-----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, BGyZkthAYA4ArpOw6eaOCXksD0HW50Bl+rMndyB6w9KGNRXe7w9Dq4mIUf9C2zcZ ePcQnJCvH6wiBLcHRFhROQ== 0000903100-02-000160.txt : 20020515 0000903100-02-000160.hdr.sgml : 20020515 20020515172049 ACCESSION NUMBER: 0000903100-02-000160 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COLLAGENEX PHARMACEUTICALS INC CENTRAL INDEX KEY: 0001012270 STANDARD INDUSTRIAL CLASSIFICATION: PHARMACEUTICAL PREPARATIONS [2834] IRS NUMBER: 521758016 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-28308 FILM NUMBER: 02653838 BUSINESS ADDRESS: STREET 1: 41 UNIVERSITY DRIVE CITY: NEWTON STATE: PA ZIP: 18940 BUSINESS PHONE: 2155797388 MAIL ADDRESS: STREET 1: 41 UNIVERSITY DRIVE CITY: NEWTON STATE: PA ZIP: 18940 10-Q 1 form10q-033102.txt SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 ----------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2002 Commission File Number 0-28308 COLLAGENEX PHARMACEUTICALS, INC. --------------------------------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 52-1758016 - ---------------------------------- ---------------------------------- (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 41 University Drive, Newtown, PA 18940 - -------------------------------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (215) 579-7388 ------------------------------- (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: X No: ----- ----- Indicate the number of shares outstanding of each of the Registrant's classes of Common Stock as of April 15, 2002: Class Number of Shares --------------------------- ---------------- Common Stock $.01 par value 11,119,594 COLLAGENEX PHARMACEUTICALS, INC. TABLE OF CONTENTS ----------------- Page ---- PART I. FINANCIAL INFORMATION............................................. 1 Item 1. Financial Statements.......................................... 1 Condensed Consolidated Balance Sheets as of December 31, 2001 and March 31, 2002 (unaudited).............................. 2 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2001 and 2002 (unaudited)............ 3 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2001 and 2002 (unaudited)............ 4 Notes to Condensed Consolidated Financial Statements (unaudited)................................................. 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 9 Results of Operations.......................................... 10 Liquidity and Capital Resources................................ 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 21 PART II. OTHER INFORMATION................................................. 22 Item 2. Changes in Securities and Use of Proceeds...................... 22 Item 5. Other Information.............................................. 22 Item 6. Exhibits and Reports on Form 8-K............................... 23 SIGNATURES................................................................. 24 -i- PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. -1- COLLAGENEX PHARMACEUTICALS, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets December 31, 2001 and March 31, 2002 (dollars in thousands, except per share data)
DECEMBER 31, MARCH 31, ASSETS 2001 2002 ------------- ------------- (unaudited) Current assets: Cash and cash equivalents........................................... $ 6,171 $ 4,195 Accounts receivable, net of allowance of $950 and $1,067 at December 31, 2001 and March 31, 2002, respectively............... 4,478 5,698 Inventories......................................................... 1,402 1,483 Prepaid expenses and other current assets........................... 1,200 1,533 -------------- ------------- Total current assets.......................................... 13,251 12,909 Equipment and leasehold improvements, net........................... 537 639 Other assets........................................................ 910 885 -------------- ------------- Total assets.................................................. $ 14,698 $ 14,433 ============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of note payable..................................... $ 35 $ 15 Accounts payable.................................................... 3,769 4,436 Accrued expenses.................................................... 3,153 2,562 -------------- ------------- Total current liabilities..................................... 6,957 7,013 -------------- ------------- Deferred revenue.................................................... 614 552 Commitments Stockholders' equity: Preferred stock, $0.01 par value, 5,000,000 shares authorized; 200,000 shares of Series D cumulative convertible preferred stock issued and outstanding at December 31, 2001 and March 31, 2002 (liquidation value of $20,000 at March 31, 2002).................. 2 2 Common stock, $0.01 par value; 25,000,000 shares authorized, 10,999,573 and 11,116,019 shares issued and outstanding at December 31, 2001 and March 31, 2002, respectively............... 110 111 Common stock to be issued (103,196 shares at December 31, 2001 and none at March 31, 2002) ..................................... 840 -- Additional paid in capital.......................................... 80,129 81,266 Accumulated deficit................................................. (73,954) (74,511) -------------- ------------- Stockholders' equity.......................................... 7,127 6,868 -------------- ------------- Total liabilities and stockholders' equity.................... $ 14,698 $ 14,433 ============== =============
See accompanying notes to unaudited condensed consolidated financial statements. -2- COLLAGENEX PHARMACEUTICALS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations For the Three Months Ended March 31, 2001 and 2002 (dollars in thousands, except per share data) (unaudited)
THREE MONTHS ENDED MARCH 31, ----------------------------- 2001 2002 ----------- ----------- Revenues: Product sales........................................... $ 6,113 $ 9,881 Contract revenues....................................... 875 792 License revenues........................................ 36 87 ----------- ----------- Total revenues..................................... 7,024 10,760 ----------- ----------- Operating expenses: Cost of product sales................................... 1,366 1,580 Research and development................................ 944 829 Selling, general and administrative..................... 7,477 8,928 ----------- ----------- Total operating expenses.......................... 9,787 11,337 ----------- ----------- Operating loss.................................... (2,763) (577) Other income (expense): Interest income......................................... 63 22 Interest expense........................................ (3) (1) Other income (expense).................................. 12 (1) ----------- ----------- Net loss.......................................... (2,691) (557) ----------- ----------- Preferred stock dividend.................................. 420 420 ----------- ----------- Net loss allocable to common stockholders................. $ (3,111) $ (977) =========== =========== Basic and diluted net loss per share allocable to common stockholders............................................ $ (0.33) $ (0.09) =========== =========== Shares used in computing basic and diluted net loss per share allocable to common stockholders.................. 9,336,639 11,078,258 =========== ===========
See accompanying notes to unaudited condensed consolidated financial statements. -3- COLLAGENEX PHARMACEUTICALS, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2001 and 2002 (dollars in thousands) (unaudited)
THREE MONTHS ENDED MARCH 31, ---------------------------- 2001 2002 ---------- --------- Cash flows from operating activities: Net loss................................................ $ (2,691) $ (557) Adjustments to reconcile net loss to net cash used in operating activities: Noncash compensation expense........................ 7 -- Depreciation and amortization expense............... 64 90 Change in assets and liabilities: Accounts receivable............................... (438) (1,220) Inventories....................................... (227) (81) Prepaid expenses and other assets................. (1,523) (86) Accounts payable.................................. 621 667 Accrued expenses.................................. (349) (591) Deferred revenue.................................. (15) (62) ---------- --------- Net cash used in operating activities...... (4,551) (1,840) ---------- --------- Cash flows from investing activities: Capital expenditures.................................... (8) (167) Proceeds from the sale of short term investments........ 1,739 -- ---------- --------- Net cash provided by (used in) investing activities................................. 1,731 (167) ---------- --------- Cash flows from financing activities: Net proceeds from issuance of common stock.............. 6,878 51 Repayment of long-term debt............................. (18) (20) ---------- --------- Net cash provided by financing activities.. 6,860 31 ---------- --------- Net increase (decrease) in cash and cash equivalents...... 4,040 (1,976) Cash and cash equivalents at beginning of period.......... 3,709 6,171 ---------- --------- Cash and cash equivalents at end of period................ $ 7,749 $ 4,195 ========== ========= Supplemental schedule of noncash financing activities: Common stock dividends issued or to be issued on preferred stock.................................... $ 420 $ 420 ========== ========= Issuance of common stock to be issued................. 872 840 ========== ========= Issuance of warrants to purchase common stock in connection with equity line........................... -- 248 ========== ========= Supplemental disclosure of cash flow information: Cash paid during the period for interest.............. $ 3 $ 1 ========== =========
See accompanying notes to unaudited condensed consolidated financial statements. -4- COLLAGENEX PHARMACEUTICALS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 AND 2002 (DOLLARS IN THOUSANDS) (UNAUDITED) NOTE 1 -- BASIS OF PRESENTATION: The unaudited condensed consolidated financial statements included herein have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles generally accepted in the United States of America. Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated financial statements should be read in conjunction with the Company's 2001 audited consolidated financial statements and footnotes included in its Form 10-K for the year ended December 31, 2001. The accompanying unaudited condensed consolidated financial statements include the results of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. In the opinion of the Company's management, the accompanying unaudited condensed consolidated financial statements have been prepared on a basis substantially consistent with the audited consolidated financial statements and contain adjustments, all of which are of a normal recurring nature, necessary to present fairly the Company's consolidated financial position as of March 31, 2002, their results of operations for the three months ended March 31, 2001 and 2002, and their cash flows for the three months ended March 31, 2001 and 2002. Interim results are not necessarily indicative of results anticipated for the full fiscal year. NOTE 2 -- INVENTORIES: Inventories at December 31, 2001 and March 31, 2002 consisted of the following: 2001 2002 ---- ---- Raw materials $ 174 $ 347 Work-in-process 66 891 Finished goods 1,162 245 -------- -------- $ 1,402 $ 1,483 ======== ======== -5- NOTE 3 -- CHANGE IN ACCOUNTING PRINCIPLE: In the fourth quarter of 2000, the Company adopted SAB 101, "Revenue Recognition in Financial Statements", implementing a change in revenue recognition policy for certain upfront payments received in international licensing arrangements for Periostat(R). Effective January 1, 2000, upfront payments received from licensees, where the Company has continuing involvement, are now being deferred and recognized as license revenue over the estimated performance period of the individual license agreements. In previous years, prior to the Company's adoption of SAB 101, the Company recognized revenue when the upfront payments were received, generally upon the execution of each agreement. During the three months ended March 31, 2001 and 2002, the Company recognized $15 and $16, respectively, in license revenues which were deferred upon the implementation of SAB 101 as of January 1, 2000 and which were previously recognized as license revenues under the historical revenue recognition policy prior to the adoption of SAB 101. During 2000, the Company recorded a $764 charge as a result of the cumulative effect of the change in accounting principle for revenue recognized prior to January 1, 2000; $149 of this deferred revenue has been recognized through March 31, 2002. NOTE 4 -- COMMON STOCK AND DEBT FINANCINGS: On March 19, 2001, the Company consummated a one-year revolving credit facility (the "Facility") with Silicon Valley Bank (the "Bank"). The Facility was subsequently amended on March 22, 2002 to increase the amount available to the Company under the Facility to the lesser of $4,000 or 80% of eligible accounts receivable, as defined in the amendment. The amount available is also reduced by outstanding letters of credit which may be issued under this agreement in amounts totaling up to $1,500. The Facility may be used only for working capital purposes. The Company is not obligated to draw amounts under the Facility and any such draws under the Facility will bear interest at the then prevailing prime rate plus 1.0 to 1.5% per annum. The Company must also maintain (i) a tangible net worth of $5,000, subject to certain upward adjustments as defined in the amendment, as a result of profitable operation or additional debt or equity financings and (ii) a minimum of $2,000 in cash, net of borrowings under the facility, at all times during the term of the Facility, which expires March 15, 2004. Without the consent of the Bank, the Company, among other things, shall not (i) merge or consolidate with another entity; (ii) acquire assets outside the ordinary course of business; or (iii) pay or declare any cash dividends on the Company's Common Stock. In addition, the Company has secured its obligations under the Facility through the granting of a security interest in favor of the Bank with respect to all of the Company's assets, including its intellectual property. At March 31, 2002, there were no borrowings against the Facility, however, on March 26, 2002, the Company issued an irrevocable letter of credit under the Facility for $1,343. This letter of credit will be used to secure future purchases of inventory that the Company expects to make from a supplier. As the Company pays down amounts under the letter of credit, the amount available to the Company under the Facility will increase. On February 14, 2002, the Company entered into an equity line (the "Equity Line") arrangement under the terms of a Common Stock Purchase Agreement (the "Agreement") with -6- Kingsbridge Capital Limited ("Kingsbridge"). Under the terms of the Agreement, the Company may, at its sole discretion and from time to time over the next 12 months, sell shares of its Common Stock to Kingsbridge at a discount to market price of up to 10%, as determined prior to each such sale. The maximum amounts of individual draws is based on the Company's market capitalization and may not exceed $3,000 and availability is subject to certain representations, warranties and covenants of the Company. The Company has committed to: (i) draw down on the Equity Line an amount aggregating at least $1,500 in registered shares of Common Stock, prior to August 14, 2002 (the "Minimum Commitment Amount"); or (ii) if the Company has not satisfied such Minimum Commitment Amount, pay to Kingsbridge an amount equal to 10% of the amount by which the Minimum Commitment Amount exceeds the aggregate of all amounts drawn down under the Equity Line in respect of the shares of Common Stock issued and sold thereunder, except if the price of the Company's Common Stock is below certain levels during this period. The Equity Line provides for the sale of up to an aggregate $8,500 in registered shares of Common Stock. In connection with the consummation of the Equity Line, the Company issued to Kingsbridge a warrant to purchase 40,000 shares of Common Stock at an exercise price of $9.38 per share. Such warrant will not become exercisable until August 14, 2002, and will expire on August 13, 2007. The Company recorded the fair value of the warrants issued in connection with the Equity Line of approximately $248 as an increase to additional paid in capital and other current assets in the accompanying condensed consolidated balance sheet as of March 31, 2002. NOTE 5 -- COMMITMENTS: During 1999, the Company entered into a three-year co-promotion agreement with Merck & Co., Inc. for Vioxx under which the Company is committed to spend up to $1,000 annually for promotional expenses, unless the agreement is earlier terminated pursuant to the terms of the agreement. Pursuant to the terms of an exclusive License Agreement with Atrix Laboratories, the Company has committed to spend no less than $2,000 in advertising and selling expenses related to the licensed products during 2002, and the lesser of $4,000 or 30% of the Company's contribution margin, as defined in the agreement, relating to a specific Atrix product that the Company markets and the lesser of $2,000 or 30% of the Company's contribution margin, as defined in the agreement, relating to a separate Atrix product that the Company markets commencing with fiscal year 2003. For the three months ended March 31, 2002, the Company has fulfilled $439 of the $2,000 advertising and selling expense commitment for 2002. Accordingly, the Company's obligation as of March 31, 2002 is $1,561. Additionally, the Company must maintain a minimum amount of full time sales professionals and make a specific amount of sales presentations over the first 24 months of the agreement. On February 11, 2002, the Company executed a Co-operation, Development and Licensing Agreement with Thomas Skold pursuant to which the Company was granted an exclusive, sublicenseable, transferable license with respect to the Restoraderm(TM) topical drug delivery system which the Company intends to develop for dermatological applications. Pursuant to the terms of such agreement, upon the occurrence of certain events, the Company will be required to pay certain consulting, royalty and milestone payments in the aggregate amount of up to $4,170, of which no more than $533, $950, $1,650 and $1,037 shall be payable -7- prior to December 31, 2002, January 1, 2003, January 1, 2004 and January 1, 2005, respectively. The term of such agreement is for the life of any patent that may be issued to the Company for the first product the Company develops utilizing such technology, or, if the Company does not acquire any patentable products, seven years. NOTE 6 -- SUBSEQUENT EVENTS: At the Company's 2002 Annual Meeting of Stockholders held on May 9, 2002, the stockholders of the Company approved a proposal to amend the Company's 1996 Stock Option Plan (the "1996 Stock Option Plan") to increase the maximum number of shares of the Company's Common Stock available for issuance under the 1996 Stock Option Plan from 2,000,000 to 2,500,000 shares and to reserve an additional 500,000 shares of the Company's Common Stock for issuance in connection with awards granted under the 1996 Stock Option Plan. -8- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. OVERVIEW CollaGenex Pharmaceuticals, Inc. and subsidiaries is a specialty pharmaceutical company currently focused on providing innovative medical therapies to the dental and dermatology markets. Our first product, Periostat, is an orally administered, prescription pharmaceutical product that was approved by the United States Food and Drug Administration in September 1998 and is the first and only pharmaceutical to treat adult periodontitis by inhibiting the enzymes that destroy periodontal support tissues. We are marketing Periostat to the dental community through our own professional dental pharmaceutical sales force of approximately 120 sales representatives and managers. Pursuant to an exclusive License and Marketing Agreement with Atrix Laboratories, Inc., we began, in October 2001, to actively market Atrix's proprietary dental products, Atridox(R), Atrisorb FreeFlow(R) and Atrisorb-D(R), to the United States dental market. We distribute Periostat through drug wholesalers and large retail chains in the United States and the United Kingdom. The Atrix dental products are distributed through a specialty distributor who sells these products directly to dental practitioners in the United States. Our sales force also co-promotes Vioxx, a prescription non-steroidal anti-inflammatory drug developed by Merck & Co., Inc., in the United States, and Pandel(R), a topical corticosteroidal product developed by Altana Inc. and indicated for dermatologic use. We began operations in January 1992 and functioned primarily as a research and development company until 1998. During this period, we operated with a minimal number of employees, and substantially all of our pharmaceutical development activities were contracted to independent contract research and other organizations. Following FDA approval of Periostat in September 1998, we significantly increased our number of employees, primarily in the areas of sales and marketing. We continue to contract our research and development activities as well as manufacturing, warehousing and distribution functions. We have incurred losses each year since inception and have an accumulated deficit of $74.5 million at March 31, 2002. Statements contained or incorporated by reference in this Quarterly Report on Form 10-Q that are not based on historical fact are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may be identified by the use of forward-looking terminology such as "may," "will," "expect," "estimate," "anticipate," "continue," or similar terms, variations of such terms or the negative of those terms. This Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our business of selling, marketing and developing pharmaceutical products is subject to a number of significant risks, including risks relating to the implementation of our sales and marketing plans for Periostat and other products that we market, risks inherent in research and development activities, risks associated with conducting business in a highly regulated environment and uncertainty relating to clinical trials of products under development. Our success depends to a large degree upon the market acceptance of Periostat by periodontists, dental practitioners, other health care providers, patients and insurance companies. Periostat has been approved by the FDA for marketing in the United States, approved by the Medicines -9- Control Agency for marketing in the United Kingdom and approved for marketing in Austria, Finland and Israel. There can be no assurance that any of our other product candidates will be approved by any regulatory authority for marketing in any jurisdiction or, if approved, that any such products will be successfully commercialized by us. In addition, there can be no assurance that we will successfully commercialize Vioxx, Pandel, Atridox, Atrisorb FreeFlow and Atrisorb-D. As a result of these risks, and others expressed from time to time in our filings with the Securities and Exchange Commission, our actual results may differ materially from the results discussed in the forward-looking statements contained herein. Periostat(R), Metastat(R), Dermostat(R), Nephrostat(R), Osteostat(R), Arthrostat(R), Rheumastat(R), Corneostat(R), Gingistat(R), IMPACS(TM), PS20(TM), The Whole Mouth Treatment(TM), Restoraderm(TM) and Dentaplex(TM) are United States trademarks of CollaGenex Pharmaceuticals, Inc. Periostat(R), Nephrostat(R), Optistat(R), and Xerostat(R) are European Community trademarks of CollaGenex Pharmaceuticals, Inc. Periostat(R), Nephrostat(R), Optistat(R), Xerostat(R), IMPACS(R) and Dentaplex(R) are United Kingdom trademarks of our wholly-owned subsidiary, CollaGenex International Limited. CollaGenex(R) and PS20(R) are both European Community and United Kingdom trademarks of CollaGenex International Limited. All other trade names, trademarks or service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners and are not property of CollaGenex Pharmaceuticals, Inc. or any of our subsidiaries. RESULTS OF OPERATIONS During the three months ended March 31, 2002, we achieved net product sales of $9.9 million, including approximately $9.0 million from the sale of Periostat and approximately $900,000 from the sale of Atridox, Atrisorb FreeFlow and Atrisorb-D. We launched each of Atridox and Atrisorb FreeFlow in October 2001, and launched Atrisorb-D in February 2002. In addition, during the three months ended March 31, 2002, we generated $792,000 in contract revenues from our two (2) co-promotion agreements for Vioxx and Pandel, and $87,000 in licensing revenue. Critical Accounting Judgments and Estimates Management's discussion and analysis of its financial position and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make judgments and estimates that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Management believes the critical accounting policies and areas that require the most significant judgments and estimates to be used in the preparation of the consolidated financial statements pertain to revenue recognition. We recognize sales revenue upon shipment, net of estimated returns, provided that collection is determined to be probable and no significant obligations remain. Sales revenue from our customers is subject to agreements allowing limited rights of return, rebates and price protection. Accordingly, we reduce revenue recognized for estimated future returns, rebates and price protection at the time the related revenue is recorded. The estimates for returns are -10- adjusted periodically based upon historical rates of returns, inventory levels in the distribution channel and other related factors. While management believes it can make reliable estimates for these matters, unsold products in these distribution channels may be exposed to expiration. Accordingly, it is possible that these estimates will change in the future or that the actual amounts could vary materially from our estimates and that the amounts of such changes could impact our results of operations, financial condition and our business. Since our inception, a portion of our revenue has been generated from license and distribution agreements for our products. We recognize nonrefundable signing or license fees that are not dependent on future performance under these agreements as revenue when received and over the term of the arrangement if we have continuing performance obligations. Any amounts deferred are amortized to revenue over the expected performance period of each underlying agreement. The expected performance period is based on management's best estimate and subject to change based on current market conditions. Deferred revenue represents the portion of up front license payments received that has not been earned. Milestone revenue from licensing arrangements is recognized upon completion of the milestone event or requirement if it represents the achievement of a significant step in the research, development or regulatory process. Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001 REVENUES - -------------------------------------------------------------------------------- Revenues 2002 CHANGE 2001 (dollars in thousands) ---- ------ ---- - -------------------------------------------------------------------------------- Product Sales $ 9,881 62% $ 6,113 - -------------------------------------------------------------------------------- Contract Revenues 792 (9%) 875 - -------------------------------------------------------------------------------- License Revenues 87 142% 36 --------- --------- - -------------------------------------------------------------------------------- Total $ 10,760 53% $ 7,024 - -------------------------------------------------------------------------------- Total revenues during the three months ended March 31, 2002 were $10.8 million, representing a 53% increase over total revenues of $7.0 million during the three months ended March 31, 2001. Such 2002 revenues included approximately $9.0 million in net sales of Periostat, approximately $900,000 in net sales of Atridox, Atrisorb FreeFlow and Atrisorb-D, $792,000 in contract revenues, which were derived from our co-promotion of Vioxx and Pandel, and $87,000 in foreign license and milestone revenues for Periostat. Product sales increased $3.8 million, or 62%, during the three months ended March 31, 2002 to $9.9 million compared to $6.1 during the three months ended March 31, 2001, mainly as a result of the Direct-To-Consumer, or DTC, advertising campaign for Periostat in addition to new incremental sales of the Atrix products we market. Total revenues during the three months ended March 31, 2001 included $6.1 million in net sales of Periostat, $875,000 in contract revenues, which were derived from our co-promotion of Vioxx and Denavir, a prescription cold sore medication owned by Novartis Pharmaceuticals Corporation, and $36,000 in license revenues. Revenues from Denavir accounted for approximately $175,000 of such contract revenues. Novartis, which acquired Denavir from SmithKline Beecham Consumer Healthcare in early 2001, terminated our Co-Promotion -11- Agreement with respect to Denavir effective April 13, 2001. We have not recognized any revenue with respect to sales of Denavir since April 2001. There were no sales of Atridox, Atrisorb FreeFlow or Atrisorb-D in the first quarter of 2001. In accordance with SAB 101, which we adopted in 2000, $16,000 and $15,000 of our licensing revenues recorded during each of the three months ended March 31, 2002 and March 31, 2001, respectively, were attributable to our recognition of previously recognized up-front license fees received for various agreements that were deferred upon the adoption of SAB 101 and are being recognized as income over the expected performance period of these agreements. COST OF PRODUCT SALES - -------------------------------------------------------------------------------- Cost of Product Sales 2002 CHANGE 2001 (dollars in thousands) ---- ------ ---- - -------------------------------------------------------------------------------- Cost of Product Sales $ 1,580 16% $ 1,366 - -------------------------------------------------------------------------------- Percent of Product Sales 16.0% 22.3% - -------------------------------------------------------------------------------- Cost of product sales includes product packaging, third-party royalties, amortization of new product licensing fees, and the costs associated with the manufacturing, storage and stability of Periostat and the Atrix products. Cost of product sales were $1.6 million, or 16.0% of product sales during the three months ended March 31, 2002, compared to $1.4 million, or 22.3% of product sales during the three months ended March 31, 2001. Cost of product sales increased in absolute dollars but decreased as a percentage of product sales during such period in 2002 compared to 2001, primarily due to our continued manufacturing cost savings for Periostat tablets, which we launched in July 2001. For Periostat, cost of product sales as a percent of sales, declined to 13.7% during the three months ended March 31, 2002 from 22.3% during the three months ended March 31, 2001. The cost of product sales for Atridox, Atrisorb FreeFlow and Atrisorb-D were 39.0% for the first quarter of 2002. RESEARCH AND DEVELOPMENT - -------------------------------------------------------------------------------- Research and Development 2002 CHANGE 2001 (dollars in thousands) ---- ------ ---- - -------------------------------------------------------------------------------- Research and Development $ 829 (12%) $ 944 - -------------------------------------------------------------------------------- Percentage of Total Revenue 7.7% 13.4% - -------------------------------------------------------------------------------- Research and development expenses consist primarily of funds paid to third parties for the provision of services and materials for drug development, manufacturing and formulation enhancements, clinical trials, statistical analysis and report writing and regulatory compliance costs. Research and development expenses decreased to $829,000 during the three months ended March 31, 2002 from $944,000 during the three months ended March 31, 2001. This decrease of $115,000, or 12%, was mainly the result of higher research and clinical development expenses incurred exclusively in 2001 for Metastat, our antiangiogenesis drug, and Dentaplex, a -12- nutritional supplement, as well as European regulatory expenses for Periostat. This was partially offset by the initial spending in 2002 for clinical trials for Periostat in dermatologic and opthalmologic indications. Development projects contracted during the three months ended March 31, 2002 included our continuation of a feasibility study and formulation development work for a once-a-day formulation of Periostat and our Restoraderm technology, which totaled $155,000 and $70,000, respectively. Future development of the once-a-day technology will be contingent on the outcome of the initial phase of the project, which is expected to be determined by mid-2002. Additional expenses ranging from approximately $1.0 million in 2002 to as much as $6.0 million through completion could be incurred if the project is successful. Clinical projects totaling $273,000 were conducted during the three months ended March 31, 2001 and included several Phase IV studies for Periostat in various dental indications and the continuation of clinical trials for Periostat in dermatological indications. We are currently in discussions with the FDA regarding protocols for additional trials with Periostat for acne and rosacea. Until these discussions are finalized, it is premature to estimate the future costs associated with the continued development of Periostat for dermatological indications. Other expenses incurred during the three months ended March 31, 2002 included $44,000 in regulatory consulting and filing fees under the Mutual Recognition Procedure in Europe and $61,000 for various regulatory costs, including annual FDA filing fees, legal, and regulatory expenses in the United States. Direct salaries and other personnel expenses incurred during the three months ended March 31, 2002 were $145,000. Additionally, during such period we incurred $81,000 in travel and other office expenses. Research and development expenses incurred during the three months ended March 31, 2001 included $130,000 in research grants to various academic institutions for conducting research related to our core technology, $105,000 in Periostat Phase IV clinical trial grants, $180,000 in contracted clinical and development expenses related to a safety and pharmacokinetic study for Metastat and other IMPACS compounds in the development stage and $180,000 in manufacturing development and validation expenses for Dentaplex. Other expenses incurred during the three months ended March 31, 2001 included $90,000 in regulatory consulting and filing fees under the Mutual Recognition Procedure in Europe and $92,000 for various regulatory costs, including annual FDA filing fees and legal and regulatory expenses in the United States related to obtaining FDA approval for Periostat tablets. Research and development expenses incurred during the three months ended March 31, 2001 also included $122,000 in direct salaries and other personnel related expenses and $45,000 in travel and other office expenses. SELLING, GENERAL AND ADMINISTRATIVE - -------------------------------------------------------------------------------- Selling, General and Administrative 2002 CHANGE 2001 (dollars in thousands) ---- ------ ---- - -------------------------------------------------------------------------------- Selling, General and Administrative $ 8,928 19% $ 7,477 - -------------------------------------------------------------------------------- Percentage of Total Revenue 83.0% 106.4% - -------------------------------------------------------------------------------- -13- Selling, general and administrative expenses consist primarily of personnel salaries and benefits, direct marketing costs, professional, legal and consulting fees, insurance and general office expenses. Selling, general and administrative expenses increased 19% to $8.9 million during the three months ended March 31, 2002 from $7.5 million during the three months ended March 31, 2001. Significant components of selling, general and administrative expenses incurred during the three months ended March 31, 2002 included $4.4 million in direct selling and sales training expenses, $3.2 million in marketing expenses (including Periostat DTC advertising expenditures, launch expenditures for the Atrix products and co-promotion expenses relating to Vioxx and Pandel) and $1.3 million in general and administrative expenses, which include business development, finance and corporate activities. Significant components of selling, general and administrative expenses during the three months ended March 31, 2001 included $3.3 million in direct selling and training expenses, $3.1 million in marketing expenses (including Periostat DTC advertising expenditures and co-promotion expenses related to Vioxx) and $1.1 in general and administrative expenses. This increase of $1.4 million, or 19%, from the three months ended March 31, 2001 to the three months ended March 31, 2002, was primarily the result of increases in incentive compensation and salaries for our dental sales force, which are directly related to higher sales during this period. Additionally, we incurred an incremental $200,000 in selling expenses associated with our Pandel sales initiative, which we began in 2002. During the three months ended March 31, 2002 we incurred $1.5 million in DTC advertising expenses compared to $1.4 million during the same period in 2001. OTHER INCOME/EXPENSE - -------------------------------------------------------------------------------- Other Income / Expense 2002 CHANGE 2001 ---- ------ ---- - -------------------------------------------------------------------------------- Interest Income $ 22,000 (65%) $ 63,000 - -------------------------------------------------------------------------------- Interest Expense $ 1,000 (67%) $ 3,000 - -------------------------------------------------------------------------------- Other (Expense) Income $ (1,000) N/A $ 12,000 - -------------------------------------------------------------------------------- Interest income decreased to $22,000 for the three months ended March 31, 2002 compared to $63,000 for the three months ended March 31, 2001. This decrease was due to lower average balances in cash and short-term investments and lower investment yields during the three months ended March 31, 2002. Interest expense for the three months ended March 31, 2002 was $1,000, compared to $3,000 for the year ended December 31, 2001. Other expense during the three months ended March 31, 2002 was $1,000. Other income during the three months ended March 31, 2001 of $12,000 was recognized as a result of foreign currency transactions. PREFERRED STOCK DIVIDEND Preferred stock dividends were $420,000 during each of the three months ended March 31, 2002 and March 31, 2001. Such preferred stock dividends, paid in shares of our Common -14- Stock, were the result of our obligations in connection with the issuance of our Series D Preferred Stock in May 1999. Beginning in mid-2002, as more fully set forth in the Amended Certificate of Designation, Preferences and Rights of the Series D Cumulative Convertible Preferred Stock, we will no longer pay dividends on the Series D Preferred Stock in shares of our Common Stock, and will become obligated to pay such dividends in cash, at a rate equal to 8% per annum. LIQUIDITY AND CAPITAL RESOURCES Since our origin in January 1992, we have financed our operations through private placements of our preferred and Common Stock, an initial public offering of 2,000,000 shares of Common Stock, which generated net proceeds to us of approximately $18.0 million after underwriting fees and related expenses, and a subsequent public offering of 1,000,000 shares of Common Stock, which generated net proceeds to us of approximately $11.6 million after underwriting fees and related expenses. On May 12, 1999, we consummated a $20.0 million financing through the issuance of our Series D cumulative convertible preferred stock, which generated net proceeds to us of $18.5 million. The issuance of the Series D Preferred Stock was approved by a majority of our stockholders at our Annual Meeting of Stockholders on May 11, 1999. A portion of the proceeds of the preferred stock financing consummated in May 1999 were used to repay a $10.0 million senior secured convertible note provided by one of the investors on March 19, 1999 in connection with such financing. The remaining proceeds have been and will be used for general working capital purposes. The Series D Preferred Stock is convertible at any time into shares of our Common Stock at a current conversion price of $9.91 per share, which conversion price reflects a decrease from the initial conversion price of $11.00 per share as a result of both a Common Stock financing in March 2001 and the sale of shares of our Common Stock to Atrix Laboratories, Inc. in August 2001. Such conversion price is not subject to reset except in the event that we should fail to declare and pay dividends when due or we should issue new equity securities or convertible securities at a price per share or having a conversion price per share lower than the then applicable conversion price of the Series D Preferred Stock. During the first three years following issuance, holders of the Series D Preferred Stock have and are entitled to receive dividends payable in shares of fully registered Common Stock at a rate of 8.4% per annum. Thereafter, and beginning in 2002, dividends will be payable in cash at a rate of 8.0% per annum. All or a portion of the shares of Series D Preferred Stock shall, at our option (as determined by our board of directors), automatically be converted into fully paid, registered and non-assessable shares of Common Stock, if the following two conditions are met: (i) the last sale price, or, in case no such sale takes place on such day, the average of the closing bid and asked prices on the Nasdaq National Market is at least 200% of the conversion price then in effect (as of March 31, 2002, such conversion price was $9.91 per share) for forty consecutive trading days; and (ii) a shelf registration statement is in effect for the shares of Common Stock to be issued upon conversion of the Series D Preferred Stock. Without written approval of a majority of the holders of record of the Series D Preferred Stock, we, among other things, shall not: (i) declare or pay any dividend or distribution on any shares of our capital stock other than dividends on the Series D Preferred Stock; (ii) make any loans, incur any indebtedness or -15- guarantee any indebtedness, advance capital contributions to, or investments in any person, issue or sell any securities or warrants or other rights to acquire our debt securities, except that we may incur such indebtedness in any amount not to exceed $10.0 million in the aggregate outstanding at any time for working capital requirements in the ordinary course of business; or (iii) make research and development expenditures in excess of $7.0 million in any continuous twelve month period, unless we have reported positive net income for four consecutive quarters immediately prior to such twelve month period. In April 1999, we received $219,000 in proceeds from our issuance of a note payable. We used the proceeds of such note to fund the purchase of equipment, fixtures and furniture for our corporate offices in Newtown, Pennsylvania. The term of the note is three years at 9.54% per annum, with monthly minimum payments of principal and interest. On March 12, 2001, we consummated a private equity offering of 1,500,000 shares of Common Stock for an aggregate purchase price of $7.5 million, which generated net proceeds to us of approximately $6.8 million. We are using such proceeds primarily for our DTC advertising campaign and for general working capital purposes. In addition, the investors in such financing were also issued an aggregate of 400,000 warrants which are exercisable for up to three (3) years from the date of such financing into 400,000 shares of our Common Stock at an exercise price per share of $6.00. The consideration received for such warrants is included in the aggregate proceeds received in such financing. We also issued to our financial advisor in such financing warrants to purchase an aggregate of 150,000 shares of our Common Stock exercisable for up to three (3) years at an exercise price of $5.70 per share, as partial consideration for services rendered in connection with the financing. Such warrants may be deemed automatically exercised in certain circumstances based upon our stock price. In connection with the March 2001 financing, we are obligated to maintain the effectiveness of a shelf registration statement with respect to all such shares of Common Stock issued and shares underlying all such warrants for a continuous twenty-four (24) month period, or we will be required to issue to the investors and the financial advisor an additional 27,500 shares of our Common Stock, in the aggregate, for no additional consideration. On March 19, 2001, we consummated a revolving credit facility with Silicon Valley