Exhibit 10.42
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. IT MAY NOT BE SOLD OR OFFERED FOR SALE
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SAID ACT AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM SUCH
REGISTRATION REQUIREMENTS.
No. ____ $8,250,000
CYGNUS, INC.
8.5% CONVERTIBLE DEBENTURE DUE JUNE 29, 2004
THIS DEBENTURE ("Debenture") is one of a duly authorized issue of
Debentures of CYGNUS INC., a corporation duly organized and existing under
the laws of the State of Delaware (the "Company"), designated as the
Company's 8.5% Convertible Debentures Due June 29, 2004, in an aggregate
principal amount not exceeding eight million two hundred fifty thousand
dollars (U.S.$8,250,000).
FOR VALUE RECEIVED, the Company promises to pay to Halifax Fund, L.P.,
the initial holder hereof, or its order (including successors-in-interest, the
"Holder"), the principal sum of eight million two hundred fifty thousand U.S.
DOLLARS (U.S.$8,250,000) on June 29, 2004 (the "Maturity Date") and to pay
interest on the principal sum outstanding under this Debenture ("Outstanding
Principal Amount"), at the rate of 8.5% per annum, as an accretion to the
Outstanding Principal Amount of this Debenture and payable in full at the
Maturity Date. Interest shall accrue daily and compound quarterly commencing on
the date hereof and shall continue until payment in full of all amounts due
under this Debenture. At the end of each quarter, unless paid in cash pursuant
to the terms hereof, all interest accrued during such quarter shall be added
and shall accrete to the prior principal amount. The following quarter,
interest shall accrue and accrete on such new principal amount. The Outstanding
Principal Amount and accrued interest so payable will be paid to the person in
whose name this Debenture is registered on the records of the Company regarding
registration and transfers of the Debenture (the "Debenture Register").
Capitalized terms used herein and not otherwise defined shall have the meanings
set forth in the Convertible Debenture and Warrant Purchase Agreement dated as
of June 29, 1999 between the Company and the Holder and the other parties
thereto (the "Purchase Agreement") or the Registration Rights Agreement dated
as of June 29, 1999 between the Company and the Holder and the other parties
thereto (the "Registration Rights Agreement"). All Debentures issued pursuant
to the Purchase Agreement shall hereinafter be referred to collectively as the
"Debentures."
The principal of, interest on, and default payments (referred to
below) in respect of this Debenture are payable in such coin or currency of
the United States that as of the time of payment is legal tender for payment
of public and private debts at the address last appearing on the Debenture
Register of the Company as designated in writing by the Holder hereof from
time to time. Any interest when added to the Outstanding Principal Amount due
under this Debenture shall, for all purposes of this Debenture, be deemed to
have been
part of the principal indebtedness originally evidenced by this Debenture
including, without limitation, for purposes of determining amounts
convertible into shares of Common Stock hereunder.
The Company will pay any principal due and all accrued and unpaid
interest due upon this Debenture to the person that is the Holder of this
Debenture on the records of the Company as of the Maturity Date and addressed
to such Holder at the last address appearing on the Debenture Register.
The Outstanding Principal Amount and interest due hereunder shall
bear interest, from and after the 31st day following the occurrence and
during the continuance of an Event of Default hereunder, at the rate equal to
the lower of the Citibank Prime Rate per annum plus 8% or the highest rate
permitted by law.
Adjustments to the Conversion Price may be required pursuant to the
Registration Rights Agreement if the Registration Statement is not declared
effective.
Subject to applicable law, any interest otherwise payable that is
not paid because it would exceed the highest rate permitted by law shall
become payable whenever the payment thereof, together with other interest due
would not exceed such highest legal rate.
The Holder of this Debenture is entitled to certain rights and
remedies pursuant to the Purchase Agreement and Registration Rights
Agreement. This Debenture does not provide voting rights to the Holder.
This Debenture shall rank PARI PASSU with all current and future
unsecured indebtedness of the Company; PROVIDED, HOWEVER, that prior to
issuing a private placement of any convertible debentures to any person or
entity , excluding for this purpose any convertible debenture issued (i)
pursuant to the Purchase Agreement, (ii) to any strategic partner of the
Company or (iii) in connection with any acquisition of a business or assets
(other than cash) by the Company, the Company will obtain subordination
agreements in form reasonably satisfactory to the holders of a majority of
the aggregate principal amount of the Debentures then outstanding
subordinating such convertible debentures to the Debentures.
This Debenture is subject to the following additional provisions:
1. DENOMINATION. Subject to applicable law, this Debenture is
exchangeable for an equal aggregate principal amount of Debentures of
different denominations, as requested by the Holder surrendering the same. No
service charge will be made for such registration or transfer or exchange.
2. TRANSFERS. This Debenture may be transferred or exchanged in
the United States only in compliance with the Securities Act of 1933, as
amended (the "Act"), and applicable state securities laws, or applicable
exemptions therefrom. Prior to due presentment for transfer of this
Debenture, the Company may treat the person in whose name this Debenture is
duly registered on the Company's Debenture Register as the
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owner hereof for the purpose of receiving payment as herein provided, whether
or not this Debenture is overdue.
