Back to GetFilings.com
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000 Commission file number 0-18044
PROCYTE CORPORATION
(exact name of registrant as specified in its charter)
Washington 91-1307460
(State of incorporation) (I.R.S. Employer Identification No.)
8511 154/th/ Avenue N.E., Building A, Redmond, WA 98052-3557
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (425) 869-1239
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to the Section 12(g) of the Act: Common Stock,
par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of March 13, 2001 there were issued and outstanding 15,542,769 shares of
common stock, par value $.01 per share.
The aggregate market value of common stock held by non-affiliates as of March
13, 2001 was $15.1 million, based upon the average of the closing high and low
prices of such stock as reported on the NASD OTC bulletin board.
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the following documents are incorporated by reference in Parts II and
III of this Form 10-K report: (1) the Proxy Statement for the Registrant's 2001
Annual Meeting of Shareholders scheduled to be held May 23, 2001 and (2) the
Registrant's 2000 Annual Report to Shareholders.
1
ProCyte Corporation
2000 Form 10-K
Table of Contents
PART I.......................................................................................... 3
Item 1. Business............................................................................... 3
Item 2. Properties............................................................................. 11
Item 3. Legal Proceedings...................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.................................... 12
PART II......................................................................................... 12
Item 5. Market for Company's Common Stock and Related Shareholder Matters...................... 12
Item 6. Selected Financial Data................................................................ 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 13
Item 7a. Quantitative and Qualitative Disclosures About Market Risk............................ 15
Item 8. Financial Statements and Supplementary Data............................................ 16
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure... 29
PART III........................................................................................ 29
Item 10. Directors and Executive Officers of the Registrant.................................... 29
Item 11. Executive Compensation................................................................ 29
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 29
Item 13. Certain Relationships and Related Transactions........................................ 29
PART IV......................................................................................... 29
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................... 29
2
PART I
Item 1. Business
The entire discussion in this report, as well as other management
discussion of the Company's goals and expectations as reported in the Company's
2000 Annual Report to Shareholders contains Forward-Looking statements that are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those projected. The words "believe", "expect", "intend",
"anticipate", variations of such words and similar expressions identify Forward-
Looking statements, but their absence does not mean that the statement is not
Forward-Looking. These statements are not guaranties of future performance and
are subject to certain risks, uncertainties and assumptions that are difficult
to predict. Factors that could affect the Company's actual results include,
among other things, the availability of adequate funding, the availability of
contract manufacturing opportunities, relationships with corporate
collaborators, the rate of market acceptance of the Company's products, the
availability of third-party reimbursement for the Company's products, the
ability to obtain and defend patent and related future product and intellectual
property rights and to market the Company's products and the status of competing
products. See "Important Factors Regarding Forward-Looking Statements." Readers
are cautioned not to place undue reliance on these Forward-Looking statements,
which speak only as of the date of this report. ProCyte undertakes no obligation
to update publicly any Forward-Looking statement to reflect new information,
events or circumstances after the date of this report or to reflect the
occurrence of unanticipated events.
General
ProCyte Corporation ("ProCyte" or the "Company") is a Washington
corporation organized in 1986. ProCyte is a healthcare company that develops,
manufactures and markets products for skin health, hair care and to a lesser
extent wound care. Some of the Company's products incorporate its patented
Copper Peptide technology.
The Company's products are targeted for use in dermatology, plastic and
cosmetic surgery markets following procedures, and for therapeutic maintenance
of the skin and hair. The Company's focus has recently expanded to include a
wide variety of consumer markets for skin care products via strategic partners.
ProCyte's mission is to market and/or license patented GHK and AHK
Copper Peptide(TM) technologies for skin and hair care applications. Its novel
Copper Peptide technology is just beginning to expand into the consumer market,
and has the potential for significant, rapid growth following in the steps of
AHAs (alpha hydroxy acids) and retinol. It is our goal to generate profits from
the sale of the products that the Company develops and licenses. To augment the
commercialization of its technology, the Company has entered into distribution
and license agreements primarily in the consumer markets and, to a lesser
extent, the wound care markets. Consistent with this goal, the Company intends
to retain and expand its proprietary rights to its products and technologies.
Products and Markets
In 2000, ProCyte continued to emphasize products that incorporate its
GHK and AHK Copper Peptide(TM) formulations, which address skin health, hair
care and wound care needs. The Company has identified several broad markets for
its products.
Dermatology, Plastic and Cosmetic Surgery and Consumer Skin Care
ProCyte believes its products are well suited for use in the medical
specialties of dermatology, plastic and cosmetic surgery. Most of the products
developed by ProCyte incorporate the Company's clinically tested Copper Peptide
formulations. Several recent studies have confirmed the advantages of products
containing the Copper Peptide formulation versus materials such as trentinoin
and Vitamin C, and other popular anti-aging and skin rejuvenation products.
Previously, the actions of Copper Peptide containing wound care gels and creams
3
have been documented in the scientific literature, for its ability to stimulate
collagen synthesis, new blood vessel growth and tissue repair. This has lead to
the development of a variety of products designed to treat the skin following
certain cosmetic procedures such as microdermabrasion, laser resurfacing and
hair transplantation. There are an increasing number of these cosmetic
procedures performed each year as the baby boomer population ages. ProCyte has
introduced a series of products tailored to the needs of these markets,
including the GraftCyte(TM) System, and the Complex Cu\\3\\(R) System.
The Company has continued to emphasize its Complex Cu\\3\\(R) Intensive
Repair Creme, Cleanser and Hydrating Gel products used to treat patients
following chemical peels, microdermabrasion and laser treatments. During 2000, a
new Post Laser Lotion was introduced to complement the existing Complex
Cu\\3\\(R) products. The Complex Cu\\3\\(R) products provide a comprehensive
approach to post-procedure care and allow the Company to differentiate its line
of skin care products on the basis of its proprietary Copper Peptide technology.
During 1999, the Company launched its Neova(R) Therapy line of
anti-aging products in response to demand from physician customers. The original
Neova(R) Therapy line of three products now numbers five products. In
addition, there are complementary products, including oily skin, dry skin and
sensitive skin products to treat specific skin conditions. Some of the new
products incorporate the technology acquired with the NextDerm acquisition.
ProCyte's GraftCyte(TM) System was launched in 1997 to address the special
tissue repair needs of patients following hair restoration surgery. In the
fourth quarter of 2000, the GraftCyte(TM) Men's Kit was launched to upgrade
the image and presentation of the GraftCyte(TM) products. This new kit
replaces the Single Patient Pack, and also includes a tube of the Iamin(R) Gel
for treatment of the donor site incision. The GraftCyte(TM) System currently
consists of four differentiated products: GraftCyte(TM) Moist Dressings for
use after surgery; GraftCyte(TM) Concentrated Spray to provide continuous
hydration of the scalp after surgery; GraftCyte(TM) Post-Surgical Shampoo and
GraftCyte(TM) Post-Surgical Conditioner to provide a gentle cleansing of the
scalp.
The Company believes its technology has tremendous potential in a
variety of consumer skin care markets. There is an increasing consumer and
physician awareness of the ability to improve skin health and appearance with
products designed specifically to meet the needs of the aging. Specific
ingredients, such as AHA (alpha hydroxy acid) and retinols have played a major
role in expanding the anti-aging and specialty skin care markets. The company
believes that its Copper Peptide has the same ability to grow the skin care
markets and generate the same presence in the market place. In April 2000,
ProCyte entered a long-term worldwide license agreement with Neutrogena
Corporation, a Johnson & Johnson Company ("Neutrogena"), for worldwide use of
its patented Copper Peptide Complexes in products for skin health. Neutrogena
develops, manufactures and markets internationally premium skin and hair care
products.
In 1997, ProCyte entered into an exclusive worldwide supply and
marketing agreement with Osmotics Corporation ("Osmotics"), pursuant to which
the Company granted Osmotics the right to market Copper Peptide containing
products to the prestige department store skin care market. Osmotics sells
products to Saks, Nordstroms, Sephora and other leading prestige stores
throughout the world.
ProCyte also expects to continue to license its Copper Peptide
technology to other companies for specific market segments in the skin care
category. The Company also believes that it can develop products for one or two
niche market segments, where they can be marketed, cost efficiently, as a
separate line of products by the Company.
Hair Care
The Company commenced shipping its Tricomin(R) line of Triamino
Copper Complex(TM) containing hair care products to physicians' offices in the
third quarter of 1998. Tricomin(R) Shampoos, Conditioners and Follicle Therapy
Solution are positioned to participate in the rapidly growing $1.5 billion
Worldwide hair care market as a program for the maintenance of thinning hair in
men and women. Hair follicles require high concentrations of biological copper
and the Tricomin(R) products deliver copper along with amino acids for
nourishing and stimulating the hair and scalp for improved health, strength and
appearance. One of the strengths of these
4
products is that they provide the physicians a non-drug alternative to the
problem of thinning hair for their patients. The Company has initiated a series
of consumer advertisements focused specifically on the hair care needs and
concerns of an aging baby boomer population.
