-----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, Ij95e7d1sW4UTCXvokE9l+9TmVgnmR/fX0OhspSJ/YWAxEx2RLubth0z85VnmgMr WXBWD7ozGvRYuJzhv9zyRw== 0000950005-00-000496.txt : 20000331 0000950005-00-000496.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950005-00-000496 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUMAN PHEROMONE SCIENCES INC CENTRAL INDEX KEY: 0000878616 STANDARD INDUSTRIAL CLASSIFICATION: PERFUMES, COSMETICS & OTHER TOILET PREPARATIONS [2844] IRS NUMBER: 943107202 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-23544 FILM NUMBER: 588097 BUSINESS ADDRESS: STREET 1: 4034 CLIPPER CT CITY: FREMONT STATE: CA ZIP: 94538 BUSINESS PHONE: 5102266874 FORMER COMPANY: FORMER CONFORMED NAME: EROX CORP DATE OF NAME CHANGE: 19940307 10KSB 1 10KSB Washington, D.C. 20549 FORM 10-KSB (MARK ONE) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (fee required) For the fiscal year ended December 31, 1999 ----------------- [ ] TRANSITION REPORT UNDER SECTION 13 OR A5(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (no fee required) Commission file number 0-23544 ------- HUMAN PHEROMONE SCIENCES, INC. ------------------------------------------------- (Name of small business issuer in its charter) California 94-3107202 - ----------------------------------------------------- ------------------------ (State or other jurisdiction of (I.R.S. employee incorporation or organization) Identification No.) 4034 Clipper Court, Fremont, California 94538 - ----------------------------------------------------- ------------------------ (Address of principal executive offices) (Zip code) Issuer's telephone number: (510) 226-6874 -------------- Securities registered under Section 12(b) of the Exchange Act: None ---------------- (Title of class) Check whether the Issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. [X] State issuer's revenues for its most recent fiscal year. $9,305,615 ---------- State the aggregate market value of the voting stock held by non-affiliates computed by reference to the price at which the stock was sold, or the average bid and asked price of such stock, as of a specified date within the past 60 days. (See definition of affiliate in rule 12b-2 of the Exchange Act.) $4,987,051 (1) ---------- (1) Excludes 478,921 shares held by directors, officers and shareholders whose ownership exceeds 5% of the outstanding shares at March 8, 2000 based on a closing bid price on that day of $1.69 per share. Exclusion of such shares should not be construed as indicating that the holders thereof possess the power, direct or indirect, to direct the management or policies of the registrant or that such person is controlled by or under common control with the registrant. (APPLICABLE ONLY TO CORPORATE REGISTRANTS) State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date.1,449,817 shares of convertible preferred stock, 3,429,839 shares of common stock. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X] DOCUMENTS INCORPORATED BY REFERENC Portions of the following document are incorporated by reference into Part III of this Form 10-KSB Report: the Proxy Statement for the Registrant's 1999 Annual Meeting of Shareholders (the "Proxy Statement"). 1 This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Except for the historical information contained in this discussion of the business and the discussion and analysis of financial condition and results of operations, the matters discussed herein are forward looking statements. These forward looking statements include but are not limited to the Company's plans for sales growth and expansion into new channels of trade, expectations of gross margin, expenses, new product introduction, and the Company's liquidity and capital needs. These matters involve risks and uncertainties that could cause actual results to differ materially from the statements made. In addition to the risks and uncertainties described in "Risk Factors", below, these risks and uncertainties may include consumer trends, business cycles, scientific developments, changes in governmental policy and regulation, currency fluctuations, economic trends in the United States and inflation. These and other factors may cause actual results to differ materially from those anticipated in forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. Item 1. Description of Business Introduction The Company, a California corporation, was founded in 1989 as EROX Corporation to develop and market a broad range of consumer products containing human pheromones as a component. On May 29, 1998, the shareholders of the Company voted to change the name of the Company to Human Pheromone Science, Inc. The Company believes that human pheromone research funded by the Company presents an opportunity to create and market an entirely new category of pheromone-based fragrances and toiletry products, as well as other types of consumer products. The Company believes that its related patents provide it a proprietary position in developing, licensing and marketing a new category of consumer products that could significantly change the consumer accepted standard for products containing a fragrance component and for cosmetic treatment products. Pheromones are chemical substances known to stimulate species-specific biological responses in animals. For ten years, scientists and advisors engaged by Human Pheromone Science, Inc. ("HPSI") have studied the functions and characteristics of human pheromones. The human pheromones included as a component of and as a fixative for the Company's fragrance products have been manufactured for the Company by Pherin Pharmaceuticals, Inc.. The manufacturing process for human pheromones begins with hydrocarbon compounds commonly available from chemical supply houses, and involves the use of a synthetic chemistry process performed for the Company by Pherin at its laboratories in Salt Lake City, Utah. In early 1999, in response to the need for significant increases in production, two independent laboratories were engaged to manufacture such pheromones under the direction of Pherin scientists. All the steps in the manufacturing process are standard chemical laboratory procedures. The manufacturing process for pheromones is similar to methods by which other naturally occurring substances (such as amino acids) are synthetically produced. The HPSI Technology Pheromones. People have long known that insects and animals communicate with one another through subtle, biochemical cues recognized and understood by other members of the same species. These biochemical signals warn of danger, indicate the presence of food, mark territorial boundaries and display sexual maturation or readiness. The biochemical messengers that deliver these communications are pheromones. Pheromones trigger a nerve impulse to the hypothalamus when applied within or adjacent to the nasal passages. Scientists have observed that in higher species the influence of pheromones grows increasingly more subtle and complex. Not surprisingly, reactions to pheromones are very subtle in human beings. While humans appear to have definite responses to pheromones, the research sponsored by HPSI suggests that the highly developed human brain filters and masks those reactions. Rather than producing an isolated effect, as in lower level species, human pheromones act in concert with other sensory cues provided by odor, sight, taste, sound and touch to provide a cumulative influence. As a result of its sponsored research, the Company believes evidence has been developed that indicates that humans respond to human pheromones. HPSI has also found that its human pheromones are sexually dimorphic: that is, some are more active in females while others show a higher level of activity in males. During the studies of human pheromones conducted by the Company, certain human subjects volunteered descriptions of their feelings. Women frequently described feeling comfortable or at ease, while a number of male subjects described a feeling of confidence and self-assurance. The 2 Company continues to explore these naturally occurring substances in a variety of tests to increase its knowledge and understanding of their range of influence on human emotions and their application as components of fine fragrance products. Fragrances and Pheromones. Animal pheromones are well known in the fragrance industry. Natural and synthetic equivalents of mammalian pheromones such as musk, civet and castoreum are found in many perfumes today. However, since pheromonal cues can trigger a response only by members of the same species, these animal pheromones have no specific effect on humans; instead, they act only as fixatives or carriers for the fragrance or as a component of the scent. A scent binds to smell receptors in the nose and stimulates a specific region of the brain resulting in the sensation of smell. A pheromone binds to separate receptors that are physically and functionally distinct from smell receptors. These pheromone receptors stimulate a region of the brain different from that stimulated by smell receptors. Since it is widely believed that traditional perfumes allure and intrigue the senses, an alliance between fine fragrances and pheromones seems quite natural. For a perfume to create a true pheromonal effect in humans, however, it must contain human pheromones. Thus, a fragrance containing human pheromones may provide more allure than a traditional fragrance. The Vomeronasal Organ. The VNO consists of two tiny sensory organs -- one in each nasal passage. The VNO had been identified earlier in animal species, from reptiles to mammals, and has been known for some time to be a receptor for pheromones in animals. In humans, however, the VNO was assumed to be a non-functioning, vestigial remnant, rarely even present in modern-day men and women. Over the course of their work on human pheromones, scientists working on behalf of HPSI believe they have made a further, important discovery concerning the VNO. Not only is the VNO present in all normal adults, it appears to be an active, functional receptor for human pheromones. This has allowed scientists engaged on behalf of HPSI to track the activity of human pheromones by measuring the changes in the neuroelectric potential of the VNO's receptor cells caused by pheromones. To measure these changes in humans, a proprietary noninvasive method is utilized to measure the electrical response of the VNO in a way similar to how electrical responses of the heart are recorded by an electrocardiogram. The HPSI Products Products. The Company operates in one business segment and markets three fragrances, REALM(R) Women, REALM(R) Men and inner REALM(R). These "proof - -of-concept" products include a full line of fragrance and bath and body products including eau de toilette, cologne, eau de parfume, lotion, bath and shower gel, after-shave balm, antiperspirant, talc, soap and body cream. The Company's fragrances were developed by Ann Gottlieb, a leading consultant to the fragrance industry. All of the Company's products contain the Company's synthesized human pheromones as a component of the fragrance. In 1996, the Company introduced a unique refillable, dripless roll-on applicator containing REALM and inner REALM eau de toilette for women, and in 1998 REALM Women and REALM Men candles were launched. In 1999, the Company developed a new line of fragrance and toiletry products containing synthesized human pheromones for men and women under the trademark Natural Attraction(TM). The company anticipates introducing these products via a new website, naturalattraction.com, in April 2000. Initial commercialization of this line of products will be through the web and other direct marketing channels in the United States. Research. Pheromones are chemical substances known to stimulate species-specific biological responses in animals. The study of the uses, effects and advantages of human pheromones is in its infancy, but abstracts from presentations of two recent studies performed at leading research universities reveal new information regarding the beneficial effects of human pheromones. Most interestingly, these studies reveal new information regarding the biological pathways human pheromones traverse in the body. Publication of these findings continued in 1998 and in 1999, and the Company expects increased interest in its patented technology as the result of these studies and others currently being undertaken. Scientists working on behalf of HPSI have identified and synthesized several naturally occurring human pheromones. One combination of pheromones shows a measurable response in women and another a comparable response in men. HPSI has also developed the capability to manufacture commercial quantities of these naturally occurring substances. HPSI intends to continue basic pheromone research as applied to fragrances and ancillary products. For the years ended December 31, 1999 and 1998, research and development expense totaled $333,000 and $365,000, respectively. Since its inception through December 31, 1999, the Company has incurred $4,296,000 in research and development related expenses. 3 Markets and Competition The Competitive Environment. The Company's current fragrance products contain what the Company believes are unique components: human pheromones. Consequently, HPSI believes it will be able to differentiate its products from traditional products. If such differentiation is successful, the Company's products initially should have little direct competition in the marketplace, since the Company believes no other companies in the United States have the right to produce or distribute products containing human pheromones. However, if such differentiation is not successful the Company will compete against the numerous companies in the fragrance industry, including Estee Lauder, Chanel and the fragrances subsidiaries of Unilever and L'Oreal. While HPSI's current products are fragrances, the Company feels strongly that fine fragrances are only a "proof of concept". The Company's patented human pheromone technology has applications far beyond traditional fragrances and bath and body products. HPSI hopes to position its technology as a desired "value added" ingredient for any product that contains a fragrance. Synthesized human pheromones provide the first patented technology of a component that could have broad application and usage in cosmetic, treatment, cleansing, over-the-counter health supplements and home and vehicle environmental products. The Company does not feel that it has the resources to successfully exploit the potential market for such applications and is actively seeking licensing agreements with consumer product manufacturers. Marketing Strategy. HPSI's initial products are a line of fragrance and bath and body products containing the Company's patented human pheromones as a component. The first of these "proof of concept products" were developed in 1993 when the Company developed REALM Women and REALM Men. While new product launches in the fragrance industry frequently require considerable expenditures for promotional programs which attempt to establish product differentiation based upon imagery alone, HPSI sought to develop a program in 1993 following a different approach -- one that relied on the human pheromone component in its fragrances for product differentiation. The Company's initial marketing program was intended to educate consumers and the trade about pheromones while suggesting the enhanced sensuality that the wearer of an HPSI fragrance might feel. The Company also used packaging, pricing and distribution channels to communicate the uniqueness of their products and to differentiate them from traditional fragrance products. The Company launched its REALM products through direct marketing to ensure the quality and clarity of the HPSI message and thereafter moved to more conventional fragrance channels based on criteria such as store location, image and promotional support. Distribution and Promotional Activities. During 1993, the Company developed two fragrances, REALM Women and REALM Men, each presented in 50ml and 5ml sizes. Initial promotion and distribution was in the form of a one half-hour infomercial, broadcast-tested in August 1994 and rolled-out nationally in the last four months of the year. The infomerical continued to be broadcast through mid-1995 while the Company commenced selling its products in the U.S.retail department stores on a limited basis in late 1994. By the beginning of 1997, HPSI was still a single product company, primarily involved in one class of trade -- better U.S. department stores. REALM fragrances and toiletries were available in more than 1,300 stores in the 48 contiguous states. While this is the largest channel of distribution for basic fragrances, the high level of retailer employee turnover required expensive ongoing training for continued success of differentiated, scientifically based products such as REALM fragrances. In addition, HPSI provides significant in-store fragrance modeling to ensure that consumers driven to the stores by the Company's ongoing radio advertisements have the opportunity to actually experience REALM products once they reach the store. To lessen its dependence on a single class of trade and in an effort to leverage the expense of its radio advertising and promotion, the Company entered into agreements with distributors who focus on the fast growing perfumery and middle market department store classes of trade. These alternative channels provide additional exposure for the Company's products and human pheromone technology at a significantly lower cost than the better department stores. In mid-1997, the Company introduced a second women's fragrance line, innerREALM initially to the department store class of trade. Results of this expensive product launch were disappointing. A decision was made to reposition this brand to the alternative channels of distribution in 1998, and results from the initial repositioning are encouraging. During 1998, the Company continued distributing its REALM Men and REALM Women's fragrances in leading U.S. department stores, while substantially completing the transfer of the sale and marketing of innerREALM fragrances to alternative markets - including perfumeries and middle market department stores. These alternative markets are handled by an independent distributor who purchases the product from the Company without the right of return and is responsible for advertising, selling and marketing expenses. By focusing the innerREALM product line on these secondary markets, the Company reduced its dependence on the department stores for sales to the U.S. consumer. The Company reorganized it's U.S. sales organization in the last quarter of 1998. 