<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
For the Quarterly Period Ended June 30, 1999
Commission File Number 0-18044
PROCYTE CORPORATION
(Exact name of the registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C>
Washington 91-1307460
--------------
(State of incorporation) (I.R.S. Employer Identification No.)
8511 154th Avenue N.E., Redmond, WA 98052
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (425) 869-1239
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes {X} No
As of August 9, 1999, there were issued and outstanding 15,400,850 shares of
common stock, par value $.01 per share.
1
<PAGE>
ProCyte Corporation
INDEX
<TABLE>
<S> <C>
Part I - Financial Information................................................................ 3
Item 1. Condensed Financial Statements......................................................... 3
Balance Sheets - as of June 30, 1999 and December 31, 1998 (unaudited)..................... 3
Statements of Operations - three and six months ended June 30, 1999 and 1998 (unaudited)... 4
Statements of Cash Flows - six months ended June 30, 1999 and 1998 (unaudited)............. 5
Statements of Stockholders' Equity - six months ended June 30, 1999 and 1998 (unaudited)... 6
Notes to Financial Statements (unaudited).................................................. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 20
Part II - Other Information..................................................................... 20
Item 1. Legal Proceedings...................................................................... 20
Item 2. Change in Securities................................................................... 20
Item 3. Defaults Upon Senior Securities........................................................ 21
Item 4. Submission of Matters to a Vote of Security Holders.................................... 21
Item 5. Other Information...................................................................... 21
Item 6. Exhibits and Reports on Form 8-K....................................................... 22
Signatures...................................................................................... 22
EXHIBIT INDEX................................................................................... 23
</TABLE>
2
<PAGE>
Part I - Financial Information
Item 1. Condensed Financial Statements
Balance Sheets - as of June 30, 1999 and December 31, 1998 (unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------
June 30, 1999 December 31, 1998
-------------------------------------------------
<S> <C> <C>
Assets
Cash, cash equivalents and securities available for sale.......... $ 5,019,050 $ 6,938,981
Accounts receivable, net of reserve for uncollectable accounts
of $65,421 and $54,948 at June 30, 1999 and December 31, 1998,
respectively..................................................... 634,754 692,196
Other current assets.............................................. 918,686 574,967
-------------------------------------------------
Total current assets.......................................... 6,572,490 8,206,144
Raw materials and work in process, net of reserve for excess and
obsolete inventory of $300,000 at June 30, 1999 and December
31, 1998......................................................... 1,492,032 1,493,557
Property and equipment, net of accumulated depreciation of
$3,314,266 and $3,008,159 at June 30, 1999 and December 31,
1998, respectively............................................... 4,913,942 5,163,967
Intangible assets, net of accumulated amortization of $394,833
and $281,829 at June 30, 1999 and December 31, 1998,
respectively..................................................... 3,571,609 3,159,101
Other assets...................................................... 229,859 279,609
-------------------------------------------------
Total Assets.................................................. $ 16,779,932 $ 18,302,378
=================================================
Liabilities and Stockholders' Equity
Total current liabilities......................................... $ 584,022 $ 497,611
Other liabilities................................................. 133,981 125,217
-------------------------------------------------
Total liabilities............................................. 718,003 622,828
Common stock and additional paid in capital....................... 84,875,812 84,465,480
Accumulated deficit............................................... (68,813,883) (66,785,930)
-------------------------------------------------
Stockholders' equity.......................................... 16,061,929 17,679,550
-------------------------------------------------
Total Liabilities and Stockholders' Equity.................... $ 16,779,932 $ 18,302,378
=================================================
</TABLE>
See notes to financial statements
3
<PAGE>
Statements of Operations - three and six months ended June 30, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
Three months ended June 30 Six months ended June 30
1999 1998 1999 1998
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Product sales........................... $ 969,981 $ 609,126 $ 1,919,562 $ 845,586
Contract manufacturing.................. 197,430 105,624 301,750 131,987
Licenses, royalties and other........... 14,703 12,334 98,100 12,334
-----------------------------------------------------------------------------------
Total revenue........................... 1,182,114 727,084 2,319,412 989,907
Cost of product sales................... 344,826 216,246 742,947 343,789
-----------------------------------------------------------------------------------
837,288 510,838 1,576,465 646,118
Operating Expenses
Selling, general and administrative..... 1,510,662 1,123,229 2,811,272 1,941,088
Research and development................ 463,386 570,907 943,070 1,113,188
-----------------------------------------------------------------------------------
Total expenses.......................... 1,974,048 1,694,136 3,754,342 3,054,276
Operating Loss.......................... (1,136,760) (1,183,298) (2,177,877) (2,408,158)
Interest Income......................... 66,946 142,446 149,924 318,699
-----------------------------------------------------------------------------------
Net loss................................ ($1,069,814) ($1,040,852) ($2,027,953) ($2,089,459)
=====================================================================================
Net loss per common share................ ($0.07) ($0.07) ($0.14) ($0.15)
Weighted average number of common shares
used in computing net loss per common
share................................... 14,642,507 14,090,581 14,582,685 13,727,770
</TABLE>
See notes to financial statements
4
<PAGE>
Statements of Cash Flows - six months ended June 30, 1999 and 1998 (unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------
Six months ended June 30,
1999 1998
--------------------------------------------------
<S> <C> <C>
Operating Activities
Net Loss ($2,027,953) ($2,089,459)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................................. 419,111 381,000
Loss on sale of securities.................................... 6,980 -
Stock issued in payment of expenses........................... 160,332 -
Changes in assets and liabilities:
Decrease (increase) in accounts receivable.................... 57,442 (107,327)
Decrease (increase) in other current assets................... (343,719) 141,920
Decrease (increase) in raw materials and work in process...... 1,525 (264,580)
Increase in other non-current assets.......................... (2,564) -
Increase (decrease) in current liabilities.................... 86,411 (101,350)
Increase in other liabilities................................. 8,764 92,142
--------------------------------------------------
Net cash used in operating activities...................... (1,633,671) (1,947,654)
Investing Activities
Acquisition of NextDerm, Inc. (1999) and purchase of assets
of HumaTech Corp. (1998)..................................... (285,000) (1,925,000)
Purchase of property and equipment........................... (46,594) (69,247)
Purchase of securities....................................... - (499,922)
Proceeds from sale or maturity of securities................. 3,415,605 4,869,052
Decrease in security deposit................................. 52,314 -
--------------------------------------------------
Net cash provided by investing activities.................. 3,136,325 2,374,883
--------------------------------------------------
Net Increase in Cash and Cash Equivalents.................. 1,502,654 427,229
Cash and Cash Equivalents:
At Beginning of Period.................................... 2,003,896 3,003,524
--------------------------------------------------
At End of Period.......................................... $ 3,506,550 $ 3,430,753
==================================================
</TABLE>
See notes to financial statements
5
<PAGE>
Statements of Stockholders' Equity - six months ended June 30, 1999 and 1998
(unaudited)
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
Common Stock Additional
------------ paid-in Accumulated
Shares Par Value Capital Deficit Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1998......... 13,364,958 $133,650 $82,801,830 ($62,318,983) $20,616,497
Shares issued on April 27, 1998
in connection with the purchase
of the assets of HumaTech
Corporation...................... 1,088,435 10,884 1,489,116 1,500,000
Net loss.......................... (2,089,459) (2,089,459)
-------------------------------------------------------------------------------------------
Balance - June 30, 1998........... 14,453,393 $144,534 $84,290,946 ($64,408,442) $20,027,038
===========================================================================================
Balance - January 1, 1999......... 14,489,803 $144,898 $84,320,582 ($66,785,930) $17,679,550
Shares issued on January 4, 1999
for fourth quarter 1998 retainer
under the 1998 Non-employee
Director stock plan.............. 32,395 324 14,676 15,000
Shares issued on April 1, 1999
for first quarter 1999 retainer
under the 1998 Non-employee
Director stock plan.............. 25,260 253 14,747 15,000
Shares issued on May 26, 1999 for
HumaTech earn-out payments.......
