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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934 FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1999 OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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COMMISSION FILE NUMBER 0-18962
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CYGNUS, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 94-2978092
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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400 PENOBSCOT DRIVE, REDWOOD CITY, CALIFORNIA 94063
(Address of principal executive offices and zip code)
(650) 369-4300
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $0.001
PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of voting stock held by non-affiliates of the
registrant, based upon the closing price of Common Stock on MARCH 15, 2000 as
reported on the Nasdaq National Market was APPROXIMATELY $409,203,216.
Determination of affiliate status for this purpose is not a determination of
affiliate status for any other purpose.
25,575,201
(Number of shares of Common Stock outstanding as of MARCH 15, 2000)
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's consolidated financial statements for the fiscal year ended
December 31, 1999 and definitive Proxy Statement to be filed pursuant to
Regulation 14A for its 2000 Annual Meeting of Stockholders are incorporated by
reference into Part III hereof.
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CYGNUS, INC.
1999 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
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PAGE
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PART I
ITEM 1. Business.................................................... 1
ITEM 2. Properties.................................................. 14
ITEM 3. Legal Proceedings........................................... 14
PART II
ITEM 5. Market for Registrant's Common Equity and Related
Stockholder Matters....................................... 15
ITEM 6. Selected Financial Data..................................... 15
ITEM 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 17
ITEM 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 29
ITEM 8. Financial Statements and Supplementary Data................. 30
ITEM 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 30
PART III
ITEM 10. Directors and Executive Officers of the Registrant.......... 31
ITEM 11. Executive Compensation...................................... 32
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 32
ITEM 13. Certain Relationships and Related Transactions.............. 32
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................. 33
SIGNATURES............................................................ 39
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PART I
ITEM 1. BUSINESS
OVERVIEW
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES RELATING TO THE FUTURE FINANCIAL PERFORMANCE OF CYGNUS, INC.
("CYGNUS," "THE COMPANY," "WE," "OUR," OR "US"), AND ACTUAL EVENTS OR RESULTS
MAY DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, STOCKHOLDERS AND INVESTORS
SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED UNDER THE CAPTION
"RISK FACTORS" CONTAINED IN THE MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE INDICATED BY SUCH FORWARD-LOOKING STATEMENTS. WE
UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE THE RESULTS OF ANY REVISIONS TO
THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE MADE TO REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE OCCURRENCES OF
UNANTICIPATED EVENTS.
We are engaged in the development and manufacture of diagnostic medical
devices, utilizing proprietary technologies to satisfy unmet medical needs cost
effectively. Our current efforts are focused on a frequent, automatic and
non-invasive glucose monitoring device, the GlucoWatch-Registered Trademark-
biographer, and enhancements thereto.
Cygnus was incorporated in California in 1985 and was merged into a Delaware
corporation in September 1995. Our principal executive offices are located at
400 Penobscot Drive, Redwood City, California 94063, our telephone number at
that address is (650) 369-4300 and our facsimile number at that address is (650)
369-5318. Additionally, our website is www.cygn.com.
On July 9, 1999, John C Hodgman, President and Chief Executive Officer,
succeeded Gary W. Cleary, Ph.D., as Chairman of the Board of Directors. (Dr.
Cleary resigned as Chief Technical Officer effective the same date.) Dr. Cleary
served as Chairman Emeritus of the Board from July 9, 1999 until February 22,
2000, when he resigned from the Board of Directors.
CYGNUS' BUSINESS STRATEGY
In 1999 we chose to focus solely on glucose monitoring systems and sold our
drug delivery business to Ortho-McNeil Pharmaceutical, Inc., a Johnson & Johnson
company. Our GlucoWatch-Registered Trademark- system represents a potential
advance in glucose monitoring technology as compared to the currently prevailing
"finger stick" blood monitoring methods. The GlucoWatch system is designed to
measure glucose frequently, automatically and non-invasively through the ease
and convenience of a device worn like a wristwatch. Worldwide sales of blood
glucose self-monitoring products were approximately $2.5 billion in 1997 (Boston
Biomedical Consultants, Inc.). More than forty million people in North America,
Europe, Japan and Korea have diabetes. In the United States alone, more than ten
million people have been diagnosed with diabetes, with another five million
believed to have the condition. The number of people with diabetes is expected
to continue to grow with the aging of the population, while the number of
diagnosed cases is also expected to increase with changes in diagnostic
standards and new diagnostic technologies.
Clinical studies sponsored by the National Institutes of Health (NIH)
indicate that better management of glucose levels through more frequent testing
and more frequent insulin injections would enable people with diabetes to reduce
or significantly delay many serious diabetes-related
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health complications. However, largely due to the pain of repetitive finger
sticking and the associated disruption of daily life, most people with diabetes
currently test their glucose levels less than half as often as recommended,
resulting in limited glucose information to make decisions that could better
control glucose fluctuations. We believe this lack of information presents a
significant unmet need for a new type of glucose monitoring device.
To address this unmet need, our GlucoWatch system provides frequent,
automatic and non-invasive glucose measurements and is intended for detecting
trends and tracking patterns of glucose levels in adults, 18 years and older,
who have diabetes. The device is intended for use at home and in healthcare
facilities to supplement, not replace, information obtained from standard home
blood glucose monitoring devices. Following a three-hour warm-up period and
calibration from a finger stick blood measurement, the device is capable of
providing up to thirty-six non-invasive glucose measurements over twelve hours.
The extracted glucose is collected in a consumable component called the
AutoSensor, which is attached to the back of the biographer and replaced after
twelve hours of measurements. The GlucoWatch system (i.e., the biographer and
AutoSensor ) offers features such as alerts indicating hypoglycemic and
hyperglycemic conditions, and event markers that record factors affecting
glucose levels.
On December 6, 1999, we announced that our Premarket Approval application
(PMA) for the GlucoWatch system received a unanimous recommendation for approval
with conditions by the United States Food and Drug Administration's (FDA)
Clinical Chemistry and Clinical Toxicology Devices Panel of the Medical Devices
Advisory Committee. The Advisory Committee suggested three conditions for
approval. The first is the creation of an education program, about which we have
already been in discussions with the FDA concerning the substance of such a
program. The second condition is that our product labeling will be revised in
accordance with recommendations given to the FDA by the Committee, and we are
currently in discussions with the FDA on proposed labeling. Third, the Committee
suggested a post-market study of detection of hypoglycemia and hyperglycemia.
This lattermost condition does not need to be satisfied prior to FDA approval.
Although the FDA is not bound by the decisions of the Advisory Committee, the
agency typically follows its advisory committees' advice. By way of background,
our 5,000-page PMA application included analyses of clinical studies conducted
on more than 600 people with diabetes, who used the device from a few hours to
up to six weeks. The studies, which were performed at more than 15 clinical
sites across the United States, involved over 25,000 hours of use of the
GlucoWatch system. The participants consisted of a cross-section of racial and
age groups, diabetes types (both type 1 and type 2), and other defining
characteristics. Approximately 19,000 paired data points were generated from the
studies, comparing interstitial fluid glucose measurements obtained by the
GlucoWatch system to glucose measurements obtained with finger stick monitors
using capillary blood.
On December 2, 1999, we announced the receipt of a CE Certificate for the
GlucoWatch system, indicating that the product has met the essential
requirements and other criteria of the European Community Directive 93/42/ECC,
Annex V, Section 3.2. The CE Certificate is required for selling products in the
European Community. We are compliant with ISO 9002 and EN 46002.
In December 1999, we entered into a five-year Supply Agreement with Hydrogel
Design Systems, Inc. relating to the manufacture of the AutoSensor hydrogel
laminate used in the GlucoWatch system. Also, in December 1999, we entered into
a three-year Supply Agreement with Key Tronic Corporation relating to the
manufacture of the biosensor component of the AutoSensor.
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Both of these agreements contain percentage minimum requirements of product that
we must purchase from these companies if and when the GlucoWatch system is
commercialized. Additionally, we are currently in negotiations with a
third-party manufacturer for the GlucoWatch system.
In September 1999, we were awarded a six-month Phase I Small Business
Innovative Research 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) in the amount of
$0.1 million. This funding is used to investigate advancements in biosensor
materials used for glucose detection and measurement, potentially to include in
future versions of the GlucoWatch system.
In June 1998, we entered into long-term agreements with E.I. du Pont de
Nemours & Company ("DuPont") for the development and supply of thick film
materials for our GlucoWatch system. In July 1997, we entered into a Product
Supply Agreement with Contract Manufacturing, Inc. relating to the assembly of
the AutoSensor and also the final packaging of the GlucoWatch system starter
kits. This latter agreement continues for five years from date of first
commercial sale, and contains minimum requirements of product that we must
purchase from this company if and when the GlucoWatch system is commercialized.
In 1996, we entered into a collaboration agreement with Yamanouchi
Pharmaceutical Co., Ltd. for the commercialization of the GlucoWatch system in
Japan and Korea, and also a collaboration agreement with Becton Dickinson &
Company for the commercialization of the GlucoWatch system in the rest of the
world. Under the Yamanouchi agreement, we are eligible to receive milestone
payments prior to commercialization and to receive a percentage of the product's
future commercial success in Japan and Korea. In March of 1998, we announced the
termination of our agreement with Becton Dickinson. One of our priorities is to
establish an alliance or alliances for the commercialization of the GlucoWatch
system in North America and Europe. The purpose of such an alliance or alliances
is for us to secure certain commercialization functions, such as distribution,
sales and customer service. We are in discussions with several companies
regarding this objective. Some of the companies are international in scope and
would provide the requisite commercialization functions worldwide. Other
companies focus on certain geographies and/or certain commercialization
functions. The potential signing of a worldwide commercialization agreement may
or may not coincide with the launch of our GlucoWatch system, assuming we
receive FDA approval. We are evaluating out-sourced capabilities for a U.S.
launch without a worldwide commercialization alliance. There can be no assurance
that we will be able to enter into a commercialization alliance or alliances or
that we will be able to out-source certain commercialization capabilities for
launch without a worldwide commercialization alliance in place.
In 1995, we entered into an exclusive license agreement with The Regents of
the University of California to patents and patent applications relating to
devices for iontophoretic non-invasive sampling of substances. Under this
license, if our GlucoWatch system is commercialized and is covered by the scope
of the license, we will pay the University of California certain royalties.
SALE OF OUR TRANSDERMAL DRUG DELIVERY SYSTEMS
On December 15, 1999, we completed the sale of substantially all of our drug
delivery business assets to Ortho-McNeil Pharmaceutical, Inc., a Johnson &
Johnson company. The transaction was
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finalized upon receiving clearance under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976. We sold all of the assets of our drug delivery
business to Ortho-McNeil except those relating to a nicotine patch under
development and one other early- stage project, both of which were terminated
before year end.
Cygnus products that were sold to Ortho-McNeil include certain assets
related to the Nicotrol-Registered Trademark- (Pharmacia AB, Stockholm, Sweden)
nicotine system (currently marketed by Pharmacia & Upjohn in Europe and by
McNeil Consumer Healthcare, a Johnson & Johnson company, in the U.S.); two
hormone replacement transdermal products (a 7-day estrogen patch recently
approved by the U.S. Food and Drug Administration and an estrogen/progestin
combination product that completed Phase III clinical trials); and the EVRA-TM-
(Johnson & Johnson, New Brunswick, New Jersey) contraceptive patch we were
developing with the R.W. Johnson Pharmaceutical Research Institute.
Under the terms of the agreement with Ortho-McNeil, we received $20 million
in cash at closing, and Ortho-McNeil will pay up to an additional $55 million in
cash, contingent on the achievement of certain milestones. The contingent
payments relate to the achievement by Ortho-McNeil of certain technical,
regulatory and commercialization milestones related to the EVRA transdermal
contraceptive patch. We are eligible to receive up to $14.8 million of these
contingent milestones in the year 2000; however, because the achievement of
these milestones is not within our control, we cannot predict the likelihood or
timing of these contingent payments in the year 2000 and beyond.
The Final Award in an arbitration matter between Sanofi, S.A. and Cygnus
relating to transdermal hormone replacement therapy systems, however, remained
with Cygnus and is not part of the Ortho-McNeil sale. This Final Award was
entered as a judgment of the U.S. District Court for the Northern District of
California on December 11, 1997. Cygnus' obligations under the Final Award are
as follows: (i) the $14.0 million cash payment already made by Cygnus to Sanofi
in January 1998, (ii) payments of an aggregate amount equal to $17.0 million,
commencing in 2001 and ending in 2005, and (iii) a convertible promissory note
in the principal amount of $6.0 million, issued in December 1997, payable in
full at the end of four years and bearing interest at 6.5% per annum. (The note
will be convertible into our Common Stock at Sanofi's option, exercisable at any
time during the four year term, at a conversion rate of $21.725 per share.) The
underlying agreement, which was the subject matter of the arbitration, was
terminated on December 15, 1999.
The primary reason for selling the drug delivery business was to focus
management attention and corporate resources on our glucose monitoring business.
We will use the proceeds to accelerate commercialization activities for the
GlucoWatch system.
OUR FREQUENT, AUTOMATIC AND NON-INVASIVE GLUCOSE MONITORING SYSTEMS
MARKET OPPORTUNITY
People with diabetes measure blood glucose levels to adjust their diet,
medication and insulin use to better control their glucose levels in order to
prevent diabetes-related complications. Currently, to measure their glucose
levels, people with diabetes must prick their fingers, draw blood and place a
drop of blood on a glucose reagent strip inserted in an instrument that provides
a glucose reading. Each day of testing can involve numerous sticks and the
complete procedure is not only painful but disruptive to daily life. As a result
of this pain and disruption, most people with diabetes
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monitor their blood glucose levels less than twice per day, instead of the
recommended four to seven times per day. Even at the recommended level of
testing, the market for products for self-monitoring of glucose levels by people
with diabetes is quite substantial.
Worldwide sales of products for the self-monitoring of blood glucose levels
were approximately $2.5 billion in 1997. Approximately 80% to 90% of the sales
were related to disposable glucose reagent strips for finger stick monitoring
(Boston Biomedical Consultants, Inc.). In the U.S., a majority of glucose level
testing is conducted by a relatively small segment of people with diabetes; for
example, of these people, just 19% (about 1.6 million) account for 52% of the
tests performed. The number of people diagnosed with diabetes has been growing
and is expected to continue to grow due to the aging of the population, changes
in diagnostic standards and new diagnostic technologies. Specifically, the
diagnostic standards in the U.S. have been changed such that a fasting plasma
glucose value of greater than or equal to 126 mg/dL now indicates a diagnosis of
diabetes, whereas such diagnosis previously required a value of greater than or
equal to 140 mg/dL. Diabetes can lead to severe complications over time,
including blindness, loss of kidney function and peripheral neuropathy, causing
circulation problems to the arms and legs, pain and potential amputation. The
American Diabetes Association (ADA) estimated that the complications arising
from diabetes cost the U.S. healthcare system in excess of $45 billion in 1992.
These complications are largely a consequence of years of poor management of
glucose levels by people with diabetes. Results of the Diabetes Control and
Complication Trial, a major clinical trial sponsored by the National Institutes
of Health and published in 1993, showed that more frequently monitored blood
glucose levels and rigid adherence to a program of diet, exercise and insulin
injections could prevent or significantly delay the onset of many of the
long-term complications of diabetes.
THE GLUCOWATCH-REGISTERED TRADEMARK- SYSTEM
We believe that there is an unmet need for automatic, frequent and
non-invasive glucose monitoring. In an effort to address this unmet need, we
have developed the GlucoWatch biographer, which is worn like a wristwatch and,
after calibrating each new AutoSensor with a standard blood glucose monitor,
automatically extracts and measures glucose levels through intact skin
approximately every twenty minutes. The durable GlucoWatch biographer displays
and stores current and past glucose levels and trend data. The extracted glucose
is collected in a consumable AutoSensor attached to the back of the device and
replaced after twelve hours of readings. The GlucoWatch system offers, in a
portable and discreet device, features not available in currently marketed
devices. These include frequent data collection, electronic memory to store and
display glucose levels, alerts indicating hypoglycemic and hyperglycemic
conditions and event markers that record factors that affect glucose levels. The
GlucoWatch biographer is designed to be worn day and/or night for glucose
monitoring, and is expected to reduce significant drawbacks of the finger stick
technique, such as the pain of repetitive sticking and the disruption of normal
activities caused by cumbersome procedures. We believe that the GlucoWatch
system can provide additional information that can help people with diabetes
understand fluctuations in their glucose levels.
Specifically, our GlucoWatch system extracts glucose molecules through
intact skin utilizing a patented sampling process called electro-osmosis (or
"reverse iontophoresis"). The glucose is extracted from interstitial fluid, not
blood, and is collected and measured by the consumable AutoSensor, which
includes an enzyme-containing hydrogel and electrodes for electro-osmotic
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extraction and biosensing. The glucose collected in the AutoSensor triggers an
electro-chemical reaction in the AutoSensor, generating electrons. The biosensor
measures the electrons and an application-specific integrated circuit ("ASIC")
in the GlucoWatch system equates the number of electrons to a concentration of
blood glucose. The GlucoWatch system automatically measures glucose levels at
twenty-minute intervals, and displays the most recent readings and trends at the
push of a button. Its electronic memory capabilities permit the retrieval of
past data, allowing longer-term trend analysis. Additionally, we are developing
future generation glucose monitoring products, as well as enhancements to the
GlucoWatch system. Such enhancements include, but are not limited to, features
for increased user convenience such as a shorter warm-up period, extension of
the AutoSensor measurement duration beyond twelve hours, an increase in the
number of glucose measurements per hour, addition of a delayed start feature,
and personal computer linkages for downloading data, as well as various cost
reductions in the manufacturing process. Other enhancements are also under
consideration. We are in the early developmental stages for a future telemetric
product that allows both greater flexibility in the location of the glucose
extraction component and a new form of the monitor that stores and displays
glucose data.
REGULATORY STATUS
On January 25, 1999, we submitted the first part of our PMA for the
GlucoWatch system 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 with diabetes, at more than 15 clinical sites across the U.S., who
used our biographer from a few hours to up to six weeks, as well as two
additional studies. The participants in our clinical studies consisted of a
cross-section of racial and age groups, diabetes types (both type 1 and type 2),
and other defining characteristics. This represented over 25,000 hours of use of
the GlucoWatch biographer. Approximately 19,000 paired data points were
generated from the studies, comparing glucose measurements obtained by the
GlucoWatch biographer to glucose measurements obtained with finger stick
monitors using capillary blood. In July 1999, the FDA notified Cygnus that our
PMA was deemed suitable for filing and was granted expedited review status. On
December 6, 1999, our PMA for the GlucoWatch biographer received a unanimous
recommendation for approval with conditions by the FDA's Clinical Chemistry and
Clinical Toxicology Devices Panel of the Medical Devices Advisory Committee. The
Advisory Committee suggested three conditions for approval. The first is the
creation of an education program, about which we have already been in discussion
with the FDA concerning the substance of such a program. The second condition is
that our product labeling will be revised in accordance with recommendations
given to the FDA by the Committee, and we are currently in discussions with the
FDA on proposed labeling. Third, the Committee suggested post-market study of
detection of hypoglycemia and hyperglycemia. This lattermost condition does not
need to be satisfied prior to FDA approval. Although the FDA is not bound by the
decisions of the advisory committee, the agency typically follows its Advisory
Committees' advice; however, no assurance can be given that the FDA will approve
our GlucoWatch biographer and we cannot predict the timing of such approval, if
given.
Furthermore, we are in the process of preparing an Investigational Device
Exemption (IDE) for filing with the FDA so that we can conduct clinical trials
on an ongoing basis. We also anticipate commencing clinical trials with children
and adolescents if the IDE is obtained.
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COMPETITION
The glucose monitoring market is highly competitive. Currently the market is
dominated by finger stick blood glucose monitoring products sold by a few major
companies. These companies have established products and distribution channels.
Finger stick glucose monitoring presents a number of barriers to generating more
frequent blood glucose measurements, including the pain of repetitive finger
sticking and the disruption of normal activities, as often people with diabetes
do not want to go through the finger stick process in public. Several companies
are developing alternative invasive, semi-invasive, minimally invasive or
non-invasive methods to monitor glucose levels in a less painful or painless
manner, as well as on a continuous or continual basis. Companies are attempting
to develop a variety of methods to extract interstitial fluid and measure the
glucose concentration therein. Another technology that some companies are
pursuing is the use of infrared spectroscopy, which uses radiation to measure
glucose levels. We are not aware of any products under development that offer
the range of potential benefits of the GlucoWatch system. However, there can be
no assurance that other products will not be more accepted in the marketplace
than the GlucoWatch system or will not render our devices uncompetitive or
obsolete. A number of companies have developed or are seeking to develop new
drugs to treat diabetes that could reduce demand for glucose monitoring systems.
In addition, many of our competitors and potential competitors have
substantially greater resources, research and development staffs and facilities
than we do and have significantly greater experience in developing,
manufacturing and marketing glucose monitoring devices. Competition within the
glucose monitoring industry could also result in price reductions for glucose
monitoring devices such that we may not be able to sell the GlucoWatch system at
a price level adequate for us to realize a return on our investment.
DEPENDENCE ON NEW PRODUCTS; UNCERTAINTY OF MARKET ACCEPTANCE
For Cygnus to be successful, we will need to continue to develop glucose
monitoring products that address the needs of people with diabetes. Enhanced
glucose monitoring products based on our technologies are currently under
development. In addition, we will be evaluating new products outside of the
glucose monitoring field that can utilize our diagnostic technologies. These
products will require significant additional development and investment,
including preclinical and clinical testing, prior to their commercialization.
From time to time, we have experienced delays or setbacks in the development of
certain of our products. For example, in the past, we experienced development
delays in the miniaturization of the GlucoWatch biographer. There can be no
assurance that we will be able to successfully address problems that may arise
during the development and commercialization process. In addition, there can be
no assurance that the GlucoWatch system, its enhancements or future products can
or will be successfully developed, prove to be safe and effective in clinical
trials, meet applicable regulatory standards, be capable of being manufactured
in commercial quantities at a reasonable cost, be marketed successfully or
achieve market acceptance. If any of our development programs are not
successfully completed, required regulatory approvals or clearances are not
obtained, or products for which approvals or clearances are obtained are not
commercially successful, our business, financial condition and results of
operations could be materially adversely affected.
Our business is subject to the risks inherent in the development of new
products using new technologies and approaches. There can be no assurance that
unforeseen problems will not develop with these technologies or applications,
that we will be able to successfully address technological
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challenges we encounter in our research and development programs or that we will
be able to develop commercially feasible products.
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVALS
The design, manufacturing, labeling, distribution and marketing of our
products are subject to extensive and rigorous government regulation in the U.S.
and certain other countries where the process of obtaining and maintaining
required regulatory clearance or approvals is lengthy, expensive and uncertain.
In order for us to market our products in the U.S., we must obtain clearance or
approval from the FDA after clinical trials. To date, we have two products which
have received FDA approval; however, these were both in the drug delivery
business that has since been sold to Ortho-McNeil Pharmaceutical, Inc. For the
initial GlucoWatch system, we filed a PMA with the FDA. We anticipate that, if
and when enhancements are added and/or manufacturing processes are modified in
cost-effective ways, we will file one or more supplements to this PMA. We cannot
assure you that these supplements will be approved or that we will not have to
file a new PMA for future enhancements and products. The time required for
regulatory approval of our products after filing is uncertain. There can be no
assurance that problems will not arise that could delay or prevent the
commercialization of our products or that the FDA and foreign regulatory
agencies will be satisfied with the results of clinical trials or approve the
marketing of any products. Moreover, even if regulatory approval is granted,
such approval may include significant limitations on indicated uses for which
any such products could be marketed.
A medical device and its manufacturer are subject to continual review after
approval, and later discovery of previously unknown problems with a product or
the manufacturing process may result in restrictions on such product or the
manufacturer, including withdrawal of the product from the market. Failure to
comply with applicable regulatory requirements may, among other things, result
in fines, suspensions of regulatory approvals, product recalls, operating
restrictions and criminal prosecution. In addition, new government regulations
may be established that could delay or prevent regulatory approval of our
potential products. We are also subject to federal, state and local regulations
regarding work place safety, environmental protection and hazardous material
controls, among others.
In order for us to market our products in Europe, Japan and certain other
foreign jurisdictions, we and any of our distributors and agents must obtain
required regulatory registrations or approvals and otherwise comply with
extensive regulations regarding safety, efficacy and quality in those
jurisdictions. Specifically, certain foreign regulatory bodies have adopted
various regulations governing product standards, packaging requirements,
labeling requirements, import restrictions, tariff regulations, duties and tax
requirements. These regulations vary from country to country. Failure to receive
foreign regulatory approvals could have a material adverse effect on our
business, financial condition and results of operations. There can be no
assurance that we will obtain any other required regulatory registrations or
approvals in such countries or that we will not be required to incur significant
costs in obtaining or maintaining such regulatory registrations or approvals.
Delays in obtaining any registrations or approvals required to market our
products, failure to receive these registrations or approvals, or future loss of
previously obtained registrations or approvals could have a material adverse
effect on our business, financial condition and results of operations.
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Even if we receive the necessary regulatory approvals for the GlucoWatch
system, there can be no assurance that unforeseen problems will not occur in
product manufacturing and commercial scale-up or marketing or product
distribution. Any such occurrence could significantly delay the
commercialization of the GlucoWatch system or prevent its market introduction
entirely. Furthermore, even if the GlucoWatch system is successfully developed,
the commercial success of the GlucoWatch system will depend on its acceptance in
the market as well as on our ability to generate enhanced products.
MANUFACTURING; DEPENDENCE ON THIRD-PARTY SUPPLIERS
Our GlucoWatch system has not yet been manufactured for commercial sale, and
we have no experience manufacturing the volumes that would be necessary for us
to achieve significant commercial sales. To successfully commercialize the
GlucoWatch system, it will have to be manufactured in compliance with regulatory
requirements, in a timely manner and in sufficient quantities while maintaining
product performance, quality and acceptable manufacturing costs. There can be no
assurance that we will be able to establish and maintain reliable, full-scale
manufacturing of the GlucoWatch system at commercially reasonable prices.
Manufacturers often encounter difficulties in scaling up production of new
products, including problems involving product performance, production yields,
quality control and assurance, and shortages of personnel. In addition,
manufacturing facilities will be subject to extensive regulations, including
international quality standards and other regulatory requirements. Difficulties
encountered in manufacturing scale-up or failure by us to implement and maintain
manufacturing facilities in accordance with international quality standards or
other regulatory requirements could result in a delay or termination of
production, which could have a material adverse effect on our business,
financial condition and results of operations.
In the past, we have experienced these problems in scaling up our
transdermal drug delivery products for commercial launch. There can be no
assurance that similar problems will not be encountered in the future with our
new diagnostic devices. In addition, there can be no assurance that we will be
able to achieve and maintain product performance, quality and reliability if and
when we are able to produce our GlucoWatch system in the quantities required for
commercialization, or that the GlucoWatch system can be assembled and
manufactured at an acceptable cost.
The GlucoWatch system will be manufactured from components purchased from
outside suppliers, most of which are our single source for such components. In
the event we are unable to obtain these components from our suppliers, we will
be required to obtain components from alternate suppliers. Any interruption in
the supply of GlucoWatch system components could have a material adverse effect
on our business, financial condition and results of operations.
Currently, our facility complies with ISO 9002, EN 46002, and U.S. Quality
System Regulations standards. We hold a medical Device Manufacturing License
from the California Department of Health Services, Food and Drug Branch. We are
currently establishing our AutoSensor and biographer commercial manufacturing
operations in two existing third-party facilities, which also comply with
applicable regulatory requirements. We cannot, however, assure you that these
facilities will maintain compliance with regulatory requirements.
9
<PAGE>
THIRD-PARTY REIMBURSEMENT
Successful commercialization of certain of our products may depend in part
on the availability of reimbursement from third-party healthcare payers, such as
private insurance plans and the government. There can be no assurance that such
reimbursement will be available. Third-party payers are increasingly attempting
to contain healthcare costs by limiting both coverage and the level of
reimbursement for new therapeutic and diagnostic products. There can be no
assurance that adequate levels of reimbursement will be available to enable us
to achieve market acceptance of the GlucoWatch system or other new products
under development or to maintain price levels sufficient to realize an
appropriate return on our investment. In certain countries, the period of time
needed to obtain such reimbursement can be lengthy. We may delay the launch of
our products in certain countries until eligibility for reimbursement is
established. This could potentially harm our business, financial condition and
results of operations.
CONVERTIBLE DEBT
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 in 2005 ("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, our ability 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 into Common Stock 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 into Common Stock on June 30, 1999 at $6.89 per share (such
conversion price determined by a market-based formula on February 1, 1999). 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 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. As a result, the remaining unamortized debt issuance costs of $1.1
million were expensed.
On the date the Notes were restructured (October 28, 1998), the conversion
price for the first tranche was below the quoted market price of our Common
Stock. Consequently, we computed a beneficial conversion feature by comparing
the quoted market price of our Common Stock on that date ($6.06125) to the
conversion price of the first tranche ($3.5375) and then by multiplying the
difference by the number of shares (1.7 million) into which the first tranche
was convertible. The
10
<PAGE>
above computation resulted in a total charge of $4.2 million, which was written
off as interest expense at the date of restructuring.
In order to help finance the redemption of the third tranche discussed
above, and to provide additional capital, in 1999 we entered into two new
financing arrangements: a Convertible Debenture and Warrant Purchase Agreement
and a Structured Equity Line Flexible Financing Agreement.
On June 29, 1999, we entered into a Convertible Debenture and Warrant
Purchase Agreement with institutional investors ("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 and incurred debt issuance costs of $0.5 million. With the mutual
agreement of the Investors and us, or if certain trading volume, pricing and
other conditions are met, we and/or the Investors will have the right to require
the sale to existing Investors 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%. On September 29, 1999 we
received $3.0 million in gross proceeds from the issuance of the first
Additional Tranche due September 29, 2004, with a conversion price of $11.8663
(determined by the above market-based formula), and incurred debt issuance costs
of $0.1 million. Neither the June 29, 1999 nor the September 29, 1999
Convertible Debentures contained any beneficial conversion features.
In conjunction with the issuance of Convertible Debentures in June, 1999,
and the first Additional Tranche in September 1999, we issued to the debenture
holders warrants to purchase approximately 606 thousand shares and 139 thousand
shares of Common Stock, at the exercise price of $13.86 per share and $16.18 per
share, respectively. Each tranche of warrants had a contractual term of
five years from the date of respective grant. At the respective dates of grant,
the fair values ascribed to these warrants were approximately $5.0 million and
$1.1 million, respectively, based on a Black-Scholes valuation model, and were
recorded as debt discount and are being amortized as additional interest expense
over the debt term. We recorded amortization of $0.6 million in 1999. As of
December 31, 1999, the unamortized fair value amounted to $5.5 million. We will
be required to issue warrants if the second Additional Tranche of the
Convertible Debentures is sold. Such warrants will be priced at 150% of the
respective Additional Closing Price. The number of additional warrants to be
issued will be determined by dividing 50% of the respective Additional Tranche
by the respective Additional Closing Price.
We also issued to the placement agent warrants to purchase 50 thousand
shares of Common Stock at the exercise price of $13.86 per share. At the date of
grant, the fair value ascribed to the warrants was approximately $417 thousand,
based on a Black-Scholes valuation model, and that amount was recorded as
deferred financing cost and is being amortized as additional interest expense
over the debt term. We recorded amortization of $42 thousand in 1999.
11
<PAGE>
The Convertible Debentures have a stated interest rate of 8.5% and an
effective interest rate of 18.20%. The effective interest rate includes a
non-cash charge of $6.6 million for the amortization of the implicit value of
warrants issued in connection with the Convertible Debentures.
STRUCTURED EQUITY LINE
On June 30, 1999, we also entered into a Structured Equity Line Flexible
Financing Agreement ("Equity Line") with certain institutional investors
("Investors"). The Equity Line is effective for two years ("Commitment Period")
and allows us, at our sole discretion, to sell Common Stock with a maximum
aggregate issue price of $30.0 million over the Commitment Period. On June 30,
1999, we received net proceeds of approximately $3.8 million, after deducting
the issuance costs, from the sale of approximately 346 thousand shares of Common
Stock (the "Initial Investment"). The number of shares of Common Stock for the
Initial Investment was determined on the basis of the average closing bid price
for the ten trading days prior to June 30, 1999 ("Initial Investment Purchase
Price"). Under the terms of the Equity Line, over a period of eighty
trading days following June 30, 1999 ("Initial Period"), the Investors were
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 required, to match the aggregate number of
shares covered by the $4.0 million of purchase notices. We issued an additional
92 thousand shares to reflect the actual purchase prices on the purchase
notices.
On September 29, 1999, we issued 361 thousand shares of Common Stock for
$4.0 million ("Additional Investment") pursuant to an amendment to the Equity
Line agreement which allowed for an Additional Investment period of 110 days
("Additional Period"). The terms for this Additional Investment are similar to
those applied to the Initial Investment, and the number of shares was adjusted
upwards at the end of the Additional Period, resulting in the issuance of an
additional 92 thousand shares of Common Stock.
After the Initial Period and the Additional 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. In addition
to the above and upon our approval, the Investors may also elect to purchase an
additional $1.0 million ("Investor Election") of Common Stock in each Investment
Period. In each Investment Period in which we elect to sell additional shares,
the Investors will from time to time issue purchase notices for the aggregate
amount of the Company Election and the Investor Election, if applicable. The
per-share price of Common Stock to be sold for each such purchase notice will
equal 98% of the average of the two daily low trade prices during the six
trading days immediately prior to the respective purchase notice. At the
beginning of each Investment Period, we can set a minimum sales price ("Floor
Price") for our Common Stock. The Investors may require the aggregate dollar
amount of the Company Election and Investor Election for any Investment Period
to be less than requested, based on certain market trading volume guidelines. In
December 1999, we sold 100 thousand shares of Common Stock for $1.5 million
pursuant to the Equity Line. In January 2000, we sold an additional 59 thousand
share of Common Stock for $1.0 million pursuant to the Equity Line.
12
<PAGE>
In conjunction with the Equity Line, in January 2000 we issued five-year
warrants to the Investors to purchase 95 thousand shares of Common Stock at
$11.51 per share. The price of the warrants will be determined each calendar
year and will equal 120% of the weighted average per-share sales price of all
shares of Common Stock sold pursuant to the Equity Line that year. The number of
shares will equal 1% of the aggregate proceeds received for all shares sold
pursuant to the Equity Line during the year. Warrants to purchase a minimum of
120 thousand shares must be issued under the Equity Line and, if at the end of
the Commitment Period, warrants to purchase less than 120 thousand shares of
Common Stock have been issued, 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.
PATENTS AND PROPRIETARY RIGHTS
It is our policy to aggressively protect our investments in technology and
marketing by filing patent and trademark applications in the U.S. and key
foreign countries. We also rely on trade secrets, know-how, licensing
opportunities, and collaborative relationships to develop and maintain our
competitive position.
As of December 1999, and after the sale of substantially all of our drug
delivery business assets, including the intellectual property associated
therewith, we have seven issued U.S. patents and six issued foreign patents,
with approximately sixty additional patent applications pending worldwide. These
patents and applications cover various aspects of analyte monitoring, including
glucose monitoring systems and represent over twenty patent families. As of
December 1999, we have four U.S. trademark registrations, with four U.S.
trademark applications pending or published, and about thirty-nine foreign
trademark registrations, with approximately twenty-one additional foreign
trademark applications pending. Our "GlucoWatch" trademark is registered in the
U.S., the European Community, and additional foreign countries.
Additionally, our GlucoWatch system incorporates technology licensed
exclusively to us by The Regents of the University of California. The Regents
hold U.S. and foreign patents covering technology for transdermal extraction of
glucose and other analytes.
EMPLOYEES
As of December 31, 1999, we had eighty-four full-time employees. Of this
total number of employees, forty-six were engaged in research and development,
including process developments; eight in scientific affairs and quality
assurance; twenty-three in general administrative; and seven in operations. None
of our employees is represented by a labor union. We have experienced no work
stoppages and believe our employee relations are good.
Our success will depend in large part on the continued services of our
scientific, managerial and manufacturing personnel. The loss of a significant
group of key personnel could have a material adverse effect on us. Our success
also depends upon our ability to continue to attract and retain other highly
qualified scientific, managerial and manufacturing personnel. Competition for
such personnel is intense. In this respect, we compete with numerous
pharmaceutical and healthcare companies, as well as universities and nonprofit
research organizations. There can be no assurance that we will continue to be
able to attract and retain sufficient qualified personnel.
13
<PAGE>
ITEM 2. PROPERTIES
We lease approximately 92,000 square feet in four buildings. Three buildings
are located in Redwood City, California and the fourth is located in Menlo Park,
California. The first building, approximately 38,000 square feet, is used by us.
The second building, approximately 11,000 square feet, is subleased to The 3DO
Company, and this sublease runs concurrent with our main leases through 2003.
The third building has approximately 21,000 square feet, and is subleased to
Ortho-McNeil Pharmaceutical, Inc., with this sublease also running concurrently
with our main leases through 2003. The fourth building, which is located in
Menlo Park, has approximately 22,000 square feet, and is currently used by us
for storage. The three buildings in Redwood City are leased through 2003, with
an option to renew at the then-prevailing market rent through 2008. The facility
in Menlo Park is leased over a two-year period ending in October 2001.
The applicable Cygnus facility complies with ISO 9002, EN 46002, and U.S.
Quality System Regulations standards. We hold a medical Device Manufacturing
License from the California Department of Health Services, Food and Drug Branch.
We are currently establishing our AutoSensor and GlucoWatch biographer
commercial manufacturing operations in two existing third-party facilities,
which also comply with applicable regulatory requirements.
ITEM 3. LEGAL PROCEEDINGS
None.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The market price for shares of our Common Stock has been highly volatile.
Factors such as the results of clinical trials for our products or products of
our competitors, announcements of technological innovations, strategic
relationships, new product introductions by us or our competitors, governmental
regulation, regulatory approvals or delays, and developments relating to our
patent or proprietary rights or those of our competitors, as well as
period-to-period fluctuations in financial results, may have a significant
impact on the market price of the Common Stock. Additionally, in recent years,
the stock market has experienced extreme price and volume fluctuations.
Our Common Stock trades on the Nasdaq national market tier of the Nasdaq
Stock Market-SM- under the symbol "CYGN." The following table sets forth, for
the periods indicated, the high and low closing sale prices per share of the
Common Stock as reported by the national market.
