<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996
Commission File Number 0-18044
PROCYTE CORPORATION
(Exact name of the registrant as specified in its charter)
Washington 91-1307460
---------- ----------
(State of incorporation) (I.R.S. Employer Identification No.)
12040 115th Avenue N.E., Suite 210, Kirkland, WA 98034-6900
- ------------------------------------------------ ----------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (206)820-4548
-------------
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 the filing
requirements for 90 days.
Yes {X} No{ }
As of November 8, 1996, there were issued and outstanding 13,363,758 shares of
common stock, par value $.01 per share.
<PAGE>
PROCYTE CORPORATION
INDEX
PART I FINANCIAL INFORMATION PAGE NO.
Item 1. Financial Statements (unaudited)
Balance Sheet-
As of September 30, 1996 and
December 31, 1995 3
Statements of Operations -
Three and nine months ended
September 30, 1996 and 1995 4
Statements of Cash Flows
For nine months ended
September 30, 1996 and 1995 5
Statements of Stockholders' Equity 6
Notes to Financial Statements 7
Item 2. Management's Discussion and
Analysis of Financial Condition and
Results of Operations 9
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 17
EXHIBIT INDEX 17
2
<PAGE>
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PROCYTE CORPORATION
(a development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
--------------- ---------------
(unaudited)
--------------- ---------------
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.................................. $ 4,374,727 $ 6,019,740
Cash in escrow............................................. 2,500,000 0
Securities available for sale ............................. 23,728,335 30,057,780
Insurance claim receivable................................. 1,000,000 3,000,000
Inventories................................................ 557,828 0
Other...................................................... 523,400 477,116
--------------- ---------------
Total current assets..................................... 32,684,290 39,554,636
PROPERTY AND EQUIPMENT, at cost
Equipment.................................................. 3,729,508 3,328,829
Leasehold improvements..................................... 5,097,833 5,097,833
Less accumulated depreciation and amortization............. (3,722,044) (3,244,799)
--------------- ---------------
Property and equipment, net.............................. 5,105,297 5,181,863
PATENTS, at cost........................................... 290,930 290,930
Less accumulated amortization.............................. (105,270) (93,270)
--------------- ---------------
Patents, net............................................. 185,660 197,660
OTHER...................................................... 1,291,443 159,399
--------------- ---------------
TOTAL ASSETS............................................... $ 39,266,690 $ 45,093,558
--------------- ---------------
--------------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable........................................... $ 469,590 $ 678,698
Accrued liabilities........................................ 536,008 687,452
Payable to stockholders for settlement of litigation....... 7,750,000 7,750,000
--------------- ---------------
Total current liabilities................................ 8,755,598 9,116,150
DEFERRED LEASE PAYMENTS.................................... 54,355 69,172
DEFERRED STATE SALES TAXES................................. 23,682 23,682
COMMITMENTS
STOCKHOLDERS' EQUITY
Preferred stock $.01 par value: 2,000,000 shares
authorized; no shares issued or outstanding.............
Common stock $.01 par value: 30,000,000 shares
authorized; shares issued and outstanding 13,358,758
- September 30, 1996 and 13,318,495 -
December 31, 1995....................................... 132,464 131,311
Additional paid-in capital................................. 82,638,437 82,350,862
Deficit accumulated during the development stage........... (52,282,077) (46,513,220)
Unearned compensation...................................... (55,769) (84,399)
--------------- ---------------
Total stockholders' equity.............................. 30,433,055 35,884,554
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $ 39,266,690 $ 45,093,558
--------------- --------------
--------------- --------------
</TABLE>
3
SEE NOTES TO FINANCIAL STATEMENTS
<PAGE>
PROCYTE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
January 1,
1985
(predecessor
Three months ended September 30, Nine months ended September 30, inception) to
-------------------------------- ------------------------------- September 30,
1996 1995 1996 1995 1996
--------------- -------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
REVENUES
Product revenues....................... $ 14,153 $ 14,153 $ 14,153
Research and development
revenues under collaborative
agreements........................... 88,722 250,000 563,938 1,536,315 8,470,485
License fees........................... 0 0 900,000 1,500,000
Interest income........................ 437,375 434,382 1,222,954 1,898,529 8,258,755
Other ................................. 697,764
----------- ----------- ----------- ----------- ------------
Total revenues......................... 540,250 684,382 2,701,045 3,434,844 18,941,157
----------- ----------- ----------- ----------- ------------
COSTS AND EXPENSES
Cost of product sales 6,532 6,532 6,532
Research and
development.......................... 1,701,652 1,095,982 4,908,639 4,819,351 48,048,997
Litigation settlement................. 4,750,000
General & administrative.............. 1,130,885 968,930 3,554,731 2,869,838 18,420,493
----------- ----------- ----------- ----------- ------------
Total costs and expenses.............. 2,832,537 2,064,912 8,463,370 7,689,189 71,219,490
----------- ----------- ----------- ----------- ------------
NET LOSS............................... $(2,298,819) $(1,380,530) $(5,768,857) $(4,254,345) $(52,284,865)
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
NET LOSS PER
COMMON SHARE......................... $ (0.17) $ (0.11) $ (0.44) $ (0.32) $ (6.94)
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
Weighted average number of
common shares used in computing
net loss per common share............ 13,225,773 13,118,495 13,191,941 13,083,800 7,533,964
----------- ----------- ----------- ----------- ------------
----------- ----------- ----------- ----------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
<TABLE>
<CAPTION>
PROCYTE CORPORATION
(a development stage company)
STATEMENTS OF CASH FLOWS
(unaudited)
January 1,
1985
(predecessor
Nine months ended September 30, inception) to
------------------------------------- September 30,
OPERATING ACTIVITIES 1996 1995 1996
----------------- -------------------- ---------------------
<S> <C> <C> <C>
Net Loss ($5,768,857) ($4,254,345) $(52,284,865)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation.................................................... 477,245 586,084 3,972,714
Patent expense.................................................. 12,000 45,000 782,929
Amortization of discount on marketable securities............... (15,625)
(Gain) loss on sale of securities available for sale............ 137,074 (238,010) (50,550)
Stock grants and Restricted Stock grants........................ 194,250 267,971
Compensation expense on stock options........................... 28,630 55,257 684,369
Changes in assets and liabilities:
(Increase) decrease in inventories............................. (557,828) (557,828)
(Increase) decrease in other current assets.................... (46,284) (43,581) (523,403)
(Increase) decrease in insurance receivable.................... 2,000,000 0 (1,000,000)
(Increase) decrease in escrowed cash........................... (2,500,000) 0 (2,500,000)
(Increase) decrease in deferred offering expenses.............. 0
(Increase) decrease in other assets............................ (1,132,044) (1,141,443)
Increase (decrease) in accounts payable....................... (209,108) (32,988) 384,471
Increase (decrease) in accrued liabilities.................... (151,444) (517,012) 481,100
Increase (decrease) in litigation payable..................... 0 7,750,000
Increase (decrease) in deferred income........................ 0 (340,344) 0
Increase (decrease) in deferred lease payments................ (14,817) (8,892) 54,355
Decrease in deferred use tax.................................. 0 0 (71,031)
----------------- -------------------- ---------------------
Net cash used in operating activities.............................. (7,531,183) (4,748,831) (43,766,836)
----------------- -------------------- ---------------------
FINANCING ACTIVITIES
Proceeds from issuance of stock - net............................ 94,478 27,423 81,389,374
Proceeds from borrowings......................................... 500,000
----------------- -------------------- ---------------------
Net cash provided by financing activities.......................... 94,478 27,423 81,889,374
----------------- -------------------- ---------------------
INVESTING ACTIVITIES
Purchase of property and equipment................................ (400,679) 36,210 (8,982,080)
Refund (payment) Interest-bearing lease deposit................... (150,000)
Purchase of securities available-for-sale......................... (135,794,265) (127,464,452) (344,288,060)
Proceeds from sale or maturity of securities available for sale... 141,986,636 117,824,183 320,625,900
Patents:
Expenditures..................................................... 0 (29,351) (1,018,117)
Reimbursements................................................... 0 64,546
----------------- -------------------- ---------------------
Net cash used in investing activities.............................. 5,791,692 (9,633,410) (33,747,811)
----------------- -------------------- ---------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................... (1,645,013) (14,354,818) 4,374,727
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD....................................... 6,019,740 26,243,922
----------------- -------------------- ---------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD......................... $4,374,727 $11,889,104 $4,374,727
----------------- -------------------- ---------------------
----------------- -------------------- ---------------------
SUPPLEMENTAL SCHEDULE OF NON-CASH
FINANCING AND INVESTING ACTIVITIES
Conversion of debt to common stock.............................. $ 500,000
---------------------
---------------------
Issuance of stock for patents................................... $ 27,790
---------------------
---------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
PROCYTE CORPORATION
(a development stage company)
STATEMENTS OF STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the
---------- ---------- Paid-in Development Unearned
Shares Par Value Capital Stage Compensation Total
---------- ---------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995....................... 13,131,095 $ 131,311 $ 82,350,862 (46,513,220) (84,399) $ 35,884,554
---------- ---------- ------------ ------------ ------------ -------------
Exercise of stock options:
($2.64 per share) January 5 to April 12 ....... 14,635 146 35,705 35,851
($2.53 per share) January 5 to September 6..... 8,836 88 22,267 22,355
($2.16 per share) April 1 to September 15...... 16,792 169 36,103 36,272
Hymedix Restricted Stock:
($2.59 per share) March 31...................... 25,000 250 64,500 64,750
($2.59 per share) June 30....................... 25,000 250 64,500 64,750
($2.59 per share) September 30.................. 25,000 250 64,500 64,750
Amortization of unearned compensation............ 28,630 28,630
Net loss......................................... (5,768,857) (5,768,857)
---------- ---------- ------------ ------------ ------------ -------------
Balance, September 30, 1996...................... 13,246,358 132,464 82,638,437 (52,282,077) (55,769) 30,433,055
---------- ---------- ------------ ------------ ------------ -------------
---------- ---------- ------------ ------------ ------------ -------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
PROCYTE CORPORATION
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited Financial Statements of ProCyte Corporation
("ProCyte" or the "Company") as of September 30, 1996 and December 31, 1995, and
for the three and nine-month periods ended September 30, 1996 and 1995, have
been prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Pursuant to such rules and regulations,
the Financial Statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. Accordingly, this financial information should be read in
conjunction with the complete Financial Statements, including the notes thereto
and the auditors' opinion, which are included in the Company's Annual Report,
incorporated by reference on Form 10-K, for the year ended December 31, 1995.
In the opinion of management, all material adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Interim results are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996.
2. INVESTMENTS
At September 30, 1996, the Company's investments consist entirely of U.S.
