<PAGE>
As filed with the Securities and Exchange Commission on October , 2000
--
Registration No. 333-
------------
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
FORM S-3
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
--------------------
CYGNUS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-2978092
--------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
400 PENOBSCOT DRIVE
REDWOOD CITY, CALIFORNIA 94063-4719
(650) 369-4300
--------------------------------------------------------------------------------
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JOHN C HODGMAN
PRESIDENT, CHIEF EXECUTIVE OFFICER & CHAIRMAN
CYGNUS, INC.
400 PENOBSCOT DRIVE, REDWOOD CITY, CALIFORNIA 94063-4719
(650) 369-4300
--------------------------------------------------------------------------------
(Name, address, including zip code, and telephone number, including area
code, of agent for service of process)
Copies to:
BLAIR W. WHITE
Pillsbury Madison & Sutro LLP
P.O. Box 7880
San Francisco, CA 94120
Approximate date of commencement of proposed sale to the public:
From time to time this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box.
/X/
-------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
-----------------
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===========================================================================================================================
<S> <C> <C>
Title of Each Proposed
Class of Securities Maximum Aggregate Amount of
To Be Registered Offering Price(2) Registration Fee(1)
------------------------------------- --------------------------------------- ------------------------------------------
Common Stock, $.001 par value(2) $36,000,000 $9,504.00
===========================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) promulgated under the Securities Act of 1933,
as amended.
(2) Associated with the Common Stock are Series A Participating Preferred
Stock Purchase Rights that will not be exercisable or be evidenced
separately from the Common Stock prior to the occurrence of certain
events.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
Subject to Completion, dated October 30, 2000
PROSPECTUS
----------
---------------------
$36,000,000
CYGNUS, INC.
COMMON STOCK
---------------------
This prospectus relates to the offer and sale of common stock of
Cygnus, Inc. We are offering and selling shares with a total purchase price up
to $36 million pursuant to the terms of an agreement between us and Cripple
Creek Securities, LLC. Cripple Creek is an underwriter in connection with the
sale of the shares offered by this prospectus. Under the terms of the agreement:
- We can sell only a maximum of $60 million of common stock until June
30, 2003. We have to date sold $22 million, have sent purchase
notices for $2 million, and may sell up to an additional $36 million.
- We will sell the common stock at a price equal to the average of the
two lowest volume-weighted average prices for the stock during the six
trading days preceding the sale, but in no event lower than a
designated minimum per share price we indicate in our notice, delivered
from time to time to Cripple Creek.
For further information regarding the terms governing the issuance of
shares under the agreement, see "Underwriting" on page 12.
Our common stock is quoted on the Nasdaq National Market under the
symbol "CYGN." On October 27, 2000, the last reported sale price for our common
stock was $8.25 per share.
Cripple Creek has an option in the form of a call right, exercisable
during any monthly period for which we elect to sell common stock, to purchase
an amount of common stock up to the amount sold by us in the same monthly
period, up to a maximum of $3 million per month.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY READ AND CONSIDER THE "RISK FACTORS" BEGINNING ON PAGE 4.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
---------------------
The date of this prospectus is , 2000
------------
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
OUR COMPANY.......................................................................................................1
RISK FACTORS......................................................................................................4
FORWARD-LOOKING STATEMENTS.......................................................................................10
USE OF PROCEEDS..................................................................................................12
UNDERWRITING.....................................................................................................12
PLAN OF DISTRIBUTION.............................................................................................14
LEGAL MATTERS....................................................................................................15
EXPERTS..........................................................................................................15
WHERE YOU CAN FIND MORE INFORMATION..............................................................................15
IMPORTANT INFORMATION INCORPORATED BY REFERENCE..................................................................16
</TABLE>
We have not authorized anyone to provide you with information or to
represent anything not contained in this prospectus. You must not rely on any
unauthorized information or representations. Cripple Creek is offering to sell,
and seeking offers to buy, only the shares of Cygnus common stock covered by
this prospectus, and only under circumstances and in jurisdictions where it is
lawful to do so. The information contained in this prospectus is current only as
of its date, regardless of the time of delivery of this prospectus or of any
sale of the shares.
YOU SHOULD READ CAREFULLY THE ENTIRE PROSPECTUS, AS WELL AS THE
DOCUMENTS INCORPORATED BY REFERENCE IN THE PROSPECTUS, BEFORE MAKING AN
INVESTMENT DECISION. ALL REFERENCES TO "WE," "US," "OUR," OR "CYGNUS" IN THIS
PROSPECTUS MEAN CYGNUS, INC., AND ALL REFERENCES TO "CRIPPLE CREEK" OR "THE
UNDERWRITER" REFER TO CRIPPLE CREEK SECURITIES, LLC.
i
<PAGE>
OUR COMPANY
We develop and manufacture diagnostic medical devices, utilizing
proprietary technologies to satisfy unmet medical needs cost effectively. In
1999, we sold substantially all of our drug delivery business to Ortho-McNeil
Pharmaceutical, Inc. and chose to focus on diagnostic medical devices, the
first of which is our GlucoWatch-Registered Trademark- system. The GlucoWatch
system is a frequent, automatic and non-invasive glucose monitoring device
intended for detecting trends and tracking patterns of glucose levels in
adults, 18 years and older, who have diabetes. Our GlucoWatch system, with
its durable biographer and consumable AutoSensor, represents a potential
advance in glucose monitoring technology, as compared to the currently
prevailing "finger stick" blood monitoring methods. The GlucoWatch system is
designed to measure glucose frequently, automatically and non-invasively
through the ease and convenience of a device worn like a wristwatch. The
device is intended for use at home and in health care facilities to
supplement, not replace, information obtained from standard blood glucose
monitoring devices.
In mid-1998 we established product specifications and manufacturing
processes for the GlucoWatch system that the United States Food and Drug
Administration, or FDA, is currently reviewing. Since that time, we have
developed, and continue to develop, a number of enhancements to the GlucoWatch
system and our manufacturing processes. We will submit some of these product and
manufacturing enhancements to the FDA in the form of one or more supplements to
our existing premarket approval, or PMA, application shortly after PMA approval,
assuming the FDA approves our existing PMA. Future supplements could include
enhancements to product performance, user convenience, and manufacturing
capacity, and decreases in manufacturing costs. We are in the early
developmental stages for a future telemetric product that allows both a greater
flexibility in the location of the glucose extraction component and a new form
of the monitor that stores and displays glucose data. There have been no sales
of our glucose monitoring systems to date.
