<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 SEPTEMBER 30, 1998
--------------------
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
CYGNUS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2978092
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 PENOBSCOT DRIVE, REDWOOD CITY, CALIFORNIA 94063-4719
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (650) 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 NOVEMBER 9, 1998:
Common Stock - 20,592,613 shares
<PAGE>
CYGNUS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1: Financial Statements
Condensed Consolidated Statements of Operations for the three and nine month
periods ended September 30, 1998 and 1997 (unaudited).......................2
Condensed Consolidated Balance Sheets at September 30,1998 (unaudited) and
December 31, 1997...........................................................3
Condensed Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 1998 and 1997 (unaudited)...............................4
Notes to Condensed Consolidated Financial Statements (unaudited)..............5
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................9
PART II. OTHER INFORMATION
Item 1: Legal Proceedings...........................................................32
Item 6: Exhibits and Reports on Form 8-K............................................33
SIGNATURES...........................................................................34
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYGNUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1997 1998 1997
-------- -------- ------ --------
<S> <C> <C> <C> <C>
Product revenues $ -- $ 1,770 $ 587 $ 3,470
Contract revenues 2,463 3,528 7,822 10,984
Royalty and other revenues 319 139 714 8,516
-------- -------- ------ --------
TOTAL REVENUES 2,782 5,437 9,123 22,970
Costs and expenses:
Costs of products sold 741 3,062 2,701 7,071
Research and development 7,859 5,381 22,665 16,353
Marketing, general and administrative 3,634 2,240 8,350 6,103
Arbitration settlement -- 39,633 -- 39,633
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES 12,234 50,316 33,716 69,160
LOSS FROM OPERATIONS (9,452) (44,879) (24,593) (46,190)
Interest income (expense), net (171) 272 (227) 910
-------- -------- -------- --------
NET LOSS $ (9,623) $(44,607) $(24,820) $(45,280)
-------- -------- -------- --------
-------- -------- -------- --------
NET LOSS PER SHARE $ (0.48) $ (2.36) $ (1.23) $ (2.41)
-------- -------- -------- --------
-------- -------- -------- --------
Shares used in computation of basic and
diluted net loss per share 20,241 18,879 20,107 18,818
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(See accompanying notes.)
2
<PAGE>
CYGNUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
ASSETS: SEPTEMBER 30, December 31,
- ------- 1998 1997
------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 18,708 $ 20,669
Short-term investments 36,539 14,163
Trade accounts receivable, net of allowance 1,313 2,040
Inventories 770 924
Prepaid expenses and other current assets 1,049 1,988
--------- ---------
TOTAL CURRENT ASSETS 58,379 39,784
Equipment and improvements, at cost 18,766 15,741
Less accumulated depreciation and amortization (12,618) (11,145)
--------- ---------
Net equipment and improvements 6,148 4,596
Deferred compensation and other assets 7,440 4,897
--------- ---------
TOTAL ASSETS $ 71,967 $ 49,277
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICIENCY):
Current liabilities:
Accounts payable $ 1,278 $ 1,294
Current portion of arbitration obligation 2,352 16,223
Accrued compensation 3,465 3,298
Accrued professional services 1,057 842
Other accrued liabilities 1,971 1,263
Customer advances 232 624
Current portion of deferred revenue 1,207 1,846
Current portion of long term debt 2,762 3,767
Current portion of capital lease obligations 338 686
--------- ---------
TOTAL CURRENT LIABILITIES 14,662 29,843
Long-term portion of deferred revenue 237 1,188
Long-term debt, non-current portion 9,330 3,812
Long-term portion of capital lease obligations 787 390
Long-term portion of arbitration obligations 23,000 23,000
Deferred compensation and other long-term liabilities 5,331 4,844
Convertible subordinated debt 43,000 --
Stockholders' equity (net capital deficiency):
Common stock 136,921 122,728
Accumulated deficit (161,301) (136,528)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY) (24,380) (13,800)
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(NET CAPITAL DEFICENCY) $ 71,967 $ 49,277
--------- ---------
--------- ---------
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1997 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
(See accompanying notes.)
3
<PAGE>
CYGNUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase/(Decrease) in Cash and Cash Equivalents
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1998 1997
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (24,820) $ (45,280)
Adjustments to reconcile net loss to cash
(used in)/provided by operating activities:
Depreciation and amortization 1,391 3,108
Decrease/(increase) in assets 1,726 3,812
Increase/(decrease) in liabilities (421) (11,861)
Increase/(decrease) in arbitration liability (13,871) 39,633
-------------- ---------------
NET CASH (USED IN)/PROVIDED BY OPERATING ACTIVITIES (35,995) (10,588)
-------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,590) (2,588)
Decrease/(increase) in short-term investments (22,057) (5,048)
-------------- ---------------
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES (24,647) (7,636)
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 14,193 4,273
Principal payments of long-term debt (1,598) (1,813)
Payment of capital lease obligations (375) (1,042)
Issuance of convertible subordinated debt, net 40,351 --
Issuance of long-term debt, net 6,110 1,331
-------------- ---------------
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES 58,681 2,749
-------------- ---------------
NET INCREASE /(DECREASE) IN CASH AND CASH EQUIVALENTS (1,961) (15,475)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 20,669 33,148
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,708 $ 17,673
-------------- ---------------
-------------- ---------------
</TABLE>
(See accompanying notes.)
4
<PAGE>
CYGNUS, INC.
September 30, 1998
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Cygnus, Inc. (the
"Company" or "Cygnus") as of and for the nine month periods ended September
30, 1998 and 1997 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, 1997 included in the Company's
1997 Annual Report on Form 10-K.
2. NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement No.
128, EARNINGS PER SHARE ("Statement 128"). Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants, and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented and where appropriate restated to conform to
the Statement 128 requirements.
Currently, basic and diluted net loss per share is computed using the
weighted average number of shares of common stock outstanding. Shares
issuable from stock options, warrants and convertible debt outstanding are
excluded from the diluted earnings per share computation, as their effect is
anti-dilutive.
3. COMPREHENSIVE INCOME (LOSS)
As of January 1, 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new rules
for the reporting and display of comprehensive income and its components;
however, the adoption of SFAS 130 had no impact on the Company's net loss or
shareholders' equity. Comprehensive income (loss) has not been presented
separately herein as it approximates the Company's net loss.
5
<PAGE>
CYGNUS, INC.
September 30, 1998
4. INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method)
or market, after appropriate consideration has been given to obsolescence and
inventories in excess of anticipated future demand. Net inventories consist
of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Raw materials $ 770 $ 787
Work in process 0 86
Finished goods 0 51
------- -------
$ 770 $ 924
------- -------
------- -------
</TABLE>
Inventories at September 30, 1998 and December 31, 1997 relate to the
Company's estradiol transdermal product, the FemPatch -Registered
Trademark-system (Warner-Lambert Co., Morris Plains, NJ).
5. DEBT AND EQUITY ISSUANCES
In February 1998, the Company entered into Note Purchase Agreements with
certain institutional investors to issue and sell approximately $43 million
of 4% Senior Subordinated Convertible Notes due 2005 (the "Notes"). On
October 28, 1998, the Company restructured the Notes. Key provisions in the
restructured Notes include the repayment of $18.5 million in principal
reducing the principal balance from $43 million to $24.5 million, a delay in
the convertibility of the majority of the Notes to June 30, 1999,
modification of conversion prices of the Notes, the ability of the Company to
redeem at par at any time all or part of the new principal amount of the
Notes, an increase in the interest rate to 5.5% paid annually on the new
principal balance, and the change in the final maturity of the Notes to
October 1, 2000.
On October 28, 1998 Cygnus redeemed $18.5 million of the original
principal amount of the Notes. Under the terms of the restructured Notes, all
of the remaining $24.5 million principal amount of the Notes are redeemable
by the Company at par with accrued interest. In addition, $18.5 million of
the Notes will not be convertible into Common Stock by the Note holders until
June 30, 1999 and after, effectively a five-month delay from the original
terms of the Note. The restructured Notes are divided into three tranches.
The first tranche has an original principal amount of $6 million and is
convertible in whole or in part into Common Stock at any time, at $3.5375
until June 30, 1999, subject to a potential upward adjustment on February 1,
1999, based on certain market formulas. On and after July 1, 1999, the
conversion price will be based on other market based pricing formulas. The
second tranche also has an original principal amount of $6 million but cannot
be converted into Common Stock until June 30, 1999, at which time the second
tranche becomes convertible in whole or in part at a price of the average of
closing bid prices using a fifteen trading day look-back from February 1,
1999. The third tranche of the restructured Notes has an original principal
amount of $12.5 million and cannot be converted into Common Stock until on or
after July 1, 1999.
6
<PAGE>
CYGNUS, INC.
September 30, 1998
Beginning July 1, 1999, no more than 15% of the second and third tranches may
be converted per calendar month, at conversion prices which reflect certain
market formulas. Such formulas include components based on various averages
of closing bid prices and low trading prices during fifteen or ten, as the
case may be, trading day look-back periods from various dates. Any portions
of the 15% monthly amounts of the second and third tranches that are not
converted in the relevant month may be rolled over for conversion in future
months. If the Company calls the second tranche of Notes ($6 million) for
redemption before February 1, 1999, the Note holders will be entitled to
convert not more than 50% of such Notes called before the redemption occurs.
If the Company calls the third tranche of Notes ($12.5 million) for
redemption before July 1, 1999, the Note holders will not be entitled to
convert any portion of such tranche so called. The Note holders will
otherwise be entitled to convert Notes called for redemption before the
redemption occurs, at conversion prices based on market formulas, which, in
the case of Notes that would otherwise be convertible in the absence of such
redemption, are the same that would be applicable to such conversion.
The restructured Notes contain a beneficial conversion feature related
to the first tranche which will result in a non-cash charge to interest
expense of $4.2 million on the date of the restructuring . Additional debt
restructuring costs of $1.4 million (including a $1.0 million write-off
relating to prior debt issuance costs associated with the $18.5 million debt
paid down) will be charged to interest expense. The Company will record total
charges related to the restructuring of the Notes of $5.6 million in the
quarter ended December 31, 1998.
On February 4, 1998, the Company completed a direct public offering of
905,740 shares of its Common Stock for net proceeds to the Company of
approximately $13.3 million. The Common Stock was sold at a discount from the
market price.
7
<PAGE>
CYGNUS, INC.
September 30, 1998
6. LEGAL PROCEEDINGS
In May 1997 Cygnus reported it had initiated arbitration proceedings
against Pharmacia & Upjohn ("Pharmacia") relating to the Nicotrol-Registered-
patch (Pharmacia AB, Stockholm, Sweden), Cygnus' smoking cessation patch. In
March of 1997, Cygnus announced that Pharmacia exercised its option to
purchase the U.S. manufacturing rights for the Nicotrol patch. The agreement
between Cygnus and Pharmacia provided that Pharmacia would be obligated to
pay Cygnus for, among other things, existing inventory costs and certain
purchase order commitments. Pharmacia disputes their obligations regarding
certain of the inventory costs and certain purchase order commitments. The
arbitration is intended to resolve these matters. In March 1998, Pharmacia
added a counterclaim against Cygnus in the arbitration, seeking approximately
$1.5 million in reimbursement for an alleged overpayment in royalties for
Nicotrol units shipped in 1996 and 1997. Cygnus disputes this counterclaim.
The arbitration hearing on both Cygnus' claim and Pharmacia's counterclaim
commenced on June 15, 1998 before a panel of the American Arbitration
Association. Testimony concluded on June 24, 1998, at which time the panel
heard argument and scheduled post-hearing briefings. Both sides submitted
their post-hearing briefs on July 17, 1998. The panel has not yet closed the
hearing proceedings and still has the option to request more evidence or
argument. Once the proceedings are closed, a decision is expected within 30
days of that date. See the Company's quarterly reports on Form 10-Q for the
quarter ended March 31, 1998 and June 30, 1998, filed with the Securities and
Exchange Commission ("SEC") on May 15, 1998 and August 4, 1998, respectively,
and the Company's annual report on Form 10-K for the year ended December 31,
1997, filed with the SEC on February 6, 1998.
8
<PAGE>
CYGNUS, INC.
September 30, 1998
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS, INCLUDING
BUT NOT LIMITED TO THOSE SPECIFICALLY IDENTIFIED AS SUCH, THAT INVOLVE RISKS
AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT ON FORM 10-Q THAT
ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT,
INCLUDING WITHOUT LIMITATION STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS,
BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL FORWARD-LOOKING
STATEMENTS INCLUDED IN THIS REPORT ON FORM 10-Q ARE BASED ON INFORMATION
AVAILABLE TO THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE
FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING, BUT
NOT LIMITED TO, THOSE SET FORTH IN THE "RISK FACTORS" BEGINNING ON PAGE 16
AND ELSEWHERE IN THIS REPORT ON FORM 10-Q.
GENERAL
Cygnus is engaged in the development and manufacture of diagnostic and
drug delivery systems, utilizing proprietary technologies to satisfy unmet
medical needs cost-effectively. The Company's current efforts are primarily
focused on two core areas: a continuous and automatic glucose monitoring
device (the GlucoWatch-Registered- system) and transdermal 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 distributors, or
both. In general, the Company's agreements provide that Cygnus will
manufacture its products and receive manufacturing revenues from sales of
these products to its licensees or distributors. Cygnus may also receive
royalties based on certain of its licensees' or distributors' product sales.
In certain circumstances, the Company may elect to license manufacturing
rights for a product to its licensee in exchange for a technology transfer
fee and/or a higher royalty rate.
In 1996, the Company entered into a collaboration with Becton Dickinson
& Company ("Becton Dickinson") for the commercialization of the GlucoWatch
monitor, a continuous and automatic glucose monitoring system that painlessly
extracts and measures glucose levels for people with diabetes. Under the
Becton Dickinson agreement, the Company had granted Becton Dickinson
exclusive worldwide marketing and distribution rights, with the exception of
Japan and Korea. The agreement was amended in June 1997 to grant Becton
Dickinson worldwide marketing rights, with the exception of Japan and Korea,
for the Company's second generation glucose monitor. On March 31, 1998, the
Company announced that the agreement it had with Becton Dickinson had been
terminated. Consequently, the Company will not receive any future milestone
payments under the Becton Dickinson agreement and will not be obligated to
share future revenue, if any, associated with commercialization of the
GlucoWatch monitor. The Company is currently involved in discussions with
other companies with regard to the collaboration for the sales and
distribution of the GlucoWatch monitor in the United States and Europe. There
can be no assurance that the Company will be able to enter into new
collaborative arrangements.
In July 1998, the Company was notified by American Home Products
Corporation (AHP), the licensee for two of the Company's transdermal hormone
replacement products, that AHP
9
<PAGE>
CYGNUS, INC.
September 30, 1998
wanted to discuss the status of its agreement with the Company. Cygnus was
notified by AHP that it intended to exercise its right under the agreement to
seek a sublicensee for these products and is now actively involved in doing
so. AHP and Cygnus have negotiated an amendment to the agreement that
provides Cygnus immediate ownership of the regulatory filing packages for the
two products and the right to co-promote the two products as well. The
amendment also provides that if AHP is unable to sign an agreement with a
sublicensee within six months, the rights to the two products will revert to
Cygnus and AHP will be obligated to continue development activities for the
two products for an additional six months. There can be no assurance that AHP
will find a sublicensee. Furthermore, if AHP is unsuccessful in finding a
sublicensee, it is uncertain what course of action the Company will take with
regard to these two products, although it is expected the Company will seek a
new collaboration for the distribution and marketing of the products.
The Company received notification from Warner-Lambert and Sanofi that
Warner-Lambert was terminating its FemPatch system agreement with Sanofi.
Pursuant to the Company's agreement with Warner-Lambert, the termination of
the agreement between Warner- Lambert and Sanofi also terminates the supply
agreement between the Company and Warner- Lambert. The effective date of
termination was November 7, 1998. As a result of this termination the Company
does not expect any future revenues from Warner-Lambert related to the
FemPatch system. The Company and Sanofi are currently discussing potential
alternative marketing arrangements for the FemPatch system. However, there
can be no assurance that the Company will be successful in these discussions
or in its efforts to establish alternative marketing arrangements for the
FemPatch system.
The Company's results of operations vary significantly from year to year
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 or distribution fees and cost
reimbursement payments made by pharmaceutical licensees, and the demand for
the Nicotrol patch. Up-front and interim milestone payments from contracts
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 have
generally exceeded contract revenue in any particular period and the Company
expects the same situation to continue for the next few 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 1998. At September 30, 1998, the Company's accumulated deficit and net
capital deficiency were approximately $161.3 million and $24.4 million,
respectively.
RESULTS OF OPERATIONS:
COMPARISON FOR THE QUARTERS ENDED SEPTEMBER 30, 1998 AND 1997
PRODUCT REVENUES for the quarter ended September 30, 1998 were $0.0
million, compared to $1.8 million for the quarter ended September 30, 1997.
Product revenues were $0.6 million for the nine months ended September 30,
1998 compared to $3.5 million for the nine months ended September 30, 1997.
Product revenue for the nine months ended September 30, 1998 resulted from
the shipments of the FemPatch system. Product revenues for the comparable
1997 period resulted
10
<PAGE>
from shipments of the FemPatch system and the Nicotrol patch. As a result of
the termination of the agreement between Warner-Lambert and Sanofi and the
supply agreement between the Company and Warner-Lambert in November 1998, the
Company does not expect any further product revenue related to the FemPatch
system. The reduction in total product revenue for the nine months ended
September 30, 1998 resulted primarily from reduced shipments of the FemPatch
system in the second half of 1998 and from the discontinuation of Nicotrol
patch manufacturing in the first quarter of 1997. Included in third quarter
1997 product revenue were the initial shipments of FemPatch systems.
Due to the discontinuation of Nicotrol patch manufacturing and the
termination of the FemPatch system, the Company does not expect any further
product revenues until new products are commercialized. The Company does,
however, expect to continue to receive royalty revenues from the manufacture
and sale of the Nicotrol Patch by the Company's licensee. There can be no
assurance that the Company will be successful in its efforts to commercialize
any future products.
Due to the above factors and the uncertainty regarding when and if
additional products will obtain approval from the FDA and when and if
licensees will sell and market such products, the Company believes that the
level of product revenues experienced to date is not indicative of future
results and may fluctuate from period to period.
CONTRACT REVENUES for the quarter ended September 30, 1998 were $2.5
million compared to $3.5 million for the quarter ended September 30, 1997 and
were $7.8 million for the nine months ended September 30, 1998 compared to
$11.0 million for the nine months ended September 30, 1997. Contract revenues
primarily reflect labor and material cost reimbursements associated with the
development of certain transdermal delivery systems and the amortization of
milestone payments relating to certain transdermal delivery systems and the
glucose monitoring device. The decrease in contract revenues for the quarter
and nine months ended September 30, 1998 as compared to the comparable 1997
periods is primarily due to a payment of $1.0 million received from
Pharmacia & Upjohn in June 1997 for the exercise of its option to purchase
the manufacturing rights for the Nicotrol patch, a reduction in clinical
billings related to one of the Company's hormone replacement products and
reduced milestone amortization related to the GlucoWatch monitor.
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 monitor. Under the 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. In the third quarter of 1996, Cygnus
received an up-front, non-refundable payment from Yamanouchi and is eligible
to receive milestone payments as well as a percentage of the product's future
commercial sales. 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. In July 1998, Yamanouchi
discontinued the agreement related to the 7-day transdermal 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
11
<PAGE>
CYGNUS, INC.
September 30, 1998
agreements, timely achievement of milestones under current contracts, and
strategic decisions on self-funding certain projects. The Company is unable
to predict to what extent the termination of existing contracts by current
partners, or new collaborative agreements, if any, will impact overall
contract revenues in the remainder of 1998 and subsequent future periods.
