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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 March 31, 2000
Commission File Number 0-18044
PROCYTE CORPORATION
(Exact name of the registrant as specified in its charter)
Washington 91-1307460
(State of incorporation) (I.R.S. Employer Identification No.)
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
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 April 21, 2000, there were issued and outstanding 15,452,970 shares of
common stock, par value $.01 per share.
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ProCyte Corporation
INDEX
<TABLE>
<S> <C>
Part I - Financial Information....................................................... 3
Item 1. Condensed Financial Statements............................................... 3
Balance Sheets - as of March 31, 2000 and December 31, 1999 (unaudited)............ 3
Statements of Operations - three months ended March 31, 2000 and 1999 (unaudited).. 4
Statements of Cash Flows - three months ended March 31, 2000 and 1999 (unaudited).. 5
Statements of Stockholders' Equity - three months ended March 31, 2000 and 1999
(unaudited)........................................................................ 6
Notes to Financial Statements (unaudited).......................................... 7
Item 2 - Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................ 10
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.................. 18
Part II - Other Information........................................................... 18
Item 1. Legal Proceedings........................................................... 18
Item 2. Changes in Securities and Use of Proceeds................................... 18
Item 3. Defaults Upon Senior Securities............................................. 18
Item 4. Submission of Matters to a Vote of Security Holders......................... 18
Item 5. Other Information........................................................... 19
Item 6. Exhibits and Reports on Form 8-K............................................ 20
Signatures............................................................................ 20
EXHIBIT INDEX......................................................................... 21
</TABLE>
2
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Part I - Financial Information
Item 1. Condensed Financial Statements
Balance Sheets - as of March 31, 2000 and December 31, 1999 (unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------
March 31, 2000 December 31, 1999
-------------------------------------------------
<S> <C> <C>
Assets
Cash and cash equivalents...................................... $ 3,584,888 $ 3,883,187
Accounts receivable, net....................................... 717,377 757,343
Other current assets........................................... 785,394 813,756
-------------------------------------------------
Total current assets......................................... 5,087,659 5,454,286
Raw materials and work in process, net......................... 1,517,008 1,572,655
Property and equipment, net.................................... 2,589,636 2,746,373
Intangible assets, net......................................... 3,375,827 3,441,088
Other assets................................................... 182,107 232,226
-------------------------------------------------
Total Assets $ 12,752,237 $ 13,446,628
=================================================
Liabilities and Stockholders' Equity
Total current liabilities...................................... $ 345,838 $ 416,056
Other liabilities.............................................. 146,067 142,035
-------------------------------------------------
Total liabilities............................................ 491,905 558,091
Common stock and additional paid in capital.................... 85,010,433 84,989,929
Accumulated deficit............................................ (72,750,101) (72,101,392)
Stockholders' equity......................................... 12,260,332 12,888,537
-------------------------------------------------
Total Liabilities and Stockholders' Equity $ 12,752,237 $ 13,446,628
=================================================
</TABLE>
See notes to financial statements
3
<PAGE>
Statements of Operations - three months ended March 31, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
-----------------------------------------
Three months ended March 31
2000 1999
-----------------------------------------
<S> <C> <C>
Revenues
Product sales........................... $ 1,092,399 $ 949,581
Contract manufacturing.................. 302,443 104,320
Licenses, royalties and other........... 68,216 83,397
-----------------------------------------
Total revenue........................... 1,463,058 1,137,298
Cost of product sales................... 276,623 398,121
-----------------------------------------
1,186,435 739,177
Operating Expenses
Selling, general and administrative..... 1,514,611 1,300,610
Research and development................ 375,241 479,684
-----------------------------------------
Total expenses.......................... 1,889,852 1,780,294
-----------------------------------------
Operating Loss.......................... (703,417) (1,041,117)
Interest Income......................... 54,708 82,978
Net loss................................ $ (648,709) $ (958,139)
=========================================
Net loss per common share................ ($0.04) ($0.07)
Weighted average number of common shares
used in computing net loss per common
share................................... 15,435,833 14,522,198
</TABLE>
See notes to financial statements
4
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Statements of Cash Flows - three months ended March 31, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------
Three months ended March 31,
2000 1999
-------------------------------------------------
<S> <C> <C>
Operating Activities
Net loss..................................................... $ (648,709) $ (958,139)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 221,998 208,556
Loss on sale of securities.................................. - 2,158
Stock issued in payment of expenses......................... 12,000 15,000
Changes in assets and liabilities:
Decrease in accounts receivable............................. 39,966 36,529
Decrease (increase) in other current assets................. 28,362 (45,373)
Decrease in raw materials and work in process............... 55,647 20,966
Increase in other non-current assets........................ (1,184) (1,170)
(Decrease) increase in current liabilities.................. (70,218) 168,509
Increase in other liabilities............................... 4,032 4,722
-------------------------------------------------
Net cash used in operating activities..................... (349,602) (548,852)
Financing Activities
Proceeds from issunce of stock............................... 8,504 -
-------------------------------------------------
Net cash provided by investing activities................. 8,504 -
Investing Activities
Purchase of property and equipment........................... - (15,176)
Purchase of securities....................................... - (908)
Proceeds from sale or maturity of securities................. - 3,131,685
Decrease in security deposit................................. 51,303 -
-------------------------------------------------
Net cash provided by investing activities................. 51,303 3,115,601
-------------------------------------------------
Net Increase in cash and cash equivalents................. (298,299) 2,566,749
Cash and Cash Equivalents:
At beginning of period.................................... 3,883,187 2,003,896
-------------------------------------------------
At end of period.......................................... $ 3,584,888 $ 4,570,645
=================================================
</TABLE>
See notes to financial statements
5
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Statements of Stockholders' Equity - three months ended March 31, 2000 and 1999
(unaudited)
<TABLE>
<CAPTION>
Common Stock Additional
---------------------------------- paid-in Accumulated
Shares Par Value Capital Deficit Total
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance - January 1, 1999........ 14,489,803 $144,898 $84,320,582 $(66,785,930) $17,679,550
Shares issued under non-employee
director stock plan............. 32,395 324 14,676 15,000
Net loss for three months ended
March 31, 1999.................. (958,139) (958,139)
-------------------------------------------------------------------------------------------
Balance - March 31, 1999......... 14,522,198 $145,222 $84,335,258 $(67,744,069) $16,736,411
===========================================================================================
Balance - January 1, 2000........ 15,418,722 $154,187 $84,835,742 $(72,101,392) $12,888,537
Shares issued under non-employee
director stock plan............ 16,632 166 11,834 12,000
Shares issued upon exercise of
options......................... 11,600 116 8,388 8,504
Net loss for three months ended
March 31, 2000.................. (648,709) (648,709)
-------------------------------------------------------------------------------------------
Balance - March 31, 2000......... 15,446,954 $154,470 $84,855,963 $(72,750,101) $12,260,332
===========================================================================================
</TABLE>
See notes to financial statements
6
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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-month periods ended March
31, 2000 and 1999 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, 1999. 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, 2000.
2. Sale of manufacturing operation
During 1999 the Company retained a financial advisor to assist it with the
sale or spin-off of its manufacturing operation in order to tighten the
Company's focus on its core business. On March 29, 2000 ProCyte agreed to sell
the assets and liabilities related to the manufacturing operation for $2.5
million to a group including a member of ProCyte management. The transaction is
expected to close by May 30, 2000 and is subject to negotiation of a definitive
agreement and contingent upon availability of financing and ratification by the
ProCyte Board of Directors. A provision of $1.9 million was recorded at
December 31, 1999 as an estimate of the loss to be realized upon consummation of
this transaction. The manufacturing operation includes the substantial majority
of the fixed assets of the Company and the lease obligation for the Company's
facility. The manufacturing operation generated contract revenues of $762,320,
$436,167 and $705,706 in 1999, 1998 and 1997, respectively. Expenses related to
the manufacturing operation were approximately $1,800,000 in 1999, $2,050,000 in
1998, and $2,850,000, in 1997. During the quarter ended March 31, 2000 such
revenues and expenses amounted to $302,443 and approximately $470,000,
respectively.
3. Accounts receivable
At March 31, 2000 accounts receivable are shown net of a reserve for
uncollectable accounts of $65,421.
4. Inventory
At March 31, 2000, other current assets included finished goods inventory
valued at $704,638, net of a reserve for obsolete and excess finished goods of
$80,000. The value of raw materials was $550,789 and the value of work in
process was $1,266,241 at March 31, 2000. The reserve for obsolete and excess
raw materials and work in process amounted to $300,000 at that date.
7
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5. Property and equipment
At March 31, 2000 property and equipment consisted of the following:
<TABLE>
<S> <C>
Equipment.......................................... $ 2,518,151
Leasehold improvements............................. 5,513,850
Less reserve for loss on disposition of
manufacturing operation........................... (1,900,000)
Less accumulated depreciation and amortization..... (3,542,365)
Property and equipment, net........................ $ 2,589,636
===========
</TABLE>
6. Intangible assets
At March 31, 2000 intangible assets are shown net of $590,615 of
accumulated amortization.
7. 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, 1999......................... 1,618,061 $2.18
Granted.......................................... 265,500 $0.93
Exercised........................................ - -
Canceled......................................... (59,334) $1.09
-------------------------------------------------
Balance - March 31, 1999.......................... 1,824,227 $2.03
=================================================
</TABLE>
<TABLE>
<CAPTION>
Shares subject to Weighted average
option exercise price
---------------------- -----------------------
<S> <C> <C>
Balance - January 1, 2000......................... 1,861,727 $1.71
Granted.......................................... 43,000 $1.68
Exercised........................................ (11,667) $0.65
Canceled......................................... (31,997) $0.86
-------------------------------------------------
Balance - March 31, 2000.......................... 1,861,063 $1.73
=================================================
Currently exercisable............................. 881,747 $2.65
=================================================
</TABLE>
8
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At March 31, 2000 there remained 263,500 shares of the Company's common
stock reserved for issuance under the Company's 1996 Stock Option Plan.
At March 31, 2000 there were 100,000 shares of the Company's common stock
reserved for issuance under the common stock warrants issued on May 26, 1999.
The warrants oblige the Company to issue 33,334 shares at $0.6875 per share, the
market price on the grant date, 33,333 shares at $1.6875 and 33,333 shares at
$2.6875. Each of the three warrants has a five year life and vests one-third on
the grant date, one-third six months after the grant date, and one-third twelve
months after the grant date.
9
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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, 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 sale of the manufacturing operation, 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. The
entire discussion in this report should be read in conjunction with the
Company's annual report on Form 10-K.
