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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997 Commission file number 0-18044
PROCYTE CORPORATION
(exact name of registrant as specified in its charter)
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Washington 91-1307460
(State of incorporation) (I.R.S. Employer Identification No.)
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8511 154th Avenue, N.E., Building A, Redmond, WA 98052-3557
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (425) 869-1239
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to the Section 12(g) of the Act: Common Stock,
par value $.01 per share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
----- -----
Indicate by check mark if disclosure of delinquency filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K /X/.
As of March 20, 1998, there were issued and outstanding 13,364,958 shares of
common stock, par value $.01 per share.
The aggregate market value of common stock held by non-affiliates as of March
20, 1998 was $16.289 million, based upon the average of the closing high and low
prices of such stock as reported by the Nasdaq National Market.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference in Parts II and
III of this Form 10-K report: (1) the Proxy Statement for the Registrant's 1998
Annual Meeting of Shareholders scheduled to be held June 10, 1998, and (2) the
Registrant's 1997 Annual Report to Shareholders.
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ProCyte Corporation
1997 Form 10-K
Table of contents
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PART I.................................................................................................3
Item 1. Business..............................................................................3
Item 2. Properties...........................................................................10
Item 3. Legal Proceedings....................................................................10
Item 4. Submission of Matters to a Vote of Security Holders..................................10
PART II...............................................................................................10
Item 5. Market for Company's Common Stock and Related Shareholder Matters....................10
Item 6. Selected Financial Data..............................................................11
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................................11
Item 7a Quantitative and Qualitative Disclosures About Market Risk...........................14
Item 8. Financial Statements and Supplementary Data..........................................14
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure...............................................................28
PART III..............................................................................................28
PART IV...............................................................................................28
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...........................28
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PART I
Item 1. Business
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
1997 Annual Report to Shareholders, contains forward-looking statements. Any and
all statements of goals, beliefs, intent, plans, anticipation or expectations
set forth in the Company's reports to the Securities and Exchange Commission
(the "SEC") and other communications may be forward-looking statements. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which reflect the Company's position only as of the date hereof. The Company
undertakes no obligation to publicly release any revisions to these
forward-looking statements to reflect events or circumstances occurring after
the date of this report. See "--Important Factors Regarding Forward-looking
Statements."
General
ProCyte Corporation ("ProCyte" or the "Company") is a Washington
corporation organized in 1986. ProCyte is a healthcare company that develops,
manufactures and markets products for wound care, skin health and hair care. The
Company's products incorporate its patented copper-peptide technology and
absorbent polymer technology.
The Company's products are targeted for use in medical market sectors
that provide healthcare solutions for tissue repair, skin health and hair care
conditions, and also for the consumer markets that address skin and hair care.
The Company's business currently focuses on three target markets: chronic wound
care; plastic and cosmetic surgery and dermatology; and skin and hair care.
ProCyte's goal is to generate profitability from the sale of products
developed from its own efforts, developed by others, and/or licensed or acquired
by the Company. To augment the commercialization of its products and technology,
the Company has entered into and plans to continue to enter into distribution
and license agreements. Consistent with this goal, the Company intends to retain
the proprietary rights to its products and technologies.
Products and Markets
In 1997, ProCyte continued its focus on the role of its copper-peptide
formulations in products that address wound repair, skin health and hair care
needs. During the year, the Company identified three primary markets for its
products.
Chronic Wound Care
The worldwide chronic wound care market is currently estimated to
exceed $2 billion in revenues. It is highly fragmented, with many competitors
and price constraints. For these reasons, ProCyte decided in 1997 to seek
partners to market its chronic wound care products.
Since inception, the Company has focused its energies on the chronic
wound care market. In 1997, ProCyte introduced a number of products that were
promoted to wound care specialists for use in the care of chronic wounds in
hospitals, nursing homes and extended care facilities.
The chronic wound care market is expansive and competitive. To compete
effectively, a company must have a well-received and cost-effective line of
products that can be promoted broadly to hospitals, nursing homes, home
healthcare and medical professionals. In 1997 ProCyte undertook to introduce its
own line of innovative products to these diverse markets. However, although the
Company believes its products were well-
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received by the health care community, the Company recognized in 1997 that the
future success of its products would require a larger marketing and sales
effort.
In December 1997, ProCyte entered into an exclusive distribution
agreement with the Bard Medical Division ("Bard") of C.R. Bard, Inc. Bard is a
newly formed division servicing the hospital, nursing home and extended care
markets. ProCyte's Iamin-Registered Trademark- Hydrating Gel, Iamin-Registered
Trademark- Wound Cleanser, and OsmoCyte-Registered Trademark- Pillow Wound
Dressings became the first Company products to be added to the Bard sales
effort, which began in January 1998.
ProCyte granted Bard the exclusive rights to distribute ProCyte's
products for the wound care markets in the United States and Canada. As partial
consideration for this grant, Bard must make certain minimum purchases
quarterly. Although ProCyte expects to develop additional products for Bard's
introduction in 1998 or 1999, there can be no assurance that the Company's
product candidates will be developed on schedule, if at all, or, if such
products are developed, that they will be commercially successful. See
"--Important Factors Regarding Forward-looking Statements."
Subsequent to the Bard agreement, ProCyte entered into exclusive
distribution agreements for the registration and distribution of certain of its
wound care products in certain foreign countries. ProCyte plans to seek similar
distribution partnerships in additional countries. The Company anticipates that
product registration in numerous countries may take well over one year, and
there can be no assurance that registration will be obtained or that the
products will be commercially successful in the various countries. See
"--Important Factors Regarding Forward-looking Statements - Government
Regulation."
A related field of use for ProCyte's chronic wound care products is the
veterinary market. At present, the Company's products for veterinary care
applications are promoted through specialty distributors.
Plastic & Cosmetic Surgery and Dermatology
ProCyte believes its products are well suited for use in the medical
specialties of plastic & cosmetic surgery and dermatology. There is an
increasing consumer and physician awareness of the ability to improve skin and
hair health with products designed specifically to meet the needs of the aging
population. During 1997, ProCyte introduced a number of new products tailored to
the needs of these markets, including the GraftCyte-TM- System, Pillo-TM- Pro
dressings and Complex Cu3-TM- Intensive Repair Creme.
The Complex Cu3-TM- Intensive Repair Creme is used to treat patients
following chemical peels, dermabrasion and laser treatments. The Company's
Pillo-TM- Pro dressings provide moisture absorption required following
liposuction. Each year in the United States alone an estimated 400,000 such
surgeries are performed.
ProCyte's GraftCyte-TM- System was introduced in 1997 to address the
special tissue repair needs of patients following hair restoration surgery. The
GraftCyte-TM- System currently consists of three differentiated products -
GraftCyte-TM- Moist Dressings for use during and after surgery; GraftCyte-TM-
Hydrating Mist to provide continuous hydration of the scalp after surgery; and
GraftCyte-TM- Post-Surgical Shampoo to provide a gentle cleansing of the scalp.
ProCyte markets its products for use in these specialized skin and hair
care practices through specialty distributors in the United States.
Skin and Hair Care
Most of ProCyte's products incorporate the Company's clinically tested
copper-peptide formulations. The biological actions of copper have been
documented in the scientific literature and include its ability to stimulate
collagen synthesis, new blood vessel growth and tissue repair. Given these
properties, the Company believes its technology has potential value in the skin
and hair care markets.
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In the fourth quarter of 1997, ProCyte entered into an exclusive
worldwide supply and marketing agreement with Osmotics Corporation
("Osmotics"), pursuant to which the Company granted Osmotics the right to
introduce the Company's copper-peptide-containing products to the prestige
skin care market. Osmotics announced, in January 1998, the first such product
- - Blue Copper-TM- - an anti-aging formulation to be sold at cosmetic counters
in such stores as Saks, Neimann Marcus and others by March 1998.
Additional Product Development and/or Acquisitions
The Company plans to continue its wound repair, skin health and hair
care product development, and expects to introduce additional products in 1998.
At year-end, the Company had three new 510(k) submissions pending with the
United States Food and Drug Administration ("FDA"). See "- Important Factors
Regarding Forward-looking Statements."
The Company also plans to continue to evaluate complementary companies,
products and technologies for acquisition and/or distribution by the Company.
Contract Manufacturing
During the period that the Company was developing its first products,
it elected to optimize the use of its manufacturing facility by offering select
services to industry clientele. During 1997, the Company continued to provide
contract manufacturing services to select clients in the biotechnology and
pharmaceutical industries, though efforts to seek new clients subsided somewhat
as the Company focused on meeting the demand for its own product manufacturing
requirements.
In February 1998, the Company learned that one of its significant
contract manufacturing clients, responsible for approximately 34% of the
Company's 1997 contract manufacturing revenue, would face an indefinite delay in
receiving FDA clearance for its product. It is uncertain whether this client
will use any of the Company's contract manufacturing services in 1998 or beyond.
ProCyte expects to continue to provide certain contract manufacturing
services in the future and to produce clinical and commercial quantities of
certain of its copper-peptide compounds for use by it and its partners. See
"--Important Factors Regarding Forward-looking Statements."
Business Relationships
Bard Medical Division, C.R. Bard Inc.
In December 1997, ProCyte entered into an exclusive distribution
agreement with the Bard Medical Division of C.R. Bard, Inc. (the "Bard
Agreement"), pursuant to which the Company granted to Bard the exclusive rights
in the United States and Canada to distribute wound care products manufactured
by ProCyte. The Bard Agreement, which has an initial term of three years,
specifies the products to be distributed by Bard in the hospital, nursing home
and home healthcare markets, and sets minimum purchases required of Bard during
the initial three-year term.
Hymedix International, Inc
Effective November 20, 1997, ProCyte entered into a Restated Agreement
with Hymedix International Inc. ("Hymedix") in which the parties agreed to
reduce the scope of ProCyte's initial license rights for Hymedix's polymer
technology (the "Restated Agreement"). The Restated Agreement required a
one-time payment of $125,000 by ProCyte to Hymedix and delivery of a quantity of
bulk material held by ProCyte, the value of which was not significant. ProCyte
retained an exclusive worldwide license, outside of Asia, to make, have made,
use and sell absorbent polymer-based products in specified forms for wound care.
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Osmotics Corporation
In the fourth quarter of 1997, ProCyte entered into a supply and
marketing agreement with Osmotics Corporation (the "Osmotics Agreement"),
pursuant to which the Company granted to Osmotics a limited, worldwide,
non-transferable right to purchase and use one of ProCyte's copper-peptide
compounds for making and selling skin care products for prestige skin care
markets. Such rights are exclusive to the prestige skin care market where the
ultimate sale of products is at retail department store cosmetic counters and
international perfumeries, but nonexclusive where the ultimate sale of
products is at prestige skin care salons and spas. ProCyte has the exclusive
right to manufacture the copper-peptide compound for sale to Osmotics and may
purchase from Osmotics products made to its specifications for sale in the
dermatology, cosmetic/plastic surgery, and related medical markets. The
Osmotics Agreement sets forth certain milestones, minimum payments and
royalties payable by Osmotics to ProCyte.
Other Distribution Agreements
In first quarter 1998, ProCyte formed distribution alliances for the
registration, promotion and distribution of ProCyte's products to the chronic
wound care markets in certain foreign countries.
ProCyte intends to seek to establish corporate alliances with others
who are capable of pursuing device registrations of the Company's copper-based
wound care products and technology in Europe, Latin America, Asia and elsewhere.
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 wound care technology or otherwise, 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
necessary technology transfer, clinical development, regulatory compliance,
manufacturing, marketing or other obligations. Suspension or termination of
agreements with the Company's current or future distributors, partners or
licensees could have a material adverse affect on the development of the
Company's proposed products and could materially adversely affect the Company's
financial position. See "--Important Factors Regarding Forward-looking
Statements - Uncertainty of Corporate Alliances."
Employees
At December 31, 1997, the Company had 28 full-time employees, of whom
three hold Ph.D. degrees. At year-end, four employees were engaged in product
development, twelve in manufacturing and quality control, four in sales and
marketing, and eight in accounting, finance and administration. The Company does
not expect to add staff in 1998 for other than normal attrition replacements.
The Company believes that its relations with its employees are good.
Important Factors Regarding 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.
Need for Additional Capital
The Company may be required to raise additional capital through equity
offerings, strategic alliances, sale of assets or other sources. There can be no
assurance that such funds will be available to the Company on acceptable terms,
if at all.
Uncertainty of Corporate Alliances
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 copper-peptide technology or otherwise, that the
interests and motivations of any corporate partner, distributor or licensee
would be or remain
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consistent with those of the Company, or that such partners, distributors or
licensees would successfully perform the necessary technology transfer, clinical
development, regulatory compliance, manufacturing, marketing or other
obligations. Suspension or termination of agreements with the Company's current
or future partners, distributors or licensees could have a material adverse
effect on the development of the Company's proposed products and could
materially adversely affect the Company's financial position.
Clinical and Commercial Development of Novel Compounds and Products
There can be no assurance that the Company will commence, continue or
successfully complete clinical testing or commercial development, including
commercial-scale manufacturing and market launch, of any of its current product
candidates, 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 clinical studies are
not necessarily indicative of efficacy or safety of a commercial product for
human use.
Given the risks and uncertain timelines associated with device,
pharmaceutical and biotechnology products being developed, tested, reviewed or
sold by the Company's contract manufacturing clients, 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.
Product Development, Manufacture and Distribution
ProCyte currently promotes certain of its products through specialty
distributors in accordance with distribution agreements, or it out-licenses
certain products and/or technology for incorporation into products sold by
others.
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, 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 products in a cost-effective, timely
manner, if at all.
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 December 31, 1997, the Company had 18 issued United States
patents expiring between 2005 and 2014, and 132 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 that
offer significant market potential.
The Company currently holds several registered trademarks for its
products and 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
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the Company's patents or that others will not be issued patents that
may prevent the Company's manufacture, sale or use of its 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
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 Company 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.
Competition
Competition in the Company's planned area of marketing, wound, skin and
hair care and related applications, is particularly intense, involving a number
of well-established, major pharmaceutical, cosmetic and healthcare companies,
such as Bristol Myers Squibb's ConvaTec division, Kendall Healthcare Company,
and Johnson and Johnson, as well as L'Oreal, Revlon and others. A significant
number of smaller companies as well are developing or marketing competitive
products, some of which may have an entirely different approach than products
being developed by the Company.
Each of the markets in which the Company's products compete is evolving
in terms of technology, regulations, product innovation, and other factors. The
Company believes that its most substantial competition with respect to its
chronic wound care product line will come from established pharmaceutical and
healthcare companies, including, but not limited to, those listed above, 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 which have considerable years of experience, and established
reputations, promoting to healthcare providers.
Competition in all of the Company's areas of interest is based on
scientific and technological advances, the availability of patent protection,
access to adequate 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 products or 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
products or 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 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.
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Government Regulation
The manufacture and marketing of ProCyte's products, whether internally
developed or in-licensed, and its research and development activities in
general, are subject to extensive regulation in the United States by the federal
government, principally by the FDA, and in other countries by similar health and
regulatory authorities. The Federal Food, Drug and Cosmetic Act and the
regulations promulgated thereunder, and other federal and state statutes govern,
among other things, the testing, manufacture, safety, labeling, storage,
recordkeeping, advertising and promotion of pharmaceutical products and medical
devices. Product development and approval or clearance within the regulatory
framework requires a number of years and involves the expenditure of substantial
resources.
In order to obtain FDA clearance to market a new drug or device in the
United States for use in humans, it is necessary to proceed through several
stages of product testing, including research and development, clinical trials,
and the filing of a product registration dossier such as a new drug application
or 510(k) application with the FDA to obtain authorization to market a product.
The Company's products and product candidates may be regulated by any of a
number of divisions of the FDA.
Before human testing of a therapeutic product candidate may commence,
the FDA, and like agencies in other countries, generally require certain
preclinical testing, such as toxicology studies in animals, to begin to
establish product safety. Results of such studies are submitted as part of the
application to the regulatory agency. Preclinical testing is not necessarily
indicative of the safety or effectiveness of a product candidate for human use.