ROYALTY AND OTHER REVENUES for the quarter ended September 30, 1998 were
$0.3 million compared to $0.1 million for the quarter ended September 30,
1997 and were $0.7 million for the nine months ended September 30, 1998
compared to $8.5 million for the nine months ended September 30, 1997. The
net decrease in royalty and other revenues for the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1997 is
primarily due to the 1996 launch in the United States of the non-prescription
Nicotrol patch. The nine months ended September 30, 1997 included the
recognition of previously deferred royalty payments associated with this
launch, whereas no such amortization was included in the nine months ended
September 30, 1998.
Royalty revenue 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
revenue for any given period is not indicative of the expected royalty
revenue for future periods.
COSTS OF PRODUCTS SOLD for the quarter ended September 30, 1998 were
$0.7 million compared to $3.1 million for the quarter ended September 30,
1997 and were $2.7 million for the nine months ended September 30, 1998
compared to $7.1 million for the nine months ended September 30, 1997. Costs
of products sold primarily include direct and indirect production, facility
and personnel costs required to meet future anticipated production levels.
Costs of products sold for the quarter and nine months ended September 30,
1998 include shipments of the FemPatch system. The decrease in costs of
products sold for the quarter and nine months ended September 30, 1998 is
primarily due to the reduced shipments of the FemPatch system. The Company
experienced negative product margins for the quarter and nine months ended
September 30, 1998 and September 30, 1997 due to low production volumes that
prevented the Company from absorbing all of its fixed manufacturing costs.
Because the Company is not currently manufacturing any commercial products,
the Company expects that fixed manufacturing costs will continue to result in
negative product margins for the foreseeable future.
RESEARCH AND DEVELOPMENT EXPENSES for the quarter ended September 30,
1998 were $7.9 million compared to $5.4 million for the quarter ended
September 30, 1997 and were $22.7 million for the nine months ended September
30, 1998 compared to $16.4 million for the nine months ended September 30,
1997. The increase in research and development expenses for the quarter and
nine months ended September 30, 1998 is due primarily to the Company's
accelerated level of clinical activities associated with the GlucoWatch
system. Research and development and clinical activities primarily include
support and development for the glucose monitoring program, the Company's
hormone replacement therapy products and a contraception product. Cygnus
anticipates that the development of new products, continued research of new
technologies and preparation for regulatory filings and clinical trials will
result in an increase in its overall research and development expenses in
future periods.
12
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CYGNUS, INC.
September 30, 1998
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES for the quarter ended
September 30, 1998 were $3.6 million compared to $2.2 million for the quarter
ended September 30, 1997 and were $8.3 million for the nine months ended
September 30, 1998 compared to $6.1 million for the nine months ended
September 30, 1997. While current levels are higher than the prior year,
Cygnus anticipates that marketing, general and administrative expenses may
increase in the future as the Company expands its operations.
ARBITRATION SETTLEMENT EXPENSE for the quarter ended September 30, 1997 of
$39.6 million represents a non-recurring arbitration settlement expense with
Sanofi. As of September 30, 1998, the Company had accrued liabilities related
to the arbitration settlement of $25.4 million. Of the total accrued
liability of $25.4 million, $23.0 million is long-term. Under the terms of
the settlement, Cygnus (i) paid Sanofi $14.0 million in cash in January 1998,
(ii) will make royalty payments of between 6.5% and 8.5% of any and all net
sales of two products, which are subject to minimum payments in an aggregate
amount equal to $17.0 million, commencing in 2001 and ending in 2005, whether
or not any net sales of the two products have occurred, and (iii) issued in
December 1997, a convertible promissory note in the principal amount of $6.0
million, payable in full at the end of four years and bearing interest at
6.5% per annum. The note will be convertible into the Company's Common Stock
at Sanofi's option, exercisable at any time during the four year term, at a
conversion rate of $21.725 per share.
INTEREST INCOME(EXPENSE), NET OF INTEREST AND OTHER EXPENSE for the
quarter ended September 30, 1998 were $(0.2) million compared to $0.3 million
for the quarter ended September 30, 1997 and were $(0.2) million for the nine
months ended September 30, 1998 compared to $0.9 million for the nine months
ended September 30, 1997. The decrease for the quarter and nine months ended
September 30, 1998 is due primarily to higher interest expense associated
with the Company's issuance of the convertible debt, the amortization of the
financing fees related to this debt and the interest related to the
additional long-term debt incurred in the second quarter of 1998.
13
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CYGNUS, INC.
September 30, 1998
LIQUIDITY AND CAPITAL RESOURCES
Through December 1997, the Company received net proceeds of
approximately $82.1 million from public offerings of its Common Stock. In
February 1998, the Company received net proceeds of approximately $13.3
million (net of issuance costs of approximately $0.5 million) from a direct
public offering of its Common Stock.
Through 1997, the Company financed approximately $9.7 million of
manufacturing and research equipment under capital loan and lease
arrangements. In the second quarter of 1998, the Company entered into a new
loan agreement for $1.4 million to finance additional capital equipment.
Borrowings under this agreement are secured by specific Company assets.
In April of 1998, the Company consolidated its two outstanding bank
loans into an expanded credit facility with the same bank. An additional $4.7
million was borrowed, increasing the total outstanding under the new
agreement to $10.0 million. This balance will be repaid through October 2001,
with monthly interest-only payments through October 1998, and monthly
principal-and-interest installments thereafter. As of September 30, 1998
there is $10.0 million outstanding under this agreement.
In February 1998, the Company entered into Note Purchase Agreements with
certain institutional investors to issue and sell approximately $43 million
of 4% Senior Subordinated Convertible Notes due 2005 (the "Notes"). On
October 28, 1998, the Company restructured the Notes. Key provisions in the
restructured Notes include the October 1998 repayment of $18.5 million in
principal (reducing the principal balance from $43 million to $24.5 million),
a delay in the convertibility of the majority of the Notes to June 30, 1999,
modification of conversion prices of the notes, the ability of the Company to
redeem at par at any time all or part of the new principal amount of the
Notes, an increase in the interest rate to 5.5% paid annually on the new
principal balance and the change in the final maturity of the Notes to
October 1, 2000 (see Note 5, "Debt and Equity Issuances" in the Notes to the
Condensed Consolidated Financial Statements).
Net cash used in operating activities for the nine months ended
September 30, 1998 was $36.0 million, compared with net cash used of $10.6
million for the nine months ended September 30, 1997. Cash used in operating
activities during the nine months ended September 30, 1998 was primarily due
to the Company's net loss of $24.8 million and a $14.0 million cash payment
made in January 1998 to Sanofi under the terms of the arbitration settlement,
offset by an increase in accounts payable and other accrued liabilities of
$0.7 million, a decrease in notes receivable, prepaid expenses and other
current assets of $0.8 million and a decrease in accounts receivable of $0.7
million. Cash used in operating activities during the nine months ended
September 30, 1997 was primarily due to the Company's net loss of $45.3
million, a decrease of $10.0 million in deferred revenue and an increase of
$3.3 million in notes receivable, prepaid expenses and other current assets.
This was offset by the $39.6 million increase in accrued Sanofi obligations
and a decrease of $7.0 million in accounts receivable.
In addition to the cash received from the public offerings, equipment
lease and short-term working capital financing, the Company has been
financing its operations through revenues and interest income.
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CYGNUS, INC.
September 30, 1998
The current level of cash used in operating activities is not
necessarily indicative of the level of future cash usage. As a result of
expected increased expenditures for the development of new products,
preparation for regulatory filings and clinical trials and the expected
reduction in product revenues, the Company anticipates an increase in cash
usage for 1998 and future operating activities.
Net cash used in investing activities of $24.6 million for the nine
months ended September 30, 1998 resulted primarily from net purchases of
short-term investments of $22.0 million and capital expenditures of $2.6
million. Net cash used in investing activities of $7.6 million for the nine
months ended September 30, 1997 resulted primarily from net purchases of
short-term investments of $5.0 million and capital expenditures of $2.6
million.
Net cash provided by financing activities of $58.7 million for the nine
months ended September 30, 1998 includes, as mentioned above, net proceeds of
$40.4 million and $13.3 million from the Company's February 1998 issuance of
Senior Subordinated Convertible Notes and from a direct public offering of
its Common Stock, respectively, additional stock proceeds of $0.9 million and
$6.1 million from the issuance of long-term debt, offset by long-term debt
and capital lease repayments of $1.6 million and $0.4 million, respectively.
Net cash provided by financing activities of $2.7 million for the nine months
ended September 30, 1997 includes $2.5 million from the exercise of warrants
to purchase common stock, $1.7 million of common stock issuance proceeds and
$1.3 million received from the Company's capital equipment loan, offset by
long-term debt and capital lease repayments of $1.8 million and $1.0 million,
respectively.
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; the 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
GlucoWatch system, 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 cash flows and
liquidity for 1999.
Based upon current expectations for operating losses, payment of the
$18.5 million related to the restructured Notes in October 1998, arbitration
settlement payments, and projected short-term capital expenditures, the
Company believes that its existing cash, cash equivalents and short-term
investments of $55.2 million as of September 30, 1998 (reduced to $36.7
million as a result of the October 28, 1998 $18.5 million subordinated debt
principal payment), when coupled with cash from revenues and earnings from
investments, will be sufficient to meet its operating expenses and capital
expenditure requirements at least through September 30, 1999. However, there
can be no assurance that the Company will not require additional financing,
depending upon future business strategies, results of clinical trials and
management decisions to accelerate certain research and development programs
and other factors.
15
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CYGNUS, INC.
September 30, 1998
RISK FACTORS
POTENTIAL DELISTING OF SECURITIES FROM THE NASDAQ MARKET; LIMITED LIQUIDITY OF
TRADING MARKET
Shares of the Company's Common Stock are quoted on the Nasdaq National
Market. On February 23, 1998 Nasdaq promulgated new rules (the "New Nasdaq
Listing Requirements") that make continued listing of companies on the Nasdaq
National Market more difficult and has significantly increased its
enforcement efforts with regard to the Nasdaq standards for such listing.
Nasdaq's rules as applied to the Company require a $5.00 minimum closing bid
price. On September 30, 1998, the Company received correspondence from Nasdaq
stating that if the Company is unable to demonstrate compliance with the
minimum bid price requirement for continued listing on the Nasdaq National
Market on or before the end of the ninety day period ended December 29, 1998,
the Company's securities will be delisted at the opening of business on
January 2, 1999. The Company can demonstrate compliance with this requirement
by maintaining a $5.00 minimum closing bid price for ten consecutive trading
days. The Company plans to request a hearing with Nasdaq to discuss the
listing requirements. No potential delisting action would take place until
after the hearing.
If the Company is delisted from the Nasdaq National Market, the Company
will be in default under certain material contracts, including certain
subordinated debt arrangements. Such a default under such subordinated debt
arrangements could obligate the Company to redeem such debt at an amount
equal to 110% of the principal amount thereof plus accrued interest.
Furthermore, if the Company is delisted from the Nasdaq National Market,
trading, if any, in the Common Stock would be conducted in the
over-the-counter market on an electronic bulletin board established for
securities that do not meet the Nasdaq National Market or Nasdaq SmallCap
Market listing requirements, or in what are commonly referred to as the
"pinksheets." As a result, an investor would find it more difficult to
dispose of, or to obtain accurate quotations of the price of, the Company's
Common Stock. In addition, if the Company's Common Stock were removed from
the Nasdaq National Market, the Company's Common Stock would be subject to
so-called "penny stock" rules that impose additional sales practice and
market making requirements on broker-dealers who sell and/or make a market in
such securities. Consequently, removal from the Nasdaq National Market, if
it were to occur, could affect the ability or willingness of broker-dealers
to sell and/or make a market in the Company's Common Stock and the ability of
purchasers of the Company's Common Stock to sell their securities in the
secondary market. In addition, if the market price of the Company's Common
Stock is less than $5.00 per share, the Company may become subject to certain
penny stock rules even if still quoted on the Nasdaq National Market. Such
rules may further limit the market liquidity of the Company's Common Stock
and the ability of purchasers to sell such Common Stock in the secondary
market.
The Board of Directors of the Company has approved a proposal (the
"Reverse Stock Split Proposal") to amend the Company's Certificate of
Incorporation to effect a one-for-three reverse stock split of the Company's
outstanding Common Stock, each share having a par value of one-tenth of one
cent (the "Common Stock"), subject to the approval by the stockholders of the
Company. The Reverse Stock Split Proposal provides for the combination and
reclassification of the presently issued and outstanding shares of Common
Stock into a smaller number of shares of identical Common Stock, on the basis
of one share of Common Stock for each three shares of Common Stock previously
issued and outstanding (the "Reverse Stock Split"). Except as may result from
the payment of cash for fractional shares as described below, each
stockholder will hold the same percentage of Common Stock outstanding
immediately following the Reverse Stock Split as each stockholder did
immediately prior to the Reverse Stock Split. If approved by the stockholders
of the Company as provided herein, the Reverse Stock Split will be effected
by an amendment and restatement of the Company's Certificate of Incorporation
(the "Reverse Stock Split Amendment"), and will become effective upon the
filing of the Reverse Stock Split Amendment with the Secretary of State of
Delaware (the "Effective Time"). The following discussion is qualified in its
entirety by the full text of the Reverse Stock Split Amendment, which is
incorporated by reference herein.
At the Effective Time, each share of Common Stock issued and outstanding
will automatically be reclassified and converted into one-third of a share of
Common Stock. Fractional shares of Common Stock will not be issued as a
result of the Reverse Stock Split. Stockholders entitled to receive a
fractional share of Common Stock as a consequence of the Reverse Stock Split
will, instead, receive from the Company a cash payment in U.S. dollars equal
to such fraction multiplied by three times the arithmetic mean average
closing bid price per share of the Common Stock on the Nasdaq Stock Market,
Inc. ("Nasdaq") for the five trading days immediately preceding the Effective
Date.
The primary purpose of the Reverse Stock Split is to increase the per
share price in order to meet the New Nasdaq Listing Requirements. The Company
believes that maintaining the listing of the Common Stock on Nasdaq is in the
best interests of the Company and its stockholders. Inclusion on Nasdaq
increases liquidity and may potentially minimize the spread between the "bid"
and "asked" prices quoted by market makers. Further, continued Nasdaq listing
will avoid the Company being in default under certain material contracts,
including certain debt arrangements, and may enhance the Company's access to
capital and increase the Company's flexibility in responding to anticipated
capital requirements. The Company believes that prospective investors will
view an investment in the Company more favorably if its shares qualify for
listing on Nasdaq.
For the above reasons, the Company believes that the Reverse Stock Split
is in the best interests of the Company and its stockholders, if needed to
remain listed on the Nasdaq National Market. However, there can be no
assurance that the Reverse Stock Split will have the desired consequences.
The Company anticipates that, following the consummation of the Reverse Stock
Split, the Common Stock will trade at a price per share that is significantly
higher than the current market price of the Common Stock. Additionally, the
Company believes that a higher quoted market price per share may encourage
potential new investors, decrease market price volatility and increase the
liquidity of the Common Stock. However, there can be no assurance that,
following the Reverse Stock Split, the Common Stock will trade at three times
the market price of the Common Stock prior to the Reverse Stock Split or will
have the other desired market effects.
If the Reverse Stock Split Proposal is approved by the stockholders at
the Special Meeting, the Board of Directors of the Company may elect not to
file, or to delay the filing of, the Reverse Stock Split Amendment, if it is
not needed for continued Nasdaq listing or if the Board of Directors
determines that filing the Reverse Stock Split Amendment would not be in the
best interest of the Company's stockholders at such time. Factors leading to
such a determination could include, without limitation, any possible effect
on Nasdaq listing or future securities offerings.
DEPENDENCE ON NEW PRODUCTS; UNCERTAINTY OF MARKET ACCEPTANCE
For the Company to be successful, it will need to develop, license, or
acquire new products. Several products based on the Company's technologies
are currently under development by Cygnus and its licensees. Many of these
products (including the GlucoWatch monitor) will require significant
additional development and investment, including preclinical and clinical
testing, prior to their commercialization. From time to time the Company has
experienced delays or setbacks in the development of certain of its products.
For example, the Company experienced development delays in the
miniaturization of the GlucoWatch monitor. There can be no assurance that
the Company will be able to successfully address the problems that may arise
during the development and commercialization process. In addition, there can
be no assurance that such products or future products (including the
GlucoWatch monitor) can or will be successfully developed, prove to be safe
and effective in clinical trials, meet applicable regulatory standards, be
capable of being manufactured in commercial quantities at reasonable cost, be
marketed successfully or achieve market acceptance. Product development
efforts can be terminated by the Company or its licensees and there can be no
assurance that initial product development efforts or third party
collaborations will be successful. If any of the Company's development
programs are not successfully completed, required regulatory approvals or
clearances are not obtained, or products for which approvals or clearances
are obtained are not commercially successful, the Company's business,
financial condition and results of operations would be materially and
adversely affected.
The Company's business is subject to the risks inherent in the
development of new products using new technologies and approaches. There can
be no assurance that unforeseen problems will not develop with these
technologies or applications, that the Company will be able to successfully
address technological challenges it encounters in its research and
development programs or that commercially feasible products will ultimately
be developed by the Company.
Before the Company can market the GlucoWatch monitor, it must first
conduct registration clinical trials using a version of the product designed
for commercial sale, prepare a submission to the FDA and obtain clearance or
approval from the FDA. Approval from other U.S. or foreign government
regulatory agencies may also be required. Each of these stages will involve
certain risks and challenges. The Company has completed research clinical
studies using a commercial version of the product and will be conducting
registration clinical trials for submission to the FDA. There can be no
assurance that the commercial product will produce results that are
substantially equivalent to FDA-approved glucose monitoring products or that
will support the necessary regulatory filings and approvals. In addition, if
the Company receives the necessary regulatory approvals for the GlucoWatch
monitor, there can be no assurance that unforeseen problems will not occur in
product manufacturing and commercial scale-up or marketing or product
distribution. Any such occurrence could significantly delay the
commercialization of the GlucoWatch monitor or prevent its market
introduction entirely. Furthermore, if the GlucoWatch monitor is
successfully developed, the commercial success of the GlucoWatch monitor will
depend on its acceptance in the market.
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CYGNUS, INC.
September 30, 1998
HISTORY OF OPERATING LOSSES; FUTURE CAPITAL REQUIREMENTS
The Company has a limited operating history upon which its prospects can
be evaluated. Such prospects must be considered in light of the substantial
risks, expenses and difficulties encountered by entrants into the medical
device and drug delivery industry. The Company reported a net loss of $9.6
million for the third quarter of 1998 and has experienced annual operating
losses since inception. The Company expects to continue to incur operating
losses at least until significant sales, if any, of the GlucoWatch monitor or
the contraceptive patch (which is in phase III clinical trails and is
currently in development with Johnson & Johnson) commence. There can be no
assurance that the Company will generate significant revenues or achieve
profitability. The Company has, and expects to have, fluctuations in
quarterly results based on recognition of collaborative and contract revenues
and expenses. Some of these fluctuations could be significant.
To date the Company has generated limited revenues from product sales
and does not have significant experience in manufacturing, marketing or
selling its products. There can be no assurance that the Company's future
development efforts will result in commercially viable products, that the
Company will be successful in introducing its products, or that required
regulatory clearances or approvals will be obtained in a timely manner, or at
all. There can be no assurance that the Company's products will ever gain
market acceptance or that the Company will continue to generate revenues or
achieve profitability.
The Company's revenues to date have been derived primarily from product
development and licensing fees related to its products under development, as
well as from manufacturing and royalty revenues from the Nicotrol patch and
the FemPatch system. The Company will no longer receive manufacturing revenue
from the Nicotrol patch or the FemPatch system. The Company will, however,
continue to receive royalty payments for the Nicotrol patch. The Company
expects that a substantial portion of its future revenues will be derived, if
regulatory approvals are obtained, from sales of the GlucoWatch and other
products currently under development.
