<PAGE>
FILED PURSUANT TO RULE 424(B)(5)
FILE NUMBER 333-39275
PROSPECTUS SUPPLEMENT
(To Prospectus Dated November 12, 1997)
166,765 Shares
CYGNUS, INC.
Common Stock
______________
Cygnus, Inc. is selling 166,765 shares. The shares are being sold by
Cygnus to Cripple Creek Securities, LLC in accordance with a Structured
Equity Line Flexible Financing-SM-Agreement, as amended.
The shares are being sold at an average price of $15.74 per share.
The total proceeds to Cygnus will be approximately $2,500,000.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE S-8.
Cripple Creek has advised Cygnus that it anticipates that the shares
will be sold from time to time primarily in transactions (which may include
block transactions) on the Nasdaq National Market at the market price
prevailing at the time of sale. Sales may also be made in negotiated
transactions with institutional investors or otherwise.
Cripple Creek is an "underwriter" as defined in the Securities Act of
1933 in connection with the sale of the shares. Any broker-dealers or agents
that participate with Cripple Creek in selling the shares may be deemed to be
"underwriters." Any commission received by such broker-dealers or agents and
any profit on resale of the shares purchased by them may be deemed to be
underwriting discounts or commissions under the Securities Act.
The common stock is listed on the Nasdaq National Market under the
symbol "CYGN." On December 13, 1999, the last reported sale price of the
common stock on the Nasdaq National Market was $19.1875 per share.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to
the contrary is a criminal offense.
The date of this Prospectus Supplement is December 14, 1999.
<PAGE>
TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
<TABLE>
<CAPTION>
PAGE
<S> <C>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS. . . . . . . . . . . . . . . . S-1
IMPORTANT INFORMATION INCORPORATED BY REFERENCE. . . . . . . . . . . . . . . . . S-1
OUR COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-2
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-8
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-13
EQUITY LINE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-14
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-15
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . S-16
PROSPECTUS
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Incorporation of Certain Documents by Reference. . . . . . . . . . . . . . . . . .3
The Company. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Recent Developments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Use of Proceeds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Ratio of Earnings to Fixed Charges . . . . . . . . . . . . . . . . . . . . . . . .5
Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Legal Opinions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
</TABLE>
-i-
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under "Our Company" and "Risk Factors" and
elsewhere in this prospectus supplement and prospectus, including in the
documents incorporated by reference, are forward-looking statements that
involve risks and uncertainties. These forward-looking statements include
statements about our plans, objectives, expectations, intentions and
assumptions and other statements contained in this prospectus supplement and
prospectus, including in the documents incorporated by reference, that are
not statements of historical fact. You can identify these statements by
words such as "may," "will," "should," "estimates," "predicts" "potential,"
"continue," "strategy," "believes," "anticipates," "plans," "expects,"
"intends" and similar expressions. We cannot guarantee future results,
levels of activity, performance or achievements. Our actual results and the
timing of certain events may differ significantly from the results discussed
in the forward-looking statements. Factors that might cause such a
discrepancy include those discussed in "Risk Factors" and elsewhere in this
prospectus supplement and prospectus, including in the documents incorporated
by reference. You should rely only on the information contained in this
prospectus supplement and prospectus. No dealer, salesperson or other person
is authorized to give information that is not contained in this prospectus
supplement and prospectus. This prospectus supplement and prospectus is not
an offer to sell nor is it seeking an offer to buy these securities in any
jurisdiction where the offer or sale is not permitted. The information
contained in this prospectus supplement and prospectus is current only as of
its date, regardless of the time of its delivery or any sale of these
securities.
IMPORTANT INFORMATION INCORPORATED BY REFERENCE
THE SECURITIES AND EXCHANGE COMMISSION ALLOWS CYGNUS TO "INCORPORATE
BY REFERENCE" THE INFORMATION CYGNUS FILES WITH THEM, WHICH MEANS THAT IT CAN
DISCLOSE IMPORTANT BUSINESS AND FINANCIAL INFORMATION ABOUT CYGNUS TO YOU
THAT IS NOT INCLUDED IN OR DELIVERED WITH THIS PROSPECTUS SUPPLEMENT AND
PROSPECTUS BY REFERRING YOU TO THOSE DOCUMENTS.
The information incorporated by reference is considered to be part of
this document. Information that we file later with the Securities and
Exchange Commission will automatically update and supersede this information.
We incorporate by reference the documents listed below and any filing we
will make with the Securities and Exchange Commission under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 following the date
of this prospectus supplement:
1. Annual Report on Form 10-K of Cygnus for the fiscal year ended
December 31, 1998;
2. Quarterly Reports on Form 10-Q filed by Cygnus for the fiscal quarters
ended March 31, 1999 (Amendment No. 2), June 30, 1999 and September 30,
1999;
3. Current Reports on Form 8-K dated February 5, 1999, June 7, 1999,
July 2, 1999, July 20, 1999, July 28, 1999, October 7, 1999, November 4,
1999, November 22, 1999 and December 13, 1999.
-1-
<PAGE>
4. The description of common stock contained in Cygnus' registration
statement on Form 8-A.
YOU MAY REQUEST A COPY OF THESE FILINGS, AT NO COST, BY WRITING OR
TELEPHONING US AT THE FOLLOWING ADDRESS:
CYGNUS, INC.