4 Responsibility for selling and marketing to the department stores was transferred from Company personnel to an independent organization comprised of senior managers with significant experience introducing and managing fragrances in this class of trade. This group is compensated by commission on net sales generated. One of the principal's of this organization had been and continues to be the CEO of Northern Brands, the Company's distributor in the secondary markets. Also, in late 1998 the Company determined that it could not profitably continue doing business with the May Company and ceased selling products to this retailer and its subsidiaries at such time. To further reduce its dependence on a single market, the Company sought to increase its non-U.S. distribution. In 1995 and 1996, HPSI entered into distribution agreements for the sale of REALM fragrances and toiletries in selected Middle East markets, including Saudi Arabia and the Gulf States as well as selected Duty Free markets in the Caribbean, South America and on the Mexican and Canadian borders. In 1997, additional South American markets were opened and discussions were undertaken for the profitable sale of REALM products in several European markets and the Far East. In early 1998, initial shipments were made under distribution agreements with distributors in Switzerland and the People's Republic of China. Also in 1998, initial shipments were made to a distributor for the sale of the Company's products in Spain and Portugal. The Company's direct foreign sales represented approximately 6.1% and 6.3% of net sales during 1999 and 1998, respectively. International expansion will continue to be a focus of HPSI. The Company is very conscious of the fact that numerous brands of prestige fragrances have suffered immeasurable harm due to diversion by gray marketers. While realizing that certain levels of such diversion are inevitable, the Company hopes to curtail the risk of its REALM products being diverted back into the U.S. by gray market discounters by selecting duty free partners who purchase realistic quantities for sale in the regions they service. Such partnership agreements are subject to cancellation if significant diversion occurs. During 1999, the Company continued to reduce its presence in U.S. retailers whose business was not profitable to HPSI. It also began a program to more tightly focus advertising, selling and promotional efforts with the remaining retail accounts and did reduce its loss on sales to this class of trade as compared with prior periods. During 1999, three customers comprised 33%, 20% and 17% of the Company's total net sales. However, the Company still believes that it is difficult for a niche marketer to generate earnings in the highly competitive fragrance market. Technology Licensing and Supply Agreements One of the strategic objectives of the company is to expand the use of its patented human pheromone technology by working closely with consumer products companies who are leaders in their particular markets. In December 1998, HPSI signed its first agreement to supply its synthesized human pheromones to a major cosmetics and fragrance company. Revenues commenced in 1999. Total revenues from this agreement and another signed later in the year aggregated $989,000. HPSI is also in supply and /or licensing discussions with several other companies. Patents and Other Intellectual Property In December 1993 and January 1994, the Company received two United States patents for non-therapeutic compositions of fragrances and human pheromones for use as components in perfumes and personal care products and consumer and industrial products such as clothing, air fresheners and paper products. European patents regarding these compositions have been filed and are pending. In 1995, patents were granted in Taiwan, and in 1997, patents were granted in Mexico. In June 1998, the Company was granted a Notice of Allowance of its patents for the inclusion of synthesized human pheromones by the European Patent Office. Individual country patents are pending issuance. HPSI is also the exclusive licensee for non-therapeutic uses of pheromones in consumer products under a royalty-free world-wide perpetual license to five United States patent applications covering pheromone technology owned by Pherin Corporation. This technology is also the subject of foreign patent applications. The Company also relies on trade secrets protection for confidential and proprietary information. Other patent applications are currently in process. Regulation Unless the FDA extends its regulatory authority, regulation by governmental authorities in the United States and other countries is not expected to be a significant consideration in the sale of the Company's fragrance products and in its ongoing research and development activities. Under current regulations, the market introduction of the majority of non-medicated cosmetics products does not require prior formal registration or approval by the FDA, although this could change in the future. The cosmetic industry has established self-regulating procedures and most companies perform their own toxicity and consumer tests. Voluntary filings related to manufacturing facilities are made with the FDA. The Cosmetics Division of the FDA, however, does monitor closely problems of safety, adulteration and labeling. In addition, if the FDA should determine that claims made by the Company for its fragrances involve the cure, mitigation or treatment of disease, the 5 FDA could take regulatory action against the Company and its products. In addition, the United States Federal Trade Commission ("FTC") monitors product claims made in television and radio commercials and print advertising to ensure that any claim can be substantiated. If the FTC believes that any advertising claim made by the Company with regard to the effect or benefit of its products is not substantiated by adequate data or research and the Company cannot support such claim, the FTC could also take regulatory action against the Company and its products. Employees At March 1, 2000, the Company had fourteen full-time employees. In addition, the Company retains consultants to provide advice in the areas of sales and marketing, public relations, advertising, product safety testing, regulatory compliance, MIS and product development. The Company also has access to scientific and professional consultants, some of whom are retained directly by Pherin Pharmaceuticals, Inc., and who undertake projects for the Company by virtue of the Company's agreement with Pherin. None of the Company's employees is represented by a labor union. The Company considers its relations with its employees and consultants to be good. Manufacturing The Company is dependent on third parties to manufacture its fragrance products. The Company has selected two essential oil companies, that provide fragrance products to the industry, to supply such compounds to HPSI in accordance with proprietary formulas developed for the Company. The Company has agreements in place with suppliers for its fragrances and has been furnished with commercial quantities of the Company's products for sale to consumers. While the Company is responsible for blending the human pheromones with these fragrances, final bottling and packaging of the fragrance and ancillary product lines are performed by independent manufacturers. These manufacturers selected by HPSI have extensive experience in blending, filling and packaging fragrance, cosmetic and related products, and have the capacity to satisfy the Company's manufacturing needs, at least for the foreseeable future. The Company believes that such manufacturing services are widely available to the fragrance industry at competitive prices and has identified additional contract manufacturing companies. The Company and Pherin are parties to an agreement under which Pherin will supply HPSI with its reasonable requirements of human pheromones and will make available to HPSI the basic manufacturing technology. At any time after January 31, 1996, rather than supply human pheromones to HPSI, Pherin may instead elect to provide to the Company all manufacturing technology in its possession that it has not previously supplied to HPSI. Through 1998 only small quantities of human pheromones, which could be produced in a laboratory environment, were required for its fragrance and ancillary products. As a result of the initial third party supply agreement entered into in December 1998, the Company requires significantly more production of the synthesized human pheromones than were needed in the past. In January 1999, HPSI and Pherin contracted with two independent laboratories to manufacture kilogram quantities of the synthesized human pheromones under the direction of scientists working on behalf of the Company and Pherin. HPSI received initial quantities from these independent laboratories commencing March 1999. The Company does not believe that it would be economically feasible to establish it's own manufacturing facilities since synthesized human pheromones are available from chemical laboratories who now have experience in the preparation of these compounds. Risk Factors The Company's future results may be affected to a greater or lesser degree by the following factors among others: The Company may not be able to effectively compete with larger companies or with new products. The prestige fragrance market is extremely competitive. Many fragrance products are better known than the Company's products and compete for advertising and retail shelf space. Many competitors have significantly greater resources that will allow them to develop and introduce new competing products or increase the promotion of current products. The product life cycle of a fragrance can be very short. Changing fashions and fads can dramatically shift consumer preferences and demands. Traditional fragrance companies introduce a new fragrance every year or so. Changing fashions and new products may reduce the chance of creating long term brand loyalty to the Company's products. 6 The Company's marketing strategy may not be successful. The Company may not be able to establish and maintain the necessary sales and distribution channels. Retail outlets and catalogs may choose not to carry the Company's products. The Company may not have sufficient funds to successfully market its products if the current marketing strategy is not successful. The current retail environment may cause pricing and promotional pressures. Five companies, Federated Department Stores, The May Company, Dayton Hudson/Marshall Fields , Dillard Department Stores and Saks (formerly Proffitts), own the majority of upper end department stores. Because of their market share, each company will have significant power to determine the price and promotional terms that the Company must meet in order to sell its products in the company's department stores. Upper end department stores face increasing competition by discount perfumeries, drug chains and lower priced department stores for sales of fragrances and cosmetics. To compete, upper end department stores have cut inventories, reduced co-op advertising, and increased promotions. These tactics may force the Company to reduce its prices or increase the cost of its promotions. Seasonality in sales may cause significant variation in quarterly results. Sales in the fragrance industry are generally seasonal with sales higher in the second half of the year because of Christmas. This seasonality could cause a significant variation in the Company's quarterly operating results. The Company may not be able to protect its technology or trade secrets. The Company's patents and patent applications may not protect the Company's technology or ensure that the Company's technology does not infringe another's valid patent. Others may independently develop substantially equivalent proprietary information. The Company may not be able to protect its technology, proprietary information or trade secrets. The Company may not be able to recruit and retain key personnel. The Company's success substantially depends upon recruiting and retaining key employees and consultants with research, product development and marketing experience. The Company may not be successful in recruiting and retaining these key people. The Company relies upon other companies to manufacture its products. The Company relies upon Pherin and other companies to manufacture its pheromones, supply components, and to blend, fill and package its fragrance products. The Company may not be able to obtain or retain pheromones manufacturers, fragrance suppliers, or component manufacturers on acceptable terms. If not, the Company may not be able to obtain commercial quantities of its products. This would adversely affect operating results. Item 2. Description of Property The Company presently leases approximately 8,780 square feet of office and warehousing space for its headquarters in Fremont, California, pursuant to a lease which expires on October 31, 2000, and which is currently cancelable by the Company on 90 days written notice and paying a $15,000 cancellation fee which may be waived under certain circumstances. The annual base rent was approximately $116,774 for the 12 months ended December 31, 1999 and will be $100,970 in 2000, unless the lease is terminated earlier than its expiration date of October 31, 2000. Total rent expense may be increased by the Company's proportional share of any escalation related to taxes, common area charges and outside maintenance incurred by the complex in which the facility is located. In July 1998, the Company entered into an agreement to sublease approximately 5,890 feet of warehousing space under substantially the same terms as its primary lease.. Such sublease expired on November 1, 1999. In addition, the Company leases approximately 8,000 square feet of warehousing and distribution space, at a cost of $0.60 per square foot, from an independent company under a fulfillment agreement cancelable with 90 days notice. During the year ended December 31, 1999, the Company incurred $120,175 in net rent expense and related charges for these facilities. Item 3. Legal Proceedings Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. 7 PART II Item 5. Market for Common Equity and Related Stockholder Matters The Company's Common Stock is quoted on the NASDAQ Small-Cap Market under the symbol EROX. As of March 1, 2000, there were approximately 320 holders of record of the Company's Common Stock. The Company believes that there are a significant number of beneficial owners of its Common Stock whose shares are held by nominees in "Street Name". Set forth below is the high and low bid information for the Company's Common Stock on the NASDAQ Small-Cap Market as reported by Nasdaq-Amex Online during each of the four calendar quarters of 1999 and 1998, adjusted for a one for three reverse stock split effected on April 13, 1999. HIGH LOW ---- --- 1999 ---- First quarter $ 4.41 $ 1.50 Second quarter $ 3.00 $ 0.81 Third quarter $ 3.06 $ 1.25 Fourth quarter $ 1.06 $ 0.75 1998 ---- First quarter $ 4.41 $ 2.25 Second quarter $ 3.39 $ 1.68 Third quarter $ 2.73 $ 1.23 Fourth quarter $ 3.93 $ 0.57 These quotations reflect interdealer prices, without retail mark-up, markdown or commissions and may not represent actual sales. The Company has never paid cash dividends on its Common Stock. The Company currently intends to retain future earnings, if any, to fund the development and growth of its business and does not plan to pay any cash dividends in the foreseeable future. Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operations Year ended December 31, 1999 compared with the year ended December 31, 1998 Net sales for the year ended December 31, 1999 were $9,306,000 compared to $10,379,000 for the prior year. Net sales to department stores in the United States decreased approximately $2,509,000 in 1999, attributable to continued weakness in the department store fragrance category, the elimination of sales to unprofitable retailers and the cessation of innerREALM(R) sales to the better department stores. In the last six months of 1998, the Company decided to cease doing business with certain upscale U.S. Department store chains whose promotional demands had become so excessive that the business with these stores was unprofitable; in 1999, additional unprofitable stores were terminated. These decisions were based on the Company's goal to focus on bottom line improvement even if total revenues declined. Revenue of approximately $1,690,000 was generated from these stores in 1998. Sales to distributors handling the Company's products in the secondary markets in the United States (mid-level department stores, perfumeries and selected mass market accounts) increased by 15% in 1999. While these distributor sales bear a lower selling price, they result in the generation of operating profits since the distributor is responsible for absorbing all sales returns, advertising and promotional expenses. In 1999, the Company began receiving revenues from sales and licensing of its patented human pheromone technology, generating revenues of almost $1,000,000. In the aggregate, sales to catalogs and via direct marketing in the United States and sales to International distributors increased by 11% in 1999. Gross margin in 1999 represented 61% of sales as compared with 68% in the prior year. The decrease was attributable to a higher percentage of sales of lower gross margin value sets to U.S. Department stores and increased sales to the lower margin secondary class of trade in 1999. The secondary market sales, while reflecting lower gross margin, can have a better contribution to operating profit since they do not require the level of financial support for advertising and marketing that the department stores demand. In addition, the gross margin on revenues generated by the supply of pheromones is slightly lower than that generated by sales to department stores; however, virtually all of the gross profit generated by such revenue becomes operating profit since no promotional spending is required. As more revenue is generated from pheromone licensing and supply agreements, gross margin may decline but operating results should improve. 