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FILED PURSUANT TO RULE 424(b)(5)
FILE NUMBER 333-39275
PROSPECTUS SUPPLEMENT
(To Prospectus Dated November 12, 1997)
345,946 Shares
CYGNUS, INC.
Common Stock
_____________
Cygnus, Inc. is selling 345,946 shares. The shares are being sold by
Cygnus to Cripple Creek Securities, LLC in accordance with a Structured Equity
Line Flexible Financing(SM) Agreement.
The shares are being sold at $11.56 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 commission under the Securities Act.
The price paid to Cygnus for the shares was calculated based on 98% of
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. The common stock is listed on the Nasdaq National Market under the
symbol "CYGN." On June 29, 1999, the last reported sale price of the common
stock on the Nasdaq National Market was $11.19 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 June 30, 1999.
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
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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-14
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
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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
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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 Report on Form 10-Q (Amendment No. 2) filed by Cygnus for the
fiscal quarter ended March 31, 1999;
3. Current Report on Form 8-K dated June 2, 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 monitor represents a potential advance in diabetes care
technology as compared to the currently prevailing "finger stick" blood
monitoring method. The GlucoWatch 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
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 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;
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- - alerts indicating hypo- and hyperglycemic conditions; and
- - event markers which record factors that affect glucose levels.
The GlucoWatch monitor can be worn during the day and night.. We
believe the GlucoWatch 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 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 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 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. 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 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 monitor. Under the Yamanouchi agreement,
Cygnus granted Yamanouchi the marketing and distribution rights of the
GlucoWatch 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 monitor. We are currently in discussions
with a number of companies to establish an alliance for the commercialization of
the GlucoWatch 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.
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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 monitor. A key component of the GlucoWatch
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 TRANSDERMAL DRUG DELIVERY SYSTEMS
Transdermal drug delivery systems provide for the controlled release
of drugs directly into the bloodstream through intact skin. 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, transdermal 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 transdermal product line is focused on contraception, hormone
replacement therapy and smoking cessation. We have received FDA approval for two
products, one of which is currently marketed, the Nicotrol(R) (Pharmacia AB,
Stockholm, Sweden) nicotine patch. The Company has strategic collaborations for
its transdermal products with Ortho-McNeil Pharmaceutical, Inc. ("Ortho"), a
subsidiary of Johnson & Johnson (contraception), American Home Products ("AHP")
Corporation and Sanofi S.A. ("Sanofi") (hormone replacement therapy), 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,
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, we do not expect product revenue related to the FemPatch system in
1999.
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 require 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
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mid-November 1999. It is uncertain what course of action we will then take
with regard to these two products.
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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MARKETING
PRODUCT INDICATIONS STATUS (1) RIGHTS
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DIAGNOSTIC SYSTEMS:
FREQUENT, AUTOMATIC GLUCOSE MONITORING:
GlucoWatch Monitor Diabetes Submitted to FDA Yamanouchi
Cygnus
DRUG DELIVERY SYSTEMS:
TRANSDERMAL DRUG DELIVERY:
SMOKING CESSATION:
Nicotrol Patch Smoking cessation Commercialized in North Pharmacia & Upjohn,
America and certain Inc.;
European countries Johnson & Johnson (2)
Nicotine Patch Smoking cessation Pre-clinical Undisclosed
HORMONE REPLACEMENT
Low-Dose Estrogen 7-Day: Menopausal symptoms Commercialized in North Sanofi (3)
FemPatch System America
Estrogen 7-Day Menopausal symptoms Submitted New Drug American Home Products
Application ("NDA") and
European Dossier
Estrogen/Progestin: Combination Menopausal symptoms Phase 3 clinicals American Home Products
3.5-Day
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MARKETING
PRODUCT INDICATIONS STATUS (1) RIGHTS
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CONTRACEPTION: Contraception Phase 3 clinicals Johnson & Johnson (4)
Estrogen/Progestin:
Combination 7-Day
OTHER PRODUCTS:
Clonazepam Anti-epileptic Pre-clinical National Institutes
of Health ("NIH") (5)
Mucosal Disk Breath freshening Marketing Authorization Undisclosed
Filed
Mucosal Disk Sore throat Marketing Authorization Undisclosed
Filed
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(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) In November 1998, Warner-Lambert terminated its agreement with Sanofi,
which also terminated the Supply Agreement between Warner-Lambert and
Cygnus.
(4) Cygnus' agreement with Johnson & Johnson grants Johnson & Johnson exclusive
rights to the estrogen/progestin combination 7-day contraception product.
(5) Product being funded through the first clinical trial by an NIH grant.
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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 $6.8 million for the first quarter
of 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- (PharmaciaAB, Stockholm, Sweden) nicotine patch and the
FemPatch-R- system.
In the future, we will no longer receive manufacturing revenue from
the Nicotrol-- Registered Trademark patch or the FemPatch-R- 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.
The 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. 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
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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 March 31, 2000. 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;
- - 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-R- monitor, we
will depend upon Yamanouchi Pharmaceutical Co., Ltd. to market and distribute
the GlucoWatch-R- monitor in Japan and Korea. We do not have any marketing or
distribution agreements for the GlucoWatch-R- monitor other than the Yamanouchi
collaboration. However, we are currently involved in discussions with several
companies about collaborating to market and distribute the GlucoWatch-R- 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 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, we cannot assure you that current and future licensees or
distributors will 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
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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 would likely require us to seek an alternative
licensee or distributor. We cannot assure you that we would be able to reach an
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 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.
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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 its
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 at 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 March 31, 1999, we had indebtedness of $54.3 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 depend 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 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, me 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 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
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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-R-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.
OUR STOCK PRICE IS VOLATILE.
The trading price of our common stock substantially fluctuates in
response to factors such as:
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- 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, 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 345,946
shares of common stock will be approximately $3,850,000, 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. 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
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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 Equity Line Agreement, Cripple Creek is
purchasing 345,946 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 80 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 345,946 we must
give additional shares to Cripple Creek representing the difference. During each
month beginning October 1999, 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. 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.
Cygnus may terminate the Equity Line Agreement at any time, provided
that we must then issue Cripple Creek a final warrant to purchase that number of
shares of common stock equal to 120,000 shares less the shares of common stock
issuable upon exercise of all warrants previously issued under the Equity Line
Agreement. The exercise price under the final warrant is 120% of the average
exercise prices of all warrants previously issued under the Equity Line
Agreement. Cripple Creek may terminate the Equity Line Agreement without further
obligation to us after a 60 day negotiation period if any change in law makes it
impracticable or impossible for Cripple Creek to fulfill its obligations under
the Equity Line Agreement or upon any breach by us of the Equity Line Agreement
or the Registration Rights Agreement
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.
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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.
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
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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.
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