In the United States, products that do not seek to make effectiveness
claims based on human clinical evaluation may be subject to review and
regulation under the FDA's cosmetic or 510(k) medical device guidelines. Similar
guidelines exist for such products in other countries. Such products, which
include wound care dressings, ointments and gels, must show safety and
substantial equivalency with predicate products already cleared to be marketed
by the FDA. There can be no assurance that such product pre-market notification
applications submitted to the FDA or similar agencies in other countries will
receive clearance to be marketed, or that the labeling claims sought will be
approved, or that, if cleared, such products will be commercially successful.
In addition to obtaining FDA or other countries' approval or clearance
to market a product, the prospective manufacturer's quality control and
manufacturing procedures must conform to current good manufacturing practices
("cGMPs") guidelines, or ISO 9000 standards, when appropriate. In complying with
standards set forth in these regulations, which are subject to change at any
time without notice to the Company, manufacturers must continue to expend time,
effort and financial resources in production and quality control. Manufacturing
establishments, such as ProCyte's manufacturing plant, are also subject to
regulations from and inspections by other foreign, federal, state or local
agencies, such as the Drug Enforcement Agency, the city water and waste
treatment agencies, and state and federal safety and health regulations. There
can be no assurance that the Company's manufacturing facility or its operations
for the manufacture of its own products or product candidates or the bulk
products manufactured and processes followed by the Company on behalf of its
clients will be able to meet all appropriate guidelines or to pass inspections
by any government agency. If the Company's manufacturing operations should fail
to pass an inspection, for any reason, the possible resultant outcome on the
plant's continuing operations, and the impact on the Company's overall
reputation, operations and financial condition could be severe.
The Company also is or may become subject to various other foreign, US,
state and local laws, regulations and policies relating to, among other things,
safe working conditions, good laboratory practices, animal welfare, and the use
and disposal of hazardous or potentially hazardous substances used in connection
with research, development and/or manufacturing.
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Factors Affecting Stock Price
The market prices for securities of healthcare, medical dressings,
pharmaceutical and biotechnology companies are subject to volatility, and the
market has from time to time experienced significant fluctuations that are
unrelated to the operations of the Company.
ProCyte's market price has fluctuated over a wide range since the
Company's initial public offering in 1989. Announcements concerning the Company
or its competitors, including changes in earnings, research and development
program direction, results of clinical trials, addition or deletion of corporate
partnerships, technology licenses, clearance or approval to market products,
government regulations, healthcare reform, litigation concerning business
operations or intellectual property, or public concern as to safety of products,
as well as changes in general market conditions and mergers and acquisitions,
may have a significant effect on the market price of ProCyte's common stock.
Item 2. Properties
The Company presently leases approximately 33,000 square feet of
production, laboratory and office space at its corporate and development offices
and production facility in Redmond, Washington. In July 1997, the Company
consolidated its facilities, moving from its 28,000 square foot laboratory and
corporate office space in Kirkland, Washington to the expanded Redmond site,
which houses the Company's production facility. The Company executed a ten year
lease for the Redmond location.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to the shareholders for vote during fourth
quarter 1997.
PART II
Item 5. Market for Company's Common Stock and Related Shareholder Matters
The Company's common stock is traded on the Nasdaq National Market
under the symbol "PRCY." The following table sets forth the high and low bid
prices as reported by the Nasdaq National Market for the periods indicated. Such
prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not necessarily represent actual transactions.
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High Low
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1996
First quarter 5 1/4 2 9/16
Second quarter 5 1/8 3 5/16
Third quarter 3 7/8 2 7/16
Fourth quarter 3 2
1997
First quarter 2 3/8 1 3/4
Second quarter 1 7/16 1 1/8
Third quarter 1 7/16 1 1/32
Fourth quarter 1 1/16 15/32
1998
Through March 20th 1 5/8 7/8
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At the close of business on March 20, 1998 there were 459 holders of
record of the Company's common stock. ProCyte has not paid any cash dividends on
its common stock and does not intend to pay cash dividends in the foreseeable
future.
Item 6. Selected Financial Data
The information required by this Item is incorporated by reference to
the information contained under the caption, "Financial Highlights," located in
the Registrant's 1997 Annual Report to Shareholders.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
Since its inception in 1986, the Company has been engaged in the
development of wound, skin care and hair care products that incorporate its
patented copper-peptide technology. The Company's research, development and
commercialization efforts have been principally funded from the Company's
equity-derived working capital and through collaborative agreements with other
companies. The Company's net operating losses incurred since inception are
primarily a result of the Company's independent research, development and
clinical evaluation activities, and investment in the Company's commercial-scale
production facility and product launches. Net losses for the fiscal years ended
December 31, 1997, 1996 and 1995 were $6.4 million, $9.4 million, and $12.4
million, respectively. It is anticipated that product sales will continue to
increase in 1998. However, based upon the factors described in "Business--
Important Factors Regarding Forward-looking Statements," there can be no
assurance that such results will be achieved.
Results of Operations
Product Sales
In 1997, the Company earned revenues of approximately $184,000 from
products sales, up from approximately $31,000 in 1996. The Company had no
revenue from product sales in 1995. The increase from 1996 to 1997 was due to a
growing customer base for the Company's products as well as an increased number
of available products launched in 1997.
During 1997, the Company received FDA clearance for a number of its
products that address one or more of the markets it or its distributors and
partners serve. These products include Pillo-TM- Pro dressings, GraftCyte-TM-
Moist Dressings and Complex Cu3-TM- Intensive Repair Creme.
The Company's marketing and sales efforts during 1997 focused primarily
on identifying distributors who could assist the Company with product promotion,
introducing the Company's products to healthcare professionals, and identifying
markets where such products could compete. Product sales are expected to
increase as chronic wound care product distributors, such as Bard, begin to
introduce ProCyte products through their sales and marketing programs, as
international registration and distribution commence, and as specialty
distributors and specialized physicians become more familiar with the Company's
products.
Contract manufacturing revenues, license fees
In 1997, ProCyte earned revenues of approximately $706,000 from
performing contract manufacturing services, almost unchanged from the
approximately $708,000 earned in 1996. The Company anticipates that contract
manufacturing revenues will decline in 1998 as a result of the loss of two
significant contract manufacturing clients, one of whom faces uncertain FDA
approval for its products. In late 1997, the Company increased its marketing
efforts to attract new contract manufacturing clients. The Company expects that
contract manufacturing revenues will be less than revenues from product sales in
1998.
11
<PAGE>
In accordance with the Osmotics Agreement, ProCyte is eligible for a
royalty payment on the sale of products containing the Company's copper-peptide
technology. Such royalty payments are expected to commence in 1998.
Additionally, Osmotics must purchase its requirements for bulk copper-peptide
compound from the Company. Osmotics placed its first such order in January 1998.
The Company does not currently expect that significant revenues will result from
the Osmotics Agreement in 1998.
Cost of product sales
The aggregate cost of product sales as a percentage of product sales
was approximately 244% for the year ended December 31, 1997, as compared to 45%
in 1996. The change in gross margin percentage was principally due to the effect
of creating a reserve for surplus and obsolete inventory of $380,000. If this
inventory reserve had not been created, the aggregate cost of product sales as a
percentage of product sales would have been approximately 38% for the year ended
December 31, 1997. In 1996, product revenue resulted only from the sale of the
Company's initial product, Iamin-Registered Trademark- Hydrating Gel. The
Company did not have any product sales in 1995.
Research and development expenses
During the fiscal years ended December 31, 1997, 1996 and 1995, the
Company had research and development expenses of approximately $3.77 million,
$6.74 million, and $7.24 million, respectively.
Research and development expenses decreased by approximately 44% from
1996 to 1997. The primary reasons for this decrease include: the increased focus
on development of existing, rather than new, compounds and formulations;
decreased research staff levels and staff-related expenditures; reduced license
fees paid to Hymedix; and greater reliance on outside service vendors for
certain product formulation and other services.
Research and development expenses decreased by approximately 7% from
1995 to 1996. The primary reasons for this decrease include: decreased research
and development staff levels and staff-related expenditures; and significantly
decreased expenditures for human clinical trial activities associated with the
Company's chronic wound care products.
The Company anticipates that total research and development expenses in
fiscal 1998 will continue to decrease from levels reported in fiscal 1997.
However, if, among other things, the Company's current products or product
candidates are not commercially successful, or if the development of new
products does not proceed as expected, the Company could incur greater than
expected research and development expenses as well as possible excess inventory
charges. See "Business -- Important Factors Regarding Forward-Looking
Statements."
Selling, general and administrative expenses
Selling, general and administrative expenses decreased by approximately
31% from 1996 to 1997. The primary reasons for this decrease include: reduced
staffing levels (including the elimination of the Company's eight-person sales
force in September 1997 and the associated reduction in staff-related expenses
in the fourth quarter); elimination of expenses incurred in 1995 and 1996
related to the litigation and settlement of the Company's October 1994
shareholders lawsuit (including a $400,000 insurance settlement payment received
in 1997 and treated as a reduction in expense); reduced rent expenses with the
termination of the lease on the Kirkland facility; and reductions in other
miscellaneous expenses.
Selling, general and administrative expenses increased by approximately
3% from 1995 to 1996, primarily as a result of the Company's defense and
settlement of the shareholder suit and related insurance arbitrations.
The Company anticipates that total selling, general and administrative
expenses in fiscal 1998 will continue to decrease from levels reported in fiscal
1997 due largely to the continuing cost savings from the elimination of the
Company's direct sales force and the utilization of the services of
distributors, partners and
12
<PAGE>
licensees to promote its products. However, there can be no assurance that the
Company will be successful in attracting or retaining corporate alliances on
terms favorable to the Company or that the interests and motivations of any
distributor, partner, or licensee would be or remain consistent with those of
the Company. See "Business -- Important Factors Regarding Forward-Looking
Statements."
Interest and other income
Interest income decreased by approximately 44% from 1996 to 1997 due
principally to reduced cash available for investing. Interest income decreased
from 1995 to 1996 by approximately 31%, also due principally to reduced cash
available for investing. The Company anticipates that, absent additional revenue
sources or a significant change in interest rates, fiscal 1998 interest income
will be less than that of fiscal 1997.
Liquidity and Capital Resources
Historically, the Company has relied principally on equity financings
and corporate collaborations to fund its operations and capital expenditures.
However, beginning in mid 1996 and continuing into 1997, the Company commenced
initial sales of its first chronic wound care products and has continued to
expand the commercialization of its products since that time. The Company
anticipates that net sales of its total product lines will increase during 1998,
thereby providing a contribution toward funding the Company's operations.
At December 31, 1997, the Company had net working capital of
approximately $14.5 million, a decrease of $6.1 million from December 31, 1996
due principally to the continuing use of the Company's cash to finance
operations. It is anticipated that the Company's cash and short-term investments
will continue to be used in operations until and unless product sales increase.
At December 31, 1997, the Company had cash, cash equivalents and short-term
investments of approximately $12.9 million. The Company used approximately $7.3
million in cash for operating activities in 1997, compared to approximately
$13.6 million in 1996. Investing activities provided approximately $8.5 million
in cash in 1997, compared to approximately $9.2 million in cash provided by
investing activities in 1996.
The Company believes that its existing capital resources, even in
the absence of any increase in revenues from commercial activities, should be
sufficient to fund its cash requirements for at least the next year. This
belief is based on current product development plans, anticipated working
capital requirements associated with the expanding commercialization of the
Company's new and existing products, acquisitions, the current regulatory
environment, historical industry experience in the development of medical
devices and related products and general economic conditions. It also assumes
completion of the transaction described in "--Recent Developments." However,
there can be no assurance that the Company will have sufficient resources to
fund the cost of all its planned activities, or that it will be able to
obtain any additional financial resources on acceptable terms or in time to
fund any necessary or desirable expenditures. See "Business -- Important
Factors Regarding Forward-Looking Statements."
The Company believes that additional financing may be required to meet
the planned operating needs after fiscal 1998 if significant positive cash flows
are not generated from commercial activities. Such needs would include the
expenditure of funds to continue to expand product acquisition and development
activities, and to support the increasing working capital requirements of a
growing commercial infrastructure, including manufacturing and distribution
capabilities. The Company may be required to pursue various financing
alternatives, such as commercial lines of credit, collaborative arrangements,
licenses, or additional public offerings or private placements of Company
securities. If such alternatives are not available, or are not available on
terms acceptable to the Company, the Company may be required to defer or
eliminate certain planned commercial activities, delay or eliminate expenditures
for certain of its potential products under development or license third parties
to commercialize products or technologies that the Company would otherwise seek
to develop or commercialize itself.
Capital Expenditures
Capital expenditures totaled approximately $587,000 for the year ended
December 31, 1997, compared with $1,740,000 for 1996. The Company had no capital
expenditures in 1995. Of the company's total capital
13
<PAGE>
expenditures during 1997 and 1996, approximately $499,000 and $1,250,000,
respectively, represented leasehold improvement costs associated with certain of
the Company's facilities. With the exception of the leasehold improvement costs,
virtually all of the capital expenditures during 1997 and 1996 represented
manufacturing and scientific laboratory equipment to support a research,
development, and manufacturing infrastructure.
For 1998, capital expenditures are expected to be approximately $100,000 to
support continued product manufacturing capabilities. The Company does not
anticipate any leasehold improvements expenditures on its existing facility in
1998.
Year 2000 Software Issue
The Company utilizes various computer software packages as tools in
running its operations. Management plans to implement any necessary vendor
upgrades and modifications to ensure continued functionality with respect to the
widely discussed software problems associated with the Year 2000. At present,
management does not expect that material incremental costs will be incurred in
the aggregate or in any single future year.
Recent Developments
On March 1, 1998, ProCyte signed a non-binding letter of intent to
purchase the assets of a privately owned company involved in the distribution
of skin care products. The aggregate purchase price for the company's assets
is currently expected to be $3.0 million, half of which would be payable in
cash and the other half of which would be payable in ProCyte's common stock.
The transaction is contingent upon, among other things, satisfactory
completion of due diligence and execution of a final purchase agreement.
Assuming all contingencies are satisfied, ProCyte expects the transaction to
close in the second quarter of 1998.
Item 7a Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
<TABLE>
<CAPTION>
Index to Financial Statements and Schedules Page
- ------------------------------------------- ------
<S> <C>
Balance Sheets as of December 31, 1997 and 1996........................................... 15
Statements of Operations for the years ended December 31, 1997, 1996, and 1995............ 16
Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995............ 17
Statements of Stockholders' Equity for the years ended December 31, 1997, 1996, and 1995.. 18
Notes to Financial Statements............................................................. 19
Report of Independent Accountants......................................................... 27
</TABLE>
Note: All schedules have been omitted because of the absence of conditions
under which they are required or because the required information is
included in the Financial Statements or notes thereto.
