEMA(TM)") film, which delivers drug to the mucosal tissue (mouth and vagina) for localized drug delivery or through buccal tissue for systemic drug delivery; the Mucocutaneous Absorption ("MCA(TM)") system, which binds a drug to the skin and mucosal tissue; and the Biocompatible Polymer ("BCP(TM)") system, which forms a non-constricting, protective film for wound healing and delivers drug to a wound and the surrounding tissue. The polymers used in the BEMA(TM), MCA(TM) and BCP(TM) delivery systems are members of a class of polymers which have been previously approved by the FDA for human use in other applications. The BEMA(TM) film consists of a bi-layer or multi-layer film that adheres to mucosal surfaces with little or no foreign body sensation. The BEMA(TM) film is bioerodible with naturally occurring fluids and can provide drug delivery through the backing or the adhesive layer. The Company believes the BEMA(TM) delivery system represents a highly versatile delivery system for both systemic and localized delivery of drugs, peptides and proteins. The BEMA(TM) film can be cut into any shape or size, and its set-up time, biodegradability, taste and thickness all can be modified. The MCA(TM) delivery system delivers a resilient, strong bonding, moisture resistant film that can be applied in the form of a gel or aerosol spray. The Company believes the advantages of the MCA(TM) drug delivery system include its ability to bind a drug to the skin or mucosal surfaces, to adhere to dry, moist and wet surfaces, and preferred aesthetics when used on the skin or in the mouth. The BCP(TM) delivery system can be applied in liquid or gel form. The Company believes the advantage of the BCP(TM) delivery system is its ability to deliver locally a drug or compound to a wound or surrounding tissue, and then dry to a protective film, creating an ideal environment for wound healing and protecting against contamination and irritation. Solvent/Microparticle Drug Delivery System. The Company is developing a solvent/microparticle ("SMP(TM)") drug delivery system that provides controlled delivery of a pharmaceutical compound to the skin, even where the skin barrier is compromised or completely absent, such as in the case of a wound or lesion. The SMP(TM) delivery system is applied in a gel form and enhances solubility of relatively water-insoluble compounds. The SMP(TM) delivery system combines dissolved drug with a microparticle suspension of the drug in a single formulation. This formulation provides a two staged topical delivery in which the dissolved drug readily enters the skin while the microparticle drug is maintained above the top layer of the skin for later (sustained) delivery. The ratio of dissolved to microparticle drug is adjustable, depending on the drug to be delivered. 4 6 Topical Anesthetic Depot Delivery System. The proprietary topical anesthetic depot ("TAD(TM)") delivery system enhances antiviral efficacy and creates a prolonged anesthetic effect (i.e., numbing, pain and itching relief) through sustained delivery of a local anesthetic to the skin. The TAD(TM) delivery system creates a depot of drug at the basal cell layer of the skin, the site at which the nerve endings interact with the epidermis and the primary site of viral replication. A double-blinded, placebo-controlled clinical study for the treatment of recurrent herpes labialis lesions (cold sores and fever blisters) exhibited a 30% reduction in healing time with an active formulation that incorporated the TAD(TM) delivery system versus a placebo. The Viractin(R) product was developed using this delivery system. In connection with the sale of Viractin(R) to CEP Holdings, Inc., ViroTex transferred all rights, title and interest to the TAD(TM) delivery system and received an exclusive license to use the technology in the topical treatment of diseases other than oral herpes lesions. PRODUCTS AND PRODUCTS UNDER DEVELOPMENT The following table sets forth certain information about the Company's products and products under development based on the ATRIGEL(R) system.
PRODUCT INDICATION STATUS(1) ------- ---------- --------- Periodontal Applications: ATRIDOX(R) Antibiotic therapy for chronic Marketed periodontitis Launched November 1998 ATRISORB(R)GTR Barrier Tissue regeneration following periodontal Marketed surgery Launched 1996 ATRISORB(R) Free Flow Tissue regeneration following periodontal Marketed and launched in November GTR Barrier surgery 1998 ATRISORB(R)-DOXY Tissue regeneration and infection Pivotal clinical trials commenced reduction following periodontal surgery July 1998 ATRIGEL(R) system with Periodontal regeneration Preclinical development growth factors Oncology Applications: ATRIGEL(R) system with leuprolide Prostate cancer Phase I/II clinical trials began acetate in 1999 Orthopedic Applications: ATRIGEL(R) system with growth Tissue and bone regeneration Preclinical development factors Veterinary Applications: Heska Periodontal Therapeutic Periodontitis in companion animals Marketed & launched December 1997
---------- (1) See "Government Regulation." 5 7 The following table provides a summary of the Company's products and products under development not based on the ATRIGEL(R) system, including drug class, anticipated year of introduction and corresponding delivery systems.
PRODUCT INDICATION STATUS(1) ------- ---------- --------- Dermatological Treatment SMP(TM) topical dapsone Treatment of acne Phase I clinical trials Commenced May 1998 BCP(TM) topical antibiotic Infection protection Future OTC product BCP(TM) wound wash Minor cuts and abrasions Future OTC product Viractin(R) cream and gel Cold sores and fever blisters OTC, sold to JB Williams July 1997, royalty through July 2002 Mucosal Applications BEMA(TM) Dyclonine Canker sores and dental pain Future OTC product MCA(TM) Benzocaine Canker sores Future OTC product General Applications BEMA(TM) systemic delivery Several drugs under evaluation Preclinical MCA(TM) external analgesic Arthritis, muscle pain, bursitis Future OTC product
(1) See "Government Regulation." PERIODONTAL APPLICATIONS Periodontal disease is an infection caused by plaque build up on the teeth and gums. The severity of the disease varies from the mildest cases, clinically termed gingivitis (bleeding gums) to more severe cases, clinically termed periodontitis. When gingivitis is not controlled, the disease progresses into periodontitis, a condition characterized by the progressive, chronic infection and inflammation of the gums and surrounding tissue. This chronic infection and inflammation causes destruction of a tooth's supporting structure (bone and periodontal ligament) and results in the formation of periodontal pockets (spaces between the gum and tooth). If left untreated, periodontitis will continue to progress and eventually lead to tooth loss. Based on published industry reports, the Company believes there are in excess of 50 million Americans with periodontal disease, and this number is increasing as a result of the increasing average age of the U.S. population. The Company believes that only a small percentage of Americans are now being treated for periodontal disease. In its early stages, 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. The most common treatment, scaling and root planing, requires the dental professional to anesthetize the gums and then 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 do not seek treatment due to a number of factors including cost, pain, potential medical complications associated with current therapies, and because the disease is asymptomatic in its early stages. The Company believes, based on published industry reports, that over $6.5 billion is spent annually on the treatment of periodontal disease. The ATRIDOX(R) Product. The ATRIDOX(R) product employs the ATRIGEL(R) system and the antibiotic doxycycline to form a product designed to control the bacteria that cause periodontal disease. The ATRIDOX(R) product is intended to add a new, minimally invasive pharmaceutical maintenance procedure to current periodontal treatment. The ATRIDOX(R) product is administered by a periodontist or a general dentist by inserting the liquid ATRIDOX(R) product into the periodontal pocket through a cannula. The liquid ATRIDOX(R) product solidifies in the periodontal pocket and then biodegrades as it releases doxycycline over a period of seven to ten days. On September 4, 1998 the Company received notice that the FDA had approved the NDA for the ATRIDOX(R) product. 6 8 In connection with the Block Agreement, Block has the exclusive rights to market the ATRIDOX(R) product in North America. Block began introducing ATRIDOX(R) at dental professional meetings in October 1998, and began detailing ATRIDOX(R) to the U.S. dental profession in November 1998. The Company is currently considering various arrangements with respect to the marketing of the ATRIDOX(R) product in Europe. ATRISORB(R) GTR Barrier. The ATRISORB(R) GTR Barrier is a biodegradable, liquid polymer product that utilizes the ATRIGEL(R) system to aid in the regeneration of a tooth's support following osseous flap surgery or other periodontal procedures. Osseous flap surgery, a common treatment for severe cases of periodontal disease, involves cutting a flap of gum tissue to expose and debride areas not reachable by conventional scaling and root planing procedures. The Company estimates that there are currently over 2 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 required to hold the barrier in place, which allows the ATRISORB(R) GTR Barrier to be placed in a shorter time relative to existing guided tissue regeneration barrier products. In addition, periodontists have the potential for treatment of multiple diseased sites in one surgical session and can form multiple barriers from a single kit, thereby reducing the inventory requirements and costs. Since the ATRISORB(R) GTR Barrier is biodegradable, a second surgery to remove the barrier is unnecessary. On March 22, 1996, the Company received a 510(k) premarket notification clearance from the FDA to market the ATRISORB(R) GTR Barrier in the United States. The Company received the CE Mark for the ATRISORB(R) product in December 1997, increasing from eight to seventeen countries in Europe where the product is cleared for sale. The CE Mark approval included a new in situ application technique allowing the direct placement of the liquid on bone graft material. On September 9, 1998 the Company received a 510(k) premarket notification clearance from the FDA to market this improved version of the ATRISORB(R) GTR Barrier in the United States, where it is being sold by Block as the ATRISORB(R) FreeFlow GTR Barrier. As of December 31, 1998 the Company had received clearance to market the ATRISORB(R) GTR Barrier in 29 foreign countries, with 3 applications pending. 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. The Company commenced commercial sales of the Atrisorb(R) GTR Barrier in the United States in the third quarter of 1996. Under the Block Agreement, Block has the exclusive rights to market the ATRISORB(R) GTR Barrier in North America. The Company currently markets the ATRISORB(R) GTR Barrier in Europe through independent distributors and is considering various marketing arrangements at this time. See "Collaborations." The ATRISORB(R)-DOXY Product. The ATRISORB(R)-DOXY product is under development by the Company to address infections following periodontal surgery. It has been shown clinically that post operative infections often lead to less than optimum healing. Medicinal agents such as doxycycline can be incorporated into the ATRISORB(R) GTR Barrier, which the Company believes could provide a drug delivery capability not feasible with other barriers currently on the market. As a result, the Company believes the ATRISORB(R)-DOXY product will contribute to better healing of the surgical site. The Company commenced a pivotal clinical trial of the ATRISORB(R)-DOXY product in July 1998. If clinical trials are successful, and if the ATRISORB(R)-DOXY product is approved for sale by the FDA, Block has the exclusive rights to market this product in North America. 7 9 ATRIGEL(R) System with Growth Factors. The Company is currently investigating the use of the ATRIGEL(R) system with a variety of growth factors to treat periodontal defects where there exists no current effective therapy. In preclinical studies, the ATRIGEL(R) system demonstrated that certain growth factors could be delivered during periodontal osseous flap surgery to regenerate periodontal attachment in a manner superior to controls. ONCOLOGY APPLICATIONS The Company believes the ATRIGEL(R) system is well suited for the local delivery of certain anti-cancer agents and has the potential to capitalize on the potency of these drugs while diminishing the systemic side effects associated with them. The Company believes that the ATRIGEL(R) system can release active drug agents into solid tumors at higher concentrations and for extended periods of time while maintaining lower systemic levels of drug than generally can be achieved with injection or intravenous delivery. The Company also believes that there are a number of potential systemic cancer therapies that are compatible with the ATRIGEL(R) technology. The Company's first such systemic application for the ATRIGEL(R) system in oncology is prostate cancer. ORTHOPEDIC APPLICATIONS The Company is pursuing the use of its ATRIGEL(R) system to deliver tissue growth factors for a variety of product applications, including the healing of bone fractures and defects and the treatment of dermal ulcers and other soft tissue wounds. In the area of orthopedics, the Company is initially focusing on the development of the ATRIGEL(R) system for bone regeneration and orthopedic post-operative pain. In 1996, the Company conducted preclinical trials which showed that a combination of tissue growth factors could be incorporated into the ATRIGEL(R) system and released at controlled rates for extended periods of time. For example, when the ATRIGEL(R) formulation containing bone growth factors was applied to a bone defect in preclinical studies, the amount of new bone formed was increased significantly over that obtained in control groups. The Company continues to evaluate a number of different growth factors. VETERINARY APPLICATIONS In 1995, the Company signed an exclusive worldwide license agreement with Heska to develop a product to treat periodontal disease in companion animals. Under the terms of the agreement, the Company developed a subgingival therapy for periodontal disease in dogs and cats, comprised of the antibiotic doxycycline and the ATRIGEL(R) system. A New Animal Drug application ("NADA") was approved for this product on November 19, 1997 and the product was launched in December 1997. Heska has the worldwide rights to market this product, which is manufactured exclusively by the Company. DERMATOLOGY The Company is currently developing a proprietary prescription acne product that incorporates the novel anti-inflammatory and antimicrobial drug dapsone into the SMP(TM) drug delivery system. The Company has completed product formulation and stability studies, GMP manufacturing, preclinical irritation and toxicity studies, and in vitro skin permeation studies for such product. Phase I clinical trials of this product commenced in the second quarter of 1998. 8 10 COLLABORATIONS Block Drug Agreement. On December 17, 1996, the Company entered into the Block Agreement pursuant to which Block acquired exclusive rights to market the ATRISORB(R) GTR Barrier products and the ATRISORB(R)-DOXY product, when and if approved, in North America, and the rights to market the ATRIDOX(R) product in the United States, with an option to acquire the rights to market the ATRIDOX(R) product in Canada and certain European countries. On September 12, 1997, Block exercised its option to market the ATRIDOX(R) product in Canada, but let its option lapse with respect to Europe. Under the Block Agreement, Block is responsible for sales and marketing for the products and will advise, consult and may financially support various aspects of the Company's dental research and development program. The Company also has the right to co-market the products if certain annual sales levels are not met. The Block Agreement provides for both milestone and royalty payments to the Company. The Block Agreement expires on a product-by-product and a country-by-country basis upon the expiration of the last applicable patent or loss of patent protection for a product in a given country. The first patent will expire in 2012. In addition, Block may terminate the Block Agreement at any time without cause upon 12-months written notice to the Company, if the Company commits a willful and material breach of the Block Agreement, or if the Company ceases to manufacture or supply the product to Block pursuant to the Block Agreement. The Company may terminate the Block Agreement if Block fails to make any required payment, if Block commits a willful and material breach of the Block Agreement, if Block ceases to offer the product for distribution, or if Block markets, distributes or sells a competitive product. PATENTS AND TRADEMARKS The Company considers patent protection and proprietary position to be materially significant to its business. As of December 31, 1998, the Company maintained 30 United States patents and 18 foreign patents, and has 25 United States and 40 foreign patent applications pending. A total of 3 U.S. patents and 14 U.S. pending patent applications are attributed to the acquisition of ViroTex during 1998. Claims contained in these patents and pending patent applications protect the Company's drug delivery technology and products based upon these technologies. These include the ATRIGEL(R) system developed by the Company, the BEMA(TM), MCA(TM), BCP(TM), and SMP(TM) technologies acquired through the acquisition of ViroTex, and the ATRISORB(R) GTR Barrier, ATRISORB(R) FreeFlow, and the ATRIDOX(R) products currently manufactured by the Company. 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 that 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 knowledge. No assurance can be given that others will not be able to develop substantially equivalent proprietary knowledge or otherwise obtain access to the Company's knowledge, or that the Company's rights under any patents will afford sufficient protection. In addition to patents, the Company also maintains several U.S. and numerous foreign trademark and service mark applications for registrations of its name, logo, drug delivery systems and products. These include 7 U.S. and 16 foreign issued trademarks with 3 U.S. and 22 foreign applications pending. The 3 U.S. pending trademark applications are attributed to the ViroTex purchase. 9 11 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 safety, efficacy, patient convenience, reliability, availability and price. 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. GOVERNMENT REGULATION The research and development, preclinical studies and clinical trials, and ultimately, the manufacturing, marketing and labeling of the Company's products, are subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries. The United States Food, Drug and Cosmetic Act ("FD&C Act") and the regulations promulgated thereunder govern, among other things, the testing, manufacturing, safety, efficacy, labeling, storage, record keeping, approval, clearance, advertising and promotion of the Company's products. Preclinical study and clinical trial requirements and the regulatory approval process typically take years and require the expenditure of substantial resources. Additional government regulation may be established that could prevent or delay regulatory approval or clearance of the Company's products. Delays or rejections in obtaining regulatory approvals or clearances would adversely affect the Company's ability to commercialize any product the Company develops and the Company's ability to receive product revenues. If regulatory approval or clearance of a product is granted, the approval or clearance may include significant limitations on the indicated uses for which the product may be marketed. FDA REGULATION -- APPROVAL OF THERAPEUTIC PRODUCTS The Company's ATRIDOX(R) product is regulated in the United States as a drug. The steps ordinarily required before a drug may be marketed in the United States include (a) preclinical and clinical studies, (b) the submission to the FDA of an Investigational New Drug Application ("IND"), which must become effective before human clinical trials may commence, (c) adequate and well-controlled human clinical trials to establish the safety and efficacy of the drug, (d) the submission to the FDA of an NDA, and (e) FDA approval of the application, including approval of all labeling. Preclinical tests include laboratory evaluation of product chemistry and formulation, as well as animal studies to assess the potential safety and efficacy of the product. Preclinical tests must be conducted in compliance with Good Laboratory Practice regulations. The results of preclinical testing are submitted to the FDA as part of an IND. A 30-day waiting period after the filing of each IND is required prior to the commencement of clinical testing in humans. In addition, the FDA may, at any time during this 30-day period, or anytime thereafter, impose a clinical hold on proposed or ongoing clinical trials. If the FDA imposes a clinical hold, clinical trials cannot commence or recommence without FDA authorization. 10 12 Clinical trials to support NDAs are typically conducted in three sequential phases, but the phases may overlap. In Phase I, the initial introduction of the drug into healthy human subjects or patients, the drug is tested to assess metabolism, pharmacokinetics and pharmacology and safety, including side effects associated with increasing doses. Phase II usually involves studies in a limited patient population to (i) assess the efficacy of the drug in specific, targeted indications, (ii) assess dosage tolerance and optional dosage and (iii) identify possible adverse effects and safety risks. If a compound is found to be potentially effective and to have an acceptable safety profile in Phase II evaluations, Phase III trials are undertaken to further demonstrate clinical efficacy and to further test for safety within an expanded patient population at several study sites. There can be no assurance that Phase I, Phase II or Phase III testing will be completed successfully within any specified time period, if at all, with respect to any of the Company's products subject to such testing. After successful completion of the required clinical testing, generally an NDA is submitted. Once the submission is accepted for filing, the FDA begins an in-depth review of the NDA. Under the FD&C Act, the FDA has 180 days in which to review the NDA and respond to the applicant. The review is often significantly extended by FDA requests for additional information or clarification regarding information already provided in the submission. The FDA may refer the application to an appropriate advisory committee, typically a panel of clinicians, for review, evaluation and a recommendation as to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee. If the FDA evaluations of the NDA and the manufacturing facilities are favorable, the FDA may issue either an approval letter or an approvable letter, which usually contains a number of conditions that must be met in order to secure final approval of the NDA. When and if those conditions have been met to the FDA's satisfaction, the FDA will issue an approval letter. If the FDA's evaluation of the NDA or manufacturing facility is not favorable, the FDA may refuse to approve the NDA or issue a not approvable letter, and often requiring additional testing or information. Even if regulatory approval is obtained, a marketed product and its manufacturing facilities are subject to continual review and periodic inspections. In addition, identification of certain side effects after a drug is on the market or the occurrence of manufacturing problems could cause subsequent withdrawal of approval, reformulation of the drug, additional preclinical testing or clinical trials and changes in labeling. In March 1997, the Company submitted an NDA with the FDA for the ATRIDOX(R) product. The Company's NDA was accepted for filing by the FDA in June 1997. The Company filed the NDA based on the results of pivotal Phase III trials, which were completed in May 1996 and included data from 822 patients at 20 study sites. The Company received approval of the NDA on September 4, 1998. Failure to comply with FDA or other applicable regulatory requirements may subject a company to administrative sanctions or judicially imposed sanctions such as civil penalties, criminal prosecution, injunctions, product seizure or detention, product recalls, or total or partial suspension of production. In addition, noncompliance may result in the FDA's refusal to approve pending NDAs or supplements to approved NDAs, premarket approval application ("PMA") or PMA supplements and the FDA's refusal to clear 510(k)s. FDA REGULATION -- APPROVAL OF MEDICAL DEVICES The Company's ATRISORB(R) GTR Barrier product is regulated in the United States as a medical device. New medical devices are generally introduced to the market based on a premarket notification or 510(k) submission to the FDA in which the sponsor establishes that the proposed device is "substantially equivalent" to a legally marketed Class I or Class II medical device or to a Class III device for which the FDA has not required premarket approval. If the sponsor cannot demonstrate substantial equivalence, the sponsor will be required to submit a PMA, which generally requires preclinical and clinical trial data, to prove the safety and effectiveness of the device. The Company has received 510(k) clearances from the FDA for the ATRISORB(R) GTR Barrier and the ATRISORB(R) FreeFlow GTR Barrier, and is currently marketing these products in the United States. 11 13 FDA REGULATION -- POST-APPROVAL REQUIREMENTS Even if regulatory clearances or approvals for the Company's products are obtained, its products and the facilities manufacturing the Company's products are subject to continued review and periodic inspection by the FDA. Each U.S. drug and device manufacturing establishment must be registered with the FDA. Domestic manufacturing establishments are subject to biennial inspections by the FDA and must comply with the FDA's current Good Manufacturing Practices ("cGMP") regulations if the facility manufactures drugs, and Quality System Regulations ("QSR") regulations if the facility manufactures devices. In complying with cGMP and QSR, manufacturers must expend funds, time and effort in the area of production and quality control to ensure full technical compliance. The FDA stringently applies regulatory standards for manufacturing. Labeling and promotional activities are regulated by the FDA. The Company must also report certain adverse events involving its drugs and devices to the FDA under regulations issued by the FDA. EUROPEAN REGULATION -- APPROVAL OF MEDICINAL PRODUCTS In 1993, legislation was adopted which established a new and amended system for the registration of medicinal products in the European Union ("EU"). A significant purpose of this system is to prevent the existence of essentially separate national approval systems which have been a major obstacle to harmonization. One of the most significant features of this new system is the establishment of a new European Agency for the Evaluation of Medicinal Products ("EMEA"). Under this new system, marketing authorization, broadly speaking, may be submitted at either a centralized, a decentralized or a national level. The centralized procedure is administered by the EMEA; this procedure is mandatory for the approval of biotechnology products and available at the applicant's option for other products. The centralized procedure provides for the first time in the EU for the grant of a single marketing authorization which is valid in all EU Member States. A mutual recognition procedure is available at the request of the applicant for all medicinal products which are not subject to the centralized procedure, under the so-called "decentralized procedure." The decentralized procedure creates a new system for mutual recognition of national approvals and establishes procedures for coordinated EU action on product suspensions and withdrawals. Under this procedure, the holder of a national marketing authorization for which mutual recognition is sought may submit an application to one or more Member States, certifying that identical dossiers are being submitted to all Member States for which recognition is sought. Within 90 days of receiving the application and assessment report, each Member State must decide whether to recognize the approval. The procedure encourages Member States to work with applicants and other regulatory authorities to resolve disputes concerning mutual recognition. If such disputes cannot be resolved within the 90-day period provided for review, the application will be subject to a binding arbitration procedure. The Company has chosen a decentralized procedure that utilizes a mutual recognition process for European regulatory filings and submitted the regulatory dossier to the Medicines Control Agency in the United Kingdom in October 1997. However, there can be no assurance that the chosen regulatory strategy will secure regulatory approvals or approvals of the applications submitted by the Company. EUROPEAN REGULATION -- APPROVAL OF MEDICAL DEVICES The Company's ATRISORB(R) GTR Barrier is regulated in Europe as a medical device. The EU has promulgated rules that require medical devices received by mid-June 1998 the right to affix the CE Mark, an international symbol of adherence to quality assurance standards and compliance with applicable European medical device directives. Failure to receive the right to affix the CE Mark will prohibit a company from selling products in Member States of the EU. The Company has been certified as being in compliance with the ISO 9000 standards, one of the CE Mark certification prerequisites, and received the CE Mark for the ATRISORB(R) GTR Barrier in December 1997. 12 14 REGULATORY CONSIDERATIONS FOR OTC DRUG PRODUCTS An over-the-counter drug ("OTC") may be lawfully marketed in one of three ways: (i) the drug is generally recognized as safe and effective ("GRAS/E"), (ii) the drug is the subject of an approved NDA or (iii) the drug complies with a Tentative Final or Final Monograph published by FDA as part of the OTC Review. Prior FDA approval is required only if an NDA is submitted. A company makes the determination as to which route to market is the most appropriate. If a company determines that the drug product is GRAS/E or is covered in a monograph, it is the company's responsibility to substantiate the safety and efficacy of the formulation and that the dosage form and claims are applicable under GRAS/E or monograph status. Most OTC drug products are marketed pursuant to an FDA monograph. There are several other regulatory requirements applicable to all OTC drug products. These requirements pertain to labeling, drug registration and listing, and manufacturing. With regard to labeling, the regulations require certain language for statement of identity, net contents, adequate directions for use, and name and address of the manufacturer, and their placement on the finished package, as well as additional warning statements when relevant to the product. All OTC manufacturers must register their establishments with the FDA and submit to the FDA a list of products made within 5 days after beginning operations, as well as a list of products in commercial distribution. All registered establishments must be inspected by the FDA at least every 2 years. Lastly, OTC drug products must be manufactured in accordance with cGMP regulations. If the FDA finds a violation of cGMPs, it may enjoin a company's operations, seize product, or criminally prosecute the manufacturer. ADDITIONAL REGULATORY ISSUES Under the Drug Price Competition and Patent Term Restoration Act of 1984, a patent that 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 the 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 Institute of Health has been requested by the Department of Health and Human Services to submit proposals for addressing potential conflicts of interest in the 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 13 15 exploration of more cost-effective methods of delivering health care. In general, these government and private 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 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. EMPLOYEES As of December 31, 1998, the Company employed 114 employees on a full-time basis and one person on a part-time basis. Of the 114 full-time employees, 99 are engaged in production, research and clinical testing and the remaining 15 are in administrative capacities. Sixteen employees have earned doctorate or advanced degrees. 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 three 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, 2003. The Company has a one time right to terminate this lease on June 1, 2000. In addition, the Company leases an additional 4,000 square feet of space at the same location for preclinical and initial manufacturing activities, pursuant to a lease which expires on December 1, 1999. The Company owns a 24,800 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. In August 1997, the Company acquired an additional 2.7 acres for possible future development or expansion of the Company. 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. 14 16 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 year. 15 17 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 Common Stock, as reported on The Nasdaq Stock Market:
High Low ---- --- 1998: First Quarter $19 7/8 $ 12 1/4 Second Quarter 21 1/4 13 1/8 Third Quarter 16 1/2 11 Fourth Quarter 13 1/2 7 5/8 1997: First Quarter $14 1/2 $ 10 1/8 Second Quarter 12 1/4 9 Third Quarter 22 1/4 11 Fourth Quarter 23 7/8 12 3/8
As of March 5, 1999, there were approximately 2,990 holders of record of the 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. RECENT STOCK SALES In connection with the ViroTex acquisition, the Company issued 37,860 shares of Common Stock, valued at $10.30 per share, to eleven principal stockholders of ViroTex, as partial consideration for the cancellation of their shares under the Merger Agreement. The Company also issued a warrant to purchase 6,750 shares of Common Stock at an exercise price of $12.94 per share, which expires on April 28, 2000 in replacement of a warrant to purchase shares of common stock of ViroTex. The foregoing transactions were made in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended, provided by Section 4(2). 16 18 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.
