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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 2
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended MARCH 31, 1999
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Transition Period from ____ to ___
COMMISSION FILE NUMBER 0-18962
CYGNUS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2978092
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
400 PENOBSCOT DRIVE, REDWOOD CITY, CALIFORNIA 94063-4719
(Address of principle executive offices and zip code)
Registrant's telephone number, including area code: (650) 369-4300
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares outstanding of each of the registrant's classes of common stock
as of APRIL 22, 1999:
Common Stock - 22,578,076 shares
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CYGNUS, INC.
INDEX
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<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
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Item 1: Financial Statements
Condensed Consolidated Statements of Operations for the three month periods
ended March 31, 1999 and 1998 (unaudited).......................................... 2
Condensed Consolidated Balance Sheets at March 31, 1999
(unaudited) and December 31, 1998.................................................. 3
Condensed Consolidated Statements of Cash Flows for the three month periods
ended March 31, 1999 and 1998 (unaudited)......................................... 4
Notes to Condensed Consolidated Financial Statements (unaudited)..................... 5
SIGNATURES.......................................................................................... 9
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1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYGNUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per-share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
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<S> <C> <C>
Product revenues $ ----- $ 506
Contract revenues 2,566 2,723
Royalty and other revenues 355 231
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TOTAL REVENUES 2,921 3,460
Costs and expenses:
Costs of products sold ----- 1,023
Research and development 7,885 6,065
Marketing, general and administrative 1,470 1,916
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TOTAL COSTS AND EXPENSES 9,355 9,004
LOSS FROM OPERATIONS (6,434) (5,544)
Interest income/(expense), net (382) 6
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NET LOSS $ (6,816) $ (5,538)
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BASIC AND DILUTED NET LOSS PER SHARE $ (0.31) $ (0.28)
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Shares used in computation of basic and diluted
net loss per share 21,733 19,841
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(See accompanying notes.)
2
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CYGNUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
MARCH 31, December 31,
1999 1998
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<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 8,480 $ 10,219
Short-term investments 13,961 14,982
Trade accounts receivable, net of allowance 1,122 876
Inventories ---- 771
Prepaid expenses and other current assets 782 695
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Total current assets 24,345 27,543
EQUIPMENT AND IMPROVEMENTS:
Equipment and improvements, at cost 20,873 19,541
Less accumulated depreciation and amortization (13,549) (13,077)
--------------------------------------------
Net equipment and improvements 7,324 6,464
Long-term investments 3,586 3,622
Deferred compensation and other assets 1,609 5,825
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Total Assets $ 36,864 $ 43,454
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LIABILITIES AND NET CAPITAL DEFICIENCY:
CURRENT LIABILITIES:
Accounts payable $ 6,467 $ 4,459
Accrued compensation 4,492 4,593
Accrued professional services 745 729
Other accrued liabilities 936 943
Customer advances 182 207
Current portion of arbitration obligation 157 60
Current portion of deferred revenue 2,462 1,153
Current portion of long-term debt 3,436 3,415
Current portion of capital lease obligations 442 442
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Total current liabilities 19,319 16,001
Long-term portion of arbitration obligation 23,909 24,158
Long-term portion of debt 7,385 8,252
Long-term portion of capital lease obligations 475 581
Senior Subordinated Convertible Notes 18,500 22,563
Deferred compensation and other long-term liabilities 523 4,666
STOCKHOLDERS' NET CAPITAL DEFICIENCY:
Common stock 22 21
Additional paid-in-capital 149,500 143,155
Accumulated deficit (182,771) (175,955)
Accumulated other comprehensive income 2 12
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Net capital deficiency (33,247) (32,767)
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Total liabilities and stockholders' net
capital deficiency $ 36,864 $ 43,454
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</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1998 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
(See accompanying notes.)
3
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CYGNUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase/(Decrease) in Cash and Cash Equivalents
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,816) $ (5,538)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 477 450
Decrease/(increase) in assets 4,696 689
Increase/(decrease) in liabilities (678) (1,092)
Increase/(decrease) in arbitration liability (151) (14,065)
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NET CASH USED IN OPERATING ACTIVITIES (2,472) (19,556)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,332) (1,117)
Decrease/(increase) in investments 1,001 (20,869)
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NET CASH USED IN INVESTING ACTIVITIES (331) (21,986)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 2,015 13,931
Principal payments of long-term debt (846) (999)
Payment of capital lease obligations (105) (167)
Net proceeds from the issuance of Senior Subordinated Convertible
Notes ---- 40,442
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NET CASH PROVIDED BY FINANCING ACTIVITIES 1,064 53,207
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NET INCREASE /(DECREASE) IN CASH AND CASH EQUIVALENTS (1,739) 11,665
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,219 20,669
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 8,480 $ 32,334
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</TABLE>
(See accompanying notes.)