236,748 2,367 127,965 130,332
Shares issued on June 30, 1999
for the acquisition of NextDerm,
Inc.............................. 600,000 6,000 244,000 250,000
Net Loss.......................... (2,027,953) (2,027,953)
-------------------------------------------------------------------------------------------
Balance - June 30, 1999........... 15,384,206 $153,842 $84,721,970 (68,813,883) 16,061,929
===========================================================================================
</TABLE>
See notes to financial statements
6
<PAGE>
ProCyte Corporation
Notes to Financial Statements (unaudited)
1. Basis of Presentation
The accompanying unaudited condensed financial statements of ProCyte
Corporation ("ProCyte" or the "Company") for the three- and six-month periods
ended June 30, 1999 and 1998 have been prepared by the Company in accordance
with generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-X. Pursuant to
such rules and regulations, the condensed financial statements do not include
all of the information and footnotes required by generally accepted accounting
principles for audited financial statements. Accordingly, this financial
information should be read in conjunction with the complete audited financial
statements, including the notes thereto, which are included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998. In the opinion
of management, all material adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Interim results are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999.
2. Investments
At June 30, 1999, the Company's investments consisted entirely of US
Treasury notes and US Agency securities. At June 30, 1999, the cost and
estimated market value of the investments was $1,512,500 and all of the
investments matured in less than one year. There were no material unrealized
gains or losses on investments at June 30, 1999.
3. Inventories
Inventory is valued at the lower of cost or market. At June 30, 1999, the
finished goods inventory was valued at $767,246 and the related reserve remained
at $80,000. Also at that date raw materials were valued at $552,832 and work in
process was valued at $1,239,200.
4. Stockholders' Equity
Information relating to stock options granted, exercised, canceled and
currently exercisable is as follows:
<TABLE>
<CAPTION>
Shares subject to Weighted average
option exercise price
---------------------- -----------------------
<S> <C> <C>
Balance - January 1, 1998 1,304,374 $2.94
Granted 636,500 $1.31
Exercised - -
Canceled (33,334) $2.94
-------------------------------------------------
Balance - June 30, 1998 1,907,540 $2.40
=================================================
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Shares subject to Weighted average
----------------- ----------------
option exercise price
------ --------------
<S> <C> <C>
Balance - January 1, 1999......................... 1,618,061 $2.18
Granted.......................................... 378,500 $0.86
Exercised........................................ - -
Canceled......................................... (187,666) $1.19
-------------------------------------------------
Balance - June 30, 1999 1,808,895 $2.00
=================================================
Currently exercisable 987,244 $2.64
=================================================
</TABLE>
During the three-month period ended June 30, 1999, the Compensation
Committee of the Company's Board of Directors awarded incentive stock options
and non-qualified stock options to employees and consultants to purchase 83,000
shares of common stock under the Company's 1989 Restated Stock Option Plan. In
addition, options to purchase 30,000 shares of common stock were automatically
granted to the Company's non-employee directors under the 1991 Non-employee
Director Stock Option Plan and the 1996 Stock Option Plan. At June 30, 1999 the
remaining number of shares reserved for issuance under the Company's various
option plans were as follows:
<TABLE>
<CAPTION>
Option plan Number of shares reserved for option grants
----------- -------------------------------------------
<S> <C>
1989 Restated Stock Option Plan.......................... 51,684
1996 Stock Option Plan................................... 324,500
1991 Non-Employee Director Stock Option Plan............. -
</TABLE>
On May 26, 1999 the Company's Board of Directors reserved 100,000 shares of
the Company's common stock for common stock warrants and, in connection with a
contract for professional services, issued warrants for 33,334 shares at $0.6875
per share, the market price on the day the warrants were granted, as well as
33,333 shares at $1.6875 (one dollar above the market price,) and 33,333 shares
at $2.6875 (two dollars above the market price.) Each of the three warrants has
a five year life and vests one-third on the date granted, one-third six months
after the grant date, and one-third twelve months after the grant date.
5. NextDerm Acquisition
During the second quarter ProCyte acquired all of the stock of NextDerm,
Inc., a new company developing topical therapeutics for skin conditions such as
acne and oily skin. The consideration for the acquisition included $250,000 in
cash and 600,000 shares of ProCyte common stock with a value of $250,000 on the
date that the terms were established. The Company accounted for the acquisition
as a purchase and recorded $525,000 of goodwill. In connection with the
acquisition, ProCyte entered into consulting arrangements with two of the
principal NextDerm shareholders and nominated Mr. Glenn Oclassen, the chairman
of the NextDerm board of directors, for election to the ProCyte board of
directors.
8
<PAGE>
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 1998 Annual
Report to Shareholders, contains Forward-Looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. The words "believe", "expect", "intend",
"anticipate", variations of such words and similar expressions identify Forward-
Looking statements, but their absence does not mean that the statement is not
Forward-Looking. These statements are not guaranties of future performance and
are subject to certain risks, uncertainties and assumptions that are difficult
to predict. Factors that could affect the Company's actual results include,
among other things, the availability of adequate funding, the availability of
contract manufacturing opportunities, relationships with corporate
collaborators, the rate of market acceptance of the Company's products, the
status of competing products, and the Company's ability to obtain and defend
patent and intellectual property rights and to successfully develop and market
the Company's existing and future products. See "Important Factors Regarding
Forward-Looking Statements." Readers are cautioned not to place undue reliance
on these Forward-Looking statements, which speak only as of the date of this
report. ProCyte undertakes no obligation to update publicly any Forward-Looking
statement to reflect new information, events or circumstances after the date of
this report or to reflect the occurrence of unanticipated events.