On December 6, 1999, we received a unanimous recommendation for
approval of our PMA for the GlucoWatch system from the FDA's Clinical
Chemistry and Clinical Toxicology Devises Panel of the Medical Devices
Advisory Committee, subject to certain conditions. In May 2000 we received an
approvable letter from the FDA for our GlucoWatch-Registered Trademark-
biographer. An approvable letter means that the FDA has reviewed our PMA
application, as well as its own Advisory Committee's report and
recommendation, and believes it will approve the application, pending
specific final conditions. The FDA's conditions relate to manufacturing,
final printed labeling materials, and post-market evaluations of aspects of
product performance.
Assuming FDA approval, we anticipate introducing the GlucoWatch
biographer initially on a limited basis to a small number of patients selected
by designated physicians. We also expect to begin clinical trials with
adolescents and children. In addition, we plan to initiate professional
education programs to introduce our technology to physicians and other diabetes
health care professionals. Concurrently, before we can make the GlucoWatch
biographer broadly available, we must qualify and validate, then submit to the
FDA for approval, our large-scale production equipment and facility. For
products in the GlucoWatch's category, it is common to seek approval for
commercial-scale manufacturing after a PMA application is approved.
It has been our priority to establish alliances to allow us to
successfully develop, manufacture, and commercialize the GlucoWatch system, in
the event we receive FDA approval. We have already entered into several
agreements that include:
- a patent license agreement with The Regents of the University of
California;
- supply agreements with E.I. du Pont de Nemours and Company, Key Tronic
Corporation and Hydrogel Design Systems, Inc. relating to materials
for our GlucoWatch system; and
- contract manufacturing agreements with Contract Manufacturing, Inc.
for the consumable AutoSensor and with Sanmina Corporation for the
manufacture of the durable GlucoWatch biographer.
1
<PAGE>
In August, 2000, we signed a Warehouse Distribution Contract with
Livingston Healthcare Services, Inc. to provide outsource logistics services in
the US for our GlucoWatch system. The agreement covers receiving, storage,
customer service, technical support and shipment. However, we are still solely
responsible for the production, marketing and sales of the GlucoWatch system.
The term of the agreement is for five years, but we may terminate the agreement
before then with an early-termination payment. In October 2000, we regained the
marketing and distribution rights for the GlucoWatch system in Japan. Yamanouchi
Pharmaceutical Co., Ltd. informed us that, due to strategic reasons, the
collaboration between Cygnus and Yamanouchi for the marketing and distribution
of the GlucoWatch Biographer in Japan needed to be terminated. Under terms of
the agreement, Yamanouchi will continue to be responsible for a potential
milestone payment over the next nine months and we assume ownership of all the
Japanese clinical trial data and regulatory submissions.
In December 1999, we received a CE Certificate for the GlucoWatch
system, 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.
In July 2000, we established Cygnus (UK) Limited, a wholly-owned subsidiary of
Cygnus, Inc., in the UK and have hired initial management, training, and sales
personnel to manage our launch in the United Kingdom. We are also finalizing an
agreement with one company to provide direct-to-consumer distribution/logistics
functions and a second agreement with another company to provide call center
technical services for the UK. In October 2000, we shipped our first commercial
GlucoWatch systems to the United Kingdom. We have established a Medical Advisory
Board in the UK who will provide our GlucoWatch system to select adults with
diabetes in order to understand patient and health care provider experiences
with our GlucoWatch system.
We are currently exploring strategic alternatives for commercializing
the GlucoWatch system in other countries in Europe. We are continuing
discussions for commercialization alliances with companies ranging from
international companies that would provide commercialization functions worldwide
to companies that focus on specific geographies or commercialization functions.
On December 15, 1999, we completed the sale of substantially all of
our drug delivery business segment assets to Ortho-McNeil Pharmaceutical,
Inc., a Johnson & Johnson company. Under the terms of our agreement with
Ortho-McNeil, we received $20 million in cash at closing, and Ortho-McNeil
was subject to paying up to an additional $55 million in cash, contingent on
the achievement of milestones. The contingent payments relate to the
achievement of technical, regulatory and commercialization milestones related
to the EVRA-TM- (Johnson & Johnson, New Brunswick, New Jersey) transdermal
contraceptive patch. Because some of the milestones have not been achieved,
we are now eligible to receive only up to $35 million through 2006 of the
total $55 million contingent milestones. Because the achievement of these
milestones is not within our control, we cannot predict the likelihood or
timing of these contingent payments.
OUR FREQUENT, AUTOMATIC AND NON-INVASIVE GLUCOSE MONITORING SYSTEMS.
MARKET ANALYSIS.
People with diabetes measure blood glucose levels to adjust their diet,
medication and insulin use to better control their glucose levels in order to
prevent diabetes-related complications. Currently, to measure their glucose
levels, people with diabetes must prick their fingers, draw blood and place a
drop of blood on a glucose reagent strip inserted in an instrument that provides
a glucose reading. Each day of testing can involve numerous sticks and the
complete procedure can be not only painful but disruptive to daily life. As a
result of this pain and disruption, most people with diabetes monitor their
blood glucose levels less than twice per day, instead of the recommended four to
seven times per day. Even at the recommended level of testing, the market for
products for self-monitoring of glucose levels by people with diabetes is quite
substantial.
Worldwide sales of products for the self-monitoring of blood glucose
levels were approximately $2.5 billion in 1997. According to Boston Biomedical
Consultants, Inc., approximately 80% to 90% of the sales were related to
disposable glucose reagent strips for finger stick monitoring. In the U.S., a
majority of glucose level testing is conducted by a relatively small segment of
people with diabetes; for example, of these people, just 19%, or
2
<PAGE>
about 1.6 million, account for 52% of the tests performed. The number of
people diagnosed with diabetes has been growing and is expected to continue
to grow due to the aging of the population, changes in diagnostic standards
and new diagnostic technologies. Specifically, the diagnostic standards in
the U.S. have been changed such that a fasting plasma glucose value of
greater than or equal to 126 mg/dL now indicates a diagnosis of diabetes,
whereas such diagnosis previously required a value of greater than or equal
to 140 mg/dL. Diabetes can lead to severe complications over time, including
blindness, loss of kidney function and peripheralneuropathy, causing
circulation problems to the arms and legs, pain and potential amputation. The
American Diabetes Association (ADA) estimated that the complications arising
from diabetes cost the U.S. health care system in excess of $45 billion in
1992. These complications are largely a consequence of years of poor
management of glucose levels by people with diabetes. Results of the Diabetes
Control and Complication Trial, a major clinical trial sponsored by the
National Institutes of Health and published in 1993, showed that more
frequently monitored blood glucose levels and rigid adherence to a program of
diet, exercise and insulin injections could prevent or significantly delay
the onset of many of the long-term complications of diabetes.
