<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
__X__ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended JUNE 30, 1996
-------------
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 0-18962
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CYGNUS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2978092
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification No.)
400 PENOBSCOT DRIVE, REDWOOD CITY, CALIFORNIA 94063-4719
(Address of principle executive offices and zip code)
Registrant's telephone number, including area code: (415) 369-4300
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes __X__ No ____
Number of shares outstanding of each of the registrant's classes of common
stock as of AUGUST 6, 1996:
Common Stock - 18,579,630 shares
Total pages: 15
Page number of exhibit index: 14
<PAGE>
CYGNUS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
Item 1: Financial Statements
Consolidated Statements of Operations for the three month
period ended June 30, 1996 and 1995 (unaudited)................2
Consolidated Condensed Balance Sheets at June 30, 1996
(unaudited) and December 31, 1995..............................3
Consolidated Statements of Cash Flows for the six month
period ended June 30, 1996 and 1995 (unaudited)................4
Notes to Consolidated Financial Statements (unaudited)...........5
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................7
PART II. OTHER INFORMATION
Item 1: Legal Proceedings................................................13
Item 4: Submission of Matters to a Vote of Security Holders..............13
Item 6: Exhibits and Reports on Form 8-K.................................14
SIGNATURES.................................................................15
1
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THIS REPORT ON FORM 10-Q CONTAINS PROJECTIONS AND FORWARD LOOKING
STATEMENTS REGARDING FUTURE EVENTS AND THE FUTURE FINANCIAL PERFORMANCE OF
THE COMPANY. WE WISH TO CAUTION YOU THAT THESE STATEMENTS ARE ONLY OUR
PREDICTIONS AND OBJECTIVES. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY.
PLEASE NOTE IN PARTICULAR THROUGHOUT THIS DOCUMENT WHERE WE HAVE HIGHLIGHTED
SPECIFIC RISKS ASSOCIATED WITH THE COMPANY AND ITS ACTIVITIES. WE ALSO REFER
YOU TO DOCUMENTS THE COMPANY FILES FROM TIME TO TIME, SUCH AS ITS FORM 10-K,
ITS OTHER 10-Q AND ITS FORM 8-K REPORTS. THESE DOCUMENTS AND THIS REPORT ON
FORM 10-Q CONTAIN IMPORTANT FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS TO
DIFFER FROM OUR CURRENT EXPECTATIONS AND THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS REPORT ON FORM 10-Q.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
CYGNUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
1996 1995 1996 1995
------- ------- ------- -------
Product revenues $ 5,274 $ 964 $ 5,292 $ 1,852
Contract revenues 3,373 2,944 6,813 6,534
Royalty and other revenues 340 864 646 1,782
------- ------- ------- -------
TOTAL REVENUES 8,987 4,772 12,751 10,168
Costs and expenses:
Costs of products sold 3,804 1,191 4,761 2,358
Research and development 5,667 4,693 10,885 10,276
Marketing, general and
administrative 3,040 1,839 5,378 3,304
------- ------- ------- -------
TOTAL COSTS AND EXPENSES 12,511 7,723 21,024 15,938
LOSS FROM OPERATIONS (3,524) (2,951) (8,273) (5,770)
Interest income, net 425 37 969 88
------- ------- ------- -------
NET LOSS $(3,099) $(2,914) $(7,304) $(5,682)
------- ------- ------- -------
------- ------- ------- -------
NET LOSS PER SHARE $ (0.17) $ (0.19) $ (0.40) $ (0.36)
------- ------- ------- -------
------- ------- ------- -------
Shares used in computation of
net loss per share 18,570 15,667 18,466 15,624
------- ------- ------- -------
------- ------- ------- -------
(See accompanying notes.)
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CYGNUS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
JUNE 30, December 31,
ASSETS: 1996 1995
- ------ ----------- -------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,252 $ 30,445
Short-term investments 28,899 16,053
Trade accounts receivable, net of allowance 9,096 2,310
Inventories 1,232 378
Prepaid expenses and other current assets 716 640
-------- --------
TOTAL CURRENT ASSETS 57,195 49,826
Equipment and improvements, at cost 18,667 18,132
Less accumulated depreciation and amortization (12,625) (11,260)
-------- --------
NET EQUIPMENT AND IMPROVEMENTS 6,042 6,872
Lease deposits and other assets 2,016 1,156
-------- --------
TOTAL ASSETS $ 65,253 $ 57,854
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY:
- -------------------------------------
Current liabilities:
Accounts payable 1,352 1,006
Accrued compensation 2,008 2,191
Accrued professional services 1,081 726
Other accrued liabilities 913 1,287
Customer advances 846 846
Current portion of deferred revenue 6,320 3,301
Current portion of long term debt 1,389 489
Current portion of capital lease obligations 1,461 1,425
-------- --------
TOTAL CURRENT LIABILITIES 15,370 11,271
Long-term portion of deferred revenue 3,908 3,532
Long-term debt 7,589 734
Long-term portion of capital lease obligations 1,520 1,976
Accrued rent and other Long-term liabilities 2,820 2,089
Stockholders' equity:
Common stock 116,312 113,266
Accumulated deficit (82,266) (75,014)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 34,046 38,252
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 65,253 $ 57,854
-------- --------
-------- --------
</TABLE>
(See accompanying notes.)
3
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CYGNUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase/(Decrease) in Cash and Cash Equivalents
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1996 1995
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,304) $ (5,682)
Adjustments to reconcile net loss to
cash (used in)/provided by
operating activities:
Depreciation and amortization 1,299 1,301
Decrease/(increase) in assets (8,597) (2,892)
Increase/(decrease) in liabilities 4,402 (3,907)
-------- --------
NET CASH (USED IN)/PROVIDED BY
OPERATING ACTIVITIES (10,200) (11,180)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (602) (1,937)
Decrease/(increase) in short-term investments (12,773) 4,922
-------- --------
NET CASH (USED IN)/PROVIDED
BY INVESTING ACTIVITIES (13,375) 2,985
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale and leaseback of assets 282 2,001
Issuance of common stock 3,046 464
Issuance of long-term debt 8,000 --
Principal payments of long-term debt (245) (225)
Payment of capital lease obligations (701) (613)
-------- --------
NET CASH (USED IN)/PROVIDED
BY FINANCING ACTIVITIES 10,382 1,627
-------- --------
NET (DECREASE)/INCREASE IN CASH AND CASH
EQUIVALENTS (13,193) (6,568)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 30,445 9,220
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,252 $ 2,652
-------- --------
-------- --------
</TABLE>
(See accompanying notes.)
4
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CYGNUS, INC.
June 30, 1996
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- ----------------------------------------------------------
1. Basis of Presentation
---------------------
Cygnus, Inc. (the "Company" or "Cygnus") was incorporated in California
in April 1985. In September 1995 the Company changed its name from Cygnus
Therapeutic Systems to Cygnus, Inc. and its place of incorporation to
Delaware.
The consolidated financial statements as of and for the six month periods
ended June 30, 1996 and 1995, included herein, are unaudited, but include all
adjustments (consisting only of normal recurring adjustments), which the
management of Cygnus, Inc. believes necessary for a fair presentation of the
financial position as of the reported dates and the results of operations for
the respective periods presented. Interim financial results are not
necessarily indicative of results for a full year. The consolidated
financial statements should be read in conjunction with the audited financial
statements and related notes for the year ended December 31, 1995 included in
the Company's 1995 Annual Report and incorporated by reference on Form 10-K.
2. Net Loss Per Share
------------------
Net loss per share is computed using the weighted average number of
shares of common stock outstanding. Common equivalent shares from stock
options and warrants are excluded from the computation as their effect is
anti-dilutive.
3. Legal Proceedings
-----------------
Alza Corporation ("Alza") owns a patent that was issued on May 13, 1986
and contains claims for the transdermal delivery of fentanyl. The Alza
fentanyl patent claims were reviewed by the Patent Office during two
re-examination procedures, one of which was instituted by Cygnus, but were
nevertheless confirmed in January 1989. In January 1994, Cygnus filed a
complaint in the U.S. District Court in San Francisco, California against
Alza for violation of the antitrust laws and for declaration of
unenforceability and invalidity of the Alza patent on fentanyl transdermal
systems. In April 1995, motions by Alza to dismiss the suit were granted
primarily on the basis that Alza had made insufficient threat of enforcement.
The Company appealed this ruling in May 1995 and, in August of 1996, the
appelate court affirmed the dismissal of the Company's lawsuit. If the
Company were to seek to commercialize this product and Alza were to
successfully enforce its fentanyl patent against the Company, the Company
could be enjoined from manufacturing and marketing fentanyl transdermal
systems in the U.S. or the Company could be required to seek a license or
similar arrangement from Alza. Such a license may not be available, or may
only be available on adverse terms. In addition, the existence of the Alza
patent has negatively affected the Company's ability to obtain a
collaborative partner for its fentanyl product and the Company has
effectively suspended its development efforts for this product.
On June 30, 1994, Sanofi, S.A. ("Sanofi") filed a request for arbitration
against Cygnus with the International Court of Arbitration. In its request
for arbitration, Sanofi has alleged that Cygnus
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CYGNUS, INC.
June 30, 1996
breached its existing contract with Sanofi by, among other things, entering
into product development agreements with The Warner-Lambert Company
("Warner-Lambert") and American Home Products Corporation ("American Home
Products") for the development of transdermal systems in the field of hormone
replacement therapy (which agreements pertain to each of the Company's
hormone replacement products other than FemPatch). Sanofi claims it has a
proprietary interest in certain Cygnus technologies and that it has incurred
substantial damages as a result of the alleged breach. Sanofi is seeking to
recover from Cygnus approximately $60.0 million for damages attributable to
the alleged breach. Cygnus has answered Sanofi's request for arbitration by
maintaining that Sanofi's claims are inconsistent with its contractual
relationship and that such claims are otherwise without merit. Cygnus plans
to continue aggressively defending against this arbitration and has asserted
certain counterclaims exceeding the amount being sought by Sanofi. A hearing
was held in May 1996 with respect to the liability aspects of Sanofi's claims
against Cygnus, and the parties are awaiting the arbitrators' decision.
Remaining to be heard are Cygnus' liability claims against Sanofi and a
determination as to the amount of damages to be awarded to either party. No
date has been set for further hearings. Cygnus believes that it will
ultimately prevail in this arbitration; however, should all or part of the
claims asserted by Sanofi be successful, the Company could be materially and
adversely affected.
6
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CYGNUS, INC.
June 30, 1996
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT ON FORM 10-Q CONTAINS PROJECTIONS AND FORWARD LOOKING
STATEMENTS REGARDING FUTURE EVENTS AND THE FUTURE FINANCIAL PERFORMANCE OF
THE COMPANY. WE WISH TO CAUTION YOU THAT THESE STATEMENTS ARE ONLY OUR
PREDICTIONS AND OBJECTIVES. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY.
PLEASE NOTE IN PARTICULAR THROUGHOUT THIS DOCUMENT WHERE WE HAVE HIGHLIGHTED
SPECIFIC RISKS ASSOCIATED WITH THE COMPANY AND ITS ACTIVITIES. WE ALSO REFER
YOU TO DOCUMENTS THE COMPANY FILES FROM TIME TO TIME, SUCH AS ITS FORM10-K,
ITS OTHER 10-Q AND ITS FORM 8-K REPORTS. THESE DOCUMENTS AND THIS REPORT ON
FORM 10-Q CONTAIN IMPORTANT FACTORS THAT COULD CAUSE OUR ACTUAL RESULTS TO
DIFFER FROM OUR CURRENT EXPECTATIONS AND THE FORWARD-LOOKING STATEMENTS
CONTAINED IN THIS REPORT ON FORM 10-Q.
GENERAL
Cygnus is engaged in the development of diagnostic and drug delivery
systems, with its current efforts primarily focused on three core
technologies: a painless, continuous glucose monitoring device, transdermal
drug delivery systems and mucosal drug delivery systems.
The Company's product development efforts have been and are expected to
continue to be either self-funded, funded by licensees, or both. In general,
the Company's licensing agreements provide that Cygnus will manufacture drug
delivery systems and receive manufacturing revenues from sales of these
products to its licensees. Cygnus may also receive royalties based on
certain of its licensees' product sales. In certain circumstances, the
Company may elect to license manufacturing rights for the product to its
licensees in exchange for a technology transfer fee and/or a higher royalty
rate.
Cygnus' licensees generally have the right to abandon a product
development effort at any time for any reason without significant penalty,
and this can result in delays in clinical testing, in the preparation and
processing of regulatory filings and in commercialization efforts. Licensees
have exercised this right in the past, and there can be no assurance that
current and future licensees will not exercise this right in the future.
Such cancellations may cause delays in product development. In January 1995,
the Company and Procter and Gamble (P&G) terminated their collaboration for
the development and marketing of a consumer product utilizing Cygnus' mucosal
technology. This collaboration was terminated primarily because the consumer
product application chosen by P&G did not meet either company's financial
criteria. In October 1995, the Company and P&G also terminated a
collaboration to develop and market a portfolio of transdermal smoking
cessation products. If a licensee were to terminate funding one of the
Company's products, Cygnus would either self-fund development efforts,
identify and enter into an agreement with an alternative licensee or suspend
further development work on the product. There can be no assurance that, if
necessary, the Company would be able to negotiate an agreement with an
alternative licensee on acceptable terms. Since all payments to the Company
under its licensing agreements following their execution are contingent on
the occurrence of future events or sales levels, and the agreements are
terminable by the licensee, no assurance can be given as to whether the
Company will receive any particular payment thereunder or as to the amount or
timing of any such payment. The Company may choose to self-fund certain
research and development projects in order to exploit its technologies and to
maximize financial returns. Any increase in Company-sponsored research and
development activities will have an immediate adverse effect on the Company's
results of
7
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CYGNUS, INC.
June 30, 1996
operations. However, should such Company-sponsored research and development
activities result in a commercial product, the long-term effect on the
Company's results of operations could be favorable.
For the Company to be successful, it will need to develop new diagnostic
and drug delivery products. Furthermore, the Company's ability to develop
and commercialize products in the future will depend on its ability to enter
into collaborative arrangements with additional licensees. There can be no
assurance that the Company will be able to enter into new collaborative
arrangements. Further, there can be no assurance that the Company's potential
new products, including its Glucowatch, will be successfully developed or
commercialized.
The Company's results of operations vary significantly from period to
period and depend on, among other factors, the signing of new product
development agreements and the timing of recognizing payment amounts
specified thereunder, the timing of recognizing license fees and cost
reimbursement payments made by licensees, the demand for and shipments of its
Nicotrol-Registered Trademark-product, and the costs associated with the
manufacture of Nicotrol. The Company's contract revenues are generally
earned and recognized based on the percentage of actual efforts expended
compared to total expected efforts during the development period for each
contract. However, contract revenues are not always aligned with the timing
of related expenses. To date, research and development expenses generally
have exceeded contract revenue in any particular period and the Company
expects the same situation to continue for the next several years. In
addition, the level of revenues in any given period is not necessarily
indicative of expected revenues in future periods. The Company has incurred
net losses each year since its inception and does not believe it will achieve
profitability in 1996 or 1997. At June 30, 1996, the Company's accumulated
deficit was approximately $82.3 million.
RESULTS OF OPERATIONS:
COMPARISON FOR THE QUARTERS ENDED JUNE 30, 1996 AND 1995
PRODUCT REVENUES for the quarter ended June 30, 1996 were $5.3 million
compared to $1.0 million for the quarter ended June 30, 1995 and were $5.3
million for the six months ended June 30, 1996 compared to $1.9 million for
the six months ended June 30, 1995. This reflects increased demand for
additional shipments of Nicotrol during the first half of 1996 related to the
anticipated change by the Food and Drug Administration (the "FDA") of
Nicotrol's status from prescription to over-the-counter ("OTC"). On July 3,
1996 the FDA approved Nicotrol as the first over-the-counter smoking
cessation transdermal patch.
In November 1993, the Company entered into an agreement pursuant to which
the Company granted Pharmacia & Upjohn, Inc. ("Pharmacia") the exclusive
worldwide right to manufacture Nicotrol in return for a royalty based on
Pharmacia's sales of such products. Prior to that, Pharmacia had the
exclusive right to manufacture Nicotrol outside of North America and was
obligated to pay to Cygnus a royalty based on Pharmacia's sales of such
products outside of North America. The November 1993 agreement, as amended
in November 1994, obligated Cygnus to continue to manufacture and supply
Nicotrol until December 31, 1995. In February of 1996, the Company and
Pharmacia further amended the 1993 agreement, whereby Cygnus will continue to
manufacture and supply Nicotrol for the United States market through 1999.
In addition to product
8
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CYGNUS, INC.
June 30, 1996
revenues, the Company will also earn a royalty on sales within the United
States. Pharmacia can terminate the amendment with the payment of certain
amounts to the Company.
As a result of the above factors, the Company believes that the level of
product revenues experienced to date are not necessarily indicative of future
results.
CONTRACT REVENUES for the quarter ended June 30, 1996 were $3.4 million
compared to the $2.9 million for the quarter ended June 30, 1995 and were
$6.8 million for the six months ended June 30, 1996 compared to $6.5 million
for the six months ended June 30, 1995. The increase in contract revenues
primarily reflects the recognition, through amortization of previously
capitalized milestone payments, of glucose monitoring device and certain
transdermal delivery system revenues.
In February 1996 the Company entered into an agreement with Becton
Dickinson for the marketing and distribution of the GlucoWatch-TM-, Cygnus'
painless, continuous glucose monitoring device. Under the terms of the
agreement, Becton Dickinson has exclusive worldwide marketing and
distribution rights, with the exception of Japan and Korea. Cygnus will have
primary responsibility for completing product development, obtaining
regulatory approvals and manufacturing. In addition, Cygnus will participate
in sales, marketing and customer service and support for the product. In the
first half of 1996, Cygnus received an up-front payment and is eligible to
receive milestone payments as well as a percentage of the products' future
commercial success.
In July 1996 the Company entered into an agreement with Tokyo-based
Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi") for the marketing and
distribution of the GlucoWatch-TM-, described above. Under terms of this
agreement, Yamanouchi has exclusive marketing and distribution rights in
Japan and Korea. Cygnus will have primary responsibility for completing
product development and for manufacturing. Cygnus will be eligible to receive
up-front and milestone payments as well as a percentage of the products'
future commercial success. In July 1996 the Company also entered into a
development and marketing agreement with Yamanouchi for a 7-day transdermal
product to deliver a proprietary Yamanouchi compound. Under the terms of the
agreement, Cygnus will receive funding for the development of the transdermal
product and will have exclusive rights to manufacture and supply Yamanouchi
with the product and Yamanouchi will have exclusive worldwide marketing
rights to the product.
Contract revenues are expected to fluctuate from quarter to quarter and
from year to year, and future contract revenues cannot be reasonably
predicted. The contributing factors to achieving contract revenues include,
but are not limited to, future successes in finalizing new collaborative
agreements, timely achievement of milestones under current contracts, and
strategic decisions on self-funding certain projects. Cygnus' licensees
generally have the right to abandon the rights to a product and the
obligation to make related payments. Since all payments to the Company under
these agreements following their execution are contingent on the occurrence
of future events or sales levels, and the agreements are terminable by the
licensee, no assurance can be given as to whether the Company will receive
any particular payment thereunder or as to the amount or timing of any such
payment. The Company expects that contract revenues will be lower in 1996
compared
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CYGNUS, INC.
June 30, 1996
to 1995 for those contracts existing in 1995, but cannot predict to what
extent new collaborative agreements, if any, will impact overall contract
revenues in 1996 and subsequent future periods.
ROYALTY AND OTHER REVENUES for the quarter ended June 30, 1996 were $0.3
million compared to $0.9 million for the quarter ended June 30, 1995 and were
$0.6 million for the six months ended June 30, 1996 compared to $1.8 million
for the six months ended June 30, 1995. The amounts include royalties from
sales by Pharmacia of the Company's nicotine transdermal product in Europe
and Canada. Additionally, in the first half of 1995, amounts included the
amortization of the unearned balance of prepayments from Pharmacia included
in "Customer Advances". As of June 30, 1995, all of the prepayments were
fully amortized. The decrease in the quarter and six months ended June 30,
1996 is primarily attributable to the corresponding periods in 1995 including
a full six months amortization of "Customer Advances" compared to the quarter
and six months ended June 30, 1996 which included no such amortization.
