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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(X) Annual report pursuant to Section 13 or 15(d) of the Securities Act of 1934 for the
fiscal year ended December 31, 1998 or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.
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COMMISSION FILE NO. 0-18962
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CYGNUS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 94-2978092
(State or other (I.R.S. Employer
jurisdiction of
incorporation or Identification
organization) No.)
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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
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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 MARCH 18, 1999 as
reported on the Nasdaq National Market was APPROXIMATELY $153,328,872.
Determination of affiliate status for this purpose is not a determination of
affiliate status for any other purpose.
22,101,459
(Number of shares of common stock outstanding as of MARCH 18, 1999)
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Consolidated financial statements for the fiscal year ended
December 31, 1998 and definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 1999 Annual Meeting of Stockholders is incorporated by
reference into Part III hereof.
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CYGNUS, INC.
1998 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PART I
Item 1. Business .................................................................................... 2
Item 2. Properties .................................................................................. 13
Item 3. Legal Proceedings ........................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders ......................................... 14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters ....................... 17
Item 6. Selected Financial Data ..................................................................... 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 19
Item 7A. Quantitative and Qualitative Disclosures About Market Risk .................................. 30
Item 8. Financial Statements and Supplementary Data ................................................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ........ 31
PART III
Item 10. Directors and Executive Officers of the Registrant .......................................... 32
Item 11. Executive Compensation ...................................................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management .............................. 32
Item 13. Certain Relationships and Related Transactions .............................................. 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ............................. 33
SIGNATURES ............................................................................................ 38
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PART I
ITEM 1. BUSINESS
OVERVIEW
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES RELATING TO THE FUTURE FINANCIAL PERFORMANCE OF CYGNUS, INC.
("CYGNUS" OR THE "COMPANY"), AND ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY. IN EVALUATING SUCH STATEMENTS, STOCKHOLDERS AND INVESTORS SHOULD
SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED UNDER THE CAPTION "RISK
FACTORS" CONTAINED IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCES
OF UNANTICIPATED EVENTS.
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: an
automatic and continuous glucose monitoring device (the GlucoWatch-Registered
Trademark- monitor) and transdermal drug delivery systems.
The Company was incorporated in California in 1985 and was merged into a
Delaware corporation in September 1995. The Company's principal executive
offices are located at 400 Penobscot Drive, Redwood City, California 94063,
and its telephone number at that address is (650) 369-4300.
On August 11, 1998, John Hodgman was appointed President, Chief Executive
Officer and Director by Cygnus' Board of Directors following the resignation
of Gregory B. Lawless. In addition, Andre Marion, who is a Cygnus Director,
was named Vice Chairman of the Board of Directors. Gary Cleary continues his
duties as Chairman of the Board of Directors and Chief Technical Officer.
THE GLUCOWATCH -Registered Trademark- SYSTEM.
The Company's GlucoWatch monitor represents a potential advance in
diabetes care technology as compared to the currently prevailing "finger
stick" blood monitoring method. The GlucoWatch monitor is designed to measure
glucose automatically and continuously 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 1997 (Boston
Biomedical Consultants, Inc.). 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 sticking 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 stick method, the Company believes that there is
a significant unmet demand for an automatic and continuous glucose-monitoring
device.
To address this unmet demand, the Company is developing the GlucoWatch
monitor, which is expected to reduce or eliminate significant drawbacks of
the finger stick testing technique. The device, which is worn like a
wristwatch, is designed to automatically extract and measure glucose levels
through intact skin up to three times per hour. The extracted glucose is
collected in a consumable component called the AutoSensor, which is attached
to the back of the device and replaced approximately every twelve hours. The
GlucoWatch monitor potentially offers 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;
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alerts indicating hypo- and hyperglycemic conditions; and event markers which
record factors that affect glucose levels. The GlucoWatch monitor can be worn
during the day and night for continuous glucose monitoring. The Company
believes the GlucoWatch monitor 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 repetitive pain and inconvenience
associated with the finger stick monitoring method. 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 monitor, the Company has sought to design a
device that would offer the above features and be safe and effective for
home use by patients with diabetes. In December 1998, Cygnus completed
extensive development clinical studies using a version of the GlucoWatch
monitor designed for commercial sale. These studies were conducted on people
with diabetes by independent clinical investigators across the U.S. The
results of these studies demonstrated that the GlucoWatch monitor is able to
measure glucose levels with accuracy and precision. The results of the most
controlled testing portion of the development clinical studies exceeded
Cygnus' internal performance accuracy target values. The protocols for the
development clinical studies were designed to be the same as the protocols
used in its registration clinical studies which, if successfully completed,
will lead to its completed United States Food and Drug Administration ("FDA")
submission for clearance to market the device. Although the Company believes
its clinical results to date are encouraging, no assurance can be given that
data generated in the registration clinical studies 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 monitor by the FDA.
On January 25, 1999 the Company submitted the first part of the
Pre-Market Approval Application ("PMA") to the FDA. This submission included
a variety of information, including manufacturing documentation. The Company
intends to submit the remainder of the PMA by the end of June 1999. The
product PMA will include analysis of a series of clinical studies totaling
more than 500 people which were completed in December 1998, as well as at
least two additional studies.
In 1996, the Company entered into collaboration agreements with Becton
Dickinson & Company ("Becton Dickinson") and Yamanouchi Pharmaceutical Co.,
Ltd. ("Yamanouchi") for the commercialization of the GlucoWatch monitor.
Under the Yamanouchi agreement, Cygnus granted Yamanouchi the marketing and
distribution rights of the GlucoWatch monitor in Japan and Korea. Cygnus is
eligible to receive up-front and milestone payments prior to
commercialization and to receive a percentage of the product's future
commercial success. Under the Becton Dickinson agreement, the Company had
granted Becton Dickinson exclusive worldwide marketing and distribution
rights, with the exception of Japan and Korea. On March 31, 1998, the Company
announced the termination of its agreement with Becton Dickinson.
Consequently, the Company will not receive any future milestone payments
under the Becton Dickinson agreement and will not be obligated to share
future revenue, if any, associated with commercialization of the GlucoWatch
monitor. The Company is currently in discussions with a number of companies
to establish an alliance for the commercialization of the GlucoWatch monitor
to provide for distribution, sales, marketing, and customer service support
in North America and Europe. There can be no assurance that the Company will
be able to enter into new collaborative arrangements.
In 1998, the Company entered into long term agreements with E.I. du Pont
de Nemours & Company ("DuPont") for the development and supply of thick film
materials for Cygnus' GlucoWatch monitor. A key component of the GlucoWatch
monitor is the sensor, which Cygnus developed with DuPont's materials. The
agreements call for continued cooperation for future sensor technology
developments and continued supply of materials.
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 traditional 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
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equivalent dosage for the transdermal delivery of certain compounds can be
significantly less than the corresponding oral dosage, potentially reducing
dosage-related side-effects.
The Company's transdermal product line is focused on contraception,
hormone replacement therapy and smoking cessation. The Company has received
FDA approval for two products, one of which is currently marketed, the
Nicotrol-Registered Trademark- (Pharmacia AB, Stockholm, Sweden) nicotine
patch. The Company has strategic collaborations for its transdermal products
with Ortho-McNeil Pharmaceutical, Inc. ("Ortho"), a subsidiary of Johnson &
Johnson (contraception), American Home Products ("AHP") Corporation and
Sanofi S.A. ("Sanofi") (hormone replacement therapy), and Pharmacia & Upjohn
("Pharmacia") (smoking cessation).
The FemPatch-Registered Trademark- (Warner-Lambert Co., Morris Plains,
NJ) system, commercially launched in 1997, is a low-dose, 7-day estrogen
replacement transdermal patch for the treatment of menopausal symptoms.
Sanofi, the Company's worldwide licensee, had sublicensed U.S. marketing
rights to Warner-Lambert. In November 1998, Warner-Lambert terminated its
agreement with Sanofi, which also terminated the Supply Agreement between
Warner-Lambert and the Company. Consequently, the Company does not expect
product revenue related to the FemPatch system in 1999.
In July 1998, the Company was notified by AHP, the licensee for two of
the Company's transdermal hormone replacement products, that AHP wanted to
discuss the status of their agreement with the Company. In November 1998, the
Company and AHP entered into an Amendment to their Agreement. (For more on
the AHP amendment, see "Contract Revenue," under Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
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
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PRODUCT INDICATIONS STATUS (1) MARKETING
RIGHTS
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DIAGNOSTIC SYSTEMS:
CONTINUOUS, AUTOMATIC GLUCOSE MONITORING:
GlucoWatch Monitor Diabetes Registration clinicals Yamanouchi
Cygnus
DRUG DELIVERY SYSTEMS:
TRANSDERMAL DRUG DELIVERY:
SMOKING CESSATION:
Nicotrol Patch Smoking cessation Commercialized in North Pharmacia & Upjohn, Inc.;
America and certain European Johnson & Johnson (2)
countries
Nicotine Patch Smoking cessation Pre-clinical Undisclosed
HORMONE REPLACEMENT:
Low-Dose Estrogen
7-Day:
FemPatch System Menopausal symptoms Commercialized in North Sanofi (3)
America
Estrogen 7-Day Menopausal symptoms Submitted New Drug American Home Products
Application ("NDA") and
European Dossier
Estrogen/Progestin:
Combination 3.5-Day Menopausal symptoms Phase 3 clinicals American Home Products
CONTRACEPTION:
Estrogen/Progestin:
Combination 7-Day Contraception Phase 3 clinicals Johnson & Johnson (4)
OTHER PRODUCTS:
Clonazepam Anti-epileptic Pre-clinical National Institutes of
Health ("NIH") (5)
Mucosal Disk Breath freshening Marketing Authorization Filed Undisclosed
Mucosal Disk Sore throat Marketing Authorization Filed Undisclosed
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(1) The Company's drug delivery products are generally developed in the
following stages: development, prototype, pre-clinical studies in
preparation 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) In November 1998, Warner-Lambert terminated its agreement with Sanofi,
which also terminated the Supply Agreement between Warner-Lambert and
the Company.
(4) The Company's agreement with Johnson & Johnson grants Johnson & Johnson
exclusive rights to the estrogen/progestin combination 7-day contraception
product.
(5) Product being funded through the first clinical trial by an NIH grant.
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AUTOMATIC AND CONTINUOUS GLUCOSE MONITORING
MARKET OPPORTUNITY
People with diabetes measure blood glucose levels to adjust their diet
and insulin use to better control their glucose levels in order to prevent
diabetes-related complications. Currently, to measure their glucose levels,
people with diabetes must stick 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
sticks 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 1997. The Company believes that
approximately 80% to 90% of the sales were related to disposable glucose
reagent strips for finger stick monitoring (Boston Biomedical Consultants,
Inc.). 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 19% (about 1.6 million) account for 52% of the 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 National Institutes of Health ("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 MONITOR
The Company believes that there is an unmet demand for automatic and
continuous glucose monitoring. To address this unmet demand, the Company has
developed the GlucoWatch monitor, which is worn like a wristwatch and, after
calibrating each new AutoSensor with a standard blood glucose monitor,
automatically extracts and measures glucose levels painlessly through intact
skin every twenty or thirty minutes. The GlucoWatch monitor then displays and
stores current and past glucose levels and trend data. The extracted glucose
is collected in a consumable component called the AutoSensor, which is
attached to the back of the device and replaced approximately every twelve
hours. The GlucoWatch monitor potentially offers, in a portable and discreet
device, a combination of features not available in currently marketed
devices. These include frequent data collection, electronic memory to store
and display glucose levels, personal computer downloading for trend analysis,
alerts indicating hypo- and hyperglycemic conditions and event markers which
record factors that affect glucose levels. The GlucoWatch monitor is designed
to be worn day and night for continuous glucose monitoring. The GlucoWatch
monitor is expected to reduce or eliminate significant drawbacks of the
finger stick technique, such as the pain of repetitive sticking and the
disruption of normal activities caused by indiscreet, cumbersome procedures.
The Company believes the GlucoWatch monitor can lead to improved disease
management, enabling people with diabetes to prevent or delay severe
complications associated with the condition.
The GlucoWatch monitor extracts glucose molecules through intact skin
utilizing a patented sampling process called electroosmosis (or "reverse
iontophoresis"). The extracted glucose is collected and measured by an
AutoSensor, a replaceable component which includes an enzyme-containing
hydrogel and electrodes for electroosmotic extraction and biosensing. The
glucose collected in the AutoSensor triggers an electro-chemical reaction in
the AutoSensor, generating
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electrons. The biosensor measures the electrons and an application specific
integrated circuit ("ASIC") in the GlucoWatch monitor equates the number of
electrons to a concentration of glucose in the blood. The GlucoWatch monitor
automatically measures glucose levels at twenty minute intervals. The
GlucoWatch monitor 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 monitor system was designed to be simple and easy to use.
Each day the rechargeable battery is replaced. In addition, an AutoSensor is
attached on the back of the GlucoWatch monitor, which will provide twelve
hours of glucose measurements after a three-hour warm-up period. A finger
stick blood glucose measurement is input into the GlucoWatch monitor for
calibration. Measurements will then be generated painlessly, bloodlessly and
automatically by the GlucoWatch monitor, 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 monitor
uses a similar approach. The "monitoring device" is designed to function for
a number of years, while the consumable AutoSensor is designed to provide
twelve hours of measurements.
REGULATORY APPROVAL
For FDA approval of the GlucoWatch monitor, the Company is currently
conducting registration clinical studies. In response to conversations with
the FDA, the Company intends to complete the submission of a Pre-Market
Approval Application ("PMA") by June 1999 for the GlucoWatch monitor for
adults with diabetes. On January 25, 1999 the Company submitted the first
part of the PMA to the FDA. This submission included a variety of
information, including manufacturing documentation.
Although the Company believes its clinical results to date are
encouraging, no assurance can be given that data generated in the
registration clinical studies 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
monitor by the FDA. In addition, there can be no assurance that if the
product is cleared for marketing by the FDA that all of the potential
features of the GlucoWatch monitor would be approved for use or that the
intended usage described above would be approved.
COMPETITION
The glucose monitoring market is highly competitive. Currently the
market is dominated by finger stick 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 stick 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 stick products nor other products in development have the
range of features and benefits offered by the GlucoWatch monitor to address
the unmet needs.
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 traditional 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
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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 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, by industry sources, to have had
1997 worldwide sales of $2.9 billion. The market is dominated by oral
contraceptive pills. There are no transdermal patches currently marketed for
contraception. 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-McNeil Pharmaceutical, Inc. ("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
commercialized, 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 $1.33 billion in sales
worldwide in 1997, and is expected to grow as more women reach the age of
menopause (Med Ad News, May 1998). The Company believes that its transdermal
hormone replacement products have a competitive advantage over certain
transdermal hormone replacement products as a result of superior patient
comfort profile as well as applicable seven-day extended delivery systems.
Cygnus has two hormone replacement products in development: a 7-day
estrogen patch, for which the New Drug Application ("NDA") has been submitted
to the FDA, and the European Dossier has been submitted to the European
authorities; and a 3.5-day estrogen/progestin combination patch, which is
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, AHP pays 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 subject to certain minimums. In
July 1998, the Company was notified by AHP that AHP wanted to discuss the
status of their agreement with the Company. In November 1998, the Company and
AHP entered into an Amendment to their Agreement. (For more on the AHP
amendment see "Contract Revenue," under Management's Discussion and Analysis
of Financial Condition and Results of Operations.)
The FemPatch system, commercially launched in 1997, 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. In November 1998, Warner-Lambert
terminated its agreement with Sanofi, which also terminated the Supply
Agreement between Warner-Lambert and the Company.
SMOKING CESSATION
The smoking cessation market is estimated to have had 1997 worldwide
sales of $555.0 million (Drug Store News, September 7, 1998). 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. The Nicotrol patch is currently marketed in North America by
Johnson & Johnson and in many European countries by Pharmacia. Cygnus
receives royalties on the worldwide sales of the Nicotrol patch. Cygnus is
also collaborating with an undisclosed partner for a different
over-the-counter nicotine transdermal system. This product is currently in
the pre-clinical stage.
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DEPENDENCE ON NEW PRODUCTS; UNCERTAINTY OF MARKET ACCEPTANCE
For the Company to be successful, it will need to develop, license, or
acquire new products. Several products based on the Company's technologies
are currently under development by Cygnus and its licensees. Many of these
products (including the GlucoWatch monitor) will require significant
additional development and investment, including preclinical and clinical
testing, prior to their commercialization. From time to time the Company has
experienced delays or setbacks in the development of certain of its products.
For example, the Company experienced development delays in the
miniaturization of the GlucoWatch monitor. There can be no assurance that the
Company will be able to successfully address problems that may arise during
the development and commercialization process. In addition, there can be no
assurance that such products or future products (including the GlucoWatch
monitor) can or will be successfully developed, prove to be safe and
effective in clinical trials, meet applicable regulatory standards, be
capable of being manufactured in commercial quantities at reasonable cost, be
marketed successfully or achieve market acceptance. Product development
efforts can be terminated by the Company or its licensees and there can be no
assurance that initial product development efforts or third party
collaborations will be successful. If any of the Company's development
programs are not successfully completed, required regulatory approvals or
clearances are not obtained, or products for which approvals or clearances
are obtained are not commercially successful, the Company's business,
financial condition and results of operations could be materially and
adversely affected.
The Company's business is subject to the risks inherent in the
development of new products using new technologies and approaches. There can
be no assurance that unforeseen problems will not develop with these
technologies or applications, that the Company will be able to successfully
address technological challenges it encounters in its research and
development programs or that commercially feasible products will ultimately
be developed by the Company.
Before the Company can market the GlucoWatch monitor, it must first
conduct registration clinical trials using a version of the product designed
for commercial sale, prepare a submission to the FDA and obtain clearance or
approval from the FDA. Approval from other U.S. or foreign government
regulatory agencies may also be required. Each of these stages will involve
certain risks and challenges. The Company has completed research clinical
studies using a commercial version of the product and is conducting
registration clinical trials for submission to the FDA. There can be no
assurance that the commercial product will produce results that support the
necessary regulatory filings and approvals. In addition, if the Company
receives the necessary regulatory approvals for the GlucoWatch monitor, there
can be no assurance that unforeseen problems will not occur in product
manufacturing and commercial scale-up or marketing or product distribution.
Any such occurrence could significantly delay the commercialization of the
GlucoWatch monitor or prevent its market introduction entirely. Furthermore,
if the GlucoWatch monitor is successfully developed, the commercial success
of the GlucoWatch monitor will depend on its acceptance in the market.
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS
The design, manufacturing, labeling, distribution and marketing of the
Company's products are subject to extensive and rigorous government regulation
in the U.S. and certain other countries where the process of obtaining and
maintaining required regulatory clearance or approvals is lengthy, expensive
and uncertain. In order for the Company to market its products in the U.S.,
the Company must obtain clearance or approval from the FDA. To date, the
Company has two products which have received FDA approval, the Nicotrol patch
and the FemPatch system. Before a regulatory submission can be filed with the
FDA, a product must undergo extensive clinical trials. The Company's drug
delivery systems require the filing of a NDA or an Abbreviated New Drug
Application ("ANDA") with the FDA and the FDA's approval of the NDA or ANDA.
Devices such as the GlucoWatch monitor under development by the Company will
require the filing and FDA clearance or approval of a medical device
submission. The time required for regulatory approval of the Company's
products after a filing is uncertain. There can be no assurance that problems
will not arise that could delay or prevent the commercialization of the
Company's products or that the FDA and foreign regulatory agencies will be
satisfied with the results of clinical trials or approve the marketing of any
products. Moreover, even if regulatory approval is granted, such approval may
include significant limitations on indicated uses for which any such products
could be marketed.
9
<PAGE>
On January 25, 1999 the Company submitted the first part of the PMA to
the FDA for the GlucoWatch monitor. This submission included a variety of
information, including manufacturing documentation. The Company intends to
submit the remainder of the PMA by the end of June 1999. The product PMA will
include analysis of a series of clinical studies totaling more than 500
people which were completed in December 1998, as well as at least two
additional studies.
A drug or medical device and its manufacturer are subject to continual
review after approval, and later discovery of previously unknown problems
with a product or the manufacturing process may result in restrictions on
such product or the manufacturer, including withdrawal of the product or
products from the market. Failure to comply with applicable regulatory
requirements may, among other things, result in fines, suspensions of
regulatory approvals, product recalls, operating restrictions and criminal
prosecution. In addition, new government regulations may be established that
could delay or prevent regulatory approval of the Company's potential
products. Cygnus is also subject to federal, state and local regulations
regarding work place safety, environmental protection and hazardous and
controlled substance controls, among others.
In order for the Company to market its products in Europe and certain
other foreign jurisdictions, the Company and its distributors and agents must
obtain required regulatory registrations or approvals and otherwise comply
with extensive regulations regarding safety, efficacy and quality in those
jurisdictions. Specifically, certain foreign regulatory bodies have adopted
various regulations governing product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and
tax requirements. These regulations vary from country to country. In order to
commence sales of the GlucoWatch monitor in Europe, the Company must receive
CE mark certification, which is an international symbol of quality and
compliance with applicable European medical device directives. To obtain CE
certification, the Company must pass a review of the GlucoWatch monitor
technical file by a European Community notified body. Failure to receive CE
mark certification or other foreign regulatory approvals could have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will obtain
any other required regulatory registrations or approvals in such countries or
that it will not be required to incur significant costs in obtaining or
maintaining such regulatory registrations or approvals. Delays in obtaining
any registrations or approvals required to market the Company's products,
failure to receive these registrations or approvals, or future loss of
previously obtained registrations or approvals could have a material adverse
effect on the Company's business, financial condition and results of
operations.
COMPETING PRODUCTS AND CHANGES IN TECHNOLOGY
A large number of companies are involved or are becoming involved in the
development and commercialization of products incorporating diagnostic and
drug delivery systems. This field is highly competitive, and Cygnus believes
that competition will substantially increase in the future. A number of
companies have invested, and are continuing to invest, significant resources
in the development of diagnostic and drug delivery systems. Many of these
companies have greater financial, research and development and other
resources than Cygnus, as well as more experience than Cygnus in
commercializing diagnostic and transdermal drug delivery products. Such
companies may improve existing drug formulations and products more
efficiently than Cygnus or may design and develop new diagnostic and
transdermal drug delivery products which are more accepted in the marketplace
than the Company's products.
The Company's primary competitors in the glucose monitoring industry are
expected to be companies that currently market finger stick method products.
These companies have established products and distribution channels. In
addition, a number of companies are engaged in the development of products
using technology that is different than that used by Cygnus, but that are
also intended to permit less painful or painless glucose monitoring. These
technologies include infrared spectroscopy, which uses radiation to measure
glucose levels, and a variety of methods (including, in one case, transdermal
technology) to extract interstitial fluid and measure the glucose
concentration therein. The Company is not aware of any products under
development that potentially offer the range of benefits of the GlucoWatch
monitor. However, there can be no assurance that these products will not be
more accepted in the marketplace than the GlucoWatch monitor or will not
render the Company's glucose monitor uncompetitive or obsolete. A number of
companies have developed or are seeking to develop new drugs to treat
diabetes that could reduce demand for glucose monitoring systems. In
addition, many of the Company's competitors and potential competitors have
substantially greater resources, research and development staffs and
facilities than the Company and have significantly greater experience than
the Company in developing, manufacturing and marketing glucose
10
<PAGE>
monitoring devices. Competition within the glucose monitoring industry could
also result in price reductions for glucose monitoring devices such that the
Company may not be able to sell the GlucoWatch monitor at a price level
adequate for the Company to realize a return on its investment.
The drug delivery industry is a rapidly evolving field. A number of
other companies, including major pharmaceutical companies, are also
developing and marketing transdermal and other similar systems for the
controlled delivery of drugs. Products currently on the market or under
development by competitors deliver the same drugs or other drugs to treat the
same indications as many of the products under development by the Company.
The first pharmaceutical product to reach the market in a therapeutic area
often obtains and maintains significant market share relative to later
entrants to the market. The Company's transdermal products will also compete
with drugs marketed not only in similar drug delivery systems but also in
traditional dosage forms such as oral administration, bolus injection and
continuous infusion. New drugs, new therapeutic approaches or future
developments in alternative drug delivery technologies, such as time-release
capsules, liposomes, inhalants, and implants, may provide therapeutic or cost
advantages over the drug delivery systems being developed by the Company.
MANUFACTURING; DEPENDENCE ON THIRD PARTY SUPPLIERS
Any manufacture of the Company's products is subject to current good
manufacturing practices ("cGMP") requirements prescribed by the FDA and other
standards prescribed by the appropriate regulatory agency in the country of
use. Additionally, the Company's agreements with licensees either specify
pricing formulas for products manufactured and sold by Cygnus to its
licensees or specify that prices will be negotiated in the future. There can
be no assurance that prices for the Company's products will cover the
manufacturing costs for these products in light of the Company's limited
manufacturing experience and general supply and demand conditions in the
marketplace.
The Company's GlucoWatch monitor has not yet been manufactured for
commercial sale, and the Company has no experience manufacturing the
GlucoWatch monitor in the volumes that would be necessary for the Company to
achieve significant commercial sales. To successfully commercialize the
GlucoWatch monitor, the device will have to be manufactured in compliance
with regulatory requirements, in a timely manner and in sufficient quantities
while maintaining product performance, quality and acceptable manufacturing
costs. There can be no assurance that the Company will be able to establish
and maintain reliable, full scale manufacturing of the GlucoWatch monitor at
commercially reasonable prices. Manufacturers often encounter difficulties in
scaling up production of new products, including problems involving product
performance, production yields, quality control and assurance and shortages
of personnel. In addition, manufacturing facilities will be subject to cGMP
regulations, including possible preapproval inspection, international quality
standards and other regulatory requirements. Difficulties encountered by the
Company in manufacturing scale-up or failure by the Company to implement and
maintain manufacturing facilities in accordance with cGMP regulations,
international quality standards or other regulatory requirements could result
in a delay or termination of production, which could have a material adverse
effect on the Company's business, financial condition and results of
operations.
In the past, the Company has experienced these problems in scaling up
its products for commercial launch. There can be no assurance that similar
problems will not be encountered in the future. In addition, there can be no
assurance that the Company will be able to achieve and maintain product
performance quality and reliability if and when producing the GlucoWatch
monitor in the quantities required for commercialization, nor that the
GlucoWatch monitor can be assembled and manufactured at an acceptable cost.
The GlucoWatch monitor will be manufactured from components 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 monitor components could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company received ISO 9002 certification in 1997. Consequently, the
Company expects to receive approval for the use of the "CE" mark for sales of
its products in Europe in 1999.
Several materials used in the Company's transdermal products are
currently obtained from single sources. Although the Company has not
experienced difficulty acquiring these materials for the manufacture of its
products for
11
<PAGE>
sale or clinical trials, there can be no assurance that supply interruptions
will not occur or that the Company will not have to obtain substitute
vendors, if such vendors are available, which could require additional
regulatory submissions and approvals. Any such interruption of supplies could
have a material adverse effect on the Company's ability to develop,
manufacture and sell its transdermal products.
The Company leases a 21,000 square foot manufacturing facility which has
been used in both commercial and clinical supply production. The Company
believes it has sufficient capacity to support the planned market
introduction of its current drug delivery products for the next 3-5 years.
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.
THIRD-PARTY REIMBURSEMENT
Successful commercialization of certain of the Company's products may
depend in part on the availability of reimbursement from third-party health
care payors, such as private insurance plans and the government. There can be
no assurance that such reimbursement will be available. Third-party payors
are increasingly attempting to contain health care costs by limiting both
coverage and the level of reimbursement for new therapeutic and diagnostic
products. There can be no assurance that adequate levels of reimbursement
will be available to enable the Company to achieve market acceptance of the
GlucoWatch monitor or other new products under development or to maintain
price levels sufficient to realize an appropriate return on its investment.
In certain international countries, the period of time needed to obtain such
reimbursement can be lengthy. The Company may delay the launch of its
products into certain countries until eligibility for reimbursement is
established. This could potentially have an adverse effect on the Company.
SENIOR CONVERTIBLE NOTES
In February 1998, the Company entered into Note Purchase Agreements with
certain institutional investors to issue and sell approximately $43 million
of 4% Senior Subordinated Convertible Notes due in 2005 (the "Notes"). On
October 28, 1998, the Company restructured the Notes. Key provisions in the
restructured Notes include the repayment of $18.5 million in principal
(reducing the principal balance from $43 million to $24.5 million) in October
1998, a delay in the convertibility of the majority of the Notes to June 30,
1999 or after, modification of conversion prices of the Notes, the ability of
the Company to redeem at par at any time all or part of the new principal
amount of the Notes, an increase in the interest rate to 5.5% paid annually
on the new principal balance and the change in the final maturity of the
Notes to October 1, 2000.
Under the terms of the restructured Notes, all of the remaining $24.5
million principal amount of the Notes are redeemable by the Company at par
including accrued interest. In addition, $18.5 million of the Notes will not
be able to be converted into Common Stock by the Note Holders until June 30,
1999 or later, effectively a five-month delay from the original terms of the
Notes. The restructured Notes were divided into three tranches. The first
tranche had an original principal amount of $6 million and was convertible
in whole or in part into Common Stock at any time, at a price that was fixed
until June 30, 1999 ($3.54), and was subject to a potential upward adjustment
on February 1, 1999 based on certain market formulas. As of December 31,
1998, $1.9 million of the first tranche had been converted into Common Stock.
The balance of the first tranche was fully converted in January 1999. The
second tranche also has an original principal amount of $6 million and cannot
be converted into Common Stock until June 30, 1999, at which time it becomes
convertible in whole or in part. On June 30, 1999, the conversion price of
the second tranche will be $6.89, which was established on February 1, 1999,
based on certain market formulas. Subsequent to June 30, 1999, the conversion
price of the second tranche will be determined based on other market
formulas. The third tranche of the restructured Notes has an original
principal amount of $12.5 million and cannot be converted into Common Stock
until July 1, 1999. Beginning July 1, 1999, no more than 15% of the second
and third tranches may be converted per calendar month at a conversion
price formulated from market prices. Any portions of the 15% monthly amounts
of the second and third tranches that are not converted in the relevant month
may be rolled over for conversion in future months. If the Company called the
second tranche of Notes ($6 million) for redemption before February 1, 1999,
the Note Holders would have been entitled to convert not more than 50% of
such Notes called before the redemption occurs. No such call was made by the
Company prior to February 1, 1999. If the Company calls the third tranche of
Notes ($12.5 million) for redemption before July 1, 1999, the Note Holders
will not be entitled to convert any portion of such tranche so called. The
Note Holders will otherwise be entitled to convert Notes called for
redemption before the redemption occurs, at conversion prices based on market
formulas.
12
<PAGE>
The terms of the restructured Notes contained beneficial conversion
features relative to the first tranche which resulted in a non-cash charge to
earnings of $4.2 million. Future tranches of the restructured Notes may also
have similar beneficial conversion features. Such beneficial features, if
any, are contingent upon future events including timing of conversion and
market prices at the time of conversion and accordingly the Company is not
able to estimate any potential charges at this time.
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 1998, the Company had approximately 45 issued U.S.
patents and about 94 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 more than 100 patent applications pending worldwide,
including the U.S. The Company has 3 U.S. trademark registrations, with 5
trademark applications pending; and 19 foreign trademark registrations, with
52 trademark applications pending.
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 or
granted. The Company has an exclusive license worldwide under these patents.
EMPLOYEES
As of December 31, 1998, the Company had 143 full time employees. Of
this total number of employees, 59 were engaged in research and development,
including process development, 34 in scientific affairs and quality
assurance, 29 in general administrative, and 21 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.
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. 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 2003 with an
option to renew at the then-prevailing market rent through 2008. The facility
in Menlo Park is leased over a three year period ending in October 1999.
The manufacturing facility was designed and constructed to comply with
ISO 9002 and cGMP standards. Cygnus holds drug and medical device
manufacturing licenses from the California Department of Health Services, has
an application on file with the U.S. Drug Enforcement Agency for the
manufacture of controlled drug products in this
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<PAGE>
facility, and is registered with the FDA as a drug establishment. The Company
believes it 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 products, it will begin
evaluating its existing manufacturing plans, under which a new manufacturing
site may become necessary.
ITEM 3. LEGAL PROCEEDINGS
On November 20, 1998, the American Arbitration Association issued the
final award on the arbitration proceedings between Cygnus and Pharmacia &
Upjohn ("Pharmacia") relating to the Nicotrol patch, Cygnus' smoking
cessation patch. Pursuant to the findings from the arbitration proceedings,
Cygnus was awarded $4.3 million for prevailing in some of its claims and
Pharmacia was awarded $1.6 million for prevailing in some of its claims.
Accordingly, Cygnus realized a net amount of $2.7 million. By way of
background, Cygnus initiated these proceedings in May 1997 based on an
agreement between Cygnus and Pharmacia, which provided that Pharmacia would
be obligated to pay Cygnus for, among other things, existing inventory costs
and certain purchase order commitments. Pharmacia disputed their obligations
regarding certain of the inventory costs and certain purchase order
commitments. In March 1998, Pharmacia added a counterclaim against Cygnus in
the arbitration, seeking approximately $1.5 million in reimbursement for an
alleged overpayment in royalties for Nicotrol units shipped in 1996 and 1997.
Cygnus' claim and Pharmacia's counterclaim commenced on June 15, 1998 before
a panel of the American Arbitration Association. This final and unappealable
decision settles all claims and counterclaims submitted to this Arbitration
by the Parties. See the Company's quarterly reports on Form 10-Q for the
quarter ended March 31, 1998, June 30, 1998 and September 30, 1998, filed
with the Securities and Exchange Commission ("SEC") on May 15, 1998,
August 4, 1998 and November 16, 1998, respectively, and the Company's annual
report on Form 10-K for the year ended December 31,1997, filed with the SEC
on February 6, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A Special Meeting of Stockholders of Cygnus, Inc. was held on
December 1, 1998. The following item was voted upon by the stockholders:
<TABLE>
<CAPTION>
Votes
----------------------------------------------------------
Broker
Affirmative Negative Abstain Non-Votes
------------ -------- -------- ----------
<S> <C> <C> <C> <C>
To approve the Company's amendment of
the Restated Certificate of Incorporation to
effect a one-for-three reverse stock split
Proposal of the Company's outstanding
Common Stock as set forth in the Cygnus, 16,773,772 547,427 91,601 0
Inc. Proxy Statement for Special Meeting of
Stockholders, dated November 10, 1998.
(For further details, see "Management's
Discussion and Analysis of Financial
Condition and Results of Operation".)
</TABLE>
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EXECUTIVE OFFICERS
The executive officers of the Company, who serve at the discretion of
the Board of Directors, are as follows, in alphabetical order:
<TABLE>
<CAPTION>
NAME AGE TITLE
<S> <C> <C>
Neil R. Ackerman, Ph.D. 55 Senior Vice President, Research & Development
Craig W. Carlson 51 Appointed Chief Financial Officer and Senior
Vice President, Finance effective December 8,
1998
Gary W. Cleary, Ph.D. 56 Chairman of the Board of Directors and Chief
Technical Officer
James F. Grady, Jr., Ph.D. 50 Senior Vice President, Human Resources &
Administration
John C. Hodgman 45 Appointed President, Chief Executive Officer and
Director effective August 11, 1998
Stephen N. Kirnon 36 President, Drug Delivery Division
Andre S. Marion 63 Appointed Vice Chairman of the Board of
Directors effective August 11, 1998
Barbara G. McClung 44 Vice President, General Counsel and appointed
Secretary effective December 8, 1998
</TABLE>
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 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 was appointed Chief Financial Officer and Senior Vice
President, Finance effective December 8, 1998. He joined Cygnus in July 1993
as Vice President, Corporate Communications, then became Vice President,
Strategic Planning and Corporate Marketing. Mr. Carlson most recently served
as Senior Vice President, Finance, with responsibilities for the finance,
information technology and corporate communications functions at
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<PAGE>
Cygnus. 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. 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. 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 Beecham), 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 was appointed President, Chief Executive Officer and
Director in August 1998. From May 1995 to August 1998, Mr. Hodgman served as
President, Cygnus Diagnostics, for which he was responsible for all
commercialization efforts for the GlucoWatch monitor, and Chief Financial
Officer. Mr. Hodgman joined Cygnus in August 1994 as Vice President, Finance
and Chief Financial Officer. 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
and, subsequently, he was promoted to Vice President, Business Development.
In September 1997, Mr. Kirnon was promoted to President, Drug Delivery
Division, and he is responsible for all efforts of the Drug Delivery
Division. Prior to joining Cygnus, Mr. Kirnon served as the National Sales &
Marketing Manager for BioGenex, Inc. Prior to that, he held various positions
in sales, marketing, and operations as part of the fast track management
program for SmithKline Beecham. Mr. Kirnon holds a B.A. in Biochemical
Sciences from Harvard University and an M.B.A. from Pepperdine University in
General Management.
MR. MARION, a Cygnus Director, was named Vice Chairman of Cygnus in
August 1998. Mr. Marion founded Applied Biosystems, Inc., a supplier of
instruments for biotechnology research, and served as President, Chief
Executive Officer and Chairman of the Board prior to its merger with The
Perkin-Elmer Corporation in 1993. He then served as Vice President, The
Perkin-Elmer Corporation and President of the Applied Biosystems Division
until his retirement in February 1995. Mr. Marion is also a director of
Molecular Devices Corp., Applied Imaging and a private company.
MS. McCLUNG joined the Company in January 1998 as Vice President,
Intellectual Property. In August 1998, Ms. McClung was promoted to Vice
President and General Counsel. Ms. McClung was also appointed Secretary,
effective December 8, 1998. From August 1990 to January 1998, she was
Corporate Patent Counsel at Chiron Corporation. Prior to that she was Patent
Counsel at DuPont. She is a member of the California, Delaware, and
Pennsylvania bars as well as being a registered patent attorney before the US
Patent and Trademark Office. Ms. McClung received a JD from the University of
Pennsylvania Law School, as well as a B.A. from the University of California,
San Diego, and an M.A. from the University of Pennsylvania.
16
<PAGE>
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.
<TABLE>
<CAPTION>
1998: High Low
---- ---
<S> <C> <C>
First Quarter $20 5/8 $16
Second Quarter 13 1/2 5 25/32
Third Quarter 10 1/4 3 1/16
Fourth Quarter 6 7/8 2 5/8
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
</TABLE>
As of December 31, 1998, 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 expect 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.