Corporate Overview
During the first half of 1999 ProCyte continued the development and
marketing of its skin health and hair care products, introduced new packaging
for its therapeutic skin health products, introduced a line of new anti-aging
products, and continued to work with its distributors to increase sales of its
wound care products. As the Company's product line has expanded, it has
continued to focus its direct efforts on specialty tissue repair sectors -
marketing its products primarily to dermatologists, plastic surgeons and
cosmetic surgeons.
The Company has continued to refine its approach to marketing the
GraftCyte(TM) line of copper peptide containing wound care products for use
following hair restoration. ProCyte is the only company to provide a line of
products that address the importance of wound repair in the hair transplant
process. The Company's GraftCyte(TM) products are promoted through specialty
distributors, its own sales force and contract sales representatives.
The Company has also continued to emphasize its Complex Cu\\3\\(TM)
Intensive Repair Creme, a product used to treat patients following chemical
peels, dermabrasion and laser treatments, as a complement to its line of
prescription and over-the-counter topical drugs, sun protection and anti-aging
skin care products. The Complex Cu\\3\\(TM) products provide a comprehensive
approach to post-laser care and allow the Company to differentiate its line of
skin care products on the basis of its proprietary copper peptide technology. In
January 1999 the Company and Neutrogena signed a product study agreement
covering the ongoing evaluation of ProCyte's proprietary copper peptide
technology for inclusion in potential products that Neutrogena would sell in the
worldwide consumer skin care market. During the first quarter, ProCyte began
shipping its skin care products in redesigned packaging including a new icon and
the tagline-"Healing the Wounds of Time(TM)." The new packaging received an
enthusiastic response from physician customers. During the second quarter the
Company acquired NextDerm, Inc. and with it the rights to several skin care
products in various stages of development. Also at the end of the second quarter
the Company launched its Neova(TM) Therapy line of anti-aging products in
response to demand from physician customers.
9
<PAGE>
These products are distributed using the Company's own sales force, contract
sales representatives and specialty distributors. The Company's sales force has
been expanded with the addition of four part-time contract sales representatives
and during the first quarter of 1999 the Company signed a distribution agreement
with Sigmacon Medical Products of Toronto, Canada, covering the Company's skin
and hair care products in the Canadian dermatology and cosmetic surgery markets.
ProCyte has a wound care distribution agreement with the Bard Medical
Division ("Bard") of C.R. Bard, Inc. Subject to increasing minimum annual
purchase requirements, the satisfaction of which is not assured, Bard has the
right to distribute the Company's wound care products, including Iamin(R)
Hydrating Gel, Iamin(R) Wound Cleanser, and OsmoCyte(R) Pillow Wound
Dressings, in the hospital, nursing home and extended care markets in the United
States. ProCyte also has a distribution agreement with Tanox Pharma
International, Inc. for Iamin(R) Hydrating Gel and OsmoCyte(R) Pillow Wound
Dressings in China, Taiwan and Hong Kong and other Asian countries, and with
Merck KGaA for Iamin(R) Hydrating Gel in Latin America and South Africa.
Iamin(R) Hydrating Gel has been approved as a pharmaceutical in China and
Taiwan, and the process of obtaining approval in various Latin American nations
is underway.
The Company primarily markets its Tricomin(R) line of triamino copper
complex containing hair care products to physicians. Tricomin(R) shampoos,
conditioners, and follicle therapy solution are positioned to participate in the
rapidly growing $1.5 billion United States hair care market as a program for the
maintenance of thinning hair in men and women. Hair follicles require high
concentrations of biological copper and the Tricomin(R) products deliver
copper along with amino acids for nourishing and stimulating the hair and scalp
for improved health, strength, and appearance. The Company has initiated a
series of consumer advertisements focused specifically on the hair care needs
and concerns of the aging babyboomer population and has begun selling the
Tricomin(R) products directly to consumers through its web site at
www.tricomin.com. In January 1999 the Company and Neutrogena signed an option
and product study agreement covering the ongoing evaluation of the Company's
proprietary triamino copper technology for use in potential consumer hair care
products to be marketed worldwide by Neutrogena.
Operating Losses
The Company has incurred operating losses since its inception due to the
marketing expense of product launches and the costs of supporting research,
development and clinical studies of its proprietary technology at a time when
sales of the Company's products and other revenues do not yet exceed operating
expenses. At June 30, 1999 the Company's accumulated deficit was approximately
$68.8 million. The Company expects to incur additional operating losses until
its product lines have been further expanded and have achieved market
acceptance.
Revenue
During the six-month period ended June 30, 1999 ProCyte generated total
operating revenue of $2,319,412 from product sales, contract manufacturing and
royalties. Comparable revenues were $989,907 for the six-month period ended
June 30, 1998. Total operating revenue was $1,182,114 and $727,084 for the
second quarter of 1999 and 1998, respectively.
Revenue from product sales was $1,919,562 during the six-month period ended
June 30, 1999, up $1,073,976 or 127% from $845,586 during the comparable six-
month period in 1998. Revenue from product sales was $969,981 and $609,126 for
the second quarter of 1999 and 1998,
10
<PAGE>
respectively, an increase of $360,855 or 59%. The increase was primarily a
result of the expanded product line obtained through the acquisition of HumaTech
Corporation on April 27, 1998 and the introduction of the new Tricomin(R) line
of hair care products incorporating the Company's proprietary copper peptide
technology.
Contract manufacturing revenue was $301,750 during the six-month period
ended June 30, 1999, an increase of $169,763 or 129% from $131,987 during the
comparable six-month period in 1998. Contract manufacturing revenue was
$197,430 and $105,624 for the second quarter of 1999 and 1998, respectively, an
increase of $91,806 or 87%. This increase reflects a greater volume of projects
undertaken for customers. The Company is considering the feasibility of
disposing of its contract manufacturing operations and the facility used for
such purposes and has retained the investment banking firm of Alexander Hutton
to assist it with this and related matters. See "Important Factors Regarding
Forward-Looking Statements - Uncertainties related to Contract Manufacturing."
Revenue from royalties and licenses in 1999 includes fees from the product study
and option agreements with Neutrogena recognized during the first quarter. No
such income was earned during the first half of 1998.
Interest income was $149,924 during the six-month period ended June 30,
1999, down $168,755 or 53% from $318,699 during the comparable period in 1998.
Interest income was $66,946 and $142,446 during the second quarter of 1999 and
1998, respectively, a decrease of $75,500 or 53%. The decrease in interest
income was primarily a result of reduced funds available for investment.