The Company believes royalty income will fluctuate from period to period
since it is primarily based upon sales by the Company's licensees. The level
of royalty income for a product also depends on various external factors,
including the size of the market for the product, product pricing levels and
the ability of the Company's licensee to market the product. Therefore, the
level of royalty income for any given period is not indicative of the
expected royalty income for future periods.
COSTS OF PRODUCTS SOLD for the quarter ended June 30, 1996 were $3.8
million compared to $1.2 million for the quarter ended June 30, 1995 and were
$4.8 million for the six months ended June 30, 1996 compared to $2.4 million
for the six months ended June 30, 1995. Costs of products sold include direct
and indirect manufacturing costs of Nicotrol production and facility and
personnel costs required to meet future anticipated production levels. For
the quarter and six months ended June 30, 1996, costs of products sold
increased due to increased Nicotrol shipments.
The Company experienced positive product margins for the quarter and six
months ended June 30, 1996 due to increased demand for additional shipments
of Nicotrol. Conversely, the Company experienced negative product margins for
the quarter and six months ended June 30, 1995 primarily due to low
production volumes which prevented the Company from absorbing all the fixed
costs associated with Nicotrol production. There can be no assurance that
product margins associated with Nicotrol production will improve, nor can
there be any assurance that the overall level of demand for Nicotrol will
remain at current levels despite the change in Nicotrol's status from
prescription to OTC.
RESEARCH AND DEVELOPMENT EXPENSES for the quarter ended June 30, 1996
were $5.7 million compared to $4.7 million for the quarter ended June 30,
1995 and were $10.9 million for the six months ended June 30, 1996 compared
to $10.3 million for the six months ended June 30, 1995. These increases
reflect the Company's accelerated level of research and development costs
primarily associated with the glucose monitoring system. Research and
development and clinical activities primarily include the support of the
Company's hormone replacement therapy products (one of which, FemPatch, is
covered by an NDA ( "New Drug Application") submitted to the FDA and three of
which are in clinical trials), contraception product and the glucose
monitoring development program. After the NDA was submitted for FemPatch, the
FDA requested a bioequivalency study, which is
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CYGNUS, INC.
June 30, 1996
the responsibility of Warner-Lambert, the Company's marketing partner. It is
uncertain when, if ever, the NDA will ultimately be approved. Cygnus expects
that its anticipated development of new products, continued research of new
technologies and preparation for regulatory filings and clinicals could
result in an increase in its overall research and development expenses.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES for the quarter ended June
30, 1996 were $3.0 million compared to the $1.8 million for the quarter ended
June 30, 1995 and were $5.4 million for the six months ended June 30, 1996
compared to $3.3 million for the six months ended June 30, 1995. The increase
primarily reflects an increase in expenses due to the Company's legal
proceedings against Sanofi (See Part I, Item I, "Notes to the Consolidated
Financial Statements", Note 3 Legal Proceedings). The Company expects that
marketing, general and administrative expenses could increase in the future
as the Company expands its operations.
INTEREST INCOME, NET OF INTEREST AND OTHER EXPENSE for the quarter ended
June 30, 1996 was $0.4 million compared to $0.04 million for the quarter
ended June 30, 1995 and were $1.0 million for the six months ended June 30,
1996 compared to $.09 million for the six months ended June 30, 1995. The
increase is due primarily to interest earned on the October 1995 public
offering proceeds as mentioned below.
LIQUIDITY AND CAPITAL RESOURCES
In 1991 and 1992 the Company generated net proceeds of approximately
$52.3 million from public offerings. Additionally the Company received net
proceeds of approximately $29.8 million from its October 1995 public
offering. In June 1992, January 1993, December 1994, and in the first half of
1995 & 1996, the Company financed approximately $2.5 million, $1.6 million,
$1.7 million, $2.0 million and $0.3 million respectively, of manufacturing
and research equipment under capital loan and lease arrangements. In December
of 1994, the Company borrowed $1.7 million under a bank line of credit to
finance the purchase of manufacturing and research equipment. This line will
be repaid in monthly installments by June 30, 1998. In June of 1996, the
Company entered into a new $8.0 million bank line of credit for short-term
working capital. This line will be repaid monthly starting January 1997 and
is scheduled to be fully paid by December 1999. Both lines are subject to a
number of financial and other covenants. In addition to the cash from the
public offerings, equipment lease and short-term working capital financing,
the Company has been financing its operations primarily through contract
revenues and interest income.
Net cash used in operating activities for the six month period ended June
30, 1996 was $10.2 million, compared to $11.2 million for the period ended
June 30, 1995. Cash used in operating activities during the period ended June
30, 1996 was primarily due to the Company's net loss of $7.3 million,
increases in accounts receivable, prepaid and other assets and inventories
and the decrease in accrued compensation, offset by increases in deferred
revenue, accrued rent and other liabilities, and accrued professional
services. Cash used in operating activities during the period ended June 30,
1995 was primarily due to the Company's net loss of $5.7 million, the
increases in accounts receivable and inventories, and the decreases in
customer advances, accrued compensation and accounts payable.
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CYGNUS, INC.
June 30, 1996
The current level of cash used in operating activities is not necessarily
indicative of the level of future cash usage. As a result of increased
expenditures for the development of new products, preparation for regulatory
filings and clinical trials, the Company anticipates an increase in cash
usage for future operating activities.
Net cash used in investing activities of $13.4 million for the six months
ended June 30, 1996 resulted primarily from net purchases of short-term
investments of $12.8 million and capital expenditures of $0.6 million. Net
cash provided by investing activities of $3.0 million for the six month
period ended June 30, 1995 was primarily generated by the sales and maturity
of short-term investments to finance operating activities.
Net cash provided by financing activities for the six months ended June
30, 1996 includes $8.0 million received from the short term working capital
loan and security agreement, $3.0 million of common stock issuance proceeds
and $0.3 million from the sale and leaseback of equipment offset by long-term
debt and capital lease repayments. Net cash provided by financing activities
for the six months ended June 30, 1995 includes proceeds of $2.0 million from
the sale and leaseback of equipment and $0.5 million of common stock issuance
proceeds offset by long-term debt and capital lease repayments. The Company
continues to evaluate the benefits of using equipment leases to finance
equipment purchases.
The Company's long term capital expenditure requirements will depend upon
numerous factors, including the progress of the Company's research and
development programs; the time required to obtain regulatory approvals; the
resources that the Company devotes to the development of self-funded
products, proprietary manufacturing methods and advanced technologies; the
ability of the Company to obtain additional licensing arrangements and to
manufacture products under those arrangements, additional expenditures to
support the manufacture of new products if and when approved; and possible
acquisitions of products, technologies and companies. As the Company
evaluates the progress of its development projects, in particular the glucose
monitoring device and hormone replacement products, its commercialization
plans and the lead time to set up manufacturing capabilities, Cygnus may
commence long-term planning for another manufacturing site. Nevertheless,
the Company believes that such long-term planning will not result in any
material impact on the cash flows and liquidity for 1996.
Based upon current expectations for operating losses and capital
expenditures for 1996, the Company believes that its existing cash, cash
equivalents and short-term investments of $46.2 million, when coupled with
future contract revenues from development agreements, interest income and
possible additional equipment financing, will be sufficient to meet its
operating expenses and capital expenditure requirements through at least
1996. However, there can be no assurance that the Company will not require or
pursue additional financing depending upon future business strategies,
results of clinical trials and management decisions to accelerate certain
research and development programs and other factors.
12
<PAGE>
CYGNUS, INC.
June 30, 1996
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
See Part I, Item I, "Notes to the Consolidated Financial Statements", Note 3
regarding Legal Proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On June 6, 1996 the Annual Meeting of Stockholders was held. The
following Directors were re-elected at this meeting.
Frank T. Cary Gregory B. Lawless
Gary W. Cleary Richard G. Rogers
Walter B. Wriston Andre F. Marion
Other matters voted upon:
<TABLE>
<CAPTION>
Votes
------------------------------------------------
Broker
Affirmative Negative Abstain Non-Votes
----------- --------- ------- ----------
<S> <C> <C> <C> <C>
To approve an amendment to the 1994 Stock
Option/Award Plan to increase the pool of 8,311,108 3,118,199 35,221 5,674,837
options available for grant under the plan
by 1,500,000 shares.
To approve an amendment to the Employees
Stock Purchase Plan to increase the pool 13,020,349 1,503,039 26,110 2,589,867
of shares available for purchase under the
plan by 200,000
To re-appoint Ernst & Young LLP to serve as
the Company's independent auditors. 16,450,965 654,490 33,910 0
</TABLE>
13
<PAGE>
CYGNUS, INC.
June 30, 1996
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a) EXHIBITS
--------
The following exhibits are filed herewith or incorporated by reference:
10.1 Loan and Security Agreement between the Registrant and Silicon
Valley Bank entered into as of June 24, 1996.
10.2 Product Supply and Distribution Agreement between the Registrant
and Yamanouchi Pharmaceutical Co., LTD. dated as of July 14, 1996
(Confidential treatment has been applied for or granted for portions of this
agreement. The portions redacted have been filed separately with the SEC).
27. Financial Data Schedule
b) REPORTS ON FORM 8-K
-------------------
The Company did not file any reports on Form 8-K for the three months
ended June 30, 1996.
14
<PAGE>
CYGNUS, INC.
June 30, 1996
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.
CYGNUS, INC.
By: /s/ John C. Hodgman
---------------------------------------
John C. Hodgman
Chief Financial Officer (and Principal
Accounting Officer), and Vice President,
Finance; President, Cygnus Diagnostics
15
<PAGE>
INDEX OF EXHIBITS
The following exhibits are included herein:
Exhibit 10.1 Loan and Security Agreement
Exhibit 10.2 Product Supply and Distribution agreement between Cygnus, Inc.
and Yamanouchi Pharmaceutical Co., Ltd. dated July 14, 1996
(Confidential treatment has been applied or granted for portions
of this agreement. The portions redacted have been filed
separately with the SEC).
Exhibit 27 Financial Data Schedule
<PAGE>
EXHIBIT 10.1
- -------------------------------------------------------------------------------
CYGNUS, INC.
LOAN AND SECURITY AGREEMENT
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms. . . . . . . . . . . . . . . . . . . . . . . . . . 7
2. LOAN AND TERMS OF PAYMENT. . . . . . . . . . . . . . . . . . . . . . . . 7
2.1 Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Interest Rate Protection. . . . . . . . . . . . . . . . . . . . . . 7
2.3 Interest Rates, Payments, and Calculations. . . . . . . . . . . . . 7
2.4 Crediting Payments. . . . . . . . . . . . . . . . . . . . . . . . . 8
2.5 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.6 Additional Costs. . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.7 Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3. CONDITIONS OF LOANS. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
3.1 Conditions Precedent to Advance . . . . . . . . . . . . . . . . . . 9
4. CREATION OF SECURITY INTEREST. . . . . . . . . . . . . . . . . . . . . . 10
4.1 Grant of Security Interest. . . . . . . . . . . . . . . . . . . . . 10
4.2 Delivery of Additional Documentation Required . . . . . . . . . . . 10
4.3 Right to Inspect. . . . . . . . . . . . . . . . . . . . . . . . . . 10
5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . 11
5.1 Due Organization and Qualification. . . . . . . . . . . . . . . . . 11
5.2 Due Authorization; No Conflict. . . . . . . . . . . . . . . . . . . 11
5.3 No Prior Encumbrances . . . . . . . . . . . . . . . . . . . . . . . 11
5.4 Bona Fide Accounts. . . . . . . . . . . . . . . . . . . . . . . . . 11
5.5 Merchantable Inventory. . . . . . . . . . . . . . . . . . . . . . . 11
5.6 Name; Location of Chief Executive Office. . . . . . . . . . . . . . 11
5.7 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.8 No Material Adverse Change in Financial Statements. . . . . . . . . 12
5.9 Solvency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.10 Regulatory Compliance . . . . . . . . . . . . . . . . . . . . . . . 12
5.11 Environmental Condition . . . . . . . . . . . . . . . . . . . . . . 12
5.12 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.13 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
5.14 Government Consents . . . . . . . . . . . . . . . . . . . . . . . . 12
5.15 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.1 Good Standing . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.2 Government Compliance . . . . . . . . . . . . . . . . . . . . . . . 13
6.3 Adverse Information . . . . . . . . . . . . . . . . . . . . . . . . 13
6.4 Financial Statements, Reports, Certificates . . . . . . . . . . . . 13
6.5 Inventory; Returns. . . . . . . . . . . . . . . . . . . . . . . . . 14
6.6 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.7 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.8 Principal Depository. . . . . . . . . . . . . . . . . . . . . . . . 15
6.9 Debt-Net Worth Ratio. . . . . . . . . . . . . . . . . . . . . . . . 15
6.10 Tangible Net Worth. . . . . . . . . . . . . . . . . . . . . . . . . 15
6.11 Minimum Liquidity and Debt Service Coverage.. . . . . . . . . . . . 15
i
<PAGE>
6.12 Registration of Intellectual Property Rights. . . . . . . . . . . . 15
6.13 Further Assurances. . . . . . . . . . . . . . . . . . . . . . . . . 16
7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.1 Dispositions. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.2 Change in Business. . . . . . . . . . . . . . . . . . . . . . . . . 16
7.3 Mergers or Acquisitions . . . . . . . . . . . . . . . . . . . . . . 16
7.4 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.5 Encumbrances. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.6 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.7 Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.8 Transactions with Affiliates. . . . . . . . . . . . . . . . . . . . 16
7.9 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.10 Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
7.11 Compliance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.1 Payment Default . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.2 Covenant Default. . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.3 Material Adverse Change . . . . . . . . . . . . . . . . . . . . . . 17
8.4 Attachment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.5 Insolvency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.6 Other Agreements. . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.7 Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . . . 18
8.8 Adverse Legal Action/Judgments. . . . . . . . . . . . . . . . . . . 18
8.9 Misrepresentations. . . . . . . . . . . . . . . . . . . . . . . . . 18
8.10 FDA Determinations. . . . . . . . . . . . . . . . . . . . . . . . . 18
8.11 Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . 18
9. BANK'S RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . 19
9.1 Rights and Remedies . . . . . . . . . . . . . . . . . . . . . . . . 19
9.2 Power of Attorney . . . . . . . . . . . . . . . . . . . . . . . . . 19
9.3 Accounts Collection.. . . . . . . . . . . . . . . . . . . . . . . . 20
9.4 Bank Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
9.5 Bank's Liability for Collateral . . . . . . . . . . . . . . . . . . 20
9.6 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . 20
9.7 Demand; Protest . . . . . . . . . . . . . . . . . . . . . . . . . . 20
10. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER . . . . . . . . . . . . . . . 21
12. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
12.1 Successors and Assigns. . . . . . . . . . . . . . . . . . . . . . . 21
12.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.3 Time of Essence . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.4 Severability of Provisions. . . . . . . . . . . . . . . . . . . . . 22
12.5 Amendments in Writing, Integration. . . . . . . . . . . . . . . . . 22
12.6 Counterparts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12.7 Survival. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
12.8 Confidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . 23
ii
<PAGE>
This LOAN AND SECURITY AGREEMENT is entered into as of June 24, 1996, by
and between SILICON VALLEY BANK ("Bank") and CYGNUS, INC. ("Borrower").
RECITALS
--------
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
---------
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
----------------------------
1.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"Accounts" means all presently existing and hereafter arising
accounts, contract rights, and all other forms of obligations owing to Borrower
arising out of the sale or lease of goods (including, without limitation, the
licensing of software and other technology) or the rendering of services by
Borrower, whether or not earned by performance, and any and all credit
insurance, guaranties, and other security therefor, as well as all merchandise
returned to or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
"Advance" means the Advance under the Term Loan Facility.
"Affiliate" means, with respect to any Person, any Person that
owns or controls directly or indirectly such Person, any Person that controls or
is controlled by or is under common control with such Person, and each of such
Person's senior executive officers, directors and partners.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents, whether or not suit is
brought.
"Borrower's Books" means all of Borrower's books and records
including: ledgers; records concerning Borrower's assets or liabilities, the
Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Business Day" means any day that is not a Saturday, Sunday, or
other day on which banks in the State of California are authorized or required
to close.
"Closing Date" means the date the conditions precedent set forth
in Section 3 are satisfied and the Advance is made.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on EXHIBIT A attached
hereto.
"Committed Loan Amount" means Eight Million Dollars ($8,000,000).
1
<PAGE>
"Contingent Obligation" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold
with recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or
other agreement or arrangement designated to protect a Person against
fluctuation in interest rates, currency exchange rates or commodity prices;
provided, however, that the term "Contingent Obligation" shall not include
endorsements for collection or deposit in the ordinary course of business.
The amount of any Contingent Obligation shall be deemed to be an amount equal
to the stated or determined amount of the primary obligation in respect of
which such Contingent Obligation is made or, if not stated or determinable,
the maximum reasonably anticipated liability in respect thereof as determined
by such Person in good faith; provided, however, that such amount shall not
in any event exceed the maximum amount of the obligations under the guarantee
or other support arrangement.
"Daily Balance" means the amount of the Obligations owed at the
end of a given day.
"Debt Service Coverage" means, as measured quarterly as of the
last day of each fiscal quarter of Borrower (unless measured monthly in
accordance with Section 6.11 herein), on a consolidated basis determined in
accordance with GAAP, the ratio of (a) an amount equal to the sum of (i) net
income, PLUS (ii) depreciation, amortization of intangible assets and other
non-cash charges to income to (b) an amount equal to the sum of all scheduled
repayments for such quarter (or month, as applicable) and mandatory
prepayments of principal on account of long-term Debt.
"Equipment" means all present and future machinery, equipment,
tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"FDA" means the Food and Drug Administration of the United States
government, and any successor regulatory body.
"GAAP" means generally accepted accounting principles as in
effect from time to time.
"GMP" has the meaning set forth in Section 6.2.
"Indebtedness" means (a) all indebtedness for borrowed money or
the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds
and letters of credit, (b) all obligations evidenced by notes, bonds,
debentures or similar instruments, (c) all capital lease obligations and
(d) all Contingent Obligations.
"Insolvency Proceeding" means any proceeding commenced by or
against any person or entity under any provision of the United States
Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or
proceedings seeking reorganization, arrangement, or other relief.
2
<PAGE>
"Inventory" means all present and future inventory in which
Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished
products intended for sale or lease or to be furnished under a contract of
service, of every kind and description now or at any time hereafter owned by
or in the custody or possession, actual or constructive, of Borrower,
including such inventory as is temporarily out of its custody or possession
or in transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above,
and Borrower's Books relating to any of the foregoing.
"Investment" means any beneficial ownership of (including
stock, partnership interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge, pledge,
security interest or other encumbrance.
"Liquidity" means, at any date of determination, the sum of
Borrower's cash, cash equivalents, and short term investments, less any cash
and cash equivalent balances that are held in a sinking fund for the
retirement of debt or capital stock or that are held in pledge for another
creditor.
"Loan Documents" means, collectively, this Agreement, any note
or notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or
extended from time to time.
"Material Adverse Effect" means a material adverse effect on
(i) the business operations or condition (financial or otherwise) of Borrower
and its Subsidiaries taken as a whole or (ii) the ability of Borrower to
repay the Obligations or otherwise perform its obligations under the Loan
Documents.
"Maturity Date" means December 24, 1999.
"Negotiable Collateral" means all of Borrower's present and
future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and
Borrower's Books relating to any of the foregoing.
"Net Cash Losses" means, with respect to any period of
determination, determined on a consolidated basis in accordance with GAAP for
such period for Borrower and its consolidated Subsidiaries, the sum of
(i) net income (loss), PLUS (ii) non-cash expenses, depreciation and
amortization, MINUS (iii) increases in gross fixed assets, PLUS (iv) increases
(decreases) in long term debt or capital leases excluding changes in deferred
revenue.
"Obligations" means all debt, principal, interest, Bank
Expenses and other amounts owed to Bank by Borrower pursuant to this
Agreement or any other agreement, whether absolute or contingent, due or to
become due, now existing or hereafter arising, including any interest that
accrues after the commencement of an Insolvency Proceeding and including any
debt, liability, or obligation owing from Borrower to others that Bank may
have obtained by assignment or otherwise.
"Periodic Payments" means all installments or similar recurring
payments that Borrower may now or hereafter become obligated to pay to Bank
pursuant to the terms and provisions of any instrument, or agreement now or
hereafter in existence between Borrower and Bank.