14
<PAGE>
ProCyte Corporation
Balance Sheets
<TABLE>
<CAPTION>
December 31,1997 December 31, 1996
---------------- -----------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............... $3,003,524 $1,804,875
Securities available for sale .......... 9,863,093 19,041,961
Inventories, net of reserve............. 1,927,325 596,740
Other................................... 363,134 318,580
---------------- -----------------
Total current assets.................... 15,157,076 21,762,156
Property and Equipment, at cost
Equipment.............................. 2,484,535 3,604,764
Leasehold improvements................. 5,513,850 5,097,833
Improvements in progress............... 0 1,463,940
Less accumulated depreciation and
amortization......................... (2,394,562) (4,306,094)
---------------- -----------------
Property and equipment, net............ 5,603,823 5,860,443
Patents, at cost........................... 290,930 290,930
Less accumulated amortization.......... (125,269) (109,270)
---------------- -----------------
Patents, net........................... 165,661 181,660
Other...................................... 384,399 159,399
---------------- -----------------
Total Assets............................... $21,310,959 $27,963,658
---------------- -----------------
---------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable....................... $203,764 $334,843
Accrued liabilities.................... 470,643 779,890
---------------- -----------------
Total current liabilities.............. 674,407 1,114,733
Deferred Lease Payments.................... 20,055 10,148
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 13,364,958.... 133,650 132,776
Additional paid-in capital............. 82,801,830 82,576,340
Accumulated deficit.................... (62,318,983) (55,870,339)
---------------- -----------------
Total stockholders' equity............. 20,616,497 26,838,777
---------------- -----------------
Total Liabilities and Stockholders' Equity. $21,310,959 $27,963,658
---------------- -----------------
---------------- -----------------
</TABLE>
See notes to financial statements
15
<PAGE>
ProCyte Corporation
Statements of Operations
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
---------------------------------------------------------
1997 1996 1995
------------------- ------------------- -----------------
<S> <C> <C> <C>
Revenues
Product sales.................................... $184,034 $30,563 $0
Contract manufacturing........................... 705,706 708,104 151,836
License fees..................................... 0 900,000 0
R&D revenue under collaborative agreements....... 0 0 1,536,316
------------------- ------------------- -----------------
Total revenue.................................... 889,740 1,638,667 1,688,152
Operating Expenses
Cost of product sales............................ 449,261 13,910 0
Research & development........................... 3,774,415 6,738,911 7,235,298
General & administrative......................... 4,481,744 4,880,255 4,729,693
Litigation settlement............................ (400,000) 1,000,000 4,750,000
------------------- ------------------- -----------------
Total costs and expenses......................... 8,305,420 12,633,076 16,714,991
Operating Loss...................................... (7,415,680) (10,994,409) (15,026,839)
Other Income
Interest income.................................. 907,628 1,622,944 2,631,904
Other income..................................... 59,408 14,346 0
------------------- ------------------- -----------------
Total other income............................... 967,036 1,637,290 2,631,904
Net loss............................................ $(6,448,644) $(9,357,119) $(12,394,935)
Net loss per common share........................... $(0.48) $(0.71) $(0.95)
Weighted average number of common shares used in
computing net loss per common share............... 13,326,929 13,210,036 13,100,818
</TABLE>
See notes to financial statements
16
<PAGE>
ProCyte Corporation
Statements of Cash Flows
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
---------------------------------------------------
OPERATING ACTIVITIES 1997 1996 1995
---------------- ----------------- ----------------
<S> <C> <C> <C>
Net Loss ($6,448,644) ($9,357,119) ($12,394,935)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 730,330 1,061,294 781,445
Patent expense......................................... 15,999 16,000 213,358
(Gain) loss on sale of securities available for sale... (765) 50,036 (324,534)
Gain on sale of property & equipment................... (58,643) 0 0
Stock grants and restricted stock grants............... 226,366 259,000 32,634
Compensation expense on stock options.................. 0 (58,101) 69,657
Changes in assets and liabilities:
Increase in inventories.............................. (1,330,585) (596,740) 0
(Increase) decrease in other current assets.......... (44,554) 158,536 (16,892)
(Increase) decrease in insurance receivable.......... 0 3,000,000 (3,000,000)
Increase (decrease) in accounts payable.............. (131,079) (343,855) 385,232
Increase (decrease) in accrued liabilities........... (309,247) 92,438 (406,502)
Increase (decrease) in litigation settlement payable. 0 (7,750,000) 7,750,000
Decrease in deferred income.......................... 0 0 (340,344)
Increase (decrease) in deferred lease payments....... 9,907 (59,024) (13,831)
Decrease in deferred sales tax....................... 0 (23,682) (28,862)
---------------- ----------------- ----------------
Net cash used in operating activities.................. (7,340,915) (13,551,217) (7,293,574)
---------------- ----------------- ----------------
FINANCING ACTIVITIES
Proceeds from issuance of stock - net.................. 0 110,444 27,423
---------------- ----------------- ----------------
Net cash provided by financing activities.............. 0 110,444 27,423
---------------- ----------------- ----------------
INVESTING ACTIVITIES
Purchase of property and equipment..................... (586,740) (1,739,875) 0
Sale of property and equipment......................... 171,671 0 0
Purchase of securities available-for-sale.............. (45,652,513) (171,186,634) (142,491,420)
Proceeds from sale or maturity of securities
available for sale.................................. 54,832,146 182,152,417 129,528,389
Patents reimbursements................................ 0 0 5,000
Increase in other assets.............................. (225,000) 0 0
---------------- ----------------- ----------------
Net cash provided by (used in) investing activities... 8,539,564 9,225,908 (12,958,031)
---------------- ----------------- ----------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,198,649 (4,214,865) (20,224,182)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 1,804,875 6,019,740 26,243,922
---------------- ----------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $3,003,524 $1,804,875 $6,019,740
---------------- ----------------- ----------------
---------------- ----------------- ----------------
</TABLE>
See notes to financial statements
17
<PAGE>
ProCyte Corporation
Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-in Accumulated Unearned
Shares Par Value Capital Deficit Compensation Total
------------ ----------- -------------- ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995.................... 12,920,296 $129,203 $82,292,913 $(34,118,285) $(154,056) $48,149,775
Exercise of stock options................... 198,199 1,982 25,441 27,423
Hymedix restricted stock released........... 12,600 126 32,508 32,634
Amortization of unearned compensation....... 69,657 69,657
Net loss.................................... (12,394,935) (12,394,935)
------------ ----------- -------------- ------------- -------------- ------------
Balance, December 31, 1995 13,131,095 131,311 82,350,862 (46,513,220) (84,399) 35,884,554
------------ ----------- -------------- ------------- -------------- ------------
Exercise of stock options................... 46,463 465 109,978 110,443
Hymedix restricted stock released........... 100,000 1,000 258,000 259,000
Cancel compensatory stock option grants..... (142,500) (142,500)
Amortization of unearned compensation....... 84,399 84,399
Net loss.................................... (9,357,119) (9,357,119)
------------ ----------- -------------- ------------- -------------- ------------
Balance, December 31, 1996.................. 13,277,558 132,776 82,576,340 (55,870,339) 0 26,838,777
------------ ----------- -------------- ------------- -------------- ------------
Hymedix restricted stock released........... 87,400 874 225,490 226,364
Net loss.................................... (6,448,644) (6,448,644)
------------ ----------- -------------- ------------- -------------- ------------
Balance, December 31, 1997.................. 13,364,958 $133,650 $82,801,830 ($62,318,983) $0 $20,616,497
------------ ----------- -------------- ------------- -------------- ------------
------------ ----------- -------------- ------------- -------------- ------------
</TABLE>
See notes to financial statements
18
<PAGE>
ProCyte Corporation
Notes to Financial Statements
Note 1. Description of Business and Summary of Significant Accounting Policies
Nature of Operations
ProCyte Corporation ("ProCyte" or the "Company") is a healthcare
products company engaged in the discovery, development and commercialization of
a new class of wound care products incorporating the Company's proprietary
copper- peptide technology and other wound care technologies.
ProCyte commenced operations on September 22, 1986 (inception). Since
that time, the Company's research and development programs have focused
principally on wound healing and tissue repair applications with its topically
administered copper-peptide compounds. In November 1995, the Company acquired
certain rights to a polymer technology for use in wound care applications.
The Company launched its first commercial product, Iamin-Registered
Trademark- Hydrating Gel, in June 1996. Additional wound care product lines were
launched throughout 1997, including OsmoCyte-Registered Trademark- Pillow Wound
Dressings (which incorporate the Company's licensed polymer technology);
Iamin-Registered Trademark- Wound Cleanser; a line of transparent film
dressings; and several products under the GraftCyte-TM- brand name for
application following hair restoration surgery. The Company also concurrently
markets several of its products to the veterinary market under the
Iamin-Registered Trademark- Vet and OsmoCyte-Registered Trademark- brand names.
Additional product launches are expected in 1998.
In December 1997, the Company signed an exclusive distribution
agreement with the Bard Medical Division ("Bard") of C.R. Bard, Inc. Bard will
be the exclusive supplier of the Company's wound care products into the
hospital, nursing home, and extended care markets in the United States and
Canada. The Company retains the rights to distribute its wound care products
independently or with other partners to different market segments, including the
cosmetic surgery market, the hair restoration market, the dermatology market,
the retail cosmetic market, the veterinary market, and the international market
outside of the United States and Canada.
Most of the Company's products are sold as medical devices requiring
FDA regulatory clearance. None of the Company's products have clearance to be
sold as prescription drugs in the United States or elsewhere.
The Company maintains a manufacturing plant at its Redmond, Washington
facility. The manufacturing facility includes a small-scale chemical plant that
produces the Company's copper-peptide compounds. It also includes a processing
facility for the Company's polymer-based OsmoCyte-Registered Trademark-
products. Additional product manufacturing services are out-sourced to
independent suppliers. The Company also provides contract manufacturing services
to companies in the pharmaceutical, biotechnology, and related industries in
order to more fully utilize its existing facility's capacity.
The Company has a total investment of approximately $6.1 million ($5.2
million net book value) in its manufacturing facility, including capital
equipment and leasehold improvement construction costs. At this time, management
believes that the cost of the facility will be recovered from the processing of
current and anticipated bulk substance requirements for product sales, and from
performing contract manufacturing services.
To date, the Company's revenues have principally been from interest
income, research fees, license fees, and fees for performance of contract
manufacturing services. For the year ended December 31, 1997, revenues generated
from product sales totaled approximately $184,000. From inception through
December 31, 1997, the Company incurred expenses for, among other things,
research, development, administration, and settlement of litigation that
resulted in an accumulated deficit of approximately $62.3 million. Further
expenditures will be required for development, regulatory submissions, marketing
and manufacturing for the Company's existing products and product candidates.
There can be no assurance that the Company will be able to generate sufficient
product sales to achieve a profitable level of operation.
19
<PAGE>
As of December 31, 1997, the Company had cash, cash equivalents and
securities available for sale of $12.9 million which management believes will be
sufficient to fund its planned operating losses and other cash requirements for
at least the next year.
The Company was in development stage at December 31, 1996. During 1997,
the Company substantially completed its initial product development activities
and commenced its planned principal operations. Accordingly, the Company's
Statements of Operations, Statements of Cash Flows, and Statements of
Stockholders' Equity no longer show inception-to-date information.
Summary of Significant Accounting Policies
Revenue recognition
Product revenues are recognized when products are shipped, and contract
manufacturing revenues are recognized when services are performed. Development
revenues under collaborative agreements and nonrefundable license fees are
recognized when earned for the performance of research activities under contract
terms.
During 1997 and 1996, one customer accounted for approximately 34% and
10%, respectively, of contract manufacturing revenue. In February 1998, the
Company learned that this customer would face an indefinite delay in receiving
FDA clearance for its products. It is uncertain whether this client will provide
significant revenues to the Company in 1998 and beyond.
Research and development
Research and development costs are expensed as incurred. The Company
enters into contracts with outside laboratories for certain clinical,
biocompatibility, and toxicology studies. Payment for such contracts are
typically made in installments at the initiation, completion and other specified
stages of the studies. The Company recognizes the expenses associated with these
contracts when the related services are performed.
Inventories
Inventories are stated at the lower of cost, as determined by the first
in, first out method, or market, and consist of materials, work-in-process, and
finished goods as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- ----------------
<S> <C> <C>
Raw materials........................... $371,313 $ 99,698
Work in process......................... 1,440,215 316,848
Finished goods.......................... 495,797 180,194
Reserve for surplus/obsolete inventory.. (380,000) --
--------------- ----------------
Total................................... $1,927,325 $596,740
--------------- ----------------
--------------- ----------------
</TABLE>
During the fourth quarter of 1997, the Company established a reserve
for surplus and obsolete inventory of $380,000, based upon review of quantities
and forecasted needs of individual items included within raw materials,
work-in-process and finished goods.
20
<PAGE>
Depreciation and amortization
Equipment is depreciated using accelerated methods over the estimated
useful lives of the related assets, ranging from 5 to 20 years. Leasehold
improvements are amortized over the term of the facility lease (See Note 5).
Long-lived assets
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed of, the Company periodically reviews long-lived assets,
including intangible assets, for impairment to determine whether events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable and that adjustments might accordingly be necessary. No loss
provisions have been required to date.
Patents and amortization
Patent application costs are amortized on a straight-line basis over 17
years from the date the related U.S. patents are issued. Application costs for
abandoned patents are expensed in the period abandoned.
Beginning in fourth quarter 1992, the Company changed its accounting
policy to capitalize only those recoverable patent costs that relate to
indications for which licensing agreements have been in place. As a result, in
the fourth quarters of 1992 and 1995, the Company recorded non-cash write-downs
of $378,615 and $200,760, respectively, for previously capitalized patent costs
that do not meet the above criteria. No additional patents were capitalized in
1997.
Net loss per common share
In 1997 the Company adopted SFAS No. 128, Earnings per Share. Adoption
of this standard had no significant effect on previously reported loss per share
for 1995, 1996 and 1997.
Net loss per common share is based upon the weighted average number of
common shares outstanding. Common stock equivalents include shares issuable upon
the exercise of stock options and assignment of shares granted to Hymedix
International, Inc. (see Note 3). However, only the vested portion of the shares
granted is considered in the computation of the net loss per common share as the
remaining shares would have an anti-dilutive effect.
Federal income taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. The Company has provided a full valuation allowance
for tax benefits of net operating losses and research and development tax credit
carry forwards.
Cash equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Such investments are
primarily in a United States Treasury money market fund.
Securities available for sale
The Company's investments, consisting of U.S. Treasury notes and bills
and investment-grade commercial paper, are all classified as "available for
sale" and are stated at fair value, with valuation adjustments recorded directly
to equity, if significant. Fair value is based upon quoted market prices and
approximates cost as of December 31, 1997 and 1996. For purposes of computing
realized gains and losses, the specific identification method is used to
determine the cost of investments sold.
21
<PAGE>
Stock options
In 1996, the Company implemented SFAS No. 123, Accounting for
Stock-Based Compensation. The statement defines a fair value method of
accounting for an employee stock option or similar equity instrument and
encourages, but does not require, adoption of that method. Under SFAS No. 123
certain disclosures about stock-based compensation arrangements are made
regardless of the method used to account for them. As permitted by SFAS No. 123,
the Company continues to follow the existing accounting requirements for stock
options and stock-based awards contained in APB Opinion No. 25, Accounting for
Stock Issued to Employees.
Use of estimates in financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. At December 31, 1997, the most
significant such estimate relates to the allowance for surplus and obsolete
inventory. It is reasonably possible that actual losses may differ from the
estimate.
Note 2. Investments
At December 31, 1997 and 1996, the Company's investments consisted
primarily of U.S. Treasury notes and bills and investment-grade commercial
paper. All investments are classified as "available for sale." At December 31,
1997, the amortized cost and estimated market value for investments maturing in
one year or less was $6,884,238 and those maturing in one through five years was
$2,978,855. Unrealized gains or losses at December 31, 1997, 1996 and 1995 were
insignificant. Realized gains (losses) from sales of investments during 1997,
1996 and 1995 were $765, ($50,036) and $324,534, respectively.
Note 3. Collaborative Agreements
The Company earned revenue under collaborative agreements as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------
1997 1996 1995
------------- ---------------- ----------------
<S> <C> <C> <C>
R&D Funding:
Kaken Pharmaceutical..... $0 $0 $690,345
Kissei Pharmaceutical.... 0 0 750,000
Cost Reimbursement:
Kaken Pharmaceutical..... 0 0 3,027
Kissei Pharmaceutical.... 0 0 92,944
License Fees................ 0 900,000 0
------------- ---------------- ----------------
Total....................... $0 $900,000 $1,536,316
------------- ---------------- ----------------
------------- ---------------- ----------------
</TABLE>
22
<PAGE>
Hymedix International, Inc.
In November 1995, the Company entered into a license agreement with
Hymedix International, Inc. ("Hymedix"). Under the agreement, the Company
acquired from Hymedix an exclusive license to make, have made, use and sell
products for the wound care field using Hymedix's HYPAN polymer technology. The
agreement gave the Company exclusive worldwide rights, outside Asia, to five
wound care products that have received market clearance from the United States
Food and Drug Administration.
In November 1997, the Company renegotiated the license agreement with
Hymedix. The Company retained a full license to certain of the Hymedix patents
and technology in exchange for a one-time payment of $125,000, and the delivery
of certain polymer raw materials to Hymedix, the value of which was not
considered significant. The Company was relieved of its obligation to make
future milestone payments totaling $2,000,000, as well as royalty payments from
product sales. As a result, the Company made a fourth quarter adjustment of
$375,000 to reverse a previously accrued liability for such obligations. As part
of the renegotiated agreement, the Company relinquished the rights to certain
products that it had no plans to market. (Also see Note 7.)