During the year the Company initiated sales to several distributors in
the Pacific Rim as well as signing a distribution agreement with a home shopping
and infomercial company for a 1 year test program to evaluate the effectiveness
of selling the Tricomin(R) products via TV and catalog marketing programs.
Chronic Wound Care
Since inception, the Company has focused on the chronic wound care
market. Worldwide, this market is estimated to exceed $5 billion. It is highly
fragmented, with many competitors and price constraints and requires a
significant investment in supporting a dedicated sales organization of 50-100
representatives. For these reasons, ProCyte collaborates with partners to market
its chronic wound care products. The Company has signed distribution agreements
with major companies for the United States, Latin America and Europe rather than
individual agreements for each country.
In December 1997, ProCyte entered into an exclusive distribution
agreement covering the United States and Canada, with the Bard Medical Division
of C.R. Bard, Inc. ("Bard"), for the hospital, nursing home and extended care
markets. ProCyte's Iamin(R) Hydrating Gel, Iamin(R) Wound Cleanser, and
OsmoCyte(R) Pillow Wound Dressings were added to the Bard sales effort in
January 1998. Canada was removed from the territory in 1999. Bard is required to
make certain minimum annual purchases, but did not achieve that level in 1999 or
2000. The Company has agreed to continue the Bard agreement through 2001 on a
non-exclusive basis, while it evaluates its options in this connection.
Subsequent to the agreement with Bard, ProCyte has entered into
exclusive distribution agreements for the registration and distribution of
certain of its wound care products in various foreign countries, including Merck
KGaA ("Merck"), for Latin America and South Africa. The initial shipment of
product to Brazil was made in the third quarter of 2000. It is expected that
additional shipments to other Latin American countries will begin in 2001.
Amuchina SpA ("Amuchina") an Italian medical products company signed an
agreement in 1999 for France and Italy. The Company has also given Amuchina a
right of first negotiation for distribution to the rest of Europe, contingent
upon obtaining CE Mark registration. Initial product shipment should begin in
late 2001. ProCyte also entered into a distribution agreement with Tanox Pharma
International, Inc., a division of Tanox Biosystems, Inc. ("Tanox"), for
countries in the Far East, but as a result of unexpected regulatory and
distribution issues with its distributor, Tanox did not achieve the minimum
level of annual purchases specified in the agreement, and the agreement was
terminated in March 2000, with registrations reverting to ProCyte. The Company
anticipates that product registration in certain countries may take well over a
year to obtain, and there can be no assurance that registration will be obtained
or that the products will be commercially successful in all of the various
countries. See "Important Factors Regarding Forward-Looking Statements -
Government Regulation."
Additional Product Development and/or Acquisitions
During 1999, the Company acquired NextDerm, Inc. ("NextDerm"), and
with it the rights to several products in various stages of development. The
Company introduced its first product based on the acquired technology during the
third quarter 2000 as part of the Neova(R) oily skin product line. The Company
plans to continue its skin health and hair care product development, and has
introduced a number of anti-aging products and related products in 2000. The
Company reported expenditures of $1,275,294, $1,744,421, and $2,422,076 on
research and development in 2000, 1999 and 1998, respectively.
The Company also plans to continue to evaluate companies, products and
technologies that offer synergistic opportunities for the Company to leverage
its position in the medical marketplace, for acquisition and/or distribution by
the Company.
5
Contract Manufacturing
During 2000, the Company continued to utilize the excess capacity in
its manufacturing facility to provide processing and other services to
pharmaceutical and biotechnology clientele. In March of 2000, ProCyte agreed to
sell the assets and liabilities related to its manufacturing operation to an
investor group. Subsequently, the investor group was unable to meet certain
requirements necessary to complete the purchase. Under the original term sheet
ProCyte would have received a significant cash payment upon closing. The
investor group was unable to obtain funding and asked ProCyte to consider an
alternative structure that would have required the Company to assume a sizable
ongoing financial risk. The Directors believed it was in the best interest of
the shareholders not to conclude a sale under the newly proposed terms. The
manufacturing operation generated contract revenues of $1,085,750, $762,320 and
$436,167 in 2000, 1999 and 1998, respectively. Expenses related to the
manufacturing operation, although not specifically segregated, are estimated to
be $1,500,000 in 2000, $1,800,000 in 1999 and $2,050,000 in 1998.
Business Relationships
Neutrogena Corporation
In April 2000, ProCyte signed License and Supply Agreements with
Neutrogena, giving them worldwide rights to the Copper Peptide technology for
skin care in the mass retail markets. The Company received and will receive
certain milestone payments and fees in addition to royalty payments based on
sales by Neutrogena. Neutrogena expects to launch its products by mid-year
2001.
Osmotics Corporation
In 1997, ProCyte entered into a supply and marketing agreement with
Osmotics Corporation (the "Osmotics Agreement"), pursuant to which the Company
granted to Osmotics a limited, worldwide, non-transferable right to purchase and
use one of ProCyte's Copper Peptide compounds for making and selling skin care
products for the prestige skin care market. The Osmotics Agreement sets forth
certain milestones, minimum payments and royalties payable by Osmotics to
ProCyte. The first product marketed under this agreement was launched in 1998
as Blue Copper(TM), an anti-aging formulation sold at cosmetic counters in
stores such as Saks and Neimann Marcus. Additional Copper Peptide products are
marketed under the Spa Sonte brand, targeted at prestige spas.
Bard Medical
In 1997, ProCyte entered into an exclusive distribution agreement with
Bard (the "Bard Agreement"), giving Bard the exclusive rights to distribute
wound care products manufactured by ProCyte in the United States. The Bard
Agreement specified the products to be distributed by Bard in the hospital,
nursing home and home healthcare markets and set minimum purchases required of
Bard during the initial three-year term. Bard's purchases of ProCyte products
during 1998 exceeded the minimum required, but such purchases during 1999 and
2000 did not. The Company has agreed to continue the Bard Agreement in 2001 on a
non-exclusive basis while it evaluates alternatives.
Tanox Pharma
During 1998, ProCyte entered into a distribution agreement with Tanox
for sales of Iamin(R) Hydrating Gel and OsmoCyte(R) Pillow Wound Dressings in
China and Taiwan. Tanox received approval of its application to register
Iamin(R) Hydrating Gel in China, and the initial orders were shipped in December
1998. After the initial shipment Tanox experienced unexpected regulatory and
distribution issues with its distributor and did not achieve the minimum sales
levels specified in the agreement. In March 2000, Tanox and ProCyte terminated
the agreement, with the registrations reverting to ProCyte. The Company is
currently evaluating its distribution options for the Far East.
6
Merck KGaA
In 1999, ProCyte entered into an exclusive distribution agreement with
Merck (the "Merck Agreement"). Merck is a $5 billion German pharmaceutical
company. The Merck Agreement provides for the registration, promotion and
distribution of ProCyte's wound care products to the chronic wound care markets
in Latin America and South Africa. The Merck Agreement has a ten-year term and
establishes milestones and minimum purchase quantities that are contingent upon
product registration in certain countries. Iamin(R) Hydrating Gel has been
registered in Brazil, Mexico and Peru, which triggered a milestone payment in
2000. The first shipment of Iamin Gel to Brazil was made in August 2000. We
expect that shipments to Mexico and Peru will begin during the first half of
2001.
Amuchina SpA
In 1999, ProCyte entered into an exclusive distributor agreement with
Amuchina (the "Amuchina Agreement"), providing for distribution of Iamin(R)
Hydrating Gel and OsmoCyte(R) Pillow Wound Dressings in Italy and France.
ProCyte also gave Amuchina a right of first negotiation for other countries
within the European Economic Community contingent upon obtaining CE Mark
registration. The Amuchina Agreement provides for minimum purchases once the
registration is complete. The local regulatory authority has notified Amuchina
that they have been granted approval to market the products in Italy in 2001,
and we expect to begin product shipments late in the year.
Other business relationships
During 1999, the Company signed a distribution agreement with Sigmacon
Medical Products of Toronto, Canada, covering the distribution of the Company's
skin and hair care products in the Canadian dermatology and cosmetic surgery
markets.
ProCyte intends to establish corporate alliances with others that are
capable of pursuing registrations of the Company's copper-based wound care
products and technology. There can be no assurance that the Company will be
successful in attracting or retaining corporate alliances on terms favorable to
the Company, whether for the Company's wound care technology or otherwise, that
the interests and motivations of any corporate partner or licensee would be or
remain consistent with those of the Company, or that such partners or licensees
would successfully perform the necessary technology transfer, clinical
development, regulatory compliance, manufacturing, marketing or other
obligations. Suspension or termination of agreements with the Company's current
or future distributors, partners or licensees could have a material adverse
affect on the development of the Company's proposed products and could
materially adversely affect the Company's financial position. See "Important
Factors Regarding Forward-Looking Statements - Uncertainty of Corporate
Alliances."