3
<PAGE>
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising under
this Agreement or any other Loan Document;
(b) Indebtedness existing on the date of this Agreement and
disclosed in the Schedule;
(c) Indebtedness to trade creditors incurred in the ordinary
course of business;
(d) Subordinated Debt;
(e) Indebtedness of Borrower to any Subsidiary and Contingent
Obligations of any Subsidiary with respect to obligations of Borrower
(provided that the primary obligations are not prohibited hereby);
Indebtedness of any Subsidiary to any other Subsidiary and Contingent
Obligations of any Subsidiary with respect to obligations of any other
Subsidiary (provided that the primary obligations are not prohibited hereby);
and Contingent Obligations of the Borrower as a guarantor for obligations of
its Subsidiaries that (i) are existing on the date of this Agreement, or
(ii) have been approved by Bank in writing;
(f) Indebtedness secured by Permitted Liens;
(g) Capital leases or indebtedness incurred solely to purchase
equipment which is secured in accordance with clause (c) of "Permitted Liens"
below and is not in excess of the lesser of the purchase price of such
equipment or the fair market value of such equipment on the date of
acquisition; and
(h) Extensions, refinancings, modifications, amendments and
restatements of any of items of Permitted Indebtedness (a) through (g) above,
provided that the principal amount thereof is not increased or the terms
thereof are not modified to impose more burdensome terms upon Borrower or its
Subsidiary, as the case may be.
"Permitted Investment" means:
(a) Investments existing on the Date of this Agreement
disclosed in the Schedule; and
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or
any State thereof maturing within one (1) year from the date of acquisition
thereof, (ii) commercial paper maturing no more than one (1) year from the
date of creation thereof and currently having the highest rating obtainable
from either Standard & Poor's Corporation or Moody's Investors Service, Inc.,
and (iii) certificates of deposit maturing no more than one (1) year from the
date of investment therein issued by Bank, and (iv) any Investments permitted
by Borrower's investment policy, as amended from time to time, provided that
such investment policy (any such amendment thereto) has been approved by Bank;
(c) Investments consisting of the endorsement of negotiable
instrument for deposit or collection or similar transactions in the ordinary
course of business;
(d) Investments accepted in connection with Transfers permitted
by Section 7.1;
4
<PAGE>
(e) Investments (whether consisting of the purchase of
securities, loans, capital contribution, or otherwise) of Borrower in
Subsidiaries and of Subsidiaries in or to other Subsidiaries or in Borrower;
(f) Investments consisting of (i) compensation of employees,
officers and directors of Borrower or its Subsidiaries so long as the Board
of Directors of Borrower determines that such compensation is in the best
interests of Borrower, (ii) travel advances, employee relocation loans and
other employee loans and advances in the ordinary course of business, and
(iii) loans to employees, officers or directors relating to the purchase of
equity securities of Borrower or its Subsidiaries pursuant to employee stock
purchase plans or agreements approved by Borrower's Board of Directors;
(g) Investments (including debt obligations) received in
connection with the bankruptcy or reorganization of customers or suppliers
and in settlement of delinquent obligations of, and other disputes with,
customers or suppliers arising in the ordinary course of business;
(i) Investments consisting of notes receivable of, or prepaid
royalties and other credit extensions, to customers and suppliers who are not
Affiliates, in the ordinary course of business; provided that this paragraph
(i) shall not apply to Investments by Borrower in any Subsidiary;
(j) Investments constituting acquisitions permitted under
Section 7.3; and
(k) Deposit accounts of Borrower in which Bank has a Lien
prior to any other Lien.
"Permitted Liens" means the following:
(a) Any Liens existing on the date of this Agreement and
disclosed in the Schedule or arising under this Agreement or the other Loan
Documents;
(b) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings, PROVIDED the same have no priority over any of
Bank's security interests;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time
of its acquisition, PROVIDED that the Lien is confined solely to the property
so acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens on Equipment leased by Borrower or any Subsidiary
pursuant to an operating or capital lease in the ordinary course of business
(including proceeds thereof and accessions thereto) incurred solely for the
purpose of financing the lease of such Equipment (including Liens pursuant to
leases permitted pursuant to Section 7.1 and Liens referred to in UCC
financing statements regarding leases permitted by this Agreement);
(e) Leases or subleases and license and sublicenses granted to
others in the ordinary course of Borrower's business not interfering in any
material respect with the business of Borrower and its Subsidiaries taken as
a whole, and any interest or title of a lessor, licensor or under any lease
or license;
(g) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 8.8;
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(h) Easements, reservations, rights-of-way, restrictions,
minor defects or irregularities in title and other similar charges or
encumbrances affecting real property not constituting a Material Adverse
Effect;
(i) Liens in favor of customs and revenue authorities arising
as a matter of law to secure payments of customs duties in connection with
the importation of goods;
(l) Liens incurred in connection with the extension, renewal
or refinancing of the indebtedness secured by Liens of the type described in
clauses (a), (c), (d), (e), (f) and (k) above, PROVIDED that any extension,
renewal or replacement Lien shall be limited to the property encumbered by
the existing Lien and the principal amount of the indebtedness being
extended, renewed or refinanced does not increase; and
(m) Liens on insurance proceeds in favor of insurance
companies granted solely as security for financed premiums.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit
corporation, firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per annum,
most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Remaining Months Liquidity" means, at any time of
determination, the ratio of (i) Unrestricted Cash Reserves at such time to
(ii) the average of Net Cash Losses for the immediately preceding three month
period.
"Responsible Officer" means each of the Chief Executive
Officer, the Chief Financial Officer and the Controller of Borrower.
"Schedule" means the schedule of exceptions attached hereto, if
any.
"Subordinated Debt" means any debt incurred by Borrower that is
subordinated to the debt owing by Borrower to Bank on terms acceptable to
Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which
(i) any general partnership interest or (ii) more than 50% of the stock of
which by the terms thereof ordinary voting power to elect the Board of
Directors, managers or trustees of the entity shall, at the time as of which
any determination is being made, be owned by Borrower, either directly or
through an Affiliate.
"Tangible Net Worth" means at any date as of which the amount
thereof shall be determined, the consolidated total assets of Borrower and
its Subsidiaries MINUS, without duplication, (i) the sum of any amounts
attributable to (a) goodwill, (b) intangible items such as unamortized debt
discount and expense, patents, trade and service marks and names, copyrights
and research and development expenses except prepaid expenses, and (c) all
reserves not already deducted from assets, AND (ii) Total Liabilities.
"Term Loan Facility" means the facility under which Borrower
may request Bank to loan the Committed Loan Amount as specified in
Section 2.1.
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"Total Liabilities" means at any date as of which the amount
thereof shall be determined, all obligations that should, in accordance with
GAAP be classified as liabilities on the consolidated balance sheet of
Borrower, including in any event all Indebtedness, but specifically excluding
Subordinated Debt.
"Unrestricted Cash Reserves" means, at any time of
determination, the sum of Borrower's (i) cash balance of deposit accounts and
investment accounts, PLUS (ii) market value of all readily marketable
securities beneficially owned by Borrower, MINUS (iii) cash value of any
certificates of deposit or securities encumbered and/or restricted by any
Bank or any other Persons.
1.2 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with GAAP and all calculations made
hereunder shall be made in accordance with GAAP. When used herein, the terms
"financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
-------------------------
2.1 TERM LOAN.
(a) Subject to and upon the terms and conditions of this
Agreement, Bank will loan to Borrower the Committed Loan Amount on the
Closing Date. The Term Loan Facility will be used to provide temporary
working capital to Borrower.
(b) Interest shall accrue on the Committed Loan Amount from
the Closing Date at the rate specified in Section 2.3(a), and shall be
payable monthly on the twenty-fourth day of the month through the month in
which the term of the Term Loan Facility expires. All outstanding
obligations under this Agreement, including, but not limited to, any accrued
and unpaid interest and other unpaid charges or principal balances, shall be
payable on the Maturity Date.
(c) When Borrower desires the Advance, Borrower will notify
Bank by facsimile transmission or telephone no later than 3:00 p.m.
California time, on the Business Day that the Advance is to be made. Such
notification shall be promptly confirmed by a Payment/Advance Form in
substantially the form of EXHIBIT B hereto. Bank shall be entitled to rely
on any telephonic notice given by a person who Bank reasonably believes to be
a Responsible Officer, and Borrower shall indemnify and hold Bank harmless
for any damages or loss suffered by Bank as a result of such reliance. Bank
will credit the amount of the Advance to Borrower's deposit account.
2.2 INTEREST RATE PROTECTION. Subject to the terms and
condition of this Agreement, Borrower may prepay the Advance, in whole or in
part, only upon payment in full of (i) all accrued but unpaid interest and
all outstanding obligations hereunder (or, if partial prepayment, an
applicable or proportionate amount of such obligations), and (ii), if
Borrower has elected the fixed rate option set forth in Section 2.3(a), a fee
as shall be determined by Bank in its reasonable discretion to provide for
interest rate protection in the event the fixed interest rate set forth in
Section 2.3(a) is lower than the then current fixed rate for the Term Loan
Facility.
2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) INTEREST RATE. Except as set forth in Section 2.3(b), the
Advance shall bear interest, on the average daily balance thereof, at a rate
equal to, at Borrower's election, either (i) one percentage (1%) point above
the Prime Rate; or (ii) three and one-quarter percentage (3.25%) points above
the yield of the 42 month Treasury Note as reported in the Western edition of
THE WALL STREET JOURNAL, which rate shall be fixed at the time of Borrower's
election. Borrower shall give written notice to Bank of its interest rate
election on the day of the Advance concurrently with the
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Payment/Advance form. If Borrower fails to give such notice, then the
applicable rate shall be the 42 month Treasury Note fixed rate described
herein.
(b) DEFAULT RATE. All Obligations shall bear interest, from
and after the occurrence and during the continuance of an Event of Default
(except for an Event of Default with respect to Section 6.11(b) only), at a
rate equal to five (5) percentage points above the interest rate applicable
immediately prior to the occurrence of the Event of Default.
(c) PAYMENTS. Interest hereunder shall be due and payable on
the twenty-fourth calendar day of each month during the term hereof.
Borrower shall make payments of principal as follows: (i) beginning on
December 24, 1996 and continuing on the twenty-fourth day of each calendar
month for each of the eleven (11) months thereafter, Borrower shall make a
payment of principal to Bank in the amount of One Hundred Fifty Thousand
Dollars ($150,000), (ii) beginning on December 24, 1997 and continuing on the
twenty-fourth day of each calendar month for each of the twenty-three (23)
months thereafter, Borrower shall pay to Bank principal payments of Two
Hundred Fifty Eight Thousand Three Hundred Thirty Three Dollars ($258,333).
Bank shall, at its option, charge such interest, principal, all Bank
Expenses, and all Periodic Payments against any of Borrower's deposit
accounts, in which case those amounts shall thereafter accrue interest at the
rate then applicable hereunder. Any interest not paid when due shall be
compounded by becoming a part of the Obligations, and such interest shall
thereafter accrue interest at the rate then applicable hereunder.
(d) COMPUTATION. In the event the Prime Rate is changed from
time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate
is changed, by an amount equal to such change in the Prime Rate. All
interest chargeable under the Loan Documents shall be computed on the basis
of a three hundred sixty (360) day year for the actual number of days
elapsed. Notwithstanding the foregoing, this Section 2.3(d) shall not apply
in the event the Borrower elects the fixed rate option as set forth in
Section 2.3(a).
2.4 CREDITING PAYMENTS. Prior to the occurrence and during the
continuance of an Event of Default, Bank shall credit a wire transfer of
funds, check or other item of payment to such deposit account or Obligation
as Borrower specifies. After the occurrence and during the continuance of an
Event of Default, the receipt by Bank of any wire transfer of funds, check,
or other similar item for the purpose of payment of Obligations shall be
immediately applied to conditionally reduce Obligations, but shall not be
considered a payment on account unless such payment is of immediately
available federal funds or unless and until such check or other item of
payment is honored when presented for payment. Notwithstanding anything to
the contrary contained herein, any wire transfer or payment received by Bank
after 12:00 noon California time shall be deemed to have been received by
Bank as of the opening of business on the immediately following Business Day.
Whenever any payment to Bank under the Loan Documents would otherwise be due
(except by reason of acceleration) on a date that is not a Business Day, such
payment shall instead be due on the next Business Day, and additional fees or
interest, as the case may be, shall accrue and be payable for the period of
such extension.
2.5 FEES. Borrower shall pay to Bank the following:
(a) FACILITY FEE. A Facility Fee equal to One Hundred
Thousand Dollars ($100,000), which fee shall be due on the date of this
Agreement, shall be fully earned and non-refundable, and shall be disbursed
by Bank in accordance with the Disbursement Request Form of even date
herewith;
(b) FINANCIAL EXAMINATION AND APPRAISAL FEES. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral
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and financial analysis and examination of Borrower performed from time to
time by Bank or its agents; and
(c) BANK EXPENSES. Upon the date hereof, all Bank Expenses
incurred through the Closing Date, including reasonable attorneys' fees and
expenses, and, after the date hereof, all Bank Expenses, including reasonable
attorneys' fees and expenses, as and when they become due.
2.6 ADDITIONAL COSTS. In case any change in any law, regulation,
treaty or official directive or the interpretation or application thereof by
any court or any governmental authority charged with the administration
thereof or the compliance with any guideline or request of any central bank
or other governmental authority (whether or not having the force of law), in
each case after the date of this Agreement:
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for
taxes on the overall net income of Bank imposed by the United States of
America or any political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets
held by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to its
performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank,
reduce the income receivable by Bank or impose any expense upon Bank with
respect to any loans, Bank shall notify Borrower thereof. Borrower agrees to
pay to Bank the amount of such increase in cost, reduction in income or
additional expense as and when such cost, reduction or expense is incurred or
determined, upon presentation by Bank of a statement of the amount and
setting forth Bank's calculation thereof, all in reasonable detail which
statement shall be deemed true and correct absent manifest error; PROVIDED,
HOWEVER, that Borrower shall not be liable for any such amount attributable
to any period prior to the date one hundred and eighty (180) days prior to
the date of such certificate.
2.7 TERM. This Agreement shall become effective on the Closing
Date and, subject to Section 12.7, shall continue in full force and effect
for a term ending on the Maturity Date. Notwithstanding the foregoing, Bank
shall have the right to terminate its obligation to make the Advance under
this Agreement immediately and without notice upon the occurrence and during
the continuance of an Event of Default. Notwithstanding termination, Bank's
Lien on the Collateral shall remain in effect for so long as any Obligations
(other than inchoate indemnity obligations) are outstanding.
3. CONDITIONS OF LOANS
3.1 CONDITIONS PRECEDENT TO ADVANCE. The obligation of Bank to make
the Advance is subject to the conditions precedent that:
(a) Bank shall have received, in form and substance satisfactory
to Bank, the following:
(i) this Agreement;
(ii) a certificate of the Secretary of Borrower with
respect to incumbency and resolutions authorizing the execution and delivery
of this Agreement;
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(iii) certificates of good standing from the Secretaries
of State of California, Delaware and any other state in which the Borrower is
required to be qualified to do business;
(iv) a collateral assignment and patent mortgage;
(v) financing statements (Forms UCC-1);
(vi) insurance certificate;
(vii) payment of the fees and Bank Expenses then due
specified in Section 2.5 hereof;
(viii) timely receipt of the Payment/Advance Form as
provided in Section 2.1;
(ix) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate; and
(b) the representations and warranties contained in Section 5
shall be true and correct in all material respects on and as of the date of
the Payment/Advance Form and on the effective date of the Advance, and no
Event of Default shall have occurred and be continuing, or would result from
the Advance. The making of the Advance shall be deemed to be a representation
and warranty by Borrower on the date of the Advance as to the accuracy of the
facts referred to in this Section 3.1(b).
4. CREATION OF SECURITY INTEREST
-----------------------------
4.1 GRANT OF SECURITY INTEREST. Borrower grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each
of its covenants and duties under the Loan Documents. Except as set forth in
the Schedule, such security interest constitutes a valid, first priority
security interest in the presently existing Collateral, and will constitute a
valid, first priority security interest in Collateral acquired after the date
hereof, in each case, to the extent that a security interest in such
Collateral can be perfected by the filing of a financing statement or, in the
case of Collateral consisting of instruments, documents, chattel paper or
certificated securities, to the extent that Bank takes possession of such
Collateral. Bank agrees to execute and deliver to Borrower from time to time
such Lien releases as Borrower may request and as are necessary to give to
other lenders which finance new Equipment for Borrower a first priority
security interest in the new Equipment financed so long as the Liens and the
Indebtedness incurred with respect to such Equipment financing are permitted
under this Agreement.
4.2 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 RIGHT TO INSPECT. Bank (through any of its officers, employees,
or agents) shall have the right, upon reasonable prior notice, from time to time
during Borrower's usual business hours, to inspect Borrower's Books and to make
copies thereof and to check, test, and appraise the Collateral in order to
verify Borrower's financial condition or the amount, condition of, or any other
matter relating to, the Collateral.
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4.4 REQUIREMENT FOR CASH COLLATERAL. Borrower shall pledge cash or
a certificate of deposit to Bank as follows:
(a) If Borrower does not comply with Sections 6.9, 6.10 or
6.11 herein (except for six (6) months Remaining Months Liquidity of Section
6.11), then Borrower shall pledge cash or a certificate of deposit to the
Bank in an amount equal to fifty-five percent (55%) of the outstanding loan
balance. Bank agrees to release the cash pledged pursuant to this Section
4.4(a) upon Borrower achieving compliance with Sections 6.9, 6.10 or 6.11.
(b) If at any time the Liquidity of Borrower is less than
(i) Twelve Million Dollars ($12,000,000), or (ii) three (3) times Remaining
Months Liquidity, then Borrower shall pledge cash or a certificate of deposit
to the Bank in an amount equal to one hundred and five percent (105%) of the
outstanding loan balance. Bank agrees to release the cash collateral pledged
pursuant to this Section 4.4(b) upon Borrower achieving Liquidity greater
than (i) Twelve Million Dollars ($12,000,000), or (ii) three (3) times
Remaining Months Liquidity.
5. REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower represents and warrants as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. Borrower and each Subsidiary
is a corporation duly existing and in good standing under the laws of its state
of incorporation and qualified and licensed to do business in, and is in good
standing in, any state in which the conduct of its business or its ownership of
property requires that it be so qualified, except to the extent that failure to
so qualify would not have a Material Adverse Effect on the Borrower provided
that any such failure has been disclosed to Bank.
5.2 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. Borrower is not in default
under any agreement to which it is a party or by which it is bound, which
default could have a Material Adverse Effect.
5.3 NO PRIOR ENCUMBRANCES. Borrower has good and indefeasible title
to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 BONA FIDE ACCOUNTS. The Accounts are bona fide existing
obligations. The property giving rise to such Accounts has been delivered to
the account debtor or to the account debtor's agent for immediate shipment to
and unconditional acceptance by the account debtor. Borrower has not received
notice of actual or imminent Insolvency Proceeding of any account debtor.
5.5 MERCHANTABLE INVENTORY. All Inventory, net of reserves in
accordance with GAAP, is in all material respects of good and marketable
quality, free from all material defects.
5.6 NAME; LOCATION OF CHIEF EXECUTIVE OFFICE. Except as disclosed in
the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The chief executive office of Borrower
is located at the address indicated in Section 10 hereof.
5.7 LITIGATION. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision could have a
Material Adverse Effect or a material adverse effect on Borrower's interest or
Bank's security interest in the Collateral. Borrower does not have knowledge of
any such pending or threatened actions or proceedings.
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5.8 NO MATERIAL ADVERSE CHANGE IN FINANCIAL STATEMENTS. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material
respects Borrower's consolidated financial condition as of the date thereof
and Borrower's consolidated results of operations for the period then ended.
There has not been a material adverse change in the consolidated financial
condition of Borrower since the date of the most recent of such financial
statements submitted to Bank.
5.9 SOLVENCY. Borrower is solvent and able to pay its debts
(including trade debts) as they mature.
