Document:

EXHIBIT
10.13

AMENDMENT TO THE TENNANT
COMPANY PENSION PLAN

 

Pursuant to the authority
delegated to the undersigned by the Board of Directors of TENNANT Company (the
“Company”), the undersigned hereby authorizes the amendment of the Tennant
Company Pension Plan (the “Plan”) effective as of December 31, 2002.

WHEREAS, the Company has authority to amend the
Plan pursuant to the provisions of Section 11.1 of the Plan at such time and in
such a manner as the Company may desire; and

WHEREAS, the Company wishes to amend the Plan to
adopt a Model Amendment issued by the Service to conform the Plan to Revenue
Ruling 2001-62 issued by the Internal Revenue Service, and

WHEREAS, the Company wishes to amend the Plan to
reflect certain provision of the Economic Growth and Tax Relief Reconciliation
Act of 2001 (“EGTRRA”).

NOW,
THEREFORE, BE IT RESOLVED, that the amendment set forth in Exhibit A, attached hereto, to amend
the Plan to comply with Internal Revenue Code Sections 415 and 417(e) as
required under Revenue Ruling 2001-62 is hereby approved and adopted as of the
effective date set forth on Exhibit A.

FURTHER
RESOLVED, that
the amendments set forth on Exhibit B, attached hereto, to amend the Plan
reflect certain provision of the Economic Growth and Tax Relief Reconciliation
Act of 2001 (“EGTRRA”) is hereby approved and adopted as of the effective dates
set forth on Exhibit B.

 

	
  Dated: December 26, 2002

  	
  TENNANT Company

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Janet Dolan

  	 

	
   

  	
  Its President

  	
   

  
					

 

 

EXHIBIT A

 

 

TENNANT Company Pension Plan

 

Amendment of Plan to Comply with

Sections 415 and 417(e), as Required Under Revenue Ruling
2001-62

 

1.             This amendment shall apply to distributions with annuity
starting dates on or after December 31, 2001.

2.             Notwithstanding any other Plan provisions to the
contrary, the applicable mortality table used for purposes of adjusting any
benefit or limitation under Section 415(b)(2)(B), (C), or (D) of the Internal
Revenue Code as set forth in Section 6.11 of the Plan and the applicable
mortality table used for purposes of satisfying the requirements of Section
417(e) of the Internal Revenue Code as set forth in Section 2.3(b) and (c) of
the Plan is the table prescribed in Revenue Ruling 2001-62.

3.             For any distribution with an annuity starting date on or
after the effective date of this amendment and before the adoption of this
amendment, if application of the amendment as of the annuity starting date
would have caused a reduction in the amount of any distribution, such reduction
is not reflected in any payment made before the adoption date of this
amendment.  However, the amount of any
such reduction that is required under Section 415(b)(2)(B) must be reflected
actuarially over any remaining payments to the Participant.

 

 

 

EXHIBIT B

 

TENNANT Company Pension Plan

Amendment of the Plan for EGTRRA

 

PREAMBLE

Adoption and effective
date of amendment.  This amendment of
the Plan is adopted to reflect certain provisions of the Economic Growth and
Tax Relief Reconciliation Act of 2001 (“EGTRRA”).  This amendment is intended as good faith compliance with the
requirements of EGTRRA and is to be construed in accordance with EGTRRA and
guidance issued thereunder.  Except as
otherwise provided, this amendment shall be effective as of the first day of
the first Plan Year beginning after December 31, 2001.

Supersession of inconsistent provisions.  This amendment shall supersede the
provisions of the Plan to the extent those provisions are inconsistent with the
provisions of this amendment.

SECTION
1.  MODIFICATION OF TOP-HEAVY RULES

1.1.         Effective date.  This section shall apply for purposes of
determining whether the Plan is a top-heavy plan under Code Section 416(g) for
Plan Years beginning after December 31, 2001, and whether the Plan satisfies the
minimum benefits requirements of Code Section 416(c) for such years.  This section amends Article 12 of the Plan.

1.2.         Determination of
top-heavy status.

(a)           Key
Employee.  Key Employee means any
Employee or former Employee (including any deceased Employee) who at any time
during the Plan Year that includes the Determination Date was an officer of the
Employer having 415 Compensation greater than $130,000 (as adjusted under Code
Section 416(i)(1) for Plan Years beginning after December 31, 2002), a
5-percent owner of the Employer, or a 1-percent owner of the Employer having
415 Compensation of more than $150,000. 
The determination of who is a Key Employee will be made in accordance
with Code Section 416(i)(1) and the applicable regulations and other guidance
of general applicability issued thereunder.

(b)           Determination
of present values and amounts.  This
paragraph (b) shall apply for purposes of determining the present values of
Accrued Benefits and the amounts of account balances of Employees as of the
determination date.

(i)            Distributions
during year ending on the Determination Date. 
The present values of Accrued Benefits and the amounts of account
balances of an Employee as of the Determination Date shall be increased by the
distributions made with respect to the Employee under the Plan and any plan
aggregated with the Plan under Code Section 416(g)(2) during the 1-year period
ending on the Determination Date.  The
preceding sentence shall also apply to distributions under a terminated plan
which, had it not been terminated, would have been aggregated with the Plan
under Code Section 416(g)(2)(A)(i).  In
the case of a distribution made for a reason other than separation from
service, death, or disability, this provision shall be applied by substituting
“5-year period” for “1-year period.”

(ii)           Employees
not performing services during year ending on the Determination Date.  The Accrued Benefits and accounts of any
individual who has not performed services for the Employer during the 1-year
period ending on the Determination Date shall not be taken into account.

1.3          Minimum benefits.  For purposes of satisfying the minimum
benefit requirements of Code Section 416(c)(1) and the Plan, in determining
years of Service with the Employer, any service with the Employer shall be
disregarded to the extent that such Service occurs during a Plan Year when the
Plan benefits (within the meaning of Code Section 410(b)) no Key Employee or
former Key Employee.

SECTION
2.  DIRECT ROLLOVERS OF PLAN
DISTRIBUTIONS

2.1          Effective date.  This section shall apply to distributions
made after December 31, 2001.

2.2          Modification of
definition of eligible retirement plan. 
For purposes of the direct rollover provisions in Section 6.2 of the
Plan, an eligible retirement plan shall also mean an annuity contract described
in Code Section 403(b) and an eligible plan under Code Section 457(b) which is
maintained by a state, political subdivision of a state, or any agency or
instrumentality of a state or political subdivision of a state and which agrees
to separately account for amounts transferred into such plan from this
Plan.  The definition of eligible
retirement plan shall also apply in the case of a distribution to a surviving
spouse, or to a spouse or former spouse who is the Alternate Payee under a
Qualified Domestic Relation Order, as defined in section Code Section 414(p).Exhibit 10.211

SALES, MARKETING AND DISTRIBUTION
AGREEMENT

 

 

BY AND BETWEEN

 

 

CYGNUS, INC.

 

AND

 

SANKYO PHARMA INC.

 

 

 

*** Certain information on this
page has been omitted and filed separately with the Commission.  Confidential treatment has been requested
with respect to the omitted portions.

 

SALES, MARKETING AND DISTRIBUTION
AGREEMENT

THIS SALES, MARKETING AND
DISTRIBUTION AGREEMENT (the “Agreement”) is made and entered into as of July 8,
2002, by and between CYGNUS, INC., a Delaware corporation with its principal
place of business at 400 Penobscot Drive, Redwood City, California 94063
(“Cygnus”) and SANKYO PHARMA INC., a Delaware corporation with its place of
business at Two Hilton Court, Parsippany, New Jersey 07054 (“Sankyo”).  Cygnus and Sankyo are referred to herein
individually as a “party” and collectively as the “parties.”

RECITALS

WHEREAS:

A.                                   The parties entered into a Co-Promotion
Agreement on November 28, 2001 relating to the sales and marketing in the
United States of Cygnus’ reverse iontophoresis glucose monitoring products (the
“Co-Promotion Agreement”);

B.                                     The parties now wish to supersede and
completely replace the Co-Promotion Agreement with this Sales, Marketing and
Distribution Agreement as of the date set forth above;

NOW,
THEREFORE, for
good and valid consideration, the parties agree to the following terms and
conditions set forth herein:

1.                                      DEFINITIONS

Unless specifically provided otherwise, capitalized
terms used in this Agreement, whether used in the singular or plural, shall
have the meanings specified below.

1.1                                 “Advertising and Promotional Amount” for
any period shall mean all out-of-pocket costs and expenses incurred (i.e., paid
to third parties or accrued therefor) by Sankyo or Cygnus with respect to the
advertising, marketing and sales of the Product in the Territory for such
period, including, without limitation, costs for advertisements, agency fees,
meetings scheduled solely for the Product, sales and marketing meetings,
samples, sales force funds, development and production of training materials,
development and production of sales force training materials, website costs,
conventions and seminars, market research, sponsorships, grants including
funding of continuing medical education programs that are relevant to the Product,
and other payments for programs to institutional and managed care purchasers,
acquisition and shipping costs of training and sales and marketing materials,
and the cost of field aids and sales premiums and other tokens.

1.2                                 “Affiliate” of a person, firm or entity
means any entity controlled by, under common control with, or controlling such
person, firm or entity.  For purposes of
this Section 1.2, “control” shall mean direct or indirect beneficial ownership
of fifty percent (50%) or more of the voting stock or other voting interest, of
a corporation, partnership or other business organization, or the possession of
the power to direct the management and policies of a person, firm or entity,
whether through ownership of voting securities, by contract, or otherwise.

 

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1.3                                 “Calendar Quarter” shall mean the
respective periods of three (3) consecutive calendar months ending in March 31,
June 30, September 30 and December 31.

1.4                                 “Competitive Product” means any glucose
monitoring product of a party other than Cygnus.

1.5                                 “Cygnus Copyrights” has the meaning set
forth in Section 9.3.

1.6                                 “Cygnus Intellectual Property Rights” has
the meaning set forth in Section 8.2(b).

1.7                                 “Cygnus Know-How” shall mean all information
and data, technical information, trade secrets, specifications, instructions,
processes, formulae, materials, expertise and information (whether or not
patentable) relating to the Product, processes for its manufacture, its
manufacture, development, use or marketing or methods of using the Product
known to Cygnus, an Affiliate, designee, licensee or sublicensee thereof as of
the Effective Date or developed or acquired by Cygnus, an Affiliate, designee,
licensee or sublicensee thereof at any time during the Term.

1.8                                 “Cygnus Patent Rights” shall mean all
U.S. patent rights owned or controlled by or licensed to Cygnus or an Affiliate
thereof, as of the Effective Date or at any time during the Term, relating to
the Product, including, but not limited to, its development, processes for its
manufacture, use of the Product or methods of using the Product as well as any
improvements thereof.  Cygnus Patent
Rights shall include all U.S. patents and U.S. patent applications, all U.S.
divisionals, U.S. continuations, U.S. substitutions, U.S.
continuations-in-part, U.S. re-examinations, U.S. reissues, U.S. extensions,
U.S. registrations and the like of the foregoing.  Cygnus Patent Rights shall also include Cygnus’, or any Affiliate’s,
share of any U.S. patent rights relating to the Product jointly owned by Cygnus
or such Affiliate of Cygnus.  Attached
hereto as Exhibit B is a list of U.S. patents owned by Cygnus or licensed by
Cygnus relating to the Product as of the Effective Date.  Cygnus will update such U.S. patents
relating to the Product on an annual basis during the Term of the Agreement,
which such updates shall replace Exhibit B hereto.  Cygnus Patent Rights shall not include any patent rights outside
of the United States.

1.9                                 “Cygnus Trademarks” has the meaning set
forth in Section 9.1.

1.10                           “Effective Date” is the date first set
forth above in this Agreement.

1.11                           “FDA” means the U.S. Food and Drug
Administration, and any successor United States governmental agency or division
thereof responsible for approving a Product in the Territory.

1.12                           “Net Sales by Cygnus” means gross
revenues in such period as measured by the gross invoice amount for the Product
sold to third-party customers other than Sankyo, excluding any repair Product
and further excluding any sales tax and other non-Product charges, invoiced to
third-party customers by Cygnus, its Affiliates, designees (“designee” shall
include any entity providing fulfillment services for Cygnus), licensees, or
sublicensees or any other third party who shall have rights to sell the Product
in the Territory less the following items as determined in accordance with U.S.
generally accepted accounting principles (GAAP):

 

3

 

(a)                                  cash discounts;

(b)                                 credits or allowances given or made on
account of price adjustments, rebates (including Medicaid or other government
programs, chargebacks, and contractual agreements), or volume reimbursements;

(c)                                  any and all credits or allowances given
or made on account of returns of  Product;

(d)                                 deductions for bad debt and collection
charges relating thereto; and

(e)                                  direct shipping and handling expenses for
the Product incurred by Cygnus, to the extent such expenses are not billed
separately to third-party customers until one year after the initial Product
Launch Date for the AutoSensor and six (6) months after the launch of the
GlucoWatch® G2TM Biographer provided that all Regulatory Approvals,
if any, have been obtained.

