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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) Annual report pursuant to Section 13 or 15(d) of the Securities Act of
1934 for the fiscal year ended December 31, 1997 or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
COMMISSION FILE NO. 0-18962
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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
(Address of principal executive offices and zip code)
(650) 369-4300
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK,
$ 0.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant, based upon the closing price of Common Stock on FEBRUARY 4, 1998
as reported on the Nasdaq National Market was APPROXIMATELY $355,667,442.
Determination of affiliate status for this purpose is not a determination of
affiliate status for any other purpose.
20,179,713
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(Number of shares of common stock outstanding as of FEBRUARY 4, 1998)
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A
for its 1998 Annual Meeting of Stockholders is incorporated by reference into
Part III hereof.
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CYGNUS, INC.
1997 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
ITEM 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 16
ITEM 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 16
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . . . . . . . . . 18
ITEM 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . 19
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . 20
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . 26
ITEM 8. Financial Statements and Supplementary Data. . . . . . . . . . . . 26
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . 26
PART III
ITEM 10. Directors and Executive Officers of the Registrant . . . . . . . . 27
ITEM 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 12. Security Ownership of Certain Beneficial Owners and Management . . 27
ITEM 13. Certain Relationships and Related Transactions . . . . . . . . . . 27
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. . 28
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
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PART I
ITEM 1. BUSINESS
OVERVIEW
This Report on Form 10-K contains projections and forward looking statements
regarding future events and the future financial performance of the Company. We
wish to caution you that these statements are only our predictions and
objectives. Actual events or results may differ materially. Please note in
particular throughout this document where we have highlighted specific risks
associated with the Company and its activities. We also refer you to documents
the Company files from time to time, such as its Form 10-Q and Form 8-K reports.
This document, as well as the Company's Form 10-Q and Form 8-K reports, contain
important factors that could cause our actual results to differ from our current
expectations and the forward-looking statements contained in this Report on Form
10-K.
Cygnus, Inc. ("Cygnus" or the "Company") 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 painless, bloodless
and automatic glucose monitoring device (the GlucoWatch system) and transdermal
drug delivery systems.
The Company entered into Note Purchase Agreements dated as of February 3,
1998 with certain institutional investors to issue and sell approximately $43
million of 4% Senior Subordinated Convertible Notes due 2005 (the "Notes").
This transaction closed on February 5, 1998. The Notes were sold at par and
mature on February 1, 2005 and bear interest at a rate of 4% per annum. After
deducting the debt issuance costs, the Company received approximately $40.0
million. Interest on the Notes may be paid in Common Stock or cash at the
option of the Company. The Notes are convertible into Common Stock of the
Company at a conversion price equal to the average of the two lowest trade
prices of the Common Stock as reported on the Nasdaq National Market for a
specified number of trading days immediately preceding the conversion date
until February 1, 2000. The conversion price will be subject to maximum
conversion prices until February 1, 2000 and minimum conversion prices until
February 1, 1999. Commencing February 1, 2000, the conversion price of the
Notes will be set at a fixed price equal to the greater of $150.00 per share
and 150% of the market price of the Common Stock for 20 trading days
preceding such date. Debt issuance costs of approximately $2.6 million will
result in additional interest charges to be recorded over the term of the
Notes.
On February 4, 1998, the Company completed a direct public offering of
905,740 shares of its Common Stock for total proceeds to the Company of
approximately $13.8 million. The Common Stock was sold at a discount from the
market price.
THE GLUCOWATCH SYSTEM.
The Company's GlucoWatch system represents a potential advance in diabetes
care technology as compared to the currently prevailing "finger stab" blood
monitoring method. The GlucoWatch is designed to measure glucose painlessly,
bloodlessly and automatically through the ease and convenience of a device worn
like a wristwatch. Worldwide sales of blood glucose self-monitoring products
were approximately $2.5 billion in 1996, which represented an increase of
approximately 14% over 1995 levels. It is estimated that more than 40 million
people in North America, Europe, Japan and Korea have diabetes. In the United
States ("U.S.") alone, more than ten million people have been diagnosed with
another five million believed to have the condition. The number of people
with diabetes is expected to continue to grow with the aging of the
population, while the number of diagnosed cases is also expected to increase
with changes in diagnostic standards and new diagnostic technologies.
Clinical studies sponsored by the National Institutes of Health ("NIH")
indicate that better management of glucose levels through more frequent
testing would enable people with diabetes to reduce or significantly delay
many serious diabetes-related health complications. However, largely due to
the pain of repetitive finger stabbing and the associated disruption of daily
life, the Company believes most people with diabetes currently test their
glucose levels less than half as often as recommended. As a result of the
drawbacks of the finger stab method, the Company believes that there is a
significant unmet demand for a painless, bloodless, automatic
glucose-monitoring device.
To address this unmet demand, the Company is developing the GlucoWatch,
which is expected to reduce or eliminate significant drawbacks of the finger
stab testing technique. The device, which is worn like a wristwatch is
designed to
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automatically extract and measure glucose levels painlessly through intact
skin every twenty or thirty minutes. The extracted glucose is collected in a
consumable transdermal pad called the AutoSensor, which is attached to the
back of the device and replaced approximately every twelve hours. The
GlucoWatch system is intended to offer a combination of features not
available in currently marketed devices, such as: an electronic memory to
store and display glucose levels; the ability to download stored information
to personal computers to analyze glucose data and trends; alarms indicating
hypo- and hyperglycemic conditions; and event markers which record factors
that affect glucose levels. The GlucoWatch can be worn during the day and
night for continuous glucose monitoring. The Company believes the GlucoWatch
system will provide the frequent testing and trend analysis of glucose
levels necessary to enable people with diabetes to better manage their
condition and eliminate the pain and inconvenience associated with
repetitively stabbing the finger to test the blood. The Company believes
this unique combination of features will result in better control of glucose
levels, improved quality of life and more cost-effective healthcare.
In developing the GlucoWatch, the Company has sought to design a device
that would offer the above features and be substantially equivalent to finger
stab blood glucose monitoring in terms of accuracy and precision. Test
results from a clinical study using a prototype of the GlucoWatch, which were
published in NATURE MEDICINE (November 1995), indicated a level of accuracy
and precision that the Company believes is comparable to those associated
with finger stab blood glucose monitoring devices. In 1997, Cygnus completed
extensive research clinical studies using a version of the GlucoWatch
designed for commercial sale. The results of these studies demonstrated that
the GlucoWatch is able to measure glucose levels with statistically
significant accuracy and precision across a variety of conditions. Based on
the Company's research clinical studies and published performance data for
certain currently marketed finger stab monitoring devices, the Company
believes the GlucoWatch is capable of a level of accuracy and precision
comparable to such devices. There can be no assurance that the Company will
be able to successfully develop the GlucoWatch or that it will obtain
clearance or approval from the U.S. Food and Drug Administration (the "FDA").
To prepare a submission to the FDA for approval of the GlucoWatch, the
Company has initiated registration clinical trials. Based on discussions with
the FDA, the Company believes that the submission will be in the form of a
510(k) notification, although the final determination will not be made until the
FDA receives the submission. The Company anticipates submitting a 510(k)
notification in the second quarter of 1998, although the potential exists for
this filing to be deferred until the second half of 1998.
Although the Company believes its clinical results to date are
encouraging, to seek FDA approval for the GlucoWatch system, the Company will
need to conduct registration clinical trials. No assurance can be given that
data generated in such trials will be as favorable as data generated in
clinical trials to date or that, even if such data are as favorable, such
data will provide a sufficient basis for the approval of the GlucoWatch
system by the FDA.
In 1996, Cygnus entered into collaborations with Becton Dickinson and
Yamanouchi for the commercialization of the GlucoWatch. Under the Becton
Dickinson agreement, the Company has granted Becton Dickinson exclusive
worldwide marketing and distribution rights, with the exception of Japan and
Korea. Under this agreement, the Company has primary responsibility for product
development, regulatory approvals, manufacturing and customer support, and
retains the option to participate in sales and marketing. The Company also
entered into an agreement with Yamanouchi for the marketing and distribution of
the GlucoWatch in Japan and Korea. Under these agreements, Cygnus is eligible to
receive up-front and milestone payments totaling $30 million prior to
commercialization and to receive a percentage of the product's future commercial
success. In June 1997, Cygnus granted Becton Dickinson exclusive worldwide
marketing rights, with the exception of Japan and Korea, for the Company's
second generation glucose monitor. Becton Dickinson has agreed to fund, in part,
the development of the product. In the past some of the Company's licensees,
distributors and collaborators have approached the Company requesting
modification of the terms of existing agreements. Becton Dickinson has recently
approached the Company to discuss modifying the non-compete terms of the
existing agreement. The Company is unable to predict the outcome of these
discussions.
TRANSDERMAL DRUG DELIVERY SYSTEMS.
Transdermal drug delivery systems provide for the controlled release of
drugs directly into the bloodstream through intact skin. The Company's
transdermal drug delivery products are thin multilayer systems, in the form of
small adhesive patches. Transdermal delivery can provide a number of advantages
over conventional methods of drug administration, including enhanced efficacy,
increased safety, greater convenience and improved patient compliance. By
delivering a steady flow of drugs into the bloodstream over an extended period
of time, transdermal systems can avoid the "peak and valley" effect of oral or
injectable therapy and can enable more controlled, effective treatment. By
avoiding first pass metabolism through the gastrointestinal tract and the liver,
the therapeutically equivalent dosage for the transdermal delivery of certain
compounds can be significantly less than the corresponding oral dosage,
potentially reducing dosage-related side-effects.
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The Company's transdermal product line is focused on contraception, hormone
replacement therapy and smoking cessation. The Company has two marketed
products, the Nicotrol nicotine patch and the FemPatch estrogen hormone
replacement patch. The Company has strategic collaborations for its transdermal
products with Ortho Pharmaceutical Corporation, a subsidiary of Johnson &
Johnson (contraception), American Home Products Corporation, Sanofi and
Warner-Lambert (hormone replacement therapy), and Pharmacia (smoking cessation).
PORTFOLIO OF PRODUCTS
The data in the following table summarize Cygnus' current product portfolio,
the potential indications, development status and licensees of marketing and
distribution rights. The data in the table are qualified by reference to the
more detailed descriptions set forth herein. Development of the various
products listed is being funded by the designated licensee or distributor, the
Company, or both. The Company has additional products in early development,
which are not listed below, and is conducting a number of new product
feasibility studies.
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PRODUCT PORTFOLIO
<TABLE>
<CAPTION>
PRODUCT INDICATIONS STATUS (1) MARKETING RIGHTS
- ------- ----------- ---------- ----------------
DIAGNOSTIC SYSTEMS:
- ------------------
PAINLESS, AUTOMATIC GLUCOSE MONITORING:
- ---------------------------------------
<S> <C> <C> <C>
GlucoWatch Diabetes Registration clinicals Becton Dickinson
Yamanouchi
DRUG DELIVERY SYSTEMS:
- ----------------------
TRANSDERMAL DRUG DELIVERY:
- --------------------------
SMOKING CESSATION:
Nicotrol Smoking cessation Commercialized in North Pharmacia & Upjohn, Inc.:
America and certain Johnson & Johnson (2)
European countries
Nicotine Patch Smoking cessation Phase 2 clinicals completed Cygnus
HORMONE REPLACEMENT:
Estrogen 7-Day:
FemPatch Menopausal symptoms Commercialized in North Sanofi: Warner-Lambert (3)
America
E(2)III Menopausal symptoms Phase 3 clinicals American Home Products
Estrogen/Progestin:
Combination Menopausal symptoms Phase 3 clinicals American Home Products
3.5-Day
CONTRACEPTION:
Estrogen/Progestin:
Combination 7-Day Contraception Phase 3 clinicals Johnson & Johnson (4)
</TABLE>
(1) The Company's products are generally developed in the following stages:
development, prototype, pre-clinical studies (preparing to file an
Investigational New Drug Application ("IND"), clinical trials, and
regulatory submission.
(2) Pharmacia has worldwide rights, and has sublicensed rights in North America
to Johnson & Johnson.
(3) Sanofi has granted a sublicense of such rights with respect to North
America to Warner-Lambert.
(4) The Company's agreement with Johnson & Johnson grants Johnson & Johnson
exclusive rights to the estrogen/progestin combination 7-day contraception
product.
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PAINLESS, BLOODLESS AND AUTOMATIC GLUCOSE MONITORING
MARKET OPPORTUNITY
People with diabetes measure blood glucose levels to adjust their diet and
insulin use to better control their glucose levels to prevent diabetes-related
complications. Currently, to measure their glucose levels, people with diabetes
must stab their fingers with a lancet, draw blood and place a drop of blood on a
glucose reagent strip inserted in an instrument which provides a glucose
reading. Each day of testing can involve numerous stabs and the complete
procedure is not only painful but disruptive to daily life. As a result of this
pain and disruption, the Company believes most people with diabetes monitor
their blood glucose levels less than twice per day, instead of the recommended
four to seven times per day. Even at this level of testing, the market for
products for self-monitoring of glucose levels by people with diabetes is quite
substantial.
Worldwide sales of products for the self-monitoring of blood glucose levels
were approximately $2.5 billion in 1996, which represented an increase of
approximately 14% over 1995 levels. The Company believes that approximately 80%
to 90% of the sales were related to disposable glucose reagent strips for finger
stab monitoring. In the U.S., a relatively small segment of people with diabetes
who measure their glucose level account for the majority of testing: for
example, of these people, just 22% (about 1.7 million) account for 68% of the
tests performed and 37% (about 2.9 million) account for 87% of tests performed.
It is estimated that more than 40 million people in North America, Europe, Japan
and Korea have diabetes. In the U.S. alone, more than ten million people have
been diagnosed with diabetes with another five million believed to be
undiagnosed. The number of people diagnosed with diabetes has been growing and
is expected to continue to grow due to the aging of the population, changes in
diagnostic standards and new diagnostic technologies. Specifically, the
diagnostic standards in the U.S. have been changed such that a fasting plasma
glucose value of greater than or equal to 126 mg/dL now indicates a diagnosis of
diabetes, whereas such diagnosis previously required a value of greater than or
equal to 140 mg/dL. Diabetes can lead to severe complications over time,
including blindness, loss of kidney function and peripheral neuropathy, causing
circulation problems to the arms and legs and pain and potential amputation. The
American Diabetes Association ("ADA") estimated that the complications arising
from diabetes cost the U.S. healthcare system in excess of $45 billion in 1992.
These complications are largely a consequence of years of poor management of
glucose levels by people with diabetes. Results of the Diabetes Control and
Complication Trial, a major clinical trial sponsored by the NIH and published in
1993, showed that more frequently monitored blood glucose levels and rigid
adherence to a program of diet, exercise and insulin injections could prevent or
significantly delay the onset of many of the long-term complications of
diabetes.
THE GLUCOWATCH SYSTEM
The Company believes that there is an unmet demand for painless,
bloodless and automatic glucose monitoring. To address this unmet demand, the
Company has developed the GlucoWatch, which is worn like a wristwatch and
automatically extracts and measures glucose levels painlessly through intact
skin every twenty or thirty minutes. The GlucoWatch then displays and stores
current and past glucose levels and trend data. The extracted glucose is
collected in a consumable transdermal pad called the AutoSensor, which is
attached to the back of the device and replaced approximately every twelve
hours. The GlucoWatch system offers a combination of features not available
in currently marketed devices, in a portable and discreet device. These
include frequent data collection, electronic memory to store and display
glucose levels, personal computer downloading for trend analysis, alarms
indicating hypo- and hyperglycemic conditions and event markers which record
factors that affect glucose levels. The GlucoWatch is designed to be worn day
and night for continuous glucose monitoring. The GlucoWatch is expected to
reduce or eliminate significant drawbacks of the finger stab technique, such
as the pain of repetitive stabbing and the disruption of normal activities
caused by indiscreet, cumbersome procedures. The Company believes the
GlucoWatch can lead to improved disease management, enabling people with
diabetes to prevent or delay severe complications associated with the
condition.
The GlucoWatch extracts glucose molecules through intact skin utilizing a
patented proprietary process called electroosmosis, which uses low levels of
electric current. Glucose molecules are collected in the AutoSensor, which
adheres to the skin, contains a biosensor and is attached to the back of the
GlucoWatch. The collected glucose triggers an electro-chemical reaction in the
AutoSensor, generating electrons. The biosensor measures the electrons and an
application specific integrated circuit ("ASIC") in the GlucoWatch equates the
number of electrons to a concentration of glucose in the blood. The GlucoWatch
automatically measures glucose levels at frequent intervals. The GlucoWatch
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displays the most recent readings and trends at the push of a button. Its
electronic memory capabilities permit the retrieval and downloading of data,
allowing longer-term trend analysis for better disease management.
The GlucoWatch system was designed to be simple and easy to use. Each day
the rechargeable battery is replaced and a new AutoSensor is attached on the
back of the GlucoWatch. A finger stab blood glucose measurement is input into
the GlucoWatch for calibration. Measurements will then be generated
automatically by the GlucoWatch system, providing up to thirty-six glucose
measurements over a twelve hour period.
The Company believes approximately 80% to 90% of current sales in the
glucose monitoring market come from the consumable test strips on which a drop
of blood is placed and inserted into a meter. The GlucoWatch uses a similar
approach. The "watch device" is designed to function for a number of years while
the consumable AutoSensor is designed to last for approximately twelve hours.
REGULATORY APPROVAL
To prepare a submission to the FDA for approval of the GlucoWatch, the
Company has initiated registration clinical trials. Based on discussions with
the FDA, the Company believes that the submission will be in the form of a
510(k) notification, although the final determination will not be made until the
FDA receives the submission. The Company anticipates submitting a 510(k)
notification in the second quarter of 1998, although the potential exists for
this filing to be deferred until the second half of 1998.
Although the Company believes its clinical results to date are encouraging,
to seek FDA approval for the GlucoWatch system, the Company will need to conduct
registration clinical trials. However, no assurance can be given that data
generated in such trials will be as favorable as data generated in clinical
trials to date or that, even if such data are as favorable, such data will
provide a sufficient basis for the approval of the GlucoWatch system by the FDA.
COMPETITION
The glucose monitoring market is highly competitive. Currently the market is
dominated by finger stab blood glucose monitoring products. This monitoring
technique presents a number of barriers to generating more frequent blood
glucose measurements, including the pain of repetitive finger lancing and the
disruption of normal activities as people with diabetes typically do not want to
go through the finger stab process in public. Several companies are attempting
to develop non-invasive or less invasive methods to monitor glucose levels. One
technology that a number of companies are pursuing is the use of infrared
spectroscopy, which uses radiation to measure glucose levels. Other companies
are attempting to develop a variety of methods to extract interstitial fluid and
measure the glucose concentration therein. The Company believes that none of the
currently marketed finger stab products nor other products in development have
the range of features and benefits offered by the GlucoWatch to address the
unmet needs of this category.
TRANSDERMAL DRUG DELIVERY SYSTEMS
Transdermal drug delivery systems provide for the controlled release of
drugs directly into the bloodstream through intact skin. The Company's
transdermal drug delivery products are thin multilayer systems, in the form of
small adhesive patches. Transdermal delivery can provide a number of advantages
over conventional methods of drug administration, including enhanced efficacy
increased safety, greater convenience and improved patient compliance. By
delivering a steady flow of drugs into the bloodstream over an extended period
of time, transdermal systems can avoid the "peak and valley" effect of oral or
injectable therapy and can enable more controlled, effective treatment. By
avoiding first pass metabolism through the gastrointestinal tract and the liver,
the therapeutically equivalent dosage for the transdermal delivery of certain
compounds can be significantly less than the corresponding oral dosage,
potentially reducing dosage-related side-effects.
Cygnus has established a comprehensive, integrated approach to the
development of transdermal delivery systems. Cygnus develops a unique product
profile for each transdermal product based on an evaluation of several key
variables that change with each drug and therapeutic indication. Based on its
assessment of the product profile and the interrelationship between the drug and
the physical and biological characteristics of the skin, Cygnus formulates the
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appropriate materials and designs the structure of the transdermal system to
achieve desired product characteristics such as comfort, extended wear, delayed
or enhanced onset and controlled release.
CONTRACEPTION
The contraceptive market is estimated to have had 1996 worldwide sales of
$2.4 billion. The market is dominated by oral contraceptive pills. There are no
transdermal patches currently marketed. The Company believes a seven day
contraceptive patch could lead to improved dosing compliance and is developing
such a product under an agreement with Ortho Pharmaceutical Corporation
("Ortho"), a subsidiary of Johnson & Johnson. Ortho has exclusive worldwide
marketing rights to the product. Cygnus has received up-front payments and will
receive milestone payments as well as a percentage of net sales, if and when the
product is commericialized, and is responsible for the development and
manufacture of the product. This product is currently in Phase 3 clinical
trials.
HORMONE REPLACEMENT
The hormone replacement market is large, with $1.75 billion in sales
worldwide in 1996, and is expected to grow as more women reach the age of
menopause. The Company believes that its transdermal hormone replacement
products have a competitive advantage over certain transdermal hormone
replacement products as a result of their seven-day extended delivery systems
and superior patient comfort profile. Many hormone replacement products under
development by competitors last for only 3.5 days. The Company believes, based
in part on its market research, that patients and physicians prefer 7-day
systems to 3.5 day systems because of increased convenience and comfort, which
could also lead to improved compliance.
The Company has three hormone replacement products. FemPatch, a 7-day
estrogen patch launched in 1997, was developed under an agreement with Sanofi.
Warner-Lambert, which is Sanofi's sublicensee, is marketing FemPatch in North
America. For a discussion of the Company's recent arbitration settlement with
Sanofi, see "Business--Legal Proceedings." Cygnus' two other hormone replacement
products, a 7-day estrogen patch, and an estrogen/progestin combination patch
are currently in Phase 3 clinical trials. These products are being developed
under an agreement with American Home Products. Under the terms of the
agreement, American Home Products has worldwide marketing rights with respect to
the products resulting from the collaboration. Cygnus received up-front fees and
is entitled to receive milestone payments as well as a percentage of net sales
on all products to be manufactured by Cygnus for the worldwide market. In
addition, American Home Products will pay for all clinical trial expenses.
Cygnus is otherwise responsible for financing the development and manufacture of
the products. Cygnus will pay Sanofi a percentage of net sales on the two
products licensed to American Home Products.
SMOKING CESSATION
The smoking cessation market is estimated to have had 1996 worldwide sales
of $450 million. The Company's Nicotrol product was initially introduced in the
U.S. as a prescription product in 1992 and subsequently approved for
over-the-counter sale in the U.S. in 1996. Nicotrol is currently marketed in
North America by Johnson & Johnson and many European countries by Pharmacia.
Cygnus receives royalties on the worldwide sales of Nicotrol. The Company is
developing a second generation nicotine patch designed to address currently
unsatisfied patient needs. These products are being developed to match the
nicotine dosing level with the patient's level of addiction. Phase 2 clinical
trials have been completed and the Company is seeking a marketing collaboration
to fund further work on this product. The Company believes that the number of
people who wish to stop smoking will increase, which could positively affect the
smoking cessation category.
NEED TO DEVELOP NEW PRODUCTS; DEVELOPMENT STAGE OF CURRENT PRODUCTS.
For the Company to be successful, it will need to develop and
commercialize new drug delivery and diagnostic products. Several products
based on the Company's technologies are currently under development by Cygnus
and its licensees. These products (including the GlucoWatch) will require
significant additional development and investment, including preclinical and
clinical testing, prior to their commercialization and are not expected to be
commercially available for several years, if at all. There can be no
assurance that such products or future products (including the GlucoWatch)
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 or be marketed
successfully. During 1994 and early 1995, the Company ceased certain of its
previous development efforts. For example, the Company has suspended the
development of
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transdermal systems for the delivery of alprazolam and prazosin, primarily due
to the systems' failure to meet financial/market goals. As illustrated by the
product development efforts recently terminated by the Company, there can be no
assurance that initial product development efforts or third party collaborations
will be successful.
Before the Company can market the GlucoWatch, 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 has initiated
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,
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 or prevent its market introduction entirely. Furthermore, if the
GlucoWatch is successfully developed, the commercial success of the
GlucoWatch will depend on its acceptance in the market.
GOVERNMENT REGULATION.
The development, manufacture and marketing of drug delivery systems and
diagnostic devices are subject to regulation by the FDA and other U.S. and
foreign federal, state and local entities. These entities regulate, among other
things, research and development activities and the testing, manufacture,
safety, effectiveness, labeling, storage, record keeping, approval, advertising
and promotion of the Company's products. Sales of the Company's products outside
the U.S. are subject to comparable regulatory requirements. These requirements
vary widely from country to country.
FDA permission to market and distribute a new device can be obtained in one
of two ways. If a new or significantly modified device is "substantially
equivalent" to an existing legally marketed device, the new device can be
commercially introduced after submission of a 510(k) notification to the FDA,
and after the subsequent clearance or approval by the FDA. Changes to existing
devices that do not significantly affect safety or effectiveness can be made by
the Company without a 510(k) notification.
The second, more comprehensive approval process applies to a new device that
is not substantially equivalent to an existing product. First, the Company must
conduct clinical trials in compliance with testing protocols approved by an
Institutional Review Board ("IRB") for the participating research institution
and the FDA's investigational device exemption regulations. Second, the Company
must submit a pre-market approval ("PMA") application that contains, among
other things, the results of the clinical trials. The PMA application also
contains other information required under the Federal Food, Drug, and
Cosmetic Act, such as a full description of the device and its components, a
full description of the methods, facilities and controls used for
manufacturing and proposed labeling. Finally, the manufacturing site for the
product subject to the PMA must operate using Good Manufacturing Practices
("GMP") and pass an FDA Pre-Approval Inspection ("PAI") before product
approvals.
The process required by the FDA before a drug delivery system may be
marketed in the U.S. depends on whether the compound has existing approval for
use in other dosage forms. If the drug is a new chemical entity that has not
been approved, then the process includes (i) pre-clinical laboratory and animal
tests, (ii) the filing of an Investigational New Drug ("IND") application, (iii)
adequate and controlled human clinical trials to establish the safety and
efficacy of the drug in its intended indication and (iv) FDA approval of an New
Drug Application ("NDA"). If the drug has been previously approved, then the
approval process is similar, except that certain toxicity tests normally
required for the IND and NDA applications may not be necessary. In addition to
the foregoing, the FDA requires proof that the drug delivery system delivers
sufficient quantities of the drug to the bloodstream to produce the desired
therapeutic result.
The results of preclinical studies and clinical studies are submitted to the
FDA in a submission for approval or clearance of the marketing and commercial
shipment of a drug delivery or diagnostic system. The FDA may deny a clearance
or approval if applicable regulatory criteria are not satisfied, or may require
additional clinical testing. Even if such data are submitted, the FDA may
ultimately decide that the submission does not satisfy the criteria for
clearance or approval. Product approvals may be withdrawn if compliance with
regulatory standards is not maintained or if problems occur after the product
reaches the market. The FDA may require testing in addition to surveillance
programs
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to monitor the effect of products that have been commercialized, and it has the
power to prevent or limit further marketing of the product based on the results
of these post-marketing programs.
Cygnus' drug delivery product licensees historically have been responsible
for the clinical and regulatory approval procedures. Cygnus has participated in
this process by submitting to the licensee portions of the Drug Master File
maintained by Cygnus and data concerning the manufacturing process for the drug
delivery system. Cygnus' ability to manufacture and sell products developed
under contract depends upon the licensee's completing satisfactory clinical
trials and obtaining the foregoing approvals or clearances. Cygnus may prepare
and submit an IND application, or obtain Non-Significant Risk device
investigation status from an IRB, and perform initial clinical studies before
licensing the product for marketing. The Company is increasingly taking a more
active role with its collaborative partners in the clinical trials and
regulatory processes of its products.
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, state
and foreign regulatory agencies will be satisfied with the results of the
clinical trials and approve the marketing of any products.
REGULATORY APPROVALS.
The Company's products require the approval of the FDA before they can be
marketed in the U.S. In addition, approvals are required from regulatory
agencies in most foreign countries before the Company's product can be marketed
in such countries. To date, the Company has two products which have received FDA
approval, Nicotrol and FemPatch. 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 NDA with the FDA, and the FDA's
approval of the NDA. Devices such as the glucose monitoring system 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.
The Company believes that the submission to the FDA for the GlucoWatch will
be in the form of a premarket notification (a "510(k) notification"), although
the final determination of the type of submission cannot be made until
the FDA receives the submission. In the event that a 510(k) notification is
not accepted by the FDA, the Company will be required to submit a PMA for
this product, rather than a 510(k) notification. The FDA approval process for
a PMA is typically more involved and requires more time than a 510(k)
submission.
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
regulation under federal, state and local regulations regarding work place
safety, environmental protection and hazardous and controlled substance
controls, among others.
