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FILED PURSUANT TO RULE 424(B)(5)
FILE NUMBER 333-39275
PROSPECTUS SUPPLEMENT
(To Prospectus Dated November 12, 1997)
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$2,500,000
CYGNUS, INC.
Common Stock
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Cygnus, Inc. is selling shares of common stock that will yield gross
proceeds to us of up to $2,500,000. 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 number of shares sold, purchase price and total proceeds to Cygnus will
be set forth in the Pricing Supplement to this Prospectus Supplement.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY READ AND CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE S-7.
Cripple Creek has advised Cygnus that it anticipates that the shares will
be sold from time to time primarily in transactions (which may include block
transactions) on the Nasdaq National Market at the market price prevailing at
the time of sale. Sales may also be made in negotiated transactions with
institutional investors or otherwise.
Cripple Creek is an "underwriter" as defined in the Securities Act of 1933
in connection with the sale of the shares. Any broker-dealers or agents that
participate with Cripple Creek in selling the shares may be deemed to be
"underwriters." Any commission received by such broker-dealers or agents and any
profit on resale of the shares purchased by them may be deemed to be
underwriting discounts or commissions under the Securities Act.
The common stock is listed on the Nasdaq National Market under the symbol
"CYGN." On February 24, 2000, the last reported sale price of the common stock
on the Nasdaq National Market was $19.00 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 February 28, 2000.
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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-1
IMPORTANT INFORMATION INCORPORATED BY REFERENCE..............................S-1
OUR COMPANY..................................................................S-3
RISK FACTORS.................................................................S-7
USE OF PROCEEDS.............................................................S-14
EQUITY LINE.................................................................S-14
PLAN OF DISTRIBUTION........................................................S-15
LEGAL MATTERS...............................................................S-16
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PROSPECTUS
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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 Reports on Form 10-Q filed by Cygnus for the fiscal quarters
ended March 31, 1999 (Amendment No. 2), June 30, 1999 and September 30,
1999 (Amendment No. 1);
3. Current Reports on Form 8-K dated February 5, 1999, June 7, 1999, July 2,
1999, July 20, 1999, July 28, 1999, October 7, 1999, November 4, 1999,
November 22, 1999, December 13, 1999, December 30, 1999 (as amended
February 18, 2000).
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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 medical
devices, utilizing proprietary technologies to satisfy unmet medical needs cost
effectively. Our current efforts are primarily focused on a frequent, automatic
and non-invasive glucose monitoring device (the GlucoWatch-Registered Trademark-
monitor).
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 glucose monitoring 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 and more
frequent insulin injections 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 resulting in
insufficient glucose information to make decisions that could better control
glucose fluctuations. This lack of information, we believe, presents a
significant unmet demand for a frequent, automatic and non-invasive glucose
monitoring device.
To address this unmet demand, we are developing the GlucoWatch-Registered
Trademark- monitor, which is expected to provide additional glucose information
to people with diabetes. 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 alerts indicating hypo- and hyper-glycemic conditions; event
markers which record factors that affect glucose levels; and the ability to
download stored information to personal computers to analyze glucose data and
trends.
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The GlucoWatch-Registered Trademark- monitor provides frequent, automatic
and non-invasive glucose measurements and is intended for detecting trends and
tracking patterns in glucose levels in adults, 18 years and older, who have
diabetes. The device is intended for use at home and in health care facilities
to supplement, not replace, information obtained from standard home blood
glucose monitoring devices. Following a three-hour warm-up period and
calibration from a finger stick blood measurement, the device is capable of
providing up to three non-invasive glucose measurements per hour for 12 hours.
In addition, the GlucoWatch-Registered Trademark- monitor has the capability to
alert users when glucose levels are too high or too low. These situations may be
hard to identify with regular glucose testing alone.
In July 1999, the FDA notified Cygnus that our premarket approval
application, or PMA, was deemed suitable for filing and was granted expedited
review status. Our 5,000-page PMA application included analyses of clinical
studies conducted on more than 600 people with diabetes, who used the device
for up to six weeks. The studies, which were performed at more than 15
clinical sites across the United States, involved over 25,000 hours of use of
the GlucoWatch-Registered Trademark-monitor. The participants consisted of a
cross-section of racial and age groups, diabetes types (both type 1 and type
2), and other defining characteristics. Approximately 19,000 paired data
points were generated from the studies, comparing glucose measurements
obtained by the GlucoWatch-Registered Trademark-monitor to glucose
measurements obtained with finger-stick monitors using capillary blood.
