<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
- ----- Exchange Act of 1934 For the quarterly period ended JUNE 30, 1999
or
- ----- Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period from ___ to ___
COMMISSION FILE NUMBER 0-18962
-------
CYGNUS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2978092
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
400 PENOBSCOT DRIVE, REDWOOD CITY, CALIFORNIA 94063-4719
(Address of principle executive offices and zip code)
Registrant's telephone number, including area code: (650) 369-4300
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding of each of the registrant's classes of common
stock as of AUGUST 9, 1999:
Common Stock, $.001 par value - 24,145,826 shares
Total pages: 30
Page number of exhibit index: 27
<PAGE>
CYGNUS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
Condensed Consolidated Statements of Operations for the three and six month
periods ended June 30, 1999 and 1998 (unaudited)............................ 2
Condensed Consolidated Balance Sheets at June 30,1999 (unaudited) and
December 31, 1998........................................................... 3
Condensed Consolidated Statements of Cash Flows for the six month periods
ended June 30, 1999 and 1998 (unaudited).................................... 4
Notes to the Condensed Consolidated Financial Statements (unaudited)........... 5
Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................... 11
Item 3: Quantitative and Qualitative Disclosures About Market Risk..................... 26
PART II. OTHER INFORMATION
Item 1: Legal Proceedings........................................................... 27
Item 4: Submission of Matters to a Vote of Security Holders......................... 27
Item 6: Exhibits and Reports on Form 8-K............................................ 28
SIGNATURES.................................................................................... 30
</TABLE>
1
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYGNUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
------------------------------ ----------------------------
1999 1998 1999 1998
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Product revenues $ ---- $ 81 $ ---- $ 587
Contract revenues 3,797 2,636 6,363 5,359
Royalty and other revenues 265 165 620 396
----------- ------------ ------------ -----------
TOTAL REVENUES 4,062 2,882 6,983 6,342
Costs and expenses:
Costs of products sold ---- 937 ---- 1,960
Research and development 5,564 8,741 13,449 14,806
Marketing, general and administrative 1,996 2,800 3,466 4,716
----------- ------------ ------------ -----------
TOTAL COSTS AND EXPENSES 7,560 12,478 16,915 21,482
LOSS FROM OPERATIONS (3,498) (9,596) (9,932) (15,140)
Interest income/(expense), net (1,494) (63) (1,876) (57)
----------- ------------ ------------ -----------
NET LOSS $ (4,992) $ (9,659) $ (11,808) $ (15,197)
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
BASIC AND DILUTED NET LOSS PER SHARE $ (0.22) $ (0.48) $ (0.53) $ (0.76)
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
Shares used in computation of basic and
diluted net loss per share 22,632 20,239 22,182 20,040
----------- ------------ ------------ -----------
----------- ------------ ------------ -----------
</TABLE>
(See accompanying notes.)
2
<PAGE>
CYGNUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
JUNE 30, December 31,
1999 1998
------------------------------------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 31,394 $ 10,219
Restricted cash 871 ----
Short-term investments 468 14,982
Trade accounts receivable, net of allowance 1,133 876
Inventories ---- 771
Prepaid expenses and other current assets 609 695
------------------------------------------
Total current assets 34,475 27,543
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements, at cost 21,674 19,541
Less accumulated depreciation and amortization (13,976) (13,077)
------------------------------------------
Net equipment and improvements 7,698 6,464
Long-term investments 3,810 3,622
Deferred compensation and other assets 7,374 5,825
------------------------------------------
Total Assets $ 53,357 $ 43,454
------------------------------------------
------------------------------------------
LIABILITIES AND NET CAPITAL DEFICIENCY:
CURRENT LIABILITIES:
Accounts payable $ 4,266 $ 4,459
Accrued compensation 5,013 4,593
Accrued professional services 578 729
Other accrued liabilities 1,205 943
Customer advances 157 207
Current portion of arbitration obligation 255 60
Current portion of deferred revenue 643 1,153
Current portion of long-term debt 3,533 3,415
Current portion of capital lease obligations 442 442
------------------------------------------
Total current liabilities 16,092 16,001
Long-term portion of arbitration obligation 23,909 24,158
Long-term portion of debt 6,512 8,252
Long-term portion of capital lease obligations 367 581
Senior Subordinated Convertible Notes 12,500 22,563
Convertible Debentures 14,000
Deferred compensation and other long-term liabilities 412 4,666
STOCKHOLDERS' NET CAPITAL DEFICIENCY:
Common stock 24 21
Additional paid-in-capital 167,316 143,155
Accumulated deficit (187,763) (175,955)
Accumulated other comprehensive income/(loss) (12) 12
------------------------------------------
Net capital deficiency (20,435) (32,767)
------------------------------------------
Total liabilities and stockholders' net capital
deficiency $ 53,357 $ 43,454
------------------------------------------
------------------------------------------
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1998 has been
derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
(See accompanying notes.)
3
<PAGE>
CYGNUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase/(Decrease) in Cash and Cash Equivalents
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (11,808) $ (15,197)
Adjustments to reconcile net loss to cash used in
Operating activities:
Depreciation and amortization 926 925
Decrease/(increase) in assets 5,191 1,662
Increase/(decrease) in liabilities (4,503) 581
Increase/(decrease) in arbitration liability (53) (13,968)
------------------ -------------------
NET CASH USED IN OPERATING ACTIVITIES (10,247) (25,997)
------------------ -------------------
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,152) (2,280)
Decrease/(increase) in investments 14,218 (24,729)
------------------ -------------------
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES 12,066 (27,009)
------------------ -------------------
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 7,191 13,959
Principal payments of long-term debt (1,621) (1,387)
Payment of capital lease obligations (214) (276)
Issuance of Convertible Debentures 14,000 ----
Issuance of long-term debt, net ---- 6,110
Net proceeds from the issuance of Senior Subordinated
Convertible Notes ---- 40,351
------------------ -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 19,356 58,757
------------------ -------------------
NET INCREASE /(DECREASE) IN CASH AND CASH EQUIVALENTS 21,175 5,751
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,219 20,669
------------------ -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 31,394 $ 26,420
------------------ -------------------
------------------ -------------------
</TABLE>
(See accompanying notes.)
4
<PAGE>
CYGNUS, INC.
June 30, 1999
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Cygnus, Inc. (All
references to "we", "us", "our", the "Company" or "Cygnus" in this Report on
Form 10-Q mean Cygnus, Inc.) as of and for the six month periods ended June
30, 1999 and 1998 included herein are unaudited, but include all adjustments
(consisting only of normal recurring adjustments) which the management of
Cygnus believes are necessary for a fair presentation of the financial position
as of the reported dates and the results of operations for the respective
periods presented. Interim financial results are not necessarily indicative
of results for a full year. The condensed consolidated financial statements
should be read in conjunction with the audited financial statements and
related notes for the year ended December 31, 1998 included in the Company's
1998 Annual Report on Form 10-K.
2. 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.
3. COMPREHENSIVE INCOME
Comprehensive income includes all changes in stockholders' equity
during a period except those resulting from investments by owners and
distributions to owners. Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" ("FAS 130"), which was adopted by the
Company on January 1, 1998, requires unrealized gains and losses on the
Company's available-for-sale securities to be included in other comprehensive
income or loss. Unrealized gains or losses for the three month periods ended
June 30, 1999 and June 30, 1998 were not material and total comprehensive
loss closely approximated net loss for each of these periods.
4. NEW ACCOUNTING PRONOUNCEMENT
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, 2001 and is not
expected to have a material impact on the Company's results of operations or
financial condition.
5. INVENTORIES
Net inventories of $0.8 million as of December 31, 1998 consisted of
raw materials related to the Company's estrogen transdermal product
(FemPatch-Registered Trademark-Warner-Lambert Co., Morris Plains,
NJ-system) and were stated at the lower of cost (first-in, first-out method) or
5
<PAGE>
CYGNUS, INC.
June 30, 1999
market, after appropriate consideration was given to obsolescence and
inventories in excess of anticipated future demand.
Due to the termination of the Supply Agreement between Warner-Lambert
Company ("Warner-Lambert") and the Company, all related inventory was sold or
written off against prior reserves during the first quarter of 1999.
6. DEBT RESTRUCTURING
In February 1998, the Company entered into Note Purchase Agreements
with certain institutional investors to issue and sell approximately $43.0
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 included 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 the 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 a change in the final
maturity of the Notes to October 1, 2000.
The restructured Notes, which totaled $24.5 million, were divided into
three tranches. The first tranche had an original principal amount of $6.0
million and was fully converted by January 1999 at $3.54 per share. The
second tranche also had an original principal amount of $6.0 million and was
fully converted on June 30, 1999 at $6.89 per share. The third tranche of the
restructured Notes had an original principal amount of $12.5 million and
could not have been converted into Common Stock until July 1, 1999, at a
conversion price that would have been determined based on market-based
pricing formulas which contained look-back provisions. Also, under the terms
of the restructured Notes, if the Company called the third tranche for
redemption before July 1, 1999, the Note Holders would not be entitled to
convert any portion of that tranche. On June 29, 1999, the Company issued
redemption notices with a redemption date of July 9, 1999 for the entire
third tranche and, accordingly, the Note Holders were not entitled to convert
any portion of that tranche. On July 9, 1999, the Company paid $12.5 million
in principal and $0.4 million in accrued interest to redeem the third tranche.
In order to help finance the redemption of the third tranche discussed
above, and to provide additional potential sources of capital, the Company
entered into two new financing arrangements.
On June 29, 1999, the Company entered into a Convertible Debenture
Agreement with certain institutional investors ("the Investors") to issue and
sell $14.0 million principal amount of 8.5% Convertible Debentures Due June
29, 2004 ("Convertible Debentures"). These Convertible Debentures are
convertible into shares of Common Stock at any time at a conversion price of
$12.705 per share. The Company received gross proceeds of $14.0 million from
the issuance of the Convertible Debentures and incurred debt issuance costs
of $0.4 million. If certain trading volume, pricing and other conditions are
met, the Company and/or the Investors will have the right to require the sale
of an additional $6.0 million in additional aggregate principal amount of
Convertible Debentures in two separate tranches of $3.0 million each (each
6
<PAGE>
CYGNUS, INC.
June 30, 1999
an "Additional Tranche"), provided that the second Additional Tranche notice
date may not be earlier than sixty days after the first Additional Tranche
notice date. The conversion price for each Additional Tranche will be the
average of the closing bid prices for the ten trading days prior to and
including the respective Additional Tranche notice date and the ten trading
days subsequent to the respective Additional Tranche notice date ("Additional
Closing Price") multiplied by 110% (see Convertible Debenture and Warrant
Purchase Agreement attached hereto as Exhibit 10.42).
In conjunction with the Convertible Debentures, the Company issued
five-year warrants to purchase approximately 656 thousand shares of Common
Stock at $13.86 per share. The Company has included $6.5 million on June 30,
1999 to reflect the fair value of the warrants, computed using the
Black-Scholes valuation model, and this amount will be amortized over the
life of the underlying warrants. The Company is also required to issue
warrants if Additional Tranches of the Convertible Debenture are sold. Such
warrants will be priced at 120% of the respective Additional Closing Price. The
number of additional warrants to be issued will be determined by dividing 50%
of the respective Additional Tranche by the respective Additional Closing Price.
On June 30, 1999, the Company also entered into a Structured Equity
Line Flexible Financing Agreement ("Equity Line") with certain institutional
investors. The Equity Line is effective for two years ("Commitment Period")
and allows the Company, at its sole discretion, to sell Common Stock with a
maximum aggregate issue price of up to $30.0 million over the Commitment
Period. On June 30, 1999, the Company received a net of approximately $3.9
million, after deducting the issuance costs, from the $4.0 million ("Initial
Investment") in exchange for approximately 346 thousand shares of Common
Stock. The number of shares of Common Stock for the Initial Investment was
determined on the basis of the average closing bid price for the ten trading
days prior to June 30, 1999 ("Initial Investment Purchase Price"). Under the
terms of the Equity Line, over the eighty days following June 30, 1999
("Initial Period") the Investors should deliver purchase notices from time to
time up to a maximum aggregate amount of $4.0 million to purchase shares of
the Company's Common Stock. The per share price for each such purchase notice
will be equal to 98% of the average of the two lowest daily trade prices
during the six trading days immediately prior to the respective purchase
notice. At the end of the Initial Period, the number of shares originally
issued will be adjusted upward, if required, to match the aggregate number of
shares covered by the $4.0 million of purchase notices. Thereafter, the
Company is under no obligation to sell any additional shares. After the
Initial Period, on a monthly basis ("Investment Period"), the Company can
elect, at its sole discretion, to sell up to $1.5 million ("Company
Election") in additional shares of Common Stock. In addition to the above and
upon the Company's approval, the Investors may also elect to purchase an
additional $1.0 million ("Investor Election") of Common Stock in each
Investment Period. In each Investment Period in which the Company has elected
to sell additional shares, the Investors will from time to time issue
purchase notices for the aggregate amount of the Company Election and the
Investor Election. The per share price of Common Stock to be sold for each
such purchase notice will equal 98% of the average of the two daily low trade
prices during the six trading days immediately prior to the respective
purchase notice. At the beginning of each Investment Period, the Company can
set a minimum sales price ("Floor Price") for its Common Stock. The Investors
may require the aggregate dollar amount of the Company Election and
7
<PAGE>
CYGNUS, INC.
June 30, 1999
Investor Election for any Investment Period to be less than requested based
on certain market trading volume guidelines (see Form 8-K filed July 2, 1999).
In conjunction with the Equity Line, the Company will also issue
five-year warrants to the Investors to purchase shares of the Common Stock.
The price of the warrants will be determined each calendar year and will equal
120% of the weighted average per share sales price of all shares of Common
Stock sold pursuant to the Equity Line that year. The number of shares will
equal 1% of the aggregate proceeds received for all shares sold pursuant to
the Equity Line during the year. For the $4.0 million received pursuant to the
Equity Line on June 30, 1999, the Company will issue warrants to purchase 40
thousand shares of Common Stock. Warrants to purchase a minimum of 120
thousand shares must be issued under the Equity Line and, if at the end of the
Commitment Period warrants to purchase less than 120 thousand shares of Common
Stock have been issued, the Company must issue a warrant to purchase the
number of shares equal to the difference, at a price equal to 120% of the
average exercise price of all warrants previously issued pursuant to the
Equity Line.
7. CERTIFICATE OF DEPOSIT FOR LETTER OF CREDIT
In June 1999, we opened a standby letter of credit ("LC") for $0.9
million in favor of our lessor to maintain compliance with our capital lease
agreement. To secure this standby LC, we pledged a certificate of deposit,
which is considered restricted cash, to the issuing bank. The certificate of
deposit earns interest at a rate yielding 4.19% per annum.
8. STATEMENTS OF CASH FLOWS DATA
<TABLE>
<CAPTION>
JUNE 30, JUNE 30,
1999 1998
----------------------------------
(in thousands)
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES
Conversion of principal and related interest of Senior
Subordinated Convertible Notes into Common Stock $ 10,267 $ ----
Fair value of the Common Stock Warrants issued to
certain investors in connection with the
Convertible Debenture $ 6,515 $ ----
</TABLE>
9. BUSINESS SEGMENTS
We operate 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 a frequent
automatic and non- invasive glucose monitoring device, the
GlucoWatch-Registered Trademark- monitor. The GlucoWatch-Registered
Trademark- monitor is designed to take frequent measurements, thus providing
an abundance of glucose data to
8
<PAGE>
CYGNUS, INC.
June 30, 1999
potentially better control fluctuating glucose levels. We believe our
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. We have received United States Food and Drug Administration ("FDA")
approval for two products and have a number of others in late-stage
development, including two hormone replacement therapy products and a
contraceptive product.
There are no reconciling items between total segment revenues and
profit and loss and consolidated results. We utilize the following
information for the purpose of making decisions and assessing segment
performance.
<TABLE>
<CAPTION>
BUSINESS SEGMENTS
SIX MONTHS ENDED ---------------------------------------------------
JUNE 30, 1999 DIAGNOSTICS DRUG DELIVERY CORPORATE TOTAL
------------- ----------- ------------- ---------------
<S> <C> <C> <C>
Revenue $ ---- $ 6,984 $ 6,984
Profit/(loss) $ (12,964) $ 1,156 $ (11,808)
SIX MONTHS ENDED
JUNE 30, 1998
-------------
Revenue $ 457 $ 5,885 $ 6,342
Profit/(loss) $ (14,345) $ (852) $ (15,197)
THREE MONTHS ENDED
JUNE 30, 1999
-------------
Revenue $ ---- $ 4,062 $ 4,062
Profit/(loss) $ (6,147) $ 1,155 $ (4,992)
THREE MONTHS ENDED
JUNE 30, 1998
-------------
Revenue $ 152 $ 2,730 $ 2,882
Profit/(loss) $ (8,498) $ (1,161) $ (9,659)
BUSINESS SEGMENTS
---------------------------------------------------
JUNE 30, 1999 DIAGNOSTICS DRUG DELIVERY CORPORATE TOTAL
------------- ----------- ------------- ---------------
Identifiable assets $ 49,981 $ 3,376 $ 53,357
JUNE 30, 1998
-------------
Identifiable assets $ 77,334 $ 5,018 $ 82,352
</TABLE>
9
<PAGE>
CYGNUS, INC.
June 30, 1999
There has been no significant change from December 31, 1998 in the
basis of measurement of segment revenues and profit or loss. The change in
identifiable assets from June 30, 1998 to June 30, 1999 is primarily due to
operating losses and the partial redemption of Senior Subordinated Convertible
Notes.
Essentially all segmental revenues have been generated in the U.S. and
we currently do not have any long-lived assets outside the U.S.
10. 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 interest income/expense. The cost of securities
sold is based on the specific identification method. Interest and dividends
on securities classified as available-for-sale are also included in interest
income/expense.
We consider all highly liquid investments with a maturity from the date
of purchase of three months or less to be cash equivalents. We invest our
excess (to current demands) cash in short-term and long-term 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.
10
<PAGE>
CYGNUS, INC.
June 30, 1999
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS,
INCLUDING BUT NOT LIMITED TO THOSE SPECIFICALLY IDENTIFIED AS SUCH, THAT
INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS REPORT ON
FORM 10-Q THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF
THE EXCHANGE ACT, INCLUDING WITHOUT LIMITATION STATEMENTS REGARDING OUR
EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ON FORM 10-Q ARE BASED ON
INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE ASSUME NO OBLIGATION
TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS COULD
DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS
AS A RESULT OF A NUMBER OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THOSE SET
FORTH IN THE "RISK FACTORS" CONTAINED IN THIS MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND ELSEWHERE IN
THIS REPORT ON FORM 10-Q.
GENERAL
We are engaged in the development and manufacture of diagnostic and
drug delivery systems, utilizing proprietary technologies to satisfy unmet
medical needs cost-effectively. Our efforts are primarily focused on two core
areas: a frequent, automatic and non-invasive glucose monitoring device (the
GlucoWatch-Registered Trademark- monitor) and transdermal drug delivery
systems.
Our product development efforts have been and are expected to continue
to be either self-funded, funded by licensees or distributors, or both. In
general, our agreements provide that we will manufacture our products and
receive manufacturing revenues from sales of these products to our licensees
or distributors. We may also receive royalties based on certain of our
licensees' or distributors' product sales. In certain circumstances, we may
elect to license manufacturing rights for a product to our licensee in
exchange for a technology transfer fee and/or a higher royalty rate.
Our 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 our
products, we 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, we would be able to negotiate an agreement with an alternative
licensee or distributor on acceptable terms. Since all payments to us under
our agreements following 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 we will receive any
particular payment thereunder or as to the amount or timing of any such
payment. We may choose to self-fund certain research and development projects
in order to exploit our technologies. Any increase in Company-sponsored
research and development activities will have an immediate adverse effect on
our results of operations. However, should such Company-sponsored research
and development activities result in a commercial product, the long-
11
<PAGE>
CYGNUS, INC.
June 30, 1999
term effect on our results of operations could be favorable. In the past some
of our licensees, distributors and collaborators have approached us
requesting modification of the terms of existing agreements.
We are currently involved in discussions with a short list of companies
with regard to a collaboration for the marketing and distribution of the
GlucoWatch-Registered Trademark- monitor in the United States, Europe and
those territories not included in the agreement between us and Tokyo-based
Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi"). (For more on the
Yamanouchi agreement see "Contract Revenue," under Results of Operations.)
There can be no assurance that we will be able to enter into such a
collaboration agreement.
To remain competitive, we will need to develop, in-license or acquire
new diagnostic and drug delivery products. Furthermore, our ability to
develop and commercialize products in the future will depend on our ability
to enter into collaboration arrangements with additional licensees on
favorable terms. There can be no assurance that we will be able to enter into
new collaboration arrangements on such terms, if at all.
Our results of operations vary significantly from year to year and
quarter to quarter 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 such 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 during the
development period for each contract. However, contract revenues are not always
aligned with the timing of related expenses. To date, our research and
development expenses have generally exceeded contract revenue in any particular
period and we expect 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. We have incurred net losses
each year since our inception and do not believe we will achieve profitability
in 1999. At June 30, 1999, our accumulated deficit and net capital
deficiency were approximately $187.8 million and $20.4 million, respectively.
12
<PAGE>
CYGNUS, INC.
June 30, 1999
RESULTS OF OPERATIONS:
COMPARISON FOR THE QUARTERS ENDED JUNE 30, 1999 AND 1998
PRODUCT REVENUES for the quarter ended June 30, 1999 were $0.0 million,
compared to $0.1 million for the quarter ended June 30, 1998. Product
revenues for the six months ended June 30, 1999 were $0.0 million, compared
to $0.6 million for the six months ended June 30, 1998. Product revenues for
the three and six months ended June 30, 1998 resulted from the shipments of
the FemPatch-Registered Trademark- (Warner-Lambert Co., Morris Plains, NJ)
system. The reduction in total product revenues is due to the discontinuation
of shipments of the FemPatch-Registered Trademark- system.
The FemPatch-Registered Trademark- system, commercially launched in
1997, is a low-dose, 7-day estrogen replacement transdermal patch for the
treatment of menopausal symptoms. Sanofi S.A. ("Sanofi"), our 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 Cygnus.
Consequently, we do not expect product revenue related to the the
FemPatch-Registered Trademark- system in 1999.
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, we believe that the level of
product revenues experienced to date is not indicative of future results and
may fluctuate from period to period.
CONTRACT REVENUES for the quarter ended June 30, 1999 were $3.8
million, compared to $2.6 million for the quarter ended June 30, 1998 and
were $6.4 million for the six months ended June 30, 1999 compared to $5.4
million for the six months ended June 30, 1998. 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 increase in contract revenues for the three and
six months ended June 30, 1999 is primarily due to the acceleration of the
amortization of a previously deferred milestone payment of $1.8 million
received from American Home Products ("AHP") acting through its Wyeth-Ayerst
division. This acceleration resulted from AHP's notification to us that AHP
would not be exercising its option to reacquire rights under the amendment to
the Agreement discussed below. In addition, there were increased development
billings related to our contraception product.
We are currently involved in discussions with a short list of companies
with regard to a collaboration for the marketing and distribution of the
GlucoWatch-Registered Trademark- monitor in the U.S., Europe and those
territories not included in the agreement between Cygnus and Yamanouchi as
described below. There can be no assurance that we will be able to enter into
such a collaboration arrangement.
In July 1996, we entered into an agreement with Tokyo-based Yamanouchi
Pharmaceutical Co., Ltd. ("Yamanouchi") for the marketing and distribution of
the GlucoWatch-Registered Trademark- monitor. Under the terms of this
agreement, Yamanouchi has exclusive marketing and distribution rights in
Japan and Korea. We have primary responsibility for completing product
development and for manufacturing. In the third quarter of 1996, we received
an up-front, non-
13
<PAGE>
CYGNUS, INC.
June 30, 1999
refundable payment from Yamanouchi. In July of 1999, we received a
non-refundable milestone payment from Yamanouchi and we are eligible to
receive further milestone payments as well as a percentage of the product's
future commercial sales.
In 1998, we entered into an agreement with an 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. We have exclusive manufacturing and supply
rights. The undisclosed company has primary responsibility for obtaining
regulatory approval and commercialization. We have received payments for 1999
and 1998 manufacturing and development costs and will receive similar future
payments. We are also eligible to receive future milestone payments, as well
as a percentage of the product's future commercial success.
In December 1998, a New Drug Application ("NDA") was submitted to the
FDA and the European Dossier was submitted to the European authorities for
our 7-day estrogen patch. In July 1998, we were notified by American Home
Products Corporation ("AHP"), the licensee for two of our transdermal hormone
replacement products, that AHP wanted to discuss the status of its agreements
with us and that it intended to exercise its right under the agreements to
seek a sublicensee for the products. In November 1998, we negotiated with AHP
an amendment to the agreements that provided us 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 provided that, if AHP was unable
to sign an agreement with a sublicensee or opted not to reacquire its rights
within six months, the rights to the two products would revert to Cygnus.
However, AHP would still be obligated to continue development activities for
the two products for an additional six months. In June 1999, AHP notified us
that a sublicense agreement was not signed and that AHP would not be
exercising its option to reacquire rights, but that it would support
development activities until mid-November 1999 pursuant to the amendment. We
have not decided on any course of action with regard to these two products.
Contract revenues are expected to fluctuate from quarter to quarter and
from year to year, and future contract revenues cannot reasonably be
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. We are unable to
predict to what extent the termination of existing contracts by current
partners or new collaborative agreements, if any, will impact overall
contract revenues in the remainder of 1999 and future periods.
ROYALTY AND OTHER REVENUES for the quarter ended June 30, 1999 were
$0.3 million compared to $0.2 million for the quarter ended June 30, 1998 and
were $0.6 million for the six months ended June 30, 1999 compared to $0.4
million for the six months ended June 30, 1998. The amounts reflect royalties
from worldwide sales by Pharmacia & Upjohn ("Pharmacia") of the Company's
nicotine transdermal product.
Royalty revenues will fluctuate from period to period, since they are
primarily based upon sales by our 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 our
14
<PAGE>
CYGNUS, INC.
June 30, 1999
licensees to market the product. Therefore, the level of royalty revenues for
any given period is not indicative of the expected royalty revenues for future
periods.
COSTS OF PRODUCTS SOLD for the quarter ended June 30, 1999 were $0.0
million compared to $0.9 million for the quarter ended June 30, 1998 and were
$0.0 million for the six months ended June 30, 1999 compared to $2.0 million
for the six months ended June 30, 1998. Costs of products sold primarily
include direct and indirect production, facility and personnel costs required
to meet anticipated production levels. The decrease in costs of products sold
for the three and six months ended June 30, 1999 is due to the discontinuation
of shipments of the FemPatch-Registered Trademark- system as a result of the
termination of the FemPatch-Registered Trademark- system supply agreement.
Cost of products sold for the three and six months ended June 30, 1998 include
shipments of the FemPatch-Registered Trademark- system. We do not have any
product revenue or costs of products sold for the three and six months ended
June 30, 1999 as a result of the aforementioned and experienced negative
production margins for the three and six months ended June 30, 1998 due to
low production volumes that prevented us from absorbing all of our fixed
manufacturing costs.
RESEARCH AND DEVELOPMENT EXPENSES for the quarter ended June 30, 1999
were $5.6 million compared to $8.7 million for the quarter ended June 30,
1998 and were $13.4 million for the six months ended June 30, 1999 compared
to $14.8 million for the six months ended June 30, 1998. The decrease in
research and development expenses for the three and six months ended June 30,
1999 is primarily due to decreased design costs and clinical studies
associated with the GlucoWatch-Registered Trademark- monitor and the
AutoSensor (a consumable component which is attached to the back of the
GlucoWatch-Registered Trademark- monitor). Research and development and
clinical activities primarily include support and development for the glucose
monitoring program, hormone replacement therapy products and a contraceptive
product.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES for the quarter ended
June 30, 1999 were $2.0 million compared to $2.8 million for the quarter
ended June 30, 1998 and were $3.5 million for the six months ended June 30,
1999 compared to $4.7 million for the six months ended June 30, 1998. The
decrease is primarily due to reduced legal and compensation expenses.
INTEREST INCOME/(EXPENSES), NET for the quarter ended June 30, 1999
were $(1.5) million compared to $(0.1) million for the quarter ended June 30,
1998 and were $(1.9) million for the six months ended June 30, 1999 compared
to $(0.1) million for the six months ended June 30, 1998. The increase in net
interest expense is due primarily to the write down of the remaining
unamortized debt issuance costs associated with the Senior Subordinated
Convertible Notes Agreement entered into in February 1998. In addition,
interest income earned has decreased in conjunction with the decrease in the
cash and cash equivalents balance.
LIQUIDITY AND CAPITAL RESOURCES
Through December 1998, we received net proceeds of approximately $95.4
million from public offerings of our Common Stock.
Through December 1998, we financed approximately $11.1 million of
manufacturing and research equipment under capital loan and lease arrangements.
Borrowings under those arrangements are secured by specific Company assets.
15
<PAGE>
CYGNUS, INC.
June 30, 1999
In April 1998, we consolidated our 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 June 30, 1999 there was
$8.5 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. Through June 30, 1999, $6.0 million was converted into
Common Stock at a price of $3.54 per share and $6.0 million was converted
into Common Stock at a price of $6.89 per share. The remaining $12.5
million and accrued interest was redeemed in July 1999.
In June 1999, we entered into agreements with certain institutional
Investors to issue and sell $14 million aggregate principal amount of 8.5%
Convertible Debentures Due June 29, 2004. On June 30, 1999 we also entered
into an Equity Line agreement. The Equity Line is effective for two years and
allows us, at our sole discretion, to sell shares of Cygnus Common Stock with
a maximum aggregate sales price of up to $30 million. As of June 30, 1999, we
received gross proceeds of $14.0 million from the issuance of 8.5%
Convertible Debentures and $4.0 million from the sale of Common Stock under
the Equity Line (see Note 6 to the financial statements contained in this
report).
In June 1999, we opened a standby letter of credit ("LC") for $0.9
million in favor of our lessor to maintain compliance with our capital lease
agreement. To secure this standby LC, we pledged a certificate of deposit,
which is considered restricted cash, to the issuing bank. The certificate of
deposit earns interest at a rate yielding 4.19% per annum.
In addition to the cash received from the public offerings, issuance of
the Notes, Equity Line, equipment lease and short-term working capital
financing, we have financed our operations primarily through revenues and
interest income.
Net cash used in operating activities for the six months ended June 30,
1999 was $10.2 million, compared with net cash used of $26.0 million for the
six months ended June 30, 1998. Cash used in operating activities during the
six months ended June 30, 1999 was primarily due to our net loss of $11.8
million and decreases in provision for doubtful accounts of $2.0 million,
deferred compensation and other assets of $4.3 million and deferred revenue of
$0.5 million, offset by decreases in notes receivable, prepaid expenses and
other current assets of $4.4 million, accounts receivable of $1.8 million
and increases in amortization of debt issuance cost of $1.1 million and
16
<PAGE>
CYGNUS, INC.
June 30, 1999
depreciation and amortization of $0.9 million. Cash used in operating
activities during the six months ended June 30, 1998 was primarily due to a
$14.0 million cash payment made in January 1998 to Sanofi under the terms of
the settlement agreement and our net loss of $15.2 million, offset by an
increase in accounts payable and other accrued liabilities of $1.8 million
and a decrease in accounts receivable of $1.0 million.
The current level of cash used in operating activities is not
necessarily indicative of the level of future cash usage. We expect a
decrease in operating cash usage for 1999 primarily due to the $14.0 million
payment in 1998 of the Sanofi arbitration liability, which will not recur
in 1999.
Net cash provided by investing activities of $12.1 million for the six
months ended June 30, 1999 resulted primarily from net sales of investments
of $14.2 million, offset by capital expenditures of $2.1 million. Net cash
used in investing activities of $27.0 million for the six months ended June
30, 1998 resulted primarily from net purchases of investments of $24.7
million and capital expenditures of $2.3 million.
Net cash provided by financing activities of $19.4 million for the six
months ended June 30, 1999 includes, as mentioned above, gross proceeds of
$14.0 million and $4.0 million from the June 1999 issuance of 8.5%
Convertible Debentures and from the sale of Common Stock under the Equity
Line, respectively, and additional stock proceeds of $3.2 million, offset by
long-term debt and capital lease repayments of $1.6 million and $0.2 million,
respectively. Net cash provided by financing activities of $58.8 million for
the six months ended June 30, 1998 includes net proceeds of $40.4 million and
$13.3 million from the February 1998 issuance of Senior Subordinated
Convertible Notes and from a direct public offering of our Common Stock,
respectively; additional stock proceeds of $0.7 million; and $6.1 million
from the issuance of long-term debt, offset by long-term debt and capital
lease repayments of $1.4 million and $0.3 million, respectively. In July
1999, we redeemed $12.5 million of the Convertible Debentures and paid $0.4
million accrued interest on these Debentures.
Our long-term capital expenditure requirements will depend upon
numerous factors, including the progress of our research and development
programs; the time required to obtain regulatory approvals; the resources
that we devote to the development of self-funded products, proprietary
manufacturing methods and advanced technologies; our ability 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 we evaluate the progress of our development
projects, in particular the GlucoWatch-Registered Trademark- monitor, our
commercialization plans and the lead time to set up manufacturing
capabilities, we may commence long-term planning for another manufacturing
site. Nevertheless, we believe that such long-term planning will not result
in any material impact on cash flows and liquidity for the next twelve months.