Employees
At December 31, 2000, the Company had 44 full-time employees, of whom two
hold Ph.D. degrees. At year-end, two employees was engaged in product
development, ten in manufacturing, distribution and quality control, twenty-six
in sales and marketing, and six in accounting, finance and administration. The
Company does not expects to increase its staff in 2001, except to hire a general
manager in its contract manufacturing operations. The Company believes that it
has good relations with its employees.
Important Factors Regarding Forward-Looking Statements
History of Operating Losses; Accumulated Deficit; Fluctuations in Future
Earnings
The Company has been launching products based on its proprietary Copper
Peptide technology since 1996. It will continue to launch new Copper Peptide
based products in 2001. To date the Company has generated progressively
increasing revenues from sales of products based on its proprietary technology,
but
7
there can be no assurance that the Company will be able to generate sufficient
product sales from those products to achieve a profitable level of operations.
As of December 31, 2000, the Company's accumulated deficit was approximately
$74.2 million. The Company expects to incur additional operating losses through
2001. In addition to sales of products based on its proprietary Copper Peptide
technology, the Company's revenues have historically included sales of non-
proprietary products, license fees and royalties, revenue from contract
manufacturing and interest income. There can be no assurance that the Company
can achieve a consistent and profitable level of operations, which is dependent
upon successfully manufacturing and marketing its products, entering into
agreements with corporate partners for commercialization of the Company's
products, and licensing the Company's products and technology. In addition,
payments under corporate partnerships and licensing arrangements, if any, may be
subject to fluctuations in both timing and amounts. The time required to reach
sustained profitability is uncertain, and there can be no assurance that the
Company will be able to achieve profitability on a sustained basis. Moreover, if
profitability is achieved, the level of profitability cannot be predicted and
may vary significantly from quarter to quarter.
Need for Additional Capital
The Company expects negative cash flow from operations to continue at least
through the second quarter of 2001. The Company may require additional funds
to expand or enhance its sales and marketing activities and to continue product
development. The Company's future capital requirements will depend on numerous
factors, including: its efforts, and the efforts of its collaborative partners,
to commercialize its products; the continued progress in the Company's research
and development programs; the relationships with existing and future corporate
collaborators, if any; the competing technological and market developments; the
costs involved in filing, prosecuting and enforcing patent claims; the time and
costs of commercialization activities; and other factors. As of December 31,
2000, the Company had cash, and cash equivalents of $2.8 million. The Company
estimates that, at its planned rate of spending, its existing cash and cash
equivalents and the interest income thereon will be sufficient to meet its
capital requirements for at least the next twelve months. There can be no
assurance that the underlying assumed levels of revenue and expense will prove
accurate. Whether or not these assumptions prove to be accurate, the Company
may need to raise additional capital. The Company may be required to seek
additional funding through public or private financing, including equity
financing, or through collaborative arrangements. Adequate funds for these
purposes, whether obtained through financial markets or from collaborative or
other arrangements with corporate partners or other sources, may not be
available when needed or may not be available on terms favorable to the Company.
If issuing equity securities raises additional funds, dilution to existing
shareholders will result. In addition, in the event that additional funds are
obtained through arrangements with collaborative partners, such arrangements may
require the Company to relinquish its rights to certain technologies or
potential products that it would otherwise seek to develop or commercialize on
its own. If funding is insufficient at any time in the future, the Company may
be required to: delay, scale back or eliminate some or all of its marketing and
research and development programs; sell assets; or license to third parties the
rights to commercialize products or technologies that the Company would
otherwise seek to develop on its own. Furthermore, the terms of any such
license agreements or asset sales might be less favorable than if the Company
were negotiating from a stronger position. Moreover, if funding is insufficient
at any time in the future and the Company's existing funds are depleted, the
Company may be required to cease operations.
Uncertainties Related to Product Development
From the Company's inception in 1986 until it launched its first commercial
product in 1996, substantially all of its resources were dedicated to the
research and development of wound healing, hair growth and other therapeutic
pharmaceutical applications of its Copper Peptide compounds. To date, the
Company has generated progressively increasing revenue from the sales of
products based on its proprietary Copper Peptide technology. There can be no
assurance that the Company's current products or potential products will
continue to be successfully commercialized and accepted for use by physicians,
healthcare providers and consumers.
8
Dependence on and Management of Existing and Future Corporate Alliances
The successful commercialization of the Company's existing and future
products in the consumer markets and wound care markets will depend upon
ProCyte's ability to enter into and effectively manage corporate partnerships.
There can be no assurance that any of the Company's collaborators will perform
their obligations under their agreements with the Company or that the Company's
products or the products of others that incorporate the Company's products or
technology will be successfully commercialized. Any of these factors could have
a material adverse effect on the Company's business, financial condition and
results of operations.
Furthermore, there can be no assurance that the Company will be successful
in establishing corporate alliances in the future, or that it will be successful
in maintaining existing or any future corporate alliances. Moreover, there can
be no assurance that the interests and motivations of any corporate partner,
distributor or licensee would be or remain consistent with those of the Company,
or that such partners, distributors or licensees would successfully perform the
necessary technology transfer, clinical development, regulatory compliance,
manufacturing, marketing or other obligations. Failure of any of the foregoing
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Uncertainty of Patent Position and Proprietary Rights
The patent positions of biotechnology, medical device and healthcare
products companies are often uncertain and involve complex legal and factual
questions, and the breadth of claims allowed in such patents cannot be
predicted. In addition, there is a substantial backlog of patents at the US
Patent and Trademark Office that may delay the review and the potential issuance
of patents. The Company's success will depend significantly on its ability to
obtain patents and licenses to patent rights, to maintain trade secrets, and to
operate without infringing on the proprietary rights of others, both in the
United States and in other countries. The failure of the Company or its
licensors to obtain and maintain patent protection for the Company's technology
could have a material adverse effect on the Company.
ProCyte's success depends, in part, upon its ability to protect its
products and technology under intellectual property laws in the United States
and abroad. As of February 29, 2001, the Company had 21 issued US patents
expiring between 2005 and 2017 and numerous issued foreign patents and patent
registrations. The patents relate to use of the Company's copper-based
technology for a variety of healthcare applications, and to the composition of
certain biologically active, synthesized compounds. The Company's strategy has
been to apply for patent protection for certain compounds and their discovered
uses that are believed to have potential commercial value in countries that
offer significant market potential. There can be no assurance that patent
applications relating to the technology used by the Company will result in
patents being issued. There can be no assurance that any patent issued to the
Company will not be subjected to further proceedings limiting the scope of the
rights under the patent or that such patent will provide a competitive
advantage, will afford protection against competitors with similar technology,
or will not be successfully challenged, invalidated or circumvented by
competitors.
The Company's processes and potential products may conflict with patents
that have been or may be granted to competitors and others. As the
biotechnology, medical device and healthcare industries expand and more patents
are issued, the risk increases that the Company's processes and potential
products may give rise to claims that they infringe the patents of others. Such
other persons could bring legal actions against the Company claiming damages and
seeking to enjoin clinical testing, manufacturing and marketing of the affected
product or use of the affected process. Litigation may be necessary to enforce
patents issued to the Company, to protect trade secrets or know-how owned by the
Company or to determine the enforceability, scope and validity of proprietary
rights of others. If the Company becomes involved in such litigation, it could
result in substantial expense to the Company and significant diversion of effort
by the Company's technical and management personnel. In addition to any
potential liability for significant damages, the Company could be required to
obtain a license to continue to manufacture or market the affected product or
use the affected process. Costs associated with any licensing arrangement may
be substantial and could include ongoing royalties. There can be
9
no assurance that any license required under any such patent would be made
available to the Company on acceptable terms, if at all. If such licenses could
not be obtained on acceptable terms, the Company could be prevented from
manufacturing and marketing existing or potential products. Accordingly, an
adverse determination in such litigation could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company also relies upon non-patented proprietary technology. There
can be no assurance that the Company can meaningfully protect its rights to such
non-patented technology, that any obligation to maintain the confidentiality of
such proprietary technology will not be breached by employees, consultants,
collaborators or others or that others will not independently develop or acquire
substantially equivalent technology. To the extent that corporate partners or
consultants apply Company technological information independently developed by
them or by others to Company projects or apply Company technology or know-how to
other projects, disputes may arise as to the ownership of proprietary rights to
such information. Any failure to protect non-patented proprietary technology or
any breach of obligations designed to protect such technology or development of
equivalent technology may have a material adverse effect on the Company's
business, financial condition and results of operations.