Treasury bills and notes which are classified as "available for sale." The
amortized cost and estimated market value for investments maturing in one year
or less is $11,150,724, and those maturing in one through five years is
$12,577,611. There were no gross unrealized gains or losses at September 30,
1996, and realized gains and losses from sales of investments in the three and
nine-month periods ended September 30, 1996 were $23,905 and $(137,074),
respectively.
3. EXISTING CORPORATE LICENSE AGREEMENTS
HYMEDIX INTERNATIONAL, INC.
In November 1995, ProCyte entered into a license agreement with Hymedix
International Inc. ("Hymedix") in which the Company acquired the exclusive
worldwide rights, outside of Asia, to five FDA-cleared wound care products
developed by Hymedix, as well as exclusive rights to the use of the underlying
technology in the territory for future wound care products. Additionally, the
Company acquired, on a non-exclusive basis, the rights to a sixth FDA-cleared
wound care product in the same territory. The Company shares marketing rights
to the sixth product with B. Braun Medical, Inc. The Company also acquired
exclusive worldwide rights to the drug delivery application of Hymedix's
polymer-based technology for wound healing applications.
Under the terms of the agreement with Hymedix, the Company is obligated to
pay certain upfront, milestone and royalty payments. The Company's November
1995 upfront
7
<PAGE>
payment included 200,000 shares of the Company's common stock, releasable
over a two-year period in four equal segments of 50,000 shares each, unless
Hymedix has materially breached the agreement or the Company has terminated
the agreement. The stock is subject to SEC Rule 144 restrictions and has
piggyback registration rights for a limited period of time. The Company may
terminate the agreement at any time upon sixty days' written notice.
During the three-month period ended March 31, 1996, and pursuant to the
agreement, the Company paid $150,000 to Hymedix for the 1996 research and
development program related to the licensed technology. During second quarter
1996, the Company released 50,000 shares of the Company's common stock to
Hymedix, and on July 3, 1996 paid Hymedix a milestone payment of $500,000 due
under the terms of the agreement.
KISSEI PHARMACEUTICAL CO., LTD.
In November 1993, the Company entered into a license agreement with Kissei
Pharmaceutical Co., Ltd. ("Kissei"). Under the terms of the agreement, the
Company granted to Kissei an exclusive license to make, have made, use and sell
the Company's Iamin-Registered Trademark- compound in Japan, China, Taiwan, and
Korea for topical wound healing applications, including chronic human dermal
wounds such as diabetic ulcers, venous stasis ulcers, pressure sores, surgical
wounds and burns.
Pursuant to the terms of the agreement with Kissei, the Company will
manufacture Kissei's requirements for the Iamin-Registered Trademark- compound
for Kissei's product development and for Kissei's clinical trials for the first
approved use of the Iamin-Registered Trademark- compound in Japan. In addition,
Kissei is responsible for making certain research and development, milestone and
royalty payments to the Company subject to the terms of the agreement. In
January 1996, Kissei paid the Company a $900,000 milestone payment due under the
agreement. Kissei may terminate the agreement at any time upon sixty days'
written notice.
KAKEN PHARMACEUTICAL CO., LTD.
On January 31, 1996, the Company's license agreement with Kaken
Pharmaceutical Co., Ltd. ("Kaken"), for development of the Company's peptide-
copper hair growth technology in Asia, was terminated. As a result, ProCyte
regained worldwide rights to the use of its technology for hair growth and hair
loss prevention applications. Kaken satisfied all of its research and
development funding obligation to ProCyte during the term of the agreement.
4. INVENTORIES
Inventories consist of raw materials, work in process and finished goods,
and are accounted for at the lower of cost or market.
5. STOCKHOLDERS' EQUITY
Information relating to stock options granted, exercised, canceled and
currently exercisable is as follows:
Shares subject Option price
8
<PAGE>
to option range
--------- -----
Balance, January 1, 1995 1,412,710 $.09 - $11.88
Granted 428,500 $2.94
Exercised 203,880 $.09 - $2.16
Canceled 98,812 $.86 - $11.25
---------
Balance, Sept. 30, 1995 1,538,518
Balance, January 1, 1996 1,536,957 $2.15 - $11.88
Granted 390,000 $2.78 - $4.20
Exercised 40,263 $2.16 - $2.64
Canceled 301,843 $2.53 - $11.88
---------
Balance, Sept. 30, 1996 1,584,861
Currently exercisable 696,225
-------
During the three-month period ended September 30, 1996, the Compensation
Committee of the Board of Directors approved grants of incentive stock options
to purchase an aggregate of 44,500 shares of the Company's common stock to
employees of the Company. All options are subject to vesting schedules. In
addition, the Compensation Committee approved grants of incentive and non-
qualified stock options to Mr. Jack Clifford, the newly appointed president and
chief executive officer, as part of his total compensation plan. Mr. Clifford
was granted an incentive stock option to purchase 105,633 shares of the
Company's common stock, and a non-qualified stock option to purchase 44,367
shares of the Company's common stock under the terms of the Company's 1989
Restated Stock Option Plan, and a non-qualified stock option to purchase 100,000
shares of the Company's common stock under the Company's newly adopted 1996
Stock Option Plan, which is subject to shareholder approval at the next meeting
of the shareholders.
During the three-month period ended September 30, 1996, the Compensation
Committee of the Board of Directors also approved certain amendments to the
Company's 1991 Restated Stock Option Plan for Non-Employee Directors. Pursuant
to one of these amendments, two non-employee directors each received a grant of
non-qualified stock options to purchase 6,000 shares of the Company's common
stock. The plan amendments and the grants of options to the non-employee
directors are subject to shareholder approval at the next meeting of the
Company's shareholders.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
9
<PAGE>
The Company relies primarily on equity financings and corporate
partnerships to fund its operations and capital expenditures. At September 30,
1996, the Company had cash, cash equivalents and short-term investments of
approximately $28.1 million.
The Company believes that its present capital resources and expected
revenues from its product sales, and existing license and contract manufacturing
agreements should be sufficient to fund the Company's currently planned
operations and capital needs for approximately two years. The Company's future
cash requirements, however, may vary materially from those now expected because
of a number of factors, including the cost to staff a dedicated sales force and
cash requirements for expansion of the Company's manufacturing facility for
commercialization of polymer-based wound care products.
ProCyte's mission is to become a fully integrated healthcare products and
services company through continued pursuit of its threefold strategy, which the
Company implemented in 1995 in an effort to build long-term shareholder value.
This strategy includes: (1) development of certain of the Company's proprietary
family of copper-based compounds for therapeutic or other applications; (2)
utilization of the Company's manufacturing facility to serve both the Company's
own clinical and commercial needs as well as to address the contract
manufacturing needs of selected industry clients; and (3) continued development
of prezatide copper acetate ("PCA")-containing and polymer-based wound
dressings, and, if appropriate, evaluation and acquisition through in-licensing
or cross-licensing of technologies or products which complement the Company's
wound care product focus. In addition, the Company continues to seek corporate
partners or out-licensing opportunities to develop and/or distribute certain of
its technologies or products.
During third quarter 1996, the Company had three copper-based drug
candidates in clinical development. Enrollment in the Company's Phase II study
of investigational PC1358, tradenamed Tricomin-Registered Trademark- solution,
was completed in first quarter 1996. The treatment and evaluation phase of the
study is continuing.
The Company's Phase I/II safety and initial effectiveness study of PCA in
humans, administered via retention enema, for the potential treatment of mild to
moderate ulcerative colitis, was completed during third quarter 1996. The
results of this early-stage study, which was designed to measure the effect of
the experimental therapy versus placebo in affecting remission and symptomatic
improvement, showed that the investigational compound, tradenamed Iamin-IB-
Registered Trademark- solution, provided statistically significant findings
regarding the number of patients who experienced overall symptom improvement in
the high drug dose group (1.0% PCA) versus placebo. Patients in the 1.0% PCA
group had a two-fold improvement in reduction of disease activity as compared to
the placebo group. Additionally, patients in the 1.0% PCA treatment group
experienced no worsening of symptoms as was reported for the low dose (0.1%) and
placebo groups. The rate of remission was slightly improved for the 1.0% PCA
treated group, but this rate was not statistically significant. The Company is
investigating partnership or licensing opportunities for any further development
of this application of its technology in order to focus resources on its wound
care product development.
10
<PAGE>
ProCyte initiated a Phase II study of PCA in the UK during third quarter
1996. In this clinical study, the compound will be tested against standard
compression wrap in the treatment of venous stasis ulcers. Additionally, Kissei
has placed an order for quantities of PCA bulk compound for its planned Phase II
testing in Japan, which is expected to commence in 1997.
The Company has diminished its internal efforts and resource commitment in
the area of anti-viral research with certain of its proprietary compounds due to
ProCyte's internal resource commitment to wound care product commercialization
and contract manufacturing priorities.
ProCyte's second strategic goal in 1996 is to continue to expand the
utilization of the Company's manufacturing plant by providing contract
manufacturing services to select industry clientele and to service ProCyte's own
product needs. The Company currently utilizes the plant for the manufacture of
ProCyte's own bulk compounds for clinical or commercial use, and for the
development of manufacturing processes for the Company's planned polymer-based
wound care products. In the first nine months of 1996, the Company also
performed contract manufacturing services on behalf of outside clients. The
Company expects to utilize approximately 85% of the plant's current capacity for
overall manufacturing endeavors in 1996, including manufacture of its own
products and product candidates and contract manufacturing services provided on
behalf of clients of the plant.
The third primary business strategy being pursued by the Company in 1996
builds upon the Company's pioneering research expertise in the complex field of
wound care and healing. In February 1996, the FDA granted ProCyte clearance to
market Iamin-Registered Trademark- Hydrating Gel as a 510(k)-regulated medical
dressing for the care and management of acute and chronic wounds, including
diabetic ulcers, venous stasis ulcers, pressure sores, first and second degree
burns, postoperative incisions and skin abrasions. The product was launched in
the U.S. in July 1996.
ProCyte is continuing to evaluate the polymer technology to which it
acquired worldwide rights, exclusive of Asia, for wound care product
applications. In third quarter 1996, the Company continued to conduct marketing
studies with several of its prototype products which incorporate the polymer
and/or PCA technology, and the Company is working to develop manufacturing
methods for the first of these planned products. The Company announced in July
1996, that it had filed its first 510(k) pre-market notification with the FDA
for clearance to market a ProCyte developed polymer-based dressing called
OsmoCyte-TM- Pillow Wound Dressing.
ProCyte intends to continue to explore corporate alliance relationships
with companies that are capable of pursuing alternative commercialization
strategies of the Company's skin health and hair technologies in Asia and
elsewhere, and to distribute and/or develop certain other Company compounds
and/or products.
RISK FACTORS
11
<PAGE>
The entire discussion in this report, as well as other management
discussion of the Company's goals and expectations as reported in the Company's
Annual Report on Form 10-K and its Annual Report to Shareholders for the year
ended December 31, 1995, contain forward-looking statements. Any and all
statements of goals, beliefs, intent, plans, anticipation or expectations set
forth in its SEC reports and other communications may be forward-looking
statements.
