Washington, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (fee required)
For the fiscal year ended December 31, 1999
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[ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (no fee required)
Commission file number 0-23544
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HUMAN PHEROMONE SCIENCES, INC.
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(Name of small business issuer in its charter)
California 94-3107202
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(State or other jurisdiction of (I.R.S. employee
incorporation or organization) Identification No.)
4034 Clipper Court, Fremont, California 94538
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(Address of principal executive offices) (Zip code)
Issuer's telephone number: (510) 226-6874
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Securities registered under Section 12(b) of the Exchange Act:
None
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(Title of class)
Check whether the Issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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[ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year. $9,305,615
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State the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was sold,
or the average bid and asked price of such stock, as of a specified date within
the past 60 days. (See definition of affiliate in rule 12b-2 of the Exchange
Act.) $4,987,051 (1)
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(1) Excludes 478,921 shares held by directors, officers and shareholders whose
ownership exceeds 5% of the outstanding shares at March 8, 2000 based on a
closing bid price on that day of $1.69 per share. Exclusion of such shares
should not be construed as indicating that the holders thereof possess the
power, direct or indirect, to direct the management or policies of the
registrant or that such person is controlled by or under common control with the
registrant.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date.1,449,817 shares of
convertible preferred stock, 3,429,839 shares of common stock.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENC Portions of the following document are
incorporated by reference into Part III of this Form 10-KSB Report: the Proxy
Statement for the Registrant's 1999 Annual Meeting of Shareholders (the "Proxy
Statement").
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This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Except for the historical
information contained in this discussion of the business and the discussion and
analysis of financial condition and results of operations, the matters discussed
herein are forward looking statements. These forward looking statements include
but are not limited to the Company's plans for sales growth and expansion into
new channels of trade, expectations of gross margin, expenses, new product
introduction, and the Company's liquidity and capital needs. These matters
involve risks and uncertainties that could cause actual results to differ
materially from the statements made. In addition to the risks and uncertainties
described in "Risk Factors", below, these risks and uncertainties may include
consumer trends, business cycles, scientific developments, changes in
governmental policy and regulation, currency fluctuations, economic trends in
the United States and inflation. These and other factors may cause actual
results to differ materially from those anticipated in forward-looking
statements. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
Item 1. Description of Business
Introduction
The Company, a California corporation, was founded in 1989 as EROX
Corporation to develop and market a broad range of consumer products containing
human pheromones as a component. On May 29, 1998, the shareholders of the
Company voted to change the name of the Company to Human Pheromone Science, Inc.
The Company believes that human pheromone research funded by the Company
presents an opportunity to create and market an entirely new category of
pheromone-based fragrances and toiletry products, as well as other types of
consumer products. The Company believes that its related patents provide it a
proprietary position in developing, licensing and marketing a new category of
consumer products that could significantly change the consumer accepted standard
for products containing a fragrance component and for cosmetic treatment
products.
Pheromones are chemical substances known to stimulate species-specific
biological responses in animals. For ten years, scientists and advisors engaged
by Human Pheromone Science, Inc. ("HPSI") have studied the functions and
characteristics of human pheromones.
The human pheromones included as a component of and as a fixative for
the Company's fragrance products have been manufactured for the Company by
Pherin Pharmaceuticals, Inc.. The manufacturing process for human pheromones
begins with hydrocarbon compounds commonly available from chemical supply
houses, and involves the use of a synthetic chemistry process performed for the
Company by Pherin at its laboratories in Salt Lake City, Utah. In early 1999, in
response to the need for significant increases in production, two independent
laboratories were engaged to manufacture such pheromones under the direction of
Pherin scientists. All the steps in the manufacturing process are standard
chemical laboratory procedures. The manufacturing process for pheromones is
similar to methods by which other naturally occurring substances (such as amino
acids) are synthetically produced.
The HPSI Technology
Pheromones. People have long known that insects and animals communicate
with one another through subtle, biochemical cues recognized and understood by
other members of the same species. These biochemical signals warn of danger,
indicate the presence of food, mark territorial boundaries and display sexual
maturation or readiness. The biochemical messengers that deliver these
communications are pheromones. Pheromones trigger a nerve impulse to the
hypothalamus when applied within or adjacent to the nasal passages.
Scientists have observed that in higher species the influence of
pheromones grows increasingly more subtle and complex. Not surprisingly,
reactions to pheromones are very subtle in human beings. While humans appear to
have definite responses to pheromones, the research sponsored by HPSI suggests
that the highly developed human brain filters and masks those reactions. Rather
than producing an isolated effect, as in lower level species, human pheromones
act in concert with other sensory cues provided by odor, sight, taste, sound and
touch to provide a cumulative influence.
As a result of its sponsored research, the Company believes evidence
has been developed that indicates that humans respond to human pheromones. HPSI
has also found that its human pheromones are sexually dimorphic: that is, some
are more active in females while others show a higher level of activity in
males. During the studies of human pheromones conducted by the Company, certain
human subjects volunteered descriptions of their feelings. Women frequently
described feeling comfortable or at ease, while a number of male subjects
described a feeling of confidence and self-assurance. The
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Company continues to explore these naturally occurring substances in a variety
of tests to increase its knowledge and understanding of their range of influence
on human emotions and their application as components of fine fragrance
products.
Fragrances and Pheromones. Animal pheromones are well known in the
fragrance industry. Natural and synthetic equivalents of mammalian pheromones
such as musk, civet and castoreum are found in many perfumes today. However,
since pheromonal cues can trigger a response only by members of the same
species, these animal pheromones have no specific effect on humans; instead,
they act only as fixatives or carriers for the fragrance or as a component of
the scent.
A scent binds to smell receptors in the nose and stimulates a specific
region of the brain resulting in the sensation of smell. A pheromone binds to
separate receptors that are physically and functionally distinct from smell
receptors. These pheromone receptors stimulate a region of the brain different
from that stimulated by smell receptors. Since it is widely believed that
traditional perfumes allure and intrigue the senses, an alliance between fine
fragrances and pheromones seems quite natural. For a perfume to create a true
pheromonal effect in humans, however, it must contain human pheromones. Thus, a
fragrance containing human pheromones may provide more allure than a traditional
fragrance.
The Vomeronasal Organ. The VNO consists of two tiny sensory organs --
one in each nasal passage. The VNO had been identified earlier in animal
species, from reptiles to mammals, and has been known for some time to be a
receptor for pheromones in animals. In humans, however, the VNO was assumed to
be a non-functioning, vestigial remnant, rarely even present in modern-day men
and women.
Over the course of their work on human pheromones, scientists working
on behalf of HPSI believe they have made a further, important discovery
concerning the VNO. Not only is the VNO present in all normal adults, it appears
to be an active, functional receptor for human pheromones. This has allowed
scientists engaged on behalf of HPSI to track the activity of human pheromones
by measuring the changes in the neuroelectric potential of the VNO's receptor
cells caused by pheromones. To measure these changes in humans, a proprietary
noninvasive method is utilized to measure the electrical response of the VNO in
a way similar to how electrical responses of the heart are recorded by an
electrocardiogram.
The HPSI Products
Products. The Company operates in one business segment and markets
three fragrances, REALM(R) Women, REALM(R) Men and inner REALM(R). These "proof
- -of-concept" products include a full line of fragrance and bath and body
products including eau de toilette, cologne, eau de parfume, lotion, bath and
shower gel, after-shave balm, antiperspirant, talc, soap and body cream. The
Company's fragrances were developed by Ann Gottlieb, a leading consultant to the
fragrance industry. All of the Company's products contain the Company's
synthesized human pheromones as a component of the fragrance. In 1996, the
Company introduced a unique refillable, dripless roll-on applicator containing
REALM and inner REALM eau de toilette for women, and in 1998 REALM Women and
REALM Men candles were launched. In 1999, the Company developed a new line of
fragrance and toiletry products containing synthesized human pheromones for men
and women under the trademark Natural Attraction(TM). The company anticipates
introducing these products via a new website, naturalattraction.com, in April
2000. Initial commercialization of this line of products will be through the web
and other direct marketing channels in the United States.
Research. Pheromones are chemical substances known to stimulate
species-specific biological responses in animals. The study of the uses, effects
and advantages of human pheromones is in its infancy, but abstracts from
presentations of two recent studies performed at leading research universities
reveal new information regarding the beneficial effects of human pheromones.
Most interestingly, these studies reveal new information regarding the
biological pathways human pheromones traverse in the body. Publication of these
findings continued in 1998 and in 1999, and the Company expects increased
interest in its patented technology as the result of these studies and others
currently being undertaken.
Scientists working on behalf of HPSI have identified and synthesized
several naturally occurring human pheromones. One combination of pheromones
shows a measurable response in women and another a comparable response in men.
HPSI has also developed the capability to manufacture commercial quantities of
these naturally occurring substances. HPSI intends to continue basic pheromone
research as applied to fragrances and ancillary products. For the years ended
December 31, 1999 and 1998, research and development expense totaled $333,000
and $365,000, respectively. Since its inception through December 31, 1999, the
Company has incurred $4,296,000 in research and development related expenses.
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Markets and Competition
The Competitive Environment. The Company's current fragrance products
contain what the Company believes are unique components: human pheromones.
Consequently, HPSI believes it will be able to differentiate its products from
traditional products. If such differentiation is successful, the Company's
products initially should have little direct competition in the marketplace,
since the Company believes no other companies in the United States have the
right to produce or distribute products containing human pheromones. However, if
such differentiation is not successful the Company will compete against the
numerous companies in the fragrance industry, including Estee Lauder, Chanel and
the fragrances subsidiaries of Unilever and L'Oreal.
While HPSI's current products are fragrances, the Company feels
strongly that fine fragrances are only a "proof of concept". The Company's
patented human pheromone technology has applications far beyond traditional
fragrances and bath and body products. HPSI hopes to position its technology as
a desired "value added" ingredient for any product that contains a fragrance.
Synthesized human pheromones provide the first patented technology of a
component that could have broad application and usage in cosmetic, treatment,
cleansing, over-the-counter health supplements and home and vehicle
environmental products. The Company does not feel that it has the resources to
successfully exploit the potential market for such applications and is actively
seeking licensing agreements with consumer product manufacturers.
Marketing Strategy. HPSI's initial products are a line of fragrance and
bath and body products containing the Company's patented human pheromones as a
component. The first of these "proof of concept products" were developed in 1993
when the Company developed REALM Women and REALM Men. While new product launches
in the fragrance industry frequently require considerable expenditures for
promotional programs which attempt to establish product differentiation based
upon imagery alone, HPSI sought to develop a program in 1993 following a
different approach -- one that relied on the human pheromone component in its
fragrances for product differentiation.
The Company's initial marketing program was intended to educate
consumers and the trade about pheromones while suggesting the enhanced
sensuality that the wearer of an HPSI fragrance might feel. The Company also
used packaging, pricing and distribution channels to communicate the uniqueness
of their products and to differentiate them from traditional fragrance products.
The Company launched its REALM products through direct marketing to ensure the
quality and clarity of the HPSI message and thereafter moved to more
conventional fragrance channels based on criteria such as store location, image
and promotional support.
Distribution and Promotional Activities. During 1993, the Company
developed two fragrances, REALM Women and REALM Men, each presented in 50ml and
5ml sizes. Initial promotion and distribution was in the form of a one half-hour
infomercial, broadcast-tested in August 1994 and rolled-out nationally in the
last four months of the year. The infomerical continued to be broadcast through
mid-1995 while the Company commenced selling its products in the U.S.retail
department stores on a limited basis in late 1994.
By the beginning of 1997, HPSI was still a single product company,
primarily involved in one class of trade -- better U.S. department stores. REALM
fragrances and toiletries were available in more than 1,300 stores in the 48
contiguous states. While this is the largest channel of distribution for basic
fragrances, the high level of retailer employee turnover required expensive
ongoing training for continued success of differentiated, scientifically based
products such as REALM fragrances. In addition, HPSI provides significant
in-store fragrance modeling to ensure that consumers driven to the stores by the
Company's ongoing radio advertisements have the opportunity to actually
experience REALM products once they reach the store.
