Document:

Exhibit
10.216

 

MEMORANDUM
OF UNDERSTANDING  (THERACOM)

TO THE
SALES, MARKETING AND DISTRIBUTION AGREEMENT

 

 

THIS MEMORANDUM OF
UNDERSTANDING (THERACOM) to the Sales, Marketing and Distribution Agreement
(the “Agreement”), having an effective date of July 8, 2002, is made and
entered into as of January 23, 2003, 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 Sales, Marketing
and Distribution Agreement having an effective date of July 8, 2002 (the
“Agreement”) and, pursuant to the Agreement, have entered into a Supply
Agreement dated January 23, 2003;

 

B.                                     After execution of the Agreement, Sankyo
entered into an agreement with TheraCom, Inc. (“TheraCom”) for the dispensing
and patient end user reimbursement services of the Product in the Territory;

 

C.                                     The parties now wish to enter into a
Memorandum of Understanding (TheraCom) with regard to the contractual
arrangement between Sankyo and TheraCom as set forth below;

 

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

 

1.               Under the current contractual arrangement between
Sankyo and TheraCom whereby TheraCom provides Product dispensing and patient
end user reimbursement services for Sankyo in the Territory, the definition of
Net Sales by Sankyo set forth in Section 1.13 of the Agreement is amended to
include the following additional deduction:

 

(d)                                 patient end user distribution costs and
reimbursement adjudication costs paid to TheraCom.

 

2.               Under the current contractual arrangement between
Sankyo and TheraCom whereby TheraCom provides Product dispensing and patient
end user reimbursement services for Sankyo in the Territory, the definition of
Transfer Price set forth in Section 5.4(b) of the Agreement and in Section 2.6
of the Supply  Agreement is amended as
follows:  “Wholesale Acquisition Cost”
is replaced with “Direct Purchase Price” in all instances.  Direct Purchase Price is defined as the
sales price paid by TheraCom to Sankyo.

 

 

 

3.               All other terms and conditions of the Agreement shall
remain in full force and effect and are unchanged by this Memorandum of
Understanding (TheraCom).

 

4.               This Memorandum of Understanding (TheraCom) 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.

 

 

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

 

	
  CYGNUS, INC.

  	
   

  	
  SANKYO PHARMA INC.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ John C
  Hodgman

  	
   

  	
  By:

  	
  /s/ John P.
  Gargiulo

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Name:

  	
  John C Hodgman

  	
   

  	
  Name:

  	
  John P. Gargiulo

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Title:

  	
  Chairman,
  President & CEO

  	
   

  	
  Title:

  	
  VP Marketing
  & Commercial OPS

  

 

 

2Exhibit
10.501

CYGNUS,
INC.

1999 STOCK
INCENTIVE PLAN

(As Amended
and Restated January 27, 2003)

 

 

TABLE OF CONTENTS

	
   

  	
   

  	
  Page

  
	
   

  	
   

  	
   

  
	
  SECTION 1. INTRODUCTION

  	
   

  	
  1

  
	
  SECTION 2. DEFINITIONS

  	
   

  	
  1

  
	
  SECTION 3. ADMINISTRATION

  	
   

  	
  4

  
	
   

  	
  (a)

  	
  Committee Composition

  	
   

  	
  4

  
	
   

  	
  (b)

  	
  Authority of the
  Committee

  	
   

  	
  5

  
	
  SECTION 4. ELIGIBILITY

  	
   

  	
  5

  
	
   

  	
  (a)

  	
  General Rules

  	
   

  	
  5

  
	
   

  	
  (b)

  	
  Incentive Stock Options

  	
   

  	
  5

  
	
  SECTION 5. SHARES
  SUBJECT TO PLAN

  	
   

  	
  5

  
	
   

  	
  (a)

  	
  Basic
  Limitations

  	
   

  	
  5

  
	
   

  	
  (b)

  	
  Additional
  Shares

  	
   

  	
  5

  
	
   

  	
  (c)

  	
  Dividend
  Equivalents

  	
   

  	
  6

  
	
  SECTION
  6. TERMS AND CONDITIONS FOR AWARDS OF RESTRICTED STOCK AND STOCK UNITS

  	
   

  	
  6

  
	
   

  	
  (a)

  	
  Time, Amount and
  Form of Awards

  	
   

  	
  6

  
	
   

  	
  (b)

  	
  Payment
  for Awards

  	
   

  	
  6

  
	
   

  	
  (c)

  	
  Vesting
  Conditions

  	
   

  	
  6

  
	
   

  	
  (d)

  	
  Form
  and Time of Settlement of Stock Units

  	
   

  	
  6

  
	
   

  	
  (e)

  	
  Death
  of Recipient

  	
   

  	
  6

  
	
   

  	
  (f)

  	
  Creditors’
  Rights

  	
   

  	
  7

  
	
   

  	
  (g)

  	
  Effect of a Change
  in Control

  	
   

  	
  7

  
	
  SECTION 7.
  TERMS AND CONDITIONS OF OPTIONS

  	
   

  	
  7

  
	
   

  	
  (a)

  	
  Stock Option Agreement

  	
   

  	
  7

  
	
   

  	
  (b)

  	
  Number
  of Shares

  	
   

  	
  7

  
	
   

  	
  (c)

  	
  Exercise
  Price

  	
   

  	
  7

  
	
   

  	
  (d)

  	
  Exercisability and Term

  	
   

  	
  7

  
	
   

  	
  (e)

  	
  Effect of a Change
  in Control

  	
   

  	
  8

  
	
   

  	
  (f)

  	
  Modifications
  or Assumption of Options

  	
   

