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FILED PURSUANT TO RULE 424(b)(5)
FILE NUMBER 333-39275
PROSPECTUS SUPPLEMENT
(To Prospectus Dated November 12, 1997)
361,174 Shares
CYGNUS, INC.
Common Stock
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Cygnus, Inc. is selling 361,174 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 $11.06 per share. The total proceeds to
Cygnus will be $4,000,000.
INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE S-10.
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 price paid to Cygnus for the shares was calculated based on the
average closing bid price for Cygnus' common stock on the ten trading days
preceding the date of this Prospectus Supplement, as provided in the Equity
Line Agreement. Cygnus may be required to issue additional shares to Cripple
Creek under certain circumstances. See "Equity Line." Any such additional
shares required to be issued will be covered by a supplement to this
Prospectus Supplement.
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The common stock is listed on the Nasdaq National Market under the
symbol "CYGN." On September 28, 1999, the last reported sale price of the
common stock on the Nasdaq National Market was $11.06 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 September 29, 1999.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
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PAGE
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS....................................S-3
IMPORTANT INFORMATION INCORPORATED BY REFERENCE......................................S-3
OUR COMPANY..........................................................................S-5
RISK FACTORS........................................................................S-10
We have incurred substantial losses and anticipate continuing losses.............S-10
We may need additional financing and it may not be available.....................S-10
We depend on licensees, distributors and collaborative arrangements..............S-11
We depend on licensed patent applications and proprietary technology.............S-12
We are highly leveraged and may be unable to service our debt....................S-13
We have limited marketing and sales experience...................................S-14
We may be subject to product liability claims....................................S-14
We may not be able to retain or hire key personnel...............................S-14
Our stock price is volatile......................................................S-15
We do not pay dividends..........................................................S-15
USE OF PROCEEDS.....................................................................S-15
EQUITY LINE.........................................................................S-15
PLAN OF DISTRIBUTION................................................................S-16
LEGAL MATTERS.......................................................................S-18
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>
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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) and June 30, 1999;
3. Current Reports on Form 8-K dated February 5, 1999, June 7, 1999, July 2,
1999, July 20, 1999, and July 28, 1999; and
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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
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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 transdermal drug delivery
systems.
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 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
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- - 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 and eliminate
the repetitive pain and inconvenience associated with the finger stick
monitoring method. 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 on people with diabetes by independent clinical
investigators across the U.S. 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 its
registration clinical studies.
On January 25, 1999 the Company submitted the first part of the
Pre-Market Approval Application ("PMA") to the FDA. This submission included
a variety of information, including manufacturing documentation. We submitted
the remainder of the PMA in June 1999. The product PMA included analysis of a
series of clinical studies totaling more than 600 people which were completed
in December 1998, as well as at least two additional studies. The FDA
notified the Company in July 1999 that the PMA for the GlucoWatch-Registered
Trademark- monitor has been deemed suitable for filing. The FDA also granted
expedited review status to the GlucoWatch-Registered Trademark- monitor and
stated that the GlucoWatch-Registered Trademark- monitor will be reviewed by
the Clinical Chemistry and Toxicology Devices Panel at a yet to be determined
date. Although we believe its clinical results to date are encouraging, no
assurance can be given that data generated in the clinical studies to date
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. 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
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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.
OUR DRUG DELIVERY SYSTEMS
Drug delivery systems provide for the controlled release of drugs
directly into the bloodstream through intact skin or mucosa. Our drug
delivery products are thin multilayer systems, in the form of small adhesive
patches. Transdermal or transmucosal 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 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, potentially reducing dosage-related
side-effects.
Our drug delivery division 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
subsidiary of Johnson & Johnson (contraception), American Home Products
Corporation ("AHP") (hormone replacement therapy) and Pharmacia & Upjohn
("Pharmacia") (smoking cessation).
The FemPatch-Registered Trademark- system, commercially launched in
1997, is a low-dose, 7-day estrogen replacement transdermal patch for the
treatment of menopausal symptoms. 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
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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. It is uncertain what course
of action we will then take with regard to these two products.
From time to time, we consider strategic transactions and alternatives
relating to our drug delivery business, with the goal of providing additional
funding for the development of the GlucoWatch-Registered Trademark- monitor.