Uncertainty of Government Regulatory Requirements
The manufacturing and marketing of ProCyte's products are subject to
extensive regulation in the United States by the federal government, principally
by the FDA, and in other countries by similar health and regulatory authorities.
The Federal Food, Drug and Cosmetic Act, and the regulations promulgated
thereunder, and other federal and state statutes govern, among other things, the
testing, manufacture, safety, labeling, storage, record-keeping, advertising and
promotion of cosmetic products and medical devices. Product development and
approval or clearance within the regulatory framework requires a number of years
and involves the expenditure of substantial resources.
The Company's products and product candidates may be regulated by any of a
number of divisions of the FDA. The process of obtaining and maintaining
regulatory approvals for the manufacturing or marketing of the Company's
existing and potential products is costly and time-consuming and is subject to
unanticipated delays. Regulatory requirements ultimately imposed could also
adversely affect the ability of the Company to clinically test, manufacture or
market products.
In the United States, products that do not seek to make effectiveness
claims based on human clinical evaluation may be subject to review and
regulation under the FDA's cosmetic or 510(k) medical device guidelines.
Similar guidelines exist for such products in other countries. Such products,
which include wound care dressings and certain ointments and gels, must show
safety and substantial equivalency with predicate products already cleared by
the FDA to be marketed. There can be no assurance that such product
applications submitted to the FDA or similar agencies in other countries will
receive clearance to be marketed, or that the labeling claims sought will be
approved, or that, if cleared, such products will be commercially successful.
In addition to obtaining approval or clearance from the FDA or foreign
regulatory bodies to market a product, the prospective manufacturer's quality
control and manufacturing procedures must conform to current good manufacturing
practices ("cGMP") guidelines, or ISO 9000 standards, when appropriate. In
complying with these regulations, which are subject to change at any time
without notice to the Company, ProCyte must continue to expend time, effort and
financial resources in production and quality control. In addition, ProCyte's
manufacturing plant is subject to the regulations of and inspections by other
foreign, federal, state or local agencies, such as local and regional water and
waste treatment agencies, and state and federal safety and health agencies.
There can be no assurance that the Company's manufacturing facility or its
manufacturing operations will meet or continue to meet all appropriate
guidelines or to pass inspections by any government agency.
The Company also is or may become subject to various other federal, state,
local and foreign laws, regulations and policies relating to, among other
things, safe working conditions, good laboratory practices, and the use and
disposal of hazardous or potentially hazardous substances used in connection
with research, development and manufacturing.
10
Failure to obtain regulatory approvals for its product candidates or to
attain or maintain compliance with cGMP or other manufacturing requirements
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Intense Competition
Competition in the wound care, skin health and hair care markets is
intense. The Company's competitors include well-established pharmaceutical,
cosmetic and healthcare companies such as Bristol Myers Squibb's ConvaTec,
Johnson and Johnson, OMP, Biomedic, Allergan and Nioxin. These competitors have
substantially more financial and other resources, larger research and
development staffs, and more experience and capabilities in researching,
developing and testing products in clinical trials, in obtaining FDA and other
regulatory approvals and in manufacturing, marketing and distribution than the
Company. In addition, a number of smaller companies are developing or marketing
competitive products. The Company's competitors may succeed in developing and
commercializing products or obtaining patent protection or other regulatory
approvals for products more rapidly than the Company. In addition, competitive
products may be manufactured and marketed more successfully than the Company's
potential products. Such developments could render the Company's existing or
potential products less competitive or obsolete and could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The contract manufacturing service business is also highly competitive.
Competitors include major chemical and pharmaceutical companies, as well as
specialized biotechnology firms, smaller contract chemical manufacturers and
some universities. Many of these companies or institutions have greater
financial, technical and marketing resources than the Company.
Potential Volatility of Stock Price; Bulletin Board Listing
The market prices for securities of healthcare, medical dressings,
pharmaceutical and biotechnology companies are subject to volatility, and the
market has from time to time experienced significant fluctuations that are
unrelated to the operations of the Company. ProCyte's market price has
fluctuated over a wide range since the Company's initial public offering in
1989, and since March 25, 1999, the Company's common stock has traded on the
NASD OTC bulletin board. Because real-time price information may not be easily
available for bulletin board securities, an investor is likely to find it more
difficult to dispose of, or to obtain accurate quotations on the market value
of, the Company's securities than if they were listed on a national exchange.
In addition, purchases and sales of the Company's securities may become subject
to Rule 15g-9 of the Exchange Act, which imposes various sales practice
requirements on broker-dealers, or to the "penny stock" rules, either of which
would likely reduce the level of trading activity in the secondary market for
the Company's securities and make selling the securities more difficult for an
investor.
Announcements concerning the Company or its competitors, including
fluctuations in operating results, research and development program direction,
results of clinical trials, addition or termination of corporate alliances,
technology licenses, clearance or approval to market products, announcements of
technological innovations or new products by the Company or its competitors,
changes in government regulations, healthcare reform, developments in patent or
other proprietary rights of the Company or its competitors, litigation
concerning business operations or intellectual property, or public concern as to
safety of products, as well as changes in general market conditions and mergers
and acquisitions, may have a significant effect on the market price of ProCyte's
common stock.
Item 2. Properties
As of December 31, 2000, the Company leased approximately 33,000 square
feet of production, laboratory and office space at its facility in Redmond,
Washington under a ten-year lease, which expires on June 30, 2007.
11
Item 3. Legal Proceedings
The Company is not a party to any litigation that would have a material
adverse effect on the Company or its business.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to the shareholders for vote during the fourth
quarter of 2000.
PART II
Item 5. Market for the Company's Common Stock and Related Shareholder Matters
Until March 24, 1999, the Company's common stock was traded on the
NASDAQ National Market; subsequent to that date it has traded on the NASD over
the counter bulletin board under the symbol "PRCY." The following table sets
forth the high and low bid prices for the Company's common stock for the periods
indicated. Such prices reflect inter-dealer prices, without retail mark-up,
markdown or commission, and may not necessarily represent actual transactions.
High Low
--------------------------------------
1999
First quarter 15/16 15/32
Second quarter 25/32 7/16
Third quarter 13/16 9/16
Fourth quarter 7/8 15/32
2000
First quarter 2 13/16 23/32
Second quarter 2 3/8 30/32
Third quarter 1 17/32 7/8
Fourth quarter 1 5/25 18/32
2001
Through March 13, 1 17/32 41/64
At the close of business on March 13, 2001, there were 418 holders of
record of the Company's common stock. This does not include the number of
persons, whose stock is in nominee or "street name" accounts through brokers.
ProCyte has not paid any cash dividends on its common stock and does not intend
to pay cash dividends in the foreseeable future.
12
Item 6. Selected Financial Data
2000 1999 1998 1997 1996
Revenue..................... $ 6,615,383 $ 4,694,966 $ 2,720,444 $ 949,148 $ 1,653,013
Cost and expenses........... 8,980,386 10,259,357 7,726,233 8,305,420 12,633,076
Interest and other income... 222,251 248,929 538,842 907,628 1,622,944
Net loss.................... (2,142,752) (5,315,462) (4,466,947) (6,448,644) (9,357,119)
Net loss per common
share, basic and diluted.... $(0.14) $(0.35) $(0.32) $(0.48) $(0.71)
Weighted average number
of common shares used in
computing net loss per
common share................ 15,481,007 14,999,496 14,117,485 13,326,929 13,210,036
Cash, cash equivalents
and short term
investments................. $ 2,773,474 $ 3,883,187 $ 6,938,981 $12,866,617 $20,846,836
Total assets................ 12,185,426 13,446,628 18,302,378 21,310,959 27,963,658
Total liabilities........... 1,324,405 558,091 622,828 694,462 1,124,881
Stockholders' equity........ $10,861,021 $12,888,537 $17,679,550 $20,616,497 $26,838,777
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Corporate Overview
During 2000, ProCyte continued to develop and market its skin health and
hair care products, introduced new packaging for its GraftCyte(TM) System,
introduced a line of new anti-aging products and continued to work with its
licensees to promote sales of its wound care products. As the Company's product
line has expanded, it has continued to focus its direct efforts on specialty
skin health and wound care sectors, marketing its products primarily to
dermatologists, plastic surgeons and cosmetic surgeons.
The Company has continued its approach to marketing the GraftCyte(TM)
line of Copper Peptide containing wound care products for use following hair
restoration surgery. ProCyte is the only company to provide a comprehensive line
of products that address the importance of wound repair in the hair transplant
procedure. The Company's GraftCyte(TM) products are promoted through its own
sales force and specialty distributors.