Bank, which was subsequently amended in March 2002. The credit facility, as amended, extends through March 15, 2004. We may borrow up to the lesser of $4.0 million or 80% of eligible accounts receivable, as defined under the credit facility. The amount available to us is also reduced by outstanding letters of credit which may be issued under the credit facility in amounts totaling up to $1.5 million. On March 26, 2002, we secured our expected purchase order commitments for Periostat from Pharmaceutical Manufacturing Research Services, Inc., a contract manufacturing company, with a letter of credit under the credit facility for approximately $1.3 million. As we pay down amounts under the letter of credit, the amount available to us under the Facility will increase. We are not obligated to draw amounts and any such borrowings bear interest, payable monthly, currently at the prime rate plus 1.0 to 1.5% per annum and may be used only for working capital purposes. Without the consent of the Silicon Valley Bank, we, among other things, shall not (i) merge or consolidate with another entity; (ii) acquire assets outside the ordinary course of business; or (iii) pay or declare any cash dividends on our Common Stock. We must also maintain a certain tangible net worth and a minimum of $2.0 million in cash at Silicon Valley Bank, net of borrowings under the credit -16- facility, at all times during the term thereto. In addition, we have secured our obligations under the credit facility through the granting of a security interest in favor of the bank with respect to all of our assets, including our intellectual property. As of March 31, 2002, we had no current borrowings outstanding against the credit facility. On August 24, 2001, we signed a License and Marketing Agreement with Atrix Laboratories, Inc. to market Atrix's proprietary dental products, Atridox, Atrisorb FreeFlow and Atrisorb-D, to the United States dental market. Pursuant to the terms of this agreement, among other things: (i) Atrix will manufacture the dental products for us at an agreed upon transfer price and will receive royalties on future net sales of the products each calendar year; (ii) we paid to Atrix a $1.0 million licensing fee to market such products; (iii) we have committed to no less than $2.0 million in advertising and selling expenses related to the Atrix products during the fiscal year beginning January 1, 2002; (iv) we have agreed to maintain, for a period of 24 months, a force of no less than ninety (90) full time dental consultants and divisional and regional managers to make sales and product recommendation calls on dental professionals; and (v) we have agreed that the Atrix products will be the subject of a specific number of detail calls in the United States during 2002. We will also be required to make certain minimum expenditures for advertising and promotional activities after 2002, including: (i) the lesser of $4,000,000 or 30% of our contribution margin relating to a specific Atrix product that we market, and (ii) the lesser of $2,000,000 or 30% of our contribution margin relating to a separate Atrix product that we market. In addition, pursuant to the terms of a Stock Purchase Agreement that we executed with Atrix, dated August 24, 2001, Atrix purchased 330,556 unregistered shares of our Common Stock for an aggregate purchase price of approximately $3.0 million. As a result of the sale of such shares to Atrix, the conversion price of our Series D Preferred Stock was reduced from $9.94 to $9.91 per share. On February 14, 2002, we entered into an equity line arrangement under the terms of a Common Stock purchase agreement with Kingsbridge Capital Limited. Pursuant to this agreement, we may, at our sole discretion and from time to time over the next 12 months, sell shares of our Common Stock to Kingsbridge at a discount to market price, as determined prior to each such sale. We have committed to: (i) draw down on this equity line, an amount aggregating at least $1.5 million in registered shares of Common Stock, prior to August 14, 2002; or (ii) if, prior to August 14, 2002, we have not drawn down an amount aggregating at least $1.5 million in registered shares of Common Stock, we will be obligated to pay Kingsbridge, in cash, an amount equal to 10% of the amount by which $1.5 million exceeds the aggregate of all amounts drawn down by us under the equity line up to that date. The equity line provides for the sale of up to $8.5 million in registered shares of our Common Stock to Kingsbridge. Additionally, in connection with the consummation of the equity line and pursuant to the terms of a warrant agreement executed by us, we issued Kingsbridge a warrant to purchase 40,000 shares of our Common Stock at an exercise price of $9.38 per share. The conversion price of our Series D Preferred Stock was not reduced as a result of such issuance. Such warrant will not become exercisable until August 14, 2002, and will thereafter expire on August 13, 2007. We have registered the shares of our Common Stock which may be issued by us under the -17- equity line and upon any exercise of the warrant by Kingsbridge, under our recent shelf registration statement on Form S-3, which registered an aggregate of 964,880 shares of our Common Stock for use in connection the equity line. On April 29, 2002, the Securities and Exchange Commission declared such shelf registration statement on Form S-3 effective. At March 31, 2002, we had cash, cash equivalents and short-term investments of approximately $4.2 million, a decrease of $2.0 million from the $6.2 million balance at December 31, 2001. In accordance with investment guidelines approved by our Board of Directors, cash balances in excess of those required to fund operations have been invested in short-term United States Treasury securities and commercial paper with a credit rating no lower than A1/P1. Our working capital at March 31, 2002 was $5.9 million, a decrease of $400,000 from $6.3 million at December 31, 2001. This decrease was primarily attributable to our continued use of cash to fund operations during the quarter ended March 31, 2002. We anticipate that our existing working capital will be sufficient to fund our current operations through at least the end of 2002 and that existing cash and cash equivalents, internally generated funds from operations and the anticipated cash inflows from both our equity line of credit with Kingsbridge and our revolving credit facility with Silicon Valley Bank will be sufficient to support our operations through 2003. Our actual future cash requirements, however, will depend on many factors, including market acceptance of our products and technology. We believe that other key factors that could affect our internal and external sources of cash are: o Revenues and margins from sales of Periostat and other products and contracted services; o The success of our dermatology franchise; o The success of our pre-clinical, clinical and development programs; o The receptivity of the capital markets to future financings; o Our ability to enter into additional strategic collaborations and to maintain existing and new collaborations and the success of such collaborations; and o Our ability to meet the covenant requirements under our revolving credit facility. CONTRACTUAL OBLIGATIONS Our major outstanding contractual obligations relate to cash dividends on our Series D Preferred Stock outstanding, operating leases for our office space and other contractual commitments with our marketing partners for certain selling and promotional expenses associated with the products we are currently detailing. Additionally, we also expect to make certain inventory purchases from our contract manufacturer of Periostat, guaranteed by our irrevocable Letter of Credit with Silicon Valley Bank. Our Series D Preferred Stock paid dividends in Common Stock at a rate of 8.4% per -18- annum from the date of issuance of such Series D Preferred Stock through May 11, 2002. After May 11, 2002, the Series D Preferred Stock pays dividends in cash at a rate of 8.0% per annum. The Series D Preferred Stock is convertible into our Common Stock at a current conversion price of $9.91 per share, subject to adjustment, at any time by the holder and under certain conditions by us. The conversion price of the Series D Preferred Stock is subject to adjustment in the event we fail to declare or pay dividends when due or should we issue new equity securities or convertible securities at a price per share or having a conversion price per share lower than the applicable conversion price of the Series D Preferred Stock. In May 1999, we entered into a lease agreement relating to our office space in Newtown, Pennsylvania. The lease has an initial term of 10 years. Rent is expected to be approximately $318,000 per year and is subject to market adjustments at the end of the 5th year. In August of 1999, we entered into a three-year co-promotion agreement with Merck & Co., Inc. for Vioxx under which we are committed to spend up to $1.0 million annually for promotional expenses, unless the agreement is earlier terminated. Pursuant to our License and Marketing Agreement with Atrix Laboratories, we have committed to: (i) expend no less than $2.0 million in advertising and selling expenses related to the Atrix products during the fiscal year beginning January 1, 2002; (ii) maintain, through 2003, a force of no less than ninety (90) full time dental consultants and divisional and regional managers to make sales and product recommendation calls on dental professionals; and (iii) make the Atrix products the subject of a specific number of detail calls in the United States during 2002. We will also be required to make certain minimum expenditures for advertising and promotional activities after 2002, including: (i) the lesser of $4,000,000 or 30% of our contribution margin, as defined in the agreement, relating to a specific Atrix product that we market, and (ii) the lesser of $2,000,000 or 30% of our contribution margin, as defined in the agreement, relating to a separate Atrix product that we market. For the three months ended March 31, 2002, the Company has fulfilled $439,000 of the $2,000,000 advertising and selling expense commitment for 2002. Accordingly, the Company's obligation as of March 31, 2002 is $1,561,000. On February 11, 2002, we executed a Co-operation, Development and Licensing Agreement with Thomas Skold pursuant to which we were granted an exclusive, sublicenseable, transferable license with respect to the Restoraderm(TM) topical drug delivery system which we intend to develop for dermatological applications. Pursuant to the terms of such agreement, upon the occurrence of certain events, we will be required to pay certain consulting, royalty and milestone payments in the aggregate amount of up to $4.2 million, of which no more than $533,000, $950,000, $1,650,000 and $1,037,000 shall be payable prior to December 31, 2002, January 1, 2003, January 1, 2004 and January 1, 2005, respectively. The term of such agreement is for the life of any patent that may be issued to us for the first product we develop utilizing such technology, or, if we do not acquire any patentable products, seven years. -19- Below is a table which presents our contractual obligations and commercial commitments as of March 31, 2002:
- ------------------------------------------------------------------------------------------------------------------ PAYMENTS DUE BY PERIOD ------------------------------------------------------------------------------------ 9 MONTHS CONTRACTUAL ENDING OBLIGATIONS DECEMBER 31, 2003 AND 2005 AND 2007 AND TOTAL 2002 2004 2006 AFTER - ------------------------------------------------------------------------------------------------------------------ LONG-TERM DEBT(1) $ 15,000 $ 15,000 $0 $0 $0 - ------------------------------------------------------------------------------------------------------------------ OPERATING LEASES(2) $ 2,448,000 $ 251,000 $ 667,000 $ 668,000 $ 862,000 - ------------------------------------------------------------------------------------------------------------------ UNCONDITIONAL $ 293,000(3) PURCHASE $ 894,000(4) OBLIGATIONS $ 2,748,000 $ 1,561,000(5) (5) -- -- - ------------------------------------------------------------------------------------------------------------------ CASH DIVIDEND ON SERIES D PREFERRED STOCK $ 7,600,000(6) $ 1,200,000(6) $ 3,200,000(6) $ 3,200,000(6) (6) - ------------------------------------------------------------------------------------------------------------------ TOTAL CONTRACTUAL OBLIGATIONS $ 12,811,000 $ 4,214,000 $ 3,867,000 $ 3,868,000 $ 862,000 - ------------------------------------------------------------------------------------------------------------------
(1) Balance payable on April 1999 $219,000 note. (2) Such amounts primarily include minimum rental payments for our office lease in Newtown, Pennsylvania. (3) Such amount represents committed inventory purchases on a purchase order under the terms of our Agreement with Pharmaceutical Research Manufacturing Services, Inc. (4) Such amount represents the maximum amounts payable under the terms of our Co-Promotion Agreement with Merck & Co., Inc. for Vioxx. (5) Such amounts are payable under the terms of our Agreement with Atrix Pharmaceuticals. As of March 31, 2002, we will be required to expend $1,561,000 in advertising and selling expenses related to the Atrix products in 2002, and to make certain minimum expenditures for advertising and promotional activities after 2002, including: (i) the lesser of $4,000,000 or 30% of our contribution margin (as defined in the agreement) relating to a specific Atrix product that we market, and (ii) the lesser of $2,000,000 or 30% of our contribution margin (as defined in the agreement) relating to a separate Atrix product that we market. (6) Pursuant to the terms of our Series D Cumulative Convertible Preferred Stock issued in May 1999, and unless earlier converted pursuant to its terms, the holders of the Series D Preferred Stock are entitled to dividends payable in our Common Stock at a rate of 8.4% per annum for the first three years and dividends payable in cash at a rate of 8.0% per annum thereafter. -20- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company believes that it is not subject to a material impact to its financial position or results of operations relating to market risk. -21- PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. Changes in Securities On February 14, 2002, in connection with the consummation of our equity line arrangement with Kingsbridge Capital Limited and pursuant to the terms of a warrant agreement executed by us, we issued Kingsbridge a warrant to purchase 40,000 shares of our Common Stock at an exercise price of $9.38 per share. The warrant will not become exercisable until August 14, 2002, and will thereafter expire on August 13, 2007. Such warrant was not registered under the Securities Act of 1933, as amended, at the time of such issuance. We have registered the shares of our Common Stock which may be issued by us under the equity line and upon any exercise of the warrant by Kingsbridge, on our shelf Registration Statement on Form S-3 (File No. 333-72166), which registered an aggregate of 964,880 shares of our Common Stock and was declared effective by the Securities and Exchange Commission on February 14, 2002. We believe that the issuance of such warrant to Kingsbridge was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, as a transaction not involving any public offering. Kingsbridge had adequate access to information about us. ITEM 5. OTHER INFORMATION. Receipt of Marketing Authorization On April 23, 2002, we announced that we had received final Marketing Authorizations for our lead product, Periostat, from the Ministries of Health in Austria and Finland. Periostat will be marketed and commercialized in Austria by Willvonseder & Marchesani Ges.m.b.H & Co. KG, a Vienna based company, with which we entered into a marketing and distribution agreement on June 9, 2000. We are currently in discussions with suitable partner companies for the Scandinavian countries. Additionally, on May 6, 2002, we announced that the Israeli Ministry of Health granted a Marketing Authorisation for Periostat to our Israeli commercial partner, Taro Pharmaceutical Industries Ltd. ("Taro"). Taro will market and distribute Periostat in Israel pursuant to the terms of a Marketing and Distribution Agreement which we entered into with Taro on August 24, 2000. Periostat tablets will be supplied to Taro by our wholly-owned United Kingdom subsidiary, CollaGenex International Limited. Publication of Metastat Phase I Results On March 7, 2002, we announced that the January 2002 issue of the Journal of Clinical Oncology featured a report describing the results of a Phase I clinical trial carried out by the AIDS Malignancy Consortium and sponsored by the National Cancer Institute designed to evaluate the use of our anti-angiogenesis compound, COL-3 (Metastat(R)), in the treatment of AIDS-related Kaposi's sarcoma. -22- Co-operation, Development and Licensing Agreement On February 11, 2002, we executed a Co-operation, Development and Licensing Agreement with Thomas Skold pursuant to which we were granted an exclusive, sublicenseable, transferable license with respect to the Restoraderm(TM) topical drug delivery system which we intend to develop for dermatological applications. Pursuant to the terms of such agreement, upon the occurrence of certain events, we will be required to pay certain consulting, royalty and milestone payments in the aggregate amount of up to $4.2 million, of which no more than $533,000, $950,000, $1,650,000 and $1,037,000 shall be payable prior to December 31, 2002, January 1, 2003, January 1, 2004 and January 1, 2005, respectively. The term of such agreement is for the life of any patent that may be issued to us for the first product we develop utilizing such technology, or, if we do not acquire any patentable products, seven years. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits *10.1 - Wholesale Service Agreement effective as of November 1, 2001, by and between the Company and National Specialty Services, Inc. *10.2 - First Amendment to Wholesale Service Agreement effective as of November 12, 2001, by and between the Company and National Specialty Services, Inc. *10.3 - Exclusive Distribution Agreement dated as of March 1, 2002, by and between the Company and CORD Logistics, Inc. 10.4 - First Loan Modification Agreement dated as of March 22, 2002 by and between the Company and Silicon Valley Bank. 10.5 - Second Loan Modification Agreement dated as of March 27, 2002 by and between the Company and Silicon Valley Bank. (b) Reports on Form 8-K. On February 15, 2002 we filed a current report on Form 8-K with the Securities and Exchange Commission relating to our equity line arrangement with Kingsbridge Capital Limited. * Confidential Treatment has been sought for a portion of this Exhibit -23- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CollaGenex Pharmaceuticals, Inc. Date: May 15, 2002 By: /s/ Brian M. Gallagher, Ph.D. ------------------------------------- Brian M. Gallagher, Ph.D. President and Chief Executive Officer (Principal Executive Officer) Date: May 15, 2002 By: /s/ Nancy C. Broadbent ------------------------------------- Nancy C. Broadbent Chief Financial Officer (Principal Financial and Accounting Officer) -24- EX-99 4 exh10-1.txt EXHIBIT 10.1 Exhibit 10.1 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. WHOLESALE SERVICE AGREEMENT --------------------------- This Agreement is made November 1, 2001, between National Specialty Services, Inc. ("NSS") whose address for purposes of this Agreement is 556 Metroplex Drive, Nashville, TN 37211 and CollaGenex Pharmaceuticals, Inc. ("Supplier") whose address is set forth under its name on the signature page of this Agreement. Background Information A. Supplier is in the business of manufacturing and/or marketing healthcare products. B. NSS is a broad-line wholesale distributor of healthcare products. C. Supplier desires to appoint NSS as an authorized distributor of those healthcare products manufactured and/or marketed by Supplier, which are set forth on Attachment A hereto (the "Products") and agrees to sell the Products to NSS. NSS desires to accept such appointment and agrees to purchase the Products from Supplier on the terms and subject to the conditions described in this Agreement. Statement of Agreement Supplier and NSS hereby agree as follows: ss.1. Appointment of NSS. Supplier hereby appoints NSS as a non-exclusive, authorized distributor of the Products, and NSS hereby accepts that appointment on the terms and subject to the conditions described in this Agreement. As an authorized distributor, NSS may purchase such quantities of the Products as NSS deems necessary or appropriate to fill its customers' orders from time to time, subject to the order cutback procedures described below. NSS will not be required to provide any particular level of promotion or marketing activities with respect to or on behalf of any Product and will not be prohibited from providing customized promotional or marketing services with respect to any other products or on behalf of other suppliers. Notwithstanding the foregoing sentence, during the term hereof, NSS shall not conduct itself in such a manner as to detrimentally affect the name and/or reputation of Supplier. ss.2. Orders for the Products. NSS will transmit orders for the Products to Supplier using a mutually acceptable automated order entry system or such other means as may be agreed upon by the parties. All of NSS's orders for the Products are subject to acceptance and approval by Supplier. If the Products are in limited supply or otherwise unavailable in the quantities requested by NSS, Supplier may elect to cutback NSS's order and instead allocate such limited supply or availability among NSS and its other wholesaler customers in a commercially reasonable manner, which does not place NSS at a competitive disadvantage. NSS shall have no obligation to accept automatic shipments of any Product. ss.3. Terms of Sale and Shipment. Supplier shall sell the Products to NSS at Supplier's published wholesale prices in effect on the date of NSS's order and deliver the Products F.O.B. to NSS' distribution center located at 556 Mextroplex Drive, Nashville, Tennessee 37211, or such other location as may be designated by NSS on its purchase order, freight prepaid. Supplier shall give NSS notice at least one full business day prior to the effective date of an increase in Supplier's published wholesale price of any Product. Title and risk of loss to the Products shall remain with Supplier until shipment is received at the specified destination. If NSS requests special routing of a shipment which results in a higher transportation cost than would be incurred as a result of the routing selected by Supplier, then the extra cost incurred by Supplier shall be added to Supplier's invoice. NSS shall report any damage, defect, loss in transit, or other shipping errors promptly following NSS's discovery of the same. Any chargebacks, rebates or similar promotional incentives will be based on Supplier's published wholesale price without reduction for cash or off-invoice discounts and will be based on all purchases by NSS. ss.4. Payment Terms. Unless otherwise agreed by both parties, all orders for the Products shall be invoiced by Supplier on the date shipped. NSS shall pay all Supplier's invoices in accordance with the due dates specified therein; provided that such terms shall [**] in no instance shall be less than [**]. Supplier shall provide NSS with [**] days additional dating on invoices of new products, in addition to other pricing terms hereunder. In the event that NSS notifies Supplier that amounts owed by Supplier to NSS resulting from rebates, chargebacks or any other credit exceed amounts owed by NSS to Supplier (a "Debit Balance"), Supplier will remit payments for such amount by check or wire transfer until such time that NSS notifies Supplier that it is no longer in a Debit Balance. NSS will provide Supplier with its most recent audited year-end consolidated financial statements and quarterly year-to-date updates to such financial statements promptly following Supplier's request from time-to-time during the term of this Agreement. If Supplier establishes so-called "credit limits" for NSS's purchases from Supplier, it will inform NSS of such limits promptly following such determination and in any event not less than ten (10) business days in advance of cutting back orders or otherwise acting upon such limits and will consult in good faith with NSS as to the appropriateness of such limits in light of NSS's overall credit worthiness, sales growth rate, and other relevant factors. 