5.10 REGULATORY COMPLIANCE. Borrower and each Subsidiary has met
the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA. No event has occurred resulting from
Borrower's failure to comply with ERISA that is reasonably likely to result
in Borrower's incurring any liability that could have a Material Adverse
Effect. Borrower is not an "investment company" or a company "controlled" by
an "investment company" within the meaning of the Investment Company Act of
1940. Borrower is not engaged principally, or as one of the important
activities, in the business of extending credit for the purpose of purchasing
or carrying margin stock (within the meaning of Regulations G, T and U of the
Board of Governors of the Federal Reserve System). Borrower has complied
with all the provisions of the Federal Fair Labor Standards Act and Borrower
has not violated any statutes, laws, ordinances or rules applicable to it,
noncompliance with or which violation of which could have a Material Adverse
Effect.
5.11 ENVIRONMENTAL CONDITION. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release,
or transport, any hazardous waste or hazardous substance other than in
accordance with applicable law; to the best of Borrower's knowledge, none of
Borrower's properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a hazardous waste
or hazardous substance disposal site, or a candidate for closure pursuant to
any environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous
waste or hazardous substances into the environment.
5.12 TAXES. Borrower and each Subsidiary has filed or caused to be
filed all tax returns required to be filed, and has paid, or has made
adequate provision for the payment of, all taxes reflected therein, except
for taxes the amount or validity of which the Borrower is contesting in good
faith by appropriate proceedings and with respect to which the Borrower has
taken adequate reserves in accordance with GAAP.
5.13 SUBSIDIARIES. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 GOVERNMENT CONSENTS. Borrower and each Subsidiary has obtained
all consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all governmental authorities that are
necessary for the continued operation of Borrower's business as currently
conducted. Except as disclosed in writing to Bank, Borrower has not been
denied an Investigational New Drug status nor has any application for New
Drug Approval been denied, nor has Borrower received any information
indicating that the FDA is unlikely to issue an approval letter in response
to such application for any products material to Borrower's business.
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5.15 FULL DISCLOSURE. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished
to Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading.
6. AFFIRMATIVE COVENANTS
---------------------
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to
make an Advance hereunder, Borrower shall do all of the following:
6.1 GOOD STANDING. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 GOVERNMENT COMPLIANCE.
(a) ERISA. Borrower shall meet, and shall cause each Subsidiary
to meet, the minimum funding requirements of ERISA with respect to any employee
benefit plans subject to ERISA.
(b) FDA. To the extent required by law, Borrower shall cause
its, and each of its Subsidiaries', manufacturing and quality control to conform
in all material respects to FDA Good Manufacturing Practices ("GMP") regulations
and such other regulations applicable to Borrower and its Subsidiaries with
respect to advertising, labeling and reporting, product testing, design, safety
and labeling of products except where the failure to so conform is not
reasonably likely to have a Material Adverse Effect. To the extent necessary to
the conduct of its and its Subsidiaries' business, Borrower shall register, and
shall cause each of its Subsidiaries to register, with the Food and Drug Branch
of the California Department of Health Services and the FDA, and Borrower shall
register its, and shall cause each of its Subsidiaries to register their,
manufacturing facilities in accordance with GMP regulations.
(c) STATUTORY COMPLIANCE. Borrower shall comply, and shall
cause each Subsidiary to comply, with all statutes, laws, ordinances and
government rules and regulations to which it is subject, noncompliance with
which is reasonably likely to have a Material Adverse Effect, including without
limitation, compliance in all material respects with the Federal Food, Drug, and
Cosmetics Act, the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, and all other applicable
federal, state and local laws, orders and regulations.
6.3 ADVERSE INFORMATION. Borrower shall immediately notify Bank upon
receipt of any information that indicates that (a) the FDA has denied, or has
stated that it is likely to deny, any of Borrower's, or its Subsidiaries',
Investigational New Drug Applications or New Product Application, (b) Borrower
or a Subsidiary has elected not to proceed with clinical trials for any of
Borrower's or Subsidiary's products for which Borrower or any Subsidiary has
filed an Investigational New Drug Application with the FDA, or (c) the FDA or
other governmental agency has advised Borrower that it found material
deficiencies in Borrower's or a Subsidiary's compliance with applicable
regulations.
6.4 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.
(a) Borrower shall deliver to Bank: (i) as soon as available,
but in any event within ninety (90) days after the end of Borrower's fiscal
year, audited consolidated financial statements of Borrower prepared in
accordance with GAAP, consistently applied, together with an unqualified
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opinion on such financial statements of an independent certified public
accounting firm reasonably acceptable to Bank; (ii) within five (5) days upon
becoming available, copies of all statements, reports and notices sent or
made available generally by Borrower to its security holders or to any
holders of Subordinated Debt and all reports on Form 10-K and 10-Q filed with
the Securities and Exchange Commission; (iii) promptly upon receipt of notice
thereof, a report of any legal actions pending or threatened against Borrower
or any Subsidiary that could result in damages or costs to Borrower or any
Subsidiary of One Hundred Thousand Dollars ($100,000) or more; and (iv) such
budgets, sales projections, operating plans or other financial information as
Bank may reasonably request from time to time.
(b) Borrower shall deliver to Bank with the quarterly financial
statements a Compliance Certificate signed by a Responsible Officer in
substantially the form of EXHIBIT C hereto.
(c) If at any time and during such time that Borrower's
Liquidity is less than Twenty Five Million Dollars ($25,000,000), or if an
Event of Default occurs and is continuing, Borrower shall deliver a company
prepared consolidated balance sheet and income statement covering Borrower's
consolidated operations for the relevant month, certified by a Responsible
Officer and a Compliance Certificate (as referenced above) to Borrower within
thirty (30) days after the last day of each calendar month. Borrower shall
deliver to Bank with such monthly financial statements and Compliance
Certificate a monthly liquidity and average cash burn report in a form and
substance satisfactory to Bank.
6.5 INVENTORY; RETURNS. Borrower shall keep all Inventory in good
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on
the same basis and in accordance with the usual customary practices of
Borrower, as they exist at the time of the execution and delivery of this
Agreement. Borrower shall promptly notify Bank of all returns and recoveries
and of all disputes and claims, where the return, recovery, dispute or claim
involves more than Fifty Thousand Dollars ($50,000).
6.6 TAXES. Borrower shall make, and shall cause each Subsidiary to
make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments
and withholding taxes required of it by applicable laws, including, but not
limited to, those laws concerning F.I.C.A., F.U.T.A., state disability, and
local, state, and federal income taxes, and will, upon request, furnish Bank
with proof satisfactory to Bank indicating that Borrower or a Subsidiary has
made such payments or deposits; provided that Borrower or a Subsidiary need
not make any payment if the amount or validity of such payment is contested
in good faith by appropriate proceedings and is reserved against (to the
extent required by GAAP) by Borrower.
6.7 INSURANCE.
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against
by other owners in similar businesses conducted in the locations where
Borrower's business is conducted on the date hereof. Borrower shall also
maintain insurance relating to Borrower's ownership and use of the Collateral
in amounts and of a type that are customary to businesses similar to
Borrower's. Nothing herein shall be construed as requiring the Borrower to
maintain credit insurance with respect to its accounts receivable.
(b) All such policies of insurance shall be in such form, with
such companies and in such amounts as reasonably satisfactory to Bank. All
such policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing
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Bank as an additional loss payee thereof and all liability insurance policies
shall show the Bank as an additional insured, and shall specify that the
insurer must give at least twenty (20) days notice to Bank before canceling
its policy for any reason. Upon Bank's request, Borrower shall deliver to
Bank certified copies of such policies of insurance and evidence of the
payments of all premiums therefor. All proceeds payable under any such
policy shall, at the option of Bank, be payable to Bank for application to
the Obligations.
6.8 PRINCIPAL DEPOSITORY. Borrower shall maintain its principal
depository and operating accounts with Bank.
6.9 DEBT-NET WORTH RATIO. Subject to the last sentence of this
Section, Borrower shall maintain, as of the last day of each of Borrower's
fiscal quarters, a ratio of Total Liabilities (excluding deferred revenue) less
Subordinated Debt to Tangible Net Worth plus Subordinated Debt of not more than
1.50 to 1.00. If at any time and during such time Borrower's Liquidity is less
than Twenty Five Million Dollars ($25,000,000), Borrower shall maintain, as of
the last day of each calendar month, a ratio of Total Liabilities (excluding
deferred revenue) less Subordinated Debt to Tangible Net Worth plus Subordinated
Debt of not more than 1.50 to 1.00.
6.10 TANGIBLE NET WORTH. Subject to the last sentence of this
Section, Borrower shall maintain, as of the last day of each of Borrower's
fiscal quarters, a Tangible Net Worth of not less than Twelve Million Dollars
($12,000,000). If at any time and during such time Borrower's Liquidity is less
than Twenty Five Million Dollars ($25,000,000), Borrower shall maintain, as of
the last day of each calendar month, a Tangible Net Worth of not less than
Twelve Million Dollars ($12,000,000).
6.11 MINIMUM LIQUIDITY AND DEBT SERVICE COVERAGE. Subject to the
remainder of this Section, Borrower shall maintain, as of the last day of each
of Borrower's fiscal quarters, a minimum Liquidity of (a) two (2) times the
amount of Obligations, AND (b) six times (6x) the average of net cash losses for
the immediately preceding three (3) month period. Notwithstanding the
foregoing, from and after the time Borrower achieves a Debt Service Coverage for
two consecutive fiscal quarters of at least 1.50 to 1.00, and for so long as
Borrower maintains as of the last day of each fiscal quarter thereafter, a Debt
Service Coverage of at least 1.50 to 1.00, Borrower shall not be subject to the
minimum required Liquidity set forth above. If at any time and during such time
Borrower's Liquidity is less than Twenty Five Million Dollars ($25,000,000),
Borrower shall maintain the minimum Liquidity and Debt Service Coverage
covenants contained herein as of the last day of each calendar month.
6.12 REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS. Borrower shall
register or cause to be registered (to the extent not already registered) with
the United States Patent and Trademark Office or the United States Copyright
Office, as applicable, those intellectual property rights listed on Exhibits A,
B and C to the Collateral Assignment, Patent Mortgage and Security Agreement
delivered to Bank by Borrower in connection with this Agreement within
thirty (30) days of the date of this Agreement, as is material to the Borrower's
business. Borrower shall register or cause to be registered with the United
States Patent and Trademark Office or the United States Copyright Office, as
applicable, those additional intellectual property rights developed or acquired
by Borrower from time to time in connection with any product prior to the sale
or licensing of such product to any third party, including without limitation
revisions or additions to the intellectual property rights listed on such
Exhibits A, B and C, as is material to the Borrower's business. Borrower shall
execute and deliver such additional instruments and documents from time to time
as Bank shall reasonably request to perfect Bank's security interest in such
additional intellectual property rights.
6.13 FURTHER ASSURANCES. At any time and from time to time Borrower
shall execute and deliver such further instruments and take such further
action as may reasonably be requested by Bank to effect the purposes of this
Agreement.
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7. NEGATIVE COVENANTS
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Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until payment in full of the outstanding Obligations or
for so long as Bank may have any commitment to make the Advance, Borrower will
not do any of the following:
7.1 DISPOSITIONS. Convey, sell, lease, transfer or otherwise dispose
of (collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer,
all or any part of its business or property, other than: (i) Transfers of
Inventory in the ordinary course of business; (ii) Transfers of non-exclusive
licenses and similar arrangements for the use of the property of Borrower or its
Subsidiaries; (iii) Transfers of worn-out or obsolete Equipment or new Equipment
financed by other vendors; or (iv) Transfers which constitute liquidation of
Investments permitted under Section 7.7.
7.2 CHANGE IN BUSINESS. Engage in any business, or permit any of
its Subsidiaries to engage in any business, other than the businesses
currently engaged in by Borrower and any business substantially similar or
related thereto (or incidental thereto). Borrower will not, without thirty
(30) days prior written notification to Bank, relocate its chief executive
office.
7.3 MERGERS OR ACQUISITIONS. Merge or consolidate, or permit any of
its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person; PROVIDED
that this Section 7.3 shall not apply to (i) transactions among Subsidiaries or
among Borrower and its Subsidiaries in which Borrower is the surviving entity,
or (ii) such transactions that do not involve an amount that, in the aggregate,
exceeds Five Million Dollars ($5,000,000) during the term of this Agreement as
long as giving effect to such transactions will not cause the Borrower to
violate Sections 6.9, 6.10 or 6.11 herein.
7.4 INDEBTEDNESS. Create, incur, assume or be or remain liable with
respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 ENCUMBRANCES. Create, incur, assume or suffer to exist any Lien
with respect to any of its property, or assign or otherwise convey any right to
receive income, including the sale of any Accounts, or permit any of its
Subsidiaries so to do, except for Permitted Liens.
7.6 DISTRIBUTIONS. Pay any dividends or make any other distribution
or payment on account of or in redemption, retirement or purchase of any capital
stock; PROVIDED, that Borrower may convert any of its convertible securities
into other securities pursuant to the terms of such convertible securities or
otherwise in exchange therefor.
7.7 INVESTMENTS. Directly or indirectly acquire or own, or make any
Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
7.8 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of
Borrower except for transactions that are in the ordinary course of
Borrower's business, upon fair and reasonable terms that are no less
favorable to Borrower than would be obtained in an arm's length transaction
with a nonaffiliated Person and except for transactions with a Subsidiary
that are upon fair and reasonable terms and transactions constituting
Permitted Investments.
7.9 SUBORDINATED DEBT. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such
payment, except in compliance with the terms of such Subordinated Debt, or
amend any provision contained in any documentation relating to the
Subordinated Debt without Bank's prior written consent.
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7.10 INVENTORY. Store the Inventory with a bailee, warehouseman, or
similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section
10 hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.11 COMPLIANCE. Become an "investment company" controlled by an
"investment company," within the meaning of the Investment Company Act of
1940, or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance or Loan for such
purpose. Fail to (i) comply in all material respects with FDA's GMP
regulations and registration requirements; (ii) comply in all material
respects with Federal Food, Drug and Cosmetics Act, the Occupational Safety
and Health Act, the Environmental Protection Act, and the Toxic Substances
Control Act; (iii) meet the minimum funding requirements of ERISA, permit a
reportable event or prohibited transaction, as defined in ERISA, to occur;
(iv) comply with the Federal Fair Labor Standards Act in all material
respects; or (v) violate any law or regulation, in each case which violation
could have a Material Adverse Effect.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event of
Default by Borrower under this Agreement:
8.1 PAYMENT DEFAULT. If Borrower fails to pay the principal of, or
any interest on, the Advance when due and payable; or fails to pay any portion
of any other Obligations not constituting such principal or interest, including
without limitation Bank Expenses, within thirty (30) days of receipt by Borrower
of an invoice for such other Obligations;
8.2 COVENANT DEFAULT. If Borrower fails to perform any obligation
under Section 6.8, 6.9, 6.10 or 6.11 or violates any of the covenants contained
in Article 7 of this Agreement, or fails or neglects to perform, keep, or
observe any other material term, provision, condition, covenant, or agreement
contained in this Agreement, in any of the Loan Documents, or in any other
present or future agreement between Borrower and Bank and as to any default
under such other term, provision, condition, covenant or agreement that can be
cured, has failed to cure such default within ten (10) days after Borrower
receives notice thereof or any officer of Borrower becomes aware thereof;
provided, however, that if the default cannot by its nature be cured within the
ten (10) day period or cannot after diligent attempts by Borrower be cured
within such ten (10) day period, and such default is likely to be cured within a
reasonable time, then Borrower shall have an additional reasonable period (which
shall not in any case exceed thirty (30) days) to attempt to cure such default,
and within such reasonable time period the failure to have cured such default
shall not be deemed an Event of Default (provided that no Advance will be
required to be made during such cure period);
8.3 MATERIAL ADVERSE CHANGE. If there occurs a material adverse
change in Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or a
material impairment of the value or priority of Bank's security interests in the
Collateral;
8.4 ATTACHMENT. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any
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material portion of Borrower's assets, or if a notice of lien, levy, or
assessment is filed of record with respect to any of Borrower's assets by the
United States Government, or any department, agency, or instrumentality
thereof, or by any state, county, municipal, or governmental agency, and the
same is not paid within ten (10) days after Borrower receives notice thereof,
provided that none of the foregoing shall constitute an Event of Default
where such action or event is stayed or an adequate bond has been posted
pending a good faith contest by Borrower (provided that no Advance will be
required to be made during such cure period);
8.5 INSOLVENCY. If Borrower becomes insolvent, or if an Insolvency
Proceeding is commenced by Borrower, or if an Insolvency Proceeding is commenced
against Borrower and is not dismissed or stayed within thirty (30) days
(provided that no Advance will be made prior to the dismissal of such Insolvency
Proceeding);
8.6 OTHER AGREEMENTS. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Thousand
Dollars ($100,000) or that could have a Material Adverse Effect;
8.7 SUBORDINATED DEBT. If Borrower makes any payment on account of
Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 ADVERSE LEGAL ACTION/JUDGMENTS. If there occurs any adverse
legal decision, determined in Bank's sole and independent discretion, that
represents a potential judgment in an amount representing liability to the
Borrower (whether contingent or otherwise) greater than Three Million Dollars
($3,000,000); or
8.9 MISREPRESENTATIONS. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
8.10 FDA DETERMINATIONS. If the FDA takes one or more of the
following actions with respect to all or substantially all of Borrower's or a
Subsidiary's products: (a) withdraws Investigational New Drug status for any
such product that is undergoing clinical trials as the result of a determination
by the FDA that such product exposes subjects or patients to an unacceptable
health risk; (b) suspends clinical trials of any such product as the result of a
determination that such product is not reasonably likely to be demonstrated to
be safe and efficacious; (c) withdraws product approval of any such product as
the result of any failure to comply with regulatory standards; or (d) determines
that such products are not safe or efficacious.
8.11 CHANGE OF CONTROL. If any "person" or "group" (within the
meaning of Section 13(d) and 14(d)(2) of the Securities Exchange Act of 1934)
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934), directly or indirectly, of a sufficient number of shares
of all classes of stock then outstanding of Borrower ordinarily entitled to vote
in the election of directors, empowering such "person" or "group" to elect a
majority of the Board of Directors of Borrower.
9. BANK'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
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(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due
and payable (provided that upon the occurrence of an Event of Default
described in Section 8.5 all Obligations shall become immediately due and
payable without any action by Bank);
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement or under any other agreement between
Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account
debtors for amounts, upon terms and in whatever order that Bank reasonably
considers advisable;
(d) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to
protect its security interest in the Collateral. Borrower agrees to assemble
the Collateral if Bank so requires, and to make the Collateral available to
Bank as Bank may designate. Borrower authorizes Bank to enter the premises
where the Collateral is located, to take and maintain possession of the
Collateral, or any part of it, and to pay, purchase, contest, or compromise
any encumbrance, charge, or lien which in Bank's determination appears to be
prior or superior to its security interest and to pay all expenses incurred
in connection therewith. With respect to any of Borrower's owned premises,
Borrower hereby grants Bank a license to enter into possession of such
premises and to occupy the same, without charge, for up to one hundred twenty
(120) days in order to exercise any of Bank's rights or remedies provided
herein, at law, in equity, or otherwise;
(e) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank,
or (ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(f) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Bank is hereby granted a license or other right,
solely pursuant to the provisions of this Section 9.1, to use, without
charge, Borrower's labels, patents, copyrights, rights of use of any name,
trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the
Collateral, in completing production of, advertising for sale, and selling
any Collateral and, in connection with Bank's exercise of its rights under
this Section 9.1, Borrower's rights under all licenses and all franchise
agreements shall inure to Bank's benefit;
(g) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms,
in such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable, and apply any proceeds to the
Obligations in whatever manner or order Bank deems appropriate;
(h) Bank may credit bid and purchase at any public sale; and
(i) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 POWER OF ATTORNEY. Effective only upon the occurrence and
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
Borrower's true and lawful attorney to: (a) send requests for verification
of Accounts or notify account debtors of Bank's security interest in the
Accounts; (b) endorse Borrower's name on any checks or other forms of payment
or security that may come into Bank's possession; (c) sign Borrower's name on
any invoice or bill of lading relating to any Account, drafts against account
debtors, schedules and assignments of Accounts, verifications of Accounts,
and notices to account debtors; (d) make, settle, and adjust all claims under
and decisions with respect to
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Borrower's policies of insurance; and (e) settle and adjust disputes and
claims respecting the accounts directly with account debtors, for amounts and
upon terms which Bank determines to be reasonable; provided Bank may exercise
such power of attorney to sign the name of Borrower on any of the documents
described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each
and every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
9.3 ACCOUNTS COLLECTION. After the occurrence and during the
continuance of an Event of Default, Bank may notify any Person owing funds to
Borrower of Bank's security interest in such funds and verify the amount of such
Account. Borrower shall collect all amounts owing to Borrower for Bank, receive
in trust all payments as Bank's trustee, and immediately deliver such payments
to Bank in their original form as received from the account debtor, with proper
endorsements for deposit.