The following factors, among others, could affect the Company's actual
results with regard to such forward-looking statements, and could cause such
results to differ materially from those expressed in the Company's forward-
looking statements.
GENERAL FINANCIAL POSITION OF THE COMPANY
The Company may be required to raise additional capital through equity
offerings, strategic alliances or other sources. There can be no assurance that
such funds will be available to the Company on acceptable terms, if at all.
There can be no assurance that the Company will be successful in attracting
or retaining corporate alliances on terms favorable to the Company, whether for
the Company's hair or IBD technology or otherwise, or that the interests and
motivations of any corporate partner or licensee would be or remain consistent
with those of the Company, or that such partners or licensees would successfully
perform the technology transfer, clinical development, regulatory compliance,
manufacturing, marketing or other obligations. Suspension or termination of
agreements with the Company's current or future partners or licensees could have
a material adverse effect on the development of the Company's proposed products
and could materially adversely effect the Company's financial position.
CLINICAL AND COMMERCIAL DEVELOPMENT OF NOVEL COMPOUNDS
There can be no assurance that the Company will commence, continue or
successfully complete preclinical or clinical testing or commercial development,
including commercial-scale manufacturing and market launch of any of the product
candidates identified above, or that, if successfully developed, such product
candidates would be cleared by the FDA for sale in the United States or by
comparable regulatory authorities for sale in other countries. Approval of a
product for marketing in one country does not ensure approval for marketing in
other countries. Launch of a product does not ensure market acceptance. The
results of Phase I, Phase II or Phase III studies are not necessarily indicative
of efficacy or safety of a commercial product for human use.
12
<PAGE>
CONTRACT MANUFACTURING
Given the risks and uncertain timelines associated with pharmaceutical and
biotechnology products being developed, tested, reviewed or sold by clients of
the manufacturing facility, the Company will be required to strive to maintain
sufficient clientele to counter the effect that regulatory delays, product
failures, product recalls, and other such circumstances may have on its contract
manufacturing capabilities and revenues. Also, such factors as unexpected or
unsuccessful plant audits or regulatory inspections, the potential impact of
adverse weather conditions on plant operations, the decision of a client to
manufacture its own products or have them manufactured elsewhere, inability or
failure to manufacture a product to established product specifications, market
acceptance of clients' products, and competition, mean there can be no assurance
that the Company will be successful in its contract manufacturing endeavors.
WOUND CARE PRODUCT DEVELOPMENT AND DISTRIBUTION
Factors beyond the Company's control, such as delays in obtaining FDA
clearance to market new products, delays in product launch, the promotion and
introduction of competitive products by others with larger and more established
sales and marketing organizations and distribution networks, lack of product
acceptance by the marketplace, changes in Medicare reimbursement and the impact
this would have on product pricing, unexpected difficulties in scaling-up the
full scale commercial manufacturing processes, obtaining suitable raw materials,
and staffing the production operation, mean that there can be no assurance that
the Company will be able to commercialize any of its planned wound care products
in a cost-effective, timely manner, if at all.
COMPETITION
Competition in the Company's planned area of initial product launch, wound
care, is particularly intense, involving a number of well-established, major
pharmaceutical and healthcare companies, such as Bristol Myers Squibb, Kendall
Healthcare Company, Johnson & Johnson, and others. A significant number of
smaller companies as well are developing or marketing competitive wound care
products, some of which may have an entirely different approach than products
being developed by the Company.
Wound care is an evolving field as far as technology, regulations, and
products are concerned. The Company believes that its most substantial
competition with respect to its planned wound care product line will come from
established pharmaceutical and healthcare companies, which are significantly
larger than the Company and have substantially greater financial resources,
marketing and sales staffs, and experience in obtaining regulatory approvals, as
well as in manufacturing and marketing wound care products, and have
considerable experience, and established reputations, promoting to healthcare
providers.
Competition in the Company's other areas of interest, as well as wound
care, is based on scientific and technological advances, the availability of
patent protection, access to adequate
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<PAGE>
capital, the requirement for and ability to obtain government approval for
new products or testing, timing and scope of regulatory approvals, product
pricing, manufacturing and marketing capability. There can be no assurance
that the Company's competitors will not succeed in bringing to market
technologies and/or products that may make the proposed products being
developed by the Company obsolete or noncompetitive. Some of the Company's
competitors may achieve product commercialization earlier than the Company,
which may adversely affect market introductions and sales of the Company's
proposed products. Competition for highly qualified scientific, technical,
and managerial personnel, consultants and advisors on whose services the
Company depends is also intense.
The contract manufacturing service business also is highly competitive.
Competitors include major chemical and pharmaceutical companies, as well as
specialized biotechnology firms, smaller contract chemical manufacturers and
some universities. Many of these companies or institutions have greater
financial, technical and marketing resources than the Company.
The chemical, commodity-products and pharmaceutical industries have
undergone and are expected to continue to undergo significant technological and
strategic change, and the Company expects the competition to intensify as
technical advances or business alliances are made by others in fields of
interest to the Company. The Company believes that its success in competing
with others will depend on such things as its ability to retain scientific
expertise and capable, experienced management, and identifying and pursuing
scientifically feasible, medically relevant, and commercially viable
opportunities.
PATENTS AND PROPRIETARY RIGHTS
ProCyte's success depends in part upon its ability to protect its products
and technology under intellectual property laws in the Unites States and abroad.
As of September 30, 1996, the Company had 18 issued United States patents
expiring between 2005 and 2010, and 123 issued foreign patents and patent
registrations. The patents relate to use of the Company's copper-based
technology for a variety of healthcare applications, and to the composition of
certain biologically active, synthesized compounds. The Company's strategy has
been to apply for patent protection for certain compounds and their discovered
uses that are believed to have potential commercial value in countries which
offer significant market potential. The Company currently holds several
registered trademarks for its product candidates.
There can be no assurance as to the breadth or degree of protection that
the Company's existing trademarks or patents, or any additional trademarks or
patents that may be granted in the future, will afford the Company, or that any
additional trademarks or patents will be issued to the Company. In addition,
there can be no assurance that others will not independently develop
substantially equivalent proprietary technology that is not covered by the
Company's patents or that others will not be issued patents that may prevent the
Company's manufacture, sale or use of the Company's proposed products or require
licensing and the payment of significant fees or royalties by the Company for
the pursuit of its business. Litigation, which could result in substantial cost
to the Company, may be necessary to enforce the Company's
14
<PAGE>
patents or to determine the scope and validity of other parties' proprietary
rights. If the outcome of any such litigation were adverse, the Company's
business could be materially affected. The Company is unable to predict how
courts would resolve any future issues relating to the validity and scope of
the Company's patents or trademarks should they be challenged.
The Company also intends to rely on its unpatented proprietary know-how,
and there can be no assurance that others will not develop or acquire equivalent
proprietary information. To the extent that corporate partners or consultants
apply technological information independently developed by them or by others to
Company projects or apply Company technology or know-how to other projects,
disputes may arise as to the ownership of proprietary rights to such
information.
The Company may elect to abandon or license certain patents for specific
applications of its technologies, or in countries where it feels that the
expense of patent filing and maintenance exceeds the market opportunity. If the
Company does not correctly evaluate the potential market of any such
applications or the market opportunities in any such countries, such actions
could cause the Company to forego significant future revenue and could have a
material adverse effect on the financial condition of the Company.
OPERATING LOSSES
The Company is engaged in the research and development of human health care
products, including potential pharmaceutical agents, utilizing copper-containing
and polymer-based compounds. Such research and development has been funded from
the Company's equity-derived working capital and through corporate partnerships.
The Company has incurred operating losses since its inception due to financial
and regulatory requirements required to support research, development and
clinical studies of its proprietary technology. In particular, the Company has
supported and continues to finance development of Iamin-Registered Trademark-
gel for potential treatment of chronic dermal wounds, investigational prezatide
copper acetate ("PCA") for potential treatment of inflammatory bowel disease,
investigational PC1358 for potential treatment of hair loss conditions, and
polymer-based wound care products.
The Company expects to incur additional operating losses for a number of
years until its proposed products may be approved and successfully distributed.
At September 30, 1996, the Company's accumulated deficit was approximately
$52.3 million.
REVENUES
For the three and nine-month periods ended September 30, 1996, ProCyte
earned revenues from product sales, contract manufacturing and collaborative
agreements of $102,875 and $1,478,091, and interest income of $437,375 and
$1,222,954, respectively. This compares to collaborative agreement revenues
alone of $250,000 and $1,536,315, and interest income of $434,382 and $1,898,529
earned in the first three and nine-month periods, respectively, in 1995. The
decrease in revenues from the year ago period was primarily as a result of
contract manufacturing product release schedules, which are expected to occur in
the fourth quarter of
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<PAGE>
1996.
EXPENSES
Research and development expenses for the three and nine-month periods
ended September 30, 1996 were $1,708,184 and $4,915,171, respectively, compared
to $1,095,982 and $4,819,351 for the same periods in 1995. Expenditures during
the period conform with the Company's planned expenses, relating primarily to
the Company's clinical and wound care product development programs.
General and administrative expenses for the three and nine-month periods
ended September 30, 1996 were $1,130,885 and $3,554,731, respectively, compared
to $968,930 and $2,869,838 for the same periods in 1995. The increase was
primarily related to sales force staffing expenses and one-time legal and other
fees incurred as a result of the Company's defense and settlement of the class
action lawsuit, and the related arbitration proceedings pending against two of
the Company's insurance providers.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 5, 1996, the Company announced that a tentative settlement had
been reached in the shareholder lawsuit filed in October 1994 against the
Company and certain of its officers and directors. The Company continues to
believe that there was no wrongdoing on the part of the Company and/or any of
its officers and directors, but reached the tentative settlement agreement in an
effort to focus management's attention and corporate financial resources on the
important business of building long-term shareholder value in the Company.
The settlement, which was for $7.75 million, received court approval on
September 12, 1996. The court directed that approximately $2.7 million of the
settlement fund be paid to the plaintiffs' counsel for their fees and to
reimburse their expenses. On October 22, 1996 the Company paid the $5.25 million
balance owing the settlement fund with cash, rather than shares of the Company's
common stock. ProCyte and one of its insurance carriers had already paid $2.5
million of the settlement in June 1996. Two other carriers have declined
coverage, one with respect to $1.0 million, and the other with respect to $2.0
million. Arbitration proceedings are pending against both carriers.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION
On July 23, 1996, the Board of Directors appointed John F. "Jack" Clifford
as president and chief executive officer, in place of Joseph Ashley who remains
a consultant to the
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Company and chairman of the board.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of this report are listed in the accompanying
Exhibit Index.