<TABLE>
<CAPTION>
HIGH LOW
----------- -------------
<S> <C> <C>
1999:
First Quarter......................................... $ 8 1/4 $ 4 1/2
Second Quarter........................................ 13 8 7/32
Third Quarter......................................... 12 1/2 9 1/4
Fourth Quarter........................................ 19 5/8 8 13/16
<CAPTION>
HIGH LOW
----------- -------------
<S> <C> <C>
1998:
First Quarter......................................... $ 20 5/8 $ 16
Second Quarter........................................ 13 1/2 5 25/32
Third Quarter......................................... 10 1/4 3 1/16
Fourth Quarter........................................ 6 7/8 2 5/8
</TABLE>
As of December 31, 1999, there were approximately 626 record holders of our
Common Stock. We have not paid any cash dividends since our inception and do not
expect to pay any cash dividends on our Common Stock in the foreseeable future.
In addition, we are precluded from paying any dividends under certain of our
financing arrangements.
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data presented below are derived from
the audited consolidated financial statements of Cygnus, Inc. The consolidated
financial statements as of December 31, 1999 and 1998 and for each of the three
years in the three-year period ended December 31, 1999 are included elsewhere
herein. The selected financial data as of December 31, 1997, 1996, and 1995 and
for each of the years in the two-year period ended December 31, 1996 are derived
from audited consolidated financial statements not included herein. We have
restated our consolidated statements of operations for the years ended December
31, 1998, 1997, 1996 and 1995 to reflect the results of the drug delivery
business as a discontinued operation. The data should be read in conjunction
with the consolidated financial statements and related notes, the information
set forth under "Management's
15
<PAGE>
Discussion and Analysis of Financial Conditions and Results of Operations" and
other financial information included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS
DATA:
Contract revenues.................... $ 2,061 $ 457 $ 2,146 $ 2,712 $ --
Costs and expenses:
Research and development........... 15,745 25,635 16,198 11,079 3,249
Marketing, general and
administrative................... 4,794 8,810 2,205 1,903 309
-------- -------- -------- -------- --------
Total costs and expenses......... 20,539 34,445 18,403 12,982 3,558
-------- -------- -------- -------- --------
Loss from operations................. (18,478) (33,988) (16,257) (10,270) (3,558)
Other income and (expense)........... (3,496) (6,446) 1,140 1,865 296
-------- -------- -------- -------- --------
Loss from continuing operations
before tax......................... (21,974) (40,434) (15,117) (8,405) (3,262)
Provision for tax.................... (200) -- -- -- --
-------- -------- -------- -------- --------
Loss from continuing operations...... (22,174) (40,434) (15,117) (8,405) (3,262)
-------- -------- -------- -------- --------
Discontinued operations:
Income/(loss) from operations of
discontinued segment............. 3,031 1,006 (35,343) (2,647) (9,580)
Gain on disposal of segment........ 16,308 -- -- -- --
-------- -------- -------- -------- --------
Net loss............................. $ (2,835) $(39,428) $(50,460) $(11,052) $(12,842)
======== ======== ======== ======== ========
Net loss per share from continuing
operations, basic and diluted...... (0.95) (2.00) (0.80) (0.45) (0.20)
======== ======== ======== ======== ========
Net income/(loss) per share from
discontinued segment, basic and
diluted............................ 0.83 0.05 (1.87) (0.15) (0.59)
======== ======== ======== ======== ========
Net income/(loss) per share, basic
and diluted........................ $ (0.12) $ (1.95) $ (2.67) $ (0.60) $ (0.79)
======== ======== ======== ======== ========
Shares used in computation of net
loss per share, basic and
diluted............................ 23,354 20,226 18,928 18,544 16,265
======== ======== ======== ======== ========
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................... $ 30,111 $ 11,542 $ 9,941 $ 36,386 $ 38,555
Total assets...................... 46,976 43,454 49,277 68,798 57,854
Long-term liabilities............. 44,071 60,220 33,234 13,437 8,331
Accumulated deficit............... (178,790) (175,955) (136,527) (86,067) (75,015)
Stockholders' equity (net capital
deficiency)..................... (1,204) (32,767) (13,800) 31,213 38,252
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES RELATING TO THE FUTURE FINANCIAL PERFORMANCE OF CYGNUS, INC.
("CYGNUS," "THE COMPANY," "WE," "OUR," "US" ), AND ACTUAL EVENTS OR RESULTS MAY
DIFFER MATERIALLY. IN EVALUATING SUCH STATEMENTS, STOCKHOLDERS AND INVESTORS
SHOULD SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED UNDER THE CAPTION
"RISK FACTORS" CONTAINED BELOW IN THIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION, AS WELL AS UNDER BUSINESS ABOVE,
WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED BY
SUCH FORWARD-LOOKING STATEMENTS. WE UNDERTAKE NO OBLIGATION TO PUBLICLY RELEASE
THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS WHICH MAY BE
MADE TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE HEREOF OR TO REFLECT THE
OCCURRENCES OF UNANTICIPATED EVENTS.
GENERAL
We are engaged in the development and manufacture of diagnostic medical
devices, utilizing proprietary technologies to satisfy unmet medical needs cost
effectively. Our current efforts are primarily focused on a frequent, automatic
and non-invasive glucose monitoring device, the GlucoWatch-Registered Trademark-
system, and enhancements thereto. In 1999, we sold substantially all of our drug
delivery business to Ortho-McNeil Pharmaceutical, Inc., and chose to focus on
glucose monitoring systems. The drug delivery business has been accounted for as
a discontinued operation and prior years' financial statements have been
restated to report only continuing operations. For us to remain competitive, we
will need to develop, in-license or acquire new diagnostic products.
Our results of operations vary significantly from year to year and have
depended 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 our products. The
level of revenues in any given period is not necessarily indicative of expected
revenues for future periods. In 1999, 97% of our revenues were attributable to
one customer. We have incurred net losses each year since our inception and do
not believe we will achieve profitability in 2000. At December 31, 1999, our
accumulated deficit and net capital deficiency were approximately
$178.8 million and $1.2 million, respectively.
17
<PAGE>
RESULTS OF OPERATIONS:
The drug delivery business has been accounted for as a discontinued
operation and prior years' financial statements have been restated to report
only continuing operations. As a result no product revenues, royalty revenues or
costs of products sold have been reflected in our financial statements.
COMPARISON FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
CONTRACT REVENUES for the year ended December 31, 1999 were $2.1 million,
compared to the $0.5 million for the year ended December 31, 1998. Contract
revenues primarily reflect the amortization of previously deferred and
additional milestone payments relating to the GlucoWatch system. The increase in
contract revenue was primarily due to the amortization of an additional
milestone payment received in 1999.
In 1996, we entered into a collaboration agreement with Yamanouchi
Pharmaceutical Co., Ltd. for the commercialization of the GlucoWatch biographer
in Japan and Korea. Cygnus is eligible to receive milestone payments prior to
commercialization and to receive a percentage of the product's future commercial
success in Japan and Korea.
In September 1999, we were awarded a six-month Phase I Small Business
Innovative Research Grant for "High Performance Biosensor Electrode Materials"
from the National Institute of Diabetes and Digestive and Kidney Diseases
division of the NIH in the amount of $0.1 million. We are using the funding to
investigate advancements in biosensor materials used for glucose detection and
measurement, potentially to include in future versions of the GlucoWatch system.
Revenue is recognized as reimbursable expenses are incurred.
Contract revenues, if any, are expected to fluctuate from quarter to quarter
and from year to year, and future contract revenues, if any, cannot be
reasonably predicted. The contributing factors to achieving contract revenues
include, but are not limited to, future successes in finalizing new
collaborative agreements, achievement of milestones under our current contract,
and strategic decisions on self-funding certain projects. We are unable to
predict to what extent the termination of any existing contracts or new
collaborative agreements, if any, will impact overall contract revenues in 2000
and subsequent future periods.
RESEARCH AND DEVELOPMENT EXPENSES for the year ended December 31, 1999 were
$15.7 million, compared to $25.6 million for the year ended December 31, 1998.
This decrease reflects a reduction in clinical studies and development
expenditures associated with the GlucoWatch system. Research, development and
clinical activities primarily included support and development for the glucose
monitoring program. We anticipate that the development of new products and
technologies, along with additional clinical trials, will result in an increase
in our overall research and development expenses in 2000.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES for the year ended
December 31, 1999 were $4.8 million, compared to $8.8 million for the year ended
December 31, 1998. The decrease was primarily due to reduced compensation and
market research expenses. We expect that marketing, general and administrative
expenses will increase in 2000 as we plan for possible regulatory approval and
commercialization of our GlucoWatch system.
18
<PAGE>
INTEREST INCOME (EXPENSE), NET OF INTEREST AND OTHER EXPENSE for the year
ended December 31, 1999 was ($3.5) million, compared to ($6.4) million for the
year ended December 31, 1998. The decrease was due primarily to the recording in
1998 of the (i) $4.2 million non-cash costs of the beneficial conversion feature
associated with the October 1998 restructuring of the 4% Senior Subordinated
Convertible Notes and (ii) write-off of the previously deferred debt issuance
cost of $1.0 million, in conjunction with the partial repayment of the Senior
Subordinated Convertible Notes, offset by a net arbitration settlement with
Pharmacia & Upjohn from which Cygnus received $2.7 million.
INCOME FROM OPERATIONS OF DISCONTINUED SEGMENT for the year ended
December 31, 1999 was $3.0 million, compared to $1.0 million for the year ended
December 31, 1998. The increase was due primarily to a decrease in overall
segment expenses.
DISCONTINUED OPERATIONS. On December 15, 1999, we completed the sale of
substantially all the assets of our drug delivery business to Ortho-McNeil
Pharmaceutical, Inc. Total revenues and net income on the discontinued
operations were $12.3 million and $3.0 million, respectively, for the year ended
December 31, 1999. We also recorded a gain of $16.3 million on the disposal of
the segment.
COMPARISON FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
CONTRACT REVENUES for the year ended December 31, 1998 were $0.5 million,
compared to the $2.1 million for the year ended December 31, 1997. Contract
revenues primarily reflected the amortization of previously deferred milestone
payments relating to our GlucoWatch system. The decrease in contract revenue was
primarily attributable to the decrease in amortization of these milestone
payments.
RESEARCH AND DEVELOPMENT EXPENSES for the year ended December 31, 1998 were
$25.6 million, compared to $16.2 million for the year ended December 31, 1997.
The increase in research and development expenses for the year ended
December 31, 1998 was primarily due to the increased costs associated with the
GlucoWatch biographer and the AutoSensor in the following areas: material,
design and scale-up for development efforts, and material and outside charges
for the accelerated level of clinical activities. Research and development and
clinical activities primarily included support and development for the glucose
monitoring program.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES for the year ended
December 31, 1998 were $8.8 million, compared to $2.2 million for the year ended
December 31, 1997. The increase was primarily due to increased sales and
marketing expenses related to the GlucoWatch system, in particular marketing
research expenses.
INTEREST INCOME (EXPENSE), NET OF INTEREST AND OTHER EXPENSE for the year
ended December 31, 1998 was ($6.4) million, compared to $1.1 million for the
year ended December 31, 1997. The decrease was due primarily to the
$4.2 million non-cash costs of the beneficial conversion feature associated with
the October 1998 restructuring of the 4% Senior Subordinated Convertible Notes,
the interest expense associated with the subordinated convertible debt, the
amortization of the financing fees related to this debt and the interest related
to the additional long-term debt incurred in the second quarter of 1998.
INCOME/(LOSS) FROM OPERATIONS OF DISCONTINUED SEGMENT for the year ended
December 31, 1998 was a profit of $1.0 million, compared to a loss of
($35.3) million for the year ended December 31, 1997.
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The change was due primarily to a non-recurring arbitration settlement expense
with Sanofi of $39.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investment balances as of December 31, 1999
totaled $38.9 million, representing an increase of $10.1 million from the total
as of December 31, 1998. As of December 31, 1999, we had a negative net worth of
$1.2 million.
Through December 1999, we have received net proceeds of approximately
$104.5 million from public offerings of our Common Stock.
Through December 1999, 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 Cygnus assets.
We have an outstanding bank loan with Silicon Valley Bank that requires
monthly principal and interest payments through November 2001, in addition to
compliance with various financial covenants. As of December 31, 1999 there was
$5.6 million outstanding under this agreement. Borrowings under this agreement
are secured by specific Cygnus assets.
In February 1998, we entered into Note Purchase Agreements with
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, our ability 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 was redeemed in July 1999.
In June 1999, we entered into a Convertible Debenture and Warrant Purchase
Agreement with institutional investors to issue and sell up to $20 million
principal amount of 8.5% five-year Convertible Debentures. In June 1999, we
issued $14.0 million principal amount of 8.5% Convertible Debentures Due
June 29, 2004 at par. On September 29, 1999 we issued $3.0 principal amount of
8.5% Convertible Debentures due September 29, 2004 at par.
On June 30, 1999, we also entered into a Structured Equity Line Flexible
Financing Agreement. The Equity Line is effective for two years and allows us,
at our sole discretion, to sell shares of our Common Stock with a maximum
aggregate sales price of up to $30.0 million. On June 30, 1999 we received
$4.0 million from the sale of a total of 438 thousand shares of Common Stock
under the Equity Line. On September 29, 1999, we received an additional
$4.0 million in exchange for a total of 453 thousand shares of Common Stock
pursuant to the Equity Line agreement. In December 1999, we sold 100 thousand
shares of Common Stock for $1.5 million. In January 2000, we sold an additional
59 thousand shares of Common Stock for $1.0 million pursuant to the Equity Line.
(See Note 9 in the "Notes to Consolidated Financial Statements" in this report.)
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In addition to the cash received from the offerings, issuance of 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 year ended December 31, 1999
was $17.9 million, compared with net cash used of $42.5 million for year ended
December 31, 1998. Cash used in operating activities during the year ended
December 31, 1999 was primarily due to the net loss from continuing operations
of $22.2 million, and decreases in deferred compensation and other liabilities
of $4.4 million, offset by a decrease in deferred compensation, prepaid expenses
and other assets of $4.4 million and accounts receivable of $0.8 million;
depreciation and amortization of 1.9 million; and debt issuance and financing
costs and debt discount of $1.7 million. Cash used in operating activities
during the year ended December 31, 1998 was primarily due to our net loss of
$39.4 million and a $14.0 million cash payment made in January 1998 to Sanofi
under the terms of the arbitration settlement; offset by the non-cash beneficial
conversion costs of $4.2 million associated with the October 1998 restructuring
of the Notes, an increase in accounts payable and other accrued liabilities of
$2.3 million, depreciation and amortization of $1.9 million, and amortization of
debt issuance and financing costs and debt discount of $1.6 million.
The current level of cash used in operating activities is not necessarily
indicative of the level of future cash usage. We expect an increase in operating
cash usage for 2000.
Net cash provided by investing activities of $24.8 million for the year
ended December 31, 1999 resulted primarily from the receipt of $20.0 million
from the sale of the drug delivery business, net sales of investments of
$8.3 million, offset by capital expenditures of $2.7 million and a contract
termination fee of $0.8 million in conjunction with disposal of the drug
delivery segment. Net cash used in investing activities of $7.6 million for the
year ended December 31, 1998 resulted primarily from net purchases of
investments of $4.2 million and capital expenditures of $3.4 million.
Net cash provided by financing activities of $11.6 million for the year
ended December 31, 1999 includes, as mentioned above, net proceeds of $16.4
million and $9.2 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 $5.7 million, offset by the July
1999 redemption of Senior Subordinated Convertible Notes of $12.5 million, and
long-term debt and capital lease repayments of $5.3 million and $1.9 million,
respectively. Net cash provided by financing activities of $39.7 million for the
year ended December 31, 1998 includes, as mentioned above, net proceeds of $40.4
million and $13.3 million from our February 1998 issuance of Senior Subordinated
Convertible Notes and from a direct public offering of our Common Stock,
respectively; additional stock proceeds of $0.9 million and $6.1 million from
the issuance of long-term debt, offset by a subordinated debt principal
repayment of $18.5 million, and long-term debt and capital lease repayments of
$2.0 million and $0.5 million, respectively.
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
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products, technologies and companies. As we evaluate the progress of our
development projects, in particular the GlucoWatch system and our enhanced
glucose monitoring products in development, 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 $38.9 million as of December 31, 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 December 31, 2000. However, there can be no
assurance that we will not require additional financing, depending upon future
business strategies, manufacturing and commercialization efforts, results of
clinical trials and management decisions to accelerate certain research and
development programs and other factors.
INCOME TAXES. We recorded a $0.2 million income tax provision consisting
entirely of foreign withholding taxes for the year ended December 31, 1999. As
of December 31, 1999, we had federal net operating loss and research and
development tax credit carryforwards of approximately $152.6 million and $3.7
million, respectively. We had state net operating loss and tax credit
carryforwards of approximately $36.5 million and $3.1 million, respectively.
These carryforwards will expire at various dates beginning in 2000. Because of
the "change in ownership" provisions of the Internal Revenue Code, a substantial
portion of our net operating loss and tax credit carryforwards may be subject to
annual limitations. The annual limitations may result in the expiration of the
net operating losses and tax credits before utilization.
IMPACT OF YEAR 2000
In prior years, we discussed the nature and progress of our plans to become
Year 2000 ready. In late 1999, we completed our remediation and testing of
systems. As a result of those planning and implementation efforts, we
experienced no significant disruptions in mission critical information
technology and non-information technology systems and believe these systems
successfully responded to the Year 2000 date change. We expensed approximately
$150 thousand during 1999 in connection with remediating our systems. We are not
aware of any material problems resulting from Year 2000 issues, either with our
products, our internal systems, or the products and services of third parties.
We will continue to monitor our mission critical computer applications and those
of our suppliers and vendors throughout the year 2000 to ensure that any latent
Year 2000 matters that may arise are addressed promptly.
RISK FACTORS
We wish to caution stockholders and investors that the following important
factors, among others, in some cases have affected, and in the future could
affect, our actual results and could cause our actual consolidated results for
1999 and beyond to differ materially from those expressed in any forward-looking
statements made by or on behalf of Cygnus. The statements under this caption are
intended to serve as cautionary statements within the meaning of the Private
Securities Litigation
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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.
OUR PRODUCT PIPELINE IS SEVERELY LIMITED.
With the sale of the majority of the drug delivery business assets to
Ortho-McNeil Pharmaceutical, Inc., and the termination of the remaining drug
delivery projects, we are now exclusively focused on diagnostic medical devices,
initially on a line of frequent, automatic and non-invasive glucose monitoring
devices. There is an inherent risk in not having a broad base of products in
development and we cannot assure you that we will be successful with this narrow
line of products.
WE MAY NOT RECEIVE FDA APPROVAL ON OUR PRODUCTS.
Although the FDA's Clinical Chemistry and Toxicology Devices Panel of the
Medical Devices Advisory Committee has recommended the GlucoWatch biographer for
approval for sale with three conditions, there can be no assurance that we can
meet these conditions or, if we can, that the recommendation of the Advisory
Committee will convince the FDA to approve the product. Additionally, there can
be no assurance that the FDA will approve the GlucoWatch biographer on the same
terms, if at all. Furthermore, as we seek regulatory approval for enhancements
and possible manufacturing changes through the PMA supplement process, there can
be assurances that such supplements will be approved or that one or more new
PMAs will not need to be filed.
Even if we receive the necessary regulatory approvals for the GlucoWatch
system, there can be no assurance that unforeseen problems will not occur in
product manufacturing and commercial scale-up or marketing or product
distribution. Any such occurrence could significantly delay the
commercialization of the GlucoWatch system or prevent its market introduction
entirely. Furthermore, even if the GlucoWatch system is successfully developed,
the commercial success of the GlucoWatch system will depend on its acceptance in
the market.
WE HAVE LIMITED MARKETING, DISTRIBUTION, MANUFACTURING AND SALES EXPERIENCE.
We have limited experience marketing, distributing, manufacturing or selling
medical device products. To successfully market, distribute, manufacture and
sell the GlucoWatch system or our other glucose monitoring products under
development, we must either develop a more extensive marketing, distributing,
manufacturing and sales force or enter into arrangements with third parties to
market, distribute, manufacture and sell our products. We cannot assure you that
we will be able to successfully develop a more extensive marketing,
distributing, manufacturing and sales force or that we will enter into
acceptable marketing, distributing, manufacturing and sales agreements with
third parties. If we maintain our own marketing, distributing, manufacturing and
sales capabilities, we will compete with other companies that have experienced
and well-funded marketing, distributing, manufacturing and sales operations. If
we enter into a marketing arrangement with a third party, any revenues we
receive will depend on the third party, and we will likely have to pay a sales
commission or similar amount. We may be unable to successfully commercialize our
products.
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WE CANNOT PREDICT THE MARKET ACCEPTANCE OF OUR PRODUCTS.
We are focusing our efforts predominantly on a line of frequent, automatic,
and non-invasive glucose monitoring devices. No one can predict market
acceptance or penetration of such products, given that they are entirely
different from any glucose diagnostic product currently on the market. There is
a risk in introducing a very new type of product in a market of established
finger stick glucose monitors, and we cannot assure you that our products will
be accepted or to what degree. Additionally, some of our competitors have
announced, and others may be developing, new, frequent, automatic, and
non-invasive (or minimally invasive, semi-invasive or less-invasive) glucose
monitoring devices. We cannot predict what impact introduction of competing
products will have on our market sales.
WE DEPEND ON PROPRIETARY TECHNOLOGY.
Our success depends in large part on our ability to obtain patent protection
for our products, preserve our trade secrets and operate without infringing upon
the proprietary rights of others, both in the U.S. and abroad. Since currently
patent applications in the U.S. are maintained in secrecy 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 or
upheld 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 FACE INTENSE COMPETITION.
The medical device industry in general, and the market in which we expect to
offer the GlucoWatch system in particular, is intensely competitive. Even if we
successfully develop the GlucoWatch system, we will compete with other providers
of personal glucose monitors. A number of our competitors are currently
marketing traditional glucose monitors. These monitors are widely
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accepted in the healthcare industry and have long histories of accuracy and
effective use. Furthermore, a number of companies have announced that they are
developing products that permit less painful or painless, as well as continual
or continuous, glucose monitoring. Accordingly, we expect competition to
increase. Many of our competitors have substantially greater resources than we
do and have greater name recognition and lengthier operating histories in the
healthcare industry. We cannot assure you that we will be able to compete
effectively against our competitors. Additionally, we cannot assure you that the
GlucoWatch system or our other enhanced products under development will replace
any currently used devices or systems. Furthermore, we cannot assure you that
our competitors will not succeed in developing, even before we develop and
commercialize the GlucoWatch system or our other enhanced products under
development, devices and technologies that permit more-efficient and
less-expensive glucose monitoring devices. Pharmaceutical or other healthcare
companies may also develop therapeutic drugs, treatments or other products that
will substantially reduce the prevalence of diabetes or otherwise render our
products obsolete.
THIRD PARTIES MAY NOT REIMBURSE PATIENTS, HOSPITALS AND PHYSICIANS FOR THE COSTS
OF MEDICAL DEVICES.
Successful commercialization of certain of our products may depend in part
on the availability of reimbursement from third-party healthcare payers, such as
private insurance plans and the government. There can be no assurance that such
reimbursement will be available. Third-party payers are increasingly attempting
to contain healthcare costs by limiting both coverage and the level of
reimbursement for new therapeutic and diagnostic products. There can be no
assurance that adequate levels of reimbursement will be available to enable us
to achieve market acceptance of the GlucoWatch system or other new products
under development or to maintain price levels sufficient to realize an
appropriate return on our investment. In certain international countries, the
period of time needed to obtain such reimbursement can be lengthy. We may delay
the launch of our products in certain countries until eligibility for
reimbursement is established. This could potentially harm our business,
financial condition and results of operations.
WE HAVE INCURRED SUBSTANTIAL LOSSES, HAVE A HISTORY OF OPERATING LOSSES, HAVE AN
ACCUMULATED DEFICIT AND EXPECT CONTINUED OPERATING LOSSES.
We reported a net loss from continuing operations of $22.2 million for the
year ended December 31, 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 system. We cannot
assure you that we will generate significant revenues or achieve profitability.
We do not have experience in manufacturing, marketing or selling our medical
device 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 our discontinued operations, including
Nicotrol-Registered Trademark- (Pharmacia AB, Stockholm, Sweden) nicotine patch
and the Fempatch-Registered Trademark- (Warner-Lambert Co., Morris Plains, New
Jersey) system. As a result of the sale of our drug delivery business, we will
no longer receive manufacturing revenue or royalty payments from the Nicotrol
patch or the Fempatch system. If we obtain regulatory approvals, we expect that
a
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substantial portion of our future revenues will be derived from sales of the
GlucoWatch system and other diagnostic products currently under development.
WE ARE HIGHLY LEVERAGED AND MAY BE UNABLE TO SERVICE OUR DEBT.
As of December 31, 1999, we had indebtedness of approximately
$47.0 million. The degree to which we are leveraged could materially 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 relating to our debt
obligations, our assets will first be available to pay the amounts due under our
debt obligations. Holders of Common Stock would only receive the assets
remaining, if any, after payment of all indebtedness and Preferred Stock.
WE MAY NEED ADDITIONAL FINANCING AND IT MAY NOT BE AVAILABLE.
In order to continue to develop our diagnostic products, we will require
substantial resources to conduct research and development and clinical trials
necessary to bring our products to market and to establish production and
marketing capabilities. We may seek additional funding through public or private
financings, including debt or equity financings. We may also seek other
arrangements, including collaborative arrangements. Any additional equity
financings may dilute the holdings of current stockholders. Debt financing, if
available, may restrict our ability to issue dividends in the future 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
license or sell products or technologies that we would otherwise seek to develop
ourselves. We believe that our existing cash, cash equivalents and investments,
plus cash from revenues, other fundings such as potential product funding
collaborations or financings, and earnings from investments, will suffice to
meet our operating expenses, debt servicing and repayments and capital
expenditure requirements at least through the end of the year 2000. The amounts
and timing of future expenditures will depend on progress of ongoing research
and development, results of clinical trials, rates at which operating losses are
incurred, executing possible development and licensing agreements with corporate
partners, developing our products, manufacturing scale-up for the GlucoWatch
system, the FDA regulatory process, and several other factors, many of which are
beyond our control.
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WE DEPEND ON LICENSEES, DISTRIBUTORS AND COLLABORATIVE 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 collaborative arrangements with
third-party partners, distributors, licensees, and other such parties. If we
commercialize our GlucoWatch system, we will depend upon Yamanouchi
Pharmaceutical Co., Ltd. to market and distribute the GlucoWatch system in Japan
and Korea. We do not have any marketing or distribution agreements for the
GlucoWatch system other than the Yamanouchi collaboration. One of our priorities
is to establish an alliance or alliances for the commercialization of the
GlucoWatch system in North America and Europe. The purpose of such an alliance
or alliances is for us to secure certain commercialization functions, such as
distribution, sales and customer service. We are in discussions with several
companies regarding this objective. Some of the companies are international in
scope and would provide the requisite commercialization functions worldwide.
Other companies focus on certain geographies and/or certain commercialization
functions. The potential signing of a worldwide commercialization agreement may
or may not coincide with the launch of our GlucoWatch system, assuming we
receive FDA approval. We are evaluating out-sourced capabilities for a U.S.
launch without a worldwide commercialization alliance. There can be no assurance
that we will be able to enter into a commercialization alliance or alliances or
that we will be able to out-source certain commercialization capabilities for
launch without a worldwide commercialization alliance in place. We cannot assure
you that such third parties will not, for competitive reasons, support, directly
or indirectly, a company or product that competes with one of our products.
Furthermore, any dispute between us and such a third party might require us to
initiate or defend against expensive litigation or arbitration proceedings. If
one of our partners, distributors or licensees 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 partner, distributor, or licensee. We
cannot assure you that we would be able to reach agreement with a replacement
third party. If we were unable to find a replacement third party, we might not
be able to perform or fund the activities of the current partner, distributor or
licensee. Even if we were able to perform and fund these activities, our capital
requirements would increase substantially. 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 but will negatively affect our short-term
operating results. Furthermore, as discussed above, we have limited marketing,
manufacturing, distribution and sales experience.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS.
The design, development, manufacture and use of our medical 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
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product recall creates significant adverse publicity, our business, financial
condition and results of operations could be materially adversely affected.
WE MAY NOT BE ABLE TO RETAIN OR HIRE KEY PERSONNEL.
Our ability to operate successfully and manage our potential future growth
significantly depends upon retaining key scientific, technical, managerial and
financial personnel, and attracting and retaining additional highly qualified
scientific, technical, managerial and financial personnel. We face intense
competition for qualified personnel in these areas, and we cannot assure you
that we will be able to attract and retain qualified personnel. The loss of key
personnel or our inability to hire and retain additional qualified personnel in
the future could adversely affect our business, financial condition and
operating results.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS HAVE ANTI-TAKEOVER PROVISIONS.
Our Restated Certificate of Incorporation and Bylaws contain several
provisions that may make the acquisition of control of Cygnus more difficult or
expensive. The Certificate of Incorporation and Bylaws, among other things:
(i) provide that directors may be removed only for cause and only upon the
affirmative vote of the holders of at least a majority of the outstanding shares
of voting stock entitled to vote for such directors, (ii) permit the remaining
directors (but not the stockholders, unless the directors so resolve) to fill
vacancies and newly created directorships on the Board, (iii) eliminate the
ability of stockholders to act by written consent and (iv) require the vote of
stockholders holding at least 66 2/3% of the outstanding shares of voting stock
to amend, alter or repeal the Bylaws and certain provisions of the Restated
Certificate of Incorporation, including the provisions described in (i) through
(iv).
Such provisions may make the removal of incumbent directors more difficult
and time-consuming and may have the effect of discouraging a tender offer or
other takeover attempt not previously approved by the Board of Directors. Under
the Restated Certificate of Incorporation, the Board of Directors also has the
authority to issue shares of Preferred Stock in one or more series and to fix
the powers, preferences and rights of any such series without stockholder
approval. The Board of Directors could, therefore, issue, without stockholder
approval, Preferred Stock with voting and other rights that could adversely
affect the voting power of the holders of Common Stock and could make it more
difficult for a third party to gain control of Cygnus. In addition, we have
adopted a Stockholder Rights Plan which, under certain circumstances, would
significantly dilute the equity interest of persons seeking to acquire control
over us without the prior approval of the Board of Directors.
OUR STOCK PRICE IS VOLATILE.
The trading price of our Common Stock substantially fluctuates in response
to factors such as, but not limited to: 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
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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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to our investment portfolio and long-term debt obligations. We do not use
derivative financial instruments in our investment portfolio. We place our
investments with high credit quality issuers and, by policy, limit the amount of
credit exposure to any one issuer. As stated in our policy, we are averse to
principal loss and ensure the safety and preservation of our invested funds by
limiting default risk, market risk and reinvestment risk.
We mitigate default risk by investing in only the highest credit quality
securities. The portfolio includes only marketable securities with active
secondary or resale markets to ensure portfolio liquidity.
We have no cash flow exposure due to rate changes for our $17.0 million
Convertible Debentures, our $0.7 million equipment loans, and our $6.0 million
convertible promissory note related to the Sanofi arbitration settlement, which
all have fixed rates. We also have no cash flow exposure due to the rate change
for certain long-term portions of our Sanofi arbitration obligations, as such
obligations are not interest-bearing. We do have cash flow exposure on our $5.6
million bank term loan due to its variable interest rate (prime plus 1.0%). We
primarily enter into debt obligations to support general corporate purposes,
including capital expenditures and working capital needs.
Because we do not have any assets or liabilities in foreign currencies, we
have no risk from exchange rate changes.
29
<PAGE>
The table below presents principal amounts and related weighted-average
interest rates by year of maturity for our investment portfolio and debt
obligations.
<TABLE>
<CAPTION>
FAIR
2000 2001 2002 2003 2004 TOTAL VALUE
(DOLLARS IN THOUSANDS) -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS:
Cash equivalents
Fixed.................................... $ 6,842 -- -- -- -- $ 6,842 $ 6,842
Average rate............................. 6.15% -- -- -- -- 6.15% --
Variable rate............................ $20,744 -- -- -- -- $20,744 $20,744
Average rate............................. 4.71% -- -- -- -- 4.71% --
Short-term investments
Fixed.................................... $10,239 -- -- -- -- $10,239 $10,215
Average rate............................. 6.40% -- -- -- -- 6.40% --
Total investments
Securities............................... $37,825 -- -- -- -- $37,825 $37,801
Average rate............................. 5.42% -- -- -- -- 5.42% --
LIABILITIES:
Total long-term debt, including current
portion
Senior Subordinated
Convertible Notes........................ -- -- -- -- $17,000 $17,000 $17,000
Fixed.................................... -- -- -- -- 8.5% 8.5% --
Other
Fixed.................................... $ 535 $6,151 -- -- -- $ 6,686 $ 6,686
Average rate............................. 9.11% 6.56% -- -- -- 6.76% --
Variable rate............................ $ 2,708 $2,938 -- -- -- $ 5,646 $ 5,646
Average rate............................. 8.75% 8.75% -- -- -- 8.75% --
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements for the years ended December 31, 1999,
1998 and 1997 are incorporated herein by reference and submitted as a separate
section of this Form 10-K. (See Item 14.)
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
30
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, who serve at the discretion of the
Board of Directors, are as follows, in alphabetical order:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- -------- -----------------------------------------------------
<S> <C> <C>
Neil R. Ackerman, Ph.D..... 56 Senior Vice President, Research & Development and
Scientific Affairs
Craig W. Carlson........... 52 Chief Financial Officer and Senior Vice President,
Finance
John C Hodgman............. 46 Chairman of the Board, President and Chief Executive
Officer
Barbara G. McClung......... 45 Senior Vice President, General Counsel and Secretary
</TABLE>
DR. ACKERMAN joined Cygnus in May of 1994 as Vice President, Research &
Development. In September 1998, Dr. Ackerman was promoted to Senior Vice
President, Research & Development and Scientific Affairs. From January 1997 to
September 1998, Dr. Ackerman served as Senior Vice President, Research &
Development. From 1990 to May 1994, Dr. Ackerman served as Vice President of
Research and Development for Glycomed, leading its discovery efforts focused on
cardiovascular and inflammatory diseases. From 1982 to 1990, he was Research
Director, Cancer and Inflammatory Diseases with DuPont Pharmaceuticals,
responsible for leading a 100-person staff that had the objective of discovering
therapeutics for cancer, inflammatory and immune-based diseases. Prior to that
he was employed by Syntex Corporation and Pfizer, Inc. in research and
management capacities. Dr. Ackerman received B.S. and Ph.D. degrees from the
University of Maryland and completed a post-doctoral fellowship at Stanford
University.
MR. CARLSON was appointed Chief Financial Officer effective December 8,
1998, with responsibilities for the Finance, Information Technology and
Corporate Communications functions at Cygnus. He joined Cygnus in July 1993 as
Vice President, Corporate Communications, became Vice President, Strategic
Planning and Corporate Marketing, then assumed responsibility for the Finance
and Information Technologies functions in 1997 as Senior Vice President,
Finance. From 1988 to July 1993, he was Vice President and Group Director at
Young & Rubicam Advertising in San Francisco. Prior to that, Mr. Carlson was
Vice President of Campbell-Mithun Advertising. He holds a B.A. from Union
College and an M.B.A. from Stanford University.
MR. HODGMAN was appointed Chairman of the Board effective July 9, 1999 and
has served as President and Chief Executive Officer since August 1998. From May
1995 to August 1998, Mr. Hodgman served as President, Cygnus Diagnostics, for
which he was responsible for all commercialization efforts for the GlucoWatch
biographer, and as Chief Financial Officer. Mr. Hodgman joined Cygnus in August
1994 as Vice President, Finance and Chief Financial Officer. Prior to joining
Cygnus, Mr. Hodgman served as Vice President of Operations and Finance and Chief
Financial Officer for Central Point Software, a personal computer and networking
software company. Prior to that, he was the Vice President of Finance and
Administration and Chief Financial Officer of Ateq Corporation. Mr. Hodgman
holds a B.S. degree from Brigham Young University and an M.B.A. from the
University of Utah.
31
<PAGE>
MS. McCLUNG joined Cygnus in January 1998 as Vice President, Intellectual
Property. In August 1998, Ms. McClung was promoted to Vice President and General
Counsel. In December 1998, Ms. McClung was promoted to Senior Vice President,
General Counsel and Secretary, and also assumed responsibilities for the Human
Resources function shortly thereafter. From August 1990 to January 1998, she was
Corporate Patent Counsel at Chiron Corporation, a biotechnology company. Prior
to that she was Patent Counsel at DuPont. She is a member of the California,
Delaware, and Pennsylvania bars, as well as being a registered patent attorney
before the U.S. Patent and Trademark Office. Ms. McClung received a J.D. from
the University of Pennsylvania Law School, as well as a B.A. from the University
of California, San Diego, and an M.A. from the University of Pennsylvania.
Additionally, we incorporate by reference the information concerning our
directors set forth under the heading "Proposal One--Re-election of Directors"
in our definitive Proxy Statement to be filed pursuant to Regulation 14A for our
2000 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
We incorporate by reference the information set forth under the heading
"Executive Compensation and Other Information" in our definitive Proxy Statement
to be filed pursuant to Regulation 14A for our 2000 Annual Meeting of
Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We incorporate by reference the information set forth under the heading
"Security Ownership of Certain Beneficial Owners and Management" in our
definitive Proxy Statement to be filed pursuant to Regulation 14A for our 2000
Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We incorporate by reference the information set forth under the headings
"Proposal One--Re-election of Directors" and "Executive Compensation and Other
Information" in our definitive Proxy Statement to be filed pursuant to
Regulation 14A for our 2000 Annual Meeting of Stockholders.
32
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
A.1) FINANCIAL STATEMENTS AND REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-3
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997.......................... F-5
Consolidated Statements of Stockholders' Net Capital
Deficiency for the years ended December 31, 1999, 1998 and
1997...................................................... F-6
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997.......................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
A.2) FINANCIAL STATEMENT SCHEDULE
All other schedules have been omitted because the required information is
not present or is not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements, including the notes thereto.
B) REPORTS ON FORM 8-K
We have recently filed the following Current Reports on Form 8-K.
On February 18, 2000, we filed an Amendment No. 1 to Current Report on Form
8-K, reporting under Item 2 that we completed the sale of substantially all of
our drug delivery business assets to Ortho-McNeil Pharmaceutical, Inc., a
Johnson & Johnson company, for up to $75 million in cash.
On December 30, 1999, we filed a Current Report on Form 8-K, reporting under
Item 2 that we completed the sale of substantially all of our drug delivery
business assets to Ortho-McNeil Pharmaceutical, Inc. for up to $75 million in
cash.
On December 13, 1999, we filed a Current Report on Form 8-K, reporting under
Item 5: (i) that we received a CE Certificate for the GlucoWatch system, which
is required for selling products in the European Community; (ii) that our
Premarket Approval application (PMA) for the GlucoWatch system received a
unanimous recommendation for approval with conditions by the Food and Drug
Administration's (FDA) Clinical Chemistry and Clinical Toxicology Devises Panel
of the Medical Devices Advisor Committee; and (iii) a copy of our condensed
consolidated balance sheet and pro forma condensed consolidated statements of
income to illustrate the effect of the sale of substantially all of our drug
delivery business assets to Ortho-McNeil Pharmaceutical, Inc.