The continued development of the Company's products will require the
commitment of substantial resources to conduct the research, preclinical
development and clinical trials necessary to bring such products to market
and to establish production and marketing capabilities. The Company may seek
additional funding through public or private financings, including debt or
equity financings, and through other arrangements, including collaborative
arrangements. Any additional equity financings may be dilutive to
stockholders and debt financing, if available, may involve restrictions on
dividends and other restrictions on the Company. Adequate funds, whether
through financial markets or collaborative or other arrangements with
corporate partners or from other sources, may not be available when needed
or, if available, on terms acceptable to the Company. Lack of sufficient
additional funds may require the Company to delay, scale back or eliminate
some or all of its research and product development programs or to license
others to commercialize products or technologies that the Company would
otherwise seek to develop itself.
The Company believes that its existing cash, cash equivalents and short-
term investments, when coupled with cash from revenues and earnings from
investments, will be sufficient to meet its operating expenses, dept repayment
and capital expenditure requirements at least through September 30, 1999. The
amounts and timing of expenditures will depend on the progress of ongoing
research and development, the results of preclinical testing and clinical
trials, the rate at
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CYGNUS, INC.
September 30, 1998
which operating losses are incurred, the execution of any development and
licensing agreements with corporate partners, the Company's development of
products, the FDA regulatory process and other factors, many of which are
beyond the Company's control.
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS
The design, manufacturing, labeling, distribution and marketing of the
Company's products will be subject to extensive and rigorous government
regulation in the United States and certain other countries where the process
of obtaining and maintaining required regulatory clearance or approvals is
lengthy, expensive and uncertain. In order for the Company to market its
products in the United States, the Company must obtain clearance or approval
from the Untied States Food and Drug Administration ("FDA"). To date, the
Company has two products which have received FDA approval, the Nicotrol patch
and the FemPatch system. Before a regulatory submission can be filed with the
FDA, a product must undergo extensive clinical trials. The Company's drug
delivery systems require the filing of a New Drug Application ("NDA") with
the FDA, and the FDA's approval of the NDA. Devices such as the GlucoWatch
monitor under development by the Company will require the filing and FDA
clearance or approval of a medical device submission. The time required for
regulatory approval of the Company's products after a filing is uncertain.
There can be no assurance that problems will not arise that could delay or
prevent the commercialization of the Company's products or that the FDA and
foreign regulatory agencies will be satisfied with the results of clinical
trials or approve the marketing of any products. Moreover, even if regulatory
approval is granted, such approval may include significant limitations on
indicated uses for which any such products could be marketed.
Based on discussions with the FDA to date, the Company believes that the
submission to the FDA for the GlucoWatch monitor will be in the form of a
premarket notification (a "510(k) notification"), although the final
determination of the type of submission will not be made until FDA submission.
There can be no assurance that the FDA will act favorably or quickly on the
Company's 510(k) submission, or that significant difficulties and costs will
not be encountered during efforts to obtain FDA clearance or approval.
Specifically, the FDA may request additional data or require additional
clinical studies be conducted to obtain 510(k) clearance for one or more of the
Company's products. In addition, there can be no assurance that the FDA will
not require the submission of a premarket approval ("PMA") application to
obtain FDA approval to market one or more of the Company's products. The PMA
process is more rigorous and potentially lengthier than the supporting data and
clinical information, which could materially delay the introduction of the
GlucoWatch monitor. In addition, there can be no assurance that the FDA will
not impose strict labeling or other requirements as a condition of its 510(k)
clearance or PMA, any of which could limit the Company's ability to market its
products. Further, if the Company wishes to modify a product after FDA
clearance of a 510(k) premarket notification or approval of a PMA application,
including changes in indications or other modifications that could affect
safety and efficacy, additional clearances or approvals will be required from
the FDA. Any request by the FDA for additional data or any requirement by the
FDA that the Company conduct additional clinical studies or submit to the more
rigorous and lengthier PMA process could result in a significant delay in
bringing the Company's products to market and substantial additional research
and other expenditures by the Company. Similarly, any labeling or other
conditions or restrictions imposed by the FDA on the marketing of the Company's
products could hinder the Company's ability to effectively market its products.
Any of the foregoing actions by the FDA could delay or prevent
18
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CYGNUS, INC.
September 30, 1998
altogether the Company's ability to market and distribute its products and
could have a material adverse effect on the Company's business, financial
condition and results of operations.
A drug or medical device and its manufacturer are subject to continual
review after approval, and later discovery of previously unknown problems
with a product or the manufacturing process may result in restrictions on
such product or the manufacturer, including withdrawal of the product or
products from the market. Failure to comply with applicable regulatory
requirements may, among other things, result in fines, suspensions of
regulatory approvals, product recalls, operating restrictions and criminal
prosecution. In addition, new government regulations may be established that
could delay or prevent regulatory approval of the Company's potential
products. Cygnus is also subject to federal, state and local regulations
regarding work place safety, environmental protection and hazardous and
controlled substance controls, among others.
In order for the Company to market its products under development in
Europe and certain other foreign jurisdictions, the Company and its
distributors and agents must obtain required regulatory registrations or
approvals and otherwise comply with extensive regulations regarding safety,
efficacy and quality in those jurisdictions. Specifically, certain foreign
regulatory bodies have adopted various regulations governing product
standards, packaging requirements, labeling requirements, import
restrictions, tariff regulations, duties and tax requirements. These
regulations vary from country to country. In order to commence sales of the
GlucoWatch monitor in Europe, the Company must receive CE mark certification,
which is an international symbol of quality and compliance with applicable
European medical device directives. To obtain CE certification the Company
must pass a review of the GlucoWatch monitor technical file by a European
Community notified body. Failure to receive CE mark certification or other
foreign regulatory approvals could have a material adverse effect on the
Company's business, financial condition and results of operations. There can
be no assurance that the Company will obtain any other required regulatory
registrations or approvals in such countries or that it will not be required
to incur significant costs in obtaining or maintaining such regulatory
registrations or approvals. Delays in obtaining any registrations or
approvals required to market the Company's products, failure to receive these
registrations or approvals, or future loss of previously obtained
registrations or approvals could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON LICENSEES, DISTRIBUTORS AND COLLABORATIVE ARRANGEMENTS
The Company's business strategy for the development, clinical testing,
regulatory approval, manufacturing and commercialization of its products
depends, in large part, upon the Company's ability to selectively enter into
and maintain collaborative arrangements with licensees and distributors. If
the GlucoWatch monitor is commercialized, the Company will be dependent upon
Yamanouchi Pharmaceutical Co., Ltd. for marketing and distribution of the
GlucoWatch monitor in Japan and Korea. The Company does not currently have
any marketing or distribution agreements for the GlucoWatch monitor other
than the Yamanouchi collaboration. However, the Company is currently involved
in discussions with other companies with regard to the collaboration for the
sales and distribution of the GlucoWatch monitor in the United States and
Europe. The Company's licensees and distributors generally have the right to
terminate a product development effort at any time prior to regulatory
approval for any reason without significant penalty. Such cancellations may
result in delays, suspension or abandonment of clinical testing, the
preparation and processing of
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CYGNUS, INC.
September 30, 1998
regulatory filings and product development and commercialization efforts.
Licensees have exercised this right in the past, and there can be no
assurance that current and future licensees or distributors will not exercise
this right in the future.
Since all payments to the Company under its licensing and distribution
agreements following their execution are contingent on the occurrence of
future events or sales levels, and the agreements are terminable by the
licensee or distributor, 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. In the past some of the Company's licensees,
distributors and collaborators have approached the Company requesting
modification of the terms of existing agreements. If a licensee or
distributor were to cease 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 distributor, or suspend further development
work on the product. Additionally, the Company may choose to self-fund
certain research and development projects in order to exploit its
technologies. 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. There can be no assurance
that, if necessary, the Company would be able to negotiate an agreement with
an alternative licensee or distributor on acceptable terms. Any increase in
Company-sponsored research and development or sales and marketing activities
will have an immediate adverse effect on the Company's results of operations.
Furthermore, the resources and attention a licensee or distributor
devotes to a product are not within the Company's control. As a result,
there may be delays in clinical testing, the preparation and processing of
regulatory filings and commercialization efforts conducted by the Company's
licensees or distributors. There can be no assurance that one or more of the
Company's licensees or distributors will not, for competitive reasons,
support, directly or indirectly, a company or product that competes with the
Company's product that is the subject of its license or distributor agreement
with the Company. Furthermore, any dispute between the Company and one of its
licensees or distributors might require the Company to initiate or defend
against expensive litigation or arbitration proceedings.
Any termination of any license or distributor arrangement by one of the
Company's licensees or distributors, any inability of a licensee or
distributor to fund or otherwise satisfy its obligations under its
arrangements with the Company and any significant dispute with, or breach of
a contractual commitment by, a licensee or distributor, would likely require
the Company to seek and reach agreement with another licensee or distributor
or to assume, to the extent possible and at its own expense, all the
responsibilities being undertaken by the licensee or distributor. There can
be no assurance that the Company would be able to reach agreement with a
replacement licensee or distributor. If the Company were not able to find a
replacement licensee or distributor, there can be no assurance that the
Company would be able to perform or fund the activities for which such
licensee or distributor is currently responsible. Even if the Company were
able to perform and fund these activities, the Company's capital requirements
would increase substantially. In addition, the further development and the
clinical testing, regulatory approval process, marketing, distribution and
sale of the product covered by such licensee or distributor would be
significantly delayed. See "Risk Factors - Limited Marketing and Sales
Experience."
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CYGNUS, INC.
September 30, 1998
For the Company to be competitive, it will need to develop, in-license
or acquire new diagnostic and drug delivery products. Furthermore, the
Company's ability to develop and commercialize products in the future will
depend, in part, on its ability to enter into collaborative arrangements with
additional licensees on favorable terms. There can be no assurance that the
Company will be able to enter into new collaborative arrangements on such
terms, if at all. Additionally, there can be no assurance that existing or
future collaborative arrangements will be successful.
Any of the foregoing circumstances could have a material adverse effect
upon the Company's business, financial condition, and results of operations.
DEPENDENCE ON LICENSED PATENT APPLICATIONS AND PROPRIETARY TECHNOLOGY
The Company's success depends in large part on its ability to obtain
patent protection for its products, preserve its trade secrets and operate
without infringing the proprietary rights of others, both in the U.S. and in
other countries. Patent applications in the U.S. are maintained in secrecy
until patents are issued, and since publication of discoveries in the
scientific or patent literature tends to lag behind actual discovery by
several months, Cygnus cannot be certain that it was the first to file patent
applications on such inventions or that it will not infringe third party
patents once issued. No assurance can be made that patents will be issued
with respect to any of the Company's patent applications or that any patents
will provide competitive advantages for its products or will not be
challenged or circumvented by competitors. Cygnus also relies on trade
secrets and proprietary know-how that it seeks to protect, in part, by
confidentiality agreements with its licensees, employees and consultants.
There can be no assurance that these agreements will not be breached, that
the Company would have adequate remedies for any breach or that the Company's
trade secrets will not otherwise become known or be independently developed
by its competitors.
Any litigation, in the U.S. or abroad, as well as foreign opposition
and/or domestic interference proceedings, could result in substantial expense
to the Company and significant diversion of effort by the Company's technical
and management personnel. Litigation may be necessary to enforce patents
issued to the Company or to protect trade secrets or know-how owned by the
Company as well at to defend against infringement charges. A negative
determination in such proceedings in which the Company is a party could
subject the Company to significant liabilities to third parties or require
the Company to seek licenses from third parties. Although patent and
intellectual property disputes in the pharmaceutical product area have often
been settled through licensing or similar arrangements, costs associated with
such arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure
to obtain necessary licenses could prevent the Company from manufacturing and
selling certain of its products, which would have a material adverse effect
on the Company.
21
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CYGNUS, INC.
September 30, 1998
HIGHLY LEVERAGED; ABILITY TO SERVICE DEBT
As of September 30, 1998, prior to the $18.5 million reduction in
convertible debt pursuant to the debt restructuring agreement concluded on
October 28,1998 (see Note 5 "Debt and Equity issuances"), the Company had
indebtedness of $81.6 million, including $43.0 million resulting from the
issuance by the Company of its 4% Senior Subordinated Convertible Notes due
2005 (the "Notes") in February 1998. The October restructuring agreement
mentioned above, among other things, accelerated the due date to October 1,
2000. The degree to which the Company is leveraged could materially adversely
affect the Company's ability to obtain financing for working capital,
acquisitions or other purposes and could make it more vulnerable to industry
downturns and competitive pressures. The Company's ability to meet its debt
service obligations will be dependent upon the Company's future performance,
which will be subject to financial, business and other factors affecting the
operations of the Company, many of which are beyond its control. Although the
Company believes its cash flows will be adequate to meet its interest
payments, there can be no assurance that the Company will continue to
generate cash flows in the future sufficient to cover its fixed charges or to
permit the Company to satisfy any redemption obligations pursuant to the
Notes (see below). If the Company is unable to generate cash flows in the
future sufficient to cover its fixed charges or to permit the Company to
satisfy any redemption obligations pursuant to the Notes, and the Company is
unable to borrow sufficient funds either under its credit facilities or from
other sources, it may be required to refinance all or a portion of its
existing debt, to sell all or a portion of its assets, or to sell equity
securities. There can be no assurance that a refinancing would be possible,
nor can there be any assurance as to the timing of any asset sales or sales
of equity securities or the proceeds which the Company could realize
therefrom.
The Notes are subordinate in right of payment to all existing and future
Senior Debt (as defined in the First Supplemental Indenture). By reason of
such subordination of the Notes, in the event of insolvency, bankruptcy,
liquidation, reorganization, dissolution or winding up of the business of the
Company or upon default in payment with respect to any Senior Debt of the
Company or an event of default with respect to such indebtedness resulting in
the acceleration thereof, the assets of the Company will be available to pay
the amounts due on the Notes only after all Senior Debt of the Company has
been paid in full. Moreover, holders of Common Stock would only receive the
assets remaining after payment of all indebtedness and preferred stock, if
any.
The Notes are obligations exclusively of the Company. Although the Company
does not currently conduct operations through subsidiaries, it may elect to do
so as products become commercialized. In such event, the cash flow and the
consequent ability to service debt, including the Notes, of the Company, will
be partially dependent upon the earnings of its subsidiaries and the
distribution of those earnings to, or upon loans or other payments of funds by
those subsidiaries to, the Company. The payment of dividends and the making of
loans and advances to the Company by its subsidiaries would be subject to
statutory or contractual restrictions, would be dependent upon the earnings of
those subsidiaries and would be subject to various business considerations.
Any right of the Company to receive assets of any of its subsidiaries upon
their liquidation or reorganization (and the consequent right of the holders of
the Notes (the "Holder(s)") to participate in those assets) would be effectively
subordinated to the claims of that subsidiary's creditors (including trade
creditors), except to the extent that the Company is itself recognized as a
creditor of such subsidiary, in which case the claims of the Company would
still be subordinate to any
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CYGNUS, INC.
September 30, 1998
security interests in the assets of such subsidiary and any indebtedness of
such subsidiary senior to that held by the Company. Under certain
circumstances, including the delisting of the Company's securities from the
Nasdaq National Market, each holder of Notes will have the right, at the
Holder's option, to require the Company to repurchase all or a portion of
such Holder's Notes at a purchase price equal to 110% of the principal amount
thereof plus accrued interest thereon to the repurchase date.
COMPETING PRODUCTS AND CHANGES IN TECHNOLOGY
A large number of companies are involved or are becoming involved in the
development and commercialization of products incorporating diagnostic and
drug delivery systems. This field is highly competitive, and Cygnus believes
that competition will substantially increase in the future. A number of
companies have invested, and are continuing to invest, significant resources
in the development of diagnostic and drug delivery systems. Many of these
companies have greater financial, research and development and other
resources than Cygnus, as well as more experience than Cygnus in
commercializing diagnostic and transdermal drug delivery products. Such
companies may improve existing drug formulations and products more
efficiently than Cygnus or may design and develop new diagnostic and
transdermal drug delivery products which are more accepted in the marketplace
than the Company's products.
The Company's primary competitors in the glucose monitoring industry are
expected to be companies that currently market finger stab method products.
These companies have established products and distribution channels. In
addition, a number of companies are engaged in the development of products
using technology that is different than that used by Cygnus, but that are also
intended to permit less painful or painless glucose monitoring. These
technologies include infrared spectroscopy, which uses radiation to measure
glucose levels, and a variety of methods (including, in one case, transdermal
technology) to extract interstitial fluid and measure the glucose concentration
therein. The Company is not aware of any products under development that offer
the range of benefits of the GlucoWatch monitor. However, there can be no
assurance that these products will not be more accepted in the marketplace than
the GlucoWatch monitor or will not render the Company's glucose monitor
uncompetitive or obsolete. A number of companies have developed or are seeking
to develop new drugs to treat diabetes that could reduce demand for glucose
monitoring systems. In addition, many of the Company's competitors and
potential competitors have substantially greater resources, research and
development staffs and facilities than the Company and have significantly
greater experience than the Company in developing, manufacturing and marketing
glucose monitoring devices. Competition within the glucose monitoring industry
could also result in price reductions for glucose monitoring devices such that
the Company may not be able to sell the GlucoWatch monitor at a price level
adequate for the Company to realize a return on its investment.
The drug delivery industry is a rapidly evolving field. A number of other
companies, including major pharmaceutical companies, are also developing and
marketing transdermal and other similar systems for the controlled delivery of
drugs. Products currently on the market or under development by competitors
deliver the same drugs or other drugs to treat the same indications as many of
the products under development by the Company. The first pharmaceutical product
to reach the market in a therapeutic area often obtains and maintains
significant market share relative to later entrants to the market. The
Company's transdermal products will also compete with drugs
23
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CYGNUS, INC.
September 30, 1998
marketed not only in similar drug delivery systems but also in traditional
dosage forms such as oral administration, bolus injection and continuous
infusion. New drugs, new therapeutic approaches or future developments in
alternative drug delivery technologies, such as time-release capsules,
liposomes, inhalants, and implants, may provide therapeutic or cost
advantages over the drug delivery systems being developed by the Company.
MANUFACTURING; DEPENDENCE ON THIRD PARTY SUPPLIERS
Any manufacture of the Company's products is subject to current good
manufacturing practices ("cGMP") requirements prescribed by the FDA or other
standards prescribed by the appropriate regulatory agency in the country of
use. Additionally, the Company's agreements with licensees either specify
pricing formulas for products manufactured and sold by Cygnus to its
licensees or specify that prices will be negotiated in the future. There can
be no assurance that prices for the Company's products will cover the
manufacturing costs for these products in light of the Company's limited
manufacturing experience and general supply and demand conditions in the
marketplace.
The Company's GlucoWatch monitor has not yet been manufactured for
commercial sale, and the Company has no experience manufacturing the
GlucoWatch monitor in the volumes that would be necessary for the Company to
achieve significant commercial sales. To successfully commercialize the
GlucoWatch monitor, the device will have to be manufactured in compliance
with regulatory requirements, in a timely manner and in sufficient quantities
while maintaining product performance, quality and acceptable manufacturing
costs. There can be no assurance that the Company will be able to establish
and maintain reliable, full scale manufacturing of the GlucoWatch monitor at
commercially reasonable prices. Manufacturers often encounter difficulties in
scaling up production of new products, including problems involving product
performance, production yields, quality control and assurance and shortages
of personnel. In addition, manufacturing facilities will be subject to GMP
regulations, including possible preapproval inspection, international quality
standards and other regulatory requirements. Difficulties encountered by the
Company in manufacturing scale-up or failure by the Company to implement and
maintain manufacturing facilities in accordance with GMP regulations,
international quality standards or other regulatory requirements could result
in a delay or termination of production, which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
In the past, the Company has experienced these problems in scaling up its
products for commercial launch. There can be no assurance that similar
problems will not be encountered in the future. In addition, there can be no
assurance that the Company will be able to achieve and maintain product
performance quality and reliability if and when producing the GlucoWatch
monitor in the quantities required for commercialization, nor that the
GlucoWatch monitor can be assembled and manufactured at an acceptable cost.