Expenses
The cost of product sales was $742,947 (38.7% of product sales) for the six-
month period ended June 30, 1999, an increase of $399,158 or 116% from $343,789
(40.7% of product sales) during the comparable period in 1998. The cost of
product sales was $344,826 and $216,246 during the second quarter of 1999 and
1998, respectively, an increase of $128,580 or 59%. The increase in the cost of
products sold reflects the growth in the number units sold and the introduction
of skin health products with generally lower margins than those based on
proprietary technology.
Selling, general and administrative expenses were $2,811,272 during the six-
month period ended June 30, 1999, an increase of $870,184 or 45% from $1,941,088
during the comparable period in 1998. Selling, general and administrative
expenses were $1,510,662 and $1,123,229 during the second quarter of 1999 and
1998, respectively, an increase of $387,433 or 34%. The increase reflects the
higher level of sales support required for new products and the cost of entering
the consumer hair care market. The Company anticipates that during the
remainder of 1999 expenditures will remain at or near current levels in
proportion to product sales.
Research and development expenses were $943,070 during the six month period
ended June 30, 1999, down $170,118 or 15% from $1,113,188 during the comparable
period in 1998. Research and development expenses were $463,386 and $570,907
during the second quarter of 1999 and 1998, respectively, a decrease of $107,521
or 19%. The decrease resulted from the completion of certain research projects
and studies. The Company anticipates that expenditures for product development
will remain at or near current levels during the remainder of 1999.
11
<PAGE>
Liquidity and Capital Resources
The Company has relied primarily on equity financing, product sales,
contract manufacturing, interest income and corporate partnerships to fund its
operations and capital expenditures. At June 30, 1999, the Company had
approximately $5.0 million in cash, cash equivalents and securities available
for sale, as compared to $6.9 million at December 31, 1998. The $1.9 million
decrease in cash reflects primarily the $1.6 million cash outflow from
operations and the payment of $250,000 for the acquisition of NextDerm, Inc.
The Company expects that its operating cash needs will continue at similar
levels in future periods.
The decrease of $20,913 in accounts receivable from December 31, 1998 to
June 30, 1999 reflects the receipt of royalties accrued at year-end net of an
increase in balances due from customers. The increase in other current assets
from December 31, 1998 to June 30, 1999 includes an increase of $197,913 in
finished goods inventory, primarily as a result of new products and in support
of higher sales volumes, and an increase of $145,806 in prepaid insurance
premiums. During the second quarter of 1999 the Company made the payments
required under certain employment and non-competition agreements by issuing
shares of common stock with a value of $130,332.
Since March 25, 1999 the Company's common stock has traded on the NASD OTC
bulletin board. See "Important Factors Regarding Forward-Looking Statements -
NASDAQ National Market System listing."
The Company believes that its existing cash, cash equivalents, securities
available for sale, and interest thereon, will be sufficient to meet its capital
requirements at least for the next twelve months. However, there can be no
assurance that the underlying assumed levels of revenue and expense will prove
accurate. Although the Company believes that its existing and potential
products appear promising, it is unknown whether any of such products will prove
commercially viable. In any event, substantial additional funds will be needed
to commercialize existing products and to continue development of potential
products. The Company will depend upon product revenues contract manufacturing,
interest income, asset redeployment, equity financing, and funding from
corporate partnerships to meet its future capital needs. The Company has
engaged the investment banking firm of Alexander Hutton to advise it on matters
including disposition of assets and financing alternatives. There can be no
assurance that additional funds will be available as needed or on terms that are
acceptable to the Company. In addition, the Company's ability to raise funds is
likely to be adversely affected if it is unable to regain a listing on a
national securities exchange. If the Company is unable to obtain sufficient
funds to satisfy its cash requirements, the Company will be required to delay,
reduce or eliminate some or all of its research and development activities and
manufacturing and administrative programs, or dispose of assets or technology.
See "Important Factors Regarding Forward-Looking Statements - Need for
Additional Capital", "Important Factors Regarding Forward-Looking Statements -
Uncertainties related to Contract Manufacturing", and "Important Factors
Regarding Forward-Looking Statements - NASDAQ National Market System listing."
Year 2000 Software Issue
The Company has completed assessment, remediation and testing of its
information technology ("IT") systems. The Company did not incur any material
incremental costs in this regard. Other than the installation of additional
upgrades and modifications provided by vendors, if any, the Company does not
plan to conduct further assessment, remediation or testing of its IT systems and
consequently does not expect to incur additional year 2000 related costs with
respect to those
12
<PAGE>
systems. There can be no assurance, however, that the Company has accurately
assessed the need for software and computer upgrades or modifications and if
such upgrades and modifications are not made, or if they are not made on a
timely basis, year 2000 problems could have a material impact on the operations
of the Company.
The Company has completed assessment, remediation and testing of the non-IT
systems it considers critical and has completed assessment and either completed
or contracted for the remediation of its non-critical non-IT systems. The
Company anticipates that the remaining remediation and testing of these systems
will be completed in the third quarter. The Company has not incurred material
costs in connection with assessment, remediation and testing of non-IT systems
and does not anticipate that the costs related to the remaining remediation and
testing of non-IT systems will be material.
Funding for remediation of both IT and non-IT systems has come from funds
provided by operations and the Company expects to fund any additional year 2000
related costs in a similar manner. No other IT projects were deferred as a
result of year 2000 remediation projects.
The Company is not dependent on any single source of supply for its products
and consequently does not intend to survey suppliers or other third parties
concerning their year 2000 preparedness. The Company has recently reviewed the
public statements made by its significant customers and service providers
(including providers of financial services, utilities and telecommunications
services,) all of which assert that their systems are year 2000 compliant or
expected to be year 2000 compliant by the end of 1999. In the Company's
judgment the most reasonably likely worst case scenario would be short-term
disruptions to the Company's supply chain and customer payments. The Company
has arranged for stockpiles of certain raw materials to attempt to mitigate the
risk of short-term supply chain disruption and expects that its financial
position will be adequate to accommodate a short-term disruption of customer
payments. The Company has not developed a formal contingency plan for such
disruptions and is currently analyzing the costs and benefits of preparing such
a plan. The Company expects to decide during the third quarter if such a formal
plan is warranted. There can be no assurance that the Company's efforts will
mitigate the risk of disruptions and significant failures of customers or other
third parties could materially affect the Company's business.
The Company believes it is taking the necessary steps regarding year 2000
issues with respect to matters within the Company's control as it seeks to
minimize the impact of year 2000 issues on its business. However, despite these
steps there can be no assurance that the systems on which the Company relies are
year 2000 compliant or can be made year 2000 compliant in a timely manner, that
the Company will not incur significant additional expenses in dealing with year
2000 issues, that the third parties on which the Company's business depends will
avoid year 2000 issues, or that the year 2000 issues will not materially
adversely affect the Company's business, financial condition or results of
operations.
