<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended SEPTEMBER 30, 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 OCTOBER 28, 1999:
Common Stock, $.001 par value - 24,773,821 shares
<PAGE>
CYGNUS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1: Financial Statements
Condensed Consolidated Statements of Operations for the three and nine
month periods ended September 30, 1999 and 1998 (unaudited).................................2
Condensed Consolidated Balance Sheets at September 30, 1999 (unaudited)
and December 31, 1998.......................................................................3
Condensed Consolidated Statements of Cash Flows for the nine month periods
ended September 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....................................27
PART II. OTHER INFORMATION
Item 1: Legal Proceedings.............................................................................28
Item 4: Submission of Matters to a Vote of Security Holders...........................................28
Item 6: Exhibits and Reports on Form 8-K..............................................................28
SIGNATURES...................................................................................................32
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYGNUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Product revenues $ ---- $ ---- $ ---- $ 587
Contract revenues 3,915 2,463 10,278 7,822
Royalty and other revenues 352 319 972 714
----------- ------------ ------------ -----------
TOTAL REVENUES 4,267 2,782 11,250 9,123
Costs and expenses:
Costs of products sold ---- 741 ---- 2,701
Research and development 5,848 7,859 19,297 22,665
Marketing, general and administrative 1,710 3,634 5,176 8,350
----------- ------------ ------------ -----------
TOTAL COSTS AND EXPENSES 7,558 12,234 24,473 33,716
LOSS FROM OPERATIONS (3,291) (9,452) (13,223) (24,593)
Interest income/(expense), net (831) (171) (2,707) (227)
----------- ------------ ------------ -----------
NET LOSS $ (4,122) $ (9,623) $ (15,930) $ (24,820)
=========== ============ ============ ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.17) $ (0.48) $ (0.70) $ (1.23)
============ ============ ============ ===========
Shares used in computation of
basic and diluted net loss per share 24,196 20,241 22,854 20,107
=========== ============ ============ ==========
</TABLE>
(See accompanying notes.)
2
<PAGE>
CYGNUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
1999 1998
(UNAUDITED)
--------------------------------------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 18,125 $ 10,219
Restricted cash 871 ----
Short-term investments 3,757 14,982
Trade accounts receivable, net of allowance 1,424 876
Inventories ---- 771
Prepaid expenses and other current assets 847 695
--------------------- ---------------------
Total current assets 25,024 27,543
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements, at cost 21,751 19,541
Less accumulated depreciation and amortization (14,381) (13,077)
--------------------------------------------
Net equipment and improvements 7,370 6,464
Long-term investments ---- 3,622
Deferred compensation and other assets 1,011 5,825
Deferred financing cost 6,299 ----
--------------------------------------------
Total assets $ 39,704 $ 43,454
============================================
LIABILITIES AND NET CAPITAL DEFICIENCY:
CURRENT LIABILITIES:
Accounts payable $ 2,253 $ 4,459
Accrued compensation 3,299 4,593
Accrued professional services 606 729
Other accrued liabilities 910 943
Customer advances 27 207
Current portion of arbitration obligation 320 60
Current portion of deferred revenue 2,120 1,153
Current portion of long-term debt 3,387 3,415
Current portion of capital lease obligations 442 442
--------------------------------------------
Total current liabilities 13,364 16,001
Long-term portion of arbitration obligation 23,909 24,158
Long-term portion of debt 4,158 8,252
Long-term portion of capital lease obligations 254 581
Senior Subordinated Convertible Notes ---- 22,563
Convertible Debentures 17,000 ----
Deferred compensation and other long-term liabilities 416 4,666
STOCKHOLDERS' NET CAPITAL DEFICIENCY:
Common stock 25 21
Additional paid-in-capital 172,475 143,155
Accumulated deficit (191,885) (175,955)
Accumulated other comprehensive income/(loss) (12) 12
--------------------------------------------
Net capital deficiency (19,397) (32,767)
--------------------------------------------
Total liabilities and stockholders' net capital
deficiency $ 39,704 $ 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>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
------------------ -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (15,930) $ (24,820)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 1,334 1,391
Decrease/(increase) in assets 5,014 1,726
Increase/(decrease) in liabilities (4,664) (421)
Increase/(decrease) in arbitration liability 12 (13,871)
------------------ -------------------
NET CASH USED IN OPERATING ACTIVITIES (14,234) (35,995)
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,229) (2,590)
Purchases of investments (4,901) (45,292)
Maturity and sale of investments 19,574 23,235
------------------ -------------------
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES 12,444 (24,647)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock, net 10,130 14,193
Principal payment of Senior Subordinated Convertible Notes (12,500) ----
Principal payments of long-term debt (4,122) (1,598)
Payment of capital lease obligations (326) (375)
Issuance of Convertible Debentures, net 16,514 ----
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 9,696 58,681
------------------ -------------------
NET INCREASE /(DECREASE) IN CASH AND CASH EQUIVALENTS 7,906 (1,961)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,219 20,669
================== ===================
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,125 $ 18,708
================== ===================
</TABLE>
(See accompanying notes.)
4
<PAGE>
Cygnus, Inc.
September 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 nine month periods ended
September 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 we adopted 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 and nine month periods ended
September 30, 1999 and September 30, 1998 were not material and total
comprehensive loss approximated net loss for each of these periods.
4. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 requires
all derivative instruments to be recorded on the balance sheet at fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction, and, if so, the type
of hedge transaction. In June 1999, the FASB issued FAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133" ("FAS 137"), which amends FAS 133 to be
effective for all fiscal years beginning after June 15, 2000 or January 1,
2001 for Cygnus. Management does not currently expect that adoption of FAS
137 will have a material impact on our financial position or results of
operations.
5
<PAGE>
Cygnus, Inc.
September 30, 1999
5. INVENTORIES
Net inventories of $0.8 million as of December 31, 1998 consisted of
raw materials related to our 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 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, we entered into Note Purchase Agreements with
certain institutional investors ("the Investors") to issue and sell
approximately $43.0 million of 4% Senior Subordinated Convertible Notes Due
in 2005 (the "Notes"). On October 28, 1998, we 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 $43.0 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 we issued a call before July 1, 1999 for the
redemption of the third tranche, the Note Holders would not be entitled to
convert any portion of that tranche. On June 29, 1999, we 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, we 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 capital, we entered into two new
financing arrangements.
On June 29, 1999, we entered into a Convertible Debenture Agreement
with certain institutional 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. We received gross proceeds of $14.0 million from the issuance of the
Convertible Debentures
6
<PAGE>
Cygnus, Inc.
September 30, 1999
and incurred debt issuance costs of $0.5 million. With the mutual agreement
of the Investors and the Company, or if certain trading volume, pricing and
other conditions are met, we and/or the Investors have the right before June
29, 2000 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 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 incorporated by reference as Exhibit
10.41 to Form 10-Q for period ended June 30, 1999).
On September 29, 1999 we notified the Investors of our intent to
cause the sale of the first Additional Tranche and we received $3.0 million
in gross proceeds from the issuance of Convertible Debentures due September
29, 2004 and incurred debt issuance costs of $0.1 million. These Convertible
Debentures are convertible into shares of our Common Stock at any time at a
conversion price of $11.8663 per share. The Company and/or the Investors may
still require a second Additional Tranche subject to the terms set forth
above any time after October 1999 and before June 29, 2000.
In conjunction with the issuance of Convertible Debentures in June
1999 and the first Additional Tranche in September 1999, we issued warrants
to purchase approximately 656 thousand shares and 139 thousand shares of
Common Stock at the exercise price of $13.86 per share and $16.18 per share
respectively with a term of five years from the respective date of grant. At
the respective dates of grant, the fair values ascribed to these warrants
were approximately $5.5 million and $1.1 million respectively, based on a
Black-Scholes valuation model. The amounts were recorded as deferred
financing cost and are being amortized as additional interest expense over
the life of the respective warrants. We have recorded amortization of $0.3
million for both the three months and the nine months ended September 30,
1999. We will be required to issue more warrants if a second Additional
Tranche of the Convertible Debentures is sold. Such warrants will be priced
at 150% of the Additional Closing Price. The number of additional warrants to
be issued would be determined by dividing 50% of the Additional Tranche by
the Additional Closing Price.
On June 30, 1999, we also entered into a Structured Equity Line
Flexible Financing Agreement ("Equity Line") with Cripple Creek Securities
LLC ("Cripple Creek"). The Equity Line is effective for two years
("Commitment Period") and allows us, at our sole discretion, to sell Common
Stock to Cripple Creek with a maximum aggregate issue price of up to $30.0
million over the Commitment Period. On June 30, 1999, we received a net of
approximately $3.8 million, after deducting the issuance costs, from the $4.0
million ("Initial Investment") in exchange for approximately 346 thousand
shares of Common Stock. Under the terms of the Equity Line, over a period of
eighty trading days following June 30, 1999 ("Initial Period"), Cripple Creek
is required to deliver purchase notices from time to time for the aggregate
amount of the Initial Investment ($4.0 million) to purchase shares of our
Common Stock. The per-share price for each such purchase notice equaled 98%
of the average of the two lowest daily trade prices during the six trading
days immediately prior to the respective purchase notice. The number of
shares originally issued was subject to an upward adjustment, if
7
<PAGE>
Cygnus, Inc.
September 30, 1999
required, to match the aggregate number of shares covered by the $4.0 million
of purchase notices. On August 23, 1999, we issued an additional 92 thousand
shares to reflect such upward adjustment.
On September 29, 1999, we received $4.0 million ("Additional
Investment") from Cripple Creek pursuant to an amendment to the Equity Line
agreement (the "Equity Line Amendment") by which we issued an additional 361
thousand shares of Common Stock. The terms for this Additional Investment are
similar to those applied to the Initial Investment, and the number of shares
may be adjusted upwards at the end of a 110 trading day period following
September 29, 1999 (the "Additional Investment Period") pursuant to the same
adjustment mechanism as in the Initial Period. Thereafter, we are under no
obligation to sell any additional shares.
After the Additional Investment Period, on a monthly basis
("Investment Period"), we can elect, at our sole discretion, to sell up to
$1.5 million ("Company Election") in additional shares of Common Stock. If we
make a Company Election and upon our approval, Cripple Creek 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 we elect to
sell additional shares, Cripple Creek 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 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, we can set a minimum sales price ("Floor Price") for our
Common Stock. Cripple Creek may limit the aggregate dollar amount of the
Company Election and Investor Election for any Investment Period based on
certain market trading volume guidelines (see Form 8-K filed July 2, 1999).
In conjunction with the Equity Line and the Equity Line Amendment,
we will issue five-year warrants to Cripple Creek 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 and the Equity Line
Amendment that year. The number of shares will equal 1% of the aggregate
proceeds received for all shares sold pursuant to the Equity Line and the
Equity Line Amendment during the year. Warrants to purchase a minimum of 120
thousand shares must be issued under the Equity Line and, if, as of June 30,
2001, warrants to purchase less than 120 thousand shares of Common Stock have
been issued, we 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. To date, we have
not issued any warrants in conjunction with the Equity Line and Equity Line
amendment.
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
<PAGE>
Cygnus, Inc.
September 30, 1999
8. STATEMENTS OF CASH FLOWS DATA
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
----------------------------------
(in thousands)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Interest paid $ 823 $ 794
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 Debentures $ 6,572 $ ----
Issuance of restricted Stock grants $ 2,019 $ ----
</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 business' 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 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 business' 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 a number of products 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.
9
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Cygnus, Inc.
September 30, 1999
<TABLE>
<CAPTION>
BUSINESS SEGMENTS
-------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, 1999 DIAGNOSTICS DRUG DELIVERY CORPORATE TOTAL
------------------ ----------- ------------- ---------------
<S> <C> <C> <C>
Revenue $ 913 $ 10,337 $ 11,250
Profit/(loss) $ (17,076) $ 1,146 $ (15,930)
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
Revenue $ 457 $ 8,666 $ 9,123
Profit/(loss) $ (23,407) $ (1,413) $ (24,820)
THREE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
Revenue $ 913 $ 3,354 $ 4,267
Profit/(loss) $ (4,112) $ (10) $ (4,122)
THREE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
Revenue $ ---- $ 2,782 $ 2,782
Profit/(loss) $ (9,062) $ (561) $ (9,623)
BUSINESS SEGMENTS
-------------------------------------------------------
SEPTEMBER 30, 1999 DIAGNOSTICS DRUG DELIVERY CORPORATE TOTAL
------------------ ----------- ------------- ---------------
Identifiable assets $ 36,181 $ 3,523 $ 39,704
SEPTEMBER 30, 1998
------------------
Identifiable assets $ 67,343 $ 4,624 $ 71,967
</TABLE>
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 September 30, 1998 to September 30, 1999 is
primarily due to operating losses and the partial redemption of Senior
Subordinated Convertible Notes.
The majority of the 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
10
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Cygnus, Inc.
September 30, 1999
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.
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. From time to time, we consider strategic transactions and
alternatives relating to our drug delivery business, with the goal of
providing additional funding for the development of the GlucoWatch -
Registered Trademark - monitor. These alternatives include, among others, the
divestiture of all or part of the drug delivery business. We will continue to
evaluate strategic transactions and alternatives which we believe may enhance
stockholder value.
On January 25, 1999 the Company submitted the first part of the
Pre-Market Approval Application ("PMA") for the GlucoWatch - Registered
Trademark - monitor to the FDA. This submission included a variety of
information, including manufacturing documentation. We submitted the
remainder of the PMA in June 1999, including analysis of a series of clinical
studies totaling more than 600 people which were completed in December 1998,
as well as two additional studies. The FDA notified the Company in July 1999
that the PMA for the GlucoWatch - Registered Trademark - monitor had been
deemed suitable for filing. The FDA also granted expedited review status to
the GlucoWatch -Registered Trademark - monitor and has since stated that the
GlucoWatch -Registered Trademark - monitor will be reviewed by the Clinical
Chemistry and Toxicology Devices Panel on December 6, 1999. Although we
believe its
11
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Cygnus, Inc.
September 30, 1999
clinical results to date are encouraging, no assurance can be given that data
generated in the clinical studies to date will provide a sufficient basis for
the approval of the GlucoWatch - Registered Trademark - monitor by the FDA.
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.
In 1998, Cygnus entered into long term agreements with E.I. du Pont
de Nemours & Company ("DuPont") for the development and supply of thick film
materials for Cygnus' GlucoWatch - Registered Trademark - monitor. A key
component of the GlucoWatch -Registered Trademark - monitor is the sensor,
which we developed with DuPont's materials. The agreements call for continued
cooperation for future sensor technology developments and continued supply of
materials.
On September 30, 1999, we entered into a Manufacturing and Supply
Agreement and Amendment thereto with LTS Lohmann Therapy Systems Corp. ("LTS
Corp"), wherein LTS Corp will manufacture the majority of the contraceptive
transdermal patch (the Evra -Trademark - Johnson & Johnson, New Brunswick,
New Jersey - System) that Cygnus is developing for Ortho-McNeil
Pharmaceutical, Inc., a Johnson & Johnson company. In addition to the
Manufacturing and Supply Agreement, Cygnus and LTS Corp entered into a Side
Letter to said Agreement of the same date that describes additional
manufacturing capacity needs, equipment costs and liabilities.
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 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
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Cygnus, Inc.
September 30, 1999
whether we will receive any particular payment thereunder or as to the amount
or timing of any such payment. In the past some of our licensees,
distributors and collaborators have approached us requesting modification of
the terms of existing agreements. 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-term effect on our results of operations could be favorable.
To remain competitive, we will need to develop, in-license or
acquire new diagnostic 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 September 30, 1999, our accumulated deficit
and net capital deficiency were approximately $191.9 million and $19.4
million, respectively.
RESULTS OF OPERATIONS:
COMPARISON FOR THE QUARTERS ENDED SEPTEMBER 30, 1999 AND 1998
PRODUCT REVENUES. There were no product revenues for the quarter and
nine months ended September 30, 1999 or for the quarter ended September 30,
1998. Product revenues for the nine months ended September 30, 1998 were $0.6
million. These revenues resulted from the shipments of the FemPatch -
Registered Trademark - (Warner-Lambert Co., Morris Plains, NJ) system during
the first half of 1998. 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, the product is no longer being marketed.
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Cygnus, Inc.
September 30, 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 September 30, 1999 were $3.9
million compared to $2.5 million for the quarter ended September 30, 1998 and
were $10.3 million for the nine months ended September 30, 1999 compared to
$7.8 million for the nine months ended September 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 related to certain transdermal delivery systems and the
glucose monitoring device. The increase in contract revenues for the three
months ended September 30, 1999 is primarily due to the increased development
billings related to the contraception product we are developing with
Ortho-McNeil Pharmaceutical, Inc., a division of Johnson & Johnson and the
amortization of a previously capitalized milestone payment received from
Yamanouchi for the GlucoWatch(R) monitor. The increase in contract revenues
for the nine months ended September 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 Corporation ("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.
Additional reasons for the increase in contract revenue for the nine months
ended September 30, 1999 were increased development billings related to the
contraception and nicotine patch products and the amortization of a milestone
payment received from Yamanouchi in July 1999, as mentioned below.
By way of background for the AHP agreement, 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 AHP, the licensee for two of our transdermal
hormone replacement products, including our 7-day estrogen patch, 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. In September 1999, our
7-day estrogen patch was cleared for marketing by the FDA. We have not
decided on any course of action with regard to these two products, and AHP's
support will cease on November 17, 1999.
Regarding our contraception product, in 1994, Cygnus entered into an
agreement with Ortho-McNeil Pharmaceutical Inc. ("Ortho"), a Johnson &
Johnson company, for the development of a 7-day contraceptive patch, the
EVRA(TM) (Johnson & Johnson, New Brunswick, NJ) system.
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Cygnus, Inc.
September 30, 1999
Ortho has exclusive worldwide marketing rights to the product. Cygnus has
received up-front payments and will receive milestone payments as well as a
percentage of net sales, if and when the product is commercialized, and is
responsible for the development and manufacture of the product. Phase 3
clinical trials for this product have been completed.
Also, 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-refundable payment from Yamanouchi. In July of
1999, we received a non-refundable milestone payment from Yamanouchi which is
being amortized, and we are eligible to receive further milestone payments as
well as a percentage of the product's future commercial sales.
Additionally, 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.
In September 1999, Cygnus was awarded a Phase I Small Business
Innovative Research (SBIR) grant for "High Performance Biosensor Electrode
Materials" from the National Institute of Diabetes and Digestive and Kidney
Diseases division of the National Institutes of Health (NIH).
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 collaboration
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 collaboration agreements, if any, will impact overall
contract revenues in the remainder of 1999 and future periods.
ROYALTY AND OTHER REVENUES for the quarter ended September 30, 1999
were $0.4 million compared to $0.3 million for the quarter ended September
30, 1998 and were $1.0 million for the nine months ended September 30, 1999
compared to $0.7 million for the nine months ended September 30, 1998. The
amounts reflect royalties from worldwide sales by Pharmacia & Upjohn
("Pharmacia") of the Company's nicotine transdermal product, the Nicotrol -
Registered Trademark (Pharmacia AB, Stockholm, Sweden) - system.
The Company's Nicotrol - Registered Trademark - product was
initially introduced in the U.S. as a prescription product in 1992 and
subsequently approved for over-the-counter sale in the U.S. in 1996. The
Nicotrol -Registered Trademark - patch is currently marketed in North America
by Ortho-McNeil Pharmaceutical, Inc., a Johnson & Johnson company and in many
15
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Cygnus, Inc.
September 30, 1999
European countries by Pharmacia. Cygnus receives royalties on the worldwide
sales of the Nicotrol - Registered Trademark - patch.
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
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 September 30, 1999 were
$0.0 million compared to $0.7 million for the quarter ended September 30,
1998 and were $0.0 million for the nine months ended September 30, 1999
compared to $2.7 million for the nine months ended September 30, 1998. Costs
of products sold primarily include direct and indirect production, and
facility and personnel costs required to meet anticipated production levels.
The decrease in costs of products sold for the three and nine months ended
September 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 nine months ended September 30, 1998 include shipments of the FemPatch
Registered Trademark -system in the first half of 1998. We do not have any
product revenue or costs of products sold for the three and nine months ended
September 30, 1999 as a result of the aforementioned discontinuation, and we
experienced negative production margins for the three and nine months ended
September 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 September
30, 1999 were $5.8 million compared to $7.9 million for the quarter ended
September 30, 1998 and were $19.3 million for the nine months ended September
30, 1999 compared to $22.7 million for the nine months ended September 30,
1998. The decrease in research and development expenses for the three and
nine months ended September 30, 1999 is primarily due to decreased costs of
clinical studies associated with the GlucoWatch - Registered Trademark -
monitor. Research and development and clinical activities primarily include
support and development for the glucose monitoring program, the contraceptive
product, and hormone replacement therapy products.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES for the quarter ended
September 30, 1999 were $1.7 million compared to $3.6 million for the quarter
ended September 30, 1998 and were $5.2 million for the nine months ended
September 30, 1999 compared to $8.4 million for the nine months ended
September 30, 1998. The decrease is primarily due to reduced legal and
compensation expenses.
INTEREST INCOME/(EXPENSES), NET for the quarter ended September 30,
1999 were $(0.8) million compared to $(0.2) million for the quarter ended
September 30, 1998 and were $(2.7) million for the nine months ended
September 30, 1999 compared to $(0.2) million for the nine months ended
September 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.
16
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Cygnus, Inc.
September 30, 1999
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.