  	
  8

  
	
   

  	
  (g)

  	
  Transferability of
  Options

  	
   

  	
  8

  
	
   

  	
  (h)

  	
  No Rights as a
  Stockholder

  	
   

  	
  8

  
	
   

  	
  (i)

  	
  Restrictions on Transfer

  	
   

  	
  8

  
	
   

  	
  (j)

  	
  Automatic
  Option Grants to Non-Employee Directors

  	
   

  	
  8

  

 

 

-i-

 

 

	
  SECTION 8.
  PAYMENT FOR OPTION SHARES

  	
   

  	
  9

  
	
   

  	
  (a)

  	
  General Rule

  	
   

  	
  9

  
	
   

  	
  (b)

  	
  Surrender
  of Stock

  	
   

  	
  10

  
	
   

  	
  (c)

  	
  Promissory
  Note

  	
   

  	
  10

  
	
   

  	
  (d)

  	
  Cashless
  Exercise

  	
   

  	
  10

  
	
   

  	
  (e)

  	
  Other Forms of Payment

  	
   

  	
  10

  
	
  SECTION 9. STOCK
  APPRECIATION RIGHTS

  	
   

  	
  10

  
	
   

  	
  (a)

  	
  SAR Agreement

  	
   

  	
  10

  
	
   

  	
  (b)

  	
  Number
  of Shares

  	
   

  	
  10

  
	
   

  	
  (c)

  	
  Exercise
  Price

  	
   

  	
  10

  
	
   

  	
  (d)

  	
  Exercisability and Term

  	
   

  	
  10

  
	
   

  	
  (e)

  	
  Effect of Change in
  Control

  	
   

  	
  11

  
	
   

  	
  (f)

  	
  Exercise
  of SARs

  	
   

  	
  11

  
	
   

  	
  (g)

  	
  Modification or
  Assumption of SARs

  	
   

  	
  11

  
	
  SECTION 10.
  PROTECTION AGAINST DILUTION

  	
   

  	
  11

  
	
   

  	
  (a)

  	
  Adjustments

  	
   

  	
  11

  
	
   

  	
  (b)

  	
  Reorganizations

  	
   

  	
  12

  
	
  SECTION 11.
  VOTING AND DIVIDEND RIGHTS

  	
   

  	
  12

  
	
   

  	
  (a)

  	
  Restricted
  Stock

  	
   

  	
  12

  
	
   

  	
  (b)

  	
  Stock Units

  	
   

  	
  12

  
	
  SECTION 12.
  AWARDS UNDER OTHER PLANS

  	
   

  	
  12

  
	
  SECTION 13.
  LIMITATIONS ON RIGHTS

  	
   

  	
  12

  
	
   

  	
  (a)

  	
  Retention
  Rights

  	
   

  	
  12

  
	
   

  	
  (b)

  	
  Stockholders’
  Rights

  	
   

  	
  13

  
	
   

  	
  (c)

  	
  Regulatory Requirements

  	
   

  	
  13

  
	
  SECTION 14. WITHHOLDING
  TAXES

  	
   

  	
  13

  
	
   

  	
  (a)

  	
  General

  	
   

  	
  13

  
	
   

  	
  (b)

  	
  Share
  Withholding

  	
   

  	
  13

  
	
  SECTION
  15. ASSIGNMENT OR TRANSFER OF AWARDS

  	
   

  	
  13

  
	
   

  	
  (a)

  	
  General

  	
   

  	
  13

  
	
   

  	
  (b)

  	
  Trusts

  	
   

  	
  13

  
	
  SECTION 16.
  DURATION AND AMENDMENTS

  	
   

  	
  14

  

 

 

-ii-

 

 

	
   

  	
  (a)

  	
  Term of
  the Plan

  	
   

  	
  14

  
	
   

  	
  (b)

  	
  Right to
  Amend or Terminate the Plan

  	
   

  	
  14

  
	
  SECTION 17. EXECUTION

  	
   

  	
  14

  

 

 

 

-iii-

 

CYGNUS, INC.

1999 STOCK INCENTIVE PLAN

As Amended and Restated January 27, 2003

SECTION
1.         INTRODUCTION.

The Cygnus, Inc. 1999 Stock Incentive Plan amended and
restated the Company’s 1994 Stock Option/Award Plan effective February 1,
1999.  Effective February 12, 2002, the
Plan was further amended and restated to increase the number of shares available
for awards of Options by 1,500,000 shares (from 9,916,385 shares to 11,416,385
shares).

The purpose of the Plan is to promote the long-term
success of the Company and the creation of stockholder value by offering Key
Employees an opportunity to acquire a proprietary interest in the success of
the Company, or to increase such interest, and to encourage such selected
persons to continue to provide services to the Company or its Subsidiaries and
to attract new individuals with outstanding qualifications.

The Plan seeks to achieve this purpose by providing
for Awards in the form of Restricted Stock, Stock Units, Options (which may
constitute Incentive Stock Options or Nonstatutory Stock Options) or Stock
Appreciation Rights.

The Plan shall be governed by, and construed in
accordance with, the laws of the State of California (except its choice-of-law
provisions).  Capitalized terms shall
have the meaning provided in Section 2 unless otherwise provided in this Plan,
or in the applicable Stock Award Agreement, SAR Agreement or Stock Option
Agreement.

SECTION
2.         DEFINITIONS.

(a)           “Award” means any award of an Option, SAR,
Restricted Stock or Stock Unit under the Plan.

(b)           “Board” means the Board of Directors of the
Company, as constituted from time to time.