The Company has also continued to emphasize its Complex Cu3(R) Intensive
Repair Creme Lotion, Cleanser and Hydrating Gel products used to treat patients
following chemical peels, microdermabrasion and laser treatments. The Complex
Cu3(R) allows the Company to differentiate its line of skin care products on the
basis of its proprietary Copper Peptide technology. During the second quarter
of 1999, the Company acquired NextDerm, Inc., and with it the rights to several
skin care products in various stages of development. Also at the end of the
second quarter of 1999, the Company launched its Neova(R) Therapy line of anti-
aging products in response to demand from physician customers. These products
are distributed using the Company's own sales force, contract sales
representatives and specialty distributors.
ProCyte's Bard Agreement gives Bard the right to distribute the
Company's wound care products, including Iamin(R) Hydrating Gel, Iamin(R) Wound
Cleanser and OsmoCyte(R) Pillow Dressings, in the hospital, nursing home and
extended care markets in the United States. ProCyte had a distribution agreement
with Tanox for Iamin(R) Hydrating Gel and OsmoCyte(R) Pillow Wound Dressings in
China and Taiwan, which was terminated in March 2000 with product registrations
reverting to ProCyte because the minimum annual purchase requirements were not
met. Additionally, ProCyte has a distribution agreement with Merck for Iamin(R)
Hydrating Gel in Latin America and South Africa and with Amuchina for Iamin(R)
Hydrating Gel and OsmoCyte(R) Pillow Wound Dressings in France and Italy. The
Company has also given Amuchina a right of first negotiation
13
on distribution rights for other European countries, contingent upon obtaining
CE Mark registration. Sale of Iamin(R) Hydrating Gel has been approved in China,
Brazil, Mexico and Peru, and the process of obtaining approval in various other
Latin American nations and in Europe is nearing completion.
The Company markets its Tricomin(R) line of Triamino Copper Complex(TM)
containing hair care products primarily to physicians. Tricomin(R) shampoos,
conditioners, and follicle therapy solution are positioned to participate in the
rapidly growing $1.5 billion worldwide hair care market as a program for the
maintenance of thinning hair for both men and women. Hair follicles require
high concentrations of biological copper, and the Tricomin(R) products deliver
copper along with amino acids for nourishing and stimulating the hair and scalp
for improved health, strength, and appearance. The Company has initiated a
series of consumer advertisements focused specifically on the hair care needs
and concerns of the aging babyboomer population and has begun selling the
Tricomin(R) products directly to consumers through its web site at
www.tricomin.com.
Operating Losses
The Company has incurred operating losses since its inception due to the
marketing expense of product launches and the costs of supporting research,
development and clinical studies of its proprietary technology at a time when
sales of the Company's products and other revenues do not yet exceed operating
expenses. As of December 31, 2000, the Company's accumulated deficit was
approximately $74.2 million. The Company expects to incur additional operating
losses until its product lines have been further expanded and have achieved
market acceptance.
Revenue
During the year ended December 31, 2000, ProCyte generated total operating
revenue of $6,615,383 from product sales, contract manufacturing, licensing and
royalties. Comparable revenues were $4,694,966 for the year ended December 31,
1999 and $2,720,444 for the year ended December 31, 1998.
Revenue from product sales was $5,055,030 during the year ended December 31,
2000, up $1,397,384 or 38% from $3,657,646, during the comparable period in
1999. Product sales in 1998 were $2,177,784. The increase in 2000 was mostly
from the introductions of new Neova(R) and GraftCyte(TM) products. The increase
in 1999 was primarily a result of the expanded product line obtained through the
acquisition of HumaTech Corporation on April 27, 1998.
Revenue from contract manufacturing services was $1,085,750 during the year
ended December 31, 2000, an increase of $323,430 or 42% from $762,320 during the
comparable period in 1999. Revenue from contract manufacturing in 1998 was
$436,167. The increases during 2000 and 1999 reflect several additional
projects undertaken with new customers and the continuation of a longer-term
agreement initiated in 1999.
Revenue from royalties and licenses in 2000 and 1999 includes fees from the
product study and option agreements, milestone payments with Neutrogena and
royalties from the license agreement with Osmotics. Royalties in 1998 were
primarily from Osmotics.
Interest income was $222,251 during the year ended December 31, 2000, down
$26,678 or 10.7% from $248,929 during the comparable period in 1999. Interest
income was $538,842 in 1998. The decrease in interest income for both periods
was primarily a result of reduced funds available for investment.
Expenses
The cost of product sales was $1,499,086 (29.7% of product sales) for the
year ended December 31, 2000, as compared to $1,376,156 (37.6% of product sales)
during the similar period in 1999. In 1998, the cost of product sales was
$963,733 (44.3% of product sales). The decrease in percentages for the cost of
products sold in 2000 versus 1999, and 1999 versus 1998, reflects the growth in
the number of units sold at higher margins.
14
Selling, general and administrative expenses were $6,206,006 during the
year ended December 31, 2000, an increase of $967,226 or 18.5% from $5,238,780
during the comparable period in 1999. Selling, general and administrative
expenses in 1998 were $4,340,424. The increase in costs during 2000 and 1999
reflects the increase in expanding the sales and marketing support for new
products and markets.
Research and development expenses were $1,275,294 during the year ended
December 31, 2000, down $469,127 or 27% from $1,744,421 during the comparable
period in 1999. Research and development expenses in 1998 were $2,422,076. The
decrease in both periods resulted from the completion of research projects and
studies and a scaling back of research activities.
Expenses in 1999 also reflected the decision made by the Company to
recognize a $1.9 million impairment of the asset values related to its contract
manufacturing operations and the facility used for such purposes.
Liquidity and Capital Resources
The Company has relied primarily on equity financing, product sales,
contract manufacturing, interest income and corporate partnerships to fund its
operations and capital expenditures. At December 31, 2000, the Company had
approximately $2.8 million in cash and cash equivalents, compared to $3.9
million at December 31, 1999. The change in cash and cash equivalents reflects a
$600,000 deposit from one of its customers for the purchase of GHK copper, and
$1.8 million cash outflow from other operating activities.
The Company believes that its existing cash and cash equivalents and
interest thereon, will be sufficient to meet its working capital requirements
for at least the next twelve months. However, there can be no assurance that
the underlying assumed levels of revenue and expense will prove accurate. The
Company will depend upon product revenues, contract manufacturing, asset
redeployment, interest income, equity financing, and funding from corporate
partnerships to meet its future capital needs. See "Important Factors Regarding
Forward-Looking Statements - Need for Additional Capital".
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
ProCyte did not own any derivative financial instruments as of December
31, 2000. The Company is debt-free and is exposed to interest rate risk only to
the extent that it has invested idle cash balances. At December 31, 2000, such
balances were invested in a United States Treasury money market fund. ProCyte
employs established policies and procedures to manage its exposure to changes in
the market risk of its investments. The Company believes that the market risk
arising from holdings of its financial instruments is not material.
15
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements and Schedules Page
Balance Sheets as of December 31, 2000 and 1999 17
Statements of Operations for the years ended December 31, 2000, 1999, and 1998 18
Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998 19
Statements of Stockholders' Equity for the years ended December 31, 2000, 1999, and 1998 20
Notes to Financial Statements 21
Report of Independent Accountants 28
Note: All schedules have been omitted because of the absence of conditions
under which they are required or because the required information is
included in the Financial Statements or notes thereto.