1.13                           “Net Sales by Sankyo” means gross
revenues in such period as measured by the gross invoice amount for the
Product, excluding any sales tax, invoiced to third-party customers by Sankyo
less the following items as determined in accordance with U.S. generally
accepted accounting principles (GAAP):

(a)                                  cash discounts;

(b)                                 credits or allowances given or made on
account of price adjustments, rebates (including Medicaid or other government
programs, chargebacks, and contractual agreements), or volume reimbursements;
and

(c)                                  any and all credits or allowances given
or made on account of returns of Product.

For purposes of this
Agreement, “Net Sales” not qualified by either “by Cygnus” or “by Sankyo” shall
refer to the aggregate of Net Sales by Cygnus and Net Sales by Sankyo.

1.14                           “Product Launch Date” shall be defined as
April 1, 2002.

1.15                           “Product” means any of Cygnus’ reverse
iontophoresis (i.e., using electric current for sampling a substance from a
human) glucose monitoring products, including, but not limited to, such Product
covered by any claim of Cygnus Patent Rights, such as, for example, the
GlucoWatch® Biographer System approved by the FDA on March 22, 2001
consisting of the Biographer (the primary, re-usable glucose monitoring
component) and the AutoSensor (the disposable, glucose monitoring component,
sold either alone or in combination with a Product) and Accessories (wherein
“Accessories” are defined as items that specifically relate to the Product) and
upgrades thereto, as well as any other Cygnus reverse iontophoresis glucose
monitoring products receiving Regulatory Approval and sold during the Term
(such as, for example, “GlucoWatch® G2TM Biographer,” a Product
approved by the FDA on March 21, 2002, and “Gemini,” a Product having the
durable and consumable components physically separated and in wireless communication).  The term “Product” is used in the singular
throughout this Agreement, but is meant to include the singular and
plural.  Additionally, there may be
multiple Products covered by this Agreement.

 

4

 

1.16                           “Proprietary Information” of a party
means

(a)                                  all inventions, processes, materials,
know-how and ideas of such party including but not limited to Cygnus
Intellectual Property Rights;

(b)                                 non-public financial information
concerning such party;

(c)                                  in the case of Cygnus, among other
information, Cygnus’ research and development and  new product plans, and, in the case of Sankyo, among other
information, Sankyo’s Sales, Marketing and Distribution Plans, unless and until
publicly announced;

(d)                                 in the case of Cygnus until such time as
Sankyo assumes distribution pursuant to Section 3.1, the customer list of
purchasers of the Product; and, in the case of Sankyo, the list of health care
professionals who are called on or targeted by Sankyo and after such time as
Sankyo assumes distribution pursuant to Section 3.1,the customer list of
purchasers of the Product; and

(e)                                  any other information designated as
confidential by such party in writing; provided that no oral or visual
communications shall be deemed confidential unless confirmed in writing to be
so within thirty (30) calendar days of the time such information is orally or
visually communicated (however such information shall be maintained as
confidential during this thirty (30) calendar day period), and provided further
that Proprietary Information shall not include any information that is:

(i)                                     already in the possession of the
receiving party at or before the time of disclosure hereunder as shown by the
receiving party’s files existing at the time of disclosure antedating the date
of disclosure; or

(ii)                                  now or hereafter publicly known or
otherwise known by the receiving party through no wrongful act of the receiving
party (provided that if Proprietary Information becomes publicly known, this
shall not excuse a prior disclosure by the receiving party); or

(iii)                               lawfully received by the receiving party
from a third party without obligation of confidence; or

(iv)                              developed by the receiving party or its
Affiliates independent of any disclosure made hereunder as shown by the
receiving party’s files; or

(v)                                 required by law to be disclosed by the
receiving party, provided that the disclosing party is given ten (10) calendar
days written notice of the legal requirement.

1.17                           “Regulatory Approval” of a Product means
FDA approval to sell such Product in the Territory.

 

5

 

1.18                           “Sales, Marketing and Distribution Plan”
shall mean, for any period, a written plan that has been reviewed by the
Steering Committee as defined in Section 7.1 and sets forth for such period the
plan and budget for the detail levels, advertising, marketing and sale of the
Product, including a Product sales forecast for the upcoming year.  Sankyo will be responsible for developing
Sales, Marketing and Distribution Plans.

1.19                           “Sales Year” shall mean, with respect to
the first Sales Year, the twelve (12) month period commencing on the Product
Launch Date and, with respect to subsequent Sales Years, each successive twelve
(12) month period thereafter.

1.20                           “Sankyo Gross Profit” is equal to Net
Sales by Sankyo minus the Transfer Price (as defined in Section 5.4(b)) and
minus Sankyo’s out of pocket distribution costs (which such out of pocket
distribution costs shall not exceed *** of the published Wholesale Acquisition
Cost).

1.21                           “Term” has the meaning set forth in
Section 11.1.

1.22                           “Territory” means the United States and
its territories and commonwealth possessions only and does not include any
other countries.

2.                                      RIGHT OF SALES AND MARKETING

2.1                                 Appointment.  Cygnus hereby grants to Sankyo the exclusive right to sell and
market the Product in the Territory during the Term upon the terms and
conditions set forth herein. Cygnus also grants to Sankyo an exclusive license
under the Cygnus Intellectual Property Rights to offer for sale and sell the
Product in the Territory during the Term, and a non-exclusive license under the
Cygnus Intellectual Property Rights to use the Product in the Territory during
the Term, only as set forth under the terms and conditions of this Agreement.
Additionally, Cygnus grants to Sankyo a non-exclusive license to manufacture or
have a third-party manufacture the Product for sale in the Territory during the
Term, and a non-exclusive license under the Cygnus Intellectual Property Rights
to make and have made the Product for sale in the Territory during the Term,
provided however that Sankyo will only manufacture or have a third-party
manufacture the Product for sale in the Territory in the event that either an
Anticipatory Breach as defined in Section 14.1 has occurred and the conditions
of Section 14.2 have been met, or Sankyo exercises its option to manufacture
under Section 5.4(h).  Notwithstanding
these rights granted to Sankyo, (i) Cygnus or its designee shall continue to
take and fulfill orders and receive payment for the Product until such time as
Sankyo assumes distribution responsibilities under Section 3.1; and (ii)
Cygnus, its Affiliates, designees, licensees and/or its sublicensees may
promote the Product in the Territory through the use of additional field sales
personnel to detail health care professionals. 
In the event that Cygnus utilizes the services of such Affiliates,
designees, licensees and/or sublicensees in the Territory, then Cygnus shall
obtain the prior written consent of Sankyo before entering into an agreement or
other business arrangement with such third party and, if such consent is
obtained, Cygnus shall provide Sankyo under confidentiality with the terms and
conditions of the agreement or other business relationship.  Sankyo’s consent shall not be unreasonably
withheld, and Sankyo shall have reasonable grounds to withhold consent in the
event such third party is a competitor of Sankyo. Any and all sales generated
as a result of

 

6

 

Cygnus efforts under subparagraphs (i) and (ii) of
this Section 2.1 shall be included in the calculation of Net Sales.  Sankyo shall have no rights, whether
explicit or implied, to the Product outside of the Territory under any term or
condition of this Agreement.

2.2                                 Consideration.  In consideration of Cygnus’ grants to Sankyo of a right of sales
and marketing, a right of distribution, and a right of manufacture, all
pursuant to Section 2.1, Sankyo shall pay to Cygnus milestone payments totaling
fifteen million dollars ($15,000,000) as follows: (i) twelve and one-half
million dollars ($12,500,000) within ten (10) calendar days of the Effective
Date of this Agreement, and (ii)  two
and one-half million dollars ($2,500,000) within ten (10) calendar days of
Cygnus’ supplemental PMA application (FDA number P990026/S08), for use of the
GlucoWatch® Biographer in children and adolescents (ages 7-17) being approved
by the FDA.

2.3                                 Payments.  In consideration for Sankyo’s sales and marketing activities in
the Territory under Section 4.1 during the Term and commencing on the Product
Launch Date, Cygnus shall pay to Sankyo as to each of the first four (4)
Calendar Quarters following the Product Launch Date, a fee equal to fifteen
percent (15%) of all Net Sales of the Product in the Territory minus Sankyo
Gross Profit; as to the each of the next four (4) Calendar Quarters thereafter,
a fee equal to thirty percent (30%) of all Net Sales of the Product in the
Territory minus Sankyo Gross Profit; and thereafter for the remainder of the
initial Term for each Calendar Quarter, a fee equal to forty percent (40%) of
all Net Sales of the Product in the Territory minus Sankyo Gross Profit (the
“Sales and Marketing Fee”).  Commencing
on January 1, 2007, in the event that Sankyo Net Sales exceeds two hundred
twenty-five million dollars ($225,000,000) in any given Calendar Year, then
Cygnus shall pay to Sankyo as to only each of the four (4) Calendar Quarters
immediately following that Calendar Year, a Sales and Marketing Fee equal to
forty-five percent (45%) of all Net Sales of the Product in the Territory minus
Sankyo Gross Profit. If this Agreement is extended pursuant to Section 11.1,
the parties will negotiate in good faith the Sales and Marketing Fee for subsequent
periods.

2.4                                 Deferral of Payments.  For the first three (3) Sales Years of this
Agreement, if “Cygnus Product Profit,” as defined below, in any Sales Year is a
negative amount, the payment of the Sales and Marketing Fee shall be deferred
and payable out of future Cygnus Product Profit, as defined below, earned
before April 1, 2008.  Regardless of
Cygnus Product Profit, all deferred Sales and Marketing Fees will be payable in
full on April 1, 2008.  After the first
three (3) Sales Years, regardless of Cygnus Product Profit, all subsequent
Sales and Marketing Fees shall be due and payable as set forth in Section
2.5.  “Cygnus Product Profit” for any
Sales Year is defined as the Transfer Price of the Product (as defined in
Section 5.4(b)) invoiced to Sankyo during that Sales Year less each of the
following: (a) Cygnus’ variable cost of goods of the Product during that Sales
Year; (b) the Sales and Marketing Fee for that Sales Year due Sankyo under this
Agreement; and (c) Cygnus’ operating expenses associated with the Product
during that Sales Year, including but not limited to, Cygnus’ research,
development, fixed manufacturing, customer service, and general and
administrative costs and expenses, and other costs associated with the
fulfillment of Cygnus’ obligations under Section 5.1, and a twelve (12)-year
amortization of Cygnus’ past research and development expenses associated with
the Product,

 

7

 

provided however that the amount in this Section
2.4(c) shall not exceed.***  Commencing
upon the date that the combined amount of (x) deferred Sales and Marketing Fees
and (y) Advertising and Promotion Amount reimbursement under Section 5.1(k)
equals or exceeds ***, Cygnus shall grant Sankyo a first lien and security
interest in Cygnus-owned issued U.S. Patents as set forth on Exhibit A hereto,
and Sankyo will, at its sole cost, file its interest, and release its interest
at such time as Cygnus has fully paid all such deferred Sales and Marketing
Fees and Advertising and Promotion Amount reimbursement, with the U.S. Patent
and Trademark Office.  Furthermore,
commencing upon the Effective Date of this Agreement until such time as Cygnus
has fully paid all such deferred Sales and Marketing Fees and Advertising and
Promotion Amount reimbursement, Cygnus shall abide by the Negative Covenants
set forth in Exhibit D hereto. In the event that this Agreement shall terminate
under Section 11.1, Section 11.2, Section 11.3, Section 11.4 and Section 11.5,
and termination by Cygnus under Section 11.6, any and all deferred Sales and
Marketing Fees and Advertising and Promotion Amount reimbursement shall become
due and payable.   Within fifteen (15)
calendar days after Cygnus files with the U.S. Securities and Exchange
Commission its quarterly (10-Q) financial report for the last Calendar Quarter
within a given Sales Year, Cygnus will report in writing to Sankyo as to the
Cygnus Product Profit for the previous Sales Year.

2.5                                 Reports and Payments. Until such time as
Sankyo assumes distribution pursuant to Section 3.1, within thirty (30)
calendar days of the end of each Calendar Quarter, Cygnus shall provide a
written statement to Sankyo of Net Sales by Cygnus of the Product in the
Territory during such Calendar Quarter. 
Thereafter, within thirty (30) calendar days of the end of each Calendar
Quarter, Sankyo shall provide Cygnus a written statement of Net Sales by Sankyo
of the Product in the Territory during such Calendar Quarter.  Such written statements shall include gross
revenues of the Product and all itemized deductions and calculated Net Sales as
described in Section 1.12 and Section 1.13. 
Such written statement shall also be signed by a duly authorized
representative of the party on behalf of that party and shall show such Net
Sales during such Calendar Quarter, and the amount due and payable to Sankyo
pursuant to Section 2.3.  Net Sales
shall be calculated as set forth in Section 1.12 and Section 1.13 and shall be
consistent with accounting methods used by Cygnus and/or Sankyo in preparing
and maintaining its books and records. 
Except as set forth in Section 2.4, Cygnus shall make the payments
specified in Section 2.3 to Sankyo on a quarterly basis within thirty (30)
calendar days after the end of each Calendar Quarter if the payments are based
on Net Sales by Cygnus, and within fifteen (15) calendar days after receipt of
the written statement of Net Sales by Sankyo, during the Term with respect to
amounts that become due and payable during the preceding quarter.