3. DEFINITIONS. For purposes hereof the following definitions
shall apply:
"CHANGE IN CONTROL TRANSACTION" shall mean (x) any
consolidation or merger of the Company with or into any other corporation or
other entity or person (whether or not the Company is the surviving
corporation) or any other corporate reorganization or transaction or series
of related transactions pursuant to which the stockholders of the Company
immediately prior to such transaction beneficially own less than 50% of the
Company's or any such surviving corporation's voting securities upon
consummation of such transaction, (y) any sale by the Company of assets that
represent more than 66 2/3% of the total fair market value of the Company's
assets immediately prior to such sale, or (z) any person or group of persons
(as defined in Section 13(d) or 14(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), together with its affiliates and associates
(as such terms are defined in Rule 405 under the Act), becoming the
beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of in
excess of 50% of the Company's then outstanding voting securities.
"CLOSING DATE" shall mean June, 28 1999.
"CLOSING PRICE" shall mean the average of the closing bid
prices for the Company's Common Stock on the ten (10) consecutive Trading
Days ending on the Closing Date and the ten (10) consecutive Trading Days
thereafter.
"COMMON STOCK" shall mean the common stock, par value $.001
per share, of the Company.
"CONVERSION NOTICE" shall have the meaning set forth in
Paragraph 5(d).
"CONVERSION PRICE" shall have the meaning set forth in
Paragraph 5(c).
"FORCED CONVERSION NOTICE" shall have the meaning set forth
in Paragraph 6(a).
"HOLDER CONVERSION DATE" shall have the meaning set forth in
Paragraph 5(d).
"MARKET PRICE FOR SHARES OF COMMON STOCK" shall mean the
price of one share of Common Stock determined as follows:
(i) If the Common Stock is listed on Nasdaq NMS, the
closing bid price on the date of valuation;
(ii) If the Common Stock is listed on the New York Stock
Exchange or the American Stock Exchange, the low trading price on such
exchange on the date of valuation;
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(iii) If neither (i) nor (ii) apply but the Common Stock is
quoted in the over-the-counter market, another recognized exchange, on the
pink sheets or bulletin board, the lesser of (A) the lowest sales price on
the date of valuation or (B) the mean between the last reported "bid" and
"asked" prices thereof on the date of valuation; and
(iv) If neither clause (i), (ii) or (iii) above applies,
the fair market value as determined by a nationally recognized investment
banking firm or other nationally recognized financial advisor retained by the
Company for such purpose, taking into consideration, among other factors, the
earnings history, book value and prospects for the Company, and, if
applicable, the prices at which shares of Common Stock recently have been
traded. Such determination shall be conclusive and binding on all persons.
"TRADING DAY" shall mean a day on which the Common Stock is
traded on the NASDAQ or principal exchange on which the Common Stock has been
listed (or any similar organization or agency succeeding such market or
exchange's functions of reporting prices).
4. CHANGE IN CONTROL; BLACKOUT PERIODS.
(a) If at any time there occurs any Change in Control
Transaction, Holder shall be entitled to have the Company redeem this
Debenture, in cash or shares of Common Stock, at the election of the Holder
in whole or in part at a redemption price equal to 115% of the Outstanding
Principal Amount of this Debenture plus all accrued but unpaid interest and
penalties on this Debenture. Such Holder shall be entitled to make such
election at any time after consummation of the Change in Control Transaction
and up to fifteen (15) Trading Days thereafter.
(b) If at any time after the effectiveness of the
Registration Statement contemplated by the Registration Rights Agreement
applicable to this Debenture, a Holder does not have the ability to trade
freely any shares of Common Stock acquired upon conversion of this Debenture
for five (5) consecutive Trading Days or fifteen (15) Trading Days, in the
aggregate, in any 12 month period for any reason other than a transaction
(such as a merger or an acquisition or a disposition of a business) or other
corporate event which, under applicable securities laws or SEC regulations,
require the Company to delay or restate its financial statements to comply
with such laws or regulations (a "Blackout Period"), then the Holder shall
have the right to require the Company to redeem any then outstanding
Debentures in cash or shares of Common Stock, at the election of the Holder
at the greater of (i) 120% of the Outstanding Principal Amount plus accrued
interest and default payments, if any, or (ii) that number of shares of
Common Stock calculated in accordance with Section 5(b) below multiplied by
the Market Price per Share of Common Stock on the day prior to exercise of
such right. Notwithstanding the foregoing, in no event may any Blackout
Period extend more than twenty (20) consecutive Trading Days or forty (40)
Trading Days, in the aggregate, in any 12 month period.
5. CONVERSION AT THE OPTION OF THE HOLDER. The Holder of this
Debenture shall have the following conversion rights.
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(a) HOLDER'S RIGHT TO CONVERT. This Debenture shall be
convertible in full at any time, in whole or in part, at the option of the
Holder hereof, into fully paid, validly issued and nonassessable shares of
Common Stock. If this Debenture is converted in part, the remaining portion
of this Debenture not so converted shall remain entitled to the conversion
rights provided herein.
(b) CONVERSION FOR HOLDER CONVERTED SHARES. The
Outstanding Principal Amount of this Debenture plus accrued interest that is
converted into shares shall be convertible into the number of shares of
Common Stock which results from application of the following formula:
P + I + D
------------------------------
Conversion Price
P = Outstanding Principal Amount of this Debenture
submitted for conversion as of the Holder
Conversion Date
I = accrued but unpaid interest (not previously added
to principal) on P as of the Holder Conversion Date
D = default payments (not previously added to
principal) as of the Holder Conversion Date
(c) CONVERSION PRICE. Subject to adjustment as provided herein or
in the Registration Rights Agreement, this Debenture will have a conversion
price (the "Conversion Price") equal to 110% of the Closing Price.