2 ss.5. Distribution Fee. Supplier agrees to pay to NSS a Distribution Fee for Atridox equal to [**]% of the greater of $[**] or the average selling price for the period for each unit sold by NSS during the applicable month. The average selling price shall not include shipping or handling charges. The $[**] price will change on a percentage basis in accordance with any manufacturer price increases. Supplier agrees to pay to NSS a Distribution Fee for Atrisorb and Atrisorb-D equal to [**]% of the greater of $[**] or the average selling price for the period for each unit sold by NSS during the applicable month. The average selling price shall not include shipping or handling charges. The $[**] price will change on a percentage basis in accordance with any manufacturer price increases. Supplier will pay said fees monthly, within [**] days after the end of the applicable month via credit memo. ss.6. Marketing Services. NSS agrees to offer marketing services to Supplier as defined and priced in Attachment B. NSS reserves the right to amend the prices and service offerings in Attachment B at any time. NSS will invoice Supplier for such marketing service fees, as applicable, and such fees shall be paid in accordance with the terms of the applicable invoice. ss.7. Sales Data. NSS agrees to provide Supplier with customer level sales detail reports within five (5) days after the end of each month, except when the terms and conditions of a customer's agreement with NSS precludes NSS from providing such data. ss.8. Inventory. If at any time during the term of this Agreement, [**] Supplier shall [**] (a) the [**] NSS's then-current inventory of that Product [**] that Product, and (b) the [**] NSS's then-current inventory of that Product, determined [**] for all such inventory. For purposes of this section, "NSS's then-current inventory" shall include all inventory held in NSS's distribution centers, all Products owned by NSS at any store owned or operated by a customer of NSS and held by such customer on consignment, and all Product "in transit" to or from such distribution centers on the effective date of such price decrease. For product owned by NSS and held by customer on consignment, the [**] (a) the [**] or a [**] of NSS's then-current inventory of that Product at the Customer location and (b) the [**] NSS's then-current inventory of that product at the customer's location, [**] as applicable. NSS will use good-faith efforts to notify Supplier [**] pursuant to this section (including reasonable supporting documentation) within [**] days following the effective date [**]. ss.9. Returned Goods and Recalls. NSS will have the right to return to Supplier and receive full credit for both outdated Products and Products still indate but within [**] 3 months of their expiration date. NSS will notify Supplier of its intent to return the product in order to obtain return authorization from Supplier. Such authorization will not be unreasonably withheld by Supplier. Products with more than [**] months remaining dating are not eligible for return absent prior authorization from Supplier; provided that (a) such authorization will not be unreasonably withheld, (b) NSS will have the right during the [**]-month period following introduction of a new Product in which to return that Product without regard to the remaining dating and (c) Supplier will have the option to issue additional [**] days dating in which to return product. These return guidelines will be in effect for all Products originally purchased by NSS from Supplier, exclusive only of specialty or promotional program purchases specifically exempted by mutual written consent of the parties. See Attachment C (the "Return Goods Policy"). Supplier shall reimburse NSS, consistent with Healthcare Distribution Management Association (HDMA) standards, for the full amount of all reasonable costs and expenses incurred by NSS in connection with NSS's performance of any recall services or assistance relating to the Products, unless such recall is due solely to the gross negligence or willful misconduct of NSS in handling such Products. ss.10. Contract Administration and Chargeback Procedures. NSS will recognize and administer those contracts between Supplier and customers of NSS ("Supplier Contracts") pursuant to which Supplier and such customers have established prices at which the customer may purchase certain Products, subject to the continued validity of Supplier Contracts in accordance with applicable law. NSS's Standard Policy on Chargebacks (a copy of which is incorporated herein as Attachment D (the "Chargeback Policy")) will govern the administration of the Supplier Contracts under this Agreement. ss.11. Setoff Rights. If and to the extent either party fails to pay, reimburse, or credit the other for any amount owed when due under this Agreement, then the party to whom such amount is owed will have the right to setoff such amount against amounts otherwise due from it. ss.12. Confidential Information. In connection with the ongoing business relationship between Supplier and NSS, each party may gain access to proprietary information of the other which may be considered confidential by the party providing such information, and each party shall use the same care to prevent disclosure, publication, or dissemination to any third party of the other party's confidential information as is used to protect its own confidential information, but not less than reasonable care. All information provided by a party hereunder to the other party shall be deemed confidential unless such information (i) is in the public domain, (ii) is known to the party receiving the information prior to the time of disclosure by the other party as evidenced by the written records of the receiving party, (iii) was lawfully received by the receiving party from a third party without any obligation of confidentiality, (iv) is independently developed by or for the receiving party without reference to the confidential information, as evidenced by written records or (v) is required to be disclosed by law or court order provided that the receiving party provides a reasonable 4 opportunity to the disclosing party to seek confidential treatment or other protective measures for such information. However, information generated, compiled or stored by NSS reflecting the purchase and resale of Products to its customers does not constitute the confidential information of Supplier, and NSS will be entitled to utilize all such information in any manner deemed appropriate by it. Supplier understands and agrees that NSS may, in its sole discretion, elect to sell warehouse withdrawal, sales, and other data to IMS/DDD and/or other third parties without contribution to Supplier. ss.13. Warranty and Indemnification. Supplier hereby warrants that the Products are and shall be manufactured and delivered to NSS in conformity with the Federal Food, Drug and Cosmetic Act, as amended, and all other applicable laws, rules, and regulations. NSS warrants that it will not alter any labels affixed to the Products. Supplier shall defend, indemnify, and hold harmless NSS and its affiliates, directors, officers, employees and representatives from and against any and all claims, liabilities, losses, damages, costs, and expenses (including without limitation reasonable attorneys' fees) arising directly or indirectly out of: (a) injury or death to person or property alleged to have been caused by any defect in the Products (exclusive of defects to the extent shown to be attributable to NSS's negligence in handling such Products); (b) "class of trade" pricing, if any, maintained by Supplier from and after the effective date of this Agreement, including without limitation those arising out of NSS's administration of Supplier Contracts; and (c) any intellectual property infringement actions (including patent, trademark, service mark, copyright trade dress, trade secret and other proprietary rights) brought by a third party in connection with NSS's distribution of Products hereunder. The warranty and indemnification provisions of this section shall survive any termination or expiration of this Agreement. EXCEPT AS EXPRESSLY STATED HEREIN, NEITHER NSS NOR SUPPLIER MAKES ANY OTHER WARRANTIES WHATSOEVER, AND EXPRESSLY DISCLAIMS ALL WARRANTIES WHETHER EXPRESS, IMPLIED, OR STATUTORY WITH REGARD TO THE SERVICES OR PRODUCTS PROVIDED HEREUNDER, INCLUDING, WITHOUT LIMITATION, ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND WARRANTIES ARISING FROM COURSE OF DEALING OR USAGE OF TRADE. ss.14. Insurance. During the term of this Agreement and thereafter as may be necessary to cover claims associated with Products purchased by NSS (whether before, during or after such term), Supplier shall obtain, pay for, and keep in full force and effect commercial general liability insurance, with one or more reputable insurance carriers with a minimal rating by AM Best of A- or its equivalent, (including coverage for product liability and personal injury damages) with a per occurrence limit of not less than $10 million. "National Specialty Services, Inc." shall be designated as an "additional insured" under all such insurance policies, and Supplier shall deliver to NSS certificates evidencing the existence and continuation of such insurance at the execution of this Agreement and upon Supplier's periodic renewal of such policy. Such insurance shall 5 include a provision for at least 30 days prior written notice to NSS in the event of cancellation or material reduction of coverage. During the term of this Agreement and thereafter as may be necessary to cover claims associated with NSS' services provided hereunder (whether before, during or after such term), NSS shall obtain, pay for, and keep in full force and effect commercial general liability insurance, though self-insurance or with one or more reputable insurance carriers with a minimal rating by AM Best of A- or its equivalent, (including coverage for product liability and personal injury damages) with a per occurrence limit of not less than $2 million. "CollaGenex Pharmaceuticals, Inc. " shall be designated as an "additional insured" under all such insurance policies, and NSS shall deliver to Supplier certificates evidencing the existence and continuation of such insurance at the execution of this Agreement and upon NSS' periodic renewal of such policy. Such insurance shall include a provision for at least 30 days prior written notice to Supplier in the event of cancellation or material reduction of coverage. ss.15. Term and Termination. The initial term of this Agreement shall begin on the date of this Agreement and shall continue until the three (3)-year anniversary date of this Agreement (the "Initial Term"). At the expiration of the Initial Term, this Agreement shall renew automatically for successive one-year periods upon the same terms and conditions, unless or until terminated in accordance with this section. Any reference in this Agreement to the "term of this Agreement" shall include the Initial Term and any such renewal periods. Notwithstanding the foregoing, either party may terminate this Agreement for any reason or without reason at any time by giving the other party not less than [**]days written notice prior to the specified termination date. ss.16. Compliance With Laws. Each party shall comply in all material respects with all federal, state, and local laws (and any regulations promulgated thereunder) which are now or hereafter become applicable to the manufacture, purchase, handling, sale, or distribution of the Products. Further, each party shall comply with all federal, state and local laws and regulations applicable to its operations, including but not limited to, those dealing with employment opportunity and affirmative action including Executive Order 11246 (Equal Opportunity), Affirmative Action for Disabled Veterans and Veterans of the Vietnam Era (38 U.S.C. 4212(a)), Affirmative Action for Handicapped Workers (29 U.S.C. 793) and any amendment and applicable regulations pertaining thereto. In addition, each party shall comply with all terms of 48 C.F.R. ss. 52.244-6 (Federal Acquisition Regulations) (including the requirement of including this provision in subcontracts awarded under this contract) and such provision is hereby incorporated into this Agreement as if fully set forth herein. 6 Child Labor. Each party represents and warrants that it complies with all federal, state, local and other applicable laws, regulations, conventions or treaties prohibiting any form of child labor or other exploitation of children in the manufacturing and delivery of such party's products or services. ss.17. Arbitration. Prior to submission to arbitration, the parties will negotiate in good faith any disagreements or controversies arising out of or relating to this Agreement. The disputing party shall give the other party written notice of the dispute. Within twenty (20) days after receipt of that notice, the receiving party shall submit to the other a written response. If the matter has not been resolved within ninety (90) days of receipt of the disputing party's notice, or if either party will not meet within 30 days of receipt of the disputing party's notice, either party may initiate arbitration in accordance with the terms of this Agreement. Any and all disagreements or controversies arising out of or relating to this Agreement not resolved by the foregoing negotiation procedures shall be settled by binding arbitration pursuant to the then-current rules of the American Arbitration Association. The arbitration shall be held before a panel of three arbitrators, one to be selected by Supplier, one to be selected by NSS, and the third to be selected by agreement of the two arbitrators selected by the parties. The determination made in accordance with such rules shall be delivered in writing to the parties and shall be final, binding, and conclusive on the parties. Each party shall pay its own legal, accounting, and other fees in connection with such arbitration, along with the fees and expenses of the arbitrator selected by that party and one-half of the fees and expenses of the third arbitrator. Notwithstanding any of the foregoing to the contrary, either party may seek from any court having jurisdiction any interim measures or provisional remedies (including without limitation temporary or preliminary injunctive relief) pending the establishment of the arbitration panel and until the panel's final award has been satisfied. ss.18. Audit and Inspection. During the term of this Agreement, upon reasonable prior notice and during normal business hours, either party shall be entitled to audit and inspect those relevant records which are maintained by the other party in direct connection with its performance under this Agreement; provided, however, the audit or inspection shall be performed by bona fide, permanent employees of the party conducting such audit or inspection and in no event shall any such audit or inspection relate to any transaction or event which occurred more than twelve months prior to the date of such audit or inspection. Supplier chargeback audits shall be governed by the additional terms and conditions contained in the Chargeback Policy. ss.19. Relationship of the Parties. The relationship among the parties is and shall be that of independent contractors. This Agreement does not establish or create a partnership or joint venture among the parties. In performing its duties hereunder, NSS shall not enter into any contract or arrangement on behalf or in the name of Supplier. 7 ss.20. Notices. Any notice or other communication required or desired to be given to any party under this Agreement shall be in writing and shall be deemed given when: (a) deposited in the United States mail, first-class postage prepaid, and addressed to that party at the address for such party set forth at the end of this Agreement; (b) delivered to Federal Express, Airborne, or any other similar express delivery service for delivery to that party at that address; or (c) sent by facsimile transmission, with electronic confirmation, to that party at its facsimile number set forth at the end of this Agreement. Any party may change its address or facsimile number for notices under this Agreement by giving the other party notice of such change. ss.21. Governing Law. All questions concerning the validity or meaning of this Agreement or relating to the rights and obligations of the parties with respect to performance under this Agreement shall be construed and resolved under the laws of the State of Ohio. ss.22. Severability. The intention of the parties is to comply fully with all laws and public policies, and this Agreement shall be construed consistently with all laws and public policies to the extent possible. If and to the extent that any arbitration panel or any court of competent jurisdiction determines that it is impossible to construe any provision of this Agreement consistently with any law or public policy and consequently holds that provision to be invalid, such holding shall in no way affect the validity of the other provisions of this Agreement, which shall remain in full force and effect. ss.23. Force Majeure. If the performance of any part of this Agreement by any party shall be affected for any length of time by fire or other casualty, government restrictions, war, riots, strikes or labor disputes, lock out, acts of God, or any other causes which are beyond its control, such party shall not be responsible for delay or failure of performance of this Agreement for such length of time, provided, however, that the obligation of either party to pay amounts due to the other party shall not be subject to the provisions of this section. ss.24. Complete Agreement. This Agreement and the Chargeback Policy contain the entire agreement between the parties and supersedes all prior or contemporaneous discussions, negotiations, representations, warranties, or agreements relating to the subject matter of this Agreement, including without limitation any previous wholesale distribution agreement entered into between Supplier and NSS. No changes to this Agreement will be made or be binding on either party unless made in writing and signed by each party. 