400 PENOBSCOT DRIVE
REDWOOD CITY, CALIFORNIA 94063
ATTENTION: SECRETARY
TELEPHONE REQUESTS MAY BE DIRECTED TO: (650) 369-4300
OUR COMPANY
We are engaged in the development and manufacture of diagnostic and
drug delivery systems, utilizing proprietary technologies to satisfy unmet
medical needs cost effectively. Our current efforts are primarily focused on
two core areas: a frequent, automatic and non-invasive glucose monitoring
device (the GlucoWatch-Registered Trademark- monitor) and drug delivery
systems. In December 1999, we announced an agreement to sell most of the
assets comprising our drug delivery systems business.
Cygnus was incorporated in California in 1985 and was merged into a
Delaware corporation in September 1995. Our principal executive offices are
located at 400 Penobscot Drive, Redwood City, California 94063, and our
telephone number at that address is (650) 369-4300.
THE GLUCOWATCH-Registered Trademark- SYSTEM.
Our GlucoWatch-Registered Trademark- monitor represents a potential
advance in diabetes care technology as compared to the currently prevailing
"finger stick" blood monitoring method. The GlucoWatch-Registered
Trademark-monitor is designed to measure glucose frequently, automatically
and non-invasively through the ease and convenience of a device worn like a
wristwatch. Worldwide sales of blood glucose self-monitoring products were
approximately $2.5 billion in 1997 (Boston Biomedical Consultants, Inc.). It
is estimated that more than 40 million people in North America, Europe, Japan
and Korea have diabetes. In the United States alone, more than ten million
people have been diagnosed, with another five million believed to have the
condition. The number of people with diabetes is expected to continue to grow
with the aging of the population, while the number of diagnosed cases is also
expected to increase with changes in diagnostic standards and new diagnostic
technologies.
Clinical studies sponsored by the National Institutes of Health
indicate that better management of glucose levels through more frequent
testing would enable people with diabetes to reduce or significantly delay
many serious diabetes-related health complications. However, largely due to
the pain of repetitive finger sticking and the associated disruption of daily
life, we believe most people with diabetes currently test their glucose
levels less than half as often as
-2-
<PAGE>
recommended. As a result of the drawbacks of the finger stick method, we
believe that there is a significant unmet demand for an automatic and
continuous glucose-monitoring device.
To address this unmet demand, we are developing the
GlucoWatch-Registered Trademark- monitor, which is expected to reduce or
eliminate significant drawbacks of the finger stick testing technique. The
device, which is worn like a wristwatch, is designed to automatically and
non-invasively extract and measure glucose levels through intact skin up to
three times per hour. The extracted glucose is collected in a consumable
component called the AutoSensor, which is attached to the back of the device
and replaced approximately every twelve hours. The GlucoWatch-Registered
Trademark- monitor potentially offers a combination of features, such as:
- an electronic memory to store and display glucose levels;
- the ability to download stored information to personal computers
- to analyze glucose data and trends;
- alerts indicating hypo- and hyperglycemic conditions; and
- event markers which record factors that affect glucose levels.
The GlucoWatch-Registered Trademark- monitor can be worn during the
day and night. We believe the GlucoWatch-Registered Trademark- monitor will
provide the frequent testing and trend analysis of glucose levels necessary
to enable people with diabetes to better manage their condition. We believe
this unique combination of features will result in better control of glucose
levels, improved quality of life and more cost-effective healthcare.
In developing the GlucoWatch-Registered Trademark- monitor, Cygnus has
sought to design a device that would offer the above features and be safe and
effective for home use by patients with diabetes. In December 1998, we
completed extensive development clinical studies using a version of the
GlucoWatch-Registered Trademark- monitor designed for commercial sale. These
studies were conducted by independent clinical investigators across the U.S.
on people with diabetes. The results of these studies demonstrated that the
GlucoWatch-Registered Trademark- monitor is able to measure glucose levels
with accuracy and precision. The results of the most controlled testing
portion of the development clinical studies exceeded Cygnus' internal
performance accuracy target values. The protocols for the development
clinical studies were designed to be the same as the protocols used in our
registration clinical studies.
On January 25, 1999 the Company submitted the first module of the
Pre-Market Approval Application ("PMA") to the FDA. This submission included
a variety of information, including manufacturing documentation. We submitted
the second module of the PMA in June 1999, which included analysis of a
series of clinical studies totaling more than 600 people that were completed
in December 1998, as well as at least two additional studies. The FDA
notified Cygnus that the PMA for the GlucoWatch-Registered Trademark- monitor
has been deemed suitable for filing.
On December 6, 1999 the FDA's Clinical Chemistry and Toxicology
Devices Panel of the Medical Devices Advisory Committee met and unanimously
recommended the
-3-
<PAGE>
GlucoWatch-Registered Trademark- monitor for approval for sale in the United
States with three conditions. The first is an education program, about which
we have already been in discussions with the FDA. In order to satisfy the
second condition, the labeling will be revised in accordance with
recommendations to be given to the FDA by the Committee. Third, the
Committee suggested post-market study of detection of hypoglycemia and
hyperglycemia. We plan to work with the FDA regarding the satisfaction of
these conditions.