17
<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, 1998, 1997 and for each
of the three years in the three-year period ended December 31, 1998 are
included elsewhere herein. The selected financial data as of December 31,
1996, 1995, and 1994 and for each of the years in the two-year period ended
December 31, 1995, 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,
---------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In thousands, except per share data)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Product revenues $ 587 $ 4,212 $ 17,211 $ 3,704 $ 1,917
Contract revenues 10,178 14,106 13,085 12,579 14,533
Royalty and other revenues 890 11,184 5,907 2,723 4,820
------- ------ ------- ------ ------
Total revenues 11,655 29,502 36,203 19,006 21,270
Costs and expenses:
Costs of products sold 3,478 10,413 16,659 4,746 3,293
Research and development 32,149 22,328 23,165 20,029 21,605
Marketing, General and
Administrative 11,730 8,695 9,296 7,369 5,491
Arbitration settlement -- 39,666 -- -- --
Purchase of in-process research
and development -- -- -- -- 9,000
------- ------ ------- ------ ------
Total costs and expenses 47,357 81,102 49,120 32,144 39,389
------- ------ ------- ------ ------
Loss from operations (35,702) (51,600) (12,917) (13,138) (18,119)
Other income and expense (3,726) 1,140 1,865 296 759
------- ------ ------- ------ ------
Net loss $(39,428) $(50,460) $(11,052) $(12,842) $(17,360)
------- ------ ------- ------ ------
------- ------ ------- ------ ------
Basic and diluted net loss per share $ (1.95) $ (2.67) $ (0.60) $ (0.79) $ (1.24)
------- ------ ------- ------ ------
------- ------ ------- ------ ------
Shares used in computation of basic and
diluted net loss per share 20,226 18,928 18,544 16,265 13,947
------- ------ ------- ------ ------
------- ------ ------- ------ ------
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(In thousands)
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 11,542 $ 9,941 $ 36,386 $ 38,555 $ 18,041
Total assets 43,454 49,277 68,798 57,854 38,116
Long-term obligations 60,220 33,234 13,437 8,331 7,398
Accumulated deficit (175,955) (136,527) (86,067) (75,015) (62,174)
Stockholders' equity (net capital deficiency) (32,767) (13,800) 31,213 38,252 18,117
</TABLE>
18
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES RELATING TO THE FUTURE FINANCIAL PERFORMANCE OF CYGNUS, INC.
("CYGNUS" OR THE "COMPANY), AND ACTUAL EVENTS OR RESULTS MAY DIFFER
MATERIALLY. IN EVALUATING SUCH STATEMENTS, STOCKHOLDERS AND INVESTORS SHOULD
SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED UNDER THE CAPTION "RISK
FACTORS" CONTAINED IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS WHICH COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS.
THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY
REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT
EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCES
OF UNANTICIPATED EVENTS.
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 continuous 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. The
Company is currently involved in discussions with several companies with
regard to a collaboration for the marketing and distribution of the
GlucoWatch monitor in the U.S. and Europe. There can be no assurance that the
Company will be able to enter into new collaborative arrangements.
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, and the demand for
its products. 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
19
<PAGE>
during the development period for each contract. However, contract revenues
are not always aligned with the timing of related expenses. To date, research
and development expenses have generally exceeded contract revenue in any
particular period and the Company expects the same situation to continue for
the next few years. In addition, the level of revenues in any given period is
not necessarily indicative of expected revenues in future periods. In 1998
seventy six percent of revenues recognized by the Company were attributable
to four customers. The Company has incurred net losses each year since its
inception and does not believe it will achieve profitability in 1999. At
December 31, 1998, the Company's accumulated deficit and net capital
deficiency were approximately $175.9 million and $32.8 million, respectively.
RESULTS OF OPERATIONS:
COMPARISON FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
PRODUCT REVENUES for the year ended December 31, 1998 were $0.6 million
compared to $4.2 million for the year ended December 31, 1997. Product
revenue for the year ended December 31, 1998 resulted from the shipments of
the FemPatch system. Included in product revenue for the year ended December
31, 1997 are the initial shipments of the FemPatch system and the final
shipments of the Nicotrol patch. The reduction in total product revenue is
primarily due to the discontinuation of shipments of the FemPatch system.
Due to the discontinuation of Nicotrol patch manufacturing and the
termination of the FemPatch system supply agreement, the Company does not
expect any further product revenues until new products are commercialized.
The Company does, however, expect to continue to receive royalty revenues
from the manufacture and sale of the Nicotrol patch by the Company's
licensee. There can be no assurance that the Company will be successful in
its efforts to commercialize any future products.
Due to the above factors and the uncertainty regarding when and if
additional products will obtain approval from the FDA and when and if
licensees will sell and market such products, the Company believes that the
level of product revenues experienced to date is not indicative of future
results and may fluctuate from year to year.
CONTRACT REVENUES for the year ended December 31, 1998 were $10.2
million compared to the $14.1 million for the year ended December 31, 1997.
Contract revenues primarily reflect labor and material cost reimbursements
associated with the development of certain transdermal delivery systems and
the amortization of milestone payments relating to certain transdermal
delivery systems and the glucose monitoring device. The decrease in contract
revenues is primarily due to a one-time payment of $1.0 million received
from Pharmacia & Upjohn in June 1997 for the exercise of its option to
purchase the U.S. manufacturing rights for the Nicotrol patch, a reduction in
clinical billings related to one of the Company's hormone replacement
products and reduced milestone amortization related to the GlucoWatch monitor.
In February 1996, the Company entered into an agreement with Becton
Dickinson & Company for the marketing and distribution of the GlucoWatch
monitor, a continuous and automatic glucose monitoring device being developed
by Cygnus. Under the terms of the agreement, Becton Dickinson had exclusive
worldwide marketing and distribution rights, with the exception of Japan and
Korea. The agreement was amended in June 1997 to grant Becton Dickinson
worldwide marketing rights, with the exception of Japan and Korea, for the
Company's second generation glucose monitor. Cygnus retained primary
responsibility for completing product development, obtaining regulatory
approvals and manufacturing. In the first half of 1996, Cygnus received an
up-front, non-refundable payment from Becton Dickinson. On March 31, 1998,
the Company announced that the agreement it had with Becton Dickinson had
been terminated. Consequently, the Company will not receive any future
milestone payments under the Becton Dickinson agreement and will not be
obligated to share future revenue, if any, associated with commercialization
of the GlucoWatch monitor. The Company is currently involved in discussions
with several companies with regard to collaboration for the sales and
distribution of the GlucoWatch monitor in the U.S. and Europe. There can be
no assurance that the Company will be able to enter into new collaborative
arrangements.
In July 1996, the Company entered into an agreement with Tokyo-based
Yamanouchi for the marketing and distribution of the GlucoWatch monitor.
Under the terms of this agreement, Yamanouchi has exclusive marketing and
distribution rights in Japan and Korea. Cygnus will have primary
responsibility for completing product development and for manufacturing. In
the third quarter of 1996, Cygnus received an up-front, non-refundable
payment from
20
<PAGE>
Yamanouchi and is eligible to receive milestone payments as well as a
percentage of the product's future commercial sales. In July 1996, the
Company also entered into a development and marketing agreement with
Yamanouchi for a 7-day transdermal product to deliver a proprietary
Yamanouchi compound. In July 1998, Yamanouchi discontinued the agreement
related to the 7-day transdermal product.
In 1998, the Company entered into an agreement with Undisclosed company,
for the development, supply and commercialization of a nicotine transdermal
system, a smoking cessation patch being developed by Cygnus. Under the terms
of the agreement, the Undisclosed company has marketing and distribution
rights in certain territories. Cygnus has exclusive manufacturing and supply
rights. The Undisclosed company has primary responsibility for obtaining
regulatory approval and commercialization. Cygnus has received payment for
1998 manufacturing and development costs and will receive similar future
payments. The Company is also eligible to receive future milestone payments
as well as a percentage of the product's future commercial success.
In December 1998, a NDA was submitted to the FDA and the European
Dossier has been submitted to the European authorities for the Company's
7-day estrogen patch. In July 1998, the Company was notified by AHP, the
licensee for two of the Company's transdermal hormone replacement products,
that AHP wanted to discuss the status of its agreement with the Company.
Cygnus was notified by AHP that it intended to exercise its right under the
agreement to seek a sublicensee for these products and is now actively
involved in doing so. AHP and Cygnus have negotiated an amendment to the
agreement that provides Cygnus immediate ownership of the regulatory filing
packages for the two products and the right to co-promote the two products as
well. The amendment also provides that if AHP is unable to sign an agreement
with a sublicensee within six months, the rights to the two products will
revert to Cygnus and AHP will be obligated to continue development
activities for the two products for an additional six months. There can be no
assurance that AHP will find a sublicensee. Furthermore, if AHP is
unsuccessful in finding a sublicensee, it is uncertain what course of action
the Company will take with regard to these two products, although it is
expected the Company will seek a new collaboration for the distribution and
marketing of the products.
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. The Company is unable
to predict to what extent the termination of existing contracts by current
partners, or new collaborative agreements, if any, will impact overall
contract revenues in 1999 and subsequent future periods.
ROYALTY AND OTHER REVENUES for the year ended December 31, 1998 were
$0.9 million, compared to $11.2 million for the year ended December 31, 1997.
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. The net decrease in royalty and other revenues
for the year ended December 31, 1998 compared to the year ended December 31,
1997 is primarily due to the 1996 launch in the U.S. of the non-prescription
Nicotrol patch. The year ended December 31, 1997 included the recognition of
previously deferred royalty payments associated with this launch, and a
reimbursement payment from Pharmacia relating to inventory and purchase
commitments, whereas no such revenue was included in the period ended
December 31, 1998.
Royalty revenue will fluctuate from period to period, since it is
primarily based upon sales by the Company's licensees. The level of royalty
income for a product also depends on various external factors, including the
size of the market for the product, product pricing levels and the ability of
the Company's licensee to market the product. Therefore, the level of royalty
revenue for any given period is not indicative of the expected royalty
revenue for future periods.
COSTS OF PRODUCTS SOLD for the year ended December 31, 1998, were $3.5
million compared to $10.4 million for the year ended December 31, 1997. Costs
of products sold primarily include direct and indirect production, facility
and personnel costs required to meet current and future anticipated
production levels. Costs of products sold for the period ended December 31,
1998 include shipments of the FemPatch system. The decrease in costs of
products sold for the period ended December 31, 1998 is primarily due to the
reduced shipments of the FemPatch system. The Company experienced negative
product margins for the periods ended December 31, 1998 and December 31, 1997
due to low production volumes that prevented the Company from absorbing all
of its fixed manufacturing costs. Because
21
<PAGE>
the Company is not currently manufacturing any commercial products, the
Company expects that fixed manufacturing costs will continue to result in
negative product margins for the foreseeable future.
RESEARCH AND DEVELOPMENT EXPENSES for the year ended December 31, 1998
were $32.1 million compared to $22.3 million for the year ended December 31,
1997. The increase in research and development expenses for the year ended
December 31, 1998 is primarily due to the increased costs associated with the
GlucoWatch monitor and the Autosensor in the following areas: material,
design and scale up for development efforts, and material and outside charges
for the accelerated level of clinical activities. Research and development and
clinical activities primarily include support and development for the glucose
monitoring program, the Company's hormone replacement therapy products and a
contraception product. Cygnus does not anticipate an increase in its overall
research and development expenses in 1999.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES for the year ended
December 31, 1998 were $11.7 million, compared to $8.7 million for the year
ended December 31, 1997. The increase is primarily due to increased sales
and marketing expenses related to the GlucoWatch monitor, in particular
marketing research expenses. The Company does not expect that marketing,
general and administrative expenses will increase in 1999.
ARBITRATION SETTLEMENT EXPENSE for the year ended December 31, 1997 of
$39.7 million represents a non-recurring arbitration settlement expense with
Sanofi. As of December 31, 1998, the Company had accrued liabilities related
to the arbitration settlement of $24.2 million. Of the total accrued
liability of $24.2 million, $24.1 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 on its two hormone replacement products, which are subject to minimum
payments in an aggregate amount equal to $17.0 million, commencing in 2001
and ending in 2005, whether or not any net sales of the two products have
occurred, and (iii) issued, in December 1997, a convertible promissory note
in the principal amount of $6.0 million, payable in full at the end of four
years and bearing interest at 6.5% per annum. The note will be convertible
into the Company's Common Stock at Sanofi's option, exercisable at any time
during the four year term, at a conversion rate of $21.725 per share.
INTEREST INCOME (EXPENSE), NET OF INTEREST AND OTHER EXPENSE for the
year ended December 31, 1998, was ($3.7) million as compared to $1.1 million
for the year ended December 31, 1997. The decrease is due primarily to the
$4.2 million non-cash costs of the beneficial conversion feature associated
with the October 1998 restructuring of the 4% Senior Subordinated Convertible
Notes, the interest expense associated with the subordinated convertible
debt, the amortization of the financing fees related to this debt and the
interest related to the additional long-term debt incurred in the second
quarter of 1998. These costs were offset by a net arbitration settlement with
Pharmacia & Upjohn from which Cygnus received $2.7 million.
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 the FemPatch system. The reduction in total product revenue resulted from
the discontinuation of the Nicotrol patch manufacturing in the first quarter
of 1997.
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 one time $1.0 million payment from Pharmacia for the exercise of its
option to purchase the U.S. manufacturing rights for the Nicotrol patch.
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 U.S. The net increase in royalty and other revenues
is primarily due to the recognition of previously deferred royalty payments
associated with the U.S. over-the-counter sales of the Nicotrol patch 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.
22
<PAGE>
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 the production levels. The decrease in
costs of products sold largely reflects the reduction of direct expenses
related to the Nicotrol patch production as a result of Pharmacia exercising
its option to purchase the manufacturing rights of the Nicotrol patch. Cost
of products sold for the year ended December 31, 1997 include the initial
shipments of the FemPatch system, 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.
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 and a contraception product.
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 resulted primarily from decreased
professional fees associated with the Company's legal proceedings involving
Sanofi.
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.
LIQUIDITY AND CAPITAL RESOURCES
Overall, the cash, cash equivalents and investment balances as of
December 31, 1998 totaled $28.8 million, representing a decrease of $6.0
million from the total as of December 31, 1997. At December 31, 1998, the
Company had a negative net worth of $32.8 million.
Through December 1997, the Company received net proceeds of
approximately $82.1 million from public offerings of its Common Stock. In
February 1998, the Company received net proceeds of approximately $13.3
million (net of issuance costs of approximately $0.5 million) from a direct
public offering of its Common Stock.
Through 1997, the Company financed approximately $9.7 million of
manufacturing and research equipment under capital loan and lease
arrangements. In the second quarter of 1998, the Company entered into a new
loan agreement for $1.4 million to finance additional capital equipment.
Borrowings under this agreement are secured by specific Company assets.
In April of 1998, the Company consolidated its two outstanding bank
loans into an expanded credit facility with the same bank. An additional $4.7
million was borrowed, increasing the total outstanding under the new
agreement to $10.0 million. In November of 1998, the April agreement was
further amended to modify the covenants. This balance will be repaid through
November 2001, with monthly interest-only payments through November 1998 and
monthly principal-and-interest installments thereafter. As of December 31,
1998 there is $9.8 million outstanding under this agreement. Borrowings under
this agreement are secured by specific Company assets.
In February 1998, the Company entered into Note Purchase Agreements with
certain institutional investors to issue and sell approximately $43 million
of 4% Senior Subordinated Convertible Notes due 2005 (the "Notes"). On
October 28, 1998, the Company restructured the Notes. Key provisions in the
restructured Notes include the October 1998 repayment of $18.5 million in
principal (reducing the principal balance from $43 million to $24.5 million),
a delay in the convertibility of the majority of the Notes to June 30, 1999,
modification of conversion prices of the Notes, the ability of the Company to
redeem at par at any time all or part of the new principal amount of the
Notes, an increase in the interest rate to 5.5% paid annually on the new
principal balance and the change in the final maturity of the Notes to
October 1, 2000 (see "Senior Convertible Notes" Part 1, Item I). Through
December 31, 1998, $1.9 million of the first tranche of $6.0 million was
converted into equity. In January 1999, the remaining balance of $4.1
million of the original first tranche of $6.0 million was converted into
equity.
23
<PAGE>
In addition to the cash received from the public offerings, issuance of
the Notes, 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,
1998 was $42.5 million, compared with net cash used of $14.6 million for year
ended December 31, 1997. Cash used in operating activities during the year
ended December 31, 1998 was primarily due to the Company's net loss of $39.4
million and a $14.0 million cash payment made in January 1998 to Sanofi under
the terms of the arbitration settlement, offset by the non-cash beneficial
conversion costs of $4.2 million associated with the October 1998
restructuring of the Notes, an increase in accounts payable and other accrued
liabilities of $2.8 million, depreciation and amortization of $1.9 million
and amortization of debt issuance cost of $1.6 million. 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, a decrease of $10.4 million
in deferred revenue, a 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.
The current level of cash used in operating activities is not
necessarily indicative of the level of future cash usage. The Company expects
a decrease in operating cash usage for 1999 primarily because the $14.0
million payment in 1998 of the Sanofi arbitration liability will not recur in
1999.
Net cash used in investing activities of $7.6 million for the year ended
December 31, 1998 resulted primarily from net purchases of investments of
$4.2 million and capital expenditures of $3.4 million. 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 investments.
Net cash provided by financing activities of $39.7 million for the year
ended December 31, 1998 includes, as mentioned above, net proceeds of $40.4
million and $13.3 million from the Company's February 1998 issuance of Senior
Subordinated Convertible Notes and from a direct public offering of its
Common Stock, respectively; additional stock proceeds of $0.9 million and
$6.1 million from the issuance of long-term debt, offset by a subordinated
debt principal repayment of $18.5 million; and long-term debt and capital
lease repayments of $2.0 million and $0.5 million, respectively. 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.
The Company's long-term capital expenditure requirements will depend
upon numerous factors, including the progress of the Company's research and
development programs; the time required to obtain regulatory approvals; the
resources that the Company devotes to the development of self-funded
products, proprietary manufacturing methods and advanced technologies; the
ability of the Company to obtain additional licensing arrangements and to
manufacture products under those arrangements; the additional expenditures to
support the manufacture of new products, if and when approved; and possible
acquisitions of products, technologies and companies. As the Company
evaluates the progress of its development projects, in particular the
GlucoWatch system, its commercialization plans and the lead time to set up
manufacturing capabilities, Cygnus may commence long-term planning for
another manufacturing site. Nevertheless, the Company believes that such
long-term planning will not result in any material impact on cash flows and
liquidity for 1999.
Based upon current expectations for operating losses and projected
short-term capital expenditures, the Company believes that its existing cash,
cash equivalents and investments of $28.8 million as of December 31, 1998,
when coupled with cash from revenues and earnings from investments, will be
sufficient to meet its operating expenses and capital expenditure
requirements at least through the end of 1999. However, there can be no
assurance that the Company will not require additional financing, depending
upon future business strategies, results of clinical trials and management
decisions to accelerate certain research and development programs and other
factors.
24
<PAGE>
INCOME TAXES. At December 31, 1998, the Company had federal net
operating loss and research and development tax credit carryforwards of
approximately $131.0 million and $2.4 million, respectively. The Company had
state net operating loss and tax credit carryforwards of approximately $19.8
million and $1.9 million, respectively. These carryforwards will expire at
various dates beginning in 1999. 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 limitations may result in the expiration of
net operating losses and tax credits before utilization.
YEAR 2000 COMPLIANCE
The Company is preparing for the impact of the arrival of the Year 2000
("Y2K")on its business, as well as on the businesses of its customers,
suppliers and business partners. The "Y2K Issue" is a term used to describe
the problems created by systems that are unable to accurately interpret dates
after December 31, 1999. These problems are derived predominantly from the
fact that many software programs have historically categorized the "year" in
a two-digit format. The Year 2000 Issue creates potential risks for the
Company, including potential problems in the Company's products as well as in
the Information Technology ("IT") and non-IT systems that the Company uses in
its business operations. The Company may also be exposed to risks from third
parties with whom the Company interacts who fail to adequately address their
own Y2K Issues.
The Company began its Y2K efforts early in 1998 by forming a Project
office chaired by the Company's Senior Vice President of Finance. The Board
of Directors is advised periodically on the status of the Company's Y2K
compliance program.
The project team developed a five phase approach to identifying and
remediating Y2K Issues. These phases are:
1. Awareness
2. Inventory
3. Assessment
4. Correction and Testing
5. Implementation
The Company completed the awareness phase of the project in the third
quarter of 1998. This phase consisted of meetings with company personnel
educating them on the issues related to Y2K. The meetings focused on internal
systems, both IT and non-IT, as well as external systems and relationships.
The Company engaged the services of an outside Y2K consulting service to
perform a comprehensive inventory of internal IT and non-IT systems and
applications. The inventory was completed during the fourth quarter of 1998.
Concurrent with the inventory, the Company's consultant performed an
assessment of the systems and applications documented in the inventory. The
result of this independent assessment showed that the majority of the
Company's internal IT systems were compliant. This is due to the fact that
the Company does not rely on in-house developed applications for its core
business applications and therefore does not have legacy code to review and
test. The Company's core business applications, Accounts Payable, Accounts
Receivable, Sales Orders, and Inventory Control are supported by an
application that has been certified by the supplier to be fully Y2K
compliant and the compliance has been tested by the company. The assessment
did determine that the payroll application in use was non-compliant. This was
upgraded to a compliant version in the first quarter of 1999.
Due to the regulatory requirements placed on the pharmaceutical and
medical device industry by the FDA, the Company has placed appropriate
attention on the non-IT systems. For the Company, this specifically covers
all areas governed by current Good Manufacturing Practice ("cGMP") guidelines
and include but are not limited to environmental monitoring/control systems,
laboratory instrumentation and their sub-systems, production equipment, and
materials handling equipment. The assessment identified several of these
non-IT systems to be non-compliant. The majority of these non-compliant
systems are laboratory instrumentation and their sub-systems. These systems
are assessed to be non-mission critical. The Company fully expects that these
systems will be upgraded, replaced or have a contingency plan in place by
January 1, 2000.
Concurrent with the inventory and assessment of internal systems and
applications, the Company identified several providers of products and
services that are critical to its operations. The Company is working with
these providers to ensure that these critical products and services are
available for continued operations after January 1, 2000. At this time the
Company is not aware of any issues relating to these providers.
The correction and testing, as well as the implementation, phases of the
Company's Y2K compliance program are currently under way and are expected to
be completed prior to January 1, 2000.
The total cost associated with the Company's Y2K remediation is not
expected to be material to the Company's financial condition or results of
operations. The estimated total cost of the Company's Year 2000 remediation
is not expected to exceed $500,000. Through December, 1998, the Company has
spent approximately $100,000 in connection with Y2K Issues. The cost of
implementing the replacement for the Company's core business applications has
not been included in this figure since the replacement of the previous
applications was not accelerated due to Y2K Issues. All Y2K expenditures are
made from the respective departments' budgets.
Although the Company assesses its Y2K issue to be moderate to low, there
can be no assurance that the Company will be completely successful in its
efforts to address Y2K Issues.
Having reasonably determined that the Company's own hardware and
software systems will be substantially Y2K compliant, management believes
that the worst case scenarios would most likely involve simultaneous
Y2K-related disruptions from the Company's key customers, suppliers, service
providers and/or other business partners. For these worst case scenarios to
have maximum adverse impact on the Company, the vendors in question would
either need to be sole-source providers, or their peer companies, who would
otherwise be potential second-source suppliers, would also need to undergo
similar Y2K-related disruption. The Company believes that such simultaneous
disruptions of the supply of basic goods and services due to Y2K-related
issues are unlikely to occur.
Although the Company has not yet developed a comprehensive contingency
plan to address situations that may result if the Company or any of the third
parties upon which the Company is dependent is unable to achieve Y2K
readiness, the Company's Y2K compliance program is ongoing and its ultimate
scope, as well as the consideration of contingency plans, will continue to be
evaluated as new information becomes available.
The foregoing Y2K discussion contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements, including without limitation, anticipated costs and the
dates by which the Company expects to complete certain actions, are based on
management's best current estimates, which were derived utilizing numerous
assumptions about future events, including the continued availability of
certain resources, representations received from third parties and other
factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the ability to identify and remediate all relevant IT and
non-IT systems, results of Year 2000 testing, adequate resolution of Y2K
Issues by businesses and other third parties who are service providers,
suppliers or customers of the Company, unanticipated system costs, the
adequacy of and ability to develop and implement contingency plans and
similar uncertainties. The "forward-looking statements" made in the foregoing
Y2K discussion speak only as of the date on which such statements are made,
and the Company undertakes no obligation to update any forward-looking
statement to reflect events or circumstances after the date on which such
statement is made or to reflect the occurrence of unanticipated events.
RISK FACTORS
Cygnus wishes to caution stockholders and investors that the following
important factors, among others, in some cases have affected, and in the
future could affect, Cygnus' actual results and could cause Cygnus' actual
consolidated results for 1999, and beyond, to differ materially from those
expressed in any forward-looking statements made by or on behalf of Cygnus.
The statements under this caption are intended to serve as cautionary
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. The following information is not intended to limit in any way the
characterization of other statements or information under other captions as
cautionary statements for such purpose.
HISTORY OF OPERATING LOSSES; FUTURE CAPITAL REQUIREMENTS
The Company has a limited operating history upon which its prospects can
be evaluated. Such prospects must be considered in light of the substantial
risks, expenses and difficulties encountered by entrants into the medical
device and drug delivery industry. The Company reported a net loss of $14.6
million for the fourth quarter of 1998 and has experienced annual operating
losses since inception. The Company expects to continue to incur operating
losses at least until significant sales, if any, of the GlucoWatch monitor or
the contraceptive patch (which is in phase III clinical trails and is
currently in development with Johnson & Johnson) commence. There can be no
assurance that the Company will generate significant revenues or achieve
profitability. The Company has, and expects to have, fluctuations in
quarterly results based on recognition of collaborative and contract revenues
and expenses. Some of these fluctuations could be significant.
To date the Company has generated limited revenues from product sales
and does not have significant experience in manufacturing, marketing or
selling its products. There can be no assurance that the Company's future
development efforts will result in commercially viable products, that the
Company will be successful in introducing its products, or that required
regulatory clearances or approvals will be obtained in a timely manner, or at
all. There can be no assurance that the Company's products will ever gain
market acceptance or that the Company will continue to generate revenues or
achieve profitability.
The Company's revenues to date have been derived primarily from product
development and licensing fees related to its products under development, as
well as from manufacturing and royalty revenues from the Nicotrol patch and
the FemPatch system. The Company will no longer receive manufacturing revenue
from the Nicotrol patch or the FemPatch system. The Company will, however,
continue to receive royalty payments for the Nicotrol patch. The Company
expects that a substantial portion of its future revenues will be derived, if
regulatory approvals are obtained, from sales of the GlucoWatch monitor and
other products currently under development.
The continued development of the Company's products will require the
commitment of substantial resources to conduct the research, preclinical
development and clinical trials necessary to bring such products to market
and to establish production and marketing capabilities. The Company may seek
additional funding through public or private financings, including debt or
equity financings, and through other arrangements, including collaborative
arrangements. Any additional equity financings may be dilutive to
stockholders and debt financing, if available, may involve restrictions on
dividends and other restrictions on the Company. Adequate funds, whether
through financial markets or collaborative or other arrangements with
corporate partners or from other sources, may not be available when needed
or, if available, on terms acceptable to the Company. Lack of sufficient
additional funds may require the Company to delay, scale back or eliminate
some or all of its research and product development programs or to license
others to commercialize products or technologies that the Company would
otherwise seek to develop itself.
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<PAGE>
The Company believes that its existing cash, cash equivalents and
investments, when coupled with cash from revenues and earnings from
investments, will be sufficient to meet its operating expenses, dept
repayment and capital expenditure requirements at least through 1999. The
amounts and timing of expenditures will depend on the progress of ongoing
research and development, the results of preclinical testing and clinical
trials, the rate at which operating losses are incurred, the execution of any
development and licensing agreements with corporate partners, the Company's
development of products, the FDA regulatory process and other factors, many
of which are beyond the Company's control.
DEPENDENCE ON LICENSEES, DISTRIBUTORS AND COLLABORATIVE ARRANGEMENTS
The Company's business strategy for the development, clinical testing,
regulatory approval, manufacturing and commercialization of its products
depends, in large part, upon the Company's ability to selectively enter into
and maintain collaborative arrangements with licensees and distributors. If
the GlucoWatch monitor is commercialized, the Company will be dependent upon
Yamanouchi Pharmaceutical Co., Ltd. for marketing and distribution of the
GlucoWatch monitor in Japan and Korea. The Company does not currently have
any marketing or distribution agreements for the GlucoWatch monitor other
than the Yamanouchi collaboration. However, the Company is currently involved
in discussions with several companies with regard to the collaboration for
the sales and distribution of the GlucoWatch monitor in the U.S. and Europe.
The Company's licensees and distributors generally have the right to
terminate a product development effort at any time prior to regulatory
approval for any reason without significant penalty. Such cancellations may
result in delays, suspension or abandonment of clinical testing, the
preparation and processing of regulatory filings and product development and
commercialization efforts. Licensees have exercised this right in the past,
and there can be no assurance that current and future licensees or
distributors will not exercise this right in the future.
Since all payments to the Company under its licensing and distribution
agreements following their execution are contingent on the occurrence of
future events or sales levels, and the agreements are terminable by the
licensee or distributor, no assurance can be given as to whether the Company
will receive any particular payment thereunder or as to the amount or timing
of any such payment. In the past some of the Company's licensees,
distributors and collaborators have approached the Company requesting
modification of the terms of existing agreements. If a licensee or
distributor were to cease funding one of the Company's products, Cygnus would
either self-fund development efforts, identify and enter into an agreement
with an alternative licensee or distributor, or suspend further development
work on the product. Additionally, the Company may choose to self-fund
certain research and development projects in order to exploit its
technologies. However, should such Company-sponsored research and development
activities result in a commercial product, the long-term effect on the
Company's results of operations could be favorable. There can be no assurance
that, if necessary, the Company would be able to negotiate an agreement with
an alternative licensee or distributor on acceptable terms. Any increase in
Company-sponsored research and development or sales and marketing activities
will have an immediate adverse effect on the Company's results of operations.
Furthermore, the resources and attention a licensee or distributor
devotes to a product are not within the Company's control. As a result,
there may be delays in clinical testing, the preparation and processing of
regulatory filings and commercialization efforts conducted by the Company's
licensees or distributors. There can be no assurance that one or more of the
Company's licensees or distributors will not, for competitive reasons,
support, directly or indirectly, a company or product that competes with the
Company's product that is the subject of its license or distributor agreement
with the Company. Furthermore, any dispute between the Company and one of
its licensees or distributors might require the Company to initiate or defend
against expensive litigation or arbitration proceedings.
Any termination of any license or distributor arrangement by one of the
Company's licensees or distributors, any inability of a licensee or
distributor to fund or otherwise satisfy its obligations under its
arrangements with the Company and any significant dispute with or breach of a
contractual commitment by a licensee or distributor would likely require the
Company to seek and reach agreement with another licensee or distributor or
to assume, to the extent possible and at its own expense, all the
responsibilities being undertaken by the licensee or distributor. There can
be no assurance that the Company would be able to reach agreement with a
replacement licensee or distributor. If the Company were not able to find a
replacement licensee or distributor, there can be no assurance that the
Company would be able to perform or fund the activities for which such
licensee or distributor is currently responsible. Even if the Company were
able to perform and fund these activities, the Company's capital requirements
would increase substantially. In addition, the further development and the
clinical testing, regulatory approval process, marketing,
26
<PAGE>
distribution and sale of the product covered by such licensee or distributor
would be significantly delayed. (See "Risk Factors -- Limited Marketing and
Sales Experience.")
For the Company to be competitive, it will need to develop, in-license
or acquire new diagnostic and drug delivery products. Furthermore, the
Company's ability to develop and commercialize products in the future will
depend, in part, on its ability to enter into collaborative arrangements with
additional licensees on favorable terms. There can be no assurance that the
Company will be able to enter into new collaborative arrangements on such
terms, if at all. Additionally, there can be no assurance that existing or
future collaborative arrangements will be successful.
Any of the foregoing circumstances could have a material adverse effect
upon the Company's business, financial condition, and results of operations.
DEPENDENCE ON LICENSED PATENT APPLICATIONS AND PROPRIETARY TECHNOLOGY
The Company's success depends in large part on its ability to obtain
patent protection for its products, preserve its trade secrets and operate
without infringing the proprietary rights of others, both in the U.S. and in
other countries. Patent applications in the U.S. are maintained in secrecy
until patents are issued, and since publication of discoveries in the
scientific or patent literature tends to lag behind actual discovery by
several months, Cygnus cannot be certain that it was the first to file patent
applications on such inventions or that it will not infringe third party
patents once issued. No assurance can be made that patents will be issued
with respect to any of the Company's patent applications or that any patents
will provide competitive advantages for its products or will not be
challenged or circumvented by competitors. Cygnus also relies on trade
secrets and proprietary know-how that it seeks to protect, in part, by
confidentiality agreements with its licensees, employees and consultants.
There can be no assurance that these agreements will not be breached, that
the Company would have adequate remedies for any breach or that the Company's
trade secrets will not otherwise become known or be independently developed
by its competitors.
Any litigation, in the U.S. or abroad, as well as foreign opposition
and/or domestic interference proceedings, could result in substantial expense
to the Company and significant diversion of effort by the Company's technical
and management personnel. Litigation may be necessary to enforce patents
issued to the Company or to protect trade secrets or know-how owned by the
Company as well at to defend against infringement charges. A negative
determination in such proceedings in which the Company is a party could
subject the Company to significant liabilities to third parties or require
the Company to seek licenses from third parties. Although patent and
intellectual property disputes in the pharmaceutical product area have often
been settled through licensing or similar arrangements, costs associated with
such arrangements may be substantial and could include ongoing royalties.
Furthermore, there can be no assurance that necessary licenses would be
available to the Company on satisfactory terms, if at all. Accordingly, an
adverse determination in a judicial or administrative proceeding or failure
to obtain necessary licenses could prevent the Company from manufacturing and
selling certain of its products, which would have a material adverse effect
on the Company.
HIGHLY LEVERAGED; ABILITY TO SERVICE DEBT
As of December 31, 1998, the Company had indebtedness of $59.5 million,
including a balance of $22.6 million remaining on its Notes. Through December
31, 1998 $1.9 million of the first tranche of $6.0 million was converted into
equity. In January 1999, the remaining balance of $4.1 million of the
original first tranche of $6.0 million was converted into equity. The degree
to which the Company is leveraged could materially and adversely affect the
Company's ability to obtain financing for working capital, acquisitions or
other purposes and could make it more vulnerable to industry downturns and
competitive pressures. The Company's ability to meet its debt service
obligations will be dependent upon the Company's future performance, which
will be subject to financial, business and other factors affecting the
operations of the Company, many of which are beyond its control. Although the
Company believes its cash flows will be adequate to meet its interest
payments, there can be no assurance that the Company will continue to
generate cash flows in the future sufficient to cover its fixed charges or to
permit the Company to satisfy any redemption obligations pursuant to the
Notes (see below). If the Company is unable to generate cash flows in the
future sufficient to cover its fixed charges or to permit the Company to
satisfy any redemption obligations pursuant to the Notes, and the Company is
unable to borrow sufficient funds either under its credit facilities or from
other sources, it may be required to refinance all or a portion of its
existing debt, to sell all or a portion of its assets, or to sell equity
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<PAGE>
securities. There can be no assurance that a refinancing would be possible,
nor can there be any assurance as to the timing of any asset sales or sales
of equity securities or the proceeds which the Company could realize
therefrom.
The Notes are subordinate in right of payment to all existing and future
Senior Debt (as defined in the First Supplemental Indenture). By reason of
such subordination of the Notes, in the event of insolvency, bankruptcy,
liquidation, reorganization, dissolution or winding up of the business of the
Company or upon default in payment with respect to any Senior Debt of the
Company or an event of default with respect to such indebtedness resulting in
the acceleration thereof, the assets of the Company will be available to pay
the amounts due on the Notes only after all Senior Debt of the Company has
been paid in full. Moreover, holders of Common Stock would only receive the
assets remaining after payment of all indebtedness and preferred stock, if
any.
The Notes are obligations exclusively of the Company. Although the
Company does not currently conduct operations through subsidiaries, it may
elect to do so as products become commercialized. In such event, the cash
flow and the consequent ability to service debt, including the Notes, of the
Company, will be partially dependent upon the earnings of its subsidiaries
and the distribution of those earnings to, or upon loans or other payments of
funds by those subsidiaries to, the Company. The payment of dividends and the
making of loans and advances to the Company by its subsidiaries would be
subject to statutory or contractual restrictions, would be dependent upon the
earnings of those subsidiaries and would be subject to various business
considerations. Any right of the Company to receive assets of any of its
subsidiaries upon their liquidation or reorganization (and the consequent
right of the holders of the Notes [the "Holder(s)"] to participate in those
assets) would be effectively subordinated to the claims of that subsidiary's
creditors (including trade creditors), except to the extent that the Company
is itself recognized as a creditor of such subsidiary, in which case the
claims of the Company would still be subordinate to any security interests in
the assets of such subsidiary and any indebtedness of such subsidiary senior
to that held by the Company. Under certain circumstances, including the
delisting of the Company's securities from the Nasdaq National Market, each
holder of Notes will have the right, at the Holder's option, to require the
Company to repurchase all or a portion of such Holder's Notes at a purchase
price equal to 110% of the principal amount thereof plus accrued interest
thereon to the repurchase date.
LIMITED MARKETING AND SALES EXPERIENCE
The Company has limited experience in marketing or selling medical
device products. In order to successfully market and sell the GlucoWatch
monitor or the Company's other products under development, the Company must
either develop a more extensive marketing and sales force or enter into
arrangements with third parties to market and sell such products. There can
be no assurance that the Company will be able to successfully develop a more
extensive marketing and sales force or that it will be able to enter into
marketing and sales agreements with third parties on acceptable terms, if at
all. If the Company maintains its own marketing and sales capabilities, it
will compete with other companies that have experienced and well-funded
marketing and sales operations. If the Company enters into a marketing
arrangement with a third party for the marketing and sales of the Company's
products, any revenues to be received by the Company from such products will
be dependent on the third party, and the Company will likely be required to a
pay a sales commission or similar amount to such party.
PRODUCT LIABILITY
The design, development, manufacture and use of the Company's products
involve an inherent risk of product liability claims and associated adverse
publicity. Producers of medical products may face substantial liability for
damages in the event of product failure or if it is alleged that the product
caused harm. The Company currently maintains product liability insurance.
Such insurance is expensive and difficult to obtain and may not be available
in the future on acceptable terms or at all. There can be no assurance that
the Company will not be subject to product liability claims, that the
Company's current insurance would cover such claims, or that adequate
insurance will continue to be available on acceptable terms to the Company in
the future. In the event the Company is held liable for damages in excess of
the limits of its insurance coverage, or if any claim or product recall
results in significant adverse publicity against the Company, the Company's
business, financial condition and results of operations could be materially
and adversely affected.
ATTRACTING AND RETAINING KEY EMPLOYEES
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The Company's ability to operate successfully and manage its potential
future growth depends in significant part upon the continued service of
certain key scientific, technical, managerial and finance personnel, and its
ability to attract and retain additional highly qualified scientific,
technical, managerial and finance personnel. The Company faces intense
competition for qualified personnel in these areas, many of whom are often
subject to competing employment offers, and there can be no assurance that
the Company will be able to attract and retain such personnel. The loss of
key personnel or inability to hire and retain additional qualified personnel
in the future could have a material adverse effect on the Company's business,
financial condition and results of operations.