To lessen its dependence on a single class of trade and in an effort to
leverage the expense of its radio advertising and promotion, the Company entered
into agreements with distributors who focus on the fast growing perfumery and
middle market department store classes of trade. These alternative channels
provide additional exposure for the Company's products and human pheromone
technology at a significantly lower cost than the better department stores. In
mid-1997, the Company introduced a second women's fragrance line, innerREALM
initially to the department store class of trade. Results of this expensive
product launch were disappointing. A decision was made to reposition this brand
to the alternative channels of distribution in 1998, and results from the
initial repositioning are encouraging. During 1998, the Company continued
distributing its REALM Men and REALM Women's fragrances in leading U.S.
department stores, while substantially completing the transfer of the sale and
marketing of innerREALM fragrances to alternative markets - including
perfumeries and middle market department stores. These alternative markets are
handled by an independent distributor who purchases the product from the Company
without the right of return and is responsible for advertising, selling and
marketing expenses. By focusing the innerREALM product line on these secondary
markets, the Company reduced its dependence on the department stores for sales
to the U.S. consumer. The Company reorganized it's U.S. sales organization in
the last quarter of 1998.
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Responsibility for selling and marketing to the department stores was
transferred from Company personnel to an independent organization comprised of
senior managers with significant experience introducing and managing fragrances
in this class of trade. This group is compensated by commission on net sales
generated. One of the principal's of this organization had been and continues to
be the CEO of Northern Brands, the Company's distributor in the secondary
markets. Also, in late 1998 the Company determined that it could not profitably
continue doing business with the May Company and ceased selling products to this
retailer and its subsidiaries at such time.
To further reduce its dependence on a single market, the Company sought
to increase its non-U.S. distribution. In 1995 and 1996, HPSI entered into
distribution agreements for the sale of REALM fragrances and toiletries in
selected Middle East markets, including Saudi Arabia and the Gulf States as well
as selected Duty Free markets in the Caribbean, South America and on the Mexican
and Canadian borders. In 1997, additional South American markets were opened and
discussions were undertaken for the profitable sale of REALM products in several
European markets and the Far East. In early 1998, initial shipments were made
under distribution agreements with distributors in Switzerland and the People's
Republic of China. Also in 1998, initial shipments were made to a distributor
for the sale of the Company's products in Spain and Portugal. The Company's
direct foreign sales represented approximately 6.1% and 6.3% of net sales during
1999 and 1998, respectively. International expansion will continue to be a focus
of HPSI. The Company is very conscious of the fact that numerous brands of
prestige fragrances have suffered immeasurable harm due to diversion by gray
marketers. While realizing that certain levels of such diversion are inevitable,
the Company hopes to curtail the risk of its REALM products being diverted back
into the U.S. by gray market discounters by selecting duty free partners who
purchase realistic quantities for sale in the regions they service. Such
partnership agreements are subject to cancellation if significant diversion
occurs.
During 1999, the Company continued to reduce its presence in U.S.
retailers whose business was not profitable to HPSI. It also began a program to
more tightly focus advertising, selling and promotional efforts with the
remaining retail accounts and did reduce its loss on sales to this class of
trade as compared with prior periods. During 1999, three customers comprised
33%, 20% and 17% of the Company's total net sales. However, the Company still
believes that it is difficult for a niche marketer to generate earnings in the
highly competitive fragrance market.
Technology Licensing and Supply Agreements
One of the strategic objectives of the company is to expand the use of
its patented human pheromone technology by working closely with consumer
products companies who are leaders in their particular markets. In December
1998, HPSI signed its first agreement to supply its synthesized human pheromones
to a major cosmetics and fragrance company. Revenues commenced in 1999. Total
revenues from this agreement and another signed later in the year aggregated
$989,000. HPSI is also in supply and /or licensing discussions with several
other companies.
Patents and Other Intellectual Property
In December 1993 and January 1994, the Company received two United
States patents for non-therapeutic compositions of fragrances and human
pheromones for use as components in perfumes and personal care products and
consumer and industrial products such as clothing, air fresheners and paper
products. European patents regarding these compositions have been filed and are
pending. In 1995, patents were granted in Taiwan, and in 1997, patents were
granted in Mexico. In June 1998, the Company was granted a Notice of Allowance
of its patents for the inclusion of synthesized human pheromones by the European
Patent Office. Individual country patents are pending issuance. HPSI is also the
exclusive licensee for non-therapeutic uses of pheromones in consumer products
under a royalty-free world-wide perpetual license to five United States patent
applications covering pheromone technology owned by Pherin Corporation. This
technology is also the subject of foreign patent applications. The Company also
relies on trade secrets protection for confidential and proprietary information.
Other patent applications are currently in process.
Regulation
Unless the FDA extends its regulatory authority, regulation by
governmental authorities in the United States and other countries is not
expected to be a significant consideration in the sale of the Company's
fragrance products and in its ongoing research and development activities. Under
current regulations, the market introduction of the majority of non-medicated
cosmetics products does not require prior formal registration or approval by the
FDA, although this could change in the future. The cosmetic industry has
established self-regulating procedures and most companies perform their own
toxicity and consumer tests. Voluntary filings related to manufacturing
facilities are made with the FDA. The Cosmetics Division of the FDA, however,
does monitor closely problems of safety, adulteration and labeling. In addition,
if the FDA should determine that claims made by the Company for its fragrances
involve the cure, mitigation or treatment of disease, the
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FDA could take regulatory action against the Company and its products.
In addition, the United States Federal Trade Commission ("FTC")
monitors product claims made in television and radio commercials and print
advertising to ensure that any claim can be substantiated. If the FTC believes
that any advertising claim made by the Company with regard to the effect or
benefit of its products is not substantiated by adequate data or research and
the Company cannot support such claim, the FTC could also take regulatory action
against the Company and its products.
Employees
At March 1, 2000, the Company had fourteen full-time employees. In
addition, the Company retains consultants to provide advice in the areas of
sales and marketing, public relations, advertising, product safety testing,
regulatory compliance, MIS and product development. The Company also has access
to scientific and professional consultants, some of whom are retained directly
by Pherin Pharmaceuticals, Inc., and who undertake projects for the Company by
virtue of the Company's agreement with Pherin. None of the Company's employees
is represented by a labor union. The Company considers its relations with its
employees and consultants to be good.
Manufacturing
The Company is dependent on third parties to manufacture its fragrance
products. The Company has selected two essential oil companies, that provide
fragrance products to the industry, to supply such compounds to HPSI in
accordance with proprietary formulas developed for the Company. The Company has
agreements in place with suppliers for its fragrances and has been furnished
with commercial quantities of the Company's products for sale to consumers.
While the Company is responsible for blending the human pheromones with these
fragrances, final bottling and packaging of the fragrance and ancillary product
lines are performed by independent manufacturers. These manufacturers selected
by HPSI have extensive experience in blending, filling and packaging fragrance,
cosmetic and related products, and have the capacity to satisfy the Company's
manufacturing needs, at least for the foreseeable future. The Company believes
that such manufacturing services are widely available to the fragrance industry
at competitive prices and has identified additional contract manufacturing
companies.
The Company and Pherin are parties to an agreement under which Pherin
will supply HPSI with its reasonable requirements of human pheromones and will
make available to HPSI the basic manufacturing technology. At any time after
January 31, 1996, rather than supply human pheromones to HPSI, Pherin may
instead elect to provide to the Company all manufacturing technology in its
possession that it has not previously supplied to HPSI. Through 1998 only small
quantities of human pheromones, which could be produced in a laboratory
environment, were required for its fragrance and ancillary products. As a result
of the initial third party supply agreement entered into in December 1998, the
Company requires significantly more production of the synthesized human
pheromones than were needed in the past. In January 1999, HPSI and Pherin
contracted with two independent laboratories to manufacture kilogram quantities
of the synthesized human pheromones under the direction of scientists working on
behalf of the Company and Pherin. HPSI received initial quantities from these
independent laboratories commencing March 1999. The Company does not believe
that it would be economically feasible to establish it's own manufacturing
facilities since synthesized human pheromones are available from chemical
laboratories who now have experience in the preparation of these compounds.
Risk Factors
The Company's future results may be affected to a greater or lesser
degree by the following factors among others:
The Company may not be able to effectively compete with larger
companies or with new products. The prestige fragrance market is extremely
competitive. Many fragrance products are better known than the Company's
products and compete for advertising and retail shelf space. Many competitors
have significantly greater resources that will allow them to develop and
introduce new competing products or increase the promotion of current products.
The product life cycle of a fragrance can be very short. Changing
fashions and fads can dramatically shift consumer preferences and demands.
Traditional fragrance companies introduce a new fragrance every year or so.
Changing fashions and new products may reduce the chance of creating long term
brand loyalty to the Company's products.
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The Company's marketing strategy may not be successful. The Company may
not be able to establish and maintain the necessary sales and distribution
channels. Retail outlets and catalogs may choose not to carry the Company's
products. The Company may not have sufficient funds to successfully market its
products if the current marketing strategy is not successful.
The current retail environment may cause pricing and promotional
pressures. Five companies, Federated Department Stores, The May Company, Dayton
Hudson/Marshall Fields , Dillard Department Stores and Saks (formerly
Proffitts), own the majority of upper end department stores. Because of their
market share, each company will have significant power to determine the price
and promotional terms that the Company must meet in order to sell its products
in the company's department stores.
Upper end department stores face increasing competition by discount
perfumeries, drug chains and lower priced department stores for sales of
fragrances and cosmetics. To compete, upper end department stores have cut
inventories, reduced co-op advertising, and increased promotions. These tactics
may force the Company to reduce its prices or increase the cost of its
promotions.
Seasonality in sales may cause significant variation in quarterly
results. Sales in the fragrance industry are generally seasonal with sales
higher in the second half of the year because of Christmas. This seasonality
could cause a significant variation in the Company's quarterly operating
results.
The Company may not be able to protect its technology or trade secrets.
The Company's patents and patent applications may not protect the Company's
technology or ensure that the Company's technology does not infringe another's
valid patent. Others may independently develop substantially equivalent
proprietary information. The Company may not be able to protect its technology,
proprietary information or trade secrets.
The Company may not be able to recruit and retain key personnel. The
Company's success substantially depends upon recruiting and retaining key
employees and consultants with research, product development and marketing
experience. The Company may not be successful in recruiting and retaining these
key people.
The Company relies upon other companies to manufacture its products.
The Company relies upon Pherin and other companies to manufacture its
pheromones, supply components, and to blend, fill and package its fragrance
products. The Company may not be able to obtain or retain pheromones
manufacturers, fragrance suppliers, or component manufacturers on acceptable
terms. If not, the Company may not be able to obtain commercial quantities of
its products. This would adversely affect operating results.
Item 2. Description of Property
The Company presently leases approximately 8,780 square feet of office
and warehousing space for its headquarters in Fremont, California, pursuant to a
lease which expires on October 31, 2000, and which is currently cancelable by
the Company on 90 days written notice and paying a $15,000 cancellation fee
which may be waived under certain circumstances. The annual base rent was
approximately $116,774 for the 12 months ended December 31, 1999 and will be
$100,970 in 2000, unless the lease is terminated earlier than its expiration
date of October 31, 2000. Total rent expense may be increased by the Company's
proportional share of any escalation related to taxes, common area charges and
outside maintenance incurred by the complex in which the facility is located. In
July 1998, the Company entered into an agreement to sublease approximately 5,890
feet of warehousing space under substantially the same terms as its primary
lease.. Such sublease expired on November 1, 1999. In addition, the Company
leases approximately 8,000 square feet of warehousing and distribution space, at
a cost of $0.60 per square foot, from an independent company under a fulfillment
agreement cancelable with 90 days notice. During the year ended December 31,
1999, the Company incurred $120,175 in net rent expense and related charges for
these facilities.
Item 3. Legal Proceedings
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is quoted on the NASDAQ Small-Cap Market
under the symbol EROX. As of March 1, 2000, there were approximately 320 holders
of record of the Company's Common Stock. The Company believes that there are a
significant number of beneficial owners of its Common Stock whose shares are
held by nominees in "Street Name". Set forth below is the high and low bid
information for the Company's Common Stock on the NASDAQ Small-Cap Market as
reported by Nasdaq-Amex Online during each of the four calendar quarters of 1999
and 1998, adjusted for a one for three reverse stock split effected on April 13,
1999.