Although we believe the clinical results to date are encouraging, no
assurance can be given that data generated in the clinical studies to date or
the recommendation of the Committee will provide a sufficient basis for the
approval of the GlucoWatch-Registered Trademark- monitor by the FDA.
In 1996, we entered into collaboration agreements with Becton
Dickinson & Company and Yamanouchi Pharmaceutical Co., Ltd. for the
commercialization of the GlucoWatch-Registered Trademark- monitor. Under the
Yamanouchi agreement, Cygnus granted Yamanouchi the marketing and
distribution rights of the GlucoWatch-Registered Trademark- monitor in Japan
and Korea. Cygnus is eligible to receive up-front and milestone payments
prior to commercialization and to receive a percentage of the product's
future commercial success. Under the Becton Dickinson agreement, we granted
Becton Dickinson exclusive worldwide marketing and distribution rights, with
the exception of Japan and Korea. On March 31, 1998, we announced the
termination of our agreement with Becton Dickinson. Consequently, we will not
receive any future milestone payments under the Becton Dickinson agreement
and will not be obligated to share future revenue, if any, associated with
commercialization of the GlucoWatch-Registered Trademark- monitor in the
Becton Dickinson territories. We are currently in discussions with a short
list of companies to establish an alliance for the commercialization of the
GlucoWatch-Registered Trademark- monitor to provide for distribution, sales,
marketing, and customer service support in North America and Europe. There
can be no assurance that we will be able to enter into new collaborative
arrangements.
In 1998, Cygnus entered into long term agreements with E.I. du Pont de
Nemours & Company ("DuPont") for the development and supply of thick film
materials for Cygnus' GlucoWatch-Registered Trademark- monitor. A key
component of the GlucoWatch-Registered Trademark- monitor is the sensor,
which we developed with DuPont's materials. The agreements call for continued
cooperation for future sensor technology developments and continued supply of
materials.
In September 1999, Cygnus was awarded a Phase I Small Business
Innovative Research Grant for "High Performance Biosensor Electrode
Materials" from the National Institute of Diabetes and Digestive and Kidney
Diseases division of the NIH. We plan to use funding to investigate
advancements in biosensor materials used for glucose detection and
measurement, potentially to include in future versions of the
GlucoWatch-Registered Trademark- monitor.
OUR DRUG DELIVERY SYSTEMS
Drug delivery systems provide for the controlled release of drugs
directly into the bloodstream through intact skin or mucosa. Our transdermal
drug delivery products are thin multilayer systems, in the form of small
adhesive patches. Transdermal delivery can provide a number of advantages
over conventional methods of drug administration, including enhanced
efficacy, increased safety, greater convenience and improved patient
compliance. By delivering a steady flow of drugs into the bloodstream over an
extended period of time, such systems can
-4-
<PAGE>
avoid the "peak and valley" effect of traditional oral or injectable therapy
and can enable more controlled, effective treatment. By avoiding first pass
metabolism through the gastrointestinal tract and the liver, the
therapeutically equivalent dosage for the transdermal delivery of certain
compounds can be significantly less than the corresponding oral dosage.
Our drug delivery business is focused on contraception, hormone
replacement therapy and smoking cessation. We have received FDA approval for
three products, one of which is currently marketed, the Nicotrol-Registered
Trademark- (Pharmacia AB, Stockholm, Sweden) nicotine patch, and one of
which, the FemPatch-Registered Trademark- (Warner-Lambert Co., Morris Plains,
NJ) system, an estrogen replacement patch, is no longer being marketed. The
third product, a seven-day hormone replacement patch, was cleared for
marketing by the FDA in September 1999. The Company has strategic
collaborations for its transdermal products with Ortho-McNeil Pharmaceutical,
Inc. ("Ortho"), a Johnson & Johnson company (contraception), and Pharmacia &
Upjohn ("Pharmacia") (smoking cessation).
The FemPatch-Registered Trademark- (Warner-Lambert Co., Morris Plains,
NJ) system, commercially launched in 1997, is a low-dose, 7-day estrogen
replacement transdermal patch for the treatment of menopausal symptoms.
Sanofi S.A. ("Sanofi"), our worldwide licensee, had sublicensed U.S.
marketing rights to Warner-Lambert. In November 1998, Warner-Lambert
terminated its agreement with Sanofi, which also terminated the Supply
Agreement between Warner-Lambert and Cygnus. Consequently, the product is no
longer being marketed.
In July 1998, we were notified by AHP, the licensee for two of our
transdermal hormone replacement products, that AHP wanted to discuss the
status of its agreements with Cygnus and that it intended to exercise its
right under the agreements to seek a sublicensee for the products. AHP and
Cygnus negotiated an amendment to the agreements in November 1998 that
provided Cygnus immediate ownership of the regulatory filing packages for the
two products and the right to co-promote the two products as well. The
amendment also provided that if AHP was unable to sign an agreement with a
sublicensee or opted not to reacquire its rights within six months, the
rights to the two products would revert to Cygnus; however, AHP would still
be obligated to continue development activities for the two products for an
additional six months. In June 1999, AHP notified us that a sublicense
agreement was not signed and that AHP would not be exercising its option to
reacquire rights, but that they would support development activities until
mid-November 1999. Effective as of November 17, 1999, AHP is no longer a
partner with respect to these two products.