Based upon current expectations for operating losses and projected
short-term capital expenditures, we believe that existing unrestricted cash,
cash equivalents and investments of $35.6 million as of June 30, 1999 ($22.7
million net of the $12.9 million, July 1999 redemption of Senior Subordinated
Convertible Notes and accrued interest) -- when coupled with cash from
revenues and other funding, such as from potential product funding
collaborations or from public financings (including debt or equity
financings) and earnings from investments -- will be sufficient to meet our
operating expenses, debt servicing and repayments and capital expenditure
requirements at least through June 30, 2000. However, there can be no
assurance that we will not require additional financing, depending
17
<PAGE>
CYGNUS, INC.
June 30, 1999
upon future business strategies, results of clinical trials and management
decisions to accelerate certain research and development programs and other
factors.
YEAR 2000 COMPLIANCE
We are preparing for the impact of the arrival of the Year 2000 ("Y2K")
on our business, as well as on the businesses of our 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 Y2K Issue creates potential risks for Cygnus, including
potential problems in our products as well as in the Information Technology
("IT") and non-IT systems that we use in our business operations. We may also
be exposed to risks from third parties with whom we interact who fail to
adequately address their own Y2K Issues.
We began our Y2K efforts early in 1998 by forming a Project office
chaired by the Senior Vice President of Finance. The Board of Directors is
advised periodically on the status of our 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
We completed the awareness phase of the project in the third quarter of
1998. This phase consisted of meetings with our personnel to educate 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.
We 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, our consultant performed an assessment
of the systems and applications documented in the inventory. The result of
this independent assessment showed that the majority of our internal IT
systems were compliant. This is due to the fact that we do not rely on
in-house developed applications for our core business applications and
therefore do not have legacy code to review and test. Our 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
us. Additionally, we use a third party application for tracking our
Intellectual Property assets. This application has been certified by the
vendor to be fully compliant. The assessment did determine
18
<PAGE>
CYGNUS, INC.
June 30, 1999
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, we have placed appropriate attention on
the non-IT systems. For us, this specifically covers all areas governed by
current Good Manufacturing Practice ("cGMP") guidelines and includes but is
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. We fully expect that these systems will be
upgraded or replaced or have a contingency plan in place by January 1, 2000.
Concurrent with the inventory and assessment of internal systems and
applications, we identified several providers of products and services that
are critical to our operations. We are working with these providers to ensure
that these critical products and services are available for continued
operations after January 1, 2000. At this time we are not aware of any issues
relating to these providers.
The correction and testing, as well as the implementation phases of our
Y2K compliance programs, are currently underway and are expected to be
completed prior to January 1, 2000.
The total cost associated with our Y2K remediation is not expected to
be material to our financial condition or results of operations. The
estimated total cost of our Year 2000 remediation is not expected to exceed
$500,000. Through June 30, 1999 we have spent approximately $100,000 in
connection with Y2K Issues. The cost of implementing the replacement for our
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 we assess our Y2K Issue to be moderate to low, there can be no
assurance that we will be completely successful in our efforts to address Y2K
Issues.
Having reasonably determined that our 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
our key customers, suppliers, service providers and/or other business
partners. For these worst case scenarios to have maximum adverse impact on
Cygnus, either the vendors in question would 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. We believe that such simultaneous disruptions of the supply of
basic goods and services due to Y2K-related issues is unlikely to occur.
Although we have not yet developed a comprehensive contingency plan to
address situations that may result if we or any of the third parties upon
which we are dependent are unable to achieve Y2K readiness, our Y2K
compliance program is ongoing and its ultimate
19
<PAGE>
CYGNUS, INC.
June 30, 1999
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 we expect 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 Cygnus; 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
we undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statements are made or
to reflect the occurrence of unanticipated events.
RISK FACTORS
WE WISH TO CAUTION STOCKHOLDERS AND INVESTORS THAT THE FOLLOWING
IMPORTANT FACTORS, AMONG OTHERS, IN SOME CASES HAVE AFFECTED, AND IN THE
FUTURE COULD AFFECT, OUR ACTUAL RESULTS AND COULD CAUSE OUR ACTUAL
CONSOLIDATED RESULTS FOR 1999, AND BEYOND, TO DIFFER MATERIALLY FROM THOSE
EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY US OR ON BEHALF OF US.
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.
WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUING LOSSES.
We have a limited operating history to evaluate our prospects. You
should consider our prospects in light of the substantial risks, expenses and
difficulties encountered by companies entering into the medical device and
drug delivery industry. We reported a net loss of $5.0 million for the
quarter ended June 30, 1999 and have experienced annual operating losses
since our inception. We expect to continue to incur operating losses at least
until we have significant sales, if we ever do, of the GlucoWatch-Registered
Trademark- monitor or the contraceptive patch. We cannot assure you that we
will generate significant revenues or achieve profitability. We have, and
expect to continue to have, fluctuations in quarterly results based on
varying contract revenues and expenses associated with our contracts and
collaborative projects. Some of these fluctuations could be significant. To
date, we have generated limited revenues from product sales. We do not have
significant experience in manufacturing, marketing or selling our products.
Our future development efforts may not result in commercially viable
products. We may fail in our efforts
20
<PAGE>
CYGNUS, INC.
June 30, 1999
to introduce our products or to obtain required regulatory clearances. Our
products may never gain market acceptance, and we may never generate revenues
or achieve profitability.
Our revenues to date have been derived primarily from:
- product development and licensing fees related to our products under
development, and
- manufacturing and royalty revenues from the Nicotrol-Registered
Trademark- (Pharmacia AB, Stockholm, Sweden) nicotine patch and
the FemPatch-Registered Trademark- (Warner-Lambert Co., Morris
Plains, NJ) system.
In the future, we will no longer receive manufacturing revenue from the
Nicotrol-Registered Trademark- patch or the FemPatch-Registered Trademark-
system. We will, however, continue to receive royalty payments for the
Nicotrol-Registered Trademark- patch. If we obtain regulatory approvals, we
expect that a substantial portion of our future revenues will be derived from
sales of the GlucoWatch-Registered Trademark- monitor and other products
currently under development.
WE MAY NEED ADDITIONAL FINANCING AND IT MAY NOT BE AVAILABLE.
To continue the development of our products, we will require
substantial resources to conduct research and conduct preclinical development
and clinical trials necessary to bring our products to market and to
establish production and marketing capabilities. We may seek additional
funding through public or private financings, including debt or equity
financings. We may also seek other arrangements, including collaborative
arrangements. Any additional equity financings may dilute the holdings of
current stockholders. Debt financing, if available, may restrict our ability
to issue dividends and take other actions. We may not be able to obtain
adequate funds when we need them from financial markets or arrangements with
corporate partners or other sources. Even if funds are available, they may
not be on acceptable terms. If we cannot obtain sufficient additional funds,
we may have to delay, scale back or eliminate some or all of our research and
product development programs, or to license or sell products or technologies
that we would otherwise seek to develop ourselves.
We believe that our existing cash, cash equivalents and investments,
plus cash from revenues; other fundings, such as potential product funding
collaborations or financings; and earnings from investments will suffice to
meet our operating expenses, debt servicing and repayments and capital
expenditure requirements at least through June 30, 2000. The amounts and
timing of future expenditures will depend on:
- - progress of ongoing research and development;
- - results of preclinical testing and clinical trials;
- - rates at which operating losses are incurred;
- - executing any development and licensing agreements with corporate partners;
- - developing our products;
21
<PAGE>
CYGNUS, INC.
June 30, 1999
- - the FDA regulatory process; and
- - other factors, many of which are beyond our control.
WE DEPEND ON LICENSEES, DISTRIBUTORS AND COLLABORATIVE ARRANGEMENTS.
Our strategy to develop, clinically test, obtain regulatory approval,
manufacture and commercialize our products depends, in large part, upon our
ability to selectively enter into and maintain collaborative arrangements
with licensees and distributors. If we commercialize our
GlucoWatch-Registered Trademark- monitor, we will depend upon Yamanouchi
Pharmaceutical Co., Ltd. to market and distribute the GlucoWatch-Registered
Trademark- monitor in Japan and Korea. We do not have any marketing or
distribution agreements for the GlucoWatch-Registered Trademark- monitor
other than the Yamanouchi collaboration. However, we are currently involved
in discussions with a short list of companies about collaborating to market
and distribute the GlucoWatch-Registered Trademark-monitor in the U.S.,
Europe and elsewhere outside Japan and Korea.
Our licensees and distributors generally have the right to terminate
product development at any time before we are granted regulatory approval,
for any reason and without significant penalty. These cancellations may cause
us to delay, suspend or abandon our clinical testing, regulatory filings and
product development and commercialization efforts. Licensees have exercised
this right in the past, and we cannot assure you that current and future
licensees or distributors will not exercise this right in the future. All
payments to us under our licensing and distribution agreements depend on
future events or sales levels, and the licensee or distributor may terminate
these agreements. As a result, we cannot assure you when or if we will
receive any particular payment. In the past, some of our licensees,
distributors and collaborators have asked us to modify the terms of existing
agreements. If a licensee or distributor stopped funding one of our products,
we would either fund development efforts ourselves, enter into an agreement
with an alternative licensee or distributor, or suspend further development
work on the product. We cannot assure you that we would be able to negotiate
an acceptable agreement with an alternative licensee or distributor.
Additionally, we may choose to self-fund certain research and
development projects in order to exploit our technologies. If these
activities result in a commercial product, they will help our long-term
operating results. However, any increase in self-sponsored research and
development or sales and marketing activities will negatively affect our
short-term operating results. Furthermore, we cannot control the resources
and attention a licensee or distributor devotes to a product. As a result, we
may experience delays in clinical testing, regulatory filings and
commercialization efforts conducted by our licensees or distributors. We
cannot assure you that our licensees or distributors will not, for
competitive reasons, support, directly or indirectly, a company or product
that competes with one of our products that is the subject of its license or
distribution agreement with us. Furthermore, any dispute between us and one
of our licensees or distributors might require us to initiate or defend
against expensive litigation or arbitration proceedings. If one of our
licensees or distributors terminates an arrangement, cannot fund or otherwise
satisfy its obligations under its arrangements, or significantly disputes or
breaches a contractual commitment, then we would likely be required to seek an
alternative licensee or distributor. We cannot assure you that we would be
able to reach agreement with a replacement licensee or distributor. If we
were unable to find a replacement licensee or distributor, we might
22
<PAGE>
CYGNUS, INC.
June 30, 1999
not be able to perform or fund the activities of the current licensee or
distributor. Even if we were able to perform and fund these activities, our
capital requirements would increase substantially. In addition, the further
development and the clinical testing, regulatory approval process, marketing,
distribution and sale of the product covered by such licensee or distributor
would be significantly delayed. (See "Risk Factors - We Have Limited
Marketing and Sales Experience.")
For us to be competitive, we will need to develop, license or acquire
new diagnostic and drug delivery products. Furthermore, our ability to
develop and commercialize products in the future will depend, in part, on our
ability to enter into collaborative arrangements with additional licensees on
favorable terms. We cannot assure you that we will be able to enter into new
collaborative arrangements on favorable terms, if at all, or that existing or
future collaborative arrangements will succeed.
WE DEPEND ON LICENSED PATENT APPLICATIONS AND PROPRIETARY TECHNOLOGY.
Our success depends in large part on our ability to obtain patent
protection for our products, preserve our trade secrets and operate without
infringing the proprietary rights of others, both in the U.S. and abroad.
Since patent applications in the U.S. are secret until issuance, and
publication of discoveries in the scientific or patent literature tends
to lag behind actual discovery by several months, we cannot be certain that
we were the first to file our patent applications or that we will not
infringe upon third party patents. We cannot assure you that any patents
will be issued with respect to any of our patent applications or that any
patents will provide competitive advantages for our products or will not
be challenged or circumvented by our competitors.
We also rely on trade secrets and proprietary know-how that we seek to
protect, in part, by confidentiality agreements with our licensees, employees
and consultants. We cannot assure you that these agreements will not be
breached, that we would have adequate remedies for any breach or that our
trade secrets will not otherwise become known or be independently developed
by our 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 us and significant diversion of effort by our
technical and management personnel. We may resort to litigation to enforce
our patents or protect trade secrets or know-how as well as to defend against
infringement charges. A negative determination in such proceedings could
subject us to significant liabilities or require us 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, we cannot
assure you that necessary licenses would be available to us on satisfactory
terms, if at all. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could
prevent us from manufacturing and selling certain of our products, and could
materially adversely affect us.
WE ARE HIGHLY LEVERAGED AND MAY BE UNABLE TO SERVICE OUR DEBT.
As of June 30, 1999, we had indebtedness of $62.2 million ($49.7
million net of the $12.5 million, July 1999 Senior Subordinated Convertible
Notes redemption). The degree to which we are leveraged could materially and
adversely affect our ability to obtain financing for
23
<PAGE>
CYGNUS, INC.
June 30, 1999
working capital, acquisitions or other purposes and could make us more
vulnerable to industry downturns and competitive pressures. Our ability to
meet our debt service obligations depends upon our future performance, which
will depend upon financial, business and other factors, many of which are
beyond our control. Although we believe our cash flows will be adequate to
meet our interest payments, we cannot assure you that we will continue to
generate cash flows in the future sufficient to cover our fixed charges or to
permit us to satisfy any redemption obligations pursuant to our indebtedness.
If we cannot generate cash flows in the future sufficient to cover our fixed
charges or to permit us to satisfy any redemption obligations pursuant to our
indebtedness, and we cannot borrow sufficient funds either under our credit
facilities or from other sources, we may need to refinance all or a portion
of our existing debt, to sell all or a portion of our assets, or to sell
equity securities. There is no assurance that we could successfully
refinance, sell our assets or sell equity securities, or, if we could, we
cannot give any assurance as to the amount of proceeds we could realize.
In the event of insolvency, bankruptcy, liquidation, reorganization,
dissolution or winding up of our business or upon default or acceleration
relating to our debt obligations, our assets will first be available to pay
the amounts due under our debt obligations. Holders of Common Stock would
only receive the assets remaining, if any, after payment of all indebtedness
and preferred stock. Although we do not currently conduct operations through
subsidiaries, we may elect to do so as products become commercialized. In
such event, our cash flow and our ability to service debt would partially
depend upon the earnings of our subsidiaries and the distribution, loaning or
other payments of funds by those subsidiaries to us. The payment of dividends
and the making of loans and advances to us by our subsidiaries would be
subject to statutory or contractual restrictions, would depend upon the
earnings of those subsidiaries and would be subject to various business
considerations. Our right to receive assets of any of our subsidiaries upon
their liquidation or reorganization would be effectively subordinated to the
claims of our subsidiaries' creditors, except to the extent that we are
recognized as a creditor of such subsidiary, in which case our claims would
still be subordinate to any security interests in the assets of such
subsidiary and any senior indebtedness.
WE HAVE LIMITED MARKETING AND SALES EXPERIENCE.
We have limited experience marketing or selling medical device
products. To successfully market and sell the GlucoWatch-Registered
Trademark- monitor or our other products under development, we must either
develop a more extensive marketing and sales force or enter into arrangements
with third parties to market and sell our products. We cannot assure you that
we could successfully develop a more extensive marketing and sales force or
that we could enter into acceptable marketing and sales agreements with third
parties. If we maintain our own marketing and sales capabilities, we will
compete with other companies that have experienced and well-funded marketing
and sales operations. If we enter into a marketing arrangement with a third
party, any revenues we receive will depend on the third party, and we will
likely have to pay a sales commission or similar amount.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS.
The design, development, manufacture and use of our products involve an
inherent risk of product liability claims and associated adverse publicity.
Producers of medical products may face
24
<PAGE>
CYGNUS, INC.
June 30, 1999
substantial liability for damages in the event of product failure or
allegations that the product caused harm. We currently maintain product
liability insurance, but it is expensive and difficult to obtain and may not
be available in the future on acceptable terms. We cannot assure you that we
will not be subject to product liability claims, that our current insurance
would cover any claims, or that adequate insurance will continue to be
available on acceptable terms in the future. In the event we are held liable
for damages in excess of the limits of our insurance coverage, or if any
claim or product recall creates significant adverse publicity, our business,
financial condition and results of operations could be materially and
adversely affected.
WE MAY NOT BE ABLE TO RETAIN OR HIRE KEY PERSONNEL.
Our ability to operate successfully and manage our potential future
growth significantly depends upon retaining key scientific, technical,
managerial and financial personnel, and attracting and retaining additional
highly qualified scientific, technical, managerial and financial personnel.
We face intense competition for qualified personnel in these areas, and we
cannot assure you that we will be able to attract and retain qualified
personnel. The loss of key personnel or our inability to hire and retain
additional qualified personnel in the future could adversely affect our
business, financial condition and operating results.
OUR STOCK PRICE IS VOLATILE.
The trading price of our Common Stock substantially fluctuates in
response to factors such as:
- - announcements by us or our 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, and general conditions in the medical technology industry;
- - changes in securities analysts' recommendations; or
- - other events or factors, many of which are beyond our control.
In addition, the stock market in general has experienced extreme price
and volume fluctuations in recent years that have particularly affected the
market prices of many medical technology companies, unrelated to the
operating performance of these companies. Fluctuations or decreases in the
trading price of our Common Stock may adversely affect the market for our
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 our business, financial condition and operating results.
25
<PAGE>
CYGNUS, INC.
June 30, 1999
WE DO NOT PAY DIVIDENDS.
We have never declared or paid cash dividends on our Common Stock. Our
current bank term loan precludes us from paying dividends to stockholders. We
currently intend to retain any earnings for use in our business and therefore
do not anticipate paying any dividends in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, in the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998.
26
<PAGE>
CYGNUS, INC.
June 30, 1999
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 11, 1999 our Annual Meeting of Stockholders was held. The
following Directors were re-elected at this meeting:
<TABLE>
<CAPTION>
Directors For Withheld
--------- --- --------
<S> <C> <C>
Frank T. Cary 20,522,139 77,142
Gary W. Cleary 20,167,795 431,486
John C. Hodgman 20,543,185 56,096
Andre F. Marion 20,542,606 56,675
Richard G. Rogers 20,505,349 93,932
Walter B. Wriston 20,518,932 80,349
</TABLE>
Other matters voted upon:
<TABLE>
<CAPTION>
Votes
--------------------------------------------------------------------
Broker
Affirmative Negative Abstain Non-Votes
----------- -------- ------- ---------
<S> <C> <C> <C> <C>
To approve an amendment to the Certificate of
Incorporation to increase the number of
shares of Common Stock authorized for 19,138,154 1,386,462 74,665 0
issuance thereunder by an additional
15,000,000 shares.
To approve an amendment to the 1991 Employee
Stock Purchase Plan to increase the number of
shares of Common Stock authorized for 19,661,509 855,208 82,564 0
issuance over the term of the Purchase Plan
by 350,000 shares.
To re-appoint Ernst & Young LLP to serve as
the Company's independent auditors. 20,520,868 46,012 32,401 0
</TABLE>
27
<PAGE>
CYGNUS, INC.
June 30, 1999
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) 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 and
filled with the Office of the Secretary of State of Delaware on May 21,
1999.
4.1 Specimen of Common Stock certificate of the Registrant, incorporated by
reference to Exhibit 4.1 of the Registrant's Registration Statement
Form S-1 No. 33-38363.
4.2 Rights Agreement dated September 21, 1993 between the Company and
Chemical Trust Bank of California (the "Transfer Agent"), which
includes the Certificate of Determination for the Series A Junior
Participating Preferred Stock as Exhibit A, the Form of Right
Certificate as Exhibit B and the Summary of Rights to purchase
Preferred Shares as Exhibit C, incorporated by reference to Exhibit I
of the Registrant's Form 8-A filed on October 21, 1993, Registration
No. 0-18962.
4.3 Form of Senior Indenture incorporated herein by reference to Exhibit
4.1 filed with the Company's Registration Statement on Form S-3 (File
No. 33-39275) declared effective by the Securities and Exchange
Commission on November 12, 1997 (the "November 1997 Form S-3").
4.4 Form of Subordinated Indenture incorporated herein by reference to
Exhibit 4.2 filed with the Company's November 1997 Form S-3.
4.5 Form of Senior Debt Security (included in Exhibit 4.1) incorporated
herein by reference to Exhibit 4.3 filed with the Company's November
1997 Form S-3.
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.
28
<PAGE>
CYGNUS, INC.
June 30, 1999
4.11 Registration Rights Agreement dated June 30, 1999 between the
Registrant and Cripple Creek Securities, LLC.
4.12 Registration Rights Agreement dated June 29, 1999 between the
Registrant and the listed investors on Schedule I thereto.
10.39 Sublease Agreement dated February 19, 1999 between the Registrant and
The 3DO Company, incorporated by reference to Exhibit 10.39 of the
Registrant's Form 10-Q for the period ending March 31, 1999, filed
April 27, 1999.
10.40 Structured Equity Line Flexible Financing Agreement, dated June 30,
1999 between the Registrant and Cripple Creek Securities, LLC,
incorporated by referenced to Exhibit 1 of the Registrant's Form 8-K
filed on July 2, 1999.
10.41 Convertible Debenture and Warrant Purchase Agreement dated June 29,
1999 between the Registrant and the listed investors on Schedule I
thereto.
10.42 Form of 8.5% Convertible Debenture Due June 29, 2004.
10.43 Form of Common Stock Purchase Warrant.
27 Financial Data Schedule
B) REPORTS ON FORM 8-K
Cygnus filed four Reports on Form 8-K during the quarter ended June 30,
1999.
On June 7, 1999, Cygnus filed a Current Report on Form 8-K, reporting
under Item 5 the submission of the second and final module of our
Pre-Market Approval Application (PMA) to the United States Food and
Drug Administration (FDA) for the GlucoWatch-Registered Trademark-
automatic glucose monitor. We also announced that we are in discussion
with a short list of potential partners for the marketing and
distribution of the GlucoWatch-Registered Trademark- monitor in North
America and Europe.
On July 2, 1999, Cygnus filed a Current Report on Form 8-K, reporting
under Item 5 that we entered into a Structured Equity Flexible
Financing Agreement with Cripple Creek Securities, LLC.
On July 20, 1999, Cygnus filed a Current Report on Form 8-K, reporting
under Item 5 that John C. Hodgman, Cygnus' President and Chief
Executive Officer, was named Chairman of the Board, succeeding Gary
Cleary, Ph.D. Dr. Cleary will serve as Chairman Emeritus of the Board
of Directors.
On July 28, 1999, Cygnus filed a Current Report on Form 8-K, reporting
under Item 5 that the United States Food and Drug Administration (FDA)
notified Cygnus that the Pre-Market Approval Application (PMA) for the
GlucoWatch-Registered Trademark- monitor has been deemed suitable for
filing. The FDA also granted an expedited review status for Cygnus'
GlucoWatch-Registered Trademark- monitor.
29
<PAGE>
CYGNUS, INC.
June 30, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYGNUS, INC.
Date: August 16, 1999 By: /S/ JOHN C. HODGMAN
---------------------- -------------------------------------
John C. Hodgman
President and Chief Executive Officer
and Chairman
(Principal Executive Officer)
Date: August 16, 1999 By: /S/ CRAIG W. CARLSON
---------------------- -------------------------------------
Craig W. Carlson
Senior Vice President, Finance
and Chief Financial Officer
(Principal Accounting Officer)
30
<PAGE>
INDEX OF EXHIBITS
The following exhibits are included herein:
Exhibit 3.2 Restated Articles of Incorporation of the Registrant, as amended
and filled with the Office of the Secretary of State of Delaware on May
21, 1999.
Exhibit 4.11 Registration Rights Agreement, dated June 30, 1999 between the
Registrant and Cripple Creek Securities, LLC.
Exhibit 4.12 Registration Rights Agreement dated June 29, 1999 between the
Registrant and the listed investors on Schedule I thereto.
Exhibit 10.41 Convertible Debenture and Warrant Purchase Agreement dated June
29, 1999 between the Registrant and the listed investors on Schedule I
thereto.
Exhibit 10.42 Form of 8.5% Convertible Debenture Due June 29, 2004.
Exhibit 10.43 Common Stock Purchase Warrant.
Exhibit 27 Financial Data Schedule
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CYGNUS, INC.
CYGNUS, INC., a corporation organized and existing under the General
Corporation Law of the State of Delaware DOES HEREBY CERTIFY:
FIRST: The original Certificate of Incorporation of CYGNUS
THERAPEUTIC SYSTEMS, INC. was filed with the Secretary of State of Delaware
on March 15, 1994. The corporate name was changed to CYGNUS, INC. in the
Agreement and Plan of Merger filed with the Secretary of State of Delaware on
September 11, 1995.
SECOND: The Amended and Restated Certificate of Incorporation of
CYGNUS, INC. has been duly adopted in accordance with the provisions of
Sections 245 and 242 of the General Corporation Law of the State of Delaware
by the directors of the Corporation and such Amended and Restated Certificate
of Incorporation shall be amended and restated to read in full as follows:
I.
The name of the corporation is CYGNUS, INC. (the "Corporation").
II.
The address of the Corporation's registered office in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle and
the name of its registered agent at such address is The Prentice-Hall
Corporation System, Inc.
III.
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General
Corporation Law of Delaware.
IV.
The Corporation is authorized to issue two classes of shares to be
designated respectively Common Stock and Preferred Stock. The total number of
shares of all classes of stock which the Corporation has authority to issue
is Sixty Million (60,000,000) shares, consisting of Fifty-five Million
(55,000,000) shares of Common Stock, each having a par value of one-tenth of
one cent ($.001) (the "Common Stock") and Five Million (5,000,000) shares of
Preferred Stock, each having a par value of one-tenth of one cent ($.001)
(the "Preferred Stock").
As to the Preferred Stock of the Corporation, the Board of Directors
shall have the power to issue any additional shares of Preferred Stock from
time to time in one or more series. The Board of Directors is hereby
authorized to fix or alter from time to time the voting powers and such
designations, preferences and relative, participating, optional or other
special rights of the shares of each such series and the qualifications,
limitations or restrictions of any wholly unissued series of Preferred Stock,
and to establish from time to time the number of shares constituting any such
series, or any of them.
1.
<PAGE>
The Board of Directors is further authorized to increase or decrease
(but not below the number of shares of any such series then outstanding) the
number of shares of any series, the number of which was fixed by it,
subsequent to the issue of shares of such series then outstanding, subject to
the limitations and restrictions stated in the resolution of the Board of
Directors originally fixing the number of shares of such series. If the
number of shares of any series is so decreased, then the shares constituting
such decrease shall resume the status which they had prior to the adoption of
the resolution originally fixing the number of shares of such series.
V.
The Corporation is to have perpetual existence.
VI.
The election of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
VII.
The number of directors which constitute the whole Board of
Directors of the Corporation shall be designated in the Bylaws of the
Corporation. Subject to the rights of the holders of any series of Preferred
Stock, no director shall be removed without cause. Subject to any limitations
imposed by law, the Board of Directors or any individual director may be
removed from office at any time with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares
of voting stock of the Corporation entitled to vote at an election of
directors.
VIII.
In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend
or repeal the Bylaws of the Corporation. Subject to Section 6.1 of the
Bylaws, the Bylaws may also be altered or amended or new Bylaws adopted by
the affirmative vote of least two-thirds (2/3) of the combined voting power
of all the then-outstanding shares of the Corporation entitled to vote.
IX.
To the fullest extent permitted by the Delaware General Corporation
Law as the same exists or as may hereafter be amended, no director of the
Corporation shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director.
Neither any amendment nor repeal of this Article, nor the adoption
of any provision of this Certificate of Incorporation inconsistent with this
Article, shall eliminate or reduce the effect of this Article in respect of
any matter occurring, or any cause of action, suit or claim that, but for
this Article, would accrue or arise, prior to such amendment, repeal or
adoption of an inconsistent provision.
X.
Each director shall serve until his or her successor is duly elected
and qualified or until his or her death, resignation or removal. No decrease
in the number of directors constituting the Board of Directors shall shorten
the term of any incumbent director. No stockholder will be permitted to
cumulate votes at any election of directors.
2.
<PAGE>
Subject to the rights of the holders of any series of Preferred
Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes, and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such
vacancies or newly created directorships shall be filled by the stockholders,
except as otherwise provided by law, be filled only by the affirmative vote
of a majority of the directors then in office, even though less than a quorum
of the Board of Directors, and not by the stockholders. Any director elected
in accordance with the preceding sentence shall hold office for the remainder
of the full term of the director for which the vacancy was created or
occurred and until such director's successor shall have been elected and
qualified.
XI.
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by
the Board of Directors or in the Bylaws of the Corporation.
XII.
No action shall be taken by the stockholders of the Corporation
except at an annual or special meeting of stockholders called in accordance
with the Bylaws and no action shall be taken by the stockholders by written
consent in lieu of a meeting.
XIII.
Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser
vote or no vote, but in addition to any affirmative vote of the holders of
the capital stock required by law or this Certificate of Incorporation, the
affirmative vote of the holders of at least two-thirds (2/3) of the combined
voting power of all of the then-outstanding shares of the Corporation
entitled to vote shall be required to alter, amend or repeal Articles VI,
VII, VIII, IX, X, XI, XII, XIII or any provision thereof.
XIV.
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner
now or hereafter prescribed by statute, except as provided in Article XIII,
and all rights conferred upon stockholders herein are granted subject to this
reservation.
The undersigned hereby acknowledges that the foregoing Certificate is
his act and deed and that the facts stated herein are true.
/S/ JOHN C. HODGMAN
-----------------------------------------------
John C. Hodgman
President, Chief Executive Officer and Director
Dated: May 12, 1999
3.
<PAGE>
Exhibit 4.11
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT ("AGREEMENT") is entered into as of
June 30, 1999 by and between CYGNUS, INC., a Delaware corporation with offices
at 400 Penobscot Drive, Redwood City, California 94063 (the "COMPANY"), and
Cripple Creek Securities, LLC (the "INVESTOR").
W I T N E S S E T H:
WHEREAS, pursuant to that certain Structured Equity Line Flexible
Financing Agreement by and between the Company and the Investor dated as of June
30, 1999 (the "Equity Line Agreement"), the Company may elect to issue to the
Investor, and the Investor shall purchase from the Company, from time to time as
provided in the Agreement, shares of the Company's common stock, par value
$0.001 per share (the "Common Stock"), for a maximum aggregate purchase price of
$30,000,000; and
WHEREAS, pursuant to the terms of, and in partial consideration for,
the Investor's agreement to enter into the Equity Line Agreement, the Company
has agreed to issue to the Investor one or more warrants, each in the form
attached as Exhibit A to the Equity Line Agreement (each a "Warrant" or the
"Final Warrant," as applicable, and collectively, the "Warrants") to purchase up
to an aggregate of 120,000 shares of Common Stock (the "Common Shares") at
prices determined pursuant to the Equity Line Agreement upon the occurrence, if
any, of certain circumstances set forth in the Equity Line Agreement; and
WHEREAS, pursuant to the terms of and in partial consideration for, the
Investor's commitment to enter into the Equity Line Agreement, the Company has
agreed to provide the Investor with certain registration rights with respect to
the Common Shares as set forth in this Agreement;
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in the Equity
Line Agreement, the Warrants and this Agreement, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged,
intended to be legally bound hereby, the Company and the Investor agree as
follows:
1. CERTAIN DEFINITIONS. Capitalized terms used herein and not
otherwise defined shall have the meaning ascribed thereto in the Equity Line
Agreement or the Warrants. As used in this Agreement, the following terms
shall have the following respective meanings:
"COMMISSION" or "SEC" shall mean the Securities and Exchange
Commission or any other federal agency at the time administering the
Securities Act.
<PAGE>
"HOLDER" and "HOLDERS" shall include the Investor and any
transferee of the Warrants, Common Stock or other Registrable Securities
which have not been sold to the public to whom the registration rights
conferred by this Agreement have been transferred in compliance with this
Agreement.
"ISSUANCE DATE" shall mean each date a Warrant is issued to
the Investor.
"REGISTRABLE SECURITIES" shall mean: (i) the Common Stock
issued to each Holder or its permitted transferee or designee upon exercise
of each respective Warrant, or upon any stock split, stock dividend,
recapitalization or similar event with respect to such Common Stock; (ii) any
securities issued or issuable to each Holder upon the exercise or exchange of
such Warrant, or Common Shares; and (iii) any other security of the Company
issued as a dividend or other distribution with respect to, or upon
conversion or exchange of or in replacement of such Registrable Securities.
The terms "REGISTER", "REGISTERED" and "REGISTRATION" shall
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering by the SEC of the
effectiveness of such registration statement.
"REGISTRATION EXPENSES" shall mean all reasonable expenses to
be incurred by the Company in connection with the Holder's registration
rights under this Agreement, including, without limitation, all registration
and filing fees, printing expenses, fees and disbursements of counsel for the
Company, blue sky fees and expenses, and the expense of any audited financial
statements incident to or required by any such registration (but excluding
the compensation of regular employees of the Company, which shall be paid in
any event by the Company; provided that Registration Expenses shall not
include Selling Expenses).
"REGISTRATION STATEMENT" shall have the meaning set forth in
Section 2(a)(i) herein.
"REGULATION D" shall mean Regulation D as promulgated pursuant
to the Securities Act, and as subsequently amended.
"SECURITIES ACT" or "ACT" shall mean the Securities Act of
1933, as amended, together with the rules and regulations promulgated
thereunder.
"SELLING EXPENSES" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities and all
fees and disbursements of counsel for Holders.