16
ProCyte Corporation
Balance Sheets
Assets December 31,2000 December 31,1999
----------------------------------------------------
Current Assets
Cash and cash equivalents......................................... $ 2,773,474 $ 3,883,187
Accounts receivable, net of reserve............................... 1,263,810 757,343
Finished goods inventory, net of reserve.......................... 942,739 666,203
Raw materials and work in process, net of reserve................. 1,299,288 -
Other............................................................. 171,510 147,553
----------------------------------------------------
Total current assets.............................................. 6,450,821 5,454,286
Raw materials and work in process, net of reserve - 1,572,655
Property and Equipment
Equipment......................................................... 2,122,000 2,103,194
Leasehold improvements............................................ 4,028,807 4,028,807
Less accumulated depreciation and amortization.................... (3,808,816) (3,385,628)
----------------------------------------------------
Property and equipment, net....................................... 2,341,991 2,746,373
Intangible Assets
Patents........................................................... 290,930 290,930
Goodwill.......................................................... 3,675,512 3,675,512
Less accumulated amortization..................................... (786,396) (525,354)
----------------------------------------------------
Intangible assets, net............................................ 3,180,046 3,441,088
Note Due From Employee............................................. 113,169 108,435
Security Deposits.................................................. 99,399 123,791
----------------------------------------------------
Total Assets....................................................... $ 12,185,426 $ 13,446,628
====================================================
Liabilities and stockholders' equity
Current Liabilities
Accounts payable and other accrued liabilities.................... $ 579,227 $ 416,056
Customer deposit.................................................. 600,000 -
----------------------------------------------------
Total current liabilities......................................... 1,179,227 416,056
Deferred Lease Payments............................................ 145,178 142,035
Stockholders' Equity
Preferred stock $.01 par value: 2,000,000 shares authorized; no
shares issued or outstanding..................................... - -
Common stock $.01 par value: 30,000,000 shares authorized;
15,514,700 and 15,418,722 shares issued and outstanding at
December 31, 2000 and 1999, respectively......................... 155,147 154,187
Additional paid-in capital........................................ 84,950,018 84,835,742
Accumulated deficit............................................... (74,244,144) (72,101,392)
----------------------------------------------------
Total stockholders' equity........................................ 10,861,021 12,888,537
----------------------------------------------------
Total Liabilities and Stockholders' Equity......................... $ 12,185,426 $ 13,446,628
====================================================
See notes to financial statements
17
ProCyte Corporation
Statements of Operations
Twelve Months Ended December 31,
2000 1999 1998
------------------------------------------------
Revenues
Product sales............................................ $ 5,055,030 $ 3,657,646 $ 2,177,784
Contract manufacturing................................... 1,085,750 762,320 436,167
Licenses and royalties................................... 474,603 275,000 106,493
------------------------------------------------
Total revenue............................................ 6,615,383 4,694,966 2,720,444
Cost of product sales.................................... 1,499,086 1,376,156 963,733
------------------------------------------------
Operating Expenses
Selling, general & administrative........................ 6,206,006 5,238,780 4,340,424
Research & development................................... 1,275,294 1,744,421 2,422,076
Provision for impairment of assets....................... - 1,900,000 -
------------------------------------------------
Total expenses........................................... 7,481,300 8,883,201 6,762,500
------------------------------------------------
Loss from operations...................................... (2,365,003) (5,564,391) (5,005,789)
Interest and other income................................. 222,251 248,929 538,842
------------------------------------------------
Net loss.................................................. ($2,142,752) ($5,315,462) ($4,466,947)
================================================
Net loss per common share, basic and diluted.............. ($0.14) ($0.35) ($0.32)
Weighted average and diluted weighted average number of
common shares used in computing net loss per 15,481,007 14,999,496 14,117,485
common share...........................................
See notes to financial statements
18
ProCyte Corporation
Statements of Cash Flows
Twelve Months Ended December 31,
Operating Activities 2000 1999 1998
----------------------------------------------
Net Loss........................................................... ($2,142,752) ($5,315,462) ($4,466,947)
Adjustments to reconcile net loss to net cash used in operating
activities:
Provision for impairment of assets................................ - 1,900,000 -
Depreciation and amortization..................................... 684,230 822,773 786,970
Non-cash expense related to stock-based compensation.............. 100,998 274,449 30,000
Loss (gain) on sale of securities................................. - 6,980 (683)
Loss on sale of property & equipment.............................. - 13,510 -
Cash provided (used) by:
Increase in finished goods inventories.......................... (276,536) (176,870) (73,536)
(Increase) decrease in raw materials and work in process........ 273,367 (79,098) 147,971
Increase in accounts receivables................................ (506,467) (65,147) (368,949)
(Increase) decrease in other current assets..................... (23,957) (61,919) 99,253
Increase (decrease) in accounts payable and other liabilities... 163,173 (81,555) (176,796)
Increase (decrease) in customer deposits........................ 600,000 - -
Increase in note due from employee.............................. (4,734) (4,931) (103,504)
Increase in deferred lease payments............................. 3,143 16,818 105,162
----------------------------------------------
Net cash used in operating activities............................. (1,129,535) (2,750,452) (4,021,059)
----------------------------------------------
Financing Activities
Proceeds from issuance of stock................................... 14,234 - -
----------------------------------------------
Net cash provided by financing activities......................... 14,234 - -
----------------------------------------------
Investing Activities
Purchase of property and equipment................................ (18,804) (66,278) (190,554)
Proceeds from sale of property and equipment...................... - 602 -
Purchase of securities............................................ - - (5,234,935)
Proceeds from sale or maturity of securities...................... - 4,928,105 10,163,626
Purchase of NextDerm, Inc. (1999) and purchase of assets of
HumaTech Corporation (1998)....................................... - (285,000) (1,925,000)
Decrease (increase) in security deposits.......................... 24,392 52,314 208,294
----------------------------------------------
Net cash provided by investing activities......................... 5,588 4,629,743 3,021,431
----------------------------------------------
Net Increase (Decrease) in Cash And Cash Equivalents............... (1,109,713) 1,879,291 (999,628)
Cash And Cash Equivalents:
At Beginning Of Period............................................ 3,883,187 2,003,896 3,003,524
----------------------------------------------
At End Of Period.................................................. $ 2,773,474 $ 3,883,187 $ 2,003,896
==============================================
See notes to financial statements
19
ProCyte Corporation
Statements of Stockholders' Equity
Common Stock Additional Accumulated
------------
Shares Par Value Paid-in Capital Deficit Total
----------------------------------------------------------------------
Balance, January 1, 1998 13,364,958 $133,650 $82,801,830 ($62,318,983) $20,616,497
----------------------------------------------------------------------
Shares issued at $1.38 per share to
acquire HumaTech Corporation.............. 1,088,435 10,884 1,489,116 - 1,500,000
Shares issued under the 1998 Non-
Employee Director stock plan.............. 36,410 364 29,636 - 30,000
Net loss................................... - - - (4,466,947) (4,466,947)
----------------------------------------------------------------------
Balance, December 31, 1998 14,489,803 $144,898 $84,320,582 ($66,785,930) $17,679,550
----------------------------------------------------------------------
Shares issued at $0.55 per share to
settle contingent obligation to sellers
of HumaTech Corporation................... 236,748 2,367 127,965 - 130,332
Shares issued at $0.42 per share to
acquire NextDerm, Inc..................... 600,000 6,000 244,000 - 250,000
Issuance of warrants and options to
non-employees in exchange for - - 90,117 - 90,117
services..................................
Shares issued under the 1998 Non-
Employee Director stock plan.............. 92,171 922 53,078 - 54,000
Net Loss................................... - - - (5,315,462) (5,315,462)
----------------------------------------------------------------------
Balance, December 31, 1999 15,418,722 $154,187 $84,835,742 ($72,101,392) $12,888,537
======================================================================
Shares issued at $1.50 per share to
settle contingent obligation to sellers
of HumaTech Corporation................... 37,333 373 55,627 - 56,000
Shares issued under the 1989 and
1996 Stock Option Plans................... 16,334 165 14,069 - 14,234
Shares issued under the 1998 Non-
Employee Director stock plan.............. 42,311 422 44,580 - 45,002
Net Loss................................... - - - (2,142,752) (2,142,752)
----------------------------------------------------------------------
Balance, December 31, 2000 15,514,700 $155,147 $84,950,018 ($74,244,144) $10,861,021
======================================================================
See notes to financial statements
20
ProCyte Corporation
Notes to Financial Statements
Note 1. Description of Business and Summary of Significant Accounting Policies
Nature of Operations
ProCyte Corporation ("ProCyte" or "the Company") is a health care
company that develops, manufactures and markets products for wound care, skin
health and hair care, many of which incorporate the Company's proprietary Copper
Peptide compounds.
Summary of Significant Accounting Policies
Revenue recognition
Product revenues are recognized when products are shipped, contract
manufacturing revenues are recognized when services are performed, license fees
are recognized on a straight-line basis over the term of the licensing agreement
and royalties are recognized when earned. Customer payments for products that
are received prior to shipment are recorded as customer deposits.
Research and development
Research and development costs are expensed as incurred. The Company
enters into contracts with outside laboratories for certain studies and
recognizes the expenses associated with these contracts when the related
services are performed.
Selling, general and administrative
Selling, general and administrative includes costs associated with the
contract manufacturing activities, which are not separately segregated.
Inventories
Finished goods inventories and raw materials and work in process are
stated at the lower of cost, as determined by the first in, first out method, or
market. Inventory and work in process costs include material, direct labor and
overhead, net of a reserve for excess and obsolete items. The Company has
provided a reserve for excess and obsolete finished goods inventory in the
amount of $80,000 at both December 31, 2000 and 1999. In 1999, as raw materials
and work in process included supplies and compounds that were utilized after the
current operating cycle, such amounts were classified as long-term.
Depreciation and amortization
Equipment is depreciated using accelerated methods over the estimated
useful lives of the related assets, ranging from 5 to 20 years. Leasehold
improvements are amortized over the term of the facility lease. Patent
application costs are amortized on a straight-line basis over 17 years from the
date the patents are issued. Goodwill is amortized on a straight-line basis over
15 years.