RECENT DEVELOPMENTS
On November 18, 1999, we announced the signing of a binding agreement
to sell most of the assets of our drug delivery business to Ortho-McNeil
Pharmaceutical, Inc, a Johnson & Johnson company ("Ortho-McNeil").
Ortho-McNeil will pay up to $75 million in cash, contingent on the
achievement of certain milestones. Under terms of the agreement, Cygnus will
receive $20 million in cash at closing. The remaining contingent payments
relate to the achievement of certain technical, regulatory and
commercialization milestones for the contraceptive patch Cygnus is developing
with the R.W. Johnson Pharmaceutical Research Institute, a Johnson & Johnson
company.
-5-
<PAGE>
The assets of the drug delivery business that we agreed to sell to
Ortho-McNeil do not include those relating to a nicotine patch under
development and one other early stage project. Cygnus products that are being
acquired include the FemPatch-Registered Trademark- system, the
Nicotrol-Registered Trademark-system, the 7-day estrogen patch, an
estrogen/progestin combination product, and the contraceptive patch. The
proposed sale is subject to a number of customary conditions, including
satisfaction of the waiting period requirments under the Hart-Scott-Rodino
Act.
On December 2, 1999, we received a CE Certificate for the
GlucoWatch-Registered Trademark- monitor, indicating that the product has met
the essential requirements and other criteria of the European Community
Directive 93/42/ECC, Annex V, Section 3.2. The CE Certificate is required
for selling products in the European Community.
On December 6, 1999 the FDA's Clinical Chemistry and Toxicology
Devices Panel of the Medical Devices Advisory Committee met and unanimously
recommended the GlucoWatch-Registered Trademark- monitor for approval for
sale in the United States with three conditions. Please see "The
Glucowatch-Registered Trademark-System" above.
OUR PORTFOLIO OF PRODUCTS
The data in the following table summarize our current product
portfolio, the potential indications, development status and licensees of
marketing and distribution rights. The data in the table are qualified by
reference to the more detailed descriptions set forth in our Annual Report on
Form 10-K for the year ended December 31, 1998. Development of the various
products listed is being funded by the designated licensee or distributor,
Cygnus, or both. Cygnus has additional products in early development, which
are not listed below, and is conducting a number of new product feasibility
studies.
-6-
<PAGE>
OUR PRODUCT PORTFOLIO
<TABLE>
<S> <C> <C> <C>
PRODUCT INDICATIONS STATUS (1) STRATEGIC PARTNER
DIAGNOSTIC SYSTEMS:
FREQUENT, AUTOMATIC
GLUCOSE MONITORING:
GlucoWatch-Registered Trademark- Monitor Diabetes Filed with FDA Cygnus; Yamanouchi
DRUG DELIVERY SYSTEMS(2):
SMOKING CESSATION:
Nicotrol-Registered Trademark- Patch Smoking cessation Commercialized in North Pharmacia & Upjohn, Inc.;
America and certain Johnson & Johnson(3)
European countries(2)
Nicotine Patch Smoking cessation Pre-clinical Undisclosed
HORMONE REPLACEMENT:
Low-Dose Estrogen Menopausal symptoms No longer marketed
7-Day: Fempatch-Registered Trademark- System
Estrogen 7-Day Menopausal symptoms Approved by FDA and European
Dossier underreview(2)
Estrogen/Progestin: Menopausal symptoms Phase 3 clinicals(2)
Combination 3.5-Day
CONTRACEPTION:
Combination 7-Day Contraception Phase 3 clinicals(2) Johnson & Johnson(4)
Estrogen/Progestin:
OTHER PRODUCTS:
Clonazepam Anti-epileptic Grant expired as of 9/29/99(5)
Mucosal Disk Breath freshening Marketing Authorization Undisclosed
Filed(2)
Mucosal Disk Sore Throat Marketing Authorization Undisclosed
Filed(2)
</TABLE>
(1) Cygnus' drug delivery products are generally developed in the
following stages: development, prototype, pre-clinical studies in
preparation to file an Investigational New Drug Application
("IND"), clinical trials, and regulatory submission.
(2) Cygnus has entered an agreement to sell this product and most of
the other products in its drug delivery systems business to
Ortho-McNeil Pharmaceutical, Inc, a Johnson & Johnson company.
Please see "Our Drug Delivery Systems" above.
(3) Pharmacia has worldwide rights and has sublicensed rights in
North America to Johnson & Johnson.
(4) Cygnus' agreement with Johnson & Johnson grants Johnson & Johnson
exclusive rights to the estrogen/progestin combination 7-day
contraception product.
(5) Product funding, through an NIH grant, expired on September 29,
1999.
-7-
<PAGE>
RISK FACTORS
IN DETERMINING WHETHER TO INVEST IN THE COMMON STOCK, YOU SHOULD
CAREFULLY CONSIDER THE INFORMATION BELOW IN ADDITION TO ALL OTHER INFORMATION
PROVIDED TO YOU IN THIS MEMORANDUM.
WE HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUING LOSSES.