The GlucoWatch monitor will be manufactured from components to be
purchased from outside suppliers, most of which are the Company's single source
for such components. In the event the Company is unable to obtain these
components from its suppliers, the Company would be required to obtain
components from alternate suppliers. Any interruption in the supply of
24
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CYGNUS, INC.
September 30, 1998
GlucoWatch monitor components could have a material adverse effect on the
Company's business, financial condition and results of operations.
Several materials used in the Company's transdermal products are
currently obtained from single sources. Although the Company has not
experienced difficulty acquiring these materials for the manufacture of its
products for sale or clinical trials, there can be no assurance that supply
interruptions will not occur or that the Company will not have to obtain
substitute vendors, if such vendors are available, which could require
additional regulatory submissions and approvals. Any such interruption of
supplies could have a material adverse effect on the Company's ability to
develop, manufacture and sell its transdermal products.
LIMITED MARKETING AND SALES EXPERIENCE
The Company has limited experience in marketing or selling medical
device products. In order to successfully market and sell the GlucoWatch
monitor or the Company's other products under development, the Company must
either develop a more extensive marketing and sales force or enter into
arrangements with third parties to market and sell such products. There can
be no assurance that the Company will be able to successfully develop a more
extensive marketing and sales force or that it will be able to enter into
marketing and sales agreements with third parties on acceptable terms, if at
all. If the Company maintains its own marketing and sales capabilities, it
will compete with other companies that have experienced and well-funded
marketing and sales operations. If the Company enters into a marketing
arrangement with a third party for the marketing and sales of the Company's
products, any revenues to be received by the Company from such products will
be dependent on the third party, and the Company will likely be required to a
pay a sales commission or similar amount to such party.
THIRD-PARTY REIMBURSEMENT
Successful commercialization of certain of the Company's products may
depend in part on the availability of reimbursement from third-party health
care payors, such as private insurance plans and the government. There can be
no assurance that such reimbursement will be available. Third-party payors
are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new therapeutic and diagnostic
products. There can be no assurance that adequate levels of reimbursement
will be available to enable the Company to achieve market acceptance of the
GlucoWatch monitor or other new products under development or to maintain
price levels sufficient to realize an appropriate return on its investment.
In certain international countries, the period of time needed to obtain such
reimbursement can be lengthy. The Company may delay the launch of its
products into certain countries until eligibility for reimbursement is
established. This could potentially have an adverse effect on the Company.
PRODUCT LIABILITY
The design, development, manufacture and use of the Company's products
involve an inherent risk of product liability claims and associated adverse
publicity. Producers of medical products may face substantial liability for
damages in the event of product failure or if it is alleged the product caused
harm. The Company currently maintains product liability insurance. Such
insurance is expensive and difficult to obtain and may not be available in the
future on acceptable
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CYGNUS, INC.
September 30, 1998
terms or at all. There can be no assurance, however, that the Company will
not be subject to product liability claims, that the Company's current
insurance would cover such claims, or that adequate insurance will continue
to be available on acceptable terms to the Company in the future. In the
event the Company is held liable for damages in excess of the limits of its
insurance coverage, or if any claim or product recall results in significant
adverse publicity against the Company, the Company's business, financial
condition and results of operations could be materially and adversely
affected.
ATTRACTING AND RETAINING KEY EMPLOYEES
The Company's ability to operate successfully and manage its potential
future growth depends in significant part upon the continued service of
certain key scientific, technical, managerial and finance personnel, and its
ability to attract and retain additional highly qualified scientific,
technical, managerial and finance personnel. The Company faces intense
competition for qualified personnel in these areas, many of whom are often
subject to competing employment offers, and there can be no assurance that
the Company will be able to attract and retain such personnel. The loss of
key personnel or inability to hire and retain additional qualified personnel
in the future could have a material adverse effect on the Company's business,
financial condition and results of operations.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock is subject to
substantial fluctuations in response to factors such as announcements by the
Company or its competitors of results of regulatory approval filings or
clinical trials or testing, developments or disputes governing proprietary
rights, technological innovations or new commercial products, government
regulatory action, general conditions in the medical technology industry,
changes in securities analysts' recommendations, or other events or factors,
many of which are beyond the Company's control. In addition, the stock market
in general has experienced extreme price and volume fluctuations in recent
years which have particularly affected the market prices of many medical
technology companies and which have been unrelated to the operating
performance of such companies. Fluctuations or decreases in the trading
price of the Company's Common Stock may adversely affect the market for the
Company's Common Stock. In the past, following periods of volatility in the
market price for a company's securities, securities class action litigation
often has been instituted. Such litigation could result in substantial costs
and a diversion of management attention and resources, which could have a
material adverse effect on the Company's business, financial condition and
operating results.
If all the first tranche Notes (see Note 5 "Debt and Equity issues")
convert at $3.5375 before January 31, 1999, an additional 1.7 million shares
will be issued resulting in a substantial dilution of the Company's Common
Stock. Conversion of the remaining $18.5 million outstanding principal
balance of the Notes will have an additional dilutive effect. However,
because the conversion prices of the second and third tranches will be
established based on future market prices that cannot be predicted, and
because the Company has the right to redeem the $18.5 million outstanding
principal of the Note subject to the preemptive conversion right of the Note
holders, the Company is unable to predict the extent of this dilution. For
further details on the formulas used in determining conversion prices refer
to the Second Supplemental Indenture incorporated by reference in the Form
8-K filed on October 30, 1998.
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CYGNUS, INC.
September 30, 1998
ABSENCE OF DIVIDENDS
The Company has never declared or paid cash dividends on its Common
Stock. The Company's current bank term loan precludes it from paying
dividends to stockholders. The Company currently intends to retain any
earnings for use in its business and therefore does not anticipate paying any
dividends in the future.
CERTAIN CHARTER AND BYLAW PROVISIONS AND DELAWARE ANTI-TAKEOVER STATUTE
On September 21,1993, while a California Corporation, the company
adopted a Shareholder Rights Agreement. In November 1998, as a result of the
Company's reincorporation in Delaware and the passage of time, the Company
adopted a revised Stockholder Rights Plan (the "Rights Plan") with provisions
very similar to those in the 1993 agreement. Such provisions provide for a
dividend distribution of one Preferred Share Purchase Right (a "Right") on
each outstanding share of the Common Stock. Each Right entitles stockholders
to buy 1/1000th of a share (a "Unit") of the Company's Series A Junior
Participating Preferred Stock at an exercise price of $40.00 per Unit. The
Rights will become exercisable upon the earlier of (i) the close of business
on the first date of a public announcement that a person or a group acquires
20 percent or more of the outstanding Common Stock or (ii) ten business days
(or such later date as may be determined by the Board of Directors) after a
person or group commences or announces the intention to commence a tender or
exchange offer, the consummation of which would result in ownership by the
person or group of 20 percent or more of the Common Stock. The Company will
be entitled to redeem all, but not less than all, the outstanding Rights at
$0.01 per Right at any time prior to the earlier of (i) the first date of a
public announcement of an acquisition by a person or group of 20 percent or
more of the Company's Common Stock or (ii) the close of business on the tenth
anniversary of the Rights Plan.
The Stockholder Rights Plan and certain provisions of the Company's
Amended and Restated Certificate of Incorporation ( the "Restated Certificate")
and the Company's Bylaws may have the effect of making it more difficult for a
third party to acquire, or of discouraging a third party from attempting to
acquire control of the Company. Such provisions could limit the price that
certain investors might be willing to pay in the future for shares of Common
Stock. The Company's Restated Certificate allows the Company to issue Preferred
Stock without the vote of or further action by the stockholders and certain
provisions of the Restated Certificate and the Bylaws eliminate the right of
stockholders to act by written consent without a meeting, specify procedures
for director nominations by stockholders and submission of other proposals for
consideration at stockholder meetings, and eliminate cumulative voting in the
election of directors. These provisions and the Stockholder Rights Plan may
make it more difficult for stockholders to take certain corporate actions and
could have the effect of delaying or preventing a change in control of the
Company. In addition, the Company is subject to Section 203 of the Delaware
General Corporation Law which, subject to certain exceptions, prohibits a
Delaware corporation from engaging in any business combination with any
interested stockholder for a period of three years following the date that such
stockholder became an interested stockholder, unless (1) prior to such date,
the Board of Directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, or (2) upon consummation of the transaction which
resulted in the stockholder becoming an interested
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CYGNUS, INC.
September 30, 1998
stockholder, the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares outstanding of
those shares owned (i) by persons who are directors and also officers and
(ii) employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer, or (iii) on or subsequent to
such time the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder.
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CYGNUS, INC.
September 30, 1998
YEAR 2000 COMPLIANCE
The Year 2000 ("Y2K") program at the Company is comprised of the following
major phases:
1. Awareness
2. Inventory
3. Assessment
4. Correction and Testing
5. Implementation
The Company expects to complete the awareness, inventory and most of the
assessment phases by the end of 1998
Y2K issues pertaining to Information Technology ("IT") systems are
expected to be minor due to the newness of the core systems and the relative
simplicity of their application today. Certain externally provided systems
and services are non-compliant. Renovating/replacement, testing, and
implementation of these systems are not expected to be a major risk.
Due to the regulatory requirements placed on the pharmaceutical and
medical device industry by the FDA, the Company has placed appropriate
attention on the non-IT systems. For the Company, this specifically covers
all areas governed by current Good Manufacturing Practice ("cGMP") guidelines
and include but are not limited to environmental monitoring/control systems,
laboratory instrumentation and their sub-systems, production equipment, and
materials handling equipment.
The Company has identified several providers of products and services
that are critical to its operations. The Company is working with these
providers to ensure that these critical products and services are available
for continued operations after January 1, 2000. At this time the Company is
not aware of any issues relating to these providers.
There is currently no reliable estimate of the total Y2K remediation
costs. This will be available by the end of December 1998, and will be
published in the 1998 SEC 10-K filing.
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CYGNUS, INC.
September 30, 1998
Direct costs planned in 1998 for completion up to the Assessment phase are
approximately $100,000.
The preliminary perspective on the anticipated Y2K risks for the Company
is at a low level of risk on the IT side, and at a higher risk level with
several critical materials and services and their respective providers. Full
detail on these will not be known until the end of 1998.
At this time, the Company has not identified any Y2K items requiring a
contingency plan.
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CYGNUS, INC.
September 30, 1998
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 1997 Cygnus reported it had initiated arbitration proceedings against
Pharmacia & Upjohn ("Pharmacia") relating to the Nicotrol-Registered
Trademark- patch (Pharmacia AB, Stockholm, Sweden), Cygnus' smoking cessation
patch. In March of 1997, Cygnus announced that Pharmacia exercised its option
to purchase the U.S. manufacturing rights for the Nicotrol patch. The
agreement between Cygnus and Pharmacia provided that Pharmacia would be
obligated to pay Cygnus for, among other things, existing inventory costs and
certain purchase order commitments. Pharmacia disputes their obligations
regarding certain of the inventory costs and certain purchase order
commitments. The arbitration is intended to resolve these matters. In March
1998, Pharmacia added a counterclaim against Cygnus in the arbitration,
seeking approximately $1.5 million in reimbursement for an alleged
overpayment in royalties for Nicotrol units shipped in 1996 and 1997. Cygnus
disputes this counterclaim. The arbitration hearing on both Cygnus' claim and
Pharmacia's counterclaim commenced on June 15, 1998 before a panel of the
American Arbitration Association. Testimony concluded on June 24, 1998, at
which time the panel heard argument and scheduled post-hearing briefings.
Both sides submitted their post-hearing briefs on July 17, 1998. The panel
has not yet closed the hearing proceedings and still has the option to
request more evidence or argument. Once the proceedings are closed, a
decision is expected within 30 days of that date. See the Company's quarterly
reports on Form 10-Q for the quarter ended March 31, 1998 and June 30, 1998,
filed with the Securities and Exchange Commission ("SEC") on May 15, 1998 and
August 4, 1998, respectively, and the Company's annual report on Form 10-K
for the year ended December 31, 1997, filed with the SEC on February 6, 1998.
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CYGNUS, INC.
September 30, 1998
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
The following exhibits are filed herewith or incorporated by reference:
<TABLE>
<C> <S>
4.8 Second Supplemental Indenture, dated as of October 28, 1998, to
the Indenture dated as of February 3, 1998 and the First
Supplemental Indenture dated as of February 3, 1998, incorporated
by reference to Exhibits 4.8 of the Company's Form 8-K filed on
October 30, 1998.
10.37 1994 Stock Option/Award Plan (As Amended and Restated as of
February 24, 1998), incorporated by reference to Exhibit 99.1 of
the Company's Form S-8 filed on November 16, 1998.
10.38 Amended 1991 Employee Stock Purchase Plan (As Amended and
Restated as of February 24, 1998), incorporated by reference to
Exhibit 99.6 of the Company's Form S-8 filed on November 16, 1998.
10.39 Plan Amendment Cygnus, Inc. 1994 Stock Option/Award Plan,
incorporated by reference to Exhibit 99.2 of the Company's Form
S-8 filed on November 16, 1998.
10.40 Form of Special Addendum to Stock Option Agreement (Change in
Control), incorporated by reference to Exhibit 99.3 of the
Company's Form S-8 filed on November 16, 1998.
10.41 Form of Special Addendum to Stock Option Agreement (Termination
of Employment Without Cause - Officers), incorporated by
reference to Exhibit 99.4 of the Company's Form S-8 filed on
November 16, 1998.
10.42 Form of Special Addendum to Stock Option Agreement (Termination
of Employment Without Cause - Key Employee), incorporated by
reference to Exhibit 99.5 of the Company's Form S-8 filed on
November 16, 1998.
10.43 Written Compensation Agreement between Registrar and Mr. Marion,
incorporated by reference to Exhibit 99.7 of the Company's Form
S-8 filed on November 16, 1998.
10.44 Stock Option Agreement between Registrar and Mr. Marion,
incorporated by reference to Exhibit 99.8 of the Company's Form
S-8 filed on November 16, 1998.
10.45 Amended and Restated Loan and Security Agreement between the
Registrant and Silicon Valley Bank entered into as of April 30,
1998.
10.46 Form of Agreement between the Company and each of the Executive
Officers with respect to post-employment benefits.
10.47 Form of Agreement between the Company and each of the Executive
Officers with respect to post-employment benefits relating to
change of control.
</TABLE>
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CYGNUS, INC.
September 30, 1998
<TABLE>
<C> <S>
27.1 Financial Data Schedule.
</TABLE>
b) REPORTS ON FORM 8-K
The Company has recently filed three current Reports on Form 8-K.
The first Report on Form 8-K was dated August 11, 1998 regarding the
Company's press release announcing the resignation of Gregory B. Lawless
as President, Chief Executive Officer and a Director of the Company and
the appointment of John C. Hodgman as President, Chief Executive Officer
and a Director of the Company and the naming of Andre F. Marion as Vice
Chairman, as filed with the Securities and Exchange Commission on August
21, 1998.
The second Report on Form 8-K was dated October 22, 1998 regarding the
Company's press release announcing its earnings for the quarter ended
September 30, 1998, as filed with the Securities and Exchange Commission
on October 28, 1998.
The third Report on Form 8-K was dated October 30, 1998 regarding the
restructuring of the Company's 4% Senior Subordinated Convertible Notes
due 2005, as filed with the Securities and Exchange Commission on October
30, 1998.
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CYGNUS, INC.
September 30, 1998
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.
Date: November 16, 1998 By: /s/ John C. Hodgman
------------------------------ -------------------------------
John C. Hodgman
President, Chief Executive Officer
and Chief Financial Officer
(and Principal Accounting Officer)
34
<PAGE>
CYGNUS, INC.
September 30, 1998
INDEX OF EXHIBITS
The following exhibits are included herein:
<TABLE>
<C> <S>
Exhibit 10.45 Amended and Restated Loan and Security Agreement between the
Registrant and Silicon Valley Bank entered into as of April 30,
1998.
Exhibit 10.46 Form of Agreement between the Company and each of the Executive
Officers with respect to post-employment benefits.
Exhibit 10.47 Form of Agreement between the Company and each of the Executive
Officers with respect to post-employment benefits relating to
change of control.
Exhibit 27 Financial Data Schedule.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
CYGNUS, INC.