8 ss.25. Assignment. Neither party shall have the right to assign this Agreement to any third party without the prior written consent of the other party. CollaGenex National Specialty Services, Inc. By /s/ Frank Ruffo By /s/David J. Canniff ------------------------ ------------------------ Name Frank Ruffo Name David J. Canniff ---------------------- ---------------------- Title Sr. Director Finance Title VP --------------------- ---------------------- Address: 41 University Dr. Address: 556 Metroplex Drive ----------------- Nashville, TN 37211 Newtown, PA ----------------- Date: 2/26/02 Date: 2-26-02 -------------------- --------------------- Facsimile Number: 215-579-5877 Facsimile Number: (615) 833-5057 -------------- 9 ATTACHMENT A Products ------------------------------------------------------------- Atridox Tier Prices ------------------------------------------------------------- [**] boxes $[**]/box ------------------------------------------------------------- Introductory Price ([**] boxes) Exp. $[**]/box [**] ------------------------------------------------------------- [**] boxes $[**]/box ------------------------------------------------------------- [**] boxes $[**]/box ------------------------------------------------------------- ------------------------------------------------------------- Atrisorb Tier Prices ------------------------------------------------------------- [**] $[**].00/box ------------------------------------------------------------- [**] boxes $[**].00/box ------------------------------------------------------------- [**] boxes $[**].00/box ------------------------------------------------------------- ------------------------------------------------------------- Atrisorb-D Tier Prices ------------------------------------------------------------- [**] $[**].00/box ------------------------------------------------------------- [**] boxes $[**].00/box ------------------------------------------------------------- [**] boxes $[**].00/box ------------------------------------------------------------- 10 ATTACHMENT B MARKETING SERVICES -------------------------------------------------------------------- Service Fee -------------------------------------------------------------------- Scripts/Market Survey Program Dependent -------------------------------------------------------------------- Voice Mail Greeting $[**]/week -------------------------------------------------------------------- Tagline Message $[**]/week -------------------------------------------------------------------- On Hold Message $[**]/month -------------------------------------------------------------------- Facsimile Notices $[**]/fax -------------------------------------------------------------------- Newsletter $[**]-$[**] -------------------------------------------------------------------- Shipment Stuffers $[**]-$[**] per insertion -------------------------------------------------------------------- Direct Mail Program Dependent -------------------------------------------------------------------- Database Analysis Service Program Dependent -------------------------------------------------------------------- Customer Referral Service Program Dependent -------------------------------------------------------------------- Reporting - by location or zip Program Dependent code; daily to monthly -------------------------------------------------------------------- 11 ATTACHMENT C RETURN GOODS POLICY GENERAL POLICY Product in "merchantable condition" (as defined below) may generally be returned to the National Specialty Services, Inc. ("NSS") facility from which the product was originally purchased if the return is made within the timeframes and subject to the terms and conditions described below: Return Made Within: [**] Days from Invoice Date [**]% of original invoice amount paid by customer. No returns will be accepted beyond [**] days from invoice date. SHORTS AND DAMAGED MERCHANDISE Claims of order shortages (e.g., invoiced but not received) and damage must be reported within two business days of receipt of goods. Controlled substance claims must be reported immediately per DEA requirements. Pricing and other errors/mistakes must be reported within 10 business days from the invoice date. REQUIRED RETURN PROCEDURES A fully completed NSS Credit Request Form (the "Return Form") must accompany all merchandise to be returned. Each Return Form must include the following information: A. Customer name, address and account number (as it appears on the invoice); B. Name and address of the NSS facility to which the return is made; C. "Ship to" address if different than "bill to" address; D. NSS invoice/order number and date; E. Product item number, quantity, form/size, description, lot number, serial number, and expiration date. (Note: A copy of the F. NSS invoice and packing slip will provide this information.) G. Purchase order number, if applicable; H. Reason for return; and I. The date of the return. Return merchandise must be placed in a proper shipping container and, for merchandise valued at more than $[**], signed for by the carrier/driver when the product is picked up. NSS will arrange for pick up of product, freight paid, for all items shipped in error. All items ordered in error by the customer must be returned freight pre-paid. All Return 12 Forms will be reviewed by NSS for compliance with its Returned Goods Policy. The acceptability, valuation, and acceptance of any return is at the sole discretion of NSS and /or the manufacturer. Any credit or similar offsets may be taken only as previously approved by NSS (as evidenced by the issuance of a valid credit memo), and may not be otherwise taken or deducted by the customer. For returned goods authorization, please call Customer Service at 888.920.3322. OTHER RESTRICTIONS This policy is subject to change without notice by NSS. This policy is further subject to modification as NSS may deem necessary or appropriate to comply with applicable federal and/or state laws, rules and regulations, FDA guidelines, and any other restrictions applicable to returned merchandise. BLOC DRUG LABELED PRODUCTS 1. The customer [**]. 2. [**] the customer [**]. The customer [**] the customer [**] the customer 2. [**] the customer [**] 13 ATTACHMENT D NATIONAL SPECIALTY SERVICES, INC. STANDARD POLICY ON CHARGEBACKS The following represents the standard policy of National Specialty Services, Inc. ("NSS") pertaining to the sale of product under contract ("chargebacks") between NSS' customers and supplier ("Supplier") and the processing and audits of chargebacks, as well as certain related matters. Depending upon the individual facts and circumstances associated with a Supplier's administrative procedures for chargeback related matters (e.g. the extent of use of EDI, electronic funds transfer, and other factors that contribute to or detract from NSS' ability to efficiently deal with chargeback matters), NSS reserves the right to modify any or all of the following terms and conditions. I. CHARGEBACK PROCESSING NSS will recognize and administer contracts between Suppliers and customers pursuant to which prices at which the customer may purchase certain products have been established, subject to the continued validity of such contracts in accordance with applicable law and the Supplier's compliance with NSS' standard policy and credit considerations deemed relevant to NSS. Amounts owed to NSS by Suppliers relating to chargebacks shall be calculated based upon the wholesale acquisition price of Supplier's product at the date of sale, and shall be paid, or credited, as appropriate, to NSS within seven (7) days following NSS' submission of a request for such amounts. In the event that NSS notifies Supplier that chargeback amounts owed by Supplier to NSS exceed amounts owed by NSS to Supplier (a "Debit Balance") Supplier will remit payment for chargebacks to NSS by check or wire transfer until such time that NSS notifies Supplier that it is no longer in a Debit Balance. Chargeback reconciliation issues shall be resolved as soon as practicable with each party responding to the other within sixty (60) days following receipt of documentation supporting those issues. II. SUPPLIER CHARGEBACK AUDITS The Supplier shall have the right to audit NSS' compliance with the respective contracts in force and related chargeback matters subject to the following terms and conditions: A. Chargeback audits will be limited to twelve (12) months of historical information as of the date such audit begins. B. NSS shall have a reciprocal twelve (12) month period to reconcile any differences that may arise with Supplier related to chargeback 14 issues (including submission and other errors and regardless of whether such issues arise as part of a Supplier chargeback audit). C. Supplier shall notify NSS' Controller of an intent to perform an audit at least thirty (30) days prior to beginning the audit, specifying the location to be audited and the time period to be covered. In the event that such timing is expected to create undue disruption in NSS' business, NSS shall have the right to delay the start of the audit for up to thirty (30) additional days. D. Audits must be performed by bona fide, permanent employees of Supplier, subject to a confidentiality agreement to be prepared by NSS and signed by the Supplier and such employee(s), prior to beginning the audit. E. Audits shall be performed at the NSS site that is being audited, or such alternate sites where appropriate records are located, as NSS may designate. F. Audits shall be performed during the normal, customary office hours of the NSS site that is being audited. G. The existing accounting records of the NSS site being audited will be made available for audit, subject to the following limitations: 1. Electronic data will not be specially created. 2. NSS reserves the right to summarize and/or retract the contents of all records containing sensitive or competitive information. H. NSS will bill Supplier for any direct out-of-pocket costs incurred in conjunction with a Supplier-requested audit, unless such audit reflects a deficiency of five percent (5.0%) or greater of the actual amount of the invoice submitted over the audit period. Amounts billed will be deducted from NSS' next payment for current purchases, after completion of the audit. I. Any Supplier claims arising from an audit must be supported by specific audit results related to specific transactions. Extrapolation of results from one period to another will not be accepted. J. Any Supplier claims arising from an audit must be submitted to NSS' Controller within thirty (30) days of completing the audit. All claims must be accompanied by specific supporting details of 15 the transactions that comprise such claim. NSS shall then have forty-five (45) days to review the claim and advise Supplier of its acceptance or disagreement. IV. Related Matters A. NSS shall be entitled to cash discounts based on the gross invoice price of all goods purchased from Supplier, regardless of whether a chargeback is ultimately claimed by NSS. 16 EX-99 5 exh10-2.txt EXHIBIT 10.2 Exhibit 10.2 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. FIRST AMENDMENT TO WHOLESALER SERVICE AGREEMENT This First Amendment to Wholesaler Service Agreement ("FIRST AMENDMENT"), dated November 12, 2001, and is between National Specialty Services, Inc. ("NSS") and CollaGenex Pharmaceuticals, Inc. ("COLLAGENEX"). RECITALS A. NSS and CollaGenex entered into a Wholesale Service Agreement dated November 1, 2001 pursuant to which CollaGenex engaged NSS to provide distribution services for Atridox(TM) and Atrisorb(TM) (the "ORIGINAL AGREEMENT"). B. NSS and CollaGenex desire to amend the Original Agreement as further set forth below. NOW, THEREFORE, to implement the foregoing and in consideration of the covenants and undertaking as set forth in this First Amendment, and other good and valuable consideration, the receipt and sufficiency of which is acknowledged by the parties, the parties hereby agree to incorporate the foregoing recitals into this First Amendment as if fully rewritten herein, and agree as follows: I. AMENDMENT. The following sections shall be added to the Original Agreement, as if fully rewritten therein: 1. SHIPPING AND HANDLING FEES. Shipping and handling fees collected for the shipment of Atridox, based on the pre-payment options offered to NSS' customers will be shared equally between NSS and CollaGenex. Any fees due CollaGenex will be paid on or before the [**] business day of the month following collection of the fee from the customer. 2. ACCOUNTS RECEIVABLE UNDERWRITING. In accordance with the following terms and conditions, CollaGenex shall underwrite the accounts receivable for customers purchasing Atridox and Atrisorb that NSS would not normally extend a trade account, such accounts to be pre-approved by CollaGenex; provided, however, the institutional customers (i.e., dental schools and dental universities) set forth on Exhibit A to this First Amendment have been approved by CollaGenex. For all accounts approved by CollaGenex for underwriting, NSS will invoice CollaGenex for the amounts past due greater than [**] days from date of invoice, plus the applicable service charge assessed on such amounts. At such time NSS receives payment from CollaGenex, NSS will offset the debt, and upon notice to the customer, submit such outstanding amounts due to an outside collection agency and cancel such customer's NSS trade account. After such time, CollaGenex shall be solely responsible for collecting all amounts due and NSS shall have no liability with regard to the ultimate payment or non-payment of such accounts. The payment by CollaGenex to NSS shall not relieve the customer of its obligation to pay all amounts due and owing, and CollaGenex shall notify such customer of its obligation to make all future payments directly to CollaGenex. NSS will make a commercially reasonable effort to collect all amounts due from customers in accordance with NSS' then current collection procedures. CollaGenex shall, at all times, comply with the provisions of all applicable laws, rules and regulations and shall indemnify and hold NSS harmless from any failure on CollaGenex's part to do so. The terms and conditions of this First Amendment shall be confidential and shall not be disclosed to any third party, including, but not limited to, the customers affected by the provisions hereof. 3. CONTRACT REVIEW. NSS and CollaGenex shall review the terms and conditions of the arrangement set forth in the Original Agreement and this First Amendment every six (6) months. The basis of this review will be to determine if the Distribution Fees should be increased or decreased, as applicable, based on average order size, customer payment history, and other mutually agreed upon operational indicators. 4. DAMAGED PRODUCT. CollaGenex acknowledges that it desires not to participate in NSS' "Freeze Watch" program related to shipment of products into certain climates. Therefore, NSS, at CollaGenex's direction, will ship Atridox and Atrisorb to customers, regardless of the weather conditions, and CollaGenex will bear the risk of loss with regard to such shipment of the products. As such, CollaGenex will reimburse NSS for the cost of product (including the applicable distribution fee) for all Atridox and Atrisorb damaged in transit to the customer due to weather conditions. NSS will document such incidents via the return code used to process the credit to the applicable customer. For shipments of Atridox and Atrisorb into "Freeze Watch" areas, NSS will upgrade the shipping to 8:30 a.m. delivery at a charge of $[**] per delivery to CollaGenex; provided, however, if the customer requests that the shipping be upgraded, any additional charge will be borne by the customer in accordance with NSS' standard terms and conditions of sale and not by CollaGenex. In addition, NSS will include Tempshield(TM) Self-Sealed Bubble pouches in the shipping containers for shipments of Atridox and Atrisorb into "Freeze Watch" areas at a charge to CollaGenex of $[**] per Tempshield(TM) pouch. Notwithstanding the upgraded delivery and addition of Tempshield(TM) pouches, CollaGenex shall continue bear the risk of loss with regard to the shipment of products damaged in transit to the customer due to weather conditions as set forth above. II. EFFECTIVE DATE. The effective date of this First Amendment shall be January 25, 2002 ("Effective Date"). Except as otherwise amended herein, the terms and conditions of the Original Agreement, as amended, shall remain in full force and effect. IN WITNESS WHEREOF, the parties have executed this First Amendment as of the date first set forth above. NATIONAL SPECIALTY SERVIES, COLLAGENEX PHARMACEUTICALS, INC. INC. By: /s/ David J. Canniff By: /s/ Frank Ruffo --------------------------- -------------------------------- Its: Vice President Its: Senior Director of Finance --------------------------- ------------------------------- Date: 2-26-02 Date: 2-26-02 --------------------------- ------------------------------ EXHIBIT A PRE-APPROVED INSTITUTIONAL CUSTOMERS [to be completed] EX-99 6 exh10-3.txt EXHIBIT 10.3 Exhibit 10.3 Confidential Materials omitted and filed separately with the Securities and Exchange Commission. Asterisks denote omissions. EXCLUSIVE DISTRIBUTION AGREEMENT -------------------------------- This Exclusive Distribution Agreement ("Agreement") is made as of March 1, 2002 (the "Effective Date"), between CollaGenex Pharmaceuticals, a Pennsylvania corporation, having its principal place of business at 41 University Drive, Suite 200, Newton, PA 18940 ("Client"), and CORD Logistics, Inc., an Ohio corporation, having its principal place of business at 15 Ingram Boulevard, LaVergne, TN 37086 ("CORD"). A. Client is, among other things, in the business of developing and marketing pharmaceutical products in the United States, the District of Columbia and Puerto Rico (the "Territory"). B. CORD is, among other things, in the business of distributing pharmaceutical products to wholesalers, specialty distributors, physicians, clinics, hospitals, pharmacies, and other health care providers in the Territory, and of providing Information Systems and other services that support its customers' use of its distribution capabilities. C. Client desires to engage CORD as its exclusive distribution agent for commercial sales and samples of Periostat, Atrisorb-D and Atridox in all formulations (collectively, the "Product"), and such other pharmaceutical products agreed to by the parties in writing in the Territory and to perform certain other services described in this Agreement, all upon the terms and conditions set forth in this Agreement. THEREFORE, in consideration of the mutual conditions and covenants set forth herein, CORD and Client (collectively referred to as "Party" or "Parties") agree as follows: 1. APPOINTMENT/AUTHORIZATION. 1.1 Upon the terms and conditions set forth in this Agreement, Client appoints CORD as its exclusive distribution agent of Product (including samples of the Product) in the Territory to Client's customers, including, but not limited to, wholesalers, specialty distributors, physicians, clinics, hospitals, pharmacies and other health care providers in the Territory (collectively, "Customers"). 1.2 Subject to the terms and conditions set forth in this Agreement, CORD accepts the appointment to represent Client as its authorized exclusive distribution agent of Product to Customers in the Territory. 2. SERVICES. 2.1 CORD shall provide the services set forth in the Operating Guidelines, which include, without limitation, storage, distribution, returns, customer support, financial support, EDI and system access support ("Services"). A copy of the Operating Guidelines is attached hereto as Exhibit A and incorporated by reference. 2.2 The Operating Guidelines may be amended from time to time upon the mutual written agreement of the Parties; provided, however, that any change, modification or amendment to the Operating Guidelines may result in an increase in the fees charged by CORD in Section 5. 2.3 CORD's services shall comply with the Operating Guidelines, provided Client's shipments of Product to CORD are within [**] percent ([**]%) of its Forecast (as hereinafter defined). 2.4 All Product Returns shall be processed and handled by CORD in accordance with the Operating Guidelines; and, any customization or additional return services requested by Client shall be performed at an additional fee as agreed by the Parties. 2.5 Client is solely responsible for all Product recalls. In the event Product is subject to recall, or Client, on its own initiative, recalls any Product, CORD shall provide assistance to Client as set forth in the Operating Guidelines, provided that Client shall pay to CORD an amount equal to CORD's actual costs incurred with any such recall services, (such cost shall be in addition to the Service Fees described in Section 5 below), unless such recall is due solely to the negligence or willful misconduct of CORD, in which case, CORD shall reimburse Client for Client's actual costs resulting from any such recall. 3. PRODUCT SUPPLY/CLIENT RESPONSIBILITIES. 3.1 Client shall deliver Product to CORD at CORD's facility located at 15 Ingram Boulevard, Suite 100, La Vergne, TN 37086, or to such other distribution facility as may be designated by CORD to Client in writing ("Facility"). 3.2 Client shall be responsible for delivery of Product to the Facility, including all costs, expenses and risk of loss associated with such delivery. Title to Product shall remain with Client at all times, even when Product is stored or warehoused at the Facility. Client shall at all times insure the Product for damage, loss, destruction, theft or any such other property damage ("Loss") as further set forth in Section 17 below. Except for Loss resulting solely from the gross negligence or willful misconduct of CORD, Client shall bear all risk of loss or damage with respect to the Product stored or warehoused at the Facility. 3.3 Client shall provide CORD with a forecast of the volume of Product to be handled by CORD under this Agreement, not less often than semi-annually ("Forecast"). Upon execution of this Agreement, Client shall deliver to CORD a customer list, which sets forth the Product prices (the "Customer Price List"). Client shall notify CORD of any change in the Customer 2 Price List not less than seventy-two (72) hours prior to the effective date of any such change. CORD shall use commercially reasonably efforts to implement such price change in accordance with Client's instruction. 3.4 Upon receipt of the Product at the Facility, CORD shall visually inspect each shipment of Product for external damage or loss in transit and notify Client of any such damage or loss within a commercially reasonable period of time following discovery. 4. INFORMATION SYSTEM ACCESS. 4.1 CORD shall provide Client access to an Operating System Base, which consists of the software used by CORD to support the services provided to Client, including the server and other components needed to execute the software and certain support services associated therewith, as further set forth in the Operating Guidelines (collectively, the "System"), upon the terms and conditions set forth in the System Access Agreement. A copy of the System Access Agreement is attached as Exhibit C and incorporated herein by reference. The software releases are (i) EliteSeries 6.1.2, as modified by CORD, supplied by Tecsys, Inc., a Montreal, Quebec, Canadian company, and any upgrades, maintenance releases or modifications implemented by CORD to support distribution services provided by CORD; (ii) BACCS 3.0 as modified by CORD and any upgrades implemented by CORD to support financial services provided by CORD; and (iii) Impromptu 6.0, supplied by Cognos Inc., a Canadian company, and any upgrades, maintenance releases or modifications implemented by CORD to support reporting services provided by CORD. 4.2 The System shall be made available to Client at the fees set forth in the Fee Schedule, except that any custom enhancements requested by Client shall be billed separately based on an hourly rate set forth in the Fee Schedule (as defined in Section 5). 4.3 In addition to the terms set forth in the System Access Agreement, Client shall maintain (i) a local area network sufficient to support Client's terminals and personal computers that have access to the System, all such personal computers shall meet the minimum specifications necessary to support software needed to access the system; (ii) a centralized server sufficient for data storage, if data export requirements exist; and (iii) a connection to the internet sufficient to support system access. Client shall also assign knowledgeable and qualified employees or representatives to facilitate access to the System. 5. FEES. 5.1 As compensation for the Services, Client shall pay to CORD the fees (the "Fees") set forth on Exhibit B (the "Fee Schedule"). 5.2 CORD shall issue an invoice to Client for the Services rendered under this Agreement or for any other amounts due on a monthly basis. Payment is due within [**] days of the invoice date. If the Invoice is not paid within such [**] day period, a service charge on the unpaid amount calculated at the rate of 1.5% per month (or the maximum rate permitted by law if such rate is less than 1.5% per month) shall be imposed until such amount is paid in full. 3 5.3 The Fees shall be held firm for the first contract year. Thereafter, CORD shall adjust the price not more often than once per contract year by the greater of (i) the increase in the Producer Price Index - All Commodities published by the United States Department of Labor, Bureau of Statistics, as amended from time to time, or (ii) five percent (5%). For purposes of sub-Section (i), the base point shall be the index level on the first day of the contract year. 5.4 Notwithstanding the terms set forth above in Section 5.3, if CORD can reasonably demonstrate that the costs for providing the Services have materially increased, or are likely to materially increase in the coming year due to the adoption of any applicable law or regulation (or any material change in the interpretation or administration thereof), or due to unforeseen circumstances beyond CORD's reasonable control, then upon notice from CORD, the Parties agree to meet in good faith and negotiate a mutually acceptable adjustment to the Fees. 6. TERM AND TERMINATION. 