Year Year Year Year Year Ended Ended Ended Ended Ended Dec. 31, Dec. 31, Dec. 31, Dec. 31, Dec. 31, 1998 1997 1996 1995 1994 --------- --------- --------- --------- --------- (In thousands, except per share data) Summary of Operations: Total revenues $ 21,073 $ 9,849 $ 1,640 $ 580 $ 713 Total expenses (19,996) (15,105) (14,328) (14,212) (7,355) Other income (expense) 404 1,389 1,256 974 1,102 Income tax expense (48) -- -- -- -- Extraordinary gain on extinguishment of debt 257 -- -- -- -- -------- -------- -------- -------- -------- Net income (loss) $ 1,690 $ (3,867) $(11,432) $(12,658) $ (5,540) ======== ======== ======== ======== ======== Basic and diluted per common share: Income (loss) before extraordinary item $.13 $(.35) $(1.13) $(1.58) $(.72) Extraordinary item .02 -- -- -- -- -------- -------- -------- -------- -------- Net income (loss) $.15 $(.35) $(1.13) $(1.58) $(.72) ======== ======== ======== ======== ======== Basic and diluted weighted average shares outstanding 11,270 11,134 10,147 8,002 7,741 ======== ======== ======== ======== ======== Balance Sheet Data: Working capital $ 63,121 $ 67,229 $ 24,669 $ 10,913 $ 12,616 Total assets 79,480 78,294 38,463 14,894 22,006 Long-term obligations 48,500 50,000 -- -- -- Shareholders' equity 28,422 26,703 30,284 12,807 21,191
17 19 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following Management's Discussion and Analysis of Financial Condition and Results of Operation, as well as information contained elsewhere in this Report, contains statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements regarding the intent, belief or current expectations of the Company, its directors or its officers with respect to, among other things: (i) whether the Company will receive, and the timing of, regulatory approvals or clearances to market potential products, (ii) the results of current and future clinical trials, and (iii) the time 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 receipt and timing of regulatory approvals or clearances for potential products, the effectiveness of the Company's marketing strategies to market its current and any future products, the 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 as set forth under "Risk Factors" below. Forward-looking statements are not guarantees of future performance and involve risks and uncertainties and actual results may differ materially from those projected in the forward-looking statements as a result of various factors. OVERVIEW Since its inception, the Company has devoted its efforts and resources primarily to research and development of dental products. The Company has sustained losses in each year of its operations prior to 1998. The Company realized a net profit in 1998 primarily as a result of earning $17 million in milestone revenue from Block. The Block Agreement provides for potential milestone payments totaling up to $50 million to the Company over a three-to-five year period, as well as manufacturing margins and royalties on sales. As of December 31, 1998, the Company had recognized approximately $24.1 million in milestone revenue from Block. On November 24, 1998, the Company acquired ViroTex through a reverse subsidiary merger, resulting in ViroTex becoming a wholly-owned subsidiary of the Company. In connection with the transaction the Company recorded intangible assets of approximately $3,975,000 (made up of purchased technology, purchased royalty rights and goodwill) and a charge to income for purchased in-process research and development, in the amount of $3,050,000. The $3,050,000 charge to income for purchased in-process research and development was based upon an independent third party valuation using assumptions and methodologies commonly used by companies in calculating such charge to income. The Securities and Exchange Commission is reviewing the assumptions and methodology commonly used by companies in calculating such charges to income. While the Company believes that it has followed the Securities and Exchange Commission's guidelines in the valuation of in-process research and development, there can be no assurance that it has done so and if the Securities and Exchange Commission challenges such charges to income, the Company may be required to reclassify such charges to income. As a result of the ViroTex acquisition, the Company obtained four polymer- and solvent-based drug delivery technologies and four near-term OTC products for oral care and skin care, as well as two prescription products ready to enter Phase I Clinical Trials for oral care and severe acne. ViroTex's first product, Viractin(R) Cold Sore & Fever Blister Medicine ("Viractin(R)"), launched in 1996, was developed using this system. ViroTex subsequently sold all of the rights to Viractin(R) to CEP Holdings, Inc. in July 1997. The Company will continue to receive royalty payments on the sale of Viractin(R) through September 30, 2002. The Company believes the acquisition of ViroTex significantly strengthens the Company's research and development base, and creates both immediate and long-term opportunities to provide enabling bio-degradable drug delivery systems for a variety of medical, dental and veterinary applications. 18 20 The Company anticipates that expenses for the year ending December 31, 1999 will increase as a result of increasing costs for product development, preclinical and clinical testing, regulatory affairs, manufacturing, commercial distribution activities, and general and administrative activities associated with the ATRIDOX(R) product, the ATRISORB(R) FreeFlow GTR Barrier, the ATRISORB(R) GTR Barrier and future products. At December 31, 1998 the Company had available for Federal income tax purposes net operating loss carryforwards of approximately $42 million and approximately $1.6 million in research and development tax credits. These carryforwards will expire through 2012. The Company's ability to utilize its net operating loss, alternative minimum tax, and research and development credit carryforwards is subject to an annual limitation in future periods pursuant to the "change in ownership" rules under Section 382 of the Internal Revenue Code of 1986, as amended. The Company operates in a single reportable segment and all revenues from customers are from a similar group of periodontal products. Sales and milestone revenues from one customer amounted to $19,028,000 and $8,213,000 for the years ended December 31, 1998 and 1997, respectively. Contract revenues from three customers amounted to $198,000, $235,000 and $270,000 for the year ended December 31, 1996. Revenues from export sales to foreign customers amounted to approximately $557,000, $100,000 and $124,000 for the years ended December 31, 1998, 1997 and 1996 respectively. RESULTS OF OPERATIONS Years Ended December 31, 1998 and 1997 Total revenues for the year ended December 31, 1998 were approximately $21,073,000 compared to approximately $9,849,000 for the year ended December 31, 1997, representing a 114% increase. The increase was primarily due to $17,000,000 earned in milestone revenue under the Block Agreement in 1998. ATRIDOX(R) product sales and ATRISORB(R) FreeFlow GTR Barrier product sales, both commencing September 1998 also contributed to the increase in total revenues. The Company had revenue from product sales of approximately $3,451,000 for the year ended December 31, 1998 compared to approximately $1,895,000 for the year ended December 31, 1997, representing a 82% increase. The increase in sales was primarily the result of the market launch in September 1998 of the ATRIDOX(R) product and the ATRISORB(R) FreeFlow GTR Barrier product. 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) system, and was approximately $622,000 for the year ended December 31, 1998, compared to approximately $854,000 for the year ended December 31, 1997, representing a 27% decrease. The decrease was primarily due to the completion of several research contracts during 1997. Sale of marketing rights represents milestone revenue the Company received pursuant to the Block Agreement during the year ended December 31, 1998. The Company expects to receive additional future revenue upon the achievement of other milestones under the Block Agreement, which could result in substantial payments. Cost of goods sold was approximately $2,250,000 for the year ended December 31, 1998 compared to approximately $1,533,000 for the year ended December 31, 1997, representing a 47% increase. The increase was primarily related to sales 19 21 commencing in September 1998 for both the ATRIDOX(R) product and the ATRISORB(R) FreeFlow GTR Barrier product. Research and development expenses, which included activities for ATRIDOX(R) and other research activities, were approximately $12,189,000 for the year ended December 31, 1998 compared to approximately $11,545,000 for the year ended December 31, 1997, representing a 6% increase. The increase was primarily a result of additional expenditures in new areas of research using the Company's existing technology. The Company expensed $3,050,000 of the ViroTex purchase price, which was allocated to purchased in-process research and development projects, as of the date of acquisition. The charge to income was based upon an independent third party valuation. Administrative and marketing expenses were approximately $2,507,000 for the year ended December 31, 1998 compared to approximately $2,027,000 for the year ended December 31, 1997, representing a 24% increase. The primary reason for this increase was administrative costs associated with the preparation for the ATRIDOX(R) market launch. Investment income for the year ended December 31, 1998 was approximately $3,938,000 compared to approximately $1,726,000 for the year ended December 31, 1997, representing a 128% increase. Investment income increased due to additions in principal investments as a result of the proceeds from the sale of the Company's 7% Convertible Subordinated Notes (the "Notes"), which was completed in the fourth quarter of 1997, and the milestone payments received under the Block Agreement during 1998. 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 and commercial paper to fund the Company's short-term operations. Interest expense for the year ended December 31, 1998 was approximately $3,575,000 compared to approximately $307,000 for the year ended December 31, 1997 representing a 1064% increase. The increase was due to the interest expense on the Notes. In December 1998, the Company repurchased $1,500,000, or 3%, of the Notes on the open market for $1,192,500. As a result, the Company reduced deferred finance charges by approximately $51,000 on a pro-rated basis and recognized an extraordinary gain of approximately $257,000. As of December 31, 1998, $48,500,000 of the Notes are outstanding. In January 1999, the Company repurchased $3,000,000, or 6%, of the Notes for $2,250,000. As a result, the Company recognized an extraordinary gain of approximately $650,000, net of deferred finance charges of $100,000. For the reasons described above, the Company recorded a net income of approximately $1,690,000 for the year ended December 31, 1998 compared to a net loss of approximately $3,867,000 for the year ended December 31, 1997, representing a 144% increase. Years Ended December 31, 1997 and 1996 Total revenue for the year ended December 31, 1997 was approximately $9,849,000 compared to approximately $1,640,000 for the year ended December 31, 1996, representing a 501% increase. The increase in total revenue was primarily due to increases in sales and sale of marketing rights. The Company had sales of approximately $1,895,000 for the year ended December 31, 1997 compared to approximately $636,000 for the year ended December 31, 1996 representing a 198% increase. The increase was primarily due to the increased sales of the ATRISORB(R) GTR Barrier in the United States as a result of the Block Agreement and a new product released in the fourth quarter of 1997 and marketed by Heska. 20 22 Contract revenue was approximately $854,000 for the year ended December 31, 1997 compared to approximately $1,004,000 for the year ended December 31, 1996, representing a 15% decrease. 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) system. The decrease was primarily due to the completion of several research contracts during 1996. Sale of marketing rights represents milestone revenue the Company received pursuant to the Block Agreement during the year ended December 31, 1997. The Company earned $7,100,000 in milestone revenue for the year ended December 31, 1997. There was no revenue from the sale of marketing rights in 1996. The Company expects to receive additional revenue in the future upon the achievement of other milestones under the Block Agreement. Cost of goods sold was approximately $1,533,000 for the year ended December 31, 1997 compared to approximately $364,000 for the year ended December 31, 1996, representing a 321% increase. The increase was primarily due to the increased sales of the ATRISORB(R) GTR Barrier in the United States as a result of the Block Agreement and sales of a new product released in the fourth quarter of 1997 and marketed by Heska. Research and development expenses, which included activities for the ATRIDOX(R) product, the ATRISORB(R) GTR Barrier product and other research activities, for the year ended December 31, 1997 were approximately $11,545,000 compared to approximately $10,092,000 for the year ended December 31, 1996, representing a 14% increase. The increase was primarily a result of additional expenditures in new areas of research using the Company's existing technology. Administrative and marketing expenses were approximately $2,027,000 for the year ended December 31, 1997 compared to $3,872,000 for the year ended December 31, 1996, representing a 48% decrease. The primary reason for this decrease was the termination of the Company's sales and marketing expenses related to the ATRISORB(R) GTR Barrier, since Block marketed the product. Investment income for the year ended December 31, 1997 was approximately $1,726,000 compared to approximately $1,204,000 for the year ended December 31, 1996, representing a 43% increase. Investment income increased due to additions in principal investments as a result of the proceeds from the Company's Note offering completed in the fourth quarter of 1997 and the $7,100,000 payment received under the Block Agreement. 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 and commercial paper to fund the Company's short-term operations. Interest expense for the year ended December 31, 1997 was approximately $307,000 compared to zero for the year ended December 31, 1996. The increase was due to the interest expense on the $50,000,000 Notes issued in the fourth quarter of 1997. 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 that extended the term to ten years. The Company recorded a net loss of approximately $3,867,000 for the year ended December 31, 1997 compared to a net loss of approximately $11,432,000 for the year ended December 31, 1996, representing a 66% decrease. The reduction in net loss was primarily the result of the receipt of the milestone payment of $7,100,000 from Block. 21 23 LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1998, the Company had cash and cash equivalents of approximately $18,557,000, marketable securities of approximately $37,103,000, accounts receivable of approximately $5,937,000, inventory of approximately $2,564,000, and other current assets of approximately $1,518,000, for total current assets of approximately $65,678,000. Current liabilities totaled approximately $2,557,000, which resulted in working capital of approximately $63,121,000. In September 1998, the Company renewed a $1,000,000 line of credit with a bank. Borrowings under the line bear interest at the prime rate. As of December 31, 1998, there were no borrowings outstanding under this credit agreement. In November 1997, the Company issued $50,000,000 in principal amount of the Notes. Interest is payable semi-annually and the Notes mature on December 1, 2004. The Notes are convertible, at the option of the holder, into Common Stock at a conversion price of $19.00 a share, subject to adjustment in certain events. The Notes are redeemable, in whole or in part, at the Company's option at any time on or after December 5, 2000. In December 1998, the Company purchased $1,500,000 in principal amount of the Notes on the open market for approximately $1,193,000 and subsequently cancelled the repurchased Notes. Through the purchase of these Notes, the Company reduced deferred finance charges by approximately $51,000 on a pro-rated basis and recognized an extraordinary gain of approximately $257,000. As of December 31, 1998, $48,500,000 of the Notes remain outstanding. During the year ended December 31, 1998, net cash used in operating activities was approximately $1,176,000. This was primarily a result of the net income for the period of approximately $1,690,000 which is offset by certain non-cash expenses, and changes in other operating assets and liabilities as set forth in the statements of cash flows. Net cash provided by investing activities was approximately $7,157,000 during the year ended December 31, 1998, primarily as a result of the net proceeds received from the maturity and sale of various marketable securities during the period. Significant uses of cash for investing activities during the year ended December 31, 1998 included the acquisition of property, plant and equipment and the acquisition of ViroTex. Net cash used in financing activities was approximately $2,610,000 during the year ended December 31, 1998, primarily as a result of the retirement of $1,500,000 in principal amount of Notes and the repurchase of the Common Stock. FUTURE CAPITAL REQUIREMENTS 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 and clearance applications, the development of the Company's commercial manufacturing facilities, including the expansion or possible construction of an administrative and laboratory facility on land adjacent to its manufacturing facility, the ability of the Company to obtain additional licensing arrangements, and the demand for the Company's products. The Company expended approximately $1,004,000 for property, plant and equipment, approximately $213,000 for patent development, and approximately $3,976,000 for the acquisition of ViroTex in the year ended December 31, 1998. 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 significant amount of funds in its ongoing clinical studies. 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 previously anticipated. Management believes that the proceeds of the Note Offering, together with existing cash resources, will be sufficient to fund its operations through 1999. However, there can be no assurance that underlying assumed levels of revenue and expense will prove accurate. 22 24 The Company believes that it is advisable to augment its cash in order to fund all of its activities, including potential product acquisitions. Therefore, the Company will consider raising cash whenever market conditions are favorable. Such capital may be raised through additional public or private financing, as well as collaborative relationships, borrowings and other available sources. In addition, in the course of its business, the Company evaluates products and technologies held by third parties which, if acquired, could result in the development of product candidates by the Company or which complement technologies currently being developed by the Company. The Company expects, from time to time, to be involved in discussions with other entities concerning the Company's potential acquisition of rights to additional pharmaceutical products. In the event that the Company acquires such products or third party technologies, the Company may find it necessary or advisable to obtain additional funding. IMPACT OF INFLATION Although it is difficult to predict the impact of inflation on costs and revenues of the Company in connection with the Company's products, the Company does not anticipate that inflation will materially impact its costs of operation or the profitability of its products when marketed. YEAR 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company is currently engaged in a two-phase process to evaluate its internal status with respect to the Year 2000 issue. In the first phase, which the Company expects to complete in the second quarter of fiscal 1999, the Company is conducting an evaluation of its systems, including both information technology ("IT") systems and non-IT systems such as hardware and manufacturing equipment containing embedded technology, for Year 2000 compliance. The Company has completed a significant portion of this phase to date, and systems that have been evaluated are either Year 2000 compliant or are expected to be made compliant at an immaterial cost to the Company. Although the Company does not expect that the impact of the Year 2000 issue will be material in systems still under evaluation, there can be no assurance that the Company will not discover Year 2000 issues in the course of its evaluation process that would have a material adverse effect on the business, financial condition or results of operations of the Company. Phase two of the process, which is expected to be completed during the fourth quarter of fiscal 1999, will involve taking any needed corrective action to bring systems into compliance and to develop a contingency plan in the event any non-compliant critical systems remain by January 1, 2000. As part of this phase, the Company will attempt to quantify the impact, if any, of the failure to complete any necessary corrective action. Although the Company cannot currently estimate the magnitude of such impact, if systems material to the Company's operations have not been made Year 2000 compliant upon completion of this phase, the Year 2000 issue could have a material adverse effect on the Company's business, financial condition and results of operations. To date, the costs incurred by the Company with respect to this process have not been material. Future costs will remain difficult to estimate until the completion of phase one; however, the Company does not currently anticipate that such costs will be material. Concurrently with the two-phase analysis of its internal systems, the Company has begun to survey third-party entities with which the Company transacts business, including critical vendors and financial institutions, for Year 2000 compliance. The Company expects to complete this survey in the second quarter of fiscal 1999. At this time the Company cannot estimate the effect, if any, that non-compliant systems at these entities could have on the business, financial condition or results of operations of the Company, and there can be no assurance that the impact, if any, will not be material. 23 25 NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (the "Statement"). The Statement, which will be effective for the year 2000, requires derivative instruments to be recorded in the balance sheet at their fair value with changes in fair value being recognized in earnings unless specific hedging accounting criteria are met. The Company does not utilize hedges or derivative instruments and will not be impacted by this Statement. RISK FACTORS In addition to the other information contained in this Report, the Company cautions stockholders and potential investors that the following important factors, among other, in some cases have affected, and in the future could affect, the Company's actual results of and could cause the Company's actual results to differ materially from those expressed in any forward-looking statements made by, on, or on behalf of, the Company. The following information is not intended to limit in any way the characterization of other statements or information under other captions as cautionary statements for such purpose: o Delay, difficulty or failure in obtaining regulatory approval or clearance to market additional products; including delays or difficulties in development because of insufficient proof of safety or efficacy. o Substantial manufacturing and marketing expenses to be incurred in the commercial launch of the ATRIDOX(R) product and commercializing future products. o Failure of corporate partners to develop or commercialize successfully the Company's products or to retain and expand markets served by the commercial collaborations; conflicts of interest, priorities, and commercial strategies that may arise between the Company and such corporate partners. o The Company's limited experience in the sale and marketing of its products; dependence on Block to establish effective marketing, sales and distribution capabilities for the ATRIDOX(R) product, the ATRISORB(R) GTR Barrier products and the ATRISORB(R)-DOXY product in North America. Failure to internally develop marketing channels for the ATRISORB(R) GTR Barrier products, the ATRISORB(R)-DOXY product and the ATRIDOX(R) product in Europe. o The ability to obtain, maintain and prosecute intellectual property rights, and the cost of acquiring in-process technology and other intellectual property rights, either by license, collaboration or purchase of another entity. o Limited experience in manufacturing products on a commercial scale; failure to manufacture present and future products in compliance with applicable regulations and at an acceptable cost. o Cancellation or termination of material collaborative agreements (including the Block Agreement) and the resulting loss of research or other funding, or marketing, sales and distribution capabilities. o Access to the pharmaceutical compounds necessary to successfully commercialize the ATRIGEL(R) system or other delivery systems currently in development. 24 26 o Competitive or market factors that may cause use of the Company's products to be limited or otherwise fail to achieve broad acceptance. o The ability to attract and retain highly qualified management and scientific personnel. o Difficulties or high costs of obtaining adequate financing to fund future research, development and commercialization of products. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. The Company owns financial instruments that are sensitive to market risks as part of its investment portfolio of cash equivalents and marketable securities. The investment portfolio is used to preserve the Company's capital until it is required to fund operations, including the Company's research and development activities. None of these market-risk sensitive instruments are held for trading purposes. The Company does not own derivative financial instruments in its investment portfolio. Due the nature of the Company's investments portfolio, the investment portfolio contains instruments that are primarily subject to interest rate risk. Interest Rate Risk. The Company's investment portfolio includes fixed rate debt instruments that are primarily United States government and agency bonds of durations ranging from one to four years. The market value of these bonds are subject to interest rate risk, and could decline in value if interest rates decrease. To mitigate the impact of fluctuations in cash flow, the Company maintains substantially all of its debt instruments as fixed rate. The portion maintained as fixed rate is dependent on many factors including judgments as to future trends in interest rates. The Company's investment portfolio also includes equity interests in United States government and agency bond funds. The value of these equity interests is also subject to interest rate risk. The Company regularly assesses the above-described market risks and has established policies and business practices to protect against the adverse effects of these and other potential exposures. The Company's investment policy restricts investments to U.S. Government or government backed securities, or the highest rated commercial paper (A1P1) only. As a result, the Company does not anticipate any material losses in these areas. For disclosure purposes, the Company uses sensitivity analysis to determine the impacts that market risk exposures may have on the fair values of the Company's debt and financial instruments. The financial instruments included in the sensitivity analysis consist of all of the Company's cash and cash equivalents and long-term and short-term debt instruments. To perform sensitivity analysis, the Company assesses the risk of loss in fair values from the impact of hypothetical changes in interest rates on market sensitive instruments. The fair values are computed based on the present value of future cash flows as impacted by the changes in the rates attributable to the market risk being measured. The discount rates used for the present value computations were selected based on market interest rates in effect at December 31, 1998. The fair values that result from these computations are compared with the fair values of these financial instruments at December 31, 1998. The differences in this comparison are the hypothetical gains or losses associated with each type of risk. The results of the sensitivity analysis at December 31, 1998 are as follows: Interest Rate Sensitivity: A 10% decrease in the levels of interest rates with all other variables held constant would result in a decrease in the fair value of the Company's financial instruments by $300,000 25 27 per year. A 10% increase in the levels of interest rates with all other variables held constant would result in an increase in the fair value of the Company's financial instruments by $300,000 per year. The Company maintains a portion of its financial instruments, including long-term debt instruments of $4.9 million at December 31, 1998, at variable interest rates. If interest rates were to increase 10%, the impact of such instruments on cash flows or earnings would not be material. The use of a 10% estimate is strictly for estimation and evaluation purposes only. The value of the Company's assets may rise or fall by a greater amount depending on actual general market performances and the value of individual securities owned by the Company. The market price of the Notes generally changes in parallel with the market price of the Common Stock. When the Common Stock price increases, the price of the Notes generally increases proportionally. Fair market price of the Notes can be determined from quoted market prices, where available. The fair value of the Company's long-term debt was estimated to be $36,375,000 at December 31, 1998 and is lower than the carrying value by $12,125,000. Market risk was estimated as the potential decrease in fair value resulting from a hypothetical 1% increase in the Company's weighted average long term borrowing rate and a 1% decrease in quoted market prices, or $1,000,000. 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 25, 1999 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 25, 1999 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 25, 1999 regarding security ownership of certain beneficial owners and management is hereby incorporated herein by reference in response to this item. 26 28 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 25, 1999 regarding certain relationships and related transactions is hereby incorporated herein by reference in response to this item. 27 29 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 Independent Auditors' Report Balance Sheets - December 31, 1998 and 1997 Statements of Operations - Years Ended December 31, 1998, 1997 and 1996 Statements of Changes in Shareholders' Equity - Years Ended December 31, 1998, 1997 and 1996 Statements of Cash Flows - Years Ended December 31, 1998, 1997 and 1996 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 2.1 Agreement and Plan of Reorganization dated November 24, 1998 by and among Atrix Laboratories, Inc., Atrix Acquisition Corporation and ViroTex Corporation(6) 2.2 Certificate of Merger of Atrix Acquisition Corporation into ViroTex Corporation dated November 24, 1998(6) 3.1 Amended and Restated Certificate of Incorporation* 3.2 Seventh Amended and Restated Bylaws(1) 4.1 Form of Common Stock Certificate(2) 4.2 Indenture, dated November 15, 1997, by and among the Registrant and State Street Bank and Trust company of California, N.A., as trustee thereunder(4) 4.3 Form of Note (included in Indenture, see Exhibit 4.2) 4.4 Rights Agreement (including form of Right Certificate, as Exhibit A, and form of Summary of Rights, as Exhibit B)(5) 4.5 Warrant to purchase 6,750 shares of Atrix Common Stock issued to Gulfstar Investments, Limited* 28 30 10.1 Employment Agreement between Registrant and John E. Urheim dated June 4, 1993(2) 10.2 Lease Agreement dated May 11, 1991 between the Registrant and GB Ventures(2) 10.3 Agreement dated December 16, 1996 between the Registrant and Block Drug Corporation ("Block Agreement")(3)** 10.3A First Amendment to Block Agreement dated June 10, 1997*,** 10.3B Second Amendment to Block Agreement dated July 31, 1997*,** 10.3C Third Amendment to Block Agreement dated February 4, 1998*,** 10.3D Fourth Amendment to Block Agreement dated January 12, 1999*,** 10.3E Fifth Amendment to Block Agreement dated January 27, 1999*,** 10.4 Registration Rights Agreement, dated as of November 15, 1997, by and among Registrant and NationsBanc Montgomery Securities, Inc. and SBC Warburg Dillon Read, Inc.(4) 10.5 Amended and Restated Performance Stock Option Plan, as amended.* 10.6 Non-Qualified Stock Option Plan, as amended.* 10.7 Employment Agreement between Registrant and Dr. J. Steven Garrett dated April 17, 1995* 10.8 Employment Agreement between Registrant and Rees M. Orland dated January 1, 1996* 10.9 Employment Agreement between Registrant and Dr. David W. Osborne dated November 24, 1998* 10.10 Employment Agreement between Registrant and Dr. Richard L. Jackson dated November 1, 1998* 21 Subsidiaries of the Registrant* 23 Consent of Deloitte & Touche LLP* 27 Financial Data Schedule* - ------------------- * Filed herewith. ** Confidential treatment requested. (1) Incorporated by reference to the Registrant's Registration Statement on Form S-3, file number 333-43191. (2) 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. (3) Incorporated by reference to Registrant's Current Report on Form 8-K dated December 16, 1996, as amended on May 20, 1998, as filed with the Securities and Exchange Commission. (4) Incorporated by reference to Registrant's Current Report on Form 8-K dated November 6, 1997, as filed with the Securities and Exchange Commission. (5) Incorporated by reference to Registrant's Registration Statement on Form 8-A, file number 000-18231. (6) Incorporated by reference to Registrant's Current Report on Form 8-K dated November 24, 1998, as filed with the Securities and Exchange Commission. (b) Reports on Form 8-K: 1. A current report on Form 8-K, dated November 24, 1998, was filed with the Securities and Exchange Commission under Item 2 regarding the acquisition of ViroTex. 29 31 FINANCIAL STATEMENT INDEX
Page ---- INDEPENDENT AUDITORS' REPORT F-2 FINANCIAL STATEMENTS: Balance Sheets - December 31, 1998 and 1997 F-3 Statements of Operations - Years Ended December 31, 1998, 1997 and 1996 F-4 Statements of Changes in Shareholders' Equity - Years Ended December 31, 1998, 1997 and 1996 F-5 Statements of Cash Flows - Years Ended December 31, 1998, 1997 and 1996 F-6 Notes to the financial statements F-7- F-19
F-1 32 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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Denver, Colorado March 3, 1999 F-2 33 ATRIX LABORATORIES, INC. BALANCE SHEETS ASSETS
December 31, December 31, 1998 1997 ----------------- ----------------- CURRENT ASSETS: Cash and cash equivalents $ 18,556,641 $ 15,185,841 Marketable securities, at fair market value 37,102,867 50,233,553 Accounts receivable, net of allowance for doubtful accounts of $49,165 and $111,479 5,937,446 1,553,427 Interest receivable 664,374 340,346 Inventories 2,563,536 1,309,519 Prepaid expenses and deposits 853,266 196,574 -------------- ----------------- Total current assets 65,678,130 68,819,260 -------------- ----------------- PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment 9,504,581 8,332,671 Leasehold improvements 605,107 605,107 -------------- ----------------- Total property plant and equipment 10,109,688 8,937,778 Accumulated depreciation and amortization (2,978,121) (2,381,908) -------------- ----------------- Property, plant and equipment, net 7,131,567 6,555,870 -------------- ----------------- OTHER ASSETS: Intangible assets, net of accumulated amortization of $522,314 and $96,355 5,049,493 1,024,953 Deferred finance costs, net of accumulated amortization of $252,131 and $22,814 1,620,412 1,893,576 -------------- ----------------- Total other assets 6,669,905 2,918,529 -------------- ----------------- TOTAL ASSETS $ 79,479,602 $ 78,293,659 ============== ================= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable - trade $ 1,650,490 $ 1,052,362 Interest payable 279,039 287,671 Accrued salaries and payroll taxes 263,204 155,200 Other accrued liabilities 210,869 95,508 Deferred revenue 153,602 -- -------------- ----------------- Total current liabilities 2,557,204 1,590,741 -------------- ----------------- CONVERTIBLE SUBORDINATED NOTES PAYABLE 48,500,000 50,000,000 -------------- ----------------- 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; 11,360,672 and 11,177,261 shares issued; 11,203,672 and 11,177,261 shares outstanding 11,361 11,177 Additional paid-in capital 74,822,942 73,224,442 Treasury stock, 157,000 shares, at cost (1,650,564) -- Accumulated other comprehensive loss (96,553) (177,867) Accumulated deficit (44,664,788) (46,354,834) -------------- ----------------- Total shareholders' equity 28,422,398 26,702,918 -------------- ----------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 79,479,602 $ 78,293,659 ============== =================
See notes to the financial statements F-3 34 ATRIX LABORATORIES, INC. STATEMENTS OF OPERATIONS
Year Ended Year Ended Year Ended December 31, December 31, December 31, 1998 1997 1996 ------------- ------------- ------------- REVENUE: Sales $ 3,451,148 $ 1,895,179 $ 635,517 Contract revenue 621,771 854,081 1,004,201 Sale of marketing rights 17,000,000 7,100,000 -- ------------- ------------- ------------- Total revenue 21,072,919 9,849,260 1,639,718 ------------- ------------- ------------- OPERATING EXPENSES: Cost of goods sold 2,249,776 1,533,441 363,517 Research and development 12,189,212 11,544,593 10,091,736 Purchased in-process research and development 3,050,000 -- -- Administrative and marketing 2,506,879 2,027,034 3,872,425 ------------- ------------- ------------- Total operating expenses 19,995,867 15,105,068 14,327,678 ------------- ------------- ------------- INCOME (LOSS) FROM OPERATIONS 1,077,052 (5,255,808) (12,687,960) ------------- ------------- ------------- OTHER INCOME (EXPENSE): Investment income 3,937,780 1,725,838 1,204,352 Interest expense (3,574,906) (306,950) -- Other 41,625 (29,797) 51,455 ------------- ------------- ------------- Total other income 404,499 1,389,091 1,255,807 ------------- ------------- ------------- INCOME (LOSS) BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 1,481,551 (3,866,717) (11,432,153) Income tax - current expense (48,183) -- -- ------------- ------------- ------------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 1,433,368 (3,866,717) (11,432,153) Extraordinary gain on extinguishment of debt 256,678 -- -- ------------- ------------- ------------- ET INCOME (LOSS) $ 1,690,046 $(3,866,717) $(11,432,153) ============= ============= ============== Basic and diluted earnings per common share: Income (loss) before extraordinary item $ .13 $ (.35) $ (1.13) Extraordinary item .02 -- -- ------------- ------------- ------------- Net income (loss) $ .15 $ (.35) $ (1.13) ============= ============= ============= Basic and diluted weighted average common shares outstanding 11,269,981 11,133,669 10,146,703 ------------- ------------- -------------
See notes to the financial statements. F-4 35 STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock Additional Accumulated Accumulated Treasury Total Paid-in Deficit Other Stock Shareholders' Capital Comprehensive Equity Loss Shares Amount ---------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1995 8,433,296 $ 8,433 $43,889,473 $(31,055,964) $(35,176) $ --- $ 12,806,766 Comprehensive loss: Net loss --- --- --- (11,432,153) --- --- (11,432,153) Other comprehensive loss - Unrealized loss on --- --- --- --- (117,465) --- (117,465) investments ________________ Total comprehensive loss (11,549,618) Exercise of stock options 92,828 93 597,824 --- --- --- 597,917 Issuance for cash 2,587,500 2,588 27,841,389 --- --- --- 27,843,977 Compensation-stock options --- --- 584,588 --- --- --- 584,588 ---------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 11,113,624 11,114 72,913,274 (42,488,117) (152,641) --- 30,283,630 Comprehensive loss: Net loss --- --- --- (3,866,717) --- --- (3,866,717) Other comprehensive loss - Unrealized loss on --- --- --- --- (25,226) --- (25,226) investments ________________ Total comprehensive loss (3,891,943) Exercise of stock options 63,637 63 311,168 --- --- --- 311,231 ---------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 11,177,261 11,177 73,224,442 (46,354,834) (177,867) --- 26,702,918 Comprehensive income: Net income --- --- --- 1,690,046 --- --- 1,690,046 Other comprehensive Income - Unrealized gain on --- --- --- --- 81,314 --- 81,314 investments ________________ Total comprehensive income 1,771,360 Exercise of stock options 145,212 146 228,686 --- --- --- 228,832 Issuance for employee stock purchase plan 339 --- 4,557 --- --- --- 4,557 Issuance for acquisition: Common stock 37,860 38 389,920 --- --- --- 389,958 Stock options --- --- 921,370 --- --- --- 921,370 Warrants --- --- 30,555 --- --- --- 30,555 Compensation-stock options --- --- 23,412 --- --- --- 23,412 Purchase of treasury stock (157,000) --- --- --- --- (1,650,564) (1,650,564) ---------------------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 11,203,672 $11,361 $74,822,942 $(44,664,788) $(96,553) $(1,650,564) $28,422,398 ====================================================================================================