(c)           “Change in Control” means a change in
control of a nature that would be required to be reported (assuming such event
has not been “previously reported”) in response to Item 1(a) of the Current
Report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or
15(d) of the Exchange Act; provided that, without limitation, such a change in
control shall be deemed to have occurred at such time as (a) any person is or
becomes the “beneficial owner” (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of 50% or more of the combined voting power of
the Company’s voting securities; or (b) individuals who constitute the Board on
the date hereof (the “Incumbent Board”) cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election, or nomination for election by the
Company’s stockholders, was approved by a vote of at least three quarters of
the directors comprising the Incumbent Board (either by 

 

 

a specific vote or by approval of the proxy statement of the Company in which
such person is named as a nominee for director, without objection to such
nomination) shall be, for purposes of this clause (b), considered as though
such person were a member of the Incumbent Board.

A transaction shall not constitute a Change in Control
if its sole purpose is to change the state of the Company’s incorporation or to
create a holding company that will be owned in substantially the same
proportions by the persons who held the Company’s securities immediately before
such transaction.

(d)           “Code” means the Internal Revenue Code of
1986, as amended.

(e)           “Committee” means a committee consisting of
one or more members of the Board that is appointed by the Board (as described
in Section 3) to administer the Plan.

(f)            “Common Stock” means the
Company’s common stock.

(g)           “Company” means Cygnus, Inc. a Delaware
corporation.

(h)           “Consultant” means an individual who
performs bona fide services to the Company or a Subsidiary other than as an
Employee or Director or Non-Employee Director.

(i)            “Director” means a member of
the Board who is also a common-law employee of the Company or Subsidiary.

(j)            “Disability” means that the
Key Employee is unable to engage in any substantial gainful activity by reason
of any medically determinable physical or mental impairment.

(k)           “Employee” means any individual who is a
common-law employee of the Company or Subsidiary.

(l)            “Exchange Act” means the
Securities Exchange Act of 1934, as amended.

(m)          “Exercise Price” in the case of an Option,
means the amount for which a Share may be purchased upon exercise of such
Option, as specified in the applicable Stock Option Agreement.  “Exercise Price,” in the case of a SAR,
means an amount, as specified in the applicable SAR Agreement, which is
subtracted from the Fair Market Value of a Share in determining the amount
payable upon exercise of such SAR.

(n)           “Fair Market Value” means the market price
of Shares, determined by the Committee as follows:

(i)            If the Shares were traded
over-the-counter on the date in question but were not classified as a national
market issue, then the Fair Market Value shall be equal to the mean between the
last reported representative bid and asked prices quoted by the NASDAQ system
for such date;

 

2

 

(ii)           If the Shares were traded
over-the-counter on the date in question and were classified as a national
market issue, then the Fair Market Value shall be equal to the last-transaction
price quoted by the NASDAQ system for such date;

(iii)          If the Shares were traded on a stock
exchange on the date in question, then the Fair Market Value shall be equal to
the closing price reported by the applicable composite transactions report for
such date; and

(iv)          If none of the foregoing provisions is
applicable, then the Fair Market Value shall be determined by the Committee in
good faith or by an independent third party valuation on such basis as it deems
appropriate.

Whenever possible, the determination of Fair Market
Value by the Committee shall be based on the prices reported in the Western
Edition of The Wall Street Journal. 
Such determination shall be conclusive and binding on all persons.

(o)           “Grant” means any grant of an Option under
the Plan.

(p)           “Incentive Stock Option” or “ISO” means an
incentive stock option described in Code section 422(b).

(q)           “Key Employee” means an Employee, Director,
Non-Employee Director or Consultant who has been selected by the Committee to
receive an Award under the Plan.

(r)            “Non-Employee Director” means
a member of the Board who is not a common-law employee of the Company or
Subsidiary.

(s)           “Nonstatutory Stock Option” or “NSO”
means a stock option that is not an ISO.

(t)            “Option” means an ISO or NSO
granted under the Plan entitling the Optionee to purchase Shares.

(u)           “Optionee” means an individual or estate or
other entity that holds an Option or SAR.

(v)           “Participant” means an individual or estate
or other entity that holds an Award.

(w)          “Plan” means this Cygnus, Inc. 1999 Stock
Incentive Plan as it may be amended from time to time.

(x)            “Restricted Stock” means a
Share awarded under the Plan.

(y)           “SAR Agreement” means the agreement between
the Company and an Optionee which contains the terms, conditions and restrictions
pertaining to his or her SAR.

(z)            “Securities Act” means the
Securities Act of 1933, as amended.

(aa)         “Service” means service as an Employee,
Director, Non-Employee Director or Consultant.

 

3

 

(bb)         “Share” means one share of Common Stock.

(cc)         “Stock Appreciation Right” or “SAR”
means a stock appreciation right awarded under the Plan.

(dd)         “Stock Award Agreement” means the agreement
between the Company and the recipient of a Restricted Stock or Stock Unit award
which contains the terms, conditions and restrictions pertaining to such
Restricted Stock or Stock Unit Award.

(ee)         “Stock Option Agreement” means the agreement
between the Company and an Optionee that contains the terms, conditions and
restrictions pertaining to his or her Option.

(ff)           “Stock Unit” means a bookkeeping entry
representing the equivalent of a Share, as awarded under the Plan.

(gg)         “Subsidiary” means any corporation (other
than the Company) in an unbroken chain of corporations beginning with the
Company, if each of the corporations other than the last corporation in the
unbroken chain owns stock possessing fifty percent (50%) or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.  A corporation that
attains the status of a Subsidiary on a date after the adoption of the Plan
shall be considered a Subsidiary commencing as of such date.