Important Factors Regarding Forward-Looking Statements
History of Operating Losses; Accumulated Deficit; Fluctuations in Future
Earnings
The Company launched its first product based on its proprietary copper
peptide technology in 1996, launched additional products based on that
technology in 1997 and 1998 and will continue to launch new copper peptide based
products in 1999. To date, however, the Company has generated
13
<PAGE>
relatively minor revenues from sales of products based on its proprietary
technology and there can be no assurance that the Company will be able to
generate sufficient product sales from those products to achieve a profitable
level of operations. As of June 30, 1999, the Company's accumulated deficit was
approximately $68.8 million. The Company expects to incur additional operating
losses at least through 1999. In addition to sales of products based on its
proprietary copper peptide technology, the Company's revenues have historically
included sales of non-proprietary products, license fees and royalties, revenue
from contract research and manufacturing, and interest income. The Company's
ability to achieve a consistent, profitable level of operations is dependent in
large part on successfully manufacturing and marketing its products, entering
into agreements with corporate partners for distribution and commercialization
of the Company's products and out-licensing of the Company's products and
technology, of which there can be no assurance. In addition, payments under
corporate partnerships and licensing arrangements, if any, may be subject to
significant fluctuations in both timing and amounts. The time required to reach
sustained profitability is highly uncertain, and there can be no assurance that
the Company will be able to achieve profitability on a sustained basis, if at
all. Moreover, if profitability is achieved, the level of profitability cannot
be predicted and it may vary significantly from quarter to quarter.
Need for Additional Capital
The Company expects negative cash flow from operations to continue at least
through 1999. The Company may require substantial additional funds to expand or
enhance its sales and marketing activities and to continue product development.
The Company's future capital requirements will depend on numerous factors,
including its efforts, and the efforts of its collaborative partners, to
commercialize its products; continued progress in the Company's research and
development programs; the results of research and development activities;
relationships with existing and future corporate collaborators, if any;
competing technological and market developments; the costs involved in filing,
prosecuting and enforcing patent claims; the time and costs of commercialization
activities; and other factors. At June 30, 1999 the Company had cash, cash
equivalents and securities available for sale of $5.0 million. The Company
estimates that at its planned rate of spending, its existing cash, cash
equivalents and securities available for sale and the interest income thereon
will be sufficient to meet its capital requirements at least for the next twelve
months. There can be no assurance that the underlying assumed levels of revenue
and expense will prove accurate. Whether or not these assumptions prove to be
accurate, the Company may need to raise additional capital. The Company has
engaged the investment banking firm of Alexander Hutton to advise it on matters
including disposition of assets and financing alternatives. The Company may be
required to seek additional funding through public or private financing,
including equity financing, or through collaborative arrangements. Adequate
funds for these purposes, whether obtained through financial markets or from
collaborative or other arrangements with corporate partners or other sources,
may not be available when needed or may not be available on terms favorable to
the Company, if at all. If issuing equity securities raises additional funds,
dilution to existing shareholders will result. In addition, in the event that
additional funds are obtained through arrangements with collaborative partners,
such arrangements may require the Company to relinquish rights to certain of its
technologies or potential products that it would otherwise seek to develop or
commercialize itself. If funding is insufficient at any time in the future, the
Company may be required to delay, scale back or eliminate some or all of its
marketing and research and development programs, to sell assets, or to license
third parties to commercialize products or technologies that the Company would
otherwise seek to develop itself. Furthermore, the terms of any such license
agreements or asset sales might be less favorable than if the Company were
negotiating from a stronger position. Moreover, if funding is insufficient at
any time in the future, and the Company's existing funds are depleted, the
Company may be required to cease operations.
14
<PAGE>
NASDAQ National Market System listing; Application of Rule 15g-9 and Penny Stock
Rules
Since March 25, 1999 the Company's Common Stock has traded on the NASD OTC
Bulletin Board. The Company had requested a continued NASDAQ National Market
System listing notwithstanding its failure to meet the NASDAQ minimum bid price
requirement and presented its plan to return to compliance with that requirement
at a hearing with NASDAQ officials held on February 12, 1999. On March 24, 1999
the Company was informed of the determination by the NASDAQ Listing
Qualifications Panel that Company's securities should be delisted. The Company
requested a review of this determination and on July 26, 1999 it was informed
that the request would not be considered. Because real-time price information
may no longer be available, an investor is likely to find it more difficult to
dispose of, or obtain accurate quotations on the market value of, the Company's
securities.
In addition, purchases and sales of the Company's securities may be subject
to Rule 15g-9 of the Exchange Act. This Rule imposes various sales practice
requirements on broker-dealers who sell securities governed by the Rule to
persons other than established customers and accredited investors (generally
institutions with assets exceeding $5 million or individuals with a net worth
exceeding $1 million or annual income exceeding $200,000 or $300,000 jointly
with their spouse). For transactions covered by Rule 15g-9, the broker-dealer
must specially determine the purchaser's suitability and obtain the purchaser's
written consent before the sale. Application of this Rule is likely to
adversely affect the ability of broker-dealers to sell the Company's securities,
the salability of the securities in the secondary market and the ability of the
Company to raise funds.
The Company's securities may also become subject to penny stock rules, which
could have a material adverse effect on their market liquidity. The Securities
and Exchange Commission regulates broker-dealer practices in connection with
transactions in "penny stocks," which generally are equity securities priced at
less than $5.00 per share (other than securities registered on certain national
securities exchanges or quoted on the NASDAQ system, provided that the exchange
or system gives current price and volume information). The penny stock rules
require a broker-dealer, before trading in a penny stock not exempt from the
rules, to give the customer a standardized document providing information about
penny stocks and the risks in the penny stock market, current bid and offer
quotations for the penny stock, and a statement of the compensation of the
broker-dealer and its salesperson in the transaction. The broker dealer must
also provide monthly account statements showing the market value of each penny
stock held in the customer's account. If the Company's common stock continues
to trade below the $5.00 per share threshold it may fall within the definition
of penny stocks. If the penny stock rules were to apply, these disclosure
requirements are likely to reduce the level of trading activity in the secondary
market for the Company's securities and make selling the securities more
difficult for an investor.