6.1 The initial term of this Agreement shall begin on the Effective Date and shall continue for a period of three (3) years (the "Initial Term"), unless terminated earlier pursuant to this Agreement. Thereafter, this Agreement shall automatically renew for additional terms of one (1) year each, unless written notice of termination is given by either Party at least [**] days prior to the end of the Initial Term, or such other term, in which case this Agreement shall terminate at the end of the then current term. 6.2 Either Party shall have the right to terminate this Agreement: (a) upon [**] days prior written notice to the other Party, provided that in the event Client terminates this Agreement, without cause, prior to the end of the Initial Term, such termination shall be effective only upon payment to CORD of [**] of System Access Fees set forth on the Fee Schedule; (b) upon the breach by the other Party of a material provision of this Agreement and that Party's failure to cure such breach within thirty (30) days following written notice thereof from the non-breaching Party, provided that, with respect to any failure to make any payment when due under this Agreement, such period to cure shall be reduced to ten (10) days; or (c) immediately upon notice to the other Party following the commencement of any bankruptcy or insolvency proceeding (whether voluntary or involuntary) with respect to such other Party or its assets, which in the event of an involuntary proceeding, is not dismissed within sixty (60) days, the general assignment for the benefit of creditors by such other Party, or the appointment of a receiver, trustee or liquidator by or for such other Party. 6.3 Termination or expiration of this Agreement shall not relieve either Party from any liability or obligation that accrued prior to such termination or expiration. Upon termination or expiration of this Agreement, all Product shall be returned to Client or a designee of Client, at Client's sole cost and expense. Sections 13 and 14 shall survive termination or expiration of this Agreement. 4 7. AUDITS. No more than once per calendar year, Client or its designee shall have the right during normal business hours (i.e., 8:00 a.m. to 5:00 p.m. local time), upon fifteen (15) business days prior written notice to CORD, to: (a) conduct a physical audit of such parties of the Facility that relate solely to Product stored and warehoused at the Facility under this Agreement; and (b) review and audit records that relate solely to the storage and distribution of the Product. 8. COMPLIANCE WITH LAWS. Each Party shall conduct its activities in connection with this Agreement in compliance with all applicable laws, rules, regulations, and orders of governmental entities. 9. REPRESENTATIONS AND WARRANTIES. 9.1 Each Party represents and warrants to the other that: (a) it has full power and authority to enter into this Agreement and perform all obligations and conditions to be performed by it under this Agreement without any restriction by any other Agreement or otherwise; (b) the execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action of that Party; and (c) this Agreement constitutes the legal, valid and binding obligation of that Party. 9.2 Client further represents and warrants to CORD that the Product: (a) is and shall be manufactured in conformity with the Food, Drug and Cosmetic Act, as amended from time to time, and all other applicable laws, rules, regulations and orders of governmental entities relating to the manufacture, promotion, sale or distribution of the Product; and (b) does not violate or infringe any patent, trademark, tradename or other interest of any person or entity. 10. TAXES. Client shall pay when due all sales, use, gross receipts, excise, personal property taxes associated with the Product (excluding any personal property tax associated with CORD's equipment used in connection with the Services), and other taxes now or hereafter imposed as a result of the transactions contemplated by this Agreement, none of which have been included in the fees payable to CORD under this Agreement; provided that the amounts payable by Client under this section shall not include taxes based on the net income of CORD. 11. TRADEMARKS. Neither Party shall have the right to use the name of the other Party or any Affiliate of the other Party, or the other Party's or such Affiliates' trademarks, service marks, logos, or other similar marks in any manner except with the prior written approval of that Party; provided that the foregoing shall not prohibit CORD's use of Client' names or marks in connection with the performance of the Services in a manner consistent with this Agreement. 5 "Affiliate," as used in this Agreement, means any legal entity which, during the Term hereof, controls, is controlled by, or is under common control with, such Party. For purposes of this definition, an entity shall be deemed to control another entity if it owns or controls, directly or indirectly, at least fifty percent (50%) of the voting interest of all equity interests of the other entity (or other such comparable ownership interest for an entity other than a corporation). 12. CONFIDENTIALITY. 12.1 Each Party acknowledges that as a result of this Agreement it may learn and have access to trade secrets and other confidential and proprietary information of the other Party through employees, representatives and/or agents acting on behalf of or subcontracted to either Party (collectively the "Representatives"), including without limitation, financial information, information regarding business practices and techniques, and systems and technology information, or any information identified as confidential in writing by either Party (the "Confidential Information"). For purposes of this Agreement, Confidential Information shall not include information disclosed by one Party to the other Party to the extent that such information can be proven by written evidence: (a) to be in the public domain or generally available in the industry in which the disclosing Party engages in business without any violation of this Agreement by the other Party; (b) is already legally known to the other Party or any of its Affiliates at the time of its disclosure by the disclosing Party; (c) becomes known to the other Party or any of its Affiliates from a third party without any obligation of confidentiality or limitation on use; or (d) is independently developed by the other Party or any of its Affiliates prior to the date of its disclosure. The specific material terms of this Agreement shall be deemed to be the Confidential Information of each Party. Confidential Information shall not be deemed to be in the public domain or publicly known or in the receiving Party's possession because it is embraced by more general information in the receiving Party's possession or because it is embraced in general terms in publications. 12.2 Neither Party shall, directly or indirectly, at any time: (a) disclose to any third person or entity any Confidential Information of the other Party (whether learned before or after the date of this Agreement), or (b) use, or permit or assist any third person or entity to use, any such Confidential Information, excepting only: (i) disclosures required by law, rule, regulation or order, as reasonably determined by the disclosing Party or its legal counsel, and (ii) disclosures on a confidential basis to directors, officers, employees, and agents of that Party or its Affiliates who have a reasonable need to know such Confidential Information in the normal course of business of that Party or any of that Party's Affiliates. 12.3 The obligations of confidentiality hereunder shall survive the termination of this Agreement for a period of three (3) years. Upon termination of this Agreement (for any reason) each Party shall promptly: (i) return to the other Party all documentation and other materials (including copies of original documentation or other materials) containing any Confidential Information of the other Party; or (ii) with the other Party's consent, which consent will not be unreasonably withheld, certify to the other Party, pursuant to a certificate in form and substance reasonably satisfactory to the other Party, as to the destruction of all such documentation and other materials. 6 13. INDEMNIFICATION. Each Party shall indemnify, defend and hold harmless the other Party and its parent and Affiliates, and each of their directors, officers, employees, agents, and representatives from and against all claims, liabilities, losses, damages, costs, and expenses, including, without limitation, reasonable attorneys' fees ("Liability") to a third party or property arising directly or indirectly out of any failure of that Party to perform fully all obligations and conditions to be performed by that Party pursuant to this Agreement or any breach of any warranty made by that Party in this Agreement. Client further agrees to indemnify, defend and hold harmless CORD, its parent and Affiliates and each of their directors, officers, employees, agents and representatives from any and all Liability arising directly or indirectly out of injury or death to person or property alleged to have been caused by Client's Product. 14. LIMITATION OF LIABILITY. NOTWITHSTANDING THE FOREGOING PROVISIONS OF SECTION 13, OR ANY OTHER PROVISION OF THIS AGREEMENT TO THE CONTRARY, NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY CONSEQUENTIAL (SPECIFICALLY EXCEPTING THOSE CONSEQUENTIAL DAMAGES ARISING FROM EACH PARTY'S OBLIGATION TO INDEMNIFY THE OTHER FOR LIABILITY ARISING OUT OF OR RELATING TO THIRD PARTY CLAIMS IN ACCORDANCE WITH SECTION 13 ABOVE), INCIDENTAL, INDIRECT, SPECIAL, OR OTHER SIMILAR DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT. 15. INSURANCE. During the term of this Agreement and for as long thereafter as necessary to cover claims resulting from this Agreement, Client shall maintain: (i) product liability and commercial general liability insurance having a limit of not less than $5 million; and (ii) property damage insurance at replacement value for the Product located at the CORD Facility or in transit to or from the CORD Facility, pursuant to one or more insurance policies with reputable insurance carriers. Cardinal Health, Inc. and its subsidiaries shall be designated as "additional insureds" under the product liability and commercial general liability insurance policy(ies) and under the property damage insurance policy(ies). Prior to the Commencement Date, Client shall deliver to CORD certificates evidencing such insurance. Client shall not cause or permit such insurance to be canceled or modified to materially reduce its scope or limits of coverage during the term of this Agreement or thereafter as provided above. Except for any losses resulting solely from the gross negligence or intentional misconduct of CORD, Client shall bear all risk of loss or damage with respect to the Product, whether located at the Facility or otherwise. During the term of this Agreement, CORD shall maintain commercial general liability insurance in the amount of Two Million Dollars ($2,000,000). Client shall be designated as an "additional insured" under such commercial general liability insurance. 16. DISPUTE RESOLUTION. The Parties agree to use good faith efforts to resolve all disputes within ninety (90) days of written notice that such a dispute exists. If dispute under this Agreement cannot be resolved by the Parties within such sixty (60) day period, the Parties agree to refer the matter to one executive from each Party not directly involved in the dispute for review and resolution. A copy of the terms of this Agreement, agreed upon facts and areas of disagreement, and a concise summary of the basis for each side's contentions will be provided to both executives who shall review the same, confer, and attempt to reach a mutual resolution of 7 the issue within forty-five (45) days after receipt of the materials referenced above. If the matter has not been resolved within such forty-five (45) day period, either or both Parties may pursue resolution of the matter through litigation or other process available under law or equity. 17. COMPLIANCE WITH PRESCRIPTION DRUG MARKETING ACT. 17.1 Each Party shall comply with the applicable provisions of the Prescription Drug Marketing Act ("PDMA") and the distribution of the samples of the Product pursuant to this Agreement shall be in accordance with the applicable provisions of the PDMA, including but not limited to the following. 17.2 Client hereby appoints CORD is an authorized distributor of record (as that term is used in the PDMA) for purposes of distributing samples of the Product. 17.3 A written request for a sample of the Product to be delivered to a licensed practitioner must be received by CORD prior to the delivery of the sample of the Product. The request must contain the following information: (a) The name, address, professional title, and signature of the practitioner making the request; (b) The practitioner's State license or authorization number or, where a scheduled drug product is requested, the practitioner's Drug Enforcement Administration number; (c) The proprietary or established name and the strength of the drug sample requested; (d) The quantity requested; (e) The name of the manufacturer (Client) and the authorized distributor of record (CORD), if the drug sample is requested from an authorized distributor of record; and (f) The date of the request. A written request for a drug sample to be delivered to the pharmacy of a hospital or other health care entity is required to contain, in addition to the information set forth above, the name and address of the pharmacy of the hospital or other health care entity to which the drug sample is to be delivered. 17.4 Client shall verify with the appropriate State authority that the practitioner requesting the drug sample is licensed or authorized under State law to prescribe the drug product, and shall communicate such verification to CORD prior to shipment of the sample of the Product. 17.5 The recipient of the drug sample must execute a written receipt that includes the following information when the drug sample is delivered: 8 (a) If the drug sample is delivered to the licensed practitioner who requested it, the receipt is required to contain the name, address, professional title and signature of the practitioner or the practitioner's designee who acknowledges delivery of the drug sample; the proprietary or established name and strength of the drug sample and the quantity of the drug sample delivered; and the date of delivery. (b) If the drug sample is delivered to the pharmacy of a hospital or other health care entity at the request of a licensed practitioner, the receipt is required to contain the name and address of the requesting licensed practitioner; the name and address of the hospital or health care entity pharmacy designated to receive the drug sample; the name, address, professional title, and signature of the person acknowledging delivery of the drug sample; the proprietary or established name and strength of the drug sample delivered; and the date of delivery. The receipt shall be returned to CORD by the carrier. 18. MISCELLANEOUS. 18.1 Relationship of the Parties. The relationship among the Parties is that of independent contractors, and this Agreement does not establish or create a partnership, joint venture, or other agency relationship among the Parties. 18.2 Notices. Any notice or other communication required or desired to be given to any Party under this Agreement shall be in writing and shall be deemed given: (a) three business days after such notice is deposited in the United States mail, first-class postage prepaid, and addressed to that Party at the address for such Party set forth at the end of this Agreement; (b) one business day after delivered to Federal Express, Airborne, or any other similar express delivery service for delivery to that Party at that address; or (c) when sent by facsimile transmission, with electronic confirmation, to that Party at its facsimile number set forth at the end of this Agreement. Any notice delivered by facsimile transmission will be deemed delivered upon electronic confirmation provided the notice is also deposited in the U.S. mail, first-class postage prepaid. Any Party may change its address or facsimile number for notices under this Agreement by giving the other Parties notice of such change. 18.3 Governing Law. This Agreement shall be construed under the laws of the State of Tennessee, without regard to its conflicts of laws provisions. 18.4 Severability. If any term of this Agreement is declared invalid or unenforceable by a court or other body of competent jurisdiction, the remaining terms of this Agreement will continue in full force and effect. 18.5 Non-Waiver. No failure by either Party to insist upon strict compliance with any term of this Agreement, to enforce any right, or to seek any remedy upon any default of the other Party shall affect, or constitute a waiver of, the first Party's right to insist upon strict compliance, to exercise that option, to enforce that right, or to seek that remedy with respect to that default or any prior, contemporaneous, or subsequent default. No custom or practice of the Parties at 9 variance with any provision of this Agreement shall affect, or constitute a waiver of, that Party's right to demand strict compliance with all provisions of this Agreement. 18.6 Force Majeure. If the performance of any part of this Agreement by either Party shall be prevented, restricted, interfered with or affected for any length of time by fire or other casualty, government restrictions, war, riots, strikes or labor disputes, lock out, transportation delays, acts of God, or any other causes which are beyond the reasonable control of such Party, such Party shall not be responsible for delay or failure of performance of this Agreement for such length of time, provided, however, that the obligation of one Party to pay amounts due to the other Party shall not be subject to the provisions of this Section. 18.7 Complete Agreement. This Agreement constitutes the entire understanding between the Parties and supersedes any contracts, agreements or understanding (oral or written) of the Parties with respect to the subject matter hereof. No term of this Agreement may be amended except upon written agreement of both Parties, unless provided otherwise in this Agreement. 18.8 Assignment. Except as set forth herein, neither Party shall have the right to assign this Agreement, or any of such Party's rights or obligations under this Agreement, without the prior written consent of the other Party, provided, however, that CORD may assign its rights under this Agreement to any parent, subsidiary or affiliate without obtaining such consent. This Agreement shall be binding upon, inure to the benefit of, and be enforceable by and against the respective successors and assigns of the Parties. 18.9 Independent Contractor. The relationship of the Parties is that of independent contractors, and neither Party shall incur any debts or make any commitments for the other Party except to the extent expressly provided in this Agreement. Nothing in this Agreement is intended to create or shall be construed as creating between the Parties the relationship of joint ventures, co-partners, employer/employee, principal and agent, or any other agency relationship. IN WITNESS WHEREOF, the undersigned acknowledge and accept the terms of this Agreement and have duly executed this Agreement. CORD LOGISTICS, INC. COLLAGENEX PHARMACEUTICALS By /s/ Frank C. Wegerson By /s/Frank Ruffo ---------------------------- -------------------------------- Frank C. Wegerson Vice President and General Manager Title Sr. Director of Finance, Controller ---------------------------- 15 Ingram Boulevard 41 University Drive, Suite 200 LaVergne, TN 37086 Newtown, PA 18940 Facsimile No. (615) 793-4783 Facsimile No. 215-579-8577 --------------------- 10 EXHIBITS -------- Exhibit A Operating Guidelines Exhibit B Fee Schedule Exhibit C System Access Agreement 11 EXHIBIT A --------- OPERATING GUIDELINES 12 EXHIBIT B --------- FEE SCHEDULE - -------------------------------------------------------------------------------- DISTRIBUTION SERVICES Monthly per pallet refrigerated storage $ [**] Monthly per pallet ambient storage $ [**] Product pick/pack/stage - per line (1) $ [**] Representative Sample Product pick/pack/stage - (first case)(1) $ [**] Representative Sample Product pick/pack/stage - (each add'l case)(1) $ [**] Monthly distribution system access and use (2) $ [**] Monthly account management fee (4) $ [**] Emergency/International Orders $ [**] Packing/Shipping Supplies (3) Cost plus [**]% handling fee (includes ordering, receiving, storage) Outbound Shipping Charges Cost plus [**]% handling fee CUSTOMER SERVICE Monthly fixed fee $ [**] Per order fee & per credit memo fee $ [**] FINANCIAL SERVICES Monthly fixed fee Accounts Receivable Management $ [**] Per order fee Accounts Receivable Management $ [**] Monthly fixed fee Chargeback Management $ [**] Per submission Chargeback Processing & Government Reporting $ [**] - --------------------------------------------------------------------------------