On November 22, 1999, we filed a Current Report on Form 8-K, reporting under
Item 5 that we signed a binding agreement to sell substantially all of the
assets of our drug delivery business to Ortho-McNeil Pharmaceutical, Inc.
33
<PAGE>
On November 4, 1999, we filed a Current Report on Form 8-K, reporting under
Item 5 that the FDA had scheduled December 6, 1999 as the date for an advisory
committee review of our PMA for the GlucoWatch system.
C) EXHIBITS
The following exhibits are filed herewith or incorporated by reference:
<TABLE>
<C> <S>
3.01 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.
3.02 Restated Articles of Incorporation of the Registrant, as
amended to date, incorporated by reference to Exhibit 3.4
of the Registrant's Registration Statement Form S-1 No.
33-38363.
4.01 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.
4.02 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).
4.03 Form of Subordinated Indenture incorporated herein by
reference to Exhibit 4.2 filed with the Company's
November 1997 Form S-3.
4.04 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.
4.05 Form of Subordinated Debt Security (included in
Exhibit 4.2) incorporated herein by reference to
Exhibit 4.4 filed with the Company's November 1997
Form S-3.
4.06 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.
4.07 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.
4.08 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.
</TABLE>
34
<PAGE>
<TABLE>
<C> <S>
4.09 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.
4.10 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.
10.001 Ten-year Industrial Net Lease Agreement (Building No. 2)
dated September 27, 1988 between the Registrant and
Seaport Centre Venture Phase I, incorporated by reference
to Exhibit 10.26 of the Registrant's Form S-1 Registration
Statement No. 33-38363.
10.002 Ten-year Industrial Net Lease Agreement (Building No. 8)
dated September 27, 1988 between the Registrant and
Seaport Centre Venture Phase I, incorporated by reference
to Exhibit 10.27 of the Registrant's Form S-1 Registration
Statement No. 33-38363.
10.003 Lease Agreement dated as of October 15, 1991 between the
Registrant and Lincoln Menlo Associates Limited, a
California Limited Partnership, incorporated by reference
to Exhibit 10.34 of the Registrant's Form S-1 Registration
Statement No. 33-45180.
10.004 First Amendment to Ten-year Industrial Net Lease Agreement
(Building No. 2) dated June 9, 1998 between the Registrant
and Metropolitan Life Insurance Company, a New York
corporation (predecessor in interest to Seaport Centre
Venture Phase I), incorporated by reference to
Exhibit 10.29 of the Registrant's Form 10-K for the period
ending December 31, 1998.
10.005 Third Amendment to Ten-year Industrial Net Lease Agreement
(Building No. 8) dated June 9, 1998 between the Registrant
and Metropolitan Life Insurance Company, a New York
corporation (predecessor in interest to Seaport Centre
Venture Phase I), incorporated by reference to
Exhibit 10.29 of the Registrant's Form 10-K for the period
ending December 31, 1998.
10.006 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.
10.007 Amendment No. 4 Lease Extension dated July 20, 1999 between
the Registrant and Lincoln Menlo Associates Limited, a
California Limited Partnership, incorporated by reference
to Exhibit 10.44 of the Registrant's Form 10-Q for the
period ending March 31, 1999.
10.008 Sublease dated December 15, 1999 between the Registrant and
Ortho-McNeil Pharmaceutical, Inc.
10.009 through 10.099 Reserved.
10.101 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.
</TABLE>
35
<PAGE>
<TABLE>
<C> <S>
10.102 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.
10.103 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.
10.104 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.
10.105 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.
10.106 Form of Note Purchase Agreement dated as of February 2, 1998
between Cygnus, Inc. and certain institutional investors.
Incorporated by reference to Exhibit 10.28 of the
Company's Form 8-K dated February 4, 1998.
10.107 Form Common Stock Purchase Agreement dated February 2, 1998
between Cygnus, Inc. and certain institutional investors.
Incorporated by reverence to exhibit 10.29 of the
Company's Form 8-K dated February 4, 1998.
10.108 Amended and Restated Loan and Security Agreement between the
Registrant and Silicon Valley Bank entered into as of
April 30, 1998, incorporated by reference to exhibit 10.45
of the Company's Form 10-Q for the quarter ended
September 30, 1998.
10.109 through 10.199 Reserved.
*10.201 Product Supply and Distribution Agreement between the
Registrant and Yamanouchi Pharmaceutical Co., Ltd., dated
as of July 14, 1996 Incorporated by reference to exhibit
10.1 of the Company's Form 10-Q for the quarter ended
June 30, 1996.
*10.202 Product Supply Agreement between the Registrant and Contract
Manufacturing, Inc. dated July 15, 1997.
*10.203 Supply Agreement dated June 19, 1998 between the Registrant
and E.I. du Pont de Nemours & Co., a Delaware corporation,
incorporated by reference to Exhibit .10.34 of
Registrant's Form 10-K for period ending December 31,
1998.
*10.204 Detection of Analytes Product Development and License
Agreement dated June 19, 1998 between the Registrant and
E.I. du Pont de Nemours & Co., a Delaware corporation,
incorporated by reference to Exhibit 10.35 of Registrant's
Form 10-K for period ending December 31, 1998.
*10.205 Supply Agreement between the Registrant and Key Tronic
Corporation dated December 1, 1999.
*10.206 Supply Agreement between the Registrant and Hydrogel Design
Systems, Inc. dated December 31, 1999.
10.207 through 10.299 Reserved.
</TABLE>
36
<PAGE>
<TABLE>
<C> <S>
*10.301 Exclusive License Agreement between the Registrant and The
Regents of the University of California dated January 31,
1995.
*10.302 License Agreement Amendment between the Registrant and The
Regents of the University of California dated April 23,
1998.
10.303 through 10.399 Reserved.
*10.401 Asset Purchase Agreement dated November 17, 1999 between the
Registrant and Ortho-McNeil Pharmaceutical, Inc.,
incorporated by reference to Exhibit 10.49 of Registrant's
Form 8-K filed December 30, 1999.
10.402 through 10.499 Reserved
10.501 Cygnus, Inc. 1999 Stock Incentive Plan (As Amended and
Restated March 1, 2000)
10.502 Cygnus, Inc. Amended 1991 Employee Stock Purchase Plan (As
Amended and Restated March 1, 2000).
10.503 Form of Indemnification Agreement for Directors and
Officers, incorporated by reference to Exhibit 10.29 of
the Registrant's Form S-1 Registration Statement No.
33-38363.
10.504 Form of Agreement (Termination of Employment Without
Cause--Officers) between the Company and each of the
Executive officers, incorporated by reference to
Exhibit 10.46 of the Company's Form 10-Q for the period
ended September 30, 1998.
10.505 Form of Agreement (Change of Control) between the Company
and each of the Executive officers, incorporated by
reference to Exhibit 10.47 of the Company's Form 10-Q for
the period ended September 30, 1998.
10.506 Form of Special Addendum to Stock Option Agreement
(Termination of Employment Without Cause--Officers),
incorporated by reference to Exhibit 99.4 of the Company's
Form S-8 Registration Statement No. 333-67331, filed
November 16, 1998.
10.507 Form of Special Addendum to Stock Option Agreement
(Termination of Employment Without Cause--Key Employee),
incorporated by reference to Exhibit 99.5 of the Company's
Form S-8 Registration Statement No. 333-67331, filed
November 16, 1998.
10.508 Form of Special Addendum to Stock Option Agreement (Change
in Control), incorporated by reference to Exhibit 99.3 of
the Company's Form S-8 Registration Statement No.
333-67331, filed November 16, 1998.
10.509 Written Compensation Agreement dated August 28, 1998 between
Registrant and Andre F. Marion, incorporated by reference
to Exhibit 99.7 of the Company's Form S-8 Registration
Statement No. 333-67331, filed November 16, 1998.
</TABLE>
37
<PAGE>
<TABLE>
<C> <S>
10.510 Stock Option Agreement between Registrant and Andre F.
Marion, incorporated by reference to Exhibit 99.8 of the
Company's Form S-8 Registration Statement No. 333-67331,
filed November 16.1998.
25.1 Power of Attorney (see page 40)
27.0 Financial Data Schedule
</TABLE>
- ------------------------
* A confidential treatment request has been applied for or granted with
respect to a portion of this document.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 22nd day of March,
2000.
<TABLE>
<S> <C> <C>
CYGNUS, INC.
By: /s/ JOHN C HODGMAN
------------------------------------
John C Hodgman
CHAIRMAN, PRESIDENT AND CHIEF
EXECUTIVE OFFICER (PRINCIPAL
EXECUTIVE OFFICER)
</TABLE>
39
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints John C Hodgman attorney-in-fact for the
undersigned, with the power of substitution, for the undersigned in any and all
capacities, to sign any and all amendments to this Report on Form 10-K, and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorney-in-fact, or his substitute or substitutes, may
do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney as of the date indicated opposite his/her name.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman of the Board of
/s/ JOHN C HODGMAN Directors, President
------------------------------------------- and Chief Executive
John C Hodgman Officer (Principal
Executive Officer) March 22, 2000
Chief Financial Officer
/s/ CRAIG W. CARLSON and Senior Vice
------------------------------------------- President, Finance
Craig W. Carlson (Principal Accounting
Officer) March 22, 2000
/s/ ANDRE F. MARION
------------------------------------------- Vice Chairman of the
Andre F. Marion Board of Directors March 22, 2000
/s/ FRANK T. CARY
------------------------------------------- Director
Frank T. Cary March 22, 2000
/s/ RICHARD G. ROGERS
------------------------------------------- Director
Richard G. Rogers March 22, 2000
/s/ WALTER B. WRISTON
------------------------------------------- Director
Walter B. Wriston March 22, 2000
</TABLE>
40
<PAGE>
CYGNUS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
WITH
REPORT OF INDEPENDENT AUDITORS
F-1
<PAGE>
CYGNUS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
CONTENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-3
Audited Consolidated Financial Statements:
Consolidated Balance Sheets................................. F-4
Consolidated Statements of Operations....................... F-5
Consolidated Statements of Shareholders' Net Capital
Deficiency................................................ F-6
Consolidated Statements of Cash Flows....................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-2
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Cygnus, Inc.
We have audited the accompanying consolidated balance sheets of Cygnus, Inc.
as of December 31, 1999 and 1998, and the related consolidated statements of
operations, stockholders' equity (net capital deficiency) and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of Cygnus' management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Cygnus, Inc. at
December 31, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
/s/ ERNST & YOUNG LLP
Palo Alto, California
January 28, 2000
F-3
<PAGE>
CYGNUS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
--------- ---------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents................................. $ 28,677 $ 10,219
Short-term investments.................................... 10,215 14,982
Trade accounts receivable, net of allowance ($123 in
1998)................................................... 62 876
Inventories............................................... -- 771
Prepaid expenses and other current assets................. 498 510
Current portion of employee notes receivable.............. 162 185
Current portion of unamortized deferred financing cost.... 201 --
--------- ---------
Total current assets.................................. 39,815 27,543
EQUIPMENT AND IMPROVEMENTS:
Office and laboratory equipment........................... 7,856 14,421
Leasehold improvements.................................... 426 1,304
Construction in progress.................................. 4,417 3,816
--------- ---------
12,699 19,541
Less accumulated depreciation and amortization............ (6,610) (13,077)
--------- ---------
Net equipment and improvements........................ 6,089 6,464
Long-term investments..................................... -- 3,622
Long-term portion of employee notes receivable............ 201 286
Deferred compensation and other assets.................... 162 4,451
Unamortized portion of deferred financing cost............ 709 1,088
--------- ---------
Total Assets.......................................... $ 46,976 $ 43,454
========= =========
LIABILITIES AND NET CAPITAL DEFICIENCY:
CURRENT LIABILITIES:
Accounts payable.......................................... $ 1,884 $ 2,585
Amounts payable to related parties........................ -- 1,043
Accrued clinical trials expenses.......................... 118 831
Accrued compensation...................................... 2,919 4,593
Other accrued liabilities................................. 640 1,939
Current portion of deferred revenue....................... 900 1,153
Current portion of long-term debt......................... 3,243 3,415
Current portion of capital lease obligations.............. -- 442
--------- ---------
Total current liabilities............................. 9,704 16,001
Arbitration obligation...................................... 23,000 24,158
Long-term portion of debt................................... 3,088 8,252
Long-term portion of capital lease obligations.............. -- 581
Senior Subordinated Convertible Notes....................... -- 22,563
Convertible Debentures, net of discount of $5,595 in 1999... 12,084 --
Deferred compensation and other long-term liabilities....... 304 4,666
STOCKHOLDERS' NET CAPITAL DEFICIENCY:
Preferred stock, $0.001 par value: 5,000 shares
authorized; no shares issued and outstanding............ -- --
Common Stock, $0.001 par value: 55,000 and 40,000 shares
authorized; Issued and outstanding: 25,411 and 20,886
shares at December 31, 1999 and 1998, respectively...... 25 21
Additional paid-in-capital................................ 177,576 143,155
Accumulated deficit....................................... (178,790) (175,955)
Accumulated other comprehensive income/(loss)............. (15) 12
--------- ---------
Net capital deficiency.................................... (1,204) (32,767)
--------- ---------
Total liabilities and stockholders' net capital
deficiency............................................. $ 46,976 $ 43,454
========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CYGNUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CONTRACT REVENUES......................................... $ 2,061 $ 457 $ 2,146
COSTS AND EXPENSES:
Research and development................................ 15,745 25,635 16,198
Marketing, general and administrative................... 4,794 8,810 2,205
-------- -------- --------
TOTAL COSTS AND EXPENSES.............................. 20,539 34,445 18,403
LOSS FROM OPERATIONS...................................... (18,478) $(33,988) (16,257)
Interest and other income............................... 194 3,284 2,989
Interest and other expense.............................. (3,690) (9,730) (1,849)
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS BEFORE TAX................ (21,974) (40,434) (15,117)
Provision for tax......................................... (200) -- --
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS........................... (22,174) (40,434) (15,117)
DISCONTINUED OPERATIONS:
Income/(loss) from operations of discontinued segment... 3,031 1,006 (35,343)
Gain on disposal of segment............................. 16,308 -- --
-------- -------- --------
NET LOSS.................................................. $ (2,835) $(39,428) $(50,460)
======== ======== ========
NET LOSS PER SHARE FROM CONTINUING OPERATIONS, BASIC AND
DILUTED................................................. $ (0.95) $ (2.00) $ (0.80)
======== ======== ========
NET INCOME/(LOSS) PER SHARE FROM DISCONTINUED SEGMENT,
BASIC AND DILUTED....................................... $ 0.83 0.05 $ (1.87)
======== ======== ========
NET LOSS PER SHARE, BASIC AND DILUTED..................... $ (0.12) $ (1.95) $ (2.67)
======== ======== ========
SHARES USED IN COMPUTATION OF NET LOSS PER SHARE, BASIC
AND DILUTED............................................. 23,354 20,226 18,928
======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CYGNUS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' NET CAPTIAL DEFICIENCY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED TOTAL
ADDITIONAL OTHER STOCKHOLDERS'
COMMON PAID-IN- ACCUMULATED COMPREHENSIVE NET CAPITAL
STOCK CAPITAL DEFICIT INCOME/(LOSS) DEFICIENCY
-------- ---------- ------------ -------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996...................... $18 $117,266 $ (86,067) $ (4) $ 31,213
Issuance of 322 shares of Common Stock under the
Employee Stock Option Plan and Employee Stock
Purchase Plan................................. 1 2,918 -- -- 2,919
Issuance of 255 shares of Common Stock through
exercise of warrant........................... -- 2,525 -- -- 2,525
Net loss...................................... -- -- (50,460) -- (50,460)
Unrealized gain on available-for-sale
securities.................................. -- -- -- 3 3
--------
Net comprehensive loss........................ -- -- -- -- (50,457)
--- -------- --------- ---- --------
BALANCE, DECEMBER 31, 1997...................... $19 $122,709 $(136,527) $ (1) $(13,800)
=== ======== ========= ==== ========
Issuance of 144 shares of Common Stock under the
Employee Stock Option Plan and Employee Stock
Purchase Plan................................. $-- $ 892 $ -- $ -- $ 892
Issuance of 906 shares of Common Stock in fourth
public offering, net of issuance costs........ 1 13,326 -- -- 13,327
Issuance of 565 shares arising upon conversion
of the Senior Subordinated Note............... 1 1,998 -- -- 1,999
Additional paid-in capital arising from the
beneficial conversion feature in connection
with the restructuring of the Senior
Subordinated Notes............................ -- 4,230 -- -- 4,230
Net loss...................................... -- -- (39,428) -- (39,428)
Unrealized gain on available-for-sale
securities.................................. -- -- -- 13 13
--------
Net comprehensive loss........................ -- -- -- -- (39,415)
--- -------- --------- ---- --------
BALANCE, DECEMBER 31, 1998...................... $21 $143,155 $(175,955) $ 12 $(32,767)
=== ======== ========= ==== ========
Issuance of 1,103 shares of Common Stock under
the Employee Stock Incentive Plan and Employee
Stock Purchase Plan........................... $ 1 $ 6,694 $ -- $ -- $ 6,695
Issuance of 259 shares of Common Stock for
services rendered............................. -- 864 -- -- 864
Stock-based compensation........................ -- 378 -- -- 378
Issuance of 991 shares of Common Stock pursuant
to the Equity Line Agreement, net of issuance
costs......................................... 1 9,117 -- -- 9,118
Issuance of 120 shares of Common Stock upon
exercise of warrant........................... -- 531 -- -- 531
Issuance of 2,053 shares upon conversion of the
Senior Subordinated Note...................... 2 10,265 -- -- 10,267
Issuance of warrants in connection with the
Convertible Debentures........................ -- 6,572 -- -- 6,572
Net loss...................................... -- -- (2,835) -- (2,835)
Unrealized loss on available-for-sale
securities.................................. -- -- -- (27) (27)
--------
Net comprehensive loss........................ -- -- -- -- (2,862)
--- -------- --------- ---- --------
BALANCE, DECEMBER 31, 1999...................... $25 $177,576 $(178,790) $(15) $ (1,204)
=== ======== ========= ==== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
CYGNUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (2,835) $(39,428) $(50,460)
Adjustments to reconcile net loss to net cash (used
in)/provided by operating activities:
Depreciation.............................................. 1,850 1,665 1,971
Amortization.............................................. 12 256 768
Loss on write-down of equipment........................... -- -- 1,350
Beneficial conversion feature of restructured Notes....... 4,230 --
Amortization of debt issuance and financing costs and debt
discount................................................ 1,743 1,561 --
Stock-based compensation.................................. 378 -- --
Gain on disposal of segment............................... (16,308) -- --
Change in operating assets and liabilities:
Trade accounts receivables................................ 814 1,163 5,719
Inventories............................................... 771 153 1,407
Deferred compensation, prepaid expenses and other
assets.................................................. 4,409 1,454 (3,201)
Other..................................................... 77 (125) (133)
Accounts payable and other accrued liabilities............ (3,351) 2,316 (2,432)
Accrued compensation...................................... 317 1,295 121
Deferred revenue.......................................... (253) (1,881) (10,445)
Arbitration liability..................................... (1,157) (15,005) 39,223
Deferred compensation and other liabilities............... (4,362) (178) 1,494
-------- -------- --------
Net cash used in operating activities................... (17,895) (42,524) (14,618)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures........................................ (2,725) (3,365) (3,095)
Proceeds from disposal of segment........................... 20,000 -- --
Contract termination fee in conjunction with disposal of
segment................................................... (750) -- --
Purchases of investments.................................... (11,301) (48,314) (30,148)
Maturity and sale of investments............................ 19,574 44,073 32,408
-------- -------- --------
Net cash provided by/(used) in investing activities..... 24,798 (7,606) (835)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock.................................... 14,926 14,219 5,444
Net proceeds from the issuance of Senior Subordinated
Convertible Notes......................................... -- 40,351 --
Net proceeds from the issuance of Convertible Debentures.... 16,407 -- --
Proceeds from issuance of long-term debt.................... -- 6,110 1,331
Principal payments of Senior Subordinated Convertible
Notes..................................................... (12,500) (18,500) --
Principal payments of long-term debt........................ (5,335) (2,023) (2,486)
Payments of capital lease obligations....................... (1,943) (477) (1,315)
-------- -------- --------
Net cash provided by financing activities............... 11,555 39,680 2,974
-------- -------- --------
Net increase/(decrease) in cash and cash equivalents........ 18,458 (10,450) (12,479)
Cash and cash equivalents at beginning of year.............. 10,219 20,669 33,148
-------- -------- --------
Cash and cash equivalents at end of year.................... $ 28,677 $ 10,219 $ 20,669
======== ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
NOTE 1: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Cygnus was incorporated in California in 1985 and was merged into a Delaware
corporation in September 1995. We are engaged in the development and manufacture
of diagnostic systems, utilizing proprietary technologies to satisfy unmet
medical needs cost effectively. Our current efforts are primarily focused on a
frequent, automatic and non-invasive glucose monitoring device, the GlucoWatch
biographer, and enhancements thereto.
CONSOLIDATION
The consolidated financial statements include the accounts of Cygnus and its
wholly-owned subsidiaries after elimination of all material inter-company
balances and transactions. Cygnus' subsidiaries were inactive in 1999, 1998 and
1997, and were dissolved effective February 21, 2000.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
FINANCIAL PRESENTATION
Certain prior-year amounts have been reclassified to conform to the current
year's presentation.
DISCONTINUED OPERATIONS
On December 15, 1999, we completed the sale of substantially all of our drug
delivery business segment assets to Ortho-McNeil, except for certain assets with
a net book value of $505 thousand of which assets with a net book value of $205
thousand were written off prior to year end.
We have restated our consolidated statements of operations for the years
ended December 31, 1998 and 1997 to reflect the results of the drug delivery
business as a discontinued operation, in accordance with Accounting Principles
Board Opinion No. 30 (APB 30).
REVENUE RECOGNITION
Our contract revenues include up-front and interim milestone payments from
development contracts. The amortization of the initial fees and interim
milestone payments is based on the total person hours expended to date by
project, as compared to the estimated total project person hours
F-8
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
required, a manner similar to the percentage of completion methodology. Due the
nature of the projects we have undertaken, revenue recognized using our current
policy approximates the revenue that would be recognized using a straight-line
basis. However, contract revenues are not always aligned with the timing of
related expenses. To date, research and development expenses generally have
exceeded contract revenues in any particular period. Deferred revenue includes
the portion of up-front and interim milestone payments received on research,
development and distribution agreements which have been deferred and will be
recognized over the related development period in relation to efforts expended
under the agreement.
CUSTOMER CONCENTRATION
One customer provided 97% of the 1999 contract revenues. In 1998 this
customer provided 40% of our contract revenues and in 1997 this customer
provided 69% of our contract revenues. Another customer provided zero percent
(0%) of our 1999 contract revenues, 60% of our 1998 contract revenues, and 31%
of our 1997 contract revenues. No other customer provided more than 10% of
contract revenues during the three years ended December 31, 1999.
RESEARCH AND DEVELOPMENT
Research and development expenses are expensed as incurred.
INVENTORIES
The December 31, 1998 net inventory consisted primarily of raw materials and
was stated at the lower of cost (first-in, first-out method) or market, after
appropriate consideration was given to obsolescence and inventory in excess of
anticipated future demand.
EQUIPMENT AND IMPROVEMENTS
Equipment and improvements are recorded at the lower of cost or net
realizable value. Depreciation of equipment is computed on a straight-line basis
over the estimated useful lives of eighteen months to sixty months. Leasehold
improvements and assets recorded under capital leases are amortized using the
straight-line method over the shorter of the estimated useful life of the assets
or the term of the leases. No depreciation charge is computed on assets under
construction.
ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF
The Financial Accounting Standards Board Statement of Financial Accounting
Standards, No. 121 (FAS 121), "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of," prescribes the accounting
for the impairment of long-lived assets, such as property, plant, equipment, and
intangible assets, as well as the accounting for long-lived assets that are held
F-9
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
for disposal. We review property, plant, equipment, and other long-lived assets
for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability is measured
by comparison of its carrying amount to the future net cash flows the assets are
expected to generate. If such assets are considered to be impaired, the
impairment is recognized and is measured as the amount by which the carrying
amount of the asset exceeds the present value of the future net cash flows. In
December 1999, as part of the disposal of the drug delivery business segment, we
recorded a charge of $205 thousand. No charge was incurred during 1998. During
1997, we recorded a charge of $1.3 million relating to the write-off of certain
leasehold improvements resulting from the decision to coordinate research and
development facilities into existing space. This amount was included in research
and development expenses in the consolidated statement of operations for 1997.
DEFERRED COMPENSATION
In 1995, we adopted a non-qualified deferred compensation plan. The plan was
intended to be unfunded and was maintained primarily for the purpose of
providing deferred compensation for a select group of management. As of
December 31, 1999 and 1998, other long-term assets and other long-term
liabilities related to the plan, which included both contributions and net
investment earnings, amounted to $0.0 million and $4.3 million, respectively.
These investments were directed by the participants. In January 1999, we
terminated the plan and the plan assets were distributed to participants in the
first quarter of 1999.
NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the weighted average
number of shares of Common Stock outstanding. Shares issuable from stock
options, warrants and Convertible Debentures outstanding are excluded from the
diluted-earnings-per-share computation, as their effect is anti-dilutive.
ACCOUNTING FOR STOCK-BASED COMPENSATION
Under Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation"(FAS 123), stock-based compensation expense to
employees is measured using either the intrinsic-value method as prescribed by
Accounting Principle Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), or the fair-value method described in FAS 123. We have
elected to follow APB 25 and related interpretations in accounting for our
employee stock options and disclose only the pro forma impact of the fair value
method on net income and earnings per share. (See Note 4, "Stockholders'
Equity.")
F-10
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard 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). We do not currently expect that
adoption of FAS 137 will have a material impact on our financial position or
results of operations.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
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
cash in high credit quality, highly liquid instruments. These investments have
included Treasury Notes, Federal Agency Securities, Auction Rate Certificates,
Auction Rate Preferred Stock, and Commercial Paper.
We consider all short-term investments as available-for-sale. As such,
short-term investments are carried at estimated fair value with related
unrealized gains and losses included in stockholders' net capital deficiency.
Realized gains and losses and declines in value judged to be
other-than-temporary on available-for-sale securities are included in investment
income. The cost of securities sold is based on the specific identification
method. Interest and dividends on securities classified as available-for-sale
are included in investment income.
DEFERRED FINANCING COSTS
Deferred financing costs relate to costs incurred in connection with debt
financing that are amortized over the term of the related debt.
F-11
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
NOTE 2: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following is a summary of cash equivalents and investments as of
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1999:
Cash Equivalents:
Money Market Fund.............................. $20,744 $-- $ -- $20,744
Certificate of Deposit......................... 871 -- -- 871
Short-term Corporate Note/Commercial Paper, due
in less than ninety days..................... 5,971 -- -- 5,971
------- --- ---- -------
Total Cash Equivalents....................... $27,586 $-- $ -- $27,586
======= === ==== =======
Short-Term Investments:
Federal Agency Securities...................... $ 3,819 $-- $(15) $ 3,804
Auction Rate Certificates...................... 6,411 -- -- 6,411
------- --- ---- -------
Total Short-Term Investments................. $10,230 $-- $(15) $10,215
======= === ==== =======
AS OF DECEMBER 31, 1998:
Cash Equivalents:
Money Market Fund.............................. $ 3,961 $-- $ -- $ 3,961
Certificate of Deposit......................... 4,000 -- -- 4,000
Federal Agency Security, due in less than
ninety days.................................. 1,305 -- -- 1,305
------- --- ---- -------
Total Cash Equivalents....................... $ 9,266 $-- $ -- $ 9,266
======= === ==== =======
Short-Term Investments:
Federal Agency Securities...................... 2,290 3 -- 2,293
Auction Rate Certificates...................... 11,049 -- -- 11,049
Corporate Notes................................ 1,640 -- -- 1,640
------- --- ---- -------
Total Short-Term Investments................. $14,979 $ 3 $ -- $14,982
======= === ==== =======
Long-Term Investments:
Federal Agency Securities...................... $ 3,613 $11 $ (2) $ 3,622
------- --- ---- -------
Total Long-Term Investments.................. $ 3,613 $11 $ (2) $ 3,622
======= === ==== =======
</TABLE>
F-12
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
For the years ended December 31, 1999 and 1998 the net realized gains and
losses on available-for-sale securities were immaterial.
NOTE 3: CREDIT LINES AND LONG-TERM DEBT
In 1998, we consolidated and amended our working capital bank loans. The new
loan will be repaid through November 2001. As of December 31, 1999, there was
$5.6 million outstanding under this agreement. The line bears interest at one
percentage point above the prime rate (9.50% in total as of December 31, 1999).
In June 1997, we entered into a loan agreement for $1.3 million to finance
additional capital equipment. This line bears interest at a fixed rate of 9.39%
per year. Borrowings under this agreement are secured by specific Cygnus assets.
This loan is being repaid monthly through June 2000. As of December 31, 1999,
there was $0.3 million outstanding. In the second quarter of 1998, we entered
into a new loan agreement for $1.4 million to finance additional capital
equipment. This line bears interest at a fixed rate of 8.87% per year.
Borrowings under this agreement are also secured by specific Cygnus assets and
are being repaid monthly through July 2001. As of December 31, 1999, there was
$0.4 million outstanding. All loan agreements are subject to certain financial
covenants, including minimum cash balances and tangible net worth. If certain of
these covenants are not met, the lenders may require collateral of the amounts
outstanding. In the event of default, the lenders may, at their option, exercise
their rights to remedies specified in the loan agreements, which include, among
other things, the acceleration of amounts due under the agreements. As of
December 31, 1999, we were in compliance with all these covenants.
In December 1999, we repaid all our lease liabilities and, consequently, at
December 31, 1999 we did not have any assets under capital lease. The future
aggregate principal payments of long-term debt, including equipment financing
lines, are as follows:
<TABLE>
<CAPTION>
LONG-TERM
DEBT
---------
<S> <C>
Years ending December 31,
2000...................................................... $3,243
2001...................................................... 3,088
------
Total principal payments................................ $6,331
======
</TABLE>
The fair market value of the long-term debt approximates its carrying value
of $6,331.
We lease our facilities under non-cancelable operating leases expiring in
2003 for three of our four buildings. The terms of the leases provide for rental
payments on a graduated scale. We are recognizing rent expense on a
straight-line method over the lease periods and therefore have accrued for the
rent expense incurred but not paid. Additionally, we lease an off-site warehouse
with a three-year lease term ending in October 2001.
F-13
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Rent expense amounted to $1,861, $1,064, and $1,020 for the years ended
December 31, 1999, 1998, and 1997, respectively. Two of our buildings have been
subleased, and these subleases run concurrently with the operating leases.
Minimum future rental commitments and minimum future sublease rental
receipts under the operating leases on December 31, 1999 are as follows:
<TABLE>
<CAPTION>
MINIMUM MINIMUM
FUTURE FUTURE
RENTAL SUBLEASE RENTAL
COMMITMENTS RECEIPTS
----------- ---------------
<S> <C> <C>
Years ending December 31,
2000....................................... $2,109 $ 882
2001....................................... 2,135 905
2002....................................... 2,017 931
2003....................................... 1,963 904
------ ------
$8,224 $3,622
====== ======
</TABLE>
NOTE 4: STOCKHOLDERS' EQUITY
PREFERRED SHARE PURCHASE RIGHTS PLAN
Pursuant to our Stockholder Rights Plan, the Board of Directors declared a
dividend distribution of one Preferred Share Purchase Right ("Right") for each
outstanding share of Common Stock, issuable on October 18, 1993 to stockholders
of record on that date. These Rights will remain outstanding until
September 21, 2003.
WARRANTS
Currently, we account for all warrants issued in connection with services
rendered on the basis of the fair value of the warrants. We estimate the fair
value of such instruments by running a Black-Scholes model, and the fair value
thus computed is then recognized over the period for which the underlying
services are rendered.
On February 23, 1999, we issued two warrants to a consultant to purchase 60
thousand shares each for the exercise price of $0.01 and $3.25, respectively, in
connection with financing services rendered by the consultant. A fair value of
$335 thousand, computed on the basis of a Black-Scholes valuation model, was
ascribed to these warrants and was expensed at the time the services were
rendered. These warrants were exercised in February 1999 and April 1999,
respectively.
F-14
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
In conjunction with the issuance of Convertible Debentures, we issued
five-year warrants to purchase 795 thousand shares of Common Stock, all of which
are outstanding at December 31, 1999. The fair value of these warrants was
determined to be $6.6 million and is being amortized over the term of the
Convertible Debentures. The total amortization of the fair value of the 795
thousand warrants in 1999 was $0.6 million. Included in the warrants for 795
thousand shares of Common Stock were warrants to purchase 745 thousand shares of
Common Stock that were issued to Investors. These warrants had a valuation of
$6.1 million and were recorded as a debt discount to the Convertible Debentures.
EMPLOYEE STOCK PURCHASE PLAN
As part of an employee retention program, we established the Amended 1991
Employee Stock Purchase Plan, as Amended and Restated as of October 1, 1999 (the
"Stock Purchase Plan") to provide employees with an opportunity to purchase our
Common Stock through payroll deductions. A total of 1.275 million shares of
Common Stock were reserved for issuance to eligible employees under the Stock
Purchase Plan. The Stock Purchase Plan will terminate in 2011 unless sooner
terminated by the Board of Directors. Under this Stock Purchase Plan, our
employees, subject to certain restrictions, may purchase shares of Common Stock
at 85% of the lesser of the fair market value of the Common Stock on the date of
the beginning of the two-year offering or the end of the purchase period. During
1999, 1998 and 1997, 250 thousand shares, 116 thousand shares and 64 thousand
shares, respectively, were issued under the Stock Purchase Plan, and, at
December 31, 1999, 461 thousand shares were available for issuance.
STOCK INCENTIVE PLAN
We have a 1999 Stock Incentive Plan (the "Stock Plan") that authorizes the
Board of Directors to grant incentive stock options, nonstatutory stock options,
stock purchase rights and stock bonuses to employees and consultants. The Stock
Plan authorizes the issuance of up to 7.916 million Common Shares, of which
1.447 million were available for grant as of December 31, 1999. Under the Stock
Plan, incentive stock options must be granted at fair market value at the date
of grant as determined by the Board of Directors or a committee thereof. Options
generally vest over a four-year period and are exercisable for a term of ten
years after issuance, unless otherwise determined by the Board of Directors or a
committee thereof.
We have elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related interpretations
in accounting for our employee stock options because the alternative fair value
accounting provided for under FAS Statement No. 123, "Accounting for Stock-Based
Compensation" (FAS 123), requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, because the
exercise
F-15
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
price of our employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
OPTION ACTIVITY SUMMARY FOR THE YEAR ENDED DECEMBER 31:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- -------------------------- --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE OPTIONS EXERCISE OPTIONS EXERCISE
(IN THOUSANDS) PRICE (IN THOUSANDS) PRICE (IN THOUSANDS) PRICE
-------------- --------- -------------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................. 4,427 $11.34 3,277 $13.26 2,432 $11.81
Granted................... 973 $ 6.78 1,458 $ 7.72 1,346 $14.96
Granted outside Plan...... 20 $ 3.25
---- ---- ---- ----
Exercised................. (852) $ 6.97 (25) $ 8.51 (258) $ 8.35
Forfeited................. (1,369) $13.20 (303) $14.36 (243) $13.24
------ ----- -----
Outstanding at end of
year.................... 3,179 $10.31 4,427 $11.34 3,277 $13.27
====== ===== =====
Exercisable at end of
year.................... 1,567 $12.90 2,512 $12.65 1,627 $11.89
====== ===== =====
Weighted-average fair
value of options granted
during the year......... $ 3.83 $4.26 $7.13
</TABLE>
A summary of our stock option position as of December 31, 1999 is as
follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING EXERCISABLE
-------------------------------------------------- -------------------------------
NUMBER WEIGHTED- NUMBER
OUTSTANDING AVERAGE WEIGHTED- EXERCISABLE WEIGHTED-
RANGE OF AT YEAR END REMAINING AVERAGE AT YEAR END AVERAGE
EXERCISE PRICES (IN THOUSANDS) CONTRACTUAL LIFE EXERCISE PRICE (IN THOUSANDS) EXERCISE PRICE
--------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$3.2500 - $3.2500 564 5.56 $ 3.2500 139 $ 3.2500
$4.2500 - $5.7500 671 9.15 $ 5.7218 10 $ 5.6567
$5.8750 - $11.1250 632 5.74 $ 8.8875 504 $ 8.5034
$11.6250 - $14.5000 662 7.37 $14.1363 424 $14.3511
$15.0000 - $22.5000 650 7.06 $18.6768 490 $19.0489
----- -----
3,179 7.05 $10.3130 1,567 $12.8982
===== =====
</TABLE>
Pro forma information regarding net income and earnings per share is
required by FAS 123, which also requires that the information be determined as
if we had accounted for our employee stock options granted subsequent to
December 31, 1994 under the fair-value method of FAS123. The
F-16
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
fair value for these options and the fair value for the stocks issued under the
Stock Purchase Plan were estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1999,
1998 and 1997: risk-free interest rate of 5.88%, 4.25% and 5.41%, respectively;
a dividend yield of 0.0%; volatility factors of the expected market price of our
Common Stock of .82, .78, and .66, respectively; and a weighted-average expected
life of the option of five years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions, including the expected stock price volatility. Because
our employee stock options have characteristics significantly different from
those of traded options, and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion the
existing models do not necessarily provide a reliable single measure of the fair
value of our employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options issued under the Stock Plan is amortized to expense over the vesting
period of the options. The estimated fair value of the compensation benefit
received under the Stock Purchase Plan is expensed in the year of purchase. Our
pro forma information follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Pro forma net loss................................. $(8,576) $(44,898) $(54,691)
Pro forma net loss per share, basic and diluted.... $ (0.37) $ (2.22) $ (2.89)
</TABLE>
Under the Stock Plan, stock may be sold and stock bonuses or rights to
purchase Common Stock may be granted by the Board of Directors or a committee
thereof for past services at the fair market value at the date of grant. The
Board may impose certain repurchase rights, in favor of Cygnus, in the event
that an employee is terminated prior to certain predetermined vesting dates. As
of December 31, 1999, 1998 and 1997, no shares were subject to repurchase.
F-17
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At December 31, 1999, the total number of shares of Common Stock reserved
for issuance are as follows:
<TABLE>
<CAPTION>
COMMON STOCK
RESERVED
------------
<S> <C>
Under all employee stock plans............................ 5,087
Convertible Debentures.................................... 1,355
Outstanding warrants...................................... 795
Other potential issuances................................. 335
-----
Total Common Stock reserved............................. 7,572
=====
</TABLE>
NOTE 5: INCOME TAXES
We recorded a $0.2 million income tax provision for the year ended
December 31, 1999 consisting entirely of foreign withholding taxes.