Corporate Overview
ProCyte develops and markets skin health and hair care products, focusing its
direct efforts on the specialty skin health sector and marketing its products
primarily to dermatologists, plastic surgeons and cosmetic surgeons. On April
19, 2000 ProCyte announced a long-term worldwide license agreement with
Neutrogena Corporation, a Johnson & Johnson company, for worldwide use of its
patented copper peptide complexes in consumer products for skin health. The
agreement provides ProCyte with milestone and royalty payments and specifies
minimum payment levels.
The Company markets its Neova(TM) Therapy line of copper peptide based anti-
aging products directly to physicians. The Company also markets its Complex
Cu3(TM) Intensive Repair Creme, Cleanser and Hydrating Gel products used to
treat patients following chemical peels, microdermabrasion and laser treatments,
as a complement to its line of prescription and over-the-counter topical drugs,
sun protection and other skin care products. The Complex Cu3(TM) and Neova(TM)
Therapy products allow the Company to differentiate its comprehensive line of
skin care products on the basis of its proprietary copper peptide technology.
These products are distributed using the Company's own sales force.
The Company positions its Tricomin(R) line of triamino copper complex containing
hair care products as a therapeutic approach to the maintenance of thinning hair
in both men and women. These products are marketed to physicians using the
Company's own sales force and directly to consumers through specialty
distributors and through the Company's web site at www.tricomin.com.
Additionally, ProCyte believes that it is the only company providing a line of
products that address the importance of wound care in the hair transplant
procedure. The Company's GraftCyte(TM) line of copper peptide containing wound
care products for use following hair restoration surgery are promoted through
its own sales force and specialty distributors.
10
<PAGE>
The Company's other wound care products, including Iamin(R) Hydrating Gel,
Iamin(R) Wound Cleanser and OsmoCyte(R) Pillow Dressings, are marketed in the
hospital, nursing home and extended care markets in the United States directly
and through an agreement with a distribution partner. Similar agreements have
been concluded, with product registrations in place or in process, for Latin
America, Europe, and the Far East.
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 and
development of its proprietary technology at a time when sales of the Company's
product and other revenues do not yet exceed operating expenses. At March 31,
2000, the Company's accumulated deficit was approximately $72.8 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 quarter ended March 31, 2000, ProCyte generated total operating
revenue of $1,463,058 from product sales, contract manufacturing and royalties.
Comparable revenues were $1,137,298 for the quarter ended March 31, 1999.
Revenue from product sales was $1,092,399 during the quarter ended March 31,
2000, up $142,818 or 15% from $949,581 during the comparable period in 1999.
The increase was primarily a result of additional sales of the skin care product
line and the introduction of new products incorporating the Company's
proprietary copper peptide technology.
Revenue from contract manufacturing services was $302,443 during the quarter
ended March 31, 2000, an increase of $198,123 or 190% from $104,320 during the
comparable period in 1999. The increase reflects the timing of projects
undertaken for customers. The Company has agreed to sell its contract
manufacturing operations and the facility used for such purposes. See
"Important Factors Regarding Forward-Looking Statements - Uncertainties related
to the Sale of the Manufacturing Operation."
Revenue from royalties and licenses in 2000 includes a milestone payment due
from E. Merck as a result of wound care product registration in Brazil and
royalties from a license agreement with Osmotics Corporation. The comparable
amount in 1999 includes initial fees from an agreement with Neutrogena and
royalties from Osmotics.
Interest income was $54,708 during the quarter ended March 31, 2000, down
$28,270 or 34% from $82,978 during the comparable period in 1999. The decrease
in interest income was primarily a result of reduced funds available for
investment.
Expenses
The cost of product sales was $276,623 (25.3% of product sales) for the quarter
ended March 31, 2000, a decrease of $121,498 or 30.5% from $398,121 (41.9% of
product sales) during the comparable period in 1999. Cost of products sold
during the first quarter of 1999 included an adjustment related to manufacturing
variances. Additionally, higher margin products based on proprietary technology
represent a greater percentage of total product sales during the quarter ended
11
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March 31, 2000 than during the quarter ended Mach 31, 1999.
Selling, general and administrative expenses were $1,514,611 during the quarter
ended March 31, 2000, an increase of $214,001 or 16.5% from $1,300,610 during
the comparable period in 1999. The increase reflects the higher level of sales
support provided for certain products and the cost of the expanded sales force.
Research and development expenses were $375,241 during the quarter ended March
31, 2000, down $104,443 or 21.8% from $479,684 during the comparable period in
1999. The decrease resulted from the continuing conversion of research
activities into a more conventional product development program.
Liquidity and Capital Resources
Historically, the Company has relied on equity financing, product sales,
contract manufacturing, interest income and corporate partnerships to fund its
operations and capital expenditures. At March 31, 2000, the Company had
approximately $3.6 million in cash and cash equivalents, compared to $3.9
million at December 31, 1999. The $300,000 decrease in cash represents the cash
outflow from operations. The Company expects that its operating cash needs will
continue at similar, progressively decreasing, levels in future periods until
revenues exceed operating expenses.
The Company believes that its existing cash and cash equivalents and interest
thereon, will be sufficient to meet its working capital requirements for at
least the next twelve months. However, there can be no assurance that the
underlying assumed levels of revenue and expense will prove accurate. On or
about May 30, 2000 the Company expects to receive $2.5 million from the sale of
its contract manufacturing operations. See "Important Factors Regarding
Forward-Looking Statements - Uncertainties related to the Sale of the
Manufacturing Operation." Although the Company believes that its existing and
potential products are promising, it does not know whether any of such products
will prove commercially viable. In any event, substantial additional funds
could be needed to commercialize existing products and to continue development
of potential products. The Company will depend upon product revenues, interest
income, equity financing, and funding from corporate partnerships to meet its
future capital needs. There can be no assurance that additional funds will be
available as needed or on terms that are acceptable to the Company. 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 administrative programs, or dispose of
additional assets or technology. See "Important Factors Regarding Forward-
Looking Statements - Need for Additional Capital".
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. To date, however, the Company has generated 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
March 31, 2000 the Company's accumulated deficit was approximately $72.8
million. The Company expects to incur additional operating losses at least
through 2000. 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
12
<PAGE>
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 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
may vary significantly from quarter to quarter.
Need for Additional Capital
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 March 31, 2000, the Company had cash and cash
equivalents of $3.6 million. The Company has agreed to sell its contract
manufacturing operations and the facility used for such purposes for $2.5
million in a transaction expected to close by May 30, 2000. See "Important
Factors Regarding Forward-Looking Statements - Uncertainties related to the Sale
of the Manufacturing Operation." The Company estimates that at its planned rate
of spending, its existing cash and cash equivalents 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 to expand
or enhance its sales and marketing activities and to continue product
development. 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 additional 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.
Uncertainties Related to the Sale of the Manufacturing Operation
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. During 1999 the Company retained a financial advisor to assist it
with the sale or spin-off of the manufacturing operation in order to tighten the
Company's focus on its core business. On March 29, 2000 ProCyte agreed to sell
the assets and liabilities related
13
<PAGE>
to its manufacturing operation for $2.5 million to a group including a member of
ProCyte management. The transaction is expected to close by May 30, 2000 and is
subject to negotiation of a definitive agreement and contingent upon
availability of financing and ratification by the ProCyte Board of Directors. A
provision of $1.9 million was recorded at December 31, 1999 as an estimate of
the loss to be realized upon consummation of this transaction. The manufacturing
operation includes the substantial majority of the fixed assets of the Company
and the lease obligation for the Company's facility. The manufacturing operation
generated contract revenues of $762,320, $436,167 and $705,706 in 1999, 1998 and
1997, respectively. Expenses related to the manufacturing operation were
approximately $1,800,000 in 1999, $2,050,000 in 1998, and $2,850,000, in 1997.
During the quarter ended March 31, 2000 such revenues and expenses amounted to
$302,443 and approximately $470,000, respectively. Such a transaction may not be
feasible on a timely basis or may not be feasible with terms acceptable to the
Company, and there can be no assurance that such a transaction will ever be
successfully completed.
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 these 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.
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.
Furthermore, there can be no assurance that the Company will be successful in
establishing corporate
14
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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 April 21, 2000 the Company had 21 issued US patents expiring between 2005 and
2017 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 that 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 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
15
<PAGE>
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 based on changes in the policy or regulations of the FDA or foreign
governmental authorities during the period of product development 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
16
<PAGE>
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, and the use and disposal of
hazardous or potentially hazardous substances used in connection with research,
development and manufacturing.
Failure to obtain regulatory approvals for its product candidates or to 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
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.
Potential Volatility of Stock Price; Bulletin Board Listing
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
17
<PAGE>
fluctuated over a wide range since the Company's initial public offering in
1989, and since March 25, 1999 the Company's common stock has traded on the NASD
OTC bulletin board. Because real-time price information may not be available
for bulletin board securities, an investor is likely to find it more difficult
to dispose of, or to obtain accurate quotations on the market value of, the
Company's securities than if they were listed on a national exchange. In
addition, purchases and sales of the Company's securities may become subject to
Rule 15g-9 of the Exchange Act which imposes various sales practice requirements
on broker-dealers, or to the "penny stock" rules, either of which would likely
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.
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
ProCyte did not own any derivative financial instruments as of March 31,
2000. The Company is debt-free and is exposed to interest rate risk only to the
extent that it has invested idle cash balances. At March 31, 2000 such balances
were invested in a United States Treasury money market fund. ProCyte employs
established policies and procedures to manage its exposure to changes in the
market risk of its investments. The Company believes that the market risk
arising from holdings of its financial instruments is not material.
Part II - Other Information
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
18
<PAGE>
Item 5. Other Information
On April 19, 2000 the Company issued a press release with the following
text:
PROCYTE IN LICENSE AGREEMENT WITH NEUTROGENA
Deal Introduces ProCyte's Copper Peptide Technology to the
Worldwide Consumer Market
REDMOND, WA -- April 19, 2000 -- ProCyte Corporation (OTC BB: PRCY), a leading
skin care and tissue repair company, today announced a long term worldwide
license agreement with Neutrogena, a Johnson & Johnson company, for worldwide
use of its patented Copper Peptide Complexes in products for skin health. The
agreement provides ProCyte with milestone and royalty payments and includes
certain minimum payment levels.
The retail market for skin care products, including the food, drug and mass
market channels, was in excess of $3.5 Billion in the United States in 1999. It
is a rapidly growing market segment, as the aging baby boomer population demands
products that prolong and improve the quality of life. Clinical studies
indicate that the products sold by ProCyte in the medical marketplace
significantly improve skin tone and have high consumer appeal.
"We are excited to be able to make our proven Copper Peptide technology
available to a broader market base" said Jack Clifford, ProCyte Chairman and
CEO. "ProCyte has established a growing position in the medical marketplace,
where demand for our Copper Peptide therapeutic and anti-aging products has
risen dramatically since their launch less than two years ago."