We have a limited operating history to evaluate our prospects. You
should consider our prospects in light of the substantial risks, expenses and
difficulties encountered by companies entering into the medical device and
drug delivery industry. We reported a net loss of $4.1 million for the
quarter ended September 30, 1999 and have experienced annual operating losses
since our inception. We expect to continue to incur operating losses at least
until we have significant sales, if we ever do, of the GlucoWatch-Registered
Trademark-monitor. We cannot assure you that we will generate significant
revenues or achieve profitability. We have, and expect to continue to have,
fluctuations in quarterly results based on varying contract revenues and
expenses associated with our contracts and collaborative projects. Some of
these fluctuations could be significant. To date, we have generated limited
revenues from product sales. We do not have significant experience in
manufacturing, marketing or selling our products. Our future development
efforts may not result in commercially viable products. We may fail in our
efforts to introduce our products or to obtain required regulatory
clearances. Our products may never gain market acceptance, and we may never
generate revenues or achieve profitability. Our revenues to date have been
derived primarily from:
- product development and licensing fees related to our products
under development, and
- manufacturing and royalty revenues from the Nicotrol-Registered
Trademark- (Pharmacia AB, Stockholm, Sweden) nicotine patch and
the FemPatch-Registered Trademark- system.
In the future, we will no longer receive manufacturing revenue from
the Nicotrol-Registered Trademark- patch or the FemPatch-Registered
Trademark-system. If the sale of our drug delivery business is consummated,
we will no longer receive royalty payments for the Nicotrol-Registered
Trademark- patch. If we obtain regulatory approvals, we expect that a
substantial portion of our future revenues will be derived from sales of the
GlucoWatch-Registered Trademark- monitor and other products currently under
development.
WE MAY NEED ADDITIONAL FINANCING AND IT MAY NOT BE AVAILABLE.
In order to continue to develop our products, we will require
substantial resources to conduct research and conduct preclinical development
and clinical trials necessary to bring our products to market and to
establish production and marketing capabilities. We may seek additional
funding through public or private financings, including debt or equity
financings. We may also seek other arrangements, including collaborative
arrangements.
-8-
<PAGE>
Any additional equity financings may dilute the holdings of current
stockholders. Debt financing, if available, may restrict our ability to issue
dividends and take other actions. We may not be able to obtain adequate funds
when we need them from financial markets or arrangements with corporate
partners or other sources. Even if funds are available, they may not be on
acceptable terms. If we cannot obtain sufficient additional funds, we may
have to delay, scale back or eliminate some or all of our research and
product development programs or license or sell products or technologies that
we would otherwise seek to develop ourselves.
We believe that our existing cash, cash equivalents and investments,
plus cash from revenues, other fundings such as potential product funding
collaborations or financings, and earnings from investments, will suffice to
meet our operating expenses, debt servicing and repayments and capital
expenditure requirements at least through the next 12 months. The amounts and
timing of future expenditures will depend on:
- progress of ongoing research and development;
- results of preclinical testing and clinical trials;
- rates at which operating losses are incurred;
- executing any development and licensing agreements with corporate
partners;
- developing our products;
- manufacturing scale-up for the GlucoWatch-Registered Trademark-
monitor;
- the FDA regulatory process; and
- other factors, many of which are beyond our control.
WE DEPEND ON LICENSEES, DISTRIBUTORS AND COLLABORATIVE ARRANGEMENTS.
Our strategy to develop, clinically test, obtain regulatory approval,
manufacture and commercialize our products depends, in large part, upon our
ability to selectively enter into and maintain collaborative arrangements
with licensees and distributors. If we commercialize our
GlucoWatch-Registered Trademark- monitor, we will depend upon Yamanouchi
Pharmaceutical Co., Ltd. to market and distribute the GlucoWatch-Registered
Trademark- monitor in Japan and Korea. We do not have any marketing or
distribution agreements for the GlucoWatch-Registered Trademark- monitor
other than the Yamanouchi collaboration. However, we are currently involved
in discussions with a short list of companies about collaborating to market
and distribute the GlucoWatch-Registered Trademark- monitor in the U.S.,
Europe and elsewhere outside Japan and Korea.
Our licensees and distributors generally have the right to terminate
product development, for any reason without significant penalty, at any time
before we are granted regulatory approval. These cancelations may cause us to
delay, suspend or abandon our clinical testing, regulatory filings and
product development and commercialization efforts. Licensees have exercised
this right in the past and we cannot assure you that current and future
licensees or distributors will
-9-
<PAGE>
not exercise this right in the future. All payments to us under our licensing
and distribution agreements depend on future events or sales levels, and the
licensee or distributor may terminate these agreements. As a result, we
cannot assure you when or if we will receive any particular payment. In the
past, some of our licensees, distributors and collaborators have asked us to
modify the terms of existing agreements. If a licensee or distributor stopped
funding one of our products, we would either fund development efforts
ourselves, enter into an agreement with an alternative licensee or
distributor, or suspend further development work on the product. We cannot
assure you that we would be able to negotiate an acceptable agreement with an
alternative licensee or distributor.