DEPENDENCE ON LICENSEES, DISTRIBUTORS AND COLLABORATIVE ARRANGEMENTS.
Cygnus depends on its licensees and distributors to fund a significant
portion of product development costs, to conduct clinical testing, to obtain
regulatory approvals and to market products. The Company is dependent on
Pharmacia and its sublicensee, Johnson & Johnson, for the marketing of Nicotrol.
The company is also dependent upon Sanofi and its sublicensee, Warner-Lambert
Company ("Warner-Lambert"), for the marketing of FemPatch. If the GlucoWatch is
commercialized the company will be dependent upon Becton Dickinson and
Yamanouchi for marketing and distribution. The Company's licensees and
distributors generally have the right to terminate the development funding or
marketing arrangements for a product at any time prior to regulatory approval
for any reason without significant penalty. 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. In the past some of the
Company's licensees distributors and collaborators have approached the Company
requesting modification of the
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terms of existing agreements. Becton Dickinson has recently approached the
Company to discuss modifying the non-compete terms of the existing agreement.
The Company is unable to predict the outcome of these discussions.
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.
Certain of the Company's licensees may also be permitted to offer products that
are competitive with those of the Company, which could interfere with their
efforts on behalf of the Company. The Company's ability to develop and
commercialize products in the future will also depend on its ability to enter
into collaborative arrangements. There can be no assurance that the Company will
be able to enter into new collaborative arrangements or renew existing
collaborative arrangements. Additionally, there can be no assurance that
existing or future collaborative arrangements will be successful.
Since all payments to the Company under it's 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. The Company may choose to self-fund certain research and development
projects or sales and marketing efforts in order to exploit its technologies.
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.
COMPETING PRODUCTS AND CHANGES IN TECHNOLOGY.
A large number of pharmaceutical companies are involved or are becoming
involved in the development and commercialization of products incorporating
advanced or novel drug delivery and diagnostic systems. This field is highly
competitive, and Cygnus believes that competition will substantially increase in
the future. A number of pharmaceutical companies have invested, and are
continuing to invest, significant resources in the development of their own drug
delivery and diagnostic systems. In addition, a number of companies have been
formed to develop specific advanced drug delivery and diagnostic systems. Many
of these pharmaceutical and other companies have greater financial, research and
development and other resources than Cygnus, as well as more experience than
Cygnus in commercializing pharmaceutical, drug delivery and diagnostic products.
Such companies may improve existing drug formulations and products more
efficiently than Cygnus and thus may represent significant potential
competitors. Other companies, which have substantially greater financial and
research and development resources than Cygnus, may acquire the skills required
to design and develop transdermal drug delivery and diagnostic systems and thus
may represent significant potential for future competition.
The blood glucose monitoring industry is characterized by frequent new
product introductions and changes in technology. The Company's primary
competitors in the glucose monitoring industry are expected to include companies
that currently market finger stab method products. These companies have
significantly greater resources than Cygnus and could use these resources to
hinder the market penetration of the Company's product. In addition, a number of
companies are engaged in the development of products using technology which is
different than that under development by Cygnus, but also intended to permit
painless glucose monitoring. For example, a number of competitors are developing
non-invasive glucose monitoring devices based on infrared spectroscopy. These
devices would illuminate body tissue with radiation and measure the rate at
which the radiation is absorbed. There can be no assurance that these products
will not render the Company's glucose monitor uncompetitive or obsolete. In
addition, a number of companies are seeking to develop new drugs to treat
diabetes, and if any such development is successful it could reduce demand for
glucose monitoring systems.
The drug delivery industry is a rapidly evolving field. A number of other
companies, including major pharmaceutical companies, are also developing and
marketing transdermal, mucosal and 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 and mucosal drug delivery products will also compete with drugs
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
and implants, may provide therapeutic or cost advantages over the drug delivery
systems being developed by the Company.
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Changes in drug delivery and diagnostic technology will require substantial
investments by companies to maintain their competitive position and may provide
opportunities for new competitors to enter the industry. There can be no
assurance that developments by others will not render the Company's drug
delivery or diagnostic products or other technologies noncompetitive or
obsolete.
Cygnus generally seeks to retain rights to manufacture the transdermal
products developed for its licensees. To date, Cygnus has manufactured only
Nicotrol in commercial quantities on a continuous basis. No assurance can be
given that manufacturing or control problems will not arise as the Company
increases production of its products or as additional facilities are required in
the future. Cygnus must continue to develop, adapt or acquire the production
technology, facilities and technical and managerial personnel to manufacture
each of its planned products in commercial quantities or find alternative means,
if available, to manufacture such products. No assurance can be given that
Cygnus will be able to successfully increase its manufacturing capabilities at a
reasonable cost. The production of the GlucoWatch will involve the manufacture
and assembly of electronic and other components that require manufacturing and
sourcing capabilities with which the Company has little experience. No assurance
can be given that the Company will be able to develop these manufacturing
capabilities or arrange for qualified sources of those components that it is not
able to manufacture.
Furthermore, the 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 expects to market and sell certain of its products directly or
through co-promotion with third parties. The Company has limited experience in
sales, marketing or distribution. If the Company wishes to market a product
directly, the Company must develop a substantial marketing staff and sales force
with technical expertise. There can be no assurance that the Company will be
able to build such a marketing staff or sales force, that the cost of
establishing such a marketing staff or sales force will not exceed any product
revenues, or that the Company's direct sales and marketing efforts will be
successful. In addition, the Company may have to compete with other companies
that currently have extensive and well-funded marketing and sales operations.
PATENTS AND PROPRIETARY RIGHTS.
It is the Company's policy to aggressively protect its investments in
technology and marketing by filing patent and trademark applications in the U.S.
and key foreign countries. The Company also relies on trade secrets, know-how,
licensing opportunities, and collaborative relationships to develop and maintain
its competitive position.
As of December 1997, the Company had approximately 40 U.S. patents and more
than 85 foreign patents issued or allowed. These patents cover various aspects
of transdermal technology including transdermal patch formulations (such as
those used in hormone replacement therapy, contraception, and nicotine
dependence therapy), and glucose monitoring systems. The Company has numerous
additional patent applications pending worldwide.
The Company's GlucoWatch system incorporates technology developed in-house
as well as technology licensed exclusively to the Company by the Regents of the
University of California ("Regents"). Regents holds several U.S. patents
covering technology for transdermal extraction of glucose and other analytes.
Corresponding foreign patent applications are also pending. The Company has an
exclusive license worldwide under these patents.
MANUFACTURING.
The Company's GlucoWatch has not yet been manufactured for commercial sale.
To successfully commercialize the GlucoWatch, 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. The Company is responsible for all aspects of
manufacturing the GlucoWatch system, although the "watch device" will be
manufactured by an outside supplier. Manufacturers often encounter difficulties
in scaling up production of new products, including problems involving product
performance production yields, quality control and assurance and
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shortages of personnel. In the past, the Company has experienced these problems
in sealing up its products for commercial launch. There is 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 in the
quantities required for commercialization, nor that the GlucoWatch can be
assembled and manufactured at an acceptable cost.
The GlucoWatch 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 GlucoWatch components could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company recently received ISO 9002 certification. Consequently, the
Company expects to receive approval for the use of the "CE" mark for sales of
its products in Europe.
The Company's transdermal products are manufactured using several
proprietary materials and production technologies developed by Cygnus in
conjunction with equipment and material suppliers. Since the Company designs a
unique transdermal system for each drug, Cygnus' process development engineers
become involved early in the product design process. The Company believes that
close interaction at the design stage permits development of efficient
manufacturing techniques. In addition, Cygnus performs analytical testing
in-house for each aspect of the manufacturing process, from raw material studies
to final product characterization. The Company has developed proprietary assays
to measure patch characteristics such as drug release rate, drug and solvent
residues, and product stability. The Company has patented certain aspects of its
manufacturing processes.
Several materials used in the Company's drug delivery 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 would 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 products.
The Company leases a 21,000 square foot manufacturing facility used in the
commercial production of FemPatch and the clinical supply of other products. The
Company believes this facility will have sufficient capacity to support the
planned market introduction of its current drug delivery products. The Company
is currently establishing its commercial AutoSensor manufacturing operations in
an existing third-party facility. Each of the foregoing facilities complies with
applicable regulatory requirements.
EMPLOYEES
As of December 31, 1997, the Company had 157 full time employees. Of this
total number of employees, 66 were engaged in research and development,
including process development, 26 in scientific affairs and quality assurance,
25 in general administrative, and 40 in operations. None of the Company's
employees is represented by a labor union. Cygnus has experienced no work
stoppages and it believes its employee relations are good.
The Company's success will depend in large part on the continued services of
its scientific, managerial and manufacturing personnel. The loss of a
significant group of key personnel could have a material adverse effect on the
Company. The Company's success also depends upon its ability to continue to
attract and retain other highly qualified scientific, managerial and
manufacturing personnel. Competition for such personnel is intense. In this
respect, the Company competes with numerous pharmaceutical and health care
companies, as well as universities and nonprofit research organizations. There
can be no assurance that the Company will continue to be able to attract and
retain sufficient qualified personnel.
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
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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
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.
ITEM 2. PROPERTIES
Cygnus leases approximately 92,000 square feet in four buildings. Three are
located in Redwood City, California and the fourth is located in Menlo Park,
California. The first, approximately 38,000 square feet, is the headquarters
building, used for laboratories and administrative offices. The second,
approximately 21,000 square feet, is used for manufacturing, laboratories and
support offices. The third facility, also in Redwood City, California, has
approximately 11,000 square feet of which approximately 8,000 square feet are
utilized for additional administrative offices and the remainder is reserved for
expansion purposes. The fourth facility, which is located in Menlo Park, has
approximately 22,000 square feet, and is used for storage of manufacturing
materials and final products.
The three facilities in Redwood City are leased through 1998 with an option
to renew at the then fair market value through 2003. The facility in Menlo Park
is leased over a three year period ending in 1999.
The manufacturing facility was designed and constructed to comply with cGMP
standards. Cygnus has received licenses from the California Department of Health
Services and the United States Drug Enforcement Agency for the manufacture of
drug products in this facility, and has filed a Drug Master File for the
facility with the FDA. The Company believes that this manufacturing facility has
sufficient capacity to meet current operating requirements and satisfy
foreseeable future demands for its current drug delivery products. The Company
is currently establishing its commercial AutoSensor manufacturing operations in
an existing third-party facility which complies with applicable regulatory
requirements.
As the Company completes the development of its hormone replacement
products, it will begin evaluating its existing manufacturing plans under which
a new manufacturing site may become necessary.
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ITEM 3. LEGAL PROCEEDINGS
On June 30, 1994, Sanofi filed a request for arbitration against Cygnus with
the International Court of Arbitration. In its request for arbitration, Sanofi
alleged that Cygnus breached its existing contract with Sanofi by, among other
things, entering into a product development agreement with another company for
the development of transdermal systems in the field of hormone replacement
therapy (which agreements pertain to each of the Company's hormone replacement
products other than FemPatch). Sanofi, in the original filing sought to recover
from Cygnus in excess of $60.0 million for damages attributable to the alleged
breach. International Chambers of Commerce (the "Tribunal") announced an interim
award in the arbitration proceedings in October 1996. The Tribunal found that
two transdermal products for hormone replacement therapy licensed by Cygnus to
another company fall within the scope of an exclusive license previously granted
to Sanofi.
In September, 1997, the Company and Sanofi agreed to a settlement of the
arbitration dispute. 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, 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.
Overall, Cygnus' non-recurring expenses attributable to the arbitration
settlement recorded in the quarter ended September 30, 1997 totaled $39.7
million. Of the total related liability of $39.2, at December 31, 1997, $23.0
million is long-term.
In May 1997 Cygnus reported it had initiated arbitration proceedings against
Pharmacia & Upjohn ("Pharmacia") relating to Nicotrol-Registered Trademark-,
Cygnus' smoking cessation patch. In March of this year, Cygnus announced that
Pharmacia exercised its option to purchase the U.S. manufacturing rights for
Nicotrol. The agreement between Cygnus and Pharmacia provided that Pharmacia
would be obligated to pay Cygnus for, among other things, existing inventory
costs and for certain purchase order commitments. Pharmacia disputes their
obligations regarding certain purchase order commitments. The arbitration is
intended to resolve these matters. Separately, Cygnus and Pharmacia are not in
agreement regarding certain royalty calculations for 1996 and 1997. If this
issue is unable to be resolved by the two Companies, it could become part of the
arbitration proceedings. However, the Company does not believe the resolution of
this issue will have a material adverse effect on its financial position or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were brought to a vote of the Company's Stockholders in the
quarter ended December 31, 1997.
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EXECUTIVE OFFICERS
As of November 24, 1997 the executive officers of the Company, who serve at
the discretion of the Board of Directors, are as follows:
NAME AGE TITLE
- ---- --- -----
Gary W. Cleary, Ph.D. 55 Chairman of the Board of Directors and
Chief Technical Officer
Gregory B. Lawless, Ph.D. 57 President, Chief Executive Officer and
Director
Neil R. Ackerman, Ph.D. 54 Senior Vice President, Research &
Development
Craig W. Carlson 49 Senior Vice President, Finance
James F. Grady, Jr., Ph.D. 49 Senior Vice President, Human Resources &
Administration
John C. Hodgman 43 President, Cygnus Diagnostics and Chief
Financial Officer
Stephen N. Kirnon 35 President, Drug Delivery Division
Alan F. Russell, Ph.D. 55 Senior Vice President, Scientific
Affairs
DR. CLEARY, the Company's founder and Chairman of the Board of Directors,
also served as the Company's President and Chief Executive Officer from its
inception until July 1986. Since 1986, Dr. Cleary has served as Chief Technical
Officer of the Company. During his professional career, Dr. Cleary has served as
an investigator with the U.S. Food and Drug Administration and held research and
management positions at Cutter Labs, Alza Corporation, Key Pharmaceuticals, Inc.
and Genentech Inc. Dr. Cleary holds an M.B.A. in Health Sciences from the
University of Miami, a Ph.D. in Pharmaceutical Sciences from Rutgers University
and a Pharm.D. in Pharmacy from the University of California, San Francisco.
DR. LAWLESS joined Cygnus in January 1992 as President, Chief Executive
Officer and Director. From March 1989 to January 1992, Dr. Lawless was President
and Chief Operating Officer of Chiron Corporation, a biopharmaceutical company.
Prior to joining Chiron he held various positions with the DuPont Co. from May
1969 to February 1989, including serving as Chief Operating Officer of its
pharmaceutical subsidiary and as Director of DuPont Specialty Diagnostic
Division. He holds a Ph.D. in Pharmaceutical Chemistry from Temple University.
DR. ACKERMAN joined Cygnus in May of 1994 as Vice President, Research &
Development. In January 1997, Dr. Ackerman was promoted to Senior Vice
President, Research & Development. From 1990 to May 1994, Dr. Ackerman served as
Vice President of Research and Development for Glycomed, leading its discovery
efforts focused on cardiovascular and inflammatory diseases. From 1982 to 1990,
he was Research Director, Cancer and Inflammatory Diseases with DuPont
Pharmaceuticals, responsible for leading a 100-person staff that had the
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objective of discovering therapeutics for cancer, inflammatory and immune-based
diseases. Prior to that he was employed by Syntex Corporation and Pfizer, Inc.
in research and management capacities. Dr. Ackerman received B.S. and Ph.D.
degrees from the University of Maryland and completed a post-doctoral fellowship
at Stanford University.
MR. CARLSON joined the Company in July 1993 as Vice President, Corporate
Communications, after 15 years in the advertising and marketing industry. In
September 1997, Mr. Carlson was given additional responsibilities for Finance
and Information Technology. His current title is Senior Vice President, Finance.
From 1988 to July 1993, he was Vice President and Group Director at Young &
Rubicam Advertising in San Francisco. Prior to that, Mr. Carlson was Vice
President of Campbell-Mithun Advertising. He holds a B.A. from Union College and
an M.B.A. from Stanford University.
DR. GRADY joined the Company in May 1993 as Vice President, Human Resources.
From June 1995 to September 1997, Dr. Grady also served as Vice President of
Operations at the Company. In September 1997, he was appointed Senior Vice
President, Human Resources and Administration. From January 1989 to May 1993,
Dr. Grady led the human resources department for a division of Beckman
Instruments. From 1986 to January 1989, Dr. Grady held various positions with
SmithKline Beckman (now SmithKline Beechum), including Director of Compensation
& Organizational Development for its worldwide research and development business
unit. He received a B.S. in Psychology and a Ph.D. in Education from the
University of Pittsburgh.
MR. HODGMAN joined Cygnus in August 1994 as Vice President, Finance and
Chief Financial Officer. In June 1995, Mr. Hodgman was additionally appointed
President of Cygnus Diagnostics. Prior to joining Cygnus, Mr. Hodgman served as
Vice President of Operations and Finance and Chief Financial Officer for Central
Point Software, a personal computer and networking software company. Prior to
that, he was the Vice President of Finance and Administration and Chief
Financial Officer of Ateq Corporation. Mr. Hodgman holds a B.S. degree from
Brigham Young University and an M.B.A. from the University of Utah.
MR. KIRNON joined Cygnus in April 1993 as Director, Business Development. In
September 1997, Mr. Kirnon was promoted to President, Drug Delivery Division.
Prior to joining Cygnus, Mr. Kirnon served as the National Sales & Marketing
Manager for BioGenex, Inc. Prior to that, he worked at SmithKline Beecham
Corporation. Mr. Kirnon holds a B.A. in Biochemical Sciences from Harvard
University and an M.B.A. from Pepperdine University in General Management.
DR. RUSSELL joined the Company in May 1992 as Vice President, Scientific
Affairs, and was promoted to Senior Vice President, Scientific Affairs in
November 1994. Dr. Russell was Vice President for Scientific Affairs at Chiron
Corporation from 1987 to April 1992. He held the same position at Beecham
Laboratories from 1983 to 1987, prior to which he held various positions at
Syntex Corporation from 1971 to 1983, including Director of Regulatory Affairs
for Investigational Drugs. He holds a Ph.D. in Organic Chemistry from the
University of New South Wales in Australia and M.B.A. and J.D. degrees from the
University of Santa Clara.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The market price for shares of the Company's Common Stock has been highly
volatile. Factors such as the results of preclinical studies and clinical trials
for Cygnus' products or products of its competitors, announcements of
technological innovations, strategic relationships, new product introductions by
the Company or its competitors, governmental regulation, regulatory approvals or
delays or developments relating to patent or proprietary rights, as well as
period-to-period fluctuations in financial results, may have a significant
impact on the market price of the Common Stock. Additionally, in recent years,
the stock market has experienced extreme price and volume fluctuations.
The Company's Common Stock trades on the Nasdaq National Market tier of the
Nasdaq Stock Market-SM- under the symbol "CYGN." The following table sets
forth, for the periods indicated, the high and low closing sale prices per share
of the Common Stock as reported by the national market.
1997: High Low
---- ---
First Quarter $ 16 5/8 $ 13 3/8
Second Quarter 17 1/4 10 5/8
Third Quarter 19 3/4 16
Fourth Quarter 24 5/8 18 3/4
1996: High Low
---- ---
First Quarter $ 24 1/2 $ 19 3/8
Second Quarter 23 15
Third Quarter 17 1/4 11
Fourth Quarter 16 7/8 12
As of December 31, 1997, there were approximately 557 record holders of the
Company's Common Stock. Cygnus has not paid any cash dividends since its
inception and does not intend to pay any cash dividends on its Common Stock in
the foreseeable future. In addition, the Company is precluded from paying any
dividends under certain of its financing arrangements.
18
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below are derived from
the audited consolidated financial statements of Cygnus, Inc. The financial
consolidated statements as of December 31, 1997 and 1996 and for each of the
three years ended December 31, 1997 are included elsewhere herein. The selected
financial data as of December 31, 1995, 1994, and 1993 and for each of the years
in the two-year period ended December 31, 1994, are derived from audited
consolidated financial statements not included herein. The data should be read
in conjunction with the consolidated financial statements and related notes, the
information set forth under "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and other financial information included
herein.
No dividends have been paid for any of the periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Product revenues $ 4,212 $ 17,211 $ 3,704 $ 1,917 $ 8,587
Contract revenues 14,106 13,085 12,579 14,533 7,156
Royalty and other revenues 11,184 5,907 2,723 4,820 1,734
------ ------ ------ ------ ------
Total revenues 29,502 36,203 19,006 21,270 17,477
Costs and expenses:
Costs of products sold 10,413 16,659 4,746 3,293 9,534
Research and development 22,328 23,165 20,029 21,605 13,675
Marketing, general and
administrative 8,695 9,296 7,369 5,491 5,846
Arbitration settlement 39,666 - - - -
Purchase of in process research
and development - - - 9,000 -
------ ------ ------ ------ ------
Total costs and expenses 81,102 49,120 32,144 39,389 29,055
------ ------ ------ ------ ------
Loss from operations (51,600) (12,917) (13,138) (18,119) (11,578)
Other income and expense 1,140 1,865 296 759 969
------ ------ ------ ------ ------
Net loss $ (50,460) $(11,052) $(12,842) $(17,360) $(10,609)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Basic and diluted net loss per share $ (2.67) $ (0.60) $ (0.79) $ (1.24) $ (0.77)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Shares used in computation of basic and
diluted net loss per share 18,928 18,544 16,265 13,947 13,752
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 9,941 $ 36,386 $ 38,555 $ 18,041 $ 24,044
Total assets 49,277 68,798 57,854 38,116 46,861
Long-term obligations 33,234 13,437 8,331 7,398 6,509
Accumulated deficit (136,528) (86,071) (75,014) (62,588) (44,814)
Stockholders' equity (net capital deficiency) (13,800) 31,213 38,252 18,117 26,243
</TABLE>
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE DISCUSSION SET FORTH BELOW CONTAINS PROJECTIONS AND FORWARD-LOOKING
STATEMENTS REGARDING FUTURE EVENTS AND THE FUTURE FINANCIAL PERFORMANCE OF THE
COMPANY. WE WISH TO CAUTION YOU THAT THESE STATEMENTS ARE ONLY OUR PREDICTIONS
AND OBJECTIVES. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY. PLEASE NOTE IN
PARTICULAR THROUGHOUT THIS DOCUMENT WHERE WE HAVE HIGHLIGHTED SPECIFIC RISKS
ASSOCIATED WITH THE COMPANY AND ITS ACTIVITIES. WE ALSO REFER YOU TO DOCUMENTS
THE COMPANY FILES FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION,
SUCH AS ITS FORM 10-K, ITS FORM 10-Q AND FORM 8-K REPORTS. THESE DOCUMENTS AND
THE DISCUSSION BELOW CONTAIN IMPORTANT FACTORS, INCLUDING WITHOUT LIMITATION
THOSE INVOLVING CERTAIN ONGOING ARBITRATION PROCEEDINGS INVOLVING THE COMPANY
THAT COULD CAUSE OUR ACTUAL RESULTS TO DIFFER FROM OUR CURRENT EXPECTATIONS AND
THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
GENERAL
Cygnus is engaged in the development and manufacture of diagnostic and drug
delivery systems, utilizing its proprietary technologies to satisfy unmet
medical needs cost-effectively. The Company's current efforts are primarily
focused on two core areas: a painless, bloodless and automatic glucose
monitoring device (the GlucoWatch 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.
Cygnus' licensees and distributors generally have the right to abandon a
product development effort at any time for any reason without significant
penalty. Such cancellations may result in delays, suspension or abandonment of
clinical testing, the preparation and processing of 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. 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. 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. Since all payments to the Company under its
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. The Company may choose to self-fund certain research and development
projects in order to exploit its technologies. Any increase in Company-sponsored
research and development activities will have an immediate adverse effect on the
Company's results of operations. However, should such Company-sponsored research
and development activities result in a commercial product, the long-term effect
on the Company's results of operations could be favorable. In the past some of
the Company's licensees, distributors and collaborators have approached the
Company requesting modification of the terms of existing agreements. Becton
Dickinson has recently approached the Company to discuss modifying the
non-compete terms of the existing agreement. The Company is unable to predict
the outcome of these discussions.
For the Company to remain 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 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.
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, the demand for its Nicotrol product,
the demand for and shipments of its FemPatch product, and the costs associated
with its manufacture. 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
20
<PAGE>
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 December 31, 1997, after recording the $39.7 million
arbitration settlement discussed below, the Company's accumulated deficit and
net capital deficiency were approximately $136.5 million and $13.8 million,
respectively.
RESULTS OF OPERATIONS:
COMPARISON FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
PRODUCT REVENUES for the year ended December 31, 1997 were $4.2 million
compared to $17.2 million for the year ended December 31, 1996. Included in
product revenue, for the year ended December 31, 1997, are initial shipments
of FemPatch, the Company's second commercialized product. FemPatch is a
low-dose, 7-day estrogen replacement transdermal patch for the treatment of
menopausal symptoms. Sanofi, the Company's worldwide licensee, has
sublicensed U.S. marketing rights to Warner-Lambert. Cygnus manufactures
FemPatch and first recorded revenue from its initial shipments in the third
quarter of 1997. The reduction in total product revenue resulted from the
discontinuation of Nicotrol manufacturing in the first quarter of 1997.
In May 1997 Cygnus reported it had initiated arbitration proceedings
against Pharmacia & Upjohn ("Pharmacia") relating to Nicotrol, Cygnus'
smoking cessation patch. In March of this year, Cygnus announced that
Pharmacia exercised its option to purchase the United States manufacturing
right of Nicotrol. The agreement between Cygnus and Pharmacia provided that
Pharmacia would be obligated to pay Cygnus for, amount other things, existing
inventory costs and for certain purchase order commitments. Pharmacia
disputes its obligations regarding certain purchase order commitments. The
arbitration is intended to resolve these matters. Separately, Cygnus and
Pharmacia are not in agreement regarding certain royalty calculations for
1996 and 1997. If this issue is unable to be resolved by the two companies,
it could become part of the arbitration proceedings. However, the Company
does not believe the resolution of this issue will have a material adverse
effect on its financial position or results of operations.
Due to the above factors, the uncertainty of the success of the Company's
recently launched FemPatch product, and the uncertainty regarding when and if
additional products will obtain clearance 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 are not indicative of future results and
may fluctuate from year to year.
CONTRACT REVENUES for the year ended December 31, 1997 were $14.1 million
compared to the $13.1 million for the year ended December 31, 1996. Contract
revenues primarily reflect labor and material cost reimbursements associated
with certain transdermal delivery systems and the amortization of milestone
payments relating to certain transdermal delivery systems and the glucose
monitoring device. The increase in contract revenues is primarily due to a $1.0
million payment from Pharmacia for the exercise of its option to purchase the
manufacturing rights for Nicotrol, as noted above.
In February 1996, the Company entered into an agreement with Becton
Dickinson and Company for the marketing and distribution of the GlucoWatch, a
painless, automatic glucose monitoring device being developed by Cygnus. Under
the terms of the agreement, Becton Dickinson has exclusive worldwide marketing
and distribution rights, with the exception of Japan and Korea. Cygnus will have
primary responsibility for completing product development, obtaining regulatory
approvals and manufacturing. In addition, Cygnus may participate in sales,
marketing and customer service and support for the product. In the first half of
1996, Cygnus received an up-front, non-refundable payment from Becton Dickinson.
The Company is also eligible to receive future milestone payments as well as a
percentage of the product's future commercial success.
In July 1996, the Company entered into an agreement with Yamanouchi for the
marketing and distribution of the GlucoWatch. 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
21
<PAGE>
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. Under the terms of the agreement, Cygnus will
receive funding for the development of the transdermal product and will have
exclusive rights to manufacture and supply Yamanouchi with the product and
Yamanouchi will have exclusive worldwide marketing rights to the product.
Contract revenues are expected to fluctuate from quarter to quarter and
from year to year, and future contract revenues cannot be reasonably predicted.
The contributing factors to achieving contract revenues include, but are not
limited to, future successes in finalizing new collaborative agreements, timely
achievement of milestones under current contracts, and strategic decisions on
self-funding certain projects. Cygnus' licensees and distributors generally have
the ability to abandon the rights to a product and the obligation to make
related payments. Since all future payments to the Company under these
agreements following their execution are contingent on the occurrence of future
events or sales levels, and the agreements are terminable by the licensee 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. The Company is unable to predict to what extent potential future
terminations of existing contracts by current partners, or new collaborative
agreements, if any, will impact overall contract revenues in 1998 and subsequent
future periods.
ROYALTY AND OTHER REVENUES for the year ended December 31, 1997 were
$11.2 million, compared to $5.9 million for the year ended December 31, 1996.