Neutrogena Corporation manufactures, develops and internationally markets
premium skin and hair care products.
About ProCyte:
ProCyte Corporation is a healthcare products company that develops,
manufactures, and markets products for tissue repair, skin health and hair care.
ProCyte's product portfolio includes comprehensive skin care lines for
therapeutic care, anti-aging products and products for thinning hair. The
Company's products incorporate its patented copper peptide technology and are
marketed both directly and through distribution partners.
This report may contain forward-looking statements that are subject to certain
risks and uncertainties that could cause actual results to differ materially
from those projected. This report should be read in conjunction with the
Company's annual report on Form 10-K and it's quarterly reports on Form 10-Q.
The Company's results may vary significantly from quarter to quarter and will
depend, among other factors, on product launches and market acceptance,
manufacturing contracts, and distribution agreements.
19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.18 License Agreement dated April 19, 2000 between ProCyte Corporation
and Neutrogena Corporation.
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.
PROCYTE CORPORATION
(REGISTRANT)
Date: May 2, 2000 By: /s/ John F. Clifford
-----------------------------------
John F. Clifford, Chairman and CEO
Date: May 2, 2000 By: /s/ Jerry Scott
----------------------------------
Jerry P. Scott, Vice President -
Finance and CFO
20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Number Title
-------------- -----
<S> <C>
10.18 License Agreement dated April 19, 2000 between ProCyte
Corporation and Neutrogena Corporation
27 Financial Data Schedule
</TABLE>
21
<PAGE>
EXHIBIT 10.18
Redacted Version
LICENSE AGREEMENT
-----------------
This Agreement is by and between ProCyte Corporation, having an address at
8511-154th Avenue N.E., Redmond, Washington 98052 (hereinafter referred to as
"PROCYTE") and Neutrogena Corporation, having an address at 5760 West 96th
Street, Los Angeles, California 90045-5544 (hereinafter referred to as
"NEUTROGENA").
W I T N E S S E T H
-------------------
WHEREAS, PROCYTE has developed and is the owner of patents, patent
applications and know-how relating to certain Metal-Peptide Compositions (as
hereinafter defined) and their use for skin care and/or the treatment of skin
disorders;
WHEREAS, NEUTROGENA wishes to acquire a license under such patents and
patent applications from PROCYTE and the right to use such know-how from PROCYTE
and PROCYTE is willing to grant such license and rights to NEUTROGENA under the
terms and conditions of this Agreement; and
WHEREAS, NEUTROGENA wishes to have PROCYTE supply NEUTROGENA and its
sublicensees with Metal-Peptide Compositions and PROCYTE is willing to supply
such Metal-Peptide Compositions under the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the above premises and the covenants
contained herein, the parties agree as follows:
- -------------------
"[ * ]" = omitted, confidential material, which material has been separately
filed with the Securities and Exchange Commission pursuant to a request
for confidential treatment.
<PAGE>
ARTICLE 1 - DEFINITIONS
-----------------------
As used in this Agreement, the following terms, when used with initial
capital letters, shall have the following meanings, the singular shall include
the plural and vice-versa:
1.1 Affiliate shall mean any entity that directly or indirectly controls,
is controlled by or is under common control with a party to this Agreement, and
for such purpose "control" shall mean the possession, direct or indirect, of the
power to direct or cause the direction of the management or the policies of the
entity, whether through the ownership of voting securities, by contract or
otherwise. The direct of indirect ownership of at least thirty percent (30%)
or, if smaller, the maximum allowed by applicable law, of the voting securities
of a business entity or an interest in the assets, profits or earnings of a
business entity shall be deemed to constitute control of the business entity.
1.2 Effective Date of this Agreement shall mean the later of the two dates
appearing below the parties' signature lines at the end of this Agreement.
1.3 FDA shall mean the United States Food and Drug Administration and
successor bodies or corresponding foreign administrative bodies.
1.4 Field shall mean the use of a Metal-Peptide Composition for the
purpose of human cosmetic skin care [ * ].
- -------------------
[ * ] Confidential Treatment Requested
2
<PAGE>
1.5 Fiscal Quarter shall mean each of the periods of time between January
and March; April and June; July and September; and October and December.
1.6 Fiscal Year shall mean the period of time commencing on the Monday
following the Sunday closest to the end of the calendar month of December and
terminating on the Sunday closest to the end of the immediately succeeding
December in accordance with the Johnson & Johnson fiscal year used in its
regular course of business.
1.7 Licensed Product shall mean any finished product in final packaged form
containing a Metal-Peptide Composition for use in the Field which either (i)
employs or is made through the use of PROCYTE Know-How or (ii) would infringe a
Valid Claim of any PROCYTE Patent Rights but for the licenses granted herein.
For clarification, Licensed Product shall not include a finished product in
final packaged form containing a Metal-Peptide Composition for use in the Field
sold by an Affiliate of NEUTROGENA which (i) does not employ or is not made
through the use of PROCYTE Know-How (i.e., such Affiliate did not acquire any
PROCYTE Know-How from NEUTROGENA, a sublicensee under this Agreement or any
other PROCYTE licensee) or (ii) would not infringe a Valid Claim of any PROCYTE
Patent Rights but for the licenses granted herein.
1.8 Mass Retail Market shall mean [ * ]
1.9 Metal-Peptide Composition shall mean a compound containing copper and a
peptide, including but without limitation Glycyl-L-histidyl-L-lysine: copper(II)
and L-alanyl-L-histidyl-L-lysine: copper(II).
- -------------------
[ * ] Confidential Treatment Requested
3
<PAGE>
1.10 National Launch shall mean the time when the Licensed Product is
available for sale by a domestic sales force and notification in writing to
commence the selling effort has been made by management to the sales force.
1.11 NDA shall mean a New Drug Application or any other application or
procedure required to seek approval from the FDA to allow NEUTROGENA or its
sublicensees to market and/or sell Licensed Product in the United States or
other countries.
1.12 Net Sales shall mean the gross amount invoiced by NEUTROGENA, its
Affiliates, and its sublicensees for the sale or other disposition of Licensed
Product to independent third parties less the following amounts: (i) discounts,
including cash discounts or rebates actually allowed or granted; (ii) credits or
allowances actually granted upon claims or returns, regardless of the party
requesting the return; (iii) separately itemized freight charges paid for
delivery; and (iv) taxes or other governmental charges levied on or measured by
the invoiced amount, whether absorbed by the billing party or the billed party
and separately stated on the invoice.
In the event that Licensed Product is sold in the form of a combination
package or kit containing one or more other stand alone products that are
separately vialed or packaged and are sold separately("Combination Product"),
Net Sales for such Combination Product will be calculated by multiplying actual
Net Sales of such Combination Product by the fraction A/(A+B), where A is the
invoice price of the Licensed Product if sold separately by NEUTROGENA, its
Affiliates, or its sublicensees, and B is the total invoice price of the one or
more other products in the Combination Product, if sold separately by
NEUTROGENA, its
4
<PAGE>
Affiliates or its sublicensees, such invoice prices and Net Sales calculations
being on a country-by-country basis.
If, on a country-by-country basis, one or more of the other products in the
Combination Product are not sold separately in said country by NEUTROGENA, its
Affiliates, or its sublicensees, Net Sales for such Combination Product shall be
calculated by multiplying actual Net Sales of such Combination Product by the
fraction A/C, where A is the invoice price of the Licensed Product sold
separately by NEUTROGENA, its Affiliates, or its sublicensees, and C is the
invoice price of the Combination Product sold by NEUTROGENA, its Affiliates, or
its sublicensees; provided that the maximum value of such fraction shall be one.
If, on a country-by-country basis, the Licensed Product is not sold
separately in said country by NEUTROGENA, its Affiliates, or its sublicensees,
Net Sales for such Combination Product shall be calculated by multiplying actual
Net Sales of such Combination Product by the fraction X/Y, where X shall be
NEUTROGENA's, its Affiliate's, or its sublicensees' fully allocated cost of the
Licensed Product and Y shall be NEUTROGENA's, its Affiliate's, or its
sublicensees' fully allocated cost of the Combination Product.
Any Licensed Product sold or otherwise disposed of in other than an arm's
length transaction or for other property (e.g., barter) shall be deemed invoiced
at its fair market value in such country of sale or disposition.
1.13 Patented Neutrogena Product shall mean a Patented Product sold by
NEUTROGENA or its Affiliate.
5
<PAGE>
1.14 Patented Product shall mean any Licensed Product, the making, using or
selling of which in a country would infringe a Valid Claim of a patent within
the PROCYTE Patent Rights in that country but for the licenses granted herein.
1.15 Patented Sublicensee Product shall mean a Patented Product sold by a
sublicensee of NEUTROGENA that is not an Affiliate of NEUTROGENA.
1.16 Pharmaceutical Product shall mean [ * ]
1.17 PROCYTE Know-How shall mean all information, trade secrets, data,
inventions and know-how in the Field which is owned or controlled by or licensed
to PROCYTE at any time, prior to or during the term of this Agreement,
including, without limitation, processes, techniques, methods, reports,
protocols, improvements, products, apparatuses and other materials and
compositions which are related to the Field; provided, however, that PROCYTE
Know-How shall not include anything (i) related to the formulation of products
of PROCTYE, its Affiliates, or its sublicensees containing Metal-Peptide
Compositions and (ii) that is not as of the Effective Date owned or controlled
by or licensed to PROCYTE unless (a) PROCYTE has the right to license or
sublicense it at the time of acquisition and (b) NEUTROGENA promptly pays
PROCYTE and agrees to pay PROCYTE in the future (i) its pro-rata share of any
amounts PROCYTE has paid or is obligated to pay a third party for the
acquisition or license of such information, trade secrets, data, inventions or
know-how in the Field and (ii) any amounts PROCYTE has paid or is obligated to
pay a third party with respect to the use of such information, trade secrets,
data, inventions or know-how in the Field by NEUTROGENA or its sublicensees
(e.g. royalties or other payments
- -------------------
[ * ] Confidential Treatment Requested
6
<PAGE>
tied to sales or introduction of Licensed Products). If NEUTROGENA does not pay
and does not agree to pay in the future such amounts, then such information,
trade secrets, data, invention or know-how shall not be considered part of
PROCYTE Know-How. PROCYTE Know-How does not include rights under any patents or
patent applications.