(hh)         “10-Percent Shareholder” means an individual
who owns more than ten percent (10%) of the total combined voting power of all
classes of outstanding stock of the Company, its parent or any of its
subsidiaries.  In determining stock
ownership, the attribution rules of section 424(d) of the Code shall be
applied.

SECTION
3.         ADMINISTRATION.

(a)   Committee
Composition.  The Plan shall be administered
by a Committee appointed by the Board. 
The Board shall designate one of the members of the Committee as
chairperson.  If no Committee has been
appointed, the entire Board shall constitute the Committee.  Members of the Committee shall serve for
such period of time as the Board may determine and shall be subject to removal
by the Board at any time.  The Board may
also at any time terminate the functions of the Committee and reassume all
powers and authority previously delegated to the Committee.

The Committee shall consist of two or more directors
of the Company who shall satisfy the requirements of Rule 16b-3 (or its
successor) under the Exchange Act with respect to Awards to Key Employees who
are officers or directors of the Company under section 16 of the Exchange Act.

The Board may also appoint one or more separate
committees of the Board, each composed of one or more directors of the Company
who need not qualify under Rule 16b-3, who may administer the Plan with respect
to Key Employees who are not considered officers or 

 

4

 

directors of the Company under Section 16 of the
Exchange Act, may grant Awards under the Plan to such Key Employees and may determine
all terms of such Awards.

With respect to any matter, the term “Committee”, when
used in this Plan, shall refer to the Committee that has been delegated
authority with respect to such matter.

(b)   Authority of
the Committee.  Subject to the provisions of
the Plan, the Committee shall have full authority and discretion to take any
actions it deems necessary or advisable for the administration of the
Plan.  Such actions shall include:

(i)            selecting Key Employees who are to
receive Awards under the Plan;

(ii)           determining the type, number, vesting
requirements and other features and conditions of such Awards (with the
exception of the Section 7(j) Automatic Option Grants);

(iii)          interpreting the Plan; and

(iv)          making all other decisions relating to
the operation of the Plan.

The Committee may adopt such rules or guidelines as it
deems appropriate to implement the Plan. 
The Committee’s determinations under the Plan shall be final and binding
on all persons.

SECTION
4.         ELIGIBILITY.

(a)   General
Rules.  Only Employees, Directors, Non-Employee
Directors and Consultants shall be eligible for designation as Key Employees by
the Committee.

(b)   Incentive
Stock Options.  Only Key Employees who are
common-law employees of the Company or a Subsidiary shall be eligible for the
grant of ISOs.  In addition, a Key
Employee who is a 10-Percent Shareholder shall not be eligible for the grant of
an ISO unless the requirements set forth in section 422(c)(5) of the Code are
satisfied.

SECTION
5.         SHARES SUBJECT TO PLAN.

(a)   Basic
Limitations.  The stock issuable under the
Plan shall be authorized but unissued Shares or treasury Shares.  The aggregate number of Shares reserved for
Awards under the Plan shall not exceed 11,416,385 Shares on a fully diluted
basis, subject to adjustment pursuant to Section 10.  In addition, the total number of Shares underlying Awards of
Restricted Stock, Stock Appreciation Rights and Stock Units shall not exceed
1,200,000 Shares.  For purposes of
determining whether this 1,200,000 Share limit has been reached, Shares that
are withheld from Awards of Restricted Stock, Stock Appreciation Rights and
Stock Units pursuant to Section 14(b) shall not be counted.

(b)   Additional
Shares.  If Stock Units, Options or SARs are
forfeited or if Options or SARs terminate for any other reason before being
exercised, then such Stock Units, Options or 

 

5

 

SARs shall again become
available for Awards under the Plan.  If
SARs are exercised, then only the number of Shares (if any) actually issued in
settlement of such SARs shall reduce the number available under Section 5(a)
and the balance shall again become available for Awards under the Plan.  If Restricted Stock is forfeited, then such
Restricted Stock shall again become available for Awards under the Plan.

(c)   Dividend
Equivalents.  Any dividend equivalents
distributed under the Plan shall not be applied against the number of
Restricted Stock, Stock Units, Options or SARs available for Awards, whether or
not such dividend equivalents are converted into Stock Units.

SECTION
6.                            TERMS AND
CONDITIONS FOR AWARDS OF RESTRICTED STOCK AND STOCK UNITS.

(a)   Time, Amount
and Form of Awards.  Awards under
the Plan may be granted in the form of Restricted Stock, in the form of Stock
Units, or in any combination of both. 
Restricted Stock or Stock Units may also be awarded in combination with
NSOs or SARs, and such an Award may provide that the Restricted Stock or Stock
Units will be forfeited in the event that the related NSOs or SARs are
exercised.

(b)   Payment for
Awards.  No cash consideration shall be required of
the recipients of Restricted Stock or Stock Units under this Section 6.

(c)   Vesting
Conditions.  Each Award of Restricted Stock
or Stock Units shall become vested, in full or in installments, upon
satisfaction of the conditions specified in the Stock Award Agreement.  To the extent required by applicable law,
Restricted Stock or Stock Units shall vest at least as rapidly as 20% annually over
a five-year period and any rights to repurchase Shares at their original
purchase price shall also lapse at least as rapidly as 20% annually.  A Stock Award Agreement may provide for
accelerated vesting in the event of the Participant’s death, Disability,
retirement, Change in Control or other events.