HIGH LOW
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1999
----
First quarter $ 4.41 $ 1.50
Second quarter $ 3.00 $ 0.81
Third quarter $ 3.06 $ 1.25
Fourth quarter $ 1.06 $ 0.75
1998
----
First quarter $ 4.41 $ 2.25
Second quarter $ 3.39 $ 1.68
Third quarter $ 2.73 $ 1.23
Fourth quarter $ 3.93 $ 0.57
These quotations reflect interdealer prices, without retail mark-up,
markdown or commissions and may not represent actual sales.
The Company has never paid cash dividends on its Common Stock. The
Company currently intends to retain future earnings, if any, to fund the
development and growth of its business and does not plan to pay any cash
dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Year ended December 31, 1999 compared with the year ended December 31,
1998
Net sales for the year ended December 31, 1999 were $9,306,000 compared
to $10,379,000 for the prior year. Net sales to department stores in the United
States decreased approximately $2,509,000 in 1999, attributable to continued
weakness in the department store fragrance category, the elimination of sales to
unprofitable retailers and the cessation of innerREALM(R) sales to the better
department stores. In the last six months of 1998, the Company decided to cease
doing business with certain upscale U.S. Department store chains whose
promotional demands had become so excessive that the business with these stores
was unprofitable; in 1999, additional unprofitable stores were terminated. These
decisions were based on the Company's goal to focus on bottom line improvement
even if total revenues declined. Revenue of approximately $1,690,000 was
generated from these stores in 1998. Sales to distributors handling the
Company's products in the secondary markets in the United States (mid-level
department stores, perfumeries and selected mass market accounts) increased by
15% in 1999. While these distributor sales bear a lower selling price, they
result in the generation of operating profits since the distributor is
responsible for absorbing all sales returns, advertising and promotional
expenses. In 1999, the Company began receiving revenues from sales and licensing
of its patented human pheromone technology, generating revenues of almost
$1,000,000. In the aggregate, sales to catalogs and via direct marketing in the
United States and sales to International distributors increased by 11% in 1999.
Gross margin in 1999 represented 61% of sales as compared with 68% in
the prior year. The decrease was attributable to a higher percentage of sales of
lower gross margin value sets to U.S. Department stores and increased sales to
the lower margin secondary class of trade in 1999. The secondary market sales,
while reflecting lower gross margin, can have a better contribution to operating
profit since they do not require the level of financial support for advertising
and marketing that the department stores demand. In addition, the gross margin
on revenues generated by the supply of pheromones is slightly lower than that
generated by sales to department stores; however, virtually all of the gross
profit generated by such revenue becomes operating profit since no promotional
spending is required. As more revenue is generated from pheromone licensing and
supply agreements, gross margin may decline but operating results should
improve.
8
<PAGE>
Research and development costs in 1999 decreased slightly to $333,000
from $365,000 in the prior year. This reduction is primarily a result of a
reduction in the monthly contractual R&D payments to Pherin Corporation.
Selling, general and administrative expenses declined by 34% and
represented 65% of sales as compared with 89% of sales in 1998. On a dollar
basis, expenditures decreased $3,156,000, with all spending categories lower in
1999 than the prior year. Selling/Advertising and marketing expenses were
reduced by $2,908,000; this significant decline is attributable to more focused
advertising efforts in the remaining department stores and the elimination of
promotional spending with non-profitable department store accounts.
Other expense increased to $104,000 from $53,000 in 1998, primarily a
result of higher average bank borrowings and higher interest rates associated
therewith.
The Company recorded no income tax provision in either 1999 of 1998 due
to the net operating losses generated.
As of December 31, 1999, the Company's gross deferred tax asset, which
relates primarily to net operating loss carryforwards, was $6,692,000. However,
a full valuation allowance was provided for the gross deferred tax asset as
management could not determine whether its realization was more likely than not.
Seasonality
Sales in the fragrance industry are generally seasonal with sales
higher in the second half of the year because of the Holiday period. This
seasonality could cause a significant variation in the Company's quarterly
operating results.
Liquidity
At December 31, 1999, the Company had cash and cash-equivalents equal
to $108,000 and working capital of $2,052,000. These balances at December 31,
1998 were $77,000 and $2,351,000 respectively. Net cash used in operating
activities was $596,000 and $988,000 for the years ended December 31, 1999 and
1998, respectively. The decrease in net cash used in operating activities in
1999 as compared with 1998 was principally due to a decrease in the net loss in
1999. Issuance of convertible preferred stock to a long-term investor in the
amount of $550,000 in 1999, and $600,000 in 1998 partially offset cash usage in
1999. Other cash infusion was from bank borrowings in the amounts of $127,000
and $225,000 for 1999 and 1998, respectively. At December 31, 1999, borrowings
against the Company's $3,000,000 line of credit were $900,000.
The Company is in negotiations for the license of the Company's REALM
and innerREALM product lines for a ten-year period. Additional working capital
may be required should the Company fail to complete the transaction being
negotiated. Also, additional working capital may be required to generate
anticipated consumer response levels at comparable levels to 1999 or if the
Company experience a greater than planned success with its current products,
potential product line extensions and efforts. Funds would be needed for
inventory build, accounts receivable financing and staffing purposes. If the
Company fails to achieve significant revenues from its 2000 marketing efforts or
if expansion proves to be more capital intensive than planned, the Company may
require additional funding. The Company obtained an additional $260,000 from the
sale of convertible preferred stock in March 2000.
The Company's Business Loan Agreement with Mid-Peninsula Bank of Palo
Alto, California ("the Bank") expires on April 1, 2000. The Bank has extended
the line of credit for a three month period ending June 30, 2000. The Company
may borrow up to $1,500,000 at an interest rate equal to the Bank's prime rate
plus 1.0 % with borrowings secured primarily by the Company's trade receivables
and inventory. The agreement contains certain debt-to-equity and working capital
covenants. If the transaction being negotiated is not successfully completed,
the Company may need to seek alternative bank financing, using its assets as
collateral.
New Accounting Pronouncement
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize
all derivatives contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge, the objective of which is to match
the timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the
9
<PAGE>
change in the fair value of the hedged asset or liability that are attributable
to the hedged risk or (ii) the earnings effect of the hedged forecasted
transaction. For a derivative not designated as a hedging instrument, the gain
or loss is recognized in income in the period of change. SFAS No. 133, as
amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000.
The Company has not entered into derivatives contracts either to hedge
existing risks or for speculative purposes. Accordingly, the Company does not
expect adoption of the new standard on January 1, 2001 to affect its financial
statements
Impact of the Year 2000
Many currently installed computer systems and software products are
coded to accept or recognize only two digit entries in the date code field.
These systems may recognize a date using "00" as the year 1900 rather than the
year 2000. As a result, computer systems and/or software used by many companies
and governmental agencies may need to be upgraded to comply with year 2000
requirements or risk system failure or miscalculations causing disruptions of
normal business activities.
State of Readiness. Although as of March 1, 2000, the Company
experienced no material technical problems related to the year 2000, the Company
shall continue to seek verification from our key vendors, distributors and
suppliers that they are year 2000 compliant. To date, however, none of the
Company's systems have needed to be revised or replaced.
Costs. To date, we have not incurred any material costs in identifying
or evaluating year 2000 compliance issues. Most of our expenses have related to,
and are expected to continue to relate to, the upgrades or replacements, when
necessary, of software or hardware, as well as costs associated with time spent
by employees in the evaluation process and year 2000 compliance matters
generally. These expenses are included in our capital expenditures plans are not
expected to be material to the Company's financial position or results of
operations. These expenses, however, if higher than anticipated, could have a
material and adverse effect on our business, results of operations and financial
condition.
Risks. Although as of March 1, 2000 we experienced no material
technical problems related to the year 2000, there can be no assurance that the
Company will not discover year 2000 compliance problems in its systems that will
require substantial revisions or replacements. In the event that the operational
facilities that support the Company's business are not year 2000 compliant, it
may be unable to deliver goods or services to customers. In addition, there can
be no assurance that third-party software, hardware or services incorporated
into the Company's material systems will not need to be revised or replaced,
which could be time-consuming and expensive. The Company's inability to fix or
replace third-party software, hardware or services on a timely basis could
result in lost revenues, increased operating costs and other business
interruptions, any of which could have a material and adverse effect on the
Company's business, results of operations and financial condition. Moreover, the
failure to adequately address year 2000 compliance issues in the software,
hardware or systems could result in claims of mismanagement, misrepresentation
or breach of contract and related litigation, which could be costly and
time-consuming to defend.
In addition, there can be no assurance that governmental agencies,
utility companies, Internet access companies and others outside the Company's
control will be year 2000 compliant. The failure by these entities to be year
2000 compliant could result in a systematic failure beyond our control,
including, for example, a prolonged Internet, telecommunications or electrical
failure, which could also prevent the Company from delivering services to its
users, decrease the use of the Internet or prevent users from accessing the
Company's services, any of which would have a material and adverse effect on the
Company's business, results of operations and financial condition.
Contingency Plan. As discussed above, the Company is engaged in an
ongoing year 2000 assessment and does not currently have a contingency plan to
deal with the worst case scenario that might occur if technologies on which the
Company depends are not year 2000 compliant and fail to operate effectively
after the year 2000. The results of the Company's year 2000 compliance
evaluation and the responses received from distributors, suppliers and other
third parties with which the Company conducts business will be taken into
account in determining the need for and nature and extent of any contingency
plans.
If the Company's present efforts to address the year 2000 compliance
issues discussed above are not successful, or if distributors, suppliers and
other third parties with which the Company conducts business do not successfully
address such issues, the Company customers could seek alternate suppliers of our
products and services. Any material year 2000 problem could require the Company
to incur significant unanticipated expenses to remedy and could divert the
Company's management's time and attention, either of which could have a material
and adverse efect on the Company's business, operating results and financial
condition.
10
<PAGE>
Item 7. Financial Statements
See the Financial Statements listed in Item 13(a), which are
incorporated herein by reference.
Item 8. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
11
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The executive officers of the Company and their ages as of March 1,
2000 are as follows:
Name Age Position
---- --- --------
William P. Horgan 52 Chairman, Chief Executive Officer and Director
Gregory S. Fredrick 45 Vice President Finance
William P. Horgan was appointed to the newly created post of Chairman of the
Board in November 1996 after serving as President, Chief Executive Officer and
Director since January 1994, when he joined the Company. From May 1992 to
January 1994, he served as Chief Financial and Administrative Officer of
Geobiotics, Inc., a biotechnology-based development stage company, and from
January 1990 to May 1992, was employed by E.S. Jacobs and Company as Senior Vice
President of Worlds of Wonder, Inc. From March 1988 to January 1990, he was
Chief Financial Officer of Advanced Polymer Systems, Inc., a manufacturer and
supplier of polymer based delivery systems for the ethical dermatology, OTC skin
care and personal care markets. Prior thereto, he held various executive and
management positions with CooperVision, Inc. and several affiliated companies,
including President of its Revo, Inc. subsidiary.
Gregory S. Fredrick joined the Company in October 1998 as Vice President,
Controller. Prior to joining the Company Mr. Fredrick spent nearly eight years
in the Entertainment industry. From February 1997 to June 1998 he was the Vice
President, Controller for a start-up record label / internet company 911
Entertainment. Mr. Fredrick served in various finance and operations capacities
while with Windham Hill Records / BMG Entertainment from April 1990 leaving as
Director of Operations in December 1996.
The remainder of this item is incorporated by reference to the
Company's definitive Proxy Statement relating to its 1999 Annual Meeting of
Shareholders (the "Proxy Statement").
Item 10. Executive Compensation
Incorporated by reference to the Proxy Statement.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference to the Proxy Statement.
Item 12. Certain Relationships and Related Transactions
Incorporated by reference to the Proxy Statement.