1.18 PROCYTE Patent Rights shall mean (a) all the patents and patent
applications in the Field which are owned or controlled by or licensed to
PROCYTE, prior to or during the term of this Agreement, a listing of those
presently known is identified in Schedule A, which is attached hereto and made a
part of this Agreement and which shall promptly be updated by PROCYTE, any
foreign counterparts thereof, as well as all continuations, continuations-in-
part, divisions and renewals thereof, all patents which may be granted thereon,
and all reissues, re-examinations, extensions, patents of additions and patents
of importation thereof; provided, however, that PROCYTE Patent Rights shall not
include any patents or patent applications that are not as of the Effective Date
owned or controlled by or licensed to PROCYTE unless (a) PROCYTE has the right
to license or sublicense it at the time of acquisition and (b) NEUTROGENA
promptly pays PROCYTE and agrees to pay PROCYTE in the future (i) its pro-rata
share of any amounts PROCYTE has paid or is obligated to pay a third party for
the acquisition or license of such patents or patent applications in the Field
and (ii) any amounts PROCYTE has paid or is obligated to pay a third party with
respect to the use of such patents or patent applications in the Field by
NEUTROGENA or its sublicensees (e.g. royalties or other payments tied to sales
or introduction of Licensed Products). If NEUTROGENA does not pay and does not
agree to pay in the future such amounts, then such patent and
7
<PAGE>
patent applications shall not be considered part of PROCYTE Patent Rights
and, consequently, will not be added to Schedule A.
1.19 PROCYTE Rights shall mean the PROCYTE Patent Rights and the PROCYTE
Know-How.
1.20 Professional Product shall mean [ * ]
1.21 Supply Agreement shall mean the agreement between NEUTROGENA and
PROCYTE that contemplates the terms set forth in Schedule D to this Agreement
and such other terms as the parties may mutually agree upon, and that shall be
executed by the parties by [ * ].
1.22 Territory shall mean the world.
1.23 U.S. shall mean the United States of America (including Puerto Rico)
and its territories and possessions.
1.24 Valid Claim shall mean a claim in any unexpired, issued patent within
the PROCYTE Patent Rights which has not been held invalid or unenforceable by a
non-appealed or unappealable decision by a court or other appropriate body of
competent jurisdiction, and which is not admitted to be invalid through
disclaimer or dedication to the public.
ARTICLE 2 - GRANT OF RIGHTS
---------------------------
2.1 Subject to the terms of this Agreement, including Sections 2.5,
2.6 and 4.5, PROCYTE hereby grants to NEUTROGENA an exclusive license, with the
unrestricted right to grant sublicenses, under PROCYTE Rights to make, have
made, use, sell
- -------------------
[ * ] Confidential Treatment Requested
8
<PAGE>
and have sold Licensed Products [ * ] solely in the Mass Retail Market in the
Field within the Territory.
2.2 Subject to the terms of this Agreement, including Sections 2.3, 2.5 and
2.6, PROCYTE hereby grants to NEUTROGENA a non-exclusive license, without the
right to grant sublicenses (except as provided in Section 2.4 and for the
manufacturing Licensed Products by third parties for its needs), under PROCYTE
Rights to make, have made, use, sell and have sold Licensed Products, including
Professional Products and Pharmaceutical Products, outside the Mass Retail
Market in the Field within the Territory, including Pharmaceutical Products in
the Mass Retail Market.
2.3 Notwithstanding the provisions of Section 2.2, NEUTROGENA shall not
have the right or license to make, have made, use, sell or have sold any
Licensed Products [ * ].
2.4 NEUTROGENA may sublicense its rights under Section 2.2 to its
Affiliates so long as they remain Affiliates of NEUTROGENA. NEUTROGENA shall
provide PROCYTE with notice of the identity of any sublicensee (whether under
the preceding sentence or under Section 2.1) and the term, territory and scope
of said sublicensee's sublicense. Any sublicense by NEUTROGENA shall be subject
to the terms and conditions of this Agreement. [ * ].
2.5 Notwithstanding the provisions of Sections 2.1 and 2.2, NEUTROGENA
shall not have the right or license under PROCYTE Rights to make or have made
Metal-Peptide Compositions for use in a Licensed Product during the term of this
Agreement except as set forth in Schedule D to this Agreement or the subsequent
Supply Agreement or with the written permission of PROCYTE.
- -------------------
[ * ] Confidential Treatment Requested
9
<PAGE>
2.6 Notwithstanding the foregoing, NEUTROGENA and PROCYTE, including their
respective sublicensees, agree not to introduce and sell a Licensed Product
[ * ].
2.7 Notwithstanding the foregoing, NEUTROGENA and PROCYTE, including their
respective sublicensees, [ * ].
2.8 NEUTROGENA shall not, and shall require that its Affiliates (who
receive Licensed Product, directly or indirectly, from NEUTROGENA or its
licensees) and sublicensees not, market, sell or use Licensed Products [ * ].
NEUTROGENA shall not, and shall require its Affiliates (who receive Licensed
Product, directly or indirectly, from NEUTROGENA or its licensees) and
sublicensees not to, sell or transfer any Licensed Product to a party that
NEUTROGENA or sublicensee knows or has reason to know may, or intends to,
directly or indirectly, sell, transfer, use or market the Licensed Product[ * ].
2.9 Except as set forth in Section 4.5, PROCYTE shall not, and shall
require that its sublicensees not, market, sell or use Licensed Products in the
Field in the Mass Retail Market. Except as set forth in Section 4.5, PROCYTE
shall not, and shall require its sublicensees not, sell or transfer any Licensed
Product to a party that PROCYTE or sublicensee knows or has reason to know may,
or intends to, directly or indirectly, sell, transfer, use or market the
Licensed Product in the Field in the Mass Retail Market.
2.10 PROCYTE hereby grants NEUTROGENA an option to use hereunder in
Licensed Products, despite Section 2.6, its formulation and all its know-how
related thereto for [ * ].
- -------------------
[ * ] Confidential Treatment Requested
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<PAGE>
ARTICLE 3 - PAYMENTS
--------------------
3.1 NEUTROGENA shall make lump sum payments in U.S. Dollars to PROCYTE as
follows:
[ * ].
ARTICLE 4 - ROYALTIES
---------------------
4.1 (a) NEUTROGENA shall pay to PROCYTE a running royalty based on Net
Sales of a Patented Neutrogena Product sold in the Territory as follows: [ * ].
(b) NEUTROGENA shall pay to PROCYTE a running royalty based on Net Sales
of a Patented Sublicensee Product sold in the Territory as follows: [ * ].
4.2 (a) NEUTROGENA shall pay to PROCYTE a running royalty of [ * ] of Net
Sales of a Pharmaceutical Product sold in the Territory. This running royalty
shall be [ * ] of Net Sales of a Pharmaceutical Product that is not, or that
ceases to be, a Patented Product; provided, however, that the obligation to pay
such [ * ] royalty under this Section 4.2(a) shall terminate after [ * ] from
the first National Launch of a Licensed Product in such country of sale. For
example, [ * ].
(b) NEUTROGENA shall pay to PROCYTE a running royalty [ * ] of Net Sales
of a Professional Product sold in the Territory. This running royalty shall [ *
] of Net Sales of a Professional Product that is not, or that ceases to be, a
Patented Product; provided, however, that the obligation to pay such [ * ]
royalty
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under this Section 4.2(b) shall terminate after [ * ] from the first National
Launch of a Licensed Product in such country of sale. For example, [ * ].
4.3 NEUTROGENA shall pay to PROCYTE a running royalty of [ * ] Net Sales
of a Licensed Product sold in the Territory that (i) is not, or that ceases to
be, a Patented Product and (ii) is not a Professional Product or Pharmaceutical
Product in the country of sale; provided, however, that the obligation to pay a
royalty under this Section 4.3 shall terminate after [ ] from the first National
Launch of a Licensed Product in such country of sale. For example, [ * ]
4.4 No running royalties due under this Article shall be payable on sales
transactions as between NEUTROGENA, its Affiliates, and any sublicensee, the
final vendee sale to a third party alone being used for the purposes of
determining the running royalty payments due hereunder. A maximum of only one
running royalty payment shall be payable on the sale of each Licensed Product
and such running royalty will be provided in accordance with either Section 4.1,
4.2 or 4.3 thereof but not more than one; provided, however, that the section
with the highest royalty will be used in the event that more than one section
applies.
4.5 Net Sales of Licensed Product in any country where such Licensed
Product is not a Patented Product or where there is no obligation to pay a
running royalty under Section 4.2 or 4.3 shall incur no running royalties.
[ * ].
4.6 [ * ] minimum royalties shall be due and payable by NEUTROGENA for the
sale of all Licensed Products (including sales
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of Licensed Products by NEUTROGENA and its sublicensees) with the following
schedule:
Fiscal Year Minimum Royalty
- ----------- ---------------
[ * ]
Furthermore, if NEUTROGENA is not able to launch or continue to sell any
Licensed Product due to (i) a substantiated safety issue or governmental action
associated directly with the Metal-Peptide Composition or (ii) PROCYTE'S failure
to supply Metal Peptide Compositions as set forth in the Supply Agreement,
NEUTROGENA will so notify PROCYTE in writing and any payments of minimum
royalties pursuant to this Section 4.6 during the period during which such
substantiated safety issues, supply failure, or government action continues,
despite the reasonable efforts of NEUTROGENA, shall cease. Issues concerning
safety include, but are not limited to, unacceptable chronic inflammation,
chronic irritation, photo-toxicity, or any systemic side effects that are
clinically significant and are associated directly with the Metal-Peptide
Composition. Governmental actions include, but are not limited to, notification
by the U.S. Food and Drug Administration (FDA) claims that there are
insufficient safety of efficacy data to justify the marketing of products
containing the Metal-Peptide Composition. NEUTROGENA agrees to provide a copy
of written documents relating to such governmental actions, if possible. If
such issues have not been resolved [ * ] of notification by NEUTROGENA, the
parties shall meet to discuss such issues and efforts to resolve them. If such
issues have not been resolved [ * ] of notification by NEUTROGENA, then
NEUTROGENA shall either resume paying minimum royalties under this Section 4.6
or terminate this Agreement pursuant to Section 10.3.
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4.7 All running royalties shall be calculated and payable on a Fiscal
Quarter basis and running royalties shall be paid within [ * ] following the end
of such Fiscal Quarter. Each such payment shall be accompanied by a written
report indicating the amount of Net Sales during such Fiscal Quarter by Licensed
Product (including by quantity of Licensed Product), by country and by party
(i.e., NEUTROGENA, its Affiliates, and its sublicensees) and a calculation of
the royalties due. In the event that the running royalties, as calculated in
accordance with Sections 4.1, 4.2 and 4.3, for a Fiscal Year in which a minimum
royalty applies are less than the applicable minimum royalty for such Fiscal
Year, NEUTROGENA shall pay to PROCYTE, together with its payment of running
royalties in accordance with Sections 4.1, 4.2 and 4.3 for the reporting period
ending with the close of the Fiscal Year, the shortfall between the minimum
royalty and the running royalty.