(b) There were no reports on From 8-K for the quarter ended September 30,
1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PROCYTE CORPORATION
(REGISTRANT)
Date: November 8, 1996 By /s/Jack Clifford
-------------------------------------
Jack Clifford
President and Chief Executive Officer
Date: November 8, 1996 By: /s/Robert MacDonald
-------------------------------------
Robert MacDonald
Principal Accounting Officer
EXHIBIT INDEX
Exhibit Description Note
- -------------------------------------------------------------------------------
10.3 ProCyte Corporation 1991 Stock Option Plan for Non-employee Directors,
amended
10.21 ProCyte Corporation 1996 Stock Option Plan
10.22 Consulting Agreement for Mr. Ashley
27.1 Financial Data Schedule
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<PAGE>
Exhibit 10.3
PROCYTE CORPORATION
1991 RESTATED STOCK OPTION PLAN FOR NONEMPLOYEE
DIRECTORS
ARTICLE I - PURPOSE
The purpose of the ProCyte Corporation 1991 Restated Stock Option Plan for
Nonemployee Directors (the "Plan") are to attract and retain the services of
experienced and knowledgeable nonemployee directors of ProCyte Corporation (the
"Corporation") and to provide an incentive for such directors to increase their
proprietary interest in the Corporation's long-term success and progress.
ARTICLE II - SHARES SUBJECT TO THE PLAN
The total number of shares of common stock (the "Shares") of the
Corporation for which options may be granted under the Plan is 200,000,
subject to adjustment in accordance with Article IV hereof. Such Shares
shall be shares presently authorized but unissued or subsequently acquired by
the Corporation and shall include shares representing the unexercised portion
of any option granted under the Plan which expires or terminates without
being exercised in full.
ARTICLE III - ADMINISTRATION OF THE PLAN
The administrator of the Plan (the "Plan Administrator") shall consist of
a committee appointed by the Board of Directors of the Corporation (the
"Board"). Subject to the terms of the Plan, the Plan Administrator shall have
the power to construe the provisions of the Plan, to determine all questions
arising thereunder and to adopt and amend such rules and regulations for the
administration of the Plan as it may deem desirable.
ARTICLE IV - PARTICIPATION IN THE PLAN
Each Director of the Corporation elected or appointed who is not
otherwise an employee of the Corporation or any subsidiary (an "Eligible
Director") shall be eligible to receive the following option grants under the
Plan:
1. Initial Grants
<PAGE>
An option to purchase 25,000 Shares (if granted prior to September 4,
1996) or 12,000 Shares (if granted on or after September 4, 1996) (as
adjusted pursuant to Article VI hereof) (an "Initial Grant") shall be granted
to
(a) each Eligible Director immediately following the Board's approval of
the Plan, and
(b) each Eligible Director upon the earlier of such Eligible Director's
initial election or appointment.
2. ADDITIONAL AND SUPPLEMENTAL GRANTS
Once an Eligible Director's Initial Grant for 25,000 Shares
becomes fully vested, provided such vesting occurs prior to September 4,
1996, such Eligible Director shall automatically receive an additional grant
(an "Additional Grant") of an option for the acquisition of 18,000 Shares
immediately following the annual meeting of shareholders of the Corporation
as specified in the Corporation's Bylaws (an "Annual Meeting") at which an
option previously granted thereunder becomes fully vested.
Each Eligible Director in office on September 4, 1996 who will have
continuously served as an Eligible Director for at least five years as of
September 4, 1996, shall automatically receive the grant of an option to
purchase 6,000 Shares (a "Supplemental Grant") on September 4, 1996.
3. ANNUAL GRANTS
Commencing with the 1997 Annual Meeting, each Eligible Director shall
automatically receive an option to purchase 6,000 Shares immediately
following each year's Annual Meeting (each an "Annual Grant"); provided
that any Eligible Director who received an Initial Grant for 25,000
Shares, or who received an Initial Grant for 12,000 Shares within four
months of an Annual Meeting, shall not receive an Annual Grant until
immediately following the Annual Meeting at which such Initial Grant
becomes fully vested.
ARTICLE V - OPTIONS TERMS
Each option granted under the Plan and the issuance of Shares
thereunder shall be subject to the following terms:
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<PAGE>
1. OPTION AGREEMENT
Each option granted under the Plan shall be evidenced by an option
agreement (an "Agreement") duly executed on behalf of the Corporation and by
the Eligible Director to whom such option is granted. Each Agreement shall
comply with and be subject to the terms and conditions of the Plan. Any
Agreement may contain such other terms, provisions and conditions not
inconsistent with the Plan as may be determined by the Plan Administrator.
2. OPTION EXERCISE PRICE
The option exercise price for an option granted under the Plan shall be
the fair market value of the Shares covered by the option at the time the
option is granted. For purposes of the Plan, "fair market value" shall mean
the average between the high and low sale prices quoted on the day of grant
on the National Association of Securities Dealers Automated Quotation System
or the closing price on the principal exchange on which such Shares are then
traded.
3. TIME AND MANNER OF EXERCISE OF OPTION
Each Initial Grant for 25,000 Shares and each Additional Grant shall
vest and become exercisable in accordance with the following schedule and
vested portions may be exercised in full at one time or in part from time to
time:
<TABLE>
<CAPTION>
PERIOD OF OPTIONEE'S CONTINUOUS
Service as a Director With the Corporation PORTION OF GRANT
FROM THE DATE THE OPTION IS GRANTED THAT IS EXERCISABLE
----------------------------------- -------------------
<S> <C>
First Subsequent Annual Meeting After Grant 33-1/3%
Second Subsequent Annual Meeting After Grant 66-2/3%
Third Subsequent Annual Meeting After Grant 100%
</TABLE>
Provided that if such Initial Grant is made within four months of an
Annual Meeting, the Initial Grant shall not begin to vest until the second
subsequent Annual Meeting after grant and shall vest ratably upon the second,
third and fourth subsequent Annual Meetings after grant.
Subject to shareholder approval of the Plan as amended on September 4,
1996, each Initial Grant for 12,000 Shares and each Supplemental Grant and
Annual Grant shall vest and become exercisable upon the first subsequent
Annual Meeting after grant; provided that if such Initial Grant is made
within four months of an Annual
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<PAGE>
Meeting, the Initial Grant shall vest and become exercisable upon the second
Annual Meeting after grant.
If the shareholders of the Corporation fail to approve the Plan at the
next Annual Meeting, all options granted hereunder shall be deemed null and
void. Any option may be exercised by giving written notice, signed by the
person exercising the option, to the Corporation stating the number of Shares
with respect to which the option is being exercised, accompanied by payment
in full for such Shares, which payment may be in whole or in part in cash,
check or (i) shares of the Common Stock of the Corporation already owned for
at least six (6) months by the person exercising the option, valued at fair
market value at the time of such exercise, or (ii) delivery of a properly
executed exercise notice, together with irrevocable instructions to a broker,
all in accordance with the regulations of the Federal Reserve Board, to
properly deliver to the Corporation the amount of sale or loan proceeds to
pay the exercise price and any federal, state or local withholding tax
obligations that may arise in connection with the exercise.
4. TERM OF OPTIONS
Each option shall expire not more than ten (10) years from the date of
the granting thereof, but shall be subject to earlier termination as follows:
(a) In the event of the death of an optionee, the unvested portion of
the option granted to such optionee shall terminate immediately and the
vested portion of the option granted to such optionee may be exercised only
within one (1) year after the date of death of such optionee or prior to the
date on which the option expires by its terms, whichever is earlier, by the
estate of such optionee, or by any person or persons whom the optionee shall
have designated in writing on forms prescribed by and filed with the
Corporation, or if no such designation has been made by the person or persons
to whom the optionee's rights have passed, by will or the laws of descent and
distribution.
(b) In the event that an optionee has ceased to be a Director of the
Corporation, the unvested portion of the option granted to such optionee
shall terminate immediately and the vested portion of the option granted to
such optionee may be exercised by him or her only within one (1) year after
the date such optionee ceased to be a Director of the Corporation or prior to
the date on which the option expires by its terms, whichever is earlier.
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<PAGE>
5. TRANSFERABILITY
The right of any optionee to exercise an option granted to him or her
under the Plan may not be assigned, pledged or transferred by any such
optionee otherwise than (a) by will or the laws of descent and distribution,
(b) in accordance with the terms of a domestic relations order as defined in
the Internal Revenue Code of 1986, as amended, or (c) by gift or other
transfer to either (i) a spouse or other immediate family member or (ii) any
trust, partnership or other entity in which the original optionee or such
person's spouse or other immediate family member has a substantial beneficial
interest; provided that any option so assigned or transferred shall be
subject to all the same terms and conditions contained in the Plan. Any
option granted under the Plan shall be exercisable during the lifetime of the
optionee only by the optionee or a permitted transferee or assignee. Any
attempt to assign, pledge, transfer, hypothecate or otherwise dispose of any
option under this Plan or of any right or privilege conferred thereby,
contrary to the provisions of this Plan, or the sale or levy or any
attachment or any similar process upon the rights and privileges conferred
hereby, shall be null and void.
6. HOLDING PERIOD
If an individual subject to Section 16 of the Securities Exchange Act of
1934, as amended (the "Exchange Act") sells shares of Common Stock obtained
upon the exercise of any option granted under this Plan within six (6) months
after the date the option was granted, such sale may result in short swing
profit recovery under Section 16(b) of the Exchange.
7. PARTICIPANT'S OR SUCCESSOR'S RIGHTS AS SHAREHOLDER
Neither the recipient of an option under the Plan nor his or her
successor(s) in interest shall have any rights as a shareholder of the
Corporation with respect to any Shares subject to an option granted to such
person until such person becomes a holder of record of such Shares.
8. REGULATORY APPROVAL AND COMPLIANCE
The Corporation shall not be required to issue any certificate or
certificates for Shares upon the exercise of an option granted under the
Plan, or record as a holder of record of Shares the name of the individual
exercising an option under the Plan, without obtaining to the complete
satisfaction of the Plan Administrator the approval of all regulatory bodies
deemed necessary by the Plan Administrator, and without complying, to the
Plan Administrator's complete satisfaction, with all rules and
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<PAGE>
regulations under federal, state or local law deemed applicable by the Plan
Administrator.
ARTICLE VI - CAPITAL ADJUSTMENTS
The aggregate number of Shares with respect to which options may
be granted under the Plan, as provided in Article II, the additional
aggregate number of Shares with respect to which an option may be granted
under the Plan as provided in Article IV, the number of Shares subject to
each outstanding option and the price per share specified in each such option
shall all be proportionally adjusted for any increases or decreases in the
number of issued shares of the Corporation's common stock resulting from a
subdivision or consolidation of shares or any other similar capital
adjustments, the payment of a stock dividend, or other increase or decrease
in such shares effected without receipt of consideration by, or a merger or
consolidation of, the Corporation, or the sale of all or substantially all of
the assets of, or the liquidation of, the Corporation.