12
<PAGE>
<TABLE>
Item 13. Exhibits and Reports on Form 8-K
<CAPTION>
(a) Financial Statements. The following are filed as a part of this report:
Page
----
<S> <C> <C>
Report of BDO Seidman, LLP, Independent Certified Public Accountants 16
Report of Ernst & Young LLP, Independent Auditors 17
Consolidated Balance Sheets -- December 31, 1999 and 1998 18
Consolidated Statements of Operations and Comprehensive Loss -
Years ended December 31, 1999 and 1998 19
Consolidated Statements of Shareholders' Equity -Years ended December 31, 1999 and 1998 20
Consolidated Statements of Cash Flows -- Years ended December 31, 1999 and 1998 21
Notes to Consolidated Financial Statements 22
(b) Reports on form 8-K. None
During the quarter ended September 30, 1999 the Company filed a current report on
Form 8-K dated September 30, 1999 to report the resignation of its previous independent
accounting firm Ernst & Young, LLP.
During the quarter ended December 31, 1999 the Company filed a current report on
Form 8-K dated November 24, 1999 to report the appointment of its current independent
accounting firm BDO Seidman, LLP.
(c) Exhibits. The following exhibits are filed as part of this report:
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
3.1 Copy of the Registrant's Articles of Incorporation (1)
3.1.1 Certificate of Determination of Preferences of Series AA Preferred Stock of Registrant
3.2 Copy of Registrant's By-laws (1)
10.1 Registrant's Stock Plan * (1)
10.2 Research and Development Agreement between Registrant and Pherin dated
July 1, 1992 (1)
10.7 Technology Transfer Agreement between Registrant and Pherin dated
August 23, 1991 (1)
10.10 Registrant's Non-employee Directors Stock Option Plan * (2)
10.12 Standard Industrial Lease - Net between Registrant
and SCI Limited Partnership-I dated September 29,
1995 for the Registrant's California facility (3)
10.13 Amendment to Research and Development Agreement between Registrant and
Pherin dated February 29, 1996 (3
10.14 Business Loan Agreement dated July 1, 1997 (4)
10.15 Business Loan Agreement dated April 1, 1998(5)
10.16 Extension of Industrial Lease between Registrant and SCI Limited Partnership-I
dated September 24, 1998 for the Registrant's California facility(5)
10.17 Supply Agreement with Avon Products, Inc.(5)
10.18 Business Loan Agreement and Change In Terms dated March 22, 2000 (6)
23.1 Consent of BDO Seidman, LLP , Independent Certified Public Accountants 30
23.2 Consent of Ernst & Young, LLP , Independent Auditors 31
27.01 Financial Data Schedule 32
<FN>
(1) Filed as an exhibit with corresponding exhibit no. to Registrant's Registration Statement on Form SB-2
(Registration No. 33-52340) and incorporated herein by reference.
(2) Filed as an exhibit with corresponding exhibit no. to Registrant's Annual Report on Form 10-KSB for
the Year Ended December 31, 1993.
(3) Filed as an exhibit with corresponding exhibit no. to Registrant's Annual Report on Form 10-KSB for
the Year Ended December 31, 1996.
13
<PAGE>
Item 13. Exhibits and Reports on Form 8-K (continued)
(4) Filed as an exhibit with corresponding exhibit no. to Registrant's Quarterly Report on From 10-QSB for
the Three Months Ended June 30, 1997.
(5) Filed as an exhibit with corresponding exhibit no. to Registrant's Annual Report on Form 10-KSB for
the Year Ended December 31, 1998.
(6) Files as an exhibit with corresponding exhibit no. To Registrant's Annual Report on Form 10-KSB for
the Year ended December 31, 1999.
* Management contract or compensatory plan
</FN>
</TABLE>
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
HPSI Corporation has duly caused this Annual Report on Form 10-KSB to be signed
on its behalf by the undersigned, thereunto duly authorized, in Fremont,
California, on March 29, 2000
HUMAN PHEROMONE SCIENCES, INC.
By: /s/ William P. Horgan
----------------------------------
Name: William P. Horgan
--------------------------------
Title: Chairman of the Board
-------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed on behalf of Human Pheromone Sciences, Inc.
by the following persons in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ William P. Horgan Chief Executive Officer March 29, 2000
- ---------------------------- and Director
William P. Horgan
/s/ Gregory S. Fredrick Vice President, Finance March 29, 2000
- ---------------------------- (Principal Financial and
Gregory S. Fredrick Accounting Officer)
/s/ Bernard I. Grosser Director March 29, 2000
- ----------------------------
Bernard I. Grosser, MD
/s/ Michael D. Kaufman Director March 29, 2000
- ----------------------------
Michael D. Kaufman
/s/ Helen C. Leong Director March 29, 2000
- ----------------------------
Helen C. Leong
/s/ Robert Marx Director March 29, 2000
- ----------------------------
Robert Marx
15
<PAGE>
Report of BDO Seidman, LLP, Independent Certified Public Accountants
To the Board of Directors and Shareholders
Human Pheromone Sciences, Inc.
We have audited the accompanying consolidated balance sheet of Human
Pheromone Sciences, Inc. as of December 31, 1999, and the related consolidated
statements of operations and comprehensive loss, shareholders' equity and cash
flows for the year ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Human
Pheromone Sciences, Inc. at December 31, 1999, and the results of its operations
and its cash flows for the year ended December 31, 1999, in conformity with
generally accepted accounting principles.
/s/ BDO Seidman, LLP
San Jose, California
February 15, 2000
16
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors and Shareholders
Human Pheromone Sciences, Inc.
We have audited the accompanying consolidated balance sheet of Human
Pheromone Sciences, Inc. as of December 31, 1998, and the related consolidated
statements of operations and comprehensive loss, shareholders' equity and cash
flows for the year ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Human
Pheromone Sciences, Inc. at December 31, 1998, and the results of its operations
and its cash flows for the year ended December 31, 1998, in conformity with
accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
March 19, 1999
17
<PAGE>
<TABLE>
Human Pheromone Sciences, Inc.
Consolidated Balance Sheets
<CAPTION>
December 31, December 31,
(in thousands except share data) 1999 1998
- --------------------------------------------------------------- ------------ ------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 108 $ 77
Accounts receivable, net of allowances of $338
and $678 in 1999 and 1998, respectively 2,050 2,051
Inventories 2,304 2,894
Other current assets 36 114
------------ ------------
Total current assets 4,498 5,136
Property and equipment, net 14 59
------------ ------------
$ 4,512 $ 5,195
============ ============
Liabilities and Shareholders' Equity
Current liabilities:
Bank borrowings $ 900 773
Accounts payable 573 692
Accrued advertising 313 554
Accrued commissions 286 448
Other accrued expenses 374 318
------------ ------------
Total current liabilities 2,446 2,785
------------ ------------
Commitments and Contingencies
Shareholders' equity:
Preferred stock, issuable in series, no par value, 10,000,000
shares authorized, 1,433,333 Series AA convertible shares
issued and outstanding at December 31, 1999 and 1998,
14,203 and 6,000 Series BB convertible shares issued and
outstanding at December 31, 1999 and December 31, 1998,
respectively 3,296 2,746
Common stock, no par value, 13,333,333 shares authorized,
3,429,839 shares issued and outstanding 17,667 17,667
Accumulated deficit (18,847) (18,003)
Foreign currency translation (50) --
------------ ------------
Total shareholders' equity 2,066 2,410
------------ ------------
$ 4,512 $ 5,195
============ ============
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
18
<PAGE>
<TABLE>
Human Pheromone Sciences, Inc.
Consolidated Statements of Operations and Comprehensive Loss
<CAPTION>
Years ended December 31,
------------------------
(in thousands except per share data) 1999 1998
- ------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Net sales, including license fees in 1999 of $989, $0 in 1998 $ 9,306 $ 10,379
Cost of goods sold 3,646 3,358
---------- ----------
Gross profit 5,660 7,021
---------- ----------
Operating expenses:
Research and development 333 365
Selling, general and administrative 6,067 9,223
---------- ----------
Total operating expenses 6,400 9,588
---------- ----------
Loss from operations (740) (2,567)
---------- ----------
Other expense
Interest expense (98) (63)
Other (6) 10
---------- ----------
Total other expense (104) (53)
---------- ----------
Net loss available to common shareholders (844) (2,620)
Other comprehensive loss - translation adjustment (50) --
---------- ----------
Comprehensive loss $ (894) $ (2,620)
========== ==========
Net loss per common share-basic and diluted $ (0.26) $ (0.76)
========== ==========
Weighted average common shares outstanding 3,430 3,430
========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
19
<PAGE>
<TABLE>
Human Pheromone Sciences, Inc.
Consolidated Statements of Shareholders' Equity
<CAPTION>
(In thousands)
- --------------------------------------------------------------------------------------------------------------------
Convertible Preferred Stock
--------------------------------------------------
Series AA Series BB Common Stock
-------------------------- ----------------------- ---------------------------
Shares Amount Shares Amount Shares Amount
--------------------------------------- ------------ ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, at December 31, 1997 1,433 $2,146 -- $ 3,430 $17,667
Issuance of Series BB -- -- 6 600 -- --
preferred stock
Net loss -- -- -- -- -- --
------------- ------------ ----------- ----------- ----------- -------------
Balances, at December 31, 1998 1,433 2,146 6 600 3,430 17,667
Issuance of Series BB -- -- 8 550 -- --
preferred stock
Foreign currency translation -- -- -- -- -- --
Net Loss -- -- -- -- -- --
------------- ------------ ----------- ----------- ----------- -------------
Balances, at December 31, 1999
1,433 $2,146 14 $ 1,150 3,430 $17,667
============= ============ =========== =========== =========== =============
</TABLE>
<TABLE>
Human Pheromone Sciences, Inc.
Consolidated Statements of Shareholders' Equity
<CAPTION>
Foreign Currency Total Shareholders'
Translation Accumulated Deficit Equity
-----------------------------------------------------------------
<S> <C> <C> <C>
Balances, at December 31, 1997 $ -- $(15,383) $4,430
Issuance of Series BB -- -- 600
preferred stock
Net loss -- (2,620) (2,620)
------------------- ---------------------- ---------------------
Balances, at December 31, 1998 -- (18,003) 2,410
Issuance of Series BB -- -- 550
preferred stock
Foreign currency translation (50) -- (50)
Net Loss -- (844) (844)
------------------- ---------------------- ---------------------
Balances, at December 31, 1999
$ (50) $(18,847) $2,066
=================== ====================== =====================
<FN>
See accompanying notes to consolidated financial statements
</FN>
</TABLE>
20
<PAGE>
<TABLE>
Human Pheromone Sciences, Inc.
Consolidated Statements of Cash Flows
<CAPTION>
Years ended December 31,
------------------------
(in thousands) 1999 1998
- -------------------------------------------------------------- ----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (844) $ (2,620)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 45 50
Changes in operating assets and liabilities:
Accounts receivable 1 1,204
Inventories 590 527
Other current assets 78 15
Accounts payable (119) (109)
Accrued advertising (241) (190)
Accrued commissions (162) 278
Other accrued expenses 56 (143)
----------- ----------
Net cash used in operating activities (596) (988)
----------- ----------
Cash flows from investing activities:
Purchase of property and equipment -- (9)
----------- ----------
Cash flows from financing activities:
Proceeds from bank borrowings 1,810 4,309
Repayment of bank borrowings (1,683) (4,084)
Proceeds from issuance of convertible preferred stock 550 600
----------- ----------
Net cash provided by financing activities 677 825
----------- ----------
Effect of currency translation (50) --
----------- ----------
Net increase (decrease) in cash and cash equivalents 31 (172)
Cash and cash equivalents at beginning of the year 77 249
----------- ----------
Cash and cash equivalents at end of the year $ 108 $ 77
=========== ==========
<FN>
See accompanying notes to consolidated financial statements.
</FN>
</TABLE>
21
<PAGE>
Human Pheromone Sciences, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Human Pheromone Sciences, Inc. (the "Company") was incorporated in the
State of California in 1989 under the name of EROX Corporation. The Company
changed the name to Human Pheromone Sciences, Inc. in May 1998. The Company is
engaged in the research, development, manufacturing and marketing of consumer
products containing synthetic human pheromones as a component. The Company
initiated commercial operations in late 1994 with a line of fine fragrances and
toiletries. The Company currently sells its REALM fragrance products through
department and specialty stores across the United States and selected
international markets.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiary in France. All significant intercompany
accounts and transactions have been eliminated.
Use of Estimates
The preparation of the financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Segment Reporting
During the year ended December 31, 1999, the Company began receiving
revenues from sales and licensing of its patented human pheromone technology.