The amounts include royalties from sales by Pharmacia of the Company's nicotine
transdermal product in Europe and Canada and by Pharmacia's marketing partner in
the United States. The net increase in royalty and other revenues is primarily
due to the recognition of previously deferred royalty payments associated with
the U.S. OTC sales of Nicotrol during the second half of 1996 and a $2.5 million
reimbursement payment from Pharmacia relating to inventory and purchase
commitments previously expensed by the Company in 1996.
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. The Company expects royalty and other revenue to decrease in 1998 due
to the non recurring $2.5 million payment mentioned above and the high level of
royalty payments earned in early 1997.
COSTS OF PRODUCTS SOLD for the year ended December 31, 1997, were
$10.4 million compared to $16.7 million for the year ended December 31, 1996.
Costs of products sold primarily include direct and indirect production,
facility and personnel costs required to meet future anticipated production
levels. The decrease in costs of products sold largely reflects the reduction of
direct expenses related to Nicotrol production as a result of Pharmacia
exercising its option to purchase the manufacturing rights of Nicotrol. Cost of
products sold for the year ended December 31, 1997 include the initial shipments
of FemPatch, the Company's second commercialized product. The Company
experienced negative product margins for the year ended December 31, 1997 due to
low production volumes which prevented the Company from absorbing all of its
fixed manufacturing costs.
Due to the above factors, the uncertainty of the success of the Company's
recently launched FemPatch product, and the uncertainty regarding when and if
additional products will obtain clearance from the FDA and when and if licensees
will sell and market such products, the Company believes that the level of costs
of products sold experienced to date are not indicative of future results and
may fluctuate from year to year.
RESEARCH AND DEVELOPMENT EXPENSES for the year ended December 31, 1997 were
$22.3 million compared to $23.2 million for the year ended December 31, 1996.
Research and development and clinical activities primarily include the glucose
monitoring development program, the support of the Company's hormone replacement
therapy products (one of which, FemPatch, was launched in September 1997 and two
of which are in clinical trials) and a contraception product. While current
levels are slightly lower than the prior year, 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.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES for the year ended
December 31, 1997 were $8.7 million, compared to $9.3 million for the year ended
December 31, 1996. The decrease primarily reflects decreased professional
22
<PAGE>
fees associated with the Company's legal proceedings involving Sanofi (See Note
7 to the Financial Statements). The Company expects that marketing, general and
administrative expenses will increase in the future as the Company expands its
operations.
ARBITRATION SETTLEMENT EXPENSE for the year ended December 31, 1997 was
$39.7 million. As of December 31, 1997, the Company had accrued liabilities
related to the arbitration settlement of $39.2 million. These amounts
represent a non-recurring arbitration settlement expense. Of the total
accrued liability of $39.2 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, NET OF INTEREST AND OTHER EXPENSE for the year ended
December 31, 1997 was $1.1 million as compared to $1.9 million for the year
ended December 31, 1996. The decrease is due primarily to higher interest
expense associated with the Company's June 1996 $8.0 million bank loan
agreement for short-term working capital. In addition, interest income earned
has decreased in conjunction with the decrease in the cash and cash
equivalents balance. There will be interest expenses recorded in 1998
reflecting the issuance of the convertible debt and the amortization of the
financing fees related to this debt (see Note 8 to the consolidated financial
statements)
COMPARISON FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
PRODUCT REVENUES for the year ended December 31, 1996 were $17.2 million
compared to $3.7 million for the year ended December 31, 1995. This reflects
increased demand for additional shipments of Nicotrol during 1996 due to the
change of Nicotrol's status from a prescription to an over-the-counter ("OTC")
product. On July 3, 1996 the United States ("U.S.") Food and Drug Administration
(the "FDA") approved Nicotrol as the first OTC smoking cessation transdermal
patch.
CONTRACT REVENUES for the year ended December 31, 1996 were $13.1 million
compared to the $12.6 million for the year ended December 31, 1995. Contract
revenues primarily reflect labor and material cost reimbursements associated
with certain transdermal delivery systems and the amortization of milestone
payments relating to certain transdermal delivery systems and the glucose
monitoring device. In 1996, the Company received up-front non-refundable
payments from Becton Dickinson and Yamanouchi.
ROYALTY AND OTHER REVENUES for the year ended December 31, 1996 were $5.9
million, compared to $2.7 million for the year ended December 31, 1995. The
amounts include royalties from sales by Pharmacia of the Company's nicotine
transdermal product in Europe and Canada, and by Pharmacia's marketing partner
in the U.S. Additionally, in the first half of 1995, amounts included the
amortization of the unearned balance of prepayments from Pharmacia. As of June
30, 1995, all of the prepayments were fully amortized. The net increase in
royalty and other revenues is primarily due to the significant increase in
volume of units shipped as a result of the change of Nicotrol's status to OTC in
the U.S.
COSTS OF PRODUCTS SOLD for the year ended December 31, 1996, were $16.7
million compared to $4.7 million for the year ended December 31, 1995. Costs of
products sold include direct and indirect manufacturing costs of Nicotrol
production and facility and personnel costs required to meet production levels.
In addition, due to uncertainties related to the level of the future sales of
Nicotrol, the Company recorded in 1996 as part of cost of products sold, certain
expenses relating to estimated committed future production costs. Costs of
products sold increased primarily due to increased Nicotrol shipments as a
result of the change of Nicotrol's status to OTC in the U.S. and the expenses
related to the estimated committed future productions costs. While the Company
experienced a positive product margin during 1996 due to increased demand for
additional shipments of Nicotrol, the Company experienced negative product
margins during 1995, primarily due to low production volumes which prevented the
Company from absorbing all of the fixed costs associated with its production of
Nicotrol.
23
<PAGE>
RESEARCH AND DEVELOPMENT EXPENSES for the year ended December 31, 1996 were
$23.2 million compared to $20.0 million for the year ended December 31, 1995.
This increase reflects the Company's accelerated level of research and
development costs primarily associated with the glucose monitoring system.
Research and development and clinical activities primarily include the glucose
monitoring development program, the support of the Company's hormone replacement
therapy products (one of which, FemPatch, was approved by FDA on December 5,
1996 and two of which are in clinical trials), and a contraception product.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES for the year ended December
31, 1996 were $9.3 million, compared to $7.4 million for the year ended December
31, 1995. The increase resulted from increased legal expenses primarily related
to the Sanofi arbitration, which has been settled (See Note 7 to the Financial
Statements).
INTEREST INCOME, NET OF INTEREST AND OTHER EXPENSE for the year ended
December 31, 1996 was $1.9 million as compared to $0.3 million for the year
ended December 31, 1995. The increase is due primarily to interest earned on
the proceeds from the Company's 1995 public offering.
IMPACT OF YEAR 2000
On January 1, 1998, the Company implemented a new suite of financial and
manufacturing applications which are fully year 2000 compliant. The Company
uses these applications for the management of all financial data as well as
inventory control and planning. The Company is instituting a program to analyze
all other ancillary programs to ensure year 2000 compliance. This program is
expected to be completed prior to December 31, 1998 and is not expected to
result in material expenditures to resolve year 2000 issues. In addition the
Company has initiated a program to review year 2000 compliance by all major
suppliers and customers in order to determine any exposure to year 2000 issues.
This program should be completed by December 31, 1998. It is not anticipated
that there will be any significant exposure areas, but it is possible that non
compliance to year 2000 concerns by major vendors or customers could have a
material adverse effect on the Company.
LIQUIDITY AND CAPITAL RESOURCES
Overall, the cash, cash equivalents and short-term investment balances as
of December 31, 1997 totaled $34.8 million, representing a decrease of
$14.6 million from the total as of December 31, 1996. At December 31, 1997, the
Company had a negative net worth of $13.8 million.
Through October 1995, the Company received net proceeds of approximately
$82.1 million from public offerings of its Common Stock. Through 1996, the
Company financed approximately $8.4 million of manufacturing and research
equipment under capital loan and lease arrangements. In 1997, the Company
entered into a new loan agreement for $1.3 million to finance additional capital
equipment. Borrowings under this agreement are secured by specific Company
Assets and a security deposit of $631.
In December of 1994, the Company borrowed $1.7 million under a bank line of
credit to finance the purchase of manufacturing and research equipment. This
line is being repaid in monthly installments through June 30, 1998. As of
December 31, 1997 there was $0.2 million outstanding under this agreement. In
June 1996, the Company received $8.0 million under a bank loan agreement for
short-term working capital. This loan is being repaid monthly through December
1999. As of December 31, 1997 there was $6.2 million outstanding under this
agreement. The bank loans are subject to a number of financial and other
covenants. In the event of default, the Bank may, at its option, exercise its
rights to remedies specified in the loan agreements which include, among other
things, the acceleration of amounts due under the agreements. As a result of
recording the arbitration settlement, the Company was in default of these
agreements due to the breach of several financial covenants, including those
related to the ratio of Debt to Tangible Net Worth and the total Tangible Net
Worth. The Company could remove the default condition on the June 1996 loan by
pledging cash or certificates of deposit in the amount of 55% of the $6.2
million December 31, 1997 outstanding balance. However, since the bank had
agreed to forbear from exercising its rights under the Loan Documents until
March 31, 1998, the Company did not provide this collateral as of December 31,
1997.
As of December 31, 1997, the Company also was in violation of similar
financial covenants with one leasing company, which had agreed to waive the
covenant defaults until February 15, 1998.
24
<PAGE>
On February 5, 1998, the Company completed financing arrangements which
raised gross cash proceeds of $56.8 million. The Company issued $43.0 million
of convertible notes and $13.8 million of equity before offering costs and
expenses (see Note 8 to the consolidated financial statements). Both the bank
and the leasing company have agreed to include the convertible debt in equity
for purposes of measuring covenant compliance. As a result of the receipt of
proceeds from the financing arrangements, the Company has cured the default
conditions with the bank and the leasing company as of February 5, 1998 and
the Company expects to remain in compliance with these financial covenants
throughout 1998.
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 primarily through revenues and interest income.
Net cash used in operating activities for the year ended December 31, 1997
was $14.6 million, compared with net cash used of $6.3 million for year ended
December 31, 1996. Cash used in operating activities during the year ended
December 31, 1997 was primarily due to the Company's net loss of $50.5 million,
decrease of $10.4 million in deferred revenue, decrease of $2.1 million in
accounts payable and other accrued liabilities and an increase of $3.2 million
in prepaid expenses and other current assets. This was offset by the $39.2
million increase in Sanofi obligations, decrease of $5.7 million in accounts
receivable, $2.7 million of depreciation and amortization and an increase of
$1.5 million in deferred compensation and other long term liabilities. Cash used
in operations during the year ended December 31, 1996 was primarily due to the
Company's net loss of $11.1 million, increase of $5.4 million in accounts
receivable offset by an increase of $6.6 million in deferred revenue and $2.8
million of depreciation and amortization.
The current level of cash used in operating activities is not necessarily
indicative of the level of future cash usage. For example, in January 1998 the
Company paid Sanofi $14.0 million of its arbitration settlement obligation
recorded in 1997. As a result of increased expenditures for the development of
new products, preparation for regulatory filings and clinical trials and the
expected reduction in product revenues, the Company has experienced an increase
in cash usage in 1997 and anticipates an increase in cash usage for future
operating activities.
Net cash used in investing activities of $0.8 million for the year ended
December 31, 1997 resulted primarily from $3.1 million in capital expenditures
offset by $2.3 million in net maturity and sales of short-term investments. Net
cash used in investing activities of $1.5 million for the year ended
December 31, 1996 resulted primarily from $1.5 million in capital expenditures.
Net cash provided by financing activities of $3.0 million for the year
ended December 31, 1997 included $2.5 million from the exercise of warrants to
purchase common stock, $2.9 million of common stock issuance proceeds and $1.3
million received from the Company's capital equipment loan offset by $3.8
million in long-term debt and capital lease repayments. Net cash provided by
financing activities of $10.5 million for the year ended December 31, 1996
includes $8.0 million received from the Company's working capital loan and
security agreement, $4.0 million of common stock issuance proceeds and $0.5
million received under the equipment lease agreement offset by $2.0 million in
long-term debt and capital lease repayments.
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 and hormone replacement
products, its commercialization plans and the lead time to set up manufacturing
capabilities, Cygnus may commence long-term planning for another manufacturing
site. Nevertheless, the Company believes that such long-term planning will not
result in any material impact on cash flows and liquidity for 1998.
Based upon current expectations for operating losses, arbitration
settlement payments, and projected short-term capital expenditures, the
Company believes that its existing cash, cash equivalents and short-term
investments of $34.8 million as of December 31, 1997, when coupled with cash
from revenues, earnings from investments and the recently completed financing
arrangements which raised net proceeds of approximately $53.8 million, will
be sufficient to meet its operating expenses and capital expenditure
requirements at least through the end of 1998. However, there can be no
assurance that the Company will
25
<PAGE>
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's investments are all categorized as available for sale, and
are invested in short term, highly liquid instruments. The unrealized gain or
loss at December 31, 1997 is immaterial. These investments conform to the
Company's investment policy and are invested in either Treasuries, Government
Agency securities, or other instruments with an A1/P1/AAA rating.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements for the years ended December 31,
1997, 1996 and 1995 are submitted as a separate section of this Form 10-K. See
Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
26
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Cygnus incorporates by reference the information concerning its directors
set forth under the heading "Proposal One - Re-Election of Directors" in the
Company's definitive Proxy Statement to be filed for its 1998 Annual Meeting of
Stockholders.
Information concerning Cygnus' executive officers appears at the end of
Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
Cygnus incorporates by reference the information set forth under the
heading "Executive Compensation and Other Information" in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A for its 1998
Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Cygnus incorporates by reference the information set forth under the
heading "Security Ownership of Certain Beneficial Owners and Management" in the
Company's definitive Proxy Statement to be filed pursuant to Regulation 14A for
its 1998 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Cygnus incorporates by reference the information set forth under the
headings "Proposal One - Re-Election of Directors" and "Executive Compensation
and Other Information" in the Cygnus' definitive Proxy Statement to be filed
pursuant to Regulation 14A for its 1998 Annual Meeting of Stockholders.
27
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
a.1) FINANCIAL STATEMENTS AND REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Page
-------------------------------------------------------------------------- ----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996. . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statement of Stockholders' Equity (net capital deficiency) for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
a.2) FINANCIAL STATEMENT SCHEDULE
II. Valuation and Qualifying Accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-1
</TABLE>
All other schedules have been omitted since the required information is
not present or is not present in amounts sufficient to require
submission of the schedule, or because the information required is
included in the consolidated financial statements, including the notes
thereto.
b) REPORTS ON FORM 8-K
The Company filed a Report on Form 8-K on November 25, 1997.
Item 5. Other events - Cygnus, Inc. issued a press release announcing
the results of research clinical studies conducted on its
GlucoWatch glucose monitoring system. Cygnus, Inc. also issued
a second press release, announcing its intent to conduct a
public offering of its convertible subordinated notes.
Item 7. Financial Statements and Exhibits - Exhibits 99.1 and 99.2
c) EXHIBITS
The following exhibits are filed herewith or incorporated by reference:
3.1 Bylaws of the Registrant, as amended, incorporated by
reference to Exhibit 3.3 of the Registrant's Registration
Statement Form S-1 No. 33-38363.
3.2 Restated Articles of Incorporation of the Registrant, as
amended to date, incorporated by reference to Exhibit 3.4 of
the Registrant's Registration Statement Form S-1 No. 33-38363.
4.1 Specimen of Common Stock certificate of the Registrant,
incorporated by reference to Exhibit 4.1 of the Registrant's
Registration Statement Form S-1 No. 33-38363.
4.2 Rights Agreement dated September 21, 1993 between the Company
and Chemical Trust Bank of California (the "Transfer Agent"),
which includes the Certificate of Determination for the Series
A Junior Participating Preferred Stock as Exhibit A, the form
of Right Certificate as Exhibit B and the Summary of Rights to
purchase Preferred Shares as Exhibit C, incorporated by
reference to Exhibit I of the Registrant's Form 8-A filed on
October 21, 1993, Registration No. 0-18962.
4.3 Form of Senior Indenture incorporated herein by reference to
Exhibit 4.1 filed with the Company's Registration Statement on
Form S-3 (File No. 33-39275) declared effective by the
Securities and Exchange Commission on November 12, 1997 (the
"November 1997 Form S-3")
4.4 Form of Subordinated indenture incorporated herein by
reference to Exhibit 4.2 filed with the Company's November
1997 Form S-3.
4.5 Form of Senior Debt Security (included in Exhibit 4.1)
incorporated herein by reference to Exhibit 4.3 filed with the
Company's November 1997 Form S-3.
28
<PAGE>
4.6 Form of Subordinated Debt Security (included in Exhibit 4.2)
incorporated herein by reference to Exhibit 4.4 filed with the
Company's November 1997 Form S-3.
10.1 Warrant dated September 28, 1990 issued by the Registrant to
Paine Webber R&D Partners II, L.P., incorporated by reference
to Exhibit 10.5 of the Registrant's Registration Statement
Form S-1 No. 33-38363.
10.2 Agreement dated October 1, 1992 between the Registrant and
Kabi Pharmacia, incorporated by reference to Exhibit 19.1 of
the Registrant's Form 10-Q for the quarter ended September 30,
1992, Registration No. 0-18962.
10.3 Amended August 29, 1986 Agreement dated as of May 30, 1988
between the Registrant and Sanofi S.A. ("Sanofi"),
incorporated by reference to Exhibit 10.9A of the Registrant's
Registration Statement Form S-1 No. 33-38363.
10.4 Amendment No. 1 made as of May 4, 1990 to the Amended August
29, 1986 Agreement between the Registrant and Sanofi,
incorporated by reference to Exhibit 10.9B of the Registrant's
Form S-1 Registration Statement No. 33-38363.
10.5 Amendment No. 2 made as of August 31, 1990 to the Amended
August 29, 1986 Agreement between the Registrant and Sanofi,
incorporated by reference to Exhibit 10.9C of the Registrant's
Form S-1 Registration Statement No. 33-38363.
10.6 Supply Agreement dated September 28, 1990 between the
Registrant and Warner-Lambert Company, incorporated by
reference to Exhibit 10.12 of the Registrant's Form S-1
Registration Statement No. 33-38363.
10.7 Agreement dated November 29, 1990 between the Registrant and
Warner-Lambert Company, incorporated by reference to Exhibit
10.13 of the Registrant's Form S-1 Registration Statement No.
33-38363.
10.8 Ten-year Industrial Net Lease Agreement (Building No. 2) dated
September 27, 1988 between the Registrant and Seaport Centre
Venture Phase I, incorporated by reference to Exhibit 10.26 of
the Registrant's Form S-1 Registration Statement No. 33-38363.
10.9 Ten-year Industrial Net Lease Agreement (Building No. 8) dated
September 27, 1988 between the Registrant and Seaport Centre
Venture Phase I, incorporated by reference to Exhibit 10.27 of
the Registrant's Form S-1 Registration Statement No. 33-38363.
10.10 Sublease Agreement dated June 12, 1990 between the Registrant
and M&T Publishing, Inc., incorporated by reference to Exhibit
10.28 of the Registrant's Form S-1 Registration Statement No.
33-38363.
10.11 Letter Agreement dated December 18, 1991 between the
Registrant and Menlo Capital Corporation, incorporated by
reference to Exhibit 10.33 of the Registrant's Form S-1
Registration Statement No. 33-45180.
10.12 Lease Agreement dated as of October 15, 1991 between the
Registrant and Lincoln Menlo Associates Limited, a California
Limited Partnership, incorporated by reference to Exhibit
10.34 of the Registrant's Form S-1 Registration Statement No.
33-45180.
10.13 Services Agreement made as of April 6, 1990 between the
Registrant and DepoMed Systems, Inc., incorporated by
reference to Exhibit 10.35 of the Registrant's Form S-1
Registration Statement No. 33-45180.
10.14 Loan and Security Agreement dated June 26, 1992 between the
Registrant and AT&T Commercial Finance Corporation.
Incorporated by reference to Exhibit 10.30 of the Registrant's
Form 10-K for the fiscal year ended December 31, 1993.
* 10.15 Distributorship Agreement dated as of February 9, 1996 between
the Registrant and Becton Dickinson. Incorporated by reference
to exhibit 10.1 of the Company's Form 10-Q for the quarter
ended March 31, 1996.
* 10.16 Agreement dated November 11, 1993 between the Registrant and
Kabi Pharmacia (the "Kabi Agreement") Incorporated in
reference to exhibit 10.33 of the Company's Form 10-K for the
fiscal year ended December 31, 1993.
* 10.17 Development, Supply and License Agreement dated December 28,
1993 between the Registrant and Wyeth-Ayerst, a division of
American Home Products (the "U.S. Agreement") Incorporated by
reference to exhibit 10.34 of the Company's Form 10-K for the
fiscal year ended December 31, 1993.
* 10.18 Development, Supply and License Agreement dated December 28,
1993 between the Registrant and Wyeth-Ayerst, a division of
American Home Products (the "International Agreement")
Incorporated
29
<PAGE>
by reference to exhibit 10.35 of the Company's Form 10-K for
the fiscal year ended December 31, 1993.
* 10.19 Loan and Security Agreement between the Registrant and Silicon
Valley Bank entered into as of June 24, 1996. Incorporated by
reference to exhibit 10.1 of the Company's Form 10-Q for the
quarter ended June 30, 1996.
10.20 Product Development, Supply and License Agreement dated June
8, 1994 between the Registrant and Ortho Pharmaceutical
Corporation, a division of Johnson & Johnson. Incorporated by
reference to exhibit 10.35 of the Company's Form 10-Q for the
quarter ended June 30, 1994.
10.21 Agreement dated November 22, 1994, between the Registrant and
Kabi Pharmacia (the "Kabi" Agreement). Incorporated by
reference to exhibit 10.39 of the Company's Form 10-K for the
fiscal year ended December 31, 1994.
10.22 Loan and Security Agreement between Silicon Valley Bank and
Registrant entered into as of December 21, 1994. Incorporated
by reference to exhibit 10.40 of the Company's Form 10-K for
the fiscal year ended December 31, 1994.
10.23 GMS Technology Purchase Agreement dated December 30, 1994,
between the Registrant and PaineWebber. Incorporated by
reference to exhibit 10.41 of the Company's Form 10-K for the
fiscal year ended December 31, 1994.
10.24 Lease Agreement dated January 18, 1995, between the Registrant
and Comdisco for $4.5 million. Incorporated by reference to
exhibit 10.42 of the Company's Form 10-K for the fiscal year
ended December 31, 1994.
* 10.25 Product Supply and Distribution Agreement between the
Registrant and Yamanouchi Pharmaceutical Co., LTD. dated as of
July 14, 1996. Incorporated by reference to exhibit 10.1 of
the Company's Form 10-Q for the quarter ended June 30, 1996.
10.26 Loan and Security Agreement dated June 27, 1997 between Heller
Financing and Registrant.
10.27 First Supplemental Indenture dated as of February 2, 1998 by
and between Cygnus, Inc. and State Street Bank and Trust
Company of California, N.A. Incorporated by reference to
Exhibit 4.5 of the Company's Form 8-K dated February 4,
1998.
10.28 Form of Note Purchase Agreement dated as of February 2, 1998
between Cygnus, Inc. and certain institutional investors.
Incorporated by reference to Exhibit 10.28 of the Company's
Form 8-K dated February 4, 1998.
10.29 Form Common Stock Purchase Agreement dated February 2, 1998
between Cygnus, Inc. and certain institutional investors.
Incorporated by reference to Exhibit 10.29 of the Company's
Form 8-K dated February 4, 1998.
99.1 Press Release, dated November 25, 1997, issued by Cygnus, Inc.
announcing the results of research clinical studies.
Incorporated by reference to exhibit 99.1 of the Company's
Form 8-K dated December 25, 1997.
99.2 Press Release, dated November 25, 1997, issued by Cygnus, Inc.
announcing a proposed public offering of convertible
subordinated notes. Incorporated by reference to exhibit 99.2
of the Company's Form 8-K dated December 25, 1997.
EXECUTIVE COMPENSATION PLANS AND ARRANGEMENTS
10.30 1994 Stock Option / Award Plan, incorporated by reference to
Exhibit 99.1 of the Registrant's Form S-8 Registration
Statement No. 333-18357.
10.31 Amended 1991 Employee Stock Purchase Plan incorporated by
reference to Exhibit 99.2 of the Registrant's Form S-8
Registration Statement No. 333-18357.
10.32 Form of Indemnification Agreement for Directors and Officers,
incorporated by reference to Exhibit 10.29 of the Registrant's
Form S-1 Registration Statement No. 33-38363.
10.33 1991 Bonus Plan for Director-Level Employees and Officers,
incorporated by reference to Exhibit 10.36 of the Registrant's
Form S-1 Registration Statement No. 33-45180.
10.34 Amended and Restated Employment Agreement dated January 29,
1996 between the Registrant and Gregory B. Lawless.
Incorporated by reference to exhibit 10.30 of the Company's
Form 10-K for the fiscal year ended December 31, 1996.
10.35 Form of Agreement with Executive Officers relating to change
in control. Incorporated by reference to exhibit 10.31 of the
Company's Form 10-K for the fiscal year ended December 31,
1996.
10.36 Employment Agreement dated May 30, 1992 between the Registrant
and Alan F. Russell
- ---------------
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page
34)
30
<PAGE>
25.1 Power of Attorney (see page 31)
27.0 Financial Data Schedule
- ---------------
* A confidential treatment request has been applied for or granted with respect
to a portion of this document.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 5th day of
February, 1998.
CYGNUS, INC.
By: /s/ JOHN C. HODGMAN
-------------------------------
John C. Hodgman
President, Cygnus Diagnostics
and Chief Financial Officer
(and Principal Accounting Officer)
32
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints, jointly and severally, Gregory B.
Lawless and John C. Hodgman, and each one of them, attorneys-in-fact for the
undersigned, each with the power of substitution, for the undersigned in any and
all capacities, to sign any and all amendments to this Report on Form 10-K, and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his/her name.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ GARY W. CLEARY, Ph.D. Chairman of the Board of Directors and Chief February 5, 1998
- ------------------------------------- Technical Officer
Gary W. Cleary, Ph.D.
/s/ GREGORY B. LAWLESS, Ph.D. President, Chief Executive Officer (Principal February 5, 1998
- ------------------------------------- Executive Officer) and Director
Gregory B. Lawless, Ph.D.
/s/ JOHN C. HODGMAN President, Cygnus Diagnostics and Chief February 5, 1998
- ------------------------------------- Financial Officer (and Principal Accounting
John C. Hodgman Officer)
/s/ JAMES F. GRADY, JR., Ph.D. Vice President, Human Resources, and February 5, 1998
- ------------------------------------- Administration (and Secretary)
James Grady, Jr., Ph.D.
/s/ FRANK T. CARY Director February 5, 1998
- -------------------------------------
Frank T. Cary
/s/ ANDRE F. MARION Director February 5, 1998
- -------------------------------------
Andre F. Marion
/s/ RICHARD G. ROGERS Director February 5, 1998
- -------------------------------------
Richard G. Rogers
/s/ WALTER B. WRISTON Director February 5, 1998
- -------------------------------------
Walter B. Wriston
</TABLE>
33
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated January 16, 1998, except for the
fourth paragraph of Note 3 and for Note 8, as to which the date is February
5, 1998, in this Annual Report (Form 10-K) of Cygnus, Inc.
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-41502, 33-43710, 33-59774, 33-86038 and 333-18357) pertaining
to the Amended 1986 Stock Option Plan, the 1991 Amended Employee Stock Purchase
Plan, the Amended 1986 Incentive Stock Plan and the 1994 Stock Option/Award Plan
of Cygnus, Inc. of our report dated January 16, 1998, except for the fourth
paragraph of Note 3 and for Note 8, as to which the date is February 5, 1998
with respect to the consolidated financial statements and schedule of Cygnus,
Inc. included in the Annual Report (Form 10-K) for the year ended December
31, 1997.
Palo Alto, California /s/ ERNST & YOUNG LLP
February 5, 1998
34
<PAGE>
CYGNUS, INC.
Consolidated Financial Statements
For the Years ended December 31, 1997, 1996 and 1995
with
Report of Independent Auditors
F-1
<PAGE>
CYGNUS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years ended December 31, 1997, 1996 and 1995
CONTENTS
Report of Ernst & Young LLP, Independent Auditors. . . . . . . . . . . . . F-3
Audited Consolidated Financial Statements:
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Operations. . . . . . . . . . . . . . . . . . . F-5
Consolidated Statement of Shareholders' Equity (net capital deficiency). . F-6
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . . . . . . F-7
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-8
F-2
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cygnus, Inc.