Kissei Pharmaceutical Co., Ltd.
In November 1993, the Company entered into a strategic alliance with
Kissei Pharmaceutical Co., Ltd. ("Kissei"). Under the terms of the agreement,
the Company granted Kissei an exclusive license to make, have made, use and sell
the Company's Iamin-Registered Trademark- compound in Japan, China, Korea and
Taiwan for topical wound healing applications, including chronic human dermal
wounds such as diabetic, venous stasis or pressure ulcers, surgical wounds and
burns.
On March 7, 1997, the Company received notice from Kissei that it was
terminating the agreement. The Company regained the exclusive license rights for
its copper-peptide products in Japan, China, Korea and Taiwan for topical wound
healing applications. All previous funding obligations were satisfied and no
payments were required as a result of the termination.
Kaken Pharmaceutical Co., Ltd.
In December 1992, the Company entered into an agreement with Kaken
Pharmaceutical Co., Ltd. ("Kaken") for developing and marketing hair growth
products in Asia based on the Company's technology. The agreement gave Kaken
exclusive license rights for copper-peptide hair growth and hair loss prevention
products in Asian countries.
On January 31, 1996, the Company's license agreement with Kaken was
terminated. The Company regained the exclusive license rights for its copper-
peptide hair growth and hair loss prevention products in Asian countries. In
1995, Kaken satisfied all of its research and development funding and cost
reimbursement obligations under the agreement, and no payments were required as
a result of this termination.
Note 4. Federal Income Taxes
The following is a summary of the components of deferred taxes (in
millions) at December 31, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
1997 1996
---------- ---------
<S> <C> <C>
Deferred Tax Asset.... $ 22.6 $ 18.4
Valuation Allowance... (22.6) (18.4)
---------- ---------
Total $ 0.0 $ 0.0
---------- ---------
---------- ---------
</TABLE>
23
<PAGE>
At December 31, 1997, the Company's deferred tax asset relates to net
operating losses and research and development tax credit carry forwards of
approximately $60.2 million and $1.5 million, respectively, which are scheduled
to expire from 2000 to 2010. As a result of issuing common stock subsequent to
inception, the Company's ability to use these net operating losses and tax
credit carry forwards in the future will be subject to limitations under
Internal Revenue Code Section 382. A full valuation allowance has been recorded
since realization of this deferred tax asset is not reasonably assured.
Note 5. Lease Commitments
The Company presently leases approximately 33,000 square feet of
manufacturing, warehouse, laboratory, and administrative space in Redmond,
Washington under a lease executed in August 1993, as amended in January 1994 and
again in March 1997. Prior to the second amendment to the lease in March 1997,
the Company leased approximately 16,000 square feet of manufacturing space at
the facility. The amended lease provided an additional 17,000 square feet, which
allowed the Company to consolidate all of its manufacturing, research, and
administrative functions into one location in July 1997. As amended, the lease
term extends 120 months from July 1, 1997 through June 30, 2007, and contains a
renewal option for the Company to extend the original term by an additional five
years.
On June 30, 1997, the Company terminated a lease for approximately
28,000 square feet of laboratory and administrative space in Kirkland,
Washington. No early termination fee was incurred by the Company as a result of
the Kirkland lease termination.
Future minimum annual lease payments on the total leased space of
approximately 33,000 square feet are as follows:
<TABLE>
<S> <C>
1998.............. $ 299,034
1999.............. 387,378
2000.............. 401,053
2001.............. 419,232
2002.............. 406,584
----------
----------
Thereafter........ 1,843,608
----------
Total............. $3,756,889
----------
----------
</TABLE>
Rent expense in 1997, 1996 and 1995 was $550,333, $519,629, and
$536,212, respectively.
Note 6. Legal Proceedings
In May 1997, the Company received a negotiated final settlement payment
of $400,000 from one of its insurance carriers resulting from the 1996
settlement of the shareholder lawsuit filed against the Company and certain of
its officers and directors in October 1994. In 1995, the Company accrued the
then tentative liability to stockholders of $4.75 million, net of a related
insurance claim receivable of $3.0 million, related to settlement of the suit.
At December 31, 1996, the Company had provided a full valuation allowance for
the remaining $1.0 million insurance claim receivable from an insurance carrier
that had denied coverage. The $400,000 payment in 1997 was in settlement of this
claim. The provision for litigation settlement and related insurance claims and
settlements are reported as "litigation settlement" in the Statement of
Operations.
24
<PAGE>
Note 7. Stockholders' Equity
Common stock
On November 15, 1995, the Company issued 200,000 shares of its common
stock to Hymedix International, Inc. pursuant to a stock purchase agreement.
These shares were subject to forfeiture under certain conditions and were held
in escrow by the Company and released to Hymedix over a two-year period in four
equal installments of 50,000 shares each. The stock is subject to SEC Rule 144
restrictions and has piggyback registration rights for a limited period of time.
The Company released 100,000 of these shares to Hymedix in 1996 with the final
two installments of 50,000 shares each released to Hymedix in May 1997 and
November 1997. Other than these shares released to Hymedix, no shares of common
stock were issued or released during 1997.
Stock options
The Company has stock option plans for directors, officers, employees
and consultants that provide for grants of nonqualified and incentive stock
options. Options generally are granted at fair market value, expire between five
and ten years from grant date and vest ratably over three to five years.
The following table summarizes information about stock option activity
in 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- -------------------------- --------------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Exer. Price Shares Exer. Price Shares Exer. Price
----------- ------------- ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.... 1,442,193 $3.50 1,536,957 $4.44 1,412,710 $4.63
Granted........................... 415,500 $1.57 402,000 $2.94 479,500 $2.90
Exercised......................... - - (46,463) $2.38 (203,880) $0.22
Canceled or expired............... (553,319) $3.46 (450,301) $6.34 (151,373) $7.20
Outstanding, end of year.......... 1,304,374 $2.94 1,442,193 $3.50 1,536,957 $4.44
Exercisable, end of year.......... 675,044 742,383 705,788
</TABLE>
As required by SFAS 123, the Company has determined the fair value of
stock options granted during 1997, 1996 and 1995 using the Black-Scholes option
pricing model and the following assumptions:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ------------- --------------
<S> <C> <C> <C>
Risk-free interest rate............... 4.99% 5.88% 5.75%
Expected option life (years).......... 5.81 5.81 5.81
Dividend yield........................ 0.00 0.00 0.00
Expected volatility................... 117% 79% 47%
</TABLE>
The weighted average fair value of options granted during 1997 and 1996
was approximately $1.35 and $2.04, respectively. The effect on net loss had the
Company elected to adopt the measurement provisions of SFAS 123 would have been
an increase in the net loss for the periods ending December 31, 1997, 1996 and
1995, respectively, by $596,401 to $7,045,045, by $552,913 to $9,910,032, and by
$318,632 to $12,713,567.
25
<PAGE>
On a proforma basis, net loss per share would have increased by $0.05 to $0.53,
by $0.04 to $0.75, and by $0.02 to $0.97, respectively.
Note 8. Benefit Plans
On April 1, 1991, the Company adopted the 1991 ProCyte Corporation
Profit Sharing and Salary Deferral 401(k) Plan (the "401(k) Plan"). The 401(k)
Plan is funded by voluntary employee pretax salary deferrals, to the extent
permitted under law, and provides for employer matching contributions, at the
discretion of the Board of Directors. No employer contribution has been made
since adoption of the 401(k) Plan.
Note 9. Subsequent Event
On March 1, 1998, the Company signed a non-binding letter of intent
to purchase the assets of a privately owned company involved in the
distribution of skin health products. The transaction is contingent upon
satisfactory completion of due diligence and execution of a final purchase
agreement. The tentative purchase price is $3.0 million in equal amounts of
cash and stock. Upon, among other things, satisfactory completion of due
diligence, execution of a final purchase agreement, and satisfaction of all
other closing contingencies, management expects the transaction to close in
the second quarter of 1998.
26
<PAGE>
ProCyte Corporation
Independent Auditors' Report
Board of Directors
ProCyte Corporation
Redmond, Washington
We have audited the accompanying balance sheets of ProCyte Corporation
as of December 31, 1997 and 1996, and the related statements of operations, cash
flows, and stockholders' equity for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all
material respects, the financial position of the Company as of December 31, 1997
and 1996, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
Seattle, Washington
March 25, 1998
27
<PAGE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
The information required under Part III, Items 10, 11, 12, and 13, is
included in the Company's Proxy Statement relating to the Company's annual
meeting of shareholders, and is incorporated herein by reference. Such Proxy
Statement will be filed with the Securities and Exchange Commission not later
than 120 days after the close of the Company's fiscal year end, December 31,
1997.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. List of documents filed as part of this report:
(1) Financial Statements and Supplementary Data - Reference is
made to the Index to Financial Statements and Schedules under
Item 8 in Part II hereof, where such documents are listed.
(2) Exhibits - see (c) below
b. Reports on Form 8-K
None
28
<PAGE>
c. Exhibits
<TABLE>
<CAPTION>
Exhibit Description Note
- ------- ------------------------------------------------------------------------------------------- ----
<C> <S> <C>
3.1 Restated Articles of Incorporation of the Registrant A
3.2 Restated Bylaws of the Registrant A
10.1* 1987 Stock Benefit Plan of ProCyte Corporation A
10.2* ProCyte Corporation 1989 Restated Stock Option Plan B
10.3* ProCyte Corporation 1991 Restated Stock Option Plan for Nonemployee Directors and
amendments thereto D
10.4+ Teachers Insurance & Annuity Association Lease dated as of October 1, 1993 and second
amendment thereto dated February 28, 1997 D
10.5* 1996 Stock Option Plan D
10.6* Consulting and Separation Agreement for Mr. Joseph Ashley D
10.7* Change of Control Agreement for Ms. Karen L. Hedine C
10.8* Change of Control Agreement for Mr. John F. Clifford D
10.9* Form of Indemnity Agreement dated February 23, 1995 between the Registrant and each of
Mr. Ashley, Dr. Blake, Ms. Hedine, Mr. Patterson, Mr. Tierney, Mr. Clifford, Mr. Green
and Mr. Sullivan C
10.10* Form of Severance Agreement for Ms. Karen Hedine, Mr. Kenneth Green and Mr. John Clifford D
10.11* Part-time Employment and Separation Agreement for Ms. Karen L. Hedine E
10.12+ Distribution & License Agreement dated December 12, 1997 between the Registrant and Bard
Medical Division E
13.1 1997 Annual Report to Shareholders E
23.1 Consent of Deloitte & Touche LLP E
27.1 Financial Data Schedule E
</TABLE>
- --------------------------
* Management contract or compensatory plan or arrangement.
+ Confidential treatment has been granted or requested with respect to
portions of this exhibit.
A. Incorporated by reference to the Registrant's Registration Statement of
Form S-1 (No. 33-31353).
B. Incorporated by reference to the Registrant's Registration Statement of
Form S-1 (No. 33-46364).
C. Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1994.
D. Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996.
E. Filed herewith.
29
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROCYTE CORPORATION
(REGISTRANT)
By: /s/ John F. Clifford
------------------------------------------------
Date: March 31, 1998 John F. Clifford
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
- ------------------------ ------------------------------------- ---------------
<S> <C> <C>
/s/ Jules Blake
- ------------------------ Director March 31, 1998
Jules Blake, Ph.D.
/s/ John F. Clifford President and Chief Executive Officer March 31, 1998
- ------------------------ (Principal Executive Officer and
John F. Clifford Principal Financial Officer)
/s/ Robert E. Patterson
- ------------------------ Director March 31, 1998
Robert E. Patterson
/s/ William M. Sullivan
- ------------------------ Director March 31, 1998
William M. Sullivan
/s/ Thomas E. Tierney
- ------------------------ Chairman of the Board March 31, 1998
Thomas E. Tierney
/s/ Jon Sortland Manager of Finance March 31, 1998
- ------------------------ (Principal Accounting Officer)
Jon Sortland
</TABLE>
30
<PAGE>
EXHIBIT 10.11
PART-TIME EMPLOYMENT AND SEPARATION AGREEMENT
THIS PART-TIME EMPLOYMENT AND SEPARATION AGREEMENT (this "Agreement")
dated as of October 17, 1997 is entered into by and between Karen Hedine
("Hedine") and ProCyte Corporation ("ProCyte").
RECITALS
A. Hedine has been employed as Vice President and Secretary of ProCyte.
Hedine's full-time employment relationship with ProCyte ceased effective October
17, 1997.
B. Hedine and ProCyte wish to have Hedine continue as a part-time
employee of 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
Effective October 17, 1997, Hedine's full-time employment with ProCyte
terminated and she resigned as Vice President and Secretary of ProCyte. From
October 17, 1997 through January 31, 1998 (the "Part-Time Employment Period"),
Hedine shall be employed by ProCyte on a part-time basis, after which her
employment and retention by ProCyte will terminate. As requested by ProCyte, she
will provide up to one day per week of services during the Part-Time Employment
Period and, in connection therewith, will schedule with the President of ProCyte
to be physically present at ProCyte's facility at least one day per week through
November 30, 1997.
Hedine shall be reimbursed for all preapproved, reasonable
out-of-pocket business expenses incurred by her as a part-time employee
hereunder 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.
2. Consideration
(a) Cash. In consideration of this Agreement, ProCyte shall
continue to pay Hedine at her normal annual salary of $134,000 (less tax
withholding) at ProCyte's normal pay periods (currently every two weeks) during
the Part-Time Employment Period. In addition, ProCyte shall continue to pay and
provide Hedine during the Part-Time Employment Period the health insurance
benefits that it provides to ProCyte's full-time employees. In the event Hedine
receives comparable insurance coverage through another employer, ProCyte's
obligation to pay and provide such health insurance benefits to Hedine shall
cease.
(b) Stock Options. It is recognized and agreed that (i) all
stock options previously granted to Hedine by ProCyte have vested with the
exception of an incentive stock option for 100,000 shares granted on January 26,
1995 at an exercise price of $2.94, which will continue to vest at the normal
rate (i.e., as if she were a full-time employee) through January 31, 1998, prior
to which time it will have become fully vested, (ii) the nonqualified stock
option granted Hedine on July 28, 1988 at an exercise price of $2.16 for 3,480
shares
<PAGE>
has terminated pursuant to its terms, (iii) the nonqualified option granted
Hedine on September 16, 1988 at an exercise price of $2.16 for 29,000 shares
will terminate, pursuant to its terms, on September 16, 1998, (iv) after Hedine
completes her part-time employment in accordance with this Agreement, ProCyte
will extend to September 16, 1998 the time to exercise the incentive stock
options granted Hedine on May 7, 1991, September 27, 1991 and January 26, 1995
for 1,000, 70,000 and 100,000 shares, respectively, after which time such
options shall no longer be exercisable and shall terminate, and (v) the
extension of time to exercise provided by the preceding clause (iv) will cause
such stock options to be treated as nonqualified stock options for tax purposes
and not incentive stock options.
3. Benefits
All benefits to which Hedine was entitled shall cease as of the date of
termination of part-time employment, except Hedine's right to health insurance
benefits under COBRA, if Hedine elects, and her right, in accordance with
federal law, to leave her 401(k) contributions in ProCyte's 401(k) plan.
4. Reaffirmation of Prior Agreements
Hedine and ProCyte expressly reaffirm and incorporate herein as part of
this Agreement the following agreements:
(a) Indemnity Agreement. The Indemnity Agreement that Hedine
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 Hedine signed effective
January 29, 1987 shall remain in full force and effect.
(c) Confidentiality and Computer Systems Agreement. The
Confidentiality and Computer Systems Agreement that Hedine signed effective
January 28, 1994 shall remain in full force and effect.
5. Nonsolicitation
Hedine 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.
6. No Disparagement
Hedine 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 Hedine or Hedine's proposed business, business practices,
services, judgments or decisions.
7. General Release of Claims
Hedine expressly waives any claims against ProCyte and releases ProCyte
(including its officers, directors, shareholders, managers, agents and
representatives) from any claims that Hedine may have in any way arising out of
or connected with Hedine's employment with
2
<PAGE>
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.
Hedine represents that she has not filed any complaints, charges or
lawsuits against ProCyte with any governmental agency or any court, and agrees
that she 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 Hedine from filing a lawsuit for the exclusive purpose of enforcing
Hedine's rights under this Agreement.