2.6                                 Manner of Payment.  All payments to Sankyo under Section 2.3
shall be made by wire transfer in U.S. dollars.  Late payments shall bear interest at the lower of (a) the prime
rate as quoted from time to time by Bank of America plus 1%, or (b) the maximum
rate permitted by law.

 

8

 

3.                                      RIGHT OF DISTRIBUTION

3.1                                 Appointment.  Cygnus will terminate its Services Agreement dated May 7, 2002
with Express-Med with respect to Group II states as set forth on Exhibit A to
such Services Agreement, and will not renew its agreement with respect to Group
I states (which expires on November 30, 2002). 
In addition, as of the date Sankyo provides written notice of its
ability to assume distribution responsibilities under this Agreement, Cygnus
will not produce any further promotional materials directing patients to order
Products through Express-Med.  Pursuant
to Section 3.2 and Section 3.3, Cygnus agrees that it will terminate its
existing Warehouse Distribution Contract with UPS Supply Chain Management, Inc.
dated August 25, 2000 and, upon such termination, Cygnus will grant to Sankyo
the non-exclusive right during the Term to distribute the Product in the
Territory.  Upon the expiration of the
Express-Med Services Agreement, such non-exclusive right shall become an
exclusive right to distribute the Product in the Territory during the Term
under the terms and conditions herein.

3.2                                 Subject to Section 3.1, Cygnus shall give
notice of termination of the Express-Med Group II states and the UPS Warehouse
Distribution Contract within ten (10) calendar days after receipt of written
notice from Sankyo of Sankyo’s ability to assume distribution responsibilities
under this Agreement.

3.3                                 Subject to Section 3.1, Cygnus shall
attempt to make the termination of the UPS Warehouse Distribution Contract
effective immediately upon such notice. 
Any early termination fee or similar sum will be Cygnus’ sole
responsibility.

4.                                      RESPONSIBILITIES AND OBLIGATIONS OF SANKYO

4.1                                 During the Term, and with respect to each
Product in the Territory for which Regulatory Approval has been obtained,
Sankyo will at its sole cost and expense:

(a)                                  use its commercially reasonable efforts
to market, sell and support (through education and training of health care
professionals and customers) the Product on a continuing basis;

(b)                                 comply with good business practices and
all applicable laws and regulations;

(c)                                  promptly notify Cygnus or its designee of
any Product complaints or adverse patient reactions according to Section 4.3
and any actual or potential governmental actions relevant to any Product;

(d)                                 not make any false claims,
representations, warranties or guarantees to any third party with respect to
the specifications, features, capabilities or intended use of the Product;

(e)                                  deploy initially a minimum of fifty (50)
of its specialty sales representatives to sell the Product and, by January 1,
2003 and thereafter, deploy a minimum of one hundred (100) of its specialty
sales representatives to sell the Product. 
These specialty sales representatives will target high potential
physicians for the Product

 

9

 

(defined
as ***) and will deliver a minimum of *** first position Product details to
high potential physicians and associated health care professionals in 2002 and
*** first position Product details annually thereafter;

(f)                                    commencing January 1, 2003, provide
support in the minimum form of third position details through its national
primary care sales representatives (currently approximately 450 primary care
sales representatives, which approximate number is to be maintained or
increased during the Term of this Agreement unless Sankyo provides a
commercially reasonable basis for decreasing this number);

(g)                                 support the sales forces set forth in
Section 4.1(e) and Section 4.1(f) through its sales operations and training
programs, personnel and systems;

(h)                                 utilize its managed care personnel
(currently approximately 20 managed care specialists, which approximate number
is to be maintained or increased during the Term of this Agreement unless
Sankyo provides a commercially reasonable basis for decreasing this number) to
conduct and administer contracting and pull-through programs within managed
care accounts;

(i)                                     utilize its medical manager group
(currently approximately 20 personnel, which approximate number is to be
maintained or increased during the Term of this Agreement unless Sankyo
provides a commercially reasonable basis for decreasing this number) to support
the activities of the sales forces set forth in Section 4.1(e) and Section
4.1(f) as well as the managed care personnel set forth in Section 4.1(h);

(j)                                     prepare all marketing, sales,
educational, training and communication materials, graphical treatment of
Product labeling (excluding the Patient Information Sheet),  including Product websites (e.g.,
glucowatch.com and other website domain names having glucowatch therein and
owned by Cygnus), subject to review by Cygnus through a designated person who
will participate in Sankyo’s review process, for marketing and sale of the
Product to consumers, third-party distributors, managed care organizations,
health care professionals,  (the “Sales
and Marketing Materials”). Sankyo shall include the trademarks and/or company
logos of Cygnus on such Sales and Marketing Materials;

(k)                                  develop and produce sales force training
materials for the Sankyo sales force;

(l)                                     spend a minimum of ten million dollars
($10,000,000) in Advertising and Promotional Amount as defined in Section 1.1,
and subject to Section 5.1(k), in the calendar year 2002. For the calendar year
2002, Cygnus’ “Promotional Amount” as defined in Section 1.16 of the
Co-Promotion Agreement of November 28, 2001, spent in 2002 will apply toward
this minimum amount for

 

10

 

2002.  Beginning January 1, 2003, Sankyo will spend
a minimum of *** on an annualized basis per calendar year in Advertising and
Promotional Amount;

(m)                               prepare a Sales, Marketing and
Distribution Plan as set forth in Section 1.18;

(n)                                 distribute the Product in the Territory
during the Term pursuant to Section 3.1, and shall enter into, and administer,
agreements with third-party distributors, including but not limited to
wholesale distributors, retail distributors and durable medical equipment
distributors;

(o)                                 keep for five (5) years after termination
of this Agreement records of information relating to the Product; and

(p)                                 market, sell and distribute the Products
to the total and complete exclusion of any and all Competitive Product.

4.2                                 Reports. 
At least quarterly and whenever reasonably requested by Cygnus, Sankyo
will provide Cygnus with all current sales and marketing information relating
to the Product, including, without limitation, a confidential written summary
describing the number and type of details performed, as well as any research
and competitive analysis.  Sankyo will
on a daily basis provide Cygnus a copy of its daily sales report, which is
generated by Sankyo in the ordinary course of business.  In addition, upon reasonable request by
Cygnus, Sankyo will provide Cygnus with current confidential information
regarding potential medical professionals contacted by Sankyo.  All reports provided by Sankyo to Cygnus
shall be treated as Proprietary Information unless otherwise agreed to in
writing by Sankyo.

4.3                                 Adverse Event Reporting (“AER”). Sankyo
shall report all suspected AERs to Cygnus’ Regulatory Department or its
designee, via telephone at 1-866-GLWATCH or to such other number as Cygnus may
designate, as soon as possible but in no event later than two (2) business days
of receipt of such information by any employee of Sankyo. For the purposes of
this Section 4.3, AER shall mean any adverse medical event in or complaint by a
patient who uses the Product (as defined by Parts 803 and 820 of the U.S. Code
of Federal Regulations Chapter 21 and any other applicable definitions in
regulations promulgated by the FDA) that require reporting by Cygnus to the
FDA.  If requested, Sankyo will make
reasonable efforts to assist Cygnus, or its designee, in obtaining AER
follow-up information from reporters initially identified by Sankyo.  Cygnus shall retain responsibility for all
FDA reporting requirements, and Sankyo shall have no responsibility to report
any AER to the FDA.

5.                                      RESPONSIBILITIES AND OBLIGATIONS OF CYGNUS

5.1                                 During the Term and with respect to each
Product in the Territory, Cygnus will at its sole cost and expense:

 

11

 

(a)                                  use its commercially reasonable efforts
to conduct all research, development, legal, clinical and regulatory (including
labeling) activities relating to the Product;

(b)                                 use its commercially reasonable efforts
to obtain and maintain Cygnus Intellectual Property Rights, maintain the UC
License Agreement, maintain the glucowatch.com domain name and other website
domain names having glucowatch.com therein and owned by Cygnus, and obtain and
maintain all Regulatory Approvals in the Territory relating to the Product;

(c)                                  prepare all Product labeling including
patent marking, provided that Sankyo’s name and corporate logo, in a size
comparable to the size of Cygnus’ name and corporate logo, will be added to the
Product labeling as soon as practicable after Sankyo assumes distribution pursuant
to Section 3.1, and determine the Product name;

(d)                                 handle warranty obligations for the
Product, in accordance with the terms of the product warranty provided with the
Product;

(e)                                  provide all customer support (wherein
customer support is in the form of telephonic, email and mail consultation to
patients who have purchased the Product);

(f)                                    provide technical information to Sankyo
so that Sankyo can develop and produce training, and sales and marketing
materials;

(g)                                 provide Sankyo with a copy of all reported
AERs and provide Sankyo a monthly summary of the customer service and technical
support inquiries;

(h)                                 continue to use its commercially
reasonable efforts to develop and obtain Regulatory Approval for additional
indications and future Products;

(i)                                     take and fulfill orders and receive
payment for Product sold to third-party customers pursuant to Section 2.1(i)
until such time as Sankyo assumes distribution pursuant to Section 3.1;

(j)                                     be responsible for any advertising and
promotional costs incurred by Cygnus, its Affiliates, designees, licensees
and/or sublicensees, in the event that Cygnus, its Affiliates, designees,
licensees and/or sublicensees promote the Product pursuant to Section 2.1(ii),
and such promotional costs will not be applied to the Advertising and
Promotional Amount.  Furthermore, in
such event, marketing direction for the Product will be provided by Sankyo; and

(k)                                  reimburse Sankyo for Sankyo’s Advertising
and Promotion Amount for the 2002 calendar year, wherein such reimbursement
amount will not exceed  ten million
dollars ($10,000,000) minus the amount spent by Cygnus in 2002 for its
“Promotional Amount” as defined in Section 1.16 of the Co-Promotion Agreement
of November 28, 2001.  Cygnus shall
notify Sankyo in 2003 of such

 

12

 

Promotional Amount
spent by Cygnus in 2002, and Sankyo will then invoice Cygnus for the
reimbursement amount.

5.2                                 Regulatory Notification to Sankyo.  During the Term Cygnus will notify Sankyo
promptly (and in any event within two (2) business days) of its receipt of
information from the FDA:

(a)                                  that raises any material concerns
regarding the safety or effectiveness of the Product or would affect Product
labeling;

(b)                                 that indicates a material liability for
either party arising in connection with the Product;

(c)                                  that, in Cygnus’ opinion, is reasonably
likely to lead to a recall or market withdrawal of the Product.  Information that shall be disclosed pursuant
to this Section 5.2 shall include, but not be limited to, the items in Section
5.2(e) and (f);

(d)                                 of any materially adverse action of the
FDA or any other governmental or regulatory authority in the Territory relating
to:

(i)                                     inspections of manufacturing,
distribution or other related facilities;

(ii)                                  inquiries concerning clinical
investigation activities (including inquiries of investigators, clinical
monitoring organizations and other related parties); and

(iii)                               any communication specifically involving
the manufacture, marketing, sale,  or
distribution of the Product or any other reviews or inquiries relating to the
Product;

(e)                                  of a receipt of a “Warning Letter” or
other correspondence relating to the Product from the FDA or any other
governmental or regulatory authority in the Territory; and

(f)                                    of an initiation of any governmental or
regulatory authority investigation, detention, seizure or injunction concerning
the Product in the Territory.

5.3                                 Recalls or Other Corrective Action.  Cygnus shall have sole responsibility and
shall make all decisions in its sole discretion with respect to any recall,
market withdrawals or any other corrective action related to the Product,
including the right to cease all sales of Product in the Territory or the sales
and marketing of the Product in the Territory. 
Cygnus shall promptly notify Sankyo of all recalls and all other
decisions or notifications (including, without limitation, notifications to or
from the FDA) relating to recalls, market withdrawals or other such corrective
action relating to the Product.  At
Cygnus’ request, Sankyo shall use its commercially reasonable efforts to assist
Cygnus in conducting such recall, market withdrawal or other corrective action,
and any documented out-of-pocket costs incurred by Sankyo with respect to
participating in such recall, market withdrawal or other corrective action
shall be reimbursed by Cygnus.  In the
event that a Product recall, market withdrawal or corrective action results in
the situation where there 

 

13

 

are no Net Sales of any Product due to Product recall,
market withdrawal or corrective action, then the Term will be extended for
twice the number of days such recall, market withdrawal or corrective action is
in effect, however, the Advertising and Promotional Amount set forth in Section
4.1(l) shall be suspended during the time period where there are no Net Sales
of any Product.  In the event that there
are no Net Sales of any Product for six (6) months, then Sankyo may terminate
this Agreement pursuant to Section 11.3.