Uncertainties Related to Contract Manufacturing
Since inception, a substantial portion of the Company's revenues have been
derived from contract manufacturing as the Company has sought to more fully
utilize its existing facility's capacity while its own products were under
development. For the foreseeable future, ProCyte expects to continue to have
excess manufacturing capacity as it works to commercialize its potential
products. Accordingly, the Company will continue to seek contract manufacturing
opportunities. Contract manufacturing revenues will be adversely affected to
the extent the Company's customers decide to manufacture their products
themselves or choose to have them manufactured elsewhere. In addition, the
Company's contract manufacturing revenues may be adversely affected to the
extent its customers
15
<PAGE>
experience regulatory delays, product recalls, or competitive pressures in the
marketplace. Contract manufacturing projects, and the revenue derived from them,
may be subject to significant fluctuations in both timing and size. There can be
no assurance that contract revenues in the future will be significant.
The Company is considering the feasibility of disposing of its contract
manufacturing operations and the facility used for such purposes and has
retained the investment banking firm of Alexander Hutton to assist it with this
and related matters. Such a transaction may not be feasible on a timely basis
or may not be feasible with terms acceptable to the Company, or may not be
feasible at all.
Uncertainties Related to Product Development
From the Company's inception in 1986 until it launched its first commercial
product in 1996, substantially all of its resources were dedicated to the
research and development of wound healing and hair health applications of its
topically administered copper peptide compounds. To date the Company has
generated relatively minor revenues from sales of products based on its
proprietary copper peptide technology. There can be no assurance that the
Company's current products or potential products will be successfully
commercialized and accepted for use by physicians, healthcare providers and
consumers.
The Company is dependent upon the successful development of its current and
potential products. Development of the Company's potential products is highly
uncertain, and unanticipated developments, clinical and regulatory delays,
adverse or unexpected side effects or inadequate therapeutic efficacy could slow
or prevent the successful completion of the Company's product and technology
development. There can be no assurance that the Company will obtain regulatory
approval, that an approved product can be produced in commercial quantities at
reasonable costs or gain acceptance for use by physicians, healthcare providers
and consumers or that any potential products will be successfully marketed at
prices that would permit the Company to operate profitably, the failure of any
of which would have a material adverse effect on the Company's business,
financial condition and results of operations.
Dependence on and Management of Existing and Future Corporate Alliances
The successful commercialization of the Company's existing and future
products will depend upon ProCyte's ability to enter into and effectively manage
corporate partnerships. ProCyte currently promotes certain of its products
through specialty distributors. Other products and technology are licensed for
incorporation into products sold by others. In November 1997, the Company
entered into an exclusive worldwide supply and marketing agreement with Osmotics
Corporation ("Osmotics"), pursuant to which the Company granted Osmotics the
right to introduce products containing the Company's copper peptide technology
to the prestige skin care market. In December 1997, the Company entered into a
wound care distribution agreement with the Bard Medical Division ("Bard") of
C.R. Bard, Inc. Pursuant to this agreement, Bard is the exclusive supplier of
the Company's wound care products to the hospital, nursing home and extended
care markets in the United States and has agreed to increasing minimum annual
purchase requirements, the satisfaction of which is not assured. ProCyte has
also entered into similar agreements for the registration and distribution of
certain of its wound care products in the Far East and Latin America with Tanox
Pharma International, Inc. and Merck KGaA, respectively. During the first
quarter of 1999 the Company signed a distribution agreement with Sigmacon
Medical Products of Toronto, Canada, covering the Company's skin and hair care
products in the Canadian dermatology and cosmetic
16
<PAGE>
surgery markets. ProCyte plans to seek similar distribution partnerships in
additional countries as well as alliances for development, manufacturing,
marketing and distribution of products for the consumer market. Toward this end,
in January 1999 the Company and Neutrogena signed an option and product study
agreement covering the ongoing evaluation of the Company's proprietary triamino
copper technology for use in potential consumer hair care products to be
marketed worldwide by Neutrogena and a product study agreement covering the
ongoing evaluation of ProCyte's proprietary copper peptide technology for
inclusion in potential products that Neutrogena would sell in the worldwide
consumer skin care market. There can be no assurance that any of the Company's
collaborators will perform their obligations under their agreements with the
Company or that the Company's products or the products of others that
incorporate the Company's products or technology, will be successfully
commercialized, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations.
There can be no assurance that the Company will be successful in
establishing corporate alliances in the future, or that it will be successful in
maintaining existing or any future corporate alliances. Moreover, there can be
no assurance that the interests and motivations of any corporate partner,
distributor or licensee would be or remain 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. Failure of any of the foregoing
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Uncertainty of Patent Position and Proprietary Rights
The patent positions of biotechnology, medical device and healthcare
products companies are often uncertain and involve complex legal and factual
questions, and the breadth of claims allowed in such patents cannot be
predicted. In addition, there is a substantial backlog of patents at the US
Patent and Trademark Office that may delay the review and the potential issuance
of patents. The Company's success will depend to a significant degree on its
ability to obtain patents and licenses to patent rights, to maintain trade
secrets and to operate without infringing on the proprietary rights of others,
both in the United States and in other countries. The failure of the Company or
its licensors to obtain and maintain patent protection for the Company's
technology could have a material adverse effect on the Company.
ProCyte's success depends in part, upon its ability to protect its products
and technology under intellectual property laws in the United States and abroad.
As of June 30, 1999, the Company had 18 issued United States patents expiring
between 2005 and 2013, and numerous issued foreign patents and patent
registrations. The patents relate to use of the Company's copper-based
technology for a variety of healthcare applications, and to the composition of
certain biologically active, synthesized compounds. The Company's strategy has
been to apply for patent protection for certain compounds and their discovered
uses that are believed to have potential commercial value in countries, which
offer significant market potential. There can be no assurance that patent
applications relating to the technology used by the Company will result in
patents being issued. There can be no assurance that any patent issued to the
Company will not be subjected to further proceedings limiting the scope of the
rights under the patent or that such patent will provide a competitive advantage
or will afford protection against competitors with similar technology, or will
not be successfully challenged, invalidated or circumvented by competitors.
The Company's processes and potential products may conflict with patents
that have been or may be granted to competitors and others. As the
biotechnology, medical device and healthcare
17
<PAGE>
industries expand and more patents are issued, the risk increases that the
Company's processes and potential products may give rise to claims that they
infringe the patents of others. Such other persons could bring legal actions
against the Company claiming damages and seeking to enjoin clinical testing,
manufacturing and marketing of the affected product or use of the affected
process. Litigation may be necessary to enforce patents issued to the Company,
to protect trade secrets or know-how owned by the Company or to determine the
enforceability, scope and validity of proprietary rights of others. If the
Company becomes involved in such litigation, it could result in substantial
expense to the Company and significant diversion of effort by the Company's
technical and management personnel. In addition to any potential liability for
significant damages, the Company could be required to obtain a license to
continue to manufacture or market the affected product or use the affected
process. Costs associated with any licensing arrangement may be substantial and
could include ongoing royalties. There can be no assurance that any license
required under any such patent would be made available to the Company on
acceptable terms, if at all. If such licenses could not be obtained on
acceptable terms, the Company could be prevented from manufacturing and
marketing existing or potential products. Accordingly, an adverse determination
in such litigation could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company also relies upon unpatented proprietary technology. There can
be no assurance that the Company can meaningfully protect its rights in such
unpatented technology, that any obligation to maintain the confidentiality of
such proprietary technology will not be breached by employees, consultants,
collaborators or others, or that others will not independently develop or
acquire substantially equivalent technology. 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. Any failure to protect unpatented
proprietary technology or any breach of obligations designed to protect such
technology or development of equivalent technology may have a material adverse
effect on the Company's business, financial condition and results of operations.