ARTICLE VII - EXPENSES OF THE PLAN
All costs and expenses of the adoption and administration of the Plan
shall be borne by the Corporation, and none of such expenses shall be charged
to any optionee.
ARTICLE VIII - APPROVAL OF SHAREHOLDERS
The Plan shall be effective upon adoption by the Board so long as it
receives any required approval by the holders of a majority of the
Corporation's outstanding shares of voting capital stock at the next Annual
Meeting.
ARTICLE IX
COMPLIANCE WITH RULE 16b-3
It is the intention of the Corporation that the Plan comply in all
respects with the requirements for a "formula plan" within the meaning
attributed to that term for purposes of Rule 16b-3 promulgated under Section
16(b) of the Exchange Act. Therefore, if any Plan provision is later found
not to be in compliance with such requirements, that provision shall be
deemed null and void, and in all events the Plan shall be construed in favor
of its meeting such requirements.
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<PAGE>
ARTICLE X - TERMINATION AND AMENDMENT OF THE PLAN
The Board may amend, terminate or suspend the Plan at any time, in its
sole and absolute discretion; provided, however, that if required to qualify
the Plan as a formula plan for purposes of Rule 16b-3 promulgated under
Section 16 of the Exchange Act, no amendment may be made more than once every
six months that would change the amount, price or timing of Grants any option
granted under the Plan, other than to comport with changes in the Internal
Revenue Code of 1986, as amended, or the rules and regulations promulgated
thereunder; and provided, further, that if required by any applicable law or
regulation, no amendment that would
(a) materially increase the number of Shares that may be issued under
the Plan, or
(b) otherwise require approval under any applicable law or regulation
shall be made without the approval of the Corporation's shareholders.
Adopted by the Board of Directors on September 27, 1991 and approved by
the shareholders on May 8, 1992. Plan amended and restated by the Board of
Directors on February 24, 1994 and approved by the shareholders on May 10,
1994. Plan amended and restated by the Board of Directors on September 4,
1996 and approved by the shareholders on .
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<PAGE>
Exhibit 10.21
PROCYTE CORPORATION
1996 STOCK OPTION PLAN
SECTION 1. PURPOSE
The purpose of the ProCyte Corporation 1996 Stock Option Plan (the
"Plan") is to enhance the long-term shareholder value of ProCyte Corporation,
a Washington corporation (the "Company"), by offering opportunities to
employees, directors, officers, consultants, agents, advisors and independent
contractors of the Company and its Subsidiaries (as defined in Section 2) to
participate in the Company's growth and success, and to encourage them to
remain in the service of the Company and its Subsidiaries and to acquire and
maintain stock ownership in the Company.
SECTION 2. DEFINITIONS
For purposes of the Plan, the following terms shall be defined as set forth
below:
2.1 AWARD
"Award" means an award or grant made to a Participant pursuant to the
Plan, including awards or grants of Incentive Stock Options and Nonqualified
Stock Options or any combination of the foregoing.
2.2 BOARD
"Board" means the Board of Directors of the Company.
2.3 CAUSE
"Cause" means dishonesty, fraud, misconduct, unauthorized use or disclosure
of confidential information or trade secrets, or conviction or confession of a
crime punishable by law (except minor violations), in each case as determined by
the Plan Administrator, and its determination shall be conclusive and binding.
2.4 CODE
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
2.5 COMMON STOCK
"Common Stock" means the common stock of the Company.
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<PAGE>
2.6 CORPORATE TRANSACTION
"Corporate Transaction" means any of the following events:
(a) Consummation of any merger or consolidation of the Company in
which the Company is not the continuing or surviving corporation,
or pursuant to which shares of the Common Stock are converted into cash,
securities or other property, if following such merger or consolidation the
holders of the Company's outstanding voting securities immediately prior to
such merger or consolidation own less than 66-2/3% of the outstanding
voting securities of the surviving corporation;
(b) Consummation of any sale, lease, exchange or other transfer in
one transaction or a series of related transactions of all or substantially
all of the Company's assets other than a transfer of the Company's assets
to a majority-owned subsidiary corporation (as the term "subsidiary
corporation" is defined in Section 8.3) of the Company;
(c) Approval by the holders of the Common Stock of any plan or
proposal for the liquidation or dissolution of the Company; or
(d) Acquisition by a person, within the meaning of Section 3(a)(9)
or of Section 13(d)(3) (as in effect on the date of adoption of the Plan)
of the Exchange Act of a majority or more of the Company's outstanding
voting securities (whether directly or indirectly, beneficially or of
record).
Ownership of voting securities shall take into account and shall include
ownership as determined by applying Rule 13d-3(d)(1)(i) (as in effect on the
date of adoption of the Plan) pursuant to the Exchange Act.
2.7 DISABILITY
"Disability" means "disability" as that term is defined for purposes of
Section 22(e)(3) of the Code.
2.8 EXCHANGE ACT
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
2.9 FAIR MARKET VALUE
"Fair Market Value" shall be as established in good faith by the Plan
Administrator or (a) if the Common Stock is listed on the Nasdaq National
Market, the closing selling price for the Common Stock as reported by the Nasdaq
National Market for a single trading day or (b) if the Common Stock is listed on
the New York Stock Exchange or the American Stock Exchange, the closing selling
price for the Common Stock as such price is officially quoted in the composite
tape of transactions on such exchange for a single trading day. If there is no
such reported price for
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<PAGE>
the Common Stock for the date in question, then such price on the last
preceding date for which such price exists shall be determinative of Fair
Market Value.
2.10 GOOD REASON
"Good Reason" means the occurrence of any of the following events or
conditions and the failure of the Successor Corporation to cure such event or
condition within 30 days after receipt of written notice by the Holder:
(a) a change in the Holder's status, title, position or
responsibilities (including reporting responsibilities) that, in the Holder's
reasonable judgment, represents a substantial reduction in the status, title,
position or responsibilities as in effect immediately prior thereto; the
assignment to the Holder of any duties or responsibilities that, in the Holder's
reasonable judgment, are materially inconsistent with such status, title,
position or responsibilities; or any removal of the Holder from or failure to
reappoint or reelect the Holder to any of such positions, except in connection
with the termination of the Holder's employment for Cause, for Disability or as
a result of his or her death, or by the Holder other than for Good Reason;
(b) a reduction in the Holder's annual base salary;
(c) the Successor Corporation's requiring the Holder (without the
Holder's consent) to be based at any place outside a 35-mile radius of his or
her place of employment prior to a Corporate Transaction, except for reasonably
required travel on the Successor Corporation's business that is not materially
greater than such travel requirements prior to the Corporate Transaction;
(d) the Successor Corporation's failure to (i) continue in
effect any material compensation or benefit plan (or the substantial
equivalent thereof) in which the Holder was participating at the time of a
Corporate Transaction, including, but not limited to, the Plan, or (ii)
provide the Holder with compensation and benefits substantially equivalent
(in terms of benefit levels and/or reward opportunities) to those provided
for under each material employee benefit plan, program and practice as in
effect immediately prior to the Corporate Transaction;
(e) any material breach by the Successor Corporation of its
obligations to the Holder under the Plan or any substantially equivalent plan of
the Successor Corporation; or
(f) any purported termination of the Holder's employment or service
for Cause by the Successor Corporation that does not comply with the terms of
the Plan or any substantially equivalent plan of the Successor Corporation.
2.11 GRANT DATE
"Grant Date" means the date the Plan Administrator adopted the granting
resolution or a later date designated in a resolution of the Plan Administrator
as the date an Award is to be granted.
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<PAGE>
2.12 HOLDER
"Holder" means the Participant to whom an Award is granted or, for a Holder
who has died, the personal representative of the Holder's estate, the person(s)
to whom the Holder's rights under the Award have passed by will or the
applicable laws of descent and distribution or the beneficiary designated
pursuant to Section 10.
2.13 INCENTIVE STOCK OPTION
"Incentive Stock Option" means an Option to purchase Common Stock granted
under Section 7 with the intention that it qualify as an "incentive stock
option" as that term is defined in Section 422 of the Code.
2.14 NONQUALIFIED STOCK OPTION
"Nonqualified Stock Option" means an Option to purchase Common Stock
granted under Section 7 other than an Incentive Stock Option.
2.15 OPTION
"Option" means the right to purchase Common Stock granted under Section 7.
2.16 PARTICIPANT
"Participant" means an individual who is a Holder of an Award or, as the
context may require, any employee, director, officer, consultant, agent, advisor
or independent contractor of the Company or a Subsidiary who has been designated
by the Plan Administrator as eligible to participate in the Plan.
2.17 PLAN ADMINISTRATOR
"Plan Administrator" means the Board or any committee of the Board
designated to administer the Plan under Section 3.1.
2.18 SECURITIES ACT
"Securities Act" means the Securities Act of 1933, as amended.
2.19 SUBSIDIARY
"Subsidiary," except as provided in Section 8.3 in connection with
Incentive Stock Options, means any entity that is directly or indirectly
controlled by the Company or in which the Company has a significant ownership
interest, as determined by the Plan Administrator, and any entity that may
become a direct or indirect parent of the Company.
2.20 SUCCESSOR CORPORATION
"Successor Corporation" has the meaning set forth under Section 11.2.
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<PAGE>
SECTION 3. ADMINISTRATION
3.1 PLAN ADMINISTRATOR
The Plan shall be administered by the Board or a committee or committees
(which term includes subcommittees) appointed by, and consisting of two or more
members of, the Board. If and so long as the Common Stock is registered under
Section 12(b) or 12(g) of the Exchange Act, the Board shall consider in
selecting the Plan Administrator and the membership of any committee acting as
Plan Administrator for any persons subject or likely to become subject to
Section 16 under the Exchange Act the provisions regarding (a) "outside
directors" as contemplated by Section 162(m) of the Code and (b) "nonemployee
directors" as contemplated by Rule 16b-3 under the Exchange Act. The Board may
delegate the responsibility for administering the Plan with respect to
designated classes of eligible Participants to different committees, subject to
such limitations as the Board deems appropriate. Committee members shall serve
for such term as the Board may determine, subject to removal by the Board at any
time.
3.2 ADMINISTRATION AND INTERPRETATION BY THE PLAN ADMINISTRATOR
Except for the terms and conditions explicitly set forth in the Plan, the
Plan Administrator shall have exclusive authority, in its discretion, to
determine all matters relating to Awards under the Plan, including the selection
of individuals to be granted Awards, the type of Awards, the number of shares of
Common Stock subject to an Award, all terms, conditions, restrictions and
limitations, if any, of an Award and the terms of any instrument that evidences
the Award. The Plan Administrator shall also have exclusive authority to
interpret the Plan and may from time to time adopt, and change, rules and
regulations of general application for the Plan's administration. The Plan
Administrator's interpretation of the Plan and its rules and regulations, and
all actions taken and determinations made by the Plan Administrator pursuant to
the Plan, shall be conclusive and binding on all parties involved or affected.