5.4                                 Supply.

(a) Supply Agreement. The
parties will execute a supply agreement within thirty (30) calendar days from
the Effective Date of this Agreement containing the terms and conditions set
forth below and other such terms and conditions that are customarily found in
an agreement of this nature (the “Supply Agreement”).

(b) The price at which
Cygnus will sell the Product to Sankyo (the “Transfer Price”) will be, for the
first *** following the Product Launch, the greater of *** of the published
Wholesale Acquisition Cost or the amounts set forth in Exhibit C hereto, for
the subsequent, *** the greater of *** of the published Wholesale Acquisition
Costs or the amounts set forth in Exhibit C hereto, and thereafter for the
remaining Calendar Quarters in the initial Term, the greater of *** of the
published Wholesale Acquisition Cost or the amounts set forth in Exhibit C
hereto.  From time to time, the parties
may amend the amounts set forth in Exhibit C as mutually agreed. If this
Agreement is extended pursuant to Section 11.1, the parties will negotiate in
good faith the Transfer Price for subsequent periods.

(c) The price at which
Cygnus will sell the Product to Sankyo for use as professional samples or as
practice units will be Cygnus’ Product material and labor costs.

(d) Sankyo will provide
Cygnus rolling twelve (12)-month forecasts for the Product in the Territory,
which will be updated on a quarterly basis. 
Such forecasts will take Cygnus’ manufacturing capacities into account,
and will contain binding and non-binding forecasts, to be set forth in the
Supply Agreement.  Furthermore, to
ensure that there is no interruption of supply to Product customers, Sankyo
will maintain a minimum of three (3) months inventory during the first three
(3) Sales Years and a minimum of two (2) months inventory during the next three
(3) Sales Years.  Sankyo will place
orders at least one (1) Calendar Quarter in advance, and Sankyo will pay Cygnus
fifty percent (50%) of the Transfer Price upon placement of such orders and
will pay the remaining fifty percent (50%) of the Transfer Price upon
acceptance of shipment.

(e) In the case of
returned Product from patients under Cygnus’ warranty policy, Cygnus will
provide the Patient with either a replacement or repair.  In all other cases, the Supply Agreement
will set forth the terms and conditions of such returns.

(f) The parties will
enter into a mutually agreed upon Quality Agreement that will contain
provisions including but not limited to document retention, deviations and out-of-specification

 

14

 

results, audit and inspection rights, Product
acceptance/release/Certificate of Analysis requirements, quality control, FDA
reporting requirements, and the like.

(g) Cygnus shall use its
commercially reasonable efforts to supply Product (for trade purposes, practice
units and samples) during the Term in sufficient quantities to meet forecasted
amounts of demand set forth in the Sales, Marketing and Distribution Plan.  Cygnus will, from time to time, at Sankyo’s
written request, promptly inform Sankyo of all material problems relating to
Cygnus’ inventory levels and ability to continue supply of the Product to meet
forecasted amounts of demand set forth in the Sales, Marketing and Distribution
Plan.

(h) Failure of Supply.
Option to Manufacture.  In the event
that for any reason (other than by a Force Majeure Act, as defined in Section
15.10), (i) Cygnus is unable to supply on a timely basis at least seventy-five
percent (75%) of the volume of all-ordered Product during a Calendar Quarter
and (ii) such orders are not greater than the forecasted Product requirements
included in the then current Sales, Marketing and Distribution Plan, then the
Term will be extended for twice the number of days Cygnus is unable to supply
on a timely basis at least seventy-five percent (75%) of the volume of
all-ordered Product.  In the event that
the failure to supply continues for six (6) months, then Sankyo has the option,
at its sole discretion, to either terminate this Agreement pursuant to Section
11.4 or exercise its right to manufacture or have manufactured the Product for
sale in the Territory during the Term pursuant to Section 2.1.  From time to time, the parties will exchange
information relating to orders, inventory levels and backlog.

6.                                      OBLIGATIONS OF BOTH PARTIES

6.1                                 Records and Audit Rights.  Each party shall keep and maintain complete
and accurate books and records reflecting all information necessary or useful
in verifying the accuracy of all reports delivered and payments made under this
Agreement and such books and records are proprietary to that party.  Each party (the “Auditing Party”) shall have
the right to audit, or cause its independent auditor to audit, the books and
records of the other party (the “Audited Party”) as they relate to such reports
and payments, provided that any accountant agrees in writing to keep all
information confidential, except as needed to disclose any discovered
discrepancies and provided further that such audit:

(a)                                  is conducted during normal business
hours;

(b)                                 is conducted no more often than once per
year (unless a discrepancy resulting in a payment in excess of one hundred
thousand dollars ($100,000) is discovered in favor of the Auditing Party, in
which case the audits may be conducted semi-annually);

(c)                                  is conducted only after the Auditing
Party has given ten (10) calendar days prior written notice to the Audited
Party. The Auditing Party shall bear the full cost and expense of such audit,
unless a discrepancy resulting in a payment in excess of the one hundred
thousand dollars ($100,000) in favor of the Auditing Party is discovered, in
which event the Audited Party shall bear the full cost and expense of such
audit, however this amount shall not exceed fifty thousand dollars ($50,000)
and any costs or expenses in excess of this amount shall be borne by the

 

15

 

Auditing
Party.  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 (5) years after the Term;
and

(d)                                 in the case of a dispute as to the
alleged discrepancy found, the parties shall hire an independent third-party
accountant and shall bear equally the costs or expenses of such independent
third-party accountant.

6.2                                 Insurance.  During the Term and in the Territory, Cygnus and Sankyo each will
purchase and maintain in full force and effect, with a responsible insurance
carrier, the insurance coverage and amounts typical in the medical devices
industry for the type of activities performed by each of the parties for
similarly positioned and sized companies. 
Specifically, Cygnus will be solely responsible for insuring against
product liability claims arising from, or relating to, the Product in the
Territory.  Cygnus shall maintain
product liability insurance throughout the Term in an amount of at least *** on
a “per occurrence” basis with an insurance company rated at least A-3 by Best’s
rating guide. Sankyo shall be added as an additional insured on Cygnus’ product
liability insurance policy.  Sankyo
shall maintain all insurance necessary for its obligations throughout the Term
in the Territory in an amount of at least *** on a “per occurrence” basis with
an insurance company rated at least A-3 by Best’s rating guide.  Cygnus shall be added as an additional
insured of Sankyo’s insurance policy. 
Each party shall provide the other with a certificate of insurance and
shall keep such policy current.  Each
such insurance policy shall provide for at least thirty (30) calendar days
prior written notice to Cygnus and Sankyo of the cancellation or any
substantial modification of the terms of coverage.

6.3                                 Governmental Approvals; Compliance with
Law. Cygnus and Sankyo each shall make all filings with government authorities
as shall be required by applicable laws in connection with this Agreement and
the activities contemplated hereunder. 
In fulfilling its obligations under this Agreement, Cygnus and Sankyo
each agrees to comply in all material respects with all applicable laws.

6.4                                 Cooperation.  The parties will work together to perform their obligations under
this Agreement. Sankyo may, upon reasonable advance notice, at Sankyo’s cost,
visit facilities where the Product is being manufactured, stored, tested or
shipped during normal business hours. 
Cygnus may, upon reasonable advance notice, have its personnel accompany
the Sankyo sales force in the field to observe Sankyo’s field sales activities
relating to the Product and Cygnus may, from time to time, contact health care
professionals to obtain feedback on the Product.  During the transition period prior to Sankyo’s exclusive
distribution of Product, the parties will work together to facilitate an
orderly transition, to keep each other informed of possible overlapping
activities, and to enter channels of distribution other than direct-to-patient
as soon as practicable.  Throughout the
Term of this Agreement, each party will execute all necessary

 

16

 

consents or other required documents to enable the
other party to perform its obligations hereunder.

6.5                                 Responsibility.  Other than the payments specifically set forth in this Agreement,
there shall be no other payments made by the parties to each other.  Neither party shall be responsible for the
costs and expenses, whether external or internal and whether direct or
indirect, including salaries and travel, of the other party.

7.                                      MANAGEMENT OF RELATIONSHIP

7.1                                 Steering Committee.  Within twenty (20) calendar days from the
Effective Date, the parties will form a Steering Committee consisting of three
(3) people from each party (the “Steering Committee”).  A representative from each party shall serve
as co-chairpersons of the Steering Committee. 
The Steering Committee may establish one or more subcommittees as
appropriate. The Steering Committee shall meet at least quarterly, and shall
document their meetings in written minutes, to:

(a)                                  review the sales, marketing and
distribution of the Product in the Territory, including a review and update of
the Sales, Marketing and Distribution Plan at least annually;

(b)                                 discuss actions to foster the attainment
of sales objectives;

(c)                                  review current marketing, distribution,
sales and pricing strategies, including amount and form of discount and rebate
programs;

(d)                                 coordinate  activities between Sankyo and Cygnus, its Affiliates, designees,
licensees and/or its sublicensees who are promoting the Product for Cygnus
pursuant to Section 2.1(ii);

(e)                                  review Sankyo’s efforts to develop and
implement strategies of institutional, governmental and managed care marketing
and contracting;

(f)                                    review Cygnus’ obligations under Section
5.1 and receive updates from Cygnus on other significant activities relating to
its obligations under Section 5.1, including an annual review of Cygnus
Intellectual Property Rights in the Territory;

(g)                                 review Cygnus’ proposed product
development as set forth in Section 5.1(h) in light of marketing issues
regarding the Product;

(h)                                 review Sankyo’s obligations under Section
4.1;

(i)                                     review, and if necessary, amend the
schedule set forth in Exhibit C hereto;

(j)                                     resolve any disputes pursuant to Section
7.1; and

(k)                                  agree upon the initial Sales, Marketing
and Distribution Plan.

 

17

 

Each party may change its members of the Steering Committee
at any time upon written notice, and each party will cause its members of the
Steering Committee to act reasonably, in good faith and consistent with the
terms and conditions of this Agreement. 
The Steering Committee may take action only by the unanimous written
consent of all members, as indicated by all members signing the written
minutes.  If an issue remains unresolved
after good faith consideration by the Steering Committee for thirty (30)
calendar days, any Steering Committee member may submit it to the Executive
Officers of the parties for resolution. The initial Sales, Marketing and
Distribution Plan shall be mutually agreed upon by Sankyo and Cygnus.

7.2                                 Executive Officers.  Each party shall designate an “Executive
Officer” of its company who will be available in the event of any dispute that
has not been resolved by the Steering Committee in accordance with Section 7.1.
The Executive Officer must be at least at the level of an officer of the
company.  The initial Executive Officers
shall be designated within twenty (20) calendar days of the Effective
Date.  The Executive Officers shall
attempt in good faith to resolve any issue presented to them by the Steering
Committee.  In the event that an issue
relates to Cygnus’ particular manner of implementing its responsibilities and
obligations under Section 5.1, the Executive Officer from Cygnus shall make the
final determination.  In the event that
an issue relates to Sankyo’s particular manner of implementing its
responsibilities and obligations under Section 4.1, the Executive Officer from
Sankyo shall make the final determination. 
Any other issue will be deemed not to be resolved if the Executive
Officers are unable to resolve it within thirty (30) calendar days after
attempting in good faith to do so.

8.                                      REPRESENTATIONS, WARRANTIES AND COVENANTS

8.1                                 Mutual Representations.  Each party represents, warrants and
covenants to the other as follows:

(a)                                  Existence and Authority.  It is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of
incorporation and has the corporate power and authority to execute, deliver and
perform this Agreement.  The execution
of this Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on its part and do
not conflict with the terms or conditions of any contract, agreement,
arrangement or understanding to which such party is subject.

(b)                                 Enforceability.  This Agreement is a valid and binding obligation of said party,
enforceable against it in accordance with its terms.

(c)                                  Litigation.  There is no action, suit, proceeding or investigation pending or,
to its knowledge, threatened before any court or administrative agency against
said party which could, directly or indirectly, reasonably be expected to
materially affect its ability to perform its obligations hereunder or the
marketability of the Product.

(d)                                 Compliance with Laws.  Each party shall fully comply in all
material respects with all applicable federal, state and local laws, rules,
regulations or ordinances with respect to its obligations hereunder and shall
obtain and maintain all licenses,

 

18

 

permits, approvals
and other authorizations applicable to it in order to enable it to perform its
obligations hereunder.

8.2                                 Cygnus’ Representations.  Cygnus hereby represents, warrants and
covenants to Sankyo as follows:

(a)                                  Product Specifications.  All sample Product delivered by or for
Cygnus to Sankyo or distributed by or for Cygnus and Product manufactured,
distributed or sold by or for Cygnus during the Term will comply in all
material respects with the specifications for the Product; will comply in all
material respects with all requirements of the FDA and other applicable laws,
rules and regulations; will not be adulterated or misbranded and will have been
determined to be safe and effective by the FDA for the Product’s intended use
under the U.S. Food, Drug and Cosmetic Act and regulations issued thereunder or
other applicable laws; and will have been manufactured in all material respects
in accordance with current good manufacturing practices as provided in the U.S.
Food, Drug and Cosmetic Act and regulations issued thereunder This
representation does not apply to Product that has been mishandled, mistreated
or used or maintained or stored by Sankyo other than in conformity with Cygnus’
written instructions.

