-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GpHmNUq3mL/EiH4BcTK7hr+xuoTOSxQI7cC7iMHOVonPLs8ZVl1XRyAOQI56m8E4 GZDAo5fluzduLLeSMkRZXA== 0001072993-00-000170.txt : 20000327 0001072993-00-000170.hdr.sgml : 20000327 ACCESSION NUMBER: 0001072993-00-000170 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROTEIN POLYMER TECHNOLOGIES INC CENTRAL INDEX KEY: 0000858155 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 330311631 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-19724 FILM NUMBER: 578221 BUSINESS ADDRESS: STREET 1: 10655 SORRENTO VALLEY RD CITY: SAN DIEGO STATE: CA ZIP: 92121 BUSINESS PHONE: 6195586064 MAIL ADDRESS: STREET 1: 10655 SORRENTO VALLEY ROAD CITY: SAN DIEGO STATE: CA ZIP: 92121 10KSB 1 FORM 10-KSB ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION 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 For the fiscal year ended December 31, 1999 OR [_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ___________________ Commission file number 0-19724 PROTEIN POLYMER TECHNOLOGIES, INC. (Exact name of small business issuer as specified in its charter) Delaware 33-0311631 (State or Other Jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) 10655 Sorrento Valley Road, San Diego, CA 92121 (Address of Principal Executive Offices) Issuer's Telephone Number: (619) 558-6064 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, Redeemable Warrants (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 pursuant to Item 405 of Regulation S-B contained herein, and no disclosure will 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-KSB or any amendment to this Form 10-KSB. [_] The issuer's revenues for the most recent fiscal year were $96,000. The aggregate market value of the voting stock held by non-affiliates of the issuer on March 22, 2000 was $15,208,769. State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date: As of March 22, 2000, 18,286,510 shares of common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Definitive Proxy Statement to be filed no later than April 7, 2000 pursuant to Regulation 14A with respect to the Registrant's 2000 Annual Meeting of Stockholders (incorporated by reference in Part III). Transitional Small Business Disclosure Format: Yes [_] No [X] ================================================================================ PROTEIN POLYMER TECHNOLOGIES, INC. FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 TABLE OF CONTENTS Page No. -------- PART I.................................................................... 2 Item 1. Business.................................................. 2 Item 2. Properties................................................ 18 Item 3. Legal Proceedings......................................... 19 Item 4. Submission of Matters to a Vote of Security Holders....... 19 PART II................................................................... 20 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................... 20 Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 24 Item 7. Financial Statements...................................... F-1 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 29 PART III.................................................................. 29 Items 9, 10, 11 and 12 - Incorporated by Reference Item 13. Financial Statements, Exhibits and Reports on Form 8-K.............................................. 29 Signatures ......................................................... 35 1 PART I ITEM 1. BUSINESS COMPANY BACKGROUND Protein Polymer Technologies, Inc., a Delaware corporation ("PPTI" or "the Company"), is a development-stage biotechnology company incorporated on July 6, 1988 and is engaged in the research, development, production and clinical testing of medical products based on its proprietary protein-based biomaterials technology. Since 1992, the Company has focused primarily on developing materials technology and products to be used in the surgical repair of tissue: surgical adhesives and sealants; soft tissue augmentation products; wound healing matrices; drug delivery devices; and surgical adhesion barriers. The Company has also developed coating technology that can efficiently modify and improve the surface properties of more traditional biomedical devices. A common goal is to develop materials that beneficially interact with human cells, enabling cell growth and the regeneration of tissues with improved outcomes as compared to current products and practices. In December 1999, the Company initiated human clinical testing of its urethral bulking agent for the treatment of female stress urinary incontinence. The August 1999 approval by the U.S. Food and Drug Administration ("FDA") of the Company's Investigational Device Exemption ("IDE") allows PPTI to test the safety and effectiveness of the incontinence product in women over the age of 40 who have become incontinent due to the shifting of their bladder or the weakening of the muscle at its base that controls the flow of urine, or both problems combined. The Company estimates that more than 2.5 million women begin to experience stress urinary incontinence in the United States each year. In most untreated cases, the problem becomes progressively more pronounced. Due to limited efficacy or invasiveness of current treatments, only a small proportion of the women experiencing stress urinary incontinence are clinically treated, relying instead on pads and plugs and the like that only address the symptoms. In contrast, PPTI's product is injected, typically in an out patient procedure, into urethral tissue at the base of the bladder forming a solid implant that provides support to the muscles controlling the flow of urine. The Company believes that its product will prove to be easy for the physician to use, offer enduring effectiveness, and avoid most of the other limitations of urethral bulking products on the market or in development. The tissue augmentation materials and technology underlying the incontinence product have the potential to be effective and desirable in a number of other clinical applications. The Company intends to submit an additional IDE to the FDA in 2000 to obtain approval to begin human clinical testing of its dermal bulking agent for use in cosmetic and reconstructive surgery applications. PPTI began studies to identify its most promising biomaterial formulations for use in these soft tissue augmentation products in 1996, devoted increasing resources through 1997 and 1998, and has primarily focused on this program area in 1999 in preparation for human clinical testing. 2 In January 2000, PPTI established a strategic alliance with Femcare, Ltd. ("Femcare") for the commercialization of the incontinence product in Europe and Australia. In the agreement, Femcare is responsible for clinical testing, regulatory approval, and product sales and marketing within these territories, and PPTI is responsible for product manufacturing. Contingent on successful clinical trials commercialization of the product in Europe is expected to begin more than a year before approval for marketing the product in the United States can be obtained. PPTI also is in discussions with several companies regarding the establishment of strategic alliances for commercializing the incontinence product in the United States and other markets outside the Femcare territories. Between 1994 and 1997, the Company's efforts were focused predominantly on the development of its surgical adhesive and sealant technology. As part of this effort, the Company targeted the establishment of a strategic alliance with a market leader in the field of surgical wound closure products which lead to the execution of comprehensive license, supply and development agreements in September 1995, with Ethicon, Inc. ("Ethicon"), a subsidiary of the Johnson & Johnson Company ("J&J"). Ethicon elected to terminate these agreements in December 1997. The Company has demonstrated both the adhesive performance and the biocompatibility of its product formulations in animal models, including the resorption of the adhesive matrix in conjunction with the progression of wound healing. PPTI is committed to the commercial development of its adhesive and sealant technology. Subsequent to the termination of the Ethicon agreement, the Company has worked to determine the most significant market and product opportunities for its use. PPTI is seeking to establish new strategic alliances with leaders in those markets. To the extent sufficient resources are available, the Company continues to research the use of its protein polymers for other tissue repair and medical device applications, principally for use in tissue engineering matrices and drug delivery devices. Through 1999, PPTI marketed specialty use products for in vitro cell -------- culture applications including SmartPlastic(R) and ProNectin(R) F Cell Attachment Factor. ProNectin F was launched commercially in 1991. SmartPlastic is ProNectin F Activated Cultureware where ProNectin F is presented in ready to use form on the surfaces of disposable plastic labware for culturing human and animal cells. SmartPlastic was launched commercially in 1995. In 1998 the Company discontinued direct sales of its cell culture products, and in February 2000, the Company sold all rights to the use of the technology for in vitro cell -------- culture applications, the product trademarks, and remaining inventory to Sanyo Chemical Industries, Ltd. Prior to 1992, the Company's scientists had successfully demonstrated the ability to create and produce novel protein polymer materials having important physical, biological and chemical properties. During this period, most of the Company's efforts were dedicated to supplying E. I. DuPont de Nemours & Co. ("DuPont") with materials under contract for its proprietary research and testing purposes. 3 In 1992, the Company raised approximately $8.9 million through its initial public offering of common stock and redeemable warrants. The Company used a major portion of these proceeds to generate substantive in vitro -------- laboratory evidence and in vivo animal test data demonstrating the ------- biocompatibility and performance of its protein polymers and derived biomaterials, and to establish a materials science group which has developed important materials modification and fabrication technology. In July 1994, the Company raised approximately $2.1 million from the sale of its unregistered Series C Preferred Stock to private investors. In September 1995, the Company raised approximately $2.4 million from the sale of its unregistered Series D Preferred Stock to the same private investors. Also at this time these investors exchanged all of their holdings of Series C Preferred Stock and accumulated dividends into Series D Preferred Stock. In January 1997, the Company raised approximately $4.6 million from a private placement of the Company's common stock with a number of institutional and accredited investors. In April and May 1998, the Company raised approximately $5.4 million from the private sale of the Company's Series E Convertible Preferred Stock and warrants to a small group of institutional and accredited investors. In connection with this transaction, the Company also issued shares of Series F Convertible Preferred Stock in exchange for the same number of shares of outstanding Series D Convertible Preferred Stock. During April 1999, the Company received approximately $508,000 from the exercise of redeemable, publicly traded warrants originally issued as part of PPTI's Initial Public Offering, and during May 1999 the Company received approximately $416,000 for the conversion of warrants issued in conjunction with its private placement of Series E Convertible Preferred Stock. In August and September of 1999, the Company received approximately $2 million, net of costs, from a private placement of its Series G Convertible Preferred Stock priced at $100 per share with warrants to purchase an aggregate of 4,200,000 shares of common stock to a small group of institutional and accredited investors. The Company's cash balance as of December 31, 1999 was $156,000. The Company believes this amount, in combination with approximately $3.4 million in revenues and receivables obtained in January and February 2000 from licensing and R&D agreements, and the exercise of common stock warrants issued in connection with Series G Convertible Preferred Stock, is sufficient to fund its operations through January 2001. Beyond this fiscal year, we believe there are a number of alternatives available to meet our continuing capital requirements. See the Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Condition and Results of Operations for further discussion. THE COMPANY'S TECHNOLOGY PPTI is focused on developing products to improve medical and surgical outcomes, based on an extensive portfolio of proprietary biomaterials. Biomaterials are materials that are used to direct, supplement, or replace the functions of living systems. The interaction between materials 4 and living systems is dynamic. It involves the response of the living system to the materials (e.g., biocompatibility) and the response of the materials to the living system (e.g., degradation). The requirements for performance within this demanding biological environment have been a critical factor in limiting the myriad of possible metal, polymer, and ceramic compositions to a relatively small number that to date have been proven useful in medical devices. The goal of biomaterials development historically has been to produce inert materials -- materials that elicit little or no response from the living system. However, the Company believes that such conventional biomaterials are constrained by their inability to convey appropriate messages to the cells that surround them -- the same messages that are conveyed by proteins in normal human tissues. The products targeted for development by PPTI are based on a new generation of biomaterials which have been designed to be recognized and accepted by human cells, to aid in the natural process of bodily repair (including the healing of tissue and the restoration or augmentation of its form and function), and, ultimately, to promote the regeneration of tissues. The Company believes that the successful realization of these properties will substantially expand the role that artificial devices can play in the prevention and treatment of human disability and disease, and enable the culture of native tissues for successful reimplantation. Through its proprietary core technology, PPTI produces high molecular weight polymers that can be processed into a variety of material forms such as gels, sponges, films, and fibers, with their physical strength and rate of resorption tailored to each potential product application. These polymers are constructed of the same amino acids as natural proteins found in the body. The Company has demonstrated that its polymers can mimic the biological and chemical functions of natural proteins and peptides, such as the attachment of cells through specific membrane receptors and the ability to participate in enzymatic reactions, thus overcoming a critical limitation of conventional biomaterials. In addition, materials made from PPTI's polymers have demonstrated excellent biocompatibility in a variety of preclinical feasibility studies. PPTI's patented core technology enables messages that direct activities of cells to be precisely formulated and presented in a structured environment similar to what nature has demonstrated to be essential in creating, maintaining and restoring the body's functions. The Company's protein polymers are made by combining the techniques of modern biotechnology and traditional polymer science. The techniques of biotechnology are used to create synthetic genes that direct the biological synthesis of protein polymers in recombinant microorganisms. The methods of traditional polymer science are used to design novel materials for specific product applications by combining the properties of individual "building block" components in polymer form. In contrast to natural proteins, either isolated from natural sources or produced using traditional genetic engineering techniques, PPTI's technology results in the creation of new proteins with unique properties. PPTI has demonstrated its capability to create materials that: . combine properties of different proteins found in nature; 5 . reproduce and amplify selected activities of natural proteins; . eliminate undesired properties of natural proteins; and . incorporate synthetic properties via chemical modifications. This capability is fundamental to PPTI's current primary product research and development focus -- tissue repair and regeneration. Tissues are highly organized structures made up of specific cells arranged in relation to an extracellular matrix ("ECM"), which is principally composed of proteins. The behavior of cells is determined largely by their interactions with the ECM. Thus, the ability to structure the cells' ECM environment allows the protein messages they receive -- and their activity -- to be controlled. Similar to what nature has demonstrated to be essential in creating, maintaining and restoring the body's functions, PPTI's patented core technology enables messages that direct activities of cells to be precisely formulated and presented in a structured environment. FUNDAMENTAL PROTEIN POLYMERS PPTI's primary products under development are based on protein polymers combining selected properties from two of the most extraordinary structural proteins found in nature: silk and elastin. Silk, based upon its crystalline structure, has long been known as an incredibly strong material, and has a long history of medical use in humans as a material for sutures. Elastin fibers are one of the most remarkable rubber-like materials ever studied. Found in human tissues such as lungs and arteries, elastin fibers must expand and contract over a life time, and can be extended nearly three times their resting length without damaging their flexibility. Despite the incredible individual properties of silk and elastin, neither of these natural protein materials is capable of being processed into forms other than what nature has provided without destroying their valuable materials properties. However, PPTI's proprietary technology has enabled the creation of polymers that combine the repeating blocks of amino acids responsible for the strength of silk and the elasticity of elastin. By precisely varying the number and sequence of the different blocks in the assembled protein polymer, new combinations of properties suitable for various medical applications have been created. The Company has also created protein polymers based on repeating blocks of amino acids found in two other classes of structural proteins found in nature: collagen and keratin. Collagen is the principal structural component of the body, found in some shape or form in virtually every tissue, ranging from shock absorbing cartilage to light transmitting corneas. Keratin is a major component in hair, nails and skin. The development of materials based on these polymers is at an early stage of research. PRODUCT CANDIDATES AND ANTICIPATED MARKETS The Company's technology and materials have the potential to create products and product applications in a variety of medical and specialty use markets. The Company's current development efforts are principally focused on preparations for scale-up and validation of manufacturing processes for its hydrogel bulking agents for soft tissue augmentation. However, 6 opportunities for research and development of product candidates for other medical and specialty use continue to be evaluated, particularly those based on its tissue adhesive and sealant technology. All of the Company's product candidates are subject to preclinical and clinical testing requirements for obtaining U.S. Food and Drug Administration's ("FDA's") marketing approval. The actual development of other product candidates, if any, will depend on a number of factors, including the availability of funds required to research, develop, test and obtain necessary regulatory approvals; the anticipated time to market; the potential revenues and margins that may be generated if a product candidate is successfully developed and commercialized; and the Company's assessment of the potential market acceptance of a product candidate. Soft Tissue Augmentation Conditions where there is a need to augment the body's soft tissues include both cosmetic and medical applications. In the former, for example, current procedures include the injection of collagen-based materials to smooth out facial wrinkles, acne scars and to modify lip contours. However, these treatments only last a matter of months, which puts them economically out of reach for a large portion of the population of people who would otherwise desire the procedure. Medical applications include the treatment of stress urinary incontinence, gastroesophageal reflux, and fecal incontinence, the reversible blockage of fallopian tubes for birth control, the augmentation of vocal chords, and the expansion of gingival tissues impacted by periodontal disease. PPTI believes there is a lack of materials with suitable properties for these applications, primarily because materials having the required durability in vivo ------- either lack the requisite biocompatibility or the ability to be easily injected. The Company has developed protein polymers that demonstrate excellent biocompatibility, are soluble in water at room temperature, and are easily injected into body tissues, irreversibly forming soft, durable gels at body temperature. Previously, PPTI has shown gels of similar composition to persist at least 18 months in an animal model. PPTI's bulking agents are unique in that they are applied as an aqueous solution, easily injected through a 30-gauge needle, rapidly spreading throughout the native tissue architecture. With the increase from room to body temperature, the polymer solution irreversibly transforms within minutes to a soft, pliable hydrogel. Importantly, the volume of material remains constant in the liquid to gel transition, such that the tissue expansion observed by the physician upon administration will be subsequently maintained. This is in direct contrast to the majority of competing technologies, which are suspensions or slurries of solid particles in an aqueous carrier such as saline. When injected through a fine gauge needle, with some difficulty due to their thick constitution, the carrier liquid dissipates through the tissues with time, usually within 24 hours, such that roughly half of the effective bulking volume is lost. This requires the physician to either overcompensate for the expected volume reduction upon initial administration, with increased risks to the patient, or to 7 "top off" the bulking effect with repeated administrations of the product over time, with substantially increased costs. Other hydrogel technologies of which the Company is aware are either preformed gels, difficult to administer by injection, or polymer solutions mixed with a chemical cross-linking agent prior to injection. PPTI believes that such technologies are limited in their overall performance including durability, biocompatibility and ease of administration. In August 1999, the Company obtained the FDA's approval of its Investigational Device Exemption (IDE) to begin human clinical testing of its urethral bulking agent for the treatment of female stress urinary incontinence. The Company began pilot clinical testing of the product's safety and efficacy in December 1999. The Company projects expanding into a multi-site pivotal clinical study in the fourth quarter of 2000. To the extent funds are available, the Company intends to submit an additional IDE to the FDA in 2000 to obtain approval to begin human clinical testing of its dermal bulking agent for use in cosmetic and reconstructive surgery applications. Surgical Adhesives and Sealants Surgeons are master craftsmen. However, instead of working with metal, wood or plastic, they work with living tissues. Like carpenters, they use saws, chisels (knives) and drills to take things apart and fit pieces together. But they only have access to string (sutures) and nails (staples, pins, screws) to hold things in place. Furthermore, a surgeon's work is complicated by the biological healing response occurring when tissues are injured. As in everyday life, there are many surgical uses for glue where string and nails just don't work well. They may not be quick or easy enough to use; they may not be capable of staying in place; they may do more damage than desired; they and/or the tools to use them may not fit within the available work space; they may result in fluid or air leaks; or the "fit and finish" or healing response is just not satisfactory. Certain surgical adhesives and sealants that seek to avoid these limitations have been developed and marketed outside the United States by other parties. In 1998, the FDA approved two such products for certain uses in the U.S. DermaBond(TM), a cyanoacrylate adhesive, was approved for topical application to close skin incisions and lacerations. Cyanoacrylate adhesives set fast and have high strength, but are toxic to certain tissues and form brittle plastics that do not resorb. These limitations restrict their use to bonding the outer surfaces of skin together. Tisseel(TM), a fibrin sealant, was approved for use as an adjunct to hemostasis in surgery. Fibrin sealants have excellent hemostatic properties, but are derived from human and/or animal blood products, set slowly, have low strength, and lose their strength rapidly. A third category of tissue adhesives combines natural proteins such as collagen or albumin with aldehyde cross-linking agents. Such products are marketed in Europe for limited life-threatening indications. The aldehyde cross-linking agents employed (i.e. glutaraldehyde, formaldehyde) in such products are known to cause adverse tissue reactions. Additional adhesive 8 and/or sealant products employing other polymer systems and cross-linking agents are also under development. PPTI is seeking to develop surgical adhesives and sealants that combine the biocompatibility of fibrin glues (without the risks associated with use of blood-derived products) with the high strength and fast setting times of cyanoacrylates. Unique features include significant elasticity within the adhesive matrix (to move as tissues move) and the capability of tailoring the resorption rate of the adhesive matrix with the rate at which the wound heals. A non-resorbable adhesive or sealant can only be used where the damaged tissues will not heal. Otherwise, a barrier to wound healing is unavoidably created. In September 1995, the Company entered into a series of agreements with Ethicon regarding this program. Ethicon elected to terminate these agreements in December 1997. However, the Company has demonstrated both the adhesive performance and the biocompatibility of its product formulations in animal models, including the resorption of the adhesive matrix in conjunction with the progression of wound healing. Subsequently, the Company has worked to determine the specific markets and products providing the most significant opportunities for the use of its adhesive and sealant technology. As a result of its evaluations of the medical market needs, the properties achievable with its technology, and the capabilities of competitive technologies, PPTI has focused its product development interests on certain orthopedic applications, particularly those related to the repair of the spinal disc for the treatment of chronic low back pain. Low back pain is the most common musculoskeletal disorder in industrialized societies. PPTI is committed to the commercial development of its adhesive and sealant technology and is seeking to establish new strategic alliances with market leaders. However, there can be no assurance that such alliances can be entered into. Wound Healing/Tissue Engineering Matrices The current market for wound care products is highly segmented, involving a variety of different approaches to wound care. Products currently marketed and being developed by other parties include fabric dressings (such as gauze), synthetic materials (such as polyurethane films) and biological materials (such as growth factors and living tissue skin graft substitutes). While the type of product used varies depending on the type of wound and extent of tissue damage, the Company believes that a principal treatment goal in all instances is to stimulate wound healing while regenerating functional (as opposed to scar) tissue. The Company has developed protein polymers which it believes may be useful in the treatment of dermal wounds, particularly chronic wounds such as decubitous ulcers, where both reconstruction of the ECM and re-establishment of its function are desired. These polymers, based on key ECM protein sequence blocks, are biocompatible, fully resorbable and have been processed into gels, sponges, films and fibrous sheets. The Company believes that such materials, if successfully developed, could improve the wound-healing process by providing physical support in situ for cell migration and tissue regeneration and as ------- delivery systems for 9 growth factors. Additionally, such materials may serve as scaffolds for the ex vivo production of living tissue substitutes. - ------- This program is in the early stages of research, which the Company has principally conducted in collaboration with third parties. Such collaborations have primarily focused on the treatment of dermal wounds. Controlled Release Drug Delivery Oral delivery of drugs is the most preferred route of administration. However, for many drugs this is not possible and alternative drug delivery routes are required. Alternative routes include transdermal, mucosal, and by implantation or injection. For implantation or injection, it is often desirable to extend the availability of the drug in order to minimize the frequency of these invasive procedures. A few materials have been commercialized which act as depots for a drug when implanted or injected, releasing the drug over periods ranging from one month to several years. Other material and drug combinations are being developed by third parties. PPTI believes that the properties of these materials for such applications can be substantially improved upon, making available the use of depot systems for a wider range of drugs and applications. PPTI's soft tissue augmentation products, its wound healing matrices, and its medical device coating technology all provide platforms for drug delivery applications, serving as controlled release drug depots. The protein polymer materials the Company has developed exhibit exceptional biocompatibility, provide for control over rates of resorption, and are fabricated using aqueous solvent systems at ambient temperatures -- attributes which can be critical in maintaining the activity of the drug, particularly protein-based drugs emerging from the biotechnology industry. This program is in the early stages of research. MANUFACTURING, MARKETING AND DISTRIBUTION Preclinical and clinical testing of potential medical device products, where the results will be submitted to the FDA, requires compliance with the FDA's Good Laboratory Practices ("GLP") and other Quality System Regulations ("QSR"). The Company has implemented, and continues to implement, polymer production and quality control procedures, and has made certain facilities renovations to operate in conformance with FDA requirements. The Company believes its current polymer production capacity is sufficient for supplying its development programs with the required quality and quantity of materials needed for feasibility and preclinical testing and initial ("pilot") clinical testing. To expand beyond initial clinical trials, the Company will require additional manufacturing capacity. The Company is considering several methods for increasing production of its biomedical and other product candidates to meet clinical and commercial requirements. For example, the Company may expand its existing facility to produce needed quantities of materials under FDA's GLP and QSR regulations for clinical and commercial use. Alternatively, the Company may establish external contract manufacturing arrangements for needed quantities of materials. 10 However, there can be no assurance that such arrangements, if desired, could be entered into or maintained on acceptable terms, if at all, or that the existence or maintenance of such arrangements would not adversely affect the Company's margins or its ability to comply with applicable governmental regulations. The actual method, or combination of methods, that the Company may ultimately pursue will depend on a number of factors, including availability, cost and the Company's assessment of the ability of such production methods to meet its commercial objectives. PPTI has entered into an agreement with Femcare for marketing and distribution of its urethral bulking agent for stress urinary incontinence in certain countries, if the required regulatory approvals are obtained (see "Collaborative Agreements). The Company currently expects that its other biomedical products, if any were commercialized, would be marketed and distributed by corporate partners. While this arrangement could minimize the Company's marketing costs and facilitate wider distribution of any biomedical products it may develop, these arrangements could possibly reduce the Company's revenues and profits as compared to what would be possible if the Company directly sold such products. RESEARCH AND DEVELOPMENT Information regarding Company-sponsored research and development activities and contract research and development revenue is set forth below under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations". COLLABORATIVE AGREEMENTS Because of the highly technical focus of its business, the Company must conduct extensive research and development prior to any commercial production of its biomedical products or the biomaterials from which they are created. During this development stage, PPTI's ability to generate revenues is limited. Because of this limitation, the Company does not have sufficient resources to devote to extensive testing or marketing of its products. The Company's primary method of expanding its product development, testing and marketing capabilities is to seek to form collaborative arrangements with selected corporate partners with specific resources that the Company believes complement its business strategies and goals. The medical device industry has traditionally licensed from development stage companies product candidates whose safety and efficacy has been demonstrated at least in pilot human clinical trials. In December 1999, the Company began human clinical testing of its urethral bulking agent for the treatment of female stress urinary incontinence. The Company also intends to submit an additional IDE to the FDA in 2000 to obtain approval to begin human clinical testing of its dermal bulking agent for use in cosmetic and reconstructive surgery applications. 11 Femcare, Ltd. In January 2000, PPTI announced the formation of a strategic alliance with Femcare, Ltd. for the commercialization in Europe and Australia of its urethral bulking agent for treatment of stress urinary incontinence. Femcare is a British-based developer and international marketer of surgical products for gynecological and urological applications. In the alliance, PPTI will provide Femcare with technical assistance, and the incontinence product for Femcare's clinical testing and regulatory approvals in the Femcare territories. Femcare will utilize its existing customer base and its extensive distribution network as the basis for introducing the product into Europe and Australia. Currently, Femcare markets its products in 40 countries worldwide. A new Urology division has been created to extend the company's success in gynecology to urological applications, in particular female stress urinary incontinence. PPTI receives a $1 million license fee and a royalty on the revenues generated by Femcare from the sale of the product. PPTI will be responsible for providing the product to Femcare for commercial sale. Other Agreements PPTI is discussing other potential collaboration agreements with prospective marketing partners for both its soft tissue augmentation products and its tissue adhesive and sealant products. There can be no assurance that the Company will continue such discussions or be able to establish such agreements at all, or do so in a timely manner and on reasonable terms, or that such agreements will lead to successful product development and commercialization. From time to time, the Company is a party to certain materials evaluation agreements regarding biomedical and specialty use applications of its products, polymers and technology, including applications in areas other than those identified as product candidates above. These agreements provide, or are intended to provide, for the evaluation of product feasibility. There can be no assurance that the Company will continue to be able to establish such agreements at all, or do so in a timely manner and on reasonable terms, or that such agreements will lead to joint product development and commercialization agreements. INTENSE COMPETITION The principal anticipated commercial uses of PPTI's biomaterials are as components of end-use products for biomedical and other specialty applications. End-use products using or incorporating the Company's biomaterials would compete with other products that rely on the use of alternative materials. For example, bulking agents for soft tissue augmentation are currently marketed based on bovine collagen and, outside the U.S., silicone particles. Similarly, all targeted applications of the Company's potential products will compete with other products having the same or similar applications. The areas of business in which the Company engages and proposes to engage are characterized by intense competition and rapidly evolving technology. Competition in the biomedical and surgical repair markets is particularly significant. The Company's competitors in 12 the biomedical and surgical repair markets include major pharmaceutical, surgical product, chemical and specialized biopolymer companies, many of which have financial, technical, research and development and marketing resources significantly greater than those of the Company. Academic institutions and other public and private research organizations are also conducting research and seeking patent protection, and may commercialize products on their own or through joint ventures. Most of the Company's competitors depend on synthetic polymer technology rather than protein engineering for developing products. However, the Company believes that DuPont and several university laboratories are currently conducting research into similar protein engineering technology. The primary elements of competition in the biomedical and surgical repair products market are performance, cost, safety, reliability, convenience and commercial production capabilities. The Company believes that its ability to compete in this market will be enhanced by its issued patent claims, the breadth of its other pending patent applications, its early entry into its field and its experience in protein engineering. PATENTS AND TRADE SECRETS PPTI is aggressively pursuing domestic and international patent protection for its technology, making claim to an extensive range of recombinantly prepared structural and functional proteins, methods for preparing synthetic repetitive DNA, methods for the production and purification of protein polymers, end-use products incorporating such materials and methods for their use. The United States Patent and Trademark Office ("USPTO") has issued fifteen patents to the Company. U.S. Patent 5,235,041 (1993) relates to the Company's method for purifying structurally ordered recombinant protein polymers. U.S. Patent 5,243,038 (1993) covers the Company's synthetic DNA compositions that encode polymers and copolymers comprising the amino acid "building blocks" of silk and elastin. U.S. Patent 5,496,712 (1996) covers the Company's family of high molecular weight collagen like polymers and the DNA sequences encoding them. U.S. Patent 5,514,581 (1996) covers DNA sequences encoding silk-like structural building blocks with an intervening sequence coding for the key cell attachment ligand from human fibronectin. One of the claimed sequences encodes ProNectin F. U.S. Patent 5,606,019 (1997) covers the protein compositions comprising copolymers of the amino acid "building blocks" of silk and elastin. These are the primary materials used in the Company's current product development efforts. U.S. Patent 5,641,648 (1997) covers methods by which synthetic genes encoding protein polymers are created. U.S. Patent 5,723,588 (1998) covers molded articles incorporating biologically active proteins. U.S. Patent 5,760,004 (1998) covers chemical modification of protein polymers to enhance their water solubility. U.S. Patent 5,770,697 (1998) broadly covers protein polymers incorporating repetitive amino acid sequences found in naturally occurring proteins. U.S. Patent 5,773,249 (1998) expands the coverage of high molecular weight collagen like polymers. U.S. Patent 5,773,577 (1998) covers protein polymers that can be cross-linked by certain enzymes 13 that naturally occur in the body. U.S. Patent 5,808,012 (1998) expands the coverage of molded articles to those incorporating chemically active proteins. U.S. Patent 5,817,303 (1998) covers the use of protein polymers with chemical cross-linking agents as adhesives and sealants. U.S. Patent 5,830,713 (1998) expands the coverage of methods by which synthetic genes encoding protein polymers are created. U.S. Patent 6,018,030 (2000) broadly covers DNA sequences encoding protein polymers incorporating repetitive amino acid sequences found in naturally occurring proteins. Additionally, PPTI has nine U.S. patent applications pending, two of which have been allowed, covering related aspects of its core technology. Although the Company believes its existing issued patent claims may provide a competitive advantage, there can be no assurance that the scope of the Company's patent protection is or will be adequate to protect its technology or that the validity of any patent issued will be upheld in the future. Additionally, with respect to the Company's allowed and pending applications, there can be no assurance that any patents will be issued, or that, if issued, they will provide substantial protection or be of commercial benefit to the Company. The two patents issued to PPTI in 1993 will expire in 2010, as will one of the patents issued in 1996. The other patent issued in 1996 will expire in 2013, and the patents issued in 1997 will expire in 2014. The three patents issued in 1998, which expand the coverage of previously issued patents, will expire in concert with the original patents. The other five patents issued in 1998 will expire in 2015. The patent issued in 2000 will expire in 2017. Generally, for patent applications filed in the U.S. prior to June 8, 1995, the term of the patent will be 17 years from the issue date. Subsequently filed U.S. patent applications will have a term of 20 years from the date of filing, consistent with the patent laws in international jurisdictions. Although the Company does not currently have any operations outside the U.S., it anticipates that its potential products will be marketed on a worldwide basis, with possible manufacturing operations outside the U.S. For example, the Company has recently established a licensing and distribution agreement with Femcare Ltd. for the sale of its urethral bulking agents in Europe and Australia. Accordingly, international patent applications corresponding to the major U.S. patents and patent applications described above have been filed in these and other important market jurisdictions. Due to translation costs and patent office fees, international patents are significantly more expensive to obtain than U.S. patents. Additionally, there are differences in the requirements concerning novelty and the types of claims that can be obtained compared to U.S. patent laws, as well as the nature of the rights conferred by a patent grant. PPTI carefully considers these factors in consultation with its patent counsel, as well as the size of the potential markets represented, in determining the foreign countries in which to file patents. In almost all cases, the Company files for patents in Australia, Canada, Europe and Japan. Currently, PPTI has fourteen issued foreign patents, and thirty-one pending foreign applications. One of the issued foreign patents is in Europe and the scope of its claims broadly covers protein polymers having biological or chemical activity. 14 Because of the uncertainty concerning patent protection and the unavailability of patent protection for certain processes and techniques, PPTI also relies upon trade secret protection and continuing technological innovation to maintain its competitive position. Although all of the Company's employees have signed confidentiality agreements, there can be no assurance that the Company's proprietary technology will not be independently developed by other parties, or that secrecy will not be breached. Additionally, the Company is aware that substantial research efforts in protein engineering technology are taking place at universities, government laboratories and other corporations and that numerous patent applications have been filed. The Company cannot predict whether it may have to obtain licenses to use any technology developed by third parties or whether such licenses can be obtained on commercially reasonable terms, if at all. In the course of its business, PPTI employs various trademarks and trade names in packaging and advertising its products. The Company has assigned the federal registration of its ProNectin(R) trademark and its SmartPlastic(R) trademark for ProNectin F Activated Cultureware to Sanyo Chemical Industries, Ltd. in connection with the sale to Sanyo of its cell culture business. The Company intends to protect and promote all of its trademarks and, where appropriate, will seek federal registration of its trademarks. REGULATORY MATTERS Regulation by governmental authorities in the United States and other countries is a significant factor affecting the success of products resulting from biotechnological research. The Company's current operations and products are, and anticipated products and operations will be, subject to substantial regulation by a variety of agencies, particularly those products and operations related to biomedical applications. Currently, the Company's activities are subject principally to regulation under the Occupational Safety and Health Act and the Food, Drug and Cosmetic Act. Extensive preclinical and clinical testing and pre-market approval from the FDA is required for new medical devices, drugs or vaccines, which is generally a costly and time-consuming process. PPTI is required to be in compliance with many of the FDA's regulations to conduct testing in support of product approvals; in particular, compliance with the FDA's Good Laboratory Practices ("GLP") regulations and portions of the FDA's Quality Systems Regulations ("QSR"). Where PPTI has conducted such testing, the Company may choose to file product approval submissions itself or maintain with the FDA a "Master File" containing, among other items, such test results. A Master File can then be accessed by the FDA in reviewing particular product approval submissions from companies commercializing products based on PPTI's materials. There can be no assurance that the Company or its customers will be able to obtain or maintain the necessary approvals from the FDA or corresponding international regulatory authorities, or that the Company will be able to maintain a Master File in accordance with FDA regulations. In either case, the Company's anticipated business could be adversely affected. To the extent PPTI manufactures medical devices, as opposed to a component material supplied to a medical device manufacturer, it will be required to conform commercial manufacturing operations 15 to the FDA's QSR requirements. The Company would also be required to register its facility with the FDA as an establishment involved in the manufacture of medical devices. QSR requirements are rigorous, and there can be no assurance that compliance could be obtained in a timely manner and without the expenditure of substantial resources, if at all. International quality system requirements, i.e., ISO 9001 issued by the International Organization for Standardization is the quality model used by medical product manufacturers, and is required for the sale of medical devices in Europe. ISO 9001 standards are similar to the FDA's QSR. In August 1999, the Company obtained the FDA's approval of its IDE to begin human clinical testing of its urethral bulking agent for the treatment of female stress urinary incontinence. The Company initiated clinical testing in December 1999. The Company intends to submit an additional IDE to the FDA in 2000 to obtain approval to begin human clinical testing of its dermal bulking agent for use in cosmetic and reconstructive surgery applications. The Company has implemented, and continues to implement, polymer production and quality control procedures, and has made certain facilities renovations, to operate in conformance with FDA requirements. The Company's research, development and production activities are, or may be, subject to various federal and state laws and regulations relating to environmental quality and the use, discharge, storage, transportation and disposal of toxic and hazardous substances. The Company's future activities may be subject to regulation under the Toxic Substances Control Act, which requires the Company to obtain pre-manufacturing approval for any new "chemical material" the Company produces for commercial use that does not fall within the FDA's regulatory jurisdiction. The Company believes it is currently in substantial compliance with all such laws and regulations. Although the Company intends to use its best efforts to comply with all environmental laws and regulations in the future, there can be no assurance that the Company will be able to fully comply with such laws, or that full compliance will not require substantial capital expenditures. PRODUCT LIABILITY AND ABSENCE OF INSURANCE PPTI's business may expose it to potential product liability risks whenever human clinical testing is performed or upon the use of any commercially marketed medical product. Prior to initiating human clinical testing of its urethral bulking agent, the Company procured product liability insurance. There can be no assurance, however, that PPTI will be able to continue to obtain such insurance on acceptable terms or that such insurance will provide adequate coverage against potential liabilities. A successful product liability claim or series of claims could result in a material adverse effect on the Company. 16 EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position with the Company - ---- --- ------------------------- J. Thomas Parmeter 60 Chairman of the Board of Directors, President and Chief Executive Officer Joseph Cappello, Ph.D. 43 Vice President, Research and Development, Chief Technical Officer and Director, Polymer Research Philip J. Davis 69 Corporate Secretary Franco A. Ferrari, Ph.D. 48 Vice President, Laboratory Operations and Polymer Production and Director, Molecular Genetics John E. Flowers 43 Vice President, Planning and Operations Janis Y. Neves 48 Director, Finance and Administration, Treasurer, and Assistant Secretary