THE GLUCOWATCH SYSTEM.
We believe that there is an unmet need for automatic, frequent and
non-invasive glucose monitoring. In an effort to address this unmet need, we
have developed the GlucoWatch biographer, which is worn like a wristwatch and,
after calibrating each new AutoSensor with a standard blood glucose monitor,
automatically extracts and measures glucose levels through intact skin
approximately every twenty minutes. The durable GlucoWatch biographer displays
and stores current and past glucose levels and trend data. The extracted glucose
is collected in a consumable AutoSensor attached to the back of the device and
replaced after twelve hours of readings. The GlucoWatch system offers, in a
portable and discreet device, features not available in currently marketed
devices. These features include frequent data collection, electronic memory to
store and display glucose levels, alerts indicating hypoglycemic and
hyperglycemic conditions and event markers that record factors that affect
glucose levels. The GlucoWatch biographer is designed to be worn day and/or
night for glucose monitoring, and is expected to reduce significant drawbacks of
the finger stick technique, such as the pain of repetitive sticking and the
disruption of normal activities caused by cumbersome procedures. We believe that
the GlucoWatch system can provide additional information that can help people
with diabetes understand fluctuations in their glucose levels.
Specifically, our GlucoWatch system extracts glucose molecules through
intact skin utilizing a patented sampling process called electroosmosis, or
"reverse iontophoresis." The glucose is extracted from interstitial fluid, not
blood, and is collected and measured by the consumable AutoSensor, which
includes an enzyme-containing hydrogel and electrodes for electro-osmotic
extraction and biosensing. The glucose collected in the AutoSensor triggers an
electro-chemical reaction in the AutoSensor, generating electrons. The biosensor
measures the electrons and an application-specific integrated circuit ("ASIC")
in the GlucoWatch system equates the number of electrons to a concentration of
blood glucose. The GlucoWatch system automatically measures glucose levels at
twenty-minute intervals, and displays the most recent readings and trends at the
push of a button. Its electronic memory capabilities permit the retrieval of
past data, allowing longer-term trend analysis. Additionally, we are developing
future generation glucose monitoring products, as well as enhancements to the
GlucoWatch system.
3
<PAGE>
RISK FACTORS
IN DETERMINING WHETHER TO INVEST IN THE COMMON STOCK, YOU SHOULD CAREFULLY
CONSIDER THE INFORMATION BELOW IN ADDITION TO ALL OTHER INFORMATION PROVIDED TO
YOU IN THIS PROSPECTUS, INCLUDING THE INFORMATION INCORPORATED BY REFERENCE IN
THIS PROSPECTUS.
WE MAY NOT RECEIVE REGULATORY APPROVAL ON OUR PRODUCTS FROM THE FDA
AND/OR FOREIGN AGENCIES. IF WE DO NOT RECEIVE REGULATORY APPROVAL, WE WILL NOT
BE ABLE TO SELL OUR PRODUCTS OR GENERATE REVENUE.
Although in May 2000 we received an approvable letter from the FDA for
our GlucoWatch biographer, there can be no assurance that we can meet the
pending specific final conditions or, if we can, that the FDA will approve the
product. Furthermore, as we seek regulatory approval for enhancements and
possible manufacturing changes to the GlucoWatch system through the PMA
supplement process, there can be no assurance that these supplements will be
approved or that we will not need to file one or more new PMAs. The timing for
approval of PMA supplements could substantially delay introduction of product
enhancements and our ability to cost-effectively manufacture large quantities of
the AutoSensor, a component of our GlucoWatch. Regulatory requirements and
procedures also vary on a country-by-country basis, and we may not be able to
obtain regulatory approval in foreign countries. Furthermore, even if the
GlucoWatch system is successfully developed, its commercial success will depend
on its market acceptance.
OUR PRODUCT PIPELINE IS SEVERELY LIMITED, SO THE FAILURE OF ANY ONE
PRODUCT COULD RESULT IN THE FAILURE OF OUR ENTIRE BUSINESS.
We recently sold substantially all of our drug delivery business
segment assets to Ortho-McNeil Pharmaceutical, Inc. and terminated our remaining
drug delivery projects. We are now exclusively focused on diagnostic medical
devices, initially on 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, since we would not have alternate sources of revenue if
we are unable to commercialize our narrow line of products. We cannot assure you
that we will be successful with this narrow, nondiversified line of products.
The failure of any one product, such as the GlucoWatch monitor, could cut off
our only source of revenue and result in the failure of our entire business.
WE DO NOT HAVE MEDICAL DEVICE MARKETING, DISTRIBUTION, MANUFACTURING OR
SALES EXPERIENCE. IF WE ARE UNABLE TO MAKE SATISFACTORY ARRANGEMENTS FOR EACH OF
THESE, WE MAY BE UNABLE TO SUCCESSFULLY COMMERCIALIZE OUR PRODUCTS.
Even if we receive the necessary regulatory approvals for the
GlucoWatch system, we may have problems in product manufacturing, commercial
scale-up, marketing or product distribution. We do not have any experience in
any of these areas. To successfully market, distribute, manufacture and sell the
GlucoWatch system and our other glucose monitoring products under development,
we must either develop these capabilities ourselves or enter into arrangements
with third parties. We cannot assure you that we will be able to successfully do
either course of action. If we attempt to develop our own capabilities, we will
incur significant start-up expenses and we will compete with other companies
that have experienced and well-funded operations. If we enter into arrangements
with third parties, any revenues we receive will depend on the third party, and
we will likely have to pay fees, sales commissions or similar amounts to third
parties. If we are unable to make satisfactory arrangements, we may be unable to
successfully commercialize our products after FDA approval or may experience
delays in commercialization.
WE MAY NEED TO RELY ON AGREEMENTS WITH THIRD PARTIES IN ORDER TO
COMMERCIALIZE OUR PRODUCTS. IF WE ARE UNABLE TO SECURE THESE NECESSARY
AGREEMENTS, WE MAY NOT BE ABLE TO SELL OUR PRODUCTS OR GENERATE REVENUE.