These alternatives include, among others, the divestiture of all or part of
the drug delivery business. We will continue to evaluate strategic
transactions and alternatives which we believe may enhance stockholder value.
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 herein. 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.
OUR PRODUCT PORTFOLIO
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STRATEGIC
PRODUCT INDICATIONS STATUS (1) PARTNER
- ------------------------------------------- --------------------- -------------------------- -------------------------
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DIAGNOSTIC SYSTEMS:
FREQUENT, AUTOMATIC GLUCOSE MONITORING:
GlucoWatch-Registered Trademark- Monitor Diabetes Submitted to FDA Yamanouchi
Cygnus
DRUG DELIVERY SYSTEMS:
TRANSDERMAL DRUG DELIVERY:
SMOKING CESSATION:
Nicotrol Patch Smoking cessation Commercialized in North Pharmacia & Upjohn,Inc.;
America and certain Johnson & Johnson (2)
European countries
Nicotine Patch Smoking cessation Pre-clinical Undisclosed
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STRATEGIC
PRODUCT INDICATIONS STATUS (1) PARTNER
- ------------------------------------------- --------------------- -------------------------- -------------------------
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HORMONE REPLACEMENT
Low-Dose Estrogen 7-Day: Menopausal No longer marketed.
FemPatch-Registered Trademark- System symptoms
Estrogen 7-Day Menopausal Approved by FDA and American Home Products
symptoms European Dossier under
review
Estrogen/Progestin: Menopausal Phase 3 clinicals American Home Products
Combination 3.5-Day symptoms
CONTRACEPTION: Contraception Phase 3 clinicals Johnson & Johnson (3)
Combination 7-Day completed
Estrogen/Progestin:
OTHER PRODUCTS:
Clonazepam Anti-epileptic Grant expired as of
9/29/99 (4)
Mucosal Disk Breath freshening Marketing Authorization Undisclosed
Filed
Mucosal Disk Sore throat Marketing Authorization Undisclosed
Filed
</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) Pharmacia has worldwide rights and has sublicensed rights in North America
to Johnson & Johnson.
(3) Cygnus' agreement with Johnson & Johnson grants Johnson & Johnson exclusive
rights to the estrogen/progestin combination 7-day contraception product.
(4) Product funding, through an NIH grant, expired on September 29, 1999.
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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 $5.0 million for the
quarter ended June 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 or the contraceptive patch. 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- (Warner-Lambert Co., Morris Plains, NJ)
system.
In the future, we will no longer receive manufacturing revenue from the
Nicotrol-Registered Trademark- patch or the FemPatch-Registered
Trademark-system. We will, however, continue to 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.
To continue the development of 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. In
addition, we continue to explore potential strategic alternatives for parts
of or all of the drug delivery business. These alternatives include, among
others, the divestiture of all or part of the drug delivery business.
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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 to 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 twelve 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, at any time before we are granted regulatory approval, for
any reason without significant penalty. These cancellations 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
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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
distribution 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 diagnostic and drug delivery 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
discovery by several months, we cannot be certain that we were the first to file
our patent
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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 June 30, 1999, we had indebtedness of $62.2 million ($49.7 million
net of the $12.5 million, July 1999 Senior Subordinated Convertible Notes
redemption). 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 so as products become commercialized. In such
event, our cash flow and our ability to service
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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 our 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 to 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.
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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.
USE OF PROCEEDS
Cygnus estimates that the net proceeds from the sale of the 361,174
shares of common stock will be approximately $3.8 million after deducting the
estimated offering expenses payable by us.
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
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September 29, 1999. The shares covered by this prospectus supplement are
being issued under the amendment to 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.
At the closing of the amendment to the Equity Line Agreement, Cripple
Creek is purchasing 361,174 shares of common stock for an aggregate purchase
price of $4 million. However, Cripple Creek has the right to notify us as if
it were purchasing $4 million dollars worth of shares in the amounts and on
the days Cripple Creek chooses, subject to limitations, over the next 110
trading days at a price equal to 98% of the two lowest sales prices of the
common stock during the six trading days immediately preceding the date of
each notice. If the number of shares it would have received under this method
is greater than 361,174 we must give additional shares to Cripple Creek
representing the difference. Any additional shares to be issued will be
covered by a supplement to this Prospectus Supplement.
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;
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- 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.
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
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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.
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