(d) MECHANICS OF CONVERSION. In order to convert this Debenture
(in whole or in part) into full shares of Common Stock, the Holder shall
surrender this Debenture, duly endorsed, by either overnight courier or 2-day
courier, to the principal office of the Company, and shall give written
notice in the form of EXHIBIT 1 hereto (the "Conversion Notice") by facsimile
(with the original of such notice forwarded with the foregoing courier) to
the Company at such office that the Holder elects to convert the principal
amount (plus accrued but unpaid interest and default payments) specified
therein, which such notice and election shall be revocable by the Holder at
any time prior to the date on which the Company issues the Common Stock upon
conversion; PROVIDED, HOWEVER, that the Company shall not be obligated to
issue certificates evidencing the shares of the Common Stock issuable upon
such conversion unless either the Debenture evidencing the principal amount
is delivered to the Company as provided above, or the Holder notifies the
Company that such Debenture(s) has been lost, stolen or destroyed and
promptly executes an agreement reasonably satisfactory to the Company to
indemnify the Company from any loss that may be incurred by it in connection
with such lost, stolen or destroyed Debenture(s).
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Within three (3) Trading Days ("T+3") after delivery to the Company
of such Conversion Notice, the Company shall issue and deliver to such Holder
of Debenture(s) at the address of the Holder, or to its designee, a
certificate or certificates for the number of shares of Common Stock to which
the Holder shall be entitled as aforesaid and a Debenture or Debentures for
the principal amount of Debentures not submitted for conversion. The date on
which the Conversion Notice is given (the "Holder Conversion Date") shall be
deemed to be the date the Company received by facsimile the Conversion Notice
duly executed by the Holder, and the Holder entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder or holders of such shares of Common Stock at the close
of business on the Holder Conversion Date.
In lieu of delivering physical certificates representing the Common
Stock issuable upon conversion of this Debenture provided the Company's
transfer agent is participating in the Depository Trust Company ("DTC") Fast
Automated Securities Transfer ("FAST") program, upon request of the Holder,
the Company shall use its best efforts to cause its transfer agent to
electronically transmit the Common Stock issuable upon conversion or exercise
of this Debenture to the Holder, by crediting the account of Holder's prime
broker with DTC through its Deposit Withdrawal Agent Commission ("DWAC")
system. The time periods for delivery described above shall apply to the
electronic transmittals through the DWAC system. The parties agree to
coordinate with DTC to accomplish this objective. The conversions pursuant to
Sections 5 and 6 shall be deemed to have been made immediately prior to the
close of business on the Holder Conversion Date. The person or persons
entitled to receive the Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such Common Stock
at the close of business on the Holder Conversion Date.
6. FORCED CONVERSION AT THE OPTION OF THE COMPANY.
(a) The Company shall have the option, on thirty (30)
Trading Days' prior written notice to the Holder ("Forced Conversion
Notice"), to require the Holder to convert up to 100% of the original
Outstanding Principal Amount of the Debentures plus accrued interest if (i)
the last sale price as reported by the Bloomberg Financial Press
("Bloomberg") for the Common Stock is greater than 200% of the Closing Price
for ten (10) consecutive Trading Days, (ii) the Registration Statement has
been continuously effective during the thirty (30) Trading Day period
following the date of the Forced Conversion Notice, and (iii) no Event of
Default then exists.
(b) Any Forced Conversion Notice must be given by
facsimile and by overnight courier to the Holder of this Debenture. The
Forced Conversion Notice shall be addressed to each such Holder at the
facsimile number and address of such Holder appearing on the books of the
Company or given by the Holder to the Company for the purpose of notice. Each
Holder that receives a Forced Conversion Notice shall surrender its Debenture
to the Company at the place designated in such notice, or to such Holder's
agent, and shall thereupon be entitled to receive shares of Common Stock
calculated in accordance with Section 5(b) above and delivered in accordance
with the procedures set forth in Paragraph 5(d) hereof.
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(c) Unless default shall be made by the Company in duly
delivering the shares of Common Stock (which default shall be deemed a breach
of the terms of this Debenture by the Company), in which case all the rights
of the Holder of this Debentures shall continue, the Holder of this Debenture
shall, from and after the date of the Forced Conversion Notice, cease to have
any rights relating to this Debenture, except the right to receive such
Holder's portion of the shares of Common Stock, and this Debenture shall not
thereafter be transferred on the books of the Company and shall not be deemed
outstanding for any purpose whatsoever.
(d) If the Company elects not to deliver a Forced
Conversion Notice although entitled to do so pursuant to Paragraph 6(a)
hereof, the interest will cease accruing on the Outstanding Principal Amount
until the last sale price as reported by Bloomberg for the Common Stock
closes below 200% of the Closing Price.
(e) There shall be no forced conversion of any Debentures
of the Company where such action would be in violation of applicable law.
7. STOCK SPLITS; DIVIDENDS; ADJUSTMENTS; REORGANIZATIONS; BELOW
MARKET ISSUANCES.