Significant components of our deferred tax assets as of December 31, 1999
and 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Net operating loss carryforwards............................ $ 54,000 $ 46,000
Research and development credits............................ 5,800 3,600
Reserves and accruals....................................... 700 4,500
Capitalized R&D............................................. 4,400 7,900
Arbitration obligation...................................... 9,500 10,000
Other--net.................................................. 4,400 2,700
-------- --------
Total deferred tax assets................................. $ 78,800 $ 74,700
Valuation allowance for deferred tax assets............... (78,800) (74,700)
-------- --------
Net deferred tax assets..................................... $ -- $ --
======== ========
</TABLE>
Realization of deferred tax assets is dependent on future earnings, if any,
the timing and amount of which are uncertain. Accordingly, a valuation allowance
in an amount equal to the net deferred tax assets as of December 31, 1999 and
1998 has been established to reflect these uncertainties. The deferred tax asset
valuation allowance increased by $4.1 million and $17.4 million in 1999 and
1998, respectively.
F-18
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Approximately $5.8 million of the valuation allowance results from tax
deductions under the stock option plans and will be credited to Common Stock
when recognized.
At December 31, 1999, we had federal net operating loss and research and
development tax credit carryforwards of approximately $152.6 million and $3.7
million, respectively. We had state net operating loss and tax credit
carryforwards of approximately $36.5 million and $3.1 million, respectively.
These carryforwards will expire at various dates beginning in 2000 and through
2018.
Because of the "change in ownership" provisions of the Internal Revenue
Code, a substantial portion of our net operating loss and tax credit
carryforwards may be subject to annual limitations. The annual limitations may
result in the expiration of net operating losses and tax credits before
utilization.
NOTE 6: STATEMENTS OF CASH FLOWS DATA
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Interest paid............................................... $ 1,352 $2,834 $1,631
Foreign tax paid............................................ $ 200 $ -- $ --
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 Investors
and placement agent in connection with the Convertible
Debentures................................................ $ 6,572 $ -- $ --
</TABLE>
NOTE 7: DISCONTINUED OPERATIONS
On December 15, 1999, we completed the sale of substantially all of our drug
delivery business to Ortho-McNeil Pharmaceutical, Inc. ("Ortho-McNeil"). We sold
all of our drug delivery business to Ortho-McNeil except two contracts relating
to a nicotine patch under development and one other early-stage project, both of
which were terminated prior to year end. Under the terms of the agreement, we
received $20.0 million in cash at closing, and Ortho-McNeil is obligated to pay
up to an additional $55.0 million in cash, contingent on the achievement of
certain milestones. The remaining contingent payments relate to the achievement
of certain technical, regulatory and commercialization milestones related to the
EVRA transdermal contraceptive patch. We are eligible to receive up to $14.8
million of these contingent milestones in the year 2000; however, because the
achievement of these milestones is not within our control, we cannot predict the
likelihood or timing of these contingent payments in the year 2000 and beyond.
The revenues of the drug delivery business were $12.3 million, $11.2 million and
$27.4 million for the years ended December 31, 1999,
F-19
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
1998 and 1997, respectively. The net income/(loss) of the drug delivery business
was $3.0 million, $1.0 million and $(35.3) million for the years ended
December 31, 1999, 1998 and 1997, respectively.
NOTE 8: BUSINESS SEGMENTS
Prior to December 15, 1999, we operated in two business segments:
diagnostics and drug delivery. Both segments were engaged in development and
manufacture, utilizing proprietary technologies to satisfy unmet medical needs
cost effectively. The segments were strategic business units managed separately,
based on the differences in the technologies of their respective product lines.
On December 15, 1999, we completed the sale of substantially all of our drug
delivery business segment assets to Ortho-McNeil Pharmaceutical, Inc., except
for certain assets with a net book value of $505 thousand, of which assets with
a net book value of $205 thousand were written off prior to year end. The
remaining drug delivery assets are being held for sale at December 31, 1999 and
have a value of $300 thousand, which reflects management's best estimates of net
realizable value. All financial results related to the drug delivery business
are accounted for as discontinued operations in accordance with APB 30.
The accounting policies of the business segments are the same as those
described in the summary of significant accounting policies. We do not currently
have a measure of interest income or interest expense by business segment. We
utilized the following information for the purpose of making decisions and
assessing segments' performance.
F-20
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
The table below details the segment information prior to the sale of the
drug delivery business, with a reconciling column to reflect totals related to
continuing operations.
<TABLE>
<CAPTION>
BUSINESS SEGMENTS
----------------------------------------------------
CONTINUING
DRUG OPERATIONS
DIAGNOSTICS DELIVERY RECONCILIATION TOTAL
----------- -------- -------------- ----------
<S> <C> <C> <C> <C>
1999
Revenue..................................... $ 2,061 $ 12,293 $(12,293) $ 2,061
Profit/(loss)............................... (22,174) 3,031 (3,031) (22,174)
Depreciation and amortization............... 993 869 (869) 993
Other significant items:
Gain on sale of segment................... -- 16,308 (16,308) --
Identifiable assets......................... 46,976 1,036 (1,036) 46,976
1998
Revenue..................................... $ 457 $ 11,198 $(11,198) $ 457
Profit/(loss)............................... (40,434) 1,006 (1,006) (40,434)
Depreciation and amortization............... 950 971 (971) 950
Other significant items:
Beneficial conversion costs............... 4,230 -- -- 4,230
Identifiable assets......................... 39,130 4,324 -- 43,454
1997
Revenue..................................... $ 2,146 $ 27,356 $(27,356) $ 2,146
Profit/(loss)............................... (15,117) (35,343) 35,343 (15,117)
Depreciation and amortization............... 1,230 1,509 (1,509) 1,230
Other significant items:
Arbitration settlement.................... -- (39,666) 39,666 --
Writedown of assets....................... 15 1,275 (1,275) 15
Identifiable assets......................... 42,955 6,322 -- 49,277
</TABLE>
All segment revenues have been generated in the U.S., and we currently do
not have any long-lived assets outside the U.S.
NOTE 9: CONVERTIBLE DEBT NOTES
SENIOR SUBORDINATED CONVERTIBLE NOTES
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 in 2005 ("Notes"). On October 28,
1998, we restructured the Notes. Key provisions in the restructured
F-21
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
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, our ability 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 into Common Stock 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 into Common Stock on June 30, 1999 at $6.89 per share (such
conversion price determined by a market-based formula on February 1, 1999). 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 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. As a result, the remaining unamortized debt issuance costs of $1.1
million were expensed.
On the date the Notes were restructured (October 28, 1998), the conversion
price for the first tranche was below the quoted market price of our Common
Stock. Consequently, we computed a beneficial conversion feature by comparing
the quoted market price of our Common Stock on that date ($6.06125) to the
conversion price of the first tranche ($3.5375) and then by multiplying the
difference by the number of shares (1.7 million) into which the first tranche
was convertible. The above computation resulted in a total charge of
$4.2 million, which was written off as interest expense at the date of
restructuring.
In order to help finance the redemption of the third tranche discussed
above, and to provide additional capital, in 1999 we entered into two new
financing arrangements: a Convertible Debenture and Warrant Purchase Agreement
and a Structured Equity Line Flexible Financing Agreement.
CONVERTIBLE DEBT AGREEMENT
On June 29, 1999, we entered into a Convertible Debenture and Warrant
Purchase Agreement with institutional investors ("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
F-22
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
share. We received gross proceeds of $14.0 million from the issuance of the
Convertible Debentures and incurred debt issuance costs of $0.5 million. With
the mutual agreement of the Investors and us, or if certain trading volume,
pricing and other conditions are met, we and/or the Investors will have the
right to require the sale to existing Investors 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%. On September 29,
1999 we received $3.0 million in gross proceeds from the issuance of the first
Additional Tranche due September 29, 2004, with a conversion price of $11.8663
(determined by the above market-based formula), and incurred debt issuance costs
of $0.1 million. Neither the June 29, 1999 nor the September 29, 1999
Convertible Debentures contained any beneficial conversion features.
In conjunction with the issuance of Convertible Debentures in June, 1999,
and the first Additional Tranche in September 1999, we issued to the debenture
holders warrants to purchase approximately 606 thousand shares and 139 thousand
shares of Common Stock, at the exercise price of $13.86 per share and $16.18 per
share, respectively. Each tranche of warrants had a contractual term of
five years from the date of respective grant. At the respective dates of grant,
the fair values ascribed to these warrants were approximately $5.0 million and
$1.1 million, respectively, based on a Black-Scholes valuation model, and
recorded as debt discount and are being amortized as additional interest expense
over the debt term. We recorded amortization of $0.6 million in 1999. As of
December 31, 1999, the unamortized fair value amounted to $5.5 million. We will
be required to issue warrants if the second Additional Tranche of the
Convertible Debentures is sold. Such warrants will be priced at 150% of the
respective Additional Closing Price. The number of additional warrants to be
issued will be determined by dividing 50% of the respective Additional Tranche
by the respective Additional Closing Price.
We also issued to the placement agent warrants to purchase 50 thousand
shares of Common Stock at the exercise price of $13.86 per share. At the date of
grant, the fair value ascribed to the warrants was approximately $417 thousand,
based on a Black-Scholes valuation model, and that amount was recorded as
deferred financing cost and is being amortized as additional interest expense
over the debt term. We recorded amortization of $42 thousand in 1999.
The Convertible Debentures have a stated interest rate of 8.5% and an
effective interest rate of 18.20%. The effective interest rate includes a
non-cash charge of $6.6 million for the amortization of the implicit value of
warrants issued in connection with the Convertible Debentures.
F-23
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
STRUCTURED EQUITY LINE NOTES
On June 30, 1999, we also entered into a Structured Equity Line Flexible
Financing Agreement ("Equity Line") with certain institutional investors
("Investors"). The Equity Line is effective for two years ("Commitment Period")
and allows us, at our sole discretion, to sell Common Stock with a maximum
aggregate issue price of $30.0 million over the Commitment Period. On June 30,
1999, we received net proceeds of approximately $3.8 million, after deducting
the issuance costs, from the sale of approximately 346 thousand shares of Common
Stock (the "Initial Investment"). The number of shares of Common Stock for the
Initial Investment was determined on the basis of the average closing bid price
for the ten trading days prior to June 30, 1999 ("Initial Investment Purchase
Price"). Under the terms of the Equity Line, over a period of eighty
trading days following June 30, 1999 ("Initial Period"), the Investors were
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 required, to match the aggregate number of
shares covered by the $4.0 million of purchase notices. We issued an additional
92 thousand shares to reflect the actual purchase prices on the purchase
notices.
On September 29, 1999, we issued 361 thousand shares of Common Stock for
$4.0 million ("Additional Investment") pursuant to an amendment to the Equity
Line agreement which allowed for an Additional Investment period of 110 days
("Additional Period"). The terms for this Additional Investment are similar to
those applied to the Initial Investment, and the number of shares was adjusted
upwards at the end of the Additional Period, resulting in the issuance of an
additional 92 thousand shares of Common Stock.
After the Initial Period and the Additional 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. In addition
to the above and upon our approval, the Investors may also elect to purchase an
additional $1.0 million ("Investor Election") of Common Stock in each Investment
Period. In each Investment Period in which we elect to sell additional shares,
the Investors will from time to time issue purchase notices for the aggregate
amount of the Company Election and the Investor Election, if applicable. The
per-share price of Common Stock to be sold for each such purchase notice will
equal 98% of the average of the two daily low trade prices during the six
trading days immediately prior to the respective purchase notice. At the
beginning of each Investment Period, we can set a minimum sales price ("Floor
Price") for our Common Stock. The Investors may require the aggregate dollar
amount of the Company Election and Investor Election for any Investment Period
to be less than requested, based on certain market trading volume guidelines. In
December 1999, we sold 100 thousand shares of Common Stock for $1.5 million
pursuant to the
F-24
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
Equity Line. In January 2000, we sold an additional 59 thousand share of Common
Stock for $1.0 million pursuant to the Equity Line.
In conjunction with the Equity Line, in January 2000 we issued five-year
warrants to the Investors to purchase 95 thousand shares of Common Stock at
$11.51 per share. The price of the warrants will be determined each calendar
year and will equal 120% of the weighted-average per-share sales price of all
shares of Common Stock sold pursuant to the Equity Line that year. The number of
shares will equal 1% of the aggregate proceeds received for all shares sold
pursuant to the Equity Line during the year. In January 2000, we issued warrants
to purchase 95 thousand shares of Common Stock. Warrants to purchase a minimum
of 120 thousand shares must be issued under the Equity Line and, if at the end
of the Commitment Period, warrants to purchase less than 120 thousand shares of
Common Stock have been issued, 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.
NOTE 10: RELATED PARTY TRANSACTIONS
We do business with two companies, including Contract Manufacturing, Inc.,
that are principally owned by a Cygnus non-officer employee. This individual's
employment with us will terminate on March 31, 2000. The two companies primarily
design and build manufacturing equipment for the GlucoWatch system and
manufacture components of the GlucoWatch system. During 1999, we purchased
approximately $3.2 million of goods and services from these companies. As of
December 31, 1999, we had non-cancelable purchase commitments to these companies
totaling $0.7 million. During 1998, we purchased approximately $4.0 million of
goods and services from these companies. As of December 31, 1998, $1.0 million
was payable to these companies. During 1997, we purchased approximately $2.7
million of goods and services from these companies.
NOTE 11: CONCENTRATION OF CREDIT RISK
We maintain our cash, cash equivalents and investments primarily with a bank
and two brokerage houses. This practice is consistent with our policy to
maintain high liquidity and to ensure safety of principal.
As of December 31, 1999, 100% of the trade accounts receivable are due from
one customer. As of December 31, 1998, three customers accounted for
approximately 61%, 18% and 18%, respectively, of the trade accounts receivable.
The remaining balances of the 1998 trade accounts receivable are due from two
customers, which are large pharmaceutical companies. Generally, we do not
require any collateral on receivable balances.
F-25
<PAGE>
CYGNUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
NOTE 12: EMPLOYEE BENEFIT PLAN
We have an employee savings plan ("Plan") that qualifies as a deferred
salary arrangement under Section 401(k) of the Internal Revenue Code covering
substantially all employees. The Plan provides for employee contributions up to
15% of their annual pre-tax compensation or to a maximum of 17% of the combined
pre-tax and after-tax compensation, as defined in the Plan. The Plan provides
for Cygnus to match a portion of the contributions. For the years ended
December 31, 1999, 1998 and 1997, we incurred defined contribution expense of
$0.08 million, $0.1 million and $0.08 million, respectively.
NOTE 13: LEGAL PROCEEDINGS
On November 20, 1998, the American Arbitration Association issued a Final
Award, which was not appealable, in an arbitration proceeding between Cygnus and
Pharmacia & Upjohn relating to the Nicotrol patch. Pursuant to the findings from
the arbitration proceedings, we were awarded $4.3 million for prevailing in some
of our claims, and Pharmacia was awarded $1.6 million for prevailing on some of
their claims. Accordingly, Cygnus realized a net amount of $2.7 million in 1998.
The Nicotrol patch business was sold to Ortho-McNeil as part of our drug
delivery sale.
On December 11, 1997, the International Court of Arbitration issued a Final
Award, which was not appealable, in an arbitration matter between Sanofi, S.A.
and Cygnus relating to transdermal hormone replacement therapy systems. This
Final Award was entered as a judgment of the U.S. District Court for the
Northern District of California. Although the drug delivery business was
subsequently sold to Ortho-McNeil, the following payments remain with Cygnus:
(i) the $14.0 million cash payment already made by Cygnus to Sanofi in
January 1998, (ii) payments of an aggregate amount equal to $17.0 million,
commencing in 2001 and ending in 2005 ($2.0 million for the year 2001,
$3.0 million for the year 2002, $4.0 million for the year 2003, $4.0 million for
the year 2004 and $4.0 million for the year 2005), and (iii) a convertible
promissory note in the principal amount of $6.0 million, issued in
December 1997, payable in full at the end of four years and bearing interest at
6.5% per annum. (The note will be convertible into our Common Stock at Sanofi's
option, exercisable at any time during the four year term, at a conversion rate
of $21.725 per share.) The underlying agreement, which was the subject matter of
the arbitration, was terminated on December 15, 1999.
F-26
<PAGE>
SCHEDULE II
CYGNUS, INC.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
YEAR EXPENSES ACCOUNTS DEDUCTIONS END OF YEAR
------------ ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999:
DEDUCTED FROM ASSET ACCOUNTS:
ALLOWANCE FOR DOUBTFUL
ACCOUNTS.................... $ 123 $ -- $(123) $ -- $ --
WARRANTY RESERVE.............. 435 (435) -- -- --
------ ----- ----- ------- ----
$ 558 $(435) $(123) $ -- $ --
====== ===== ===== ======= ====
YEAR ENDED DECEMBER 31, 1998:
DEDUCTED FROM ASSET ACCOUNTS:
ALLOWANCE FOR DOUBTFUL
ACCOUNTS.................... $ 123 $ -- $ -- $ -- $123
WARRANTY RESERVE.............. 435 -- -- -- 435
------ ----- ----- ------- ----
$ 558 $ -- $ -- $ -- $558
====== ===== ===== ======= ====
YEAR ENDED DECEMBER 31, 1997:
DEDUCTED FROM ASSET ACCOUNTS:
ALLOWANCE FOR DOUBTFUL
ACCOUNTS.................... $1,137 $ -- $ -- $(1,014) $123
WARRANTY RESERVE.............. 435 -- -- -- 435
------ ----- ----- ------- ----
$1,572 $ -- $ -- $(1,014) $558
====== ===== ===== ======= ====
</TABLE>
S-1
<PAGE>
SUBLEASE
THIS SUBLEASE ("Sublease") is entered into as of the 15th day of
December, 1999 between CYGNUS, INC., a Delaware corporation ("Sublandlord"), and
ORTHO-McNEIL PHARMACEUTICAL, INC., a Delaware corporation ("Subtenant"), with
reference to the following facts:
A. Pursuant to that certain Ten-Year Industrial Net Lease Agreement
dated September 27, 1988 ("Lease"), between Seaport Centre Venture Phase I, a
California general partnership, as Landlord ("Landlord"), and Cygnus, as Tenant,
as amended by the First Amendment to Ten-Year Industrial Net Lease Agreement
dated May 15, 1992 ("First Amendment"), the Second Amendment to Ten-Year
Industrial Net Lease Agreement dated August 8, 1992 ("Second Amendment"), and
the Third Amendment to Ten-Year Industrial Net Lease Agreement dated June 9,
1998 ("Third Amendment") (collectively, the "Master Lease"), a copy of which is
attached hereto as Exhibit A and made a part hereof, Sublandlord leased from
Landlord and Landlord leased to Sublandlord approximately 32,038 rentable square
feet of space consisting of two (2) buildings located at 701 Galveston Street
and 501 Chesapeake Drive, Redwood City, California ("Master Lease Premises").
B. Subtenant desires to sublet from Sublandlord the portion of the
Master Lease Premises commonly known as 701 Galveston Street, Redwood City,
California, consisting of approximately 20,880 rentable square feet, as more
particularly set forth in EXHIBIT B attached hereto and made a part hereof
("Subleased Premises"), and Sublandlord does hereby sublet the same to Subtenant
upon the terms, covenants and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the covenants herein contained, and
for other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the parties do hereby agree as follows:
1. SUBLEASE. Sublandlord does hereby sublease and demise to Subtenant,
and Subtenant does hereby hire and take from Sublandlord, all of the Subleased
Premises subject to: (i) the covenants, agreements, terms, provisions and
conditions of this Sublease for the term hereinafter stated; and (ii) the
covenants, agreements, terms, provisions and conditions of the Master Lease.
Subtenant hereby acknowledges receipt of the copy of the Master Lease attached
hereto as EXHIBIT A. Sublandlord represents to Subtenant that the copy of the
Master Lease attached hereto is true and correct and that there are no
amendments or modifications to such document other than as so attached.
Capitalized terms not otherwise defined herein shall have the meaning ascribed
to them in the Master Lease.
2. TERM. The term of this Sublease ("Term") shall commence on December
15, 1999 (the "Commencement Date") and shall end December 10, 2003, or on such
earlier date upon which said Term may expire or be terminated pursuant to any of
the conditions of limitation or other provisions of this Sublease, the Master
Lease, or pursuant to law.
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3. USE. Subtenant shall use the Subleased Premises in strict
conformance with allowable uses under the Master Lease and for no other purpose
without the prior written consent of Sublandlord and Landlord. Subtenant hereby
represents and warrants that it shall not use any Hazardous Materials (as
defined in Paragraph 9 of the Master Lease and Rider No. 1) within the Subleased
Premises, except for those materials that Sublandlord is permitted to use under
the Master Lease, and that Subtenant shall strictly comply with all the terms
and conditions of Paragraph 9 and Rider No. 1 of the Master Lease as
incorporated herein pursuant to Paragraph 5 below.
4. RENT.
A. Subtenant shall pay Sublandlord as monthly base rent for the
Subleased Premises on the first (1st) day of each calendar month during the Term
of this Sublease according to the following schedule:
Months Amount
------ ------
12/15/99-01/10/00 $41,281.78
1/11/00-12/10/00 $47,397.60
12/11/00-12/10/01 $48,650.40
12/11/01-12/10/02 $50,112.00
12/10/02-12/10/03 $51,782.40
The base rent for the December 1999 period shall be due and payable on the
mutual execution of this Sublease. All rent shall be payable, in advance,
without any offset, deduction, or abatement, except as otherwise set forth in
this Sublease. The base rent shall be a triple net rent, and Subtenant shall
also be fully responsible for Additional Rent assessed against the Subleased
Premises pursuant to Paragraph 4.B. below.
B. Subtenant shall also pay to Sublandlord all Additional Rent for the
Subleased Premises for each calendar month of the Term. If Landlord bills
subtenant for any Additional Rent, Subtenant shall pay the same to Landlord in
accordance with the Master Lease. If Sublandlord bills subtenant for any
Additional Rent, Subtenant shall pay the same to Sublandlord within ten (10)
days thereafter. If Subtenant fails to reimburse Sublandlord for Additional Rent
within such ten (10) day period, Subtenant shall also pay interest on such
amount at ten percent (10%) per annum from the date due until paid. As used in
this Sublease, the term "Additional Rent" shall mean all payments that Subtenant
is required to pay under this Sublease other than monthly base rent, together
with all payments that Sublandlord is required to pay to Landlord with respect
to the Subleased Premises during the Term pursuant to the Master Lease other
than monthly base rent. Subtenant shall, at its own expense, contract for and
pay directly for its telephone service for the Subleased Premises and all
utilities as set forth in Paragraph 8 of the Master Lease, Paragraph 6(c) of the
Second Amendment and Paragraph 7 of the Third Amendment. For purposes herein,
"Rent" shall include all monthly base rent, Additional Rent and all utility
expenses.
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5. INCORPORATION OF MASTER LEASE. Except to the extent that they are
inapplicable to, or modified by, or excluded by, the terms of this Sublease, all
of the covenants, agreements, terms, provisions and conditions of the Master
Lease are hereby incorporated into and made a part of this Sublease. Except to
the extent that they are inapplicable to, or modified by, the terms of this
Sublease, the rights and obligations contained in the Master Lease are hereby
imposed upon the respective parties hereto, Sublandlord being substituted for
"Landlord" named in the Master Lease, Subtenant being substituted for the
"Tenant" named in the Master Lease, and "Subleased Premises" being substituted
for the "Premises" named in the Master Lease, except for Paragraphs 1, 2, 3, 4,
5 and 6, Paragraph 26(g), the last sentence of the first paragraph of Paragraph
28, Paragraph 30, Paragraph 34(b), Paragraph 35, Paragraph 38, Paragraph 39,
Paragraph 41, Exhibits A, A-1, B, and C of the Lease; the First Amendment in its
entirety; the Second Amendment in its entirety; and all references to "Building
3 and 5" in the Third Amendment, and Section 2, Section 4(b)(iii), 4(b)(iv),
Section 4(c), Section 5, Section 6(ii), Section 8, Section 9, Section 10,
Section 13, Section 14, Section 15 and Section 16 of the Third Amendment, which
are hereby deleted from this Sublease. Except as so excluded, inapplicable or
modified, all acts and obligations to be performed and all of the terms and
conditions to be observed by Sublandlord as Tenant under the Master Lease with
respect to the Master Lease Premises shall be performed and observed by
Subtenant with respect to the Subleased Premises.
6. SUBORDINATION RIGHTS TO THE MASTER LEASE. This Sublease and
Subtenant's rights under this Sublease shall at all times be subject and
subordinate to the underlying Master Lease. If any conflict between the Master
Lease and the Sublease occurs, the Master Lease will control, except as
inapplicable to, or modified by, the terms of this Sublease or excluded from the
incorporation provisions of Paragraph 5 hereof. Subtenant acknowledges and
agrees that any termination of the underlying Master Lease shall extinguish the
Sublease at Landlord's discretion, without liability to Sublandlord; provided,
however, that such termination is not due to the default of Sublandlord under
the Master Lease or to the voluntary surrender by Sublandlord of its rights
under the Master Lease. Subtenant shall have no right to assign the Sublease or
further sublet the Subleased Premises without the prior written consent of
Sublandlord and the Landlord and in strict conformance with the terms of
Paragraph 15 of the Master Lease.
7. MODIFICATIONS TO INCORPORATED TERMS OF MASTER LEASE. Subtenant
agrees that, notwithstanding anything to the contrary in this Sublease and the
Master Lease, Sublandlord shall not be required to provide any of the services,
make any of the repairs (including, without limitation, maintenance and repairs
required pursuant to Paragraph 12(b), Paragraph 24 and Paragraph 25 of the
Master Lease), improvements or restorations, or perform any of the other
obligations that the Landlord has agreed to provide or make or cause to be
provided or made under the provisions of the Master Lease, respectively,
including, without limitation, repairs, utilities, insurance and indemnification
obligations, and Subtenant shall rely upon and look solely to the Landlord for
the provision or making thereof. Notwithstanding the foregoing, Sublandlord
agrees: (i) to maintain the insurance with respect to Paragraph 20 of the Master
Lease as applicable to the Master Lease Premises and Sublandlord's personal
property; and (ii) that the provisions of Paragraph 19 of the Master Lease shall
apply as between Sublandlord and Subtenant. Sublandlord, upon request of
Subtenant, agrees to use reasonable efforts to cause
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Landlord to observe and/or perform any such obligations; provided, however,
without limiting the generality of the foregoing, the obligation of Sublandlord
to use "reasonable efforts" shall not be construed as requiring Sublandlord to
pay any money or incur any cost or liability beyond that which it has under the
Master Lease or to institute or prosecute any legal action or proceeding. If
Landlord shall still default in the performance of any such obligations or any
representations under the terms of the Master Lease, Sublandlord's obligations
in respect thereto shall be to use its diligent efforts to assist Subtenant
hereunder in any claims or proceedings against Landlord as long as Subtenant
agrees to reimburse Sublandlord for all costs associated with such actions or
proceeding under the Master Lease.
8. CONDITION OF SUBLEASED PREMISES.
A. Sublandlord shall deliver the Subleased Premises to Subtenant in its
current "as-is" condition, and Subtenant shall rely solely on Subtenant's own
inspection of the Subleased Premises and the physical condition thereof,
including, without limitation, accessibility and location of utilities, the
condition of improvements and the existence of hazardous materials, and not on
any representations or warranties of Sublandlord or its agents, employees or
contractors, whether express or implied except as set forth in the next
sentence. Notwithstanding the foregoing, Sublandlord shall, at its own cost,
deliver the Subleased Premises in broom clean condition, with all furniture in
place.
B. Subtenant shall not make or suffer to be made any alterations,
additions or improvements (collectively, "Alterations") in, on or to the
Subleased Premises without the prior written consent of Sublandlord and
Landlord, which shall not be unreasonably withheld. All Alterations shall be
performed in strict compliance with Paragraph 11 of the Master Lease. In the
event Sublandlord consents to the making of any such Alterations by Subtenant,
the same shall be made by Subtenant at Subtenant's sole cost and expense, and
any contractor or person selected by Subtenant to make the same shall first be
approved in writing by Sublandlord and Landlord. Upon the expiration or sooner
termination of this Sublease, Subtenant shall, upon demand by Sublandlord and
Landlord, at Subtenant's sole cost and expense, forthwith and with all due
diligence, remove any Alterations made or paid for by Subtenant, and repair and
restore the Subleased Premises to their original condition, ordinary wear and
tear excepted. In addition, Subtenant hereby assumes all of Sublandlord's
restoration obligations to Landlord pursuant to Paragraph 28 of the Lease (as
modified by Section 10 of the Third Amendment). Finally, Sublandlord will
cooperate with Subtenant to acquire Landlord's consent to any Alterations, but
Subtenant acknowledges that Sublandlord makes no representation as to Landlord's
willingness to approve such Alterations and shall have no liability for
Landlord's failure to provide such approval.
C. Subtenant shall, at its sole cost, make all modifications,
alterations and improvements to the Subleased Premises and Building that are
required by any applicable city, state or federal rule, law, regulation or order
because of: (i) Subtenant's particular use of the Subleased Premises or
Building; (ii) Subtenant's application for any permit or governmental approval;
or (iii) Subtenant's making of any Alterations to or within the Subleased
Premises. All other improvements or capital expenditures relating to
modifications, alterations or
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improvements to the Subleased Premises or Building shall be governed by the
terms and conditions of Paragraph 11 of the Master Lease.
D. Sublandlord is in compliance with all laws, ordinances, rules, and
regulations affecting the Subleased Premises, including any alterations or
modifications performed thereon by Sublandlord.
9. INSURANCE. Subtenant, at its sole cost and expense, shall obtain and
keep in full force and effect during the entire term of this Sublease such
insurance, and in such amounts, as are required under Paragraph 20 of the Master
Lease. Sublandlord and Landlord shall be named as additional insured parties
under any such policy of insurance. Subtenant and Sublandlord shall each obtain
from their respective insurers hereof a waiver of all rights of subrogation as
set forth in Paragraph 19 of the Master Lease and the other waivers contained in
Paragraph 19 shall apply as between the Subtenant and Sublandlord.
10. TIME LIMITS. The time limits provided in the Master Lease for the
giving of notices, making demands, performance of any act, condition, or
covenant, or the exercise of any right or remedy, are changed solely for the
purpose of incorporation of the terms of this Sublease by lengthening or
shortening the same in each instance by three (3) days (or two (2) days for any
three (3) day period), as appropriate; so that notices may be given, demands
made, or any act, condition, or covenant performed, or any right or remedy
exercised, by Sublandlord or Subtenant, as the case may be, within the time
limit relating thereto contained in the Master Lease.
11. NOTICES. All notices and other communications that are required or
desired to be given by either party to the other hereunder shall be in writing
and shall be sent by United States registered or certified mail, postage
prepaid, return receipt requested, addressed to the appropriate party at its
address as such party shall have last designated by notice to the other party in
the manner herein provided. Notices and communications to Sublandlord shall be
sent to:
Cygnus, Inc.
400 Penobscot Drive
Redwood City, CA 94063
Attn: General Counsel
Notices and communications to Subtenant shall be sent to the Subleased Premises.
Notices and other communications shall be deemed given on the date so mailed.
12. AMENDMENTS. Sublandlord and Subtenant shall not amend in any respect
this Sublease unless such is in writing and signed by both parties.
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13. CONSENT. This Sublease shall be subject to the consent by Landlord
to the terms and conditions of this Sublease, which shall not become effective
unless and until such consent is executed and delivered by such parties.
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14. INDEMNIFICATION
A. Subtenant shall indemnify, defend, protect and hold harmless
Sublandlord and Sublandlord's officers, directors, agents and employees
(collectively, "Sublandlord's Parties") from and against all liability, cost,
damage and expense (including, without limitation, reasonable attorneys' fees)
arising from either: (i) the negligence, willful misconduct, or breach of this
Sublease by Subtenant or Subtenant's officers, directors, agents or employees
(collectively "Subtenant's Parties"), (ii) the use of the Subleased Premises by
Subtenant or Subtenant's Parties and any related claims for Subtenant's use of
the Subleased Premises solely for a professional office and administrative uses;
(iii) the construction of the Alterations or any claims for work or labor
performed, or for materials or supplies furnished to or at the request of
Subtenant in relation thereto; or (iv) the use, release or disposal of Hazardous
Materials by Subtenant or Subtenant's Parties provided, however, that the
indemnification provided in this Paragraph 15.A. shall not apply to the extent
that any liability, cost, damage or expense arises from the negligence, willful
misconduct, or breach of this Sublease by Sublandlord or Sublandlord's Parties.
B. Sublandlord shall indemnify, defend, protect and hold harmless
Subtenant and Subtenant's Parties from and against all liability, cost, damage
and expense (including, without limitation, reasonable attorneys' fees) arising
from either (i) the negligence, willful misconduct, or breach of this Sublease
by Sublandlord or Sublandlord's Parties; (ii) the use of the Master Lease
Premises by Sublandlord or Sublandlord's Parties; (iii) the use, release or
disposal of Hazardous Materials by Sublandlord or Sublandlord's Parties in the
Building; provided, however, that the indemnification provided in this Paragraph
15.B. shall not apply to the extent that any liability, cost, damage or expense
arises from the negligence, willful misconduct, or breach of this Sublease by
Subtenant or Subtenant's Parties, or (iv) any environmental condition that
existed prior to the Commencement Date of this Sublease due to the storage,
production, for distribution of environmentally hazardous materials at the
Subleased Premises.
C. The terms of this Paragraph 15 shall survive the expiration or
termination of this Sublease and shall be an addition to, and not a replacement
of, the terms of Paragraph 17 of the Master Lease and Paragraph 1.7 of Rider No.
1.
15. MISCELLANEOUS
A. Subtenant shall be entitled to use, on a nonexclusive basis and free
of charge, all of the parking stalls available for use by Sublandlord for the
Subleased Premises at the ratio set forth in the Master Lease.
B. Subtenant shall be responsible and shall pay to Sublandlord upon
demand, any late charges owed arising out of Subtenant's late payment of Rent
hereunder.
C. This Sublease may be executed in counterparts each of which when
executed shall constitute but one original, and all of which together shall
constitute a single agreement.
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D. Subtenant shall have the right, at its sole cost and expense, to
install: (i) door signage at the entrance to the Premises. All signage shall be
subject to the terms of the Master Lease and the consent of Sublandlord,
Landlord, and the City of Redwood City.
E. Should Sublandlord or Subtenant engage the services of a Broker in
connection with this Sublease, each party shall be responsible for its own
Broker's commission.
F. Should Subtenant or any of its successors in interest, holdover the
Subleased Premises, or any part thereof, after the expiration of the Term of
this Sublease, unless otherwise agreed to in writing, such holding over shall
constitute and be construed as tenancy from month-to-month only at a monthly
rent equal to twice the monthly base rent owed during the final year of the Term
of this Sublease as the same may be extended from time to time. This inclusion
of the preceding sentence shall not be construed as Sublandlord's permission for
Subtenant to holdover.
G. Sublandlord represents to Subtenant that the Master Lease is in full
force and effect and that, to the best of Sublandlord's knowledge, without duty
of inquiry, no default or event that, with the passing of time or the giving of
notice or both, would constitute a default, exists on the part of Sublandlord,
and to the best of Sublandlord's knowledge, without duty of inquiry, the
Landlord thereunder. Sublandlord agrees to maintain the Master Lease in full
force and effect except to the extent its failure to maintain the Master Lease
is due to the failure of Subtenant to comply with its obligations under this
Sublease provided Subtenant receives prior written notice from Sublandlord as
required by the Master Lease (as modified by Paragraph 11 above). During the
Term, Sublandlord shall not enter into any amendment of the Master Lease that
during the initial term, would materially diminish Subtenant's rights or
materially increase Subtenant's obligations hereunder.
[REST OF THIS PAGE INTENTIONALLY LEFT BLANK]
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IN WITNESS WHEREOF, the parties hereto have executed this Sublease as
of this date first above written.
SUBLANDLORD: SUBTENANT:
CYGNUS, INC., a Delaware corporation ORTHO-McNEIL PHARMACEUTICAL,
INC., a Delaware corporation
By: /s/ John C Hodgman By: Robert P. O'Neil
--------------------------------- ----------------------------
Its: Chairman, President & CEO Its:
----------------------------- -----------------------
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PRODUCT SUPPLY AGREEMENT
between
CYGNUS, INC.
and
CONTRACT MANUFACTURING, INC.
<PAGE>
PRODUCT SUPPLY AGREEMENT
This Agreement (the "Agreement") is made this 15th day of July 1997
("Effective Date"), by and between Cygnus, Inc., a Delaware
corporation("Cygnus"), and Contract Manufacturing, Inc. ("CMI"), a Michigan
corporation, and is made with reference to the following facts.
RECITALS
A. Cygnus is in the course of developing a product for the
non-invasive measurement of human blood glucose levels known as the
"Glucowatch", and
B. Two components of the Glucowatch are a Glucopad and a biosensor,
and
C. Cygnus desires to market to end users, packaged together, a
Glucopad, physically contained within rails, known as a "corral" and a
biosensor, and
D. CMI is willing to accept, from sources of Cygnus' selection,
supply of Glucopad material (supplied in rolls) and biosensors, and (i)
manufacture finished Glucopads by cutting the Glucopad material and inserting
the material into corrals which CMI would manufacture (ii) combine the pads and
biosensors protected by suitable release liner backings, and (iii) supply the
combination in final consumer protective packaging.
WHEREFORE, the parties do hereby agree as follows:
1. DEFINITIONS
1.1. "CONSUMER PACKAGE UNIT" shall mean a single package which
contains a Glucopad and a biosensor as more particularly
specified in Exhibit 1.
1.2. "GLUCOWATCH" shall mean Cygnus' Reverse Iontophoresis Product
currently under development for the measurement of human blood
glucose values and any modifications, improvements,
evolutions, and for future versions thereof.
1.3. "GLUCOPAD" shall mean laminate material, supplied in rolls cut
into pads and placed within a corral as more particularly
specified in Exhibit 1.
1.4. "MANUFACTURING COST" for a Consumer Package Unit means the
following costs (as determined in accordance with GAAP):
both direct and indirect costs specifically attributable to
the production of such components (excluding , freight
charges, sales taxes and duties). Direct costs are personnel,
supplies, materials purchased by CMI, contracted and outside
services costs specifically attributable to the applicable
materials or activities. Raw Materials are not part of
Manufacturing Cost. Indirect costs are (i) utility,
facility-related and machine maintenance expenses and (ii)
personnel, supplies and material expenses of internal services
from other departments (including general management and
administration), in each case, only to the extent specifically
attributable to the applicable materials or activities.
1.5. "TERM" shall mean the period beginning at the Effective Date
of this Agreement and ending five years after the date of the
first commercial sale of Consumer Package Units anywhere in
the world.