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 September 30, 1999
there was $6.3 million outstanding under this agreement. Borrowings under
this agreement are secured by specific Company assets.
In February 1998, we entered into Note Purchase Agreements with
certain institutional Investors to issue and sell approximately $43.0 million
of 4% Senior Subordinated Convertible Notes Due 2005 (the "Notes"). On
October 28, 1998, we 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 $43.0 million to $24.5
million), a delay in the convertibility of the majority of the Notes to
September 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 a 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 were redeemed in July 1999.
In June 1999, we entered into agreements with certain institutional
Investors to issue and sell up to $20 million aggregate principal amount of
8.5% Convertible Debentures Due September 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 $30.0 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. On September 29, 1999, we received $4.0 million
("Additional Investment") pursuant to an amendment to the Equity Line
agreement. We issued 361 thousand shares of Common Stock in exchange for the
Additional Investment subject to adjustment upwards at the end of 110 trading
days after September 29, 1999. Also on September 29, 1999, we received $3.0
million in gross proceeds from the issuance of the first Additional Tranche
due September 29, 2004 pursuant to the terms of the Convertible Debentures
purchase agreement. (See Note 6 to the financial statements contained in this
report.)
17
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Cygnus, Inc.
September 30, 1999
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 nine months ended
September 30, 1999 was $14.2 million compared with net cash used of $36.0
million for the nine months ended September 30, 1998. Cash used in operating
activities during the nine months ended September 30, 1999 was primarily due
to our net loss of $15.9 million and decreases in provision for doubtful
accounts of $2.0 million, deferred compensation and other assets of $4.2
million and accountants payable and other accrued liabilities of $2.1
million, offset by decreases in notes receivable, prepaid expenses and other
current assets of $4.1 million, accounts receivable of $1.5 million and
inventories of $0.8 million and increases in depreciation and amortization of
$1.3 million, amortization of debt issuance cost of $1.1 million, deferred
revenue of $1.0 million and accrued compensation of $0.7 million. Cash used
in operating activities during the nine months ended September 30, 1998 was
primarily due to our net loss of $24.8 million and a $14.0 million cash
payment made in January 1998 to Sanofi under the terms of the arbitration
settlement, offset by an increase in accounts payable and other accrued
liabilities of $0.7 million, a decrease in notes receivable, prepaid expenses
and other current assets of $0.8 million and a decrease in accounts
receivable of $0.7 million.
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 compared to 1998 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 $12.4 million for the
nine months ended September 30, 1999 resulted primarily from net sales of
investments of $14.7 million, offset by capital expenditures of $2.2 million.
Net cash used in investing activities of $24.6 million for the nine months
ended September 30, 1998 resulted primarily from net purchases of short-term
investments of $22.0 million and capital expenditures of $2.6 million.
Net cash provided by financing activities of $9.7 million for the
nine months ended September 30, 1999 includes, as mentioned above, gross
proceeds of $17.0 million and $8.0 million from the June 1999 and September
1999 issuance of 8.5% Convertible Debentures and from the sale of Common
Stock under the Equity Line, respectively, and additional stock proceeds of
$2.5 million, offset by the July 1999 redemption of Senior Subordinated
Convertible Notes of $12.5 million, long-term debt of $4.1 million and
capital lease repayments of $0.3 million. Net cash provided by financing
activities of $58.7 million for the nine months ended September 30, 1998
includes net proceeds of $40.4 million and $13.3 million from the Company's
February 1998 issuance of Senior Subordinated Convertible Notes and from a
direct public offering of its Common Stock, respectively, additional stock
proceeds of $0.9 million and $6.1
18
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Cygnus, Inc.
September 30, 1999
million from the issuance of long-term debt, offset by long-term debt and
capital lease repayments of $1.6 million and $0.4 million, respectively.
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 $21.9 million as of September 30,
1999 -- 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 September 30, 2000.
However, there can be no assurance that we will not require additional
financing, depending upon future business strategies, results of clinical
trials and management decisions to accelerate certain research and
development programs and other factors.
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
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Cygnus, Inc.
September 30, 1999
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 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.
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Cygnus, Inc.
September 30, 1999
Through September 30, 1999 we have spent approximately $125,000 in connection
with Y2K Issues and we have substantially completed our remediation efforts.
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 completed 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 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
21
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Cygnus, Inc.
September 30, 1999
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 September 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
collaboration 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 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
diagnostic 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 possibly marketing capabilities. We may seek
additional funding through public or private financings, including debt or
equity financings. We may also seek other arrangements, including
collaboration arrangements. Any additional equity financings may dilute the
holdings of current stockholders. Debt financing, if available, may
22
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Cygnus, Inc.
September 30, 1999
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.
From time to time, we consider strategic transactions and
alternatives related to our drug delivery business, with the goal of
providing additional funding for the development of the GlucoWatch -
Registered Trademark - monitor. These alternatives include, among others, the
divestiture of all or part of the drug delivery business. We will continue to
evaluate strategic transactions and alternatives which we believe may enhance
stockholder value.
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 September 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,
- - manufacturing scale-up for the GlucoWatch - Registered
Trademark - monitor;
- - the FDA regulatory process, and
- - other factors, many of which are beyond our control.
WE DEPEND ON LICENSEES, DISTRIBUTORS AND COLLABORATION ARRANGEMENTS.
Our strategy to develop, clinically test, obtain regulatory approval
for, manufacture and commercialize our products depends, in large part, upon
our ability to selectively enter into and maintain collaboration 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.
23
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Cygnus, Inc.
September 30, 1999
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 their 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 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 products. Furthermore, our ability to develop and
commercialize products in the future will depend, in part, on our ability to
enter into collaboration arrangements with additional licensees on favorable
terms. We cannot assure you that we will be able to enter into new
collaboration arrangements on favorable terms, if at all, or that existing or
future collaboration arrangements will succeed.
WE DEPEND ON LICENSED PATENTS AND APPLICATIONS AND PROPRIETARY TECHNOLOGY.
24
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Cygnus, Inc.
September 30, 1999
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 September 30, 1999, we had indebtedness of $51.6 million,
$23.0 million of which can be converted to Common Stock. The degree to which
we are leveraged could materially and adversely affect our ability to obtain
financing for 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
related to our debt obligations, our assets will
25
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Cygnus, Inc.
September 30, 1999
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 fee.
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 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
26
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Cygnus, Inc.
September 30, 1999
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.
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.
27
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Cygnus, Inc.
September 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 SECURITIES HOLDERS
None.
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.
28
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Cygnus, Inc.
September 30, 1999
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
he 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.
4.11 Registration Rights Agreement dated June 30, 1999 between the
Registrant and Cripple Creek Securities, LLC., incorporated by
reference to Exhibit 4.11 of the Registrant's Form 10-Q for the
quarter ended June 30, 1999.
4.12 Registration Rights Agreement dated June 29, 1999 between the
Registrant and the listed investors on Schedule I thereto,
incorporated by reference to Exhibit 4.12 of the Registrant's Form
10-Q for the quarter ended June 30, 1999.
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, incorporated by reference to Exhibit 10.41 of the
Registrant's Form 10-Q for the quarter ended June 30, 1999.
10.42 Form of 8.5% Convertible Debenture Due June 29, 2004, incorporated by
reference to Exhibit 10.42 of the Registrant's Form 10-Q for the
quarter ended June 30, 1999.
29
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Cygnus, Inc.
September 30, 1999
10.43 Form of Common Stock Purchase Warrant, incorporated by reference to
Exhibit 10.43 of the Registrant's Form 10-Q for the quarter ended June
30, 1999.
10.44 Amendment No. 4 Lease Extension to Lease Agreement dated as of October
15, 1991 between the Registrant and Lincoln Menlo Associates Limited,
a California Limited Partnership, dated July 20, 1999.
10.45 1999 Stock Incentive Plan.
10.46 Amendment No. 1 to Structured Equity Line Flexible Financing
Agreement, dated September 29, 1999 between the Registrant and Cripple
Creek Securities, LLC, incorporated by reference to Exhibit 1.1 of the
Registrant's Form 8-K filed on October 7, 1999.
*10.47 Manufacturing and Supply Agreement and Amendment thereto; and Side
Letter dated September 30, 1999 between the Registrant and LTS Lohmann
Therapy Systems Corp.
10.48 Amended 1991 Employee Stock Purchase Plan (As Amended and Restated as
of October 1, 1999), incorporated by reference to Exhibit 99.1 of the
Company's Form S-8 Registration Statement No. 333-89377, filed October
20, 1999.
27 Financial Data Schedule
*A confidential treatment request has been applied for or granted with
respect to a portion of this document.
30
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Cygnus, Inc.
September 30, 1999
B) REPORTS ON FORM 8-K
Cygnus filed one Report on Form 8-K for the quarter ended September
30, 1999.
On October 7, 1999, Cygnus filed a Current Report on Form 8-K,
reporting under Item 5:
On September 22, 1999, Cygnus, Inc. issued a press release, the text
of which is attached hereto as Exhibit 99.1, announcing that its 7-day
estrogen transdermal hormone replacement therapy patch was cleared for
marketing by the United States Food and Drug Administration (FDA).
On September 28, 1999, Cygnus, Inc. issued a press release, the text
of which is attached hereto as Exhibit 99.2, announcing that it had been
awarded a Phase I Small Business Innovative Research (SBIR) grant for "High
Performance Biosensor Electrode Materials" from the National Institute of
Diabetes and Digestive and Kidney Diseases division of the National
Institutes of Health (NIH).
On September 29, 1999, Cygnus, Inc. issued 361,174 shares of its
Common Stock for $4 million to Cripple Creek Securities, LLC ("Cripple
Creek"), pursuant to its Structured Equity Line Flexible Financing Agreement
with Cripple Creek, dated as of June 30, 1999, as amended by Amendment No. 1
to Structured Equity Line Flexible Financing Agreement dated as of September
29, 1999, attached hereto as Exhibit 1.1, the contents of which are
incorporated herein by reference. The number of shares issued to Cripple
Creek may be increased in accordance with the terms of such agreement.
Also on September 29, 1999, Cygnus, Inc. received $3 million for the
issuance of a $3 million aggregate principal amount of its Convertible
Debentures and five-year Warrants to purchase approximately 135,624 shares of
its Common Stock (subject to adjustment).
31
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Cygnus, Inc.
September 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: NOVEMBER 5, 1999 By: /S/ JOHN C. HODGMAN
------------------------------- -------------------------------
John C. Hodgman
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: NOVEMBER 5, 1999 By: /S/ CRAIG W. CARLSON
------------------------------- -------------------------------
Craig W. Carlson
Senior Vice President, Finance and
Chief Financial Officer
(Principal Accounting Officer)
32
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Cygnus, Inc.
September 30, 1999
INDEX OF EXHIBITS
The following exhibits are included herein:
Exhibit 10.44 Amendment No. 4 Lease Extension to Lease Agreement dated as of
October 15, 1991 between the Registrant and Lincoln Menlo
Associates Limited, a California Limited Partnership, dated
July 20, 1999.
Exhibit 10.45 1999 Stock Incentive Plan.
Exhibit *10.47 Manufacturing and Supply Agreement and Amendment thereto; and
Side Letter dated September 30, 1999 between the Registrant
and LTS Lohmann Therapy Systems Corp.
Exhibit 27 Financial Data Schedule
*A confidential treatment request has been applied for or granted with
respect to a portion of this document.
<PAGE>
EXHIBIT 10.44
AMENDMENT NO. 4
LEASE EXTENSION
This AMENDMENT NO. 4 to Lease Agreement ("Amendment") is entered into this
20th day of July, 1999, between CYGNUS INC, A DELAWARE CORPORATION
("LESSEE"), AND AMB PROPERTY L.P., A DELAWARE LIMITED PARTNERSHIP ("LESSOR"),
with reference to the following:
RECITALS
WHEREAS, LINCOLN MENLO ASSOCIATES LIMITED, a California limited partnership
("Lincoln") and Lessee have entered into that certain Lease Agreement dated
October 15, 1991, as amended on June 30, 1994 (Amendment No. 1), August 25,
1995 (Amendment No. 2), and August 23, 1996 (Amendment No. 3) (collectively,
the "Lease") for the Premises located at 1255 Hamilton Court, Menlo Park,
California 94025 (the "Premises"); and
WHEREAS, LINCOLN assigned its interest in the Lease to Lessor; and
WHEREAS, Lessor and Lessee wish to modify some of the provisions of the Lease
and Amendments 1, 2 and 3 in order to extend Lessee's Term of the Lease.
NOW, THEREFORE, Lessor and Lessee agree as follows:
1. The above recitals are true and correct.
2. TERM: The Term of the Lease is hereby extended for a period of two
(2) years, the "Fourth Extended Term," commencing on November 1,
1999, and terminating on October 31, 2002.
3. RENT: The Base Rent and Section 3 of the Lease for the Fourth
Extended Term shall be amended as follows:
11/01/99 through 10/31/00: Base Rent shall be equal to
$14,454.00 per month,
11/01/00 through 10/31/01: Base Rent shall be equal to
$15,560.00 per month,
11/01/01 through 10/31/02: Base Rent shall be equal to
$16,678.00 per month.
Lessee agrees to pay Lessor, without prior notice or demand, or
abatement, offset, deduction or claim, the Base Rent specified
above, payable in advance at Lessor's address specified in the
Basic Lease Information on the Commencement Date and thereafter
on the first (1st) day of each month throughout the balance of
the Term of the Lease. In addition to the Base Rent set forth
above, Lessee shall pay Lessor in advance on the Commencement
Date and thereafter on the first (1st) day of each month
throughout the balance of the Term of this Lease, as Additional
Rent, Lessee's Share of Operating Expenses, Tax Expenses, Common
Area Utility Costs, and Utility Expenses. Lessee shall also pay
to Lessor as Additional Rent hereunder, immediately on Lessor's
demand therefor, any and all costs and expenses incurred by
Lessor to enforce the provisions of this Lease, including, but
not limited to, costs associated with the delivery of notices,
delivery and recordation of notice(s) of default, attorneys'
fees, expert fees, court costs and filing fees (collectively,
the "Enforcement Expenses"). The term "Rent" whenever used
herein refers to the aggregate of all these amounts. If Lessor
permits Lessee to
<PAGE>
AMENDMENT NO. 4
PAGE 2 OF 2
occupy the Premises without requiring Lessee to pay rental payments
for a period of time, the waiver of the requirement to pay rental
payments shall only apply to waiver of the Base Rent and Lessee shall
otherwise perform all other obligations of Lessee required hereunder.
The Rent for any fractional part of a calendar month at the
commencement or termination of the Lease term shall be a prorated
amount of the Rent for a full calendar month based upon a thirty (30)
day month. The prorated Rent shall be paid on the Commencement Date
and the first day of the calendar month in which the date of
termination occurs, as the case may be.
4. EXPENSES: Section 6.A.h. of the Lease is hereby modified and replaced
by this Section 4 of Amendment No. 4. Lessor's cost for the
management and administration of the Premises, the Building and/or
Park or any part thereof, including, without limitation, a property
management fee, accounting, auditing, billing, postage, salaries and
benefits for clerical and supervisory employees, whether located on
the Park or off-site, payroll taxes and legal and accounting costs
and all fees, licenses and permits related to the ownership,
operation and management of the Park.
5. SECURITY DEPOSIT: The Security Deposit shall hereby increase by nine
thousand three hundred thirty-nine and 94/100 dollars ($9,339.94) for
a total Security Deposit of seventeen thousand seven hundred ninety
and 00/100 dollars ($17,790.00).
6. EFFECT OF AMENDMENT: Except as modified herein, the terms and
conditions of the Lease shall remain unmodified and continue in full
force and effect. In the event of any conflict between the terms and
conditions of the Lease and this Amendment, the terms and conditions
of this Amendment shall prevail.
7. DEFINITIONS: Unless otherwise defined in this Amendment, all terms
not defined in this Amendment shall have the meaning set forth in the
Lease.
8. AUTHORITY: Subject to the provisions of the Lease, this Amendment
shall be binding upon and inure to the benefit of the parties hereto,
their respective heirs, legal representatives, successors and
assigns. Each party hereto and the persons signing below warrant that
the person signing below on such party's behalf is authorized to do
so and to bind such party to the terms of this Amendment.
9. The terms and provisions of the Lease are hereby incorporated in this
Amendment.
<PAGE>
AMENDMENT NO. 4
PAGE 3 OF 2
IN WITNESS WHEREOF, Lessor and Lessee have executed this AMENDMENT NO. 4 as
of the date first above written.
LESSEE:
Cygnus Inc.,
A Delaware Corporation
By: /s/ John C Hodgman
-------------------------------
Its: Chairman, Pres & CEO
-------------------------------
Date: 8-2-99
-------------------------------
LESSOR:
WILLOW PARK HOLDING COMPANY II, LLC,
a Delaware limited liability company
By: AMB PROPERTY, L.P.,
a Delaware limited partnership, its manager
By: AMB PROPERTY CORPORATION,
a Maryland corporation, its general partner
By: /s/ Gayle Starr
----------------------------------------
Gayle Starr
Its: Vice President
Date: 8/10/99
----------------------------------------
<PAGE>
EXHIBIT 10.45
CYGNUS, INC.
1999 STOCK INCENTIVE PLAN
EFFECTIVE AS OF FEBRUARY 1, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
SECTION 1. INTRODUCTION................................................ 1
SECTION 2. DEFINITIONS................................................. 1
SECTION 3. ADMINISTRATION.............................................. 4
(a) Committee Composition.............................. 4
(b) Authority of the Committee......................... 5
SECTION 4. ELIGIBILITY................................................. 5
(a) General Rules...................................... 5
(b) Incentive Stock Options............................ 5
SECTION 5. SHARES SUBJECT TO PLAN...................................... 5
(a) Basic Limitations.................................. 5
(b) Additional Shares.................................. 5
(c) Dividend Equivalents............................... 6
SECTION 6. TERMS AND CONDITIONS FOR AWARDS OF RESTRICTED
STOCK AND STOCK UNITS....................................... 6
(a) Time, Amount and Form of Awards.................... 6
(b) Payment for Awards................................. 6
(c) Vesting Conditions................................. 6
(d) Form and Time of Settlement of Stock Units......... 6
(e) Death of Recipient................................. 6
(f) Creditors' Rights.................................. 6
(g) Effect of a Change in Control...................... 7
SECTION 7. TERMS AND CONDITIONS OF OPTIONS............................. 7
(a) Stock Option Agreement............................. 7
(b) Number of Shares................................... 7
(c) Exercise Price..................................... 7
(d) Exercisability and Term............................ 7
(e) Effect of a Change in Control...................... 8
(f) Modifications or Assumption of Options............. 8
(g) Transferability of Options......................... 8
(h) No Rights as a Stockholder......................... 8
(i) Restrictions on Transfer........................... 8
(j) Automatic Option Grants to Non-Employee Directors.. 8
-i-
<PAGE>
TABLE OF CONTENTS
-----------------
(continued)
Page
----
SECTION 8. PAYMENT FOR OPTION SHARES................................... 9
(a) General Rule....................................... 9
(b) Surrender of Stock................................. 10
(c) Promissory Note.................................... 10
(d) Cashless Exercise.................................. 10
(e) Other Forms of Payment............................. 10
SECTION 9. STOCK APPRECIATION RIGHTS................................... 10
(a) SAR Agreement...................................... 10
(b) Number of Shares................................... 10
(c) Exercise Price..................................... 10
(d) Exercisability and Term............................ 10
(e) Effect of Change in Control........................ 11
(f) Exercise of SARs................................... 11
(g) Modification or Assumption of SARs................. 11
SECTION 10. PROTECTION AGAINST DILUTION................................ 11
(a) Adjustments........................................ 11
(b) Reorganizations.................................... 12
SECTION 11. VOTING AND DIVIDEND RIGHTS................................. 12
(a) Restricted Stock................................... 12
(b) Stock Units........................................ 12
SECTION 12. AWARDS UNDER OTHER PLANS................................... 12
SECTION 13. LIMITATIONS ON RIGHTS...................................... 12
(a) Retention Rights................................... 12
(b) Stockholders' Rights............................... 13
(c) Regulatory Requirements............................ 13
SECTION 14. WITHHOLDING TAXES.......................................... 13
(a) General............................................ 13
(b) Share Withholding.................................. 13
SECTION 15. ASSIGNMENT OR TRANSFER OF AWARDS........................... 13
(a) General............................................ 13
(b) Trusts............................................. 13
SECTION 16. DURATION AND AMENDMENTS.................................... 14
-ii-
<PAGE>
TABLE OF CONTENTS
-----------------
(continued)
Page
----
(a) Term of the Plan................................... 14
(b) Right to Amend or Terminate the Plan............... 14
SECTION 17. EXECUTION.................................................. 14
-iii-
<PAGE>
CYGNUS, INC.
1999 STOCK INCENTIVE PLAN
EFFECTIVE AS OF FEBRUARY 1, 1999
SECTION 1. INTRODUCTION.
The Cygnus, Inc. 1999 Stock Incentive Plan amends and restates the
Company's 1994 Stock Option/Award Plan as provided herein effective February 1,
1999.
The purpose of the Plan is to promote the long-term success of the
Company and the creation of stockholder value by offering Key Employees an
opportunity to acquire a proprietary interest in the success of the Company, or
to increase such interest, and to encourage such selected persons to continue to
provide services to the Company or its Subsidiaries and to attract new
individuals with outstanding qualifications.