(a) If the Company, at any time while this Debenture is
outstanding, (i) shall pay a stock dividend or otherwise make a distribution
or distributions on any equity securities (including securities convertible
into or exchangeable for such equity securities) in shares of Common Stock,
(ii) issue any securities payable in shares of Common Stock, (iii) subdivide
outstanding shares of Common Stock into a larger number of shares or (iv)
combine outstanding shares of Common Stock into a smaller number of shares,
then the Conversion Price shall be multiplied by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding before such
event and the denominator of which shall be the number of shares of Common
Stock outstanding after such event. Any adjustment made pursuant to this
Paragraph 7(a) shall become effective immediately after the record date for
the determination of shareholders entitled to receive such dividend or
distribution and shall become effective immediately after the effective date
in the case of a subdivision or combination.
(b) If the Company, at any time while this Debenture is
outstanding, shall distribute to all holders of Common Stock securities of
the Company any (other than Common Stock) or evidences of its indebtedness or
assets or rights or warrants to subscribe for or purchase any security
(excluding those referred to in Paragraph 7(a) above), then in each such case
the Conversion Price at which this Debenture shall thereafter be convertible
shall be adjusted by multiplying the Conversion Price in effect immediately
prior to the record date fixed for determination of shareholders entitled to
receive such distribution by a fraction, the numerator of which shall be such
Market Price for Shares of Common Stock on such record date less the then
fair market value at such record date of the portion of the capital stock or
assets or evidence of indebtedness so distributed or of such rights or
warrants applicable to one outstanding share of Common Stock as determined by
the Board of Directors in good faith, and the denominator of which shall be
the Market Price for Shares of Common Stock determined as of such
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record date; PROVIDED, HOWEVER that in the event of a distribution exceeding
25% of the net assets of the Company, such fair market value shall be
determined by a nationally recognized or major regional investment banking
firm or firm of independent chartered accountants of recognized standing
(which may be the firm that regularly examines the financial statements of
the Company) (an "Appraiser") selected in good faith by the Board of
Directors and Holders of a majority in interest of the Debentures. In either
case the adjustments shall be described in a statement to be provided to all
holders of Debentures regarding the portion of assets or evidences of
indebtedness so distributed. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date mentioned in this subparagraph.
(c) (1) In the event that at any time or from time to
time after the Closing Date, the Common Stock issuable upon the conversion of
the Debentures is changed into the same or a different number of shares of
any class or classes of stock, whether by merger, consolidation,
recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or reorganization provided for
elsewhere in this Paragraph 7), then, as a condition to each such event,
provision shall be made in a reasonable manner so that the Holder of this
Debenture shall have the right thereafter to convert this Debenture into the
kind of stock receivable upon such recapitalization, reclassification or
other change by a holder of a number of shares of Common Stock issuable upon
conversion of this Debenture immediately prior to such merger, consolidation,
recapitalization, reclassification or other event. In such event, the
formulae set forth herein for conversion and redemption shall be equitably
adjusted to reflect such change in number of shares or, if shares of a new
class of stock are issued, to reflect the market price of the class or
classes of stock (applying the same factors used in determining the
Conversion Price) issued in connection with the above described transaction.
(2) If at any time or from time to time after the
Closing Date there is a capital reorganization of the Common Stock, including
by way of a sale of all or substantially all of the assets of the Company
(other than a recapitalization, subdivision, combination, reclassification or
exchange of shares provided for elsewhere in this Paragraph 7), then, as a
part of and a condition to such reorganization, provision shall be made in a
reasonable manner so that the Holder of this Debenture shall thereafter be
entitled to receive upon conversion of this Debenture the number of shares of
stock or other securities or property receivable upon such capital
reorganization by a holder of a number of shares of Common Stock issuable
upon conversion of this Debenture immediately prior to such capital
reorganization. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Paragraph 7 with respect to the rights
of the Holders of this Debenture after such reorganization to the end that
the provisions of this Paragraph 7 shall be applicable after that event and
be as nearly equivalent as may be practicable, including, by way of
illustration and not limitation, by equitably adjusting the formulae set
forth herein for conversion and redemption to reflect the market price of the
securities or property (applying the same factors used in determining the
Market Price for Shares of Common Stock) issued in connection with the above
described transaction.
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(d) If at any time or from time to time after twelve (12)
months from the Closing Date, the Company sells or issues Common Stock (or
other equity securities or rights exercisable or exchangeable for, or
convertible into, Common Stock or such other equity securities) in a private
placement, excluding the issuance of any Common Stock pursuant to the
contemplated Equity Line Flexible Financing Agreement, in the case of Common
Stock, at a discount to the market price of the Common Stock on the date of
sale or issuance, or in the case of a convertible, exchangeable, or
exercisable security, with a conversion price less than the market price on
the date of issuance, then, the Conversion Price of this Debenture shall be
reduced by multiplying the Conversion Price by a fraction, the numerator of
which shall be the aggregate amount of such discount to the market price and
the denominator of which shall be the Company's market capitalization on the
date of such sale or issuance and then subtracting this number from the
Conversion Price; PROVIDED, HOWEVER, that if such reduction is less than one
percent (1%) of the Conversion Price, then no adjustment shall be made,
PROVIDED, FURTHER, HOWEVER, that all such issuances shall be cumulative and
upon exceeding one percent (1%), the Conversion Price of this Debenture shall
be adjusted accordingly.