One of our priorities is to establish one or more alliances for the
commercialization of the GlucoWatch system worldwide. The purpose of alliances
is to secure commercialization functions, such as distribution, sales and
customer service. We do not have any marketing or distribution agreements for
the GlucoWatch system other than an agreement with Livingston Healthcare
Services to provide receiving, storage, customer service, technical support
4
<PAGE>
and shipment services in the United States. Our agreement with Yamanouchi to
commercialize the GlucoWatch in Japan was terminated in October 2000. We are in
discussions with several companies regarding commercialization alliances. Some
of the companies are international in scope and would provide the requisite
commercialization functions worldwide. Other companies focus on certain
geographies and/or certain commercialization functions. There can be no
assurance that we will enter into an agreement with a worldwide
commercialization partner. Even if we obtain a worldwide commercialization
partner, we may not do so until after our large-scale manufacturing process is
approved by the FDA.
We are currently evaluating outsourced capabilities for launch without
a worldwide commercialization alliance. We may not be able to outsource some
commercialization capabilities in time for launch. Third parties performing
these outsourced capabilities may, for competitive reasons, support, directly or
indirectly, a company or product that competes with one of our products.
Furthermore, any dispute with a third party might require us to initiate or
defend against expensive litigation or arbitration proceedings. If a third party
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 third party.
If we were unable to find a replacement third party, we might not be able to
perform or fund the activities of the current third party. Even if we were able
to perform and fund these activities, our capital requirements could increase
substantially. Additionally, we may choose to self-fund some of our 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
but will negatively affect our short-term operating results.
IF THIRD PARTIES DO NOT REIMBURSE THE COSTS OF OUR MEDICAL DEVICES,
PATIENTS, HOSPITALS AND PHYSICIANS MAY DECIDE NOT TO USE OUR PRODUCTS, SEVERELY
HARMING OUR PRODUCT SALES.
Successful commercialization of our products may depend in part on the
availability of reimbursement from third-party health care payers, such as
private insurance plans and the government. We plan to conduct outcome studies
for reimbursement; however, there can be no assurance that such reimbursement
will be available or in what time frame. Third-party payers are increasingly
attempting to contain health care costs by limiting both coverage and the level
of reimbursement for new therapeutic and diagnostic products. There can be no
assurance that adequate levels of reimbursement will be available to enable us
to achieve market acceptance of the GlucoWatch system or other new products
under development or to maintain price levels sufficient to realize an
appropriate return on our investment. In both the US and foreign countries, the
period of time needed to obtain such reimbursement can be lengthy. We may delay
the launch of our products in some countries until eligibility for reimbursement
is established. This delay could potentially harm our business.
IF THE MARKET DOES NOT ACCEPT OUR NEW TYPE OF PRODUCTS, WE MAY NOT
GENERATE REVENUES AND ACHIEVE OR SUSTAIN PROFITABILITY.
We are focusing our efforts predominantly on a line of frequent,
automatic, and non-invasive glucose monitoring devices. We cannot predict market
acceptance or penetration of our products, given that they are different from
any glucose diagnostic products 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 glucose monitoring devices that are frequent, automatic,
and non-invasive (or minimally invasive, semi-invasive or less-invasive). We
cannot predict what impact the introduction of competing products will have on
our market sales.
OUR STOCK PRICE COULD BE ADVERSELY AFFECTED BY THE RISK OF OWNERSHIP
DILUTION CAUSED BY THE ISSUANCE OF SHARES UNDER THE EQUITY LINE OR BY ADDITIONAL
SHARES OF OUR COMMON STOCK BECOMING AVAILABLE FOR SALE IN THE FUTURE. IF OUR
STOCK PRICE DECLINES, YOU MAY NOT BE ABLE TO RESELL OUR SHARES AT OR ABOVE THE
PRICE YOU PAID, OR AT ALL.
Under the equity line, each month we may sell up to $4 million of
common stock and Cripple Creek may exercise its option to purchase up to an
additional $3 million of common stock during each month in an investment
5
<PAGE>
period (up to an aggregate of $60 million during the term of the equity line) at
a price equal to the average of the two lowest volume-weighted average prices
for the stock during the six trading days preceding the sale, but in no event
lower than a designated minimum per share price we indicate in our notice to
Cripple Creek. Because the price of the shares that may be sold under the equity
line is based on the market value of the common stock at the time of the sale,
the number of shares sold will be greater if the price of the common stock
declines, which would cause greater ownership dilution. In addition, the
perceived risk of dilution resulting from the sale of shares could cause some of
our stockholders to sell their stock, thus causing the price of our stock to
further decline.
The total number of shares that may be issued under the equity line
depends on the market price of our common stock at the time that the shares are
sold and whether we choose to sell shares, and the number of shares we choose to
sell from time to time, to Cripple Creek. The following table illustrates the
effect of variations in the market price in our common stock, and resulting
variations in sales prices to Cripple Creek, on the number of shares issued in a
one month period, assuming that we choose to sell all possible shares under the
equity line. This table illustrates how the ownership dilution resulting from
the sale of shares under the equity line agreement increases as the market value
of our common stock declines.
<TABLE>
<CAPTION>
Price Per Share Number Of Shares Issued
--------------- -----------------------
(one month)
<S> <C>
$15 466,667
$10 700,000
$5 1,400,000
</TABLE>
Our decision to choose to sell all possible shares under the equity
line would be influenced by, among other things, whether it is in the best
interests of our stockholders to sell at lower market prices, given our
financing requirements and access to alternative sources of financing. As of
the date of this prospectus, we expect to satisfy substantially all of our
expected financing needs during 2001 through sales under the equity line.
We have 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.
INTENSE COMPETITION IN THE MARKET FOR GLUCOSE DIAGNOSTIC PRODUCTS COULD
PREVENT US FROM INCREASING OR SUSTAINING OUR REVENUE AND PREVENT US FROM
ACHIEVING OR SUSTAINING PROFITABILITY.
The medical device industry in general, and the market in which we
expect to offer the GlucoWatch system in particular, is intensely competitive.
Even if we successfully develop, gain FDA approval for and manufacture the
GlucoWatch system, we will compete with other providers of personal glucose
monitors. A number of our competitors are currently marketing traditional finger
stick glucose monitors. These monitors are widely accepted in the health care
industry and have long histories of acceptable accuracy and effective use.