1.6. "RAW MATERIALS" shall mean those components required to build
a Consumer Package Unit as set forth in the bill of materials
specified in Exhibit 1.
1
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2. PURCHASE AND SALE
2.1. SUPPLY. For the Term hereof CMI agrees to supply Consumer
Package Units to Cygnus as provided in this Agreement.
2.2. PURCHASE PRICE. The purchase price for Consumer Package Units
shall be [CONFIDENTIAL TREATMENT REQUESTED]:
Annualized Production Volume: Maximum
Consumer Package Units/12 Month Period Price/Consumer Package Unit
-------------------------------------- ---------------------------
[CONFIDENTIAL TREATMENT REQUESTED] [CONFIDENTIAL TREATMENT REQUESTED]
2.3. COST REDUCTION. CMI and Cygnus will work to reduce the
cost of Consumer Package Units. Routine reductions in the
Manufacturing Cost due to things such as volume increases or
"learning curve" gains in efficiency will result in lower
pricing according to Section 2.2 above. If CMI, through it's
own effort, reduces the cost of the Consumer Package Units as
a result of a capital improvement to the Equipment (as defined
in Section 7.1 below), which proposal of such improvement
shall be submitted to Cygnus in writing and approved by Cygnus
in writing prior to implementation, the benefits from the cost
reduction effort will be shared equally. In such instance of
capital improvement to the Equipment, CMI's markup will be
increased while the maximum price will be reduced accordingly
in all annualized production volume ranges. All new pricing
resulting from cost reduction efforts shall be amended to this
Agreement.
2.4. MATERIAL WASTAGE. CMI agrees that material wastage shall not
exceed a maximum of [CONFIDENTIAL TREATMENT REQUESTED] for
each item of material at the commencement of supply and shall
not exceed a maximum of [CONFIDENTIAL TREATMENT REQUESTED]
commencing [CONFIDENTIAL TREATMENT REQUESTED] after the
commencement of supply. In the event wastage exceeds the
maxima specified in this Section, Cygnus shall be entitled to
a credit equal to the full cost of any wasted material in
excess of the maxima specified above. Material wastage shall
not include defective material supplied by vendors.
2.5. MANUFACTURING REPORTS. Within fifteen (15) days of the end of
each month, CMI shall provide Cygnus with a report, in an
electronic format compatible to Cygnus' system, indicating for
such month (i) the quantity of Consumer Package Units produced
and shipped, (ii) the Manufacturing Cost of such Consumer
Package Units (including quantity and cost for each component
of such Manufacturing Cost), (iii) the amount of material
wastage for each material, and (iv) such other information as
shall be requested by Cygnus from time to time. CMI and Cygnus
will work together to develop a method to transfer this
information electronically. CMI will use a system that is
compatible with Cygnus' system.
3. CONSUMER PACKAGE UNIT SPECIFICATIONS. Consumer Package Units shall
conform to the specifications set forth in Exhibit 1, as amended from
time to time ("Specifications"). Cygnus may modify the Specifications
in Exhibit 1, from time to time in its sole discretion. It shall give
written notice of any change in the Specifications to CMI, which change
shall become effective within forty-five (45) days of such notice. All
such changes shall be forwarded in writing by Cygnus to CMI to the
attention of the Production Manager and the Quality Assurance Manager.
Provided, however, if CMI in good faith determines that it would be
commercially unreasonable to supply Consumer Package Units meeting any
such changed Specification, it may give written notice of such
inability to supply to Cygnus within fifteen (15) days of the change
notice. Failure to give such notice within this fifteen (15) day period
shall be deemed to be acceptance of the
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<PAGE>
Specification change. Upon giving of timely notice of such inability to
supply, CMI shall be relieved of its obligation to accept orders
according to the changed Specification.
4. PURCHASES AND PURCHASE ORDER PROCEDURE
4.1. ORDERS AND FORECASTS. With respect to Consumer Package Units
which Cygnus wishes to purchase from CMI, prior to the first
month in which annualized production volume reaches
[CONFIDENTIAL TREATMENT REQUESTED] Consumer Package Units per
year, Cygnus will order Consumer Package Units on a lot by
lot basis. Cygnus shall deliver to CMI at least two (2) full
months prior to the month in which it wishes to take
delivery, Cygnus' firm order (which firm orders must be in
writing) and requested delivery date ("Delivery Date") for a
lot of Consumer Package Units. Immediately following the
first month in which annualized production volume reaches
[CONFIDENTIAL TREATMENT REQUESTED] Consumer Package Units per
year, Cygnus shall deliver to CMI at least one (1) full month
prior to the month in which it wishes to take delivery,
Cygnus' firm order (which firm orders must be in writing) and
requested delivery dates ("Delivery Dates") for such Consumer
Package Units for the month and a forecast of its quantity
requirements for such Consumer Package Units for the
subsequent eleven (11) months. Thereafter, Cygnus shall
deliver to CMI within five (5) days after the beginning of
each calendar month, Cygnus' firm order and Delivery Dates
for such Consumer Package Units for the next month and a
forecast of its quantity requirements for such Consumer
Package Units for the subsequent eleven (11) months. If a
required forecast or order for a one (1) month period is not
timely submitted for Consumer Package Units, the immediately
preceding forecast for that month shall become the new
forecast or order; if there is no preceding forecast for a
month, the forecast or order for the immediately preceding
month shall become the forecast or order. All forecasts are
non-binding. All firm orders are binding.
4.2. DELIVERY DATE. CMI will provide a firm scheduled delivery
date and an order acknowledgment promptly after receipt of
Cygnus' firm order. CMI will meet each firm scheduled
delivery date, but will not be liable for failure to do so
due to an event of force majeure (as defined in Section 15.11
below) or Cygnus' firm order not being received according to
the provisions of 4.1 above. If an event of force majeure
occurs, CMI may not reduce production or shipment of Consumer
Package Units for Cygnus by any amount exceeding the amount
of reduction caused by the force majeure event. Other than in
the case of an event of force majeure or Cygnus' firm order
not being received according to the provisions of 4.1 above,
CMI shall be solely responsible for any costs associated with
expediting materials in order to meet the scheduled delivery
date for each firm order (including, without limitation,
overtime charges, fees required to expedite materials or
services used in manufacturing and incremental transportation
costs), provided that Cygnus has complied with the terms of
this Agreement in placing such order.
4.3. TITLE AND RISK OF LOSS: PAYMENT. All shipments shall be FOB
Origin, Prepaid and Charged Back. Title and risk of loss shall
remain with CMI until Consumer Package Units have been
delivered to a common carrier for shipment. All of CMI's costs
for transportation, shipping and transportation insurance
expenses shall be invoiced to and paid by Cygnus.
4.4. PAYMENT. Prior to the first month in which the annualized
production volume reaches [CONFIDENTIAL TREATMENT REQUESTED]
Consumer Package Units per year, CMI shall invoice Cygnus for
shipped Consumer Package Units, in accordance with Section 2.
The payment terms for these shipments shall be [CONFIDENTIAL
TREATMENT REQUESTED] upon receipt of CMI's order
acknowledgment and invoice and [CONFIDENTIAL TREATMENT
REQUESTED] within thirty (30) days of receipt of Consumer
Package Units.
Immediately following the first month in which annualized
production volume reaches [CONFIDENTIAL TREATMENT REQUESTED]
Consumer Package Units per year, CMI shall
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invoice Cygnus for shipped Consumer Package Units in
accordance with Section 2 within thirty (30) days of shipment.
Within thirty (30) days of receipt of Consumer Package Units,
Cygnus shall pay CMI's invoice for Consumer Package Units.
4.5. QUARTERLY RECONCILIATION. No later than ten (10) working days
after the end of each of Cygnus' fiscal quarters during the
Term hereof, CMI shall prepare a quarterly reconciliation of
all Manufacturing Costs and Consumer Package Units provided by
CMI to Cygnus. This information will be provided by CMI to
Cygnus in an electronic format that is compatible with Cygnus'
system.
4.6. REIMBURSEMENT OF COST BY CYGNUS. In the event Cygnus has not
provided CMI with any firm orders, as provided in Section
4.1, by [CONFIDENTIAL TREATMENT REQUESTED], Cygnus and CMI
will develop a plan to reimburse CMI for costs incurred in
order to maintain readiness of the manufacturing facility
for a period of time to be determined by Cygnus.
4.7. CONFLICTING TERMS. In ordering and delivering Consumer Package
Units, CMI and Cygnus may use their standard forms, but
nothing in such forms shall be construed to amend or modify
the terms of this Agreement.
5. QUALITY
5.1 QUALITY CONTROL. Prior to each shipment of Consumer Package
Units, CMI shall perform or cause to be performed quality
control procedures that are calculated to verify that the
units to be shipped conform with the Specifications for such
Consumer Package Units as determined under Section 3 hereof.
Each shipment of Consumer Package Units shall be accompanied
by a Quality Assurance Analytical Certificate of Conformance
("Q.A. Certificate of Conformance").
5.2. REJECTION. Cygnus shall have sixty (60) days following the
day on which it receives a shipment to reject same because
all or part of the shipment fails to conform to the
applicable Specifications or otherwise fails to conform to
the warranties given by CMI herein, by giving written
notice to CMI specifying the manner in which all or part of
such shipment fails to meet the foregoing requirements. If
Cygnus timely rejects all or part of a shipment, CMI is
responsible for replacing the defective units at its
expense. CMI will be solely responsible for any
transportation charges pertaining to the return and
reshipping of rejected Consumer Product Units.
5.3. LATENT DEFECTS. It is recognized that it is possible for a
shipment of Consumer Package Units to have defects ("defects"
meaning that such Consumer Package Units fail to conform to
the applicable Specifications or otherwise fail to conform to
the warranties given by CMI herein) which would not be
discoverable upon reasonable physical inspection or testing
(the "Latent Defects"). As soon as either party becomes aware
of a Latent Defect in any lot or batch of Consumer Package
Units, it shall immediately notify the other party and the lot
or batch involved, at Cygnus' election, shall be deemed
rejected as of the date of such notice. CMI shall be
responsible for replacing all defective units involved at its
expense and shall reimburse Cygnus for its costs of accepting
returns from its customers and shall be responsible for all
costs reasonably incurred by Cygnus in recalling the Consumer
Package Units having Latent Defects. At its election, Cygnus
may recover moneys to which it may become entitled under this
Section by deducting same from amounts then due or that may
subsequently become due to CMI from Cygnus hereunder.
5.4. ISO 9002; QUALITY CONTROL SYSTEM. CMI shall obtain IS0 9002
certification of the facility used to manufacture Consumer
Package Units no later than [CONFIDENTIAL TREATMENT
REQUESTED]. CMI shall, at all times during the performance of
its manufacturing and supply
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obligations under this Agreement, manufacture all Consumer
Package Units in compliance with, and maintain a quality
control system that meets the requirements of, ISO 9002 and
all applicable Good Manufacturing Practices which are in force
or hereinafter adopted by the FDA or any successor agency
thereto ("GMP"). CMI shall at all times take such additional
measures as are necessary to maintain a quality control system
designed to identify, correct and prevent quality deficiencies
in the Consumer Package Units. CMI shall establish and
maintain registration as a medical device manufacturer through
the United States Food and Drug Administration.
5.5. SUBCONTRACT MANUAL. In addition to ISO 9002 and GMP compliant
procedures, CMI shall comply with such other quality
requirements as may be set forth from time to time in Cygnus'
Subcontract Manual for the Glucowatch.
5.6. INSPECTION. Cygnus shall have the right to inspect the
manufacturing and testing facilities of CMI from time to time
during normal business hours in order to verify compliance
with this Agreement.
6. MINIMUM QUANTITIES
6.1. MINIMUM. [CONFIDENTIAL TREATMENT REQUESTED]
6.2. REMEDY FOR FAILURE TO PURCHASE. If in any Minimum Year,
Cygnus' firm orders shall require shipment of less than the
Minimum during the Minimum year, CMI shall be entitled to a
termination election ("Elective Termination") as provided
herein. No later than April 15 following the Minimum Year in
which the Minimum was not met, CMI may give written notice of
Elective Termination to Cygnus. CMI's right to give notice of
Elective Termination shall not extend beyond April 15 of any
year in which it shall be entitled to give notice and any
notice given untimely shall be void. Upon the giving of timely
notice of Elective Termination, Cygnus shall be relieved of
any requirements for firm orders under Section 4 hereof and
shall have thirty days after receipt of the notice of Elective
Termination to submit revised firm orders, which shall be
binding on both parties for the period from the date of notice
of Elective Termination through October 1 of that year.
6.3. EXCLUSIVENESS OF REMEDY. The sole remedy for CMI in the event
of a failure to fulfill Minimums in a Minimum Year, shall be
an election to terminate as provided in Section 6.2 above and,
more particularly, CMI shall have no remedy for monetary
damages of any kind, regardless of the cause of Cygnus'
failure to meet Minimums. This Section shall not be construed
to prevent CMI from recovering monetary damages on account of
other breaches of this contract by Cygnus.
7. SUPPLY SPECIFIC EQUIPMENT
7.1. EQUIPMENT. "Equipment" shall mean those items of manufacturing
equipment required to produce Consumer Package Units which
cannot be reasonably accomplished by CMI's general production
equipment.
7.2. INSTALLATION AND MAINTENANCE OF EQUIPMENT. In the event Cygnus
elects to provide such Equipment, it shall acquire the
Equipment or otherwise obtain the Equipment and provide for
shipping to CMI's facilities located at 4550 AIRWEST DR., SE.
SUITE A, GRAND RAPIDS, MI 49512-3950 ("CMI's Premises"). CMI
shall be obligated to bear all costs of tenant improvements,
installation, qualification and acceptance of the Equipment.
Thereafter, CMI shall be obligated to reasonably maintain the
Equipment in accordance with any requirements set forth in the
operating manuals for such Equipment. CMI shall be responsible
for any and all damage to the Equipment, apart from normal
wear and tear.
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7.3. TITLE: UCC FILINGS. Title to any Equipment provided by Cygnus
hereunder shall remain with Cygnus or any party with whom
Cygnus contracts to obtain the Equipment; CMI shall have no
ownership interest in any Supply Specific Equipment or any
replacement parts or components installed in the Equipment.
Cygnus may display notice of its ownership of the Equipment by
affixing to the Equipment an identifying label, or plate or
any other indication of ownership and CMI shall not alter or
remove any such identification. CMI shall cooperate with
Cygnus and shall execute any documents, including UCC filings
or other notices, as Cygnus may determine are advisable to
document Cygnus' or third-party ownership in the Equipment.
CMI shall cooperate with Cygnus to sign any and all security
agreements, financing statements, or otherwise, in order to
effectuate a bailment lien on the Equipment, and to file such
documents at the proper location or locations.
7.4. USE OF THE EQUIPMENT. CMI shall use Equipment provided by
Cygnus solely for production of Consumer Package Units for
Cygnus and for no other use. CMI is responsible for the
operation of the Equipment after its delivery to, and
installation at, CMI's Premises and the use of the Equipment
shall be restricted solely to CMI unless Cygnus instructs
otherwise in writing. CMI will use and operate the Equipment
in a careful manner, will comply with all governmental laws
and regulations related thereto, and will cause the Equipment
to be operated in accordance with the applicable operating
manuals. CMI will not make or authorize any change to the
Equipment without the prior written consent of Cygnus. CMI
shall only permit the Equipment to be operated by competent
and qualified employees and shall ensure that the Equipment is
not subject to careless or rough usage. The Equipment will not
be moved from CMI's Premises without Cygnus' prior written
consent.
7.5. REMOVAL OF EQUIPMENT. At the end of the Term or following any
termination, CMI shall provide Cygnus with reasonable access
to its facilities, as Cygnus requires, to remove all Equipment
from CMI's facilities. Cygnus shall have responsibility for
any damage to CMI's facility arising from the removal of such
Equipment.
7.6. TAXES; PERMITS; FEES. CMI shall secure any and all necessary
governmental or regulatory approvals or permits required by
any law or regulation for the possession or operation of the
Equipment. Cygnus is solely responsible for the payment of any
and all required taxes or governmental fees incurred with
respect to the Equipment during the Term. If any change is
required in the Equipment during the bailment term to bring
the Equipment into compliance with any new law or regulation
applicable to the Equipment, CMI shall be responsible for
implementing and Cygnus shall pay for the change required to
make the Equipment comply with such requirements. CMI shall
secure and pay for any necessary governmental or regulatory
approvals or permits required by any law or regulation for the
operation or maintenance of CMI's Premises. Taxes, Permits and
Fees relating to the operation and maintenance of CMI's
Premises are not to be included in the Manufacturing Cost.
7.7. NO WARRANTY, NO LIABILITY FOR EQUIPMENT. THE PARTIES HERETO
AGREE THAT THE EQUIPMENT IS LOANED WITHOUT ANY EXPRESS OR
IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO IMPLIED
WARRANTIES OF MERCHANTABILITY, NONINFRINGEMENT AND FITNESS FOR
A PARTICULAR PURPOSE. Cygnus shall not be liable for any loss
or damage, including third party losses or claims, claimed to
have resulted from the design, manufacture, testing,
installation, warning, possession, or use of the Equipment
regardless of the form of action, including, but not limited
to, those claims based upon strict liability or negligence.
Cygnus shall not be liable for loss of profit or other
consequential damages resulting from the theft, destruction,
breakdown, or disrepair of the Equipment or for the failure of
the Equipment to operate properly.
7.8. INSURANCE. During the Term, CMI shall maintain casualty, fire,
and theft insurance on the
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Equipment in amounts deemed appropriate by Cygnus. The
proceeds of any such insurance coverage with respect to the
Equipment shall be payable solely to Cygnus. CMI, at its own
expense, shall obtain such additional insurance coverage on
the Equipment or on CMI's Premises as CMI shall require. Upon
Cygnus' request, CMI shall deliver copies of the policies and
loss payable endorsements (in form satisfactory to Cygnus) to
Cygnus.
8. RAW MATERIALS.
8.1. Cygnus will negotiate agreements with suppliers of Cygnus'
choice for supply of Glucopad material (supplied in rolls) and
biosensors ( materials to be used in the manufacture of
Consumer Package Units ). Cygnus will provide CMI with a copy
of the relevant supply agreements ("Master Supply
Agreements"). CMI shall issue its own purchase orders directly
to such suppliers, with a copy to Cygnus, and will reference
the applicable Master Supply Agreements for terms and pricing.
8.2. For any such materials that are purchased to enable CMI to
fill firm orders, Cygnus shall pay CMI at least ten (10) days
prior to the date upon which CMI must pay the supplier for
such materials. If CMI acquires inventory in excess of the
materials needed for firm orders it shall bear sole
responsibility and risk with respect to such inventory,
including without limitation the risk that such inventory
could become obsolete. However, this paragraph shall not apply
to the extent that such excess material obtained by CMI is
pursuant to minimum requirements defined in a Master Supply
Agreement. CMI shall be solely responsible for any
transportation charges pertaining to the return and reshipping
of any rejected materials.
9. WARRANTY; INDEMNITY.
9.1. CMI warrants (i) Consumer Package Units, when shipped to
Cygnus, shall conform to the then in effect Specifications as
determined under Section 3; (ii) Consumer Package Units, when
shipped to Cygnus, shall conform with the information on the
Q. A. Certificate of Conformance sheet provided for the
particular shipment and not contain any Latent Defects or any
other defects in materials or workmanship; (iii) Consumer
Package Units shall have been manufactured, stored and shipped
in conformance with all applicable Good Manufacturing
Practices which are in force or hereinafter adopted by the FDA
or any successor agency thereto; (iv) Consumer Package Units
shall not have been adultered; and (v) title to all Consumer
Package Units shall be free of any security interest or
encumbrance. CMI makes no warranty, expressed or implied, with
respect to material supplied by vendors under the Master
Supply Agreements including the warranty of merchantability.
9.2. CMI agrees to defend Cygnus from, indemnify Cygnus and hold
Cygnus harmless from any claim, demand, action, cause of
action or suit (each a "Claim") related to or arising from any
breach of the warranty set forth in Section 9.1, negligence on
the part of CMI or defect in Consumer Package Units supplied
by CMI. Provided, however as an exception to the foregoing
right to defense and indemnity will be any claim, action or
cause of action arising from a defect in a Consumer Package
Unit, where such Consumer Package Unit, as supplied, was in
full conformance with the warranty set forth in Section 9.1.
CMI also agrees to defend Cygnus from, indemnify Cygnus and
hold Cygnus harmless from any Claim arising out of or
resulting from any injury to any person or damage to any
property caused by the Supply Specific Equipment as a result
of the testing , installation, insufficiency of any warnings
thereon or of CMI's improper use of the Equipment. In the
event Cygnus is served or is otherwise notified of any Claim
under this Section 9.2, it shall notify CMI thereof and tender
its defense to CMI who shall promptly undertake such defense
with counsel mutually acceptable to both parties. Either party
receiving an offer of settlement shall communicate such offer
as soon as reasonably practicable to the other. In the event
Cygnus enters into a settlement, without the prior consent of
CMI, it will be deemed to
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have waived its right under this Section to be indemnified
from any amounts it becomes obligated to pay under the terms
of the settlement agreement.
10. PATENT/INTELLECTUAL PROPERTY INDEMNITY.
10.1. CMI agrees to defend Cygnus from, indemnify Cygnus and hold
Cygnus harmless from any claim, demand, action, cause of
action or suit related to or arising from any claim that the
manufacturing processes used to produce Consumer Package Units
(apart from the materials supplied by Cygnus) supplied by CMI
infringe any patent or intellectual property right held by a
third party. In the event Cygnus is served or is otherwise
notified of any such claim, it shall notify CMI thereof and
tender its defense to CMI who shall promptly undertake such
defense with counsel mutually acceptable to both parties.
Either party receiving an offer of settlement shall
communicate such offer as soon as reasonably practicable to
the other. In the event Cygnus enters into a settlement,
without the prior consent of CMI, it shall be deemed to have
waived its right under this Section to be indemnified from any
amounts it becomes obligated to pay under the terms of such
settlement agreement.
11. SECONDARY FACILITIES.
11.1. The parties agree that Cygnus may establish one or more of its
own facilities ("Secondary Facilities") to produce Consumer
Package Units or components thereof. CMI hereby grants to
Cygnus a fully paid-up, royalty-free, worldwide, perpetual
license under its intellectual property rights in CMI
Technology (as defined below) for the purpose of making,
having made and marketing Consumer Package Units and
components thereof. For the purposes of this Section 11, "CMI
Technology" shall mean any invention (whether or not
patentable), idea, process, formula, know-how and/or software
owned, licensed or controlled by CMI during the term of this
Agreement, that is or will be necessary or useful to Cygnus in
the production of Consumer Package Units or components
thereof.
11.2. To carry out the physical transfer of CMI Technology from CMI
to Cygnus, CMI shall, as requested from time to time by
Cygnus, disclose to Cygnus in tangible form the CMI
Technology. To carry out the transfer of CMI Technology that
cannot be provided in tangible form (for instance, certain
"know-how"), CMI shall, as soon as reasonably practicable
after a request from Cygnus from time to time, disclose such
CMI Technology to employees and contractors of Cygnus through
consultation at Cygnus' Secondary Facilities. In connection
with such technology transfer, Cygnus shall compensate CMI for
time of its employees and for the reasonable direct costs of
travel to the Secondary Facilities, as approved in advance by
Cygnus.
12. INTELLECTUAL PROPERTY OWNERSHIP AND CONFIDENTIALITY.
12.1. OWNERSHIP. As between the parties, each party will be the sole
owner of the intellectual property rights in any invention of
which only its employees and its third party contractors are
inventors and each party will jointly own the intellectual
property rights in all inventions of which both parties'
employees or contractors are joint inventors, except that
intellectual property rights with respect to inventions which
claim or relate in any way to (i) [CONFIDENTIAL TREATMENT
REQUESTED], (ii) [CONFIDENTIAL TREATMENT REQUESTED], (iii)
[CONFIDENTIAL TREATMENT REQUESTED], (iii) [CONFIDENTIAL
TREATMENT REQUESTED], (iv) [CONFIDENTIAL TREATMENT REQUESTED],
will be solely owned by Cygnus. Any assignments necessary to
accomplish the foregoing are hereby made and each party will
execute such further documents as may be reasonably requested
by the other with respect thereto.
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12.2. CONFIDENTIALITY. Each party agrees that all inventions
(whether or not patentable), trade secrets, ideas, processes,
formulas, materials, chemicals, technology, know-how and all
other business, technical and financial information it obtains
from the other are the confidential property of the disclosing
party ("Proprietary Information" of the disclosing party).
Except as expressly allowed in this Agreement, the receiving
party will hold in confidence and not use or disclose any
Proprietary Information of the disclosing party during the
term of this Agreement and for a period of five (5) years
after the end of the Supply Terms of this Agreement, and its
employees shall be similarly bound. The receiving party shall
not be obligated under this Section with respect to any
information the receiving party can document:
a) Is or has become readily publicly
available through no fault of the
receiving party or its employees or
agents; or
b) Is received from a third party lawfully
in possession of such information and
lawfully empowered to disclose such
information and provided the receiving
party abides by all restrictions, if
any, imposed by such third party; or
c) Was rightfully in the possession of the
receiving party prior to its disclosure
by the other party provided the
receiving party abides by all
restrictions, if any, imposed on its
possession of such information; or
d) Was independently developed by
employees or consultants of the
receiving party without use of or
access to Proprietary Information of
the disclosing party; or
e) Is required to be disclosed to a
governmental entity or agency in
connection with seeking any
governmental or regulatory
registration, approval or license, or
pursuant to the lawful requirement or
request of a governmental entity or
agency, provided that reasonable
measures are taken to obtain
confidential treatment thereof and to
guard against further disclosure.
12.3. Nothing in Section 12.1 or 12.2 shall prevent Cygnus from
utilizing in the manufacture by Cygnus itself or with a
third-party of Consumer Package Units or any other product
using Proprietary Information which Cygnus learned, received
or otherwise acquired from CMI.
13. RECORDS AND AUDIT RIGHT. Both parties shall keep complete and accurate
books and records reflecting all information necessary or useful in
verifying the accuracy of any payment made hereunder. Each party shall
have the right to hire an independent certified public accountant to
inspect all such records so required to be kept by the other (which
accountant shall agree in writing to keep all information confidential
except as needed to disclose any discovered discrepancies); provided,
such audit (i) is conducted during normal business hours, (ii) is
conducted no more often than once per year (unless a discrepancy
greater than seven percent (7%) is discovered in favor of the auditing
party), and (iii) is conducted only after the auditing party has given
ten (10) days prior written notice to the audited party. The auditing
party shall bear the full cost and expense of such audit. Regardless of
the amount of discrepancy discovered, all discrepancies (and interest
thereon) shall be immediately due and payable by the party found to
have caused the discrepancy. All books and records relating to either
party's obligations under this Agreement shall be retained by such
party for five years after the Term has expired.
14. TERMINATION
14.1. TERMINATION. This Agreement may be terminated in its entirety
by a party immediately upon the
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occurrence of any of the following events:
14.1.1. If the other ceases to do business, or otherwise
terminates its business operations;
14.1.2. If the other shall fail to promptly secure or renew
any license, registration, permit, authorization or
approval necessary for the conduct of its business in
the manner contemplated by this Agreement, or if any
such license, registration, permit, authorization or
approval is revoked or suspended and not reinstated
within sixty (60) days or if reinstatement is not
possible within sixty (60) days, or if diligent
efforts are not being made to effect such
reinstatement;
14.1.3. If the other materially breaches any material
provision of this Agreement and fails to cure such
breach within sixty (60) days (except immediately in
the case of a breach of Section 12.2) of written
notice describing the breach; or
14.1.4. If the other shall seek protection under any
bankruptcy, receivership, trust deed, creditors
arrangement, composition or comparable proceeding, or
if any such proceeding is instituted against the
other (and not dismissed within one hundred and
twenty (120) days).
14.2. NO LIABILITY FOR TERMINATION. Neither party shall incur any
liability whatsoever for any damage, loss or expenses of any
kind suffered or incurred by the other (or for any
compensation to the other) arising from or incident to any
termination of this Agreement by such party which complies
with the terms of this Agreement, whether or not such party is
aware of any such damage, loss or expenses.
14.3. EFFECT OF TERMINATION. In addition to provisions that by their
terms survive termination, the following provisions shall
survive the termination of this Agreement: Sections 4.4, 7,
8.2, 9, 10, 12, 13 and 15. Remedies for all breaches hereunder
will also survive. Each party will promptly return all
Proprietary Information of the other (and all copies and
abstracts thereof, except that one (I) copy may be retained
and shall be kept in its legal archives for legal record
keeping purposes only) that it is not entitled to under the
surviving terms of this Agreement.
14.4. TERMINATION NOT SOLE REMEDY. Termination is not the sole
remedy under this Agreement and, whether or not termination is
effected, all other remedies will remain available.
15. GENERAL.
15.1. AMENDMENT AND WAIVER. Except as otherwise expressly provided
herein, any provision of this Agreement may be amended and the
observance of any provision of this Agreement may be waived
(either generally or in any particular instance and either
retroactively or prospectively) only with the written consent
of the parties. However, it is the intention of the parties
that this Agreement be controlling over additional or
different terms of any purchase order, confirmation, invoice
or similar document, even if accepted in writing by both
parties, and that waivers and amendments of any provision of
this Agreement shall be effective only if made by
non-pre-printed agreements signed by both parties and clearly
understood by both parties to be an amendment or waiver. The
failure of either party to enforce its rights under this
Agreement at any time for any period shall not be construed as
a waiver of such rights.
15.2. GOVERNING LAW AND LEGAL ACTIONS. This Agreement shall be
governed by and construed under the laws of the State of
California and the United States without regard to conflicts
of laws provisions thereof and without regard to the United
Nations Convention on Contracts for the International Sale of
Goods. The sole jurisdiction and venue for actions related to
the subject matter hereof
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shall be the state and U.S. federal courts located in San
Francisco, California. Both parties consent to the
jurisdiction of such courts and agree that process may be
served in the manner provided herein for giving of notices or
otherwise as allowed U.S. federal law or the laws of
California. In any action or proceeding to enforce rights
under this Agreement, the prevailing party shall be entitled
to recover costs and attorney's fees.
15.3. HEADINGS. Headings and captions are for convenience only and
are not to be used in the interpretation of this Agreement.
15.4. NOTICES. Any notice or other communication required or
permitted to be made or given to either party under this
Agreement shall be deemed sufficiently made or given on the
date of delivery if delivered in person or by overnight
commercial courier service with tracking capabilities with
costs prepaid, or three (3) days after the date of mailing if
sent by certified first class U.S. mail, return receipt
requested and postage prepaid, at the address of the parties
set forth below or such other address as may be given from
time to time under the terms of this notice provision:
If to CMI:
Contract Manufacturing, Inc.
4550 Airwest Dr., SE, Suite A
Grand Rapids, MI 49512-3950
Attention: Jack Sauer
If to Cygnus:
Cygnus, Inc.
400 Penobscot Drive
Redwood City, California 94063
Attention: Director, Materials
15.5. ENTIRE AGREEMENT. This Agreement (and all Exhibits hereto)
constitutes the entire understanding and agreement with
respect to the subject matter hereof and supersedes all
proposals, oral or written, all negotiations, conversations,
or discussions between or among parties relating to the
subject matter of this Agreement and all past dealing or
industry custom.
15.6. SEVERABILITY. If any provision of this Agreement is held to be
illegal or unenforceable, that provision shall be limited or
eliminated to the minimum extent necessary so that this
Agreement shall otherwise remain in full force and effect and
enforceable.
15.7. BASIS OF BARGAIN. Each party recognizes and agrees that the
warranty disclaimers and liability and remedy limitations in
this Agreement are material bargained for bases of this
Agreement and that they have been taken into account and
reflected in determining the consideration to be given by each
party under this Agreement and in the decision by each party
to enter into this Agreement.
15.8. RELATIONSHIP OF PARTIES. The parties hereto expressly
understand and agree that the other is an independent
contractor in the performance of each and every part of this
Agreement and is solely responsible for all of its employees
and agents and its labor costs and expenses arising in
connection therewith.
15.9. ASSIGNMENT. This Agreement and the rights and obligations
hereunder are not transferable or assignable by either party
without the prior written consent of the other party, except
for rights to
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payment and except to a person or entity who acquires all or
substantially all of a party's stock, assets or business to
which this Agreement pertains, whether by sale, merger,
acquisition or otherwise.
15.10. PUBLICITY AND PRESS RELEASES. Except to the extent necessary
under applicable laws or for ordinary marketing purposes, the
parties agree that no press releases or other publicity
relating to the substance of the matters contained herein will
be made without approval by both parties. A press release
announcing this Agreement will be jointly developed and
released by the parties.
15.11. FORCE MAJEURE. No liability or loss of rights hereunder shall
result to either party from delay or failure in performance
caused by an event of force majeure (that is, circumstances
beyond the reasonable control of the party affected thereby,
including, without limitation, acts of God, fire, flood, war,
government action, strikes, lockouts or other serious labor
disputes and vendors inability to supply material due to such
events.) for so long as such event of force majeure continues
in effect.
15.12. REMEDIES. Except as otherwise expressly stated in this
Agreement, the rights and remedies of a party set forth herein
with respect to failure of the other to comply with the terms
of this Agreement (including, without limitation, rights of
full termination of this Agreement) are not exclusive, the
exercise thereof shall not constitute an election of remedies
and the aggrieved party shall in all events be entitled to
seek whatever additional remedies may be available in law or
in equity.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
Effective Date.
CYGNUS, INC. CONTRACT MANUFACTURING, INC.
By: /s/ Gregory B. Lawless By: /s/ Jack Sauer
------------------------------- -------------------------------
Name: G.B. Lawless Name: Jack Sauer
------------------------------ -----------------------------
Title: President & CEO Title: President (CEO/COO)
----------------------------- ------------------------------
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EXHIBIT 1
[CONFIDENTIAL TREATMENT REQUESTED]
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SUPPLY AGREEMENT
This Supply Agreement ("Agreement") is entered as of December 1, 1999
("Effective Date") by and between Cygnus, Inc., a Delaware corporation, with its
principal place of business at 400 Penobscot Drive, Redwood City, California
94063 ("Cygnus"), and Key Tronic Corporation., a Washington corporation, with
its principal place of business at N. 4424 Sullivan Road, Spokane, Washington
99216 ("Key Tronic").
1. SCOPE OF AGREEMENT
A. This Agreement shall cover the purchase by Cygnus and the sale by Key
Tronic of one or more of the products identified in Exhibit A (the "Product"),
attached to this Agreement. Key Tronic agrees to manufacture the Product in
accordance with Cygnus' specifications and drawings set forth in Exhibit B (the
"Specifications"), attached to this Agreement. Exhibit B may be amended from
time to time by mutual written agreement of the parties. Key Tronic acknowledges
that (i) time is of the essence in the delivery of the Product and (ii) Product
quality is of critical importance to Cygnus. Failure of Key Tronic to supply
Product as specified shall be grounds for termination of this Agreement by
Cygnus.
B. Whenever Cygnus wishes to purchase the Product from Key Tronic, Cygnus
shall issue its purchase order which shall reference this Agreement and shall be
construed to have incorporated the terms and conditions hereof. Purchase orders
issued by Cygnus shall include the part number, description of the Product,
quantity, unit price and requested delivery date for the Product.
C. Cygnus will notify Key Tronic if it wishes to add a new Product to this
Agreement. The parties shall then proceed to establish pricing and delivery
schedules for each such new Product. Upon agreement of these items, such Product
shall be considered Product under this Agreement.
2. TERM
This Agreement shall commence on the Effective Date set forth above and will be
for a term of three (3) years, unless terminated as otherwise provided herein.
During the term of this Agreement Cygnus agrees to purchase from Key Tronic,
Product in accordance with the Exhibit C, attached to this agreement.
3. PRICE AND PAYMENT
A. PRICES. The prices for the Product are set forth in Exhibit C, attached
to this Agreement. Prices will not change for the term of this Agreement except
for the following reasons:
(1) For price changes to extraordinary raw material as listed in
Exhibit C; any extraordinary price adjustments due to cost fluctuations (up or
down) to such raw material will be effective on January 1st of each year during
the term of this Agreement and will be based on costs actually paid by Key
Tronic as evidenced by actual invoices or quotations made available for Cygnus'
review.
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(2) Changes in design, materials, or requirements made by Cygnus.
(3) PRODUCTIVITY. Commencing on [CONFIDENTIAL TREATMENT REQUESTED] Key
Tronic will implement a continuous productivity program with the
objective of achieving actual cost reductions as set forth in Exhibit
C. The productivity projects will be jointly agreed on by both parties
and involve the following types of activities:
(a) manufacturing process improvements;
(b) the Key Tronic's involvement in the design process to
ensure manufacturability;
(c) target saving for materials/design;
(d) review of processes and equipment to ensure quality
and cost;
(e) joint efforts to plan inventory levels;
(f) reduced overhead rates; and
(g) improved layout and alternative packaging.
B. TAXES. Prices do not include applicable U.S. federal or state sales or
use taxes which shall be paid by Cygnus, unless an exemption is available, if
separately indicated on the invoice for the applicable Product shipment.
C. INVOICING. Invoices will be submitted by Key Tronic to the Cygnus
location indicated on purchase orders. Invoices will reference Cygnus' purchase
order number and will contain such other information as Cygnus may request.
Invoices are to be submitted upon shipment of the Product. Payment for
acceptable Product will be made by Cygnus within thirty-five (35) calendar days
of receipt of invoice. Any invoice not paid within thirty five (35) calendar
days from receipt of invoice or Product, whichever is later, shall be subject to
a late charge of [CONFIDENTIAL TREATMENT REQUESTED] per month of the invoice
amount.
4. VALUE ENGINEERING
Key Tronic agrees to explore and identify cost reduction opportunities in the
Product in addition to those set forth in Section 3. Cygnus and Key Tronic agree
to share equally, all cost reductions once all price increases for raw materials
have been offset.
5. PURCHASE ORDERS
On the first day of each month during the term of this Agreement, Cygnus shall
issue its written purchase order to Key Tronic for the current month for
purchase of the Product. Purchase orders may be issued by EDI, facsimile or via
U.S. mail. Purchase orders shall not be binding on Key Tronic until acknowledged
in writing by Key Tronic. Such acknowledgement shall be made within five (5)
business days of receipt by Key Tronic; otherwise the purchase order shall be
deemed binding on Key Tronic. In addition, purchase orders shall contain the
following data:
(1) Purchase Order number and date;
(2) Description, quantity and price of Product;
(3) Date and Location of delivery; and
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(4) Mode of shipment.
6. DELIVERY AND SHIPPING TERMS
Subject to Section 10 hereof, Key Tronic shall deliver Product to Cygnus'
facility to meet the delivery dates requested by Cygnus in its purchase orders,
which in no event shall be less than the lead times for the Product as set forth
in Exhibit A. Delivery of the Product shall be F.O.B. Key Tronic's facility,
freight collect. The price of all Product shall exclude transportation charges.