Mr. Parmeter has been the Company's President, Chief Executive Officer and Chairman of the Board of Directors since its inception in July 1988 (and, from July 1988 to July 1992, its Chief Financial Officer). From 1982 to November 1987, Mr. Parmeter was President, Chief Executive Officer and, from June 1987 to June 1988, Chairman of the Board of Syntro Corporation. Dr. Cappello has been the Company's Vice President, Research and Development since February 1997 and Director, Polymer Research and Chief Technical Officer since February 1993. From September 1988 to February 1993, he was the Company's Senior Research Director, Protein Engineering. Mr. Davis has been the Company's Secretary since January 1989. Mr. Davis has been a director of the Company since April 1995; he previously served as a director of the Company from January 1989 until October 1991. Mr. Davis has been employed by Donaldson, Lufkin & Jenrette since June 1994 and currently is a Managing Director of Investment Banking. He was Director, Institutional Sales at Merrill Lynch, Inc. (formerly Merrill Lynch Capital Markets) from February 1991 to June 1994, and was a Vice President at Merrill Lynch, Inc. from 1986 to 1991. Mr. Flowers has been the Company's Vice President, Planning and Operations, since February 1993. From September 1988 to February 1993, he was the Company's Vice President, Commercial Development. 17 Dr. Ferrari has been the Company's Vice President, Laboratory Operations and Director, Molecular Genetics since February 1993. From September 1988 to February 1993, he was the Company's Senior Research Director, Genetic Engineering. Ms. Neves has been the Company's Director of Finance since November 1998 and Controller and Assistant Secretary since January 1990. From July 1988 until January 1990, Ms. Neves was the Company's Business Office Manager. All executive officers of the Company were elected by the Board of Directors and serve at its discretion. No family relationships exist between any of the officers or directors of the Company. EMPLOYEES On June 30, 1999, the Company laid off eighteen employees, approximately 60% of its work force, as part of a broad cost cutting measure to preserve cash. In late July, several employees were brought back on the payroll in order to prevent delays in beginning the clinical testing of the Company's lead product, scheduled to begin in December, 1999. With the closing of the Series G Preferred stock offering, several more of the laid off employees were rehired. As of February 29, 2000, PPTI had 19 full-time and one part-time employee, of whom four hold employment contracts with the Company and three hold Ph.D. degrees in the chemical or biological sciences. The Company is highly dependent on the services of its executive officers and scientists. The loss of the services of any one of these individuals would have a material adverse effect on the achievement of the Company's development objectives, its business opportunities and prospects. The recruitment and retention of additional qualified management and scientific personnel is also critical to the Company's success. There can be no assurance that the Company will be able to attract and retain required personnel on acceptable terms, due to the competition for such experienced personnel from other biotechnology, pharmaceutical, medical device and chemical companies, universities and non-profit research institutions. ITEM 2. PROPERTIES PPTI does not own any real property. The Company leases approximately 21,000 square feet in San Diego, California from Sycamore/San Diego Investors. The leased property includes the Company's administrative offices, which encompass approximately 4,000 square feet, and its laboratory facilities, which encompass approximately 17,000 square feet. The current annual rent is approximately $417,000. The lease expires in May 2005. The Company believes that its current facilities are adequate to meet its needs until the end of 2000. The Company retains an option to lease an additional 7,000 square feet of office and laboratory space in its present facility and to extend its lease for an additional five years. 18 ITEM 3. LEGAL PROCEEDINGS None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of security holders during the fourth quarter of 1999. 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. NASDAQ Delisting Prior to September 1999, the Company's Common Stock traded on The Nasdaq Stock Market under the symbol "PPTI". The Company's Common Stock was delisted from the NASDAQ Small Cap Quotation System, effective September 20, 1999. The reasons for the delisting were failure to maintain the minimum bid requirement of $1.00 per share for PPTI common stock, and failure to meet the minimum net asset requirement of $2 million. The Company's Common Stock is now traded on the "over-the-counter" NASD Bulletin Board. To access the quotations for the Company's Common Stock, use the call letters PPTI.OB. The trade prices set forth below represent inter-dealer prices without retail markups, markdowns or commissions. Trade Prices ------------------------------- 1999 High Low ---- ------- ------- First Quarter $1.531 $1.063 Second Quarter 2.250 0.875 Third Quarter 1.719 0.750 Fourth Quarter 1.250 0.688 1998 ---- First Quarter $1.531 $1.063 Second Quarter 2.250 0.875 Third Quarter 1.719 0.750 Fourth Quarter 1.250 0.688 As of March 22, 2000, the Company had approximately 163 shareholders of record; it estimates it has approximately 1,500 beneficial holders. The Company has never paid cash dividends on its Common Stock. The Company currently intends to retain earnings, if any, for use in the operation and expansion of its business and therefore does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. Unregistered Offerings On August 16, 1999, the Company received $1,775,000 for 17,750 shares of Series G Convertible Preferred Stock ("Series G Stock") from several institutional and accredited individual investors following the 10 day stockholder notification period required by the NASD prior to the sale. On September 15, 1999, the Company received an additional $325,000 for 3,250 shares of Series G Stock, for a total of $2,100,000. Each share of Series G Stock was priced 20 at $100 per share. Each share can be converted at any time by the holder into common stock at a price of $0.50 per share, subject to certain antidilution adjustments. Each share of Series G Preferred Stock also received a common stock warrant, exercisable for 12 months, that allows the holder to acquire 200 shares of PPTI common stock at a price of $0.50 per share. The Series G Stock, warrants and underlying common stock have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. Between April 1 and April 15, 1999, the Company received approximately $508,000 from the exercise of redeemable, publicly traded, warrants originally issued as part of PPTI's Initial Public Offering. Following the close of business on April 15, the remaining unexercised redeemable, publicly traded, warrants expired. On May 12, 1999, the Company received approximately $416,000 from the exercise of warrants issued in conjunction with the private placement of the Company's Series E Convertible Preferred Stock ("Series E Stock"). In April and May of 1998, the Company raised approximately $5.4 million from the sale of 54,437 shares of the Company's Series E Stock priced at $100 per share, with warrants to purchase an aggregate of 3,266,250 shares of common stock to a small group of institutional and accredited investors. Each share of Series E Stock is convertible at any time at the election of the holder into 80 shares of common stock at a conversion price of $1.25 per share, subject to certain antidilution adjustments. No underwriters were engaged by the Company in connection with such issuance and, accordingly, no underwriting discounts were paid. The offering is exempt from registration under Section 4(2) of the Securities Act, and met the requirements of Rule 506 of Regulation D promulgated under the Securities Act. The Company has registered the shares of common stock underlying the Series E Stock and the warrants with the Securities and Exchange Commission. Each share of Series E Stock received two common stock warrants. One warrant (first warrant) is exercisable at any time for 40 shares of common stock at an exercise price of $2.50 per share, and expires approximately 18 months after the close of the offering; the other warrant (second warrant) is exercisable at any time for 20 shares of common stock at an exercise price of $5.00 per share, and expires approximately 36 months after the close of the offering. In addition, an 18 month warrant to acquire 200,000 common shares exercisable at $2.50 per share and a 36 month warrant to acquire 100,000 common shares exercisable at $5.00 per share were issued as a finder and document review fee paid to a lead investor. An 18 month warrant to acquire 32,000 common shares exercisable at $2.50 per share, a 24 month warrant to acquire 16,000 common shares exercisable at $5.00 per share, and 5 year warrants to acquire an aggregate of 25,200 common shares exercisable at $2.50 per share were issued to certain persons for service as finders in relation to the private placement. In connection with the above private placement, the Company issued 26,420 shares of its Series F Convertible Preferred Stock in exchange for the same number of shares of outstanding Series D Convertible Preferred Stock. The Company's Series F Convertible Preferred Stock is equivalent to the Company's Series E Stock with regard to liquidation preferences. All other 21 terms of the Company's Series F Convertible Preferred Stock remained the same as the Company's Series D Convertible Preferred Stock. On January 7, 1997, the Company received $4,760,000, less expenses of approximately $140,000, from a private placement of 1,904,000 shares of the Company's common stock, at $2.50 per share, with a number of accredited investors. No underwriters were engaged by the Company in connection with such issuance and, accordingly, no underwriting discounts or commissions were paid. The issuance was exempt from registration under Section 4(2) of the Securities Act, and met the requirements of Rule 506 of Regulation D promulgated under the Securities Act. The Company agreed to register the shares with the Securities and Exchange Commission promptly after the closing. The registration was declared effective on January 24, 1997. On September 14, 1995, the Company issued 49,187 shares of its Series D Convertible Preferred Stock and warrants to purchase 500,960 shares of common stock at $1.25 per share in a private placement to certain accredited investors. Of this amount, 20,000 shares of Series D Convertible Preferred Stock and warrants to purchase 400,000 shares of common stock were issued for cash at $100.00 per share; 21,600 shares of Series D Convertible Preferred Stock were issued in exchange for all outstanding shares of the Company's Series C Convertible Preferred Stock and 2,539 shares for accrued and unpaid dividends thereon; and an additional 5,048 shares of Series D Convertible Preferred Stock and warrants to purchase 100,960 shares of common stock were issued in exchange for cancellation of a $500,000 bridge loan and accrued interest thereon. No underwriters were engaged by the Company in connection with such issuance and, accordingly, no underwriting discounts or commissions were paid. The issuance was exempt from registration under Section 4(2) of the Securities Act and met the requirements of Rule 506 of Regulation D promulgated under the Securities Act. Each share of Series D and Series F Convertible Preferred Stock earns a cumulative dividend at the annual rate of $10 per share, payable as and when declared by the Company's Board of Directors in the form of cash, common stock or any combination thereof. The Series D and F Convertible Preferred Stock is convertible into common stock after two years from the date of issuance at the holder's option. The conversion price at the time of conversion is the lesser of $3.75 or the market price. The Series D and F Convertible Preferred Stock is redeemable at the Company's option after four years from the date of issuance. Automatic conversion of all of the Series D and F Convertible Preferred Stock will occur if: (a) the Company completes a public offering of common stock at a price of $2.50 or higher; or (b) the holders of a majority thereof elect to convert. The Company has the option to demand conversion of the Series D and F Convertible Preferred Stock if the average market price of its common stock equals or exceeds $5.00 per share over a period of twenty business days. The Series D Convertible Preferred Stock has a liquidation preference of $100 per share plus accumulated dividends. At the time of purchase, the Series D Convertible Preferred stockholders received warrants to purchase, at an exercise price of $1.25 per share, twenty shares of the Company's common stock for each share of Series D Convertible Preferred Stock acquired for cash, or upon conversion of the outstanding bridge loan and accrued interest thereon, described above. Warrants 22 to acquire a total of 500,960 shares of common stock were issued. All of these warrants were exercised during 1996, from which the Company received aggregate gross proceeds of $626,200. The Series D Convertible Preferred stockholders were granted certain registration rights relating to their shares of common stock issuable upon conversion of the Series D Convertible Preferred Stock and upon the exercise of their warrants. In July 1994, the Company received $2,160,000 from a private placement of the Company's Series C Convertible Preferred Stock with certain accredited investors, consisting of 21,600 shares at $100.00 per share. No underwriters were engaged by the Company in connection with such issuance and, accordingly, no underwriter discounts or commissions were paid. The issuance was exempt from registration under Section 4(2) of the Securities Act and met the requirements under Rule 506 of Regulation D promulgated under the Securities Act. As described above, the investors exchanged 21,600 shares of Series C Convertible Preferred Stock, plus accrued and unpaid dividends thereon, for 24,139 shares of Series D Convertible Preferred Stock. There are currently no shares of Series C Convertible Preferred Stock outstanding. In connection with the issuance of the Series C Convertible Preferred Stock, warrants were also issued to acquire a total of 432,000 shares of the Company's common stock at a price of $1.25 per share. All of these warrants were exercised during 1996, from which the Company received aggregate gross proceeds of $540,000. In July 1996, holders of warrants to acquire 322,663 shares of common stock (all of whom were accredited investors) exercised such warrants at $2.50 per share, resulting in approximately $807,000 in gross proceeds to the Company. These warrants were originally issued in 1991 in connection with the issuance of the Company's Series B Convertible Preferred Stock. The issuance upon exercise of these warrants was exempt from registration under Section 4(2) of the Securities Act and met the requirements under Rule 506 of Regulation D promulgated under the Securities Act. The Company agreed to register the resale of the common stock received upon exercise of these warrants, and the applicable registration was declared effective on July 19, 1996. 23 ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS CERTAIN STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE IN THIS ANNUAL REPORT ON FORM 10-KSB CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY, OR INDUSTRY RESULTS, TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY FORWARD-LOOKING STATEMENTS. SUCH RISKS AND UNCERTAINTIES INCLUDE, AMONG OTHERS, HISTORY OF OPERATING LOSSES, RAISING ADEQUATE CAPITAL FOR CONTINUING OPERATIONS, EARLY STAGE OF PRODUCT DEVELOPMENT, SCIENTIFIC AND TECHNICAL UNCERTAINTIES, COMPETITIVE PRODUCTS AND APPROACHES, RELIANCE UPON COLLABORATIVE PARTNERSHIP AGREEMENTS AND FUNDING, REGULATORY TESTING AND APPROVALS, PATENT PROTECTION UNCERTAINTIES AND MANUFACTURING SCALE-UP AND REQUIRED QUALIFICATIONS. WHILE THESE STATEMENTS REPRESENT MANAGEMENT'S CURRENT JUDGMENT AND EXPECTATIONS FOR THE COMPANY, SUCH RISKS AND UNCERTAINTIES COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FUTURE RESULTS SUGGESTED HEREIN. THE COMPANY UNDERTAKES NO OBLIGATION TO RELEASE PUBLICLY THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES ARISING AFTER THE DATE HEREOF. GENERAL OVERVIEW Incorporated in 1988, Protein Polymer Technologies, Inc. has concentrated its research and development efforts on establishing a scientific and technical leadership position in the production and development of unique protein-based materials. The Company has identified biomedical market and product opportunities for further research and development that management believes will exploit the unique properties of the Company's technology to competitive advantage. The Company has been unprofitable to date, and as of December 31, 1999 has an accumulated deficit of $37,245,495. The Company's product candidates for surgical repair, augmentation and regeneration of human tissues are in various stages of research and development. Its more advanced programs are in the areas of bulking agents for soft tissue augmentation, particularly for use in urethral tissue for the treatment of female stress incontinence and in dermal tissue for cosmetic and reconstructive procedures. The Company currently is devoting the majority of its resources to the development and registration of these products, with the greatest emphasis on the incontinence product which began human clinical trials in December 1999. The Company's other advanced product technology is in the area of tissue adhesives and sealants. Currently the Company's research and development in this area is focused on the repair of spinal discs for the treatment of lower back pain. The Company's first commercial products, ProNectin F and SmartPlastic, are used by biologists and cell culture laboratories, principally to grow mammalian cells for biomedical research purposes. In February 2000, the Company licensed the rights for the 24 manufacture and sale of these products for use in in vitro cell culture, ------- including the transfer of all existing inventory, to a third party. In 1995, the Company entered into a collaborative relationship with Ethicon regarding its surgical adhesives and sealants program. Ethicon terminated the relationship in December 1997 which materially adversely affected the Company. The Company's strategy with most of its programs is to enter into collaborative development agreements with major medical product marketing and distribution companies. Although these relationships, to the extent any are consummated, may provide significant near-term revenues through up-front licensing fees, research and development reimbursements and milestone payments, the Company expects to continue incurring operating losses for the next several years. The Company's cash balance as of December 31, 1999 was $156,000. The Company believes this amount, in combination with funds received from licensing and R&D agreements in January and February 2000, and the exercise of the common stock warrants issued in connection with the Series G Stock in February 2000, which in total will generate approximately $3.4 million (net of costs) during the calendar year 2000, is sufficient to fund its operations through January 2001. The Company will continue to attempt to raise additional funds for continuing operations through private or public offerings and collaborative agreements (see "Liquidity and Capital Resources" below, and Note 1 of the Audited Financial Statements for additional information and a description of the associated risks). RESULTS OF OPERATIONS Interest income was $39,000 for the year ended December 31, 1999, as compared to $135,000 for 1998 and $187,000 for 1997. The year-to-year variability resulted from the amount and timing of the receipt of equity capital and the amounts of excess cash available for investment. Product sales for the years ended December 31, 1999 were $54,000, compared to $71,000 and $77,000 in 1998 and 1997 respectively. Product sales consist of ProNectin F related product revenues and licensing fees. Sales during 1996 reflected disappointing market interest in the line of ProNectin products; as a result the Company discontinued related promotional expenditures to conserve cash. Sales in 1998 and 1999 primarily reflect distributor stocking orders. The manufacturing and marketing rights and the inventory for this product line were sold to Sanyo Chemical Industries, Ltd. in February 2000. Because of previously booked inventory reserves, their was no cost of sales booked for any product sales in 1999. Research and development expenses for the year ended December 31, 1999 were $2,812,000, compared to $4,138,000 in 1998, a decrease of 32%. This decrease is due primarily to a downsizing of the Company's staff and operational expenses in June 1999, but also in part to the completion of preclinical testing and regulatory consulting costs associated with the filing of the Company's Investigational Device Exemption (IDE) with the U.S. Food and Drug Administration to begin human trials for the treatment of female stress urinary incontinence. These latter savings are temporary and will be replaced and increased by the cost of conducting 25 human clinical testing which began in December 1999. Other related expenses include expanded manufacturing capacity and manufacturing process validation, quality assurance efforts, and outside testing services. The Company expects its research and development expenses will increase in the future, to the extent additional capital is obtained, due to the expansion of product-directed development efforts including human clinical testing, increased manufacturing requirements, and increased use of outside testing services. Selling, general and administrative expenses for the year ended December 31, 1999 were $1,554,000, as compared to $1,727,000 for 1998, a decrease of 10%. This decrease was due to the Corporate downsizing in June 1999, and generally tighter cost management following that period. To the extent possible, the Company continues to concentrate on controlling costs reflected in reduced travel, office supplies, and non-regulatory consulting costs. The Company expects its selling, general and administrative expenses will increase in the future, to the extent additional capital is obtained, consistent with supporting its research and development efforts and as business development, patent, legal and investor relations activities require. For the year ended December 31, 1999, the Company recorded a net loss applicable to common shareholders of $4,535,000, or $.36 per share, as compared to $9,183,000, or $.88 per share for 1998, and $4,887,000, or $.52 per share for 1997. The difference between 1999 and previous year end results is due primarily to a non-cash "imputed dividend" expense of $3,266,000 that resulted from the sale and issuance of the Company's Series E Convertible Preferred Stock during 1998. The 1999, 1998 and 1997 losses and per share calculations also include $278,000, $278,000, and $433,000, respectively, of undeclared and/or paid dividends from the Company's Preferred Stock. The Company expects to incur increasing operating losses for the next several years, to the extent additional capital is obtained, based upon the successful continuation of the tissue augmentation program and product registration, and the tissue adhesives program, as well as expected increases in the Company's other research and development, manufacturing and business development activities. The Company's results depend in part on its ability to establish strategic alliances and generate contract revenues, increased research, development and manufacturing efforts, preclinical and clinical product testing and commercialization expenditures, expenses incurred for regulatory compliance and patent prosecution, and other factors. The Company's results will also fluctuate from period to period due to timing differences. To date, the Company believes that inflation and changing prices have not had a material impact on its continuing operations. Based upon the Company's earnings history, a valuation allowance of $12,867,000 is required to reduce the Company's net deferred tax assets to the amount realizable. 26 LIQUIDITY AND CAPITAL RESOURCES As of December 31, 1999, the Company had cash, cash equivalents and short-term investments totaling $156,000, as compared to $1,383,000 at December 31, 1998. As of December 31, 1999, the Company had working capital of $(458,000), compared to $600,000 at December 31, 1998. In April and May of 1999, the Company realized approximately $924,000 from the exercise of common stock warrants and in August and September 1999, approximately $2,075,000, net of expenses, from the private placement of the Company's Series G Convertible Preferred Stock and warrants. Subsequently, the Company received in January and February 2000 approximately $1,350,000 (net of costs) in cash and receivables from licensing and R&D agreements with Femcare, Ltd. for the European and Australian marketing rights to the stress urinary incontinence bulking product, with Perkin-Elmer for a research and development project and commercialization option, and with Sanyo Chemical Industries, Ltd. for the rights to the in vitro cell culture business. Also in February 2000, the Company received approximately $2.1 million from the exercise of common stock warrants originally granted as part of the sale of Series G Convertible Preferred Stock and warrants. The Company had long-term capital lease obligations of $25,000 as of December 31, 1999, compared to an obligation of $106,000 as of December 31, 1998. For the year ended December 31, 1999, the Company's cash expenditures for capital equipment and leasehold improvements totaled $26,000, compared with $197,000 for the same period last year. The Company anticipates that these expenditures will be increased in 2000 as laboratory renovations and additional equipment required to meet GLP manufacturing regulations and production capacity as the Company scales up its manufacturing operations to meet product requirements for clinical testing. The Company anticipates a significant increase in manufacturing-related equipment and leasehold improvement expenditures in 2001 due to an increase in need for products for clinical testing, and anticipated need for additional product manufacturing for European product sales. The Company may enter into additional capital equipment lease arrangements in the future if available at appropriate rates and terms. The Company believes its existing available cash, cash equivalents and short-term investments as of February 29, 2000 would be sufficient to meet its anticipated capital requirements through December 2000. Substantial additional capital resources will be required to fund continuing expenditures related to the Company's research, development, manufacturing and business development activities. The Company believes there may be a number of alternatives available to meet the continuing capital requirements of its operations, such as collaborative agreements and public or private financings. During 2000, the Company expects that the possible exercise of other existing warrants could result in additional funds for continuing operations. Further, the Company is currently in preliminary discussions with a number of potential collaborative partners and, based on the results of various materials evaluations, revenues in the form of license fees, milestone payments or research and development reimbursements could be generated. There can be no assurance that any of these fundings will be consummated in the necessary timeframes needed for continuing operations or on terms favorable to the Company. If adequate funds are not available, the Company will be required to significantly curtail its 27 operating plans and may have to sell or license out significant portions of the Company's technology or potential products. YEAR 2000 COMPLIANCE The Company's plan to modify its information technology in recognition of the year 2000 issue has been successfully implemented. The "Year 2000" issue concerned potential exposure related to the interruption of business practice and financial misinformation resulting from the application of computer programs which have been written using two digits, rather than four, to define the applicable year of business transactions. Based on its assessments to date, the Company does not expect to incur any further significant costs, or anticipate any significant problems or uncertainties associated with remaining Year 2000 compliant. 28 ITEM 7. FINANCIAL STATEMENTS Filed herewith are the following Audited Financial Statements for Protein Polymer Technologies, Inc. (a Development Stage Company):
Description Page ----------- ---- Report of Ernst & Young LLP, Independent Auditors............................. F-2 Balance Sheets at December 31, 1999 and 1998.................................. F-3 Statements of Operations for the years ended December 31, 1999, 1998 and 1997 and the period July 6, 1988 (inception) to December 31, 1999...... F-4 Statements of Stockholders Equity for the period July 6, 1988 (inception) to December 31, 1999....................................................... F-5 Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 and the period July 6, 1988 (inception) to December 31, 1999...... F-7 Notes to Financial Statements................................................. F-9
F-1 Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Stockholders Protein Polymer Technologies, Inc. We have audited the accompanying balance sheets of Protein Polymer Technologies, Inc. (a Development Stage Company) as of December 31, 1999 and 1998, and the related statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999 and for the period July 6, 1988 (inception) to December 31, 1999. 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. 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, the financial statements referred to above present fairly, in all material respects, the financial position of Protein Polymer Technologies, Inc. (a Development Stage Company) at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 and for the period July 6, 1988 (inception) to December 31, 1999 in conformity with accounting principles generally accepted in the United States. ERNST & YOUNG LLP San Diego, California February 29, 2000 F-2 Protein Polymer Technologies, Inc. (A Development Stage Company) Balance Sheets
DECEMBER 31, 1999 1998 -------------------------------- ASSETS Current assets: Cash and cash equivalents $ 155,692 $ 1,383,148 Other current assets 49,266 66,459 ------------------------------- Total current assets 204,958 1,449,607 Deposits 36,177 36,177 Notes receivable from officers 140,000 141,000 Equipment and leasehold improvements, net 360,005 598,447 ------------------------------- $ 741,140 $ 2,225,231 =============================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 385,932 $ 515,413 Accrued employee benefits 84,335 167,849 Other accrued expenses 17,118 21,574 Current portion capital lease obligations 79,593 84,518 Deferred rent 95,973 60,668 ------------------------------- Total current liabilities 662,951 850,022 Long-term portion capital lease obligations 25,088 105,548 Stockholders' equity: Convertible Preferred Stock, $.01 par value, 188,917 shares authorized, 91,065 and 79,202 shares issued and outstanding at December 31, 1999 and 1998, respectively - liquidation preference of $9,106,500 and $7,480,200 at December 31, 1999 and December 31, 1998, respectively 8,761,072 7,600,226 Common stock, $.01 par value, 25,000,000 shares authorized, 13,443,510 and 10,827,240 shares issued and outstanding at December 31, 1999 and 1998, respectively 134,447 108,274 Additional paid-in capital 28,403,077 26,549,125 Deficit accumulated during development stage (37,245,495) (32,987,964) ------------------------------- Total stockholders' equity 53,101 1,269,661 ------------------------------- $ 741,140 $ 2,225,231 ===============================
See accompanying notes. F-3 Protein Polymer Technologies, Inc. (A Development Stage Company) Statements of Operations
FOR THE PERIOD JULY 6, 1988 (INCEPTION) TO YEARS ENDED DECEMBER 31, DECEMBER 31, 1999 1998 1997 1999 --------------------------------------------------------------- Revenues: Contract revenue $ 2,320 $ 50,000 $ 459,510 $ 4,357,285 Interest income, net 39,343 134,978 186,531 1,120,272 Product and other income 54,304 70,846 76,917 684,317 -------------------------------------------------------------- Total revenues 95,967 255,824 722,958 6,161,874 Expenses: Research and development 2,799,147 4,167,144 3,188,398 24,754,081 Selling, general and administrative 1,554,351 1,726,883 1,988,493 14,704,903 -------------------------------------------------------------- Total expenses 4,353,498 5,894,027 5,176,891 39,458,984 -------------------------------------------------------------- Net loss (4,257,531) (5,638,203) (4,453,933) (33,297,110) Undeclared and/or paid dividends on preferred stock 277,639 3,544,323 432,682 5,239,654 -------------------------------------------------------------- Net loss applicable to common shareholders $ (4,535,170) $ (9,182,526) $ (4,886,615) $ (38,536,764) ============================================================== Net loss per common share - basic and diluted $ (.36) $ (.88) $ (.52) ============================================= Shares used in computing net loss per common share - basic and diluted 12,570,987 10,484,277 9,487,165 =============================================
See accompanying notes. F-4 Protein Polymer Technologies, Inc. (A Development Stage Company) Statements of Stockholders' Equity For the period July 6, 1988 (inception) to December 31, 1999
COMMON STOCK PREFERRED STOCK SHARES AMOUNT SHARES AMOUNT ---------------------------------------------------- Issuance of common stock at $.01 per share for cash 400,000 $ 4,000 -- $ -- Issuance of common stock at $.62 per share for cash and receivables 1,116,245 11,162 -- -- Receivables from sale of common stock -- -- -- -- Net loss -- -- -- -- ---------------------------------------------------- Balance at December 31, 1988 1,516,245 15,162 -- -- Repayment of receivables from sale of common stock -- -- -- -- Issuance of common stock at $.62 per share 359,136 3,594 -- -- Net loss -- -- -- -- ---------------------------------------------------- Balance at December 31, 1989 1,875,381 18,756 -- -- Exercise of common stock options at $.01 per share for cash 60,000 600 -- -- Issuance of common stock at $.68 per share for cash and compensation 5,000 50 -- -- Common stock repurchased at $.01 per share for cash (25,000) (250) -- -- Common stock issued at $.68 per share for cash and compensation 25,000 250 -- -- Net loss -- -- -- -- ---------------------------------------------------- Balance at December 31, 1990 1,940,381 19,406 -- -- Exercise of common stock options at $.68 per share for cash 5,000 50 -- -- Exercise of warrants for common stock 483,755 4,837 -- -- Conversion of notes payable to common stock 339,230 3,391 -- -- Conversion of notes payable to preferred stock -- -- 278,326 2,783 Issuance of preferred stock at $2.00 per share for cash, net of issuance costs -- -- 400,000 4,000 Issuance of warrants for cash -- -- -- -- Issuance of warrants in connection with convertible notes payable -- -- -- -- Net loss -- -- -- -- --------------------------------------------------- Balance at December 31, 1991 2,768,366 27,684 678,326 6,783 Initial public offering at $6.50 per unit, net of issuance costs 1,667,500 16,676 -- -- Conversion of Series B preferred stock into common stock in connection with initial public offering 678,326 6,783 (6,783) -- Conversion of Series A preferred stock into common stock at 1.13342 per share 713,733 7,137 -- -- Net loss -- -- -- -- ---------------------------------------------------- Balance at December 31, 1992 5,827,925 58,280 -- -- Exercise of common stock options at $.68 per share 3,000 30 -- -- Net loss -- -- -- -- ---------------------------------------------------- Balance at December 31, 1993 5,830,925 58,310 -- -- Issuance of preferred stock at $100 per share for cash, net of issuance costs -- -- 21,600 2,073,925 Net loss -- -- -- -- ---------------------------------------------------- Balance at December 31, 1994 5,830,925 58,310 21,600 2,073,925 Issuance of preferred stock at $100 per share for cash and cancellation of bridge loan, net of issuance costs -- -- 25,000 2,432,150 Series C dividends paid in Series D preferred stock -- -- 2,539 253,875 Interest paid in Series D preferred stock -- -- 48 4,795 Exercise of common stock options at $.53 per share 2,000 20 -- -- Net loss -- -- -- -- ---------------------------------------------------- Balance at December 31, 1995 5,832,925 58,330 49,187 4,764,745 Exercise of common stock warrants at $1.25 per share 932,960 9,330 -- -- Exercise of common stock warrants at $2.50 per share, net of issuance costs 322,663 3,226 -- -- Exercise of common stock warrants at $1.00 per share 25,000 250 -- -- Exercise of common stock options 136,000 1,360 -- -- Stock repurchases (16,320) (163) -- -- Net loss -- -- -- -- ---------------------------------------------------- Balance at December 31, 1996 7,233,228 72,333 49,187 4,764,745 Issuance of common stock at $2.50 per share, net of issuance costs 1,904,000 19,040 -- -- Exercise of common stock options 28,000 280 -- -- Issuance of common stock under stock purchase plan 15,036 151 -- -- Conversion of Series D preferred stock into common stock 1,032,537 10,325 (20,973) (2,097,342) Series D dividends paid in common stock 207,921 2,079 -- -- Net loss -- -- -- -- ---------------------------------------------------- Balance at December 31, 1997 10,420,722 $ 104,208 28,214 $ 2,667,403 Issuance of common stock under stock purchase plan 36,715 368 -- -- Exercise of common stock options 12,000 120 -- -- Issuance of common stock at $1.60 per share, net of issuance costs 23,439 234 -- -- Issuance of Series E preferred stock, net of issuance costs -- -- 54,438 5,277,813 Grant of stock to finder 64,000 640 -- -- Conversion of Series D and E preferred stock into common stock 270,364 2,704 (3,450) (344,990) Net Loss -- -- -- -- ---------------------------------------------------- Balance at December 31, 1998 10,827,240 $ 108,274 79,202 $ 7,600,226 Issuance of common stock under stock purchase plan 19,429 194 -- -- Issuance of common stock and warrants for services rendered and debt issued 16,941 180 -- -- Issuance of Series G preferred stock, net of issuance costs -- -- 21,000 2,074,596 Conversion of Series E preferred stock into common stock 731,000 7,310 (9,138) (913,750) Exercise of common stock and Series E warrants at $.50 per share 1,848,900 18,489 -- -- Net Loss -- -- -- -- ---------------------------------------------------- Balance at December 31, 1999 13,443,510 $ 134,447 91,064 $ 8,761,072 ====================================================
F-5 Protein Polymer Technologies, Inc. (A Development Stage Company) Statements of Stockholders' Equity For the period July 6, 1988 (inception) to December 31, 1999
DEFICIT ACCUMULATED DURING RECEIVABLES TOTAL ADDITIONAL DEVELOPMENT FROM STOCKHOLDERS PAID-IN CAPITAL STAGE STOCK EQUITY ----------------------------------------------------- Issuance of common stock at $.01 per share for cash $ -- $ -- $ -- $ 4,000 Issuance of common stock at $.62 per share for cash and receivables 681,838 -- -- 693,000 Receivables from sale of common stock -- -- (86,000) (86,000) Net loss -- (322,702) -- (322,702) ---------------------------------------------------- Balance at December 31, 1988 681,838 (322,702) (86,000) 288,298 Repayment of receivables from sale of common stock -- -- 86,000 86,000 Issuance of common stock at $.62 per share 219,358 -- -- 222,952 Net loss -- (925,080) -- (925,080) ---------------------------------------------------- Balance at December 31, 1989 901,196 (1,247,782) -- (327,830) Exercise of common stock options at $.01 per share for cash -- -- -- 600 Issuance of common stock at $.68 per share for cash and compensation 3,350 -- -- 3,400 Common stock repurchased at $.01 per share for cash -- -- -- (250) Common stock issued at $.68 per share for cash and compensation 16,750 -- -- 17,000 Net loss -- (1,501,171) -- (1,501,171) ---------------------------------------------------- Balance at December 31, 1990 921,296 (2,748,953) -- (1,808,251) Exercise of common stock options at $.68 per share for cash 3,350 -- -- 3,400 Exercise of warrants for common stock 295,493 -- -- 300,330 Conversion of notes payable to common stock 508,414 -- -- 511,805 Conversion of notes payable to preferred stock 553,869 -- -- 556,652 Issuance of preferred stock at $2.00 per share for cash, net of issuance costs 703,475 -- -- 707,475 Issuance of warrants for cash 3,000 -- -- 3,000 Issuance of warrants in connection with convertible notes payable 28,000 -- -- 28,000 Net loss -- (1,143,119) -- (1,143,119) ---------------------------------------------------- Balance at December 31, 1991 3,016,897 (3,892,072) -- (840,708) Initial public offering at $6.50 per unit, net of issuance costs 8,911,024 -- -- 8,927,700 Conversion of Series B preferred stock into common stock in connection with initial public offering -- -- -- -- Conversion of Series A preferred stock into common stock at 1.13342 per share 1,717,065 -- -- 1,724,202 Net loss -- (3,481,659) -- (3,481,659) ---------------------------------------------------- Balance at December 31, 1992 13,644,986 (7,373,731) -- 6,329,535 Exercise of common stock options at $.68 per share 2,010 -- -- 2,040 Net loss -- (3,245,436) -- (3,245,436) ---------------------------------------------------- Balance at December 31, 1993 13,646,996 (10,619,167) -- 3,086,139 Issuance of preferred stock at $100 per share for cash, net of issuance costs -- -- -- 2,073,925 Net loss -- (3,245,359) -- (3,245,359) ---------------------------------------------------- Balance at December 31, 1994 13,646,996 (13,864,526) -- 1,914,705 Issuance of preferred stock at $100 per share for cash and cancellation of bridge loan, net of issuance costs -- -- -- 2,432,150 Series C dividends paid in Series D preferred stock -- (253,875) -- -- Interest paid in Series D preferred stock -- -- -- 4,795 Exercise of common stock options at $.53 per share 1,040 -- -- 1,060 Net loss -- (2,224,404) -- (2,224,404) ---------------------------------------------------- Balance at December 31, 1995 13,648,036 (16,342,805) -- 2,128,306 Exercise of common stock warrants at $1.25 per share $ 1,156,870 $ -- $ -- $ 1,166,200 Exercise of common stock warrants at $2.50 per share, net of issuance costs 779,413 -- -- 782,639 Exercise of common stock warrants at $1.00 per share 24,750 -- -- 25,000 Exercise of common stock options 91,650 -- -- 93,010 Stock repurchases (81,437) -- -- (81,600) Net loss -- (2,864,432) -- (2,864,432) ---------------------------------------------------- Balance at December 31, 1996 15,619,282 (19,207,237) -- 1,249,123 Issuance of common stock at $2.50 per share, net of issuance costs 4,601,322 -- -- 4,620,362 Exercise of common stock options 20,200 -- -- 20,480 Issuance of common stock under stock purchase plan 29,950 -- -- 30,101 Conversion of Series D preferred stock into common stock 2,087,017 -- -- -- Series D dividends paid in common stock 420,262 (422,341) -- -- Net loss -- (4,453,933) -- (4,453,933) ---------------------------------------------------- Balance at December 31, 1997 $ 22,778,033 $(24,083,511) $ -- $ 1,466,133 Issuance of common stock under stock purchase plan 38,010 -- -- 38,378 Exercise of common stock options 7,920 -- -- 8,040 Issuance of common stock at $1.60 per share, net of issuance costs 37,266 -- -- 37,500 Issuance of Series E preferred stock, net of issuance costs 3,266,250 (3,266,250) -- 5,277,813 Grant of stock to finder 79,360 -- -- 80,000 Conversion of Series D and E preferred stock into common stock 342,286 -- -- -- Net Loss -- (5,638,203) -- (5,638,203) ---------------------------------------------------- Balance at December 31, 1998 $ 26,549,125 $(32,987,964) $ -- $ 1,269,661 Issuance of common stock under stock purchase plan 15,111 -- -- 15,305 Issuance of common stock and warrants for services rendered and debt issued 26,440 -- -- 26,620 Issuance of Series G preferred stock, net of issuance costs -- -- -- 2,074,596 Conversion of Series E preferred stock into common stock 906,440 -- -- -- Exercise of common stock and Series E warrants at $.50 per share 905,961 -- -- 924,450 Net Loss -- (4,257,531) -- (4,257,531) ---------------------------------------------------- Balance at December 31, 1999 $ 28,403,077 $(37,245,495) $ -- $ 53,101 ====================================================
See accompanying notes F-6 Protein Polymer Technologies, Inc. (A Development Stage Company) Statements of Cash Flows
FOR THE PERIOD JULY 6, 1988 (INCEPTION) TO YEARS ENDED DECEMBER 31, DECEMBER 31, 1999 1998 1997 1999 ----------------------------------------------------------------------------- OPERATING ACTIVITIES Net loss $ (4,257,531) $ (5,638,203) $ (4,453,933) $ (33,303,029) Adjustments to reconcile net loss to net cash used for operating activities: Stock and warrants issued for services - - - - rendered and debt interest 26,620 80,000 - 131,515 Depreciation and amortization 264,541 368,577 184,300 1,892,838 Write-off of purchased technology - - - 503,500 Changes in assets and liabilities: Deposits - 440 (14,360) (36,177) Notes receivable from officers 1,000 12,000 (153,000) (140,000) Other current assets 17,193 22,409 (11,613) (49,266) Accounts payable (129,481) 91,819 172,273 385,932 Accrued employee benefits (83,514) 16,018 34,219 84,335 Other accrued expenses (4,456) (19,577) (12,374) 17,118 Deferred revenue - - (75,000) - Deferred rent 35,305 60,668 - 95,973 ----------------------------------------------------------------------------- Net cash used for operating activities (4,130,323) (5,005,849) (4,329,488) (30,417,261) INVESTING ACTIVITIES Purchase of technology - - - (570,000) Purchase of equipment and improvements (26,099) (197,460) (295,778) (1,810,814) Purchases of short-term investments - - (4,226,729) (16,161,667) Sales of short-term investments - 974,817 4,244,954 16,161,667 ----------------------------------------------------------------------------- Net cash provided by (used for) investing activities (26,099) 777,357 (277,553) (2,380,814) FINANCING ACTIVITIES Net proceeds from issuance of warrants and sale of common stock 939,755 83,918 4,670,943 17,537,666 Net proceeds from issuance of preferred stock 2,074,596 5,277,813 - 14,290,160 Net proceeds from convertible notes and detachable warrants - - - 1,068,457 Payments on capital lease obligations (85,385) (75,112) (23,594) (184,089) Payment on note payable (150,000) - - (242,750) Proceeds from note payable 150,000 - - 484,323 Deferred offering costs - - 17,356 - ----------------------------------------------------------------------------- Net cash provided by financing activities 2,928,966 5,286,619 4,664,705 32,953,767 Net increase (decrease) in cash and cash equivalents (1,227,456) 1,058,127 57,664 155,692 Cash and cash equivalents at beginning of the period 1,383,148 325,021 267,357 - ----------------------------------------------------------------------------- Cash and cash equivalents at end of the period $ 155,692 $ 1,383,148 $ 325,021 $ 155,692 =============================================================================
F-7 Protein Polymer Technologies, Inc. (A Development Stage Company) Statements of Cash Flows
JULY 6, 1988 (INCEPTION) TO YEARS ENDED DECEMBER 31, DECEMBER 31, 1999 1998 1997 1999 ----------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Equipment purchased by capital leases $ - $ - $ 288,722 $ 288,772 Interest paid 19,983 26,692 7,763 117,911 Imputed dividend on Series E Stock - 3,266,250 - 3,266,250 Conversion of Series D preferred stock to common stock - 44,990 2,097,342 2,142,332 Conversion of Series E preferred stock to - - - - common stock 913,750 300,000 - 1,213,750 Series D stock issued for Series C Stock - - - 2,073,925 Series C dividends paid with Series D stock - - - 253,875 Series D dividends paid with common stock - - 422,341 422,341