2. REGISTRATION REQUIREMENTS. The Company shall use reasonable
commercial efforts to effect the registration of the Registrable Securities
(including, without limitation, an undertaking to file post-effective
amendments, appropriate qualification under applicable blue sky or other
state securities laws and appropriate compliance with applicable regulations
issued under the Securities Act) as would permit or facilitate the sale or
2
<PAGE>
distribution of all the Registrable Securities in the manner (including
manner of sale) and in all states reasonably requested by the Holder on a
Principal Market. Such reasonable commercial efforts by the Company shall
include the following:
(a) The Company shall, as expeditiously as reasonably
practicable after each Issuance Date:
(i) Prepare and file a registration statement with the
Commission pursuant to Rule 415 under the Securities Act on Form S-3 under
the Securities Act (or such other form as the Company is eligible to use
under the Securities Act) covering the Registrable Securities underlying the
Warrant issued on such Issuance Date ("REGISTRATION STATEMENT") which
Registration Statement (including any amendments or supplements thereto and
prospectuses contained therein) shall not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein,
or necessary to make the statements therein not misleading. Such Registration
Statement shall initially register for resale a number of shares of Common
Stock equal the number of shares of Common Stock issuable upon exercise of
the Warrants. Such Registration Statement shall, in addition and without
limitation, register (pursuant to Rule 416 under the Securities Act, or
otherwise) such additional indeterminate number of Registrable Securities as
shall be necessary to permit exercise of the Warrants to prevent dilution
resulting from stock splits, stock dividends or similar transactions.
Thereafter, the Company shall use reasonable commercial efforts to cause such
Registration Statement and other filings to be declared effective as soon as
possible, and in any event within to 90 days following the applicable
Issuance Date (the "EFFECTIVE DATE"); PROVIDED, HOWEVER, that,
notwithstanding Sections 2(a)(ii) and 2(a)(v) below, the Company's
obligations hereunder to file a Registration Statement and to keep a
registration statement continuously in effect under the Securities Act shall
be suspended if (A) the fulfillment of such obligations would require the
Company to make a disclosure that would, in the reasonable judgment of the
Company's Board of Directors, have a Material Adverse Effect (as such term is
defined in the Equity Line Agreement) on the Company or a material adverse
effect on the future prospects of the Company or its stockholders, (B) the
Company has filed or proposes to file a registration statement with respect
to any of its securities to be distributed in an underwritten public offering
and it is advised by its lead or managing underwriter that an offering by a
Holder of Registrable Securities would materially adversely affect the
distribution of such securities, or (C) the fulfillment of such obligations
would require the Company to prepare financial statements under the
Securities Act that would not otherwise be required to be prepared by the
Company in order to comply with its obligations under the Exchange Act. Such
obligations shall be reinstated (x) in the case of clause (A) above, upon the
making of such disclosure by the Company (or, if earlier, when such
disclosure would either no longer be necessary for the fulfillment of such
obligations or no longer be detrimental), (y) in the case of clause (B)
above, upon the conclusion of any period during which the Company would not,
pursuant to the terms of its underwriting arrangements, be permitted to sell
Registrable Securities for its own account and (z) in the case of clause (C)
above, as soon as it would no longer be necessary to prepare such financial
statements to comply with the Securities Act.
3
<PAGE>
(ii) Prepare and file with the SEC such amendments and
supplements to such Registration Statement and the prospectus used in
connection with such Registration Statement as may be necessary to keep the
Registration Statement effective, subject to Section 2(a)(i) above, and to
comply with the provisions of the Act with respect to the disposition of all
securities covered by such Registration Statement until such time as all of
such Registrable Securities have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof as set forth
in such Registration Statement and notify the Holders of the filing and
effectiveness of such Registration Statement and any amendments or
supplements.
(iii) Furnish to each Holder such numbers of copies of a
current prospectus conforming with the requirements of the Act, copies of the
Registration Statement, any amendment or supplement thereto and any documents
incorporated by reference therein and such other documents as such Holder may
reasonably require in order to facilitate the disposition of Registrable
Securities owned by such Holder and, in the case of the Registration
Statement referred to in Section 2(a)(i), each letter written by or on behalf
of the Company to the SEC or the staff of the SEC, and each item of
correspondence from the SEC or the staff of the SEC, in each case relating to
such Registration Statement (other than any portion of any thereof which
contains information for which the Company has sought confidential
treatment). The Company will immediately notify the Holder by facsimile of
the effectiveness of the Registration Statement or any post-effective
amendment. The Company will promptly respond to any and all comments received
from the SEC, with a view towards causing the Registration Statement or any
amendment thereto to be declared effective by the SEC as soon as reasonably
practicable and shall promptly file an acceleration request as soon as
practicable following the resolution or clearance of all SEC comments or, if
applicable, following notification by the SEC that the Registration Statement
or any amendment thereto will not be subject to review.
(iv) (a) If legally required, register and qualify, or
obtain an appropriate exemption from registration or qualification, the
securities covered by such Registration Statement under such other securities
or "Blue Sky" laws of such jurisdictions as shall be reasonably requested by
each Holder (b) prepare and file in those jurisdictions such supplements
(including post-effective amendments) and supplements to such registrations
and qualifications as may be necessary to maintain the effectiveness thereof,
(c) take such other actions as may be necessary to maintain such
registrations and qualifications in effect at all times, and (d) take all
other actions reasonably necessary or advisable to qualify the Registrable
Securities for sale in such jurisdictions; provided that the Company shall
not be required in connection therewith or as a condition thereto to qualify
to do business or to file a general consent to service of process in any such
states or jurisdictions, and shall not be required to register or qualify in
any jurisdiction where such registration or qualification is not permitted or
approved by such jurisdiction following the Company's reasonable efforts to
obtain such permission or approval.
(v) Notify each Holder immediately of the happening of
any event as a result of which the prospectus (including any supplements
thereto or thereof) included in such Registration Statement, as then in
effect, includes an untrue statement of
4
<PAGE>
material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances then existing, and use its best efforts to promptly update
and/or correct such prospectus to correct such untrue statement or omission,
and deliver such number of copies of such supplement or amendment to each
Holder as such Holder may reasonably request.
(vi) Notify each Holder immediately of the issuance by
the Commission or any state securities commission or agency of any stop order
suspending the effectiveness of the Registration Statement or the initiation
of any proceedings for that purpose. The Company shall use reasonable efforts
to prevent the issuance of any stop order and, if any stop order is issued,
to obtain the lifting thereof at the earliest practicable time.
(vii) Permit a single firm of counsel, designated as
Holders' counsel by the Holders of a majority of the Registrable Securities
included in the Registration Statement (the fees and expenses of which shall
be paid in their entirety by the Holders not withstanding Section 3 below),
to review the Registration Statement and all amendments and supplements
thereto within a reasonable period of time prior to each filing, and shall
not request acceleration of the Registration Statement without prior notice
to such counsel. The sections of the Registration Statement covering
information with respect to the Investor, the Investor's beneficial ownership
of securities of the Company or the Investor's intended method of disposition
of Registrable Securities shall conform in all material respects to the
information provided to the Company by the Investor.
(viii) List the Registrable Securities covered by such
Registration Statement with all securities exchange(s) and/or markets on
which the Common Stock is then listed and prepare and file any required
filings with the National Association of Securities Dealers, Inc. or any
exchange or market where the Common Shares are then traded.
(ix) If applicable, take all reasonable steps necessary
to enable Holders to avail themselves of the prospectus delivery mechanism
set forth in Rule 153 (or successor thereto) under the Act.
(x) The Company shall hold in confidence and not make any
disclosure of information concerning the Investor provided to the Company
unless (a) disclosure of such information is reasonably necessary in the
Company's good faith judgment to comply with federal or state securities
laws, (b) the disclosure of such information is reasonably necessary in the
Company's good faith judgment to avoid or correct a misstatement or omission
in any Registration Statement, (c) the release of such information is ordered
pursuant to a subpoena or other order from a court or governmental body of
competent jurisdiction, or (d) such information has been made generally
available to the public other than by disclosure in violation of this or any
other agreement. The Company agrees that it shall, upon learning that
disclosure of such information concerning the Investor is sought in or by a
court or governmental body of competent jurisdiction or through other means,
give prompt notice to the Investor prior to making such disclosure,
5
<PAGE>
and allow the Investor, at its expense, to undertake appropriate action to
prevent disclosure of, or obtain a protective order for, such information.
(xi) The Company shall provide a transfer agent (the
"Transfer Agent") and registrar, which may be a single entity, for the
Registrable Securities not later than the effective date of the Registration
Statement.
(xii) The Company shall cooperate with the Investor who
holds Registrable Securities being offered to facilitate the timely
preparation and delivery of certificates representing Registrable Securities
to be offered pursuant to the Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, as
the Investor may reasonably request and registered in such names as the
Investor may request.
(xiii) From and after the date of this Agreement, the
Company shall not, and shall not agree to, allow the holders of any
securities of the Company to include any of their securities in any
Registration Statement under this Section 2(a) without the consent of the
holders of a majority-in-interest of the Registrable Securities.
(xiv) The Company shall take all other reasonable actions
necessary to allow disposition by the Investor of Registrable Securities
pursuant to the Registration Statement.
(b) DELAY IN EFFECTIVENESS.
(i) If the Registration Statement has not become
effective on or before ninety (90) days from the applicable Issuance Date,
the Investor shall have, in addition to and without limiting any other rights
it may have in equity, for breach of the Equity Line Agreement, or this
Agreement (including the right to specific performance), the right to
receive, as liquidated damages, the payments as provided in subparagraph (ii)
of this section.
(ii) In the event the Company fails to obtain the
effectiveness of a Registration Statement within the time period set forth in
Section 2(a)(i), the Company shall pay to the Investor an amount equal to (A)
$100, in cash, for each day of the thirty (30) day period following the date
by which such Registration Statement was required to have been declared
effective and (B) $500, in cash, for each day after such first thirty (30)
day period until the earlier of (x) the date such Registration Statement has
been declared effective or (y) the date which this Agreement has terminated.
In addition to the foregoing, but subject to Section 2(c) below, in the event
the Company fails to maintain the effectiveness of a Registration Statement
(or the use of the underlying prospectus) throughout the period set forth in
Section 5(a), other than suspensions as set forth in Section 2, the Company
shall pay to the Investor an amount equal to $500, in cash, per day, in which
a suspension has occurred.
(c) BLACKOUT PERIODS. The Company may suspend dispositions
under the Registration Statement and notify the Investor that it may not sell
the Registrable
6
<PAGE>
Securities pursuant to any Registration Statement or prospectus (a "Blocking
Notice") as a result of the circumstances described in Sections 2(a)(i)(A),
2(a)(i)(B) or 2(a)(i)(C); provided that such suspension pursuant to a
Blocking Notice may not exceed ninety (90) days (whether or not consecutive)
in any twelve (12) month period. If the Investor's ability to sell under the
Registration Statement is suspended for more than the ninety (90) days period
described above, the Investor may elect, in its sole and absolute discretion,
to terminate the Agreement pursuant to Section 10.4(b)(i) in the Agreement.
3. EXPENSES OF REGISTRATION. All Registration Expenses incurred
in connection with any registration, qualification or compliance with
registration pursuant to this Agreement shall be borne by the Company, and
all Selling Expenses of a Holder shall be borne by such Holder.
4. REGISTRATION ON FORM S-3. The Company shall seek to qualify
for registration on Form S-3 or any comparable or successor form or forms, or
in the event that the Company is ineligible to use such form, such form as
the Company is eligible to use under the Securities Act.
5. REGISTRATION PERIOD. In the case of the registration effected
by the Company pursuant to this Agreement, the Company will use its best
efforts to keep such registration effective until all the Holders have
completed the sales or distribution described in the Registration Statement
relating thereto, provided that the Company shall not be required to keep
such Registration Statement effective after the earlier of (i) the sale by
the Holder of the Common Stock under the Registration Statement and (ii) two
(2) years after the acquisition by the Holder from the Company of such Common
Stock; PROVIDED, HOWEVER, that if Rule 144 is amended, the obligations of the
Company under this Section 5 will terminate at such time as the Common Shares
are freely tradable under such amended Rule 144.
6. INDEMNIFICATION.
(a) THE COMPANY INDEMNITY. The Company will indemnify each
Holder, each of its officers, directors and partners, and each person
controlling each Holder, within the meaning of Section 15 of the Securities
Act and the rules and regulations thereunder, with respect to which
registration, qualification or compliance has been effected pursuant to this
Agreement, against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
circular or other document (including any related registration statement,
notification or the like) incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by the Company of the
Securities Act or any state securities law or in either case, any rule or
regulation thereunder applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration,
qualification or compliance, and will reimburse each Holder, each of its
officers, directors and partners, and each person controlling such Holder,
each such underwriter and each person who controls any such underwriter, for
any reasonable
7
<PAGE>
legal and any other expenses reasonably incurred in connection with
investigating and defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable in any such case to a
Holder to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission based upon
written information furnished to the Company by such Holder or the
underwriter (if any) therefor and stated to be specifically for use therein.
The indemnity agreement contained in this Section 6(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Company
(which consent will not be unreasonably withheld).
(b) HOLDER INDEMNITY. Each Holder will, severally and not
jointly, if Registrable Securities held by or issuable to it are included in
the securities as to which such registration, qualification or compliance is
being effected, indemnify the Company, each of its directors, officers and
partners, each person who controls the Company within the meaning of Section
15 of the Securities Act and the rules and regulations thereunder, each other
Holder (if any), and each of their officers, directors and partners, and each
person controlling such other Holder(s), against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on
any untrue statement (or alleged untrue statement) of a material fact
contained in any such registration statement, prospectus, offering circular
or other document, or any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company and such
other Holder(s) and their respective directors, officers and partners,
underwriters or control persons for any reasonable legal or any other
expenses reasonably incurred in connection with investigating and defending
any such claim, loss, damage, liability or action, in each case to the
extent, but only to the extent, that such untrue statement (or alleged untrue
statement) or omission (or alleged omission) is made in such registration
statement, prospectus, offering circular or other document in reliance upon
and in conformity with written information furnished to the Company by such
Holder and stated to be specifically for use therein, and provided that the
maximum amount for which such Holder shall be liable under this indemnity
shall not exceed the net proceeds received by such Holder from the sale of
the Registrable Securities. The indemnity agreement contained in this Section
6(b) shall not apply to amounts paid in settlement of any such claims,
losses, damages or liabilities if such settlement is effected without the
consent of such Holder (which consent shall not be unreasonably withheld).
(c) PROCEDURE. Each party entitled to indemnification under
this Article (the "INDEMNIFIED PARTY") shall give notice to the party
required to provide indemnification (the "INDEMNIFYING PARTY") promptly after
such Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the Indemnifying Party to assume
the defense of any such claim in any litigation resulting therefrom, provided
that counsel for the Indemnifying Party, who shall conduct the defense of
such claim or any litigation resulting therefrom, shall be approved by the
Indemnified Party (whose approval shall not be unreasonably withheld), and
the Indemnified Party may participate in such defense at such party's
expense, and provided further that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Article except to the extent that the Indemnifying
Party is
8
<PAGE>
prejudiced by such failure to provide notice. No Indemnifying Party, in the
defense of any such claim or litigation, shall, except with the consent of
each Indemnified Party, consent to entry of any judgment or enter into any
settlement which does not include as an unconditional term thereof the giving
by the claimant or plaintiff to such Indemnified Party of a release from all
liability in respect to such claim or litigation. Each Indemnified Party
shall furnish such information regarding itself or the claim in question as
an Indemnifying Party may reasonably request in writing and as shall be
reasonably required in connection with the defense of such claim and
litigation resulting therefrom.
7. CONTRIBUTION. If the indemnification provided for in Section 6
herein is unavailable to the Indemnified Parties in respect of any losses,
claims, damages or liabilities referred to herein (other than by reason of
the exceptions provided therein), then each such Indemnifying Party, in lieu
of indemnifying such Indemnified Party, shall contribute to the amount paid
or payable by such Indemnified Party as a result of such losses, claims,
damages or liabilities as between the Company on the one hand and any Holder
on the other, in such proportion as is appropriate to reflect the relative
fault of the Company and of such Holder in connection with the statements or
omissions which resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The relative fault of
the Company on the one hand and of any Holder on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or omission or alleged omission to state
a material fact relates to information supplied by the Company or by such
Holder.
In no event shall the obligation of any Indemnifying Party to
contribute under this Section 7 exceed the amount that such Indemnifying
Party would have been obligated to pay by way of indemnification if the
indemnification provided for under Section 6(a) or 6(b) hereof had been
available under the circumstances.
The Company and the Holders agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by
PRO RATA allocation (even if the Holders or the underwriters were treated as
one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to in the
immediately preceding paragraphs. The amount paid or payable by an
Indemnified Party as a result of the losses, claims, damages and liabilities
referred to in the immediately preceding paragraphs shall be deemed to
include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such Indemnified Party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this section, no Holder shall be required to contribute any
amount in excess of the amount by which the net proceeds received by such
Holder from the sale of Registrable Securities exceeds, in any such case, the
amount of any damages that such Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person liable for or guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled
to contribution from any person who was not liable for or guilty of such
fraudulent misrepresentation.
9
<PAGE>
8. SURVIVAL. The indemnity and contribution agreements contained
in Sections 6 and 7 shall remain operative and in full force and effect
regardless of any termination of this Agreement or the Purchase Agreement.
9. INFORMATION BY HOLDERS. Each Holder shall furnish to the
Company such information regarding such Holder and the distribution and/or
sale proposed by such Holder as the Company may reasonably request in writing
and as shall be reasonably required in connection with any registration,
qualification or compliance referred to in this Agreement. The intended
method or methods of disposition and/or sale (Plan of Distribution) of such
securities as so provided by such Holder shall be included without alteration
in the Registration Statement covering the Registrable Securities, subject to
any reasonable objection of the Company and shall not be changed without
written consent of such Holder or its designated representative.
10. NASDAQ LIMIT ON STOCK ISSUANCES. Notwithstanding anything to
the contrary herein, the Company shall not be obligated to issue or register
with the SEC any shares of Common Stock to the extent that such issuance or
registration is prohibited by any rule, regulation or policy of Nasdaq or any
exchange or market upon which the Common Stock may be traded.
11. TRANSFER OR ASSIGNMENT. Except as otherwise provided herein,
this Agreement shall be binding upon and inure to the benefit of the parties
and their successors and permitted assigns. The rights granted to the
Investor by the Company under this Agreement to cause the Company to register
Registrable Securities may be transferred or assigned (in whole or in part)
to a transferee or assignee which transfer has been effected in compliance
with the Debentures and Warrants; provided in each case that the Company must
be given written notice by the such Investor at the time of or within a
reasonable time after said transfer or assignment, stating the name and
address of said transferee or assignee and identifying the securities with
respect to which such registration rights are being transferred or assigned;
and provided further that the transferee or assignee of such rights agrees in
writing to be bound by the registration provisions of this Agreement.
12. MISCELLANEOUS.
(a) REMEDIES. The Company and the Investor acknowledge and
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent or cure
breaches of the provisions of this Agreement and to enforce specifically the
terms and provisions hereof, this being in addition to any other remedy to
which any of them may be entitled by law or equity.
(b) NOTICES. Any notice or other communication required or
permitted to be given hereunder shall be in writing by facsimile, mail or
personal delivery and shall be effective upon actual receipt of such notice.
The addresses for such communications shall be:
10
<PAGE>
to the Company:
Cygnus, Inc.
400 Penobscot Drive
Redwood City, California 94063
Attention: Chief Executive Officer
Facsimile: (650) 599-3972
with copies to:
Cygnus, Inc.
400 Penobscot Drive
Redwood City, California 94063
Attention: General Counsel
Facsimile: (650) 599-3913
to the Holder:
Cripple Creek Securities, LLC
c/o The Palladin Group, L.P.
195 Maplewood Avenue
Maplewood, New Jersey 07040
Attention: Robert L. Chender
Facsimile: (973) 313-6490
with copies to:
Arnold & Porter
555 Twelfth Street, NW
Washington, D.C. 20004
Attention: Richard E. Baltz
Facsimile: (202) 942-5999
Any party hereto may from time to time change its address for notices by giving
at least 10 days' written notice of such changed address to the other parties
hereto.
(c) WAIVERS. No waiver by any party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission
of any party to exercise any right hereunder in any manner impair the
exercise of any such right accruing to it thereafter. The representations and
warranties and the agreements and covenants of the Company and each Investor
contained herein shall survive the Closing.
(d) EXECUTION. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same agreement, it
being understood that all parties need not sign the same counterpart.
11
<PAGE>
(e) PUBLICITY. The Company agrees that it will not disclose,
and will not include in any public announcement, the name of the Investor
without its consent, unless and until such disclosure is required by law or
applicable regulation, and then only to the extent of such requirement.
(f) ENTIRE AGREEMENT. This Agreement, together with the
Purchase Agreement, the Debentures and the Warrants and the agreements and
documents contemplated hereby and thereby, contains the entire understanding
and agreement of the parties, and may not be modified or terminated except by
a written agreement signed by both parties.
(g) GOVERNING LAW; CONSENT OF JURISDICTION. THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS TO BE EXECUTED AND
PERFORMED ENTIRELY WITHIN SUCH STATE. EACH PARTY (I) HEREBY IRREVOCABLY
SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED
IN SAN FRANCISCO COUNTY, CALIFORNIA FOR THE PURPOSES OF ANY SUIT, ACTION OR
PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT AND (II) HEREBY
WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY
CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT,
THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR
THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH PARTY
CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY
MAILING A COPY THEREOF TO SUCH PARTY AS PROVIDED HEREIN AND AGREES THAT SUCH
SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE
THEREOF. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
(h) JURY TRIAL. EACH PARTY HERETO WAIVES THE RIGHT TO A TRIAL
BY JURY.
(i) TITLES. The titles used in this Agreement are used for
convenience only and are not to be considered in construing or interpreting
this Agreement.
[SIGNATURE PAGE FOLLOWS]
12
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
CYGNUS, INC.
By: /s/ John C. Hodgman
---------------------------------------------
Name: John C. Hodgman
-----------------------------------
Title: President & Chief Executive Officer
-----------------------------------
INVESTOR:
CRIPPLE CREEK SECURITIES, LLC
By: /s/ Robert L. Chender
---------------------------------------------
Name: Robert L. Chender
Title: Principal
13
<PAGE>
Exhibit 4.12
REGISTRATION RIGHTS AGREEMENT
-----------------------------
THIS REGISTRATION RIGHTS AGREEMENT ("AGREEMENT") is entered into as
of June 29, 1999 by and between CYGNUS, INC., a Delaware corporation with
offices at 400 Penobscot Drive, Redwood City, California 94063 (the
"COMPANY"), and each person or entity listed as an investor on SCHEDULE I to
this Agreement (each individually an "INVESTOR" and collectively the
"INVESTORS").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, pursuant to that certain Convertible Debenture and Warrant
Purchase Agreement by and between the Company and the Investors dated as of
June 29, 1999 (the "PURCHASE AGREEMENT"), the Company has agreed to sell and
issue to the Investor, and the Investor has agreed to purchase from the
Company, $14,000,000 principal amount of 8.5% Convertible Debentures Due June
29, 2004, and up to an additional $12,000,000 principal amount of such
Convertible Debentures pursuant to Article V of the Purchase Agreement
(collectively, the "DEBENTURES"), on the terms and conditions set forth
therein;
WHEREAS, the Purchase Agreement contemplates that the Debentures may
be converted into shares (the "COMMON SHARES") of common stock, $0.001 par
value, of the Company ("COMMON STOCK") pursuant to the terms and conditions
set forth in the Debentures; and
WHEREAS, pursuant to the terms of, and in partial consideration for,
the Investors' agreement to enter into the Purchase Agreement, at Closing the
Company has agreed to issue to the Investors warrants (the "Warrants")
exercisable for shares of Common Stock (the "Warrant Shares") in the form
attached as Exhibit 1.1B to the Purchase Agreement;
NOW, THEREFORE, in consideration of the mutual promises,
representations, warranties, covenants and conditions set forth in the
Purchase Agreement and this Agreement, the Company and each of the Investors
agree as follows:
1. CERTAIN DEFINITIONS. Capitalized terms used herein and not
otherwise defined shall have the meaning ascribed thereto in the Purchase
Agreement, the Warrants or the Debentures. As used in this Agreement, the
following terms shall have the following respective meanings:
"CLOSING" and "CLOSING DATE" shall have the meanings
ascribed to such terms in the Purchase Agreement.
"COMMISSION" or "SEC" shall mean the Securities and
Exchange Commission or any other federal agency at the time administering the
Securities Act.
"HOLDER" and "HOLDERS" shall include the Investors and any
transferee of the Debentures, Warrants, Warrant Shares, Common Shares or
other Registrable Securities
<PAGE>
which have not been sold to the public to whom the registration rights
conferred by this Agreement have been transferred in compliance with this
Agreement.
"REGISTRABLE SECURITIES" shall mean: (i) the Common Shares
and Warrant Shares issued to each Holder or its permitted transferee or
designee upon conversion of the Debentures or exercise of the Warrants, as
applicable, or upon any stock split, stock dividend, recapitalization or
similar event with respect to such Common Shares or Warrant Shares; (ii) any
securities issued or issuable to each Holder upon the conversion, exercise or
exchange of any Debentures, Warrants, Warrant Shares, or Common Shares; and
(iii) any other security of the Company issued as a dividend or other
distribution with respect to, or upon conversion or exchange of or in
replacement of Registrable Securities.
The terms "REGISTER", "REGISTERED" and "REGISTRATION" shall
refer to a registration effected by preparing and filing a registration
statement in compliance with the Securities Act and applicable rules and
regulations thereunder, and the declaration or ordering by the SEC of the
effectiveness of such registration statement.
"REGISTRATION EXPENSES" shall mean all reasonable expenses
to be incurred by the Company in connection with the Holder's registration
rights under this Agreement, including, without limitation, all registration
and filing fees, printing expenses, fees and disbursements of counsel for the
Company, blue sky fees and expenses, and the expense of any audited financial
statements incident to or required by any such registration (but excluding
the compensation of regular employees of the Company, which shall be paid in
any event by the Company; provided that Registration Expenses shall not
include Selling Expenses).
"REGISTRATION STATEMENT" shall have the meaning set forth
in Section 2(a)(i) herein.
"REGULATION D" shall mean Regulation D as promulgated
pursuant to the Securities Act, and as subsequently amended.
"SECURITIES ACT" or "ACT" shall mean the Securities Act of
1933, as amended, together with the rules and regulations promulgated
thereunder.
"SELLING EXPENSES" shall mean all underwriting discounts
and selling commissions applicable to the sale of Registrable Securities and
all fees and disbursements of counsel for Holders.
2. REGISTRATION REQUIREMENTS. The Company shall use reasonable
commercial efforts to effect the registration of the Registrable Securities
(including, without limitation, an undertaking to file post-effective
amendments, appropriate qualification under applicable blue sky or other
state securities laws and appropriate compliance with applicable regulations
issued under the Securities Act) as would permit or facilitate the sale or
distribution of all the Registrable Securities in the manner (including
manner of sale) and in all states reasonably requested by the Holder on a
Principal Market. Such reasonable commercial efforts by the Company shall
include the following:
-2-
<PAGE>
(a) The Company shall, as expeditiously as reasonably
practicable after the Closing Date:
(i) Prepare and file a registration statement with
the Commission pursuant to Rule 415 under the Securities Act on Form S-3
under the Securities Act (or such other form as the Company is eligible to
use under the Securities Act) covering the Registrable Securities
("REGISTRATION STATEMENT") which Registration Statement (including any
amendments or supplements thereto and prospectuses contained therein) shall
not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein, or necessary to make the
statements therein not misleading. Such Registration Statement shall
initially register for resale a number of shares of Common Stock equal the
number of Common Shares issuable upon the conversion or exercise of the
Debentures and Warrants. Such Registration Statement shall, in addition and
without limitation, register (pursuant to Rule 416 under the Securities Act,
or otherwise) such additional indeterminate number of Registrable Securities
as shall be necessary to permit the conversion in full of the Debentures or
exercise of the Warrants to prevent dilution resulting from stock splits,
stock dividends or similar transactions. Thereafter, the Company shall use
reasonable commercial efforts to cause such Registration Statement and other
filings to be declared effective as soon as possible, and in any event within
to 90 days following the Closing Date (the "EFFECTIVE DATE"); PROVIDED,
HOWEVER, that, notwithstanding Sections 2(a)(ii) and 2(a)(v) below, the
Company's obligations hereunder to file a Registration Statement and to keep
a registration statement continuously in effect under the Securities Act
shall be suspended if (A) the fulfillment of such obligations would require
the Company to make a disclosure that would, in the reasonable judgment of
the Company's Board of Directors, have a Material Adverse Effect (as such
term is defined in the Purchase Agreement) on the Company or a material
adverse effect on the future prospects of the Company or its stockholders,
(B) the Company has filed or proposes to file a registration statement with
respect to any of its securities to be distributed in an underwritten public
offering and it is advised by its lead or managing underwriter that an
offering by a Holder of Registrable Securities would materially adversely
affect the distribution of such securities, or (C) the fulfillment of such
obligations would require the Company to prepare financial statements under
the Securities Act that would not otherwise be required to be prepared by the
Company in order to comply with its obligations under the Exchange Act. Such
obligations shall be reinstated (x) in the case of clause (A) above, upon the
making of such disclosure by the Company (or, if earlier, when such
disclosure would either no longer be necessary for the fulfillment of such
obligations or no longer be detrimental), (y) in the case of clause (B)
above, upon the conclusion of any period during which the Company would not,
pursuant to the terms of its underwriting arrangements, be permitted to sell
Registrable Securities for its own account and (z) in the case of clause (C)
above, as soon as it would no longer be necessary to prepare such financial
statements to comply with the Securities Act. In the event that the Company's
obligations are suspended as provided above, the Company shall deliver a
certificate in writing, signed by an officer of the Company, to each Holder,
which shall state that its obligations hereunder have been suspended in
accordance with this Section 2(a)(i).
-3-
<PAGE>
(ii) Prepare and file with the SEC such amendments
and supplements to such Registration Statement and the prospectus used in
connection with such Registration Statement as may be necessary to keep the
Registration Statement effective, subject to Section 2(a)(i) above, and to
comply with the provisions of the Act with respect to the disposition of all
securities covered by such Registration Statement until such time as all of
such Registrable Securities have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof as set forth
in such Registration Statement and notify the Holders of the filing and
effectiveness of such Registration Statement and any amendments or
supplements.
(iii) Furnish to each Holder such numbers of copies
of a current prospectus conforming with the requirements of the Act, copies
of the Registration Statement, any amendment or supplement thereto and any
documents incorporated by reference therein and such other documents as such
Holder may reasonably require in order to facilitate the disposition of
Registrable Securities owned by such Holder and, in the case of the
Registration Statement referred to in Section 2(a)(i), each letter written by
or on behalf of the Company to the SEC or the staff of the SEC, and each item
of correspondence from the SEC or the staff of the SEC, in each case relating
to such Registration Statement (other than any portion of any thereof which
contains information for which the Company has sought confidential
treatment). The Company will immediately notify the Holder by facsimile of
the effectiveness of the Registration Statement or any post-effective
amendment. The Company will promptly respond to any and all comments received
from the SEC, with a view towards causing the Registration Statement or any
amendment thereto to be declared effective by the SEC as soon as reasonably
practicable and shall promptly file an acceleration request as soon as
practicable following the resolution or clearance of all SEC comments or, if
applicable, following notification by the SEC that the Registration Statement
or any amendment thereto will not be subject to review.
(iv) (a) If legally required, register and qualify,
or obtain an appropriate exemption from registration or qualification, the
securities covered by such Registration Statement under such other securities
or "Blue Sky" laws of such jurisdictions as shall be reasonably requested by
each Holder (b) prepare and file in those jurisdictions such supplements
(including post-effective amendments) and supplements to such registrations
and qualifications as may be necessary to maintain the effectiveness thereof,
(c) take such other actions as may be necessary to maintain such
registrations and qualifications in effect at all times, and (d) take all
other actions reasonably necessary or advisable to qualify the Registrable
Securities for sale in such jurisdictions; provided that the Company shall
not be required in connection therewith or as a condition thereto to qualify
to do business or to file a general consent to service of process in any such
states or jurisdictions, and shall not be required to register or qualify in
any jurisdiction where such registration or qualification is not permitted or
approved by such jurisdiction following the Company's reasonable efforts to
obtain such permission or approval.
(v) Notify each Holder immediately of the happening
of any event as a result of which the prospectus (including any supplements
thereto or thereof) included in such Registration Statement, as then in
effect, includes an untrue statement of
-4-
<PAGE>
material fact or omits to state a material fact required to be stated therein
or necessary to make the statements therein not misleading in light of the
circumstances then existing, and use its best efforts to promptly update
and/or correct such prospectus to correct such untrue statement or omission,
and deliver such number of copies of such supplement or amendment to each
Holder as such Holder may reasonably request.
(vi) Notify each Holder immediately of the issuance
by the Commission or any state securities commission or agency of any stop
order suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose. The Company shall use
reasonable efforts to prevent the issuance of any stop order and, if any stop
order is issued, to obtain the lifting thereof at the earliest practicable
time.
(vii) Permit a single firm of counsel, designated as
Holders' counsel by the Holders of a majority of the Registrable Securities
included in the Registration Statement (the fees and expenses of which shall
be paid in their entirety by the Holders not withstanding Section 3 below),
to review the Registration Statement and all amendments and supplements
thereto within a reasonable period of time prior to each filing, and shall
not request acceleration of the Registration Statement without prior notice
to such counsel. The sections of the Registration Statement covering
information with respect to the Investors, the Investors' beneficial
ownership of securities of the Company or the Investor's intended method of
disposition of Registrable Securities shall conform in all material respects
to the information provided to the Company by the Investors.
(viii) List the Registrable Securities covered by
such Registration Statement with all securities exchange(s) and/or markets on
which the Common Stock is then listed and prepare and file any required
filings with the National Association of Securities Dealers, Inc. or any
exchange or market where the Common Shares are then traded.
(ix) If applicable, take all reasonable steps
necessary to enable Holders to avail themselves of the prospectus delivery
mechanism set forth in Rule 153 (or successor thereto) under the Act.