We have audited the accompanying consolidated balance sheets of Cygnus,
Inc. as of December 31, 1997 and 1996, and the related consolidated statements
of operations, stockholders' equity (net capital deficiency) and cash flows for
each of the three years in the period ended December 31, 1997. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cygnus, Inc. at
December 31, 1997 and 1996, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Palo Alto, California
January 16, 1998, except for the fourth paragraph of Note 3 and for Note 8,
as to which the date is February 5, 1998
F-3
<PAGE>
CYGNUS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
------------------------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 20,669 $ 33,148
Short-term investments 14,163 16,286
Trade accounts receivable, net of allowance (1997 - $123;
1996 -$1,137) 2,040 7,759
Inventories 924 2,331
Prepaid expenses and other current assets 1,988 1,010
------------------------------
Total current assets 39,784 60,534
EQUIPMENT AND IMPROVEMENTS:
Office and laboratory equipment 14,856 12,781
Leasehold improvements 885 6,681
------------------------------
15,741 19,462
Less accumulated depreciation and amortization (11,145) (13,872)
------------------------------
Net equipment and improvements 4,596 5,590
Deferred compensation and other assets 4,897 2,674
------------------------------
Total Assets $ 49,277 $ 68,798
------------------------------
------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY ( NET CAPITAL
DEFICENCY)
CURRENT LIABILITIES:
Accounts payable $ 1,294 $ 2,153
Current portion of arbitration obligation 16,223 --
Accrued compensation 3,298 3,177
Accrued professional services 842 691
Other accrued liabilities 1,263 2,465
Customer advances 624 1,146
Current portion of deferred revenue 1,846 10,912
Current portion of long-term debt 3,767 2,289
Current portion of capital lease obligations 686 1,315
------------------------------
Total current liabilities 29,843 24,148
Long-term portion of deferred revenue 1,188 2,567
Long-term portion of debt 3,812 6,444
Long-term portion of capital lease obligations 390 1,076
Long-term portion of arbitration obligation 23,000 --
Deferred compensation and other long-term liabilities 4,844 3,350
STOCKHOLDERS' EQUITY (NET CAPITAL DEFICIENCY):
Preferred stock, $0.001 par value: 5,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $0.001 par value: 30,000 shares authorized;
issued and outstanding: 19,273 and 18,691 shares at
December 31, 1997 and 1996, respectively 122,728 117,284
Accumulated deficit (136,528) (86,071)
------------------------------
Total stockholders' equity (net capital deficiency) (13,800) 31,213
------------------------------
Total liabilities and stockholders' equity (net capital deficiency) $ 49,277 $ 68,798
------------------------------
------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
CYGNUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
REVENUES:
Product revenues $ 4,212 $ 17,211 $ 3,704
Contract revenues 14,106 13,085 12,579
Royalty and other revenues 11,184 5,907 2,723
-----------------------------------------------
TOTAL REVENUES 29,502 36,203 19,006
COSTS AND EXPENSES:
Costs of products sold 10,413 16,659 4,746
Research and development 22,328 23,165 20,029
Marketing, general and administrative 8,695 9,296 7,369
Arbitration settlement 39,666 --- ---
-----------------------------------------------
TOTAL COSTS AND EXPENSES 81,102 49,120 32,144
Loss from operations ( 51,600) ( 12,917) ( 13,138)
Interest and other income 2,989 2,851 1,139
Interest and other expense (1,849) (986) (843)
-----------------------------------------------
NET LOSS $ ( 50,460) $ ( 11,052) $ ( 12,842)
-----------------------------------------------
-----------------------------------------------
BASIC AND DILUTED NET LOSS PER SHARE $ (2.67) $ (0.60) $ (0.79)
-----------------------------------------------
-----------------------------------------------
Shares used in computation of basic and diluted
net loss per share 18,928 18,544 16,265
-----------------------------------------------
-----------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
CYGNUS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
(In thousands)
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
COMMON ACCUMULATED EQUITY (NET CAPITAL
STOCK DEFICIT DEFICIENCY)
------------------------------------------------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 80,705 (62,588) 18,117
Issuance of 245 shares of common stock 2,129 -- 2,129
Issuance of 2,300 shares of common stock in third public offering,
net of issuance costs of $2,379 29,821 -- 29,821
Issuance of 105 shares of common stock under the Employee Stock
Purchase Plan 611 -- 611
Unrealized gain on investments -- 416 416
Net loss -- (12,842) (12,842)
------------------------------------------------------
BALANCE, DECEMBER 31, 1995 113,266 (75,014) 38,252
------------------------------------------------------
------------------------------------------------------
Issuance of 333 shares of common stock 2,749 -- 2,749
Issuance of 90 shares of common stock under the Employee Stock
Purchase Plan 823 -- 823
Issuance of 45 shares of common stock through exercise of
warrant 446 446
Change in unrealized loss on investments -- (5) (5)
Net loss -- (11,052) (11,052)
------------------------------------------------------
BALANCE, DECEMBER 31, 1996 $ 117,284 $ (86,071) $ 31,213
------------------------------------------------------
------------------------------------------------------
Issuance of 258 shares of common stock 2,212 -- 2,212
Issuance of 64 shares of common stock under the Employee Stock
Purchase Plan 707 -- 707
Issuance of 255 shares of common stock through exercise of
warrant 2,525 2,525
Change in unrealized loss on investments -- 3 3
Net loss -- (50,460) (50,460)
------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ 122,728 $ (136,528) $ (13,800)
------------------------------------------------------
------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-6
<PAGE>
CYGNUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase/(Decrease) in Cash and Cash Equivalents
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (50,460) $ (11,052) $ (12,842)
Adjustments to reconcile net loss to net cash (used in)/provided by
operating activities:
Depreciation and amortization 2,739 2,802 2,683
Loss on write-down and disposals of equipment 1,350 -- --
Other (133) (280) 88
(Increase)/decrease in assets:
Trade Accounts receivables 5,719 (5,449) (588)
Inventories 1,407 (1,953) (232)
Prepaid expenses and other assets (3,201) (1,888) (427)
Increase/(decrease) in liabilities:
Accounts payable and other accrued liabilities (2,061) 2,325 (1,166)
Accrued compensation 121 986 (670)
Accrued professional services 151 (35) 121
Customer advances (522) 300 (449)
Deferred revenue (10,445) 6,646 670
Arbitration liability 39,223 -- --
Deferred compensation and other liabilities 1,494 1,261 267
-----------------------------------------------
Net cash used in operating activities (14,618) (6,337) (12,545)
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (3,095) (1,515) (2,405)
Purchases of short-term investments (30,148) (31,565) (21,697)
Maturity and sale of short-term investments 32,408 31,602 24,959
-----------------------------------------------
Net cash provided by/(used in) investing activities (835) (1,478) 857
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale and leaseback of assets -- 464 2,122
Issuance of common stock 5,444 4,018 32,561
Proceeds from issuance of long-term debt 1,331 8,000 --
Principal payments of long-term debt (2,486) (490) (469)
Payment of capital lease obligations (1,315) (1,474) (1,301)
-----------------------------------------------
Net cash provided by financing activities 2,974 10,518 32,913
-----------------------------------------------
Net increase (decrease) in cash and cash equivalents (12,479) 2,703 21,225
Cash and cash equivalents at beginning of year 33,148 30,445 9,220
-----------------------------------------------
Cash and cash equivalents at end of year $ 20,669 $ 33,148 $ 30,445
-----------------------------------------------
-----------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Cygnus, Inc. was incorporated in California in April 1985. In September
1995 the Company changed its name from Cygnus Therapeutic Systems to Cygnus,
Inc. and its place of incorporation to Delaware. Cygnus is engaged in the
development and manufacture of diagnostic and drug delivery systems, with its
current efforts primarily focused on two core areas: a painless, bloodless and
automatic glucose monitoring device (the Gluco Watch system), and transdermal
drug delivery systems. The Company's products in the most advanced stages of
development include two in the market (Nicotrol; marketed as
Nicorette-Registered Trademark- in Europe; collectively "Nicotrol Products" and
FemPatch) and several in different stages of clinical trials.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries after elimination of all material
inter-company balances and transactions. Cygnus' subsidiaries were inactive in
1997, 1996 and 1995.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Product sales are recorded when FemPatch or Nicotrol Products are shipped.
Nicotrol product shipments were discontinued in the first quarter of 1997 upon
Pharmacia's exercise of its option to purchase the U.S. manufacturing rights for
Nicotrol from Cygnus. Upfront and interim milestone payments from feasibility
and development contracts are generally earned and recognized based on
percentage of actual efforts expended compared to total expected efforts during
the development period for each contract. The total expected efforts under each
contract are estimated by management and updated periodically in light of the
current conditions and expected development timeline. Milestone payments
received at the end of the development period of an agreement are generally
recognized upon receipt. Deferred revenue includes the portion of upfront and
interim milestone payments received on research, development and distribution
agreements which have been deferred and will be recognized over the related
development period in relation to efforts expended under the agreement and at
December 31, 1996, portions of deferred royalty from U.S. over-the-counter
("OTC") sales of Nicotrol. Royalty income from Nicotrol Products is recognized
in the quarter following the quarter in which the sales occurred.
Two customers provided 84% and 16% of the 1997 product sales and royalty
and other income. In 1995 and in 1996, one of these customers provided 100% of
product sales and royalty and other income.
Five customers provided 33%, 14%, 11%, 10% and 10% of the 1997 contract
revenues. In 1996, four of these customers provided 28%, 25%, 14% and 13% of
this revenue, and in 1995, two of these customers provided 34% and 27% of this
revenue.
COSTS OF PRODUCTS SOLD
Direct and indirect costs associated with manufacturing FemPatch and
Nicotrol products are included in costs of products sold.
RESEARCH AND DEVELOPMENT
F-8
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The Company has entered into license, collaboration and distribution
agreements with certain companies. In general, these agreements provide that
Cygnus will create and/or manufacture the drug delivery or diagnostic system and
receive reimbursements for costs incurred, payment for product shipped to
licensees or distributors and royalties based on product sales by its licensees
and distributors. Additionally, under such agreements, Cygnus may receive one or
more upfront payments and milestone payments (which are made upon the occurrence
of certain events, such as the filing of the New Drug Application for a
product), as well as reimbursements of certain research and development
expenses. Research and development expenses consist of process development
costs, costs associated with work performed under development agreements and
self-funded research, and costs incurred in clinical studies and
regulatory/scientific affairs. Research and development expenses covered under
contracts partially funded by the Company's licensees and distributors for the
years ended December 31, 1997, 1996 and 1995 were approximately $19,242,
$18,422, and $16,951, respectively. Cygnus' pharmaceutical company licensees
and distributors generally have the right to abandon the rights to a product and
the obligation to make related payments. Since all payments to the Company
under these agreements 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.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out method) or
market, after appropriate consideration was given to obsolescence and
inventories in excess of anticipated future demand. Net inventories consist of
the following:
DECEMBER 31,
1997 1996
--------------------------
Raw materials $ 787 $ 1,111
Work in process 86 842
Finished goods 51 378
--------------------------
$ 924 $ 2,331
--------------------------
--------------------------
Inventories at December 31, 1997 relate to the Company's estradiol
(FemPatch) transdermal product. Inventories at December 31, 1996 relate to the
Company's nicotine (Nicotrol) and estradiol (FemPatch) transdermal products.
F-9
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RELATED PARTY TRANSACTIONS
The Company currently does business with two companies that are principally
owned by a non-officer Vice President of the Company. These companies are
primarily engaged to design and build manufacturing equipment for the GlucoWatch
system, and to manufacture components of the GlucoWatch system. The Company
spent approximately $2.7 million with these companies in 1997, and this amount
is expected to increase in 1998. As of December 31, 1997, $0.3 million was
payable to these companies, and the Company had outstanding purchase commitments
to these companies totaling $1.1 million.
COMMITMENTS
As of December 31, 1997, the Company had non-cancelable purchase orders
totaling $1.1 million with a single vendor for the construction of manufacturing
equipment to be used to produce components of the GlucoWatch system.
RECEIVABLES
As of December 31, 1997, approximately 90% of the trade accounts receivable
are due from two customers. The remaining balance of the trade accounts
receivable are due from four customers, all of which are large pharmaceutical
companies. As of December 31, 1996, approximately 83% of the trade accounts
receivable are due from two customers. The remaining balance of the trade
accounts receivable are due from three customers, all of which are large
pharmaceutical companies. Generally, the Company does not require any collateral
on receivable balances.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are recorded at the lower of cost or net
realizable value. Depreciation of equipment is computed on a straight-line basis
over the estimated useful lives of eighteen months to sixty months. Leasehold
improvements and assets recorded under capital leases are amortized using the
straight-line method over the shorter of the estimated useful life of the assets
or the term of the leases. In 1997, the Company incurred charges of $1.3
million to write down the cost of Nicotrol equipment to its net realizable
value. This write down was due to the termination of Nicotrol manufacturing by
the Company.
DEFERRED COMPENSATION
In 1995, the Company adopted a non-qualified deferred compensation plan.
The Plan is intended to be unfunded and is maintained by the Company primarily
for the purpose of providing deferred compensation for a select group of
management. As of December 31, 1997 and 1996, the Company recorded $4.4 million
and $2.5 million, respectively, as other long-term assets and as other long-term
liabilities related to the plan which included both contributions and net
investment earnings. These investments are directed by the participants.
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 earning 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 earning 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 and warrants outstanding are excluded from the diluted
earnings per share computation, as their effect is anti-dilutive.
ACCOUNTING FOR STOCK BASED COMPENSATION
F-10
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Under Statement 123 "Accounting for Stock Based Compensation", stock-based
compensation expense to employees is measured using either the intrinsic value
method as prescribed by Accounting Principle Board Opinion No. 25 , "Accounting
for Stock Issued to Employees" (APB 25) or the fair-value method described in
FAS 123. Cygnus has elected to follow APB 25 and related interpretations in
accounting for its employee stock options and only disclose the pro-forma
impact of the fair-value method on net income and earnings per share (See Note
4).
ACCOUNTING FOR SEGMENTS OF AN ENTERPRISE
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standard No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION (Statement 131), which is effective for years
beginning after December 15, 1997. Statement 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. The Company will adopt the new
requirement retroactively in 1998. Management has not completed its review of
the impact of Statement 131, but anticipates that the adoption of this statement
will affect the number of segments the Company is required to report.
CONCENTRATION OF CREDIT RISK
The Company maintains its cash, cash equivalents and short-term investments
primarily with a bank and two brokerage houses. This practice is consistent with
the Company's policy to maintain high liquidity and ensure safety of principal.
SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale are carried at fair value, based on quoted
market prices, and the unrealized gains and losses have been combined with the
accumulated deficit due to immateriality. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in investment income.
The Company considers all highly liquid investments with a maturity from
the date of purchase of three months or less to be cash equivalents. The
Company invests its excess (to current demands) cash in short term, highly
liquid instruments. These investments have included, but are not limited to,
Treasury Notes, Federal Agency Securities, Auction Rate Certificates, Auction
Rate Preferred Stock, and Commercial Paper.
DEPENDENCE ON FEMPATCH; UNCERTAINTY OF MARKET
The Company currently relies on sales of Fempatch for all of its product
sales revenues. The long term demand for Fempatch is uncertain in both existing
and potential markets. Currently, in addition to Fempatch, there are other
estradiol patches available in the market which are not made by or licensed from
Cygnus. A reduction in demand for Fempatch will have the effect of reducing the
Company's revenues and therefore negatively impact its overall results of
operations.
DEPENDENCE ON SUPPLIERS
Several materials used in the Company's 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 would 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 products.
DEPENDENCE ON LICENSEES AND COLLABORATIVE ARRANGEMENTS
F-11
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Cygnus depends on its licensees to fund a significant portion of product
development costs, to conduct clinical testing, to obtain regulatory approvals
and to market products. The Company is dependent on Pharmacia & Upjohn, a
subsidiary of Procordia AB ("Pharmacia") and its sublicensee Johnson & Johnson
for the marketing of Nicotrol. In February 1996, the Company entered into an
agreement with Becton Dickinson for the marketing and distribution of the
GlucoWatch. Under the terms of the agreement, Becton Dickinson has exclusive
worldwide marketing and distribution rights, with the exception of Japan and
Korea. Cygnus has primary responsibility for completing product development,
obtaining regulatory approvals, manufacturing, and customer service and support
for the product. In July 1996, the Company entered into an agreement with
Tokyo-based Yamanouchi Pharmaceutical Co., Ltd. for the marketing and
distribution of the GlucoWatch in Japan and Korea. Cygnus will have primary
responsibility for completing product development and for manufacturing. Cygnus
will be eligible to receive up-front and milestone payments as well as a
percentage of the product's future commercial success from both Becton Dickinson
and Yamanouchi. The Company's licensees generally have the right to terminate
the development funding for a product at any time for any reason without
significant penalty. Licensees have exercised this right in the past, and there
can be no assurance that current and future licensees will not also exercise
this right in the future. In the past some of the Company's licensees,
distributors and collaborators have approached the Company requesting
modification of the terms of existing agreements. Becton Dickinson has recently
approached the Company to discuss modifying the non-compete terms of the
existing agreement. The Company is unable to predict the outcome of these
discussions.
F-12
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
For the years ended December 31, 1997 and 1996 the net realized gains and losses
on available-for-sale securities were immaterial.
As of December 31, 1997 and 1996 all debt securities are classified as
available-for-sale. The following is a summary of available-for-sale securities
as of December 31, 1997 and 1996
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE SECURITIES
--------------------------------------------------------------
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------------------------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997:
Cash Equivalents:
Money Market Fund $ 18,925 $ -- $ -- $ 18,925
---------- ------- ------- ----------
Total Cash Equivalents $ 18,925 $ -- $ -- $ 18,925
---------- ------- ------- ----------
---------- ------- ------- ----------
Short-Term Investments:
Treasury Bills $ 1,900 $ 1 $ -- $ 1,901
Federal Agency Securities 3,023 -- -- 3,023
Auction Rate Certificates 6,216 -- -- 6,216
Auction Rate Preferred 1,012 -- -- 1,012
Corporate Notes 2,013 -- (2) 2,011
---------- ------- ------- ----------
Total Short-Term Investments $ 14,164 $ 1 $ (2) $ 14,163
---------- ------- ------- ----------
---------- ------- ------- ----------
AS OF DECEMBER 31, 1996:
Cash Equivalents:
Money Market Fund $ 5,952 $ -- $ -- $ 5,952
Short-term Corporate note / Commercial
Paper, due in less than ninety days 7,881 -- -- 7,881
Federal Agency Securities, due in less
than ninety days 13,981 -- -- 13,981
---------- ------- ------- ----------
Total Cash Equivalents $ 27,814 $ -- $ -- $ 27,814
---------- ------- ------- ----------
---------- ------- ------- ----------
Short-Term Investments:
Federal Agency Securities $ 2,006 $ -- $ (5) $ 2,001
Auction Rate Certificates 2,206 -- -- 2,206
Auction Rate Preferred 9,042 -- -- 9,042
Corporate Notes 3,037 -- -- 3,037
---------- ------- ------- ----------
Total Short-Term Investments $ 16,291 $ -- $ (5) $ 16,286
---------- ------- ------- ----------
---------- ------- ------- ----------
</TABLE>
All cash equivalents and short-term investments as of December 31, 1997
and 1996 have maturity dates of less than one year.
F-13
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3: CREDIT LINE AND LEASES
In December 1994, the Company borrowed $1,712 under a bank line of credit
to finance the purchase of manufacturing and research equipment. The line bears
interest at two percentage points above the prime rate (10.50% in total as of
December 31, 1997). Borrowings under this line are secured by the equipment
purchased and will be paid off in monthly installments through June 30, 1998.
As of December 31, 1997, $245 was outstanding. In June of 1996, the Company
received $8,000 under a bank loan agreement for short-term working capital. The
line bears interest at a fixed rate of 9.57% per year. Borrowings under this
line are secured by the Company's assets excluding those securing lease lines of
credit. This line is repaid in monthly installments starting in January 1997
and is scheduled to be fully repaid by December 1999. As of December 31, 1997,
there was $6,200 outstanding under this agreement. In June 1997, the Company
entered into a loan agreement for $1,331 to finance additional capital
equipment. The line bears interest at a fixed rate of 9.39% per year. Borrowings
under this agreement are secured by specific Company's assets and a security
deposit of $631. This loan is being repaid monthly through June 2000. As of
December 31, 1997, there was $1,134 outstanding. All loan agreements are
subject to certain financial covenants, including minimum cash balances,
tangible net worth, and debt to net worth ratio. In the event of default, the
lenders may, at their option, exercise their rights to remedies specified in the
loan agreements which include, among other things, the acceleration of amounts
due under the agreements.
Assets leased under capital leases are included in equipment with a cost of
$5,065 and $5,717 on December 31, 1997 and 1996, respectively, with related
accumulated amortization of approximately $4,275 and $3,914 on December 31, 1997
and 1996, respectively. Upon the expiration of the lease, the Company has
purchase options for the leased equipment at market value. As of 12/31/97,
there was $1,076 outstanding. Under this lease agreement, in the event of
default, the leasing company can accelerate all amounts due.
At December 31, 1997, as a result of recording the arbitration settlement
in September 1997, the Company was in default of the December 1994 and June 1996
loan agreements and the lease agreement due to the breach of several financial
covenants, including those related to the ratio of debt to tangible net worth
and the total tangible net worth. As of December 31, 1997, the bank has agreed
to forbear from exercising its rights under the Loan Documents until March 31,
1998. The leasing company has agreed to waive the covenant defaults until
February 15, 1998.
On February 5, 1998 the Company completed the issuance of $43.0 million
of 4% Senior Subordinated Convertible Notes and on February 4, 1998 completed
the issuance of $13.8 million of common stock (see Subsequent Event, Note 8
to the consolidated financial statements for further description). Both the
bank and the leasing company have agreed to include the convertible debt in
equity for purposes of measuring covenant compliance. As a result of the
receipt of proceeds from the financing arrangements, the Company has cured
the default condition with the bank and the leasing company as of February 5,
1998 and expects to remain in compliance with these financial covenants
throughout 1998. Therefore, the Company has classified debt on the basis of
repayment terms.
The future aggregate principal payments of long-term debt and minimum lease
payments under capital leases, together with the present value of the net
minimum lease payments as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
LONG-TERM DEBT CAPITAL LEASES
-------------- --------------
<S> <C> <C>
Years ending December 31,
1998 $ 3,767 $ 737
1999 3,564 332
2000 248 72
--------------------------------------
Total principal and minimum lease payments, respectively $ 7,579 1,141
-----------------
-----------------
Less amount representing interest 65
---------------------
Present value of net minimum lease payments 1,076
Current portion 686
---------------------
Amounts due after one year $ 390
---------------------
---------------------
</TABLE>
F-14
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The fair market value of the equipment line of credit and short-term
working capital bank loan approximates their carrying value of $7,579.
The Company leases its facilities under a non-cancelable operating lease
expiring in 1998, with a five-year renewal option at the end of the lease. The
terms of the lease provide for rental payments on a graduated scale. The
Company is recognizing rent expense on a straight-line method over the lease
period and therefore has accrued for the rent expense incurred but not paid.
Additionally, the Company leases an off-site warehouse with a three-year lease
term ending in 1999.
Minimum future rental commitments under the operating leases on
December 31, 1997 amount to $1,172 in 1998, and $96 in 1999. Rent expense
amounted to $1,020, $1,013, and $1,011, for the years ended December 31, 1997,
1996, and 1995 respectively.
NOTE 4: STOCKHOLDERS' EQUITY
PREFERRED SHARE PURCHASE RIGHTS PLAN
Pursuant to the Company's Stockholder Rights Plan, the Board declared a
dividend distribution of one Preferred Share Purchase Right ("Right") for each
outstanding share of Common Stock, issuable on October 18, 1993 to stockholders
of record on that date. These rights will remain outstanding until
September 21, 2003.
WARRANTS
In September 1990, in connection with the Paine Webber product development
program, a warrant to purchase 300 shares of common stock at $9.90 per share was
issued to the development partner. All warrants have been exercised as of
December 31, 1997.
EMPLOYEE STOCK PURCHASE PLAN
As part of an employee retention program, the Company established the 1991
Employee Stock Purchase Plan (the "Stock Purchase Plan") to provide employees
with an opportunity to purchase common stock of the Company through payroll
deductions. A total of 575 shares of common stock were reserved for issuance to
eligible employees under the amended Stock Purchase Plan. The amended Stock
Purchase Plan will terminate in 2023 unless sooner terminated by the Board of
Directors. Under this Stock Purchase Plan, the Company's employees, subject to
certain restrictions, may purchase shares of common stock at 85 percent of the
lesser of the fair market value at either the date of enrollment or the date of
purchase. During 1997 and 1996, 64 and 90 shares, respectively, were issued
under the Stock Purchase Plan, and at December 31, 1997, 128 shares were
available for issuance.
STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion
NO.25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
The Company has an Incentive Stock Plan (the "Stock Plan") which authorizes
the Board of Directors to grant incentive stock options, nonstatutory stock
options, stock purchase rights and stock bonuses to employees and consultants.
The Stock Plan, as amended, authorizes the issuance of up to 5,916 common shares
of which 575 are available for grant at December 31, 1997. Under the Stock Plan,
incentive stock options must be granted at fair market value at the date of
grant as determined by the Board of Directors or committee thereof. Options
vest over a four-year period and are exercisable for a term of ten years after
issuance unless otherwise determined by the Board of Directors or committee
thereof.
F-15
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options and the fair value for the stocks
issued under the 1991 Employee Stock Purchase Plan (the "Stock Purchase Plan")
were estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1997, 1996 and 1995:
risk-free interest rate of 5.41%, 6.125% and 6.125%, respectively; a dividend
yield of 0.0%; volatility factors of the expected market price of the Company's
common stock of .66, .68, and .69, respectively; and a weighted-average expected
life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options issued under the Stock Plan is amortized to expense over the options'
vesting period. The estimated fair value of the compensation benefit received
under the Stock Purchase Plan is expensed in the year of purchase. The
Company's pro forma information follows:
1997 1996 1995
---- ---- ----
Pro forma net loss $ (54,691) $ (13,653) $ (14,145)
Pro forma loss per share $ (2.89) $ (0.74) $ (0.87)
BECAUSE STATEMENT 123 IS APPLICABLE ONLY TO OPTIONS GRANTED SUBSEQUENT TO
DECEMBER 31, 1994 ITS PRO FORMA EFFECT WILL NOT BE FULLY REFLECTED UNTIL 1999.
F-16
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
A summary of the Company's stock option activity, including the number,
weighted-average exercise price, and weighted-average remaining contractual life
for options outstanding and the number and weighted-average exercise price of
options exercisable for the year ended December 31, 1997 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING EXERCISABLE
- --------------------- --------------------------------------------- ---------------------------------
Weighted Weighted Weighted
Range of Exercise Number Average Average Number Average
Prices Outstanding Remaining Exercise Exercisable Exercise
at Year-end Contractual Price at Year-end Price
Life
- --------------------- --------------------------------------------- ---------------------------------
<S> <C> <C> <C> <C> <C>
$ 5.75 - $ 7.75 675 7.78 $7.03 506 $7.03
$ 7.875 - $14.625 853 7.38 $11.69 458 $9.85
$ 14.375 - $15.000 716 9.42 $14.52 21 $14.52
$ 15.125 - $17.000 566 5.23 $15.70 471 $15.71
$17.625 - $22.625 457 8.57 $20.45 171 $20.86
---------------- ----------------
$ 5.75 - $ 22.625 3,267 7.50 $13.27 1,627 $11.89
</TABLE>
<TABLE>
<CAPTION>
OPTION ACTIVITY SUMMARY FOR THE YEAR ENDED DECEMBER 31:
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
------------------------- ----------------------- ---------------------------
Weighted - Weighted - Weighted -
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
------------------------- ----------------------- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year 2,432 $11.81 2,372 $ 9.66 2,174 $10.20
Granted 1,346 $14.96 486 $19.78 758 $ 7.51
Exercised (258) $ 8.35 (333) $ 8.41 (245) $ 8.59
Forfeited (253) $13.24 (93) $10.75 (315) $ 9.06
-------- -------- -------
Outstanding-end of year 3,267 $13.27 2,432 $11.81 2,372 $9.66
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
Exercisable at end of year 1,627 $11.89 1,350 $10.90 1,008 $11.54
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
Weighted-average fair value of
options granted during the year $7.13 $ 9.54 $ 3.65
</TABLE>
Under the Stock Plan, stock may be sold and stock bonuses or rights to purchase
common stock may be granted by the Board of Directors or a committee thereof
(the "Board") for past services at the fair market value at the date of grant.
The Board may impose certain repurchase rights, in favor of the Company, in the
event that an employee is terminated prior to certain predetermined vesting
dates. As of December 31, 1997, 1996 and 1995, no shares were subject to
repurchase.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At December 31, 1997, the total number of shares of common stock reserved
for issuance under all stock plans was 3,971.