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
1. DEFINITIONS AND CONSTRUCTION . . . . . . . . . . . . . . . . . . 1
1.1 Definitions . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Accounting Terms. . . . . . . . . . . . . . . . . . . . . . 8
2. LOAN AND TERMS OF PAYMENT. . . . . . . . . . . . . . . . . . . . 8
2.1 Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.2 Interest Rate Protection. . . . . . . . . . . . . . . . . . 9
2.3 Interest Rates, Payments, and Calculations. . . . . . . . . 10
2.4 Crediting Payments. . . . . . . . . . . . . . . . . . . . . 11
2.5 Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.6 Additional Costs. . . . . . . . . . . . . . . . . . . . . . 12
2.7 Term. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
3. CONDITIONS OF LOANS. . . . . . . . . . . . . . . . . . . . . . . 12
3.1 Conditions Precedent to Advance . . . . . . . . . . . . . . 12
4. CREATION OF SECURITY INTEREST. . . . . . . . . . . . . . . . . . 13
4.1 Grant of Security Interest. . . . . . . . . . . . . . . . . 13
4.2 Delivery of Additional Documentation Required . . . . . . . 13
4.3 Right to Inspect. . . . . . . . . . . . . . . . . . . . . . 13
5. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . 14
5.1 Due Organization and Qualification. . . . . . . . . . . . . 14
5.2 Due Authorization; No Conflict. . . . . . . . . . . . . . . 14
5.3 No Prior Encumbrances . . . . . . . . . . . . . . . . . . . 14
5.4 Bona Fide Accounts. . . . . . . . . . . . . . . . . . . . . 14
5.5 Merchantable Inventory. . . . . . . . . . . . . . . . . . . 14
5.6 Intellectual Property . . . . . . . . . . . . . . . . . . . 14
5.7 Name; Location of Chief Executive Office. . . . . . . . . . 15
5.8 Litigation. . . . . . . . . . . . . . . . . . . . . . . . . 15
5.9 No Material Adverse Change in Financial Statements. . . . . 15
5.10 Solvency. . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.11 Regulatory Compliance . . . . . . . . . . . . . . . . . . . 15
5.12 Environmental Condition . . . . . . . . . . . . . . . . . . 15
5.13 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
5.14 Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . 16
5.15 Government Consents . . . . . . . . . . . . . . . . . . . . 16
5.16 Full Disclosure . . . . . . . . . . . . . . . . . . . . . . 16
6. AFFIRMATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . 16
6.1 Good Standing . . . . . . . . . . . . . . . . . . . . . . . 16
6.2 Government Compliance . . . . . . . . . . . . . . . . . . . 16
6.3 Adverse Information . . . . . . . . . . . . . . . . . . . . 17
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6.4 Financial Statements, Reports, Certificates . . . . . . . 17
6.5 Inventory; Returns. . . . . . . . . . . . . . . . . . . . 17
6.6 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.7 Insurance . . . . . . . . . . . . . . . . . . . . . . . . 18
6.8 Principal Depository. . . . . . . . . . . . . . . . . . . 18
6.9 Adjusted Total Liabilities-Net Worth Ratio. . . . . . . . 18
6.10 Tangible Net Worth. . . . . . . . . . . . . . . . . . . . 18
6.11 Minimum Liquidity and Debt Service Coverage.. . . . . . . 18
6.12 Registration of Intellectual Property Rights. . . . . . . 19
6.13 Further Assurances. . . . . . . . . . . . . . . . . . . . 19
7. NEGATIVE COVENANTS . . . . . . . . . . . . . . . . . . . . . . . 19
7.1 Dispositions. . . . . . . . . . . . . . . . . . . . . . . 19
7.2 Change in Business. . . . . . . . . . . . . . . . . . . . 19
7.3 Mergers or Acquisitions . . . . . . . . . . . . . . . . . 20
7.4 Indebtedness. . . . . . . . . . . . . . . . . . . . . . . 20
7.5 Encumbrances. . . . . . . . . . . . . . . . . . . . . . . 20
7.6 Distributions . . . . . . . . . . . . . . . . . . . . . . 20
7.7 Investments . . . . . . . . . . . . . . . . . . . . . . . 20
7.8 Transactions with Affiliates. . . . . . . . . . . . . . . 20
7.9 Intellectual Property Agreements. . . . . . . . . . . . . 20
7.10 Subordinated Debt . . . . . . . . . . . . . . . . . . . . 20
7.11 Inventory . . . . . . . . . . . . . . . . . . . . . . . . 20
7.12 Compliance. . . . . . . . . . . . . . . . . . . . . . . . 20
8. EVENTS OF DEFAULT. . . . . . . . . . . . . . . . . . . . . . . . 21
8.1 Payment Default . . . . . . . . . . . . . . . . . . . . . 21
8.2 Covenant Default. . . . . . . . . . . . . . . . . . . . . 21
8.3 Material Adverse Change . . . . . . . . . . . . . . . . . 21
8.4 Attachment. . . . . . . . . . . . . . . . . . . . . . . . 21
8.5 Insolvency. . . . . . . . . . . . . . . . . . . . . . . . 22
8.6 Other Agreements. . . . . . . . . . . . . . . . . . . . . 22
8.7 Subordinated Debt . . . . . . . . . . . . . . . . . . . . 22
8.8 Adverse Legal Action/Judgments. . . . . . . . . . . . . . 22
8.9 Misrepresentations. . . . . . . . . . . . . . . . . . . . 22
8.10 Change of Control . . . . . . . . . . . . . . . . . . . . 22
9. BANK'S RIGHTS AND REMEDIES . . . . . . . . . . . . . . . . . . . 22
9.1 Rights and Remedies . . . . . . . . . . . . . . . . . . . 22
9.2 Power of Attorney . . . . . . . . . . . . . . . . . . . . 23
9.3 Accounts Collection.. . . . . . . . . . . . . . . . . . . 24
9.4 Bank Expenses . . . . . . . . . . . . . . . . . . . . . . 24
9.5 Bank's Liability for Collateral . . . . . . . . . . . . . 24
9.6 Remedies Cumulative . . . . . . . . . . . . . . . . . . . 24
9.7 Demand; Protest . . . . . . . . . . . . . . . . . . . . . 24
10. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER . . . . . . . . . . . 25
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12. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . 25
12.1 Successors and Assigns. . . . . . . . . . . . . . . . . . 25
12.2 Indemnification . . . . . . . . . . . . . . . . . . . . . 26
12.3 Time of Essence . . . . . . . . . . . . . . . . . . . . . 26
12.4 Severability of Provisions. . . . . . . . . . . . . . . . 26
12.5 Amendments in Writing, Integration. . . . . . . . . . . . 26
12.6 Amendments in Writing, Integration. . . . . . . . . . . . 26
12.7 Counterparts. . . . . . . . . . . . . . . . . . . . . . . 26
12.8 Survival. . . . . . . . . . . . . . . . . . . . . . . . . 26
12.9 Confidentiality . . . . . . . . . . . . . . . . . . . . . 27
12.10 Effect of Amendment and Restatement. . . . . . . . . . . 27
iii
<PAGE>
This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT is entered into as of
April 30, 1998, by and between SILICON VALLEY BANK ("Bank") and CYGNUS, INC.
("Borrower").
RECITALS
A. Borrower and Bank are parties to that certain Loan and Security
Agreement, dated as of December 9, 1994 and the Loan and Security Agreement
dated as of June 24, 1996, each as amended from time to time, including, without
limitation by the Assumption and Loan Modification Agreement dated as of October
30, 1997, the Loan Modification Agreement dated as of January 2, 1998, and the
Loan Modification Agreement dated as of February 9, 1998 (collectively, and as
may have been further amended, the "Original Loan Documents").
B. Borrower and Bank wish to amend and restate the terms of the Original
Loan Documents as stated herein. This Agreement sets forth the terms on which
Bank will loan money 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" or "Advances" means cash advances under the First Term
Loan Facility and the Second 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.
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<PAGE>
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
"Collateral" means the property described on EXHIBIT A attached
hereto.
"Committed Loan Amount" means Ten Million Dollars ($10,000,000).
"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.
"Copyrights" means any and all copyright rights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now or hereafter
existing, created, acquired or held.
"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, and (iii) accrued interest, to (b) an amount equal
to the sum of all scheduled repayments for such quarter (or month, as
applicable), including accrued interest, 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.
"First Term Loan Facility" means the facility under which
Borrower may request cash advances as specified in Section 2.1 (a).
2
<PAGE>
"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.
"Intellectual Property Collateral" means any and all right, title
and interest of Borrower in the proceeds of the following:
(a) Copyrights, Trademarks and Patents;
(b) Any and all trade secrets, and any and all intellectual
property rights in computer software and computer software products now or
hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to Borrower
now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present and
future infringement of any of the rights included above, with the right, but not
the obligation, to sue for and collect such damages for said use or infringement
of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the Copyrights,
Patents or Trademarks, and all license fees and royalties arising from such use
to the extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks or Patents; and
(g) All proceeds and products of the foregoing, including
without limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
"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.
3
<PAGE>
"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 October 29, 2001.
"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 date of
determination, determined on a consolidated basis in accordance with GAAP for
Borrower and its consolidated Subsidiaries, the reduction in cash from
operations (excluding non-recurring charges) during the three months prior to
such date of determination or if the date of determination is the last day of a
fiscal quarter, during the fiscal quarter then ending (or, if monthly reporting
is required pursuant to Section 6.4(c), during the three fiscal months ending
prior to such date of determination).
"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.
"Patents" means all patents, patent applications and like
protections including without limitation improvements, divisions, continuations,
renewals, reissues, extensions and continuations-in-part of the same.
"Payment Date" means the twenty-ninth (29th) calendar day of each
month during the term of this Agreement.
"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.
4
<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;
5
<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;
(h) 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;
(i) Investments constituting acquisitions permitted under
Section 7.3; and
(j) 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;
(f) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 8.8;
6
<PAGE>
(g) 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;
(h) 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;
(i) 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) and (f) 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
(j) 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 the end of each fiscal
quarter, or if monthly reporting is required pursuant to Section 6.4(c), as at
the end of each fiscal month, the ratio of (i) Liquidity at such time to
(ii) the monthly average of Net Cash Losses.
"Responsible Officer" means each of the Chief Executive Officer,
the Chief Financial Officer and the Director of Finance of Borrower.
"Schedule" means the schedule of exceptions attached hereto, if
any.
"Second Term Loan Facility" means the facility under which
Borrower may request cash advances as specified in Section 2.1 (b).
"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.
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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, except as amended in Section 6.9 below.
"Trademarks" means any trademark and servicemark rights, whether
registered or not, applications to register and registrations of the same and
like protections, and the entire goodwill of the business of Assignor connected
with and symbolized by such trademarks.
"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.
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2. LOAN AND TERMS OF PAYMENT
2.1 TERM LOANS.
(a) FIRST TERM LOAN FACILITY. Borrower acknowledges that
Borrower has certain outstanding Obligations under the Original Loan Documents.
Subject to and upon the terms and conditions of this Agreement, Bank agrees to
make an Advance to Borrower as of the Closing Date, in an aggregate principal
amount of the outstanding Obligations under the Original Loan Documents, which
Advance shall be used to repay the outstanding Obligations under the Original
Loan Documents; PROVIDED, HOWEVER, that Borrower shall repay such Advance in
accordance with the terms of this Agreement; PROVIDED, FURTHER, that the amount
of outstanding Obligations under the First Term Loan Facility and the Second
Term Loan Facility do not exceed, in the aggregate, the Committed Loan Amount.
Amounts borrowed pursuant to this Section 2.1(a) may not be reborrowed once
repaid.
(b) SECOND TERM LOAN FACILITY. Subject to and upon the terms
and conditions of this Agreement, Bank agrees, at any time from the date of this
Agreement through April 29, 1999, to make Advances to Borrower in an aggregate
principal amount not to exceed the Committed Loan Amount LESS the outstanding
Obligations under the First Term Loan Facility as determined on the Closing
Date. Amounts borrowed pursuant to this Section 2.1 (b) may not be reborrowed
once repaid.
(c) PROCEDURES. Whenever Borrower desires an Advance, Borrower
shall notify Bank by facsimile transmission or telephone no later than 3:00 p.m.
California time, one (1) Business Day before the day on which the Advance is
requested to be made. Each such notification shall be promptly confirmed by a
Payment/Advance Form in substantially the form of EXHIBIT B hereto and signed by
a Responsible Officer. Bank is authorized to make Advances under this
Agreement, based upon instructions received from a Responsible Officer, or
without instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. 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 Advances made under this Section 2.1 to Borrower's
deposit account.
(d) INTEREST AND PRINCIPAL. Interest shall accrue from the date
of each Advance at the rate specified in Section 2.3(a), and shall be payable
monthly on the Payment Date for each month through the month in which the
Maturity Date falls. Bank shall, at its option, charge such interest, all Bank
Expenses, and all Periodic Payments against any of Borrower's deposit accounts,
including account number _____________ against the First Term Facility or
against the Second Term Facility, 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) MATURITY. The First Term Facility and the Second Term
Facility shall terminate on the Maturity Date, at which time all Obligations
owing under this Section 2.1 shall be immediately due and payable.
2.2 INTEREST RATE PROTECTION. Subject to the terms and condition of
this Agreement, Borrower may prepay the Advances, 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 higher than the then current
fixed rate for the Advances.
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2.3 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) INTEREST RATE. Except as set forth in Section 2.3(b):
(i) ADVANCE UNDER THE FIRST TERM LOAN FACILITY. From and
after the Closing Date through October 29, 1998, the Advance under the First
Term Loan Facility shall bear interest, on the average daily balance thereof, at
a rate equal to one-half of one (1) percentage point above the Prime Rate. From
and after October 30, 1998 through the Maturity Date, the Advance under the
First Term Loan Facility shall bear interest, on the average daily balance
thereof, at a rate equal to, at Borrower's election, either (i) one-half of one
(1) percentage point above the Prime Rate; or (ii) three and one-half (3.5)
percentage 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 no later than October 28, 1998, of its interest rate
election hereunder. If Borrower fails to give such notice, then the applicable
rate shall be the 42 month Treasury Note fixed rate described herein.
(ii) ADVANCES UNDER THE SECOND TERM LOAN FACILITY.
From and after the Closing Date through April 29, 1999, the Advances under the
Second Term Loan Facility shall bear interest, on the average daily balance
thereof, at a rate equal to one-half of one (1) percentage point above the Prime
Rate. From and after April 30, 1999 through the Maturity Date, the Advances
under the Second Term Loan Facility shall bear interest, on the average daily
balance thereof, at a rate equal to, at Borrower's election, either (i) one-half
of one (1) percentage point above the Prime Rate; or (ii) three and one-half
(3.5) percentage 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 no later than April 28, 1999, of its interest
rate election hereunder. 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, 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 Payment Date of each month during the term hereof. Borrower shall make
payments of principal and interest, as follows:
(i) FIRST TERM LOAN FACILITY. Borrower shall make payments
on the Advance under the First Term Loan Facility, as follows: (i) beginning on
November 29, 1998, and continuing on the Payment Date of each calendar month for
each of the twenty-four (24) months thereafter, Borrower shall make a payment of
principal and interest to Bank in equal monthly installments totalling fifty
percent (50%) of the outstanding Obligations under the First Term Loan Facility,
and (ii) beginning on November 29, 2000, and continuing on the Payment Date of
each calendar month for each of the twelve (12) months thereafter through the
Maturity Date, Borrower shall make a payment of principal and interest to Bank
in equal monthly installments totalling the remaining balance of the outstanding
Obligations under the First Term Loan Facility. Bank shall, at its option,
charge such interest, principal, all Bank Expenses, and all Periodic Payments
against any of Borrower's deposit accounts, including Account Number
______________ 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.
(ii) SECOND TERM LOAN FACILITY. Borrower shall make
payments on the Advances under the Second Term Loan Facility, as follows: (i)
beginning on May 29, 1999, and continuing on the Payment Date of each calendar
month for each of the eighteen (18) months thereafter, Borrower shall make a
payment of principal and interest to Bank in equal monthly installments
totalling fifty percent (50%) of the
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outstanding Obligations under the Second Term Loan Facility, and (ii) beginning
on November 29, 2000, and continuing on the Payment Date of each calendar month
for each of the twelve (12) months thereafter through the Maturity Date,
Borrower shall make a payment of principal and interest to Bank in equal monthly
installments totalling the remaining balance of the outstanding Obligations
under the Second Term Loan Facility. Bank shall, at its option, charge such
interest, principal, all Bank Expenses, and all Periodic Payments against any of
Borrower's deposit accounts, including Account Number __________________ 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 (i) Thirty-Eight
Thousand Dollars ($38,000) for the First Term Loan Facility, which fee shall be
due and payable on the date of this Agreement, shall be fully earned and
non-refundable, and (ii) a Facility Fee in the amount of three-quarters of one
(.75) percentage point of the Advances available to be borrowed under the Second
Term Loan Facility as of the Closing Date, which amount shall be the Committed
Loan Amount LESS the Advance under the First Term Loan Facility, fifty percent
(50%) of which fee shall be due and payable on the date of this Agreement, and
shall be fully earned and non-refundable, and the remaining fifty percent (50%)
of which fee shall be due and payable on October 29, 1998, and shall be fully
earned and non-refundable;
(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 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.
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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;
(iii) an intellectual property security agreement;
(iv) financing statements (Forms UCC-1);
(v) insurance certificate;
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(vi) payment of the fees and Bank Expenses then due
specified in Section 2.5 hereof;
(vii) timely receipt of the Payment/Advance Form as
provided in Section 2.1;
(viii) 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 each of the Advances, and no
Event of Default shall have occurred and be continuing, or would result from
each of the Advances. The making of each of the Advances shall be deemed to be
a representation and warranty by Borrower on the date of each of the Advances 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 subordinations 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.
4.4 REQUIREMENT FOR CASH COLLATERAL. Borrower shall pledge cash or a
certificate of deposit to Bank as follows:
(a) Upon an Event of Default (except for six (6) months
Remaining Months Liquidity of Section 6.11), then Borrower shall pledge cash in
the form of a certificate of deposit at Silicon Valley Bank, on terms acceptable
to Bank, in an amount equal to fifty-five percent (55%) of the outstanding loan
balance, at which time Borrower shall be deemed to have cured the Event of
Default. Notwithstanding the foregoing, Bank shall have no obligation to
release the cash pledged pursuant to this Section 4.4(a) unless and until
Borrower achieves compliance with all the terms of the Loan Documents and cures
such Event of Default.
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(b) If at any time the Liquidity of Borrower is less than (i)
Fifteen Million Dollars ($15,000,000), or (ii) six (6) times Remaining Months
Liquidity, then Borrower shall pledge cash in the form of a certificate of
deposit at Silicon Valley Bank, on terms acceptable to Bank, in an amount equal
to one hundred and five percent (105%) of the outstanding loan balance, at which
time Borrower shall be deemed to have cured the Event of Default.
Notwithstanding the foregoing, Bank shall have no obligation to release the cash
pledged pursuant to this Section 4.4(b) unless and until Borrower achieves
compliance with all the terms of the Loan Documents and cures such Event of
Default.
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.
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 except to the extent that
certain intellectual property agreements prohibit the assignment of the rights
thereunder to a third party without the Borrower's or other party's consent and
the Loan Documents constitute an assignment. Borrower is not in default under
any agreement to which it is a party or by which it is bound, which default
could reasonably be expected to 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 INTELLECTUAL PROPERTY. Borrower is the sole owner of the
Intellectual Property Collateral, except for non-exclusive licenses granted by
Borrower to its customers in the ordinary course of business. Each of the
Patents is valid and enforceable, and no part of the Intellectual Property
Collateral has been judged invalid or unenforceable, in whole or in part, and no
claim has been made that any part of the Intellectual Property Collateral
violates the rights of any third party. Except for and upon the filing with the
United States Patent and Trademark Office with respect to the Patents and
Trademarks and the Register of Copyrights with respect to the Copyrights
necessary to perfect the security interests created hereunder, and except as has
been already made or obtained, no authorization, approval or other action by,
and no notice to or filing with, any United States governmental authority or
United States regulatory body is required either (i) for the grant by Borrower
of the security interest granted hereby or for the execution, delivery or
performance of Loan Documents by Borrower in the United States or (ii) for the
perfection in the United States or the exercise by Bank of its rights and
remedies hereunder.
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5.7 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.
5.8 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.
5.9 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.
5.10 SOLVENCY. The fair saleable value of Borrower's assets
(including goodwill minus disposition costs) exceeds the fair value of its
liabilities; Borrower is not left with unreasonably small capital after the
transactions contemplated by this Agreement; and Borrower and each Guarantor are
able to pay their respective debts (including trade debts) as they mature.
5.11 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.
5.12 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.
5.13 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.
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5.14 SUBSIDIARIES. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.15 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.
5.16 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
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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
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; (iv) prompt
notice of any material change in the composition of the Intellectual Property
Collateral, including, but not limited to, any subsequent ownership right of the
Borrower in or to any Copyright, Patent or Trademark not specified in any
intellectual property security agreement between Borrower and Bank or knowledge
of an event that materially adversely affects the value of the Intellectual
Property Collateral; and (v) 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 twenty (20) 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.
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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 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 ADJUSTED TOTAL LIABILITIES-NET WORTH RATIO. Subject to the last
sentence of this Section, Borrower shall maintain, (i) as of the last day of
each fiscal quarter through the fiscal quarter ending December 31, 1998, a ratio
of Total Liabilities (excluding long-term and short-term deferred revenue and
excluding $23,000,000 in long-term debt owed to Sanofi) less Subordinated Debt
to Tangible Net Worth plus Subordinated Debt of not more than 2.00 to 1.00, (ii)
as of the last day of each fiscal quarter commencing with the quarter ending
March 31, 1999, through the fiscal quarter ending March 31, 2000, a ratio of
Total Liabilities (excluding long-term and short-term deferred revenue and
excluding $23,000,000 in long-term debt owed to Sanofi) less Subordinated Debt
to Tangible Net Worth plus Subordinated Debt of not more than 3.25 to 1.00, and
(iii) as of the last day of each fiscal quarter commencing on the fiscal quarter
ending June 30, 2000, a ratio of Total Liabilities (excluding long-term and
short-term deferred revenue) less Subordinated Debt to Tangible Net Worth plus
Subordinated Debt of not more than 2.00 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 fiscal quarter, (i)
commencing on the Closing Date through the fiscal quarter ending December 31,
1998, a Tangible Net Worth of not less than Eighteen Million Dollars
($18,000,000), (ii) commencing on the fiscal quarter ending March 31, 1999
through the fiscal quarter ending March 31, 2000, a Tangible Net Worth of not
less than Ten Million Dollars ($10,000,000), and (iii) commencing on the fiscal
quarter ending June 30, 2000 through the term of this Agreement, a Tangible Net
worth of not less than Fifteen Million Dollars ($15,000,000).
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 fiscal quarter, a minimum Liquidity of the greater of (a) two (2) times the
amount of Obligations, OR (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.
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6.12 REGISTRATION OF INTELLECTUAL PROPERTY RIGHTS.
(a) 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 Intellectual Property
Security Agreement delivered to Bank by Borrower in connection with this
Agreement within thirty (30) days of the date of this Agreement. 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.