Additionally, we may choose to self-fund certain research and
development projects in order to exploit our technologies. If these
activities result in a commercial product, they will help our long-term
operating results. However, any increase in self-sponsored research and
development or sales and marketing activities will negatively affect our
short-term operating results. Furthermore, we cannot control the resources
and attention a licensee or distributor devotes to a product. As a result, we
may experience delays in clinical testing, regulatory filings and
commercialization efforts conducted by our licensees or distributors. We
cannot assure you that our licensees or distributors will not, for
competitive reasons, support, directly or indirectly, a company or product
that competes with one of our products that is the subject of its license or
distributor agreement with us. Furthermore, any dispute between us and one of
our licensees or distributors might require us to initiate or defend against
expensive litigation or arbitration proceedings. If one of our licensees or
distributors terminates an arrangement, cannot fund or otherwise satisfy its
obligations under its arrangements, or significantly disputes or breaches a
contractual commitment, then we would likely be required to seek an
alternative licensee or distributor. We cannot assure you that we would be
able to reach agreement with a replacement licensee or distributor. If we
were unable to find a replacement licensee or distributor, we might not be
able to perform or fund the activities of the current licensee or
distributor. Even if we were able to perform and fund these activities, our
capital requirements would increase substantially. In addition, the further
development and the clinical testing, regulatory approval process, marketing,
distribution and sale of the product covered by such licensee or distributor
would be significantly delayed. (See "Risk Factors - we have limited
marketing and sales experience.")
For us to be competitive, we will need to develop, license or acquire
new products. Furthermore, our ability to develop and commercialize products
in the future will depend, in part, on our ability to enter into
collaborative arrangements with additional licensees on favorable terms. We
cannot assure you that we will be able to enter into new collaborative
arrangements on favorable terms, if at all, or that existing or future
collaborative arrangements will succeed.
WE DEPEND ON LICENSED PATENT APPLICATIONS AND PROPRIETARY TECHNOLOGY.
Our success depends in large part on our ability to obtain patent
protection for our products, preserve our trade secrets and operate without
infringing the proprietary rights of others, both in the U.S. and abroad.
Since patent applications in the U.S. are secret until issuance, and
publication of discoveries in the scientific or patent literature tends to
lag behind actual
-10-
<PAGE>
discovery by several months, we cannot be certain that we were the first to
file our patent applications or that we will not infringe upon third party
patents. We cannot assure you that any patents will be issued with respect to
any of our patent applications or that any patents will provide competitive
advantages for our products or will not be challenged or circumvented by our
competitors.
We also rely on trade secrets and proprietary know-how that we seek to
protect, in part, by confidentiality agreements with our licensees, employees
and consultants. We cannot assure you that these agreements will not be
breached, that we would have adequate remedies for any breach or that our
trade secrets will not otherwise become known or be independently developed
by our competitors. Any litigation, in the U.S. or abroad, as well as foreign
opposition and/or domestic interference proceedings, could result in
substantial expense to us and significant diversion of effort by our
technical and management personnel. We may resort to litigation to enforce
our patents or protect trade secrets or know-how as well as to defend against
infringement charges. A negative determination in such proceedings could
subject us to significant liabilities or require us to seek licenses from
third parties. Although patent and intellectual property disputes in the
pharmaceutical product area have often been settled through licensing or
similar arrangements, costs associated with such arrangements may be
substantial and could include ongoing royalties. Furthermore, we cannot
assure you that necessary licenses would be available to us on satisfactory
terms, if at all. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could
prevent us from manufacturing and selling certain of our products, and could
materially adversely affect us.
WE ARE HIGHLY LEVERAGED AND MAY BE UNABLE TO SERVICE OUR DEBT.
As of September 30, 1999, we had indebtedness of $51.6 million. The
degree to which we are leveraged could materially and adversely affect our
ability to obtain financing for working capital, acquisitions or other
purposes and could make us more vulnerable to industry downturns and
competitive pressures. Our ability to meet our debt service obligations
depends upon our future performance, which will depend upon financial,
business and other factors, many of which are beyond our control. Although we
believe our cash flows will be adequate to meet our interest payments, we
cannot assure you that we will continue to generate cash flows in the future
sufficient to cover our fixed charges or to permit us to satisfy any
redemption obligations pursuant to the our indebtedness. If we cannot
generate cash flows in the future sufficient to cover our fixed charges or to
permit us to satisfy any redemption obligations pursuant to our indebtedness,
and we cannot borrow sufficient funds either under our credit facilities or
from other sources, we may need to refinance all or a portion of our existing
debt, to sell all or a portion of our assets, or to sell equity securities.
There is no assurance that we could successfully refinance, sell our assets
or sell equity securities, or, if we could, we cannot give any assurance as
to the amount of proceeds we could realize.
In the event of insolvency, bankruptcy, liquidation, reorganization,
dissolution or winding up of our business or upon default or acceleration
relating to our debt obligations, our assets will first be available to pay
the amounts due under our debt obligations. Holders of common stock would
only receive the assets remaining, if any, after payment of all indebtedness
and preferred stock. Although we do not currently conduct operations through
subsidiaries, we may elect to do
-11-
<PAGE>
so as products become commercialized. In such event, our cash flow and our
ability to service debt would partially depend upon the earnings of our
subsidiaries and the distribution, loaning or other payments of funds by
those subsidiaries to us. The payment of dividends and the making of loans
and advances to us by our subsidiaries would be subject to statutory or
contractual restrictions, would depend upon the earnings of those
subsidiaries and would be subject to various business considerations. Our
right to receive assets of any of our subsidiaries upon their liquidation or
reorganization would be effectively subordinated to the claims of our
subsidiaries' creditors, except to the extent that we are recognized as a
creditor of such subsidiary, in which case our claims would still be
subordinate to any security interests in the assets of such subsidiary and
any senior indebtedness.