F-17
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5: INCOME TAXES
An income tax benefit has not been accrued on net losses due to the
uncertainty regarding the Company's future profitability.
Significant components of the Company's deferred tax assets for federal and
state income taxes as of December 31, 1997 and 1996 are as follows:
YEAR ENDED DECEMBER 31,
1997 1996
---- ----
Net operating loss carryforwards $ 25,900 $ 19,700
Research and development credits 2,400 1,980
Reserves and accruals 4,100 3,300
Deferred revenue 1,400 5,490
Capitalized R&D 5,700 5,940
Arbitration obligation 15,800
Other - net 2,000 1,140
---------------------------
Total deferred tax assets $ 57,300 $ 37,550
Valuation allowance for deferred tax assets (57,300) (37,550)
---------------------------
Net deferred tax assets $ 0 $ 0
---------------------------
---------------------------
Approximately $2.9 million of the valuation allowance results from tax
deductions under the stock option plans and will be credited to common stock
when recognized.
At December 31, 1997, the Company had federal net operating loss and
research and development tax credits carryforwards of approximately $76.0
million and $1.6 million, respectively. The Company had state net operating loss
and tax credit carryforwards of approximately $2.0 million and $0.8 million,
respectively. These carryforwards will expire at various dates beginning in
1999. Approximately $73.0 million of the federal net operating loss
carryforwards will expire at various dates beginning in 2005.
Because of the "change in ownership" provisions of the Internal Revenue
Code, a substantial portion of the Company's net operating loss and tax credit
carryforwards may be subject to annual limitations. The annual limitation may
result in the expiration of net operating losses and tax credits before
utilization.
NOTE 6: STATEMENTS OF CASH FLOWS DATA
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Interest paid $ 1,631 $ 844 $ 548
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Equipment purchased under capital leases $ --- $ 464 $ 2,122
Unrealized gain/(loss) on investments $ 3 $ (5) $ 416
</TABLE>
F-18
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7: LEGAL PROCEEDINGS
On June 30, 1994, Sanofi filed a request for arbitration against Cygnus
with the International Court of Arbitration. In its request for arbitration,
Sanofi alleged that Cygnus breached its existing contract with Sanofi by, among
other things, entering into a product development agreement with another company
for the development of transdermal systems in the field of hormone replacement
therapy (which agreements pertain to each of the Company's hormone replacement
products other than FemPatch). Sanofi, in the original filing sought to recover
from Cygnus in excess of $60.0 million for damages attributable to the alleged
breach. International Chambers of Commerce (the "Tribunal") announced an interim
award in the arbitration proceedings in October 1996. The Tribunal found that
two transdermal products for hormone replacement therapy licensed by Cygnus to
another company fall within the scope of an exclusive license previously granted
to Sanofi.
In September, 1997, the Company and Sanofi agreed to a settlement of the
arbitration dispute. 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, 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.
Overall, Cygnus' non-recurring expenses attributable to the arbitration
settlement recorded in the quarter ended September 30, 1997 totaled $39.7
million. Of the total related liability of $39.2, at December 31, 1997, $23.0
million is long-term.
In May 1997 Cygnus reported it had initiated arbitration proceedings
against Pharmacia & Upjohn ("Pharmacia") relating to Nicotrol-Registered
Trademark-, Cygnus' smoking cessation patch. In March of this year, Cygnus
announced that Pharmacia exercised its option to purchase the U.S. manufacturing
rights for Nicotrol. The agreement between Cygnus and Pharmacia provided that
Pharmacia would be obligated to pay Cygnus for, among other things, existing
inventory costs and for certain purchase order commitments. Pharmacia disputes
their obligations regarding certain purchase order commitments. The arbitration
is intended to resolve these matters. Separately, Cygnus and Pharmacia are not
in agreement regarding certain royalty calculations for 1996 and 1997. If this
issue is unable to be resolved by the two Companies, it could become part of the
arbitration proceedings. However, the Company does not believe the resolution of
this issue will have a material adverse effect on its financial position or
results of operations.
F-19
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8: SUBSEQUENT EVENTS
The Company entered into Note Purchase Agreements dated as of February 3,
1998 with certain institutional investors to issue and sell approximately $43
million of 4% Senior Subordinated Convertible Notes due 2005 (the "Notes").
This transaction closed on February 5, 1998. The Notes were sold at par and
mature on February 1, 2005 and bear interest at a rate of 4% per annum. After
deducting the debt issuance costs, the Company received approximately $40.0
million. Interest on the Notes may be paid in Common Stock or cash at the
option of the Company. The Notes are convertible into Common Stock of the
Company at a conversion price equal to the average of the two lowest trade
prices of the Common Stock as reported on the Nasdaq National Market for a
specified number of trading days immediately preceding the conversion date
until February 1, 2000. The conversion price will be subject to maximum
conversion prices until February 1, 2000 and minimum conversion prices until
February 1, 1999. Commencing February 1, 2000, the conversion price of the
Notes will be set at a fixed price equal to the greater of $150.00 per share
and 150% of the market price of the Common Stock for 20 trading days
preceding such date. Debt issuance costs of approximately $2.6 million will
result in additional interest charges to be recorded over the term of the
Notes.
On February 4, 1998, the Company completed a direct public offering of
905,740 shares of its Common Stock for total proceeds to the Company of
approximately $13.8 million. The Common Stock was sold at a discount from the
market price.
F-20
<PAGE>
SCHEDULE II
CYGNUS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
(Dollars in thousands)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF YEAR
YEAR EXPENSES ACCOUNTS DEDUCTIONS
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,137 $ -- $ -- $ (1,014) $ 123
Warranty reserve 435 -- -- -- 435
-------------------------------------------------------------------------
$ 1,572 $ -- $ -- $ (1,014) $ 558
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,137 $ -- $ -- $ -- $ 1,137
Warranty reserve 435 -- -- -- 435
-------------------------------------------------------------------------
$ 1,572 $ -- $ -- $ -- $ 1,572
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Year ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,028 $ 109 $ -- $ -- $ 1,137
Warranty reserve 435 -- -- -- 435
-------------------------------------------------------------------------
$ 1,463 $ 109 $ -- $ -- $ 1,572
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
S-1
<PAGE>
CERTIFIED COPY OF RESOLUTIONS
I do hereby certify that I am the duly elected, qualified, and acting
(Assistant) Secretary of CYGNUS, INC., a Delaware corporation, and, as such,
have custody of the records of the Corporation, including the minutes of the
meeting of the Board of Directors of said corporation duly called and held on
October 11, 1994, at which a quorum was present and acting throughout
and at which the following resolutions were duly adopted. I further certify
that said resolutions are in full force and effect as of the date hereof and
have not been modified or rescinded in any manner whatsoever.
RESOLVED, that the President, any Vice President, any Assistant Vice President,
the Treasurer, any Assistant Treasurer, Director, Finance & Acctg, or
______________________, each has full authority to execute and deliver in the
name and on behalf of the Corporation, instruments, documents, and agreements,
including amendments, renewals, or extensions thereof, with HELLER FINANCIAL,
INC. ("Lender"), providing for various financing arrangements with the
Corporation, including but not limited to, the leasing of equipment by, and
financing the acquisition of equipment for, the Corporation, the borrowing of
monies and the pledging, mortgaging, or otherwise encumbering of any or all of
the Corporation's assets pursuant to any sale and leaseback or other financing
arrangement, with or without recourse to the Corporation, all upon terms and
conditions and containing such provisions as such officer(s), employee(s), or
agent(s) may in her or their sole discretion deem advisable, necessary, or
expedient; and
FURTHER RESOLVED, that the authority herein conferred shall be deemed
retroactive and any and all acts authorized hereunder performed prior to the
date hereof are hereby approved and ratified; and that nothing herein contained
shall be deemed to affect the authority heretofore or hereafter conferred upon
any other person or persons, it being understood and agreed that the authority
herein conferred shall continue in full force and effect until written notice to
the contrary shall be actually received by Lender.
I further certify that there is no provision in the charter or by-laws of the
Corporation limiting the power of the Board of Directors to adopt the foregoing
resolutions, that the same are in conformity with the provisions of said charter
and by-laws, and that no shareholder consent is required to permit the action
provided for thereby.
I further certify that the persons whose names, titles, and signatures appear
below are elected or appointed, qualified, and acting officer(s), employee(s),
or agent(s) of the Corporation and hold on the date of this certificate the
office or position set forth opposite their respective names, and the signatures
appearing opposite their respective names are the genuine signatures of such
officer(s), employee(s), or agent(s).
NAME TITLE OR POSITION SIGNATURE
CFO, VP Finance
John C. Hodgman President, Cygnus Diagnostics /s/ John C. Hodgman
____________________ _____________________________ ______________________
Director, Finance
Frank A. Raab and Accounting /s/ Frank A. Raab
____________________ _____________________________ ______________________
____________________ _____________________________ ______________________
____________________ _____________________________ ______________________
____________________ _____________________________ ______________________
____________________ _____________________________ ______________________
IN WITNESS WHEREOF, I have hereunto set my hand and affixed the seal of the
Corporation this 27th day of June, 1997.
CYGNUS, INC.
[ILLEGIBLE] (NAME)
CORPORATE SEAL [ASSISTANT] SECRETARY
<PAGE>
Loan No.: 1910128-0001
- -------------------------------------------------------------------------------
HELLER FINANCIAL
SECURITY AGREEMENT
THIS SECURITY AGREEMENT ("AGREEMENT") is made this 27th day of June, 1997, by
and between CYGNUS, INC., a Delaware corporation ("DEBTOR"), whose business
address is 400 Penobscot Drive, Redwood City, California 94063 and HELLER
FINANCIAL, INC., a Delaware corporation ("SECURED PARTY"), whose address is
Commercial Equipment Finance Division, 500 West Monroe Street, Chicago,
Illinois 60661.
WITNESSETH:
1. SECURE PAYMENT. To secure payment of indebtedness in the principal sum of
up to One Million Five Hundred Thousand and 00/100 Dollars ($1,500,000.00), as
evidenced by a note or notes executed and delivered by Debtor to Secured Party
(the "NOTES") and any obligations arising under this Agreement, and also to
secure any other indebtedness or liability of Debtor to Secured Party, direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising and no matter how acquired by Secured Party, including all
future advances or loans which may be made at the option of Secured Party (all
the foregoing hereinafter called the "INDEBTEDNESS"), Debtor hereby grants and
conveys to Secured Party a first priority continuing lien and security interest
in the personal property described on any schedule(s) now or hereafter attached
to or made a part hereof by reference hereto (the "SCHEDULES"), all products and
proceeds (including insurance proceeds) thereof, if any, and all substitutions,
replacements, attachments, additions, and accessions thereto (all of the
foregoing hereinafter called the "COLLATERAL.") The Schedules may be
supplemented from time to time to evidence the Collateral subject to this
Agreement.
Debtor shall request in writing each advance of principal under the Notes, which
request shall be satisfactory to Secured Party in form and substance. Each
advance shall be on and subject to the terms and conditions set forth in this
Agreement and shall otherwise be at Secured Party's sole discretion. Each Note
shall be in an amount not less than $500,000.00. No principal advance under any
Notes shall be made after July 31, 1997, and each advance shall reduce, dollar
for dollar, the amount that may be advanced under the Notes in the aggregate.
Amounts advanced and repaid may not be reborrowed.
1
<PAGE>
2. REPRESENTATIONS, WARRANTIES AND COVENANTS. Except as otherwise provided,
each representation and warranty made by Debtor in this Agreement shall be true,
correct and complete as of the date of this Agreement and as of the date of each
advance of funds under a Note. Debtor hereby represents, warrants and covenants
as follows:
(a) PERFORM OBLIGATIONS. Debtor shall pay as and when due all
Indebtedness secured by this Agreement and perform all of the obligations
contained in this Agreement according to its terms. Debtor shall use the loan
proceeds for business uses and not for personal, family, household, or
agricultural uses.
(b) PERFECTION. This Agreement and all necessary Uniform Commercial Code
filings together create a valid, perfected and first priority continuing lien
and security interest in the Collateral, securing the payment and performance of
the Indebtedness, and all filings and other actions necessary or desirable to
create, perfect and protect such security interest have been or will be duly
taken.
(c) COLLATERAL FREE AND CLEAR. Except as may be set forth on a Schedule,
the Collateral is and shall remain free and clear of all liens, claims, charges,
encumbrances and other security interests of any kind (other than the security
interest granted hereby). Debtor shall defend the title to the Collateral
against all persons and against all claims and demands whatsoever.
(d) POSSESSION AND OPERATING ORDER OF THE COLLATERAL. Debtor shall retain
possession of the Collateral at all times and shall not sell, exchange, assign,
loan, deliver, lease, mortgage, or otherwise dispose of the Collateral or any
part thereof without the prior written consent of Secured Party. Debtor shall
at all times keep the Collateral at the location[s] specified on the Schedules
(except for removals thereof in the usual course of business for temporary
periods). At Debtor's sole cost and expense, Debtor shall keep the Collateral
in good repair and condition and shall not misuse, abuse, waste or otherwise
allow it to deteriorate, except for normal wear and tear. Secured Party may
verify any Collateral in any reasonable manner which Secured Party may consider
appropriate, and Debtor shall furnish all reasonable assistance and information
and perform any acts which Secured Party may reasonably request in connection
therewith.
(e) INSURANCE. Debtor shall insure the Collateral against loss by fire
(including extended coverage), theft and other hazards, for its full insurable
value including replacement costs, with a deductible not to exceed Fifty
2
<PAGE>
Thousand and 00/100 Dollars ($50,000.00) per occurrence and without
co-insurance. In addition, Debtor shall obtain liability insurance covering
liability for bodily injury, including death and property damage, in an amount
of at least Five Million and 00/100 Dollars ($5,000,000.00) per occurrence or
such greater amount as may comply with general industry standards, or in such
other amounts as Secured Party may otherwise require. All policies of insurance
required hereunder shall be in such form, amounts, and with such companies as
Secured Party may approve; shall provide for at least thirty (30) days prior
written notice to Secured Party prior to any modification or cancellation
thereof; shall name Secured Party as loss payee or additional insured, as
applicable, and shall be payable to Debtor and Secured Party as their interests
may appear; shall waive any claim for premium against Secured Party; and shall
provide that no breach of warranty or representation or act or omission of
Debtor shall terminate, limit or affect the insurers' liability to Secured
Party. Certificates of insurance or policies evidencing the insurance required
hereunder along with satisfactory proof of the payment of the premiums therefor
shall be delivered to Secured Party. Debtor shall give immediate written notice
to Secured Party and to insurers of loss or damage to the Collateral and shall
promptly file proofs of loss with insurers. To the extent related to the
Collateral or liability or alleged liability of Secured Party, Debtor hereby
irrevocably appoints Secured Party as Debtor's attorney-in-fact, coupled with an
interest, for the purpose of obtaining, adjusting and canceling any such
insurance and endorsing settlement drafts. Debtor hereby assigns to Secured
Party, as additional security for the Indebtedness, all sums which may become
payable under such insurance.
In the event Debtor fails to provide Secured Party with evidence of the
insurance coverage required by this Agreement, Secured Party may purchase
insurance at Debtor's expense to protect Secured Party's interests in the
Collateral. This insurance may, but need not, protect Debtor's interests. The
coverage purchased by Secured Party may not pay any claim made by Debtor or any
claim that is made against Debtor in connection with the Collateral. Debtor may
later cancel any insurance purchased by Secured Party, but only after providing
Secured Party with evidence that Debtor has obtained insurance as required by
this Agreement. If Secured Party purchases insurance for the Collateral, Debtor
will be responsible for the costs of that insurance, including interest and
other charges imposed by Secured Party in connection with the placement of the
insurance, until the effective date of the cancellation or expiration of the
insurance. The costs of the insurance may be added to the Indebtedness. The
costs of the insurance may be more than the cost of insurance Debtor is able to
obtain on its own.
3
<PAGE>
(f) IF COLLATERAL ATTACHES TO REAL ESTATE. If the Collateral or any part
thereof has been attached to or is to be attached to real estate, an accurate
description of the real estate and the name and address of the record owner is
set forth on the Schedules. Debtor shall, on demand of Secured Party, furnish
Secured Party with a disclaimer or waiver of any interest in any such Collateral
satisfactory to Secured Party and signed by all persons having an interest in
the real estate. Notwithstanding the foregoing, the Collateral shall remain
personal property and shall not be affixed to realty without the prior written
consent of Secured Party.
(g) FINANCIAL STATEMENTS. Debtor shall furnish to Secured Party, as soon
as practicable, and in any event within sixty (60) days after the end of each
fiscal quarter of Debtor and each guarantor of all or any part of the
Indebtedness (each, a "GUARANTOR"), respectively, Debtor's and each Guarantor's
unaudited financial statements including in each instance, balance sheets,
income statements, and statements of cash flow, on a consolidated and
consolidating basis, as appropriate, and separate profit and loss statements as
of and for the quarterly period then ended and for the respective person's
fiscal year to date, prepared in accordance with generally accepted accounting
principles, consistently applied ("GAAP"). Debtor shall also furnish to Secured
Party, as soon as practicable, and in any event within ninety (90) days after
the end of each fiscal year of Debtor and each Guarantor, respectively, Debtor's
and each Guarantor's annual audited financial statements, including balance
sheets, income statements and statements of cash flow for the fiscal year then
ended, on a consolidated and consolidating basis, as appropriate, which have
been prepared by its independent accountants in accordance with GAAP. Such
audited financial statements shall be accompanied by the independent
accountant's opinion, which opinion shall be in form generally recognized as
"unqualified".
(h) AUTHORIZATION. Debtor is now, and will at all times remain, duly
licensed, qualified to do business and in good standing in every jurisdiction
where failure to be so licensed or qualified and in good standing would have a
material adverse effect on its business, properties or assets. The execution
and delivery of this Agreement, the Notes and any other documents and
instruments executed contemporaneously with or delivered pursuant to this
Agreement and the Notes, all as amended from time to time (collectively the
"LOAN DOCUMENTS"), have been duly authorized by Debtor and constitute the legal,
valid, and binding obligations of Debtor, enforceable against Debtor in
accordance with their respective terms. Debtor shall preserve and maintain its
existence and shall not wind up its affairs or otherwise dissolve. Debtor shall
not, without thirty (30) days prior written notice to Secured Party, (1) change
its name or so change its structure such that any financing statement or other
record notice becomes misleading or (2) change its principal place of
4
<PAGE>
business or chief executive or accounting offices from the address stated
herein.
(i) LITIGATION. Except for the arbitration before the International
Chamber of Commerce known as ICC No. 8309/HV, involving Cygnus Therapeutic
Systems, Inc. and Sanofi, S.A. (the "SANOFI ARBITRATION"), and otherwise as
disclosed by Debtor on a Schedule, there are no judgments outstanding against or
affecting Debtor, its officers, directors or affiliates or any part of the
Collateral and there are no actions, charges, claims, demands, suits,
proceedings, or investigations pending or threatened against Debtor or otherwise
affecting any part of the Collateral ("LITIGATION"). Debtor shall furnish to
Secured Party all information regarding any material Litigation as Secured Party
shall reasonably request and in any event shall promptly notify Secured Party in
writing of any Litigation against it which if decided against it would
materially and adversely affect the finances or operations of Debtor. For the
purposes of this subsection 2(i), Five Hundred Thousand and 00/100 Dollars
($500,000.00) shall be deemed material.
(j) NO CONFLICTS. Debtor is not in violation of any material term or
provision of its by-laws, or of any material agreement or instrument, decree,
order, or any statute, rule, or governmental regulation applicable to it. The
execution, delivery, and performance of the Loan Documents do not and will not
violate, constitute a default under, or otherwise conflict with any such term or
provision or result in the creation of any security interest, lien, charge, or
encumbrance upon any of the properties or assets of Debtor, except for the
security interest created hereunder.
(k) COMPLIANCE WITH LAWS. Debtor shall use and maintain the Collateral in
accordance with all applicable laws, regulations, ordinances, and codes and
shall otherwise comply in all material respects with all applicable laws, rules,
and regulations and duly observe all valid requirements of all governmental
authorities, and all statutes, rules and regulations relating to its business as
now in effect and which may be imposed in the future.
(l) TAXES. Debtor has timely filed all tax returns (federal, state,
local, and foreign) required to be filed by it and has paid or established
reserves for all taxes, assessments, fees, and other governmental charges in
respect of its properties, assets, income and franchises. Debtor shall promptly
file, pay and discharge all taxes, assessments, license fees (related to the
Collateral) and other governmental charges prior to the date on which penalties
are attached thereto, establish adequate reserves for the payments of such
taxes, assessments, and other governmental charges and make all required
withholding and other tax deposits, and, upon request, provide Secured Party
5
<PAGE>
with receipts or other proof that any or all of such taxes, assessments, license
fees or governmental charges have been paid in a timely fashion; provided,
however, that nothing contained herein shall require the payment of any tax,
assessment, or other governmental charge so long as its validity is being
diligently contested in good faith and by appropriate proceedings diligently
conducted and Debtor has established cash reserves therefor in accordance with
GAAP. Should any stamp, excise, or other tax, including mortgage, conveyance,
deed, intangible, or recording taxes become payable in connection with or
respect of any of the Loan Documents, Debtor shall pay the same (including
interest and penalties, if any) and shall hold Secured Party harmless with
respect thereto.
(m) ENVIRONMENTAL LAWS/COMPLIANCE. Except as disclosed by Debtor on a
Schedule, Debtor (1) has not received any claim, summons, complaint, order, or
other notice that it is not in compliance with, or that any public authority is
investigating its compliance with, any federal, state, and local laws, rules,
regulations, orders, and decrees relating to pollution, hazardous substances,
waste, disposal or the protection of human health or safety, plant life or
animal life, natural resources or the environment, all as amended from time to
time (collectively, "Environmental Laws"), (2) has no knowledge of any material
violation of any Environmental Laws on or about its assets or property, and (3)
is not under any current clean up or other remediation program or order. Debtor
has obtained all environmental, health and safety permits necessary for the
operation of Debtor's business. Debtor is and shall remain in compliance, in
all respects, with the terms and conditions of all permits and with all
applicable Environmental Laws. Debtor shall provide Secured Party, promptly
following receipt, copies of any correspondence, notice, complaint, order, or
other document that it receives asserting or alleging a circumstance or
condition which requires or may require a cleanup, removal, remedial action or
other response by or on the part of Debtor under any Environmental Laws, or
which seeks damages or civil, criminal or punitive penalties from Debtor for an
alleged violation of any Environmental Laws. Debtor will promptly notify Secured
Party of any release, spill or material change in the nature or extent of any
hazardous substances or contaminants used, transported or stored by Debtor or
any subsidiary of Debtor, and allow no material change in the use thereof or of
Debtor's operations that would increase in any material amount the risk of
violation of any Environmental Laws without the express prior written approval
of Secured Party.
(n) REGULATIONS. No proceeds of the loans or any other financial
accommodation hereunder will be used, directly or indirectly, for the purpose of
purchasing or carrying any margin security, as that term is defined in
6
<PAGE>
Regulations G, T, U, X of the Board of Governors of the Federal Reserve System.
(o) BOOKS AND RECORDS. Debtor shall maintain, at all times, true and
complete books and records in accordance with GAAP and consistent with those
applied in the preparation of Debtor's financial statements. At all reasonable
times, upon reasonable notice, and during normal business hours, Debtor shall
permit Secured Party or its agents to audit, examine and make extracts from or
copies of any of its books, ledgers, reports, correspondence, and other records
relating to the Collateral.
(p) SETOFF. Without limiting any other right of Secured Party, whenever
Secured Party has the right to declare any Indebtedness to be immediately due
and payable (whether or not it has so declared), Secured Party is hereby
authorized at any time and from time to time to the fullest extent permitted by
law, but shall not be obligated to, set off and apply against any and all
Indebtedness, any and all monies then or thereafter owed to Debtor by Secured
Party, whether or not the obligation to pay such monies owed by Secured Party is
then due. An election by Secured Party to exercise its right of setoff shall be
effective immediately upon such election even though any charge therefor is made
or entered on Secured Party's records subsequent thereto.
(q) STANDARD OF CARE; NOTICE OF CLAIMS. Debtor acknowledges and agrees
that Secured Party shall not be liable for any acts or omissions nor for any
error of judgment or mistake of fact or law other than as a sole and direct
result of Secured Party's gross negligence or willful misconduct. Debtor shall
give Secured Party written notice of any action or inaction by Secured Party or
any agent or attorney of Secured Party that may give rise to a claim against
Secured Party or any agent or attorney of Secured Party or that may be a defense
to payment of the Indebtedness or performance hereunder for any reason,
including commission of a tort (subject, in any event, to the first sentence of
this paragraph) or violation of any contractual duty or duty implied by law.
Debtor agrees that unless such notice is fully given as promptly as possible
(and in any event within thirty (30) days) after Debtor has knowledge, or with
the exercise of reasonable diligence should have had knowledge, of any such
action or inaction, Debtor shall not assert, and Debtor shall be deemed to have
waived, any claim or defense arising therefrom.
(r) INDEMNITY. Debtor shall indemnify, defend and hold Secured Party, its
parent, affiliates, officers, directors, agents, employees, consultants, persons
engaged by Secured Party to evaluate or monitor the Collateral, auditors and
attorneys harmless from and against any loss, cost, expense (including
reasonable attorneys' fees and costs and any consultants' or other
7
<PAGE>
experts' fees and expenses), damage, penalty, fine, claim, lien, suit,
judgment or liability of every kind and nature arising directly or indirectly
out of (i) any Loan Document, (ii) the ownership, possession, lease,
operation, use, condition, sale, return, or other disposition of the
Collateral, except to the extent the loss, expense, damage or liability
arises solely and directly from Secured Party's gross negligence or willful
misconduct, (iii) any Environmental Laws, and (iv) the enforcement by Secured
Party of its rights or remedies hereunder. Any payments required to be made
hereunder shall be due and payable on demand.
(s) PAYMENTS SET ASIDE. If any payment is made to Secured Party or
Secured Party enforces its security interest or exercises its right of set off,
and such payment or part, or any proceeds of such enforcement or set off are
subsequently invalidated, declared to be fraudulent or preferential, set aside
and/or required to be repaid to a trustee, receiver or any other party under any
bankruptcy law, state or federal law, common law or equitable cause, then to the
extent of such recovery, the Indebtedness or part thereof originally intended to
be satisfied, and all liens, security interests, rights and remedies therefor,
shall be revived and continued in full force and effect as if such payment had
not been made or such enforcement or set off had not occurred.
(t) EXPENSES AND ATTORNEYS' FEES. Debtor shall be liable for all charges,
costs, expenses and attorneys' fees incurred by Secured Party (including
allocated costs of internal counsel): (i) in perfecting, defending, protecting
or terminating its security interest in the Collateral, or any part thereof;
(ii) in the negotiation, execution, delivery, administration, amendment or
enforcement of the Loan Documents or the collection of any amounts due under any
Note or other Loan Document; (iii) in any lawsuit or other legal proceeding in
any way connected with any of the Loan Documents, including any contract or tort
or other actions, any arbitration or other alternative dispute resolution
proceeding, all appeals and judgment enforcement actions and any bankruptcy
proceeding (including any relief from stay and/or adequate protection motions,
cash collateral disputes, assumption/rejection motions and disputes or
objections to any proposed disclosure statement or reorganization plan).
(u) COMPLETE INFORMATION. No representation or warranty made by Debtor in
any Loan Document and no other document or statement now or hereafter furnished
to Secured Party by or on behalf of Debtor contains or will contain any
misstatement of a material fact or omit to state any material fact which would
make the statements contained therein misleading. Except as expressly set forth
in the Schedules, there is no fact known to Debtor that has or could have a
materially adverse affect on the business, operation,
8
<PAGE>
condition (financial or otherwise), performance, properties or prospects of
Debtor or Debtor's ability to timely pay all of the Indebtedness and perform
all of its other obligations contained in or secured by this Agreement.
(v) COLLATERAL DOCUMENTATION. Debtor shall deliver to Secured Party prior
to any advance, satisfactory documentation regarding the Collateral to be
financed, including such invoices, canceled checks evidencing payments, or other
documentation as may be reasonably requested by Secured Party. Additionally,
Debtor shall satisfy Secured Party that Debtor's business and financial
information is as has been represented and there has been no material change in
Debtor's business, financial condition, or operations.
3. PREPAYMENT. Upon forty-five (45) days prior written notice to Secured
Party, Debtor may prepay in whole, but not in part, the then entire unpaid
principal balance of any Note, together with all accrued and unpaid interest
thereon to the date of such prepayment, provided that in addition to such
prepayment, Debtor shall pay (i) any and all other sums then due under any of
the Loan Documents, and (ii) a prepayment fee as liquidated damages and not as a
penalty, in a sum equal to one percent (1%) of the principal balance prepaid for
each full or partial twelve (12) month period by which the date of the
prepayment precedes the scheduled date of the final installment of principal
under the Note. The prepayment fee described in clause (ii) above shall also be
due upon the acceleration of the maturity date of any Note following the
occurrence of any Event of Default.