(x) The Company shall hold in confidence and not make
any disclosure of information concerning the Investors provided to the
Company unless (a) disclosure of such information is reasonably necessary in
the Company's good faith judgment to comply with federal or state securities
laws, (b) the disclosure of such information is reasonably necessary in the
Company's good faith judgment to avoid or correct a misstatement or omission
in any Registration Statement, (c) the release of such information is ordered
pursuant to a subpoena or other order from a court or governmental body of
competent jurisdiction, or (d) such information has been made generally
available to the public other than by disclosure in violation of this or any
other agreement. The Company agrees that it shall, upon learning that
disclosure of such information concerning an Investor is sought in or by a
court or governmental body of competent jurisdiction or through other means,
give prompt notice to such Investor prior to making such disclosure,
-5-
<PAGE>
and allow each Investor, at its expense, to undertake appropriate action to
prevent disclosure of, or obtain a protective order for, such information.
(xi) The Company shall provide a transfer agent (the
"Transfer Agent") and registrar, which may be a single entity, for the
Registrable Securities not later than the effective date of the Registration
Statement.
(xii) The Company shall cooperate with the Investors
who hold Registrable Securities being offered to facilitate the timely
preparation and delivery of certificates representing Registrable Securities
to be offered pursuant to the Registration Statement and enable such
certificates to be in such denominations or amounts, as the case may be, as
the Investors may reasonably request and registered in such names as the
Investors may request, and, within three (3) business days after a
Registration Statement which includes Registrable Securities is ordered
effective by the SEC, the Company shall deliver, and shall cause legal
counsel selected by the Company to deliver, to the transfer agent for the
Registrable Securities (with copies to the Investors whose Registrable
Securities are included in such Registration Statement) an instruction in the
form attached hereto as EXHIBIT 1 and an opinion of such counsel in the form
attached hereto as EXHIBIT 2.
(xiii) From and after the date of this Agreement,
except for shares of Common Stock listed on Schedule 2.1(a) attached hereto,
the Company shall not, and shall not agree to, allow the holders of any
securities of the Company to include any of their securities in any
Registration Statement under this Section 2(a) without the consent of the
holders of a majority-in-interest of the Registrable Securities.
(xiv) The Company shall take all other reasonable
actions necessary to allow disposition by the Investors of Registrable
Securities pursuant to the Registration Statement.
(b) Set forth below in this Section 2(b) are (I) events
that may arise that the Investors consider will interfere with the full
enjoyment of their rights under the the Purchase Agreement and this Agreement
(the "Interfering Events"), and (II) certain remedies applicable in each of
these events.
Paragraphs (i) through (iv) of this Section 2(b)
describe the Interfering Events, provide a remedy to the Investors if an
Interfering Event occurs and provide that each of the Investors may require
that the Company convert outstanding shares of Debentures at a specified
price if certain Interfering Events are not timely cured.
Paragraph (v) provides, INTER ALIA, that if cash
payments required as the remedy in the case of certain of the Interfering
Events are not paid when due, the Company may be required by each of the
Investors to convert outstanding Debentures at a specified price.
Paragraph (vi) provides, INTER ALIA, that the
Investors have the right to specific performance.
-6-
<PAGE>
The preceding paragraphs in this Section 2(b) are
meant to serve only as an introduction to this Section 2(b), are for
convenience only, and are not to be considered in applying, construing or
interpreting this Section 2(b).
(i) DELAY IN EFFECTIVENESS OF REGISTRATION STATEMENT.
The Company agrees that it shall file the Registration Statement complying
with the requirements of this Agreement promptly and shall use its best
efforts to cause such Registration Statement to become effective as soon as
possible and in any event prior to 90 days following the initial closing of
the purchase (the "EFFECTIVE DATE"). In the event that the Registration
Statement has not been declared effective within 90 days from the Closing
Date, then the "CONVERSION PRICE" pursuant to Section 5(c) of the Debentures
shall be reduced by 1% during and after the first 30-day period from and
after the 90th day following the Closing Date during any part of which such
Registration Statement is not effective, and such "CONVERSION PRICE" shall be
further reduced by an additional 1.5% during and after each subsequent 30-day
period thereafter during any part of which the Registration Statement is not
effective. The Company acknowledges that the Conversion Price is also subject
to further adjustment as set forth in the Debentures, and the Purchase
Agreement; provided, however, that once the Registration Statement first
becomes effective, there can be no further adjustment to the Conversion Price
under this Section 2(b)(i). If the Registration Statement has not been
declared effective within 150 days after the Closing Date, then each Holder
shall have the right in its sole discretion to sell its Debentures to the
Company (in whole or in part) at a price in immediately available funds (the
"PREMIUM CONVERSION PRICE") equal to the greater of (x) 1.2 times (I.E., 120%
of) the Outstanding Principal Amount of the Debentures then held by such
Holder plus any accrued but unpaid interest or default payments and (y) the
number of shares of Common Stock issuable upon conversion of the Outstanding
Principal Amount of the Debentures then held by such Holder plus any accrued
but unpaid or unrecognized interest or default payments relating to such
Debentures times the Market Price for one Share of Common Stock on the day
prior to the day such Holder notifies the Company it intends to exercise its
right to the Premium Conversion Price.
(ii) NO LISTING; PREMIUM PRICE CONVERSION FOR
DELISTING OF CLASS OF SHARES.
(A) In the event that the Company fails, refuses
or is unable to cause the Registrable Securities covered by the Registration
Statement to be listed with the Approved Market and each other securities
exchange and market on which the Common Stock is then traded at all times
during the period ("LISTING PERIOD") commencing the earlier of the effective
date of the Registration Statement or the 90th day following the Closing
Date, and continuing thereafter for so long as the Debentures are
outstanding, then the Company shall pay in cash to each Holder a default
payment at a rate (the "DEFAULT PAYMENT RATE") equal to one and one half
percent (1.5%) of the sum of (x) the Outstanding Principal Amount of, (y) the
accrued but unpaid interest on, plus (z) the accrued but unpaid or
unrecognized default payments on the Debentures (the "Debenture Amount") held
by such Holder for each 30-day period (or portion thereof) during the Listing
Period from and after such failure, refusal or inability to so list the
Registrable
-7-
<PAGE>
Securities until the Registrable Securities are so listed. Alternatively, at
any time five (5) days after the commencement of the running of the first
30-day period described above, a holder shall have the right to require the
Company to purchase the Debentures for cash in an amount equal to the Premium
Conversion Price.
(B) In the event that shares of Common Stock of
the Company are delisted from the Approved Market at any time following the
Closing Date and remain delisted for five (5) consecutive trading days, then
at the option of each Holder and to the extent such Holder so elects, the
Holder will be entitled to require the Company to purchase the Debentures for
cash in an amount equal to the Premium Conversion Price.
(iii) BLACKOUT PERIODS. In the event any Holder's
ability to sell Registrable Securities under the Registration Statement is
suspended for more than (i) five (5) consecutive Trading Days or (ii) fifteen
(15) days in any 12 month period (except in the case of an event described in
Sections 2(a)(i)(A), 2(a)(i)(B) or 2(a)(i)(C), in which case such time
periods shall be extended to twenty (20) consecutive Trading Days and forty
(40) Trading Days in any 12 month period, respectively) ("SUSPENSION GRACE
PERIOD"), including without limitation by reason of a suspension of trading
or delisting of the Common Stock on the Approved Market, or any suspension or
stop order with respect to the Registration Statement or the fact that an
event has occurred as a result of which the prospectus (including any
supplements thereto) included in such Registration Statement then in effect
includes an untrue statement of material fact or omits to state a material
fact required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances then existing, then the
Company shall pay in cash to each Holder a default payment at the Default
Payment Rate of the Debenture Amount for the Debentures held by such Holder
for each 30-day period (or portion thereof) from and after the expiration of
the Suspension Grace Period. Alternatively, a Holder shall have the right to
require the Company to purchase the Debentures for cash in an amount equal to
the Premium Conversion Price.
(iv) CONVERSION DEFICIENCY; PREMIUM PRICE CONVERSION
FOR CONVERSION DEFICIENCY. In the event that the Company does not have a
sufficient number of Common Shares available to satisfy the Company's
obligations to any Holder upon receipt of a Conversion Notice (as defined in
the Debenture) or is otherwise unable or unwilling to issue such Common
Shares (including without limitation by reason of the limit described in
Section 10 below) in accordance with the terms of the Debenture for any
reason after receipt of a Conversion Notice, then:
(A) The Company shall pay in cash to each Holder
a default payment at the Default Payment Rate on the Outstanding Amount for
the Debentures held by such Holder for each 30-day period (or portion
thereof) that the Company fails or refuses to issue Common Shares in
accordance with the Debenture terms; and
(B) At any time five (5) days after the
commencement of the running of the first 30-day period described above in
clause (A) of this paragraph (iv), at the request of any Holder pursuant to a
redemption notice, the Company promptly (x) shall
-8-
<PAGE>
purchase from such Holder, at a purchase price equal to the Premium
Conversion Price, the Outstanding Amount of Debentures equal to such Holder's
pro rata share of the "Deficiency", as such terms are defined below, if the
failure to issue Common Shares results from the lack of a sufficient number
thereof and (y) shall purchase all (or such portion as such Holder may elect)
of such Holder's Debentures at such Premium Conversion Price if the failure
to issue Common Shares results from any other cause. The "Deficiency" shall
be equal to the outstanding amount of Debentures that would not be able to be
converted for Common Shares, due to an insufficient number of Common Shares
available, if all the outstanding Debentures were submitted for conversion at
the Conversion Price set forth in the Debentures as of the date such
Deficiency is determined. Any request by a Holder pursuant to this paragraph
(iv)(B) shall be revocable by that Holder at any time prior to its receipt of
the Premium Conversion Price.
(v) PREMIUM PRICE CONVERSION FOR CASH PAYMENT
DEFAULTS.
(A) The Company acknowledges that any failure,
refusal or inability by the Company described in the foregoing paragraphs (i)
through (iv) will cause the Holders to suffer damages in an amount that will
be difficult to ascertain, including without limitation damages resulting
from the loss of liquidity in the Registrable Securities and the additional
investment risk in holding the Registrable Securities. Accordingly, the
parties agree that it is appropriate to include in this Agreement the
foregoing provisions for default payments, discounts and mandatory
conversions in order to compensate the Holders for such damages. The parties
acknowledge and agree that the default payments, discounts and mandatory
conversions set forth above are liquidated damages representing the parties'
good faith effort to quantify such damages and, as such, agree that the form
and amount of such default payments, discounts and mandatory conversions are
reasonable and will not constitute a penalty.
(B) Each default payment provided for in the
foregoing paragraphs (ii) through (iv) shall be in addition to each other
default payment. All default payments (which payments shall be pro rata on a
per diem basis for any period of less than 30 days) required to be made in
connection with the above provisions shall be paid in cash at any time upon
demand, and whether or not a demand is made, by the tenth (10th) day of each
calendar month for each partial or full 30-day period occurring prior to that
date.
(C) In the event that the Company fails or
refuses to pay any default payment or honor any penalty or similar amounts
when due, at any Holder's request and option the Company shall purchase (1)
all or a portion of the Debentures, Common Shares and/or Warrant Shares held
by such Holder (with default payments accruing through the date of such
purchase), within five (5) days of such request, at a purchase price equal to
the Premium Conversion Price, and/or (2) all or a portion of the Warrants,
within five (5) days of such request, held by such Holder at a purchase price
equal to the Warrant Redemption Price, provided that such Holder may revoke
either such request at any time prior to receipt of such payment of such
purchase price. Until such time as the Company purchases such Debentures at
the request of such Holder pursuant to the preceding sentence, at any
Holder's request and option the Company shall as to such Holder
-9-
<PAGE>
pay such amount by adding and including the amount of such default payment to
the Outstanding Principal Amount of a Holder's Debentures.
(vi) CUMULATIVE REMEDIES. Except as provided above,
nothing herein is intended to limit any other rights the Holders may have at
law, in equity or under the terms of the Debentures, the Purchase Agreement,
the Warrants or this Agreement, including without limitation the right to
specific performance. Each Holder shall be entitled to specific performance
of any and all obligations of the Company in connection with the registration
rights of the Holders hereunder.
(c) Subject to Section 2(b) above, the Company may
suspend the use of any prospectus used in connection with the Registration
Statement only in the event, and for such period of time as, such a
suspension is required by the rules and regulations of the Commission. The
Company will use reasonable commercial efforts to cause such suspension to
terminate at the earliest possible date.
(d) The Company shall file a Registration Statement with
respect to any newly authorized and/or reserved shares, if necessary to
fulfill its obligations under this Agreement, within fifteen (15) business
days of any stockholders meeting authorizing same and shall use reasonable
commercial efforts to cause such Registration Statement to become effective
within ninety (90) days of such stockholders meeting. If the Holders become
entitled, pursuant to an event described in clause (iii) of the definition of
Registrable Securities, to receive any securities in respect of Registrable
Securities that were already included in a Registration Statement, subsequent
to the date such Registration Statement is declared effective, and the
Company is unable under the securities laws to add such securities to the
then effective Registration Statement, the Company shall as soon as
practicable file, in accordance with the procedures set forth herein, an
additional Registration Statement with respect to such newly Registrable
Securities. The Company shall use reasonable commercial efforts to (i) cause
any such additional Registration Statement, when filed, to become effective
under the Securities Act, and (ii) keep such additional Registration
Statement effective during the period described in Section 5 below. All of
the registration rights and remedies under this Agreement shall apply to the
registration of such newly reserved shares and such new Registrable
Securities, including without limitation the provisions providing for default
payments contained herein.
3. EXPENSES OF REGISTRATION. All Registration Expenses
incurred in connection with any registration, qualification or compliance
with registration pursuant to this Agreement shall be borne by the Company,
and all Selling Expenses of a Holder shall be borne by such Holder.
4. REGISTRATION ON FORM S-3. The Company shall seek to qualify
for registration on Form S-3 or any comparable or successor form or forms, or
in the event that the Company is ineligible to use such form, such form as
the Company is eligible to use under the Securities Act.
5. REGISTRATION PERIOD. In the case of the registration
effected by the Company pursuant to this Agreement, the Company will use its
best efforts to keep such registration
-10-
<PAGE>
effective until all the Holders have completed the sales or distribution
described in the Registration Statement relating thereto, provided that the
Company shall not be required to keep such Registration Statement effective
(a) with respect to Warrant Shares, after the earlier of (i) the sale by the
Holder of such Warrant Shares under the Registration Statement and (ii) two
(2) years after the acquisition from the Company of such Warrant Shares and
(b) with respect to Common Shares, after such shares are freely tradable by
the Holder under Rule 144(k); PROVIDED, HOWEVER, that if Rule 144 is amended,
the obligations of the Company under this Section 5 will terminate at such
time as the Common Shares and Warrant Shares are freely tradable under such
amended Rule 144.
6. INDEMNIFICATION.
(a) THE COMPANY INDEMNITY. The Company will indemnify
each Holder, each of its officers, directors and partners, and each person
controlling each Holder, within the meaning of Section 15 of the Securities
Act and the rules and regulations thereunder, with respect to which
registration, qualification or compliance has been effected pursuant to this
Agreement, against all claims, losses, damages and liabilities (or actions in
respect thereof) arising out of or based on any untrue statement (or alleged
untrue statement) of a material fact contained in any prospectus, offering
circular or other document (including any related registration statement,
notification or the like) incident to any such registration, qualification or
compliance, or based on any omission (or alleged omission) to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, or any violation by the Company of the
Securities Act or any state securities law or in either case, any rule or
regulation thereunder applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration,
qualification or compliance, and will reimburse each Holder, each of its
officers, directors and partners, and each person controlling such Holder,
each such underwriter and each person who controls any such underwriter, for
any reasonable legal and any other expenses reasonably incurred in connection
with investigating and defending any such claim, loss, damage, liability or
action, provided that the Company will not be liable in any such case to a
Holder to the extent that any such claim, loss, damage, liability or expense
arises out of or is based on any untrue statement or omission based upon
written information furnished to the Company by such Holder or the
underwriter (if any) therefor and stated to be specifically for use therein.
The indemnity agreement contained in this Section 6(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Company
(which consent will not be unreasonably withheld).
(b) HOLDER INDEMNITY. Each Holder will, severally and not
jointly, if Registrable Securities held by or issuable to it are included in
the securities as to which such registration, qualification or compliance is
being effected, indemnify the Company, each of its directors, officers and
partners, each person who controls the Company within the meaning of Section
15 of the Securities Act and the rules and regulations thereunder, each other
Holder (if any), and each of their officers, directors and partners, and each
person controlling such other Holder(s), against all claims, losses, damages
and liabilities (or actions in respect thereof) arising out of or based on
any untrue statement (or alleged untrue
-11-
<PAGE>
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse
the Company and such other Holder(s) and their respective directors, officers
and partners, underwriters or control persons for any reasonable legal or any
other expenses reasonably incurred in connection with investigating and
defending any such claim, loss, damage, liability or action, in each case to
the extent, but only to the extent, that such untrue statement (or alleged
untrue statement) or omission (or alleged omission) is made in such
registration statement, prospectus, offering circular or other document in
reliance upon and in conformity with written information furnished to the
Company by such Holder and stated to be specifically for use therein, and
provided that the maximum amount for which such Holder shall be liable under
this indemnity shall not exceed the net proceeds received by such Holder from
the sale of the Registrable Securities. The indemnity agreement contained in
this Section 6(b) shall not apply to amounts paid in settlement of any such
claims, losses, damages or liabilities if such settlement is effected without
the consent of such Holder (which consent shall not be unreasonably withheld).
(c) PROCEDURE. Each party entitled to indemnification
under this Article (the "INDEMNIFIED PARTY") shall give notice to the party
required to provide indemnification (the "INDEMNIFYING PARTY") promptly after
such Indemnified Party has actual knowledge of any claim as to which
indemnity may be sought, and shall permit the Indemnifying Party to assume
the defense of any such claim in any litigation resulting therefrom, provided
that counsel for the Indemnifying Party, who shall conduct the defense of
such claim or any litigation resulting therefrom, shall be approved by the
Indemnified Party (whose approval shall not be unreasonably withheld), and
the Indemnified Party may participate in such defense at such party's
expense, and provided further that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of
its obligations under this Article except to the extent that the Indemnifying
Party is prejudiced by such failure to provide notice. No Indemnifying Party,
in the defense of any such claim or litigation, shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement which does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation. Each
Indemnified Party shall furnish such information regarding itself or the
claim in question as an Indemnifying Party may reasonably request in writing
and as shall be reasonably required in connection with the defense of such
claim and litigation resulting therefrom.
7. CONTRIBUTION. If the indemnification provided for in
Section 6 herein is unavailable to the Indemnified Parties in respect of any
losses, claims, damages or liabilities referred to herein (other than by
reason of the exceptions provided therein), then each such Indemnifying
Party, in lieu of indemnifying such Indemnified Party, shall contribute to
the amount paid or payable by such Indemnified Party as a result of such
losses, claims, damages or liabilities as between the Company on the one hand
and any Holder on the other, in such proportion as is appropriate to reflect
the relative fault of the Company and of such Holder in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
-12-
<PAGE>
relative fault of the Company on the one hand and of any Holder on the other
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or omission or alleged
omission to state a material fact relates to information supplied by the
Company or by such Holder.
In no event shall the obligation of any Indemnifying Party
to contribute under this Section 7 exceed the amount that such Indemnifying
Party would have been obligated to pay by way of indemnification if the
indemnification provided for under Section 6(a) or 6(b) hereof had been
available under the circumstances.
The Company and the Holders agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by
PRO RATA allocation (even if the Holders or the underwriters were treated as
one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to in the
immediately preceding paragraphs. The amount paid or payable by an
Indemnified Party as a result of the losses, claims, damages and liabilities
referred to in the immediately preceding paragraphs shall be deemed to
include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such Indemnified Party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this section, no Holder shall be required to contribute any
amount in excess of the amount by which the net proceeds received by such
Holder from the sale of Registrable Securities exceeds, in any such case, the
amount of any damages that such Holder has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission. No person liable for or guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled
to contribution from any person who was not liable for or guilty of such
fraudulent misrepresentation.
8. SURVIVAL. The indemnity and contribution agreements
contained in Sections 6 and 7 shall remain operative and in full force and
effect regardless of any termination of this Agreement or the Purchase
Agreement.
9. INFORMATION BY HOLDERS. Each Holder shall furnish to the
Company such information regarding such Holder and the distribution and/or
sale proposed by such Holder as the Company may reasonably request in writing
and as shall be reasonably required in connection with any registration,
qualification or compliance referred to in this Agreement. The intended
method or methods of disposition and/or sale (Plan of Distribution) of such
securities as so provided by such Holder shall be included without alteration
in the Registration Statement covering the Registrable Securities, subject to
any reasonable objection of the Company and shall not be changed without
written consent of such Holder or its designated representative.
10. NASDAQ LIMIT ON STOCK ISSUANCES. Notwithstanding anything
to the contrary herein, the Company shall not be obligated to issue or
register with the SEC any shares of Common Stock to the extent that such
issuance or registration is prohibited by any rule, regulation or policy of
Nasdaq or any exchange or market upon which the Common Stock may be traded.
-13-
<PAGE>
11. TRANSFER OR ASSIGNMENT. Except as otherwise provided
herein, this Agreement shall be binding upon and inure to the benefit of the
parties and their successors and permitted assigns. The rights granted to the
Investors by the Company under this Agreement to cause the Company to
register Registrable Securities may be transferred or assigned (in whole or
in part) to a transferee or assignee which transfer has been effected in
compliance with the Debentures and Warrants; provided in each case that the
Company must be given written notice by the such Investor at the time of or
within a reasonable time after said transfer or assignment, stating the name
and address of said transferee or assignee and identifying the securities
with respect to which such registration rights are being transferred or
assigned; and provided further that the transferee or assignee of such rights
agrees in writing to be bound by the registration provisions of this
Agreement.
12. MISCELLANEOUS.
(c) REMEDIES. The Company and each of the Investors
acknowledge and agree that irreparable damage would occur in the event that
any of the provisions of this Agreement were not performed in accordance with
their specific terms or were otherwise breached. It is accordingly agreed
that the parties shall be entitled to an injunction or injunctions to prevent
or cure breaches of the provisions of this Agreement and to enforce
specifically the terms and provisions hereof, this being in addition to any
other remedy to which any of them may be entitled by law or equity.
(b) NOTICES. Any notice or other communication required
or permitted to be given hereunder shall be in writing by facsimile, mail or
personal delivery and shall be effective upon actual receipt of such notice.
The addresses for such communications shall be:
to the Company:
Cygnus, Inc.
400 Penobscot Drive
Redwood City, California 94063
Attention: Chief Executive Officer
Facsimile: (650) 599-3972
with copies to:
Cygnus, Inc.
400 Penobscot Drive
Redwood City, California 94063
Attention: General Counsel
Facsimile: (650) 599-3913
to the Holder:
----------------
c/o The Palladin Group, L.P.
-14-
<PAGE>
195 Maplewood Avenue
Maplewood, New Jersey 07040
Attention: Robert L. Chender
Facsimile: (973) 313-6490
with copies to:
Arnold & Porter
555 Twelfth Street, NW
Washington, D.C. 20004
Attention: Richard E. Baltz
Facsimile: (202) 942-5999
Any party hereto may from time to time change its address for notices by
giving at least 10 days' written notice of such changed address to the other
parties hereto.
(d) WAIVERS. No waiver by any party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission
of any party to exercise any right hereunder in any manner impair the
exercise of any such right accruing to it thereafter. The representations and
warranties and the agreements and covenants of the Company and each Investor
contained herein shall survive the Closing.
(e) EXECUTION. This Agreement may be executed in two or
more counterparts, all of which shall be considered one and the same
agreement, it being understood that all parties need not sign the same
counterpart.
(f) PUBLICITY. The Company agrees that it will not
disclose, and will not include in any public announcement, the name of any of
the Investors without its consent, unless and until such disclosure is
required by law or applicable regulation, and then only to the extent of such
requirement.
(g) ENTIRE AGREEMENT. This Agreement, together with the
Purchase Agreement, the Debentures and the Warrants and the agreements and
documents contemplated hereby and thereby, contains the entire understanding
and agreement of the parties, and may not be modified or terminated except by
a written agreement signed by both parties.
(h) GOVERNING LAW; CONSENT OF JURISDICTION. THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS TO BE EXECUTED AND
PERFORMED ENTIRELY WITHIN SUCH STATE. EACH PARTY (I) HEREBY IRREVOCABLY
SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED
IN SAN FRANCISCO COUNTY, CALIFORNIA FOR THE PURPOSES OF ANY SUIT, ACTION OR
PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT AND (II) HEREBY
WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY
CLAIM THAT
-15-
<PAGE>
IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT THE
SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE
VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH PARTY CONSENTS TO
PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY
THEREOF TO SUCH PARTY AS PROVIDED HEREIN AND AGREES THAT SUCH SERVICE SHALL
CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING
IN THIS PARAGRAPH SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE PROCESS IN ANY
OTHER MANNER PERMITTED BY LAW.
(i) JURY TRIAL. EACH PARTY HERETO WAIVES THE RIGHT TO A
TRIAL BY JURY.
(j) TITLES. The titles used in this Agreement are used
for convenience only and are not to be considered in construing or
interpreting this Agreement.
[SIGNATURE PAGE FOLLOWS]
-16-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
CYGNUS, INC.
By: /s/ Craig W. Carlson
--------------------------------
Name: Craig W. Carlson
--------------------------
Title: Sr. VP Finance, CFO
--------------------------
INVESTORS:
CONESCO DIRECT LIFE INSURANCE COMPANY
BY: THE PALLADIN GROUP
ATTORNEY-IN-FACT AND INVESTMENT
ADVISOR
By: /s/ Jeffrey E. Devers
--------------------------------
Jeffrey E. Devers
THE GLENEAGLES FUND COMPANY
BY: THE PALLADIN GROUP
ATTORNEY-IN-FACT AND INVESTMENT
ADVISOR
By: /s/ Jeffrey E. Devers
--------------------------------
Jeffrey E. Devers
LANCER SECURITIES (CAYMAN) LIMITED
BY: THE PALLADIN GROUP
ATTORNEY-IN-FACT AND INVESTMENT
ADVISOR
By: /s/ Jeffrey E. Devers
--------------------------------
Jeffrey E. Devers
-17-
<PAGE>
PALLADIN PARTNERS I, L.P.
BY: THE PALLADIN GROUP
ATTORNEY-IN-FACT AND INVESTMENT
ADVISOR
By: /s/ Jeffrey E. Devers
--------------------------------
Jeffrey E. Devers
PALLADIN OVERSEAS FUND LIMITED
BY: THE PALLADIN GROUP
ATTORNEY-IN-FACT AND INVESTMENT
ADVISOR
By: /s/ Jeffrey E. Devers
--------------------------------
Jeffrey E. Devers
PGEP III, L.L.C.
BY: THE PALLADIN GROUP
ATTORNEY-IN-FACT AND INVESTMENT
ADVISOR
By: /s/ Jeffrey E. Devers
--------------------------------
Jeffrey E. Devers
HALIFAX FUND, L.P.
BY: THE PALLADIN GROUP
ATTORNEY-IN-FACT AND INVESTMENT
ADVISOR
By: /s/ Jeffrey E. Devers
--------------------------------
Jeffrey E. Devers
-18-
<PAGE>
SCHEDULE I
1. Conseco Direct Life Insurance Company
c/o The Palladin Group, L.P.
195 Maplewood Avenue
Maplewood, N.J. 07040
2. The Gleneagles Fund Company
c/o The Palladin Group, L.P.
195 Maplewood Avenue
Maplewood, N.J. 07040
3. Lancer Securities (Cayman) Limited
c/o The Palladin Group, L.P.
195 Maplewood Avenue
Maplewood, N.J. 07040
4. Palladin Partners I, L.P.
c/o Palladin Administrative Services LLC
195 Maplewood Avenue
Maplewood, N.J. 07040
5. Palladin Overseas Fund Limited
c/o The Palladin Group, L.P.
195 Maplewood Avenue
Maplewood, N.J. 07040
6. PGEP III, L.L.C.
c/o The Palladin Group, L.P.
195 Maplewood Avenue
Maplewood, N.J. 07040
-19-
<PAGE>
7. Halifax Fund, L.P.
c/o The Palladin Group, L.P.
195 Maplewood Avenue
Maplewood, N.J. 07040
-20-
<PAGE>
EXHIBIT 1
TO REGISTRATION RIGHTS
AGREEMENT
[Company Letterhead]
[Date]
[Name and address of Transfer Agent]
Ladies and Gentlemen:
This letter shall serve as our irrevocable authorization and
direction to you (1) to issue shares (the "COMMON SHARES") of Common Stock,
par value $0.001 per share (the "COMMON STOCK"), of Cygnus, Inc., a Delaware
corporation (the "COMPANY"), to or upon the order of the registered holder
from time to time of 8.5% Convertible Debentures Due June 29, 2004 of the
Company (the "DEBENTURES") upon surrender to you of the Debentures and (2) to
issue shares (the "WARRANT SHARES") of Common Stock to or upon the order of
the registered holder from time to time of the Warrants of the Company (the
"WARRANTS") upon surrender to you of a properly completed and duly executed
Exercise Agreement [TO BE PROVIDED] and such Warrants notwithstanding the
legend appearing on such Warrants. Certificates for the Common Shares and
Warrant Shares should not bear any restrictive legend and should not be
subject to any stop-transfer restriction.
Pursuant to applicable securities laws or certain agreements between
the Company and ________________ (the "INVESTOR"), the Investor may be
prohibited during certain limited periods of time from selling its shares of
Common Stock issuable upon conversion of the Debentures and exercise of the
Warrants under the Registration Statement; PROVIDED, HOWEVER, that such
Investor may continue to sell such securities pursuant to an exemption from
registration under the Securities Act of 1933, as amended (the "SECURITIES
ACT"). The Company may, during such periods, deliver a notice to you advising
you to refrain from transferring any Common Shares or Warrant Shares pursuant
to such Registration Statement, provided that such notice shall not prohibit
the transfer of such shares pursuant to an exemption from registration under
the Securities Act during such periods.
Contemporaneous with the delivery of this letter, the Company is
delivering to you a letter of ___________________________ as to registration
of the Common Shares and the Warrant Shares under the Securities Act.
<PAGE>
Should you have any questions concerning this matter, please contact
me.
Very truly yours,
CYGNUS, INC.
By:___________________________
Title:
Enclosures
cc: ________________
-2-
<PAGE>
EXHIBIT 2
TO REGISTRATION RIGHTS
AGREEMENT
[Date]
[Name and address
of Transfer Agent]
RE: CYGNUS, INC.
Ladies and Gentlemen:
We are counsel to Cygnus, Inc., a Delaware corporation (the
"COMPANY"), and we understand that ________________ (the "HOLDER") has
purchased from the Company a 8.5% Convertible Debenture Due June 29, 2004 of
the Company (the "DEBENTURE") and warrants (the "WARRANTS") that are
convertible into or exercisable into the Company's Common Stock, par value
$0.001 per share (the "COMMON STOCK"). Pursuant to a Registration Rights
Agreement, dated as of June 29, 1999, between the Company and the Holder (the
"REGISTRATION RIGHTS AGREEMENT"), the Company agreed with the Holder, among
other things, to register the Registrable Securities (as that term is defined
in the Registration Rights Agreement) under the Securities Act of 1933, as
amended (the "SECURITIES ACT"), upon the terms provided in the Registration
Rights Agreement. In connection with the Company's obligations under the
Registration Rights Agreement, on ______________, 1999, the Company filed a
Registration Statement on Form S-3 (File No. 333-___________) (the
"REGISTRATION STATEMENT") with the Securities and Exchange Commission
relating to the Registrable Securities, which names the Holder as a selling
stockholder thereunder.
[OTHER INTRODUCTORY LANGUAGE TO BE INSERTED]
Based on the foregoing, we are of the opinion that the Registrable
Securities have been registered under the Securities Act.
[OTHER APPROPRIATE LANGUAGE TO BE INCLUDED.]
Very truly yours,
cc: _______________
<PAGE>
Exhibit 10.41
CONVERTIBLE DEBENTURE AND WARRANT PURCHASE AGREEMENT
CONVERTIBLE DEBENTURE PURCHASE AGREEMENT ("AGREEMENT") dated as of
June 29, 1999 between Cygnus, Inc., a Delaware corporation (the "COMPANY"),
and each person or entity listed as an investor on SCHEDULE I to this
Agreement (each individually an "INVESTOR" and collectively the "INVESTORS").
W I T N E S S E T H:
WHEREAS, the Company desires to sell and issue to the Investors, and
the Investors wish to purchase from the Company, 8.5% Convertible Debentures
Due June 29, 2004, in the aggregate principal amount of $14,000,000 at an
aggregate price of $14,000,000 and up to an additional $6,000,000 in
aggregate principal amount of such convertible debentures, having the rights
and privileges set forth in the form of EXHIBIT 1.1A attached hereto (the
"DEBENTURES"), on the terms and conditions set forth herein;
WHEREAS, the Debentures will be convertible into shares ("COMMON
SHARES") of common stock, $0.001 par value per share, of the Company ("COMMON
STOCK"), pursuant to the terms thereof, and the Investors will have
registration rights with respect to such Common Shares and the Warrant Shares
(as defined herein) pursuant to the terms of that certain Registration Rights
Agreement to be entered into between the Company and the Investors
substantially in the form of EXHIBIT 4.2(f) hereto ("REGISTRATION RIGHTS
AGREEMENT"); and
WHEREAS, to induce the Investors to purchase the Debentures, the
Company has agreed to issue to the Investors certain warrants exercisable for
shares of Common Stock and may issue certain additional warrants exercisable
for shares of Common Stock, in the form attached as EXHIBIT 1.1B (the
"WARRANTS");
NOW, THEREFORE, in consideration of the foregoing premises and the
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I.