(b)                                 Intellectual Property.  As of the Effective Date, Cygnus has
received no credible or material notices, threats, or warnings, orally or in
writing, alleging infringement or violation of any intellectual property right
of another party with respect to the Product and that the Exclusive License
Agreement for Device for Iontophoretic Non-Invasive Sampling or Delivery of
Substances between Cygnus and the University of California, effective January
1, 1995, and any amendments thereto (the “UC License Agreement”), remains in
full force and effect. Additionally, Cygnus is not aware of any patents, trademarks,
copyrights or other intellectual property rights of third parties that the
initial Products (i.e., GlucoWatch® Biographer 
and GlucoWatch® G2TM Biographer) would infringe in the
Territory.  To the best of its
knowledge, Cygnus owns or possesses all right, title and interest in and to, or
has licenses to, all patents, know-how, trademarks, copyrights, trade secrets
and all other intellectual property of any nature whatsoever relating to the
Product, including but not limited to Cygnus Patent Rights, Cygnus Trademarks,
Cygnus Copyrights and Cygnus Know-How, required to make, use, sell or offer for
sale the Product in the Territory (collectively, “Cygnus Intellectual Property
Rights”).  Except for any security interest
granted to Sankyo pursuant to Section 2.4, Cygnus owns or has licenses to the
Cygnus Intellectual Property Rights free and clear of all liens, claims and
encumbrances and free of all royalty or similar payment obligations to any
third party except for the University of California.  Cygnus has not received any notice concerning the institution or
possible institution of any interference, opposition, re-examination or reissue
involving any of Cygnus Patent Rights.

(c)                                  Information Disclosure.  Cygnus represents and warrants to Sankyo
that, as of the Effective Date, all documents, materials, representations and
other information provided to Sankyo by Cygnus concerning the Product,
including, without

 

19

 

limitation, with respect
to the FDA’s determination of safety and effectiveness of the Product, are
materially accurate, and, taken as whole, do not contain any statement which is
false or misleading in any material respect, and that Cygnus has not omitted or
failed to state any fact that would materially adversely affect Sankyo’s or
Cygnus’ ability to perform its obligations under this Agreement.

(d)                                 Other Agreements.  As of the Effective Date, Cygnus has not
entered into any agreement or other business arrangement with a third party for
the marketing, sales, or offer for sale of the Product in the Territory other
than the U.S. Market Research Agreement with Lifescan, dated February 22, 2001,
and any amendments thereto; the Warehouse Distribution Contract with UPS Supply
Chain Management, Inc., dated August 25, 2000, and amendments thereto; and into
the Services Agreement with Express-Med, Inc., dated May 7, 2002 and amendments
thereto.

8.3                                 Sankyo’ Representations.  Sankyo hereby represents, warrants and
covenants to Cygnus as follows:

(a)                                  Sales Misconduct. As of the Effective
Date, Sankyo has not received any notices or citations from the FDA relating to
misconduct or illegal sales and marketing activities of its sales force with
regard to any product. During the Term, Sankyo will comply with all applicable
laws and regulations relating to the conduct of its sales force.

(b)                                 Product Claims. All sales presentations
by Sankyo and sales and marketing materials provided or distributed by Sankyo
shall comply in all material respects with all applicable laws and regulations.

9.                                      INTELLECTUAL PROPERTY

9.1                                 Trademarks.  Cygnus has applied for and/or registered in the Territory the
trademark “GLUCOWATCH,” “G2,” “G3” and “CYGNUS” that Cygnus may use on one or
more of the Products, and in the future will register or otherwise protect
additional trademarks, service marks, logos and other designations relating to
the Product in the Territory (collectively, “Cygnus Trademarks”).  Cygnus shall be the sole owner of all Cygnus
Trademarks, and Sankyo has not and will not apply for and/or register any
trademarks relating to the Product. Each party hereby grants to the other a
nonexclusive right and license to use any trademark of the party to permit the
other party to meet its obligations under this Agreement during the Term in the
Territory.  In the event Cygnus decides
to stop marking the Product in the Territory as “GLUCOWATCH,” Cygnus will first
consult with Sankyo prior to making its decision.

9.2                                 Rights in Trademarks, Trade Names, Logos
or Designations.  Sankyo acknowledges
that it has paid no consideration for the use of Cygnus Trademarks, and nothing
contained in this Agreement shall give Sankyo any right, title or interest in
or to any of Cygnus Trademarks.  Sankyo
acknowledges that Cygnus retains all proprietary rights in all of Cygnus
Trademarks, and Sankyo agrees that it will not at any time during or after the
Term assert or claim any interest or do anything that might adversely affect
the validity or enforceability of any Cygnus Trademarks.

 

20

 

9.3                                 Copyrights.  Cygnus owns its copyrights in Cygnus-developed software, sales
and marketing materials, Product labeling, and other copyrightable materials
published in connection with the development, sales and marketing of the
Product (“Cygnus Copyrights”).  Sankyo
owns its copyrights in Sankyo-developed software, sales and marketing
materials, and other copyrightable materials published in connection with the
sales, marketing and distribution of the Product (“Sankyo Copyrights”).  Each party hereby grants to the other a
nonexclusive right and license to use any copyright of the party to permit the
other party to meet its obligations under this Agreement during the Term in the
Territory.

9.4                                 glucowatch.com. Cygnus retains ownership
of its website domain name, glucowatch.com and any other website domain names
having glucowatch therein and owned by Cygnus, and Cygnus grants Sankyo an
exclusive license right and license to use such domain names during the Term of
this Agreement, after Cygnus transitions its United Kingdom information to
another domain name other than glucowatch.com or any other website domain names
having glucowatch therein and owned by Cygnus. 
The parties will work together to facilitate this transition and to
provide U.K. customers with a gateway to U.K. information in a legally
compliant manner. After the transition, but in any case no later than sixty
(60) calendar days after the Effective Date, Sankyo will assume control over
such website domain  contents pursuant
to Section 4.1(j).

9.5                                 Ownership.  As between the parties and subject to the exclusion set forth in
this Section 9.5, each party will be the sole owner of the intellectual
property rights in any invention made during the Term 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 made during the Term of
which both parties, employees or contractors are joint inventors.  In the case of solely owned intellectual
property rights, each party will bear the cost and responsibility of such
rights.  In the case of jointly owned
intellectual property rights, the parties will share the cost and
responsibility in filing, prosecuting and maintaining such jointly owned
rights, which may be exploited and non-exclusively licensed to third
parties by either party without accounting to or further approval of the other
party. Inventorship on patent applications will be determined by U.S. patent
law.  If Sankyo, during the Term through
its employees or its third-party contractors, is an owner of, or a licensee
with a right to sublicense, any intellectual property rights relating to
reverse iontophoresis glucose monitoring, Sankyo hereby grants Cygnus a
royalty-free, non-exclusive, perpetual license in such intellectual property to
Cygnus, however Sankyo shall bear the cost and responsibility of filing,
prosecuting and maintaining such intellectual property rights.

9.6                                 Claim of Infringement.  If Sankyo or Cygnus (“Receiving Party”)
receives a claim that any of the Product infringe upon a patent or copyright in
the U.S., or that any Cygnus Trademarks employed with a Product infringe upon a
registered trademark, service mark, logo or protectable trade-dress of a
third party in the U.S., the Receiving Party will notify the other party
promptly in writing to ensure that Cygnus has all necessary information and
assistance and the authority to evaluate and defend such claim.  Cygnus, at its sole and absolute discretion,
shall determine what course of action it wishes to take in defending such a
claim including but not limited to litigation, license and the like.  Cygnus warrants and represents that it shall
use its commercially reasonable efforts to secure a right to continue using the
Product in the Territory during the Term free of liability for infringement of
any third-party patent, copyright, trademark or any other intellectual property
right.  Royalties and other payments
associated with such right shall be borne by Cygnus.  Cygnus shall indemnify, defend and hold harmless Sankyo, and its

 

21

 

officers, directors,
employees and agents with respect to such claims in accordance with the terms
and conditions of Section 12.1 and Section 12.3.

9.7                                 Infringement by Third Parties.  Each party shall notify the other party in
writing promptly upon its becoming aware of any infringement by a third party
of Cygnus Intellectual Property Rights utilized in manufacturing, using,
developing, supplying, importing, exporting, marketing, distributing,
co-promoting, offering for sale or selling the Product in the Territory during
the Term.  Cygnus shall have the right,
but not the obligation, to file and maintain lawsuits in its own name for
infringement by third parties of any Cygnus Intellectual Property Rights
related to any Product in the Territory during the Term.  Sankyo shall cooperate as reasonably
requested by Cygnus, at Cygnus’ expense, in any investigation or action taken
by Cygnus in respect of such infringement. 
All sums obtained as a result of such suit or proceeding, whether by
judgment, award, decree or settlement, shall be the property of Cygnus except,
however, Cygnus shall pay to Sankyo *** of all sums obtained after such sums
are first applied to reimburse Cygnus for its out-of-pocket costs incurred in
connection therewith.  In the event that
Cygnus chooses not to pursue legal action against such infringing third party
and the infringing product or products subsequently obtains at least *** of the
market share for the Product in the Territory, wherein the market is defined as
the Cygnus Product and the infringing reverse iontophoresis glucose monitoring
product or products, then Cygnus shall treat the volume of the infringing reverse
iontophoresis glucose monitoring product or products as Net Sales during the
period of infringement.  In the case
there is a dispute between the parties as to whether a third party infringes
Cygnus Intellectual Property Rights, the parties shall request the opinion of a
mutually agreed upon third-party patent expert and shall equally bear the cost
of such expert.

9.8                                 No Other Licenses. Cygnus agrees it will
not assert against Sankyo any claim of infringement under Cygnus Patent Rights
based on Sankyo’s activities under this Agreement in the Territory during the
Term. No other rights or licenses, whether express or implied, in Cygnus’
intellectual property are granted by Cygnus to Sankyo, and Sankyo has no rights
or licenses to Cygnus’ intellectual property outside of the Territory.

10.                               CONFIDENTIALITY

10.1                           Confidentiality.  Each party agrees that any Proprietary
Information it obtains from the other party is the confidential property of the
disclosing party, and may not be used by the receiving party other than in
connection with the activities contemplated under this Agreement. Except as
expressly permitted in this Agreement, the receiving party will hold in
confidence and not use or disclose any Proprietary Information of the
disclosing party and shall obtain the prior written permission of the other
party before releasing such Proprietary Information to a third party. If such
permission is granted, the releasing party shall ensure that the third party is
bound to the same obligations of confidentiality. The restrictions on use and
disclosure of Proprietary Information imposed upon a receiving party under this
Section 10.1 shall continue in full force and effect during the Term and for a
period of five (5) years thereafter.

 

22

 

11.                               TERM AND TERMINATION

11.1                           Term. Termination. Unless terminated
earlier as provided in Section 11.2, Section 11.3, Section 11.4, Section 11.5,
or Section 11.6, or extended as provided in Section 5.3 or Section 5.4(h), this
Agreement will have an initial term of twelve (12) years from the Product
Launch Date (the “Term”).  The Term
shall automatically be extended for successive periods of one (1) year unless
either party gives written notice of termination to the other at least six (6) months
prior to the end of the Term or any one-year extension thereof.

11.2                           Termination Due to Insufficient Sales.

(a)                                  Either party may terminate this Agreement
upon six (6) months prior written notice if, after four (4) years from the
Product Launch Date but during the initial Term of the Agreement, the Net Sales
of the Product are less than sixty million dollars ($60,000,000) in the
immediately preceding twelve (12) month period.

(b)                                 In the event Cygnus terminates this
Agreement pursuant to Section 11.2(a), then Cygnus shall pay to Sankyo for the
remainder of the initial Term of this Agreement, (i) payments of thirty-three
percent (33%) of Net Sales for the first seventy-five million dollars
($75,000,000) of cumulative Net Sales, such payments made annually following
termination until seventy-five million ($75,000,000) dollars of cumulative Net
Sales is met, and (ii) thereafter an annual payment of ten percent (10%) of Net
Sales.   The payments shall be paid in
accordance with the terms of Section 2.6.

(c)                                  In the event Sankyo terminates this
Agreement pursuant to Section 11.2(a), then Cygnus shall pay to Sankyo five
(5%) percent of Net Sales for the remainder of the initial Term.  The payments shall be paid in accordance
with the terms of Section 2.5 and Section 2.6.

11.3                           Termination Due to Recall or Market
Withdrawal.

(a)                                  In the event the Product cannot be sold
as a result of a recall, market withdrawal or other corrective action under
Section 5.3, and such inability to sell the Product continues for a period of
six (6) months, Sankyo shall have the right to immediately terminate the
Agreement.

(b)                                 In the event Sankyo terminates this
Agreement pursuant to Section 11.3(a) during the first three (3) years from the
Product Launch Date, then Cygnus shall pay to Sankyo twenty-five million
dollars ($25,000,000) to be paid out in equal quarterly payments for four (4)
years following termination.  The
payments shall be paid in accordance with the terms of Section 2.5 and Section
2.6.