9.4 BANK EXPENSES. If Borrower fails to pay any amounts or furnish
any required proof of payment due to third persons or entities, as required
under the terms of this Agreement, then Bank may do any or all of the
following: (a) make payment of the same or any part thereof; (b) set up such
reserves under the Revolving Facility as Bank deems necessary to protect Bank
from the exposure created by such failure; or (c) obtain and maintain
insurance policies of the type discussed in Section 6.6 of this Agreement,
and take any action with respect to such policies as Bank deems prudent. Any
amounts so paid or deposited by Bank shall constitute Bank Expenses, shall be
immediately due and payable, and shall bear interest at the then applicable
rate hereinabove provided, and shall be secured by the Collateral. Any
payments made by Bank shall not constitute an agreement by Bank to make
similar payments in the future or a waiver by Bank of any Event of Default
under this Agreement.
9.5 BANK'S LIABILITY FOR COLLATERAL. So long as Bank complies with
Section 9207 of the Code, Bank shall not in any way or manner be liable or
responsible for: (a) the safekeeping of the Collateral; (b) any loss or damage
thereto occurring or arising in any manner or fashion from any cause; (c) any
diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk
of loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 REMEDIES CUMULATIVE. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by
Bank shall constitute a waiver, election, or acquiescence by it. No waiver by
Bank shall be effective unless made in a written document signed on behalf of
Bank and then shall be effective only in the specific instance and for the
specific purpose for which it was given.
9.7 DEMAND; PROTEST. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
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Unless otherwise provided in this Agreement, all notices or demands by
any party relating to this Agreement or any other agreement entered into in
connection herewith shall be in writing and (except for financial statements and
other informational documents which may be sent by first-class mail, postage
prepaid) shall be personally delivered or sent by a recognized overnight
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delivery service, certified mail, postage prepaid, return receipt requested,
or by telefacsimile to Borrower or to Bank, as the case may be, at its
addresses set forth below:
If to Borrower: Cygnus, Inc.
400 Penobscot Drive
Redwood City, CA 94063
Attn: Mr. John C. Hodgman
FAX: (415) 599-3972
If to Bank: Silicon Valley Bank
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
Attn: Mr. Chris Coleman
FAX: (415) 812-0640
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
------------------------------------------
This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to
principles of conflicts of law. Each of Borrower and Bank hereby submits to
the exclusive jurisdiction of the state and Federal courts located in the
County of Santa Clara, State of California. BORROWER AND BANK EACH HEREBY
WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION
BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE
TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH
PARTY RECOGNIZES AND AGREES THAT THE FOREGOING WAIVER CONSTITUTES A MATERIAL
INDUCEMENT FOR IT TO ENTER INTO THIS AGREEMENT. EACH PARTY REPRESENTS AND
WARRANTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
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12.1 SUCCESSORS AND ASSIGNS.
(a) This Agreement shall bind and inure to the benefit of the
respective successors and permitted assigns of each of the parties; PROVIDED,
HOWEVER, that neither this Agreement nor any rights hereunder may be assigned
by Borrower without Bank's prior written consent, which consent may be
granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participations in all or any part of, or any interest in Bank's
obligations, rights and benefits hereunder subject to the provisions of this
Section 12.1.
(b) Bank may sell, negotiate or grant participations to other
financial institutions in all or part of the obligations of the Borrower
outstanding under the Loan Documents, without notice to or the approval of
Borrower; PROVIDED that any such sale, negotiation or participation shall be in
compliance with the applicable federal and state securities laws and the other
requirements of this Section 13.1. Notwithstanding the sale, negotiation or
grant of participations, Bank shall remain solely responsible for the
performance of its obligations under this Agreement, and Borrower shall continue
to deal solely and directly with Bank in connection with this Agreement and the
other Loan Documents.
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(c) The grant of a participation interest shall be on such
terms as Bank determines are appropriate, provided only that (1) the holder
of such a participation interest shall not have any of the rights of Bank
under this Agreement except, if the participation agreement so provides,
rights to demand the payment of costs of the type described in Section 2.6,
(ii) extend the term of this Agreement, (iii) decrease the rate of interest
or the amount of any fee or any other amount payable to Bank under this
Agreement, (iv) reduce the principal amount payable under this Agreement, or
(v) extend the date fixed for the payment of principal or interest or any
other amount payable under this Agreement.
(d) Bank may assign, from time to time, all or any portion of
its pro rata share of the Committed Loan Amount to an Affiliate of the Bank
or to the Federal Reserve Bank or, subject to the prior written approval of
Borrower (which approval will not be unreasonably withheld), to any other
financial institution; provided, that the parties to each such assignment
shall execute and deliver to Borrower an assignment agreement in a form
renewable acceptable to each. Upon such execution and delivery, from and
after the effective date specified in such assignment agreement (x) the
assignee thereunder shall be a party hereto and, to the extent that rights
and obligations hereunder have been assigned to it pursuant to such
assignment agreement, have the rights and obligations of a Bank hereunder and
(y) Bank shall, to the extent that rights and obligations hereunder have been
assigned by it pursuant to such assignment agreement, relinquish its rights
and be released from its obligations under this Agreement (other than
pursuant to this Section 12.1(d)), and, in the case of an assignment
agreement covering all or the remaining portion of Bank's rights and
obligations under this Agreement, Bank shall cease to be a party hereto. In
the event of an assignment hereunder, the parties agree to amend this
Agreement to the extent necessary to reflect the mechanical changes which are
necessary to document such assignment and which are standard for a multi-bank
credit facility.
12.2 INDEMNIFICATION. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any
other party in connection with the transactions contemplated by this
Agreement; and (b) all losses or Bank Expenses in any way suffered, incurred,
or paid by Bank as a result of or in any way arising out of, following, or
consequential to transactions between Bank and Borrower whether under this
Agreement, or otherwise (including without limitation reasonable attorneys
fees and expenses), except for losses caused by Bank's gross negligence or
willful misconduct.
12.3 TIME OF ESSENCE. Time is of the essence for the performance of
all obligations set forth in this Agreement.
12.4 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 AMENDMENTS IN WRITING, INTEGRATION. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
12.6 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, shall be deemed to be an original, and all of
which, when taken together, shall constitute but one and the same Agreement.
12.7 SURVIVAL. All covenants, representations and warranties made in
this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and
22
<PAGE>
liabilities described in Section 12.2 shall survive until all applicable
statute of limitations periods with respect to actions that may be brought
against Bank have run, provided that so long as the obligations set forth in
the first sentence of this Section 12.7 have been satisfied, and Bank has no
commitment to make any Advance or to make any other loans to Borrower, Bank
shall release all security interests granted hereunder and redeliver all
Collateral held by it in accordance with applicable law.
12.8 CONFIDENTIALITY. In handling any confidential information Bank
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 Bank 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 and have
delivered a copy to Borrower, (iii) as required by law, regulations, rule or
order, subpoena, judicial order or similar order, (iv) as may be required in
connection with the examination, audit or similar investigation of Bank and
(v) as Bank may determine in connection with the enforcement 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
Bank when disclosed to Bank, or becomes part of the public domain after
disclosure to Bank through no fault of Bank; or (b) is disclosed to Bank by a
third party, provided Bank does not have actual knowledge that such third
party is prohibited from disclosing such information.
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
CYGNUS, INC.
By: /s/ John C. Hodgman
----------------------------------------
Title: Chief Financial Officer
--------------------------------------
SILICON VALLEY BANK
By: /s/ Chris Coleman
-----------------------------------------
Title: Senior Vice President
--------------------------------------
-24-
<PAGE>
EXHIBIT A
---------
The Collateral shall consist of all right, title and interest of Borrower
in and to the following:
(a) All goods and equipment now owned or hereafter acquired, including,
without limitation, all machinery, fixtures, vehicles (including motor
vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including, without
limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds,
including insurance proceeds, resulting from the sale or disposition of any
of the foregoing and any documents of title representing any of the above,
and Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or hereafter
acquired, including, without limitation, goodwill, trademarks, servicemarks,
trade styles, trade names, patents, patent applications, leases, license
agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs,
computer discs, computer tapes, literature, reports, catalogs, design rights,
income tax refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract rights,
royalties, license rights and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not earned by
performance, and any and all credit insurance, guaranties, and other security
therefor, as well as all merchandise returned to or reclaimed by Borrower and
Borrower's Books relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of credit,
certificates of deposit, instruments and chattel paper now owned or hereafter
acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright registrations
and like protections in each work of authorship and derivative work thereof,
whether published or unpublished, now owned or hereafter acquired; all trade
secret rights, including all rights to unpatented inventions, know-how,
operating manuals, license rights and agreements and confidential information,
now owned or hereafter acquired; all mask work or similar rights available for
the protection of semiconductor chips, now owned or hereafter acquired; all
claims for damages by way of any past, present and future infringement of any of
the foregoing; and
(g) Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
25
<PAGE>
EXHIBIT B
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE: _______________________
FAX#: (408) 496-2426 TIME: _______________________
- ------------------------------------------------------------------------------
FROM: _______________________________________________________________________
CLIENT NAME (BORROWER)
REQUESTED BY: _______________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
_____________________________________________________________________________
PHONE NUMBER: _______________________________________________________________
FROM ACCOUNT #__________________ TO ACCOUNT # _____________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
PRINCIPAL INCREASE (ADVANCE) $ _________________________________________
PRINCIPAL PAYMENT (ONLY) $ _________________________________________
INTEREST PAYMENT (ONLY) $ _________________________________________
PRINCIPAL AND INTEREST (PAYMENT) $ _________________________________________
OTHER INSTRUCTIONS: _________________________________________________________
_____________________________________________________________________________
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the
date of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in
all material respects as of such date.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
BANK USE ONLY
TELEPHONE REQUEST:
- -----------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
______________________________________ __________________________________
Authorized Requester Phone #
______________________________________ __________________________________
Received By (Bank) Phone #
___________________________________
Authorized Signature (Bank)
- -------------------------------------------------------------------------------
-26-
<PAGE>
EXHIBIT C
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: CYGNUS, INC.
The undersigned authorized officer of Cygnus, Inc. hereby certifies that
in accordance with the terms and conditions of the Loan and Security
Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is in
complete compliance for the period ending ________________ with all required
covenants except as noted below and (ii) all representations and warranties
of Borrower stated in the Agreement are true and correct in all material
respects as of the date hereof. Attached herewith are the required documents
supporting the above certification. The Officer further certifies that these
are prepared in accordance with Generally Accepted Accounting Principles
(GAAP) and are consistently applied from one period to the next except as
explained in an accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES
- ------------------ -------- --------
Financial statements* 10-K 10-Q within 5 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
Liquidity/Cash Burn Report** Monthly within 30 days Yes No
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
- ------------------ -------- ------ --------
Maintain on a Quarterly*** Basis:
Debt/Tangible Net Worth**** 1.50:1.00 _____:1.0 Yes No
Tangible Net Worth**** $12,000,000 $_______ Yes No
Liquidity/Debt Service Coverage 2x Obligations _____:1.0 Yes No
plus 6 RML*****
*Monthly if Liquidity below $25,000,000. **Only required if Liquidity below
$25,000,000. ***Tested monthly if Liquidity is less than $25,000,000. ****Minus
deferred revenue.*****Debt Service Coverage of 1.5:1.0 upon two consecutive
quarters of Liquidity.
- ---------------------------------------------
BANK USE ONLY
Received by:_______________________________
AUTHORIZED SIGNER
Date:_____________________________________
Verified:_________________________________
AUTHORIZED SIGNER
Date:_____________________________________
Compliance Status: Yes No
- ----------------------------------------------
COMMENTS REGARDING EXCEPTIONS: See Attached.
Sincerely,
____________________________________________
SIGNATURE
____________________________________________
TITLE
____________________________________________
DATE
27
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
BORROWER: Cygnus, Inc. BANK: Silicon Valley Bank
- ------------------------------------------------------------------------------
LOAN TYPE. This is a Variable/Fixed Rate, Term Loan Facility of a principal
amount up to $8,000,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: Short Term Working
Capital.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
TERM LOAN
---------
Amount paid to Borrower directly: $
--------
Undisbursed Funds $
--------
Principal $
--------
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Prepaid Finance Charges Paid in Cash: $100,000
$60,000 Silicon Valley Bank Loan Fee
$40,000 Meier Mitchell Loan Fee
$
--------
Other Charges Paid in Cash: $
--------
$ TBD UCC Search Fees
--------
$ TBD UCC Filing Fees
--------
$ TBD Patent Filing Fees
--------
$ TBD Trademark Filing Fees
--------
$ TBD Copyright Filing Fees
--------
$ TBD Outside Counsel Fees and Expenses (Estimate)
--------
Total Charges Paid in Cash $
---------
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct
from Borrower's account numbered ______________ the amount of any loan payment.
If the funds in the account are insufficient to cover any payment, Bank shall
not be obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF JUNE 24, 1996.
BORROWER:
___________________________
___________________________
Authorized Officer
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
GRANTOR: Cygnus, Inc. BANK: Silicon Valley Bank
- -------------------------------------------------------------------------------
INSURANCE REQUIREMENTS. Cygnus, Inc. ("Grantor") understands that
insurance coverage is required in connection with the extending of a loan or
the providing of other financial accommodations to Grantor by Bank. These
requirements are set forth in the Loan Documents. The following minimum
insurance coverages must be provided on the following described collateral
(the "Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation that
coverage will not be cancelled or diminished without a
minimum of twenty (20) days' prior written notice to
Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance company
Grantor may choose that is reasonably acceptable to Bank. Grantor understands
that credit may not be denied solely because insurance was not purchased through
Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of June 24, 1996, or earlier. Grantor acknowledges and agrees
that if Grantor fails to provide any required insurance or fails to continue
such insurance in force, Bank may do so at Grantor's expense as provided in
the Loan and Security Agreement. The cost of such insurance, at the option
of Bank, shall be payable on demand or shall be added to the indebtedness as
provided in the security document. GRANTOR ACKNOWLEDGES THAT IF BANK SO
PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION
AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN;
HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN ADDITION,
THE INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE
INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL
RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED JUNE 24,
1996.
GRANTOR:
CYGNUS, INC.
x _____________________________________
Authorized Officer
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: _________________ PHONE: ___________
AGENT'S NAME: _________________________________________________________________
INSURANCE COMPANY: ____________________________________________________________
POLICY NUMBER: ________________________________________________________________
EFFECTIVE DATES: ______________________________________________________________
COMMENTS: _____________________________________________________________________
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CORPORATE RESOLUTIONS TO BORROW
- -------------------------------------------------------------------------------
BORROWER: Cygnus, Inc.
- -------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of Cygnus, Inc. (the
"Corporation"), HEREBY CERTIFY that the Corporation is organized and existing
under and by virtue of the laws of the State of Delaware.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true and
complete copies of the Certificate of Incorporation and Bylaws of the
Corporation, each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation,
duly called and held, at which a quorum was present and voting (or by other duly
authorized corporate action in lieu of a meeting), the following resolutions
were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
________________ ___________________ __________________________
________________ ___________________ __________________________
________________ ___________________ __________________________
________________ ___________________ __________________________
________________ ___________________ __________________________
acting for an on behalf of this Corporation and as its act and deed be, and
they hereby are, authorized and empowered:
BORROW MONEY. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers,
employees, or agents and Bank, such sum or sums of money as in their judgment
should be borrowed, without limitation, including such sums as are specified
in that certain Loan and Security Agreement dated as of June 24, 1996 (the
"Loan Agreement").
EXECUTE NOTES. To execute and deliver to Bank the promissory note or
notes of the Corporation, on Lender's forms, at such rates of interest and on
such terms as may be agreed upon, evidencing the sums of money so borrowed or
any indebtedness of the Corporation to Bank, and also to execute and deliver
to Lender one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the notes, or any portion
of the notes.
GRANT SECURITY. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all of
the Corporation's Obligations, as described in the Loan Agreement.
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness
payable to or belonging to the Corporation or in which the Corporation may
have an
1
<PAGE>
interest, and either to receive cash for the same or to cause such
proceeds to be credited to the account of the Corporation with Bank, or to
cause such other disposition of the proceeds derived therefrom as they may
deem advisable.
FURTHER ACTS. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances thereunder,
and in all cases, to do and perform such other acts and things, to pay any
and all fees and costs, and to execute and deliver such other documents and
agreements as they may in their discretion deem reasonably necessary or
proper in order to carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full
force and effect and Bank may rely on these Resolutions until written notice
of their revocation shall have been delivered to and received by Bank. Any
such notice shall not affect any of the Corporation's agreements or
commitments in effect at the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above
are duly elected, appointed, or employed by or for the Corporation, as the
case may be, and occupy the positions set forth opposite their respective
names; that the foregoing Resolutions now stand of record on the books of the
Corporation; and that the Resolutions are in full force and effect and have
not been modified or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on June 24, 1996 and attest
that the signatures set opposite the names listed above are their genuine
signatures.
CERTIFIED TO AND ATTESTED BY:
X _______________________________________
- -------------------------------------------------------------------------------
Attachments:
1. Certificate of Incorporation
2. By-Laws
2
<PAGE>
PRODUCT SUPPLY AND DISTRIBUTION AGREEMENT
BETWEEN
CYGNUS, INC.
AND
YAMANOUCHI PHARMACEUTICAL CO., LTD.
DATED
JULY 14, 1996
<PAGE>
TABLE OF CONTENTS
PAGE
1. DEFINITIONS............................................................. 2
2. Grant of Distributorship................................................ 5
2.1. Exclusive Distributorship........................................ 5
2.2. Minor Improvement Product........................................ 6
2.3. Major Improvement Product........................................ 8
2.4. Meetings to Discuss Product Development.......................... 11
2.5. Right to Use Subdistributors..................................... 11
2.6. Sales Only in the Territory...................................... 12
3. Product Registration.................................................... 12
4. Obligations of Cygnus................................................... 14
4.1. Regulatory Submissions........................................... 14
4.2. Supply of Product................................................ 14
4.3. Quantity: Forecasts.............................................. 14
4.4. Delivery......................................................... 16
4.5. Acceptance and Rejection of Product in Case of Nonconformity..... 16
4.6. Inability to Supply.............................................. 16
4.7. Sample Products.................................................. 16
4.8. Technical Support................................................ 16
4.9. No Duty to Deliver if Product Terminated......................... 17
5. Obligations of Yamanouchi............................................... 17
5.1. General Obligations of Yamanouchi................................ 17
5.2. Korea............................................................ 17
5.3. Long Range Forecasts............................................. 18
5.4. Adjustments of Long Range Forecast, Quantity Forecast and Firm
Order............................................................ 18
5.5. Non-achievement of Long Range Forecast........................... 18
5.6. Marketing Obligations............................................ 18
5.7. Purchasing Requirements.......................................... 20
6. Payments................................................................ 20
6.1. Milestone Payments............................................... 20
6.2. Product Related Payments......................................... 20
6.3. Currency Conversion.............................................. 21
6.4. Payment Terms.................................................... 21
6.5. Taxes and Duties................................................. 21
7. Records and Audit Rights................................................ 22
8. Non-Competition......................................................... 23
i.
<PAGE>
9. Adverse Reaction........................................................ 23
10. Export Law.............................................................. 23
11. Term and Termination.................................................... 24
11.1. Term............................................................. 24
11.2. Termination by Either Party for Cause............................ 24
11.3. Termination for Unsatisfactory Results........................... 25
11.4. Effect of Termination; Survivability of Certain Provisions....... 26
11.5. Termination Not Sole Remedy...................................... 27
12. Product Warranty and Warranty Disclaimers............................... 27
12.1. Cygnus Warranty.................................................. 27
13. Insurance............................................................... 28
14. Ownership............................................................... 29
14.1. Ownership........................................................ 29
14.2. Use of Non-Clinical and Clinical Data............................ 29
15. Confidentiality......................................................... 30
16. Trademarks.............................................................. 30
16.1. Trademark Registration........................................... 30
16.2. No Rights in Trademarks, Trade Names, Logos or Designations...... 31
16.3. After Termination or Expiration.................................. 32
17. Patent and Trademark Indemnification.................................... 32
17.1. Cygnus' Patent and Copyright Indemnity........................... 32
17.2. Limitation of Indemnity.......................................... 34
17.3. Settlement....................................................... 34
18. Limited Liability....................................................... 34
19. Infringement by Third Parties........................................... 35
20. Manufacturing in the Event of Bankruptcy................................ 35
21. General................................................................. 36
21.1. Amendment and Waiver............................................. 36
21.2. Governing Law and Legal Actions.................................. 36
21.3. Arbitration...................................................... 37
21.4. Headings......................................................... 38
21.5. Notices.......................................................... 38
21.6. Entire Agreement................................................. 38
21.7. Severability..................................................... 38
21.8. Basis of Bargain................................................. 38
ii.