The Plan seeks to achieve this purpose by providing for Awards in the
form of Restricted Stock, Stock Units, Options (which may constitute Incentive
Stock Options or Nonstatutory Stock Options) or Stock Appreciation Rights.
The Plan shall be governed by, and construed in accordance with, the
laws of the State of California (except its choice-of-law provisions).
Capitalized terms shall have the meaning provided in Section 2 unless otherwise
provided in this Plan, or in the applicable Stock Award Agreement, SAR Agreement
or Stock Option Agreement.
SECTION 2. DEFINITIONS.
(a) "AWARD" means any award of an Option, SAR, Restricted Stock or
Stock Unit under the Plan.
(b) "BOARD" means the Board of Directors of the Company, as
constituted from time to time.
(c) "CHANGE IN CONTROL" means a change in control of a nature that
would be required to be reported (assuming such event has not been
"previously reported") in response to Item 1(a) of the Current Report
on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or
15(d) of the Exchange Act; provided that, without limitation, such a
change in control shall be deemed to have occurred at such time as (a)
any person is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of 50% or more
of the combined voting power of the Company's voting securities; or (b)
individuals who constitute the Board on the date hereof (the "Incumbent
Board") cease for any reason to constitute at least a majority thereof,
provided that any person becoming a director subsequent to the date
hereof whose election, or nomination for election by the Company's
stockholders, was approved by a vote of at least three quarters of the
directors comprising the Incumbent Board (either by a specific vote or
by approval of the proxy statement of the Company in which such person
is named as a nominee for director, without objection to such
nomination) shall
<PAGE>
be, for purposes of this clause (b), considered as though such person
were a member of the Incumbent Board.
A transaction shall not constitute a Change in Control if its sole
purpose is to change the state of the Company's incorporation or to
create a holding company that will be owned in substantially the same
proportions by the persons who held the Company's securities
immediately before such transaction.
(d) "CODE" means the Internal Revenue Code of 1986, as amended.
(e) "COMMITTEE" means a committee consisting of one or more
members of the Board that is appointed by the Board (as described in
Section 3) to administer the Plan.
(f) "COMMON STOCK" means the Company's common stock.
(g) "COMPANY" means Cygnus, Inc. a Delaware corporation.
(h) "CONSULTANT" means an individual who performs bona fide
services to the Company or a Subsidiary other than as an Employee or
Director or Non-Employee Director.
(i) "DIRECTOR" means a member of the Board who is also a
common-law employee of the Company or Subsidiary.
(j) "DISABILITY" means that the Key Employee is unable to engage
in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to last for a
continuous period of not less than 12 months.
(k) "EMPLOYEE" means any individual who is a common-law employee
of the Company or Subsidiary.
(l) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(m) "EXERCISE PRICE" in the case of an Option, means the amount
for which a Share may be purchased upon exercise of such Option, as
specified in the applicable Stock Option Agreement. "Exercise Price,"
in the case of a SAR, means an amount, as specified in the applicable
SAR Agreement, which is subtracted from the Fair Market Value of a
Share in determining the amount payable upon exercise of such SAR.
(n) "FAIR MARKET VALUE" means the market price of Shares,
determined by the Committee as follows:
(i) If the Shares were traded over-the-counter on the
date in question but were not classified as a national market issue,
then the Fair Market Value shall be equal to the mean between the last
reported representative bid and asked prices quoted by the NASDAQ
system for such date;
2
<PAGE>
(ii) If the Shares were traded over-the-counter on the
date in question and were classified as a national market issue, then
the Fair Market Value shall be equal to the last-transaction price
quoted by the NASDAQ system for such date;
(iii) If the Shares were traded on a stock exchange on the
date in question, then the Fair Market Value shall be equal to the
closing price reported by the applicable composite transactions report
for such date; and
(iv) If none of the foregoing provisions is applicable,
then the Fair Market Value shall be determined by the Committee in good
faith or by an independent third party valuation on such basis as it
deems appropriate.
Whenever possible, the determination of Fair Market Value by the
Committee shall be based on the prices reported in the Western Edition
of THE WALL STREET JOURNAL. Such determination shall be conclusive and
binding on all persons.
(o) "GRANT" means any grant of an Option under the Plan.
(p) "INCENTIVE STOCK OPTION" or "ISO" means an incentive stock
option described in Code section 422(b).
(q) "KEY EMPLOYEE" means an Employee, Director, Non-Employee
Director or Consultant who has been selected by the Committee to
receive an Award under the Plan.
(r) "NON-EMPLOYEE DIRECTOR" means a member of the Board who is not
a common-law employee of the Company or Subsidiary.
(s) "NONSTATUTORY STOCK OPTION" OR "NSO" means a stock option that
is not an ISO.
(t) "OPTION" means an ISO or NSO granted under the Plan entitling
the Optionee to purchase Shares.
(u) "OPTIONEE" means an individual or estate or other entity that
holds an Option or SAR.
(v) "PARTICIPANT" means an individual or estate or other entity
that holds an Award.
(w) "PLAN" means this Cygnus, Inc. 1999 Stock Incentive Plan as
it may be amended from time to time.
(x) "RESTRICTED STOCK" means a Share awarded under the Plan.
(y) "SAR AGREEMENT" means the agreement between the Company and an
Optionee which contains the terms, conditions and restrictions
pertaining to his or her SAR.
(z) "SECURITIES ACT" means the Securities Act of 1933, as amended.
(aa) "SERVICE" means service as an Employee, Director, Non-Employee
Director or Consultant.
3
<PAGE>
(bb) "SHARE" means one share of Common Stock.
(cc) "STOCK APPRECIATION RIGHT" or "SAR" means a stock appreciation
right awarded under the Plan.
(dd) "STOCK AWARD AGREEMENT" means the agreement between the
Company and the recipient of a Restricted Stock or Stock Unit award
which contains the terms, conditions and restrictions pertaining to
such Restricted Stock or Stock Unit Award.
(ee) "STOCK OPTION AGREEMENT" means the agreement between the
Company and an Optionee that contains the terms, conditions and
restrictions pertaining to his or her Option.
(ff) "STOCK UNIT" means a bookkeeping entry representing the
equivalent of a Share, as awarded under the Plan.
(gg) "SUBSIDIARY" means any corporation (other than the Company) in
an unbroken chain of corporations beginning with the Company, if each
of the corporations other than the last corporation in the unbroken
chain owns stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other
corporations in such chain. A corporation that attains the status of a
Subsidiary on a date after the adoption of the Plan shall be considered
a Subsidiary commencing as of such date.
(hh) "10-PERCENT SHAREHOLDER" means an individual who owns more
than ten percent (10%) of the total combined voting power of all
classes of outstanding stock of the Company, its parent or any of its
subsidiaries. In determining stock ownership, the attribution rules of
section 424(d) of the Code shall be applied.
SECTION 3. ADMINISTRATION.
(a) COMMITTEE COMPOSITION. The Plan shall be administered by a
Committee appointed by the Board. The Board shall designate one of the members
of the Committee as chairperson. If no Committee has been appointed, the entire
Board shall constitute the Committee. Members of the Committee shall serve for
such period of time as the Board may determine and shall be subject to removal
by the Board at any time. The Board may also at any time terminate the functions
of the Committee and reassume all powers and authority previously delegated to
the Committee.
The Committee shall consist of two or more directors of the Company
who shall satisfy the requirements of Rule 16b-3 (or its successor) under the
Exchange Act with respect to Awards to Key Employees who are officers or
directors of the Company under section 16 of the Exchange Act.
The Board may also appoint one or more separate committees of the
Board, each composed of one or more directors of the Company who need not
qualify under Rule 16b-3, who may administer the Plan with respect to Key
Employees who are not considered officers or
4
<PAGE>
directors of the Company under Section 16 of the Exchange Act, may grant Awards
under the Plan to such Key Employees and may determine all terms of such Awards.
With respect to any matter, the term "Committee", when used in this
Plan, shall refer to the Committee that has been delegated authority with
respect to such matter.
(b) AUTHORITY OF THE COMMITTEE. Subject to the provisions of the
Plan, the Committee shall have full authority and discretion to take any actions
it deems necessary or advisable for the administration of the Plan. Such actions
shall include:
(i) selecting Key Employees who are to receive Awards
under the Plan;
(ii) determining the type, number, vesting requirements
and other features and conditions of such Awards (with the exception of
the Section 7(j) Automatic Option Grants);
(iii) interpreting the Plan; and
(iv) making all other decisions relating to the operation
of the Plan.
The Committee may adopt such rules or guidelines as it deems
appropriate to implement the Plan. The Committee's determinations under the Plan
shall be final and binding on all persons.
SECTION 4. ELIGIBILITY.
(a) GENERAL RULES. Only Employees, Directors, Non-Employee
Directors and Consultants shall be eligible for designation as Key Employees by
the Committee.
(b) INCENTIVE STOCK OPTIONS. Only Key Employees who are common-law
employees of the Company or a Subsidiary shall be eligible for the grant of
ISOs. In addition, a Key Employee who is a 10-Percent Shareholder shall not be
eligible for the grant of an ISO unless the requirements set forth in section
422(c)(5) of the Code are satisfied.
SECTION 5. SHARES SUBJECT TO PLAN.
(a) BASIC LIMITATIONS. The stock issuable under the Plan shall be
authorized but unissued Shares or treasury Shares. The aggregate number of
Shares reserved for Awards under the Plan shall not exceed 7,916,385 Shares on a
fully diluted basis, subject to adjustment pursuant to Section 10. In addition,
the total number of Shares underlying Awards of Restricted Stock, Stock
Appreciation Rights and Stock Units shall not exceed 1,200,000 Shares.
(b) ADDITIONAL SHARES. If Stock Units, Options or SARs are
forfeited or if Options or SARs terminate for any other reason before being
exercised, then such Stock Units, Options or SARs shall again become available
for Awards under the Plan. If SARs are exercised, then only the number of Shares
(if any) actually issued in settlement of such SARs shall reduce the number
available under Section 5(a) and the balance shall again become available for
Awards under the
5
<PAGE>
Plan. If Restricted Stock is forfeited, then such Restricted Stock shall again
become available for Awards under the Plan.
(c) DIVIDEND EQUIVALENTS. Any dividend equivalents distributed
under the Plan shall not be applied against the number of Restricted Stock,
Stock Units, Options or SARs available for Awards, whether or not such dividend
equivalents are converted into Stock Units.
SECTION 6. TERMS AND CONDITIONS FOR AWARDS OF RESTRICTED STOCK
AND STOCK UNITS.
(a) TIME, AMOUNT AND FORM OF AWARDS. Awards under the Plan may be
granted in the form of Restricted Stock, in the form of Stock Units, or in any
combination of both. Restricted Stock or Stock Units may also be awarded in
combination with NSOs or SARs, and such an Award may provide that the Restricted
Stock or Stock Units will be forfeited in the event that the related NSOs or
SARs are exercised.
(b) PAYMENT FOR AWARDS. No cash consideration shall be required of
the recipients of Restricted Stock or Stock Units under this Section 6.
(c) VESTING CONDITIONS. Each Award of Restricted Stock or Stock
Units shall become vested, in full or in installments, upon satisfaction of the
conditions specified in the Stock Award Agreement. A Stock Award Agreement may
provide for accelerated vesting in the event of the Participant's death,
Disability, retirement, Change in Control or other events.
(d) FORM AND TIME OF SETTLEMENT OF STOCK UNITS. Settlement of
vested Stock Units may be made in the form of (i) cash, (ii) Shares or (iii) any
combination of both. The actual number of Stock Units eligible for settlement
may be larger or smaller than the number included in the original Award, based
on predetermined performance factors. Methods of converting Stock Units into
cash may include (without limitation) a method based on the average Fair Market
Value of Shares over a series of trading days. Vested Stock Units may be settled
in a lump sum or in installments. The distribution may occur or commence when
all vesting conditions applicable to the Stock Units have been satisfied or have
lapsed, or it may be deferred to any later date. The amount of a deferred
distribution may be increased by an interest factor or by dividend equivalents.
Until an Award of Stock Units is settled, the number of such Stock Units shall
be subject to adjustment pursuant to Section 10.
(e) DEATH OF RECIPIENT. Any Stock Units Award that becomes payable
after the Award recipient's death shall be distributed to the recipient's
beneficiary or beneficiaries. Each recipient of a Stock Units Award under the
Plan shall designate one or more beneficiaries for this purpose by filing the
prescribed form with the Company. A beneficiary designation may be changed by
filing the prescribed form with the Company at any time before the recipient's
death. If no beneficiary was designated or if no designated beneficiary survives
the recipient, then any Stock Units Award that becomes payable after the
recipient's death shall be distributed to the recipient's estate.
(f) CREDITORS' RIGHTS. A holder of Stock Units shall have no
rights other than those of a general creditor of the Company. Stock Units
represent an unfunded and unsecured
6
<PAGE>
obligation of the Company, subject to the terms and conditions of the applicable
Stock Award Agreement.
(g) EFFECT OF A CHANGE IN CONTROL. The Committee may determine, at
the time of making an Award or thereafter, that such Award shall become fully
vested in the event that a Change in Control occurs with respect to the Company.
If the Committee finds that there is a reasonable possibility that, within the
succeeding six (6) months, a Change in Control will occur with respect to the
Company, then the Committee at its sole discretion may determine that any or all
outstanding Awards shall become fully exercisable as to all Shares subject to
such Awards.
SECTION 7. TERMS AND CONDITIONS OF OPTIONS.
(a) STOCK OPTION AGREEMENT. Each Grant under the Plan shall be
evidenced by a Stock Option Agreement between the Optionee and the Company. Such
Option shall be subject to all applicable terms and conditions of the Plan and
may be subject to any other terms and conditions that are not inconsistent with
the Plan and that the Committee deems appropriate for inclusion in a Stock
Option Agreement. The provisions of the various Stock Option Agreements entered
into under the Plan need not be identical. A Stock Option Agreement may provide
that new Options will be granted automatically to the Optionee when he or she
exercises the prior Options. The Stock Option Agreement shall also specify
whether the Option is an ISO or an NSO.
(b) NUMBER OF SHARES. Each Stock Option Agreement shall specify
the number of Shares that are subject to the Option and shall provide for the
adjustment of such number in accordance with Section 10. Options granted to any
Optionee in a particular calendar year shall in no event exceed 25% of the
Shares authorized for Award under this Plan subject to adjustment in accordance
with Section 10.
(c) EXERCISE PRICE. An Option's Exercise Price shall be
established by the Committee and set forth in a Stock Option Agreement. An
Option's Exercise Price shall not be less than 100% of the Fair Market Value
(110% for 10-Percent Shareholders) of a Share on the date of Grant. In the case
of an NSO, a Stock Option Agreement may specify an Exercise Price that varies in
accordance with a predetermined formula while the NSO is outstanding.
(d) EXERCISABILITY AND TERM. Each Stock Option Agreement shall
specify the date when all or any installment of the Option is to become
exercisable. The Stock Option Agreement shall also specify the term of the
Option; provided that the term of an ISO, and to the extent required by
applicable law a NSO, shall in no event exceed ten (10) years from the date of
Grant (five (5) years for ISO Grants to 10-Percent Shareholders). A Stock Option
Agreement may provide for accelerated exercisability in the event of the
Optionee's death, Disability, retirement, Change in Control or other events and
may provide for expiration prior to the end of its term in the event of the
termination of the Optionee's Service. Options may be awarded in combination
with SARs, and such an Award may provide that the Options will not be
exercisable unless the related SARs are forfeited. NSOs may also be awarded in
combination with Restricted Stock or Stock Units, and such an Award may provide
that the NSOs will not be
7
<PAGE>
exercisable unless the related Restricted Stock or Stock Units are forfeited. In
no event shall the Company be required to issue fractional Shares upon the
exercise of an Option.
(e) EFFECT OF A CHANGE IN CONTROL. The Committee may determine, at
the time of granting an Option or thereafter, that such Option shall become
fully exercisable as to all Shares subject to such Option in the event that a
Change in Control occurs with respect to the Company. If the Committee finds
that there is a reasonable possibility that, within the succeeding six (6)
months, a Change in Control will occur with respect to the Company, then the
Committee at its sole discretion may determine that any or all outstanding
Options shall become fully exercisable as to all Shares subject to such Options.
(f) MODIFICATIONS OR ASSUMPTION OF OPTIONS. Within the limitations
of the Plan, the Committee may modify, extend or assume outstanding Options or
may accept the cancellation of outstanding options (whether granted by the
Company or by another issuer) in return for the grant of new Options for the
same or a different number of Shares and at the same Exercise Price. The
foregoing notwithstanding, no modification of an Option shall, without the
consent of the Optionee, alter or impair his or her rights or obligations under
such Option.
(g) TRANSFERABILITY OF OPTIONS. Except as otherwise provided in
the applicable Stock Option Agreement and then only to the extent permitted by
applicable law, no Option shall be transferable by the Optionee other than by
will or by the laws of descent and distribution. Except as otherwise provided in
the applicable Stock Option Agreement, an Option may be exercised during the
lifetime of the Optionee only by the Optionee or by the guardian or legal
representative of the Optionee. No Option or interest therein may be assigned,
pledged or hypothecated by the Optionee during his lifetime, whether by
operation of law or otherwise, or be made subject to execution, attachment or
similar process.
(h) NO RIGHTS AS A STOCKHOLDER. An Optionee, or a transferee of an
Optionee, shall have no rights as a stockholder with respect to any Shares
covered by an Option until such person becomes entitled to receive such Shares
by filing a notice of exercise and paying the Exercise Price pursuant to the
terms of such Option.
(i) RESTRICTIONS ON TRANSFER. Any Shares issued upon exercise of
an Option shall be subject to such rights of repurchase, rights of first refusal
and other transfer restrictions as the Committee may determine. Such
restrictions shall apply in addition to any restrictions that may apply to
holders of Shares generally and shall also comply to the extent necessary with
applicable law.
(j) AUTOMATIC OPTION GRANTS TO NON-EMPLOYEE DIRECTORS.
Non-Employee Directors shall automatically be Granted NSOs ("Automatic Option
Grants") as set forth in this Section 7(j) (subject to adjustment under
Section 10).
(i) Each Non-Employee Director shall receive an Automatic
Option Grant for 6,000 Shares on the first trading day in June on or
after his or her initial election or appointment. However, any
Non-Employee Director who is first elected or appointed after May 31 of
any year (and who is not already serving on the Board at that time)
shall receive an Automatic Option Grant on the date of such initial
election or appointment for
8
<PAGE>
the number of Shares he or she would have received on the first trading
day in June of that year had he or she then been eligible. In addition,
on each anniversary of each Non-Employee Director's initial Automatic
Option Grant, each such continuing Non-Employee Director shall receive
an additional Automatic Option Grant for an amount of Shares that is
equal to 110% of the number of Shares (rounded down to the nearest
whole number) he or she received under the previous year's Automatic
Option Grant.
(ii) The terms and conditions applicable to each Automatic
Option Grant shall be as contained in this Section 7(j)(ii). The Option
Exercise Price shall be equal to one hundred percent (100%) of the Fair
Market Value of one Share on the date of Grant. Each Automatic Option
Grant shall have a term of ten (10) years measured from the date of
Grant. Fully vested Shares shall be exercisable at any time beginning
twelve (12) months after the date of Grant. No Options Granted under
this Plan may be exercised prior to Plan approval by the Company's
stockholders. Upon exercise of the Option, the Exercise Price shall be
payable immediately in cash or in Shares that the Optionee has held for
at least six (6) months. Payment may also be made by delivery of a
properly executed exercise notice together with irrevocable
instructions to a broker to promptly deliver to the Company the amount
of sale or loan proceeds to pay the Exercise Price. In the event the
Optionee ceases to provide Services as a Non-Employee Director,
outstanding vested Options may be exercised, within the term of such
Options, for a period of three (3) months after the date of such
cessation of Board service. However, the post-Service Option exercise
period shall be twelve (12) months in the case of cessation by reason
of the Optionee's Disability or death. In the case of death, the Option
may be exercised within such twelve (12) month period by the estate or
heirs of the Optionee.
(iii) This Automatic Option Grant program for the
Non-Employee Directors shall be self-executing in accordance with its
terms as provided for under the Plan, and neither the Board or
Committee shall exercise any discretionary functions with respect to
any Option Grants made under this program. Notwithstanding the
preceding sentence, the full Board in its sole discretion may make
additional NSO Grants to one or more Non-Employee Directors on such
terms and conditions as the Board determines.
SECTION 8. PAYMENT FOR OPTION SHARES.
(a) GENERAL RULE. The entire Exercise Price of Shares issued upon
exercise of Options shall be payable in cash at the time when such Shares are
purchased, except as follows:
(i) In the case of an ISO granted under the Plan, payment
shall be made only pursuant to the express provisions of the applicable
Stock Option Agreement. The Stock Option Agreement may specify that
payment may be made in any form(s) described in this Section 8.
(ii) In the case of an NSO granted under the Plan, the
Committee may at any time accept payment in any form(s) described in
this Section 8.
9
<PAGE>
(b) SURRENDER OF STOCK. To the extent that this Section 8(b) is
applicable, payment for all or any part of the Exercise Price may be made with
Shares which have already been owned by the Optionee for such duration as shall
be specified by the Committee. Such Shares shall be valued at their Fair Market
Value on the date when the new Shares are purchased under the Plan.
(c) PROMISSORY NOTE. To the extent that this Section 8(c) is
applicable, payment for all or any part of the Exercise Price may be made with a
full-recourse promissory note.