(b) 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 the Intellectual Property Collateral.
(c) Borrower shall (i) protect, defend and maintain the validity
and enforceability of the Trademarks, Patents and Copyrights, (ii) use its best
efforts to detect infringements of the Trademarks, Patents and Copyrights and
promptly advise Bank in writing of material infringements detected and (iii) not
allow any Trademarks, Patents or Copyrights to be abandoned, forfeited or
dedicated to the public without the written consent of Bank, which shall not be
unreasonably withheld, unless Bank determines that reasonable business practices
suggest that abandonment is appropriate.
(d) Bank shall have the right, but not the obligation, to take,
at Borrower's sole expense, any actions that Borrower is required under this
Section 6.12 to take but which Borrower fails to take, after fifteen (15) days'
notice to Borrower. Borrower shall reimburse and indemnify Bank for all
reasonable costs and reasonable expenses incurred in the reasonable exercise of
its rights under this Section 6.12.
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.
7. NEGATIVE COVENANTS
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.
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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, before and after giving effect to such transactions, Borrower will be
in compliance with Sections 6.9, 6.10 and 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 INTELLECTUAL PROPERTY AGREEMENTS. Borrower shall not permit the
inclusion in any material contract to which it becomes a party of any provisions
that could or might in any way prevent the creation of a security interest in
Borrower's rights and interests in any property included within the definition
of the Intellectual Property Collateral acquired under such contracts, except to
the extent that such provisions are necessary in Borrower's exercise of its
reasonable business judgement.
7.10 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.
7.11 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.
7.12 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
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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 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);
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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 the
exercise of a right by such third party or parties to accelerate the maturity
of any Indebtedness in an amount in excess of Five Hundred Thousand Dollars
($500,000) 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 or approved by Bank in Bank's
sole discretion;
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 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:
(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
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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 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;
(f) to modify, in its sole discretion, any intellectual property security
agreement entered into between Borrower and Bank without first obtaining
Borrower's approval of or signature to such modification by amending Exhibit A,
Exhibit B and Exhibit C, thereof, as appropriate, to include reference to any
right, title or interest in any Copyrights, Patents or Trademarks acquired by
Borrower after the execution hereof or to delete any reference to any right,
title or interest in any Copyrights, Patents or Trademarks in which Borrower no
longer has or claims any right, title or interest; (g) to file, in its sole
discretion, one or more financing or continuation statements and amendments
thereto, relative to any of the Collateral without the signature of Borrower
where permitted by law; and (h) to transfer the Collateral into the name of Bank
or a third party to the extent permitted under the California Uniform Commercial
Code 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
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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. Bank shall
have a non-exclusive, royalty-free license to use the Intellectual Property
Collateral to the extent reasonably necessary to permit Bank to exercise its
rights and remedies upon the occurrence of an Event of Default.
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
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
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:
24
<PAGE>
If to Borrower: Cygnus, Inc.
400 Penobscot Drive
Redwood City, CA 94063
Attn: Mr. John C. Hodgman
FAX: (650) 599-3972
If to Bank: Silicon Valley Bank
1731 Embarcadero Road, Suite 220
Palo Alto, CA 94303
Attn: Ms. Debra Springer-Bowman
FAX: (650) 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
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 12.1. 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.
25
<PAGE>
(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 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 except that any financing statements or other
agreements or instruments, filed by Bank with respect to the Borrower shall
remain in full force and effect.
26
<PAGE>
12.7 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.
12.8 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 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 12.8 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.
12.9 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.
12.10 EFFECT OF AMENDMENT AND RESTATEMENT. This Agreement is
intended to and does completely amend and restate, without novation, the
Original Loan Documents. All security interests granted under the Original Loan
Documents are hereby confirmed and ratified and shall continue to secure all
Obligations under this Agreement.
27
<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/ Frank Raab
----------------------------------
Title: Executive Director of Finance
-------------------------------
SILICON VALLEY BANK
By: /s/ Deborah Bowman
----------------------------------
Title: Vice President
-------------------------------
28
<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, financial assets,
investment property, securities accounts, securities entitlements, 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.
Notwithstanding the foregoing, Bank's security interest in the Intellectual
Property Collateral shall be perfected only to the extent necessary to perfect
Bank's security interest in the proceeds of the Intellectual Property
Collateral.
29
<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: CYGNUS, INC.
---------------------------------------------------------------------------
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 (FIRST TERM ADVANCE) $
---------------------------------
PRINCIPAL INCREASE (SECOND TERM 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.
- --------------------------------------------------------------------------------
- -
30
<PAGE>
- --------------------------------------------------------------------------------
- -
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)
- --------------------------------------------------------------------------------
- -
31
<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 Amended and Restated 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.
<TABLE>
<CAPTION>
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER "COMPLIES" COLUMN.
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C> <C>
Financial statements(1) 10-K 10-Q within 5 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
Liquidity/Cash Burn Report(2) Monthly within 20 days Yes No
(1) Monthly if Liquidity below $25,000,000
(2) Only required if Liquidity below $25,000,000.
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
Maintain on a Quarterly Basis:
Total Liabilities/Tangible Net Worth(3) 4 _____:1.0 Yes No
Tangible Net Worth 5 $_______ Yes No
Liquidity/Debt Service Coverage 2x Obligations _____:1.0 Yes No
or 6 RML(6)
</TABLE>
(3) see Section 6.9 for Total Liabilities exclusions
(4) (i) through 12/31/98, 2.00 to 1.00, (ii) as of 3/31/99 through 3/31/00,
3.25 to 1.00, (iii) from and after 6/30/00, 2.00 to 1.00
(5) $18,000,000 through 12/31/98, $10,000,000 from 3/31/99 through 3/31/00,
$15,000,000 from 6/30/00
(6) converts to Debt Service Coverage of 1.5:1.0 upon two consecutive quarters
of compliance with Debt Service Coverage
32
<PAGE>
--------------------------------
BANK USE ONLY
COMMENTS REGARDING EXCEPTIONS: See Attached. Received by:
--------------------
AUTHORIZED SIGNER
Sincerely, Date:
---------------------------
- -------------------------------------------- Verified:
SIGNATURE -----------------------
AUTHORIZED SIGNER
- --------------------------------------------
TITLE Date:
---------------------------
- --------------------------------------------
DATE Compliance Status: Yes No
--------------------------------
33
<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 $10,000,000.
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:
<TABLE>
<CAPTION>
TERM LOAN
---------
<S> <C>
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:
SILICON VALLEY BANK LOAN FEE: $38,000 plus one-half of .75% of
Advances available under the Second
Term Loan Facility
Other Charges Paid in Cash: $
--------
$ 100 UCC Search Fees
--------
$ 100 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 $
--------
</TABLE>
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 APRIL 30, 1998.
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 April 30, 1998, 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
Amended and Restated 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 APRIL 30,
1998.
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 Amended and Restated Loan and Security Agreement dated as of April 30,
1998 (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
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.
1
<PAGE>
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 April 30, 1998, 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>
August 28, 1998
((First_Name)) ((Initial_Last_Name))
((Title))
Cygnus, Inc.
400 Penobscot Drive
Redwood City, CA 94063
Dear ((Salutation)):
Cygnus, Inc., a Delaware corporation (the "Company"), considers the
establishment and maintenance of a sound and vital management team to be
essential to protecting and enhancing the best interests of the Company and
its stockholders. The Company recognizes that attracting and retaining
quality members of management are critical to its success.
In view of the above, the Board of Directors of the Company (the
"Board") has determined that appropriate steps should be taken to reinforce
and encourage the continued attention and dedication of members of the
Company's management to their assigned duties without distraction in
circumstances arising from a termination of employment of a member of
management. The Board also believes it is important to attract and retain
quality management and to provide for severance benefits to a departing
member of management under certain circumstances.
In order to induce you to remain in the employ of the Company, this
letter agreement (the "Agreement"), which has been approved by the Board,
sets forth the severance benefits which the Company agrees will be provided
to you in the event your employment with the Company is terminated under the
circumstances described below. This Agreement includes, as if set forth in
full herein, those definitions set forth in EXHIBIT A hereto, which exhibit
is specifically incorporated herein by this reference. All capitalized terms
used and defined in EXHIBIT A, shall have the meanings ascribed to them in
EXHIBIT A.
1. AGREEMENT TO PROVIDE SERVICES; RIGHT TO TERMINATE. The
Company or you may terminate your employment at any time, subject to the
Company's providing the benefits hereinafter specified in accordance with the
terms hereof.
2. TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall continue in force and effect until February 28, 2000;
provided, however, that commencing on January 1, 2000 and each January 1
thereafter, the term of this Agreement shall automatically be extended for
one additional year after February 28 unless at least 30 days prior to such
January 1st date, the Company or you shall have given written notice that
this Agreement shall not be extended; and provided, further, that this
Agreement shall continue in effect for a
<PAGE>
period of fourteen (14) months beyond the term provided herein if you are
terminated without Cause. Notwithstanding anything in this Section 2 to the
contrary, this Agreement (and only this Agreement) shall terminate if you or
the Company terminate your employment prior to the expiration and/or
non-renewal of this Agreement, but in the case of a termination of you by the
Company without Cause, you shall be entitled to the specific benefits set
forth herein.
3. TERMINATION BY THE COMPANY. If your employment with the
Company is terminated by the Company without Cause while this Agreement is in
force and effect, then you shall be entitled to the benefits specifically
provided for in Section 4(iii) and (iv) and Section 5 hereof.
Any purported termination by the Company or by you shall be
communicated by written Notice of Termination to the other party hereto. For
purposes of this Agreement, a "Notice of Termination" shall mean a written
notice which shall indicate the specific termination provision in this
Agreement relied upon.
4. COMPENSATION UPON TERMINATION AND OTHER AGREEMENTS.
(i) During any period that you fail to perform your duties
as a result of your incapacity due to Disability, you shall continue to
receive your salary at the rate then in effect and any benefits or awards
under any Plans shall continue to accrue during such period, to the extent
not inconsistent with such Plans, until your employment is terminated
pursuant to and in accordance with the provisions hereof. Thereafter, your
benefits shall be determined in accordance with the Plans then in effect.
(ii) If your employment shall be terminated by the Company
for Cause or by you as a result of your death or by you if you depart from
the Company (other than if the Company terminates your employment without
Cause), the Company shall pay you your salary through the Date of Termination
at the rate in effect immediately prior to the time a Notice of Termination
is given plus any benefits or awards (including both the cash and stock
components) which pursuant to the terms of any Plans have been earned or
become payable, but which have not yet been paid to you. Thereupon, the
Company shall have no further obligations to you under this Agreement.
(iii) Subject to Section 8 hereof, if, while this Agreement is
in force and effect, your employment by the Company shall be terminated by
the Company other than for Cause, you shall be entitled, without regard to
any contrary provisions of any Plan, to the benefits as provided below:
(A) the Company shall pay your salary through the Date
of Termination at the rate and times in effect immediately prior to the
time a Notice of Termination is given plus any benefits or awards
(including both the cash and stock components) which pursuant to the terms
of any Plans have been earned or become payable, but which have not yet
been paid to you (including amounts which previously had been deferred at
your request);
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(B) subject to Section 4(v) below, as severance pay, the
Company shall pay to you over a period of twelve months after the Date of
Termination based on the Company's standard payroll policy cash equal in
the aggregate to one times (1x) your annual base salary in effect
immediately prior to the Notice of Termination, plus one times (1x) the
amount of any cash bonus awards made to you with respect to the Company's
full fiscal year immediately preceding the Notice of Termination payable in
equal amounts over a period of twelve months after the Date of Termination
based on the Company's standard payroll policy;
(C) with respect to any stock options, restricted stock,
share rights or other incentive compensation awards made to you by the
Company which (i) were originally denominated in Common Stock of the
Company and (ii) are subject to various restrictions and limitations, such
equity awards shall have the features set forth in Section 5 herein and in
the underlying equity agreements; and
(D) if so requested by you, the Company shall pay for
reasonable outplacement services engaged by you in seeking new regular
full-time employment, which services will include the provision to you of
appropriate office, telephone, computer and secretarial services until the
earlier of (x) six (6) months from the Date of Termination or (y) such time
as you obtain regular full-time employment.
(iv) Following a termination by the Company without Cause,
while this Agreement is in force and effect, the Company shall maintain in
full force and effect, for the continued benefit of you and your dependents
for a period terminating on the earliest of (a) one year after the Date of
Termination, (b) the commencement date of equivalent benefits from a new
employer or (c) your normal retirement date under the terms of the Retirement
Policy, all insured and self-insured employee welfare benefit Plans in which
you and your dependents were entitled to participate immediately prior to the
Date of Termination, provided that your continued participation is possible
under the general terms and provisions of such Plans and you continue to pay
an amount equal to your regular contribution under such plans for such
participation (calculated at the rate of the contribution amounts in effect
immediately preceding the Date of Termination). In the event that your
participation in any such Plan is barred, the Company, at its sole cost and
expense, shall arrange to have issued for the benefit of you and your
dependents individual policies of insurance providing benefits substantially
similar (on an after-tax basis) to those which you otherwise would have been
entitled to receive under such Plans pursuant to this paragraph (iv) or, if
such insurance is not available at a reasonable cost to the Company, the
Company shall otherwise provide you and your dependents equivalent benefits
(on an after-tax basis). You shall not be required to pay any premiums or
other charges in an amount greater than that which you would have paid in
order to participate in such Plans at the rate in effect immediately
preceding the Date of Termination.
(v) The amount of any payment or coverage provided for in
Section 4(iii)(B) and (D) and 4(iv) shall be eliminated once you become a
regular full-time employee of another employer after the Date of Termination.
5. STOCK OPTION DOCUMENTATION. Effective as of August 28, 1998,
the Board of Directors and Compensation Committee have agreed to amend your
previously granted
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and any future Common Stock purchase options granted prior to the closing
date of a change in control to effect the following changes:
A. Should your employment be terminated by the Company without
Cause while those options remain outstanding but not otherwise fully
exercisable for all of the option shares, then each of those options shall
immediately become exercisable on an accelerated basis for that number of
additional option shares equal to the LESSER of (i) the total number of
shares for which the option is not otherwise exercisable on your Date of
Termination or (ii) twenty-percent (20%) of (x) the total number of unvested
shares at the time subject to your option plus (y) the number of shares
vested and exercisable under that option on the Date of Termination. Each of
your current options will remain outstanding until the EARLIEST to occur of
(i) the specified expiration date of the option term, (ii) the expiration of
the nine (9)-month period measured from the Date of Termination or (iii) the
closing date of a change in control in which the option is not assumed by the
successor entity (or parent company) or otherwise continued in full force and
effect and will continue to vest and become exercisable for additional shares
during the first five (5) months of that post-employment exercise period.
Accordingly, during that five (5)-month period, each of your current options
will continue to vest and become exercisable for any remaining unexercisable
shares at a monthly rate equal to one percent (1%) of (x) the total number of
unvested shares at the time subject to your option, plus (y) the number of
vested and exercisable shares under that option and held by you on such Date
of Termination. The option will become exercisable for those additional one
percent (1%) increments at the end of each month within that five (5)-month
post-employment exercise period.
B. After the end of such five (5)-month post-employment period,
all further vesting of the options will cease, and your options will
thereupon terminate and cease to be exercisable for any shares for which
those options have not otherwise become exercisable in accordance with the
additional vesting provisions of subparagraph 5.A of this Agreement. You
will have until the EARLIEST to occur of (i) the specified expiration date of
the option term, (ii) the expiration of the nine (9)-month period measured
from the Date of Termination or (iii) the closing date of a change in control
in which the option is not assumed by the successor entity (or parent
company) or otherwise continued in full force and effect, in which to
exercise each of your options for any or all shares in which that option is
exercisable at the end of the five (5)-month post-employment period.
Except as set forth herein, in addition, each new Common Stock
purchase option granted to you by the Company on and after the date of this
Agreement, but prior to the earliest of the expiration or termination date of
this Agreement or the closing date of the change in control, shall include
these same post-employment vesting and exercise provisions. Except as set
forth herein, any options outstanding at the time this Agreement expires or
terminates shall continue to be governed by the vesting and post-employment
exercise provisions of this Section 5.
6. BINDING AGREEMENT. This Agreement shall inure to the benefit
of and be enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If
you should die while any amount would still be payable to you hereunder if
you had continued to live, all such amounts, unless otherwise
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provided herein, shall be paid in accordance with the terms of this Agreement
to your devisee, legatee or other designee or, if there be no such designee,
to your estate.
7. FEES AND MITIGATION.
(i) Other than with respect to Section 15, if any action at
law or in equity is necessary to enforce or interpret the terms of this
Agreement or to protect the rights obtained hereunder, if you prevail, you
shall be entitled to be reimbursed by the Company for your reasonable legal
fees, including reasonable legal fees on appeal, costs and disbursements in
addition to any other relief to which you may be entitled.
(ii) You shall not be required to mitigate the amount of any
payment the Company becomes obligated to make to you in connection with this
Agreement, by seeking employment or otherwise. If you become a regular
full-time employee of another employer, however, you shall be obligated to
comply with Section 4(v) of this Agreement.
8. TAXES. All payments to be made to you under this Agreement
will be subject to required withholding of federal, state and local income
and employment taxes.
9. SURVIVAL. Except as set forth in the following sentence, the
respective obligations of, and benefits afforded to, the Company and you as
provided in this Agreement shall not survive termination of this Agreement,
except to the extent of compensation and health care coverage earned but not
paid or covered or expense reimbursement not paid as of the termination of
this Agreement and except for Sections 3, 5, 6, 7, 8, 9, 10, 12, 14 and 15 of
this Agreement. This Agreement (including Section 5 and the provisions and
documentation memorializing Section 5 of this Agreement) shall automatically
terminate in full immediately prior to the closing date of a change in
control of the Company or any time within five months prior to the closing
date of a change in control if you are terminated by the Company without
"cause" (as such term is defined in the modified employment agreement
(covering severance on change in control matters) entered into by you and the
Company on August 28, 1998) or you terminate for "good reason" (as such term
is defined in the modified employment agreement (covering severance on change
in control matters) entered into by you and the Company on August 28, 1998).
The benefits and obligations under Sections 3, 5, 6, 7, 9, 10, 12 and 15
shall survive expiration and/or non-renewal of this Agreement.
10. EMPLOYEE'S COMMITMENT. You agree that during and subsequent
to your period of employment with the Company, you will not at any time
communicate or disclose to any unauthorized person, without the written
consent of the Company, the existence, terms or conditions of this Agreement
or any proprietary or other confidential information concerning the Company
or any subsidiary pursuant to the terms set forth in the proprietary
information agreement executed by you.
11. NOTICE. Notices and all other communications provided for in
the Agreement shall be in writing and shall be deemed to have been duly given
when delivered or mailed by United States registered mail, return receipt
requested, postage prepaid and addressed, in the case of the Company, to
Cygnus, Inc., 400 Penobscot Drive, Redwood City, California 94063, or, in the
case of the undersigned employee, to the address set forth below such person's
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signature, provided that all notices to the Company shall be directed to the
attention of the Chairman of the Board or President and Chief Executive
Officer of the Company, with a copy to the Secretary of the Company, or to
such other address as either party may have furnished to the other in writing
in accordance herewith, except that notice of change of address shall be
effective only upon receipt.