4. EVENTS OF DEFAULT. If any one of the following events (each of which is
herein called an "EVENT OF DEFAULT") shall occur: (a) Debtor fails to pay any
part of the Indebtedness within ten (10) calendar days of its due date, or (b)
any warranty or representation of Debtor in any Loan Document is materially
untrue, misleading or inaccurate, or (c) Debtor breaches or defaults in the
performance of any obligation under Section 2(c), (d) or (e) of this Agreement,
or (d) Debtor or any Guarantor breaches or defaults in the performance of any
other agreement or covenant under any Loan Document (other than as specified in
clauses (a), (b) and (c) of this Section 4), and such breach or default shall
continue for a period of thirty (30) days without being cured, or (e) Debtor or
any Guarantor breaches or defaults in the payment or performance of any debt or
other obligation owed by it to Secured Party or any affiliate of Secured Party,
and Secured Party has (without being obligated to do so) declared such event, an
Event of Default hereunder, or (f) Debtor breaches or defaults in the payment or
performance of any debt or other obligation, whether now or hereafter existing,
with an outstanding principal balance in excess of One Million and 00/100
Dollars ($1,000,000.00), and the same is subsequently accelerated, or (g) there
shall be a change in the beneficial ownership and control, directly or
indirectly, of the majority of
9
<PAGE>
the outstanding voting securities or other interests entitled (without regard
to the occurrence of any contingency) to elect or appoint members of the
board of directors or other managing body of Debtor or any Guarantor (a
"CHANGE OF CONTROL"), or there is any merger, consolidation, dissolution,
liquidation, winding up or sale or other transfer of all or substantially all
of the assets of Debtor or any Guarantor pursuant to which there is a change
of control or cessation of Debtor or the Guarantor or the business of either,
or (h) other than pursuant to a decision rendered in the Sanofi Arbitration,
any money judgment is entered or filed against Debtor or any Guarantor in
excess of One Million and 00/100 Dollars ($1,000,000.00), or (i) Debtor or
any Guarantor shall file a voluntary petition in bankruptcy, shall apply for
or permit the appointment by consent or acquiescence of a receiver,
conservator, administrator, custodian or trustee for itself or all or a
substantial part of its property, shall make an assignment for the benefit of
creditors or shall be unable, fail or admit in writing its inability to pay
its debts generally as such debts become due, or (j) there shall have been
filed against Debtor or any Guarantor an involuntary petition in bankruptcy
or Debtor or any Guarantor shall suffer or permit the involuntary appointment
of a receiver, conservator, administrator, custodian or trustee for all or a
substantial part of its property or the issuance of a warrant of attachment,
diligence, execution or similar process against all or any substantial part
of its property; unless, in each case, such petition, appointment or process
is fully bonded against, vacated or dismissed within forty-five (45) days
from its effective date, but no later than ten (10) days prior to any
proposed disposition of any assets pursuant to any such proceeding, or (k) if
there is a material adverse change in the business or financial condition or
prospects of Debtor, or any Guarantor, then, and in any such event, Secured
Party shall have the right to exercise any one or more of the remedies
hereinafter provided.
Each of the following events shall also constitute an Event of Default hereunder
and upon the occurrence of any one or more of them, Secured Party shall have the
right to exercise any one or more of the remedies hereinafter provided:
(aa) If Debtor at any time has less than Fifteen Million Dollars
($15,000,000.00) of cash and cash equivalents on hand;
(bb) If Debtor at any time has a tangible net worth as determined in
accordance with GAAP (but excluding trademarks, service marks, patents, patent
rights, capitalized development costs, monies due from affiliates of Debtor or
shareholders of Debtor or affiliates of Debtor, goodwill and similar intangible
assets) of less than Twelve Million Dollars ($12,000,000.00); or
10
<PAGE>
(cc) If, pursuant to a decision rendered in the Sanofi Arbitration,
Debtor is obligated to pay a liquidated sum in excess of $15,000,000.00 (whether
or not additional relief is also awarded).
5. REMEDIES. Upon the occurrence of an Event of Default, in addition to all
rights and remedies of a secured party under the Uniform Commercial Code,
Secured Party may, at its option, at any time (a) declare the Indebtedness to be
immediately due and payable; (b) without demand or legal process, enter the
premises where the Collateral may be found and take possession of and remove the
Collateral, all without charge to or liability on the part of Secured Party; or
(c) require Debtor to assemble the Collateral, render it unusable, and crate,
pack, ship, and deliver the Collateral to Secured Party in such manner and at
such place as Secured Party may require, all at Debtor's sole cost and expense.
DEBTOR HEREBY EXPRESSLY WAIVES ITS RIGHTS, IF ANY, TO (1) PRIOR NOTICE OF
REPOSSESSION AND (2) A JUDICIAL OR ADMINISTRATIVE HEARING PRIOR TO SUCH
REPOSSESSION. Secured Party may, at its option, ship, store and repair the
Collateral so removed and sell any or all of the Collateral at a public or
private sale or sales. Unless the Collateral is perishable or threatens to
decline speedily in value or is of a type customarily sold on a recognized
market, Secured Party will give Debtor reasonable notice of the time and place
of any public sale thereof or of the time after which any private sale or any
other intended disposition thereof is to be made, it being understood and agreed
that Secured Party may be a buyer at any such sale and Debtor may not, either
directly or indirectly, be a buyer at any such sale. The requirements, if any,
for reasonable notice will be met if such notice is mailed postage prepaid to
Debtor at its address shown above, at least five (5) days before the time of
sale or disposition. After any such sale or disposition, Debtor shall be liable
for any deficiency of the Indebtedness remaining unpaid, with interest thereon
at the rate set forth in the related Notes.
6. CUMULATIVE REMEDIES/MARSHALING. All remedies of Secured Party hereunder
are cumulative, are in addition to any other remedies provided for by law or in
equity, or under any other provision of any of the Loan Documents, or under the
provisions of any other document, instrument or other writing executed by Debtor
or any third party in favor of Secured Party, all of which may, to the extent
permitted by law, be exercised concurrently or separately, and the exercise of
any one remedy shall not be deemed an election of such remedy or to preclude the
exercise of any other remedy. No failure on the part of Secured Party to
exercise, and no delay in exercising any right or remedy, shall operate as a
waiver thereof or in any way modify or be deemed to modify the terms of this
Agreement or any other Loan Document or the Indebtedness, nor shall any single
or partial exercise by Secured Party of any right or remedy preclude any other
or further exercise
11
<PAGE>
of the same or any other right or remedy. Secured Party shall not be under
any obligation to marshal any assets in favor of Debtor, any Guarantor or any
other person or against or in payment of any or all of the Indebtedness.
7. ASSIGNMENT. Secured Party may transfer or assign all or any part of the
Indebtedness and the Loan Documents without releasing Debtor or the Collateral,
and upon such transfer or assignment the assignee or holder shall be entitled to
all the rights, powers, privileges and remedies of Secured Party to the extent
assigned or transferred. The obligations of Debtor shall not be subject, as
against any such assignee or transferee, to any defense, set-off, or
counter-claim available to Debtor against Secured Party and any such defense,
set-off, or counter-claim may be asserted only against Secured Party.
8. TIME IS OF THE ESSENCE. Time and manner of performance by Debtor of its
duties and obligations under the Loan Documents is of the essence. If Debtor
shall fail to comply with any provision of any of the Loan Documents, Secured
Party shall have the right, but shall not be obligated, to take action to
address such non-compliance, in whole or in part, and all moneys spent and
expenses and obligations incurred or assumed by Secured Party shall be paid by
Debtor upon demand and shall be added to the Indebtedness. Any such action by
Secured Party shall not constitute a waiver of Debtor's default.
9. ENFORCEMENT. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS,
WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. AT SECURED PARTY'S ELECTION
AND WITHOUT LIMITING SECURED PARTY'S RIGHT TO COMMENCE AN ACTION IN ANY OTHER
JURISDICTION, DEBTOR HEREBY SUBMITS TO THE EXCLUSIVE JURISDICTION AND VENUE OF
ANY COURT (FEDERAL, STATE OR LOCAL) HAVING SITUS WITHIN THE STATE OF ILLINOIS,
EXPRESSLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO SERVICE BY
CERTIFIED MAIL, POSTAGE PREPAID, DIRECTED TO THE LAST KNOWN ADDRESS OF DEBTOR,
WHICH SERVICE SHALL BE DEEMED COMPLETED WITHIN TEN (10) DAYS AFTER THE DATE OF
MAILING THEREOF.
10. FURTHER ASSURANCE; NOTICE. Debtor shall, at its expense, execute and
deliver such documents and do such further acts as Secured Party may from time
to time reasonably require to assure and confirm the rights created or intended
to be created hereunder, to carry out the intention or facilitate the
performance of the terms of the Loan Documents or to assure the validity,
perfection, priority or enforceability of any security interest created
hereunder. Debtor agrees to execute any instrument or instruments necessary or
expedient for filing, recording, perfecting, notifying, foreclosing, and/or
liquidating of Secured Party's interest in the Collateral upon request of, and
as determined by, Secured Party, and Debtor hereby specifically
12
<PAGE>
authorizes Secured Party to prepare and file Uniform Commercial Code
financing statements and other documents and to execute same for and on
behalf of Debtor as Debtor's attorney-in-fact, irrevocably and coupled with
an interest, for such purposes. All notices required or otherwise given by
either party shall be in writing and shall be delivered by hand, by
registered or certified first class United States mail, return receipt
requested, or by overnight courier to the other party at its address stated
herein or at such other address as the other party may from time to time
designate by written notice. All notices shall be deemed given when
received, when delivery is refused or when returned for failure to be called
for. Each provision of this Agreement shall remain in full force and effect
until all of the Indebtedness is fully, finally and indefeasibly satisfied
and, notwithstanding anything in this Agreement or implied by law to the
contrary, the agreements of Debtor and Secured Party set forth in Sections
2(p), 2(r), 2(s), 2(t), 9 and 12 shall survive the full, final and
indefeasible satisfaction of the Indebtedness.
11. JOINT AND SEVERAL OBLIGATION. If this Agreement is executed by more than
one person as Debtor, each such Debtor hereby acknowledges it is jointly and
severally liable for and unconditionally guarantees the prompt and full payment
and performance of all obligations of each other Debtor hereunder and under the
other Loan Documents.
12. WAIVER OF JURY TRIAL. DEBTOR AND SECURED PARTY HEREBY WAIVE THEIR
RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR
ARISING IN CONNECTION WITH ANY OF THE LOAN DOCUMENTS. DEBTOR AND SECURED PARTY
ACKNOWLEDGE THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS
RELATIONSHIP, THAT EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THE
LOAN DOCUMENTS, AND THAT EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR
RELATED FUTURE DEALINGS. DEBTOR AND SECURED PARTY FURTHER WARRANT AND REPRESENT
THAT EACH HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT EACH
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
13. COMPLETE AGREEMENT. The Loan Documents embody the entire agreement among
the parties hereto superseding all prior commitments, agreements,
representations, and understandings, whether written or oral relating to the
subject matter hereof, and may not be contradicted or varied by evidence of
prior, contemporaneous, or subsequent oral agreements or discussions of the
parties hereto. The Loan Documents may not be altered, modified or terminated
in any manner except by a writing duly signed by the parties thereto. Debtor
and Secured Party intend the Loan Documents to be valid and binding and no
provisions hereof and thereof which may be deemed unenforceable shall in any way
invalidate any other provisions of the Loan
13
<PAGE>
Documents, all of which shall remain in full force and effect. The Loan
Documents shall be binding upon the respective successors, legal
representatives, and assigns of the parties. The Schedules are incorporated
herein by this reference and made a part hereof.
14. SECURITY DEPOSIT. On or before the date of this Agreement, Debtor shall
cause to be deposited with Secured Party in immediately available funds the
amount of One Million Three Hundred Thirty-One Thousand Four Hundred Eighty-Two
and 55/100 Dollars ($1,331,482.55) (the "SECURITY DEPOSIT"), which shall be held
by Secured Party as additional collateral for the due and punctual payment and
performance of the Indebtedness. Debtor hereby assigns, grants and sets over to
Secured Party all of Debtor's right, title, and interest in and to the Security
Deposit for such purpose. For so long as the Security Deposit is held by
Secured Party, the Security Deposit shall bear interest at the rate of five
percent (5%) per annum, which such interest shall be paid by Secured Party to
Debtor on the first business day of each consecutive calendar month beginning
August 1, 1997; provided, however, that no interest shall accrue on the Security
Deposit or be payable to Debtor at any time following the occurrence of an Event
of Default. If (i) (a) Debtor provides evidence reasonably satisfactory to
Secured Party that the Sanofi Arbitration has been fully and finally resolved
(through a final, binding decision in, or settlement of, the Sanofi
Arbitration), and (b) no Event of Default has occurred under Section 2(cc) above
or otherwise, or (ii) if no Event of Default has occurred, at any time after
July 31, 1997, then, in either case, upon Debtor's written request therefor,
Secured Party shall return the Security Deposit to Debtor.
IN WITNESS WHEREOF, Secured Party and Debtor have each signed this Agreement as
of the day and year first above written.
HELLER FINANCIAL, INC., CYGNUS, INC.
a Delaware corporation a Delaware corporation
By: /s/ Clifford A. Lehman By: /s/ John C. Hodgman
---------------------------- ----------------------------
Name: Clifford A. Lehman Name: John C. Hodgman
---------------------------- ----------------------------
Title: Senior Vice President Title: C.F.O.
---------------------------- ----------------------------
14
<PAGE>
SCHEDULE
DESCRIPTION OF COLLATERAL
Description of Collateral (Full description including make, model and serial
number):
SEE SCHEDULE A ATTACHED HERETO AND MADE A PART HEREOF.
Place where Collateral is to be kept:
400 PENOBSCOT DRIVE, REDWOOD CITY, CA 94063
Other liens, encumbrances or security interests to which Collateral is or may be
subject, if any:
N/A
Other Collateral
N/A
Other:
If Collateral is attached or to be attached to real estate, set forth:
Address of Real Estate (Including County, block number, lot number, etc.):
N/A
Record Owner of Real Estate (Name and Address):
N/A
If the real estate at which the Collateral is to be kept is leased:
Name and Address of Lessor of Real Estate:
N/A
[ILLEGIBLE]
------------
Initials
15
<PAGE>
SCHEDULE A
PAGE 1 OF 5
Schedule annexed to and made a part of a certain Security Agreement dated the
27th day of June 1997, or related documentation by and between the undersigned.
Description of Collateral (Quantity; New/Used; Model; General Description; and
if applicable, Engine and/or Serial Number), together with all products and
proceeds (including insurance proceeds) thereof, any, and if all increases,
substitutions, replacements, attachments, additions, and accessions thereto:
<TABLE>
Asset
Place-in -------------------------------------- Manufacturer
Svc Date ID Description Vendor Serial Numbers Invoice #
- -------- ---- ----------- ------ -------------- ---------
<C> <S> <C> <C> <C> <C>
9/1/96 4047 COMPAQ COMPUTER NETiS Technology, Inc. 6621HXS4E058 606259
9/1/96 4048 COMPAQ COMPUTER NETiS Technology, Inc. 6621HXS4E060 606259
9/1/96 4049 COMPAQ COMPUTER NETiS Technology, Inc. 6621HXS4E614 606259
9/1/96 4050 COMPAQ COMPUTER NETiS Technology, Inc. 6621HXS4E414 606260
9/1/96 4051 COMPAQ COMPUTER NETiS Technology, Inc. 6621HXS4E048 606260
9/1/96 4052 COMPAQ COMPUTER NETiS Technology, Inc. 6621HXS4E398 606260
9/1/96 4053 HP LASERJET PRINTER A & A Technology, Inc. USBF057703 606333
9/1/96 4054 COMPAQ COMPUTER A & A Technology, Inc. S6610HXS4Q956 607315
9/1/96 4055 COMPAQ COMPUTER A & A Technology, Inc. S6610HXS4R058 607315
9/1/96 4056 COMPAQ COMPUTER A & A Technology, Inc. S6610HXS4Q881 607315
9/1/96 4057 COMPAQ COMPUTER A & A Technology, Inc. S6610HXS4Q978 607315
9/1/96 4058 COMPAQ COMPUTER A & A Technology, Inc. S6610HXS4R054 607315
9/1/96 4059 COMPAQ LAPTOP COMPUTER NETiS Technology, Inc. J626HZN7L366 607395
9/1/96 4060 COMPAQ COMPUTER A & A Technology, Inc. 6629HVT5P020 608043
9/1/96 4061 COMPAQ COMPUTER A & A Technology, Inc. 6629HVTT5P111 608043
10/1/96 4046 METTLER BALANCE SCALE WWR Scientific 54504790
10/1/96 4062 COMPAQ COMPUTER A & A Technology, Inc. 6629HVT5R254 607523
10/1/96 4067 COMPAQ COMPUTER A & A Technology, Inc. 6634HVY6U141 609258
10/1/96 4076 AUTOCAD R13 CD-ROM CAD Systems Unlimited, Inc. 19463
10/1/96 4077 EQUITY EDGE FOR VALUATION ShareData, Inc. Proposal
10/1/96 4078 VOICE MAIL SYSTEM UPGRADE Octel Communications Corp. 5026847
10/1/96 4079 DISHWASHER VWR Scientific 77288 44973100
10/1/96 4080 COMPAQ COMPUTER A & A Technology, Inc. 6629HVT5R954 607523
10/1/96 4081 COMPAQ COMPUTER A & A Technology, Inc. 6629HVT5R951 607523
11/1/96 4075 COMPAQ COMPUTER Computerland 6634HVT3Q373 3032
11/1/96 4082 COMPAQ LAPTOP COMPUTER A & A Technology, Inc. J633HZM70317 609540
11/1/96 4084 COMPAQ COMPUTER A & A Technology, Inc. 6626HVT3P195 610141
11/1/96 4085 COMPAQ COMPUTER A & A Technology, Inc. 6626HVT3P232 610141
11/1/96 4086 COMPAQ COMPUTER A & A Technology, Inc. 6626HVT3P256 610141
11/1/96 4089 COMPAQ COMPUTER A & A Technology, Inc. 6626HVT3P206 610141
11/1/96 4092 COMPAQ COMPUTER A & A Technology, Inc. 6640HVT3P146 610261
11/1/96 4093 COMPAQ COMPUTER A & A Technology, Inc. 6626HVT3P261 610141
11/1/96 4095 COMPAQ COMPUTER A & A Technology, Inc. 6626HVT3P244 610141
11/1/96 4096 COMPAQ COMPUTER A & A Technology, Inc. 6640HVT3P155 610261
</TABLE>
<PAGE>
PAGE 2 OF 5
<TABLE>
Asset
Place-in -------------------------------------- Manufacturer
Svc Date ID Description Vendor Serial Numbers Invoice #
- -------- ---- ----------- ------ -------------- ---------
<C> <S> <C> <C> <C> <C>
11/1/96 4098 COMPAQ LAPTOP COMPUTER A & A Technology, Inc. J628HZL8P518 610503
11/1/96 4099 AUTO VESSEL ALIQUOT COLLECTOR SLR Systems, Inc. 6633BBM4P292/SG55702 Ck. Req.
11/1/96 4099 AUTO VESSEL ALIQUOT COLLECTOR SLR Systems, Inc. 6633BBM4P292/SG55702 95014
11/1/96 4099 AUTO VESSEL ALIQUOT COLLECTOR SLR Systems, Inc. 6633BBM4P292/SG55702 95019
11/1/96 4100 AUTO DIST. VESSEL ALIQ. COLLECTR SLR Systems, Inc. 6633BBM4P292/SG55702 Ck. Req.
11/1/96 4100 AUTO DIST. VESSEL ALIQ. COLLECTR SLR Systems, Inc. 6633BBM4P292/SG55702 95014
11/1/96 4100 AUTO DIST. VESSEL ALIQ. COLLECTR SLR Systems, Inc. 6633BBM4P292/SG55702 95019
11/1/96 4101 AUTO LIQUID CHROMATOGRAPHY SYS SLR Systems, Inc. 6633BBM4P292/SG55702 Ck. Req.
11/1/96 4101 AUTO LIQUID CHROMATOGRAPHY SYS SLR Systems, Inc. 6633BBM4P292/SG55702 95012
11/1/96 4101 AUTO LIQUID CHROMATOGRAPHY SYS SLR Systems, Inc. 6633BBM4P292/SG55702 95019
11/1/96 4102 CHEMDRAW PRO WIN SL CambrideSoft Corp. 24736
11/1/96 4103 MEETMAKER UPGRADE SOFTWARE On Technology Corp. 86548
11/1/96 4104 ORACLE7 WORKGROUP SERVER V7.3 Oracle Corp. 764163
12/1/96 4063 COMPAQ COMPUTER Computerland 6634HVT3Q223 2831
12/1/96 4068 COMPAQ COMPUTER Computerland 6634HVT3S281 2831
12/1/96 4069 COMPAQ LAPTOP COMPUTER Computerland J633HZM70037 3062
12/1/96 4070 COMPAQ COMPUTER Computerland 6634HVT3R360 2831
12/1/96 4072 COMPAQ LAPTOP COMPUTER Computerland J633HZM70023 3062
12/1/96 4073 COMPAQ COMPUTER Computerland 6634HVT3Q230 2831
12/1/96 4074 COMPAQ COMPUTER Computerland 6634HVT3S254 2831
12/1/96 4083 COMPAQ COMPUTER Computerland 6633HVT3Q322 3061
12/1/96 4087 COMPAQ COMPUTER Computerland 6634HVT3S300 3061
12/1/96 4088 COMPAQ COMPUTER Computerland 6634HVT3S103 3061
12/1/96 4091 COMPAQ COMPUTER Computerland 6634HVT3R355 2831
12/1/96 4094 COMPAQ COMPUTER Computerland 6634HVT3R396 3061
12/1/96 4097 COMPAQ COMPUTER NETiS Technology, Inc. 6633BBM4P292 608264
12/1/96 4105 COMPAQ COMPUTER Computerland 6640BBC3U322 10082
12/1/96 4106 COMPAQ COMPUTER Computerland 6640BBC3U105 10082
12/1/96 4107 COMPAQ COMPUTER Computerland 6640BBC3U322 10082
12/1/96 4108 COMPAQ COMPUTER Computerland 6638BBC3Q624 10082
12/1/96 4109 COMPAQ COMPUTER Computerland 6640BBC3U087 10082
12/1/96 4111 COMPAQ LAPTOP COMPUTER A & A Technology, Inc. J633HZM7031 611153
12/1/96 4112 COMPAQ COMPUTER A & A Technology, Inc. 6641HVT3Q006 610626
12/1/96 4113 COMPAQ COMPUTER A & A Technology, Inc. 6641HVT3W385 610570
12/1/96 4114 COMPAQ COMPUTER Computerland 6540BBC3U311 10082
12/1/96 4117 AUTOSAMPLER Perkin Elmer Corp. N2930010-A 10052
</TABLE>
<PAGE>
PAGE 3 OF 5
<TABLE>
Asset
Place-in -------------------------------------- Manufacturer
Svc Date ID Description Vendor Serial Numbers Invoice #
- -------- ---- ----------- ------ -------------- ---------
<C> <S> <C> <C> <C> <C>
12/1/96 41178 AUTOSAMPLE Perkin Elmer Corp. N2930100 10052
12/1/96 4123 BINARY QA/QC SYSTEM Perkin Elmer Corp. N2600515 998687
12/1/96 4123 BINARY QA/QC SYSTEM Perkin Elmer Corp. N2600515 998408
12/1/96 4124 COMPAQ COMPUTER A & A Technology, Inc. 6637HVT3Z866 609486
12/1/96 4125 QUATERNARY PUMP Perkin Elmer Corp. N2600510 16651
12/1/96 4126 HELPSTAR FOR WINDOWS Help Desk Automation Software 3515
12/1/96 4127 COMPAQ COMPUTER Computerland 6633BBM4Q304 3180
12/1/96 4128 COMPAQ COMPUTER A & A Technology, Inc. 6641HVT3W406 610261
12/1/96 4129 COMPAQ COMPUTER A & A Technology, Inc. 6637HVT3Z183 610261
12/1/96 4130 ELECTROANALYTICAL SYSTEMS Cypress Systems 90492
12/1/96 4131 HYPERION PILLAR SYSTEM Hyperion Software N/A (Customized software) 102555
12/1/96 4131 HYPERION PILLAR SYSTEM Hyperion Software N/A (Customized software) 407375
12/1/96 4131 HYPERION PILLAR SYSTEM Hyperion Software N/A (Customized software) 311445
12/1/96 4123A TURBO-GEL PLUS SOFTWARE Avatar Consulting 1022
1/1/97 4119 COMPAQ COMPUTER Computerland 6634HVT3Q526 3061
1/1/97 4121 COMPAQ COMPUTER A & A Technology, Inc. 6644BBM4P402 611153
1/1/97 4132 COMPAQ COMPUTER A & A Technology, Inc. 6645BBC1P405 612009
1/1/97 4133 COMPAQ COMPUTER A & A Technology, Inc. 6646BBC1P720 612164
1/1/97 4135 COMPAQ COMPUTER A & A Technology, Inc. 6643BBC3R635 612009
1/1/97 4136 COMPAQ COMPUTER A & A Technology, Inc. 6643BBC3R613 612009
1/1/97 4137 COMPAQ COMPUTER A & A Technology, Inc. 6645BBC1P440 612009
1/1/97 4138 COMPAQ LAPTOP COMPUTER A & A Technology, Inc. J629HZM70812 612009
1/1/97 4140 COMPAQ COMPUTER Computerland 6629HVT3V512 3061
1/1/97 4141 WINLIMS LAB DATABASE SYSTEM Quality Systems International N/A (Customized software) 168
1/1/97 4141 WINLIMS LAB DATABASE SYSTEM Quality Systems International N/A (Customized software) 224
1/1/97 4144 COMPAQ LAPTOP COMPUTER A & A Technology, Inc. J639HZM7G990 610467
1/1/97 4145 AUTOCAD FOR PC'S R12 & R13 OBBS, Inc. 5830
1/1/97 4146 AUTOCAD FOR PC'S R12 & R13 OBBS, INC. 5830
1/1/97 4147 COMPAQ COMPUTER CompUSA 57785
1/1/97 4149 COMPAQ COMPUTER A & A Technology, Inc. 6643BBC3U242 612009
1/1/97 4150 SAMPLE CANGER - STD MODEL Gilson, Inc. 139944
1/1/97 4152 COMPAQ COMPUTER Computerland 6638BBC3Q624 10082
2/1/97 4064 100-GALLON TANK MIXER Lee Industries C367A Ck. Req.
