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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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$7,000,000
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 $7,000,000. 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-6.
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 October 3, 2000, the last reported sale price of the common stock on
the Nasdaq National Market was $9.5625 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 October 4, 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-2
Our Company..................................................................S-3
Risk Factors.................................................................S-7
Use of Proceeds.............................................................S-13
Equity Line.................................................................S-14
Plan of Distribution........................................................S-15
Legal Matters...............................................................S-16
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PROSPECTUS
<TABLE>
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<S> <C>
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.
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
- 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 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.
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IMPORTANT INFORMATION INCORPORATED BY REFERENCE
THE SECURITIES AND EXCHANGE COMMISSION ALLOWS CYGNUS TO "INCORPORATE BY
REFERENCE" THE INFORMATION WE FILE 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 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,
1999;
2. Quarterly Report on Form 10-Q of Cygnus for the fiscal quarter ended June
30, 2000; and
3. 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 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 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
healthcare 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 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 healthcare
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.
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In December 1999, we also 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 June 2000, we created Cygnus (UK) Limited, a
wholly-owned subsidiary of Cygnus, Inc., in the United Kingdom to facilitate
commercializing the GlucoWatch system in the United Kingdom. We are currently
exploring strategic alternatives for commercializing the GlucoWatch system in
other countries in Europe.
We have entered into several agreements in order to be prepared to
commercialize our GlucoWatch system, in the event that the system receives FDA
approval. These agreements 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, the
manufacturer of the durable GlucoWatch biographer.
On August 25, 2000, we signed a Warehouse Distribution Contract with
Livingston Healthcare Services, Inc to provide outsource logistics services in
the United States for our GlucoWatch system. The agreement covers receiving,
storage, customer service, technical support and shipment. However, we are still
solely responsible for the procurement, 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.
OUR FREQUENT, AUTOMATIC AND NON-INVASIVE GLUCOSE MONITORING SYSTEMS.
MARKET OPPORTUNITY
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. Approximately 80% to 90% of the sales
were related to disposable glucose reagent strips for finger stick monitoring
(Boston Biomedical Consultants, Inc.). In the U.S., a majority of glucose level
testing is conducted by a relatively small segment
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of people with diabetes; for example, of these people, just 19% (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. healthcare 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-REGISTERED TRADEMARK- 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
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future generation glucose monitoring products, as well as enhancements to the
GlucoWatch system. Such enhancements include, but are not limited to, features
for increased user convenience such as a shorter warm-up period, extension of
the AutoSensor measurement duration beyond twelve hours, an increase in the
number of glucose measurements per hour, addition of a delayed start feature,
and personal computer linkages for downloading data, as well as various cost
reductions in the manufacturing process. We are also considering other
enhancements.
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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 REGULATORY APPROVAL ON OUR PRODUCTS FROM THE FDA AND/OR
FOREIGN AGENCIES.
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 AutoSensors.
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.
With the sale of substantially all of our drug delivery business segment
assets to Ortho-McNeil Pharmaceutical, Inc. and the termination of 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, and we cannot assure you that we will be successful
with this narrow, nondiversified line of products.
WE DO NOT HAVE MEDICAL DEVICE MARKETING, DISTRIBUTION, MANUFACTURING OR
SALES EXPERIENCE.
Even if we receive the necessary regulatory approvals for the GlucoWatch
system, we may have unforeseen problems in product manufacturing, commercial
scale-up, marketing or product distribution. We do not have any experience
marketing, distributing, manufacturing or selling medical device products. To
successfully market, distribute, manufacture and sell the GlucoWatch system and
our other glucose monitoring products under development, we must either develop
these capabilities or enter into arrangements with third parties. We cannot
assure you that we will successfully implement either course of action. If we
maintain our own capabilities, 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 a sales commission or similar amount to the third party. 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.
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WE MAY NOT BE ABLE TO ENTER INTO AGREEMENTS NECESSARY FOR COMMERCIALIZATION
OF OUR PRODUCTS.
One of our priorities is to establish one or more alliances to secure
commercialization functions, such as distribution, sales and customer service,
for the GlucoWatch system in North America, Europe and elsewhere in the world.