Long-lived assets
The Company reviews its long-lived assets for impairment to determine
whether any events or circumstances indicate that the carrying amount of the
assets may not be recoverable. In 1999, the Company determined that its
manufacturing facility was impaired and recognized an impairment loss of
$1,900,000.
21
Net loss per common share
Net loss per common share is based upon the weighted average number of
common shares outstanding. Shares issuable upon the exercise of stock options
are common stock equivalents, but including those shares in the computation of
the basic net loss per common share would have had an anti-dilutive effect and
consequently diluted earnings per share is not presented.
Federal income taxes
The Company uses the asset and liability method to account for income
taxes as provided for in SFAS 109, Accounting for Income Taxes. Under this
method deferred tax assets and liabilities are created by differences between
basis for financial and tax reporting. The Company has provided a full valuation
reserve for tax benefits of net operating losses and research and development
tax credit carry forwards.
Accounts Receivable
The Company has provided a reserve for uncollectable accounts
receivable in the amount of $92,332 and $65,421 at December 31, 2000 and 1999,
respectively. Bad debt expense amounted to $46,987, $43,243 and 24,948 in 2000,
1999 and 1998, respectively.
Cash equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. Such investments are
primarily in a United States Treasury money market fund.
Stock options
The Company has implemented SFAS No. 123, Accounting for Stock-Based
Compensation, which requires a fair value method of accounting for employee
stock options. As permitted by SFAS No. 123, the Company follows the intrinsic
value accounting method for stock options contained in APB Opinion No. 25,
Accounting for Stock Issued to Employees. Under SFAS No. 123, certain
disclosures about stock-based compensation arrangements are made regardless of
the method used to account for them.
Use of estimates in financial statements
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
revenues and expenses during the reporting period and the reported amounts of
assets and liabilities at the date of the financial statements, particularly
with respect to the valuation of inventory, goodwill and other non-current
assets. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to items reported in prior
years to conform to the current year's presentation.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. This pronouncement requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS No. 133, as
amended by SFAS No. 137 and 138, was adopted by the Company on January 1, 2001,
which did not have a material impact on the financial statements.
22
In December 1999, the staff of the Securities and Exchange Commission released
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition, to provide
guidance on the recognition, presentation and disclosure of revenues in
financial statements. The Company believes that its revenue recognition
practices are in conformity with the guidelines in SAB 101, as such, the
Company's adoption of the SAB on October 1, 2000 did not have a material impact
on its financial statements.
Note 2. Raw materials and work in process
Because of federal Food and Drug Administration requirements for the
cGMP manufacturing process, and to take advantage of market conditions and
scheduling efficiencies, the Company procures materials and produces compounds
in economic order quantities. Raw materials and work in process at December 31,
2000 and 1999 consisted of the following:
2000 1999
-------------------------------
Work in process $1,417,580 $1,294,440
Raw materials 181,708 578,215
Reserve for excess and obsolete items (300,000) (300,000)
-------------------------------
Total $1,299,288 $1,572,655
===============================
Note 3. Product and geographic information
The Company's wound care products are sold primarily to specialty
distributors, and its skin health and hair care products are sold primarily to
physicians. In 2000, a single customer accounted for approximately 55% of
contract manufacturing revenue. During 1999 and 1998, respectively, different
customers also accounted for approximately 54% and 12%, respectively, of such
revenue each year. One customer, a wound care products distributor, accounted
for approximately 15% of product sales in 1998. The Company has not made
significant sales outside of the United States and does not currently maintain
discrete financial information to measure operating performance on a segment
basis.
Product sales consisted of the following:
Year Ended December 31,
2000 1999 1998
--------------------------------------
Wound Care $ 66,770 $ 158,348 $ 314,893
Skin Health 4,558,600 3,126,306 1,776,830
Hair Care 429,660 372,992 86,061
--------------------------------------
$5,055,030 $3,657,646 $2,177,784
======================================
23
Note 4. Federal Income Taxes
The following is a summary of the components of deferred taxes at
December 31, 2000 and 1999:
2000 1999
-----------------------------------------
Federal NOL carryforwards $24,200,000 $ 23,800,000
Research and development credit carryforwards 1,600,000 1,600,000
Other 700,000 700,000
Valuation allowance (26,500,000) (26,100,000)
-----------------------------------------
Total - -
=========================================
At December 31, 2000, the Company's deferred tax asset relates to net
operating losses and research and development tax credit carry forwards of
approximately $70.9 million and $1.6 million, respectively, which are scheduled
to expire from 2005 to 2020. As a result of issuing common stock subsequent to
inception, the Company's ability to use these net operating losses and tax
credit carry forwards in the future will be subject to limitations under
Internal Revenue Code Section 382. A full valuation allowance has been provided
since realization of the deferred tax asset is not reasonably assured. The
difference between the statutory tax rate of 35% and the rate included in the
financial statements is primarily a result of the Company's net operating
losses.
Note 5. Lease Commitments
The Company presently leases approximately 33,000 square feet of
manufacturing, warehouse, laboratory, and administrative space in Redmond,
Washington under a lease executed in August 1993. As amended, the lease term
extends through June 30, 2007 and contains a renewal option for the Company to
extend the term by an additional five years.
Future minimum annual lease payments are as follows:
2001 419,232
2002 408,692
2003 393,936
2004 393,936
2005 411,660
Thereafter 641,968
-------------
Total $2,669,424
=============
Rent expense in 2000, 1999 and 1998 was $403,357, $405,343, and
$528,730, respectively.
Note 6. 401(k) Plan
The Company sponsors the 1991 ProCyte Corporation Profit Sharing and
Salary Deferral 401(k) Plan, which is funded by voluntary employee pretax salary
deferrals to the extent permitted under law and provides for employer matching
contributions at the discretion of the Board of Directors. No employer
contribution has been made since the adoption of the plan.
24
Note 7. Note Due from Employee
At December 31, 2000 and 1999, respectively, an employee owed the
Company $113,169 and $108,435 including accrued interest at 4.28% under the
terms of a promissory note dated December 16, 1998. The note is due in full on
June 30, 2002.
Note 8. Stockholders' Equity
HumaTech Corporation
In April 1998, the Company purchased substantially all of the assets of
HumaTech Corporation for $1.5 million and 1,088,435 shares of ProCyte common
stock. In connection with the acquisition, ProCyte entered into two-year
employment agreements with two of the HumaTech principals and a two-year
confidentiality and non-competition agreement with another HumaTech principal.
Among other terms, each of these agreements provided for contingent payments
based on future sales, which, at the Company's option, could be made in the form
of shares of ProCyte common stock. During 2000 and 1999 the initial payments
under these agreements were made with 37,333 and 236,748 shares of ProCyte
common stock, respectively. Subsequent to the initial payments, the two
employment agreements were cancelled.
NextDerm, Inc.
In June 1999, ProCyte acquired all of the stock of NextDerm, Inc., a
new company developing topical therapeutics for skin conditions such as acne and
oily skin. The consideration for the acquisition included $250,000 in cash and
600,000 shares of ProCyte common stock with a value of $250,000 on the date that
the terms were established. The Company accounted for the acquisition as a
purchase and recorded $525,000 of goodwill. In connection with the acquisition,
ProCyte entered into consulting arrangements with two of the principal NextDerm
shareholders and nominated Mr. Glenn Oclassen, the chairman of the NextDerm
board of directors, for election to the ProCyte board of directors.
Non-employee Director Stock Plan
In June 1998, the shareholders approved the 1998 Non-employee Director
Stock Plan, reserving 200,000 shares for issuance to directors. Two hundred
thousand additional shares were approved for the plan at the Company's annual
shareholders meeting on May 23, 2000. Under this plan eligible directors receive
all or a portion of their quarterly retainer fees in shares of the common stock
of the Company. The number of shares each eligible director receives is based
on the average fair market value of the common stock for the last 20 business
days of the fiscal quarter. After issuing 17,568 shares on January 1, 2001, the
Company's 1998 Non-employee Director Stock Plan had 211,539 shares available for
issuance.
Shareholder Rights plan
In December 1994, the Board of Directors adopted a shareholder rights
plan declaring a dividend of one preferred share purchase right (the "Rights")
for each outstanding share of common stock of the Company. Each Right, initially
evidenced by and traded with the shares of common stock, entitles the registered
holder to purchase one one-hundredth (1/100) of a share of preferred stock of
the Company at an exercise price of $14.00, subject to adjustment based on the
market price of the Company's common stock at the time the Rights become
exercisable. The Rights will be exercisable only if a person or group acquires
15% or more of the Company's common stock or announces a tender offer for the
Company. The Rights may be redeemed, at a redemption price of $0.01 per Right,
at any time until any person or group has acquired 15% or more of the Company's
common stock. The Board of Directors may also elect to exchange the Rights for
shares of the Company's common or preferred stock. In the event the Company is
acquired, each outstanding Right will represent the right to acquire shares of
the surviving entity. The Rights expire on December 7, 2004.