Furthermore, a number of companies have announced that they are developing
products that permit less-painful or painless, as well as continual or
continuous, 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
system or our other enhanced products under development will replace any
currently used devices or systems. Our competitors may also develop, even before
we develop or commercialize the GlucoWatch system or our other enhanced products
under development, devices and technologies that permit more efficient and less
expensive glucose monitoring devices.
6
<PAGE>
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.
WE DEPEND ON PROPRIETARY TECHNOLOGY. IF WE FAIL TO OBTAIN PATENT
PROTECTION FOR OUR PRODUCTS, PRESERVE OUR TRADE SECRETS AND OPERATE WITHOUT
INFRINGING UPON THE PROPRIETARY RIGHTS OF OTHERS, OUR BUSINESS COULD BE SEVERELY
HARMED.
Our success depends in large part on our ability to obtain patent
protection for our products, preserve our trade secrets and operate without
infringing upon the proprietary rights of others, both in the U.S. and abroad.
Currently, patent applications in the U.S. are maintained in secrecy until
issuance, and publication of discoveries in the scientific or patent literature
tends to lag behind actual discovery by several months. Thus, we cannot be
certain that we were the first to file patent applications on our inventions or
that we will not infringe upon third-party patents. We cannot assure you that
any patents will issue or will be upheld 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 suppliers, 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 medical device 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 severely
harm our business.
WE DEPEND ON THIRD-PARTY SUPPLIERS. ANY INTERRUPTION IN THE SUPPLY OF
SYSTEM COMPONENTS OR THE PRICING OF THESE COMPONENTS COULD SEVERELY HARM OUR
BUSINESS.
The GlucoWatch system is manufactured from components purchased from
outside suppliers, most of which are our single source for such components. In
the event that we are unable, for whatever reason, to obtain these components
from our suppliers or that the components obtained from these suppliers do not
pass quality standards, we will be required to obtain the components from
alternative suppliers. Additionally, we cannot assure you that, in the event a
current supplier were unable to meet our component requirements, we would be
able to rapidly find another supplier of the particular component or that the
alternate supply would be at the same price or have the same lead time. Any
interruption in the supply of the GlucoWatch system components or the pricing of
these components could severely harm our business.
WE MAY NEED ADDITIONAL FINANCING AND IT MAY NOT BE AVAILABLE. IF
ADEQUATE FUNDS ARE NOT AVAILABLE OR ARE NOT AVAILABLE ON ACCEPTABLE TERMS, WE
MAY BE UNABLE TO DEVELOP OR ENHANCE OUR PRODUCTS, TAKE ADVANTAGE OF FUTURE
OPPORTUNITIES, OR RESPOND TO COMPETITIVE PRESSURES, WHICH COULD NEGATIVELY
IMPACT OUR PRODUCT COMMERCIALIZATION.
In order to continue to develop our diagnostic products, we will
require substantial resources to conduct research and 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 in the future and take
other actions. We may not be able to obtain adequate funds when we need them
from financial markets or arrangements with commercialization 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
7
<PAGE>
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 funding
(such as financings or potential product funding collaborations), and
earnings from investments, will suffice to meet our operating expenses, debt
servicing and repayments, and capital expenditure requirements at least for
the next twelve months. The amounts and timing of future expenditures will
depend on progress of ongoing research and development, results of clinical
trials, rates at which operating losses are incurred, executing possible
commercialization agreements, developing our products, manufacturing of the
GlucoWatch system, the FDA regulatory process, and other factors, many of
which are beyond our control.
WE ARE HIGHLY LEVERAGED AND MAY BE UNABLE TO SERVICE OUR DEBT. IF WE
CANNOT PAY AMOUNTS DUE UNDER OUR DEBT OBLIGATIONS, WE MAY NEED TO REFINANCE ALL
OR A PORTION OF OUR EXISTING DEBT, SELL ALL OR A PORTION OF OUR ASSETS, OR SELL
EQUITY SECURITIES.
As of September 30, 2000, we had indebtedness of approximately $45.8
million. The degree to which we are leveraged could limit our ability to obtain
financing for working capital, commercialization of products 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
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, sell all or a portion of our assets, or sell
equity securities. There is no assurance that we could successfully complete any
of these courses of action. 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, if any.
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 $22.4 million
for the nine months ended September 30, 2000 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 system. We cannot assure you that we will generate significant
revenues or achieve profitability. We do not have experience in
manufacturing, marketing or selling our medical device 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 our discontinued operations, including 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 patch or the Fempatch system. If we obtain regulatory approvals, we
expect to significantly increase our level of expenditures for sales,
marketing and general and administrative activities in connection with
product commercialization, and these expenditures will precede commercial
revenues, if any.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT ARE COSTLY TO DEFEND
AND COULD LIMIT OUR ABILITY TO USE SOME TECHNOLOGIES IN THE FUTURE.
The design, development, manufacture and use of our medical products
involve an inherent risk of product liability claims and associated adverse
publicity. Producers of medical products may face substantial liability for
8
<PAGE>
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 will 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 could be severely harmed.
THE COMPETITION FOR QUALIFIED PERSONNEL IS PARTICULARLY INTENSE IN OUR
INDUSTRY AND IN NORTHERN CALIFORNIA. IF WE ARE UNABLE TO RETAIN OR HIRE KEY
PERSONNEL, WE MAY NOT BE ABLE TO SUSTAIN OR GROW OUR BUSINESS.
Our ability to operate successfully and manage our potential future
growth significantly depends upon retaining key scientific, technical, sales,
marketing, managerial and financial personnel, and attracting and retaining
additional highly qualified scientific, technical, sales, marketing, 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 severely harm our
business.
OUR STOCK PRICE IS VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL OUR
SHARES AT OR ABOVE THE PRICE YOU PAID, OR AT ALL.
The trading price of our common stock fluctuates substantially in
response to factors such as, but not limited to:
- 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 and even in recent months 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 severely harm our
business.
DELAWARE LAW AND OUR RESTATED CERTIFICATE OF INCORPORATION AND OUR
BYLAWS HAVE ANTI-TAKEOVER PROVISIONS THAT WOULD DELAY OR DISCOURAGE TAKEOVER
ATTEMPTS THAT STOCKHOLDERS MAY CONSIDER FAVORABLE.