PURCHASE AND SALE OF DEBENTURES AND WARRANTS
Section 1.1 ISSUANCE OF DEBENTURES AND WARRANTS. (a) ISSUANCE. Upon
the following terms and conditions, the Company shall issue and sell
$14,000,000 aggregate principal amount of Debentures, and each Investor
severally shall purchase from the Company, the principal amount of Debentures
and Warrants to purchase the number of shares of Common Stock indicated next
to such Investor's name on SCHEDULE I attached hereto, against payment by the
Investors of an aggregate of $14,000,000 (the "Purchase Price") as set forth
below.
<PAGE>
(b) THE CLOSING.
(i) The closing of the purchase and sale
of the Debentures and the Warrants (the "CLOSING"), shall take place
at the offices of Arnold & Porter ("INVESTORS' COUNSEL"), at 10:00
a.m., local time on the later of the following: (x) the date on
which the last of the conditions set forth in Article IV hereof
(other than those conditions that by their nature can only be
fulfilled at the Closing, but subject to the fulfillment of such
conditions) shall be fulfilled or waived in accordance herewith, or
(y) such other time and place and/or on such other date as the
Investors and the Company may agree. The date and time at which the
Closing occurs is referred to herein as the "CLOSING DATE".
(ii) On the Closing Date, the Company
shall deliver to each Investor (x) a certificate or certificates
(with the number of and outstanding principal amount of such
certificates requested by such Investor) representing the Debentures
purchased hereunder by such Investor at the Closing registered in
the name of the Investor or its nominee and (y) the Warrants
registered in the name of such Investor or its nominee in such
denominations as reasonably requested by such Investor, and such
Investor shall deliver to the Company the Purchase Price for the
Debentures and Warrants purchased by such Investor hereunder at
Closing by wire transfer in immediately available funds to an
account designated in writing by the Company. The delivery of
payment by such Investor of the Purchase Price applicable to it as
set forth in this paragraph shall constitute a payment delivered to
the Company in satisfaction of such Investor's obligation to pay the
Purchase Price hereunder. In addition, each of the Company and each
Investor shall deliver all documents, instruments and writings
required to be delivered by such party pursuant to this Agreement at
or prior to this Closing.
ARTICLE II.
REPRESENTATIONS AND WARRANTIES
Section 2.1 REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The
Company hereby makes the following representations and warranties to each of
the Investors as of the date hereof and on the Closing Date:
(a) ORGANIZATION AND QUALIFICATION; MATERIAL
ADVERSE EFFECT. The Company is a corporation duly incorporated and existing
in good standing under the laws of the State of Delaware and has the
requisite corporate power to own its properties and to carry on its business
as now being conducted. The Company does not have any direct or indirect
subsidiaries other than the subsidiaries listed on SCHEDULE 2.1(a) attached
hereto. Except where specifically indicated to the contrary, all references
in this Agreement to subsidiaries shall be deemed to refer to all direct and
indirect subsidiaries of the Company. The Company is duly qualified as a
foreign corporation to do business and is in good standing in every
jurisdiction in which the nature of the business conducted or property owned
by it makes such qualification necessary other than those in which the
failure so to qualify would not have a Material Adverse Effect. "MATERIAL
- 2 -
<PAGE>
ADVERSE EFFECT" means (i) any adverse effect on the business, operations,
properties, or financial condition of the entity with respect to which such
term is used and its subsidiaries, or other entities controlled by such
entity, taken as a whole, and which is material to such entity and its
subsidiaries or other entities controlled by such entity, taken as a whole,
and (ii) any condition or situation, whether or not a material adverse
effect, which would reasonably be expected to prohibit or otherwise
materially interfere with or prevent such entity from entering into or
performing its obligations under, or from consummating the transactions
contemplated by, this Agreement, the Registration Rights Agreement, the
Debentures or the Warrants or any other agreement or document contemplated
hereby or thereby.
(b) AUTHORIZATION; ENFORCEMENT. (i) The
Company has all requisite corporate power and authority to enter into and
perform this Agreement, the Warrants, and the Registration Rights Agreement
and to issue the Debentures, in accordance with the terms hereof and thereof,
(ii) the execution and delivery of this Agreement, the Warrants, and the
Registration Rights Agreement by the Company, and the consummation by the
Company of the transactions contemplated hereby and thereby, including the
issuance of the Debentures, the Warrants, the Common Shares and the issuance
of shares of Common Stock upon exercise of the Warrants (the "Warrant
Shares"), have been duly authorized by all necessary corporate action, and no
further consent or authorization of the Company, or its Board of Directors
(or any committee or subcommittee thereof) or stockholders is required, (iii)
this Agreement has been, and on the Closing Date the Warrants, the
Debentures, and the Registration Rights Agreement will be, duly executed and
delivered by the Company, and (iv) this Agreement constitutes, and upon
execution, issuance and delivery thereof the Warrants, the Debentures, and
the Registration Rights Agreement shall constitute, valid and binding
obligations of the Company, enforceable against the Company, in accordance
with their terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium, liquidation or similar
laws relating to, or affecting generally the enforcement of creditors' rights
and remedies or by other equitable principles of general application.
(c) CAPITALIZATION; INDEBTEDNESS. (i) The
authorized capital stock of the Company consists of 55,000,000 shares of
Common Stock and 5,000,000 shares of preferred stock, par value $0.001 per
share (the "PREFERRED STOCK"). As of the date hereof, there are 22,646,345
shares of Common Stock and no shares of Preferred Stock issued and
outstanding. All of the outstanding shares of the Company's Common Stock have
been validly authorized and issued and are fully paid and nonassessable. No
shares of capital stock are entitled to preemptive rights; and there are, as
of June 23, 1999, outstanding options to purchase 3,768,271 shares of Common
Stock and no outstanding warrants to purchase shares of Common Stock
(excluding the Warrants). Except as set forth in SCHEDULE 2.1(c)(i), there
are no other scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights exchangeable for or
convertible into, any shares of capital stock of the Company, or contracts,
commitments, understandings, or arrangements by which the Company is or may
become bound to issue additional shares of capital stock of the Company or
options,
- 3 -
<PAGE>
warrants, scrip, rights to subscribe to, or commitments to purchase
or acquire, any shares, or securities or rights convertible or exchangeable
into shares, of capital stock of the Company. Attached hereto as EXHIBIT
2.1(c)(i) is a true and correct copy of the Company's Certificate of
Incorporation (the "CHARTER"), as in effect on the date hereof and a true and
correct copy of the Company's By-Laws (the "BY-LAWS"), as in effect on the
date hereof.
(ii) Set forth on SCHEDULE 2.1(c)(ii) is a
complete and accurate listing of (i) all of the outstanding indebtedness of
the Company, except for trade payables incurred in the ordinary course of
business (the "COMPANY DEBT"), (ii) all of the principal documents that
evidence the Company Debt and (iii) any collateral which has been pledged by
the Company to secure any of the Company Debt. The Company has provided to
Investors a correct and complete copy of, or given Investors access to, each
of the documents representing such Company Debt and all amendments thereto.
All of the documents representing any Company Debt are in full force and
effect in accordance with their terms. There exists no material default on
the part of the Company under any document evidencing any Company Debt or any
event or condition which after notice or passage of time or both would
constitute such a default. Except as set forth on SCHEDULE 2.1(c)(ii), the
documents evidencing the Company Debt do not require the consent of any party
thereto to the consummation of the transactions contemplated by this
Agreement.
(d) ISSUANCE OF COMMON SHARES. The Common Shares
and the Warrant Shares are duly authorized and reserved for issuance and,
upon such conversion in accordance with the Debentures and/or exercise in
accordance with the Warrants, such Common Shares and Warrant Shares will be
validly issued, fully paid and non-assessable, free and clear of any and all
liens, claims and encumbrances, and the holders of such Common Shares and
Warrant Shares shall be entitled to all rights and preferences accorded to a
holder of Common Stock. The outstanding shares of Common Stock are currently
listed, and are entitled to be traded, on the Nasdaq National Market System
("NASDAQ NMS," and collectively with the American Stock Exchange and the New
York Stock Exchange, the "APPROVED MARKETS") and the Company has not received
any notice (written or oral) from the Nasdaq NMS (or any other Approved
Market where the Common Stock is currently listed) to which the Company has
not made a satisfactory response indicating that delisting of the Common
Stock is under consideration.
(e) NO CONFLICTS. The execution, delivery and
performance by the Company of this Agreement, the Registration Rights
Agreement, the Warrants, and the Debentures, including the issuance of the
Debentures, and the Warrants, the conversion of the Debentures into the
Common Shares the exercise of the Warrants, and the consummation by the
Company of the transactions contemplated hereby and thereby do not and will
not (i) result in a violation of the Company's Charter or By-Laws or (ii)
conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any
agreement, indenture, patent, patent license or instrument to which the
Company, or any of its subsidiaries is a party, or (iii) result in a
violation of any federal, state, local or foreign law, rule, regulation,
order,
- 4 -
<PAGE>
judgment or decree (including Federal and state securities laws and
regulations) applicable to the Company, or any of its subsidiaries or by
which any property or asset of the Company, or any of its subsidiaries is
bound or affected, except where any such violation would not reasonably be
expected to have a Material Adverse Effect on the Company. The business of
the Company and its direct and indirect subsidiaries is not being conducted
in violation of, and is in compliance in all material respects with, all
applicable material laws, ordinances and regulations of any governmental
entity except where any such violation would not reasonably be expected to
have a Material Adverse Effect on the Company. Except for filings, consents
and approvals required under applicable state and Federal securities laws,
the Company is not required under Federal, state, local or foreign law, rule
or regulation to obtain any consent, authorization or order of, or make any
filing or registration with, any court or governmental agency in order for it
(x) to execute, deliver or perform any of its obligations under this
Agreement, the Registration Rights Agreement, the Debentures, or the
Warrants, (y) to issue and sell the Debentures or the Warrants in accordance
with the terms hereof, to issue the Common Shares upon conversion of the
Debentures or to issue the Warrant Shares on exercise of the Warrants or (z)
to comply with the registration provisions provided in the Registration
Rights Agreement.
(f) SEC DOCUMENTS; NO NON-PUBLIC INFORMATION;
FINANCIAL STATEMENTS. The Common Stock of the Company is registered pursuant
to Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"EXCHANGE ACT") and the Company is in compliance in all material respects
with and has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the Securities and Exchange
Commission ("SEC") pursuant to the Exchange Act, in addition to one or more
registration statements and amendments thereto heretofore filed by the
Company with the SEC (all of the foregoing including filings incorporated by
reference therein being referred to herein as the "SEC DOCUMENTS"). The
Company has delivered or made available to the Investors true and complete
copies of all SEC Documents (including, without limitation, proxy information
and solicitation materials and registration statements) filed with the SEC
since December 31, 1998, and all annual SEC Documents filed with the SEC
since December 31, 1997. The Company has not provided to the Investors any
material non-public information or any information which, according to
applicable law, rule or regulation, should have been disclosed publicly by
the Company but which has not been so disclosed. As of their respective
dates, the SEC Documents complied (and as of its effective date, the
Registration Statement (as defined in the Registration Rights Agreement) will
comply) in all material respects with the requirements of the Exchange Act
(or, in the case of such Registration Statement, the Securities Act of 1933,
as amended (the "ACT")) and the rules and regulations of the SEC promulgated
thereunder and other federal, state and local laws, rules and regulations
applicable to such SEC Documents, and none of the SEC Documents contained
(and, as of its effective date, such Registration Statement, as amended, will
not contain) any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. The SEC Documents contain (and, as of its effective date,
such Registration Statement, as amended, will contain) all material
- 5 -
<PAGE>
information concerning the Company, and no event or circumstance has occurred
which would require the Company to disclose such event or circumstance in
order to make the statements in the SEC Documents not misleading on the date
hereof or on the Closing Date but which has not been so disclosed. The
financial statements of the Company included (or to be included) in the SEC
Documents (or such Registration Statement) comply (or will comply) as to form
and substance in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC or other
applicable rules and regulations with respect thereto. Such financial
statements have been (or will be) prepared in accordance with United States
generally accepted accounting principles applied on a consistent basis during
the periods involved (except (i) as may be otherwise indicated in such
financial statements or the notes thereto or (ii) in the case of unaudited
interim statements, to the extent they may not include footnotes or may be
condensed or summary statements) and fairly present (or will fairly present)
in all material respects the financial position of the Company as of the
dates thereof and the results of operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal year-end
audit adjustments).
(g) PRINCIPAL EXCHANGE/MARKET. The principal
market on which the Common Stock is currently traded is the Nasdaq NMS.
(h) NO MATERIAL ADVERSE CHANGE. Since March 31,
1999, no Material Adverse Effect has occurred or exists with respect to the
Company and no event or circumstance has occurred that with notice or the
passage of time or both is reasonably likely to result in a Material Adverse
Effect with respect to the Company or any of its subsidiaries.
(i) NO UNDISCLOSED LIABILITIES. The Company has
no liabilities or obligations not disclosed in the SEC Documents, other than
those liabilities incurred in the ordinary course of the Company's businesses
since March 31, 1999, which liabilities, individually or in the aggregate, do
not or would have not had a Material Adverse Effect on the Company.
(j) NO UNDISCLOSED EVENTS OR CIRCUMSTANCES. No
event or circumstance has occurred or exists with respect to the Company or
its businesses, properties, prospects, operations or financial condition,
which, under applicable law, rule or regulation, requires public disclosure
or announcement by the Company but which has not been so publicly announced
or disclosed.
(k) NO GENERAL SOLICITATION. Neither the
Company, nor any of its affiliates, or, to the Knowledge of the Company, any
person acting on its or their behalf, has engaged in or conducted any form of
general solicitation or general advertising (within the meaning of Regulation
D under the Act) with respect to or in connection with the offer or sale of
the Debentures, the Warrants, the Common Shares or the Warrant Shares. For
purposes of this Agreement, "KNOWLEDGE OF THE COMPANY" shall mean the actual
knowledge, without independent inquiry, of any of the executive officers of
the Company.
- 6 -
<PAGE>
(l) NO INTEGRATED OFFERING. Neither the Company,
nor any of its affiliates, nor, to the Knowledge of the Company, any person
acting on its or their behalf, has, directly or indirectly, made any offers
or sales of any security or solicited any offers to buy any security, under
circumstances that would require registration of the Debentures, the
Warrants, the Common Shares or Warrant Shares under the Act.
The issuance of the Debentures, the Warrants, the
Common Shares or the Warrant Shares to the Investors will not be integrated
with any other issuance of the Company's securities which requires
stockholder approval under the rules of the Nasdaq NMS.
(m) FORM S-3. The Company is eligible to file
the Registration Statement (as defined in the Registration Rights Agreement)
on Form S-3 under the Act and the rules promulgated thereunder, and Form S-3
is permitted to be used for the transactions contemplated by the Registration
Rights Agreement under the Act and the rules promulgated thereunder.
(n) INTELLECTUAL PROPERTY. Except as set forth
in Schedule 2.1(n), the Company owns or possesses adequate patent rights or
licenses or other rights to use patent rights, inventions, trademarks,
service marks, trade names and copyrights the Company reasonably believes are
necessary to conduct the general business now operated by the Company, and
the Company has not received any notice of infringement or conflict with
asserted rights of others with respect to any patent, patent rights,
inventions, trademarks, service marks, trade names or copyrights which,
individually or in the aggregate, would reasonably be expected to have a
Material Adverse Effect.
(o) NO LITIGATION. Except as set forth on
SCHEDULE 2.1(o) or in the SEC Documents, no litigation, arbitration,
proceeding or claim (including those for unpaid taxes) against the Company is
pending or, to the Company's knowledge, threatened, and no other event has
occurred, which if determined adversely would singly or in the aggregate
reasonably be expected to have a Material Adverse Effect on the Company.
(p) BROKERS. Except for the Company's agreement
with Reedland Capital Partners (which agreement has been fully disclosed to
the Investors), the Company has taken no action which would give rise to any
claim by any person for brokerage commissions, finder's fees or similar
payments by the Company or any Investor relating to this Agreement or the
transactions contemplated hereby.
(q) OTHER INVESTORS. Except as set forth on
SCHEDULE 2.1(q), there are no outstanding securities issued by the Company
that are entitled to registration rights under the Act. Except as set forth
in SCHEDULE 2.1(q), there are no outstanding securities issued by the Company
that are directly or indirectly convertible into, exercisable, or
exchangeable for, shares of Common Stock of the Company, that have
anti-dilution, preemptive or similar rights that would be affected or
triggered by the issuance of the Debentures, the Common Shares, the Warrant
Shares, or the Warrants.
- 7 -
<PAGE>
(r) CERTAIN TRANSACTIONS. Except as disclosed in
the SEC Documents, or as set forth on SCHEDULE 2.1(r) attached hereto, none
of the officers, directors, or employees of the Company is presently a party
to any transaction with the Company or any of its subsidiaries (other than
for services as employees, officers and directors), including any contract,
agreement or other arrangement providing for the furnishing of services to or
by, providing for rental of real or personal property to or from, or
otherwise requiring payments to or from any such officer, director or such
employee or, to the knowledge of the Company, any corporation, partnership,
trust or other entity in which any such officer, director, or any such
employee has a substantial interest or is an officer, director, trustee or
partner.
(s) PERMITS; COMPLIANCE. The Company and each of
its subsidiaries is in possession of all material franchises, grants,
authorizations, licenses, permits, easements, variances, exemptions,
consents, certificates, approvals and orders necessary to own, lease and
operate its properties and to carry on its business as it is now being
conducted (collectively, the "COMPANY PERMITS") except where failure to
possess such Company Permits would not have a Material Adverse Effect on the
Company. There is no action or proceeding pending or, to the Knowledge of the
Company, threatened regarding suspension or cancellation of any of the
Company Permits, except with respect to such Company Permits the failure of
which to possess, or the cancellation or suspension of which, would not,
individually or in the aggregate, have a Material Adverse Effect on the
Company. The Company is not in material conflict with, or in material default
or material violation of, any of the Company Permits. Since December 31,
1998, the Company has not received any notification with respect to possible
material conflicts, material defaults or material violations of applicable
laws.
(t) INSURANCE. The Company is insured by
insurers of recognized financial responsibility against such losses and risks
and in such amounts as management of the Company believes to be prudent and
customary in the businesses in which the Company is engaged. The Company has
no reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers.
(u) INTERNAL ACCOUNTING CONTROLS. The Company
maintains a system of internal accounting controls sufficient, in the
judgment of the Company's board of directors, to provide reasonable assurance
that (i) transactions are executed in accordance with management's general or
specific authorizations, (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability, (iii)
access to assets is permitted only in accordance with management's general or
specific authorization and (iv) the recorded accountability for assets is
compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(v) ENVIRONMENTAL MATTERS. Except as otherwise
disclosed in the SEC Documents, each of the Company and each of its
subsidiaries is in compliance in all material respects with all applicable
state and federal environmental laws, except
- 8 -
<PAGE>
where any such non-compliance would not reasonably be expected to have a
Material Adverse Effect on the Company, and no event or condition has
occurred that may interfere with the compliance by the Company or any of its
subsidiaries with any environmental law or that may give rise to any
liability under any environmental law that, individually or in the aggregate,
would have a Material Adverse Effect.
(w) SOLVENCY.
(i) The Company's fair saleable value of
its assets as of the date hereof exceeds the amount that is required
to be paid as of the date hereof on or in respect of the Company's
existing debts and other liabilities (including contingent
liabilities) as they mature.
(ii) The Company's assets do not
constitute unreasonably small capital to carry out its business as
now conducted and as proposed to be conducted including the
Company's capital needs taking into account the particular capital
requirements of the business conducted by the Company, and projected
capital requirements and capital availability thereof.
(iii) The Company does not intend to incur
debts beyond its ability to pay such debts as they mature (taking
into account the timing and amounts of cash to be payable on or in
respect of its debt).
(iv) The Company does not believe that
final judgments against the Company in pending actions for money
damages will be rendered at a time when, or in an amount such that,
the Company will be unable to satisfy any such judgments promptly in
accordance with their terms. The Company believes that its cash
flow, after taking into account all other anticipated uses of the
cash (including the payments on or in respect of debt referred to in
paragraph (iii) above), will be sufficient to pay all such judgments
promptly in accordance with their terms.
(v) Neither the Company nor any of its
subsidiaries is subject to any bankruptcy, insolvency or similar
proceeding.
(x) TAXES. All federal, state, and other tax
returns, reports and declarations required to be filed by the Company have
been filed and such returns are complete and correct and all taxes (whether
based upon income, operations, purchases, sales, payroll, licenses,
compensation, business, capital, properties or assets or otherwise) shown
thereon (other than set forth on SCHEDULE 2.1(x)) have been paid, except
where any failure to file or to be complete or correct would not have a
Material Adverse Effect on the Company.
(y) TITLE TO PROPERTIES; ENCUMBRANCES. SCHEDULE
2.1(y) contains a complete and accurate list of all material real property,
leaseholds, or other interests in real property owned by the Company. The
Company owns (with good and marketable title in the case of real property)
all the properties and assets (whether real,
- 9 -
<PAGE>
personal, or mixed and whether tangible or intangible) that it purports to
own. All material properties and assets listed on SCHEDULE 2.1(y) are free
and clear of all encumbrances (other than as set forth on SCHEDULE 2.1(y) and
except any encumbrances that would not reasonably be expected to have a
Material Adverse Effect on the Company) and are not, in the case of real
property, subject to any rights of way, building use restrictions,
exceptions, variances, reservations or limitations of any nature, except with
respect to all such properties and assets, (a) mortgages or security
interests shown on SCHEDULE 2.1(y) as securing specified liabilities or
obligations, with respect to which no default (or event that, with notice or
lapse of time or both, would constitute a default) exists, (b) liens for
current taxes not yet due, and (c) with respect to real property, (i) minor
imperfections of title, if any, none of which is substantial in amount,
materially detracts from the value, or impairs the use, of the property
subject thereto, or impairs the operations the Company, and (ii) zoning laws
and other land use restrictions that do not impair the present or anticipated
use of the property subject thereto. All buildings, plans, and structures
owned by the Company lie wholly within the boundaries of the real property
owned by the Company, and do not encroach upon the property of, or otherwise
conflict with the property rights of, any other person.
(z) EFFECTIVENESS OF SEC FILINGS. There is not
in effect any stop order or other order of the SEC suspending the
effectiveness of any registration involving the Company.
Section 2.2 REPRESENTATIONS AND WARRANTIES OF THE INVESTORS.
Each of the Investors, severally (as to itself) and not jointly, hereby makes
the following representations and warranties to the Company as of the date
hereof and on the Closing Date:
(a) ORGANIZATION AND STANDING. Each of the
Investors is duly organized, validly existing, and in good standing under the
laws of the jurisdiction of its organization and is duly qualified to do
business and in good standing in each jurisdiction in which the nature of the
business conducted by it makes such qualification necessary, except where the
failure to be so qualified or in good standing would not reasonably be
expected to have a Material Adverse Effect.
(b) AUTHORIZATION; ENFORCEMENT. (i) Such
Investor has the requisite power and authority to enter into and perform this
Agreement and the Registration Rights Agreement and to purchase the
Debentures and Warrants being sold hereunder, (ii) the execution and delivery
of this Agreement and the Registration Rights Agreement by such Investor and
the consummation by it of the transactions contemplated hereby and thereby
have been duly authorized by all necessary corporate or partnership action,
and (iii) this Agreement constitutes, and upon execution, issuance and
delivery thereof, the Registration Rights Agreement will constitute, a valid
and binding obligation of such Investor enforceable against such Investor in
accordance with their terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally the enforcement of
creditors' rights and remedies or by other equitable principles of general
application.
- 10 -
<PAGE>
(c) NO CONFLICTS. The execution, delivery and
performance by such Investor of this Agreement, and the Registration Rights
Agreement, the performance by such Investor under the Debentures and Warrants
and the consummation by such Investor of the transactions contemplated hereby
and thereby do not and will not (i) result in a violation of such Investor's
organizational documents, (ii) materially conflict with any agreement,
indenture or instrument to which such Investor is a party, or (iii) result in
a material violation of any law, rule, or regulation, or any order, judgment
or decree of any court or governmental agency applicable to such Investor.
Such Investor is not required to obtain any consent or authorization of any
governmental agency in order for it to perform its obligations under this
Agreement, the Registration Rights Agreement, the Warrants and the Debentures.
(d) INVESTMENT REPRESENTATION. Such Investor is
purchasing the Debentures and Warrants for its own account and not with a
view to distribution thereof in violation of any securities laws. Such
Investor has no present intention to sell the Debentures, Warrants, Common
Shares or Warrant Shares in violation of Federal or state securities laws and
such Investor has no present arrangement (whether or not legally binding) to
sell the Debentures, Warrants, Common Shares or Warrant Shares to or through
any person or entity; PROVIDED, however, that by making the representations
herein, such Investor does not agree to hold the Debentures, Warrants, Common
Shares or Warrant Shares for any minimum or other specific term and reserves
the right to dispose of the Debentures, Warrants, Common Shares or Warrant
Shares at any time in accordance with Federal and state securities laws
applicable to such disposition.
(e) ACCREDITED INVESTOR. Such Investor is an
"accredited investor" as defined in Rule 501(a)(3) of Regulation D
promulgated under the Act. Such Investor has such knowledge and experience in
financial and business matters in general and investments in particular that
it is able to evaluate the merits and risks of an investment in the
Debentures and Warrants and to protect its own interests in connection with
such investment. In addition (but without limiting the effect of the
Company's representations and warranties contained herein), such Investor has
received such information as it considers necessary or appropriate for
deciding whether to purchase the Debentures and Warrants pursuant hereto.
Such Investor has had an opportunity to ask questions and receive answers
from the Company regarding the terms and conditions of the purchase of the
Debentures and Warrants, and the business, properties, prospects, and
financial condition of the Company.
(f) RULE 144. Such Investor understands that
there is no public trading market for the Debentures, or Warrants, that none
is expected to develop, and that the Debentures, and Warrants must be held
indefinitely unless such Debentures or Warrants are converted or exercised,
as the case may be, and the Common Shares or Warrant Shares, as the case may
be, are registered under the Act or an exemption from registration is
available. Such Investor has been advised or is aware of the provisions of
Rule 144 promulgated under the Act.
(g) BROKERS. Such Investor has taken no action which
would give rise to any claim by any person for brokerage commissions,
finder's fees or similar
- 11 -
<PAGE>
payments by the Company relating to this Agreement or the transactions
contemplated hereby.
(h) NOT AN AFFILIATE. Such Investor is not an
officer, director or "affiliate" (as that term in defined in Rule 405 of the
Act) of the Company.
(i) RELIANCE BY THE COMPANY. Such Investor
understands that the Debentures and Warrants are being offered and sold in
reliance on a transactional exemption from the registration requirements of
Federal and state securities laws and that the Company is relying upon the
truth and accuracy of the representations, warranties, agreements,
acknowledgments and understandings of such Investor set forth herein in order
to determine the applicability of such exemptions and the suitability of such
Investor to acquire the Debentures and the, Warrants.
(j) FINANCIAL CONDITION. Such Investor has, or
has available to it, sufficient funds to satisfy all of its financial
obligations under this Agreement, including, but not limited to, the purchase
of additional Debentures as set forth in Article V. Such Investor will
promptly notify the Company of any event or circumstance with could
reasonably be expected to hinder such Investor's ability to perform its
obligations hereunder.
(k) NO HEDGING OR SHORT SELLING. (a) During the
period sixty (60) days prior to the date of this Agreement such Investor has
not engaged in any short sales or hedging of any kind in anticipation of this
Agreement, and (b) during the term of this Agreement such Investor may not
make any sales with the intention of reducing the price of the Common Stock
to such Investor's benefit.
(l) WITHHOLDING. (i) (A) Such Investor (x) is
not, and during the term of this Agreement, shall not become, licensed to do
business as a bank or trust company in any jurisdiction or (y) is not, and
during the term of this Agreement, shall not become, required to be licensed
as a bank or trust company or do any act which will render itself subject to
supervision or examination as a bank or trust company by any governmental
authority and (B) such Investor is not controlled by, and is not acting as a
conduit on behalf of, any person which is a bank or trust company or any
person which is required to be licensed or registered as a bank or trust
company and (C) such Investor did not derive funds required to fund its
participation in the transaction contemplated under this Agreement through a
back-to-back loan or other similar arrangement with a bank or trust company;
(ii) such Investor does not own, and during the term of the Debentures, will
not own, directly or indirectly, ten percent (10%) or more of the total
combined voting power of all classes of stock of the Company entitled to vote.
ARTICLE III.
COVENANTS
Section 3.1 REGISTRATION AND LISTING; EFFECTIVE REGISTRATION.
Until such time as no Debentures or Warrants are outstanding, the Company
will cause the Common Stock
- 12 -
<PAGE>
to continue at all times to be registered under Section 12(g) of the Exchange
Act, the Company will comply in all material respects with its reporting and
filing obligations under the Exchange Act, and the Company will not take any
action or file any document (whether or not permitted by the Exchange Act or
the rules thereunder) to terminate or suspend such reporting and filing so
long as it is so obligated. Until such time as no Debentures or Warrants or
Additional Warrants (as defined in Section 5.2) are outstanding, the Company
shall continue the listing or trading of the Common Stock on the Nasdaq NMS
or one of the other Approved Markets and shall comply in all respects with
the Company's reporting, filing and other obligations under the bylaws or
rules of the Nasdaq NMS or such other Approved Market on which the Common
Stock is traded or listed and the National Association of Securities Dealers
("NASD"). The Company shall cause the Common Shares and the Warrant Shares to
be listed on the Nasdaq NMS (or, if the Common Stock is listed on another of
the Approved Markets, on such other Approved Market) no later than the
registration of the Common Shares or the Warrant Shares under the Act, and at
all times shall continue such listing(s) on one of the Approved Markets on
which the Common Stock is traded or listed. As used herein and in the
Registration Rights Agreement and the Warrants, the term "EFFECTIVE
REGISTRATION" shall mean that (a) all registration obligations of the Company
pursuant to the Registration Rights Agreement and this Agreement have been
satisfied, (b) such registration is not subject to any suspension or stop
order, (c) the prospectus for each of the Common Shares issuable upon
conversion of the Debentures then outstanding, and the Warrant Shares
issuable upon exercise of the Warrants then outstanding is current, (d) such
Common Shares and Warrant Shares are listed for trading on one of the
Approved Markets and such trading has not been suspended for any reason, (e)
none of the Company or any direct or indirect subsidiary of the Company is
subject to any bankruptcy, insolvency or similar proceeding, and (f) no
Interfering Event (as defined in Section 2(b) of the Registration Rights
Agreement) exists. For purposes of this Section 3.1, "Common Stock" means the
Company's currently outstanding Common Stock or any securities into which the
Common Stock is changed or converted by merger, consolidation,
recapitalization, reclassification, or otherwise, so long as such Common
Stock or securities are publicly held.
Section 3.2 DEBENTURES ON CONVERSION AND WARRANTS ON EXERCISE.
(a) Upon any conversion by an Investor (or then
holder of Debentures) of the Debentures pursuant to the terms thereof, the
Company shall issue and deliver to such Investor (or holder) within three (3)
Trading Days of the HOLDER CONVERSION DATE (as defined in the Debenture) a
new certificate or certificates for the principal amount of Debentures which
such Investor (or holder) has not yet elected to convert but which are
evidenced in part by the certificate(s) submitted to the Company in
connection with such conversion (with the principal amount of and
denomination of such new certificate(s) designated by such Investor or
holder).
(b) Upon any partial exercise by an Investor (or
then holder of the Warrants) of the Warrants, the Company shall issue and
deliver to such Investor (or holder) within three (3) days of the date on
which such Warrants are exercised, a new
- 13 -
<PAGE>
Warrant or Warrants representing the number of adjusted Warrant Shares, in
accordance with the terms of Section 2 of the Warrants.
Section 3.3 REPLACEMENT DEBENTURES AND WARRANTS.
(a) The certificate(s) representing the
Debentures held by any Investor (or then holder) may be exchanged by such
Investor (or such holder) at any time and from time to time for certificates
with different denominations representing an equal aggregate principal amount
of Debentures, as requested by such Investor (or such holder) upon
surrendering the same. No service charge will be made for such registration
or transfer or exchange.
(b) The Warrants will be exchangeable at the
option of any Investor (or then holder of the Warrants) at the office of the
Company for other Warrants of different denominations entitling such Investor
(or the holder thereof) to purchase in the aggregate the same number of
Warrant Shares as are purchasable under such Warrants. No service charge will
be made for such transfer or exchange.
Section 3.4 EXPENSES. The Company shall pay in immediately
available funds, at the Closing and promptly upon receipt of any further
invoices relating to same, all reasonable due diligence fees and expenses and
attorneys' fees and expenses of the Investors' Counsel, not to exceed
$35,000, incurred by the Investors in connection with the preparation,
negotiation, execution and delivery of this Agreement, the Registration
Rights Agreement, the Debentures, the Warrants, and the related agreements
and documents and the transactions contemplated hereunder and thereunder.
Prior to Closing, the Investor shall provide the Company copies of invoices
relating to such fees and expenses. At Closing, the Company shall pay the
amount due for such fees and expenses (which may include fees and expenses
estimated to be incurred for completion of the transaction including
post-closing matters). In the event such amount is ultimately less than the
actual fees and expenses, the Company shall promptly pay such deficiency upon
receipt of an invoice regarding same. In the event the amount is ultimately
more than actual fees and expenses, the Investor shall promptly pay to the
Company such difference in the amount actually provided by the Company and
the amount actually invoiced by the Investor.
