<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30 1999, or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from ________________ to
_________________
Commission File Number 0-12943
CYPRESS BIOSCIENCE, INC.
(Exact Name of Registrant as specified in its charter)
DELAWARE 22-238983
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4350 Executive Drive, Suite 325, San Diego, California 92121
(Address of principal executive offices) (zip code)
(858) 452-2323
(Registrant's telephone number including area code)
__________________________________
Indicate by check (X) 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
----- -----
At November 1, 1999, 46,163,385 shares of Common Stock of the Registrant
were outstanding.
This filing, without exhibits, contains 18 pages.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION Page
----
<S> <C>
Item 1 - Consolidated Balance Sheets as of
September 30, 1999 (unaudited) and December 31, 1998......... 3
Consolidated Statements of Operations for the quarter and nine
months ended September 30, 1999 and 1998 (unaudited)......... 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 (unaudited).... 5
Notes to Consolidated Financial Statements....................... 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 9
Item 3 - Quantitative and Qualitative Disclosure About Market Risk..... 15
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................. 16
Item 4 - Submission of Matters to a Vote of Security Holders........... 16
Item 6 - Exhibits and Reports on Form 8-K.............................. 17
Signature.............................................................. 18
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- ---------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 12,909,759 $ 5,619,568
Accounts receivable:
Trade and other -- 584,200
From agreement with Fresenius 361,616 --
Inventories -- 1,014,443
Assets of business transferred to Fresenius 1,359,020 --
Prepaid expenses 202,848 254,891
Deferred financing costs - current 140,266 --
-------------- ---------------
Total current assets 14,973,509 7,473,102
Property and equipment, net 238,147 1,789,976
Restricted cash -- 35,000
Deferred financing costs - non-current 115,338 --
Debt issuance costs, net 12,133 17,957
-------------- ---------------
Total assets $ 15,339,127 $ 9,316,035
============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 496,437 $ 778,061
Accrued compensation 108,334 164,832
Accrued liabilities 646,738 952,448
Liabilities of business transferred to Fresenius 3,216,667 --
Notes payable - current 374,229 --
Current portion of capital lease obligations 6,003 9,823
-------------- ---------------
Total current liabilities 4,848,408 1,905,164
Convertible debentures 400,000 400,000
Notes payable - long term 1,742,370 144,804
Capital lease obligations, net of current portion 10,925 21,496
Stockholders' equity:
Series A convertible preferred stock, $.02 par value; authorized 3,333,333
shares; issued and outstanding, none and 1,156,832 at September 30, 1999
and December 31, 1998, respectively -- 23,136
Common stock, $.02 par value; authorized 60,000,000 shares; issued and
outstanding, 46,163,385 shares at September 30, 1999 and 41,402,045
shares at December 31, 1998 923,268 828,041
Additional paid-in capital 94,374,010 86,238,466
Deferred compensation -- (239,446)
Accumulated deficit (86,959,854) (80,005,626)
-------------- ---------------
Total stockholders' equity 8,337,424 6,844,571
-------------- ---------------
Total liabilities and stockholders' equity $ 15,339,127 $ 9,316,035
============== ===============
</TABLE>
See accompanying notes
Notes: The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements
3
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Quarter Ended September 30, Nine Months Ended September 30,
1999 1998 1999 1998
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Revenues:
Product sales -- $ 603,060 $ 588,120 $ 1,592,830
Revenue from Fresenius agreement $ 330,681 -- 709,991 --
Grant income -- 38,542 -- 242,777
----------- ----------- ----------- -----------
Total revenue 330,681 641,602 1,298,111 1,835,607
Costs and expenses:
Production costs 47,059 628,202 836,685 1,398,390
Sales and marketing 1,478,683 811,431 3,880,903 1,563,992
Research and development 373,142 824,585 1,513,610 3,521,900
General and administrative 672,378 719,443 3,003,750 2,538,477
------------ ----------- ----------- -----------
Total cost and expenses 2,571,262 2,983,661 9,234,948 9,022,759
Other income (expense):
Interest income 147,884 60,144 340,326 248,484
Interest expense (28,411) (12,116) (51,092) (27,951)
Gain on sale of assets, net 150 -- 693,375 --
------------ ----------- ----------- -----------
119,623 48,028 982,609 220,533
------------ ----------- ----------- -----------
Net loss (2,120,958) (2,294,031) (6,954,228) (6,966,619)
Undeclared, imputed dividend on preferred
stock -- (2,078,431) -- (2,078,431)
------------ ----------- ----------- -----------
Net loss applicable to common shareholders $(2,120,958) $(4,372,462) $(6,954,228) $(9,045,050)
------------ ----------- ----------- -----------
Net loss per share $ (0.05) $ (0.11) $ (0.16) $ (0.23)
============ =========== =========== ===========
Shares used in computing net loss
per share 46,111,452 39,265,768 44,652,133 38,961,261
============ =========== =========== ===========
</TABLE>
See accompanying notes.
4
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CYPRESS BIOSCIENCE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
--------------------- -----------------------
<S> <C> <C>
Operating activities:
Net loss $(6,954,228) $(6,966,619)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 221,720 426,549
Amortization of deferred compensation 239,446 330,081
Gain (loss) on disposal of property and equipment 94,477 (6,610)
Common stock issued for services and expenses 121,750 109,206
Stock options and warrants issued as compensation 239,354 --
Changes in operating assets and liabilities, net 645,238 (303,075)
--------------------- -----------------------
Net cash used in operating activities (5,392,243) (6,410,468)
Investing activities:
Purchase of equipment (132,612) (236,768)
Restricted cash 35,000 (35,000)
Proceeds from business transferred to Fresenius 3,216,667 --
Proceeds from sale of assets 15,050 7,500
Short-term investments -- (26,567)
--------------------- -----------------------
Net cash provided by (used in) investing activities 3,134,105 (290,835)
Financing activities:
Net proceeds from exercise of stock options and warrants 6,346,529 1,405,119
Net proceeds from issuance of Series A convertible preferred stock -- 4,282,332
Proceeds from notes payable 2,000,000 166,479
Deferred financing costs (255,604) --
Payment of notes payable (28,205) --
Payment of capital lease obligations (14,391) --
Sale of common stock and warrants to Fresenius 1,500,000 --
--------------------- -----------------------
Net cash provided by financing activities 9,548,329 5,853,930
Net increase (decrease) in cash and cash equivalents 7,290,191 (847,373)
Cash and cash equivalents at beginning of period 5,619,568 7,541,320
--------------------- -----------------------
Cash and cash equivalents at end of period $12,909,759 $ 6,693,947
===================== =======================
</TABLE>
See accompanying notes
5
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
CYPRESS BIOSCIENCE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Business
Cypress Bioscience, Inc. and its subsidiaries (the "Company") researches,
develops and markets medical devices and therapeutics for the treatment of
certain types of immune system disorders and is engaged in the development of
novel therapeutic agents for the treatment of blood platelet disorders. In April
1999, the Company launched the PROSORBA/(R)/ column, a therapeutic medical
device, for the treatment of moderate to severe rheumatoid arthritis ("RA") in
adult patients with long standing disease who have failed or are intolerant to
disease-modifying anti-rheumatic drugs ("DMARDS"). The PROSORBA column was
previously approved for use in idiopathic thrombocytopenic purpura ("ITP"), an
immune-mediated bleeding disorder. The Company is also developing Cyplex, a
platelet alternative, previously known as Infusible Platelet Membranes, as an
alternative to traditional platelet transfusions.
2. Basis of Presentation and Significant Accounting Policies
The accompanying consolidated financial statements have been prepared
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the "SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted as permitted by
the rules and regulations of the SEC for interim financial reporting. The
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All intercompany accounts and transactions have been
eliminated. In the opinion of the Company's management, all adjustments
necessary for a fair presentation of the accompanying unaudited financial
statements are reflected herein. All such adjustments are normal and recurring
in nature. Interim results are not necessarily indicative of results for the
full year. For more complete financial information, these consolidated financial
statements should be read in conjunction with the audited consolidated financial
statements included in the Company's 1998 Annual Report on Form 10-K filed with
the SEC.
3. Fresenius Agreements
In March 1999, Cypress entered into an agreement with Fresenius AG
("Fresenius") of Bad Homburg, Germany and its U.S. subsidiary, Fresenius
Hemotechnology, Inc. ("FHI"). The agreement provides Fresenius with an exclusive
license to distribute the PROSORBA column in the U.S., Europe, Latin America,
and subject to certain conditions, Japan and select Asian countries. Upon
signing of the agreement, Cypress received a total of $1.5 million from
Fresenius consisting of the purchase of 297,530 shares of Cypress common stock
for $1.0
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million, and $500,000 for the purchase of three-year warrants to buy 342,466
shares of Cypress common stock at $7.50 per share.
In the U.S., Cypress and FHI will jointly market the PROSORBA column.
Cypress and FHI will share in clinical trials and sales and marketing expenses
in the U.S., subject to certain annual dollar limits. Fresenius will have
exclusive distribution rights and responsibility for clinical trials and
registration of the product overseas. In the U.S., net profit will be split
50/50 until PROSORBA column revenue reaches a pre-determined sales threshold,
after which time Cypress will receive 60% of the profits and Fresenius will
receive 40%. Net profits will be split 50/50 outside the U.S.
Revenue from the Fresenius arrangement for the second and third quarter of
1999 consisted of Cypress's pro rata share of sales by FHI. Until profits are
generated, Cypress will recognize revenue based on the payments from Fresenius,
which are generally determined as the ratio of allowable expenses incurred for
production, research and development and sales and marketing by Cypress compared
to allowable expenses incurred by Cypress and Fresenius under the agreement.
Until April 1999, Cypress recorded total PROSORBA column sales. As such, current
year revenues are not directly comparable to revenues recorded in the prior
periods.
In April 1999, Fresenius exercised its option to acquire the PROSORBA
column manufacturing facility and related assets, located in Redmond,
Washington, for $5.2 million. The purchase price paid to Cypress consisted of
cash of $1.2 million and an offset of $4.0 million from the previous draw down
of an interest-free line of credit provided by Fresenius. In connection with
this transaction, Fresenius purchased from the company inventory for $2.0
million that resulted in a gain to Cypress of $693,000.
The purchase price of the manufacturing facility and related assets may result
in a gain to Cypress. The potential gain was deferred since the Company is
responsible for reimbursing Fresenius for operating losses associated with this
facility during 1999. The net book value of the property and equipment sold to
Fresenius totaling $1.4 million was recorded on the balance sheet as "Assets of
Business Transferred to Fresenius". The purchase price of the property and
equipment sold totaling $3.2 million was recorded as "Liabilities of Business
Transferred to Fresenius". As the Company becomes obligated to reimburse
Fresenius, such amounts will be charged to "Liabilities of Business Transferred
to Fresenius". When the obligation to Fresenius lapses at year end, the assets
sold will be removed from the Company's balance sheet and the excess of the
purchase price over the net book value of the assets sold plus reimbursement of
certain operating costs will be recorded as a gain from sale of assets, if any.
In October 1999, Fresenius notified the Company that it appears that there will
be an operating loss for the plant this year. The amount of such losses has not
yet been determined.
4. Term Loan
In September 1999, Cypress signed a $5.0 million term loan agreement with a
financing company of which $2.0 million was drawn down immediately. The initial
loan is repayable in six monthly installments of interest only at 13.29% per
annum. Thereafter, the loan is payable in twenty-four equal monthly payments of
principal and interest. Under the terms of the
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loan agreement, Cypress may draw down an additional $1.0 million prior to the
end of 1999. The remaining $2.0 million in available loans may be drawn down at
the option of the Company and only if the Company meets certain financial
conditions. Repayment terms for the remaining loan tranches are similar to the
initial loan. The loan is secured by certain assets of the Company. In
connection with this agreement, Cypress granted the lender a five-year warrant
to purchase 168,851 shares of the company's common stock at an exercise price of
$2.96 per share. The warrant was valued in accordance with SFAS No.12 and is
amortized as additional interest expense over the term of the loan.
5. Inventories
Inventories at December 31, 1998 were comprised of the following:
<TABLE>
<CAPTION>
<S> <C>
Raw materials and components $ 536,513
Work in process 288,930
Finished goods 189,000
-------------------
$1,014,443
===================
</TABLE>
In connection with the acquisition of the PROSORBA column manufacturing
facility and related assets by Fresenius in April 1999, all inventory on hand
was sold to Fresenius. The Company will not incur production costs for the
PROSORBA column after April 1999. Accordingly, production costs for 1999 are not
comparable to prior periods.
6. Net Loss Per Share
The computation of net loss per share is based on the weighted average
number of shares of common stock outstanding for each period. Common stock
equivalents related to options, warrants and convertible debentures are
excluded, as their effect is antidilutive.
7. Equity
In March 1999, Cypress received proceeds of $600,000 from the exercise of
warrants to purchase 332,944 shares of common stock. During April 1999, the
Company received additional proceeds of approximately $4.6 million from the
exercise of warrants to purchase 2,286,916 shares of common stock. The warrants
were exercised at $2.00 per share.
During the third quarter of 1998, the Company recognized a one-time, non-
cash charge for imputed dividend of $2.1 million from the sale and issuance of
Series A convertible preferred stock that raised $4.6 million.
8
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PART I - FINANCIAL INFORMATION
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements within the meaning of Section 21E
of the Exchange Act that involve risks and uncertainties. The Company's actual
results could differ materially from those discussed below and elsewhere in this
Report. Factors that could cause or contribute to such differences include,
without limitation, those discussed in this section, as well as other sections
of this report, and those discussed in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998.
Results of Operations
In March 1999, the Company entered into an agreement with Fresenius and
FHI. The Company granted to Fresenius the exclusive right to co-market and
distribute the PROSORBA/(R)/ column in the U.S. and to register and distribute
the PROSORBA column in Europe, Latin America, and subject to certain conditions,
Japan and select Asian countries. In the U.S., net profits will be split 50/50
until PROSORBA column revenue reaches a pre-determined sales threshold, after
which time Cypress will receive 60% of the profits and Fresenius will receive
40%. Net profits will be split 50/50 in countries outside the U.S. In addition,
the Company may be entitled to receive milestone payments upon the achievement
of certain cumulative net sales of the PROSORBA column.
Product sales by Cypress for the third quarter of 1998 totaled $603,000.
Product sales by Cypress for the nine months ended September 30, 1999 totaled
$588,000 compared to $1.6 million for the comparable period in 1999. As of April
1999, the Company no longer recorded revenues from the sale of the PROSORBA
column. Instead, Cypress recognizes revenue based on a pro rata share of the net
sale of the PROSORBA column by Fresenius. Accordingly, product sales for the
third quarter and nine months ended September 30, 1999 are not directly
comparable to prior periods.
Sales of the PROSORBA column by Fresenius for the third quarter of 1999
totaled $886,000 compared to product sales of Cypress of $603,000 in the
comparable period in 1998. Sales of the PROSORBA column by Cypress or Fresenius
for the nine months ended September 30, 1999 totaled $2.1 million compared to
$1.6 million for the same period in 1998. The increase in PROSORBA column sales
was attributed to sales of the product for use in RA offset in part by a decline
in sales for use in the Idiopathic Thromboeytopenic Purpura ("ITP") indication.
Until profits are generated from the arrangement with Fresenius, Cypress
will recognize revenue based on payments due from Fresenius, which are generally
determined as the ratio of allowable expenses incurred for production, research
and development and sales and marketing by Cypress compared to allowable
expenses incurred by Cypress and Fresenius under the agreement. Revenue from the
Fresenius arrangement totaled $331,000 and $710,000 for the third quarter and
nine months ended September 30, 1999, respectively.
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During 1998, the Company had a NIH Small Business Innovation Research grant
that generated revenues of $39,000 and $243,000 for the third quarter and nine
months ended September 30, 1998, respectively. This grant expired at the end of
1998 and will not be renewed.
Production costs were $47,000 and $837,000 for the quarter and nine months
ended September 30, 1999, respectively, compared to $628,000 and $1.4 million
for the comparable periods of 1998. In April 1999, Fresenius purchased the
PROSORBA column manufacturing facility and related assets from Cypress. As of
May 1999, production costs represent royalties incurred by the Company for
PROSORBA column sales payable to third parties. The decrease in production costs
of 93% and 40% for the quarter and nine months ended September 30, 1999 compared
to the same periods in 1998 were primarily attributable to the sale of this
facility. In connection with the sale of the manufacturing plant, Fresenius
purchased from the Company inventory of $2.0 million that resulted in a gain to
the Company of $693,000. This gain was recorded as a gain on sale of assets in
the statement of operations.
Sales and marketing expenses were $1.5 million and $3.9 million for the
quarter and nine months ended September 30, 1999, respectively, up from $811,000
and $1.6 million for the same periods of 1998. The increases in sales and
marketing expenses of approximately 85% and 144% for the quarter and nine months
ended September 30, 1999 compared to the same periods in 1998 primarily resulted
from the hiring of a sales force and other activities associated with the launch
of the PROSORBA column for RA in April 1999. In the U.S., Cypress and Fresenius
will jointly market the PROSORBA column. Under its agreement with Fresenius,
sales and marketing expenses of up to 15% of net sales for the applicable
periods may be incurred by the Company in the U.S. Fresenius may incur sales and
marketing expenses of up to 5% of net sales. Fresenius may incur sales and
marketing expenses of up to 20% of net sales outside the U.S. During the first
two years of the partnership, the Company expects to spend approximately $11.0
million in sales and marketing expenses due to launch costs. This is expected to
be in excess of the 15% of net sales Cypress is allowed under the agreement. If
net sales beginning in March 1999 and ending in March 2001, are higher than
expected, the Company may be able to recover a portion of its excess
unreimbursed sales and marketing expenses up to $9.0 million under the
agreement. The Company expects to incur substantially higher sales and marketing
expenses during 1999 due to the commercial launch of the PROSORBA column for RA.