<PAGE>
21.9. Relationship of Parties.......................................... 38
21.10. Assignment....................................................... 39
21.11. Publicity and Press Releases..................................... 39
21.12. Force Majeure.................................................... 39
21.13. Remedies......................................................... 39
SCHEDULE A MILESTONE PAYMENTS
EXHIBIT A INITIAL GLUCOSE MONITORING PRODUCT
iii.
<PAGE>
PRODUCT SUPPLY AND DISTRIBUTION AGREEMENT
This Product Supply and Distribution Agreement (the "Agreement")
is entered as of July ___, 1996 (the "Effective Date") by and between Cygnus,
Inc. ("Cygnus"), a Delaware corporation, with its principal place of business
at 400 Penobscot Drive, Redwood City, California 94063, and Yamanouchi
Pharmaceutical Co., Ltd. ("Yamanouchi"), a Japanese corporation, with its
principal place of business at 3-11, Nihonbashi-honcho 2-chome, Chuo-ku, Tokyo
103, Japan.
WHEREAS, Cygnus is a leading developer of non-invasive glucose
monitoring systems and Cygnus owns (or is otherwise licensed or entitled to)
certain Proprietary Rights (defined below) relating to the Products (defined
below);
WHEREAS, Cygnus and Yamanouchi desire to commercially introduce the
Products in the Territory (defined below);
WHEREAS, Yamanouchi has the capabilities and expertise to market,
sell and distribute the Products in the Territory and Cygnus desires to maximize
the long-term sales of the Products by developing new Products suitable for the
market in the Territory in cooperation with Yamanouchi; and
WHEREAS, Cygnus and Yamanouchi are prepared to enter into a supply
and distribution agreement on the terms and conditions set forth below;
NOW THEREFORE, in consideration of the mutual promises, undertakings
and covenants herein expressed, the parties agree as follows:
1.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
1. DEFINITIONS.
1.1. "Affiliate Company" shall mean any company, corporation, or
other business entity which owns or controls directly or indirectly, or is under
common control with Cygnus or Yamanouchi, or which Cygnus or Yamanouchi owns or
controls directly or indirectly by ownership of fifty percent (50%) or more of
the outstanding voting stock of such corporation or business entity.
1.2. "Calculation Period" shall mean each of the following half
year periods: April 1 through September 30 and October 1 through March 31.
1.3. "Component Products" shall mean with respect to any Initial
Glucose Monitoring Product and Improved Glucose Monitoring Product, such
products, parts or replacement components capable of sale or sold individually
to consumers and including the Glucopad and the sensors described in Exhibit A.
1.4. "Contract Year" shall be for the first Contract Year, that
annual period commencing on the first day of First Commercial Sale of the
Initial Glucose Monitoring Product system in any country in the Territory.
Subsequent Contract Years shall be annual periods commencing on the
anniversaries of the first Contract Year.
1.5. "Delivery Date" shall mean a date for which delivery of a
Product is properly requested in a purchase order.
1.6. "First Commercial Sale" shall mean, as to each Product, the
first commercial sale by Yamanouchi.
1.7. "Fully Burdened Development Cost" of a Product means the
following direct and indirect costs (as determined in accordance with generally
accepted
2.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
accounting principles ("GAAP")), to the extent specifically attributable to an
Improved Glucose Monitoring Product: *
1.8. "Improved Glucose Monitoring Products" shall mean (i) any and
all systems for glucose monitoring which is based upon iontophoresis technology,
except the Initial Glucose Monitoring Product system, and (ii) any Component
Products thereof.
1.9. "Initial Glucose Monitoring Products" shall mean the glucose
monitoring system and any Component Product thereof described and listed in
Exhibit A as first approved for sale in the United States. * For each such
change, * the modified version and any Component Product thereof shall be deemed
the "Initial Territory Glucose Monitoring Product."
1.10. "Know-How" shall mean all know-how, techniques, trade
secrets, practices, procedures, processes, inventions, methods, data, skill,
experience, technology, test data, including but not limited to nonclinical
data, special ability and information, including but not limited to improvements
thereof relating to each Product.
1.11. "Long Range Forecast" shall have the meaning set forth in
Section 5.3 of this Agreement.
1.12. "Major Improvement Product" shall mean any Improved Glucose
Monitoring Product which (i) embodies or offers a substantial change in function
or performance from existing Products, or (ii) incorporates any additional
patent or patentable invention which has not been employed in any existing
Product, or (iii) needs a clinical trial to obtain U.S regulatory approval for
sale in the U.S. As used herein, a substantial change in function or
performance will be deemed to exist for an entire product and the components
thereof if such improvement exists in a major component
3.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
thereof, notwithstanding the absence of such improvements in the other
components of the product system. Mere cosmetic or superficial changes do not
constitute a substantial improvement in function or performance.
1.13. "Manufacturing Cost" means the aggregate of the following (as
determined in accordance with generally accepted accounting principles): both
direct and indirect costs specifically attributable to *
1.14. "Market Research" shall mean, with respect to each Product,
market research to determine, among other things, market size, price, Product
requirements and other appropriate market data.
1.15. "Minor Improvement Product" shall mean any Improved Glucose
Monitoring Product that is not a Major Improvement Product.
1.16. "Non-Invasive Product" shall mean a glucose monitoring
product that does not require sample extraction that penetrates the skin (other
than an existing Product) for management of diabetes in humans.
1.17. "Payment Report" shall mean the report for every Calculation
Period described in Section 6.2.3 of this Agreement.
1.18. "Product Launch" for a country shall mean the date such
Product has received all necessary approvals and the first commercial sale of
such Product has occurred in such country.
1.19. "Products" shall mean (i) any Initial Glucose Monitoring
Product, (ii) any Improved Glucose Monitoring Product included in this Agreement
pursuant to Sections 2.2 and 2.3 of this Agreement, and (iii) any Component
Product.
4.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
1.20. "Proprietary Rights" shall mean all rights with respect to
all patented or patentable material, including singularly or in groups, or
subgroups, any component or ingredient thereof, medical, clinical, toxicological
or other scientific data or information relating to the Products or the
manufacture of the Products, trademarks, copyrights or copyrightable material,
any Know-How and all business, technical and financial information disclosed by
one party hereunder to the other. Such Proprietary Rights shall be deemed the
confidential property of the disclosing party.
1.21. "Qualified Subdistributors" shall be a medical-device or
pharmaceutical manufacturer or distributor of medical devices within the
Territory selling to the same classes of customer within the Territory as
Yamanouchi within the Territory.
1.22. "Submission" shall mean the filing of all materials specified
by applicable governmental statutes and/or regulations as necessary to obtain
approval for commercial sale within a particular country.
1.23. "Territory" shall mean Japan and Korea.
1.24. "Total Net Sales" for a period means *
1.25. "U.S. Regulatory Submission" shall mean a 510K or PMA
submission (whichever the U.S. Food and Drug Administration determines to be
applicable) to the U.S. Food and Drug Administration.
2. GRANT OF DISTRIBUTORSHIP.
2.1. EXCLUSIVE DISTRIBUTORSHIP. Subject to the terms and
conditions of this Agreement and during the term hereof, Cygnus grants
Yamanouchi an exclusive distributorship of the Products in the Territory.
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2.2. MINOR IMPROVEMENT PRODUCT. If either Cygnus or Yamanouchi
desire that a Minor Improvement Product be developed, either may make a written
proposal (the "Proposal") to the other.
2.2.1. In the event either party wishes to make a Proposal it
shall set forth (1) a description and proposed specifications of the product,
(ii) if the Proposal is made by Cygnus, an estimate of the Fully Burdened
Development Cost and details of the conditions for and amounts of milestone
payments and (iii) a schedule for development. The party receiving the Proposal
may accept or reject the Proposal. If, within * of sending of the
Proposal, the receiving party has not provided notice in writing either
(i) accepting the Proposal or (ii) offering a counter Proposal, the Proposal
shall be deemed rejected. If the parties reach agreement, which must be
evidenced in writing, and which must include express agreement upon the
(i) description and proposed specifications; (ii) details of the conditions for
and amounts of milestone payments totaling * and (iii) schedule for development,
such Minor Improvement Product shall become a Product under this Agreement to be
developed by Cygnus. Failure to reach such agreement within * of the
giving of the first notice with respect to the Proposal shall be deemed a
rejection of the Proposal. Yamanouchi shall make all milestone payments when
due as provided in the agreement between the parties for such Minor Improvement
Product. * All rights and obligations with respect to such accepted Minor
Improvement Product shall be as provided in this Agreement for any Product.
Cygnus shall have the right to make, have made, use, sell and to grant rights to
any such accepted Minor Improvement Product outside the Territory. In the event
the Proposal is rejected, Cygnus and Yamanouchi shall be prohibited during the
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term of the Agreement from directly or indirectly manufacturing, distributing or
offering for sale such Minor Improvement Product in the Territory and/or
contracting with, licensing to or forming a venture with any third party for the
purpose of manufacturing, selling, promoting, distributing or otherwise offering
such Minor Improvement Product in the Territory; PROVIDED, HOWEVER there shall
be no such restrictions upon Cygnus outside the Territory.
2.2.2. Yamanouchi may elect to terminate the development
work for any Minor Improvement Product as set forth below by providing
written notice of termination to Cygnus. In the event, Yamanouchi can
demonstrate (i) that following completion of Cygnus' development work on a
Minor Improvement Product, the Minor Improvement Product has actually failed
to meet the agreed upon specifications and that such failure substantially
and materially impairs the commercial value of the Minor Improvement Product;
(ii) that following actual payment * or (iii) that Cygnus has actually failed
to meet the deadline for completion of development and that the additional
time required to complete development will substantially and materially
impair the commercial value of the Minor Improvement Product, Yamanouchi may
give notice of termination for cause ("Termination for Cause"). In the event
of Termination for Cause * Upon Cygnus' determination that it has developed
a product which reasonably meets the agreed upon specifications, Cygnus shall
give notice of completion to Yamanouchi. Yamanouchi's right to give notice
of termination shall expire within * of receipt of such notice. Upon the
expiration of such * period, Yamanouchi shall be required to use reasonable
efforts to obtain regulatory approval (if required) and launch the Minor
Improvement Product as soon as reasonably practicable.
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2.2.3. Cygnus may elect to terminate development work for any
Minor Improvement Product if it in good faith determines that there is a
substantial risk that (i) it will be unable to meet the agreed upon
specifications or * (iii) that it will be unable to meet the agreed upon
schedule for development. In such event, Cygnus may give Yamanouchi notice in
writing terminating the project to develop such Minor Improvement Product.
Following notice of termination, *
2.2.4. In the event either Yamanouchi or Cygnus terminate a
Minor Improvement Product development project, Cygnus and Yamanouchi shall be
prohibited during the term of the Agreement from directly or indirectly
manufacturing, distributing or offering for sale such Minor Improvement Product
in the Territory and/or contract licensing with, licensing to, or forming a
venture with any third party for the purpose of manufacturing, selling,
promoting, distributing or otherwise offering such Minor Improvement Product in
the Territory; PROVIDED, HOWEVER, there shall be no such restriction upon Cygnus
outside the Territory.
2.2.5. In the event that Yamanouchi has launched a Minor
Improvement Product in the Territory and Cygnus launches a product outside the
Territory, which is identical in each and every respect with the launched Minor
Improvement Product, *
2.3. MAJOR IMPROVEMENT PRODUCT. If either party wishes to
develop, manufacture or sell a Major Improvement Product, it may make a written
proposal (the "Proposal") therefor to the other. Any such Proposal shall set
forth the following: (i) a description and proposed specification of the
product; (ii) if the Proposal is made by Cygnus, * payments with conditions for
each payment and the amount thereof (each
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payment conceived to be made in advance of performing the development work
contemplated thereunder and in an amount estimated to cover *; and (iii) a
schedule for development. In the event Cygnus has already commenced a Major
Improvement Product as of the Effective Date of the Agreement, Cygnus shall
make a Proposal in the first meeting set forth in Section 2.4 and in such
case the Proposal shall set forth * in addition to items (i) through (iii)
above. Following the making of any such Proposal, the receiving party shall
have * from the sending of the Proposal to either (i) give written notice of
acceptance or (ii) offer a counter-Proposal. If notice of acceptance or a
counter-Proposal is not given within the * the Proposal shall be deemed
rejected. If the parties reach agreement, which must be evidenced in writing
and which must include agreement upon the (i) description and proposed
specifications; and (ii) the details of the conditions for and the amounts of
* and (iii) a schedule for development. Such Major Improvement Product shall
become a Product under this Agreement to be developed by Cygnus. Failure to
reach such agreement within * of the giving of the first notice with respect
to the Proposal, shall be deemed a rejection of the Proposal.
2.3.1. In the event a Proposal given under the above
Section 2.3 is accepted, Yamanouchi shall make all milestone payments when due
as provided in the agreement between the parties. * All rights and obligations
with respect to such accepted Major Improvement Product shall be as provided for
any Product in this Agreement. Cygnus shall have the right to make, have made,
use, sell and to grant rights to any such accepted Major Improvement Product
outside the Territory.
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2.3.2. Either party may terminate a Major Improvement Product
by giving notice thereunder. In the event of termination, Yamanouchi shall be
obligated to pay * through the date of notice of termination. Cygnus shall
submit an invoice following notice of termination showing * In the event of
termination by Cygnus, if Cygnus recommences work on the terminated Major
Improvement Product, it shall make a new Proposal therefor under Section 2.3.
2.3.3. In the event that a Proposal is rejected or deemed
rejected, or the development project is terminated by Yamanouchi under
Section 2.3.2, Cygnus shall be free itself, or with a third party to develop,
manufacture, distribute or sell or otherwise exploit the Major Improvement
Product (and all future modifications to or evolutions thereof) within or
outside the Territory. PROVIDED, HOWEVER, with respect to a rejected or deemed
rejected Proposal or a Major Improvement Product for which development was
terminated by Yamanouchi under Section 2.3.2, if Cygnus receives a proposal or
offer from a third-party to sell, distribute or otherwise exploit such Major
Improvement Product in the Territory, Cygnus shall give notice thereof to
Yamanouchi, prior to concluding a binding agreement with the third-party. Such
notice shall set forth all monetary consideration to be received under the
proposal or offer from the third-party and the amount of Cygnus' Fully Burdened
Development Cost incurred to date and Cygnus' estimate of the Fully Burdened
Development Cost to complete development. Upon receipt of such notice,
Yamanouchi shall have * to make a "Qualifying Offer." A "Qualifying Offer"
shall be equal to * In the event Cygnus elects to distribute such previously
rejected or deemed rejected Major Improvement Product in the Territory itself or
through wholesalers, Cygnus shall give notice thereof to Yamanouchi, who shall
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have * to make a Qualifying Offer. A Qualifying Offer where Cygnus is to
distribute itself or through wholesalers must be equal to * In the event
Cygnus elects to distribute such previuosly rejected or deemed rejected Major
Improvement Product in the Territory itself or through wholesalers, Cygnus
shall give notice thereof to Yamanouchi who shall have * to make a Qualifying
Offer. A Qualifying Offer where Cygnus is to distribute itself or through
wholesalers must be equal to * In the event Yamanouchi shall fail to make a
Qualifying Offer fully meeting the requirements set forth in this section
within * of the receipt of notice by Yamanouchi, in the case of a proposal by
a third-party, Cygnus shall be free to conclude an agreement with respect to
such Major Improvement Product or, in the case of distribution itself or with
wholesalers, to commence such activity.
2.4. MEETINGS TO DISCUSS PRODUCT DEVELOPMENT. The parties shall
meet every six months, or more often by agreement of both parties, to discuss
product development. In such meetings, the parties may discuss the concepts of
new products, estimated budgets for the development thereof and the timing of
Launch.
2.5. RIGHT TO USE SUBDISTRIBUTORS. Yamanouchi may submit a
request to Cygnus that Yamanouchi be allowed to utilize Qualified
Subdistributors. Such request must be accompanied by a consent on the part of
the proposed Qualified Subdistributor to be bound by all of the terms of this
Agreement including the audit provisions set forth in Section 7. Such request
shall not become effective without Cygnus' prior written approval which shall
not be unreasonably withheld; PROVIDED, HOWEVER, that no approval is required in
the event that Yamanouchi designates an Affiliate Company as a Qualified
Subdistributor. Notwithstanding the giving of consent to a Qualified
Subdistributor hereunder, Yamanouchi shall remain directly and primarily
obligated to Cygnus with respect to Products received and sold by any Qualified
Subdistributor including all payments, forecasts and marketing obligations.
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2.6. SALES ONLY IN THE TERRITORY. Yamanouchi shall market, sell
and distribute the Products only to persons or entities taking delivery in and
located in the Territory.
3. PRODUCT REGISTRATION.
3.1. Yamanouchi shall be responsible, at its sole cost and
expense, for * Yamanouchi shall use its reasonable efforts to make its
Submission in each country in the Territory on the Initial Territory Glucose
Monitoring Product or any Improved Glucose Monitoring Product included in this
Agreement as soon as reasonably possible; PROVIDED, HOWEVER, in the case of the
Initial Territory Glucose Monitoring Product, Yamanouchi shall use reasonable
efforts to make its Submission no later than an estimated target date set in
notice to Cygnus to be provided by Yamanouchi within * of execution of this
Agreement, which date shall be established by Yamanouchi after its consultation
with regulatory agencies in the Territory. To the extent that approval must be
obtained or application made for any governmental or insurance reimbursement
plan, Yamanouchi shall use reasonable efforts to obtain such reimbursement rate
in an amount designed to maximize Total Net Sales, and in no event less than the
amount established for existing glucose monitoring products. Yamanouchi shall
promptly submit copies of all documentation related to each application and
registration (including regulatory approvals) to Cygnus for its use and review.
3.2. Cygnus shall cooperate with Yamanouchi in Yamanouchi's
Submission in the countries within the Territory by providing such materials as
may otherwise be in existence and as are necessary to Yamanouchi's Submission.
*
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3.3. In the event that Cygnus believes Yamanouchi is not using
reasonable efforts to perform any of its responsibilities with respect to
registration or approval as set forth in Section 3.1 above and that such failure
has or may cause a delay with respect to Product Launch or regulatory approval
of such Product or any Product relating to such Proprietary Information, Cygnus
shall provide written notice thereof to Yamanouchi. Upon the giving of such
written notice, Yamanouchi shall have * to explain to Cygnus in writing the
cause of the delay. If the delay is caused by Yamanouchi's failure to use
reasonable efforts to perform any of the foregoing responsibilities, then:
(i) Cygnus shall be free to terminate Yamanouchi's rights to such Product upon *
prior written notice, and Cygnus shall be free to fully exploit without approval
or accounting, all of the information (including but not limited to the Market
Research) developed by or supplied to Cygnus hereunder with respect to such
terminated Product, and (ii) Yamanouchi shall for the immediately following *
from the date the termination becomes effective refrain from developing,
acquiring, marketing or working with others to develop or market any Non-
Invasive products intended or designed to compete, or that would be competitive
with the terminated Products.
3.4. Yamanouchi shall use reasonable efforts to launch any Product
* after receiving regulatory approval to commercially sell such Product and, if
applicable, obtaining the governmental or insurance reimbursement for the
Product. In the event Yamanouchi fails to reasonably launch any Product within
such * period, Cygnus, at its sole option and discretion, in addition to any
other remedy hereunder, may elect to terminate the distributorship rights for
such a Product and for such a country upon * written notice to Yamanouchi. Such
termination shall occur without reimbursement for
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[*CONFIDENTIAL TREATMENT REQUESTED*]
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any costs or expenses incurred by Yamanouchi or refund of payments made. Any
payments accrued as of the date of such termination shall remain payable to
Cygnus according to the terms of this Agreement.