We currently have a collaboration agreement relating to Japan and have recently
entered into a distribution agreement for the U.S. 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. However, we
may not obtain a worldwide commercialization partner, if we ever do, until well
after our large-scale manufacturing process is approved by the FDA. Any
commercialization partners we do find may, for competitive reasons, support,
directly or indirectly, a company or product that competes with our product.
Furthermore, any dispute with a commercialization partner 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 disputes or breaches a significant
contractual commitment, then we would likely be required to seek an alternative
third party. If we were unable to find a replacement partner, we might not be
able to perform or fund the partner's activities. Even if we were able to
perform and fund these activities, our capital requirements could increase
substantially.
THIRD PARTIES MAY NOT REIMBURSE THE COSTS OF OUR GLUCOWATCH SYSTEM.
Successful commercialization of our products may depend in part on the
availability of reimbursement from third-party healthcare 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 healthcare 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 U.S. 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,
financial condition and results of operations.
WE CANNOT PREDICT THE MARKET ACCEPTANCE OF OUR GLUCOWATCH SYSTEM.
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
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minimally invasive, semi-invasive or less-invasive). We cannot predict what
impact the introduction of competing products will have on our market sales.
Furthermore, market acceptance is also influenced by the level of reimbursement,
if any.
WE FACE INTENSE COMPETITION.
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 healthcare 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 healthcare 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 and commercialize, even
before we commercialize the GlucoWatch system or our other enhanced products
under development, devices and technologies that permit more efficient and less
expensive glucose monitoring devices. Pharmaceutical or other healthcare
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.
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
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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 FOR KEY COMPONENTS OF OUR GLUCOWATCH
SYSTEM.
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.
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 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 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.
As of June 30, 2000, we had indebtedness of approximately $46.2 million.
The degree to which we are leveraged could limit our ability to obtain financing
for working capital,
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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 $12.4 million for
the six months ended June 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 in December 1999, 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.
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
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
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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.
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, 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.
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.
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OUR RESTATED CERTIFICATE OF INCORPORATION AND OUR BYLAWS HAVE ANTI-TAKEOVER
PROVISIONS.
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:
- 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. In addition, we have
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.
WE DO NOT PAY DIVIDENDS.
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.
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.
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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 amended the Equity Line Agreement with Amendment No. 1 dated
September 29, 1999, Amendment No. 2 dated March 27, 2000, and Amendment No. 3
dated May 9, 2000. The shares covered by this prospectus supplement are being
issued under this amended Equity Line Agreement.
Under the Equity Line Agreement, as amended, subject to the satisfaction of
conditions, Cygnus 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. 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, as amended, 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 $4.0 million, and Cripple Creek, subject to our
approval, can require us to sell Cripple Creek additional common stock 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 (3) 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 monthly investment period. The purchase price per share for each
monthly investment period will equal the average of the two lowest daily
value-weighted average 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
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above. Cripple Creek may also sell the shares in accordance with Rule 144 under
the Securities Act, rather than under this prospectus.
Cripple Creek is an "underwriter" as defined in the Securities Act of 1933
in connection with the sale of the shares offered by this prospectus. Any
broker-dealers or agents that participate with Cripple Creek in sales of the
shares may be considered to be "underwriters" within the meaning of the
Securities Act in connection with sales in which they participate. If any
broker-dealers or agents are considered to be "underwriters," then any
commissions they receive and any profit on the resale of the shares purchased by
them may be considered to be underwriting commissions or discounts under the
Securities Act.
From time to time Cripple Creek may engage in short sales, short sales
against the box, puts and calls and other transactions in Cygnus' common stock,
and may sell and deliver the shares in connection with these transactions or to
settle securities loans. If Cripple Creek engages in such transactions, the
price of our common stock may be affected. Under the equity line, Cripple Creek
may not make any sales with the intention of reducing the price of our common
stock. From time to time Cripple Creek may pledge its shares pursuant to the
margin provisions of its agreements with its brokers. Upon a default by Cripple
Creek, the broker may offer and sell the pledged shares from time to time.
Cripple Creek and any other persons participating in the sale or
distribution of the shares will be subject to the Securities Exchange Act of
1934 and the related rules and regulations, including Regulation M, to the
extent it applies. The Exchange Act and related rules may limit 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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