Section 3.5 SECURITIES COMPLIANCE. The Company shall notify the
SEC and the Nasdaq NMS, in accordance with their respective requirements, of
the transactions contemplated by this Agreement, and the Debentures, the
Registration Rights Agreement, and the Warrants, and shall take all other
necessary action and proceedings as may be required and permitted by
applicable law, rule and regulation for the legal and valid issuance of the
Debentures hereunder, the Common Shares issuable upon conversion thereof, the
Warrants, and the Warrant Shares issuable upon exercise thereof.
Section 3.6 DIVIDENDS OR DISTRIBUTIONS. So long as any Debentures
or Warrants remain outstanding, the Company agrees that it shall not (a)
declare or pay any dividends or make any distributions (other than stock
dividends) to any holder or holders
- 14 -
<PAGE>
of Common Stock, or (b) purchase or otherwise acquire for value, directly or
indirectly, any Common Stock or other equity security of the Company.
Section 3.7 NOTICES. The Company agrees to provide all holders of
Debentures and Warrants with copies of all notices and information, including
without limitation notices and proxy statements in connection with any
meetings, that are provided to the holders of shares of Common Stock,
contemporaneously with the delivery of such notices or information to such
Common Stock holders.
Section 3.8 USE OF PROCEEDS. The Company agrees that the proceeds
received by the Company from the sale of the Debentures hereunder shall be
used to redeem $12.5 million principal amount, plus accrued interest, of the
Company's 4% senior subordinated convertible notes due 2005.
Section 3.9 PRIVATE PLACEMENT OF COMPANY SECURITIES.
(a) (i) If, within twelve (12) months of the
Closing Date or Additional Closing Date (as defined in Section 5.3(b)), as
the case may be, the Company determines that it wishes to sell any Common
Stock or securities convertible into or exchangeable for Common Stock
(excluding (A) the issuance of options to purchase Common Stock, the Common
Stock underlying such options or other equity securities granted to officers,
directors, consultants or other employees pursuant to any stock incentive
plan approved by the Board of Directors of the Company; (B) the issuance of
Common Stock or other equity securities in connection with any employee stock
purchase plan approved by the Board of Directors of the Company, (C) the
issuance of Common Stock or securities convertible or exchangeable for Common
Stock in connection with the formation of a joint venture, or as part of a
strategic relationship with another person or entity or in connection with a
merger or other acquisition transaction; (D) the issuance of Common Stock or
warrants as contemplated by the Company's letter agreement, dated May 20,
1999, with Reedland Capital Partners; or (E) Common Stock or warrants to
purchase Common Stock issued in connection with the contemplated Structured
Equity Line Flexible Financing Agreement), other than pursuant to a
registration statement under the Act, the Company shall first provide to all
Investors still holding Debentures, a written notice (a "First Offer Notice")
as follows:
(ii) The First Offer Notice shall state the
price at which it would like to sell such securities, the maximum number of
securities it would like to sell and the other material terms of such
securities. The First Offer Notice may be delivered with or without prior
consultation with the Investors, at the election of the Company.
(iii) Each of the Investors receiving a First
Offer Notice shall have 10 Trading Days to indicate in writing (a "Purchase
Notice") to the Company whether any of them wishes to accept such offer as to
all or any portion of such securities. In the event that the Investors
deliver Purchase Notices with respect to a total amount of securities in
excess of the amount described in the First Offer Notice, the amount of
securities that each Investor who delivered a Purchase Notice shall purchase
shall be proportionately reduced in accordance with its holdings of
Debentures at such time. In
- 15 -
<PAGE>
the event that the Investors deliver Purchase Notices with respect to less
than all of the amount of securities described in the First Offer Notice, (x)
the aggregate amount of securities purchased by all Investors shall be
reduced to fifty percent (50%) of the amount set forth in the First Offer
Notice if Purchase Notices are delivered with respect to 50% or more of such
amount, unless the Company otherwise elects by written notice to the
Investors, or (y) each Investor shall purchase the amount of securities set
forth in such Investor's Purchase Notice if the Purchase Notices delivered by
all Investors are delivered with respect to less than fifty percent (50%) of
the amount of securities set forth in the First Offer Notice. In the event of
a reduction in the aggregate amount of securities to be purchased in
accordance with clause (x) of the preceding sentence, the amount of
securities to be purchased by each Investor who delivered a Purchase Notice
shall be proportionately reduced in accordance with such Investor's holdings
of Debentures at such time.
(iv) If any of the Investors sends a Purchase
Notice to the Company, the Investor shall be committed to purchase the amount
of securities specified (subject to any proportionate reduction contemplated
by paragraph (iii) above) on the terms and conditions specified, and the
closing for the sale of the securities to be purchased pursuant to a Purchase
Notice shall occur at the offices of the Company within 30 days of the date
of the Purchase Notice. The purchase price to be paid at such closing shall
be made in immediately available funds (if the purchase price is for cash),
and such payment shall be made against delivery of the securities. The
Company and the Investor shall make such representations, warranties and
other agreements customary for similar transactions at the Closing as each
party shall reasonably request, that in no event shall be more onerous than
those proposed in the transaction described in the First Offer Notice.
(v) If any or all of the Investors do not
timely send the Company one or more Purchase Notices, the Company shall have
60 days after the expiration of the 10 day period described in Section
3.9(a)(iii) in which enter into a binding agreement to sell to third parties
such securities, in amounts, at prices and on terms not more favorable to the
investor than were contained in the First Offer Notice. Promptly after any
such sale, the Company shall provide to the Investors such evidence of such
sale as the Investors shall reasonably request. If at the end of such 60 day
period the Company has not entered into a binding agreement with respect to
the sale of such securities, it shall no longer be permitted to sell such
securities pursuant to this Section 3.9(a) without again fully complying with
the provisions of this Section 3.9(a).
(b) (i) Within twelve (12) months of the Closing
Date, the Company shall not sell or issue Common Stock (or other equity
securities or rights exercisable or exchangeable for, or convertible into,
Common Stock or such other equity securities) in a private placement at a
conversion price which varies as a result of the fluctuation in the price of
the Common Stock, or with an adjustment feature based on a future price of
the Common Stock (a "Floating Conversion Price").
(ii) If at any time after twelve (12) months
from the Closing Date, the Company sells or issues Common Stock (or other
equity securities or rights exercisable or exchangeable for, or convertible
into, Common Stock or such other
- 16 -
<PAGE>
equity securities) in a private placement, excluding the issuance of any
Common Stock pursuant to the contemplated Structured Equity Line Flexible
Financing Agreement, at a Floating Conversion Price, the Conversion Price of
the Debentures held by the Investors shall be adjusted to become the lesser
of the Conversion Price or the Floating Conversion Price (at such Investor's
option upon each conversion).
Section 3.10 RESERVATION OF STOCK ISSUABLE UPON CONVERSION OF
DEBENTURES AND UPON EXERCISE OF THE WARRANTS. The Company shall at all times
reserve and keep available out of its authorized but unissued shares of
Common Stock, solely for the purpose of effecting the conversion of the
Debentures, and the exercise of the Warrants, free of preemptive rights, such
number of its shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all outstanding Debentures and the full exercise
of the Warrants, and, if at any time the number of authorized but unissued
shares of Common Stock shall not be sufficient to effect the conversion of
all the then outstanding Debentures and the full exercise of the Warrants,
the Company will take such corporate action as may be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares
as shall be sufficient for such purposes, including without limitation
engaging in reasonable efforts to obtain the requisite stockholder approval.
If at any time the number of authorized but unissued shares of Common Stock
is not sufficient to effect the conversion of all the then outstanding
Debentures or the full exercise of the Warrants, the Investors shall be
entitled to, INTER ALIA, the premium price redemption rights provided in the
Registration Rights Agreement.
Section 3.11 REASONABLE EFFORTS. The parties shall use their
reasonable efforts to satisfy timely each of the conditions described in
Article IV and Article V of this Agreement.
Section 3.12 FORM D; BLUE SKY LAWS; NO INTEGRATED OFFERING. The
Company agrees to file a Form D with respect to the transactions contemplated
by this Agreement, as required under Regulation D, and to provide a copy
thereof to each Investor promptly after such filing. The Company shall, on or
before each Closing Date or Additional Closing Date, take such action as the
Company shall have reasonably determined is necessary to qualify the
Debentures, Warrants, Common Shares and Warrant Shares for sale to the
Investors at the applicable Closing pursuant to this Agreement under
applicable securities or "blue sky" laws of the states of the United States
(or to obtain an exemption from such qualification), and shall provide
evidence of any such action so taken to each Investor on or prior to the
Closing Date. The Company will not undertake any offering of securities that
would reasonably be expected to be integrated with the offering of the
Debentures, Warrants, Common Shares and Warrant Shares.
Section 3.13 NO SENIOR INDEBTEDNESS; LIMITATION ON ISSUANCE OF
EQUITY.
The Debentures shall rank PARI PASSU with all current and
future unsecured indebtedness of the Company; PROVIDED, HOWEVER, that prior
to issuing a private placement of any convertible debentures to any person or
entity, excluding for this purpose any convertible debenture issued (i)
pursuant to this Agreement, (ii) to any strategic partner of the Company or
(iii) in connection with any acquisition of a business
- 17 -
<PAGE>
or assets (other than cash) by the Company, the Company will obtain
subordination agreements in form reasonably satisfactory to the Investors
subordinating such convertible debentures to the Debentures.
Section 3.14 SUBORDINATION AGREEMENT. Until the Debentures are
redeemed or converted pursuant to this Agreement, in the event that the
Company refinances the secured debt it owes to Silicon Valley Bank, or enters
into a new agreement with a bank for debt secured by the Company's property,
the Investors will enter into a subordination agreement substantially similar
to that certain Subordination and Consent Agreement by and between Investors
and Silicon Valley Bank dated June 29, 1999, subordinating the Debentures to
the same extent as under such agreement under such refinancing or new
agreement; provided, however, the Company covenants and agrees that,
commencing on the date hereof and until twenty-four (24) months from the date
hereof, it will not incur or permit to exist any senior indebtedness in
excess of $40,000,000. If, after twenty-four (24) months from the date
hereof, the Company incurs senior indebtedness in excess of $40,000,000, the
Investors each shall have the right to require the Company to redeem any then
outstanding Debentures held by such Investor in cash, in an amount equal to
the Outstanding Principal Amount (as such term is defined in the Debenture)
of such Debenture plus accrued interest and default payments, if any, to the
redemption date. Any Investor electing to exercise the right to have such
Investor's Debentures redeemed in accordance with the preceding sentence must
give the Company written notice of such election within thirty (30) days
after the date the Company gives such Investor written notice that it has
incurred senior indebtedness in excess of $40,000,000. The redemption date
with respect to any such redemption shall be the thirtieth (30th) day after
the Company's receipt of such written notice of election from such Investor
or, if such day is not a business day, the next succeeding business day. In
order to receive the payment due upon redemption on the redemption date, the
Investor must surrender the Debentures due to be redeemed to the Company at
its principal executive office on the redemption date.
Section 3.15 REGISTRATION RIGHTS. The Company shall file and use
its best efforts to cause to become effective, as promptly as possible, a
registration statement on Form S-3 under the Act (or in the event that the
Company becomes ineligible to use such form, such other form as the Company
is eligible to use under the Act) covering the resale of the Common Shares
and the Warrant Shares issuable upon the conversion of the Debentures and the
exercise of the Warrants, respectively, and shall take all action necessary
to qualify the Common Shares and the Warrant Shares under all applicable
state securities laws, all in accordance with the Registration Rights
Agreement to be entered into by the Company and the Investors at the Closing.
Section 3.16 LEGENDS. Upon effectiveness of the Registration
Statement (as defined in the Registration Rights Agreement), the Common
Shares and the Warrant Shares and certificates evidencing the same shall at
all times be free of legends (except as otherwise provided herein or in the
Debentures, Warrants, or Registration Rights Agreement), "stop transfers",
"stock transfer restrictions" or other restrictions.
Section 3.17 WITHHOLDING. It is the intent of the Company that
the Debentures be treated as "registered obligations" under Section
871(h)(2)(B) of the Internal Revenue
- 18 -
<PAGE>
Code of 1986, as amended (the "CODE") and that the interest payments thereon
be treated as "portfolio interest" within the meaning of Section 871(h) of
the Code. Assuming no changes in the current law applicable hereto, so long
as the Investor (or any transferee thereof who is a "Holder" under the
Debenture) complies with the requirements for exemption from taxation under
the Code (including any compliance with any documentation requirements
required by the U.S. Internal Revenue Service or otherwise, reasonably
requested by the Company to establish and support such exemption) and the
interest on the Debentures is not determined to be other than "portfolio
interest", the Company agrees that it shall not withhold federal income taxes
in respect of interest payments on the Debentures.
Section 3.18 CORPORATE EXISTENCE. The Company will take all steps
necessary to preserve and continue the corporate existence and solvency of
the Company; PROVIDED, HOWEVER, that nothing herein shall be construed to
limit the ability of the Company to partake in any merger, asset sale, or
acquisition transaction involving the Company, subject to the Company's
complying with the terms of the Debentures.
ARTICLE IV.
CONDITIONS TO CLOSING
Section 4.1 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE COMPANY
TO SELL THE DEBENTURES. The obligation hereunder of the Company to issue
and/or sell the Debentures to the Investors at the Closing (unless otherwise
specified) is subject to the satisfaction, at or before the Closing, of each
of the applicable conditions set forth below. These conditions are for the
Company's sole benefit and may be waived by the Company at any time in its
sole discretion.
(a) ACCURACY OF THE INVESTORS' REPRESENTATIONS
AND WARRANTIES. The representations and warranties of each Investor will be
true and correct in all material respects as of the date when made and as of
the Closing Date as though made at that time (except for representations and
warranties made as of a specific date, which will be true and correct in all
material respects as of such date).
(b) PERFORMANCE BY THE INVESTORS. Each Investor
shall have performed in all material respects all agreements and covenants
and satisfied all conditions required to be performed or satisfied by it at
or prior to the Closing.
(c) NO INJUNCTION. No statute, rule, regulation,
executive order, decree, ruling or injunction shall have been enacted,
entered, promulgated or endorsed by any court or governmental authority of
competent jurisdiction which prohibits the consummation of any of the
transactions contemplated by this Agreement or the Registration Rights
Agreement or the Debentures or the Warrants.
(d) RECEIPT OF PURCHASE PRICE. The Company shall
have received payment of the Purchase Price pursuant to Section 1.1.
- 19 -
<PAGE>
Section 4.2 CONDITIONS PRECEDENT TO THE OBLIGATION OF THE
INVESTORS TO PURCHASE THE DEBENTURES. The obligation hereunder of each
Investor to acquire and pay for the Debentures at the Closing (unless
otherwise specified) is subject to the satisfaction, at or before the
Closing, of each of the applicable conditions set forth below. These
conditions are for each Investor's benefit and may be waived by each Investor
at any time in its sole discretion.
(a) ACCURACY OF THE COMPANY'S REPRESENTATIONS AND
WARRANTIES. The representations and warranties of the Company shall be true
and correct in all material respects as of the date when made and as of the
Closing Date as though made at that time (except for representations and
warranties made as of a specific date, which shall be true and correct in all
material respects as of such date).
(b) PERFORMANCE BY THE COMPANY. The Company shall
have performed in all material respects all agreements and covenants and
satisfied all conditions required to be performed or satisfied by the Company
at or prior to the Closing.
(c) NASDAQ NMS. Trading in the Company's Common
Stock shall not have been suspended by the SEC or the Nasdaq NMS (or other
Approved Market), and trading in securities generally as reported by the
Nasdaq NMS (or other Approved Market) shall not have been suspended or
limited or minimum prices shall not have been established on securities whose
trades are reported by the Nasdaq NMS, and the Common Stock shall not have
been delisted from the Nasdaq NMS (or any other Approved Market where they
are currently listed), and the Company shall not have received any notice
(written or oral) from the Nasdaq NMS (or any other Approved Market where
they are currently listed) indicating that delisting of the Common Stock is
under consideration.
(d) NO INJUNCTION. No statute, rule, regulation,
executive, judicial or administrative order, decree, ruling or injunction
shall have been enacted, entered, promulgated or endorsed by any court or
governmental authority of competent jurisdiction which prohibits the
consummation of any of the transactions contemplated by this Agreement, the
Registration Rights Agreement or the Debentures or the Warrants.
(e) OPINION OF COUNSEL. At the Closing, the
Investors shall have received an opinion of counsel to the Company addressing
such matters as the Investors may reasonably request and such other opinions,
certificates and documents as the Investors or their counsel shall reasonably
require incident to the Closing.
(f) REGISTRATION RIGHTS AGREEMENT. The Company
and the Investors shall have executed and delivered the Registration Rights
Agreement in the form and substance of EXHIBIT 4.2(f) attached hereto.
(g) OFFICER'S CERTIFICATE. The Company shall have
delivered to the Investors a certificate in form and substance satisfactory
to the Investors and the Investors' Counsel, executed by an officer of the
Company, certifying as to satisfaction of
- 20 -
<PAGE>
closing conditions, incumbency of signing officers, and the true, correct and
complete nature of the Charter, By-Laws, good standing of and authorizing
resolutions of the Company.
(h) DEBENTURES AND WARRANTS. The Investors shall
have received certificates representing the Debentures and the Warrants to be
purchased at Closing in the form and substance of EXHIBIT 1.1A and EXHIBIT
1.1B hereto.
(i) CONSENTS. The Company shall have received and
delivered to the Investors (i) except as set forth on Schedule 4.2(i), the
consent of all applicable lenders to the issuance of the Debentures, and (ii)
the waiver of any and all pending events of default (or pending events which
with the lapse of time or notice or both would constitute an event of
default) thereunder.
ARTICLE V.
ADDITIONAL PURCHASES
Section 5.1 ADDITIONAL PURCHASES OF DEBENTURES. At any time
prior to twelve (12) months after the Closing Date upon receipt of written
notice (the "Additional Tranche Notice Date"), the Investors shall have the
right, and the Company shall have the right to require the Investors, to
purchase up to $6,000,000 in additional aggregate principal amount of
Debentures in two separate tranches of $3,000,000 each (each an "Additional
Tranche"), and each Investor severally shall purchase from the Company, an
additional principal amount of Debentures, in proportion to such Investor's
then holdings in exchange for a cash payment equal to the principal amount of
the Debentures to be acquired; provided, however, that the second Additional
Tranche Notice Date may occur no earlier than 60 days after the first
Additional Tranche Notice Date. The purchase of the Debentures shall be made
on substantially the same terms and conditions as the purchase of the
Debentures at the initial Closing and in accordance with the terms and
conditions of this Article V.
Section 5.2 ADDITIONAL WARRANTS. If the Investors purchase or
are required to purchase Debentures pursuant to Section 5.1, then
concurrently with the closing of the purchase and sale of such Debentures,
the Company shall issue to the Investors, in proportion to the principal
amount of Debentures being purchased, additional Warrants (the "Additional
Warrants") to purchase that number of shares of Common Stock equal to the
quotient of $1,500,000 divided by the Closing Price (as defined in the form
of Debenture attached as EXHIBIT 1.1A) at such Additional Closing Date.
Additional Warrants shall have a term of five (5) years from the Additional
Closing Date (as defined below) and shall be substantially in the form
attached as EXHIBIT 1.1B, except that the exercise price for such Warrants
shall equal 150% of the Closing Price (as defined in the form of Debenture
attached as Exhibit 1.1A) at such Additional Closing Date.
Section 5.3 ADDITIONAL TRANCHE CLOSING DATES.
- 21 -
<PAGE>
(a) The closing of the purchase and sale of the
Debentures and the Additional Warrants pursuant to this Article V shall take
place at the offices of Investors' Counsel at 10:00 a.m., local time (the
"Additional Closing") on the earlier of the following: (x) the date on which
the last of the conditions set forth in this Article V hereof and applicable
to such Additional Closing (other than those conditions that by their nature
can only be fulfilled at the Additional Closing, but subject to the
fulfillment of such conditions) shall be fulfilled or waived in accordance
herewith, or (y) such other time and place and/or on such other date as the
Investors and the Company may agree. The date and time at which the
Additional Closing occurs is referred to herein as the "Additional Closing
Date".
(b) On each Additional Closing Date, the Company
shall deliver to each Investor (x) a certificate or certificates (with the
number of and outstanding principal amount of such certificates requested by
such Investor) representing the Debentures purchased at the Additional
Closing by such Investor at the Additional Closing registered in the name of
the Investor or its nominee and (y) the Warrants registered in the name of
such Investor or its nominee in such denominations as reasonably requested by
such Investor, and such Investor shall deliver to the Company an amount in
cash equal to the principal amount of the Debentures purchased by such
Investor at the Additional Closing (the "Additional Purchase Price") by wire
transfer in immediately available funds to an account designated in writing
by the Company. The delivery of payment by such Investor of the Purchase
Price applicable to it as set forth in this paragraph shall constitute a
payment delivered to the Company in satisfaction of such Investor's
obligation to pay the Additional Purchase Price hereunder. In addition, each
of the Company and each Investor shall deliver all documents, instruments and
writings required to be delivered by such party pursuant to this Agreement at
or prior to the applicable Additional Closing.
Section 5.4 CONDITIONS OF THE COMPANY TO EACH ADDITIONAL CLOSING.
The obligation of the Company to issue and/or sell the Debentures and
Additional Warrants to the Investors at each Additional Closing is subject to
the satisfaction, at the Additional Closing Date, of the conditions set forth
in Section 4.1 as of such Additional Closing Date as if made as of such
Additional Closing Date. The obligation of the Company to issue and sell
Debentures and Additional Warrants is subject to the additional condition
that there shall have been no conversion of the Common Stock into securities
of another entity, which securities are not then publicly traded.
Section 5.5 CONDITIONS OF EACH INVESTOR TO EACH ADDITIONAL
CLOSING. The obligations of each Investor with respect to each Additional
Closing to acquire and pay for the Debentures and Additional Warrants are
subject to the satisfaction, at the Additional Closing Date, of each of the
conditions set forth in Section 4.2 (other than Section 4.2(a)) as of such
Additional Closing Date as if made as of such Additional Closing Date and the
additional conditions set forth below. Except for the condition set forth in
Section 5.5(b), which may not be waived, the conditions set forth in Section
4.2 and below are for each Investor's benefit and may be waived by each
Investor at any time in its sole discretion.
- 22 -
<PAGE>
(a) The representations and warranties of the
Company set forth in Section 2.1 shall be true and correct in all material
respects as of such Additional Closing Date as though made at that time,
except as disclosed in any documents filed by the Company with the Securities
and Exchange Commission or in an update to a Disclosure Schedule delivered by
the Company to the Investors prior to such Additional Closing Date or where
the matter not disclosed would not have a Material Adverse Effect.
(b) The daily dollar volume of the Company's
Common Stock, as reported on an Approved Market, for 25 of 30 Trading Days
prior to the Additional Tranche Notice Date is at least $1.0 million;
(c) The average of the closing bid prices for the
Company's Common Stock on the ten (10) consecutive Trading Days ending on the
Additional Tranche Notice Date and for ten (10) additional consecutive
Trading Days thereafter exceeds the Conversion Price as defined in the
Debentures;
(d) The Company shall have, and shall have
maintained for each of the preceding 30 Trading Days, an Effective
Registration;
(e) There are not, and have not been in any of
the preceding 30 Trading Days, any Interfering Events (as such term is
defined in the Registration Rights Agreement);
(f) No Event of Default (as defined in the
Debentures) shall have occurred and no event shall have occurred that,
following notice or the passage of time, would constitute an Event of
Default, and
(g) The Company is not then in material breach of
any of this Agreement, the Registration Rights Agreement, the Debentures or
the Warrants.
Section 5.6 ADDITIONAL PURCHASES. The Company and each Investor
mutually may agree upon the terms for sale and purchase of a fourth tranche
of additional debentures in an aggregate principal amount of $6 million.
ARTICLE VI.
LEGEND AND STOCK
The Company will issue one or more certificates representing the
Debentures, Warrants and Additional Warrants in the name of the applicable
Investor and in such denominations to be specified by such Investor prior to
(or from time to time subsequent to) the Closing or Additional Closing. Each
certificate representing such securities and any shares of Common Stock
issued upon conversion or exercise thereof initially shall be stamped or
otherwise imprinted with a legend substantially in the following form:
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS.
THEY MAY NOT
- 23 -
<PAGE>
BE SOLD OR OFFERED FOR SALE EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER SAID ACT AND ANY APPLICABLE
STATE SECURITIES LAWS OR PURSUANT TO AN APPLICABLE
EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
The Company agrees to reissue the Debentures, Warrants and
Additional Warrants without the legend set forth above at such time as (i)
the holder thereof is permitted to dispose of such securities and Common
Stock issuable upon conversion or exercise thereof pursuant to Rule 144(k)
under the Act, or (ii) such securities are sold to a purchaser or purchasers
who (in the opinion of counsel to the seller or such purchaser(s), in form
and substance reasonably satisfactory to the Company and its counsel) are
able to dispose of such shares publicly without registration under the Act.
Prior to an applicable Registration Statement with respect to Common
Shares, Warrant Shares or Additional Warrant Shares (as defined in the
Registration Rights Agreement) being declared effective, such Common Shares,
Warrant Shares and Additional Warrant Shares shall bear a legend in the same
form as the legend indicated above. Upon such Registration Statement becoming
effective, the Company agrees to promptly, but no later than three (3)
business days thereafter, issue new certificates representing such Common
Shares, Warrant Shares and Additional Warrant Shares without such legend. Any
Common Shares, Warrant Shares or Additional Warrant Shares issued after such
Registration Statement has become effective shall be free and clear of any
legends, transfer restrictions and stop orders. Notwithstanding the removal
of such legend, each Investor agrees to sell the Common Shares, Warrant
Shares and Additional Warrant Shares represented by the new certificates in
accordance with the applicable prospectus delivery requirements (if copies of
a current prospectus are provided to such Investor by the Company) or in
accordance with an exception from the registration requirements of the Act.
Nothing herein shall limit the right of any holder to pledge these
securities pursuant to a bona fide margin account or lending arrangement.
ARTICLE VII.
TERMINATION
Section 7.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be
terminated at any time prior to the Closing by the unanimous written consent
of the Company and each of the Investors.
Section 7.2 OTHER TERMINATION. This Agreement may be terminated
by the Company or by any of the Investors at any time if the Closing shall
not have been consummated by the tenth business day following the date of
this Agreement; provided, however, that the party (or parties) prepared to
close shall retain its (or their) right to sue for any breach by the other
party (or parties) occurring prior to such termination.
- 24 -
<PAGE>
ARTICLE VIII.
MISCELLANEOUS
Section 8.1 STAMP TAXES. The Company shall pay all stamp and
other taxes and duties levied in connection with the issuance of the
Debentures and the Warrants, and the Common Shares and the Warrant Shares
issued.
Section 8.2 SPECIFIC PERFORMANCE; CONSENT TO JURISDICTION; JURY
TRIAL.
(a) The Company and the Investors acknowledge and
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent or cure
breaches of the provisions of this Agreement and to enforce specifically the
terms and provisions hereof, this being in addition to any other remedy to
which any of them may be entitled by law or equity.
(b) The Company and each of the Investors (i)
hereby irrevocably submits to the exclusive jurisdiction of the United States
District Court, the California State Courts and other courts of the United
States sitting in San Francisco County, California for the purposes of any
suit, action or proceeding arising out of or relating to this Agreement and
(ii) hereby waives, and agrees not to assert in any such suit action or
proceeding, any claim that it is not personally subject to the jurisdiction
of such court, that the suit, action or proceeding is brought in an
inconvenient forum or that the venue of the suit, action or proceeding is
improper. To the extent permitted by applicable law, the Company and each of
the Investors consents to process being served in any such suit, action or
proceeding by mailing a copy thereof to such party at the address in effect
for notices to it under this Agreement and agrees that such service shall
constitute good and sufficient service of process and notice thereof. Nothing
in this paragraph shall affect or limit any right to serve process in any
other manner permitted by applicable law.
(c) The Company and each of the Investors hereby
waive all rights to a trial by jury.
Section 8.3 ENTIRE AGREEMENT; AMENDMENT. This Agreement,
together with the Registration Rights Agreement, the Warrants, the
Debentures, and the agreements and documents executed in connection herewith
and therewith, contains the entire understanding of the parties with respect
to the matters covered hereby and thereby and, except as specifically set
forth herein or therein, neither the Company nor any Investor makes any
representation, warranty, covenant or undertaking with respect to such
matters. No provision of this Agreement may be waived or amended other than
by a written instrument signed by the party against whom enforcement of any
such amendment or waiver is sought.
Section 8.4 NOTICES. Any notice or other communication required
or permitted to be given hereunder shall be in writing by mail, facsimile or
personal delivery and shall
- 25 -
<PAGE>
be effective upon actual receipt of such notice. The addresses for such
communications shall be:
to the Company:
Cygnus, Inc.
400 Penobscot Drive
Redwood City, CA 94063-4719
Attention: Chief Executive Officer
Facsimile: (650) 599-3972
with copies to:
Cygnus, Inc.
400 Penobscot Drive
Redwood City, CA 94063-4719
Attention: General Counsel
Facsimile: (650) 599-3913
to the Investors:
To each Investor at the address and/or fax number
set forth on Schedule I of this Agreement.
with copies to:
Arnold & Porter
555 Twelfth Street, NW
Washington, D.C. 20004
Attention: Richard E. Baltz
Facsimile: (202) 942-5999
Any party hereto may from time to time change its address for notices by
giving at least 10 days' written notice of such changed address to the other
parties hereto.
Section 8.5 INDEMNITY. Each party shall indemnify each other
party against any loss, cost or damages (including reasonable attorney's
fees) incurred as a result of such parties' breach of any representation,
warranty, covenant or agreement in this Agreement.
Section 8.6 WAIVERS. No waiver by any party of any default with
respect to any provision, condition or requirement of this Agreement shall be
deemed to be a continuing waiver in the future or a waiver of any other
provision, condition or requirement hereof, nor shall any delay or omission
of any party to exercise any right hereunder in any manner impair the
exercise of any such right accruing to it thereafter.
- 26 -
<PAGE>
Section 8.7 HEADINGS. The headings herein are for convenience
only, do not constitute a part of this Agreement and shall not be deemed to
limit or affect any of the provisions hereof.
Section 8.8 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, this Agreement shall be binding upon and inure to the benefit of the
parties and their successors and permitted assigns. The parties hereto may
not amend this Agreement without notice to or the consent of any third party.
The Company may not assign this Agreement or any rights or obligations
hereunder without the prior written consent of all Investors (which consent
may be withheld for any reason in their sole discretion), except that the
Company may assign this Agreement in connection with the sale of all or
substantially all of its assets provided that the Company is not released
from any of its obligations hereunder, such assignee assumes all obligations
of the Company hereunder, and appropriate adjustment of the provisions
contained in this Agreement, the Registration Rights Agreement, the
Debentures, and the Warrants is made, in form and substance satisfactory to
the Investors, to place the Investors in the same position as they would have
been but for such assignment, in accordance with the terms of the Debentures,
and the Warrants. Any Investor may assign this Agreement (in whole or in
part) or any rights or obligations hereunder without the consent of the
Company in connection with the sale or transfer of all or any portion of the
Debentures held by such Investor to an affiliate or client of the Palladin
Group, L.P. In the event that any Investor wishes to assign this Agreement in
connection with the sale or transfer of all or any portion of the Debentures
held by such Investor to any person or entity other than an affiliate or
client of the Palladin Group, L.P.: (i) such Investor shall first provide to
the Company a notice stating the price at which it is willing to sell such
Debenture and the other material terms of the proposed sale, (ii) the Company
shall have ten (10) business days to provide notice to such Investor if it
wishes to accept such offer, (iii) if the Company accepts such offer, the
Company shall purchase such Debentures on the terms proposed within thirty
(30) days after such acceptance and (iv) in the event the Company elects not
to purchase such Debenture, such Investor may offer such Debenture to any
third party on terms no more favorable to such third party than those offered
to the Company, PROVIDED, HOWEVER, that no Investor may sell such Debentures
if after giving effect to such sale all Debentures would be held by more than
seven (7) separate persons or entities other than affiliates or clients of
the Palladin Group, L.P. and that no Investor may sell such Debentures in
increments of less than $500,000.
Section 8.9 NO THIRD PARTY BENEFICIARIES. This Agreement is
intended for the benefit of the parties hereto and their respective permitted
successors and assigns and is not for the benefit of, nor may any provision
hereof be enforced by, any other person.
Section 8.10 GOVERNING LAW. This Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of New
York applicable to Agreements executed and to be performed entirely within
such State.
Section 8.11 SURVIVAL. The representations and warranties and the
agreements and covenants of the Company and each Investor contained herein
shall survive the Closing or any Additional Closing, as the case may be, so
long as any of the Debentures
- 27 -
<PAGE>
and Warrants remain outstanding. If any provision of this Agreement becomes
or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision, provided that no such severability shall be effective
if it were to materially change the economic benefit of this Agreement to any
party.
Section 8.12 EXECUTION. This Agreement may be executed in two or
more counterparts, all of which shall be considered one and the same
agreement, it being understood that all parties need not sign the same
counterpart.
Section 8.13 PUBLICITY. The Company agrees that it will not
disclose, and will not include in any public announcement, the name of any
Investor without its consent, unless and until such disclosure is required by
law or applicable regulation, and then only to the extent of such
requirement. The Company agrees that it will deliver a copy of any public
announcement regarding the matters covered by this Agreement, or any
agreement and document executed herewith to each Investor and any public
announcement including the name of an Investor to such Investor, reasonably
in advance of the release of such announcements.
Section 8.14 SEVERABILITY. The parties acknowledge and agree that
the Investors are not agents, employees affiliates or partners of each other,
that all representations, warranties, covenants and agreements of the
Investors hereunder are several and not joint, that no Investor shall have
any responsibility or liability for the representations, warranties,
agreements, acts or omissions of any other Investor, and that any rights
granted to "Investors" hereunder shall be enforceable by each Investor
hereunder.