8. 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.
9. Revocation; Knowing and Voluntary Agreement
Hedine agrees she has been provided the opportunity to consider for
twenty-one (21) days whether to enter this Agreement and has voluntarily chosen
to enter this Agreement on this date. Hedine may revoke this Agreement for a
period of seven (7) days following execution of this Agreement; this Agreement
shall become effective following expiration of this seven (7) day period. Hedine
acknowledges that she is voluntarily executing this Agreement, that she has
carefully read and fully understands all aspect of this Agreement, that she has
not relied upon any representations or statements not set forth herein or made
by ProCyte's agent or representatives, that she has been advised to consult with
an attorney prior to executing this Agreement, and that, in fact, she has
consulted with an attorney of her choice as to the subject matter and effect of
this Agreement.
10. Consulting
For a period extending one year after the end of the Part-Time
Employment Period, Hedine shall, upon the reasonable request of ProCyte, and at
mutually agreed-upon times and places, provide part-time consulting services (as
an independent contractor) to ProCyte at the rate of $1,000 per day.
11. Entire Agreement
This Agreement sets forth the entire understanding between Hedine and
ProCyte and supersedes and cancels the Key Executive Severance Agreement dated
as of February 19, 1997 and any other prior agreements or understandings,
express or implied, with respect to the subject matter hereof, including the
terms of Hedine's part-time employment with ProCyte and the termination of her
relationship as an employee and officer.
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first set forth above.
KAREN HEDINE PROCYTE CORPORATION
/s/ Karen Hedine By /s/ John F. Clifford
- ------------------------ -------------------------
Karen Hedine
Title: President and Chief Executive Officer
4
<PAGE>
----------------
REDACTED VERSION
----------------
EXHIBIT 10.12
TO
ProCyte Corporation's
Form 10-K
For the Year Ended
December 31, 1997
"[ * ]" = omitted, confidential material, which material has been
separately filed with the Securities and Exchange Commission pursuant to a
request for confidential treatment.
<PAGE>
DISTRIBUTION & LICENSE AGREEMENT
THIS AGREEMENT, made as of this 12th day of December, 1997, by and
between ProCyte Corporation, a Washington corporation organized and validly
existing under the laws of the State of Washington, having its principal place
of business at Building A, 8511 154th Avenue, N.E., Redmond, Washington 98052
and having a mailing address of P.O. Box 808, Redmond, Washington 98073-0808
(hereinafter referred to as "PROCYTE"), and Bard Medical Division, C.R. Bard,
Inc., a corporation organized and validly existing under the laws of the State
of New Jersey, having a place of business at 8195 Industrial Boulevard,
Covington, Georgia 30014 (hereinafter referred to as "BARD").
WITNESSETH:
WHEREAS, PROCYTE has developed certain wound care dressings and gels,
and
WHEREAS, PROCYTE is desirous of granting to BARD the exclusive right to
distribute "PRODUCTS" (hereinafter defined) throughout the "TERRITORY"
(hereinafter defined) for use in the "FIELD" (hereinafter defined), and
WHEREAS, BARD is desirous of accepting said grant, all on the terms and
conditions hereinafter set forth.
NOW THEREFORE, in consideration of the above premises and of the mutual
agreements and undertakings hereinafter set forth, PROCYTE and BARD hereby agree
as follows:
2
<PAGE>
I. DEFINITIONS
1.01 ACT - shall mean the United States Food, Drug and Cosmetic Act of
1938, as amended and all regulations promulgated pursuant thereto.
1.02 AFFILIATE - shall mean any person or entity which, directly or
indirectly, controls, is controlled by or is under common control with a party
to this Agreement. For purposes of this definition, the term "control" and the
correlative terms "controlled by" and "under common control" with, as used with
respect to either party, shall mean the possession, directly or indirectly, of
the power to direct or cause the direction of the management or policies of such
party; "control" shall be presumed if there is ownership, directly or
indirectly, of forty percent (40%) or more (or, if less, the maximum permitted
by applicable law) of the voting stock, equity or income interest of an entity.
1.03 CONFIDENTIAL INFORMATION - shall mean any information of a
confidential and/or proprietary nature as to which BARD or PROCYTE, as the
disclosing party has developed or acquired prior to or during the term of this
Agreement, including, but not limited to, all discoveries, inventions,
improvements and ideas relating to any process, formula, machine, device,
manufacture, composition of matter, plan or design, whether patentable or not,
or relating to the conduct of business by either, which, prior to the date
hereof, or during the term of this Agreement, was or is disclosed to the other
party, as the receiving party, exclusive of data or information: (i) which, at
the time of disclosure was in the public domain or which, subsequent to
disclosure, becomes part of the public domain by any means other than the breach
by the receiving party of its obligations hereunder; (ii) which was known to the
receiving party at the time of disclosure as evidenced by the receiving party's
business records maintained in the ordinary course of business; (iii) which is,
at any time, disclosed to the receiving party by any person or entity not a
party hereto whom the receiving party believes, after reasonable inquiry, has
the right to disclose the same; (iv) which is developed by an employee of the
receiving party who is shown, by competent proof and by clear and convincing
evidence, not to have been privy to the disclosure by the other party hereto; or
(v) which is disclosed orally, except where the disclosing party reduces the
oral disclosure to writing, marks the same as confidential or proprietary and
furnishes the receiving party with the reduction to writing within thirty (30)
days of the oral disclosure.
1.04 EFFECTIVE DATE - shall mean the date and year first above
written.
1.05 FDA - shall mean the United States Food and Drug
Administration.
3
<PAGE>
1.06 FIELD - shall mean the sub-field of medicine relating to the
treatment of human acute and chronic wounds and skin irritations in hospitals,
health care facilities, nursing homes and extended care facilities, excluding
wounds and skin irritations related to plastic/cosmetic surgery and hair
transplantation.
1.07 GMP - shall mean Good Manufacturing Practices for medical
devices, as promulgated by the FDA.
1.08 IMPROVEMENT - shall mean any and all modifications of PRODUCTS
which, prior to the EFFECTIVE DATE or during the term of this Agreement, were or
are (i) invented by PROCYTE or any AFFILIATE of PROCYTE, alone or jointly with
BARD or any third party or (ii) acquired by PROCYTE, provided that in the case
of any item described above, the manufacture, use or sale of the same would
constitute an infringement of a VALID CLAIM in the absence of a license of the
PROPRIETARY RIGHTS, provided, however, that in order to be considered an
IMPROVEMENT, BARD must elect to distribute such item within a reasonable time
following the date such item is available for commercial distribution (including
the receipt of all required regulatory approvals).
1.09 LICENSE AGREEMENT - shall mean that certain Restated Agreement
between Hymedix International, Inc. and PROCYTE dated as of November 20, 1997, a
true and correct copy of which has been provided to BARD.
1.10 NET SALES - shall mean the NET SELLING PRICE times units of
PRODUCTS sold. In the event PRODUCT is sold or transferred in other than an
arm's-length transaction or for other property (e.g., barter) or is consumed,
NET SALES shall be calculated as if the PRODUCT had a gross invoiced selling
price equal to fair market value. Provided, however, that the foregoing sentence
shall not apply to a reasonable amount of promotional transfers, which shall not
be classified as sales for purposes of this Agreement.
1.11 NET SELLING PRICE - shall mean, for any PRODUCT, the gross
invoiced selling price of such PRODUCT by BARD or any AFFILIATE of BARD to any
nonaffiliated third party; provided, however, in the event PRODUCTS are sold in
a kit or in combination with any separate, stand-alone article which is not a
PRODUCT and does not embody any of the PROPRIETARY RIGHTS (a "COMBINATION
PRODUCT"), the NET SELLING PRICE for such kit or combination shall be determined
as if such PRODUCTS were sold as stand-alone items, but if such PRODUCTS are not
sold as a stand-alone unit, the NET SELLING PRICE shall be determined by
multiplying the gross invoiced selling price of the COMBINATION PRODUCT by a
fraction, the numerator of which shall be BARD's or its AFFILIATES'
manufacturing cost or purchase price paid for the PRODUCT
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included in the COMBINATION PRODUCT and the denominator of which shall be BARD's
or its AFFILIATES' manufacturing cost or purchase price paid for the PRODUCT and
other article included in the COMBINATION PRODUCT. Whether sold as a stand-alone
item or as part of a kit or combination, in all cases in arriving at NET SELLING
PRICE, the gross invoiced selling price described in this Article 1.15 shall
have subtracted therefrom the following offsets and deductions (which shall be
allocated in the case of COMBINATION PRODUCTS): (i) sales, use or value added
taxes, if included in the gross invoiced selling price; (ii) freight and
handling charges, if included in the gross invoiced selling price; (iii)
relevant customary cash, trade and quantity discounts and rebates actually
granted and given by BARD or an AFFILIATE of BARD to customers; and (iv)
allowances for returns actually taken.
1.12 NEW PRODUCT - shall mean and include, individually and
collectively, any product having utility in the FIELD which, during the term of
this Agreement, is conceived, developed, reduced to practice or acquired by
PROCYTE or by any AFFILIATE which is controlled by PROCYTE, alone or jointly
with any third party, which is not an IMPROVEMENT.
1.13 [ * ] - shall mean the [ * ]
1.14 PMA - shall mean a pre-market approval application as defined
in the ACT.
1.15 PRODUCTS - shall mean the products manufactured by PROCYTE for and
on behalf of BARD under this Agreement, as more fully described in Schedule A
attached hereto and incorporated herein, together with any and all IMPROVEMENTS
thereof that are manufactured by PROCYTE for sale in the TERRITORY for use in
the FIELD. Schedule A may be amended from time to time upon mutual agreement of
the parties.
1.16 PROPRIETARY RIGHTS - shall mean all know-how, trade secrets and
patent rights (including process patents) owned by or licensed to PROCYTE which
are required in order to manufacture the PRODUCT to applicable SPECIFICATIONS in
the TERRITORY, including without limitation the patent and patent applications
described in Schedule B attached hereto and incorporated herein; provided,
however, that for purposes of Article XI, PROPRIETARY RIGHTS shall not include
those PROPRIETARY RIGHTS currently licensed to, or hereafter owned by or
licensed to, PROCYTE unless (i) BARD agrees, upon thirty (30) days notice, to
pay and does pay
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promptly all royalties and other amounts due the licensor (in addition to the
amounts set forth in Article XI) and to perform and be bound by all obligations
due the licensor and (ii) PROCYTE has the right to grant licenses or sublicenses
with respect thereto. PROCYTE shall use its good faith efforts to include in any
such agreement the right to grant such licenses or sublicenses.
1.17 SPECIFICATIONS - shall mean those written raw material, component,
labeling, manufacturing, quality assurance and finished product specifications
and protocols of PROCYTE relating to PRODUCTS. The current SPECIFICATIONS shall
be provided to BARD by PROCYTE within ten (10) days of the EFFECTIVE DATE.
1.18 TERRITORY - shall mean Canada and the United States of
America.
1.19 TOOLING - shall mean (i) that certain tooling and machinery
described on Schedule C attached hereto and incorporated herein which is owned
by BARD and purchased on its behalf by PROCYTE pursuant to Article XIV and (ii)
all replacements thereof purchased by PROCYTE or BARD.
1.20 TRADEMARKS - shall mean the trademarks listed in Schedule D
attached hereto and incorporated herein by reference.
1.21 VALID CLAIM - shall mean a claim of an unexpired patent included
in PROPRIETARY RIGHTS so long as such claim has not been held invalid in an
unappealable decision by a court of competent jurisdiction.
1.22 510(k) - shall mean an application under Section 510(k) of the
ACT.
II. GRANT
2.01 PROCYTE hereby grants to BARD and BARD hereby accepts from
PROCYTE, on and subject to the terms and conditions hereinafter set forth, the
exclusive right to distribute PRODUCTS throughout the TERRITORY solely for use
in the FIELD. BARD shall not sell, or sell to others that it has reason to
believe will resell, any PRODUCTS outside the TERRITORY or for use outside the
FIELD.
2.02 PROCYTE and BARD hereby expressly agree that the grant set forth
in Article 2.01 shall be deemed to include a grant to BARD of the right to sell
directly, through AFFILIATES of BARD, through distributors of BARD and/or
through distributors of BARD's AFFILIATES.
2.03 Bard Medical Division (or such other BARD division as from time to
time is responsible for the marketing and sale of the skin and wound care
products
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currently marketed and sold by Bard Medical Division as of the EFFECTIVE DATE),
during the term of this Agreement, shall use its commercially reasonable efforts
to, market and sell the PRODUCTS and shall not market or sell in the TERRITORY
any products for use in the FIELD that are directly competitive with any of the
PRODUCTS, [ * ]. To the extent that any IMPROVEMENT is marketed as an extension
or replacement of an existing PRODUCT, BARD's obligation to use its commercially
reasonable efforts to market and sell such existing PRODUCT shall be satisfied
by BARD's commercially reasonable efforts to market and sale the IMPROVEMENT
which is intended as a replacement or extension of such existing PRODUCT.
2.04 PROCYTE may, at any time, upon sixty (60) days notice, cease
manufacturing and selling under this Agreement any PRODUCTS for the TERRITORY
for use in the FIELD, if PROCYTE determines in good faith using its reasonable
business judgment that it is unprofitable or substantially impracticable to
continue manufacturing such PRODUCTS. Notwithstanding the foregoing sentence,
PROCYTE shall remain obligated to supply hereunder, and BARD shall be obligated
to purchase, PRODUCTS for which there are undelivered orders at the time of such
notice and those PRODUCTS ordered in accordance with this Agreement by BARD
prior to the effective date of such notice for delivery not more than one
hundred twenty (120) days from the date the order is received.
2.05 During the term of this Agreement, the parties may mutually agree
to [ * ] at a mutually agreed upon initial selling price. In addition, during
the term of this Agreement and before granting an unrelated third party rights
to sell [ * ] in the TERRITORY for use in the FIELD, PROCYTE shall so notify
BARD in writing and include in its notice the general terms upon which PROCYTE
proposes to grant such third party the right to sell [ * ]. Any such notice from
PROCYTE shall be deemed an offer to BARD on the terms set forth therein which
may be accepted by BARD within sixty (60) days of receipt of PROCYTE's notice
following which time the parties shall negotiate in good faith toward a final
mutually acceptable agreement relating to the [ * ]. In the event BARD rejects
any such offer from PROCYTE or fails to timely accept the same or accepts such
offer but the parties are unable to reach a definitive agreement within sixty
(60) days following such acceptance PROCYTE shall thereafter have the right to
offer the rights, which were the subject of PROCYTE's offer to BARD, to any
third party on terms no more favorable thean those offered to BARD. Thereafter,
if, at any one or more times prior to the granting of such rights to a third
party, there shall be a material change(s) in the terms which
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are offered to such third party from those offered to BARD, PROCYTE shall
promptly so notify BARD setting forth such material change(s). Any such notice
from PROCYTE shall be deemed an amended offer on the terms outlined therein
which may be accepted by BARD within thirty (30) days of receipt of PROCYTE's
amended offer.
III. REGULATORY MATTERS
3.01 PROCYTE hereby represents to BARD that it shall, at its sole cost
and expense and to the extent required by the ACT, timely register or cause to
be registered with the FDA, in accordance with the ACT, each establishment in
which PROCYTE or a subcontractor of PROCYTE intends to manufacture and/or
assemble PRODUCTS. PROCYTE hereby agrees to permit the FDA (without a search
warrant) and BARD to inspect each of its facilities for purposes of verifying
PROCYTE's compliance with the ACT and for purposes of verifying that items being
manufactured and/or assembled by PROCYTE for sale to BARD hereunder are being
manufactured and/or assembled in accordance with the applicable SPECIFICATIONS.
Any such inspection by BARD shall be conducted upon reasonable advance notice to
PROCYTE during PROCYTE's normal business hours and shall in no way constitute a
waiver of PROCYTE's obligation to manufacture PRODUCTS in accordance with GMP
and the SPECIFICATIONS.
3.02 PROCYTE represents that, to the extent required, the PRODUCTS
existing as of the EFFECTIVE DATE have received all required regulatory
approvals (including without limitation 510(k) and PMA clearances) for sale in
the TERRITORY. PROCYTE shall be responsible for filing for and obtaining
required regulatory approvals relating to any IMPROVEMENTS.