See accompanying notes. F-8 Protein Polymer Technologies, Inc. (A Development Stage Company) Notes to Financial Statements December 31, 1999 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION AND BUSINESS ACTIVITIES Protein Polymer Technologies, Inc. (the "Company") was established to design, produce and market genetically engineered protein polymers for a variety of biomedical and specialty materials applications. The Company was incorporated in Delaware on July 6, 1988. For the period from its inception to date, the Company has been a development stage enterprise, and accordingly, the Company's operations have been directed primarily toward developing business strategies, raising capital, research and development activities, conducting clinical testing of its product candidates, exploring marketing channels and recruiting personnel. The Company operates in one segment. LIQUIDITY As of December 31, 1999, the Company had cash, cash equivalents and short-term investments totaling $156,000. In January and February 2000 the Company received approximately $1,350,000 in cash and receivables from licensing and R&D agreements with Femcare, Ltd. for the European and Australian marketing rights to the stress urinary incontinence bulking product, with Perkin-Elmer for a research and development project and commercialization option, and with Sanyo Chemical Industries, Ltd. for the marketing rights, manufacturing technology, and inventory for the in vitro cell culture business. Also in February 2000, the Company received approximately $2 million net of costs from the exercise of common stock warrants originally granted as part of the sale of Series G Convertible Preferred Stock. The Company believes its available cash, cash equivalents and short-term investments would be sufficient to meet its anticipated capital requirements through January 2001. Prior to the commercialization of its products, substantial additional capital resources will be required to fund continuing operations related to the Company's research, development, manufacturing, clinical testing, and business development activities. The Company believes there may be a number of alternatives available to meet the continuing capital requirements of its operations, such as collaborative agreements and public or private financings. During 2000, the Company expects that the possible exercise of existing warrants could result in additional funds for continuing operations. Further, the Company is currently in discussions with a number of potential collaborative partners and, based on the results of various materials evaluations, revenues in the form of license fees, milestone payments or research and development F-9 Protein Polymer Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (continued) December 31, 1999 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) reimbursements could be generated. There can be no assurance that any of these fundings will be consummated in the necessary time frames needed for continuing operations or on terms favorable to the Company. If adequate funds in the future are not available, the Company will be required to significantly curtail its operating plans and may have to sell or license out significant portions of the Company's technology or potential products. CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS Cash and cash equivalents consist of cash and highly liquid investments which include debt securities with remaining maturities of three months or less when acquired. Short-term investments consist primarily of commercial paper, notes and short-term U.S. Government securities with original maturities beyond three months and are stated at estimated fair value. Similar items with original maturities of three months or less are considered cash equivalents. The Company has established guidelines relative to diversification and maturities that maintain safety and liquidity. The Company has not experienced any losses on its short-term investments. EQUIPMENT AND LEASEHOLD IMPROVEMENTS Equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization. Equipment is depreciated over the estimated useful life of the asset, typically one to seven years, using the straight-line method. Leasehold improvements are amortized over the shorter of the lease term or life of the asset. Equipment and leasehold improvements consist of the following: DECEMBER 31, 1999 1998 -------------------------- Laboratory equipment $ 1,626,822 $ 1,600,723 Office equipment 175,128 175,128 Leasehold improvements 297,635 297,635 -------------------------- 2,099,585 2,073,486 Less accumulated depreciation and amortization (1,739,580) (1,475,039 -------------------------- $ 360,005 $ 598,447 ========================== F-10 Protein Polymer Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (continued) December 31, 1999 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) RESEARCH AND DEVELOPMENT REVENUES AND EXPENSES License fees and research and development contract revenues are recorded as earned based on the performance requirements of the contracts. If the research and development activities are not successful, the Company is not obligated to refund payments previously received. Milestone payments are recorded as revenue when received as they have not been refundable and the Company has no future performance obligations. Payments received in advance of amounts earned are recorded as deferred revenue. Research and development costs are expensed as incurred. PRODUCT REVENUE RECOGNITION Sales are recognized upon shipment of products to customers. IMPAIRMENT OF LONG-LIVED ASSETS In accordance with Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, if indicators of impairment exist, the Company assesses the recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through undiscounted future operating cash flows. If impairment is indicated, the Company will value the asset at fair value. While the Company's current and historical operating and cash flow losses are indicators of impairment, the Company believes the future cash flows to be received from the long-lived assets will exceed the assets' carrying value, and accordingly the Company has not recognized any impairment losses through December 31, 1999. STOCK OPTIONS As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, ("APB 25") and related Interpretations in accounting for its employee stock options. Under APB 25, if the exercise price of the Company's employee stock options equals or exceeds the fair value of the underlying stock on the date of grant, no compensation expense is recognized. Options issued to non-employees are recorded at their fair value and recognized over the related service period. The effects of using the fair value accounting method, as described in SFAS Statement No. 123 are described below in Note 2. F-11 Protein Polymer Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (continued) December 31, 1999 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (continued) NET LOSS PER COMMON SHARE The Company reports its earnings per share in accordance with SFAS No. 128, Earnings per Share, which requires the presentation of both basic and diluted earnings per share on the statements of operations. Basic earnings per share is calculated based upon weighted-average number of outstanding common shares for the period. Diluted earnings per share is calculated based upon weighted-average number of outstanding common shares, plus the effect of dilutive stock options. The net loss per common share for the years ended December 31, 1999, 1998 and 1997 is based on the weighted average number of shares of common stock outstanding during the periods. Potentially dilutive securities including options, warrants and convertible preferred stock have not been included in the calculation of the net loss per common share as their effect is antidilutive. Consequently, there is no difference between the basic and dilutive net loss per common share for any of the periods presented and none of the prior periods were required to be restated. For purposes of this calculation, net loss in 1999, 1998 and 1997 has been adjusted for accumulated and/or paid dividends on the Preferred Stock. COMPREHENSIVE INCOME SFAS No. 130, Reporting Comprehensive Income, requires that the Company disclose, either in the income statement or in a separate financial statement, net income as currently reported and other components of comprehensive income. Comprehensive income is defined as the change in stockholders' equity during a period resulting from transactions and other events and circumstances from non-owner sources. For the years ended December 31, 1999, 1998 and 1997 the Company did not have any components of comprehensive income as defined in SFAS No. 130. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the amount of revenue and expense reported during the period. Actual results could differ from those estimates. F-12 Protein Polymer Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (continued) December 31, 1999 2. STOCKHOLDERS' EQUITY CONVERTIBLE PREFERRED STOCK On August 16, 1999, the Company received $1,775,000 for 17,750 shares of Series G Preferred Stock from several institutional and accredited individual investors following the 10 day stockholder notification period required by the NASD prior to the sale. On September 15, 1999, the Company received an additional $325,000 for 3,250 shares of Series G Preferred Stock, for total proceeds of $2,100,000. Each share of Series G Convertible Preferred Stock was priced at $100 per share. Each share can be converted at any time by the holder into common stock at a price of $0.50 per share, subject to certain antidilution adjustments. Each share of Preferred Stock also receives a common stock warrant, exercisable for 12 months, that allows the holder to acquire 200 shares of PPTI common stock at a price of $0.50 per share. Between April 1 and April 15, 1999, the Company received approximately $508,000 from the exercise of redeemable, publicly traded, warrants to purchase common stock originally issued as part of PPTI's initial public offering. Following the close of business on April 15, the remaining unexercised redeemable, publicly traded, warrants expired. On May 12, 1999, the Company received approximately $416,000 from the exercise of warrants to purchase common stock issued in conjunction with the private placement of the Company's Series E Convertible Preferred Stock. In April and May of 1998, the Company raised approximately $5.4 million from the sale of 54,437 shares of the Company's Series E Convertible Preferred Stock ("Series E Stock") priced at $100 per share, with warrants to purchase an aggregate of 3,266,250 shares of common stock to a small group of institutional and accredited investors. In connection with this transaction, the Company recorded a non-cash "imputed dividend" expense of $3,266,250 in order to account for the difference between the fair market value of the common stock and the conversion price of the preferred stock into common stock. Each share of Series E Stock is convertible at any time at the election of the holder into 80 shares of common stock at a conversion price of $1.25 per share, subject to certain antidilution adjustments. This registration became effective on October 3, 1998. As of December 31, 1999, 11,650 shares of Series E Stock had been converted into 932,000 shares of the Company's common stock. F-13 Protein Polymer Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (continued) December 31, 1999 2. STOCKHOLDERS' EQUITY (continued) Each share of Series E Stock received two common stock warrants. One warrant is exercisable at any time for 40 shares of common stock at an exercise price of $2.50 per share, and expires approximately 18 months after the close of the offering; the other warrant is exercisable at any time for 20 shares of common stock at an exercise price of $5.00 per share, and expires approximately 36 months after the close of the offering. In addition, an 18 month warrant to acquire 200,000 common shares exercisable at $2.50 per share and a 36 month warrant to acquire 100,000 common shares exercisable at $5.00 per share has been issued as a finder and document review fee paid to a lead investor. An 18 month warrant to acquire 32,000 common shares exercisable at $2.50 per share, a 24 month warrant to acquire 16,000 common shares exercisable at $5.00 per share, and 5 year warrants to acquire an aggregate of 25,200 common shares exercisable at $2.50 per share were issued to certain persons for service as finders in relation to the private placement. In connection with the above private placement, the Company issued 26,420 shares of its Series F Convertible Preferred Stock ("Series F Stock") in exchange for the same number of shares of outstanding Series D Convertible Preferred Stock ("Series D Stock"). Each share of Series D and F Stock earns a cumulative dividend at the annual rate of $10 per share, payable if and when declared by the Company's Board of Directors, in the form of cash, common stock or any combination thereof. The Series D and F Stock is convertible into common stock after two years from the date of issuance at the holder's option. The conversion price at the time of conversion is the lesser of $3.75 or the market price. The Series D and F Stock is redeemable at the Company's option after four years from the date of issuance. Automatic conversion of all of the Series D and F Stock will occur if: (a) the Company completes a public offering of common stock at a price of $2.50 or higher; or (b) the holders of a majority thereof elect to convert. The Company has the option to demand conversion of the Series D and F Stock if the average market price of its common stock equals or exceeds $5.00 per share over a period of twenty business days. The Series D and F Stock have preference in liquidation of $100 per share plus accumulated dividends. The Series E Stock is convertible, at the option of the holder, into shares of the Company's common stock, subject to anti-dilution adjustments, and has a preference in liquidation of $100 per share, but only after any preference is paid or declared set apart for the Series D Stock. Holders of the Series E Stock are entitled to receive dividends when and if declared by the Board of Directors; however, no such dividends will be declared or paid on the Series E Stock until the preferential cumulative dividends on the Series D and F Stock have been fully F-14 Protein Polymer Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (continued) December 31, 1999 2. STOCKHOLDERS' EQUITY (continued) paid or declared and set apart. Automatic conversion of all Series E Stock will occur if: (a) the Company completes a public offering of common stock at a price of $7.50 or higher; or (b) the holders of more than 75% of outstanding Series E Stock elect to convert. The Series D, E and F Preferred Stock has been designated as non-voting stock. STOCK OPTION PLANS In September 1996 the Company established the Protein Polymer Technologies, Inc., Employee Stock Purchase Plan ("Plan"). The Plan commenced January 2, 1997, and allows for offering periods of up to two years with quarterly purchase dates occurring the last business day of each quarter. The purchase price per share is generally calculated at 85% of the lower of the fair market value on an eligible employee's entry date or the quarterly purchase date. The maximum number of shares available for issuance under the Plan is 500,000; an eligible employee may purchase up to 5,000 shares per quarter. The Plan Administrator consists of a committee of at least two non-employee directors of the Company. The Board may modify the Plan at any time. During 1999, a total of 19,429 shares were purchased under the Plan at prices ranging from $0.79 to $1.06. The value of shares issued under the Plan as calculated in accordance with Statement 123 is not significant and is not included in the following pro forma information. In June 1996, the Company adopted the 1996 Non-Employee Directors Stock Option Plan ("1996 Plan"), which provides for the granting of nonqualified options to purchase up to 250,000 shares of common stock to directors of the Company. Such grants of options to purchase 5,000 shares of common stock are awarded automatically on the first business day of June during each calendar year to every Participating Director then in office, subject to certain adjustments. No Participating Director is eligible to receive more than one grant per year. The purchase price of each option is set at the fair market value of the common stock on the date of grant. Each option has a duration of ten years, and is vested and exercisable six months after the grant date. The Board (or a designated committee of the Board) administers the 1996 Plan. At December 31, 1999, 130,000 options to purchase have been granted under the 1996 Plan. The Company adopted the 1992 Stock Option Plan which provides for the issuance of incentive and non-statutory stock options for the purchase of up to 1,500,000 shares of common stock to its key employees and certain other individuals. The options will expire F-15 Protein Polymer Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (continued) December 31, 1999 2. STOCKHOLDERS' EQUITY (continued) ten years from their respective dates of grant. Options become exercisable ratably over periods of up to five years from the dates of grant. At December 31, 1999, options to purchase 527,000 shares of common stock were exercisable, and 212,000 shares were available for future grant. The Company adopted the 1989 Stock Option Plan which provided for the issuance of incentive and non-statutory stock options for the purchase of up to 500,000 shares of common stock to key employees and certain other individuals. The 1989 Stock Option Plan expired as of March 17, 1999. Options granted in the plan became exercisable ratably over periods of up to five years from the date of grant. At December 31, 1999, options for 365,000 shares were exercisable. Since inception, the Company has granted non-qualified options outside the option plans to employees, directors and consultants of the Company. At December 31, 1999, options for 130,000 shares were exercisable. The following table summarizes the Company's stock option activity:
Years ended December 31, ---------------------------------------------------------------------------- 1999 1998 1997 ---------------------- -------------------------- --------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ------- ------- ------- ------- ------- ------- Outstanding - beginning of year 1,765,000 $1.51 1,540,600 $1.52 1,393,600 $1.38 Granted 548,500 $0.44 568,000 $0.99 190,000 $2.34 Exercised - - (12,000) ($0.67) (28,000) ($0.73) Forfeited/Expired (315,500) ($1.40) (331,600) ($0.83) (15,000) ($0.60) --------- ----- --------- ----- ------- ----- Outstanding - end of year 1,998,000 $1.23 1,765,000 $1.51 1,540,600 $1.52 ========= ===== ========= ===== ========= ===== Exercisable - end of year 1,152,000 $1.37 1,093,600 $1.36 916,600 $1.56 ========= ===== ========= ===== ========= =====
F-16 Protein Polymer Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (continued) December 31, 1999 2. STOCKHOLDERS' EQUITY (continued) The exercise prices for options outstanding as of December 31, 1999 range from $0.22 to $0.84. The weighted average remaining contractual life of these options is approximately 7.20 years. STATEMENT 123 PRO FORMA INFORMATION Pro forma information regarding net loss is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method prescribed by SFAS No. 123, using the Black-Scholes option pricing model. The fair value was estimated using the following weighted-average assumptions: a risk free interest rate of 5.50% for 1999, 6.00% for 1998 and 6.43% for 1997; a volatility factor of the expected market price of the Company's common stock of 100% for 1999, 89% for 1998 and 102% for 1997; expected option lives of 5 years for 1999, 5 years for 1998, and 8 years for 1997; and no dividend yields for all years. The Black-Scholes option valuation model was originally developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the expected life of the options. The Company's pro forma information is as follows:
1999 1998 1997 ---- ---- ---- Net loss as reported $ (4,535,170) $ (9,182,526) $ (4,886,615) Net loss per share as reported (0.36) (0.88) (0.52) Net loss pro forma (4,772,359) (9,877,344) (5,188,511) Net loss per share pro forma (.38) (.94) (0.55) Weighted average fair value per share of options granted during the year $ 0.34 $ 0.87 $ 1.77
F-17 Protein Polymer Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (continued) December 31, 1999 2. STOCKHOLDERS' EQUITY (continued) The pro forma effect on net loss for 1999, 1998 and 1997 is not representative of the pro forma effect on net loss in future years because it does not take into consideration pro forma compensation expense from option grants made prior to 1995. 3. STOCKHOLDER PROTECTION AGREEMENT In 1997, the Board of Directors of the Company adopted a Stockholder Protection Agreement ("Rights Plan") that distributes Rights to stockholders of record as of September 10, 1997. The Rights Plan contains provisions to protect stockholders in the event of an unsolicited attempt to acquire the Company. The Rights trade together with the common stock, and generally become exercisable ten business days after a person or group acquires or announces the intention to acquire 15% or more of the outstanding shares of the Company's common stock, with certain permitted exceptions. The Rights then generally allow the holder to acquire additional shares of the Company's capital stock at a discounted price. The issuance of the Rights is not a taxable event, does not affect the Company's reported earnings per share, and does not change the manner in which the Company's common stock is traded. 4. COMMITMENTS The Company leases its office and research facilities totaling 21,000 square feet under an operating lease, which expires in May 2005. The facilities lease is subject to an annual escalation provision based upon the Consumer Price Index. The lease provides for deferred rent payments; however, for financial purposes rent expense is recorded on a straight-line basis over the term of the lease. Accordingly, deferred rent in the accompanying balance sheet represents the difference between rent expense accrued and amounts paid under the lease agreement. F-18 Protein Polymer Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (continued) December 31, 1999 4. COMMITMENTS (continued) Annual future minimum operating and capital lease payments are as follows:
Obligations Operating Under Year ending December 31, Leases Capital Leases ------------------------ --------------- --------------- 2000 $ 451,841 $ 87,228 2001 460,933 25,651 2002 461,782 - 2003 473,200 - 2004 487,396 - Thereafter 164,064 - --------------- --------------- Total minimum operating and capital lease payments $ 2,499,216 112,879 =============== Less amount representing interest (8,198) --------------- Present value of remaining minimum capital lease payments 104,681 Less amount due in one year (79,593) --------------- Long-term portion of obligations under capital leases $ 25,088 ===============
Cost and accumulated depreciation of equipment held under capital leases as of December 31, 1999 was $279,497 and $149,483, respectively. The carrying amount of the Company's obligations under its capital lease agreements approximate their fair value and the implicit interest rate approximates the Company's borrowing rate. Rent expense was approximately $417,000, $442,633, $412,000, and $3,637,633 for the years ended December 31, 1999, 1998 and 1997 and for the period July 6, 1988 (inception) through December 31, 1999, respectively. 5. INCOME TAXES At December 31, 1999, the Company had net operating loss carryforwards of approximately $30,589,000 for federal income tax purposes, which may be applied against future income, if any, and will begin expiring in 2004 unless previously utilized. In addition, F-19 Protein Polymer Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (continued) December 31, 1999 5. INCOME TAXES (continued) the Company had California net operating loss carryforwards of approximately $12,249,000. The California tax loss carryforwards continue to expire. The difference between the tax loss carryforwards for federal and California purposes is attributable to the capitalization of research and development expenses for California tax purposes, the required 50% limitation in the utilization of California loss carryforwards, and the expiration of certain California tax loss carryforwards. The Company also has federal and California research and development tax credit carryforwards of approximately $1,043,000 and $478,000, respectively, which will begin expiring in 2004 unless previously utilized. As a result of an ownership change that occurred in January 1992, approximately $2,700,000 of the Company's federal net operating loss carryforwards will be subject to an annual limitation regarding utilization against taxable income in future periods. However, the Company believes that such limitations will not have a material impact upon the utilization of the carryforwards. Significant components of the Company's deferred tax assets as of December 31, 1999 are shown below. A valuation allowance of $12,867,000 has been recognized to offset the deferred tax assets as realization of such assets is uncertain. 1999 1998 ------------------------------- Deferred tax assets: Net operating loss carryforwards $ 11,410,000 $ 9,899,000 Research and development credits 1,354,000 1,122,000 Other, net 103,000 728,000 ------------------------------- Total deferred tax assets 12,867,000 11,749,000 Valuation allowance for deferred tax assets (12,867,000) (11,749,000) ------------------------------- Net deferred tax assets $ - $ - =============================== 6. EMPLOYEE BENEFITS PLAN On January 1, 1993, the Company established a 401(k) Savings Plan for substantially all employees who meet certain service and age requirements. Participants may elect to defer up to 20% of their compensation per year, subject to legislated annual limits. Each year the F-20 Protein Polymer Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (continued) December 31, 1999 6. EMPLOYEE BENEFITS PLAN (continued) Company may provide a discretionary matching contribution. As of December 31, 1999, the Company had not made a contribution to the Savings Plan. 7. SUBSEQUENT EVENTS Between January 1 and February 29, 2000, the Company received approximately $3.5 million in cash and receivables from license and development agreements, the sale of the Company's cell culture business, and the exercise of common stock warrants. FEMCARE AGREEMENTS On January 26, 2000, PPTI and Femcare Ltd. ("Femcare"), headquartered in Nottingham, Great Britain, executed three related agreements involving the grant of a license to Femcare to register and market PPTI's urethral bulking agent for the treatment of female stress urinary incontinence in Europe and Australia. In addition to the License and Development Agreement, PPTI agreed in a separate Supply Agreement to provide final product to Femcare, and if unable to do so, agreed to make the manufacturing methods and materials available to Femcare as specified in a separate Escrow agreement. In addition to agreeing to purchase the final product from PPTI for a defined percentage of the revenues received by Femcare from the sale of the incontinence product, Femcare agreed to pay PPTI an upfront license fee of $1 million in two installments and agreed to pay PPTI a royalty on revenues received from the sale of the incontinence product. The agreements specify the performance benchmarks and timelines for each party, the definition of yearly minimum royalties and minimum product purchases, and the methods and procedures for determining product manufacturing requirements. The license grant from PPTI to Femcare is for the greater of 20 years or the date upon which the last patent included within the license grant for the territories covered expires, subject to meeting various sales requirements, and is exclusive in the territories covered, subject to certain conditions being maintained. The parties agreed to cooperate extensively in the clinical testing and the registration of the product with the appropriate governmental authorities. SALE OF IN VITRO CELL CULTURE BUSINESS TO SANYO CHEMICAL INDUSTRIES, LTD. -------- On February 18, 2000, PPTI and Sanyo Chemical Industries, Ltd. ("Sanyo"), of Kyoto, Japan, executed an agreement involving the grant of a royalty-free license to Sanyo for exclusive worldwide rights to make and sell ProNectin(R) F and ProNectin(R)L and derivative F-21 Protein Polymer Technologies, Inc. (A Development Stage Company) Notes to Financial Statements (continued) December 31, 1999 7. SUBSEQUENT EVENTS (continued) products for in vitro cell culture and related applications. PPTI will receive -------- from Sanyo $355,000 (less associated expenses) for the license, including assignment of the ProNectin(R) and SmartPlastic(R) trademarks and transfer of remaining product inventory. The agreement remains in effect until the last patent included within the license grant expires. EXERCISE AND EXCHANGE OF SERIES G WARRANTS During February 2000, holders of warrants issued in connection with the sale of Series G Preferred Stock exercised their warrants to purchase common stock which were due to expire in September, 2000. The exercise price was $0.50 per share. As an inducement to exercise the warrant early, the Company offered each holder a new one year warrant for a similar number of shares at an exercise price of $1.50 per share. As a result the Company raised $2.1 million (less offering expenses). The newly issued warrants will expire on the last day of February 2001. F-22 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III Items 9, 10, 11 and 12 are incorporated by reference from the Company's definitive Proxy Statement to be filed by the Company with the Commission no later than April 7, 2000. ITEM 13. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K (a)(1) and (2) Financial Statements and Schedules The Financial Statements are incorporated herein as a part of Item 7. (a)(3) Exhibits The following documents are included or incorporated by reference: Exhibit Number Description ------ ----------- 3.1 (6) Certificate of Incorporation of the Company, as amended. 3.1.1 (13) Certificate of Designation of Series E Convertible Preferred Stock. 3.1.2 (13) Certificate of Designation of Series F Convertible Preferred Stock. 3.1.3 (14) Certificate of Designation of Series G Convertible Preferred Stock. 3.2 (6) Bylaws of the Company, as amended. 10.1 (1) 1989 Stock Option Plan, together with forms of Incentive Stock Option Agreement and Nonstatutory Option Agreement. 10.2 (4) 1992 Stock Option Plan of the Company, together with forms of Incentive Stock Option Agreement and Nonstatutory Option Agreement. 29 10.3 (1) Form of Employee's Proprietary Information and Inventions Agreement. 10.4 (1) Form of Consulting Agreement. 10.5 (1) Form of Indemnification Agreement. 10.6 (4) License Agreement, dated as of April 15, 1992, between the Board of Trustees of the Leland Stanford Junior University and the Company. 10.7 (6) Amended and Restated Registration Rights Agreement dated September 14, 1995, among the Company and the holders of its Series D Preferred Stock. 10.8 (6) Securities Purchase Agreement related to the sale of the Company's Series D Preferred Stock. 10.9 (7) Letter Agreement dated as of October 4, 1996 between the Company and MBF I, LLC ("MBF") relating to the provision of consulting and advisory services. 10.10 (7) Form of Warrant with respect to a warrant for 50,000 shares issued to MBF, and to be used with respect to additional warrants which may be issued to MBF. 10.11 (7) Registration Rights Agreement dated as of October 4, 1996 between the Company and MBF. 10.12 (7) Securities Purchase Agreement dated as of January 6, 1997 among the Company and the investors named therein relating to the sale and purchase of 1,904,000 shares of the Company's common stock. 10.13 (8) Lease, with exhibits, dated March 1, 1996 between the Company and Sycamore/San Diego Investors. 10.14 (8) Second Amendment to Lease between the Company and Sycamore/San Diego Investors, dated March 1, 1996. 10.15 (8) 1996 Non-Employee Directors' Stock Option Plan. 30 10.16 (9) Stockholder Protection Agreement, dated August 22, 1997, between the Company and Continental Stock Transfer & Trust Company as rights agent. 10.17 (10) Employee Stock Purchase Plan, together with Form of Stock Purchase Agreement. 10.18 (11) Lease, with rider and exhibits, dated April 13, 1998, between the Company and Sycamore/San Diego Investors 10.19 (12) First Amendment to Stockholder Protection Agreement dated April 24, 1998, between the Company and Continental Stock Transfer & Trust Company as rights agent. 10.20 (13) Securities Purchase Agreement related to the sale of the Company's Series E Convertible Preferred Stock dated as of April 13, 1998 among the Company and Investors named therein related to the purchase of 54,437.50 shares of Series E Preferred Stock. 10.21 (13) Form of First Warrants to purchase Common Stock related to the sale of the Company's Series E Preferred Stock. 10.22 (13) Form of Second Warrants to purchase Common Stock related to the sale of the Company's Series E Preferred Stock. 10.23 (13) Letter of Agreement dated April 13, 1998 between the Company and Johnson & Johnson Development Corporation for the exchange of up to 27,317 shares of Series D Preferred Stock for a like number of shares of Series F Preferred Stock. 10.24 (14) Securities Purchase Agreement related to the sale of the Company's Series G Convertible Preferred Stock 10.25 (14) Form of Warrant to Purchase Common Stock issued in connection with the Series G Preferred Stock 10.26 (14) Second Amendment to Stockholder Protection Agreement, dated July 26, 1999 between the Company and Continental Stock Transfer and Trust Company as rights agent 10.27 License and Development Agreement dated as of January 26, 2000 between the Company and Prospectivepiercing Limited, to be known as Femcare Urology Limited. 31 10.28 Supply Agreement dated as of January 26, 2000 between the Company and Femcare Urology Limited. 10.29 Escrow Agreement dated as of January 26, 2000 between the Company and Femcare Urology Limited. 10.30 Employment Agreement, dated as of February 17, 2000, between the Company and J. Thomas Parmeter. 10.31 Employment Agreement, dated as of February 17, 2000, between the Company and John E. Flowers. 10.32 Employment Agreement, dated as of February 17, 2000, between the Company and Joseph Cappello. 10.33 Employment Agreement, dated as of February 17, 2000, between the Company and Franco A. Ferrari. 10.34 License Agreement dated as of February 18, 2000 between the Company and Sanyo Chemical Industries, Ltd. 23.1 Consent of Ernst & Young LLP, Independent Auditors 27 Financial Data Schedule 32 (1) Incorporated by reference to the Company's Registration Statement on Form S-1 (No. 33-43875) filed with the Commission on November 12, 1991, as amended by Amendments Nos. 1, 2, 3 and 4 thereto filed on November 25, 1991, December 23, 1991, January 17, 1992 and January 21, 1992, respectively. (2) Incorporated by reference to Registrant's Report on Form 10-Q for the quarter ended March 31, 1992, as filed with the Commission on May 14, 1992. (3) Incorporated by reference to Registrant's Report on Form 10-Q for the quarter ended September 30, 1992, as filed with the Commission on November 13, 1992. (4) Incorporated by reference to Registrant's Report on Form 10-K for the fiscal year ended December 31, 1992, as filed with the Commission on March 31, 1993. (5) Incorporated by reference to Registrant's Report on Form 10-KSB for the fiscal year ended December 31, 1994, as filed with the Commission on March 30, 1995. (6) Incorporated by reference to Registrant's Report on Form 10-Q for the quarter ended September 30, 1995, as filed with the Commission on October 24, 1995. (7) Incorporated by reference to Registrant's current Report on Form 8-K, as filed with the Commission on January 7, 1997. (8) Incorporated by reference to Registrant's Report on Form 10-KSB for the fiscal year ended December 31, 1996, as filed with the Commission on March 27, 1997. (9) Incorporated by reference to Registrant's Current Report on Form 8-K, as filed with the Commission on August 27, 1997. (10) Incorporated by reference to Registrant's Report on Form 10-KSB for the fiscal year ended December 31, 1997, as filed with the Commission on April 9, 1998. (11) Incorporated by reference to Registrant's Report on Form 10-Q for the quarter ended March 31, 1998, as filed with the Commission on May 14, 1998. (12) Incorporated by reference to Registrant's Report on Form 10-Q for the quarter ended June 30, 1998, as filed with the Commission on August 13, 1998. (13) Incorporated by reference to Registrant's Report on Form 10-KSB for the fiscal year ended December 31, 1998, as filed with the Commission on April 9, 1999. (14) Incorporated by reference to Registrant's Report on Form 10-Q for the quarter ended September 30, 1999, as filed with the Commission on November 1, 1999. 33 (b) Reports on Form 8-K. On August 17, 1999, the Company filed a Current Report on Form 8-K with the Commission. In Item 5 of the report, the Company reported an initial private placement of 17,750 shares of the Company's Series G Convertible Preferred Stock, and warrants to purchase an aggregate of 3,550,000 shares of common stock. On September 20, 1999, the Company filed a Current Report on Form 8-K with the Commission. In Item 5 of the report, the Company reported the delisting of the Company's common stock from the NASDAQ Small Cap Market. The Company also reported a subsequent closing of a private placement of the Company's Series G Convertible Preferred Stock which, including the previous closing, was for a total of 21,000 shares and warrants to purchase an aggregate of 4,200,000 shares of common stock. On January 27, 2000, the Company filed a Current Report on Form 8-K with the Commission. In Item 5 of the Report, the Company reported the establishment of a strategic partnership with Femcare, Ltd., including the execution of a License and Development Agreement, a Supply Agreement, and an Escrow Agreement which in combination granted Femcare Ltd. the exclusive right to commercialize the Company's urethral bulking agents in Europe and Australia. 34 SIGNATURE In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PROTEIN POLYMER TECHNOLOGIES, INC. March 23, 2000 By /S/ J. THOMAS PARMETER ----------------------- J. Thomas Parmeter Chairman of the Board, Chief Executive Officer, President In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Capacity Date - --------- -------- ---- /S/ J. THOMAS PARMETER Chairman of the Board, Chief March 23, 2000 - ----------------------- Executive Officer, President J. Thomas Parmeter /S/ JANIS Y. NEVES Director of Finance, Controller, March 23, 2000 - ------------------- and Assistant Secretary Janis Y. Neves /S/ RICHARD ADELSON Director March 23, 2000 - -------------------- Richard Adelson /S/ PATRICIA J. CORNELL Director March 23, 2000 - ------------------------ Patricia J. Cornell /S/ EDWARD E. DAVID Director March 23, 2000 - -------------------- Edward E. David /S/ PHILIP J. DAVIS Director March 23, 2000 - -------------------- Philip J. Davis /S/ PATRICK A. GERSCHEL Director March 23, 2000 - ------------------------ Patrick A. Gerschel
35
Signature Capacity Date - --------- -------- ---- /S/ EDWARD J. HARTNETT Director March 23, 2000 - ----------------------- Edward J. Hartnett /S/ J. PAUL JONES Director March 23, 2000 - ------------------ J. Paul Jones /S/ GEORGE R. WALKER Director March 23, 2000 - --------------------- George R. Walker
36 EX-10.27 2 LICENSE AND DEVELOPMENT AGREEMENT EXHIBIT 10.27 LICENSE AND DEVELOPMENT AGREEMENT This Agreement is between PROTEIN POLYMERS TECHNOLOGIES, INC., a Delaware corporation, having its place of business at 10655 Sorrento Valley Road, San Diego, California 92121 (hereinafter referred to as "PPTI"), and PROSPECTIVEPIERCING LIMITED, to be known as FEMCARE UROLOGY LIMITED, a company incorporated under the laws of England and Wales whose registered office is at St. Peter Street, Nottingham NG7 3EN, England (hereinafter referred to as "FEMCARE"). W I T N E S S E T H: WHEREAS, PPTI is developing and intends to commercialize the Product; and WHEREAS, FEMCARE, has experience and capability in obtaining governmental approvals in the Territories for medical devices and in marketing such products throughout the Territories; and WHEREAS, FEMCARE, desires to purchase from PPTI an exclusive license to market the Product in the Territories solely for use in the Field; and WHEREAS, PPTI desires to sell to FEMCARE an exclusive license to market the Product in the Territories in the Field, subject to the terms and conditions of this Agreement; and WHEREAS, FEMCARE desires to engage PPTI to manufacture and supply to FEMCARE, the Product for Commercialization in the Territories in the Field; NOW, THEREFORE, in consideration of the mutual covenants herein contained, PPTI and FEMCARE agree as follows: 1. DEFINITIONS In this Agreement (including the recitals) the following expressions shall have the following meanings unless the context otherwise requires: 1 "Affiliate" shall mean, in relation to either party, (a) any company, partnership, limited liability company, or other entity in which the relevant party directly or indirectly holds 30% or more of the voting interests, (b) any company which holds directly or indirectly 30% or more of the voting stock or shares of the relevant party, (c) any other company, partnership, limited liability company, or other entity in which 30% or more of the voting interests is directly or indirectly held by any company described in clause (b), or (d) any company partnership, limited liability company, or other entity in which the relevant party directly or indirectly holds less than 30% of the voting interests but has management control of such company in that it has the ability to appoint or remove the majority of the directors or managers of such company. "Calendar Quarter" shall mean the usual and customary FEMCARE calendar quarters, the first quarter being the months of January, February and March, the second quarter being the months of April, May and June, the third quarter being the months of July, August and September, and the fourth quarter being the months of October, November and December. "Clinical Efficacy Trials" shall mean trials of the Product on sufficient numbers of patients to establish the safety and efficacy of the Product in order to assist the parties in obtaining Regulatory Approval for the manufacture and Commercialization of Product. "Clinical Safety Trials" shall mean trials for the first introduction into humans of the Product with the purpose of establishing its safety sufficiently to proceed to Clinical Efficacy Trials. "Commercialization" shall mean the continuous marketing, use, offer for sale, sale and supply of the Product to third parties, and "Commercialized" shall be construed accordingly. "Competitive Product" shall mean Contigen, Macroplastique, Durasphere and similar injectable or inplantable products for the treatment of stress urinary incontinence which compete with the Product in the Territories in the Field. 2 "Copyright" shall mean all copyright and rights in the nature of copyright to which PPTI or its Subsidiaries may now or may subsequently become entitled in or in respect of all drawings and other documents, recordings in any form and/or other materials bearing or embodying any part of the Know-How or the Regulatory Information including without limitation any such materials consisting of or containing software or databases. "Effective Date" shall mean January 26, 2000. "Existing IDE" shall mean the investigational device exemption application filed with the FDA by PPTI in respect to the Product: ***. "FDA" shall mean the United States Food and Drug Administration. "Field" shall mean soft tissue augmentation in the genitourinary tract to treat urological symptoms of disease, including the delivery in any manner of lidocaine or an equivalent local anesthetic to ameliorate pain associated with such treatment, but excluding all other drug delivery (except as aforesaid), birth control, cosmetic tissue augmentation, and adhesive and sealant applications and all other uses of soft tissue augmentation. "IDE" shall mean an investigational device exemption application filed with the FDA by PPTI. "Intellectual Property" shall mean Patents, Know-How and Copyright. "Know-How" shall mean all information, data or experience whether patentable or not, useful in the Field in the Territories owned or controlled by PPTI or its Subsidiaries at any time prior to or during the term of this Agreement, including without limitation, processes, techniques, methods, products, apparatuses, cultures, other biological materials and other materials and compositions, operating instructions, machinery designs, raw material or - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 3 product specifications, drawings, blue prints, and any other technical and commercial information relating to research, design, development, manufacture, assembly, use or sale of the Product which are or may be useful in the Field, but excluding PMA Know-How and information and data that cannot be disclosed without PPTI or its Subsidiaries being in breach of a bona-fide confidentiality obligation to a third party. "Joint Product" shall mean a product whose manufacture, marketing, use or sale would infringe a Valid Claim of a Joint Invention. "Marketing Year" shall mean each period of 12 months calculated from the first day of the month following the date on which FEMCARE shall first sell Products to independent third parties on a commercial basis in any of the Territories. The first Marketing Year shall include sales made in the month preceding the commencement date of the first Marketing Year. "Net Sales" shall, subject to the two provisos to this definition, mean: (a) the invoiced price of Product upon the sale by a party or its Affiliates and distributors of Product to third parties (other than Affiliates); (b) subject to paragraph (c) of this definition the fair market value of sales or transfers of Product from a party to Affiliates, where the fair market value shall be determined from the sales of similar volumes of Product in the same Territory (or if none a comparable Territory) to third parties (other than Affiliates); or (c) invoiced price of Product upon the sale by a party to an Affiliate of Product which is to be used primarily for performing clinical trials or testing to obtain Regulatory Approval in the United States or the Territories, in each case less the following amounts: (i) all normal discounts of any type or nature (e.g., cash discounts, volume discounts, credits and rebates if not already reflected in the invoiced price); 4 (ii) credits or allowances actually granted upon claims or returns regardless of the party requesting the return; (iii) provided the amounts are separately charged upon the invoice and not already excluded from Net Sales all proper deductions for any costs of packaging, insurance, carriage, freight, value added tax or other sales tax, import duties or similar government levies or export insurance cost; each determined in accordance with such party's accounting principles from time to time or if none are applicable generally accepted accounting principles in the United Kingdom or United States, as the case may be, from time to time consistently applied. Provided that if Product is sold by a party in a Territory in combination with another product sold by that party and the Product is not separately invoiced or priced on the relevant invoice for the Product and the other product, Net Sales for such Product in a Calendar Quarter will be calculated by multiplying actual Net Sales of the Product and other product in the Territory in such Calendar Quarter by the fraction A/(A+B) where A is the average invoiced price (less the amounts referred to in (iii) of this definition) of Product when sold separately by such party is such Territory in such Calendar Quarter to third parties (other than Affiliates) and B is the invoice price (less the amounts referred to in (iii) of this definition) of the other product when sold separately by such party in such Territory to such third parties (other than Affiliates) in such Territory in such Calendar Quarter. Provided further that if in the circumstances described in the preceding proviso either the Product or the other product is not sold separately in a Territory in a Calendar Quarter by party, Net Sales for Product shall be calculated by multiplying actual Net Sales of the Product and other product by the fraction D/E where D is a party's direct cost of Product, and E shall be a party's aggregate direct cost of the Product and other product. For purposes of the foregoing, if the party is FEMCARE, party shall mean FEMCARE and its Affiliates and if the party is PPTI, party shall mean PPTI and its Subsidiaries (and the term "Subsidiaries" (and the term "Subsidiaries" shall be substituted for "Affiliates"). 5 "Net Selling Price" shall mean the same as Net Sales save that Joint Product or Joint Products shall be substituted for "Product" or "Products" (as the case may be) wherever the latter appear. "Patent(s)" shall mean: (a) any and all the patents and applications for patents that are identified in Schedule A, any foreign counterparts thereof, all continuations, continuations-in-part, divisions and renewals thereof, all patent supplementary protection certificates and similar rights that are based on or derive priority from any of the foregoing or which may be granted thereon, and all reissues, re-examinations, extensions, patents of addition and patent of importation thereof; (b) any and all patent applications by PPTI related to or based on any Know-How related to the Product or Product Improvements, if applicable, that is developed by PPTI during the term of this Agreement, all continuations, continuations-in-part or divisions of any such applications, any patents which shall issue based on such applications, continuations, continuations-in-part or divisions and any and all patents, patent supplementary protection certificates and similar rights that are based upon or derive priority from any of the foregoing or which may be granted thereon and all reissues or extensions thereof or patents of addition thereto but not including any PMA Know-How developed by PPTI after completion of its obligations under Article 3.01; and (c) all such patent applications, patents Certificates and rights, a Valid Claim of which would be infringed by the manufacture marketing use or sale of the Product (but for the license granted herein). 