[IRELL & MANELLA LLP LETTERHEAD]
WRITER'S DIRECT
TELEPHONE (310) 203-7139
AMUKHEY@IRELL.COM
February 1, 2005
VIA EDGAR AND OVERNIGHT COURIER
David Ritenour, Esq.
Special Counsel
U.S. Securities and Exchange Commission
Mail Stop 0306
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Cygnus, Inc.
Preliminary Proxy Statement on Schedule 14A filed January 24, 2005
Commission File No. 0-18962
Dear Mr. Ritenour:
On behalf of Cygnus, Inc., a Delaware corporation, and in connection
with its Preliminary Proxy Statement on Schedule 14A of the Securities Exchange
Act of 1934, we hereby file a revised Preliminary Proxy Statement and respond to
the comment letter of the Securities and Exchange Commission dated January 28,
2005. In our letter, we refer to Cygnus, Inc. as "Cygnus" or the "Company," to
the Staff of the Securities and Exchange Commission as the "Staff," and to the
revised Preliminary Proxy Statement as the "Proxy Statement." Comment numbering
used for each response set forth below corresponds to the comment numbering used
in the Staff's letter.
PROPOSAL NO. 2: APPROVAL OF PLAN OF COMPLETE LIQUIDATION AND DISSOLUTION - PAGES
35 TO 49
ARBITRATION MATTER - PAGE 36
1. WE NOTE YOUR RESPONSE TO PRIOR COMMENT 7 AND REISSUE THE COMMENT.
PLEASE DESCRIBE THE CIRCUMSTANCES UNDER WHICH THE BOARD MAY ELECT NOT
TO PURSUE ITS CLAIMS IN THE ARBITRATION MATTER. FOR EXAMPLE, MIGHT THE
BOARD ELECT NOT TO PURSUE ITS CLAIMS IF IT DETERMINED THAT THE COMPANY
WAS UNLIKELY TO SUCCEED IN THE ARBITRATION?
Response:
The Company has revised the Proxy Statement in accordance with the
Staff's comment by stating that the Board of Directors might elect not to pursue
its claims in the
David Ritenour, Esq.
February 1, 2005
Page 2
Arbitration Matter if it determined, in its judgment, that it
was not in the Company's best financial interests to do so.
LIQUIDATING DISTRIBUTIONS: NATURE; AMOUNT: TIMING - PAGES 39 TO 43
ESTIMATED DISTRIBUTIONS TO STOCKHOLDERS.... - PAGES 40 TO 43
2. PLEASE REVISE YOUR ESTIMATED DISTRIBUTIONS TABLE AS FOLLOWS:
- PLEASE QUANTIFY AND LIST SEPARATELY THE AMOUNTS TO BE USED TO
DISCHARGE OUTSTANDING INDEBTEDNESS AND THE AMOUNTS ALLOCATED
TO PAY OR ACCRUE FOR ACCOUNTS PAYABLE.
Response:
The Company notes that the table currently quantifies and
lists separately the amounts to be used to discharge outstanding
indebtedness and the amounts allocated to pay or accrue for accounts
payable. The Company's only outstanding indebtedness is the arbitration
obligation owing to Sanofi-Aventis, which, as described in the Proxy
Statement, has been reduced to $10 million if payment of $10 million is
made prior to February 28, 2006. Please note that the table now lists
separately (both for the January-March 2005 period and the April-
December 2005 period) line items for "Other operating expenses." In the
January-March 2005 period, "Payments of accounts payable/accruals as of
December 31, 2004" are also listed separately. The Company anticipates
having no accounts payable/accruals in the April-December 2005 period
that are not otherwise reflected in "Other operating expenses."
Please note that the Company has also revised the Estimated
Distribution to Stockholders table to separate the expenses occurring
in first quarter 2005 prior to the consummation of the Asset Sale from
those expenses that will occur in the second, third and fourth quarters
of 2005 after the Company has vacated its facility and after the Asset
Sale has closed.
- PLEASE QUANTIFY AND LIST SEPARATELY THE $175,000 PER QUARTER
IN SALARY AND DIRECTORS' FEES THAT IS EXPECTED TO BE INCURRED,
AS WELL AS ANY OTHER COMPENSATION EXPENSES (OTHER THAN THE
SEVERANCE COSTS THAT ARE ALREADY SEPARATELY DISCLOSED). IN
ADDITION, IF THE TABLE INCLUDES AMOUNTS ALLOCATED FOR THE
POTENTIAL PAYMENT OF THE INCENTIVE COMPENSATION REFERENCED IN
YOUR RESPONSE TO PRIOR COMMENT 9, PLEASE QUANTIFY AND LIST
SEPARATELY THOSE AMOUNTS, OR, ALTERNATIVELY, PROVIDE
APPROPRIATE FOOTNOTE DISCLOSURE INDICATING, IF TRUE, THAT THE
TABLE HAS BEEN PREPARED ASSUMING THAT NO SUCH INCENTIVE
COMPENSATION WILL BE PAID.