IV. REPRESENTATIONS AND WARRANTIES
4.01 PROCYTE hereby represents and warrants to BARD as of the EFFECTIVE
DATE that:
(i) As set forth more specifically in Schedule B and Schedule
D hereof PROCYTE is the owner or licensee of all existing PROPRIETARY RIGHTS and
TRADEMARKS in the TERRITORY, and has full authority to license (or sublicense)
such PROPRIETARY RIGHTS and TRADEMARKS, and grant distribution rights related to
such PROPRIETARY RIGHTS, and grant licenses related to such TRADEMARKS;
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(ii) PROCYTE is not a party to any lawsuit, nor is there any
outstanding claim against PROCYTE, alleging that use of the existing PROPRIETARY
RIGHTS infringes the proprietary right of any third party;
(iii) PROCYTE is not currently a party to any agreement or
understanding, oral or written, which would, in any manner, be inconsistent with
the rights herein granted to BARD and shall not enter into any such agreement or
understanding, oral or written, during the term of this Agreement, nor, during
the term of this Agreement, directly or indirectly, engage in any activity which
would, in any manner, be inconsistent with the rights herein granted to BARD;
(iv) PROCYTE is a corporation organized, validly existing and
in good standing under the laws of the State of Washington, has all requisite
corporate power and authority to own (or lease) and operate its property and to
carry on its business as now being conducted and is duly qualified and in good
standing to do business in any of those jurisdictions where it is required to be
qualified as a result of ownership of property or residence of any of its
employees or agents;
(v) the execution and delivery of this Agreement by PROCYTE
has been duly and validly authorized by all necessary corporate action on the
part of PROCYTE and (assuming valid execution by BARD and subject to federal
bankruptcy law) this Agreement is a valid and binding obligation of PROCYTE
enforceable against it;
(vi) the LICENSE AGREEMENT is the only third party license
agreement under which PROCYTE has licensed any of the PROPRIETARY RIGHTS;
(vii) to the best knowledge of PROCYTE as of the EFFECTIVE
DATE, the LICENSE AGREEMENT is in full force and effect, there are no material
breaches, and PROCYTE has received no notice of any alleged breach by PROCYTE;
and
(viii) during the term of this Agreement, PROCYTE shall keep
the LICENSE AGREEMENT in full force and effect so long as the rights granted
under the Agreement are necessary for the manufacture of any PRODUCT.
4.02 BARD hereby represents and warrants to PROCYTE as of the EFFECTIVE
DATE that:
(i) BARD is a corporation organized, validly existing and in
good standing under the laws of the State of New Jersey, has all requisite
corporate power
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and authority to own (or lease) and operate its property and to carry on its
business as now being conducted and is duly qualified and in good standing to
do business in any of those jurisdictions where it is required to be
qualified as a result of ownership of property or residence of any of its
employees or agents;
(ii) the execution and delivery of this Agreement by BARD has
been duly and validly authorized by all necessary corporate action on the part
of BARD and that (assuming valid execution by PROCYTE and subject to federal
bankruptcy law) this Agreement is a valid and binding obligation of BARD
enforceable against it, and
(iii) BARD is not currently a party to any third party
agreement or understanding, oral or written, which would, in any manner, be
inconsistent with its obligations described herein and shall not enter into any
such agreement or understanding, oral or written, during the term of this
Agreement, nor, during the term of this Agreement, directly or indirectly,
engage in any activity which would, in any manner, be inconsistent with its
obligations described herein.
V. [ * ]
5.01 During the initial term of this Agreement and before [ * ].
VI. SPECIFICATIONS
6.01 No change to the SPECIFICATIONS may be made by PROCYTE to the
SPECIFICATIONS without prior written notice to BARD not less than sixty (60)
days prior to the intended change. If such change to the SPECIFICATIONS
significantly changes the performance of the PRODUCTS, such change shall not be
made without the prior written consent of BARD, which consent shall not be
unreasonably withheld.
VII. TERMS OF PURCHASE AND SALE
7.01 All sales of PRODUCTS by PROCYTE to BARD shall be subject to, and
governed by, the terms and conditions of this Agreement, including the
quantities and delivery dates set forth in BARD's purchase orders placed in
accordance with, and subject to, this Agreement, including Schedule E attached
hereto and incorporated herein. The terms and conditions of this Agreement and
Schedule E supersede the terms and conditions of any purchase order,
acknowledgment or similar document at any time submitted by one party to the
other, unless specifically and mutually agreed
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upon in writing by both parties. BARD shall purchase and PROCYTE shall sell and
deliver to BARD, PRODUCTS in accordance with this Agreement and the firm
purchase orders placed by BARD in accordance with this Agreement.
7.02 PROCYTE and BARD hereby agree that the initial selling price by
PROCYTE to BARD for PRODUCTS, F.O.B. PROCYTE's manufacturing facility, exclusive
of sales or other taxes, if applicable, shall be as set forth in Schedule F
attached hereto and incorporated herein. The selling price shall include
sterilization and final packaging per the SPECIFICATIONS. The selling price
described above may be subject to periodic adjustments as described in Schedule
F.
7.03 (A) Concurrently with the execution of this Agreement, the parties
will mutually agree upon the initial order (including delivery dates) for
PRODUCTS for delivery [ * ]. Schedule G attached hereto and incorporated herein
is [ * ]. BARD, on a quarterly basis during the term of this Agreement, shall
issue firm purchase orders for PRODUCTS which orders shall be delivered to
PROCYTE no later than [ * ] prior to the commencement of the calendar quarter
for which delivery dates are stated. At the time of issuance by BARD of each
such purchase order hereunder, BARD shall deliver to PROCYTE a [ * ]. Firm
purchase orders issued by BARD shall be for not less than [ * ] for the calendar
quarter given to PROCYTE with the order for the previous quarter.
(B) In no event shall PROCYTE be required to accept any firm
purchase order for PRODUCTS issued by BARD for a quantity of PRODUCTS in excess
of [ * ] for the quarter with the previous quarter's order. In the event PROCYTE
does not reject such an order, it shall deliver [ * ] by the delivery date
requested and shall use commercially reasonable efforts to deliver the remaining
quantity of PRODUCTS in excess of the [ * ]. PROCYTE shall promptly advise BARD
of the expected delivery date for such excess. BARD shall have the right to
terminate its order for such excess within [ * ] after receipt of the expected
delivery date if the expected delivery date is more than [ * ] after BARD's
requested delivery date. In the event PROCYTE is late in delivering any firm
purchase order (unless excused by Article 15.04) and in addition to any other
remedy set forth herein, at law or in equity, that BARD may have, BARD may
cancel the undelivered portion of the order if, after [ * ] prior written notice
to PROCYTE of such failure, PROCYTE has not delivered the PRODUCT. PROCYTE shall
bulk ship all PRODUCTS ordered by BARD hereunder, at BARD's expense, to a
location or locations in the TERRITORY to be designated by BARD.
Schedule G attached hereto sets forth [ * ].
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7.04 At the time of shipment to BARD of PRODUCTS, PROCYTE shall invoice
BARD for the selling price of such PRODUCTS in effect as of the date of invoice,
and shall include in its invoice [ * ] actually paid by PROCYTE incident to such
shipment. BARD shall pay all such invoices [ * ] of its receipt of invoice. All
validly invoiced amounts which are not paid when due shall bear interest at the
rate of [ * ] until paid in full. In the event BARD fails to pay any validly
invoiced amount [ * ] of its due date, PROCYTE shall have the right to withhold
future shipments of any PRODUCTS until such time as such invoiced amount and
interest are paid by BARD.
7.05 Within sixty (60) days after the end of each calendar year during
the term of this Agreement and within sixty (60) days after expiration or
termination of this Agreement, BARD shall provide PROCYTE with a general report
of sales by its distributors for PRODUCTS which shall specifically not include
an average selling price of PRODUCT.
7.06 Subject to the provisions of Article XI below, BARD agrees to
purchase from PROCYTE the following total annual minimum amounts of the PRODUCTS
during each twelve (12) month period following December 31, 1997 (a "MINIMUM
PURCHASE PERIOD"):
<TABLE>
<CAPTION>
Period Amount
------------------------------------------------------ --------
<S> <C> <C>
(i) First MINIMUM PURCHASE PERIOD [ * ]
(ii) Second MINIMUM PURCHASE PERIOD [ * ]
(iii) Third MINIMUM PURCHASE PERIOD [ * ]
(iv) Fourth and subsequent MINIMUM PURCHASE [ * ]
</TABLE>
Notwithstanding anything to the contrary contained in this Agreement, in the
event BARD and PROCYTE agree to add [ * ] to the definition of PRODUCTS at any
time during the term of this Agreement, the above-stated MINIMUM PURCHASE
REQUIREMENTS shall [ * ], effective in the MINIMUM PURCHASE PERIOD immediately
following the MINIMUM PURCHASE PERIOD in which the [ * ] is so added to this
Agreement. Subject to the provisions of Article XI hereof, in the event BARD
fails to fulfill the MINIMUM PURCHASE REQUIREMENTS of this Article 7.06 during
any year, PROCYTE shall have the option to notify BARD in writing of the failure
to achieve the applicable MINIMUM PURCHASE
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REQUIREMENT and the amount of the shortfall no later than [ * ] after the end of
the applicable MINIMUM PURCHASE PERIOD when the shortfall occurs. BARD shall
have [ * ] after receipt of such notice to rectify the shortfall. To rectify the
shortfall, BARD shall [ * ].
VIII. WARRANTIES/SERVICES
8.01 PROCYTE hereby warrants to BARD that (i) PRODUCTS sold to BARD hereunder
shall be manufactured in accordance with GMP and shall, at the time of delivery
to BARD, comply in all respects with the applicable SPECIFICATIONS therefore,
and (ii) until the expiration date for any PRODUCT occurs, such PRODUCTS sold to
BARD hereunder shall be free from defects in materials, manufacturing and
packaging, and (iii) shall be delivered to BARD with a reasonable period of time
left before the expiration date, as more specifically agreed upon between the
parties. In the event BARD believes in good faith that for any particular
PRODUCT received the time remaining before the occurrence of the expiration date
is inadequate, BARD shall so notify PROCYTE and the parties shall mutually
resolve the situation. EXCEPT AS EXPRESSLY STATED HEREIN, PROCYTE MAKES NO OTHER
WARRANTIES, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE AND WARRANTIES ARISING FROM COURSE OF
PERFORMANCE, COURSE OF DEALING, USAGE OF TRADE OR SAMPLES PREVIOUSLY SUPPLIED.
8.02 PROCYTE's obligation and liability under the warranty provided herein is
limited solely, at PROCYTE's option, to (a) replacement of the defective
PRODUCTS at its expense, including shipping, with any defective PRODUCT being
returned to PROCYTE at its expense and only upon its request or (b) repayment of
the purchase price for the defective PRODUCTS, together with any and all
shipping charges incurred by BARD relating to the original and return (if
approved) shipments. PROCYTE shall not be liable to BARD for any special,
indirect, incidental or consequential damages arising from breach of warranty or
any defect in PRODUCTS, except as provided in Article IX.
8.03 BARD shall promptly reimburse PROCYTE for all of its reasonable and
actually incurred employee costs and out-of-pocket costs (including travel
expenses which have been approved in advance by BARD) in providing training and
assistance in connection with educating BARD's sales force, customers and
AFFILIATES and in,
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as requested and agreed, marketing and promotion, all as such has been performed
at BARD's request.
IX. INDEMNIFICATION/INSURANCE
9.01 PROCYTE and BARD hereby agree to indemnify, save and hold each other
harmless from and against all suits, actions, claims, demands, judgments and
expenses (including court costs and reasonable attorneys fees) which arise or
result from their respective misrepresentations of any representation contained
herein.
9.02 PROCYTE hereby agrees to indemnify, save and hold BARD and its AFFILIATES
harmless from and against all suits, actions, claims, demands, judgments,
liabilities and expenses which arise or result from alleged injury to third
parties (including death) incident to the use of any PRODUCTS provided by
PROCYTE hereunder, except where, and to the extent that, the negligent acts of
BARD or an AFFILIATE of BARD in handling, storing, selling, labeling or
marketing of the PRODUCTS are the proximate cause of the alleged injury or
death. PROCYTE acknowledges that the PRODUCTS shall be shipped via non
temperature-controlled means. BARD and PROCYTE further acknowledge that BARD
shall be deemed not to have been negligent in storing the PRODUCTS if a PRODUCT
is damaged by an act taken by BARD in storing the PRODUCT, if such act is
specifically covered by the SPECIFICATIONS, and BARD adhered to the
SPECIFICATIONS in performing such act. As a condition precedent to PROCYTE's
obligation under this Article 9.02, the party charged in such suit shall
promptly notify PROCYTE and shall not settle the same without PROCYTE's prior
written approval. It is expressly agreed that PROCYTE shall have the duty to
defend any action referred to in this Article 9.02 utilizing counsel reasonably
acceptable to the party charged and shall have the right to settle the same on
such terms as it deems appropriate. It is expressly agreed that the party
charged shall have the right to participate in any such action utilizing counsel
selected and paid for by it.
9.03 BARD hereby agrees to indemnify, save and hold PROCYTE and its AFFILIATES
harmless from and against all suits, actions, claims, demands, judgments,
liabilities and expenses which arise or result from alleged injury to third
parties (including death) incident to the exercise of BARD's license rights
under Article XI or caused by the negligent acts of BARD or an AFFILIATE of BARD
in handling, storing, selling, labeling or marketing of the PRODUCTS. PROCYTE
acknowledges that the PRODUCTS shall be shipped via non temperature-controlled
means. BARD and PROCYTE further acknowledge that BARD shall be deemed not to
have been negligent in storing the PRODUCTS if a PRODUCT is damaged by an act
taken by BARD in storing the PRODUCT, such act is specifically covered by the
SPECIFICATIONS, and if BARD adhered to the SPECIFICATIONS in performing
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such act As a condition precedent to BARD's obligation under this Article 9.03,
the party charged in such suit shall promptly notify BARD and shall not settle
the same without BARD's prior written approval. It is expressly agreed that BARD
shall have the duty to defend any action referred to in this Article 9.03
utilizing counsel reasonably acceptable to the party charged and shall have the
right to settle the same on such terms as it deems appropriate. It is expressly
agreed that the party charged shall have the right to participate in any such
action utilizing counsel selected and paid for by it.
9.04 PROCYTE hereby covenants to maintain, during the term of this Agreement,
(i) a comprehensive general liability insurance policy, with products liability
and contractual liability endorsements for the PRODUCTS provided by PROCYTE
hereunder, which policy shall be in a minimum amount of [ * ] per occurrence and
[ * ] in the aggregate, and (ii) a property damage insurance policy insuring
against loss of or damage to the [ * ], at such [ * ] full replacement cost,
while such is on PROCYTE's premises or under PROCYTE's reasonable control. The
policy described in Article 9.04(i) shall, at PROCYTE's option, either name BARD
and its AFFILIATES as additional insureds or shall provide coverage via a broad
form Vendor's endorsement. In either event, the policy shall provide for not
less than thirty (30) days' prior written notice to BARD in the event of change
in coverage or policy cancellation. The policy described in Article 9.04(ii)
shall name BARD as loss payee and shall provide for not less than thirty (30)
days' prior written notice to BARD in the event of change in coverage or policy
cancellation. PROCYTE hereby covenants to deliver to BARD certificates
evidencing such coverage within ten (10) business days after the EFFECTIVE DATE
or, in the case of [ * ], after its acquisition by PROCYTE.