Section 8.15 LIKE TREATMENT OF HOLDERS; REDEMPTION. Neither the
Company nor any of its affiliates shall, directly or indirectly, pay or cause
to be paid any consideration (immediate or contingent), whether by way of
interest, fee, payment for the redemption or conversion of the Debentures or
exercise of the Warrants, or otherwise, to any holder of Debentures or the
Warrants for or as an inducement to, or in connection with the solicitation
of, any consent, waiver or amendment of any terms or provisions hereof or
thereof unless such consideration is required to be paid to all holders bound
by such consent, waiver or amendment whether or not such holders so consent,
waive or agree to amend and whether or not such holders tender their
Debentures or Warrants for redemption, conversion or exercise. The Company
shall not, directly or indirectly, force a conversion of any portion of the
Debentures unless such conversion is made applicable to all holders of
Debentures.
Section 8.16 NO STRICT CONSTRUCTION. The language used in this
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied
against any party.
[SIGNATURE PAGE FOLLOWS]
- 28 -
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the date first above written.
CYGNUS, INC.
By: Craig W. Carlson
-----------------------
Name: Craig Carlson
-----------------------
Title: SR. VP, Finance, CFO
-----------------------
INVESTORS:
CONESCO DIRECT LIFE INSURANCE COMPANY
BY: THE PALLADIN GROUP
ATTORNEY-IN-FACT AND INVESTMENT
ADVISOR
By: /s/ Jeffrey E. Devers
-----------------------
Jeffrey E. Devers
THE GLENEAGLES FUND COMPANY
BY: THE PALLADIN GROUP
ATTORNEY-IN-FACT AND INVESTMENT
ADVISOR
By: /s/ Jeffrey E. Devers
-----------------------
Jeffrey E. Devers
LANCER SECURITIES (CAYMAN) LIMITED
BY: THE PALLADIN GROUP
ATTORNEY-IN-FACT AND INVESTMENT
ADVISOR
By: /s/ Jeffrey E. Devers
-----------------------
Jeffrey E. Devers
- 29 -
<PAGE>
PALLADIN PARTNERS I, L.P.
BY: THE PALLADIN GROUP
ATTORNEY-IN-FACT AND INVESTMENT
ADVISOR
By: /s/ Jeffrey E. Devers
-----------------------
Jeffrey E. Devers
PALLADIN OVERSEAS FUND LIMITED
BY: THE PALLADIN GROUP
ATTORNEY-IN-FACT AND INVESTMENT
ADVISOR
By: /s/ Jeffrey E. Devers
-----------------------
Jeffrey E. Devers
PGEP III, L.L.C.
BY: THE PALLADIN GROUP
ATTORNEY-IN-FACT AND INVESTMENT
ADVISOR
By: /s/ Jeffrey E. Devers
-----------------------
Jeffrey E. Devers
HALIFAX FUND, L.P.
BY: THE PALLADIN GROUP
ATTORNEY-IN-FACT AND INVESTMENT
ADVISOR
By: /s/ Jeffrey E. Devers
-----------------------
Jeffrey E. Devers
- 30 -
<PAGE>
SCHEDULE I
1. Conseco Direct Life Insurance Company
c/o The Palladin Group, L.P.
195 Maplewood Avenue
Maplewood, N.J. 07040
2. The Gleneagles Fund Company
c/o The Palladin Group, L.P.
195 Maplewood Avenue
Maplewood, N.J. 07040
3. Lancer Securities (Cayman) Limited
c/o The Palladin Group, L.P.
195 Maplewood Avenue
Maplewood, N.J. 07040
4. Palladin Partners I, L.P.
c/o Palladin Administrative Services LLC
195 Maplewood Avenue
Maplewood, N.J. 07040
5. Palladin Overseas Fund Limited
c/o The Palladin Group, L.P.
195 Maplewood Avenue
Maplewood, N.J. 07040
6. PGEP III, L.L.C.
c/o The Palladin Group, L.P.
195 Maplewood Avenue
Maplewood, N.J. 07040
- 31 -
<PAGE>
7. Halifax Fund, L.P.
c/o The Palladin Group, L.P.
195 Maplewood Avenue
Maplewood, N.J. 07040
- 32 -
<PAGE>
Exhibit 10.42
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR OFFERED FOR SALE
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS.
No. ____ $8,250,000
CYGNUS, INC.
8.5% CONVERTIBLE DEBENTURE DUE JUNE 29, 2004
THIS DEBENTURE ("Debenture") is one of a duly authorized issue of
Debentures of CYGNUS INC., a corporation duly organized and existing under
the laws of the State of Delaware (the "Company"), designated as the
Company's 8.5% Convertible Debentures Due June 29, 2004, in an aggregate
principal amount not exceeding eight million two hundred fifty thousand
dollars (U.S.$8,250,000).
FOR VALUE RECEIVED, the Company promises to pay to Halifax Fund, L.P.,
the initial holder hereof, or its order (including successors-in-interest, the
"Holder"), the principal sum of eight million two hundred fifty thousand U.S.
DOLLARS (U.S.$8,250,000) on June 29, 2004 (the "Maturity Date") and to pay
interest on the principal sum outstanding under this Debenture ("Outstanding
Principal Amount"), at the rate of 8.5% per annum, as an accretion to the
Outstanding Principal Amount of this Debenture and payable in full at the
Maturity Date. Interest shall accrue daily and compound quarterly commencing on
the date hereof and shall continue until payment in full of all amounts due
under this Debenture. At the end of each quarter, unless paid in cash pursuant
to the terms hereof, all interest accrued during such quarter shall be added
and shall accrete to the prior principal amount. The following quarter,
interest shall accrue and accrete on such new principal amount. The Outstanding
Principal Amount and accrued interest so payable will be paid to the person in
whose name this Debenture is registered on the records of the Company regarding
registration and transfers of the Debenture (the "Debenture Register").
Capitalized terms used herein and not otherwise defined shall have the meanings
set forth in the Convertible Debenture and Warrant Purchase Agreement dated as
of June 29, 1999 between the Company and the Holder and the other parties
thereto (the "Purchase Agreement") or the Registration Rights Agreement dated
as of June 29, 1999 between the Company and the Holder and the other parties
thereto (the "Registration Rights Agreement"). All Debentures issued pursuant
to the Purchase Agreement shall hereinafter be referred to collectively as the
"Debentures."
The principal of, interest on, and default payments (referred to
below) in respect of this Debenture are payable in such coin or currency of
the United States that as of the time of payment is legal tender for payment
of public and private debts at the address last appearing on the Debenture
Register of the Company as designated in writing by the Holder hereof from
time to time. Any interest when added to the Outstanding Principal Amount due
under this Debenture shall, for all purposes of this Debenture, be deemed to
have been
<PAGE>
part of the principal indebtedness originally evidenced by this Debenture
including, without limitation, for purposes of determining amounts
convertible into shares of Common Stock hereunder.
The Company will pay any principal due and all accrued and unpaid
interest due upon this Debenture to the person that is the Holder of this
Debenture on the records of the Company as of the Maturity Date and addressed
to such Holder at the last address appearing on the Debenture Register.
The Outstanding Principal Amount and interest due hereunder shall
bear interest, from and after the 31st day following the occurrence and
during the continuance of an Event of Default hereunder, at the rate equal to
the lower of the Citibank Prime Rate per annum plus 8% or the highest rate
permitted by law.
Adjustments to the Conversion Price may be required pursuant to the
Registration Rights Agreement if the Registration Statement is not declared
effective.
Subject to applicable law, any interest otherwise payable that is
not paid because it would exceed the highest rate permitted by law shall
become payable whenever the payment thereof, together with other interest due
would not exceed such highest legal rate.
The Holder of this Debenture is entitled to certain rights and
remedies pursuant to the Purchase Agreement and Registration Rights
Agreement. This Debenture does not provide voting rights to the Holder.
This Debenture shall rank PARI PASSU with all current and future
unsecured indebtedness of the Company; PROVIDED, HOWEVER, that prior to
issuing a private placement of any convertible debentures to any person or
entity , excluding for this purpose any convertible debenture issued (i)
pursuant to the Purchase Agreement, (ii) to any strategic partner of the
Company or (iii) in connection with any acquisition of a business or assets
(other than cash) by the Company, the Company will obtain subordination
agreements in form reasonably satisfactory to the holders of a majority of
the aggregate principal amount of the Debentures then outstanding
subordinating such convertible debentures to the Debentures.
This Debenture is subject to the following additional provisions:
1. DENOMINATION. Subject to applicable law, this Debenture is
exchangeable for an equal aggregate principal amount of Debentures of
different denominations, as requested by the Holder surrendering the same. No
service charge will be made for such registration or transfer or exchange.
2. TRANSFERS. This Debenture may be transferred or exchanged in
the United States only in compliance with the Securities Act of 1933, as
amended (the "Act"), and applicable state securities laws, or applicable
exemptions therefrom. Prior to due presentment for transfer of this
Debenture, the Company may treat the person in whose name this Debenture is
duly registered on the Company's Debenture Register as the
- 2 -
<PAGE>
owner hereof for the purpose of receiving payment as herein provided, whether
or not this Debenture is overdue.
3. DEFINITIONS. For purposes hereof the following definitions
shall apply:
"CHANGE IN CONTROL TRANSACTION" shall mean (x) any
consolidation or merger of the Company with or into any other corporation or
other entity or person (whether or not the Company is the surviving
corporation) or any other corporate reorganization or transaction or series
of related transactions pursuant to which the stockholders of the Company
immediately prior to such transaction beneficially own less than 50% of the
Company's or any such surviving corporation's voting securities upon
consummation of such transaction, (y) any sale by the Company of assets that
represent more than 66 2/3% of the total fair market value of the Company's
assets immediately prior to such sale, or (z) any person or group of persons
(as defined in Section 13(d) or 14(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), together with its affiliates and associates
(as such terms are defined in Rule 405 under the Act), becoming the
beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of in
excess of 50% of the Company's then outstanding voting securities.
"CLOSING DATE" shall mean June, 28 1999.
"CLOSING PRICE" shall mean the average of the closing bid
prices for the Company's Common Stock on the ten (10) consecutive Trading
Days ending on the Closing Date and the ten (10) consecutive Trading Days
thereafter.
"COMMON STOCK" shall mean the common stock, par value $.001
per share, of the Company.
"CONVERSION NOTICE" shall have the meaning set forth in
Paragraph 5(d).
"CONVERSION PRICE" shall have the meaning set forth in
Paragraph 5(c).
"FORCED CONVERSION NOTICE" shall have the meaning set forth
in Paragraph 6(a).
"HOLDER CONVERSION DATE" shall have the meaning set forth in
Paragraph 5(d).
"MARKET PRICE FOR SHARES OF COMMON STOCK" shall mean the
price of one share of Common Stock determined as follows:
(i) If the Common Stock is listed on Nasdaq NMS, the
closing bid price on the date of valuation;
(ii) If the Common Stock is listed on the New York Stock
Exchange or the American Stock Exchange, the low trading price on such
exchange on the date of valuation;
- 3 -
<PAGE>
(iii) If neither (i) nor (ii) apply but the Common Stock is
quoted in the over-the-counter market, another recognized exchange, on the
pink sheets or bulletin board, the lesser of (A) the lowest sales price on
the date of valuation or (B) the mean between the last reported "bid" and
"asked" prices thereof on the date of valuation; and
(iv) If neither clause (i), (ii) or (iii) above applies,
the fair market value as determined by a nationally recognized investment
banking firm or other nationally recognized financial advisor retained by the
Company for such purpose, taking into consideration, among other factors, the
earnings history, book value and prospects for the Company, and, if
applicable, the prices at which shares of Common Stock recently have been
traded. Such determination shall be conclusive and binding on all persons.
"TRADING DAY" shall mean a day on which the Common Stock is
traded on the NASDAQ or principal exchange on which the Common Stock has been
listed (or any similar organization or agency succeeding such market or
exchange's functions of reporting prices).
4. CHANGE IN CONTROL; BLACKOUT PERIODS.
(a) If at any time there occurs any Change in Control
Transaction, Holder shall be entitled to have the Company redeem this
Debenture, in cash or shares of Common Stock, at the election of the Holder
in whole or in part at a redemption price equal to 115% of the Outstanding
Principal Amount of this Debenture plus all accrued but unpaid interest and
penalties on this Debenture. Such Holder shall be entitled to make such
election at any time after consummation of the Change in Control Transaction
and up to fifteen (15) Trading Days thereafter.
(b) If at any time after the effectiveness of the
Registration Statement contemplated by the Registration Rights Agreement
applicable to this Debenture, a Holder does not have the ability to trade
freely any shares of Common Stock acquired upon conversion of this Debenture
for five (5) consecutive Trading Days or fifteen (15) Trading Days, in the
aggregate, in any 12 month period for any reason other than a transaction
(such as a merger or an acquisition or a disposition of a business) or other
corporate event which, under applicable securities laws or SEC regulations,
require the Company to delay or restate its financial statements to comply
with such laws or regulations (a "Blackout Period"), then the Holder shall
have the right to require the Company to redeem any then outstanding
Debentures in cash or shares of Common Stock, at the election of the Holder
at the greater of (i) 120% of the Outstanding Principal Amount plus accrued
interest and default payments, if any, or (ii) that number of shares of
Common Stock calculated in accordance with Section 5(b) below multiplied by
the Market Price per Share of Common Stock on the day prior to exercise of
such right. Notwithstanding the foregoing, in no event may any Blackout
Period extend more than twenty (20) consecutive Trading Days or forty (40)
Trading Days, in the aggregate, in any 12 month period.
5. CONVERSION AT THE OPTION OF THE HOLDER. The Holder of this
Debenture shall have the following conversion rights.
- 4 -
<PAGE>
(a) HOLDER'S RIGHT TO CONVERT. This Debenture shall be
convertible in full at any time, in whole or in part, at the option of the
Holder hereof, into fully paid, validly issued and nonassessable shares of
Common Stock. If this Debenture is converted in part, the remaining portion
of this Debenture not so converted shall remain entitled to the conversion
rights provided herein.
(b) CONVERSION FOR HOLDER CONVERTED SHARES. The
Outstanding Principal Amount of this Debenture plus accrued interest that is
converted into shares shall be convertible into the number of shares of
Common Stock which results from application of the following formula:
P + I + D
------------------------------
Conversion Price
P = Outstanding Principal Amount of this Debenture
submitted for conversion as of the Holder
Conversion Date
I = accrued but unpaid interest (not previously added
to principal) on P as of the Holder Conversion Date
D = default payments (not previously added to
principal) as of the Holder Conversion Date
(c) CONVERSION PRICE. Subject to adjustment as provided herein or
in the Registration Rights Agreement, this Debenture will have a conversion
price (the "Conversion Price") equal to 110% of the Closing Price.
(d) MECHANICS OF CONVERSION. In order to convert this Debenture
(in whole or in part) into full shares of Common Stock, the Holder shall
surrender this Debenture, duly endorsed, by either overnight courier or 2-day
courier, to the principal office of the Company, and shall give written
notice in the form of EXHIBIT 1 hereto (the "Conversion Notice") by facsimile
(with the original of such notice forwarded with the foregoing courier) to
the Company at such office that the Holder elects to convert the principal
amount (plus accrued but unpaid interest and default payments) specified
therein, which such notice and election shall be revocable by the Holder at
any time prior to the date on which the Company issues the Common Stock upon
conversion; PROVIDED, HOWEVER, that the Company shall not be obligated to
issue certificates evidencing the shares of the Common Stock issuable upon
such conversion unless either the Debenture evidencing the principal amount
is delivered to the Company as provided above, or the Holder notifies the
Company that such Debenture(s) has been lost, stolen or destroyed and
promptly executes an agreement reasonably satisfactory to the Company to
indemnify the Company from any loss that may be incurred by it in connection
with such lost, stolen or destroyed Debenture(s).
- 5 -
<PAGE>
Within three (3) Trading Days ("T+3") after delivery to the Company
of such Conversion Notice, the Company shall issue and deliver to such Holder
of Debenture(s) at the address of the Holder, or to its designee, a
certificate or certificates for the number of shares of Common Stock to which
the Holder shall be entitled as aforesaid and a Debenture or Debentures for
the principal amount of Debentures not submitted for conversion. The date on
which the Conversion Notice is given (the "Holder Conversion Date") shall be
deemed to be the date the Company received by facsimile the Conversion Notice
duly executed by the Holder, and the Holder entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock at the close
of business on the Holder Conversion Date.
In lieu of delivering physical certificates representing the Common
Stock issuable upon conversion of this Debenture provided the Company's
transfer agent is participating in the Depository Trust Company ("DTC") Fast
Automated Securities Transfer ("FAST") program, upon request of the Holder,
the Company shall use its best efforts to cause its transfer agent to
electronically transmit the Common Stock issuable upon conversion or exercise
of this Debenture to the Holder, by crediting the account of Holder's prime
broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC")
system. The time periods for delivery described above shall apply to the
electronic transmittals through the DWAC system. The parties agree to
coordinate with DTC to accomplish this objective. The conversions pursuant to
Sections 5 and 6 shall be deemed to have been made immediately prior to the
close of business on the Holder Conversion Date. The person or persons
entitled to receive the Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such Common Stock
at the close of business on the Holder Conversion Date.
6. FORCED CONVERSION AT THE OPTION OF THE COMPANY.
(a) The Company shall have the option, on thirty (30)
Trading Days' prior written notice to the Holder ("Forced Conversion
Notice"), to require the Holder to convert up to 100% of the original
Outstanding Principal Amount of the Debentures plus accrued interest if (i)
the last sale price as reported by the Bloomberg Financial Press
("Bloomberg") for the Common Stock is greater than 200% of the Closing Price
for ten (10) consecutive Trading Days, (ii) the Registration Statement has
been continuously effective during the thirty (30) Trading Day period
following the date of the Forced Conversion Notice, and (iii) no Event of
Default then exists.
(b) Any Forced Conversion Notice must be given by
facsimile and by overnight courier to the Holder of this Debenture. The
Forced Conversion Notice shall be addressed to each such Holder at the
facsimile number and address of such Holder appearing on the books of the
Company or given by the Holder to the Company for the purpose of notice. Each
Holder that receives a Forced Conversion Notice shall surrender its Debenture
to the Company at the place designated in such notice, or to such Holder's
agent, and shall thereupon be entitled to receive shares of Common Stock
calculated in accordance with Section 5(b) above and delivered in accordance
with the procedures set forth in Paragraph 5(d) hereof.
- 6 -
<PAGE>
(c) Unless default shall be made by the Company in duly
delivering the shares of Common Stock (which default shall be deemed a breach
of the terms of this Debenture by the Company), in which case all the rights
of the Holder of this Debentures shall continue, the Holder of this Debenture
shall, from and after the date of the Forced Conversion Notice, cease to have
any rights relating to this Debenture, except the right to receive such
Holder's portion of the shares of Common Stock, and this Debenture shall not
thereafter be transferred on the books of the Company and shall not be deemed
outstanding for any purpose whatsoever.
(d) If the Company elects not to deliver a Forced
Conversion Notice although entitled to do so pursuant to Paragraph 6(a)
hereof, the interest will cease accruing on the Outstanding Principal Amount
until the last sale price as reported by Bloomberg for the Common Stock
closes below 200% of the Closing Price.
(e) There shall be no forced conversion of any Debentures
of the Company where such action would be in violation of applicable law.
7. STOCK SPLITS; DIVIDENDS; ADJUSTMENTS; REORGANIZATIONS; BELOW
MARKET ISSUANCES.
(a) If the Company, at any time while this Debenture is
outstanding, (i) shall pay a stock dividend or otherwise make a distribution
or distributions on any equity securities (including securities convertible
into or exchangeable for such equity securities) in shares of Common Stock,
(ii) issue any securities payable in shares of Common Stock, (iii) subdivide
outstanding shares of Common Stock into a larger number of shares or (iv)
combine outstanding shares of Common Stock into a smaller number of shares,
then the Conversion Price shall be multiplied by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding before such
event and the denominator of which shall be the number of shares of Common
Stock outstanding after such event. Any adjustment made pursuant to this
Paragraph 7(a) shall become effective immediately after the record date for
the determination of shareholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date
in the case of a subdivision or combination.
(b) If the Company, at any time while this Debenture is
outstanding, shall distribute to all holders of Common Stock securities of
the Company any (other than Common Stock) or evidences of its indebtedness or
assets or rights or warrants to subscribe for or purchase any security
(excluding those referred to in Paragraph 7(a) above), then in each such case
the Conversion Price at which this Debenture shall thereafter be convertible
shall be adjusted by multiplying the Conversion Price in effect immediately
prior to the record date fixed for determination of shareholders entitled to
receive such distribution by a fraction, the numerator of which shall be such
Market Price for Shares of Common Stock on such record date less the then
fair market value at such record date of the portion of the capital stock or
assets or evidence of indebtedness so distributed or of such rights or
warrants applicable to one outstanding share of Common Stock as determined by
the Board of Directors in good faith, and the denominator of which shall be
the Market Price for Shares of Common Stock determined as of such
- 7 -
<PAGE>
record date; PROVIDED, HOWEVER that in the event of a distribution exceeding
25% of the net assets of the Company, such fair market value shall be
determined by a nationally recognized or major regional investment banking
firm or firm of independent chartered accountants of recognized standing
(which may be the firm that regularly examines the financial statements of
the Company) (an "Appraiser") selected in good faith by the Board of
Directors and Holders of a majority in interest of the Debentures. In either
case the adjustments shall be described in a statement to be provided to all
holders of Debentures regarding the portion of assets or evidences of
indebtedness so distributed. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date mentioned in this subparagraph.
(c) (1) In the event that at any time or from time to
time after the Closing Date, the Common Stock issuable upon the conversion of
the Debentures is changed into the same or a different number of shares of
any class or classes of stock, whether by merger, consolidation,
recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or reorganization provided for
elsewhere in this Paragraph 7), then, as a condition to each such event,
provision shall be made in a reasonable manner so that the Holder of this
Debenture shall have the right thereafter to convert this Debenture into the
kind of stock receivable upon such recapitalization, reclassification or
other change by a holder of a number of shares of Common Stock issuable upon
conversion of this Debenture immediately prior to such merger, consolidation,
recapitalization, reclassification or other event. In such event, the
formulae set forth herein for conversion and redemption shall be equitably
adjusted to reflect such change in number of shares or, if shares of a new
class of stock are issued, to reflect the market price of the class or
classes of stock (applying the same factors used in determining the
Conversion Price) issued in connection with the above described transaction.
(2) If at any time or from time to time after the
Closing Date there is a capital reorganization of the Common Stock, including
by way of a sale of all or substantially all of the assets of the Company
(other than a recapitalization, subdivision, combination, reclassification or
exchange of shares provided for elsewhere in this Paragraph 7), then, as a
part of and a condition to such reorganization, provision shall be made in a
reasonable manner so that the Holder of this Debenture shall thereafter be
entitled to receive upon conversion of this Debenture the number of shares of
stock or other securities or property receivable upon such capital
reorganization by a holder of a number of shares of Common Stock issuable
upon conversion of this Debenture immediately prior to such capital
reorganization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Paragraph 7 with respect to the rights
of the Holders of this Debenture after such reorganization to the end that
the provisions of this Paragraph 7 shall be applicable after that event and
be as nearly equivalent as may be practicable, including, by way of
illustration and not limitation, by equitably adjusting the formulae set
forth herein for conversion and redemption to reflect the market price of the
securities or property (applying the same factors used in determining the
Market Price for Shares of Common Stock) issued in connection with the above
described transaction.
- 8 -
<PAGE>
(d) If at any time or from time to time after twelve (12)
months from the Closing Date, the Company sells or issues Common Stock (or
other equity securities or rights exercisable or exchangeable for, or
convertible into, Common Stock or such other equity securities) in a private
placement, excluding the issuance of any Common Stock pursuant to the
contemplated Equity Line Flexible Financing Agreement, in the case of Common
Stock, at a discount to the market price of the Common Stock on the date of
sale or issuance, or in the case of a convertible, exchangeable, or
exercisable security, with a conversion price less than the market price on
the date of issuance, then, the Conversion Price of this Debenture shall be
reduced by multiplying the Conversion Price by a fraction, the numerator of
which shall be the aggregate amount of such discount to the market price and
the denominator of which shall be the Company's market capitalization on the
date of such sale or issuance and then subtracting this number from the
Conversion Price; PROVIDED, HOWEVER, that if such reduction is less than one
percent (1%) of the Conversion Price, then no adjustment shall be made,
PROVIDED, FURTHER, HOWEVER, that all such issuances shall be cumulative and
upon exceeding one percent (1%), the Conversion Price of this Debenture shall
be adjusted accordingly.
(e) Whenever the Conversion Price is adjusted pursuant to
Section 7(a), (b), (c) or (d) the Company shall promptly mail to each Holder
of the Debentures, a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(f) In the event of any taking by the Company of a record
date of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend or other
distribution, any security or right convertible or exchangeable into or
entitling the holder thereof to receive additional Common Shares, or any
right to subscribe for, purchase or otherwise acquire any shares of stock of
any class or any other securities or property, or to receive any other right
or for any other purpose, the Company shall deliver to each Holder of
Debentures at least 20 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose
of such dividend, distribution, security, right or purpose and the amount and
character of such dividend, distribution, security, right or purpose.
8. FRACTIONAL SHARES. No fractional shares of Common Stock or
scrip representing fractional shares of Common Stock shall be issuable
hereunder. The number of shares of Common Stock that are issuable upon any
conversion shall be rounded to the nearest whole share.
9. RESERVATION OF STOCK ISSUABLE UPON CONVERSION.
(a) RESERVATION REQUIREMENT. The Company covenants that
it will at all times reserve and keep available out of its authorized and
unissued Common Stock solely for the purpose of issuance upon conversion of
the Debenture as herein provided, free from preemptive rights or any other
present or contingent purchase rights of persons other than the Holders of
the Debentures, a sufficient number of shares of Common Stock as shall be
issuable (taking into account the adjustments and restrictions of Paragraphs
5 and 7 hereof) upon the conversion of all of the Debentures pursuant hereto.
The
- 9 -
<PAGE>
Company covenants that all shares of Common Stock that shall be so issuable
upon the conversion of all of this Debenture pursuant hereto shall, upon
issue, be duly and validly authorized and issued and fully paid and
nonassessable.
(b) DEFICIENCY. If the Company does not have a sufficient
number of shares of Common Stock available to satisfy the Company's
obligations to a Holder of Debentures upon receipt of a Conversion Notice or
is otherwise unable to issue such shares of Common Stock in accordance with
the terms of this Agreement, then such Holder shall be entitled to the rights
and remedies set forth in the Registration Rights Agreement.
10. NO REISSUANCE OF THE DEBENTURE. No Debentures acquired by the
Company by reason of conversion or otherwise shall be reissued, and all such
Debentures shall be retired.
11. NO IMPAIRMENT. The Company shall not intentionally take any
action which would materially impair the rights and privileges of the
Debentures set forth herein or the Holders thereof.
12. LIMITATIONS ON HOLDER'S RIGHT TO CONVERT.
(a) Notwithstanding anything to the contrary contained
herein but subject the Company's right of Forced Conversion set forth in
Section 6, no Debenture may be converted, to the extent that, after giving
effect to the conversion and issuing the shares of Common Stock to be issued
pursuant to the applicable Conversion Notice, the total number of shares of
Common Stock deemed beneficially owned by such Holder (other than by virtue
of the ownership of Debentures or ownership of other securities that have
limitations on a Holder's rights to exchange, convert or exercise similar to
those limitations set forth herein), together with all shares of Common Stock
deemed beneficially owned by such Holder's "affiliates" (as defined in Rule
405 of the Act) that would be aggregated for purposes of determining whether
a group under Section 13(d) of the Securities Exchange Act of 1934, as
amended, exists, would exceed 9.9% (the "Restricted Ownership Percentage") of
the total issued and outstanding shares of the Company's Common Stock;
PROVIDED that (w) each Holder shall have the right at any time and from time
to time to reduce its Restricted Ownership Percentage immediately upon notice
to the Company, (x) each Holder shall have the right at any time and from
time to time, to increase its Restricted Ownership Percentage immediately in
the event of the announcement of a pending or proposed Change in Control
Transaction, (y) each Holder may make any number of subsequent adjustments
pursuant to clauses (w) or (x) of this Paragraph 12(a) from time to time
(which adjustment shall be effective immediately if it results in a decrease
in the percentage or immediately in the event of the announcement of a
pending or proposed Change in Control Transaction if it results in an
increase in the percentage) and (z) each Holder may reinstate this limitation
at any time and from time to time (which reinstatement will be effective
immediately). For this purpose, any material modification of the terms of a
Change in Control Transaction will be deemed to result in a new Change in
Control Transaction. The term "deemed beneficially owned" as used in this
Debenture shall exclude shares that might otherwise
- 10 -
<PAGE>
be deemed beneficially owned by reason of the convertibility of the
Debentures. The Company shall provide all Holders with the earlier of (i) 20
days' prior written notice of any such Change in Control Transaction, to the
extent the Company has prior knowledge of a Change in Control Transaction; or
(ii) notice on the day immediately following the Company's learning of any
such transaction, but only after, in the case of (i) and (ii), such Change in
Control Transaction has been publicly disclosed.
13. OBLIGATIONS ABSOLUTE. No provision of this Debenture shall
alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the principal of, and interest and default payments on,
this Debenture at the time, place and rate, and in the manner, herein
prescribed.
14. AMENDMENTS. (a) Any term, covenant, agreement or condition of
this Debenture may, with the written consent of the Company, be amended, by
one or more substantially concurrent written instruments signed by the
Holders of at least 66 2/3% of the aggregate principal amount of Debentures
then outstanding, except that without the prior written consent of the
Holders of all of the Debentures, no such amendment shall (i) reduce the
principal of, or interest rate on, or the formula for the calculation of the
Conversion Price with respect to any of the Debentures, (ii) extend the time
of payment for all or any portion of the principal or interest on or with
respect to any of the Debentures, (iii) modify any of the provisions of this
Debenture with respect to the payment or prepayment of the principal thereof
or interest thereon, (iv) reduce the percentage of Holders required with
respect to any such amendment or (v) modify any provision of this Section 14.
(b) Any amendment pursuant to Section 14(a) shall apply equally to all
Holders at the time outstanding and shall be binding upon them, upon each
future Holder of any Debenture, and upon the Company, in each case whether or
not a notation thereof shall have been placed on any Debenture.
15. WAIVERS OF DEMAND, ETC. The Company hereby expressly and
irrevocably waives demand and presentment for payment, notice of nonpayment,
protest, notice of protest, notice of dishonor, notice of acceleration or
intent to accelerate, bringing of suit and diligence in taking any action to
collect amounts called for hereunder, and will be directly and primarily
liable for the payment of all sums owing and to be owing hereon, regardless
of and without any notice, diligence, act or omission as or with respect to
the collection of any amount called for hereunder.
16. REPLACEMENT DEBENTURE. In the event that any Holder notifies
the Company that its Debenture(s) have been lost, stolen or destroyed,
replacement Debenture(s) identical in all respects to the original
Debenture(s) (except for registration number and Outstanding Principal
Amount, if different than that shown on the original Debenture(s)), shall be
issued to the Holder, provided that the Holder executes and delivers to the
Company an agreement reasonably satisfactory to the Company to indemnify the
Company from any loss that may be incurred by it in connection with such
Debenture.
17. PAYMENT OF EXPENSES; ISSUE TAXES. The Company agrees to pay
all reasonable expenses, including reasonable attorneys' fees, which may be
incurred by the
- 11 -
<PAGE>
Holder in enforcing the provisions of this Debenture and/or collecting any
amount due under this Debenture. The issue of stock certificates upon
conversion of this Debenture shall be made without charge to the converting
Holder for any tax in respect to the issue thereof. The Company shall not,
however, be required to pay any tax which may be payable in respect to any
transfer involved in the issue and delivery of stock in any name other than
that of the Holder of this Debenture.