(c)                                  In the event the Product cannot be sold
due to a recall or market withdrawal or other corrective action under Section
5.3 for a continuous period of six (6) months, such occurrence shall be deemed
a material breach of the Agreement only if such inability was due to Cygnus’
negligence.

 

23

 

11.4                           Termination Due To Failure To Supply.

(a)                                  In the event Cygnus shall be unable to
supply on a timely basis in accordance with the terms of Section 5.4(h) for a
continuous period of six (6) months, Sankyo shall have the right to immediately
terminate the Agreement.

(b)                                 In the event Sankyo terminates this
Agreement pursuant to Section 11.4(a) during the first three (3) years from the
Product Launch Date, then Cygnus shall pay to Sankyo twenty-five million
dollars ($25,000,000) to be paid out on in equal quarterly payments for four
(4) years following termination.  The
payments shall be paid in accordance with the terms of Section 2.5 and Section
2.6.

(c)                                  Cygnus’ inability to supply the Product
under Section 5.4(h) for a continuous period of six (6) months shall be deemed
a material breach of the Agreement only if such failure to supply was due to
Cygnus’ negligence.

11.5                           Right of First Refusal; Termination as a
Result of a Change of Control in Cygnus.

(a)                                  In the event that a Change of Control as
defined in Section 11.5(d) affecting Cygnus is contemplated, Sankyo shall have
an ongoing right of first refusal, at the same or better terms as offered by a
bona fide third party, to enter into a transaction whereby Sankyo is the Person
acquiring beneficial ownership as described in Section 11.5(d)(i), is the
Acquiring Corporation as described in Section 11.5(d)(ii), or is the Person
purchasing properties or assets as described in Section 11.5(d)(iii).   Sankyo shall have thirty (30) calendar days
after notification by Cygnus of the terms offered by a bona fide third party in
which to offer the same or better terms to Cygnus.  If Sankyo has not made such an offer within such thirty (30)-day
time period, then Cygnus may, in its sole discretion, accept or reject such
offer of a bona fide third party.  In
the event that a Change of Control as defined in Section 11.5(d) affecting
Cygnus takes place by a party other than Sankyo or its Affiliates, Sankyo,
Cygnus or Cygnus’ successor in interest shall have the right, but not the
obligation, to terminate the Agreement by furnishing notice of such election to
terminate within fifteen (15) calendar days from execution of Change of Control
documents, such termination to be effective thirty (30) calendar days after
Cygnus’ Change of Control is effective and all regulatory and shareholder
approvals, if any, are obtained.  In the
event that Sankyo, Cygnus or Cygnus’ successor in interest exercises its rights
of termination, Cygnus or Cygnus’ successor in interest, as the case may be,
shall purchase Sankyo’s remaining rights under this Agreement.  The purchase price for such sale shall be as
set forth in Section 11.5(b) or Section 11.5(c).

(b)                                 In the event that a Change of Control affecting
Cygnus takes place and Cygnus or Cygnus’ successor in interest exercises its
right of termination, then Cygnus or Cygnus’ successor in interest, as the case
may be, shall pay Sankyo as follows:

(i)                                     in the event that a Change of Control
affecting Cygnus takes place during the first two (2) years from the Product
Launch Date, (A) an

 

24

 

amount equal to
Sankyo’s investment from the Effective Date of the Co-Promotion Agreement until
the date of termination of this Agreement (including all milestone payments
under this Agreement and the Co-Promotion Agreement dated November 28,
2001 made by Sankyo to Cygnus and all costs and expenses  incurred by Sankyo to comply with its
obligations under Section 4.1),  (B) three
million dollars ($3,000,000) for Sankyo discontinuing its activities under this
Agreement, and (C) either, at the sole option of Cygnus or Cygnus’ successor in
interest, as the case may be, (x) an annual payment of eight percent (8%) of
Net Sales from the date of termination of this Agreement through the end of the
initial Term (without regard to such termination) and such payments shall be
made in accordance with the terms of Section 2.5 and Section 2.6, or (y) the
fair market value of a cash flow stream of eight percent (8%) of Net Sales for
a period of time equal to the duration of time remaining in the initial Term
(without regard to termination). The parties agree to negotiate the fair market
value in good faith promptly following notice of termination pursuant to
Section 11.5(a). In the event no agreement upon fair market value has been
reached within fifteen (15) calendar days of such notice of termination, the
parties agree that fair market value shall be determined by a valuation expert
within fifteen (15) calendar days thereafter whose determination shall be
binding and conclusive on the parties and whose cost shall be borne equally by
the parties.  Payment of fair market
value shall be made within fifteen (15) calendar days of its determination.

(ii)                                  in the event that a Change of Control
takes place after the first two (2) years from the Product Launch Date but
during the initial Term of the Agreement, either, at the sole option of Cygnus
or Cygnus’ successor in interest, as the case may be, (A) an annual
payment of forty percent (40%) of Net Sales or forty-five percent (45%) of Net
Sales if Net Sales exceed two hundred twenty-five million dollars
($225,000,000) in the Sales Year immediately preceding the Change of Control
for the number of years that would have remained under the initial Term but for
termination of this Agreement, minus the amount of costs that would have been
incurred under Section 4.1 but for termination of this Agreement (however,
in no event shall such costs be less than those costs of the Sales Year
immediately prior to termination) from the date of termination of this
Agreement through the end of the initial Term and such payments shall be made
in accordance with the terms of Section 2.5 and Section 2.6, or (B) the
fair market value of a cash flow stream of forty percent (40%) of Net Sales or
forty-five percent (45%) of Net Sales if Net Sales exceed two hundred
twenty-five million dollars ($225,000,000) in the Sales Year immediately
preceding the Change of Control for the number of years that would have
remained under the initial Term but for termination of this Agreement, minus
the amount of costs that would have been incurred under Section 4.1 but for
termination of this Agreement (however, in no

 

25

 

event shall such
costs be less than those costs of the Sales Year immediately prior to
termination) from the date of termination of this Agreement through the end of
the initial Term. The parties agree to negotiate the fair market value in good
faith promptly following notice of termination pursuant to Section 11.5(a). In
the event no agreement upon fair market value has been reached within fifteen
(15) calendar days of such notice of termination, the parties agree that fair market
value shall be determined by a valuation expert within fifteen (15) calendar
days thereafter whose determination shall be binding and conclusive on the
parties and whose cost shall be borne equally by the parties.  Payment of fair market value shall be made
within fifteen (15) calendar days of its determination.  However, in no event will Sankyo owe Cygnus
payments under this paragraph.

(c)                                  In the event that a Change of Control
affecting Cygnus takes place and Sankyo exercises its right of termination,
then Cygnus or Cygnus’ successor in interest, as the case may be, shall pay
Sankyo as follows:

(i)                                     in the event that a Change of Control
affecting Cygnus takes place during the first two (2) years from the
Product Launch Date, (A) an amount equal to Sankyo’s investment from the
Effective Date of the Co-Promotion Agreement until the date of termination of
this Agreement (including all milestone payments under this Agreement and the
Co-Promotion Agreement dated November 28, 2001 made by Sankyo to Cygnus and all
costs and expenses incurred by Sankyo to comply with its obligations under
Section 4.1) minus fifteen percent (15%) of Net Sales for the first Sales Year
and minus thirty percent (30%) thereafter through the date of termination of
this Agreement and (B) either, at the sole option of Cygnus or Cygnus’
successor in interest, as the case may be, (x) an annual payment of four
percent (4%) of Net Sales from the date of termination of this Agreement
through the end of the initial Term (without regard to such termination) and
such payments shall be made in accordance with the terms of Section 2.5 and
Section 2.6, or (y) the fair market value of a cash flow stream of four percent
(4%) of Net Sales for a period of time equal to the duration of time remaining
in the initial Term (without regard to termination). The parties agree to
negotiate the fair market value in good faith promptly following notice of
termination pursuant to Section 11.5(a). In the event no agreement upon fair
market value has been reached within fifteen (15) calendar days of such notice
of termination, the parties agree that fair market value shall be determined by
a valuation expert within fifteen (15) calendar days thereafter whose
determination shall be binding and conclusive on the parties and whose cost
shall be borne equally by the parties. 
Payment of fair market value shall be made within fifteen (15) calendar
days of its determination.

(ii)                                  in the event that a Change of Control
takes place after the first two (2) years from the Product Launch Date but
during the initial Term of the

 

26

 

Agreement, either,
at the sole option of Cygnus or Cygnus’ successor in interest, as the case may
be, (A) an annual payment equal to half of the following:  an annual payment of forty percent (40%) of
Net Sales or forty-five percent (45%) of Net Sales if Net Sales exceed two
hundred twenty-five million dollars ($225,000,000) in the Sales Year
immediately preceding the Change of Control for the number of years that would
have remained under the initial Term but for termination of this Agreement,
minus the amount of costs that would have been incurred under Section 4.1 but
for termination of this Agreement (however, in no event shall such costs be
less than those costs of the Sales Year immediately prior to termination) from
the date of termination of this Agreement through the end of the initial Term
and such payments shall be made in accordance with the terms of Section 2.5 and
Section 2.6, or (B) half of the fair market value of a cash flow stream of
forty percent (40%) of Net Sales or forty-five percent (45%) of Net Sales if
Net Sales exceed two hundred twenty-five million dollars ($225,000,000) in the
Sales Year immediately preceding the Change of Control for the number of years
that would have remained under the initial Term but for termination of this
Agreement, minus the amount of costs that would have been incurred under
Section 4.1 but for termination of this Agreement (however, in no event shall
such costs be less than those costs of the Sales Year immediately prior to
termination) from the date of termination of this Agreement through the end of
the initial Term. The parties agree to negotiate the fair market value in good
faith promptly following notice of termination pursuant to Section 11.5(a). In
the event no agreement upon fair market value has been reached within fifteen
(15) calendar days of such notice of termination, the parties agree that fair
market value shall be determined by a valuation expert within fifteen (15)
calendar days thereafter whose determination shall be binding and conclusive on
the parties and whose cost shall be borne equally by the parties.  Payment of fair market value shall be made within
fifteen (15) calendar days of its determination. However, in no event will
Sankyo owe Cygnus payments under this paragraph.

(d)                                 For purposes of Section 11.5, Section
13.1 and Exhibit D, Number 6, a “Change of Control” shall mean an event where:

(i)                                     any “Person(s)”, meaning any natural
person(s), corporation(s), general partnership(s), limited

partnership(s), joint venture(s), proprietor-ship(s) or business
organization(s), acquires beneficial ownership of capital stock of a party
entitling the holder(s) thereof to at least fifty-one percent (51%) of the
voting power of the then outstanding capital stock of Cygnus with respect to
the election of directors of Cygnus; or

(ii)                                  Cygnus enters into a merger,
consolidation or similar transaction with another Person (the “Acquiring
Corporation”) in which

(A)          Cygnus is not the surviving
corporation in such transaction; or

 

27

 

(B)                                the members of the Board of Directors of
Cygnus prior to such transaction constitute less than one-half of the members
of the Board of Directors of the Acquiring Corporation following such
transaction; or

(C)                                at least fifty-one percent (51%) of the
voting power of the outstanding capital stock of the Acquiring Corporation with
respect to the election of directors following such transaction is held by
Persons who were shareholders of the Acquiring Corporation prior to such
transaction; or

(iii)                               Cygnus sells to any Person(s) in one or
more related transactions, properties or assets representing at least fifty-one
percent (51%) of Cygnus’ consolidated total assets as reflected on its most
recent Annual Report on Form 10-K or Quarterly Report on Form 10-Q, provided
that all or substantially all of the properties and assets used in connection
with Cygnus’ business are included in such transaction(s).

11.6                           Termination Due to Other Circumstances.

(a)                                  This Agreement may be terminated as set
forth below upon the occurrence of any of the following events:

(i)                                     by either party immediately, if the other
ceases to do business, or otherwise terminates its business operations;

(ii)                                   by either party immediately, 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) calendar days or diligent efforts are not being made to
effect such reinstatement;

(iii)                               by either party immediately, if the other
materially breaches any material provision of this Agreement and fails to cure
such breach within sixty (60) calendar days of written notice describing the
breach; or

(iv)                              by either party immediately, if the other
shall seek voluntary protection under any bankruptcy, receivership, trust deed,
creditors’ arrangements, composition or comparable proceeding, or if any such
proceeding is instituted against the other (and not dismissed within ninety
(90) calendar days).

11.7                           Effect of Termination

(a)                                  Upon termination of this Agreement, each
party will within ninety (90) calendar days cease all use of the trademarks,
service marks, trade names, logos and designations of the other

 

28

 

party and Sankyo will not thereafter use, advertise or
display any name, mark or logo that is, or any part of which is, similar to or
confusing with any such designation associated with any Product.

(b)                                 Upon termination of this Agreement the
parties will cooperate with each other to wind down all supply, sales and
marketing efforts under this Agreement, including return of Product inventory
purchased by Sankyo from Cygnus.