4.8 NEUTROGENA shall keep and require its Affiliates and sublicensees to
keep complete and accurate records of the sale or other disposition of Licensed
Products. PROCYTE shall have the right, at its own expense, for the period
during which a running royalty is due to PROCYTE and for [ * ] thereafter, to
have an independent certified public accountant, to whom NEUTROGENA has no
reasonable objection, examine the relevant books and records of account of
NEUTROGENA and its Affiliates and its sublicensees selling Licensed Products
during reasonable business hours and no more than once during each Fiscal Year,
to determine whether appropriate payment has been made by NEUTROGENA hereunder,
provided, however, that if such examination reveals a [ * ] or greater
discrepancy between the amount owing and the actual amount paid by NEUTROGENA to
PROCYTE, then NEUTROGENA shall be responsible for the costs associated with such
examination. The
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accountant shall disclose to PROCYTE only information relating to the accuracy
of the royalty report and the royalty payments made according to this Agreement.
The information received by the accountant shall be held confidential except for
information necessary for disclosure to PROCYTE to establish the accuracy of the
royalty reports.
4.9 The remittance of royalties payable on sales outside the U.S. will be
payable to PROCYTE in U.S. Dollars according to the official rate of exchange of
the currency of the country from which the royalties are payable as quoted by
The Wall Street Journal, New York edition, for the last day of the Fiscal
Quarter for which the royalty payment is made. NEUTROGENA shall make all
payments to PROCYTE under this Agreement in full, without deduction or
withholding on account of taxes withheld or deducted from any payment made by a
sublicensee to NEUTROGENA.
4.10 NEUTROGENA acknowledges that PROCYTE's assistance in the initial Field
and a supply of Metal-Peptide Compositions may be of substantial value and that
the PROCYTE Know-How may constitute valuable and substantial trade secrets of
PROCYTE. The parties acknowledge and agree that, for their mutual convenience
and after considering other alternatives, the payments to PROCYTE set forth in
this Agreement, including the structure and term of royalty payments, are an
appropriate and mutually convenient way of compensating PROCYTE.
ARTICLE 5- SUPPLY OF METAL-PEPTIDE COMPOSITIONS
-----------------------------------------------
5.1 PROCYTE agrees to supply NEUTROGENA and its sublicensees with Metal-
Peptide Compositions, and NEUTROGENA agrees to purchase from PROCYTE the Metal-
Peptide Compositions on the terms set forth in the Supply Agreement.
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ARTICLE 6 - CONFIDENTIALITY AND PUBLICITY
-----------------------------------------
6.1 All information disclosed by one party to the other(s) or developed by
the parties pursuant to the terms of this Agreement shall be maintained
confidential and used only for the purposes of this Agreement in accordance with
this Article 6. Each party may also disclose the other's information to an
Affiliate, agent or consultant, who is under an obligation of confidentiality
and non-use at least substantially equivalent to the obligations of this Article
6. The term of maintaining confidentiality of all such information and the
limitations on use shall be for a period of [ * ] after the date of termination
of this Agreement. Each party shall guard such information as it normally
guards any of its confidential, proprietary information. Notwithstanding the
foregoing, each party shall be relieved of the confidentiality and limited use
obligations of this Agreement if:
(a) the information was previously known to the receiving party from
sources other than the disclosing party as evidenced by the prior written
records of such party;
(b) the information is or becomes generally available to the public
through no fault of the receiving party; or
(c) the information is acquired in good faith in the
future by the receiving party from a third party not under an obligation of
confidence to the disclosing party with respect to such information.
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6.2 Notwithstanding the above obligations of confidentiality and non-use a
party may:
(a) disclose information to a regulatory agency that is necessary to
obtain regulatory approval in a particular jurisdiction;
(b) disclose information to a government agency if the disclosure is
necessary to protect the health and safety of the party's workers or the public
or as required by law;
(c) disclose information reasonably required in connection with the
development, manufacture, use, sale, external testing or marketing trials of
products in accordance with the terms of this Agreement; or
(d) disclose information by filing patent applications, the filing of
which is contemplated by this Agreement, without violating the above secrecy
provision.
In making such disclosures, the disclosing party shall obligate the recipient to
secrecy, if possible.
6.3 Except for the filing of a copy of this Agreement with the Securities
& Exchange Commission to the extent required by law, the public announcement in
the form set forth in Schedule C, and such other public announcements as may
hereafter become required by law due to changes from the facts and circumstances
in existence as of the Effective Date, no party hereunder shall disclose this
Agreement or make any public announcement or filing concerning this Agreement or
the subject matter hereof without the prior written consent of the other;
provided, however, that NEUTROGENA shall be free to disclose the
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existence of this Agreement and the nature of the licenses granted hereunder to
its Affiliates and prospective sublicensees under a similar obligation of
confidentiality as set forth in this Article 6 and PROCYTE shall be free to
disclose the existence of this Agreement and its terms to its Affiliates,
consultants, investment bankers and prospective licensees under a similar
obligation of confidentiality as set forth in this Article 6, provided that
PROCYTE does not disclose the economic terms of this Agreement (e.g., royalty
rates, minimum royalties and lump sum payments) to such prospective licensees.
In the event that pursuant to the foregoing PROCYTE shall file a copy of this
Agreement with the Securities & Exchange Commission, it shall seek confidential
treatment for all portions thereof requested by NEUTROGENA within [ * ].
following receipt of PROCYTE'S proposed SEC submission.
6.4 With respect to information disclosed on or after the Effective Date
between NEUTROGENA and PROCYTE under the provisions of this Agreement, the
provisions of this Agreement shall govern and prevail. In the event of any
conflict between this Agreement and the Confidentiality Agreement of November
19, 1998 between NEUTROGENA and PROCYTE, which is attached hereto as Schedule B,
with respect to information disclosed on or after the Effective Date, the terms
of this Agreement shall govern and prevail.
6.5 The rights and obligations of this Article 6 shall survive termination
of this Agreement.
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ARTICLE 7 - PATENT PROSECUTION AND MAINTENANCE
----------------------------------------------
7.1 PROCYTE shall, at its discretion, be responsible to prosecute or cause
to prosecuted to allowance or final rejection in the United States and in
foreign countries the patent applications included in PROCYTE Patent Rights.
PROCYTE shall, at its discretion, be responsible to issue and maintain as a
patent each such application prosecuted to allowance and maintain the issued
patents included in PROCYTE Patent Rights. [ * ].
7.2 Upon the request of NEUTROGENA, PROCYTE agrees to promptly provide
NEUTROGENA:
(a) Copies of all patent applications included in PROCYTE Patent
Rights;
(b) Copies of all existing prior art searches related to such patent
applications and the subject matter of this Agreement; and
(c) Access to all correspondence to and from the U. S. Patent and
Trademark Office and foreign patent offices relating to such patent
applications.
7.3 NEUTROGENA shall have the right to consult with PROCYTE regarding the
content of the patent applications included in PROCYTE Patent Rights, prior art
searches and correspondence, and to comment thereon. PROCYTE shall consider all
such comments offered by NEUTROGENA, it being agreed, however, that all final
decisions respecting conduct of the prosecution of said patent applications
shall rest solely in the discretion of PROCYTE.
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7.4 PROCYTE shall promptly notify NEUTROGENA in the event PROCYTE decides
at any time to abandon or discontinue prosecution of any one or more of the
patent applications included in PROCYTE Patent Rights. Such notification will be
given as early as possible which in no event will be less than [ * ] prior to
the date on which said application(s) will become abandoned. [ * ], NEUTROGENA
shall have the option, exercisable upon written notification to PROCYTE, to
assume full responsibility, at its discretion, for the prosecution of the
affected patent application(s), in which event such affected patent
application(s) shall no longer be within the PROCYTE Patent Rights for the
purpose of determining Patented Products.
7.5 PROCYTE shall, at its discretion, be responsible for paying all
official taxes, annuities and fees required to keep in force patents included in
PROCYTE Patent Rights. In the event PROCYTE decides not to pay the maintenance
fee due on any one or more of said patents, PROCYTE will give NEUTROGENA written
notice of such decision at least [ * ] in advance of the payment date. [ * ],
NEUTROGENA shall thereupon have the option to pay, at its discretion, the
maintenance fees due on the affected patents, in which case the affected
patent(s) at NEUTROGENA's option shall no longer be within the PROCYTE Patent
Rights for the purpose of determining Patented Products.
7.6 Should a priority or opposition contest develop in any Patent Office
throughout the world relating to a patent or patent application within the
PROCYTE Patent Rights for which PROCYTE does not want to maintain, then
NEUTROGENA shall be given [ * ] notice in which to elect to continue maintaining
such patent or patent applications at NEUTROGENA's own [ * ] If NEUTROGENA has
elected to continue, NEUTROGENA shall bear the cost of such a
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contest and shall have control of such contest. PROCYTE shall provide NEUTROGENA
with all cooperation and available documents required by NEUTROGENA to prosecute
such priority or opposition contest including cooperation of any licensor or
consultants of PROCYTE, at NEUTROGENA's expense. PROCYTE shall have the right to
participate in such contest, or designate its own counsel to so participate, at
PROCYTE's own expense, throughout each step of such priority or opposition
contest. If such patent or patent application issues as a patent, it shall no
longer be within the PROCYTE Patent Rights for the purpose of determining
Patented Products.
ARTICLE 8 - COMPETING PRODUCTS AND INFRINGEMENT
-----------------------------------------------
8.1 If PROCYTE or NEUTROGENA become aware of substantial infringement of
any issued patent included in PROCYTE Patent Rights by a third party selling a
product in a country in the Field in the Mass Retail Market that is competitive
with NEUTROGENA's Patented Products sold under the license granted pursuant to
Section 2.1 [ * ]. If, prior to the expiration of [ * ] from said notice,
PROCYTE has not obtained a discontinuance of such infringement or brings suit in
such country against the third party infringer, then, subject to the rights of
any PROCYTE licensor, NEUTROGENA shall have the right to bring suit in such
country against such infringer in the Field in the Mass Retail Market. Each
party will cooperate with the other in any suit and will have the right to
consult with the other and be represented by its own counsel at its own expense.
All monies recovered by either party upon final judgment or settlement of any
infringement suit shall be retained by the party bringing the suit. No
settlement by a party bringing a suit shall diminish
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the rights or interests of the other party without the other party's consent.
8.2 In the event PROCYTE or NEUTROGENA learn that NEUTROGENA's making,
using or selling of Licensed Product pursuant to Section 2.1 [ * ] infringes,
will infringe or is alleged by a third party to infringe a third party patent
with respect to the Metal-Peptide Composition, the party becoming aware of same
shall promptly notify the other. PROCYTE and NEUTROGENA shall thereafter
attempt to agree upon a course of action which may include: (a) modifying of
the Licensed Product or its use and manufacture so as to be non-infringing; or
(b) obtaining a license or assignment from said third party.