4. OBLIGATIONS OF CYGNUS.
4.1. REGULATORY SUBMISSIONS. Cygnus shall be solely responsible
for any U.S. Regulatory Submission required for each Product. Cygnus shall keep
Yamanouchi reasonably informed of the progress with respect to the
U.S. Regulatory Submission. With respect to the Initial Glucose Monitoring
Product, Cygnus further agrees as soon as reasonably practicable to provide
Yamanouchi with necessary information to enable Yamanouchi to evaluate Cygnus'
U.S. Submission. If Cygnus has not otherwise reported during a calendar
quarter, Yamanouchi may make * for information during the * and Cygnus shall
reply concerning the U.S. Regulatory Submission.
4.2. SUPPLY OF PRODUCT. Cygnus, within the limitations contained
in this Section 4, agrees to supply to Yamanouchi such quantities of each
Product as Yamanouchi has ordered in conformity with the provisions of this
Agreement.
4.3. QUANTITY: FORECASTS.
4.3.1. Yamanouchi shall deliver to Cygnus (i) at least * the
First Commercial Sale of such Product is projected to occur, a forecast of
Yamanouchi's quantity requirements for such Product for the calendar quarter in
which the First Commercial Sale of such Product is projected to occur and
(ii) at least * prior to the calendar * in which the First Commercial Sale
of such Product is projected to occur, Yamanouchi's firm order including
Delivery Dates for such Product * (which shall be subject to agreement by
Cygnus, which agreement shall not be unreasonably withheld)
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and a good faith forecast of its quantity requirements for such Product for the
next * provided that such forecasts shall not materially deviate from the
forecast of sales provided in the Long Range Forecast. Thereafter, Yamanouchi
shall deliver to Cygnus at or prior to the end of each * Yamanouchi's firm
order, including Delivery Dates for such Product for the * following * and a
forecast of its quantity requirements for such Product for the next * provided
that no forecasts or orders need be given for any period after the term of this
Agreement. If a required forecast or order * is not timely submitted for a
Product, the immediately preceding forecast for that * shall become the
new forecast or order; if there is no preceding forecast for a *, the
forecast or order for the immediately preceding * shall become the
forecast or order.
4.3.2. For each * forecast of each Product, the quantity of
any Product forecasted for delivery in the first of the * forecasted shall be
not less than * or more than * of the most recent previous forecast for such *.
4.3.3. The total quantity of each Product ordered by
Yamanouchi for delivery in any calendar * for which an order is required may not
be less than * of Yamanouchi's most recent forecast of its requirements for such
Product for such *. In addition, Cygnus will not be obligated to supply more
than * of Yamanouchi's most recent forecast of its requirements for such Product
for such *. If a firm order for * of Yamanouchi's most recent forecast of its
requirements for such Product for such calendar * Cygnus and Yamanouchi will
discuss in good faith the additional quantity which Cygnus will be able to
supply consistent with its other obligations, and Yamanouchi will adjust its
order accordingly.
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4.3.4. Yamanouchi's forecasts and orders shall reflect its
good faith expectations of customer demand and Yamanouchi shall act in a
commercially reasonable manner to schedule orders to avoid creating production
capacity problems for Cygnus.
4.4. DELIVERY. All Products delivered by Cygnus to Yamanouchi
shall be * Cygnus shall use reasonable commercial efforts to deliver Product on
the applicable Delivery Dates as set forth in each firm order and shall arrange
*
4.5. ACCEPTANCE AND REJECTION OF PRODUCT IN CASE OF NONCONFORMITY.
No less than * prior to the date of the First Commercial Sale of the Initial
Glucose Monitoring Products, * shall agree on the acceptance criteria and
procedures and upon the manner for return of the Product rejected thereunder.
The parties have already agreed that shipped Product shall have * of its
official life remaining * upon receipt by Yamanouchi.
4.6. INABILITY TO SUPPLY. In the event that Cygnus expects an
inability to supply any Product continuously for more than * due to force
majeure or other reasons, Cygnus shall immediately notify Yamanouchi, and both
parties hereto shall consult with each other with respect to responses. In the
event that both parties agree upon the manufacture of the Product by Yamanouchi,
Cygnus shall cooperate therefor.
4.7. SAMPLE PRODUCTS. Cygnus shall provide sample Product to
Yamanouchi at *
4.8. TECHNICAL SUPPORT. Cygnus shall provide *
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4.9. NO DUTY TO DELIVER IF PRODUCT TERMINATED. Cygnus shall be
under no obligation to deliver any Product if Yamanouchi's rights to such
Product shall have been terminated for any reason.
5. OBLIGATIONS OF YAMANOUCHI.
5.1. GENERAL OBLIGATIONS OF YAMANOUCHI. Subject to the terms and
conditions of this Agreement, Yamanouchi shall use reasonable efforts to perform
from time to time the Market Research necessary to ensure the successful
commercialization of the Products in the Territory. Yamanouchi shall *
5.2. KOREA. Yamanouchi shall have until * to give written notice
to Cygnus stating its intention to distribute Product in Korea. Prior to * the
parties shall meet to discuss any modifications required for the Product to
comply with or meet governmental regulations or market customs for Korea and the
costs thereof. If Yamanouchi fails to give timely written notice, it shall be
deemed to have relinquished all rights under this Agreement to Korea and Korea
shall immediately cease to be a Territory hereunder. If Yamanouchi decides to
distribute Product in Korea, it must proceed under the terms and conditions of
this Agreement. Yamanouchi shall then employ reasonable efforts to submit an
application for registration or approval of the Product in Korea and,
thereafter, to launch the Products as soon as reasonably practicable. The
parties hereby agree to discuss any changes to this Agreement which are
appropriate for the country. All such changes shall be in the form of a written
request if Yamanouchi intends to distribute Product in Korea.
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5.3. LONG RANGE FORECASTS. With respect to each country within
the Territory, at least * prior to the beginning of the second Contract Year,
Yamanouchi shall supply Cygnus with *
5.4. ADJUSTMENTS OF LONG RANGE FORECAST, QUANTITY FORECAST AND
FIRM ORDER. In the event that (i) the timing of the governmental approval and,
if any, the listing on the governmental reimbursement plan are different from
the good faith estimate by Yamanouchi, (ii) market conditions materially change
due to the changes in laws or governmental relations or due to the launch of
competitive products, or (iii) any government in any country in the Territory
orders or instructs the discontinuation of or any other restriction on the sales
of any Product, due to the discovery of unexpected defects in the Products, both
parties hereto shall consult with each other and, if necessary, shall adjust the
Long Range Forecast fixed pursuant to Section 5.3, and the quantity forecasts
and firm orders as fixed under Section 4.3.
5.5. NON-ACHIEVEMENT OF LONG RANGE FORECAST. At or following the
end of * in the event that Yamanouchi's annual Total Net Sales in any country in
the Territory fall below * of the Long Range Forecast for such country in the
Territory for that year, the parties hereto shall have a meeting to discuss in
good faith how to increase sales.
5.6. MARKETING OBLIGATIONS. Yamanouchi, for itself and for its
Qualified Subdistributors approved pursuant to Section 2.4, agrees to conduct
reasonable sales and promotion activities. In addition, Yamanouchi, for itself
and for its Qualified Subdistributors represents, warrants and agrees:
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(i) to use reasonable efforts to successfully market, sell
and support the Products throughout the Territory on a continuing basis and
to comply with good business practices and all laws and regulations
relevant to the regulatory authorities in each country in the Territory
where any Product is sold;
(ii) to use reasonable efforts to substantially and
continuously commercially distribute and sell each of the Products after
the first regulatory approval to do so and, if any, the first listing on
the governmental reimbursement plan for each such Product or, where no
regulatory approval or listing is required, after the First Commercial Sale
of such Products;
(iii) to use reasonable efforts to achieve the Long Range
Forecasts set forth in Section 5.3;
(iv) to keep Cygnus informed as to any problems encountered
with any of the Products and any resolutions arrived at for those problems,
and to communicate promptly to Cygnus any and all modifications, design
changes or improvements of any of the Products suggested by any customer,
employee or agent;
(v) not to make any claims, representations or warrants
directly or indirectly to any third party about the Products except as
expressly agreed upon by the parties in writing prior thereto; PROVIDED,
HOWEVER, that Yamanouchi may conduct promotional activities to consumers
based upon information and material provided by Cygnus to Yamanouchi or
those acquired by Yamanouchi within the Territory;
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(vi) to maintain and provide Cygnus with all sales and
other information which is useful in monitoring sales progress on a
country-by-country basis and with which Yamanouchi is able to provide to
Cygnus;
(vii) to the extent that Yamanouchi obtains or generates
such records, to keep for * year period after termination of this Agreement
records of all Product sales and customers, including complaints or reports
sufficient to adequately administer a recall of any of the Products and to
fully cooperate in any decision to recall, retrieve and/or replace such
Product.
5.7. PURCHASING REQUIREMENTS. Subject to the terms and conditions
of this Agreement, Yamanouchi, for itself and for its Qualified Subdistributors,
agrees to purchase all of its Product requirements from Cygnus.
6. PAYMENTS.
6.1. MILESTONE PAYMENTS. Yamanouchi shall pay the amounts set
forth in Schedule A in accordance with the milestone dates set forth therein. *
6.2. PRODUCT RELATED PAYMENTS. In addition to the payments
specified in Section 6.1 above, Yamanouchi shall pay Cygnus the following:
6.2.1. PURCHASE PRICE. Yamanouchi shall be obligated to pay
Cygnus *
6.2.2. ESTIMATED PURCHASE PRICE. Yamanouchi shall pay and
Cygnus shall receive from Yamanouchi, *
6.2.3. PAYMENT REPORT. Within * days following the end of
each Calculation Period, Yamanouchi shall prepare a report in accordance with
GAAP (the "Payment Report") showing the following (i) the calculation of Total
Net Sales in *
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(ii) the number of units of each Product sold on a country-by-country basis
during the Calculation Period, (iii) the aggregate Estimated Purchase Price paid
for all Products sold in such period * and (v) the calculation of the Estimated
Purchase Payment for the next Calculation Period.
6.2.4. RECONCILIATION. For each Calculation Period, in the
event that * of the Total Net Sales in local currencies exceeds the aggregate
Estimated Purchase Price paid for all Products sold during such period
(converted to local currencies at the exchange rate(s) in effect on the date(s)
each Estimated Purchase Price payment was made, and accounted on a first-in,
first-out basis), Yamanouchi shall *
6.2.5. PRICE DISCUSSION. In the event that * of Total Net
Sales for a Calculation Period falls below * of the aggregate Manufacturing Cost
of the Products sold during such period, then the parties hereto shall promptly
meet to discuss in good faith the willingness of the respective parties to *
6.3. CURRENCY CONVERSION. Conversion from foreign currency to
U.S. Dollars will be determined as of an applicable date based on the rate at
which Japanese yen or Korean won, as applicable, may be purchased with U.S.
Dollars at *
6.4. PAYMENT TERMS. All payments under this Agreement are *
unless otherwise expressly provided herein. All such payments to Cygnus shall
be made in U.S. dollars in the United States or other country designated by
Cygnus. Late payments shall bear a late fee at the lower of: * or (ii) the
maximum rate allowed by law.
6.5. TAXES AND DUTIES. All payments to Cygnus under this
Agreement are * In the event of any such withholding, the parties agree to
confer regarding other measures to minimize such withholding.
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7. RECORDS AND AUDIT RIGHTS.
7.1. Among other things, Yamanouchi and any Qualified
Subdistributor shall keep complete and accurate records reflecting all
information necessary or useful in verifying the accuracy of each Payment
Report. Cygnus shall have the right to hire an independent certified public
accountant to inspect all the above required records (who shall agree in writing
to keep all information confidential except as needed to disclose any discovered
discrepancies); PROVIDED, such audit: (i) is conducted during normal business
hours, (ii) is conducted * (unless a discrepancy is discovered in favor of the
auditing party), (iii) * shall bear the full cost and expense of such audit, *
Regardless of the amount of discrepancy discovered, all discrepancies (and
interest thereon) shall be immediately due and payable. In addition, Cygnus
shall at its own expense have the right, at its option, upon reasonable notice
to Yamanouchi, during normal business hours and * to inspect any promotional
materials then in use by Yamanouchi or any sales and/or marketing practices of
Yamanouchi.
7.2. Among other things, Cygnus shall keep complete and accurate
records reflecting all information necessary or useful in verifying the accuracy
of each Fully Burdened Development Cost and Manufacturing Cost. Yamanouchi
shall have the right to hire an independent certified public accountant to
inspect all the above required records (who shall agree in writing to keep all
information confidential except as needed to disclose any discovered
discrepancies); PROVIDED, such audit: (i) is conducted during normal business
hours, (ii) is conducted * (unless a discrepancy is discovered in favor of the
auditing party), (iii) * shall bear the full cost and expense of such audit, *
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Regardless of the amount of discrepancy discovered, all discrepancies (and
interest thereon) shall be immediately due and payable.
8. NON-COMPETITION.
8.1. Except as provided below, during the term hereof Yamanouchi
shall be prohibited from each of the following acts with respect to any form of
Non-Invasive Product:
(i) directly or indirectly manufacturing, distributing or
offering for sale any Non-Invasive Products, other than the Products
contemplated in this Agreement, within the Territory; and
(ii) contracting with or forming a venture with any third
party for the purpose of manufacturing, selling, promoting, distributing or
otherwise offering any Non-Invasive Products, other than the Products
contemplated in this Agreement, for sale within the Territory, or assisting
in any of the foregoing acts.
9. ADVERSE REACTION. Each party hereto shall immediately notify the
other party of any adverse or unexpected reaction or results or any actual or
potential government action relevant to any of the Products. If Cygnus requests
in writing for good cause (e.g., safety reasons), both parties hereto shall in
good faith discuss the necessary counter-measures, including but not limited to
suspension of distribution of any of the Products. In the event that the
governmental agency in the Territory orders or instructs, or both parties agree
upon, the recall of any Product, the costs for such recall shall be borne by *
10. EXPORT LAW. Both parties hereto shall, in cooperation with each
other, comply with all export laws and restrictions and regulations of the
Department of
23.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
Commerce or any other United States or foreign agency or authority, and agree
not to export, or allow the export or reexport of any Cygnus Proprietary Rights
or Products or any direct product thereof in violation of any such restrictions,
laws or regulations, or, without obtaining all necessary approvals and
authorizations therefrom. Yamanouchi shall assist Cygnus in obtaining any
necessary licenses and/or exemptions with respect to the export from the U.S. of
all material or items, including but not limited to, any material or items
deliverable by Cygnus, to any location and shall demonstrate to Cygnus
compliance with all applicable laws and regulations prior to delivery thereof by
Cygnus.
11. TERM AND TERMINATION.
11.1. TERM. Unless terminated earlier as provided below or
elsewhere in this Agreement, with respect to each Product this Agreement shall
have a term extending from the Effective Date to the later of: (i) the
expiration of the last patent relating to the Products for the use or sale of
such Product in any country in the Territory or (ii) fifteen (15) years from the
date of the First Commercial Sale of such Product; PROVIDED, HOWEVER that unless
either party gives the other notice of termination twelve (12) months prior to
the expiration date of the original term hereof, this Agreement shall be
automatically extended for three (3) years. Thereafter, this Agreement shall be
further extended for an additional three (3) years unless either party gives the
other party notice of termination twelve (12) months prior to the expiration
date of such extension.
11.2. TERMINATION BY EITHER PARTY FOR CAUSE. This Agreement
(including any rights to any Product hereunder) may be terminated by a party for
cause immediately upon the occurrence of any of the following events:
24.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
(i) if the other party ceases to do business, or otherwise
terminates its business operations;
(ii) if the other party shall fail to promptly secure or
renew any license, registration, permit, authorization or approval
necessary for the conduct of its business in the manner contemplated by
this Agreement or in the Territory, or if any such license, registration,
permit, authorization or approval is revoked or suspended and not
reinstated within sixty (60) days;
(iii) if the other party materially breaches any provision
of this Agreement and fails to cure such breach within * in the case of a
failure to pay as provided for in Sections 2.2, 2.3 and 6, and immediately
in the case of a breach of Section 15) of notice describing the breach; or
(iv) if the other party shall seek protection under any
bankruptcy, receivership, trust deed, creditors arrangement, composition or
comparable proceeding, or if any such proceeding is instituted against the
other (and not dismissed within *
11.3. TERMINATION FOR UNSATISFACTORY RESULTS. In the event either
party determines that it is receiving an unsatisfactory financial return under
the Agreement, it may notify the other in writing that it desires a meeting to
discuss its dissatisfaction. Upon the giving of such notice, the parties shall
meet promptly but in no event later than * days after giving of notice. If
there is no agreement on a solution within * days of the commencement of
negotiations or the deadline for commencing negotiations, the party giving
notice may elect, in its sole discretion, to give written notice of termination.
In the case of Cygnus, it shall be deemed to receive a satisfactory financial
return so long
25.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
as the aggregate Purchase Price for all Products sold during the most recent
Calculation Period is * of the aggregate applicable Manufacturing Cost for the
Product Sold during such Period. Notice of termination shall become effective *
of the notice. * following the date of notice of such termination under this
Section 11.3, if Cygnus offers to a distributor in the Territory selling to the
same tier of customers as Yamanouchi has sold prior to termination Products
covered by the Agreement at a price equal to or less than the Purchase Price
being paid by Yamanouchi during the Calculation Period immediately preceding the
date of notice of such termination, Yamanouchi shall have a * right of first
refusal on the terms offered to such other distributor. If Yamanouchi has given
notice of termination pursuant to this Section 11.3, then it is prohibited from
selling any Non-Invasive Products in the Territory for * from the effective date
of the termination.
11.4. EFFECT OF TERMINATION; SURVIVABILITY OF CERTAIN PROVISIONS.
The following provisions shall survive the termination of this Agreement:
(i) the last sentence of Section 3.4, (ii) Sections 5.6(iv) and (vii),
(iii) payment obligations accrued or earned under Section 6, (iv) Section 12.1,
(v) Section 14.1, (vi) Section 15, (vii) Sections 16.2 and 16.3,
(viii) Section 17, and (ix) Section 18. Each party shall promptly return all
Proprietary Information of the other (and all copies and abstracts thereof) that
it is not entitled to use under the surviving terms of this Agreement. Upon
termination, Yamanouchi shall promptly deliver all of its customer lists related
to the Product to Cygnus and shall promptly transfer to Cygnus all Product
regulatory submissions, regulatory approvals and clinical data used to support
any regulatory approval. Termination of this Agreement with respect to a
particular Product in a particular
26.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
country shall have the same effect as termination of this entire Agreement,
but with respect to the applicable Product and country only.
11.5. TERMINATION NOT SOLE REMEDY. Termination is not the sole
remedy under this Agreement and, whether or not termination is effected, all
other remedies shall remain available.
12. PRODUCT WARRANTY AND WARRANTY DISCLAIMERS.
12.1. CYGNUS WARRANTY. Cygnus warrants only to Yamanouchi that the
Products, when shipped to Yamanouchi by Cygnus, from the time of delivery to
Yamanouchi to the end of the official life of the Products (as established by
Cygnus), shall conform in all material respects to the applicable Product
specifications as then in effect. Cygnus shall establish the terms of the
warranty that may be given to end-users, consistent with the Product
specifications. Yamanouchi shall write packaging, packaging inserts or other
materials to be given to end-users which refer or relate to any end-user
warranty consistent with the terms established by Cygnus. In such event,
Yamanouchi may distribute such consistent written warranty materials with the
Products to end-users. In the event that Product delivered to a customer or end
user is found, prior to the end of the official life of the Product (as
established by Cygnus), not to conform in a material respect to warranty,
established as provided above and Yamanouchi may replace the non-conforming
Product from Yamanouchi's inventory. Upon notice of such replacement from
Yamanouchi's inventory, Cygnus shall either refund to Yamanouchi the Purchase
Price paid by Yamanouchi for the replacement Product or ship replacement Product
to Yamanouchi. Such warranty does not apply to units that have been mishandled,
mistreated or used or maintained or stored other than in conformity
27.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
with Cygnus' instructions. YAMANOUCHI'S SOLE AND EXCLUSIVE REMEDY FOR ANY
BREACH OF THE FOREGOING WARRANTY SHALL BE REPLACEMENT BY CYGNUS OF THE NON-
CONFORMING GOODS, OR, AT CYGNUS' OPTION, REFUND TO YAMANOUCHI OF THE FULL
PURCHASE PRICE PAID BY YAMANOUCHI. EXCEPT FOR THE FOREGOING WARRANTIES, CYGNUS
DOES NOT WARRANT THE MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OF THE
PRODUCTS OR PERFORMANCE OF THE PRODUCTS OR NONINFRINGEMENT BY THE PRODUCTS; DOES
NOT MAKE ANY WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO PRODUCTS,
SPECIFICATIONS, SUPPORT, SERVICE OR ANYTHING ELSE AND DOES NOT MAKE ANY WARRANTY
TO YAMANOUCHI'S CUSTOMERS OR AGENTS. CYGNUS HAS NOT AUTHORIZED ANYONE TO MAKE
ANY REPRESENTATION OR WARRANTY OTHER THAN AS PROVIDED ABOVE.