On December 6, 1999, we announced that our PMA for the
GlucoWatch-Registered Trademark- monitor received a unanimous recommendation
for approval with conditions by the Food and Drug Administration's (FDA)
Clinical Chemistry and Clinical Toxicology Devices Panel of the Medical
Devices Advisory Committee. The Advisory Committee suggested three conditions
for approval. The first is an education program, about which we have already
been in discussion with the FDA. In order to satisfy the second condition,
the labeling will be revised in accordance with recommendations to be given
to the FDA by the Committee. Third, the Committee suggested post-market study
of detection of hypoglycemia and hyperglycemia. Although the FDA is not bound
by the decisions of the advisory committee, the agency typically follows its
advisory committee's advice.
In 1996, we entered into a collaboration agreement with Yamanouchi
Pharmaceutical Co., Ltd. for the commercialization of the
GlucoWatch-Registered Trademark- monitor in Japan and Korea and a
collaboration agreement with Becton Dickinson & Company for the
commercialization of the GlucoWatch-Registered Trademark- monitor in all
other parts of the world. Under the Yamanouchi agreement, Cygnus is eligible
to receive milestone payments prior to commercialization and to receive a
percentage of the product's future commercial success in Japan and Korea. In
March of 1998, our agreement with Becton Dickinson was terminated. We are
currently in discussions with a short list of companies to establish an
alliance for the commercialization of the GlucoWatch-Registered Trademark-
monitor to provide for distribution, sales, marketing, and customer service
support in North America and Europe. There can be no assurance that we will
be able to enter into new collaborative arrangements. On December 2, 1999, we
announced the receipt of a CE Certificate for the GlucoWatch-Registered
Trademark- monitor, indicating that the product has met the essential
requirements and other criteria of the European Community Directive
93/42/ECC, Annex V, Section 3.2. The CE Certificate is required for selling
products in the European Community. We demonstrate compliance to BS EN ISO
9002 and EN 46002.
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In 1998, we entered into long term agreements with E.I. du Pont de Nemours
& Company ("DuPont") for the development and supply of thick film materials for
our GlucoWatch-Registered Trademark- monitor. A key component of the
GlucoWatch-Registered Trademark- monitor is the sensor, which we developed with
DuPont's materials. The agreements call for continued cooperation for future
sensor technology developments and continued supply of materials.
In September 1998, we were awarded a Phase I Small Business Innovative
Research Grant for "High Performance Biosensor Electrode Materials" from the
National Institute of Diabetes and Digestive and Kidney Diseases division of the
NIH. We plan to use funding to investigate advancements in biosensor materials
used for glucose detection and measurement, potentially to include in future
versions of the GlucoWatch-Registered Trademark- monitor.
On December 15, 1999, we announced that we completed the sale of
substantially all of our drug delivery business assets to Ortho-McNeil
Pharmaceutical, Inc., a Johnson & Johnson company. We sold all of the assets
of our drug delivery business to Ortho-McNeil except those relating to a
nicotine patch under development and one other early-stage project -- both of
which have since been terminated. Cygnus products that were sold include
certain assets related to the Nicotrol-Registered Trademark-(Pharmacia AB,
Stockholm, Sweden) nicotine system that is being marketed by Pharmacia &
Upjohn in Europe and by McNeil Consumer Healthcare, a Johnson & Johnson
company, in the U.S.; two hormone replacement transdermal products: a 7-day
estrogen patch recently approved by the U.S. Food and Drug Administration and
an estrogen/progestin combination product that completed Phase III clinical
trials; and the EVRA-TM- (Johnson & Johnson, New Brunswick, New Jersey)
contraceptive patch we were developing with the R.W. Johnson Pharmaceutical
Research Institute. Under the terms of the agreement, we received $20 million
in cash at closing, and Ortho-McNeil will pay up to an additional $55 million
in cash, contingent on the achievement of certain milestones. The contingent
payments relate to the achievement by Ortho-McNeil of technical, regulatory
and commercialization milestones related to the EVRA-TM- transdermal
contraceptive patch. We are eligible to receive up to $14.8 million of these
contingent payments in 2000. However, because the achievement of these
milestones is not within our control, we cannot predict the likelihood or
timing of these contingent payments. The primary reason for selling the drug
delivery business was to focus management attention and corporate resources
on our glucose monitoring business. We will use the proceeds to accelerate
commercialization activities for the GlucoWatch-Registered Trademark- monitor.