11.8                           Survival.  The following provisions shall survive the termination of this
Agreement: Section 2.5, Section 2.6, Section 6.1, Section 8, Section 9, Section
10, Section 11 and Section 12, as well as any applicable definitions and
general provisions. Remedies for breaches will also survive termination of this
Agreement.  Each party will promptly
return all tangible Proprietary Information of the other (and all copies
thereof) that it is not entitled to use under the surviving terms and
conditions of this Agreement, except for one copy, which may be retained solely
for legal, archival purposes.  Upon termination,
Sankyo will transfer ownership of the customer list set forth in Section
1.16(d) to Cygnus.

12.                               INDEMNIFICATION

12.1                           Indemnification by Cygnus.  Cygnus agrees to indemnify, hold harmless
and defend Sankyo, its Affiliates and their respective officers, directors,
employees, agents and representatives from and against any and all liabilities,
losses, suits, claims, damages and expenses (including, without limitation,
attorneys’ fees, expert fees and other disbursements) (collectively,
“Liabilities”) asserted against or incurred by Sankyo arising out of or
relating to (a) the use, distribution by Cygnus, marketing by Cygnus, field
sales activity by Cygnus, sale by Cygnus, repair or replacement, manufacture
and/or supply of the Product 
(including, without limitation, Liabilities relating to product
liability, product deficiencies and/or personal injury); (b) the breach by
Cygnus of any of its representations, warranties or other obligations under
this Agreement and/or the Supply Agreement; (c) a claim by a third party that
the marketing, sales, use, offer for sale or sale of the Product in the
Territory during the Term or use of sales and marketing material created by
Cygnus related to the Product in the Territory during the Term infringes any
patent, trademark, copyright or other intellectual property rights of such
third party; and/or (d) any negligence or willful misconduct of Cygnus; except
to the extent any such Liabilities set forth above result from the breach by
Sankyo of its representations, warranties or obligations under this Agreement
and/or the Supply Agreement or its negligence or willful misconduct, or its
sale, marketing or distribution of Product in a manner which is inconsistent
with the terms of this Agreement and/or the Supply Agreement.  THE INDEMNIFICATION PROVIDED HEREBY SHALL
NOT BE DEEMED TO INCLUDE INDEMNIFICATION FOR LOST PROFITS OR INDIRECT OR
CONSEQUENTIAL DAMAGES OF SANKYO. Any indemnification hereunder shall be net of
any insurance proceeds recovered by Sankyo.

12.2                           Indemnification by Sankyo.  Sankyo agrees to indemnify, hold harmless
and defend Cygnus, its Affiliates and their respective officers, directors,
employees, agents and representatives from and against any Liabilities asserted
against or incurred by Cygnus, arising out of or relating to (a) the
distribution by Sankyo, marketing by Sankyo, field sales activity by Sankyo,
sale by Sankyo of Product; (b) the breach by Sankyo of any of its
representations, warranties or other obligations under this Agreement and/or
the Supply Agreement; (c) a claim

 

29

 

by a third party that use of sales and marketing
material created by Sankyo related to the Product in the Territory during the
Term infringes any patent, trademark, copyright or other intellectual property
rights of such third party; and/or (d) any negligence or willful
misconduct of Sankyo; except to the extent any such Liabilities set forth above
result from the breach by Cygnus of its representations, warranties or obligations
under this Agreement and/or the Supply Agreement or its negligence or willful
misconduct, or its sale, marketing or distribution of Product in a manner which
is inconsistent with the terms of this Agreement and/or the Supply Agreement,
or any actions that would be indemnified against by Cygnus under Section
9.6.  THE INDEMNIFICATION PROVIDED
HEREBY SHALL NOT BE DEEMED TO INCLUDE INDEMNIFICATION FOR LOST PROFITS OR
INDIRECT OR CONSEQUENTIAL DAMAGES OF CYGNUS. Any indemnification hereunder
shall be net of any insurance proceeds recovered by Cygnus.

12.3                           Cooperation in Connection with
Indemnification.  Any party entitled to
indemnification pursuant to Section 12.1 or Section 12.2 shall notify the
indemnifying party promptly of any claim that might give rise to a claim of
indemnification, shall allow the indemnifying party to handle the defense of
the claim (provided the indemnifying party acknowledges its obligation to
indemnify hereunder), shall cooperate in the defense of such claim and shall
not settle such claim without the indemnifying party’s written consent (which
shall not be unreasonably withheld, delayed or conditioned).  An indemnified party shall have the right to
participate in the defense of any matter as to which indemnification is being
provided with its own counsel and at its own expense.  Where any indemnity is claimed under this Agreement, the party
claiming such indemnity shall take all reasonable action at the request of the
indemnifying party (the reasonable cost of which shall be borne by the
indemnifying party) to mitigate such Liabilities.

13.                               NO SALE OR
LICENSE OF CYGNUS PATENT RIGHTS OR CERTAIN TRADEMARKS.  OPTION FOR CERTAIN COUNTRIES IN ASIA.

13.1                           During the Term of this Agreement, Cygnus
may not assign, sell or license any Cygnus Patent Rights, or the trademarks
“GLUCOWATCH” or “G2,” or the glucowatch.com domain name to any third party who
is not an Affiliate unless such assignment, sale or license occurs in
connection with a Change of Control. 
Cygnus may, however license or sublicense any Cygnus Patent Rights to a
third party for products other than the Product (as defined in Section
1.15).  Notwithstanding the foregoing,
Cygnus may encumber or pledge any Cygnus Patent Rights and/or the above-mentioned
trademarks pursuant to one or more financing arrangements only after Cygnus has
fully paid off the deferred payments set forth in Section 2.4.

13.2                           During the Term of this Agreement, Cygnus
grants Sankyo a right of first refusal for the rights to sell, market and
distribute the Product in Japan, China, Korea, Thailand and/or Taiwan.  In the event Sankyo exercises its right, the
parties will negotiate in good faith the terms and conditions of such an
arrangement and may, if both parties reach agreement, enter into a separate
agreement for Japan and/or China.

14.                               ANTICIPATORY BREACH

14.1                           During the Term of this Agreement, Within
fifteen (15) calendar days after the end of each month, and within five (5)
calendar days after the occurrence of any adverse material event,

 

30

 

during the Term of the Agreement Cygnus shall provide
Sankyo with a written report describing the aggregate amount of its cash and
investments, as permitted in Exhibit D, Number 3, as of the end of the month or
event.  If such aggregate amount is less
than the amount of Cygnus Cash Requirements, as defined below,  and both of the following conditions are
met: (a) Sankyo is not in breach of any material term of this Agreement,
including but in no way limited to breach of its sales, marketing and
distribution obligations under Section 4.1 or its supply payment obligations
under the Supply Agreement, and (b) Net Sales by Sankyo are greater than or
equal to ninety percent (90%) of the amounts set forth in Exhibit E for the specified
Calendar Years as prorated due to the calendar month in which this event
occurs, then Sankyo may declare, and such declaration must be in writing and
pursuant to Section 15.4, an “Anticipatory Breach.”  “Cygnus Cash Requirements” equals the amount of any net decrease
in cash and investments  for the most
recent Calendar Quarter, after eliminating the effect of any material and
non-recurring payments (including but not limited to payments of deferred
payments to Sankyo or material arbitration and debt obligations existing as of
the Effective Date), as reported on Cygnus’ most recent quarterly (10-Q) or
annual (10-K) reports filed with the U.S. Securities and Exchange Commission
for the most recent Calendar Quarter.

14.2                           In the event that an Anticipatory Breach
occurs, upon prior written notice Sankyo may exercise any or all of the
following rights as set forth in Section 14.2(a) and (b):

(a)                                  the right to purchase Cygnus’ Regulatory
Approval submissions including but not limited to its pre-market approval applications
and any supplements thereto at the fair market value, and contract with Cygnus
to be Sankyo’s contract regulatory organization and contract research and
development organization for the Product in the Territory during the Term. The
parties agree to negotiate in good faith the fair market value of Cygnus’
Regulatory Approval submissions promptly following notification by Sankyo of
its intent to exercise this right.  In
the event no agreement upon fair market value has been reached within fifteen
(15) calendar days of such notice of exercise, the parties agree that fair
market value shall be determined by a valuation expert within fifteen (15)
calendar days thereafter whose determination shall be binding and conclusive on
the parties and whose cost shall be borne equally by the parties.  Payment of fair market value shall be made
within fifteen (15) calendar days of its determination.  Additionally, the parties will negotiate in
good faith the terms and conditions of the contract regulatory and contract
research and development contractual obligations. In the event that Cygnus
cannot perform as a contract regulatory organization and/or a contract research
and development organization for the Product in Territory during the Term, then
Sankyo may contract with third parties for these services. The parties will
also negotiate in good faith and amend the terms of this Agreement to reflect
the changed obligations and responsibilities between the parties, however such
amendments will not result in Sankyo receiving a less favorable combination of
Sales and Marketing Fees and Transfer Prices.

(b)                                 the right to contract with Cygnus to be
Sankyo’s contract manufacturing organization for the Product in the Territory
during the Term.  The parties will
negotiate in good faith the terms and conditions of the contract manufacturing
contractual obligations. The parties will also negotiate in good faith and
amend the terms of this Agreement to reflect the changed obligations and
responsibilities between the parties, however such amendments will not result
in Sankyo receiving a less favorable combination of Sales and Marketing Fees
and Transfer Prices. Furthermore, Cygnus will assign its manufacturing
contracts with third parties to Sankyo; and,

 

31

 

only in the event that such manufacturing contracts
with third parties are not sufficient for manufacture of the Product, Sankyo
may exercise its license under Section 2.1 to manufacture or have a third-party
manufacture the Product in the Territory during the Term.

14.3                           Notwithstanding the foregoing, if at any
time during the Term of this Agreement after Sankyo has declared Anticipatory
Breach, the sum of Cygnus’ cash and investments, excluding any proceeds
received from Sankyo for the purchases and contracts set forth in Section 14.2,
is sufficient to meet Cygnus Cash Requirements for a period of six (6) months,
Cygnus may then have the option, at its sole discretion, to do one or more of
the following:

(a)                                  repurchase Cygnus’ Regulatory Approval
submissions, such as its pre-market approval applications and any supplements
thereto, at the then-current fair market value and terminate any contract
regulatory and contract research and development contractual obligations made
pursuant to Section 14.2(a). The parties agree to negotiate the fair market
value in good faith promptly following notification by Cygnus of its intent to
repurchase these submissions.  In the
event no agreement upon fair market value has been reached within fifteen (15)
calendar days of such notice of repurchase, the parties agree that fair market
value shall be determined by a valuation expert within fifteen (15) calendar
days thereafter whose determination shall be binding and conclusive on the
parties and whose cost shall be borne equally by the parties.  Payment of fair market value shall be made
within fifteen (15) calendar days of its determination. The parties will
negotiate in good faith and amend the terms of this Agreement to reflect the
changed obligations and responsibilities between the parties, however such
amendments will not result in Cygnus receiving a less favorable combination of
Sales and Marketing Fees and Transfer Prices than are present in this
Agreement, prior to any amendment pursuant to Section 14.2(a)

(b)                                 have Sankyo re-assign the manufacturing
contracts with third parties as set forth in Section 14.2(b) to Cygnus;
terminate any contract manufacturing contractual obligations with Sankyo, and
Sankyo will not manufacture or have a third-party manufacture the Product for
Sale in the Territory.  The parties will
negotiate in good faith and amend the terms of this Agreement to reflect the
changed obligations and responsibilities between the parties, however such
amendments will not result in Cygnus paying a less favorable combination of
Sales and Marketing Fees and Transfer Prices than are present in this
Agreement, prior to any amendment pursuant to Section 14.2(b).

14.4                           The parties will cooperate in good faith
in negotiating the purchases, contracts and repurchases set forth in Section
14.2 and Section 14.3, and will each execute any and all necessary documents to
execute such transactions. 
Additionally, the parties will work together to effectuate a smooth
transition of such purchases, contracts and repurchases.

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.  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.

 

32

 

15.2                           Governing Law and Legal Actions.  This Agreement shall be governed by and
construed in accordance with the laws of the State  of  California, as if executed
and fully performed within California; any disputes under this Agreement shall
be subject to the exclusive jurisdiction and venue of the federal courts
located in California, and the parties hereby consent to the personal and
exclusive jurisdiction and venue of these courts.

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. 
Notices under this Agreement shall be in writing and shall be sufficient
only if personally delivered, delivered by a major commercial rapid delivery
service or mailed by certified or registered mail, return receipt requested to
a party at its addresses first set forth herein or as amended by notice
pursuant to this Section 15.4, to the attention of the President and Chief
Executive Officer, with a copy to the General Counsel, in the case of Cygnus,
and to the attention of the President with a copy to General Counsel in the
case of Sankyo.  Any notice shall be
deemed received upon one (1) business day after delivery to a major commercial
rapid delivery service or, if delivered by U.S. mail service other than Express
Mail, upon receipt or, if not received sooner, upon five (5) business days
after deposit.