(d)   Form and
Time of Settlement of Stock Units.  Settlement of
vested Stock Units may be made in the form of (i) cash, (ii) Shares or (iii)
any combination of both.  The actual
number of Stock Units eligible for settlement may be larger or smaller than the
number included in the original Award, based on predetermined performance
factors.  Methods of converting Stock
Units into cash may include (without limitation) a method based on the average
Fair Market Value of Shares over a series of trading days.  Vested Stock Units may be settled in a lump
sum or in installments.  The
distribution may occur or commence when all vesting conditions applicable to
the Stock Units have been satisfied or have lapsed, or it may be deferred to
any later date.  The amount of a
deferred distribution may be increased by an interest factor or by dividend
equivalents.  Until an Award of Stock
Units is settled, the number of such Stock Units shall be subject to adjustment
pursuant to Section 10.

(e)   Death of
Recipient.  Any Stock Units Award that
becomes payable after the Award recipient’s death shall be distributed to the
recipient’s beneficiary or beneficiaries. 
Each recipient of a Stock Units Award under the Plan shall designate one
or more beneficiaries for this purpose by filing the prescribed form with the
Company.  A beneficiary designation may
be changed by filing the prescribed form with the Company at any time before
the recipient’s death.  

 

6

 

If no beneficiary was
designated or if no designated beneficiary survives the recipient, then any
Stock Units Award that becomes payable after the recipient’s death shall be
distributed to the recipient’s estate.

(f)    Creditors’
Rights.  A holder of Stock Units shall have no rights
other than those of a general creditor of the Company.  Stock Units represent an unfunded and
unsecured obligation of the Company, subject to the terms and conditions of the
applicable Stock Award Agreement.

(g)   Effect of a
Change in Control.  The Committee
may determine, at the time of making an Award or thereafter, that such Award
shall become fully vested in the event that a Change in Control occurs with
respect to the Company.  If the
Committee finds that there is a reasonable possibility that, within the
succeeding six (6) months, a Change in Control will occur with respect to the
Company, then the Committee at its sole discretion may determine that any or
all outstanding Awards shall become fully exercisable as to all Shares subject
to such Awards.

SECTION
7.         TERMS AND CONDITIONS OF
OPTIONS.

(a)   Stock Option
Agreement.  Each Grant under the Plan
shall be evidenced by a Stock Option Agreement between the Optionee and the
Company.  Such Option shall be subject
to all applicable terms and conditions of the Plan and may be subject to any
other terms and conditions that are not inconsistent with the Plan and that the
Committee deems appropriate for inclusion in a Stock Option Agreement.  The provisions of the various Stock Option
Agreements entered into under the Plan need not be identical.  A Stock Option Agreement may provide that
new Options will be granted automatically to the Optionee when he or she
exercises the prior Options.  The Stock
Option Agreement shall also specify whether the Option is an ISO or an NSO.

(b)   Number of
Shares.  Each Stock Option Agreement shall specify
the number of Shares that are subject to the Option and shall provide for the
adjustment of such number in accordance with Section 10.  Options granted to any Optionee in a particular
calendar year shall in no event exceed 25% of the Shares authorized for Award
under this Plan subject to adjustment in accordance with Section 10.

(c)   Exercise
Price.  An Option’s Exercise Price shall be
established by the Committee and set forth in a Stock Option Agreement.  An Option’s Exercise Price shall not be less
than 100% of the Fair Market Value (110% for 10-Percent Shareholders) of a
Share on the date of Grant.  In the case
of an NSO, a Stock Option Agreement may specify an Exercise Price that varies
in accordance with a predetermined formula while the NSO is outstanding.

(d)   Exercisability
and Term.  Each Stock Option Agreement shall specify
the date when all or any installment of the Option is to become
exercisable.  The Stock Option Agreement
shall also specify the term of the Option; provided that the term of an ISO,
and to the extent required by applicable law a NSO, shall in no event exceed
ten (10) years from the date of Grant (five (5) years for ISO Grants to
10-Percent Shareholders).  To the extent
required by applicable law, Options shall vest at least as rapidly as 20%
annually over a five-year period.  A
Stock Option Agreement may provide for accelerated exercisability in the event
of the Optionee’s death, Disability, retirement, Change in Control or other
events and may provide for expiration prior to the end of its term in the event
of the termination of the Optionee’s Service. 
Options may be 

 

7

 

awarded in combination
with SARs, and such an Award may provide that the Options will not be
exercisable unless the related SARs are forfeited.  NSOs may also be awarded in combination with Restricted Stock or
Stock Units, and such an Award may provide that the NSOs will not be exercisable
unless the related Restricted Stock or Stock Units are forfeited.  In no event shall the Company be required to
issue fractional Shares upon the exercise of an Option.

(e)   Effect of a
Change in Control.  The Committee
may determine, at the time of granting an Option or thereafter, that such
Option shall become fully exercisable as to all Shares subject to such Option
in the event that a Change in Control occurs with respect to the Company.  If the Committee finds that there is a
reasonable possibility that, within the succeeding six (6) months, a Change in
Control will occur with respect to the Company, then the Committee at its sole
discretion may determine that any or all outstanding Options shall become fully
exercisable as to all Shares subject to such Options.

(f)    Modifications
or Assumption of Options.  Within the
limitations of the Plan, the Committee may modify, extend or assume outstanding
Options or may accept the cancellation of outstanding options (whether granted
by the Company or by another issuer) in return for the grant of new Options for
the same or a different number of Shares and at the same or a different
Exercise Price.  The foregoing
notwithstanding, no modification of an Option shall, without the consent of the
Optionee, alter or impair his or her rights or obligations under such Option.