VOLATILITY OF STOCK PRICE
The trading price of the Company's Common Stock is subject to
substantial fluctuations in response to factors such as announcements by the
Company or its competitors of results of regulatory approval filings or
clinical trials or testing, developments or disputes governing proprietary
rights, technological innovations or new commercial products, government
regulatory action, general conditions in the medical technology industry,
changes in securities analysts' recommendations, or other events or factors,
many of which are beyond the Company's control. In addition, the stock market
in general has experienced extreme price and volume fluctuations in recent
years which have particularly affected the market prices of many medical
technology companies and which have been unrelated to the operating
performance of such companies. Fluctuations or decreases in the trading
price of the Company's Common Stock may adversely affect the market for the
Company's Common Stock. In the past, following periods of volatility in the
market price for a company's securities, securities class action litigation
often has been instituted. Such litigation could result in substantial costs
and a diversion of management attention and resources, which could have a
material adverse effect on the Company's business, financial condition and
operating results.
ABSENCE OF DIVIDENDS
The Company has never declared or paid cash dividends on its Common
Stock. The Company's current bank term loan precludes it from paying
dividends to stockholders. The Company currently intends to retain any
earnings for use in its business and therefore does not anticipate paying any
dividends in the future.
NO REVERSE STOCK SPLIT FOR THE COMPANY; NASDAQ CONTINUED LISTING REQUIREMENTS
ACHIEVED
On September 30, 1998, the Company received correspondence from Nasdaq
stating that the Company was not in compliance with the minimum bid price
requirement for continued listing on the Nasdaq National Market. The Company
subsequently demonstrated compliance with the New Nasdaq Listing Requirements
by maintaining a $5.00 minimum closing bid price for the required number of
consecutive trading days.
In January 1999, the Company announced that there will be no reverse
stock split of the Company's common stock. Nasdaq notified the Company on
January 27, 1999 that it had been found to be in compliance with the bid
price requirement as well as all other requirements necessary for continued
listing on the Nasdaq National Market. The Company had received approval from
shareholders, in December 1998, for a three-for-one reverse stock split as a
solution if there was no other recourse in complying with the continued
listing requirements for the Nasdaq National Market; however, the Company has
no current plans to implement the stock split at this time.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates
relates primarily to the Company's investment portfolio and long-term debt
obligations. The Company does not use derivative financial instruments in its
investment portfolio. The Company places its investments with high credit
quality issuers and, by policy, limits the amount of credit exposure to any
one issuer. As stated in its policy, the Company is averse to principal loss
and ensures the safety and preservation of its invested funds by limiting
default risk, market risk and reinvestment risk.
The Company mitigates default risk by investing in only the highest
credit quality securities. The portfolio includes only marketable securities
with active secondary or resale markets to ensure portfolio liquidity.
The Company has no cash flow exposure due to rate changes for its $22.6
million Notes or for the $8.9 million of other liabilities with fixed rates.
The Company also has no cash flow exposure due to the rate change for certain
long-term portions of Company's arbitration obligations as such obligations
are not interest bearing. The Company does have cash flow exposure on its
$9.8 million bank term loan due to its variable pricing. The Company
primarily enters into debt obligations to support general corporate purposes
including capital expenditures and working capital needs.
The table below presents principal amounts and related weighted-average
interest rates by year of maturity for the Company's investment portfolio and
debt obligations.
<TABLE>
<CAPTION>
(dollars in thousands) 1999 2000 2001 Total Fair Value
---- ---- ---- ----- ----------
<S> <C> <C> <C> <C> <C>
ASSETS:
Cash & Cash equivalents
Fixed $ 5,305 --- --- $ 5,305 $ 5,305
Average rate 4.49% --- --- 4.49% ---
</TABLE>
30
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<TABLE>
<S> <C> <C> <C> <C> <C>
Variable rate $ 3,961 --- --- $ 3,961 $ 3,961
Average rate 4.92% --- --- 4.92% ---
Short-term investments
Fixed $ 14,979 --- --- $ 14,979 $ 14,982
Average rate 5.44% --- --- 5.44% ---
Long-term investments
Fixed --- $ 3,613 --- $ 3,613 $ 3,622
Average rate --- 5.7% --- 5.7% ---
Total investments
Securities $ 24,245 $ 3,613 --- $ 27,858 $ 27,870
Average rate 5.15% 5.7% --- 5.63% ---
LIABILITIES:
Total long-term debt, including
current portion
Senior Subordinated
Convertible Notes --- $ 22,563 --- $ 22,563 $ 22,563
Fixed --- 5.5% --- 5.5% ---
Other
Fixed $ 1,357 $ 1,183 $ 6,358 $ 8,898 $ 8,898
Average rate 11.05% 11.27% 6.77% 8.02% ---
Variable rate $ 2,500 $ 2,708 $ 4,583 $ 9,791 $ 9,791
Average rate 8.75% 8.75% 8.75% 8.75% ---
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements for the years ended December 31,
1998, 1997 and 1996 are incorporated herein by reference and 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.
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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 with respect to
Cygnus' 1999 Annual Meeting of Stock Holders to be filed with the Securities
and Exchange Commission within 120 days of December 31, 1998 (the "Proxy
Statement").
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
1999 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 1999 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 Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A for its 1999 Annual Meeting
of Stockholders.
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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, 1998 and 1997 ...................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996 .......................................................... F-5
Consolidated Statement of Stockholders' Equity/(net capital deficiency) for the years ended
December 31, 1998, 1997 and 1996 .......................................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 .......................................................... 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 has recently filed three Current Reports on Form 8-K.
On October 28, 1998, the Company filed a Current Report on Form 8-K
reporting under Item 5 that the Company publicly announced its
earnings for the quarter ended September 30, 1998.
On October 30, 1998, the Company filed a Current Report on Form 8-K
reporting under Item 5 the restructuring of the Company's 4% Senior
Subordinated Convertible Notes due 2005.
On December 3, 1998, the Company filed a Current Report on Form 8-K
reporting under Item 5 that it is to receive $2.726 million from
arbitration proceedings against Pharmacia & Upjohn.
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.
33
<PAGE>
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.
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.
4.7 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.
4.8 Second Supplemental Indenture, dated as of October 28, 1998, by and
between Cygnus, Inc. and State Street Bank and Trust Company of
California, N.A., to the Indenture dated as of February 3, 1998 and
the First Supplemental Indenture dated as of February 3, 1998,
incorporated by reference to Exhibit 4.8 of the Company's Form 8-K
filed on October 30, 1998.
4.9 First Amendment to the Rights Agreement dated October 26, 1998 between
the Company and ChaseMellon Shareholder Services, L.L.C. (the "Rights
Agent" successor to Chemical Trust), incorporated by reference to
Exhibit 99.1 of the Registrant's Form 8-A/A filed on December 14, 1998,
Registration No. 0-18962.
4.10 Amended and Restated Rights Agreement dated October 27, 1998 between
the Company and ChaseMellon Shareholder Services, L.L.C. (the "Rights
Agent" successor to Chemical Trust), 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 99.2 of the Registrant's Form 8A/A filed on
December 14, 1998, Registration No. 0-19962.
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.
34
<PAGE>
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
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 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 Paine Webber. 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 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.
10.28 Form Common Stock Purchase Agreement dated February 2, 1998 between
Cygnus, Inc. and certain institutional investors. Incorporated by
reverence to exhibit 10.29 of the Company's Form 8-K dated
February 4, 1998.
10.29 First Amendment to Ten Year Industrial Net Lease Agreement
(Building No. 2) dated June 9, 1998 between the Registrant and
Metropolitan Life Insurance Company, a New York corporation
(predecessor in interest to Seaport Centre Venture Phase I).
10.30 Third Amendment to Ten Year Industrial Net Lease Agreement
(Building No. 8) dated June 9, 1998 between the Registrant and
Metropolitan Life Insurance Company, a New York corporation
(predecessor in interest to Seaport Centre Venture Phase I).
*10.31 Amendment Agreement to Development, Supply and License Agreement dated
November 17, 1998 between the Registrant and Wyeth-Ayerst, a division
of American Home Products Corporation, a Delaware corporation.
*10.32 Supply and Development Agreement dated May 21, 1998 between the
Registrant and Undisclosed.
35
<PAGE>
*10.33 Amendment No. 1 to Supply and Development Agreement dated August 21,
1998 between the Registrant and Undisclosed
*10.34 Supply Agreement dated June 19, 1998 between the Registrant and E.I.
du Pont de Nemours & Co., a Delaware corporation.
*10.35 Detection of Analytes Product Development and License Agreement dated
June 19, 1998 between the Registrant and E.I. du Pont de Nemours & Co.,
a Delaware corporation.
10.36 Amended and Restated Loan and Security Agreement between the Registrant
and Silicon Valley Bank entered into as of April 30, 1998, incorporated
by reference to exhibit 10.45 of the Company's Form 10-Q for the
quarter ended September 30, 1998.
10.37 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.
10.38 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
10.39 1994 Stock Option / Award Plan, incorporated by reference to
Exhibit 99.1 of the Registrant's Form S-8 Registration Statement
No. 333-18357, filed December 20, 1996.
10.40 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, filed December 20, 1996.
10.41 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.
10.42 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.
10.43 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.
10.44 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.
10.45 Employment Agreement dated May 30, 1992 between the Registrant and
Alan F. Russell.
10.46 1994 Stock Option/Award Plan (As Amended and Restated as of February 24,
1998), incorporated by reference to Exhibit 99.1 o the Company's
Form S-8 Registration Statement No. 333-67331, filed November 16, 1998.
10.47 Amended 1991 Employee Stock Purchase Plan (As Amended and Restated as of
February 24, 1998), incorporated by reference to Exhibit 99.6 of the
Company's Form S-8 Registration Statement No. 333-67331, filed
November 16.1998.
10.48 Plan Amendment Cygnus, Inc. 1994 Stock Option/Award Plan, Incorporated
by reference to Exhibit 99.2 of the Company's Form S-8 Registration
Statement No. 333-67331, filed November 16.1998.
10.49 Form of Special Addendum to Stock Option Agreement (Change in Control),
incorporated by reference to Exhibit 99.3 of the Company's Form S-8
Registration Statement No. 333-67331, filed November 16.1998.
10.50 Form of Special Addendum to Stock Option Agreement (Termination of
Employment Without Cause -- Officers), incorporated by reference to
Exhibit 99.4 of the Company's Form S-8 Registration Statement
No. 333-67331, filed November 16.1998.
10.51 Form of Special Addendum to Stock Option Agreement (Termination of
Employment Without Cause -- Key Employee), incorporated by reference to
Exhibit 99.5 of the Company's Form S-8 Registration Statement
No. 333-67331, filed November 16.1998.
10.52 Written Compensation Agreement between Registrar and Mr. Marion,
incorporated by reference to Exhibit 99.7 of the Company's Form S-8
Registration Statement No. 333-67331, filed November 16.1998.
10.53 Stock Option Agreement between Registrant and Mr. Marion, incorporated
by reference to Exhibit 99.8 of the Company's Form S-8 Registration
Statement No. 333-67331, filed November 16.1998.
10.54 Form of Agreement dated August 28, 1998 between the Company and each of
the Executive officers with respect to post-employment benefits
incorporated by reference to Exhibit 10.46 of the Company's form 10-Q
for the period ended September 30, 1998.
36
<PAGE>
10.55 Form of Agreement between the Company and each of the Executive
officers with respect to post-employment benefits relating to change
of control incorporated by reference to Exhibit 10.46 of the Company's
Form 10-Q for the period ended September 30, 1998.
- ------------
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 40)
25.1 Power of Attorney (see page 39)
27.0 Financial Data Schedule
- ------------
* A confidential treatment request has been applied for or granted with respect
to a portion of this document.
37
<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 30th day of
March, 1999.
CYGNUS, INC.
By: /s/ JOHN C. HODGMAN
-------------------------------------
John C. Hodgman
President and Chief Executive Officer
(Principal Executive Officer)
38
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John C. Hodgman, attorney-in-fact for
the undersigned, 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 said attorney-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 March 30, 1999
- ------------------------------ Technical Officer
Gary W. Cleary, Ph.D.
/s/ JOHN C. HODGMAN President and Chief Executive Officer March 30, 1999
- ------------------------------ (Principal Executive Officer)
John C. Hodgman
/s/ CRAIG W. CARLSON Chief Financial Officer and Senior Vice March 30, 1999
- ------------------------------ President, Finance (Principal Accounting
Craig W. Carlson Officer)
/s/ FRANK T. CARY Director March 30, 1999
- ------------------------------
Frank T. Cary
/s/ ANDRE F. MARION Vice Chairman of the Board of Directors March 30, 1999
- ------------------------------
Andre F. Marion
/s/ RICHARD G. ROGERS Director March 30, 1999
- ------------------------------
Richard G. Rogers
/s/ WALTER B. WRISTON Director March 30, 1999
- ------------------------------
Walter B. Wriston
</TABLE>
39
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated January 19, 1999, except for
the Note 14, as to which the date is February 23, 1999 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 19,
1999, except for the Note 14, as to which the date is February 23, 1999 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,
1998.
Palo Alto, California /s/ ERNST & YOUNG LLP
March 30, 1999
40
<PAGE>
Cygnus, Inc.
Consolidated Financial Statements
For the Years ended December 31, 1998, 1997 and 1996
with
Report of Independent Auditors
F-1
<PAGE>
Cygnus, Inc.
CONSOLIDATED FINANCIAL STATEMENTS
For the Years ended December 31, 1998, 1997 and 1996
Contents
<TABLE>
<S> <C>
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
</TABLE>
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, 1998 and 1997, 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, 1998.
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, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1998, 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 19, 1999, except for the Note 14, as to which
the date is February 23, 1999
/s/ Ernst & Young LLP
F-3
<PAGE>
Cygnus, Inc.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
-------------------------------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 10,219 $ 20,669
Short-term investments 14,982 14,163
Trade accounts receivable, net of allowance (1998 -- $123;
1997 -- $123) 876 2,040
Inventories 771 924
Prepaid expenses and other current assets 510 1,834
Current portion of employee notes receivable 185 154
-------------------------------------
Total current assets
27,543 39,784
EQUIPMENT AND IMPROVEMENTS:
Office and laboratory equipment 18,237 14,856
Leasehold improvements 1,304 885
-------------------------------------
19,541 15,741
Less accumulated depreciation and amortization (13,077) (11,145)
-------------------------------------
Net equipment and improvements 6,464 4,596
Long-term investments 3,622 --
Long-term portion of employee notes receivable 286 301
Deferred compensation and other assets 4,451 4,596
Unamortized portion of the issuance costs of the Senior
Subordinated Convertible Notes 1,088 --
-------------------------------------
Total Assets $ 43,454 $ 49,277
-------------------------------------
-------------------------------------
LIABILITIES AND NET CAPITAL DEFICIENCY:
CURRENT LIABILITIES:
Accounts payable $ 2,585 $ 1,070
Amounts payable to related parties 1,043 224
Accrued clinical trials 831 --
Accrued compensation 4,593 3,298
Accrued professional services 729 842
Other accrued liabilities 943 1,263
Customer advances 207 624
Current portion of arbitration obligation 60 16,223
Current portion of deferred revenue 1,153 1,846
Current portion of long-term debt 3,415 3,767
Current portion of capital lease obligations 442 686
-------------------------------------
Total current liabilities 16,001 29,843
Long-term portion of arbitration obligation 24,158 23,000
Long-term portion of deferred revenue -- 1,188
Long-term portion of debt 8,252 3,812
Long-term portion of capital lease obligations 581 390
Senior Subordinated Convertible Notes 22,563 --
Deferred compensation and other long-term liabilities 4,666 4,844
STOCKHOLDERS' NET CAPITAL DEFICIENCY:
Preferred stock, $0.001 par value: 5,000 shares authorized;
no shares issued and outstanding -- --
Common stock, $0.001 par value: 40,000 shares authorized;
issued and outstanding: 20,886 and 19,273 shares at
December 31, 1998 and 1997, respectively 21 19
Additional paid-in-capital 143,155 122,709
Accumulated deficit (175,955) (136,527)
Accumulated other comprehensive income / (loss) 12 (1)
-------------------------------------
Net capital deficiency (32,767) (13,800)
-------------------------------------
Total liabilities and stockholders' net capital deficiency $ 43,454 $ 49,277
-------------------------------------
-------------------------------------
</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,
1998 1997 1996
-------------------------------------
<S> <C> <C> <C>
REVENUES:
Product revenues $ 587 $ 4,212 $ 17,211
Contract revenues 10,178 14,106 13,085
Royalty and other revenues 890 11,184 5,907
--------------------------------------
TOTAL REVENUES 11,655 29,502 36,203
COSTS AND EXPENSES:
Costs of products sold 3,478 10,413 16,659
Research and development 32,149 22,328 23,165
Marketing, general and administrative 11,730 8,695 9,296
Arbitration settlement --- 39,666 ---
--------------------------------------
TOTAL COSTS AND EXPENSES 47,357 81,102 49,120
Loss from operations (35,702) (51,600) (12,917)
Interest and other income 6,009 2,989 2,851
Interest and other expense (9,735) (1,849) (986)
--------------------------------------
NET LOSS $(39,428) $(50,460) $(11,052)
--------------------------------------
--------------------------------------
BASIC AND DILUTED NET LOSS PER SHARE $ (1.95) $ (2.67) $ (0.60)
--------------------------------------
--------------------------------------
Shares used in computation of basic and diluted
net loss per share 20,226 18,928 18,544
--------------------------------------
--------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
Cygnus, Inc.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY/(NET CAPTIAL DEFICIENCY)
For the Years Ended December 31, 1998, 1997 and 1996
(In thousands)
<TABLE>
<CAPTION>
Accumulated Total
Other Stockholders'
Additional Compre- Equity (net
Common paid-in- Accumulated hensive capital
Stock capital Deficit Income/(loss) deficiency)
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 18 $ 113,248 $ (75,015) $ 1 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 $ 18 $ 117,266 $ (86,067) $ (4) $ 31,213
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Issuance of 258 shares of common stock 1 2,211 -- -- 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 $ 19 $ 122,709 $ (136,527) $ (1) $ (13,800)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Issuance of 3 shares of common stock -- 20 -- -- 20
Issuance of 141 shares of common stock under
the Employee Stock Purchase Plan -- 872 -- -- 872
Issuance of 906 shares of common stock in
fourth public offering, net of issuance
costs of $486 1 13,326 -- -- 13,327
Issuance of 565 shares arising from the
conversion of the Senior Subordinated
Note 1 1,998 -- -- 1,999
Additional paid-in capital arising from the
beneficial conversion feature of the
restructure of the Senior Subordinated
Notes -- 4,230 -- -- 4,230
Change in unrealized gain / (loss) on
investments -- -- -- 13 13
Net loss -- -- (39,428) -- (39,428)
---------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 21 $ 143,155 $ (175,955) $12 $(32,767)
---------------------------------------------------------------------------
---------------------------------------------------------------------------
</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,
1998 1997 1996
------------------------------------
<C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (39,428) $ (50,460) $ (11,052)
Adjustments to reconcile net loss to net cash (used in)/provided by
operating activities:
Depreciation 1,684 1,971 1,861
Amortization 256 768 941
(Gain)/loss on write-down and disposals of equipment (19) 1,350 --
Beneficial conversion feature of restructured Notes 4,230 -- --
Amortization of debt issuance costs 1,561
Other (125) (133) (280)
(Increase)/decrease in assets:
Trade accounts receivables 1,163 5,719 (5,449)
Inventories 153 1,407 (1,953)
Prepaid expenses and other assets 1,454 (3,201) (1,888)
Increase/(decrease) in liabilities:
Accounts payable and other accrued liabilities 2,848 (2,061) 2,325
Accrued compensation 1,295 121 986
Accrued professional services (114) 151 (35)
Customer advances (418) (522) 300
Deferred revenue (1,881) (10,445) 6,646
Arbitration liability (15,005) 39,223 --
Deferred compensation and other liabilities (178) 1,494 1,261
--------- --------- ----------
Net cash used in operating activities (42,524) (14,618) (6,337)
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (3,365) (3,095) (1,515)
Purchases of investments (48,314) (30,148) (31,565)
Maturity and sale of investments 44,073 32,408 31,602
--------- --------- ----------
Net cash used in investing activities (7,606) (835) (1,478)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale and leaseback of assets -- -- 464
Issuance of common stock 14,219 5,444 4,018
Net proceeds from the issuance of Senior Subordinated Convertible Notes 40,351
Proceeds from issuance of long-term debt 6,110 1,331 8,000
Principal payments of Senior Subordinated Convertible Notes (18,500)
Principal payments of long-term debt (2,023) (2,486) (490)
Payment of capital lease obligations (477) (1,315) (1,474)
--------- --------- ----------
Net cash provided by financing activities 39,680 2,974 10,518
--------- --------- ----------
Net increase/(decrease) in cash and cash equivalents (10,450) (12,479) 2,703
Cash and cash equivalents at beginning of year 20,669 33,148 30,445
--------- --------- ----------
Cash and cash equivalents at end of year $10,219 $20,669 $33,148
--------- --------- ----------
--------- --------- ----------
</TABLE>
SEE ACCOMPANYING NOTES.
F-7
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
The Company was incorporated in California in 1985 and was merged into a
Delaware corporation in September 1995. 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: an automatic and continuous glucose monitoring device (the GlucoWatch
monitor) and transdermal drug delivery systems.
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 1998, 1997 and 1996.
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 the Nicotrol patch from Cygnus. FemPatch product
shipments were discontinued in the second quarter of 1998 and in November
1998 the agreement between Warner-Lambert and Sanofi was terminated, which
also terminated the supply agreement between the Company and Warner-Lambert.
Up-front 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 up-front 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.
Two customers provided 60% and 40% of the 1998 product sales and royalty
and other income. In 1997, these two customers provided 84% and 16% of this
revenue, and in 1995 and 1996 one of these customers provided 100% of product
sales and royalty and other income.
Five customers provided 47%, 17%, 11%, 9% and 6% of the 1998 contract
revenues. In 1997, four of these customers provided 33%, 14%, 10% and 10% of
this revenue, and in 1996, three of these customers provided 28%, 25% and 5%
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
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
F-8
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 up-front payments and milestone payments (which are made upon the
occurrence of certain events, such as the filing of the NDA or an ANDA 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, 1998, 1997 and 1996 were approximately
$24,374, $19,242 and $17,657, respectively. Revenues recorded under
arrangements amounted to $10,178, $11,206 and $10,827, 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:
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
------------
<S> <C> <C>
Raw materials $771 $787
Work in process ---- 86
Finished goods ---- 51
------------
$771 $924
------------
------------
</TABLE>
Inventories at December 31, 1998 and 1997 relate to the Company's estrogen
(FemPatch) transdermal product.
F-9
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 patch equipment to
its net realizable value. This write-down was due to the termination of
Nicotrol patch manufacturing by the Company.
DEFERRED COMPENSATION
In 1995, the Company adopted a non-qualified deferred compensation plan.
The Plan was intended to be unfunded and was maintained by the Company
primarily for the purpose of providing deferred compensation for a select
group of management. As of December 31, 1998 and 1997, the Company recorded
$4.3 million and $4.4 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 were directed by
the participants. In January 1999, the Company terminated the plan and the
plan assets will be distributed to participants in the first quarter of 1999.
NET LOSS PER SHARE
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
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
disclose only the pro-forma impact of the fair-value method on net income and
earnings per share. (See Note 4 "Stockholders' Equity.")
NEW ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1998 the Company adopted the Financial Accounting
Standard Board's Statements of Financial Accounting Standards No. 130,
Reporting Comprehensive Income ("FAS 130") and Financial Accounting Standard
No. 131, Disclosure about Segment of an Enterprise and Related Information
("FAS 131") and restated prior years' financial statements to conform to the
above reporting standards.
FAS 130 establishes standards for reporting and displaying comprehensive
income and its components in a full set of general purpose financial
statements. Comprehensive income includes all changes in stockholders' equity
during a period except those resulting from investments by owners and
distributions to owners. The adoption of FAS 130 resulted in revised and
additional disclosure but had no effect on the financial position, results of
operations or liquidity of the Company.
FAS 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. Effective December 31, 1998, the Company adopted
FAS 131. On this basis, the Company has two principal businesses and,
therefore, two reportable business segments: diagnostics and drug delivery.
Segment results are presented on this basis in 1998, as well as retroactively
(see Note 7, "Business Segments"). This new pronouncement does not alter
reported net income.
F-10
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133, Accounting for Derivative
Instruments and Hedging Activities ("FAS 133"). FAS 133 requires all
derivatives to be recorded on the balance sheet at fair value and establishes
special accounting rules for different types of hedges. Adoption of this
statement is required in the year ending December 31, 2000 and is not
expected to have a material impact on Company's results of operations or
financial condition.
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 high credit quality,
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.
F-11
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
For the years ended December 31, 1998 and 1997 the net realized gains and
losses on available-for-sale securities were immaterial.
As of December 31, 1998 and 1997 all debt securities are classified as
available-for-sale. The following is a summary of available-for-sale
securities as of December 31, 1998 and 1997:
<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, 1998:
Cash Equivalents:
Money Market Fund $ 3,961 $ -- $ -- $ 3,961
Certificate of Deposit 4,000 -- -- 4,000
Federal Agency Security, due in less
than ninety days 1,305 -- -- 1,305
------- ---- ---- -------
Total Cash Equivalents $ 9,266 $ -- $ -- $ 9,266
------- ---- ---- -------
------- ---- ---- -------
Short-Term Investments:
Federal Agency Securities 2,290 3 -- 2,293
Auction Rate Certificates 11,049 -- -- 11,049
Corporate Notes 1,640 -- -- 1,640
------- ---- ---- -------
Total Short-Term Investments $14,979 $ 3 $ -- $14,982
------- ---- ---- -------
------- ---- ---- -------
Long-Term Investments:
Federal Agency Securities 3,613 11 (2) 3,622
------- ---- ---- -------
Total Long-Term Investments $ 3,613 $ 11 $ (2) $ 3,622
------- ---- ---- -------
------- ---- ---- -------
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
------- ---- ---- -------
------- ---- ---- -------
</TABLE>
All cash equivalents and investments as of December 31, 1998 and 1997 have
maturity dates of less than twenty-one months and one year, respectively.
F-12
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3: CREDIT LINE AND LEASES
In December 1994, the Company borrowed $1.7 million under a bank line of
credit to finance the purchase of manufacturing and research equipment. In
June of 1996, the Company received $8.0 million under a bank loan agreement
for short-term working capital. In April of 1998, the Company consolidated
its two outstanding bank loans into an expanded credit facility with the same
bank. An additional $4.7 million was borrowed, increasing the total
outstanding under the new agreement to $10.0 million. In November of 1998,
the April agreement was further amended to modify the covenants. This balance
will be repaid through November 2001, with monthly interest-only payments
through November 1998, and monthly principal-and-interest installments
thereafter. As of December 31, 1998 there is $9.8 million outstanding under
this agreement. The line bears interest at one percentage point above the
prime rate (8.75% in total as of December 31, 1998). In June 1997, the
Company entered into a loan agreement for $1.3 million 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 assets. This
loan is being repaid monthly through June 2000. As of December 31, 1998,
there was $0.7 million outstanding. In the second quarter of 1998, the
Company entered into a new loan agreement for $1.4 million to finance
additional capital equipment. Borrowings under this agreement are also
secured by specific Company assets. As of December 31, 1998, there was $1.2
million outstanding. All loan agreements are subject to certain financial
covenants, including minimum cash balances and tangible net worth. If certain
of these covenants are not met, the lenders may require collateral of the
amounts outstanding. 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 $5,490 and $5,065 on December 31, 1998 and 1997, respectively, with
related accumulated amortization of approximately $4,806 and $4,275 on
December 31, 1998 and 1997, respectively. Upon the expiration of the lease,
the Company has purchase options for the leased equipment at market value. As
of December 31, 1998, there was $1,023 outstanding. This lease agreement has
certain financial covenants, including minimum cash balance. If certain of
these covenants are not met, the leasing company may require collateral of
the amounts outstanding. In the event of default, the leasing company can
accelerate all amounts due.
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, 1998, are as follows:
<TABLE>
<CAPTION>
LONG-TERM DEBT CAPITAL LEASES
-------------- --------------
<S> <C> <C>
Years ending December 31,
1999 $ 3,415 $ 555
2000 3,450 495
2001 4,802 145
------- ------
Total principal and minimum lease payments, respectively $11,667 1,195
-------
-------
Less amount representing interest 172
------
Present value of net minimum lease payments 1,023
Current portion 442
------
Amounts due after one year $ 581
------
------
</TABLE>
The fair market value of the long-term debt approximates its carrying
value of $11,667.
The Company leases its facilities under a non-cancelable operating lease
for three of its four buildings expiring in 2003. 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
October 1999.
F-13
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3: CREDIT LINE AND LEASES (CONTINUED)
Minimum future rental commitments under the operating leases on December
31, 1998 amount to $1,941 in 1999, $1,904 in 2000, $1,954 in 2001, $2,015 in
2002, and $2,078 in 2003. Rent expense amounted to $1,064, $1,020, and
$1,013, for the years ended December 31, 1998, 1997, and 1996, 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 PaineWebber 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, as Amended and Restated as of February 24,
1998 (the "Stock Purchase Plan") to provide employees with an opportunity to
purchase Common Stock of the Company through payroll deductions. A total of
925 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 1998 and 1997, 116 and 64 shares, respectively, were issued
under the Stock Purchase Plan, and at December 31, 1998, 362 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 a 1994 Stock Option/Award Plan, as Amended and Restated
as of February 24, 1998 (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 7,916 Common Shares, of
which 1,402 are available for grant at December 31, 1998. 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 generally 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.
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 Stock Purchase Plan were estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1998, 1997 and 1996: risk-free interest rate
of 4.25%, 5.41% and 6.125%, respectively; a dividend yield of 0.0%;
volatility factors of the expected market price of the Company's common stock
of .78, .66, and .68, respectively; and a weighted-average expected life of
the option of 5 years.
F-14
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4: STOCKHOLDERS' EQUITY (CONTINUED)
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:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Pro forma net loss $(44,898) $(54,691) $(13,653)
Pro forma loss per share $ (2.22) $ (2.89) $ (0.74)
</TABLE>
The effects on pro forma disclosures of applying FAS 123 are not likely
to be representative of effects on pro forma disclosures of future years
because FAS123 is applicable only to options granted subsequent to
December 31, 1994.
F-15
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4: STOCKHOLDERS' EQUITY (CONTINUED)
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, 1998, is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING EXERCISABLE
- ----------------- ------------------------------------- -------------------------
Number Weighted Weighted Number Weighted
Outstanding Average Average Exercisable Average
Range of Exercise at Year-end Remaining Exercise at Year-end Exercise
Prices (000) Contractual Price (000) Price
Life
- ----------------- ------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C>
$ 3.25 - $ 3.25 881 6.31 $3.25 0 0
$ 4.25 - $ 7.000 588 6.11 $6.7695 539 $ 6.8934
$ 7.25 - $10.75 606 5.53 $9.1055 541 $ 9.0473
$11.00 - $14.375 442 8.04 $13.8119 229 $14.1384
$14.500 - $14.500 594 8.44 $14.5000 338 $14.5000
$14.750 - $15.625 454 4.27 $15.5668 428 $15.5940
$15.84 - $18.000 449 7.74 $16.9533 168 $16.4855
$18.1250 - $22.625 413 7.56 $20.4436 269 $20.7817
------- -------
$ 3.25 - $22.625 4,427 6.69 $11.3393 2,512 $12.6510
</TABLE>
<TABLE>
<CAPTION>
OPTION ACTIVITY SUMMARY FOR THE YEAR ENDED DECEMBER 31:
---------------------------------------------------------------------
1998 1997 1996
--------------------- ---------------------- ---------------------
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 3,277 $13.2569 2,432 $11.81 2,372 $ 9.66
Granted 1,458 $ 7.717 1,346 $14.96 486 $19.78
Granted outside Plan 20 $ 3.25 ---- ---- ---- ----
Exercised (25) $ 8.5055 (258) $ 8.35 (333) $ 8.41
Forfeited (303) $14.356 (243) $13.24 (93) $10.75
----- ----- -----
Outstanding at end of year 4,427 $11.3393 3,277 $13.27 2,432 $11.81
----- -------- ----- ------ ----- ------
----- -------- ----- ------ ----- ------
Exercisable at end of year 2,512 $12.6510 1,627 $11.89 1,350 $10.90
----- -------- ----- ------ ----- ------
----- -------- ----- ------ ----- ------
Weighted-average fair value of
Options granted during the year $7.717 $7.13 $9.54
</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, 1998, 1997 and 1996, no
shares were subject to repurchase.
F-16
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4: STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At December 31, 1998, the total number of shares of Common Stock reserved
for issuance under all stock plans was 6,190.
F-17
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(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, 1998 and 1997 are as follows:
YEAR ENDED DECEMBER 31,
1998 1997
---- ----
Net operating loss carryforwards $ 46,000 $ 25,900
Research and development credits 3,600 2,400
Reserves and accruals 4,500 4,100
Capitalized R&D 7,900 5,700
Arbitration obligation 10,000 15,800
Other -- net 2,700 3,400
----------------------
Total deferred tax assets $ 74,700 $ 57,300
Valuation allowance for deferred tax assets (74,700) (57,300)
----------------------
Net deferred tax assets $ 0 $ 0
----------------------
----------------------
The valuation allowance for the deferred tax assets increased by $17.4
million and $19.8 million during the years ended December 31, 1998 and
December 31, 1997, respectively. Approximately $3.2 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, 1998, the Company had federal net operating loss and
research and development tax credit carryforwards of approximately $131
million and $2.4 million, respectively. The Company had state net operating
loss and tax credit carryforwards of approximately $19.8 million and $1.9
million, respectively. These carryforwards will expire at various dates
beginning in 1999.
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>
1998 1997 1996
--------------------------------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Interest paid $ 2,834 $ 1,631 $ 844
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES
Equipment purchased under capital leases $ --- $ --- $ 464
Unrealized gain/(loss) on investments $ 12 $ 3 $ (5)
</TABLE>
F-18
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7: BUSINESS SEGMENTS
The Company operates in two business segments: diagnostics and drug
delivery. Both segments are engaged in development and manufacture, utilizing
proprietary technologies to satisfy unmet medical needs cost effectively. The
segments are strategic business units managed separately based on the
differences in the technologies of their respective product lines.
The diagnostics division's efforts are primarily focused on an automatic
and continuous glucose monitoring device, the GlucoWatch automatic glucose
monitor. The GlucoWatch monitor is designed to take frequent measurements,
thus providing an abundance of glucose data to potentially better control
fluctuating glucose levels. The Company believes its proprietary extraction
and sensing technologies provide the potential to develop unique products for
glucose monitoring which could lead to improved treatment for people with
diabetes.
The drug delivery division's efforts are focused primarily on transdermal
drug delivery systems, which provide for the controlled release of drugs
directly into the bloodstream through intact skin. Cygnus' transdermal
technology is based on the objective of making transdermal products less
irritating, more comfortable and longer to wear for the patient. The Company
has received FDA approval for two products and has a number of others in
late-stage development, including two hormone replacement therapy products
and a contraceptive product.
The accounting policies of the business segments are the same as those
describe in the summary of significant accounting policies. The Company does
not currently have a measure of interest income or interest expense by
business segment. There are no reconciling items between total segment
revenues and profit and (loss) and consolidated results. The Company utilizes
the following information for the purpose of making decisions and assessing
segments' performance.
<TABLE>
<CAPTION>
BUSINESS SEGMENTS
---------------------------------------------
1998 DIAGNOSTICS DRUG DELIVERY CORPORATE TOTAL
---- ----------- ------------- ---------------
<S> <C> <C> <C>
Revenue $ 457 $ 11,198 $ 11,655
Profit/(loss) (40,030) 602 (39,428)
Depreciation and amortization 969 971 1,940
Other significant items:
Beneficial conversion costs 4,230 ---- 4,230
Identifiable assets 39,130 4,324 43,454
Expenditure for long lived assets $ 2,834 $ 531 $ 3,365
1997
----
Revenue $ 2,146 $ 27,356 $ 29,502
Profit/(loss) (15,083) (35,377) (50,460)
Depreciation and amortization 1,230 1,509 2,739
Other significant items:
Arbitration settlement ---- (39,666) (39,666)
Writedown of assets 15 1,275 1,290
Identifiable assets 42,955 6,322 49,277
Expenditure for long lived assets $ 2,577 $ 518 $ 3,095
1996
----
Revenue $ 2,712 $ 33,491 $ 36,203
Profit/(loss) (8,405) (2,647) (11,052)
Depreciation and amortization 757 2,045 2,802
Identifiable assets 53,750 15,048 68,798
Expenditure for long lived assets $ 791 $ 724 $ 1,515
</TABLE>
F-19
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7: BUSINESS SEGMENTS (CONTINUED)
All segmental revenues have been generated in the U.S. and the Company
currently does not have any long lived assets outside the U.S.
NOTE 8: SENIOR CONVERTIBLE NOTES
In February 1998, the Company entered into Note Purchase Agreements with
certain institutional investors to issue and sell approximately $43 million
of 4% Senior Subordinated Convertible Notes due 2005 (the "Notes"). On
October 28, 1998, the Company restructured the Notes. Key provisions in the
restructured Notes include the October 1998 repayment of $18.5 million in
principal (reducing the principal balance from $43 million to $24.5 million),
a delay in the convertibility of the majority of the Notes to June 30, 1999
or after, modification of conversion prices of the Notes, the ability of the
Company to redeem at par at any time all or part of the new principal amount
of the Notes, an increase in the interest rate to 5.5% paid annually on the
new principal balance and the change in the final maturity of the Notes to
October 1, 2000.
Under the terms of the restructured Notes, all of the remaining $24.5
million principal amount of the Notes are redeemable by the Company at par
including accrued interest. $18.5 million of the Notes will not be
convertible into Common Stock by the Note Holders until June 30, 1999. The
restructured Notes are divided into three tranches. The first tranche had a
original principal amount of $6 million and was convertible in whole or in
part into Common Stock at any time, at a price that was fixed until June 30,
1999 ($3.54), and was subject to a potential upward adjustment on February 1,
1999 based on certain market formulas. As of December 31, 1998, $1.9 million
of the first tranche had been converted into Common Stock. The balance of the
first tranche was fully converted in January 1999. The second tranche also
has an original principal amount of $6 million and cannot be converted into
Common Stock until June 30, 1999, at which time it becomes convertible in
whole or in part. On June 30, 1999, the conversion price of the second
tranche will be $6.89, which was established on February 1, 1999, based on
the average of closing bid prices using a fifteen trading days look-back from
February 1, 1999. Subsequent to June 30, 1999, the conversion price of the
second tranche will be determined based on other market formulas containing
certain look-back provisions. The third tranche of the restructured notes has
an original principal amount of $12.5 million and cannot be converted into
Common Stock until July 1, 1999 at a conversion price that will be determined
based on market based pricing formulas which contain look-back provisions.