4
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CYGNUS, INC.
March 31, 1999
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Cygnus, Inc. (the
"Company" or "Cygnus") as of and for the three month periods ended March 31,
1999 and 1998 included herein are unaudited, but include all adjustments
(consisting only of normal recurring adjustments) which the management of
Cygnus, Inc. believes necessary for a fair presentation of the financial
position as of the reported dates and the results of operations for the
respective periods presented. Interim financial results are not necessarily
indicative of results for a full year. The consolidated financial statements
should be read in conjunction with the audited financial statements and related
notes for the year ended December 31, 1998 included in the Company's 1998 Annual
Report on Form 10-K.
2. NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the weighted
average number of shares of Common Stock outstanding. Shares issuable from stock
options and warrants outstanding are excluded from the diluted earnings per
share computation, as their effect is anti-dilutive.
3. COMPREHENSIVE INCOME
Comprehensive income includes all changes in stockholders' equity during a
period except those resulting from investments by owners and distributions to
owners. Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income" ("SFAS 130") which was adopted by the Company on January
1, 1998, requires unrealized gains and losses on Company's available-for-sale
securities to be included in other comprehensive income or loss. Unrealized
gains or losses for the three months periods ended March 31, 1999 and March 31,
1998 were not material and total comprehensive loss closely approximated net
loss for each of these periods.
4. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 requires all derivatives to be
recorded on the balance sheet at fair value and establishes special accounting
rules for different types of hedges. Adoption of this statement is required in
the year ending December 31, 2000 and is not expected to have a material impact
on the Company's results of operations or financial condition.
5. INVENTORIES
Net inventories of $771 as of December 31, 1998 consisted of raw materials
related to the Company's estrogen transdermal product (FemPatch-R- system
[Warner-Lambert Company, Morris Plains, NJ]) and were stated at the lower of
cost (first-in, first-out method) or market, after
5
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CYGNUS, INC.
March 31, 1999
appropriate consideration was given to obsolescence and inventories in excess
of anticipated future demand.
Due to the termination of the Supply Agreement between Warner-Lambert
Company ("Warner-Lambert") and the Company, all related inventory was sold or
written off against prior reserves during the three months ended March 31, 1999.
6. SENIOR SUBORDINATED CONVERTIBLE NOTES
In February 1998, the Company entered into Note Purchase Agreements
with certain institutional investors to issue and sell approximately $43 million
of 4% Senior Subordinated Convertible Notes due in 2005 (the "Notes"). On
October 28, 1998, the Company restructured the Notes. Key provisions in the
restructured Notes included the October 1998 repayment of $18.5 million in
principal (reducing the principal balance from $43 million to $24.5 million), a
delay in the convertibility of the majority of the Notes to June 30, 1999 or
after, modification of conversion prices of the Notes, the ability of the
Company to redeem at par at any time all or part of the new principal amount of
the Notes, an increase in the interest rate to 5.5% paid annually on the new
principal balance and the change in the final maturity of the Notes to October
1, 2000.
Under the terms of the restructured Notes, all of the remaining $24.5
million principal amount of the Notes is redeemable by the Company at par,
including accrued interest. $18.5 million of the Notes will not be convertible
into Common Stock by the Note Holders until June 30, 1999. The restructured
Notes were divided into three tranches. The first tranche had an original
principal amount of $6 million and was convertible in whole or in part into
Common Stock at any time, at a price that was fixed until June 30, 1999 ($3.54),
and was subject to a potential upward adjustment on February 1, 1999 based on
certain market formulas. As of December 31, 1998, $1.9 million of the first
tranche had been converted into Common Stock. The balance of the first tranche
was fully converted in January 1999. The second tranche also has an original
principal amount of $6 million and cannot be converted into Common Stock until
June 30, 1999, at which time it becomes convertible in whole or in part. On June
30, 1999, the conversion price of the second tranche will be $6.89, which was
established on February 1, 1999, based on the average of closing bid prices
using a fifteen-trading-day look-back from February 1, 1999. Subsequent to June
30, 1999, the conversion price of the second tranche will be determined based on
other market formulas containing certain look-back provisions. The third tranche
of the restructured Notes has an original principal amount of $12.5 million and
cannot be converted into Common Stock until July 1, 1999 at a conversion price
that will be determined based on market-based pricing formulas which contain
look-back provisions. Beginning July 1, 1999, no more than 15% of the second and
third tranches may be converted per calendar month at conversion prices which
reflect market-based formulas. Such formulas contain components based on various
averages of closing bid prices and low trading prices during fifteen or ten, as
the case may be, trading days look-back periods from various dates. Any portions
of the 15% monthly amounts of the second and third tranches that are not
converted in the relevant month may be rolled over for conversion in future
months. If the Company had called the second tranche of Notes ($6 million) for
redemption before February 1, 1999, the Note Holders would have been entitled to
convert not more than 50% of such Notes called before the redemption occurs. The
Company made no such call prior to February 1, 1999. If the Company calls the
third tranche of Notes ($12.5 million) for redemption before July 1, 1999, the
Note Holders will not be entitled to convert any portion of such tranche so
called. The Note Holders will
6
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CYGNUS, INC.