Research and development expenses were $373,000 and $1.5 million for the
quarter and nine months ended September 30, 1999, respectively, down from
approximately $825,000 and $3.5 million for the corresponding periods of 1998.
The decrease in research and development expenses of approximately 55% and 57%
for the quarter and nine months ended September 30, 1999 compared to the same
periods in 1998 was primarily attributable to the completion of the Phase III
clinical trials for the PROSORBA column for RA in January 1998. In addition,
expenses associated with the development of Cyplex decreased with the closing of
a facility in Boston in June 1998. Effective April 1999, Cypress and Fresenius
will share in future clinical trial expenses in the U.S. Fresenius will have
exclusive responsibility for clinical trials and registration of the product in
certain other markets. The Company expects to incur significant ongoing research
and development expenses in connection with the mandatory Phase IV U.S. clinical
trials for the treatment of RA
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using the PROSORBA column in combination with methotrexate, a disease-modifying
anti-rheumatic drug ("DMARD"). Cypress and Fresenius will share in the funding
of these clinical studies.
General and administrative expenses totaled $672,000 and $3.0 million for
the quarter and nine months ended September 30, 1999, respectively, compared to
$719,000 and $2.5 million for the comparable periods in 1998. The 7% decrease in
general and administrative expenses for the third quarter of 1999 compared to
1998 was due to completion of business development efforts associated with the
Company's agreement with Fresenius. The 20% increase in general and
administrative expenses for the nine months ended September 30, 1999 compared to
the same period in 1998 was primarily the result of business development
activities with Fresenius in the first quarter of 1999.
The purchase price of the manufacturing facility and related assets by
Fresenius may result in a gain to Cypress. The potential gain was deferred since
the Company is responsible for reimbursing Fresenius for operating losses
associated with this facility during 1999. The net book value of the property
and equipment sold to Fresenius totaling $1.4 million is recorded on the balance
sheet as "Assets of Business Transferred to Fresenius". The purchase price of
the property and equipment sold totaling $3.2 million was recorded as
"Liabilities of Business Transferred to Fresenius". As the Company becomes
obligated to reimburse Fresenius, such amounts will be charged to "Liabilities
of Business Transferred to Fresenius". When the obligation to Fresenius lapses
at year end, the assets sold will be removed from the Company's balance sheet
and the excess of the purchase price over the net book value of the assets sold
plus reimbursement of certain operating losses will be recorded as a gain from
sale of assets, if any. In October 1999, Fresenius notified the Company that it
appears that there will be an operating loss for the plant this year. The amount
of such losses has not been determined.
During the third quarter of 1998, the Company recognized a one-time, non-
cash charge for imputed dividend of $2.1 million from the sale and issuance of
Series A convertible preferred stock that raised $4.6 million.
The Company expects to incur operating losses until it and Fresenius
successfully market the PROSORBA column for RA in the U.S There can be no
assurance that the Company can achieve or sustain profitability. There can be no
assurance that the Company and Fresenius will be able to successfully market the
PROSORBA column for RA in the U.S. There can be no assurance that the Company
will be able to obtain FDA approval for or be able to successfully commercialize
Cyplex. The Company has spent considerable time and expense in obtaining FDA
approval of the PROSORBA column for the RA indication. Pursuant to the Company's
agreement with Fresenius, the Company must incur significant additional expense
and assume the majority of the risk associated with the commercial launch and
ongoing sales and marketing of the PROSORBA column in the U.S., and the on-going
clinical trials. Any net profits from the sale of the PROSORBA column are shared
with Fresenius and the Company depends upon Fresenius to reimburse it for
expenses from net sales. The successful launch of the PROSORBA column for use in
RA will depend without limitation on the following factors; acceptance of the
product by physicians, medical groups and patients, availability and convenience
of treatment centers,
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availability of third party reimbursements, the effectiveness of the Company's
and Fresenius' marketing strategy, competition and effectiveness and
availability of alternative treatments.
Liquidity and Capital Resources
At September 30, 1999, the Company had cash and cash equivalents of $12.9
million compared to $5.6 million at December 31, 1998. The Company's working
capital as of September 30, 1999 was approximately $10.1 million compared to
$5.6 million at December 31, 1998. The increase in working capital was partially
attributable to proceeds from the sale of common stock and warrants to Fresenius
totaling $1.5 million. In addition, the Company sold the PROSORBA manufacturing
facility and related assets to Fresenius for $5.2 million. The purchase price
consisted of cash of $1.2 million and an offset of a draw down in March 1999 of
$4.0 million from an interest-free line of credit provided by Fresenius during
the same period. Further, during 1999, the Company received proceeds of $6.3
million from the exercise of warrants and stock options to purchase 3.3 million
shares of the Company's common stock. In September 1999, the Company signed a
$5.0 million term loan with a financing company of which $2.0 million was
immediately drawn down. The increase in working capital was partially offset by
cash used in operations of approximately $5.4 million during the first nine
months of 1999.
In September 1999, the Company signed a $5.0 million term loan agreement
with a financing company of which $2.0 million was drawn down immediately. The
initial loan is repayable in six monthly installments of interest only at 13.29%
per annum. Thereafter, the loan is payable in twenty-four equal monthly payments
of principal and interest. Under the terms of the loan agreement, Cypress may
draw down an additional $1.0 million prior to the end of 1999. The remaining
$2.0 million in available loans may be drawn down at the option of the Company
and only if the Company meets certain financial conditions. There can be no
assurance that the Company will be able to satisfy the financial criteria
required to draw down the final $2.0 million of the loan. Repayment terms for
the remaining loan tranches are similar to the initial loan. The loan is secured
by certain assets of the Company. In connection with this agreement, Cypress
granted the lender a five-year warrant to purchase 168,851 shares of the
company's common stock at an exercise price of $2.96 per share. The warrant was
valued in accordance with SFAS No.12 and is amortized as additional interest
expense over the term of the loan.
During the fourth quarter of 1998, the Company hired a sales force for the
commercial launch of the PROSORBA column for RA. The Company's sales force has
had only limited experience in marketing the PROSORBA column for use in the
treatment of RA. There can be no assurance that the Company's sale force will be
successful in marketing the PROSORBA column for RA or any other use. The
Company's marketing strategy includes gaining medical association support and
the support of opinion leaders in the rheumatology community. There can be no
assurance that the Company's sales force will succeed in gaining this
acceptance. Any such failure to successfully market the PROSORBA column for RA,
or any other disease indication other than ITP, could have a material adverse
effect on the Company's business, cash flow and financial position. The failure
of sales to increase at expected rates may adversely affect the Company's cash
flow, its results of operations and its profit share from the Fresenius
agreement.
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<PAGE>
In both domestic and foreign markets, sales of the Company's product
depends in part on the availability of reimbursement of third-party payors such
as government health administration authorities, private health insurers and
other organizations. Third-party payors are increasingly challenging the price
and cost-effectiveness of medical products and services. There can be no
assurance that the Company's proposed products will be considered cost effective
or that adequate third-party reimbursement will be available to enable the
Company to maintain price levels sufficient to realize an appropriate return on
its investment in product development. Legislation and regulations affecting the
pricing of medical devices may change over time. Any such changes could further
limit reimbursement for medical products and services.
As a condition to FDA approval of the Post Marketing Application for the
PROSORBA column for RA, the Company is obligated to conduct a Phase IV clinical
trial on the use of the PROSORBA column in combination with a DMARD. The Company
expects this study will require enrollment of a significant number of patients
and take approximately two years to four years to complete. The cost of the
Phase IV trial will be shared with Fresenius and will result in lower profits
for the Company. There can be no assurance that the outcome of the Phase IV
clinical trials will be indicative of earlier clinical trial results or generate
positive results. Any of these occurrences could have a material adverse on the
Company including changes to the product labeling for the RA indication,
reduction of the potential sales of the PROSORBA column and/or withdrawal of FDA
approval.
The Company is actively seeking opportunities to raise additional capital
to fund sales and marketing efforts, post-marketing studies and additional
clinical trials for the PROSORBA column in RA and other indications; and the
further development of Cyplex. To the extent the Company decides to develop
products other than the PROSORBA column, it will be required to raise additional
capital. The amount of capital required by the Company is dependent upon many
factors, including the following: the timing and volume of PROSORBA sales,
selling and marketing costs, the profitability of the Fresenius agreement,
results of clinical trials, results of current research and development efforts,
the FDA regulatory process, costs of commercialization of products and potential
competitive and technological advances. Because the Company is unable to predict
the outcome of the foregoing factors, some of which are beyond the Company's
control; the Company is unable to estimate with certainty its mid- to long-term
capital needs. Although the Company may seek to raise additional capital through
a combination of equity sources, there can be no assurance the Company will be
able to raise additional capital through such sources or the funds raised
thereby will allow the Company to maintain its current and planned operations.
If the Company is unable to obtain additional capital, it will be required to
delay, scale back or eliminate some or all of its sales and marketing and
research and development activities. The Company expects that existing cash
resources, and if necessary, a reduction of its expenditure rate will be
sufficent to fund operations through the end of 2000. In addition, the Company
may be required to license to third parties technologies that the Company would
otherwise seek to develop itself, to seek financing through the debt market at
potentially higher costs to the Company or to seek additional methods of
financing.
13
<PAGE>
Year 2000 Compliance
Cypress's business hardware, telecommunication and software systems are
generally new, therefore, the Company believes that most of these systems are
already year 2000 compliant and will not be adversely affected by the year 2000
issue.
The Company has evaluated the corporate systems and operations that could
be affected by the year 2000 problem. The following areas were reviewed:
information technology infrastructure; non-information technology systems; and
third-party compliance.
Information Technology Infrastructure
Cypress's year 2000 plan required the year 2000 team to assess and evaluate
the information technology systems, including computers, hardware, and software
systems. The year 2000 team identified critical computer, hardware, or software
information technology systems that required replacement, upgrade, or
modification. The Company has made the required replacements, upgrades, or
modifications, and believes that all the critical information technology systems
are year 2000 compliant.
Non-Information Technology Systems
Some non-information technology systems used in the business, including air
conditioning, fire sprinkler, telephone systems, and other equipment, may
contain software that is vulnerable to year 2000 problems. The year 2000 problem
could cause failures in these systems which could disrupt operations. The
Company has assessed the year 2000 readiness of many of these systems and
equipment internally and with third parties. Cypress believes that all of the
critical non-information technology systems are year 2000 compliant.
Third-Party Compliance
Cypress's material third party business relationships include: a third
party manufacturer of the PROSORBA column, contract research organizations who
assist with the management of clinical trials and clinical data, and vendors and
suppliers who provide goods and services. The Company has evaluated the year
2000 compliance of all significant third party vendors and is satisfied that
they have taken all the necessary steps to ensure their year 2000 compliance.
Costs
The year 2000 assessment, remediation and testing activities were conducted
by internal personnel, and the amount of employee time expended on these tasks
was not tracked. Therefore, the Company is unable to determine the cost of
employee time devoted to year 2000 matters. Cypress estimates that the cost of
year 2000 readiness efforts, including any necessary modifications, upgrading or
replacement of computer equipment or software, has not been material.
14
<PAGE>
Contingency Plan
The Company does not believe that a contingency plan is needed for the
information technology infrastructure. However, despite the efforts of the year
2000 team, the Company cannot guarantee that the year 2000 problem will not
adversely affect the financial condition or results of operations. Should the
third party manufacturer be unable to manufacture PROSORBA columns due to a year
2000 problem, it will adversely affect the financial condition and results of
operations of Cypress.
PART I - FINANCIAL INFORMATION
Item 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference is made to the Company's Annual Report on Form 10-K for the year
ended December 31, 1998.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders (the "Annual Meeting") of the
Company was held on September 14, 1999.
(b) Philip O'Reilly was elected as directors to serve until the 2002
annual meeting, or until such directors' earlier death, resignation or
removal. The Company's Board of Directors is comprised of the
individual elected this year and the following directors completing
the following terms: Jay D. Kranzler, M.D., Ph.D., Richard M. Crooks,
Jr. and David Golde, M.D., whose terms expire in 2000, Jack Vaughn and
Samuel D. Anderson whose terms expire in 2001.
(c) The following sets forth a brief description of each matter voted upon
at the Annual Meeting and the results of the voting on each such
matter:
(1) For the election of the nominee as director:
<TABLE>
<CAPTION>
Withheld Authority or
For Against
------------------------ ------------------------
<S> <C> <C>
Philip O'Reilly 31,933,427 519,521
</TABLE>
(2) To approve an amendment to the Company's Amended and Restated
Certificate of Incorporation to (i) effect, at any time prior to
the 1999 Annual Meeting of Stockholders, a reverse stock split,
whereby the Company would issue one (1) new share of Common Stock
of the Company in exchange for between two (2) and four (4) shares
of outstanding Common Stock and (ii) after giving effect to the
aforesaid reverse stock split, establish the number of authorized
shares of (A) Common Stock at 50,000,000 shares and (B) Preferred
Stock at 15,000,000 shares;
<TABLE>
<CAPTION>
For Against Abstained Non-votes
-------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
31,162,225 1,214,536 76,187 13,636,681
</TABLE>
16
<PAGE>
(3) To approve an amendment to the Company's Restated Certificate of
Incorporation to increase the Company's authorized number of
shares of Common Stock from 60,000,000 share to 75,000,000 shares;
<TABLE>
<CAPTION>
For Against Abstained Non-votes
-------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
31,180,397 1,166,661 105,890 13,636,681
</TABLE>
(4) To ratify the selection of Ernst & Young LLP as the Company's
independent auditors for its fiscal year ending December 31,
1999:
<TABLE>
<CAPTION>
For Against Abstained Non-votes
-------------------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C>
32,194,534 141,799 116,615 -
</TABLE>
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Loan and Securities Agreement between Cypress Biosciences, Inc.,
PRP, Inc. and Transamerica Business Credit Corporation
10.2 Stock Subscription Warrant to Purchase Common Stock of Cypress
Bioscience, Inc. between the Company and TBCC Funding Trust II
or its Registered Assigns
27. Financial Date Schedule
Reports on Form 8-K
None
17
<PAGE>
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.
Cypress Bioscience, Inc.
November 15, 1999 /s/ Jay D. Kranzler
- -------------------------- -------------------------------------------------
Date Jay D. Kranzler, M.D., Ph.D.
Chief Executive Officer and Chairman of the Board
(Principal Executive Officer and Acting
Principal Accounting and Financial Officer)
18
<PAGE>
EXHIBIT 10.1
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT dated as of September 7, 1999, is
made by Cypress Bioscience, Inc. ("Cypress"), a Delaware corporation having its
principal place of business and chief executive office at 4350 Executive Drive,
San Diego, California, 92121, and PRP, Inc. ("PRP"), a Delaware corporation
having its principal place of business and chief executive office at 4350
Executive Drive, San Diego, California, 92121, (Cypress and PRP, individually
and collectively the "Borrower"), in favor of Transamerica Business Credit
Corporation, a Delaware corporation (the "Lender"), having its principal office
at 9399 West Higgins Road, Suite 600, Rosemont, Illinois 60018 and having an
office at 76 Batterson Park Road, Farmington, Connecticut 06032.
WHEREAS, the Borrower has requested that the Lender make a Loan to the
Borrower; and
WHEREAS, the Lender has agreed to make such Loan on the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and to induce the
Lender to extend credit, the Borrower hereby agrees with the Lender as follows:
SECTION 1. DEFINITIONS.
-----------
As used herein, the following terms shall have the following meanings,
and shall be equally applicable to both the singular and plural forms of the
terms defined:
Agreement shall mean this Loan and Security Agreement together with
---------
all schedules and exhibits hereto, as amended, supplemented, or otherwise
modified from time to time.
Applicable Law shall mean the laws of the State of Illinois (or any
--------------
other jurisdiction whose laws are mandatorily applicable notwithstanding the
parties' choice of Illinois law) or the laws of the United States of America,
whichever laws allow the greater interest, as such laws now exist or may be
changed or amended or come into effect in the future.
Business Day shall mean any day other than a Saturday, Sunday, or
------------
public holiday or the equivalent for banks in New York City or San Diego,
California.
Cash Equivalents means (i) securities issued, guaranteed or insured by
----------------
the United States or any of its agencies with maturities of not more than one
year from the date acquired; (ii) certificates of deposit with maturities of not
more than one year from the date acquired, issued by any U.S. federal or state
chartered commercial bank of recognized standing which has capital and
unimpaired surplus in excess of $100,000,000; (iii) investments in money market
funds registered under the Investment Company Act of 1940; (iv) mutual funds, at
least 90% of the assets of which constitute Cash Equivalents of the kinds
described in clauses (i) - (iii) of this definition; and (v) other instruments,
commercial paper or investments acceptable to the Lender in its sole discretion.
Closing Date means the date on which the initial Loan is made
------------
hereunder.
Code shall have the meaning specified in Section 8(d).
----
Collateral shall have the meaning specified in Section 2.
----------
<PAGE>
Collateral Access Agreement shall mean any landlord waiver, mortgagee
---------------------------
waiver, bailee letter, or similar acknowledgement of any warehouseman or
processor in possession of any Collateral.