18. DEFAULTS. If one or more of the following described "Events
of Default" shall occur:
(a) The Company shall default in the timely payment of
(i) interest on this Debenture or (ii) the principal of this Debenture, and
in each case such default shall not have been cured within five (5) days ; or
(b) Any of the representations or warranties made by the
Company, herein, in the Purchase Agreement, the Registration Rights
Agreement, any Warrant or in any certificate or financial or other statements
heretofore or hereafter furnished by or on behalf of the Company, in
connection with the execution and delivery of this Debenture or such other
documents shall be false or misleading in any material respect at the time
made and written notice of such breach shall have been given to the Company
by the Holders of at least twenty-five percent (25%) of the aggregate
principal amount of the Debentures then outstanding; or
(c) The Company shall fail to perform or observe in any
material respect any covenant or agreement in the Purchase Agreement or the
Registration Rights Agreement (including a failure to have the Registration
Statement declared effective within the time periods specified therein) or
any other material covenant, term, provision, condition, agreement or
obligation of the Company under this Debenture and such failure shall
continue uncured for a period of five (5) business days after notice from the
Holders of at least twenty-five percent (25%) of the aggregate principal
amount of the Debentures then outstanding of such failure; or
(d) The Company shall (1) become insolvent; (2) admit in
writing its inability to pay its debts generally as they mature; (3) make an
assignment for the benefit of creditors or commence proceedings for its
dissolution; or (4) apply for or consent to the appointment of a trustee,
liquidator or receiver for it or for a substantial part of its property or
business; or
(e) A trustee, liquidator or receiver shall be appointed
for the Company or for a substantial part of its property or business without
its consent and shall not be discharged within thirty (30) days after such
appointment; or
(f) Any governmental agency or any court of competent
jurisdiction at the instance of any governmental agency shall assume custody
or control of the whole or any substantial portion of the properties or
assets of the Company and shall not be dismissed within thirty (30) days
thereafter; or
- 12 -
<PAGE>
(g) Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings or relief under any bankruptcy, insolvency
or other similar law or any law for the relief of debt shall be instituted by
or against the Company and, if instituted against the Company, shall not be
dismissed within thirty (60) days after such institution, or the Company
shall by any action or answer approve of, consent to, or acquiesce in any
such proceedings or admit to any material allegations of, or default in
answering a petition filed in any such proceeding; or
(h) The Company shall be in default, and shall not have
cured within the applicable time period allowed therefor, of any of its
indebtedness (excluding indebtedness incurred in the ordinary course of
business such as trade debt and accounts payable and indebtedness secured by
accounts receivable and inventory) that gives the holder thereof the right to
accelerate such indebtedness;
THEN, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by Holders of at least
seventy-five (75%) of the aggregate principal amount of the Debentures then
outstanding (which waiver shall not be deemed to be a waiver of any
subsequent default), at the option of the Holders of at least twenty-five
(25%) of the aggregate principal amount of the Debentures then outstanding
the Holders may consider the Debentures immediately due and payable, without
presentment, demand, protest or notice of any kind, all of which are hereby
expressly waived, anything herein or in any other instruments to the contrary
notwithstanding, and the Holders may immediately, and without expiration of
any period of grace, enforce any and all of the Holders' rights and remedies
provided herein or any other rights or remedies afforded by law. In such
event, this Debenture shall be redeemed at a redemption price per Debenture
equal to the greater of (i) 120% of the Outstanding Principal Amount plus
accrued interest and default payments, if any, or (ii) that number of shares
of Common Stock calculated in accordance with Section 5(b) above multiplied
by the Market Price per Share of Common Stock on the day prior to exercise of
such right.
19. SUBORDINATION AGREEMENT. Until this Debenture is redeemed or
converted pursuant to the Purchase Agreement, in the event that the Company
refinances the secured debt it owes to Silicon Valley Bank, or enters into a
new agreement with a bank for debt secured by the Company's property, the
Holder will enter into a subordination agreement substantially similar to
that certain Subordination and Consent Agreement by and between the Holders
and Silicon Valley Bank dated June 29, 1999, subordinating this Debenture to
the same extent as under such agreement under such refinancing or new
agreement; provided, however, the Company covenants and agrees that,
commencing on the date hereof and until twenty-four (24) months from the date
hereof, it will not incur or permit to exist any senior indebtedness in
excess of $40,000,000. If, after twenty-four (24) months from the date
hereof, the Company incurs senior indebtedness in excess of $40,000,000, the
Holder shall have the right to require the Company to redeem this Debenture
in cash, in an amount equal to the Outstanding Principal Amount plus accrued
interest and default payments, if any, to the redemption date. If the Holder
desires to exercise the right to have this Debenture redeemed in accordance
with the preceding sentence, to be effective, the Holder must give the
- 13 -
<PAGE>
Company written notice of such exercise within thirty (30) days after the
date the Company gives such Investor written notice that it has incurred
senior indebtedness in excess of $40,000,000. The redemption date with
respect to any such redemption shall be the thirtieth (30th) day after the
Company's receipt of such written notice of election from such Investor or,
if such day is not a business day, the next succeeding business day. In order
to receive the payment due upon redemption on the redemption date, the
Investor must surrender this Debenture to the Company at its principal
executive office on the redemption date.
20. SAVINGS CLAUSE. In case any provision of this Debenture is
held by a court of competent jurisdiction to be excessive in scope or
otherwise invalid or unenforceable, such provision shall be adjusted rather
than voided, if possible, so that it is enforceable to the maximum extent
possible, and the validity and enforceability of the remaining provisions of
this Debenture will not in any way be affected or impaired thereby, and such
provision shall remain effective in all other jurisdictions.
21. ENTIRE AGREEMENT. This Debenture, the Warrants and the
agreements referred to in this Debenture constitute the full and entire
understanding and agreement between the Company and the Holder with respect
to the subject hereof. Neither this Debenture nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by the Company and the Holder.
22. ASSIGNMENT, ETC. The Holder may assign this Debenture (in
whole or in part) without the consent of the Company in connection with the
sale or transfer of all or any portion of this Debenture to an affiliate or
client of the Palladin Group, L.P. In the event that the Holder wishes to
assign this Debenture (in whole or in part) in connection with the sale or
transfer of all or any portion of this Debenture to any person or entity
other than an affiliate or client of the Palladin Group, L.P.: (i) the Holder
shall first provide to the Company a notice stating the price at which it is
willing to sell such Debenture (or portion thereof) and the other material
terms of the proposed sale, (ii) the Company shall have ten (10) business
days to provide notice to the Holder if it wishes to accept such offer, (iii)
if the Company accepts such offer, the Company shall purchase such Debenture
(or portion thereof) on the terms proposed within thirty (30) days after such
acceptance and (iv) in the event the Company elects not to purchase such
Debenture (or portion thereof), the Holder may offer such Debenture (or
portion thereof) to any third party on terms no more favorable to such third
party than those offered to the Company, PROVIDED, HOWEVER, that no Holder
may sell such Debenture (or portion thereof) if after giving effect to such
sale all Debentures would be held by more than seven (7) separate persons or
entities other than affiliates or clients of the Palladin Group, L.P.; and
PROVIDED, FURTHER, HOWEVER, that no Investor may sell such Debentures in
increments of less than $500,000. The Company agrees that, subject to
compliance with the Purchase Agreement, after receipt by the Company of
written notice of assignment from the Holder or from the Holder's assignee,
all principal, interest and other amounts which are then and thereafter
become due under this Debenture shall be paid to such assignee at the place
of payment designated in such notice. This Debenture shall be binding upon
the
- 14 -
<PAGE>
Company and its successors and affiliates and shall inure to the benefit of
the Holder and its successors and assigns.
23. NO WAIVER. No failure on the part of the Holder to exercise,
and no delay in exercising any right, remedy or power hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise by the Holder
of any right, remedy or power hereunder preclude any other or future exercise
of any other right, remedy or power. Each and every right, remedy or power
hereby granted to the Holder or allowed it by law or other agreement shall be
cumulative and not exclusive of any other, and may be exercised by the Holder
from time to time.
24. CERTIFICATE FOR CONVERSION PRICE ADJUSTMENT. The Company
shall, upon the written request at any time of any Holder of this Debenture,
furnish or cause to be furnished to such Holder a certificate prepared by the
chief financial officer of Company setting forth any adjustments or
readjustments of the Conversion Price pursuant to this Debenture.
25. NOTICES. The Company shall distribute to the Holder of this
Debenture copies of all notices, materials, annual and quarterly reports,
proxy statements, information statements and any other documents distributed
generally to the holders of shares of Common Stock of the Company, at such
times and by such method as such documents are distributed to such holders of
such Common Stock, but shall not directly or indirectly provide material
non-public information to the Holder without such Holder's prior written
consent.
26. SPECIFIC ENFORCEMENT. The Company agrees that irreparable
damage would occur in the event that any of the provisions of this Debenture
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the Holder of this Debenture shall be
entitled to swift specific performance, injunctive relief or other equitable
remedies to prevent or cure breaches of the provisions of this Debenture and
to enforce specifically the terms and provisions hereof, this being in
addition to any other remedy to which any of them may be entitled under
agreement, at law or in equity.
27. MISCELLANEOUS. Unless otherwise provided herein, any notice
or other communication to a party hereunder shall be sufficiently given if in
writing and personally delivered, facsimiled or mailed to said party by
certified mail, return receipt requested, at its address set forth herein or
such other address as either may designate for itself in such notice to the
other and communications shall be deemed to have been received when delivered
personally or, if sent by mail or facsimile, then when actually received by
the party to whom it is addressed. Whenever the sense of this Debenture
requires, words in the singular shall be deemed to include the plural and
words in the plural shall be deemed to include the singular. Paragraph
headings are for convenience only and shall not affect the meaning of this
document.
28. GOVERNING LAW; CONSENT TO JURISDICTION. THIS DEBENTURE SHALL
BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF
- 15 -
<PAGE>
THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS TO BE EXECUTED AND PERFORMED
ENTIRELY WITHIN SUCH STATE. THE COMPANY (I) HEREBY IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN SAN
FRANCISCO COUNTY, CALIFORNIA FOR THE PURPOSES OF ANY SUIT, ACTION OR
PROCEEDING ARISING OUT OF OR RELATED TO THIS DEBENTURE AND (II) HEREBY
WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY
CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT,
THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR
THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER. THE COMPANY
CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY
MAILING A COPY THEREOF TO SUCH PARTY AS PROVIDED HEREIN AND AGREES THAT SUCH
SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE
THEREOF. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
[SIGNATURE PAGE FOLLOWS]
- 16 -
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
DATED: June 29,1999
CYGNUS, INC.
By: /s/ Craig W. Carlson
---------------------------------------------
Name: Craig Carlson
---------------------------------------
Title: SR. VP Finance, CFO
---------------------------------------
Address: 400 Penobscot, Redwood City, CA
-------------------------------------
[SIGNATURE PAGE TO 8.5% CONVERTIBLE SECURED DEBENTURE OF CYGNUS, INC.]
<PAGE>
EXHIBIT 1
(To be Executed by Registered Holder
in order to Convert Debenture)
CONVERSION NOTICE
FOR
8.5% CONVERTIBLE SECURED DEBENTURE DUE JUNE 29, 2004
The undersigned, as Holder of the 8.5% Convertible Secured Debenture Due June
29, 2004 of CYGNUS, INC. (the "Company"), in the outstanding principal amount
of U.S$8,250,000 (the "Debenture"), hereby elects to convert that portion of
the outstanding principal amount of the Debenture shown on the next page into
shares of Common Stock, par value $.001 per share (the "Common Stock"), of
the Company according to the conditions of the Debenture, as of the date
written below. The undersigned hereby requests that share certificates for
the Common Stock to be issued to the undersigned pursuant to this Conversion
Notice be issued in the name of, and delivered to, the undersigned or its
designee as indicated below. If shares are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer
taxes payable with respect thereto. No fee will be charged to the Holder for
any conversion, except for transfer taxes, if any.
Conversion Information: NAME OF HOLDER: HALIFAX FUND, L.P.
By:_________________________________________
Print Name:_________________________________
Print Title:________________________________
Print Address of Holder:
____________________________________________
____________________________________________
Issue Common Stock to:______________________
at:_________________________________________
Electronically transmit and credit Common Stock to:
___________________at:______________________
____________________________________________
Holder Conversion Date
THE COMPUTATION OF THE NUMBER OF COMMON SHARES TO
BE RECEIVED IS SET FORTH ON THE ATTACHED PAGE
<PAGE>
PAGE 2 TO CONVERSION NOTICE FOR: HALIFAX FUND, L.P.
------------------
(NAME OF HOLDER)
COMPUTATION OF NUMBER OF COMMON SHARES TO BE RECEIVED
A. Outstanding Principal Amount to be converted: $_____
B. Accrued, unpaid interest on Outstanding Principal Amount to be $_____
converted
C. Default payments due Holder: $_____
---------------
TOTAL DOLLAR AMOUNT CONVERTED (TOTAL OF A + B + C) $_____
===============
CONVERSION PRICE $_____
Number of Shares of Common Stock = Total dollar amount Converted
-----------------------------
Conversion Price
NUMBER OF SHARES OF COMMON STOCK = ___________
If the conversion is not being settled by DTC, please issue and deliver _____
certificate(s) for shares of Common Stock in the following amount(s):
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Please issue and deliver _____ new Debenture(s) in the following amounts:
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
- 2 -
<PAGE>
Exhibit 10.43
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION
FROM SUCH REGISTRATION REQUIREMENTS.
CYGNUS, INC.
Common Stock Purchase Warrant
Cygnus, Inc., a Delaware corporation (the "Company"), hereby certifies
that for good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, Halifax Fund, L.P., having an address at 195
Maplewood Avenue, Maplewood, New Jersey 07040, ("Purchaser") or any other
Warrant Holder (hereinafter defined) is entitled, on the terms and conditions
set forth below, to purchase from the Company at any time after the date
hereof (subject to the provisions of Section 2 hereof) and ending sixty (60)
months after the date hereof, that number of fully paid and nonassessable
shares of the common stock, par value $.001 per share, of the Company (the
"Common Stock") equal to (I) sixty percent (60%) multiplied by (II) the
quotient of (A) seven million dollars ($7,000,000) divided by (B) the Closing
Price (as such term is defined in the Debenture), at the Purchase Price
(hereinafter defined) per share, as the same may be adjusted pursuant to
Section 5 herein.
1. DEFINITIONS.
(a) The term "Fair Market Value" shall mean the closing sale price per
share of the Common Stock on the Principal Market on the day prior to the
date of exercise of this Warrant.
(b) The term "Principal Market" shall mean the New York Stock Exchange,
the American Stock Exchange or the Nasdaq National Market, whichever is the
principal trading exchange or market for the Common Stock.
(c) The term "Purchase Price" shall mean 120% of the Closing Price (as
defined in the Debenture).
(d) The term "Warrant Holder" shall mean the Purchaser or any permitted
assignee of all or any portion of this Warrant.
(e) The term "Warrant Shares" shall mean the shares of Common Stock or
other securities issuable upon exercise of this Warrant.
(f) Other terms used herein which are defined in that certain
Convertible Debenture and Warrant Purchase Agreement dated as of June 29,
1999, by and between the Company and the Purchaser (the "Agreement"), the
form of 8.5% Convertible Debenture Due June 29, 2004 attached as Exhibit 1.1A
to the Agreement (the "Debenture") or the Registration Rights
<PAGE>
Agreement, dated as of June 29, 1999, by and between the Company and the
Purchaser (the "Rights Agreement"), shall have the same meanings herein as
therein.
2. EXERCISE OF WARRANT.
This Warrant may be exercised by Warrant Holder, in whole or in part, at
any time and from time to time, on or prior to the date sixty (60) months
from the date hereof, by either of the following methods:
(a) The Warrant Holder may surrender this Warrant, together with cash,
a certified check payable to the Company or wire transfer of immediately
available funds to an account designated by the Company representing the
aggregate Purchase Price of the number of Warrant Shares for which the
Warrant is being surrendered and the form of subscription attached hereto as
Exhibit A, duly executed by Warrant Holder ("Subscription Notice"), at the
offices of the Company; or
(b) The Warrant Holder may also exercise this Warrant, in whole or in
part, on a "cashless" or "net-issue" basis by delivering to the offices of
the Company this Warrant, together with a Subscription Notice specifying the
number of Warrant Shares to be delivered to the Warrant Holder and the number
of Warrant Shares to be surrendered in payment of the aggregate Purchase
Price according to the following formula:
D = FMV - PP multiplied by SS
--------
FMV
Where
"D" means the number of Warrant Shares to be delivered on exercise of the
Warrant,
"FMV" means the Fair Market Value, and
"SS" means the number of Warrant
Shares to be delivered in payment of the Purchase Price
"PP" means Purchase Price
(c) such that, without the exchange of any funds, the Warrant Holder
will receive that number of Warrant Shares (and such other consideration
otherwise issuable, or payable, upon exercise of this Warrant) less that
number of Warrant Shares having an aggregate Fair Market Value on the date
prior to the date of exercise equal to the aggregate Purchase Price that
would otherwise have been paid by the Warrant Holder as specified in the
Subscription Notice.
In the event that the Warrant is not exercised in full, the number of
Warrant Shares shall be reduced by the number of such Warrant Shares for
which this Warrant is exercised, and the Company, at its expense, shall
forthwith issue and deliver or upon the order of Warrant Holder a new Warrant
of like tenor in the name of Warrant Holder or as Warrant Holder (upon
payment by Warrant Holder of any applicable transfer taxes) may request,
reflecting such adjusted Warrant Shares.
-2-
<PAGE>
3. DELIVERY OF CERTIFICATES.
(a) Subject to the terms and conditions of this Warrant, as soon as
practicable after the exercise of this Warrant in full or in part, and in any
event within three (3) Trading Days thereafter, the Company shall transmit
the certificates (together with any other stock or other securities or
property to which Warrant Holder is entitled upon exercise) by messenger or
overnight delivery service to reach the address designated by such holder
within three (3) trading days after the receipt of the Warrant, the
Subscription Notice and payment of the aggregate Purchase Price in Section
2(a) or 2(b), as appropriate ("T+3"). In lieu of delivering physical
certificates representing the Common Stock issuable upon exercise, provided
the Company's transfer agent is participating in the Depository Trust Company
("DTC") Fast Automated Securities Transfer ("FAST") program, upon request of
the Warrant Holder, the Company shall use its best efforts to cause its
transfer agent to electronically transmit the Common Stock issuable upon
exercise to the Warrant Holder by crediting the account of Warrant Holder's
prime broker with DTC through its Deposit Withdrawal Agent Commission
("DWAC") system. The time periods for delivery described in the immediately
preceding paragraph shall apply to the electronic transmittals described
herein.
(b) This Warrant may not be exercised as to fractional shares of Common
Stock. In the event that the exercise of this Warrant, in full or in part,
would result in the issuance of any fractional share of Common Stock, then in
such event Warrant Holder shall be entitled to cash equal to the Fair Market
Value of such fractional share.
4. REPRESENTATIONS AND COVENANTS.
(a) REPRESENTATIONS AND COVENANTS OF THE COMPANY. From the date hereof
through the last date on which this Warrant is exercisable, the Company shall
take all steps reasonably necessary and within its control to insure that the
Common Stock remains listed on a Principal Market so long as it is publicly
traded and shall not amend its Certificate of Incorporation or Bylaws so as
to adversely affect any rights of the Warrant Holder under this Warrant in
any material respect.
(b) REPRESENTATIONS AND COVENANTS OF THE PURCHASER. The Purchaser shall
not resell Warrant Shares, unless such resale is pursuant to an effective
registration statement under the Act or pursuant to an applicable exemption
from such registration requirements and such sale otherwise complies with
state and federal securities laws.
5. ADJUSTMENT OF PURCHASE PRICE AND NUMBER OF SHARES.
The number and kind of securities purchasable upon exercise of this
Warrant and the Purchase Price shall be subject to adjustment from time to
time as follows:
-3-
<PAGE>
(a) SUBDIVISIONS, COMBINATIONS AND OTHER ISSUANCES. If the Company
shall at any time after the date hereof but prior to the expiration of this
Warrant subdivide its outstanding securities as to which purchase rights
under this Warrant exist, by split-up, or otherwise, or combine its
outstanding securities as to which purchase rights under this Warrant exist,
the number of Warrant Shares as to which this Warrant is exercisable as of
the date of such split-up or combination shall forthwith be proportionately
increased in the case of a split-up, or proportionately decreased in the case
of a combination. Appropriate adjustments shall also be made to the Purchase
Price payable per share, so that the aggregate Purchase Price payable for the
total number of Warrant Shares purchasable under this Warrant as of such date
shall remain the same.
(b) STOCK DIVIDEND. If at any time after the date hereof but prior to
the expiration of this Warrant, the Company declares a dividend or other
distribution on Common Stock payable in Common Stock or other securities or
rights convertible into Common Stock ("Common Stock Equivalents") without
payment of any consideration by holders of Common Stock for the additional
shares of Common Stock or the Common Stock Equivalents (including the
additional shares of Common Stock issuable upon exercise or conversion
thereof), then the number of shares of Common Stock for which this Warrant
may be exercised shall be increased as of the record date (or the date of
such dividend distribution if no record date is set) for determining which
holders of Common Stock shall be entitled to receive such dividends, in
proportion to the increase in the number of outstanding shares (and shares of
Common Stock issuable upon conversion of all such securities convertible into
Common Stock) of Common Stock as a result of such dividend, and the Purchase
Price per share shall be adjusted so that the aggregate Purchase Price for
the Warrant Shares issuable hereunder immediately after the record date (or
on the date of such distribution, if applicable), for such dividend shall
equal the aggregate Purchase Price immediately before such record date (or on
the date of such distribution, if applicable).
(c) OTHER DISTRIBUTIONS. If at any time after the date hereof but prior
to the expiration of this Warrant, the Company distributes to holders of its
Common Stock, other than as part of its dissolution, liquidation or the
winding up of its affairs, any shares of its capital stock, any evidence of
indebtedness or any of its assets (other than cash, Common Stock or
securities convertible into or exchangeable for Common Stock), then the
number of Warrant Shares for which this Warrant is exercisable shall be
increased to equal: (i) the number of Warrant Shares for which this Warrant
is exercisable immediately prior to such event, (ii) multiplied by a
fraction, (A) the numerator of which shall be the Fair Market Value per share
of Common Stock on the record date for the dividend or distribution, and (B)
the denominator of which shall be the Fair Market Value per share of Common
Stock on the record date for the dividend or distribution minus the amount
allocable to one share of Common Stock of the value (as determined in good
faith by the Board of Directors of the Company) of any and all such evidences
of indebtedness, shares of capital stock, other securities or property, so
distributed. The Purchase Price shall be reduced to equal: (i) the Purchase
Price in effect immediately before the occurrence of any such event (ii)
multiplied by a fraction, (A) the numerator of which is the number of Warrant
Shares for which this Warrant is exercisable immediately before the
adjustment, and (B) the
-4-
<PAGE>
denominator of which is the number of Warrant Shares for which this Warrant
is exercisable immediately after the adjustment.
(d) MERGER, ETC. If at any time after the date hereof there shall be a
merger or consolidation of the Company with or into or a transfer of all or
substantially all of the assets of the Company to another entity, then the
Warrant Holder shall be entitled to receive upon payment of the aggregate
Purchase Price then in effect, the number of shares or other securities or
property of the Company or of the successor corporation resulting from such
merger or consolidation, which would have been received by Warrant Holder for
the shares of stock subject to this Warrant had this Warrant been exercised
just prior to such transfer, merger or consolidation becoming effective or to
the applicable record date thereof, as the case may be. The Company will not
merge into or consolidate with or into any other corporation, or sell or
otherwise transfer its property, assets and business substantially as an
entirety to another corporation, unless the corporation resulting from such
merger or consolidation (if not the Company), or such transferee corporation,
as the case may be, shall expressly assume, by supplemental agreement
reasonably satisfactory in form and substance to the Warrant Holder, the due
and punctual performance and observance of each and every covenant and
condition of this Warrant to be performed and observed by the Company.
(e) RECLASSIFICATION, ETC. If at any time after the date hereof there
shall be a reorganization or reclassification of the securities as to which
purchase rights under this Warrant exist into the same or a different number
of securities of any other class or classes, then the Warrant Holder shall
thereafter be entitled to receive upon exercise of this Warrant, during the
period specified herein and upon payment of the Purchase Price then in
effect, the number of shares or other securities or property resulting from
such reorganization or reclassification, which would have been received by
the Warrant Holder for the shares of stock subject to this Warrant had this
Warrant at such time been exercised.
6. NO IMPAIRMENT.
The Company will not, by amendment of its Certificate of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms of this
Warrant, but will at all times in good faith assist in the carrying out all
of such terms and in the taking of all such action as may be reasonably
necessary or appropriate in order to protect the rights of the Warrant Holder
against impairment. Without limiting the generality of the foregoing, the
Company (a) will not increase the par value of any Warrant Shares above the
amount payable therefor on such exercise, and (b) will take all such action
as may be reasonably necessary or appropriate in order that the Company may
validly and legally issue fully paid and nonassessable Warrant Shares on the
exercise of this Warrant.
7. NOTICE OF ADJUSTMENTS.
Whenever the Purchase Price or number of Warrant Shares purchasable
hereunder shall be adjusted pursuant to Section 5 hereof, the Company shall
execute and deliver to the Warrant
-5-
<PAGE>
Holder (by first class mail, postage prepaid) a certificate setting forth, in
reasonable detail, the event requiring the adjustment, the amount of the
adjustment, the method by which such adjustment was calculated and the
Purchase Price and number of shares purchasable hereunder after giving effect
to such adjustment.
8. RIGHTS AS SHAREHOLDER.
Prior to exercise of this Warrant, the Warrant Holder shall not be
entitled to any rights as a stockholder of the Company with respect to the
Warrant Shares, including (without limitation) the right to vote such shares,
receive dividends or other distributions thereon or be notified of
stockholder meetings. However, in the event of any taking by the Company of a
record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution (other than a cash dividend), any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right (other than the right
to vote), the Company shall provide notice pursuant to Section 13 below to
each Warrant Holder, at least 10 days prior to the date of such record,
therein, a notice specifying the date on which any such record is to be taken
for the purpose of such dividend, distribution or right, and the amount and
character of such dividend, distribution or right.
9. LIMITATION ON EXERCISE.
Notwithstanding anything to the contrary contained herein, this Warrant
may not be exercised by the Warrant Holder to the extent that, after giving
effect to Warrant Shares to be issued pursuant to a Subscription Notice, the
total number of shares of Common Stock deemed beneficially owned by such
holder (other than by virtue of ownership of this Warrant, or ownership of
other securities that have limitations on the holder's rights to convert or
exercise similar to the limitations set forth herein), together with all
shares of Common Stock deemed beneficially owned by the holder's "affiliates"
(as defined in Rule 144 of the Act) that would be aggregated for purposes of
determining whether a group under Section 13(d) of the Securities Exchange
Act of 1934 exists, would exceed 9.9% of the total issued and outstanding
shares of the Common Stock. The delivery of a Subscription Notice by the
Warrant Holder shall be deemed a representation by such holder that it is in
compliance with this paragraph. The term "deemed beneficially owned" as used
in this Warrant shall exclude shares that might otherwise be deemed
beneficially owned by reason of the exercise of this Warrant.
10. REPLACEMENT OF WARRANT.
On receipt of evidence reasonably satisfactory to the Company of the
loss, theft, destruction or mutilation of the Warrant and, in the case of any
such loss, theft or destruction of the Warrant, on delivery of an indemnity
agreement or security reasonably satisfactory in form and amount to the
Company or, in the case of any such mutilation, on surrender and cancellation
-6-
<PAGE>
of such Warrant, the Company, at the Warrant Holder's expense will execute
and deliver, in lieu thereof, a new Warrant of like tenor.
11. SPECIFIC ENFORCEMENT; CONSENT TO JURISDICTION AND CHOICE OF LAW.
(a) The Company and the Warrant Holder acknowledge and agree that
irreparable damage would occur in the event that any of the provisions of
this Warrant were not performed in accordance with their specific terms or
were otherwise breached. It is accordingly agreed that the parties shall be
entitled to an injunction or injunctions to prevent or cure breaches of the
provisions of this Warrant and to enforce specifically the terms and
provisions hereof, this being in addition to any other remedy to which either
of them may be entitled by law or equity.
(b) EACH OF THE COMPANY AND THE WARRANT HOLDER (I) HEREBY IRREVOCABLY
SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURT LOCATED
IN SAN FRANCISCO COUNTY, CALIFORNIA FOR THE PURPOSES OF ANY SUIT, ACTION OR
PROCEEDING ARISING OUT OF OR RELATING TO THIS WARRANT AND (II) HEREBY WAIVES,
AND AGREES NOT TO ASSERT IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY CLAIM
THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT THE
SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE
VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER. EACH OF THE COMPANY AND
THE WARRANT HOLDER CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION
OR PROCEEDING BY MAILING A COPY THEREOF TO SUCH PARTY AT THE ADDRESS IN
EFFECT FOR NOTICES TO IT UNDER THIS WARRANT AND AGREES THAT SUCH SERVICE
SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF.
NOTHING IN THIS PARAGRAPH SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE PROCESS IN
ANY OTHER MANNER PERMITTED BY LAW.
(c) THIS WARRANT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
SUCH STATE'S PRINCIPLES OF CONFLICT OF LAWS.
12. ENTIRE AGREEMENT: AMENDMENTS.
This Warrant and the provisions contained in the Agreement, the
Registration Rights Agreement and the Debenture contain the entire
understanding of the parties with respect to the matters covered hereby and
thereby and except as specifically set forth herein and therein, neither the
Company nor the Warrant Holder makes any representation, warranty, covenant
or undertaking with respect to such matters. This Warrant and any term
thereof may be changed, waived, discharged or terminated only by an
instrument in writing signed by the party against which enforcement of such
change, waiver, discharge or termination is sought.
13. NOTICES.
Any notice or other communication required or permitted to be given
hereunder shall be
-7-
<PAGE>
in writing and shall be effective (a) upon hand delivery or delivery by telex
(with correct answer back received), telecopy or facsimile at the address or
number designated below (if delivered on a business day during normal
business hours where such notice is to be received), or the first business
day following such delivery (if delivered other than on a business day during
normal business hours where such notice is to be received) or (b) on the
second business day following the date of mailing by express courier service,
fully prepaid, addressed to such address, or upon actual receipt of such
mailing, whichever shall first occur. The addresses for such communications
shall be:
to the Company:
Cygnus, Inc.
400 Penobscot Drive
Redwood City, CA 94063
Attn: Chief Executive Officer
Fax: (650) 367-5060
with copies to:
Cygnus, Inc.
400 Penobscot Drive
Redwood City, CA 94063
Attn: General Counsel
Fax: (650) 367-5060
to the Purchaser:
c/o Palladin Group, L.P.
195 Maplewood Avenue
Maplewood, New Jersey 07040
Attn: Robert L. Chender
Fax: (973) 313-6490
with copies to:
Arnold & Porter
555 12th Street, N.W.
Washington, D.C. 20004
Attn: Richard E. Baltz
Fax: (202) 942-5999
Either party hereto may from time to time change its address for notices
under this Section 13 by giving at least 10 days prior written notice of such
changed address to the other party hereto.
-8-
<PAGE>
14. MISCELLANEOUS.
This Warrant and any term hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought. The
headings in this Warrant are for purposes of reference only, and shall not
limit otherwise affect any of the terms hereof. The invalidity or
unenforceability of any provision hereof shall in no way affect the validity
or enforceability of any other provisions.
15. ASSIGNMENT.
This Warrant may not be assigned, by the Warrant Holder, in whole or in
part, without the prior written consent of the Company; PROVIDED, HOWEVER,
that upon written notice to the Company, the Warrant Holder may assign this
Warrant, in whole or in part, to an Affiliate of the Warrant Holder without
the Company's consent. In either case, to effect a transfer of this Warrant,
the Warrant Holder shall submit this Warrant to the Company together with a
duly executed Assignment in substantially the form and substance of the Form
of Assignment which accompanies this Warrant and, upon the Company's receipt
hereof, and in any event, within three (3) business days thereafter, the
Company shall issue a Warrant to the Warrant Holder to evidence that portion
of this Warrant, if any as shall not have been so transferred or assigned.
-9-
<PAGE>
Dated: June 29, 1999
CYGNUS, INC.
By: /s/ Craig W. Carlson
-----------------------------
Printed: Craig Carlson
------------------------
Title: SR. VP Finance, CFO
--------------------------
Attest:
By: /s/ John C. Hodgman
---------------------------
Its: Pres. & CEO
--------------------------
[SIGNATURE PAGE TO WARRANT]
<PAGE>
SUBSCRIPTION NOTICE
(FORM OF WARRANT EXERCISE)
(TO BE SIGNED ONLY ON EXERCISE OF WARRANT)
TO _______________
The undersigned, the holder of the within Warrant, hereby
irrevocably elects to exercise this Warrant:
_____(A) for, and to purchase thereunder, _______________
shares of Common Stock of Cygnus, Inc., a Delaware
corporation (the "Common Stock"), and herewith, or by
wire transfer, makes payment of $_____therefor; or
_____(B) in a "cashless" or "net-issue exercise" for, and
to purchase thereunder _______________ shares of
Common Stock.
The undersigned requests that the certificates for such shares
be issued in the name of, and
_____(A) delivered to ___________________, whose address is
_____________________; or
_____(B) electronically transmitted and credited to the
account of ______________ undersigned's prime
broker (Account No. _______________) with
Depository Trust Company through its Deposit
Withdrawal Agent Commission system.
Dated: _______________
_______________
_______________________________
(Signature must conform to name of holder
as specified on the face of the Warrant)
_______________________________
(Address)
Tax Identification Number: _____________
______________
<PAGE>
FORM OF ASSIGNMENT
(TO BE SIGNED ONLY ON TRANSFER OF WARRANT)
For value received, the undersigned hereby sells, assigns, and transfers
unto ______________ the right represented by the within Warrant to purchase
____ shares of Common Stock of Cygnus, Inc., a Delaware corporation, to which
the within Warrant relates, and appoints _________ Attorney to transfer such
right on the books of Cygnus, Inc., a Delaware corporation, with full power
of substitution of premises.
Dated: _______________
__________________________________
(Signature must conform to name of holder
as specified on the face of the Warrant)
__________________________________
(Address)
Signed in the presence of:
__________________________
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 32,265
<SECURITIES> 468<F1>
<RECEIVABLES> 1,228
<ALLOWANCES> 400
<INVENTORY> 0
<CURRENT-ASSETS> 34,475
<PP&E> 21,674
<DEPRECIATION> 13,976
<TOTAL-ASSETS> 53,357
<CURRENT-LIABILITIES> 16,092
<BONDS> 57,288
0
0
<COMMON> 24
<OTHER-SE> (20,459)
<TOTAL-LIABILITY-AND-EQUITY> 53,357
<SALES> 0
<TOTAL-REVENUES> 6,983
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 16,915
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,547
<INCOME-PRETAX> (11,799)
<INCOME-TAX> 9
<INCOME-CONTINUING> (11,808)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,808)
<EPS-BASIC> (0.53)
<EPS-DILUTED> (0.53)
<FN>
<F1>(SECURITIES) THIS AMOUNT REPRESENTS SHORT-TERM INVESTMENTS HELD BY THE COMPANY
6/30/99
</FN>
</TABLE>