Transportation charges will be the responsibility of Cygnus and shall be billed
directly to Cygnus by carrier. Key Tronic shall use Cygnus' designated contract
carriers which are indicated on the purchase order. Risk of loss of the Product
shall pass to Cygnus upon delivery to the designated carrier at Key Tronic's
facility.
7. FORECASTS, BINDING PURCHASE ORDERS AND BUFFER STOCK
A. Cygnus shall provide Key Tronic on a monthly basis a non-binding three
month rolling forecast. Key Tronic is authorized to rely on the forecasts to
order, purchase and otherwise make available within normal acquisition cycles in
existence from time to time as determined by Key Tronic in its reasonable
judgment parts and materials required for incorporation into forecasted Product.
B. Key Tronic agrees to maintain an inventory of stock sufficient to
provide Cygnus an additional [CONFIDENTIAL TREATMENT REQUESTED] of Product over
and above the stock necessary to meet Cygnus' forecasted requirements of
Product.
8. ORDER CANCELLATION AND RESCHEDULING
A. Cygnus may cancel any purchase order for Product by giving Key Tronic
written notice of at least the number of days specified for the given products
in Exhibit A, prior to the scheduled delivery date. Upon cancellation of a
purchase order Cygnus agrees to pay the cancellation charges set forth in
Exhibit C.
B. Cygnus may reschedule the delivery of any purchase order for Product by
giving Key Tronic written notice in advance of scheduled delivery, according to
the terms for the product in Exhibit A. Cygnus agrees to pay a rescheduling
charge for every purchase order that is rescheduled to cover Key Tronic's
documented material holding costs and production line utilization costs.
9. CHANGES
A. KEY TRONIC CHANGES. Key Tronic agrees that it will not make any changes
in: (i) Product, (ii) specified qualified suppliers for all components, (iii)
engineering or manufacturing processes, or (iv) the approved manufacturing
facility, without the prior written approval of Cygnus. In the event Key Tronic
does make an unapproved change, then Cygnus shall have the right to cancel the
purchase orders for such Product at no liability to Cygnus if not corrected
within thirty (30) days of written notice by Cygnus.
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B. CYGNUS CHANGES. When a change to the Product is required by Cygnus,
Cygnus shall provide Key Tronic the applicable documentation, specifications and
requested effective date of such change. Key Tronic shall respond within ten
(10) working days after receipt of such change, advising Cygnus as to (i)
implementation and the effective date of such change, (ii) associated costs and
effect to on-hand materials, (iii) on-order materials, work in process, and (iv)
the impact of the change upon existing Product pricing and shipment schedules
for the entire period for which purchase orders are outstanding.
10. CONSIGNMENT OF MATERIAL
A. Cygnus shall deliver on consignment to Key Tronic certain material
listed in Exhibit D, attached to this Agreement, for the sole purpose of
incorporation by Key Tronic into the Product (the "Consigned Material"). All
such Consigned Material shall remain the sole property of Cygnus and Key Tronic
shall not pledge or otherwise encumber such Consigned Material. Key Tronic shall
keep all Consigned Material in the same safe manner as its own procured material
and apply the same security measures to it. Key Tronic shall maintain full
replacement value insurance coverage for all Consigned Material. Key Tronic
agrees to assume liability for all losses of the Consigned Material while in Key
Tronic's possession, including scrap in excess of the range set forth in Exhibit
C, except losses due to passage of shelf life.
B. Cygnus may require Key Tronic to perform, at Cygnus' expense,
acceptance testing on Consigned Material. This testing will be performed in
accordance to the Specifications as set forth in Exhibit B and the Quality
Agreement set forth in Exhibit E.
11. WARRANTY
A. Key Tronic warrants that all Product furnished hereunder shall be free
from defects in material (excluding Consigned Material to the extent that Key
Tronic does not perform any acceptance testing) and workmanship, and shall
conform to all Specifications, samples and descriptions referred to in this
Agreement and in Cygnus' Purchase Order(s). Additionally, Key Tronic warrants
that it has good title to the Product supplied (other than Consigned Material),
and that the Product supplied are free and clear from all liens and
encumbrances. These warranties shall survive acceptance and payment by Cygnus.
B. If, within [CONFIDENTIAL TREATMENT REQUESTED] from date of manufacture,
such Product fails to conform to the warranties set forth above, Cygnus shall
have the right to return the Product to Key Tronic with all charges for
transportation both ways to be Key Tronic's responsibility. Key Tronic shall
repair, replace, or correct the defect(s), and/or non conformance at no cost to
Cygnus within ten (10) days following receipt thereof. In the event such failed
Product is found during automated processing at Cygnus, it may be rendered scrap
and will be accounted for by Cygnus and reported to Key Tronic. At periodic
intervals, scrap reports will be generated by Cygnus and sent to Key Tronic. At
the request of Key Tronic the scrap material will be sent to Key Tronic. Key
Tronic will credit Cygnus for this failed Product.
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12. QUALITY
A. Cygnus intends to, from time to time, and without notice to Key Tronic,
subject samples of the Product to be purchased hereunder to qualification tests,
which will consist of sufficient testing to ensure that the Product meets all
the requirements of this Agreement and purchase orders. Cygnus shall notify Key
Tronic of any deficiencies indicated by the testing and Key Tronic shall, at Key
Tronic's expense, take appropriate corrective action. Design responsibility
shall remain solely with Cygnus and any costs associated with design deficiency
shall be borne by Cygnus.
B. If Key Tronic fails to satisfactorily correct any and all deficiencies,
except deficiencies which are the responsibility of Cygnus, discovered in
Cygnus' qualification testing within a reasonable time after receipt of notice
from Cygnus, Cygnus shall have the right to cancel all or any portion of its
purchase orders for said discrepant Product without charge or billback and
without further obligation or liability to Key Tronic relating to that Product.
C. Cygnus shall have the right to conduct a source inspection or process
control audit at Key Tronic's facility at any time prior to delivery of the
Product. Any such inspection or audit shall in no way relieve Key Tronic of its
obligations to comply in all respects with the terms of this Agreement.
D. Product will be made in accordance with the Quality Agreement attached
hereto as Exhibit E, and Key Tronic will maintain ISO 9002 certification and
will comply with all applicable U.S. Federal Drug Administration (FDA) Code of
Federal Regulations.
13. INDEMNITY AND INSURANCE
A. Each party shall defend, indemnify and hold harmless the other party from and
against all damages, claims or liabilities and expenses (including attorney's
fees) arising out of or resulting in any way from any act or omission of the
indemnifying party, its agents, employees or subcontracts. With respect to Key
Tronic, the indemnification obligations in this Section shall include, but not
be limited to claims arising out of or resulting in any way from (a) a
manufacturing defect in the Product; (b) Key Tronic's non-compliance with
Cygnus' Specifications; or (c) Key Tronic's breach of any of the provisions of
this Agreement. With respect to Cygnus, the indemnification obligations in this
Section shall include, but not be limited to, claims arising out of or resulting
in any way from (a) a design defect, (b) Cygnus' Specifications as provided to
Key Tronic under this Agreement; or (c) Cygnus' breach of any of the provisions
of this Agreement.
B. Additionally, Key Tronic agrees, solely at its expense, to indemnify and
defend any suit or proceeding brought against Cygnus, its affiliates or their
customers because of any Product based on a claim (of which claim timely notice
shall have been given to Key Tronic) that said Product constitutes an
infringement of any patent, copyright, trade secret or any other proprietary
right, strictly limited to the processes and materials which Key Tronic has
control over, and Key Tronic agrees to defend, hold harmless and indemnify such
parties, for all damages, liabilities, costs and expenses (including reasonable
attorney's fees) arising from any such claim. Key Tronic agrees to either
procure for Cygnus the right to continue selling and/or using said Product; or
to replace said
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Product with non-infringing Product; or to modify it so that it becomes
non-infringing. The provisions of this section shall not apply to any claim for
infringement resulting solely from Key Tronic's compliance with Cygnus'
Specifications or to the Consigned Material supplied by Cygnus, and in such
event, Cygnus agrees, solely at its expense, to indemnify and defend any suit or
proceeding brought against Key Tronic. .
C. During the Term, Key Tronic and Cygnus each will purchase and
maintain in full force and effect, with a responsible insurance carrier,
having Best's ratings of A-VIII or greater, a comprehensive Product liability
insurance policy in amounts typical in the medical devices industry. At the
time of execution of this Agreement, Key Tronic and Cygnus will exchange
Certificates of Insurance. Each party shall keep such policy current. Each
such insurance policy shall provide for at least thirty (30) days' prior
written notice to Cygnus and Key Tronic of the cancellation or any
substantial modification of the terms of coverage.
14. TERMINATION
A. TERMINATION FOR CAUSE
(1) This Agreement may be terminated immediately for cause by
either party in the event the other party (i) becomes insolvent or
bankrupt, or (ii) ceases to function as a going concern or to conduct
its operation in the normal course of business, or (iii) fails to
perform any of the obligations imposed upon it under the terms of this
Agreement so as to be in default hereunder and fails to cure such
default within thirty (30) days after written notice.
(2) Notwithstanding the termination of this Agreement, the parties
will honor any of Cygnus' purchase orders which have been acknowledged
by Key Tronic.
B. SETTLEMENT OF TERMINATION CLAIMS
(1) Cygnus shall pay Key Tronic the following amounts within
thirty (30) days after termination of this Agreement:
(a) The price for all Product completed (which items were
delivered or available for delivery at the time notice of termination
was given) and not previously paid for by Cygnus only to the extent
such completed Product does not exceed any binding purchase orders;
(b) The actual, documented costs incurred related to the
terminated portion of the Agreement, including, only to the extent that
any components, materials and other inventory cannot be used in any of
Key Tronic's non-Cygnus Product: (1) Key Tronic's cost of work in
process materials, and (2) all components, materials and other items on
hand or on order but not yet received by Key Tronic to meet Cygnus'
forecasts for Product and which Key Tronic is unable to cancel; and
(c) the Key Tronic's actual on-hand buffer inventory but no more
than the amount
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identified in Section 7, and
(d) In the event the agreement is terminated due only to Cygnus'
uncured default, Key Tronic's cost of production line(s) shut down will
be limited to immediate and direct severance costs for employees
affected by the reduction, and the un-depreciated value of any
equipment, tooling, fixtures purchased for, and exclusive to, the
Product production process. Equipment, tooling, and fixtures purchased
for, and exclusive to, the Product production process will be
transferred to Cygnus upon payment.
C. Notwithstanding the foregoing, payments made under Section 14 B above
shall in no event exceed the aggregate price specified in the terminated portion
of the Agreement less payments otherwise previously made.
15. OWNERSHIP AND CONTROL OF MARKS
A. Cygnus may require Key Tronic to affix one or more of Cygnus'
trademarks or tradenames (the "Marks") to the Product. The Marks shall be
applied only in accordance with Cygnus' instructions. Key Tronic recognizes the
value of the goodwill associated with the Marks and acknowledges that the Marks,
and all rights therein, belong exclusively to Cygnus.
B. This Agreement shall not be construed as a grant of a license or an
assignment to Key Tronic of any right, title and/or interest in and to the
Marks. The Marks are and shall remain the exclusive property of Cygnus and at no
time shall Key Tronic acquire property rights or any interests therein.
C. As between the parties, Cygnus shall own all rights, title, and
interest in the Product, including without limitation, all patent rights,
copyrights, trade secret rights, mask work rights and other rights throughout
the world, collectively, "Proprietary Rights".
16. CONFIDENTIALITY
A. Each party agrees that all code, inventions, algorithms, source code,
schematics, test vectors, list of suppliers, know-how and ideas and all other
business, technical and financial information it obtains from the other which is
identified in writing as "Confidential" or "Proprietary" are the confidential
property of the disclosing party ("Proprietary Information" of the disclosing
party). Except as expressly allowed herein, the receiving party will hold in
strictest confidence and not use or disclose any Proprietary Information of the
disclosing party, shall take reasonable protective measures to insure same (and
at least the same measures it takes for its own Proprietary Information) and
shall similarly bind its employees in writing. The receiving party shall not be
obligated under this section with respect to information the receiving party can
document:
(1) is or has become readily publicly available without
restriction through no fault of the receiving party or its employees
or agents; or
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(2) is received without restriction from a third party lawfully in
possession of such information and lawfully empowered to disclose such
information; or
(3) was rightfully in the possession of the receiving party
without restriction prior to its disclosure by the other party; or
(4) was independently developed by employees or consultants of the
receiving party without access to such Proprietary Information; or
(5) is required to be disclosed by law or order of a court.
B. If either party breaches any of its obligations with respect to
confidentiality, the other party shall be entitled to equitable relief,
including specific performance or an injunction, in addition to any other rights
or remedies, including money damages provided by law.
C. During the term of this Agreement, Key Tronic will not directly or
indirectly engage in (or assist or encourage others in) the Diagnostics Field.
"Diagnostics Field" shall mean all applications for the detection of glucose in
connection with the diagnosis and treatment of diabetes in humans; however
currently available, whether through publication or commercialization, invasive
diagnostics applications are not included within the definition of "Diagnostics
Field."
17. LIMITATIONS ON WARRANTY AND LIABILITY
A. Except as expressly provided in this Agreement, Key Tronic disclaims
all other warranties, express or implied, or arising by course of dealing or
performance, custom, usage in the trade or otherwise, including without
limitation the implied warranties of merchantability, title and fitness for a
particular use.
B. In no event, whether as a result of breach of contract or otherwise,
shall either party be liable to the other party for any special, incidental,
consequential, or exemplary damages of any kind whether or not the other party
has been advised of the possibility of such damages.
18. GENERAL
A. CONFLICTING TERMS. The parties agree that the terms and conditions of
this Agreement shall prevail, notwithstanding contrary or additional terms in
any purchase order, sales acknowledgment, confirmation or any other document
issued by either party affecting the purchase and/or sale of Product.
B. ENTIRE AGREEMENT. This Agreement contains the entire understanding of
the parties with respect to the subject matter hereof and supersedes all prior
agreements relating thereto, written or oral, between the parties. Amendments to
this Agreement must be in writing, signed by the duly authorized agents of the
parties.
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C. ASSIGNMENT. Key Tronic may not assign or transfer, in whole or in part,
this Agreement or any of its rights or obligations arising hereunder without the
prior written consent of Cygnus.
D. COMPLIANCE WITH LAWS. Key Tronic warrants that in performance of work
under this Agreement it has complied with or will comply with all applicable
federal, state, local laws and ordinances enacted, including, but not limited
to, all laws which regulate any material because it is radioactive, toxic,
hazardous or otherwise a danger to health, reproduction or the environment. In
addition, Key Tronic shall secure and maintain adequate worker's compensation
insurance in accordance with the laws of the state or states from which Key
Tronic shall furnish Product for Cygnus. Upon request, Key Tronic agrees to
issue certificates certifying compliance with any of the aforementioned laws or
regulations as may be applicable to the Product being furnished hereunder.
E. CONTROLLING LAW. This Agreement shall be governed, controlled,
interpreted and defined by and under the laws of the State of California without
regard to the conflicts of laws provisions thereof.
F. RELATIONSHIP OF THE PARTIES. In fulfilling its obligations under this
Agreement, each party shall be acting as an independent contractor. This
Agreement does not make either party the employee, agent or legal representative
of the other.
G. SURVIVORSHIP. The terms and obligations of Sections 11, 13, 15, and 16,
17, and 18, as well as all applicable definitions shall survive termination or
expiration of this Agreement. Remedies for all breaches hereunder will also
survive.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first set forth above.
CYGNUS, INC. KEY TRONIC CORPORATION
<TABLE>
<S> <C>
By: /s/ Barbara G. Mcclung By: /s/ Ronald F. Klawitter
------------------------------------ --------------------------------
Barbara G. McClung Ronald F. Klawitter
- --------------------------------------- -----------------------------------
Printed Name Printed Name
Title: Senior. Vice President and General Counsel Title: Exec. Vice President of
-------------------------------------------- ----------------------------
Administration, CFO & Teas.
Date: 1/12/00 Date: January 20, 2000
---------------------------------------------- -----------------------
</TABLE>
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EXHIBIT A
PRODUCTS AND LEAD TIMES
[CONFIDENTIAL TREATMENT REQUESTED]
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EXHIBIT B
SPECIFICATION
[CONFIDENTIAL TREATMENT REQUESTED]
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EXHIBIT C
SENSOR ASSEMBLY WEB PRICING
[CONFIDENTIAL TREATMENT REQUESTED]
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EXHIBIT D
CONSIGNED MATERIAL
[CONFIDENTIAL TREATMENT REQUESTED]
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EXHIBIT E
QUALITY AGREEMENT
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EXHIBIT 10.206
SUPPLY AGREEMENT
This Supply Agreement ("Agreement") is entered as of December 31, 1999
("Effective Date") by and between Cygnus, Inc., a Delaware corporation, with its
principal place of business at 400 Penobscot Drive, Redwood City, California
94063 ("Cygnus"), and Hydrogel Design Systems Inc., a Delaware corporation, with
its principal place of business at 2150 Cabot Boulevard West, Langhorne,
Pennsylvania 19047 ("HDS").
Whereas, Cygnus is in the business of making and selling medical
devices to be used in conjunction with the monitoring of blood glucose levels in
the human body (hereinafter referred to as "Medical Devices");
Whereas, a component of these Medical Devices is a material known as
Hydrogel Laminate (as defined below);
Whereas, HDS is in the business of providing services for producing
Hydrogel Laminate;
Whereas, Cygnus wishes to purchase from HDS the specific Hydrogel
Laminate produced in strict compliance with specifications created by Cygnus and
set forth in Exhibit A, attached hereto and hereby made part of this Agreement
to be used by Cygnus in the manufacture of said Medical Devices;
NOW THEREFORE, in consideration of the above premises and the
mutual covenants contained herein, the Parties hereto agree as follows:
1. DEFINITIONS. When used in this Agreement, each of the following terms
shall have the meaning provided below:
a. "Affiliate" means, with respect to a Party hereto, any
corporation, partnership, joint venture or other business arrangement which is
controlled by, controlling or under common control with such Party, and shall
include without limitation any direct or indirect beneficial ownership of fifty
percent (50%) or more of the voting stock or participating profit interest of
such corporation or other business entity.
b. "Parties" means HDS and Cygnus and when used in the singular
means either of them.
c. "Hydrogel Laminate" means the hydrogel materials only for
glucose monitoring produced by HDS under this Agreement and as more specifically
set forth in Exhibit A attached hereto, including without limitation all
improvements made by HDS during the term of this Agreement.
d. "Specifications" means the performance specifications for the
Hydrogel Laminate as set forth in Exhibit A attached hereto including any
amendments thereto. It is agreed that the Specifications for the Hydrogel
Laminate may only be amended by Cygnus, and that HDS will
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strictly follow the specifications until advised of a change by Cygnus in
writing, such change being mutually agreed upon by Cygnus and HDS.
e. "HDS Technology" means all Technology relating solely to the
[CONFIDENTIAL TREATMENT REQUESTED] process for the manufacture of hydrogel
materials which was proprietary to, owned or developed by or for HDS prior to
the Effective Date and all improvements thereto and all such Technology and all
improvements invented solely by HDS during the term of this agreement. As
between the parties, HDS shall own all such HDS Technology.
f. "Cygnus Technology" means all Technology other than "HDS
Technology" owned or developed by or for Cygnus prior to the Effective Date
(including but not limited to the Hydrogel Laminate and the Specifications) and
all Technology and improvements thereto, which are invented by the Parties
either solely or jointly in connection with this Agreement. As between the
parties, Cygnus shall own all such Cygnus Technology.
g. "Technology" means all foreign and domestic patents, patent
applications, patent rights, know-how, trade secrets, copyrights, technical
data, inventions (whether patentable or not), discoveries, designs,
specifications, ideas, plans, works of authorship, techniques, methods,
procedures, processes, test procedures, trademarks, trade names, service marks
and all other scientific or technical information or materials, in whatever
form.
h. "Raw Materials" means those materials required to manufacture
Hydrogel Laminate.
2. SUPPLY OF PRODUCTS.
a. SUPPLY TO CYGNUS. During the first [CONFIDENTIAL TREATMENT
REQUESTED] years of the term of this Agreement HDS agrees to supply
[CONFIDENTIAL TREATMENT REQUESTED] of Cygnus' total worldwide commercial
requirements of Hydrogel Laminate solely to Cygnus and Cygnus agrees to
purchase [CONFIDENTIAL TREATMENT REQUESTED] of Cygnus' total worldwide
commercial requirements of Hydrogel Laminate from HDS in accordance with this
Section 2 and pursuant to the terms and conditions of this agreement.
Thereafter, HDS agrees to supply [CONFIDENTIAL TREATMENT REQUESTED] of
Cygnus' total worldwide commercial requirements of Hydrogel Laminate solely
to Cygnus and Cygnus agrees to purchase [CONFIDENTIAL TREATMENT REQUESTED] of
Cygnus' total worldwide commercial requirements of Hydrogel Laminate from HDS
in accordance with this Section 2 and pursuant to the terms and conditions of
this agreement. In the event that HDS is unwilling or unable to supply the
required amount of Product (pursuant to conditions in this Section above) in
the aggregate for [CONFIDENTIAL TREATMENT REQUESTED], the Parties shall
consult with each other within [CONFIDENTIAL TREATMENT REQUESTED] in order to
resolve the problem. HDS shall have [CONFIDENTIAL TREATMENT REQUESTED] from
the scheduled delivery date for the [CONFIDENTIAL TREATMENT REQUESTED] to
resolve the problem. If after this [CONFIDENTIAL TREATMENT REQUESTED] cure
period HDS is unwilling or unable to resolve the problem, Cygnus shall be
free to terminate this Agreement in its entirety as described in Section 7
hereto and/or shall be free to purchase
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Product from a third-party during said period of supply deficiency,
notwithstanding this Section 2.a. of this Agreement..
b. SUPPLY TO CYGNUS SUBCONTRACTORS. In the event that Cygnus
should choose to have its Affiliates or subcontractors purchase the Hydrogel
Laminate directly from HDS, HDS agrees to accept purchase orders directly from
Cygnus' Affiliates or subcontractors, provided however, that the terms and
conditions of this Agreement shall apply to those purchase orders and Cygnus
shall guarantee the performance of its Affiliates or subcontractors under such
purchase orders.
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c. FORECASTS. Cygnus shall send HDS by [CONFIDENTIAL TREATMENT
REQUESTED] of each year a non-binding, written estimate of the delivery
quantities and dates of Hydrogel Laminate to be purchased in the following
calendar year. Cygnus shall provide HDS with quarterly rolling written updates
on the non-binding forecasts for the following three months, during the term of
this Agreement. HDS shall not be obligated to supply Hydrogel Laminate in
accordance with Cygnus' non-binding quarterly forecasts until HDS has provided
written acknowledgment of Cygnus' non-binding quarterly forecasts to Cygnus,
such written acknowledgment to be provided within ten (10) days of receipt of
the forecasts. Based on the foregoing forecasts, HDS shall order Raw Materials
to meet up to two quarters of such forecasts.
d. ORDERS.
i. ORDERING AND ACKNOWLEDGMENT. In ordering Hydrogel Laminate from
HDS, Cygnus, its Affiliates or subcontractors shall issue
written purchase orders referencing and incorporating this
Agreement. Minimum order quantities, if any, are set forth in
Exhibit B attached hereto. Cygnus, its Affiliates or
subcontractors will provide HDS with a purchase order at least
forty-five (45) days prior to a requested delivery date for
Hydrogel Laminate. HDS will provide Cygnus, within three working
(3) days after receipt of an order, a firm shipment schedule and
an order acknowledgment. All orders shall be subject to
acceptance by HDS at its headquarters. HDS shall accept Cygnus',
its Affiliates' or subcontractors' purchase orders to the extent
that the purchase orders are in accordance with the most recent
non-binding quarterly forecast acknowledged by HDS pursuant to
Section 2(c) above. HDS shall accept purchase orders otherwise
in accordance with the provisions of this Agreement, provided
such purchase orders are for quantities of Hydrogel Laminate
which are not more or less than [CONFIDENTIAL TREATMENT
REQUESTED] of the most recent acknowledged non-binding quarterly
forecast. HDS shall use its best efforts to manufacture and ship
quantities of Hydrogel Laminate that exceed the most recent
acknowledged non-binding forecast by more than [CONFIDENTIAL
TREATMENT REQUESTED].
ii. SHIPMENT. HDS will use reasonable commercial efforts to ship
ordered Hydrogel Laminate on or five working days before the
date requested. HDS will be solely responsible for the costs of
expediting Hydrogel Laminate in order to meet the scheduled
shipment dates for each firm order (including, without
limitation, overtime charges, fees required to expedite Hydrogel
Laminate or services used in manufacturing), provided that
Cygnus has complied with the terms of this Agreement in placing
such order. HDS will use reasonable commercial efforts to meet
Cygnus' reasonable requests for orders of Hydrogel Laminate
which require short lead time or expedited shipment dates.
4
<PAGE>
iii. CHANGES. Except with respect to Raw Materials, Cygnus, its
Affiliates or subcontractors may, without being subject to a
cancellation fee, modification fee or any other fee or charge,
(1) cancel in whole or in part, or (2) extend the shipment
schedule set forth in any purchase order of Hydrogel Laminate,
provided that the ordering party provides HDS with written
notice of such cancellation or modification at least three (3)
weeks prior to the shipment date for such order. HDS will only
use reasonable efforts to accommodate cancellations or
modifications within three (3) weeks of shipment. Any
cancellation or extension permitted hereunder which, if accepted
by HDS, would result in any charge or cost associated with Raw
Materials shall be the sole responsibility of Cygnus. HDS
reserves the right to use any Raw Materials rendered surplus
pursuant to the terms of this Section 2(d).
e. PRICING AND PAYMENTS.
i. Pricing for units of Hydrogel Laminate sold to Cygnus is set
forth in Exhibit B and shall remain fixed for the term of this
agreement subject to changes in raw material costs as follows.
In the event that raw material costs change by [CONFIDENTIAL
TREATMENT REQUESTED] or more (either an increase or decrease)
from the cost identified on the Effective Date, HDS will adjust
the pricing by the amount of such cost change. Such price
changes will occur no more than once per three (3) month period
and shall be documented in writing by HDS. Raw material cost
changes of less than [CONFIDENTIAL TREATMENT REQUESTED] (either
an increase or decrease) shall be absorbed by HDS.
All prices are exclusive of any sales, use or other applicable
taxes, which shall be paid or reimbursed by Cygnus, its
Affiliates or subcontractors. If Cygnus claims such sales are
exempt from such taxes, then Cygnus, its Affiliates or
subcontractors shall furnish HDS with satisfactory evidence of
such exemption from such taxes.
ii. Payment terms will be net thirty (30) days after delivery of a
shipper's bill of lading to Cygnus for a shipment of Hydrogel
Laminate. HDS reserves the right to charge interest on overdue
balances in the amount of [CONFIDENTIAL TREATMENT REQUESTED] per
month.
iii. All Hydrogel Laminate is to be shipped F.O.B. HDS' Facility,
Langhorne, Pennsylvania, freight pre-paid and billed. Risk of
loss shall pass at the F.O.B. point.
f. CONFLICTING TERMS. In ordering and delivering Hydrogel
Laminate, HDS and its Affiliates and Cygnus, its Affiliates and subcontractors
may use their standard forms, however, nothing in such forms shall be construed
to amend or modify the terms of this Agreement. If Cygnus', its Affiliates' or
subcontractors' purchase order forms or HDS' order acknowledgement forms contain
terms that contradict or vary any terms contained in this Agreement, then the
terms of this Agreement shall prevail and control.
g. ACCEPTANCE PROCEDURES. Cygnus, its Affiliates or
subcontractors, shall inspect the Hydrogel Laminate within twenty (20) days of
its receipt. If Cygnus finds that the Hydrogel Laminate has a defect ("Defect"
meaning that such Hydrogel Laminate fails to conform to the applicable
Specifications or otherwise fail to conform to the warranties given by HDS under
this
5
<PAGE>
Agreement), Cygnus will notify HDS in writing. HDS agrees to promptly
investigate such reported defect and promptly provide to Cygnus, in writing the
findings of their investigation. If it is found that HDS is responsible for the
reported defect, HDS agrees to remedy such reported defect by supplying
replacement Hydrogel Laminate within a reasonable time period. If HDS fails to
remedy such reported defects within two months from the date of receipt of such
a report, then HDS agrees to issue a credit for the face amount of the affected
purchase order.
h. EXCLUSIVITY. During the term of this Agreement, HDS shall not
develop, manufacture, produce, or supply to any third parties any Hydrogel
Laminate. HDS shall not assign or delegate all or any portion of its obligations
under the terms of this Agreement without prior written consent of Cygnus at
Cygnus' sole discretion. HDS shall at all times remain fully responsible for all
obligations and commitments hereunder.
3. MANUFACTURING; TESTING
a. MANUFACTURING.
i. HDS will manufacture the Hydrogel Laminate such that it
meets the Specifications set forth in Exhibit A attached hereto.
ii. HDS shall at all times comply with all applicable current
FDA and other applicable government, regulatory and administrative agency
requirements for the manufacture of the Hydrogel Laminate for use in connection
with Medical Devices, including, without limitation, manufacturing all Hydrogel
Laminate in a facility which meets all applicable current Good Manufacturing
Practices ("cGMP") requirements. HDS shall permit Cygnus to audit and inspect
HDS's records (including, without limitation, copies of relevant licenses and
approvals) and facility from time to time for purposes of confirming the
foregoing compliance, and HDS shall promptly correct issues reasonably
identified by Cygnus as a result of such audit and inspection. HDS shall
indemnify, defend and hold Cygnus and its directors, officers, employees and
agents harmless from any liability, damages, claims, settlements, costs and
expenses for its failure to obtain and maintain relevant approvals and licenses
and for its failure to comply with any relevant government, regulatory or
administrative requirements relating to the manufacture of the Hydrogel
Laminate.
b. QUALITY CONTROL; TESTING. Prior to each shipment of Hydrogel
Laminate, HDS shall perform or cause to be performed quality control procedures,
as set forth the Quality Agreement Between HDS and Cygnus attached in Exhibit C
hereto. Each shipment of Hydrogel Laminate shall be accompanied by a
certificate, which contains the information as required by the Specification.
c. LATENT DEFECTS. It is recognized that it is possible for
Hydrogel Laminate to have defects which would not be discoverable upon
reasonable physical inspection or testing ("Latent Defects"). As soon as either
Party becomes aware of a Latent Defect in any lot or batch of Hydrogel Laminate,
it shall immediately notify the other Party in writing of the lot or batch
involved. HDS agrees to promptly investigate such reported defect and promptly
provide to Cygnus, in writing the findings of their investigation. If it is
found that HDS is responsible for the reported defect found after the inspection
described in Section 2(g) and within
6
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED] after receipt by Cygnus, its Affiliates or
subcontractors, then HDS will reimburse Cygnus for the total cost of the failed
materials plus all other costs incurred, including, but not limited to the costs
of other materials, subsequent processing costs, transportation costs, and the
costs of product recalls as are attributable to HDS' failure to provide
conforming Hydrogel Laminate. Such reimbursement in any [CONFIDENTIAL TREATMENT
REQUESTED] period is limited to the total value of the Hydrogel Laminate
purchased by Cygnus from HDS within the [CONFIDENTIAL TREATMENT REQUESTED]
period prior to the written notification of the defect.
4. CONFIDENTIALITY.
Each Party agrees that all inventions (whether or not patentable),
trade secrets, ideas, processes, formulas, materials, chemicals, technology,
know-how and all other business, technical and financial information it obtains
from the other are the confidential property of the disclosing Party
("Proprietary Information" of the disclosing Party). Except as expressly allowed
in this Agreement, (i) the receiving Party will hold in confidence and not use
or disclose any Proprietary Information of the disclosing Party during the term
of this Agreement and for a period of five (5) years after termination of this
Agreement, and its employees shall be similarly bound, and (ii) in addition,
with respect to HDS's obligations hereunder, HDS shall not allow the disclosure
or use of Cygnus Proprietary Information outside of HDS. The receiving Party
shall not be obligated under this Section 5 with respect to any information the
receiving Party can document:
a. is or has become readily publicly available through no
fault of the receiving Party or its employees or agents; or
b. is received from a third party lawfully in possession of
such information and lawfully empowered to disclose such information and
provided the receiving Party abides by all restrictions, if any, imposed by such
third party; or
c. was rightfully in the possession of the receiving Party
prior to its disclosure by the other Party as shown by the receiving Party's
written records provided the receiving Party abides by all restrictions, if any,
imposed on its possession of such information; or
d. was independently developed by employees or consultants of
the receiving Party as shown by the receiving Party's written records without
use of or access to Proprietary Information of the disclosing Party.
Notwithstanding the foregoing, the receiving Party may disclose Proprietary
Information to the extent it is required to be disclosed to a governmental
entity or agency in connection with seeking any governmental or regulatory
registration, approval or license, or pursuant to the lawful requirement or
request of a governmental entity or agency, provided that reasonable measures
are taken to obtain confidential treatment thereof and to guard against further
disclosure.
5. PRODUCT WARRANTY.
7
<PAGE>
HDS hereby covenants, represents and warrants to Cygnus that:
a. On the date of shipment, all Hydrogel Laminate sold by HDS to Cygnus
hereunder will comply with the Specifications set forth in Exhibit A or then
current Specification and conform with the information shown on the Certificate
of Conformance or Certificate of Analysis provided for the particular shipment
according to Section 3(b) above;
b. All Hydrogel Laminate sold hereunder shall have been manufactured,
packaged and stored in conformance with all applicable current Good
Manufacturing Practices which are in force or hereinafter adopted by the FDA or
any successor agency thereto;
c. Title to all Hydrogel Laminate sold hereunder shall pass to Cygnus
as provided herein free and clear of any security interest, lien, or other
encumbrance; and
d. The Hydrogel Laminate sold hereunder shall have been manufactured,
packaged and stored in facilities which meet the requirements set forth in the
Quality Agreement between HDS and Cygnus attached here to as Exhibit C. HDS has
no other obligation or duty other than the manufacture and supply of the
Hydrogel Laminate in accordance with the terms and conditions of this Agreement.
EXCEPT AS EXPRESSLY PROVIDED IN THIS SECTION, HDS MAKES NO REPRESENTATION OR
WARRANTY, EXPRESS OR IMPLIED, AS TO THE HYDROGEL LAMINATE, AND HDS HEREBY
EXPRESSLY DISCLAIMS ANY AND ALL IMPLIED OR STATUTORY WARRANTIES, INCLUDING
WITHOUT LIMITATION, WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR
PURPOSE.
6. LIMITATION OF LIABILITY.
EXCEPT FOR A BREACH OF SECTION 4 (CONFIDENTIALITY), NOTWITHSTANDING
ANYTHING ELSE IN THIS AGREEMENT OR OTHERWISE, NEITHER PARTY WILL BE LIABLE TO
THE OTHER WITH RESPECT TO ANY SUBJECT MATTER OF THIS AGREEMENT UNDER ANY
CONTRACT, TORT, STRICT LIABILITY OR OTHER LEGAL OR EQUITABLE THEORY FOR ANY
INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, EXCEPT IN THE CASE OF GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT.
THE PARTIES ACKNOWLEDGE THAT THE HYDROGEL LAMINATE ITSELF IS NOT A
MEDICAL DEVICE. THE PARTIES FURTHER ACKNOWLEDGE THAT THE HYDROGEL LAMINATE WILL
BE USED, PROCESSED OR INCORPORATED INTO OTHER GOODS BY CYGNUS AND ITS AFFILIATES
WHICH ARE MEDICAL DEVICES, WHICH MEDICAL DEVICES WILL BE SUBJECT TO REGULATION
BY THE UNITED STATES FOOD AND DRUG ADMINISTRATION (FDA). HDS SHALL NOT BE LIABLE
TO CYGNUS, ITS AFFILIATES, OR ANY THIRD PARTIES FOR ANY USE, PROCESS,
APPLICATION OR INCORPORATION INTO OTHER GOODS OF THE HYDROGEL LAMINATE AFTER IT
HAS BEEN ACCEPTED BY CYGNUS OR ITS AFFILIATES PURSUANT TO THE PROVISIONS OF THIS
AGREEMENT, WITH THE EXCEPTION OF THE PROVISIONS SET FORTH IN SECTIONS 3(c) AND
5(a)-(d) OF THIS AGREEMENT. HDS SHALL NOT BE LIABLE FOR ANY LIABILITY WHATSOEVER
RELATED TO THE
8
<PAGE>
ENFORCEMENT OF FDA REGULATIONS CONCERNING THE HYDROGEL LAMINATE AFTER ACCEPTANCE
BY CYGNUS OR ITS AFFILIATES.
THE FOREGOING PARAGRAPH IS A SEPARATE ESSENTIAL PROVISION OF THIS
AGREEMENT.
7. TERM AND TERMINATION.
a. TERM. This Agreement will commence as of the Effective Date and,
unless terminated as provided below, shall continue in effect for a period of
five (5) years. Thereafter, this Agreement shall automatically renew for
successive one (1) year terms, unless terminated as provided below, and provided
that either Party may elect not to renew this Agreement by providing the other
Party with six (6) months written notice prior to the corresponding renewal
period.
b. TERMINATION.
i. This Agreement may be terminated in its entirety by a Party
upon the occurrence of any of the following events:
(1) By a Party upon thirty (30) days' written
notice if there has been a material breach of any representation, warranty,
product warranty, covenant or obligation contained in this Agreement on the part
of the other Party provided the non-breaching Party has given written notice to
the breaching Party and afforded a thirty (30) day cure period and the breaching
Party has failed to cure the alleged breach within the thirty (30) days.
(2) If the other ceases to do business, or
otherwise terminates its business operations;
(3) If the other shall fail to promptly secure or
renew any license, registration, permit, authorization or approval necessary for
the conduct of its business in the manner contemplated by this Agreement, or if
any such license, registration, permit, authorization or approval is revoked or
suspended and not reinstated within sixty (60) days or if reinstatement is not
possible within sixty (60) days, diligent efforts are not being made to effect
such reinstatement, and any such failure shall have a material adverse affect on
that Party's performance under this Agreement; or
(4) If the other shall seek protection under any
bankruptcy, receivership, trust deed, creditors arrangement, composition or
comparable proceeding, or if any such proceeding is instituted against the other
(and not dismissed within one hundred and twenty (120) days).
c. NO LIABILITY FOR TERMINATION. Except as otherwise provided in
this Agreement, neither Party shall incur any liability whatsoever for any
damage, loss or expenses of any kind suffered or incurred by the other (or for
any compensation to the other) arising from or incident to any termination of
this Agreement by such Party which complies with the terms of this Agreement,
whether or not such Party is aware of any such damage, loss or expenses.