(e) Whenever the Conversion Price is adjusted pursuant to
Section 7(a), (b), (c) or (d) the Company shall promptly mail to each Holder
of the Debentures, a notice setting forth the Conversion Price after such
adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(f) In the event of any taking by the Company of a record
date of the holders of any class of securities for the purpose of determining
the holders thereof who are entitled to receive any dividend or other
distribution, any security or right convertible or exchangeable into or
entitling the holder thereof to receive additional Common Shares, or any
right to subscribe for, purchase or otherwise acquire any shares of stock of
any class or any other securities or property, or to receive any other right
or for any other purpose, the Company shall deliver to each Holder of
Debentures at least 20 days prior to the date specified therein, a notice
specifying the date on which any such record is to be taken for the purpose
of such dividend, distribution, security, right or purpose and the amount and
character of such dividend, distribution, security, right or purpose.
8. FRACTIONAL SHARES. No fractional shares of Common Stock or
scrip representing fractional shares of Common Stock shall be issuable
hereunder. The number of shares of Common Stock that are issuable upon any
conversion shall be rounded to the nearest whole share.
9. RESERVATION OF STOCK ISSUABLE UPON CONVERSION.
(a) RESERVATION REQUIREMENT. The Company covenants that
it will at all times reserve and keep available out of its authorized and
unissued Common Stock solely for the purpose of issuance upon conversion of
the Debenture as herein provided, free from preemptive rights or any other
present or contingent purchase rights of persons other than the Holders of
the Debentures, a sufficient number of shares of Common Stock as shall be
issuable (taking into account the adjustments and restrictions of Paragraphs
5 and 7 hereof) upon the conversion of all of the Debentures pursuant hereto.
The
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Company covenants that all shares of Common Stock that shall be so issuable
upon the conversion of all of this Debenture pursuant hereto shall, upon
issue, be duly and validly authorized and issued and fully paid and
nonassessable.
(b) DEFICIENCY. If the Company does not have a sufficient
number of shares of Common Stock available to satisfy the Company's
obligations to a Holder of Debentures upon receipt of a Conversion Notice or
is otherwise unable to issue such shares of Common Stock in accordance with
the terms of this Agreement, then such Holder shall be entitled to the rights
and remedies set forth in the Registration Rights Agreement.
10. NO REISSUANCE OF THE DEBENTURE. No Debentures acquired by the
Company by reason of conversion or otherwise shall be reissued, and all such
Debentures shall be retired.
11. NO IMPAIRMENT. The Company shall not intentionally take any
action which would materially impair the rights and privileges of the
Debentures set forth herein or the Holders thereof.
12. LIMITATIONS ON HOLDER'S RIGHT TO CONVERT.
(a) Notwithstanding anything to the contrary contained
herein but subject the Company's right of Forced Conversion set forth in
Section 6, no Debenture may be converted, to the extent that, after giving
effect to the conversion and issuing the shares of Common Stock to be issued
pursuant to the applicable Conversion Notice, the total number of shares of
Common Stock deemed beneficially owned by such Holder (other than by virtue
of the ownership of Debentures or ownership of other securities that have
limitations on a Holder's rights to exchange, convert or exercise similar to
those limitations set forth herein), together with all shares of Common Stock
deemed beneficially owned by such Holder's "affiliates" (as defined in Rule
405 of the Act) that would be aggregated for purposes of determining whether
a group under Section 13(d) of the Securities Exchange Act of 1934, as
amended, exists, would exceed 9.9% (the "Restricted Ownership Percentage") of
the total issued and outstanding shares of the Company's Common Stock;
PROVIDED that (w) each Holder shall have the right at any time and from time
to time to reduce its Restricted Ownership Percentage immediately upon notice
to the Company, (x) each Holder shall have the right at any time and from
time to time, to increase its Restricted Ownership Percentage immediately in
the event of the announcement of a pending or proposed Change in Control
Transaction, (y) each Holder may make any number of subsequent adjustments
pursuant to clauses (w) or (x) of this Paragraph 12(a) from time to time
(which adjustment shall be effective immediately if it results in a decrease
in the percentage or immediately in the event of the announcement of a
pending or proposed Change in Control Transaction if it results in an
increase in the percentage) and (z) each Holder may reinstate this limitation
at any time and from time to time (which reinstatement will be effective
immediately). For this purpose, any material modification of the terms of a
Change in Control Transaction will be deemed to result in a new Change in
Control Transaction. The term "deemed beneficially owned" as used in this
Debenture shall exclude shares that might otherwise
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be deemed beneficially owned by reason of the convertibility of the
Debentures. The Company shall provide all Holders with the earlier of (i) 20
days' prior written notice of any such Change in Control Transaction, to the
extent the Company has prior knowledge of a Change in Control Transaction; or
(ii) notice on the day immediately following the Company's learning of any
such transaction, but only after, in the case of (i) and (ii), such Change in
Control Transaction has been publicly disclosed.
13. OBLIGATIONS ABSOLUTE. No provision of this Debenture shall
alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the principal of, and interest and default payments on,
this Debenture at the time, place and rate, and in the manner, herein
prescribed.
14. AMENDMENTS. (a) Any term, covenant, agreement or condition of
this Debenture may, with the written consent of the Company, be amended, by
one or more substantially concurrent written instruments signed by the
Holders of at least 66 2/3% of the aggregate principal amount of Debentures
then outstanding, except that without the prior written consent of the
Holders of all of the Debentures, no such amendment shall (i) reduce the
principal of, or interest rate on, or the formula for the calculation of the
Conversion Price with respect to any of the Debentures, (ii) extend the time
of payment for all or any portion of the principal or interest on or with
respect to any of the Debentures, (iii) modify any of the provisions of this
Debenture with respect to the payment or prepayment of the principal thereof
or interest thereon, (iv) reduce the percentage of Holders required with
respect to any such amendment or (v) modify any provision of this Section 14.