Our Restated Certificate of Incorporation and our Bylaws contain
several provisions that may make the acquisition of control of Cygnus more
difficult or expensive. The Certificate of Incorporation and the Bylaws, among
other things:
9
<PAGE>
- provide that directors may be removed only for cause and only upon
the affirmative vote of the holders of at least a majority of the
outstanding shares of voting stock entitled to vote for such
directors;
- permit the remaining directors (but not the stockholders, unless the
directors so resolve) to fill vacancies and newly created
directorships on the Board;
- eliminate the ability of stockholders to act by written consent; and
- require the vote of stockholders holding at least 66 2/3% of the
outstanding shares of voting stock to amend, alter or repeal the
Bylaws and certain provisions of the Restated Certificate of
Incorporation, including the provisions described above.
These provisions may make the removal of incumbent directors more
difficult and time consuming and may have the effect of discouraging a tender
offer or other takeover attempt not previously approved by the Board of
Directors. Under our Restated Certificate of Incorporation, the Board of
Directors also has the authority to issue shares of Preferred Stock in one or
more series and to fix the powers, preferences and rights of any such series
without stockholder approval. The Board of Directors could, therefore, issue,
without stockholder approval, Preferred Stock with voting and other rights that
could adversely affect the voting power of the holders of common stock and could
make it more difficult for a third party to gain control of Cygnus. We have also
adopted a Stockholder Rights Plan which, under certain circumstances, would
significantly dilute the equity interest of persons seeking to acquire control
over us without the prior approval of the Board of Directors.
In addition, because we are incorporated in Delaware, we are governed
by the provisions of Section 203 of the Delaware General Corporation Law. These
provisions may prohibit large stockholders, in particular those owning 15% or
more of our outstanding voting stock, from merging or combining with us. These
provisions in our charter, bylaws and under Delaware law could reduce the price
that investors might be willing to pay for shares of our common stock in the
future and result in the market price being lower than it would be without these
provisions.
WE DO NOT PAY DIVIDENDS AND DO NOT ANTICIPATE PAYING ANY DIVIDENDS IN
THE FUTURE, SO ANY SHORT TERM RETURN ON YOUR INVESTMENT WILL DEPEND ON THE
MARKET PRICE OF OUR SHARES.
We have never declared or paid cash dividends on our common stock. Our
current bank term loan agreement 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. Any short
term return on your investment will depend only on the market price of our
shares.
FORWARD-LOOKING STATEMENTS
Some of the statements under "Our Company" and "Risk Factors" and
elsewhere in this 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, including in the documents incorporated by reference, that are not
statements of historical fact. Forward-looking statements include, but are not
limited to, statements about:
- our ability to secure FDA approval;
- plans for manufacturing and commercial scale-up of the GlucoWatch
monitor;
- plans for commercialization alliances;
- our ability to achieve market acceptance of the GlucoWatch monitor;
and
10
<PAGE>
- plans for enhancements and possible manufacturing changes through the
premarket approval supplement process.
In some cases, 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, including in the documents
incorporated by reference.
You should rely only on the information contained in this prospectus.
No dealer, salesperson or other person is authorized to give information that is
not contained in this prospectus. This 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 is
current only as of its date, regardless of the time of its delivery or any sale
of these securities.
11
<PAGE>
USE OF PROCEEDS
We could receive up to an additional $35.9 million in proceeds under
the equity line, after deducting the estimated offering expenses. The actual
amount of proceeds from the equity line and the warrants, if any, will depend
upon
- the market price of the common stock;
- whether we elect to sell common stock under the terms of the equity
line; and
- whether Cripple Creek exercises its option to purchase common stock
as permitted under the terms of the equity line.
However, there can be no assurance that we will issue any shares or
receive any proceeds from the equity line and, under the terms of the equity
line, it is possible that no shares will be issued.
We expect that any net proceeds from the equity line will be used for
development expenditures in support of our GlucoWatch monitor and general
corporate purposes, including working capital.
UNDERWRITING
We entered into the Structured Equity Line Flexible Financing Agreement
with Cripple Creek on June 30, 1999. We subsequently amended the equity line
agreement on September 29, 1999, March 27, 2000, May 9, 2000 and October 27,
2000. The shares covered by this prospectus are being issued under this amended
equity line agreement.
Under the amended equity line agreement, subject to the satisfaction of
conditions, we may require Cripple Creek to purchase shares of common stock over
a period of 48 months from June 30, 1999, for an aggregate purchase price of up
to $60 million. As of the date of this prospectus, we have issued Cripple Creek
shares for an aggregate purchase price of $22 million. We may therefore still
issue Cripple Creek additional shares with an aggregate purchase price of up to
$36 million.
We have 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. We are obligated to
issue warrants to purchase a minimum of 120,000 shares of common stock,
regardless of the amount of common stock sold under the equity line. We have to
date issued warrants to purchase 95,000 shares of common stock, and must issue
warrants to purchase a minimum of an additional 25,000 shares. We have agreed to
register the shares issuable upon exercise of the warrants that are issued to
Cripple Creek.
Under the amended equity line agreement, we may, at our sole option and
discretion, subject to the satisfaction of conditions and limitations, require
Cripple Creek to purchase shares. We may agree with Cripple Creek to have an
investment period of 30, 60 or 90 days, or 30 days if we are unable to agree.
For each month during a particular investment period, we may cause Cripple Creek
to purchase shares for an aggregate purchase price of up to $4.0 million, and
Cripple Creek, subject to our approval, can require us to sell them additional
shares for an aggregate purchase price of up to $3.0 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 trading 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 investment period. We will sell the shares at a price
equal to the average of the two lowest volume-weighted average prices for the
stock during the six trading days preceding the sale, but in no event lower than
a designated minimum per share price we indicate in our
12
<PAGE>
notice to Cripple Creek. If the investment period is for a period greater than
30 days, we may reset the minimum per share price after every 30 days.
Cripple Creek's obligation to purchase shares of common stock during
any investment period is subject to the satisfaction of various conditions,
including:
- our registration statement must remain effective under the Securities
Act of 1933;
- our common stock must continue to trade on the Nasdaq National
Market; and
- Cripple Creek may not become the beneficial owner, at any time, of
more than 9.9% of the outstanding shares of our common stock.
The equity line agreement also provides limitations on the amount of
common stock that may be sold, which may be less than the amount indicated in
the put notice and call notice. Specifically, the amount of common stock sold
during each monthly investment period will be equal to the lesser of:
- the amount indicated in the put notice and call notice, if any,
- an amount equal to 8% of the aggregate value of open market trading
for each trading day during the investment period immediately
preceding the current investment period on which the stock price is
above the minimum price for such preceding investment period, or
- an amount equal to 8% of the aggregate value of open market trading
for each trading day during the current investment period on which
the stock price is above the minimum price for the current investment
period.