Contingent Obligation means any direct, indirect, contingent or non-
---------------------
contingent guaranty or obligation for the indebtedness of another Person, except
endorsements in the ordinary course of business.
Effective Date shall mean the date on which all of the conditions
--------------
specified in Section 3.3 shall have been satisfied.
Event of Default shall mean any event specified in Section 7.
----------------
Financial Statements shall have the meaning specified in Section 6.1.
--------------------
Fresenius shall mean collectively Fresenius Hemotechnology, Inc. and
---------
Fresenius Aktiengesellschaft, or any of its subsidiaries or affiliates.
Fresenius Agreements shall mean collectively the Master Agreement
--------------------
between Borrower and Fresenius dated March 4, 1999 and the other "Transaction
Documents" (as defined therein).
GAAP shall mean generally accepted accounting principles in the United
----
States of America, as in effect from time to time.
Loans shall mean the loans and financial accommodations made by the
-----
Lender to the Borrower in accordance with the terms of this Agreement and any
Note delivered hereunder.
Loan Documents shall mean, collectively, this Agreement, the Notes,
--------------
the Intellectual Property Security Agreement, and all other present and future
documents, agreements, certificates, instruments, and opinions delivered by the
Borrower under, in connection with or relating to this Agreement, or any other
present or future instrument or agreement between Lender and Borrower, as each
of the same may be amended, modified, extended, restated or supplemented from
time to time.
Material Adverse Change shall mean, with respect to any Person, a
-----------------------
material adverse change in the business, operations, results of operations,
assets, liabilities, or financial condition of such Person taken as a whole.
Material Adverse Effect shall mean, with respect to any Person, a
-----------------------
material adverse effect on the business, operations, results of operations,
assets, liabilities, or financial condition of such Person taken as a whole.
Note shall mean each Promissory Note, in substantially the form
----
attached hereto, made by the Borrower in favor of the Lender, as amended,
supplemented, or otherwise modified from time to time.
Obligations shall mean and include all loans (including the Loans),
-----------
advances, debts, liabilities, obligations, covenants and duties owing by
Borrower to Lender of any kind or nature, present or future, whether or not
evidenced by the Note or any note, guaranty or other instrument, whether or not
arising under or in connection with, this Agreement, any other Loan Document or
any other present or future instrument or agreement, whether or not for the
payment of money, whether arising by reason of an extension of credit, opening,
guaranteeing or confirming of a letter of credit, loan, guaranty,
indemnification or in any other manner, whether direct or indirect (including
those acquired by assignment, purchase, discount or otherwise), whether absolute
or contingent, due or to become due, now due or hereafter arising and however
acquired (including without limitation all loans previously made by Lender to
Borrower). The term includes, without limitation, all interest (including
interest accruing on or after an bankruptcy, whether or not an allowed claim),
charges, expenses, commitment, facility, closing and collateral management fees,
letter of credit fees, reasonable attorneys' fees, taxes and any other sum
properly chargeable to Borrower under this Agreement, the other Loan Documents
or any other present or future agreement between Lender and Borrower.
2
<PAGE>
Permitted Liens shall mean such of the following, whether now or
---------------
hereafter existing, as to which no enforcement, collection, execution, levy, or
foreclosure proceeding shall have been commenced and be continuing: (a) liens
for taxes, assessments, and other governmental charges or levies or the claims
or demands of landlords, carriers, warehousemen, mechanics, laborers,
materialmen, and other like Persons arising by operation of law in the ordinary
course of business for sums which are not yet due and payable, or liens which
are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves are maintained to the
extent required by GAAP; (b) deposits or pledges to secure the payment of
worker's compensation, unemployment insurance, or other social security benefits
or obligations, public or statutory obligations, surety or appeal bonds, bid or
performance bonds, or other obligations of a like nature incurred in the
ordinary course of business; (c) licenses, restrictions, or covenants for or on
the use of the Collateral which do not materially impair either the use of the
Collateral in the operation of the business of the Borrower or the value of the
Collateral; (d) attachment or judgment liens that do not constitute an Event of
Default; (e) a lien on any item of equipment created substantially
simultaneously with the acquisition of such equipment for the purpose of
financing such acquisition, provided that such lien shall attach only to the
equipment acquired and the proceeds thereof and Borrower's books relating to the
foregoing (f) liens in favor of licensees (including Fresenius) of intellectual
property licensed by the Borrower, whether on an exclusive or a non-exclusive
basis in the ordinary course of business; (g) liens in favor of licensors of
intellectual property licensed to the Borrower in the ordinary course of
business; (h) liens in favor of lessees (including Fresenius) of real or
personal property leased or subleased by the Borrower in the ordinary course of
business; (i) liens in favor of lessors of real or personal property licensed to
the Borrower in the ordinary course of business pursuant to operating or capital
leases; (j) liens in favor of depository institutions and securities
intermediaries constituting rights of set-off of a customary nature or bankers'
or brokers' liens with respect to amounts or investment property on deposit,
whether arising by operation of law or by contract, in connection with
arrangements entered into with banks and securities intermediaries in the
ordinary course of business; (k) liens in favor of Silicon Valley Bank ("Bank")
existing on the date hereof on certain collateral (including goods and
equipment) pursuant to a Loan and Security Agreement between Borrower and Bank
dated March 5, 1998, as amended, provided such indebtedness does not exceed
$105,000, and (l) liens incurred in the extension, renewal or refinancing of the
indebtedness secured by liens described in (e) or (k) above, provided that any
extension, renewal or refinancing lien is limited to the property encumbered by
the existing lien and the principal amount of the indebtedness secured thereby
does not increase.
Person shall mean any individual, sole proprietorship, partnership,
------
limited liability partnership, joint venture, trust, unincorporated
organization, association, corporation, limited liability company, institution,
entity, party, or government (including any division, agency, or department
thereof), and the successors, heirs, and assigns of each, including, but not
limited to IMRE Europe, Ltd. and IMRE Services, Inc.
Receivable shall have the meaning set forth in Section 8(e).
----------
Schedule shall mean Schedule A hereto containing certain information
--------
pertaining to the Borrower.
Solvent means, with respect to any Person, that as of the date as to
-------
which such Person's solvency is measured:
(a) the fair saleable value of its assets is in excess of the total
amount of its liabilities (including contingent liabilities as valued in
accordance with GAAP) as they become absolute and matured;
(b) it has sufficient capital to conduct its business; and
(c) it is able generally to meet its debts as they mature.
Taxes shall have the meaning specified in Section 5.5.
-----
SECTION 2. CREATION OF SECURITY INTEREST; COLLATERAL. The Borrower hereby
-----------------------------------------
assigns and grants to the Lender a continuing general, lien on, and security
interest in, all the Borrower's right, title, and interest in and to the
collateral described in the next sentence (the "Collateral") to secure the
payment and performance of
3
<PAGE>
all the Obligations, subject only to Permitted Liens. Collateral means
Receivables, Investment Property, Inventory, Equipment, and Other Property and
all additions and accessions thereto and substitutions and replacements therefor
and improvements thereon, and all proceeds (whether cash or other property) and
products thereof, including, without limitation, all proceeds of insurance
covering the same and all tort claims in connection therewith, and all records,
files, computer programs and files, data and writings relating to the foregoing,
and all equipment containing the foregoing.
Notwithstanding the foregoing, the assignment and grant of a security interest
as provided herein shall not extend to (a) any government licenses or permits to
the extent such assignment or grant would violate any governmental statute, law,
rule, regulation or order, or (b) any contracts or licenses of intellectual
property which by their terms would be breached by the assignment or grant of
such security interest or with respect to which the assignment or granting of a
security interest would violate any governmental statute, law, rule, regulation
or order (it being understood and agreed, however, that notwithstanding the
foregoing, all rights to payment for money due or to become due pursuant to any
such contract or license and any and all proceeds of such contract or license
shall be subject to the security interests created pursuant to this Agreement).
Equipment means all machinery, equipment, furniture, fixtures,
---------
conveyors, tools, materials, storage and handling equipment, hydraulic presses,
cutting equipment, computer equipment and hardware, including central processing
units, terminals, drives, memory units, printers, keyboards, screens,
peripherals and input or output devices, molds, dies, stamps, vehicles, and
other equipment of every kind and nature and wherever situated now or hereafter
owned by Borrower or in which Borrower may have any interest as lessee or
otherwise (to the extent of such interest), together with all additions and
accessions thereto, all replacements and all accessories and parts therefor, all
manuals, blueprints, know-how, warranties and records in connection therewith,
all rights against suppliers, warrantors, manufacturers, sellers or others in
connection therewith, and together with all substitutes for any of the
foregoing; and
Inventory means all present and future goods intended for sale, lease
---------
or other disposition by Borrower including, without limitation, all raw
materials, work in process, finished goods and other retail inventory, goods in
the possession of outside processors or other third parties, goods consigned to
Borrower to the extent of its interest therein as consignee, materials and
supplies of any kind, nature or description which are or might be used in
connection with the manufacture, packing, shipping, advertising, selling or
finishing of any such goods, and all documents of title or documents
representing the same; and
Investment Property means any and all investment property of Borrower,
-------------------
including all securities, whether certificated or uncertificated, security
entitlements, securities accounts, commodity contracts and commodity accounts,
and all financial assets held in any securities account or otherwise, wherever
located, and whether now existing or hereafter acquired or arising; and
Other Property means all present and future instruments, documents,
--------------
documents of title, securities, bonds, notes, promissory notes, drafts,
acceptances, letters of credit and rights to receive proceeds of letters of
credit, deposit accounts, chattel paper, certificates, insurance policies,
insurance proceeds, leases, computer tapes, causes of action, judgments, claims
against third parties, leasehold rights in any personal property, books,
ledgers, files and records, general intangibles (including without limitation,
all contract rights, tax refunds, rights to receive tax refunds, patents, patent
applications, copyrights (registered and unregistered), royalties, licenses,
permits, franchise rights, authorizations, customer lists, rights of
indemnification, contribution and subrogation, computer programs, discs and
software, trade secrets, computer service contracts, trademarks, trade names,
service marks and names, logos, goodwill, deposits, choses in action, designs,
blueprints, plans, know-how, telephone numbers and rights thereto, credits,
reserves, and all forms of obligations whatsoever now or hereafter owing to
Borrower), all property at any time in the possession or under the control of
Lender, and all security given by Borrower to Lender pursuant to any other loan
document or agreement; and
Receivables means all present and future accounts and accounts
-----------
receivable, together with all security therefor and guaranties thereof and all
rights and remedies relating thereto, including any right of stoppage in
transit.
SECTION 3. THE CREDIT FACILITY.
-------------------
SECTION 3.1. Borrowings. The Lender, subject to the terms and
conditions of this Agreement, agrees to make a Loan to Borrower in three
drawdowns, at Borrower's request, in a principal amount not to exceed
$5,000,000. Notwithstanding anything herein to the contrary, the Lender shall
be obligated to make such Loan only after the Lender, in its good faith business
judgment, determines that the applicable conditions for
4
<PAGE>
borrowing contained in Sections 3.3 and 3.4 are satisfied. The timing and
financial scope of Lender's obligation to make Loans hereunder are limited as
set forth in a commitment letter executed by Lender and Borrower, dated as of
July 23, 1999 and attached hereto as Exhibit A (the "Commitment Letter").
---------
SECTION 3.2. Application of Proceeds. The Borrower shall use the
proceeds of the Loans for its general working capital purposes.
SECTION 3.3. Conditions to Initial Loan.
(a) The obligation of the Lender to make the initial Loan is subject
to the Lender's receipt of the following, on or before the Closing Date, each
dated the date of the initial Loan or as of an earlier date acceptable to the
Lender, in form and substance satisfactory to the Lender and its counsel:
(i) completed requests for information (Form UCC-11) listing all
effective Uniform Commercial Code financing statements naming the Borrower
as debtor and all tax lien, judgment, and litigation searche for the
Borrower as the Lender shall deem necessary or desirable;
(ii) acknowledgment copies of Uniform Commercial Code financi statements
(naming the Lender as secured party and the Borrower as debtor), duly filed
in all jurisdictions that the Lender deems necessary or desirable to perfect
and protect the security interests created hereunder, and evidence that all
other filings, registrations and recordings have been made in the
appropriate governmental offices, and all other action has been taken, which
shall be necessary to create, in favor of the Lender, a perfected first
priority Lien on the Collateral (subject to Permitted Liens), to the extent
a perfected first priority Lien on the Collateral can be created by filing a
Uniform Commercial Code financing statement or taking the other Required
Actions described in Section 5.9 below;
(iii) a Note duly executed by the Borrower evidencing the amount
of such Loan;
(iv) an Intellectual Property Security Agreement, in form and substance
satisfactory to the Lender and its counsel, duly executed by the Borrower,
specifically identifying and granting to the Lender a security interest in
all of the Borrower's intellectual property ;
(v) if requested by the Lender, a Collateral Access Agreement duly
executed by the lessor or mortgagee, as the case may be, of each premises
where the equipment Collateral is located;
(vi) a Notice of Security Interest, in form and substance satisfactory
to the Lender and its counsel, to each financial institution at which any
deposit accounts of Borrower are maintained except a notice of security
interest will not be required or sent to financial institutions in the U.K.,
provided that such financial institutions do not contain at any time
balances for the Borrower in excess of the equivalent of $40,000 U.S.
dollars;
(vii) the warrants described in the Commitment Letter, if any;
(viii) certificates of insurance required under Section 5.4 of this
Agreement together with loss payee endorsements for all such policies naming
the Lender as lender loss payee and as an additional insured;
(ix) a certificate of the Secretary or an Assistant Secretary of the
Borrower ("Secretary's Certificate") certifying (A) that attached to the
Secretary's Certificate is a true, complete, and accurate copy of the
resolutions of the Board of Directors of the Borrower (or a unanimous
consent of directors in lieu thereof) authorizing the execution, delivery,
and performance of this Agreement, the other Loan Documents, and the
transactions contemplated
5
<PAGE>
hereby and thereby, and that such resolutions have not been amended or
modified since the date of such certification and are in full force
and effect; (B) the incumbency, names, and true signatures of the
officers of the Borrower authorized to sign the Loan Documents to
which it is a party; (C) that attached to the Secretary's Certificate
is a true and correct copy of the Articles or Certificate of
Incorporation of the Company, as amended, which Articles or
Certificate of Incorporation have not been further modified, repealed
or rescinded and are in full force and effect; (D) that attached to
the Secretary's Certificate of the Borrower is a true and correct copy
of the Bylaws, as amended, which Bylaws of the Company have not been
further modified, repealed or rescinded and are in full force and
effect; and (E) that attached to the Secretary's Certificate is a
valid Certificate of Good Standing issued by the Secretary of the
State of the Borrower's state of incorporation;
(xi) the opinion of counsel for the Borrower covering such
matters incident to the transactions contemplated by this Agreement as
the Lender may reasonably require;
(xii) evidence of the consent or authorization of, filing with
or other act by or in respect of any governmental agency or authority
or any other Person required in connection with the execution,
delivery, performance, validity or enforceability of this Agreement,
or the other Loan Documents or the consummation of the transactions
contemplated hereby or thereby; and
(xiii) such other documents, agreements and instruments as the
Lender deems necessary in its reasonable discretion in connection with
the transactions contemplated hereby.
(b) The security interests in the Collateral granted in favor of the
Lender under this Agreement shall have been duly perfected and shall constitute
first priority liens, except for Permitted Liens , to the extent a perfected
first priority lien can be created by filing a Uniform Commercial Code financing
statement or taking the other Required Actions described in Section 5.9 below.
SECTION 3.4 Condition to Additional Loans. The obligation of the
Lender to make each additional Loan is subject to the Lender's receipt of a Note
duly executed by the Borrower evidencing the amount of such Loan on or before
the funding date of such Loan.
SECTION 3.5. Additional Conditions Precedent. The obligation of the
Lender to make each Loan (including the initial Loan) is subject to the
satisfaction of the following additional conditions precedent:
(a) There shall be no pending or, to the knowledge of the Borrower
after due inquiry, threatened litigation, proceeding, inquiry, or other action
(i) seeking an injunction or other restraining order, damages, or other relief
with respect to the transactions contemplated by this Agreement or the other
Loan Documents or thereby or (ii) which affects or could affect the business,
prospects, operations, assets, liabilities, or condition (financial or
otherwise) of the Borrower, except, in the case of clause (ii), where such
litigation, proceeding, inquiry, or other action could not reasonably be
expected to have a Material Adverse Effect in the judgment of the Lender;
(b) all representations and warranties contained in this Agreement and
the other Loan Documents shall be true and correct in all material respects on
and as of the date of such Loan as if then made, other than representations and
warranties that expressly relate solely to an earlier date, in which case they
shall have been true and correct as of such earlier date;
(c) no Event of Default or event which with the giving of notice or
the passage of time, or both, would constitute an Event of Default shall have
occurred and be continuing or would result from the making of the requested Loan
as of the date of such request; and
(d) the Borrower shall be deemed to have hereby reaffirmed and
ratified all security
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interests, liens, and other encumbrances heretofore granted by the Borrower to
the Lender.
SECTION 3.6. Interest Rate; Repayment. The interest rate applicable to
each Loan made by the Lender hereunder, and the repayment date for such Loan,
are as set forth in the Note evidencing such Loan.
SECTION 4. REPRESENTATIONS AND WARRANTIES.