15.5                           Entire Agreement.  This Agreement 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, with the sole exception of any purchase orders
outstanding as of the Effective Date of this Agreement.  The Co-Promotion Agreement, dated November
28, 2001, is completely replaced and superseded as of the Effective Date set
forth in this Sales and Marketing Agreement.

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                           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.  The parties expressly agree
and acknowledge that no partnership or joint venture exists between them.

15.8                           Assignment.  This Agreement and the rights hereunder are not transferable or
assignable without the prior written consent of the parties hereto except to a
person or entity who acquires all or substantially all of the assets or
business of a party, whether by sale, merger or otherwise.

15.9                           Publicity and Press Releases.  Except to the extent necessary under
applicable laws, the parties agree that no press releases or other publicity
relating to the substance of the matters contained herein will be made without
joint approval.  Notwithstanding the
previous sentence, the parties agree that a press release announcing this
Agreement will be jointly developed by the parties and released promptly after
the Effective Date of this Agreement, and the parties recognize that Cygnus
will need to file a copy of this Agreement, redacted to the extent

 

33

 

permissible, with the U.S. Securities and Exchange
Commission.  Both parties will consult
with each other prior to issuing any future press release relating to this
Agreement.

15.10                     Force Majeure. 
No liability or loss of rights hereunder shall result to either party
from delay or failure in performance (other than payment of money) caused by
governmental actions or restrictions (provided that any such governmental
action or restriction was not the result of actions of a party to this
Agreement), war, terrorist activities, civil commotion, riots, strikes, power
outages, lock outs and acts of God such as fire, flood, earthquakes, lightning,
drought or other similar or dissimilar causes that are beyond the control of
the parties (each, a “Force Majeure Act”).

15.11                     Remedies. 
Except as otherwise expressly stated in this Agreement including but not
limited to Section 11.2, Section 11.3, Section 11.4 and Section 11.5, the
rights and remedies of a party set forth herein with respect to failure of the
other to comply with the terms and conditions 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.

15.12                     Nonemployment. 
During the Term and for a period one (1) year thereafter, neither party
will employ any current employee of the other party unless agreed to in writing
by the parties, except that Sankyo may in its sole discretion seek to employ
any member of Cygnus’ sales and marketing group whose employment Cygnus intends
to terminate.

15.13                     Counterparts. 
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.

15.14                     Interpretation. 
The parties agree that the rule of construction to the effect that any
ambiguities are resolved against the drafting party shall not be employed in
the interpretation of this Agreement and that the terms and conditions of this
Agreement shall be construed fairly with respect to the parties hereto and
shall not be construed in favor or against any one party, regardless of which
party was generally responsible for the preparation of this Agreement.

 

34

 

IN
WITNESS WHEREOF,
the undersigned have caused this Agreement to be executed by their duly
authorized officers as of the date first written above.

 

CYGNUS, INC.

	
  By:

  	
  /s/ John C
  Hodgman

  
	
  Name:

  	
  John C Hodgman

  
	
  Title:

  	
  Chairman,
  President & CEO

  

 

SANKYO PHARMA INC.

	
  By:

  	
  /s/ J. Pieroni

  
	
  Name:

  	
  Joseph Pieroni

  
	
  Title:

  	
  President

  

 

 

35

 

EXHIBIT A

U.S. PATENTS OWNED BY
CYGNUS  SUBJECT TO FIRST LIEN AND
SECURITY

INTEREST OF SANKYO PURSUANT TO SECTION 2.4

 

U.S. 5,735,273, “Chemical Signal-Impermeable Mask,”
issued April 7, 1998

U.S. 5,771,890,
“Device and Method for Sampling of Substances Using Alternating Polarity,”
issued June 30, 1998

U.S. 5,827,183,
“Method of Measuring Chemical Concentration Iontophoretically Using Impermeable
Mask,” issued October 27, 1998

U.S. 5,954,685,
“Electrochemical Sensor with Dual Purpose Electrode,” issued September 21, 1999

U.S. 5,989,409, “Method for Glucose Sensing,” issued
November 23, 1999

U.S. 6,023,629,
“Method of Sampling Substances Using Alternating Polarity of Iontophoretic
Current,” issued February 8, 2000

U.S. 6,139,718, “Electrode with Improved Signal to
Noise Ratio,” issued October 31, 2000

U.S. 6,141,573, “Chemical Signal-Impermeable Mask,”
issued October 31, 2000

U.S. 6,144,869, “Monitoring of Physiological
Analytes,” issued November 7, 2000

U.S. 6,180,416,
“Method and Device for Predicting Physiological Values,” issued January 30,
2001

U.S. 6,201,979, “Chemical Signal-Impermeable Mask,”
issued March 13, 2001

U.S. 6,233,471,
“Signal Processing for Measurement of Physiological Analysis,” issued May 15,
2001

U.S. 6,272,364,
“Method and Device for Predicting Physiological Values,” issued August 7, 2001

U.S. 6,284,126, “Electrode with Improved Signal to
Noise Ratio,” issued September 4, 2001

U.S. 6,298,254,
“Device for Sampling Substances Using Alternating Polarity of Iontophoretic
Current,” issued October 2, 2001

U.S. 6,299,578, “Methods for Monitoring a
Physiological Analyte,” issued October 9, 2001

U.S. 6,309,351, “Methods for Monitoring a
Physiological Analyte,” issued October 30, 2001

U.S. 6,326,160,
“Microprocessors for Use in a Device for Predicting Physiological Values,”
issued December 4, 2001

U.S. 6,341,232,
“Methods for Producing Collection Assemblies, Laminates, and AutoSensor
Assemblies for Use in Transdermal Sampling Systems,” issued January 22, 2002

U.S. 6,356,776,
“Device for Monitoring Physiological Analytes,” issued March 12, 2002

U.S. 6,370,410,
“Method of Producing an Assembly for Use in a Monitoring Device,” issued April
9, 2002

U.S. 6,391,643,
“Kit and Method for Quality Control Testing of an Iontophoretic Sampling
System,” issued May 21, 2002

U.S. 6,393,318,
“Collection Assemblies, Laminates, and AutoSensor Assemblies for Use in
Transdermal Sampling Systems,” issued May 21, 2002

U.S. 6,398,562,
“Device and Methods for the Application of Mechanical Force to a Gel/Sensor
Assembly,” issued June 4, 2002

U.S. Des. 437,603,
“Device for the Application of Mechanical Force to a Gel/Sensor Assembly,”
issued February 13, 2001

U.S. Des. 438,807,
“Cover for Quality Control Testing of an Iontophoretic Sampling System,” issued
March 13, 2001

 

 

36

 

EXHIBIT B

U.S. PATENTS OWNED
BY CYGNUS OR LICENSED BY CYGNUS

(to be updated
annually)

 

Cygnus:

 

U.S. 5,735,273, “Chemical Signal-Impermeable Mask,”
issued April 7, 1998

U.S. 5,771,890,
“Device and Method for Sampling of Substances Using Alternating Polarity,”
issued June 30, 1998

U.S. 5,827,183,
“Method of Measuring Chemical Concentration Iontophoretically Using Impermeable
Mask,” issued October 27, 1998

U.S. 5,954,685,
“Electrochemical Sensor with Dual Purpose Electrode,” issued September 21, 1999

U.S. 5,989,409, “Method for Glucose Sensing,” issued
November 23, 1999

U.S. 6,023,629,
“Method of Sampling Substances Using Alternating Polarity of Iontophoretic
Current,” issued February 8, 2000

U.S. 6,139,718, “Electrode with Improved Signal to
Noise Ratio,” issued October 31, 2000

U.S. 6,141,573, “Chemical Signal-Impermeable Mask,”
issued October 31, 2000

U.S. 6,144,869, “Monitoring of Physiological
Analytes,” issued November 7, 2000

U.S. 6,180,416,
“Method and Device for Predicting Physiological Values,” issued January 30,
2001

U.S. 6,201,979, “Chemical Signal-Impermeable Mask,”
issued March 13, 2001

U.S. 6,233,471,
“Signal Processing for Measurement of Physiological Analysis,” issued May 15,
2001

U.S. 6,272,364,
“Method and Device for Predicting Physiological Values,” issued August 7, 2001

U.S. 6,284,126, “Electrode with Improved Signal to
Noise Ratio,” issued September 4, 2001

U.S. 6,298,254,
“Device for Sampling Substances Using Alternating Polarity of Iontophoretic
Current,” issued October 2, 2001

U.S. 6,299,578, “Methods for Monitoring a
Physiological Analyte,” issued October 9, 2001

U.S. 6,309,351, “Methods for Monitoring a
Physiological Analyte,” issued October 30, 2001

U.S. 6,326,160,
“Microprocessors for Use in a Device for Predicting Physiological Values,”
issued December 4, 2001

U.S. 6,341,232,
“Methods for Producing Collection Assemblies, Laminates, and AutoSensor
Assemblies for Use in Transdermal Sampling Systems,” issued January 22, 2002

U.S. 6,356,776,
“Device for Monitoring Physiological Analytes,” issued March 12, 2002

U.S. 6,370,410,
“Method of Producing an Assembly for Use in a Monitoring Device,” issued April
9, 2002

U.S. 6,391,643,
“Kit and Method for Quality Control Testing of an Iontophoretic Sampling
System,” issued May 21, 2002

U.S. 6,393,318,
“Collection Assemblies, Laminates, and AutoSensor Assemblies for Use in
Transdermal Sampling Systems,” issued May 21, 2002

U.S. 6,398,562,
“Device and Methods for the Application of Mechanical Force to a Gel/Sensor
Assembly,” issued June 4, 2002

 

 

37

 

U.S. Des. 437,603,
“Device for the Application of Mechanical Force to a Gel/Sensor Assembly,”
issued February 13, 2001

U.S. Des. 438,807,
“Cover for Quality Control Testing of an Iontophoretic Sampling System,” issued
March 13, 2001

 

 

University of California:

 

U.S. 5,279,543,
“Device for Iontophoretic Non-Invasive Sampling or Delivery of Substances,”
issued January 18, 1994

U.S. 5,362,307,
“Method for the Iontophoretic Non-Invasive-Determination of the In Vivo
Concentration Level of an Inorganic or Organic Substance,” issued November 8,
1994

U.S. 5,730,714,
“Method for the Iontophoretic Non-Invasive Determination of the In Vivo
Concentration Level of Glucose,” issued March 24, 1998

 

 

38

 

EXHIBIT C

MINIMUM AMOUNT OF CYGNUS’ TRANSFER PRICE

 

 

 

 

***

 

 

39

 

EXHIBIT D

NEGATIVE COVENANTS PURSUANT TO SECTION 2.4

 

As provided for in Section 2.4, commencing upon the Effective
Date and until such time as Cygnus has fully paid all such deferred Sales and
Marketing Fees, Cygnus shall abide by the Negative Covenants set forth below.

 

1.             Cygnus
shall not pay or declare any cash or property dividends or otherwise make a
distribution of capital or income, or redeem, retire or repurchase any stock of
Cygnus.

 

2.             Cygnus
shall not pay or become obligated to pay in any one (1) year period, directly
in cash, by way of salary, bonus or otherwise, to any officer, director or
employee of Cygnus more than two (2) times their 2001 compensation.

 

3.             Cygnus
shall not make any investments, except for the following  investment obligations: (a) obligations of
or guaranteed by the United States of America, (b) obligations issued or
guaranteed by any instrumentality or agency of the United States of America,
(c) obligations issued or guaranteed by any state of the United States or the
District of Columbia, (d) repurchase agreements fully secured by the
obligations of the type set forth above in subparagraphs (a), (c) or (c) above;
(e) interest-bearing accounts, certificates of deposit, bankers acceptances, or
commercial paper of Sankyo, and (f) commercial paper other than specified in
subparagraph (e) above and that is rated at least “P-1” by Moody’s Investors
Services or at least “A-1” by Standard and Poor’s Corporation.

 

4.             Cygnus
shall not create, incur, assume or suffer to exist any lien of any nature upon
or with respect to the Cygnus U.S. Patents set forth on Exhibit A hereto except
liens in favor of Sankyo.

 

5.             Cygnus
shall not assume, guaranty, endorse, become a surety or otherwise become liable
for the debt or obligation of any individual or entity other than any officer,
director or employee of Cygnus, or make any advance or loan for the purpose of
paying or discharging such obligations.

 

6.             Cygnus
shall not consolidate with, merge with or acquire the stock or assets of any
person or entity unless such merger or acquisition occurs in Connection with a
Change of Control.

 

7.             Cygnus
shall not compromise, settle or adjust any claim in a material amount relating
to the Cygnus U.S. Patents set forth on Exhibit A hereto.

 

8.             Cygnus
shall only use funds received from, or deferred by, Sankyo for general
corporate purposes, and Cygnus shall not purchase any equity securities or all
or substantially all of the assets of any third party.

 

 

40

 

EXHIBIT E

MINIMUM NET SALES
BY SANKYO FOR PURPOSES OF SECTION 14.1

 

 

***

 

 

41

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