(b) Any amendment pursuant to Section 14(a) shall apply equally to all
Holders at the time outstanding and shall be binding upon them, upon each
future Holder of any Debenture, and upon the Company, in each case whether or
not a notation thereof shall have been placed on any Debenture.
15. WAIVERS OF DEMAND, ETC. The Company hereby expressly and
irrevocably waives demand and presentment for payment, notice of nonpayment,
protest, notice of protest, notice of dishonor, notice of acceleration or
intent to accelerate, bringing of suit and diligence in taking any action to
collect amounts called for hereunder, and will be directly and primarily
liable for the payment of all sums owing and to be owing hereon, regardless
of and without any notice, diligence, act or omission as or with respect to
the collection of any amount called for hereunder.
16. REPLACEMENT DEBENTURE. In the event that any Holder notifies
the Company that its Debenture(s) have been lost, stolen or destroyed,
replacement Debenture(s) identical in all respects to the original
Debenture(s) (except for registration number and Outstanding Principal
Amount, if different than that shown on the original Debenture(s)), shall be
issued to the Holder, provided that the Holder executes and delivers to the
Company an agreement reasonably satisfactory to the Company to indemnify the
Company from any loss that may be incurred by it in connection with such
Debenture.
17. PAYMENT OF EXPENSES; ISSUE TAXES. The Company agrees to pay
all reasonable expenses, including reasonable attorneys' fees, which may be
incurred by the
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Holder in enforcing the provisions of this Debenture and/or collecting any
amount due under this Debenture. The issue of stock certificates upon
conversion of this Debenture shall be made without charge to the converting
Holder for any tax in respect to the issue thereof. The Company shall not,
however, be required to pay any tax which may be payable in respect to any
transfer involved in the issue and delivery of stock in any name other than
that of the Holder of this Debenture.
18. DEFAULTS. If one or more of the following described "Events
of Default" shall occur:
(a) The Company shall default in the timely payment of
(i) interest on this Debenture or (ii) the principal of this Debenture, and
in each case such default shall not have been cured within five (5) days ; or
(b) Any of the representations or warranties made by the
Company, herein, in the Purchase Agreement, the Registration Rights
Agreement, any Warrant or in any certificate or financial or other statements
heretofore or hereafter furnished by or on behalf of the Company, in
connection with the execution and delivery of this Debenture or such other
documents shall be false or misleading in any material respect at the time
made and written notice of such breach shall have been given to the Company
by the Holders of at least twenty-five percent (25%) of the aggregate
principal amount of the Debentures then outstanding; or
(c) The Company shall fail to perform or observe in any
material respect any covenant or agreement in the Purchase Agreement or the
Registration Rights Agreement (including a failure to have the Registration
Statement declared effective within the time periods specified therein) or
any other material covenant, term, provision, condition, agreement or
obligation of the Company under this Debenture and such failure shall
continue uncured for a period of five (5) business days after notice from the
Holders of at least twenty-five percent (25%) of the aggregate principal
amount of the Debentures then outstanding of such failure; or
(d) The Company shall (1) become insolvent; (2) admit in
writing its inability to pay its debts generally as they mature; (3) make an
assignment for the benefit of creditors or commence proceedings for its
dissolution; or (4) apply for or consent to the appointment of a trustee,
liquidator or receiver for it or for a substantial part of its property or
business; or
(e) A trustee, liquidator or receiver shall be appointed
for the Company or for a substantial part of its property or business without
its consent and shall not be discharged within thirty (30) days after such
appointment; or
(f) Any governmental agency or any court of competent
jurisdiction at the instance of any governmental agency shall assume custody
or control of the whole or any substantial portion of the properties or
assets of the Company and shall not be dismissed within thirty (30) days
thereafter; or
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(g) Bankruptcy, reorganization, insolvency or liquidation
proceedings or other proceedings or relief under any bankruptcy, insolvency
or other similar law or any law for the relief of debt shall be instituted by
or against the Company and, if instituted against the Company, shall not be
dismissed within thirty (60) days after such institution, or the Company
shall by any action or answer approve of, consent to, or acquiesce in any
such proceedings or admit to any material allegations of, or default in
answering a petition filed in any such proceeding; or
(h) The Company shall be in default, and shall not have
cured within the applicable time period allowed therefor, of any of its
indebtedness (excluding indebtedness incurred in the ordinary course of
business such as trade debt and accounts payable and indebtedness secured by
accounts receivable and inventory) that gives the holder thereof the right to
accelerate such indebtedness;
THEN, or at any time thereafter, and in each and every such case, unless such
Event of Default shall have been waived in writing by Holders of at least
seventy-five (75%) of the aggregate principal amount of the Debentures then
outstanding (which waiver shall not be deemed to be a waiver of any
subsequent default), at the option of the Holders of at least twenty-five
(25%) of the aggregate principal amount of the Debentures then outstanding
the Holders may consider the Debentures immediately due and payable, without
presentment, demand, protest or notice of any kind, all of which are hereby
expressly waived, anything herein or in any other instruments to the contrary
notwithstanding, and the Holders may immediately, and without expiration of
any period of grace, enforce any and all of the Holders' rights and remedies
provided herein or any other rights or remedies afforded by law. In such
event, this Debenture shall be redeemed at a redemption price per Debenture
equal to the greater of (i) 120% of the Outstanding Principal Amount plus
accrued interest and default payments, if any, or (ii) that number of shares
of Common Stock calculated in accordance with Section 5(b) above multiplied
by the Market Price per Share of Common Stock on the day prior to exercise of
such right.