RECENT DEVELOPMENTS.
On February 10, 2000, we reported total revenue from continuing
operations of $2.1 million for the year ended December 31, 1999, compared to
$0.5 million for the year ended December 31, 1998. We posted a net loss from
continuing operations of $22.2 million, or $0.95 per share, for 1999,
compared to a net loss from continuing operations of $40.4 million, or $2.00
per share, for 1998. The net loss for 1999 was $2.8 million.
The increase in revenue from continuing operations in 1999 was
attributed to the amortization of an additional milestone receipt associated
with the GlucoWatch-Registered Trademark- monitor. Research and development
costs were $15.7 million for the year ended December 31, 1999, compared to
$25.6 million for the year ended December 31, 1998. This decrease reflects a
reduction in clinical studies and
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development expenditures associated with the GlucoWatch-Registered
Trademark- monitor. Marketing, general and administrative expenses for the
year ended December 31, 1999 were $4.8 million, compared to $8.8 million for
the year ended December 31, 1998. The decrease is primarily due to reduced
compensation and market research expenses.
We reported revenue of $1.1 million from continuing operations in the
fourth quarter of 1999, compared to $0.0 million in the fourth quarter of
1998. Net loss from continuing operations for the fourth quarter 1999 was
$4.8 million, or $0.19 per share, compared to $16.7 million, or $0.81 per
share, in the fourth quarter of 1998. Net loss from continuing operations
decreased primarily due to a reduction in (i) clinical studies expenditures
associated with the GlucoWatch-Registered Trademark- monitor, (ii)
marketing, general and administrative expenses for reasons noted above and
(iii) interest expense due to the non-cash beneficial conversion costs
related to the restructuring of the Senior Subordinated Convertible Notes
recorded in the fourth quarter of 1998.
As the result of the sale of substantially all of our drug delivery
business assets and our discontinuation of the remainder of our drug delivery
business assets, all financial results related to the drug delivery business are
accounted for as discounted operations. As a result, we recorded net income of
$3.0 million on the discounted operations for the year ended December 31, 1999
and also recorded a gain of $16.3 million on the disposal of the segment. The
previous comparisons are based on the results of our continued operations.
We ended 1999 with cash, equivalents and short-term investments of $38.9
million.
Our results of operations vary significantly from period to period and
depend on, among other factors, the signing of commercialization agreements and
the timing of recognizing payment amounts. Our contract revenues are generally
earned and recognized based on the percentage of actual efforts expended,
compared to total expected efforts during the development period for each
contract, which approximates the straight line method. However, contract
revenues are not always aligned with the timing of related expenses. To date,
research and development expenses generally have exceeded contract revenues in
any particular period, and we expect the same situation to continue for a number
of years. In addition, the level of revenues in any given period is not
necessarily indicative of expected revenues in future periods.
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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 PROSPECTUS, INCLUDING THE INFORMATION INCORPORATED BY REFERENCE IN
THIS PROSPECTUS.
WE MAY NOT RECEIVE FDA APPROVAL.
Although the FDA's Clinical Chemistry and Toxicology Devices Panel of the
Medical Devices Advisory Committee has recommended the GlucoWatch-Registered
Trademark- monitor for approval for sale in the United States with three
conditions, there can be no assurance that we can meet these conditions or, if
we can, that the recommendation of the Committee will convince the FDA to
approve the product. There can be no assurance that the FDA will approve the
GlucoWatch-Registered Trademark- monitor on the same terms, if at all.
In addition, we may encounter delays or rejections based upon changes in
FDA policy, including policy relating to good manufacturing practice compliance,
during the period of product development. We may encounter similar delays in
other countries.
Even if regulatory approval of the GlucoWatch-Registered Trademark- monitor
is granted, the approval may limit the indicated uses for which we may market
the GlucoWatch-Registered Trademark- monitor. In addition, our marketed product
will be subject to continual review and periodic inspections. Later discovery
from such review and inspection of previously unknown problems may result in
restrictions on our product or on us, including withdrawal of our product from
the market.