9
<PAGE>
d. EFFECT OF TERMINATION. In addition to provisions that by their
terms survive termination, the following provisions shall survive the
termination of this Agreement: Sections 3(c), 4, 5, 6, 7, 8 and 9 and accrued
payment obligations. Remedies for all breaches hereunder will also survive. Each
Party will promptly return all Proprietary Information of the other (and all
copies and abstracts thereof, except that one (1) copy may be retained and shall
be kept in its legal archives for legal record keeping purposes only) that it is
not entitled to under the surviving terms of this Agreement. Upon termination by
either Party pursuant to Section 7(b) i (1), Cygnus shall have the right to
purchase HDS' existing inventory of Hydrogel Laminate at the then applicable
prices. Further, within sixty (60) days after termination, Cygnus shall have the
right place purchase orders for Product, delivery of such Product to be within
nine (9) months of termination, pursuant to the terms of this agreement. HDS
shall, in good faith, use reasonable commercial efforts to assist Cygnus in
securing a replacement supplier of the Hydrogel Laminate.
8. INDEMNIFICATION AND INSURANCE.
a. INDEMNIFICATION. Cygnus agrees to indemnify and hold harmless
HDS, its officers, directors, shareholders, employees, parents and subsidiaries,
successors and assigns from any loss, judgment, liability, damage, claim,
demand, lawsuit, or injury whether to person or property, arising out of any
claim, lawsuit or legal proceeding, and regardless of the legal theory asserted,
involving the sale, use or other disposition by Cygnus of the Hydrogel Laminate
either directly or as a component in any product or good; provided however,
Cygnus shall have no obligation under this Section 8(a) for any claim arising
from the gross negligence or willful misconduct of HDS, infringement of any
third party rights by any aspect of the Hydrogel Laminate that relates solely to
Hydrogel Technology, any aspect of the Hydrogel Laminate based upon manufacture
by HDS and provided further, Cygnus' obligations hereunder are conditioned upon
and subject to (i) prompt receipt of notice from HDS of any claim, threatened
claim or action, (ii) Cygnus having sole control of any litigation or settlement
of such claim or action, and (iii) HDS' reasonable cooperation in the defense of
such claim or action.
b. INSURANCE. HDS shall procure and maintain policies of
insurance to cover any and all claims that may arise from or in connection with
HDS' use, manufacture, sale or distribution of the Hydrogel Laminate to Cygnus
or its Affiliates. Cygnus and its Affiliates shall procure and maintain policies
of insurance to cover any and all claims that may arise from or in connection
with Cygnus' and its Affiliates' use, processing, sale, or distribution of
Hydrogel Laminate and/or goods produced or distributed by Cygnus or its
Affiliates which incorporate the Hydrogel Laminate. Such insurance coverage
under this Section 8(b) shall be in the amount of not less than [CONFIDENTIAL
TREATMENT REQUESTED]. The parties shall furnish each other with a certificate of
insurance evidencing such insurance coverage.
9. GENERAL.
a. AMENDMENT AND WAIVER. Except as otherwise expressly provided
herein, any provision of this Agreement may be amended and the observance of any
provision of this Agreement may be waived (either generally or in any particular
instance and either retroactively or prospectively) only with the written
consent of both Parties. However, it is the intention of the Parties that this
Agreement be controlling over additional or different terms of any purchase
10
<PAGE>
order, confirmation, invoice or similar document, even if accepted in writing by
both Parties, and that waivers and amendments of any provision of this Agreement
shall be effective only if made by non-pre-printed agreements signed by both
Parties and clearly understood by both Parties to be an amendment or waiver. The
failure of either Party to enforce its rights under this Agreement at any time
for any period shall not be construed as a waiver of such rights.
b. GOVERNING LAW AND LEGAL ACTIONS. This Agreement shall be
governed by and construed under the laws of the State of Delaware and the United
States without regard to conflicts of laws provisions thereof.
c. HEADINGS. Headings and captions are for convenience only and
are not to be used in the interpretation of this Agreement.
d. NOTICES. Any notice or other communication required or
permitted to be made or given to either Party under this Agreement shall be
deemed sufficiently made or given on the date of delivery if delivered in person
or by overnight commercial courier service with tracking capabilities with costs
prepaid, or three (3) days after the date of mailing if sent by certified first
class U.S. mail, return receipt requested and postage prepaid, at the address of
the Parties set forth below or such other address as may be given from time to
time under the terms of this notice provision:
If to HDS: HDS
2150 Cabot Boulevard. West
Langhorne, PA 19047
Attention: President and CEO
If to Cygnus: Cygnus, Inc.
400 Penobscot Drive
Redwood City, California 94063
Attention: President and CEO
e. ENTIRE AGREEMENT. This Agreement (and all Exhibits hereto)
constitutes the entire understanding and agreement with respect to the subject
matter hereof and supersedes all proposals, oral or written, all negotiations,
conversations, or discussions, with the exception of the Confidential Disclosure
Agreement, effective January 1, 1997, the Extension Letter thereto, dated
February 5, 1997 and Amendment #1 to the Confidential Disclosure Agreement,
dated February 8, 1999, shall remain in full force and effect, between or among
Parties relating to the subject matter of this Agreement and all past dealing or
industry custom. No other rights or licenses, except those rights set forth in
this Agreement, have been granted or implied to be granted.
f. SEVERABILITY. If any provision of this Agreement is held to be
illegal or unenforceable, that provision shall be limited or eliminated to the
minimum extent necessary so
11
<PAGE>
that this Agreement shall otherwise remain in full force and effect and
enforceable.
g. RELATIONSHIP OF PARTIES. The Parties hereto expressly
understand and agree that the other is an independent contractor in the
performance of each and every part of this Agreement, is solely responsible for
all of its employees and agents and its labor costs and expenses arising in
connection therewith.
h. ASSIGNMENT. This Agreement and the rights hereunder are not
transferable or assignable without the prior written consent of the Parties
hereto.
i. PUBLICITY AND PRESS RELEASES. Except to the extent necessary
under applicable laws or for ordinary marketing purposes, the Parties agree that
no press releases or other publicity relating to the substance of the matters
contained herein will be made without approval by both Parties.
j. FORCE MAJEURE. No liability or loss of rights hereunder shall
result to either Party from delay or failure in performance caused by an event
of force majeure (that is, circumstances beyond the reasonable control of the
Party affected thereby, including, without limitation, acts of God, fire, flood,
war, government action, compliance with laws or regulations (including, without
limitation, those related to infringement), strikes, lockouts or other serious
labor disputes) for so long as such event of force majeure continues in effect;
provided that if such force majeure event continues and affects or delays a
Party's performance hereunder for more than sixty (60) days, the other Party may
terminate this Agreement pursuant to Section 8(b).
k. REMEDIES. Except as otherwise expressly stated in this
Agreement, the rights and remedies of a Party set forth herein with respect to
failure of the other to comply with the terms of this Agreement (including,
without limitation, rights of full termination of this Agreement) are not
exclusive, the exercise thereof shall not constitute an election of remedies and
the aggrieved Party shall in all events be entitled to seek whatever additional
remedies may be available in law or in equity.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of the
Effective Date.
CYGNUS, INC. HYDROGEL DESIGN SYSTEMS INC.
By: /s/ Barbara G. McClung By: /s/ Matthew Harriton
------------------------------------ ----------------------------
Name: Barbara G. McClung Name: Matthew Harriton
---------------------------------- --------------------------
Title: Sr. VP & General Counsel Title: CEO
--------------------------------- -------------------------
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<PAGE>
EXHIBIT A
SPECIFICATIONS
[CONFIDENTIAL TREATMENT REQUESTED]
13
<PAGE>
EXHIBIT B
PRICING FOR HYDROGEL LAMINATE
[CONFIDENTIAL TREATMENT REQUESTED]
14
<PAGE>
EXHIBIT C
QUALITY AGREEMENT BETWEEN HDS AND CYGNUS
15
<PAGE>
EXCLUSIVE LICENSE AGREEMENT
between
THE REGENTS OF THE UNIVERSITY OF CALIFORNIA
and
CYGNUS THERAPEUTIC SYSTEMS, INC.
for
DEVICE FOR IONTOPHORETIC NON-INVASIVE SAMPLING
OR DELIVERY OF SUBSTANCES
U.C. Case No. 87-162
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
BACKGROUND .................................................................1
1. DEFINITIONS .......................................................2
2. EXCLUSIVE LICENSE GRANT ...........................................5
3. SUBLICENSES .......................................................6
4. LICENSE ISSUE FEE .................................................7
5. ROYALTIES .........................................................7
6. DUE DILIGENCE ....................................................13
7. PROGRESS AND ROYALTY REPORTS .....................................16
8. BOOKS AND RECORDS ................................................18
9. LIFE OF THE AGREEMENT ............................................19
10. TERMINATION BY THE REGENTS .......................................20
11. TERMINATION BY THE LICENSEE ......................................20
12. DISPOSITION OF LICENSED PRODUCTS ON
HAND UPON TERMINATION ............................................21
13. USE OF NAMES, TRADEMARKS, AND CONFIDENTIAL
INFORMATION ......................................................21
14. LIMITED WARRANTY .................................................22
15. PATENT PROSECUTION AND MAINTENANCE ...............................23
16. PATENT MARKING ...................................................28
17. PATENT INFRINGEMENT ..............................................28
18. INDEMNIFICATION ..................................................31
19. NOT ICES .........................................................32
20. ASSIGNABILITY ....................................................33
21. LATE PAYMENTS ....................................................33
22. WAIVER ...........................................................34
<PAGE>
23. FAILURE TO PERFORM ...............................................34
24. GOVERNING LAWS ...................................................34
25. FOREIGN GOVERNMENT APPROVAL OR REGISTRATION ......................34
26. EXPORT CONTROL LAWS ..............................................35
27. FORCE MAJEURE ....................................................35
28. CONFIDENTIALITY ..................................................35
29. INFRINGEMENT UNDER DRUG PRICE COMPETITION ACT ....................37
30. MISCELLANEOUS ....................................................39
</TABLE>
<PAGE>
UC Case No. 87-162
EXCLUSIVE LICENSE AGREEMENT
for
DEVICE FOR IONTOPHORETIC NONINVASIVE
SAMPLING OR DELIVERY OF SUBSTANCES
THIS EXCLUSIVE LICENSE AGREEMENT (the "Agreement") is made and is
effective this 31st day of January, 1995, ("Effective Date") by and between THE
REGENTS OF THE UNIVERSITY OF CALIFORNIA, a California corporation having its
statewide administrative offices at 300 Lakeside Drive, 22nd Floor, Oakland,
California 94612-3550 (hereinafter referred to as "The Regents"), and Cygnus
Therapeutic Systems, a California corporation having a principal place of
business at 400 Penobscot Drive, Redwood City, California 94063 (hereinafter
referred to as the "Licensee").
BACKGROUND
Certain inventions, generally characterized as a noninvasive
continuous iontophoretic blood monitor/drug delivery system (hereinafter
collectively referred to as the "Invention") were made in the course of research
at the University of California, San Francisco, by Dr. Richard Guy, Dr.
Christopher Cullander, Dr. Peretz Glikfeld, Dr. Robert Hinz, and Dr. Girish Rao
(collectively, "Inventors") and are covered by Regents' Patent Rights as defined
below.
Inventors have assigned their interest in the patent rights in the
Invention to The Regents subject to University of California Patent Policy.
<PAGE>
The Licensee entered into a Secrecy Agreement (U.C. Control NO.
88-20-0315) with The Regents, effective December 14, 1988, and terminating on
December 14, 1993, for the purpose of evaluating the Invention.
The Licensee entered into an Option Agreement (U.C. Control No.
90-11-0352) with The Regents, effective August 29, 1990, and terminating on
September 30, 1994, for the purpose of evaluating the Invention.
The Licensee is a "small business firm" as defined in 15 U.S.C. 632.
The Licensee is desirous of obtaining certain exclusive rights from
The Regents for the commercial development, manufacture (including the right to
have manufactured), use, and sale of the Invention, and The Regents is willing
to grant such rights.
Both parties recognize and agree that royalties due hereunder will be
paid on both pending patent applications for a limited time and issued patents
under Regents' Patent Rights.
The Regents is desirous that the Invention be developed and utilized
to the fullest extent so that the benefits can be enjoyed by the general public.
The parties agree as follows:
1. DEFINITIONS
1.1 "Regents' Patent Rights" means all U.S. and foreign patent rights
to any subject matter claimed in or covered by any of the following:
(a) U.S. Patent Application serial no. 150,159, filed 29 Jan 88,(abandoned) by
Dr. Richard Guy, et al., and assigned to The Regents; (b) U.S. Patent
Application serial no. 299,397, filed 24 Jan 89, as a continuation-in-part
application of (a), (abandoned) by Dr. Richard Guy, et al., and assigned to The
Regents;
(c) U.S. Patent Application serial no. 771,483, filed 04 Oct 91, as a
continuation-in-part of (b) (now allowed) by Dr. Richard Guy, et al., and
assigned to The Regents;
2
<PAGE>
(d) U.S. Patent No. 5,279,543, issued 18 Jan 94, which was a file wrapper
continuation application of (b), by Dr. Richard Guy, et al, and assigned to
The Regents;
and continuing applications thereof including divisions and substitutions but
including continuation-in-part applications only to the extent that the claim
was supported in the original disclosure; any patents issuing on said
application or continuing applications including reissues and extensions; and
any corresponding foreign applications or patents.
1.2 "Licensed Product" [CONFIDENTIAL TREATMENT REQUESTED]
1.3 "Licensed Method" [CONFIDENTIAL TREATMENT REQUESTED]
1.4 "Net Sales" means the total of the gross invoice prices of
Licensed Products sold (excluding Licensed Products used, given away or sold at
the Licensee's cost as samples or clinical supplies) LESS: (i) THE SUM of the
following actual and customary deductions where applicable and actually taken,
cash, trade, or quantity discounts; sales, use, tariff, import/export duties, or
other excise taxes imposed upon particular sales; transportation charges
(including insurance) and allowances or credits to customers because of
rejections or returns; and (ii) A PORTION of the resulting revenue equal to the
total revenue from distribution of Licensed Product if used in combination with
or as a component of other products multiplied by the fraction A/(A+B), where A
is the retail price specified in the Licensee's published retail price list as
of the end of the applicable period ("Retail Price") for the amount of the other
product or components used in the combination when distributed separately and B
is the Retail Price for the amount of the Licensed Product used in the
combination when distributed separately.
1.5 "Sales Year" means the twelve- (12-) month period immediately
following the first bona fide commercial sale of a Licensed Product, and each
twelve- (12-) month period thereafter.
1.6 "Affiliate" means any corporation or other business entity in
which the Licensee has the actual, present capacity to elect a majority of
directors of such Affiliate or in which the Licensee
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shall own or control, directly or indirectly, at least fifty percent (50%) of
the outstanding stock or other voting rights entitled to elect directors
provided, however, that in any country where the local law shall not permit
foreign equity participation of at least fifty percent (50%), then an
"Affiliate" shall include any company in which the Licensee shall own or
control, directly or indirectly, the maximum percentage of such outstanding
stock or voting rights permitted by local law.
1.7 "Marketing Partner" [CONFIDENTIAL TREATMENT REQUESTED]
1.8 "Sublicensee" means any third party to whom the Licensee grants
the right to make, have made, use, or sell Licensed Products or to practice
Licensed Method.
2. EXCLUSIVE LICENSE GRANT
2.1 Subject to the limitations set forth in this Agreement, The
Regents hereby grants to the Licensee a worldwide license under Regents' Patent
Rights to make, have made, use, sell, and distribute Licensed Products and to
practice Licensed Method.
2.2 Except as otherwise provided herein, the license granted in
Section 2.1 shall be exclusive for the life of the Agreement.
2.3 The Regents expressly reserves the right to use the Invention and
associated technology solely for educational and research purposes.
3. SUBLICENSES
3.1 The Regents also grants to the Licensee the right to issue
sublicenses to third parties to make, have made, use, sell, and distribute
Licensed Products and to practice the Licensed Method provided the Licensee has
current exclusive rights thereto under this Agreement. Subject to Section 3.2
below, to the extent applicable, such sublicenses shall include all of the
rights of and obligations due to The Regents that are contained in this
Agreement (including, but not limited to, the royalty rates set forth in Article
5, [ROYALTIES] herein).
3.2 The Licensee shall notify The Regents of each sublicense granted
hereunder and provide The Regents with a summary
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of the major terms of each sublicense. The Licensee shall pay and guarantee
payment of all royalties due The Regents received from Sublicensees and deliver
all reports due The Regents received from Sublicensees. Sublicensees shall not
be required to assume the obligations due to The Regents under Paragraph 5.7
(MINIMUM ANNUAL ROYALTIES) and Articles 4 (LICENSE ISSUE FEE), 6 (DUE
DILIGENCE), 15 (PATENT PROSECUTION AND MAINTENANCE), and 25 (FOREIGN GOVERNMENT
APPROVAL OR REGISTRATION). However, under any sublicense, Sublicensee shall at
least be obligated to the Licensee under Paragraphs 6.1, 6.2 (DUE DILIGENCE),
and 18.2 (INDEMNIFICATION), and Articles 15 (PATENT PROSECUTION AND MAINTENANCE)
and 25 (FOREIGN GOVERNMENT APPROVAL OR REGISTRATION).
3.3 Upon termination of this Agreement for any reason, any and all
sublicenses that are granted by the Licensee pursuant to this Agreement will
remain in effect and shall be assigned to The Regents, except that The Regents
shall not be bound by any duties or obligations set forth in such sublicenses
that extend beyond the duties and obligations of The Regents provided for in
this Agreement, and the Sublicensee must assume all the obligations due to The
Regents under this Agreement.
4. LICENSE ISSUE FEE
4.1 [CONFIDENTIAL TREATMENT REQUESTED]
4.2 [CONFIDENTIAL TREATMENT REQUESTED]
5. ROYALTIES
5.1 [CONFIDENTIAL TREATMENT REQUESTED]
5.2 [CONFIDENTIAL TREATMENT REQUESTED]
5.3 [CONFIDENTIAL TREATMENT REQUESTED]
5.4 [CONFIDENTIAL TREATMENT REQUESTED]
5.5 [CONFIDENTIAL TREATMENT REQUESTED]
5.6 [CONFIDENTIAL TREATMENT REQUESTED]
[CONFIDENTIAL TREATMENT REQUESTED]
[CONFIDENTIAL TREATMENT REQUESTED]
[CONFIDENTIAL TREATMENT REQUESTED]
[CONFIDENTIAL TREATMENT REQUESTED]
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[CONFIDENTIAL TREATMENT REQUESTED]
5.7 [CONFIDENTIAL TREATMENT REQUESTED]
5.8 [CONFIDENTIAL TREATMENT REQUESTED]
5.9 [CONFIDENTIAL TREATMENT REQUESTED]
5.10 [CONFIDENTIAL TREATMENT REQUESTED]
5.11 [CONFIDENTIAL TREATMENT REQUESTED]
5.12 [CONFIDENTIAL TREATMENT REQUESTED]
5.13 [CONFIDENTIAL TREATMENT REQUESTED]
6. DUE DILIGENCE
6.1 The Licensee, upon execution of this Agreement, shall diligently
proceed with the development, manufacture, and sale of Licensed Products and
shall earnestly and diligently endeavor to market the same within a reasonable
time after execution of this Agreement and in quantities sufficient to meet the
market demands therefor.
6.2 The Licensee shall be entitled to exercise prudent and reasonable
business judgment in meeting all of its due diligence obligations hereunder.
6.3 The Licensee shall endeavor to obtain all necessary governmental
approvals for the manufacture, use and sale of Licensed Products.
6.4 [CONFIDENTIAL TREATMENT REQUESTED]
6.4.1 [CONFIDENTIAL TREATMENT REQUESTED]
6.4.2 [CONFIDENTIAL TREATMENT REQUESTED]
6.4.3 [CONFIDENTIAL TREATMENT REQUESTED]
6.4.4 [CONFIDENTIAL TREATMENT REQUESTED]
6.4.5 [CONFIDENTIAL TREATMENT REQUESTED]
6.4.6 [CONFIDENTIAL TREATMENT REQUESTED]
6.4.7 [CONFIDENTIAL TREATMENT REQUESTED]
6.5 It is envisioned that the first Licensed Products will be for the
monitoring of glucose in the bloodstream. However, The Regents may from time to
time identify in writing to the Licensee other [CONFIDENTIAL TREATMENT
REQUESTED]. The Licensee agrees that if Inventors wish to pursue research
funding to support the development
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of a monitor/delivery device for the [CONFIDENTIAL TREATMENT REQUESTED], the
Licensee shall have [CONFIDENTIAL TREATMENT REQUESTED]from the date of
notification from The Regents identifying [CONFIDENTIAL TREATMENT REQUESTED]
to commit sufficient research support to The Regents for such development,
and the Licensee agrees to negotiate with The Regents a development and
regulatory timetable similar to that in Section 6.4 above. If the Licensee
declines to commit to support and to diligently develop the Invention for the
identified sampling[CONFIDENTIAL TREATMENT REQUESTED], The Regents shall have
the right to terminate this license with regard to the
[CONFIDENTIAL TREATMENT REQUESTED]. This right, if exercised by The Regents,
supersedes the rights granted in Article 2 (GRANT). If The Regents terminates
this Agreement with respect to such [CONFIDENTIAL TREATMENT REQUESTED]and
does not license such [CONFIDENTIAL TREATMENT REQUESTED]to a third party, The
Licensee's right to commit sufficient reasonable research support to The
Regents for the development of such [CONFIDENTIAL TREATMENT REQUESTED] in
order to maintain such [CONFIDENTIAL TREATMENT REQUESTED] in the license
granted to the Licensee under this Agreement shall automatically be
reinstated.
6.6 [CONFIDENTIAL TREATMENT REQUESTED]
7. PROGRESS AND ROYALTY REPORTS
7.1 Beginning February 28, 1995, and [CONFIDENTIAL TREATMENT
REQUESTED]thereafter, the Licensee shall submit to The Regents a progress report
covering the Licensee's activities related to the development and testing of all
Licensed Products and the obtaining of the governmental approvals necessary for
marketing. These progress reports shall be made for each Licensed Product until
the first commercial sale of that Licensed Product occurs in the United States.
7.2 The progress reports submitted under Section 7.1 should include,
but not be limited to, the following topics:
- summary of work completed
- key scientific discoveries
- summary of work in progress
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- current nonbinding, good- faith schedule of anticipated events or
milestones
- market plans for introduction of Licensed Products, and
- a summary of resources (dollar value) spent in connection with the
Licensed Product during the reporting period.
7.3 The Licensee shall have a continuing responsibility to keep The
Regents informed of the large/small entity status (as defined by the United
States Patent and Trademark Office) of itself and its Sublicensees.
7.4 The Licensee also agrees to report to The Regents in its
immediately subsequent progress and royalty report the date of first commercial
sale of a Licensed Product in each country.
7.5 After the first commercial sale of a Licensed Product anywhere in
the world, the Licensee will provide The Regents with quarterly royalty reports
on or before each February 28, May 31, August 31, and November 30 of each year.
Each such royalty report will cover the Licensee's most recently completed
calendar quarter and will show: (a) the gross sales and Net Sales of Licensed
Products sold by the Licensee during the most recently completed calendar
quarter, (b) the number of each type of Licensed Product sold by the Licensee
during the most recently completed calendar quarter, (c) the royalties, in U.S.
dollars, payable hereunder with respect to such Net Sales of Licensed Products,
(d) the method used to calculate the royalty, and (e) the exchange rates used,
if any.
7.6 If no sales of Licensed Products have been made during any
reporting period after the first commercial sale of Licensed Products, a
statement to this effect shall be required.
8. BOOKS AND RECORDS
8.1 The Licensee shall keep books and records accurately showing all
Licensed Products manufactured, used, and/or sold under the terms of this
Agreement (for the purposes of showing the amount of royalties payable to The
Regents and the Licensee's compliance with the other provisions under this
Agreement). Such books and records shall be preserved for at least five (5)
years from the date of the royalty payment to which they pertain and shall be
open to
8
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inspection and audit only by an independent certified public accountant retained
by The Regents at reasonable times during normal business hours, upon reasonable
notice. Subject to the California Public Records Act, such independent certified
public accountant shall be bound to hold all information in confidence except as
necessary to communicate the Licensee's non-compliance with this Agreement to
The Regents. The purpose of any inspection and audit pursuant to this Paragraph
8.1 shall be to verify the Licensee's royalty statements or compliance in other
respects with this Agreement.
8.2 The fees and expenses of The Regents' independent certified public
accountant performing such an examination shall be borne by The Regents.
However, if an error in royalties of more than [CONFIDENTIAL TREATMENT
REQUESTED] of the total royalties due for any year is discovered, then the fees
and expenses of these independent certified public accountant shall be borne by
the Licensee.
9. LIFE OF THE AGREEMENT
9.1 Unless otherwise terminated by operation of law or by acts of the
parties in accordance with the terms of this Agreement, this Agreement shall be
in force from the Effective Date recited on page one and shall remain in effect
for the life of the last-to-expire patent licensed under this Agreement.
9.2 Any termination of this Agreement shall not affect the rights and
obligations set forth in the following Articles:
Paragraph 3.2 Sublicenses
Article 8 Books and Records
Article 9 Life of the Agreement
Article 12 Disposition of Licensed Products on
Hand Upon Termination
Article 13 Use of Names, Trademarks, and
Confidential Information
Article 18 Indemnification
Article 23 Failure to Perform
Article 28 Confidentiality
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10. TERMINATION BY THE REGENTS
10.1 If the Licensee should violate or fail to perform any material
term or covenant of this Agreement, then The Regents may give written notice
of such default (Notice of Default) to the Licensee. If the Licensee should
fail to repair such default within [CONFIDENTIAL TREATMENT REQUESTED]of the
effective date of such notice, The Regents shall have the right to terminate
this Agreement and the licenses herein by a second written notice (Notice of
Termination) to the Licensee. If a Notice of Termination is sent to the
Licensee, this Agreement shall automatically terminate on the effective date
of such notice. Such termination shall not relieve the Licensee of its
obligation to pay any royalty or license issue fees owing at the time of such
termination and shall not impair any accrued right of The Regents. These
notices shall be subject to Article 19 (Notices).
11. TERMINATION BY THE LICENSEE
11.1 The Licensee shall have the right at any time to terminate this
Agreement in whole or as to any portion of Regents' Patent Rights by giving
notice in writing to The Regents. Such notice of termination shall be subject to
Article 19 (Notices), and termination of this Agreement shall be effective
[CONFIDENTIAL TREATMENT REQUESTED]from the effective date of such notice. If
such termination is without cause within the [CONFIDENTIAL TREATMENT
REQUESTED]of this Agreement, Licensee shall pay The Regents [CONFIDENTIAL
TREATMENT REQUESTED] ("[CONFIDENTIAL TREATMENT REQUESTED]") with the notice of
termination before such notice is effective, except that if the Licensee can
provide The Regents with written evidence satisfactory to The Regents that there
is good cause for termination of this Agreement by the Licensee, such as, for
example and without limitation, the refusal of the FDA to grant regulatory
approval of a Licensed Product or the inability of the Licensee to overcome
technical obstacles in the commercialization of a Licensed Product, then the
Licensee will not be required to pay the Relicense Fee.
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<PAGE>
11.2 Any termination pursuant to the above Paragraph 11.1 shall not
relieve the Licensee of any obligation or liability accrued hereunder prior to
such termination or rescind anything done by the Licensee or any payments made
to The Regents hereunder prior to the time such termination becomes effective,
and such termination shall not affect in any manner any rights of The Regents
arising under this Agreement prior to such termination.
12. DISPOSITION OF LICENSED PRODUCTS ON HAND UPON TERMINATION
12.1 Upon termination of this Agreement, the Licensee shall have the
privilege of disposing of all previously made or partially made Licensed
Products, but no more, within a period of one hundred and twenty (120) days
following the effective date of termination, provided, however, that the sale of
such Licensed Products shall be subject to the terms of this Agreement
including, but not limited to, the payment of royalties at the rate and at the
time provided herein and the rendering of reports thereon.
13. USE OF NAMES, TRADEMARKS, AND CONFIDENTIAL INFORMATION
13.1 Nothing contained in this Agreement shall be construed as
conferring any right to use in advertising, publicity, or other promotional
activities any name, trade name, trademark, or other designation of either party
hereto (including any contraction, abbreviation, or simulation of any of the
foregoing). Unless required by law or consented to in writing by The Regents,
the use by the Licensee of the name "The Regents of the University of
California" or the use by the Licensee of the name of any campus of the
University of California is expressly prohibited.
13.2 It is understood that The Regents shall be free to release to the
Inventors and senior administrative officials employed by The Regents the terms
and conditions of this Agreement upon their request. If such release is made,
The Regents shall request that such terms and conditions not be disclosed to
others. It is further understood that should a third party inquire whether a
license to Regents' Patent Rights is available, The Regents may disclose the
existence of this Agreement and the extent of the grant in Article 2 (GRANT) to
such third party, but shall not disclose the name of the
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<PAGE>
Licensee except where The Regents is required to release such information under
either the California Public Records Act or other applicable law.
14. LIMITED WARRANTY
14.1 The Regents warrants to the Licensee that it has the lawful right
to grant this license.
14.2 This license and the associated Invention are provided WITHOUT
WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY OTHER
WARRANTY, EXPRESS OR IMPLIED. THE REGENTS MAKES NO REPRESENTATION OR WARRANTY
THAT THE LICENSED PRODUCTS OR LICENSED METHODS WILL NOT INFRINGE ANY PATENT OR
OTHER PROPRIETARY RIGHT.
14.3 IN NO EVENT WILL THE REGENTS BE LIABLE FOR ANY INCIDENTAL,
SPECIAL, OR CONSEQUENTIAL DAMAGES RESULTING FROM EXERCISE OF THIS LICENSE OR THE
USE OF THE INVENTION OR LICENSED PRODUCTS.
14.4 Nothing in this Agreement shall be construed as:
(14.4.1) a warranty or representation by The Regents as to the
validity or scope of any Regents' Patent Rights; or
(14.4.2) a warranty or representation that anything made, used, sold,
or otherwise disposed of under any license granted in this
Agreement is or will be free from infringement of patents of
third parties; or
(14.4.3) an obligation to bring or prosecute actions or suits against
third parties for patent infringement except as provided in
Article 17; or
(14.4.4) conferring by implication, estoppel, or otherwise any
license or rights under any patents of The Regents other
than Regents' Patent Rights as defined herein, regardless of
whether such patents are dominant or subordinate to Regent's
Patent Rights; or
(14.4.5) an obligation to furnish any know-how not provided in
Regents' Patent Rights.
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15. PATENT PROSECUTION AND MAINTENANCE
15.1 The Regents shall diligently prosecute and maintain the United
States patents comprising Regents' Patent Rights using counsel of its choice. If
both The Regents and the Licensee are not reasonably satisfied with such
counsel, The Regents shall replace such counsel with new counsel reasonably
acceptable to both parties. If the Licensee rejects The Regents' choice of new
counsel three times consecutively (i.e., three different new attorneys) then The
Regents shall be free, in its sole discretion, to appoint an attorney of its
choice. The Regents' counsel will take instructions only from The Regents unless
otherwise expressly authorized in writing by The Regents. The Regents shall
promptly provide the Licensee with copies of all relevant documentation so that
the Licensee may be currently and promptly informed and apprised of the
continuing prosecution. The Licensee may comment upon such documentation,
provided that if the Licensee has not commented upon such documentation prior to
the initial deadline for filing a response with the relevant government patent
office, The Regents shall be free to respond appropriately without consideration
of the Licensee's comments. The Licensee agrees to keep this documentation
confidential in accordance with the provisions of Article 28 (CONFIDENTIALITY).
15.2 The Regents shall use all reasonable efforts to prepare or amend
any patent application to include claims reasonably requested by the Licensee to
protect the Licensed Products contemplated to be sold or Licensed Methods or
procedures to be practiced under this Agreement.
15.3 The Regents shall cooperate with the Licensee in applying for an
extension of the term of any patent included within Regents' Patent Rights if
appropriate under the Drug Price Competition and Patent Term Restoration Act of
1984. The Licensee shall prepare all such documents, and The Regents agrees to
execute such documents and to take such additional action as the Licensee may
reasonably request in connection therewith.
15.4 Subject to Paragraph 15.7 the costs of preparing, filing,
prosecuting, and maintaining all United States patent
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<PAGE>
applications and/or patents contemplated by this Agreement and not paid for by a
third party shall be borne by Licensee so long as the licenses granted to the
Licensee herein are exclusive. If The Regents reduces the exclusive licenses
granted herein to nonexclusive licenses pursuant to Paragraphs 6.4 or 6.6 and
The Regents grants additional licenses, the costs of filing, prosecuting, and
maintaining the patents and patent applications in Regents Patent Rights shall
be divided equally among the licensed parties from the effective date of each
subsequently granted license agreement. The obligations set forth in this
Paragraph 15.4 includes patent prosecution costs for this Invention incurred by
The Regents prior to the execution of this Agreement. Current and future costs
for patent prosecution and maintenance as provided herein will be billed to the
Licensee by The Regents as incurred, and the Licensee shall reimburse The
Regents for such costs within thirty (30) days of the Licensee's receipt of an
invoice from The Regents.
15.5 The Regents shall, at the request of the Licensee, file,
prosecute, and maintain patent applications and patents covered by Regents'
Patent Rights in foreign countries if available. The Licensee must notify The
Regents within seven (7) months of the filing of the corresponding United States
patent application of its decision to request The Regents to file foreign
counterpart patent applications. This notice concerning foreign filing shall be
in writing, must identify the countries desired, and shall reaffirm the
Licensee's obligation to underwrite the costs thereof subject to the conditions
set forth in Paragraph 15.4 above. The absence of such a notice from the
Licensee to The Regents within such seven- (7-) month period shall be considered
an election by the Licensee not to secure foreign patent rights.
15.6 The preparation, filing, and prosecuting of all foreign patent
applications filed at the Licensee's request, as well as the maintenance of all
resulting patents, shall be at the sole expense of the Licensee subject to the
conditions set forth in Paragraph 15.4 above. Such patents shall be held in the
name of The
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<PAGE>
Regents and shall be obtained using counsel of The Regents' choice in accordance
with Section 15.1 of this Agreement.
15.7 The Licensee's obligation to underwrite and to pay patent
prosecution and maintenance costs shall continue for so long as this Agreement
remains in effect provided, however, that the Licensee may terminate its
obligations with respect to any given patent application or patent upon one (1)
month's written notice to The Regents provided that any costs incurred by The
Regents prior to such written notice (or necessarily incurred within three (3)
months after such written notice) shall be borne by the Licensee. If The Regents
initiates any action subsequent to the written notice from the Licensee, then
The Regents shall bear all costs associated with that action. The Regents will
use its best efforts to curtail patent costs when such a notice is received from
the Licensee. Those costs which cannot be curtailed will be due and owing. The
Regents may continue prosecution and/or maintenance of such application(s) or
patent(s) at its sole discretion and expense provided, however, that the
Licensee shall have no further right or licenses thereunder unless the Licensee
pays to The Regents an amount equal to the costs the Licensee would otherwise
have been obligated to pay, and further provided that The Regents has not
granted an exclusive license to a third party in such patent and patent
applications subsequent to the Licensee's written notice. Costs of
interferences, oppositions, and appeals shall be considered prosecution costs
for the purposes of this Agreement but the Licensee may credit these costs
against future earned royalties.
15.8 The Regents shall have the right to file patent applications at
its own expense in any country in which the Licensee has not elected to secure
patent rights, and such applications and resultant patents shall not be subject
to this Agreement unless the Licensee pays to The Regents an amount equal to the
costs the Licensee would otherwise have been obligated to pay, and further
provided that The Regents has not granted an exclusive license to a third party
in such patent and patent applications subsequent to the
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Licensee's written notice of its decision not to secure such patent protection.
16. PATENT MARKING
16.1 The Licensee agrees to mark all Licensed Products made, used, or
sold under the terms of this Agreement, or their containers, or packaging, in
accordance with the applicable patent marking laws.
17. PATENT INFRINGEMENT
17.1 In the event that the Licensee shall learn of the substantial
infringement of any patent licensed under this Agreement, the Licensee shall
call The Regents' attention thereto in writing and shall provide The Regents
with reasonable evidence of such infringement. Both parties to this Agreement
agree that during the period and in a jurisdiction where the Licensee has
exclusive rights under this Agreement, neither will notify a third party of the
alleged infringement of any of Regents' Patent Rights without first obtaining
consent of the other party, which consent shall not be unreasonably denied. Both
parties shall use their reasonable efforts in cooperation with each other to
terminate such infringement without litigation. The Licensee shall have no
obligation, and The Regents shall have no right, to grant rights to such
infringing party in derogation of the Licensee's exclusive licenses under this
Agreement.
17.2 The Licensee may request that The Regents take legal action
against the infringement of Regents' Patent Rights. Such request shall be made
in writing and shall include reasonable evidence of such infringement and
damages to the Licensee. If the infringing activity has not been abated within
ninety (90) days following the effective date of such request, The Regents shall
have the right to:
a) commence suit on its own account or
b) refuse to participate in such suit,
and The Regents shall give notice of its election in writing to the Licensee by
the end of the [CONFIDENTIAL TREATMENT REQUESTED]after receiving notice of such
request from the Licensee. Absent refusal
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<PAGE>
under Paragraph 17.2 (b), The Regents shall commence suit promptly thereafter,
in no event later than [CONFIDENTIAL TREATMENT REQUESTED]following such notice.
Election by The Regents to commence such suit shall be without prejudice of the
right of the Licensee to intervention on its own account under Rule 24 of the
Federal Rules of Civil Procedure, provided that before application to the court
therefor, the Licensee shall first meet with The Regents and discuss fully with
them its reasons for such intervention. The Licensee may thereafter bring suit
for patent infringement if and only if The Regents elects not to commence suit
and if the infringement occurred during the period and in a jurisdiction where
the Licensee had exclusive rights under this Agreement. However, in the event
the Licensee elects to bring suit in accordance with this paragraph, The Regents
may thereafter join such suit at its own expense. Failing such joinder: (i) as
between the Licensee and The Regents, the Licensee shall have the sole right to
prosecute such action and recover damages for infringement, including past
infringement; and (ii) The Regents acknowledges that it will be bound by the
results of such action, will refrain from duplicate litigation involving such
infringement by the infringing party and those in privity with it, will
cooperate with the Licensee at the Licensee's expense in responding to discovery
requests by the infringing party relevant to issues of patent validity and
enforceability, and upon request will submit to the court an affidavit to the
foregoing effects.