6 "Performance Benchmarks" shall mean the goals set forth on Schedule B as may from time to time be modified by the Advisory Board. "PMA" shall mean a premarket approval application filed with the FDA, or if a PMA is not the appropriate filing, then the suitable filing to obtain Regulatory Approval in the United States. "PMA Know-How" shall mean any Know-How that would be embodied in Product Improvements. "Product(s)" shall mean Polymer 47K Urethral Bulking Agent as currently approved by the FDA under IDE *** (whether or not including or injecting lidocaine or an equivalent local anaesthetic) and any modifications made thereto as part of its PMA approval and any amendment thereto. "Product Improvements" shall mean any improvement, enhancement or modification of or alternative or substitute for the Product proposed to be developed by PPTI or its Subsidiaries that if made, would require the filing of a new IDE or PMA or the like with the FDA in addition to the Existing IDE and any PMA to be obtained in respect to the Product pursuant to the provisions of Article 3. "Regulatory Approval" shall mean with respect to any country, filing for and receipt of all regulatory agency or other registrations and approvals required in such country in respect of Product for any purpose specified in this Agreement of if no purpose is specified to enable the Product to be manufactured and for Commercialization to take place in such country. "Regulatory Information" shall mean all information, correspondence, reports, documentation and approvals (however stored) in the possession or under the control of a party in respect of any Regulatory Approvals required for the Product in the United States or any Territory. - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 7 "Subsidiary" shall mean a corporation, limited liability company or partnership of which a party holds 50% or more of the voting or economic interest. "Supply Agreement" shall mean the Supply Agreement to be entered into between PPTI and FEMCARE substantially in form attached as Schedule E. "Territories" shall mean the countries listed in Schedule D and such other countries as the parties shall agree in writing from time to time and "Territory" shall mean any one of them. "Valid Claim" shall mean a claim in any pending patent application or unexpired patent which has not been held invalid by a decision of a court or other appropriate body of competent jurisdiction against which there is no appeal or where any period for appealing against such decision has expired without an appeal having been validly submitted. 2 GRANT OF LICENSE 2.01 Rights Granted. -------------- (a) Subject to the terms and conditions of this Agreement, PPTI hereby grants to FEMCARE and FEMCARE hereby accepts from PPTI a license to use the Intellectual Property for the purpose of Commercialization of the Product solely in the Field in the Territories. (b) Subject to paragraph (c) of this Article, Article 4.02(b) and Schedule B the grant of such license to FEMCARE shall be exclusive against all parties including PPTI for the term of this Agreement. (c) If during the term of this Agreement FEMCARE shall sell Competitive Products in the Territories without the prior written consent of PPTI, the grant of this license shall immediately become non- exclusive for the remainder of the term of this Agreement. 8 (d) The grant of such license to FEMCARE shall not include the right to sublicense to any other person or entity any rights granted hereunder, in whole or in part, without the prior written approval of PPTI, except as permitted pursuant to paragraph (e) of this Article. (e) FEMCARE shall have the right to grant sublicenses to any Affiliate or to any third party of such license or any rights granted to FEMCARE under this Agreement upon such terms and conditions as PPTI shall approve, such approval not to be unreasonably withheld or delayed. (f) The parties shall execute such formal licenses as are consistent with the terms and provisions of this Agreement that FEMCARE considers may be necessary or appropriate for registration with any relevant patent or other authorities in the Territories. 2.02 Product Improvement Option. -------------------------- (a) PPTI hereby grants to FEMCARE an exclusive right of first opportunity to be granted rights and licenses by PPTI or any of its Subsidiaries to obtain Regulatory Approval for and undertake Commercialization of any Product Improvements during the term of this Agreement in the Field and the provisions of this Article 2.02 shall apply in respect of such opportunity. (b) During the term of this Agreement, PPTI shall: (i) promptly notify FEMCARE of each Product Improvement that it proposes to develop, obtain Regulatory Approval for and commence Commercialization of (either by itself or through a Subsidiary or third party), and (ii) present to FEMCARE in writing the terms and conditions upon which PPTI would require FEMCARE to participate in the development of, and obtaining of Regulatory Approvals for such Product Improvement and be willing to license/sublicense such Product Improvement to FEMCARE together with such information as FEMCARE 9 reasonably requires to enable it to evaluate the validity of the proposed development, obtaining such Regulatory Approvals and undertaking such Commercialization itself or through an Affiliate in the Field in the Territories. (c) FEMCARE shall have sixty (60) days in which to accept such terms and conditions proposed by PPTI, or, if it so desires, to propose to PPTI alternative terms and conditions. PPTI shall have fifteen (15) days in which to accept or reject any such alternative. (d) If FEMCARE accepts PPTI's terms and conditions or if PPTI accepts such alternative terms and conditions, the parties shall promptly execute and deliver to each other a license agreement containing the mutually agreed terms and conditions. (e) If the conditions in paragraph (d) of this Article shall not apply, FEMCARE shall be deemed to have waived and relinquished any and all rights it may have to participate in the development of, obtain Regulatory Approval for or to exploit the subject Product Improvement and PPTI shall thereafter have the right to develop, obtain Regulatory Approvals for and to commence Commercialization (either by itself or through a Subsidiary or a third party) of the Product Improvement anywhere in the world except in the Field within the Territories, unless it has the prior written consent of FEMCARE. If the preceding provision shall prove to be invalid for any reason, and PPTI shall offer any other person such rights as aforesaid in the Field in the Territories on more favorable terms than those offered to FEMCARE or proposed by FEMCARE under this Article 2.02, PPTI shall make a new offer to FEMCARE of such rights on the same terms as are offered to such third party, and FEMCARE shall have ten (10) Business Days (any day other than Saturday, Sunday or a legal holiday on which the banks in New York City are closed) to accept such new offer, failing which FEMCARE shall have no further claim to such Product Improvements rights. 10 2.03 Manufacturing Rights. PPTI hereby grants to FEMCARE an exclusive option -------------------- to acquire the right and license to the Intellectual Property and the Escrow Materials (as defined in the Escrow Agreement), to make or have made the Product for use and Commercialization by FEMCARE and its Affiliates, distributors and sub-licensees on the terms and conditions of Article 2.01 in the Field within the Territories. Said option shall be deemed to have been exercised if at any time during the term of this Agreement, FEMCARE shall have properly given notice to withdraw the Escrow Materials pursuant to the Escrow Agreement. 2.04 Reserved Rights. PPTI retains all rights to the Product and the --------------- Intellectual Property not expressly granted to FEMCARE pursuant to this Agreement. 2.05 Sale outside of Territories. During the terms of this Agreement PPTI --------------------------- shall not and shall procure that no Subsidiary shall sell or offer for sale the Product to any third party outside the Territories knowing or having reasonable grounds for believing that such third party intends to sell the Product in the Territories. 3 PRODUCT DEVELOPMENT 3.01 PPTI undertakes to FEMCARE to use its reasonable efforts:- (a) to further research and develop the Product so that it complies in all respects with the specification referred to in the Supply Agreement; (b) develop the methods and processes of manufacturing the Product so that PPTI is able to comply in all respects with its obligations to FEMCARE under the Supply Agreement; (c) develop the procedures for manufacturing, producing and packaging (except to the extent that this is the responsibility of FEMCARE pursuant to clause 3.02(C)) the Product under FDA Quality System Regulations and/or ISO 9001 Standards, as applicable, in commercial quantities; provided that PPTI's obligation in respect of packaging shall only 11 extend to developing the minimum packaging required for or pursuant to such FDA Regulations; (d) develop cost estimates for the commercial scale production of Product; (e) complete the Clinical Safety Trials in accordance with the IDE; (f) Upon receipt of FDA and other applicable Regulatory Approvals for the export of the Product to the Territories, to thereafter supply to FEMCARE, at FEMCARE's expense as provided herein, at the times and in the quantities reasonably required by FEMCARE to achieve its Performance Benchmarks and otherwise determined by the Advisory Board such samples of Product as FEMCARE reasonably deems to be required for the Clinical Efficacy Studies and other clinical trials within the Territories; (g) supply to FEMCARE promptly all Know-How reasonably requested and Regulatory Information required by FEMCARE in sufficient detail and quality for use in connection with obtaining Regulatory Approvals or for any other proper purpose under this Agreement, including, without limitation, carrying out its duties under paragraph (f) of Article 3.02; and (h) at the request and expense of FEMCARE, conduct or permit FEMCARE to conduct any clinical and field trials and studies in addition to the Clinical Efficacy Trials required in connection with any Regulatory Approvals in the Territories. 3.02 FEMCARE Activities. ------------------ FEMCARE undertakes to PPTI to use its reasonable efforts to: (a) obtain all Regulatory Approvals that are required for Commercialization of the Product in the Field in the Territories listed in Schedule C; 12 (b) obtain all Regulatory Approvals that are required for Commercialization of the Product in the Field in the Territories other than those listed in Schedule C when FEMCARE in its absolute discretion shall determine that obtaining such Regulatory Approvals is warranted to provide timely and orderly market introduction of the Product in such Territories; (c) develop packaging and labelling of the packaging of the Product (except to the extent this is the responsibility of PPTI pursuant to clause 3.01(c) which complies with any Regulatory Approvals for Territories or other laws of Territories where Commercialization is imminent; (d) conduct the Clinical Efficacy Trials and such outcome analysis thereof as may be required in the Territories; and (e) provide to PPTI such information and cooperation as PPTI reasonably requires in order to assist PPTI to obtain any required Regulatory Approvals for the export of Product to the Territories. 3.03 Expenses Unless otherwise expressly stated each party shall bear the cost -------- and expense of carrying out their respective obligations under Articles 3.01 and 3.02 and, without prejudice to such obligations, each party undertakes to the other to: (a) carry out its obligations expeditiously (subject to Article 3.02(b)) with all due diligence care and skill with a view to complying with such obligations where time is a relevant factor (subject as aforesaid) as soon as is reasonably practicable after the date hereof; (b) liaise with and provide all reasonable advise assistance and information to the other party arising out of such obligations; (c) supply to the other promptly all Regulatory Information in its possession; 13 (d) exchange with each other status reports and updates in reasonable detail setting out the progress they have made in connection with such obligations upon request by either of them, such requests not to be made more often than once in each Calendar Quarter; (e) permit the other party at any time during normal business hours upon reasonable notice and at reasonable intervals to visit any premises in its ownership or control, and to use reasonable efforts to obtain permission for other facilities at which testing or trials are being carried out by the other directly or indirectly in connection with such obligations; (f) procure that in complying with such obligations it complies strictly with all applicable laws and regulations including without limitation those that apply to the conduct of any activities at any site at which such activities are being carried on. 3.04 (a) After this Agreement has been executed and delivered, the parties agree to form an Advisory Board made up of not more than four (4) individuals, two (2) each from PPTI and FEMCARE, which shall include PPTI's President from time to time and FEMCARE's managing director from time to time, which Advisory Board shall be retained throughout the term of this Agreement. (b) Subject to paragraph (c) of this Article the Advisory Board shall meet from time to time (but at least once a Calendar Quarter and more frequently if mutually agreed to by PPTI and FEMCARE) to discuss such matters as it considers appropriate arising out of this Agreement and the Supply Agreement. (c) After the commencement of Commercialization in Australia and at least one other Territory, the Advisory Board shall meet semiannually. (d) The location, time and length of meetings of and all procedural matters (including quorums and voting) relating to the Advisory Board shall be agreed to by the parties. 14 (e) The Advisory Board shall alternate the location of its meetings between the facilities of each of the parties or by mutual agreement meet at any location or telephonically. (f) Without prejudice to the respective rights and obligations of the parties under this Agreement the Advisory Board shall have executive authority to deal with such matters as shall be mutually agreed upon in writing by all members of the Advisory Board. 3.05 Supply Agreement ---------------- (a) Each of PPTI and FEMCARE shall cause to be deposited into escrow with Piper, Marbury, Rudnick & Wolfe, Chicago, Illinois, a copy of the Supply Agreement executed by a duly authorized officer or director of such party. (b) The copies of the Supply Agreement shall be dated and delivered to FEMCARE (as to the PPTI executed Supply Agreement) and PPTI (as to the FEMCARE executed Supply Agreement) as provided in the written instructions and notice to said law firm setting forth the date on which Commercialization is to commence or has commenced (i) from FEMCARE that it intends to commence the Commercialization of Product under this Agreement or (ii) from PPTI that FEMCARE has commenced the Commercialization of Product under this Agreement. (c) If written instructions and notice to said law firm have not been delivered thereto on or before ***, without any further instruction or action, said law firm shall return to PPTI the copy of the Supply Agreement deposited by it and return to FEMCARE the copy of the Supply Agreement deposited by it. (d) FEMCARE and PPTI jointly and severally agree to indemnify, defend and hold Piper Marbury Rudnick & Wolfe harmless from any and all losses, costs, damages and expenses said law firm may suffer or incur as a result of its serving as escrow agent for the Supply Agreement. - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 15 (e) Piper Marbury Rudnick & Wolfe may, upon 10 days notice to PPTI and FEMCARE withdraw as escrow agent for the Supply Agreement. The parties shall promptly meet to designate a replacement escrow agent and so notify Piper Marbury Rudnick & Wolfe, who on the written instructions of the parties shall deliver the Supply Agreements in its possession to the replacement escrow agent. Failing the appointment of a replacement escrow agent for the Supply Agreement, Piper Marbury Rudnick & Wolfe shall return the Supply Agreement signed by PPTI to PPTI and the return the Supply Agreement signed by FEMCARE to FEMCARE. 4 PAYMENTS TO PPTI 4.01 License Fees. FEMCARE, relying on the representations and warranties by ------------ PPTI in Article 20.2 shall pay to PPTI a non-refundable license fee of US$1,000,000, which shall be payable in two equal US$500,000 installments, the first being due and payable by wire transfer upon execution and delivery of this Agreement and the second being due and payable by wire transfer on May 1, 2000. 4.02 Royalties. --------- (a) Subject to the provisions of this Agreement, FEMCARE shall pay PPTI, within thirty (30) days after the close of each Calendar Quarter throughout the term of this Agreement commencing after the first day of the first Marketing Year a royalty equal to *** of Net Sales of Product for the Calendar Quarter (or part thereof in the case of the first or last Calendar Quarter for which a royalty is payable if not a full quarter) then ended, such royalty to be calculated initially in Pounds Sterling (on the basis of Net Sales) and converted to and paid in United States Dollars at the average buy/sell exchange rate announced by Chase Manhattan Bank, N.A., New York, New York, or its successor, for the last Business Day of the Calendar Quarter for which such royalties are payable. - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 16 (b) If the total royalty payable to PPTI by FEMCARE for the first Marketing Year and each subsequent Marketing Year is less than the applicable "Minimum Royalty" for that Marketing Year, FEMCARE shall within 90 days of the end of each such Marketing Year pay to PPTI (subject to paragraph (e) of this Article 4.02) a sum equal to the applicable Minimum Royalty less the actual royalty payable. At any time after the fifth Marketing Year, FEMCARE may notify PPTI that it is not going to make such payment in respect of any Marketing Year commencing after such fifth Marketing Year in which case the license granted pursuant to clause 2.01 shall at the expiry of such 90 day period become non-exclusive to FEMCARE for the remainder of the term of this Agreement. The applicable Minimum Royalty shall be as follows: Marketing Year Minimum Royalty First *** Second *** Third *** Fourth *** Fifth and thereafter *** Provided that if the rate of royalty payable under Article 4.02 is reduced pursuant to any provision of this Agreement or FEMCARE is permitted by this Agreement to set off or deduct any monies against any royalty payable to clause 4.02, the Applicable Minimum Royalty shall be calculated as if such rate of royalty had not been so reduced and such set off or deduction had not been made. - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 17 Provided further that in any relevant Marketing Year such applicable Minimum Royalty shall be reduced by the extent to which FEMCARE failed to sell or procure that sale of sufficient Products to avoid having to pay such Minimum Royalty directly as a result of any material breach of this Agreement or the Supply Agreement by PPTI (and for this purpose force majeure under either Agreement which prevents PPTI from being in breach thereof shall be disregarded, and in the case of a force majeure affecting FEMCARE or its performance on which such Minimum Royalty for such Marketing Year depends is affected by the force majeure, the Minimum Royalty shall be reduced by such fair amount. Provided, however, that no Minimum Royalty shall be payable in respect of any period during which Product cannot be Commercialized as a result of any inherent defect in the Product, any Recall required by any applicable regulatory body that is not specific to identified Product lots that are replaced within a reasonable period of time, or the Product being found to not be safe for use in humans. (c) If the applicable royalty rate exceeds the permissible rate established in a Territory for royalty payments in that Territory or royalty remission from that Territory, as the case may be, the rate of royalty shall not exceed the established permissible rate and FEMCARE shall pay the difference between the royalty due and the royalty at the established permissible rate unless said payments made outside the Territory are illegal. In such event, the parties shall negotiate in good faith such equitable adjustments to other payments and financial obligations as may be appropriate so that the parties realize the intended benefits of this Agreement. (d) Any Affiliate of FEMCARE may pay any royalty obligations of FEMCARE under this Agreement directly to PPTI with the same effect as if the payment had been made by FEMCARE. (e) All payments under this Agreement shall be made without deduction of any taxes, charges, or duties except for such taxes, charges or duties which are required under any applicable laws to be deducted. Any tax deducted by FEMCARE or 18 any Affiliate of FEMCARE under the laws of any foreign country for the account of PPTI shall be promptly paid to the proper governmental authority, and FEMCARE or its Affiliates shall furnish PPTI with proof of payment of such tax together with official or other appropriate evidence issued by the appropriate governmental authority sufficient to enable PPTI to document claim for income tax credit in respect to any sum so deducted. Any such tax required to be withheld shall be an expense of and borne solely by PPTI. (f) FEMCARE shall keep accurate books and records of all payments due to PPTI. Said books of account shall be kept at FEMCARE's principal place of business or the principal place of business of an appropriate Affiliate to which this Agreement relates. (g) PPTI shall have the right to nominate an independent accountant acceptable to and approved by FEMCARE (which approval shall not be unreasonably withheld) who shall have access to FEMCARE's records on reasonable notice during reasonable business hours for the purpose of verifying, at PPTI's expense (except as provided below), the royalty payable as provided for in this Agreement for the three preceding years, but this right may not be exercised more than once in any year. PPTI shall solicit or receive only information relating to the accuracy of the royalty report and the royalty payments made. Any underpayment of royalty shall be paid within thirty (30) days of the delivery of a detailed written accountants report to FEMCARE. Any overpayment of royalty shall be credited to the next royalty payment due from FEMCARE. If no further royalty payments will be due then a refund will be made within sixty (60) days of the audit. If the accountant's report shows an underpayment of royalties of five percent (5%) or more, FEMCARE shall reimburse PPTI for all cost and expense of the accountant's report. (h) FEMCARE shall deliver to PPTI written reports of Net Sales during the preceding Calendar Quarter on or before the thirtieth (30th) day following the end of each Calendar Quarter. Such reports shall include a calculation of the earned royalty due and shall be accompanied by the monies due. If no earned royalties are due, then FEMCARE shall indicate such on its written report. 19 4.03 Samples. ------- (a) FEMCARE shall purchase from PPTI and PPTI shall sell to FEMCARE such quantities of Product in units of *** purchased in a primary container, individually wrapped and labelled so as to comply with any applicable Regulatory Approvals or laws as FEMCARE may reasonably require to conduct the Clinical Efficacy Trials. (b) Initial sample delivery shall be determined by the Advisory Board. (c) FEMCARE shall pay to PPTI upon delivery of each such sample (FOB at PPTI in San Diego, California) an amount equal to PPTI's cost of manufacture, not to exceed *** unit of Product plus the cost of packaging and delivery of (by the method required by FEMCARE) the Product from San Diego, California to Nottingham, England or other site(s) designated by FEMCARE. 5 DUTIES OF FEMCARE AND TRADE MARKS 5.01 FEMCARE shall during the term of this Agreement: (a) Subject to paragraphs (a) and (b) of Article 3.02 use its reasonable efforts: (i) to Commercialize the Product in the Territories throughout the term of this Agreement; (ii) to begin selling the Product in a Territory promptly after obtaining Regulatory Approval therefor; (iii) to maintain adequate sales representation in each Territory once sales of the Product have commenced there; (iv) maintaining adequate facilities for the storage and distribution of such quantities of the Product as may from time to time be reasonably necessary to adequately serve the applicable Territories; and - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 20 (v) subject to the express provisions of this Agreement to provide the standard and type of services consistent with the services currently provided by FEMCARE in connection with the sale and distribution of its own products or any products sold by FEMCARE, Ltd. provided that FEMCARE may satisfy any of the foregoing obligations either itself or through Affiliates, distributors or sub-licencees; (b) not to permit its Affiliates, distributors or sub-licensees to make any verbal or written warranties, representations, or claims concerning the Product except as approved in advance by PPTI in writing; (c) to address and resolve promptly all customer complaints related to Products supplied by FEMCARE, its Affiliates or distributors or sub- licencees in a manner consistent with FEMCARE'S and FEMCARE, Ltd.'s approach to the resolution of complaints lodged against other products marketed by them, (subject to PPTI providing FEMCARE with any information in its possession that may facilitate prompt and favorable resolution of any such complaints); (d) to maintain complete records regarding such complaints and the resolution thereof and make these available to inspection by PPTI on reasonable notice during business hours; (e) to maintain such reports of the Product sold by FEMCARE as are required by all applicable laws and retain such records for at least five (5) years following the expiration or other termination of this Agreement; (f) not to sell, nor authorise its Affiliates, distributors or sub- licensees to sell any Product past the shelf date or expiration date for such Product printed on the packaging thereon. 21 5.02 (a) FEMCARE shall have the exclusive right to select all trademarks and trade names to be associated with the Product in the Territories subject to the approval of PPTI, which approval will not be unreasonably withheld or delayed. (b) All costs associated with the registration and maintenance of such trademarks and trade names in the Territories will be borne by FEMCARE. (c) FEMCARE shall grant to PPTI a royalty free, perpetual license (with the right to sublicense) to use the trademarks and trade names in connection with the marketing and sale of Product outside the Territories in the Field on such other terms as FEMCARE shall reasonably require so as to prevent FEMCARE'S rights in such trade marks or trade names being damaged by PPTI's use thereof under such license. (d) The parties will not do or cause or permit to be done any act or thing impairing the validity or enforceability of such trademarks or trade names. 5.03 While the Product is manufactured by or for PPTI all labeling for the Product shall disclose that the Product is manufactured by PPTI. Such statements shall prominently appear on all packaging, labels, advertising and promotional materials for the Product. 6 CONFIDENTIALITY 6.01 Subject to Article 6.03 during the term of this Agreement and for a period of five (5) years thereafter, each party shall maintain in confidence and shall not disclose to any third party any Know-How or other information received from the other party relating to the Product, and shall not use the other party's Know-How or other information except for the purposes of this Agreement without the prior written consent of such other party (such Know-How and other information being called in this Article "Confidential Information"). These confidentiality and non-use obligations shall not apply to any Confidential Information that the receiving party can demonstrate: 22 (a) at the time of disclosure to the receiving party was, or thereafter becomes, a part of the public domain through no fault of the receiving party, its Affiliates distributors or sub-licensees; (b) was subsequently lawfully disclosed to the receiving party by a third party not under an obligation of confidentiality with or through the disclosing party; (c) was in the lawful possession of the receiving party prior to disclosure by the disclosing party; or (d) is required to be disclosed by judicial or administrative order provided that notice is given to the disclosing party and the disclosing party has an opportunity to seek a protective order, and further provided, that disclosure is limited to compliance with the judicial or administrative order. 6.02 During the term of this Agreement, each party shall take all reasonable steps to: (a) prevent any disclosure in breach of Article 6.01 of Confidential Information of the other which would be materially prejudicial to the interests of the other party; (b) limit the disclosure of information to such of its Affiliates, distributors and sub-licensees and their respective employees as require the information for the purposes of this Agreement; and (c) procure that the persons referred to in paragraph (b) of this Article 6.02 enter into appropriate confidentiality agreements. 6.03 Notwithstanding the foregoing provisions of this Article, the parties and their Affiliates, distributors and sub-licensees shall be entitled (subject to obtaining the prior written approval of PPTI such approval not to be unreasonably withheld or denied) to disclose Confidential Information of the other party which would otherwise be protected by the 23 provisions of Article 6.01 to actual or potential customers for Product in so far as such disclosure is reasonably necessary to Commercialize Products. 6.04 FEMCARE shall not, without the prior written consent of PPTI, during the term of this Agreement or for a period of two (2) years after its termination or expiration, unless PPTI has ceased operation in the Field, employ or contract with any person employed by PPTI or its Affiliates during the term of this Agreement who has worked on any of the subject matter of the Know-How. 6.05 PPTI shall not, during the term of this agreement or for a period two (2) years after its termination or explanation (unless FEMCARE has ceased operation) employ or contract with in the Field any Affiliate, distributor or sub-licensee of FEMCARE in the Field during the term of this Agreement or any employee of FEMCARE, its Affiliates, distributors or sub-licensees in the Field during the term of this Agreement without the prior written consent of FEMCARE. 6.06 Immediately upon the expiration or other termination of this Agreement, FEMCARE shall return to PPTI all of the information regarding the Know-How and all copies thereof (including summaries and notes thereof), in its possession or control, except that one copy of such information may be retained by FEMCARE's counsel under seal to evidence compliance with this Agreement. 7 INDEMNIFICATION 7.01 By FEMCARE. FEMCARE shall indemnify, defend and hold PPTI, its Affiliates, ---------- and the officers, directors and employees of PPTI and its Affiliates harmless from and against any and all liabilities, damages, loss, cost or expense (including reasonable attorneys' fees) resulting from third party claims or suits brought against PPTI or its Affiliates which arise out of FEMCARE's breach of any of its duties or obligations under this Agreement or from any willful misconduct or negligent acts or omissions of FEMCARE, 24 its Affiliates, distributors or employees in the manufacture, labeling, storage, transport, distribution or Commercialization of the Product. 7.02 By PPTI. PPTI shall indemnify, defend and hold FEMCARE, its Affiliates, ------- distributors and sub-licensees harmless against all liabilities, damages, loss, cost or expense (including reasonable attorneys' fees) resulting from third party claims and suits brought against them which arise out of PPTI's breach of any of its duties or obligations under this Agreement or from any or any of them willful misconduct or negligent acts or omissions of PPTI or its Subsidiaries, licensees or employees in the manufacture, labelling, storage, transport, distribution or Commercialization of the Product. 7.03 Notice and Defense. Each party seeking indemnity ("Claimant") pursuant to ------------------ this Article shall promptly notify in writing the other ("Indemnitor") of any claims or suits for which it seeks indemnification from the other party. The Indemnitor shall promptly assume responsibility for the defense of the claim or suit, including settlement negotiations and any legal proceedings which Indemnitor shall handle at its sole discretion, and Claimant shall fully cooperate in Indemnitor's handling and defense thereof. In no event shall a Claimant make any payment on any claim or suit for which indemnity may be sought without the prior written consent of the Indemnitor. 7.04 Damages. Notwithstanding any provision in this Agreement which may be to ------- the contrary in no event will either party be liable to the other for special, exemplary, or punitive damages. 8 RECALL If the Supply Agreement is not in effect and FEMCARE is manufacturing or having manufactured the Product pursuant to any license granted hereunder, FEMCARE, in its sole discretion, by order of a government or government agency, or at the direction of 25 PPTI, determine to recall any Product, FEMCARE shall notify PPTI promptly by telephone or electronic mail or telecopy. FEMCARE shall give PPTI reasonable opportunity to comment in advance on any public announcement to be made by FEMCARE regarding any recall. In the event any Product is recalled, FEMCARE shall assume complete responsibility for conducting such recall; however, PPTI shall provide FEMCARE with any information that may be in PPTI's possession or control concerning the manufacture of the Product which FEMCARE reasonably may require to conduct such recall. FEMCARE and PPTI shall cooperate to identify and correct deficiencies, if any, in the manufacture, shipment, storage or distribution of the Product. FEMCARE shall pay all costs of conducting such recall. 9 INVENTIONS 9.01 PPTI Inventions. --------------- (a) Title to any inventions or discoveries made by PPTI employees or agents without inventive contribution of FEMCARE employees or agents, based on any PPTI Know-How related in any way to the Product or developed during PPTI'S performance under Article 3.01 ("PPTI Inventions") shall belong to PPTI. (b) PPTI may file applications for U.S. and/or foreign patents at its own expense for such PPTI Inventions and shall keep FEMCARE fully and promptly informed as to such PPTI Inventions and the filing, prosecution and maintenance of such patent applications) and patent(s) and corresponding foreign patent applications. (c) If PPTI does not elect to file, prosecute or maintain any such patent applications or patent(s) on such PPTI Inventions after being reduced to practice, PPTI shall so notify FEMCARE and FEMCARE shall, in its sole discretion, have the right to require that PPTI file, prosecute or maintain on a country-by-country basis such patent applications or patent(s) on such PPTI Invention in which case FEMCARE shall pay the costs and expenses of and manage the prosecution of such patent application(s) or patent(s) and 26 PPTI will co-operate fully and promptly with FEMCARE in respect of such management and prosecution. (d) Until FEMCARE shall have recovered all costs and expenses associated with filings, prosecuting, issuing and maintaining said patent applications or patent(s) FEMCARE'S obligation to pay royalties to PPTI pursuant to Article 4.02 shall be reduced from *** to not less than *** for Net Sales in each Territory in which the patent application is being prosecuted. 9.02 FEMCARE Inventions. Title to any inventions and discoveries made by ------------------ FEMCARE employees or agents without inventive contribution by PPTI employees or agents and conceived or first reduced to practice under this Agreement (hereinafter, "FEMCARE Inventions") shall belong to FEMCARE. FEMCARE may file patent application(s) for FEMCARE Inventions in its own discretion and at its own expense. 9.03 Joint Inventions. ---------------- (a) Title to any inventions or discoveries made jointly by employees or agents of PPTI and FEMCARE and conceived or first reduced to practice under this Agreement ("Joint Inventions") shall belong to PPTI and FEMCARE jointly, i.e., each shall own an undivided one-half interest therein. (b) PPTI and FEMCARE shall keep each other fully and promptly informed as to such Joint Inventions. (c) After Joint Inventions are reduced to practice FEMCARE shall have primary responsibility for filing, prosecuting and maintaining any U.S. patent application(s) or patent(s) and foreign counterpart thereof for Joint Inventions, but shall give full consideration to PPTI's recommendations including selection of attorney(s). - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 27 (d) The expenses for Joint Inventions shall be borne equally by FEMCARE and PPTI, but either may, by giving at least one month's notice to the other, withdraw from further participation in the filing, prosecution and/or maintenance of any such patent application(s) or patent(s)and shall not be liable for any expenses incurred after written notice is given. (e) If either party does not elect to file, prosecute or maintain any such patent application (s) or patent(s) in a country or countries or after electing to participate in the filing, prosecution and/or maintenance on such Joint Inventions in a country or countries, does not pay its share of the expenses within one hundred twenty (120) days of written notification of expenses being due, the other party, in its sole discretion, shall have the right to file, prosecute or maintain at its expense on a country-by-country basis each such patent application(s) and patent(s). (f) If FEMCARE pays all of the costs and expenses of filing, prosecuting and maintaining any Joint Invention, until FEMCARE recovers one-half of such costs and expenses, its royalty rate to PPTI in the Territory in which the patent issues shall be reduced from *** to not less than ***. (g) If PPTI pays all of the costs and expenses of filing, prosecuting and maintaining any Joint Invention, until PPTI recovers one-half of such reasonable costs and expenses, the royalty rate charged to FEMCARE, its Affiliates and distributors in the Territory in which the Patent issues shall increase from *** to not more than ***. 9.04 Each party shall require its employees or agents responsible for conducting research in performance of this Agreement to keep contemporaneous records of their results and findings in sufficient detail to document any inventions of discoveries made by such employees and agents under this Agreement in bound notebooks (that shall be reviewed and signed by a witness on a regular basis). - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 28 9.05 PPTI and FEMCARE will cooperate in a timely manner to prepare, review and execute patent applications and all such further papers, as may be necessary to enable the parties or the party pursuing any patent application to protect Joint Inventions by patent in any and all countries and to vest title to said patent application(s) and patent(s) and assist in Patent Office proceedings. 9.06 If either party wishes to practice a Joint Invention patented in its sole name or in the joint names of the parties outside the grant provided to FEMCARE under Article 2.01, the party practicing the patented Joint Invention will pay to the other party a royalty of not less than *** nor more than *** of the Net Selling Price of any Joint Product. In no event shall such royalty be payable with respect to the use of a Joint Invention by one party to provide goods or services to the other party. Provided however, that if a party seeks to practice such Joint Invention for which it did not pay its share of the cost and expenses, such party shall have to reimburse the party that paid the costs and expenses one-half of the costs and expenses incurred in the country or countries in which the party is seeking to practice the Joint Invention. 9.07 Clause 4.02 (except for paragraph (b)) shall apply in respect of any such royalty payable making such changes as are necessary to reflect the proper payor and payee of the royalty hereunder, and when the royalty is payable by PPTI to pay it in Pounds Sterling. 10 TERM AND TERMINATION 10.01 The term of this Agreement shall commence as of the date it is executed and delivered by both parties, and, unless terminated earlier in accordance with its terms, shall continue for an initial period of the greater of twenty (20) years from the Effective Date or the date upon which the last of the Patents in the Territories expires. - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 29 10.02 This Agreement may be terminated as follows: (a) (i) By one party in the event the other substantially fails to perform or otherwise breaches any of its material obligations, other than obligations to pay money or achieve a Performance Benchmark under this Agreement by giving notice of its intent to terminate and stating the grounds therefor. (ii) The party receiving the notice shall, subject to the provisions of Article 15 and sub-paragraph (v) of this paragraph (a) have sixty (60) days from the date of receipt thereof to cure the failure or breach. (iii) In the event such breach is cured, the notice shall be of no effect. (iv) In the event it is not cured, this Agreement shall, without further action, terminate at the end of such sixty (60) day period. (v) Notwithstanding the foregoing provisions of this Article 10 if the failure to perform or other breach is due to circumstances referred to in Article 17 and such party has complied with the provisions of such Article 17 and is making all reasonable efforts to perform or cure such failure or breach, Article 10.02 (a) shall not apply unless or until the failure to perform or other breach shall have lasted continuously for one hundred and twenty (120) days from the initial receipt of notice of breach. (b) (i) By one party in the event the other fails to make any payment of money due under this Agreement or the Supply Agreement by giving notice of its intent to terminate and stating the amount of money due, reason said amount is due, and the intended termination date. (ii) The party receiving the notice shall, subject to the provisions of Article 15 have thirty (30) days from the date of receipt thereof to cure the failure to pay (during which 30 time if PPTI is the party issuing the notice it shall not be obligated to supply Product to FEMCARE under the Supply Agreement unless payment of such Product is protected by a suitable letter of credit). (iii) In the event such payment breach is cured, the notice shall be of no effect. (iv) In the event it is not, this Agreement shall, without further action terminate at the end of such thirty (30) day period. (c) (i) Subject to Schedule B, by one party in the event the other party substantially fails to meet its Performance Benchmarks through no fault of the first party by giving notice of its intent to terminate and stating the grounds therefor. (ii) The party receiving the notice shall subject to the provisions of Article 15 have one hundred eighty (180) days from the date of receipt thereof to cure the default by achieving the Performance Benchmark. (iii) In the event such default is cured, the notice shall be of no effect. (d) FEMCARE is dissolved or liquidates, makes a general assignment for the benefit of its creditors, files a voluntary petition under any applicable bankruptcy or insolvency law, has a receiver appointed for its property, or has a petition for bankruptcy or insolvency filed against it which petition is not dismissed within one hundred eighty (180) days after filing. 10.03 If the party in default under Article 10.02 is FEMCARE, and the default is not cured within the applicable period, this Agreement shall, unless PPTI notifies FEMCARE in writing prior to the end of such period, without further action, terminate at the end of such period and PPTI shall be entitled to use any and all data and information of FEMCARE to continue obtaining Regulatory Approvals in its own name and right. 31 10.04 If FEMCARE shall have properly exercised its rights to withdraw the Escrow Materials from the Escrow pursuant to the Escrow Agreement (and correspondingly exercised its option under Article 2.02 above, FEMCARE may continue to prosecute any Regulatory Approvals in the Territories and shall be entitled to deduct from any sums payable to PPTI whatsoever any moneys due to it from PPTI whether in respect of any breach of this Agreement by PPTI or otherwise; provided that if FEMCARE does not exercise as aforesaid and serve notice of termination upon PPTI, this Agreement shall terminate and the deposits in the Escrow under the Escrow Agreement shall be returned to PPTI. 10.05 Effects of Termination or Expiration. Subject to Articles 10.04 and 11 ------------------------------------ upon the expiration or termination of this Agreement under 10.01 and 10.02 above, the obligations of PPTI and the rights of FEMCARE hereunder shall immediately terminate. Provided that following such expiration or termination FEMCARE, its Affiliates, distributors and sub-licensees shall continue to have the right to sell, for a reasonable period not to exceed ninety (90) days following the date of termination or expiration, any Product then held in its inventory at not less than 75% of its then usual and customary sales prices. Provided further that notwithstanding such termination or expiration, FEMCARE shall pay to PPTI any royalties due to it through and including the sale of such inventory Product. 10.06 Escrow Agreement. To secure its obligations to manufacture and supply ---------------- Product or enable FEMCARE to manufacture or have manufactured Product in certain circumstances, PPTI has agreed to enter into an Escrow Agreement of even date herewith. 11 RIGHTS UPON TERMINATION 11.01 Subject to Article 10, the termination or expiration of this Agreement shall not relieve and release either party from its obligations to make any other payment which may be owing to 32 the other party under the terms of this Agreement or from any other liability which either may have to the other arising out of this Agreement or the breach of this Agreement. 11.02 All provisions of this Agreement which in order to give effect to their meaning need to survive its termination or expiration shall remain in full force and effect thereafter. 12 ADVERSE EFFECTS 12.01 (a) The parties recognize that the holder of or applicant for Regulatory Approvals for a country may be required to submit information and file reports to various governmental agencies on Products under clinical investigation, Products proposed for Commercialization, or Commercialized Products. (b) Consequently, each party agrees to provide to the other within three (3) Business Days (any day other than a Saturday, Sunday or legal holiday in the U.S. on which banks in New York shall be closed) of the initial receipt a copy of a report of any adverse experience with Product that is serious or unexpected. (c) Serious adverse experience means any experience that suggests a significant hazard, contraindication, side effect or precaution, or any experience that is fatal or life threatening, is permanently disabling, requires or prolongs inpatient hospitalization, or is a congenital anomaly, cancer, or overdose. (d) An unexpected adverse experience is one not identified in nature, specificity, severity or frequency in the current investigator brochure or labeling for the Product. 12.02 In the case where either party has licensed the sale of Product to a third party, each party agrees to obligate any such licensee or distributor thereof to promptly report to the licensing party any serious adverse experience or unexpected adverse experience relating to such Product so that each party can report such experience to the other party pursuant to the provisions hereunder. 13 PATENTS 33 13.01 (a) Subject to Article 13.02(a) PPTI agrees faithfully, at its sole expense to diligently prosecute to (and thereafter maintain) all patents applications for Patents referred to in paragraph (a) of the definition of "Patents" in the United States and, when reasonable under the circumstances or required by a Patent Office because more than one invention is claimed in an application, to file and prosecute additional patent applications, re-examinations, reissues or the like covering patentable technology disclosed in the Patents in the United States and within any applicable time limits to file foreign corresponding applications in the Territories (unless otherwise agreed in writing by FEMCARE) and to prosecute the same to grant and thereafter maintain the same. (b) PPTI shall have the duty and responsibility to pay when due for payment all taxes, maintenance fees and annuities on the Patents and to maintain in force all patents within the Patents granted in the Territories for the full terms thereof. (c) PPTI shall within thirty (30) days of mailing or receipt, provide FEMCARE with copies of all future filed patent applications relating to the Patents and, upon request, all correspondence from and to patent offices worldwide relating to both the Patents and future filed patent applications, re-examinations, reissues or the like. 13.02 (a) If PPTI, in its discretion, decides not to comply with any of the actions required to be taken by it under Article 13.01(a) and notifies FEMCARE in writing accordingly (such notice to specify clearly the countries in respect of which it is not going to take such actions) at least three months before the expiration of any material time period in respect of such actions, PPTI will be released from its obligations thereunder in respect of the actions so notified. PPTI shall so notify FEMCARE and FEMCARE shall, in its sole discretion, have the right to elect to assume the prosecution of such patent application on behalf of PPTI in respect of any such actions (including for the avoidance of doubt filing any applicable patent applications and prosecuting to grant any applicable patents and thereafter maintaining such patents) and PPTI shall co-operate fully and promptly with FEMCARE in the taking of any such actions by it. 34 (b) If FEMCARE so elects, it shall pay the costs and expenses of taking such actions and, notwithstanding anything in Section 4.02 to the contrary, FEMCARE's obligation to pay a royalty to PPTI in such country which is a Territory under Article 4 shall be reduced from *** to no less than *** until FEMCARE shall have recovered all costs and expenses associated with filings, prosecuting, issuing and maintaining said patent applications or patent(s). (c) If the country to which paragraph (b) of this Article 13.02 is the United States FEMCARE shall be entitled to deduct all costs and expenses as aforesaid from any sums payable to PPTI under this Agreement until they have been reimbursed in full. (d) PPTI shall not be deemed to be in breach of this Agreement for failing to comply with Article 13.01(a) to the extent that it fails to take any actions properly notified to FEMCARE pursuant to Article 13.02(a). 