See notes to the financial statements. F-5 36 ATRIX LABORATORIES, INC. STATEMENTS OF CASH FLOWS
Year Ended Year Ended Year Ended December 31, 1998 December 31, 1997 December 31, 1996 ----------------- ----------------- ----------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 1,690,046 $ (3,866,717) $ (11,432,153) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation 927,619 765,735 554,595 Amortization 390,252 58,464 56,623 Loss (gain) on sale of property, plant and equipment 45,031 76,889 (3,017) Gain on sale of marketable securities (28,186) -- (36,419) Write-off of obsolete patents 32,226 -- 29,579 Purchased in-process research and development 3,050,000 -- -- Compensation - stock options 23,412 -- 584,588 Extraordinary gain on extinguishment of debt (256,678) -- -- Net changes in operating assets and liabilities, net of effects of ViroTex acquisition: Restricted cash equivalents -- 7,000,000 (7,000,000) Accounts receivable (4,334,019) (872,137) (490,625) Interest receivable (324,028) (186,218) (41,825) Inventories (1,254,017) (1,006,014) (101,241) Prepaid expenses and deposits (649,997) 104,747 271,430 Accounts payable - trade (466,755) 119,215 (929,703) Interest payable (8,632) 287,671 -- Accrued salaries and payroll taxes (13,528) 66,332 16,669 Other accrued liabilities (152,428) (60,149) 3,549 Deferred revenue 153,602 (7,002,192) 7,002,192 ----------------- ----------------- ----------------- Net cash used in operating activities (1,176,080) (4,514,374) (11,515,758) ----------------- ----------------- ----------------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisition of property, plant and equipment (1,004,291) (2,623,291) (4,293,064) Acquisition of leasehold improvements -- (39,499) (59,418) Investment in patents (213,189) (203,854) (220,677) Proceeds from sale of property, plant and equipment 2,725 30,855 253,835 Proceeds from sale of marketable securities 20,130,000 2,025,000 1,000,000 Proceeds from maturity of marketable securities 48,043,018 -- 4,070,501 Investment in marketable securities (54,968,515) (46,252,309) (234,328) Acquisition of ViroTex - net of cash acquired (4,833,192) -- -- ----------------- ----------------- ----------------- Net cash provided by (used in) investing activities 7,156,556 (47,063,098) 516,849 ----------------- ----------------- ----------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 233,388 311,231 28,441,894 Proceeds from issuance of convertible subordinated notes -- 50,000,000 -- Purchased convertible long term debt (1,192,500) -- -- Payment of finance costs -- (1,916,390) -- Acquisition of treasury stock (1,650,564) -- -- ----------------- ----------------- ----------------- Net cash provided by (used in) financing activities (2,609,676) 48,394,841 28,441,894 ----------------- ----------------- ----------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,370,800 (3,182,631) 17,442,985 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 15,185,841 18,368,472 925,487 ----------------- ----------------- ----------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 18,556,641 $15,185,841 $18,368,472 ================= ================= ================= Supplemental cash flow information: - Cash paid for interest: $ 3,569,421 $ 19,279 $ 2,502 ================= ================= =================
Non cash activities - In 1998, the Company issued common stock, warrants, and stock options valued at $1,341,883 in connection with the acquisition of ViroTex. See notes to the financial statements. F-6 37 ATRIX LABORATORIES, INC. NOTES TO THE FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Atrix Laboratories, Inc. (the "Company") was incorporated in 1986. The Company is engaged in research, development and commercialization of a broad range of dental, medical and veterinary products based on its proprietary sustained release biodegradable polymer drug delivery system, trade-named ATRIGEL(R). The Company commenced sales of its first product, the ATRISORB(R) GTR Barrier in both the United States and Europe during 1996. In 1997, the Company commenced sales of a product to treat periodontal disease in companion animals. In 1998, the Company launched the ATRIDOX(R) product and the ATRISORB(R) FreeFlow GTR Barrier product. The majority of Atrix's other products are in either the research, development, or clinical stage. The Company acquired ViroTex Corporation ("ViroTex") in November 1998 (See Note 7). ViroTex is engaged in the development of over-the-counter and prescription products based on its proprietary polymer and solvent based drug delivery systems. 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. CASH AND CASH EQUIVALENTS Cash equivalents include 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. F-7 38 INVENTORIES Inventories are stated at the lower of cost, determined by the first-in, first-out method, or market. The components of inventories are as follows as of December 31:
1998 1997 ---- ---- Raw Materials $1,659,097 $ 563,503 Work In Progress 393,068 500,198 Finished Goods 511,371 245,818 ---------- ---------- TOTAL $2,563,536 $1,309,519 ========== ==========
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, which range between three and forty years. Leasehold improvements are amortized over the term of the related lease. 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 $203,377, $198,856 and $93,072 for the years ended December 31, 1998, 1997 and 1996 respectively. INTANGIBLE ASSETS Intangible assets consist of patents, purchased technology, purchased royalty rights, and goodwill. Patents are stated at the legal cost incurred to obtain the patents. Upon approval, patent costs are amortized, using the straight-line method, over their estimated useful life. The values assigned to the purchased technology, purchased royalty rights, and goodwill arising from the ViroTex acquisition are amortized using the straight-line method over the period of expected benefit of four to five years. VALUATION OF LONG-LIVED ASSETS The Company reviews long-lived assets, including intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and establishes guidelines for determining fair value based on future net cash flows for the use of the asset and for the measurement of the impairment loss. Any impairment loss is recorded in the period in which the recognition criteria are first applied and met. DEFERRED FINANCE COSTS Costs associated with the issuance of the 7% convertible subordinated notes are deferred and are being amortized on a straight-line basis over the seven-year term of the notes. F-8 39 REVENUE RECOGNITION The Company recognizes revenue on sales at the time of shipment. Royalty revenue is recognized at the time of shipment by licensee and is reported with sales revenue. 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. NET INCOME (LOSS) PER COMMON SHARE Basic net income (loss) per common share excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the years presented. Diluted net income (loss) per common share reflects the potential dilution of securities that could share in the earnings. For the years presented, the effect of dilutive stock options is not significant and the effect of the assumed conversion of the convertible subordinated notes would be antidilutive. Therefore, diluted net income (loss) per share is not materially different from basic net income (loss) per common share. OTHER COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." (SFAS 130) which establishes new rules for the reporting and display of comprehensive income and its components. The adoption of SFAS 130 had no impact on the Company's net income or shareholders' equity. SFAS 130 requires unrealized gains and losses on investments, which prior to adoption were reported separately in shareholder's equity, to be included in accumulated other comprehensive income. Prior year amounts have been reclassified to conform to the requirements of SFAS 130. 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 using a fair value based method in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation." F-9 40 INCOME TAXES The Company accounts for income taxes in accordance with SFAS 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 presentation. 2. MARKETABLE SECURITIES As of December 31, 1998 marketable securities consist of the following:
NUMBER OF SHARES/ PRINCIPAL ESTIMATED AMOUNT COST FAIR VALUE ----------- ----------- ----------- U.S. Government and Agency Bond Funds Thornburg Fund 43,108 $ 543,888 $ 539,283 Pimco Fund 400,009 4,375,982 4,216,096 ----------- ----------- ----------- Total 443,117 4,919,870 4,755,379 U.S. Government and Agency Bonds 40,519,885 32,279,550 32,347,488 =========== =========== =========== Total 40,963,002 $37,199,420 $37,102,867 =========== =========== ===========
As of December 31, 1997 marketable securities consist of the following:
NUMBER OF SHARES/ PRINCIPAL ESTIMATED AMOUNT COST FAIR VALUE ----------- ----------- ----------- U.S. Government and Agency Bond Funds: Thornburg Fund 40,815 $ 515,338 $ 504,059 Pimco Fund 364,087 3,992,860 3,859,326 ----------- ----------- ----------- Total 404,902 4,508,198 4,363,385 U.S. Government and Agency Bonds 42,000,000 42,014,235 41,981,180 Commercial Paper-6 month maturity 3,888,988 3,888,988 4,000,000 =========== =========== =========== Total 46,404,902 $50,411,421 $50,233,553 =========== =========== ===========
As of December 31, 1998 gross unrealized gains and losses pertaining to marketable securities are $96,069 and $192,622, respectively. As of December 31, 1997 gross unrealized gains and losses pertaining to marketable securities are $9,997 and $187,864, respectively. F-10 41 3. INTANGIBLE ASSETS Intangible assets consist of the following as of December 31:
1998 1997 ------------------ ----------------- Patents $1,596,002 $1,121,308 Purchased Technology 2,800,000 -- Purchased Royalty Rights 600,000 -- Goodwill 575,805 -- ------------------ ----------------- Sub-total 5,571,807 1,121,308 ------------------ ----------------- Less: Accumulated Amortization (522,314) (96,355) ------------------ ----------------- Total $5,049,493 $1,024,953 ================== =================
4. LINE OF CREDIT In September 1998, the Company renewed a revolving line of credit with a bank. Under the terms of the line of credit, the Company may borrow up to $1,000,000. Borrowings under the line bear interest at the prime rate and are subject to financial covenants requiring the Company to maintain certain levels of net worth and liquidity. As of December 31, 1998, the Company had no outstanding balance under this line. 5. CONVERTIBLE SUBORDINATED NOTES PAYABLE In November 1997, the company issued $50,000,000 of convertible subordinated notes. These notes bear interest at the rate of 7% and are due in 2004. The notes are convertible, at the option of the holder, into common stock at any time prior to maturity, unless previously redeemed or repurchased. The notes are convertible, at the option of the Company after three years from the date of issue. The conversion price is set at $19.00 per share. In December 1998, the Company repurchased $1,500,000, or 3%, of its outstanding 7% convertible subordinated notes for $1,192,500. As a result, the Company recognized an extraordinary gain of approximately $257,000, net of deferred finance charges of $51,000. As of December 31, 1998, $48,500,000 of these notes are outstanding. (See notes 13 and 15) 6. BLOCK DRUG CORPORATION AGREEMENT On December 17, 1996, the Company entered into an agreement with Block Drug Corporation ("Block"). Under the terms of the agreement, Block acquired the North American marketing rights to the ATRISORB(R) GTR Barrier and ATRISORB(R)-DOXY product, and the rights to market the ATRIDOX(R) product in the United States, with an option to acquire the rights to market the ATRIDOX(R) product in Canada and certain European countries. On September 12, 1997, Block exercised its option to market the ATRIDOX(R) product in Canada, but let its option lapse with respect to Europe. F-11 42 Under the Block Agreement, Block is responsible for sales and marketing for the products and will advise, consult and may financially support various aspects of the Company's dental research and development program. The Company also has the right to co-market the products if certain annual sales levels are not met. The Block Agreement provides for both milestone and royalty payments to the Company. The Block Agreement expires on a product-by-product and a country-by-country basis upon the expiration of the last applicable patent or loss of patent protection for a product in a given country. The first patent will expire in 2012. In addition, Block may terminate the Block agreement at any time without cause upon 12 months written notice to the Company, if the Company commits a willful and material breach of the Block agreement, or if the Company ceases to manufacture or supply the product to Block pursuant to the Block Agreement. The Company may terminate the Block Agreement if Block fails to make any required payment, if Block commits a willful and material breach of the Block Agreement, if Block ceases to offer the product for distribution, or if Block markets, distributes or sells a competitive product. In 1997, the Company recognized revenue of $7,000,000 for the sale of marketing rights to the ATRISORB(R) GTR Barrier. The Company received an additional $100,000 payment from Block in September 1997 when Block exercised its option to acquire rights to market ATRIDOX(R) and ATRISORB(R) GTR Barrier products in Canada. In 1998, the Company received milestone payments of $12,000,000 pursuant to Block Agreements as a result of FDA approval of the Company's new drug application for ATRIDOX(R). The Company also earned an additional milestone of $5,000,000 as a result of Block's first commercial sale of the ATRIDOX(R) product. Total milestone payments earned in 1998 were $17,000,000. 7. ACQUISITION OF VIROTEX In November 1998, the Company acquired the common stock of ViroTex. The acquisition was accounted for using the purchase method of accounting and, accordingly, the assets and liabilities of ViroTex have been recorded at their fair value at the date of acquisition. The results of operations of ViroTex have been included in the financial statements of the Company since the date of acquisition. Total consideration paid was $7,693,749 as follows: cash of $6,201,556, 37,860 shares of common stock valued at $389,958, stock options to purchase 113,229 shares of common stock valued at $921,370, a warrant to purchase 6,750 shares of common stock valued at $30,556, and transaction expenses of $150,309. Additional consideration of up to $3,000,000 is payable, in shares of common stock or cash, over the next three years upon the satisfaction of certain defined earn-out events related to the performance of certain ViroTex products. F-12 43 The total purchase price of $7,693,749 was allocated to the fair value of the assets, based primarily on an independent third party valuation, as follows: Net Tangible Assets $ 667,944 ---------- Intangible Assets: Purchased in process research and development 3,050,000 Purchased Technology 2,800,000 Purchased Royalty Rights 600,000 Goodwill 575,805 ---------- Total $7,025,805 ---------- Net Assets Purchased $7,693,749 ==========
The Company expensed $3,050,000 of the purchase price, which was allocated to in-process research and development projects, as of the date of acquisition. The projects were valued using the discounted cash flow method in an independent third party valuation. The following unaudited pro forma results of operations for the year ended December 31, 1998, 1997 and 1996 assumes the purchase of ViroTex had occurred as of January 1, 1996:
1996 1997 1998 ------------ ------------ ------------ Total revenues $ 3,763,912 $ 16,509,489 $ 25,260,962 ------------ ------------ ------------ Net income (loss) $(13,401,655) $ (2,736,752) $ (142,921) ------------ ------------ ------------ Basic and diluted net income (loss) per common share $ (1.32) $ (.25) $ (0.01) ------------ ------------ ------------
The pro forma results of operations include adjustments to give effect to amortization of goodwill and other intangible assets, the write-off of purchased in-process research and development and certain other adjustments. The unaudited pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the purchase been made as of January 1, 1996, or the future results of combined operations. 8. STOCK OPTION PLANS As of December 31, 1998, 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 F-13 44 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 income (loss) and basic and diluted income (loss) per common share would have been reduced to the pro forma amounts indicated below:
1998 1997 1996 ----------- ------------ ------------ Net income (loss) : -- as reported $ 1,690,046 $ (3,866,717) $(11,432,153) ----------- ------------ ------------ -- pro forma $ 76,088 $ (5,067,819) $(12,188,993) ----------- ------------ ------------ Basic and diluted net income (loss) per common share: -- as reported $ .15 $ (.35) $ (1.13) ----------- ------------ ------------ -- pro forma $ .01 $ (.46) $ (1.20) ----------- ------------ ------------
The Company has reserved 1,500,000 of its authorized but unissued common stock for stock options to be granted under the Plan. On April 27, 1997, the stockholders of the Company approved an amendment to the Plan that increased the maximum aggregate number of shares issuable upon the exercise of options granted under the Plan from 1,500,000 shares to 2,500,000 shares. 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 492,881 shares which remain available under the plan for future employee stock option grants. The weighted average Black-Scholes fair value per option granted in 1998, 1997 and 1996 was $5.29, $4.58 and $2.33, respectively. 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 1998, 1997 and 1996: no dividend yield, expected volatility of 47.7% for 1998, 41.7% for 1997 and 37.8% for 1996, risk free interest rate of 7.0%, and expected life of 5 years. F-14 45 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, 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 granted 189,090 10.75-- 21.75 14.41 Options canceled or expired (6,977) 6.13-- 11.63 10.97 Options exercised (20,137) .50-- 11.75 7.16 ------------ -------------- --------------- Options outstanding, December 31, 1997 1,023,397 .50-- 21.75 8.45 Options granted 409,169 1.18-- 19.00 9.60 Options canceled or expired (12,190) .50-- 12.50 8.22 Options exercised (145,222) 10.50-- 20.00 1.58 ------------ -------------- --------------- Options outstanding, December 31, 1998 1,275,154 $.50-- 21.75 $9.60 ------------ -------------- --------------- Options outstanding are available for exercise as follows: Currently Exercisable 792,600 $ 7.81 1999 226,868 12.15 2000 158,297 13.21 2001 97,389 12.40 ------------ --------------- Total 1,275,154 $ 9.60 ============ ===============
On November 18, 1996, the Company canceled certain incentive and non-qualified stock options with a five-year term and issued new incentive and 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. The following table summarizes information about stock options outstanding under the Plan as of December 31, 1998:
NUMBER WEIGHTED NUMBER WEIGHTED OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE AT AVERAGE RANGE OF DECEMBER 31, REMAINING AVERAGE DECEMBER 31, EXERCISE PRICE EXERCISE PRICES 1998 CONTRACTUAL LIFE EXERCISE PRICE 1998 EXERCISABLE - ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------ $ .50 - 1.57 31,820 1 year $1.35 31,820 $1.35 1.57 - 14.00 24,578 3 years 2.07 24,578 2.07 6.75 - 9.88 284,465 4 years 8.50 284,465 8.50 1.57 - 9.13 96,982 5 years 5.28 96,982 5.28 1.57 - 6.88 96,971 6 years 5.78 96,971 5.78 6.63 - 11.94 143,248 7 years 8.38 115,861 8.07 6.88 - 13.25 189,197 8 years 10.24 103,343 10.05 11.38 - 21.75 199,233 9 years 16.67 38,580 16.44 10.06 - 14.44 208,660 10 years 10.57 -- -- - ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------ $ 0.50 - 21.75 1,275,154 7.69 years $9.60 792,600 $7.81 - ---------------------- ------------------ ------------------- ----------------- ----------------- ------------------
NON-QUALIFIED STOCK OPTION PLAN The Company has reserved 150,000 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"). In 1998, the Company amended the Non-qualified Plan to increase 50,000 shares to provide for a total of 150,000 F-15 46 shares. 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 72,020 shares, which remain available under the Non-qualified Plan for future stock option grants. The weighted average Black-Scholes fair value per option granted in 1998, 1997 and 1996 was $7.80, $3.98 and $2.00, respectively. In 1998, compensation expense for Non-qualified Plan grants was $23,412. 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 1998, 1997 and 1996: no dividend yield, expected volatility of 47.7% for 1998, 41.7% for 1997 and 37.8% for 1996, risk free interest rate of 7.0%, and expected lives of 5 years. The following table summarizes information on stock option activity for the Non-qualified Plan.
WEIGHTED NUMBER OF EXERCISE PRICE AVERAGE SHARES PER SHARE EXERCISE PRICE ------------------- --------------------- ------------------- 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 -- -- -- ------------------- --------------------- ------------------- Options outstanding, December 31, 1996 56,980 3.75-- 9.50 5.07 Options granted 18,000 .50-- 16.50 8.59 Options exercised (43,500) .50-- 6.88 3.84 ------------------- --------------------- ------------------- Options outstanding, December 31, 1997 31,480 5.13-- 16.50 8.92 Options granted 3,000 15.38 15.38 Options exercised -- -- -- ------------------- --------------------- ------------------- Options outstanding, December 31, 1998 34,480 $ 5.13-- 16.50 $ 8.67 ------------------- --------------------- ------------------- Options outstanding are available for exercise as follows: Currently Exercisable 22,107 $ 7.53 1999 6,373 12.22 2000 5,000 13.18 2001 1,000 15.38 ------------------- ------------------- Total 34,480 $ 8.67 ------------------- -------------------
F-16 47 The following table summarizes information about stock options outstanding under the Nonqualified Plan as of December 31, 1998:
WEIGHTED WEIGHTED NUMBER AVERAGE NUMBER AVERAGE RANGE OF OUTSTANDING AT REMAINING WEIGHTED EXERCISABLE AT EXERCISE EXERCISE DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, PRICE PRICES 1998 LIFE EXERCISE PRICE 1998 EXERCISABLE - --------------------- -------------------- -------------------- ------------------- ----------------- ------------------ $5.13-- 6.63 10,360 6 years $ 5.62 10,360 $ 5.62 7.00 5,000 7 years 7.00 5,000 7.00 6.63-- 16.50 16,120 8 years 11.63 6,747 9.23 15.38 3,000 9 years 15.38 - - - --------------------- -------------------- -------------------- ------------------- ----------------- ------------------ $5.13-- 16.50 34,480 7.34 years $ 8.67 22,107 $ 7.53 - --------------------- -------------------- -------------------- ------------------- ----------------- ------------------
9. INCOME TAXES Net deferred tax assets at December 31, consist of:
1998 1997 ----------------------- -------------------- Deferred tax assets: Net operating loss carry forwards $15,129,836 $16,102,000 Research and development tax credit carryforwards 649,162 496,282 Amortization of intangibles 2,311,644 2,488,000 Purchased in-process research and development 1,131,330 -- Depreciation 164,874 140,000 Other items 229,831 269,000 ----------------------- -------------------- Net deferred tax assets 19,616,677 19,495,282 ----------------------- -------------------- Less valuation allowance 19,616,677 19,495,282 ----------------------- -------------------- Total $ 0 $ 0 ----------------------- --------------------
At December 31, 1998, the Company has approximately $42,170,473 of federal income tax net operating loss carry forwards and $1,608,039 of research and development credits, which expire through 2012. Included in the deferred tax asset for net operating loss carryforwards are benefits from the exercise of employee stock options of $1,656,063, which when subsequently recognized will be allocated to additional paid in capital. A reconciliation of the differences in income tax expense from income (loss) before extraordinary item computed at the federal statutory rate and income tax expense as recorded for the year ended December 31 are as follows:
1998 1997 1996 ---------------- ------------------ --------------- Income tax computed at federal statutory rate: $ 590,998 $(1,314,684) $(3,886,932) State income taxes - net of federal benefit 57,362 (127,602) (377,261) Permanent differences 8,457 10,685 65,212 Exercise of employee stock options (593,368) (324,545) (106,347) Research and Development (151,977) (145,739) (63,622) Other 15,316 (38,671) (53,855) Change in valuation allowance 121,395 1,940,556 4,422,805 ---------------- ------------------ --------------- Income tax expense $ 48,183 $ -- $ -- ================ ================== ===============
F-17 48 10. SEGMENT AND CUSTOMER INFORMATION The Company operates in a single reportable segment and all revenues from customers are from a similar group of periodontal products. Sales and milestone revenues from one customer amounted to $19,028,000 and $8,213,000 for the years ended December 31, 1998 and 1997, respectively. Contract revenues from three customers amounted to $198,000, $235,000 and $270,000 for the year ended December 31, 1996. Revenues from export sales to foreign customers amounted to approximately $557,000, $100,000 and $124,000 for the years ended December 31, 1998, 1997 and 1996 respectively. 11. LEASE COMMITMENTS As of December 31, 1998, minimum rental commitments under non-cancelable operating leases of one year or more are as follows:
Year Ending December 31, ------------------------ 1999 $ 290,358 2000 261,872 2001 262,944 2002 270,830 2003 114,232 2004 -- --------------------- Total $ 1,200,236 =====================
Rent expense was $275,917, $212,982 and $205,583 for the years ended December 31, 1998, 1997 and 1996, respectively. 12. BENEFIT PLANS 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 $91,889, $64,770 and $48,461 for 1998, 1997 and 1996, respectively. On April 27, 1997, the stockholders of the Company approved the Atrix Laboratories, Inc. 1997 Employee Stock Purchase Plan (the "ESPP"). The ESPP provides eligible employees with the opportunity to purchase shares through authorized payroll deductions at 85% of the average market price on the last day of each quarter. The ESPP qualifies as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code. The Company has reserved 300,000 shares of its authorized but unissued common stock for issuance under the ESPP of which 290,049 remain available at December 31, 1998. 49 13. COMMON STOCK In February 1998, the Company's Board of Directors authorized the Company to repurchase up to $10,000,000 of the Company's common stock. As of December 31, 1998, the Company has repurchased 157,000 shares of its common stock for approximately $1,651,000. The repurchase program was amended by the Board of Directors to authorize the Company to purchase up to $10 million of the 7% Convertible Subordinated Notes or shares of Common Stock and to extend the program through December 31, 1999. 14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair values of the Company's financial instruments as of December 31 are as follows:
----------------- ------------------- -------------------- ------------------ 1998 1998 1997 1997 CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE ----------------- ------------------- -------------------- ------------------ Cash and cash equivalents $ 18,556,641 $ 18,556,641 $ 15,185,841 $ 15,185,841 Marketable securities 37,102,867 37,102,867 50,233,553 50,233,553 Convertible subordinated notes 36,375,000 50,000,000 47,812,500 48,500,000 ----------------- ------------------- -------------------- ------------------
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 because of the short maturity of these instruments. Marketable securities -- The fair value is based on quoted market prices or dealer quotes. Convertible subordinated notes -- The fair value is based on quoted marked prices or dealer quotes. 15. SUBSEQUENT EVENTS In January 1999, the Company repurchased $3,000,000, or 6%, of its outstanding 7% convertible subordinated notes for $2,250,000. As a result, the Company recognized an extraordinary gain of approximately $650,000, net of deferred finance charges of $100,000. F-19 50 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) Date: March 23, 1999 By: /s/ John E. Urheim ------------------------------- John E. Urheim Vice Chairman of the Board of Directors 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 Date: March 18, 1999 - --------------------------------- David R. Bethune /s/ H. Stuart Campbell Director Date: March 23, 1999 - --------------------------------- H. Stuart Campbell /s/ Dr. D. Walter Cohen Director Date: March 18, 1999 - --------------------------------- Dr. D. Walter Cohen /s/ Michael R. Duncan Vice President of Manufacturing Date: March 23, 1999 - --------------------------------- Michael R. Duncan /s/ Richard Dunn Senior Vice President of Drug Date: March 23, 1999 - --------------------------------- Delivery Richard Dunn /s/ Dr. Richard Jackson Senior Vice President of Research Date: March 23, 1999 - --------------------------------- and Development Dr. Richard Jackson /s/ Dr. J. Steven Garrett Vice President of Clinical Research Date: March 23, 1999 - --------------------------------- Dr. J. Steven Garrett /s/ Elaine M. Gazdeck Vice President of Regulatory Date: March 23, 1999 - --------------------------------- Affairs & Quality Assurance Elaine M. Gazdeck /s/ Dr. Jere E. Goyan Director Date: March 23, 1999 - --------------------------------- Dr. Jere E. Goyan /s/Dr. R. Bruce Merrifield Director Date: March 18, 1999 - --------------------------------- Dr. R. Bruce Merrifield /s/ C. Rodney O'Connor Director Date: March 19, 1999 - --------------------------------- C. Rodney O'Connor
51 /s/ William C. O'Neil, Jr. Chairman of the Board of Directors Date: March 22, 1999 - --------------------------------- William C. O'Neil, Jr. /s/ David Osborne Vice President of Pharmaceutical Date: March 23, 1999 - --------------------------------- Development David Osborne /s/ Brian G. Richmond Vice President of Finance and Date: March 23, 1999 - --------------------------------- Assistant Secretary Brian G. Richmond Director Date: March __, 1999 - --------------------------------- G. Lee Southard /s/ John E. Urheim Vice Chairman of the Board of Date: March 23, 1999 - --------------------------------- Directors and Chief Executive John E. Urheim Officer
52 EXHIBIT INDEX Exhibit No. Description ----------- ----------- 2.1 Agreement and Plan of Reorganization dated November 24, 1998 by and among Atrix Laboratories, Inc., Atrix Acquisition Corporation and ViroTex Corporation(6) 2.2 Certificate of Merger of Atrix Acquisition Corporation into ViroTex Corporation dated November 24, 1998(6) 3.1 Amended and Restated Certificate of Incorporation* 3.2 Seventh Amended and Restated Bylaws(1) 4.1 Form of Common Stock Certificate(2) 4.2 Indenture, dated November 15, 1997, by and among the Registrant and State Street Bank and Trust company of California, N.A., as trustee thereunder(4) 4.3 Form of Note (included in Indenture, see Exhibit 4.2) 4.4 Rights Agreement (including form of Right Certificate, as Exhibit A, and form of Summary of Rights, as Exhibit B)(5) 4.5 Warrant to purchase 6,750 shares of Atrix Common Stock issued to Gulfstar Investments, Limited* 10.1 Employment Agreement between Registrant and John E. Urheim dated June 4, 1993(2) 10.2 Lease Agreement dated May 11, 1991 between the Registrant and GB Ventures(2) 10.3 Agreement dated December 16, 1996 between the Registrant and Block Drug Corporation(3) 10.3A First Amendment to Block Agreement dated June 10, 1997*,** 10.3B Second Amendment to Block Agreement dated July 31, 1997*,** 10.3C Third Amendment to Block Agreement dated February 4, 1998*,** 10.3D Fourth Amendment to Block Agreement dated January 12, 1999*,** 10.3E Fifth Amendment to Block Agreement dated January 27, 1999*,** 10.4 Registration Rights Agreement, dated as of November 15, 1997, by and among Registrant and NationsBanc Montgomery Securities, Inc. and SBC Warburg Dillon Read, Inc.(4) 10.5 Amended and Restated Performance Stock Option Plan, as amended.* 10.6 Non-Qualified Stock Option Plan, as amended.* 10.7 Employment Agreement between Registrant and Dr. J. Steven Garrett dated April 17, 1995* 10.8 Employment Agreement between Registrant and Rees M. Orland dated January 1, 1996* 10.9 Employment Agreement between Registrant and Dr. David W. Osborne dated November 24, 1998* 10.10 Employment Agreement between Registrant and Dr. Richard L. Jackson dated November 1, 1998* 21 Subsidiaries of the Registrant* 23 Consent of Deloitte & Touche LLP* 27 Financial Data Schedule* - ------------------- * Filed herewith. ** Confidential treatment requested. (1) Incorporated by reference to the Registrant's Registration Statement on Form S-3, file number 333-43191. (2) 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. (3) Incorporated by reference to Registrant's Current Report on Form 8-K dated December 16, 1996, as amended on May 20, 1998, as filed with the Securities and Exchange Commission. (4) Incorporated by reference to Registrant's Current Report on Form 8-K dated November 6, 1997, as filed with the Securities and Exchange Commission. (5) Incorporated by reference to Registrant's Registration Statement on Form 8-A, file number 000-18231. (6) Incorporated by reference to Registrant's Current Report on Form 8-K dated November 24, 1998, as filed with the Securities and Exchange Commission. EX-3.1 2 AMENDED & RESTATED CERTIFICATE OF INCORPORATION 1 EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF VIPONT RESEARCH LABORATORIES, INC. AMENDED AND RESTATED AS OF DECEMBER 15, 1989 Pursuant to the provisions of Del. Code Ann. tit. 8, ss. 245 (1983), the undersigned hereby adopts this Amended and Restated Certificate of Incorporation (the "Certificate") of Vipont Research Laboratories, Inc. (the "Corporation"). The certificate correctly sets forth (i) the provisions of the Certificate of Incorporation, originally filed with the Secretary of State of the State of Delaware on August 8, 1986; and (ii) the Certificate of Amendment of Certificate of Incorporation Before Payment of Capital filed with the Secretary of State of the State of Delaware on November 13, 1985, as amended. The Certificate restates, amends and supercedes the provisions of any and all such documents. The Certificate has been duly adopted and approved by the directors and stockholders of the Corporation on October 20, 1989 and November 30, 1989, respectively. FIRST: The name of the corporation in Atrix Laboratories, Inc. SECOND: The registered office of said Corporation and place of business in the State of Delaware is to be located at Corporation Trust Center, 1209 Orange Street, City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. THIRD: The nature of the business, and the objects and purposes proposed to be transacted, promoted and carried on, are as follow: (a) The Corporation shall have unlimited power to engage in and to do any lawful act concerning any or all lawful businesses for which corporations may be organized under the Delaware General Corporation Law. (b) The Corporation assumes to itself and shall and does possess all general powers, rights, privileges and franchises granted to or conferred upon corporations by the laws of the State of Delaware. FOURTH: The aggregate number of shares which the Corporation shall have authority to issue is thirty million (30,000,000) shares, divided into twenty-five million (25,000,000) shares of common stock of the per value of $.001 par share and five million (5,000,000) shares of preferred stock of the par value of $.001 per share. 1 2 The board of directors is authorized, subject to limitations prescribed by law, to provide for the issuance of the shares of preferred stock in series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and any qualifications, limitations or restrictions thereof. The number of authorized shares of preferred stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the outstanding shares of common stock, without a vote of the holders of the preferred stock, or of any series thereof, unless a vote of any such holders in required pursuant to the certificate or certificates establishing any series of preferred stock. No stockholder shall be entitled to preemptive rights in the issuance of preferred or common stock or be entitled to cumulative voting rights. FIFTH: Prevention of Self-Dealing. In addition to any action, including any vote by stockholders required by law or this Certificate, the approval or authorization of any Self-Dealing Transaction shall require either (a) the approval of a majority of Disinterested Directors or (b) the affirmative vote of the holders of at least a majority of the combined voting power of the Voting Stock, voting together as a single class, excluding any votes cast with respect to shares of Voting Stock beneficially owned by an Interested Stockholder which is directly or indirectly a party, or an Affiliate or Associate of which is, directly or indirectly, a party, to such Self-Dealing Transaction. Certain Definitions. For the purpose of this Article Fifth: (a) A "person" shall mean any individual, firm, corporation or other entity. (b) "Voting Stock" shall mean the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of Directors. In any vote required by or provided for in this Article Fifth, each share of Voting Stock shall have the number of votes granted to it generally in the election of Directors. (c) "Interested Stockholder" shall mean any person (other than the Corporation or any Subsidiary) who or which: (i) is the beneficial owner, directly or indirectly, of more than 5% of the outstanding Voting Stock; or (ii) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of more than 5% of the outstanding Voting Stock; or (iii) is an assignee of or has otherwise succeeded to any Voting Stock of the Corporation which at any time within the two-year period immediately prior to the date in question was beneficially owned by any Interested Stockholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. 2 3 (d) A person shall be a "beneficial owner" of, or "beneficially own" or have "beneficial ownership" of, any shares of Voting Stock: (i) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or (ii) which such person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates had any agreement, arrangement or understanding for the purpose of acquiring holding, voting or disposing of any Voting Stock. (e) In determining whether a person is an Interested Stockholder pursuant to paragraph (c) of this Article Fifth, any class of Voting Stock outstanding shall be deemed to include any Voting Stock deemed owned through application of paragraph (d) of this Article Fifth but shall not include any other securities of such class which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options or otherwise. (f) "Self-Dealing Transaction" means any of the following transactions: (i) any merger or consolidation of the Corporation or any Subsidiary with (a) any Interested Stockholder or (b) any other corporation (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate of an interested Stockholder; or (ii) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Stockholder or any Affiliate of any Interested Stockholder of any assets of the Corporation or any Subsidiary having an aggregate fair market value of $3,000,000 or more or any loan, advance, guarantee or other financial assistance, including any tax credit or other tax advantages, to or with any Interested Stockholder or any Affiliate of any Interested Stockholder which involves a financial obligation or benefit of $3,000,000 or more; or (iii) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary to any 3 4 Interested Stockholder or any Affiliate of any Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) having an aggregate fair market value of $3,000,000 or more; or (iv) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Stockholder or any Affiliate of any Interested Stockholder; or (v) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of Voting Stock of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Stockholder or any Affiliate of any Interested Stockholder. (g) "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, an in effect on October 1, 1989. (h) "Subsidiary" means any corporation of which a majority of any class of shares of such corporation entitled to vote generally in the election of directors is owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definition of Interested Stockholder set forth in paragraph (c) of this section, the term "Subsidiary" shall mean only a corporation of which a majority of the combined voting power of all shares of such corporation entitled to vote generally in the election of directors is owned, directly or indirectly, by the Corporation. (i) "Disinterested Director" means any member of the Board of Directors of the Corporation who is unaffiliated with the Interested Stockholder and was a member of the Board of Directors prior to the time that the Interested Stockholder became an Interested Stockholder, and any successor of a Disinterested Director who is unaffiliated with the Interested Stockholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board of Directors. Powers of the Board of Directors. A majority of the Disinterested Directors, or, if there are no Disinterested Directors, a majority of the members of the Board of Directors then in office, shall have the power to determine, for the purposes of this Article Fifth, on the basis of information known to them, (a) whether a person in an Interested Stockholder, (b) the number of shares of Voting Stock beneficially owned by any person, (c) whether a person in an Affiliate or Associate of another, and (d) whether the assets or financial obligations or benefits which are the subject of any Self-Dealing Transaction have, or the consideration to be received for the issuance or transfer of securities by the Corporation or any Subsidiary in any Self-Dealing Transaction has, an aggregate fair market value of or involve $3,000,000 or more. A majority of the Disinterested Directors, or, if there are no Disinterested Directors, a majority of the members of the Board of Directors then in office, shall have the further power to interpret all of the terms and provisions of this Article Fifth. 