Uncertainty of Government Regulatory Requirements
The manufacture and marketing of ProCyte's products 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, record-keeping, advertising and promotion of cosmetic
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 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 510(k) medical device 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. The process of obtaining
and maintaining regulatory approvals for the manufacturing or marketing of the
Company's existing and potential products is costly and time-consuming and is
subject to unanticipated delays. Accordingly, delays, rejections or unexpected
costs may be encountered based on changes in the policy or regulations of the
FDA or foreign governmental authorities during the period of product development
18
<PAGE>
and regulatory review, which changes may result in limitations or restrictions
on the Company's ability to utilize its technology or develop product
candidates. Regulatory requirements ultimately imposed could also adversely
affect the ability of the Company to clinically test, manufacture or market
products. Even if regulatory approval of a potential product is obtained, such
approval may entail limitations on the indicated uses for which such product may
be marketed, which may restrict the patient population for which any product may
be prescribed. In addition, a marketed product is subject to continual FDA
review. Later discovery of previously unknown problems or failure to comply
with the applicable regulatory requirements may result in restrictions on
marketing a product or withdrawal of the product from the market, as well as
possible criminal or civil sanctions.
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 and certain 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 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 approval or clearance from the FDA or foreign
regulatory bodies to market a product, the prospective manufacturer's quality
control and manufacturing procedures must conform to current good manufacturing
practices ("cGMP") guidelines, or ISO 9000 standards, when appropriate. In
complying with these regulations, which are subject to change at any time
without notice to the Company, ProCyte must continue to expend time, effort and
financial resources in production and quality control. In addition, ProCyte's
manufacturing plant is subject to the regulations of and inspections by other
foreign, federal, state or local agencies, such as local and regional water and
waste treatment agencies, and state and federal safety and health agencies.
There can be no assurance that the Company's manufacturing facility or its
manufacturing operations will meet or continue to meet all appropriate
guidelines or to pass inspections by any government agency.
The Company also is or may become subject to various other federal, state,
local and foreign 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.
Failure to obtain regulatory approvals for its product candidates or to
either attain or maintain compliance with cGMP or other manufacturing
requirements would have a material adverse effect on the Company's business,
financial condition and results of operations.
Intense Competition
Competition in the wound care, skin health and hair care markets is intense.
The Company's competitors include well-established pharmaceutical, cosmetic and
healthcare companies such as Bristol Myers Squibb's ConvaTec and BioMatrix
divisions, Johnson and Johnson, Obagi and Allergan. These competitors have
substantially more financial and other resources, larger research and
development staffs, and more experience and capabilities in researching,
developing and testing products in clinical trials, in obtaining FDA and other
regulatory approvals, and in manufacturing, marketing and distribution than the
Company. In addition, a number of smaller companies are developing or marketing
competitive products, some of which may have an entirely different approach than
products being marketed or developed by the Company. The Company's competitors
19
<PAGE>
may succeed in developing and commercializing products or obtaining patent
protection or other regulatory approvals for products more rapidly than the
Company. If the Company is successful in commercializing its products, it will
be required to be competitive with respect to manufacturing efficiency and
marketing capabilities, areas in which it has very limited experience. The
Company's competitors may develop new technologies and products that are
available for sale prior to the Company's potential products or that are more
effective than the Company's existing or potential products. In addition,
competitive products may be manufactured and marketed more successfully than the
Company's potential products. Such developments could render the Company's
existing or potential products less competitive or obsolete, and could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The contract manufacturing service business is also 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.
Potential Volatility of 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
fluctuations in operating results, research and development program direction,
results of clinical trials, addition or termination of corporate alliances,
technology licenses, clearance or approval to market products, announcements of
technological innovations or new products by the Company or its competitors,
changes in government regulations, healthcare reform, developments in patent or
other proprietary rights of the Company or its competitors, 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 3 - Quantitative and Qualitative Disclosures About Market Risk
None
Part II - Other Information
Item 1. Legal Proceedings
None.
Item 2 - Changes in Securities and Use of Proceeds
On May 26, 1999 the Company's Board of Directors reserved 100,000 shares of
the Company's common stock for common stock warrants and, in connection with a
contract for professional services, issued warrants for 33,334 shares at $0.6875
per share, the market price on the day the warrants were granted, as well as
33,333 shares at $1.6875 (one dollar above the market price,) and 33,333 shares
at $2.6875 (two dollars above the market price.) Each of the three warrants has
a five year life and vests one-third on the date granted, one-third six months
after the grant date, and one-third twelve months after the grant date.
20
<PAGE>
The warrants and the shares reserved for them were not registered under the
Securities Act of 1933, as amended, pursuant to the exemption set forth in
Section 4(2) thereof. The warrants and any shares issued thereunder are subject
to restriction on transfer absent registration under the Securities Act.
On June 30, 1999 the Company issued 600,000 shares of its Common Stock in
connection with the acquisition of NextDerm, Inc. The form of the transaction
was a purchase of NextDerm stock in exchange for a combination of cash and
shares of the Company's Common Stock. No underwriters were used and the
recipients of the Company's Common Stock were the former shareholders of
NextDerm.
The shares issued to the former NextDerm shareholders were not registered
under the Securities Act of 1933, as amended, pursuant to the exemption set
forth in Section 4(2) thereof. All recipients of shares of the Company's Common
Stock made certain representations to the Company as to investment intent,
possessed a sufficient level of financial sophistication and received or had
access to information about the Company. The shares issued in the transaction
are subject to restriction on transfer absent registration under the Securities
Act, and no offers to sell the securities were made by any form of general
solicitation or general advertisement.
Item 3 - Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of the shareholders of the Company was held on May 26,
1999. The only matter submitted to the shareholders for a vote was the election
of directors. As of April 1, 1999, the record date, there were 14,547,458
shares eligible to vote at the meeting, of which 83.03% or 12,078,995 were
present at the meeting, constituting a quorum. The six nominees for election as
directors were elected to serve until the 2000 annual meeting of the
shareholders, and until the election and qualification of their respective
successors. The vote for each director follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
DIRECTOR FOR WITHHELD
--------------------------------------------------------------------
<S> <C> <C>
Jules Blake 11,878,646 200,349
Susan Browner 11,851,377 227,618
John F. Clifford 11,869,546 209,449
Matt L. Leavitt 11,890,696 188,299
Glenn A. Oclassen 11,939,977 139,018
Robert E. Patterson 11,701,732 377,263
</TABLE>
Item 5. Other Information
None.