The Plan Administrator may delegate administrative duties to such of the
Company's officers as it so determines.
SECTION 4. STOCK SUBJECT TO THE PLAN
4.1 AUTHORIZED NUMBER OF SHARES
Subject to adjustment from time to time as provided in Section 11.1, a
maximum of 550,000 shares of Common Stock shall be available for issuance under
the Plan. Shares issued under the Plan shall be drawn from authorized and
unissued shares.
4.2 LIMITATIONS
Subject to adjustment from time to time as provided in Section 11.1, not
more than 150,000 shares of Common Stock may be made subject to Awards under the
Plan to any individual Participant in the aggregate in any one fiscal year of
the Company; except that the Company may make additional one-time grants of up
to 300,000 shares to newly hired Participants such limitation shall be applied
in a manner consistent with the requirements of, and only to the extent required
for compliance with, the exclusion from the limitation on deductibility of
compensation under Section 162(m) of the Code.
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4.3 REUSE OF SHARES
Any shares of Common Stock that have been made subject to an Award that
cease to be subject to the Award (other than by reason of exercise or payment of
the Award to the extent it is exercised for in shares), shall again be available
for issuance in connection with future grants of Awards under the Plan;
provided, however, that any such shares shall be counted in accordance with the
requirements of Section 162(m) of the Code.
SECTION 5. ELIGIBILITY
Awards may be granted under the Plan to those officers, directors and key
employees of the Company and its Subsidiaries as the Plan Administrator from
time to time selects. Awards may also be made to consultants, agents, advisors
and independent contractors who provide services to the Company and its
Subsidiaries.
SECTION 6. AWARDS
6.1 FORM AND GRANT OF AWARDS
The Plan Administrator shall have the authority, in its sole discretion, to
determine the type or types of Awards to be made under the Plan. Such Awards
may consist of Incentive Stock Options and/or Nonqualified Stock Options.
Awards may be granted singly or in combination.
6.2 ACQUIRED COMPANY AWARDS
Notwithstanding anything in the Plan to the contrary, the Plan
Administrator may grant Awards under the Plan in substitution for awards issued
under other plans, or assume under the Plan awards issued under other plans, if
the other plans are or were plans of other acquired entities ("Acquired
Entities") (or the parent of the Acquired Entity) and the new Award is
substituted, or the old award is assumed, by reason of a merger, consolidation,
acquisition of property or of stock, reorganization or liquidation (the
"Acquisition Transaction"). In the event that a written agreement pursuant to
which the Acquisition Transaction is completed is approved by the Board and said
agreement sets forth the terms and conditions of the substitution for or
assumption of outstanding awards of the Acquired Entity, said terms and
conditions shall be deemed to be the action of the Plan Administrator without
any further action by the Plan Administrator, except as may be required for
compliance with Rule 16b-3 under the Exchange Act, and the persons holding such
Awards shall be deemed to be Participants and Holders.
SECTION 7. AWARDS OF OPTIONS
7.1 GRANT OF OPTIONS
The Plan Administrator is authorized under the Plan, in its sole
discretion, to issue Options as Incentive Stock Options or as Nonqualified Stock
Options, which shall be appropriately designated.
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7.2 OPTION EXERCISE PRICE
The exercise price for shares purchased under an Option shall be as
determined by the Plan Administrator, but shall not be less than 100% of the
Fair Market Value of the Common Stock on the Grant Date with respect to
Incentive Stock Options and not less than 85% of the Fair Market Value of the
Common Stock on the Grant Date with respect to Nonqualified Stock Options.
7.3 TERM OF OPTIONS
The term of each Option shall be as established by the Plan Administrator
or, if not so established, shall be 10 years from the Grant Date.
7.4 EXERCISE OF OPTIONS
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option the time at which or the installments in which the
Option shall become exercisable, which provisions may be waived or modified by
the Plan Administrator at any time. If not so established in the instrument
evidencing the Option, the Option will become exercisable according to the
following schedule, which may be waived or modified by the Plan Administrator at
any time:
Period of Holder's Continuous Employment or
Service With the Company or Its Subsidiaries Percent of Total Option
From the Option Grant Date That Is Exercisable
-------------------------- -------------------
After 1 year 1/3
After 2 years 2/3
After 3 years 100%
Unless the Plan Administrator determines otherwise, the vesting schedule of an
Option shall be adjusted proportionately to the extent the Holder works less
than "full time" as that term is defined by the Plan Administrator.
To the extent that the right to purchase shares has accrued thereunder, an
Option may be exercised from time to time by written notice to the Company, in
accordance with procedures established by the Plan Administrator, setting forth
the number of shares with respect to which the Option is being exercised and
accompanied by payment in full as described in Section 7.5. The Plan
Administrator may determine at any time that an Option may not be exercised as
to less than 100 shares at any one time (or the lesser number of remaining
shares covered by the Option).
7.5 PAYMENT OF EXERCISE PRICE
The exercise price for shares purchased under an Option shall be paid in
full to the Company by delivery of consideration equal to the product of the
Option exercise price and the number of shares purchased. Such consideration
must be paid in cash or by check, or a combination of cash and/or check and one
or more of the following alternative forms:
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(a) tendering (either actually or, if and so long as the Common Stock is
registered under Section 12(b) or 12(g) of the Exchange Act, by attestation)
Common Stock already owned by the Holder for at least six months (or any
shorter period necessary to avoid a charge to the Company's earnings for
financial reporting purposes) having a Fair Market Value on the day prior to
the exercise date equal to the aggregate Option exercise price; (b) if and so
long as the Common Stock is registered under Section 12(b) or 12(g) of the
Exchange Act, delivery of a properly executed exercise notice, together with
irrevocable instructions, to (i) a brokerage firm designated by the Company
to deliver promptly to the Company the aggregate amount of sale or loan
proceeds to pay the Option exercise price and any withholding tax obligations
that may arise in connection with the exercise and (ii) the Company to
deliver the certificates for such purchased shares directly to such brokerage
firm, all in accordance with the regulations of the Federal Reserve Board; if
permitted by the Plan Administrator, in its sole discretion, either at the
time the Option is granted or at any time before it is exercised and subject
to such limitations as the Plan Administrator may determine, (c) a promissory
note delivered pursuant to Section 9; or (d) such other consideration as the
Plan Administrator may permit.
7.6 POST-TERMINATION EXERCISES
The Plan Administrator shall establish and set forth in each instrument
that evidences an Option whether the Option will continue to be exercisable, and
the terms and conditions of such exercise, if a Holder ceases to be employed by,
or to provide services to, the Company or its Subsidiaries, which provisions may
be waived or modified by the Plan Administrator at any time. If not so
established in the instrument evidencing the Option, the Option will be
exercisable according to the following terms and conditions, which may be waived
or modified by the Plan Administrator at any time.
In case of termination of the Holder's employment or services other than by
reason of death or Cause, the Option shall be exercisable, to the extent of the
number of shares purchasable by the Holder at the date of such termination, only
(a) within three months after the date the Holder ceases to be an employee,
director, officer, consultant, agent, advisor or independent contractor of the
Company or a Subsidiary if termination of the Holder's employment or services is
for any reason other than Disability or (b) within one year if such termination
is because of Disability, but in no event later than the remaining term of the
Option. Any Option exercisable at the time of the Holder's death may be
exercised, at any time or from time to time within one year after the date of
death, but in no event later than the remaining term of the Option, to the
extent of the number of shares purchasable by the Holder at the date of the
Holder's death, by the personal representative of the Holder's estate the
person(s) to whom the Holder's rights under the Award have passed by will or the
applicable laws of descent and distribution or the beneficiary designated
pursuant to Section 10. In case of termination of the Holder's employment or
services for Cause, the Option shall automatically terminate upon first
notification to the Holder of such termination, unless the Plan Administrator
determines otherwise. If a Holder's employment or services with the Company are
suspended pending an investigation of whether the Holder shall be terminated for
Cause, all the Holder's rights under any Option likewise shall be suspended
during the period of investigation.
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A transfer of employment or services between or among the Company and its
Subsidiaries shall not be considered a termination of employment or services.
The effect of a Company-approved leave of absence on the terms and conditions of
an option shall be determined by the Plan Administrator, in its sole discretion.
SECTION 8. INCENTIVE STOCK OPTION LIMITATIONS
To the extent required by Section 422 of the Code, Incentive Stock
Options shall be subject to the following additional terms and conditions:
8.1 DOLLAR LIMITATION
To the extent the aggregate Fair Market Value (determined as of the Grant
Date) of Common Stock with respect to which Incentive Stock Options are
exercisable for the first time during any calendar year (under the Plan and all
other stock option plans of the Company) exceeds $100,000, such portion in
excess of $100,000 shall be treated as a Nonqualified Stock Option. In the
event the Participant holds two or more such Options that become exercisable for
the first time in the same calendar year, such limitation shall be applied on
the basis of the order in which such Options are granted.
8.2 10% SHAREHOLDERS
If a Participant owns more than 10% of the total voting power of all
classes of the Company's stock, then the exercise price per share of an
Incentive Stock Option shall not be less than 110% of the Fair Market Value of
the Common Stock on the Grant Date and the Option term shall not exceed five
years. The determination of 10% ownership shall be made in accordance with
Section 422 of the Code.
8.3 ELIGIBLE EMPLOYEES
Individuals who are not employees of the Company or one of its parent
corporations or subsidiary corporations may not be granted Incentive Stock
Options. For purposes of this Section 8.3, "parent corporation" and "subsidiary
corporation" shall have the meanings attributed to those terms for purposes of
Section 422 of the Code.
8.4 TERM
The term of an Incentive Stock Option shall not exceed 10 years.
8.5 EXERCISABILITY
To qualify for Incentive Stock Option tax treatment, an Option designated
as an Incentive Stock Option must be exercised within three months after
termination of employment for reasons other than death, except that, in the case
of termination of employment due to total disability, such Option must be
exercised within one year after such termination. Employment shall not be
deemed to continue beyond the first 90 days of a leave of absence unless the
Participant's reemployment rights are guaranteed by statute or contract. For
purposes of this Section 8.5,
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"total disability" shall mean a mental or physical impairment of the
Participant which is expected to result in death or which has lasted or is
expected to last for a continuous period of 12 months or more and which
causes the Participant to be unable, in the opinion of the Company and two
independent physicians, to perform his or her duties for the Company and to
be engaged in any substantial gainful activity. Total disability shall be
deemed to have occurred on the first day after the Company and the two
independent physicians have furnished their opinion of total disability to
the Plan Administrator.
8.6 TAXATION OF INCENTIVE STOCK OPTIONS
In order to obtain certain tax benefits afforded to Incentive Stock Options
under Section 422 of the Code, the Participant must hold the shares issued upon
the exercise of an Incentive Stock Option for two years after the Grant Date of
the Incentive Stock Option and one year from the date of exercise. A
Participant may be subject to the alternative minimum tax at the time of
exercise of an Incentive Stock Option. The Plan Administrator may require a
Participant to give the Company prompt notice of any disposition of shares
acquired by the exercise of an Incentive Stock Option prior to the expiration of
such holding periods.