4 5 Amendment, Repeal, etc. Notwithstanding anything contained in this Certificate or the By-Laws of the Corporation to the contrary, the alteration, change, amendment, repeal or adoption of any provisions inconsistent with this Article Fifth shall require the affirmative vote of the holders of a majority of the combined voting power of the outstanding Voting Stock, excluding any votes cast with respect to shares of Voting Stock beneficially owned by any Interested Stockholder, voting together as a single class, but in no event less than the affirmative vote of 66.66% of combined voting power of the outstanding shares of Voting Stock, including shares of Voting Stock beneficially owned by any Interested Stockholder, voting together as a single class. SIXTH: Board of Directors. The governing board of this Corporation shall be known as directors and the number of directors may be from time to time increased or decreased in such manner as shall be specified in the By-Laws of this Corporation, provided that the number of directors shall not be reduced to less than three (3) nor increased to more than eleven (11). Classification. The board of directors shall be divided into three classes, A, B and C, as nearly equal in number as the total number of directors constituting the whole board permits, with the term of office of one class expiring each year. Directors of Class A shall hold office for an initial term expiring at the annual stockholder meeting in 1990; directors of Class B shall hold office for an initial term expiring at the annual stockholder meeting in 1991; and directors of Class C shall hold office for an initial term expiring at the annual stockholder meeting in 1992. Subject to the foregoing, at each annual meeting of stockholders the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting and each director so elected shall hold office until his successor is elected and qualified, or until his earlier resignation or removal. If the number of directors is changed, any increase or decrease in the number of directors shall be apportioned among the three classes so as to make all classes as nearly equal in number an possible. Power to Make and Alter By-Laws. In furtherance of, and not in limitation of, the powers conferred by statute, the Board of Directors is expressly authorized and empowered to make and alter the By-Laws of the Corporation; provided, however, that the By-Laws made by the Board of Directors under the powers hereby conferred may be altered, changed, amended or repealed by the Board of Directors or by the stockholders having voting power with respect thereto. Newly Created Directorships and Vacancies. Except as otherwise provided for or fixed by or pursuant to the provisions of Article Fourth of this Certificate relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect Directors under specified circumstances, newly created directorships resulting from any increase in the number of Directors and any vacancies on the Board of Directors resulting from death, resignation, disqualification, removal or other cause shall be filled only by the affirmative vote of a majority of the remaining Directors then in office, even though less than a quorum of the Board of Directors. Any Director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of Directors in which the new directorship was created or the vacancy occurred and until such Director's successor shall have been elected and qualified. No decrease in the number of Directors constituting the Board of Directors shall shorten the term of an incumbent Director. 5 6 Cumulative Voting in Certain Circumstances. Notwithstanding anything contained in this Certificate to the contrary, in any election of Directors of the Corporation on or after the date on which the Corporation becomes aware that any stockholder has become a 30% Stockholder (as defined below), there shall be cumulative voting for election of Directors so that any holder of shares of Voting Stock may cumulate the voting power represented by his shares and give one candidate a number of votes equal to the number of Directors to be elected multiplied by the number of votes to which such shares are entitled, or distribute such votes on the same principle among as many candidates for election as such holder of shares determines. For the purposes of this section, a "30% Stockholder" shall mean any person (other than the Corporation and any other corporation of which a majority of the voting power of the capital stock entitled to vote generally in the election of directors is owned, directly or indirectly, by the Corporation) who or which in the beneficial owner, directly or indirectly, of 30% or more of the outstanding Voting Stock (as hereinafter defined). Amendment, Repeal or Alteration. Notwithstanding anything contained in this Certificate to the contrary, the affirmative vote of the holders of at least 66.66% of the combined voting power of the outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, change, amend, repeal or adopt any provision inconsistent with, this Article Sixth. Certain Definitions. For the purpose of this Article Sixth: (a) A "person" shall mean any individual, firm, corporation or other entity, (b) "Voting Stock" shall mean the outstanding shares of capital stock of the Corporation entitled to vote generally in the election of Directors. In any vote required by or provided for in this Article Sixth, each share of Voting Stock shall have the number of votes granted to it generally in the election of Directors. (c) A person shall be a "beneficial owner" of any shares of Voting Stock; (i) which such person or any of its Affiliates or Associates (as hereinafter defined) beneficially owns, directly or indirectly; or (ii) which such person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding; or (iii) which is beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or 6 7 disposing of any Voting Stock; provided, however, that no person shall be deemed to be a "beneficial owner" of any shares of Voting Stock solely by reason of such person's right to vote or to acquire such Voting Stock pursuant to any agreement or instrument approved by a majority of the Board of Directors. (d) In determining whether a person is a 30% Stockholder pursuant to this Article Sixth, any class of Voting Stock outstanding shall be deemed to include any Voting Stock deemed owned through application of paragraph (c) of this section but shall not include any other securities of such class which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. (e) "Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as in effect on October 1, 1989. SEVENTH: Except as otherwise provided by law, a director of this Corporation shall not be disqualified by his office from dealing or contracting with the Corporation as a vendor, purchaser, employee, agent or otherwise; nor shall any transaction or contract or act of this Corporation be void or voidable, or in any way affected or invalidated by reason of the fact that any director, or any firm of which any director is a member, or any corporation of which any director is a stockholder or director, in any way interested in such transaction or contract or act, provided the fact that such director, or such firm, or such corporation, is so interested and shall be disclosed, or shall be known to the Board of Directors, or such members thereof as shall be present at any meeting of the Board of Directors at which action upon any such contract or transaction or act shall be taken; nor shall any director be accountable or responsible to the Corporation, for or in respect to any such transaction or contract or act of this Corporation or for any gains or profits realized by him, by reason of the fact that he or any firm of which he is a member, or any corporation of which he is a stockholder or director, is interested in such transaction or contract; and any such director may be counted in determining the existence of a quorum at any meeting of the Board of Directors of the Corporation which in authorized to take action in respect to any such contract or transaction or act, and may vote to authorize, ratify or approve any such contract or transaction or act, with like force and effect as if he or any firm of which he is a member, or any corporation of which he in a stockholder or director, are not interested in such transaction or contract or act. EIGHTH: Except an otherwise provided in this Certificate or by law, this Certificate may be amended by a majority vote of all shares of the Corporation issued and outstanding. NINTH: Without limiting the powers of the Corporation as conferred by statute to acquire its own shares, said corporation may, from time to time, when authorized by its Board of Directors and to the extent of the surplus of its assets over its liabilities, plus capital, purchase shares of any class of securities issued by it. TENTH: The Corporation is to have perpetual existence. 7 8 ELEVENTH: Section 1. Elimination of Certain Liability of Directors. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. Section 2. Indemnification and Insurance. (a) Right to Indemnification. Each person who was or is made a party or is threatened to be made a party to or is involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "Proceeding"), by reason of the fact that he or she or a person of whom he or she in the legal representative, is or was a director or officer, of the Corporation or in or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit planet whether the basis of such Proceeding is alleged action an official capacity as a director, officer, employee or agent or in any other capacity while serving as a director, officer, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such person in connection therewith and such indemnification shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in paragraph (b) hereof, the Corporation shall indemnify any such person seeking indemnification in connection with a preceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this section shall be a contract right and shall include the right to be paid by the Corporation the expenses incurred in defending any such Proceeding in advance of its final disposition; provided, however, that, if the Delaware General Corporation Law requires, the payment of such expenses incurred by a director or officer in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such person while a director or officer, including, without limitation, service to an employee benefit plan) in advance of the final disposition of a Proceeding, shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such director or officer, to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. The Corporation may, by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. 8 9 (b) Right of Claimant to Bring Suit. If a claim under paragraph (a) of this Section is not paid in full by the Corporation within thirty days after a written claim has been received by the Corporation, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any Proceeding in advance of its final disposition where the required undertaking, if any is required has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such action and indemnification of the claimant is proper in the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its stockholders) that the claimant has not met such applicable standard or conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. (c) Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of this Certificate, bylaw, agreement, vote of stockholders or disinterested directors or otherwise. (d) Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. Section 3. Amendment, Repeal or Alteration. Notwithstanding anything contained in this Certificate to the contrary, the affirmative vote of the holders of at least 66.66% of the combined voting power of the outstanding shares of the Voting Stock, voting together as a single class, shall be required to alter, change, amend, repeal, or adopt any provision inconsistent with this Article Eleventh. 9 10 Executed this 8th day of December, 1989. By: /s/ G. Lee Southard ------------------------------- G. Lee Southard, President ATTEST: /s/ Walter J. Daly - ----------------------------- Walter J. Daly, Secretary STATE OF COLORADO ] CITY OF FORT COLLINS ] SS. COUNTY OF LARIMER ] I, Ann L. Davis, a notary Public, hereby certify that on this 8th day of December, 1989, personally appeared before me G. Lee Southard, who, being by me first duly sworn, declared that he is the person who signed the foregoing document as President of Vipont Research Laboratories, Inc. and that the statements contained therein are true. IN WITNESS WHEREOF, I have hereunto set my hand and seal this 8th day of December, 1989. [SEAL] /s/ Ann L. Davis ------------------------------ Notary Public My Commission Expires: 6-21-90 - ------------------------------ 10 11 ATRIX LABORATORIES, INC. CERTIFICATE OF DESIGNATION OF THE SERIES A PREFERRED STOCK ------------------------------------- Pursuant to Section 151 of the General Corporation Law of the State of Delaware ------------------------------------- The undersigned officers of Atrix Laboratories, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation"), in accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY: That, pursuant to the authority conferred upon the Board of Directors of the Corporation by its Amended and Restated Certificate of Incorporation (the "Certificate"), the said Board of Directors, at a duly called meeting held on August 2, 1998, at which a quorum was present and acted throughout, adopted the following resolution, which resolution remains in full force and effect on the date hereof creating a series of Series A shares of preferred stock having a par value of $.001 per share, designated as Series A Preferred Stock (the "Series A Preferred Stock") out of the class of 5,000,000 shares of preferred stock, par value $.001 per share (the "Preferred Stock"): RESOLVED, that pursuant to the authority vested in the Board of Directors in accordance with the provisions of its Certificate, the Board of Directors does hereby create, authorize and provide for the issuance of 200,000 shares of its authorized Preferred Stock to be designated and issued as the Series A Preferred Stock, having the voting powers, designation, relative, participating, optional and other special rights, preferences and qualifications, limitations and restrictions that are set forth as follows: 1. Dividends and Distributions. (A) Subject to the prior and superior rights of the holders of any shares of any other series of Preferred Stock or any other shares of stock of the Corporation ranking prior and superior to the shares of Series A Preferred Stock with respect to dividends, each holder of one one-hundredth (1/100) of a share (a "Unit") of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for that purpose, (i) quarterly dividends payable in cash on the first day of March, June, September and December in each year (each such date being a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of such Unit of Series A Preferred Stock, in an amount per Unit (rounded to the nearest cent) equal to the greater of (a) $.01 or (b) subject to the provision for adjustment hereinafter set forth, the aggregate per share amount of all cash dividends declared on shares of the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of a Unit of Series A Preferred Stock, and (ii) subject to the provision for adjustment hereinafter set forth, quarterly distributions (payable in kind) on each Quarterly Dividend Payment Date in an amount per Unit equal to the aggregate per share amount of all non-cash dividends or other distributions (other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock, by 1 12 reclassification or otherwise) declared on shares of Common Stock since the immediately preceding Quarterly Dividend Payment Date, or with respect to the first Quarterly Dividend Payment Date, since the first issuance of a Unit of Series A Preferred Stock. In the event that the Corporation shall at any time after September 25, 1998 (the "Rights Declaration Date") (i) declare any dividend on outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock or (iii) combine outstanding shares of Common Stock into a smaller number of shares, then in each such case the amount to which the holder of a Unit of Series A Preferred Stock was entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the number of shares of Common Stock that are outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on Units of Series A Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the shares of Common Stock (other than a dividend payable in shares of Common Stock); provided, however, that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $.01 per Unit on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and shall be cumulative on each outstanding Unit of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issuance of such Unit of Series A Preferred Stock, unless the date of issuance of such Unit is prior to the record date for the first Quarterly Dividend Payment Date, in which case, dividends on such Unit shall begin to accrue from the date of issuance of such Unit, or unless the date of issuance is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of Units of Series A Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on Units of Series A Preferred Stock in an amount less than the aggregate amount of all such dividends at the time accrued and payable on such Units shall be allocated pro rata on a unit-by-unit basis among all Units of Series A Preferred Stock at the time outstanding. The Board of Directors may fix a record date for the determination of holders of Units of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. 2. Voting Rights. The holders of Units of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each Unit of Series A Preferred Stock shall entitle the holder thereof to one vote on all matters submitted to a vote of the stockholders of the Corporation. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock or (iii) combine 2 13 the outstanding shares of Common Stock into a smaller number of shares, then in each such case the number of votes per Unit to which holders of Units of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which shall be the number of shares of Common Stock outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event; and (B) Except as otherwise provided herein, in the Certificate or the Bylaws of the Corporation or as required by law, the holders of Units of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation, and such holders shall have no special voting rights and their consents shall not be required for taking any corporate action. 3. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on Units of Series A Preferred Stock as provided herein are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on outstanding Units of Series A Preferred Stock shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of junior stock; (ii) declare or pay dividends on or make any other distributions on any shares of parity stock, except dividends paid ratably on Units of Series A Preferred Stock and shares of all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of such Units and all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any parity stock, provided, however, that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any junior stock; (iv) purchase or otherwise acquire for consideration any Units of Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such Units. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 3, purchase or otherwise acquire such shares at such time and in such manner. 4. Reacquired Shares. Any Units of Series A Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and cancelled promptly after the acquisition thereof. All such Units shall, upon their cancellation, become authorized but unissued shares (or fractions of shares) of Preferred Stock and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors, subject to the conditions and restrictions on issuance set forth herein. 5. Liquidation, Dissolution or Winding Up. (A) Upon any voluntary or involuntary liquidation, dissolution or winding up of the Corporation, no distribution shall be made (i) to the holders of shares of junior stock unless the holders of Units of Series A Preferred Stock shall have received, subject to adjustment as hereinafter provided in paragraph (B), the greater of either (a) $.01 per Unit plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not earned or declared, to the date of such payment, or (b) the amount equal to the aggregate per share amount to be 3 14 distributed to holders of shares of Common Stock, or (ii) to the holders of shares of parity stock, unless simultaneously therewith distributions are made ratably on Units of Series A Preferred Stock and all other shares of such parity stock in proportion to the total amounts to which the holders of Units of Series A Preferred Stock are entitled under clause (i)(a) of this sentence and to which the holders of shares of such parity stock are entitled, in each case upon such liquidation, dissolution or winding up. (B) In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock, or (iii) combine outstanding shares of Common Stock into a smaller number of shares, then in each such case the aggregate amount to which holders of Units of Series A Preferred Stock were entitled immediately prior to such event pursuant to clause (i)(b) of paragraph (A) of this Section 5 shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the number of shares of Common Stock that are outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. 6. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or converted into other stock or securities, cash and/or any other property, then in any such case Units of Series A Preferred Stock shall at the same time be similarly exchanged for or converted into an amount per Unit (subject to the provision for adjustment hereinafter set forth) equal to the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is converted or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide outstanding shares of Common Stock, or (iii) combine outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the immediately preceding sentence with respect to the exchange or conversion of Units of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which shall be the number of shares of Common Stock that are outstanding immediately after such event and the denominator of which shall be the number of shares of Common Stock that were outstanding immediately prior to such event. 7. Redemption. The Units of Series A Preferred Stock and shares of Series A Preferred Stock shall not be redeemable. 8. Ranking. The Units of Series A Preferred Stock and shares of Series A Preferred Stock shall rank junior to all other series of the Preferred Stock and to any other class of Preferred Stock that hereafter may be issued by the Corporation as to the payment of dividends and the distribution of assets, unless the terms of any such series or class shall provide otherwise. 9. Fractional Shares. The Series A Preferred Stock may be issued in Units or other fractions of a share, which Units or fractions shall entitle the holder, in proportion to such holder's units or fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Preferred Stock. 4 15 10. Certain Definitions. As used in this resolution with respect to the Series A Preferred Stock, the following terms shall have the following meanings: (A) The term "Common Stock" shall mean the class of stock designated as the common stock, par value $.001 per share, of the Corporation at the date hereof or any other class of stock resulting from successive changes or reclassification of the common stock. (B) The term "junior stock" (i) as used in Section 3 shall mean the Common Stock and any other class or series of capital stock of the Corporation hereafter authorized or issued over which the Series A Preferred Stock has preference or priority as to the payment of dividends and (ii) as used in Section 5, shall mean the Common Stock and any other class or series of capital stock of the Corporation over which the Series A Preferred Stock has preference or priority in the distribution of assets on any liquidation, dissolution or winding up of the Corporation. (C) The term "parity stock" (i) as used in Section 3 shall mean any class or series of stock of the Corporation hereafter authorized or issued ranking pari passu with the Series A Preferred Stock as to dividends and (ii) as used in Section 5, shall mean any class or series of capital stock ranking pari passu with the Series A Preferred Stock in the distribution of assets on any liquidation, dissolution or winding up. 5 16 IN WITNESS WHEREOF, Atrix Laboratories, Inc. has caused this Certificate to be signed by its Vice Chairman and Chief Executive Officer and its Assistant Secretary and Chief Financial Officer this 24th day of September, 1998. ATRIX LABORATORIES, INC. By: /s/ John E. Urheim ------------------------------------------ Name: John E. Urheim Title: Vice Chairman and Chief Executive Officer By: /s/ Brian G. Richmond ------------------------------------------ Name: Brian G. Richmond Title: Assistant Secretary and Chief Financial Officer 6 EX-4.5 3 STOCK PURCHASE WARRANT 1 EXHIBIT 4.5 ----------- STOCK PURCHASE WARRANT THE SECURITIES REPRESENTED BY THIS INSTRUMENT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE OR OTHER JURISDICTION. WITHOUT SUCH REGISTRATION, SUCH SECURITIES MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED, EXCEPT UPON DELIVERY TO ATRIX LABORATORIES, INC. OF AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER, OR SUBMISSION TO THE COMPANY OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO THE COMPANY TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE OR FOREIGN SECURITIES LAW OR ANY RULE OR REGULATION PROMULGATED THEREUNDER. WHEREAS, Atrix Laboratories, Inc., a Delaware corporation (the "Company"), has agreed to acquire ViroTex Corporation ("ViroTex") pursuant to the terms of the Agreement and Plan of Reorganization by and among the Company, Atrix Acquisition Corporation, a Delaware corporation and ViroTex, dated November 24, 1998 (the "Merger Agreement") whereby ViroTex will merge with a wholly owned subsidiary of the Company (the "Merger"); and WHEREAS, Warrant Holder (as defined below) is the holder of a warrant to purchase 52,936 shares of the common stock of ViroTex, at a price of $1.65 per share, pursuant to a Stock Purchase Warrant (the "Original Warrant") between Warrant Holder and ViroTex dated April 28, 1995 (the "Prior Option"); and WHEREAS, pursuant to the terms of the Original Warrant and Section 2.04 of the Merger Agreement, the Warrant Holder is entitled to receive a substitute stock purchase warrant (the "Warrant") in exchange for the Warrant Holder's agreement to cancel and surrender the Original Warrant; and WHEREAS, the Warrant Holder is desirous of obtaining the Warrant in exchange for canceling and surrendering the Original Warrant on the terms and conditions herein contained. NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained and for other good and valuable consideration, the Company and Warrant Holder agree as follows: 1. Subject to and effective upon the consummation of the Merger, the Company hereby grants to GulfStar Investments, Limited, ("Warrant Holder"), the right to purchase (and the Company shall be obligated to issue and sell to the Warrant Holder), 2 at the option of the Warrant Holder and on the terms and conditions hereinafter set forth, all or any part of an aggregate of 6,750 shares ("Shares") of Common Stock, $.001 par value per share ("Common Stock"), of the Company, such Shares to be exercisable at a purchase price per share equal to $12.94 ("Exercise Price"). This Warrant may be exercised at any time, or from time to time, until five (5) years from April 28, 1995 (the "Expiration Date). The number of Shares subject to this Warrant and the Exercise Price therefor shall be subject to adjustment as set forth in Section 6. In consideration therefore, Warrant Holder agrees to cancel and surrender the Original Warrant in exchange for issuance of this replacement Warrant, as provided in Section 2.04(f) of the Merger Agreement. Such cancellation and surrender shall become effective automatically and without further action on the part of the Warrant Holder upon receipt by the Company of an executed copy of this Warrant and upon the consummation of the Merger. The Warrant Holder further acknowledges that the cancellation and surrender of the Original Warrant held by the Warrant Holder releases absolutely and irrevocably the Warrant Holder's interest in the Original Warrant. 2. (a) The Warrant Holder may exercise this Warrant, in whole or in part, upon surrender to the Company of this Warrant with the Subscription Form attached hereto duly executed, together with payment in full of the Exercise Price for the Shares to be purchased in cash or by certified or cashier's check to the order of the Company. (b) Upon receipt of this Warrant with the Subscription Form duly executed and accompanied by payment of the Exercise Price for the Shares for which this Warrant is then being exercised, the Company will cause to be issued certificates for the total number of whole shares of Common Stock for which this Warrant is being exercised in such denominations as are required for delivery to the Warrant Holder and the Company shall thereupon deliver such certificates to the Warrant Holder. (c) In case the Warrant Holder shall exercise this Warrant with respect to less than all of the Shares that may then be purchased under this Warrant, the Company will execute a new Warrant in the form of this Warrant for the balance of such Shares and deliver such new Warrant to the Warrant Holder. 3. The Company shall at all times during the term of this Warrant have authorized, reserve and keep available, free from preemptive rights, such number of shares of its Common Stock as will be sufficient to satisfy the requirements of this Warrant, and shall pay all fees and expenses necessarily incurred by the Company in connection therewith. The reserved shares may be either authorized and unissued shares of its Common Stock or shares of Common Stock held in its treasury, or partly unissued and partly treasury shares, at the Company's sole discretion. Upon issuance to the Warrant Holder, all of the Shares shall be duly authorized, validly issued, fully paid and nonassessable and free and clear from all liens, charges, security interests and encumbrances created by the Company. 4. (a) This Warrant, and the rights and privileges conferred hereby, may be exercised only by the Warrant Holder and its or his legal representatives, successors or 2 3 permitted assignees. This Warrant may be transferred in whole to any person or entity or in part to any partner or partners of GulfStar Investments, Limited or members of any of their families and/or trusts established for their behalf (subject to the provisions hereof including the provisions of Section 5 below). (b) Prior to due presentment for registration of transfer of this Warrant, the Company may deem and treat the Warrant Holder as the absolute owner of this Warrant (notwithstanding any notation of ownership or other writing hereon) for the purpose of any exercise hereof and for all other purposes, and the Company shall not be affected by any notice to the contrary. (c) Subject to and limited by the provisions of Section 5 hereof, this Warrant may be split up, combined or exchanged for another Warrant or Warrants containing the same terms and entitling the Warrant Holder to purchase a like aggregate number of Shares. If the Warrant Holder desires to split up, combine or exchange this Warrant, he or it shall make such request in writing delivered to the Company and shall surrender to the Company this Warrant and any other Warrants to be so split up, combined or exchanged. Upon any such surrender for a split-up, combination or exchange, the Company shall execute and deliver to the person entitled thereto a Warrant or Warrants, as the case may be, as so requested. The Company shall not be required to effect any split-up, combination or exchange which will result in the issuance of a Warrant entitling the Warrant Holder to purchase upon exercise a fraction of a share of Common Stock or a fractional Warrant. The Company may require such Warrant Holder to pay a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any split-up, combination or exchange of Warrants. (d) If this Warrant shall be mutilated, upon request by the Warrant Holder the Company shall issue a new Warrant containing the same terms and entitling the Warrant Holder to purchase the same number of Shares, in exchange for and upon cancellation of the mutilated Warrant. If this Warrant shall be lost, stolen or destroyed, upon request by the Warrant Holder and upon receipt of evidence satisfactory to the Company of such loss, theft or destruction of this Warrant Certificate and, if required by the Company, indemnity also satisfactory to it, the Company shall issue a new Warrant containing the same terms and entitling the Warrant Holder to purchase the same number of Shares, in substitution for the lost, stolen or destroyed Warrant. 5. Neither this Warrant nor the underlying Shares have been registered under the Securities Act of 1933 ("Act), or registered or qualified under the securities laws of any state. Neither this Warrant nor the underlying Shares may be sold or offered for sale in the absence of the effective registration or qualification thereof under the Act and any applicable state securities laws or an opinion of counsel acceptable to the Company that such registration or qualification is not required. Any certificates representing the shares of Common Stock issued hereunder shall bear a restrictive legend in conformity with the provisions of this Section 5. The Company will not recognize or give effect to any purported transfer of this Warrant or any interest herein, or the underlying Shares, unless and until the provisions of this Section 5 shall have been satisfied. 3 4 6. (a) (i) if at any time prior to the full exercise of this Warrant, the Company shall: (A) pay a dividend or make a distribution on its shares of Common Stock in shares of Common Stock; (B) subdivide, reclassify or recapitalize its outstanding shares of Common Stock into a greater number of shares; or (C) combine, reclassify or recapitalize its outstanding shares of Common Stock into a smaller number of shares, the number of Shares in effect at the time of the record date of such dividend, subdivision, combination, reclassification or recapitalization shall be proportionately adjusted so that the Warrant Holder shall be entitled to receive the aggregate number and type of shares that, if this Warrant had been exercised in full immediately prior to such time, it would have owned upon such exercise and been entitled to receive upon such dividend, subdivision, combination, or recapitalization. Such adjustment shall be made successively whenever any event listed in this paragraph (a) shall occur. (ii) Whenever the number of Shares issuable upon exercise of this Warrant is adjusted pursuant to paragraph (a) of this Section 6, the Exercise Price payable for such Shares shall simultaneously be adjusted by multiplying the number of Shares initially issuable upon exercise of each Warrant by the Exercise Price in effect on the date thereof and dividing the product so obtained by the number of Shares, as adjusted. (iii) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least five cents ($.05) in such price, provided, however, that any adjustments which by reason of this paragraph (iii) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 6 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. (iv) If at any time, as a result of any adjustment made pursuant to paragraph (a) of this Section 6, the Warrant Holder thereafter shall become entitled to receive any securities of the Company other than shares of Common Stock, thereafter the number of such other securities so receivable upon exercise of any Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock contained in paragraph (a) of this Section 6. (b) No adjustment in respect of any cash dividends in the ordinary course out of current earnings of the Company shall be made during the term of this Warrant or upon the exercise of this Warrant. (c) In case of any consolidation of the Company with or merger of the Company into another corporation or any sale, lease or other transfer or conveyance to another corporation of all or substantially all the property of the Company, the corporation resulting from such consolidation or surviving such merger or to which such sale or transfer shall be made, as the case may be, shall make suitable provision (which shall be fair and equitable to the holders of the Warrants) and shall assume the 4 5 obligations of the Company hereunder (by written instrument executed and mailed to each holder of the Warrants then outstanding) pursuant to which, upon exercise of the Warrants, at any time during the duration of the Warrants after such consolidation, merger, or sale, lease or other transfer or conveyance the holder shall be entitled to receive the stock or other securities or property that such holder would have been entitled to receive upon consummation if such holder had executed the Warrants immediately prior thereto, all subject to further adjustment as provided in this Section 6. (d) Whenever the number of Shares or the Exercise Price is adjusted as herein provided, the Company shall prepare and deliver to the Warrant Holder a certificate signed by its President, or any Vice President, Treasurer or Secretary, setting forth the adjusted number of shares purchasable upon the exercise of this Warrant and the Exercise Price of such shares after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made. (e) The form of this Warrant need not be changed because of any adjustments in the Exercise Price or the number or kind of the Shares, and Warrants theretofore and thereafter issued may continue to express the same price and number and kind of shares as are stated in this Warrant as initially issued. (f) In case at any time: (i) the Company shall declare any cash dividend on its Common Stock; (ii) the Company shall pay any dividends payable in stock upon its Common Stock or make any distribution (other than regular cash dividends) to the holders of its Common Stock; (iii) the Company shall offer for subscription pro rata to the holders of its Common Stock any additional shares of stock of any class or other rights; (iv) the Company shall authorize the distribution to all holders of its Common Stock of evidences of its indebtedness or assets (other than cash dividends or cash distributions payable out of current earnings or dividends payable in Common Stock); (v) there shall be any capital reorganization, or reclassification of the capital stock of the Company, or consolidation or merger of the Company with another corporation (other than a subsidiary of the Company in which the Company is the surviving or continuing corporation and no change occurs in the Company's Common Stock), or sale of all or substantially all of its assets to, another corporation; 5 6 (vi) there shall be a voluntary or involuntary dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, or winding up of the Company, or (vii) the Company proposes to take any other action or an event occurs which would require an adjustment pursuant to subsections (a) or (c) of this Section 6; then, in any one or more of said cases, the Company shall give written notice to the holder of this Warrant, of (A) the date on which the books of the Company shall close or a record shall be taken for such dividend, distribution or subscription rights, or (B) the date (or, if not then known, a reasonable approximation thereof by the Company) on which such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, winding up or other action, as the case may be, shall take place. Such notice shall also specify (or, if not then known, reasonably approximate) the date as of which the holders of Common Stock of record shall participate in such dividend, distribution or subscription rights, or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, consolidation, merger, sale, dissolution, liquidation, bankruptcy, assignment for the benefit of creditors, winding up, or other action, as the case may be. Such written notice shall be given at least 20 days prior to the action in question and not less than 20 days prior to the record date or the date on which the Company's transfer books are closed in respect thereto. (g) The number of shares of Common Stock which may be acquired upon exercise of this Warrant and the Exercise Price payable hereunder shall be subject to adjustments from time to time in the event that the Company sells or issues any shares of equity securities, or securities exercisable for or convertible into equity securities, at a price less than the Exercise Price (such securities being referred to as "Additional Shares of Common Stock"). Notwithstanding anything contained herein to the contrary, the Company shall not be required to make any adjustment of the Exercise Price in the case of: (i) the issuance or exercise of shares of Common Stock or any other securities which may now or hereafter be granted or exercised under the Company's Amended and Restated Performance Stock Option Plan, 1997 Employee Stock Purchase Plan and Non-qualified Stock Option Plan (the "Plans") or under any other employee benefit plan or stock option plan of the Company approved by the Company's Board of Directors; (ii) the issuance of any shares of Common Stock of the Company or other securities or instruments convertible into shares of Common Stock of the Company issued in connection with corporate collaborations with pharmaceutical, life science or biotechnology corporations or entities; (iii) the issuance of shares of Common Stock in connection with a bona fide merger (other than the Merger), acquisition or other similar transactions involving the Company with or into a corporation or other entity if the Board of Directors of the Company has obtained a fairness opinion with respect to the issuance of such Common Stock from a nationally recognized investment banking firm indicating that the financial terms of such merger, acquisition or other similar transaction are fair to the Company when taken as a whole; (iv) the issuance or sale of shares of Common 6 7 Stock upon conversion or exchange of any Convertible Securities, whether or not any adjustment in the Exercise Price was made or required to be made upon the issuance or sale of such Convertible Securities and whether or not such Convertible Securities were outstanding on the date of the original sale of the Warrants or were thereafter issued or sold; (v) the issuance of or sale of securities to consultants or third parties providing consulting, marketing, investor relations and other services to the Company; and (vi) issuance of securities under the Merger Agreement. If, at any time or from time to time after the date of issuance of this Warrant, the Company issues or sells any Additional Shares of Common Stock, other than as a dividend or other distribution on its shares of Common Stock as provided in Section 6(a)(i)(A), and other than a combination, reclassification or recapitalization of its outstanding shares of Common Stock as provided in Section 6(a)(i)(C), for a per share price less than the then applicable Exercise Price, then, and in each such case, the Exercise Price shall be reduced to a price determined by multiplying the Exercise Price by a fraction, (i) the numerator of which shall be (A) the number of shares of Common Stock deemed outstanding (as defined below) immediately prior to such issuance or sale, plus (B) the number of shares of Common Stock which the aggregate consideration received by the Company for the total number of Additional Shares of Common Stock so issued or sold would purchase at such Exercise Price, and (ii) the denominator of which shall be the number of shares of Common Stock deemed outstanding (as defined below) immediately prior to such issue or sale plus the total number of Additional Shares of Common Stock so issued. For the purposes of the preceding sentence, the number of shares of Common Stock deemed outstanding as of a given date shall be the sum of (A) the number of shares of Common Stock actually outstanding, and (B) the number of shares of Common Stock underlying all outstanding options, warrants (including this Warrant) and convertible securities on the day immediately preceding the given date. (h) The shares of Common Stock which may be acquired upon exercise of this Warrant shall be entitled to the registration rights on the same terms and conditions as the principal stockholders of ViroTex pursuant to the terms of the Merger Agreement. 