8 Research and development costs in 1999 decreased slightly to $333,000 from $365,000 in the prior year. This reduction is primarily a result of a reduction in the monthly contractual R&D payments to Pherin Corporation. Selling, general and administrative expenses declined by 34% and represented 65% of sales as compared with 89% of sales in 1998. On a dollar basis, expenditures decreased $3,156,000, with all spending categories lower in 1999 than the prior year. Selling/Advertising and marketing expenses were reduced by $2,908,000; this significant decline is attributable to more focused advertising efforts in the remaining department stores and the elimination of promotional spending with non-profitable department store accounts. Other expense increased to $104,000 from $53,000 in 1998, primarily a result of higher average bank borrowings and higher interest rates associated therewith. The Company recorded no income tax provision in either 1999 of 1998 due to the net operating losses generated. As of December 31, 1999, the Company's gross deferred tax asset, which relates primarily to net operating loss carryforwards, was $6,692,000. However, a full valuation allowance was provided for the gross deferred tax asset as management could not determine whether its realization was more likely than not. Seasonality Sales in the fragrance industry are generally seasonal with sales higher in the second half of the year because of the Holiday period. This seasonality could cause a significant variation in the Company's quarterly operating results. Liquidity At December 31, 1999, the Company had cash and cash-equivalents equal to $108,000 and working capital of $2,052,000. These balances at December 31, 1998 were $77,000 and $2,351,000 respectively. Net cash used in operating activities was $596,000 and $988,000 for the years ended December 31, 1999 and 1998, respectively. The decrease in net cash used in operating activities in 1999 as compared with 1998 was principally due to a decrease in the net loss in 1999. Issuance of convertible preferred stock to a long-term investor in the amount of $550,000 in 1999, and $600,000 in 1998 partially offset cash usage in 1999. Other cash infusion was from bank borrowings in the amounts of $127,000 and $225,000 for 1999 and 1998, respectively. At December 31, 1999, borrowings against the Company's $3,000,000 line of credit were $900,000. The Company is in negotiations for the license of the Company's REALM and innerREALM product lines for a ten-year period. Additional working capital may be required should the Company fail to complete the transaction being negotiated. Also, additional working capital may be required to generate anticipated consumer response levels at comparable levels to 1999 or if the Company experience a greater than planned success with its current products, potential product line extensions and efforts. Funds would be needed for inventory build, accounts receivable financing and staffing purposes. If the Company fails to achieve significant revenues from its 2000 marketing efforts or if expansion proves to be more capital intensive than planned, the Company may require additional funding. The Company obtained an additional $260,000 from the sale of convertible preferred stock in March 2000. The Company's Business Loan Agreement with Mid-Peninsula Bank of Palo Alto, California ("the Bank") expires on April 1, 2000. The Bank has extended the line of credit for a three month period ending June 30, 2000. The Company may borrow up to $1,500,000 at an interest rate equal to the Bank's prime rate plus 1.0 % with borrowings secured primarily by the Company's trade receivables and inventory. The agreement contains certain debt-to-equity and working capital covenants. If the transaction being negotiated is not successfully completed, the Company may need to seek alternative bank financing, using its assets as collateral. New Accounting Pronouncement In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the 9 change in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. The Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard on January 1, 2001 to affect its financial statements Impact of the Year 2000 Many currently installed computer systems and software products are coded to accept or recognize only two digit entries in the date code field. These systems may recognize a date using "00" as the year 1900 rather than the year 2000. As a result, computer systems and/or software used by many companies and governmental agencies may need to be upgraded to comply with year 2000 requirements or risk system failure or miscalculations causing disruptions of normal business activities. State of Readiness. Although as of March 1, 2000, the Company experienced no material technical problems related to the year 2000, the Company shall continue to seek verification from our key vendors, distributors and suppliers that they are year 2000 compliant. To date, however, none of the Company's systems have needed to be revised or replaced. Costs. To date, we have not incurred any material costs in identifying or evaluating year 2000 compliance issues. Most of our expenses have related to, and are expected to continue to relate to, the upgrades or replacements, when necessary, of software or hardware, as well as costs associated with time spent by employees in the evaluation process and year 2000 compliance matters generally. These expenses are included in our capital expenditures plans are not expected to be material to the Company's financial position or results of operations. These expenses, however, if higher than anticipated, could have a material and adverse effect on our business, results of operations and financial condition. Risks. Although as of March 1, 2000 we experienced no material technical problems related to the year 2000, there can be no assurance that the Company will not discover year 2000 compliance problems in its systems that will require substantial revisions or replacements. In the event that the operational facilities that support the Company's business are not year 2000 compliant, it may be unable to deliver goods or services to customers. In addition, there can be no assurance that third-party software, hardware or services incorporated into the Company's material systems will not need to be revised or replaced, which could be time-consuming and expensive. The Company's inability to fix or replace third-party software, hardware or services on a timely basis could result in lost revenues, increased operating costs and other business interruptions, any of which could have a material and adverse effect on the Company's business, results of operations and financial condition. Moreover, the failure to adequately address year 2000 compliance issues in the software, hardware or systems could result in claims of mismanagement, misrepresentation or breach of contract and related litigation, which could be costly and time-consuming to defend. In addition, there can be no assurance that governmental agencies, utility companies, Internet access companies and others outside the Company's control will be year 2000 compliant. The failure by these entities to be year 2000 compliant could result in a systematic failure beyond our control, including, for example, a prolonged Internet, telecommunications or electrical failure, which could also prevent the Company from delivering services to its users, decrease the use of the Internet or prevent users from accessing the Company's services, any of which would have a material and adverse effect on the Company's business, results of operations and financial condition. Contingency Plan. As discussed above, the Company is engaged in an ongoing year 2000 assessment and does not currently have a contingency plan to deal with the worst case scenario that might occur if technologies on which the Company depends are not year 2000 compliant and fail to operate effectively after the year 2000. The results of the Company's year 2000 compliance evaluation and the responses received from distributors, suppliers and other third parties with which the Company conducts business will be taken into account in determining the need for and nature and extent of any contingency plans. If the Company's present efforts to address the year 2000 compliance issues discussed above are not successful, or if distributors, suppliers and other third parties with which the Company conducts business do not successfully address such issues, the Company customers could seek alternate suppliers of our products and services. Any material year 2000 problem could require the Company to incur significant unanticipated expenses to remedy and could divert the Company's management's time and attention, either of which could have a material and adverse efect on the Company's business, operating results and financial condition. 10 Item 7. Financial Statements See the Financial Statements listed in Item 13(a), which are incorporated herein by reference. Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. 11 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act The executive officers of the Company and their ages as of March 1, 2000 are as follows: Name Age Position ---- --- -------- William P. Horgan 52 Chairman, Chief Executive Officer and Director Gregory S. Fredrick 45 Vice President Finance William P. Horgan was appointed to the newly created post of Chairman of the Board in November 1996 after serving as President, Chief Executive Officer and Director since January 1994, when he joined the Company. From May 1992 to January 1994, he served as Chief Financial and Administrative Officer of Geobiotics, Inc., a biotechnology-based development stage company, and from January 1990 to May 1992, was employed by E.S. Jacobs and Company as Senior Vice President of Worlds of Wonder, Inc. From March 1988 to January 1990, he was Chief Financial Officer of Advanced Polymer Systems, Inc., a manufacturer and supplier of polymer based delivery systems for the ethical dermatology, OTC skin care and personal care markets. Prior thereto, he held various executive and management positions with CooperVision, Inc. and several affiliated companies, including President of its Revo, Inc. subsidiary. Gregory S. Fredrick joined the Company in October 1998 as Vice President, Controller. Prior to joining the Company Mr. Fredrick spent nearly eight years in the Entertainment industry. From February 1997 to June 1998 he was the Vice President, Controller for a start-up record label / internet company 911 Entertainment. Mr. Fredrick served in various finance and operations capacities while with Windham Hill Records / BMG Entertainment from April 1990 leaving as Director of Operations in December 1996. The remainder of this item is incorporated by reference to the Company's definitive Proxy Statement relating to its 1999 Annual Meeting of Shareholders (the "Proxy Statement"). Item 10. Executive Compensation Incorporated by reference to the Proxy Statement. Item 11. Security Ownership of Certain Beneficial Owners and Management Incorporated by reference to the Proxy Statement. Item 12. Certain Relationships and Related Transactions Incorporated by reference to the Proxy Statement. 12 Item 13. Exhibits and Reports on Form 8-K
(a) Financial Statements. The following are filed as a part of this report: Page ---- Report of BDO Seidman, LLP, Independent Certified Public Accountants 16 Report of Ernst & Young LLP, Independent Auditors 17 Consolidated Balance Sheets -- December 31, 1999 and 1998 18 Consolidated Statements of Operations and Comprehensive Loss - Years ended December 31, 1999 and 1998 19 Consolidated Statements of Shareholders' Equity -Years ended December 31, 1999 and 1998 20 Consolidated Statements of Cash Flows -- Years ended December 31, 1999 and 1998 21 Notes to Consolidated Financial Statements 22 (b) Reports on form 8-K. None During the quarter ended September 30, 1999 the Company filed a current report on Form 8-K dated September 30, 1999 to report the resignation of its previous independent accounting firm Ernst & Young, LLP. During the quarter ended December 31, 1999 the Company filed a current report on Form 8-K dated November 24, 1999 to report the appointment of its current independent accounting firm BDO Seidman, LLP. (c) Exhibits. The following exhibits are filed as part of this report: EXHIBIT NUMBER EXHIBIT TITLE ------ ------------- 3.1 Copy of the Registrant's Articles of Incorporation (1) 3.1.1 Certificate of Determination of Preferences of Series AA Preferred Stock of Registrant 3.2 Copy of Registrant's By-laws (1) 10.1 Registrant's Stock Plan * (1) 10.2 Research and Development Agreement between Registrant and Pherin dated July 1, 1992 (1) 10.7 Technology Transfer Agreement between Registrant and Pherin dated August 23, 1991 (1) 10.10 Registrant's Non-employee Directors Stock Option Plan * (2) 10.12 Standard Industrial Lease - Net between Registrant and SCI Limited Partnership-I dated September 29, 1995 for the Registrant's California facility (3) 10.13 Amendment to Research and Development Agreement between Registrant and Pherin dated February 29, 1996 (3 10.14 Business Loan Agreement dated July 1, 1997 (4) 10.15 Business Loan Agreement dated April 1, 1998(5) 10.16 Extension of Industrial Lease between Registrant and SCI Limited Partnership-I dated September 24, 1998 for the Registrant's California facility(5) 10.17 Supply Agreement with Avon Products, Inc.(5) 10.18 Business Loan Agreement and Change In Terms dated March 22, 2000 (6) 23.1 Consent of BDO Seidman, LLP , Independent Certified Public Accountants 30 23.2 Consent of Ernst & Young, LLP , Independent Auditors 31 27.01 Financial Data Schedule 32 (1) Filed as an exhibit with corresponding exhibit no. to Registrant's Registration Statement on Form SB-2 (Registration No. 33-52340) and incorporated herein by reference. (2) Filed as an exhibit with corresponding exhibit no. to Registrant's Annual Report on Form 10-KSB for the Year Ended December 31, 1993. (3) Filed as an exhibit with corresponding exhibit no. to Registrant's Annual Report on Form 10-KSB for the Year Ended December 31, 1996. 13 Item 13. Exhibits and Reports on Form 8-K (continued) (4) Filed as an exhibit with corresponding exhibit no. to Registrant's Quarterly Report on From 10-QSB for the Three Months Ended June 30, 1997. (5) Filed as an exhibit with corresponding exhibit no. to Registrant's Annual Report on Form 10-KSB for the Year Ended December 31, 1998. (6) Files as an exhibit with corresponding exhibit no. To Registrant's Annual Report on Form 10-KSB for the Year ended December 31, 1999. * Management contract or compensatory plan
14 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, HPSI Corporation has duly caused this Annual Report on Form 10-KSB to be signed on its behalf by the undersigned, thereunto duly authorized, in Fremont, California, on March 29, 2000 HUMAN PHEROMONE SCIENCES, INC. By: /s/ William P. Horgan ---------------------------------- Name: William P. Horgan -------------------------------- Title: Chairman of the Board ------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed on behalf of Human Pheromone Sciences, Inc. by the following persons in the capacities and on the dates indicated. SIGNATURE CAPACITY DATE --------- -------- ---- /s/ William P. Horgan Chief Executive Officer March 29, 2000 - ---------------------------- and Director William P. Horgan /s/ Gregory S. Fredrick Vice President, Finance March 29, 2000 - ---------------------------- (Principal Financial and Gregory S. Fredrick Accounting Officer) /s/ Bernard I. Grosser Director March 29, 2000 - ---------------------------- Bernard I. Grosser, MD /s/ Michael D. Kaufman Director March 29, 2000 - ---------------------------- Michael D. Kaufman /s/ Helen C. Leong Director March 29, 2000 - ---------------------------- Helen C. Leong /s/ Robert Marx Director March 29, 2000 - ---------------------------- Robert Marx 15 Report of BDO Seidman, LLP, Independent Certified Public Accountants To the Board of Directors and Shareholders Human Pheromone Sciences, Inc. We have audited the accompanying consolidated balance sheet of Human Pheromone Sciences, Inc. as of December 31, 1999, and the related consolidated statements of operations and comprehensive loss, shareholders' equity and cash flows for the year ended December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Human Pheromone Sciences, Inc. at December 31, 1999, and the results of its operations and its cash flows for the year ended December 31, 1999, in conformity with generally accepted accounting principles. /s/ BDO Seidman, LLP San Jose, California February 15, 2000 16 Report of Ernst & Young LLP, Independent Auditors To the Board of Directors and Shareholders Human Pheromone Sciences, Inc. We have audited the accompanying consolidated balance sheet of Human Pheromone Sciences, Inc. as of December 31, 1998, and the related consolidated statements of operations and comprehensive loss, shareholders' equity and cash flows for the year ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Human Pheromone Sciences, Inc. at December 31, 1998, and the results of its operations and its cash flows for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. /s/ ERNST & YOUNG LLP Palo Alto, California March 19, 1999 17 Human Pheromone Sciences, Inc. Consolidated Balance Sheets
December 31, December 31, (in thousands except share data) 1999 1998 - --------------------------------------------------------------- ------------ ------------ Assets Current assets: Cash and cash equivalents $ 108 $ 77 Accounts receivable, net of allowances of $338 and $678 in 1999 and 1998, respectively 2,050 2,051 Inventories 2,304 2,894 Other current assets 36 114 ------------ ------------ Total current assets 4,498 5,136 Property and equipment, net 14 59 ------------ ------------ $ 4,512 $ 5,195 ============ ============ Liabilities and Shareholders' Equity Current liabilities: Bank borrowings $ 900 773 Accounts payable 573 692 Accrued advertising 313 554 Accrued commissions 286 448 Other accrued expenses 374 318 ------------ ------------ Total current liabilities 2,446 2,785 ------------ ------------ Commitments and Contingencies Shareholders' equity: Preferred stock, issuable in series, no par value, 10,000,000 shares authorized, 1,433,333 Series AA convertible shares issued and outstanding at December 31, 1999 and 1998, 14,203 and 6,000 Series BB convertible shares issued and outstanding at December 31, 1999 and December 31, 1998, respectively 3,296 2,746 Common stock, no par value, 13,333,333 shares authorized, 3,429,839 shares issued and outstanding 17,667 17,667 Accumulated deficit (18,847) (18,003) Foreign currency translation (50) -- ------------ ------------ Total shareholders' equity 2,066 2,410 ------------ ------------ $ 4,512 $ 5,195 ============ ============ See accompanying notes to consolidated financial statements.