13.03 (a) The parties agree to cooperate in order to avoid loss of any rights which may otherwise be available to the parties under the U.S. Drug Price Competition and Patent Term Restoration Act of 1984, the Supplementary Certificate of Protection of the Member States of the European Common Market and other similar measures in any other country in the Territories. (b) Without limiting the foregoing, PPTI agrees to notify FEMCARE promptly upon receipt of any PMA approval to Commercialize Product in the United States and PPTI agrees to file an application for patent extension in the U.S. Patent and Trademark Office within the sixty (60) day period following the receipt of such PMA approval. 14 INFRINGEMENT - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 35 14.01 (a) If, as a result of the manufacture or Commercialization of the Product in the Territories pursuant to this Agreement and the Supply Agreement, PPTI and its Subsidiaries or FEMCARE and/or its Affiliates, distributors or sub-licensees, are sued for patent infringement or infringement of other intellectual property rights or threatened with such a lawsuit or other action by a third party, PPTI and FEMCARE shall promptly meet to analyze the infringement claim and avoidance of same. (b) If following such meeting the parties fail to agree on a joint program of action, including how the costs of any such action are to be borne and how any damages or other sums received from such action are to be distributed, then FEMCARE shall be entitled to take action against the third party at its sole expense and it shall be entitled to all damages or other sums received from such action. PPTI shall agree to be joined in any suit to enforce such rights subject to being indemnified and secured in a reasonable manner as to any costs, damages, expenses or other liability and shall have the right to be separately represented by its own counsel at its own expenses. (c) If it is necessary to obtain a license from such third party, PPTI and FEMCARE in negotiating such a license shall in the extent practicable use their reasonable efforts to minimize the license fees and/or royalty payable to such third party. (d) If FEMCARE or its Affiliates, distributors or sub-licensees shall be obligated to pay a license fee and/or royalty to a third party under such licence as the result of the Commercialization of the Product or the use of Patents or Know-How then PPTI shall elect within ten (10) days of the execution of the license with such third party to: (i) pay all fees and expenses associated with obtaining and maintaining the license; or (ii) to have the royalties specified in Article 4.02 reduced by ***. (e) FEMCARE shall be entitled to deduct from up to one-half of the royalties payable under clause 4.02 any sums paid to third parties (including without limitation damages, payments in settlement of litigation and reasonable cost and expenses incurred in relation to any alleged or actual infringement of third party rights in the manufacture or - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 36 Commercialization of any product; provided that such payments are specifically approved, in advance, by PPTI, such approval to not be unreasonably withheld or delayed). 14.02 (a) In the event that there is infringement of a Patent involving the Product by a third party in the Territories, PPTI and FEMCARE shall notify each other in writing to that effect immediately upon becoming aware of the same, including if practicable with said written notice evidence establishing a case of infringement by such third party. (b) FEMCARE shall have the right, in its sole discretion, but not the obligation to bring such suit at its own expense and in its own name, if possible, or jointly in its name and in the name of PPTI or if necessary in PPTI's sole name. (c) FEMCARE shall bear all the expenses of any suit brought by it and shall retain all damages or other monies awarded or received in settlement of such suit; provided, however, that at its option exercised by notice in writing to FEMCARE before it commences such suit PPTI may contribute to the expenses of any such suit and, in such event, FEMCARE and PPTI shall share proportionately to their respective contributions all damages or other monies awarded or received in settlement of such suit. (d) PPTI will cooperate with FEMCARE in any such suit and shall have the right to consult with FEMCARE and, if it elects pursuant to the proviso to paragraph (c) of this Article, to be separately represented by its counsel at its own expense. 14.03 (a) In the event that there is infringement of a patent of a Joint Invention jointly owned by the parties outside the grant provided to FEMCARE under Article 3.01 by a third party, PPTI and FEMCARE shall notify each other in writing to that effect immediately upon becoming aware of the same, including if practicable with said written notice evidence establishing a case of infringement by such third party. 37 (b) PPTI and FEMCARE shall meet to analyze the infringement claim, the evidence of same and attempt to agree upon a suitable approach for addressing said infringement. 15 ARBITRATION OF DISPUTES 15.01 Excepting only actions and claims relating to actions commenced by a third party against PPTI or FEMCARE (including, without limitation, for injuries caused by a Product or in respect to a trademark or patent infringement claim), any controversy or claim arising out of or relating to the terms and conditions of this Agreement, or the decision to agree upon these terms, or the breach thereof, including questions of validity, infringement, or termination hereof, shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association. If such controversy or claim relates to patent validity or infringement, then the Patent Arbitration Rules of the AAA shall apply; otherwise the International Arbitration Rules of the AAA shall apply. Notwithstanding the foregoing to the contrary or in the arbitration rules invoked or in this Section 15, the parties retain the right to request a judicial authority to invoke interim measures of protection, and such request shall not be deemed incompatible with this agreement to arbitrate or a waiver of the right to arbitrate. 15.02 There shall be one (1) arbitrator to be mutually agreed upon by the parties and to be selected from the Regional Panel of Distinguished Neutrals. If the parties are unable to agreeupon such an arbitrator who is willing to serve within ten (10) days of receipt of the demand by the other party, the parties shall within three (3) days select one of the five largest international public accounting firms (excluding those providing services to the parties) and engage the managing partner or senior officer of its New York City office to designate a partner of such firm to serve as the arbitrator. Failing that, then the AAA shall appoint an arbitrator willing to serve from the Regional Panel of Distinguished Neutrals, or if no such panel exists, then from an appropriate AAA panel. It shall be the duty of the arbitrator to set dates for preparation and hearing of any dispute and to expedite the resolution of such dispute. 38 15.03 (a) The arbitration shall be held in the City of New York, State of New York, U.S.A. and the arbitrator shall apply the substantive law of Delaware except that the interpretation and enforcement of this arbitration provision shall be governed by the Federal Arbitration Act. (b) The arbitrator shall permit and facilitate discovery, which will be conducted in accordance with the Federal Rules of Civil Procedure, taking into account the needs of the parties and the desirability of making discovery expeditious and cost-effective. (c) The arbitrator will set a discovery schedule with which the parties will comply and attend depositions if requested by either party. (d) The arbitrator will entertain such presentation of sworn testimony or evidence, written briefs and/or oral argument as the parties may wish to present, but no testimony or exhibits will be admissible unless the adverse party was afforded an opportunity to examine such witness and to inspect and copy such exhibits during the pre-hearing discovery phase. (e) The arbitrator shall among his other powers and authorities, have the power and authority to award interim or preliminary relief. (f) The arbitrator shall not be empowered to award either party exemplary or punitive damages or any enhanced damages for willful infringement and the parties shall be deemed to have waived any right to such damages. (g) A qualified court reporter will record and transcribe the proceeding. (h) The decision of the arbitrator will be in writing and judgment upon the award by the arbitrator may be entered in any court having jurisdiction thereof. (i) Prompt handling and disposal of the issue is important. Accordingly, the arbitrator is instructed to assume adequate managerial initiative and control over discovery and other aspects of the proceeding to schedule discovery and other activities for substantially continuous work, thereby expediting the arbitration as much as is deemed reasonable to him, but in all events to effect a final award within 365 days of the arbitrator's selection or appointment and within 20 days of the close of evidence. (j) The proceedings shall be confidential and the arbitrator shall issue appropriate protective orders to safeguard both parties' confidential information. 39 (k) The fees of the arbitrator and the AAA shall be paid as designated by the arbitrator or, if he shall not so designate, they shall be split equally between the parties. 16 NOTICES 16.01 Notices hereunder shall be in writing and shall be deemed to have been duly given if personally delivered, mailed by registered mail, return receipt requested, or when sent by facsimile or other telegraphic means. Such notices shall be effective upon receipt, if by personal delivery, on the third business day following date of the receipt for registered mail, or if by facsimile, on the date of the confirmation of "ok" transmission. Addresses and persons to be notified may be changed by either party by giving written notice thereof to the other party. For FEMCARE: FEMCARE UROLOGY LIMITED. St. Peter's Street Nottingham NG7 3EN United Kingdom Attention: B. Sweeney Fax: 011-44-115-942-0234 With a copy to: Nelsons Solicitors Pennine House, 8 Stanford Street Nottingham, NG1 7BQ FAX: 0115 958 9113 Attention: David J. Tillcock 40 For PPTI: Protein Polymer Technologies, Inc. 10655 Sorrento Valley Road San Diego, California 92121 Attention: President Fax: (858) 558-6477 With a copy to: Piper Marbury Rudnick & Wolfe 203 North LaSalle Street, Suite 1800 Chicago, Illinois 60601 Fax: (312) 630-5322 Attention: John H. Heuberger 17 FORCE MAJEURE 17.01 (a) Subject to compliance with paragraph (b) of this Article 17 any delays in or failure of performance by either party under this Agreement shall not be considered a breach of this Agreement if and to the extent caused by any occurrences beyond the reasonable control of the party affected, including but not limited to: acts of God; acts, regulations or laws of any government; strikes or other concerted acts of workers; fires; floods; explosions; riots; wars; rebellion; embargo; and sabotage; and any time for performance hereunder shall be extended by the actual time of delay caused by such occurrence. (b) Any party affected by such force majeure who wishes to rely on the provisions of paragraph (a) of this Article shall as soon as reasonably practicable give notice to the other party specifying the matters constituting force majeure together with such evidence 41 thereof as it can reasonable give and specifying the period for which it is estimated that the such delay will continue. 18 SAVINGS PROVISION 18.01 The invalidity of any provision of this Agreement shall not impair the validity of any other provision; and any provision hereof which might otherwise be invalid or contravene any applicable law shall hereby be deemed to be amended to the extent necessary to remove the cause of such invalidity and to the extent practicable to continue the intent of such provision and of this Agreement, and such provision, as so amended, shall remain in full force and effect as a part hereof. 19 RELATIONSHIP OF PARTIES 19.01 Each party shall act as an independent contractor in carrying out its obligations under this Agreement. Nothing contained in this Agreement shall be construed to imply a joint venture, partnership or principal- agent relationship between the parties, and neither party by virtue of this Agreement shall have the right, power or authority to act or create any obligation, express or implied, on behalf of the other party. This Agreement shall not be construed to create rights, express or implied, on behalf of or for the use of any party aside from FEMCARE and PPTI, and neither party shall be obligated, separately or jointly, to any third parties by virtue of this Agreement. 20 WARRANTIES 20.01 FEMCARE warrants that it shall use its best efforts to comply with all laws applicable to the purchase, storage, transport, labeling, distribution or Commercialization by it of the Product in the Territories, shall comply with the U.S. Export Administration laws and regulations and shall not export or re-export any technical data or Intellectual Property, or the direct products of such technical data or Intellectual Property, or Products to any 42 prohibited country listed in the U.S. Export Administration Regulations unless properly authorized to do so by the U.S. government. 20.02 PPTI represents and warrants to FEMCARE that the following statements are true and accurate in all material respects as follows: (a) To its knowledge and belief, it has sufficient right and title to and ownership of, free and clear of all liens, claims and encumbrances of any nature, the Intellectual Property to grant to FEMCARE the various rights and Licenses granted to FEMCARE under this Agreement; (b) It has not done and subject to clause 23, will not do nor agree to do during the term of this Agreement, any of the following things if to do so would be materially inconsistent with the exercise by FEMCARE of the rights granted to it under this Agreement, assign, mortgage, hypothecate, or otherwise transfer any of the Patents or any of its rights or obligations under this Agreement; (c) It is not aware that any third party owns any rights in the Intellectual Property; (d) It is not aware that any third party owns any rights which would be infringed by the use of the Patents in accordance with provisions of this Agreement; (e) It has reasonable grounds for believing that the Product in its present form will constitute substantially the Product for Commercialization in the Territories; (f) There is no information known to PPTI concerning the Product not previously incorporated in the IDE *** or disclosed to FEMCARE which indicates that it may not be safe for administration to humans or that the development and Commercialization of the Product would not be commercially successful. - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 43 (h) To PPTI's knowledge as of the date of this Agreement, no corporation, limited liability partnership or partnership which has more than 250 employees and either an annual turnover which exceeds Euro 40 million or an annual balance sheet total exceeding Euro 27 million owns more than 25% of the share capital or voting rights of PPTI. 21 INTEGRATION AND CONFLICT 21.01 (a) It is the mutual desire and intent of the parties to provide certainty as to their future rights and remedies against each other by defining the extent of their mutual undertakings provided herein. The parties have in this Agreement and in the related Supply Agreement and Escrow Agreement incorporated the representations, warranties, covenants, commitments and understandings on which they have relied in entering into this Agreement and, except as provided for herein and in the Supply Agreement and Escrow Agreement, neither party has made any undertaking or other commitment to the other concerning its future activities. Accordingly, this Agreement and the related Supply Agreement and Escrow Agreement: (i) constitute the entire agreement and understanding between the parties with respect to the subject matter contained herein, and there are no promises, representations, conditions, provisions or terms related thereto other than as set forth in this Agreement and the related Supply Agreement and Escrow Agreement; and (ii) supersede all previous understandings and agreements, and representations between the parties, whether written or oral, relating to the subject matter. (b) The parties may from time to time during the term of this Agreement modify any of its provisions by mutual agreement in writing. 44 (c) The parties agree that each has had the opportunity to be represented by counsel of it choosing including the negotiations that preceded this Agreement. (d) In the event of any conflict between the provisions of this Agreement and the Supply Agreement, unless expressly stated in this Agreement, the provisions of this Agreement shall prevail. 22 GOVERNING LAW 22.01 This Agreement shall be construed and the rights of the parties shall be determined in accordance with the substantive laws of the State of Delaware, without regard to its conflict of laws principles, except that the Arbitration provisions contained herein shall be governed as stated in Section 15. 23 ASSIGNMENT 23.01 Except as specifically provided herein each party in its sole discretion, may assign or transfer all or a portion of its rights under this Agreement to any of its Affiliates, or designate or cause any Affiliate to have the benefit of all or a portion of its rights hereunder; provided, however, that any such party shall remain liable for the performance by its Affiliate under this Agreement. Also, either party may assign this Agreement to a party purchasing substantially all of the assets or operations of such party. Except as herein provided, neither party shall assign or otherwise transfer this Agreement or any part hereof to any third party without the prior written permission of the other party. 24 BANKRUPTCY 24.01 All rights and licenses granted under or pursuant to this Agreement by a party acting as licensor to the other party as licensee are, and shall otherwise be deemed to be, for purposes of Section 365(n) of Title 11, U.S. Code (the "Bankruptcy Code") licenses of rights to "intellectual 45 property" as defined under Section 101(60) of the Bankruptcy Code. The parties agree that a licensee of such rights under this Agreement, shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code. The licensor of such rights agrees during the term of this Agreement to create and maintain current copies or, if not amenable to copying, detailed descriptions or other appropriate embodiments, of all such intellectual property. The parties further agree that, in the event of the commencement of a bankruptcy proceeding by or against the licensor under the Bankruptcy Code, the licensee shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property and all embodiments of such intellectual property, and same, if not already in its possession, shall be promptly delivered to licensee (i) upon any such commencement of a bankruptcy proceeding upon written request therefor by the licensee, unless licensor elects to continue to perform all of its obligations under this Agreement, or [(ii) if not delivered under (i) above, upon the rejection of this Agreement by or on behalf of licensor upon written request therefor by licensee. 46 IN WITNESS WHEREOF, and FEMCARE have caused this Agreement to be executed in duplicate by their fully authorized representatives. PROTEIN POLYMERS, INC FEMCARE By: /s/ Thomas Parmeter By: /s/ Bernard Sweeney --------------------------- --------------------------- Thomas Parmeter Bernard Sweeney President and CEO Managing Director Date January 26, 2000 Date January 26, 2000 -------------------------- -------------------------- THE UNDERSIGNED PARENT COMPANY OF PROSPECTIVEPIERCING LIMITED (TO BECOME FEMCARE UROLOGY LIMITED), TO INDUCE PROTEIN POLYMER TECHNOLOGIES, INC. TO ENTER INTO THIS AGREEMENT AND FOR OTHER GOOD AND VALUABLE CONSIDERATION, THE RECEIPT, ADEQUACY AND SUFFICIENCY OF WHICH IS HEREBY ACKNOWLEDGED, HEREBY IRREVOCABLY AND UNCONDITIONALLY GUARANTEES THE TIMELY AND FULL PERFORMANCE AND PAYMENTS UNDER THIS AGREEMENT BY PROSPECTIVEPIERCING LIMITED AND AGREES THAT IT SHALL BE BOUND BY THE ARBITRATION PROVISIONS HEREIN AS IF A FULL PARTY HERETO. Date: January 26, 2000 ---------------------------- By: /s/ Bernard Sweeney ------------------------------ Bernard Sweeney Managing Director 47 SCHEDULE A Schedule of Patents -------------------
Corresponding International Patents Patent Number Issue Date Title and/or Applications - -------------- ----------- ------------------------- ------------------------- U.S. 5,243,038 Sep 7, 1993 Construction of Synthetic PCT/US87/02822: Issued in DNA and Its Use in Large Australia, Finland, New Polypeptide Synthesis Zealand; *** U.S. 5,606,019 Feb 25, 1997 Synthetic Proteins as PCT/US95/02772: *** Implantables U.S. 5,770,697 Jun 23, 1998 Peptides Comprising Not Applicable Repetitive Units of Amino Acids and DNA Sequences Encoding the Same Patent Application Number Filing Date Title Corresponding International Patents and/or Applications PCT/US89/05016 Nov 7, 1989 Functional Recombinantly Issued in Australia, Prepared Synthetic Protein Europe, Finland, Norway, Polymer South Korea; *** U.S. S/N 08/482,085 Jun 7, 1995 Peptides Comprising Not Applicable Repetitive Units of Amino Acids and DNA Sequences Encoding the Same *** *** *** *** *** *** *** *** *** *** *** ***
- ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. A-1 SCHEDULE B PRODUCT DEVELOPMENT AND REGULATORY APPROVAL MILESTONES MILESTONE TARGET DATE - --------- ----------- BEGIN NON-U.S. CLINICAL EFFICACY TRILAS *** BEGIN EUROPEAN PRODUCT SALES *** BEGIN AUSTRALIAN PRODUCT SALES *** BEGIN MINIMUM ROYALTY PERIOD *** * Provided that any failure to achieve this Performance Benchmark shall not give rise to a right of termination of this Agreement even if the failure is not cured within the required time period. In the event of such failure, FEMCARE's license for Australia hereunder shall cease to be exclusive and shall become non-exclusive for remaining term of, and subject to, this Agreement. - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. B-1 SCHEDULE C *** - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. C-1 SCHEDULE D LIST OF THE TERRITORIES TERRITORIES Norway France Finland Germany Iceland Greece Liechtenstein Ireland Sweden Italy Switzerland Luxembourg Hungary Netherlands Poland Portugal Austria Spain Belgium UK Denmark Australia *** - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. D-1 EX-10.28 3 SUPPLY AGREEMENT EXHIBIT 10.28 SUPPLY AGREEMENT THIS SUPPLY AGREEMENT is made and entered into this day of by and between PROTEIN POLYMER TECHNOLOGIES, INC., a Delaware corporation (" Supplier")and FEMCARE UROLOGY LIMITED, a corporation under the laws of the United Kingdom and Wales having offices at St. Peter's Street, Nottingham, NG7 3EN, England ("Purchaser"). WITNESSETH: WHEREAS, Purchaser and Supplier are party to that certain License and Development Agreement dated January 26, 2000 (the "License Agreement")pursuant to which Purchaser has been granted an exclusive license to Commercialize the Product in the Territories in the Field. WHEREAS, pursuant to the License Agreement, all of the Product that is marketed by Purchaser is to be manufactured by Supplier or by another company selected by Supplier and approved by Purchaser for the term of the License Agreement. WHEREAS, Supplier possesses and is further developing the Know-How and Patents to commercially manufacture the Product. WHEREAS, Supplier desires to manufacture and sell to Purchaser, and Purchaser desires to engage Supplier to manufacture and supply to it, the Product, in each case subject to the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt, sufficiency and adequacy are hereby acknowledged, the parties hereto agree as follows: 1. PREAMBLES AND DEFINITIONS. The preambles set forth above are an integral part of this Agreement and are incorporated herein by this reference. All capitalized terms used but not defined in this Agreement shall have the meanings ascribed thereto in the License Agreement. 2. SUPPLY AND PURCHASE OF PRODUCT. (a) During the five year period beginning with the date of this Agreement (the "Exclusive Term"), Purchaser hereby agrees to purchase and to cause its Affiliates to purchase from Supplier or such person as Supplier shall designate, the entire requirements of Product by Purchaser, its Affiliates, distributors and sublicensees. After the expiration of the Exclusive Term, Purchaser may, but shall not be required to purchase and to cause its Affiliates to purchase Product from Supplier or Supplier's designee. All Product supplied by Supplier pursuant to this Agreement shall be resold and distributed solely in the Territories for use in the Field. The Purchaser and its Affiliates, distributors and sublicensees shall not resell the Product to any person in the Territories knowing or having reasonable basis to believe that such person intends to re-sell the Product outside of the Territories or use or resell the Product outside of the Field. (b) Supplier agrees to manufacture, package, sell and ship or cause to be manufactured, packaged, sold and shipped, the Product to Purchaser, in finished *** units, subject to Purchaser satisfying its obligations hereunder. All purchases by Purchaser or its Affiliates will be made by purchase orders issued by Purchaser or such Affiliate to Supplier setting forth the quantities of Product ordered and the anticipated delivery date. Quantities of Product shall be identified by units. (c) Purchaser shall provide to Supplier upon the commencement of the Term and in all events not less than 120 days before the expected beginning of the first Marketing Year and thereafter not less than 90 days prior to the commencement of each subsequent Marketing Year a bona fide (based on a realistic estimate of sales in the relevant Marketing Year) 12 month projection of anticipated (not guaranteed) Product purchases by Calendar Quarter by Purchaser and its Affiliates during the upcoming Marketing Year ("Annual Estimate"). Supplier shall have 15 days in which to review the Annual Estimate and advise Purchaser as to whether or not it has the available capacity to manufacturer and supply the Annual Estimate. Supplier shall use all reasonable efforts to put itself in a position whereby it is able to agree with the Purchaser's Annual Estimate for the applicable Marketing Year. If Supplier, having applied such reasonable efforts, advises Purchaser that it cannot manufacture and supply Product equal to the Annual Estimate, Supplier may arrange for a third party manufacturer selected by it and approved by Purchaser, which approval shall not be unreasonably withheld or delayed, to assist Supplier in the manufacturer and supply of Product. If Supplier shall be unable to timely manufacture or have manufactured Product equal to the Annual Estimate, Supplier and Purchaser shall negotiate and adopt a revised Annual Estimate and in such negotiations the Supplier shall use its reasonable efforts to reduce the Purchaser's original Annual Estimate by the smallest number of units reasonably practicable. In such a case, if the revised Annual Estimate is less than the Minimum Purchase requirement for the subject Marketing Year (as expressed in units), the Minimum Purchase requirement for that Marketing Year shall be reduced to the dollar amount (using the table in Section 5(a))corresponding to the number of units in the revised Annual Estimate and a corresponding adjustment shall be made for the Minimum Royalty payable under the License Agreement. (d) Purchase orders for the Product shall be placed with Supplier at least 90 days prior to Purchaser's anticipated delivery date. All Product will be purchased in quantities of not less than one-twelfth (1-12th) of the Annual Estimate unless otherwise requested in advance by Purchaser and agreed to by Supplier, which agreement shall not be unreasonably withheld or delayed. Purchaser - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 2 submitted in accordance with this Agreement shall be firm and binding upon Purchaser after acceptance by Supplier. Purchase orders for Product shall be deemed acceptable to Supplier provided that the quantities and delivery dates do not deviate materially from the Marketing Year Annual Estimate developed by Purchaser. Purchase orders shall be deemed to have been accepted by Supplier seven (7) calendar days after delivery of the purchase order to Supplier unless within said seven (7) day period Supplier shall give notice to Purchaser of the unacceptability of said purchase order for a reason for non-acceptance permitted under this Agreement (which reason shall be set out in the notice). (e) Supplier shall supply ordered Product as requested by Purchaser to the extent that the purchase order does not exceed by an amount greater than fifty percent (50%) from the corresponding month within the Annual Estimate. Supplier shall use all reasonable efforts to fill each purchase order delivered by Purchaser or its Affiliates within 90 days of delivery of such purchase order or such lesser period of time and Purchaser and Supplier shall, in advance, agree. 3. DELIVERY (a) Delivery of Product to Purchaser and its Affiliates shall be F. O. B. Supplier's manufacturing facility, and shall be accompanied by a packing slip which describes the Product, identifies the purchase order number and shows the shipment's destination. Purchaser shall arrange insured common carrier transportation of Product to Purchaser's distribution center or where Purchaser shall otherwise direct. Title to and risk of loss of Product shall pass to Purchaser at the time of delivery to the carrier. Supplier shall promptly bill Purchaser for all Product delivered. All invoices shall be accompanied by the applicable commercial bills of lading. Unless otherwise specified by Purchaser, all Product shall be shipped on a first manufactured-first shipped basis, provided that no Product shall have an expiration date less than six (6) months from the date of shipment unless otherwise agreed to in writing by Purchaser. All Product shall be packaged for shipping using protocols designated by Supplier taking into consideration the method and timing of transport identified by Purchaser, which protocols shall be promptly furnished in writing to Purchaser. Purchaser shall notify Supplier of any change in the method and timing of transporting Product a reasonable time before Product delivery so that Supplier may develop appropriate shipping protocols. Subject to the forgoing, the shipment of Product delivered to Purchaser or its Affiliates shall be at the sole risk of Purchaser. (b) Any required governmental, regulatory or customs approvals for domestic or international shipment of the Product shall be the responsibility of Purchaser or its designated agent. Supplier will cooperate and assist Purchaser in complying with any applicable international shipping requirements. (c) All shipping cartons and units of Product within each shipping carton shall bear a readily visible code or other notation identifying the manufacturing lot number, expiration date and Product name. All shipping cartons and units of Product within each shipping carton shall comply with all applicable laws and regulations regarding the packaging and labeling of medical devices. (d) The parties shall use all reasonable efforts to schedule the timely shipment of Product pursuant to the requirements as established in the accepted purchase orders. For purposes of this Agreement, a timely shipment shall be a shipment delivered to the common carrier not later than two weeks after the agreed upon date. (e) Purchaser shall notify Supplier of any short shipment claims within ten (10) days of receipt of a shipment of Product. 4. PRODUCTION AND QUALITY CONTROL. (a) Supplier warrants, represents and covenants that all Product produced for or sold to Purchaser and its Affiliates shall be manufactured free from defects in materials and workmanship in accordance with specifications set forth in approved production protocols and shall be in compliance with Quality System Regulations and IS0 9001 Standards in effect at the time of production and/or such other lawful and appropriate standards as the parties may agree upon. All Product will have passed suitable Supplier required quality control tests. Purchaser acknowledges that production specifications may be changed from time to time to comply with applicable laws and regulations. Supplier shall delivery to Purchaser a copy of test results for each lot of Product supplied to Purchaser or its Affiliates. (b) Each of Supplier and Purchaser shall conduct such quality control procedures and inplant quality control checks as it shall deem reasonably necessary. Supplier shall use the same quality control procedures and checks as it applies in the manufacturing of Product for its own use and sale. Purchaser shall audit Supplier's quality control activities and results or conduct its own quality control testing, or provide that its Affiliates, distributors or sub- licensees conduct quality control testing, within 30 days of delivery of Product to Purchaser or direct to Purchaser's Affiliates distributors or sub-licensees. Purchaser shall immediately, and in all events within seven days of discovery or of the end of the 30 day period, whichever shall first occur, bring to the attention of Supplier any Product that does not meet Purchaser's audit or quality control procedures and checks. Product lots that meet Supplier's quality control requirements and which are not objected to by Purchaser within 30 days of delivery as provided above shall be presumed to be free from defects in material and workmanship, in the absence of manifest error. (c) Each party agrees to notify the other within 48 hours of learning of (i) the failure of any Product to meet standards found in said Product's Regulatory Approval or (ii) third-party complaints pertaining to Product. Purchaser shall use its reasonable efforts to promptly resolve any third party complaints relating to the Product in a manner consistent with Purchaser's approach to the resolution of complaints lodged against other products marketed by Purchaser and its Affiliates (subject to Supplier, as required by Purchaser's quality control manual, providing Purchaser with any information in its possession that may facilitate prompt and favorable resolution of any such complaints and without limitation, within 72 hours of the delivery of the complaint to Supplier). In the event that Purchaser cannot resolve such complaint as aforesaid, Purchaser shall notify Supplier and the parties shall jointly attempt to resolve the problem. (d) In the event that any governmental agency or authority issues a recall or takes similar action in connection with any Product sold or distributed by Purchaser and its Affiliates, its distributors or sub-licensees in a Territory, or Purchaser reasonably considers it necessary to recall Product, Purchaser shall, within 24 hours, advise Supplier by telephone, e-mail or facsimile transmission and Supplier and Purchaser shall agree on an appropriate course of action. Purchaser shall assume complete responsibility for conducting such recall; however, Supplier shall provide Purchaser with any information that may be in Supplier's possession or control concerning the manufacture of the Product which Purchaser reasonably may require to conduct such recall. Supplier and Purchaser shall cooperate to identify and correct deficiencies, if any, in the manufacture, shipment, storage or distribution of the Product. In the event of such a recall or if Supplier requests Purchaser to recall Product, Purchaser and its Affiliates, distributors and sublicensees shall immediately cease all sales of such Product and take all appropriate actions to recall such Product. Supplier shall bear the expenses of any recall requested by it or resulting from (i) defective manufacture, packaging or shipment by Supplier or (ii) any willful misconduct, negligence or gross negligence of Supplier, or any failure of Supplier to comply with the terms of this Agreement, that causes such Product recall. Purchaser shall bear the expenses of any other recall. For the purpose of this Agreement expenses of recall include, without limitation, the expenses of notification and destruction or return of the recalled Products, but not the expense or service fees associated with salesmen's time which shall be borne by Purchaser. (e) Supplier shall retain samples of all ingredients, packaging materials, records and data as may be in accordance with the sample and record retention policies which Supplier uses in connection with manufacture of Product for its own account; provided such retention shall at all times be in accordance with all applicable Regulatory Approvals, Quality System Regulations and IS0 9001 Standards. Purchaser shall have the right, from time to time, to review Supplier's manufacturing procedures and operations and its records relating to the manufacture and shipment of Product. No inspection or testing of Product by Purchaser, or failure to test or inspect, shall relieve Supplier of its obligations hereunder. Copies of any certificates, reports, test results or other information produced by Supplier, or by a third party consultant or contractor at Supplier's request, that directly relate to lots of Product sold to Purchaser shall, upon the written request of Purchaser, be furnished to Purchaser and may be relied upon by it. (f) The parties recognize that the holder of or applicant for Regulatory Approvals for a country may be required to submit information and file reports to various governmental agencies on Product under clinical investigation, Product proposed for Commercialization, or Commercialized Product. Consequently, each party agrees to provide to the other within three (3) business days of the initial receipt of a report of any adverse experience with Product that is serious or unexpected. Serious adverse experience means any experience that suggests a significant hazard, contraindication, side effect or precaution, or any experience that is fatal or life threatening, is permanently disabling, requires or prolongs inpatient hospitalization, or is a congenital anomaly, cancer, or overdose. An unexpected adverse experience is one not identified in nature, specificity, severity or frequency in the current investigatory brochure or labeling for the Product. In the case experience or unexpected adverse experience relating to such Product so that Purchaser can report such experience to Supplier pursuant to the provisions hereunder. 5. PRICE AND PAYMENT TERMS. (a) Purchaser will pay the unit price for each accepted Product. The unit price within each Marketing Year shall be the greater of that amount which is equal to *** of Purchaser's Net Sales price per Unit or as follows: Marketing *** Year First *** Second *** Third *** Fourth *** Fifth *** All prices of Product shall be stated in U. S. Dollars and all payments made under this Agreement (or any invoice issued in accordance with this Agreement) shall be paid in U. S. Dollars and shall be without deduction of any taxes or other charges except as required by law. Per unit invoice pricing shall be based on the number of units previously delivered (in accordance with the first sentence of Section 3(a) above) during the Marketing Year and being delivered under the purchase order then being filled net of any units returned and scheduled to be returned by Purchaser to Supplier. All invoices for Products sold to Purchaser and its Affiliates shall be the obligation of Purchaser. However, any Affiliate of Purchaser may pay any invoice or account payable obligation of Purchaser directly to Supplier with the same effect as if the payment had been made by Purchaser. (b) The unit price shall include manufacturing, packaging, and Supplier's quality control measures as Supplier applies to Product used or sold by Supplier. Purchaser shall provide to Supplier in writing the packaging and labeling requirements for the Product, which requirements, when determined, shall meet all applicable Quality System Regulations and IS0 9001 Standards and/or such other lawful and appropriate standards as the parties may agree upon, and shall become part of the Product specifications for the Product. Such requirements shall be specified within a reasonable period of time prior to the first shipment of Product in order to allow Supplier to be able to satisfy Purchaser's requirements. In addition, from time to time upon reasonable prior notice to Supplier, Purchaser may make changes to such packaging and labeling specifications should - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 6 Purchaser determine such changes are necessary or desirable and subject to then satisfying all applicable Regulatory Approvals. To the extent permitted under applicable law, Purchaser shall credit Supplier as the licenser or manufacturer of the technology used in the Product. (c) The unit price as specified in Section 5(a) shall apply during the first five (5) Marketing Years. Thereafter, not less than 60 days prior to the end of the fifth Marketing Year, and not less than 60 days prior to the end of every second Marketing Year thereafter, Supplier and Purchaser may agree to revise any of the prices for the forthcoming marketing years. In no event shall the price to be paid to Supplier by Purchaser and its Affiliates be less than ***of Purchaser's Net Sales price per unit in the Territory. If the average number of units required per treatment procedure in the Clinical Efficacy Trials exceeds ***, the parties shall (subject to Supplier increasing its or its approved contract manufacturing capacity of Products to allow for the consequential increase in demand) adjust the unit price and unit volume increments per Marketing Year, and volume of product per unit, in a manner which takes into account the assumptions used by the parties to determine the Minimum Purchase requirement specified in Section 5(e). (d) The terms of payment are net upon shipment of Product. Any invoice not paid when due shall be subject to late and service charges equal to l- 1/2% per month of the amount past due. Notwithstanding anything in the foregoing to the contrary, any purchase order submitted or to be filled within the last four months of the term of this Agreement or the termination of Supplier's obligations under this Agreement shall be accompanied by an unconditional, irrevocable letter of credit issued by a banking institution having facilities in New York City, New York that is reasonably acceptable to Supplier in the full face amount of the extended price of the Product ordered, and payable to Supplier or its assignee which letter of credit shall be drawable upon presentment of the letter of credit and bills of lading evidencing delivery of the Product pursuant to such purchase order. (e) If for any Marketing Year Purchaser shall not have purchased from Supplier the Minimum Purchase requirement for such Marketing Year, Purchaser shall pay to Supplier within 45 days following the close of the applicable Marketing Year the amount by which the applicable Minimum Purchase requirement for the Product exceeds the actual revenue derived by Supplier from the sale of Product to Purchaser. The Minimum Purchase requirement is as follows: Marketing Year Minimum Purchases First *** Second *** Third *** Fourth *** Fifth *** - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 7 The parties agree that the Minimum Purchase requirements shall not apply in any Marketing Year in which (i) the Minimum Royalty under the License Agreement is not payable to Supplier due to Purchaser's affirmative election under Section 4.02(b) of the License Agreement, or (ii) the quantity of Product corresponding to the Minimum Purchase requirement has been ordered by Purchaser but Supplier has failed to timely till the accepted purchase orders required to be filled within said Marketing Year or committed a breach of this Agreement that prevents the Minimum Purchase requirements being achieved. In the event of (ii), if there continues to be a delivery of Product to Purchaser, the Minimum Purchase requirements shall be reduced by dollar amount corresponding to the number of units of Product ordered by Purchaser for timely delivery on the Marketing Year which are not delivered to Purchaser in such Marketing Year but if Supplier has failed to deliver to Purchaser for six (6) months or more during the Marketing Year, any Product ordered by Purchaser and scheduled for timely delivery within the Marketing Year, the Minimum Purchase requirements for such Marketing Year shall be waived and for the next Marketing Year the Minimum Purchase requirement shall revert to that in effect for the immediately preceding Marketing Year (or if in the two Marketing Years the Minimum Purchase requirements are the same, the Minimum Purchase requirement shall be reduced by 20%) and a corresponding adjustment shall be made to subsequent Marketing Years and to the Minimum Royalty requirements under the License Agreement. Notwithstanding the forgoing, the Minimum Purchase requirement shall be suspended during any period during which Product cannot be Commercialized as a result of any inherent defect in the Product, any Recall required by any applicable regulatory body that is not specific to identified Product lots that are replaced within a reasonable period of time, or the Product being found to not be safe for use in humans. 6. MARKETING AND TECHNICAL SUPPORT (a) Supplier agrees to provide Purchaser (but not to its Affiliates or distributors), with such reasonable technical support as Purchaser may from time to time request with respect to the Commercialization of the Product, including access to research data, interpretation of such research data, assistance in initial backgrounding of Purchaser sales, marketing and technical service personnel, competitive analysis and general advice and counsel pertinent to supporting the Products in the marketplace. Such support shall be provided at no additional cost to Purchaser. To the extent appropriate, such data shall be subject to the confidentiality obligations set forth in the License Agreement. (b) Purchaser agrees to provide to Supplier copies of all training, advertising and promotional materials for the Product, as those materials become available, including translations thereof into the English language. Purchaser agrees that all such materials shall be prepared in accordance with all applicable laws and regulations. (c) Supplier shall promptly refer to Purchaser all customer inquiries and correspondence which Supplier receives from persons within a Territory in the Field relating to the Product. 8 7. REPRESENTATIONS, WARRANTIES AND COVENANTS. (a) Supplier represents and warrants to Purchaser that it is duly authorized and empowered to enter into and perform this Agreement; and the execution and performance of this Agreement by Supplier does not and will not conflict with or violate any contract, agreement, indenture, mortgage, instrument, writ, judgment, or order of any court, arbiter or governmental or quasi-governmental body to which Supplier is a party or by which Supplier is bound. (b) Supplier represents and warrants to Purchaser that prior to first shipment of the Product it will have received all necessary licenses, permits and Regulatory Approvals for manufacture and export of the Product to the applicable Territories and that there have been no recalls of Product. (c) Supplier agrees to adhere to all known laws, rules and regulations applicable to the manufacture of Product under this Agreement and warrants that the Product will be manufactured in accordance with all Product specifications and will be delivered to Purchaser free and clear of all third party claims, liens and encumbrances. (d) Purchaser represents and warrants to Supplier that it is duly authorized and empowered to enter into and perform this Agreement; and the execution and performance of this Agreement by Purchaser does not and will not conflict with or violate any contract, agreement, indenture, mortgage, instrument, writ, judgment, or order of any court, arbiter or governmental or quasi-governmental body to which Purchaser is a party or by which Purchaser is bound. (e) Purchaser represents and warrants to Supplier that the Product will, when Commercialization takes place in a Territory, have received the necessary Regulatory Approvals in such Territory, and covenants to offer or sell, directly or indirectly, Product only in the Territories and Field in which all necessary Regulatory Approvals have been obtained. (f) Provided that Supplier is not in breach of this Agreement, Purchaser shall not during the Exclusive Term purchase Product from any supplier other than Supplier or a manufacturer authorized to manufacture Product by Supplier without in each instance the prior written consent of Supplier. Purchaser shall purchase Product solely for resale purposes as provided herein and shall not combine the Product with any other components by further manufacturing or otherwise. Purchaser shall not during the Exclusive Term manufacture or distribute in any Territories any other Competitive Product. Purchaser agrees to commercialize the Product in accordance with the terms and conditions of the License Agreement. 