------------------------------
SECTION 4.1. Good Standing; Qualified to do Business. The Borrower (a)
is duly organized, validly existing, and in good standing under the laws of the
State of its organization, (b) has the power and authority to own its properties
and assets and to transact the businesses in which it is presently, or proposes
to be, engaged, and (c) is duly qualified and authorized to do business and is
in good standing in every jurisdiction in the United States in which the failure
to be so qualified could have a Material Adverse Effect on (i) the Borrower,
(ii) the Borrower's ability to perform its obligations under the Loan Documents,
or (iii) the rights of the Lender hereunder.
SECTION 4.2. Due Execution, etc. The execution, delivery, and
performance by the Borrower of each of the Loan Documents to which it is a party
are within the powers of the Borrower, do not contravene the organizational
documents, if any, of the Borrower, and do not (a) violate any law or
regulation, or any order or decree of any court or governmental authority, (b)
conflict with or result in a breach of, or constitute a default under, any
material indenture, mortgage, or deed of trust or any material lease, agreement,
or other instrument binding on the Borrower or any of its properties, or (c)
require the consent, authorization by, or approval of or notice to or filing or
registration with any governmental authority or other Person, except as may be
set forth in the Schedule and except as has been obtained. This Agreement is,
and each of the other Loan Documents to which the Borrower is or will be a
party, when delivered hereunder or thereunder, will be, the legal, valid, and
binding obligation of the Borrower enforceable against the Borrower in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, or similar laws affecting creditors' rights generally
and by general principles of equity.
SECTION 4.3. Solvency; No Liens. The Borrower is Solvent and will be
Solvent upon the completion of all transactions contemplated to occur hereunder
(including, without limitation, the Loan to be made on the Effective Date); the
security interests granted herein constitute and shall at all times constitute
the first and only liens on the Collateral other than Permitted Liens, to the
extent a perfected first priority lien can be created by filing a Uniform
Commercial Code financing statement or taking the other Required Actions
described in Section 5.9 below; and the Borrower is, or will be at the time
additional Collateral is acquired by it, the absolute owner of the Collateral
with full right to pledge, sell, consign, transfer, and create a security
interest therein, free and clear of any and all claims or liens in favor of any
other Person other than Permitted Liens.
SECTION 4.4. No Judgments, Litigation. No judgments are outstanding
against the Borrower nor is there now pending or, to the best of the Borrower's
knowledge, threatened any litigation, contested claim, or governmental
proceeding by or against the Borrower except judgments and pending or threatened
litigation, contested claims, and governmental proceedings which would not, in
the aggregate, have a Material Adverse Effect on the Borrower except as may be
set forth in the Schedule.
SECTION 4.5. No Defaults. Except as may be set forth in the Schedule
(1) the Borrower is not in default or has not received a notice of default under
any material contract, lease, or commitment to which it is a party or by which
it is bound; and (2) the Borrower knows of no dispute regarding any contract,
lease, or commitment which could reasonably be expected to have a Material
Adverse Effect on the Borrower.
SECTION 4.6. Collateral Locations. The address of the principal place
of business and chief executive office of Borrower is, and the books and records
of Borrower and all of its chattel paper and records relating to Collateral are
maintained exclusively in the possession of Borrower at, the address of Borrower
specified in the heading of this Agreement. Borrower has places of business, and
Collateral is located, only at such address and at the addresses set forth in
the Schedule and at any additional locations reported to the Lender as
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provided in Section 5.7 as to which the Lender has taken all necessary action to
perfect and protect its security interests in the Collateral at any such
locations.
SECTION 4.7. Corporate and Trade Names; Federal Tax ID. During the
past five years, Borrower has not been known by or used any other corporate,
trade or fictitious name except for its name as set forth on the signature page
of this Agreement and the other names specified in the Schedule. The Borrower's
Federal Tax ID number is as set forth in the Schedule.
SECTION 4.8. No Events of Default. No Event of Default has occurred
and is continuing nor has any event occurred which, with the giving of notice or
the passage of time, or both, would constitute an Event of Default.
SECTION 4.9. No Limitation on Lender's Rights. Except as permitted
herein, none of the Collateral is subject to contractual obligations that may
restrict or inhibit the Lender's rights or abilities to sell or dispose of the
Collateral or any part thereof after the occurrence of an Event of Default.
SECTION 4.10. Perfection and Priority of Security Interest. This
Agreement creates a valid and, upon completion of all required filings of
financing statements, perfected, and first priority and exclusive, security
interest in the Collateral, except for any Permitted Liens, securing the payment
of all the Obligations, to the extent a perfected first priority lien can be
created by filing a Uniform Commercial Code financing statement or taking the
other Required Actions described in Section 5.9 below.
SECTION 4.11. Intellectual Property. Set forth in the Schedule is a
complete and accurate list of all patents, trademarks, trade names, service
marks and copyrights (registered and unregistered), and all applications
therefor and licenses thereof, of Borrower. Borrower owns or licenses all
material patents, trademarks, service-marks, logos, tradenames, trade secrets,
know-how, copyrights, or licenses and other rights with respect to any of the
foregoing, which are necessary or advisable for the operation of its business as
presently conducted or proposed to be conducted. To the best of its knowledge
after due inquiry, Borrower has not infringed any patent, trademark, service-
mark, tradename, copyright, license or other right owned by any other Person by
the sale or use of any product, process, method, substance, part or other
material presently contemplated to be sold or used, where such sale or use would
reasonably be expected to have a Material Adverse Effect and no claim or
litigation is pending, or to the best of Borrower's knowledge, threatened
against or affecting Borrower that contests its right to sell or use any such
product, process, method, substance, part or other material.
SECTION 4.12. Consents and Filings. No consent, authorization or
approval of, or filing with or other act by, any shareholders of Borrower or any
governmental authority or other Person is required in connection with the
execution, delivery, performance, validity or enforceability of this Agreement
or any other Loan Document, the consummation of the transactions contemplated
hereby or thereby or the continuing operations of Borrower following such
consummation, except (i) those that have been obtained or made, (ii) the filing
of financing statements under the Code and (iii) any necessary filings with U.S.
Copyright Office and the U.S. Patent and Trademark Office.
SECTION 4.13. Year 2000 Compliance. The Borrower has (i) initiated a
review and assessment of all areas within its business and operations (including
those affected by suppliers and vendors) that could be adversely affected by the
"Year 2000 Problem" (that is, the risk that computer applications used by the
Borrower (or its suppliers and vendors) may be unable to recognize and perform
properly date-sensitive functions involving certain dates prior to and any date
after December 31, 1999), (ii) developed a plan and timeline for addressing the
Year 2000 Problem on a timely basis, and (iii) to date, implemented that plan in
accordance with that timetable. The Borrower reasonably believes that all
computer applications (including those of its suppliers and vendors) that are
material to its business and operations will on a timely basis be able to
perform properly date-sensitive functions for all dates before and after January
1, 2000 (that is, be "Year 2000 compliant"), except to the extent that a failure
to do so could not reasonably be expected to have Material Adverse Effect.
SECTION 4.14. Taxes. Borrower has properly completed and timely filed
all income
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tax returns it is required to file, and all Taxes, assessments, fees and other
governmental charges for periods beginning prior to the date of this Agreement
have been timely paid (or, if not yet due or being disputed in good faith,
adequate reserves therefor have been established in accordance with GAAP) and
Borrower has no liability for Taxes in excess of the amounts so paid or reserves
so established. No deficiencies for Taxes have been claimed, proposed or
assessed by any taxing or other governmental agency or authority against
Borrower and no notice of any tax lien has been filed. There are no pending or
(to the best knowledge of Borrower) threatened audits, investigations or claims
for or relating to any liability for Taxes and there are no matters under
discussion with any governmental agency or authority which could result in an
additional material liability for Taxes.
SECTION 4.15. Financial Statements. Borrower has provided to the
Lender complete and accurate Financial Statements, which have been prepared in
accordance with GAAP (except for the absence of footnotes and subject to normal
year-end adjustments with respect to unaudited financial statements)
consistently applied throughout the periods involved and fairly present the
financial position and results of operations of Cypress and its consolidated
subsidiaries for each of the periods covered, subject, in the case of any
quarterly financial statements, to normal year-end adjustments and the absence
of notes. Except for reimbursement obligations relating to a $200,000 letter of
credit issued in favor of the landlord of the Redmond, Washington premises,
Borrower has no Contingent Obligation or liability for Taxes, unrealized losses,
unusual forward or long-term commitments or long-term leases, which is not
reflected in such Financial Statements or the footnotes thereto. Since the last
date covered by such Financial Statements, there has been no sale, transfer or
other disposition by Borrower of any material part of its business or property
and no purchase or other acquisition of any business or property (including any
capital stock of any other Person) material in relation to the financial
condition of Borrower at said date other than the sale, transfer or other
disposition of assets in the ordinary course of business. Since said date, (i)
there has been no change, occurrence, development or event which has had or
could reasonably be expected to have a Material Adverse Effect and (ii) none of
the capital stock of Borrower has been redeemed, retired, purchased or otherwise
acquired for value by Borrower.
SECTION 4.16. Accuracy and Completeness of Information. All data,
reports, and information heretofore, contemporaneously, or hereafter furnished
by or on behalf of the Borrower in writing to the Lender or for purposes of or
in connection with this Agreement or any other Loan Document, or any transaction
contemplated hereby or thereby, are or will be true and accurate in all material
respects on the date as of which such data, reports, and information are dated
or certified and not incomplete by omitting to state any material fact necessary
to make such data, reports, and information not misleading at such time. There
are no facts now known to the Borrower which individually or in the aggregate
would reasonably be expected to have a Material Adverse Effect and which have
not been specified herein, in the Financial Statements, or in any certificate,
opinion, or other written statement previously furnished by the Borrower to the
Lender.
SECTION 5. COVENANTS OF THE BORROWER.
-------------------------
SECTION 5.1. Existence, etc. The Borrower shall: (a) retain its
existence and its current yearly accounting cycle, (b) maintain in full force
and effect all licenses, bonds, franchises, leases, trademarks, patents,
contracts, and other rights necessary or desirable to the profitable conduct of
its business unless the failure to do so could not reasonably be expected to
have a Material Adverse Effect on the Borrower, (c) subject to Section 5.18
below, continue in, and limit its operations to, the same general lines of
business as those presently conducted by it, and (d) comply with all applicable
laws and regulations of any federal, state, or local governmental authority,
except for such laws and regulations the violations of which would not, in the
aggregate, have a Material Adverse Effect on the Borrower.
SECTION 5.2. Notice to the Lender. As soon as possible, and in any
event within five days after the Borrower learns of the following, the Borrower
will give written notice to the Lender of the following:
(a) any proceeding instituted or threatened to be instituted by or
against the Borrower in any federal, state, local, or foreign court or before
any commission or other regulatory body (federal, state, local, or
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foreign) involving a sum, together with the sum involved in all other similar
proceedings, in excess of $100,000 in the aggregate,
(b) any contract that is terminated or amended and which has had or
could reasonably be expected to have a Material Adverse Effect on the Borrower,
(c) the occurrence of any Material Adverse Change with respect to the
Borrower;
(d) the occurrence of any Event of Default or event or condition
which, with notice or lapse of time or both, would constitute an Event of
Default, together with a statement of the action which the Borrower has taken or
proposes to take with respect thereto;
(e) of any discovery or determination by Borrower that any computer
application (including those of its suppliers and vendors) that is material to
its business and operations will not be Year 2000 compliant on a timely basis,
except to the extent that such failure could not reasonably be expected to have
a Material Adverse Effect;
(f) of any material damage to, the destruction of or any other
material loss to any Collateral owned or used by Borrower other than any such
Collateral with a net book value (individually or in the aggregate) less than
$50,000 or any condemnation, confiscation or other taking, in whole or in part,
or any event that otherwise diminishes so as to render impracticable or
unreasonable the use of such Collateral owned or used by Borrower together with
the amount of the damage, destruction, loss or diminution in value; and
(g) of the opening of any new bank account or other deposit account,
and any new securities account.
SECTION 5.3. Maintenance of Books and Records. Borrower shall (i)
maintain books and records (including computer records) pertaining to the
Collateral in such detail, form and scope as is customary for companies in
similar businesses in similar situations and (ii) provide the Lender and its
agents access to the premises of Borrower at any time and from time to time,
during normal business hours and upon reasonable notice under the circumstances,
and at any time on and after the occurrence and during the existence of an Event
of Default, or event or condition which, with notice or lapse of time or both,
would constitute an Event of Default, for the purposes of (A) inspecting and
verifying the Collateral, (B) inspecting and copying (at Borrower's expense) any
and all records pertaining thereto, and (C) discussing the affairs, finances and
business of Borrower with any officer or director of Borrower or with Borrower's
accountants. Borrower shall reimburse the Lender for the reasonable travel and
related expenses of the Lender's employees or, at the Lender's option, of such
outside accountants or examiners as may be retained by the Lender to verify or
inspect Collateral, records or documents of Borrower on a regular basis or for a
special inspection if the Lender deems the same appropriate. Absent an Event of
Default, Lender's examinations shall be limited to 2 days per annum and a
maximum cost of $600 per diem. Said limitations shall not apply if there is an
Event of Default hereunder. If, in connection herewith, the Lender's own
employees are used, Borrower shall also pay therefor $600 per person per day (or
such other amount as shall represent the Lender's then current standard charge
for the same) subject to the limitation above as to pre default costs, or, if
outside examiners or accountants are used, Borrower shall also pay the Lender,
subject to the limitation above as to pre default costs, such reasonable sum as
the Lender may be obligated to pay as fees therefor.
SECTION 5.4. Insurance. Borrower shall maintain public liability
insurance, business interruption insurance, third party property damage
insurance and replacement value insurance on its assets (including the
Collateral) under such policies of insurance, with such insurance companies, in
such amounts and covering such risks as are at all times reasonably satisfactory
to the Lender in its commercially reasonable judgment, all of which policies
covering the Collateral shall name the Lender as an additional insured and
lender loss payee in case of loss, and contain other provisions as the Lender
may reasonably require to protect fully the Lender's interest in the Collateral
and any payments to be made under such policies.
SECTION 5.5. Taxes. The Borrower will pay, when due, all taxes,
assessments,
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claims, and other charges ("Taxes") lawfully levied or assessed against the
Borrower or the Collateral other than taxes that are being diligently contested
in good faith by the Borrower by appropriate proceedings promptly instituted and
for which an adequate reserve is being maintained by the Borrower in accordance
with GAAP. If any Taxes remain unpaid after the date fixed for the payment
thereof, or if any lien shall be claimed therefor, then, without notice to the
Borrower, but on the Borrower's behalf, the Lender may pay such Taxes, and the
amount thereof shall be included in the Obligations.
SECTION 5.6. Borrower to Defend Collateral Against Claims; Fees on
Collateral. The Borrower will defend the Collateral against all claims and
demands of all Persons at any time claiming the same or any interest therein.
The Borrower will not permit any notice creating or otherwise relating to liens
on the Collateral or any portion thereof to exist or be on file in any public
office other than Permitted Liens. The Borrower shall promptly pay, when
payable, all transportation, storage, and warehousing charges and license fees,
registration fees, assessments, charges, permit fees, and taxes (municipal,
state, and federal) which may now or hereafter be imposed upon the ownership,
leasing, renting, possession, sale, or use of the Collateral, other than taxes
on or measured by the Lender's income and fees, assessments, charges, and taxes
which are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves are maintained to the
extent required by GAAP.
SECTION 5.7. Change of Location, Structure, or Identity. The Borrower
will give Lender at least 10 days prior written notice of any change of
Borrower's chief executive office or of the opening of any additional place of
business. The Borrower will not move or permit the movement of any item of
Collateral from the locations specified in the Schedule, except that the
Borrower may keep Collateral at other locations within the United States
provided that the Borrower has delivered to the Lender (i) prior written notice
thereof and (ii) duly executed financing statements and other agreements and
instruments (all in form and substance satisfactory to the Lender) necessary or,
in the opinion of the Lender, desirable to perfect and maintain in favor of the
Lender a first priority security interest in the Collateral. Notwithstanding
anything to the contrary in the immediately preceding sentence, the Borrower may
keep any Collateral consisting of motor vehicles or rolling stock or other goods
which are mobile and which are of a type normally used in more than one
jurisdiction at any location in the United States.
SECTION 5.8. Use of Collateral; Licenses; Repair. The Collateral shall
be operated by competent, qualified personnel in connection with the Borrower's
business purposes, for the purpose for which the Collateral was designed and in
accordance with applicable operating instructions, laws, and government
regulations, and the Borrower shall use every reasonable precaution to prevent
loss or damage to the Collateral from fire and other hazards. The Borrower shall
procure and maintain in effect all orders, licenses, certificates, permits,
approvals, and consents required by federal, state, or local laws or by any
governmental body, agency, or authority in connection with the delivery,
installation, use, and operation of the Collateral.
SECTION 5.9. Further Assurances. The Borrower will, promptly upon
request by the Lender, execute and deliver or use its best efforts to obtain any
document reasonably required by the Lender (including, without limitation,
warehouseman or processor disclaimers, mortgagee waivers, landlord disclaimers,
or , subject to the Permitted Liens, subordination agreements with respect to
the Obligations and the Collateral), give any notices, execute and file any
financing statements, mortgages, or other documents (all in form and substance
satisfactory to the Lender), mark any chattel paper, deliver any instruments to
the Lender, and take any other actions that are necessary or, in the opinion of
the Lender, desirable to perfect or continue the perfection and the first
priority of the Lender's security interest in the Collateral, to protect the
Collateral against the rights, claims, or interests of any Persons, or to effect
the purposes of this Agreement, in all cases subject to Permitted Liens,
provided that Borrower shall be required to take the following actions with
respect to perfection of Lender's lien on the Collateral: (i) the filing of
Uniform Commercial Code financing statements under the Code, (ii) delivery of a
Notice of Security Interest to each financial institution located in the United
States at which any deposit accounts of Borrower are maintained, (iii) the
making of all necessary filings with the U.S. Copyright Office and the U.S.