8.3 In the event PROCYTE or NEUTROGENA cannot agree on modifying the
Licensed Product pursuant to Section 8.2, NEUTROGENA shall in the first instance
have the right to negotiate with said third party for such license or
assignment. In the event that such negotiation results in a consummated
agreement, then any lump sum payment and/or royalties to be paid thereunder
shall be paid by NEUTROGENA. [ * ] to be paid by NEUTROGENA and its sublicensees
under such NEUTROGENA negotiated agreement with respect to such patent and sales
of such Licensed Product in the country shall be credited against running
royalties due PROCYTE hereunder with respect to sales of such Licensed Product
in the country, but only to the extent of reducing running royalties due PROCYTE
with respect to sales of such Licensed Product in such country by [ * ] in any
Fiscal Quarter with the remainder being carried over to the next payment period.
The minimum royalty applicable in accordance with Section 4.6 for a Fiscal Year
shall be reduced by the amount credited against running royalties in such Fiscal
Year.
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8.4 Under NEUTROGENA's license in Section 2.1 [ * ] to PROCYTE Know-How
under PROCYTE Rights, NEUTROGENA shall enjoy the benefit of any PROCYTE
contractual rights protecting the confidentiality and non-use of such PROCYTE
Know-How including enforcement of confidentiality and/or non-disclosure
agreements entered into between PROCYTE and any third parties and any
injunctions or damages which may be due from such enforcement with respect to
the Mass Retail Market in the Field.
ARTICLE 9 - WARRANTIES, REPRESENTATIONS AND ACKNOWLEDGEMENTS
------------------------------------------------------------
9.1 PROCYTE expressly warrants and represents as of the Effective Date
that it exclusively owns or controls by agreement or license all of the rights,
title and interest in and to the PROCYTE Rights as defined herein and that it
has the full right and authority to enter into this Agreement and to carry out
the transactions contemplated herein. PROCYTE further represents and warrants as
of the Effective Date that no academic institution, member of an academic
institution, corporation, local, state or federal government, or any other third
party holds any property rights in the PROCYTE Rights in the Mass Retail Market
in the Field. Further, PROCYTE represents that the patent applications and
patents of Schedule A are all existing PROCYTE Patent Rights in the Field, and
PROCYTE agrees that it will promptly update such Schedule A from time-to-time.
Further, PROCYTE warrants and represents, as of the Effective Date, that it
knows of no facts that would render any of the PROCYTE Patent Rights invalid or
unenforceable.
9.2 PROCYTE expressly warrants and represents, as of the Effective Date,
that it has no outstanding encumbrances or agreements, either written, oral, or
implied, in connection with
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the PROCYTE Rights in the Mass Retail Market in the Field, and that it has not
granted and will not grant during the term of this Agreement or any renewal
hereof, any similar rights, license, consent or privilege with respect to the
rights granted pursuant to Section 2.1 [ * ].
9.3 NEUTROGENA makes no representation or warranty that it will market
Licensed Products in the Field under this Agreement. Furthermore, all business
decisions including, without limitation, design, manufacture, sale, price and
promotion of products covered under this Agreement, seeking of regulatory
approval to market and selecting and conducting of clinical trials for
supporting an NDA, and the decision whether to sell a particular Licensed
Product shall be within the sole discretion of NEUTROGENA and/or its
sublicensees.
9.4 PROCYTE hereby acknowledges herein that NEUTROGENA and its Affiliates
already sell a large variety of products and acknowledges that NEUTROGENA and
its Affiliates may now or in the future develop or acquire cosmetic and
pharmaceutical products which may serve a similar cosmetic/therapeutic function
or compete with Licensed Products in the Field. Further, PROCYTE recognizes
that NEUTROGENA and its Affiliates have been actively involved in research and
development in the medical field and in the investigation of entries into the
cosmetic/pharmaceutical field for various uses and that NEUTROGENA and its
Affiliates intend to continue with such activities. These activities may result
in products that would compete with Licensed Products in the Field. Should any
such products be developed and/or marketed, they would not be subject to any
royalties or other obligations to PROCYTE hereunder if not a Patented Product or
Licensed Product that would infringe a Valid Claim of PROCYTE
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Patent Rights or that employs or is made through the use of any PROCYTE Know-
How. Moreover, PROCYTE realizes that some of the Licensed Products in the Field
are presently in early stages of development, and accordingly it is uncertain
whether or not any such Licensed Product(s) will be successfully developed and
marketed by NEUTROGENA.
9.5 PROCYTE hereby represents and acknowledges that NEUTROGENA is not
obligated under this Agreement to continue development of or market Licensed
Products in the Field and that the payments provided by NEUTROGENA to PROCYTE in
Article 3 and Article 4 are in complete satisfaction of any duty, express or
implied, imposed upon NEUTROGENA to commercially exploit any of the rights and
licenses granted hereunder, including without limitation, any obligation on the
part of NEUTROGENA and/or its sublicensees to exercise any specific level of
effort in developing and marketing Licensed Products(s) in the Field.
9.6 PROCYTE and NEUTROGENA each expressly warrants and represents that, at
the time of execution of this Agreement, it knows of no third party patents or
pending applications that would materially affect NEUTROGENA's ability to sell
Metal-Peptide Compositions in the Field nor PROCYTE's ability to obtain patent
protection for currently pending patent applications included in PROCYTE Patent
Rights.
9.7 Each party expressly warrants and represents that it has no agreement
nor any other obligation to any third party that would in any way interfere,
hamper or limit its ability to carry out and fulfill its obligations under this
Agreement.
9.8 NEUTROGENA hereby represents and warrants as of the Effective Date
that it has full right and authority to enter into
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this Agreement and to carry out the transactions contemplated herein.
9.9 EXCEPT AS SET FORTH IN THIS AGREEMENT AND IN THE SUPPLY AGREEMENT,
PROCYTE MAKES NO OTHER WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE PROCYTE
RIGHTS OR LICENSED PRODUCTS, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, PATENTABILITY, VALIDITY AND
NON-INFRINGEMENT.
ARTICLE 10 - TERM AND TERMINATION
---------------------------------
10.1 This Agreement shall commence as of the Effective Date and shall
remain in force unless otherwise terminated in accordance with any of the
provisions herein, until the last to occur of the following events:
(a) NEUTROGENA is no longer obligated to pay a royalty under Sections
4.1, 4.2 or 4.3, or
(b) [ * ] after the Effective Date of this Agreement; provided,
however, that upon the expiration of this Agreement under either Section 10.1(a)
or Section 10.1(b), NEUTROGENA shall have a fully paid up, non-exclusive license
to PROCYTE Know-How disclosed under this Agreement.
10.2 Upon any breach of, or default under, any material provision of this
Agreement by a party, the other party may terminate this Agreement in whole or
in part by giving [ * ] written notice to the breaching party. Said notice shall
become effective at the end of such period, unless during said period the
breaching party shall cure such breach or default.
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10.3 NEUTROGENA shall have the right to terminate this entire Agreement
upon [ * ] written notice to PROCYTE; provided, however, that NEUTROGENA shall
not be obligated to make any payments pursuant to Article 3 that become due
after such written notice is sent from NEUTROGENA to PROCYTE.
10.4 PROCYTE or NEUTROGENA may terminate this Agreement should the other
party commit an act of bankruptcy, be declared bankrupt, voluntarily file or
have filed against it a petition for bankruptcy or reorganization unless such
petition is dismissed within [ * ] of filing, enter into a procedure of winding
up to dissolution or should a trustee or receiver be appointed for its business
assets or operations. All rights and licenses granted under or pursuant to this
Agreement are, and shall otherwise be deemed to be, for the purposes of Section
365(n)of Title 11, U.S. Code ("Bankruptcy Code") license rights to "intellectual
property" as defined under Section 101(60) of the Bankruptcy Code. The parties
agree that NEUTROGENA, as a licensee of such right, under this Agreement, shall
retain and may fully exercise all of its rights and elections under the
Bankruptcy Code.
10.5 Upon termination of this Agreement, NEUTROGENA shall have the right to
sell off over the next [ * ] any Licensed Product in its inventory provided
NEUTROGENA pays to PROCYTE the running royalties calculated in accordance with
Article 4. The rights and obligations of this Section 10.5 shall survive
termination of this Agreement.
10.6 Upon termination of this Agreement, NEUTROGENA and its sublicensees
shall cease using PROCYTE Rights and cease making,
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using and selling Licensed Products, except as provided in Section 10.5. Because
of the value of PROCYTE's assistance and know-how provided to NEUTROGENA, any
sales of products containing a Metal-Peptide Composition in the Field in a
country in the Territory by NEUTROGENA or its sublicensees following such
termination shall be presumed to be royalty bearing hereunder and NEUTROGENA
shall pay running royalties thereon to PROCYTE in accordance with Sections
4.2,4.3, 4.7, 4.8, and 4.9 until [ * ] whichever occurs first.
10.7 Termination or expiration of this Agreement shall not relieve the
parties of any obligation or liability accruing prior to such termination or
expiration. Any accrued obligation or liability (including a pro rata portion
of any minimum royalties due under Section 4.6 for the year of termination or
expiration) and the provisions of Sections 6, 10.1, 10.5, and 10.6 and Article
11 and shall survive termination or expiration of this Agreement. Upon
termination each party shall return all forms of Confidential Information
received from the other party (or the Confidential Information pertaining to the
terminated License), retaining only one copy of written or electronic
Confidential Information for archival purposes.
10.8 [ * ].
ARTICLE 11 - INDEMNIFICATION
----------------------------
11.1 NEUTROGENA shall defend, indemnify and hold PROCYTE, its directors,
officers and employees, harmless from and against any and all claims, suits or
demands for liability, damages, losses, costs and expenses (including the costs
and expenses of attorneys and other professionals) arising out of third party
claims or
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suits or demands based on bodily injury or property damage resulting from the
clinical testing, manufacture, use or sale of Licensed Product by NEUTROGENA or
its sublicensees or the exercise of its license rights hereunder, except for
claims, suits or demands arising from the supply of Metal-Peptide Compositions
by PROCYTE under the Supply Agreement.
11.2 Each party ("Indemnifying Party") shall defend, indemnify and hold the
other party and its directors, officers and employees, harmless from and against
any and all claims, suits, and demands for liability, damages, losses, costs and
expenses (including the costs and expenses of attorneys and other professionals)
arising out of or resulting from the inaccuracy of any representation or the
breach by the Indemnifying Party of any warranty, covenant or agreement
contained in this Agreement.