In addition, the equity line also provides for a pro rata reduction in
the amount of common stock that may be sold if there are any trading days during
the period in which the volume-weighted average price of the common stock is
below the minimum price that we set for the period.
We may terminate the equity line at any time without further
obligation (beyond the minimum warrants) to Cripple Creek. Cripple Creek may
terminate the equity line without further obligation to us if we breach the
equity line agreement or if Cripple Creek determines, in its reasonable
discretion, that the adoption of, or change in, or any change in the
interpretation or application of, any law, regulation, rule, guideline or treaty
makes it illegal or materially impractical for Cripple Creek to fulfill its
obligations under the equity line agreement.
Cripple Creek has advised us that it may sell the common stock offered
by this prospectus from time to time primarily in transactions on the Nasdaq
National Market or in other types of transactions, including those described in
"Plan of Distribution."
The equity line agreement provides that we must indemnify Cripple Creek
in some circumstances against liabilities, including liabilities under the
Securities Act, and contribute to payments that Cripple Creek may be required to
make in respect of those liabilities. Cripple Creek is required by the equity
line agreement to indemnify us in some circumstances against liabilities,
including liabilities under the Securities Act, and to contribute to payments
that we may be required to make in respect of those liabilities.
Cripple Creek may create a short position in the common stock for its
own account by selling more shares of common stock than we have actually sold to
it under the equity line. The potential size of the short position at any time
is not expected to be greater than the amount remaining to be purchased under
any put notice or call notice. Cripple Creek may elect to cover any short
position by delivering shares of common stock purchased in the open market or
shares of common stock purchased pursuant to a particular put notice or call
notice. Cripple Creek will deliver a prospectus to all purchasers of shares in
short sales which Cripple Creek covers with purchases under the equity line.
Purchasers of shares sold pursuant to such short sales may be entitled to the
same remedies under the
13
<PAGE>
federal securities laws as any other purchaser of shares covered by the
registration statement. Under the equity line agreement, Cripple Creek is
prohibited from making any sales with the intention of reducing the price of our
common stock to Cripple Creek's benefit. Cripple Creek has advised us that it is
a registered broker-dealer under the Securities Exchange Act of 1934.
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.
Cripple Creek may sell the shares by one or more of the following
methods, without limitation:
- block trades in which the broker or dealer 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.
14
<PAGE>
Cripple Creek is an "underwriter" as defined in the Securities Act of
1933 in connection with the sale of the shares offered by this prospectus. Any
broker-dealers or agents that participate with Cripple Creek in sales of the
shares may be considered to be "underwriters" within the meaning of the
Securities Act in connection with sales in which they participate. If any
broker-dealers or agents are considered to be "underwriters," then any
commissions they receive and any profit on the resale of the shares purchased by
them may be considered to be underwriting commissions or discounts under the
Securities Act.
From time to time Cripple Creek may engage in short sales, short sales
against the box, puts and calls and other transactions in Cygnus' common stock,
and may sell and deliver the shares in connection with these transactions or to
settle securities loans. If Cripple Creek engages in such transactions, the
price of our common stock may be affected. Under the equity line, Cripple Creek
may not make any sales with the intention of reducing the price of our common
stock. From time to time Cripple Creek may pledge its shares pursuant to the
margin provisions of its agreements with its brokers. Upon a default by Cripple
Creek, the broker may offer and sell the pledged shares from time to time.
Cripple Creek and any other persons participating in the sale or
distribution of the shares will be subject to the Securities Exchange Act of
1934 and the related rules and regulations, including Regulation M, to the
extent it applies. The Exchange Act and related rules may limit the timing of
purchases and sales of any of the shares by Cripple Creek or any other such
person which may affect the marketability of the shares. Cripple Creek also must
comply with the applicable prospectus delivery requirements under the Securities
Act in connection with the sale or distribution of the shares.
We are required to pay certain fees and expenses incident to the
registration of the shares.
We have agreed to indemnify in some circumstances Cripple Creek against
liabilities, including liabilities under the Securities Act. Cripple Creek has
agreed to indemnify us in some circumstances against liabilities, including
liabilities under the Securities Act.
We have agreed to use our best efforts to keep the registration
statement, of which this prospectus is a part, effective until the shares may be
or have been sold under Rule 144(k) of the Securities Act.
LEGAL MATTERS
Selected legal matters with respect to the validity of common stock
offered by this prospectus will be passed upon for us by Pillsbury Madison &
Sutro LLP, San Francisco, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements included in our Annual Report on Form 10-K for the year
ended December 31, 1999, as set forth in their report, which is incorporated by
reference in this prospectus and elsewhere in the registration statement. Our
consolidated financial statements are incorporated by reference in reliance upon
Ernst & Young LLP's report, given on their authority as experts in accounting
and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements, and
other information with the Securities and Exchange Commission. You may read and
copy any materials we file with the Commission at the Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call
the Commission at 1-800-SEC-0330 for more information on its public reference
rooms. The Commission also maintains an Internet Website at http://www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the Commission.
15
<PAGE>
We have filed with the Commission a registration statement (which
contains this prospectus) on Form S-3 under the Securities Act of 1933. The
registration statement relates to the common stock offered by Cripple Creek.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. Please refer to the registration statement and its exhibits and
schedules for further information with respect to Cygnus and the common stock.
Statements contained in this prospectus as to the contents of any contract or
other document are not necessarily complete and, in each instance, we refer you
to the copy of that contract or document filed as an exhibit to the registration
statement. You may read and obtain a copy of the registration statement and its
exhibits and schedules from the Commission, as described in the preceding
paragraph.
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 WE CAN
DISCLOSE IMPORTANT BUSINESS AND FINANCIAL INFORMATION ABOUT US TO YOU THAT IS
NOT INCLUDED IN OR DELIVERED WITH THIS 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 filings 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:
1. Annual Report on Form 10-K of Cygnus for the fiscal year ended December
31, 1999;
2. Quarterly Reports on Form 10-Q filed by Cygnus for the fiscal quarters
ended March 31, 2000, June 30, 2000 and September 30, 2000;
3. Current Report on Form 8-K dated October 17, 2000;
4. The description of common stock contained in Cygnus' registration
statement on Form 8-A; and
5. The description of our Series A Junior Participating Preferred Stock
contained in the registration statement on Form 8-A12B/A filed December
14, 1988.