OUR PRODUCT PIPELINE IS SEVERELY LIMITED.
With the sale of the majority of the drug delivery business assets to
Ortho-McNeil Pharmaceutical, Inc., and the termination of the remaining drug
delivery projects, we are now exclusively focused on diagnostic medical devices,
predominantly a line of frequent, automatic and non-invasive glucose monitoring
devices. There is an inherent risk in not having a broad base of products in
development and we cannot assure you that we will be successful with this narrow
line of products.
WE CANNOT PREDICT THE MARKET ACCEPTANCE OF OUR PRODUCTS.
We are focusing our efforts predominantly on a line of frequent,
automatic, and non-invasive glucose monitoring devices. No one can predict
market acceptance or penetration of such products, given that they are
entirely different from any glucose diagnostic product currently on the
market. There is a risk in introducing a very new type of product in a market
of established "finger stick" glucose monitors, and we cannot assure you that
our products will be accepted or to what degree. Additionally, some of our
competitors have announced, and others may be developing, new frequent,
automatic, and non-invasive glucose monitoring devices. We cannot predict
what impact the ongoing introduction of competing products will have on our
ability to sell our glucose-monitoring devices, if approved by the FDA.
WE HAVE LIMITED MARKETING, DISTRIBUTION, MANUFACTURING AND SALES
EXPERIENCE.
We have limited experience marketing, distributing, manufacturing or
selling medical device products. To successfully market, distribute,
manufacture and sell the GlucoWatch-Registered Trademark- monitor or our
other monitoring products under development, we must either develop a more
extensive marketing, distributing, manufacturing and sales force or enter
into arrangements with third parties to market, distribute, manufacture and
sell our products. We cannot assure you that we could successfully develop a
more extensive marketing, distributing, manufacturing and sales force or that
we could enter into acceptable marketing, distributing, manufacturing and
sales agreements with third parties. If we maintain our own marketing,
distributing, manufacturing and sales capabilities, we will compete with
other companies that have experienced and well-funded marketing,
distributing, manufacturing 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 unable successfully to commercialize our products.
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WE FACE INTENSE COMPETITION.
The medical device industry in general, and the market in which we expect
to offer the GlucoWatch-Registered Trademark- monitor in particular, is
intensely competitive. Even if we successfully develop the GlucoWatch-Registered
Trademark- monitor, we will compete with other providers of personal glucose
monitors. A number of our competitors are currently marketing traditional
glucose monitors. These monitors are widely accepted in the health care industry
and have long histories of accurate and effective use. Furthermore, a number of
companies have announced that they are developing products that permit
non-invasive and/or frequent and automatic glucose monitoring. Accordingly, we
expect competition to increase.
Many of our competitors have substantially greater resources than we do and
have greater name recognition and lengthier operating histories in the health
care industry. We cannot assure you that we will be able to compete effectively
against our competitors. Additionally, we cannot assure you that the
GlucoWatch-Registered Trademark- monitor or our other products under development
will replace any currently used devices or systems. Furthermore, we cannot
assure you that our competitors will not succeed in developing, even before we
develop and commercialize the GlucoWatch-Registered Trademark- monitor or our
other products under development, devices and technologies that permit more
efficient, less expensive non-invasive and/or frequent and automatic glucose
monitoring. Pharmaceutical or other health care companies may also develop
therapeutic drugs, treatments or other products that will substantially reduce
the prevalence of diabetes or otherwise render our products obsolete. In
addition, we cannot assure you that our collaborative partners will not, for
competitive reasons, reduce their support of their collaborative arrangements
with us or support, directly or indirectly, a company or product that competes
with us.
THIRD PARTIES MAY NOT REIMBURSE PATIENTS, HOSPITALS AND PHYSICIANS FOR THE
COSTS OF MEDICAL DEVICES.
In the United States, patients, hospitals and physicians who purchase
medical devices such as the GlucoWatch-Registered Trademark- monitor
generally rely on third-parties, principally federal Medicare, state Medicaid
and private health insurance plans, to reimburse them for all or a portion of
the costs of medical devices. We cannot predict what changes governmental or
private health care providers will make in their reimbursement methods.