17.3 Such legal action as is decided upon shall be at the expense of
the party on account of whom suit is brought and all recoveries recovered
thereby shall belong to such party provided, however, that legal action brought
jointly by The Regents and the Licensee, or by one such party with later
intervention or joinder by the other, and fully participated in by both shall be
at the joint expense of the parties and all recoveries from such joint legal
action shall be allocated in the following order: (i) to each party as
reimbursement of costs and fees of outside attorneys and other related expenses
to the extent each party paid for such costs, fees and expenses in proportion to
the share of expenses paid by each
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party and until such costs, fees, and expenses are consumed; and (ii) any
remaining amount to be divided by the parties in the following manner: 1)
[CONFIDENTIAL TREATMENT REQUESTED] and 2) [CONFIDENTIAL TREATMENT REQUESTED]
17.4 Each party agrees to cooperate with the other in legal
proceedings instituted hereunder but at the expense of the party on account of
whom such proceeding is brought. Such legal proceedings shall be controlled by
the party bringing the action except that The Regents may be represented by
counsel of its choice, at its expense, pursuant to The Regents' determination in
any action brought by the Licensee and the Licensee may be represented by
counsel of its choice at its sole expense in any action brought by The Regents
in which the Licensee intervenes.
18. INDEMNIFICATION
18.1 The Licensee agrees to indemnify, hold harmless, and defend The
Regents, their officers, employees, and agents; the sponsors of the research
that led to the Invention; and the Inventors of any Invention covered by any of
the patents and patent applications under Regents' Patent Rights and their
employers against any and all claims, suits, losses, damage, costs, fees, and
expenses resulting from or arising out of exercise of this license or any
sublicense. This indemnification will include, but will not be limited to, any
product liability.
18.2 The Licensee, at its sole cost and expense, shall insure its
activities in connection with the work under this Agreement, and obtain, keep in
force, and maintain Comprehensive or Commercial Form General Liability Insurance
(contractual liability included) or an equivalent program of self-insurance with
limits as follows:
(a) [CONFIDENTIAL TREATMENT REQUESTED]
(b) [CONFIDENTIAL TREATMENT REQUESTED]
(c) [CONFIDENTIAL TREATMENT REQUESTED]
(d) [CONFIDENTIAL TREATMENT REQUESTED]
It should be expressly understood, however, that the coverages and limits
referred to under the above shall not in any way limit the liability of the
Licensee. The Licensee shall furnish The Regents
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with certificates of insurance evidencing compliance with all requirements. Such
certificates shall.
(18.2.1) Provide a thirty (30)-day advance written
notice to The Regents of any modification.
(18.2.2) Indicate that The Regents has been endorsed
as an additional insured under the coverages
referred to under the above, but only with
respect to the subject matter of this
Agreement.
(18.2.3) Include a provision that the coverages will
be primary and will not participate with nor
will be excess over any valid and
collectable insurance or program of
self-insurance carried or maintained by The
Regents.
18.3 The Regents shall promptly notify Licensee in writing of any
claim or suit, or any perceived written threat thereof, brought against The
Regents in respect of which The Regents intends to invoke the provisions of this
Article 18. The Licensee will keep The Regents informed on a current basis of
its defense of any claims pursuant to this Article 18. No settlement of any
claim or suit, or any perceived written threat thereof, received by The Regents
shall be made without the approval of the Licensee if indemnification is sought
by The Regents hereunder.
19. NOTICES
19.1 Any notice or payment required to be given to either party shall
be deemed to have been properly given and to be effective (a) on the date of
delivery if delivered in person or (b) five (5)days after mailing if mailed by
first-class certified mail, postage paid, to the respective addresses given
below or to such other address as it shall designate by written notice given to
the other party.
In the case of the Licensee: CYGNUS THERAPEUTIC SYSTEMS
400 Penobscot Drive
Redwood City, California 94063
ATTENTION: President
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In the case of The Regents: THE REGENTS OF THE UNIVERSITY
OF CALIFORNIA
1320 Harbor Bay Parkway, Suite 150
Alameda, California 94501
ATTENTION: Assistant Director, Office
of Technology Transfer
Referring to: UC Case No. 87-162
20. ASSIGNABILITY
20.1 This Agreement is binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns, provided that
this Agreement shall be personal to the Licensee and shall be assignable by the
Licensee only with the written consent of The Regents, which consent shall not
be unreasonably withheld, except that the Licensee may freely assign this
Agreement to a business entity that acquires all or substantially all of the
common stock, business, or assets of the Licensee and that expressly assumes, in
writing, the performance of all provisions of this Agreement to be performed by
the Licensee.
21. LATE PAYMENTS
21.1 In the event royalty payments or fees or patent cost
reimbursements are not received by The Regents when due, the Licensee shall pay
to The Regents interest charges at a rate of [CONFIDENTIAL TREATMENT REQUESTED]
compounded per annum. Such interest shall be calculated from the date payment
was due until actually received by The Regents.
22. WAIVER
22.1 It is agreed that no waiver by either party hereto of any breach
or default of any of the covenants or agreements herein set forth shall be
deemed a waiver as to any subsequent and/or similar breach or default.
23. FAILURE TO PERFORM
23.1 In the event of a failure of performance due under the terms of
this Agreement and if it becomes necessary for either party to undertake legal
action against the other on account thereof, then the prevailing party shall be
entitled to reasonable attorney's t fees in addition to costs and necessary
disbursements.
20
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24. GOVERNING LAWS
24.1 THIS AGREEMENT SHALL BE INTERPRETED AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF CALIFORNIA, but the scope and validity of any
patent or patent application licensed under this Agreement shall be governed by
the applicable laws of the country in which such patent was granted or such
patent application is pending.
25. FOREIGN GOVERNMENT APPROVAL OR REGISTRATION
25.1 If this Agreement or any associated transaction is required by
the law of any nation to be either approved or registered with any governmental
agency, the Licensee shall assume all legal obligations to do so. The Regents
shall fully cooperate with the Licensee, to the extent it is able to do so
within the law and established Regents' policy, to provide documentation and
testimony to obtain such approval or registration.
26. EXPORT CONTROL LAWS
26.1 The Licensee shall observe all applicable United States and
foreign laws with respect to the transfer of Licensed Products and related
technical data to foreign countries, including without limitation, the
International Traffic in Arms Regulations (ITAR) and the Export Administration
Regulations.
27. FORCE MAJEURE
27.1 The parties to this Agreement shall be excused from any
performance required hereunder if such performance is rendered impossible or
unfeasible due to any catastrophes or other major events beyond their reasonable
control, including without limitation, war, riot, and insurrection; laws,
proclamations, edicts, ordinances, or regulations; strikes, lock-outs, or other
serious labor disputes; and floods, fires, explosions, or other natural
disasters. When such events have abated, the parties' respective obligations
hereunder shall resume.
28. CONFIDENTIALITY
28.1 The Regents and the Licensee respectively shall hold the other
party's proprietary business, patent prosecution, engineering, process and
technical information, and other proprietary information in confidence using at
least the same degree of care as
21
<PAGE>
that party uses to protect its own proprietary information of a like nature for
a period from the date of disclosure until five (5) years after the date of
termination of this Agreement. All proprietary information shall be labeled or
marked confidential or as otherwise appropriate by the disclosing party. All
confidential information orally disclosed shall be reduced to writing or some
other physically tangible form, marked and labeled as set forth above by the
disclosing party and delivered to the receiving party within thirty (30) days of
the oral disclosure as a record of the disclosure and the confidential nature
thereof. Nothing contained herein shall in any way restrict or impair the right
of the Licensee or The Regents to use, disclose or otherwise deal with any
information or data that it can document:
(28.1.1) that the recipient can demonstrate by written records was
previously known to it; or
(28.1.2) that is now, or becomes in the future, public knowledge
other than through acts or omissions of the recipient; or
(28.1.3) that is lawfully obtained without restrictions by the
recipient from sources independent of the disclosing party;
or
(28.1.4) that was independently developed by the recipient by
employees without the use of or access to the disclosing
party's similar proprietary information as shown by written
records; or
(28.1.5) that is required to be disclosed to a governmental entity or
agency in connection with seeking any governmental or
regulatory approval, or pursuant to the lawful requirement
or request of a governmental entity or agency; or
(28.1.6) that is furnished to a third party by the recipient without
similar confidentiality restrictions imposed on such third
party, as evidenced in writing, or
22
<PAGE>
(28.1.7) that The Regents is required to disclose pursuant to the
California Public Records Act or other applicable law.
28.2 Upon termination of this Agreement, the Licensee and The Regents
agree to destroy or return to the disclosing party proprietary information
received from the other in its possession within fifteen (15) days following the
effective date of termination. However, each party may retain one copy of
proprietary confidential information of the other solely for archival purposes
in nonworking confidential files for the sole purpose of verifying the ownership
of the proprietary information, provided that such proprietary information shall
be subject to the confidentiality provisions set forth above in Paragraph 28.1.
Upon request, the Licensee and The Regents agree to provide each other, within
thirty (30) days following termination, with a written notice that proprietary
information has been returned or destroyed.
29. INFRINGEMENT UNDER DRUG PRICE COMPETITION ACT
29.1 In the event either party receives notice pertaining to any
patent included within Regents' Patent Rights pursuant to the DRUG PRICE
COMPETITION AND PATENT TERM RESTORATION ACT OF 1984 (Public Law 98-417) or
foreign equivalent legislation (hereinafter, "the Act"), including but not
necessarily limited to notices pursuant to Sections 101 and 103 of the Act from
persons who have filed an Abbreviated New Drug Application or device equivalent
("ANDA"), or a "paper" New Drug Application or device equivalent ("paper"
"NDA"), or in the case of an infringement of Regents' Patent Rights as defined
in Section 271(e) of Title 35 of the United States Code, such party shall notify
the other party promptly but in no event later than ten (10) days after receipt
of such notice.
29.2 If the Licensee wishes action to be taken against such
infringement as provided in the Act, the Licensee shall request such action by
written notice to The Regents. Within thirty (30) days of receiving said
request, The Regents will give written notice to the Licensee of its election
to:
(29.2.1) commence suit on its own account; or
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<PAGE>
(29.2.2) refuse to participate in such suit. The Licensee may
thereafter bring suit for patent infringement as provided by the Act if and only
if The Regents elects not to commence suit and if the infringement occurred
during the period that the Licensee had exclusive rights in the United States
under this Agreement. However, in the event the Licensee elects to bring suit in
accordance with this paragraph, The Regents may thereafter join such suit at its
own expense.
29.3 The provisions of paragraphs 17.3 and 17.4 shall likewise apply
to any legal action brought under this Article 29.
29.4 The Regents hereby authorizes the Licensee to include in any NDA
for a Licensed Product a list of patents included within Regents' Patent Rights
identifying The Regents as patent owner.
30. MISCELLANEOUS
30.1 The headings of the several sections are inserted for convenience
of reference only and are not intended to be a part of or to affect the meaning
or interpretation of this Agreement.
30.2 This Agreement will not be binding upon the parties until it has
been signed below on behalf of each party; in which event, it shall be effective
as of the Effective Date recited on page one hereof.
30.3 No amendment or modification hereof shall be valid or binding
upon the parties unless made in writing and signed on behalf of each party.
30.4 This Agreement embodies the entire understanding of the parties
with respect to the subject matter hereof and shall supersede all previous
communications, representations, or understandings, either oral or written,
between the parties relating to the subject matter hereof. A Secrecy Agreement
between the parties dated December 14, 1988, has already expired, and the Option
Agreement dated August 29, 1990, will automatically terminate upon both parties'
execution of this Agreement.
30.5 In case any of the provisions contained in this Agreement shall
be held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality, or unenforceability shall
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<PAGE>
not affect any other provisions hereof, but this Agreement shall be construed as
if such invalid or illegal or unenforceable provisions had never been contained
herein.
IN WITNESS WHEREOF, both The Regents and the Licensee have executed
this Agreement in duplicate originals by their respective officers hereunto duly
authorized, on the day and year hereinafter written.
CYGNUS THERAPEUTIC SYSTEMS: THE REGENTS OF THE
UNIVERSITY OF CALIFORNIA:
By: /s/ Roger P. Francis By: /s/ Terence A. Feuerborn
------------------------------ ----------------------------
(signature)
Name: Roger P. Francis Name: Terence A. Feuerborn
----------------------------
(please print)
Title: Senior Vice President Title: Interim Director
--------------------------- Office of Technology
Marketing & Business Transfer
Development
Date: 1/30/95 Date: 2-2-95
---------------------------- --------------------------
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<PAGE>
EXHIBIT 10.302
LICENSE AGREEMENT AMENDMENT
This amendment ("Amendment") is effective this 23 day of
April 1998, between The Regents of the University of California, a
California corporation having statewide administrative headquarters at 300
Lakeside Drive, 22nd Floor, Oakland, California 94612-3550, said headquarters to
be moved as of April 24, 1998, to 1111 Franklin Street, 5th Floor, Oakland, CA
94607-5200 ("The Regents") and Cygnus, Inc., a California corporation, having a
principal place of business at 400 Penobscot Drive, Redwood City, California
94603 ("Licensee").
RECITALS
A. The Regents and the Licensee entered into an exclusive license
agreement effective January 31, 1995 (UC Control No. 95-04-0565), relating to a
"Device for Iontophoretic Non-invasive Sampling or Delivery of Substances"
disclosed under UC Case No. 87-162 ("Agreement"), granting to the Licensee an
exclusive license to make, have made, use, sell and distribute Licensed Products
and to practice the Licensed Method under Regents' Patent Rights (as defined in
the Agreement).
B. [CONFIDENTIAL TREATMENT REQUESTED];"
C. The Licensee has requested (pursuant to its letter to The Regents of
March 3, 1998) such an extension, and The Regents has agreed to grant a
[CONFIDENTIAL TREATMENT REQUESTED]extension under the terms and Provisions of
this Amendment.
- - oo 0 oo - -
<PAGE>
1. Therefore, in view of the foregoing, The Regents and the Licensee
agree to [CONFIDENTIAL TREATMENT REQUESTED]
2. [CONFIDENTIAL TREATMENT REQUESTED] as follows:
a. [CONFIDENTIAL TREATMENT REQUESTED];
b. [CONFIDENTIAL TREATMENT REQUESTED]
c. [CONFIDENTIAL TREATMENT REQUESTED]
3. [CONFIDENTIAL TREATMENT REQUESTED]
The parties have executed this Amendment by their respective and duly
authorized officers, as evidenced by the signatures below.
CYGNUS, INC. THE REGENTS OF THE UNIVERSITY
OF CALIFORNIA
By /s/ John C. Hodgman By /s/ David J. Aston
----------------------------------- -----------------------------------
(SIGNATURE) (SIGNATURE)
Name John C. Hodgman Name: David J. Aston
---------------------------------
(PLEASE PRINT)
Title President, Cygnus Diagnostics Title: Associate Director
-------------------------------- Office of Technology Transfer
Date 5-1-98 Date 5-5-98
--------------------------------- ---------------------------------
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CYGNUS, INC.
1999 STOCK INCENTIVE PLAN
(AS AMENDED AND RESTATED MARCH 1, 2000)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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............................................................7
(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>
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
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<PAGE>
(a) Term of the Plan............................................................14
(b) Right to Amend or Terminate the Plan........................................14
SECTION 17. EXECUTION.....................................................................................14
</TABLE>
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<PAGE>
CYGNUS, INC.
1999 STOCK INCENTIVE PLAN
AS AMENDED AND RESTATED MARCH 1, 2000
SECTION 1. INTRODUCTION.
The Cygnus, Inc. 1999 Stock Incentive Plan amended and restated the
Company's 1994 Stock Option/Award Plan effective February 1, 1999. Effective
March 1, 2000, the Plan was further amended and restated to increase the number
of shares available for Award by 2,000,000 shares subject to stockholder
approval.
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
<PAGE>
a specific vote or by approval of the proxy statement of the Company in
which such person is named as a nominee for director, without objection
to such nomination) shall be, for purposes of this clause (b),
considered as though such person were a member of the Incumbent Board.
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
2
<PAGE>
mean between the last reported representative bid and asked prices
quoted by the NASDAQ system for such date;
(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.
3
<PAGE>
(aa) "SERVICE" means service as an Employee, Director, Non-Employee
Director or Consultant.
(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.
4
<PAGE>
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 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 9,916,385 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
5
<PAGE>
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 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.
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<PAGE>
(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 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
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Restricted Stock or Stock Units, and such an Award may provide that the NSOs
will not be 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
8
<PAGE>
receive an Automatic Option Grant on the date of such initial election
or appointment for 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.
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<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.
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<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).
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(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 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
--------------------------------------
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CYGNUS, INC.
AMENDED 1991 EMPLOYEE STOCK
PURCHASE PLAN
(AS AMENDED AND RESTATED MARCH 1, 2000)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. Purpose.................................................................................................1
2. Definitions.............................................................................................1
3. Eligibility.............................................................................................3
4. Offering Periods........................................................................................3
5. Participation...........................................................................................3
6. Payroll Deductions......................................................................................4
7. Grant Of Purchase Right.................................................................................5
8. Exercise Of Purchase Right..............................................................................5
9. Delivery................................................................................................5
10. Withdrawal; Termination Of Employment...................................................................5
11. Interest................................................................................................6
12. Stock...................................................................................................6
13. Administration..........................................................................................6
14. Designation Of Beneficiary..............................................................................6
15. Transferability.........................................................................................7
16. Use Of Funds............................................................................................7
17. Reports.................................................................................................7
18. Adjustments Upon Changes In Capitalization, Dissolution, Merger Or Asset Sale...........................7
19. Amendment Or Termination................................................................................8
20. Notices.................................................................................................9
21. Conditions Upon Issuance Of Shares......................................................................9
22. Term Of Plan............................................................................................9
23. Automatic Transfer To Low Price Offering Period.........................................................9
24. Execution...............................................................................................9
</TABLE>
-i-
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CYGNUS, INC.
AMENDED 1991 EMPLOYEE STOCK PURCHASE PLAN
(AS AMENDED AND RESTATED MARCH 1, 2000)
The following constitutes the provisions of the Amended 1991 Employee
Stock Purchase Plan of Cygnus, Inc., as last amended and restated on March 1,
2000.
1. PURPOSE. The purpose of the Plan is to provide Employees of the
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the intention
of the Company to have the Plan qualify as an "Employee Stock Purchase Plan"
under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, accordingly, shall be construed so as to extend and
limit participation in a manner consistent with the requirements of that section
of the Code.
2. DEFINITIONS.
(a) "BOARD" shall mean the Board of Directors of the Company
or a Committee appointed by the Board pursuant to Section 13.
(b) "CODE" shall mean the Internal Revenue Code of 1986, as
amended.
(c) "COMMON STOCK" shall mean the common stock of the Company.
(d) "COMPANY" shall mean Cygnus, Inc.
(e) "COMPENSATION" shall mean all base straight time gross
earnings, including bonuses, but excluding payments for overtime, shift premiums
and commissions, awards, and other compensation.
(f) "DESIGNATED SUBSIDIARIES" shall mean the Subsidiaries
which have been designated by the Board from time to time in its sole discretion
as eligible to participate in the Plan.
(g) "EMPLOYEE" shall mean any individual who is a regular
employee of the Company or a Designated Subsidiary for purposes of
tax-withholding under the Code. For purposes of the Plan, the employment
relationship shall be treated as continuing intact while the individual is on
sick leave or other leave of absence approved by the Company. Where the period
of leave exceeds 90 days and the individual's right to reemployment is not
guaranteed either by statute or by contract, the employment relationship will be
deemed to have terminated on the 91st day of such leave.
(h) "ENROLLMENT DATE" shall mean the first Trading Day of each
Offering Period.
1.
<PAGE>
(i) "ENROLLMENT DATE PRICE" shall mean the Fair Market Value
of a share of Common Stock on the last Trading Day prior to the Enrollment Date.
(j) "EXERCISE DATE" shall mean the last Trading Day of each
Purchase Period.
(k) "FAIR MARKET VALUE" shall mean, as of any date, the value
of Common Stock determined as follows:
(1) If the Common Stock is listed on any established
stock exchange or a national market system, including without limitation the
National Market System of the National Association of Securities Dealers, Inc.
Automated Quotation ("NASDAQ") System, its Fair Market Value shall be the
closing sales price for such stock (or the closing bid, if no sales were
reported), as quoted on such exchange (or the exchange with the greatest volume
of trading in Common Stock) or system on the day of such determination, as
reported in The Wall Street Journal or such other source as the Board deems
reliable, or;
(2) If the Common Stock is quoted on the NASDAQ
system (but not on the National Market System thereof) or is regularly quoted by
a recognized securities dealer but selling prices are not reported, its Fair
Market Value shall be the mean between the high and low asked prices for the
Common Stock on the day of such determination, as reported in The Wall Street
Journal or such other source as the Board deems reliable, or;
(3) In the absence of an established market for the
Common Stock, the Fair Market Value thereof shall be determined in good faith by
the Board.
(l) "OFFERING PERIOD" shall mean, subject to the discretion of
the Board pursuant to Section 4, a period of approximately twenty-four (24)
months, commencing on the first Trading Day on or after October 1 and
terminating on the last Trading Day in the September twenty-four (24) months
later, or commencing on the first Trading Day on or after April 1 and
terminating on the last Trading Day in the March twenty-four (24) months later.
(m) "PLAN" shall mean this Amended 1991 Employee Stock
Purchase Plan.
(n) "PARTICIPANT" shall mean an Employee who is participating
in the Plan.
(o) "PURCHASE PERIOD" shall mean the approximately six-month
period commencing after one Exercise Date and ending with the next following
Exercise Date, except that the first Purchase Period of any Offering Period
shall commence on the Enrollment Date and end with the next following Exercise
Date.
(p) "PURCHASE PRICE" shall mean an amount equal to a
designated percentage of the Enrollment Date Price or a designated percentage of
the Fair Market Value on the Exercise Date, whichever is lower. Each designated
percentage shall be 85% unless determined otherwise by the Board with respect to
any Offering Period, but shall in no event be less than 85%.
2.
<PAGE>
(q) "RESERVES" shall mean the number of shares of Common Stock
covered by each purchase right under the Plan which have not yet been exercised
and the number of shares of Common Stock which have been authorized for issuance
under the Plan but not yet placed under purchase right.
(r) "SUBSIDIARY" shall mean a corporation, domestic or
foreign, of which not less than 50% of the voting shares are held by the Company
or a Subsidiary, whether or not such corporation now exists or is hereafter
organized or acquired by the Company or a Subsidiary.
(s) "TRADING DAY" shall mean a day on which national stock
exchanges and the National Association of Securities Dealers Automated Quotation
(NASDAQ) System are open for trading.
3. ELIGIBILITY.
(a) Any Employee, as defined in Section 2(g), who shall be
employed by the Company or a Designated Subsidiary on a given Enrollment Date
shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary
notwithstanding, no Employee shall be granted a purchase right under the Plan
(i) if, immediately after the grant, such Employee (or any other person whose
stock would be attributed to such Employee pursuant to Section 424(d) of the
Code) would own stock and/or hold outstanding purchase rights to purchase stock
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or of any Subsidiary of the Company, or
(ii) which permits his or her rights to purchase stock under all employee stock
purchase plans of the Company and its Subsidiaries to accrue at a rate which
exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the
fair market value of the shares at the time such purchase right is granted) for
each calendar year in which such purchase right is outstanding at any time.
4. OFFERING PERIODS. The Plan shall be implemented by consecutive and
overlapping Offering Periods. The Board shall have the power to change the
duration of Offering Periods with respect to future offerings without
shareholder approval if such change is announced at least fifteen (15) days
prior to the scheduled beginning of the first Offering Period to be affected.
Absent action by the Board, each Offering Period shall be for a period of
approximately twenty-four months (24) and new Offering Periods shall commence on
the first Trading Day of April and October of each year. No Offering Period
shall exceed twenty-four (24) months in length.
5. PARTICIPATION.
(a) An eligible Employee may become a Participant in the Plan
by completing a subscription agreement authorizing payroll deductions in the
form provided by the Company and filing it with the Company's payroll office
prior to the applicable Enrollment Date.
3.
<PAGE>
(b) Payroll deductions for a Participant shall commence on the
first payroll period following the Enrollment Date and shall end on the last
payroll period in the Offering Period, unless sooner terminated by the
Participant as provided in Section 10.
6. PAYROLL DEDUCTIONS.
(a) At the time a Participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding fifteen percent (15%) of
the Compensation which he or she receives on each pay day during the Offering
Period, and the aggregate of such payroll deductions during the Offering Period
shall not exceed fifteen percent (15%) of the Participant's Compensation during
said Offering Period.
(b) All payroll deductions made for a Participant shall be
credited to his or her account under the Plan and will be withheld in whole
percentages only. A Participant may not make any additional payments into such
account.
(c) A Participant may discontinue his or her participation in
the Plan as provided in Section 10, or may increase or decrease the rate of his
or her payroll deductions during the current Purchase Period by filing with the
Company a new subscription agreement authorizing such a change in the payroll
deduction rate. A reduction to a 0% rate of contribution shall be treated as a
withdrawal from the Plan effective with the following Purchase Period unless
such rate is increased prior to the following Purchase Period. The change in
rate shall be effective with the first full payroll period following such
advance notice period as the Company shall specify. A Participant's subscription
agreement shall remain in effect for successive Purchase Periods and Offering
Periods unless terminated as provided in Section 10. The Board shall be
authorized to limit the number of participation rate changes during any Offering
Period. A Participant may at any time elect to have his or her participation
agreement become irrevocable for such period of time as he or she may designate.
(d) Notwithstanding the foregoing, to the extent necessary to
comply with Section 423(b)(8) of the Code and Section 3(b) herein, a
Participant's payroll deductions may be decreased to 0% at such time during any
Purchase Period which is scheduled to end during the current calendar year (the
"Current Purchase Period") that the aggregate of all payroll deductions which
were previously used to purchase stock under the Plan in a prior Purchase Period
which ended during that calendar year plus all payroll deductions accumulated
with respect to the Current Purchase Period equal $21,250. The Company may
provide either (i) that payroll deductions shall recommence at the rate provided
in such Participant's subscription agreement at the beginning of the first
Purchase Period which is scheduled to end in the following calendar year, unless
terminated by the Participant as provided in Section 10, or (ii) that
participation shall recommence only upon filing a new enrollment form following
such waiting period as the Company shall specify.
(e) At the time the purchase right is exercised, in whole or
in part, or at the time some or all of the Company's Common Stock issued under
the Plan is disposed of, the Participant must make adequate provision for the
Company's federal, state, or other tax withholding
4.
<PAGE>
obligations, if any, which arise upon the exercise of the purchase right or the
disposition of the Common Stock. At any time, the Company may, but will not be
obligated to, withhold from the Participant's compensation the amount necessary
for the Company to meet applicable withholding obligations, including any
withholding required to make available to the Company any tax deductions or
benefit attributable to sale or early disposition of Common Stock by the
Employee.
7. GRANT OF PURCHASE RIGHT. On the Enrollment Date of each Offering
Period, each eligible Employee participating in such Offering Period shall be
granted a purchase right to purchase on each Exercise Date during such Offering
Period (at the applicable Purchase Price) up to a number of shares of the
Company's Common Stock determined by dividing such Employee's payroll deductions
accumulated prior to such Exercise Date and retained in the Participant's
account as of the Exercise Date by the applicable Purchase Price; provided that
such purchase shall be subject to the limitations set forth in Section 3(b) and
12 hereof. Exercise of the purchase right shall occur as provided in Section 8,
unless the Participant has withdrawn pursuant to Section 10, and the purchase
right shall expire on the last day of the Offering Period.
8. EXERCISE OF PURCHASE RIGHT. Unless a Participant withdraws from the
Plan as provided in Section 10 below, his or her purchase right for the purchase
of shares of Common Stock will be exercised automatically on each Exercise Date,
and the maximum number of full shares subject to the purchase right shall be
purchased for such Participant at the applicable Purchase Price with the
accumulated payroll deductions in his or her account. No fractional shares will
be purchased. Any payroll deductions accumulated in a Participant's account
which are not sufficient to purchase a full share shall be retained in the
Participant's account for the subsequent Purchase Period, subject to earlier
withdrawal by the Participant as provided in Section 10. During a Participant's
lifetime, a Participant's purchase right to purchase shares hereunder is
exercisable only by him or her.
9. DELIVERY. As promptly as practicable after each Exercise Date on
which a purchase of shares occurs, the Company shall arrange the delivery of
purchased shares to a directed brokerage account. Certificates representing the
shares that were purchased by each Participant will remain with the brokerage
account until such time as the Participant (or beneficiary) requests that their
shares be transferred out of the brokerage account.
10. WITHDRAWAL; TERMINATION OF EMPLOYMENT.
(a) A Participant may, subject to the terms of any irrevocable
participation agreement elected by the Participant, withdraw all but not less
than all the payroll deductions credited to his or her account and not yet used
to exercise his or her purchase right under the Plan at any time by giving
written notice to the Company in the form provided by the Company. All of the
Participant's payroll deductions credited to his or her account will be paid to
such Participant promptly after receipt of notice of withdrawal and such
Participant's purchase right for the Offering Period will be automatically
terminated, and no further payroll deductions for the purchase of shares will be
made during the Offering Period. If a Participant withdraws from an Offering
Period, payroll deductions will not resume at the beginning of the succeeding
Offering Period unless the Participant delivers to the Company a new
subscription agreement.
5.
<PAGE>
(b) Upon a Participant's ceasing to be an Employee for any
reason or upon termination of a Participant's employment relationship (as
described in Section 2(g)), the payroll deductions credited to such
Participant's account during the Offering Period but not yet used to exercise
the purchase right will be returned to such Participant or, in the case of his
or her death, to the person or persons entitled thereto under Section 14, and
such Participant's purchase right will be automatically terminated. The Company
may reduce the amount returned to a Participant by the amount of any outstanding
debts that the Participant owes to either the Company or a Subsidiary.
11. INTEREST. No interest shall accrue on the payroll deductions of a
Participant in the Plan.
12. STOCK.
(a) The maximum number of shares of the Company's Common Stock
which shall be made available for sale under the Plan shall be 1,975,000 shares,
subject to adjustment upon changes in capitalization of the Company as provided
in Section 18. If on a given Exercise Date the number of shares with respect to
which purchase rights are to be exercised exceeds the number of shares then
available under the Plan, the Company shall make a pro rata allocation of the
shares remaining available for purchase in as uniform a manner as shall be
practicable and as it shall determine to be equitable.
(b) The Participant will have no interest or voting right in
shares covered by this purchase right until such purchase right has been
exercised.
(c) Shares to be delivered to a Participant under the Plan
will be registered in the name of the Participant or in the name of the
Participant and his or her spouse.
13. ADMINISTRATION. The Plan shall be administered by the Board of the
Company or a committee of one or more members of the Board as appointed by the
Board. Committee members serve for the period of time specified by the Board of
Directors and can be removed from the committee by the Board at any time. The
Board or its committee shall have full and exclusive discretionary authority to
construe, interpret and apply the terms of the Plan, to determine eligibility
and to adjudicate all disputed claims filed under the Plan. Every finding,
decision and determination made by the Board or its committee shall, to the full
extent permitted by law, be final and binding upon all parties.
14. DESIGNATION OF BENEFICIARY.
(a) A Participant may file a written designation of a
beneficiary who is to receive any shares and cash, if any, from the
Participant's account under the Plan in the event of such Participant's death
subsequent to an Exercise Date on which the purchase right is exercised but
prior to delivery to such Participant of such shares and cash. In addition, a
Participant may file a written designation of a beneficiary who is to receive
any cash from the Participant's account under the Plan in the event of such
Participant's death prior to exercise of the purchase right. If a Participant is
married and the designated beneficiary is not the spouse, spousal consent shall
be required for such designation to be effective.
6.
<PAGE>
(b) Such designation of beneficiary may be changed by the
Participant (and his or her spouse, if any) at any time by written notice. In
the event of the death of a Participant and in the absence of a beneficiary
validly designated under the Plan who is living at the time of such
Participant's death, the Company shall deliver such shares and/or cash to the
executor or administrator of the estate of the Participant, or if no such
executor or administrator has been appointed (to the knowledge of the Company),
the Company, in its discretion, may deliver such shares and/or cash to the
spouse or to any one or more dependents or relatives of the Participant, or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate.
15. TRANSFERABILITY. Neither payroll deductions credited to a
Participant's account nor any rights with regard to the exercise of a purchase
right or to receive shares under the Plan may be assigned, transferred, pledged
or otherwise disposed of in any way (other than by will, the laws of descent and
distribution or as provided in Section 14 hereof) by the Participant. Any such
attempt at assignment, transfer, pledge or other disposition shall be without
effect, except that the Company may treat such act as an election to withdraw
funds from an Offering Period in accordance with Section 10.
16. USE OF FUNDS. All payroll deductions received or held by the
Company under the Plan may be used by the Company for any corporate purpose, and
the Company shall not be obligated to segregate such payroll deductions.
17. REPORTS. Individual accounts will be maintained for each
Participant in the Plan. Statements of account will be given to participating
Employees at least annually, which statements will set forth the amounts of
payroll deductions, the Purchase Price, the number of shares purchased and the
remaining cash balance, if any.
18. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION, DISSOLUTION, MERGER OR
ASSET SALE.
(a) CHANGES IN CAPITALIZATION. Subject to any required action
by the shareholders of the Company, the Reserves as well as the price per share
of Common Stock covered by each purchase right under the Plan which has not yet
been exercised, shall be proportionately adjusted for any increase or decrease
in the number of issued shares of Common Stock resulting from a stock split,
reverse stock split, stock dividend, combination or reclassification of the
Common Stock, or any other increase or decrease in the number of shares of
Common Stock effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall not
be deemed to have been "effected without receipt of consideration." Such
adjustment shall be made by the Board, whose determination in that respect shall
be final, binding and conclusive. Except as expressly provided herein, no issue
by the Company of shares of stock of any class, or securities convertible into
shares of stock of any class, shall affect, and no adjustment by reason thereof
shall be made with respect to, the number or price of shares of Common Stock
subject to a purchase right. The Board may, if it so determines in the exercise
of its sole discretion, make provision for adjusting the Reserves, as well as
the price per share of Common Stock covered by each outstanding purchase
7.
<PAGE>
right, in the event the Company effects one or more reorganizations,
recapitalizations, rights offerings or other increases or reductions of shares
of its outstanding Common Stock.
(b) DISSOLUTION OR LIQUIDATION. In the event of the proposed
dissolution or liquidation of the Company, the Offering Periods will terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board.
(c) MERGER OR ASSET SALE. In the event of a proposed sale of
all or substantially all of the assets of the Company, or the merger of the
Company with or into another corporation, each purchase right under the Plan
shall be assumed or an equivalent purchase right shall be substituted by such
successor corporation or a parent or subsidiary of such successor corporation,
unless the Board determines, in the exercise of its sole discretion and in lieu
of such assumption or substitution, to shorten the Offering Periods then in
progress by setting a new Exercise Date (the "New Exercise Date"). If the Board
shortens the Offering Periods then in progress in lieu of assumption or
substitution in the event of a merger or sale of assets, the Board shall notify
each Participant in writing, at least ten (10) days prior to the New Exercise
Date, that the Exercise Date for his purchase right has been changed to the New
Exercise Date and that his purchase right will be exercised automatically on the
New Exercise Date, unless prior to such date he has withdrawn from the Offering
Period as provided in Section 10. For purposes of this Section, a purchase right
granted under the Plan shall be deemed to be assumed or substituted if
accomplished in accordance with Section 424 of the Code.
19. AMENDMENT OR TERMINATION.
(a) The Board of Directors of the Company may at any time and
for any reason terminate or amend the Plan. Except as provided in Section 18, no
such termination can affect purchase rights previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Plan is in the best
interests of the Company and its shareholders. Except as provided in Section 18,
no amendment may make any change in any purchase right theretofore granted which
adversely affects the rights of any Participant. To the extent necessary to
comply with Rule 16b-3 or under Section 423 of the Code (or any successor rule
or provision or any other applicable law or regulation), the Company shall
obtain shareholder approval in such a manner and to such a degree as required.
(b) Without shareholder consent and without regard to whether
any Participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Purchase Periods and/or
Offering Periods (subject to Section 4), limit the frequency and/or number of
changes in the amount withheld during Purchase Periods and/or Offering Periods,
establish the exchange ratio applicable to amounts withheld in a currency other
than U.S. dollars, permit payroll withholding in excess of the amount designated
by a Participant in order to adjust for delays or mistakes in the Company's
processing of properly completed withholding elections, establish reasonable
waiting and adjustment periods and/or accounting and crediting procedures to
ensure that amounts applied toward the purchase of Common Stock for each
Participant properly correspond with amounts withheld from the Participant's
Compensation,
8.
<PAGE>
and establish such other limitations or procedures as the Board (or its
committee) determines in its sole discretion advisable which are consistent with
the Plan.
20. NOTICES. All notices or other communications by a Participant to
the Company under or in connection with the Plan shall be deemed to have been
duly given when received in the form specified by the Company at the location,
or by the person, designated by the Company for the receipt thereof.
21. CONDITIONS UPON ISSUANCE OF SHARES. Shares shall not be issued with
respect to a purchase right unless the exercise of such purchase right and the
issuance and delivery of such shares pursuant thereto shall comply with all
applicable provisions of law, domestic or foreign, including, without
limitation, the Securities Act of 1933, as amended, the Securities Exchange Act
of 1934, as amended, the rules and regulations promulgated thereunder, and the
requirements of any stock exchange upon which the shares may then be listed, and
shall be further subject to the approval of counsel for the Company with respect
to such compliance.
22. TERM OF PLAN. The Plan was originally effective on August 1, 1991.
The Plan shall continue in effect through July 31, 2011 unless sooner terminated
under Section 19.
23. AUTOMATIC TRANSFER TO LOW PRICE OFFERING PERIOD. If the Fair Market
Value of the Common Stock on any Exercise Date in an Offering Period is lower
than the Enrollment Date Price of such Offering Period, then all Participants in
such Offering Period shall be automatically withdrawn from such Offering Period
immediately after the exercise of their purchase rights on such Exercise Date
and automatically reenrolled in the immediately following Offering Period as of
the first day thereof.
24. EXECUTION. To record the adoption of this amended and restated Plan
by the Board, the Company has caused its duly authorized officer to sign below.
CYGNUS, INC.
By /s/ John C Hodgman
-----------------------------------
Title Chairman, President & CEO
-------------------------------
9.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 28,677
<SECURITIES> 10,215<F1>
<RECEIVABLES> 224
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 39,815
<PP&E> 12,699
<DEPRECIATION> 6,610
<TOTAL-ASSETS> 46,976
<CURRENT-LIABILITIES> 9,704
<BONDS> 0
0
0
<COMMON> 25
<OTHER-SE> (1,204)
<TOTAL-LIABILITY-AND-EQUITY> 46,976
<SALES> 0
<TOTAL-REVENUES> 2,061
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 20,539
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,690
<INCOME-PRETAX> (21,974)
<INCOME-TAX> 200
<INCOME-CONTINUING> (22,174)
<DISCONTINUED> 19,339
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,835)
<EPS-BASIC> (.12)
<EPS-DILUTED> 23,354
<FN>
<F1>THIS AMOUNT REPRESENTS SHORT-TERM INVESTMENTS HELD BY THE COMPANY AT 12-31-99
</FN>
</TABLE>