(g)   Transferability
of Options.  Except as otherwise provided
in the applicable Stock Option Agreement and then only to the extent permitted
by applicable law, no Option shall be transferable by the Optionee other than
by will or by the laws of descent and distribution.  Except as otherwise provided in the applicable Stock Option
Agreement, an Option may be exercised during the lifetime of the Optionee only
by the Optionee or by the guardian or legal representative of the
Optionee.  No Option or interest therein
may be assigned, pledged or hypothecated by the Optionee during his lifetime,
whether by operation of law or otherwise, or be made subject to execution, attachment
or similar process.

(h)   No Rights as
a Stockholder.  An Optionee, or a transferee
of an Optionee, shall have no rights as a stockholder with respect to any
Shares covered by an Option until such person becomes entitled to receive such
Shares by filing a notice of exercise and paying the Exercise Price pursuant to
the terms of such Option.

(i)    Restrictions
on Transfer.  Any Shares issued upon
exercise of an Option shall be subject to any restrictions that may apply to
holders of Shares generally and shall also comply to the extent necessary with
applicable law and with the Company’s insider trading policy.

(j)    Automatic
Option Grants to Non-Employee Directors. 
Non-Employee Directors shall automatically be Granted NSOs (“Automatic
Option Grants”) as set forth in this Section 7(j) (subject to adjustment under
Section 10).

(i)            Each Non-Employee Director shall
receive an Automatic Option Grant for 6,000 Shares on the first trading day in
June on or after his or her initial election or appointment.  However, any Non-Employee Director who is
first elected or appointed after May 31 of any year (and who is not already
serving on the Board at that time) shall 

 

8

 

receive an Automatic Option Grant on the date of such initial election or
appointment for the number of Shares he or she would have received on the first
trading day in June of that year had he or she then been eligible.  In addition, on each anniversary of each
Non-Employee Director’s initial Automatic Option Grant, each such continuing
Non-Employee Director shall receive an additional Automatic Option Grant for an
amount of Shares that is equal to 110% of the number of Shares (rounded down to
the nearest whole number) he or she received under the previous year’s
Automatic Option Grant.

(ii)           The terms and conditions applicable
to each Automatic Option Grant shall be as contained in this Section
7(j)(ii).  The Option Exercise Price
shall be equal to one hundred percent (100%) of the Fair Market Value of one
Share on the date of Grant.  Each Automatic
Option Grant shall have a term of ten (10) years measured from the date of
Grant.  Fully vested Shares shall be
exercisable at any time beginning twelve (12) months after the date of Grant.  No Options Granted under this Plan may be
exercised prior to Plan approval by the Company’s stockholders.  Upon exercise of the Option, the Exercise
Price shall be payable immediately in cash or in Shares that the Optionee has
held for at least six (6) months. 
Payment may also be made by delivery of a properly executed exercise
notice together with irrevocable instructions to a broker to promptly deliver
to the Company the amount of sale or loan proceeds to pay the Exercise
Price.  In the event the Optionee ceases
to provide Services as a Non-Employee Director, outstanding vested Options may
be exercised, within the term of such Options, for a period of three (3) months
after the date of such cessation of Board service.  However, the post-Service Option exercise period shall be twelve
(12) months in the case of cessation by reason of the Optionee’s Disability or
death.  In the case of death, the Option
may be exercised within such twelve (12) month period by the estate or heirs of
the Optionee.

(iii)          This Automatic Option Grant program
for the Non-Employee Directors shall be self-executing in accordance with its
terms as provided for under the Plan, and neither the Board or Committee shall
exercise any discretionary functions with respect to any Option Grants made
under this program.  Notwithstanding the
preceding sentence, the full Board in its sole discretion may make additional
NSO Grants to one or more Non-Employee Directors on such terms and conditions
as the Board determines.

SECTION
8.         PAYMENT FOR OPTION SHARES.

(a)   General Rule. 
The entire Exercise Price of Shares issued upon exercise of Options
shall be payable in cash at the time when such Shares are purchased, except as
follows:

(i)            In the case of an ISO granted under
the Plan, payment shall be made only pursuant to the express provisions of the
applicable Stock Option Agreement.  The
Stock Option Agreement may specify that payment may be made in any form(s)
described in this Section 8.

(ii)           In the case of an NSO granted under
the Plan, the Committee may at any time accept payment in any form(s) described
in this Section 8.

 

9

 

(b)   Surrender of
Stock.  To the extent that this Section 8(b) is
applicable, payment for all or any part of the Exercise Price may be made with
Shares which have already been owned by the Optionee for such duration as shall
be specified by the Committee.  Such
Shares shall be valued at their Fair Market Value on the date when the new
Shares are purchased under the Plan.

(c)   Promissory
Note.  To the extent that this Section 8(c) is
applicable, payment for all or any part of the Exercise Price may be made with
a full-recourse promissory note.

(d)   Cashless
Exercise.  To the extent that this Section 8(d) is
applicable, payment for all or any part of the Exercise Price may be made by
delivery (on a form prescribed by the Company) of an irrevocable direction to a
securities broker to sell Shares and to deliver all or part of the sale
proceeds to the Company.

(e)   Other Forms
of Payment.  To the extent that this
Section 8(e) is applicable, and with Committee approval, payment may be made in
any other form that is consistent with applicable laws, regulations and rules.

SECTION
9.         STOCK APPRECIATION RIGHTS.

(a)   SAR
Agreement.  Each Award of a SAR under the
Plan shall be evidenced by a SAR Agreement between the Optionee and the
Company.  Such SAR shall be subject to
all applicable terms of the Plan and may be subject to any other terms that are
not inconsistent with the Plan.  The
provisions of the various SAR Agreements entered into under the Plan need not
be identical.  SARs may be granted in
consideration of a reduction in the Optionee’s other compensation.