Beginning July 1, 1999, no more than 15% of the second and third tranches
may be converted per calendar month at conversion prices which reflect
market based formulas. Such formulas contain components based on various
averages of closing bid prices and low trading prices during fifteen or ten,
as the case may be, trading days look-back periods from various dates. Any
portions of the 15% monthly amounts of the second and third tranches that are
not converted in the relevant month may be rolled over for conversion in
future months. If the Company calls the second tranche of Notes ($6 million)
for redemption before February 1, 1999, the Note Holders will be entitled to
convert not more than 50% of such notes called before the redemption occurs.
No such call was made by the Company prior to February 1, 1999. If the
Company calls the third tranche of Notes ($12.5 million) for redemption
before July 1, 1999, the Note Holders will not be entitled to convert any
portion of such tranche so called. The Note Holders will otherwise be
entitled to convert Notes called for redemption before the redemption occurs,
at conversion prices based on market formulas.
The terms of the restructured Notes contained beneficial conversion
features relative to the first tranche which resulted in a non-cash charge to
earnings of $4.2 million. Future tranches of the restructured Notes may also
have similar beneficial conversion features. Such beneficial features, if
any, are contingent upon future events including timing of conversion and
market prices at the time of conversion and accordingly the Company is not
able to estimate any potential charges at this time.
F-20
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9: 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 $4.0 million with these companies in
1998, and this amount is expected to increase in 1999. As of December 31,
1998, $1.0 million was payable to these companies, and the Company had
outstanding purchase commitments to one of these companies totaling $0.9
million.
NOTE 10: COMMITMENTS
As of December 31, 1998, the Company had non-cancelable purchase orders
totaling $0.9 million with a single vendor for the construction of
manufacturing equipment to be used to produce components of the GlucoWatch
system.
NOTE 11: CONCENTRATION OF CREDIT RISK
The Company maintains its cash, cash equivalents and 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.
As of December 31, 1998, approximately 97% of the trade accounts
receivable are due from three customers. The remaining balance of the trade
accounts receivable are due from two customers, all of which are large
pharmaceutical companies. As of December 31, 1997, approximately 90% of the
trade accounts receivable were due from two customers. The remaining balance
of the trade accounts receivable were due from four customers, all of which
were large pharmaceutical companies. Generally, the Company does not require
any collateral on receivable balances.
NOTE 12: EMPLOYEE BENEFIT PLAN
The Company has a defined contribution benefit plan (the "Plan") covering
substantially all employees. The Plan provides for employee contributions up
to 15 percent of their annual pre-tax compensation or to a maximum of 17
percent of the combined pre-tax and after-tax compensation, as defined in the
Plan. The Plan provides for the Company to match a portion of the
contributions. For the years ended December 31, 1998 and 1997, the Company
incurred defined contribution expense of $0.1 million and $0.08 million,
respectively.
NOTE 13: LEGAL PROCEEDINGS
On November 20, 1998, the American Arbitration Association issued the
final award on the arbitration proceedings between Cygnus and Pharmacia &
Upjohn ("Pharmacia") relating to the Nicotrol patch, Cygnus' smoking
cessation patch. Pursuant to the findings from the arbitration proceedings,
Cygnus was awarded $4.3 million for prevailing in some of its claims and
Pharmacia was awarded $1.6 million for prevailing in some of its claims.
Accordingly, Cygnus realized a net amount of $2.7 million. By way of
background, Cygnus initiated these proceedings in May 1997 based on the
agreement between Cygnus and Pharmacia, which provided that Pharmacia would
be obligated to pay Cygnus for, among other things, existing inventory costs
and certain purchase order commitments. Pharmacia disputed their obligations
regarding certain of the inventory costs and certain purchase order
commitments. In March 1998, Pharmacia added a counterclaim against Cygnus in
the arbitration, seeking approximately $1.5 million in reimbursement for an
alleged overpayment in royalties for Nicotrol units shipped in 1996 and 1997.
Cygnus' claim and Pharmacia's counterclaim commenced on June 15, 1998 before
a panel of the American Arbitration Association. This final and unappealable
decision settles all claims and counterclaims submitted to this Arbitration
by the Parties.
NOTE 14: SUBSEQUENT EVENTS
On February 23, 1999 a warrant to purchase 120 shares of Common Stock was
issued to Petkevich and Partners, LLC for services rendered in providing
financing advice. Sixty (60) shares can be purchased at $0.01 (one cent) per
share prior to March 2, 1999 by Petkevich and Partners, LLC and 60 shares at
$3.25 per share prior to November 1, 1999. The warrant and shares have not
been registered under the Securities Act of 1933. On February 26, 1999,
Petkevich and Partners, LLC exercised the warrant to purchase 60 shares at
the exercise price of $0.01 (one cent) per share of the outstanding warrant.
F-21
<PAGE>
SCHEDULE II
CYGNUS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Deducted from asset accounts:
Allowance for doubtful accounts $ 123 $ -- $ -- $ -- $ 123
Warranty reserve 435 -- -- -- 435
---------------------------------------------------------------------
$ 558 $ -- $ -- $ -- $ 558
---------------------------------------------------------------------
---------------------------------------------------------------------
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
---------------------------------------------------------------------
---------------------------------------------------------------------
</TABLE>
S-1
<PAGE>
Exhibit 10.29
FIRST AMENDMENT TO TEN-YEAR INDUSTRIAL NET LEASE AGREEMENT
(Building No. 2)
This First Amendment to Office Lease ("Amendment") is entered into,
and dated for reference purposes, as of June 9, 1998 by and between
METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation (herein referred
to as "Metropolitan" or "Landlord"), as Landlord, and CYGNUS, INC., a
Delaware corporation (herein referred to as "Cygnus" or "Tenant"), with
reference to the following facts:
RECITALS
A. Metropolitan's predecessor in interest as Landlord (Seaport
Centre Venture Phase I, a California general partnership, herein, the
"Venture") and Tenant's predecessor in interest as Tenant (Cygnus Research
Corporation, a California corporation) entered into that certain written
Lease dated September 27, 1988 (the "Lease"), for certain premises of
approximately 37,856 square feet of space in Building 2 of Phase I ("Building
2 Space"), whose current street address remains 400 Penobscot Drive, Redwood
City, California, all as more particularly described in the Lease, which
Lease included Rider No. 1 To Seaport Centre Standard Lease and Exhibits A,
A-1& B, but did not include any Exhibit C which was inapplicable and was
mistakenly listed as an attachment.
B. Met acquired and holds the interest of Landlord under the
Lease.
C. Landlord and Tenant now desire to provide for extension of the
term of the Lease of the entire Premises and other amendments of the Lease,
all as more particularly provided herein.
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants set forth herein and of other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto
agree as follows:
SECTION 1. DEFINED TERMS; PREMISES. All capitalized terms not
otherwise defined in this Amendment have the meanings set forth in the Lease
unless the context clearly requires otherwise. The term "Landlord" as used
herein shall have the same meaning as and may be used interchangeably with
the term "Lessor" in the Lease, and the term "Tenant" as used herein shall
have the same meaning as and may be used interchangeably with the term
"Lessee" in the Lease. As used herein, the term "Premises" shall mean the
Building 2 Space.
SECTION 2. TENANT'S INTEREST UNDER THE LEASE. Tenant represents
and warrants and agrees that: (i) Tenant occupies the Premises and is the
Tenant under the Lease; (ii) Tenant is the successor in interest to Cygnus
Research Corporation, a California corporation, and as such is the assignee
of the interest of Tenant under the Lease, has assumed, or hereby assumes,
the obligations of Tenant under the Lease, and holds all right, title and
interest of Tenant under the Lease; (iii) has not entered into any assignment
of the Lease, and no sublease or other agreement for use or occupancy of the
Premises or any part thereof is in effect. Tenant's obligations with respect
to the representations, warranties and agreements under this Section survive
the expiration or sooner termination of the Term of the Lease and of this
Lease.
SECTION 3. EXTENSION OF TERM. Landlord and Tenant acknowledge and
agree that notwithstanding any provision of the Lease to the contrary, the
Term of this Lease expires on December 10, 1998, and that the Term is hereby
extended for the "Extended Term" commencing on December 11, 1998 (the
"Extended Term Commencement Date") and expiring on December 10, 2003, unless
sooner terminated pursuant to the terms of the Lease. This extension is with
respect to the entire Premises. This extension is further upon and subject
to the same conditions, terms, covenants and agreements contained in the
Lease except as otherwise provided in this Amendment. Landlord and Tenant
acknowledge and agree that this Amendment provides all rights and obligations
of the parties with respect to extension of the Term, whether or not in
accordance with any other provisions, if any, of the Lease regarding renewal
or extension, and
<PAGE>
without limiting the generality of the foregoing, Tenant and Landlord
acknowledge and agree that the Option to Renew Lease Term set forth in
Paragraph 2(b) of the Lease is null, void and of no force or effect, and that
any extension beyond the Extended Term is governed by the Option to Extend
set forth in Section 13 below.
SECTION 4. PREMISES LEASED "AS-IS"; CONSTRUCTION
(a) AS-IS. Notwithstanding any provision of the
Lease to the contrary, Tenant acknowledges and agrees that (i) Tenant
occupies the Premises and has investigated their condition to the extent
Tenant desires to do so; (ii) Tenant hereby agrees that this Lease is of the
Premises in its "AS IS" condition; (iii) no representation regarding the
condition of the Premises or Building 2 has been made by or on behalf of
Landlord; and (iv) Landlord has no obligation to remodel or to make any
repairs (except as otherwise provided for in the Lease), alterations or
improvements to the Premises or the building in connection with this
Amendment or provide Tenant any allowance for any work by Tenant except to
the extent of Landlord's Maximum Contribution, as provided below.
(b) TENANT WORK GENERALLY. Landlord and Tenant
acknowledge and agree that notwithstanding any provisions of the Lease to the
contrary: (i) Tenant may desire to do certain repainting, recarpeting,
remodeling, repair, improvement or alteration in connection with this
Amendment, which for purposes of this Lease is referred to as the Tenant
Work; (ii) all Tenant Work, if any, shall be done as alterations, additions
or improvements of the Premises or any part thereof within the meaning of
Paragraph 11 of the Lease ("Tenant Alterations"), subject to and in
compliance with all conditions and provisions of the Lease applicable to
Tenant Alterations, except as otherwise expressly provided herein; (iii) if
the aggregate cost of the Tenant Work does not exceed the amount of
Landlord's Maximum Contribution (defined below), Tenant shall not be required
to obtain a completion and lien indemnity bond for it; and (iv) such work,
including all design, plan review, obtaining all approvals and permits, and
construction shall be at Tenant's sole cost and expense, except to the extent
reimbursable out of Landlord's Maximum Contribution as provided below.
(c) LANDLORD'S MAXIMUM CONTRIBUTION. Landlord's
Maximum Contribution shall mean an amount up to a maximum of One Hundred and
Thirteen Thousand Five Hundred and Sixty-eight Dollars ($113,568.00) to
reimburse Tenant for the actual costs of design, plan review, obtaining all
approvals and permits, and construction of such Alterations (i) for the
Premises, and/or (ii) for Alterations to Tenant's "Building 8 Space", at 701
Galveston Street, Redwood City, California, or "Building 3 Space" at 501
Chesapeake Street, Redwood City, California as both are defined and provided
for in that certain third amendment of that certain Related Lease (as defined
in the Lease) being executed concurrently herewith ("Related Amendment"),
except for the additional amount of Landlord's Maximum Contribution provided
in the Related Amendment. In no event shall the Landlord's Maximum
Contribution be used to reimburse any costs of designing, procuring or
installing in the Premises any trade fixtures, movable equipment, furniture,
furnishings, telephone equipment, cabling for any of the foregoing, or other
personal property (collectively "Personal Property" for purposes of this
Rider) to be used in the Premises by Tenant, and the cost of such Personal
Property shall be paid by Tenant. Landlord's Maximum Contribution pursuant to
this Amendment and that payable under the Related Amendment shall together be
payable by Landlord to Tenant no more often than three times and no more
often than one application every thirty (30) days, and otherwise follows:
(a) for costs based upon the percentage of work completed prior to the date
of application; and (b) in each case, any amount so payable shall be paid
within 30 days after Landlord's receipt of Tenant's complete application for
payment, which application shall include reasonable substantiation of costs
incurred by Tenant, conditional lien releases to the extent of work
completed, and full, final and unconditional lien releases upon completion of
all Alterations (or, if the work is done under separate contracts or in
smaller separate identifiable segments or phases, then upon completion of and
with respect to each separate contract or phase). Tenant shall keep full and
correct accounts and shall exercise such control as may be necessary or
appropriate for the proper financial management of the construction of the
Alterations separately identified as to each of the Premises, the Building 8
Space and the Building 3 Space and, if the work is done under separate
contracts or in smaller separate identifiable segments or phases, then with
respect to each separate contract or phase. Provided further, Tenant must
prior to October 1, 1999 submit
<PAGE>
all written applications with the items required above for disbursement or
reimbursement for any reimbursable costsout of the Landlord's Maximum
Contribution, and to the extent of any funds for which application has not
been made prior to that date or if and to the extent that the reimbursable
costs of the Tenant Work are less than the amount of Landlord's Maximum
Contribution, then Landlord shall retain the unapplied or unused balance of
the Landlord's Maximum Contribution and shall have no obligation or liability
to Tenant with respect to such excess.
SECTION 5. MONTHLY BASE RENT FOR EXTENDED TERM COMMENCING UPON
EXTENDED TERM COMMENCEMENT DATE. Notwithstanding any provision of the Lease
to the contrary, the amount of monthly base rent due and payable by Tenant
for the Premises, accruing on and after the Extended Term Commencement Date
and monthly thereafter for the Extended Term shall be as follows:
<TABLE>
<CAPTION>
Period from/through Monthly Total Monthly Rate/Square Foot
<S> <C> <C>
12/11/1998 - 12/10/1999 $83,283.20 $2.20
12/11/1999 - 12/10/2000 $85,933.12 $2.27
12/11/2000 - 12/10/2001 $88,204.48 $2.33
12/11/2001 - 12/10/2002 $90,854.40 $2.40
12/11/2002 - 12/10/2003 $93,882.88 $2.48
</TABLE>
SECTION 6. TENANT'S SHARE OF OPERATING EXPENSES. Landlord and
Tenant desire to set forth with greater particularity the components of
operating expenses pursuant to Paragraph 7 of the Lease, and Tenant's
proportionate share of such operating expenses allocated to Building 2, to
Phase I and to the Project (defined below). Notwithstanding any provision of
the Lease to the contrary, during the Extended Term in addition to the base
rent payable by Tenant, Tenant shall pay Tenant's proportionate share of all
operating expenses as set forth below. Operating expenses and exclusions
therefrom are as defined in the Lease, except as otherwise provided below.
Operating Expenses are not limited by references to the building in Paragraph
7 of the Lease, but are determined with respect to and as allocable to the
building in which the Premises is located, to Phase I and to the Project, and
Tenant shall pay its proportionate share of such operating expenses, as
follows:
(i) Tenant's proportionate share of Building Operating
Expenses (defined below) of and attributable to Building 2 as of the
date hereof equals one hundred percent (100%);
(ii) Tenant's proportionate share of Project Operating
Expenses (defined below) is the percentage obtained by dividing the
aggregate rentable square footage of the Premises located in the Project
(defined below) by the total rentable square footage of the Project, and
as of the date hereof equals seven and 44/1000 percent (7.044%);
(iii) Tenant's proportionate share of Phase Operating Expenses
(defined below) of and attributable to Phase I, in which Building 2 is
located, is the percentage obtained by dividing the aggregate rentable
square footage of the Premises located in Phase I by the total rentable
square footage of Phase I, and as of the date hereof equals twelve and
542/1000 percent (12.542%);
(iv) operating expenses of and attributable to each building
in which the Premises or part thereof is located includes all operating
expenses that are directly and separately identifiable to the operation,
maintenance or repair of such building and may also be referred to as
"Building Operating Expenses" for each such building. Tenant's
proportionate share of Building Operating Expenses is the percentage
obtained by dividing the rentable square footage of the Premises located
in each building by the total rentable square footage of such building;
(v) operating expenses of and attributable to the Project
("Project Operating Expenses") includes all operating expenses with
respect to the Project (defined below) that are not included as Phase
Operating Expenses (defined below) and that are not either Building
Operating
<PAGE>
Expenses or operating expenses directly and separately identifiable to
the operation, maintenance or repair of any other leasable building
located in the Project, but Project Operating Expenses includes
operating expenses allocable to any areas of a building during such
time as such areas are made available by Landlord for the general
common use or benefit of the tenants of the Project, and their
employees and invitees, or the public, as such areas currently exist
and as they may be changed from time to time. As of the date hereof,
"Project" means and consists of Phase I and Phase II of the
development commonly known as Seaport Centre in Redwood City,
California, and any expenses allocable to either pursuant to any
covenants, conditions and restrictions, or any reciprocal easements,
or any owner's association now or hereafter affecting them. In the
event any building is added to or deleted from Tenant's Phase or any
Phase is added to or deleted from the Project which affects tenant's
proportionate share of either or both, Landlord shall recalculate
tenant's proportionate share as applicable;
(vi) operating expenses of a Phase ("Phase Operating
Expenses") may include operating expenses that are directly and
separately identifiable to the operation, maintenance or repair of each
leasable building located in that Phase (including but not limited to
Building Operating Expenses) and may include Project Operating Expenses
that are separately identifiable to a Phase; and
(vii) Landlord shall have the right to allocate a particular
operating expense as Building Operating Expenses, Project Operating
Expenses or Phase Operating Expenses; however, in no event shall any
portion of Building Operating Expenses, Project Operating Expenses or
Phase Operating Expenses be assessed or counted against Tenant more than
once.
SECTION 7. UTILITIES. Landlord and Tenant desire to set forth
with greater particularity the allocation of utilities expenses pursuant to
Paragraph 8 of the Lease, and Tenant's proportionate share of such operating
expenses allocated to the building in which the Premises is located, to Phase
I and to the Project. Notwithstanding any provision of the Lease to the
contrary, excluding all utilities separately billed or metered to Tenant
which shall be paid for solely and separately by Tenant, during the Extended
Term in addition to the base rent and operating expenses payable by Tenant,
Tenant shall pay Tenant's proportionate share of all utilities expenses as
allocated and paid in the same proportionate share as set forth in Section 6
of this Amendment regarding operating expenses.
SECTION 8. SECURITY DEPOSIT. Notwithstanding any provision of
Paragraph 6 of the Lease to the contrary, Landlord and Tenant acknowledge and
agree that: (a) as of the date hereof the only Security Deposit under the
Lease held by Landlord is the security deposit of Thirty Thousand Five
Hundred and Sixty-two Dollars ($30,562.00) held under the Related Lease, as
amended, and that such amount is substituted for the reference to "Twenty
Thousand Five Hundred Sixty-two Dollars ($20,562)" in Paragraph 6 of the
Lease; and (b) except as modified above, the provisions of such Paragraph 6
shall continue to apply.
SECTION 9. PARKING. Landlord and Tenant acknowledge and agree
that during the Extended Term the aggregate number of parking spaces provided
for Tenant's use pursuant to Paragraph 30 of the Lease shall be one hundred
and twenty-five (125) undesignated parking spaces.
SECTION 10. REMOVAL OF TENANT ALTERATIONS. Upon the expiration or
earlier termination of the Term of the Lease, including the Extended Term
provided for in this Amendment, Tenant shall not be required to remove any of
the alterations, additions or improvements to or of the Premises or any part
thereof by Tenant for Tenant's initial occupancy under the Lease or made
thereafter and still existing as of the date of this Amendment, provided that
such alterations, additions or improvements were made in accordance with the
applicable provisions of the Lease, as amended. Landlord and Tenant
acknowledge and agree that hereafter, all alterations, additions or
improvements of the Premises or any part thereof within the meaning of
Paragraph 11 of the Lease ("Tenant Alterations", as used in Section 4(b) of
this Amendment), including Tenant Work, if any, as used in Section 4(b) of
this Amendment, shall be subject to and in compliance with all conditions and
provisions of the Lease applicable to Tenant Alterations, including the
procedure set forth
<PAGE>
in the third paragraph of Paragraph 11 of the Lease to identify those Tenant
Alterations which Tenant desires to remove at the end of the Lease term and
those which Landlord will require Tenant to remove.
SECTION 11. BOOKS AND RECORDS. Supplementing the second sentence
of the third paragraph of Paragraph 7 of the Lease, as amended, the Tenant or
its representative (which representative shall be a certified public
accountant licensed to do business in the state in which the Property is
located and whose primary business is certified public accounting) shall have
the right, for a period of ninety (90) days following the date upon which
Landlord furnishes Tenant with Landlord's statement accounting for actual
costs of operating expenses (herein, "Landlord's Statement") is delivered to
Tenant, to examine the Landlord's books and records with respect to the items
in the foregoing statement of Operating Expenses during normal business
hours, upon written notice, delivered at least three (3) business days in
advance. If Tenant does not object in writing to Landlord's Statement within
one hundred and twenty (120) days of Tenant's receipt thereof, specifying the
nature of the item in dispute and the reasons therefor, then Landlord's
Statement shall be considered final and accepted by Tenant. Any amount due
to the Landlord as shown on Landlord's Statement, whether or not disputed by
Tenant as provided herein, shall be paid by Tenant when due within thirty
(30) days after delivery of Landlord's Statement, as provided in Paragraph 7
of the Lease, but such payment is without prejudice to any written exception
Tenant may make pursuant to this Section.
SECTION 12. PARAGRAPH 38 OF THE LEASE. Notwithstanding any
provision of the Lease to the contrary, Paragraph 38 of the Lease is of no
force or effect and is hereby deleted from the Lease.
SECTION 13. OPTION TO EXTEND.
(a) Landlord hereby grants Tenant a single option to extend the
Extended Term of the Lease for an additional period of five (5) years (such
period may be referred to as the "Option Term"), as to the entire Premises as
it may then exist, upon and subject to the terms and conditions of this
Section (the "Option To Extend"), and provided that at the time of exercise
of such right: (i) Tenant must be in occupancy of the entire Premises; and
(ii) there has been no material adverse change in Tenant's financial position
from such position as of the date of execution of the Lease, as certified by
Tenant's independent certified public accountants, and as supported by
Tenant's certified financial statements, copies of which shall be delivered
to Landlord with Tenant's written notice exercising its right hereunder.
(b) Tenant's election (the "Election Notice") to exercise the
Option To Extend must be given to Landlord in writing no earlier than the
date which is two hundred and seventy (270) days before the Expiration Date
and no later than the date which is two hundred and forty (240) days prior to
the Expiration Date. If Tenant either fails or elects not to exercise its
Option to Extend by not timely giving its Election Notice, then the Option to
Extend shall be null and void.
(c) The Option Term shall commence immediately after the
expiration of the Extended Term of the Lease. Tenant's leasing of the
Premises during the Option Term shall be upon and subject to the same terms
and conditions contained in the Lease except that (i) the monthly base rent,
plus payment of Tenant's proportionate share of Operating Expenses and
Utilities charges pursuant to the Lease (in addition to all expenses paid
directly by Tenant to the utility or service provider, which direct payments
shall continue to be Tenant's obligation) shall be amended to equal the
"Option Term Rent", defined and determined in the manner set forth in the
immediately following Subsection; (ii) the Security Deposit provisions shall
remain as provided in the Lease; (iii) Tenant shall accept the Premises in
its "AS-IS" condition without any obligation of Landlord to repaint, remodel,
repair (except as otherwise provided for in the Lease), improve or alter the
Premises or to provide Tenant any allowance therefor; and (iv) there shall be
no further option or right to extend the term of the Lease. If Tenant timely
and properly exercises the Option To Extend, references in the Lease to the
Term shall be deemed to mean the Extended Term as extended by the Option Term
unless the context clearly requires otherwise.
(d) The Option Term Rent shall mean the greater of (i) the monthly
base rent payable by Tenant under this Lease calculated at the rate applicable
for the last full month of the Extended Term,
<PAGE>
plus payment of Tenant's proportionate share of Operating Expenses and
Utilities charges pursuant to the Lease (in addition to all expenses paid
directly by Tenant to the utility or service provider, which direct payments
shall continue to be Tenant's obligation) (collectively, "Preceding Rent") or
(ii) the "Prevailing Market Rent". As used herein Prevailing Market Rent
shall mean the rent and all other monetary payments, escalations and triple
net payables by Tenant, including consumer price increases, that Landlord
could obtain from a third party desiring to lease the Premises for a term
equal to the Option Term and commencing when the Option Term is to commence
under market leasing conditions, and taking into account the following: the
size, location and floor levels of the Premises; the type and quality of
tenant improvements; age and location of the Project; quality of construction
of the Project; services to be provided by Landlord or by tenant; the rent,
all other monetary payments and escalations obtainable for new leases of
space comparable to the Premises in the Project and in comparable buildings
in the mid-Peninsula area, and other factors that would be relevant to such a
third party in determining what such party would be willing to pay therefor.
The determination of Prevailing Market Rent based upon the foregoing criteria
shall be made by Landlord, in the good faith exercise of Landlord's business
judgment. Within thirty (30) days after Tenant's exercise of the Option To
Extend, Landlord shall notify Tenant of Landlord's determination of Option
Term Rent for the Premises. If Landlord's determination of Prevailing Market
Rent is greater than the Preceding Rent, and if Tenant, in Tenant's sole
discretion, disagrees with the amount of Prevailing Market Rent determined by
Landlord, Tenant may elect to revoke and rescind the exercise of the option
by giving written notice thereof to Landlord within forty-five (45) days
after notice of Landlord's determination of Prevailing Market Rent.
(e) This Option to Extend is personal to Cygnus and to any
assignee of the Lease which is an Affiliate (defined below) and may not be
used by, and shall not be transferable or assignable (voluntarily or
involuntarily) to any other person or entity. For purposes of this Section,
"Affiliate" means (i) any subsidiary, affiliate or division controlled by
Tenant; (ii) a successor corporation related to Tenant through merger,
consolidation or non-bankruptcy reorganization; or (iii) a purchaser of
substantially all of Tenant's assets, in each case of (i), (ii) and (iii)
which also must satisfy the requirements described in the paragraph
immediately following Paragraph 15(d) of the Lease.
(f) Upon the occurrence of any of the following events, Landlord
shall have the option, exercisable at any time prior to commencement of the
Option Term, to terminate all of the provisions of this Section with respect
to the Option to Extend, with the effect of canceling and voiding any prior
or subsequent exercise so this Option to Extend is of no force or effect:
(i) Tenant's failure to timely exercise the Option to Extend in
accordance with the provisions of this Section.
(ii) The existence at the time Tenant exercises the Option to
Extend or at the commencement of the Option Term of any default beyond any
applicable notice and grace period.
(g) Without limiting the generality of any provision of the Lease,
time shall be of the essence with respect to all of the provisions of this
Section.
SECTION 14. NOTICES & ADDRESSES. The Lease is hereby amended to
provide that all bills, statements, consents, notices, requests, demands or
communications which either party may desire or be required to give to the
other shall be in writing and delivered to the other party personally or sent
by registered or certified or express United States mail, return receipt
requested, postage prepaid, or by reputable overnight delivery service
addressed to Landlord or Tenant, as applicable, at the addresses set forth at
the end of this Section. Any item sent by registered or certified or express
mail or by such delivery service shall be effective, respectively, upon being
deposited in the United States mail or when deposited with such delivery
service, as shown by the records of the mail or such service. However, the
time period in which a response to any such item must be given shall commence
to run from (a) in the case of mail, the date of receipt of the item by the
addressee thereof shown on the return receipt, or (b) in the case of such
overnight delivery service, the date of acceptance of delivery of the item by
an employee, officer, director or
<PAGE>
partner of the recipient party. Rejection or other refusal to accept or the
inability to deliver because of changed address of which no notice was given,
as indicated by mail return receipt or advice from such courier service,
shall be deemed to be receipt of the item sent. Notices may also be served
by personal service upon any officer, director or partner of Landlord or
Tenant, and shall be effective upon such service. If Tenant is notified of
the identity and address of any Mortgage and/or Trust Deed Holder (as used in
Paragraph 29(b) of the Lease), Tenant shall give, by one of the methods
described above, such party any Notice of Default (as used in Paragraph 29(b)
of the Lease) which Tenant gives to Landlord under the Lease. Any party
hereto, or any Mortgage and/or Trust Deed Holder described in the preceding
sentence, may by notice given by one of the methods described above designate
new addreses for notices to it. Counsel for either party may deliver notices
on behalf of its client. The current addresses for notices to be sent to
Landlord and Tenant respectively pursuant to this Section are as follows:
Notices to Landlord shall be addressed:
Metropolitan Life Insurance Company
c/o Seaport Centre Project Manager
701 Chesapeake Drive
Redwood City, CA 94063
with copies to the following:
Metropolitan Life Insurance Company
101 Lincoln Centre Drive, Suite 600
Foster City, CA 94404
Attention: Assistant Vice President
Notices to Tenant shall be addressed as follows:
Cygnus, Inc.
400 Penobscot Drive
Redwood City, CA 94063
Attention: Mr. James Grady, Senior Vice President, Human
Resources and Administration
SECTION 15. TIME OF ESSENCE. Without limiting the generality of any
other provision of the Lease, time is of the essence to each and every term
and condition of this Amendment.
SECTION 16. BROKERS. Tenant represents that in connection with this
Amendment it is represented by Staubach Company ("Tenant's Broker") and,
except for Tenant's Broker and Landlord's Broker (defined below), Tenant has
not dealt with any real estate broker, sales person, or finder in connection
with this Lease, and no such person initiated or participated in the
negotiation of this Lease, or showed the Premises to Tenant. Tenant hereby
agrees to pay any commission to which Tenant's Broker is entitled in
connection with this Lease and agrees that Landlord is not obligated to pay
or fund any commission payable to Tenant's Broker. Tenant hereby agrees to
indemnify, protect, defend and hold Landlord harmless from and against any
and all liabilities and claims for commissions and fees arising out of a
breach of the foregoing representation or agreement. Landlord represents
that in connection with this Lease it is represented by Cornish and Carey
("Landlord's Broker") and, except for Landlord's Broker and Tenant's Broker,
Landlord has not dealt with any real estate broker, sales person, or finder
in connection with this Lease, and no such person initiated or participated
in the negotiation of this Lease. Landlord hereby agrees to pay any
commission to which Landlord's Broker is entitled in connection with this
Lease pursuant to Landlord's written agreement with Landlord's Broker and
agrees that Tenant is not obligated to pay or fund any commission payable to
Landlord's Broker. Landlord hereby agrees to indemnify, protect, defend and
hold Tenant harmless from and against any and all liabilities and claims for
commissions and fees arising out of a breach of the foregoing representation
or agreement.
<PAGE>
SECTION 17. ATTORNEYS' FEES. Each party to this Amendment shall bear
its own attorneys' fees and costs incurred in connection with the discussions
preceding, negotiations for and documentation of this Amendment. In the
event any party brings any suit or other proceeding with respect to the
subject matter or enforcement of this Amendment or the Lease, as amended, the
prevailing party (as determined by the court, agency or other authority
before which such suit or proceeding is commenced) shall, in addition to such
other relief as may be awarded, be entitled to recover attorneys' fees,
expenses and costs of investigation as actually incurred, including court
costs, expert witness fees, costs and expenses of investigation, and all
attorneys' fees, costs and expenses in any such suit or proceeding (including
in any action or participation in or in connection with any case or
proceeding under the Bankruptcy Code, 11 United States Code Sections 101 ET
SEQ., or any successor statutes, in establishing or enforcing the right to
indemnification, in appellate proceedings, or in connection with the
enforcement or collection of any judgment obtained in any such suit or
proceeding).
SECTION 18. EFFECT OF HEADINGS; RECITALS: EXHIBITS. The titles or
headings of the various parts or sections hereof are intended solely for
convenience and are not intended and shall not be deemed to or in any way be
used to modify, explain or place any construction upon any of the provisions
of this Amendment. Any and all Recitals set forth at the beginning of this
Amendment are true and correct and constitute a part of this Amendment as if
they had been set forth as covenants herein. Exhibits, schedules, plats and
riders hereto which are referred to herein are a part of this Amendment.
SECTION 19. FORCE AND EFFECT. Except as modified by this Amendment,
the terms and provisions of the Lease are hereby ratified and confirmed and
shall remain in full force and effect. Should any inconsistency arise
between this Amendment and the Lease as to the specific matters which are the
subject of this Amendment, the terms and conditions of this Amendment shall
control. This Amendment shall be construed to be a part of the Lease and
shall be deemed incorporated in the Lease by this reference.
SECTION 20. ENTIRE AGREEMENT; AMENDMENT. The Lease as amended by
this Amendment constitutes the full and complete agreement and understanding
between the parties hereto and shall supersede all prior communications,
representations, understandings or agreements, if any, whether oral or
written, concerning the subject matter contained in the Lease as so amended,
and no provision of the Lease as so amended may be modified, amended, waived
or discharged, in whole or in part, except by a written instrument executed
by all of the parties hereto.
SECTION 21. AUTHORITY. Each party represents and warrants to the
other that it has full authority and power to enter into and perform its
obligations under this Amendment, that the person executing this Amendment is
fully empowered to do so, and that no consent or authorization is necessary
from any third party. Landlord may request that Tenant provide Landlord
evidence of Tenant's authority.
SECTION 22. COUNTERPARTS. This Amendment may be executed in
duplicates or counterparts, or both, and such duplicates or counterparts
together shall constitute but one original of the Amendment. Each duplicate
and counterpart shall be equally admissible in evidence, and each original
shall fully bind each party who has executed it.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first set forth above.
TENANT: CYGNUS, INC
a Delaware corporation
By: /s/ James F. Grady, Jr.
---------------------------------------------
James Grady,
Senior Vice President, Human Resources and
Administration
Date: June 9, 1998
LANDLORD: METROPOLITAN LIFE INSURANCE COMPANY,
a New York corporation
By: /s/ Edward J. Hayes
---------------------------------------------
Edward J. Hayes
Assistant Vice President
Date: June 9, 1998
<PAGE>
Exhibit 10.30
THIRD AMENDMENT TO TEN-YEAR INDUSTRIAL NET LEASE AGREEMENT
(Building No 8)
This Third Amendment to Office Lease ("Amendment") is entered into,
and dated for reference purposes, as of June 9, 1998 by and between
METROPOLITAN LIFE INSURANCE COMPANY, a New York corporation (herein referred
to as "Metropolitan" or "Landlord"), as Landlord, and CYGNUS, INC., a
Delaware corporation (herein referred to as "Cygnus" or "Tenant"), with
reference to the following facts:
RECITALS
A. Metropolitan's predecessor in interest as Landlord (Seaport
Centre Venture Phase I, a California general partnership, herein, the
"Venture") and Tenant's predecessor in interest as Tenant (Cygnus Research
Corporation, a California corporation) entered into that certain written
Lease dated September 27, 1988 (the "Original Lease"), for certain premises
of approximately 20,880 square feet of space in Building 8 of Phase I
("Building 8 Space"), whose current street address remains 701 Galveston
Street, Redwood City, California, all as more particularly described in the
Original Lease, which Original Lease included Rider No. 1 To Seaport Centre
Standard Lease and Exhibits A, A-1, B & C.
B. The Venture and Tenant's predecessor in interest as Tenant at
the time (then, Cygnus Therapeutic Systems, a California corporation) entered
into that certain written First Amendment To Ten-Year Industrial Net Lease
Agreement dated May 15, 1992 (the "First Amendment") for certain space in
Building 5 of Phase I ("Building 5 Space"), and that certain written Second
Amendment To Ten-Year Industrial Net Lease Agreement dated August 8, 1992
(the "Second Amendment") for certain space of approximately 11,158 square
feet in Building 3 of Phase I ("Building 3 Space"), whose current street
address remains 501 Chesapeake Street, Redwood City, California.
C. The Original Lease, as amended, is referred to herein as the
Lease.
D. Met acquired and holds the interest of Landlord under the
Lease.
E. Landlord and Tenant now desire to provide for extension of the
term of the Lease of the entire Premises and other amendments of the Lease,
all as more particularly provided herein.
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants set forth herein and of other good and valuable consideration, the
receipt and adequacy of which are hereby acknowledged, the parties hereto
agree as follows:
SECTION 1. DEFINED TERMS; PREMISES. All capitalized terms not
otherwise defined in this Amendment have the meanings set forth in the Lease
unless the context clearly requires otherwise. The term "Landlord" as used
herein shall have the same meaning as and may be used interchangeably with
the term "Lessor" in the Lease, and the term "Tenant" as used herein shall
have the same meaning as and may be used interchangeably with the term
"Lessee" in the Lease. As used herein, the term "Premises" shall mean the
Building 8 Space and Building 3 Space. The Building 5 Space is not included
in the Premises and the term of Tenant's lease of the Building 5 Space
previously expired and Tenant is no longer leasing or occupying any of the
Building 5 Space. Accordingly, Paragraph 8 of the Second Amendment is hereby
amended to delete the reference to Building 5 and hereafter to provide in its
entirety that the term "building" as used in Paragraphs 24 and 25 of the
Original Lease shall apply to either Building 8 or Building 3 as the
circumstances require, provided that the rights of the parties to terminate
this Lease set forth in said paragraphs shall be limited to the portion of
the Premises within the building affected by any such casualty or
condemnation.
SECTION 2. TENANT'S INTEREST UNDER THE LEASE. Tenant represents
and warrants and agrees that: (i) Tenant occupies the Premises and is the
Tenant under the Lease; (ii) Tenant is the successor in
<PAGE>
interest to Cygnus Research Corporation, a California corporation, and Cygnus
Therapeutic Systems, a California corporation, and as such is the assignee of
the interest of Tenant under the Lease, has assumed, or hereby assumes, the
obligations of Tenant under the Lease, and holds all right, title and
interest of Tenant under the Lease; (iii) has not entered into any assignment
of the Lease, and no sublease or other agreement for use or occupancy of the
Premises or any part thereof is in effect. Tenant's obligations with respect
to the representations, warranties and agreements under this Section survive
the expiration or sooner termination of the Term of the Lease and of this
Lease.
SECTION 3. EXTENSION OF TERM. Landlord and Tenant acknowledge and
agree that notwithstanding any provision of the Lease to the contrary, the
Term of this Lease expires on December 10, 1998, and that the Term is hereby
extended for the "Extended Term" commencing on December 11, 1998 (the
"Extended Term Commencement Date") and expiring on December 10, 2003, unless
sooner terminated pursuant to the terms of the Lease. This extension is with
respect to the entire Premises. This extension is further upon and subject
to the same conditions, terms, covenants and agreements contained in the
Lease except as otherwise provided in this Amendment. Landlord and Tenant
acknowledge and agree that this Amendment provides all rights and obligations
of the parties with respect to extension of the Term, whether or not in
accordance with any other provisions, if any, of the Lease regarding renewal
or extension, and without limiting the generality of the foregoing, Tenant
and Landlord acknowledge and agree that the Option to Renew Lease Term set
forth in Paragraph 2(c) of the Original Lease is null, void and of no force
or effect, and that any extension beyond the Extended Term is governed by the
Option to Extend set forth in Section 13 below.