18 Human Pheromone Sciences, Inc. Consolidated Statements of Operations and Comprehensive Loss
Years ended December 31, ------------------------ (in thousands except per share data) 1999 1998 - ------------------------------------------------------------------- ---------- ---------- Net sales, including license fees in 1999 of $989, $0 in 1998 $ 9,306 $ 10,379 Cost of goods sold 3,646 3,358 ---------- ---------- Gross profit 5,660 7,021 ---------- ---------- Operating expenses: Research and development 333 365 Selling, general and administrative 6,067 9,223 ---------- ---------- Total operating expenses 6,400 9,588 ---------- ---------- Loss from operations (740) (2,567) ---------- ---------- Other expense Interest expense (98) (63) Other (6) 10 ---------- ---------- Total other expense (104) (53) ---------- ---------- Net loss available to common shareholders (844) (2,620) Other comprehensive loss - translation adjustment (50) -- ---------- ---------- Comprehensive loss $ (894) $ (2,620) ========== ========== Net loss per common share-basic and diluted $ (0.26) $ (0.76) ========== ========== Weighted average common shares outstanding 3,430 3,430 ========== ========== See accompanying notes to consolidated financial statements.
19 Human Pheromone Sciences, Inc. Consolidated Statements of Shareholders' Equity
(In thousands) - -------------------------------------------------------------------------------------------------------------------- Convertible Preferred Stock -------------------------------------------------- Series AA Series BB Common Stock -------------------------- ----------------------- --------------------------- Shares Amount Shares Amount Shares Amount --------------------------------------- ------------ --------------------------- Balances, at December 31, 1997 1,433 $2,146 -- $ 3,430 $17,667 Issuance of Series BB -- -- 6 600 -- -- preferred stock Net loss -- -- -- -- -- -- ------------- ------------ ----------- ----------- ----------- ------------- Balances, at December 31, 1998 1,433 2,146 6 600 3,430 17,667 Issuance of Series BB -- -- 8 550 -- -- preferred stock Foreign currency translation -- -- -- -- -- -- Net Loss -- -- -- -- -- -- ------------- ------------ ----------- ----------- ----------- ------------- Balances, at December 31, 1999 1,433 $2,146 14 $ 1,150 3,430 $17,667 ============= ============ =========== =========== =========== =============
Human Pheromone Sciences, Inc. Consolidated Statements of Shareholders' Equity
Foreign Currency Total Shareholders' Translation Accumulated Deficit Equity ----------------------------------------------------------------- Balances, at December 31, 1997 $ -- $(15,383) $4,430 Issuance of Series BB -- -- 600 preferred stock Net loss -- (2,620) (2,620) ------------------- ---------------------- --------------------- Balances, at December 31, 1998 -- (18,003) 2,410 Issuance of Series BB -- -- 550 preferred stock Foreign currency translation (50) -- (50) Net Loss -- (844) (844) ------------------- ---------------------- --------------------- Balances, at December 31, 1999 $ (50) $(18,847) $2,066 =================== ====================== ===================== See accompanying notes to consolidated financial statements
20 Human Pheromone Sciences, Inc. Consolidated Statements of Cash Flows
Years ended December 31, ------------------------ (in thousands) 1999 1998 - -------------------------------------------------------------- ----------- ---------- Cash flows from operating activities: Net loss $ (844) $ (2,620) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 45 50 Changes in operating assets and liabilities: Accounts receivable 1 1,204 Inventories 590 527 Other current assets 78 15 Accounts payable (119) (109) Accrued advertising (241) (190) Accrued commissions (162) 278 Other accrued expenses 56 (143) ----------- ---------- Net cash used in operating activities (596) (988) ----------- ---------- Cash flows from investing activities: Purchase of property and equipment -- (9) ----------- ---------- Cash flows from financing activities: Proceeds from bank borrowings 1,810 4,309 Repayment of bank borrowings (1,683) (4,084) Proceeds from issuance of convertible preferred stock 550 600 ----------- ---------- Net cash provided by financing activities 677 825 ----------- ---------- Effect of currency translation (50) -- ----------- ---------- Net increase (decrease) in cash and cash equivalents 31 (172) Cash and cash equivalents at beginning of the year 77 249 ----------- ---------- Cash and cash equivalents at end of the year $ 108 $ 77 =========== ========== See accompanying notes to consolidated financial statements.
21 Human Pheromone Sciences, Inc. Notes to Consolidated Financial Statements December 31, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization and Nature of Operations Human Pheromone Sciences, Inc. (the "Company") was incorporated in the State of California in 1989 under the name of EROX Corporation. The Company changed the name to Human Pheromone Sciences, Inc. in May 1998. The Company is engaged in the research, development, manufacturing and marketing of consumer products containing synthetic human pheromones as a component. The Company initiated commercial operations in late 1994 with a line of fine fragrances and toiletries. The Company currently sells its REALM fragrance products through department and specialty stores across the United States and selected international markets. Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiary in France. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Segment Reporting During the year ended December 31, 1999, the Company began receiving revenues from sales and licensing of its patented human pheromone technology. Currently, the Company's management does not regularly review operating results relating to this revenue, nor does it assess its performance by allocating various expenditures. Consequently, it will not report this revenue as an individual segment. As the Company's sales and licensing revenues of its patented human pheromone technology progresses, it will begin to develop systems to monitor this segment, and report its results accordingly. The Company's direct sales in international markets is not material. Accordingly, the Company will not report international markets as a geographic segment. Concentration of Credit Risk The Company's concentration of credit risk consists principally of cash, cash equivalents and trade receivables. Concentration of credit risk with respect to trade receivables is limited because the Company's customer base consists of a large number of geographically diverse customers in the department and specialty store trade, in the United States and various international markets. On-going credit evaluations of customers' financial condition are performed and generally, no collateral is required. The company maintains an allowance for potential losses based upon management analysis of possible uncollectable accounts. Customer Concentration During 1999, three customers comprised 33%, 20% and 17% of the Company's net sales. During 1998, two customers comprised 22% and 16% of the Company's net sales. Supplier Concentration The Company is dependent on third parties to manufacture its fragrance products, as well as the synthesized human pheromones used in these products. Capacity limitations at these essential suppliers, or any other occurrences leading to an interruption of supply could have a material adverse effect on the Company. 22 Human Pheromone Sciences. Inc. Notes to Consolidated Financial Statements December 31, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Revenue Recognition Revenue is recorded at the time of merchandise shipment, net of provisions for returns. License fees are earned according to the terms of the license agreement and the license. The majority of the Company's sales are to large department store chains. Advertising Expense The cost of advertising is expensed as incurred. Advertising costs were $1,108,000 and $2,160,000 in 1999 and 1998, respectively. Research and Development Research and development costs are charged to expense when incurred. Research and development costs were $333,000 and $365,000 in 1999 and 1998, respectively. Fair Value of Financial Instruments The Company believes the book value of financial instruments approximates their fair value. Long-term Assets The company applies SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets". Under SFAS No.121, long-lived assets and certain intangibles are evaluated for impairment when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable through estimated undiscounted future cash flows resulting from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. Income Taxes The Company follows the provisions of SFAS No. 109, "Accounting for Income Taxes", which requires use of the "liability method". Accordingly, deferred tax liabilities and assets are determined based on the temporary differences between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Stock Options The Company applies Accounting Principles Board Opinion ("APB") 25, "Accounting for Stock Issued to Employees", and related Interpretations in accounting for all stock option plans. Under APB 25, compensation cost is recognized for stock options granted at prices below the market price of the underlying common stock on the date of grant. SFAS No. 123, "Accounting for Stock - Based Compensation", requires the Company to provide pro forma information regarding net income as if compensation had been determined in accordance with the fair value based method prescribed in SFAS No. 125. Comprehensive Income Comprehensive income is comprised of net income and all changes to the statements of shareholders' equity, except those due to investment by shareholders, changes in paid-in capital and distributions to shareholders. 23 Human Pheromone Sciences, Inc. Notes to Consolidated Financial Statements December 31, 1999 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Translation of Foreign Currencies The financial statements of the Company's foreign subsidiary are measured in the local currency and then translated into U. S. dollars. All balance sheet accounts have been translated using the current rate of exchange at the balance sheet date. Results of operations have been translated using the average rate prevailing throughout the year. Translation gains and losses resulting from the change in exchange rates from year- to-year are accumulated in a separate account of shareholders' equity. Foreign currency transaction gains and losses are included in consolidated net income. New Accounting Pronouncement In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal quarters of fiscal years beginning after June 15, 2000. The Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard on January 1, 2001 to affect its financial statements. Net Income/Loss Per Share The Company follows the provisions of SFAS No. 128, "Earnings Per Share". SFAS NO. 128 provides for the calculation of "Basic" and Diluted" earning per share. Basic net income/(loss) per share is computed using the weighted-average number of common shares outstanding. Diluted net income/(loss) per share is computed using the weighted-average number of common shares and dilutive common shares outstanding during the period. For the years ended December 31, 1999 and 1998, options to purchase 367,000 and 313,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share since their effect would be antidilutive. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents. Inventories Inventories are stated at the lower of cost (first-in, first-out method) or market. Property and Equipment The Company's property and equipment is stated at cost, net of accumulated depreciation. Depreciation is provided on a straight-line basis over three years 24 Human Pheromone Sciences, Inc. Notes to Consolidated Financial Statements December 31, 1999 2. INVENTORIES
A summary of inventories follows (in thousands): December 31, ------------ 1999 1998 ------------------------- Components $ 1,170 $ 1,114 Work-in-process 472 264 Finished goods 662 1,516 --------- --------- $ 2,304 $ 2,894 ========= ========= 3. PROPERTY AND EQUIPMENT Property and equipment consist of the following (in thousands): December 31, ------------------------ 1999 1998 ------------------------- Molds $ 478 $ 478 Computer hardware 103 103 Computer software 140 140 Furniture and other office equipment 79 79 --------- --------- 800 800 Accumulated depreciation (786) (741) --------- --------- $ 14 $ 59 ========= =========
4. BANK BORROWING The Company has a revolving line of credit with Mid-Peninsula Bank, which expires April 1, 2000. Under the terms of this loan agreement the Company may borrow up to 75% of allowable accounts receivable, as defined, up to a maximum of $3 million. As of December 31, 1999 $900,000 was outstanding against the credit line, and the interest rate on borrowings is the bank's prime rate, 8.5% at December 31, 1999, plus 1.00%. Borrowings are primarily secured by the Company's accounts receivable and inventories. The line of credit requires the company to maintain debt-to-equity and liquidity ratios, and a minimum net worth. As of December 31, 1999 the Company was in compliance with these financial covenants. 5. COMMITMENTS AND CONTINGENCIES Effective November 1, 1998, the Company extended the existing lease arrangement for office space in Fremont, California until October 31, 2000. The annual base rent will be approximately $100,970 for the year ending December 31, 2000. The lease also provides for payments related to taxes, common area charges and outside maintenance. In July 1998 the Company subleased a portion of the Fremont facilities. The sublease expired October 31, 1999 and required a total rent of $78,900 including reimbursement of common area charges, property taxes, and maintenance. The sublease income is netted against rent expense. Total rental expense was $120,175 and $129,400 for the years ended December 31, 1999 and 1998, respectively. 6. SHAREHOLDERS' EQUITY In 1999, the Company shareholders' authorized a 1-for-3 reverse stock split. All share and per share amounts in the accompanying financial statements have been restated to give effect to the stock split. 25 Human Pheromone Sciences, Inc. Notes to Consolidated Financial Statements December 31, 1999 6. SHAREHOLDERS' EQUITY (continued) Convertible Preferred Stock Series BB During 1999 the Company issued 8,203 shares of Series BB convertible preferred stock for $550,000, net of issuance costs, to a current shareholder. The cash was used to reduce bank borrowings. During 1998, the Company issued 6,000 shares of Series BB convertible preferred stock for $600,000, net of issuance costs, to a current shareholder. The cash was used to reduce bank borrowings. Holders of shares of Series BB convertible preferred stock shall be entitled to the number of votes equal to the number of shares of common stock into which such shares could be converted. 600,000 shares of common stock are reserved for the future conversion of this preferred stock. No dividends are payable in connection with these preferred shares. Initially, each share of Series BB preferred stock shall be convertible at the option of the holder into shares of common stock at an initial conversion price of $1.00 per share of common stock. The initial conversion price shall be increased quarterly beginning April 1, 1999 by $2.00 such that the original issue price shall increase by $8.00 per share each year. In addition, each preferred share shall automatically convert in the event of any of the following: o Immediately after the closing bid price of the common stock on the NASDAQ Stock Market exceeds $5.00 per share for a period of twelve consecutive weeks. o Immediately after the Company reports earnings per common share for any fiscal ear of $.50 or greater. o Upon the written request for such conversion by sixty-six and two-thirds percent (66 2/3%) of the then outstanding preferred stockholders. o At the time that sixty-six and two-thirds percent (66 2/3%) of the preferred stock ever outstanding have converted to common stock Series AA Holders of shares of Series AA convertible preferred stock shall be entitled to the number of votes equal to the number of shares of common stock into which such shares could be converted. Reserved for the future conversion of this preferred stock are 1,433,333 shares of common stock. No dividends are payable in connection with these preferred shares. Each share of Series AA preferred stock shall be convertible at the option of the holder into shares of common stock at an initial conversion price of $1.50 per share of common stock. Such initial conversion price shall be increased quarterly beginning October 1, 1997 by $.0225 such that the original issue price shall increase by $.09 per share each year. In addition, each preferred share shall automatically convert in the event of any of the following: o Immediately after the closing bid price of the common stock on the NASDAQ Stock Market exceeds $5.00 per share for a period of twelve consecutive weeks. o Immediately after the Company reports earnings per common share for any fiscal year of $.50 or greater. o Upon the written request for such conversion by sixty-six and two-thirds percent (66 2/3%) of the then outstanding preferred stockholders. o At the time that sixty-six and two-thirds percent (66 2/3%) of the preferred stock ever outstanding have converted to common stock. Stock Option Plan In 1990, the Company adopted a stock option plan (the "Plan"), which is administered by the Compensation and Stock Option Committee of the Board of Directors. The maximum number of shares that may be issued under the Plan is 708,333. Terms and conditions of stock options are set by the Board of Directors. Options may be granted at the fair value at the date of the grant as determined by the Board of Directors. Options for a holder of more than 10% of the voting stock of 26 Human Pheromone Sciences, Inc. Notes to Consolidated Financial Statements December 31, 1999 6. SHAREHOLDERS' EQUITY (continued) the Company may be granted at not less than 110% of fair market value. Options have a maximum term of ten years or a shorter period as set forth in the option agreement, and generally vest over a four-year period unless otherwise specified. Options granted to a shareholder with 10% or more of the voting stock of the Company have a maximum term of five years. A summary of the option activity under the Plan is as follows (in thousands except per share data): WEIGHTED AVERAGE SHARES EXERCISE PRICE ------ -------------- Outstanding, January 1, 1997 344 $ 9.33 Granted 42 $ 1.92 Canceled (160) $10.95 ------ Outstanding, December 31, 1998 226 $ 6.81 Granted 210 $ 0.95 Canceled (169) $ 6.86 ------ Outstanding, December 31, 1999 267 $ 2.19 ====== At December 31, 1999, a total of 441,633 shares of the Company's common stock were reserved for future grants under the Plan, and options to purchase 50,140 shares were exercisable. In June 1993, the Company's Board of Directors adopted a Non-Employee Directors' Stock Option Plan (Directors' Plan) covering a total of 158,333 shares of common stock, which provides for a one-time automatic grant of options to purchase 8,333 shares of common stock and annual grants thereafter of options to purchase 3,333 shares of common stock to each non-employee director at an exercise price equal to the fair market value of the stock on the date of grant. The stock option activity under the Plan was as follows (in thousands except per share data): WEIGHTED AVERAGE EXERCISE SHARES PRICE ------ ------- Outstanding, January 1, 1997 74 $10.35 Granted 13 $ 2.01 ----- Outstanding, December 31, 1998 87 $ 9.06 Granted 13 $ 1.80 ----- Outstanding, December 31, 1999 100 $ 8.10 ===== At December 31, 1999, a total of 58,341 shares of the Company's common stock were reserved for future grants under the Directors' Plan, and options to purchase 93,324 shares were exercisable. The following table summarizes information about stock options outstanding at December 31, 1999 (in thousands except per share data): 27 Human Pheromone Sciences, Inc. Notes to Consolidated Financial Statements December 31, 1999 6. SHAREHOLDERS' EQUITY (continued)