(d) CASHLESS EXERCISE. To the extent that this Section 8(d) is
applicable, payment for all or any part of the Exercise Price may be made by
delivery (on a form prescribed by the Company) of an irrevocable direction to a
securities broker to sell Shares and to deliver all or part of the sale proceeds
to the Company.
(e) OTHER FORMS OF PAYMENT. To the extent that this Section 8(e)
is applicable, and with Committee approval, payment may be made in any other
form that is consistent with applicable laws, regulations and rules.
SECTION 9. STOCK APPRECIATION RIGHTS.
(a) SAR AGREEMENT. Each Award of a SAR under the Plan shall be
evidenced by a SAR Agreement between the Optionee and the Company. Such SAR
shall be subject to all applicable terms of the Plan and may be subject to any
other terms that are not inconsistent with the Plan. The provisions of the
various SAR Agreements entered into under the Plan need not be identical. SARs
may be granted in consideration of a reduction in the Optionee's other
compensation.
(b) NUMBER OF SHARES. Each SAR Agreement shall specify the number
of Shares to which the SAR pertains and shall provide for the adjustment of such
number in accordance with Section 10.
(c) EXERCISE PRICE. Each SAR Agreement shall specify the Exercise
Price. A SAR Agreement may specify an Exercise Price that varies in accordance
with a predetermined formula while the SAR is outstanding.
(d) EXERCISABILITY AND TERM. Each SAR Agreement shall specify the
date when all or any installment of the SAR is to become exercisable. The SAR
Agreement shall also specify the term of the SAR. A SAR Agreement may provide
for accelerated exercisability in the event of the Optionee's death, Disability,
retirement, Change in Control or other events and may provide for expiration
prior to the end of its term in the event of the termination of the Optionee's
Service. SARs may also be awarded in combination with Options, Restricted Stock
or Stock Units, and such an Award may provide that the SARs will not be
exercisable unless the related Options, Restricted Stock or Stock Units are
forfeited. A SAR may be included in an ISO only at the time of Grant but may be
included in an NSO at the time of Grant or at any subsequent time, but not later
than six (6) months before the expiration of such NSO. A SAR granted under the
Plan may provide that it will be exercisable only in the event of a Change in
Control.
10
<PAGE>
(e) EFFECT OF CHANGE IN CONTROL. The Committee may determine, at
the time of awarding a SAR or thereafter, that such SAR shall become fully
exercisable as to all Shares subject to such SAR in the event that a Change in
Control occurs with respect to the Company. If the Committee finds that there is
a reasonable possibility that, within the succeeding six months, a Change in
Control will occur with respect to the Company, then the Committee at its sole
discretion may determine that any or all outstanding SARs shall become fully
exercisable as to all Shares subject to such SARs.
(f) EXERCISE OF SARs. If, on the date when a SAR expires, the
Exercise Price under such SAR is less than the Fair Market Value on such date
but any portion of such SAR has not been exercised or surrendered, then such SAR
shall automatically be deemed to be exercised as of such date with respect to
such portion. Upon exercise of a SAR, the Optionee (or any person having the
right to exercise the SAR after his or her death) shall receive from the Company
(i) Shares, (ii) cash or (iii) a combination of Shares and cash, as the
Committee shall determine. The amount of cash and/or the Fair Market Value of
Shares received upon exercise of SARs shall, in the aggregate, be equal to the
amount by which the Fair Market Value (on the date of surrender) of the Shares
subject to the SARs exceeds the Exercise Price.
(g) MODIFICATION OR ASSUMPTION OF SARs. Within the limitations of
the Plan, the Committee may modify, extend or assume outstanding SARs or may
accept the cancellation of outstanding SARs (whether granted by the Company or
by another issuer) in return for the Award of new SARs for the same or a
different number of Shares and at the same or a different Exercise Price. The
foregoing notwithstanding, no modification of a SAR shall, without the consent
of the Optionee, alter or impair his or her rights or obligations under such
SAR.
SECTION 10. PROTECTION AGAINST DILUTION.
(a) ADJUSTMENTS. In the event of a subdivision of the outstanding
Shares, a declaration of a dividend payable in Shares, a declaration of a
dividend payable in a form other than Shares in an amount that has a material
effect on the price of Shares, a combination or consolidation of the outstanding
Shares (by reclassification or otherwise) into a lesser number of Shares, a
recapitalization, a spin-off or a similar occurrence, the Committee shall make
such adjustments as it, in its sole discretion, deems appropriate in one or more
of:
(i) the number of Options, SARs, Restricted Stock and
Stock Units available for future Awards under Section 5;
(ii) the number of Stock Units included in any prior Award
which has not yet been settled;
(iii) the number of Shares covered by each outstanding
Option and SAR; or
(iv) the Exercise Price under each outstanding Option and
SAR.
Except as provided in this Section 10, a Participant shall have no rights by
reason of any issue by the Company of stock of any class or securities
convertible into stock of any class, any
11
<PAGE>
subdivision or consolidation of shares of stock of any class, the payment of any
stock dividend or any other increase or decrease in the number of shares of
stock of any class.
(b) REORGANIZATIONS. In the event that the Company is a party to a
merger or other reorganization, outstanding Options, SARs, Restricted Stock and
Stock Units shall be subject to the agreement of merger or reorganization. Such
agreement may provide, without limitation, for the assumption of outstanding
Awards by the surviving corporation or its parent, for their continuation by the
Company (if the Company is a surviving corporation), for accelerated vesting and
accelerated expiration, or for settlement in cash or for cancellation.
SECTION 11. VOTING AND DIVIDEND RIGHTS.
(a) RESTRICTED STOCK. The holders of Restricted Stock awarded
under the Plan shall have the same voting, dividend and other rights as the
Company's other stockholders. A Stock Award Agreement, however, may require that
the holders of Restricted Stock invest any cash dividends received in additional
Restricted Stock. Such additional Restricted Stock shall be subject to the same
conditions and restrictions as the Award with respect to which the dividends
were paid. Such additional Restricted Stock shall not reduce the number of
Shares available under Section 5.
(b) STOCK UNITS. The holders of Stock Units shall have no voting
rights. Prior to settlement or forfeiture, any Stock Unit awarded under the Plan
may, at the Committee's discretion, carry with it a right to dividend
equivalents. Such right entitles the holder to be credited with an amount equal
to all cash dividends paid on one Share while the Stock Unit is outstanding.
Dividend equivalents may be converted into additional Stock Units. Settlement of
dividend equivalents may be made in the form of cash, in the form of Shares, or
in a combination of both. Prior to distribution, any dividend equivalents which
are not paid shall be subject to the same conditions and restrictions as the
Stock Units to which they attach.
SECTION 12. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such awards
may be settled in the form of Shares issued under this Plan. Such Shares shall
be treated for all purposes under the Plan like Shares issued in settlement of
Stock Units and shall, when issued, reduce the number of Shares available under
Section 5.
SECTION 13. LIMITATIONS ON RIGHTS.
(a) RETENTION RIGHTS. Neither the Plan nor any Award granted under
the Plan shall be deemed to give any individual a right to remain an employee,
consultant or director of the Company or a Subsidiary. The Company and its
Subsidiaries reserve the right to terminate the Service of any person at any
time, and for any reason, subject to applicable laws, the Company's certificate
of incorporation and by-laws and a written employment agreement (if any).
12
<PAGE>
(b) STOCKHOLDERS' RIGHTS. A Participant shall have no dividend
rights, voting rights or other rights as a stockholder with respect to any
Shares covered by his or her Award prior to the issuance of a stock certificate
for such Shares. No adjustment shall be made for cash dividends or other rights
for which the record date is prior to the date when such certificate is issued,
except as expressly provided in Sections 6, 10 and 11.
(c) REGULATORY REQUIREMENTS. Any other provision of the Plan
notwithstanding, the obligation of the Company to issue Shares under the Plan
shall be subject to all applicable laws, rules and regulations and such approval
by any regulatory body as may be required. The Company reserves the right to
restrict, in whole or in part, the delivery of Shares pursuant to any Award
prior to the satisfaction of all legal requirements relating to the issuance of
such Shares, to their registration, qualification or listing or to an exemption
from registration, qualification or listing.
SECTION 14. WITHHOLDING TAXES.
(a) GENERAL. To the extent required by applicable federal, state,
local or foreign law, a Participant or his or her successor shall make
arrangements satisfactory to the Company for the satisfaction of any withholding
tax obligations that arise in connection with the Plan. The Company shall not be
required to issue any Shares or make any cash payment under the Plan until such
obligations are satisfied.
(b) SHARE WITHHOLDING. The Committee may permit a Participant to
satisfy all or part of his or her withholding or income tax obligations by
having the Company withhold all or a portion of any Shares that otherwise would
be issued to him or her or by surrendering all or a portion of any Shares that
he or she previously acquired. Such Shares shall be valued at their Fair Market
Value on the date when taxes otherwise would be withheld in cash. Any payment of
taxes by assigning Shares to the Company may be subject to restrictions,
including any restrictions required by rules of the Securities and Exchange
Commission.
SECTION 15. ASSIGNMENT OR TRANSFER OF AWARDS.
(a) GENERAL. Except as provided in Section 14, or in an applicable
agreement, or as required by applicable law, an Award granted under the Plan
shall not be anticipated, assigned, attached, garnished, optioned, transferred
or made subject to any creditor's process, whether voluntarily, involuntarily or
by operation of law. An Option or SAR may be exercised during the lifetime of
the Optionee only by him or her or by his or her guardian or legal
representative. Any act in violation of this Section 15 shall be void. However,
this Section 15 shall not preclude a Participant from designating a beneficiary
who will receive any outstanding Awards in the event of the Participant's death,
nor shall it preclude a transfer of Awards by will or by the laws of descent and
distribution.
(b) TRUSTS. Neither this Section 15 nor any other provision of the
Plan shall preclude a Participant from transferring or assigning Restricted
Stock or Stock Units to (a) the trustee of a trust that is revocable by such
Participant alone, both at the time of the transfer or assignment and at all
times thereafter prior to such Participant's death, or (b) the trustee of any
other trust to
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<PAGE>
the extent approved in advance by the Committee in writing. A transfer or
assignment of Restricted Stock or Stock Units from such trustee to any person
other than such Participant shall be permitted only to the extent approved in
advance by the Committee in writing, and Restricted Stock or Stock Units held by
such trustee shall be subject to all of the conditions and restrictions set
forth in the Plan and in the applicable Stock Award Agreement, as if such
trustee were a party to such Agreement.
SECTION 16. DURATION AND AMENDMENTS.
(a) TERM OF THE PLAN. The Plan, as set forth herein, shall become
effective on February 1, 1999 and shall terminate, subject to Section 16(b), no
later than January 1, 2004.
(b) RIGHT TO AMEND OR TERMINATE THE PLAN. The Board may amend or
terminate the Plan at any time and for any reason. The termination of the Plan,
or any amendment thereof, shall not affect any Award previously granted under
the Plan. No Awards shall be granted under the Plan after the Plan's
termination. The Board may not, without the approval of the Company's
stockholders (i) materially increase the number of Shares subject to Awards
under the Plan (unless necessary to effect the adjustments required under
Section 10)), (ii) materially modify the eligibility requirements for Awards
under the Plan, or (iii) make any other change with respect to which the Board
determines that Company stockholder approval is required by applicable law or
regulatory standards.
SECTION 17. EXECUTION.
To record the adoption of the Plan by the Board, the Company has caused
its duly authorized officer to execute this Plan.
Cygnus, Inc,
By /s/ John C. Hodgman
------------------------------
Title Chairman, President and CEO
---------------------------
14
<PAGE>
EXHIBIT 10.47
[CONFIDENTIAL TREATMENT REQUESTED]
MANUFACTURING AND SUPPLY AGREEMENT
BETWEEN
CYGNUS, INC.
AND
LTS LOHMANN THERAPY SYSTEMS CORP.
<PAGE>
i
TABLE OF CONTENTS
I. DEFINITIONS
1.1 Active Ingredient
1.2 Active Ingredient Specifications
1.3 Affiliate
1.4 Authority
1.5 Batch
1.6 Calendar Quarter
1.7 Certificate of Analysis
1.8 Commercially Reasonable Efforts
1.9 Commercial Value
1.10 Facility
1.11 GMP
1.12 Manufacturing
1.13 Marketing Authorization
1.14 Packaging
1.15 Preparation for Shipment
1.16 Primary Packaging
1.17 Processing
1.18 Product
1.19 Raw Materials
1.20 Scaling-Up
1.21 Secondary Packaging
1.22 Product Specifications
1.23 Technical Information
II. ESTABLISHING PRODUCTION, SCALE UP
2.1 Cost of Additional Equipment/ Payments to LTS CORP
2.2 Reimbursement by LTS CORP
2.3 Reimbursement for Scaling Up
2.4 Project Team
2.5 Assumption of all Liabilities by LTS CORP
III. REGISTRATION OF PRODUCT
3.1 Clinical Studies
3.2 Registration of Product
3.3 Regulatory Documents
3.4 Specific Manufacturing Know-how
<PAGE>
ii
IV. REQUIREMENTS AND SUPPLY
4.1 Supply of CYGNUS' Requirements
4.2 Samples
4.3 CYGNUS' Manufacturing Rights
4.4 Artwork and Text
4.5 LTS Corp's Refusal to Supply
4.6 Product Specifications
4.7 Compliance with Specifications
4.8 GMP-Compliance
4.9 Certificates of Analysis
4.10 Transport Packaging and Shipment
4.11 Grant of License
V. SUPPLY OF ACTIVE INGREDIENT BY CYGNUS
5.1 CYGNUS Contribution
5.2 Active Ingredient Specifications
5.3 LTS Corp's Audit
5.4 Quality Tests
5.5 Replacement of Active Ingredient
5.6 Costs Associated with Storage
5.7 Verification
VI. FORECASTS, PURCHASE ORDERS
6.1 First Forecast
6.2 Subsequent Forecast
6.3 Purchase Orders
6.4 Purchase Obligation
6.5 Supply Obligation
6.6 Initial Order
6.7 CYGNUS' Liability
6.8 LTS Corp's Supply Deficiency
VII. PRICE AND PAYMENTS
7.1 Supply Price
7.2 Payment
7.3 Credit in Favor of CYGNUS
VIII. INTELLECTUAL PROPERTY
8.1 No Rights by Implication
8.2 Patent Infringement
<PAGE>
iii
8.3 CYGNUS Rights for Manufacturing
IX. REPRESENTATIONS AND WARRANTIES
9.1 Limited Warranty
9.2 Product Adulteration or Misbranding
9.3 No Other LTS CORP Warranties
9.4 CYGNUS' Representations
X. INDEMNIFICATION
10.1 Indemnification by CYGNUS
10.2 Indemnification by LTS CORP
10.3 Details of Indemnification
10.4 No Punitive Damages
XI. INSURANCE COVERAGE
11.1 LTS Corp's Product Liability Insurance
11.2 CYGNUS' Product Liability Insurance
XII. RECALLS, WITHDRAWALS, ADVERSE REACTIONS
12.1 Recalls and Market Withdrawals
12.2 Notices
12.3 Used Products
XIII. CONFIDENTIALITY
13.1 Definition of Disclosing/ Receiving Party
13.2 Confidential Information
13.3 Exceptions to Confidentiality
13.4 No Copy
13.5 Secure Place
13.6 No Use of Information
13.7 No Disclosure to Third Parties
13.8 No Misuse
13.9 Necessary Use
13.10 No Obligation
13.11 Procedure
13.12 Duration
13.13 Sole Liability
<PAGE>
iv
XIV. TERM AND TERMINATION
14.1 Term of Agreement
14.2 Termination
14.3 Continuing Obligations
XV. MISCELLANEOUS
15.1 Information About First Launch
15.2 Assignments
15.3 Dispute Resolution
15.4 Governing Law and Forum
15.5 No Jury Trial
15.6 Force Majeure
15.7 Waiver
15.8 No Other Relationship
15.9 Notices
15.10 Entire Understanding
15.11 Invalidity
15.12 Amendments
15.13 Disclosure
15.14 Counterparts, Headings
EXHIBITS 1-6
<PAGE>
1
MANUFACTURING AND SUPPLY AGREEMENT
THIS AGREEMENT, made and effective as of this 30 day of September, 1999 by
and between CYGNUS, Inc., a Delaware corporation, having its principal place
of business at 400 Penobscot Drive, Redwood City, California 94063, USA
("CYGNUS") and LTS LOHMANN Therapy Systems Corp., a Delaware corporation,
having its principal place of business at 21 Henderson Drive, West Caldwell,
New Jersey 07006, USA ("LTS CORP"), hereinafter the "Parties".
W I T N E S S E T H:
WHEREAS, CYGNUS manufactures, distributes and sells the Product as
hereinafter defined; and
WHEREAS, CYGNUS owns or possesses the rights to the necessary proprietary
information related to the Manufacturing of the Product as such terms are
defined herein; and
WHEREAS, LTS CORP is presently engaged in the production of similar products
and, subject to the terms and conditions of this Manufacturing and Supply
Agreement, has the expertise and capacity to Manufacture and supply the
Product in the quantities desired by and in accordance with the high
standards of quality control of CYGNUS; and
WHEREAS, LTS LOHMANN Therapie-Systeme GmbH (now LTS LOHMANN Therapie Systeme
AG) ("LTS AG"), the parent company of LTS CORP, and CYGNUS entered into a
Letter of Intent ("LOI") executed by CYGNUS on April 30, 1998, and by LTS
GmbH on May 8, 1998, the terms of which are intended to be superseded by this
Agreement; and
WHEREAS, it is the intention of the Parties that, as of the Effective Date of
this Manufacturing and Supply Agreement between LTS CORP and CYGNUS, LTS AG
will cease to have any liability to CYGNUS in connection with this Agreement;
and
WHEREAS, CYGNUS desires to contract with LTS CORP and its Affiliates for the
Manufacturing and supply of CYGNUS' requirements of the Product for
transportation and sale to certain contract partner(s) worldwide, and LTS
CORP and its Affiliates wishes to supply such requirements as an
[CONFIDENTIAL TREATMENT REQUESTED] third-party manufacturer, upon the terms
and conditions hereinafter contained; and
NOW THEREFORE, CYGNUS and LTS CORP, in consideration of the premises and of
the mutual promises and covenants hereinafter contained, do each hereby
covenant and agree as hereinafter set forth.
<PAGE>
2
I. DEFINITIONS
1.1 ACTIVE INGREDIENT
Active Ingredient shall mean [CONFIDENTIAL TREATMENT REQUESTED].
1.2 ACTIVE INGREDIENT SPECIFICATIONS
Active Ingredient Specifications shall mean the specifications therefor, as
described in EXHIBIT 1.
1.3 AFFILIATE
Affiliate, used in relation to a Party hereto, shall mean
(i) any company or other entity of which such party now or hereafter
directly or indirectly owns more than fifty percent (50%) of the stock
entitled to vote for the election of directors of such company or otherwise
has voting control over such entity; or
(ii) any company or other entity of which such Party has the power to
appoint more than half the members of the supervisory board, board of
directors or boards legally representing the company or other entity; or
(iii) any company or other entity in which voting control is directly or
indirectly held by a parent company or other entity which also holds voting
control of, in such Party;
nevertheless and furthermore,
(iv) LTS LOHMANN Therapie-Systeme AG ("LTS AG") shall be deemed to be an
Affiliate of LTS CORP for purposes of this Agreement; and
(v) Lohmann GmbH & Co. KG shall not be deemed an Affiliate of LTS CORP
for purposes of this Agreement.
1.4 AUTHORITY
Authority shall mean the relevant governmental or regulatory body whose
approval is required to sell a Product in a particular country.
1.5 BATCH
Batch shall mean one (1) production lot of Product.
<PAGE>
3
1.6 CALENDAR QUARTER
Calendar Quarter shall mean the calendar quarters of the year beginning first
of January, April, July and October.
1.7 CERTIFICATE OF ANALYSIS
Certificate of Analysis shall mean a certificate issued by LTS CORP or its
Affiliates that states the Specifications, indicates the final release test
result and ranges, and includes documentation of any Batch deviations.
1.8 COMMERCIALLY REASONABLE EFFORTS
Commercially Reasonable Efforts shall mean those efforts employed by the
Parties equivalent to that level of attention and care and providing of
funding and personnel that they devote to their other transdermal products of
similar commercial potential and at a similar stage of progress of
development. For purposes of this Agreement, "commercially reasonable" shall
have the same meaning.
1.9 COMMERCIAL VALUE
Commercial Value shall mean the value that can be obtained for equipment in
an orderly, non-distressed sale. For a three year period commencing as of the
date of the LOI, the Commercial Value of equipment shall conclusively be
deemed to be not less than the full amount paid by CYGNUS to LTS AG pursuant
to Section 2.1, for items listed as 1, 2, 3 and 10 on EXHIBIT 2.
1.10 FACILITY
Facility shall mean any of the present LTS CORP manufacturing facilities,
namely
LTS LOHMANN Therapy Systems Corp., 21 Henderson Drive, West Caldwell, New
Jersey 07006, USA.
1.11 GMP
GMP shall mean the current Good Manufacturing Practices applicable to the
Manufacturing and Packaging of pharmaceutical products for human use in the
country of Manufacturing.
1.12 MANUFACTURING
Manufacturing shall mean the Processing and the Packaging of the Product in
accordance with this Agreement; the term "Manufacture" shall be construed
accordingly.
1.13 MARKETING AUTHORIZATION
<PAGE>
4
Marketing Authorization shall mean the document issued by the relevant
Authority granting CYGNUS or its contract partner the right to market a
Product in a particular country.