SECTION 4. PREMISES LEASED "AS-IS"; CONSTRUCTION
(a) AS-IS. Notwithstanding any provision of the
Lease to the contrary, Tenant acknowledges and agrees that (i) Tenant
occupies the Premises and has investigated their condition to the extent
Tenant desires to do so; (ii) Tenant hereby agrees that this Lease is of the
Premises in its "AS IS" condition; (iii) no representation regarding the
condition of the Premises or Building 8 or Building 3 has been made by or on
behalf of Landlord; and (iv) Landlord has no obligation to remodel or to make
any repairs (except as otherwise provided for in the Lease), alterations or
improvements to the Premises or such buildings in connection with this
Amendment or provide Tenant any allowance for any work by Tenant except to
the extent of Landlord's Maximum Contribution, as provided below.
(b) TENANT WORK GENERALLY. Landlord and Tenant
acknowledge and agree that notwithstanding any provisions of the Lease to the
contrary: (i) Tenant may desire to do certain repainting, recarpeting,
remodeling, repair, improvement or alteration in connection with this
Amendment, which for purposes of this Lease is referred to as the Tenant
Work; (ii) all Tenant Work, if any, shall be done as alterations, additions
or improvements of the Premises or any part thereof within the meaning of
Paragraph 11 of the Lease ("Tenant Alterations"), subject to and in
compliance with all conditions and provisions of the Lease applicable to
Tenant Alterations, except as otherwise expressly provided herein; (iii) if
the aggregate cost of the Tenant Work does not exceed the amount of
Landlord's Maximum Contribution (defined below), Tenant shall not be required
to obtain a completion and lien indemnity bond for it; and (iv) such work,
including all design, plan review, obtaining all approvals and permits, and
construction shall be at Tenant's sole cost and expense, except to the extent
reimbursable out of Landlord's Maximum Contribution as provided below.
(c) LANDLORD'S MAXIMUM CONTRIBUTION. Landlord's
Maximum Contribution shall mean an amount up to a maximum of Ninety-six
Thousand One Hundred and Fourteen Dollars ($96,114.00) to reimburse Tenant
for the actual costs of design, plan review, obtaining all approvals and
permits, and construction of such Alterations (i) for the Premises, and/or
(ii) for Alterations to Tenant's "Building 2 Space", at 400 Penobscot Drive,
Redwood City, California, as defined and provided in that certain amendment
of that certain Related Lease (as defined in the Original Lease) being
executed concurrently herewith ("Related Amendment"), except for the
additional amount of Landlord's Maximum Contribution provided in the Related
Amendment. In no event shall the Landlord's Maximum Contribution be used to
reimburse any costs of
<PAGE>
designing, procuring or installing in the Premises any trade fixtures,
movable equipment, furniture, furnishings, telephone equipment, cabling for
any of the foregoing, or other personal property (collectively "Personal
Property" for purposes of this Rider) to be used in the Premises by Tenant,
and the cost of such Personal Property shall be paid by Tenant. Landlord's
Maximum Contribution pursuant to this Amendment and that payable under the
Related Amendment shall together be payable by Landlord to Tenant no more
often than three times and no more often than one application every thirty
(30) days, and otherwise follows: (a) for costs based upon the percentage of
work completed prior to the date of application; and (b) in each case, any
amount so payable shall be paid within 30 days after Landlord's receipt of
Tenant's complete application for payment, which application shall include
reasonable substantiation of costs incurred by Tenant, conditional lien
releases to the extent of work completed, and full, final and unconditional
lien releases upon completion of all Alterations (or, if the work is done
under separate contracts or in smaller separate identifiable segments or
phases, then upon completion of and with respect to each separate contract or
phase). Tenant shall keep full and correct accounts and shall exercise such
control as may be necessary or appropriate for the proper financial
management of the construction of the Alterations separately identified as to
each of the Premises and the Building 2 Space and, if the work is done under
separate contracts or in smaller separate identifiable segments or phases,
then with respect to each separate contract or phase. Provided further,
Tenant must prior to October 1, 1999 submit all written applications with the
items required above for disbursement or reimbursement for any reimbursable
costs out of the Landlord's Maximum Contribution, and to the extent of any
funds for which application has not been made prior to that date or if and to
the extent that the reimbursable costs of the Tenant Work are less than the
amount of Landlord's Maximum Contribution, then Landlord shall retain the
unapplied or unused balance of the Landlord's Maximum Contribution and shall
have no obligation or liability to Tenant with respect to such excess.
SECTION 5. MONTHLY BASE RENT FOR EXTENDED TERM COMMENCING UPON
EXTENDED TERM COMMENCEMENT DATE. Notwithstanding any provision of the Lease
to the contrary, the amount of monthly base rent due and payable by Tenant
for the Premises, accruing on and after the Extended Term Commencement Date
and monthly thereafter for the Extended Term shall be as follows:
<TABLE>
<CAPTION>
Period from/through Monthly Total Monthly Rate/Square Foot
<S> <C> <C>
12/11/1998 - 12/10/1999 $70,483.60 $2.20
12/11/1999 - 12/10/2000 $72,726.26 $2.27
12/11/2000 - 12/10/2001 $74,648.54 $2.33
12/11/2001 - 12/10/2002 $77,024.69 $2.40
12/11/2002 - 12/10/2003 $79,320.75 $2.48
</TABLE>
SECTION 6. TENANT'S SHARE OF OPERATING EXPENSES. Landlord and
Tenant desire to set forth with greater particularity the components of
operating expenses pursuant to Paragraph 7 of the Original Lease, as amended
by Paragraph 6(b) of the Second Amendment, and Tenant's proportionate share
of such operating expenses allocated to each building in which the Premises
is located, to Phase I and to the Project (defined below). Notwithstanding
any provision of the Lease to the contrary, during the Extended Term in
addition to the base rent payable by Tenant, Tenant shall pay Tenant's
proportionate share of all operating expenses as set forth below. Operating
expenses and exclusions therefrom are as defined in the Original Lease,
except as otherwise provided below. Operating Expenses are not limited by
references to the building in Paragraph 7 of the Original Lease or by
reference to Phase I in Paragraph 6(b) of the Second Amendment, but are
determined with respect to and as allocable to each building in which the
Premises is located, to Phase I and to the Project, and Tenant shall pay its
proportionate share of such operating expenses, as follows:
(i) Tenant's proportionate share of Building Operating
Expenses (defined below) of and attributable to Building 8 as of the
date hereof equals eighty-seven percent (87%);
<PAGE>
(ii) Tenant's proportionate share of Building Operating
Expenses (defined below) of and attributable to Building 3 as of the
date hereof equals twenty-nine percent (29%);
(iii) Tenant's proportionate share of Project Operating
Expenses (defined below) is the percentage obtained by dividing the
aggregate rentable square footage of the Premises located in the Project
(defined below) by the total rentable square footage of the Project, and
as of the date hereof equals five and 961/1000 percent (5.961%);
(iv) Tenant's proportionate share of Phase Operating Expenses
(defined below) of and attributable to Phase I, in which both Building 8
and Building 3 are located, is the percentage obtained by dividing the
aggregate rentable square footage of the Premises located in Phase I by
the total rentable square footage of Phase I, and as of the date hereof
equals eleven percent (11%);
(v) operating expenses of and attributable to each building
in which the Premises or part thereof is located includes all operating
expenses that are directly and separately identifiable to the operation,
maintenance or repair of such building and may also be referred to as
"Building Operating Expenses" for each such building. Tenant's
proportionate share of Building Operating Expenses is the percentage
obtained by dividing the rentable square footage of the Premises located
in each building by the total rentable square footage of such building;
(vi) operating expenses of and attributable to the Project
("Project Operating Expenses") includes all operating expenses with
respect to the Project (defined below) that are not included as Phase
Operating Expenses (defined below) and that are not either Building
Operating Expenses or operating expenses directly and separately
identifiable to the operation, maintenance or repair of any other
leasable building located in the Project, but Project Operating Expenses
includes operating expenses allocable to any areas of a building during
such time as such areas are made available by Landlord for the general
common use or benefit of the tenants of the Project, and their employees
and invitees, or the public, as such areas currently exist and as they
may be changed from time to time. As of the date hereof, "Project"
means and consists of Phase I and Phase II of the development commonly
known as Seaport Centre in Redwood City, California, and any expenses
allocable to either pursuant to any covenants, conditions and
restrictions, or any reciprocal easements, or any owner's association
now or hereafter affecting them. In the event any building is added to
or deleted from Tenant's Phase or any Phase is added to or deleted from
the Project which affects tenant's proportionate share of either or
both, Landlord shall recalculate tenant's proportionate share as
applicable;
(vii) operating expenses of a Phase ("Phase Operating
Expenses") may include operating expenses that are directly and
separately identifiable to the operation, maintenance or repair of each
leasable building located in that Phase (including but not limited to
Building Operating Expenses) and may include Project Operating Expenses
that are separately identifiable to a Phase; and
(viii) Landlord shall have the right to allocate a particular
operating expense as Building Operating Expenses, Project Operating
Expenses or Phase Operating Expenses; however, in no event shall any
portion of Building Operating Expenses, Project Operating Expenses or
Phase Operating Expenses be assessed or counted against Tenant more than
once.
SECTION 7. UTILITIES. Landlord and Tenant desire to set forth
with greater particularity the allocation of utilities expenses pursuant to
Paragraph 8 of the Original Lease, as amended by Paragraph 6(c) of the Second
Amendment, and Tenant's proportionate share of such operating expenses
allocated to each building in which the Premises is located, to Phase I and
to the Project. Notwithstanding any provision of the Lease to the contrary,
excluding all utilities separately billed or metered to Tenant which shall be
paid for solely and separately by Tenant, and except as provided in Paragraph
4 of the Second Amendment regarding Building 3 utilities, during the Extended
Term in addition to the base rent and operating expenses
<PAGE>
payable by Tenant, Tenant shall pay Tenant's proportionate share of all
utilities expenses as allocated and paid in the same proportionate share as
set forth in Section 6 of this Amendment regarding operating expenses.
SECTION 8. SECURITY DEPOSIT. Landlord and Tenant acknowledge and
agree that Landlord holds a Security Deposit in the amount of Thirty Thousand
Five Hundred and Sixty-two Dollars ($30,562.00) and that Landlord shall
continue to hold the Security Deposit pursuant to the provisions of Paragraph
6 of the Original Lease, as amended by Paragraph 6(a) of the Second Amendment.
SECTION 9. PARKING. Landlord and Tenant acknowledge and agree
that during the Extended Term the aggregate number of parking spaces provided
for Tenant's use pursuant to Paragraph 30 of the Original Lease, as amended
by Paragraph 6(d) of the Second Amendment shall be one hundred and one (101)
undesignated parking spaces.
SECTION 10. REMOVAL OF TENANT ALTERATIONS. Upon the expiration or
earlier termination of the Term of the Lease, including the Extended Term
provided for in this Amendment, Tenant shall not be required to remove any of
the alterations, additions or improvements to or of the Premises or any part
thereof by Tenant for Tenant's initial occupancy under the Original Lease or
made thereafter and still existing as of the date of this Amendment, provided
that such alterations, additions or improvements were made in accordance with
the applicable provisions of the Original Lease, as amended. Landlord and
Tenant acknowledge and agree that hereafter, all alterations, additions or
improvements of the Premises or any part thereof within the meaning of
Paragraph 11 of the Lease ("Tenant Alterations", as used in Section 4(b) of
this Amendment), including Tenant Work, if any, as used in Section 4(b) of
this Amendment, shall be subject to and in compliance with all conditions and
provisions of the Lease applicable to Tenant Alterations, including the
procedure set forth in the third paragraph of Paragraph 11 of the Original
Lease to identify those Tenant Alterations which Tenant desires to remove at
the end of the Lease term and those which Landlord will require Tenant to
remove.
SECTION 11. BOOKS AND RECORDS. Supplementing the second sentence
of the third paragraph of Paragraph 7 of the Original Lease, as amended, the
Tenant or its representative (which representative shall be a certified
public accountant licensed to do business in the state in which the Property
is located and whose primary business is certified public accounting) shall
have the right, for a period of ninety (90) days following the date upon
which Landlord furnishes Tenant with Landlord's statement accounting for
actual costs of operating expenses (herein, "Landlord's Statement") is
delivered to Tenant, to examine the Landlord's books and records with respect
to the items in the foregoing statement of Operating Expenses during normal
business hours, upon written notice, delivered at least three (3) business
days in advance. If Tenant does not object in writing to Landlord's Statement
within one hundred and twenty (120) days of Tenant's receipt thereof,
specifying the nature of the item in dispute and the reasons therefor, then
Landlord's Statement shall be considered final and accepted by Tenant. Any
amount due to the Landlord as shown on Landlord's Statement, whether or not
disputed by Tenant as provided herein, shall be paid by Tenant when due
within thirty (30) days after delivery of Landlord's Statement, as provided
in Paragraph 7 of the Original Lease, as amended, but such payment is without
prejudice to any written exception Tenant may make pursuant to this Section.
SECTION 12. PARAGRAPH 39 OF THE ORIGINAL LEASE. Notwithstanding
any provision of the Lease to the contrary, Paragraph 39 of the Original
Lease is of no force or effect and is hereby deleted from the Lease.
SECTION 13. OPTION TO EXTEND.
(a) Landlord hereby grants Tenant a single option to extend the
Extended Term of the Lease for an additional period of five (5) years (such
period may be referred to as the "Option Term"), as to the entire Premises as
it may then exist, upon and subject to the terms and conditions of this
Section (the "Option To Extend"), and provided that at the time of exercise
of such right: (i) Tenant must be in
<PAGE>
occupancy of the entire Premises; and (ii) there has been no material adverse
change in Tenant's financial position from such position as of the date of
execution of the Lease, as certified by Tenant's independent certified public
accountants, and as supported by Tenant's certified financial statements,
copies of which shall be delivered to Landlord with Tenant's written notice
exercising its right hereunder.
(b) Tenant's election (the "Election Notice") to exercise the
Option To Extend must be given to Landlord in writing no earlier than the
date which is two hundred and seventy (270) days before the Expiration Date
and no later than the date which is two hundred and forty (240) days prior to
the Expiration Date. If Tenant either fails or elects not to exercise its
Option to Extend by not timely giving its Election Notice, then the Option to
Extend shall be null and void.
(c) The Option Term shall commence immediately after the
expiration of the Extended Term of the Lease. Tenant's leasing of the
Premises during the Option Term shall be upon and subject to the same terms
and conditions contained in the Lease except that (i) the monthly base rent,
plus payment of Tenant's proportionate share of Operating Expenses and
Utilities charges pursuant to the Lease (in addition to all expenses paid
directly by Tenant to the utility or service provider, which direct payments
shall continue to be Tenant's obligation) shall be amended to equal the
"Option Term Rent", defined and determined in the manner set forth in the
immediately following Subsection; (ii) the Security Deposit provisions shall
remain as provided in the Lease; (iii) Tenant shall accept the Premises in
its "AS-IS" condition without any obligation of Landlord to repaint, remodel,
repair (except as otherwise provided for in the Lease), improve or alter the
Premises or to provide Tenant any allowance therefor; and (iv) there shall be
no further option or right to extend the term of the Lease. If Tenant timely
and properly exercises the Option To Extend, references in the Lease to the
Term shall be deemed to mean the Extended Term as extended by the Option Term
unless the context clearly requires otherwise.
(d) The Option Term Rent shall mean the greater of (i) the monthly
base rent payable by Tenant under this Lease calculated at the rate
applicable for the last full month of the Extended Term, plus payment of
Tenant's proportionate share of Operating Expenses and Utilities charges
pursuant to the Lease (in addition to all expenses paid directly by Tenant to
the utility or service provider, which direct payments shall continue to be
Tenant's obligation) (collectively, "Preceding Rent") or (ii) the "Prevailing
Market Rent". As used herein Prevailing Market Rent shall mean the rent and
all other monetary payments, escalations and triple net payables by Tenant,
including consumer price increases, that Landlord could obtain from a third
party desiring to lease the Premises for a term equal to the Option Term and
commencing when the Option Term is to commence under market leasing
conditions, and taking into account the following: the size, location and
floor levels of the Premises; the type and quality of tenant improvements;
age and location of the Project; quality of construction of the Project;
services to be provided by Landlord or by tenant; the rent, all other
monetary payments and escalations obtainable for new leases of space
comparable to the Premises in the Project and in comparable buildings in the
mid-Peninsula area, and other factors that would be relevant to such a third
party in determining what such party would be willing to pay therefor. The
determination of Prevailing Market Rent based upon the foregoing criteria
shall be made by Landlord, in the good faith exercise of Landlord's business
judgment. Within thirty (30) days after Tenant's exercise of the Option To
Extend, Landlord shall notify Tenant of Landlord's determination of Option
Term Rent for the Premises. If Landlord's determination of Prevailing Market
Rent is greater than the Preceding Rent, and if Tenant, in Tenant's sole
discretion, disagrees with the amount of Prevailing Market Rent determined by
Landlord, Tenant may elect to revoke and rescind the exercise of the option
by giving written notice thereof to Landlord within forty-five (45) days
after notice of Landlord's determination of Prevailing Market Rent.
(e) This Option to Extend is personal to Cygnus and to any
assignee of the Lease which is an Affiliate (defined below) and may not be
used by, and shall not be transferable or assignable (voluntarily or
involuntarily) to any other person or entity. For purposes of this Section,
"Affiliate" means (i) any subsidiary, affiliate or division controlled by
Tenant; (ii) a successor corporation related to Tenant through merger,
consolidation or non-bankruptcy reorganization; or (iii) a purchaser of
substantially all of
<PAGE>
Tenant's assets, in each case of (i), (ii) and (iii) which also must satisfy
the requirements described in the paragraph immediately following Paragraph
15(d) of the Lease.
(f) Upon the occurrence of any of the following events, Landlord
shall have the option, exercisable at any time prior to commencement of the
Option Term, to terminate all of the provisions of this Section with respect
to the Option to Extend, with the effect of canceling and voiding any prior
or subsequent exercise so this Option to Extend is of no force or effect:
(i) Tenant's failure to timely exercise the Option to Extend in
accordance with the provisions of this Section.
(ii) The existence at the time Tenant exercises the Option to
Extend or at the commencement of the Option Term of any default beyond
any applicable notice and grace period.
(g) Without limiting the generality of any provision of the Lease,
time shall be of the essence with respect to all of the provisions of this
Section.
SECTION 14. NOTICES & ADDRESSES. The Lease is hereby amended to
provide that all bills, statements, consents, notices, requests, demands or
communications which either party may desire or be required to give to the
other shall be in writing and delivered to the other party personally or sent
by registered or certified or express United States mail, return receipt
requested, postage prepaid, or by reputable overnight delivery service
addressed to Landlord or Tenant, as applicable, at the addresses set forth at
the end of this Section. Any item sent by registered or certified or express
mail or by such delivery service shall be effective, respectively, upon being
deposited in the United States mail or when deposited with such delivery
service, as shown by the records of the mail or such service. However, the
time period in which a response to any such item must be given shall commence
to run from (a) in the case of mail, the date of receipt of the item by the
addressee thereof shown on the return receipt, or (b) in the case of such
overnight delivery service, the date of acceptance of delivery of the item by
an employee, officer, director or partner of the recipient party. Rejection
or other refusal to accept or the inability to deliver because of changed
address of which no notice was given, as indicated by mail return receipt or
advice from such courier service, shall be deemed to be receipt of the item
sent. Notices may also be served by personal service upon any officer,
director or partner of Landlord or Tenant, and shall be effective upon such
service. If Tenant is notified of the identity and address of any Mortgage
and/or Trust Deed Holder (as used in Paragraph 29(b) of the Lease), Tenant
shall give, by one of the methods described above, such party any Notice of
Default (as used in Paragraph 29(b) of the Lease) which Tenant gives to
Landlord under the Lease. Any party hereto, or any Mortgage and/or Trust
Deed Holder described in the preceding sentence, may by notice given by one
of the methods described above designate new addreses for notices to it.
Counsel for either party may deliver notices on behalf of its client. The
current addresses for notices to be sent to Landlord and Tenant respectively
pursuant to this Section are as follows:
Notices to Landlord shall be addressed:
Metropolitan Life Insurance Company
c/o Seaport Centre Project Manager
701 Chesapeake Drive
Redwood City, CA 94063
with copies to the following:
Metropolitan Life Insurance Company
101 Lincoln Centre Drive, Suite 600
Foster City, CA 94404
Attention: Assistant Vice President
<PAGE>
Notices to Tenant shall be addressed as follows:
Cygnus, Inc.
400 Penobscot Drive
Redwood City, CA 94063
Attention: Mr. James Grady, Senior Vice President, Human
Resources and Administration
SECTION 15. TIME OF ESSENCE. Without limiting the generality of any
other provision of the Lease, time is of the essence to each and every term
and condition of this Amendment.
SECTION 16. BROKERS. Tenant represents that in connection with this
Amendment it is represented by Staubach Company ("Tenant's Broker") and,
except for Tenant's Broker and Landlord's Broker (defined below), Tenant has
not dealt with any real estate broker, sales person, or finder in connection
with this Lease, and no such person initiated or participated in the
negotiation of this Lease, or showed the Premises to Tenant. Tenant hereby
agrees to pay any commission to which Tenant's Broker is entitled in
connection with this Lease and agrees that Landlord is not obligated to pay
or fund any commission payable to Tenant's Broker. Tenant hereby agrees to
indemnify, protect, defend and hold Landlord harmless from and against any
and all liabilities and claims for commissions and fees arising out of a
breach of the foregoing representation or agreement. Landlord represents
that in connection with this Lease it is represented by Cornish and Carey
("Landlord's Broker") and, except for Landlord's Broker and Tenant's Broker,
Landlord has not dealt with any real estate broker, sales person, or finder
in connection with this Lease, and no such person initiated or participated
in the negotiation of this Lease. Landlord hereby agrees to pay any
commission to which Landlord's Broker is entitled in connection with this
Lease pursuant to Landlord's written agreement with Landlord's Broker and
agrees that Tenant is not obligated to pay or fund any commission payable to
Landlord's Broker. Landlord hereby agrees to indemnify, protect, defend and
hold Tenant harmless from and against any and all liabilities and claims for
commissions and fees arising out of a breach of the foregoing representation
or agreement.
SECTION 17. ATTORNEYS' FEES. Each party to this Amendment shall bear
its own attorneys' fees and costs incurred in connection with the discussions
preceding, negotiations for and documentation of this Amendment. In the
event any party brings any suit or other proceeding with respect to the
subject matter or enforcement of this Amendment or the Lease, as amended, the
prevailing party (as determined by the court, agency or other authority
before which such suit or proceeding is commenced) shall, in addition to such
other relief as may be awarded, be entitled to recover attorneys' fees,
expenses and costs of investigation as actually incurred, including court
costs, expert witness fees, costs and expenses of investigation, and all
attorneys' fees, costs and expenses in any such suit or proceeding (including
in any action or participation in or in connection with any case or
proceeding under the Bankruptcy Code, 11 United States Code Sections 101 ET
SEQ., or any successor statutes, in establishing or enforcing the right to
indemnification, in appellate proceedings, or in connection with the
enforcement or collection of any judgment obtained in any such suit or
proceeding).
SECTION 18. EFFECT OF HEADINGS; RECITALS: EXHIBITS. The titles or
headings of the various parts or sections hereof are intended solely for
convenience and are not intended and shall not be deemed to or in any way be
used to modify, explain or place any construction upon any of the provisions
of this Amendment. Any and all Recitals set forth at the beginning of this
Amendment are true and correct and constitute a part of this Amendment as if
they had been set forth as covenants herein. Exhibits, schedules, plats and
riders hereto which are referred to herein are a part of this Amendment.
SECTION 19. FORCE AND EFFECT. Except as modified by this Amendment,
the terms and provisions of the Lease are hereby ratified and confirmed and
shall remain in full force and effect. Should any inconsistency arise
between this Amendment and the Lease as to the specific matters which are the
subject of this Amendment, the terms and conditions of this Amendment shall
control. This Amendment shall be construed to be a part of the Lease and
shall be deemed incorporated in the Lease by this reference.
<PAGE>
SECTION 20. ENTIRE AGREEMENT; AMENDMENT. The Lease as amended by
this Amendment constitutes the full and complete agreement and understanding
between the parties hereto and shall supersede all prior communications,
representations, understandings or agreements, if any, whether oral or
written, concerning the subject matter contained in the Lease as so amended,
and no provision of the Lease as so amended may be modified, amended, waived
or discharged, in whole or in part, except by a written instrument executed
by all of the parties hereto.
SECTION 21. AUTHORITY. Each party represents and warrants to the
other that it has full authority and power to enter into and perform its
obligations under this Amendment, that the person executing this Amendment is
fully empowered to do so, and that no consent or authorization is necessary
from any third party. Landlord may request that Tenant provide Landlord
evidence of Tenant's authority.
SECTION 22. COUNTERPARTS. This Amendment may be executed in
duplicates or counterparts, or both, and such duplicates or counterparts
together shall constitute but one original of the Amendment. Each duplicate
and counterpart shall be equally admissible in evidence, and each original
shall fully bind each party who has executed it.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first set forth above.
TENANT: CYGNUS, INC
a Delaware corporation
By: /s/ James F. Grady
---------------------------------------------
James Grady,
Senior Vice President, Human Resources and
Administration
Date: June 9, 1998
LANDLORD: METROPOLITAN LIFE INSURANCE COMPANY,
a New York corporation
By: /s/ Edward J. Hayes
---------------------------------------------
Edward J. Hayes
Assistant Vice President
Date: June 9, 1998
<PAGE>
Exhibit 10.31
AMENDMENT AGREEMENT
This Amendment Agreement ("Amendment"), effective as of this 17th day
of November, 1998, is between American Home Products Corporation, a Delaware
corporation, having a principal place of business at Five Giralda Farms,
Madison, New Jersey, 07940, U.S.A. acting through its Wyeth-Ayerst
Laboratories Division (hereinafter "Wyeth-Ayerst") and Cygnus, Inc.
(hereinafter "Cygnus"), a Delaware corporation, having a principal place of
business at 400 Penobscot Drive, Redwood City, California, 94063, U.S.A.
WITNESSETH
WHEREAS, Wyeth-Ayerst and Cygnus have entered into a Product Development,
Supply and License Agreement for the U.S. and a Product Development, Supply
and License Agreement for territories outside the U.S. dated December 28,
1993, and a Letter Agreement dated March 7, 1996, pertaining to the 3.5 day
estrogen-only system (hereinafter collectively referred to as "the
Agreements"), for the development, license and supply of certain transdermal
systems in the field of Hormone Replacement Therapy as set forth in the
Agreements;
WHEREAS, Wyeth-Ayerst and Cygnus mutually desire to amend the Agreements in
accordance with the terms set forth herein to clarify each party's rights and
obligations.
NOW, THEREFORE, Wyeth-Ayerst and Cygnus agree as follows:
1. DEFINITIONS
1.1 Except as otherwise specifically stated herein, all capitalized
terms shall be as defined in the Agreements, as the context
requires.
1.2 "Products" as used in this Amendment, shall mean the 7-day
[Confidential Treatment Requested] matrix transdermal patch
("E(2)III") and the 3.5-day [Confidential Treatment Requested]
acetate combination matrix patch and its 3.5 day estrogen-only
matching patch (collectively "E(2)NETA").
-1-
<PAGE>
1.3 "Product Assets" shall mean all U.S. New Drug Application and
Investigational New Drug Application filings, and any foreign
equivalents, relating to Products and all information, data,
submissions and approvals related thereto, as well as Market
Information. "Market Information" shall mean all market
forecasts and market summaries prepared to date by Wyeth-Ayerst
and presented to Cygnus. Cygnus shall remove all references to
Wyeth-Ayerst from such Market Information before distributing it
to any Third Party.
1.4 "Third Party(ies)" shall mean any person(s) or entity(ies) other
than Cygnus or Wyeth-Ayerst or their respective Affiliates.
"Affiliates" shall mean any company that owns or controls
directly or indirectly at least fifty percent (50%) of the voting
stock of either party or any company at least fifty percent (50%)
of whose voting stock is owned or controlled directly or
indirectly by either party. Notwithstanding the foregoing, for
purposes of this Amendment, Immunex Corporation shall not be
considered an Affiliate of Wyeth-Ayerst.
2. TERMS
2.1 The parties agree that the rights and obligations of Wyeth-Ayerst
and Cygnus as set forth in the Agreements are hereby amended as
set forth herein. The parties further agree that the terms of
the Amendment supercede the provisions of Section IX(B)(2) of the
Agreements.
2.2 Upon execution of this Amendment, Wyeth-Ayerst and Cygnus agree
that the Agreements shall be limited to the Products.
Wyeth-Ayerst agrees that upon execution of this Amendment, Cygnus
shall be free to develop, manufacture, license, and market other
transdermal systems in the field of Hormone Replacement Therapy,
either itself or in conjunction with a Third Party.
3. PARTIES' RIGHTS AND OBLIGATIONS
3.1 Upon execution of this Amendment, and for a period of six (6)
months thereafter, Wyeth-Ayerst shall continue to fully perform
its Product
-2-
<PAGE>
Development obligations consistent with the provisions of
Section IV of the Agreements. Within the later of either
thirty (30) calendar days after execution of this Amendment or
December 15, 1998, Wyeth-Ayerst and Cygnus project teams shall
meet and agree upon a list of Wyeth-Ayerst and Cygnus
development obligations for the next twelve (12) months. The
minutes of the last two joint team meetings and CMC meetings
shall serve as a basis for the obligations list. Wyeth-Ayerst
shall pay Cygnus for any and all remaining Product-related
inventory and the like arising out of such development
obligations.
3.2 Upon execution of this Amendment henceforth, Wyeth-Ayerst shall
have no further obligation to conduct any prelaunch and launch
activities for the Products, other than the development
obligations of Section 3.1 hereof.
3.3 At the end of the six (6) month period referred to in Section 3.1
hereof or the execution of a sublicense in accordance with the
provisions of Section 4 hereof, whichever occurs first,
Wyeth-Ayerst shall henceforth be relieved of all rights and
obligations pertaining to the marketing and sales of the Products
in all markets, except for the specific rights provided for in
Section 7.1 hereof.
3.4 For a period of six (6) months less fifteen (15) calendar days
after execution of this Amendment, Wyeth-Ayerst shall have the
sole option to reacquire its rights and obligations under the
Agreements, as superseded by this Amendment (including, but not
limited to, the transfer of Product Assets specified in Section
6.1 hereof), relating to any non-sublicensed territories.
Relevant terms of the Agreements include, but are not limited to,
Section III in the International Agreement and Section III(B),
(C), (D) and (E) in the US Agreement, as well as Cygnus' right to
copromote Products in all territories. If Wyeth-Ayerst does not
exercise its sole option by the close of business fifteen (15)
calendar days after the end of the six (6) month period after
execution of this Amendment, then the option will expire in its
entirety.
4. SUBLICENSE RIGHTS
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<PAGE>
4.1 During the six (6) month period referred to in Section 3.1
hereof, Wyeth-Ayerst shall have the right to sublicense its
rights and obligations under the Agreements for either one or
both Products to one or more Third Parties. Wyeth-Ayerst agrees
to work with Cygnus in identifying and selecting potential
sublicensees. Any such sublicense shall be subject to the prior
written approval of Cygnus, such approval not to be unreasonably
withheld or delayed by Cygnus. Cygnus shall use reasonable
efforts to assist Wyeth-Ayerst in its sublicensing endeavors and
shall not cause unreasonable delays in such endeavors. If the
parties cannot agree regarding any aspect covered by this Section
4.1 or Section 3.1 hereof, then, and for one time only and for a
period not to exceed fourteen (14) days, the area of disagreement
shall be referred to the President/Chief Executive Officer of
Cygnus and the Senior Vice President, Global Business Development
of Wyeth-Ayerst for resolution. During this period not to exceed
fourteen (14) days, the time periods specified in this Amendment
shall be held in abeyance.
4.2 The parties agree that the terms of any such sublicense shall
specify that the sublicensee shall give Cygnus the option to
co-promote the Products. The terms of such option shall be
negotiated directly by Cygnus and said sublicensee.
4.3 If, at the conclusion of the six (6) month period referred to in
Section 3.1 hereof, Wyeth-Ayerst is unable to execute a
sublicense for either one or both Products, then Wyeth-Ayerst
shall be obligated to continue to perform its Product Development
activities under the provisions of Section IV of the Agreements
for each Product which is not sublicensed for an additional six
(6) month period to begin immediately following the six (6) month
period referred to in Section 3.1 hereof. At the end of this
additional six (6) month period, Wyeth-Ayerst's rights and
obligations under the Agreements shall be satisfied and the
Agreements shall be terminated in their entireties, with the
exception of those rights specifically provided for in Section
7.1 hereof.
5. DELAY OF PAYMENT
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<PAGE>
5.1 Cygnus agrees that Wyeth-Ayerst shall be allowed to delay the
payment of any and all relevant regulatory filing milestones for
the E(2)III product under the provisions of Section III (B) of
the Agreements until the end of the six (6) month period referred
to in Section 3.1 hereof or the execution of a sublicense for one
or both Products for the Territory where the milestone in
question applies, whichever occurs first.
6. OWNERSHIP OF PRODUCT ASSETS
6.1 Upon the execution of this Amendment, the Product Assets,
including the regulatory filings for the Products, if any, as
well as any corresponding foreign equivalents thereof, shall
become the sole property of Cygnus. Wyeth-Ayerst agrees to make
commercially reasonable efforts to transfer all rights in said
materials to Cygnus, at no cost to Cygnus, no later than the end
of the six (6) month period referred to in Section 3.1 hereof.
This transfer shall occur at a time and in a manner to be agreed
upon by the parties. Wyeth-Ayerst shall be allowed to retain one
(1) copy of Product Assets in a secure location for purposes of
internal research. Wyeth-Ayerst's use of Product Assets shall be
solely for internal research purposes, which internal research
purposes shall not include the development of Products or any
public disclosure of the Product Assets.
7. NEW ROYALTY AGREEMENT
7.1 In the event that the Agreements are terminated pursuant to the
last sentence of Section 4.3 hereof, in consideration for
Wyeth-Ayerst's development costs to date, Cygnus agrees to pay
Wyeth-Ayerst a royalty of [Confidential Treatment Requested] on
annual Net Sales of Products by Cygnus or its licensee(s) or
sublicensee(s) for a period ending [Confidential Treatment
Requested] from the date of first commercial shipment of Products
by Cygnus or its licensee(s) or sublicensee(s) in the Territory
on a Product by Product and country by country basis. In the
event that Cygnus becomes obligated to make such royalty
payments, the parties agree to execute a new Royalty Agreement
reflecting the royalty above and duplicating the provisions of
the Agreements relating to
-5-
<PAGE>
Payment Terms (Section III(D)) and Records and Audit Rights
(Section III(E)) as applied to Cygnus.
8. SURVIVAL
8.1 The parties agree that the following Sections shall be considered
to survive termination of the Agreements: IV(C) (penultimate
sentence of the first paragraph), VII, VIII, X, XI (first
paragraph only) and XII.
IN WITNESS WHEREOF, the parties have executed this Amendment Agreement
as of the date and year first written above.
AMERICAN HOME PRODUCTS CORPORATION,
acting through its Wyeth-Ayerst Laboratories Division:
By: /s/ Tuan Hangoc
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Name: Tuan Hangoc
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Title: Vice President, AHPC
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Date: November 17, 1998
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CYGNUS, INC.:
By: /s/ Stephen N. Kirnon
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Name: Stephen N. Kirnon
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Title: President, Drug Delivery
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Date: November 12, 1998
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TABLE OF CONTENTS
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RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. DEVELOPMENT OF THE PRODUCTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.1 DEVELOPMENT OF THE PRODUCT . . . . . . . . . . . . . . . . . . . . . . . . 6
2.2 PAYMENT FOR DEVELOPMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 7
3. TERMINATION DURING DEVELOPMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.1 DEVELOPMENT TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.2 WIND DOWN/PAYMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.3 CONSEQUENCE OF TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . 7
4. [CONFIDENTIAL TREATMENT REQUESTED]'S OBLIGATIONS. . . . . . . . . . . . . . . . . 8
4.1 REGULATORY FILINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.2 CYGNUS PARTICIPATION IN REGULATORY PROCESS . . . . . . . . . . . . . . . . 8
4.3 COMMERCIALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
5. [CONFIDENTIAL TREATMENT REQUESTED]. . . . . . . . . . . . . . . . . . . . . . . 10
5.1 [CONFIDENTIAL TREATMENT REQUESTED] . . . . . . . . . . . . . . . . . . . . 10
5.2 [CONFIDENTIAL TREATMENT REQUESTED] . . . . . . . . . . . . . . . . . . . . 11
5.3 [CONFIDENTIAL TREATMENT REQUESTED] FINAL PRODUCT
RIGHTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.4 CYGNUS COMPETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
5.5 PRIOR AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6. SUPPLY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.1 [CONFIDENTIAL TREATMENT REQUESTED] MANUFACTURING AND
SUPPLY RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.2 ROLLING ORDERS AND FORECASTS . . . . . . . . . . . . . . . . . . . . . . . 12
6.3 DELIVERY DATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.4 PACKAGING AND SHIPMENT; RISK OF LOSS . . . . . . . . . . . . . . . . . . . 15
6.5 SHIPMENT AND CLAIM EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . 15
6.6 CYGNUS' FAILURE TO SUPPLY. . . . . . . . . . . . . . . . . . . . . . . . . 15
7. ACCEPTANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
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7.1 INITIAL ACCEPTANCE OF THE PRODUCTS.. . . . . . . . . . . . . . . . . . . . 16
7.2 INSPECTION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.3 RETURN PROCEDURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
7.4 [CONFIDENTIAL TREATMENT REQUESTED] RECALLS . . . . . . . . . . . . . . . . 17
8. PURCHASE PRICE PAYMENT FOR SHIPPING PRODUCT . . . . . . . . . . . . . . . . . . . 17
8.1 BASE PURCHASE PRICE FOR PRODUCT SHIPPED. . . . . . . . . . . . . . . . . . 17
8.2 INVOICE; PAYMENT FOR PRODUCT SHIPPED . . . . . . . . . . . . . . . . . . . 17
8.3 ADDITIONAL PURCHASE PRICE. . . . . . . . . . . . . . . . . . . . . . . . . 17
8.4 MANNER OF PAYMENT; CURRENCY. . . . . . . . . . . . . . . . . . . . . . . . 18
8.5 AUDIT RIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
9. LONG RANGE FORECASTS AND PERFORMANCE MEASURES . . . . . . . . . . . . . . . . . . 19
9.1 [CONFIDENTIAL TREATMENT REQUESTED] PREPARATION AND
SUBMISSION OF LONG RANGE FORECAST. . . . . . . . . . . . . . . . . . . . . 19
9.2 CYGNUS ACCEPTANCE OF LONG RANGE FORECASTS; DISPUTES. . . . . . . . . . . . 20
9.3 FAILURE TO MEET FORECASTS. . . . . . . . . . . . . . . . . . . . . . . . . 21
10. INTELLECTUAL PROPERTY OWNERSHIP . . . . . . . . . . . . . . . . . . . . . . . . . 22
11. CONFIDENTIALITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
12. TERM AND TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
12.1 TERM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
12.2 TERMINATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
12.2.1 TERMINATION FOR CAUSE. . . . . . . . . . . . . . . . . . . . . . . 23
12.2.2 TERMINATION BY AGREEMENT . . . . . . . . . . . . . . . . . . . . . 24
12.3 LIABILITY DISCLAIMER.. . . . . . . . . . . . . . . . . . . . . . . . . . . 24
12.4 GENERAL EFFECTS OF TERMINATION . . . . . . . . . . . . . . . . . . . . . . 24
12.5 TRANSFER OF CUSTOMER AND MARKETING INFORMATION . . . . . . . . . . . . . . 25
12.6 TERMINATION NOT SOLE REMEDY. . . . . . . . . . . . . . . . . . . . . . . . 25
13. PRODUCT WARRANTY AND WARRANTY DISCLAIMERS . . . . . . . . . . . . . . . . . . . . 25
14. PATENT AND TRADEMARK CLAIMS AGAINST THE PARTIES . . . . . . . . . . . . . . . . . 26
14.1 PATENT CLAIMS AGAINST [CONFIDENTIAL TREATMENT REQUESTED] . . . . . . . . . 26
14.3 TRADEMARK CLAIMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
15. INFRINGEMENT BY THIRD PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . 27
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16. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . . . 28
16.1 CYGNUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
16.2 [CONFIDENTIAL TREATMENT REQUESTED] . . . . . . . . . . . . . . . . . . . . 29
16.3 MUTUAL DISCLAIMER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
17. GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
17.1 AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
17.2 GOVERNING LAW AND LEGAL ACTIONS. . . . . . . . . . . . . . . . . . . . . . 30
17.3 HEADINGS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
17.4 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
17.5 ENTIRE AGREEMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
17.6 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
17.7 BASIS OF BARGAIN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
17.8 RELATIONSHIP OF PARTIES. . . . . . . . . . . . . . . . . . . . . . . . . . 31
17.9 ASSIGNMENT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
17.10 PUBLICITY AND PRESS RELEASES.. . . . . . . . . . . . . . . . . . . . . . . 32
17.11 FORCE MAJEURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
17.12 REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
17.13 LIMITATION OF CYGNUS' LIABILITY. . . . . . . . . . . . . . . . . . . . . . 32
17.14 CONSULTATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
17.15 TIME OF ESSENCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
17.16 LETTER OF INTENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
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AGREEMENT
THIS AGREEMENT is made this 21 day of May, 1998 by and between Cygnus
Inc. ("Cygnus"), a Delaware corporation having its principal place of business
at 400 Penobscot Drive, Redwood City, California 94063, and [Confidential
Treatment Requested] Limited ("[Confidential Treatment Requested]"), a
corporation incorporated pursuant to the laws of the Province of [Confidential
Treatment Requested] and having its principal place of business at [Confidential
Treatment Requested]
RECITALS
A. Cygnus and [Confidential Treatment Requested] have executed a
Letter of Intent dated February 10, 1998 (the "LOI"). The parties desire to
enter into a definitive agreement for the development, clinical development,
regulatory approval, supply and commercialization of a nicotine transdermal
system to be sold as a [Confidential Treatment Requested] product or under the
[Confidential Treatment Requested]and, on a [Confidential Treatment Requested]
basis and subject to Section 5.4 herein, bearing [Confidential Treatment
Requested] other than those of [Confidential Treatment].