8. MARKETING YEAR: TERM AND TERMINATION. (a) The term of this Agreement shall commence as of the date hereof and, unless terminated earlier pursuant to the provisions of this Agreement, shall expire upon the expiration or termination of the License Agreement. (b) The obligations of a party under this Agreement (but not its rights hereunder) may be terminated by such party if: (i) subject to Section 9 below, the other party fails to perform any material term, provision, covenant or obligation imposed upon it under this Agreement, which failure or refusal shall continue for thirty (30) days following written notice thereof from the non- defaulting party specifying the event of default; (ii) the other party is dissolved or liquidated, makes a general assignment for the benefit of its creditors, files a voluntary petition under any applicable bankruptcy or insolvency law, has a receiver appointed for its property, or has a petition for bankruptcy or insolvency filed against it which petition is not dismissed or vacated within 120 days after filing; or (iii) the License Agreement is terminated or expires. (c) The failure of a party to terminate its obligations under this Agreement by reason of the breach of any of the provisions by the other party shall not be construed as a waiver of the rights or remedies available for any subsequent breach of the terms and provisions of this Agreement. (d) A party electing to terminate its obligations under this Agreement shall also be entitled to pursue such additional remedies at law or in equity that it may have as a result of a breach of or default under this Agreement by the other party. (e) Any party bringing action to enforce the obligations of the other party or its rights under this Agreement shall be entitled to recover all costs and expenses (including reasonable attorneys fees and court costs) incurred by it in such enforcement action. 9. FORCE MAJEURE. (a) The obligations of a party hereunder shall be suspended (and reasonable adjustment made to the Minimum Purchase requirement, if such suspension shall continue for more than 30 consecutive days) by the occurrence of any event beyond the control of such party, such as acts of god, war, warlike conditions, strikes, lockouts, power failures, the elements, embargoes, failure or inability to obtain suitable and sufficient labor, materials or transportation facilities, or law, regulation or governmental order, whether or not valid, restricting performance; provided, however, that such party shall take reasonable measures to remove the disability or restriction and resume operations at the earliest possible date, and further provided that nothing contained herein shall excuse the obligation to pay money (except to the extent that a Minimum Purchase requirement is adjusted as aforesaid). (b) Subject to compliance with Section (c) below, any delay in or failure of performance by either party under this Agreement as a result of a Force Majeure shall not be considered a breach of this Agreement during the period of delay. (c) Any party affected by such Force Majeure who wishes to rely on the provisions of Section (a) above shall as soon as reasonably practicable give notice to the other party specifying the matters constituting Force Majeure together. with such evidence thereof as it can reasonably give and specifying the period for which it is estimated that such delay will continue. 10 10. INDEMNIFICATION. (a) Each party ("Indemnitor") agree to indemnify, defend and hold harmless the other party ("Indemnitee") from and against all liabilities, losses, costs, damages and expenses (excluding fees and disbursements of the Indemnitee's counsel and court costs, except as provided below) caused by, arising out of resulting from (i) the Indemnitor's gross negligence or willful misconduct in carrying out its obligations under this Agreement, (ii) the Indernnitor's failure to comply with any law or regulation applicable to the performance of its obligations under this Agreement, (iii) Product seizures made as a direct result of the Indemnitor's negligence, gross negligence or willful misconduct in the performance of or failure to perform, its obligations under this Agreement and any liabilities of Indernnitor in respect of recalls under Article 4(d), and (iv) any labels or advertising used by the Indemnitor, in any such case that is not based on any act or omission or alleged act or omission of the Indemnitee. The indemnity provided above shall not extend to any liabilities, losses, costs, damages or expenses caused by or resulting from or arising out of any act or omission or breach of representation, warranty or covenant of the Indemnitee. (b) Each party agrees to give the other party prompt notice of any claim or demand made or the institution of any suit or proceeding brought upon the grounds referred to under this Section 10, and to permit the Indemnitor to conduct the defense of any such claim, demand, suit, or proceeding, and to give the Indemnitor all information in its possession which is pertinent to the defense of any such claim, demand, suit or proceeding, and to give the Indemnitor the authority and assistance appropriate or necessary to enable the Indemnitor to carry on such defense and any appeal from a judgment or decree rendered in any such suit or proceeding. However, nothing in this Section 10(b) will prevent the Indemnitee from engaging its own counsel in any such matter and, if there shall exist a bona fide conflict between the rights and interest of the indemnifying party and the indemnified party, from being indemnified with respect to such engagement to the extent provided in this Section 10. (c) Without its prior consent, Supplier will not be responsible for or bound by any compromise made by Purchaser in any matter in which Purchaser is indemnified by Supplier. Without its prior consent, Purchaser will not be responsible for or bound by any compromise made by Supplier in any matter in which Purchaser is indemnified by Supplier. (d) The Indemnitee agrees to give the Indemnitor prompt notice of any claim, demand, suit or proceeding asserted, made or brought against the Indemnitee (including any claim, demand, suit or proceeding asserted, made or brought by any governmental authority) for which the Indemnitor might be liable under the foregoing provisions. However, the failure to give prompt notice shall not relieve the Indemnitor from its obligations hereunder unless the failure to give prompt notice has materially and adversely affected the Indemnitor's defense of the claim or action. 11. PRODUCT LIABILITY INSURANCE. Each of Supplier and Purchaser (and each Affiliate of Purchaser purchasing and selling Product) shall at all times during the term of this Agreement and for a period of 12 months after the expiration or termination of this Agreement carry such products liability (comprehensive general liability insurance) in such amounts and subject to such 11 requirements and restrictions as may be customary in the Territory (in the case of Purchaser or its Affiliates)or in the United States (in the case of Supplier). 12. ARBITRATION. (a) Excepting only actions and claims relating to actions commenced by a third party against Supplier or Purchaser (including, without limitation, for injuries caused by a Product or in respect to a trademark or patent infringement claims), any controversy or claim arising out of or relating to the terms and conditions of this Agreement, or the decision to agree upon these terms, or the breach thereof, including questions of validity, infringement, or termination hereof, shall be settled exclusively by arbitration in accordance with the rules of the American Arbitration Association. If such controversy or claim relates to patent validity or infringement, then the Patent Arbitration Rules of the AAA shall apply, otherwise the International Arbitration Rules of the AAA shall apply. Notwithstanding the forgoing to the contrary or in the arbitration rules invoked or in this Section 12, the parties retain the right to request a judicial authority to invoke interim measures of protection, and such request shall not be deemed incompatible with this agreement to arbitrate or a waiver of the right to arbitrate. (b) There shall be one (1) arbitrator to be mutually agreed upon by the parties and to be selected from the Regional Panel of Distinguished Neutrals. If the parties are unable to agree upon such an arbitrator who is willing to serve within ten (10)days of receipt of the demand by the other party, the parties shall within three (3) days select one of the five (5) largest international accounting firms (excluding those providing services for the parties) and engage the managing partner or senior officer of its New York City office to designate a partner of such firm to serve as the arbitrator. Failing that, then the AAA shall appoint an arbitrator willing to serve from the Regional Panel of Distinguished Neutrals, or if no such panel exists, then from an appropriate AAA panel. It shall be the duty of the arbitrator to set dates for preparation and hearing of any dispute and to expedite the resolution of such dispute. (c) The arbitration shall be held in the City of New York, State of New York, U. S. A. and the arbitrator shall apply the substantive law of Delaware except that the interpretation and enforcement of this arbitration provision shall be governed by the Federal Arbitration Act. The arbitrator shall permit and facilitate discovery, which will be conducted in accordance with the Federal Rules of Civil Procedure, taking into account the needs of the parties and the desirability of making discovery expeditious and cost-effective. The arbitrator will set a discovery schedule with which the parties will comply and attend depositions if requested by either party. The arbitrator will entertain such presentation of sworn testimony or evidence, written briefs and/or oral argument as the parties may wish to present; however, no testimony or exhibits will be admissible unless the adverse party was afforded an opportunity to examine such witness and to inspect and copy such exhibits during the pre-hearing discovery phase. The arbitrator shall among his other powers and authorities, have the power and authority to award interim or preliminary relief. The arbitrator shall not be empowered to award either party exemplary, consequential or punitive damages or any enhanced damages for willful infringement and the parties shall be deemed to have waived any right to such damages. A qualified court reporter will record and transcribe the proceeding. The decision of the arbitrator will be in writing and judgment upon the award by the arbitrator may be entered in 12 any court having jurisdiction thereof. Prompt handling and disposal of the issue is important. Accordingly, the arbitrator is instructed to assume adequate managerial initiative and control over discovery and other aspects of the proceeding to schedule discovery and other activities for substantially continuous work, thereby expediting the arbitration as much as is deemed reasonable to him, but in all events to effect a final award within 365 days of the arbitrator's selection or appointment and within 20 days of the close of evidence. The proceedings shall be confidential and the arbitrator shall issue appropriate protective orders to safeguard both parties'confidential information. The fees of the arbitrator and the AAA shall be paid as designated by the arbitrator or, if he shall not so designate, they shall be split equally between the parties. 13. ESCROW AGREEMENT. Notwithstanding the Effective Date of this Supply Agreement, Supplier agrees to place into escrow when and as required under the Escrow Agreement of even date herewith sealed containers containing a copy of the Escrow Materials (as defined in the Escrow Agreement) for the Product to be held subject to the terms and conditions of the Escrow Agreement. Supplier shall, upon placing the Escrow Materials into escrow, so notify Purchaser of such fact in writing. 14. NOTICES. Any notice provided for under this Agreement shall be given by sending such notice to the noticed party by personal delivery, telecopy or mail at the following address: To Purchaser: FEMCARE UROLOGY LIMITED St. Peter Street Nottingham NG7 3EN United Kingdom Telecopy No: 011-44-l 15-942-0234 Attn: B. Sweeney To Supplier: Protein Polymer Technologies, Inc. 10655 Sorrento Valley Road San Diego, California 92121 Telecopy No: (858)558-6477 Attn: President Any such notice delivered personally shall be effective upon confirmation of receipt. Any such notice delivered by telecopy shall be effective upon confirmation of receipt if received prior to 5:00 p.m., recipient's time, or on the next business day following confirmation of receipt if received after 5:00 p.m., recipient's time, on the date of transmittal. Any such notice delivered by mail shall be effective on the fifth (5th) business day following deposit in first class mail, postage prepaid. Either party may change its notice address by written notice to the other party. 15. MISCELLANEOUS. (a) This instrument, together with the License Agreement and the Escrow Agreement constitute the entire agreement between the parties with respect to the subject matter hereof. This Agreement shall not be amended, varied, modified or supplemented except by an agreement in writing signed 13 by the party to be charged. To the extent the terms of this Agreement shall conflict with the terms of the License Agreement, the terms of this Agreement shall control. (b) The headings used herein are for ease of reference only and are not to be used in the interpretation or construction of this Agreement. (c) Neither party shall have the right to assign this Agreement or any interest herein without the prior written consent of the other except in connection with the sale or other disposition of all or substantially all of the assets of the assigning party or its parent corporation. (d) Supplier and Purchaser shall at all times be and remain independent contractors and not agents, partners or joint venturers of the other for any purpose whatsoever and neither Supplier nor Purchaser shall have authority to create or assume any obligation, express or implied, in the name of or on behalf of the other party or to bind the other party in any manner whatsoever. (e) The failure of either party to enforce at any time or for any period of time any one or more of the provisions hereof shall not be construed to be a waiver of such provisions or of the right of such party thereafter to enforce each such provision. (f) This Agreement shall be construed in accordance with the laws of the State of Delaware (U. S. A.). The invalidity of any provision of this Agreement shall not impair the validity of any other provision; and any provision hereof which might otherwise be invalid or contravene any applicable law shall hereby be deemed to be amended to the extent necessary to remove the cause of such invalidity and to the extent practicable to continue the intent of such provision and of this Agreement, and such provision, as so amended, shall remain in full force and effect as a part hereof. (g) This Agreement shall be binding upon and enure to the benefit of the parties hereto, their successors and permitted assigns. (h) Those provisions of this Supply Agreement dealing with rights and obligations upon and/or after termination of this Supply Agreement shall survive termination of this Supply Agreement to the extent necessary to give effect to such provisions. (i) If either party terminates this Supply Agreement in accordance with the terms herein, the terminating party shall owe no penalty or indemnity to the terminated party on account of such termination. (j) This Agreement may be executed in two or more counterparts, each of which shall be deemed an original and together shall constitute one and the same instrument. 14 IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. FEMCARE UROLOGY LIMITED By: ----------------------------------- Printed Name: ---------------------- Title: ----------------------------- PROTEIN POLYMERTECHNOLOGIES, INC., a Delaware corporation By: ----------------------------------- ----------------------------------- President THE UNDERSIGNED PARENT COMPANY OF FEMCARE UROLOGY LIMITED, TO INDUCE PROTEIN POLYMER TECHNOLOGIES, INC. TO ENTER INTO THIS AGREEMENT AND FOR OTHER GOOD AND VALUABLE CONSIDERATION, THE RECEIPT, ADEQUACY AND SUFFICIENCY OF WHICH IS HEREBY ACKNOWLEDGED, HEREBY IRREVOCABLY AND UNCONDITIONALLY GUARANTEES THE TIMELY AND FULL PERFORMANCE AND PAYMENTS UNDER THIS AGREEMENT BY FEMCARE UROLOGY LIMITED AND AGREES THAT IT SHALL BE BOUND BY THE ARBITRATION PROVISIONS HEREIN AS IF A FULL PARTY HERETO. Date: , 2000 ----------------- FEMCARE, LTD. By: -------------------------------- Name: --------------------------- Title: -------------------------- 15 EX-10.29 4 ESCROW AGREEMENT EXHIBIT 10.29 ESCROW AGREEMENT ESCROW AGREEMENT, dated as of January 26, 2000, among PROSPECTIVEPIERCING LIMITED, to be known as FEMCARE UROLOGY LIMITED, corporation organized under the laws of the United Kingdom and Wales, having its principal place of business at St. Peters Street, Nottingham NG7 3EN, United Kingdom ("FEMCARE"), and PROTEIN POLYMER TECHNOLOGIES, INC., a corporation with its principal office at 10655 Sorrento Valley Road, San Diego, California 92121 ("PPTI"), and the party identified on Exhibit A attached hereto ("Escrow Agent"). WHEREAS, in connection with the License and Development Agreement between FEMCARE and PPTI ("License Agreement") and Supply Agreement between PPTI and FEMCARE ("Supply Agreement"), each dated as of the date of this Escrow Agreement, PPTI has agreed to enter into this Escrow Agreement pursuant to which PPTI shall deposit into escrow, when required (i) aliquotes of the Master Cell Bank and Working Cell Bank for the Product (as such term is defined under the License Agreement) ("Sample", herein), and (ii) the current manufacturing and quality control procedures with respect to the Sample being deposited, as well as such other Know-How (as defined in the License Agreement), technical specifications, instructions, processes and other intellectual property and information as PPTI shall possess and as shall be necessary in order to allow FEMCARE to manufacture and/or have manufactured for it the Product so licensed (a "Process Description") and (iii) any written agreement between PPTI and any contract manufacturer engaged by PPTI to manufacture Product and a related assignment and assumption agreement and letter of direction as provided in Section 2 (c) below ("Toll Manufacturing Materials" and together with the Process Descriptions and the Sample, collectively, the "Escrow Material"); NOW, THEREFORE, the parties hereto agree as follows: 1. APPOINTMENT OF ESCROW AGENT. Within thirty (30) days after the execution of this Agreement, FEMCARE shall select and appoint an Escrow Agent, which appointment shall be subject to the consent of PPTI, such consent not to be unreasonably withheld or delayed. The Escrow Agent must certify to the parties that it has and will at all times during the term of the escrow liquid nitrogen storage capabilities and that it will use such capabilities to hold the Samples. Upon such appointment, the Escrow Agent shall execute a copy of Exhibit A (duly filled in with the information specified thereon), whereupon the Escrow Agent shall become a party to this Agreement. 2. DEPOSIT BY PPTI. (a) Within ten (10) days after the appointment of the Escrow Agent, PPTI will deposit in escrow with the Escrow Agent a sealed receptacle containing a copy of the Process Description, which receptacle shall be held subject to the terms and conditions of this Escrow Agreement. The Process Description shall be sufficiently clear and detailed that it can be readily followed and carried 1 out by a trained scientist and PPTI shall, upon placing the Process Description into escrow, so notify FEMCARE of such deposit in writing, and provide to FEMCARE a schedule of Process Description information so deposited. A FEMCARE representative on the Advisory Board appointed under the License Agreement may verify the Process Description information being deposited against the schedule. The schedule shall constitute PPTI Know-How (as defined in the License Agreement) and shall be kept confidential. PPTI agrees to update and keep current, accurate and complete the Process Description on an annual basis or more frequently if required to reflect procedures embodied in Regulatory Approvals (as that term is defined in the License Agreement) or required to assist in the manufacture of Product (and where appropriate, the term "Process Description" shall include any such updated materials from time-to-time). PPTI shall, upon each updating of the Process Description, so notify FEMCARE of such fact in writing, and give it the same verification opportunity as is provided above. FEMCARE may, at its sole cost and expense, obtain such insurance as it deems reasonable and necessary regarding the Escrow Materials. (b) Within ten (10) days after the appointment of the Escrow Agent, PPTI will also deposit in escrow with the Escrow Agent a sealed receptacle containing the Sample, which receptacle shall be held subject to the terms and conditions of this Escrow Agreement. PPTI shall, upon placing each Sample into escrow, so notify FEMCARE of such deposit in writing. PPTI agrees to replace the deposited Sample with a newly-generated set of Sample if PPTI, based on quality control testing of Product manufactured from cognate cells shall determine that the cells in the Sample are not viable, in which case FEMCARE shall give its written instructions pursuant to Article 4. PPTI shall, upon each replacement of the Sample, so notify FEMCARE of such deposit in writing and such replacement shall be deemed the Sample for purposes of this Agreement. (c) Within ten (10) days after the engagement by PPTI of a contract manufacturer of Product, if any, PPTI will also deposit into escrow with the Escrow Agent a sealed receptacle containing any written agreement for the manufacture of Product between PPTI and such contract manufacturer, an assignment and assumption of said written agreement by and between PPTI and FEMCARE duly executed by PPTI (but not FEMCARE), and a letter of direction addressed to the contract manufacturer informing it of the assignment of the written agreement to FEMCARE and authorizing it to manufacture Product on behalf of, and supply such Product directly to FEMCARE under said assigned written agreement (the "Toll Manufacturing Materials"). Any deposit of Toll Manufacturing Materials notwithstanding, PPTI shall not be obligate to continue the engagement of any contract manufacturer or to keep in effect any written agreement for the contract manufacture of Product, or fully comply with the terms and conditions of any such written agreement. PPTI shall promptly notify FEMCARE of any change in the Toll Manufacturing Materials and, when necessary, shall replace Toll Manufacturing Materials with new, amended or additional Toll Manufacturing Materials, and shall so notify FEMCARE in writing. 3. REPRESENTATION. PPTI represents that the Process Description will be accurate and complete in all material respects, that in its reasonable opinion the Process Description is sufficiently clear and detailed so that they can be readily followed and carried out by a trained scientist to 2 manufacture the Product, and that the deposited Sample(s) (including any replacement Sample deposited pursuant to Article 2) will be free of defects and will be viable at the time of deposit. 4. CUSTODY; ACCESS. Escrow Agent agrees to accept deposit of the Escrow Materials and to act as its custodian until the escrow is terminated pursuant to the terms of this Escrow Agreement. Except as otherwise provided in this Escrow Agreement, Escrow Agent shall not permit (i) any party access to the Escrow Materials and (ii) any copies to be made of the Escrow Materials deposited hereunder. Escrow Agent shall not open the sealed recepticals containing the Escrow Materials, except upon receipt of mutual written instructions from PPTI and FEMCARE. 5. RELEASE OF ESCROW MATERIALS. (a) TO FEMCARE. Escrow Agent shall release and deliver any or all of the Escrow Materials to FEMCARE upon the occurrence of any of the following events: (i) Upon the written instructions of PPTI; (ii) Upon delivery to the Escrow Agent of (A) a copy of an order, judgment or decree adjudicating PPTI bankrupt or insolvent; (B) written notice that PPTI has commenced any case, proceeding or other action relating to it in bankruptcy or seeking reorganization, liquidation, dissolution, winding-up, arrangement, composition or readjustment of its debts, or for any other relief, under any bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement, composition, readjustment of debt or other similar act or law of any jurisdiction, domestic or foreign, now or hereafter existing; (C) PPTI has applied for a receiver, custodian or trustee of it or for all or a substantial part of its property, made an assignment for the benefit of its creditors; (D) written notice that a case, proceeding or other action has been commenced against PPTI in bankruptcy, or seeking reorganization, liquidation, dissolution, winding-up, arrangement, composition or readjustment of its debts, or any other relief, under any bankruptcy, insolvency, reorganization, liquidation, dissolution, arrangement, composition, readjustment of debt or other similar act or law of any jurisdiction, domestic or foreign, now or hereafter existing; or if a receiver, custodian or trustee of PPTI or for all or substantially all of its properties shall be appointed; or if a warrant of attachment, execution or distraint, or similar process, shall be issued against any substantial part of the property of PPTI; and if in each such case in this clause (D) such condition shall continue for a period of ninety (90) days undismissed, undischarged or unbonded; (E) written notice along with reasonable evidence that shows that PPTI has failed to deliver to FEMCARE at least *** of the quantities of Product ordered on at least *** of acceptable purchase orders within the deliver periods allowed in the Supply Agreement; or (F) written notice along with reasonable evidence that shows that in two consecutive Marketing Years for which Minimum Purchases are required under the Supply Agreement and in which FEMCARE has had sales of Product equal to or in excess of the - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 3 Minimum Purchases for such Marketing Years, PPTI has reduced FEMCARE's original Annual Estimate (as defined in the Supply Agreement) by more than twenty percent ***. (iii) Ten (10) business days after FEMCARE delivers to both Escrow Agent and PPTI a letter or certificate signed by a director of FEMCARE indicating that it is entitled to the Escrow Materials as a result of a material breach by PPTI of the License Agreement (which breach was not cured in accordance with the applicable provisions thereof). (b) TO PPTI. Escrow Agent shall release and deliver all of the Escrow Materials to PPTI within ten (10) business days after PPTI delivers to both Escrow Agent and FEMCARE a letter or certificate signed by the President of PPTI indicating that it is entitled to the Escrow Materials as a result of (1) a breach by FEMCARE of the License Agreement (which breach was not cured in accordance with the applicable provisions thereof) or (2) termination or expiration of FEMCARE's license under Section 2.1 of the License Agreement. 6. LICENSE TO ESCROW MATERIALS. If the Escrow Materials are released and delivered to FEMCARE, PPTI shall retain title to such Escrow Materials and FEMCARE shall have a license to use such Escrow Materials in accordance with the rights set out in the License Agreement. 7. TERMINATION OF ESCROW. (a) The escrow shall terminate upon the earliest to occur of the following events: (i) mutual written agreement of the parties; or (ii) delivery of a Process Description and related Sample and the Toll Manufacturing Materials to FEMCARE or PPTI, as the case may be, in accordance with the terms of Section 5. (b) The parties agree that if the escrow is terminated pursuant to Section 7(a)(i) above, the relevant Escrow Materials shall be delivered to whichever party is designated in the written agreement among the parties. 8. ESCROW AGENT FEES. In consideration for performing its function as escrow agent, Escrow Agent shall be paid solely by FEMCARE the charge for any duties required in connection with this Escrow Agreement. 9. ESCROW AGENT. (a) The obligations of the Escrow Agent are those specifically provided in this Escrow Agreement, and the Escrow Agent shall have no liability under, or duty to inquire into the terms and provisions of, any other agreement including, without limitation, the License Agreement. The duties of the Escrow Agent are purely ministerial in nature, and it shall not incur any liability whatsoever, except for willful misconduct, gross negligence or breach of Article 9(d). - ------------------------ *** Material is confidential and has been omitted and filed separately with the Securities and Exchange Commission. 4 (b) The Escrow Agent shall not have any responsibility for the genuineness or validity of any document or other item deposited with it or of any signature thereon and shall not have any liability for acting in accordance with any written instructions or certificates given to it hereunder and believed by it to be signed by the proper parties. If the Escrow Agent shall receive conflicting instructions, it shall advise FEMCARE and PPTI of such fact. FEMCARE and PPTI shall have thirty (30) days to resolve the conflicting instructions and jointly notify the Escrow Agent. If the Escrow Agent is not timely jointly notified, it may at any time thereafter submit such conflict to arbitration in accordance with the provisions of Section 10(c). (c) The Escrow Agent may resign and be discharged from its duties hereunder at any time by giving at least 30 days' notice of such resignation to FEMCARE and PPTI, specifying a date upon which such resignation shall take effect; provided, however, that the Escrow Agent shall continue to serve until its successor accepts the appointment as new Escrow Agent. Upon receipt of such notice, a successor escrow agent shall be appointed by FEMCARE and PPTI, such successor escrow agent to become the Escrow Agent hereunder on the resignation date specified in such notice. If an instrument of acceptance by a successor escrow agent shall not have been delivered to the Escrow Agent within 40 days after the giving of such notice of resignation, the resigning Escrow Agent may at the expense of FEMCARE request that an arbitrator appoint a successor escrow agent in accordance with the provisions of Section 10(c). FEMCARE and PPTI, acting jointly, may at any time substitute a new escrow agent by giving 10 days' notice thereof to the current Escrow Agent then acting and paying all expenses of the current Escrow Agent. (d) The Escrow Agent hereby agrees: i. to maintain the Escrow Material and all information and/or documentation coming into its possession or to its knowledge under this Escrow Agreement in strictest confidence and secrecy; ii. not to make use of the Escrow Materials other than for the performance of its obligations under this Escrow Agreement and shall not disclose or release the same to any party other than in accordance with the terms hereof; and iii. that the obligations imposed hereunder shall continue, notwithstanding release of the Escrow Materials or termination of this Escrow Agreement, until or unless as the Escrow Materials falls within the public domain, through no fault of the Escrow Agent. 10. MISCELLANEOUS. (a) NOTICES. All notices, claims, certificates, requests, demands and other communications hereunder shall be in writing and shall be delivered personally or sent by facsimile 5 transmission, air courier, or registered or certified mail, return receipt requested, addressed as follows: IF TO PPTI TO: Protein Polymer Technologies, Inc. 10655 Sorrento Valley Road San Diego, California 92121 Fax: (619) 558-6477 Attention: President; with a copy to: Piper Marbury Rudnick & Wolfe 203 North LaSalle Street Suite 1800 Chicago, IL 60601 Fax: (312) 630-5322 Attention: John H. Heuberger; and IF TO FEMCARE TO: Femcare Urology Limited St. Peter Street Nottingham NG7 3EN United Kingdom Attention: Fax: 011-44-115-942-0234 Copy to B. Sweeney with a copy to: Nelson Solicitors Perrine House, 8 Stanford Street Nottingham NG1 7BQ United Kingdom Fax: 011-44-115-958-9113 if to ESCROW AGENT, to the address specified on Exhibit A attached hereto or to such other address as the party to whom notice is to be given may have furnished to the other parties in writing in accordance herewith. Any such communication shall be deemed to have been delivered (i) when delivered, if delivered personally, (ii) when sent (with confirmation received), if sent by facsimile transmission on a business day, (iii) on the first business day after dispatch (with confirmation received), if sent by facsimile transmission on a day other than a business day, (iv) on the third business day after dispatch, if sent by air courier, and (v) on the fifth business day after mailing, if sent by registered or certified mail. 6 (b) SEVERABILITY. In the event that any provision of this Escrow Agreement would be held in any jurisdiction to be invalid, prohibited or unenforceable for any reason, such provision, as to such jurisdiction, shall be ineffective, without invalidating the remaining provisions of this Escrow Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. Notwithstanding the foregoing, if such provision could be more narrowly drawn so as not to be invalid, prohibited or unenforceable in such jurisdiction, it shall, as to such jurisdiction, be so narrowly drawn, without invalidating the remaining provisions of this Escrow Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. (c) GOVERNING LAW; DISPUTE RESOLUTION. Any controversy or claim arising out of or relating to the Escrow Agreement, or the parties' decision to enter into this Escrow Agreement, or the breach hereof, shall be settled by arbitration in accordance with the International Arbitration Rules of the American Arbitration Association ("AAA"), and judgment upon the award rendered by the arbitrator may be entered in any court having jurisdiction thereof. Notwithstanding the forgoing to the contrary or in the arbitration rules invoked or in this Section 10 (c), the parties retain the right to request a judicial authority to invoke interim measures of protection, and such request shall not be deemed incompatible with this agreement to arbitrate or a waiver of the right to arbitrate. The arbitration shall be held in the City of New York, State of New York, U.S.A., and the arbitrator shall apply the substantive law of the State of Delaware, except that the interpretation and enforcement of this arbitration provision shall be governed by the Federal Arbitration Act. There shall be one (1) arbitrator to be mutually agreed upon by the parties and to be selected from the Regional Panel of Distinguished Neutrals. If the parties are unable to agree upon such an arbitrator who is willing to serve within ten (10) days of receipt of a demand to arbitrate by the other party, then the AAA shall appoint an arbitrator willing to serve from the stated panel, or if no such panel exists, the parties shall within three (3) days select one of the five (5) largest international accounting firms (excluding those providing services for the parties) and engage the managing partner or senior officer of its New York City office to designate a partner of such firm to serve as the arbitrator. Failing that, then the AAA shall appoint an arbitrator willing to serve from the Regional Panel of Distinguished Neutrals, or if no such panel exists, then from an appropriate AAA panel. It shall be the duty of the arbitrator to set dates for preparation and hearing of any dispute and to expedite the resolution of such dispute. Recognizing that the release of Escrow Materials is time critical, the parties do hereby direct any arbitrator hereunder to reach a decision regarding the release of Escrow Materials (which may be a temporary or preliminary decision subject to such conditions as the arbitrator may, in its sole discretion, order) within 30 days following his or her engagement or appointment. It shall be the duty of the arbitrator to set dates for preparation and hearing of any dispute and to expedite the resolution of such dispute. The arbitrator shall permit and facilitate discovery, which will be conducted in accordance with the Federal Rules of Civil Procedure, taking into account the needs of the parties and the desirability of making discovery expeditious and cost-effective. The arbitrator will set a discovery schedule with which the parties will comply and attend depositions if requested by either party. The arbitrator will entertain such presentation of sworn testimony or evidence, written briefs and/or oral argument as the parties may wish to present; however, no testimony or exhibits will be admissible unless the adverse party was afforded an opportunity to 7 examine such witness and to inspect and copy such exhibits during the pre- hearing discovery phase. The arbitrator shall among his other powers and authorities, have the power and authority to award interim or preliminary relief. The arbitrator shall not be empowered to award either party exemplary or punitive damages or any enhanced damages for willful infringement and the parties shall be deemed to have waived any right to such damages. A qualified court reporter will record and transcribe the proceedings. The decision of the arbitrator will be in writing and judgment upon the award by the arbitrator may be entered into any court having jurisdiction thereof. Prompt handling and disposal of the issue is important. Accordingly, the arbitrator is instructed to assume adequate managerial initiative and control over discovery and other aspects of the proceeding to schedule discovery and other activities for substantially continuous work, thereby expediting the arbitration as much as is deemed reasonable to him, but in all events to effect a final award within 365 days of the arbitrator's selection or appointment and within 20 days of the close of evidence. The proceedings shall be confidential and the arbitrator shall issue appropriate protective orders to safeguard both parties' confidential information and the Escrow Materials. The fees of the arbitrator and the AAA shall be paid as designated by the arbitrator or, if he shall not so designate, they shall be split equally between the parties. (d) BINDING EFFECT; BENEFITS; ASSIGNMENT. This Escrow Agreement shall enure to the benefit of and be binding upon the parties hereto and their respective permitted successors and assigns. Nothing contained herein shall give to any other person any benefit or any legal or equitable right, remedy or claim. This Escrow Agreement shall not be assignable by PPTI without the prior written consent of FEMCARE, which consent may be withheld in the sole discretion of FEMCARE. Notwithstanding the foregoing, no consent of FEMCARE shall be required if such assignment is in connection with the sale or transfer of all or substantially all of the assets of PPTI or the merger or consolidation of PPTI with or into any other business entity. FEMCARE shall be permitted to assign this Escrow Agreement upon written notice to PPTI to any party to which it assigns all of its rights under the License Agreement or sells or transfers all or substantially all of its assets. No such assignment shall relieve the assigning party of its underlying obligations under this Escrow Agreement. (e) ENTIRE ESCROW AGREEMENT; AMENDMENTS. This Escrow Agreement and the other writings referred to herein or delivered pursuant hereto which form a part hereof contain the entire understanding of the parties with respect to its subject matter. This Escrow Agreement may be amended only by a written instrument duly executed by the parties hereto. (f) WAIVERS. It is further understood and agreed that no failure or delay by either party hereto in exercising any right, power or privilege under this Escrow Agreement shall operate as a waiver thereof nor shall any single or partial exercise thereof preclude any other or further exercise of any right, power or privilege hereunder. (g) COUNTERPARTS. This Escrow Agreement may be executed in any number of counterparts, and execution by each of the parties of any one of such counterparts will constitute due 8 execution of this Escrow Agreement. Each such counterpart hereof shall be deemed to be an original instrument, and all such counterparts together shall constitute but one agreement. (h) HEADINGS. The article and section headings contained in this Escrow Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Escrow Agreement. IN WITNESS WHEREOF, the parties have caused this Escrow Agreement to be signed by authorized persons, whereupon it became binding on the parties as of the date first above written. PROSPECTIVEPIERCING LIMITED PROTEIN POLYMER TECHNOLOGIES, INC., (TO BECOME FEMCARE UROLOGY LIMITED) a Delaware corporation By: /s/ Bernard Sweeney By: /s/ Thomas Parmeter -------------------------------- ------------------------------ Name: Bernard Sweeney Thomas Parmeter, President and CEO ------------------------------ Its: Managing Director ------------------------------- THE UNDERSIGNED PARENT COMPANY OF PROSPECTIVEPIERCING LIMITED, TO INDUCE PROTEIN POLYMER TECHNOLOGIES, INC. AND THE ESCROW AGENT TO ENTER INTO THIS AGREEMENT AND FOR OTHER GOOD AND VALUABLE CONSIDERATION, THE RECEIPT, ADEQUACY AND SUFFICIENCY OF WHICH IS HEREBY ACKNOWLEDGED, HEREBY IRREVOCABLY AND UNCONDITIONALLY GUARANTEES THE TIMELY AND FULL PERFORMANCE AND PAYMENTS UNDER THIS AGREEMENT BY PROSPECTIVEPIERCING LIMITED AND AGREES THAT IT SHALL BE BOUND BY THE ARBITRATION PROVISIONS HEREIN AS IF A FULL PARTY HERETO. FEMCARE, LTD. By: /s/ Bernard Sweeney ---------------------------- Name: Bernard Sweeney ------------------------- Title: Managing Director ------------------------- 9 EXHIBIT A The undersigned party hereby (a) agrees to be the Escrow Agent pursuant to and under that certain Escrow Agreement dated as of January __, 2000, between Protein Polymer Technologies, Inc. and Femcare Urology Limited and (b) certifies that it has liquid nitrogen storage capabilities and that it will use such capabilities to store the cells that are part of the Escrow Materials. ESCROW AGENT: Name: ---------------------------------- Address: ------------------------------- Telephone: ----------------------------- Fax: ----------------------------------- By: ------------------------------ Name: ---------------------------- Title: --------------------------- Date: ---------------------------- A-1 EX-10.30 5 EMPLOYMENT AGREEMENT EXHIBIT 10.30 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of February 17, 2000 between PROTEIN POLYMER TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and J. THOMAS PARMETER (the "Employee"). RECITAL The Company desires to continue to employ the Employee, and the Employee desires to be so employed by the Company, on the terms and subject to the conditions set forth in this Agreement. This Agreement supersedes that certain employment agreement between the Company and the Employee dated November 1, 1996 (the "Prior Agreement"). AGREEMENT NOW, THEREFORE, in consideration of the premises and the mutual promises set forth in this Agreement, the Company and the Employee hereby agree as follows: 1. Employment. (a) Subject to the terms and conditions contained herein, the Company hereby agrees to employ the Employee, and the Employee accepts such employment, from the date hereof until the earlier of (i) December 31, 2002 or (ii) the date such employment is terminated pursuant to Section 4 of this Agreement. During the Employee's employment under this Agreement, the Employee shall perform such duties for the Company as may from time to time be assigned to the Employee by Board of Directors of the Company (the "Board"). The Employee shall have the title of Chairman of the Board of Directors, Chief Executive Officer and President, or such other title or titles, if any, as from time to time may be assigned to the Employee by the Board. (b) The Employee will devote his entire business time, energy, attention and skill to the services of the Company and its affiliates and to the promotion of their interests. So long as the Employee is employed by the Company, the Employee shall not, without the written consent of the Company: (i) engage in any other activity for compensation, profit or other pecuniary advantage, whether received during or after the term of this Agreement; (ii) render or perform services of a business, professional, or commercial nature other than to or for the Company, either alone or as an employee, consultant, director, officer, or partner of another business entity, whether or not for compensation, and whether or not such activity, occupation or endeavor is similar to, competitive with, or adverse to the business or welfare of the Company; or (iii) invest in or become a shareholder of another corporation or other entity; provided, that the Employee's investment solely as a shareholder in another corporation shall not be prohibited hereby so long as such investment is not in excess of one percent (1%) of any class of shares that are traded on a national securities exchange. (c) Prior to or concurrently with the execution of this Agreement, the Employee has executed an Employee Proprietary Information, Trade Secret and Confidentiality Agreement (the "Confidentiality Agreement"). 2. Location of Employment. The Employee's principal place of employment shall be at the executive offices of the Company located at 10655 Sorrento Valley Road, San Diego, California 92121 or, as may be requested by the Board, at any other office of the Company or any of its affiliates currently or hereinafter located in San Diego County; provided, that at the direction of the Board, the Employee may from time to time be required to travel to various domestic and foreign locations. 3. Compensation. (a) In exchange for full performance of the Employee's obligations and duties under this Agreement, the Company shall pay the Employee an annual base salary (the "Base Salary") equal to $212,000, payable in monthly installments in accordance with the Company's standard payroll practices. In any month in which the Employee shall be employed for less than the entire number of days in such month, the compensation payable under this Section 3(a) shall be prorated on the basis of the number of days during which the Employee was actually employed divided by the number of days in such month. (b) The Base Salary is a gross amount, and the Company shall be required to withhold from such amount deductions with respect to Federal, state and local taxes, FICA, unemployment compensation taxes and similar taxes, assessments or withholding requirements. (c) During the Employee's employment under this Agreement, the Employee shall also be reimbursed by the Company for reasonable business expenses actually incurred or paid by the Employee, consistent with the policies established by the Board, in rendering to the Company the services provided for in this Agreement, upon presentation of expense statements or such other supporting information as is consistent with the policies of the Company. (d) The Employee shall be entitled to 20 business days vacation for each full year of employment under this Agreement, which vacation time will accrue in accordance with the vacation policy of the Company. (e) The Employee shall be entitled to participate in all benefit plans (including deferred compensation plans and any medical, dental or life insurance plans) which shall 2 be available from time to time to the domestic management employees of the Company generally, except to the extent such participation in any plan would, in the opinion of the Board, alter the intended tax treatment of such plan; provided, however, that the Employee shall have no right under this Agreement to participate in any stock option, stock purchase or other plan relating to shares of capital stock of the Company or its affiliates. The Employee acknowledges and agrees that the Board may in its discretion terminate at any time or modify from time to time any such benefit plans. (f) During the term of this Agreement, the Company shall maintain, for the benefit of the Employee, a "term life" insurance policy in the amount of $250,000, the proceeds of which are payable to a person designated by the Employee. (g) The Employee shall be entitled to use, at the expense of the Company, a corporate automobile leased by the Company, provided that the monthly lease payments shall be less than $550. Upon termination or expiration of this Agreement, the Employee shall have the option to purchase such automobile from the Company at a price equal to the book value thereof, as reflected on the most recent regularly-prepared balance sheet of the Company. The Employee may exercise this option by delivering a check, in the amount of such price, to the Company within 30 days of such termination or expiration. (h) Other than as expressly set forth in this Section 3 or Sections 4(f) and 4(g) below, the Employee shall not receive any other compensation or benefits except to the extent provided by the Board. 