19. SUBORDINATION AGREEMENT. Until this Debenture is redeemed or
converted pursuant to the Purchase Agreement, in the event that the Company
refinances the secured debt it owes to Silicon Valley Bank, or enters into a
new agreement with a bank for debt secured by the Company's property, the
Holder will enter into a subordination agreement substantially similar to
that certain Subordination and Consent Agreement by and between the Holders
and Silicon Valley Bank dated June 29, 1999, subordinating this Debenture to
the same extent as under such agreement under such refinancing or new
agreement; provided, however, the Company covenants and agrees that,
commencing on the date hereof and until twenty-four (24) months from the date
hereof, it will not incur or permit to exist any senior indebtedness in
excess of $40,000,000. If, after twenty-four (24) months from the date
hereof, the Company incurs senior indebtedness in excess of $40,000,000, the
Holder shall have the right to require the Company to redeem this Debenture
in cash, in an amount equal to the Outstanding Principal Amount plus accrued
interest and default payments, if any, to the redemption date. If the Holder
desires to exercise the right to have this Debenture redeemed in accordance
with the preceding sentence, to be effective, the Holder must give the
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Company written notice of such exercise within thirty (30) days after the
date the Company gives such Investor written notice that it has incurred
senior indebtedness in excess of $40,000,000. The redemption date with
respect to any such redemption shall be the thirtieth (30th) day after the
Company's receipt of such written notice of election from such Investor or,
if such day is not a business day, the next succeeding business day. In order
to receive the payment due upon redemption on the redemption date, the
Investor must surrender this Debenture to the Company at its principal
executive office on the redemption date.
20. SAVINGS CLAUSE. In case any provision of this Debenture is
held by a court of competent jurisdiction to be excessive in scope or
otherwise invalid or unenforceable, such provision shall be adjusted rather
than voided, if possible, so that it is enforceable to the maximum extent
possible, and the validity and enforceability of the remaining provisions of
this Debenture will not in any way be affected or impaired thereby, and such
provision shall remain effective in all other jurisdictions.
21. ENTIRE AGREEMENT. This Debenture, the Warrants and the
agreements referred to in this Debenture constitute the full and entire
understanding and agreement between the Company and the Holder with respect
to the subject hereof. Neither this Debenture nor any term hereof may be
amended, waived, discharged or terminated other than by a written instrument
signed by the Company and the Holder.
22. ASSIGNMENT, ETC. The Holder may assign this Debenture (in
whole or in part) without the consent of the Company in connection with the
sale or transfer of all or any portion of this Debenture to an affiliate or
client of the Palladin Group, L.P. In the event that the Holder wishes to
assign this Debenture (in whole or in part) in connection with the sale or
transfer of all or any portion of this Debenture to any person or entity
other than an affiliate or client of the Palladin Group, L.P.: (i) the Holder
shall first provide to the Company a notice stating the price at which it is
willing to sell such Debenture (or portion thereof) and the other material
terms of the proposed sale, (ii) the Company shall have ten (10) business
days to provide notice to the Holder if it wishes to accept such offer, (iii)
if the Company accepts such offer, the Company shall purchase such Debenture
(or portion thereof) on the terms proposed within thirty (30) days after such
acceptance and (iv) in the event the Company elects not to purchase such
Debenture (or portion thereof), the Holder may offer such Debenture (or
portion thereof) to any third party on terms no more favorable to such third
party than those offered to the Company, PROVIDED, HOWEVER, that no Holder
may sell such Debenture (or portion thereof) if after giving effect to such
sale all Debentures would be held by more than seven (7) separate persons or
entities other than affiliates or clients of the Palladin Group, L.P.; and
PROVIDED, FURTHER, HOWEVER, that no Investor may sell such Debentures in
increments of less than $500,000. The Company agrees that, subject to
compliance with the Purchase Agreement, after receipt by the Company of
written notice of assignment from the Holder or from the Holder's assignee,
all principal, interest and other amounts which are then and thereafter
become due under this Debenture shall be paid to such assignee at the place
of payment designated in such notice. This Debenture shall be binding upon
the
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Company and its successors and affiliates and shall inure to the benefit of
the Holder and its successors and assigns.
23. NO WAIVER. No failure on the part of the Holder to exercise,
and no delay in exercising any right, remedy or power hereunder shall operate
as a waiver thereof, nor shall any single or partial exercise by the Holder
of any right, remedy or power hereunder preclude any other or future exercise
of any other right, remedy or power. Each and every right, remedy or power
hereby granted to the Holder or allowed it by law or other agreement shall be
cumulative and not exclusive of any other, and may be exercised by the Holder
from time to time.
24. CERTIFICATE FOR CONVERSION PRICE ADJUSTMENT. The Company
shall, upon the written request at any time of any Holder of this Debenture,
furnish or cause to be furnished to such Holder a certificate prepared by the
chief financial officer of Company setting forth any adjustments or
readjustments of the Conversion Price pursuant to this Debenture.
25. NOTICES. The Company shall distribute to the Holder of this
Debenture copies of all notices, materials, annual and quarterly reports,
proxy statements, information statements and any other documents distributed
generally to the holders of shares of Common Stock of the Company, at such
times and by such method as such documents are distributed to such holders of
such Common Stock, but shall not directly or indirectly provide material
non-public information to the Holder without such Holder's prior written
consent.