11.3 In the event that any party hereunder seeks indemnification under this
Article 11, such party shall: (a) promptly inform the indemnifying party of any
claim, suit or demand threatened or filed, (b) permit the indemnifying party to
assume direction and control of the defense of claims resulting therefrom
(including the right to settle such claims at the sole discretion of the
indemnifying party), and (c) cooperate as requested (at the expense of the
indemnifying party) in the defense of such claims.
11.4 An indemnifying party's (including sublicensees) obligations under
this Article 11 shall not extend to any claims, suits or demands for liability,
damages, losses, costs and expenses arising from the indemnified party's failure
to comply with the terms and conditions of this Agreement or arising from the
negligence or willful misconduct of the indemnified party, its agents or
employees.
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ARTICLE 12- NEUTROGENA OPTION TO NEGOTIATE
------------------------------------------
12.1 PROCYTE hereby grants to NEUTROGENA, for a period beginning upon the
Effective Date and continuing [ * ] (the "Right Period"), a right of first
negotiation with respect to any type of transactions not involving an Affiliate
relating to the licensing, sale, or assignment of PROCYTE patents or patent
applications relating to the use of compositions or compounds containing a
metal, other than copper, and a peptide in the Field [ * ] (hereinafter "New
Technology License"). PROCYTE shall not negotiate, consummate or agree to
consummate a New Technology License with any party other than an Affiliate
without first giving written notice thereof to NEUTROGENA (the "Notice")
specifying the compositions/compounds. In the event that NEUTROGENA notifies
PROCYTE of its intention to enter into negotiations for the New Technology
License within [ * ] of its receipt of the Notice (the "Reply"), PROCYTE and
NEUTROGENA agree to negotiate the terms of the New Technology License in good
faith for a period not to exceed [ * ] after the date of such Reply (the
"Negotiation Period"). In the event that (i) NEUTROGENA fails to elect to
exercise this right of first negotiation within the above [ * ] period following
such Notice or (ii) following expiration of such [ * ] period, in the event that
NEUTROGENA and PROCYTE have not entered into a definitive, written agreement
such New Technology License, then PROCYTE may enter into an agreement with
respect to the New Technology License with any third party within the next
succeeding [ * ]. Following the expiration of such [ * ] period, in the event
that PROCYTE has not entered into a definitive, written agreement regarding such
New Technology License, and until the expiration
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of the Right Period, the New Technology License shall be subject to this right
of first negotiation.
12.2 Until the termination of the Right Period or, in the event that a
Notice is given, the failure of NEUTROGENA to give a timely Reply or the
termination of the Negotiation Period, PROCYTE shall not negotiate, license,
sell, assign or otherwise transfer to any third party that is not an Affiliate
any right, title and interest in its patents or patent applications necessary to
consummate the New Technology License or to enable the parties to conduct the
transactions contemplated thereby. The parties hereby acknowledge and agree
that neither NEUTROGENA nor PROCYTE shall have an obligation to enter into a
definitive agreement concerning the New Technology License.
ARTICLE 13 - MISCELLANEOUS
--------------------------
13.1 Any controversy or claim arising out of or relating to this Agreement
or the validity, inducement, or breach thereof, shall be settled by arbitration
before a single arbitrator in accordance with the Commercial Arbitration Rules
of the American Arbitration Association ("AAA") then pertaining, except where
those rules conflict with this provision, in which case this provision controls.
The parties hereby consent to the jurisdiction of the federal district court for
the district in which the arbitration is held for the enforcement of this
provision and the entry of judgment on any award rendered hereunder. Should
such court for any reason lack jurisdiction, any court with jurisdiction shall
enforce this clause and enter judgment on any award. The arbitrator shall be an
attorney who has at least 15 years of experience with a law firm or corporate
law department of over 25 lawyers or was a judge of a court of general
jurisdiction. The arbitration shall be held in Denver,
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Colorado and in rendering the award the arbitrator must apply the substantive
law of New York (except where that law conflicts with this clause), except that
the interpretation and enforcement of this arbitration provision shall be
governed by the Federal Arbitration Act. The arbitrator shall be neutral,
independent, disinterested, impartial and shall abide by The Code of Ethics for
Arbitrators in Commercial Disputes approved by the AAA. Within 45 days of
initiation of arbitration, the parties shall reach agreement upon and thereafter
follow procedures assuring that the arbitration will be concluded and the award
rendered within no more than eight months from selection of the arbitrator.
Failing such agreement, the AAA will design and the parties will follow
procedures that meet such a time schedule. Each party has the right before or,
if the arbitrator cannot hear the matter within an acceptable period, during the
arbitration to seek and obtain from the appropriate court provisional remedies
such as attachment, preliminary injunction, replevin, etc., to avoid irreparable
harm, maintain the status quo or preserve the subject matter of the arbitration.
THE ARBITRATOR SHALL NOT AWARD ANY PARTY PUNITIVE, EXEMPLARY, MULTIPLIED OR
CONSEQUENTIAL DAMAGES, AND EACH PARTY HEREBY IRREVOCABLY WAIVES ANY RIGHT TO
SEEK SUCH DAMAGES. NO PARTY MAY SEEK OR OBTAIN PREJUDGMENT INTEREST OR
ATTORNEYS' FEES OR COSTS.
13.2 Any delays in or failures of performance by a party under this
Agreement shall not be considered a breach of this Agreement if and to the
extent caused by occurrences beyond the reasonable control of the party
affected, including but not limited to: acts of God; acts, regulations or laws
of any government; strikes or other concerted acts of workers; fires; floods;
explosions; riots; wars; rebellions; and sabotage; and any time for performance
hereunder shall be extended by the actual time of delay caused by such
occurrence.
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13.3 This Agreement, or any of the rights and obligations created herein,
shall not be assigned or transferred, in whole or in part, by either party
hereto without the prior written consent of the other party; provided, however,
that NEUTROGENA and PROCYTE each shall have the right to assign this Agreement
to any successor of all or substantially all of its business to which this
Agreement relates without such prior written consent. Any attempted assignment
or transfer of such rights or obligations without such consent, except as
provided herein, shall be void.
13.4 The waiver by a party, whether express or implied, of any provisions
of this Agreement, or of any breach or default of a party, shall not be
construed to be a continuing waiver of such provision, or of any succeeding
breach or default or of a waiver of any other provisions of this Agreement.
13.5 All matters affecting the interpretation, validity, and performance of
this Agreement shall be governed by the laws of the State of New York, U.S.A.,
without regard to its choice or conflict of law principles.
13.6 Any provision hereof which is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective only to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof or affecting the validity or enforceability of such provision
in any other jurisdiction. The parties shall replace such ineffective provision
for such jurisdiction with a valid and enforceable provision which most closely
approaches the idea, intent, and purpose of this Agreement, and in particular,
the provision to be replaced.
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13.7 PROCYTE and NEUTROGENA are independent contractors and shall not be
deemed to be partners, joint venturers or each other's agents, and neither shall
have the right to act on behalf of the other except as expressly provided
hereunder or otherwise expressly agreed to in writing.
13.8 NEUTROGENA shall have the right to promote and sell Licensed Product
under trademarks selected by NEUTROGENA, which trademarks shall be and remain
the property of NEUTROGENA. Nothing herein shall be deemed to give PROCYTE,
either during the term of this Agreement or thereafter, any right to NEUTROGENA
trademarks or their use.
13.9 It is the mutual desire and intent of the parties to provide certainty
as to their future rights and remedies against each other by defining the extent
of their mutual undertakings as provided herein. The parties have in this
Agreement incorporated all representations, warranties, covenants, commitments
and understandings on which they have relied in entering into this Agreement
and, except as provided for herein, neither party has made any covenant or other
commitment to the other concerning its future action. Accordingly, this
Agreement and the schedules attached hereto (i) constitutes the entire agreement
and understanding between the parties with respect to the matters contained
herein, and there are no promises, representations, conditions, provisions or
terms related thereto other than those set forth in this Agreement, and (ii)
supersedes all previous understandings, agreements and representations between
the parties, written or oral relating to the subject matter hereof. The parties
hereto may from time to time during the continuance of this Agreement modify,
vary or alter any of the provisions of this Agreement, but only by written
agreement of all parties hereto.
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13.10 All communications, reports, payments and notices required by this
Agreement shall be addressed to the partie(s) at their respective address(s) set
forth below or to such other address as requested by a party by notice in
writing to the other parties.
If to PROCYTE: ProCyte Corporation
Attention: President
8511-154th Avenue N.E.
Redmond, Washington 98052
If to NEUTROGENA: Neutrogena Corporation
Attention: President
5760 West 96th Street
Los Angeles, CA 90045-5544
With a copy to: Chief Patent Counsel
Johnson & Johnson
One Johnson & Johnson Plaza
New Brunswick, New Jersey 08933
All such notices, reports, payments and communications shall be made by
First Class mail, postage prepaid, and shall be considered made as of the date
of deposit with the United States Post Office.
13.11 NEUTROGENA shall cause all Licensed Products to be marked with the
applicable PROCYTE Patent Rights in accordance with applicable patent laws.
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IN WITNESS WHEREOF, and intending to be legally bound, the parties hereto
have caused this Agreement to be executed by their duly authorized
representatives as of the Effective Date.
PROCYTE CORPORATION NEUTROGENA CORPORATION
By: /s/ John F. Clifford By: /s/ Michael E. Macnamara
----------------------- --------------------------
John F. Clifford Michael E. McNamara
President & CEO President
Date: April 19, 2000 Date: April 19, 2000
--------------------- ------------------------
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SCHEDULE A
----------
PROCYTE PATENT RIGHTS
---------------------
UNITED STATES PATENTS
U.S. Patent No. 5,348,943 issued on September 20, 1994
U.S. Patent No. 5,135,913 issued on August 4, 1992.
U.S. Patent No. 5,550,183 issued on August 27, 1996
U.S. Patent No. 5,120,831 issued on June 9, 1992
INTERNATIONAL PATENTS
European Patent No. 420, 914 issued on March 9, 1994 in Germany, France,
United Kingdom, and Italy.
Australian Patent No. 633,005 issued on May 14, 1993.
Australian Patent No. 652,136 issued on December 6, 1994.
Canadian Patent No. 1,335,568 issued on May 16, 1995.