4. Termination. (a) The employment of the Employee under this Agreement may be terminated by the Company immediately upon giving the Employee notice if (i) the Board determines that the Employee is unable to discharge his essential job duties by reason of illness or injury or (ii) the Employee has been unable to discharge his essential job duties by reason of illness or injury for either (A) a period of two consecutive months or (B) twelve weeks in any twelve-month period. (b) The employment of the Employee under this Agreement shall terminate on the date of the Employee's death. (c) The employment of the Employee under this Agreement may be terminated by the Company upon written notice from the Board that, in the opinion of the Board, the Employee has (i) refused or failed (after reasonable notice that such refusal or failure would result in termination of the Employee's employment) to perform, to the satisfaction of the Board, any duties assigned to the Employee by the Board, (ii) committed a breach of the terms of this Agreement or any other legal obligation to the Company, (iii) failed to perform any of the Employee's obligations under the Confidentiality Agreement, (iv) demonstrated negligence or willful misconduct in the execution of the Employee's assigned duties, (v) been convicted of or pleaded nolo ---- 3 contendere to a felony or other serious crime, (vi) repeatedly and intemperately - ---------- used alcohol or drugs, (vii) engaged in business practices which, in the opinion of the Board, are unethical or reflect adversely on the Company, (viii) misappropriated assets of the Company or (ix) been repeatedly absent from work during normal business hours for reasons other than disability. (d) The employment of the Employee under this Agreement shall terminate upon receipt by the Board of a written notice of resignation signed by the Employee or, if no notice is given, on the date on which the Employee voluntarily terminates his or her employment relationship with the Company. (e) In addition to the circumstances described in subsections (a), (b), (c) and (d) above, the Company may terminate the Employee's employment for any reason or no reason and with or without cause or prior notice. The Employee understands that, subject to subsections (f)(iii) and (g) below, he is an at-will employee and may be terminated by the Company without cause or prior notice pursuant to this subsection (e) notwithstanding any other provision contained in this Agreement. This at-will relationship will remain in effect during the term of this Agreement and so long thereafter provided that the Employee remains employed by the Company, unless such at-will employment relationship is modified by a specific, express written agreement signed by the Company. (f) If the Employee's employment is terminated pursuant to this Section 4 or for any, other reason, the Employee shall not be entitled to any compensation or benefits from the Company, under Section 3 of this Agreement or otherwise, except for the following: (i) Base Salary and vacation pay accrued, and reasonable business expenses incurred, under Section 3 of this Agreement through the date of such termination; (ii) such benefits, if any, as may be required to be provided by the Company under the Comprehensive Omnibus Budget Reconciliation Act (COBRA); and (iii) if the Employee's employment is terminated pursuant to subsection (e) above, the Company shall continue to pay to the Employee the Base Salary then in effect at intervals in accordance with the Company's standard payroll practice until the termination date set forth in Section 1(a)(i) of this Agreement. (g) Employee may terminate his employment hereunder for "Good Reason" (as hereinafter defined) 4 (i) For purposes of this Agreement, "Good Reason" shall mean a termination of Employee's employment by Employee within 90 days after the occurrence of any of the following after a "Change in Control" (as hereinafter defined): (i) a reduction in Employee's Base Salary then in effect; (ii) a material reduction in Employee's positions, duties and responsibilities from those described in Section 1(a) of this Agreement; or (iii) the failure of the Company to obtain the assumption of this Agreement by any successor to the extent required pursuant to Section 10(a) of this Agreement. (ii) For purposes of this Agreement, the term "Change in Control" shall mean the occurrence of any of the following events with respect to the Company: (A) All or substantially all of the assets of the Company are sold or transferred to another corporation or entity; or (B) The Company is sold, transferred, merged, consolidated, ventured or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than a majority of the outstanding securities entitled to vote generally in the election of directors or other capital interests of the acquiring corporation or entity are owned, directly or indirectly, by the shareholders of the Company immediately prior to the sale, transfer, merger, consolidation, venture or reorganization; or (C) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing more than 50% of the combined voting power of the then-outstanding voting securities of the Company; or (D) The Company shall file a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Item 1 of Form 8-K thereunder or Item 14 of Schedule 14A thereunder (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (E) The individuals who, at the beginning of any period of two consecutive calendar years, constituted members of the Board cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's stockholders of each new director of the Company was approved by a vote of at least two-thirds of the directors of the Company still in office who were Directors of the Company at the beginning of any such period. 5 (iii) Notwithstanding the foregoing, a termination shall not be treated as a termination for Good Reason (i) if Employee shall have specifically consented in writing to the occurrence of the event giving rise to the claim of termination for Good Reason or (ii) unless Employee, within 30 days after receiving written notice from the Company specifying in reasonable detail the occurrence of one of such events, shall have delivered a written notice to the Company stating that he intends to terminate his employment for Good Reason and specifying the factual basis for such termination and such event, if capable of being cured, shall not have been cured within 30 days of the receipt by the Company of such notice. (iv) If Employee shall terminate his employment for Good Reason, the Company shall pay Employee (or, in the event of his death, his devisee, legatee or, if there is none, his estate) a lump-sum amount equal to the highest level of Employee's annual Base Salary in effect on the date of the Change in Control, multiplied by a factor of 2.99. Employee will also be entitled to any vested benefits under any employee benefit plans. 5. Employee's Representations. (a) The Employee represents that he has full authority to enter into this Agreement and that he is free to enter into this Agreement and not under any contractual restraint which would prohibit the Employee from satisfactorily performing his duties to the Company under this Agreement. (b) The Employee hereby agrees to indemnify and hold harmless the Company, its officers, directors and stockholders from and against any losses, liabilities, damages or costs (including reasonable attorney's fees) arising out of a breach, or claimed breach, of any of the representations, warranties and covenants of the Employee set forth in this Agreement. (c) The Employee acknowledges that he is free to seek advice from independent counsel with respect to this Agreement. The Employee has either obtained such advice or, after carefully reviewing this Agreement, has decided to forego such advice. The Employee is not relying on any representation or advice from the Company or any of its officers, directors, attorneys or other representatives regarding this Agreement, its content or effect. 6. Arbitration. Any controversy or claim arising out of or relating to this Agreement or any breach hereof or the Employee's employment by the Company or termination thereof, shall be settled by arbitration by one arbitrator in accordance with the rules of the American Arbitration Association, and judgment upon such award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration shall be held in the City of San Diego or such other place as may be agreed upon at the time by the parties to the arbitration. 6 7. Equitable Relief. The Employee acknowledges that the Company is relying for its protection upon the existence and validity of the provisions of this Agreement, that the services to be rendered by the Employee are of a special, unique and extraordinary character, and that irreparable injury will result to the Company from any violation or continuing violation of the provisions of this Agreement for which damages may not be an adequate remedy. Accordingly, the Employee hereby agrees that in addition to the remedies available to the Company by law or under this Agreement, the Company shall be entitled to obtain such equitable relief as may be permitted by law in a court of competent jurisdiction including, without limitation, injunctive relief from any violation or continuing violation by the Employee of any term or provision of this Agreement. 8. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal substantive laws (and not the laws of conflicts) of the State of California. 9. Entire Agreement. This Agreement constitutes the whole agreement of the parties hereto in reference to any employment of the Employee by the Company and in reference to any of the matters or things herein provided for or hereinabove discussed or mentioned in reference to such employment; all prior agreements, promises, representations and understandings relative thereto (including, without limitation, the Prior Agreement) being herein merged. 10. Assignability. (a) In the event the Company shall merge or consolidate with any other corporation, partnership or business entity, or all or substantially all of the Company's business or assets shall be transferred in any manner to any other corporation, partnership or business entity, then such successor to the Company shall thereupon succeed to, and be subject to, all rights, interests, duties and obligations of, and shall thereafter be deemed for all purposes hereof to be, the "Company" under this Agreement. This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die, any amounts payable to him hereunder shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to his estate. (b) This Agreement is personal in nature and the Employee shall not, except as set forth in subsection (a) hereof, without the written consent of the Company, assign or transfer this Agreement or any rights or obligations hereunder. (c) Except as set forth in subsection (a) above, nothing expressed or implied in this Agreement is intended or shall be construed to confer upon or give to any person, other than the parties to this Agreement, any right, remedy or claim under or by reason of this Agreement or of any term, covenant or condition of this Agreement. 7 l1. Amendments; Waivers. This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants of this Agreement may be waived only by a written instrument executed by the parties to this Agreement or, in the case of a waiver, by the party waiving compliance. Any such written instrument must be approved by the Board to be effective as against the Company. The failure of any party at any time or times to require performance of any provision of this Agreement shall in no manner affect the right at a later time to enforce the same. No waiver by any party of the breach of any term or provision contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 12. Notice. All notices, requests or consents required or permitted under this Agreement shall be made in writing and shall be given to the other parties by personal delivery, overnight air courier (with receipt signature) or facsimile transmission (with "answerback" confirmation of transmission), sent to such parties' addresses or telecopy numbers as are set forth below such parties' signatures to this Agreement, or such other addresses or telecopy numbers of which the parties have given notice pursuant to this Section 12. Each such notice, request or consent shall be deemed effective upon the date of actual receipt, receipt signature or confirmation of transmission, as applicable. 13. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 14. Survival. The representations and agreements of the Employee set forth in Sections 5, 6 and 7 of this Agreement shall survive the expiration or termination of this Agreement (irrespective of the reason for such expiration of termination). 15. Attorney's Fees. If any party to this Agreement seeks to enforce his or its rights under this Agreement, the prevailing party or parties shall be entitled to recover reasonable fees, costs and expenses incurred in connection therewith including, without limitation, the fees, costs and expenses of attorneys, accountants and experts, whether or not litigation is instituted, and including such fees, costs and expenses of appeals. [Signature page follows] 8 1N WITNESS WHEREOF, the parties to this Agreement have executed this Employment Agreement as of the date first above written. PROTEIN POLYMER TECHNOLOGIES, 1NC. By: /s/ Philip J. Davis ------------------------------ Philip J. Davis Corporate Secretary Address for Notices: 10655 Sorrento Valley Road First Floor San Diego, California 92121 Attention: Philip J. Davis Telecopy: (619) 5558-6477 /s/ J. THOMAS PARMETER --------------------------------- J. THOMAS PARMETER Address for Notices: 1842 Viking Way La Jolla, CA 92037 9 EX-10.31 6 EMPLOYMENT AGREEMENT EXHIBIT 10.31 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of February l7, 2000 between PROTEIN POLYMER TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and JOHN FLOWERS (the "Employee"). RECITAL The Company desires to continue to employ the Employee, and the Employee desires to be so employed by the Company, on the terms and subject to the conditions set forth in this Agreement. This Agreement supersedes that certain employment agreement between the Company and the Employee dated November 1, 1996 (the "Prior Agreement"). AGREEMENT NOW, THEREFORE, in consideration of the premises and the mutual promises set forth in this Agreement, the Company and the Employee hereby agree as follows: 1. Employment. (a) Subject to the terms and conditions contained herein, the Company hereby agrees to employ the Employee, and the Employee accepts such employment, from the date hereof until the earlier of (i) December 31, 2002 or (ii) the date such employment is terminated pursuant to Section 4 of this Agreement. During the Employee's employment under this Agreement, the Employee shall perform such duties for the Company as may from time to time be assigned to the Employee by Board of Directors of the Company (the "Board") or the President of the Company (the "Designated Officer"). The Employee shall have the title of Vice President, Planning and Operations and Director, Intellectual Property, or such other title or titles, if any, as from time to time may be assigned to the Employee by the Board. (b) The Employee will devote his entire business time, energy, attention and skill to the services of the Company and its affiliates and to the promotion of their interests. So long as the Employee is employed by the Company, the Employee shall not, without the written consent of the Company: (i) engage in any other activity for compensation, profit or other pecuniary advantage, whether received during or after the term of this Agreement; (ii) render or perform services of a business, professional, or commercial nature other than to or for the Company, either alone or as an employee, consultant, director, officer, or partner of another business entity, whether or not for compensation, and whether or not such activity, occupation or endeavor is similar to, competitive with, or adverse to the business or welfare of the Company; or (iii) invest in or become a shareholder of another corporation or other entity; provided, that the Employee's investment solely as a shareholder in another corporation shall not be prohibited hereby so long as such investment is not in excess of one percent (1%) of any class of shares that are traded on a national securities exchange. (c) Prior to or concurrently with the execution of this Agreement, the Employee has executed an Employee Proprietary information, Trade Secret and Confidentiality Agreement (the "Confidentiality Agreement"). 2. Location of Employment. The Employee's principal place of employment shall be at the executive offices of the Company located at 10655 Sorrento Valley Road, San Diego, California 92121 or, as may be requested by the Board, at any other office of the Company or any of its affiliates currently or hereinafter located in San Diego County; provided, that at the direction of the Board or the Designated Officer, the Employee may from time to time be required to travel to various domestic and foreign locations. 3. Compensation. (a) In exchange for full performance of the Employee's obligations and duties under this Agreement, the Company shall pay the Employee an annual base salary (the "Base Salary") equal to $125,000, payable in monthly installments in accordance with the Company's standard payroll practices. In any month in which the Employee shall be employed for less than the entire number of days in such month, the compensation payable under this Section 3(a) shall be prorated on the basis of the number of days during which the Employee was actually employed divided by the number of days in such month. (b) The Base Salary is a gross amount, and the Company shall be required to withhold from such amount deductions with respect to Federal, state and local taxes, FICA, unemployment compensation taxes and similar taxes, assessments or withholding requirements. (c) During the Employee's employment under this Agreement, the Employee shall also be reimbursed by the Company for reasonable business expenses actually incurred or paid by the Employee, consistent with the policies established by the Board, in rendering to the Company the services provided for in this Agreement, upon presentation of expense statements or such other supporting information as is consistent with the policies of the Company. (d) The Employee shall be entitled to 20 business days vacation for each full year of employment under this Agreement, which vacation time will accrue in accordance with the vacation policy of the Company. (e) The Employee shall be entitled to participate in all benefit plans (including deferred compensation plans and any medical, dental or life insurance plans) which shall 2 be available from time to time to the domestic management employees of the Company generally, except to the extent such participation in any plan would, in the opinion of the Designated Officer, alter the intended tax treatment of such plan; provided, however, that the Employee shall have no right under this Agreement to participate in any stock option, stock purchase or other plan relating to shares of capital stock of the Company or its affiliates. The Employee acknowledges and agrees that the Board may in its discretion terminate at any time or modify from time to time any such benefit plans. (f) Other than as expressly set forth in this Section 3 or Sections 4(f) and 4(g) below, the Employee shall not receive any other compensation or benefits except to the extent provided by the Board. 4. Termination. (a) The employment of the Employee under this Agreement may be terminated by the Company immediately upon giving the Employee notice if (i) the Board determines that the Employee is unable to discharge his essential job duties by reason of illness or injury or (ii) the Employee has been unable to discharge his essential job duties by reason of illness or injury for either (A) a period of two consecutive months or (B) twelve weeks in any twelve-month period. (b) The employment of the Employee under this Agreement shall terminate on the date of the Employee's death. (c) The employment of the Employee under this Agreement may be terminated by the Company upon written notice from the Board that, in the opinion of the Board, the Employee has (i) refused or failed (after reasonable notice that such refusal or failure would result in termination of the Employee's employment) to perform, to the satisfaction of the Designated Officer or the Board, any duties assigned to the Employee by the Designated Officer or the Board, (ii) committed a breach of the terms of this Agreement or any other legal obligation to the Company, (iii) failed to perform any of the Employee's obligations under the Confidentiality Agreement, (iv) demonstrated negligence or willful misconduct in the execution of the Employee's assigned duties, (v) been convicted of or pleaded nolo contendere to a felony or other serious crime, (vi) ---- ---------- repeatedly and intemperately used alcohol or drugs, (vii) engaged in business practices which, in the opinion of the Board, are unethical or reflect adversely on the Company, (viii) misappropriated assets of the Company or (ix) been repeatedly absent from work during normal business hours for reasons other than disability. (d) The employment of the Employee under this Agreement shall terminate upon receipt by the Board of a written notice of resignation signed by the Employee or, if no notice is given, on the date on which the Employee voluntarily terminates his or her employment relationship with the Company. 3 (e) In addition to the circumstances described in subsections (a), (b), (c) and (d) above, the Company may terminate the Employee's employment for any reason or no reason and with or without cause or prior notice. The Employee understands that, subject to subsections (f)(iii) and (g) below, he is an at-will employee and may be terminated by the Company without cause or prior notice pursuant to this subsection (e) notwithstanding any other provision contained in this Agreement. This at-will relationship will remain in effect during the term of this Agreement and so long thereafter provided that the Employee remains employed by the Company, unless such at-will employment relationship is modified by a specific, express written agreement signed by the Company. (f) If the Employee's employment is terminated pursuant to this Section 4 or for any other reason, the Employee shall not be entitled to any compensation or benefits from the Company, under Section 3 of this Agreement or otherwise, except for the following: (i) Base Salary and vacation pay accrued, and reasonable business expenses incurred, under Section 3 of this Agreement through the date of such termination; (ii) such benefits, if any, as may be required to be provided by the Company under the Comprehensive Omnibus Budget Reconciliation Act (COBRA); and (iii) if the Employee's employment is terminated pursuant to subsection (e) above, the Company shall continue to pay to the Employee the Base Salary then in effect at intervals in accordance with the Company's standard payroll practice until the earlier of (A) six months following such termination or (B) the termination date set forth in Section l(a)(i) of this Agreement. (g) Employee may terminate his employment hereunder for "Good Reason" (as hereinafter defined). (i) For purposes of this Agreement, "Good Reason" shall mean a termination of Employee's employment by Employee within 90 days after the occurrence of any of the following after a "Change in Control" (as hereinafter defined): (i) a reduction in Employee's Base Salary then in effect; (ii) a material reduction in Employee's positions, duties and responsibilities from those described in Section l(a) of this Agreement; or (iii) the failure of the Company to obtain the assumption of this Agreement by any successor to the extent required pursuant to Section 10(a) of this Agreement. (ii) For purposes of this Agreement, the term "Change in Control" shall mean the occurrence of any of the following events with respect to the Company: 4 (A) All or substantially all of the assets of the Company are sold or transferred to another corporation or entity; or (B) The Company is sold, transferred, merged, consolidated, ventured or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than a majority of the outstanding securities entitled to vote generally in the election of directors or other capital interests of the acquiring corporation or entity are owned, directly or indirectly, by the shareholders of the Company immediately prior to the sale, transfer, merger, consolidation, venture or reorganization; or (C) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing more than 50% of the combined voting power of the then-outstanding voting securities of the Company; or (D) The Company shall file a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Item 1 of Form 8-K thereunder or Item 14 of Schedule 14A thereunder (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (E) The individuals who, at the beginning of any period of two consecutive calendar years, constituted members of the Board cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's stockholders of each new director of the Company was approved by a vote of at least two-thirds of the directors of the Company still in office who were Directors of the Company at the beginning of any such period. (iii) Notwithstanding the foregoing, a termination shall not be treated as a termination for Good Reason (i) if Employee shall have specifically consented in writing to the occurrence of the event giving rise to the claim of termination for Good Reason or (ii) unless Employee, within 30 days after receiving written notice from the Company specifying in reasonable detail the occurrence of one of such events, shall have delivered a written notice to the Company stating that he intends to terminate his employment for Good Reason and specifying the factual basis for such termination and such event, if capable of being cured, shall not have been cured within 30 days of the receipt by the Company of such notice. 5 (iv) If Employee shall terminate his employment for Good Reason, the Company shall pay Employee (or, in the event of his death, his devisee, legatee or, if there is none, his estate) a lump-sum amount equal to the highest level of Employee's annual Base Salary in effect on the date of the Change in Control, multiplied by a factor of 2.0. Employee will also be entitled to any vested benefits under any employee benefit plans. 5. Employee's Representations. (a) The Employee represents that he has full authority to enter into this Agreement and that he is free to enter into this Agreement and not under any contractual restraint which would prohibit the Employee from satisfactorily performing his duties to the Company under this Agreement. (b) The Employee hereby agrees to indemnify, and hold harmless the Company, its officers, directors and stockholders from and against any losses, liabilities, damages or costs (including reasonable attorney's fees) arising out of a breach, or claimed breach, of any of the representations, warranties and covenants of the Employee set forth in this Agreement. (c) The Employee acknowledges that he is free to seek advice from independent counsel with respect to this Agreement. The Employee has either obtained such advice or, after carefully reviewing this Agreement, has decided to forego such advice. The Employee is not relying on any representation or advice from the Company or any of its officers, directors, attorneys or other representatives regarding this Agreement, its content or effect. 6. Arbitration. Any controversy or claim arising out of or relating to this Agreement or any breach hereof or the Employee's employment by the Company or termination thereof, shall be settled by arbitration by one arbitrator in accordance with the rules of the American Arbitration Association, and judgment upon such award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration shall be held in the City of San Diego or such other place as may be agreed upon at the time by the parties to the arbitration. 7. Equitable Relief. The Employee acknowledges that the Company is relying for its protection upon the existence and validity of the provisions of this Agreement, that the services to be rendered by the Employee are of a special, unique and extraordinary character, and that irreparable injury will result to the Company from any violation or continuing violation of the provisions of this Agreement for which damages may not be an adequate remedy. Accordingly, the Employee hereby agrees that in addition to the remedies available to the Company by law or under this Agreement, the Company shall be entitled to obtain such equitable relief as may be permitted by law in a court of competent jurisdiction including, without limitation, injunctive relief from any violation or continuing violation by the Employee of any term or provision of this Agreement. 6 8. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal substantive laws (and not the laws of conflicts) of the State of California. 9. Entire Agreement. This Agreement constitutes the whole agreement of the parties hereto in reference to any employment of the Employee by the Company and in reference to any of the matters or things herein provided for or hereinabove discussed or mentioned in reference to such employment; all prior agreements, promises, representations and understandings relative thereto (including, without limitation, the Prior Agreement) being herein merged. 10. Assignability. (a) In the event the Company shall merge or consolidate with any other corporation, partnership or business entity, or all or substantially all of the Company's business or assets shall be transferred in any manner to any other corporation, partnership or business entity, then such successor to the Company shall thereupon succeed to, and be subject to, all rights, interests, duties and obligations of, and shall thereafter be deemed for all purposes hereof to be, the "Company" under this Agreement. This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die, any amounts payable to him hereunder shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to his estate. (b) This Agreement is personal in nature and the Employee shall not, except as set forth in subsection (a) hereof, without the written consent of the Company, assign or transfer this Agreement or any rights or obligations hereunder (c) Except as set forth in subsection (a) above, nothing expressed or implied in this Agreement is intended or shall be construed to confer upon or give to any person, other than the parties to this Agreement, any right, remedy or claim under or by reason of this Agreement or of any term, covenant or condition of this Agreement. 11. Amendments; Waivers. This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants of this Agreement may be waived only by a written instrument executed by the parties to this Agreement or, in the case of a waiver, by the party waiving compliance. Any such written instrument must be approved by the Board to be effective as against the Company. The failure of any party at any time or times to require performance of any provision of this Agreement shall in no manner affect the right at a later time to enforce the same. No waiver by any party of the breach of any term or provision contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 7 12. Notice. Ail notices, requests or consents required or permitted under this Agreement shall be made in writing ad shall be given to the other parties by personal delivery, overnight air courier (with receipt signature) or facsimile transmission (with "answerback" confirmation of transmission), sent to such parties' addresses or telecopy numbers as are set forth below such parties' signatures to this Agreement, or such other addresses or telecopy numbers of which the parties have given notice pursuant to this Section 12. Each such notice, request or consent shall be deemed effective upon the date of actual receipt, receipt signature or confirmation of transmission, as applicable. 13. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction 14. Survival. The representations and agreements of the Employee set forth in Sections 5, 6 and 7 of this Agreement shall survive the expiration or termination of this Agreement (irrespective of the reason for such expiration of termination). 15. Attorney's Fees. If any party to this Agreement seeks to enforce his or its rights under this Agreement, the prevailing party or parties shall be entitled to recover reasonable fees, costs and expenses incurred in connection therewith including, without limitation, the fees, costs and expenses of attorneys, accountants and experts, whether or not litigation is instituted, and including such fees, costs and expenses of appeals. [Signature page follows] 8 IN WITNESS WHEREOF, the parties to this Agreement have executed this Employment Agreement as of the date first above written. PROTEIN POLYMER TECHNOLOGIES, INC. By /s/ J. THOMAS PARMETER ---------------------------------- Its President Address for Notices: 10655 Sorrento Valley Road First Floor San Diego, California 92121 Attention: J. Thomas Parmeter Telecopy: (619) 558-6477 /s/ JOHN FLOWERS ------------------------------------- John Flowers Address for notices: 1005 Santa Queta Solana Beach, CA 92075 9 EX-10.32 7 EMPLOYMENT AGREEMENT EXHIBIT 10.32 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of February 17, 2000 between PROTEIN POLYMER TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and JOSEPH CAPPELLO (the "Employee"). RECITAL The Company desires to continue to employ the Employee, and the Employee desires to be so employed by the Company, on the terms and subject to the conditions set forth in this Agreement. This Agreement supersedes that certain employment agreement between the Company and the Employee dated November 1, 1996 (the "Prior Agreement"). AGREEMENT NOW, THEREFORE, in consideration of the premises and the mutual promises set forth in this Agreement, the Company and the Employee hereby agree as follows: l. Employment. (a) Subject to the terms and conditions contained herein, the Company hereby agrees to employ the Employee, and the Employee accepts such employment, from the date hereof until the earlier of (i) December 31, 2002 or (ii) the date such employment is terminated pursuant to Section 4 of this Agreement. During the Employee's employment under this Agreement, the Employee shall perform such duties for the Company as may from time to time be assigned to the Employee by Board of Directors of the Company (the "Board") or the President of the Company (the "Designated Officer"). The Employee shall have the title of Vice President, Research and Development, Chief Technical Officer and Director, Polymer Research, or such other title or titles, if any, as from time to time may be assigned to the Employee by the Board. (b) The Employee will devote his entire business time, energy, attention and skill to the services of the Company and its affiliates and to the promotion of their interests. So long as the Employee is employed by the Company, the Employee shall not, without the written consent of the Company: (i) engage in any other activity for compensation, profit or other pecuniary advantage, whether received during or after the term of this Agreement; (ii) render or perform services of a business, professional, or commercial nature other than to or for the Company either alone or as an employee, consultant, director, officer, or partner of another business entity, whether or not for compensation, and whether or not such activity, occupation or endeavor is similar to, competitive with, or adverse to the business or welfare of the Company; or (iii) invest in or become a shareholder of another corporation or other entity; provided, that the Employee's investment solely as a shareholder in another corporation shall not be prohibited hereby so long as such investment is not in excess of one percent (1%) of any class of shares that are traded on a national securities exchange. (c) Prior to or concurrently with the execution of this Agreement, the Employee has executed an Employee Proprietary Information, Trade Secret and Confidentiality Agreement (the "Confidentiality Agreement"). 2. Location of Employment. The Employee's principal place of employment shall be at the executive offices of the Company located at 10655 Sorrento Valley Road, San Diego, California 92121 or, as may be requested by the Board, at any other office of the Company or any of its affiliates currently or hereinafter located in San Diego County; provided, that at the direction of the Board or the Designated Officer, the Employee may from time to time be required to travel to various domestic and foreign locations. 3. Compensation. (a) In exchange for full performance of the Employee's obligations and duties under this Agreement, the Company shall pay the Employee an annual base salary (the "Base Salary") equal to $137,000, payable in monthly installments in accordance with the Company's standard payroll practices. In any month in which the Employee shall be employed for less than the entire number of days in such month, the compensation payable under this Section 3(a) shall be prorated on the basis of the number of days during which the Employee was actually employed divided by the number of days in such month. (b) The Base Salary is a gross amount, and the Company shall be required to withhold from such amount deductions with respect to Federal, state and local taxes, FICA, unemployment compensation taxes and similar taxes, assessments or withholding requirements. (c) During the Employee's employment under this Agreement, the Employee shall also be reimbursed by the Company for reasonable business expenses actually incurred or paid by the Employee, consistent with the policies established by the Board, in rendering to the Company the services provided for in this Agreement, upon presentation of expense statements or such other supporting information as is consistent with the policies of the Company. (d) The Employee shall be entitled to 20 business days vacation for each full year of employment under this Agreement, which vacation time will accrue in accordance with the vacation policy of the Company. (e) The Employee shall be entitled to participate in all benefit plans (including deferred compensation plans and any medical, dental or life insurance plans) which shall be available from time to time to the domestic management employees of the Company generally, except to the extent such participation in any plan would, in the opinion of the Designated Officer, alter the intended tax treatment of such plan; provided, however, that the Employee shall have no right under this Agreement to participate in any stock option, stock purchase or other plan relating to shares of capital stock of the Company or its affiliates. The Employee acknowledges and agrees that the Board may in its discretion terminate at any time or modify from time to time any such benefit plans. (f) Other than as expressly set forth in this Section 3 or Sections 4(f) and 4(g) below, the Employee shall not receive any other compensation or benefits except to the extent provided by the Board. 4. Termination. (a) The employment of the Employee under this Agreement may be terminated by the Company immediately upon giving the Employee notice if (i) the Board determines that the Employee is unable to discharge his essential job duties by reason of illness or injury or (ii) the Employee has been unable to discharge his essential job duties by reason of illness or injury for either (A) a period of two consecutive months or (B) twelve weeks in any twelve-month period. (b) The employment of the Employee under this Agreement shall terminate on the date of the Employee's death. (c) The employment of the Employee under this Agreement may be terminated by the Company upon written notice from the Board that, in the opinion of the Board, the Employee has (i) refused or failed (after reasonable notice that such refusal or failure would result in termination of the Employee's employment) to perform, to the satisfaction of the Designated Officer or the Board, any duties assigned to the Employee by the Designated Officer or the Board, (ii) committed a breach of the terms of this Agreement or any other legal obligation to the Company, (iii) failed to perform any of the Employee's obligations under the Confidentiality Agreement, (iv) demonstrated negligence or willful misconduct in the execution of the Employee's assigned duties, (v) been convicted of or pleaded nolo contendere to a felony or other serious crime, (vi) ---- ---------- repeatedly and intemperately used alcohol or drugs, (vii) engaged in business practices which, in the opinion of the Board, are unethical or reflect adversely on the Company, (viii) misappropriated assets of the Company or (ix) been repeatedly absent from work during normal business hours for reasons other than disability. (d) The employment of the Employee under this Agreement shall terminate upon receipt by the Board of a written notice of resignation signed by the Employee or, if no notice is given, on the date on which the Employee voluntarily terminates his or her employment relationship with the Company. (e) In addition to the circumstances described in subsections (a), (b), (c) and (d) above, the Company may terminate the Employee's employment for any reason or no reason and with or without cause or prior notice. The Employee understands that, subject to subsections (f)(iii) and (g) below, he is an at-will employee and may be terminated by the Company without cause or prior notice pursuant to this subsection (e) notwithstanding any other provision contained in this Agreement. This at-will relationship will remain in effect during the term of this Agreement and so long thereafter provided that the Employee remains employed by the Company, unless such at-will employment relationship is modified by a specific, express written agreement signed by the Company. (f) If the Employee's employment is terminated pursuant to this Section 4 or for any other reason, the Employee shall not be entitled to any compensation or benefits from the Company, under Section 3 of this Agreement or otherwise, except for the following: (i) Base Salary and vacation pay accrued, and reasonable business expenses incurred, under Section 3 of this Agreement through the date of such termination; (ii) such benefits, if any, as may be required to be provided by the Company under the Comprehensive Omnibus Budget Reconciliation Act (COBRA); and (iii) if the Employee's employment is terminated pursuant to subsection (e) above, the Company shall continue to pay to the Employee the Base Salary then in effect at intervals in accordance with the Company's standard payroll practice until the earlier of (A) six months following such termination or (B) the termination date set forth in Section 1(a)(i) of this Agreement. (g) Employee may terminate his employment hereunder for "Good Reason" (as hereinafter defined). (i) For purposes of this Agreement, "Good Reason" shall mean a termination of Employee's employment by Employee within 90 days after the occurrence of any of the following after a "Change in Control" (as hereinafter defined): (i) a reduction in Employee's Base Salary then in effect; (ii) a material reduction in Employee's positions, duties and responsibilities from those described in Section 1(a) of this Agreement; or (iii) the failure of the Company to obtain the assumption of this Agreement by any successor to the extent required pursuant to Section 10(a) of this Agreement. (ii) For purposes of this Agreement, the term "Change in Control" shall mean the occurrence of any of the following events with respect to the Company: (A) All or substantially all of the assets of the Company are sold or transferred to another corporation or entity; or (B) The Company is sold, transferred, merged, consolidated, ventured or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than a majority of the outstanding securities entitled to vote generally in the election of directors or other capital interests of the acquiring corporation or entity are owned, directly or indirectly, by the shareholders of the Company immediately prior to the sale, transfer, merger, consolidation, venture or reorganization; or (C) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing more than 50% of the combined voting power of the then-outstanding voting securities of the Company; or (D) The Company shall file a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Item 1 of Form 8-K thereunder or Item 14 of Schedule 14A thereunder (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (E) The individuals who, at the beginning of any period of two consecutive calendar years, constituted members of the Board cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's stockholders of each new director of the Company was approved by a vote of at least two-thirds of the directors of the Company still in office who were Directors of the Company at the beginning of any such period. (iii) Notwithstanding the foregoing, a termination shall not be treated as a termination for Good Reason (i) if Employee shall have specifically consented in writing to the occurrence of the event giving rise to the claim of termination for Good Reason or (ii) unless Employee, within 30 days after receiving written notice from the Company specifying in reasonable detail the occurrence of one of such events, shall have delivered a written notice to the Company stating that he intends to terminate his employment for Good Reason and specifying the factual basis for such termination and such event, if capable of being cured, shall not have been cured within 30 days of the receipt by the Company of such notice. (iv) If Employee shall terminate his employment for Good Reason, the Company shall pay Employee (or, in the event of his death, his devisee, legatee or, if there is none, his estate) a lump-sum amount equal to the highest level of Employee's annual Base Salary in effect on the date of the Change in Control, multiplied by a factor of 2.0. Employee will also be entitled to any vested benefits under any employee benefit plans. 5. Employee's Representations. (a) The Employee represents that he has full authority to enter into this Agreement and that he is free to enter into this Agreement and not under any contractual restraint which would prohibit the Employee from satisfactorily performing his duties to the Company under this Agreement. (b) The Employee hereby agrees to indemnify and hold harmless the Company, its officers, directors and stockholders from and against any losses, liabilities, damages or costs (including reasonable attorney's fees) arising out of a breach, or claimed breach, of any of the representations, warranties and covenants of the Employee set forth in this Agreement. (c) The Employee acknowledges that he is free to seek advice from independent counsel with respect to this Agreement. The Employee has either obtained such advice or, after carefully reviewing this Agreement, has decided to forego such advice. The Employee is not relying on any representation or advice from the Company or any of its officers, directors, attorneys or other representatives regarding this Agreement, its content or effect. 6. Arbitration. Any controversy or claim arising out of or relating to this Agreement or any breach hereof or the Employee's employment by the Company or termination thereof, shall be settled by arbitration by one arbitrator in accordance with the rules of the American Arbitration Association, and judgment upon such award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration shall be held in the City of San Diego or such other place as may be agreed upon at the time by the parties to the arbitration. 7. Equitable Relief. The Employee acknowledges that the Company is relying for its protection upon the existence and validity of the provisions of this Agreement, that the services to be rendered by the Employee are of a special, unique and extraordinary character, and that irreparable injury will result to the Company from any violation or continuing violation of the provisions of this Agreement for which damages may not be an adequate remedy. Accordingly, the Employee hereby agrees that in addition to the remedies available to the Company by law or under this Agreement, the Company shall be entitled to obtain such equitable relief as may be permitted by law in a court of competent jurisdiction including, without limitation, injunctive relief from any violation or continuing violation by the Employee of any term or provision of this Agreement. 8. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal substantive laws (and not the laws of conflicts) of the State of California. 9. Entire Agreement. This Agreement constitutes the whole agreement of the parties hereto in reference to any employment of the Employee by the Company and in reference to any of the matters or things herein provided for or hereinabove discussed or mentioned in reference to such employment; all prior agreements, promises, representations and understandings relative thereto (including, without limitation, the Prior Agreement) being herein merged. 10. Assignability. (a) In the event the Company shall merge or consolidate with any other corporation, partnership or business entity, or all or substantially all of the Company's business or assets shall be transferred in any manner to any other corporation, partnership or business entity, then such successor to the Company shall thereupon succeed to, and be subject to, all rights, interests, duties and obligations of, and shall thereafter be deemed for all purposes hereof to be, the "Company" under this Agreement. This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die, any amounts payable to him hereunder shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to his estate. (b) This Agreement is personal in nature and the Employee shall not, except as set forth in subsection (a) hereof, without the written consent of the Company, assign or transfer this Agreement or any rights or obligations hereunder. (c) Except as set forth in subsection (a) above, nothing expressed or implied in this Agreement is intended or shall be construed to confer upon or give to any person, other than the parties to this Agreement, any right, remedy or claim under or by reason of this Agreement or of any term, covenant or condition of this Agreement. 