X. PATENT MATTERS
10.1 In the event PROCYTE or BARD knows or has reason to believe that any patent
included in PROPRIETARY RIGHTS is being infringed in the TERRITORY and in the
FIELD, the party possessing such knowledge or belief shall promptly notify the
other and shall include in its notice all facts in its possession on which such
knowledge or belief is based. PROCYTE and BARD hereby agree that, while PROCYTE
shall not be obligated in any way to attempt to stop any such infringement, it
shall have the first right to take timely measures, including prosecution of a
law suit, if necessary, to terminate such infringement. PROCYTE and BARD hereby
agree that all recoveries and awards that may be obtained as a result of any
such infringement action brought by PROCYTE, including any settlement thereof,
shall be the sole property of PROCYTE. In the event PROCYTE elects to institute
any such suit, PROCYTE shall indemnify and hold BARD harmless
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from all claims, judgments, costs and expenses arising from such suit, and BARD
hereby agrees to be named as a nominal party therein. In the event PROCYTE
declines to bring any such suit within ninety (90) days of a request by BARD to
do so, BARD shall thereafter have the right, but not the obligation to bring
such suit at its sole cost and expense. In the event BARD brings such suit, all
recoveries and awards, including any settlement shall be the sole property of
BARD. In the event BARD elects to bring such suit, BARD shall indemnify and hold
PROCYTE harmless from all claims, judgments, costs and expenses arising from
such suit and PROCYTE hereby agrees to be named as a nominal party to such suit.
10.2 In the event suit is filed against BARD or any AFFILIATE of BARD by a third
party alleging that the manufacture, use or sale of a PRODUCT provided by
PROCYTE hereunder infringes the proprietary rights of such third party (unless
the infringement is based on the combination of the PRODUCT with an item not
included in the PROPRIETARY RIGHTS or has resulted from a composition or a
method requested by BARD), BARD shall promptly notify PROCYTE and shall include
in its notice all facts in BARD's possession relating to the same. In said
event, PROCYTE hereby agrees to defend (utilizing counsel reasonably acceptable
to BARD), indemnify, save and hold BARD harmless from and against all costs,
liabilities and expenses incident to any such suit. It is expressly agreed that
PROCYTE shall have the exclusive right to settle such suit on such terms as it
deems appropriate and to replace, or refund the purchase price of, the
infringing PRODUCT or otherwise cure any infringement on account of which the
use or sale the PRODUCT is prevented.
XI. LICENSE
11.01 PROCYTE hereby acknowledges that a reliable and continuous source of
supply of PRODUCTS is imperative to BARD's successful marketing efforts.
Therefore, as a material inducement to the execution of this Agreement by BARD,
PROCYTE hereby grants to BARD a current license and sublicense of its rights
under the LICENSE AGREEMENT (in each case without the right to sublicense) under
existing and PROPRIETARY RIGHTS to manufacture, have manufactured, use and sell
PRODUCTS in the FIELD throughout the TERRITORY, subject to the terms hereof. The
grant described in this Article 11.01 shall be deemed to automatically apply to
PROPRIETARY RIGHTS relating to IMPROVEMENTS as such PROPRIETARY RIGHTS come into
existence. BARD agrees, however, to withhold the exercise of its rights for each
PRODUCT under this current license until the happening of any one or more of the
following events with respect to the PRODUCT:
(i) PROCYTE becomes insolvent, makes a general assignment for the
benefit of its creditors, files or has filed against it a petition in bankruptcy
which is not dismissed before an order for relief is entered or files a petition
in any State or Federal
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proceeding seeking relief from its creditors if any such action prevents PROCYTE
from meeting its manufacturing and shipping obligations for the PRODUCT under
this Agreement;
(ii) PROCYTE has ceased manufacturing the PRODUCT in accordance
with Article 2.04;
(iii) PROCYTE, during any [ * ] within a period of [ * ], fails to
deliver to BARD all quantities of PRODUCT ordered in accordance with this
Agreement for delivery in a calendar quarter and such failure continues for (a)
ten (10) days after BARD has given written notice to PROCYTE of such failure and
(b) in the case of force majeure (as described in Article 15.04, ninety (90)
days thereafter; or
(iv) PROCYTE, on [ * ] within a period of [ * ] for reasons other than
force majeure (as described in Article 15.04), delivers to BARD PRODUCT which
has been ordered in accordance with this Agreement for delivery in a calendar
quarter and [ * ] of such delivered quarterly amount does not conform to the
SPECIFICATIONS, provided such nonconformity is not attributable to damage in
transit and such nonconformity is documented in writing by BARD within fifteen
(15) days of its receipt of the nonconforming PRODUCT and at least forty-five
(45) days in advance of the next nonconforming delivery.
11.02 The current license granted to BARD pursuant to Article 11.01 is
exclusive, except PROCYTE retains the right to manufacture or have manufactured
PRODUCTS (i) in the TERRITORY for sale and use outside the TERRITORY and (ii)
for sale to BARD hereunder until exercise of BARD's rights as provided in the
Article 11.01 and fulfillment of BARD's outstanding orders. BARD's obligations
under Article 2.03 shall also apply to its exercise of the license granted in
Article 11.01.
11.03 In the event BARD elects to utilize the current license granted under
Article 11.01 for a PRODUCT, it shall so notify PROCYTE in writing within thirty
(30) days of BARD's knowledge of an occurrence referred to in Article 11.01
involving the PRODUCT. In the event BARD does so, its obligation to purchase,
and PROCYTE's obligation to sell, the PRODUCT shall terminate hereunder (except
as to outstanding orders, unless otherwise agreed) and BARD shall promptly
reimburse PROCYTE for any future costs and expenses (including reasonable
attorneys fees) it incurs in the PROPRIETARY RIGHTS in the TERRITORY [ * ]. In
the event BARD issues to PROCYTE a notice described in this Article 11.03,
PROCYTE
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<PAGE>
covenants to furnish to BARD, [ * ], within [ * ] of PROCYTE's receipt of BARD's
notice, all technical information, data and know-how in its possession as may be
necessary in order for BARD to manufacture or have manufactured the PRODUCT, and
to permit BARD to have immediate access to and use of the [ * ] that is not
associated with the manufacture of other PRODUCTS as to which BARD has not
exercised its license rights. BARD shall not use the PROPRIETARY RIGHTS for any
purpose other than permitted by the license.
11.04 In the event BARD elects to utilize the current license granted under
Article 11.01, BARD shall pay PROCYTE a royalty of [ * ] of NET SALES of
PRODUCTS. Notwithstanding the foregoing, in the event any PRODUCTS are not
covered by a VALID CLAIM or a claim in a patent application included in the
PROPRIETARY RIGHTS in the country of manufacture or sale at the time of
manufacture or sale, the royalty rate on NET SALES of such PRODUCTS shall be
[ *]. Royalties, if any, payable under this Article 11.04 shall be payable in
United States dollars and shall be paid quarterly within [ * ] following the
last day of each calendar quarter following the first commercial sale of
PRODUCTS manufactured by BARD or manufactured for BARD by a third party. With
respect to sales of PRODUCTS on which royalties are payable hereunder,
conversions to United States dollars shall be made as of the last business day
of each quarter based upon the applicable average exchange rates quoted by the
Wall Street Journal for such day. Notwithstanding the foregoing, BARD shall pay
PROCYTE a minimum quarterly royalty (which shall be offset against any actual
royalty payment for the quarter) based on sales as calculated in Article 7.06 if
BARD has exercised its license rights as to all PRODUCTS. At the time of BARD's
remittance of each royalty payment, if any, BARD shall furnish to PROCYTE a
report showing the NET SALES and total number of each type of PRODUCTS sold by
BARD or any AFFILIATE of BARD during the quarter to which the royalty payment
relates and sufficient information from which the royalties payable may be
determined. BARD hereby grants to PROCYTE the right, during normal business
hours and upon reasonable advance notice to BARD, to have an independent
certified public accounting firm, reasonably acceptable to BARD, inspect BARD's
records relating to all items on which royalties are payable hereunder, no more
often than annually, for the purpose of ascertaining the truth and accuracy of
information contained in royalty reports furnished to PROCYTE by BARD. The cost
of any such audit shall be borne by PROCYTE; provided, however, in the event any
such audit (other than the first audit) indicates a discrepancy of five percent
(5%) or more, to the detriment of PROCYTE, between
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<PAGE>
royalties actually paid hereunder and royalties actually owing, BARD, within
thirty (30) days of receipt from PROCYTE of a copy of the auditor's report
evidencing such discrepancy, shall reimburse PROCYTE for the actual incurred
cost of such audit.
11.05 Notwithstanding the provisions of Article 11.04, BARD's license in Article
11.01, to the extent notice of exercise has been given pursuant to Article 11.03
for a PRODUCT, shall become a fully paid up, nonexclusive license throughout the
TERRITORY in the FIELD [ * ].
11.06 Notwithstanding anything to the contrary contained herein, BARD shall
retain all rights given to a licensee under Section 365(n) of the Bankruptcy
Code (11 U.S.C. Section 365 (n)).
XII. CONFIDENTIALITY
12.01 The parties hereby expressly agree that all CONFIDENTIAL INFORMATION made
available by one party to the other, pursuant to the terms of this Agreement,
shall be held in strict confidence by the receiving party during the term of
this Agreement and for a period of three (3) years thereafter and shall be
utilized by the receiving party solely in furtherance of the objectives of this
Agreement.
12.02 Upon the expiration or termination of this Agreement, each party shall
promptly return to the other all CONFIDENTIAL INFORMATION disclosed to it
hereunder and all copies thereof; provided however, each party shall have the
right to retain one (1) copy of all such CONFIDENTIAL INFORMATION under lock and
key for archival purposes in the event any dispute should arise between the
parties with respect to the same.
XIII. [ * ]
13.01 PROCYTE shall purchase on BARD's behalf the [ * ] described on Schedule C.
Title to such [ * ] shall automatically vest in BARD, and PROCYTE shall cause
the seller of such [ * ] to issue, listing BARD as purchaser, a bill of sale or
other proof of ownership for such [ * ]. BARD shall promptly pay for such
purchase of [ * ] and reimburse PROCYTE for the reasonable and actually incurred
cost of any [ * ]; provided, however, that in no event may the total purchase
price of such [ * ] without the express written consent of BARD.
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13.02 PROCYTE will assure that the [ * ] is delivered to, or is otherwise
on-site at, PROCYTE's facility or other facilities as directed by PROCYTE, in
which case PROCYTE shall provide BARD with a written notification of the exact
location of such [ * ]. PROCYTE hereby acknowledges that the [ * ] is the sole
and exclusive property of BARD. BARD shall provide identification and ownership
tags for the [ * ], and PROCYTE shall ensure that such tags are properly placed
and maintained on all [ * ]. PROCYTE hereby covenants that, during the term of
this Agreement: (i) PROCYTE and any subcontractor of PROCYTE using the [ * ]
shall give top priority for use of the [ * ] to fill BARD's firm purchase orders
for PRODUCTS; (ii) PROCYTE shall not encumber any of the [ * ], nor shall
PROCYTE permit the [ * ] to become encumbered as a result of any act or omission
of PROCYTE or any subcontractor of PROCYTE; (iii) PROCYTE or PROCYTE's
subcontractor shall be solely responsible for the routine repair and maintenance
of the [ * ] in accordance with the manufacturers' specifications; provided that
repairs of [ * ] other than routine maintenance and repairs shall be subject to
the prior approval and consent of BARD, which shall not be unreasonably withheld
or delayed, and BARD shall pay for repairs other than routine maintenance and
repairs to which it has consented; and (iv) within thirty (30) days following
each anniversary date of this Agreement, PROCYTE shall furnish BARD with a
report detailing the current condition of the [ * ], such report to contain a
listing of all non-routine repairs and maintenance performed since the previous
such report. In the event any item of [ * ] shall become inoperable as a result
of a negligent or intentional act or omission of PROCYTE or a subcontractor of
PROCYTE, including, without limitation, PROCYTE's or such subcontractor's
failure to perform routine maintenance and repair, PROCYTE agrees that, at
BARD's sole option, PROCYTE shall either repair or replace such item at
PROCYTE's sole expense.
13.03 Within thirty (30) days following termination or expiration of this
Agreement for any reason, PROCYTE shall elect to (A) purchase all or a portion
of the [ * ] at its then current net book value and/or (B) return the [ * ] to
BARD, or cause the [ * ] to be returned to BARD, such return to occur no later
than six (6) months following PROCYTE's election, F.O.B. point of shipment, the
same to be shipped to such facility in the U.S. as BARD directs. In the event
BARD issues a notice to PROCYTE pursuant to Article 11.03, then within six (6)
months following the date of such notice, PROCYTE shall properly pack and
return, or cause to be properly packed and returned to BARD, F.O.B. point of
shipment, all [ * ] which is utilized in the manufacture of the PRODUCT(S) which
was the subject of the notice issued by
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BARD. For purposes of this Article XIII current net book value shall mean the
value of the [ * ].
XIV. TERM/TERMINATION
14.01 This Agreement shall commence on the EFFECTIVE DATE and shall
continue thereafter through [ * ].
14.02 In the event of a material breach or default by either of the
parties hereto of any term or provision of this Agreement on their respective
parts to be observed or performed, the party who is not in breach or default
shall have the right to give the other party notice thereof, whereupon the party
receiving such notice shall have thirty (30) days to cure or cause the cure of
such breach or default, or if the same cannot reasonably be cured within such
thirty (30) day period, the party receiving such notice shall, within said
period, commence or have caused the commencement of such cure and thereafter
continue to diligently prosecute or cause the prosecution of cure of the same.
If such breach or default is so cured, this Agreement, shall remain in full
force and effect. If such breach or default is not so cured, this Agreement,
shall immediately terminate upon notice of termination given to the party which
failed to so cure such breach or default. The right to terminate shall be in
addition to any other remedies a party may have.
14.03 The rights and obligations of the parties under Articles 7.05,
7.06, VIII, IX, 11.05 (as to license rights that have become fully paid up), XII
and 13.02 (last two sentences) and any accrued obligations shall survive
expiration or termination of this Agreement.
XV. MISCELLANEOUS
15.01 All notices required or permitted to be given under this
Agreement shall be in writing and shall be deemed effective and given when
delivered in person or sent by certified or registered mail, postage and
certification prepaid, return receipt requested, addressed to the party to be
notified at its address first above written or to such changed address as the
party may direct by notice given in the aforementioned manner. In the case of
notices to BARD, the same shall be directed to the attention: President and a
copy thereof shall be sent in the aforementioned manner to: C.R. Bard, Inc.,
Attention: General Counsel, 730 Central Avenue, Murray Hill, NJ
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<PAGE>
07974. In the case of notices to PROCYTE, the same shall be directed to the
attention of President.
15.02 This Agreement may not be assigned by either of the parties
hereto without the express prior written consent of the non-assigning party;
provided however, either party may assign this Agreement, upon notice to but
without the consent of the non-assigning party, to any AFFILIATE of such party
or to any person or entity which purchases substantially all of the stock or
substantially all of the assets of the assigning party relating to the FIELD,
and which agrees in writing to be bound by the terms hereof.
15.03 This Agreement shall be binding upon and inure to the benefit of
the respective successors of the parties and their permitted assigns.
15.04 Notwithstanding anything to the contrary contained in this
Agreement, other than as provided in Article 11.01(ii), in the event either
party is delayed or prevented from fulfilling any of their respective
obligations under this Agreement for any reason beyond its reasonable control
including but not limited to, acts of God, fire, strike, flood, riot, war, delay
of transportation, or inability to obtain necessary raw materials through normal
commercial channels, then such party shall not be liable under this Agreement
for any such delay or failure.
15.05 None of the provisions of this Agreement shall be deemed to have
been modified, amended or waived by any act on the part of either party, its
agents or employees, except by an instrument in writing signed by an authorized
officer of the waiving party or by officers of both parties in the case of an
amendment or modification. No waiver by either party of any breach or default
under this Agreement by the other party shall be effective as to any other
breach or default of the same or any other provisions of this Agreement.
15.06 In the event any term or provision of this Agreement is held, by
a court of competent jurisdiction from which there is no appeal, to be invalid,
illegal or contrary to public policy, this Agreement shall be construed as
though such term or provision did not appear herein and the remaining provisions
of this Agreement shall continue in full force and effect.
15.07 The Article headings of this Agreement are intended for
convenience of reference only and shall not define or limit the provisions of
this Agreement.
15.08 This Agreement shall be governed and construed in all respects in
accordance with the internal laws of the State of Washington.
22
<PAGE>
15.09 This Agreement, the Schedules hereto and any purchase order
issued by BARD pursuant to the terms of this Agreement constitute the entire
Agreement and understanding between the parties with respect to the subject
matter hereof and supersede any and all prior negotiations and understandings
between the parties hereto, oral or written, with respect to the subject matter
hereof.