WE HAVE LIMITED MARKETING AND SALES EXPERIENCE.
We have limited experience marketing or selling medical device
products. To successfully market and sell the GlucoWatch-Registered
Trademark- monitor or our other products under development, we must either
develop a more extensive marketing and sales force or enter into arrangements
with third parties to market and sell our products. We cannot assure you that
we could successfully develop a more extensive marketing and sales force or
that we could enter into acceptable marketing and sales agreements with third
parties. If we maintain our own marketing and sales capabilities, we will
compete with other companies that have experienced and well-funded marketing
and sales operations. If we enter into a marketing arrangement with a third
party, any revenues we receive will depend on the third party, and we will
likely have to pay a sales commission or similar amount.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS.
The design, development, manufacture and use of our products involve
an inherent risk of product liability claims and associated adverse
publicity. Producers of medical products may face substantial liability for
damages in the event of product failure or allegations that the product
caused harm. We currently maintain product liability insurance, but it is
expensive and difficult to obtain and may not be available in the future on
acceptable terms. We cannot assure you that we will not be subject to product
liability claims, that our current insurance would cover any claims, or that
adequate insurance will continue to be available on acceptable terms in the
future. In the event we are held liable for damages in excess of the limits
of our insurance coverage, or if any claim or product recall creates
significant adverse publicity, our business, financial condition and results
of operations could be materially and adversely affected.
WE MAY NOT BE ABLE TO RETAIN OR HIRE KEY PERSONNEL.
Our ability to operate successfully and manage our potential future
growth significantly depends upon retaining key scientific, technical,
managerial and financial personnel, and attracting and retaining additional
highly qualified scientific, technical, managerial and financial personnel.
We face intense competition for qualified personnel in these areas, and we
cannot assure you that we will be able to attract and retain qualified
personnel. The loss of key personnel or our inability to hire and retain
additional qualified personnel in the future could adversely affect our
business, financial condition and operating results.
-12-
<PAGE>
OUR STOCK PRICE IS VOLATILE.
The trading price of our common stock substantially fluctuates in
response to factors such as:
- announcements by us or our competitors of results of regulatory
approval filings or clinical trials or testing;
- developments or disputes governing proprietary rights;
- technological innovations or new commercial products, government
regulatory action, and general conditions in the medical
technology industry;
- changes in securities analysts' recommendations; or
- other events or factors, many of which are beyond our control.
In addition, the stock market in general has experienced extreme price
and volume fluctuations in recent years that have particularly affected the
market prices of many medical technology companies, unrelated to the
operating performance of these companies. Fluctuations or decreases in the
trading price of our common stock may adversely affect the market for our
common stock. In the past, following periods of volatility in the market
price for a company's securities, securities class action litigation often
has been instituted. Such litigation could result in substantial costs and a
diversion of management attention and resources, which could have a material
adverse effect on our business, financial condition and operating results.
WE DO NOT PAY DIVIDENDS.
We have never declared or paid cash dividends on our common stock. Our
current bank term loan precludes us from paying dividends to stockholders. We
currently intend to retain any earnings for use in our business and therefore
do not anticipate paying any dividends in the future.
WE MAY NOT RECEIVE FDA APPROVAL.
Although the FDA's Clinical Chemistry and Toxicology Devices Panel of
the Medical Devices Advisory Committee has recommended the
GlucoWatch-Registered Trademark- monitor for approval for sale in the United
States with three conditions, there can be no assurance that we can meet
these conditions or, if we can, that the recommendation of the Committee will
convince the FDA to approve the product. There can be no assurance that the
FDA will approve the GlucoWatch-Registered Trademark- monitor on the same
terms, if at all.
USE OF PROCEEDS
Cygnus estimates that the net proceeds from the sale of the 166,765
shares of common stock will be approximately $2.5 million after deducting the
estimated offering expenses payable by us.
-13-
<PAGE>
The net proceeds of this offering will be used for working capital and
general corporate purposes.
EQUITY LINE
Cygnus and Cripple Creek entered into the Structured Equity Line
Flexible Financing Agreement, dated as of June 30, 1999. Cygnus and Cripple
Creek subsequently entered into the Amendment No. 1 to the Structured Equity
Line Flexible Financing Agreement, dated as of September 29, 1999. The
shares covered by this prospectus supplement are being issued under the
Equity Line Agreement.
Under the Equity Line Agreement, subject to the satisfaction of
conditions, Cygnus may require Cripple Creek to purchase shares of common
stock over a period of 24 months from June 30, 1999, for an aggregate
purchase price of up to $30 million. Cygnus has also agreed to issue to
Cripple Creek warrants to purchase 10,000 shares for every $1,000,000 in
gross proceeds from the sale of common stock under the Equity Line Agreement.
The warrants will be issued after the end of each calendar year. The
warrants are exercisable for 5 years from the date they are issued at an
exercise price equal to the weighted average price at which shares were sold
during the preceding calendar year.