Additionally, reimbursement and health care payments in international markets
vary significantly among counties. If patients, hospitals, or physicians in
the U.S. or abroad cannot obtain sufficient reimbursement for our products,
our business could be seriously harmed.
WE HAVE INCURRED SUBSTANTIAL LOSSES, HAVE A HISTORY OF OPERATING LOSSES,
HAVE AN ACCUMULATED DEFICIT AND EXPECT CONTINUED OPERATING LOSSES.
We reported a net loss from continuing operations of $22.2 million for
the quarter ended December 31, 1999 and have experienced annual operating
losses since our inception. We expect to continue to incur operating losses
at least until we have significant sales, if we ever do, of the
GlucoWatch-Registered Trademark- monitor. We cannot assure you that we will
generate significant revenues
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or achieve profitability. 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, New
Jersey) system.
As a result of the sale of our drug delivery business, we will no longer
receive manufacturing revenue or royalty payments from the Nicotrol-Registered
Trademark- patch or the FemPatch-Registered Trademark- system. 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 ARE HIGHLY LEVERAGED AND MAY BE UNABLE TO SERVICE OUR DEBT.
As of September 30, 1999, we had indebtedness of approximately $51.6
million. The degree to which we are leveraged could materially and adversely
affect our ability to obtain financing for working capital, acquisitions or
other purposes and could make us more vulnerable to industry downturns and
competitive pressures. Our ability to meet our debt service obligations depends
upon our future performance, which will depend upon financial, business and
other factors, many of which are beyond our control. Although we believe our
cash flows will be adequate to meet our interest payments, we cannot assure you
that we will continue to generate cash flows in the future sufficient to cover
our fixed charges or to permit us to satisfy any redemption obligations pursuant
to the our indebtedness. If we cannot generate cash flows in the future
sufficient to cover our fixed charges or to permit us to satisfy any redemption
obligations pursuant to our indebtedness, and we cannot borrow sufficient funds
either under our credit facilities or from other sources, we may need to
refinance all or a portion of our existing debt, to sell all or a portion of our
assets, or to sell equity securities. There is no assurance that we could
successfully refinance, sell our assets or sell equity securities, or, if we
could, we cannot give any assurance as to the amount of proceeds we could
realize.
In the event of insolvency, bankruptcy, liquidation, reorganization,
dissolution or winding up of our business or upon default or acceleration
relating to our debt obligations, our assets will first be available to pay the
amounts due under our debt obligations. Holders of common stock would only
receive the assets remaining, if any, after payment of all indebtedness and
preferred stock. Although we do not currently conduct operations through
subsidiaries, we may elect to do so as products become commercialized. In such
event, our cash flow and our ability to service debt would partially depend upon
the earnings of our subsidiaries and the distribution, loaning or other payments
of funds by those subsidiaries to us. The payment of dividends and the making of
loans and advances to us by our subsidiaries would be subject to statutory or
contractual restrictions, would depend upon the earnings of those subsidiaries
and would be subject to various business considerations. Our right to receive
assets of any of our subsidiaries upon their liquidation or reorganization would
be effectively subordinated to the claims of our subsidiaries' creditors, except
to the extent that we are recognized as a creditor of such subsidiary, in which
case our claims would still be subordinate to any security interests in the
assets of such subsidiary and any senior indebtedness.
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WE MAY NEED ADDITIONAL FINANCING AND IT MAY NOT BE AVAILABLE.
In order to continue to develop our products, we will require substantial
resources to conduct research and conduct preclinical development and clinical
trials necessary to bring our products to market and to establish production and
marketing capabilities. We may seek additional funding through public or private
financings, including debt or equity financings. We may also seek other
arrangements, including collaborative arrangements.
Any additional equity financings may dilute the holdings of current
stockholders. Debt financing, if available, may restrict our ability to issue
dividends and take other actions. We may not be able to obtain adequate funds
when we need them from financial markets or arrangements with corporate partners
or other sources. Even if funds are available, they may not be on acceptable
terms. If we cannot obtain sufficient additional funds, we may have to delay,
scale back or eliminate some or all of our research and product development
programs or license or sell products or technologies that we would otherwise
seek to develop ourselves.