(b)   Number of
Shares.  Each SAR Agreement shall specify the number
of Shares to which the SAR pertains and shall provide for the adjustment of such
number in accordance with Section 10.

(c)   Exercise
Price.  Each SAR Agreement shall specify the
Exercise Price.  A SAR Agreement may
specify an Exercise Price that varies in accordance with a predetermined
formula while the SAR is outstanding.

(d)   Exercisability
and Term.  Each SAR Agreement shall specify the date
when all or any installment of the SAR is to become exercisable.  The SAR Agreement shall also specify the
term of the SAR.  To the extent required
by applicable law, SARs shall vest at least as rapidly as 20% annually over a
five-year period.  A SAR Agreement may
provide for accelerated exercisability in the event of the Optionee’s death,
Disability, retirement, Change in Control or other events and may provide for
expiration prior to the end of its term in the event of the termination of the
Optionee’s Service.  SARs may also be
awarded in combination with Options, Restricted Stock or Stock Units, and such
an Award may provide that the SARs will not be exercisable unless the related
Options, Restricted Stock or Stock Units are forfeited.  A SAR may be included in an ISO only at the
time of Grant but may be included in an NSO at the time of Grant or at any
subsequent time, but not later than six (6) months before the expiration of
such NSO.  A SAR granted under the Plan
may provide that it will be exercisable only in the event of a Change in
Control.

 

10

 

(e)   Effect of
Change in Control.  The Committee
may determine, at the time of awarding a SAR or thereafter, that such SAR shall
become fully exercisable as to all Shares subject to such SAR in the event that
a Change in Control occurs with respect to the Company.  If the Committee finds that there is a
reasonable possibility that, within the succeeding six months, a Change in
Control will occur with respect to the Company, then the Committee at its sole
discretion may determine that any or all outstanding SARs shall become fully
exercisable as to all Shares subject to such SARs.

(f)    Exercise of
SARs.  If, on the date when a SAR expires, the
Exercise Price under such SAR is less than the Fair Market Value on such date
but any portion of such SAR has not been exercised or surrendered, then such
SAR shall automatically be deemed to be exercised as of such date with respect
to such portion.  Upon exercise of a
SAR, the Optionee (or any person having the right to exercise the SAR after his
or her death) shall receive from the Company (i) Shares, (ii) cash or (iii) a combination
of Shares and cash, as the Committee shall determine.  The amount of cash and/or the Fair Market Value of Shares
received upon exercise of SARs shall, in the aggregate, be equal to the amount
by which the Fair Market Value (on the date of surrender) of the Shares subject
to the SARs exceeds the Exercise Price.

(g)   Modification
or Assumption of SARs.  Within the
limitations of the Plan, the Committee may modify, extend or assume outstanding
SARs or may accept the cancellation of outstanding SARs (whether granted by the
Company or by another issuer) in return for the Award of new SARs for the same
or a different number of Shares and at the same or a different Exercise
Price.  The foregoing notwithstanding,
no modification of a SAR shall, without the consent of the Optionee, alter or
impair his or her rights or obligations under such SAR.

SECTION 10.       PROTECTION
AGAINST DILUTION.

(a)   Adjustments. 
In the event of a subdivision of the outstanding Shares, a declaration
of a dividend payable in Shares, a declaration of a dividend payable in a form
other than Shares in an amount that has a material effect on the price of
Shares, a combination or consolidation of the outstanding Shares (by
reclassification or otherwise) into a lesser number of Shares, a
recapitalization, a spin-off or a similar occurrence, the Committee shall make
such adjustments as it, in its sole discretion, deems appropriate in one or
more of:

(i)            the number of Options, SARs,
Restricted Stock and Stock Units available for future Awards under Section 5;

(ii)           the number of Stock Units included in
any prior Award which has not yet been settled;

(iii)          the number of Shares covered by each
outstanding Option and SAR; or

(iv)          the Exercise Price under each
outstanding Option and SAR.

Except as provided in this Section 10, a Participant shall
have no rights by reason of any issue by the Company of stock of any class or
securities convertible into stock of any class, any 

 

11

 

subdivision or consolidation of shares of stock of any
class, the payment of any stock dividend or any other increase or decrease in
the number of shares of stock of any class.

(b)   Reorganizations. 
In the event that the Company is a party to a merger or other
reorganization, outstanding Options, SARs, Restricted Stock and Stock Units
shall be subject to the agreement of merger or reorganization.  Such agreement may provide, without
limitation, for the assumption of outstanding Awards by the surviving
corporation or its parent, for their continuation by the Company (if the
Company is a surviving corporation), for accelerated vesting and accelerated
expiration, or for settlement in cash or for cancellation.

SECTION
11.       VOTING AND DIVIDEND RIGHTS.

(a)   Restricted
Stock.  The holders of Restricted Stock awarded
under the Plan shall have the same voting, dividend and other rights as the
Company’s other stockholders.  A Stock
Award Agreement, however, may require that the holders of Restricted Stock
invest any cash dividends received in additional Restricted Stock.  Such additional Restricted Stock shall be
subject to the same conditions and restrictions as the Award with respect to
which the dividends were paid.  Such
additional Restricted Stock shall not reduce the number of Shares available
under Section 5.

(b)   Stock Units. 
The holders of Stock Units shall have no voting rights.  Prior to settlement or forfeiture, any Stock
Unit awarded under the Plan may, at the Committee’s discretion, carry with it a
right to dividend equivalents.  Such
right entitles the holder to be credited with an amount equal to all cash
dividends paid on one Share while the Stock Unit is outstanding.  Dividend equivalents may be converted into
additional Stock Units.  Settlement of
dividend equivalents may be made in the form of cash, in the form of Shares, or
in a combination of both.  Prior to
distribution, any dividend equivalents which are not paid shall be subject to
the same conditions and restrictions as the Stock Units to which they attach.