Patent and Trademark Office, and (iv) the delivery to Lender of any documents or
certificates of title issued with respect to any property included in the
Collateral, and any promissory notes, letters of credit or instruments related
to or
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otherwise in connection with any property included in the Collateral
(collectively, the "Required Actions"). The Borrower hereby authorizes the
Lender to file one or more financing or continuation statements, and amendments
thereto, relating to all or any part of the Collateral without the signature of
the Borrower where permitted by law. A carbon, photographic, or other
reproduction of this Agreement or any financing statement covering the
Collateral or any part thereof shall be sufficient as a financing statement
where permitted by law. To the extent required under this Agreement, the
Borrower will pay all costs reasonably incurred in connection with any of the
foregoing.
SECTION 5.10. No Disposition of Collateral. The Borrower will not in
any way hypothecate or create or permit to exist any lien, security interest,
charge, or encumbrance on or other interest in any of the Collateral, except for
the lien and security interest granted hereby and Permitted Liens. In the event
the Collateral, or any part thereof, is sold, transferred, assigned, exchanged,
or otherwise disposed of in violation of this Agreement, the security interest
of the Lender shall continue in such Collateral or part thereof notwithstanding
such sale, transfer, assignment, exchange, or other disposition, and the
Borrower will hold the proceeds thereof in a separate account for the benefit of
the Lender. Following such a sale, the Borrower will transfer such proceeds to
the Lender in kind.
SECTION 5.11. No Limitation on Lender's Rights. The Borrower will not
enter into any contractual obligations which may restrict or inhibit the
Lender's rights or ability to sell or otherwise dispose of the Collateral or any
part thereof.
SECTION 5.12. Protection of Collateral. Upon the occurrence and during
the continuance of an Event of Default, the Lender shall have the right at any
time to make any payments and do any other acts the Lender may deem necessary to
protect its security interests in the Collateral, including, without limitation,
the rights to satisfy, purchase, contest, or compromise any encumbrance, charge,
or lien which, in the reasonable judgment of the Lender, appears to be prior to
or superior to the security interests granted hereunder, subject to Permitted
Liens, and appear in, and defend any action or proceeding purporting to affect
its security interests in, or the value of, any of the Collateral. The Borrower
hereby agrees to reimburse the Lender for all payments made and expenses
incurred under this Agreement including reasonable fees, expenses, and
disbursements of attorneys and paralegals (including the allocated costs of in-
house counsel) acting for the Lender, including any of the foregoing payments
under, or acts taken to protect its security interests in, any of the
Collateral, which amounts shall be secured under this Agreement, and agrees it
shall be bound by any payment made or act taken by the Lender hereunder absent
the Lender's gross negligence or willful misconduct. The Lender shall have no
obligation to make any of the foregoing payments or perform any of the foregoing
acts.
SECTION 5.13. Delivery of Items. The Borrower will (a) promptly (but
in no event later than three Business Days) after its receipt thereof, deliver
to the Lender any documents or certificates of title issued with respect to any
property included in the Collateral, and any promissory notes, letters of credit
or instruments related to or otherwise in connection with any property included
in the Collateral, which in any such case come into the possession of the
Borrower, or shall cause the issuer thereof to deliver any of the same directly
to the Lender, in each case with any necessary endorsements in favor of the
Lender and (b) deliver to the Lender as soon as available copies of any and all
press releases and other similar communications issued by the Borrower.
SECTION 5.14. Solvency. The Borrower shall be and remain Solvent at
all times.
SECTION 5.15. Intellectual Property. Borrower shall do and cause to be
done all things necessary to preserve, maintain and keep in full force and
effect all of its registrations of trademarks, service marks and other marks,
trade names and other trade rights, patents, copyrights and other intellectual
property in accordance with prudent business practices, except to the extent
that the failure to preserve or maintain any of the foregoing would not
reasonably be expected to have a Material Adverse Effect. Without limiting the
generality of the foregoing, Borrower agrees, promptly, and in any event not
later than 60 days after the date hereof, to file an application to register any
of its currently unregistered copyrightable software and computer programs and
other materials that Borrower determines in its best judgment should be
registered with the U.S. Copyright Office in Washington, D.C. (the "Copyright
Office") and to promptly provide Lender with evidence of such filing. Borrower
will, upon request, on an ongoing basis, promptly file an application to
register any future unregistered copyrightable
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software and computer programs and other materials with the Copyright Office.
SECTION 5.16. Fundamental Changes. The Borrower shall not (a) amend or
modify its name, unless the Borrower delivers to the Lender thirty days prior to
any such proposed amendment or modification written notice of such amendment or
modification and within ten days before such amendment or modification delivers
executed Uniform Commercial Code financing statements (in form and substance
satisfactory to the Lender) or (b) merge or consolidate with any other entity or
make any material adverse change, which change results from a single transaction
or series of related transactions, but not from the sale of newly issued
securities to investors, in its capital structure, in each case without the
Lender's prior written consent which shall not be unreasonably withheld other
than (i) issuances of new equity, (ii) corporate partnering agreements entered
into in the ordinary course of business, and (iii) acquisitions to the extent
permitted by Section 5.23 below.
SECTION 5.17. Contingent Obligations. Borrower will not, directly or
indirectly, incur, assume, or suffer to exist any Contingent Obligation,
excluding (i) indemnities given in connection with this Agreement or the other
Loan Documents in favor of the Lender or in connection with the sale of
inventory or other asset dispositions permitted hereunder or in connection with
the licensing of intellectual property or products in the ordinary course of
business and (ii) guaranties in favor of Fresenius under or in connection with
the Fresenius Agreements, except Contingent Obligations and other similar third
party credit support relating to obligations of vendors and suppliers of
Borrower in respect of transactions entered into in the normal course of
business, provided that the aggregate amount of any such guarantees and other
similar third party credit support shall not exceed $100,000 at any time
outstanding, and provided further that no Default or Event of Default shall
exist either immediately prior to or after giving effect to the making of the
foregoing guarantees or the entering into any third party credit support
transactions.
SECTION 5.18. Change in Nature of Business. Borrower will not at any
time make any material change in the lines of its business as carried on at the
date of this Agreement or enter into any new line of business; provided that
Borrower may enter businesses reasonably related or incidental to its current
lines of business.
SECTION 5.19. Sales of Assets. Borrower will not, directly or
indirectly, in any fiscal year, sell, transfer or otherwise dispose of any of
its assets, or grant any option or other right to purchase or otherwise acquire
any of its assets other than (i) equipment with an aggregate value of less than
$50,000 the proceeds of which shall be paid to the Lender and applied to the
Obligations, (ii) sales of inventory in the ordinary course of business and
(iii) licenses or sublicenses on a non-exclusive or exclusive basis of
intellectual property in the ordinary course of Borrower's business.
SECTION 5.20. Loans to Other Persons. Borrower will not at any time
make loans or advance any credit (except to trade debtors in the ordinary course
of business) to any Person in excess of $100,000 in the aggregate at any time
for all such loans, except that Borrower may make cashless advances of credit to
senior members of Borrower's management team to purchase restricted stock of
Borrower.
SECTION 5.21. Dividends, Stock Redemptions. Borrower will not,
directly or indirectly, pay any dividends or distributions on, purchase, redeem
or retire any shares of any class of its capital stock or any warrants, options
or rights to purchase any such capital stock, whether now or hereafter
outstanding ("Stock"), or make any payment on account of or set apart assets for
a sinking or other analogous fund for, the purchase, redemption, defeasance,
retirement or other acquisition of its Stock, or make any other distribution in
respect thereof, either directly or indirectly, whether in cash or property or
in obligations of Borrower, except for (i) repurchases or redemptions of
convertible debentures existing on the date of this Agreement either for cash or
stock (ii) dividends paid solely in stock of the Borrower, and (iii) repurchases
of stock owned by employees, directors and consultants of Borrower pursuant to
terms of employment, consulting or other stock restrictions agreements at such
time as any such employee, director or consultant terminates his or her
affiliations with the Borrower, provided that no Default or Event of Default
shall exist either immediately prior to or after giving effect to such
repurchase, and provided further that the total amount paid in connection
therewith by Borrower shall not exceed $100,000 in any consecutive 12-month
period.
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SECTION 5.22. Investments in Other Persons. Borrower will not,
directly or indirectly, at any time make or hold any investment in any Person
(whether in cash, securities or other property of any kind) other than (i)
investments in Cash Equivalents (ii) the loans and advances permitted by Section
5.20 above and (iii) investments in subsidiaries not to exceed $40,000 (except
this limitation shall not apply to PRP), in existence on the date hereof in an
amount not to exceed the amount of such investment on the date hereof.
SECTION 5.23. Acquisition of Stock or Assets. Borrower will not
acquire or commit or agree to acquire all or any stock, securities or assets of
any other Person other than (i) inventory and equipment acquired in the ordinary
course of business and (ii) rights as licensee under an exclusive license of
intellectual property.
SECTION 5.24. Partnerships; Subsidiaries; Joint Ventures; Management
Contracts. Borrower will not at any time create any direct or indirect
subsidiary, enter into any joint venture or similar arrangement (other than
joint ventures or strategic partnerships consisting of non-exclusive or
exclusive licensing of technology or products or the providing of technical
support) or become a partner in any general or limited partnership or enter into
any management contract (other than an employment contract for the employment of
an officer or employee entered into in the regular course of Borrower's
business) permitting third party management rights with respect to Borrower's
business. The Borrower shall not advance any monies, assets of any nature or
kind, stock or other capital to any of its subsidiaries or pay any dividends or
make distributions to any of its subsidiaries, including but not limited to,
IMRE Services, Inc. and IMRE Europe, Ltd. In addition, Borrower shall not
maintain any financial assets outside of the United States, except Borrower may
maintain balances outside the U.S. provided such balances do not exceed in the
aggregate the equivalent of $40,000 U.S. dollars.
SECTION 5.25. Additional Requirements. The Borrower shall take all
such further actions and execute all such further documents and instruments as
the Lender may reasonably request.
SECTION 6. FINANCIAL STATEMENTS. Until the payment and satisfaction in
--------------------
full of all Obligations, the Borrower shall deliver to the Lender the following
financial information:
SECTION 6.1. Annual Financial Statements. As soon as available, but
not later than 90 days after the end of each fiscal year of Cypress and its
consolidated subsidiaries, the consolidated balance sheet, income statement, and
statements of cash flows and shareholders equity for Cypress and its
consolidated subsidiaries (the "Financial Statements") for such year, reported
on by independent certified public accountants without an adverse qualification;
and
SECTION 6.2. Quarterly Financial Statements. As soon as available, but
not later than 45 days after the end of each of the first three fiscal quarters
in any fiscal year of Cypress and its consolidated subsidiaries, the Financial
Statements for such fiscal quarter, together with a certification duly executed
by a responsible officer of the Borrower that such Financial Statements have
been prepared in accordance with GAAP and are fairly stated in all material
respects (subject to normal year-end audit adjustments).
SECTION 7. EVENTS OF DEFAULT. The occurrence of any of the following
-----------------
events shall constitute an Event of Default hereunder:
(a) the Borrower shall fail to pay within five (5) days of when due
any principal, interest, fee or other amount required to be paid by the Borrower
under or in connection with any Note and this Agreement;
(b) any representation or warranty made or deemed made by the Borrower
under or in connection with any Loan Document or any Financial Statement shall
prove to have been false or incorrect in any material respect when made or
deemed made;
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(c) the Borrower shall fail to perform or observe (i) any of the
terms, covenants or agreements contained in Sections 5.4, 5.7, 5.10, 5.14 or
5.16 through 5.25 hereof or (ii) any other term, covenant, or agreement
contained in any Loan Document (other than the other Events of Default specified
in this Section 7) and such failure remains unremedied for the earlier of
fifteen days from (A) the date on which the Lender has given the Borrower
written notice of such failure and (B) the date on which the Borrower knew or
should have known of such failure;
(d) any defined "Event of Default" shall occur under any other Loan
Document; or Borrower or any Person shall deny or disaffirm its obligations
under any of the Loan Documents or any Liens granted in connection therewith or
shall otherwise challenge any of its obligations under any of the Loan
Documents; or any Liens granted in any of the Collateral shall be determined to
be void, voidable or invalid, are subordinated (except as provided in Section 2
hereof) or are not given the priority contemplated by this Agreement (except for
Permitted Liens); or any Loan Document shall for any reason cease to create a
valid and perfected Lien on the Collateral purported to be covered thereby, of
first priority (except for Permitted Liens), to the extent a perfected first
priority lien can be created by filing a Uniform Commercial Code financing
statement or taking the other Required Actions described in Section 5.9 above;
(e) dissolution, liquidation, winding up, or cessation of the
Borrower's business, failure of the Borrower generally to pay its debts as they
mature, admission in writing by the Borrower of its inability generally to pay
its debts as they mature, or calling of a meeting of the Borrower's creditors
for purposes of compromising any of the Borrower's debts;
(f) the commencement by or against the Borrower of any bankruptcy,
insolvency, arrangement, reorganization, receivership, or similar proceedings
under any federal or state law and, in the case of any such involuntary
proceeding, such proceeding remains undismissed or unstayed for sixty days
following the commencement thereof, or any action by the Borrower is taken
authorizing any such proceedings;
(g) an assignment for the benefit of creditors is made by the
Borrower, whether voluntary or involuntary, the appointment of a trustee,
custodian, receiver, or similar official for the Borrower or for any substantial
property of the Borrower, or any action by the Borrower authorizing any such
proceeding;
(h) the Borrower shall default in (i) the payment of principal or
interest on any indebtedness in excess of $100,000 (other than the Obligations)
beyond the period of grace, if any, provided in the instrument or agreement
under which such indebtedness was created, and such payment default has not been
cured within any applicable grace period unless such default has been waived by
such Person; or (ii) the observance or performance of any other agreement or
condition relating to any such indebtedness or contained in any instrument or
agreement relating thereto, or any other event shall occur or condition exist,
the effect of which default or other event or condition is to cause, or to
permit the holder or holders of such indebtedness to cause, with the giving of
notice if required, such indebtedness to become due prior to its stated
maturity, and such default has not been cured within any applicable grace period
unless such default has been waived by such Person; or (iii) any loan or other
agreement under which the Borrower has received financing from Transamerica
Corporation or any of its affiliates, beyond the period of grace, it any,
provided in such loan or other agreement unless such default has been waived;
(i) the Borrower suffers or sustains a Material Adverse Change as
determined in Lender's good faith business judgment;
(j) any tax lien, other than a Permitted Lien, is filed of record
against the Borrower and is not bonded or discharged within ten Business Days;
(k) any judgment or order for the payment of money in excess of
$100,000 and not otherwise covered by applicable insurance shall be rendered
against the Borrower and such judgment or order shall not be stayed, vacated,
bonded, or discharged within sixty days;
(l) any material covenant, agreement, or obligation, as determined in
the good faith
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business judgment of the Lender, made by the Borrower and contained in or
evidenced by any of the Loan Documents shall cease to be enforceable, or shall
be determined to be unenforceable, in accordance with its terms; or
(m) there is a change, which change results from a single transaction
or series of related transactions, but not from the sale of newly issued
securities to investors, in more than 50% of the ownership of any equity
interests of the Borrower on the closing date of such transaction or series of
related transactions or more than 50% of such interests become subject to any
contractual, judicial, or statutory lien, charge, security interest, or
encumbrance.
SECTION 8. REMEDIES. If any Event of Default shall have occurred and
--------
be continuing:
(a) The Lender may, without prejudice to any of its other rights under
any Loan Document or Applicable Law, declare all Obligations to be immediately
due and payable (except with respect to any Event of Default set forth in
Section 7(f) hereof, in which case all Obligations shall automatically become
immediately due and payable without necessity of any declaration) without
presentment, representation, demand of payment, or protest, which are hereby
expressly waived.
(b) The Lender may take possession of the Collateral and, for that
purpose may enter, with the aid and assistance of any person or persons, any
premises where the Collateral or any part hereof is, or may be placed, and
remove the same.
(c) The obligation of the Lender, if any, to make additional Loans or
financial accommodations of any kind to the Borrower shall immediately
terminate.
(d) The Lender may exercise in respect of the Collateral, in addition
to other rights and remedies provided for herein (or in any Loan Document) or
otherwise available to it, all the rights and remedies of a secured party under
the applicable Uniform Commercial Code (the "Code") whether or not the Code
applies to the affected Collateral and also may (i) require the Borrower to, and
the Borrower hereby agrees that it will at its expense and upon request of the
Lender forthwith, assemble all or part of the Collateral as directed by the
Lender and make it available to the Lender at a place to be designated by the
Lender that is reasonably convenient to both parties and (ii) without notice
except as specified below, sell the Collateral or any part thereof in one or
more parcels at public or private sale, at any of the Lender's offices or
elsewhere, for cash, on credit, or for future delivery, and upon such other
terms as the Lender may deem commercially reasonable.
(e) The Lender may accelerate or extend the time of payment,
compromise, issue credits, or bring suit on all accounts receivable
("Receivables") and other Collateral (in the name of Borrower or the Lender) and
otherwise administer and collect the Receivables and other Collateral.