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- -------------------------- WEIGHTED AVERAGE WEIGHTED WEIGHTED RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE PRICES AT 12/31/99 LIFE PRICE AT 12/31/99 PRICE - --------- ----------------- ----------- -------- ------------ -------- $ 0.95 to $ 2.37 253 6.1 $ 1.07 38 $ 1.52 $ 1.38 to $ 4.74 22 2.9 $ 4.69 16 $ 4.68 $ 4.75 to $ 7.12 52 5.2 $ 5.69 52 $ 5.69 $ 7.13 to $ 9.49 2 2.0 $ 7.95 2 $ 7.95 $ 9.50 to $14.23 16 3.5 $12.00 16 $12.00 $14.24 to $23.72 22 4.9 $23.67 20 $23.67 ---- --- ------ --- ------ $ 0.95 to $23.72 367 5.5 $ 3.80 144 $ 7.70 ==== ===
The weighted average fair value of options granted during 1999 and 1998 was $0.78, and $1.77, respectively. Stock Compensation The Company applies APB 25 and related Interpretations in accounting for its employee stock options. Had compensation expense been determined based upon the fair value of the awards at the grant date and consistent with the method under SFAS No. 125, the Company's net loss per share would have been increased the the proforma amount indicated in the following table (in thousands): Years ended December 31, ------------------------ 1999 1998 --------- --------- Net loss: As reported $ (844) $ (2,620) ======== ======== Pro forma $ (1,012) $ (3,016) ======== ======== Basic and diluted loss per share: As reported $ (0.25) $ (0,76) ======== ======== Pro forma $ (0.30) $ (0.88) ======== ========
1999 Option Grants 1998 Option Grants ------------------ ------------------ Risk-Free Interest Rates 3.88% to 6.13% 4.00% to 5.50% Dividend Yield 0% 0% Volatility factor of the Company's common stock 1.0 1.7 Weighted average expected life beyond each respective vesting period 1 year 1 year
7. RELATED PARTY TRANSACTIONS On March 1, 1999, the Company renewed a research and development agreement with Pherin Pharmaceuticals Corporation ("Pherin"), a company related by common shareholders, whereby Pherin supplies HPSI with its required synthesized human pheromones and also provides to HPSI research and development and scientific public relations services. This renewal has been extended to expire on March 1, 2001. The total expense incurred pursuant to the Company's research and development agreement with Pherin Corporation during the fiscal years ended December 31, 1999 and 1998 was $257,000 and $304,000, respectively. 28 Human Pheromone Sciences, Inc. Notes to Consolidated Financial Statements December 31, 1999 7. RELATED PARTY TRANSACTIONS (continued) The Company also retains the consulting services of Dr. David Berliner, a founder and current CEO of Pherin Pharmaceuticals. The total expense incurred to retain Dr. Berliner's services for the fiscal years ended December 31, 1999 and 1998 was $74,00 and $60,000, respectively. In 1999 the Company retained the marketing and consulting services of Robert Marx, a member of the Company's Board of Director's. Mr. Marx was paid $80,000 in 1999 for his services. 8. INCOME TAXES There was no provision for income taxes for the year ended December 31, 1999 or 1998 as the Company incurred net operating losses for which no benefit was recognized. A reconciliation of the effective tax rate and the statutory U.S. federal income tax rates are as follows: Years ended December 31, ------------------------ 1999 1998 ------ ------ Federal tax benefit of the federal statutory rate $ (287) $ (891) State income tax benefit, net of federal amount -- -- Permanent differences (5) (6) Other -- 43 Increase in valuation allowance 292 940 ------ ------ Income tax benefitts $ -- $ -- ====== ====== At December 31, 1999, the Company had net operating loss carryforwards of approximately $16,700,000. The Company also had federal research and development tax carryforwards of approximately $187,000. The net operating loss and credit carryforwards will expire between 2004 and 2014. The utilization of certain of the loss carryforwards is limited under Section 382 of the Internal revenue Code. Temporary differences that give rise to a significant portion of the deferred tax asset are as follows (in thousands): December 31, 1999 1998 ------ ------ Deferred tax asset: Net operating loss carryforward $6,337 $5,500 Research credit carryforward 187 200 Returns reserve 135 300 Other, net 33 400 Valuation allowance for deferred tax assets (6,692) (6,400) ------- ------- Net deferred tax assets $ -- $ -- ======= ======= Because of the Company's lack of earnings history, the deferred tax asset has been fully offset by a valuation allowance. The net valuation allowance increased by $292,000 and $940,000 in 1999 and 1998. The valuation allowance was established because the Company was not able to determine that is more likely than not that the deferred tax asset will be realized. 9. SUBSEQUENT EVENTS (unaudited) On March 27, 2000, the Company obtained $260,000 additional equity capital from a current shareholder by issuing shares of convertible preferred stock. On March 22, 2000 Mid-Peninsula Bank extended to July 1, 2000 the revolving line of credit, up to a maximum of $1,500,000. 29 EX-10.18 2 LOAN AGREEMENT LOAN AGREEMENT
- ------------------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $1,500,000.00 07-01-2000 0108143855 2000 016 - ------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------------------------------
Borrower: HUMAN PHEROMONE SCIENCES, INC. Lender: Mid-Peninsula Bank 4034 Clipper Court c/o Greater Bay Bancorp Fremont, CA 94538 2860 W. Bayshore Road Palo Alto, CA 94303 ================================================================================ THIS LOAN AGREEMENT between HUMAN PHEROMONE SCIENCES, INC. ("Borrower") and Mid-Peninsula Bank ("Lender") is made and executed on the following terms and conditions. Borrower has received prior commercial loans from Lender or has applied to Lender for a commercial loan or loans and other financial accommodations, including those which may be described on any exhibit or schedule attached to this Agreement. All such loans and financial accommodations, together with all future loans and financial accommodations from Lender to Borrower, are referred to in this Agreement individually as the "Loan" and collectively as the "Loans." Borrower understands and agrees that: (a) in granting, renewing, or extending any Loan, Lender is relying upon Borrower's representations, warranties, and agreements, as set forth in this Agreement; (b) the granting, renewing, or extending of any Loan by Lender at all times shall be subject to Lender's sole judgment and discretion; and (c) all such Loans shall be and shall remain subject to the following terms and conditions of this Agreement. TERM. This Agreement shall be effective as of March 22, 2000, and shall continue thereafter until all Indebtedness of Borrower to Lender has been performed in full and the parties terminate this Agreement in writing. DEFINITIONS. The following words shall have the following meanings when used in this Agreement. Terms not otherwise defined in this Agreement shall have the meanings attributed to such terms in the Uniform Commercial Code. All references to dollar amounts shall mean amounts in lawful money of the United States of America. Agreement. The word "Agreement" means this Loan Agreement, as this Loan Agreement may be amended or modified from time to time, together with all exhibits and schedules attached to this Loan Agreement from time to time. Account. The word "Account" means a trade account, account receivable, or other right to payment for goods sold or services rendered owing to Borrower (or to a third party grantor acceptable to Lender). Account Debtor. The words "Account Debtor" mean the person or entity obligated upon an Account. Advance. The word "Advance" means a disbursement of Loan funds under this Agreement. Borrower. The word "Borrower" means HUMAN PHEROMONE SCIENCES, INC. The word "Borrower" also includes, as applicable, all subsidiaries and affiliates of Borrower as provided below in the paragraph titled "Subsidiaries and Affiliates." Borrowing Base. The words "Borrowing Base" mean, as determined by Lender from time to time, the lesser of (a) $1,500,000.00; or (b) 75.000% of the aggregate amount of Eligible Accounts. Business Day. The words "Business Day" mean a day on which commercial banks are open for business in the State of California. CERCLA. The word "CERCLA" means the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended. Cash Flow. The words "Cash Flow" mean net income after taxes, and exclusive of extraordinary gains and income, plus depreciation and amortization. Collateral. The word "Collateral" means and includes without limitation all property and assets granted as collateral security for a Loan, whether real or personal property, whether granted directly or indirectly, whether granted now or in the future, and whether granted in the form of a security interest, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien, charge, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. The word "Collateral" includes without limitation all collateral described below in the section titled "COLLATERAL." Debt. The word "Debt" means all of Borrower's liabilities excluding Subordinated Debt. Eligible Accounts. The words "Eligible Accounts" mean, at any time, all of Borrower's Accounts which contain selling terms and conditions acceptable to Lender. The net amount of any Eligible Account against which Borrower may borrow shall exclude all returns, discounts, credits, and offsets of any nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do not include: (a) Accounts with respect to which the Account Debtor is an officer, an employee or agent of Borrower. (b) Accounts with respect to which the Account Debtor is a subsidiary of, or affiliated with or related to Borrower or its shareholders, officers, or directors. (c) Accounts with respect to which goods are placed on consignment, guaranteed sale, or other terms by reason of which the payment by the Account Debtor may be conditional. (d) Accounts with respect to which Borrower is or may become liable to the Account Debtor for goods sold or services rendered by the Account Debtor to Borrower. (e) Accounts which are subject to dispute, counterclaim, or setoff. (f) Accounts with respect to which the goods have not been shipped or delivered, or the services have not been rendered, to the Account Debtor. (g) Accounts with respect to which Lender, in its sole discretion, deems the creditworthiness or financial condition of the Account Debtor to be unsatisfactory. (h) Accounts of any Account Debtor who has filed or has had filed against it a petition in bankruptcy or an application for relief under any provision of any state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has had appointed a trustee, custodian, or receiver for the assets of such Account Debtor; or who has made an assignment for the benefit of creditors or has become insolvent or fails generally to pay its debts (including its payrolls) as such debts become due. (i) Accounts with respect to which the Account Debtor is the United States government or any department or agency of the United States. (j) Accounts which have not been paid in full within Ninety (90) Days from the invoice date. The entire balance of any Account of any single Account debtor will be ineligible whenever the portion of the Account which has not been paid within Ninety (90) Days from the invoice date is in excess of 20.000% of the total amount outstanding on the Account. 03-22-2000 LOAN AGREEMENT Page 2 Loan No 0108143855 (Continued) ================================================================================ (k) That portion of the Accounts of any single Account Debtor which exceeds 25.000% of all of Borrower's Accounts. ERISA. The word "ERISA' means the Employee Retirement Income Security Act of 1974, as amended. Event of Default. The words "Event of Default" mean and include without limitation any of the Events of Default set forth below in the section titled "EVENTS OF DEFAULT." Expiration Date. The words "Expiration Date" mean the date of termination of Lender's commitment to lend under this Agreement. Grantor. The word "Grantor" means and includes without limitation each and all of the persons or entities granting a Security Interest in any Collateral for the Indebtedness, including without limitation all Borrowers granting such a Security Interest. Guarantor. The word "Guarantor" means and includes without limitation each and all of the guarantors, sureties, and accommodation parties in connection with any Indebtedness. Indebtedness. The word "Indebtedness" means and includes without limitation all Loans, together with all other obligations, debts and liabilities of Borrower to Lender, or any one or more of them, as well as all claims by Lender against Borrower, or any one or more of them; whether now or hereafter existing, voluntary or involuntary, due or not due, absolute or contingent, liquidated or unliquidated; whether Borrower may be liable individually or jointly with others; whether Borrower may be obligated as a guarantor, surety, or otherwise; whether recovery upon such Indebtedness may be or hereafter may become barred by any statute of limitations; and whether such Indebtedness may be or hereafter may become otherwise unenforceable. Lender. The word "Lender" means Mid-Peninsula Bank, its successors and assigns. Line of Credit. The words "Line of Credit" mean the credit facility described in the Section titled "LINE OF CREDIT" below. Liquid Assets. The words "Liquid Assets" mean Borrower's cash on hand plus Borrower's readily marketable securities. Loan. The word "Loan" or "Loans" means and includes without limitation any and all commercial loans and financial accommodations from Lender to Borrower, whether now or hereafter existing, and however evidenced, including without limitation those loans and financial accommodations described herein or described on any exhibit or schedule attached to this Agreement from time to time. Note. The word "Note" means and includes without limitation Borrower's promissory note or notes, if any, evidencing Borrower's Loan obligations in favor of Lender, as well as any substitute, replacement or refinancing note or notes therefor. Related Documents. The words "Related Documents" mean and include without limitation all promissory notes, credit agreements, loan agreements, environmental agreements, guaranties, security agreements, mortgages, deeds of trust, and all other instruments, agreements and documents, whether now or hereafter existing, executed in connection with the Indebtedness. Security Agreement. The words "Security Agreement" mean and include without limitation any agreements, promises, covenants, arrangements, understandings or other agreements, whether created by law, contract, or otherwise, evidencing, governing, representing, or creating a Security Interest. Security Interest. The words "Security Interest" mean and include without limitation any type of collateral security, whether in the form of a lien, charge, mortgage, deed of trust, assignment, pledge, chattel mortgage, chattel trust, factor's lien, equipment trust, conditional sale, trust receipt, lien or title retention contract, lease or consignment intended as a security device, or any other security or lien interest whatsoever, whether created by law, contract, or otherwise. SARA. The word "SARA" means the Superfund Amendments and Reauthorization Act of 1986 as now or hereafter amended. Subordinated Debt. The words "Subordinated Debt" mean indebtedness and liabilities of Borrower which have been subordinated by written agreement to indebtedness owed by Borrower to Lender in form and substance acceptable to Lender. Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total assets excluding all intangible assets (i.e., goodwill, trademarks, patents, copyrights, organizational expenses, and similar intangible items, but including leaseholds and leasehold improvements) less total Debt. Working Capital. The words "Working Capital" mean Borrower's current assets, excluding prepaid expenses, less Borrower's current liabilities. LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time from the date of this Agreement to the Expiration Date, provided the aggregate amount of such Advances outstanding at any time does not exceed the Borrowing Base. Within the foregoing limits, Borrower may borrow, partially or wholly prepay, and reborrow under this Agreement as follows. Conditions Precedent to Each Advance. Lender's obligation to make any Advance to or for the account of Borrower under this Agreement is subject to the following conditions precedent, with all documents, instruments, opinions, reports, and other items required under this Agreement to be in form and substance satisfactory to Lender: (a) Lender shall have received evidence that this Agreement and all Related Documents have been duly authorized, executed, and delivered by Borrower to Lender. (b) Lender shall have received such opinions of counsel, supplemental opinions, and documents as Lender may request. (c) The security interests in the Collateral shall have been duly authorized, created, and perfected with first lien priority and shall be in full force and effect. (d) All guaranties required by Lender for the Line of Credit shall have been executed by each Guarantor, delivered to Lender, and be in full force and effect. (e) Lender, at its option and for its sole benefit, shall have conducted an audit of Borrower's Accounts, books, records, and operations, and Lender shall be satisfied as to their condition. (f) Borrower shall have paid to Lender all fees, costs, and expenses specified in this Agreement and the Related Documents as are then due and payable. (g) There shall not exist at the time of any Advance a condition which would constitute an Event of Default under this Agreement, and Borrower shall have delivered to Lender the compliance certificate called for in the paragraph below titled "Compliance Certificate." Making Loan Advances. Advances under the Line of Credit may be requested either orally or in writing by authorized persons. Lender may, but need not, require that all oral requests be confirmed in writing. Each Advance shall be conclusively deemed to have been made at the request of and for the benefit of Borrower (a) when credited to any deposit account of Borrower maintained with Lender or (b) when advanced in accordance with the instructions of an authorized person. Lender, at its option, may set a cutoff time, after which all requests for Advances will be treated as having been requested on the next succeeding Business Day. Mandatory Loan Repayments. If at any time the aggregate principal amount of the outstanding Advances shall exceed the applicable Borrowing 03-22-2000 LOAN AGREEMENT Page 3 Loan No 0108143855 (Continued) ================================================================================ Base, Borrower, immediately upon written or oral notice from Lender, shall pay to Lender an amount equal to the difference between the outstanding principal balance of the Advances and the Borrowing Base. On the Expiration Date, Borrower shall pay to Lender in full the aggregate unpaid principal amount of all Advances then outstanding and all accrued unpaid interest, together with all other applicable fees, costs and charges, if any, not yet paid. Loan Account. Lender shall maintain on its books a record of account in which Lender shall make entries for each Advance and such other debits and credits as shall be appropriate in connection with the credit facility. Lender shall provide Borrower with periodic statements of Borrower's account, which statements shall be considered to be correct and conclusively binding on Borrower unless Borrower notifies Lender to the contrary within thirty (30) days after Borrower's receipt of any such statement which Borrower deems to be incorrect. COLLATERAL. To secure payment of the Line of Credit and performance of all other Loans, obligations and duties owed by Borrower to Lender, Borrower (and others, if required) shall grant to Lender Security Interests in such property and assets as Lender may require (the "Collateral"), including without limitation Borrower's present and future Accounts and general intangibles. Lender's Security Interests in the Collateral shall be continuing liens and shall include the proceeds and products of the Collateral, including without limitation the proceeds of any insurance. With respect to the Collateral, Borrower agrees and represents and warrants to Lender: Perfection of Security Interests. Borrower agrees to execute such financing statements and to take whatever other actions are requested by Lender to perfect and continue Lender's Security Interests in the Collateral. Upon request of Lender, Borrower will deliver to Lender any and all of the documents evidencing or constituting the Collateral, and Borrower will note Lender's interest upon any and all chattel paper if not delivered to tender for possession by Lender. Contemporaneous with the execution of this Agreement, Borrower will execute one or more UCC financing statements and any similar statements as may be required by applicable law, and will file such financing statements and all such similar statements in the appropriate location or locations. Borrower hereby appoints Lender as its irrevocable attorney-in-fact for the purpose of executing any documents necessary to perfect or to continue any Security Interest. Lender may at any time, and without further authorization from Borrower, file a carbon, photograph, facsimile, or other reproduction of any financing statement for use as a financing statement. Borrower will reimburse Lender for all expenses for the perfection, termination, and the continuation of the perfection of Lender's security interest in the Collateral. Borrower promptly will notify Lender of any change in Borrower's name including any change to the assumed business names of Borrower. Borrower also promptly will notify Lender of any change in Borrower's Social Security Number or Employer Identification Number. Borrower further agrees to notify Lender in writing prior to any change in address or location of Borrower's principal governance office or should Borrower merge or consolidate with any other entity. Collateral Records. Borrower does now, and at all times hereafter shall, keep correct and accurate records of the Collateral, all of which records shall be available to Lender or Lender's representative upon demand for inspection and copying at any reasonable time. With respect to the Accounts, Borrower agrees to keep and maintain such records as Lender may require, including without limitation information concerning Eligible Accounts and Account balances and agings. Collateral Schedules. Concurrently with the execution and delivery of this Agreement, Borrower shall execute and deliver to Lender a schedule of Accounts and Eligible Accounts, in form and substance satisfactory to the Lender. Thereafter Borrower shall execute and deliver to Lender such supplemental schedules of Eligible Accounts and such other matters and information relating to Borrower's Accounts as Lender may request. Supplemental schedules shall be delivered according to the following schedule: Monthly Accounts Receivable and Accounts Payable agings within fifteen (15) days of month end with Borrowing Base Certificate within twenty (20) days of month end. Representations and Warranties Concerning Accounts. With respect to the Accounts, Borrower represents and warrants to Lender: (a) Each Account represented by Borrower to be an Eligible Account for purposes of this Agreement conforms to the requirements of the definition of an Eligible Account; (b) All Account information listed on schedules delivered to Lender will be true and correct, subject to immaterial variance; and (c) Lender, its assigns, or agents shall have the right at any time and at Borrower's expense to inspect, examine, and audit Borrower's records and to confirm with Account Debtors the accuracy of such Accounts. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as of the date of this Agreement, as of the date of each disbursement of Loan proceeds, as of the date of any renewal, extension or modification of any Loan, and at all times any Indebtedness exists: Organization. Borrower is a corporation which is duly organized, validly existing, and in good standing under the laws of the State of California and is validly existing and in good standing in all states in which Borrower is doing business. Borrower has the full power and authority to own its properties and to transact the businesses in which it is presently engaged or presently proposes to engage. Borrower also is duly qualified as a foreign corporation and is in good standing in all states in which the failure to so qualify would have a material adverse effect on its businesses or financial condition. Authorization. The execution, delivery, and performance of this Agreement and all Related Documents by Borrower, to the extent to be executed, delivered or performed by Borrower, have been duly authorized by all necessary action by Borrower; do not require the consent or approvai of any other person, regulatory authority or governmental body; and do not conflict with, result in a violation of, or constitute a default under (a) any provision of its articles of incorporation or organization, or bylaws, or any agreement or other instrument binding upon Borrower or (b) any law, governmental regulation, court decree, or order applicable to Borrower. Financial Information. Each financial statement of Borrower supplied to Lender truly and completely disclosed Borrower's financial condition as of the date of the statement, and there has been no material adverse change in Borrower's financial condition subsequent to the date of the most recent financial statement supplied to Lender. Borrower has no material contingent obligations except as disclosed in such financial statements. Legal Effect. This Agreement constitutes, and any instrument or agreement required hereunder to be given by Borrower when delivered will constitute, legal, valid and binding obligations of Borrower enforceable against Borrower in accordance with their respective terms. Properties. Except for Permitted Liens, Borrower owns and has good title to all of Borrower's properties free and clear of all Security Interests, and has not executed any security documents or financing statements relating to such properties. All of Borrower's properties are titled in Borrower's legal name, and Borrower has not used, or filed a financing statement under, any other name for at least the last five (5) years. Hazardous Substances. The terms "hazardous waste," "hazardous substance," "disposal," "release," and "threatened release," as used in this Agreement, shall have the same meanings as set forth in the "CERCLA," "SARA," the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 5901, et seq., Chapters 6.5 through 7.7 of Division 20 of the California Health and Safety Code, Section 25100, et seq., or other applicable state or Federal laws, rules, or regulations adopted pursuant to any of the foregoing. Except as disclosed to and acknowledged by Lender in writing, Borrower represents and warrants that: (a) During the period of Borrower's ownership of the properties, there has been no use, generation, manufacture, storage, treatment, disposal, release or threatened release of any hazardous waste or substance by any person on, under, about or from any of the properties. (b) Borrower has no knowledge of, or reason to believe that there has been (i) any use, generation, manufacture, storage, treatment, disposal, release, or threatened release of any hazardous waste or substance on, under, about or from the properties by any prior owners or occupants of any of the properties, or (ii) any actual or threatened litigation or claims of any kind by any person relating to such matters. (c) Neither Borrower nor any tenant, contractor, agent or other authorized user of any of the properties shall use, generate, manufacture, store, treat, dispose of, or release any hazardous waste or substance on, under, about or from any of the properties; and any such activity shall be conducted in compliance with all applicable federal, state, 03-22-2000 LOAN AGREEMENT Page 4 Loan No 0108143855 (Continued) ================================================================================ and local laws, regulations, and ordinances, including without limitation those laws, regulations and ordinances described above. Borrower authorizes Lender and its agents to enter upon the properties to make such inspections and tests as Lender may deem appropriate to determine compliance of the properties with this section of the Agreement. Any inspections or tests made by Lender shall be at Borrower's expense and for Lender's purposes only and shall not be construed to create any responsibility or liability on the part of Lender to Borrower or to any other person. The representations and warranties contained herein are based on Borrower's due diligence in investigating the properties for hazardous waste and hazardous substances. Borrower hereby (a) releases and waives any future claims against Lender for indemnity or contribution in the event Borrower becomes liable for cleanup or other costs under any such laws, and (b) agrees to indemnify and hold harmless Lender against any and all claims, losses, liabilities, damages, penalties and expenses which Lender may directly or indirectly sustain or suffer resulting from a breach of this section of the Agreement or as a consequence of any use, generation, manufacture, storage, disposal, release or threatened release of a hazardous waste or substance on the properties. The provisions of this section of the Agreement, including the obligation to indemnify, shall survive the payment of the Indebtedness and the termination or expiration of this Agreement and shall not be affected by Lender's acquisition of any interest in any of the properties, whether by foreclosure or otherwise. Litigation and Claims. No litigation, claim, investigation, administrative proceeding or similar action (including those for unpaid taxes) against Borrower is pending or threatened, and no other event has occurred which may materially adversely affect Borrower's financial condition or properties, other than litigation, claims, or other events, if any, that have been disclosed to and acknowledged by Lender in writing. Taxes. To the best of Borrower's knowledge, all tax returns and reports of Borrower that are or were required to be filed, have been filed, and all taxes, assessments and other governmental charges have been paid in full, except those presently being or to be contested by Borrower in good faith in the ordinary course of business and for which adequate reserves have been provided. Lien Priority. Unless otherwise previously disclosed to Lender in writing, Borrower has not entered into or granted any Security Agreements, or permitted the filing or attachment of any Security Interests on or affecting any of the Collateral directly or indirectly securing repayment of Borrower's Loan and Note, that would be prior or that may in any way be superior to Lender's Security Interests and rights in and to such Collateral. Binding Effect. This Agreement, the Note, all Security Agreements directly or indirectly securing repayment of Borrower's Loan and Note and all of the Related Documents are binding upon Borrower as well as upon Borrower's successors, representatives and assigns, and are legally enforceable in accordance with their respective terms. Commercial Purposes. Borrower intends to use the Loan proceeds solely for business or commercial related purposes. Employee Benefit Plans. Each employee benefit plan as to which Borrower may have any liability complies in all material respects with all applicable requirements of law and regulations, and (i) no Reportable Event nor Prohibited Transaction (as defined in ERlSA) has occurred with respect to any such plan, (ii) Borrower has not withdrawn from any such plan or initiated steps to do so, (iii) no steps have been taken to terminate any such plan, and (iv) there are no unfunded liabilities other than those previously disclosed to Lender in writing. Location of Borrower's Offices and Records. Borrower's place of business, or Borrower's Chief executive office, if Borrower has more than one place of business, is located at 4034 Clipper Court, Fremont, CA 94538. Unless Borrower has designated otherwise in writing this location is also the office or offices where Borrower keeps its records concerning the Collateral. Year 2000. Borrower warrants and represents that all software utilized in the conduct of Borrower's business will have appropriate capabilities and compatiblity for operation to handle calendar dates falling on or after January 1, 2000, and all information pertaining to such calendar dates, in the same manner and with the same functionality as the software does respecting calendar