25
Note 9. Warrants to Acquire Common Stock
As of December 31, 2000, there were 100,000 shares of the Company's common stock
reserved for issuance under three common stock warrants issued on May 26, 1999
in exchange for services. The three warrants oblige the Company to issue 33,334
shares at $0.6875 per share, the market price on the grant date, 33,333 shares
at $1.6875 and 33,333 shares at $2.6875. Each of the three warrants has a five-
year life and is fully vested. The fair value of these warrants was determined
to be $90,117 using the Black-Scholes option pricing model and was expensed in
1999. The assumptions used in the model were a risk-free interest rate of
4.08%, an expected life of five years, 98% stock price volatility, and no
dividends over the expected life.
Note 10. Stock Options
The Company has stock option plans for directors, officers, employees
and consultants that provide for grants of nonqualified and incentive stock
options. Options generally are granted at fair market value, expire between five
and ten years from grant date and vest ratably over three to five years.
The following table summarizes information about stock option activity in
2000, 1999 and 1998:
2000 1999 1998
---------------------------------------------------------------------------------------------
Number of Wtd. Avg. Number of Wtd. Avg. Number of Wtd. Avg.
Options Exercise Options Exercise Options Exercise
Price Price Price
Outstanding, beginning of year 1,861,727 $1.71 1,618,061 $ 2.18 1,304,374 $2.94
Granted 451,500 $0.94 850,000 $ 0.80 749,000 $1.21
Exercised (16,334) $0.87 - - - -
Canceled or expired (215,032) $0.97 (606,334) $ 1.69 (435,313) $2.95
------------ ---------- ----------
Outstanding, end of year 2,081,861 $1.63 1,861,727 $ 1.71 1,618,061 $2.18
============= ========== ==========
Exercisable, end of year 1,149,878 $2.21 788,911 $ 2.81 681,407 $3.28
The options outstanding at December 31, 2000 consisted of the following:
Range of Number of Wtd. Avg. Wtd. Avg. Number of Wtd. Avg.
exercise Options Remaining Exercise Options Exercise
prices Outstanding Life Price Exercisable Price
$0.49 - $ 0.77 862,834 8.94 $0.73 275,339 $0.73
$0.78 - $ 1.00 200,667 8.22 $0.93 63,172 $0.93
$1.01 - $ 1.44 453,500 7.34 $1.27 272,506 $1.29
$1.45 - $ 3.50 474,860 5.31 $2.75 449,860 $2.79
$3.51 - $11.87 50,500 0.79 $5.12 50,500 $5.12
---------------------------------------------------------------
$0.49 - $11.87 2,081,861 7.40 $1.63 1,149,878 $2.21
===============================================================
At December 31, 2000 there were 323,333 shares reserved for issuance under
the Company's 1996 Stock Option Plan.
26
As required by SFAS 123, the Company has determined the fair value of stock
options granted during 2000, 1999 and 1998 using the Black-Scholes option
pricing model and the following assumptions:
2000 1999 1998
-----------------------------------
Risk-free interest rate 5.03% 4.08% 4.28%
Expected option life (years) 5.81 5.81 5.81
Dividend yield 0.00 0.00 0.00
Expected volatility 208% 98% 96%
The weighted average fair value of options granted during 2000, 1999 and
1998 was approximately $0.87, $0.61 and $0.84, respectively. The effect on the
reported net loss had the Company elected to adopt the measurement provisions of
SFAS 123 would have been an increase in the reported net loss for the periods
ending December 31, 2000, 1999 and 1998, by $486,991, $414,798, and $446,865,
respectively. On such a pro forma basis, net loss per share would have
increased by $0.03 to $0.17 in 2000, by $0.03 to $0.38 in 1999 and by $0.03 to
$0.35 in 1998.
27
ProCyte Corporation
Independent Auditors' Report
Board of Directors
ProCyte Corporation
Redmond, Washington
We have audited the accompanying balance sheets of ProCyte Corporation (the
Company) as of December 31, 2000 and 1999, and the related statements of
operations, cash flows, and stockholders' equity for each of the three years in
the period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2000 and
1999, and the results of its operations and its cash flows for each of the three
years in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
Seattle, Washington
February 9, 2001
28
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required under this item is included in the Company's Proxy
Statement relating to the Company's annual meeting of shareholders, and is
incorporated herein by reference. Such Proxy Statement will be filed with the
Securities and Exchange Commission within 120 days after the close of the
Company's fiscal year end, December 31, 2000.
Item 11. Executive Compensation
The information required under this item is included in the Company's Proxy
Statement relating to the Company's annual meeting of shareholders, and is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required under this item is included in the Company's Proxy
Statement relating to the Company's annual meeting of shareholders, and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required under this item is included in the Company's Proxy
Statement relating to the Company's annual meeting of shareholders, and is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. List of documents filed as part of this report:
(1) Financial Statements and Supplementary Data - Reference is made to the
Index to Financial Statements and Schedules under Item 8 in Part II
hereof, where such documents are listed.
(2) Exhibits - see (c) below
B. Reports on Form 8-K
None
29
c. Exhibits
Exhibit Description Note
2.1 Asset Purchase and Sale Agreement dated April 27, 1998 between the Registrant and E
HumaTech Corporation
3.1 Restated Articles of Incorporation of the Registrant A
3.2 Restated Bylaws of the Registrant A
4.1 Rights Agreement between the Registrant and American Securities Transfer and Trust as G
of December 7, 1994
10.1* 1987 Stock Benefit Plan of ProCyte Corporation A
10.2* ProCyte Corporation 1989 Restated Stock Option Plan B
10.3* ProCyte Corporation 1991 Restated Stock Option Plan for Non-employee Directors and D
amendments thereto
10.4+ Teachers Insurance & Annuity Association Lease dated as of October 1, 1993 and second D
amendment thereto dated February 28, 1997
10.5* 1996 Stock Option Plan D
10.6* ProCyte Corporation 1998 Non-employee Director Stock Plan F
10.7* Change of Control Agreement for Ms. Robin Carmichael F
10.8* Change of Control Agreement for Mr. John Clifford D
10.13* Form of Indemnity Agreement dated February 23, 1995 between the Registrant and each of C
Dr. Blake, Mr. Patterson and Mr. Clifford.
10.14* Form of Indemnity Agreement between ProCyte Corporation and each of various of its F
Officers and Directors
10.15* Form of Severance Agreement for Mr. John Clifford D
10.16* Form of Promissory Note between ProCyte Corporation and Mr. John Clifford H
10.17+ Distribution & License Agreement dated December 12, 1997 between the Registrant and G
Bard Medical Division
10.18+ License Agreement dated April 19, 2000 between ProCyte Corporation and Neutrogena I
Corporation
23.1 Consent of Deloitte & Touche LLP J
- --------------------------------------------------------------------------------
* Management contract or compensatory plan or arrangement.
+ Confidential treatment has been granted or requested with respect to
portions of this exhibit.
A. Incorporated by reference to the Registrant's Registration Statement of Form
S-1 (No. 33-31353).
B. Incorporated by reference to the Registrant's Registration Statement of Form
S-1 (No. 33-46364).
C. Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1994.
D. Incorporated by reference to the Registrant's Annual Report on Form 10-K for
the year ended December 31, 1996.
E. Incorporated by reference to the Registrant's current Report on Form 8-K
dated April 27, 1998
F. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the Quarter ended June 30, 1998.
G. Incorporated by reference to the Registrant's Amended Annual Report on Form
10-K/A dated December 31, 1997.
H. Incorporated by reference to the Registrant's Amended Annual Report on Form
10-K/A dated December 31, 1998.
I. Incorporated by reference to the Registrant's Quarterly Report on Form 10-Q
for the Quarter ended March 31, 2000.
J. Filed herewith.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROCYTE CORPORATION
(REGISTRANT)
By: /s/ John F. Clifford
----------------------------------------------
Date: March 13, 2001 John F. Clifford
Chairman of the Board of Directors and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Name Title Date
/s/ John F. Clifford Chairman and Chief Executive Officer March 13, 2001
- -----------------------------------
John F. Clifford (Principal Executive Officer)
/s/ John Hammer Director March 13, 2001
- -----------------------------------
John Hammer
/s/ Matt Leavitt Director March 13, 2001
- -----------------------------------
Matt Leavitt
/s/ Glenn Oclassen Director March 13, 2001
- -----------------------------------
Glenn Oclassen
/s/ Robert E. Patterson Director March 13, 2001
- -----------------------------------
Robert E. Patterson
/s/ Mark Landis Controller March 13, 2001
- -----------------------------------
Mark Landis (Principal Finance and Accounting Director)
31