21
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.18 Consulting Agreement between ProCyte Corporation and Mr. Glenn
Oclassen
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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.
<TABLE>
<CAPTION>
PROCYTE CORPORATION
(REGISTRANT)
<S> <C>
Date: August 13, 1999 By: /s/ John F. Clifford
------------------------------------------------
John F. Clifford, President and CEO
Date: August 13, 1999 By: /s/ Jerry Scott
------------------------------------------------
Jerry P. Scott, Vice President and CFO
</TABLE>
22
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Title
-------------- -----
<S> <C>
10.18 Consulting Agreement between ProCyte Corporation and Mr. Glenn Oclassen
27 Financial Data Schedule
</TABLE>
23
<PAGE>
EXHIBIT 10.18
CONSULTING AGREEMENT
This Consulting Agreement is entered into as of June 1, 1999 between
ProCyte Corporation, a Washington corporation, hereinafter referred to as the
"Company" and Glenn Oclassen, hereinafter referred to as the "Consultant."
Whereas the program contemplated by this Agreement is of interest and
benefit to the Company, and will further the Company's overall business
objectives
1. Statement of Work
The Company desires to have Consultant assist management in its efforts to
increase sales in the Dermatology markets with Company strategy, product
development, licensing and acquisitions, development of key customer, vendor and
company relationships, and introductions and meeting with wall street analysts,
brokers and investment bankers
2. Period of Performance
The Consultant's services under the Agreement commence with the effective date
of this Agreement and continue for a period of one year and may be renewed by
mutual agreement for an additional one year period. The consulting will involve
a minimum of 16 to 20 days per year with additional compensation if the
consulting exceeds this time period. Either the Consultant or the Company may
terminate the Agreement at any time with thirty- (30) days written notice.
3. Compensation
Payment for services rendered to ProCyte will consist solely of a Stock Option
agreement for 50,000 shares of ProCyte stock for each year that the agreement is
in place. The option price will be determined on the basis of the average of the
high and low price of the Company's common stock on the date of the grant. The
options will vest at the end of one year or subsequent one year anniversary
dates of the agreement. Consultant will be reimbursed for pre-approved travel
and other ProCyte directed business expenses.
4. Patents and Inventions
For all purposes herein, "Invention" shall mean any discovery, concept or idea
whether or not patentable or copyrightable, which (i) arises out of work
performed pursuant to the obligations of this Agreement; (ii) is conceived and
reduced to practice during the term of this Agreement; and (iii) includes but is
not limited to processes, methods, software, formulae, techniques, composition
of matter, devices, and improvements thereof and know-how relating thereto.
Consultant agrees to promptly execute any and all applications, assignments or
other documents which the Company deems necessary or useful to apply for and
obtain patents in the United States and all foreign countries for any inventions
and discoveries arising under this Agreement, and agrees to transfer to the
Company the sole and exclusive right, title and interest in and to such
inventions and discoveries, as well as patent applications and patents
-1-
<PAGE>
thereon. The Company will bear the costs of preparation of such patent
applications and assignments, and the costs of prosecution and maintenance of
such patent applications.
5. Copyrights and Publications
Consultant hereby assigns to the Company its entire right, title and interest in
and to any copyrightable and/or publishable material which results from this
Agreement. Such material shall remain the exclusive property of the Company
which is under no obligation to assign said material to the Consultant or his
affiliated institution/firm. Consultant will review with and receive approval
from the Company prior to any publications or submissions on behalf of the
Company or its products.
6. Proprietary Data/Confidentiality
During the term of this Agreement and for five (5) years thereafter, Consultant
shall keep in confidence and shall not use or disclose any proprietary or trade-
secret information learned or developed. The nondisclosure and non-use
obligations of this Section shall not apply to information which at the time of
receipt:
. is generally available in the public domain or thereafter becomes available
to the public through no act of Consultant; or
. was independently known prior to receipt thereof by Consultant as shown by
documented evidence; or
. was disclosed to Consultant as a matter of lawful right by a third party
without an obligation of confidentiality; or
The obligations of the Consultant under this paragraph shall survive and
continue for five (5) years after termination of this Agreement, and shall
incorporate by reference the terms of the mutual confidentiality agreement.
7. Assignment
Because the nature of Consultant's services hereunder are personal, no
assignment of Consultant's rights nor delegation of Consultant's duties
hereunder may be made and any attempted assignment or delegation by Consultant
shall be void.
8. Independent Contractor
In the performances of all services hereunder:
. Consultant shall be deemed to be and shall be an independent contractor
and, as such, shall not be entitled to any benefits applicable to employees
of the Company;
. Neither party is authorized or empowered to act as agent for the other for
any purpose and shall not on behalf of the other enter into any contract,
or make any warranty or representation as to any matter. Neither party
shall be bound by the acts or conduct of the other.
. Consultant represents that he conducts an ongoing business with other
clients, that he maintains a place of business separate from the office of
the Company and that he is responsible for any business, payroll or income
taxes on payments under this Agreement.
-2-
<PAGE>
9. Governing Law
This Agreement shall be governed by the laws of the State of Washington,
regardless of its choice of law provisions.
In Witness whereof, the parties hereto have executed this Agreement by proper
persons hereunto duly authorized as of the date first above written.
ProCyte Corporation
By /s/ Jack Clifford By /s/ Glenn Oclassen
------------------------------------ --------------------------------
Name Jack Clifford Name Glenn Oclassen
----------------------------------- ------------------------------
Title President & CEO Title Consultant
------------------------------- -----------------------------
-3-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,506,550
<SECURITIES> 1,512,500
<RECEIVABLES> 700,175
<ALLOWANCES> (65,421)
<INVENTORY> 687,246
<CURRENT-ASSETS> 231,440
<PP&E> 8,228,208
<DEPRECIATION> (3,314,266)
<TOTAL-ASSETS> 16,779,932
<CURRENT-LIABILITIES> 584,022
<BONDS> 0
0
0
<COMMON> 153,842
<OTHER-SE> 15,908,087
<TOTAL-LIABILITY-AND-EQUITY> 16,061,929
<SALES> 969,981
<TOTAL-REVENUES> 1,182,114
<CGS> 344,826
<TOTAL-COSTS> 344,826
<OTHER-EXPENSES> 1,974,048
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,069,814)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,069,814)
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
</TABLE>