(f) The Lender may collect, receive, dispose of and realize upon any
investment property Collateral, including withdrawal of any and all funds from
any securities accounts.
(g) The Lender may (i) settle or adjust disputes or claims directly
with account debtors for amounts and upon terms which it considers advisable,
and (ii) notify account debtors on the Receivables and other Collateral that the
Receivables and Collateral have been assigned to the Lender, and that payments
in respect thereof shall be made directly to the Lender. If an Event of Default
has occurred and is continuing, Borrower hereby irrevocably authorizes and
appoints the Lender, or any Person the Lender may designate, as its attorney-in-
fact, at Borrower's sole cost and expense, to exercise, all of the following
powers, which are coupled with an interest and are irrevocable, until all of the
Obligations have been indefeasibly paid and satisfied in full in cash: (A) to
receive, take, endorse, sign, assign and deliver, all in the name of the Lender
or Borrower, any and all checks, notes, drafts, and other documents or
instruments relating to the Collateral; (B) to receive, open and dispose of all
mail addressed to Borrower and to notify postal authorities to change the
address for delivery thereof to such address as the Lender may designate; and
(C) to take or bring, in the name of the Lender or Borrower, all steps, actions,
suits or proceedings deemed by the Lender necessary or desirable to enforce or
effect collection of Receivables and other
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Collateral or file and sign Borrower's name on a proof of claim in bankruptcy or
similar document against any obligor of Borrower.
(h) The Borrower agrees that, to the extent notice of sale shall be
required by law, at least ten days' notice to the Borrower of the time and place
of any public sale or the time after which any private sale is to be made shall
constitute reasonable notification. The Lender shall not be obligated to make
any sale of Collateral regardless of notice of sale having been given. The
Lender may adjourn any public or private sale from time to time by announcement
at the time and place fixed therefor, and such sale may, without further notice,
be made at the time and place to which it was so adjourned. Borrower recognizes
that the Lender may be unable to make a public sale of any or all of any
investment property Collateral, by reason of prohibitions contained in
applicable securities laws or otherwise, and expressly agrees that a private
sale to a restricted group of purchasers for investment and not with a view to
any distribution thereof shall be considered a commercially reasonable sale.
(i) Unless expressly prohibited by any licensor thereof, the Lender is
hereby granted a license to use all computer software programs, data bases,
processes, trademarks, tradenames and materials used by Borrower in connection
with its businesses or in connection with the Collateral.
(j) All cash proceeds received by the Lender in respect of any sale
of, collection from, or other realization upon all or any part of the Collateral
may, in the discretion of the Lender, be held by the Lender as collateral for,
or then or at any time thereafter applied in whole or in part by the Lender
against, all or any part of the Obligations in such order as the Lender shall
elect. Any surplus of such cash or cash proceeds held by the Lender and
remaining after the full and final payment of all the Obligations shall be paid
over to the Borrower or to such other Person to which the Lender may be required
under applicable law, or directed by a court of competent jurisdiction, to make
payment of such surplus.
(k) Notwithstanding anything contained herein to the contrary, Lender
shall exercise its rights and remedies hereunder and under any other Loan
Document subject to the rights of Fresenius under the Fresenius Agreements.
SECTION 9. MISCELLANEOUS PROVISIONS.
------------------------
SECTION 9.1. Notices. Except as otherwise provided herein, all
notices, approvals, consents, correspondence, or other communications required
or desired to be given hereunder shall be given in writing and shall be
delivered by overnight courier, hand delivery, or certified or registered mail,
postage prepaid, if to the Lender, then to at 76 Batterson Park Road,
Farmington, Connecticut 06032, with a copy to the Lender at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, and if to the
Borrower, then to 4350 Executive Drive, San Diego, California, 92121, or such
other address as shall be designated by the Borrower or the Lender to the other
party in accordance herewith. All such notices and correspondence shall be
effective when received.
SECTION 9.2. Headings. The headings in this Agreement are for purposes
of reference only and shall not affect the meaning or construction of any
provision of this Agreement.
SECTION 9.3. Assignments and Participations. The Borrower shall not
have the right to assign any Note or this Agreement or any interest therein
unless the Lender shall have given the Borrower prior written consent and the
Borrower and its assignee shall have delivered assignment documentation in form
and substance satisfactory to the Lender in its sole discretion. The Lender may
assign (without the consent of Borrower) to one or more Persons all or a portion
of its rights and obligations under this Agreement and the other Loan Documents
(provided that such Person, or any affiliate or subsidiary thereof, shall not be
a direct or indirect competitor of the Borrower). The Lender may sell
participations in or to all or a portion of its rights and obligations under
this Agreement (including, without limitation, all or a portion of any Loans);
provided, however, that the Lender's obligations under this Agreement shall
remain unchanged. The Lender may, in connection with any permitted assignment or
participation or proposed assignment or participation pursuant to this
Agreement, disclose to the assignee or participant or proposed assignee or
participant any information relating to Borrower furnished to
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<PAGE>
the Lender by or on behalf of Borrower. In handling any confidential information
of Borrower, Lender shall exercise the same degree of care that it exercises
with respect to its own proprietary information of the same types to maintain
the confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Lender in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they have
entered into a comparable confidentiality agreement in favor of Borrower, (iii)
as required by law, regulations, rule or order, subpoena, judicial order or
similar order, (iv) as may be required in connection with an audit or similar
investigation of Lender, and (v) as Lender may deem appropriate in connection
with the exercise of any remedies hereunder. Confidential information hereunder
shall not include information that either: (a) is in the public domain or in the
knowledge or possession of Lender when disclosed to Lender, or becomes part of
the public domain after disclosure to Lender through no fault of Lender; or (b)
is disclosed to Lender by a third party, provided Lender does not have actual
knowledge that such third party is prohibited from disclosing such information.
SECTION 9.4. Amendments, Waivers, and Consents. Any amendment or
waiver of any provision of this Agreement and any consent to any departure by
the Borrower from any provision of this Agreement shall be effective only by a
writing signed by the Lender and shall bind and benefit the Borrower and the
Lender and their respective successors and assigns, subject, in the case of the
Borrower, to the first sentence of Section 9.3.
SECTION 9.5. Interpretation of Agreement. Time is of the essence in
each provision of this Agreement of which time is an element. All terms not
defined herein or in a Note shall have the meaning set forth in the applicable
Code, except where the context otherwise requires. To the extent a term or
provision of this Agreement conflicts with any Note, or any term or provision
thereof, and is not dealt with therein with more specificity, this Agreement
shall control with respect to the subject matter of such term or provision.
Acceptance of or acquiescence in a course of performance rendered under this
Agreement shall not be relevant in determining the meaning of this Agreement
even though the accepting or acquiescing party had knowledge of the nature of
the performance and opportunity for objection.
SECTION 9.6. Continuing Security Interest. This Agreement shall create
a continuing security interest in the Collateral and shall (i) remain in full
force and effect until the indefeasible payment in full of the Obligations, (ii)
be binding upon the Borrower and its successors and assigns and (iii) inure,
together with the rights and remedies of the Lender hereunder, to the benefit of
the Lender and its successors, transferees, and assigns.
SECTION 9.7. Reinstatement. To the extent permitted by law, this
Agreement and the rights and powers granted to the Lender hereunder and under
the Loan Documents shall continue to be effective or be reinstated if at any
time any amount received by the Lender in respect of the Obligations is
rescinded or must otherwise be restored or returned by the Lender upon the
insolvency, bankruptcy, dissolution, liquidation, or reorganization of the
Borrower or upon the appointment of any receiver, intervenor, conservator,
trustee, or similar official for the Borrower or any substantial part of its
assets, or otherwise, all as though such payments had not been made.
SECTION 9.8. Survival of Provisions. All representations, warranties,
and covenants of the Borrower contained herein shall survive the execution and
delivery of this Agreement, and shall terminate only upon the full and final
payment and performance by the Borrower of the Obligations secured hereby.
SECTION 9.9. Indemnification. The Borrower agrees to indemnify and
hold harmless the Lender and its directors, officers, agents, employees, and
counsel from and against any and all costs, expenses, claims, or liability
incurred by the Lender or such Person hereunder and under any other Loan
Document or in connection herewith or therewith, unless such claim or liability
shall be due to willful misconduct or gross negligence on the part of the Lender
or such Person. In addition and without limiting the generality of the
foregoing, Borrower shall, upon demand, pay to the Lender all reasonable costs
and expenses incurred by the Lender (including the reasonable fees and
disbursements of counsel and other professionals) in connection with the
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preparation, execution, delivery, administration, modification and amendment of
the Loan Documents, and pay to the Lender all reasonable costs and expenses
(including the reasonable fees and disbursements of counsel and other
professionals) paid or incurred by the Lender in order to enforce or defend any
of its rights under or in respect of this Agreement, any other Loan Document or
any other document or instrument now or hereafter executed and delivered in
connection herewith, collect the Obligations or otherwise administer this
Agreement, foreclose or otherwise realize upon the Collateral or any part
thereof, prosecute actions against, or defend actions by, account debtors;
commence, intervene in, or defend any action or proceeding; initiate any
complaint to be relieved of the automatic stay in bankruptcy; file or prosecute
any probate claim, bankruptcy claim, third-party claim, or other claim; examine,
audit, copy, and inspect any of the Collateral or any of Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
the Lender's security interest in, the Collateral; and otherwise represent the
Lender in any litigation relating to Borrower.
SECTION 9.10. Counterparts; Signatures by Facsimile. This Agreement
may be executed in counterparts, each of which when so executed and delivered
shall be an original, but both of which shall together constitute one and the
same instrument. This Agreement and each of the other Loan Documents and any
notices given in connection herewith or therewith may be executed and delivered
by facsimile transmission all with the same force and effect as if the same was
a fully executed and delivered original manual counterpart.
SECTION 9.11. Severability. In case any provision in or obligation
under this Agreement or any Note or any other Loan Document shall be invalid,
illegal, or unenforceable in any jurisdiction, the validity, legality, and
enforceability of the remaining provisions or obligations, or of such provision
or obligation in any other jurisdiction, shall not in any way be affected or
impaired thereby.
SECTION 9.12. Delays; Partial Exercise of Remedies. No delay or
omission of the Lender to exercise any right or remedy hereunder, whether before
or after the happening of any Event of Default, shall impair any such right or
shall operate as a waiver thereof or as a waiver of any such Event of Default.
No single or partial exercise by the Lender of any right or remedy shall
preclude any other or further exercise thereof, or preclude any other right or
remedy.
SECTION 9.13. Entire Agreement. The Borrower and the Lender agree that
this Agreement, the Schedule hereto, and the Commitment Letter are the complete
and exclusive statement and agreement between the parties with respect to the
subject matter hereof, superseding all proposals and prior agreements, oral or
written, and all other communications between the parties with respect to the
subject matter hereof. Should there exist any inconsistency between the terms of
the Commitment Letter and this Agreement, the terms of this Agreement shall
prevail.
SECTION 9.14. Setoff. In addition to and not in limitation of all
rights of offset that the Lender may have under Applicable Law, and whether or
not the Lender has made any demand or the Obligations of the Borrower have
matured, the Lender shall have the right to appropriate and apply to the payment
of the Obligations of the Borrower all deposits and other obligations then or
thereafter owing by the Lender to or for the credit or the account of the
Borrower.
SECTION 9.15 Joint and Several Liability. If Borrower consists of more
than one Person, their liability shall be joint and several, and the compromise
of any claim with, or the release of, any Borrower shall not constitute a
compromise with, or a release of, any other Borrower.
SECTION 9.16 Maximum Rate. Notwithstanding anything to the contrary
contained elsewhere in this Agreement or in any other Loan Document, the parties
hereto hereby agree that all agreements between them under this Agreement and
the other Loan Documents, whether now existing or hereafter arising and whether
written or oral, are expressly limited so that in no contingency or event
whatsoever shall the amount paid, or agreed to be paid, to the Lender for the
use, forbearance, or detention of the money loaned to Borrower and evidenced
hereby or thereby or for the performance or payment of any covenant or
obligation contained herein or therein, exceed the maximum non-usurious interest
rate, if any, that at any time or from time to time may be contracted for,
taken, reserved, charged or received on the Obligations, under the laws of the
State of
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Illinois (or the laws of any other jurisdiction whose laws may be mandatorily
applicable notwithstanding other provisions of this Agreement and the other Loan
Documents), or under applicable federal laws which may presently or hereafter be
in effect and which allow a higher maximum non-usurious interest rate than under
the laws of the State of Illinois (or such other jurisdiction), in any case
after taking into account, to the extent permitted by applicable law, any and
all relevant payments or charges under this Agreement and the other Loan
Documents executed in connection herewith, and any available exemptions,
exceptions and exclusions (the "Highest Lawful Rate"). If due to any
circumstance whatsoever, fulfillment of any provisions of this Agreement or any
of the other Loan Documents at the time performance of such provision shall be
due shall exceed the Highest Lawful Rate, then, automatically, the obligation to
be fulfilled shall be modified or reduced to the extent necessary to limit such
interest to the Highest Lawful Rate, and if from any such circumstance the
Lender should ever receive anything of value deemed interest by applicable law
which would exceed the Highest Lawful Rate, such excessive interest shall be
applied to the reduction of the principal amount then outstanding hereunder or
on account of any other then outstanding Obligations and not to the payment of
interest, or if such excessive interest exceeds the principal unpaid balance
then outstanding hereunder and such other then outstanding Obligations, such
excess shall be refunded to Borrower. All sums paid or agreed to be paid to the
Lender for the use, forbearance, or detention of the Obligations and other
indebtedness of Borrower to the Lender shall, to the extent permitted by
applicable law, be amortized, prorated, allocated and spread throughout the full
term of such indebtedness, until payment in full thereof, so that the actual
rate of interest on account of all such indebtedness does not exceed the Highest
Lawful Rate throughout the entire term of such indebtedness. The terms and
provisions of this Section shall control every other provision of this
Agreement, the other Loan Documents and all other agreements between the parties
hereto.
SECTION 9.17. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER
IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN
DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
SECTION 9.18. GOVERNING LAW. THE VALIDITY, INTERPRETATION, AND
ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF
LAW PRINCIPLES THEREOF.
SECTION 9.19. Venue; Service of Process. ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS SITUATED IN COOK COUNTY, OR OF
THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR ITSELF
AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION
OF THE AFORESAID COURTS. THE BORROWER HEREBY IRREVOCABLY WAIVES, IN CONNECTION
WITH ANY SUCH ACTION OR PROCEEDING, (a) ANY OBJECTION, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF
FORUM NON CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY
SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS AND (b) THE RIGHT TO
INTERPOSE ANY NONCOMPULSORY SETOFF, COUNTERCLAIM, OR CROSS-CLAIM. THE BORROWER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT THE ADDRESS
FOR IT SPECIFIED IN SECTION 9.1 HEREOF. NOTHING HEREIN SHALL AFFECT THE RIGHT OF
THE LENDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE
LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY OTHER
JURISDICTION, SUBJECT IN EACH INSTANCE TO THE PROVISIONS HEREOF WITH RESPECT TO
RIGHTS AND REMEDIES.
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IN WITNESS WHEREOF, the undersigned Borrower has caused this Agreement
to be duly executed and delivered by its proper and duly authorized officer as
of the date first set forth above.
CYPRESS BIOSCIENCE, INC.
By: /s/ Carl F. Bobkoski
-----------------------------
Name: Carl F. Bobkoski
-----------------------
Title: President & COO
-----------------------
PRP, INC.
By: /s/ Carl F. Bobkoski
-----------------------------
Name: Carl F. Bobkoski
-----------------------
Title: President & COO
-----------------------
Accepted as of the
7th day of September, 1999
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /s/ Robert D. Pomeroy, Jr.
---------------------------------
Name: Robert D. Pomeroy, Jr.
----------------------------
Title: Executive Vice President
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21
<PAGE>
Schedule A
to
Loan and Security Agreement
Consents and Approvals (Section 4.2):
Other Places of Business and Locations of Collateral (Section 4.6):
Prior Names of Obligor (Section 4.7):
Prior Trade Names of Obligor (Section 4.7):
Existing Trade Names of Obligor (Section 4.7):
Federal Tax ID (Section 4.7):
Registered and Unregistered Patents (Section 4.11):
Registered and Unregistered Trademarks (Section 4.11):
Registered Copyrights (Section 4.11):
<PAGE>
EXHIBIT 10.2
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.
No. 1
STOCK SUBSCRIPTION WARRANT
To Purchase Common Stock of
CYPRESS BIOSCIENCE, INC. (the "Company")
DATE OF INITIAL ISSUANCE: September 7, 1999
THIS CERTIFIES THAT for value received, TBCC FUNDING TRUST II or its
registered assigns (hereinafter called the "Holder") is entitled to purchase
from the Company, at any time during the Term of this Warrant, One Hundred
Sixty-Eight Thousand Six Hundred Fifty-Seven (168,651) shares of common stock,
$0.01 par value, of the Company (the "Common Stock"), at the Warrant Price,
payable as provided herein. The exercise of this Warrant shall be subject to the
provisions, limitations and restrictions herein contained, and may be exercised
in whole or in part.
SECTION 1. Definitions.
-----------
For all purposes of this Warrant, the following terms shall have the
meanings indicated:
Common Stock - shall mean and include the Company's authorized Common
------------
Stock, $0.01 par value, as constituted at the date hereof.
Exchange Act - shall mean the Securities Exchange Act of 1934, as amended
------------
from time to time.