7. Neither the Warrant Holder nor its legal representatives, successors or assignees shall be or have any rights or privileges of a shareholder of the Company in respect to the shares issuable upon exercise of the Warrants granted hereunder, unless and until the Warrant Holder shall have delivered the notice and tendered payment for the Exercise Price to the Company, as required under the provisions of Sections 1 and 2 hereof. 8. The Company shall pay all taxes and other governmental charges (other than taxes or governmental charges levied in respect of the income of the Warrant Holder) that may be imposed on the Company or on the Warrants or the Shares; provided, however, that the Company shall not be required to pay any tax or other charge imposed in respect of the transfer of Warrants or the issuance or delivery of certificates for Shares or other securities in respect of the Shares upon the exercise of Warrants to a person or entity other than the then holder of Warrants. 7 8 9. This Warrant shall be construed and enforced in accordance with the laws of the State of Colorado. Any notices to be given under the terms of this Warrant shall be addressed to the Company at 2579 Midpoint Drive, Fort Collins, Colorado 80525, Attention: Chief Executive Officer, and notice to be given to the Warrant Holder shall be addressed to it at the address last shown on the books of the Company for such Warrant Holder or at any such other address as either party may hereafter designate, by notice in writing, to the other. Any such notice shall be deemed duly given when enclosed in a properly sealed envelope or wrapper addressed as aforesaid, registered or certified, and deposited, postage and registry or certification fee prepaid, in a post office or branch post office regularly maintained by the United States Postal Service. 10. This Warrant shall be binding upon and inure to the benefit of any successor or successors of the Company, and shall inure to the benefit of and shall be enforceable by the Warrant Holder and its legal representatives, successors, heirs and permitted assigns. Dated this 24th day of November, 1998. ATTEST: ATRIX LABORATORIES, INC. /s/ Brian G. Richmond By: /s/ John E. Urheim - ---------------------------- -------------------------------- Brian G. Richmond John E. Urheim, Vice Chairman and Assistant Secretary Chief Executive Officer 8 9 ASSIGNMENT (To be executed only upon assignment of Warrant ) For value received, ______________________ hereby sells, assigns and transfers unto ________________________ the within Warrant, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint ______________________ attorney, to transfer said Warrant on the books of the within-named Company with respect to the number of Warrant Shares set forth below, with full power of substitution in the premises:
Name(s) of Assignee(s) Address No. of Shares ----------- ------- -------------
And if said number of Shares shall not be all the Shares issuable upon exercise of the Warrant, a new Warrant is to be issued in the name of said undersigned for the balance remaining of the Shares issuable upon exercise of said Warrant. Dated: ___________________, 19___ By: -------------------------------------- The above signature should correspond exactly with the name of the Warrant Holder set forth in this Warrant. 9 10 SUBSCRIPTION FORM (To be executed upon exercise of Warrant) Atrix Laboratories, Inc.: The undersigned hereby irrevocably elects to exercise the right of purchase represented by the within Warrant for, and to purchase thereunder, __________ shares of Common Stock, as provided for therein, and tenders herewith payment of the Exercise Price in full in the form of cash or a certified or cashier's check in the amount of $___________. Please issue a certificate, or certificates for such shares of Common Stock in the name of: Name: -------------------------------- Address: ----------------------------- Social Security No.: ----------------- Signature: ------------------------- NOTE: The above signature should correspond exactly with the name of the Warrant Holder set forth in this Warrant or with the name of the assignee appearing in the assignment form below. And if said number of shares shall not be all the shares purchasable under the within Warrant, a new Warrant is to be issued in the name of said undersigned for the balance remaining of the shares purchasable thereunder. 10 EX-10.3(A) 4 1ST AMENDMENT TO AGREEMENT 1 EXHIBIT 10.3(a) FIRST AMENDMENT TO AGREEMENT This First Amendment to Agreement (this "First Amendment"), is made by and between Atrix Laboratories, Inc., a Delaware corporation ("Atrix") with its principal place of business at 2579 Midpoint Drive, Fort Collins, Colorado 80525-4417 and Block Drug Corporation, a New Jersey corporation ("Block") with its principal place of business at 105 Academy Street, Jersey City, New Jersey 07302-9988, as of this 10th day of June 1997, with respect to that certain Agreement dated as of December 16, 1996 (the "Agreement") between Atrix and Block. The parties now desire to amend the Agreement. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby amend the Agreement as follows: 1. Section 2.02 of the Agreement is hereby amended in its entirety to read as follows: Section 2.02 International Option. Block shall have the option to acquire from Atrix an exclusive license in each country in Group I, II and III, on a country by country basis, to market, promote, advertise, distribute and commercialize Atridox(TM) upon the payment of the following option fees (the "Option Fees") on or before July 31, 1997: (a) [**] per country for each Group I country; (b) [**] per country for each Group II country; and (c) [**] per country for each Group III country. Failure by Block to exercise the option by payment of the Option Fees shall be deemed to be the termination of that part of the option for which the Option Fees were not paid. 2. All capitalized terms used and not otherwise defined herein shall have the same meanings as set forth in the Agreement. 3. Except as expressly modified by the terms hereof, the terms and provisions of the Agreement shall remain in full force and effect as originally written. - ---------- ** Confidential Treatment Requested by Atrix on March 23, 1999. 2 4. Signatures on this First Amendment may be communicated by facsimile transmission and shall be binding upon the parties transmitting the same by facsimile transmission. Counterparts with original signatures shall be provided to the other party within five (5) days of the applicable facsimile transmission, provided, however, that the failure to provide the original counterpart shall have no effect on the validity or the binding nature of this First Amendment. If executed in counterparts, this First Amendment will be as effective as if simultaneously executed. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as of the date first written above. ATRIX LABORATORIES, INC. By /s/ John E. Urheim ------------------------------------ John E. Urheim, Vice Chairman and Chief Executive Officer Dated: June 19, 1997. BLOCK DRUG CORPORATION By /s/ David J. Schuman ------------------------------------ David J. Schuman, Assistant Secretary Dated: June 10, 1997. 3 STATE OF COLORADO ) ) ss. COUNTRY OF USA ) The above and foregoing was acknowledged before me by John E. Urheim, Vice Chairman and Chief Executive Officer of Atrix Laboratories, Inc. on the 19th day of June, 1997. Witness my hand and official seal. /s/ Joy N. Batley -------------------- Notary Public My commission expires: 9/6/99 STATE OF NEW JERSEY ) ) ss. COUNTRY OF USA ) The above and foregoing was acknowledged before me by David J. Schuman, Assistant Secretary of Block Drug Corporation on the 10th day of June, 1997. Witness my hand and official seal. /s/ Kellyann Zwarycz ------------------------ Notary Public My Commission expires: April 26, 2000 EX-10.3(B) 5 2ND AMENDMENT TO AGREEMENT 1 EXHIBIT 10.3(b) SECOND AMENDMENT TO AGREEMENT This Second Amendment to Agreement (this "Second Amendment"), is made by and between Atrix Laboratories, Inc., a Delaware corporation ("Atrix") with its principal place of business at 2579 Midpoint Drive, Fort Collins, Colorado 80525-4417 and Block Drug Corporation, a New Jersey corporation ("Block") with its principal place of business at 105 Academy Street, Jersey City, New Jersey 07302-9988, as of this 31st day of July 1997, with respect to that certain Agreement dated as of December 16, 1996 (the "Agreement") between Atrix and Block, as amended by that certain First Amendment to Agreement dated as of June 10, 1997. WHEREAS, the parties desire to further amend the Agreement on the terms and conditions set forth herein; and WHEREAS, the Agreement was amended by that First Amendment dated as of June 10, 1997 to extend the time period for Block to elect whether or not to exercise the International Option. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby amend the Agreement as follows: 1. Section 2.02 of the Agreement is hereby amended in its entirety to read as follows: Section 2.02. International Option. Block shall have the option to acquire from Atrix an exclusive license in each country in Group I, II and III, on a country by country basis, to market, promote, advertise, distribute and commercialize Atridox(TM) upon the payment of the following option fees (the "Option Fees") on or before September 8, 1997: (a) [**] per country for each Group I country; (b) [**] per country for each Group II country; and (c) [**] per country for each Group III country. Failure by Block to exercise the option by payment of the Option Fees shall be deemed to be the termination of that part of the option for which the Option Fees were not paid. - ---------- ** Confidential Treatment Requested by Atrix on March 23, 1999 2 2. All capitalized terms used and not otherwise defined herein shall have the same meanings as set forth in the Agreement. 3. Except as expressly modified by the terms hereof, the terms and provisions of the Agreement shall remain in full force and effect as originally written. 4. Signatures on this Second Amendment may be communicated by facsimile transmission and shall be binding upon the parties transmitting the same by facsimile transmission. Counterparts with original signatures shall be provided to the other party within five (5) days of the applicable facsimile transmission, provided, however, that the failure to provide the original counterpart shall have no effect on the validity or the binding nature of this Second Amendment. If executed in counterparts, this Second Amendment will be as effective as if simultaneously executed. IN WITNESS WHEREOF, the parties hereto have executed this Second Amendment as of the date first written above. ATRIX LABORATORIES, INC. By /s/ Charles P. Cox ------------------------------------------------- Charles P. Cox, Ph.D., M.B.A. Vice President of New Business Development Dated July 31, 1997. BLOCK DRUG CORPORATION By: /s/ Michael C. Alfano ------------------------------------------------- Michael C. Alfano, Senior Vice President Research and Technology Dated July 31, 1997. 3 STATE OF COLORADO ) ) ss. COUNTY OF LARIMER ) The above and foregoing was acknowledged before me by Charles P. Cox, Ph.D., M.B.A., Vice President of New Business Development of Atrix Laboratories, Inc. on the 31st day of July, 1997. Witness my hand and official seal. /s/ Joy N. Batley ------------------------- Notary Public My Commission expires: September 6, 1999 STATE OF NEW JERSEY ) ) ss. COUNTY OF OCEAN ) The above and foregoing was acknowledged before me by Michael C. Alfano, Senior Vice President Research and Technology of Block Drug Corporation on the 4th day of August, 1997. Witness my hand and official seal. /s/ Leann Bruno ------------------------- Notary Public My Commission expires: October 4, 1999 EX-10.3(C) 6 3RD AMENDMENT TO AGREEMENT 1 EXHIBIT 10.3(c) THIRD AMENDMENT TO AGREEMENT This Third Amendment to Agreement ("Third Amendment"), is made by and between Atrix Laboratories, Inc., a Delaware corporation ("Atrix") with its principal place of business at 2579 Midpoint Drive, Fort Collins, Colorado 80525-4417, and Block Drug Corporation, a New Jersey corporation ("Block") with its principal place of business at 105 Academy Street, Jersey City, New Jersey 07302-9988, as of this 4th day of February, 1998, with respect to that certain Agreement dated as of December 16, 1996 (the "Agreement") between Atrix and Block, as amended by that certain First Amendment to Agreement dated as of June 10, 1997, and as further amended by that certain Second Amendment to Agreement dated as of July 31, 1997. WHEREAS, the parties desire to further amend the Agreement on the terms and conditions set forth herein. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby amend the Agreement as follows: 1. Section 3.02(a)(i) is amended to read as follows: (i) following receipt by Block of Notice from Atrix that the FDA has issued an Approvable Letter for the NDA for Atridox(TM) with the following indication: "Atridox(TM) is indicated for gain in clinical attachment and reduction in probing depth in patients with chronic adult periodontitis" (the "Atridox(TM) NDA"), the sum of [**] if said Approvable Letter is issued on or before June 30, 1998, or [**] if said Approvable Letter is issued after June 30, 1998. 2. Section 8.04(a) of the Agreement is amended to read as follows: (a) Subject to the provisions of the following sections 8.04(a)(i) and 8.04(a)(ii), each party shall pay fifty percent (50%) of the cost of all Developments approved by Block (the "Development Expenses"). (i) Notwithstanding the provisions of section 8.04(a), Atrix shall be solely responsible for payment of the first [**] of Development Expenses incurred in connection with Developments covered by the Agreement, thereafter; Block shall be responsible for payment of fifty percent (50%) of Development Expenses for such Developments. - ---------- ** Confidential Treatment Requested by Atrix on March 23, 1999 2 (ii) The Steering Committee shall solicit bids from Atrix and from third parties and determine which is the most appropriate and award the contract for the Development to the successful bidder. 3. In the event that the Approvable Letter for the Atridox(TM) NDA is not issued by the FDA on or before June 30, 1998, then the terms and conditions of Paragraphs 1 and 2 of this Third Amendment shall be null and void and the original terms and conditions of Sections 3.02(a)(i) and 8.04 of the Agreement shall be reinstated, effective as of the date of this Third Amendment. 4. All capitalized terms used and not otherwise defined herein shall have the same meanings as set forth in the Agreement. 5. Except as expressly modified by the terms hereof, the terms and provisions of the Agreement shall remain in full force and effect as originally written. 6. Signatures on this Third Amendment may be communicated by facsimile transmission and shall be binding upon the parties transmitting the same by facsimile transmission. Counterparts with original signatures shall be provided to the other party within five (5) days of the applicable facsimile transmission; provided, however, that failure to provide the original counterpart shall have no affect on the validity or binding nature of this Third Amendment. If executed in counterparts, this Third Amendment will be as effective as if simultaneously executed. IN WITNESS WHEREOF, the parties hereto have executed this Third Amendment as of the date first written above. ATRIX LABORATORIES, INC. BLOCK DRUG CORPORATION By /s/ John E. Urheim By /s/ Michael C. Alfano ------------------------------- ---------------------------------- John E. Urheim, Vice Chairman Michael C. Alfano, Senior Vice and Chief Executive Officer President Research and Technology EX-10.3(D) 7 4TH AMENDMENT TO AGREEMENT 1 EXHIBIT 10.3(d) FOURTH AMENDMENT TO AGREEMENT This Fourth Amendment to Agreement ("Fourth Amendment") is made by and between Atrix Laboratories, Inc., a Delaware Corporation ("Atrix"). with its principal place of business at 2579 Midpoint Drive, Fort Collins, Colorado 80525-4417; and Block Drug Corporation, a New Jersey corporation ("Block"), with its principal place of business at 105 Academy Street, Jersey City, New Jersey 07302-9988, is made and effective as of this 12th day of January, 1999, with respect to that certain Agreement dated as of December 16, 1996 (the "Agreement"), between Atrix and Block, as amended by that certain First Amendment to Agreement dated as of June 10, 1997, by that certain Second Amendment to Agreement dated as of July 31, 1997, and further amended by that certain Third Amendment to Agreement dated February 4, 1998. WHEREAS, the parties desire to further amend the Agreement on the terms and conditions set forth herein. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto hereby amend the Agreement as follows: 1. The definition of "ATRISORB with Doxycycline" in Article I is deleted and the following definition inserted in lieu thereof: "ATRISORB with Doxycycline" means the Atrisorb barrier containing doxycycline, [**]. 2. Section 3.02 is hereby deleted and the following language shall be inserted in lieu thereof: Section 3.02(b) Atrisorb(R) with Doxycycline Milestone Payments. In the event the FDA issues a Clearance Letter for the [**] Atrisorb(R) with Doxycycline, Atrix shall be entitled to receive from Block additional milestone payments upon the following terms and conditions: (i) A one time milestone payment of [**], which shall be payable within thirty (30) days following receipt by Block of Notice from Atrix that the FDA has issued a Clearance Letter for the [**] Atrisorb(R) with Doxycycline; and (ii) provided the FDA has issued the Clearance Letter for the [**] Atrisorb(R) with Doxycycline prior to April 1, 2000, a one time milestone payment of [**] which shall be payable within ninety (90) days after the receipt by Block of Notice from Atrix that the FDA has issued a Clearance Letter for the [**] Atrisorb(R) with Doxycycline; but - ---------- ** Confidential Treatment Requested by Atrix on March 23, 1999 2 (iii) in the event the FDA has not issued the Clearance Letter for the [**] Atrisorb(R) with Doxycycline prior to April 2, 2000, a one time milestone payment of [**] which shall be payable within ten (10) days after the close of the calendar quarter in which Block makes the First Commercial Sale of the [**] Atrisorb(R) with Doxycycline in the United States. 3. Section 14.09(b) is hereby deleted and the following language shall be inserted in lieu thereof: (b) Any topical or mucosal therapy product that is intended to treat the signs and symptoms of periodontal disease, provided however that the prohibition set forth in this subsection shall expire at midnight, eastern standard time, on [**], and further provided that nothing in this section shall be construed to prohibit Block from conducting business in (i) any treatment or any therapy primarily indicated for the signs and symptoms of gingivitis or (ii) Block's [**] product, provided that in no event shall Block promote any such treatment or therapy for the treatment of periodontitis. 4. Article XIV is hereby amended by adding section 14.12, which reads as follows: Section 14.12 Atridox Adverse Drug Events (ADEs). From the Effective Date of this Amendment through midnight, eastern standard time, on [**], Block shall, at Block's [**], be responsible for that portion of ADE data collection activity that occurs between Block and the patient or dental professional, as appropriate, including any follow-up inquires which Block deems necessary or appropriate. Block shall handle Atridox ADEs in accordance with Block's policies and procedures concerning ADEs, as Block in its sole discretion may amend from time to time provided that such policies and procedures are sufficient, and will be sufficient if and when amended, for Atrix to perform its obligations to the FDA regarding ADEs. Promptly upon the execution of this Amendment, Block shall provide Atrix with a copy of its policies and procedures concerning ADEs and shall notify Atrix of and deliver copies to Atrix of any amendments to such policies and procedures. Block shall on a timely basis forward to Atrix that ADE information required by Atrix to fulfil Atrix's reporting obligations to the FDA as the holder of the NDA. [**]. 5. All capitalized terms used and not otherwise defined herein shall have the same meanings as set forth in the Agreement. 6. Except as expressly modified by the terms hereof, the terms and provisions of the Agreement, as amended by the First, Second and Third Amendments, shall remain in full force and effect as originally written. - ---------- ** Confidential Treatment Requested by Atrix on March 23, 1999 3 7. Signatures on this Fourth Amendment may be communicated by facsimile transmission and shall be binding upon the parties transmitting the same by facsimile transmission. Counterparts with original signatures shall be provided to the other party within five (5) days of the applicable facsimile transmission; provided, however, that failure to provide the original counterpart shall have no affect on the validity or binding nature of this Fourth Amendment. If executed in counterparts, this Fourth Amendment will be as effective as if simultaneously executed. IN WITNESS WHEREOF, the parties hereto have executed this Fourth Amendment as of the date first written above. ATRIX LABORATORIES, INC. BLOCK DRUG CORPORATION By: /s/ John E. Urheim By: /s/ Peter C. Mann --------------------------------- ----------------------------- John E. Urheim, Vice Chairman Peter C. Mann and Chief Executive Officer President, U.S. Division EX-10.3(E) 8 5TH AMENDMENT TO AGREEMENT 1 EXHIBIT 10.3(e) FIFTH AMENDMENT TO AGREEMENT This Fifth Amendment to Agreement ("Fifth Amendment") is made by and between Atrix Laboratories, Inc., a Delaware Corporation ("Atrix"). with its principal place of business at 2579 Midpoint Drive, Fort Collins, Colorado 80525-4417; and Block Drug Corporation, a New Jersey corporation ("Block"), with its principal place of business at 105 Academy Street, Jersey City, New Jersey 07302-9988, effective as of this 27th day of January, 1999, with respect to that certain Agreement dated as of December 16, 1996 (the "Agreement"), between Atrix and Block, as amended by (i) that certain First Amendment to Agreement dated as of June 10, 1997, (ii) that certain Second Amendment to Agreement dated as of July 31, 1997, (iii) that certain Third Amendment to Agreement dated February 4, 1998, and (iv) that certain Fourth Amendment to Agreement dated as of January 12, 1999. WHEREAS, the parties desire to further amend the Agreement on the terms and conditions set forth herein. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto hereby amend the Agreement as follows: 1. Article III is hereby amended by the addition of the following Section 3.08: Section 3.08. Increased Sales Support for Atridox(R): [**]. 2. Article III is hereby amended by the addition of the following Section 3.09: Section 3.09. Reimbursement of Increased Sales Support. [**]. 3. All capitalized terms used and not otherwise defined herein shall have the same meanings as set forth in the Agreement. 4. Except as expressly modified by the terms hereof, the terms and provisions of the Agreement, as amended by the First, Second, Third and Fourth Amendments, shall remain in full force and effect as originally written. 5. Signatures on this Fifth Amendment may be communicated by facsimile transmission and shall be binding upon the parties transmitting the same by facsimile transmission. Counterparts with original signatures shall be provided to the other party within five (5) days of the applicable facsimile transmission; provided, however, that failure to provide the original counterpart shall have no affect on the validity or binding nature of this Fifth Amendment. If executed in counterparts, this Fifth Amendment will be as effective as if simultaneously executed. - ---------- ** Confidential Treatment Requested by Atrix on March 23, 1999 2 IN WITNESS WHEREOF, the parties hereto have executed this Fifth Amendment as of the date first written above. ATRIX LABORATORIES, INC. BLOCK DRUG CORPORATION By: /s/ John E. Urheim By: /s/ Peter C. Mann -------------------------------- -------------------------- John E. Urheim, Vice Chairman Peter C. Mann and Chief Executive Officer President, U.S. Division 3 ATTACHMENT A [**] - ---------- ** Confidential Treatment Requested by Atrix on March 23, 1999 EX-10.5 9 AMENDED & RESTATED PERFORMANCE STOCK OPTION PLAN 1 EXHIBIT 10.5 ATRIX LABORATORIES, INC. AMENDED AND RESTATED PERFORMANCE STOCK OPTION PLAN I. ESTABLISHMENT AND PURPOSE In 1987, Atrix Laboratories, Inc., a Delaware corporation (the "Company"), established a Performance Stock Option Plan, as amended and restated in 1992 (the "Plan"), to afford certain of its employees, officers and directors who are responsible for the continued growth of the Company an opportunity to acquire a proprietary interest in the Company, and thus to create in such employees, officers and directors an increased interest in and a greater concern for the welfare of the Company and its shareholders. The stock options ("Options") offered pursuant to this Plan are a matter of separate inducement and are not in lieu of any salary or other compensation for the services of any employee, officer or director. The Company, by means of the Plan, seeks to retain the services of persons now holding key positions with the Company and to secure the services of persons capable of filling such positions. The Board of Directors of the Company intends that the Plan conform to the requirements of Section 422 of the United States Internal Revenue Code of 1986, as amended (the "Code"), in order that options granted under the Plan may be "incentive stock options" within the definition of that term in said Section 422. II. DEFINITIONS A. "Board of Directors" shall mean the Board of Directors of the Company, as constituted from time to time. B. "Code" shall mean the Internal Revenue Code of 1986, as amended. C. "Committee" shall mean the Stock Option Committee of the Board of Directors, as described in Article IV hereof. D. "Company" shall mean Atrix Laboratories, Inc., a Delaware corporation. E. "Exercise Price" shall mean the amount for which one Share may be purchased upon the exercise of an Option, as specified in the applicable Stock Option Agreement. 2 F. "Option" shall mean an option granted under the Plan and entitling the holder to purchase Shares. G. "Optionee" shall mean an individual who holds an Option. H. "Plan" shall mean this amended and restated Performance Stock Option Plan of Atrix Laboratories, Inc., as amended from time to time. I. "Share" shall mean one share of common stock, $.001 par value per share, of the Company. J. "Stock Option Agreement" shall mean the agreement between the Company and an Optionee which contains the terms, conditions and restrictions pertaining to the Optionee's Option. III. AMOUNT OF STOCK SUBJECT TO THE PLAN The total number of shares of capital stock of the Company which may be purchased pursuant to the exercise of Options granted under the Plan shall not exceed, in the aggregate, 1,500,000 shares of the authorized common stock, $.001 par value per share, of the Company (the "Shares"). Shares which may be acquired under the Plan may be either authorized but unissued Shares, Shares of issued stock held in the Company's treasury, or both, at the discretion of the Company. If and to the extent that Options granted under the Plan expire or terminate without having been exercised, new Options may be granted with respect to the Shares covered by such expired or terminated Options, provided that the grant and the terms of such new Options shall in all respects comply with the provisions of the Plan; provided, however, that no Option shall be granted under the Plan more than ten (10) years after the date the Plan is adopted or the date the Plan is approved by the shareholders of the Company, whichever occurs earlier. Except as provided in Article XXV, the Company may, from time to time during the period from April 29, 1992 (the "Effective Date") through April 29, 2002 (the "Termination Date"), grant to certain key employees, officers and directors of the Company, or of any subsidiary corporation of the Company now existing or hereafter formed or acquired, options under the terms hereinafter set forth. IV. ADMINISTRATION The Board of Directors of the Company shall designate from among its members a Stock Option Committee (the "Committee"), which shall consist of no fewer than two members of the Board of Directors, each of whom shall be a "disinterested person" within the meaning of Rule 16b-3 (or any successor rule or regulation) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), to administer the Plan. A majority of the members of the Committee shall constitute a quorum, and the act of a majority of the members of the Committee shall be the act of the Committee. Any member of the Committee may be removed at any time either with or without cause by resolution adopted by the Board of Directors, and any vacancy on the Committee may at any time be filled by resolution adopted by the Board of Directors. 3 Any or all powers and functions of the Committee may at any time and from time to time be exercised by the Board of Directors or the Executive Committee thereof; provided, however, that, with respect to the participation in the Plan by employees who are members of the Board of Directors or of the Executive Committee, as the case may be, such powers and functions of the Committee may be exercised by the Board of Directors or the Executive Committee only if, at the time of such exercise, a majority of the members of the Board of Directors or the Executive Committee, as the case may be, and a majority of the directors acting in the particular matter, are "disinterested persons" within the meaning of Rule 16b-3 (or any successor rule or regulation) promulgated under the Exchange Act. Subject to the express provisions of the Plan, the Committee shall have authority, in its discretion, to determine the employees, officers and directors to whom Options shall be granted, the time when such Options shall be granted, the number of Shares which shall be subject to each option, the purchase price of each Share which shall be subject to each Option, the period(s) during which such Options shall be exercisable (whether in whole or in part), and the other terms and provisions thereof. In determining the employees, officers and directors to whom Options shall be granted and the number of Shares for which Options shall be granted to each employee, officer or director, the committee shall consider the length of service, the amount of earnings, and the responsibilities and duties of each such employee, officer or director. Subject to the express provisions of the Plan, the Committee also shall have authority to construe the Plan and options granted thereunder, to amend the Plan and Options granted thereunder, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the respective Options (which need not be identical) and to make all other determinations necessary or advisable for administering the Plan. The determination of the Committee on matters referred to in this Article IV shall be conclusive. The Committee may employ such legal counsel, consultants and agents as it may deem desirable for the administration of the Plan and may rely upon any opinion received from any such counsel or consultant and any computation received from any such consultant or agent. Expenses incurred by the Committee in the engagement of such counsel, consultant or agent shall be paid by the Company. No member or former member of the Committee or the Board of Directors shall be liable for any action or determination made in good faith with respect to the Plan or any option granted hereunder. V. ELIGIBILITY Options may be granted only to officers, directors and key employees of the Company or of any subsidiary corporation of the Company who, in the judgment of the Committee, contribute materially to the profitability and success of the Company. 4 VI. OPTION PRICE AND PAYMENT The price ("Exercise Price") for each Share purchasable under any Incentive Option granted hereunder shall be such amount as the Committee shall, in its best judgment made in good faith, determine on the basis of facts and circumstances to be not less than one hundred percent (100%) of the fair market value per Share at the date such Options are granted; provided, however, that in the case of an Option granted to a person who, at the time such Option is granted, owns more than ten percent (10%) of the total combined voting power of all classes of shares of the Company or of any subsidiary corporation of the Company, the Exercise Price for each Share purchasable thereunder shall be such amount as the Committee, in its best judgment, shall determine to be not less than one hundred ten percent (110%) of the fair market value per Share at the date the Option is granted. In determining stock ownership of an employee, officer or director for any purposes under the Plan, the rules of Section 424(d) of the Code shall be applied, and the Board of Directors and the Committee may rely on representations of fact made to it by the employee, officer or director and believed by it to be true. If the Shares are listed on a national securities exchange in the United States on the date any Option is granted, the fair market value per share shall be deemed to be the average of the high and low quotations at which such Shares are sold on such national securities exchange on the date such Option is granted. If the Shares are listed on a national securities exchange in the United States on such date but the Shares are not traded on such date, or such national securities exchange is not open for business on such date, the fair market value per Share shall be determined as of the closest preceding date on which such exchange shall have been open for business and the Shares were traded. If the Shares are listed on more than one national securities exchange in the United States on the date any such Option is granted, the Committee shall determine which national securities exchange shall be used for the purpose of determining the fair market value per Share. For purposes of this Plan, the determination by the Committee of the fair market value of a Share shall be conclusive. Upon the exercise of an Option granted hereunder, the Company shall cause the purchased Shares to be issued only when it shall have received the full purchase price for the Shares in cash or by certified check. VII. USE OF PROCEEDS The cash proceeds of the sale of Shares subject to the Options granted hereunder are to be added to the general funds of the Company and used for its general corporate purposes as the Board of Directors shall determine. VIII. TERMS OF OPTIONS AND LIMITATIONS ON THE RIGHT OF EXERCISE Any Option granted hereunder shall be exercisable during a period of not more than ten (10) years from the date of grant of such Option at such times and in such amounts as the Committee shall determine at such date of grant. 5 The Committee shall have the right to accelerate, in whole or in part, from time to time, conditionally or unconditionally, the vesting provisions of any Stock Option Agreement and the rights to exercise any Option granted hereunder upon written notice to the Optionee. Any such acceleration by the Committee shall not affect the expiration date of an Option. No Option granted to an officer or director of the Company shall become exercisable as a result of the acceleration of exercisability of Options provided for herein within six (6) months of the date of its grant. To the extent that an Option is not exercised within the period of exercisability specified therein, it shall expire as to the then unexercised part. If any Option granted hereunder shall terminate prior to the Termination Date, the Committee shall have the right to use the Shares as to which such Option shall not have been exercised to grant one or more additional Options to any eligible employee, officer or director, but any such grant of an additional Option shall be made prior to the close of business on the Termination Date. In no event shall an Option granted hereunder be exercised for a fraction of a Share. IX. EXERCISE OF OPTIONS Options granted under the Plan shall be exercised by the Optionee as to all or part of the Shares covered thereby by the giving of written notice of the exercise thereof to the Corporate Secretary of the Company at the principal business office of the Company, specifying the number of Shares to be purchased and specifying a business day not more than fifteen (15) days from the date such notice is given, for the payment of the purchase price against delivery of the Shares being purchased. Subject to the terms of Articles XVI and XVIII, the Company shall cause certificates for the Shares so purchased to be delivered to the Optionee at the principal business office of the Company, against payment of the full purchase price. X. MODIFICATION OF OPTIONS; CANCELLATIONS AND REGRANTS If the Committee determines that it is advisable and in the best interest of the Company, the Committee may, within the limitations of the Plan, modify, extend or assume outstanding Options and it may solicit and accept written offers from Optionees to terminate previously granted Options that remain unexercised ("Original Options"), and grant a like number of new Options ("Substitute Options") to Optionees upon surrender of an Original Option, regardless of whether the vesting schedules or exercise prices of the Substitute Option are the same as or different from the Original Option being surrendered. Such offers to terminate shall be pursuant to and in accordance with such rules and regulations as the Committee may from time to time establish, subject to the terms and conditions of and within the limitations set forth herein. XI. NONTRANSFERABILITY OF OPTIONS An Option granted hereunder shall not be transferable, whether by operation of law or otherwise, other than by will or the laws of descent and distribution, and any Option granted hereunder shall be exercisable, during the lifetime of the holder, only by such holder. 