Under the Equity Line Agreement, Cygnus, at our sole option and
discretion, subject to the satisfaction of conditions and limitations, can
require Cripple Creek to purchase shares of common stock for an aggregate
purchase price of up to $1.5 million, and Cripple Creek, subject to the
approval of Cygnus, can require Cygnus to sell it additional common stock for
an aggregate purchase price of up to $1.0 million. Cripple Creek may satisfy
these obligations by purchasing up to 5% more or less than the total
aggregate dollar amount of these obligations. Three (3) days prior to the
beginning of each monthly investment period, we are required to notify
Cripple Creek of the dollar amount of common stock required to be purchased
by Cripple Creek, if any, during the monthly investment period. The purchase
price per share to be paid by Cripple Creek for the shares of common stock
acquired under the Equity Line Agreement will equal 98% of the two lowest
sales prices of the common stock during the six trading days immediately
preceding the date of each notice sent to Cygnus by Cripple Creek specifying
a dollar amount of shares.
For the month of December 1999, we sent Cripple Creek notice that we
were requiring Cripple Creek to purchase common stock during that month for
an aggregate purchase price of $1.5, and Cripple Creek sent us notice that it
would require us to sell it an additional $1.0 million worth of common stock
at a floor price of $17 per share, for an aggregate purchase price of $2.5
million. Cripple Creek notified us that it intended to purchase $2.625
million, including the 5% extra described above, worth of common stock on
December 14, 1999. As a result, at the closing of this additional purchase,
Cripple Creek is purchasing 166,765 shares of common stock for an aggregate
purchase price of $2.625 million.
-14-
<PAGE>
PLAN OF DISTRIBUTION
Cripple Creek may, from time to time, sell all or a portion of the
shares:
- on the Nasdaq National Market, or such other exchange on which
the common stock may from time to time be trading;
- in privately negotiated transactions or otherwise;
- at fixed prices that may be changed;
- at market prices prevailing at the time of sale; or
- at prices related to such market prices or at negotiated prices.
The shares may be sold by Cripple Creek by one or more of the
following methods, without limitation:
- block trades in which the broker or dealer so engaged will
attempt to sell the shares as agent but may position and resell
a portion of the block as principal to facilitate the
transaction;
- purchases by a broker or dealer as principal;
- an exchange distribution in accordance with the rules of such
exchange;
- ordinary brokerage transactions and transactions in which the
broker solicits purchasers; privately negotiated transactions;
- short sales; and
- a combination of any of the above methods of sale.
In effecting sales, brokers and dealers engaged by Cripple Creek may
arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from Cripple Creek, or, if any broker-dealer
acts as agent for the purchaser of the shares, from the purchaser, in amounts
to be negotiated which are not expected to exceed those customary in the
types of transactions involved. Broker-dealers may agree with Cripple Creek
to sell a specified number of shares at a stipulated price per share. To the
extent a broker-dealer is unable to sell a specified number of shares acting
as agent for Cripple Creek, it will purchase as principal any unsold shares
at the price required to fulfill the broker-dealer commitment to Cripple
Creek. Broker-dealers who acquire shares as principal may resell the shares
from time to time in transactions which may involve block transactions of the
nature described above, in the over-the-counter market or otherwise at prices
and on terms then prevailing at the time of sale, at prices related to the
then-current market price or in negotiated transactions. In connection with
resales, broker-dealers may pay to or receive from the purchasers of the
shares commissions as described above. Cripple Creek may also sell the
shares in accordance with Rule 144 under the Securities Act, rather than
under this prospectus.
-15-
<PAGE>
Cripple Creek is an "underwriter" as defined in the Securities Act of
1933 in connection with the sale of the shares offered by this prospectus.
Any broker-dealers or agents that participate with Cripple Creek in sales of
the shares may be considered to be "underwriters" within the meaning of the
Securities Act in connection with sales in which they participate. If any
broker-dealers or agents are considered to be "underwriters," then any
commissions they receive and any profit on the resale of the shares purchased
by them may be considered to be underwriting commissions or discounts under
the Securities Act.
From time to time Cripple Creek may engage in short sales, short sales
against the box, puts and calls and other transactions in Cygnus' common
stock, and may sell and deliver the shares in connection with these
transactions or to settle securities loans. If Cripple Creek engages in such
transactions, the price of our common stock may be affected. Under the
equity line, Cripple Creek may not make any sales with the intention of
reducing the price of our common stock. From time to time Cripple Creek may
pledge its shares pursuant to the margin provisions of its agreements with
its brokers. Upon a default by Cripple Creek, the broker may offer and sell
the pledged shares from time to time.
Cripple Creek and any other persons participating in the sale or
distribution of the shares will be subject to the Securities Exchange Act of
1934 and the related rules and regulations, including Regulation M, to the
extent it applies. The Exchange Act and related rules may limit the timing
of purchases and sales of any of the shares by Cripple Creek or any other
such person which may affect the marketability of the shares. Cripple Creek
also must comply with the applicable prospectus delivery requirements under
the Securities Act in connection with the sale or distribution of the shares.
We are required to pay certain fees and expenses incident to the
registration of the shares.
We have agreed to indemnify in certain circumstances Cripple Creek
against certain liabilities, including liabilities under the Securities Act.
Cripple Creek has agreed to indemnify us in certain circumstances against
certain liabilities, including liabilities under the Securities Act.
We have agreed to use our best efforts to keep the registration
statement, of which this prospectus supplement and prospectus is a part,
effective until the shares may be or have been sold under Rule 144(k) of the
Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the common stock
offered hereby have been passed upon for Cygnus by Pillsbury Madison & Sutro
LLP, San Francisco, California.
-16-