8.7 PROMISSORY NOTES
The amount of any promissory note delivered pursuant to Section 9 in
connection with an Incentive Stock Option shall bear interest at a rate
specified by the Plan Administrator but in no case less than the rate required
to avoid imputation of interest (taking into account any exceptions to the
imputed interest rules) for federal income tax purposes.
SECTION 9. LOANS, INSTALLMENT PAYMENTS AND LOAN GUARANTEES
To assist a Holder (including a Holder who is an officer or director of the
Company) in acquiring shares of Common Stock pursuant to an Award granted under
the Plan, the Plan Administrator, in its sole discretion, may authorize, either
at the Grant Date or at any time before the acquisition of Common Stock pursuant
to the Award, (a) the extension of a loan to the Holder by the Company, (b) the
payment by the Holder of the purchase price, if any, of the Common Stock in
installments, or (c) the guarantee by the Company of a loan obtained by the
grantee from a third party. The terms of any loans, installment payments or
loan guarantees, including the interest rate and terms of repayment, will be
subject to the Plan Administrator's discretion. Loans, installment payments and
loan guarantees may be granted with or without security. The maximum credit
available is the purchase price, if any, of the Common Stock acquired, plus the
maximum federal and state income and employment tax liability that may be
incurred in connection with the acquisition.
SECTION 10. ASSIGNABILITY
No Award granted under the Plan may be assigned, pledged or transferred
by the Holder other than by will or by the laws of descent and distribution,
and during the Holder's lifetime, such Awards may be exercised only by the
Holder. Notwithstanding the foregoing, and to the extent
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permitted by Section 422 of the Code, the Plan Administrator, in its sole
discretion, may permit such assignment, transfer and exercisability and may
permit a Holder of such Awards to designate a beneficiary who may exercise
the Award or receive compensation under the Award after the Holder's death;
provided, however, that any Award so assigned or transferred shall be subject
to all the same terms and conditions contained in the instrument evidencing
the Award.
SECTION 11. ADJUSTMENTS
11.1 ADJUSTMENT OF SHARES
In the event that, at any time or from time to time, a stock dividend,
stock split, spin-off, combination or exchange of shares, recapitalization,
merger, consolidation, distribution to shareholders other than a normal cash
dividend, or other change in the Company's corporate or capital structure
results in (a) the outstanding shares, or any securities exchanged therefor or
received in their place, being exchanged for a different number or class of
securities of the Company or of any other corporation or (b) new, different or
additional securities of the Company or of any other corporation being received
by the holders of shares of Common Stock of the Company, then the Plan
Administrator, in its sole discretion, shall make such equitable adjustments as
it shall deem appropriate in the circumstances in (i) the maximum number and
class of securities subject to the Plan as set forth in Section 4.1, (ii) the
maximum number and class of securities that may be made subject to Awards to any
individual Participant as set forth in Section 4.2, and (iii) the number and
class of securities that are subject to any outstanding Award and the per share
price of such securities, without any change in the aggregate price to be paid
therefor. The determination by the Plan Administrator as to the terms of any of
the foregoing adjustments shall be conclusive and binding.
11.2 CORPORATE TRANSACTION
Except as otherwise provided in the instrument that evidences the Award, in
the event of any Corporate Transaction, each Award that is at the time
outstanding shall automatically accelerate so that each such Award shall,
immediately prior to the specified effective date for the Corporate Transaction,
become 100% vested, except that such acceleration will not occur, if in the
opinion of the Company's accountants, it would render unavailable "pooling of
interest" accounting for a Corporate Transaction that would otherwise qualify
for such accounting treatment. Such Award shall not so accelerate, however, if
and to the extent that (a) such Award is, in connection with the Corporate
Transaction, either to be assumed by the successor corporation or parent thereof
(the "Successor Corporation") or to be replaced with a comparable award for the
purchase of shares of the capital stock of the Successor Corporation or (b) such
Award is to be replaced with a cash incentive program of the Successor
Corporation that preserves the spread existing at the time of the Corporate
Transaction and provides for subsequent payout in accordance with the same
vesting schedule applicable to such Award. The determination of Award
comparability under clause (a) above shall be made by the Plan Administrator,
and its determination shall be conclusive and binding. All such Awards shall
terminate and cease to remain outstanding immediately following the consummation
of the Corporate Transaction, except to the extent assumed by the Successor
Corporation. Any such Awards that are assumed or replaced in the Corporate
Transaction and do not otherwise
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accelerate at that time shall be accelerated in the event the Holder's
employment or services should subsequently terminate within two years
following such Corporate Transaction, unless such employment or services are
terminated by the Successor Corporation for Cause or by the Holder
voluntarily without Good Reason.
11.3 FURTHER ADJUSTMENT OF AWARDS
Subject to the preceding Section 11.2, the Plan Administrator shall have
the discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or change in control of the Company, as defined by
the Plan Administrator, to take such further action as it determines to be
necessary or advisable, and fair and equitable to Participants, (but shall not
be limited to) establishing, amending or waiving the type, terms, conditions or
duration of, or restrictions on, Awards so as to provide for earlier, later,
extended or additional time for exercise and other modifications, and the Plan
Administrator may take such actions with respect to all Participants, to certain
categories of Participants or only to individual Participants. The Plan
Administrator may take such actions before or after granting Awards to which the
action relates and before or after any public announcement with respect to such
sale, merger, consolidation, reorganization, liquidation or change in control
that is the reason for such action.
11.4 LIMITATIONS
The grant of Awards will in no way affect the Company's right to adjust,
reclassify, reorganize or otherwise change its capital or business structure or
to merge, consolidate, dissolve, liquidate or sell or transfer all or any part
of its business or assets.
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SECTION 12. WITHHOLDING
The Company may require the Holder to pay to the Company the amount of any
withholding taxes that the Company is required to withhold with respect to the
grant or exercise of any Award. In such instances, the Plan Administrator may,
in its discretion and subject to the Plan and applicable law, permit the Holder
to satisfy withholding obligations, in whole or in part, by paying cash, by
electing to have the Company withhold shares of Common Stock or by transferring
shares of Common Stock to the Company, in such amounts as are equivalent to the
Fair Market Value of the withholding obligation. The Company shall have the
right to withhold from any shares of Common Stock issuable pursuant to an Award
or from any cash amounts otherwise due or to become due from the Company to the
Participant an amount equal to such taxes. The Company may also deduct from any
Award any other amounts due from the Participant to the Company or a Subsidiary.
SECTION 13. AMENDMENT AND TERMINATION OF PLAN
13.1 AMENDMENT OF PLAN
The Plan may be amended by the shareholders of the Company. The Board may
also amend the Plan in such respects as it shall deem advisable; however, to the
extent required for compliance with Section 422 of the Code or any applicable
law or regulation, shareholder approval will be required for any amendment that
will (a) increase the aggregate number of shares as to which Options may be
granted, (b) modify the employees or class of employees eligible to receive
Incentive Stock Options, or (c) otherwise require shareholder approval under any
applicable law or regulation. Amendments made to the Plan which would
constitute "modifications" to Incentive Stock Options outstanding on the date of
such Amendments shall not be applicable to such outstanding Incentive Stock
Options but shall have prospective effect only.
13.2 TERMINATION OF PLAN
The Company's shareholders or the Board may suspend or terminate the Plan
at any time. The Plan will have no fixed expiration date; provided, however,
that no Incentive Stock Options may be granted more than 10 years after the
earlier of the Plan's adoption by the Board or approval by the shareholders.
13.3 CONSENT OF HOLDER
The amendment or termination of the Plan shall not, without the consent of
the Holder of any Award under the Plan, alter or impair any rights or
obligations under any Award theretofore granted under the Plan.
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SECTION 14. GENERAL
14.1 AWARD AGREEMENTS
Awards granted under the Plan shall be evidenced by a written agreement
which shall contain such terms, conditions, limitations and restrictions as the
Plan Administrator shall deem advisable and which are not inconsistent with the
Plan.
14.2 CONTINUED EMPLOYMENT OR SERVICES; RIGHTS IN AWARDS
None of the Plan, participation in the Plan as a Participant or any action
of the Plan Administrator taken under the Plan shall be construed as giving any
Participant or employee of the Company any right to be retained in the employ of
the Company or limit the Company's right to terminate the employment or services
of the Participant.
14.3 REGISTRATION; CERTIFICATES FOR SHARES
The Company shall be under no obligation to any Participant to register for
offering or resale or to qualify for exemption under the Securities Act, or to
register or qualify under state securities laws, any shares of Common Stock,
security or interest in a security paid or issued under, or created by, the
Plan, or to continue in effect any such registrations or qualifications if made.
The Company may issue certificates for shares with such legends and subject to
such restrictions on transfer and stop-transfer instructions as counsel for the
Company deems necessary or desirable for compliance by the Company with federal
and state securities laws.
Inability of the Company to obtain, from any regulatory body having
jurisdiction, the authority deemed by the Company's counsel to be necessary for
the lawful issuance and sale of any shares hereunder or the unavailability of an
exemption from registration for the issuance and sale of any shares hereunder
shall relieve the Company of any liability in respect of the nonissuance or sale
of such shares as to which such requisite authority shall not have been
obtained.
14.4 NO RIGHTS AS A SHAREHOLDER
No Award shall entitle the Holder to any dividend, voting or other right of
a shareholder unless and until the date of issuance under the Plan of the shares
that are the subject of such Award, free of all applicable restrictions.
14.5 COMPLIANCE WITH LAWS AND REGULATIONS
Notwithstanding anything in the Plan to the contrary, the Board, in its
sole discretion, may bifurcate the Plan so as to restrict, limit or condition
the use of any provision of the Plan to Participants who are officers or
directors subject to Section 16 of the Exchange Act without so restricting,
limiting or conditioning the Plan with respect to other Participants.
Additionally, in interpreting and applying the provisions of the Plan, any
Option granted as an Incentive Stock Option pursuant to the Plan shall, to the
extent permitted by law, be construed as an "incentive stock option" within the
meaning of Section 422 of the Code.
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14.6 NO TRUST OR FUND
The Plan is intended to constitute an "unfunded" plan. Nothing contained
herein shall require the Company to segregate any monies or other property, or
shares of Common Stock, or to create any trusts, or to make any special deposits
for any immediate or deferred amounts payable to any Participant, and no
Participant shall have any rights that are greater than those of a general
unsecured creditor of the Company.
14.7 SEVERABILITY
If any provision of the Plan or any Award is determined to be invalid,
illegal or unenforceable in any jurisdiction, or as to any person, or would
disqualify the Plan or any Award under any law deemed applicable by the Plan
Administrator, such provision shall be construed or deemed amended to conform to
applicable laws, or, if it cannot be so construed or deemed amended without, in
the Plan Administrator's determination, materially altering the intent of the
Plan or the Award, such provision shall be stricken as to such jurisdiction,
person or Award, and the remainder of the Plan and any such Award shall remain
in full force and effect.