1.14 PACKAGING
Packaging shall mean the Primary Packaging and Secondary Packaging of Product
and the term "Packaged" shall be construed accordingly.
1.15 PREPARATION FOR SHIPMENT
Preparation for Shipment shall mean the deinstallation and customization of
LTS equipment for the purpose of shipping such equipment from Germany to the
West Caldwell, New Jersey, facility.
1.16 PRIMARY PACKAGING
Primary Packaging shall mean the procedure of blistering or sacheting the
Products in accordance with this Agreement. The terms "Primary Package" and
"Primary Packaged" in this Agreement shall be construed accordingly.
1.17 PROCESSING
Processing shall mean the compounding, component preparation, dyecutting,
testing, and any other procedures, or any part thereof, involved in
manufacturing the Products in accordance with this Agreement. The terms
"Process" and "Processed" in this Agreement shall be construed accordingly.
1.18 PRODUCT
Product shall mean a transdermal therapeutic system manufactured to meet
Product Specifications.
1.19 RAW MATERIALS
Raw Materials shall mean the Active Ingredients, excipients, components,
labels, labeling, packaging material and shipping containers necessary for
the Processing and Packaging of Products as listed in the master batch
records.
1.20 SCALING-UP
Scaling-Up shall mean the implementation of Manufacturing of Product in
accordance with this Agreement. The term "Scale-Up" shall be construed
accordingly.
1.21 SECONDARY PACKAGING
Secondary Packaging shall mean the assembly of the Primary Packaged Product,
together
<PAGE>
5
with any patient leaflet, into an appropriately labeled box in accordance
with this Agreement. The terms "Secondary Packaging" and "Secondary Packaged"
in this Agreement shall be construed accordingly.
1.22 PRODUCT SPECIFICATIONS
Product Specifications shall mean specifications contained in the US
regulatory filing or European dossier used to apply for Marketing
Authorization and furnished to LTS CORP by CYGNUS. Those Product
Specifications contain the written specifications for the Product including
the Raw Materials for the Manufacturing and quality control of Product and
its Packaging (Primary Packaged or Secondary Packaged or both), and any and
all additions and amendments to the same made by Cygnus after consultation
with LTS CORP and conveyed in writing to LTS CORP during the term of this
Agreement. The specifications for Product and criteria for the manufacturing
process are attached to and made a part of this Agreement as EXHIBIT 1. For
purposes of this Agreement, the Product is to be made by LTS CORP or its
Affiliates using the process currently employed for bioequivalency lot
[CONFIDENTIAL TREATMENT REQUESTED] or processes that do not substantially
differ from this process. A process is "substantially different" if it
requires additional clinical trials before submission of the process change
to regulatory authorities.
1.23 TECHNICAL INFORMATION
Technical Information shall mean all technical information, know-how,
discoveries, inventions, processes, formulae and methods that are necessary
or useful for the Manufacturing of the Product.
II. ESTABLISHING PRODUCTION, SCALE UP
2. 1 COST OF ADDITIONAL EQUIPMENT/PAYMENTS TO LTS CORP.
2.1.1 The equipment values and additional charges for establishing
Manufacturing of the Product at the LTS CORP site in West Caldwell,
New Jersey, USA, are set forth on EXHIBIT 2.
2.1.2 For each item as to which it has given its approval in writing,
CYGNUS shall pay to LTS CORP as follows:
(i) [CONFIDENTIAL TREATMENT REQUESTED] upon ordering of the equipment
(or upon Preparation for Shipment); and
(ii) [CONFIDENTIAL TREATMENT REQUESTED] upon installation of the
equipment; and
(iii) [CONFIDENTIAL TREATMENT REQUESTED] upon completion of the equipment
validation.
<PAGE>
6
2.1.3 In the event LTS CORP determines, prior to placing any orders, that
the cost of the items set forth on EXHIBIT 2 will exceed
$[CONFIDENTIAL TREATMENT REQUESTED] converted to US dollars as of
the conversion rate listed in the Wall Street Journal, National
Edition, for May 8, 1998, the second signature date for the LOI)
plus [CONFIDENTIAL TREATMENT REQUESTED], it shall give CYGNUS
written notice specifying the total costs and the reasons for the
excess cost.
2.1.4 LTS CORP shall seek CYGNUS consent to pay any amounts above
$[CONFIDENTIAL TREATMENT REQUESTED], which consent shall not be
unreasonably withheld to the extent such increases occur for reasons
beyond the control of LTS CORP. Under no circumstances shall LTS
CORP request CYGNUS to pay, nor shall CYGNUS be obligated to pay,
any amount in excess of $[CONFIDENTIAL TREATMENT REQUESTED], plus
[CONFIDENTIAL TREATMENT REQUESTED].
2.1.5 To the extent that CYGNUS has made payments to LTS AG pursuant to
the LOI, such payments shall be deemed as appropriate payments to
LTS CORP for the duties in question. Any outstanding payments shall,
from the date of this Agreement, be made to LTS CORP in US dollars.
2.2 REIMBURSEMENT BY LTS CORP.
2.2.1 LTS CORP shall reimburse [CONFIDENTIAL TREATMENT REQUESTED] of the
equipment costs paid by CYGNUS to LTS AG OR LTS CORP by reducing the
purchase price of the commercial Product, as set forth in EXHIBIT 5
by ten percent [CONFIDENTIAL TREATMENT REQUESTED] until such time as
such equipment costs have been fully reimbursed.
2.2.2 In the event the amount paid by CYGNUS for costs of equipment is not
[CONFIDENTIAL TREATMENT REQUESTED] through the purchase price
reductions made by LTS CORP and the result is a pay back shortfall
("Pay Back Shortfall"), one of the following shall occur:
2.2.2.1 if the Pay Back Shortfall is the result of a termination of this
Agreement that occurs prior to the date of the first commercial
launch following the first regulatory approval, LTS CORP shall
[CONFIDENTIAL TREATMENT REQUESTED]; or
2.2.2.2 if the Pay Back Shortfall is the result of a quantity of orders
which is insufficient to [CONFIDENTIAL TREATMENT REQUESTED] by means
of purchase price reductions within
[CONFIDENTIAL TREATMENT REQUESTED]after launch, LTS CORP shall
[CONFIDENTIAL TREATMENT REQUESTED].
2.3 REIMBURSEMENT FOR SCALING UP.
2.3.1 CYGNUS shall [CONFIDENTIAL TREATMENT REQUESTED], including without
limitation, Scaling-Up and validation, based on
[CONFIDENTIAL TREATMENT
<PAGE>
7
REQUESTED] in accordance with the timing and cost schedule for the
Scaling-Up and validation of Product, for which
2.3.1.1 LTS CORP has submitted to CYGNUS a detailed written breakdown in
advance of committing to perform the activities set forth in a
written detailed schedule, and
2.3.1.2 LTS CORP has obtained CYGNUS written approval in advance of
committing to perform such activities. These reimbursements shall be
paid forty-five (45) days after the receipt of an invoice.
2.3.2 A list of activities and proposed remuneration for Scale-Up and
Manufacturing is set forth in EXHIBIT 3 hereto.
2.3.3 A timing schedule and detailed description of these activities,
which includes the status thereof as of the date of execution of
this Agreement, is attached hereto as EXHIBIT 4. This Exhibit may be
amended and supplemented, as it may be necessary.
2.4 PROJECT TEAM.
2.4.1 CYGNUS and LTS CORP shall establish a joint project team (the
"Project Team") for the purpose of pursuing and supporting the
collaboration of the Parties during the period of Scaling-Up the
Manufacturing of Product.
2.4.2 Each Party shall appoint a project leader to the Project Team, who
shall act as liaison for that Party in matters relating to the
Scaling-Up.
2.4.3 The Project Team shall meet as reasonably requested by either of the
project leaders to discuss the progress made. Minutes shall be
maintained by both Parties for all Project Team meetings and shall
be exchanged by the Parties or maintained in such other manner as
the Parties may agree.
2.5 ASSUMPTION OF ALL LIABILITIES BY LTS CORP.
2.5.1 LTS CORP hereby assumes all rights and responsibilities of LTS AG
pursuant to the LOI.
2.5.2 CYGNUS hereby explicitly consents to such assumption and hereby
releases LTS AG from any and all claims arising under or related to
the LOI.
III. REGISTRATION OF PRODUCT
3.1 CLINICAL STUDIES.
All responsibility for any clinical studies shall be borne by CYGNUS or its
designee. Nothing in this Agreement shall obligate CYGNUS or its designee to
perform any such clinical studies.
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8
3.2 REGISTRATION OF PRODUCT.
CYGNUS shall own all regulatory registration filings and dossiers, except as
provided below. It is anticipated that, in the US, CYGNUS and LTS CORP will
each have its own Drug Master File (DMF) at the time of regulatory
submission. In such an event, LTS CORP shall own its DMF Type I relating to
manufacturing. CYGNUS reserves the right to fully review and approve LTS
Corp's DMF, except those parts solely related to LTS Corp's proprietary
manufacturing information.
3.3 REGULATORY DOCUMENTS.
3.3.1 LTS CORP shall furnish such assistance to CYGNUS as shall be
reasonably requested in connection with regulatory filings and the
continued maintenance thereof, at CYGNUS' expense.
3.3.2 LTS CORP shall be in charge of preparing the sections of the
applicable regulatory documents which concern the Manufacturing of
the Product at LTS CORP and shall provide those sections to CYGNUS
in a timely manner for inclusion in CYGNUS' US and foreign
regulatory filings.
3.3.3 CYGNUS shall work with LTS CORP regarding the format and contents of
the sections of the regulatory document prepared by LTS CORP in
order to ensure that the format and contents employed by LTS CORP is
consistent with that employed by CYGNUS and as required by
regulatory authorities in the relevant territories.
3.3.4 Cygnus shall use Commercially Reasonable Efforts to enable LTS CORP
to meet its obligations under this Section.
3.4 SPECIFIC MANUFACTURING KNOW HOW.
3.4.1 To the extent disclosure of specific manufacturing know-how is
required for registration purposes, LTS CORP will be entitled to
communicate such information directly to the relevant authorities
without disclosing it to CYGNUS, to the extent permitted by law.
3.4.2 LTS CORP shall permit CYGNUS to refer to any Drug Master File
maintained by LTS CORP for the purpose of Manufacturing.
IV. REQUIREMENTS AND SUPPLY
4.1 SUPPLY OF CYGNUS' REQUIREMENTS.
4.1.1 LTS CORP and its Affiliates agree to
[CONFIDENTIAL TREATMENT REQUESTED], except as set forth in Section
4.3, manufacture and supply to CYGNUS and its Affiliates all of
CYGNUS' and its Affiliates' requirements of the
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9
Product, subject to the terms and conditions of this Agreement.
CYGNUS and its Affiliates agree to [CONFIDENTIAL TREATMENT
REQUESTED], except as set forth in Section 4.3, purchase from CORP
and its Affiliates all of CYGNUS' and its Affiliates' requirements
of the Product, subject to the terms and conditions of this Agreement.
4.1.2 CYGNUS will designate to LTS CORP in writing which Affiliates of
CYGNUS are authorized to purchase the Product directly from LTS
CORP, and any Affiliate of CYGNUS so authorized by CYGNUS shall
enjoy all of the rights and be subject to all of the obligations
hereby imposed on CYGNUS. CYGNUS shall assure such compliance by
such Affiliate, and shall be deemed a guarantor for the performance
of its Affiliates under this Agreement.
4.1.3 LTS CORP shall at all times have the right to manufacture Product
under the terms of this Agreement for any third party who is
authorized by CYGNUS to have Product manufactured by LTS CORP.
4.1.4 Nothing in this Agreement shall prohibit LTS CORP from developing
any product independently or in cooperation with any third party
without use of any CYGNUS confidential or proprietary information,
or to manufacture for third parties any product developed by LTS
CORP and/or a third party, without use of any Cygnus proprietary or
confidential information, regardless of whether such product
contains the same or other active ingredients as those contained in
Product, and is used for the same or other indication as Product;
however, this Agreement expressly does not grant LTS CORP or a third
party any license(s) for the use, manufacture, or sale of such
products.
4.2 SAMPLES.
4.2.1 LTS CORP shall deliver to CYGNUS such quantities of samples of the
Product as CYGNUS shall reasonably request for the purpose of
conducting clinical trials of the Product.
4.2.2 The details and price per patch for such samples are set forth on
EXHIBIT 5 including related conditions. CYGNUS shall pay for such
samples within forty-five (45) calendar days of receipt of LTS
Corp's invoice therefore.
4.3 CYGNUS' MANUFACTURING RIGHTS.
CYGNUS may retain manufacturing rights to manufacture Product up to an amount
which is the greater of:
4.3.1 [CONFIDENTIAL TREATMENT REQUESTED]; or
4.3.2 [CONFIDENTIAL TREATMENT REQUESTED].
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10
4.4 ARTWORK AND TEXT.
4.4.1 The artwork and text required to be printed on the Primary and
Secondary Packaging, if applicable, shall be provided by CYGNUS or
its designee.
4.4.2 Any change to the artwork and text of the Primary Packaging or
Secondary Packaging (if applicable) requested by CYGNUS or its
contract partners or required by any authority shall be communicated
to LTS CORP in writing together with suitable samples of the revised
artwork or text.
4.4.3 CYGNUS shall reimburse LTS CORP for any Packaging Materials that can
no longer be used as a result of any changes, limited to the lesser
of (x) the current purchase order amount plus the forecast amounts
for the immediately following three (3) Calendar Quarters or (y) the
amount dictated under LTS Corp's standard purchase order mechanism
for similar Packaging Materials for similar products.
4.5 LTS CORP'S REFUSAL TO SUPPLY.
LTS CORP, after consultation with Cygnus, may refuse to supply Product in a
particular country in the event that LTS CORP reasonably determines that
4.5.1 the supply of Product violates any laws or regulatory requirements
in that particular country, or
4.5.2 that the sale, distribution and use of the Product endanger the
public health.
4.5.3 In such an event, CYGNUS shall be entitled to its full remedies, if
any, including those of termination, under this Agreement, only in
the event that no such violation or endangerment exists.
4.6 PRODUCT SPECIFICATIONS.
4.6.1 CYGNUS shall control and be responsible for the Product
Specifications contained in the regulatory registration filing or
dossier; however, CYGNUS shall first consult with LTS CORP before
making any changes in the Product Specifications resulting from
additional information gathered from release or stability testing of
Product batches.
4.6.2 To the extent that LTS CORP makes commercially reasonable
recommendations which are not adopted by CYGNUS, and this failure to
adopt such recommendations results in higher expenses and costs to
LTS CORP, LTS CORP shall have the right to adjust the purchase price
to reflect any such increases.
4.7 COMPLIANCE WITH PRODUCT SPECIFICATIONS.
All Products will be Manufactured in accordance with the Product
Specifications set forth in
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11
Exhibit 1 as of the date hereof. In the event of any amendments or changes to
the Product Specifications set forth in Exhibit 1 as of the date hereof,
Section 14.2.2 shall apply.
4.8 GMP-COMPLIANCE.
4.8.1 All Products will be Manufactured in accordance with GMP and in
compliance with all other applicable statutes, regulations, laws,
quality control standards, and Marketing Authorizations, as well as
in compliance with the Quality Assurance Agreement between LTS CORP
and CYGNUS to be executed within ninety (90) calendar days after the
Effective Date of this Agreement, as may be amended by the written
agreement of the Parties from time to time and annexed hereto as
soon as appropriate. LTS CORP will notify CYGNUS of any change in a
supplier of Raw Materials or a change in the manufacturing process
(but not the specific details if such details are proprietary) so
that the Parties can discuss the regulatory impact, if any, of such
change.
4.8.1.1 In accordance with procedural and regulatory requirements, LTS CORP
will maintain appropriate retain samples from every commercial lot
or batch of Product manufactured and will perform any required
analyses of complaint or retain samples of Product.
4.8.2 In relationship to the Product, these procedural and regulatory
requirements shall include, but are not limited to those relating to
the environment, food or drugs and occupational health and safety
applicable at the location of Manufacturing. Such regulations shall
include those of the U.S. Food and Drug Administration upon
commencement of commercial production for commercial sale. With
respect to all environmental, safety, and industrial hygiene matters
relating to LTS Corp's activities under this Agreement, LTS CORP
shall
(a) comply with all applicable laws and regulations issued by
national, state, and local authorities;
(b) inform CYGNUS promptly of any significant adverse event
(e.g., fires, explosions, accidental discharges, etc.);
(c) inform CYGNUS promptly of any substantiated allegations or
findings of violations of applicable laws or regulations;
(d) allow CYGNUS to inspect LTS Corp's facilities relating to
the Product, such inspections to be at reasonable times and
upon reasonable notice; and
(e) implement promptly any corrective action that may be
reasonably requested by CYGNUS, including (without
limitation) adhering to reasonable and significant elements
of the environmental, safety, and industrial hygiene
program adhered to by CYGNUS and/or its contract partners
in their own operations.
4.8.3 The Facility is and shall continue to be in compliance with GMP and
shall be available for regulatory inspection relating to
manufacturing of the Product upon the request of any Authority or
other governmental organization. In the event of governmental
inspection, LTS CORP will promptly notify CYGNUS of the
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12
occurrence of the inspection and its results, including any FDA 483
observations, warning letters, or product recalls (subject to
redaction of non-Product related information).
4.8.4 If LTS CORP fails to obtain or maintain approval of its facility by
the appropriate governmental authorities within six months after the
issuance of the first FDA or comparable regulatory agency
pre-approval inspection report denying such approval, and failure to
obtain or maintain approval is through no fault of Cygnus and within
the commercially reasonable control of LTS CORP, LTS CORP shall
immediately notify CYGNUS and the Parties shall consult with each
other within two (2) weeks after such notice in order to resolve the
problem. In the event that no unanimous solution can be reached
within a second two (2) week period, Cygnus shall then have the
right to terminate this Agreement under Section 14.2.1.2, and shall
notify LTS CORP within four (4) weeks thereafter if CYGNUS is
terminating the Agreement. In such event, CYGNUS shall have no
obligation to purchase Product from LTS CORP and shall be
[CONFIDENTIAL TREATMENT REQUESTED] pursuant to this Agreement. In
the situation where CYGNUS elects not to terminate this Agreement
and LTS CORP continues to fail to obtain or maintain approval of its
facility, then the procedures of this Section shall again apply for
a subsequent six-month period.
4.8.5 CYGNUS or its contract partners, and other third parties approved by
LTS CORP (which approval shall not be unreasonably withheld), shall
have the right to audit LTS CORP and its Affiliates for compliance
with the agreed upon Manufacture of the Product and current GMP as
well as in accordance with Section 4.8.2, at reasonable times and
after reasonable notice. Any such audit shall be restricted to areas
in which Product or its components are produced or released. In the
event that any material deficiencies are noted by CYGNUS or its
contract partners or LTS CORP-approved third parties, then LTS CORP
will prepare a remedial plan and will correct such material
deficiencies using Commercially Reasonable Efforts.
4.8.6 To the extent applicable, LTS CORP shall, as soon as practicable,
furnish CYGNUS with a copy of the Manufacturing Authorization
applicable to the Product and Facility, and other applicable
regulations, as updated from time to time.
4.8.7 In the event of a major revision or amendment of Product
Specifications or GMP, the Parties shall fairly discuss possible
ramifications and expense and Section 15.3 shall apply.
4.9 CERTIFICATES OF ANALYSIS.
LTS CORP or its Affiliates shall provide Certificates of Analysis to CYGNUS
for each shipment of Product delivered hereunder. Further, LTS CORP will
furnish to CYGNUS or its Affiliates copies of records and samples of each
production run in a computerized form, if practicable, at CYGNUS' request and
expense.
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13
4.10 TRANSPORT PACKAGING AND SHIPMENT.
4.10.1 Unless CYGNUS requests otherwise in writing, all Products shall be
packed for shipment and storage appropriate for the respective means
of transportation, using the Packaging agreed to by the Parties
according to EXHIBIT 1.
4.10.2 It is CYGNUS' obligation to first consult with and then notify LTS
CORP of any special freight packaging requirements. LTS CORP will
use Commercially Reasonable Efforts to comply with any such
requirements. All costs associated with any special packaging
requirements requested by Cygnus and performed by LTS CORP shall be
at CYGNUS' sole expense.
4.10.3 CYGNUS shall bear all costs of freight, shipping, insurance, taxes,
including without limitation import, customs, excise and sales
taxes, or other such charges related to the Product.
4.11 GRANT OF LICENSE.
4.11.1 CYGNUS hereby grants to LTS CORP [CONFIDENTIAL TREATMENT REQUESTED],
solely for the purpose of Scaling-Up and Manufacturing the Product
as manufactured by the process currently employed for bioequivalency
lot [CONFIDENTIAL TREATMENT REQUESTED] or processes that do not
substantially differ from this process, consistent with Section
1.22, for CYGNUS or its contract partners, subject to the terms and
conditions set forth in this Agreement. Any sale, disposition, or
license of such relevant Technical Information, patents, or patent
applications by CYGNUS to a third party shall include LTS Corp's
sole rights for the purpose of Scaling-Up and Manufacturing the
Product for CYGNUS. No other license or right to any CYGNUS
technology for any other purpose is expressly or implicitly given by
this Agreement.
4.11.2 Upon prior written consent by CYGNUS, LTS CORP shall have the right
to sublicense all or any portion of its rights granted under Section
4.11.1 and to delegate all or any portion of its Manufacturing
obligations under this Agreement to its Affiliates, including LTS
AG, provided that prior to the commencement of Manufacturing, such
Affiliate of LTS CORP has received all necessary validations,
inspections and regulatory approvals for Manufacturing.