13. INSURANCE.
13.1. During the Term, as defined in Section 11 above, and if
coverage is on a claims made basis, for a period after the Term reasonably
calculated to cover the legal time for which a claim for injury might be brought
for Product sold during the Term, the parties will jointly purchase and maintain
in full force and effect, with a responsible insurance carrier, a comprehensive
product liability insurance policy naming both parties as insureds. Details
with respect to such insurance, including the sharing of premium, shall be
agreed between the parties no later than six months prior to the First
Commercial Sale of the Initial Glucose Monitoring Product.
28.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
14. OWNERSHIP.
14.1. OWNERSHIP. As between the parties and with respect to any
inventions conceived and reduced to practice during the Term hereof or within *
each party will be the sole owner of the intellectual property rights in any
invention of which only its employees and its third party contractors are
inventors and each party will jointly own the intellectual property rights in
all inventions of which both parties employees or contractors are joint
inventors, except that intellectual property rights with respect to inventions
relating to the Products, iontophoresis, or reverse iontophoresis regardless of
the identity of the inventor, will be solely owned by Cygnus. Nothing herein
shall be interpreted or construed to grant to Yamanouchi any rights or interest
in the Proprietary Rights (other than the distributorship rights granted
hereunder) owned by Cygnus or to which Cygnus is otherwise entitled under this
Agreement or otherwise. Any assignments necessary to accomplish the foregoing
are hereby made and each party will execute such further documents as may be
reasonably requested by the other with respect thereto. Jointly owned
inventions may be exploited and non-exclusively licensed to third parties by
Cygnus without accounting to or further approval of Yamanouchi. Neither party
will be obligated under this Agreement to obtain intellectual property licenses
from third parties.
14.2. USE OF NON-CLINICAL AND CLINICAL DATA. Each party hereto
shall provide the other party with a copy of all data of any nonclinical and
clinical studies of any Product in its possession for which disclosure is not
otherwise barred by contract and shall permit the other to use it for Submission
or promotion of the Products during the term hereof.
29.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
15. CONFIDENTIALITY. Each party agrees that all proprietary information
it obtains from the other ("Proprietary Information") is the confidential
property of the disclosing party. Except as expressly allowed in this Agreement
and except that Yamanouchi and Cygnus may make disclosures in connection with
regulatory matters (provided that the parties shall confer in advance and
mutually agree on the extent of such disclosures), the receiving party shall
hold in confidence and not use or disclose any Proprietary Information of the
disclosing party and shall similarly bind its employees in writing. The
receiving party shall not be obligated under this Section 15 beyond * after the
termination of this Agreement or (b) with respect to information the receiving
party can document:
(i) is or has become readily publicly available through no
fault of the receiving party or its employees or agents; or
(ii) is received from a third party lawfully in possession
of such information and lawfully empowered to disclose such information and
provided the receiving party abides by all restrictions imposed by such
third party; or
(iii) was rightfully in the possession of the receiving
party prior to its disclosure by the other party provided the receiving
party abides by all restrictions imposed on its possession of such
information.
16. TRADEMARKS.
16.1. TRADEMARK REGISTRATION. Cygnus represents that it has
registered the trademarks "Glucowatch" and "Glucopad" in the U.S. Cygnus
agrees to maintain such registered trademarks. In the event the foregoing marks
are not available in the Territory or, upon the advice of Yamanouchi, Cygnus
deems it inadvisable to use either
30.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
of those marks in a country in the Territory, Cygnus may make additional
registrations. Cygnus shall be the sole owner of all such trademarks. In the
event Cygnus elects to use a previously registered trademark of Yamanouchi, the
parties shall negotiate an agreement for the transfer of ownership of such mark
to Cygnus and the amount of consideration to be paid to Yamanouchi for such
transfer. For each Product in each country, Cygnus may specify in writing which
of its trademarks are to be used for the Product. Upon receiving such
specification, Yamanouchi shall employ the designated trademark on the product,
product packaging and all promotional materials. For each such use, such
designated mark shall be the most prominent mark utilized for the article,
package or promotional material. Cygnus hereby grants Yamanouchi an exclusive
license to use such trademarks in the Territory in connection with the sale of
the Products. Yamanouchi shall submit exemplars of such proposed form of use,
including any Yamanouchi marks to be employed, to Cygnus for Cygnus' review and
approval and shall be deemed to have granted Cygnus a nonexclusive limited
license during the term of this Agreement as to any country in the Territory for
use in furtherance of this Agreement.
16.2. NO RIGHTS IN TRADEMARKS, TRADE NAMES, LOGOS OR DESIGNATIONS.
Yamanouchi acknowledges that it has paid no consideration for the use of Cygnus'
trademarks, trade names, logos and designations, and nothing contained in this
Agreement shall give Yamanouchi any right, title or interest in or to any of
such trademarks, trade names, logos or designations. Yamanouchi acknowledges
that Cygnus owns and retains all proprietary rights in all of its trademarks,
trade names, logos and designations; and agrees that it will not at any time
during or after the Term assert or
31.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
claim any interest or do anything that might adversely affect the validity or
enforceability of any trademark, trade names, logo or designation belonging to
Cygnus. Yamanouchi agrees that it will not affix any Cygnus mark to any product
other than a Product.
16.3. AFTER TERMINATION OR EXPIRATION. Upon expiration or
termination of this Agreement (whether in whole or as to one or more countries),
each party will forthwith cease (in the terminated country or countries only, in
the case of a partial termination) all display, advertising and use of the
trademark, trade names, logos and designations of the other party and will not
thereafter use, advertise or display any name, mark or logo that is, or any part
of which is, similar to or confusing with any such designation associated with
any Product, except to the extent necessary to sell any Products remaining in
inventory after termination of this Agreement, not to exceed *,
provided that the use of such trademarks, trade names, logos and designations is
otherwise in accordance with this Agreement.
17. PATENT AND TRADEMARK INDEMNIFICATION.
17.1. CYGNUS' PATENT AND COPYRIGHT INDEMNITY.
17.1.1. If Yamanouchi receives a claim that any of the
Products infringe upon a valid patent, copyright, or any other intellectual
property, Yamanouchi will notify Cygnus promptly in writing and give Cygnus all
necessary information and assistance. Yamanouchi hereby grants Cygnus the
exclusive authority to evaluate, defend and settle any such claim as it deems
appropriate; Cygnus, at its own expense and option, may then (i) settle or
defend against such claim, (ii) procure for Yamanouchi the right to such
Products, (iii) replace or modify the Products to avoid infringement,
(iv) recall the Product from any country in the Territory, or (v) do any
combination of the foregoing;
32.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
PROVIDED, HOWEVER that Cygnus hereby agrees to use reasonable efforts to
minimize the impact of its actions on Yamanouchi's ability to market, sell and
distribute the Products. Provided such timely notice has been given by
Yamanouchi, should any court of competent jurisdiction hold such Product to be
infringing, Cygnus will pay any final judgment against Yamanouchi and expenses,
including attorneys fees reasonably incurred by Yamanouchi, provided such
expenses were consented to, in advance, by Cygnus arising from such infringement
and, if the use of such Product is enjoined, Cygnus shall take the actions
described in (ii) above. If such option is not available, Cygnus may request
Yamanouchi to recall the Product from such country within the Territory, and
shall refund the purchase price paid under Section 6 less a reasonable amount of
depreciation and, if any, the cost of recall.
17.1.2. The indemnity in Section 17.1 will not apply to any
claim arising out of compliance with Yamanouchi's specifications, or arising out
of the incorporation of any other hardware or software in the Products, the
manner in which the Products are combined with each other or any other products,
or from a modification of the Products alter delivery by Cygnus. Cygnus'
obligations hereunder shall not apply to any infringement occurring after
Yamanouchi has received notice alleging the infringement unless Cygnus has given
Yamanouchi written permission for such continuing infringement.
17.1.3. Notwithstanding any other provisions hereof, Cygnus
shall not be liable for any claim based on Yamanouchi's use of the Products as
shipped after Cygnus has informed Yamanouchi of modifications or changes in the
Products required
33.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
to avoid such claims and offered to implement those modifications or changes, if
such claim would have been avoided by implementation of Cygnus' suggestions.
17.1.4. THE FOREGOING IS GIVEN TO YAMANOUCHI SOLELY FOR ITS
BENEFIT AND IN LIEU OF, AND CYGNUS DISCLAIMS, ALL OTHER WARRANTIES OF
NONINFRINGEMENT WITH RESPECT TO THE PRODUCTS.
17.2. LIMITATION OF INDEMNITY. The indemnity provisions in this
Section 17.2 shall not apply (i) if the claim is found to be based upon the
recklessness or willful action or inaction of the party seeking indemnification
(the "Indemnified Party"), or (ii) if the Indemnified Party fails to give the
party from whom indemnification is sought (the "Indemnifying Party") prompt
notice of any claim it receives and such failure materially prejudices the
Indemnifying Party, or (iii) unless the Indemnifying Party is given the
opportunity to approve in writing any settlement, which approval shall not be
unreasonably withheld.
17.3. SETTLEMENT. In no event shall the indemnified party be
entitled to settle any of the above mentioned claims without the consent of the
indemnifying party.
18. LIMITED LIABILITY. NOTWITHSTANDING ANYTHING ELSE IN THIS AGREEMENT
OR OTHERWISE, CYGNUS SHALL NOT BE LIABLE WITH RESPECT TO ANY SUBJECT MATTER OF
THIS AGREEMENT UNDER ANY CONTRACT, NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL
OR EQUITABLE THEORY, FOR ANY AMOUNTS IN EXCESS OF * OF THE AGGREGATE OF THE
AMOUNTS ACTUALLY RECEIVED BY CYGNUS
34.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
HEREUNDER (INCLUDING THE PAYMENTS RECEIVED PURSUANT TO SECTIONS 2.2, 2.3 AND 6).
19. INFRINGEMENT BY THIRD PARTIES. Cygnus shall have the sole right and
option, at its sole and absolute discretion, to file and maintain lawsuits in
its own name for infringement by third parties of any Cygnus' patents,
trademarks or other Proprietary Rights and occurring in the Territory licensed
hereunder. Yamanouchi shall, at the request of Cygnus, give Cygnus all
reasonable assistance and cooperation in any such proceedings. Notwithstanding
any of Cygnus' elections hereunder, or the results or outcomes thereof,
Yamanouchi's obligation to make payments to Cygnus under this Agreement shall be
unaffected. In the event that Yamanouchi's market share of the Products is
adversely affected by such third party infringement, Cygnus shall not be
obligated to offset any payments made hereunder. Notwithstanding any decision
on the part of Cygnus to forego bringing or continuing to prosecute any suit,
claim or litigation, Yamanouchi shall not have the right to bring, file or
litigate any claim for infringement by third parties of any Proprietary Rights
of Cygnus occurring in the Territory licensed hereunder.
20. MANUFACTURING IN THE EVENT OF BANKRUPTCY. In the event (i) Cygnus
files, by its own initiative, a petition in bankruptcy or is placed in a
bankruptcy proceeding and (ii) is substantially unable to supply Product ordered
in accord with Section 4 for a commercially substantial period of time,
Yamanouchi may give notice of intent to manufacture. If Cygnus is unable within
* of receipt of such notice to offer reasonable assurances of its ability to
resume supply in conformity with Section 4, Yamanouchi shall be granted a
license to make or have made Product under this Agreement. With respect
35.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
to Products manufactured under such license, Yamanouchi shall be required to
make payments * of Total Net Sales for all the Products sold less the
aggregate Yamanouchi Substitute Manufacturing Cost for such Products;
PROVIDED, HOWEVER, such payment shall in no event be less than * of the
aggregate Yamanouchi Substitute Manufacturing Cost for the Products. * The
foregoing license shall terminate * days after the giving of notice by Cygnus
(or on behalf of Cygnus) that it is able to resume supply in accordance with
this Agreement.
21. GENERAL.
21.1. AMENDMENT AND WAIVER. Except as otherwise expressly provided
herein, any provision of this Agreement may be amended and the observance of any
provision of this Agreement may be waived (either generally or in any particular
instance and either retroactively or prospectively) only with the written
consent of the parties. However, it is the intention of the parties that this
Agreement be controlling over additional or different terms of any purchase
order, confirmation, invoice or similar document, even if accepted in writing by
both parties, and that waivers and amendments shall be effective only if made by
non-pre-printed agreements clearly understood by both parties to be an amendment
or waiver. The failure of either party to enforce its rights under this
Agreement at any time for any period shall not be construed as a waiver of such
rights.
21.2. GOVERNING LAW AND LEGAL ACTIONS. This Agreement shall be
interpreted and enforced in accordance with the laws of the State of California
and the
36.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
United States of America without regard to conflicts of law provisions thereof
and without regard to the United Nations Convention on Contracts for the
International Sale of Goods. The sole jurisdiction and venue for actions
related to the subject matter hereof shall be the California state or U.S.
federal courts having within their jurisdiction the location of Cygnus'
principal place of business. Both parties consent to the jurisdiction of such
courts. In any action or proceeding to enforce rights under this Agreement, the
prevailing party shall be entitled to recover costs and attorneys' fees.
21.3. ARBITRATION. Any dispute arising out of Sections 2, 3, 5, 6
or 11 of this Agreement will be settled by binding arbitration (which
arbitration shall be binding for purposes of this Agreement only) as follows:
(a) plaintiff shall file an Opening Brief with the Judicial Arbitration and
Mediation Service ("JAMS"), with a copy to defendant, which brief shall set
forth the basis for such claims, (b) either party may request a list of five (5)
independent retired judge arbitrators from JAMS in San Francisco) thereafter,
within ten (10) days of the receipt of such list, each may strike two (2) names
from the list; failure to timely submit notice of the striking of names shall be
deemed acceptance of the entire list, (c) if more than one name remains, the
arbitrator shall be selected from the remaining names by JAMS, (d) defendant
will have thirty (30) days after receipt of plaintiff's Opening Brief to submit
its case in writing to the arbitrator, (e) the arbitrator shall have * the
conclusion of the hearing, in which to render a decision, and (g) such
arbitration shall be informal and need not conform to JAMS or other established
procedures. Unless otherwise agreed to by the parties, arbitration will take
place in San Francisco, California.
37.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
21.4. HEADINGS. Headings and captions are for convenience only and
are not to be used in the interpretation of this Agreement.
21.5. NOTICES. Notices under this Agreement shall be sufficient
only if in writing and personally delivered, delivered by a major commercial
rapid delivery courier service or mailed by certified or registered mail, return
receipt requested to a party at its addresses first set forth herein or as
amended by notice pursuant to this Section 20.5, to the attention of the
President in the case of Cygnus and to the attention of the President in the
case of Yamanouchi. If not received sooner, notice by mail shall be deemed
received * after deposit in the U.S. or Japan mails.
21.6. ENTIRE AGREEMENT. This Agreement supersedes all proposals,
oral or written, all negotiations, conversations, or discussions between or
among parties relating to the subject matter of this Agreement and all past
dealing or industry custom.
21.7. SEVERABILITY. If any provision of this Agreement is held to
be illegal or unenforceable, that provision shall be limited or eliminated to
the minimum extent necessary so that this Agreement shall otherwise remain in
full force and effect and enforceable.
21.8. BASIS OF BARGAIN. Each party recognizes and agrees that the
warranty disclaimers and liability and remedy limitations in this Agreement are
material bargained for basis of this Agreement and that they have been taken
into account and reflected in determining the consideration to be given by each
party under this Agreement and in the decision by each party to enter into this
Agreement.
21.9. RELATIONSHIP OF PARTIES. The parties hereto expressly
understand and agree that the other is an independent contractor in the
performance of each and
38.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
every part of this Agreement, is solely responsible for all of its employees and
agents and its labor costs and expenses arising in connection therewith.
21.10. ASSIGNMENT. This Agreement and the rights and obligations
hereunder are not transferable or assignable without the prior written consent
of the parties hereto, except for rights to payment and except to an Affiliate
Company or to a person or entity who acquires all or substantially all of the
assets or business of a party, whether by sale, merger or otherwise.
21.11. PUBLICITY AND PRESS RELEASES. Except to the extent necessary
under applicable laws or for ordinary marketing purposes, the parties agree that
no press releases or other publicity relating to the substance of the matters
contained herein shall be made without joint approval. A press release
announcing this Agreement shall be jointly developed and released by the
parties.
21.12. FORCE MAJEURE. No liability or loss of rights hereunder
shall result to either party from delay or failure in performance (other than
payment) caused by force majeure, that is, circumstances beyond the reasonable
control of the party affected thereby, including, without limitation, acts of
God, fire, flood, war, government action, compliance with laws or regulations,
strikes, lockouts or other serious labor disputes, or shortage of or inability
to obtain material or equipment.
21.13. REMEDIES. Except as otherwise expressly stated in this
Agreement, the rights and remedies of a party set forth herein with respect to
failure of the other to comply with the terms of this Agreement (including,
without limitation, rights of full termination of this Agreement) are not
exclusive, the exercise thereof shall not constitute
39.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
an election of remedies and the aggrieved party shall in all events be entitled
to seek whatever additional remedies may be available in law or in equity.
CYGNUS, INC.
By: /S/ GARY W. CLEARY
------------------
Name: GARY W. CLEARY
--------------
Title: CHAIRMAN AND CHIEF TECHNICAL
----------------------------
OFFICER
-------
YAMANOUCHI PHARMACEUTICAL
CO., LTD.
By: /S/ MASAYOSHI ONODA
-------------------
Name: MASAYOSHI ONODA
---------------
Title: PRESIDENT AND CHIEF OPERATING
-----------------------------
OFFICER
------
40.
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
SCHEDULE A
MILESTONE PAYMENTS
Product and Amount of Payment by
MILESTONE DATE YAMANOUCHI TO CYGNUS
- - Effective Date *
- - Upon written notice by Yamanouchi to Cygnus of its *
decision to obtain the right to distributorship
within * after receipt of the U.S. Regulatory
Submission material filed by Cygnus with the FDA for
the Initial Glucose Monitoring Product
In the event that Yamanouchi notifies Cygnus that
it does not intend to accept distributorship, or if
Yamanouchi fails to send written notice within the
* period, this Agreement shall automatically terminate, *
- - Upon first U.S. or Japanese registration *
-----------
TOTAL *
-----------
-----------
[*CONFIDENTIAL TREATMENT REQUESTED*]
<PAGE>
EXHIBIT A
INITIAL GLUCOSE MONITORING PRODUCT
1. Glucopad
2. Glucowatch
3. Glucowatch biosensor
4. Rechargeable batteries, type AAA
5. Battery recharger
A-1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 17,252
<SECURITIES> 28,899
<RECEIVABLES> 10,221
<ALLOWANCES> 1,014
<INVENTORY> 1,232
<CURRENT-ASSETS> 57,195
<PP&E> 18,667
<DEPRECIATION> 12,625
<TOTAL-ASSETS> 65,253
<CURRENT-LIABILITIES> 15,370
<BONDS> 0
0
0
<COMMON> 116,312
<OTHER-SE> (82,266)
<TOTAL-LIABILITY-AND-EQUITY> 65,253
<SALES> 12,751
<TOTAL-REVENUES> 12,751
<CGS> 4,761
<TOTAL-COSTS> 4,761
<OTHER-EXPENSES> 16,263
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 303
<INCOME-PRETAX> (7,282)
<INCOME-TAX> 22
<INCOME-CONTINUING> (7,304)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,304)
<EPS-PRIMARY> (.40)
<EPS-DILUTED> (.40)
</TABLE>