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: CORPORATE COMMUNICATIONS
TELEPHONE REQUESTS MAY BE DIRECTED TO: (650) 369-4300
FACSIMILE REQUESTS MAY BE DIRECTED TO: (650) 599-2503
16
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable by the
Registrant in connection with the sale and distribution of the securities being
registered hereby. Normal commission expenses and brokerage fees are payable
individually by the selling stockholders. All amounts are estimated except the
Commission registration fee.
<TABLE>
<CAPTION>
Amount
------
<S> <C>
SEC registration fee................................................... $ 9,504
Accounting fees and expenses........................................... $ 5,000
Legal fees and expenses................................................ $ 10,000
Nasdaq Additional Listing Fee.......................................... $ 17,500
Miscellaneous fees and expenses........................................ $ 796
Total ............................................................ $ 41,000
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("Section 145")
authorizes a court to award or a corporation's Board of Directors to grant
indemnification to directors and officers in terms sufficiently broad to permit
such indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act. The
Registrant's Certificate of Incorporation and Bylaws provide for mandatory
indemnification by the Registrant of all persons the Registrant may indemnify
under Section 145 to the maximum extent permitted by the Delaware General
Corporation Law. The Registrant's Certificate of Incorporation further provides
that the liability of its directors is eliminated to the fullest extent
permitted by the Delaware General Corporation Law. These provisions in the
Certificate of Incorporation do not eliminate the directors' fiduciary duty, and
in appropriate circumstances equitable remedies such as injunctive or other
forms of non-monetary relief will remain available under Delaware law. In
addition, each director will continue to be subject to liability for breach of
the director's duty of loyalty to the Registrant for acts or omissions not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws. The Registrant has entered into
indemnification agreements with all of its officers and directors.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1.1 Structured Equity Line Flexible
Financing Agreement between Cygnus,
Inc. and Cripple Creek Securities,
LLC., incorporated by reference to
Exhibit 1 of the Registrant's Form
8-K filed on July 2, 1999.
1.2 Amendment No. 1 to Structured Equity
Line Flexible Financing Agreement
between Cygnus, Inc. and Cripple
Creek Securities, LLC,
II-1
<PAGE>
incorporated by reference to Exhibit
1 of the Registrant's Form 8-K filed
on October 7, 1999.
1.3 Amendment No. 2 to Structured Equity
Line Flexible Financing Agreement
between Cygnus, Inc. and Cripple
Creek Securities, LLC, incorporated
by reference to Item 10.109 of the
Registrant's Form 10-Q filed on
April 26, 2000
1.4 Amendment No. 3 to Structured Equity
Line Flexible Financing Agreement
between Cygnus, Inc. and Cripple
Creek Securities, LLC, incorporated
by reference to Exhibit 10.110 of
the Registrant's Form 10-Q filed on
July 28, 2000.
1.5 Amendment No. 4 to Structured Equity
Line Flexible Financing Agreement
between Cygnus, Inc. and Cripple
Creek Securities, LLC.
4.1 Specimen of Common Stock certificate
of the Registrant, incorporated by
reference to Exhibit 4.1 of the
Registrant's Registration Statement
Form S-1 No. 33-38363.
4.2 Convertible Debenture and Warrant
Purchase Agreement, incorporated by
reference to Exhibit 10.41 of the
Registrant's Quarterly Report on
Form 10-Q filed on August 16, 1999.
4.3 Registration Rights Agreement,
incorporated by reference to Exhibit
4.12 of the Registrant's Quarterly
Report Form 10-Q filed on August 16,
1999.
4.5 Form of 8.5% Convertible Debenture
due 2001, incorporated by reference
to Exhibit 10.42 of the Registrant's
Quarterly Report Form 10-Q filed on
August 16, 1999.
4.6 Form of Common Stock Purchase
Warrant, incorporated by reference
to Exhibit 10.43 of the Registrant's
Quarterly Report Form 10-Q filed on
August 16, 1999.
5.1 Opinion of Pillsbury Madison & Sutro
LLP.
23.1 Consent of Ernst & Young LLP,
Independent Auditors.
23.2 Consent of Pillsbury Madison & Sutro
LLP (included in its opinion filed
as Exhibit 5.1 to this Registration
Statement).
24.1 Power of Attorney (see page II-4).
</TABLE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director,
II-2
<PAGE>
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to the Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
provided, however, that paragraphs (i) and (ii) do not apply if the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
Registrant pursuant to Section 13 or Section 15(d) of the Exchange Act
that are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(4) That, for purposes of determining any liability under the
Securities Act, each filing of the Registrant's annual report pursuant
to Section 13(a) or Section 15(d) of the Exchange Act that is
incorporated by reference in the Registration Statement shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(5) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted for Directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a Director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding)
is asserted by such Director, officer or controlling person in
connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3, and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Redwood City, State of California, on October 30,
2000.
CYGNUS, INC.
By /s/ JOHN C HODGMAN
-----------------------------------------------
John C Hodgman
Chairman, President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints John C Hodgman as his or her true and
lawful attorneys-in-fact and agents, each with full power of substitution and
resubstitution, for him or her and in his or her name, place and stead, in any
and all capacities, to sign any and all amendments, including post-effective
amendments, to this Registration Statement, and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact and agents, and each
of them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that
each of said attorneys-in-fact and agents or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Title Date
---- ----- ----
/s/ JOHN C HODGMAN Chairman of the Board of Directors, October 30, 2000
------------------------------------ President, and Chief Executive Officer
John C Hodgman (Principal Executive Officer)
/s/ CRAIG W. CARLSON Chief Financial Officer and Senior October 30, 2000
------------------------------------ Vice President, Finance (Principal
Craig W. Carlson Accounting Officer)
/s/ FRANK T. CARY Director October 30, 2000
------------------------------------
Frank T. Cary
/s/ ANDRE F. MARION Vice Chairman of the Board of Directors October 30, 2000
------------------------------------
Andre F. Marion
/s/ RICHARD G. ROGERS Director October 30, 2000
------------------------------------
Richard G. Rogers
/s/ WALTER B. WRISTON Director October 30, 2000
------------------------------------
Walter B. Wriston
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<S> <C>
1.5 Amendment No. 4 to Structured Equity Line Flexible Financing Agreement between Cygnus,
Inc. and Cripple Creek Securities, LLC.
5.1 Opinion of Pillsbury Madison & Sutro LLP.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of Pillsbury Madison & Sutro LLP (included in its opinion filed as Exhibit 5.1
to this Registration Statement).
24.1 Power of Attorney (see page II-4).
</TABLE>