SECTION 15. EFFECTIVE DATE
The Plan's effective date is the date on which it is adopted by the
Board, so long as it is approved by the Company's shareholders at any time
within 12 months of such adoption or, if earlier, and to the extent required
for compliance with Rule 16b-3 under the Exchange Act, at the next annual
meeting of the Company's shareholders after adoption of the Plan by the Board.
ADOPTED BY THE BOARD ON July 23, 1996 AND APPROVED BY THE COMPANY'S
SHAREHOLDERS ON , 199 .
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PLAN ADOPTION AND AMENDMENTS/ADJUSTMENTS
Date of
Adoption/
Amendment/ Date of Shareholder
Adjustment Section Effect of Amendment Approval
---------- ------- ------------------- --------
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Exhibit 10.22
CONSULTING AND SEPARATION AGREEMENT
THIS CONSULTING AND SEPARATION AGREEMENT (this "Agreement") dated as of
August 12, 1996 is entered into by and between Joseph Ashley ("Ashley") and
ProCyte Corporation ("ProCyte").
RECITALS
A. Ashley has been employed as Chief Executive Officer and President of
ProCyte and serves as Chairman of ProCyte's Board of Directors (the "Board of
Directors"). Ashley's employment relationship with ProCyte is terminated
effective August 12, 1996.
B. Ashley and ProCyte wish to have Ashley continue as a Director and
Chairman of the Board of Directors and to provide consulting services to
ProCyte, upon the terms and conditions set forth herein.
AGREEMENTS
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises contained below, it is agreed as follows:
1. EMPLOYMENT; CHAIRMAN OF THE BOARD
Effective August 12, 1996, Ashley's employment with ProCyte is terminated
and he has resigned as Chief Executive Officer and President of ProCyte. Ashley
will continue to serve as a Director and Chairman of the Board of Directors
through the next annual shareholders meeting, his nomination and election
thereafter being at the discretion of the Board of Directors and/or
shareholders, as the case may be.
2. CONSULTING SERVICES
As and when requested by ProCyte, Ashley shall provide consulting services
to ProCyte until August 11, 1999 (the "Consulting Period"); provided, however,
that the consulting services will be provided at mutually agreed upon times at
ProCyte's offices, Kirkland, Washington, or such other locations reasonably
requested by ProCyte and will not exceed an average of eight (8) hours per week
unless otherwise agreed. Ashley shall be reimbursed for all preapproved,
reasonable out-of-pocket business expenses incurred by him in providing the
consulting services upon presentation of an itemized expense voucher, in a form
prescribed by ProCyte, together with receipts or other reasonable evidence or
substantiation of these expenses.
3. CONSIDERATION
(a) CASH. In consideration of this Agreement, ProCyte shall pay
Ashley at an annual rate of $107,500 (i.e., approximately 50% of his current
gross base salary) at ProCyte's normal pay periods (currently every two weeks)
during the Consulting Period. In addition, ProCyte shall pay Ashley for a
period of up to eighteen (18) months after his termination of employment the
cost of any health insurance benefits he elects to continue under COBRA for
himself and/or his eligible dependents.
<PAGE>
(b) TAX CONSEQUENCES. Because Ashley is an independent contractor,
no withholding of taxes will be made from the amounts paid pursuant to
Section 3(a). Ashley assumes any and all tax obligations that may be imposed
now or at any future time with respect to such payments. Ashley shall indemnify
and hold harmless ProCyte and its responsible directors, officers, or managers
against any claims, assessments, liens, penalties, or judgments that may be
asserted against ProCyte or its directors, officers, or managers for liability
for unpaid taxes associated with the payments or treatment or characterization
of the payments to Ashley.
(c) STOCK OPTION. The stock option granted to Ashley on January 26,
1995 to purchase One Hundred Fifty Thousand (150,000) shares of ProCyte Common
Stock at $2.94 per share (the "Option") pursuant to ProCyte's 1989 Stock Option
Plan (the "Plan") shall continue to vest and be exercisable during the term of
Ashley's consulting services because his consulting relationship constitutes a
continuing relationship with ProCyte under the Plan, it being recognized that
the Option will become a nonqualified stock option and lose its status as an
incentive stock option. During the Consulting Period, Ashley shall not be
eligible for, and shall rescind, any stock option grants pursuant to the 1991
Stock Option Plan for Nonemployee Directors or any other stock option plan for
nonemployee directors.
(d) COMPENSATION AS DIRECTOR. During the Consulting Period, Ashley
shall not receive any compensation for his continuing service as a Director or
Chairman of the Board of Directors, other than reimbursement for his expenses.
4. BENEFITS
Except as expressly provided in this Agreement, all benefits to which
Ashley was entitled as of the date of termination of employment shall cease as
of the date of termination of employment, except Ashley's right to health
insurance benefits under COBRA, if Ashley elects, and his right, in accordance
with federal law, to leave his 401(k) contributions in ProCyte's 401(k) plan.
5. REAFFIRMATION OF PRIOR AGREEMENTS
Ashley and ProCyte expressly reaffirm and incorporate herein as part of
this Agreement the following agreements:
(a) INDEMNITY AGREEMENT. The Indemnity Agreement that Ashley signed
effective February 23, 1995, shall remain in full force and effect.
(b) PROPRIETY INFORMATION AND INVENTION AGREEMENT. The Propriety
Information and Invention Agreement that Ashley signed effective January 29,
1987 shall remain in full force and effect, it being understood and agreed that
the provisions applicable or relating to employment shall also be applicable or
relate to his consulting services during the Consulting Period.
(c) CONFIDENTIALITY AND COMPUTER SYSTEMS AGREEMENT. The
Confidentiality and Computer Systems Agreement that Ashley signed effective
January 28, 1994 shall remain in full force and effect.
-2-
<PAGE>
6. NONSOLICITATION
Ashley shall not directly or indirectly solicit or entice, or attempt to
solicit or entice, any employee, consultant, customer, research collaborator or
corporate partner of ProCyte to cease his, her, or its relationship with
ProCyte.
7. COOPERATION IN ONGOING LITIGATION
Ashley agrees to make himself available for, and to provide whatever
cooperation and assistance may be requested by ProCyte relating to, any ongoing
or future litigation in which ProCyte or any officer, director, stockholder,
manager, agent or representative of ProCyte is a party or has a direct interest
relating to matters occurring before or during Ashley's employment with ProCyte
or service on the Board of Directors, including, without limitation, IN RE
PROCYTE SECURITIES LITIGATION and any related cases; provided, however, that
Ashley will not be expected to spend time on such matters in excess of the time
he is to be consulting pursuant to Section 2 unless ProCyte has agreed to
compensate him at a reasonable consulting fee plus expenses. Ashley shall
execute all documents in connection with such matters as may be reasonably
requested of him.
8. NO DISPARAGEMENT
Ashley shall not make any disparaging or negative remarks to anyone, either
inside or outside of ProCyte, about ProCyte or ProCyte's business, business
practices, products, patents, technology, marketing strategy, services,
policies, judgments, decisions, officers, directors, or employees. ProCyte
shall not make any disparaging or negative remarks to anyone, either inside or
outside of ProCyte, about Ashley or Ashley's proposed business, business
practices, services, judgments or decisions.
9. GENERAL RELEASE OF CLAIMS
Ashley expressly waives any claims against ProCyte and releases ProCyte
(including its officers, directors, shareholders, managers, agents and
representatives) from any claims that Ashley may have in any way arising out of
or connected with Ashley's employment with ProCyte. It is understood that this
release includes, but is not limited to, any claims for wages, bonuses,
employment benefits, or damages of any kind whatsoever, arising out of any
contracts, express or implied, any covenant of good faith and fair dealing,
express or implied, any theory of wrongful discharge, any legal restriction on
ProCyte's right to terminate employees, or any federal, state or other
governmental statute or ordinance, including, without limitation, Title VII of
the Civil Rights Act of 1964, the federal Age Discrimination in Employment Act,
the Americans with Disabilities Act, the Washington Law Against Discrimination,
or any other legal limitation on the employment relationship.
Ashley represents that he has not filed any complaints, charges or lawsuits
against ProCyte with any governmental agency or any court, and agrees that he
shall not initiate, assist or encourage any such actions.
This waiver and release shall not waive or release claims where the events
in dispute first arise after execution of this Agreement, nor shall it preclude
Ashley from filing a lawsuit for the exclusive purpose of enforcing Ashley's
rights under this Agreement.
-3-
<PAGE>
10. SEVERABILITY
The provisions of this Agreement are severable, and if any part of it is
found to be unlawful or unenforceable, the other provisions of this Agreement
shall remain fully valid and enforceable to the maximum extent consistent with
applicable law.
11. KNOWING AND VOLUNTARY AGREEMENT
Ashley represents and agrees that he has read this Agreement, understands
its terms and the fact that it releases any claim he might have against ProCyte
and its agents, understands that he has the right to consult counsel of choice
and has done so, or knowingly waives the right to do so, and enters into this
Agreement without duress or coercion from any source.
12. ENTIRE AGREEMENT
This Agreement sets forth the entire understanding between Ashley and
ProCyte and supersedes and cancels the Key Executive Severance Agreement dated
as of February 23, 1995 and any other prior agreements or understandings,
express or implied, with respect to the subject matter hereof, including the
terms of Ashley's consulting services to be provided to ProCyte and the
termination of his relationship as an employee and officer. Ashley acknowledges
that in executing this Agreement, Ashley does not rely upon any representation
or statement by ProCyte or any representative of ProCyte concerning the subject
matter of this Agreement, except as expressly set forth in the text of this
Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
PROCYTE CORPORATION JOSEPH ASHLEY
By_____________________________ ____________________________
Joseph Ashley
Title: _________________________
-4-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 4,374,727
<SECURITIES> 23,728,335
<RECEIVABLES> 60,646
<ALLOWANCES> 0
<INVENTORY> 557,828
<CURRENT-ASSETS> 32,684,290
<PP&E> 8,827,341
<DEPRECIATION> (3,722,044)
<TOTAL-ASSETS> 39,266,690
<CURRENT-LIABILITIES> 8,755,598
<BONDS> 0
0
0
<COMMON> 82,770,901
<OTHER-SE> (52,337,846)<F1>
<TOTAL-LIABILITY-AND-EQUITY> 39,266,690
<SALES> 0
<TOTAL-REVENUES> 540,250
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,832,537
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,298,819)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,298,819)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,298,819)
<EPS-PRIMARY> (.17)
<EPS-DILUTED> 13,225,773
<FN>
<F1>5-02 (31) This represents deficit accumulated during development stage
and unearned compensation.
</FN>
</TABLE>