Currently, the Company's management does not regularly review operating results
relating to this revenue, nor does it assess its performance by allocating
various expenditures. Consequently, it will not report this revenue as an
individual segment. As the Company's sales and licensing revenues of its
patented human pheromone technology progresses, it will begin to develop systems
to monitor this segment, and report its results accordingly.
The Company's direct sales in international markets is not material.
Accordingly, the Company will not report international markets as a geographic
segment.
Concentration of Credit Risk
The Company's concentration of credit risk consists principally of
cash, cash equivalents and trade receivables. Concentration of credit risk with
respect to trade receivables is limited because the Company's customer base
consists of a large number of geographically diverse customers in the department
and specialty store trade, in the United States and various international
markets. On-going credit evaluations of customers' financial condition are
performed and generally, no collateral is required. The company maintains an
allowance for potential losses based upon management analysis of possible
uncollectable accounts.
Customer Concentration
During 1999, three customers comprised 33%, 20% and 17% of the
Company's net sales. During 1998, two customers comprised 22% and 16% of the
Company's net sales.
Supplier Concentration
The Company is dependent on third parties to manufacture its fragrance
products, as well as the synthesized human pheromones used in these products.
Capacity limitations at these essential suppliers, or any other occurrences
leading to an interruption of supply could have a material adverse effect on the
Company.
22
<PAGE>
Human Pheromone Sciences. Inc.
Notes to Consolidated Financial Statements
December 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
Revenue is recorded at the time of merchandise shipment, net of
provisions for returns. License fees are earned according to the terms of the
license agreement and the license. The majority of the Company's sales are to
large department store chains.
Advertising Expense
The cost of advertising is expensed as incurred. Advertising costs were
$1,108,000 and $2,160,000 in 1999 and 1998, respectively.
Research and Development
Research and development costs are charged to expense when incurred.
Research and development costs were $333,000 and $365,000 in 1999 and 1998,
respectively.
Fair Value of Financial Instruments
The Company believes the book value of financial instruments
approximates their fair value.
Long-term Assets
The company applies SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets". Under SFAS No.121, long-lived assets and certain intangibles
are evaluated for impairment when events or changes in circumstances indicate
that the carrying value of the assets may not be recoverable through estimated
undiscounted future cash flows resulting from the use of these assets. When any
such impairment exists, the related assets will be written down to fair value.
Income Taxes
The Company follows the provisions of SFAS No. 109, "Accounting for
Income Taxes", which requires use of the "liability method". Accordingly,
deferred tax liabilities and assets are determined based on the temporary
differences between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse.
Stock Options
The Company applies Accounting Principles Board Opinion ("APB") 25,
"Accounting for Stock Issued to Employees", and related Interpretations in
accounting for all stock option plans. Under APB 25, compensation cost is
recognized for stock options granted at prices below the market price of the
underlying common stock on the date of grant.
SFAS No. 123, "Accounting for Stock - Based Compensation", requires the
Company to provide pro forma information regarding net income as if compensation
had been determined in accordance with the fair value based method prescribed in
SFAS No. 125.
Comprehensive Income
Comprehensive income is comprised of net income and all changes to the
statements of shareholders' equity, except those due to investment by
shareholders, changes in paid-in capital and distributions to shareholders.
23
<PAGE>
Human Pheromone Sciences, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Translation of Foreign Currencies
The financial statements of the Company's foreign subsidiary are
measured in the local currency and then translated into U. S. dollars. All
balance sheet accounts have been translated using the current rate of exchange
at the balance sheet date. Results of operations have been translated using the
average rate prevailing throughout the year. Translation gains and losses
resulting from the change in exchange rates from year- to-year are accumulated
in a separate account of shareholders' equity. Foreign currency transaction
gains and losses are included in consolidated net income.
New Accounting Pronouncement
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 requires companies to
recognize all derivatives contracts as either assets or liabilities in the
balance sheet and to measure them at fair value. If certain conditions are met,
a derivative may be specifically designated as a hedge, the objective of which
is to match the timing of gain or loss recognition on the hedging derivative
with the recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal
quarters of fiscal quarters of fiscal years beginning after June 15, 2000.
The Company has not entered into derivatives contracts either to hedge
existing risks or for speculative purposes. Accordingly, the Company does not
expect adoption of the new standard on January 1, 2001 to affect its financial
statements.
Net Income/Loss Per Share
The Company follows the provisions of SFAS No. 128, "Earnings Per
Share". SFAS NO. 128 provides for the calculation of "Basic" and Diluted"
earning per share. Basic net income/(loss) per share is computed using the
weighted-average number of common shares outstanding. Diluted net income/(loss)
per share is computed using the weighted-average number of common shares and
dilutive common shares outstanding during the period. For the years ended
December 31, 1999 and 1998, options to purchase 367,000 and 313,000 shares of
common stock, respectively, were excluded from the computation of diluted
earnings per share since their effect would be antidilutive.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or market.
Property and Equipment
The Company's property and equipment is stated at cost, net of
accumulated depreciation. Depreciation is provided on a straight-line basis over
three years
24
<PAGE>
Human Pheromone Sciences, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
<TABLE>
2. INVENTORIES
<CAPTION>
A summary of inventories follows (in thousands):
December 31,
------------
1999 1998
-------------------------
<S> <C> <C>
Components $ 1,170 $ 1,114
Work-in-process 472 264
Finished goods 662 1,516
--------- ---------
$ 2,304 $ 2,894
========= =========
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following (in thousands):
December 31,
------------------------
1999 1998
-------------------------
Molds $ 478 $ 478
Computer hardware 103 103
Computer software 140 140
Furniture and other office equipment 79 79
--------- ---------
800 800
Accumulated depreciation (786) (741)
--------- ---------
$ 14 $ 59
========= =========
</TABLE>
4. BANK BORROWING
The Company has a revolving line of credit with Mid-Peninsula Bank,
which expires April 1, 2000. Under the terms of this loan agreement the Company
may borrow up to 75% of allowable accounts receivable, as defined, up to a
maximum of $3 million. As of December 31, 1999 $900,000 was outstanding against
the credit line, and the interest rate on borrowings is the bank's prime rate,
8.5% at December 31, 1999, plus 1.00%. Borrowings are primarily secured by the
Company's accounts receivable and inventories. The line of credit requires the
company to maintain debt-to-equity and liquidity ratios, and a minimum net
worth. As of December 31, 1999 the Company was in compliance with these
financial covenants.
5. COMMITMENTS AND CONTINGENCIES
Effective November 1, 1998, the Company extended the existing lease
arrangement for office space in Fremont, California until October 31, 2000. The
annual base rent will be approximately $100,970 for the year ending December 31,
2000. The lease also provides for payments related to taxes, common area charges
and outside maintenance. In July 1998 the Company subleased a portion of the
Fremont facilities. The sublease expired October 31, 1999 and required a total
rent of $78,900 including reimbursement of common area charges, property taxes,
and maintenance. The sublease income is netted against rent expense. Total
rental expense was $120,175 and $129,400 for the years ended December 31, 1999
and 1998, respectively.
6. SHAREHOLDERS' EQUITY
In 1999, the Company shareholders' authorized a 1-for-3 reverse stock
split. All share and per share amounts in the accompanying financial statements
have been restated to give effect to the stock split.
25
<PAGE>
Human Pheromone Sciences, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
6. SHAREHOLDERS' EQUITY (continued)
Convertible Preferred Stock
Series BB
During 1999 the Company issued 8,203 shares of Series BB convertible
preferred stock for $550,000, net of issuance costs, to a current shareholder.
The cash was used to reduce bank borrowings.
During 1998, the Company issued 6,000 shares of Series BB convertible
preferred stock for $600,000, net of issuance costs, to a current shareholder.
The cash was used to reduce bank borrowings.
Holders of shares of Series BB convertible preferred stock shall be
entitled to the number of votes equal to the number of shares of common stock
into which such shares could be converted. 600,000 shares of common stock are
reserved for the future conversion of this preferred stock. No dividends are
payable in connection with these preferred shares.
Initially, each share of Series BB preferred stock shall be convertible
at the option of the holder into shares of common stock at an initial conversion
price of $1.00 per share of common stock. The initial conversion price shall be
increased quarterly beginning April 1, 1999 by $2.00 such that the original
issue price shall increase by $8.00 per share each year. In addition, each
preferred share shall automatically convert in the event of any of the
following:
o Immediately after the closing bid price of the common stock on the
NASDAQ Stock Market exceeds $5.00 per share for a period of twelve
consecutive weeks.
o Immediately after the Company reports earnings per common share for any
fiscal ear of $.50 or greater.
o Upon the written request for such conversion by sixty-six and
two-thirds percent (66 2/3%) of the then outstanding preferred
stockholders.
o At the time that sixty-six and two-thirds percent (66 2/3%) of the
preferred stock ever outstanding have converted to common stock
Series AA
Holders of shares of Series AA convertible preferred stock shall be
entitled to the number of votes equal to the number of shares of common stock
into which such shares could be converted. Reserved for the future conversion of
this preferred stock are 1,433,333 shares of common stock. No dividends are
payable in connection with these preferred shares.
Each share of Series AA preferred stock shall be convertible at the
option of the holder into shares of common stock at an initial conversion price
of $1.50 per share of common stock. Such initial conversion price shall be
increased quarterly beginning October 1, 1997 by $.0225 such that the original
issue price shall increase by $.09 per share each year. In addition, each
preferred share shall automatically convert in the event of any of the
following:
o Immediately after the closing bid price of the common stock on the
NASDAQ Stock Market exceeds $5.00 per share for a period of twelve
consecutive weeks.
o Immediately after the Company reports earnings per common share for any
fiscal year of $.50 or greater.
o Upon the written request for such conversion by sixty-six and
two-thirds percent (66 2/3%) of the then outstanding preferred
stockholders.
o At the time that sixty-six and two-thirds percent (66 2/3%) of the
preferred stock ever outstanding have converted to common stock.
Stock Option Plan
In 1990, the Company adopted a stock option plan (the "Plan"), which is
administered by the Compensation and Stock Option Committee of the Board of
Directors. The maximum number of shares that may be issued under the Plan is
708,333. Terms and conditions of stock options are set by the Board of
Directors. Options may be granted at the fair value at the date of the grant as
determined by the Board of Directors. Options for a holder of more than 10% of
the voting stock of
26
<PAGE>
Human Pheromone Sciences, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
6. SHAREHOLDERS' EQUITY (continued)
the Company may be granted at not less than 110% of fair market value. Options
have a maximum term of ten years or a shorter period as set forth in the option
agreement, and generally vest over a four-year period unless otherwise
specified. Options granted to a shareholder with 10% or more of the voting stock
of the Company have a maximum term of five years.
A summary of the option activity under the Plan is as follows (in
thousands except per share data):
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------ --------------
Outstanding, January 1, 1997 344 $ 9.33
Granted 42 $ 1.92
Canceled (160) $10.95
------
Outstanding, December 31, 1998 226 $ 6.81
Granted 210 $ 0.95
Canceled (169) $ 6.86
------
Outstanding, December 31, 1999 267 $ 2.19
======
At December 31, 1999, a total of 441,633 shares of the Company's common
stock were reserved for future grants under the Plan, and options to purchase
50,140 shares were exercisable.
In June 1993, the Company's Board of Directors adopted a Non-Employee
Directors' Stock Option Plan (Directors' Plan) covering a total of 158,333
shares of common stock, which provides for a one-time automatic grant of options
to purchase 8,333 shares of common stock and annual grants thereafter of options
to purchase 3,333 shares of common stock to each non-employee director at an
exercise price equal to the fair market value of the stock on the date of grant.
The stock option activity under the Plan was as follows (in thousands except per
share data):
WEIGHTED
AVERAGE
EXERCISE
SHARES PRICE
------ -------
Outstanding, January 1, 1997 74 $10.35
Granted 13 $ 2.01
-----
Outstanding, December 31, 1998 87 $ 9.06
Granted 13 $ 1.80
-----
Outstanding, December 31, 1999 100 $ 8.10
=====
At December 31, 1999, a total of 58,341 shares of the Company's common
stock were reserved for future grants under the Directors' Plan, and options to
purchase 93,324 shares were exercisable.