We believe that our existing cash, cash equivalents and investments, plus
cash from revenues, other fundings such as potential product funding
collaborations or financings, and earnings from investments, will suffice to
meet our operating expenses, debt servicing and repayments and capital
expenditure requirements at least through the end of the year 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;
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- 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 North America and Europe.
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 and 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 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
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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.
For us to be competitive, we will need to develop, license or acquire new
products. Furthermore, our ability to develop and commercialize products in the
future will depend, in part, on our ability to enter into collaborative
arrangements with additional licensees on favorable terms. We cannot assure you
that we will be able to enter into new collaborative arrangements on favorable
terms, if at all, or that existing or future collaborative arrangements will
succeed.
WE DEPEND ON LICENSED PATENT APPLICATIONS AND PROPRIETARY TECHNOLOGY.
Our success depends in large part on our ability to obtain patent
protection for our products, preserve our trade secrets and operate without
infringing the proprietary rights of others, both in the U.S. and abroad. Since
patent applications in the U.S. are secret until issuance, and publication of
discoveries in the scientific or patent literature tends to lag behind actual
discovery by several months, we cannot be certain that we were the first to file
our patent applications or that we will not infringe upon third party patents.
We cannot assure you that any patents will be issued with respect to any of our
patent applications or that any patents will provide competitive advantages for
our products or will not be challenged or circumvented by our competitors.
We also rely on trade secrets and proprietary know-how that we seek to
protect, in part, by confidentiality agreements with our licensees, employees
and consultants. We cannot assure you that these agreements will not be
breached, that we would have adequate remedies for any breach or that our trade
secrets will not otherwise become known or be independently developed by our
competitors. Any litigation, in the U.S. or abroad, as well as foreign
opposition and/or domestic interference proceedings, could result in substantial
expense to us and significant diversion of effort by our technical and
management personnel. We may resort to litigation to enforce our patents or
protect trade secrets or know-how as well as to defend against infringement
charges. A negative determination in such proceedings could subject us to
significant liabilities or require us to seek licenses from third parties.
Although patent and intellectual property disputes in the pharmaceutical product
area have often been settled through licensing or similar arrangements, costs
associated with such arrangements may be substantial and could include ongoing
royalties. Furthermore, we cannot assure you that necessary licenses would be
available to us on satisfactory terms, if at all. Accordingly, an adverse
determination in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from manufacturing and selling certain of
our products, and could materially adversely affect us.
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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:
- 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
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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
The total proceeds to us from this offering will be set forth in the
Pricing Supplement to this Prospectus Supplement. The net proceeds of this
offering will be used for working capital and general corporate purposes.
EQUITY LINE
Cygnus and Cripple Creek entered into the Structured Equity Line Flexible
Financing Agreement, dated as of June 30, 1999. Cygnus and Cripple Creek
subsequently entered into the Amendment No. 1 to the Structured Equity Line
Flexible Financing Agreement, dated as of September 29, 1999. The shares covered
by this prospectus supplement are being issued under the Equity Line Agreement.
Under the Equity Line Agreement, subject to the satisfaction of conditions,
Cygnus may require Cripple Creek to purchase shares of common stock over a
period of 24 months from June 30, 1999, for an aggregate purchase price of up to
$30 million. Cygnus has also agreed to issue to Cripple Creek warrants to
purchase 10,000 shares for every $1,000,000 in gross proceeds from the sale of
common stock under the Equity Line Agreement. The warrants will be issued after
the end of each calendar year. The warrants are exercisable for 5 years from the
date they are issued at an exercise price equal to the weighted average price at
which shares were sold during the preceding calendar year.
Under the Equity Line Agreement, Cygnus, at our sole option and discretion,
subject to the satisfaction of conditions and limitations, can require Cripple
Creek to purchase shares of common stock for an aggregate purchase price of up
to $1.5 million, and Cripple Creek, subject to the approval of Cygnus, can
require Cygnus to sell it additional common stock for an aggregate purchase
price of up to $1.0 million. Cripple Creek may satisfy these obligations by
purchasing up to 5% more or less than the total aggregate dollar amount of these
obligations. Three (3) days prior to the beginning of each monthly investment
period, we are required to notify Cripple Creek of the dollar amount of common
stock required to be purchased by Cripple Creek, if any, during the monthly
investment period. The purchase price per share to be paid by Cripple Creek for
the shares of common stock acquired under the Equity Line Agreement will equal
98% of the two lowest sales prices of the common stock during the six trading
days immediately preceding the date of each notice sent to Cygnus by Cripple
Creek specifying a dollar amount of shares.