2/1/97 4064 100-GALLON TANK MIXER Lee Industries C367A 67765
</TABLE>
<PAGE>
PAGE 4 OF 5
<TABLE>
Asset
Place-in -------------------------------------- Manufacturer
Svc Date ID Description Vendor Serial Numbers Invoice #
- -------- ---- ----------- ------ -------------- ---------
<C> <S> <C> <C> <C> <C>
2/1/97 4064 100-GALLON TANK MIXER Lee Industries C367A 68025
2/1/97 4064 100-GALLON TANK MIXER Lee Industries C367A 68142
2/1/97 4065 LABGUARD FUME HOOD W/ CABINET ISEC Ind. 97788-14 97094053
2/1/97 4066 FLOOR SCALE Unlimited Scale of America 208828-AAA
2/1/97 4110 BECH TOP BIO-SAFETY FUME HOOD ISEC Inc. 69995ADX 96114027
2/1/97 4154 COMPAQ COMPUTER A & A Technology, Inc. 6650BBC1T612 612485
2/1/97 4155 COMPAQ COMPUTER A & A Technology, Inc. 6650BBC1T771 612485
2/1/97 4156 COMPAQ COMPUTER A & A Technology, Inc. 6650BBC1T766 612485
2/1/97 4160 COMPAQ COMPUTER A & A Technology, Inc. 6647BBC1Q717 612321
2/1/97 4161 ARTICULATED ROBOTIC SYSTEM CRS Robotics Corp. SRS-14-255A 600924
2/1/97 4162 SIGNA PLUS 8 PRINTER Computype International 1310-1042
2/1/97 4163 ONS LINE CARD Inter-Tel DataCom, Inc. 10745
2/1/97 4164 BIOCAD WKSTN & FRACTN COLLECTR PerSeptive Biosystems, Inc. 0461 117458
2/1/97 4165 STABILITY MONITORING SYSTEM Kaye Instruments, Inc. N/A (Customized software) 21278
2/1/97 4165 STABILITY MONITORING SYSTEM Kaye Instruments, Inc. N/A (Customized software) 22847
2/1/97 4165 STABILITY MONITORING SYSTEM Kaye Instruments, Inc. N/A (Customized software) 23172
3/1/97 4153 PNEUMATECH CFM DRYER K.C. Compressor Works, Inc. 0030839-IN
3/1/97 4166 DISSOLUTION SYSTEM Hanson Research Corp. 0197-0157, 0197-0170 53478
3/1/97 4167 HEADSPACE SAMPLER Perkin Elmer Corp. N6159129 52511
3/1/97 4168 AUTOSYSTEM Perkin Elmer Corp. 61N612245 47488
4/1/97 4169 COMPAQ COMPUTER NETiS Technology, Inc. 6639BBC3U388 703040
4/1/97 4170 COMPAQ COMPUTER NETiS Technology, Inc. 9947BBD2Z622 703044
4/1/97 4171 COMPAQ COMPUTER Computerland 12079
4/1/97 4172 COMPAQ COMPUTER NETiS Technology Inc. 6704BBL3D678 703112
4/1/97 4173 HP COMPUTER Computerland US64958325 12680
4/1/97 4174 HP "YODA" SERVER FOR POINTMAN InterVision Systems Tech., Inc. 374A29569 103843
4/1/97 4176 VACUUM PUMP 1/4 HP 115V Edwards High Vacuum Intern'l 972075138 475089
4/1/97 4177 POWDER MIXER CTRL SYSTEM Drivex 10070
4/1/97 4165A APPLICATION ENG. FOR #4165 Kaye Instruments, Inc. 23346
4/1/97 4175 DRAGON DICTATE POWER EDITION Safe Computing 364243
5/1/97 4189 COMPAQ COMPUTER A & A Technology, Inc. 3651BBC6054 702068
5/1/97 4190 COMPAQ COMPUTER A & A Technology, Inc. 6645BBC1Q681 702069
</TABLE>
<PAGE>
PAGE 5 OF 5
<TABLE>
Asset
Place-in -------------------------------------- Manufacturer
Svc Date ID Description Vendor Serial Numbers Invoice #
- -------- ---- ----------- ------ -------------- ---------
<C> <S> <C> <C> <C> <C>
5/1/97 4191 HP LASERJET PRINTER Computerland SUSB5128675 12080
5/1/97 4192 COMPAQ COMPUTER A & A Technology, Inc. 6651BBL3L258 701064
5/1/97 4193 COMPAQ SERVER UPGRADE NETiS Technology, Inc. 22711106, 27280001 704385
5/1/97 4194 COMPAQ PROLIANT 2500 SERVER NETiS Technology, Inc. D78HWA349 703286
5/1/97 4195 HP COMPUTER A & A Technology, Inc. US71155712 704225
5/1/97 4197 HP LASERJET PRINTER Computerland USKB163213 13648
5/1/97 4115 BENCH TOP PRESS W/ STL DIES-1 Machine Systems, Inc. 4003-1196-1 Ck. Req.
5/1/97 4115 BENCH TOP PRESS W/ STL DIES-1 Contract Manufacturing Inc. 4003-1196-1 60006
5/1/97 4116 BENCH TOP PRESS W/ STL DIES-2 Machine Systems, Inc. 4003-1196-2 Ck. Req.
5/1/97 4116 BENCH TOP PRESS W/ STL DIES-2 Contract Manufacturing Inc. 4003-1196-1 60006
5/1/97 4181 BENCH TOP PRESS W/ SPEC TOOLING Engineering Production Eq., Inc. 4112-0297-1 Ck. Req.
5/1/97 4181 BENCH TOP PRESS W/ SPEC TOOLING Engineering Production Eq., Inc. 4112-0297-1 6155
5/1/97 4182 LAMINATOR ASSEMBLY Engineering Production Eq., Inc. 4112-0297-3 Ck. Req.
5/1/97 4182 LAMINATOR ASSEMBLY Engineering Production Eq., Inc. 4112-0297-3 6155
5/1/97 4183 HYDROGEL STRIPPING SYSTEM Engineering Production Eq., Inc. 4112-0297-4 Ck. Req.
5/1/97 4183 HYDROGEL STRIPPING SYSTEM Engineering Production Eq., Inc. 4112-0297-4 6155
5/1/97 4184 "CLAM SHELL" PRESS Engineering Production Eq., Inc. 4112-297-2 Ck. Req.
5/1/97 4184 "CLAM SHELL" PRESS Engineering Production Eq., Inc. 4112-297-2 6155
5/1/97 4196 HYDROGEN GENERATOR Whatman, Inc. 75-36 211338
5/1/97 4198 GILSON 223 SAMPLE CHANGER #1 Gilson, Inc. 158918 143940
5/1/97 4199 GILSON 223 SAMPLE CHANGER #2 Gilson, Inc. 166088 143939
PLUS: POINT MAN SOFTWARE IN CONSTRUCTION-IN-PROGRESS
Point Man Software Pivotpoint, Inc. N/A Ck. Req.
Point Man Software Pivotpoint, Inc. N/A 29116
Point Man Software Pivotpoint, Inc. N/A 30134
Point Man Software Pivotpoint, Inc. N/A 30403
Point Man Software Pivotpoint, Inc. N/A 30406
Point Man Software Pivotpoint, Inc. N/A 30388
</TABLE>
HELLER FINANCIAL, INC. CYGNUS, INC.
Secured Party Debtor
By: /s/ Clifford A. Lehman By: /s/ John C. Hodgman
---------------------------- ----------------------------
Name: Clifford A. Lehman Name: John C. Hodgman
---------------------------- ----------------------------
Title: Senior Vice President Title: C.F.O.
---------------------------- ----------------------------
<PAGE>
Loan No.: 1910128-0001
- ------------------------------------------------------------------------------
HELLER FINANCIAL
PROMISSORY NOTE
$1,331,482.55 June 30, 1997
FOR VALUE RECEIVED, CYGNUS, INC., a Delaware corporation ("Maker"),
promises to pay to the order of HELLER FINANCIAL, INC., a Delaware corporation
(together with any holder of this Note, "Payee"), at its office located at 500
West Monroe Street, Chicago, Illinois 60661, or at such other place as Payee may
from time to time designate, the principal sum of One Million Three Hundred
Thirty-One Thousand Four Hundred Eighty-Two and 55/100 Dollars ($1,331,482.55),
together with interest thereon at a fixed rate equal to Nine and 39/100 percent
(9.39%) per annum. Principal and interest shall be payable in thirty-six (36)
consecutive monthly installments commencing August 1, 1997, and continuing on
the same day of each consecutive calendar month thereafter until this Note is
fully paid, each such installment in the amount of Forty-Two Thousand Five
Hundred Eighty-Two and 88/100 Dollars ($42,582.88); provided, however, that in
any and all events the final installment payment hereunder shall be in the
amount of the entire then outstanding principal balance hereunder, plus all
accrued and unpaid interest, charges and other amounts owing hereunder or under
the Security Agreement (defined below). All payments shall be applied first to
interest and then to principal. Interest shall be computed on the basis of a
360 day year comprised of 30-day months. Maker shall make an interest only
initial payment on July 1, 1997 of accrued interest from the loan disbursement
date through June 30, 1997.
Notwithstanding the foregoing, if at any time implementation of any
provision hereof shall cause the interest contracted for or charged herein or
collectable hereunder to exceed the applicable lawful maximum rate, then the
interest shall be limited to such applicable lawful maximum.
This Note is secured by the collateral described in the Security Agreement
dated June 27th, 1997, between Maker and Payee (the "SECURITY AGREEMENT;" and
together with all related documents and instruments, the "LOAN DOCUMENTS") to
which reference is made for a statement of the nature and extent of protection
and security afforded, certain rights of Payee and certain rights and
obligations of Maker, including Maker's rights, if any, to prepay the principal
balance hereof; provided, however, that in addition to any other sum payable
hereunder, under the Security Agreement or any of the other Loan Documents, in
the event of a prepayment of the principal balance hereunder, whether voluntary,
following acceleration or otherwise, Maker shall pay to Payee together with such
prepayment a Breakage Fee (defined below), which Breakage Fee, together with the
amounts payable under Section 3(ii) of the Security Agreement, if any,
represents liquidated damages to Payee for the loss of its bargain and not a
penalty. As used herein, the term "Breakage Fee" shall mean the amount, if any,
by which (A) the present value, in the aggregate, of the then remaining
installments of principal and interest due hereunder, absent the prepayment,
using a discount rate equal to (i) the yield to maturity as of the date two (2)
days prior to the date of the prepayment on United States Treasury securities
with a final maturity approximately equal to the remaining term hereof, absent
the prepayment, as published in THE WALL STREET JOURNAL, plus (ii) two and
50/100 percent (2.50%), exceeds (B) the then outstanding principal balance
hereunder, absent the prepayment.
Time is of the essence hereof. If payment of any installment or any other
sum due under this Note or the Loan Documents is not paid when due, Maker agrees
to pay a late charge equal to the lesser of (i) five cents (5CENTS) per dollar
on, and in addition to, the amount of each such payment, or (ii) the maximum
amount Payee is permitted to charge by law. In the event of the occurrence of
an Event of Default (as defined in the Security Agreement), then the entire
unpaid principal balance hereof with accrued and unpaid interest thereon,
together with all other sums payable under this Note or the Loan Documents,
shall, at the option of Payee and without notice or demand, become immediately
due and payable, such accelerated balance bearing interest until paid at the
rate of three and 00/100 percent (3.00%) per annum above the fixed rate set
forth in the first paragraph of this Note.
1
<PAGE>
Maker and all endorsers, guarantors or any others who may at any time
become liable for the payment hereof hereby consent to any and all extensions of
time, renewals, waivers and modifications of, and substitutions or release of
security or of any party primarily or secondarily liable on, or with respect to,
this Note or any of the Loan Documents or any of the terms and provisions
thereof that may be made, granted or consented to by Payee, and agree that suit
may be brought and maintained against any one or more of them, at the election
of Payee, without joinder of the others as parties thereto, and that Payee shall
not be required to first foreclose, proceed against, or exhaust any security
herefor, in order to enforce payment of this Note by any one or more of them.
Maker and all endorsers, guarantors or any others who may at any time become
liable for the payment hereof hereby severally waive presentment, demand for
payment, notice of nonpayment, protest, notice of protest, notice of dishonor,
and all other notices in connection with this Note, filing of suit and diligence
in collecting this Note or enforcing any of the security herefor, and, without
limiting any provision of any of the Loan Documents, agree to pay, if permitted
by law, all expenses incurred in collection, including reasonable attorneys'
fees, and hereby waive all benefits of valuation, appraisement and exemption
laws.
If there be more than one Maker, all the obligations, promises, agreements
and covenants of Maker under this Note are joint and several.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW. AT PAYEE'S ELECTION AND WITHOUT LIMITING
PAYEE'S RIGHT TO COMMENCE AN ACTION IN ANY OTHER JURISDICTION, MAKER HEREBY
SUBMITS TO THE EXCLUSIVE JURISDICTION AND VENUE OF ANY COURT (FEDERAL, STATE OR
LOCAL) HAVING SITUS WITHIN THE STATE OF ILLINOIS, EXPRESSLY WAIVES PERSONAL
SERVICE OF PROCESS AND CONSENTS TO SERVICE BY CERTIFIED MAIL, POSTAGE PREPAID,
DIRECTED TO THE LAST KNOWN ADDRESS OF MAKER, WHICH SERVICE SHALL BE DEEMED
COMPLETED WITHIN TEN (10) DAYS AFTER THE DATE OF MAILING THEREOF.
MAKER HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS NOTE. THIS WAIVER IS INFORMED AND
FREELY MADE. MAKER ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO
ENTER INTO A BUSINESS RELATIONSHIP, THAT PAYEE HAS ALREADY RELIED ON THE WAIVER
IN MAKING THE LOAN EVIDENCED BY THIS NOTE, AND THAT PAYEE WILL CONTINUE TO RELY
ON THE WAIVER IN ITS RELATED FUTURE DEALINGS. MAKER FURTHER WARRANTS AND
REPRESENTS 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.
Witness/Attest: CYGNUS, INC.
By:
------------------------------
Name:
------------------------------
Title:
------------------------------
<PAGE>
06/25/1997 Page 1
- -------------------------------------------------------------------------------
Cygnus
- -------------------------------------------------------------------------------
Compound Period......... Monthly
Nominal Annual Rate..... 9.390 %
Effective Annual Rate... 9.805 %
Periodic Rate........... 0.7825 %
Daily Rate.............. 0.02573%
CASH FLOW DATA
- -------------------------------------------------------------------------------
Event Start Date Amount Number Period End Date
- -------------------------------------------------------------------------------
1 Loan 07/01/1997 1,331,482.55 1
2 Payment 08/01/1997 42,582.88 36 Monthly 07/01/2000
AMORTIZATION SCHEDULE - Normal Amortization
Date Payment Interest Principal Balance
- -------------------------------------------------------------------------------
Loan 07/01/1997 1,331,482.55
1997 Totals 0.00 0.00 0.00
1 08/01/1997 42,582.88 10,418.85 32,164.03 1,299,318.52
2 09/01/1997 42,582.88 10,167.17 32,415.71 1,266,902.81
3 10/01/1997 42,582.88 9,913.51 32,669.37 1,234,233.44
4 11/01/1997 42,582.88 9,657.88 32,925.00 1,201,308.44
5 12/01/1997 42,582.88 9,400.24 33,182.64 1,168,125.80
6 01/01/1998 42,582.88 9,140.58 33,442.30 1,134,683.50
7 02/01/1998 42,582.88 8,878.90 33,703.98 1,100,979.52
8 03/01/1998 42,582.88 8,615.16 33,967.72 1,067,011.80
9 04/01/1998 42,582.88 8,349.37 34,233.51 1,032,778.29
10 05/01/1998 42,582.88 8,081.49 34,501.39 998,276.90
11 06/01/1998 42,582.88 7,811.52 34,771.36 963,505.54
12 07/01/1998 42,582.88 7,539.43 35,043.45 928,462.09
1998 Totals 510,994.56 107,974.10 403,020.46
13 08/01/1998 42,582.88 7,265.22 35,317.66 893,144.43
14 09/01/1998 42,582.88 6,988.86 35,594.02 857,550.41
15 10/01/1998 42,582.88 6,710.33 35,872.55 821,677.86
16 11/01/1998 42,582.88 6,429.63 36,153.25 785,524.61
17 12/01/1998 42,582.88 6,146.73 36,436.15 749,088.46
18 01/01/1999 42,582.88 5,861.62 36,721.26 712,367.20
19 02/01/1999 42,582.88 5,574.27 37,008.61 675,358.59
20 03/01/1999 42,582.88 5,284.68 37,298.20 638,060.39
21 04/01/1999 42,582.88 4,992.82 37,590.06 600,470.33
22 05/01/1999 42,582.88 4,698.68 37,884.20 562,586.13
23 06/01/1999 42,582.88 4,402.24 38,180.64 524,405.49
24 07/01/1999 42,582.88 4,103.47 38,479.41 485,926.08
1999 Totals 510,994.56 68,458.55 442,536.01
<PAGE>
06/25/1997 Page 2
- -------------------------------------------------------------------------------
Cygnus
- -------------------------------------------------------------------------------
Date Payment Interest Principal Balance
- -------------------------------------------------------------------------------
25 08/01/1999 42,582.88 3,802.37 38,780.51 447,145.57
26 09/01/1999 42,582.88 3,498.91 39,083.97 408,061.60
27 10/01/1999 42,582.88 3,193.08 39,389.80 368,671.80
28 11/01/1999 42,582.88 2,884.86 39,698.02 328,973.78
29 12/01/1999 42,582.88 2,574.22 40,008.66 288,965.12
30 01/01/2000 42,582.88 2,261.15 40,321.73 248,643.39
31 02/01/2000 42,582.88 1,945.63 40,637.25 208,006.14
32 03/01/2000 42,582.88 1,627.65 40,955.23 167,050.91
33 04/01/2000 42,582.88 1,307.17 41,275.71 125,775.20
34 05/01/2000 42,582.88 984.19 41,598.69 84,176.51
35 06/01/2000 42,582.88 658.68 41,924.20 42,252.31
36 07/01/2000 42,582.88 330.57 42,252.31 0.00
2000 Totals 510,994.56 25,068.48 485,926.08
Grand Totals 1,532,983.68 201,501.13 1,331,482.55
<PAGE>
06/25/1997 Page 3
- -------------------------------------------------------------------------------
Cygnus
- -------------------------------------------------------------------------------
Last interest amount decreased by 0.05 due to rounding.
<PAGE>
Loan No.: 1910128-0001
- -------------------------------------------------------------------------------
HELLER FINANCIAL
DELIVERY AND ACCEPTANCE CERTIFICATE
TO: HELLER FINANCIAL, INC.
The undersigned ("Debtor"), hereby certifies that all of the personal
property described on Schedule A attached hereto, which is incorporated herein
by this reference, is collateral ("Collateral") described in the Security
Agreement between Heller Financial Inc. ("Secured Party") and Debtor dated
June 27, 1997, ("Security Agreement"). All of the Collateral has been
delivered and received .and examined and/or tested, and is in good order and
operating condition and in all respects satisfactory. Debtor hereby
unconditionally accepts the Collateral "AS IS."
Debtor hereby acknowledges that it has reviewed and read all of the
conditions and terms of the Security Agreement and hereby reaffirms and agrees
to be bound by all of those terms and conditions. Debtor warrants and
represents that Secured Party has a first priority perfected security interest
in the Collateral under the Security Agreement and that each location of the
Collateral is open, operational, and doing business. Debtor further
acknowledges that it has not granted nor will it grant to any party any interest
in the Collateral.
Debtor further acknowledges that it has selected and specified the
Collateral; SECURED PARTY HAS MADE NO REPRESENTATIONS OR WARRANTIES OF
MERCHANTABILITY, FITNESS FOR PURPOSE, OR ANY OTHER REPRESENTATIONS OR WARRANTIES
OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, OR RELATING TO THE SELECTION,
PURCHASE, INSTALLATION, USE, OWNERSHIP, POSSESSION, OR OPERATION OF THE
COLLATERAL; that the Security Agreement is noncancellable; and that Debtor will
look solely to the manufacturer/supplier of the Collateral with respect to any
claims or disputes concerning the Collateral and it may not set-off or
counterclaim against Secured Party or any payments due under any promissory
note(s) made or given in connection with the Security Agreement.
Debtor, if a corporation, hereby certifies and represents to Secured Party,
that Debtor is duly authorized to execute and deliver this DELIVERY AND
ACCEPTANCE CERTIFICATE and that the officers thereof signing on its behalf are
duly authorized to execute and deliver same. This certificate will supplement
and not alter the terms of the Security Agreement and is given to induce Secured
Party to finance the Collateral.
CYGNUS, INC.
By: /s/ John C. Hodgman
--------------------------
Name: John C. Hodgman
--------------------------
Title: C.F.O.
--------------------------
Date: 6/27/97
--------------------------
Witness/Attest:
[ILLEGIBLE]
--------------------------
(Corporate Seal)
[ILLEGIBLE]
<PAGE>
SCHEDULE A
PAGE 1 OF 5
Schedule annexed to and made a part of a certain Security Agreement dated the
27th day of June 1997, or related documentation.
Description of Collateral (Quantity; New/Used; Model; General Description;
and if applicable. Engine and/or Serial Number), together with all products
and proceeds (including insurance proceeds) thereof, any, and if all
increases, substitutions, replacements, attachments, additions, and
accessions thereto.
<TABLE>
<CAPTION>
ASSET
PLACE-IN ------------------------------------------ MANUFACTURER
SYC DATE ID DESCRIPTION VENDOR SERIAL NUMBERS INVOICE #
- -------- ---- ----------- ------ -------------- ---------
<S> <C> <C> <C> <C> <C>
9/1/96 4047 COMPAQ COMPUTER NETiS Technology, Inc. 6621HXS4E058 606259
9/1/96 4048 COMPAQ COMPUTER NETiS Technology, Inc. 6621HXS4E060 606259
9/1/96 4049 COMPAQ COMPUTER NETiS Technology, Inc. 6621HXS4E614 606259
9/1/96 4050 COMPAQ COMPUTER NETiS Technology, Inc. 6621HXS4E414 606260
9/1/96 4051 COMPAQ COMPUTER NETiS Technology, Inc. 6621HXS4E048 506260
9/1/96 4052 COMPAQ COMPUTER NETiS Technology, Inc. 6621HSX4E398 606260
9/1/96 4053 HP LASERJET PRINTER A & A Technology, Inc. USBF057703 606333
9/1/96 4054 COMPAQ COMPUTER A & A Technology, Inc. S6610HXS4Q956 507315
9/1/96 4055 COMPAQ COMPUTER A & A Technology, Inc. S6610HXS4R058 607315
9/1/96 4056 COMPAQ COMPUTER A & A Technology, Inc. S6610HXS4Q881 607315
9/1/96 4057 COMPAQ COMPUTER A & A Technology, Inc. S6610HXS4Q978 607315
9/1/96 4058 COMPAQ COMPUTER A & A Technology, Inc. S6610HXS4R054 607315
9/1/96 4059 COMPAQ LAPTOP COMPUTER NETiS Technology, Inc. J626HZN7L366 607395
9/1/96 4060 COMPAQ COMPUTER A & A Technology, Inc. 6629HVT5P020 608043
9/1/96 4061 COMPAQ COMPUTER A & A Technology, Inc. 6629HVTT5P111 608043
10/1/96 4046 METTLER BALANCE SCALE VWR Scientific 54504790
10/1/96 4062 COMPAQ COMPUTER A & A Technology, Inc. 6629HVT5R254 607523
10/1/96 4067 COMPAQ COMPUTER A & A Technology, Inc. 6634HVY6U141 609258
10/1/96 4076 AUTOCAD R13 CD-ROM CAD Systems Unlimited, Inc. 19463
10/1/96 4077 EQUITY EDGE FOR VALUATION ShareData, Inc. Proposal
10/1/96 4078 VOICE MAIL SYSTEM UPGRADE Octel Communications Corp. 5025847
10/1/96 4079 DISHWASHER VWR Scientific 77288 44973100
10/1/96 4080 COMPAQ COMPUTER A & A Technology, Inc. 6629HVTSR954 507523
10/1/96 4081 COMPAQ COMPUTER A & A Technology, Inc. 6629HVT5R951 507523
11/1/96 4075 COMPAQ COMPUTER Computerland 5634HVT3Q373 3032
11/1/96 4082 COMPAQ LAPTOP COMPUTER A & A Technology, Inc. J633HZW70317 609540
11/1/96 4084 COMPAQ COMPUTER A & A Technology, Inc. 6626HVT3P195 610141
11/1/96 4085 COMPAQ COMPUTER A & A Technology, Inc. 6626HVT3P232 610141
11/1/96 4086 COMPAQ COMPUTER A & A Technology, Inc. 6626HVT3P256 610141
11/1/96 4089 COMPAQ COMPUTER A & A Technology, Inc. 6625HVT3P206 610141
11/1/96 4092 COMPAQ COMPUTER A & A Technology, Inc. 6640HVT3P146 601251
11/1/96 4093 COMPAQ COMPUTER A & A Technology, Inc. 6626HVT3P261 610141
11/1/96 4095 COMPAQ COMPUTER A & A Technology, Inc. 6626HVT3P244 610141
11/1/96 4096 COMPAQ COMPUTER A & A Technology, Inc. 6840HVT3P155 610261
<PAGE>
SCHEDULE A
Page 2 of 5
<CAPTION>
ASSET
PLACE-IN ------------------------------------------ MANUFACTURER
SYC DATE ID DESCRIPTION VENDOR SERIAL NUMBERS INVOICE #
- -------- ---- ----------- ------ -------------- ---------
<S> <C> <C> <C> <C> <C>
11/1/96 4098 COMPAQ LAPTOP COMPUTER A & A Technology, Inc. J628HZL8P518 610503
11/1/96 4099 AUTO VESSEL ALIQUOT COLLECTOR SLR Systems, Inc. 6633BBM4P292/SG55702 Ck Req.
11/1/96 4099 AUTO VESSEL ALIQUOT COLLECTOR SLR Systems, Inc. 6633BBM4P292/SG55702 95014
11/1/96 4099 AUTO VESSEL ALIQUOT COLLECTOR SLR Systems, Inc. 6633BBM4P292/SG55702 95019
11/1/96 4100 AUTO VESSEL ALIQUOT COLLECTOR SLR Systems, Inc. 6633BBM4P292/SG55702 Ck Req.
11/1/96 4100 AUTO VESSEL ALIQUOT COLLECTOR SLR Systems, Inc. 6633BBM4P292/SG55702 95014
11/1/96 4100 AUTO VESSEL ALIQUOT COLLECTOR SLR Systems, Inc. 6633BBM4P292/SG55702 95019
11/1/96 4101 AUTO LIQUID CHROMATOGRAPHY SYS SLR Systems, Inc. 6633BBM4P292/SG55702 Ck Req.
11/1/96 4101 AUTO LIQUID CHROMATOGRAPHY SYS SLR Systems, Inc. 6633BBM4P292/SG55702 95012
11/1/96 4101 AUTO LIQUID CHROMATOGRAPHY SYS SLR Systems, Inc. 6633BBM4P292/SG55702 95019
11/1/96 4102 CHEMDRAW PRO WIN SL CambrigeSoft Corp. 24736
11/1/96 4103 MEETMAKER UPGRADE SOFTWARE OnTechnology Corp. 86548
11/1/96 4104 ORACLE7 WORKGROUP SERVER V7.3 Oracle Corp. 764153
12/1/96 4063 COMPAQ COMPUTER Computerland 6634HVT3Q223 2831
12/1/96 4068 COMPAQ COMPUTER Computerland 6634HVT3S281 2831
12/1/96 4069 COMPAQ LAPTOP COMPUTER Computerland 6633HZM70037 3062
12/1/96 4070 COMPAQ COMPUTER Computerland 6634HVT3R360 2831
12/1/96 4072 COMPAQ LAPTOP COMPUTER Computerland J633HZM70023 3062
12/1/96 4073 COMPAQ COMPUTER Computerland 6634HVT3Q230 2831
12/1/96 4074 COMPAQ COMPUTER Computerland 6634HVT3S254 2831
12/1/96 4083 COMPAQ COMPUTER Computerland 6633HVT3Q322 3061
12/1/96 4087 COMPAQ COMPUTER Computerland 6634HVT3S300 3061
12/1/96 4088 COMPAQ COMPUTER Computerland 6634HVT3S103 3061
12/1/96 4091 COMPAQ COMPUTER Computerland 6634HVT3R366 2831
12/1/96 4094 COMPAQ COMPUTER Computerland 6634HVT3R398 3061
12/1/96 4097 COMPAQ COMPUTER NETiS Technology, Inc. 6633BBM4P292 608264
12/1/96 4105 COMPAQ COMPUTER Computerland 6640BBC3U322 10082
12/1/96 4106 COMPAQ COMPUTER Computerland 6640BBC3U105 10082
12/1/96 4107 COMPAQ COMPUTER Computerland 6640BBC3U322 10082
12/1/96 4108 COMPAQ COMPUTER Computerland 6638BBC3Q624 10082
12/1/96 4109 COMPAQ COMPUTER Computerland 6640BBC3U087 10082
12/1/96 4111 COMPAQ LAPTOP COMPUTER A & A Technology, Inc. J633HZM7031 611153
12/1/96 4112 COMPAQ COMPUTER A & A Technology, Inc. 6641HVT3Q006 610626
12/1/96 4113 COMPAQ COMPUTER A & A Technology, Inc. 6641HVT3W385 610570
12/1/96 4114 COMPAQ COMPUTER Computerland 6640BBC3U311 10082
12/1/96 4117 AUTOSAMPLER Perkin Elmer Corp. N2930010-A 10052
<PAGE>
SCHEDULE A
Page 3 of 5
<CAPTION>
ASSET
PLACE-IN ------------------------------------------ MANUFACTURER
SYC DATE ID DESCRIPTION VENDOR SERIAL NUMBERS INVOICE #
- -------- ---- ----------- ------ -------------- ---------
<S> <C> <C> <C> <C> <C>
12/1/96 4118 AUTOSAMPLER Perkin Elmer Corp. N2930100 10052
12/1/96 4123 BINARY QA/QC SYSTEM Perkin Elmer Corp. N2600515 998687
12/1/96 4123 BINARY QA/QC SYSTEM Perkin Elmer Corp. N2600515 998408
12/1/96 4124 COMPAQ COMPUTER A & A Technology, Inc. 6637HVT3Z866 609486
12/1/96 4125 QUATERNARY PUMP Perkin Elmer Corp. N2600510 16651
12/1/96 4126 HELPSTAR FOR WINDOWS Help Desk Automation Software 3515
12/1/96 4127 COMPAQ COMPUTER Computerland 6633BBM4Q304 3180
12/1/96 4128 COMPAQ COMPUTER A & A Technology, Inc. 6641HVT3W406 610261
12/1/96 4129 COMPAQ COMPUTER A & A Technology, Inc. 6637HVT3Z193 610261
12/1/96 4130 ELECTROANALYTICAL SYSTEMS Cypress Systems 90492
12/1/96 4131 HYPERION PILLAR SYSTEM Hyperion Software N/A (Customized software) 102555
12/1/96 4131 HYPERION PILLAR SYSTEM Hyperion Software N/A (Customized software) 407375
12/1/96 4131 HYPERION PILLAR SYSTEM Hyperion Software N/A (Customized software) 311445
12/1/96 4123A TURBO-GEL PLUS SOFTWARE Avatar Consulting 1022
1/1/97 4119 COMPAQ COMPUTER Computerland 6634HVT3Q526 3061
1/1/97 4121 COMPAQ COMPUTER A & A Technology, Inc. 6644BBM4P402 611153
1/1/97 4132 COMPAQ COMPUTER A & A Technology, Inc. 6645BBC1P405 612009
1/1/97 4133 COMPAQ COMPUTER A & A Technology, Inc. 6646BBC1P720 612164
1/1/97 4135 COMPAQ COMPUTER A & A Technology, Inc. 6643BBC3R635 612009
1/1/97 4136 COMPAQ COMPUTER A & A Technology, Inc. 6643BBC3R613 612009
1/1/97 4137 COMPAQ COMPUTER A & A Technology, Inc. 6645BBC1P440 612009
1/1/97 4138 COMPAQ LAPTOP COMPUTER A & A Technology, Inc. J629HZM70812 612009
1/1/97 4140 COMPAQ COMPUTER Computerland 6629HVT3V512 3061
1/1/97 4141 WINLIMS LAB DATABASE SYSTEM Quality Systems International N/A (Customer software) 168
1/1/97 4141 WINLIMS LAB DATABASE SYSTEM Quality Systems International N/A (Customer software) 224
1/1/97 4144 COMPAQ LAPTOP COMPUTER A & A Technology, Inc. J639HZM7G990 610467
1/1/97 4145 AUTOCAD FOR PC'S R12 & R13 OBBS, Inc. 5830
1/1/97 4146 AUTOCAD FOR PC'S R12 & R13 OBBS, Inc. 5830
1/1/97 4147 COMPAQ COMPUTER CompUSA 57785
1/1/97 4149 COMPAQ COMPUTER A & A Technology, Inc. 6643BBC3U242 612009
1/1/97 4150 SAMPLE CANGER - STD MODEL Gilson, Inc. 139944
1/1/ 97 4152 COMPAQ COMPUTER Computerland 6638BBC3Q624 10082
2/1/97 4064 100-GALLON TANK MIXER Lee Industries C367A Ck Req.