B. The parties intend that by reason of the negotiation of this
Agreement, Paragraph 2 of the LOI shall no longer be in force with respect to
any nicotine transdermal system.
WHEREFORE, the parties hereby agree as follows:
1. DEFINITIONS. Terms in this Paragraph 1 shall for all purposes
of this Agreement have the meaning specified herein.
1.1 "Affiliate" means a corporation or any other entity that
directly or
1.
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indirectly, through stock ownership or though other arrangements, controls,
is controlled by, or is under common control with, the designated party, but
only for so long as the relationship exists.
1.2 "Effective Date" means the date first written above.
1.3 "Fully Burdened Development Cost" includes the following (as
determined in accordance with generally accepted accounting principles
consistently applied by Cygnus: [Confidential Treatment Requested]. Direct
costs are [Confidential Treatment Requested]. Indirect costs are
[Confidential Treatment Requested].
1.4 "Fully Burdened Manufacturing Cost" means the following (as
determined in accordance with generally accepted accounting principles
consistently applied by Cygnus: [Confidential Treatment Requested]. Direct
costs are [Confidential Treatment Requested]. Indirect costs are
[Confidential Treatment Requested].
1.5 "Long Range Forecast or LRF" shall have the meaning set
forth in Paragraph 4.6 of this Agreement.
1.6 "Major European Country" means [Confidential Treatment
Requested].
1.7 "Net Sales" for a period and country means the gross revenues
in that period with respect to Products sold by [Confidential Treatment
Requested] to a customer not an Affiliate of [Confidential Treatment Requested]
(excluding free samples) in such country, less (to the extent included in the
gross amount):
[Confidential Treatment Requested]
If a unit of Product is distributed in combination or bundled with
one or more other items or services, [Confidential Treatment Requested].
1.8 "Patents" means any and all issued patents in the Territory
and any and all
2.
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applications for letters patent pending in the Territory (until such time as
such applications or any of them are denied, abandoned, or issued into
patents) any patents issuing from such applications, all divisions,
continuations, continuations-in-part and all patents granted thereon, as well
as all other patents in the Territory, including any re-issues,
re-examinations, renewals, or extensions thereof, which are owned by Cygnus,
or under which Cygnus shall have the right to grant rights, and which claim a
Product, the use of a Product, or which claim a process which is part of
Manufacturing Information.
1.9 "Final Product" means [Confidential Treatment Requested].
1.10 "Product" means [Confidential Treatment Requested].
1.11 "Target Specifications" means those specifications set
forth on Exhibit A which represent a goal and do not represent a binding
commitment by either party.
1.12 "Territory" shall mean the [Confidential Treatment Requested].
1.13 "Territory Group" shall mean any of the following countries
singly or grouped as listed: [Confidential Treatment Requested].
2. DEVELOPMENT OF THE PRODUCTS. Cygnus shall perform development
activities as provided below in this Paragraph 2. The parties agree to work
closely with one another in connection with Cygnus' development activities.
The parties expressly understand that it may not be practicable or possible
with commercially reasonable efforts herein to develop prototypes meeting the
Target Specifications for Products and that Cygnus makes no warranty that it
will successfully complete development.
2.1 DEVELOPMENT OF THE PRODUCT. Cygnus shall devote reasonable
efforts to perform the activities set forth in Exhibit B to develop Product
meeting the Target Specifications
3.
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and to conduct all clinical trials necessary to obtain regulatory approval
for the [Confidential Treatment Requested] for the Product. Exhibit B shall
also set forth Cygnus' estimates for its costs to conduct all activities
except clinical trials. Cygnus shall present the protocols, estimated time
schedule and the estimated costs for all clinical trials ("Clinical
Proposal") to [Confidential Treatment Requested] in writing for its approval
which shall not be unreasonably withheld. [Confidential Treatment Requested].
Any rejection by [Confidential Treatment Requested] of the Clinical
Proposal must be accompanied by a firm proposal from a contract research
organization, fully qualified to conduct all necessary clinical trials
[Confidential Treatment Requested] In the event [Confidential Treatment
Requested] fails to provide timely such a firm proposal, Cygnus' Clinical
Proposal shall be deemed accepted.
2.2 PAYMENT FOR DEVELOPMENT. [Confidential Treatment Requested]
shall be obligated to pay Cygnus' Fully Burdened Development Cost for its
activities set forth in paragraph 2.1 above. Cygnus may bill [Confidential
Treatment Requested] monthly and [Confidential Treatment Requested]. Cygnus
shall supply copies of any third-party invoices together with its invoice. All
payments are non-refundable and [Confidential Treatment Requested]'s obligation
under this subparagraph may not be asserted as an offset against any claims by
[Confidential Treatment Requested] against Cygnus.
3. TERMINATION DURING DEVELOPMENT.
3.1 DEVELOPMENT TERMINATION. At any time [Confidential Treatment
Requested] after completion of the first clinical study, [Confidential Treatment
Requested].
3.2 WIND DOWN/PAYMENT. Following the giving of notice of
Development Termination pursuant to Paragraph 3.1, [Confidential Treatment
Requested] shall be obligated to
4.
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pay Cygnus for its [Confidential Treatment Requested] for all development
activities through the date of the notice plus Cygnus' [Confidential Treatment
Requested] reasonably incurred in the wind down of the development project
including, but not limited to, those costs incurred in the completion of any
studies, trials or tests commenced but not concluded; contract commitments in
existence for goods and services, reallocation and reassignment of equipment
and personnel. Cygnus shall submit copies of any third-party invoices
together with its invoice.
3.3 CONSEQUENCE OF TERMINATION. Upon giving of notice of
Development Termination, [Confidential Treatment Requested] shall relinquish
all rights under Paragraphs 5.1 and 5.2.
4. [CONFIDENTIAL TREATMENT REQUESTED]'S OBLIGATIONS
4.1 REGULATORY FILINGS. [Confidential Treatment Requested] at its
own expense shall devote reasonable efforts (i) to undertake and complete, as
soon as reasonably practicable, all regulatory filings for the Product for all
countries in the Territory and (ii) obtain regulatory approval for all countries
in the Territory. [Confidential Treatment Requested] may make all regulatory
filings for the Territory in its name.
4.2 CYGNUS PARTICIPATION IN REGULATORY PROCESS. Cygnus shall be
entitled to participate in all regulatory activities undertaken by [Confidential
Treatment Requested] pursuant to Section 4.1, above, including attendance at any
meetings with regulatory bodies or experts, review all material regulatory
submissions prior to filing, and receive copies of all material communications
with regulatory bodies. The parties agree to consult with each other concerning
all material aspects and events of the process of obtaining regulatory approval
for the [Confidential Treatment Requested]. Provided, however, such information
and submission shall
5.
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be regarded as Proprietary Information of [Confidential Treatment Requested]
under Section 11 and shall not be used by Cygnus other than as provided
pursuant to the terms and conditions of this Agreement.
4.3 COMMERCIALIZATION.
(a) [Confidential Treatment Requested] shall devote diligent
efforts to launch the Final Product as soon as reasonably practicable in the
[Confidential Treatment Requested]. In no event shall launch occur later than
[Confidential Treatment Requested] after receipt of regulatory approval which
permits commercial sale for any of the [Confidential Treatment Requested]. At
any time more than [Confidential Treatment Requested] after the earlier of (i)
receipt of regulatory approval for a Product in the [Confidential Treatment
Requested]. or (ii) [Confidential Treatment Requested] may give notice in
writing to Cygnus of its intent to seek regulatory approval for and
commercialization of the Final Product in a country outside the Territory
("Territory Addition Notice"). Upon the giving of such Territory Addition
Notice, which must identify the country or countries, such country or countries
shall become part of the Territory and [Confidential Treatment Requested] shall
become obligated to use diligent efforts to obtain regulatory approval and
launch the product and all provisions of this Agreement shall govern such Final
Product in the country or countries. At any time after the commencement of the
period for [Confidential Treatment Requested] to give a Territory Addition
Notice, if no such notice has been given for a particular country outside the
Territory, Cygnus may give notice in writing to [Confidential Treatment
Requested] of intent to seek regulatory approval for and commercialization of
the Final Product for sale under terms described in Paragraph 5.1 in such
country outside the Territory. Upon receipt of such notice,
6.
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[Confidential Treatment Requested] shall have [Confidential Treatment
Requested] to give notice in writing to Cygnus accepting or rejecting the
country. If [Confidential Treatment Requested] elects to give notice
accepting the country, the country shall become included in the Territory and
it shall promptly undertake such clinical trials (as may be required), obtain
regulatory approval and launch the Final Product, as provided in this Agreement
and all provisions of this Agreement shall govern such Final Product in the
country. If [Confidential Treatment Requested] shall give notice rejecting
the country or fail to timely respond to the notice, Cygnus shall be free
itself or with a third party to develop and commercialize the Final Product
in such country as a [Confidential Treatment Requested] product without a
[Confidential Treatment Requested] or bearing the [Confidential Treatment
Requested].
(b) use diligent efforts to market, distribute and support
the Final Product on a continuing basis;
(c) comply with good business practices and all laws and
regulations of the Regulatory Authorities applicable to it in each country
where Final Product is sold;
(d) notify Cygnus of any problems encountered with the
Final Product and any suggested resolutions for those problems;
(e) not make any claims, representations, warranties or
guarantees to any third party with respect to the Specifications, features or
capabilities of Final Product that are inconsistent with the literature
provided by Cygnus;
(f) promptly notify Cygnus of any adverse reaction or
results or any actual or potential government action relevant to Final
Product and the parties will discuss with each other measures to be
undertaken necessary to resolve the problem;
7.
<PAGE>
(g) keep for [Confidential Treatment Requested] after
termination of this Agreement records of all Final Product sales and customers
sufficient to adequately administer a recall of any Final Product and to fully
cooperate in any decision by Cygnus to recall, retrieve and/or replace any Final
Product.
5. [CONFIDENTIAL TREATMENT REQUESTED].
5.1 [CONFIDENTIAL TREATMENT REQUESTED]. After the expiration of
the period specified in Paragraph 3.1 for the giving of a notice of Development
Termination, if no such notice of Development Termination has been given,
[Confidential Treatment Requested] shall have an [Confidential Treatment
Requested] for the term of this Agreement in the Territory to distribute and
sell such particular packages of the Final Product which are (i) [Confidential
Treatment Requested] Nicotine product and [Confidential Treatment Requested] or
(ii) which [Confidential Treatment Requested] offering the Final Product for
sale to the ultimate consumer.
5.2 [CONFIDENTIAL TREATMENT REQUESTED]. Commencing on the
effective date hereof and ending upon the earlier of (i) the giving of notice of
Development Termination under Paragraph 3.1 or (ii) the commencement of Product
[CONFIDENTIAL TREATMENT REQUESTED] under Paragraph 5.1 above, Cygnus shall not
enter into any agreement with any third party (which agreement was not in
existence as of the effective date hereof) to develop, manufacture or supply any
transdermal system for the delivery of nicotine which is to be offered for sale
or sold in the Territory (i) [Confidential Treatment Requested] nicotine product
and [Confidential Treatment Requested] offering the product for sale to the
ultimate consumer.
5.3 [CONFIDENTIAL TREATMENT REQUESTED] FINAL PRODUCT RIGHTS
After the expiration of the period specified in Paragraph 3.1 for
the giving of a
8.
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notice of Development Termination, if no such notice of Development
Termination has been given, [Confidential Treatment Requested], subject to
Section 5.4, shall have a [Confidential Treatment Requested] right for the
term of this Agreement in the Territory to distribute and sell the Final
Product bearing [Confidential Treatment Requested] other than of the
[Confidential Treatment Requested] offering the product for sale.
5.4 CYGNUS COMPETITION. Nothing in Paragraphs 5.1 or 5.2 shall
prevent Cygnus itself or in conjunction with or pursuant to an agreement with a
third party from developing, manufacturing, supplying, offering for sale or
selling nicotine transdermal systems, of any formulation whether or not
identical to the Final Product, which would be sold bearing prominent
[Confidential Treatment Requested] other than the [Confidential Treatment
Requested] offering the product for sale to the ultimate consumer. Provided,
however, Cygnus agrees that it will refrain from licensing for sale in the
Territory or selling in the Territory any nicotine transdermal system identical
to Final Product in dosages of 7, 14 or 21 mg/day unless such transdermal system
is also offered with a dosage greater than 21 mg/day.
5.5 PRIOR AGREEMENTS. [Confidential Treatment Requested]'s rights
under Paragraphs 5.1 and 5.2 shall be subject to the rights arising under
contracts by Cygnus with third parties, which contracts were in existence as
of the Effective Date relating to that particular nicotine patch formulation
known as "Nicotrol."
6. SUPPLY.
6.1 [Confidential Treatment Requested] MANUFACTURING AND SUPPLY
RIGHTS. Cygnus shall have the [Confidential Treatment Requested] to make,
have made, and supply the Final Product to [Confidential Treatment Requested]
and [Confidential Treatment Requested]
9.
<PAGE>
shall have no license express or implied to make itself or have made by a
third party Final Product. [Confidential Treatment Requested] shall fulfill
all of its requirements for the Final Product solely by placing orders
hereunder with Cygnus.
6.2 ROLLING ORDERS AND FORECASTS
6.2.1. With respect to Final Product to be sold in any
Territory Group in the Territory, [Confidential Treatment Requested] shall
deliver to Cygnus, on a Territory Group basis, (i) at least four (4) full
calendar quarters prior to the calendar quarter in which the first commercial
sale of such Final Product in such Territory Group is projected to occur, a
forecast of [Confidential Treatment Requested]'s quantity requirements for
such Final Product for such country for the calendar quarter in which the first
commercial sale of such Final Product is projected to occur and (ii) at least
one (1) full calendar quarter prior to the calendar quarter in which the first
commercial sale of such Final Product in such Territory Group is projected to
occur, [Confidential Treatment Requested]'s firm order and requested delivery
dates ("Delivery Dates") for such Final Product for such Territory Group for
such calendar quarter and a forecast of its quantity requirements for such
Product for such Territory Group for the subsequent three (3) calendar quarters.
Thereafter, [Confidential Treatment Requested] shall deliver to Cygnus within
ten (10) days after the beginning of each calendar quarter, [Confidential
Treatment Requested]'s firm order and Delivery Dates for such Final Product for
such Territory Group for the next calendar quarter and a forecast of its
quantity requirements for such Final Product for such Territory Group for the
subsequent three (3) calendar quarters. If a required forecast or order for a
quarter is not timely submitted for a Final Product for a Territory Group, the
immediately preceding forecast for that quarter shall become the new forecast or
order; if there is
10.
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no preceding forecast for a quarter, the forecast or order for the
immediately preceding quarter shall become the forecast or order.
6.2.2 For each forecast for a Territory Group, the amount
of Final Product forecasted for delivery in the first of the three quarters
forecasted shall be not less than fifty percent (50%) or more than one hundred
fifty percent (150%) of the most recent forecast for such quarter for such
country. If [Confidential Treatment Requested]'s purchases of Final Products
from one quarter to another vary substantially, Cygnus may experience difficulty
in adjusting efficiently its manufacturing capacity and operations.
Accordingly, [Confidential Treatment Requested] shall act in a commercially
reasonable manner to schedule orders so as to attempt to avoid creating over or
under capacity problems for Cygnus.
6.2.3. The total amount of Final Product ordered by
[Confidential Treatment Requested] for delivery in any calendar quarter in any
Territory Group may not be less than seventy-five percent (75%) of [Confidential
Treatment Requested]'s most recent required forecast for such Final Product for
such Territory Group for such quarter. Cygnus shall use reasonable efforts to
supply products properly ordered pursuant to the ordering mechanism set forth in
this Section 6. Cygnus's supply obligation will not extend to more than one
hundred twenty-five percent (125%) of [Confidential Treatment Requested]'s most
recent forecast for such Product for such country for such quarter. If a
[Confidential Treatment Requested] product requirement for any quarter exceeds
125% of [Confidential Treatment Requested]'s most recent forecast for such Final
Product for such Territory Group for such calendar quarter, Cygnus and
[Confidential Treatment Requested] will discuss in good faith the additional
amount, if any, that Cygnus is willing to supply consistent with its other
obligations and [Confidential Treatment
11.
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Requested] will adjust its order accordingly. [Confidential Treatment
Requested] shall indemnify Cygnus and reimburse it promptly upon request for
all reasonable out of pocket costs and expenses, (including the cost of
carrying increased inventory if requested by [Confidential Treatment Requested]
to do so, but excluding any such costs and expenses that are reimbursable as
Manufacturing Cost), to the extent caused by any deviation in order quantities
from the limits imposed by the preceding sentence, and Cygnus will act
reasonably to mitigate any such costs and expenses.
6.3 DELIVERY DATE
6.3.1. Cygnus will provide a firm scheduled delivery date and
an order acknowledgment promptly after receipt of [Confidential Treatment
Requested]'s firm order. Cygnus will use reasonable efforts to meet each firm
scheduled delivery date, but will not be liable for failure to do so due to a
Force Majeure Act. In the event of a Force Majeure Act, Cygnus may not reduce
production or shipment of Products for [Confidential Treatment Requested] by a
percentage exceeding the amount of reduction caused by the Force Majeure Act.
Cygnus will not be responsible for any delay after tender to the carrier for
delivery.
6.4 PACKAGING AND SHIPMENT; RISK OF LOSS. Cygnus will package and
ship all items in Cygnus's customary manner, which shall be consistent with
industry practices, CGMP and FDA regulations, as applicable. The risk of loss
of or damage to all the Products ordered by [Confidential Treatment Requested]
will pass to [Confidential Treatment Requested] upon Cygnus's tender of delivery
to the carrier for shipment.
6.5 SHIPMENT AND CLAIM EXPENSES [Confidential Treatment Requested]
of transportation, insurance, taxes, export and import fees, customs brokerage
and similar charges.
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[Confidential Treatment Requested] will make and negotiate any claims against
any carrier, insurer, customs broker, freight forwarder or customs collector.
6.6 CYGNUS' FAILURE TO SUPPLY. In the event Cygnus for reasons
other than force majeure fails to meet its supply obligations by more than
[Confidential Treatment Requested] per month for each of six consecutive months
or by more than [Confidential Treatment Requested] per month for each of any
nine months of any twelve month period, [Confidential Treatment Requested] shall
be entitled to a [Confidential Treatment Requested] to have made Final Product
solely for sale pursuant to and subject to the other terms and limitations of
this Agreement except Section 8.1. [Confidential Treatment Requested] and
Cygnus shall jointly select and negotiate with any proposed [Confidential
Treatment Requested]. Cygnus shall be entitled to reject as a [Confidential
Treatment Requested]. Cygnus, [Confidential Treatment Requested], shall supply
such assistance in transferring know-how as is reasonably required to enable the
[Confidential Treatment Requested] to manufacture the Final Product. The
[Confidential Treatment Requested] shall execute an agreement in writing binding
it to the confidentiality provisions of Section 11, hereof, and [Confidential
Treatment Requested] shall be jointly and severally liable for such
confidentiality obligations. In the event Cygnus determines that it is able
once again to supply, it may give notice thereof in writing to [Confidential
Treatment Requested] and may resume supply one hundred and twenty days (120)
days after such notice at which time the [Confidential Treatment Requested] have
made [Confidential Treatment Requested] set forth above shall terminate and
[Confidential Treatment Requested] shall cease. In the event that the
third-party manufacturing agreement requires a payment to permit commencement of
manufacturing, Cygnus and [Confidential Treatment Requested] shall
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negotiate in good faith whether or not there shall be any [Confidential
Treatment Requested] due under Section 8.3 as a result. Provided, however, in
no event shall [Confidential Treatment Requested] seek Cygnus' agreement to
[Confidential Treatment Requested] under Section 8.3 by more than [Confidential
Treatment Requested].
7. ACCEPTANCE
7.1 INITIAL ACCEPTANCE OF THE PRODUCTS [Confidential Treatment
Requested], with the input of Cygnus, and using generally accepted standards for
products of like kind, will develop criteria for acceptance of the Final
Product, subject to approval of such criteria by Cygnus, which approval will not
be unreasonably delayed or withheld.
7.2 INSPECTION [Confidential Treatment Requested] will have a
period of thirty (30) days after delivery to [Confidential Treatment Requested]
of each item of the Final Product in which to review and inspect. If
[Confidential Treatment Requested] gives Cygnus written notice of a defect or
nonconformity with specifications, [Confidential Treatment Requested] shall
return the defective or nonconforming item to Cygnus. If [Confidential Treatment
Requested] does not give Cygnus written notice of the defect or nonconformity
before expiration of that period, the item of Final Product will be accepted.
7.3 RETURN PROCEDURE. Before returning any item to Cygnus,
[Confidential Treatment Requested] will contact Cygnus and obtain a return
authorization (which shall not be delayed or withheld).
7.4 [CONFIDENTIAL TREATMENT REQUESTED] RECALLS. [Confidential
Treatment Requested] shall have the right, at any time, to recall Final Product.
[Confidential Treatment Requested] shall maintain at all times in written or
recorded form, an effective system for the
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recall of Final Product from the market. [Confidential Treatment Requested]
shall notify Cygnus prior to commencing any recall. Notwithstanding any recall,
[Confidential Treatment Requested] shall be liable for performance of its
obligations under this Agreement including all payments under Section 8 of this
Agreement. Any recall hereunder shall be at [Confidential Treatment
Requested]'s sole expense, unless it can establish that Cygnus was negligent in
the design or manufacture of the Final Product and that there was an absence of
any negligence on the part of [Confidential Treatment Requested] and/or its
customers with respect to the acceptance, inspection, storage, shipping and
distribution of the Final Product.
8. PURCHASE PRICE PAYMENT FOR SHIPPING PRODUCT
8.1 BASE PURCHASE PRICE FOR PRODUCT SHIPPED. The base purchase
price for Final Product shall be equal to Cygnus' [Confidential Treatment
Requested].
8.2 INVOICE; PAYMENT FOR PRODUCT SHIPPED. Upon shipment Cygnus may
invoice [Confidential Treatment Requested] for the amount determined by Section
8.1 for such shipment. [Confidential Treatment Requested]'s payment shall be
due forty-five (45) days after the date of Cygnus' invoice.
8.3 ADDITIONAL PURCHASE PRICE. As an additional purchase price,
[Confidential Treatment Requested] shall pay Cygnus an amount equal to the
percentages set forth below of Net Sales, computed on a Territory Group basis
for the Final Product. Such additional purchase price payment, together with a
report showing the calculation of Net Sales, the data showing the basis for the
existence of competition above[Confidential Treatment Requested], and currency
conversions on a county-by-country basis, shall be made quarterly and shall be
due forty-five (45) days after the commencement of each calendar quarter.
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If no [Confidential Treatment Requested] [Confidential Treatment Requested]
in the Territory Group
[Confidential Treatment Requested] [Confidential Treatment Requested]
in the Territory Group
[Confidential Treatment Requested] [Confidential Treatment Requested]
in the Territory Group
For purposes of this paragraph, a [Confidential Treatment Requested] in a
Territory Group is a competitor whose sales, on a unit basis, of a nicotine
transdermal system which is sold as a [Confidential Treatment Requested] without
[Confidential Treatment Requested] are reported by IMS to be equal to or greater
than [Confidential Treatment Requested] of the total number of unit sales for
all nicotine transdermal products in that Territory Group. The determination of
whether there is a [Confidential Treatment Requested] or the number of such
[Confidential Treatment Requested] shall be made on a Territory Group basis.
8.4 MANNER OF PAYMENT; CURRENCY. All payment to Cygnus under this
Paragraph 8 shall be in U.S. dollars. Late payments shall bear interest at the
lower of (i) the prime rate announced from time to time by the Bank of America
plus 3% (three percent) or (ii) the maximum rate allowed by law. Conversions
from foreign currency to U.S. dollars will be determined on the last business
day of the month for which the payment is due based on the rate at which U.S.
dollars may be purchased from such other currency at the close of business in
new York as stated in the WALL STREET JOURNAL for that day.
8.5 AUDIT RIGHTS. Both parties shall keep complete and accurate
books and records reflecting all information necessary or useful in verifying
the accuracy of all reports delivered and payments made under this Agreement.
Each party shall have the right to cause its independent certified public
accountant to audit, the books and records of the other as they relate
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to such forecasts, reports and payments, PROVIDED, that such audit: (i) is
conducted during normal business hours, (ii) is conducted no more often than
twice per year (unless a discrepancy greater than [Confidential Treatment
Requested] is discovered in favor of the auditing party, and (iii) is conducted
only after it has given ten days' prior written notice to the other. The
auditing party shall bear the [Confidential Treatment Requested] of such audit,
unless a discrepancy in excess of [Confidential Treatment Requested] in favor of
the auditing party is discovered, in which event the other party shall bear
[Confidential Treatment Requested] of such audit. Regardless of the amount of
discrepancy discovered, all discrepancies (and interest thereon) shall be
immediately due and payable by the party found to have caused the discrepancy.
All books and records relating to either party's obligations under this
Agreement shall be retained by such party for five years after the Term has
expired.
9. LONG RANGE FORECASTS AND PERFORMANCE MEASURES.
9.1 [CONFIDENTIAL TREATMENT REQUESTED] PREPARATION AND SUBMISSION
OF LONG RANGE FORECAST. [Confidential Treatment Requested] after the first
filing anywhere in the Territory of an ANDA or NDA or their equivalent,
[Confidential Treatment Requested] will supply Cygnus with a preliminary
[Confidential Treatment Requested] Product unit sales forecast for the Territory
broken down by the Territory Group. [Confidential Treatment Requested] after the
filing of any Regulatory Submission for the Territory Group, [Confidential
Treatment Requested] will supply Cygnus with a [Confidential Treatment
Requested] Product unit and dollar sales forecast for each Territory Group. For
a Product Launch in the Territory Group occurring in any year prior to
[Confidential Treatment Requested], no later than [Confidential Treatment
Requested] of the year of Product Launch, [Confidential Treatment
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Requested] will submit for Cygnus' approval, a binding one [Confidential
Treatment Requested] product unit and dollar sales forecast for the Product
for that Territory Group, such forecast covering the [Confidential Treatment
Requested] commencing on [Confidential Treatment Requested] of the year
following the year of Product Launch; for Product Launch occurring in any year
on [Confidential Treatment Requested] or later, no later than [Confidential
Treatment Requested] of the year following Product Launch, [Confidential
Treatment Requested] will submit for Cygnus' approval a binding one
[Confidential Treatment Requested] Product unit and dollar sales forecast for
the Product for such Territory Group, such forecast covering the [Confidential
Treatment Requested] commencing [Confidential Treatment Requested] of the
second year following the year of Product Launch (the "First Long Range
Forecast"). Thereafter for each Territory Group, on a Territory Group basis
three (3) months before the end of the period covered by the First Long Range
Forecast (and thereafter each Long Range Forecast) [Confidential Treatment
Requested] will submit for Cygnus' approval a new [Confidential Treatment
Requested] forecast for the Territory Group (the Long Range Forecast"). The
First Long Range Forecast and each Long Range Forecast thereafter shall set
forth the forecast of the number of units of each type of Product to be sold
and the Net Sales for a Territory Group for the year of the forecast. The
First Long Range Forecast and each Long Range Forecast for a Territory Group
shall be accompanied by data and a report prepared according to accepted
pharmaceutical marketing research methods.
9.2 CYGNUS ACCEPTANCE OF LONG RANGE FORECASTS; DISPUTES. Within
[Confidential Treatment Requested] of receipt of any Long Range Forecast or
First Long Range Forecast, as the case may be, Cygnus shall notify [Confidential
Treatment Requested] of its
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acceptance or rejection of the forecast. If Cygnus fails to give such notice,
it shall be deemed to have accepted the forecast. In the event Cygnus rejects
the forecast, Cygnus may choose an independent market research organization.
Cygnus and [Confidential Treatment Requested] shall thereupon submit all
marketing data developed to date and the proposed [Confidential Treatment
Requested] Long Range Forecast in dispute and request the retained research
organization to prepare a long range forecast which adopts neither best case
assumptions nor conservative assumptions, but adopts the mid-point between the
two categories of assumptions. The forecast prepared by the marketing research
organization shall thereupon be deemed adopted as the Long Range Forecast as of
the applicable commencement date provided in Section 9.1.
9.3 FAILURE TO MEET FORECASTS. If on a Territory Group basis for
any Territory Group at the end of [Confidential Treatment Requested] of any Long
Range Forecast or First Long Range Forecast, Net Sales of Products were less
than [Confidential Treatment Requested] of the amount forecast for such
[Confidential Treatment Requested] for that Territory Group, Cygnus may elect to
convert [Confidential Treatment Requested]'s rights under Paragraph 5.1 to
[Confidential Treatment Requested] rights for that Territory Group. In the
event that [Confidential Treatment Requested]'s Net Sales at the end of any year
of any Long Range Forecast or First Long Range Forecast were less than
[Confidential Treatment Requested] of the amount forecast for such year for that
Territory Group, Cygnus may elect to [Confidential Treatment Requested] for that
Territory Group. In the event Cygnus has obtained the right hereunder to
[Confidential Treatment Requested] for two or more Territory Groups, Cygnus may
[Confidential Treatment Requested] in its entirety. Any election by Cygnus
pursuant to this Paragraph shall be signified by notice in writing given to
[Confidential Treatment Requested].
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Provided, further, Cygnus shall not be entitled to elect to convert rights to a
[Confidential Treatment Requested] basis or [Confidential Treatment Requested]
pursuant to this Paragraph if [Confidential Treatment Requested]'s failure to
achieve the required level of Net Sales was primarily attributable to a failure
to supply on the part of Cygnus and but for such failure [Confidential Treatment
Requested] would reasonably have been expected to and been able to satisfy such
Net Sales requirements.
10. INTELLECTUAL PROPERTY OWNERSHIP. Cygnus shall be the sole owner
of all intellectual property created, developed or invented in connection with
the Product and its development and the development of its manufacturing methods
and processes, regardless of the identity of the inventor. Any assignments
necessary to accomplish the foregoing are hereby made and [Confidential
Treatment Requested] will execute such further documents as may be reasonably
requested by Cygnus with respect thereto.
11. CONFIDENTIALITY. Each party agrees that all inventions,
processes, materials, chemicals, know-how and ideas and all other business,
technical and financial information they obtain from the other are the
confidential property of the disclosing party ("Proprietary Information" of the
disclosing party). Except as expressly allowed in this Agreement, the receiving
party will hold in confidence and not use itself or disclose to any third party
any Proprietary Information of the disclosing party and shall similarly bind its
employees in writing. The receiving party shall not be obligated under this
Paragraph 11 beyond five (5) years after termination or expiration of this
Agreement or with respect to information the receiving party can document:
(i) is or has become readily publicly available through no fault
of the
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receiving party or its employees or agents; or
(ii) is received from a third party lawfully in possession of such
information and lawfully empowered to disclose such information and provided the
receiving party abides by all restrictions imposed by such third party; or
(iii) was rightfully in the possession of the receiving party
prior to its disclosure by the other party provided the receiving party
abides by all restrictions imposed on its possession of such information; or
(iv) was independently developed by employees or consultants of
the receiving party without access to such Proprietary Information.
12. TERM AND TERMINATION.
12.1 TERM Unless terminated earlier as provided herein, this
Agreement will have an initial term ending upon the later of (i) expiration of
the last to expire of any Cygnus Patents directed specifically to the Product
(including its production) or (ii) [Confidential Treatment Requested]. At any
time during the last six months of the term hereof, either party may request a
meeting with the other to discuss and negotiate contractual terms and conditions
for extending the term, and/or transferring of technology and/or a license for
manufacture and/or transferring of the regulatory package.
12.2 TERMINATION.
12.2.1 TERMINATION FOR CAUSE. This Agreement may be
terminated in its entirety by either party for cause immediately upon the
occurrence of any of the following events:
(i) If the other ceases to do business, or otherwise terminates
its business
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operations;
(ii) If the other shall fail to promptly secure or renew any
license, registration, permit, authorization or approval necessary for the
conduct of its business in the manner contemplated by this Agreement in the
U.S., or if any such license, registration, permit, authorization or approval
is revoked or suspended and not reinstated within 60 days or diligent efforts
are not being made to effect such reinstatement; or
(iii) If the other materially breaches any material provision of
this Agreement and fails to cure such breach within sixty (60) days (fifteen
(15) days in the case of a failure to pay) of written notice describing the
breach.
12.2.2 TERMINATION BY AGREEMENT. In the event the parties mutually
agree to terminate this Agreement, the parties agree that the negotiations
concerning termination will include discussion and negotiations of the
possibility of and terms for (i) transfer of all Regulatory Filings made
anywhere in the world and all market research data concerning Final Product by
[Confidential Treatment Requested] to Cygnus, and (ii) a license by Cygnus to
[Confidential Treatment Requested] to such patents and know-how as is necessary
to make and have made Final Product and a license to use and sell such Final
Product.
12.3 LIABILITY DISCLAIMER The terminating party shall not incur
any liability whatsoever to the other party for any damage, loss or expenses
of any kind suffered or incurred by the other (or for any compensation to the
other) arising from or incident to any termination of this Agreement by the
terminating party which complies with the terms of the Agreement whether or
not such party is aware of any such damage, loss or expenses.
12.4 GENERAL EFFECTS OF TERMINATION. The following provisions
shall survive
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the termination of this Agreement: Paragraphs 8.5, 10, 11, 12.5, 13, and 17.
Obligations of the parties to make any payments under Paragraph 2 and under
firm orders for purchase and delivery of Products at the time of such
termination and with regard to sales of Products occurring prior to the
termination shall remain in effect. Remedies for breaches will also survive.
Each party will promptly return all Proprietary Information of the other (and
all copies and abstracts thereof) that it is not entitled to use under the
surviving terms of this Agreement.
12.5 TRANSFER OF CUSTOMER AND MARKETING INFORMATION. In the
event of any termination by either party before the expiration of the term
provided in Paragraph 12.1, [Confidential Treatment Requested] will as soon
as practicable transfer to Cygnus title to all Regulatory Filings made
anywhere in the world and execute all necessary documents and reasonably
cooperate with Cygnus to effect a prompt transfer of ownership and rights in
the filings to Cygnus and, in addition, transfer any and all market research
data related to the Product. Cygnus, in its discretion, may elect to direct
[Confidential Treatment Requested] to transfer less than all of the foregoing
records. The parties shall negotiate a reasonable royalty payable to
[Confidential Treatment Requested] for such transfer to Cygnus which royalty
shall not exceed [Confidential Treatment Requested] of Net Sales.
12.6 TERMINATION NOT SOLE REMEDY Termination is not the sole
remedy under this Agreement and, whether or not termination is effected, all
other remedies will remain available.
13. PRODUCT WARRANTY AND WARRANTY DISCLAIMERS. Cygnus warrants only
to [Confidential Treatment Requested] that the Product, when shipped to
[Confidential Treatment Requested] by Cygnus, will conform to the applicable
Specifications, as then in effect, and
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CGMP and FDA regulations, as applicable. Such warranty does not apply to
Product that has been mishandled, mistreated or used or maintained or stored
subsequent to their dispatch by Cygnus other than in conformity with Cygnus'
instructions.