6 XII. TERMINATION OF EMPLOYMENT Upon termination of employment of any employee with the Company or any subsidiary thereof, any option previously granted to the employee, unless otherwise specified by the Committee in the Option shall, to the extent not theretofore exercised, terminate and become null and void, provided that: (a) if the employee shall die while in the employ of such corporations or during either the three (3) month or one (1) year period, whichever is applicable, specified in clause (b) below and at a time when such employee was entitled to exercise an option as herein provided, the legal representative of such employee, or such person who acquired such Option by bequest or inheritance or by reason of the death of the employee, may, not later than one (1) year from the date of death, exercise such option, to the extent not theretofore exercised, in respect of any or all of such number of Shares as specified by the Committee, in such Option; and (b) if the employment of any employee to whom such Option shall have been granted shall terminate by reason of the employee's retirement (at such age or upon such conditions as shall be specified by the Committee), disability (as described in Section 22(e)(3) of the Code) or dismissal by the employer other than for cause (as defined below), and while such employee is entitled to exercise such Option as herein provided, such employee shall have the right to exercise such option so granted, to the extent not theretofore exercised, in respect of any or all of such number of Shares as specified by the Committee, in such option, at any time up to and including (i) three (3) months after the date of such termination of employment in the case of termination by reason of retirement or dismissal other than for cause and (ii) one (1) year after the date of termination of employment in the case of termination by reason of disability. If an employee voluntarily terminates his or her employment, or is discharged for cause, any Option granted hereunder shall, unless otherwise specified by the Committee, in the Option, forthwith terminate with respect to any unexercised portion thereof. Notwithstanding the preceding paragraphs of this Article XII, if the employment of any employee with the Company and all subsidiary corporations of the Company is terminated, whether voluntarily or involuntarily, within a one-year period following a change in control of the Company (as defined in Article XIII) and while such employee is entitled to exercise an option as herein provided, other than a termination of such employment by the employer for cause, such employee shall have the right to exercise all or any portion of such Option at any time up and to and including three (3) months after the date of such termination of employment, at which time such Option shall cease to be exercisable. Notwithstanding the immediately preceding paragraphs of this Article XII, no option may be exercised after the expiration of the period of exercisability provided for in such Option. 7 If an Option granted hereunder shall be exercised by the legal representative of a deceased employee or former employee, or by a person who acquired an Option granted hereunder by bequest or inheritance or by reason of the death of any employee or former employee, written notice of such exercise shall be accompanied by a certified copy of letters testamentary or equivalent proof of the right of such legal representative or other person to exercise such Option. For the purposes of the Plan, the term "for cause" shall mean (i) with respect to an employee who is a party to a written agreement with, or alternatively, participates in a compensation or benefit plan of the Company or a subsidiary corporation of the Company, which agreement or plan contains a definition of "for cause" or "cause" (or words of like import) for purposes of termination of employment thereunder by the Company or such subsidiary corporation of the Company, "for cause" or "cause" as defined in the most recent of such agreements or plans, or (ii) in all other cases, as determined by the Committee or the Board of Directors, in its sole discretion, (a) the willful commission by an employee of a criminal or other act that causes or will probably cause substantial economic damage to the Company or a subsidiary corporation of the Company or substantial injury to the business reputation of the Company or a subsidiary corporation of the Company; (c) the continuing willful failure of an employee to perform the duties of such employee to the Company or a subsidiary corporation of the Company (other than such failure resulting from the employee's incapacity due to physical or mental illness) after written thereof (specifying the particulars thereof in reasonable detail) and a reasonable opportunity to be heard and cure such failure are given to the employee by the Board of Directors or the Committee; or (d) the order of a federal or state bank regulatory agency or a court of competent jurisdiction requiring the termination of the employee's employment. For purposes of the Plan, no act, or failure to act, on the employee's part shall be considered "willful" unless done or omitted to be done by the employee not in good faith and without reasonable belief that the employee's action or omission was in the best interest of the Company or a subsidiary corporation of the Company. For the purposes of the Plan, an employment relationship shall be deemed to exist between an individual and a corporation if, at the time of the determination, the individual was an "employee" of such corporation for purposes of Section. 422(a) of the Code. If an individual is on military, sick leave or other bona fide leave of absence such individual shall be considered an "employee" for purposes of the exercise of an Option and shall be entitled to exercise such option during such leave if the period of such leave does not exceed ninety (90) days, or, if longer, so long as the individual's right to reemployment with the corporation granting the option (or a related corporation) is guaranteed either by statute or by contract. If the period of leave exceeds ninety (90) days, the employment relationship shall be deemed to have terminated on the ninety-first (91st) day of such leave, unless the individual's right to reemployment is guaranteed by statute or contract. A termination of employment shall not be deemed to occur by reason of (i) the transfer of an employee from employment by the Company to employment by a subsidiary corporation of the Company or (ii) the transfer of an employee from employment by a subsidiary corporation of the Company to employment by the Company or by another subsidiary corporation of the Company. 8 XIII. ADJUSTMENT OF SHARES; EFFECT OF CERTAIN TRANSACTION In the event of any change in the outstanding Shares through merger, consolidation, reorganization, recapitalization, stock dividend, stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, or other like change in capital structure of the Company, an adjustment shall be made to each outstanding Option such that each such Option shall thereafter be exercisable for such securities, cash and/or other property as would have been received in respect of the Shares subject to such Option had such Option been exercised in full immediately prior to such change, and such an adjustment shall be made successively each time any such change shall occur. The term "Shares" shall after any such change refer to the securities, cash and/or property then receivable upon exercise of an Option. In addition, in the event of any such change, the Committee shall make any further adjustment as may be appropriate to the maximum number of Shares subject to the Plan, the maximum number of Shares of which Options may be granted to any one employee, and the number of Shares and price per Share subject to outstanding Options as shall be equitable to prevent dilution or enlargement of rights under such Options, and the determination of the Committee as to these matters shall be conclusive. XIV. REDUCTION OF VESTING PERIOD (a) Except as provided in subsection (b) below, notwithstanding any provisions to the contrary contained in any Stock Option Agreement, the Stock Option Committee may, in its discretion, reduce the vesting period set forth in a Stock Option Agreement upon the occurrence of any of the following events: (i) any person, including a group as defined in Section 13(d)(3) of the Exchange Act, shall become the beneficial owner of 25% of the total number of Shares of the Company then outstanding; (ii) as a result of, or in connection with, any cash tender offer, exchange offer, merger or other business combination, sale of assets or contested election, or combination of the foregoing, the persons who were directors of the Company just prior to such event shall cease to constitute a majority of the Board of Directors; (iii) the shareholders of the Company shall approve an agreement providing either for a transaction in which the Company will cease to be an independent publicly owned corporation or for a sale or other disposition of all or substantially all the assets of the Company; (iv) a tender offer or exchange offer is made for Shares of the Company (other than one made by the Company) and Shares are acquired thereunder. 9 (b) No option granted to an officer or director of the Company shall become exercisable as a result of the acceleration of exercisability of Options provided for in subsection (a) of this Article XIV within six (6) months of the date of its grant. XV. RIGHT TO TERMINATE EMPLOYMENT The Plan shall not impose any obligation on the Company or on any subsidiary corporation thereof to continue the employment of any holder of an Option; and it shall not impose any obligation on the part of any holder of an Option to remain in the employ of the Company or of any subsidiary corporation thereof. XVI. PURCHASE FOR INVESTMENT Except as hereafter provided, the holder of an Option granted hereunder shall, upon any exercise thereof, execute and deliver to the Company a written statement, in form satisfactory to the Company, in which such holder represents and warrants that such holder is purchasing or acquiring the Shares acquired thereunder for such holder's own account, for investment only and not with a view to the resale or distribution thereof, and agrees that any subsequent offer for sale or sale or distribution of any of such Shares shall be made pursuant to either (a) a Registration Statement on an appropriate form under the Securities Act of 1933, as amended (the "Securities Act"), which Registration Statement has become effective and is current with regard to the Shares being offered or sold, or (b) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption the holder shall, prior to any offer for sale or sale of such Shares, obtain a prior favorable written opinion, in form and substance satisfactory to the Company, from counsel for or approved by the Company, as to the applicability of such exemption thereto. The foregoing restrictions shall not apply to (i) issuances by the Company so long as the Shares being issued are registered under the Securities Act and a prospectus in respect thereof is current or (ii) reofferings of Shares by affiliates of the Company (as defined in Rule 405 or any successor rule or regulation promulgated under the Securities Act) if the Shares being reoffered are registered under the Securities Act and a prospectus in respect thereof is current. XVII. ISSUANCE OF CERTIFICATES; LEGENDS; PAYMENT OF EXPENSES Upon any exercise of an Option which may be granted hereunder and, in the case of an Option, payment of the purchase price, a certificate or certificates for the Shares as to which the Option has been exercised shall be issued by the Company in the name of the person exercising the Option and shall be delivered to or upon the order of such person or persons. The Company may endorse such legend or legends upon the certificates for Shares issued upon exercise of an Option granted hereunder and may issue such "stop transfer" instructions to its transfer agent in respect of such Shares as, in its discretion, it determines to be necessary or appropriate to (i) prevent a violation of, or to perfect an exemption from, the registration requirements of the Securities Act, (ii) implement the provisions of the Plan and any agreement between the Company and the Optionee or grantee with respect to such Shares, or (iii) permit the Company to determine the occurrence of a disqualifying disposition, as described in Section 421(b) of the Code, of Shares transferred upon exercise of an Option granted under the Plan. 10 The Company shall pay all issue taxes with respect to the issuance of Shares, as well as all fees and expenses necessarily incurred by the Company in connection with such issuance. All Shares issued as provided herein shall be fully paid and non-assessable to the extent permitted by law. XVIII. LISTING OF SHARES AND RELATED MATTERS If at any time the Board of Directors shall determine in its discretion that the listing, registration or qualification of the Shares covered by the Plan upon any national securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the sale or purchase of Shares under the Plan, no Shares shall be issued unless and until such listing, registration, qualification, consent or approval shall have been effected or obtained, or otherwise provided for, free of any conditions not acceptable to the Board of Directors. XIX. AMENDMENT OF THE PLAN The Board of Directors may, from time to time, amend the Plan, provided that no amendment shall be made, without the approval of the shareholders of the Company, that will (i) increase the total number of Shares reserved for Options under the Plan (other than an increase resulting from an adjustment provided for in Article XIII), (ii) reduce the exercise price of any Option granted hereunder below the price required by Article VI, (iii) modify the provisions of the Plan relating to eligibility, or (iv) materially increase the benefits accruing to participants under the Plan. The Committee shall be authorized to amend the Plan and the Options granted thereunder to permit the Options granted thereunder to qualify as incentive stock options within the meaning of Section 422 of the Code. The rights and obligations under any Option granted before amendment of the Plan or any unexercised portion of such Option shall not be adversely affected by amendment of the Plan or the Option without the consent of the holder of the Option. XX. TERMINATION OR SUSPENSION OF THE PLAN The Board of Directors may at any time suspend or terminate the Plan. The Plan, unless sooner terminated under Article XXII or by action of the Board of Directors, shall terminate at the close of business on the Termination Date. An Option may not be granted while the Plan is suspended or after it is terminated. Rights and obligations under any Option granted while the Plan is in effect shall not be altered or impaired by suspension or termination of the Plan, except upon the consent of the person to whom the Option was granted. The power of the Committee to construe and administer any options granted prior to the termination or suspension of the Plan under Article IV nevertheless shall continue after such termination or during such suspension. 11 XXI. GOVERNING LAW The Plan, such options as may be granted thereunder and all related matters shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware from time to time obtaining. XXII. PARTIAL INVALIDITY The invalidity or illegality of any provision herein shall not be deemed to affect the validity of any other provision. XXIII. APPROVAL BY SHAREHOLDERS The Plan has been approved by the Board of Directors and is subject to approval by the affirmative votes of the holders of a majority of the Shares present, or represented, and entitled to vote at the meeting of shareholders at which the Plan is submitted. XXIV. EFFECTIVE DATE The Plan shall become effective at 5:00 p.m., Fort Collins, Colorado time, on the Effective Date; provided, however, that if the Plan is not approved by a vote of the shareholders of the Company at an annual meeting or any special meeting or by written consent within twelve months after the Effective Date, the Plan and any Options granted thereunder shall terminate. XXV. IMPLEMENTATION OF PLAN If approved by the shareholders of the Company as provided in Article XXIII above, this Amended and Restated Performance Stock Option Plan shall supersede and replace the Performance Stock Option Plan adopted by the Board of Directors on October 12, 1987, except as to those Options granted pursuant to the Plan between October 12, 1987 and the Effective Date hereof. If this Plan is implemented as provided herein, no further Options will be granted under the original Performance Stock Option Plan adopted by the Board of Directors on October 12, 1987. 12 On April 27, 1997, the Company's Shareholders approved an amendment to the Plan increasing the aggregate number of shares of common stock that may be issued under the Plan to 2,500,000. 13 AMENDMENT NO. I TO AMENDED AND RESTATED PERFORMANCE STOCK OPTION PLAN OF ATRIX LABORATORIES, INC. Article XIII of the Plan is hereby deleted in its entirety and replaced with the following: XIII. TERMINATION OF EMPLOYMENT (a) If an employee ceases to be an employee for any reason, other than by reason of death or disability, then all Options held by such employee which are not exercisable when the employee ceases to be an employee shall terminate. All Options which are exercisable when the employee ceases to be an employee must be exercised prior to the earlier of (i) the expiration date of the option period of the exercisable Options, or (ii) the date occurring three (3) months after the date on which the employee ceases to be an employee. Such Options shall terminate to the extent they are not exercised during such period. (b) If the employee shall die while in the employ of such corporation and at a time when such employee was entitled to exercise an Option as herein provided, the legal representative of such employee, or such person who acquired such Option by bequest or inheritance or by reason of the death of the employee, may exercise such Option to the extent that such Option could have been exercised by the deceased employee immediately prior to his death. Such Options must be exercised prior to the earlier of (i) the expiration date of the Option period of the subject Options, or (ii) the date occurring twelve (12) months after the date of the employee's death. Such Options shall terminate to the extent they are not exercised during such period. (c) If the employment of any employee to whom such Option shall have been granted shall terminate by reason of the employee's disability (as described in Section 22(e)(3) of the Code) and while such employee is entitled to exercise such Option as herein provided, such Option may be exercised by such person to the extent that such Option could have been exercised by the disabled employee immediately prior to his disability. Such Options must be exercised prior to the earlier of (i) the expiration date of the Option period of the subject Options, or (ii) the date occurring twelve (12) months after the date of the employee's disability. Such Options shall terminate to the extent they are not exercised during such period; (d) If an Option granted hereunder shall be exercised by the legal representative of a deceased employee or former employee, or by a person who acquired an Option granted hereunder by bequest, inheritance, qualified domestic relations order or by reason of the death of any employee or former employee, written notice of such exercise shall be accompanied by a certified copy of letters testamentary or equivalent proof of the right of such legal representative or other person to exercise such Option. 14 (e) For the purposes of the Plan, an employment relationship shall be deemed to exist between an individual and a corporation if, at the time of the determination, the individual was an "employee" of such corporation for purposes of Section 422(a) of the Code. If an individual is on military, sick leave or other bona fide leave of absence such individual shall be considered an "employee" for purposes of the exercise of an Option and shall be entitled to exercise such Option during such leave if the period of such leave does not exceed ninety (90) days, or, if longer, so long as the individual's right to reemployment with the corporation granting the Option (or a related corporation) is guaranteed either by statute or by contract. If the period of leave exceeds ninety (90) days, the employment relationship shall be deemed to have terminated on the ninety-first (91st) day of such leave, unless the individual's right to reemployment is guaranteed by statute or contract. (f) A termination of employment shall not be deemed to occur by reason of (i) the transfer of an employee from employment by the Company to employment by a subsidiary corporation of the Company or (ii) the transfer of an employee from employment by a subsidiary corporation of the Company to employment by the Company or by another subsidiary corporation of the Company. (g) Notwithstanding anything above to the contrary, the Committee may in its sole discretion vary the date on which an Option would otherwise terminate pursuant to this Article XIII; provided, however, that a variation from the date an Option must terminate as described above shall cause an Incentive Option to fail to qualify for the tax treatment available pursuant to Section 422 of the Code upon the exercise of such Option. 15 AMENDMENT NO. 2 TO AMENDED AND RESTATED PERFORMANCE STOCK OPTION PLAN OF ATRIX LABORATORIES, INC. The Amended and Restated Performance Stock Option Plan of Atrix Laboratories, Inc. (the "Plan"), as amended by Amendment No. I to the Plan, is hereby amended as to Options awarded under the Plan as of November 15, 1998 and thereafter as follows: 1. The last paragraph of Article VI is deleted in its entirety and replaced with the following: Except as provided in the Stock Option Agreement, upon the exercise of an Option granted hereunder, the Company shall cause the purchased Shares to be issued only when it shall have received the full purchase price for the Shares (i) in cash, (ii) by certified check, (iii) by surrender of Shares (including withholding of Shares otherwise deliverable upon exercise of the Option) which have a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which said Option shall be exercised (but only to the extent that such exercise of the Option would not result in an accounting compensation charge with respect to the Shares used to pay the exercise price unless otherwise determined by the Committee), (iv) through a broker-dealer sale and remittance procedure pursuant to which the Optionee (A) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (B) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction, or (v) any combination of the foregoing methods of payment. 2. Article XII is deleted in its entirety and replaced with the following: XII. TERMINATION OF EMPLOYMENT (a) If an employee ceases to be an employee of the Company for any reason, other than by reason of death or disability, then all Options held by such employee which are not exercisable when the employee ceases to be an employee shall terminate. All Options which are exercisable when the employee ceases to be an employee must be exercised prior to the earlier of (i) the expiration date of the option period of the exercisable Options or (ii) the date occurring three (3) months after the date on which the employee ceases to be an employee. Such Options shall terminate to the extent they are not exercised during such period. (b) If the employee dies while in the employ of the Company or during the three (3) month post-termination exercise period specified above while such employee was entitled to exercise an Option, the legal representative of such employee, or such person who acquired such Option by bequest or inheritance or by reason of the death of the employee, may exercise such Option to the extent that such Option could have been exercised by the deceased employee immediately prior to his death. Such Options must be exercised prior to the earlier of (i) the 16 expiration date of the Option period of the subject Options, or (ii) the date occurring twelve (12) months after the date of the employee's death. Such Options shall terminate to the extent they are not exercised during such period. (c) If the employment of any employee to whom an Option shall have been granted shall terminate by reason of the employee's disability (as described in Section 22(e)(3) of the Code) while such employee is entitled to exercise the Option, such Option may be exercised by the employee to the extent that such Option could have been exercised by the employee immediately prior to his disability. Such Options must be exercised prior to the earlier of (i) the expiration date of the Option period of the subject Options or (ii) the date occurring twelve (12) months after the date of the employee's disability. Such Options shall terminate to the extent they are not exercised during such period. In the event such disability is not a "disability" as described in Section 22(e)(3) of the Code, such Option shall automatically convert to an Option not intended to qualify as an "incentive stock option" under Section 422 of the Code (a "Non-Qualified Stock Option") on the day three (3) months and one (1) day following the termination. (d) If an Option granted hereunder shall be exercised by the legal representative of a deceased employee or former employee, or by a person who acquired an Option granted hereunder by bequest, inheritance, qualified domestic relations order or by reason of the death of any employee or former employee, written notice of such exercise shall be accompanied by a certified copy of letters testamentary or equivalent proof of the right of such legal representative or other person to exercise such Option. (e) If an individual is on military, sick leave or other bona fide leave of absence such individual shall be considered an "employee" for purposes of the exercise of an Option and shall be entitled to exercise such Option during such leave if the period of such leave does not exceed ninety (90) days, or, if longer, so long as the individual's right to reemployment with the corporation granting the Option (or a related corporation) is guaranteed either by statute or by contract. If the period of leave exceeds ninety (90) days, the employment relationship shall be deemed to have terminated on the ninety-first (91st) day of such leave, unless the individual's right to reemployment is guaranteed by statute or contract. (f) A termination of employment shall not be deemed to occur by reason of (i) the transfer of an employee from employment by the Company to employment by a parent or subsidiary corporation of the Company, (ii) the transfer of an employee from employment by a parent or subsidiary corporation of the Company to employment by the Company or by another parent or subsidiary corporation of the Company, (iii) the change in status of the employee to that of a consultant or a director of the Company or of any parent or subsidiary corporation of the Company, provided that a termination of employment will be deemed to occur upon the termination such former employee's service as a consultant or director unless such termination is due to resumption of employment with the Company or any parent or subsidiary of the Company, and, provided further, that in the case of a change in status from employee to consultant or director, any Option granted to such person 17 and designated as an incentive stock option in the Stock Option Agreement shall cease to be treated as an incentive stock option and shall be treated as a Non-Qualified Stock Option on the day three (3) months and one (1) day following such change in status. (g) Notwithstanding anything above to the contrary, the Committee may in its sole discretion vary the date on which an Option would otherwise terminate pursuant to this Article XII. 3. Current Articles XX through XXV are hereby renumbered XXI through XXVI and the following new Article XX is hereby inserted: XX. SUBSTITUTION OPTIONS Options may be granted under this Plan from time to time in substitution for stock options held by employees of other corporations who are about to become employees of or affiliated with the Company as a result of a merger or consolidation of the employing corporation with the Company, the acquisition by the Company of the assets of the employing corporation, the acquisition by the Company of stock of the employing corporation, or a similar transaction as a result of which it becomes an affiliate of the Company. The terms and conditions of the substitute Options so granted may vary from the terms and conditions set forth in this Plan to such extent as the Committee at the time of grant may deem appropriate to conform, in whole or in part, to the provisions of the stock options in substitution for which they are granted. EX-10.6 10 NON-QUALIFIED STOCK OPTION PLAN 1 EXHIBIT 10.6 ATRIX LABORATORIES, INC. NONQUALIFIED STOCK OPTION PLAN A. Purpose and Scope The purposes of this Plan are to encourage stock ownership by consultants, other independent contractors and other designated persons who are not employees (collectively, "Consultants") of Atrix Laboratories, Inc. (herein called the "Company") and to provide an incentive for such persons to expand and improve the profits and prosperity of the Company through the grant of Options to purchase shares of the Stock as hereinafter defined. B. Definitions Unless otherwise required by the context: 1. "Board" shall mean the Board of Directors of the Company. 2. "Committee" shall mean the Compensation Committee, which is appointed by the Board, and which shall be composed of members of the Board. 3. "Company" shall mean Atrix Laboratories, Inc., a Delaware corporation. 4. "Code" shall mean the Internal Revenue Code of 1986, as amended. 5. "Option" shall mean a right to purchase Stock, granted pursuant to the Plan. 6. "Option Price" shall mean the purchase price for Stock under an Option, as determined in Section F below. 7. "Participant" shall mean a Consultant to whom an Option is granted under the Plan. 8. "Plan" shall mean this Atrix Laboratories, Inc. Nonqualified Stock Option Plan. 9. "Stock" shall mean the common stock of the Company, $.001 par value. C. Stock Subject to Options Subject to the provisions of Section L of the Plan, the maximum number of shares of Stock that may be optioned or sold under the Plan is 50,000 shares. Such shares may be treasury, or authorized, but unissued, shares of Stock of the Company. 2 D. Administration The Plan shall be administered by the Committee. The Committee shall be responsible to the Board for the operation of the Plan, and shall make recommendations to the Board with respect to participation in the Plan by Consultants, and with respect to the extent of that participation. The interpretation and construction of any provision of the Plan by the Committee shall be final, unless otherwise determined by the Board. No member of the Board or the Committee shall be liable for any action or determination concerning the Plan made by him in good faith. E. Eligibility The Board, upon recommendation of the Committee, may grant Options to any Consultant which the Committee in its discretion shall designate. Options granted at different times need not contain similar provisions. F. Option Price The purchase price for Stock under each Option shall be designated by the Committee in its discretion. G. Terms and Conditions of Options Options granted pursuant to the Plan shall be authorized by the Board and shall be evidenced by agreements in such form as the Board, upon recommendation of the Committee, shall from time to time approve. Such agreements shall comply with and be subject to the following terms and conditions: 1. Consulting Agreement. The Board may, in its discretion, include in any Option granted under the Plan a condition that the Participant shall agree to render services to the Company for a period of time (specified in the agreement) following the date the Option is granted. No such agreement shall impose upon the Company, however, any additional obligation to retain the Participant for any period of time. 2. Time and Method of Payment. The Option Price shall be paid in full in cash at the time an Option is exercised under the Plan. Otherwise, an exercise of any Option granted under the Plan shall be invalid and of no effect. Promptly after the exercise of an Option and the payment of the full Option Price, the Participant shall be entitled to the issuance of a stock certificate evidencing his ownership of such Stock. A Participant shall have none of the rights of a shareholder until shares are issued to him, and no adjustment will be made for dividends or other rights for which the record date is prior to the date such stock certificate is issued. 3. Number of Shares. Each Option shall state the total number of shares of Stock to which it pertains. 2 3 4. Option Period and Limitations on Exercise of Options. The Committee shall, in its discretion, designate the periods of time during which an Option may be exercised and such conditions to exercise as the Committee may deem appropriate. No Option may be exercised after the expiration of ten years from the date it is granted. No Option may be exercised for a fractional share of Stock. H. Termination of Consulting Agreements Except as provided in Section I below and except to the extent the Committee shall otherwise designate, in the event of any termination of the consulting or other agreement between the Participant and the Company all Options which had not been exercised as of the date of such termination shall immediately expire. I. Rights in Event of Death If a Participant dies while retained by the Company and without having fully exercised his Options, the executors or administrators, or legatees or heirs, of his estate shall have the right to exercise such Options to the extent that such deceased Participant was entitled to exercise the Options on the date of his death; provided, however, that in no event shall the Options be exercisable more than two years from the date of the Participant's death. J. No Obligations to Exercise Option The granting of an Option shall impose no obligation upon the Participant to exercise such Option. K. Nonassignability Options shall not be transferable other than by will or by the laws of descent and distribution, and during a Participant's lifetime shall be exercisable only by such Participant. L. Effect of Change in Stock Subject to the Plan The aggregate number of shares of Stock available for Options under the Plan, the shares subject to any Option and the price per share shall all be proportionately adjusted for any increase or decrease in the number of issued shares of Stock subsequent to the effective date of the Plan resulting from (1) a subdivision or consolidation of shares or any other capital adjustment, (2) the payment of a stock dividend, or (3) other increase or decrease in such shares effected without receipt of consideration by the Company. If the Company shall be the surviving corporation in any merger or consolidation, any Option shall pertain, apply, and relate to the securities to which a holder of the number of shares of Stock subject to the Option would have been entitled after the merger or consolidation. Upon dissolution or liquidation of the Company, or upon a merger or consolidation in which the Company is not the surviving corporation, all Options outstanding under the Plan shall terminate; provided, however, that each Participant (and each other person entitled under Section I 3 4 to exercise an Option) shall have the right, immediately prior to such dissolution or liquidation, or such merger or consolidation, to exercise such Participant's Options in whole or in part, but only to the extent that such Options are otherwise exercisable under the terms of the Plan. M. Amendment and Termination The Board, by resolution, may terminate, amend, or revise the Plan with respect to any shares as to which Options have not been granted. Neither the Board nor the Committee may, without the consent of the holder of an Option, alter or impair any Option previously granted under the Plan, except as authorized herein. Unless sooner terminated, the Plan shall remain in effect for a period of ten years from the date of the Plan's adoption by the Board. Termination of the Plan shall not affect any Option previously granted. N. Agreement and Representation of Consultants As a condition to the exercise of any portion of an Option, the Company may require the person exercising such Option to represent and warrant at the time of such exercise that any shares of Stock acquired at exercise are being acquired only for investment and without any present intention to sell or distribute such shares, if, in the opinion of counsel for the Company, such a representation is required under the Securities Act of 1933 or any other applicable law, regulation, or rule of any governmental agency. O. Reservation of Shares of Stock The Company, during the term of this Plan, will at all times reserve and keep available, and will seek or obtain from any regulatory body having jurisdiction any requisite authority necessary to issue and to sell, the number of shares of Stock that shall be sufficient to satisfy the requirements of this Plan. The inability of the Company to obtain from any regulatory body having jurisdiction the authority deemed necessary by counsel for the Company for the lawful issuance and sale of its Stock hereunder shall relieve the Company of any liability in respect of the failure to issue or sell Stock as to which the requisite authority has not been obtained. P. Effective Date of Plan The Plan shall be effective from the date that the Plan is approved by the Board. 4 5 ATRIX LABORATORIES, INC. FIRST AMENDMENT TO NONQUALIFIED STOCK OPTION PLAN This First Amendment (the "First Amendment") to the Nonqualified Stock Option Plan (the "Plan") of Atrix Laboratories, Inc. (the "Company") amends Section C of the Plan. This First Amendment has been duly adopted by the Board of Directors of the Company by unanimous written consent dated October 16, 1995. Section C of the Plan is hereby amended in its entirety to read as follows: C. Stock Subject to Options Subject to the provisions of Section L of the Plan, the maximum number of shares of Stock that may be optioned or sold under the Plan is 100,000 shares. Such shares may be treasury, or authorized, but unissued, shares of Stock of the Company. All other terms and provisions set forth in the Plan shall remain in full force and effect. IN WITNESS WHEREOF, the undersigned have acknowledged this First Amendment as of the day of October, 1995. ATRIX LABORATORIES, INC. ATTEST: By: /s/ John E. Urheim ---------------------------------------- John E. Urheim, Vice Chairman and Chief Executive Officer By: /s/ Kimberly A. Marks ---------------------------------- Kimberly A. Marks, Assistant Secretary and Corporate Controller 6 SECOND AMENDMENT TO THE ATRIX LABORATORIES, INC. NONQUALIFIED STOCK OPTION PLAN This Second Amendment ("Amendment") to Atrix Laboratories, Inc.'s (the "Company") Nonqualified Stock Option Plan (the "Plan") is dated as of this 27th day of April, 1998. RECITALS WHEREAS, the Plan was duly adopted by the Board of Directors of the Company and was subsequently amended by the Board of Directors on October 16, 1995. WHEREAS, the Company desires to further amend the Plan on the terms and conditions set forth herein. * * * 1. Section B of the Plan is hereby amended in its entirety to read as follows: B. Definitions Unless otherwise required by the context: 1. "Administrator" means the Board or any of its Committee(s) administering the Plan, in accordance with Section D of the Plan. 2. "Applicable Laws" means the legal requirements relating to the administration of stock option and equity incentive plans under applicable state of Delaware corporate and securities laws and under the Code. 3. "Board" shall mean the Board of Directors of the Company. 4. "Committee" means a Committee appointed by the Board in accordance with Section D of the Plan. 5. "Common Stock" means the Common Stock of the Company which is traded on an approved securities market pursuant to the Exchange Act. 6. "Company" shall mean Atrix Laboratories, Inc., a Delaware corporation. 7. "Code" shall mean the Internal Revenue Code of 1986, as amended. 8. "Director" means a member of the Board. 1 7 9. "Exchange Act" means the Securities Exchange Act of 1934, as amended. 