2/1/97 4064 100-GALLON TANK MIXER Lee Industries C367A 67755
<PAGE>
SCHEDULE A
Page 4 of 5
<CAPTION>
ASSET
PLACE-IN ------------------------------------------ MANUFACTURER
SYC DATE ID DESCRIPTION VENDOR SERIAL NUMBERS INVOICE #
- -------- ---- ----------- ------ -------------- ---------
<S> <C> <C> <C> <C> <C>
2/1/97 4064 100-GALLON TANK MIXER Lee Industries C367A 68025
2/1/97 4064 100-GALLON TANK MIXER Lee Industries C367A 68142
2/1/97 4065 LABGUARD FUME HOOD W/CABINET ISEC Inc. 97788-14 97094053
2/1/97 4066 FLOOR SCALE Unlimited Scale of America 208828-AAA
2/1/97 4110 BECH TOP BIO-SAFETY FUME HOOD ISEC Inc. 69995ADX 96114027
2/1/97 4154 COMPAQ COMPUTER A & A Technology, Inc. 6650BBC1T612 612485
2/1/97 4155 COMPAQ COMPUTER A & A Technology, Inc. 6650BBC1T771 612485
2/1/97 4156 COMPAQ COMPUTER A & A Technology, Inc. 6650BBC1T766 612485
2/1/97 4160 COMPAQ COMPUTER A & A Technology, Inc. 6647BBC1Q717 612321
2/1/97 4161 ARTICULATED ROBOTIC SYSTEM CRS Robotics Corp SRS-14-255A 600924
2/1/97 4162 SIGMA PLUS 8 PRINTER Computype International 1310-1042
2/1/97 4163 ONS LINE CARD Inter-Tel DataCom, Inc 10754
2/1/97 4164 BIOCAD WKSTN & FRACTN COLLECTR PerSeptive Biosystems, Inc 0461 117458
2/1/97 4165 STABILITY MONITORING SYSTEM Kaye Instruments, Inc N/A (Customized software) 21278
2/1/97 4165 STABILITY MONITORING SYSTEM Kaye Instruments, Inc N/A (Customized software) 22847
2/1/97 4165 STABILITY MONITORING SYSTEM Kaye Instruments, Inc N/A (Customized software) 23172
3/1/97 4153 PNEUMATECH CFM DRYER K.C. Compressor Works, Inc. 0030839-IN
3/1/97 4166 DISSOLUTION SYSTEM Hanson Research Corp 0197-0157, 0197-0170 53478
3/1/97 4167 HEADSPACE SAMPLER Perkin Elmer Corp. N6159129 52511
3/1/97 4168 AUTOSYSTEM Perkin Elmer Corp. 61N612245 47488
4/1/97 4169 COMPAQ COMPUTER NETiS Technology, Inc. 6639BBC3U388 703040
4/1/97 4170 COMPAQ COMPUTER NETiS Technology, Inc. 9947BBD2Z622 703044
4/1/97 4171 COMPAQ COMPUTER Computerland 12079
4/1/97 4172 COMPAQ COMPUTER NETiS Technology, Inc. 6704BBL3D878 703112
4/1/97 4173 HP COMPUTER Computerland US64958325 12680
4/1/97 4174 HP "YCDA" SERVER FOR POINTMAN InterVision Systems Tech, Inc. 374A29569 103843
4/1/97 4176 VACUUM PUMP 1/4 HP 115V Edwards High Vacuum Intern'l 972075138 475089
4/1/97 4177 POWDER MIXER CTRL SYSTEM Drivex 10070
4/1/97 4165A APPLICATION ENG. FOR #4165 Kaye Instruments, Inc 23346
4/1/97 4175 DRAGON DICTATE POWER EDITION Safe Computing 364243
5/1/97 4189 COMPAQ COMPUTER A & A Technology, Inc. 3651BBC16054 702068
5/1/97 4190 COMPAQ COMPUTER A & A Technology, Inc. 6645BBC1Q681 702069
<PAGE>
SCHEDULE A
Page 5 of 5
<CAPTION>
ASSET
PLACE-IN ------------------------------------------ MANUFACTURER
SYC DATE ID DESCRIPTION VENDOR SERIAL NUMBERS INVOICE #
- -------- ---- ----------- ------ -------------- ---------
<S> <C> <C> <C> <C> <C>
5/1/97 4191 HP LASERJET PRINTER Computerland SUSB5128675 12080
5/1/97 4192 COMPAQ COMPUTER A & A Technology, Inc. 6651BBL3U258 701054
5/1/97 4193 COMPAQ SERVER UPGRADE NETiS Technology, Inc. 2711106, 27280001 704385
5/1/97 4194 COMPAQ PROLIANT 250C SERVER NETiS Technology, Inc. D78HWA349 703286
5/1/97 4195 HP COMPUTER A & A Technology, Inc. JS71155712 704225
5/1/97 4197 HP LASERJET PRINTER Computerland LSKB163213 13648
5/1/97 4115 BENCH TOP PRESS W/STL DIES-1 Machine Systems, Inc. 4003-1196-1 Ck Req
5/1/97 4115 BENCH TOP PRESS W/STL DIES-1 Contract Manufacturing Inc. 4003-1196-1 60006
5/1/97 4116 BENCH TOP PRESS W/STL DIES-2 Machine Systems, Inc. 4003-1196-2 Ck Req
5/1/97 4116 BENCH TOP PRESS W/STL DIES-2 Contract Manufacturing Inc. 4003-1196-2 60006
5/1/97 4181 BENCH TOP PRESS W/SPEC TOOLING Engineering Production Eq., Inc. 4112-0297-1 Ck Req
5/1/97 4181 BENCH TOP PRESS W/SPEC TOOLING Engineering Production Eq., Inc. 4112-0297-1 6155
5/1/97 4182 LAMINATOR ASSEMBLY Engineering Production Eq., Inc. 4112-0297-3 Ck Req
5/1/97 4182 LAMINATOR ASSEMBLY Engineering Production Eq., Inc. 4112-0297-3 6155
5/1/97 4183 HYDROGEL STRIPPING SYSTEM Engineering Production Eq., Inc. 4112-0297-4 Ck Req
5/1/97 4183 HYDROGEL STRIPPING SYSTEM Engineering Production Eq., Inc. 4112-0297-4 6155
5/1/97 4184 "CLAM SHELL" PRESS Engineering Production Eq., Inc. 4112-297-2 Ck Req
5/1/97 4184 "CLAM SHELL" PRESS Engineering Production Eq., Inc. 4112-297-2 6155
5/1/97 4196 HYDROGEN GENERATOR Whatman, Inc 75-36 211338
5/1/97 4198 GILSON 223 SAMPLE CHANGER #1 Gilson, Inc. 158918 143940
5/1/97 4199 GILSON 223 SAMPLER CHANGER #2 Gilson, Inc. 166088 143939
PLUS: POINT MAN SOFTWARE IN CONSTRUCTION-IN-PROGRESS
Point Man Software Pivotpoint, Inc. N/A Ck Req
Point Man Software Pivotpoint, Inc. N/A 29116
Point Man Software Pivotpoint, Inc. N/A 30134
Point Man Software Pivotpoint, Inc. N/A 30403
Point Man Software Pivotpoint, Inc. N/A 30406
Point Man Software Pivotpoint, Inc. N/A 30388
</TABLE>
<PAGE>
PROCEEDS REQUEST AND INSTRUCTIONS LETTER
June 24, 1997
Heller Financial, Inc.
500 West Monroe
Chicago, IL 60661
Attention: Commercial Equipment Finance Division
RE: CYGNUS, INC. ("BORROWER")
Gentlemen:
In connection with the Security Agreement dated June 27, 1997, by and
between Heller Financial, Inc. ("Heller"), and Borrower ("Agreement"), Borrower
hereby requests a loan in the principal amount of One Million Three Hundred
Thirty-One Thousand Four Hundred Eighty-Two and 55/100 Dollars ($1,331,482.55)
(the "Advance").
Borrower hereby authorizes and directs Heller to disburse the Advance, on
Borrower's behalf, to the following entities by check or wire transfer according
to the following instructions:
a. Cygnus, Inc. $1,331,482.55
400 Penobscot Drive
Redwood City, CA 94063
Borrower agrees that for purposes of the Agreement and all documents and
instruments related thereto, the Advance shall be deemed to have paid to
Borrower immediately upon its disbursement in accordance with the foregoing
instructions, notwithstanding that the receipt of all or any part of the Advance
by any intended recipient may be delayed by mail or other factors.
Cordially,
CYGNUS, INC.
a Delaware corporation
By: /s/ John C. Hodgman
-------------------------
Name: John C. Hodgman
-------------------------
Title: C.F.O.
-------------------------
Date: 6/27/97
-------------------------
1
<PAGE>
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE RESTATED
CERTIFICATE OF "CYGNUS, INC.", FILED IN THIS OFFICE ON THE FIFTH DAY OF
OCTOBER, A.D. 1995, AT 9 0'CLOCK A.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE KENT
COUNTY RECORDER OF DEEDS FOR RECORDING.
[SEAL OF STATE OF DELAWARE]
/s/ Edward J. Freel
[SECRETARY'S SEAL] ---------------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
AUTHENTICATION: 7667280
DATE: 10-06-95
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CYGNUS, INC.
CYGNUS, INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware DOES HEREBY CERTIFY:
FIRST: The original Certificate of Incorporation of CYGNUS, INC. was
filed with the Secretary of State of Delaware on March 15, 1994.
SECOND: The Amended and Restated Certificate of Incorporation of
CYGNUS, INC. has been duly adopted in accordance with the provisions of
Sections 245 and 242 of the General Corporation Law of the State of Delaware
by the directors of the Corporation and such Amended and Restated Certificate
of Incorporation shall be amended and restated to read in full as follows:
I.
The name of the corporation is CYGNUS, INC. (the "Corporation").
II.
The address of the Corporation's registered office in the State of
Delaware is 32 Loockerman Square, Suite L-100, City of Dover, County of Kent
and the name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
III.
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General
Corporation Law of Delaware.
IV.
The Corporation is authorized to issue two classes of shares to be
designated respectively Common Stock and Preferred Stock. The total number of
shares of all classes of stock which the Corporation has authority to issue
is Thirty-Five Million (35,000,000) shares, consisting of Thirty Million
(30,000,000) shares of Common Stock, each having a par value of one-tenth of
one cent ($.001) (the "Common Stock") and Five Million (5,000,000) shares of
Preferred Stock, each having a par value of one-tenth of one cent ($.001)
(the "Preferred Stock").
1
<PAGE>
As to the Preferred Stock of the Corporation, the Board of Directors
shall have the power to issue any additional shares of Preferred Stock from
time to time in one or more series. The Board of Directors is hereby
authorized to fix or alter from time to time the voting powers and such
designations, preferences and relative, participating, optional or other
special rights of the shares of each such series and the qualifications,
limitations or restrictions of any wholly unissued series of Preferred Stock,
and to establish from time to time the number of shares constituting any such
series, or any of them.
The Board of Directors is further authorized to increase or decrease
(but not below the number of shares of any such series then outstanding) the
number of shares of any series, the number of which was fixed by it,
subsequent to the issue of shares of such series then outstanding, subject to
the limitations and restrictions stated in the resolution of the Board of
Directors originally fixing the number of shares of such series. If the
number of shares of any series is so decreased, then the shares constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such series.
V.
The Corporation is to have perpetual existence.
VI.
The election of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
VII.
The number of directors which constitute the whole Board of Directors of
the Corporation shall be designated in the Bylaws of the Corporation. Subject
to the rights of the holders of any series of Preferred Stock, no director
shall be removed without cause. Subject to any limitations imposed by law,
the Board of Directors or any individual director may be removed from office
at any time with cause by the affirmative vote of the holders of a majority
of the voting power of all the then-outstanding shares of voting stock of the
Corporation entitled to vote at the election of directors.
VIII.
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or
repeal the Bylaws of the Corporation. Subject to Section 6.1 of the Bylaws,
the Bylaws may also be altered or amended or new Bylaws adopted by the
affirmative vote of least two-thirds (2/3) of the combined voting power of
all the then-outstanding shares of the Corporation entitled to vote.
2
<PAGE>
IX.
To the fullest extent permitted by the Delaware General Corporation Law
as the same exists or as may hereafter be amended, no director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director.
Neither any amendment nor repeal of this Article, nor the adoption of any
provision of this Certificate of Incorporation inconsistent with this
Article, shall eliminate or reduce the effect of this Article in respect of
any matter occurring, or any cause of action, suit or claim that, but for
this Article, would accrue or arise, prior to such amendment, repeal or
adoption of an inconsistent provision.
X.
Each director shall serve until his or her successor is duly elected and
qualified or until his or her death, resignation or removal. No decrease in
the number of directors constituting the Board of Directors shall shorten the
term of any incumbent director. No stockholder will be permitted to cumulate
votes at any election of directors.
Subject to the rights of the holders of any series of Preferred Stock,
any vacancies on the Board of Directors resulting from death, resignation,
disqualification, removal or other causes, and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such
vacancies or newly created directorships shall be filled by the stockholders,
except as otherwise provided by law, be filled only by the affirmative vote
of a majority of the directors then in office, even though less than a quorum
of the Board of Directors, and not by the stockholders. Any director elected
in accordance with the preceding sentence shall hold office for the remainder
of the full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been elected and
qualified.
XI.
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the Bylaws of the Corporation.
XII.
No action shall be taken by the stockholders of the Corporation except
at an annual or special meeting of stockholders called in accordance with the
Bylaws and no action shall be taken by the stockholders by written consent in
lieu of a meeting.
3
<PAGE>
XIII.
Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser
vote or no vote, but in addition to any affirmative vote of the holders of
the capital stock required by law or this Certificate of Incorporation, the
affirmative vote of the holders of at least two-thirds (2/3) of the combined
voting power of all of the then-outstanding shares of the Corporation
entitled to vote shall be required to alter, amend or repeal Articles VI,
VII, VIII, IX, X, XI, XII, XIII or any provision thereof.
4
<PAGE>
XIV.
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in Article XIII, and
all rights conferred upon stockholders herein are granted subject to this
reservation.
The undersigned incorporator hereby acknowledges that the foregoing
Certificate of Incorporation is his act and deed and that the facts stated
herein are true.
/s/ Gregory B. Lawless
---------------------------------------
Gregory B. Lawless
President, Chief Executive Officer and
Director
Dated: October 4, 1995
5
<PAGE>
EXHIBIT 10.36
EMPLOYMENT AGREEMENT
This AGREEMENT, made effective as of May 30, 1992, between Cygnus
Therapeutic Systems (the "Company"), and Alan F. Russell ("Executive").
RECITALS
The Company desires to engage the services and employment of
Executive on its own behalf for the period provided in this Agreement, and
Executive is willing to accept employment by the Company on a full-time basis
for such period, upon the terms and conditions hereinafter set forth.
The execution of this Agreement has been duly authorized by the Board
of Directors of the Company ("Board").
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants herein contained, the parties hereto agree as follows:
1. EMPLOYMENT. The Company agrees to employ Executive and Executive
agrees to accept employment by the Company, and upon the other terms and
conditions herein provided.
2. POSITION AND RESPONSIBILITIES. During the period of his employment
hereunder, Executive agrees to serve the Company and the Company shall employ
Executive as its Vice President, Scientific Affairs.
3. TERM.
(a) TERM OF EMPLOYMENT. The period of Executive's employment
under this Agreement shall commence on May 4, 1992, and shall continue from day
to day until and unless Executive is terminated for cause as specified in
paragraph 6 (a) below.
4. COMPENSATION AND REIMBURSEMENT OF EXPENSES; OTHER BENEFITS.
(a) COMPENSATION. The Company shall compensate Executive
during the term of this Agreement as follows:
(i) BASE SALARY. A base salary, adjusted as provided in
Section 4 (a) (iv), ("Base Salary") of not less than One Hundred
Sixty Thousand Dollars ($160,000) per year in bi-monthly
installments;
<PAGE>
(ii) STOCK BENEFITS AND INDIVIDUAL BONUSES. Executive
shall also have the option to purchase 95,000 shares of Company
stock, at the price at which the stock is traded on NASDAQ, on
Monday, May 5, 1992. These options shall vest over a four year
period on a monthly basis. Upon performance of his duties in a
satisfactory manner, Executive shall be eligible to receive a bonus
payment of up to 20 percent of his annual salary as an annual bonus.
(iii) OTHER BENEFITS. During the period of employment
under this Agreement, Executive shall be entitled to receive all
other benefits of employment generally available to other members of
the Company's management and those benefits for which key executives
are or shall become eligible, when and as he becomes eligible
therefore, including, without limitation, group health and life
insurance benefits and participation in the Company's profit sharing,
pension, stock purchase and stock option plans, and the Company
agrees that none of such benefits shall be altered in any manner in
such a way as to reduce any existing entitlement of Executive
thereunder;
(iv) BASE SALARY INCREASES. The Company agrees to review
Executive's Base Salary within twelve (12) months after his date of
employment and annually thereafter, or within the time period
prescribed in salary administration practices applied to all officers
of the Company. The Company agrees that the Executive's annual Base
Salary increases shall be in amounts which shall be no less than 5%
per annum, except in the event of a Company-wide salary freeze.
(b) REIMBURSEMENT OF AUTO AND OTHER EXPENSES. The Company shall pay or
reimburse Executive for all reasonable travel and other expenses, including
auto operating expenses (including registration, insurance, maintenance and
telephone expenses), incurred by Executive in performing his obligations under
this Agreement.
5. BENEFITS PAYABLE UPON DISABILITY OR DEATH.
(a) DISABILITY. If during the term of this Agreement Executive
should fail to perform his duties hereunder on account of illness or other
incapacity which the Board shall in good faith determine renders Executive
incapable of performing his duties hereunder, and such illness or other
incapacity shall continue for a period of more than 6 months, the Company shall
have the right, upon written notice to Executive to terminate this Agreement;
provided, however, that in such event Executive shall be entitled to receive
the then Base Salary and other benefits due under Section 4 hereof for a period
of six months following such termination. Executive shall also be entitled to
disability payments and coverage upon the basis available to Company employees
under, and subject to the terms and provisions of, disability benefit plans of
Company which may from time to time be in effect and applicable to employees.
<PAGE>
6. TERMINATION BY COMPANY.
(a) TERMINATION FOR CAUSE. Except as otherwise provided
herein, the Company may terminate the employment of Executive "for Cause" upon
written notice to Executive specifying the cause of termination. If Executive
is terminated for cause pursuant to this Section 6 (a), his then current Base
Salary shall be paid on a prorated basis to the date of termination. For
purposes of this Agreement, "for Cause" shall mean the discharge resulting from
a determination by the Company that Executive (i) has been convicted of a crime
involving moral turpitude, including fraud, theft or embezzlement, (ii) has
failed or refused (in a material respect) to follow the reasonable policies or
directives established by the Board of Directors of the Company, which failure
or refusal continues for thirty (30) days following written notice thereof to
Executive, or (iii) has willfully and persistently failed to attend to material
duties or obligations imposed on him under this Agreement which failure
continues for thirty (30) days following written notice thereof to Executive.
(b) TERMINATION WITHOUT CAUSE. The Company may terminate the
employment of Executive without cause at any time upon written notice to
Executive; provided, however, that the Company shall be obligated to pay
Executive, as severance, an amount equal to the Base Salary for the period of
one year, which amount shall be due in a single lump sum within thirty (30)
days of the date of termination.
7. TERMINATION BY EXECUTIVE.
(a) RESIGNATION FOR GOOD REASON. If Executive terminates his
employment hereunder for Good Reason (as hereinafter defined), he shall be
entitled to the benefits set forth herein applicable to termination without
Cause as set forth in Section 6(b) hereof. For the purposes of this Agreement,
"Good Reason" shall mean:
(i) assignment to the Executive of duties inconsistent
with his responsibilities as they existed on the date of this
Agreement, a substantial alteration in the title of Executive or
substantial alteration in the status of Executive in the Company
organization;
(ii) reduction by the Company in the Executive's Base
Salary;
(iii) failure by the Company to continue in effect,
without substantial change, any benefit plan or arrangement in which
Executive was participating or the taking of any action by the
Company which would adversely affect the Executive's participation in
or materially reduce his benefits under any benefit plan;
<PAGE>
(iv) any material breach by the Company of any provision of
this Agreement without the Executive having committed any material
breach of his obligations hereunder; or
(v) any failure by the Company to obtain the assumption of
this Agreement by any successor or assign of the Company.
8. TERMINATION AFTER CORPORATE CHANGES. In the event that during the
Employment Term:
(a) There is an acquisition of the Company by merger, sale
of all or substantially all of the Company's assets, or purchase of 51% or more
of the voting stock of the Company, or other reorganization resulting in a
change of a majority or more of the ownership of the Company's voting stock
(any such action hereinafter to be referred to as a "Change of Control")
whether or not such Change of Control was caused or could have been prevented
by acts of the Company, and whether or not in each case Executive shall have
voted for such Change of Control as a director or shareholder or consented
thereto expressly or in writing; or
(b) The Company substantially changes its principal line of
business, and whether or not Executive shall have voted for such a change as a
director or shareholder or consented thereto expressly and in writing, and if
after such change, (i) Executive's employment is terminated by the Company
other than on account of Executive's death or disability or for Cause as set
forth in Section 6 (a) hereof, or (ii) Executive terminates his employment
hereunder for Good Reason as set forth in Section 7 (a) hereof, then:
(i) Vesting of Executive Stock Options shall immediately
accelerate, and all options shall, on the date of the acquisition or
change, be fully exercisable.
(ii) The Company shall arrange to provide Executive, for a
six-month period (or such shorter period as Executive may elect),
with disability, accident, life and health insurance substantially
similar to those insurance benefits which Executive was receiving
immediately prior to termination. Benefits otherwise receivable by
Executive pursuant to this Section 8 (b) (ii) shall be reduced to the
extent comparable benefits are actually received by Executive during
such six-month period following his termination (or such shorter
period elected by Executive), and any such benefits actually received
by Executive shall be reported to the Company.
9. COMPANY'S INSURANCE ON EXECUTIVE. The Company may secure in its own
name, or otherwise, and at its own expense, life, health, accident and other
insurance covering Executive, or Executive and others. Executive agrees to
assist the Company in procuring such insurance by submitting to the usual and
customary medical and other
<PAGE>
examinations and by signing, as the insured, such applications and other
instruments in writing as may be reasonably required by the insurance
companies to which application is made for such insurance. Executive agrees
that he shall have no right, title or interest in or to any insurance
policies or the proceeds thereof which the Company may so elect to take out
or to continue on his life, except as set forth in Section 10 below.
10. SUCCESSOR AND HEIRS.
(a) The Company shall require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement
satisfactory to Executive, expressly, absolutely and unconditionally to assume
and agree to perform this Agreement in the same manner and to the same extent
that the Company would be required to perform it if no such succession or
assignment has taken place. As used in this Agreement, "Company" shall mean
the Company as hereinbefore defined and any successor or assign to its business
and/or assets as aforesaid which executes and delivers the Agreement or which
otherwise becomes bound by all the terms and provisions of this Agreement by
operation of law.
(b) This Agreement shall insure to the benefit of and be
enforceable by Executive's personal and legal representatives, executors,
administrators, successors, heirs, distributees, devises and legatees. If
Executive should die while any amounts are still payable hereunder, all such
amounts shall be paid in accordance with the terms of this Agreement to
Executive's devisee, legatee, or other designee or, if there be no such
designee, to Executive's estate.
11. NON-WAIVER, COMPLETE AGREEMENT, GOVERNING LAW. No provisions of this
Agreement may be modified, waived or discharged except in writing signed by
both parties. No waiver by either party at any time of any breach by the other
party of, or compliance with, any condition or provision of this Agreement
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 set forth expressly in this
Agreement. This Agreement shall be governed by and construed in accordance
with the laws of the State of California.
12. LEGAL FEES AND EXPENSES. The Company shall pay all reasonable legal
fees and expenses which Executive may incur as a result of the Company's
contesting the validity, enforceability or Executive's good faith
interpretation of, or good faith determination under, this Agreement; provided,
however, that the Company shall not pay any legal fees and expenses incurred by
Executive in contesting the termination of Executive's employment for Cause or
asserting that his resignation was for Good Reason if, as a result of such
contest, it is determined that the Executive was in fact terminated for Cause,
or that he did not resign his employment for Good Reason.
<PAGE>
13. SEVERABILITY. The invalidity or unenforceability of any provisions
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. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to by an original but all of which
together shall constitute one of the same instrument.
IN WITNESS WHEREOF, the Executive and the Company (pursuant to a
resolution of its Board adopted at a duly constituted meeting) have executed
this Agreement, effective as of the date first above written.
CYGNUS THERAPEUTIC SYSTEMS
By: /s/ Gregory B. Lawless
------------------------------
Name: Gregory B. Lawless
------------------------------
Title: President and CEO
------------------------------
/s/ Alan F. Russell
------------------------------
Alan F. Russell
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 20,669
<SECURITIES> 14,163<F1>
<RECEIVABLES> 3,171
<ALLOWANCES> 123
<INVENTORY> 924
<CURRENT-ASSETS> 39,784
<PP&E> 15,741
<DEPRECIATION> 11,145
<TOTAL-ASSETS> 49,277
<CURRENT-LIABILITIES> 29,843
<BONDS> 0
0
0
<COMMON> 122,728
<OTHER-SE> (136,528)
<TOTAL-LIABILITY-AND-EQUITY> 49,277
<SALES> 4,212
<TOTAL-REVENUES> 29,502
<CGS> 3,054
<TOTAL-COSTS> 10,413
<OTHER-EXPENSES> 70,689
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,631
<INCOME-PRETAX> (50,322)
<INCOME-TAX> 138
<INCOME-CONTINUING> (50,460)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (50,460)
<EPS-PRIMARY> (2.67)
<EPS-DILUTED> (2.67)
<FN>
<F1>This amount represents short-term investments held by the company at 12/31/97
</FN>
</TABLE>