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PLAN OF DISTRIBUTION
Cripple Creek may, from time to time, sell all or a portion of the shares:
- on the Nasdaq National Market, or such other exchange on which the
common stock may from time to time be trading;
- in privately negotiated transactions or otherwise;
- at fixed prices that may be changed;
- at market prices prevailing at the time of sale; or
- at prices related to such market prices or at negotiated prices.
The shares may be sold by Cripple Creek by one or more of the following
methods, without limitation:
- block trades in which the broker or dealer so engaged will attempt to
sell the shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction;
- purchases by a broker or dealer as principal;
- an exchange distribution in accordance with the rules of such
exchange;
- ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
- privately negotiated transactions;
- short sales; and
- a combination of any of the above methods of sale.
In effecting sales, brokers and dealers engaged by Cripple Creek may
arrange for other brokers or dealers to participate. Brokers or dealers may
receive commissions or discounts from Cripple Creek, or, if any broker-dealer
acts as agent for the purchaser of the shares, from the purchaser, in amounts to
be negotiated which are not expected to exceed those customary in the types of
transactions involved. Broker-dealers may agree with Cripple Creek to sell a
specified number of shares at a stipulated price per share. To the extent a
broker-dealer is unable to sell a specified number of shares acting as agent for
Cripple Creek, it will purchase as principal any unsold shares at the price
required to fulfill the broker-dealer commitment to Cripple Creek.
Broker-dealers who acquire shares as principal may resell the shares from time
to time in transactions which may involve block transactions of the nature
described above, in the over-the-counter market or otherwise at prices and on
terms then prevailing at the time of sale, at prices related to the then-current
market price or in negotiated transactions. In connection with resales,
broker-dealers may pay to or receive from the purchasers of the shares
commissions as described above. Cripple Creek may also sell the shares in
accordance with Rule 144 under the Securities Act, rather than under this
prospectus.
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Cripple Creek is an "underwriter" as defined in the Securities Act of 1933
in connection with the sale of the shares offered by this prospectus. Any
broker-dealers or agents that participate with Cripple Creek in sales of the
shares may be considered to be "underwriters" within the meaning of the
Securities Act in connection with sales in which they participate. If any
broker-dealers or agents are considered to be "underwriters," then any
commissions they receive and any profit on the resale of the shares purchased by
them may be considered to be underwriting commissions or discounts under the
Securities Act.
From time to time Cripple Creek may engage in short sales, short sales
against the box, puts and calls and other transactions in Cygnus' common stock,
and may sell and deliver the shares in connection with these transactions or to
settle securities loans. If Cripple Creek engages in such transactions, the
price of our common stock may be affected. Under the equity line, Cripple Creek
may not make any sales with the intention of reducing the price of our common
stock. From time to time Cripple Creek may pledge its shares pursuant to the
margin provisions of its agreements with its brokers. Upon a default by Cripple
Creek, the broker may offer and sell the pledged shares from time to time.
Cripple Creek and any other persons participating in the sale or
distribution of the shares will be subject to the Securities Exchange Act of
1934 and the related rules and regulations, including Regulation M, to the
extent it applies. The Exchange Act and related rules may limit the timing of
purchases and sales of any of the shares by Cripple Creek or any other such
person which may affect the marketability of the shares. Cripple Creek also must
comply with the applicable prospectus delivery requirements under the Securities
Act in connection with the sale or distribution of the shares.
We are required to pay certain fees and expenses incident to the
registration of the shares.
We have agreed to indemnify in certain circumstances Cripple Creek against
certain liabilities, including liabilities under the Securities Act. Cripple
Creek has agreed to indemnify us in certain circumstances against certain
liabilities, including liabilities under the Securities Act.
We have agreed to use our best efforts to keep the registration statement,
of which this prospectus supplement and prospectus is a part, effective until
the shares may be or have been sold under Rule 144(k) of the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the common stock
offered hereby have been passed upon for Cygnus by Pillsbury Madison & Sutro
LLP, San Francisco, California.
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