10. "Fair Market Value" means, as of a specified date, the value of Common Stock determined by the Administrator as follows: (i) If the Common Stock is listed on any established stock exchange or quoted on a national market system, including without limitation the National Market System of the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") System, the Fair Market Value of a Share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange (or, if listed on more than one exchange, the exchange with the greatest volume of trading in Common Stock) or system on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Administrator deems reliable; or (ii) If the Common Stock is quoted on the NASDAQ System (but is not included on the National Market System thereof) or is regularly quoted by a recognized securities dealer but selling prices are not reported, the Fair Market Value of a Share of Common Stock shall be the mean between the closing bid and closing asked prices for the Common Stock on the last market trading day prior to the day of determination, as reported in the Wall Street Journal or such other source as the Administrator deems reliable. 11. "Nonstatutory Stock Option" means an Option that is not an Incentive Stock Option. 12. "Notice of Grant" means a written notice evidencing certain terms and conditions of an individual Option. The Notice of Grant is part of the Option Agreement. 13. "Option" shall mean a Stock Option granted pursuant to the Plan. 14. "Option Agreement" means a written agreement between the Company and an Optionee evidencing the terms and conditions of an individual Option grant. The Option Agreement is subject to the terms and conditions of the Plan and the Notice of Grant. 15. "Option Price" shall mean the purchase price for Stock under an Option, as determined in Section F of the Plan. 16. "Optioned Stock" means the Common Stock subject to an Option. 17. "Participant" shall mean a Consultant to whom an Option is granted under the Plan. 2 8 18. "Plan" shall mean Atrix Laboratories, Inc. Nonqualified Stock Option Plan. 19. "Share" means a share of the Common Stock. 20. "Stock" shall mean the common stock of the Company, $.001 par value. 2. Section C of the Plan is hereby amended in its entirety to read as follows: C. Stock Subject to Options 1. Subject to the provisions of Section L of the Plan, the total number of Shares reserved and available for distribution pursuant to awards made under the Plan shall be One Hundred Fifty Thousand (150,000) shares. The Shares may be authorized but unissued or reacquired stock. 2. If an Option should expire or become unexercisable for any reason without having been exercised in full, then unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for other options granted under the Plan. 3. Notwithstanding any other provision of the Plan, Shares issued upon exercise of Options under the Plan and later repurchased by the Company shall not become available for future grant or sale under the Plan. 3. Section D of the Plan is hereby amended in its entirety to read as follows: D. Administration 1. The Plan shall be administered by (a) the Board; (b) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws; or (c) as permitted by Rule 16b-3. 2. Once a Committee has been appointed pursuant to this Section, such Committee shall continue to serve in its designated capacity or until otherwise directed by the Board. From time to time, the Board may increase the size of any Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies (however caused) or remove all member of the Committee and thereafter directly administer the Plan, all to the extent permitted by the Applicable Laws and, in the case of a Committee appointed under this Section, to the extent permitted by Rule 16b-3 as it applies to a plan intended to qualify thereunder as a discretionary grant or award plan. 3 9 3. Subject to the provisions of the Plan and, in the case of a Committee, the specific duties delegated by the Board to such Committee, the Administrator shall have the authority, in its discretion: (a) to grant Nonqualified Stock Options; (b) to determine the Fair Market Value of the Common Stock, in accordance with Section B(10) of the Plan; (c) to determine the number of shares of Common Stock to be covered by each such award granted hereunder; (d) to approve forms of agreements for use under the Plan; (e) to determine the terms and conditions, not inconsistent with the terms of the Plan, of any award granted hereunder and of the Options so awarded (including, but not limited to, the exercise or purchase price and any restriction or limitation regarding any Option and/or the shares of Common Stock relating thereto, based in each case on such factors as the Administrator shall determine, in its sole discretion); (f) to authorize any person to execute on behalf of the Company any instrument required to effect the grant of an Option previously granted by the Administrator; (g) to interpret the Plan and to prescribe, amend, and rescind rules and regulations relating to the Plan; and (h) to make all other determinations deemed necessary or advisable for administering the Plan. 4. All decisions, determinations, and interpretations of the Administrator shall be final and binding. 5. If the Chief Executive Officer or his or her designees reasonably believes that an Optionee has committed an act of misconduct, the Chief Executive Officer may suspend the Optionee's right to exercise any Option or to receive any benefits relating thereto pending a determination by the Administrator. If the Administrator determines that an Optionee has committed an act of embezzlement, fraud, dishonesty, nonpayment of an obligation owed to the Company, breach of fiduciary duty, or deliberate disregard of the Company's rules resulting in loss, damage or injury to the Company, or if an Optionee makes an unauthorized disclosure of any Company trade secret or confidential information, engages in any conduct constituting unfair competition, induces any Company customer to breach a contract with the Company, or induces any principal for whom the Company acts as agent to terminate such agency relationship, neither the Optionee nor his or her estate shall be entitled to exercise any Option or to 4 10 receive any benefits relating to Options whatsoever. In making such determination, the Administrator shall act fairly and shall give the Optionee an opportunity to appear and present evidence on Optionee's behalf at a hearing before the Administrator. 3. Section G of the Plan is hereby amended in its entirety to read as follows: G. Terms and Conditions The Notice of Grant shall specify the per Share exercise price for the Shares issuable pursuant to an Option. The Notice of Grant shall also specify the number of Shares which are subject to the Option. 4. Section M of the Plan is hereby amended in its entirety to read as follows: M. Amendment and Termination 1. The Board, by resolution, may terminate, amend, or revise the Plan with respect to any shares as to which Options have not been granted. Neither the board nor the Committee may, without the consent of the holder of an Option, alter or impair any Option previously granted under the Pan, except as authorized herein. Unless sooner terminated, the Plan shall remain in effect for a period of ten years from the date of the Plan's adoption by the Board. Termination of the Plan shall not affect any Option previously granted. 2. Any such amendment, alteration, suspension, or termination of the Plan shall not adversely affect Options already granted and such Options shall remain in full force and effect as if this Plan had not been amended, altered, suspended, or terminated, unless mutually agreed otherwise between the Optionee and the Administrator, which agreement must be in writing and signed by the Optionee and the Company. 5. Section N of the Plan is hereby amended in its entirety to read as follows: N. Legal Compliance 1. Shares shall not be issued pursuant to the award, vesting, or exercise of an Option unless the award, vesting, or exercise of such Option, as the case may be, and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Securities Act of 1933, as amended, the Exchange Act, the rules and regulations promulgated thereunder, applicable state securities laws, and the requirements of any stock exchange or quotation system upon which the Shares may then be listed or quoted, and shall be further subject to the approval of counsel for the Company with respect to such compliance. 5 11 2. As a condition to the receipt of Shares upon the award, vesting, or exercise of an Option, the Company may require the person receiving such Shares to represent and warrant at the time of any such award, vesting, or exercise that the Shares are being acquired only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned relevant provisions of law. 3. The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 4. If the Optioned Stock covered by an Option exceeds, as of the date of grant, the number of Shares which may be issued under the Plan without additional Board approval, such Option shall be void with respect to such excess Optioned Stock, unless Board approval of an amendment sufficiently increasing the number of Shares subject to the Plan is timely obtained in accordance with Section M of the Plan. 6. The following is added as a new Section O to the Plan: O. Agreements Options shall be evidenced by written agreements in such form as the Administrator shall approve from time to time. 7. All capitalized terms used and not otherwise defined herein shall have the same meanings as set forth in the Agreement. 8. Except as expressly modified by the terms hereof, the terms and provisions of the Agreement shall remain in full force and effect as originally written. 6 12 This Second Amendment has been duly adopted by the Board of Directors at a meeting held on April 27,1998. ATRIX LABORATORIES, INC. /s/ John E. Urheim ---------------------------------------- John E. Urheim, Vice Chairman and Chief Executive Officer ATTEST: /s/ Brian G. Richmond - ---------------------------------------- Brian G. Richmond, Assistant Secretary and Vice President-Finance 7 EX-10.7 11 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.7 January 13, 1995 Steven Garrett, D.D.S., M.S. 1674 Halsey Street Redlands, California 92373 Dear Dr. Garrett: On behalf of the Atrix Board of Directors and Executive Management, I am pleased to offer you the position of Vice President of Periodontal (Dental) Clinical Research of Atrix Laboratories, Inc. You will report directly to Dr. Lee Southard, President and Chief Scientific Officer. I think the job is a perfect match and that you will enjoy the opportunities, the people, and the business very much. At the same time, I'm confident that you will lead the Clinical group well, provide the direction for its continued growth and help the rest of senior management set an appropriate strategic direction for the corporation. Your responsibilities at Atrix will span preclinical and clinical research in the dental area and will include: directing, planning, execution and interpretation of clinical trials/research and data collection activities; establishing and approving scientific methods for design and implementation of clinical protocols, data collection systems and final reports; monitoring adherence to protocols and determining study completion; interacting with various inside/outside groups to facilitate the clinical trials program for Phase I - Phase IV clinical trials; and collaborating with senior management in determining what other applications of the ATRIGELTM technology should be brought forward to the clinical testing stage in the fields of dentistry and particularly periodontal disease. The major elements of our employment offer are outlined as follows: A. Base Salary: Your base salary will be $150,000 and will be reviewed annually. Merit increases are given based on performance. Annual salary reviews for executives are given by the Board of Directors. B. Initial Stock Option: You will be granted a stock option of 50,000 shares of Atrix Laboratories, Inc. stock under the company's Performance Stock Option Plan with the purchase price being the closing bid price reported in The Wall Street Journal on the first day of your employment. Your shares will vest at the rate of 33-1/3 percent a year upon each anniversary date of employment. 2 Steve Garrett, D.D.S., M.S. January 13, 1995 Page 2 C. 401 W Saving Plan: Atrix's 401(k) plan is administered by the Principal Financial Group, and enrollment is permitted twice a year, January and July. After a year of service, you will be eligible for participation in a 401(k) savings plan in which the company matches 50 percent of your contribution up to 6 percent of your salary subject to non-discrimination rules. If you have an existing 401(k), it can be rolled-over into the Atrix plan and you may make additional contributions to the Atrix plan upon hire. D. Insurance: You will be eligible to participate in the Company's full range of insurance, including medical, dental, disability, accident and life in accordance with the Company waiting period. E. Relocation: Relocation expense reimbursements include: 1. Atrix will pay you up to $50,000 in accordance with our Relocation Assistance Policy, a copy of which is attached for your convenience. This policy takes into consideration certain IRS restrictions and requirements. Basically, all normal moving expenses (packing, loading, transporting of household goods) are deductible. We do not pay a gross up for any amount spent on relocation expenses in excess of the standard IRS deductible expenses. 2. Also, to further assist you and your family in moving to Fort Collins, the Company will pay your weekly or bi-weekly airfare between Fort Collins and Los Angeles until June 30, 1995, or until you are relocated, whichever comes first. 3. If your present house does not sell within 90 days of the date you join Atrix, the Company will provide you with a bridge loan for a down-payment to assist you in a new home purchase in Colorado at one percent above the prime rate until you sell your house. F. Termination: In the event that you are terminated for any of the following: 1. the sale by the Company of substantially all of its assets to a single purchaser or to a group of associated purchasers; 2. the sale, exchange or other disposition in one transaction, of two-thirds of the outstanding capital stock of the Company; 3. if your position is eliminated, other than for cause; 3 Steve Garrett, D.D.S., M.S. January 13, 1995 Page 3 4. if there is a change in control of the Company through a merger or consolidation of the Company in a transaction in which the Shareholders of the Company receive less than 50% of the outstanding voting shares of the new or continuing corporation or other business entity and as a result of the change in control your responsibilities are substantially reduced, the Company will pay you, in addition to amounts accrued in respect to periods prior to such termination, severance equal to one year's salary and benefits. Notwithstanding the above, such severance shall only be paid until such time as you become employed, on a consulting basis or otherwise. Upon such termination, other than for cause, all unvested stock options shall immediately vest. This summarizes the various elements in our offer. I would like to add that I believe that Atrix Laboratories is a splendid place for you at this point in your career. There is an enormous opportunity here, and I know that with all of us working together great things are in store both for Atrix and for you. I realize that you'll be investigating the potential for selling your practice and, as we discussed, you'll be getting back to us in about 45 days. In the meantime, please call if you have any questions, or if we can be of any assistance. I look forward to a long and mutually rewarding relationship in the years ahead. Sincerely, /s/ John E. Urheim John E. Urheim Chief Executive Officer and Vice Chairman of the Board Accepted: /s/ Steven Garrett Date: --------------------------------- --------------------------- Steven Garrett, D.D.S., M.S. EX-10.8 12 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.8 ------------ ATRIX ----- LABORATORIES, INC. December 27, 1995 Mr. Rees M. Orland 877 East Westminster Lake Forest, Illinois 60045-1508 Dear Mr. Orland, On behalf of the Atrix Board of Directors and Executive Management, I am pleased to offer you the position of Vice President of Sales and Marketing of Atrix Laboratories, Inc. effective January 1, 1996. You will report directly to Mr. John E. Urheim., Vice Chairman of the Board and Chief Executive Officer. I think the job is a perfect match and that you will enjoy the opportunities, the people, and the business very much. At the same time, I'm confident that you will lead the Sales and Marketing group well, provide the direction for its continued growth and help the rest of senior management set an appropriate strategic direction for the corporation. Your primary objective at Atrix will be to consistently meet sales goals through the creation of a sales, marketing and distribution function of the highest caliber consistent with what we are striving for in terms of excellence throughout the organization. To meet the objective you will develop a five year strategic marketing and distribution plan worldwide. Because of the technical nature of our products, training of Atrix personnel as well as our customers will be a critical element of all that we do. The major elements of our employment offer are outlined as follows: A. Base Salary: Your annual, base salary will be $150,000, to be paid twice per month; and, will be reviewed annually. Merit increases are given based on performance and achievement of Company goals. Annual salary reviews for officers are given by the Board of Directors. B. Initial Stock Option: You will be granted an option of 40,000 shares of Atrix Laboratories, Inc., common stock under the Company's Performance Stock Option Plan. The exercise price will be the closing bid price reported in The Wall Street Journal on the first day of your employment. The option will be exercisable at the rate of 33-1/3 percent a year upon each anniversary date of employment. C. 401(k) Savings Plan: Atrix's 401(k) plan is administered by the Principal Financial Group, and enrollment is open any time after employment. After a year of service, you will be eligible for participation in a 401(k) savings plan in which the Company matches 50 percent of your contribution up to 6 percent of your salary subject to non- 2 Mr. Rees M. Orland December 20, 1995 Page 2 discrimination rules. If you have an existing 401(k), it may be rolled-over into the Atrix plan and you may make additional contributions to the Atrix plan upon hire. D. Insurance: You will be eligible to participate in the Company's full range of insurance, including medical, dental, disability, accident and life in accordance with the Company waiting period. E. Termination: In the event that you are terminated for any of the following: 1. the sale by the Company of substantially all of its assets to a single purchaser or to a group of associated purchasers; 2. the sale, exchange or other disposition in one transaction, of two-thirds of the outstanding capital stock of the Company: 3. if your position is eliminated, other than for cause; 4. if there is a change in control of the Company through a merger of consolidation of the Company in a transaction in which the shareholders of the Company receive less than 50% of the outstanding voting shares of the new or continuing corporation or other business entity and as a result of the change in control your responsibilities are substantially reduced, the Company will pay you, in addition to amounts accrued in respect to periods prior to such termination, severance equal to nine month's salary and benefits. Notwithstanding the above, such severance shall only be paid until such time as you become employed, on a consulting basis or otherwise. Upon such termination other than for cause, all unvested stock options shall immediately vest. F. Relocation: Relocation expense reimbursements include: 1. Atrix will pay you up to $50,000 in accordance with our Relocation Assistance Policy, a copy of which is attached for your convenience. This policy takes into consideration certain IRS restrictions and requirements. Basically, all normal moving expenses (packing, loading, transporting of household goods) are deductible. We do not pay a gross up for any amount spent on relocation expenses in excess of the standard IRS deductible expenses. The Company will pay temporary living expenses during the period January 1, 1996 through March 31, 1996. In addition, the Company will reimburse you for rent only during the period April 1, 1996 through June 30, 1996. 2. Also, to further assist you and your wife in moving to Fort Collins, the Company will pay your bi-weekly airfare between Fort Collins and Chicago until February 29, 1996, or until you are relocated, whichever comes first. This summarizes the various elements in our offer. I believe Atrix Laboratories represents an ideal match between your extensive experience and our specific needs at this time. I know you agree there is an 3 Mr. Rees M. Orland December 20, 1995 Page 3 enormous opportunity here and that by working together with other members of management we can create a truly unique, highly profitable organization here. 4 Mr. Rees M. Orland December 20, 1995 Page 4 I look forward to working with you in this exciting endeavor. Sincerely, /s/ John E. Urheim Chief Executive Officer and Vice Chairman of the Board Accepted: /s/ Rees M. Orland Date: 1/1/96 ----------------------------------- ----------------- encls: 401(k) Plan Description Employee Relocation Assistance Plan Stock Option Plan EX-10.9 13 FORM OF PERSONAL SERVICES AGREEMENT 1 EXHIBIT 10.9 ------------ FORM OF PERSONAL SERVICES AGREEMENT This Personal Services Agreement (the "Agreement") is entered into this 1st day of December, 1998 by and between Atrix Laboratories, Inc., a Delaware corporation (the "Company") with its principal place of business at 2579 Midpoint Drive, Fort Collins, Colorado 80525, and David Osborne ("Employee") with his address at 19 Quiet Oak Circle, The Woodlands, Texas 77381 to be effective as of December 1, 1998 (the "Effective Date"). PREMISES -------- WHEREAS, the Company desires to employ Employee pursuant to the terms and conditions and for the consideration set forth in this Agreement and Employee desires to enter the employ of the Company pursuant to such terms and conditions and for such consideration; WHEREAS, the provisions of this Agreement are a condition of Employee being employed by Company, of Employee's having access to confidential business and technological information, and of Employee's being eligible to receive certain benefits of the Company. This Agreement is entered into, and is reasonably necessary, to protect confidential information and customer relationships to which Employee may have access, and to protect the goodwill and other business interests of the Company; and WHEREAS, the provisions of this Agreement are also a condition to Employee's agreement to provide personal services to Company. NOW THEREFORE, in consideration of the mutual promises and covenants agreed to herein, the receipt and sufficiency of which are hereby acknowledged, Company and Employee agree as follows: AGREEMENT --------- 1. Position, Term, Duties, Responsibilities a. Position. Employee shall be employed by the Company as its Vice President of Pharmacological Development at the Company's current place of business in Fort Collins, Colorado. b. Duties. Employee shall faithfully and diligently render such services and perform such related duties and responsibilities as are customarily performed by a person holding such title and as otherwise may, from time to time, be assigned to Employee by the Company's Chief Executive Officer, or his designees. Employee shall comply with the provisions of this Agreement and shall at all times be subject to such Company policies and procedures including, but not limited to, a Company code of conduct, as the Company may from time to time establish as pertaining to Employee. 2 c. Term. This Agreement shall be for a term beginning on the Effective Date and terminating the earlier of (i) twelve (12) months from the Effective Date (the "Expiration Date"), or (ii) the date on which Employee's employment is terminated pursuant to Section 3 of this Agreement (the "Term"). d. Other Activities. During Employee's employment with the Company, Employee shall devote his entire business time, attention and energies to the performance of his duties and functions under this Agreement and, except upon the prior written consent of the Company, shall not (i) accept any other employment, or (ii) directly or indirectly engage in any other business activity (whether or not pursued for gain, profit or pecuniary advantage) that is or may be in conflict with, or that might place Employee in a conflicting position to that of the Company. e. Proprietary Information. Employee agrees to comply with the terms and conditions of the standard Company Employee Proprietary Information and Inventions Agreement, which is annexed to this Agreement and referred to as ("Exhibit A") to this Agreement. 2. Compensation, Bonuses and Benefits a. Base Salary. During Employee's employment with the Company, the Company shall pay Employee a base annual salary, (the "Base Salary") which at the time of the execution of this Agreement is One Hundred and Forty-Five Thousand Dollars ($145,000). The Base Salary shall be payable in accordance with the Company's normal payroll schedule, less all applicable tax withholdings for state and federal income taxes, FICA and other deductions as required by law and/or authorized by the Employee. The Employee's Base Salary shall be reviewed no less frequently than annually to determine whether or not the same should be increased in light of the duties and responsibilities of the Employee and the performance thereof, and, if it is determined that an increase is merited in the sole discretion of the Company, such increase shall be promptly put into effect and the base salary of the Employee as so increased shall constitute the base salary of the Employee for purposes of this Section 2. b. Incentive Compensation Program. During Employee's employment with the Company, Employee shall be entitled to participate in such incentive compensation programs as are from time to time established and approved by Company's Board of Directors in accordance with the Company's practice for similarly situated employees. c. Initial Stock Options. At the Effective Date, the Company shall grant Employee stock options to purchase 30,000 shares of the Company's $.001 par value common stock with the purchase price being the closing sales price as listed on the Nasdaq National Market System on the Effective Date ("Initial Stock Options"). Subject to the provisions of Section 3 of this Agreement, Employee's Initial Stock Options shall vest pro rata over three (3) years from the date of the grant commencing on the anniversary date of Employee's employment with the Company, provided Employee remains employed by the Company. Subsequent grants may be awarded in the sole discretion of the Company, based on Employee's performance and contributions to the business. Any stock options are subject to the approval of the Company's Board of Directors. 2 3 d. Benefits. Employee shall also be entitled to participate in such employee benefit plans which the Company provides or may establish from time to time for the benefit of employees, subject to the terms of each such plan and subject to the right of the Company and the Company's Board of Directors to modify, revise or eliminate such benefit plans from time to time in their sole discretion. Employee shall pay for the portion of the cost of such benefits as is from time-to-time established by Company as the portion of such cost to be paid by employees of the Company. e. Costs and Expenses. Employee shall be entitled to reimbursement for all ordinary reasonable out-of-pocket business expenses which are reasonably incurred by him in the furtherance of the Company's business, in accordance with the policies adopted from time to time by the Company or the Company's Board of Directors. Employee will comply with the Company's travel policies as established from time to time by the Company or the Company's Board of Directors. f. Vacation. During the Term, Employee shall be entitled to paid vacation in accordance with the Company's Earned Leave Day Policy. g. Relocation Expenses. The Company shall provide Employee with a relocation benefit of a lump sum of Twenty-Five Thousand Dollars ($25,000), less all applicable tax withholdings for state and federal income taxes, FICA and other deductions as required by law, payable to Executive at the time Executive physically relocates to the Fort Collins, Colorado area on a permanent basis. 3. Termination a. For Cause by the Company. Employee's employment may be terminated for "Cause." For purposes of this Agreement, "Cause" shall mean: (i) the Employee's willful and continued failure substantially to perform his duties hereunder (other than as a result of total or partial incapacity due to physical or mental illness), (ii) the conviction of, or plea of guilty or nolo contendere by the Employee to a charge of any felony under the laws of the United States or any state thereof or crime involving moral turpitude, (iii) breach of any covenants contained in this Agreement and/or (iv) the Employee's acting in a manner which is reasonably likely to be detrimental or damaging to the Company's reputation, business, operations or relations with employees, suppliers and customers. If Employee is terminated for Cause prior to the Expiration Date, he shall be entitled to receive his then current Base Salary pursuant to Section 2(a) through the date of termination. Thereafter, Employee shall not be entitled to receive, and Company shall not be obligated to provide Employee with any additional salary, payments or benefits of any kind. b. Termination by Death of Employee. Employee's employment with the Company shall terminate upon the death of the Employee. In the event Employee's employment is terminated by death, Employee's designated beneficiary shall be entitled to receive: (i) Employee's then current Base Salary pursuant to Section 2(a) through the date of termination; (ii) the proceeds of any life insurance policy offered by the Company; and (iii) the lump-sum payment of any incentive compensation to which Employee was entitled and which Employee 3 4 did not receive prior to his death. Such incentive compensation, if any, shall be prorated through the date of termination and shall be payable to Employee's designated beneficiary at the time the bonus for such calendar year would normally be paid. c. Termination by Disability of Employee. To the extent allowable under existing law, Employee's employment with Company shall terminate upon the Disability of the Employee. For the purposes of this Section 3(c), Employee shall be considered "Disabled" if he becomes physically or mentally incapacitated, such that for a period of three (3) consecutive months or for an aggregate of six (6) months during a twelve (12) consecutive month period, Employee is unable to perform the essential functions of his job without reasonable accommodation. Any question as to the existence of the Disability of the Employee shall be determined in writing by a qualified independent physician chosen by the Company and reasonably satisfactory to Employee (or Employee's legal representative) and such determination shall be conclusive. In the event Employee's employment is terminated by Disability, Employee shall be entitled to receive: (i) Employee's then current Base Salary pursuant to Section 2(a) through the date of termination due to Disability (offset by any payments made during such period under the Company's short-term and long-term disability programs then in effect); and (ii) the lump-sum payment of any incentive compensation to which Employee was entitled and which Employee did not receive prior to the date of termination; such incentive compensation, if any, shall be prorated through the date of termination. Thereafter, Employee shall not be entitled to receive, and Company shall not be obligated to provide Employee with any additional salary, payments or benefits of any kind. d. Termination of Employee by Company Without Cause. Company may terminate Employee's employment without cause at any time for any reason prior to the Expiration Date without notice. In the event the Company terminates Employee's employment under this Section 3(d), Employee shall be entitled to receive: (i) in either a lump-sum or through salary continuation, at the Company's sole discretion, the amount of Employee's then current Base Salary pursuant to Section 2(a) until the first to occur of (A) the Expiration Date, or (B) Employee is employed, as an employee, consultant or otherwise, by a third party; and (ii) the lump-sum payment of any incentive compensation to which Employee was entitled and which Employee did not receive prior to termination; such incentive compensation, if any, shall be prorated through the date of termination. Thereafter Employee shall not be entitled to receive, and the Company shall not be obligated to provide Employee with any additional salary, payments or benefits of any kind other than those specifically set forth in Section 3(d) or 3(i). e. Termination of Employee Upon Change of Control. In the event Employee's employment is terminated prior to the Expiration Date by a Change of Control of the Company, as defined below, Employee shall be entitled to receive: (i) Employee's then current Base Salary pursuant to Section 2(a) above through the date of termination and (ii) the lump-sum payment of any incentive compensation to which Employee was entitled and which Employee did not receive prior to the date of termination; such incentive compensation, if any, shall be prorated through the date of termination. Thereafter Employee shall not be entitled to receive, and the Company shall not be obligated to provide Employee with any additional salary, payments or benefits of any kind other than those specifically set forth in Section 3(e) or 3(i). 4 5 For purposes of this Section 3(e), Change of Control shall mean: (i) any person (as defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) directly or indirectly becoming the "beneficial owner" (as defined in Rule 13d-3 promulgated pursuant to such Securities Exchange Act) of 50% or more of the combined voting power of Company's then outstanding securities; or (ii) the occurrence within any 12-month period of a change in the membership of Company's Board of Directors such that the Incumbent Members (as defined in the following sentence) do not constitute a majority of the members of such Board of Directors. "Incumbent Members" shall mean, with respect to any given 12-month period, the members of such Board of Directors on the date immediately preceding the commencement of such given 12-month period; provided, however, that any person who becomes a member of such Board of Directors during such given 12-month period whose election or appointment to such Board of Directors was approved by a vote of a majority of the members of such Board of Directors who, on the date of such election or appointment, comprised the Incumbent Members on the date of such vote shall be considered one of the Incumbent Members with respect to such 12-month period. f. Voluntary Termination by Employee. If Employee voluntarily terminates his employment prior to the Expiration Date and prior to the occurrence of a Change of Control, Employee shall receive his then current Base Salary pursuant to Section 2(a) through the date of termination. Employee shall not be entitled to receive, and Company shall have no obligation to provide Employee with any additional pay, salary, bonuses or benefits of any kind. g. Termination by Expiration Date. In the event Employee's employment is terminated by the occurrence of the Expiration Date, the Company shall have no obligation to pay Employee or provide Employee with benefits of any kind beyond the Expiration Date. In the event that Employee remains employed by Company beyond the Expiration Date, Employee shall be considered an at-will employee. h. Notice of Termination. With the exception of termination by the Expiration Date, any purported termination of employment shall be communicated through written notice indicating the specific provision in this Agreement relied upon. i. Stock Options Upon Termination. In the event that Employee's employment is terminated under the provisions of Section 3(d) and/or 3(e) of this Agreement, all unvested stock options shall vest as of the date of termination. 4. Noncompetition a. Employee covenants and agrees with the Company that so long as he is employed by the Company and for a period of twelve (12) months after the termination of Employee's employment for any reason (the "Non-Competition Period"), Employee will not engage or participate, directly or indirectly, as principal, agent, employee, employer, consultant, advisor, sole proprietor, stockholder, partner, independent contractor, trustee, joint venturer or in any other individual or representative capacity whatever, in the conduct or management of, or own any stock or other proprietary interest in, or debt of, any business organization, person, firm 5 6 partnership, association, corporation, enterprise or other entity that shall be engaged in any business (whether in operation or in the planning, research or development stage) that is a Competitive Business, unless Employee shall obtain the prior written consent of the Company which consent shall make express reference to this Agreement. Notwithstanding the foregoing, Employee may make passive investments in any company whose stock is listed on a national securities exchange or traded in the over-the-counter market so long as he does not come to own, directly or indirectly, more than five percent (5%) of the equity securities of such company. For purposes of this Agreement, a business shall be considered a "Competitive Business" if it involves or relates to (i) any business in which the Company is actively engaged on the date of termination or any business in which during the twelve (12) months immediately preceding the date of termination the Company actively contemplated engaging (as evidenced by (x) discussions between Employee or any other officer of the Company, (y) inclusion in a written business plan or proposal, or (z) discussions between Employee or any other officer of the Company and any customer or prospective customer of the Company) or (ii) any business in which an affiliate is actively engaged on the date of termination or any business in which during the twelve (12) months immediately preceding the date of termination an affiliate actively contemplated engaging (as evidenced by (x) discussions between any officer of any affiliate, (y) inclusion in a written business plan or proposal, or (z) discussions between an officer of any affiliate and any customer or prospective customer of any affiliate), provided, however, for purposes of this clause (ii), such business involves or relates to the research, development, manufacturing, production, marketing, selling or servicing of products or services for or related to the drug delivery business. b. During the Non-Competition Period, Employee will not directly or indirectly solicit or induce, or aid any other entity or person in soliciting or inducing, or knowingly permit any entity directly or indirectly controlled by him to solicit or induce, any person who is, or during the last six months of Employee's employment by the Company was, an officer, director, executive, consultant or employee of the company or any of its affiliates or any of its existing or future subsidiaries to leave the employment or association with the Company, its affiliate or subsidiary, to become employed or retained by any other entity or to participate in the establishment of any other business. c. Employee agrees that in addition to the remedies the Company may seek and obtain pursuant to this Agreement, the period during which the covenants contained in this Section 4 apply shall be extended by any and all periods during which Employee shall be found by a court possessing personal jurisdiction over him to have been in violation of the covenants contained in this Agreement. d. Without limitation of any of the provisions of this Section 4, any payments to be made to Employee or for his benefit following termination of his employment with the Company pursuant to Section 3 of this Agreement shall be deemed to secure his agreements set forth in this Section 4 and such payments may be terminated by the Company if he fails to observe the agreements set forth in this Section 4. e. Employee (i) acknowledges that his skills and experience are such that he can anticipate finding employment at a senior level in his profession, and (ii) represents and agrees 6 7 that the restrictions imposed by this Section 4 on engaging in competitive business activities are necessary for the protection of the legitimate interests and competitive position of the Company and do not impose undue hardships on him. f. This Section 4 shall survive the termination of this Agreement. 