March 31, 1999
otherwise be entitled to convert Notes called for redemption before the
redemption occurs, at conversion prices based on market formulas.
The terms of the restructured Notes contained beneficial conversion
features relative to the first tranche, which resulted in a non-cash charge to
earnings of $4.2 million. Future tranches of the restructured Notes may also
have similar beneficial conversion features. Such beneficial features, if any,
are contingent upon future events, including timing of conversion and market
prices at the time of conversion, and accordingly the Company is not able to
estimate any potential charges at this time.
7. BUSINESS SEGMENTS
The Company operates in two business segments: diagnostics and drug
delivery. Both segments are engaged in development and manufacture, utilizing
proprietary technologies to satisfy unmet medical needs cost-effectively. The
segments are strategic business units managed separately based on the
differences in the technologies of their respective product lines.
The diagnostics division's efforts are primarily focused on an
automatic and continuous glucose monitoring device, the GlucoWatch-R- automatic
glucose monitor. The GlucoWatch-R- monitor is designed to take frequent
measurements, thus providing an abundance of glucose data to potentially better
control fluctuating glucose levels. The Company believes its proprietary
extraction and sensing technologies provide the potential to develop unique
products for glucose monitoring which could lead to improved treatment for
people with diabetes.
The drug delivery division's efforts are focused primarily on
transdermal drug delivery systems, which provide for the controlled release of
drugs directly into the bloodstream through intact skin. Cygnus' transdermal
technology is based on the objective of making transdermal products less
irritating, more comfortable and longer to wear for the patient. The Company has
received United States Food and Drug Administration ("FDA") approval for two
products and has a number of others in late-stage development, including two
hormone replacement therapy products and a contraceptive product.
There are no reconciling items between total segment revenues and
profit and loss and consolidated results. The Company utilizes the following
information for the purpose of making decisions and assessing segment
performance.
<TABLE>
<CAPTION>
BUSINESS SEGMENTS
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MARCH 31, 1999 DIAGNOSTICS DRUG DELIVERY CORPORATE TOTAL
-------------- ----------- ------------- ---------------
<S> <C> <C> <C>
Revenue $ ---- $ 2,921 $ 2,921
Profit/(loss) $ (6,817) $ 1 $ (6,816)
Identifiable assets $ 33,517 $ 3,347 $ 36,864
MARCH 31, 1998
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Revenue $ 305 $ 3,155 $ 3,460
Profit/(loss) $ (5,847) $ 309 $ (5,538)
Identifiable assets $ 78,760 $ 5,586 $ 84,346
</TABLE>
7
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CYGNUS, INC.
March 31, 1999
There has been no significant change from December 31, 1998 in the
basis of measurement of segment revenues and profit or loss or identifiable
assets.
All segmental revenues have been generated in the U.S. and the Company
currently does not have any long-lived assets outside the U.S.
8. SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale are carried at fair value, based on
quoted market prices, and the unrealized gains and losses have been combined
with the accumulated deficit due to immateriality. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in investment income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in investment income.
The Company considers all highly liquid investments with a maturity
from the date of purchase of three months or less to be cash equivalents. The
Company invests its excess (to current demands) cash in short-term and long-term
high credit quality, highly liquid instruments. These investments have included,
but are not limited to, Treasury Notes, Federal Agency Securities, Auction Rate
Certificates, Auction Rate Preferred Stock, and Commercial Paper.
8
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CYGNUS, INC.
March 31, 1999
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYGNUS, INC.
Date: May 4, 1999 By: /s/ JOHN C. HODGMAN
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John C. Hodgman
President and Chief Executive Officer
(Principal Executive Officer)
Date: May 4, 1999 By: /s/ CRAIG W. CARLSON
----------------------- -------------------------------------
Craig W. Carlson
Chief Financial Officer
(Principal Accounting Officer)
9