Securities Act - the Securities Act of 1933, as amended.
--------------
Term of this Warrant - shall mean the period beginning on the date of
--------------------
initial issuance hereof and ending on September 7, 2004.
Warrant Price - $2.9647 per share, subject to adjustment in accordance with
-------------
Section 5 hereof.
Warrants - this Warrant and any other Warrant or Warrants issued in
--------
connection with a Commitment Letter dated July 23, 1999 executed by the Company
and Transamerica Business Credit Corporation (the "Commitment Letter") to the
original holder of this Warrant, or any transferees from such original holder or
this Holder.
Warrant Shares - shares of Common Stock purchased or purchasable by the
--------------
Holder of this Warrant upon the exercise hereof.
<PAGE>
SECTION 2. Exercise of Warrant.
-------------------
2.1. Procedure for Exercise of Warrant. To exercise this Warrant in whole
---------------------------------
or in part (but not as to any fractional share of Common Stock), the Holder
shall deliver to the Company at its office referred to in Section 13 hereof at
any time and from time to time during the Term of this Warrant: (i) the Notice
of Exercise in the form attached hereto, (ii) cash, certified or official bank
check payable to the order of the Company, wire transfer of funds to the
Company's account, or evidence of any indebtedness of the Company to the Holder
(or any combination of any of the foregoing) in the amount of the Warrant Price
for each share being purchased, and (iii) this Warrant. Notwithstanding any
provisions herein to the contrary, if the Current Market Price (as defined in
Section 5) is greater than the Warrant Price (at the date of calculation, as set
forth below), in lieu of exercising this Warrant as hereinabove permitted, the
Holder may elect to receive shares of Common Stock equal to the value (as
determined below) of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the office of the Company referred to in Section 13
hereof, together with the Notice of Exercise, in which event the Company shall
issue to the Holder that number of shares of Common Stock computed using the
following formula:
CS = WCS x (CMP-WP)
--------------
CMP
Where
CS equals the number of shares of Common Stock to be issued to the Holder
WCS equals the number of shares of Common Stock purchasable under the
Warrant or, if only a portion of the Warrant is being exercised, the
portion of the Warrant being exercised (at the date of such
calculation)
CMP equals the Current Market Price (at the date of such calculation)
WP equals the Warrant Price (as adjusted to the date of such calculation)
In the event of any exercise of the rights represented by this Warrant, a
certificate or certificates for the shares of Common Stock so purchased,
registered in the name of the Holder or such other name or names as may be
designated by the Holder, shall be delivered to the Holder hereof within a
reasonable time, not exceeding fifteen (15) days, after the rights represented
by this Warrant shall have been so exercised; and, unless this Warrant has
expired, a new Warrant representing the number of shares (except a remaining
fractional share), if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder hereof within such time.
The person in whose name any certificate for shares of Common Stock is issued
upon exercise of this Warrant shall for all purposes be deemed to have become
the holder of record of such shares at the close of business on the date on
which the Warrant was surrendered and payment of the Warrant Price and any
applicable taxes was made, irrespective of the date of delivery of such
certificate, except that, if the date of such surrender and payment is a date
when the stock transfer books of the Company are closed, such person shall be
deemed to have become the holder of such shares at the close of business on the
next succeeding date on which the stock transfer books are open.
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2.2. Transfer Restriction Legend. Each certificate for Warrant Shares
---------------------------
shall bear the following legend (and any additional legend required by (i) any
applicable state securities laws and (ii) any securities exchange upon which
such Warrant Shares may, at the time of such exercise, be listed) on the face
thereof unless at the time of exercise such Warrant Shares shall be registered
under the Securities Act:
"The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended, or any state securities laws and
may not be sold, offered for sale, pledged, hypothecated or transferred in
the absence of such registration or an exemption therefrom under said Act
and any applicable state securities laws."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution under a registration statement of the securities
represented thereby) shall also bear such legend unless, in the opinion of
counsel for the holder thereof (which counsel shall be reasonably satisfactory
to counsel for the Company) the securities represented thereby are not, at such
time, required by law to bear such legend.
SECTION 3. Covenants as to Common Stock. The Company covenants and agrees that
----------------------------
all shares of Common Stock that may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof. The Company further covenants and agrees that it will pay
when due and payable any and all federal and state taxes which may be payable in
respect of the issue of this Warrant or any Common Stock or certificates
therefor issuable upon the exercise of this Warrant. The Company further
covenants and agrees that the Company will at all times have authorized and
reserved, free from preemptive rights, a sufficient number of shares of Common
Stock to provide for the exercise of the rights represented by this Warrant. The
Company further covenants and agrees that if any shares of capital stock to be
reserved for the purpose of the issuance of shares upon the exercise of this
Warrant require registration with or approval of any governmental authority
under any federal or state law before such shares may be validly issued or
delivered upon exercise, then the Company will in good faith and as
expeditiously as possible endeavor to secure such registration or approval, as
the case may be. If and so long as the Common Stock issuable upon the exercise
of this Warrant is listed on any national securities exchange, the Company will,
if permitted by the rules of such exchange, list and keep listed on such
exchange, upon official notice of issuance, all shares of such Common Stock
issuable upon exercise of this Warrant.
SECTION 4. Adjustment of Number of Shares. Upon each adjustment of the Warrant
------------------------------
Price as provided in Section 5, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest tenth of a share) obtained by multiplying the
Warrant Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
SECTION 5. Adjustment of Warrant Price. The Warrant Price shall be subject to
---------------------------
adjustment from time to time as follows:
(i) If the Company shall at any time or from time to time during the Term
of this Warrant issue shares of Common Stock other than Excluded Stock (as
hereinafter defined) without consideration or for a consideration per share less
than the Warrant Price in effect immediately prior to
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<PAGE>
the issuance of such Common Stock, the Warrant Price in effect immediately prior
to each such issuance or adjustment shall forthwith (except as provided in this
clause (i)) be adjusted to a price equal to the quotient obtained by dividing:
(A) an amount equal to the sum of
(x) the total number of shares of Common Stock outstanding (including
any shares of Common Stock deemed to have been issued pursuant to
subdivision (3) of this clause (i) and to clause (ii) below)
immediately prior to such issuance multiplied by the Warrant
Price in effect immediately prior to such issuance, plus
(y) the consideration received by the Company upon such issuance,
by
(B) the total number of shares of Common Stock outstanding (including
any shares of Common Stock deemed to have been issued pursuant to
subdivision (3) of this clause (i) and to clause (ii) below)
immediately after the issuance of such Common Stock.
For the purposes of any adjustment of the Warrant Price pursuant to this
clause (i), the following provisions shall be applicable:
1. In the case of the issuance of Common Stock for cash, the
consideration shall be deemed to be the amount of cash paid therefor
after deducting therefrom any discounts, commissions or other expenses
allowed, paid or incurred by the Company for any underwriting or
otherwise in connection with the issuance and sale thereof.
2. In the case of the issuance of Common Stock for a consideration in
whole or in part other than cash, the consideration other than cash
shall be deemed to be the fair market value thereof as determined by
the Board of Directors of the Company, irrespective of any accounting
treatment; provided, however, that such fair market value as
determined by the Board of Directors, together with any cash
consideration being paid, shall not exceed the aggregate Current
Market Price (as hereinafter defined) of the shares of Common Stock
being issued.
3. In the case of the issuance of (i) options to purchase or rights to
subscribe for Common Stock, (ii) securities by their terms convertible
into or exchangeable for Common Stock or (iii) options to purchase or
rights to subscribe for such convertible or exchangeable securities:
(A) the aggregate maximum number of shares of Common Stock
deliverable upon exercise of such options to purchase or rights
to subscribe for Common Stock shall be deemed to have been issued
at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the
manner provided in subdivisions (1) and (2) above with the
proviso in subdivision (2) being applied to the number of shares
of Common Stock
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<PAGE>
deliverable upon such exercise), if any, received by the Company
upon the issuance of such options or rights plus the minimum
purchase price provided in such options or rights for the Common
Stock covered thereby;
(B) the aggregate maximum number of shares of Common Stock
deliverable upon conversion of or in exchange for any such
convertible or exchangeable securities or upon the exercise of
options to purchase or rights to subscribe for such convertible
or exchangeable securities and subsequent conversions or
exchanges thereof shall be deemed to have been issued at the time
such securities were issued or such options or rights were issued
and for a consideration equal to the consideration received by
the Company for any such securities and related options or rights
(excluding any cash received on account of accrued interest or
accrued dividends), plus the additional consideration, if any, to
be received by the Company upon the conversion or exchange of
such securities or the exercise of any related options or rights
(the consideration in each case to be determined in the manner
provided in subdivisions (1) and (2) above with the proviso in
subdivision (2) being applied to the number of shares of Common
Stock deliverable upon such conversion, exchange or exercise);
(C) on any change in the number of shares of Common Stock deliverable
upon exercise of any such options or rights or conversion of or
exchange for such convertible or exchangeable securities, other
than a change resulting from the antidilution provisions thereof,
the Warrant Price shall forthwith be readjusted to such Warrant
Price as would have obtained had the adjustment made upon the
issuance of such options, rights or securities not converted
prior to such change or options or rights related to such
securities not converted prior to such change being made upon the
basis of such change; and
(D) on the expiration of any such options or rights, the termination
of any such rights to convert or exchange or the expiration of
any options or rights related to such convertible or exchangeable
securities, the Warrant Price shall forthwith be readjusted to
such Warrant Price as would have obtained had the adjustment made
upon the issuance of such options, rights, securities or options
or rights related to such securities being made upon the basis of
the issuance of only the number of shares of Common Stock
actually issued upon the conversion or exchange of such
securities or upon the exercise of the options or rights related
to such securities.
(ii) "Excluded Stock" shall mean shares of Common Stock issued by the
Company (1) as a stock dividend payable in shares of Common Stock or upon any
subdivision or split-up of the outstanding shares of Common Stock, and (2) in
connection with the issuance of up to 30% of the shares of Common Stock
(including any share of Common Stock deemed to have been issued pursuant to
subdivision (3) of clause (i) above) (appropriately adjusted for stock splits
and combinations) to directors, officers, or employees of, or consultants to,
the Company in connection with their services as directors or consultants of the
Company or their employment by the Company and (3) in connection with options,
warrants or convertible debentures existing on the date hereof, including
without limitation, the rights in favor of Fresenius to acquire shares of Common
Stock of the Borrower pursuant to the Fresenius Agreements.
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<PAGE>
(iii) If, at any time during the Term of this Warrant, the number of shares
of Common Stock outstanding is increased by a stock dividend payable in shares
of Common Stock or by a subdivision or split-up of shares of Common Stock, then,
following the record date fixed for the determination of holders of Common Stock
entitled to receive such stock dividend, subdivision or split-up, the Warrant
Price shall be appropriately decreased so that the number of shares of Common
Stock issuable upon the exercise hereof shall be increased in proportion to such
increase in outstanding shares.
(iv) If, at any time during the Term of this Warrant, the number of shares
of Common Stock outstanding is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date for such combination,
the Warrant Price shall appropriately increase so that the number of shares of
Common Stock issuable upon the exercise hereof shall be decreased in proportion
to such decrease in outstanding shares.
(v) In case, at any time during the Term of this Warrant, the Company
shall declare a cash dividend upon its Common Stock payable otherwise than out
of earnings or earned surplus or shall distribute to holders of its Common Stock
shares of its capital stock (other than Common Stock), stock or other securities
of other persons, evidences of indebtedness issued by the Company or other
persons, assets (excluding cash dividends and distributions) or options or
rights (excluding options to purchase and rights to subscribe for Common Stock
or other securities of the Company convertible into or exchangeable for Common
Stock), then, in each such case, immediately following the record date fixed for
the determination of the holders of Common Stock entitled to receive such
dividend or distribution, the Warrant Price in effect thereafter shall be
determined by multiplying the Warrant Price in effect immediately prior to such
record date by a fraction of which the numerator shall be an amount equal to the
difference of (x) the Current Market Price of one share of Common Stock minus
(y) the fair market value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the stock, securities,
evidences of indebtedness, assets, options or rights so distributed in respect
of one share of Common Stock, and of which the denominator shall be such Current
Market Price.
(vi) All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-tenth (1/10) of a share, as the case may be.
(vii) For the purpose of any computation pursuant to this Section 5, the
Current Market Price at any date of one share of Common Stock shall be deemed to
be the average of the daily closing prices for the 15 consecutive business days
ending on the last business day before the day in question (as adjusted for any
stock dividend, split, combination or reclassification that took effect during
such 15 business day period). The closing price for each day shall be the last
reported sales price regular way or, in case no such reported sales took place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or as reported by Nasdaq (or if the
Common Stock is not at the time listed or admitted for trading on any such
exchange or if prices of the Common Stock are not reported by Nasdaq then such
price shall be equal to the average of the last reported bid and asked prices on
such day as reported by The National Quotation Bureau Incorporated or any
similar reputable quotation and reporting service, if such quotation is not
reported by The National Quotation Bureau Incorporated); provided, however, that
if the Common Stock is not traded in such manner that the quotations referred to
in this clause (v) are available for the period required hereunder, the Current
Market Price shall be determined in good faith by the Board of Directors of the
Company or, if such determination cannot be made, by a
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<PAGE>
nationally recognized independent investment banking firm selected by the Board
of Directors of the Company (or if such selection cannot be made, by a
nationally recognized independent investment banking firm selected by the
American Arbitration Association in accordance with its rules).
(viii) Whenever the Warrant Price shall be adjusted as provided in Section
5, the Company shall prepare a statement showing the facts requiring such
adjustment and the Warrant Price that shall be in effect after such adjustment.
The Company shall cause a copy of such statement to be sent by mail, first class
postage prepaid, to each Holder of this Warrant at its, his or her address
appearing on the Company's records. Where appropriate, such copy may be given in
advance and may be included as part of the notice required to be mailed under
the provisions of subsection (x) of this Section 5.
(ix) Adjustments made pursuant to clauses (iii), (iv) and (v) above shall
be made on the date such dividend, subdivision, split-up, combination or
distribution, as the case may be, is made, and shall become effective at the
opening of business on the business day next following the record date for the
determination of stockholders entitled to such dividend, subdivision, split-up,
combination or distribution.
(x) In the event the Company shall propose to take any action of the types
described in clauses (iii), (iv), or (v) of this Section 5, the Company shall
forward, at the same time and in the same manner, to the Holder of this Warrant
such notice, if any, which the Company shall give to the holders of capital
stock of the Company.
(xi) In any case in which the provisions of this Section 5 shall require
that an adjustment shall become effective immediately after a record date for an
event, the Company may defer until the occurrence of such event issuing to the
Holder of all or any part of this Warrant which is exercised after such record
date and before the occurrence of such event the additional shares of capital
stock issuable upon such exercise by reason of the adjustment required by such
event over and above the shares of capital stock issuable upon such exercise
before giving effect to such adjustment exercise; provided, however, that the
Company shall deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
SECTION 6. Ownership.
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6.1. Ownership of This Warrant. The Company may deem and treat the person
-------------------------
in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary until presentation of this Warrant for registration of transfer
as provided in this Section 6.
6.2. Transfer and Replacement. This Warrant and all rights hereunder are
------------------------
transferable in whole or in part upon the books of the Company by the Holder
hereof in person or by duly authorized attorney, and a new Warrant or Warrants,
of the same tenor as this Warrant but registered in the name of the transferee
or transferees (and in the name of the Holder, if a partial transfer is
effected) shall be made and delivered by the Company upon surrender of this
Warrant duly endorsed, at the office of the Company referred to in Section 13
hereof. Upon receipt by the Company of evidence reasonably satisfactory to it of
the loss, theft or destruction, and, in such case, of indemnity or security
reasonably satisfactory to it, and upon surrender of this Warrant if mutilated,
the Company will make and deliver a
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<PAGE>
new Warrant of like tenor, in lieu of this Warrant; provided that if the Holder
hereof is an instrumentality of a state or local government or an institutional
holder or a nominee for such an instrumentality or institutional holder an
irrevocable agreement of indemnity by such Holder shall be sufficient for all
purposes of this Section 6, and no evidence of loss or theft or destruction
shall be necessary. This Warrant shall be promptly cancelled by the Company upon
the surrender hereof in connection with any transfer or replacement. Except as
otherwise provided above, in the case of the loss, theft or destruction of a
Warrant, the Company shall pay all expenses, taxes and other charges payable in
connection with any transfer or replacement of this Warrant, other than stock
transfer taxes (if any) payable in connection with a transfer of this Warrant,
which shall be payable by the Holder. Holder will not transfer this Warrant and
the rights hereunder except in compliance with federal and state securities
laws.
SECTION 7. Mergers, Consolidation, Sales. In the case of any proposed
-----------------------------
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made whereby the Holder
of this Warrant shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein, in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable hereunder, such
shares of stock, securities or assets as may (by virtue of such consolidation,
merger, sale, reorganization or reclassification) be issued or payable with
respect to or in exchange for the number of shares of such Common Stock
purchasable hereunder immediately before such consolidation, merger, sale,
reorganization or reclassification. In any such case appropriate provision shall
be made with respect to the rights and interests of the Holder of this Warrant
to the end that the provisions hereof shall thereafter be applicable as nearly
as may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of this Warrant.