The following table summarizes information about stock options
outstanding at December 31, 1999 (in thousands except per share data):
27
<PAGE>
Human Pheromone Sciences, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
<TABLE>
6. SHAREHOLDERS' EQUITY (continued)
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- --------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/99 LIFE PRICE AT 12/31/99 PRICE
- --------- ----------------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 0.95 to $ 2.37 253 6.1 $ 1.07 38 $ 1.52
$ 1.38 to $ 4.74 22 2.9 $ 4.69 16 $ 4.68
$ 4.75 to $ 7.12 52 5.2 $ 5.69 52 $ 5.69
$ 7.13 to $ 9.49 2 2.0 $ 7.95 2 $ 7.95
$ 9.50 to $14.23 16 3.5 $12.00 16 $12.00
$14.24 to $23.72 22 4.9 $23.67 20 $23.67
---- --- ------ --- ------
$ 0.95 to $23.72 367 5.5 $ 3.80 144 $ 7.70
==== ===
</TABLE>
The weighted average fair value of options granted during 1999 and 1998
was $0.78, and $1.77, respectively.
Stock Compensation
The Company applies APB 25 and related Interpretations in accounting
for its employee stock options. Had compensation expense been determined based
upon the fair value of the awards at the grant date and consistent with the
method under SFAS No. 125, the Company's net loss per share would have been
increased the the proforma amount indicated in the following table (in
thousands):
Years ended December 31,
------------------------
1999 1998
--------- ---------
Net loss:
As reported $ (844) $ (2,620)
======== ========
Pro forma $ (1,012) $ (3,016)
======== ========
Basic and diluted loss per share:
As reported $ (0.25) $ (0,76)
======== ========
Pro forma $ (0.30) $ (0.88)
======== ========
<TABLE>
<CAPTION>
1999 Option Grants 1998 Option Grants
------------------ ------------------
<S> <C> <C>
Risk-Free Interest Rates 3.88% to 6.13% 4.00% to 5.50%
Dividend Yield 0% 0%
Volatility factor of the Company's common stock 1.0 1.7
Weighted average expected life beyond each
respective vesting period 1 year 1 year
</TABLE>
7. RELATED PARTY TRANSACTIONS
On March 1, 1999, the Company renewed a research and development
agreement with Pherin Pharmaceuticals Corporation ("Pherin"), a company related
by common shareholders, whereby Pherin supplies HPSI with its required
synthesized human pheromones and also provides to HPSI research and development
and scientific public relations services. This renewal has been extended to
expire on March 1, 2001. The total expense incurred pursuant to the Company's
research and development agreement with Pherin Corporation during the fiscal
years ended December 31, 1999 and 1998 was $257,000 and $304,000, respectively.
28
<PAGE>
Human Pheromone Sciences, Inc.
Notes to Consolidated Financial Statements
December 31, 1999
7. RELATED PARTY TRANSACTIONS (continued)
The Company also retains the consulting services of Dr. David Berliner,
a founder and current CEO of Pherin Pharmaceuticals. The total expense incurred
to retain Dr. Berliner's services for the fiscal years ended December 31, 1999
and 1998 was $74,00 and $60,000, respectively.
In 1999 the Company retained the marketing and consulting services of
Robert Marx, a member of the Company's Board of Director's. Mr. Marx was paid
$80,000 in 1999 for his services.
8. INCOME TAXES
There was no provision for income taxes for the year ended December 31,
1999 or 1998 as the Company incurred net operating losses for which no benefit
was recognized.
A reconciliation of the effective tax rate and the statutory U.S.
federal income tax rates are as follows:
Years ended December 31,
------------------------
1999 1998
------ ------
Federal tax benefit of the federal statutory rate $ (287) $ (891)
State income tax benefit, net of federal amount -- --
Permanent differences (5) (6)
Other -- 43
Increase in valuation allowance 292 940
------ ------
Income tax benefitts $ -- $ --
====== ======
At December 31, 1999, the Company had net operating loss carryforwards
of approximately $16,700,000. The Company also had federal research and
development tax carryforwards of approximately $187,000. The net operating loss
and credit carryforwards will expire between 2004 and 2014. The utilization of
certain of the loss carryforwards is limited under Section 382 of the Internal
revenue Code.
Temporary differences that give rise to a significant portion of the
deferred tax asset are as follows (in thousands):
December 31,
1999 1998
------ ------
Deferred tax asset:
Net operating loss carryforward $6,337 $5,500
Research credit carryforward 187 200
Returns reserve 135 300
Other, net 33 400
Valuation allowance for deferred tax assets (6,692) (6,400)
------- -------
Net deferred tax assets $ -- $ --
======= =======
Because of the Company's lack of earnings history, the deferred tax
asset has been fully offset by a valuation allowance. The net valuation
allowance increased by $292,000 and $940,000 in 1999 and 1998. The valuation
allowance was established because the Company was not able to determine that is
more likely than not that the deferred tax asset will be realized.
9. SUBSEQUENT EVENTS (unaudited)
On March 27, 2000, the Company obtained $260,000 additional equity
capital from a current shareholder by issuing shares of convertible preferred
stock.
On March 22, 2000 Mid-Peninsula Bank extended to July 1, 2000 the
revolving line of credit, up to a maximum of $1,500,000.
29
<TABLE>
LOAN AGREEMENT
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C>
$1,500,000.00 07-01-2000 0108143855 2000 016
- -------------------------------------------------------------------------------------------------------
<FN>
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
</FN>
- -------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: HUMAN PHEROMONE SCIENCES, INC. Lender: Mid-Peninsula Bank
4034 Clipper Court c/o Greater Bay Bancorp
Fremont, CA 94538 2860 W. Bayshore Road
Palo Alto, CA 94303
================================================================================
THIS LOAN AGREEMENT between HUMAN PHEROMONE SCIENCES, INC. ("Borrower") and
Mid-Peninsula Bank ("Lender") is made and executed on the following terms and
conditions. Borrower has received prior commercial loans from Lender or has
applied to Lender for a commercial loan or loans and other financial
accommodations, including those which may be described on any exhibit or
schedule attached to this Agreement. All such loans and financial
accommodations, together with all future loans and financial accommodations from
Lender to Borrower, are referred to in this Agreement individually as the "Loan"
and collectively as the "Loans." Borrower understands and agrees that: (a) in
granting, renewing, or extending any Loan, Lender is relying upon Borrower's
representations, warranties, and agreements, as set forth in this Agreement; (b)
the granting, renewing, or extending of any Loan by Lender at all times shall be
subject to Lender's sole judgment and discretion; and (c) all such Loans shall
be and shall remain subject to the following terms and conditions of this
Agreement.
TERM. This Agreement shall be effective as of March 22, 2000, and shall continue
thereafter until all Indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
Agreement. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
Account. The word "Account" means a trade account, account receivable, or
other right to payment for goods sold or services rendered owing to
Borrower (or to a third party grantor acceptable to Lender).
Account Debtor. The words "Account Debtor" mean the person or entity
obligated upon an Account.
Advance. The word "Advance" means a disbursement of Loan funds under this
Agreement.
Borrower. The word "Borrower" means HUMAN PHEROMONE SCIENCES, INC. The word
"Borrower" also includes, as applicable, all subsidiaries and affiliates of
Borrower as provided below in the paragraph titled "Subsidiaries and
Affiliates."
Borrowing Base. The words "Borrowing Base" mean, as determined by Lender
from time to time, the lesser of (a) $1,500,000.00; or (b) 75.000% of the
aggregate amount of Eligible Accounts.
Business Day. The words "Business Day" mean a day on which commercial banks
are open for business in the State of California.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
Cash Flow. The words "Cash Flow" mean net income after taxes, and exclusive
of extraordinary gains and income, plus depreciation and amortization.
Collateral. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real
or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise. The
word "Collateral" includes without limitation all collateral described
below in the section titled "COLLATERAL."
Debt. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
Eligible Accounts. The words "Eligible Accounts" mean, at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable
to Lender. The net amount of any Eligible Account against which Borrower
may borrow shall exclude all returns, discounts, credits, and offsets of
any nature. Unless otherwise agreed to by Lender in writing, Eligible
Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an officer, an
employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary
of, or affiliated with or related to Borrower or its shareholders,
officers, or directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by the
Account Debtor may be conditional.
(d) Accounts with respect to which Borrower is or may become liable to
the Account Debtor for goods sold or services rendered by the Account
Debtor to Borrower.
(e) Accounts which are subject to dispute, counterclaim, or setoff.
(f) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account
Debtor.
(g) Accounts with respect to which Lender, in its sole discretion,
deems the creditworthiness or financial condition of the Account Debtor
to be unsatisfactory.
(h) Accounts of any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief under
any provision of any state or federal bankruptcy, insolvency, or
debtor-in-relief acts; or who has had appointed a trustee, custodian,
or receiver for the assets of such Account Debtor; or who has made an
assignment for the benefit of creditors or has become insolvent or
fails generally to pay its debts (including its payrolls) as such debts
become due.
(i) Accounts with respect to which the Account Debtor is the United
States government or any department or agency of the United States.
(j) Accounts which have not been paid in full within Ninety (90) Days
from the invoice date. The entire balance of any Account of any single
Account debtor will be ineligible whenever the portion of the Account
which has not been paid within Ninety (90) Days from the invoice date
is in excess of 20.000% of the total amount outstanding on the Account.
<PAGE>
03-22-2000 LOAN AGREEMENT Page 2
Loan No 0108143855 (Continued)
================================================================================
(k) That portion of the Accounts of any single Account Debtor which
exceeds 25.000% of all of Borrower's Accounts.
ERISA. The word "ERISA' means the Employee Retirement Income Security Act
of 1974, as amended.
Event of Default. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
Expiration Date. The words "Expiration Date" mean the date of termination
of Lender's commitment to lend under this Agreement.
Grantor. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
Guarantor. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
Indebtedness. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by
Lender against Borrower, or any one or more of them; whether now or
hereafter existing, voluntary or involuntary, due or not due, absolute or
contingent, liquidated or unliquidated; whether Borrower may be liable
individually or jointly with others; whether Borrower may be obligated as a
guarantor, surety, or otherwise; whether recovery upon such Indebtedness
may be or hereafter may become barred by any statute of limitations; and
whether such Indebtedness may be or hereafter may become otherwise
unenforceable.
Lender. The word "Lender" means Mid-Peninsula Bank, its successors and
assigns.
Line of Credit. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.
Loan. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
Note. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
Related Documents. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Indebtedness.
Security Agreement. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
Security Interest. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
Subordinated Debt. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance acceptable
to Lender.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible items,
but including leaseholds and leasehold improvements) less total Debt.
Working Capital. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows.
Conditions Precedent to Each Advance. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is subject
to the following conditions precedent, with all documents, instruments,
opinions, reports, and other items required under this Agreement to be in
form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered by
Borrower to Lender.
(b) Lender shall have received such opinions of counsel, supplemental
opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall
be in full force and effect.
(d) All guaranties required by Lender for the Line of Credit shall have
been executed by each Guarantor, delivered to Lender, and be in full
force and effect.
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, books, records, and
operations, and Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then due
and payable.
(g) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement, and Borrower
shall have delivered to Lender the compliance certificate called for in
the paragraph below titled "Compliance Certificate."
Making Loan Advances. Advances under the Line of Credit may be requested
either orally or in writing by authorized persons. Lender may, but need
not, require that all oral requests be confirmed in writing. Each Advance
shall be conclusively deemed to have been made at the request of and for
the benefit of Borrower (a) when credited to any deposit account of
Borrower maintained with Lender or (b) when advanced in accordance with the
instructions of an authorized person. Lender, at its option, may set a
cutoff time, after which all requests for Advances will be treated as
having been requested on the next succeeding Business Day.
Mandatory Loan Repayments. If at any time the aggregate principal amount of
the outstanding Advances shall exceed the applicable Borrowing
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03-22-2000 LOAN AGREEMENT Page 3
Loan No 0108143855 (Continued)
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Base, Borrower, immediately upon written or oral notice from Lender, shall
pay to Lender an amount equal to the difference between the outstanding
principal balance of the Advances and the Borrowing Base. On the Expiration
Date, Borrower shall pay to Lender in full the aggregate unpaid principal
amount of all Advances then outstanding and all accrued unpaid interest,
together with all other applicable fees, costs and charges, if any, not yet
paid.