[CONFIDENTIAL TREATMENT REQUESTED]'S SOLE AND EXCLUSIVE REMEDY FOR ANY BREACH OF
THE FOREGOING WARRANTY SHALL BE REPLACEMENT BY CYGNUS OF RETURNED
NON-CONFORMING UNITS OF PRODUCT FOR WHICH FULL DOCUMENTATION AND NOTICE OF
NON-CONFORMITY IS PROVIDED TO CYGNUS WITHIN THE PERIOD OF THE FINAL PRODUCT
SHELF-LIFE ESTABLISHED BY CYGNUS AFTER THE ORIGINAL NON-CONFORMING UNITS ARE
SHIPPED BY CYGNUS OR, AT CYGNUS' OPTION, REFUND TO [CONFIDENTIAL TREATMENT
REQUESTED] OF THE FULL PURCHASE COSTS OF THE RETURNED NON-CONFORMING UNITS OF
THE PRODUCT. EXCEPT FOR THE FOREGOING WARRANTIES AND THE PROVISIONS OF SECTION
14, CYGNUS DOES NOT WARRANT THE MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE OF THE PRODUCTS OR PERFORMANCE OF THE PRODUCTS OR NONINFRINGEMENT BY THE
PRODUCTS; DOES NOT MAKE ANY WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO
PRODUCTS, SPECIFICATIONS, SUPPORT, SERVICE OR ANYTHING ELSE AND DOES NOT MAKE
ANY WARRANTY TO [CONFIDENTIAL TREATMENT REQUESTED]'S CUSTOMERS OR AGENTS.
CYGNUS HAS NOT AUTHORIZED ANYONE TO MAKE ANY REPRESENTATION OR WARRANTY OTHER
THAN AS PROVIDED ABOVE.
14. PATENT AND TRADEMARK CLAIMS AGAINST THE PARTIES.
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14.1 PATENT CLAIMS AGAINST [CONFIDENTIAL TREATMENT REQUESTED. If
[Confidential Treatment Requested] receives a claim that the Product infringes
upon a valid patent, [Confidential Treatment Requested] will notify Cygnus
promptly in writing and give Cygnus all necessary information and assistance and
the exclusive authority to evaluate such claim. If Cygnus receives a claim that
the Product infringes upon a valid patent, Cygnus will notify [Confidential
Treatment Requested] promptly in writing of the claim. Cygnus shall have the
sole right at its cost to defend and/or settle any such claim, including but not
limited to, the right and options to (i) settle or defend against the claim,
(ii) procure the right to the intellectual property being asserted or pay a
royalty thereon; (iii) replace or modify the Product to avoid infringement; (iv)
recall the Product or (v) do any combination of the foregoing. Provided such
timely notice has been given by [Confidential Treatment Requested], should any
court of competent jurisdiction hold the Product to be infringing, Cygnus will
pay any final judgment against [Confidential Treatment Requested] arising from
such infringement and, if the use of such Product is enjoined, Cygnus will take
at its option, one or more of the actions described in (ii), (iii) or (iv)
above.
14.2 THE FOREGOING IS GIVEN TO [CONFIDENTIAL TREATMENT REQUESTED]
SOLELY FOR ITS BENEFIT AND IN LIEU OF, AND CYGNUS DISCLAIMS ALL OTHER WARRANTIES
OF NONINFRINGEMENT WITH RESPECT TO THE PRODUCTS.
14.3 TRADEMARK CLAIMS. If either party receives a claim that the
Product infringes a valid trademark, it shall notify the other of such claim.
[Confidential Treatment Requested] shall have the sole right at its cost to
defend and/or settle any such claim, including,
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but not limited to, the right and option to (i) settle or defend against the
claim, (ii) procure a license or pay a royalty, (iii) relabel the Product to
avoid infringement, and (iv) do any combination of the foregoing. Provided
Cygnus has given timely notice of any claim against it, [Confidential Treatment
Requested] will defend any such claim and indemnify Cygnus from and against any
and all damages, settlements or judgments rendered.
15. INFRINGEMENT BY THIRD PARTIES
15.1 Cygnus shall have the initial right and option, at its sole and
absolute discretion and expense, to file and maintain lawsuits in its own name
for infringement by third parties of any intellectual property right related to
any Product. [Confidential Treatment Requested] shall, at the request of
Cygnus, give Cygnus all reasonable assistance and cooperation in any such
proceedings. Cygnus shall bear all expenses, including attorneys' fees,
incurred in the prosecution of any such proceeding and shall have the sole right
to any judgment or settlement obtained therein.
15.2 Notwithstanding Cygnus' elections hereunder, or the results or
outcome thereof, [Confidential Treatment Requested]'s obligation to make
payments to Cygnus under this Agreement shall be unaffected.
16. REPRESENTATIONS AND WARRANTIES.
16.1. CYGNUS. Cygnus hereby represents and warrants to [Confidential
Treatment Requested] as follows:
(i) Its execution and delivery of this Agreement and performance
of its obligations under this Agreement will not violate any (a) any federal,
state or municipal statute or regulation or any order of any court or other
governmental department, authority, agency or
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instrumentality, or (b) any agreements with or rights of third parties.
(ii) All corporate action on the part of Cygnus necessary for the
authorization, execution and delivery of this Agreement has been taken.
Cygnus has the requisite corporate power and authority to enter into this
Agreement and perform its obligations under the terms of this Agreement. This
Agreement has been duly authorized, executed and delivered by Cygnus, and
upon due execution and delivery by [Confidential Treatment Requested], this
Agreement will be a valid and binding agreement of Cygnus, except as
enforceability may be limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally or by
equitable principles.
16.2 [CONFIDENTIAL TREATMENT REQUESTED]. [Confidential Treatment
Requested] hereby represents and warrants to Cygnus as follows:
(i) Its execution and delivery of this Agreement and performance
of its obligations under this Agreement will not violate any (a) any federal,
state or municipal statute or regulation or any order of any court or other
governmental department, authority, agency or instrumentality, or (b) any
agreements with or rights of third parties.
(ii) All corporate action on the part of [Confidential Treatment
Requested] necessary for the authorization, execution and delivery of this
Agreement has been taken. [Confidential Treatment Requested] has the requisite
corporate power and authority to enter into this Agreement and perform its
obligations under the terms of this Agreement. This Agreement has been duly
authorized, executed and delivered by [Confidential Treatment Requested], and
upon due execution and delivery by Cygnus, this Agreement will be a valid and
binding agreement of the many, except as enforceability may be limited by
bankruptcy, insolvency,
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reorganization, moratorium or similar laws affecting creditors' rights
generally or by equitable principles.
16.3 MUTUAL DISCLAIMER Each party disclaims any and all
representations or warranties other than those expressly set forth in this
Section 16.
17. GENERAL
17.1 AMENDMENT AND WAIVER. Except as otherwise expressly provided
herein, any provision of this Agreement may be amended and the observance of any
provision of this Agreement may be waived (either generally or in any particular
instance and either retroactively or prospectively) only with the written
consent of the parties. However, it is the intention of the parties that this
Agreement be controlling over additional or different terms of any purchase
order, confirmation, invoice or similar document, even if accepted in writing by
both parties, and that waivers and amendments shall be effective only if made by
non-pre-printed agreements clearly understood by both parties to be an amendment
or waiver. The failure of either party to enforce its rights under this
Agreement at any time for any period shall not be construed as a waiver of such
rights.
17.2 GOVERNING LAW AND LEGAL ACTIONS This Agreement shall be
governed by and construed under the laws of the State of North Carolina and
the United States without regard to conflicts of laws provisions thereof and
without regard to the United Nations Convention on Contracts for the
International Sale of Goods. Unless otherwise elected by Cygnus in writing
for a particular instance (which Cygnus may do at its option), the sole
jurisdiction and venue for actions related to the subject matter hereof shall
be the California state and U.S. federal courts located in San Jose,
California. Both parties consent to the jurisdiction of
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such courts and agree that process may be served in the manner provided
herein for giving of notices or otherwise as allowed by California state or
U.S. federal law. In any action or proceeding to enforce rights under this
Agreement, the prevailing party shall be entitled to recover costs and
attorneys' fees.
17.3 HEADINGS. Headings and captions are for convenience only
and are not to be used in the interpretation of this Agreement.
17.4 NOTICES Notices under this Agreement shall be sufficient
only if personally delivered, delivered by a major commercial rapid delivery
courier service or mailed by certified or registered mail, return receipt
requested to a party at its addresses first set forth herein or as amended by
notice pursuant to this subparagraph, to the attention of the President in
the case of Cygnus and to the attention of the Office of General Counsel in
the case of [Confidential Treatment Requested]. If not received sooner,
notice by mail shall be deemed received 5 days after deposit in the U.S. or
Canadian mails.
17.5 ENTIRE AGREEMENT This Agreement supersedes all proposals,
oral or written, all negotiations, conversations, or discussions between or
among parties relating to the subject matter of this Agreement and all past
dealing or industry custom.
17.6 SEVERABILITY. If any provision of this Agreement is held to
be illegal or unenforceable, that provision shall be limited or eliminated to
the minimum extent necessary so that this Agreement shall otherwise remain in
full force and effect and enforceable.
17.7 BASIS OF BARGAIN. Each party recognizes and agrees that the
warranty disclaimers and liability and remedy limitations in this Agreement
are material bargained for bases of this Agreement and that they have been
taken into account and reflected in determining
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the consideration to be given by each party under this Agreement and in the
decision by each party to enter into this Agreement.
17.8. RELATIONSHIP OF PARTIES. The parties hereto expressly
understand and agree that the other is an independent contractor in the
performance of each and every part of this Agreement, is solely responsible
for all of its employees and agents and its labor costs and expenses arising
in connection therewith.
17.9 ASSIGNMENT This Agreement and the rights hereunder are not
transferable or assignable without the prior written consent of the parties
hereto; provided however that either party may assign this Agreement to any
wholly-owned subsidiary or to any successor by merger, sale or otherwise of all
or substantially all of the business or assets of the business unit to which
this Agreement relates.
17.10 PUBLICITY AND PRESS RELEASES Except to the extent necessary
under applicable laws or for ordinary marketing purposes, the parties agree to
devote reasonable efforts to agree upon the timing or content of press releases
or other public statements relating to the terms of this Agreement or events or
performance hereunder. A press release announcing this Agreement will be
jointly developed and released by the parties.
17.11 FORCE MAJEURE. No liability or loss of rights hereunder shall
result to either party from delay or failure in performance (other than payment)
caused by force majeure, that is, circumstances beyond the reasonable control of
the party affected thereby, including, without limitation, acts of God, fire,
flood, war, government action, compliance with laws or regulations (including,
without limitation, those related to infringement), strikes, lockouts or other
serious labor disputes, or shortage of or inability to obtain material or
equipment.
30.
<PAGE>
17.12 REMEDIES. Except as otherwise expressly stated in this
Agreement, the rights and remedies of a party set forth herein with respect to
failure of the other to comply with the terms of this Agreement (including,
without limitation, rights of full termination of this Agreement) are not
exclusive, the exercise thereof shall not constitute an election of remedies and
the aggrieved party shall in all events be entitled to seek whatever additional
remedies may be available in law or in equity.
17.13 LIMITATION OF CYGNUS' LIABILITY. IN NO EVENT WILL EITHER
PARTY BE LIABLE FOR ANY INCIDENTAL, SPECIAL, CONSEQUENTIAL OR PUNITIVE
DAMAGES IN CONNECTION WITH OR ARISING OUT OF THIS AGREEMENT (INCLUDING LOSS
OF PROFITS, USE OR OTHER ECONOMIC ADVANTAGE) NO MATTER WHAT THEORY OF
LIABILITY, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES.
17.14 CONSULTATION In the event of a material change in
circumstances which affects performance of obligations hereunder which could
not have reasonably been foreseen by one of the parties hereto, the party
affected may give notice in writing to the other. The parties will endeavor
during a twenty (20) day period thereafter to engage in negotiations and
discussions concerning possible mutual agreement as to the response thereto.
17.15 TIME OF ESSENCE Time is of the essence.
17.16 LETTER OF INTENT. All provisions of the LOI related to
Nicotine are hereby deemed cancelled and rescinded.
CYGNUS, INC. [CONFIDENTIAL TREATMENT
REQUESTED]
31.
<PAGE>
By: Stephen N. Kirnon By [Confidential Treatment Requested]
Name Stephen N. Kirnon Name [Confidential Treatment Requested]
Title President, Drug Delivery Title Chairman and CEO
Division
32.
<PAGE>
Cygnus, Inc. - Confidential
Exhibit A
Nicotine Product Profile
And Target Specifications
Drug: Nicotine
Indication: Smoking Cessation
[Confidential Treatment Requested] [Confidential Treatment Requested]
[Confidential Treatment Requested] [Confidential Treatment Requested]
[Confidential Treatment Requested] [Confidential Treatment Requested]
[Confidential Treatment Requested] [Confidential Treatment Requested]
[Confidential Treatment Requested] [Confidential Treatment Requested]
[Confidential Treatment Requested] [Confidential Treatment Requested]
[Confidential Treatment Requested] [Confidential Treatment Requested]
[Confidential Treatment Requested] [Confidential Treatment Requested]
[Confidential Treatment Requested] [Confidential Treatment Requested]
i
<PAGE>
Cygnus, Inc. - Confidential
Exhibit B
Product Development Plan
<TABLE>
<CAPTION>
Estimated Estimated Cost
--------- --------------
Activities Completion ($000s)
---------- ----------
<S> <C> <C>
</TABLE>
i
<PAGE>
Exhibit 10.33
AMENDMENT NO. 1
TO
NICOTINE AGREEMENT BETWEEN
CYGNUS INC. AND [CONFIDENTIAL TREATMENT REQUESTED]
Cygnus Inc. ("Cygnus") and [Confidential Treatment Requested] hereby
agree to amend the Nicotine Agreement between them by adding the following
paragraph as Section 6.7:
6.7 GMP AUDITS. [Confidential Treatment Requested] shall have the right
to audit the facility of Cygnus as may be necessary to assure that all
applicable FDA or similar government regulations have been met with respect to
Final Product. Cygnus shall permit duly authorized representatives of
[Confidential Treatment Requested] to conduct such an audit following the making
of a prior appointment. Such audits may be conducted for the sole purpose of
assuring compliance with all pertinent acts, regulations, and guidelines
promulgated by the FDA and other regulatory authorities concerning the Final
Product. The foregoing audits shall be conducted no more than one (1) time per
calendar year, unless there are observations which the parties mutually agree
require a further audit. Such audits will be permitted during normal business
hours and will be performed with a minimum of disruption. [Confidential
Treatment Requested] shall furnish Cygnus with copies of all reports prepared as
a result of these audits. [Confidential Treatment Requested] agrees to notify
Cygnus within ten (10) working days of any concerns that it may have which were
discovered during an audit. All information disclosed by Cygnus or discovered
or learned by [Confidential Treatment Requested] during such audits shall be
deemed Cygnus Confidential Information governed by Section 11.
DATED: August 21, 1998 DATED: August 25, 1998
------------------------ ----------------------------------
CYGNUS, INC. [Confidential Treatment Requested]
By /s/ Stephen N. Kirnon By /s/ [Confidential Treatment Requested]
---------------------------- --------------------------------------
Stephen N. Kirnon
President, Drug Delivery
<PAGE>
Exhibit 10.34
SUPPLY AGREEMENT
This Supply Agreement ("Agreement") is signed and effective on June
19, 1998 by and between Cygnus, Inc., a Delaware corporation, with its
principal place of business at 400 Penobscot Drive, Redwood City, California
94063 ("Cygnus"), and E.I. du Pont de Nemours & Co., a Delaware corporation,
with its principal place of business at 1001 Market Street, Wilmington,
Delaware 19898 ("DuPont").
WHEREAS, Cygnus has substantial knowledge and expertise in and owns
certain technology relating to the development, manufacture and sale of
transdermal monitoring systems;
WHEREAS, DuPont has substantial knowledge and expertise in and owns
certain technology relating to the development, manufacture and sale of thick
film materials commonly referred to as "inks" or "pastes";
WHEREAS, Cygnus and DuPont desire each other's assistance in
developing certain technologies related to[Confidential Treatment Requested],
including without limitation transdermal monitoring systems and the use,
composition and manufacture of thick film materials and have signed a Product
Development and License Agreement of even date herewith;
WHEREAS, Cygnus and DuPont also desire to enter into a separate
supply arrangement with respect to Thick Film Materials (as defined below).
NOW THEREFORE, in consideration of the above premises and the
mutual covenants contained herein, the Parties hereto agree as follows:
1. DEFINITIONS. When used in this Agreement, each of the following terms
shall have the meaning provided below:
a. "Development Agreement" means the Detection of Analytes Product
Development and License Agreement signed of even date herewith by the Parties.
b. "Diagnostics Field" means all applications for the [Confidential
Treatment Requested] in connection with the diagnosis and treatment of disease
in humans, including but not limited to diabetes and complications of diabetes;
however currently available, whether through publication or commercialization,
invasive diagnostics applications are not included within the definition of
Diagnostics Field.
c. "Milestones" means the Milestones as defined in the Development
Agreement.
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d. "Parties" means DuPont and Cygnus and, when used in the singular,
means either of them.
e. "Project" means the Project as defined in the Development Agreement.
f. "Specifications" means the specifications for the Thick Film Materials
as described in Exhibit A attached hereto.
g. "Thick Film Materials" means thick film materials, commonly referred
to as "inks" or "pastes," such materials [Confidential Treatment Requested]. It
is agreed that the Thick Film Materials are not, and shall not be referred to
as, "medical grade" Thick Film Materials.
h. "Thick Film Technology" means the Thick Film Technology as defined
in the Development Agreement.
i. "Technology" means the Technology as defined in the Development
Agreement.
j. "Transfer Letter" means the Transfer Letter as defined in the
Development Agreement.
k. "Signing Date" or "Effective Date" of the Agreement refers to the
date indicated on page 1 of the Agreement.
2. SUPPLY OF PRODUCTS.
a. SUPPLY TO CYGNUS. DuPont will be Cygnus' and Cygnus' subcontractors'
preferred supplier of Thick Film Materials for use in the Diagnostics Field. As
such, DuPont will have the right of first refusal to supply the Thick Film
Materials [Confidential Treatment Requested] to Cygnus and Cygnus'
subcontractors for use in the Diagnostics Field; provided however, Cygnus shall,
at its option, have the right to purchase such Thick Film Materials from third
party suppliers if Cygnus exercises its license option pursuant to Section 7.c.
DuPont will not, [Confidential Treatment Requested] the term of this Agreement,
supply or license the Thick Film Materials or Thick Film Technology to a
[Confidential Treatment Requested] for use within the Diagnostics Field.
b. SUPPLY TO CYGNUS' SUBCONTRACTORS. In the event that Cygnus should
choose to have its subcontractors purchase the Thick Film Materials directly
from DuPont, the terms and conditions of this Agreement shall apply equally to
those purchases, except for credit terms.
c. FORECASTS. Three (3) months prior to the first commercial
manufacturing order of Thick Film Materials by Cygnus or its subcontractors,
Cygnus will provide DuPont a non-binding forecast of anticipated orders of Thick
Film Materials for each calendar quarter during the following twelve (12) month
period. Thereafter, Cygnus will provide to DuPont within ten
2
<PAGE>
(10) days prior to the beginning of each calendar quarter, a non-binding
forecast of anticipated orders of Thick Film Materials for each calendar
quarter during the following twelve (12) month period.
d. SECOND SOURCE OF THICK FILM MATERIALS. During the term of this
Agreement, DuPont will use reasonable efforts to ensure the availability of
an alternative manufacturing site as a second source of Thick Film Materials
in the event that DuPont, through its primary manufacturing site, is unable
to meet its supply obligations hereunder. If for any reason or no reason,
DuPont determines that it may not be able to supply all of Cygnus' or Cygnus'
subcontractors' requirements of Thick Film Materials, DuPont will provide
Cygnus with prompt written notice of such inability to supply. Promptly
after giving such notice or if, at any time, DuPont fails on two (2)
consecutive occasions to deliver Thick Film Materials by the date scheduled
pursuant to Section 2.e below, DuPont will use its best efforts to use such
secondary manufacturing site or to assist an alternative supplier in
providing Cygnus with its requirements of Thick Film Materials.
e. ORDERS. In ordering Thick Film Materials from DuPont, Cygnus or
Cygnus' subcontractors shall use purchase orders referencing this Agreement.
Cygnus or its subcontractors will provide DuPont with a purchase order at
least thirty (30) days prior to a requested delivery date for Thick Film
Materials. DuPont will provide Cygnus, within ten (10) days after receipt of
an order, a firm delivery schedule and an order acknowledgement. DuPont will
use reasonable commercial efforts to ship and deliver ordered Thick Film
Materials on or before the date requested. DuPont will be solely responsible
for any costs associated with expediting Thick Film Materials in order to
meet the scheduled delivery dates for each firm order (including, without
limitation, overtime charges, fees required to expedite Thick Film Materials
or services used in manufacturing and incremental transportation costs),
provided that Cygnus has complied with the terms of this Agreement in placing
such order. DuPont will use reasonable commercial efforts to meet Cygnus'
reasonable requests for orders of Thick Film Materials which require short
lead time or expedited delivery dates.
f. PRICING AND PAYMENTS.
i. Price ranges for Thick Film Materials sold to Cygnus or its
subcontractors hereunder shall be set once a year by mutual consent of the
Parties, however the price will vary with that of precious metal market
prices, and will be linked to the price reduction Milestones specified in the
Development Agreement. This pricing will at that time be attached hereto as
Exhibit B. Prices shall be F.O.B. destination (whether shipped to Cygnus or
its subcontractors).
ii. During the first year that DuPont supplies Cygnus Thick Film
Materials under this Agreement, payment terms will be net [Confidential
Treatment Requested] after acceptance of Thick Film Materials, thereafter,
payment terms will be net [Confidential Treatment Requested] after acceptance of
Thick Film Materials purchased directly by Cygnus.
g. CONFLICTING TERMS. In ordering and delivering Thick Film
Materials, DuPont and Cygnus and Cygnus' subcontractors may use their
standard forms, however, nothing in such
3
<PAGE>
forms shall be construed to amend or modify the terms of this Agreement.
h. ACCEPTANCE PROCEDURES. Acceptance criteria and procedures for
Thick Film Materials shall be mutually established and agreed to by the
Parties and included in the Subcontractor Manual described in Section 3.c
below.
3. MANUFACTURING; TESTING.
a. MANUFACTURING.
i. DuPont will manufacture the Thick Film Materials such that
they meet the Specifications set forth in Exhibit A attached hereto.
ii. DuPont shall at all times manufacture all Thick Film Materials
in an ISO 9001 or ISO 9002 certified facility, or may propose a comparable
alternative certification for Cygnus' review and acceptance, and shall adhere
to the requirements established in this Agreement and in the Subcontractor
Manual.
iii. Cygnus shall have the right to audit the manufacturing and
quality control process and records at DuPont to ensure compliance with the
applicable ISO 9000 standard, this Agreement, and the Subcontractor Manual.
Such audits will be performed at a mutually agreeable time for both Parties.
Any discrepancies identified in writing by Cygnus shall be responded to in
writing by DuPont and corrected when reasonable and appropriate to do so.
b. QUALITY CONTROL; TESTING. Prior to each shipment of Thick Film
Materials, DuPont shall perform, or cause to be performed, quality control
procedures that are calculated to verify that the quantity or batch of such
Thick Film Materials to be shipped conforms with all Specifications as set
forth in Exhibit A under this Agreement. Each shipment of Thick Film
Materials shall be accompanied by a certificate of analysis ("C of A") which
shall include an assurance of quality, the Cygnus purchase order number, the
Cygnus part number, part description, DuPont manufacturing lot number and the
results of the tests performed by DuPont on the Thick Film Materials.
c. SUBCONTRACTOR MANUAL. DuPont will work with Cygnus to jointly
develop a Subcontractor Manual which will provide detail for the linkage
between the Parties' quality systems and establish the detailed expectations,
test specifications, and procedures that will govern the manufacture, supply,
delivery and acceptance of Thick Film Materials.
d. REJECTION. Cygnus or its subcontractors shall have thirty (30)
days following the day on which Thick Film Materials are received to reject
the materials because all or part of the shipment fails to conform to the
applicable Specifications as set forth in Exhibit A, by giving written notice
to DuPont specifying the manner in which all or part of such shipment fails
to meet the foregoing requirements. All shipments or portions thereof not
rejected by Cygnus during such period shall be paid for in accordance with
Section 2.f above. All shipments or portions thereof which Cygnus rejects
but did not have the right to reject, shall be paid for within
4
<PAGE>
thirty (30) days following the day on which such determination was made,
unless Cygnus had paid earlier. In the event Cygnus rejects a shipment or
portion thereof within such thirty (30) day period in accordance with the
terms hereof but after payment therefor had been made, Cygnus shall be
entitled only to recoup the payment amount by, at Cygnus' sole election,
DuPont issuing a prompt refund or by Cygnus offsetting such amount against
the payment of future invoices hereunder. The warranties given by DuPont
shall survive any failure by Cygnus to reject Thick Film Materials under this
paragraph.
e. Later Discovered Nonconformities. It is recognized that it is
possible for a shipment of Thick Film Materials to have nonconformities to
the Specifications as set forth in Exhibit A that would not be discoverable
upon reasonable physical inspection or testing. As soon as either Party
becomes aware of such a nonconformity in any lot or batch of Thick Film
Materials, it shall immediately notify the other Party in writing of the lot
or batch involved and, at Cygnus' election, such Thick Film Materials shall
be deemed rejected as of the date of such notice. In the event that such
Thick Film Materials are found to be nonconforming within one (1) year after
receipt by Cygnus or its subcontractors, DuPont will reimburse Cygnus for
that proportional share of Cygnus' total costs, including, but not limited
to, the costs of other materials, subsequent processing costs, transportation
costs, and the costs of product recalls as are attributable to DuPont's
failure to provide conforming Thick Film Materials. Such reimbursement in
any twelve (12) month period is limited to the total value of the Thick Film
Materials purchased by Cygnus from DuPont within the one (1) year period
prior to the written notification of the nonconformity.
4. CONFIDENTIALITY.
a. The Confidentiality Provisions of the Development Agreement
(Section 6 therein) govern this Supply Agreement.
b. The Confidentiality obligations of both Parties set forth in a
Confidentiality Agreement originally accepted on March 22, 1995 by Cygnus
Therapeutic Systems and extended effective March 21, 1996 signed by Cygnus
Inc. shall be governed by the present Agreement and this earlier
Confidentiality Agreement, as amended and extended, is hereby terminated.
5. REPRESENTATIONS AND WARRANTIES.
a. DuPont hereby covenants, represents and warrants to Cygnus that:
i. On the date of shipment, all Thick Film Materials sold by
DuPont to Cygnus hereunder will comply with the Specifications stated in
Exhibit A and conform with the information shown on the C of A provided for
the particular shipment according to Section 3.b above; and
ii. Title to all Thick Film Materials sold hereunder shall pass to
Cygnus as provided herein free and clear of any security interest, lien, or
other encumbrance; and
5
<PAGE>
EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION 5, DUPONT MAKES NO
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE THICK FILM
MATERIALS, AND DUPONT HEREBY EXPRESSLY DISCLAIMS ANY AND ALL IMPLIED OR
STATUTORY WARRANTIES, INCLUDING WITHOUT LIMITATION, WARRANTIES OF
MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
(b) Cygnus hereby covenants, represents, and warrants to DuPont that:
i. Cygnus has a regulatory staff properly trained in the
requirements of the United States Food, Drug and Cosmetic Act, the Medical
Device Amendments thereto, and other pertinent regulations. Cygnus has a
clinical medical staff, or qualified medical consultants and clinical
investigators, and Cygnus will take such actions as are needed to comply with
all laws and regulations pertinent to its transdermal monitoring systems, and
has conducted or will conduct such studies as are needed to evaluate the
safety of, and the proper labeling and use of, its transdermal monitoring
systems.
ii. Cygnus will not use the Thick Film Materials in any medical
applications involving permanent implantation into the human body or
permanent internal contact with body fluids or tissues (where "permanent"
means intended implantation or continuous internal contact with body fluids
or tissues for more than thirty (30) days) and will not resell or otherwise
transfer the Thick Film Materials to any third party for use in any such
permanent medical applications.
6. LIMITATION OF LIABILITY.
EXCEPT FOR A BREACH OF SECTION 4, NOTWITHSTANDING ANYTHING ELSE IN THIS
AGREEMENT OR OTHERWISE, NEITHER PARTY WILL BE LIABLE TO THE OTHER WITH
RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY CONTRACT,
NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY
INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES.
7. TERM AND TERMINATION.
a. TERM. This Agreement will commence as of the Signing Date and, unless
terminated as provided below, shall continue in effect until terminated pursuant
to Section 7.b below. DuPont shall [Confidential Treatment Requested] supply
and Cygnus shall [Confidential Treatment Requested] purchase each specific Thick
Film Material for a period of [Confidential Treatment Requested] after the Start
of Supply Date specified in Exhibit A for such Thick Film Material unless the
Agreement or the supply and purchase of that particular Thick Film Material is
terminated earlier pursuant to Section 7.b below. Thereafter, this Agreement
shall continue for a specific Thick Film Material unless a Party has provided
the other Party with eighteen (18) months' written notice of termination without
cause prior to the end of such [Confidential Treatment Requested], or provides
such eighteen months' notice at any time thereafter, or unless
6
<PAGE>
terminated pursuant to Section 7.b below.
b. TERMINATION FOR CAUSE.
i. This Agreement may be terminated in part immediately by Cygnus
only as the Agreement relates to a particular Thick Film Material upon
written notice to DuPont for that particular Thick Film Material
[Confidential Treatment Requested] after DuPont waives its development option
in Section 2.l ("Right of First Refusal") of the Development Agreement.
ii. This Agreement may be terminated in its entirety by a Party
upon the occurrence of any of the following events:
A. By a Party immediately upon written notice to the other
Party if the Development Agreement is terminated pursuant to Section 7.b.
thereof;
B. By a Party upon sixty (60) days' written notice if there has
been a material breach of any representation, warranty, covenant or obligation
contained in this Agreement on the part of the other Party which such party
fails to cure during such sixty day period;
C. If the other Party ceases to do business, or otherwise
terminates its business operations;
D. If the other Party shall fail to promptly secure or renew
any license, registration, permit, authorization or approval necessary for the
conduct of its business in the manner contemplated by this Agreement, or if any
such license, registration, permit, authorization or approval is revoked or
suspended and not reinstated within sixty (60) days or, if reinstatement is not
possible within sixty (60) days, diligent efforts are not being made to effect
such reinstatement; or
E. If the other shall seek protection under any bankruptcy,
receivership, trust deed, or comparable proceeding, or if any such proceeding is
instituted against the other (and not dismissed within one hundred and eighty
(180) days).
iii. DuPont may terminate this Agreement by giving Cygnus written
notice in the event of:
A. notice from any source to DuPont of any allegation
relating to the Thick Film Material or monitoring system using such Thick
Film Materials that, in DuPont's sole discretion, may raise an issue or a
controversy relating to the safety of such Thick Film Materials or monitoring
system using such Thick Film Materials, or
B. notice from any source to DuPont of any allegation of
personal injury that in DuPont's sole discretion, may raise an issue or a
controversy relating to the safety of the Thick Film Materials or the
monitoring system using such Thick Film Materials.
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<PAGE>
c. LICENSE OPTION.
i. If either of the following events occurs:
A. Cygnus terminates this Agreement pursuant to 7.b.ii; or
B. DuPont's [Confidential Treatment Requested] of any
specific Thick Film Material is discontinued pursuant to Section 7.a,
then Cygnus shall be entitled to make Thick Film Materials or have Thick Film
Materials made by a third party manufacturer, and DuPont shall grant Cygnus an
[Confidential Treatment Requested], [Confidential Treatment Requested] license
in the Diagnostics Field, with the right to sublicense, under DuPont's patents
and patent applications relating to Thick Film Materials that arise out of work
done in connection with the Project or are specifically listed on Exhibit C of
the Development Agreement to import, make, have made, use, offer for sale and
sell in the Diagnostics Field, provided Cygnus pays DuPont's prior actual,
direct [Confidential Treatment Requested] relating to such patent applications
and patents and, provided Cygnus agrees to pay either DuPont's future reasonable
in-house [Confidential Treatment Requested] or those [Confidential Treatment
Requested] of a mutually agreed upon law firm, whichever is more cost-effective,
for prosecuting and maintaining such patent applications and patents.
ii. DuPont shall provide at no charge to Cygnus or Cygnus' third
party manufacturer prompt, reasonable assistance, for a period not to exceed
[Confidential Treatment Requested] from the date this option is exercised and,
at Cygnus' expense, shall transfer such Thick Film Technology and other
formulations, processes, key process methods, specifications, inventions,
know-how and other confidential and proprietary information as is necessary to
enable Cygnus to efficiently and promptly implement a manufacturing facility to
manufacture the Thick Film Materials.
iii. Cygnus shall be free to use any confidential information it
deems necessary in the development and commercialization of Thick Film Materials
for use in the Diagnostics Field, without any prior approval of DuPont.
d. TERMINATION UNDER SECTION 7.b.iii. In the event only that DuPont
provides written notice of its termination of this Agreement under
Section7.b.iii:
i. DuPont shall, at the prompt written request of Cygnus,
immediately provide Cygnus or its designee a Transfer Letter detailing all
information necessary for Cygnus or its designated third party to manufacture to
specifications (as set forth in the Transfer Letter) the Thick Film Materials
applicable to the Diagnostics Field under this Agreement and take all reasonable
steps to assist Cygnus in such a transfer, provided Cygnus pays DuPont for
DuPont's reasonable actual, [Confidential Treatment Requested] in the transfer
of Technology; additionally, provided Cygnus
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<PAGE>
places an order within sixty (60) days from receipt of Transfer Letter, DuPont
shall sell Cygnus up to eighteen (18) months' supply of Thick Film Materials;
ii. Cygnus shall be free to use any confidential information it
deems necessary in the development and commercialization of Thick Film Materials
for use in the Diagnostics Field, without any prior approval of DuPont; and
iii. DuPont shall perform one of the following at DuPont's sole
discretion:
A. grant Cygnus an [Confidential Treatment Requested] license
in the Diagnostics Field, with the right to sublicense, under DuPont's patents
and patent applications relating to Thick Film Materials that arise out of work
done in connection with the Project or are specifically listed on Exhibit C of
the Development Agreement to import, make, have made, use, offer for sale and
sell in the Diagnostics Field, provided Cygnus pays DuPont's prior actual,
direct [Confidential Treatment Requested] relating to such patent applications
and patents and, provided Cygnus agrees to pay either DuPont's future reasonable
in-house [Confidential Treatment Requested] or those [Confidential Treatment
Requested] of a mutually agreed upon law firm, whichever is more cost-effective,
for prosecuting and maintaining such patent applications and patents;
B. assign promptly DuPont's patents and patent applications
relating to Thick Film Materials applicable to the Diagnostics Field that arise
out of work done in connection with the Project or are specifically listed on
Exhibit C of the Development Agreement, provided Cygnus pays DuPont's prior
actual direct [Confidential Treatment Requested] relating to such patent
applications and patents and any actual direct [Confidential Treatment
Requested] relating to the assignment of such patent applications and patents;
or
C. agree that it will not assert any patent or patent
application controlled (in the sense of having the right to grant licenses
and sublicenses) by DuPont corresponding in subject matter to the Thick Film
Technology to prevent any party, including Cygnus, from importing, making,
having made, using, offering to sell, or selling any product for use in the
Diagnostics Field.
e. In the event that Section 7.d.i is exercised, Cygnus shall
indemnify, defend, and hold DuPont harmless from all claims for compensatory
or punitive damages arising from personal injury, wrongful death, property
damage, or any other type of damages associated with the transferred Thick
Film Materials and/or Thick Film Technology, whether claims are based on any
alleged: breach of a contractual obligation; violation of any statute or
regulation; or tortious conduct, including but not limited to, claims of
negligence, strict liability, concert of action, conspiracy, third party
contractor claims, or allegations of DuPont's joint or sole negligence or
other tortious conduct associated with the transferred Thick Film Materials
and/or Thick Film Technology; provided, however, such indemnity shall apply
to Thick Film Materials made by DuPont and transferred to Cygnus under
Section 7.d.i only insofar as such Thick Film Materials meet specifications
and warranties, as delineated above in Sections 3 and 5.
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<PAGE>
f. NO LIABILITY FOR TERMINATION. Neither Party shall incur any
liability whatsoever for any damage, loss or expenses of any kind suffered or
incurred by the other (or for any compensation to the other) arising from or
incident to any termination of this Agreement by such Party which complies
with the terms of this Agreement, whether or not such Party is aware of any
such damage, loss or expenses.
g. EFFECT OF TERMINATION. In addition to provisions that by their
terms survive termination, the following provisions shall survive the
termination of this Agreement: Sections 2.f, 3.e, 4, 5, 6, 7, and 8.
Remedies for all breaches hereunder will also survive. Upon any termination
by Cygnus or by DuPont pursuant to Section 7, Cygnus shall have the right to
purchase DuPont's existing inventory of Thick Film Materials at the then
applicable prices.
h. TERMINATION NOT SOLE REMEDY. Termination is not the sole remedy
under this Agreement and, whether or not termination is effected, all other
remedies will remain available.
8. GENERAL.
a. AMENDMENT AND WAIVER. Except as otherwise expressly provided
herein, any provision of this Agreement may be amended and the observance of
any provision of this Agreement may be waived (either generally or in any
particular instance and either retroactively or prospectively) only with the
written consent of both Parties. However, it is the intention of the Parties
that this Agreement be controlling over additional or different terms of any
purchase order, confirmation, invoice or similar document, even if accepted
in writing by both Parties, and that waivers and amendments of any provision
of this Agreement shall be effective only if made by non-pre-printed
agreements signed by both Parties and clearly understood by both Parties to
be an amendment or waiver. The failure of either Party to enforce its rights
under this Agreement at any time for any period shall not be construed as a
waiver of such rights.
b. GOVERNING LAW AND LEGAL ACTIONS. This Agreement shall be governed
by and construed under the laws of the State of California and the United
States without regard to conflicts of laws provisions thereof. In any action
or proceeding to enforce rights under this Agreement, the prevailing Party
shall be entitled to recover costs and attorneys' fees.
c. HEADINGS. Headings and captions are for convenience only and are
not to be used in the interpretation of this Agreement.
d. NOTICES. Any notice or other communication required or permitted
to be made or given to either Party under this Agreement shall be deemed
sufficiently made or given on the date of delivery if delivered in person or
by overnight commercial courier service with tracking capabilities with costs
prepaid, or three (3) days after the date of mailing if sent by certified
first class U.S. mail, return receipt requested and postage prepaid, at the
address of the Parties set forth below or such other address as may be given
from time to time under the terms of this notice provision:
10
<PAGE>
If to DuPont: DuPont Photopolymer & Electronic Materials
E.I. du Pont de Nemours and Company
14 TW Alexander Drive
P.O. Box 13999
Research Triangle Park, NC 27709-3999
Attention: Director, Worldwide Microcircuit
Materials
If to Cygnus: Cygnus, Inc.