SECTION
12.       AWARDS UNDER OTHER PLANS.

The Company may grant awards under other plans or
programs.  Such awards may be settled in
the form of Shares issued under this Plan. 
Such Shares shall be treated for all purposes under the Plan like Shares
issued in settlement of Stock Units and shall, when issued, reduce the number
of Shares available under Section 5.

SECTION
13.       LIMITATIONS ON RIGHTS.

(a)   Retention
Rights.  Neither the Plan nor any Award granted under
the Plan shall be deemed to give any individual a right to remain an employee,
consultant or director of the Company or a Subsidiary.  The Company and its Subsidiaries reserve the
right to terminate the Service of any person at any time, and for any reason,
subject to applicable laws, the Company’s certificate of incorporation and
by-laws and a written employment agreement (if any).

 

12

 

(b)   Stockholders’
Rights.  A Participant shall have no dividend rights,
voting rights or other rights as a stockholder with respect to any Shares
covered by his or her Award prior to the issuance of a stock certificate for
such Shares.  No adjustment shall be
made for cash dividends or other rights for which the record date is prior to
the date when such certificate is issued, except as expressly provided in
Sections 6, 10 and 11.

(c)   Regulatory
Requirements.  Any other provision of the
Plan notwithstanding, the obligation of the Company to issue Shares under the
Plan shall be subject to all applicable laws, rules and regulations and such
approval by any regulatory body as may be required.  The Company reserves the right to restrict, in whole or in part,
the delivery of Shares pursuant to any Award prior to the satisfaction of all
legal requirements relating to the issuance of such Shares, to their
registration, qualification or listing or to an exemption from registration,
qualification or listing.

SECTION
14.       WITHHOLDING TAXES.

(a)   General. 
To the extent required by applicable federal, state, local or foreign
law, a Participant or his or her successor shall make arrangements satisfactory
to the Company for the satisfaction of any withholding tax obligations that
arise in connection with the Plan.  The
Company shall not be required to issue any Shares or make any cash payment
under the Plan until such obligations are satisfied.

(b)   Share
Withholding.  The Committee may permit a
Participant to satisfy all or part of his or her withholding or income tax
obligations by having the Company withhold all or a portion of any Shares that
otherwise would be issued to him or her or by surrendering all or a portion of
any Shares that he or she previously acquired. 
Such Shares shall be valued at their Fair Market Value on the date when
taxes otherwise would be withheld in cash. 
Any payment of taxes by assigning Shares to the Company may be subject
to restrictions, including any restrictions required by rules of the Securities
and Exchange Commission.

SECTION
15.       ASSIGNMENT OR TRANSFER OF
AWARDS.

(a)   General.  Except as
provided in Section 14, or in an applicable agreement, or as required by applicable
law, an Award granted under the Plan shall not be anticipated, assigned,
attached, garnished, optioned, transferred or made subject to any creditor’s
process, whether voluntarily, involuntarily or by operation of law.  An Option or SAR may be exercised during the
lifetime of the Optionee only by him or her or by his or her guardian or legal
representative.  Any act in violation of
this Section 15 shall be void.  However,
this Section 15 shall not preclude a Participant from designating a beneficiary
who will receive any outstanding Awards in the event of the Participant’s
death, nor shall it preclude a transfer of Awards by will or by the laws of
descent and distribution.

(b)   Trusts. 
Neither this Section 15 nor any other provision of the Plan shall preclude
a Participant from transferring or assigning Restricted Stock or Stock Units to
(a) the trustee of a trust that is revocable by such Participant alone, both at
the time of the transfer or assignment and at all times thereafter prior to
such Participant’s death, or (b) the trustee of any other trust to 

 

13

 

the extent approved in
advance by the Committee in writing.  A
transfer or assignment of Restricted Stock or Stock Units from such trustee to
any person other than such Participant shall be permitted only to the extent
approved in advance by the Committee in writing, and Restricted Stock or Stock
Units held by such trustee shall be subject to all of the conditions and
restrictions set forth in the Plan and in the applicable Stock Award Agreement,
as if such trustee were a party to such Agreement.

SECTION
16.       DURATION AND AMENDMENTS.

(a)   Term of the
Plan.  The Plan, as set forth herein, shall
terminate, subject to Section 16(b), no later than January 1, 2004.

(b)   Right to
Amend or Terminate the Plan.  The Board may
amend or terminate the Plan at any time and for any reason.  The termination of the Plan, or any
amendment thereof, shall not affect any Award previously granted under the
Plan.  No Awards shall be granted under
the Plan after the Plan’s termination. 
The Board may not, without the approval of the Company’s stockholders
(i) materially increase the number of Shares subject to Awards under the Plan
(unless necessary to effect the adjustments required under Section 10)), (ii)
materially modify the eligibility requirements for Awards under the Plan, or
(iii) make any other change with respect to which the Board determines that
Company stockholder approval is required by applicable law or regulatory
standards.

SECTION
17.       EXECUTION.

To record the adoption of the amended and restated
Plan by the Board, the Company has caused its duly authorized officer to
execute this Plan.

	
   

  	
  Cygnus, Inc.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By

  	
  /s/ John C Hodgman

  
	
   

  	
   

  	
   

  
	
   

  	
  Title

  	
  Chairman, President and
  CEO

  
	
   

  	
   

  	
   

  

 

 

14

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