European Patent No. 500,745 issued on June 17, 1998 in Germany, France,
United Kingdom, and Italy
Korea Patent No. 195,550 issued on February 12, 1999
Taiwanese Patent No. NI 58,330 issued on January 4, 1993
Mexican Patent No. 170,285 issued on August 13, 1993
Japanese Patent No. 2,951,345 issued on July 9, 1999
INTERNATIONAL PATENT APPLICATIONS
[ * ]
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SCHEDULE B
----------
CONFIDENTIALITY AGREEMENT DATED NOVEMBER 16, 1998
-------------------------------------------------
[ * ]
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SCHEDULE C
----------
TEXT OF PROCYTE ANNOUNCEMENT OF THIS AGREEMENT
----------------------------------------------
PROCYTE IN LICENSE AGREEMENT WITH NEUTROGENA
--------------------------------------------
Deal Introduces ProCyte's Copper Peptide Technology to the
Worldwide Consumer Market
REDMOND, WA--April __, 2000 -- ProCyte Corporation (OTC BB: PRCY), a leading
skin care and tissue repair company, today announced a long term worldwide
license agreement with Neutrogena, a Johnson & Johnson company, for worldwide
use of its patented Copper Peptide Complexes in products for skin health. The
agreement provides ProCyte with milestone and royalty payments and includes
certain minimum payment levels.
The retail market for skin care products, including the food, drug and mass
market channels, was in excess of $3.5 Billion in the United States in 1999. It
is a rapidly growing market segment, as the aging baby boomer population demands
products that prolong and improve the quality of life. Clinical studies
indicate that the products sold by ProCyte in the medical marketplace
significantly improve skin tone and have high consumer appeal.
"We are excited to be able to make our proven Copper Peptide technology
available to a broader market base" said Jack Clifford, ProCyte Chairman and
CEO. "ProCyte has established a growing position in the medical marketplace,
where demand for our Copper Peptide therapeutic and anti-aging products has
risen dramatically since their launch less than two years ago."
Neutrogena Corporation manufactures, develops and internationally markets
premium skin and hair care products.
About ProCyte:
ProCyte Corporation is a healthcare products company that develops,
manufactures, and markets products for tissue repair, skin health and hair care.
ProCyte's product portfolio includes comprehensive skin care lines for
therapeutic care, anti-aging products and products for thinning hair. The
Company's products incorporate its patented copper peptide technology and are
marketed both directly and through distribution partners.
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This report may contain forward-looking statements that are subject to
certain risks and uncertainties that could cause actual results to differ
materially from those projected. This report should be read in conjunction with
the Company's annual report on Form 10-K and it's quarterly reports on Form 10-
Q. The Company's results may vary significantly from quarter to quarter and
will depend, among other factors, on product launches and market acceptance,
manufacturing contracts, and distribution agreements.
40
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SCHEDULE D
----------
TERMS OF PURCHASE AND SUPPLY OF METAL-PEPTIDE COMPOSITIONS
----------------------------------------------------------
PROCYTE and NEUTROGENA have entered into a License Agreement of which this
is an attached schedule. The following terms are intended to provide guidance
to the parties in drafting a definitive Supply Agreement. The parties shall
only be bound upon execution of such definitive Supply Agreement to be duly
negotiated in good faith by the parties. Terms used in this Schedule D not
otherwise defined shall have the meaning set forth in the License Agreement.
PROCYTE shall sell and supply to NEUTROGENA, and NEUTROGENA shall purchase
from PROCYTE, Metal-Peptide Compositions ("MPC") in the following quantities and
pursuant to the following terms:
1. Blanket Orders
1.1 Timing and Quantities
NEUTROGENA shall place blanket orders for MPC with PROCYTE by the following
dates and in the following quantities:
(a) Concurrently with the execution of the Supply Agreement, [ * ] to
be delivered by [ * ];
(b) By [ * ], [ * ] to be delivered by the dates specified by
NEUTROGENA during the year 2001 through the use of purchase orders;
(c) By [ * ] of each year during the period from [ * ] through [ * ],
at least [ * ] unless reduced pursuant to paragraph 4 below, to be delivered by
the dates specified by
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NEUTROGENA during the year following the year in which each order is placed
through the use of purchase orders. It is contemplated by the parties that if
NEUTROGENA's needs should substantially exceed [ * ] amounts produced in
accordance with this schedule then the schedule may be adjusted, by the mutual
agreement of the parties, for more frequent production of NEUTROGENA's
requirements as specified in forecasts provided in accordance with paragraph 4
below.
1.2 Deposit
[ * ].
2. Price
PROCYTE shall sell MPC to NEUTROGENA for an amount not to exceed [ * ]
F.O.B. PROCYTE's plant, Redmond, Washington, plus all applicable taxes and any
reasonable and customary freight charges actually paid by PROCYTE incident to
shipment. NEUTROGENA shall pay PROCYTE an amount equal to [ * ] PROCYTE shall
notify NEUTROGENA by [ * ] of each calendar year of (a) PROCYTE's projected
Actual Cost at various manufacturing quantities for the following year
("Projected Cost") and (b) PROCYTE's Actual Cost for the preceding year. The
purchase price for MPC purchased in the preceding year shall be reduced to the
extent the Actual Cost for the preceding year was less than the Projected Cost
for such year or increased to the extent that Actual Cost for the preceding year
exceeded the Projected Cost for such year. NEUTROGENA shall have the right to
have the Actual Cost audited by a mutually acceptable accounting firm. If the
audit results in an adjustment in favor of NEUTROGENA that is in excess of
[ * ], then PROCYTE shall pay the fees of the auditor.
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3. Payment
PROCYTE shall invoice NEUTROGENA at the time of shipment. NEUTROGENA shall
pay all such invoices within [ * ] of its receipt of MPC and the invoice after
deducting [ * ]. All validly invoiced amounts which are not paid when due shall
bear interest at the rate of [ * ] until paid in full. In the event NEUTROGENA
fails to pay any validly invoiced amount [ * ] days of its due date, PROCYTE
shall have the right to withhold future shipments of any MPC until such time as
such invoiced amount and interest are paid by NEUTROGENA.
4. Meeting Forecasts
NEUTROGENA shall provide to PROCYTE forecasts of its MPC requirements in
accordance with NEUTROGENA's standard supply policies and practices. NEUTROGENA
shall provide training to PROCYTE regarding its supply policies and practices.
PROCYTE shall supply NEUTROGENA with MPC according to NEUTROGENA's
forecasts and up to an additional [ * ] of each respective quantity set forth in
Sections 1.1 (b) and (c) above. To the extent NEUTROGENA's forecasted needs
exceed the quantities set forth in Sections 1.1 (b) and (c) and the previously
submitted forecasts by more than an additional [ * ] then PROCYTE shall use
commercially reasonable efforts, and negotiate in good faith with NEUTROGENA, to
supply such additional MPC to NEUTROGENA. NEUTROGENA shall provide PROCYTE with
valid purchase orders and deposits for such additional quantities. PROCYTE shall
have [ * ] to accept any such orders for additional quantities and inform
NEUTROGENA if the additional MPC can be supplied by NEUTROGENA's requested
delivery dates.
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PROCYTE shall deliver such additional quantities to NEUTROGENA within [ * ] of
its acceptance of any such purchase order for additional quantities. In the
event NEUTROGENA desires to reduce the amount of MPC it purchases pursuant to
Section 1.1 (c) above, NEUTROGENA shall give PROCYTE written notice no later
than [ * ] prior to the date NEUTROGENA is obligated to place an order under
Section 1.1 (c). If NEUTROGENA gives such valid notice, NEUTROGENA may reduce
its order to a quantity not less than [ * ] of the quantity it is then obligated
to order under Section 1.1 (c).
5. Quality
[ * ]
6. Failure to Supply
The parties contemplate that, to assure consistent supply to NEUTROGENA,
appropriate safeguards (including incentives and penalties) will be a necessary
component of any supply agreement between the parties.
In addition to such safeguards the parties contemplate that alternate
supply arrangements and mechanisms for implementing such arrangements need to be
included in any supply agreement. The following represents a starting point for
describing such a mechanism for seeking alternative supply. If, PROCYTE (a)
fails to meet the delivery dates specified in paragraph 1.1 above without giving
NEUTROGENA [ * ] advance written notice of delivery delay, or (b) fails to meet
the delivery dates specified in paragraph 1.1 above by [ * ] or (c) fails to
meet the specifications for the MPC, NEUTROGENA may request PROCYTE to make
alternative arrangements for manufacturing the MPC. PROCYTE shall participate in
the selection of the manufacturer to be hired in this connection but NEUTROGENA
shall have final approval of PROCYTE's manufacturing choice. PROCYTE shall
cooperate with
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NEUTROGENA in securing such alternate manufacturing arrangements. In the event
that within [ * ] of making such alternative arrangements at the request of
NEUTROGENA, PROCYTE again fails to meet the delivery dates or specifications for
the MPC, NEUTROGENA may request that PROCYTE license and provide all know-how
owned by PROCYTE that is in transferable form to a third party manufacturer
selected by NEUTROGENA to produce the MPC. Such license shall specify measures
to protect PROCYTE's trade secrets or other proprietary information through the
use of generally accepted methods satisfactory to PROCYTE. NEUTROGENA shall make
arrangements for PROCYTE to work directly with such manufacturer in order to
protect PROCYTE's trade secrets and other proprietary information. NEUTROGENA,
if necessary, shall retain PROCYTE to provide quality control services (at
NEUTROGENA's expense) with respect to such manufacturing. The expense of such
quality control services shall not exceed [ * ] of the cost of manufacturing the
MPC. No additional licensing fees shall be attributable to the license of such
manufacturing alternative. NEUTROGENA shall no longer be obligated to purchase
MPC from PROCYTE at such time. Notwithstanding anything in this Paragraph 6,
neither events of force majeure [ * ] nor events caused by NEUTROGENA shall
constitute occasions that trigger the requirement to make the alternative
arrangements stated in this Paragraph 6.
7. Term
These terms of Purchase and Supply shall continue for a period of [ * ] and
may renewed for [ * ] period upon mutual agreement in writing [ * ] thereafter
as it relates to extensions. Following the termination or expiration of the
Supply Agreement, NEUTROGENA shall have the right to make and have made MPC.
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<TABLE> <S> <C>
<PAGE>
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 3,584,888
<SECURITIES> 0
<RECEIVABLES> 782,798
<ALLOWANCES> (65,421)
<INVENTORY> 704,638
<CURRENT-ASSETS> 5,087,659
<PP&E> 6,132,001
<DEPRECIATION> (3,542,365)
<TOTAL-ASSETS> 12,752,237
<CURRENT-LIABILITIES> 345,838
<BONDS> 0
0
0
<COMMON> 154,470
<OTHER-SE> 12,105,862
<TOTAL-LIABILITY-AND-EQUITY> 12,752,237
<SALES> 1,092,399
<TOTAL-REVENUES> 1,463,058
<CGS> 276,623
<TOTAL-COSTS> 276,623
<OTHER-EXPENSES> 1,889,852
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<EPS-BASIC> (0.04)
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