4.11.3 In addition, LTS CORP shall have the right to sublicense all or any
portion of its rights granted under this Section to a non-Affiliate
third party only with CYGNUS' prior written consent and at CYGNUS'
sole discretion.
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14
V. SUPPLY OF ACTIVE INGREDIENT BY CYGNUS
5.1 CYGNUS CONTRIBUTION.
CYGNUS or CYGNUS contract partners shall provide the Active Ingredient
contained in the Product free of any charge to LTS CORP at the Facility in
quantities, quality and time sufficient for LTS CORP to meet its obligations
to CYGNUS under this Agreement. LTS CORP will provide CYGNUS with utilization
estimates in a timely manner for CYGNUS to acquire necessary quantities.
5.2 ACTIVE INGREDIENT SPECIFICATIONS.
Active Ingredient supplied by CYGNUS or its contract partners hereunder shall
meet the applicable Active Ingredient Specifications, safety data sheet and
relevant information concerning the safety, handling, disposal, use and
environmental effect of Active Ingredient. Each shipment of Active Ingredient
shall include a Certificate of Analysis for the Active Ingredient being
shipped.
5.3 LTS CORP'S AUDIT.
To the extent required by the regulatory authorities, CYGNUS shall ensure
that LTS CORP shall have the right to audit its contract partners with regard
to the Active Ingredient and current GMP, at reasonable times and after
reasonable notice. To the extent required by the regulatory authorities,
CYGNUS shall ensure that LTS CORP has the right to audit CYGNUS-approved
vendors with regard to Raw Materials and current GMP, at reasonable times and
after reasonable notice.
5.4 QUALITY TESTS.
5.4.1 LTS CORP shall be responsible for confirming the identity of Active
Ingredient shipped to LTS CORP by CYGNUS or by CYGNUS-approved
vendors, upon receipt of such Active Ingredient.
5.4.2 LTS CORP and CYGNUS-approved vendors shall each retain a sample of
such Active Ingredient, for such time period as may be required by
GMP or other laws or regulations.
5.5 REPLACEMENT OF ACTIVE INGREDIENT.
5.5.1 LTS CORP agrees to be fully responsible for the costs directly
related to the replacement of Active Ingredient resulting from any
loss or damage (not including waste) to the Active Ingredient caused
by it while in its possession.
5.6 COSTS ASSOCIATED WITH STORAGE.
5.6.1 LTS CORP agrees to bear all costs associated with storage of the Active
Ingredient
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15
prior to use in the Manufacture of Product and, for Products after
commercial launch, agrees to be responsible for all waste in excess
of the amount agreed upon in writing by the Parties, based on the
data on waste ratio derived from the first ten (10) commercial
batches of Product after the date of first sale of Product.
5.6.2 LTS CORP shall use Commercially Reasonable Efforts to minimize
waste. The Parties agree to annually review the amount of loss of
Active Ingredient resulting from waste during the preceding year. An
initial estimate of the waste ratio will be provided by LTS CORP
prior to commencement of commercial Manufacturing.
5.7 VERIFICATION.
5.7.1 CYGNUS may, at its sole discretion, appoint a qualified individual
subject to the approval of LTS CORP, which approval shall not
unreasonably be withheld, and subject to the confidentiality
provisions of this Agreement and to professional confidentiality
obligations to CYGNUS, to verify LTS Corp's inventory of Active
Ingredient solely as used in the Product and waste of such Active
Ingredient. LTS CORP shall send CYGNUS monthly usage and inventory
reports for the Active Ingredient.
5.7.2 Such LTS CORP-approved qualified individual shall have the right to
audit only the Manufacturing of Product by LTS CORP and its
Affiliates for compliance with the agreed upon waste ratio, at
reasonable times and after reasonable notice, and shall report the
rate of waste to CYGNUS.
5.7.3 All other information learned in the course of the audit shall be
deemed confidential and shall not be released to CYGNUS or other
third party without the prior written consent of LTS CORP.
VI. FORECASTS, PURCHASE ORDERS
6.1. FIRST FORECAST.
6.1.1 CYGNUS will provide LTS CORP with written forecasts of the number of
units of Products which will be required at least four (4) months
prior to the beginning of the Calendar Quarter in which first
commercial sale is projected to occur.
6.1.2 This forecast shall contain an estimate of the number of unit
purchases of Product for such Calendar Quarter and the next three
(3) Calendar Quarters.
6.2. SUBSEQUENT FORECAST.
Each subsequent written forecast shall update the prior estimate and include
an estimate of requirements for the next additional Calendar Quarter, so that
estimates for a rolling one (1) year period are always provided.
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16
6.3. PURCHASE ORDERS.
6.3.1 CYGNUS shall, within the framework of the forecast, submit firm
purchase orders and delivery dates to LTS CORP for Products no later
than seventy-five (75) days prior to the beginning of each
subsequent Calendar Quarter, for Products which LTS CORP delivers
during the course of the subsequent Calendar Quarter. The submitted
purchase orders and delivery dates shall be subject to acceptance by
LTS CORP, which acceptance shall not be commercially unreasonably
withheld, and any objection must be submitted by LTS CORP within ten
(10) business days of receipt of a purchase order or else it shall
be deemed fully accepted. In those circumstances in which LTS CORP
does not accept delivery dates, then CYGNUS and LTS CORP shall
establish delivery dates that are as close as commercially
reasonable to the nonaccepted delivery dates.
6.3.2 As a part of any purchase order, CYGNUS shall identify whether the
Product shall be bulk, Primary Packaged, Secondary Packaged, or
demonstration placebo.
6.4 PURCHASE OBLIGATION.
CYGNUS shall be obligated to purchase at least
[CONFIDENTIAL TREATMENT REQUESTED] of the quantities of Product contained in
its highest forecast for any Calendar Quarter covered by a Purchase Order
submitted pursuant to Section 6.3.1.
6.5 SUPPLY OBLIGATION.
6.5.1 LTS CORP shall accept and fulfill firm purchase orders for
quantities of Products
6.5.1.1 below [CONFIDENTIAL TREATMENT REQUESTED] of CYGNUS' forecast for
such period; and
6.5.1.2 [CONFIDENTIAL TREATMENT REQUESTED] of CYGNUS' forecast for such period.
6.5.2 LTS CORP will use Commercially Reasonable Efforts to fill any
portion of such orders in excess of such amount above
[CONFIDENTIAL TREATMENT REQUESTED], respectively, of the forecast.
Failure to do so, after having used such efforts, shall not be
deemed a breach of this Agreement.
6.5.3 If CYGNUS Product requirement for any Calendar Quarter exceeds
[CONFIDENTIAL TREATMENT REQUESTED], respectively, of the most recent
forecast for such Calendar Quarter (according to Section 6.1), the
Parties will discuss in good faith the additional amount, if any,
that LTS CORP is willing to supply.
6.5.4 Section 9.1.3.5 (iv) shall apply to the Supply Obligation of this
Section.
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6.6 INITIAL ORDER.
6.6.1 LTS CORP shall use Commercially Reasonable Efforts to deliver CYGNUS
initial order within sixty (60) days of the date of the order (but
not before the relevant delivery dates) or by such other date as the
Parties may agree. In the event that CYGNUS places the initial order
and LTS CORP reasonably believes and so notifies CYGNUS that the LTS
CORP facility is not yet ready for production, then the relevant
delivery date shall be the longer of (x) thirty (30) days after LTS
Corp's receipt of notice of the first regulatory approval to market
the Product or (y) sixty (60) days after receipt of Cygnus' initial
order.
6.6.2 Such initial order and any subsequent order placed within the first
year after commercial sale of the Product shall not exceed LTS
Corp's capacity, as stated in EXHIBIT 6, in a two-shift operation.
6.6.3 Section 9.1.3.5 (iv) shall apply to this Section as well.
6.7 CYGNUS' LIABILITY.
CYGNUS and its Affiliates will use Commercially Reasonable Efforts to ensure
that the forecasts are as accurate as possible, but it is expressly agreed
and understood that, except for CYGNUS obligation pursuant to Section 6.4.
above, the forecasts shall not constitute an additional obligation of CYGNUS
and its Affiliates to purchase the estimated quantities of the Product set
out in the forecasts. However, CYGNUS shall refund LTS CORP on a full-cost
basis for materials purchased based on two (2) quarters of forecast and put
on stock by LTS CORP according to the forecasts if such material cannot be
used for Product within the twelve (12) months subsequent to the forecast.
6.8 LTS CORP'S SUPPLY DEFICIENCY.
6.8.1 LTS CORP agrees to deliver Product to CYGNUS or its Affiliates
within ten (10) days after the delivery dates specified in the
purchase order, subject to Section 6.3.1 above.
6.8.2 In the event that LTS CORP is unwilling or unable to supply
[CONFIDENTIAL TREATMENT REQUESTED] of the amount of Product in the
aggregate for two (2) consecutive accepted purchase orders, then the
Parties shall consult with each other within two (2) weeks after the
delivery date for the second purchase order in order to resolve the
problem. In the event that no unanimous solution can be reached
within a second two (2) week period, LTS CORP shall immediately
initiate and employ Commercially Reasonable Efforts to secure a
second source of manufacturing at LTS Corp's expense. Such selection
shall be governed by the provisions of Sections 4.11.2 and 4.11.3 of
this Agreement. During said period of supply deficiency by LTS CORP,
CYGNUS shall be free to manufacture its supply requirements,
notwithstanding Section 4.1.1 of this Agreement. At CYGNUS' request,
the Parties
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18
will work together, on terms to be mutually agree upon, to qualify a
second site of manufacture at LTS CORP or its Affiliates, subject to
Sections 4.11.2 and 4.11.3.
VII. PRICE AND PAYMENTS
7.1 SUPPLY PRICE.
7.1.1 The supply prices for the Product are set forth in EXHIBIT 5.
7.1.2 Such Prices do not include the cost of the Active Ingredient, which
shall be provided in accordance with Section 5 of this Agreement.
7.1.3 All shipments are FOB ("free on board") as defined in the Uniform
Commercial Code ("UCC") LTS CORP manufacturing facility and CYGNUS
shall arrange for shipping.
7.1.4 The supply price for the Product and the forecast shall be reviewed
by the Parties prior to the end of each calendar year period that
this Agreement is in force and effect by September of each year.
7.1.5 The Parties shall negotiate in good faith about an adequate increase
of such prices by the end of September of each year for the
following calendar year. Such negotiations will be based upon: (a)
quantities sold to CYGNUS in the past and anticipated for the
future, (b) labor costs, and (c) other important costs related to
manufacturing including but not limited to consequences of
environmental law; however such increase shall be limited to the
increase of the Consumer Price Index for All Urban Consumers (CPI-U)
for the US City Average for All Items, 198284=100.
7.1.6 CYGNUS and LTS CORP hereby agree that the prices for the Product
shall be treated as confidential information pursuant to Section 13
of this Agreement and shall not be made available to, or discussed
with, any third party.
7.1.7 In the event that any amendment or further clarification to the
Product Specifications is made by CYGNUS and results in
substantially higher costs for LTS CORP, the Parties shall negotiate
an adequate increase in the supply price for the Product.
7.1.8 In the event that any changes in applicable laws or requirements of
relevant regulatory authorities results in substantially higher
costs for LTS CORP, the Parties shall negotiate an adequate increase
in the supply price for the Product.
7.2 PAYMENT.
7.2.1 Payment of the supply price shall be made by CYGNUS or its Affiliates
within forty-five (45) calendar days after the date of receipt of LTS
Corp's invoice.
7.2.2 Payments by CYGNUS under this Agreement shall be made without any
setoff, net or
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19
deduction, taking of any credit, or assertion of any other defense
arising out of any transaction, unless and until CYGNUS has obtained
a final and nonappealable judgment against LTS CORP in the amount
asserted by CYGNUS. Payments not made when due shall accrue interest
at an annual rate equal to 3.0% (three percent) above the Prime rate
as published by the Wall Street Journal, National Edition, from the
specific date when the payment became due or on the first business
day thereafter until finally paid.
7.3 CREDIT IN FAVOR OF CYGNUS.
7.3.1 LTS CORP shall not be obligated to continue deliveries if the total
of the value of orders and outstanding past due payments exceeds an
amount equal to $[CONFIDENTIAL TREATMENT REQUESTED].
7.3.2 In the event that past due payments exceed such amount, LTS CORP
will continue deliveries only if CYGNUS has secured a bank guarantee
or a guarantee by a solvent third party for the full amount that is
then outstanding.
VIII. INTELLECTUAL PROPERTY
8.1 NO RIGHTS BY IMPLICATION.
Nothing contained herein shall be construed as granting or implying any
rights under any patents or patent applications covering the Product, or any
right to use any information, know-how or data covered thereby for any
purpose, including but not limited to, for developing, manufacturing,
advertising, or distributing, except as expressly provided for in this
Agreement.
8.2 PATENT INFRINGEMENT.
8.2.1 CYGNUS will bear all of the risk, cost and expense (including
reasonable attorneys' fees) of defense of any suit for patent
infringement directed solely to the composition of the Product,
subject to Section 8.2.3, and shall be fully liable for, and shall
indemnify and hold harmless LTS CORP and its Affiliates for any
damages, claims or expenses (including reasonable attorneys' fees)
arising out of such infringement.
8.2.2. LTS CORP will bear all of the risk, cost and expense (including
reasonable attorneys' fees) of defense of any suit for patent
infringement directed to manufacturing of the Product, not related
to Cygnus' instructions to employ a particular design or process
and/or a particular composition in the Product, or to Cygnus'
alterations, and shall be fully liable for, and shall indemnify and
hold harmless CYGNUS and its Affiliates for any damages, claims or
expenses (including reasonable attorneys' fees) arising out of such
infringement.
8.2.3 To the extent that CYGNUS has specified that LTS CORP employ a
particular design or process for use in the Manufacture of the
Product and/or a particular composition in
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19
the Product, or given LTS CORP a written instruction to alter any
design or Manufacturing process recommended by LTS CORP, then CYGNUS
shall indemnify and hold harmless LTS CORP and its Affiliates for
any damages, claims or expenses (including reasonable attorneys'
fees) arising out of claims or allegations that such design or
process specified by Cygnus or requested alteration of any design or
Manufacturing process infringes a validly issued patent.
8.3. CYGNUS RIGHTS FOR MANUFACTURING.
CYGNUS represents to LTS CORP that:
8.3.1. After thorough and diligent examination, to the best of its
knowledge, CYGNUS owns or controls all rights it believes to be
necessary for the manufacturing, marketing, distribution and sale of
the Product; and
8.3.2. CYGNUS has the full right to grant the license to LTS CORP as set
forth in Section 4.11 hereof without the need to obtain consents or
approvals from any third party.
IX. REPRESENTATIONS AND WARRANTIES
9.1 LIMITED WARRANTY.
9.1.1 CYGNUS' sole remedy for a breach of Section 4.7 shall be the
replacement of any defective Product including the Active Ingredient
(up to a maximum of the units contained in the applicable lot)
within nine (9) months of the date of delivery of the defective
Product, provided that CYGNUS has delivered to LTS CORP written
notice of any such defect within 30 (thirty) days after notice of
the defect, and such defect is not the result of mishandling or
other misconduct by CYGNUS. LTS CORP will replace such defective
Product within sixty (60) days without charge, including all duty
charges. LTS CORP shall pay for all out-of-pocket shipping expenses
directly related to returning defective Products that are standard
in the industry.
9.1.2 For the purposes of LTS Corp's replacement of defective Products,
"defective" shall have the following meaning:
9.1.2.1 the Product did not comply with Product Specifications at the time
of delivery by LTS CORP, which noncompliance is not the result of
the development and design of the Product; or
9.1.2.2 the Product fails to meet shelflife specifications as defined in the
Product Specifications when stored and handled within the range of
specified conditions, which failure is not the result of the
development and design of the Product. Regarding this Section, the
period of nine (9) months from date of delivery shall be extended
for the duration of the shelflife period.
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21
9.1.3 PRODUCT WARRANTY.
9.1.3.1 LTS CORP shall manufacture Product in accordance with the Product
Specifications and any additional or different Product
Specifications agreed to in writing by the Parties or required by a
regulatory authority, provided that in such case LTS CORP may be
entitled to a price increase as specified in Section 4.8.7 and
7.1.4, at an FDA- and EU-approved site that meets all applicable GMP
requirements and that is included in approved regulatory
applications.
9.1.3.2 LTS CORP warrants that all Product shipped hereunder, at the time of
shipment and for the shelflife of the Product (assuming such Product
is stored and handled after shipment by LTS CORP under conditions
specified in the NDA or equivalent document),
(i) shall meet all Product Specifications;
(ii) shall be manufactured in accordance with GMP and all
applicable laws and regulations in effect at time of
manufacture; and
(iii) shall not be adulterated or misbranded.
9.1.3.3 LTS CORP warrants that all Product shipped hereunder shall be stored
prior to shipment by LTS CORP in accordance with this Agreement and
all applicable laws and regulations.
9.1.3.4 LTS CORP warrants that all Product shipped hereunder shall be
properly packaged in accordance with packaging specifications
approved in writing by CYGNUS.
9.1.3.5 LTS CORP makes no warranties concerning, and CYGNUS agrees to be
solely responsible and liable for:
(i) the quality of components and Raw Materials supplied by
CYGNUS or CYGNUS-approved vendors and any defect or
malfunction of the Product resulting directly thereof;
(ii) the performance or quality of the results of CYGNUS design
work including the Product Specifications and stability and
any defect of malfunction of the Product resulting directly
therefrom;
(iii) the storage and handling of the Product by CYGNUS or by
third parties (other than LTS CORP or its Affiliates) after
shipment by or on behalf of LTS CORP; or
(iv) the complete and timely delivery of components and Raw
Materials supplied by CYGNUS or CYGNUS-approved vendors and
any delays or deficiencies of delivery of the Product
resulting directly therefrom for a period of two (2) years
from the Effective Date of this Agreement. This provision
applies only (a) to CYGNUS and CYGNUS-approved vendors (b)
wherein LTS CORP has properly and in a timely manner placed
an order, (c) wherein such delays or deficiencies are not
within the commercially reasonable control of LTS CORP, and
(d) wherein LTS CORP, using Commercially Reasonable
Efforts, cannot
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22
timely qualify the vendor or another vendor for such
components or Raw Materials.
9.1.4 LTS CORP shall have the right, within two weeks of its receipt of
notice from CYGNUS, to examine any Product that is claimed to be
defective before any claim for replacement is honored. If LTS CORP
asserts that Product is not defective, it shall have the burden of
showing compliance with the Product Specifications with a
specificity appropriate for methods of analysis commonly used for
pharmaceutical products. CYGNUS shall bear the burden of proving
that the defect is not related to improper design, insufficient
design stability, or inadequate storage and handling conditions.
9.1.5 In the event that any governmental agency having jurisdiction
requests or orders, or if CYGNUS or its contract partners undertake,
any corrective action with respect to Product, including any Product
recall, customer notice, restriction, market action, or Product
change, and the cause or such corrective action is due solely to a
breach by LTS CORP of a warranty, obligation, or representation
under this Agreement, then LTS CORP shall reimburse CYGNUS or its
contract partners for the reasonable costs, up to a limitation of
US$[CONFIDENTIAL TREATMENT REQUESTED] per year, of such corrective
action, including but not limited to, the cost of any Product
affected thereby.
9.1.6 LTS CORP shall comply with CYGNUS' current contract partner's Policy
on the Employment of Young Persons, in effect as of the Effective
Date of this Agreement, in the manufacturing of Product at the
Facility; and LTS CORP shall maintain the records necessary to
demonstrate such compliance in order to provide annually CYGNUS
and/or its current contract partner a written certification of
compliance.
9.2 PRODUCT ADULTERATION OR MISBRANDING.
9.2.1 LTS CORP warrants that each Product shipped by it hereunder will
not, on the date of shipment, be adulterated or misbranded within
the meaning of any applicable law in which the definitions of
"adulteration" and "misbranding" are used, as such laws are
constituted and effective at the time of such shipment or delivery,
and will not be an article which may not, in any applicable law, be
introduced into interstate commerce.
9.2.2 LTS CORP certifies that it is not debarred and that it did not and
will not use in any capacity the services of any person debarred
under subsections 306 (a) or (b) of the United States Food, Drug and
Cosmetic Act with respect to its services to CYGNUS in connection
with this Agreement and that it has provided CYGNUS with a list of
all convictions described in subsections 306 (a) and (b) of the Act
which occurred within the previous five years, of LTS CORP and
affiliated persons used in any capacity with respect to its services
to CYGNUS, if any. LTS CORP further certifies that it will promptly
amend this certification as necessary.
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23
9.3 NO OTHER LTS CORP WARRANTIES.
9.3.1 LTS CORP MAKES NO OTHER WARRANTY, EITHER EXPRESS OR IMPLIED,
STATUTORY OR OTHERWISE, WITH RESPECT TO THE PRODUCT, INCLUDING
WITHOUT LIMITATION ANY IMPLIED WARRANTY OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE AND NON INFRINGEMENT. THE
WARRANTIES GIVEN UNDER THIS AGREEMENT ARE EXPRESSLY IN LIEU OF ALL
OTHER WARRANTIES EXPRESS OR IMPLIED.