11. Amendments; Waivers. This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants of this Agreement may be waived only by a written instrument executed by the parties to this Agreement or, in the case of a waiver, by the party waiving compliance. Any such written instrument must be approved by the Board to be effective as against the Company. The failure of any party at any time or times to require performance of any provision of this Agreement shall in no manner affect the right at a later time to enforce the same. No waiver by any party, of the breach of any term or provision contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 12. Notice. All notices, requests or consents required or permitted under this Agreement shall be made in writing and shall be given to the other parties by personal delivery, overnight air courier (with receipt signature) or facsimile transmission (with "answerback" confirmation of transmission), sent to such parties' addresses or telecopy numbers as are set forth below such parties' signatures to this Agreement, or such other addresses or telecopy numbers of which the parties have given notice pursuant to this Section 12. Each such notice, request or consent shall be deemed effective upon the date of actual receipt, receipt signature or confirmation of transmission, as applicable. 13. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 14. Survival. The representations and agreements of the Employee set forth in Sections 5, 6 and 7 of this Agreement shall survive the expiration or termination of this Agreement (irrespective of the reason for such expiration of termination). 15. Attorney's Fees. If any party to this Agreement seeks to enforce his or its rights under this Agreement, the prevailing party or parties shall be entitled to recover reasonable fees, costs and expenses incurred in connection therewith including, without limitation, the fees, costs and expenses of attorneys, accountants and experts, whether or not litigation is instituted, and including such fees, costs and expenses of appeals. [Signature page follows] IN WITNESS WHEREOF, the parties to this Agreement have executed this Employment Agreement as of the date first above written. PROTEIN POLYMER TECHNOLOGIES, 1NC. By: /s/ J. THOMAS PARMETER --------------------------------- Its: President Address for Notices: 10655 Sorrento Valley Road First Floor San Diego, California 92121 Attention: J. Thomas Parmeter Telecopy: (619) 558-6477 /s/ JOSEPH CAPPELLO ------------------------------------ Joseph Cappello Address for Notices: 12879 Corbett Ct. San Diego, CA 92130 EX-10.33 8 EMPLOYMENT AGREEMENT EXHIBIT 10.33 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is entered into as of February 17, 2000 between PROTEIN POLYMER TECHNOLOGIES, INC., a Delaware corporation (the "Company"), and FRANCO A. FERRARI (the "Employee"). RECITAL The Company desires to continue to employ the Employee, and the Employee desires to be so employed by the Company, on the terms and subject to the conditions set forth in this Agreement. This Agreement supersedes that certain employment agreement between the Company and the Employee dated November 1, 1996 (the "Prior Agreement"). AGREEMENT NOW, THEREFORE, in consideration of the premises and the mutual promises set forth in this Agreement, the Company and the Employee hereby agree as follows: 1. Employment. (a) Subject to the terms and conditions contained herein, the Company hereby agrees to employ the Employee, and the Employee accepts such employment, from the date hereof until the earlier of (i) December 31, 2002 or (ii) the date such employment is terminated pursuant to Section 4 of this Agreement. During the Employee's employment under this Agreement, the Employee shall perform such duties for the Company as may from time to time be assigned to the Employee by Board of Directors of the Company (the "Board") or the President of the Company (the "Designated Officer"). The Employee shall have the title of Vice President, Laboratory Operations and Polymer Production and Director, Molecular Genetics, or such other title or titles, if any, as from time to time may be assigned to the Employee by the Board. (b) The Employee will devote his entire business time, energy, attention and skill to the services of the Company and its affiliates and to the promotion of their interests. So long as the Employee is employed by the Company, the Employee shall not, without the written consent of the Company: (i) engage in any other activity for compensation, profit or other pecuniary advantage, whether received during or after the term of this Agreement; (ii) render or perform services of a business, professional, or commercial nature other than to or for the Company, either alone or as an employee, consultant, director, officer, or partner of another business entity, whether or not for compensation, and whether or not such activity, occupation or endeavor is similar to, competitive with, or adverse to the business or welfare of the Company; or (iii) invest in or become a shareholder of another corporation or other entity; provided, that the Employee's investment solely as a shareholder in another corporation shall not be prohibited hereby so long as such investment is not in excess of one percent (1%) of any class of shares that are traded on a national securities exchange. (c) Prior to or concurrently with the execution of this Agreement, the Employee has executed an Employee Proprietary Information, Trade Secret and Confidentiality Agreement (the "Confidentiality/Agreement"). 2. Location of Employment. The Employee's principal place of employment shall be at the executive offices of the Company located at 10655 Sorrento Valley Road, San Diego, California 92121 or, as may be requested by the Board, at any other office of the Company or any of its affiliates currently or hereinafter located in San Diego County; provided, that at the direction of the Board or the Designated Officer, the Employee may from time to time be required to travel to various domestic and foreign locations. 3. Compensation. (a) In exchange for full performance of the Employee's obligations and duties under this Agreement, the Company shall pay the Employee an annual base salary (the "Base Salary') equal to $127,000, payable in monthly installments in accordance with the Company's standard payroll practices. In any month in which the Employee shall be employed for less than the entire number of days in such month, the compensation payable under this Section 3(a) shall be prorated on the basis of the number of days during which the Employee was actually employed divided by the number of days in such month. (b) The Base Salary is a gross amount, and the Company shall be required to withhold from such amount deductions with respect to Federal, state and local taxes, FICA, unemployment compensation taxes and similar taxes, assessments or withholding requirements. (c) During the Employee's employment under this Agreement, the Employee shall also be reimbursed by the Company for reasonable business expenses actually incurred or paid by the Employee, consistent with the policies established by the Board, in rendering to the Company the services provided for in this Agreement, upon presentation of expense statements or such other supporting information as is consistent with the policies of the Company. (d) The Employee shall be entitled to 20 business days vacation for each full year of employment under this Agreement, which vacation time will accrue in accordance with the vacation policy of the Company. (e) The Employee shall be entitled to participate in all benefit plans (including deferred compensation plans and any medical, dental or life insurance plans) which shall 2 be available from time to time to the domestic management employees of the Company generally, except to the extent such participation in any plan would, in the opinion of the Designated Officer, alter the intended tax treatment of such plan; provided, however, that the Employee shall have no right under this Agreement to participate in any stock option, stock purchase or other plan relating to shares of capital stock of the Company or its affiliates. The Employee acknowledges and agrees that the Board may in its discretion terminate at any time or modify from time to time any such benefit plans. (f) Other than as expressly set forth in this Section 3 or Sections 4(f) and 4(g) below, the Employee shall not receive any other compensation or benefits except to the extent provided by the Board. 4. Termination. (a) The employment of the Employee under this Agreement may be terminated by the Company immediately upon giving the Employee notice if (i) the Board determines that the Employee is unable to discharge his essential job duties by reason of illness or injury or (ii) the Employee has been unable to discharge his essential job duties by reason of illness or injury for either (A) a period of two consecutive months or (B) twelve weeks in any twelve-month period. (b) The employment of the Employee under this Agreement shall terminate on the date of the Employee's death. (c) The employment of the Employee under this Agreement may be terminated by the Company upon written notice from the Board that, in the opinion of the Board, the Employee has (i) refused or failed (after reasonable notice that such refusal or failure would result in termination of the Employee's employment) to perform, to the satisfaction of the Designated Officer or the Board, any duties assigned to the Employee by the Designated Officer or the Board, (ii) committed a breach of the terms of this Agreement or any other legal obligation to the Company, (iii) failed to perform any of the Employee's obligations under the Confidentiality Agreement, (iv) demonstrated negligence or willful misconduct in the execution of the Employee's assigned duties, (v) been convicted of or pleaded nolo contendere to a felony or other serious crime, ---- ---------- (vi) repeatedly and intemperately used alcohol or drugs, (vii) engaged in business practices which, in the opinion of the Board, are unethical or reflect adversely on the Company, (viii) misappropriated assets of the Company or (ix) been repeatedly absent from work during normal business hours for reasons other than disability. (d) The employment of the Employee under this Agreement shall terminate upon receipt by the Board of a written notice of resignation signed by the Employee or, if no notice is given, on the date on which the Employee voluntarily terminates his or her employment relationship with the Company. 3 (e) In addition to the circumstances described in subsection (a), (b), (c) and (d) above, the Company may terminate the Employee's employment for any reason or no reason and with or without cause or prior notice. The Employee understands that, subject to subsections (f)(iii) and (g) below, he is an at-will employee and may be terminated by the Company without cause or prior notice pursuant to this subsection (e) notwithstanding any other provision contained in this Agreement. This at-will relationship will remain in effect during the term of this Agreement and so long thereafter provided that the Employee remains employed by the Company, unless such at-will employment relationship is modified by a specific, express written agreement signed by the Company. (f) If the Employee's employment is terminated pursuant to this Section 4 or for any other reason, the Employee shall not be entitled to any compensation or benefits from the Company, under Section 3 of this Agreement or otherwise, except for the following: (i) Base Salary and vacation pay accrued, and reasonable business expenses incurred, under Section 3 of this Agreement through the date of such termination; (ii) such benefits, if any, as may be required to be provided by the Company under the Comprehensive Omnibus Budget Reconciliation Act (COBRA); and (iii) if the Employee's employment is terminated pursuant to subsection (e) above, the Company shall continue to pay to the Employee the Base Salary then in effect at intervals in accordance with the Company's standard payroll practice until the earlier of (A) six months following such termination or (B) the termination date set forth in Section 1(a)(i) of this Agreement. (g) Employee may terminate his employment hereunder for "Good Reason" (as hereinafter defined). (i) For purposes of this Agreement, "Good Reason" shall mean a termination of Employee's employment by Employee within 90 days after the occurrence of any of the following after a "Change in Control" (as hereinafter defined): (i) a reduction in Employee's Base Salary then in effect; (ii) a material reduction in Employee's positions, duties and responsibilities from those described in Section 1(a) of this Agreement; or (iii) the failure of the Company to obtain the assumption of this Agreement by any successor to the extent required pursuant to Section 10(a) of this Agreement. (ii) For purposes of this Agreement, the term "Change in Control" shall mean the occurrence of any of the following events with respect to the Company: 4 (A) All or substantially all of the assets of the Company are sold or transferred to another corporation or entity; or (B) The Company is sold, transferred, merged, consolidated, ventured or reorganized into or with another corporation or entity, with the result that upon conclusion of the transaction less than a majority of the outstanding securities entitled to vote generally in the election of directors or other capital interests of the acquiring corporation or entity are owned, directly or indirectly, by the shareholders of the Company immediately prior to the sale, transfer, merger, consolidation, venture or reorganization; or (C) There is a report filed on Schedule 13D or Schedule 14D-1 (or any successor schedule, form or report), each as promulgated pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"), disclosing that any person (as the term "person" is used in Section 13(d)(3) or Section 14(d)(2) of the Exchange Act) has become the beneficial owner (as the term "beneficial owner" is defined under Rule 13d-3 or any successor rule or regulation promulgated under the Exchange Act) of securities representing more than 50% of the combined voting power of the then-outstanding voting securities of the Company; or (D) The Company shall file a report or proxy statement with the Securities and Exchange Commission pursuant to the Exchange Act disclosing in response to Item 1 of Form 8-K thereunder or Item 14 of Schedule 14A thereunder (or any successor schedule, form or report or item therein) that a change in control of the Company has or may have occurred or will or may occur in the future pursuant to any then-existing contract or transaction; or (E) The individuals who, at the beginning of any period of two consecutive calendar years, constituted members of the Board cease for any reason to constitute at least a majority thereof unless the nomination for election by the Company's stockholders of each new director of the Company was approved by a vote of at least two-thirds of the directors of the Company still in office who were Directors of the Company at the beginning of any such period. (iii) Notwithstanding the foregoing, a termination shall not be treated as a termination for Good Reason (i) if Employee shall have specifically consented in writing to the occurrence of the event giving rise to the claim of termination for Good Reason or (ii) unless Employee, within 30 days after receiving written notice from the Company specifying in reasonable detail the occurrence of one of such events, shall have delivered a written notice to the Company stating that he intends to terminate his employment for Good Reason and specifying the factual basis for such termination and such event, if capable of being cured, shall not have been cured within 30 days of the receipt by the Company of such notice. 5 (iv) If Employee shall terminate his employment for Good Reason, the Company shall pay Employee (or, in the event of his death, his devisee, legatee or, if there is none, his estate) a lump-sum amount equal to the highest level of Employee's annual Base Salary in effect on the date of the Change in Control, multiplied by a factor of 2.0. Employee will also be entitled to any vested benefits under any employee benefit plans. 5. Employee's Representations. (a) The Employee represents that he has full authority to enter into this Agreement and that he is free to enter into this Agreement and not under any contractual restraint which would prohibit the Employee from satisfactorily performing his duties to the Company under this Agreement. (b) The Employee hereby agrees to indemnify and hold harmless the Company, its officers, directors and stockholders from and against any losses, liabilities, damages or costs (including reasonable attorney's fees) arising out of a breach, or claimed breach, of any of the representations, warranties and covenants of the Employee set forth in this Agreement. (c) The Employee acknowledges that he is free to seek advice from independent counsel with respect to this Agreement. The Employee has either obtained such advice or, after carefully reviewing this Agreement, has decided to forego such advice. The Employee is not relying on any representation or advice from the Company or any of its officers, directors, attorneys or other representatives regarding this Agreement, its content or effect. 6. Arbitration. Any controversy or claim arising out of or relating to this Agreement or any breach hereof or the Employee's employment by the Company or termination thereof, shall be settled by arbitration by one arbitrator in accordance with the rules of the American Arbitration Association, and judgment upon such award rendered by the arbitrator may be entered in any court having jurisdiction thereof. The arbitration shall be held in the City of San Diego or such other place as may be agreed upon at the time by the parties to the arbitration. 7. Equitable Relief. The Employee acknowledges that the Company is relying for its protection upon the existence and validity of the provisions of this Agreement, that the services to be rendered by the Employee are of a special, unique and extraordinary character, and that irreparable injury will result to the Company from any violation or continuing violation of the provisions of this Agreement for which damages may not be an adequate remedy. Accordingly, the Employee hereby agrees that in addition to the remedies available to the Company by law or under this Agreement, the Company shall be entitled to obtain such equitable relief as may be permitted by law in a court of competent jurisdiction including, without limitation, injunctive relief from any violation or continuing violation by the Employee of any term or provision of this Agreement. 6 8. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the internal substantive laws (and not the laws of conflicts) of the State of California. 9. Entire Agreement. This Agreement constitutes the whole agreement of the parties hereto in reference to any employment of the Employee by the Company and in reference to any of the matters or things herein provided for or hereinabove discussed or mentioned in reference to such employment; all prior agreements, promises, representations and understandings relative thereto (including, without limitation, the Prior Agreement) being herein merged. 10. Assignability. (a) In the event the Company shall merge or consolidate with any other corporation, partnership or business entity, or all or substantially all of the Company's business or assets shall be transferred in any manner to any other corporation, partnership or business entity, then such successor to the Company shall thereupon succeed to, and be subject to, all rights, interests, duties and obligations of, and shall thereafter be deemed for all purposes hereof to be, the "Company" under this Agreement. This Agreement shall inure to the benefit of and be enforceable by Employee's personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If Employee should die, any amounts payable to him hereunder shall be paid in accordance with the terms of this Agreement to Employee's devisee, legatee, or other designee or, if there be no such designee, to his estate. (b) This Agreement is personal in nature and the Employee shall not, except as set forth in subsection (a) hereof, without the written consent of the Company, assign or transfer this Agreement or any rights or obligations hereunder. (c) Except as set forth in subsection (a) above, nothing expressed or implied in this Agreement is intended or shall be construed to confer upon or give to any person, other than the parties to this Agreement, any right, remedy or claim under or by reason of this Agreement or of any term, covenant or condition of this Agreement. 11. Amendments; Waivers. This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants of this Agreement may be waived only by a written instrument executed by the parties to this Agreement or, in the case of a waiver, by the party waiving compliance. Any such written instrument must be approved by the Board to be effective as against the Company. The failure of any party at any time or times to require performance of any provision of this Agreement shall in no manner affect the right at a later time to enforce the same. No waiver by any party of the breach of any term or provision contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 7 12. Notice. All notices, requests or consents required or permitted under this Agreement shall be made in writing and shall be given to the other parties by personal delivery, overnight air courier (with receipt signature) or facsimile transmission (with "answerback" confirmation of transmission), sent to such parties' addresses or telecopy numbers as are set forth below such parties' signatures to this Agreement, or such other addresses or telecopy numbers of which the parties have given notice pursuant to this Section 12. Each such notice, request or consent shall be deemed effective upon the date of actual receipt, receipt signature or confirmation of transmission, as applicable. 13. Severability. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 14. Survival. The representations and agreements of the Employee set forth in Sections 5, 6 and 7 of this Agreement shall survive the expiration or termination of this Agreement (irrespective of the reason for such expiration of termination). 15. Attorney's Fees. If any party to this Agreement seeks to enforce his or its rights under this Agreement, the prevailing party or parties shall be entitled to recover reasonable fees, costs and expenses incurred in connection therewith including, without limitation, the fees, costs and expenses of attorneys, accountants and experts, whether or not litigation is instituted, and including such fees, costs and expenses of appeals. [Signature page follows] 8 IN WITNESS WHEREOF, the parties to this Agreement have executed this Employment Agreement as of the date first above written. PROTEIN POLYMER TECHNOLOGIES, 1NC. By: /s/ J. THOMAS PARMETER -------------------------------- Its: President Address for Notices: 10655 Sorrento Valley Road First Floor San Diego, California 92121 Attention: J. Thomas Parmeter Telecopy: (619) 558-6477 /s/ FRANCO FERRARI ----------------------------------- FRANCO A. FERRARI Address for Notices: 7389 High Ave. La Jolla, CA 92037 9 EX-10.34 9 LICENSE AGREEMENT EXHIBIT 10.34 AGREEMENT This Agreement, entered into this 18 day of February, 2000, by and between Protein Polymer Technologies, Inc., a corporation of Delaware, having a principal place of business at 10655 Sorrento Valley Road, First Floor, San Diego, CA 92121 (hereinafter "PPT"), and Sanyo Chemical Industries, Ltd. a corporation of Japan, having its principal place of business at 11-1 Ikkyo Nomoto-cho, Higashiyama-ku, Kyoto 605-0995, Japan (hereinafter "Sanyo"); Recitals 1. PPT states that it is the owner of PPT Patents and, to its knowledge, PPT Know-How, as defined hereinbelow, and is the exclusive licensee under certain other patent rights, and a non-exclusive licensee under other patent rights relating to the manufacture, use and sale of Proteinaceous Polymers effective in promoting cell culture, and of Coated Products, as herein defined. 2. The parties desire to enter into an agreement under which Sanyo is exclusively licensed by PPT under PPT Patent Rights, as herein defined, and for the use of PPT Know-How in the manufacture, use and sale of Licensed Products in fields further defined herein as the Sanyo Field. The parties, therefore, agree as follows: ARTICLE 1: DEFINITIONS As used in this Agreement, the following terms shall have the following definitions: 1.1 "PPT Patents" shall mean patents owned by PPT as listed on attached Schedule 1.1, all continuations, divisionals, continuations-in-part, and reissues thereof, rights under any re-examinations certificates relating thereto, and all foreign counterparts of any of the listed patents or aforesaid continuations-in-part. 1.2 "PPT Patent Rights" shall mean PPT's rights under PPT patents. 1.3 "Proteinaceous Polymer" shall mean a proteinaceous polymer which has segments containing the amino acid sequences RGD or IKVAV (defined by standard single letter amino acid designations) useful in promoting cell culture. 1.4 "Coated Product" shall mean any formed object made of another polymer, resin, glass, or metal and coated with a Proteinaceous Polymer. 1.5 "Cell Line" means a microorganism or cell line which contains a nucleotide sequence which encodes a Proteinaceous Polymer. 1.6 "Licensed PPT Cell Lines" shall mean E. coli strain EC003 containing the plasmid pPT0101 used to produce ProNectin(R) F or the plasmid pPT0278 used to produce ProNectin(R) L. 1 1.7 "Cell Line Growth Information" shall mean all information necessary to establish in Sanyo's possession Licensed PPT Cell Lines producing ProNectin(R) F and ProNectin(R) L in the quantity and quality described in PPT's letter to Sanyo dated February 18, 2000. 1.8 "PPT Know-How" shall mean the information and documentation required for Sanyo to: (a) store and grow by fermentation the Licensed PPT Cell Lines and induce their production of ProNectin(R) F and ProNectin(R) L; (b) purify ProNectin(R) F and ProNectin(R) L from biomass obtained by fermentation; (c) analyze ProNectin(R)F and ProNectin(R)L for their purity, cell attachment activity, and leachable endotoxin content; (d) prepare ProNectin(R)F Diluent and ProNectin(R)L Diluent; (e) prepare ProNectin(R)F+ from ProNectin(R)F; (f) bottle and sterilize by autoclaving ProNectin(R) F in 1 and 5 mg quantities, ProNectin(R) L in 1 mg quantity, ProNectin(R) F+ in 1 mg quantity; ProNectin(R) F Diluent in 1 and 5 mL volumes, and ProNectin(R) L Diluent in 1 mL volume; (g) analyze the fill weights, fill volumes, and sterility of the products specified in (f); (h) coat ProNectin(R)F on non-tissue culture treated, non-sterile 6, 24-, and 96-well plates, and 35, 60, and 100 mm dishes; (i) sterilize by e-beam irradiation the Coated Products specified in (h); and (j) analyze the cell attachment activity, leachable endotoxin content, and sterility of the products specified in (h); as practiced by PPT in its commercial production of the products specified in (f) and (h) above. 1.9 "Sanyo Field" shall mean the manufacture, use, sale, importation and/or exportation of Protelnaceous Polymers, including derivatives and Coated Products thereof, for in vitro cell attachment and culture and/or for use under the limitations of a "For Research Use Only" label, where the use is based upon the cellular receptor binding activity of the RGD or IKVAV amino acid sequence. Without limiting the foregoing, the Sanyo Field shall include uses for: (i) screening of drugs and other bioactive materials; (ii) quality control and other analytical applications in research and/or development; and (iii) quality control and other analytical applications in the manufacture of other products. The Sanyo Field shall not include the manufacture, use, sale, importation and/or exportation of Proteinaceous Polymers, including derivatives and Coated Products thereof, for use in therapeutic, device, or diagnostic products that require approval for marketing by any regulatory authority. 1.10 "Licensed Products" shall mean the Proteinaceous Polymers ProNectin(R)F and ProNectin(R)L, including derivatives and Coated Products thereof, as listed on attached Schedule 1.2. 1.11 "Affiliate" shall mean any entity directly or indirectly controlling, controlled by, or under common control with, a party. "Control" as used in this Paragraph 1.11 shall mean ownership of fifty percent (50% or more of the entity in question. 2 1.12 "Date of this Agreement" shall be the date first written hereinabove. ARTICLE 2: LICENSE GRANT 2.1 PPT grants to Sanyo an exclusive, world-wide, irrevocable paid up license under PPT Patents and PPT Patent Rights for the use of PPT Know-How and Licensed PPT Cell Lines solely to make, have made, use, sell, offer for sale, import and/or export Licensed Products within the Sanyo Field. 2.2 The rights granted under Paragraph 2.1 hereof shall include the right to grant sublicenses, including the right to pass on to customers, distributors and ultimate users the right to use any Licensed Product within the Sanyo Field. Sanyo shall be fully responsible for enforcing the terms and conditions of this Agreement with respect to any such sublicensees. 2.3 PPT agrees to assign, and hereby does assign, to Sanyo its entire right and interest, if any, under the SUBLICENSE AGREEMENT FOR RGD-CONTAINING ENGINEERED PROTEIN POLYMERS, dated October 1, 1991, originally entered into between PPT and Teljos Pharmaceuticals, Inc. (hereinafter "Telios"). 2.4 PPT agrees to assign, and hereby does assign, to Sanyo its entire right and interest under the PHS PATENT LICENSE AGREEMENT-NONEXCLUSIVE, dated November 27, 1996, entered into between National Institutes of Health ("NIH") and PPT ("AGREEMENT") and shall notify NIH of the assignment of the AGREEMENT to Sanyo by PPT within ten (10) days from the Date of this Agreement. ARTICLE 3: TRADEMARK ASSIGNMENT 3.1 PPT agrees to assign, and hereby does assign, to Sanyo the entire right, title and interest in and to the trademarks "PRONECTIN,' "PRONECTIN F", "PRONECTIN L', and "SMARTPLASTIC" and the good will appurtenant thereto throughout the world for use on or in connection with polymeric proteins, peptides, products comprising polymeric proteins or peptides, and other related products and services, including the U.S. trademark registrations 1,705,720 and 2,168,749. 3.2 PPT agrees not to use or adopt any trademark or service mark that is confusingly similar to "PRONECTIN," "PRONECTIN F', "PRONECTIN L", or "SMARTPLASTIC" when applied to goods or services offered or promoted by PPT or any Affiliate of PPT. ARTICLE 4: TECHNOLOGY TRANSFER AND SERVICES 4.1 Within thirty (30) days after the Date of this Agreement, PPT shall deliver to Sanyo sufficient quantities of Licensed PPT Cell Lines to enable Sanyo to establish the Licensed PPT Cell Lines and provide to Sanyo the PPT Know-How, including the Cell Line Growth Information. 3 4.2 PPT agrees to maintain a stock of Licensed PPT Cell Lines, and provide additional quantities of the Licensed PPT Cell Lines to Sanyo within fifteen (15) days of Sanyo's written request, for a period not to exceed one (1) year from the Date of this Agreement, in order to ensure that Sanyo is enabled to establish the Licensed PPT Cell Lines according to the Cell Line Growth Information. Sanyo shall pay PPT for all reasonable costs incurred by PPT in delivering additional quantities of Licensed PPT Cell Lines to Sanyo pursuant to this Paragraph 4.2. If Sanyo notifies PPT within the one (1) year period that Sanyo is not able to establish the Licensed PPT Cell Lines using such additional quantities of the Licensed PPT Cell Lines, PPT shall establish the Licensed PPT Cell Lines for Sanyo and provide Sanyo with such Cell Lines at the expense of Sanyo. Sanyo shall provide written notice to PPT once it has established the Licensed PPT Cell Lines according to the Cell Line Growth Information and thereafter, or upon expiration of such one (1) year period, PPT shall have no further obligation to provide the Licensed PPT Cell Lines to Sanyo. 4.3 Upon request of Sanyo, PPT shall train Sanyo's personnel at PPT's facility in San Diego, California, in the bulk manufacture of ProNectin(R) L, using PPT Cell Lines, by conducting fermentation, purification, and analyses of the product demonstrating that it meets specifications, provided that PPT's obligation to train such personnel shall be limited to one (1) man-month within two (2) months of the Date of this Agreement. The expenses of transport, food and lodging of such personnel in connection with such training shall be paid by Sanyo. All other training expenses shall be paid by PPT. 4.4 For a period of one (1) year from the Date of this Agreement, upon the written or oral request of Sanyo concerning the practice of PPT Know-How, PPT shall give Sanyo advice and such further information as PPT possesses to enable Sanyo to manufacture the Licensed Products in compliance with the specifications PPT has established for such Licensed Products under PPT Know-How. ARTICLE 5: ASSET TRANSFER 5.1 within thirty {30) days after the Date of this Agreement, PPT shall deliver to Sanyo the information in PPT's possession with respect to customers of the Licensed Products and their use of the Licensed Products. 5.2 Within thirty (30) days after the Date of this Agreement, PPT shall ship to a location designated by Sanyo, F.O.B. San Diego, the inventory of Licensed Products as described in PPT's letter to Sanyo dated February 18, 2000. 5.3 For a period of one (1) year from the Date of this Agreement, Sanyo shall have the right to sell the Licensed Products transferred under the Paragraph 5.2 with PPT's label without changing it. 5.4 For a period of one (1) year from the Date of this Agreement, PPT shall take orders from customers on Sanyo's behalf and provide referral services to customers. 4 5.5 For a period of six (8) months from the Date of this Agreement, PPT agrees to maintain all business and market files concerning Licensed Products in PPT's possession. Upon request of Sanyo, PPT shall deliver to Sanyo such files from time to time. After the expiration of such six (6) month period, PPT shall have no further obligation to maintain or deliver such files to Sanyo. ARTICLE 6: COMPENSATION 6.1 As compensation for the rights granted by PPT to Sanyo under Article 2 hereof, the trademarks assigned under Article 3 hereof, the technology transferred under Article 4 hereof, and the assets transferred to Sanyo under Article 5 hereof, Sanyo shall pay to PPT the sum of three hundred and fifty-five thousand U.S. dollars (U.S. $355,000) as follows: (a) One hundred and eighty thousand U.S. dollars (U.S. $180,000) within ten (10) days of the Date of this Agreement, and (b) One hundred and seventy-five thousand U.S. dollars (U.S. $175,000) within ten (10) days of the receipt of all of the Licensed Cell Lines and PPT Know-How, including the Cell Line Growth Information described in Paragraph 4.1, the information described in Paragraph 5.1 and the inventory of the Licensed Products described in Paragraph 5.2. ARTICLE 7: REPRESENTATIONS AND WARRANTIES 7.1 PPT represents and warrants that it is the owner of all right, title and interest in and to PPT Patents and Licensed PPT Cell Lines free and clear of all liens and encumbrances. 7.2 PPT represents and warrants that to its knowledge it is the owner of all right, title and interest in and to the trademarks PRONECTIN" and "SMARTPLASTIC" free and clear of any liens and encumbrances and that, prior to the assignment made hereunder, it has the exclusive right to use the aforesaid marks in commerce, throughout the United States, for use as described in the Principal Register of the U.S. Patent and Trademark Office under registration numbers 1,705,720 and 2,168,749, respectively. 7.3 PPT further represents and warrants that to its knowledge it has the requisite right and authority to grant the rights and licenses provided for in this Agreement and that to its knowledge the grant of such rights and licenses does not violate any right of any third party whether vested, unvested or inchoate. 7.4 PPT represents and warrants that PPT Know-How transferred pursuant to Article 4 hereof is current, accurate, and sufficient in detail and content to enable Sanyo to grow Licensed PPT Cell Lines and manufacture and sell Licensed Products in compliance with the specifications PPT has established for said Licensed Products as described in PPT's letter to Sanyo dated February 18, 2000. 5 7.5 PPT makes no representations and provides no warranty with respect to the assets transferred pursuant to Article 5 hereof, except that the inventory met the specifications as described in Article 7.4 upon manufacture. 7.6 PPT represents and warrants that it has not commercialized, on its own or through third parties, Proteinaceous Polymers other than the Licensed Products and will not commercialize during the term of this Agreement or thereafter, on its own or through third parties, Proteinaceous Polymers in the Sanyo Field. 7.7 PPT represents and warrants that it has taken and will continue to take during the term of this Agreement all reasonable security measures to protect the secrecy, confidentiality and value of the PPT Know-How to the extent that this is feasible and consistent with its own R & D, commercialization, and marketing of products and technology it sells outside the Sanyo Field and instructing customers in appropriate uses thereof. 7.8 PPT represents and warrants that neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated under this Agreement either requires PPT to obtain any permits, authorizations or consents under current law from any governmental authority or, to PPP's knowledge, from any third party or results in the breach of or gives rise to a cause for termination of any agreement or contract to which PPT is a party or by which PPT is bound or which otherwise relates to PPT Know-How. 7.9 PPT represents and warrants that there are no pending claims, actions, judicial or adversary proceedings concerning the PPT Know-How or the manufacture, use or sale of any product under PPT Patent Rights, and no such action or proceeding is threatened. 7.10 PPT represents and warrants that, to its knowledge, neither the manufacture, use, nor sale of any Licensed Product within the scope of PPT Patent Rights will: (i) conflict with, infringe upon or violate any patent or other proprietary right of any third party, except as described in PPT's letter dated February 18, 2000; or (ii) breach any confidential relationship or violate any contractual right of any third party except as described in PPP's letter dated February 18, 2000; and PPT has no notice of any claim that Sanyo's manufacture, use or sale of any such Licensed Product will or might conflict with, infringe, or violate any patent, proprietary right, or violate any contractual right of any third party. ARTICLE 8: CONFIDENTIALITY 8.1 PPT and Sanyo shall treat information comprising PPT Know-How as confidential. Sanyo shall not use PPT Know-How outside the Sanyo Field, and shall not disclose PPT Know-How to others during the term of this Agreement; provided, however, that Sanyo may, at its discretion, disclose PPT Know-How to customers, distributors and end users of Licensed Products for use thereof in the Sanyo Field, and to manufacturing sublicensees who agree to maintain the PPT Know-How in confidence and not disclose it to others during the term of this Agreement. PPT shall not use PPT Know-How in the Sanyo Field nor disclose PPT Know-How to others for use in the 6 Sanyo Field; provided, however, that PPT may use PPT Know-How outside the Sanyo Field and, at its discretion, may disclose PPT Know-How for use outside the Sanyo Field to customers, distributors and end users of products sold outside the Sanyo Field, and also to other manufacturing licensee(s) who agree to maintain the PPT Know-How in confidence and not disclose it to others during the term of this Agreement. 8.2 In the event that Sanyo discloses any technical or business information (collectively "Sanyo Information") in confidence to PPT, subject to the provisions of Paragraph 8.3 hereof, PPT shall not use such information or disclose it to others during the term of this Agreement without the express written consent of Sanyo. 8.3 The provisions of Paragraphs 8.1 and 8.2 shall not apply to any disclosure or use by the receiving party of information: (a) known to the receiving party prior to disclosure thereto by the disclosing party, as evidenced by the receiving party's written records; (b) that is now in the public domain, or which hereafter comes into the public domain, without fault of the receiving party; (c) that is at any time lawfully disclosed to the receiving party from a third party without violation of any obligation to the disclosing party hereunder, and without restriction on the further disclosure or use of the information running in favor of such disclosing party; (d) that is developed by the receiving party without reference to the information as received from the disclosing party; (e) that it is necessary for either party to disclose in connection with the filing of any patent application; (f) that a regulatory agency requires (i) Sanyo to disclose in connection with an application for regulatory approval of an application, use, or process for manufacture of a Licensed Product within the Sanyo Field; or (ii) PPT to disclose in connection with an application for regulatory approval of an application, use, or process for manufacture of a Licensed Product outside the Sanyo Field; (g) that either party is required to disclose by court order; or (h) is requested by a treating physician or other health professional in the event that a medical emergency arises that is associated with the handling or exposure to a Licensed Product or any precursor thereof, and the physician or other health professional determines that a medical or occupational health need exists for such information in order to administer appropriate emergency or first-aid treatment. 7 No combination or compilation of information shall qualify under any of the exceptions of this Paragraph 8.3 merely because it is constituted of plural elements of information which qualify under one or more of such exceptions, even though all of such elements of information do so qualify, unless the combination or compilation is fully set forth in a single document meeting at least one of such exceptions. ARTICLE 9: INFRINGEMENT PPT will promptly notify Sanyo of any counterfeiting, imitation or passing off of any Licensed Product or suspected infringement of any PPT Patent in the Sanyo Field by any third party of which PPT becomes aware. Sanyo shall have the right at its sole discretion and at its own expense to bring an action to police such third party infringement. PPT agrees to join such action as a party plaintiff provided that Sanyo underwrites the reasonable expense of representation of PPT as a party plaintiff in such action based on claims which Sanyo asserts. PPT shall fully cooperate with Sanyo in the prosecution of such action including the provision of witnesses and documentation which Sanyo requests in connection with the investigation of the claim and the submission of evidence supportive thereof. PPT may be represented in such action by its own counsel at its own expense. It is understood and agreed that Sanyo is not and shall not be obligated to provide representation to PPT or to defray PPT's expenses in the defense of any claim brought by any party against PPT, either in any action or proceeding brought by Sanyo under this Article 9 or otherwise. ARTICLE 10: INDEMNITIES 10.1 PPT shall indemnify, defend, and hold Sanyo harmless from and against any and all loss, claims, suits, proceedings, expenses, recoveries, and damages, including costs and attorneys fees arising out of, based on, or caused by breach of any of the warranties of Article 7 hereof. 10.2 Sanyo shall indemnify, defend, and hold PPT harmless from and against any and all loss, claims, suits, proceedings, expenses recoveries, and damages, including costs and reasonable attorneys fees arising out of, based on, or caused by any manufacture, use or sale of Licensed Products by Sanyo, or by any customer of Sanyo, except that Sanyo shall have no obligation to defend or indemnify PPT with respect to any damages, losses or liabilities arising out of gross negligence or more culpable act or omission of PPT. 10.3 PPT shall indemnify, defend, and hold Sanyo harmless from and against any and all loss, claims, suits, proceedings, expenses, recoveries, and damages, including costs and reasonable attorneys fees arising out of, based on, or caused by any manufacture, use or sale of Proteinaceous Polymer(s), including derivatives or Coated Products thereof, by PPT either outside the exclusive grant to Sanyo under this Agreement or in violation thereof, or by any customer of PPT, except that PPT shall have no obligation to defend or indemnify Sanyo with respect to any damages, losses or liabilities arising out of gross negligence or more culpable act or omission of Sanyo. 8 ARTICLE 11: TERM AND TERMINATION 11.1 This Agreement shall remain in effect until the expiration of the last to expire of patents comprised by PPT Patent Rights. 11.2 Either party shall be entitled to remedies at law and equity recognized and applied by a court having proper jurisdiction over a dispute that may arise between the parties. ARTICLE 12: ASSIGNABILITY This Agreement shall be assignable by Sanyo to any third party subject to transfer of the entire business to which this Agreement relates. ARTICLE 13: NOTICES Any notice or report or other communication permitted or required under this Agreement shall be in writing and sent by certified mail, express mail, postage prepaid, return receipt requested, or by commercial delivery service, addressed to the party to whom the notice is to be given. Ail notices, reports or other communications made hereunder shall be deemed to have been made five days after the date postmarked, if sent by mail, or two business days after deposit if sent by commercial delivery service. Changes in address shall be accomplished by a notice in compliance with this Article 13. The current address for each party is as follows: PROTEIN POLYMER SANYO CHEMICAL TECHNOLOGIES, INC. INDUSTRIES, LTD. 10655 Sorrento Valley Road 11-1 Ikkyo Nomoto-cho, San Diego, CA 92101 Higashiyama-ku, Kyoto 605-0995 United States of America Japan Attention: J. Thomas Parmeter, Attention: Masakazu SugJura, General President Manager, Bio & Medical Group, Technology & Business Innovation Department, Research Division ARTICLE 14: MISCELLANEOUS 14.1 Sanyo shall have the right to mark Licensed Products with the numbers of PPT Patents applicable thereto. 14.2 This Agreement shall be construed in accordance with the law and judicial decisions of the State of California in effect as of the Date of this Agreement. 14.3 PPT agrees for itself, its successors, and assigns, that it will execute without further consideration any further lawful documents and assurances, including recordable trademark assignments, that may be deemed necessary by Sanyo to secure to Sanyo's interest in the rights transferred under this Agreement. 9 14.4 This Agreement represents the entire understanding between the parties as of the Date of this Agreement with respect to the subject matter hereof, and supersedes all prior agreements, negotiations, understandings, representations, statements, and writings, between the parties relating thereto. No modification, alteration, waiver or change in any of the terms of this Agreement shall be valid or binding upon the parties hereto unless made in writing and specifically referring to this Agreement and duly executed by each of the parties hereto. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate by their duly authorized representatives as of the day and year first written above. PROTEIN POLYMER SANYO CHEMICAL TECHNOLOGIES, INC. INDUSTRIES, LTD. BY: /s/ J. THOMAS PARMETER By: /s/ FUSAYOSHI MASUDA ---------------------------- --------------------------- J. Thomas Parmeter Fusayoshi Masuda PRESIDENT SENIOR MANAGING DIRECTOR 10 SCHEDULE 1.1 ------------
PATENT CORRESPONDING INTERNATIONAL NUMBER ISSUE DATE TITLE PATENTS AND/OR APPLICATIONS - ------ ---------- ----- --------------------------- U.S. 5,514,581 May 7, 1996 Functional Recombinantly PCT/US89/05016: issued in Prepared Synthetic Protein Austral[a, Europe, Finland, Polymer Norway, South Korea; Pending in Denmark, Japan U.S. 5,760,004 Jun 2, 1998 Chemical modification of PCT/US95/12959: Issued in repetitive polymers to Australia. Pending in Canada, enhance water solubility Europe, Japan U.S. 5,770,697 Jun 23, 1998 Peptides Comprising Not Applicable Repetitive Units of Amino Acids and DNA Sequences Encoding the Same
PATENT APPLICATION CORRESPONDING INTERNATIONAL NUMBER FILING DATE TITLE PATENTS AND/OR APPLICATIONS - ----------- ----------- ----- --------------------------- U.S. S/N Jun 7, 1995 Peptides Comprising Not Applicable 08/482,085 Repetitive Units of Amino Acids and DNA Sequences Encoding the Same U.S. S/N Jun 7, 1995 Functional Recombinanty Not Applicable 08/475,411 Prepared Synthetic Protein Polymer U.S. S/N Jun 7, 1995 Functional Recombinantly Not Applicable 08/478,029 Prepared Synthetic Protein Polymer U.S. S/N Feb 23, 1998 Chemical modification of Not Applicable 09/028,086 repetitive polymers to enhance water solubility
SCHEDULE 1.2 ------------ Trade Name Product Number ---------- -------------- ProNectin F PF1001, PF1005 ProNectin L PL1001 ProNectin F Plus PP1001 SmartPlastic PF3035, PF3060, PF3100, PF4006, PF4024, PF4096 11 EX-23.1 10 CONSENT OF ERNST & YOUNG LLP Exhibit 23.1 CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements on Forms S-3 (Nos. 333-19695, 333-62761, 333-45759) and Forms S-8 (Nos. 33-61704, 33-61708, 33-68046), of our report dated February 29, 2000 with respect to the financial statements of Protein Polymer Technologies, Inc. included in the Annual Report (Form 10-KSB) for the year ended December 31, 1999. ERNST & YOUNG LLP San Diego, California March 21, 2000 EX-27 11 FINANCIAL DATA SCHEDULE
5 YEAR YEAR DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 DEC-31-1999 DEC-31-1998 155,692 1,383,148 0 0 30,113 9,965 0 0 0 0 204,958 1,449,607 2,099,585 2,073,486 (1,739,581) (1,475,039) 741,140 2,225,231 662,951 850,022 0 0 0 0 8,761,072 7,600,226 28,537,524 26,657,399 (37,245,495) (32,987,964) 741,140 2,225,231 52,108 67,096 95,967 255,824 (508) 4,158 (13,008) 29,158 4,366,506 5,864,819 0 0 19,983 26,692 (4,257,531) (5,638,203) 0 0 (4,257,531) (5,638,203) 0 0 0 0 0 0 (4,257,531) (5,638,203) (.36) (.88) (.36) (.88)
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