12. MISCELLANEOUS; CHOICE OF LAW AND VENUE. No provision of this
Agreement may be modified, waived or discharged unless such modification,
waiver or discharge is agreed to in a writing signed by you and the Chairman
of the Board of the Company or the President and Chief Executive Officer of
the Company (provided you are not one of such persons). No waiver by either
party hereto at any time of any breach by the other party hereto of, or of
compliance with, any condition or provision of this Agreement to be performed
by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time. No
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof have been made by either party which are
not expressly set forth in this Agreement. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws
of the State of California. In the event of any dispute relating to any
provision of this Agreement, other than indemnification matters set forth in
Section 15 which shall be governed by the laws of the State of Delaware, the
parties shall use all reasonable efforts to settle the issues in good faith
negotiations. If the dispute cannot be settled amicably in this manner, all
actions, claims or legal proceedings in any way pertaining to this Agreement
or such transactions, excluding indemnification matters, shall be commenced
and maintained only in the courts of the State of California or of the United
States of America located within the State of California, and in no other
court or tribunal whatsoever, other than indemnification matters set forth in
Section 15 which shall be governed by the laws of the State of Delaware, and
the parties hereto each agree to irrevocably submit themselves to the
respective exclusive jurisdictions of such California courts.
13. VALIDITY. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any
other provision of this Agreement, which shall remain in full force and
effect.
14. RELATED AGREEMENTS. Except to the extent set forth in the
next sentence, to the extent that any provision of any other agreement
between the Company and you shall limit, qualify or be inconsistent with any
provision of this Agreement, then for purposes of this Agreement, while the
same shall remain in force, the provision of this Agreement shall control and
such provision of such other agreement shall be deemed to have been
superseded, and to be of no force or effect, as if such other agreement had
been formally amended to the extent necessary to accomplish such purpose. To
the extent there is a change in control of the Company during the term of
this Agreement, the employment agreement (the "employment agreement") related
to severance on a change in control, as modified on August 28, 1998, will
supersede this Agreement in its entirety and this Agreement shall have no
force or effect. The terms governing your stock option and share issuance
agreements, as amended, shall be deemed incorporated by reference herein as
if specifically set forth in its entirety herein.
15. INDEMNIFICATION. Notwithstanding anything contained herein to
the contrary, the indemnification provisions for officers and agents under
the Company's certificate
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of incorporation, indemnification agreement, Bylaws and insurance policies
will (to the maximum extent permitted by law and contract) be extended to you
with respect to any and all matters, events or transactions occurring or
effected during your employment with the Company.
16. INDEPENDENT LEGAL COUNSEL. By executing this Agreement, you
acknowledge that (i) this Agreement has been prepared by Brobeck, Phleger &
Harrison LLP ("Brobeck") acting in its capacity as legal counsel to the
Company and (ii) you have had an opportunity to seek advice from your own
legal counsel with respect to the matters contained herein and such
individual counsel is not a current attorney at Brobeck.
17. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of
which together will constitute one and the same instrument.
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If this Agreement correctly sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of
this Agreement which will then constitute our agreement on this subject.
Very truly yours,
CYGNUS, INC.
By
----------------------------------
((Signee))
((Signee_Title))
Agreed to this ________ day of _______,
1998
- ----------------------------------------
((First_Name)) ((Initial_Last_Name))
Address: 400 Penobscot Drive
Redwood City, CA 94063
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EXHIBIT A
TERMS, PROVISIONS AND DEFINITIONS
APPLICABLE TO CYGNUS, INC.
TERMINATION AGREEMENT
I. DEFINITIONS.
For purposes of the Agreement to which this EXHIBIT A is attached, the
terms set forth below shall be defined as follows:
CAUSE. Termination by the Company of your employment for "Cause" shall
mean a termination for any of the following reasons: (i) unsatisfactory
performance, as determined solely by the Board of Directors of the Company;
(ii) committing an act of dishonesty or any other workplace misconduct; (iii)
being convicted of a crime; (iv) committing an act of fraud against, or the
willful misappropriation of material property belonging to, the Company; (v)
committing an act that has an adverse effect on the Company's business,
prospects or reputation; or (vi) breaching the attached employment agreement
related to severance (unrelated to a change in control) or any
confidentiality or proprietary information agreement between you and the
Company. A termination by the Company for any other reason shall be a
termination "without Cause."
CHANGE IN CONTROL. A "change in control" of the Company shall mean a
change in control of a nature that would be required to be reported (assuming
such event has not been "previously reported") in response to Item 1(a) of
the Current Report on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); provided that, without limitation, such a change in control
shall be deemed to have occurred at such time as (a) any Person is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of 50% or more of the combined voting power of the
Company's voting securities; or (b) individuals who constitute the Board on
the date hereof (the "Incumbent Board") cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election, or nomination for election by
the Company's stockholders, was approved by a vote of at least three quarters
of the directors comprising the Incumbent Board (either by a specific vote or
by approval of the proxy statement of the Company in which such person is
named as a nominee for director, without objection to such nomination) shall
be, for purposes of this clause (b), considered as though such person were a
member of the Incumbent Board. Notwithstanding anything in the foregoing to
the contrary, no change in control shall be deemed to have occurred by virtue
of any transaction which results in you, or a group of Persons which includes
you, acquiring, directly or indirectly, 30% or more of the combined voting
power of the Company's voting securities.
DATE OF TERMINATION. "Date of Termination" shall mean (a) if your
employment is to be terminated for Disability, thirty (30) days after Notice
of Termination is given (provided that you shall not have returned to the
performance of your duties on a full-time basis during such thirty (30) day
period), (b) if your employment is to be terminated by the Company for Cause,
the date
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specified in the Notice of Termination, or (c) if your employment is to be
terminated by the Company for any reason other than Cause, the date specified
in the Notice of Termination, which in no event shall be a date earlier than
sixty (60) days after the date on which a Notice of Termination is given,
unless an earlier date has been expressly agreed to by you in writing either
in advance of, or after, receiving such Notice of Termination. In the case
of termination by the Company of your employment for Cause, if you have not
previously expressly agreed in writing to the termination, then within thirty
(30) days after receipt by you of the Notice of Termination with respect
thereto, you may notify the Company that a dispute exists concerning the
termination, in which event the Date of Termination shall be the date set
either by mutual written agreement of the parties or through a judicial
determination. During the pendency of any such dispute, the Company will not
pay you your compensation and severance, but will pay you the amount due you
under this Agreement only if the dispute is resolved in accordance with the
terms hereof in your favor.
DISABILITY. Termination of your employment based on "Disability" shall
mean termination because of your absence from your duties with the Company on
a full time basis for one hundred eighty (180) consecutive days as a result
of your incapacity due to physical or mental illness, unless within thirty
(30) days after Notice of Termination is given to you following such absence
you shall have returned to the full time performance of your duties.
PERSON. "Person" shall mean and include any individual, corporation,
partnership, group, association or other "person," as such term is used in
Section 14(d) of the Exchange Act, other than the Company, a wholly-owned
subsidiary of the Company or any employee benefit plan(s) sponsored by the
Company.
PLAN. The term "Plan" shall mean any compensation plan such as an
incentive, stock option or restricted stock plan or any pension or profit
sharing plan, other than the Agreement.
RETIREMENT. Termination by you or by the Company of your employment
based on "Retirement" shall mean termination on or after your normal
retirement date under the terms of the Company's retirement policy (or any
successor or substitute policy or policies of the Company put into effect
prior to the termination) (the "Retirement Policy").
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((Date))
as modified on
August 28, 1998
((First Name)) ((Initial_Last_Name))
((Title))
Cygnus, Inc.
400 Penobscot Drive
Redwood City, CA 94063
Dear ((Salutation)):
Cygnus, Inc., a Delaware corporation (the "Company"), considers the
establishment and maintenance of a sound and vital executive management team to
be essential to protecting and enhancing the best interests of the Company and
its stockholders. In this connection, the Company recognizes that, as is the
case with many publicly held corporations, the possibility of a change in
control may arise and that such possibility, and the uncertainty and questions
which it may raise among management, may result in the departure or distraction
of management personnel to the detriment of the Company and its stockholders.
In view of the above, the Board of Directors of the Company (the
"Board") has determined that appropriate steps should be taken to reinforce and
encourage the continued attention and dedication of members of the Company's
management to their assigned duties without distraction in circumstances arising
from the possibility of a change in control of the Company. In particular, the
Board believes it important, should the Company or its stockholders receive a
proposal for transfer of control of the Company, that you be able to assess and
advise the Board whether such proposal would be in the best interests of the
Company and its stockholders and to take such other action regarding such
proposal as the Board might determine to be appropriate, without being
influenced by the uncertainties of your own situation.
In order to induce you to remain in the employ of the Company, this
letter agreement (the "Agreement"), which has been approved by the Board, sets
forth the severance benefits which the Company agrees will be provided to you in
the event your employment with the Company is terminated under the circumstances
described below. This Agreement includes, as if set forth in full herein, those
definitions set forth in Exhibit A hereto, which exhibit is specifically
incorporated herein by this reference. All such capitalized terms used and
defined herein, shall have the meanings ascribed to them in EXHIBIT A.
1. AGREEMENT TO PROVIDE SERVICES; RIGHT TO TERMINATE.
(i) Except as otherwise provided in paragraph 1(ii) below, the
Company or you may terminate your employment at any time, subject to the
Company's providing the benefits hereinafter specified in accordance with the
terms hereof.
<PAGE>
(ii) In the event a tender offer or exchange offer is made by a
Person for more than 50% of the combined voting power of the Company's
outstanding equity securities, including convertible debt, ordinarily having the
right to vote at elections of directors ("Voting Securities"), or in the event
of any solicitation of proxies or written consents not approved by the Board,
you agree that such event will not lead you to leave the employ of the Company
(other than as a result of Disability or upon Retirement) and will render the
services contemplated in the recitals to this Agreement until such tender offer
or exchange offer has been abandoned or terminated or a change in control of the
Company has occurred.
2. TERM OF AGREEMENT. This Agreement shall commence on the date
hereof and shall continue in effect until December 31, 1998; provided, however,
that commencing on January 1, 1999 and each January 1 thereafter, the term of
this Agreement shall automatically be extended for one additional year unless at
least 90 days prior to such January 1st date, the Company or you shall have
given written notice that this Agreement shall not be extended; and provided,
further, that this Agreement shall continue in force and effect for a period of
twenty-seven (27) months beyond the term provided herein if a change in control
of the Company shall have occurred during such term. Notwithstanding anything
in this Section 2 in this Agreement to the contrary, this Agreement (and only
this Agreement) shall terminate if you or the Company terminates your employment
prior to a change in control of the Company, but in the case of a termination of
you by the Company without Cause or a termination by you for Good Reason or
death or Disability within five (5) months prior to the closing date of a change
in control, the specific benefits set forth in this Agreement shall be available
to you.
3. TERMINATION REGARDING CHANGE IN CONTROL. If any of the events
described in EXHIBIT A hereto constituting a change in control of the Company
shall have occurred, you shall be entitled to the benefits provided in
(1) paragraphs (ii) and (iii) of Section 4 hereof and (2) Section 5 hereof, upon
the termination of your employment within five (5) months prior to the closing
date of a change in control, on the change in control date or within twenty-four
(24) months after such event, unless such termination is (a) because of your
Retirement, (b) by the Company for Cause or (c) by you other than for Good
Reason (other than death or Disability).
Any purported termination by the Company or by you on or following a
change in control shall be communicated by written Notice of Termination to the
other party hereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a written notice which shall indicate the specific termination
provision in this Agreement relied upon.
4. COMPENSATION AND OTHER AGREEMENTS.
(i) If your employment shall be terminated for Cause prior to,
on or following a change in control of the Company, the Company shall pay you
your salary through the Date of Termination at the rate in effect immediately
prior to the time a Notice of Termination is given, plus any benefits or awards
(including both the cash and stock components) which pursuant to the terms of
any Plans have been earned or become payable, but which have not yet been paid
to you. Thereupon, the Company shall have no further obligations to you under
this Agreement.
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(ii) Subject to Sections 6 and 10 hereof, if, within five (5)
months prior to the closing date of a change in control, on the date on which,
or within twenty-four (24) months after, a change in control of the Company
shall have occurred, your employment by the Company shall be terminated (a) by
the Company other than for Cause or (b) by you for any Good Reason or death or
Disability, then you shall be entitled, without regard to any contrary
provisions of any Plan, to the benefits as provided below:
(A) the Company shall pay your salary through the Date of
Termination at the rate and times in effect immediately prior to the time a
Notice of Termination is given, plus any benefits or awards (including both
the cash and stock components) which pursuant to the terms of any Plans
have been earned or become payable, but which have not yet been paid to you
(including amounts which previously had been deferred at your request);
(B) as severance pay, the Company shall pay to you no later
than the fifth day following the Date of Termination cash equal to one
times (1x) your annual base salary in effect immediately prior to the
Notice of Termination, plus one times (1x) the amount of any cash bonus
awards made to you with respect to the Company's full fiscal year
immediately preceding the Notice of Termination;
(C) with respect to any stock options, restricted stock,
share rights or other incentive equity compensation awards made to you by
the Company which (i) were originally denominated in Common Stock of the
Company, and (ii) are subject to various restrictions and limitations
(based solely upon your period of continuous employment by the Company or a
Successor (as defined in Section 8 hereof)), such equity awards shall have
the features set forth in Section 5 of this Agreement and the underlying
equity agreements; and
(D) if so requested by you, the Company shall pay for
reasonable outplacement services engaged by you in seeking new regular
full-time employment, which services will include the provision to you of
appropriate office, telephone, computer and secretarial services until the
earlier of (x) six (6) months from the Date of Termination or (y) such time
as you obtain regular full-time employment.
(iii) within five (5) months prior to the closing date of a
change in control, on or within twenty-four (24) months following a change in
control of the Company, unless you are terminated for Cause or Retirement or you
terminate your employment other than for any Good Reason, death or Disability,
the Company shall maintain in full force and effect, for the continued benefit
of you and your dependents for a period terminating on the earliest of (a) one
year after the Date of Termination, (b) the commencement date of equivalent
benefits from a new employer or (c) your normal retirement date under the terms
of the Retirement Policy, all insured and self-insured employee welfare benefit
Plans in which you and your dependents were entitled to participate immediately
prior to the Date of Termination, provided that your continued participation is
possible under the general terms and provisions of such Plans and you continue
to pay an amount equal to your regular contribution under such plans for such
participation (calculated at the rate of the contribution amounts in effect
immediately preceding the Date of Termination). In the event that your
participation in any such Plan is barred, the
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Company, at its sole cost and expense, shall arrange to have issued for the
benefit of you and your dependents individual policies of insurance providing
benefits substantially similar (on an after-tax basis) to those which you
otherwise would have been entitled to receive under such Plans pursuant to this
paragraph (iv) or, if such insurance is not available at a reasonable cost to
the Company, the Company shall otherwise provide you and your dependents
equivalent benefits (on an after-tax basis). You shall not be required to pay
any premiums or other charges in an amount greater than that which you would
have paid in order to participate in such Plans at the rate in effect
immediately preceding the Date of Termination.
5. STOCK OPTION DOCUMENTATION. Effective as of August 28,
1998, the Board of Directors and Compensation Committee have agreed to amend
your previously granted and any future Common Stock purchase options granted
prior to the closing date of a change in control to provide in part that,
notwithstanding Section 4 to the contrary, upon a change in control, all of your
unvested stock options shall immediately vest in full and become exercisable for
all the option shares as fully-vested shares on the closing date of the change
in control (and any outstanding repurchase rights of the Company on the Common
Stock purchased or purchasable under your options shall lapse in their entirety
at that time and those shares shall immediately vest), and your options (to the
extent assumed or otherwise continuing in effect after the change in control)
shall remain so exercisable as fully vested shares until twelve months after the
Date of Termination or the expiration date of the option term, whichever occurs
first.
Each new Common Stock purchase option granted to you by the Company on
and after the date of this Agreement but prior to the earliest of the expiration
or termination date of this Agreement or the closing date of the change in
control shall include these same vesting acceleration and exercise provisions.
Any options outstanding at the time this Agreement expires or terminates shall
continue to be governed by the vesting and post-employment exercise provisions
of this Section 5.
6. RESTRICTIVE COVENANTS. Any salary and bonus payments and
continued benefit coverage to which you become entitled under subparagraphs (ii)
or (iii) of Section 4 shall immediately cease should you at any time during the
applicable salary and bonus or benefit coverage continuation period:
(i) directly solicit any individual to leave the Company's
employ for any reason, or
(ii) induce or attempt to induce any customer, supplier,
distributor, licensor, licensee or other business relation of the Company to
cease doing business with the Company.
You acknowledge that monetary damages may not be sufficient to
compensate the Company for any economic loss which may be incurred by reason of
your breach of the foregoing restrictive covenants. Accordingly, in the event
of any such breach, the Company will, in addition to the cessation of the
severance benefits provided you under Section 4 of this Agreement and any
remedies available to the Company at law, be entitled to obtain equitable relief
in the form of an injunction precluding you from continuing to engage in such
breach.
4
<PAGE>
7. PARACHUTE PAYMENTS AND EXCISE TAX.
(i) For purposes of applying Sections 280(G) and 4999 of the
Internal Revenue Code of 1986, as amended from time to time (the "Code") and the
Treasury Regulations thereunder and any applicable state income tax laws to the
benefits which become payable to you under Sections 4 and 5 of this Agreement,
the following definitions shall be in effect:
AVERAGE COMPENSATION means the average of your W-2 wages
from the Company for the five (5) calendar years (or such
fewer number of calendar years of employment with the
Company) completed immediately prior to the calendar year in
which the change in control is effected. Any W-2 wages for
a partial year of employment will be annualized, in
accordance with the frequency which such wages are paid
during such partial year, before inclusion in your Average
Compensation.
If any of your compensation from the Company during such
five (5)-year or shorter period was not included in your W-2
wages for U.S. income tax purposes, either because you were
not a U.S. citizen or resident or because such compensation
was excludible from income as foreign earned income under
Code Section 911, then such compensation will nevertheless
be included in your Average Compensation to the same extent
as if it were part of your W-2 wages.
OPTION PARACHUTE PAYMENT means, with respect to the
accelerated vesting of any of your options or option shares
pursuant to this Agreement or otherwise, the portion of that
vesting acceleration deemed to be a parachute payment under
Code Section 280G and the Treasury Regulations issued
thereunder. The portion of such acceleration which is
categorized as an Option Parachute Payment will be
calculated in accordance with the valuation provisions
established under Code Section 280G and the applicable
Treasury Regulations and will include an appropriate dollar
adjustment to reflect the lapse of your obligation to remain
in the Company's employ as a condition to the vesting of the
accelerated installment. In no event, however, will the
Option Parachute Payment attributable to any accelerated
option (or accelerated installment) exceed the spread (the
excess of the fair market value of the accelerated option
shares over the option exercise price payable for those
shares) existing at the time of acceleration.
PARACHUTE PAYMENT means any payment or benefit provided you
under this Agreement (other than the Option Parachute
Payment) which is deemed to constitute a parachute payment
within the
5
<PAGE>
meaning of Code Section 280G(b)(2) and the Treasury
Regulations issued thereunder.
PRESENT VALUE means the value, determined as of the date of
the change in control, of any payment in the nature of
compensation to which you become entitled in connection with
the change in control (the Option Parachute Payment
attributable to the accelerated vesting of your options or
option shares) or the subsequent termination of your
employment, including (without limitation) the Option
Parachute Payment attributable to the accelerated vesting of
any of your remaining options or option shares and any
additional benefits to which you become entitled under this
Agreement (the salary and bonus and outplacement services
continuation payments under Section 4(ii) and the continued
benefit coverage under Section 4(iii)). The Present Value of
each such payment shall be determined in accordance with the
provisions of Code Section 280G(d)(4), utilizing a discount
rate equal to one hundred twenty percent (120%) of the
applicable Federal rate in effect at the time of such
determination, compounded semi-annually to the effective
date of the change in control.
(ii) In the event there is any disagreement between you and the
Company as to whether one or more payments to which you become entitled in
connection with either the change in control or your subsequent termination of
employment constitute Parachute Payments or Option Parachute Payments or as to
the determination of the Present Value thereof, such dispute will be resolved as
follows:
(A) In the event temporary, proposed or final Treasury
Regulations in effect at the time under Code Section 280G (or applicable
judicial decisions) specifically address the status of any such payment or
the method of valuation therefor, the characterization afforded to such
payment by the Regulations (or such decisions) will, together with the
applicable valuation methodology, be controlling.