SECTION 8. Notice of Dissolution or Liquidation. In case of any distribution
------------------------------------
of the assets of the Company in dissolution or liquidation (except under
circumstances when the foregoing Section 7 shall be applicable), the Company
shall give notice thereof to the Holder hereof and shall make no distribution to
shareholders until the expiration of thirty (30) days from the date of mailing
of the aforesaid notice and, in any case, the Holder hereof may exercise this
Warrant within thirty (30) days from the date of the giving of such notice, and
all rights herein granted not so exercised within such thirty-day period shall
thereafter become null and void.
SECTION 9. Notice of Extraordinary Dividends. If the Board of Directors of the
---------------------------------
Company shall declare any dividend or other distribution on its Common Stock
except out of earned surplus or by way of a stock dividend payable in shares of
its Common Stock, the Company shall mail notice thereof to the Holder hereof not
less than thirty (30) days prior to the record date fixed for determining
shareholders entitled to participate in such dividend or other distribution, and
the Holder hereof shall not participate in such dividend or other distribution
unless this Warrant is exercised prior to such record date. The provisions of
this Section 9 shall not apply to distributions made in connection with
transactions covered by Section 7.
SECTION 10. Fractional Shares. Fractional shares shall not be issued upon the
-----------------
exercise of this Warrant but in any case where the Holder would, except for the
provisions of this Section 10, be entitled under the terms hereof to receive a
fractional share upon the complete exercise of this Warrant, the Company shall,
upon the exercise of this Warrant for the largest number of whole shares then
called for, pay a sum in cash equal to the excess of the value of such
fractional share (determined in such reasonable
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<PAGE>
manner as may be prescribed in good faith by the Board of Directors of the
Company) over the Warrant Price for such fractional share.
SECTION 11. Special Arrangements of the Company. The Company covenants and
-----------------------------------
agrees that during the Term of this Warrant, unless otherwise approved by the
Holder of this Warrant:
11.1. Will Reserve Shares. The Company will reserve and set apart and
-------------------
have available for issuance at all times, free from preemptive or other
preferential rights, the number of shares of authorized but unissued Common
Stock deliverable upon the exercise of this Warrant.
11.2. Will Not Amend Certificate. The Company will not amend its
--------------------------
Certificate of Incorporation to eliminate as an authorized class of capital
stock that class denominated as "Common Stock" on the date hereof.
11.3. Will Bind Successors. This Warrant shall be binding upon any
--------------------
corporation or other person or entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company's
assets.
SECTION 12. Registration Rights; etc.
-------------------------
12.1. Certain Definitions. As used in this Section 12, the following
-------------------
terms shall have the following respective meanings:
"Commission" shall mean the Securities and Exchange Commission or any other
federal agency at the time administering the Securities Act.
"Registrable Securities" shall mean the Warrant Shares less any Warrant
Shares theretofore sold to the public or in a private placement.
The terms "register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by the Company in
compliance with Section 12.2 hereof, including, without limitation, all
registration and filing fees, printing expenses, fees and disbursements of
counsel for the Company, blue sky fees and expenses, and the expense of any
special audits incident to or required by any such registration (but excluding
the compensation of regular employees of the Company, which shall be paid in any
event by the Company).
"Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities, all fees and
disbursements of counsel for any Holder and any blue sky fees and expenses
excluded from the definition of "Registration Expenses."
"Holder" shall mean any holder of Registrable Securities
"Other Shareholders" shall mean holders of securities of the Company who
are entitled by contract with the Company or who are permitted by the Company to
have securities included in a registration of the Company's securities.
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<PAGE>
12.2. Company Registration.
--------------------
(a) Notice of Registration. If the Company shall determine to
----------------------
register any of its securities either for its own account or the account of a
security holder or holders, other than a registration relating solely to
employee benefit plans, or a registration relating solely to a Commission Rule
145 transaction, or a registration on any registration form which does not
permit secondary sales, the Company will:
(i) promptly give to each Holder written notice thereof (which
shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or other state
securities laws); and
(ii) include in such registration (and any related qualification
under blue sky laws or other compliance), and in any underwriting involved
therein, all the Registrable Securities specified in a written request or
requests, made by any Holder within fifteen (15) days after receipt of the
written notice from the Company described in clause (i) above, subject to any
limitations on the number of shares as set forth in Section 12.2(b) below.
(b) Underwriting. If the registration of which the Company gives
-----------
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as part of the written notice given pursuant
to Section 12.2(a)(i). In such event, the right of any Holder to registration
pursuant to Section 12.2 shall be conditioned upon such Holder's participation
in such underwriting and the inclusion of such Holder's Registrable Securities
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company, directors and officers and the Other Shareholders distributing their
securities through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for underwriting by
the Company.
Notwithstanding any other provision of this Section 12.2, if the
underwriter determines that marketing factors require a limitation on the number
of shares to be underwritten, the underwriter may (subject to the allocation
priority set forth below) exclude from such registration and underwriting some
or all of the Registrable Securities which would otherwise be underwritten
pursuant hereto. The Company shall so advise all holders of securities
requesting registration, and the number of shares of securities that are
entitled to be included in the registration and underwriting shall be allocated
in the following manner. The number of shares that may be included in the
registration and underwriting on behalf of such Holders, directors and officers
and Other Shareholders shall be allocated among such Holders, directors and
officers and Other Shareholders in proportion, as nearly as practicable, to the
respective amounts of Registrable Securities and other securities which they had
requested to be included in such registration at the time of filing the
registration statement.
If any Holder of Registrable Securities or any officer, director or Other
Shareholder disapproves of the terms of any such underwriting, it, he or she may
elect to withdraw therefrom by written notice to the Company and the
underwriter. Any Registrable Securities or other securities excluded or
withdrawn from such underwriting shall be withdrawn from such registration.
12.3. Registration Rights. In the event that the Company grants
-------------------
registration rights, including demand registration rights, to any other holder
of securities of the Company, the Company will promptly
-10-
<PAGE>
give to the Holder written notice thereof and, if in the opinion of the Holder
such registration rights are more favorable than the registration rights
provided under this Warrant, the Holder shall so notify the Company within
thirty (30) days of receipt of the foregoing notice from the Company, whereupon
such registration rights shall automatically be deemed to be incorporated in
this Warrant.
12.4. Expenses of Registration. The Company shall bear all Registration
------------------------
Expenses incurred in connection with any registration, qualification and
compliance by the Company pursuant to Section 12.2 hereof. All Selling Expenses
shall be borne by the holders of the securities so registered pro rata on the
basis of the number of their shares so registered.
12.5. Registration Procedures. In the case of each registration effected by
-----------------------
the Company pursuant to this Section 12, the Company will keep each Holder
advised in writing as to the initiation of each registration and as to the
completion thereof. The Company will, at its expense:
(a) keep such registration effective for a period of one hundred
twenty (120) days or until the Holder or Holders have completed the distribution
described in the registration statement relating thereto, whichever first
occurs;
(b) furnish such number of prospectuses and other documents incident
thereto as a Holder from time to time may reasonably request; and
(c) use its best efforts to register or qualify the Registrable
Securities under the securities laws or blue-sky laws of such jurisdictions as
any Holder may request; provided, however, that the Company shall not be
obligated to register or qualify such Registrable Securities in any particular
jurisdiction in which the Company would be required to qualify generally to do
business as a foreign corporation in any jurisdiction wherein it would not but
for the requirements of this Section be obligated to be so qualified or to
execute a general consent to service of process in order to effect such
registration, qualification or compliance, unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act or applicable rules or regulations thereunder or to subject itself to
taxation in any such jurisdiction.
12.6. Indemnification.
---------------
(a) The Company, with respect to each registration, qualification and
compliance effected pursuant to this Section 12, will indemnify and hold
harmless each Holder, each of its officers, directors, partners, and agents, and
each party controlling such Holder, and each underwriter, if any, and each party
who controls any underwriter, against all claims, losses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any prospectus, offering circular or other document (including any related
registration statement, notification or the like) incident to any such
registration, qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or any violation by the
Company of the Securities Act or any rule or regulation thereunder applicable to
the Company and relating to action or inaction required of the Company in
connection with any such registration, qualification or compliance, and will
reimburse each such Holder, each of its officers, directors, partners, and
agents, and each party controlling such Holder, each such underwriter and each
party who controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability or action, provided that the Company
-11-
<PAGE>
will not be liable in any such case to the extent that any such claim, loss,
damage, liability or expense arises out of or is based on any untrue statement
or omission based solely upon written information furnished to the Company by
such Holder or underwriter, as the case may be, and stated to be specifically
for use in any prospectus, offering circular or other document (including any
related registration statement, notification or the like) incident to any such
registration, qualification or compliance.
(b) Each Holder will, if Registrable Securities held by it, him or her
are included in the securities as to which such registration, qualification or
compliance is being effected, indemnify and hold harmless the Company, each of
its directors and officers and each underwriter, if any, of the Company's
securities covered by such a registration statement, each party who controls the
Company or such underwriter, each other such Holder and Other Shareholder and
each of their respective officers, directors, partners, and agents, and each
party controlling such Holder or Other Shareholder, against all claims, losses,
damages and liabilities (or actions in respect thereof) arising out of or based
on any untrue statement (or alleged untrue statement) of a material fact
contained in any such registration statement, prospectus, offering circular or
other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and will reimburse the Company and such Holders, Other
Shareholders, directors, officers, partners, agents, parties, underwriters or
control persons for any legal or any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability or action, in each case to the extent, but only to the extent, that
such untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering circular
or other document solely in reliance upon and in conformity with written
information furnished to the Company by such Holder and stated to be
specifically for use in any prospectus, offering circular or other document
(including any related registration statement, notification or the like)
incident to any such registration, qualification or compliance; provided,
however, that the obligations of such Holder hereunder shall be limited to an
amount equal to the proceeds to such Holder of securities sold as contemplated
herein.
(c) Each party entitled to indemnification under this Section 12.5
(the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense (unless the Indemnified Party shall have been
advised by counsel that actual or potential differing interests or defenses
exist or may exist between the Indemnifying Party and the Indemnified Party, in
which case such expense shall be paid by the Indemnifying Party), and provided
further that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 12. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation. Each Indemnified Party shall provide such information as may be
reasonably requested by an Indemnifying Party in order to enable such
Indemnifying Party to defend a claim as to which indemnity is sought.
-12-
<PAGE>
12.6. Information by Holder. Each Holder of Registrable Securities, and
---------------------
each Other Shareholder holding securities included in any registration, shall
furnish to the Company such information regarding such Holder or Other
Shareholder as the Company may reasonably request in writing and as shall be
reasonably required in connection with any registration, qualification or
compliance referred to in this Section 12.
12.7. Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission which may permit the sale of the
Registrable Securities to the public without registration, the Company agrees
to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times from
and after ninety (90) days following the effective date of the first
registration under the Securities Act filed by the Company for an offering of
its securities to the general public;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Securities
Exchange Act of 1934, as amended (the "Exchange Act") at any time after it has
become subject to such reporting requirements; and
(c) So long as the Holder owns any Registrable Securities, furnish to
the Holder forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of Rule 144 (at any time from and
after ninety (90) days following the effective date of the first registration
statement in connection with an offering of its Securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed as the Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing the Holder to sell any such securities
without registration.
SECTION 13. Notices. Any notice or other document required or permitted to be
-------
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at Transamerica Technology Finance Division, 76
Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice
President, Lease Administration, with a copy to the Lender at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal
Department or to such other address as shall have been furnished to the Company
in writing by the Holder. Any notice or other document required or permitted to
be given or delivered to the Company shall be delivered at, or sent by certified
or registered mail to, the Company at Cypress Bioscience, Inc., 4350 Executive
Drive, San Diego, California, 92121 or to such other address as shall have been
furnished in writing to the Holder by the Company. Any notice so addressed and
mailed by registered or certified mail shall be deemed to be given when so
mailed. Any notice so addressed and otherwise delivered shall be deemed to be
given when actually received by the addressee.
SECTION 14. No Rights as Stockholder; Limitation of Liability. This Warrant
-------------------------------------------------
shall not entitle the Holder to any of the rights of a shareholder of the
Company except upon exercise in accordance with the terms hereof. No provision
hereof, in the absence of affirmative action by the Holder to purchase shares of
Common Stock, and no mere enumeration herein of the rights or privileges of the
Holder, shall give rise to any liability of the Holder for the Warrant Price
hereunder or as a shareholder of the Company, whether such liability is asserted
by the Company or by creditors of the Company.
-13-
<PAGE>
SECTION 15. Law Governing. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS
-------------
WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
SECTION 16. Miscellaneous.
-------------
(a) This Warrant and any provision hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by both parties
(or any respective predecessor in interest thereof). The headings in this
Warrant are for purposes of reference only and shall not affect the meaning or
construction of any of the provisions hereof
(b) All capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to them in the Loan and Security Agreement
dated as of September 7, 1999 by and between the Company and Holder.
SECTION 17. REPRESENTATIONS OF HOLDER.
-------------------------
(a) The Holder represents and warrants that it is acquiring this
Warrant solely for its account for investment and not with a view to or for sale
or distribution of said Warrant or any part thereof. The Holder also represents
that the entire legal and beneficial interests of this Warrant and the Warrant
Shares the Holder is acquiring are being acquired for, and will be held for, its
account only.
(b) (i) The Holder understands that this Warrant and the Warrant
Shares have not been registered under the Securities Act of 1933, as amended
(the "Act") on the basis that no distribution or public offering of the stock of
the Company is to be effected. The Holder realizes that the basis for the
exemption may not be present if, notwithstanding its representations, the Holder
has a present intention of acquiring the securities for a fixed or determinable
period in the future, selling (in connection with a distribution or otherwise),
granting any participation in, or otherwise distributing the securities. The
Holder has no such present intention.
(ii) The Holder recognizes that this Warrant and the Warrant
Shares must be held indefinitely unless they are subsequently registered under
the Act or an exemption from such registration is available. The Holder
recognizes that the Company has no obligation to register this Warrant or,
except as provided in Section 12 hereof, the Warrant Shares, or to comply with
any exemption from such registration.
(iii) The Holder is aware that neither this Warrant nor the
Warrant Shares may be sold pursuant to Rule 144 adopted under the Act unless
certain conditions are met, including, among other things, the existence of a
public market for the shares, the availability of certain current public
information about the Company, the resale following the required holding period
under Rule 144 and the number of shares being sold during any three month period
not exceeding specified limitations. Holder is aware that the conditions for
resale set forth in Rule 144 have not been satisfied as of the date hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its
duly authorized officer this 7th day of September, 1999.
-14-
<PAGE>
CYPRESS BIOSCIENCE, INC.
[CORPORATE SEAL]
By: /s/ Carl F. Bobkoski
-----------------------------
Title: President & COO
--------------------------
TBCC FUNDING TRUST II
By: /s/ Robert D. Pomeroy, Jr.
----------------------------------
Title: Executive Vice President
-------------------------------
-15-
<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
The undersigned hereby exercises the right to purchase _________
shares of Common Stock which the undersigned is entitled to purchase by the
terms of the within Warrant according to the conditions thereof, and herewith
[check one]
[_] makes payment of $__________ therefor; or
[_] directs the Company to issue ______
shares, and to withhold ____ shares in
lieu of payment of the Warrant Price, as
described in Section 2.1 of the Warrant.
All shares to be issued pursuant hereto shall be issued in the name of and the
initial address of such person to be entered on the books of the Company shall
be:
The shares are to be issued in certificates of the following
denominations:
__________________________________
[Type Name of Holder]
By: ______________________________
Title: ___________________________
Dated: ______________________________
-16-
<PAGE>
FORM OF ASSIGNMENT
(ENTIRE)
[To be signed only upon transfer of entire Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED ___________________________ hereby sells, assigns
and transfers unto _______________________________ all rights of the undersigned
under and pursuant to the within Warrant, and the undersigned does hereby
irrevocably constitute and appoint _______________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
_________________________________
[Type Name of Holder]
By: _____________________________
Title: __________________________
Dated: __________________________
NOTICE
The signature to the foregoing Assignment must correspond to the name
as written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
-17-
<PAGE>
FORM OF ASSIGNMENT
(PARTIAL)
[To be signed only upon partial transfer of Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
transfers unto _______________________________ (i) the rights of the undersigned
to purchase ___ shares of Common Stock under and pursuant to the within Warrant,
and (ii) on a non-exclusive basis, all other rights of the undersigned under and
pursuant to the within Warrant, it being understood that the undersigned shall
retain, severally (and not jointly) with the transferee(s) named herein, all
rights assigned on such non-exclusive basis. The undersigned does hereby
irrevocably constitute and appoint __________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
__________________________________
[Type Name of Holder]
By: ______________________________
Title: ___________________________
Dated:
NOTICE
The signature to the foregoing Assignment must correspond to the name
as written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
-18-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-START> JUL-01-1999 JAN-01-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 12,910 12,910
<SECURITIES> 0 0
<RECEIVABLES> 362 362
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 14,973 14,973
<PP&E> 606 606
<DEPRECIATION> (368) (368)
<TOTAL-ASSETS> 15,339 15,339
<CURRENT-LIABILITIES> 4,848 4,848
<BONDS> 400 400
0 0
0 0
<COMMON> 923 923
<OTHER-SE> 94,374 94,374
<TOTAL-LIABILITY-AND-EQUITY> 15,339 15,339
<SALES> 0 588
<TOTAL-REVENUES> 478 2,332
<CGS> 47 837
<TOTAL-COSTS> 2,571 9,235
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 28 51
<INCOME-PRETAX> (2,121) (6,954)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,121) (6,954)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,121) (6,954)
<EPS-BASIC> (0.05) (0.16)
<EPS-DILUTED> (0.05) (0.16)
</TABLE>