400 Penobscot Drive
Redwood City, California 94063
Attention: Director, Materials
e. ENTIRE AGREEMENT. This Agreement (and all Exhibits hereto)
constitutes the entire understanding and agreement with respect to the
subject matter hereof and supersedes all proposals, oral or written, all
negotiations, conversations, or discussions between or among Parties relating
to the subject matter of this Agreement and all past dealing or industry
custom.
f. SEVERABILITY. If any provision of this Agreement is held to be
illegal or unenforceable, that provision shall be limited or eliminated to
the minimum extent necessary so that this Agreement shall otherwise remain in
full force and effect and enforceable.
g. RELATIONSHIP OF PARTIES. The Parties hereto expressly understand
and agree that the other is an independent contractor in the performance of
each and every part of this Agreement, is solely responsible for all of its
employees and agents and its labor costs and expenses arising in connection
therewith.
h. ASSIGNMENT. This Agreement and the rights hereunder are not
transferable or assignable without the prior written consent of the Parties
hereto, except for rights to payment and except to a person or entity who
acquires all or substantially all of a Party's stock, assets or business to
which this Agreement pertains, whether by sale, merger, acquisition or
otherwise.
i. PUBLICITY AND PRESS RELEASES. Except to the extent necessary under
applicable laws or for ordinary marketing purposes, the Parties agree that no
press releases or other publicity relating to the substance of the matters
contained herein will be made without approval by both Parties. Any press
release announcing this Agreement will be jointly developed and released by
the Parties.
j. FORCE MAJEURE. No liability or loss of rights hereunder shall
result to either Party from delay or failure in performance caused by an
event of force majeure (that is, circumstances beyond the reasonable control
of the Party affected thereby, including, without limitation, acts of God,
fire, flood, war, government action, compliance with laws or regulations
(including, without limitation, those related to infringement), strikes,
lockouts or other serious labor disputes) for so long as such event of force
majeure continues in effect; provided that if such force majeure event
continues and affects or delays a Party's performance hereunder for more than
sixty (60) days, the other Party may terminate this Agreement pursuant to
Section 7.b.
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<PAGE>
k. REMEDIES. Except as otherwise expressly stated in this Agreement,
the rights and remedies of a Party set forth herein with respect to failure
of the other to comply with the terms of this Agreement (including, without
limitation, rights of full termination of this Agreement) are not exclusive,
the exercise thereof shall not constitute an election of remedies and the
aggrieved Party shall in all events be entitled to seek whatever additional
remedies may be available in law or in equity.
l. COMPLIANCE WITH LAW; EXPORT CONTROL. Each Party agrees to comply
with the U.S. Foreign Corrupt Practices Act (regarding among other things,
payments to government officials) and all export laws, restrictions, national
security controls and regulations of the United States or other applicable
foreign agency or authority, and not to export or re-export, or allow the
export or re-export of any Proprietary Information or any copy or direct
product thereof in violation of any such restrictions, laws or regulations,
or to any Group D:1 or E:2 country (or any national of such country)
specified in the then current Supplement No. 1 to Part 740, or, in violation
of the embargo provisions in Part 746, of the U.S. Export Administration
Regulations (or any successor regulations or supplement), except in
compliance with and with all licenses and approvals required under applicable
export laws and regulations, including without limitation, those of the U.S.
Department of Commerce.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date indicated on the first page of this Agreement .
CYGNUS, INC. E.I. DU PONT DE NEMOURS & CO.
By: By:
---------------------------------------- ----------------------------
Name: Gregory B. Lawless Name:
--------------------------
Title: President and Chief Executive Officer Title:
-------------------------
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EXHIBIT A
THICK FILM MATERIALS SPECIFICATIONS
[Attach separate Exhibit A for each Thick Film Material]
13
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EXHIBIT A
[Confidential Treatment Requested]
MATERIAL
DuPont Product Name:
----------------------------------------------------------
Generic Chemical Name:
--------------------------------------------------------
DuPont Identification Number (if any):
----------------------------------------
Other Description (e.g. lot batch numbers):
- ------------------------------------------------------------------------------
Effective Dates of Specifications of the MATERIAL:
----------------------------
Specifications of the MATERIAL:
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Cygnus Quality Standard:
------------------------------------------------------
Development Date:
-------------------------------------------------------------
Start of Supply Date:
---------------------------------------------------------
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<PAGE>
EXHIBIT B
PRICE RANGE FOR THICK FILM MATERIALS
[Confidential Treatment Requested]
15
<PAGE>
Exhibit 10.35
DETECTION OF ANALYTES
PRODUCT DEVELOPMENT AND LICENSE AGREEMENT
This Detection of Analytes Product Development and License Agreement
("Agreement") is signed on June 19, 1998 by and between Cygnus, Inc., a
Delaware corporation, with its principal place of business at 400 Penobscot
Drive, Redwood City, California 94063 ("Cygnus"), and E.I. du Pont de Nemours
& Co., a Delaware corporation, with its principal place of business at 1001
Market Street, Wilmington, Delaware 19898 ("DuPont").
WHEREAS, Cygnus has substantial knowledge and expertise in and owns
certain technology relating to the development, manufacture and sale of
transdermal monitoring systems;
WHEREAS, DuPont has substantial knowledge and expertise in and owns
certain technology relating to the development, manufacture and sale of thick
film materials commonly referred to as "inks" or "pastes";
WHEREAS, the parties desire each other's assistance in developing
certain technologies related to [Confidential Treatment Requested], including
without limitation transdermal monitoring systems and the use, composition
and manufacture of thick film materials;
WHEREAS, the parties desire to provide such development assistance to
each other; and
WHEREAS, the parties also desire to enter into a separate supply
arrangement with respect to Thick Film Materials (as defined below).
NOW THEREFORE, in consideration of the above premises and the mutual
covenants contained herein, the parties hereto agree as follows:
1. DEFINITIONS. When used in this Agreement, each of the following terms
shall have the meaning provided below:
a. "Development Plan" means the development plan, specifications,
Milestones and schedule specified in Exhibit A including amendments thereto
established by the Development Committee pursuant to Section 2.e below.
b. "Diagnostics Field" means all applications for the
[Confidential Treatment Requested] in connection with the diagnosis and
treatment of disease in humans, including but not limited to diabetes and
complications of diabetes; however currently available, whether through
publication or commercialization, invasive diagnostics applications are not
included within the definition of Diagnostics Field.
c. "Initial Milestones" means Milestones established within sixty
(60) days
<PAGE>
following the Signing Date of this Agreement and includes, without limitation,
[Confidential Treatment Requested].
d. "Milestones" means [Confidential Treatment Requested].
e. "Parties" means DuPont and Cygnus and, when used in the
singular, means either of them.
f. "Thick Film Technology" means all Technology and improvements
thereto relating solely to the composition and manufacture of Thick Film
Materials (but not applications thereof) (i) arising out of work done by
either Party in connection with the Project, or (ii) owned or developed by or
for DuPont and specifically listed by DuPont Product Number on Exhibit C
attached hereto.
g. "Project" means the Development Plan and the collaboration
between the Parties after the Effective Date of this Agreement.
h. "Thick Film Materials" means thick film materials, commonly
referred to as "inks" or "pastes," such materials [Confidential Treatment
Requested].
i. "Sensor Technology" means all Technology and improvements
thereto within the Diagnostics Field other than Thick Film Technology (but
including, without limitation, all applications of Thick Film Technology)
arising out of work done by either Party in connection with the Project.
j. "Supply Agreement" means the Supply Agreement signed of even
date herewith by the Parties.
k. "Technology" means all foreign and domestic patents, patent
applications, patent rights, know-how, trade secrets, copyrights, trademarks,
technical data, inventions (whether patentable or not), discoveries, designs,
specifications, plans, notebooks, works of authorship, techniques, methods,
regulatory information, compliance information, clinical data, processes,
test procedures and all other scientific or technical information or
materials, in whatever form.
l. "Transfer Letter" means a document as described in Exhibit B
attached hereto.
m. "Effective Date" of the Agreement is March 22, 1995.
n. Signing Date" of the Agreement refers to the date indicated on
page 1 of the Agreement.
2. PROJECT DEVELOPMENT.
a. JOINT PROGRAM. For a period commencing on the Effective Date and
terminating as provided in Section 7 below, the Parties shall act in good faith
in a joint program to develop at
2
<PAGE>
least one commercial product in the Diagnostics Field with initial work
limited to detection of glucose levels. DuPont shall have responsibility for
development of commercially suitable Thick Film Materials; Cygnus shall have
responsibility for all other aspects in development of any commercial product
for use in the Diagnostics Field. Each Party shall bear its own costs in the
development.
b. DUPONT ASSISTANCE, TECHNICAL SUPPORT AND DEVELOPMENT. DuPont,
at its own cost, shall act in good faith with the assistance of Cygnus to (i)
develop Thick Film Materials and Thick Film Technology, (ii) meet in a timely
fashion the Milestones set forth in Exhibit A, and (iii) collaborate with and
assist Cygnus with the Sensor Technology. DuPont shall provide reasonable
resources, technical information, and expertise, at its own cost and expense,
to achieve the Milestones in accordance with the Development Plan. DuPont
will keep Cygnus informed of its progress through regular communication
between the Project Coordinators and through meetings of the Development
Committee pursuant to Section 2.e below. The Development Committee shall
periodically determine the number of DuPont technical personnel assigned to
the Project.
c. CYGNUS ASSISTANCE, TECHNICAL SUPPORT AND DEVELOPMENT. Cygnus
shall act in good faith: (i) to collaborate with and assist DuPont with the
development of the Thick Film Materials and Thick Film Technology to
accomplish the Milestones in accordance with the Development Plan, (ii) to
provide data and technical support as reasonably requested by DuPont in
connection with the Thick Film Materials and Thick Film Technology and the
Project, (iii) to actively develop Sensor Technology, and (iv) to proceed
promptly toward commercialization of commercial products in the Diagnostics
Field. Cygnus, at its own cost and expense, will allocate sufficient
resources to provide such assistance and support.
d. PROJECT COORDINATORS. Within thirty (30) days after the
Signing Date of this Agreement, each Party shall designate one (1) individual
as its representative to coordinate and generally oversee the development
work and/or assistance to be performed by such Party hereunder and coordinate
the Project (including but not limited to coordinating the Development
Committee and meetings specified in Section 2.e below), and shall provide the
name of such designated individual ("Project Coordinator") to the other Party
in writing. Each Party shall promptly notify the other Party in writing of
any change in its Project Coordinator.
e. DEVELOPMENT COMMITTEE. In addition to appointing Project
Coordinators, the Parties will form a development committee (the "Development
Committee") to monitor the progress of the Project development efforts
referred to in this Section 2. Within sixty (60) days after the Signing Date
of this Agreement, the Development Committee shall establish a detailed
Development Plan which shall include the Initial Milestones, and which shall
be deemed attached hereto as Exhibit A. For each Initial Milestone and
subsequently introduced Milestone added to Exhibit A, the Development
Committee shall specify the Thick Film Material(s) to which such Milestone
pertains. Through the Development Committee, the Parties may establish
additional Milestones and discuss and decide issues related to the Project,
including, without limitation, technical issues, scheduling issues and cost
issues arising from the above activities. Furthermore, the Development
Committee may amend Exhibit C to include or substitute other
3
<PAGE>
DuPont Product Numbers, if it is in the best interests of the Parties to do
so. The Development Committee shall also control, govern, and determine
access to, release and exchange of technical information and data between the
Parties and for purposes of regulatory applications and compliance. The
Development Committee shall also decide when, during the process of
development of a Thick Film Material, it is necessary for DuPont to prepare
and maintain a Transfer Letter, which will contain information known by
DuPont at that time and which will be periodically updated if the Development
Committee so determines as more information becomes available, and to conduct
an on-site demonstration for Cygnus of the relevant processes. If, however,
a Thick Film Material is in the scale-up or pre-commercialization phase, a
Transfer Letter shall be manditorily prepared and maintained by DuPont and an
on-site demonstration shall be conducted for Cygnus. The Development
Committee shall consist of an equal number of up to three (3) employees of
each Party, including at a minimum for each Party, the Project Coordinator
which may be a senior manager intimately involved with the subject matter of
this Agreement. The Development Committee shall meet quarterly (or more
frequently should the Development Committee decide such frequency is
desirable), alternating between DuPont's and Cygnus' facilities. Each Party
shall be responsible for the costs of its employees' attendance at meetings
of the Development Committee. All decisions of the Development Committee
shall require the consent of both Parties. Any disputes that cannot be
resolved by the Development Committee shall be escalated for resolution to
the President of Cygnus Diagnostics and the Director, Worldwide Microcircuit
Materials of DuPont, or equivalent thereof.
f. Neither Party shall have any further obligations under this
Section 2 provided Cygnus purchases in commercial quantities Thick Film
Material from DuPont under any obligations it may have under the separate
Supply Agreement and DuPont has met all Milestones set forth in Exhibit A.
However, following such Cygnus purchases and DuPont meeting the Milestones,
the Parties agree to discuss whether to continue additional development and
cooperation obligations under this Section 2 (and to amend the Agreement
accordingly) for any additional development projects or improvements to the
Thick Film Materials.
g. SITE VISITS. For purposes of reviewing progress of the
Project, the Parties may facilitate an exchange of technical personnel to
work on-site at each other's facilities. Either Party shall be free to visit
those portions of the facilities of the other Party where work on the Project
is being conducted. Such visits shall be at reasonable intervals following
reasonable notice during regular business hours. DuPont shall pay the
expenses of its staff visiting Cygnus; Cygnus shall pay the expenses of its
staff visiting DuPont. Each Party shall indemnify and hold the other Party
harmless from and against any liability arising from the activities of its
employees in the other Party's facilities.
h. PROJECT DELAYS. If at any time during the course of the
Project, DuPont anticipates that it will not be able to complete a Milestone
by the date set forth on Exhibit A (or applicable date established by the
Development Committee) despite DuPont's good faith efforts to do so, DuPont
shall so notify Cygnus in writing specifying the reasons for delay. From and
after such notice, the Parties shall cooperate and use diligent efforts to
solve the problems identified. Such Project Delays shall not constitute a
breach of this Agreement under Section 7.c.
4
<PAGE>
i. TRANSFER OF TECHNICAL INFORMATION. The Parties shall act in
good faith to freely share with each other technical information in
connection with their respective Thick Film Technology and Sensor Technology
and other technical information in connection with the Project, including,
without limitation, information necessary to enable a Party to file a patent
application and information necessary to enable Cygnus to obtain FDA approval.
j. TECHNICAL ASSISTANCE. DuPont, at no cost to Cygnus, will
provide a reasonable level of technical support to Cygnus and Cygnus'
subcontractors to ensure the Thick Film Materials can be printed effectively.
k. SUPPLY OF THICK FILM MATERIALS TO CYGNUS. Any supply of Thick
Film Material by DuPont and purchase of such Material by Cygnus shall be
governed by a separate Supply Agreement, provided that each Thick Film
Material developed pursuant to a Milestone under the Development Plan shall
be made available to Cygnus for purchase under the terms of the Supply
Agreement.
l. RIGHT OF FIRST REFUSAL. During the term of this Agreement,
DuPont shall have a right of first refusal to participate in any additional
development projects of Cygnus relating to Thick Film Materials in the
Diagnostics Field. Cygnus shall inform DuPont in writing of each new Thick
Film Material or Milestone which Cygnus intends to develop or have developed
during the term of this Agreement, and Cygnus shall give DuPont a written
notice setting forth the specifications for each such development project.
Cygnus shall offer DuPont the right to develop each new Thick Film Material
subject to the terms and conditions of this Agreement. If DuPont does not
respond or DuPont and Cygnus are unable to agree in good faith upon the
applicable milestones, specifications or other terms and conditions for the
development project within sixty (60) days of Cygnus' written notice, then
Cygnus shall be free to offer the development project to a third party
developer. The failure of DuPont to agree to undertake any specific new
development project shall not affect its rights of first refusal under this
paragraph for any subsequent development project. It is understood that any
additional development project of Cygnus relating to Thick Film Materials
pursuant to this paragraph shall involve the following:
(i) a Thick Film Material which substantially differs
chemically to reduce cost from a Thick Film Material supplied by DuPont
pursuant to this Agreement; and
(ii) a Thick Film Material which substantially differs in
performance from a Milestone of this Agreement;
provided, however, that "substantially differs," as used above, means an
improvement in cost and performance of ten percent (10%) or more.
3. OWNERSHIP, LICENSE GRANTS AND AGREEMENT NOT TO SUPPLY.
a. OWNERSHIP AND ASSIGNMENT OF THICK FILM TECHNOLOGY. As between
the Parties, DuPont shall own all rights, title, and interest, in and to all of
the Thick Film Materials and Thick
5
<PAGE>
Film Technology both within and outside of the Diagnostics Field, including,
without limitation, all inventions consisting of the Thick Film Technology
which were discovered or developed by or for either or both of the Parties
in connection with the Project. Cygnus hereby assigns to DuPont all rights,
title and interest it may obtain in and to the Thick Film Technology
throughout the world including, without limitation, any and all related
patents and patent applications. Cygnus agrees to assist DuPont (at DuPont's
request and expense) in every proper way to evidence and perfect the
foregoing assignment and to apply for patent applications concerning the
assigned intellectual property rights. Cygnus will promptly execute, and
will cause its employees and consultants to execute, applicable documents and
promptly provide reasonable information (including, without limitation,
information necessary or appropriate for use in connection with preparation
of patent applications) that DuPont may request for such purposes; DuPont
will bear the reasonable out-of-pocket expenses incurred by Cygnus in
providing such requested assistance.
b. [Confidential Treatment Requested] SUPPLY OF THICK FILM MATERIALS
IN THE DIAGNOSTICS FIELD. Provided that, subject to the terms and conditions of
the separate Supply Agreement between the parties, Cygnus meets its obligations
to purchase from DuPont Cygnus' requirements of Thick Film Materials for a
minimum of [Confidential Treatment Requested], DuPont will not, during and for
an additional period of [Confidential Treatment Requested] after the term of
this Agreement, supply or license the Thick Film Materials or Thick Film
Technology to a third party for use within the Diagnostics Field.
c. OWNERSHIP AND ASSIGNMENT OF SENSOR TECHNOLOGY. As between the
Parties, Cygnus shall own all rights, title, and interest, in and to all of the
Sensor Technology, including, without limitation, all inventions consisting of
the Sensor Technology which were discovered or developed by or for either or
both of the Parties in connection with the Project. DuPont hereby assigns to
Cygnus all rights, title and interest it may obtain in and to the Sensor
Technology throughout the world including, without limitation, any and all
related patents and patent applications. DuPont agrees to assist Cygnus (at
Cygnus' request and expense) in every proper way to evidence and perfect the
foregoing assignment and to apply for patent applications concerning the
assigned intellectual property rights. DuPont will promptly execute, and will
cause its employees and consultants to execute, applicable documents and
promptly provide reasonable information (including, without limitation,
information necessary or appropriate for use in connection with preparation of
patent applications) that Cygnus may request for such purposes; Cygnus will bear
the reasonable [Confidential Treatment Requested] incurred by DuPont in
providing such requested assistance.
d. PATENT RIGHTS.
(i) CYGNUS PATENT RIGHTS. Cygnus shall be responsible for
and shall control the preparation, filing, prosecution, grant and maintenance of
all patent applications and rights with respect to the Diagnostics Field other
than patent applications solely for the composition and manufacture of Thick
Film Materials. DuPont shall provide to Cygnus or Cygnus' authorized attorneys,
agents or representatives reasonable assistance to enable Cygnus to file patent
applications with respect to Sensor Technology and the use of Thick Film
Materials in the
6
<PAGE>
Diagnostics Field. DuPont shall sign or cause to have signed appropriate
documents relating to said patent applications at no charge to Cygnus.
(ii) DUPONT PATENT RIGHTS. DuPont shall be responsible for
and shall control the preparation, filing, prosecution, grant and maintenance
of all patent applications and rights relating solely to the composition and
manufacture of Thick Film Materials. Cygnus shall provide to DuPont or
DuPont's authorized attorneys, agents or representatives reasonable
assistance to enable DuPont to file patent applications with respect to the
composition and manufacture of Thick Film Materials. Cygnus shall sign or
cause to have signed appropriate documents relating to said patent
applications at no charge to DuPont.
(iii) PATENT APPLICATION COOPERATION. After the Signing
Date, at least fourteen (14) days prior to filing any patent application
relating to the Sensor Technology or Thick Film Technology during the term of
this Agreement, each Party agrees to provide the other Party (the "Receiving
Party") a substantially complete draft of such patent application. Should
the Receiving Party determine in good faith that such proposed patent
application claims or discloses Technology owned by the Receiving Party or
raises strategic filing issues related to such Technology, and the Receiving
Party communicates such determination in writing before seven (7) days prior
to the proposed filing date, the Parties shall thereafter decide in good
faith the ownership interests and filing strategies therein before such
filing. If the Receiving Party does not so communicate within such seven (7)
day period, the other Party may file such application without further
obligation to the Receiving Party regarding such application. Any disputes
regarding this Section 3.d.iii that cannot be resolved by the Development
Committee shall be escalated for resolution to the President of Cygnus
Diagnostics and the Director, Worldwide Microcircuit Materials of DuPont, or
equivalent thereof.
4. PUBLICATION
NOTICE OF PUBLICATION. During the term of this Agreement, the
Parties each acknowledge the other Party's interest in publishing certain of
its results to obtain recognition within the scientific community and to
advance the state of scientific knowledge. Each Party also recognizes the
mutual interest in obtaining valid patent protection and protecting business
interests. Consequently, after the Signing Date, either Party, its employees
or consultants wishing to make a publication (including, without limitation
any oral presentation) made without any obligation of confidentiality (a
"Disclosure") relating to work performed by either Party as part of the
Project ("Publishing Party") shall transmit to the other Party ("Reviewing
Party") a copy of the proposed Disclosure at least thirty (30) days prior to
submission for publication, or an outline of such oral disclosure at least
thirty (30) days prior to presentation. The Reviewing Party shall have the
right (a) to propose modifications to the publication for patent or other
reasonable commercial reasons and (b) to request a reasonable delay in
publication in order to protect patentable information. If the Reviewing
Party requests such a delay, the Publishing Party shall delay submission or
presentation of the publication for a period of not more than sixty (60) days
to enable patent applications protecting each Party's rights in such
information to be filed in accordance with Section 3.d above. For any
Disclosure, the Project Coordinators or any designee of the Project
Coordinators shall collaborate in good faith to determine authorship of
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<PAGE>
any such Disclosure. In the case of any such Disclosure, upon the expiry of
thirty (30) days from transmission to the Reviewing Party, the Publishing
Party shall be free to proceed with the Disclosure unless the Reviewing Party
has requested the delay described above. Any disputes as to authorship that
cannot be resolved by the Project Coordinators or their designees shall be
escalated for resolution to the Development Committee.
5. REPRESENTATIONS AND WARRANTIES
a. BY CYGNUS. Cygnus represents and warrants to DuPont that this
Agreement has been duly authorized, executed and delivered by Cygnus and
constitutes a valid and binding obligation of Cygnus, enforceable in
accordance with its terms.
b. BY DUPONT. DuPont represents and warrants to Cygnus that this
Agreement has been duly authorized, executed and delivered by DuPont and
constitutes a valid and binding obligation of DuPont enforceable in
accordance with its terms.
c. BY BOTH. Each Party represents and warrants to the other
that, to the best current knowledge of the Party making the representation,
the Sensor Technology (in the case of Cygnus) or the Thick Film Technology
(in the case of DuPont), when used in accordance with the assignments and
licenses granted under this Agreement, does not infringe any valid and
enforceable patent, copyright, trade secret or other proprietary right of any
third party as of the Effective Date of this Agreement.
6. CONFIDENTIALITY.
a. Each Party shall, for a period of ten (10) years following the
date of each disclosure by the other Party, keep confidential and not use for
other than the purposes of this Agreement, any information disclosed by a
Party and designated confidential. Such disclosures, other than in writing,
shall be confirmed in writing within thirty (30) days of disclosure and
marked confidential. However, this provision shall not apply to information
which:
(i) is or has become readily publicly available through no
fault of the receiving Party or its employees or agents; or
(ii) is received from a third party lawfully in possession
of such information and lawfully empowered to disclose such information and
provided the receiving Party abides by all restrictions, if any, imposed by
such third party; or
(iii) was rightfully in the possession of the receiving Party
prior to its disclosure by the other Party;
(iv) was independently developed by or for employees or
consultants of the receiving Party without use of or access to confidential
information of the disclosing Party; or
(v) is necessary in the filing of any patent application; or
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<PAGE>
(vi) is deemed reasonably necessary by DuPont in the
commercialization of Thick Film Materials or by Cygnus in the
commercialization of product for use in the Diagnostics Field, so long as
such Party has the prior written approval of the other Party prior to
disclosing or disseminating such information, such approval not to be
unreasonably withheld.
Notwithstanding the foregoing, the receiving Party may disclose confidential
information to the extent it is required to be disclosed to a governmental
entity or agency in connection with seeking any governmental or regulatory
registration, approval or license, or pursuant to the lawful requirement or
request of a governmental entity or agency, provided that reasonable measures
are taken to obtain confidential treatment thereof and to guard against
further disclosure.
b. The confidentiality obligations of both Parties set forth in a
Confidentiality Agreement originally accepted on March 22, 1995 by Cygnus
Therapeutic and extended effective March 21, 1996 signed by Cygnus, Inc.
shall be governed by the present Agreement and this earlier Confidentiality
Agreement, as amended and extended, is hereby terminated.
7. TERM AND TERMINATION.
a. TERM. This Agreement will commence as of the Effective Date
and, unless terminated as provided below, shall continue in effect for
[Confidential Treatment Requested].
b. Either Party may terminate this Agreement at any time by
providing the other Party with sixty (60) days' prior written notice.
c. Either Party may terminate this Agreement upon sixty (60)
days' written notice if there has been a material breach of any
representation, warranty, covenant or obligation contained in this Agreement
on the part of the other Party which such Party fails to cure during such
sixty day period; provided that, notwithstanding anything else to the
contrary, the terminating Party will not be obligated to continue development
work after it gives notice of termination unless the breach is timely cured
during such period.
d. Either Party may terminate this Agreement if the other ceases
to do business, or otherwise terminates its business operations.
e. Either Party may terminate this Agreement if the other shall
seek protection under any bankruptcy, receivership, trust deed, or comparable
proceeding, or if any such proceeding is instituted against the other (and
not dismissed within one hundred and eighty (180) days).
f. DuPont may terminate this Agreement by giving Cygnus written
notice in the event of:
(i) notice from any source to DuPont of any allegation
relating to the Thick Film Materials or monitoring system using such Thick Film
Materials that, in
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DuPont's sole discretion, may raise an issue or a controversy relating to the
safety of such Thick Film Materials or monitoring system using such Thick
Film Materials, or
(ii) notice from any source to DuPont of any allegation
of personal injury that in DuPont's sole discretion, may raise an issue or a
controversy relating to the safety of the Thick Film Materials or the
monitoring system using such Thick Film Materials.
g. In the event DuPont provides written notice of its termination
of this Agreement under Section 7.b or if Cygnus terminates this Agreement
for cause under Sections 7.c, 7.d, or 7.e:
(i) DuPont shall, at the prompt written request of Cygnus,
immediately provide Cygnus or its designee a Transfer Letter detailing all
information necessary for Cygnus or its designated third party to manufacture
to specifications (as set forth in the Transfer Letter) the Thick Film
Materials applicable to the Diagnostics Field under this Agreement and take
all reasonable steps to assist Cygnus in such a transfer, provided Cygnus
pays DuPont for DuPont's reasonable actual, direct costs in the transfer of
Technology; additionally, provided Cygnus places an order within sixty (60)
days from receipt of Transfer Letter, DuPont shall sell Cygnus up to eighteen
(18) months' supply of Thick Film Materials;
(ii) Cygnus shall be free to use any confidential
information it deems necessary in the development and commercialization of
Thick Film Materials for use in the Diagnostics Field, without any prior
approval of DuPont; and
(iii) DuPont shall perform either one of the following at
DuPont's sole discretion:
A. grant Cygnus an [Confidential Treatment Requested]
license in the Diagnostics Field, with the right to sublicense, under
DuPont's patents and patent applications relating to Thick Film Materials
that arise out of work done in connection with the Project or are
specifically listed on Exhibit C to import, make, have made, use, offer for
sale and sell in the Diagnostics Field, provided Cygnus pays DuPont's prior
actual, direct [Confidential Treatment Requested] relating to such patent
applications and patents and, provided Cygnus agrees to pay either DuPont's
future reasonable in-house [Confidential Treatment Requested] or those
[Confidential Treatment Requested] of a mutually agreed upon law firm,
whichever is more cost-effective, for prosecuting and maintaining such patent
applications and patents; or
B. assign promptly DuPont's patents and patent
applications relating to Thick Film Materials applicable to the Diagnostics
Field that arise out of work done in connection with the Project or are
specifically listed on Exhibit C, provided Cygnus pays DuPont's prior actual
direct out-of-pocket costs relating to such patent applications and patents
and any actual direct out-of-pocket costs relating to the assignment of such
patent applications and patents.
h. In the event only that DuPont provides written notice of its
termination of this
10
<PAGE>
Agreement under Section 7.f:
(i) DuPont shall, at the prompt written request of Cygnus,
immediately provide Cygnus or its designee a Transfer Letter detailing all
information necessary for Cygnus or its designated third party to manufacture
to specifications (as set forth in the Transfer Letter) the Thick Film
Materials applicable to the Diagnostics Field under this Agreement and take
all reasonable steps to assist Cygnus in such a transfer, provided Cygnus
pays DuPont for DuPont's reasonable actual, direct costs in the transfer of
Technology; additionally, provided Cygnus places an order within sixty (60)
days from receipt of Transfer Letter, DuPont shall sell Cygnus up to eighteen
(18) months' supply of Thick Film Materials;
(ii) Cygnus shall be free to use any confidential
information it deems necessary in the development and commercialization of
Thick Film Materials for use in the Diagnostics Field, without any prior
approval of DuPont; and
(iii) DuPont shall perform one of the following at DuPont's
sole discretion:
A. grant Cygnus an [Confidential Treatment Requested]
license in the Diagnostics Field, with the right to sublicense, under DuPont's
patents and patent applications relating to Thick Film Materials that arise out
of work done in connection with the Project or are specifically listed on
Exhibit C to import, make, have made, use, offer for sale and sell in the
Diagnostics Field, provided Cygnus pays DuPont's prior actual, direct
[Confidential Treatment Requested] relating to such patent applications and
patents and, provided Cygnus agrees to pay either DuPont's future reasonable
in-house [Confidential Treatment Requested] or those [Confidential Treatment
Requested] of a mutually agreed upon law firm, whichever is more cost-effective,
for prosecuting and maintaining such patent applications and patents;
B. assign promptly DuPont's patents and patent
applications relating to Thick Film Materials applicable to the Diagnostics
Field that arise out of work done in connection with the Project or are
specifically listed on Exhibit C, provided Cygnus pays DuPont's prior actual
direct out-of-pocket costs relating to such patent applications and patents and
any actual direct out-of-pocket costs relating to any assignment of such patent
applications and patents; or
C. agree that it will not assert any patent or patent
application controlled (in the sense of having the right to grant licenses and
sublicenses) by DuPont corresponding in subject matter to the Thick Film
Technology to prevent any party, including Cygnus, from importing, making,
having made, using, offering to sell, or selling any product for use in the
Diagnostics Field.
i. In the event that Sections 7.g.i or 7.h.i are exercised, Cygnus
shall indemnify, defend, and hold DuPont harmless from all claims for
compensatory or punitive damages arising from personal injury, wrongful death,
property damage, or any other type of damages associated with the transferred
Thick Film Materials and/or Thick Film Technology, whether claims are
11
<PAGE>
based on any alleged: breach of a contractual obligation; violation of any
statute or regulation; or tortious conduct, including but not limited to,
claims of negligence, strict liability, concert of action, conspiracy, third
party contractor claims, or allegations of DuPont's joint or sole negligence
or other tortious conduct associated with the transferred Thick Film
Materials and/or Thick Film Technology; provided, however, such indemnity
shall apply to Thick Film Materials made by DuPont and transferred to Cygnus
under Sections 7.g.i or 7.h.i only insofar as such Thick Film Materials meet
specifications and warranties, both of which are delineated in the Supply
Agreement.
j. Termination of this Agreement shall not terminate Section 3 in
its entirety and the obligations of publication clearance pursuant to Section
4, those obligations of confidentiality pursuant to Section 6, the
termination provisions of Section 7, and general requirements of Section 8.
8. GENERAL.
a. AMENDMENT AND WAIVER. Except as otherwise expressly provided
herein, any provision of this Agreement may be amended and the observance of
any provision of this Agreement may be waived (either generally or in any
particular instance and either retroactively or prospectively) only with the
written consent of both Parties. However, it is the intention of the Parties
that this Agreement be controlling over additional or different terms of any
purchase order, confirmation, invoice or similar document, even if accepted
in writing by both Parties, and that waivers and amendments of any provision
of this Agreement shall be effective only if made by non-pre-printed
agreements signed by both Parties and clearly understood by both Parties to
be an amendment or waiver. The failure of either Party to enforce its rights
under this Agreement at any time for any period shall not be construed as a
waiver of such rights.
b. GOVERNING LAW AND LEGAL ACTIONS. This Agreement shall be
governed by and construed under the laws of the State of California and the
United States without regard to conflict of laws provisions thereof. In any
action or proceeding to enforce rights under this Agreement, the prevailing
Party shall be entitled to recover costs and attorneys' fees.
c. HEADINGS. Headings and captions are for convenience only and
are not to be used in the interpretation of this Agreement.
d. NOTICES. Any notice or other communication required or
permitted to be made or given to either Party under this Agreement shall be
deemed sufficiently made or given on the date of delivery if delivered in
person or by overnight commercial courier service with tracking capabilities
with costs prepaid, or three (3) days after the date of mailing if sent by
certified first class U.S. mail, return receipt requested and postage
prepaid, at the address of the Parties set forth below or such other address
as may be given from time to time under the terms of this notice provision:
If to DuPont:
12
<PAGE>
DuPont Photopolymer & Electronic Materials
E.I. du Pont de Nemours and Company
14 TW Alexander Drive
P.O. Box 13999
Research Triangle Park, NC 27709-3999
Attention: Director, Worldwide Microcircuit Materials
If to Cygnus:
Cygnus, Inc.
400 Penobscot Drive
Redwood City, California 94063
Attention: President, Cygnus Diagnostics
e. ENTIRE AGREEMENT. This Agreement (and all Exhibits hereto)
constitutes the entire understanding and agreement with respect to the
subject matter hereof and supersedes all proposals, oral or written, all
negotiations, conversations, or discussions between or among the Parties
relating to the subject matter of this Agreement and all past dealing or
industry custom.
f. SEVERABILITY. If any provision of this Agreement is held to
be illegal or unenforceable, that provision shall be limited or eliminated to
the minimum extent necessary so that this Agreement shall otherwise remain in
full force and effect and enforceable.
g. RELATIONSHIP OF PARTIES. The Parties hereto expressly
understand and agree that the other is an independent contractor in the
performance of each and every part of this Agreement, is solely responsible
for all of its employees and agents and its labor costs and expenses arising
in connection therewith.
h. ASSIGNMENT. This Agreement and the rights hereunder are not
transferable or assignable without the prior written consent of the Parties
hereto, except for rights to payment and except to a person or entity who
acquires all or substantially all of a Party's stock, assets or business to
which this Agreement pertains, whether by sale, merger, acquisition or
otherwise.
i. PUBLICITY AND PRESS RELEASES. Except to the extent necessary
under applicable laws or for ordinary marketing purposes, the Parties agree
that no press releases or other publicity relating to the substance of the
matters contained herein will be made without approval by both Parties. Any
press release announcing this Agreement will be jointly developed and
released by the Parties.
j. FORCE MAJEURE. No liability or loss of rights hereunder shall
result to either Party from delay or failure in performance caused by an
event of force majeure (that is, circumstances beyond the reasonable control
of the Party affected thereby, including, without limitation, acts of God,
fire, flood, war, government action, compliance with laws or regulations
(including, without limitation, those related to infringement), strikes,
lockouts or other serious labor disputes, or shortage of or inability to
obtain material or equipment) for so long as such event of
13
<PAGE>
force majeure continues in effect.
k. REMEDIES. Except as otherwise expressly stated in this
Agreement, the rights and remedies of a Party set forth herein with respect
to failure of the other to comply with the terms of this Agreement
(including, without limitation, rights of full termination of this Agreement)
are not exclusive, the exercise thereof shall not constitute an election of
remedies and the aggrieved Party shall in all events be entitled to seek
whatever additional remedies may be available in law or in equity.
l. COMPLIANCE WITH LAW; EXPORT CONTROL. Each party agrees to
comply with the U.S. Foreign Corrupt Practices Act (regarding among other
things, payments to government officials) and all export laws, restrictions,
national security controls and regulations of the United States or other
applicable foreign agency or authority, and not to export or re-export, or
allow the export or re-export of any Confidential Information or any copy or
direct product thereof in violation of any such restrictions, laws or
regulations, or to any Group D:1 or E:2 country (or any national of such
country) specified in the then current Supplement No. 1 to Part 740, or, in
violation of the embargo provisions in Part 746, of the U.S. Export
Administration Regulations (or any successor regulations or supplement),
except in compliance with and with all licenses and approvals required under
applicable export laws and regulations, including without limitation, those
of the U.S. Department of Commerce.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as
of the date indicated on the first page of this Agreement.
CYGNUS, INC. E.I. DU PONT DE NEMOURS & CO.
By: /s/ Gregory B. Lawless By: /s/ J. Stan Erickson
---------------------------- --------------------------------------
Name: Gregory B. Lawless Name: J. Stan Erickson
------------------------------------
Title: President and Chief Title: Worldwide Business Development
Executive Officer ---------------------------------
Director - Microcircuit Materials
14
<PAGE>
EXHIBIT A
DEVELOPMENT PLAN
[Confidential Treatment Requested]
Milestones Associated Thick Film Material(s)
---------- ---------------------------------
(per Milestone)
15
<PAGE>
EXHIBIT B
CONTENTS OF TRANSFER LETTER
FOR THICK FILM MATERIALS
[Confidential Treatment Requested]
16
<PAGE>
EXHIBIT C
DUPONT THICK FILM MATERIALS
[Confidential Treatment Requested]
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,219
<SECURITIES> 14,982<F1>
<RECEIVABLES> 1,062
<ALLOWANCES> 2,419
<INVENTORY> 771
<CURRENT-ASSETS> 27,543
<PP&E> 19,541
<DEPRECIATION> 13,077
<TOTAL-ASSETS> 43,454
<CURRENT-LIABILITIES> 16,001
<BONDS> 55,554
0
0
<COMMON> 21
<OTHER-SE> (32,788)
<TOTAL-LIABILITY-AND-EQUITY> 43,454
<SALES> 587
<TOTAL-REVENUES> 11,655
<CGS> 390
<TOTAL-COSTS> 3,088
<OTHER-EXPENSES> 43,879
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,532
<INCOME-PRETAX> (39,415)
<INCOME-TAX> 13
<INCOME-CONTINUING> (39,428)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (39,428)
<EPS-PRIMARY> (1.95)
<EPS-DILUTED> (1.95)
<FN>
<F1>This amount represents short-term investments held by
the Company at December 31, 1998.
</FN>
</TABLE>