Loan Account. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the credit facility.
Lender shall provide Borrower with periodic statements of Borrower's
account, which statements shall be considered to be correct and
conclusively binding on Borrower unless Borrower notifies Lender to the
contrary within thirty (30) days after Borrower's receipt of any such
statement which Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all other
Loans, obligations and duties owed by Borrower to Lender, Borrower (and others,
if required) shall grant to Lender Security Interests in such property and
assets as Lender may require (the "Collateral"), including without limitation
Borrower's present and future Accounts and general intangibles. Lender's
Security Interests in the Collateral shall be continuing liens and shall include
the proceeds and products of the Collateral, including without limitation the
proceeds of any insurance. With respect to the Collateral, Borrower agrees and
represents and warrants to Lender:
Perfection of Security Interests. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's Security Interests in the Collateral. Upon
request of Lender, Borrower will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Borrower will note
Lender's interest upon any and all chattel paper if not delivered to tender
for possession by Lender. Contemporaneous with the execution of this
Agreement, Borrower will execute one or more UCC financing statements and
any similar statements as may be required by applicable law, and will file
such financing statements and all such similar statements in the
appropriate location or locations. Borrower hereby appoints Lender as its
irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue any Security Interest. Lender may at
any time, and without further authorization from Borrower, file a carbon,
photograph, facsimile, or other reproduction of any financing statement for
use as a financing statement. Borrower will reimburse Lender for all
expenses for the perfection, termination, and the continuation of the
perfection of Lender's security interest in the Collateral. Borrower
promptly will notify Lender of any change in Borrower's name including any
change to the assumed business names of Borrower. Borrower also promptly
will notify Lender of any change in Borrower's Social Security Number or
Employer Identification Number. Borrower further agrees to notify Lender in
writing prior to any change in address or location of Borrower's principal
governance office or should Borrower merge or consolidate with any other
entity.
Collateral Records. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which records
shall be available to Lender or Lender's representative upon demand for
inspection and copying at any reasonable time. With respect to the
Accounts, Borrower agrees to keep and maintain such records as Lender may
require, including without limitation information concerning Eligible
Accounts and Account balances and agings.
Collateral Schedules. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender a schedule of
Accounts and Eligible Accounts, in form and substance satisfactory to the
Lender. Thereafter Borrower shall execute and deliver to Lender such
supplemental schedules of Eligible Accounts and such other matters and
information relating to Borrower's Accounts as Lender may request.
Supplemental schedules shall be delivered according to the following
schedule: Monthly Accounts Receivable and Accounts Payable agings within
fifteen (15) days of month end with Borrowing Base Certificate within
twenty (20) days of month end.
Representations and Warranties Concerning Accounts. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of an Eligible
Account; (b) All Account information listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance; and (c)
Lender, its assigns, or agents shall have the right at any time and at
Borrower's expense to inspect, examine, and audit Borrower's records and to
confirm with Account Debtors the accuracy of such Accounts.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
Organization. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of California
and is validly existing and in good standing in all states in which
Borrower is doing business. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is presently
engaged or presently proposes to engage. Borrower also is duly qualified as
a foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.
Authorization. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approvai of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
Financial Information. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
Properties. Except for Permitted Liens, Borrower owns and has good title to
all of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements relating to
such properties. All of Borrower's properties are titled in Borrower's
legal name, and Borrower has not used, or filed a financing statement
under, any other name for at least the last five (5) years.
Hazardous Substances. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. Section 5901, et
seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and
Safety Code, Section 25100, et seq., or other applicable state or Federal
laws, rules, or regulations adopted pursuant to any of the foregoing.
Except as disclosed to and acknowledged by Lender in writing, Borrower
represents and warrants that: (a) During the period of Borrower's ownership
of the properties, there has been no use, generation, manufacture, storage,
treatment, disposal, release or threatened release of any hazardous waste
or substance by any person on, under, about or from any of the properties.
(b) Borrower has no knowledge of, or reason to believe that there has been
(i) any use, generation, manufacture, storage, treatment, disposal,
release, or threatened release of any hazardous waste or substance on,
under, about or from the properties by any prior owners or occupants of any
of the properties, or (ii) any actual or threatened litigation or claims of
any kind by any person relating to such matters. (c) Neither Borrower nor
any tenant, contractor, agent or other authorized user of any of the
properties shall use, generate, manufacture, store, treat, dispose of, or
release any hazardous waste or substance on, under, about or from any of
the properties; and any such activity shall be conducted in compliance with
all applicable federal, state,
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03-22-2000 LOAN AGREEMENT Page 4
Loan No 0108143855 (Continued)
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and local laws, regulations, and ordinances, including without limitation
those laws, regulations and ordinances described above. Borrower authorizes
Lender and its agents to enter upon the properties to make such inspections
and tests as Lender may deem appropriate to determine compliance of the
properties with this section of the Agreement. Any inspections or tests
made by Lender shall be at Borrower's expense and for Lender's purposes
only and shall not be construed to create any responsibility or liability
on the part of Lender to Borrower or to any other person. The
representations and warranties contained herein are based on Borrower's due
diligence in investigating the properties for hazardous waste and hazardous
substances. Borrower hereby (a) releases and waives any future claims
against Lender for indemnity or contribution in the event Borrower becomes
liable for cleanup or other costs under any such laws, and (b) agrees to
indemnify and hold harmless Lender against any and all claims, losses,
liabilities, damages, penalties and expenses which Lender may directly or
indirectly sustain or suffer resulting from a breach of this section of the
Agreement or as a consequence of any use, generation, manufacture, storage,
disposal, release or threatened release of a hazardous waste or substance
on the properties. The provisions of this section of the Agreement,
including the obligation to indemnify, shall survive the payment of the
Indebtedness and the termination or expiration of this Agreement and shall
not be affected by Lender's acquisition of any interest in any of the
properties, whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
Commercial Purposes. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
Employee Benefit Plans. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERlSA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
Location of Borrower's Offices and Records. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 4034 Clipper Court, Fremont, CA 94538. Unless
Borrower has designated otherwise in writing this location is also the
office or offices where Borrower keeps its records concerning the
Collateral.
Year 2000. Borrower warrants and represents that all software utilized in
the conduct of Borrower's business will have appropriate capabilities and
compatiblity for operation to handle calendar dates falling on or after
January 1, 2000, and all information pertaining to such calendar dates, in
the same manner and with the same functionality as the software does
respecting calendar dates falling on or before December 31, 1999. Further,
Borrower warrants and represents that the data-related user interface
functions, data-fields, and data-related program instructions and functions
of the software include the indication of the century.
Information. All information heretofore or oontemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
Survival of Representations and Warranties. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's Indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
Litigation. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
Financial Statements. Furnish Lender with, as soon as available, but in no
event later than twenty five (25) days after the end of each month,
Borrower's balance sheet and profit and loss statement for the period
ended, prepared and certified as correct to the best knowledge and belief
by Borrower's chief financial officer or other officer or person acceptable
to Lender. All financial reports required to be provided under this
Agreement shall be prepared in accordance with generally accepted
accounting principles, applied on a consistent basis, and certified by
Borrower as being true and correct.
Additional Information. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports
with respect to Borrower's financial condition and business operations as
Lender may request from time to time.
Financial Covenants and Ratios. Comply with the following covenants and
ratios:
Tangible Net Worth. Maintain a minimum Tangible Net Worth of not less
than $2,000,000.00.
Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible Net
Worth of less than 1.50 to 1.00.
Other Ratio. Maintain a ratio of Minimum Quick Ratio: defined as, Cash
+ Marketable Securities + Net Trade Accounts Receivable (A/R) divided
by Current Liabilities of 0.85 to 1.00. Except as provided above, all
computations made to determine compliance with the requirements
contained in this paragraph shall be made in accordance with generally
accepted accounting principles, applied on a consistent basis, and
certified by Borrower as being true and correct.
Insurance. Maintain fire and other risk insurance, public liability
insurance, and such ether isurance as Lender may require with respect
to Borrower's properties and operations, in form, amounts, coverages
and with insurance companies reasonably acceptable to Lender.
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03-22-2000 LOAN AGREEMENT Page 5
Loan No 0108143855 (Continued)
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Borrower, upon request of Lender, will deliver to Lender from time to
time the policies or certificates of insurance in form satisfactory to
Lender, including stipulations that coverages will not be cancelled or
diminished without at least ten (10) days' prior written notice to
Lender. Each insurance policy also shall include an endorsement
providing that coverage in favor of Lender will not be impaired in any
way by any act, omission or default of Borrower or any other person. In
connection with all policies covering assets in which Lender holds or
is offered a security interest for the Loans, Borrower will provide
Lender with such loss payable or other endorsements as Lender may
require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
The cost of such appraisal shall be paid by Borrower.
Other Agreements. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
Taxes, Charges and Liens. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income, or profits. Provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lien or claim so long
as (a) the legality of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have established on its
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income, or profits.
Performance. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
Operations. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act and
with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may request, all at Borrower's
expense.
Compliance Certificate. Unless waived in writing by Lender, provide Lender
at least annually and at the time of each disbursement of Loan proceeds
with a certificate executed by Borrower's chief financial officer, or other
officer or person acceptable to Lender, certifying that the representations
and warranties set forth in this Agreement are true and correct as of the
date of the certificate and further certifying that, as of the date of the
certificate, no Event of Default exists under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part
of any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice,
summons, lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
Indebtedness and Liens. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) sell, transfer, mortgage, assign, pledge,
lease, grant a security interest in, or encumber any of Borrower's assets,
or (c) sell with recourse any of Borrower's accounts, except to Lender.
Continuity of Operations. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
alter or amend Borrower's capital structure.
Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under
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03-22-2000 LOAN AGREEMENT Page 6
Loan No 0108143855 (Continued)
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the terms of this Agreement or any of the Related Documents or any other
agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any
Guarantor becomes insolvent, files a petition in bankruptcy or similar
proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse
change in Borrower's financial condition, in the financial condition of any
Guarantor, or in the value of any Collateral securing any Loan; or (d) any
Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
Guarantor's guaranty of the Loan or any other loan with Lender.
ADDITIONAL FINANCIAL REPORTING. Borrower agrees to the following:
1. To provide Lender with audited 10-K report with unqualified opinion within
120 days of filing.
2. A/R exam is not required at this time, however, if the proposed deal with
Northern Brands, Inc. is not completed and this line of credit is not paid off
prior to maturity, we will then require an A/R exam.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
Default on Indebtedness. Failure of Borrower to make any payment when due
on the Loans.
Other Defaults. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
Default in Favor of Third Parties. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or Borrower's or any
Grantor's ability to repay the Loans or perform their respective
obligations under this Agreement or any of the Related Documents.
False Statements. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time
and for any reason.
Insolvency. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender. However, this Event of
Default shall not apply if there is a good faith dispute by Borrower or
Grantor, as the case may be, as to the validity or reasonableness of the
claim which is the basis of the creditor or forfeiture proceeding, and if
Borrower or Grantor gives Lender written notice of the creditor or
forfeiture proceeding and furnishes reserves or a surety bond for the
creditor or forfeiture proceeding satisfactory to Lender.
Events Affecting Guarantor. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or
becomes incompetent, or revokes or disputes the validity of, or liability
under, any Guaranty of the Indebtedness. Lender, at its option, may, but
shall not be required to, permit the Guarantor's estate to assume
unconditionally the obligations arising under the guaranty in a manner
satisfactory to Lender, and, in doing so, cure the Event of Default.
Change In Ownership. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
Right to Cure. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given
a notice of a similar default within the preceding twelve (12) months, it
may be cured (and no Event of Default will have occurred) if Borrower or
Grantor, as the case may be, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within fifteen (15)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lender's option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
Applicable Law. This Agreement has been delivered to Lender and accepted by
Lender in the State of California. If there is a lawsuit, Borrower agrees
upon Lender's request to submit to the jurisdiction of the courts of Santa
Clara County, the State of California. This Agreement shall be governed by
and construed in accordance with the laws of the State of California.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights to privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchase of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the
<PAGE>
03-22-2000 LOAN AGREEMENT Page 7
Loan No 0108143855 (Continued)
================================================================================
rights granted under the participation agreement or agreements governing
the sale of such participation interests. Borrower further waives all
rights of offset or counterclaim that it may have now or later against
Lender or against any purchaser of such a participation interest and
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may enforce
its interests irrespective of any personal claims or defenses that Borrower
may have against Lender.