Response:
The Company has revised the Proxy Statement in accordance with
the Staff's comment by listing separately under the line item entitled
"Salary and directors' fees" the salary and directors' fees expected to
be incurred in 2005, which includes $175,000 per quarter beginning in
the second quarter after the estimated Asset Sale closing date of March
31, 2005 and the Company's departure from its premises on or before the
same date. The $175,000 per quarter after the closing of the Asset Sale
consists of the potential estimated salaries of Mr. Hodgman
and Ms.
David Ritenour, Esq.
February 1, 2005
Page 3
McClung for the balance of 2005 if retention agreements can be reached,
as disclosed elsewhere in the Proxy Statement, and directors' fees. The
Company has added a footnote to the table explaining this proposed
arrangement.
In addition to salary payments, the Company is discussing with Mr.
Hodgman and Ms. McClung whether those arrangements would include
incentive compensation to Mr. Hodgman and Ms. McClung based on the
recovery in the Arbitration Matter. No agreements have yet been reached
with Mr. Hodgman or Ms. McClung, but in accordance with the Staff's
comment, the Company has included a separate line item entitled
"Estimated incentive compensation" to show this potential payment. In
addition, this proposed arrangement is also described in "Interests of
Certain Persons in the Asset Sale and the Plan of Dissolution."
As noted in the response to the previous comment, the Company has
revised the Estimated Distribution to Stockholders table to show the
estimated 2005 cash uses before and after the consummation of the
Asset Sale. This also will give greater clarity to the ongoing
expenses following the Asset Sale, including the salaries and
directors' fees.
- PLEASE QUANTIFY AND LIST SEPARATELY ANY AMOUNTS THAT ARE
EXPECTED TO BE RECEIVED IN CONNECTION WITH THE DISPOSAL OF THE
ASSETS EXCLUDED FROM THE ASSET SALE OR DISCLOSE WHY NO SUCH
AMOUNTS HAVE NOT BEEN INCLUDED IN THE TABLE.
Response:
The Company notes that, other than the Arbitration Matter, no
amounts are expected to be received in connection with the disposal of
assets excluded from the Asset Sale. As described on page 16 of the
Proxy Statement, trade fixtures and personal property (including office
furniture) will be transferred to the landlord at the time the Company
vacates its facilities on or before March 31, 2005 in accordance with
the lease termination agreement entered into with the landlord. The
Company's only other remaining assets would be office supplies which
the Company intends to donate following the closing of the Asset Sale.
The Company has added a paragraph after the footnotes to the estimated
distribution table explaining these points.
- PLEASE QUANTIFY AND LIST SEPARATELY ANY AMOUNTS THAT ARE
EXPECTED TO BE PAID IN CONNECTION WITH THE TERMINATION OF THE
COMPANY'S FACILITIES LEASE OR IN CONNECTION WITH THE
TERMINATION OF ANY OTHER RETAINED CONTRACTS.
Response:
As described on page 16 of the Proxy Statement, in December
2004, the Company agreed to terminate the lease as of March 31, 2005 by
making a $500,000 payment and prepaying rent through March 31, 2005. No
additional cash payments are required to be made to the landlord in
connection with the termination of the facilities lease. In addition,
the Company has no retained contracts. The Company has added a
paragraph after the footnotes to the estimated distribution table
explaining these points.
* * * * * *
The Company notes that, in accordance with the Staff's request in the
initial comment letter, the Company has previously submitted a written statement
making the acknowledgments referenced at the end of the comment letter. The
Company intended that
David Ritenour, Esq.
February 1, 2005
Page 4
written statement to apply to its responses to all Staff comments in the review
of all versions of the Proxy Statement filed with the Securities and Exchange
Commission, including the initial comment letter, the comment letter to which
this letter responds and any future comment letters of the Staff. If you wish to
have a current letter, please so advise us or the Company and the Company will
provide an additional, more recently dated, letter.
If you have any questions concerning the foregoing, please contact
Barbara G. McClung at (650) 599-2527, the undersigned at (310) 203-7139 or Ben
Orlanski at (310) 203-7068. We would appreciate it if you could direct your
response to this submission to Barbara G. McClung at Cygnus, Inc. as you did
with the last comment letter. Ms. McClung's fax number is (650) 599-3913.
Very truly yours,
/s/ Ashok W. Mukhey
Ashok W. Mukhey
AM:kbj
cc: Adelaja K. Heyliger, Esq.
Barbara McClung, Esq.
Ben D. Orlanski, Esq.