5. Termination Obligations of Employee a. Return of the Company's Property. Employee hereby acknowledges and agrees that all personal property, including, without limitation, all books, manuals, records, reports, notes, contracts, lists, blueprints, and other documents, or materials, or copies thereof, and equipment furnished to or prepared by Employee in the course of or incident to Employee's employment, belong to the Company and shall be promptly returned to the Company upon termination of Employee's employment. b. Representations, Obligations and Warranties Survive Termination of Employment. The representations, obligations and warranties contained in Sections 1(e), 4, 5, 6, 7, 10, 11, 12, 13, 14 and 15 of this Agreement as well as the terms and conditions of Exhibit A of this Agreement shall survive Employee's termination of employment with the Company. c. Cooperation in Pending Work. Employee agrees to fully cooperate with the Company in all matters relating to the winding up of pending work on behalf of the Company and the orderly transfer of work to other employees of the Company following any termination of Employee's employment. Employee shall also cooperate in the resolution of any dispute, including litigation of any action, involving the Company that relates in any way to Employee's activities while employed by the Company. 6. Alternative Dispute Resolution The Company and Employee mutually agree that any controversy or claim arising out of or relating to this Agreement or the breach thereof, or any other dispute between the parties relating in any way to Employee's employment with the Company or the termination of that relationship, including disputes arising under the common law and/or any federal or state statutes, laws or regulations, shall be submitted to mediation before a mutually agreeable mediator, which cost is to be borne equally by the parties. In the event mediation is unsuccessful in resolving the claim or controversy, such claim or controversy shall be resolved exclusively by arbitration. The claims covered by this Agreement ("Arbitrable Claims") include, but are not limited to, claims for wages or other compensation due; claims for breach of any contract (including this Agreement) or covenant (express or implied); tort claims; claims for discrimination (including, but not limited to, race, sex, religion, national origin, age, marital status, medical condition, or disability); claims for benefits (except where an employee benefit or pension plan specifies that its claims procedure shall culminate in an arbitration procedure different from this one), and claims for violation of any federal, state, or other law, statute, regulation, or ordinance, except claims excluded in the following paragraph. The parties hereby waive any rights they may have to trial by jury in regard to Arbitrable Claims. 7 8 Claims Employee or the Company may have regarding Workers' Compensation or unemployment compensation benefits and the noncompetition provisions of this Agreement are not covered by the arbitration and mediation provisions of this Agreement. Claims Employee or the Company may have for violation of the proprietary information provisions of this Agreement as well as the terms and provisions of Exhibit A of this Agreement are not covered by the arbitration and mediation provisions of this Section 6 of this Agreement. Arbitration under this Agreement shall be the exclusive remedy for all Arbitrable Claims. The Company and Employee agree that arbitration shall be held in or near Denver, Colorado or Fort Collins, Colorado and shall be in accordance with the then-current Employment Dispute Resolution Rules of the American Arbitration Association, before an arbitrator licensed to practice law in Colorado. The arbitrator shall have authority to award or grant both legal, equitable, and declaratory relief. Such arbitration shall be final and binding on the parties. The Federal Arbitration Act shall govern the interpretation and enforcement of this Section 6 pertaining to Alternative Dispute Resolution. This Agreement to mediate and arbitrate survives termination of Employee's employment. 7. Notices All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered by hand, overnight delivery or mailed, postage prepaid, by certified or registered mail, return receipt requested, and addressed to the Company: Atrix Laboratories, Inc. 2579 Midpoint Drive Fort Collins, Colorado 80525 Attn: Vice President, Finance Telephone: (970) 482-5868 Facsimile: (970) 482-9735 and to Employee at: 19 Quiet Oak Circle The Woodlands, Texas 77381 Telephone: (281) 363-1693 Employee and the Company shall be obligated to notify the other party of any change in address. Notice of change of address shall be effective only when made in accordance with this Section. 8. Entire Agreement The terms of this Agreement, together with Exhibit A to this Agreement are intended by the parties to be the final and exclusive expression of their agreement with respect to the 8 9 employment of Employee by the Company and may not be contradicted by evidence of any prior or contemporaneous statements or agreements. The parties further intend that this Agreement shall constitute the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal proceeding involving this Agreement. 9. Amendments, Waivers This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by Employee and by a duly authorized representative of the Company other than Employee. No failure to exercise and no delay in exercising any right, remedy, or power under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, or power under this Agreement preclude any other or further exercise thereof, or the exercise of any other right, remedy, or power provided herein or by law or in equity. 10. Assignment; Successors and Assigns Employee agrees that Employee will not assign, sell, transfer, delegate or otherwise dispose of, whether voluntarily or involuntarily, or by operation of law, any rights or obligations under this Agreement, nor shall Employee's rights be subject to encumbrance or the claims of creditors. Any purported assignment, transfer, or delegation shall be null and void. Nothing in this Agreement shall prevent the consolidation of the Company with, or its merger into, any other corporation, or the sale by the Company of all or substantially all of its properties or assets, or the assignment by the Company of this Agreement and the performance of its obligations hereunder to any successor in interest. Subject to the foregoing, this Agreement shall be binding upon Employee and Company and shall inure to the benefit of the parties and their respective heirs, legal representatives, successors, and permitted assigns, and shall not benefit any person or entity other than those enumerated above. 11. Use of Employee's Likeness. Employee authorizes the Company to use, reuse and to reasonably grant others the right to use and reuse without additional compensation, Employee's name, photograph, likeness (including caricature), voice and biographical information and any reproduction or simulation thereof in any media now known or hereafter developed, for valid business purposes of the Company. 12. Exclusion of Property of Others. Employee will not bring to the Company or use in the performance of his duties any documents or materials of a former employer that are not generally available to the public or that have not been legally transferred to the Company. 9 10 13. Employee's Authorization to Deduct Amounts Owed. Upon Employee's separation from employment, Company is authorized to deduct from Employee's final wages or other monies due Employee any debts or amounts owed to Company by Employee. 14. Severability; Enforcement If any provision of this Agreement, or the application thereof to any person, place, or circumstance, shall be held by a court or arbitrator of competent jurisdiction to be invalid, unenforceable, or void, the remainder of this Agreement and such provisions as applied to other persons, places, and circumstances shall remain in full force and effect. 15. Governing Law The validity, interpretation, enforceability, and performance of this Agreement shall be governed by and construed in accordance with the laws of the United States and the Federal Arbitration Act to the extent applicable, and otherwise by the laws of the State of Colorado. 16. Employee Acknowledgment The parties acknowledge (a) that they have consulted with or have had the opportunity to consult with independent counsel of their own choice concerning this Agreement, and (b) that they have read and understand the Agreement, are fully aware of its legal effect, and have entered into it freely based on their own judgment and not on any representations or promises other than those contained in this Agreement. In Witness Whereof, the parties have duly executed this Agreement as of the date first written above. Company Employee By: /s/ John E. Urheim /s/ David Osborne ----------------------------------------------- ------------------------------------------- John E. Urheim David Osborne Vice Chairman and Chief Executive Officer By: /s/ Brian G. Richmond ----------------------------------------------- Brian G. Richmond Vice President, Finance
10 11 EXHIBIT A EX-10.10 14 PERSONAL SERVICES 1 EXHIBIT 10.10 PERSONAL SERVICES AGREEMENT This Personal Services Agreement (the "Agreement") is entered into this 1st day of November, 1998 by and between Atrix Laboratories, Inc., a Delaware corporation (the "Company") with its principal place of business at 2579 Midpoint Drive, Fort Collins, Colorado 80525, and Richard L. Jackson, Ph.D. ("Executive") with his address at 3950 Rose Hill Avenue, Cincinnati, Ohio 45229 to be effective as of November 1, 1998 (the "Effective Date"). PREMISES WHEREAS, the Company desires to employ Executive pursuant to the terms and conditions and for the consideration set forth in this Agreement and Executive desires to enter the employ of the Company pursuant to such terms and conditions and for such consideration; WHEREAS, the provisions of this Agreement are a condition of Executive being employed by Company, of Executive's having access to confidential business and technological information, and of Executive's being eligible to receive certain benefits of the Company. This Agreement is entered into, and is reasonably necessary, to protect confidential information and customer relationships to which Executive may have access, and to protect the goodwill and other business interests of the Company; and WHEREAS, the provisions of this Agreement are also a condition to Executive's agreement to provide personal services to Company. NOW THEREFORE, in consideration of the mutual promises and covenants agreed to herein, the receipt and sufficiency of which are hereby acknowledged, Company and Executive agree as follows: AGREEMENT 1. Position, Term, Duties, Responsibilities a. Position. Executive shall be employed by the Company as its Senior Vice President of Research and Development at the Company's current place of business in Fort Collins, Colorado. b. Duties. Executive shall faithfully and diligently render such services and perform such related duties and responsibilities as are customarily performed by a person holding such title and as otherwise may, from time to time, be reasonably assigned to Executive by the Company's Vice Chairman and Chief Executive Officer. Executive shall comply with the provisions of this Agreement and shall at all times be subject to such Company policies and procedures including, but not limited to, a Company code of conduct, as the Company may from time to time establish as pertaining to Executive. 2 c. Term. This Agreement shall be for a term beginning on the Effective Date and terminating the earlier of (i) three years from the Effective Date (the "Expiration Date"), or (ii) the date on which Executive's employment is terminated pursuant to Section 3 of this Agreement (the "Term"); provided that the term shall be automatically extended indefinitely thereafter until either party shall have given notice to the contrary (the "Term Termination Notice"), in which event the Term shall expire on the six month anniversary of such Term Termination Notice. d. Other Activities. During Executive's employment with the Company, Executive shall devote his entire business time, attention and energies to the performance of his duties and functions under this Agreement and, except upon the prior written consent of the Company, shall not (i) accept any other employment, or (ii) directly or indirectly engage in any other business activity (whether or not pursued for gain, profit or pecuniary advantage) that is or may be in conflict with, or that might place Executive in a conflicting position to that of the Company. e. Proprietary Information. Executive agrees to comply with the terms and conditions of the standard Company Employee Proprietary Information and Inventions Agreement, which is annexed to this Agreement and referred to as ("Exhibit A") to this Agreement. 2. Compensation, Bonuses and Benefits a. Base Salary. During Executive's employment with the Company, the Company shall pay Executive a base annual salary, (the "Base Salary") which at the time of the execution of this Agreement is Two Hundred Fifty Thousand Dollars ($250,000.00). The Base Salary shall be payable in accordance with the Company's normal payroll schedule, less all applicable tax withholdings for state and federal income taxes, FICA and other deductions as required by law and/or authorized by the Executive. The Executive's Base Salary shall be reviewed no less frequently than annually to determine whether or not the same should be increased in light of the duties and responsibilities of the Executive and the performance thereof, and, if it is determined that an increase is merited, such increase shall be promptly put into effect and the base salary of the Executive as so increased shall constitute the base salary of the Executive for purposes of this Section 2. b. Incentive Compensation Program. During Employee's employment with the Company, Employee shall be entitled to participate in such incentive compensation programs as are from time to time established and approved by Company's Board of Directors in accordance with the Company's practice for similarly situated employees. c. Initial Stock Options. At the Effective Date, the Company shall grant Executive stock options in 100,000 shares of the Company's $.001 par value common stock with the purchase price being the price reported in the Wall Street Journal as of the Effective Date ("Initial Stock Options"). Subject to the provisions of Section 3 of this Agreement, Executive's Initial Stock Options shall vest thirty-three and one-third percent per year on the anniversary date of Executive's employment with the Company, provided Executive remains employed by the Company. Subsequent grants may be awarded based on your performance and contributions to the business. Any stock options are subject to the approval of the Company's Board of Directors. 2 3 d. Benefits. Executive shall also be entitled to participate in such employee benefit plans which the Company provides or may establish from time to time for the benefit of employees, subject to the terms of each such plan and subject to the right of the Company and the Company's Board of Directors to modify, revise or eliminate such benefit plans from time to time in their sole discretion. Executive shall pay for the portion of the cost of such benefits as is from time-to-time established by Company as the portion of such cost to be paid by senior executives of Company. e. Costs and Expenses. Executive shall be entitled to reimbursement for all ordinary reasonable out-of-pocket business expenses which are reasonably incurred by him in the furtherance of the Company's business, in accordance with the policies adopted from time to time by the Company or the Company's Board of Directors. Executive will comply with the Company's travel policies as established from time to time by the Company or the Company's Board of Directors. f. Vacation. During the Term, Executive shall be entitled to four weeks of paid vacation per year so long as the absence of Executive does not interfere in any material respect with the performance by Executive of Executive's duties hereunder. Executive will use his best efforts to schedule vacation periods to minimize disruption of the Company's business. g. Relocation Expenses. The Company shall provide Executive with the following relocation benefits ("Relocation Benefits"): (i) A lump-sum payment of Fifteen Thousand Dollars ($15,000) ("Lump-Sum Relocation Amount"), less all applicable tax withholdings for state and federal income taxes, FICA and other deductions as required by law, payable to Executive at the time Executive physically relocates to the Fort Collins, Colorado area on a permanent basis. In the event that Executive does not physically relocate to the Fort Collins, Colorado area on a permanent basis within twelve months of the Effective Date, the Company shall apply the Lump-Sum Relocation Amount toward living expenses incurred by Executive from November 1, 1999 and thereafter up to the Lump-Sum Relocation Amount; (ii) Reasonable temporary living expenses in Fort Collins, Colorado for up to a total of twelve (12) months from the Effective Date or until the Executive locates reasonable accommodations, whichever comes first, up to a maximum amount of $24,000; (iii) Reasonable expenses for trips back to Cincinnati, Ohio from Colorado for up to twice per month for a total of twelve (12) months from the Effective Date, or until the Executive locates reasonable accommodations, whichever comes first, up to a maximum amount of $12,000; (iv) Reasonable expenses associated with Executive's house-hunting trips to find a suitable residence in the Fort Collins, Colorado area, up to a maximum amount of $5,000; and 3 4 (v) Reasonable real estate commissions, closing costs and attorney's fees incurred in connection with the sale of Executive's residence in Cincinnati, Ohio and the purchase of a residence in the Fort Collins, Colorado area, up to a maximum amount of $30,000. The Company will reimburse Executive for Relocation Benefits, up to the maximum amounts set forth above, in accordance with the Company's reimbursement policies. 3. Termination a. For Cause by the Company. Executive's employment may be terminated for "Cause." For purposes of this Agreement, "Cause" shall mean: (i) the Executive's willful and continued failure substantially to perform his duties hereunder (other than as a result of total or partial incapacity due to physical or mental illness), (ii) the conviction of, or plea of guilty or nolo contendere by the Executive to a charge of any felony under the laws of the United States or any state thereof or crime involving moral turpitude, (iii) breach of any covenants contained in this Agreement and/or (iv) the Executive's acting in an intentional manner which is reasonably likely to be materially detrimental or damaging to the Company's reputation, business, operations or relations with employees, suppliers and customers. If Executive is terminated for Cause prior to the Expiration Date, he shall be entitled to receive his then current Base Salary pursuant to Section 2(a) through the date of termination. Thereafter, Executive shall not be entitled to receive, and Company shall not be obligated to provide Executive with any additional salary, payments or benefits of any kind. b. Termination by Death of Executive. Executive's employment with the Company shall terminate upon the death of the Executive. In the event Executive's employment is terminated by death, Executive's designated beneficiary shall be entitled to receive: (i) the proceeds of any life insurance policy offered by the Company; and (ii) the lump-sum payment of any incentive compensation to which Executive was entitled and which Executive did not receive prior to his death. Such incentive compensation shall be prorated through the date of termination and shall be payable to Executive's designated beneficiary at the time the bonus for such calendar year would normally be paid. c. Termination by Disability of Executive. To the extent allowable under existing law, Executive's employment with Company shall terminate upon the Disability of the Executive. For the purposes of this Section 3(c), Executive shall be considered "Disabled" if he becomes physically or mentally incapacitated, such that for a period of six consecutive months or for an aggregate of twelve months during a twenty-four consecutive month period, Executive is unable to perform the essential functions of his job without reasonable accommodation. Any question as to the existence of the Disability of the Executive shall be determined in writing by a qualified independent physician chosen by the Company and reasonably satisfactory to Executive (or Executive's legal representative) and such determination shall be conclusive. In the event Executive's employment is terminated by Disability, Executive shall be entitled to receive his current Base Salary pursuant to Section 2(a) through the date of termination due to Disability, medical and life insurance benefits for a period of six months following the date on which Executive's employment is terminated due to Disability. Thereafter, Executive shall not be entitled to receive, and Company shall not be obligated to provide Executive with any additional salary, payments or benefits of any kind. 4 5 d. Termination of Executive by Company Without Cause. Company may terminate Executive's employment without cause at any time for any reason prior to the Expiration Date without notice. In the event the Company terminates Executive's employment under this Section 3(d), the Company shall: (i) pay to Executive in either a lump-sum or through salary continuation, at the Company's sole discretion, the amount of Executive's then current Base Salary pursuant to Section 2(a) for twelve (12) months following the date of termination; (ii) if the Executive elects continued coverage under the Company's health plan pursuant to the Comprehensive Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"), then the Company shall continue to pay the Company's portion of the premium for the Executive's continued coverage under the Company's health plan until the first to occur of (A) twelve (12) months from the date of termination; (B) Executive is employed by a third party or (C) Executive elects to cease such coverage or fails to pay his portion of the premium; and (iii) pay to Executive the portion of the incentive compensation for the year of such termination which are (A) determined by objective measurement standards under the Company's incentive compensation program applicable to senior executives of Company, and (B) would have been paid to Executive had Executive been continuously employed under this Agreement through the Expiration Date. Payment of such portions of incentive compensation, if any, shall be made to Executive within 10 business days after the date, if any, on which senior executives of Company receive payment of their incentive compensation under such incentive compensation program. Thereafter Executive shall not be entitled to receive, and the Company shall not be obligated to provide Executive with any additional salary, payments or benefits of any kind other than those specifically set forth in this Section 3(d). e. Termination of Executive Upon Change of Control. In the event Executive's employment is terminated prior to the Expiration Date by a Change of Control of the Company, as defined below, Company shall: (i) pay to Executive, in a lump sum within ten (10) days after the date Executive's employment is terminated, the amount of Executive's then current Base Salary pursuant to Section 2(a) above for twelve (12) months following the termination of Executive's employment; and (ii) pay to Executive the portion of the incentive compensation for the year of such termination which are (A) determined by objective measurement standards under the Company's incentive compensation program applicable to senior executives of Company, and (B) would have been paid to Executive had Executive been continuously employed under this Agreement through the Expiration Date. Payment of such portions of incentive compensation, if any, shall be made to Executive within 10 business days after the date, if any, on which senior executives of Company receive payment of their incentive compensation under such incentive compensation program. Thereafter Executive shall not be entitled to receive, and the Company shall not be obligated to provide Executive with any additional salary, payments or benefits of any kind other than those specifically set forth in this Section 3(e). For purposes of this Section 3(e), Change of Control shall mean: (i) any person (as defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934) directly or indirectly becoming the "beneficial owner" (as defined in Rule 13d-3 promulgated pursuant to such 5 6 Securities Exchange Act) of 50% or more of the combined voting power of Company's then outstanding securities; or (ii) the occurrence within any 12-month period of a change in the membership of Company's Board of Directors such that the Incumbent Members (as defined in the following sentence) do not constitute a majority of the members of such Board of Directors. "Incumbent Members" shall mean, with respect to any given 12-month period, the members of such Board of Directors on the date immediately preceding the commencement of such given 12-month period; provided, however, that any person who becomes a member of such Board of Directors during such given 12-month period whose election or appointment to such Board of Directors was approved by a vote of a majority of the members of such Board of Directors who, on the date of such election or appointment, comprised the Incumbent Members on the date of such vote shall be considered one of the Incumbent Members with respect to such 12-month period. f. Voluntary Termination by Executive. If Executive voluntarily terminates his employment prior to the Expiration Date and prior to the occurrence of a Change of Control, Executive shall receive his then current Base Salary pursuant to Section 2(a) through the date of termination. Executive shall not be entitled to receive, and Company shall have no obligation to provide Executive with any additional pay, salary, bonuses or benefits of any kind. g. Termination by Expiration Date. In the event Executive's employment is terminated by the occurrence of the Expiration Date, the Company shall have no obligation to pay Executive or provide Executive with benefits of any kind beyond the Expiration Date. In the event that Executive remains employed by Company beyond the Expiration Date, Executive shall be considered an at-will employee. h. Notice of Termination. With the exception of termination by the Expiration Date, any purported termination of employment shall be communicated through written notice indicating the specific provision in this Agreement relied upon. i. Stock Options Upon Termination. In the event that Executive's employment is terminated under the provisions of Section 3(d) and/or 3(e) of this Agreement, Executive's stock options shall vest upon the date his employment is terminated. 4. Noncompetition a. Executive covenants and agrees with the Company that so long as he is employed by the Company and for a period of one (1) year after the termination of Executive's employment for any reason (the "Non-Competition Period"), Executive will not engage or participate, directly or indirectly, as principal, agent, employee, employer, consultant, advisor, sole proprietor, stockholder, partner, independent contractor, trustee, joint venturer or in any other individual or representative capacity whatever, in the conduct or management of, or own any stock or other proprietary interest in, or debt of, any business organization, person, firm partnership, association, corporation, enterprise or other entity that shall be engaged in any business (whether in operation or in the planning, research or development stage) that is a Competitive Business, unless Executive shall obtain the prior written consent of the Company which consent shall make express reference to this Agreement. Notwithstanding the foregoing, Executive may make passive investments in any 6 7 company whose stock is listed on a national securities exchange or traded in the over-the-counter market so long as he does not come to own, directly or indirectly, more than five percent (5%) of the equity securities of such company. For purposes of this Agreement, a business shall be considered a "Competitive Business" if it involves or relates to (i) any business in which the Company is actively engaged on the date of termination or any business in which during the twelve (12) months immediately preceding the date of termination the Company actively contemplated engaging (as evidenced by (x) discussions between Executive or any other officer of the Company, (y) inclusion in a written business plan or proposal, or (z) discussions between Executive or any other officer of the Company and any customer or prospective customer of the Company) or (ii) any business in which an affiliate is actively engaged on the date of termination or any business in which during the twelve (12) months immediately preceding the date of termination an affiliate actively contemplated engaging (as evidenced by (x) discussions between any officer of any affiliate, (y) inclusion in a written business plan or proposal, or (z) discussions between an officer of any affiliate and any customer or prospective customer of any affiliate), provided, however, for purposes of this clause (ii), such business involves or relates to the research, development, manufacturing, production, marketing, selling or servicing of products or services for or related to the drug delivery business. b. During the Non-Competition Period, Executive will not directly or indirectly solicit or induce, or aid any other entity or person in soliciting or inducing, or knowingly permit any entity directly or indirectly controlled by him to solicit or induce, any person who is, or during the last six months of Executive's employment by the Company was, an officer, director, executive, consultant or employee of the company or any of its affiliates or any of its existing or future subsidiaries to leave the employment or association with the Company, its affiliate or subsidiary, to become employed or retained by any other entity or to participate in the establishment of any other business. c. Executive agrees that in addition to the remedies the Company may seek and obtain pursuant to this Agreement, the period during which the covenants contained in this Section 4 apply shall be extended by any and all periods during which Executive shall be found by a court possessing personal jurisdiction over him to have been in violation of the covenants contained in this Agreement. d. Without limitation of any of the provisions of this Section 4, any payments to be made to Executive or for his benefit following termination of his employment with the Company pursuant to Section 3 of this Agreement shall be deemed to secure his agreements set forth in this Section 4 and such payments may be terminated by the Company if he fails to observe the agreements set forth in this Section 4. e. Executive (i) acknowledges that his skills and experience are such that he can anticipate finding employment at a senior level in his profession, and (ii) represents and agrees that the restrictions imposed by this Section 4 on engaging in competitive business activities are necessary for the protection of the legitimate interests and competitive position of the Company and do not impose undue hardships on him. 7 8 f. This Section 4 shall survive the termination of this Agreement. 5. Termination Obligations of Executive a. Return of the Company's Property. Executive hereby acknowledges and agrees that all personal property, including, without limitation, all books, manuals, records, reports, notes, contracts, lists, blueprints, and other documents, or materials, or copies thereof, and equipment furnished to or prepared by Executive in the course of or incident to Executive's employment, belong to the Company and shall be promptly returned to the Company upon termination of Executive's employment. b. Representations, Obligations and Warranties Survive Termination of Employment. The representations, obligations and warranties contained in Sections 1(e), 4, 5, 6, 7, 10, 11, 12, 13 14 and 15 of this Agreement as well as the terms and conditions of Exhibit A of this Agreement shall survive Executive's termination of employment with the Company. c. Cooperation in Pending Work. Executive agrees to fully cooperate with the Company in all matters relating to the winding up of pending work on behalf of the Company and the orderly transfer of work to other employees of the Company following any termination of Executive's employment. Executive shall also cooperate in the resolution of any dispute, including litigation of any action, involving the Company that relates in any way to Executive's activities while employed by the Company. 6. Alternative Dispute Resolution The Company and Executive mutually agree that any controversy or claim arising out of or relating to this Agreement or the breach thereof, or any other dispute between the parties relating in any way to Executive's employment with the Company or the termination of that relationship, including disputes arising under the common law and/or any federal or state statutes, laws or regulations, shall be submitted to mediation before a mutually agreeable mediator, which cost is to be borne equally by the parties. In the event mediation is unsuccessful in resolving the claim or controversy, such claim or controversy shall be resolved exclusively by arbitration. The claims covered by this Agreement ("Arbitrable Claims") include, but are not limited to, claims for wages or other compensation due; claims for breach of any contract (including this Agreement) or covenant (express or implied); tort claims; claims for discrimination (including, but not limited to, race, sex, religion, national origin, age, marital status, medical condition, or disability); claims for benefits (except where an employee benefit or pension plan specifies that its claims procedure shall culminate in an arbitration procedure different from this one), and claims for violation of any federal, state, or other law, statute, regulation, or ordinance, except claims excluded in the following paragraph. The parties hereby waive any rights they may have to trial by jury in regard to Arbitrable Claims. Claims Executive or the Company may have regarding Workers' Compensation or unemployment compensation benefits and the noncompetition provisions of this Agreement are not covered by the arbitration and mediation provisions of this Agreement. Claims Executive or the Company may have for violation of the proprietary information provisions of this Agreement as well as the terms and provisions of Exhibit A of this Agreement are not covered by the arbitration and mediation provisions of this Section 6 of this Agreement. 8 9 Arbitration under this Agreement shall be the exclusive remedy for all Arbitrable Claims. The Company and Executive agree that arbitration shall be held in or near either Denver or Fort Collins, Colorado and shall be in accordance with the then-current Employment Dispute Resolution Rules of the American Arbitration Association, before an arbitrator licensed to practice law in Colorado. The arbitrator shall have authority to award or grant both legal, equitable, and declaratory relief. Such arbitration shall be final and binding on the parties. The Federal Arbitration Act shall govern the interpretation and enforcement of this Section 6 pertaining to Alternative Dispute Resolution. This Agreement to mediate and arbitrate survives termination of Executive's employment. 7. Notices All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered by hand, overnight delivery or mailed, postage prepaid, by certified or registered mail, return receipt requested, and addressed to the Company: Atrix Laboratories, Inc. 2579 Midpoint Drive Fort Collins, Colorado 80525 Attn: Chief Executive Officer Telephone: (800) 442-8749 Facsimile: (970) 482-9735 and to Executive at: Richard L. Jackson, Ph.D. 3950 Rose Hill Avenue Cincinnati, Ohio 45229 Telephone: (513) 861-8490 Executive and the Company shall be obligated to notify the other party of any change in address. Notice of change of address shall be effective only when made in accordance with this Section. 8. Entire Agreement The terms of this Agreement, together with Exhibit A to this Agreement are intended by the parties to be the final and exclusive expression of their agreement with respect to the employment of Executive by the Company and may not be contradicted by evidence of any prior or contemporaneous statements or agreements. The parties further intend that this Agreement shall 9 10 constitute the complete and exclusive statement of its terms and that no extrinsic evidence whatsoever may be introduced in any judicial, administrative, or other legal proceeding involving this Agreement. 9. Amendments, Waivers This Agreement may not be modified, amended, or terminated except by an instrument in writing, signed by Executive and by a duly authorized representative of the Company other than Executive. No failure to exercise and no delay in exercising any right, remedy, or power under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right, remedy, or power under this Agreement preclude any other or further exercise thereof, or the exercise of any other right, remedy, or power provided herein or by law or in equity. 10. Assignment; Successors and Assigns Executive agrees that Executive will not assign, sell, transfer, delegate or otherwise dispose of, whether voluntarily or involuntarily, or by operation of law, any rights or obligations under this Agreement, nor shall Executive's rights be subject to encumbrance or the claims of creditors. Any purported assignment, transfer, or delegation shall be null and void. Nothing in this Agreement shall prevent the consolidation of the Company with, or its merger into, any other corporation, or the sale by the Company of all or substantially all of its properties or assets, or the assignment by the Company of this Agreement and the performance of its obligations hereunder to any successor in interest. Subject to the foregoing, this Agreement shall be binding upon Executive and Company and shall inure to the benefit of the parties and their respective heirs, legal representatives, successors, and permitted assigns, and shall not benefit any person or entity other than those enumerated above. 11. Use of Employee's Likeness. Executive authorizes the Company to use, reuse and to reasonably grant others the right to use and reuse without additional compensation, Executive's name, photograph, likeness (including caricature), voice and biographical information and any reproduction or simulation thereof in any media now known or hereafter developed, for valid business purposes of the Company. 12. Exclusion of Property of Others. Executive will not bring to the Company or use in the performance of his duties any documents or materials of a former employer that are not generally available to the public or that have not been legally transferred to the Company. 13. Executive's Authorization to Deduct Amounts Owed. Upon Executive's separation from employment, Company is authorized to deduct from Executive's final wages or other monies due Executive any debts or amounts owed to Company by Executive. 10 11 14. Severability; Enforcement If any provision of this Agreement, or the application thereof to any person, place, or circumstance, shall be held by a court or arbitrator of competent jurisdiction to be invalid, unenforceable, or void, the remainder of this Agreement and such provisions as applied to other persons, places, and circumstances shall remain in full force and effect. 15. Governing Law The validity, interpretation, enforceability, and performance of this Agreement shall be governed by and construed in accordance with the laws of the United States and the Federal Arbitration Act to the extent applicable, and otherwise by the laws of the State of Colorado. 16. Executive Acknowledgment The parties acknowledge (a) that they have consulted with or have had the opportunity to consult with independent counsel of their own choice concerning this Agreement, and (b) that they have read and understand the Agreement, are fully aware of its legal effect, and have entered into it freely based on their own judgment and not on any representations or promises other than those contained in this Agreement. In Witness Whereof, the parties have duly executed this Agreement as of the date first written above. Company Executive /s/ G. Lee Southard /s/ Richard L. Jackson - ----------------------------------- ---------------------------------- G. Lee Southard, Ph.D. Richard L. Jackson, Ph.D. President and Chief Scientific Officer 11 12 EXHIBIT A (OMITTED) EX-21 15 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 MATERIAL SUBSIDIARIES OF REGISTRANT ViroTex Corporation, a Delaware corporation. EX-23 16 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT Atrix Laboratories, Inc. We consent to the incorporation by reference in Registration Statements No. 33-49268, No. 33-64029 and No. 333-29325 of Atrix Laboratories, Inc. on Forms S-8, and No. 333-43191 and No. 333-68585 of Atrix Laboratories, Inc. on Form S-3, of our report dated March 3, 1999, appearing in this Annual Report on Form 10-K of Atrix Laboratories, Inc. for the year ended December 31, 1998. /s/ DELOITTE & TOUCHE LLP DELOITTE & TOUCHE LLP Denver, Colorado March 23, 1999 EX-27 17 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 18,556,641 37,102,867 6,650,985 49,165 2,563,536 65,678,130 10,109,688 2,978,121 79,479,602 2,557,204 48,500,000 0 0 11,361 28,507,590 79,479,602 3,451,148 21,072,919 2,249,776 19,995,867 0 49,165 3,574,906 1,481,551 48,183 1,481,551 0 256,678 0 1,690,046 .15 .15
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