26. SPECIFIC ENFORCEMENT. The Company agrees that irreparable
damage would occur in the event that any of the provisions of this Debenture
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the Holder of this Debenture shall be
entitled to swift specific performance, injunctive relief or other equitable
remedies to prevent or cure breaches of the provisions of this Debenture and
to enforce specifically the terms and provisions hereof, this being in
addition to any other remedy to which any of them may be entitled under
agreement, at law or in equity.
27. MISCELLANEOUS. Unless otherwise provided herein, any notice
or other communication to a party hereunder shall be sufficiently given if in
writing and personally delivered, facsimiled or mailed to said party by
certified mail, return receipt requested, at its address set forth herein or
such other address as either may designate for itself in such notice to the
other and communications shall be deemed to have been received when delivered
personally or, if sent by mail or facsimile, then when actually received by
the party to whom it is addressed. Whenever the sense of this Debenture
requires, words in the singular shall be deemed to include the plural and
words in the plural shall be deemed to include the singular. Paragraph
headings are for convenience only and shall not affect the meaning of this
document.
28. GOVERNING LAW; CONSENT TO JURISDICTION. THIS DEBENTURE SHALL
BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF
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THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS TO BE EXECUTED AND PERFORMED
ENTIRELY WITHIN SUCH STATE. THE COMPANY (I) HEREBY IRREVOCABLY SUBMITS TO THE
EXCLUSIVE JURISDICTION OF THE STATE AND FEDERAL COURTS LOCATED IN SAN
FRANCISCO COUNTY, CALIFORNIA FOR THE PURPOSES OF ANY SUIT, ACTION OR
PROCEEDING ARISING OUT OF OR RELATED TO THIS DEBENTURE AND (II) HEREBY
WAIVES, AND AGREES NOT TO ASSERT IN ANY SUCH SUIT, ACTION OR PROCEEDING, ANY
CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT,
THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR
THAT THE VENUE OF THE SUIT, ACTION OR PROCEEDING IS IMPROPER. THE COMPANY
CONSENTS TO PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY
MAILING A COPY THEREOF TO SUCH PARTY AS PROVIDED HEREIN AND AGREES THAT SUCH
SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE
THEREOF. NOTHING IN THIS PARAGRAPH SHALL AFFECT OR LIMIT ANY RIGHT TO SERVE
PROCESS IN ANY OTHER MANNER PERMITTED BY LAW.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed by an officer thereunto duly authorized.
DATED: June 29,1999
CYGNUS, INC.
By: /s/ Craig W. Carlson
---------------------------------------------
Name: Craig Carlson
---------------------------------------
Title: SR. VP Finance, CFO
---------------------------------------
Address: 400 Penobscot, Redwood City, CA
-------------------------------------
[SIGNATURE PAGE TO 8.5% CONVERTIBLE SECURED DEBENTURE OF CYGNUS, INC.]
EXHIBIT 1
(To be Executed by Registered Holder
in order to Convert Debenture)
CONVERSION NOTICE
FOR
8.5% CONVERTIBLE SECURED DEBENTURE DUE JUNE 29, 2004
The undersigned, as Holder of the 8.5% Convertible Secured Debenture Due June
29, 2004 of CYGNUS, INC. (the "Company"), in the outstanding principal amount
of U.S$8,250,000 (the "Debenture"), hereby elects to convert that portion of
the outstanding principal amount of the Debenture shown on the next page into
shares of Common Stock, par value $.001 per share (the "Common Stock"), of
the Company according to the conditions of the Debenture, as of the date
written below. The undersigned hereby requests that share certificates for
the Common Stock to be issued to the undersigned pursuant to this Conversion
Notice be issued in the name of, and delivered to, the undersigned or its
designee as indicated below. If shares are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer
taxes payable with respect thereto. No fee will be charged to the Holder for
any conversion, except for transfer taxes, if any.
Conversion Information: NAME OF HOLDER: HALIFAX FUND, L.P.
By:_________________________________________
Print Name:_________________________________
Print Title:________________________________
Print Address of Holder:
____________________________________________
____________________________________________
Issue Common Stock to:______________________
at:_________________________________________
Electronically transmit and credit Common Stock to:
___________________at:______________________
____________________________________________
Holder Conversion Date
THE COMPUTATION OF THE NUMBER OF COMMON SHARES TO
BE RECEIVED IS SET FORTH ON THE ATTACHED PAGE
PAGE 2 TO CONVERSION NOTICE FOR: HALIFAX FUND, L.P.
------------------
(NAME OF HOLDER)
COMPUTATION OF NUMBER OF COMMON SHARES TO BE RECEIVED
A. Outstanding Principal Amount to be converted: $_____
B. Accrued, unpaid interest on Outstanding Principal Amount to be $_____
converted
C. Default payments due Holder: $_____
---------------
TOTAL DOLLAR AMOUNT CONVERTED (TOTAL OF A + B + C) $_____
===============
CONVERSION PRICE $_____
Number of Shares of Common Stock = Total dollar amount Converted
-----------------------------
Conversion Price
NUMBER OF SHARES OF COMMON STOCK = ___________
If the conversion is not being settled by DTC, please issue and deliver _____
certificate(s) for shares of Common Stock in the following amount(s):
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
Please issue and deliver _____ new Debenture(s) in the following amounts:
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________
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