9.3.2 CYGNUS shall not bind or purport to bind LTS CORP to any
affirmation, representation or warranty with respect to the Product
to any third party, and any attempts to do so shall be null and void.
9.4 CYGNUS' REPRESENTATIONS.
9.4.1 CYGNUS acknowledges that the Specifications of the Product are
determined by the results of the development carried out solely by
CYGNUS and transferred to LTS CORP and that LTS CORP shall be
entitled to disclaim any responsibility with regard to any defect in
the Specifications, except to the extent that the Specifications are
based on actual contributions by LTS CORP as set forth in Section
4.6 or as set forth in Section 9.1.
9.4.2 CYGNUS represents to LTS CORP that CYGNUS will be responsible for,
subsequent to delivery, storage, registration, proper patient and
user information, indication, medical prescription, marketing, post
sales surveillance and management of incidents relating to Product.
9.4.3 CYGNUS further represents that, at the time of execution of this
Agreement, any supply of Raw Materials described in CYGNUS'
Specifications is available from suppliers at competitive prices.
X. INDEMNIFICATION
10.1 INDEMNIFICATION BY CYGNUS.
10.1.1 CYGNUS shall indemnify and hold LTS CORP and its Affiliates, its
managing directors, directors, officers, employees, shareholders and
agents harmless from and against all damages, losses or expenses
suffered or paid as a result of any and all third party claims,
demands, suits, penalties, judgments or administrative and judicial
orders and liabilities (including reasonable counsel fees and
expenses) incurred, assessed or sustained by LTS CORP with respect
to or arising out of any injury, claim or damage resulting from or
caused by the use of the Product, and any injury, claim or damage
arising after the Manufacturing of the Product and related to the
design, Specifications, instructions of patients and/or customers
and the after sales surveillance of the Product within the scope of
its product liability insurance.
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24
10.2 INDEMNIFICATION BY LTS CORP.
10.2.1 LTS CORP shall indemnify and hold CYGNUS and Affiliates, its
managing directors, directors, officers, employees, shareholders and
agents harmless from and against all damages, losses or expenses
suffered or paid as a result of any and all third party claims,
demands, suits, penalties, judgements or administrative and judicial
orders and liabilities (including reasonable counsel fees and
expenses) incurred, assessed or sustained by CYGNUS with respect to
or arising out of any injury, claim or damage resulting from or
caused by defects in Manufacturing of Product within the scope of
its product liability insurance.
10.3 DETAILS OF INDEMNIFICATION.
10.3.1 The Party seeking indemnification under this Section 10 (the
"Indemnified Party") shall give notice to the Party providing such
indemnification (the "Indemnifying Party") of the assertion of any
claim, or commencement of any suit, action or proceeding in respect
of which indemnity may be sought under this Section promptly after
receipt of notice from a third party of the assertion of such claim
or the commencement of such suit, action or proceeding.
10.3.2 In the event indemnification is sought with respect to a direct
claim by the Indemnified Party, notice shall be given within sixty
(60) days of the discovery of the event, action, or state of facts
for which indemnification is sought.
10.3.3 With respect to third party claims, the Indemnifying Party shall be
entitled at its own expense to participate in or, to the extent that
it shall wish to do so, to assume the defense of any such claim,
suit, action or proceeding with its own counsel.
10.3.4 If the Indemnifying Party elects to assume such defense, it shall be
liable to the Indemnified Party for fees of counsel and other
expenses subsequently and reasonably incurred by the Indemnified
Party in connection with such defense, in the event that the
Indemnified Party determines that representation of both Parties by
the same counsel would be inappropriate due to an actual or
potential conflict of interest between them.
10.3.5 Whether or not the Indemnifying Party elects to assume the defense
of any third party claim, suit, action or proceeding, it shall not
be liable for any compromises or settlement of any such claim, suit,
action or proceeding effected without its consent.
10.3.6 The Parties agree to cooperate to the fullest extent possible in
connection with any third party claim, suit, action or proceeding
for which indemnification is or may be sought under this Agreement.
10.3.7 In the event the Indemnifying Party makes any payment pursuant to
its indemnification obligations under this Agreement, it shall be
subrogated to all rights
<PAGE>
25
of the Indemnified Party to pursue any claim to receive payment or
other consideration from any other third party which may be liable
with respect to such claim, suit, action or proceeding for which
indemnification was provided.
10.3.8 For any matter in which the Indemnified Party seeks indemnification
from the Indemnifying Party, the Indemnifying Party hereby
relinquishes, on its own behalf and on behalf of its insurers and
other third parties, any right to seek indemnification or
contribution that might otherwise be subrogated to such insurers or
third parties.
10.4 NO PUNITIVE DAMAGES.
10.4.1 Except for the provision in Section 10.4.2, LTS CORP shall not be
liable for damages not specified in this Agreement, whether direct,
indirect, special or consequential, lost profits or punitive
damages, unless covered by the Insurance Policy; provided, however,
that this exclusion of liability does not apply to the extent that
such an agreement would be invalidated as a violation of law or
public policy as may be the case, for example, for willful or
intentional misconduct or equivalent default. Cygnus shall indemnify
LTS CORP and its Affiliates for any such damages awarded to third
parties.
10.4.2 Section 10.4.1 shall not apply to damages caused or related to
willful misconduct by LTS CORP or its Affiliates. LTS CORP shall be
liable for such damages regardless of coverage by Insurance Policy,
and shall indemnify CYGNUS for any such damages awarded to third
parties.
XI. INSURANCE COVERAGE
11.1 LTS CORP shall obtain and maintain from the first commercial lot of
Product through the remaining term of this Agreement product liability
insurance in an amount equal to at least US
$[CONFIDENTIAL TREATMENT REQUESTED]. If the cost of the premiums for such
insurance is substantially increased from that available as of the date
hereof, then the Parties shall negotiate in good faith allocation of such
additional premium amounts. Additionally and thereafter, LTS CORP shall
submit a Certificate of Insurance to CYGNUS on an annual basis. LTS CORP
shall specifically include the Product on its product liability insurance
policy. Furthermore, LTS CORP shall provide CYGNUS with thirty (30) days
written notice of cancellation prior to canceling the product liability
insurance; however, in no event shall such notice remove the obligations of
LTS CORP to obtain and maintain such product liability insurance as set forth
herein. LTS CORP shall not be required to obtain or maintain any product
liability insurance covering a lack of performance of the Product resulting
in unwanted pregnancies, and CYGNUS shall fully indemnify and hold harmless
LTS CORP against all damages, claims or expenses (including reasonable
attorneys' fees) in connection with any such lack of performance of the
Product resulting in unwanted pregnancies.
11.2 CYGNUS' PRODUCT LIABILITY INSURANCE.
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26
CYGNUS shall maintain existing product liability insurance. CYGNUS will use
Commercially Reasonable Efforts to obtain and maintain product liability
insurance covering the general types of activities for which indemnity is
provided to LTS CORP under this Agreement (subject to standard limitations)
with coverage limits customary for similar companies in the industry at a
similar stage. CYGNUS shall further use Commercially Reasonable Efforts to
ensure that all future contract partners waive all rights to make any
additional claims against LTS CORP which are beyond the scope of liability
set forth in this Agreement.
XII. RECALLS, WITHDRAWALS, ADVERSE REACTIONS
12.1 RECALLS AND MARKET WITHDRAWALS.
12.1.1 In the event that:
(ii) any Authority issues a request, directive, or order that the Product
be recalled or withdrawn; or
(iii) a court of competent jurisdiction orders a recall or withdrawal; or
(iv) either Party determines after consultation with the other Party,
that the Product should be recalled or withdrawn as a result of
Manufacturing defects;
then the Party initiating such recall or withdrawal shall take all appropriate
corrective actions to effect the recall or withdrawal.
12.2 NOTICES.
12.2.1 Each Party shall notify the other Party promptly upon receipt of any
manufacturing technical complaint or notice of adverse reaction
relating to the manufacture of the Product.
12.2.2 Each Party shall promptly advise the other Party of any safety or
toxicity problem of which the Party becomes aware regarding the
Product or the Raw Materials used in the Manufacture of the Product.
12.2.3 In connection with marketed Products, each Party shall report within
three (3) business days (or sooner if required to comply with
regulatory requirements) of the initial receipt of a report any
adverse experience with the Product that is serious and unexpected.
Serious adverse experiences mean any experience that suggests a
significant hazard, contraindication, side effect or precaution, or
any experience that is fatal or life threatening, is permanently
disabling, requires or prolongs inpatient hospitalization or is a
congenital anomaly, cancer or overdose. An unexpected adverse
experience is one not identified in nature, specificity, severity or
frequency in the current investigator brochure or the U.S. labeling
for the drug (provided by
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27
CYGNUS). LTS CORP shall not have any obligation to actively obtain
any such information or reports.
12.3 USED PRODUCTS.
Only in the event that by operation of law, rule or regulation in a
particular country, either LTS CORP or CYGNUS is required to collect,
receive, store or dispose of used Product, CYGNUS shall fulfill, at CYGNUS'
sole cost and expense and in a manner consistent with the requirements of any
such law, rule or regulation in that particular country all obligations of
LTS CORP relating to such collection, receipt, storage or disposition.
XIII. CONFIDENTIALITY
13.1 DEFINITION OF DISCLOSING/RECEIVING PARTY.
To the extent that a Party to this agreement provides such Confidential
Information it will be referred to herein as the "Disclosing Party"; to the
extent that a Party receives such Confidential Information it will be
referred to as the "Recipient".
13.2 CONFIDENTIAL INFORMATION.
"Confidential Information" shall mean all trade secrets, information and data,
13.2.1 that are related to the subject matter of this Agreement; and
13.2.2 that are provided by a Party to the other Party pursuant to this
Agreement (or a separate agreement); and
13.2.3 includes, but is not limited to, the general manufacturing of
transdermal therapeutic systems, organization, mechanical equipment,
manufacturing processes or trade secrets which have been or may
hereafter be disclosed, directly or indirectly by Disclosing Party
either orally or in writing, or through inspection, as well as
samples, which might be necessary for experiments and tests;
13.2.4 which may be a distinct use or evaluation, or a distinct combination
of different non-confidential information, or a combination of
non-confidential information with Confidential Information;
13.2.5 and which is identified by the Disclosing Party as Confidential
Information subject to this Agreement either in writing or orally
(in the case of an oral disclosure, the Confidential Information
will be identified as such in writing within 45 days after such oral
disclosure is made), where possible in advance of its disclosure; and
13.2.6 which is furnished to the Recipient by or on behalf of the
Disclosing Party for the purpose of informing the Recipient in
connection with the Manufac-
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28
turing (and to the extent CYGNUS proposes to disclose information
not directly related to the manufacture by LTS of Product, then
CYGNUS shall first propose the nature of the disclosure and LTS may
decline such disclosure).
13.3 EXCEPTIONS TO CONFIDENTIALITY.
The confidentiality obligations shall not apply to such Information
13.3.1 that is now in the public domain or subsequently enters the public
domain without fault on the part of the Recipient; and/or
13.3.2 that the Recipient can demonstrate by competent evidence is
presently known by the Recipient from its own sources; and/or
13.3.3 that the Recipient can demonstrate by competent evidence was
generated by the Recipient independently from the disclosure thereof
by the Disclosing Party; and/or
13.3.4 which is disclosed to the Recipient without restriction, after
disclosure thereof by the Disclosing Party by a third party lawfully
and contractually entitled to make such disclosure.
13.3.5 However, any combination of features or disclosures shall not be
deemed to fall within the foregoing exclusions merely because
individual features are published or available to the general public
or in the Recipient's rightful possession unless the combination
itself and principle of operation are published or available to the
general public or are in the Recipient's rightful possession.
13.3.6 Recipient shall treat as confidential and secret all Confidential
Information unless necessary for the purpose of preparing the
Manufacturing of Product.
13.4 NO COPY.
Recipient shall not copy Confidential Information, technical data or
documents except for the purpose of this Agreement.
13.5 SECURE PLACE.
Recipient shall keep all Confidential Information, technical data, documents
and samples in good condition and a safe place and return them on request,
except that Recipient may retain one copy for archival purposes.
13.6 NO USE OF INFORMATION.
Recipient shall neither directly nor indirectly through its employees,
agents, affiliates or other persons or entities connected to Recipient use or
put into production Confidential Information, technical data, analytical
methods, documents or samples which have been received from Disclosing Party.
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29
13.7 NO DISCLOSURE TO THIRD PARTIES.
Recipient shall not forward any Confidential Information, technical data
and/or samples to third parties without express prior written consent of
Disclosing Party, which shall not be unreasonably withheld and which is
hereby permitted with regard to an affiliate of Recipient.
13.8 NO MISUSE.
Recipient shall not use Confidential Information to contest or challenge any
protected rights or applications for protection of rights concerning the
Information, and shall refrain from undertaking any action which could affect
such protected rights or impede any applications by using Information.
13.9 NECESSARY USE.
13.9.1 In case the disclosure of Confidential Information is necessary to
allow Recipient to defend itself against litigation, or to file and
prosecute health registration applications or to comply with
judicial decrees or government actions or regulations such
disclosure shall not constitute a breach of the confidentiality
obligations set forth herein provided, however, that Disclosing
Party has given its prior written consent, which consent shall not
be unreasonably withheld.
13.9.2 CYGNUS shall have the right to disclose Confidential Information to
Authorities and contract partners in order to obtain Marketing
Authorization under the utmost precautions to maintain the
confidentiality of the information, provided that CYGNUS shall only
disclose Confidential Information to contract partners who owe
obligations of confidence to CYGNUS and LTS CORP. CYGNUS and its
contract partners shall use Commercially Reasonable Efforts to
maintain confidentiality to the maximum extent possible in
connection with the disclosure of Confidential Information to
Authorities and contract partners.
13.10 NO OBLIGATION.
Nothing in this Agreement shall be construed as an obligation to provide
proprietary Information except when necessary to enable the other Party to
fulfil its obligations hereunder.
13.11 PROCEDURE.
13.11.1 All Technical Information that is intended to be Confidential shall
be channeled through a CYGNUS employee(s) designated in writing from
time to time by CYGNUS and an LTS CORP employee(s) designated in
writing from time to time by LTS CORP.
13.11.2 All Technical Information that is not disclosed to the Recipient
pursuant to the procedure set forth above may be freely used by the
Recipient without any restrictions
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30
or limitations.
13.12 DURATION.
The obligations of confidentiality and nonuse under this Agreement shall
apply for a term of 10 (ten) years after the termination of this Agreement.
13.13 SOLE LIABILITY.
LTS CORP shall be solely liable for any violations of Section 13 of this
Agreement by its employees and LTS CORP also assumes full responsibility for
any violations of Section 13 by employees of LTS AG. CYGNUS shall be solely
liable for any violations of Section 13 of this Agreement by its employees.
XIV. TERM AND TERMINATION
14.1 TERM OF AGREEMENT.
14.1.1 This Agreement shall become effective as of the Effective Date (as
defined below in Section 14.1.3) and shall continue, subject to its
termination or extension in accordance with the terms of this
Section 14, for a term of [CONFIDENTIAL TREATMENT REQUESTED] years
following the commercial launch of the Product. In the event that
either Party intends not to extend the Agreement past the initial
[CONFIDENTIAL TREATMENT REQUESTED] term, that Party shall give the
other Party [CONFIDENTIAL TREATMENT REQUESTED] years prior written
notice of such termination.
14.1.2 In the event that no notice of termination is given with respect to
the initial [CONFIDENTIAL TREATMENT REQUESTED] term or any
subsequent extension term, this Agreement shall be automatically
extended for a [CONFIDENTIAL TREATMENT REQUESTED] extension term. In
the event that either Party intends not to extend this Agreement
past any subsequent two-year extension term, that Party shall give
the other party [CONFIDENTIAL TREATMENT REQUESTED] year prior
written notice of such termination.
14.1.3 Notwithstanding anything herein to the contrary, the effectiveness
of this Agreement and the rights and obligations of the Parties
hereunder shall be subject to the condition precedent that this
Agreement shall have been approved by the Supervisory Board
(AUFSICHTSRAT) of LTS AG. As used herein, the term "Effective Date"
shall mean the date on which the condition precedent referred to in
the preceding sentence shall have been satisfied.
14.2 TERMINATION.
14.2.1 Either Party hereto shall have the right, in its discretion, to
terminate this Agreement immediately by written notice, said notice
period not to exceed two (2) months, to the other Party in the event
that:
14.2.1.1 the other Party, by voluntary or involuntary action and other than
for the purpose of a bona fide reorganization, goes into liquidation
or receivership or dissolves or files a
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31
petition for bankruptcy or for suspension of payments or is
adjudicated bankrupt, becomes insolvent or assigns or makes any
composition of its assets for the benefit of creditors, (and such
action is not dismissed within 120 days); or
14.2.1.2 either Party breaches or fails to observe or perform any material
term or condition of this Agreement, and such breach or default is
not cured or appropriate action commenced to remedy such breach
within sixty (60) days after written notice thereof is given to the
Party at fault; however, two (2) weeks before the end of such sixty
(60) day period, the Parties shall consult with each other for a
period of two (2) weeks after such sixty (60) day period order to
resolve the problem before termination is effective; provided,
however, that in the case of failure to pay, the time period shall
be a twenty (20) day period instead of a sixty (60) day period; or
14.2.1.3 either Party fails to promptly secure or renew any license,
registration, permit, authorization or approval necessary for the
conduct of its business in the manner contemplated by this Agreement
in any significant country, or if any such license, registration,
permit, authorization or approval is revoked or suspended and not
reinstated within sixty (60) days or Commercially Reasonable Efforts
are not being made to effect such reinstatement; or
14.2.1.4 either Party ceases to do business, or otherwise terminates its
business operations.
14.2.2 If after any amendments or changes to the Product Specifications
(other than amendments or changes agreed to in writing by LTS CORP),
LTS CORP notifies CYGNUS that LTS CORP is unable to comply with such
amendments or changes to the Product Specifications, then CYGNUS
shall have the right, at its sole discretion and as its exclusive
remedy hereunder, to terminate this Agreement within two (2) weeks
of receipt of such notice.
14.2.3 In the event that, notwithstanding its Commercially Reasonable
Efforts, LTS CORP is unable to obtain or maintain product liability
insurance as described in Section 11.1, CYGNUS shall have the right,
at its sole discretion and as its exclusive remedy hereunder, to
terminate this Agreement within two (2) weeks of receipt of such
notice.
14.3 CONTINUING OBLIGATIONS.
14.3.1 Notwithstanding the termination of this Agreement for any reason,
CYGNUS shall continue to be liable for the payment of purchase price
for quantities of the Product previously ordered by CYGNUS and
delivered by LTS CORP prior to the effective date of termination.
14.3.2 Upon termination of this Agreement, the obligations of the Parties
pursuant to firm orders for purchase and delivery of Products at the
time of such termination shall remain in effect, except that LTS
CORP will not be obligated with respect to delivery dates more than
two months after termination.
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14.3.3 CYGNUS and its Affiliates shall be permitted to sell off their
inventory of Product following termination of this Agreement.
XV. MISCELLANEOUS
15.1 INFORMATION ABOUT FIRST COMMERCIAL LAUNCH.
CYGNUS shall promptly inform LTS CORP in writing as to the date and
circumstances of each first commercial launch of the Product in each country.
15.2 ASSIGNMENTS.
15.2.1 This Agreement shall not be assignable by either Party hereto, in
whole or in part, in fact or by operation of law, without the prior
written consent of the other, except that either Party may assign
this Agreement to any of its present Affiliates, as well as to a
person or entity who acquires all or substantially all of the assets
or business of the business unit to which this Agreement relates,
whether by sale, merger or otherwise.
15.2.2 Any successor corporate entity of any Party hereto shall be bound to
this Agreement in the same manner as the original Party.
15.3 DISPUTE RESOLUTION.
15.3.1 Any controversy or claim arising out of or relating to either
Party's performance under this Agreement, the Parties' inability to
agree on any provision to be agreed upon, or the interpretation or
effectiveness of this Agreement shall, upon the written request of
either Party, be referred to the Chief Executive Officer of LTS CORP
and the Chief Executive Officer of CYGNUS for resolution, who shall
promptly meet, in person or by telephone, and in good faith attempt
to resolve the controversy, claims or issues referred to them.
15.3.2 If no resolution has been achieved within thirty (30) days of such
request, either Party shall be free to commence proceedings to
resolve the dispute.
15.4 GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the laws
of the State of New Jersey without reference to the laws that might otherwise
govern under applicable principles of conflicts of laws, for events,
activities and claims.
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33
15.5 NO JURY TRIAL.
In the event that any dispute or claim of any sort arising out of this
Agreement or any subsequent Agreement concerning the Product should be
commenced by either Party, each of the Parties hereby irrevocably waives any
right that such Party may have to demand or request a trial by jury.
15.6 FORCE MAJEURE.
15.6.1 Neither Party shall be responsible or liable to the other Party for,
nor shall this Agreement be terminated as a result of, any failure
to perform any of its obligations hereunder, if such failure results
from circumstances beyond the control of such Party, including,
without limitation, requisition by any government authority, the
effect of any statute, ordinance or governmental order or
regulation, wars, strikes, lockouts, riots, epidemic, disease, an
act of God, civil commotion, fire, earthquake, storm, failure of
public utilities, common carriers or lack of supplies, or any other
circumstances, whether or not similar to the above causes and
whether or not foreseeable.