dates falling on or before December 31, 1999. Further, Borrower warrants and represents that the data-related user interface functions, data-fields, and data-related program instructions and functions of the software include the indication of the century. Information. All information heretofore or oontemporaneously herewith furnished by Borrower to Lender for the purposes of or in connection with this Agreement or any transaction contemplated hereby is, and all information hereafter furnished by or on behalf of Borrower to Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified; and none of such information is or will be incomplete by omitting to state any material fact necessary to make such information not misleading. Survival of Representations and Warranties. Borrower understands and agrees that Lender, without independent investigation, is relying upon the above representations and warranties in extending Loan Advances to Borrower. Borrower further agrees that the foregoing representations and warranties shall be continuing in nature and shall remain in full force and effect until such time as Borrower's Indebtedness shall be paid in full, or until this Agreement shall be terminated in the manner provided above, whichever is the last to occur. AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while this Agreement is in effect, Borrower will: Litigation. Promptly inform Lender in writing of (a) all material adverse changes in Borrower's financial condition, and (b) all existing and all threatened litigation, claims, investigations, administrative proceedings or similar actions affecting Borrower or any Guarantor which could materially affect the financial condition of Borrower or the financial condition of any Guarantor. Financial Records. Maintain its books and records in accordance with generally accepted accounting principles, applied on a consistent basis, and permit Lender to examine and audit Borrower's books and records at all reasonable times. Financial Statements. Furnish Lender with, as soon as available, but in no event later than twenty five (25) days after the end of each month, Borrower's balance sheet and profit and loss statement for the period ended, prepared and certified as correct to the best knowledge and belief by Borrower's chief financial officer or other officer or person acceptable to Lender. All financial reports required to be provided under this Agreement shall be prepared in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Additional Information. Furnish such additional information and statements, lists of assets and liabilities, agings of receivables and payables, inventory schedules, budgets, forecasts, tax returns, and other reports with respect to Borrower's financial condition and business operations as Lender may request from time to time. Financial Covenants and Ratios. Comply with the following covenants and ratios: Tangible Net Worth. Maintain a minimum Tangible Net Worth of not less than $2,000,000.00. Net Worth Ratio. Maintain a ratio of Total Liabilities to Tangible Net Worth of less than 1.50 to 1.00. Other Ratio. Maintain a ratio of Minimum Quick Ratio: defined as, Cash + Marketable Securities + Net Trade Accounts Receivable (A/R) divided by Current Liabilities of 0.85 to 1.00. Except as provided above, all computations made to determine compliance with the requirements contained in this paragraph shall be made in accordance with generally accepted accounting principles, applied on a consistent basis, and certified by Borrower as being true and correct. Insurance. Maintain fire and other risk insurance, public liability insurance, and such ether isurance as Lender may require with respect to Borrower's properties and operations, in form, amounts, coverages and with insurance companies reasonably acceptable to Lender. 03-22-2000 LOAN AGREEMENT Page 5 Loan No 0108143855 (Continued) ================================================================================ Borrower, upon request of Lender, will deliver to Lender from time to time the policies or certificates of insurance in form satisfactory to Lender, including stipulations that coverages will not be cancelled or diminished without at least ten (10) days' prior written notice to Lender. Each insurance policy also shall include an endorsement providing that coverage in favor of Lender will not be impaired in any way by any act, omission or default of Borrower or any other person. In connection with all policies covering assets in which Lender holds or is offered a security interest for the Loans, Borrower will provide Lender with such loss payable or other endorsements as Lender may require. Insurance Reports. Furnish to Lender, upon request of Lender, reports on each existing insurance policy showing such information as Lender may reasonably request, including without limitation the following: (a) the name of the insurer; (b) the risks insured; (c) the amount of the policy; (d) the properties insured; (e) the then current property values on the basis of which insurance has been obtained, and the manner of determining those values; and (f) the expiration date of the policy. In addition, upon request of Lender (however not more often than annually), Borrower will have an independent appraiser satisfactory to Lender determine, as applicable, the actual cash value or replacement cost of any Collateral. The cost of such appraisal shall be paid by Borrower. Other Agreements. Comply with all terms and conditions of all other agreements, whether now or hereafter existing, between Borrower and any other party and notify Lender immediately in writing of any default in connection with any other such agreements. Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations, unless specifically consented to the contrary by Lender in writing. Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness and obligations, including without limitation all assessments, taxes, governmental charges, levies and liens, of every kind and nature, imposed upon Borrower or its properties, income, or profits, prior to the date on which penalties would attach, and all lawful claims that, if unpaid, might become a lien or charge upon any of Borrower's properties, income, or profits. Provided however, Borrower will not be required to pay and discharge any such assessment, tax, charge, levy, lien or claim so long as (a) the legality of the same shall be contested in good faith by appropriate proceedings, and (b) Borrower shall have established on its books adequate reserves with respect to such contested assessment, tax, charge, levy, lien, or claim in accordance with generally accepted accounting practices. Borrower, upon demand of Lender, will furnish to Lender evidence of payment of the assessments, taxes, charges, levies, liens and claims and will authorize the appropriate governmental official to deliver to Lender at any time a written statement of any assessments, taxes, charges, levies, liens and claims against Borrower's properties, income, or profits. Performance. Perform and comply with all terms, conditions, and provisions set forth in this Agreement and in the Related Documents in a timely manner, and promptly notify Lender if Borrower learns of the occurrence of any event which constitutes an Event of Default under this Agreement or under any of the Related Documents. Operations. Maintain executive and management personnel with substantially the same qualifications and experience as the present executive and management personnel; provide written notice to Lender of any change in executive and management personnel; conduct its business affairs in a reasonable and prudent manner and in compliance with all applicable federal, state and municipal laws, ordinances, rules and regulations respecting its properties, charters, businesses and operations, including without limitation, compliance with the Americans With Disabilities Act and with all minimum funding standards and other requirements of ERISA and other laws applicable to Borrower's employee benefit plans. Inspection. Permit employees or agents of Lender at any reasonable time to inspect any and all Collateral for the Loan or Loans and Borrower's other properties and to examine or audit Borrower's books, accounts, and records and to make copies and memoranda of Borrower's books, accounts, and records. If Borrower now or at any time hereafter maintains any records (including without limitation computer generated records and computer software programs for the generation of such records) in the possession of a third party, Borrower, upon request of Lender, shall notify such party to permit Lender free access to such records at all reasonable times and to provide Lender with copies of any records it may request, all at Borrower's expense. Compliance Certificate. Unless waived in writing by Lender, provide Lender at least annually and at the time of each disbursement of Loan proceeds with a certificate executed by Borrower's chief financial officer, or other officer or person acceptable to Lender, certifying that the representations and warranties set forth in this Agreement are true and correct as of the date of the certificate and further certifying that, as of the date of the certificate, no Event of Default exists under this Agreement. Environmental Compliance and Reports. Borrower shall comply in all respects with all environmental protection federal, state and local laws, statutes, regulations and ordinances; not cause or permit to exist, as a result of an intentional or unintentional action or omission on its part or on the part of any third party, on property owned and/or occupied by Borrower, any environmental activity where damage may result to the environment, unless such environmental activity is pursuant to and in compliance with the conditions of a permit issued by the appropriate federal, state or local governmental authorities; shall furnish to Lender promptly and in any event within thirty (30) days after receipt thereof a copy of any notice, summons, lien, citation, directive, letter or other communication from any governmental agency or instrumentality concerning any intentional or unintentional action or omission on Borrower's part in connection with any environmental activity whether or not there is damage to the environment and/or other natural resources. Additional Assurances. Make, execute and deliver to Lender such promissory notes, mortgages, deeds of trust, security agreements, financing statements, instruments, documents and other agreements as Lender or its attorneys may reasonably request to evidence and secure the Loans and to perfect all Security Interests. NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this Agreement is in effect, Borrower shall not, without the prior written consent of Lender: Indebtedness and Liens. (a) Except for trade debt incurred in the normal course of business and indebtedness to Lender contemplated by this Agreement, create, incur or assume indebtedness for borrowed money, including capital leases, (b) sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of Borrower's assets, or (c) sell with recourse any of Borrower's accounts, except to Lender. Continuity of Operations. (a) Engage in any business activities substantially different than those in which Borrower is presently engaged, (b) cease operations, liquidate, merge, transfer, acquire or consolidate with any other entity, change ownership, change its name, dissolve or transfer or sell Collateral out of the ordinary course of business, (c) pay any dividends on Borrower's stock (other than dividends payable in its stock), provided, however that notwithstanding the foregoing, but only so long as no Event of Default has occurred and is continuing or would result from the payment of dividends, if Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue Code of 1986, as amended), Borrower may pay cash dividends on its stock to its shareholders from time to time in amounts necessary to enable the shareholders to pay income taxes and make estimated income tax payments to satisfy their liabilities under federal and state law which arise solely from their status as Shareholders of a Subchapter S Corporation because of their ownership of shares of stock of Borrower, or (d) purchase or retire any of Borrower's outstanding shares or alter or amend Borrower's capital structure. Loans, Acquisitions and Guaranties. (a) Loan, invest in or advance money or assets, (b) purchase, create or acquire any interest in any other enterprise or entity, or (c) incur any obligation as surety or guarantor other than in the ordinary course of business. CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to Borrower, whether under this Agreement or under any other agreement, Lender shall have no obligation to make Loan Advances or to disburse Loan proceeds if: (a) Borrower or any Guarantor is in default under 03-22-2000 LOAN AGREEMENT Page 6 Loan No 0108143855 (Continued) ================================================================================ the terms of this Agreement or any of the Related Documents or any other agreement that Borrower or any Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent, files a petition in bankruptcy or similar proceedings, or is adjudged a bankrupt; (c) there occurs a material adverse change in Borrower's financial condition, in the financial condition of any Guarantor, or in the value of any Collateral securing any Loan; or (d) any Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any other loan with Lender. ADDITIONAL FINANCIAL REPORTING. Borrower agrees to the following: 1. To provide Lender with audited 10-K report with unqualified opinion within 120 days of filing. 2. A/R exam is not required at this time, however, if the proposed deal with Northern Brands, Inc. is not completed and this line of credit is not paid off prior to maturity, we will then require an A/R exam. EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default under this Agreement: Default on Indebtedness. Failure of Borrower to make any payment when due on the Loans. Other Defaults. Failure of Borrower or any Grantor to comply with or to perform when due any other term, obligation, covenant or condition contained in this Agreement or in any of the Related Documents, or failure of Borrower to comply with or to perform any other term, obligation, covenant or condition contained in any other agreement between Lender and Borrower. Default in Favor of Third Parties. Should Borrower or any Grantor default under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's or any Grantor's ability to repay the Loans or perform their respective obligations under this Agreement or any of the Related Documents. False Statements. Any warranty, representation or statement made or furnished to Lender by or on behalf of Borrower or any Grantor under this Agreement or the Related Documents is false or misleading in any material respect at the time made or furnished, or becomes false or misleading at any time thereafter. Defective Collateralization. This Agreement or any of the Related Documents ceases to be in full force and effect (including failure of any Security Agreement to create a valid and perfected Security Interest) at any time and for any reason. Insolvency. The dissolution or termination of Borrower's existence as a going business, the insolvency of Borrower, the appointment of a receiver for any part of Borrower's property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against Borrower. Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture proceedings, whether by judicial proceeding, self-help, repossession or any other method, by any creditor of Borrower, any creditor of any Grantor against any collateral securing the Indebtedness, or by any governmental agency. This includes a garnishment, attachment, or levy on or of any of Borrower's deposit accounts with Lender. However, this Event of Default shall not apply if there is a good faith dispute by Borrower or Grantor, as the case may be, as to the validity or reasonableness of the claim which is the basis of the creditor or forfeiture proceeding, and if Borrower or Grantor gives Lender written notice of the creditor or forfeiture proceeding and furnishes reserves or a surety bond for the creditor or forfeiture proceeding satisfactory to Lender. Events Affecting Guarantor. Any of the preceding events occurs with respect to any Guarantor of any of the Indebtedness or any Guarantor dies or becomes incompetent, or revokes or disputes the validity of, or liability under, any Guaranty of the Indebtedness. Lender, at its option, may, but shall not be required to, permit the Guarantor's estate to assume unconditionally the obligations arising under the guaranty in a manner satisfactory to Lender, and, in doing so, cure the Event of Default. Change In Ownership. Any change in ownership of twenty-five percent (25%) or more of the common stock of Borrower. Adverse Change. A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. Right to Cure. If any default, other than a Default on Indebtedness, is curable and if Borrower or Grantor, as the case may be, has not been given a notice of a similar default within the preceding twelve (12) months, it may be cured (and no Event of Default will have occurred) if Borrower or Grantor, as the case may be, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where otherwise provided in this Agreement or the Related Documents, all commitments and obligations of Lender under this Agreement or the Related Documents or any other agreement immediately will terminate (including any obligation to make Loan Advances or disbursements), and, at Lender's option, all Indebtedness immediately will become due and payable, all without notice of any kind to Borrower, except that in the case of an Event of Default of the type described in the "Insolvency" subsection above, such acceleration shall be automatic and not optional. In addition, Lender shall have all the rights and remedies provided in the Related Documents or available at law, in equity, or otherwise. Except as may be prohibited by applicable law, all of Lender's rights and remedies shall be cumulative and may be exercised singularly or concurrently. Election by Lender to pursue any remedy shall not exclude pursuit of any other remedy, and an election to make expenditures or to take action to perform an obligation of Borrower or of any Grantor shall not affect Lender's right to declare a default and to exercise its rights and remedies. MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of this Agreement: Amendments. This Agreement, together with any Related Documents, constitutes the entire understanding and agreement of the parties as to the matters set forth in this Agreement. No alteration of or amendment to this Agreement shall be effective unless given in writing and signed by the party or parties sought to be charged or bound by the alteration or amendment. Applicable Law. This Agreement has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Santa Clara County, the State of California. This Agreement shall be governed by and construed in accordance with the laws of the State of California. Caption Headings. Caption headings in this Agreement are for convenience purposes only and are not to be used to interpret or define the provisions of this Agreement. Consent to Loan Participation. Borrower agrees and consents to Lender's sale or transfer, whether now or later, of one or more participation interests in the Loans to one or more purchasers, whether related or unrelated to Lender. Lender may provide, without any limitation whatsoever, to any one or more purchasers, or potential purchasers, any information or knowledge Lender may have about Borrower or about any other matter relating to the Loan, and Borrower hereby waives any rights to privacy it may have with respect to such matters. Borrower additionally waives any and all notices of sale of participation interests, as well as all notices of any repurchase of such participation interests. Borrower also agrees that the purchasers of any such participation interests will be considered as the absolute owners of such interests in the Loans and will have all the 03-22-2000 LOAN AGREEMENT Page 7 Loan No 0108143855 (Continued) ================================================================================ rights granted under the participation agreement or agreements governing the sale of such participation interests. Borrower further waives all rights of offset or counterclaim that it may have now or later against Lender or against any purchaser of such a participation interest and unconditionally agrees that either Lender or such purchaser may enforce Borrower's obligation under the Loans irrespective of the failure or insolvency of any holder of any interest in the Loans. Borrower further agrees that the purchaser of any such participation interests may enforce its interests irrespective of any personal claims or defenses that Borrower may have against Lender. Costs and Expenses. Borrower agrees to pay upon demand all of Lender's expenses, including without limitation attorneys' fees, incurred in connection with the preparation, execution, enforcement, modification and collection of this Agreement or in connection with the Loans made pursuant to this Agreement. Lender may pay someone else to help collect the Loans and to enforce this Agreement, and Borrower will pay that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses, whether or not there is a lawsuit, including attorneys' fees for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. Notices. All notices required to be given under this Agreement shall be given in writing, may be sent by telefacsimile (unless otherwise required by law), and shall be effective when actually delivered or when deposited with a nationally recognized overnight courier or deposited in the United States mail, first class, postage prepaid, addressed to the party to whom the notice is to be given at the address shown above. Any party may change its address for notices under this Agreement by giving formal written notice to the other parties, specifying that the purpose of the notice is to change the party's address. To the extent permitted by applicable law, if there is more than one Borrower, notice to any Borrower will constitute notice to all Borrowers. For notice purposes, Borrower will keep Lender informed at all times of Borrower's current address(es). Severability. If a court of competent jurisdiction finds any provision of this Agreement to be invalid or unenforceable as to any person or circumstance, such finding shall not render that provision invalid or unenforceable as to any other persons or circumstances. If feasible, any such offending provision shall be deemed to be modified to be within the limits of enforceability or validity; however, if the offending provision cannot be so modified, it shall be stricken and all other provisions of this Agreement in all other respects shall remain valid and enforceable. Subsidiaries and Affiliates of Borrower. To the extent the context of any provisions of this Agreement makes it appropriate, including without limitation any representation, warranty or covenant, the word "Borrower" as used herein shall include all subsidiaries and affiliates of Borrower. Notwithstanding the foregoing however, under no circumstances shall this Agreement be construed to require Lender to make any Loan or other financial accommodation to any subsidiary or affiliate of Borrower. Successors and Assigns. All covenants and agreements contained by or on behalf of Borrower shall bind its successors and assigns and shall inure to the benefit of Lender, its successors and assigns. Borrower shall not, however, have the right to assign its rights under this Agreement or any interest therein, without the prior written consent of Lender. Survival. All warranties, representations, and covenants made by Borrower in this Agreement or in any certificate or other instrument delivered by Borrower to Lender under this Agreement shall be considered to have been relied upon by Lender and will survive the making of the Loan and delivery to Lender of the Related Documents, regardless of any investigation made by Lender or on Lender's behalf. Time Is of the Essence. Time is of the essence in the performance of this Agreement. Waiver. Lender shall not be deemed to have waived any rights under this Agreement unless such waiver is given in writing and signed by Lender. No delay or omission on the part of Lender in exercising any right shall operate as a waiver of such right or any other right. A waiver by Lender of a provision of this Agreement shall not prejudice or constitute a waiver of Lender's right otherwise to demand strict compliance with that provision or any other provision of this Agreement. No prior waiver by Lender, nor any course of dealing between Lender and Borrower, or between Lender and any Grantor, shall constitute a waiver of any of Lender's rights or of any obligations of Borrower or of any Grantor as to any future transactions. Whenever the consent of Lender is required under this Agreement, the granting of such consent by Lender in any instance shall not constitute continuing consent in subsequent instances where such consent is required, and in all cases such consent may be granted or withheld in the sole discretion of Lender. BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF MARCH 22, 2000. BORROWER: HUMAN PHEROMONE SCIENCES, INC. By: /s/ WILLIAM P. HORGAN --------------------------------------------------------- WILLIAM P. HORGAN, Chief Executive Officer LENDER: Mid-Peninsula Bank By: /s/ TERESA LINK --------------------------------------------------------- Authorized Officer ================================================================================ LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.25c (c) 2000 CFI ProServices, Inc. All rights reserved. [CA-C40 E3.28 F3.28 HUMAN99.LN C4.OVL] CHANGE IN TERMS AGREEMENT
- ------------------------------------------------------------------------------------------------------- Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials $1,500,000.00 07-01-2000 0108143855 2000 016 - ------------------------------------------------------------------------------------------------------- References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. - -------------------------------------------------------------------------------------------------------
Borrower: HUMAN PHEROMONE SCIENCES, INC. Lender: Mid-Peninsula Bank 4034 Clipper Court c/o Greater Bay Bancorp Fremont, CA 94538 2860 W. Bayshore Road Palo Alto, CA 94303 ================================================================================ Principal Amount: $1,500,000.00 Date of Agreement: March 22, 2000 DESCRIPTION OF EXISTING INDEBTEDNESS. Promissory Note dated March 15, 1999 in the original principal amount of $3,000,000.00, (the "Note"). DESCRIPTION OF COLLATERAL. Collateral as described in that Commercial Security Agreement dated August 17,1998. DESCRIPTION OF CHANGE IN TERMS. The maturity date of the Note is hereby extended from April 1, 2000 to July 1, 2000. The credit limit available under the terms of the Note is hereby decreased from $3,000,000.00 to $1,500,000.00. PROMISE TO PAY. HUMAN PHEROMONE SCIENCES, INC. ("Borrower") promises to pay to Mid-Peninsula Bank ("Lender"), or order, in lawful money of the United States of America, the principal amount of One Million Five Hundred Thousand & 00/100 Dollars ($1,500,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on July 1, 2000. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning April 1, 2000, and all subsequent interest payments are due on the same day of each month after that. The annual interest rate for this Agreement is computed on a 365/360 basis; that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to change from time to time based on changes in an independent index which is the Prime Rate as published in the Wall Street Journal (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans, If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often than each day. The Index currently is 8.750%. The interest rate to be applied to the unpaid principal balance of this Agreement will be at a rate of 1.000 percentage point over the Index, resulting in an initial rate of 9.750%. NOTICE: Under no circumstances will the interest rate on this Agreement be more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. Borrower agrees that all loan fees and other prepaid finance charges are earned fully as of the date of the loan and will not be subject to refund upon early payment (whether voluntary or as a result of default), except as otherwise required by law. In any event, even upon full prepayment of this Agreement, Borrower understands that Lender is entitled to a minimum interest charge of $250.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 5.000% of the unpaid portion of the regularly scheduled payment. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Agreement or any agreement related to this Agreement, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of Borrower's property or Borrower's ability to repay this Note or perform Borrower's obligations under this Note or any of the Related Documents. (d) Any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies or any of the other events described in this default section occurs with respect to any guarantor of this Agreement. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the Indebtedness is impaired. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision of this Agreement within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days, immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes all reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal balance on this Agreement and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon Borrower's failure to pay all amounts declared due pursuant to this section, including failure to pay upon final maturity, Lender, at its option, may also, if permitted under applicable law, increase the variable interest rate on this Agreement to 6.000 percentage points over the Index. Lender may hire or pay someone else to help collect this Agreement if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction), appeals, and any anticipated post-judgment collection services. Borrower also will pay any court costs, in addition to all other sums provided by law. This Agreement has been delivered to Lender and accepted by Lender in the State of California. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of Santa Clara County, the State of California. This Agreement shall be governed by and construed in accordance with the laws of the State of California. LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances under this Agreement may be requested either orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following party or parties are 03-22-2000 CHANGE IN TERMS AGREEMENT Page 2 Loan No 0108143855 (Continued) ================================================================================ authorized to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority: William P. Horgan, Chief Executive Officer; and Greg Fredrick. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Agreement at any time may be evidenced by endorsements on this Agreement or by Lender's internal records, including daily computer printouts. Lender will have no obligation to advance funds under this Agreement if: (a) Borrower or any guarantor is in default under the terms of this Agreement or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Agreement; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Agreement or any other loan with Lender; or (d) Borrower has applied funds provided pursuant to this Agreement for purposes other than those authorized by Lender. CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of the original obligation or obligations, including all agreements evidenced or securing the obligation(s), remain unchanged and in full force and effect. Consent by Lender to this Agreement does not waive Lender's right to strict performance of the obligation(s) as changed, nor obligate Lender to make any future change in terms. Nothing in this Agreement will constitute a satisfaction of the obligation(s). It is the intention of Lender to retain as liable parties all makers and endorsers of the original obligation(s), including accommodation parties, unless a party is expressly released by Lender in writing. Any maker or endorser, including accommodation makers, will not be released by virtue of this Agreement. If any person who signed the original obligation does not sign this Agreement below, then all persons signing below acknowledge that this Agreement is given conditionally, based on the representation to Lender that the non-signing party consents to the changes and provisions of this Agreement or otherwise will not be released by it. This waiver applies not only to any initial extension, modification or release, but also to all such subsequent actions. MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Agreement without losing them. Borrower and any other person who signs, guarantees or endorses this Agreement, to the extent allowed by law, waive any applicable statute of limitations, presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Agreement, and unless otherwise expressly stated in writing, no party who signs this Agreement, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE AGREEMENT. BORROWER: HUMAN PHEROMONE SCIENCES, INC. By: /s/ WILLIAM P. HORGAN --------------------------------------------------------- WILLIAM P. HORGAN, Chief Executive Officer ================================================================================ Variable Rate. Line of Credit. LASER PRO, Reg. U.S. Pat. & T.M. Off., Ver. 3.28c (c) 2000 CFI ProServices, Inc. All rights reserved. [CA-D20 E3.28 HUMAN99.LN C4.OVL] EX-23.1 3 CONSENTS OF EXPERTS AND COUNSEL Exhibit 23.1 CONSENT OF BDO SEIDMAN, LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-98836) pertaining to the Stock Plan and the Non-Employee Directors' Stock Option Plan of Human Pheromone Sciences, Inc. of our report dated February 15, 2000, with respect to the financial statements of Human Pheromone Sciences, Inc. as of December 31, 1999 and for the year then ended included in the Annual Report (Form 10-KSB) for the year ended December 31, 1999. /s/ BDO SEIDMAN, LLP San Jose, California March 29, 2000 30 EX-23.2 4 CONSENTS OF EXPERTS AND COUNSEL Exhibit 23.2 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-98836) pertaining to the Stock Plan and the Non-Employee Directors' Stock Option Plan of Human Pheromone Sciences, Inc. of our report dated March 19, 2000, with respect to the financial statements of Human Pheromone Sciences, Inc. included in the Annual Report (Form 10-KSB) for the year ended December 31, 1998. /s/ ERNST & YOUNG, LLP San Francisco, California March 29, 2000 31 EX-27 5 FINANCIAL DATA SCHEDULE
5 The Schedule Contains Summary Financial Information Extracted From Balance Sheets and Statements of Income 0000878616 HUMAN PHEROMONE SCIENCES, INC. 1 12-MOS DEC-31-1999 JAN-01-1999 DEC-01-1999 108,000 0 2,388,000 338,000 2,304,000 4,498,000 800,000 786,000 4,512,000 2,446,000 0 0 3,296,000 17,667,000 (18,897,000) 4,512,000 9,306,000 9,306,000 3,646,000 6,400,000 333,000 0 98,000 (844,000) 0 (844,000) 0 0 0 (844,000) (0.26) (0.26)
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