Costs and Expenses. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
Notices. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, first class, postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above. Any party may change
its address for notices under this Agreement by giving formal written
notice to the other parties, specifying that the purpose of the notice is
to change the party's address. To the extent permitted by applicable law,
if there is more than one Borrower, notice to any Borrower will constitute
notice to all Borrowers. For notice purposes, Borrower will keep Lender
informed at all times of Borrower's current address(es).
Severability. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
Subsidiaries and Affiliates of Borrower. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiaries and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
Successors and Assigns. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
Survival. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
Time Is of the Essence. Time is of the essence in the performance of this
Agreement.
Waiver. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND
BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF MARCH 22, 2000.
BORROWER:
HUMAN PHEROMONE SCIENCES, INC.
By: /s/ WILLIAM P. HORGAN
---------------------------------------------------------
WILLIAM P. HORGAN, Chief Executive Officer
LENDER:
Mid-Peninsula Bank
By: /s/ TERESA LINK
---------------------------------------------------------
Authorized Officer
================================================================================
LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.25c (c) 2000 CFI ProServices, Inc.
All rights reserved. [CA-C40 E3.28 F3.28 HUMAN99.LN C4.OVL]
<PAGE>
<TABLE>
CHANGE IN TERMS AGREEMENT
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
<S> <C> <C> <C> <C>
$1,500,000.00 07-01-2000 0108143855 2000 016
- -------------------------------------------------------------------------------------------------------
<FN>
References in the shaded area are for Lender's use only and do not limit the applicability of this
document to any particular loan or item.
</FN>
- -------------------------------------------------------------------------------------------------------
</TABLE>
Borrower: HUMAN PHEROMONE SCIENCES, INC. Lender: Mid-Peninsula Bank
4034 Clipper Court c/o Greater Bay Bancorp
Fremont, CA 94538 2860 W. Bayshore Road
Palo Alto, CA 94303
================================================================================
Principal Amount: $1,500,000.00 Date of Agreement: March 22, 2000
DESCRIPTION OF EXISTING INDEBTEDNESS. Promissory Note dated March 15, 1999 in
the original principal amount of $3,000,000.00, (the "Note").
DESCRIPTION OF COLLATERAL. Collateral as described in that Commercial Security
Agreement dated August 17,1998.
DESCRIPTION OF CHANGE IN TERMS. The maturity date of the Note is hereby extended
from April 1, 2000 to July 1, 2000. The credit limit available under the terms
of the Note is hereby decreased from $3,000,000.00 to $1,500,000.00.
PROMISE TO PAY. HUMAN PHEROMONE SCIENCES, INC. ("Borrower") promises to pay to
Mid-Peninsula Bank ("Lender"), or order, in lawful money of the United States of
America, the principal amount of One Million Five Hundred Thousand & 00/100
Dollars ($1,500,000.00) or so much as may be outstanding, together with interest
on the unpaid outstanding principal balance of each advance. Interest shall be
calculated from the date of each advance until repayment of each advance.
PAYMENT. Borrower will pay this loan in one payment of all outstanding principal
plus all accrued unpaid interest on July 1, 2000. In addition, Borrower will pay
regular monthly payments of accrued unpaid interest beginning April 1, 2000, and
all subsequent interest payments are due on the same day of each month after
that. The annual interest rate for this Agreement is computed on a 365/360
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to accrued unpaid interest, then to principal,
and any remaining amount to any unpaid collection costs and late charges.
VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to change
from time to time based on changes in an independent index which is the Prime
Rate as published in the Wall Street Journal (the "Index"). The Index is not
necessarily the lowest rate charged by Lender on its loans, If the Index becomes
unavailable during the term of this loan, Lender may designate a substitute
index after notice to Borrower. Lender will tell Borrower the current Index rate
upon Borrower's request. Borrower understands that Lender may make loans based
on other rates as well. The interest rate change will not occur more often than
each day. The Index currently is 8.750%. The interest rate to be applied to the
unpaid principal balance of this Agreement will be at a rate of 1.000 percentage
point over the Index, resulting in an initial rate of 9.750%. NOTICE: Under no
circumstances will the interest rate on this Agreement be more than the maximum
rate allowed by applicable law.
PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and
other prepaid finance charges are earned fully as of the date of the loan and
will not be subject to refund upon early payment (whether voluntary or as a
result of default), except as otherwise required by law. In any event, even upon
full prepayment of this Agreement, Borrower understands that Lender is entitled
to a minimum interest charge of $250.00. Other than Borrower's obligation to pay
any minimum interest charge, Borrower may pay without penalty all or a portion
of the amount owed earlier than it is due. Early payments will not, unless
agreed to by Lender in writing, relieve Borrower of Borrower's obligation to
continue to make payments of accrued unpaid interest. Rather, they will reduce
the principal balance due.
LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged
5.000% of the unpaid portion of the regularly scheduled payment.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this
Agreement or any agreement related to this Agreement, or in any other agreement
or loan Borrower has with Lender. (c) Borrower defaults under any loan,
extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay this Note or
perform Borrower's obligations under this Note or any of the Related Documents.
(d) Any representation or statement made or furnished to Lender by Borrower or
on Borrower's behalf is false or misleading in any material respect either now
or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Agreement. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is impaired.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Agreement
within the preceding twelve (12) months, it may be cured (and no event of
default will have occurred) if Borrower, after receiving written notice from
Lender demanding cure of such default: (a) cures the default within fifteen (15)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be sufficient
to cure the default and thereafter continues and completes all reasonable and
necessary steps sufficient to produce compliance as soon as reasonably
practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Agreement and all accrued unpaid interest immediately due,
without notice, and then Borrower will pay that amount. Upon Borrower's failure
to pay all amounts declared due pursuant to this section, including failure to
pay upon final maturity, Lender, at its option, may also, if permitted under
applicable law, increase the variable interest rate on this Agreement to 6.000
percentage points over the Index. Lender may hire or pay someone else to help
collect this Agreement if Borrower does not pay. Borrower also will pay Lender
that amount. This includes, subject to any limits under applicable law, Lender's
attorneys' fees and Lender's legal expenses whether or not there is a lawsuit,
including attorneys' fees and legal expenses for bankruptcy proceedings
(including efforts to modify or vacate any automatic stay or injunction),
appeals, and any anticipated post-judgment collection services. Borrower also
will pay any court costs, in addition to all other sums provided by law. This
Agreement has been delivered to Lender and accepted by Lender in the State of
California. If there is a lawsuit, Borrower agrees upon Lender's request to
submit to the jurisdiction of the courts of Santa Clara County, the State of
California. This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances
under this Agreement may be requested either orally or in writing by Borrower or
by an authorized person. Lender may, but need not, require that all oral
requests be confirmed in writing. All communications, instructions, or
directions by telephone or otherwise to Lender are to be directed to Lender's
office shown above. The following party or parties are
<PAGE>
03-22-2000 CHANGE IN TERMS AGREEMENT Page 2
Loan No 0108143855 (Continued)
================================================================================
authorized to request advances under the line of credit until Lender receives
from Borrower at Lender's address shown above written notice of revocation of
their authority: William P. Horgan, Chief Executive Officer; and Greg Fredrick.
Borrower agrees to be liable for all sums either: (a) advanced in accordance
with the instructions of an authorized person or (b) credited to any of
Borrower's accounts with Lender. The unpaid principal balance owing on this
Agreement at any time may be evidenced by endorsements on this Agreement or by
Lender's internal records, including daily computer printouts. Lender will have
no obligation to advance funds under this Agreement if: (a) Borrower or any
guarantor is in default under the terms of this Agreement or any agreement that
Borrower or any guarantor has with Lender, including any agreement made in
connection with the signing of this Agreement; (b) Borrower or any guarantor
ceases doing business or is insolvent; (c) any guarantor seeks, claims or
otherwise attempts to limit, modify or revoke such guarantor's guarantee of this
Agreement or any other loan with Lender; or (d) Borrower has applied funds
provided pursuant to this Agreement for purposes other than those authorized by
Lender.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of
the original obligation or obligations, including all agreements evidenced or
securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lender's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a satisfaction
of the obligation(s). It is the intention of Lender to retain as liable parties
all makers and endorsers of the original obligation(s), including accommodation
parties, unless a party is expressly released by Lender in writing. Any maker or
endorser, including accommodation makers, will not be released by virtue of this
Agreement. If any person who signed the original obligation does not sign this
Agreement below, then all persons signing below acknowledge that this Agreement
is given conditionally, based on the representation to Lender that the
non-signing party consents to the changes and provisions of this Agreement or
otherwise will not be released by it. This waiver applies not only to any
initial extension, modification or release, but also to all such subsequent
actions.
MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing any of its rights
or remedies under this Agreement without losing them. Borrower and any other
person who signs, guarantees or endorses this Agreement, to the extent allowed
by law, waive any applicable statute of limitations, presentment, demand for
payment, protest and notice of dishonor. Upon any change in the terms of this
Agreement, and unless otherwise expressly stated in writing, no party who signs
this Agreement, whether as maker, guarantor, accommodation maker or endorser,
shall be released from liability. All such parties agree that Lender may renew
or extend (repeatedly and for any length of time) this loan, or release any
party or guarantor or collateral; or impair, fail to realize upon or perfect
Lender's security interest in the collateral; and take any other action deemed
necessary by Lender without the consent of or notice to anyone. All such parties
also agree that Lender may modify this loan without the consent of or notice to
anyone other than the party with whom the modification is made.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED
COPY OF THE AGREEMENT.
BORROWER:
HUMAN PHEROMONE SCIENCES, INC.
By: /s/ WILLIAM P. HORGAN
---------------------------------------------------------
WILLIAM P. HORGAN, Chief Executive Officer
================================================================================
Variable Rate. Line of Credit. LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.28c
(c) 2000 CFI ProServices, Inc. All rights reserved. [CA-D20 E3.28 HUMAN99.LN
C4.OVL]
Exhibit 23.1
CONSENT OF BDO SEIDMAN, LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-98836) pertaining to the Stock Plan and the
Non-Employee Directors' Stock Option Plan of Human Pheromone Sciences, Inc. of
our report dated February 15, 2000, with respect to the financial statements of
Human Pheromone Sciences, Inc. as of December 31, 1999 and for the year then
ended included in the Annual Report (Form 10-KSB) for the year ended December
31, 1999.
/s/ BDO SEIDMAN, LLP
San Jose, California
March 29, 2000
30
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-98836) pertaining to the Stock Plan and the
Non-Employee Directors' Stock Option Plan of Human Pheromone Sciences, Inc. of
our report dated March 19, 2000, with respect to the financial statements of
Human Pheromone Sciences, Inc. included in the Annual Report (Form 10-KSB) for
the year ended December 31, 1998.
/s/ ERNST & YOUNG, LLP
San Francisco, California
March 29, 2000
31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The Schedule Contains Summary Financial Information Extracted From Balance
Sheets and Statements of Income
</LEGEND>
<CIK> 0000878616
<NAME> HUMAN PHEROMONE SCIENCES, INC.
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-01-1999
<CASH> 108,000
<SECURITIES> 0
<RECEIVABLES> 2,388,000
<ALLOWANCES> 338,000
<INVENTORY> 2,304,000
<CURRENT-ASSETS> 4,498,000
<PP&E> 800,000
<DEPRECIATION> 786,000
<TOTAL-ASSETS> 4,512,000
<CURRENT-LIABILITIES> 2,446,000
<BONDS> 0
0
3,296,000
<COMMON> 17,667,000
<OTHER-SE> (18,897,000)
<TOTAL-LIABILITY-AND-EQUITY> 4,512,000
<SALES> 9,306,000
<TOTAL-REVENUES> 9,306,000
<CGS> 3,646,000
<TOTAL-COSTS> 6,400,000
<OTHER-EXPENSES> 333,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 98,000
<INCOME-PRETAX> (844,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (844,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (844,000)
<EPS-BASIC> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