15.6.2 The Parties shall use their Commercially Reasonable Efforts to avoid
or remove any such cause and shall resume performance under this
Agreement as soon as feasible whenever such cause is removed;
provided, however, that the foregoing shall not be construed to
require either Party to settle any dispute with any third party, to
commence, continue or settle any litigation, or to incur any unusual
or extraordinary expense.
15.7 WAIVER.
No failure or delay by either Party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof nor shall any single or
partial exercise thereof preclude any other or further exercise of any other
right, power or privilege. The rights and remedies provided shall be
cumulative and not exclusive of any rights or remedies provided by law.
15.8 NO OTHER RELATIONSHIP.
15.8.1 LTS CORP agrees to carry out this Agreement as an independent
contractor and not as an employee, servant, agent or joint venturer
of CYGNUS. LTS CORP shall use its own employees, which are in no
sense to be deemed employees of CYGNUS. LTS CORP shall be solely
responsible for the payment of employee wages, national insurance
and pension contributions for its employees. LTS CORP acknowledges
that neither it nor its employees shall be entitled to any benefits
of any kind that CYGNUS may provide to its employees.
15.8.2 Neither Party shall have authority to bind or otherwise render the
other Party hereto pecuniarily liable in any way, whether by
agreement, contract, representation or order,
<PAGE>
34
written or oral, or by instrument or action of any kind, unless
previously authorized in writing.
15.9 NOTICES.
15.9.1 All payments, notices, approvals, reports, statements, or other
communications required or permitted to be given by one Party to the
other (collectively, "Communications") shall be in writing and (at
the of the Party delivering such Communication):
(i) Personally delivered; or
(ii) Transmitted by postage prepaid certified airmail, return receipt
requested; or
(iii) Transmitted by facsimile to the Party to which such communication is
being given at the address or facsimile number set forth below:
If to CYGNUS:
CYGNUS, Inc.
400 Penobscot Drive
Redwood City,
California 94063, USA
Attn: Chief Executive Officer
Telephone: (650) 369-4300
Facsimile: (650) 369-5318
If to LTS CORP:
LTS LOHMANN Therapy Systems Corp.
21 Henderson Drive
West Caldwell,
New Jersey 07006, USA
Attn: Chief Executive Officer
Telephone: (973) 244-2026
Facsimile: (973) 575-5174
15.9.2 Except as otherwise specified, all communications shall be deemed to
have been duly given on
(i) The date of receipt if delivered personally; or
(ii) Five (5) days after posting if transmitted by mail; or
(iii) The date of transmission if transmitted by facsimile, whichever
shall first occur.
<PAGE>
35
15.9.3 Either Party hereto may at any time give notice to the other Party
of a change of name, address or facsimile number to which
communications shall be mailed in accordance with the foregoing.
15.10 ENTIRE UNDERSTANDING.
This Agreement, together with that certain Side Letter between the Parties,
entered into as of the date hereof, embodies the entire understanding of the
Parties relating to the subject matter hereof and supersedes all prior
understandings and agreements, including but not limited to the LOI. To the
extent there is any conflict between the terms of this Agreement and those of
the existing Confidential Disclosure Agreement between CYGNUS, LTS CORP, and
LTS AG, this Manufacturing and Supply Agreement shall govern.
15.11 INVALIDITY.
If any provision of this Agreement or the application thereof is adjudicated
to be invalid or unenforceable, such invalidity or unenforceability shall not
affect any other provision of this Agreement which can be given effect
without the invalid and unenforceable provision or application, and to this
end, the provisions of this Agreement shall be severable.
15.12 AMENDMENTS.
No amendment, alteration or other modification of this Agreement shall be
valid and binding upon the Parties unless made in writing, specifically
refers to this Agreement and is duly executed by the Parties hereto.
15.13 DISCLOSURE.
Any disclosure of the terms of this Agreement, except as required by
applicable laws, rules or regulations, is subject to the other Party's
written consent. Any press announcement shall be permitted only with the
prior written consent of both Parties.
15.14 COUNTERPARTS, HEADINGS.
This Agreement may be executed in counterparts, each of which shall be deemed
to be an original. All section headings contained in this Agreement are for
convenience of reference only and shall not affect the meaning or
interpretation of this Agreement.
<PAGE>
36
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
signed and executed by its duly authorized officers.
CYGNUS, Inc.
By: /s/ Barbara G. McClung
-----------------------------------------------
Name: Barbara G. McClung
Title: Senior Vice President and General Counsel
LTS LOHMANN Therapy Systems Corp.
By: /s/ Patrick A. Walters
-----------------------------------------------
Name: PATRICK A. WALTERS
Title: CEO
ACKNOWLEDGED AND ACCEPTED:
LTS LOHMANN Therapie-Systeme AG
By: /s/ Dr. H.R. Hoffmann F Becher
-----------------------------------------------
Name: Dr. H.R. Hoffmann Becher
-----------------------------------------------
Title: Member of the Executive General Counsel
-----------------------------------------------
Board
<PAGE>
37
EXHIBIT 1: ACTIVE INGREDIENT SPECIFICATIONS AND PRODUCT SPECIFICATIONS
<PAGE>
38
EXHIBIT 1
[CONFIDENTIAL TREATMENT REQUESTED]
<PAGE>
39
EXHIBIT 2: COSTS FOR ADDITIONAL EQUIPMENT
(Appendix 4 from LOI)
[CONFIDENTIAL TREATMENT REQUESTED]
<PAGE>
40
EXHIBIT 3: REMUNERATION FOR SCALE-UP AND MANUFACTURING
(Appendix 2 from LOI)
[CONFIDENTIAL TREATMENT REQUESTED]
<PAGE>
41
EXHIBIT 4: PRODUCTION SCALE UP/ DEVELOPMENT PLAN
(UPDATED Appendix 2 from LOI)
[CONFIDENTIAL TREATMENT REQUESTED]
<PAGE>
42
EXHIBIT 5: PRICES
[CONFIDENTIAL TREATMENT REQUESTED]
<PAGE>
43
EXHIBIT 6: LTS CORP'S CAPACITY
<PAGE>
44
EXHIBIT 6
[CONFIDENTIAL TREATMENT REQUESTED]
<PAGE>
45
AMENDMENT to the
MANUFACTURING AND SUPPLY AGREEMENT dated September 30, 1999
between
LTS Lohmann Therapy Systems Corp., having its principle place of business at
21 Henderson Drive, West Caldwell, New Jersey 07006, USA ("LTS CORP")
and
Cygnus, Inc., a Delaware corporation, having its principle place of business
at 400 Penobscot Drive, Redwood City, California 94063, USA ("CYGNUS")
LTS CORP, LTS LOHMANN Therapie-Systeme AG and CYGNUS hereby agree that the
provision 14.1.3 of the Manufacturing & Supply Agreement concerning the
approval of the Aufsichtsrat is hereby cancelled. The parties hereby agree
that the Manufacturing and Supply Agreement is valid and in full force from
September 30, 1999.
CYGNUS, Inc.
By: /s/ Barbara G. McClung
-----------------------------------------------
Name: Barbara G. McClung
Title: Sr. VP & General Counsel
LTS LOHMANN Therapy Systems Corp.
By: /s/ Patrick A. Walters
-----------------------------------------------
Name: Patrick A. Walters
Title: CEO
Acknowledged and Approved:
LTS LOHMANN Therapie-Systeme AG
By: /s/ Wessling /s/ Becher
-----------------------------------------------
Name: Dr. Wessling Becher
Title: Head of Corporate General Counsel
Development
<PAGE>
"CONFIDENTIAL TREATMENT REQUESTED"
SIDE LETTER to the
MANUFACTURING AND SUPPLY AGREEMENT
between
CYGNUS, INC. and LTS LOHMANN THERAPY SYSTEMS CORP.
This Side Letter, dated September 30, 1999 (hereinafter the "Side Letter"),
to the Manufacturing and Supply Agreement, dated September 30, 1999
(hereinafter the "Agreement") between Cygnus, Inc., a Delaware corporation,
having its principal place of business at 400 Penobscot Drive, Redwood City,
California 94063 USA ("CYGNUS"), and LTS LOHMANN THERAPY SYSTEMS CORP., a
Delaware corporation, having its principal place of business at 21 Henderson
Drive, West Caldwell, New Jersey 07006 USA ("LTS CORP").
WITNESSETH
WHEREAS, LTS CORP and CYGNUS (the "Parties") have entered into the Agreement;
WHEREAS, in order to satisfy CYGNUS' projected demand for Product, LTS CORP
will be required to cover substantial internal cost and expenses, including
financing, by making significant additional investment (e.g., coating, die
cutting, packaging and cartoning equipment) and installation expenditures in
order to establish additional manufacturing capacity, estimated to represent
a risk of US$ [CONFIDENTIAL TREATMENT REQUESTED] (hereinafter the "Risk"); and
WHEREAS, the Parties mutually desire to clarify their respective liability
with respect to the assumptions of Risk connected to such investment in
accordance with the terms and conditions set forth herein.
NOW, THEREFORE, LTS CORP and CYGNUS agree as follows:
<PAGE>
47
1. Capitalized terms used but not otherwise defined herein shall have the same
meaning as in the Agreement.
2. LTS CORP shall make the investment with its own funds.
3. CYGNUS shall assume and be liable for [CONFIDENTIAL TREATMENT REQUESTED] of
the Risk and LTS CORP shall retain and be liable for [CONFIDENTIAL
TREATMENT REQUESTED] of the Risk until bioequivalency (BE) of the
LTS-Product and the CYGNUS-product has been established according to this
Side Letter.
4. The parties shall mutually decide if the BE studies have, or have not,
proven bioequivalency of the CYGNUS-product and the LTS-Product. If such
unanimous decision cannot be reached, CYGNUS shall make the final decision
not later than [CONFIDENTIAL TREATMENT REQUESTED]. In the event that no BE
of the LTS-Product and the CYGNUS-product has been established by
[CONFIDENTIAL TREATMENT REQUESTED], the payments ("the Pre-BE Date
Payments") as set forth below in this paragraph 4 shall be made.
CYGNUS shall be deemed to have assumed its liability [CONFIDENTIAL
TREATMENT REQUESTED] share of the Risk and shall make the following Pre-BE
Date Payments to LTS CORP:
(a) CYGNUS shall make the Pre-BE Date Payments to LTS CORP on the
following dates and in the following amounts:
(i) [CONFIDENTIAL TREATMENT REQUESTED];
(ii) [CONFIDENTIAL TREATMENT REQUESTED];
(iii) [CONFIDENTIAL TREATMENT REQUESTED];
(iv) [CONFIDENTIAL TREATMENT REQUESTED]; and
(v) [CONFIDENTIAL TREATMENT REQUESTED].
(b) In the event that any Pre-BE Date Payments are made according to the
above schedule, then for each year that such a Pre-BE Date Payment is
made, the corresponding reverse year Post-BE Date Payment and Minimum
Volumes under Paragraph 5(a) and 5(b) below shall be negated (e.g., if
a Pre-BE Date Payment is made for (i) above, then the obligations of
Paragraph 5(a)(v) and 5(b)(v) shall be removed).
<PAGE>
48
5. In the event that BE of the LTS-Product and the CYGNUS-product has been
established, CYGNUS shall be deemed to have assumed liability for US$
[CONFIDENTIAL TREATMENT REQUESTED] and CYGNUS shall make payments (the
"Post-BE Date
<PAGE>
49
Payments") to LTS CORP in accordance with paragraph 5(a), if not reduced,
in whole or in part, in accordance with paragraphs 4(b), 5(b) and 5(c)
below:
(a) CYGNUS shall make the Post-BE Date Payments to LTS CORP on the
following dates and in the following amounts:
(i) [CONFIDENTIAL TREATMENT REQUESTED];
(ii) [CONFIDENTIAL TREATMENT REQUESTED];
(iii) [CONFIDENTIAL TREATMENT REQUESTED];
(iv) [CONFIDENTIAL TREATMENT REQUESTED]; and
(v) [CONFIDENTIAL TREATMENT REQUESTED].
(b) For the period commencing on the date of the first commercial launch
of the Product at the LTS CORP Facility (the "Launch Date") and ending
on [CONFIDENTIAL TREATMENT REQUESTED] and for each 12-month period
thereafter ending on [CONFIDENTIAL TREATMENT REQUESTED] (each such
period, a "Volume Year"), if the number of units of Product actually
purchased and paid for in full by CYGNUS from LTS CORP pursuant to the
terms and conditions of the Agreement (the "Paid-For-Units")
[CONFIDENTIAL TREATMENT REQUESTED], then CYGNUS owe no monies under
paragraph 5(a) above with respect to the corresponding date of the
Post-BE Date Payment:
(i) From the Launch Date to the end of the first Volume Year
[CONFIDENTIAL TREATMENT REQUESTED] units;
(ii) From the end of the first Volume Year to the end of the second
Volume Year [CONFIDENTIAL TREATMENT REQUESTED] units (minus any
Paid-For-Units in excess of the Minimum Volume for the first
Volume Year);
<PAGE>
50
(iii) From the end of the second Volume Year to the end of the third
Volume Year [CONFIDENTIAL TREATMENT REQUESTED] units (minus any
Paid-For-Units in excess of the Minimum Volume for the second
Volume Year);
(iv) From the end of the third Volume Year to the end of the fourth
Volume Year [CONFIDENTIAL TREATMENT REQUESTED] units (minus any
Paid-For-Units in excess of the Minimum Volume for the third
Volume Year); and
(v) From the end of the fourth Volume Year to the end of the fifth
Volume Year [CONFIDENTIAL TREATMENT REQUESTED] units (minus any
Paid-For-Units in excess of the Minimum Volume for the fourth
Volume Year).
(c) If, at the end of any Volume Year, the number of Paid-For-Units during
such Volume Year is less than the Minimum Volume of units, then the
full amount of the Post-BE Date Payments due and payable pursuant to
paragraph 5(a) with respect to such Volume Year, shall be determined
according to the following formula:
Payment due = [CONFIDENTIAL TREATMENT REQUESTED]
6. With respect to the Post-BE Date Payments due for the first and second
Volume Years only, CYGNUS shall have the right, upon two weeks prior
written notice thereof to LTS CORP, to reduce Post-BE Date Payment due and
payable on such dates and accordingly to avoid or reduce cash payments (the
"Postponed Payment") in accordance with this paragraph 6, provided that:
(a) CYGNUS shall be deemed, by such written notice, to have increased its
binding forecast (and such written notice shall be deemed for all
purposes to be a binding purchase order under the Agreement to
purchase such additional number of units of Product) for the
subsequent Volume Year by an amount of units of Product (the
"Postponed Units") determined by the following formula:
<PAGE>
51
Postponed Units = [CONFIDENTIAL TREATMENT REQUESTED];
(b) In Volume Year 1, the amount of the Postponed Payment can equal up to
[CONFIDENTIAL TREATMENT REQUESTED] of the Post-BE Date Payment due for
such Volume Year; and
(c) In Volume Year 2, the amount of the Postponed Payment can equal only
up to [CONFIDENTIAL TREATMENT REQUESTED] of the Post-BE Date Payment
for such Volume Year, and the remaining [CONFIDENTIAL TREATMENT
REQUESTED] of such Post-BE Date Payment shall be paid in cash on
[CONFIDENTIAL TREATMENT REQUESTED] in accordance with paragraph 5(a).
Such binding forecast and the number of Minimum Volume units for the
next succeeding Volume Year shall be deemed to be increased by the
number of Year 1 Postponed Units or Year 2 Postponed Units, as
applicable.
7. In the event that the Postponed Units are not actually paid for in
accordance with the Agreement prior to the end of the first Volume Year or
the second Volume Year, as applicable, then the full amount of the
Postponed Payment for the applicable Volume Year, reduced by a percentage
equal to the Paid-For Units under the binding firm purchase order with
respect to the aggregate number of such Postponed Units, shall become due
and payable on [CONFIDENTIAL TREATMENT REQUESTED] (for Year 1 Postponed
Units) and [CONFIDENTIAL TREATMENT REQUESTED] (for Year 2 Postponed Units).
8. In the event that CYGNUS has made firm purchase orders under the Agreement
and LTS CORP is unable to deliver the Product in accordance with such firm
purchase orders due to factors that are under the reasonable control of LTS
CORP or LTS CORP is otherwise justified under the Agreement in not
delivering the Product in accordance with such firm purchase orders, then
CYGNUS shall not be liable to pay to LTS CORP any Post-BE Date Payment
attributable to such number of units for so long as such units have not
been delivered.
9. After the date on which the BE has been established, the liability of
CYGNUS with respect to payments under paragraph 4 shall cease and shall be
deemed to be replaced by the liabilities of CYGNUS under paragraph 5.
<PAGE>
52
10. In the event that the Agreement is terminated other than by CYGNUS pursuant
to Section 14.2 of the Agreement, then CYGNUS shall pay LTS CORP in cash
within thirty (30) days of such termination either [CONFIDENTIAL TREATMENT
REQUESTED], depending upon whether the Product is pre-BE or post-BE,
respectively. The Post-BE Date Payments will be reduced on a pro rata basis
by the [CONFIDENTIAL TREATMENT REQUESTED]. In the event that such aggregate
number of Paid-For-Units prior to such termination shall exceed
[CONFIDENTIAL TREATMENT REQUESTED], then CYGNUS shall owe no monies to LTS
CORP.
11. In the event, at any time during the five (5) years from the Launch Date,
but not later than [CONFIDENTIAL TREATMENT REQUESTED], the number of
Paid-For-Units exceeds a [CONFIDENTIAL TREATMENT REQUESTED], then LTS CORP
shall either (a) refund any monies paid by CYGNUS under paragraphs 4 and 5
above, or (b) provide CYGNUS with a credit against the purchase of Product
supplied CYGNUS under the Agreement for the amounts paid under paragraphs 4
and 5 above.
12. In no event shall the Supply Price of the Product be adjusted due to the
Risk assumptions according to this Agreement.
13. Until [CONFIDENTIAL TREATMENT REQUESTED], LTS CORP shall provide evidence
of the Risk, including all costs and expenses connected with providing
additional capacity, calculated according to GAAP rules, by a certificate
of its internationally acknowledged certified public accountant (CPA).
CYGNUS shall be entitled to have such calculation audited by another CPA,
provided that any and all information reviewed or discovered by the CPA
retained by CYGNUS shall be subject to confidentiality obligations on the
part of such CPA, including the obligation of non-disclosure to CYGNUS
(except for the information as to whether the calculation made by LTS CORP
were correct).
14. In the event the amount of the Risk as determined under paragraph 12 has
proven to be less than an aggregate US$ [CONFIDENTIAL TREATMENT REQUESTED],
then any payments of CYGNUS shall be reduced on a pro rata basis and
accordingly refunded or credited against the purchase of Product. Such
refunds or credits shall be payable and due on [CONFIDENTIAL TREATMENT
REQUESTED]. In no event, however, shall CYGNUS be required to make any
payments in excess of US$ [CONFIDENTIAL TREATMENT REQUESTED], or US$
[CONFIDENTIAL TREATMENT REQUESTED], whichever total amount is applicable
under this Side Letter.
<PAGE>
53
15. This Side Letter shall have the same Effective Date as that of the
Manufacturing and Supply Agreement.
16. Any successor corporate entity of any Party hereto shall be bound to this
Side Letter and to the Agreement in the same manner as the original Party.
This Side Letter shall be governed by and construed in accordance with the laws
of the State of New Jersey without reference to the laws that might otherwise
govern under applicable principles of conflicts of laws, for events, activities
and claims. No amendment alteration or other modification of this Side Letter
shall be valid and binding unless made in writing, specifically refers to this
letter and is duly executed by the parties. In the event of any controversy,
claim or dispute of any sort arising under this Side Letter, Section 15.3 and
15.5 of the Agreement shall apply accordingly. To the extent necessary, this
Side Letter shall be deemed to be an amendment to the Agreement pursuant to
Section 15.12 thereof, and in the event of any conflict between the terms of
this Side Letter and the terms of the Agreement, the terms of this Side Letter
shall govern.
IN WITNESS WHEREOF, the parties have executed this Side Letter to the
Manufacturing and Supply Agreement.
LTS LOHMANN THERAPY SYSTEMS CORP.:
By: /s/ Patrick A. Walters
-----------------------------------------
Name: Patrick A. Walters
-----------------------------------------
Title: CEO
-----------------------------------------
Dated: Sept. 30, 1999
-----------------------------------------
CYGNUS, INC.:
By: /s/ Barbara G. McClung
-----------------------------------------
Name: Barbara G. McClung
-----------------------------------------
Title: Sr. Vice President and General Counsel
-----------------------------------------
Dated: Sept. 30, 1999
-----------------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 18,125
<SECURITIES> 3,757<F1>
<RECEIVABLES> 1,937
<ALLOWANCES> 400
<INVENTORY> 0
<CURRENT-ASSETS> 25,024
<PP&E> 21,751
<DEPRECIATION> 14,381
<TOTAL-ASSETS> 39,704
<CURRENT-LIABILITIES> 13,364
<BONDS> 45,321
0
0
<COMMON> 25
<OTHER-SE> (19,372)
<TOTAL-LIABILITY-AND-EQUITY> 39,704
<SALES> 0
<TOTAL-REVENUES> 11,250
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 24,473
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,481
<INCOME-PRETAX> (15,917)
<INCOME-TAX> 13
<INCOME-CONTINUING> (15,930)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,930)
<EPS-BASIC> (0.70)
<EPS-DILUTED> (0.70)
<FN>
<F1>THIS AMOUNT REPRESENTS SHORT-TERM INVESTMENTS HELD BY THE COMPANY 9/30/99
</FN>
</TABLE>