(B) In the event Treasury Regulations (or applicable
judicial decisions) do not address the status of any payment in dispute,
the matter will be submitted for resolution to an independent auditor
mutually acceptable to the Company and you ("Independent Auditors"). The
resolution reached by the Independent Auditors will be final and
controlling. All expenses incurred in connection with the retention of the
Independent Auditors to resolve the dispute shall be shared equally by you
and the Company.
(C) In the event Treasury Regulations (or applicable
judicial decisions) do not address the appropriate valuation methodology
for any payment in dispute, the Present Value thereof will, at the
Independent Auditor's election, be determined through an independent
third-party appraisal, and the expenses incurred in obtaining such
appraisal shall be shared equally by you and the Company.
6
<PAGE>
(iii) In the case(s) in which Section 7(ii) of this Agreement
applies, no salary or bonus or outplacement services reimbursement continuation
payments will be made to you under this Agreement and none of your options shall
vest and become exercisable on an accelerated basis (and none of your unvested
shares shall vest on an accelerated basis) under this Agreement or otherwise,
until the Present Value of the Option Parachute Payment attributable to the
accelerated vesting of those options or option shares has been determined and
the status of any payments in dispute under Section 7(iii) has been resolved in
accordance therewith. The post-termination exercise period for any options
which cannot be exercised for the accelerated shares by reason of the foregoing
limitation shall automatically be stayed and shall not be deemed to expire
during any period the option remains so unexercisable.
(iv) Should one or more of the benefits which become payable to
you under Sections 4 and 5 of this Agreement be deemed to constitute an excess
parachute payment under Code Section 280(G) or any applicable state income tax
laws, the Company will provide you with a full tax gross-up with respect to your
excise tax liability under Code Section 4999 and any such applicable state
income tax laws. The amount of such tax gross-up shall be determined pursuant
to the following formula:
X = Y DIVIDED BY [1 - (A + B + C)], where
X is the total dollar payment (the "Tax Gross-Up") required
to be paid by the Company on your behalf under this
Agreement,
Y is the total excise tax (the "Excise Tax") you incur
pursuant to Code Section 4999 (or any successor provision)
and any such applicable state income tax laws with respect
to the excess parachute payment attributable to one or more
of the benefits provided you under Sections 4 and 5 of this
Agreement,
A is the combined Excise Tax rate in effect under Code
Section 4999 and any such applicable state income tax laws
for such excess parachute payment,
B is the highest combined marginal federal income and
applicable state income tax rate in effect for you, after
taking into account the deductibility of state income taxes
against federal income taxes to the extent allowable, for
the calendar year in which the Tax Gross-Up is paid, and
C is the applicable Hospital Insurance (Medicare) Tax Rate
in effect for you for the calendar year in which the Tax
Gross-Up is paid.
INITIAL PAYMENT. Within ninety (90) days after the determination
is made by the Independent Auditors or by the Internal Revenue Service that you
have received a
7
<PAGE>
parachute payment for which you are liable for an Excise Tax, you shall submit
that determination to the Company, and the Company shall calculate the Tax
Gross-Up to which you are entitled under this Section 7(iv) by reason of the
Excise Tax attributable to that payment. The Company shall pay such Tax
Gross-Up to you (net of all applicable withholding taxes, including any taxes
required to be withheld under Code Section 4999) within ten (10) business days
after your submission of the parachute payment determination.
FINAL DETERMINATION. In the event that your actual Excise Tax
liability is determined by a Final Determination to be greater than the Excise
Tax liability taken into account for purposes of the Tax-Gross-Up paid to you
pursuant to this Section 7(iv), then within ninety (90) days following the Final
Determination, you shall submit that Final Determination to the Company, and the
Company shall calculate the additional Tax Gross-Up to which you are entitled on
the basis of the Final Determination. Within ten (10) business days after
receipt of such Final Determination, the Company shall pay you the additional
Tax Gross-Up attributable to that excess Excise Tax liability.
REFUND. In the event that your actual Excise Tax liability is
determined by a Final Determination to be less than the Excise Tax liability
taken into account for purposes of the Tax Gross-Up paid to you pursuant to this
Section 7(iv), then you shall refund to the Company, promptly upon receipt, that
portion of any federal or state tax refund attributable to the Excise Tax
overpayment.
DEFINITION. For purposes of this Section 7(iv), a Final
Determination means an audit adjustment by the Internal Revenue Service agreed
to by you or your estate, with the consent of the Company (which shall not be
unreasonably withheld), or an adjustment sustained by a court of competent
jurisdiction in a decision with which you and the Company concur or with respect
to which the period within which an appeal may be filed has lapsed without a
notice of appeal being filed.
8. SUCCESSORS; BINDING AGREEMENT.
(i) The Company will seek to have any Successor, by agreement in
form and substance satisfactory to you, assent to the fulfillment by the Company
of its obligations under this Agreement. Failure of the Company to obtain such
assent at least three business days prior to the time a Person becomes a
Successor (or where the Company does not have at least three business days'
advance notice that a Person may become a Successor, within one business day
after having notice that such Person may become or has become a Successor) shall
constitute Good Reason for termination by you of your employment and, if a
change in control of the Company has occurred, shall entitle you immediately to
the benefits provided in paragraphs (ii) and (iii) of Section 4 and Section 5
hereof upon delivery by you of a Notice of Termination. For purposes of this
Agreement, "Successor" shall mean any Person that succeeds to, or has the
practical ability to control (either immediately or with the passage of time),
the Company's business directly, by merger or consolidation, or indirectly, by
purchase of the Company's Voting Securities, all or substantially all of its
assets or otherwise.
(ii) This Agreement shall inure to the benefit of and be
enforceable by your personal or legal representatives, executors,
administrators, successors, heirs, distributees,
8
<PAGE>
devisees and legatees. If you should die while any amount would still be
payable to you hereunder if you had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to your devisee, legatee or other designee or, if there be no such
designee, to your estate.
9. FEES AND EXPENSES. The Company shall pay all reasonable legal
fees and related expenses incurred by you in connection with the Agreement
following a change in control of the Company, including, without limitation,
(a) all such fees and expenses, if any, incurred in contesting or disputing any
such termination or (b) your seeking to obtain or enforce any right or benefit
provided by this Agreement.
10. TAXES. All payments to be made to you under this Agreement will
be subject to required withholding of federal, state and local income and
employment taxes.
11. SURVIVAL. The respective obligations of, and benefits afforded
to, the Company and you as provided in Sections 3, 4, 5, 6, 7, 8, 9, 10, 11, 12,
14, 16 and 17 of this Agreement shall survive termination of this Agreement in
accordance with their respective terms. The benefits and obligations available
under Sections 3, 5, 8(ii), 9, 11, 12, 14 and 17 of this Agreement shall survive
expiration and/or non-renewal of this Agreement in accordance with their
respective terms.
12. EMPLOYEE'S COMMITMENT. You agree that during and subsequent to
your period of employment with the Company, you will not at any time communicate
or disclose to any unauthorized person, without the written consent of the
Company, the existence, terms or conditions of this Agreement or any proprietary
or other confidential information concerning the Company or any subsidiary
pursuant to the terms set forth in the proprietary information agreement
executed by you and the Company.
13. NOTICE. Notices and all other communications provided for in the
Agreement shall be in writing and shall be deemed to have been duly given when
delivered or mailed by United States registered mail, return receipt requested,
postage prepaid and addressed, in the case of the Company, to Cygnus, Inc., 400
Penobscot Drive, Redwood City, California 94063, or, in the case of the
undersigned employee, to the address set forth below such person's signature,
provided that all notices to the Company shall be directed to the attention of
the Chairman of the Board or President and Chief Executive Officer of the
Company, with a copy to the Secretary of the Company, or to such other address
as either party may have furnished to the other in writing in accordance
herewith, except that notice of change of address shall be effective only upon
receipt.
14. MISCELLANEOUS; CHOICE OF LAW AND VENUE. No provision of this
Agreement may be modified, waived or discharged unless such modification, waiver
or discharge is agreed to in a writing signed by you and the Chairman of the
Board of Directors of the Company or the Company's President and Chief Executive
Officer (provided you are not one of such persons). No waiver by either party
hereto at any time of any breach by the other party hereto of, or of compliance
with, any condition or provision of this Agreement to be performed by such other
party shall be deemed a waiver of similar or dissimilar provisions or conditions
at the same or at any prior or subsequent time. No agreements or
representations, oral or otherwise,
9
<PAGE>
express or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of California. In the event of any dispute relating to
any provision of this Agreement, other than indemnification matters set forth in
Section 17 which shall be governed by the laws of the State of Delaware, the
parties shall use all reasonable efforts to settle the issues in good faith
negotiations. If the dispute cannot be settled amicably in this manner, all
actions, claims or legal proceedings in any way pertaining to this Agreement or
such transactions shall be commenced and maintained only in the courts of the
State of California or of the United States of America located within the State
of California, and in no other court or tribunal whatsoever, other than
indemnification matters set forth in Section 17 which shall be governed by the
laws of the State of Delaware, and the parties hereto each agree to irrevocably
submit themselves to the respective exclusive jurisdictions of such California
courts.
15. VALIDITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
16. RELATED AGREEMENTS. To the extent that any provision of any
other agreement between the Company and you shall limit, qualify or be
inconsistent with any provision of this Agreement, then for purposes of this
Agreement, while the same shall remain in force, the provision of this Agreement
shall control and such provision of such other agreement shall be deemed to have
been superseded, and to be of no force or effect, as if such other agreement had
been formally amended to the extent necessary to accomplish such purpose. Upon
a Notice of Termination of you by the Company without Cause or a termination by
you for Good Reason or Disability or death within five (5) months prior to a
change in control, on or within twenty-four (24) months after a change in
control, notwithstanding the applicability of the agreement originally entered
into by you on August 28, 1998 with respect to severance and other matters
unrelated to a change in control (the "1998 Agreement"), the 1998 Agreement
shall be superseded in its entirety by the terms of this Agreement and the 1998
Agreement shall have no force or effect (notwithstanding anything in the 1998
Agreement to the contrary). The terms governing your stock option and stock
issuance agreements, as amended, shall be deemed incorporated by reference
herein as if specifically set forth in their entirety herein.
17. INDEMNIFICATION. Notwithstanding anything contained herein to
the contrary, the indemnification provisions for officers, agents and directors
under the Company's certificate of incorporation, indemnification agreement,
Bylaws and insurance policies will (to the maximum extent permitted by law and
contract) be extended to you with respect to any and all matters, events or
transactions occurring or effected during your employment with the Company or
Successor.
18. INDEPENDENT LEGAL COUNSEL. By executing this Agreement, you
acknowledge that (i) this Agreement has been prepared by Brobeck, Phleger &
Harrison LLP ("Brobeck") acting in its capacity as legal counsel to the Company
and (ii) you have had an opportunity to seek advice from your own legal counsel
with respect to the matters contained herein and such individual counsel is not
a current attorney at Brobeck.
10
<PAGE>
19. COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
If this Agreement correctly sets forth our agreement on the subject
matter hereof, kindly sign and return to the Company the enclosed copy of this
Agreement which will then constitute our agreement on this subject.
Very truly yours,
CYGNUS, INC.
By
-----------------------------------
((Signee))
((Signee_Title))
Modification Agreed to this 28th day of
August, 1998
- ----------------------------------------
((First_Name)) ((Initial_Last_Name))
Address:
400 Penobscot Drive
Redwood City, CA 94063
11
<PAGE>
EXHIBIT A
TERMS, PROVISIONS AND DEFINITIONS
APPLICABLE TO CYGNUS, INC.
CHANGE IN CONTROL AGREEMENT
I. DEFINITIONS.
For purposes of the Agreement to which this EXHIBIT A is attached, the
terms set forth below shall be defined as follows:
CAUSE. Termination by the Company of your employment for "Cause" shall
mean termination upon (a) the willful and continued failure by you to perform
substantially your duties with the Company (other than any such failure
resulting from your incapacity due to physical or mental illness) after a demand
for substantial performance is delivered to you by the Chairman of the Board or
President and Chief Executive Officer of the Company or its Successor which
specifically identifies the manner in which such executive believes that you
have not substantially performed your duties, or (b) the willful engaging by you
in illegal conduct which is materially and demonstrably injurious to the
Company. For purposes of this definition, no act, or failure to act, on your
part shall be considered "willful" unless done, or omitted to be done, by you in
bad faith and without reasonable belief that your action or omission was in, or
not opposed to, the best interests of the Company. Any act, or failure to act,
based upon authority given pursuant to a resolution duly adopted by the Board or
based upon the advice of counsel for the Company shall be conclusively presumed
to be done, or omitted to be done, by you in good faith and in the best
interests of the Company. It is also expressly understood that your attention
to matters not directly related to the business of the Company shall not provide
a basis for termination for Cause so long as the Board has approved your
engagement in such activities. Notwithstanding the foregoing, you shall not be
deemed to have been terminated for Cause unless and until there shall have been
delivered to you a copy of a resolution duly adopted by the affirmative vote of
not less than three quarters of the entire membership of the Board at a meeting
of the Board called and held for the purpose (after reasonable notice to you and
an opportunity for you, together with your counsel, to be heard before the
Board), finding that in the good faith opinion of the Board you were guilty of
the conduct set forth above in (a) or (b) of this definition and specifying the
particulars thereof in detail.
CHANGE IN CONTROL. A "change in control" of the Company shall mean a
change in control of a nature that would be required to be reported (assuming
such event has not been "previously reported") in response to Item 1(a) of the
Current Report on Form 8-K, as in effect on the date hereof, pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"); provided that, without limitation, such a change in control
shall be deemed to have occurred at such time as (a) any Person is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of 50% or more of the combined voting power of the
Company's Voting Securities; or (b) individuals who constitute the Board on the
modified date hereof (the "Incumbent Board") cease for any reason to constitute
at least a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company's stockholders, was approved by a
A-1
<PAGE>
vote of at least three quarters of the directors comprising the Incumbent Board
(either by a specific vote or by approval of the proxy statement of the Company
in which such person is named as a nominee for director, without objection to
such nomination) shall be, for purposes of this clause (b), considered as though
such person were a member of the Incumbent Board. Notwithstanding anything in
the foregoing to the contrary, no change in control shall be deemed to have
occurred by virtue of any transaction which results in you, or a group of
Persons which includes you, acquiring, directly or indirectly, 30% or more of
the combined voting power of the Company's Voting Securities.
DATE OF TERMINATION. "Date of Termination" shall mean (a) if your
employment is to be terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that you shall not have returned to the
performance of your duties on a full-time basis during such thirty (30) day
period), (b) if your employment is to be terminated by the Company for Cause,
the date specified in the Notice of Termination, or (c) if your employment is to
be terminated by you for Good Reason or by the Company for any reason other than
Cause, the date specified in the Notice of Termination, which in no event shall
be a date earlier than ninety (90) days after the date on which a Notice of
Termination is given, unless an earlier date has been expressly agreed to by you
in writing either in advance of, or after, receiving such Notice of Termination.
In the case of termination by the Company of your employment for Cause, if you
have not previously expressly agreed in writing to the termination, then within
thirty (30) days after receipt by you of the Notice of Termination with respect
thereto, you may notify the Company that a dispute exists concerning the
termination, in which event the Date of Termination shall be the date set either
by mutual written agreement of the parties or through a judicial determination.
During the pendency of any such dispute, the Company will continue to pay you
your full compensation in effect immediately prior to the time the Notice of
Termination is given and until the dispute is resolved in accordance with the
terms hereof.
DISABILITY. Termination of your employment based on "Disability" shall
mean termination because of your absence from your duties with the Company on a
full time basis for one hundred eighty (180) consecutive days as a result of
your incapacity due to physical or mental illness, unless within thirty (30)
days after Notice of Termination is given to you following such absence, you
shall have returned to the full time performance of your duties.
GOOD REASON. Termination by you of your employment for "Good Reason" shall
mean termination based on:
(A) an adverse change in your status or position(s) as an officer of
the Company as in effect immediately prior to the change in control, including,
without limitation, any adverse change in your status or position as a result of
a material diminution in your duties or responsibilities (other than, if
applicable, any such change directly attributable to the fact that the Company
is no longer publicly owned) or the assignment to you of any duties or
responsibilities which, in your reasonable judgment, are inconsistent with such
status or position(s), or any removal of you from or any failure to reappoint or
reelect you to such position(s) (except in connection with the termination of
your employment for Cause or Retirement or by you other than for Good Reason);
A-2
<PAGE>
(B) a reduction by the Company in your base salary as in effect
immediately prior to the change in control;
(C) the failure by the Company to continue in effect any Plan in
which you are participating at the time of the change in control of the Company
(or Plans providing you with at least substantially similar benefits) other than
as a result of the normal expiration of any such Plan in accordance with its
terms as in effect at the time of the change in control, or the taking of any
action, or the failure to act, by the Company which would adversely affect your
continued participation in any of such Plans on at least as favorable a basis to
you as is the case on the date of the change in control or which would
materially reduce your benefits in the future under any of such Plans or deprive
you of any material benefit enjoyed by you at the time of the change in control;
(D) the failure by the Company to provide and credit you with the
number of paid vacation days to which you are then entitled in accordance with
the Company's normal vacation policy as in effect immediately prior to the
change in control;
(E) the Company's requiring you to be based more than 50 miles from
where your office is located immediately prior to the change in control except
for required travel on the Company's business to an extent substantially
consistent with the business travel obligations which you undertook on behalf of
the Company prior to the change in control;
(F) the failure by the Company to obtain from any Successor the
assent to this Agreement as contemplated by the terms hereof;
(G) any purported termination by the Company of your employment which
is not effected pursuant to a Notice of Termination satisfying the requirements
of this Agreement; and for purposes of this Agreement, no such purported
termination shall be effective; or
(H) any refusal by the Company to continue to allow you to attend to
matters or engage in activities not directly related to the business of the
Company which, prior to the change in control, you were permitted by the Board
to attend to or engage in.
PERSON. "Person" shall mean and include any individual, corporation,
partnership, group, association or other "person," as such term is used in
Section 14(d) of the Exchange Act, other than the Company, a wholly-owned
subsidiary of the Company or any employee benefit plan(s) sponsored by the
Company.
PLAN. The term "Plan" shall mean any compensation plan such as an
incentive, stock option or restricted stock plan or any pension or profit
sharing plan, other than the Agreement.
RETIREMENT. Termination by you or by the Company of your employment based
on "Retirement" shall mean termination on or after your normal retirement date
under the terms of the Company's retirement policy (or any successor or
substitute policy or policies of the Company put into effect prior to a change
in control) (the "Retirement Policy").
A-3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 18,708
<SECURITIES> 36,539<F1>
<RECEIVABLES> 1,515
<ALLOWANCES> 400
<INVENTORY> 770
<CURRENT-ASSETS> 58,379
<PP&E> 18,766
<DEPRECIATION> 12,618
<TOTAL-ASSETS> 71,967
<CURRENT-LIABILITIES> 14,662
<BONDS> 76,117
0
0
<COMMON> 136,921
<OTHER-SE> (161,301)
<TOTAL-LIABILITY-AND-EQUITY> 71,967
<SALES> 587
<TOTAL-REVENUES> 9,123
<CGS> 424
<TOTAL-COSTS> 2,701
<OTHER-EXPENSES> 31,015
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,989
<INCOME-PRETAX> (24,810)
<INCOME-TAX> 10
<INCOME-CONTINUING> (24,830)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,820)
<EPS-PRIMARY> (1.23)
<EPS-DILUTED> (1.23)
<FN>
<F1>THIS AMOUNT REPRESENTS SHORT-TERM INVESTMENTS HELD BY THE COMPANY 9/30/98.
</FN>
</TABLE>