15.10 In performing this Agreement, BARD is and shall be at all times
an independent contractor and not an agent or legal representative of PROCYTE.
BARD shall not assume or create any obligation, express or implied, on the part
of PROCYTE or make any representation, warranty or guarantee on behalf of or in
the name of PROCYTE. BARD shall be responsible for all of its costs and expenses
in performing its obligations hereunder.
XVI. TRADEMARKS
16.01 PROCYTE grants to BARD and its AFFILIATES [ * ] license to
utilize the TRADEMARKS in the FIELD throughout the TERRITORY on and in
connection with the promotion of the PRODUCTS provided by PROCYTE hereunder and,
with respect to PRODUCTS resulting from the exercise of BARD's license rights
under Article XI, until royalties on Net Sales thereof are no longer accruing
under Article 11.04. The parties agree that: (i) all references to the
TRADEMARKS by BARD or any AFFILIATE of BARD in promotional literature will
indicate that PROCYTE is the owner of the TRADEMARK and that the TRADEMARK is
used under license by BARD; (ii) BARD and its AFFILIATES may utilize any
trademark, trade name or logo owned by or licensed to BARD on and in connection
with the promotion of the PRODUCTS and, at BARD's option, such trademark(s),
trade name(s) or logo(s) may be displayed more prominently than the TRADEMARKS;
(iii) nothing contained in this Article 16.01 is intended to transfer to PROCYTE
any ownership interest in any trademark, trade name or logo owned by or licensed
to BARD or to transfer to BARD any ownership interest in any TRADEMARKS; (iv)
upon written request, BARD shall provide to PROCYTE samples of its then-current
labeling and promotional literature, and PROCYTE shall have the right to review
and request reasonable changes, if appropriate, to the use of any TRADEMARKS;
(v) neither will contest, or join any third party in contesting, the validity of
any trade name, trademark or logo used on or in connection with the PRODUCTS
which is owned by or licensed to the other party nor permit any of its
AFFILIATES to do so; and (vi) BARD shall continue to use the TRADEMARKS on and
in connection with the PRODUCTS.
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XVII. THIRD PARTY AGREEMENTS
17.01 In the event PROCYTE receives a notice of breach under the
LICENSE AGREEMENT related to a PRODUCT, PROCYTE shall immediately notify BARD
and provide to BARD all information reasonably related to the alleged breach. In
the event BARD makes a good faith determination that PROCYTE has breached the
LICENSE AGREEMENT, BARD may request PROCYTE to cure such breach in order to
prevent termination of the LICENSE AGREEMENT, and PROCYTE agrees to review such
request in good faith. If PROCYTE fails to take steps to cure the alleged breach
following a request by BARD to do so, BARD may but is not obligated to cure such
breach at BARD's sole expense and on PROCYTE's behalf. In the event BARD elects
not to cure the alleged breach on PROCYTE's behalf, PROCYTE agrees that it will
continue to periodically report to BARD on the status of the dispute and BARD
shall have the continued right to cure the alleged breach at BARD's sole expense
and on PROCYTE's behalf. In the event PROCYTE wishes to settle the dispute
surrounding the alleged breach, it may ask BARD to contribute to such proposed
settlement. While BARD is not required to contribute to any such settlement, it
may choose to accommodate PROCYTE's request, in which event BARD shall be
entitled to offset any amounts which BARD contributes to such settlement against
any amounts which BARD owes PROCYTE under this Agreement.
XVIII. COMPLAINT HANDLING
18.01 PROCYTE shall maintain a system of PRODUCT complaint recording
and reporting, and shall be responsible for preparation and filing of all
required reports of complaints and adverse events regarding PRODUCTS of which it
has knowledge, in compliance with prevailing international, Federal, state
and/or local regulatory requirements, shall advise BARD of all such reports, and
shall provide BARD with a written copy of the result of all investigations
related to such reports. BARD agrees to notify PROCYTE of customer complaints
which it receives relating to the PRODUCTS. With respect to complaints
indicating a possible adverse reaction to or from any of the PRODUCTS which in
BARD's reasonable opinion requires the filing of a Medical Device Report with
FDA, such notification shall occur within two (2) days of receipt by BARD of the
complaint. Otherwise, BARD shall so notify PROCYTE of PRODUCT complaints as soon
as possible following BARD's receipt thereof. All information collected by BARD
in investigating a complaint or other occurrence will be provided by BARD to
PROCYTE, and BARD agrees to make reasonable efforts to obtain any additional
medical or technical information which PROCYTE may request. PROCYTE and BARD
agree to cooperate in sharing information and evaluating any reports regarding
adverse reactions to assess the relationship of such to the PRODUCTS.
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<PAGE>
IN WITNESS WHEREOF, the respective parties have caused this Agreement
to be executed in duplicate by their respective duly authorized officers both as
of the date and year first above written.
BARD: PROCYTE:
Bard Medical Division, ProCyte Corporation
C. R. Bard, Inc.
By: /s/ John H. Weiland By: /s/ John F. Clifford
---------------------------- ----------------------------
Title: Group President Title: President & CEO
-------------------------- ---------------------------
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<PAGE>
SCHEDULE A
DESCRIPTION OF PRODUCTS
Current:
Iamin-Registered Trademark- Hydrating Gel - contains copper peptide
15 gram tube 24 tubes/case Reorder #M40023
90 gram tube 12 tubes/case Reorder #M40022
Iamin-Registered Trademark- Wound Cleanser - contains copper peptide
8 ounce spray bottle 6/case Reorder #WC008
2/3rd ounce unit dose 24/box Reorder #WC023
OsmoCyte-Registered Trademark- Pillow Wound Dressing
1.5 inch x 3 inch 10/box Reorder #L40037
3 inch x 3 inch 10/box Reorder #L40034
4 inch x 4 inch 10/box Reorder #L40035
ProCyte Transparent Film Dressing
2.375 inch x 2.75 inch 100/box Reorder #TF023
4 inch x 5.5 inch 50/box Reorder #TF045
6 inch x 6 inch 25/box Reorder #TF066
8 inch x 10 inch 10/box Reorder #TF810
OsmoCyte-Registered Trademark- PCA Pillow Wound Dressing - contains
copper peptide
1.5 inch x 3 inch 10/box
3 inch x 3 inch 10/box
4 inch x 4 inch 10/box
Iamin-Registered Trademark- Hydrating Gel II - contains copper
peptide and glycerin (name subject to change or product may replace
current Iamin-Registered Trademark- Hydrating Gel)
15 gram tube 24 tubes/case
90 gram tube 12 tubes/case
OsmoCyte-Registered Trademark- Island Dressing
4.5 inch x 4.5 inch Pending
2.5 inch x 2.5 inch Pending
26
<PAGE>
SCHEDULE B
PATENTS AND PATENT APPLICATIONS IN THE
TERRITORY
<TABLE>
<CAPTION>
Owned by PROCYTE:
<S> <C>
US Patent: Use of GHL:Cu as a Wound Healing and Anti-Inflammatory Agent
US Patent No.: 4,760,051
Issued: July 26, 1988
US Patent: Method for Inducing Biological Coverings in Wounds
US Patent No.: 4,810,693
Issued: March 7, 1989
US Patent: Method of Healing Wounds in Horses
US Patent No.: 4,937,230
Issued: June 26, 1990
US Patent: Cosmetic and Skin Treatment Compositions
US Patent No.: 5,348,943
Issued: September 20, 1994
Canadian Patent: Use of GHL:Cu as a Wound Healing and Anti-Inflammatory Agent
Patent No.: 1,286,988
Issued: July 30, 1991
Canadian Patent: Cosmetic and Skin Treatment Compositions
Patent No.: 1,335,568
Issued: May 16, 1995
Licensed by PROCYTE:
US Patent: Method for Preparing Polyacrylonitrile Copolymers by
Heterogeneous Reaction of Polyacrylonitrile Aquagel
US Patent No.: 4,943,618
Issued: July 24, 1990
</TABLE>
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<PAGE>
SCHEDULE C
DESCRIPTION OF TOOLING
[ * ]
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SCHEDULE D
TRADEMARKS
1. Iamin (U.S. Registration Only)
2. OsmoCyte (U.S. Registration Only)
29
<PAGE>
SCHEDULE E
TERMS AND CONDITIONS OF SALE/PURCHASE
1. Taxes. Prices do not include sales, excise, use or other taxes, duties
or fees now in effect or hereafter levied which PROCYTE may be required
to pay or collect in connection with the sale of PRODUCTS to BARD; all
such taxes, duties and fees shall be for the account of BARD, who shall
pay PROCYTE net thirty (30) days following receipt of an invoice
relating thereto.
2. Delivery. All PRODUCTS shall be delivered to BARD F.O.B. PROCYTE's
manufacturing facility. Title to and risk of loss shall pass to BARD on
delivery. PROCYTE shall have the right to make shipments and/or
deliveries in separate lots and each such shipment or delivery shall
constitute a distinct and separate contract.
3. Inspection. BARD shall promptly inspect PRODUCTS upon receipt and
either accept or reject them. BARD will be deemed to have accepted
PRODUCTS if BARD fails to give written notice of rejection within 10
days of receipt of PRODUCTS. Failure to so inspect or reject shall not
waive PROCYTE's warranty obligations hereunder.
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SCHEDULE F
INITIAL SELLING PRICES FOR PRODUCTS
(SEE ATTACHED)
PROCYTE shall have the right upon written notice to BARD to increase
the [ * ], such increase to be effective on the [ * ] immediately following the
date of such notice. Any such increase shall be [ * ] between the effective date
of such increase and the date of the previous increase or, with respect to the
first increase, the EFFECTIVE DATE. In addition, at the end of each [ * ] period
following the EFFECTIVE DATE, PROCYTE shall be entitled to increase the [ * ],
effective during the [ * ], so that PROCYTE's [ * ].
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WOUND CARE PRODUCTS BARD PRICE LIST
SCHEDULE F
<TABLE>
<CAPTION>
12/18/97 12/18/97
Order Price
Item Product Unit Size Sample price Price per case each
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
<S> <C> <C> <C> <C>
Iamin-Registered Trademark-Hydrating 15 gm tube - 24/case [ * ] [ * ] [ * ]
Gel
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
Iamin-Registered Trademark-Hydrating 90 gm tube - 12/case [ * ] [ * ] [ * ]
Gel
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
New Iamin-Registered Trademark-Gel 15 gm tube - 24/case [ * ] [ * ] [ * ]
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
New Iamin-Registered Trademark-Gel 90 gm tube - 12/case [ * ] [ * ] [ * ]
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
OsmoCyte-Registered Trademark-Pillow 0.75" x 6" - 10/box - 10 [ * ] [ * ] [ * ]
Wound Dressing boxes/case
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
OsmoCyte-Registered Trademark-Pillow 1.5" x 3.0" - 10/box - 10 [ * ] [ * ] [ * ]
Wound Dressing boxes/case
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
OsmoCyte-Registered Trademark-Pillow 3" x 3" - 10/box - 5 boxes/case [ * ] [ * ] [ * ]
Wound Dressing
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
OsmoCyte-Registered Trademark-Pillow 4" x 4" - 10/box - 5 boxes/case [ * ] [ * ] [ * ]
Wound Dressing
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
OsmoCyte-Registered Trademark-Pillow 1.5" x 3" - Bulk [ * ] [ * ] [ * ]
Wound Drsg Nonsterile
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
OsmoCyte-Registered Trademark-Pillow 0.75" x 6" - 10/box - 10 [ * ] [ * ] [ * ]
Wound Dressing boxes/case
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
OsmoCyte-Registered Trademark-Pillow 1.5" x 3.0" - 10/box - 10 [ * ] [ * ] [ * ]
Wound Dressing boxes/case
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
OsmoCyte-Registered Trademark-Pillow 3" x 3" - 10/box - 5 boxes/case [ * ] [ * ] [ * ]
Wound Dressing
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
OsmoCyte-Registered Trademark-Pillow 4" x 4" - 10/box - 5 boxes/case [ * ] [ * ] [ * ]
Wound Dressing
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
OsmoCyte-Registered Trademark-Island 2.5" x 2.5" - 10/box - 5 [ * ] [ * ] [ * ]
boxes/case
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
OsmoCyte-Registered Trademark-Island 4.5" x 4.5" - 10/box - 5 [ * ] [ * ] [ * ]
boxes/case
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
Iamin-Registered Trademark-Wound 8 oz. spray bottle - 6/case [ * ] [ * ] [ * ]
Cleanser
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
Iamin-Registered Trademark-Wound 2/3 oz. unit dose - 24/box - 4 [ * ] [ * ] [ * ]
Cleanser boxes/case
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
ProCyte Transparent Film Dressing 2.375" x 2.75" - 100/Box - [ * ] [ * ] [ * ]
4/case
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
ProCyte Transparent Film Dressing 4" x 5.5" - 50/box - 4 [ * ] [ * ] [ * ]
boxes/case
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
ProCyte Transparent Film Dressing 6" x 6" - 25/box - 4 boxes/case [ * ] [ * ] [ * ]
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
ProCyte Transparent Film Dressing 8" x 10" - 10/box - 8 boxes/case [ * ] [ * ] [ * ]
- --------------------------------------- --------------------------------- ------------- ---------------- ------------
</TABLE>
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SCHEDULE G
[ * ]
[ * ]
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<PAGE>
EXHIBIT 13.1
SELECTED FINANCIAL DATA
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA: 1997 1996 1995 1994 1993
- ------------------------------------ ------------- ------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 1,856,776 $ 3,275,957 $ 4,320,056 $ 4,472,983 $ 1,939,517
Costs and expenses.................. 8,305,420 12,633,076 16,714,991 16,626,701 9,612,531
------------- ------------- -------------- -------------- -------------
Net loss............................ $ (6,448,644) $ (9,357,119) $ (12,394,935) $ (12,153,718) $ (7,673,014)
------------- ------------- -------------- -------------- -------------
------------- ------------- -------------- -------------- -------------
Net loss per common share........... $ (0.48) $ (0.71) $ (0.95) $ (0.97) $ (0.80)
Weighted average number of common
shares used in computing net loss
per common share.................. 13,326,929 13,210,036 13,100,818 12,593,131 9,575,218
------------- ------------- -------------- -------------- -------------
------------- ------------- -------------- -------------- -------------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------
BALANCE SHEET DATA: 1997 1996 1995 1994 1993
- ------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Cash, cash equivalents and short-term
investments........................ $ 12,866,617 $ 20,846,836 $ 36,077,520 $ 43,014,137 $ 22,653,578
Working capital...................... 14,482,669 20,647,423 30,438,486 41,746,596 21,170,301
Total assets......................... 21,310,959 27,963,658 45,093,558 50,013,086 26,265,524
Total liabilities.................... 694,462 1,124,881 9,209,004 1,863,311 1,797,292
Accumulated deficit.................. (62,318,983) (55,870,339) (46513220 (34,118,285) (21,964,567)
Stockholders' equity................. 20,616,497 26,838,777 35,884,554 48,149,775 24,468,232
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF DELOITTE & TOUCHE LLP
INDEPENDENT AUDITORS' CONSENT
Board of Directors
ProCyte Corporation
Redmond, Washington
We consent to the incorporation by reference in Registration Statement No.
33-48809 of ProCyte Corporation on Form S-8 of our report dated March 25, 1998,
included in this Annual Report on Form 10-K of ProCyte Corporation for the year
ended December 31, 1997.
DELOITTE & TOUCHE LLP
Seattle, Washington
March 25, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1998
<CASH> 3,003,524
<SECURITIES> 9,863,093
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 1,927,325
<CURRENT-ASSETS> 15,157,076
<PP&E> 7,998,385
<DEPRECIATION> 2,394,562
<TOTAL-ASSETS> 21,310,959
<CURRENT-LIABILITIES> 674,407
<BONDS> 0
0
0
<COMMON> 133,650
<OTHER-SE> 20,482,847
<TOTAL-LIABILITY-AND-EQUITY> 21,310,959
<SALES> 184,034
<TOTAL-REVENUES> 1,856,776
<CGS> 449,261
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,305,420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (6,448,644)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,448,644)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,448,644)
<EPS-PRIMARY> (0.48)
<EPS-DILUTED> (0.48)
</TABLE>