Note (1): This proposal is based on the distribution of Periostat and Denatplex only, any additional products requiring distribution services will be quoted separately. The pick/pack fee will be tiered as follows: [**] to [**] lines per month $[**] per line [**] to [**] lines per month $[**] per line >[**] lines per month $[**] per line Note (2): System access fee includes licenses for two concurrent users. Any additional licenses required by CollaGenex will increase the monthly fee by $[**] per concurrent user. Note (3): Supplies include boxes, tape, labels, bubble pack, etc. (approx. $[**] to $[**] per shipment), pallets if necessary ($[**] per pallet), and any other CollaGenex requirements. Note (4): The account management fee includes the following: logistics management, inventory management, quality assurance (QA), regulatory, receiving, supply control, process set-ups, and process scheduling. 13 EXHIBIT C --------- SYSTEM ACCESS AGREEMENT This System Access Agreement ("Agreement") is made as of March 1, 2002 between CORD Logistics, Inc., an Ohio corporation ("Licensor"), and CollaGenex Pharmaceuticals, Inc., a Pennsylvania corporation ("Licensee"), who hereby agree as follows: 1. Distribution Services Agreement. Licensor and Licensee have entered into a Distribution Services Agreement ("Distribution Agreement") of even date with this Agreement, the terms of which are incorporated by reference. 2. System Access; Maintenance Obligations. Licensor hereby grants to Licensee a nonexclusive, nontransferable limited license (the "License") to utilize Licensor's Operating System Base Package, consisting of the computer hardware (as set forth below), software, and other components described in the Distribution Agreement as well as future upgrades and maintenance of the base package (collectively, the "System"), for the information processing needs of Licensee in connection with the Services to be provided by Licensor under the Distribution Agreement. Licensee shall maintain during the term of this Agreement the local area network (including without limitation centralized server) and desktop processing requirements for the System as further described in the Distribution Agreement or the Operating Guidelines, a copy of which are attached to the Distribution Agreement as Exhibit A. During the term of this Agreement, Licensor shall employ reasonable security measures and policies designed to safeguard the integrity, accessibility, and confidentiality of all of Licensee's data resident on the System and establish and maintain reasonable disaster and emergency recovery plans designed to minimize disruption from System operation interruptions. Licensee shall have the right to review the operation of the System from time to time during regular business hours, upon reasonable prior notice and at a time mutually agreeable by the parties; provided that such reviews shall be conducted in a manner to avoid disruption of Licensor's business operations. 3. Lease of Hardware. Licensee shall have the right to lease a router ("Hardware") from Licensor during the term of this Agreement, at no additional cost to Licensee, other than the Fee set forth in the Distribution Agreement. The Hardware shall be kept by Licensee (a) subject to inspection by Licensor during regular business hours, upon reasonable prior notice and at a time mutually agreeable by the parties; (b) at Licensee's address, as stated at the end of this Agreement, which Hardware shall not be relocated without the prior written consent of Licensor, which consent shall not be unreasonably withheld; (c) free of all security interests if any kind whatsoever, liens, encumbrances and other claims; (d) marked with Licensor's identification marks or numbers and if requested by Licensor, conspicuously labeled "supplied by Licensor"; and (e) maintained in good and efficient working order, condition and repair, reasonable wear and tear accepted. 14 Licensee shall use the equipment with due care to prevent injury thereto, and to any person or property and in conformity with all applicable laws, ordinances, rules, regulations and other requirements of any insurer or governmental bonding and with all requirements of the manufacturer with respect to use, maintenance and operation of the Hardware. Licensee shall not modify any hardware without the prior written consent of Licensor, which may be granted or withheld in its sole discretion. It is the intention and understanding of both Licensor and Licensee that the Hardware shall be, and at all times remain, separately identifiable personal property of Licensor. Licensee shall not permit any Hardware to be installed in or used, stored or maintained with, any of Licensee's personal property in such manner or under such circumstances that such Hardware might be or become an accession to or confused with such other personal property. Licensee shall not permit such Hardware to be installed in or used, stored or maintained with, any real property in such manner or under such circumstances that any person might acquire any rights in such Hardware paramount to the rights of the Licensor by reason of such Hardware being deemed to be real property or a fixture thereon. Licensee shall at all times during the term of this Agreement and until the Hardware has been returned to Licensor, at its own expense, maintain physical damage insurance in the amount of not less than the replacement value of the Hardware. All insurance so maintained shall provide for a thirty (30) day prior written notice to Licensor or its assignees of any cancellation or reduction of coverages; (ii) an option in Licensor or its assignees to prevent cancellation by payment of premiums, (iii) cover the interest of the Licensor and (iv) provide that all insurance proceeds shall be payable to the Licensee and Licensor, as their respective interests may appear at the time of any such payment. Licensor shall be named as an additional insured on any public liability insurance policy so maintained. Upon the request of Licensor, Licensee shall furnish to Licensor satisfactory evidence of any insurance so maintained. 4. Proprietary Rights. Licensee shall have the right to use the System during the term of this Agreement as expressly provided in paragraphs 1 and 2 of this Agreement, but not otherwise. Licensee shall not assign or otherwise transfer, disclose, copy, modify, re-engineer, sell, license, disassemble, or decompile the System or disclose or permit access to the System or related documentation to any other person or entity. The System and all parts thereof, in all of their tangible and intangible manifestations, all existing or new enhancements, developments, derivative works, and other adaptions or modifications to the System (or any part thereof), and all related proprietary rights, are and shall remain the exclusive property of Licensor. Except for the License and Lease, Licensee shall have no right, title, or interest in or to the System or any part thereof. Upon termination of this Agreement, Licensee shall promptly return to Licensor all portions of the System then in Licensee's possession or under its control in accordance with the term set forth in Section 6 below. 5. Warranties. Licensee acknowledges that it has had adequate opportunity to review the System and its features and operation, and Licensee accepts the System "AS IS" for its use as contemplated in the Distribution Agreement. LICENSOR MAKES NO REPRESENTATIONS OR WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL REPRESENTATIONS AND WARRANTIES, EXPRESS OR IMPLIED, RELATING DIRECTLY OR INDIRECTLY TO THE SYSTEM OR ANY PART THEREOF, INCLUDING WITHOUT LIMITATION ANY WARRANTIES OF QUALITY, 15 PERFORMANCE, MERCHANTABILITY, OR FITNESS FOR A PARTICULAR PURPOSE. 6. Limitation On Liability. LICENSOR SHALL NOT BE LIABLE FOR ANY CONSEQUENTIAL, INDIRECT, SPECIAL, OR OTHER SIMILAR DAMAGES ARISING DIRECTLY OR INDIRECTLY OUT OF THE USE OR INABILITY TO USE THE SYSTEM OR ANY PART THEREOF, EVEN IF INFORMED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER CLAIMED UNDER CONTRACT, TORT, OR ANY OTHER LEGAL THEORY. IF ANY OF THE LIMITATIONS ON THE LIABILITY OF LICENSOR CONTAINED IN THIS AGREEMENT ARE FOUND TO BE INVALID OR UNENFORCEABLE FOR ANY REASON, THEN LICENSOR AND LICENSEE EXPRESSLY AGREE THAT THE MAXIMUM AGGREGATE LIABILITY OF LICENSOR FOR ALL CLAIMS RELATING TO THE SYSTEM SHALL NOT EXCEED 100% OF THE AGGREGATE BASE PACKAGE FEES PAID BY LICENSEE TO LICENSOR FOR LICENSEE'S USE OF THE SYSTEM UNDER THE DISTRIBUTION AGREEMENT. 7. Taxes. Licensee shall pay when due all sales, use, gross receipts, excise, property, and other taxes (other than taxes based upon Licensor's net income) now or hereafter imposed as a result of the transactions contemplated by this Agreement. 8. System Availability. The System shall be available for access twenty-four (24) hours a day, seven (7) days a week, except for scheduled maintenance periods. 9. Term. The term of this Agreement shall begin upon Licensee's initial use of the System as evidenced by the first entry of inventory into the System (which may be a date earlier than the Commencement Date specified for the Distribution Agreement) and shall end: (a) automatically upon the termination of the Distribution Agreement (for any reason), or (b) on any earlier date specified by Licensee in notice to Licensor given not less than ninety (90) days prior to the specified termination date; provided that: (i) paragraphs 4 through 10 inclusive shall survive the termination of this Agreement, and (ii) no termination of this Agreement shall affect any liabilities arising from, or based upon, acts or omissions occurring prior to such termination. 10. Expiration/termination. Licensee shall continue to have access to the System for a reasonable period of time (not be exceed ninety (90) days) following termination of this Agreement solely for purposes of retrieving and transferring to a separate system Licensee's data relating to its pre-termination operations, and Licensor shall reasonably cooperate with Licensee to preserve the integrity and accessibility of Licensee's data during such period; provided that, during such period, Licensee shall continue to pay the full Base Package and other fees payable by Licensee under the Distribution Agreement and comply with all other requirements imposed upon Licensee under this Agreement. Upon the expiration of this Agreement, Licensee shall return the Hardware to Licensor in the same condition and configuration as received, receivable wear and tear accepted. 16 11. Notices. Any notice or other communication required or desired to be given to either Party under this Agreement shall be in writing and shall be deemed given: (a) five (5) days after mailing, if deposited in the United States mail, first-class postage prepaid, and addressed to that Party at its address set forth at the end of this Agreement; (b) when received if delivered to Federal Express or any other similar overnight delivery service for delivery to that Party at that address; or (c) when sent by facsimile transmission, with electronic confirmation, to that Party at its facsimile number set forth at the end of this Agreement. Either Party may change its address or facsimile number for notices under this Agreement by giving the other Party notice of such change. 12. Remedies. Licensee shall indemnify Licensor and its affiliates, directors, officers, employees, agents, and representatives against all claims, liabilities, losses, damages, costs, and expenses (including without limitation reasonable attorneys' fees) arising directly or indirectly out of any failure of Licensee to perform fully all obligations and conditions to be performed by Licensee pursuant to this Agreement. Licensee acknowledges that in the event of any violation by it of any of the provisions of paragraph 2 (Proprietary Rights) of this Agreement, Licensor would suffer irreparable harm and its remedies at law would be inadequate. Accordingly, in the event of any violation or attempted violation of any such provisions by Licensee, Licensor shall be entitled, in addition to any other rights or remedies which may be available to Licensor, to a temporary restraining order, temporary and/or permanent injunctions, specific performance, and other equitable relief, without the showing of irreparable harm, injury, damage or the inadequacy of damages, and without the necessity of the posting of any bond. 13. Force Majeure. Notwithstanding any other provisions of this Agreement or the Distribution Agreement to the contrary, each Party's obligations under this Agreement (exclusive of payment obligations) shall be excused if and to the extent that any delay or failure to perform such obligations is due to fire or other casualty, government restrictions, war, riot, strikes or labor disputes, acts of God, or other causes beyond the reasonable control of that Party; provided, however, that any party hindered by such condition beyond its reasonable control must employ reasonable efforts to overcome such hindrance as promptly as practicable. 14. Successors. Licensee shall not assign or otherwise transfer this Agreement or any of its rights or obligations under this Agreement without the prior written consent of Licensor, which consent shall not be unreasonably withheld. Subject to the preceding sentence, this Agreement shall be binding upon, inure to the benefit of, and be enforceable by and against the respective successors and assigns of each Party. 15. Interpretation. This Agreement shall be governed by and construed in accordance with the laws of the State of Ohio. If and to the extent that any court of competent jurisdiction determines that it is impossible to construe any provision of this Agreement consistently with any law or public policy and consequently holds that provision to be invalid, such holding shall in no way affect the validity of the other provisions of this Agreement, which shall remain in full force and effect. 16. Complete Agreement. This Agreement (together with the Distribution Agreement, which is hereby incorporated herein by reference) constitutes the entire Agreement between the Parties with respect to the subject matter of this Agreement and supersedes all prior 17 or contemporaneous discussions, negotiations, representations, warranties, or Agreements relating to the subject matter of this Agreement. This Agreement may not be amended or otherwise modified except by a written instrument signed by each Party. IN WITNESS WHEREOF, the undersigned acknowledge and accept the terms of this Agreement and have duly executed this Agreement. CORD LOGISTICS, INC. COLLAGENEX PHARMACEUTICALS By /s/ Frank C. Wegerson By /s/Frank Ruffo ---------------------------- -------------------------------- Frank C. Wegerson Vice President and General Manager Title Sr. Director of Finance, Controller ---------------------------- 15 Ingram Boulevard 41 University Drive, Suite 200 LaVergne, TN 37086 Newtown, PA 18940 Facsimile No. (615) 793-4783 Facsimile No. 215-579-8577 --------------------- 18 EX-99 7 exh10-4.txt EXHIBIT 10.4 Exhibit 10.4 FIRST LOAN MODIFICATION AGREEMENT This First Loan Modification Agreement (this "Loan Modification Agreement") is entered into as of March 22, 2002, by and between SILICON VALLEY BANK, a California-chartered bank, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at One Newton Executive Park, Suite 200, 2221 Washington Street, Newton, Massachusetts 02462, doing business under the name "Silicon Valley East" ("Bank") and COLLAGENEX PHARMACEUTICALS, INC., a Delaware corporation with its chief executive office located at 41 University Drive, Newtown, Pennsylvania 18940 ("Borrower"). 1. DESCRIPTION OF EXISTING INDEBTEDNESS AND OBLIGATIONS. Among other indebtedness and obligations which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a loan arrangement dated as of March 19, 2001, evidenced by, among other documents, a certain Loan and Security Agreement dated as of March 19, 2001, between Borrower and Bank (the "Loan Agreement"). Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement. Hereinafter, all indebtedness and obligations owing by Borrower to Bank shall be referred to as the "Obligations". 2. DESCRIPTION OF COLLATERAL. Repayment of the Obligations is secured by the Collateral as described in the Loan Agreement and the Intellectual Property Collateral, as described in the Intellectual Property Security Agreement dated as of March 19, 2001, between the Borrower and the Bank (together with any other collateral security granted to Bank, the "Security Documents"). Hereinafter, the Security Documents, together with all other documents evidencing, securing or otherwise executed in connection with the Obligations shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. Modifications to Loan Agreement. From and after the execution of this Loan Modification Agreement, the Loan Agreement shall be amended as follows: 1. By deleting the text "$3,000,000" appearing in Section 1 (A) (i) of the Schedule, and inserting "$4,000,000" in lieu thereof." 2. By adding the following text at the end of the "Interest Rate" subsection appearing in Section 2 of the Schedule: "In the event Borrower achieves two (2) consecutive fiscal quarters of profitability, as determined by Silicon in accordance with generally accepted accounting principles, the applicable interest rate shall be reduced from a rate equal to the "Prime Rate" in effect from time to time, plus 1.50% per annum, to a rate equal to the "Prime Rate" in effect from time to time, plus 1.00% per annum." 3. By deleting the following text appearing in Section 3 of the Schedule: "Collateral Handling Fee: $800.00 per month, payable in arrears." and replacing it with the following text: "Collateral Handling Fee: $800.00 per month ($500.00 per month when there are no borrowings or other amounts outstanding under the Loan and Security Agreement), payable in arrears." 4. By deleting the following text appearing in Section 4 of the Schedule: "One year from the date of this Agreement." and replacing it with the following text: "March 15, 2004." 5. By deleting the following text appearing in the Minimum Tangible Net Worth covenant in Section 5 of the Schedule: "(b) $4,000,000, plus 75% of the Borrower's cumulative quarterly profitability, thereafter;" and replacing it with the following text: "(b) $5,000,000, plus 75% of the Borrower's cumulative quarterly profitability, thereafter;" 6. By deleting the following text appearing in Section 5(c) of the Schedule: "Borrower must maintain a minimum of $2,000,000 in cash, net of borrowings under this Agreement, at all times during the term of this Agreement." and replacing it with the following text: "Borrower must maintain a minimum of $2,000,000 in cash at Silicon, net of borrowings under this Agreement, at all times during the term of this Agreement." 7. By deleting the following text appearing in Section 9(1) of the Schedule: "In order for Silicon to properly monitor its loan arrangement with Borrower, Borrower shall at all times maintain its primary banking relationship with Silicon." and replacing it with the following text: "In order for Silicon to properly monitor its loan arrangement with Borrower, Borrower and MMP, Inc., a subsidiary of Borrower and a Guarantor of the Obligations of the Borrower to Silicon, shall at all times maintain their primary banking relationships and all other material cash balances and investments with Silicon. For the purposes of this subsection, the term "material" shall be determined by Silicon in its sole discretion and, in all events, accounts with a balance in excess of $50,000.00 shall be deemed to be "material". Notwithstanding the foregoing, MMP, Inc., may maintain balances with third party institutions in an aggregate amount not to exceed $1,500,000 provided that MMP, Inc. causes to be delivered to Silicon account control agreements in such form and substance as Silicon may require." 8. By deleting text "$600 per person" appearing in Section 5.4 of the Loan Agreement and replacing it with the following text: "$700 per person," 9. By adding the following text at the end of Section 5.5(x) of the Loan Agreement: "except for, prior to the occurrence of an Event of Default, preferred stock cash dividends in an amount not to exceed $400,000 in calendar year 2002, $1,600,000 in calendar year 2003, and $400,000 in the first quarter of calendar year 2004." 4. RATIFICATION OF INTELLECTUAL PROPERTY SECURITY AGREEMENT. Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and conditions of a certain Intellectual Property Security Agreement dated as of March 19, 2001 between Borrower and Bank, and acknowledges, confirms and agrees that, except as previously disclosed in writing to Bank, said Intellectual Property Security Agreement contains an accurate and complete listing of all Intellectual Property Collateral (as defined in said Intellectual Property Security Agreement) and shall remain in full force and effect. 5. ADDITIONAL COVENANTS. Borrower shall not, without providing the Bank with thirty (30) days prior written notice: (i) relocate its principal executive office or add any new offices or business locations or keep any Collateral in any additional locations, or (ii) change its jurisdiction of organization, or (iii) change its organizational structure or type, (iv) change its legal name, or (v) change any organizational number (if any) assigned by its jurisdiction of organization. In addition, the Borrower hereby certifies that no Collateral is in the possession of any third party bailee other than Cord Logistics (such as at a warehouse). In the event that Borrower, after the date hereof, intends to store or otherwise deliver the Collateral to such a bailee, then Borrower shall first receive, the prior written consent of Bank and such bailee must acknowledge in writing that the bailee is holding such Collateral for the benefit of Bank. 6. WAIVER. Bank hereby waives Borrower's failure to comply with the Tangible Net Worth covenant requirement set forth in the Schedule to the Loan Agreement tested as of January 31, 2002 (the "Existing Default"). This waiver applies only to the specific Existing Default, is a one-time waiver, and shall not be deemed to constitute a continuing waiver of this or any other provision of the Loan Agreement or a waiver of this Tangible Net Worth covenant for any other period. 7. AUTHORIZATION TO FILE. Borrower hereby authorizes Bank to file financing statements without notice to Borrower, with all appropriate jurisdictions, as Bank deems appropriate, in order to further perfect or protect Bank's interest in the Collateral. 8. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 9. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of the Existing Loan Documents and all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Obligations. 10. NO DEFENSES OF BORROWER. The Borrower hereby acknowledges and agrees that the Borrower has no offsets, defenses, claims, or counterclaims against the Bank or the Bank's officers, directors, employees, attorneys, representatives, predecessors, affiliates, subsidiaries, parents, successors, and assigns with respect to the Obligations, and/or the Existing Loan Documents, and that if the Borrower now has, or ever did have, any offsets, defenses, claims, or counterclaims against the Bank or the Bank's officers, directors, employees, attorneys, representatives, predecessors, affiliates, subsidiaries, parents, successors, and assigns, whether known or unknown, at law or in equity, from the beginning of the world through this date and through the time of execution of this Loan Modification Agreement, with respect to the Obligations and/or the Existing Loan Documents, all of them are hereby expressly WAIVED, and the Borrower hereby RELEASES the Bank and the Bank's officers, directors, employees, attorneys, representatives, predecessors, successors, and assigns from any liability therefor. 11. FEES. Upon or prior to the execution of this Loan Modification Agreement, Borrower shall pay to Bank a fee in the amount of $20,000.00 and, on one year from the date of this Loan Modification Agreement, Borrower shall pay to Bank an additional fee in the amount of $15,000.00, which fees shall be retained by Bank and not applied in reduction of the Obligations. In addition, the Borrower shall reimburse Bank for all legal fees and expenses incurred in connection with this amendment to the Existing Loan Documents. 12. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing Obligations, Bank is relying upon Borrower's representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modify the existing Obligations pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Obligations. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Obligations. It is the intention of Bank and Borrower to retain as liable parties all makers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker will be released by virtue of this Loan Modification Agreement. 13. JURISDICTION/VENUE. Borrower accepts for itself and in connection with its properties, unconditionally, the non-exclusive jurisdiction of any state or federal court of competent jurisdiction in the Commonwealth of Massachusetts in any action, suit, or proceeding of any kind against it which arises out of or by reason of this Loan Modification Agreement; provided, however, that if for any reason Bank cannot avail itself of the courts of the Commonwealth of Massachusetts, then venue shall lie in Santa Clara County, California. NOTWITHSTANDING THE FOREGOING, THE BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION WHICH THE BANK DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE THE BANK'S RIGHTS AGAINST THE BORROWER OR ITS PROPERTY. [The remainder of this page is intentionally left blank] This Loan Modification Agreement is executed as a sealed instrument under the laws of the Commonwealth of Massachusetts as of the date first written above. BORROWER: BANK: COLLAGENEX PHARMACEUTICALS, INC. SILICON VALLEY BANK, doing business as SILICON VALLEY EAST By: /s/ Nancy C. Broadbent By: /s/ John V. Atanasoff ----------------------------- ---------------------------------- Name: Nancy C. Broadbent Name: John V. Atanasoff --------------------------- -------------------------------- Title: Chief Financial Officer Title: Regional Market Manager -------------------------- ------------------------------- ACKNOWLEDGED AND AGREED: MMP, INC. By: /s/ Frank Ruffo ----------------------------- Name: Frank Ruffo --------------------------- Title: Secretary and Treasurer -------------------------- PERFECTION CERTIFICATE OF COLLAGENEX PHARMACEUTICALS, INC. The undersigned, Nancy C. Broadbent of COLLAGENEX PHARMACEUTICALS, INC., a Delaware corporation (the "Company"), hereby certifies with reference to the Loan and Security Agreement dated as of March 19, 2001, as amended of even date between the Company and SILICON VALLEY BANK (the "Bank") (terms defined therein being used herein as therein defined), to the Bank as follows (for purposes of this Perfection Certificate, those questions for which no response is completed shall be deemed to read "NONE"): 1. Names. (a) The exact legal name of the Company as it appears in its certificate of incorporation, as amended to date, is as follows: CollaGenex Pharmaceuticals, Inc. (b) The following is a list of all other names (including trade names or similar appellations) used by the Company, or any of its divisions or other business units, or any other business or organization to which the Company became the successor by merger, consolidation, acquisition, change in form, nature or jurisdiction of organization or otherwise, now or at any time during the past five years together with the dates such names were used: CollaGenex, Inc (4/10/96) (c) The following is a list of all subsidiaries of the Company (whether wholly owned, or where the Company has a controlling or majority interest): MMP Technologies, Inc CollaGenex International, LTD (d) The following is the type of organization of the Company: C Corporation (e) The jurisdiction of organization of the Company is as follows: North America, Europe and Asia (f) The following is the Company's state issued organizational identification number, if any: Delaware 2284752 (g) The Company's federal taxpayer identification number is: 52-1758016 (h) The Company currently maintains its bank and investment accounts at: (1) Bank Accounts - SVB, First Union, DBAB (2) Investment Accounts - SVB, Evergreen Investments (First Union) (3) Payroll Accounts - SVB (4) Other depository/operating accounts - SVB (i) The Company currently has the following commercial tort claims against other parties: None (j) Attached hereto as SCHEDULE A is the information required above for any other business or organization to which the Company became the successor by merger, consolidation, acquisition, change in form, nature or jurisdiction of organization or otherwise, now or at any time during the past five (5) years: None 2. Current Locations. (a) The following is the mailing address of the Company: Mailing Address City State --------------- ---- ----- 41 University Dr Newtown Pennsylvania (b) If different from its mailing address, the Company's place of business, or if more than one, its CHIEF EXECUTIVE OFFICE is located at the following address: Mailing Address City State --------------- ---- ----- N/A (c) If different from the addresses set forth in subparagraphs (a) and (b) above, the following are all other locations in which the Company maintains any books or records relating to any of the Collateral consisting of accounts, instruments, chattel paper, general intangibles or mobile goods: Mailing Address City State --------------- ---- ----- N/A (d) If different from the addresses set forth in subparagraphs (a), (b) or (c) above, the following are all places of business of the Company and/or locations maintained by the Company where any Collateral consisting of equipment and/or inventory are located: Mailing Address City State ------- ---- ----- Cord Logistics 15 Ingram Blvd LaVergne Tennessee (e) The following are the names and addresses of all persons or entities other than the Company (such as lessees, bailees, consignees, warehousemen, or purchasers of chattel paper), which have possession or are intended to have possession of any of the Collateral consisting of instruments, chattel paper, inventory or equipment and the nature of such party's possession (such as lessee, bailee, consignee, warehouseman, purchaser of chattel paper, or other): Mailing Nature of Name Address City State Possession - ---- ------- ---- ----- ---------- 3. Prior Locations. (a) Set forth below is the information required by subparagraphs (a), (b), (c) and (d) of paragraph 2 with respect to each location or place of business previously maintained by the Company at any time during the past five (5) years in a state in which the Company has previously maintained a location or place of business: Mailing Address City State --------------- ---- ----- (a) Set forth below is the information required by subparagraph (e) of paragraph 2 with respect to each other location at which, or other person or entity with which, any of the Collateral consisting of instruments, chattel paper, inventory or equipment has been previously held at any time during the past twelve months: Mailing Nature of Name Address City State Possession - ---- ------- ---- ----- ---------- 4. Attached hereto as SCHEDULE B is the information required by U.C.C. ss.9-502(b) or former U.C.C. ss.9-402(5) of each state in which any of the Collateral consisting of fixtures are or are to be located and the name and address of each real estate recording office where a mortgage on the real estate on which such fixtures are or are to be located would be recorded. 5. NO UNUSUAL TRANSACTIONS. Except for those purchases, acquisitions, and other transactions as set forth in SCHEDULE A or SCHEDULE C attached hereto, all of the Collateral has been originated by the Company in the ordinary course of the Company's business or consists of goods which have been acquired by the Company in the ordinary course from a person in the business of selling goods of that kind. The undersigned hereby acknowledges and agrees that the Bank is relying on the representations and warranties made herein in connection with a loan transaction or transactions to be entered into between the undersigned and the Bank. IN WITNESS WHEREOF, I have hereunto set my hand this 22nd day of March, 2002, and this document shall constitute a document under seal under the laws of the Commonwealth of Massachusetts. COLLAGENEX PHARMACEUTICALS, INC. By: /s/ Nancy C. Broadbent -------------------------------------- (duly authorized) Name: Nancy C. Broadbent ----------------------------------- PERFECTION CERTIFICATE OF MMP, INC. The undersigned, Nancy C. Broadbent, of MMP Technologies, INC., a Delaware corporation (the "Company"), hereby certifies with reference to the Loan and Security Agreement dated as of March 19, 2001, as amended of even date between Collagenex Pharmaceuticals, Inc. and SILICON VALLEY BANK (the "Bank") (terms defined therein being used herein as therein defined), to the Bank as follows (for purposes of this Perfection Certificate, those questions for which no response is completed shall be deemed to read "NONE"): 1. Names. (a) The exact legal name of the Company as it appears in its certificate of incorporation, as amended to date, is as follows: MMP Technologies, Inc (b) The following is a list of all other names (including trade names or similar appellations) used by the Company, or any of its divisions or other business units, or any other business or organization to which the Company became the successor by merger, consolidation, acquisition, change in form, nature or jurisdiction of organization or otherwise, now or at any time during the past five years together with the dates such names were used: None (c) The following is a list of all subsidiaries of the Company (whether wholly owned, or where the Company has a controlling or majority interest): None (d) The following is the type of organization of the Company: C Corporation (e) The jurisdiction of organization of the Company is as follows: United States of America (f) The following is the Company's state issued organizational identification number, if any: Delaware 3059678 (g) The Company's federal taxpayer identification number is: 51-0391038 (h) The Company currently maintains its bank and investment accounts at: (1) Bank Accounts - Wilmington Trust (2) Investment Accounts - Wilmington Trust (3) Payroll Accounts- Wilmington Trust (4) Other depository/operating accounts - Wilmington Trust (i) The Company currently has the following commercial tort claims against other parties: None (j) Attached hereto as SCHEDULE A is the information required above for any other business or organization to which the Company became the successor by merger, consolidation, acquisition, change in form, nature or jurisdiction of organization or otherwise, now or at any time during the past five (5) years: None 2. Current Locations. (a) The following is the mailing address of the Company: Mailing Address City State --------------- ---- ----- 103 Springer Building Wilmington Delaware (b) If different from its mailing address, the Company's place of business, or if more than one, its CHIEF EXECUTIVE OFFICE is located at the following address: Mailing Address City State --------------- ---- ----- N/A (c) If different from the addresses set forth in subparagraphs (a) and (b) above, the following are all other locations in which the Company maintains any books or records relating to any of the Collateral consisting of accounts, instruments, chattel paper, general intangibles or mobile goods: Mailing Address City State --------------- ---- ----- N/A (d) If different from the addresses set forth in subparagraphs (a), (b) or (c) above, the following are all places of business of the Company and/or locations maintained by the Company where any Collateral consisting of equipment and/or inventory are located: Mailing Address City State --------------- ---- ----- N/A (e) The following are the names and addresses of all persons or entities other than the Company (such as lessees, bailees, consignees, warehousemen, or purchasers of chattel paper), which have possession or are intended to have possession of any of the Collateral consisting of instruments, chattel paper, inventory or equipment and the nature of such party's possession (such as lessee, bailee, consignee, warehouseman, purchaser of chattel paper, or other): Mailing Nature of Name Address City State Possession - ---- ------- ---- ----- ---------- N/A 3. Prior Locations. (a) Set forth below is the information required by subparagraphs (a), (b), (c) and (d) of paragraph 2 with respect to each location or place of business previously maintained by the Company at any time during the past five (5) years in a state in which the Company has previously maintained a location or place of business: Mailing Address City State --------------- ---- ----- N/A (b) Set forth below is the information required by subparagraph (e) of paragraph 2 with respect to each other location at which, or other person or entity with which, any of the Collateral consisting of instruments, chattel paper, inventory or equipment has been previously held at any time during the past twelve months: Mailing Nature of Name Address City State Possession - ---- ------- ---- ----- ---------- N/A 4. Attached hereto as SCHEDULE B is the information required by U.C.C. ss.9-502(b) or former U.C.C. ss.9-402(5) of each state in which any of the Collateral consisting of fixtures are or are to be located and the name and address of each real estate recording office where a mortgage on the real estate on which such fixtures are or are to be located would be recorded. 5. No Unusual Transactions. Except for those purchases, acquisitions, and other transactions as set forth in SCHEDULE A or SCHEDULE C attached hereto, all of the Collateral has been originated by the Company in the ordinary course of the Company's business or consists of goods which have been acquired by the Company in the ordinary course from a person in the business of selling goods of that kind. The undersigned hereby acknowledges and agrees that the Bank is relying on the representations and warranties made herein in connection with a loan transaction or transactions to be entered into between the undersigned and the Bank. IN WITNESS WHEREOF, I have hereunto set my hand this 22nd day of March, 2002, and this document shall constitute a document under seal under the laws of the Commonwealth of Massachusetts. MMP TECHNOLOGIES, INC. By: /s/ Nancy C., Broadbent ------------------------------------- (duly authorized) Name: Nancy C. Broadbent ----------------------------------- EX-99 8 exh10-5.txt EXHIBIT 10.5 Exhibit 10.5 SECOND LOAN MODIFICATION AGREEMENT This Second Loan Modification Agreement (this "Loan Modification Agreement") is entered into as of March 27, 2002, by and between SILICON VALLEY BANK, a California-chartered bank, with its principal place of business at 3003 Tasman Drive, Santa Clara, California 95054 and with a loan production office located at One Newton Executive Park, Suite 200, 2221 Washington Street, Newton, Massachusetts 02462, doing business under the name "Silicon Valley East" ("Bank") and COLLAGENEX PHARMACEUTICALS, INC., a Delaware corporation with its chief executive office located at 41 University Drive, Newtown, Pennsylvania 18940 ("Borrower"). 1. DESCRIPTION OF EXISTING INDEBTEDNESS AND OBLIGATIONS. Among other indebtedness and obligations which may be owing by Borrower to Bank, Borrower is indebted to Bank pursuant to a loan arrangement dated as of March 19, 2001, evidenced by, among other documents, a certain Loan and Security Agreement dated as of March 19, 2001 between Borrower and Bank, as amended by a certain First Loan Modification Agreement dated as of March 22, 2002 (as amended, the "Loan Agreement"). Capitalized terms used but not otherwise defined herein shall have the same meaning as in the Loan Agreement. Hereinafter, all indebtedness and obligations owing by Borrower to Bank shall be referred to as the "Obligations". 2. DESCRIPTION OF COLLATERAL. Repayment of the Obligations is secured by the Collateral as described in the Loan Agreement and the Intellectual Property Collateral, as described in the Intellectual Property Security Agreement dated as of March 19, 2001, between the Borrower and the Bank (together with any other collateral security granted to Bank, the "Security Documents"). Hereinafter, the Security Documents, together with all other documents evidencing, securing or otherwise executed in connection with the Obligations shall be referred to as the "Existing Loan Documents". 3. DESCRIPTION OF CHANGE IN TERMS. Modification to Loan Agreement. From and after the execution of this Loan Modification Agreement, the Loan Agreement shall be amended by deleting the following text appearing as Section 5.5(x) of the Loan Agreement: "(x) pay or declare any dividends on Borrower's stock (except for dividends payable solely in stock of Borrower and except for dividends payable to holders of the Borrower's Series D Cumulative Convertible Preferred Stock (the "Series D Stock"), except for, prior to the occurrence of an Event of Default, preferred stock cash dividends in an amount not to exceed $400,000 in calendar year 2002, $1,600,000 in calendar year 2003, and $400,000 in the first quarter of calendar year 2004." and replacing it with the following text: "(x) pay any dividends on Borrower's stock (except for dividends payable solely in stock of Borrower and except for dividends payable to holders of the Borrower's Series D Cumulative Convertible Preferred Stock (the "Series D Stock"), except for, prior to the occurrence of an Event of Default, preferred stock cash dividends in an amount not to exceed $430,000 in calendar year 2002, $1,600,000 in calendar year 2003, and $400,000 in the first quarter of calendar year 2004." 4. RATIFICATION OF INTELLECTUAL PROPERTY SECURITY AGREEMENT. Borrower hereby ratifies, confirms and reaffirms, all and singular, the terms and conditions of a certain Intellectual Property Security Agreement dated as of March 19, 2001 between Borrower and Bank, and acknowledges, confirms and agrees that, except as previously disclosed in writing to Bank, said Intellectual Property Security Agreement contains an accurate and complete listing of all Intellectual Property Collateral (as defined in said Intellectual Property Security Agreement) and shall remain in full force and effect. 5. WAIVER. Bank hereby waives Borrower's failure to comply with the Tangible Net Worth covenant requirement set forth in the Schedule to the Loan Agreement tested as of February 28, 2002 (the "Existing Default"). This waiver applies only to the specific Existing Default, is a one-time waiver, and shall not be deemed to constitute a continuing waiver of this or any other provision of the Loan Agreement or a waiver of this Tangible Net Worth covenant for any other period. 6. CONSISTENT CHANGES. The Existing Loan Documents are hereby amended wherever necessary to reflect the changes described above. 7. RATIFICATION OF LOAN DOCUMENTS. Borrower hereby ratifies, confirms, and reaffirms all terms and conditions of the Existing Loan Documents and all security or other collateral granted to the Bank, and confirms that the indebtedness secured thereby includes, without limitation, the Obligations. 8. NO DEFENSES OF BORROWER. The Borrower hereby acknowledges and agrees that the Borrower has no offsets, defenses, claims, or counterclaims against the Bank or the Bank's officers, directors, employees, attorneys, representatives, predecessors, affiliates, subsidiaries, parents, successors, and assigns with respect to the Obligations, and/or the Existing Loan Documents, and that if the Borrower now has, or ever did have, any offsets, defenses, claims, or counterclaims against the Bank or the Bank's officers, directors, employees, attorneys, representatives, predecessors, affiliates, subsidiaries, parents, successors, and assigns, whether known or unknown, at law or in equity, from the beginning of the world through this date and through the time of execution of this Loan Modification Agreement, with respect to the Obligations and/or the Existing Loan Documents, all of them are hereby expressly WAIVED, and the Borrower hereby RELEASES the Bank and the Bank's officers, directors, employees, attorneys, representatives, predecessors, successors, and assigns from any liability therefor. 9. FEES. Borrower shall reimburse Bank for all legal fees and expenses incurred in connection with this amendment to the Existing Loan Documents. 10. CONTINUING VALIDITY. Borrower understands and agrees that in modifying the existing Obligations, Bank is relying upon Borrower's representations, warranties, and agreements, as set forth in the Existing Loan Documents. Except as expressly modified pursuant to this Loan Modification Agreement, the terms of the Existing Loan Documents remain unchanged and in full force and effect. Bank's agreement to modify the existing Obligations pursuant to this Loan Modification Agreement in no way shall obligate Bank to make any future modifications to the Obligations. Nothing in this Loan Modification Agreement shall constitute a satisfaction of the Obligations. It is the intention of Bank and Borrower to retain as liable parties all makers of Existing Loan Documents, unless the party is expressly released by Bank in writing. No maker will be released by virtue of this Loan Modification Agreement. 11. JURISDICTION/VENUE. Borrower accepts for itself and in connection with its properties, unconditionally, the non-exclusive jurisdiction of any state or federal court of competent jurisdiction in the Commonwealth of Massachusetts in any action, suit, or proceeding of any kind against it which arises out of or by reason of this Loan Modification Agreement; provided, however, that if for any reason Bank cannot avail itself of the courts of the Commonwealth of Massachusetts, then venue shall lie in Santa Clara County, California. NOTWITHSTANDING THE FOREGOING, THE BANK SHALL HAVE THE RIGHT TO BRING ANY ACTION OR PROCEEDING AGAINST THE BORROWER OR ITS PROPERTY IN THE COURTS OF ANY OTHER JURISDICTION WHICH THE BANK DEEMS NECESSARY OR APPROPRIATE IN ORDER TO REALIZE ON THE COLLATERAL OR TO OTHERWISE ENFORCE THE BANK'S RIGHTS AGAINST THE BORROWER OR ITS PROPERTY. This Loan Modification Agreement is executed as a sealed instrument under the laws of the Commonwealth of Massachusetts as of the date first written above. BORROWER: BANK: COLLAGENEX PHARMACEUTICALS, INC. SILICON VALLEY BANK, doing business as SILICON VALLEY EAST By: /s/ Nancy C. Broadbent By: /s/ John V. Atanasoff --------------------------------- --------------------------------- Name: Nancy C. Broadbent Name: John V. Atanasoff ------------------------------- ------------------------------- Title: Chief Financial Officer Title: Regional Market Manager ------------------------------ ------------------------------ ACKNOWLEDGED AND AGREED: MMP, INC. By: /s/ Frank Ruffo --------------------------------- Name: Frank Ruffo ------------------------------- Title: Secretary & Treasurer ------------------------------ -----END PRIVACY-ENHANCED MESSAGE-----