<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934 for the quarterly period ended JUNE 30, 2000
or
--- Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the Transition Period from to
COMMISSION FILE NUMBER 0-18962
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
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (650) 369-4300
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ---
Number of shares outstanding of each of the registrant's classes of common stock
as of July 24, 2000:
Common Stock - 26,278,068 shares
Total pages: 24
Page number of exhibit index: 24
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CYGNUS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C>
Item 1: Financial Statements
Condensed Consolidated Statements of Operations for the three-month and six-month periods
ended June 30, 2000 and 1999 (unaudited)....................................................
2
Condensed Consolidated Balance Sheets at June 30, 2000 (unaudited) and December 31, 1999.... 3
Condensed Consolidated Statements of Cash Flows for the six-month periods ended June,
2000 and 1999 (unaudited)................................................................... 4
Notes to the Condensed Consolidated Financial Statements (unaudited)........................ 5
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations....... 7
Item 3: Quantitative and Qualitative Disclosures About Market Risk.................................. 18
PART II. OTHER INFORMATION
Item 1: Legal Proceedings........................................................................... 19
Item 4: Submission of Matters to a Vote of Security Holders......................................... 19
Item 6: Exhibits and Reports on Form 8-K............................................................ 20
SIGNATURES................................................................................................ 22
</TABLE>
1.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYGNUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Contract revenues $ ---- $ ---- $ 1,038 $ ----
Costs and expenses:
Research and development 4,553 3,248 8,382 8,755
Marketing, general and administrative 2,233 1,537 4,141 2,564
----------- ------------ ------------ -----------
Total costs and expenses 6,786 4,785 12,523 11,319
Loss from operations (6,786) (4,785) (11,485) (11,319)
Interest income/(expense), net (469) (1,460) (785) (1,841)
------------ ------------- ------------ -----------
Loss from continuing operations before income
tax (7,255) (6,245) (12,270) (13,160)
Provision for taxes ---- ---- (100) ----
----------- ------------- ------------ -----------
Loss from continuing operations (7,255) (6,245) (12,370) (13,160)
Discontinued operations:
Income from operations of discontinued
segment ----- 1,253 ---- 1,352
----------- ------------ ------------ -----------
Net loss $ (7,255) $ (4,992) $ (12,370) $ (11,808)
============ ============= ============ ===========
Net loss per share from continuing operations,
basic and diluted $ (0.28) $ (0.28) $ (0.48) $ (0.59)
============ ============= ============ ===========
Net income/(loss) per share from discontinued
segment, basic and diluted $ ---- $ 0.06 $ ---- $ 0.06
=========== ============ ============ ==========
Net loss per share, basic and diluted $ (0.28) $ (0.22) $ (0.48) $ (0.53)
============ ============ ============ ===========
Shares used in computation of net loss per
share, basic and diluted 26,277 22,632 25,902 22,182
=========== ============ ============ ==========
</TABLE>
(See accompanying notes.)
2.
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CYGNUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 (UNAUDITED) 1999
---------------------- ---------------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents $ 14,701 $ 28,677
Short-term investments 14,829 10,215
Trade accounts receivable ---- 62
Prepaid expenses and other current assets 1,223 861
---------------------- ---------------------
Total current assets 30,753 39,815
Equipment and improvements:
Equipment and improvements, at cost 9,615 8,282
Construction in progress 3,923 4,417
---------------------- ---------------------
13,538 12,699
Less accumulated depreciation and amortization (7,073) (6,610)
---------------------- ---------------------
Net equipment and improvements 6,465 6,089
Long-term investments 2,310 ----
Other assets 979 1,072
---------------------- ---------------------
Total Assets $ 40,507 $ 46,976
====================== =====================
LIABILITIES AND NET CAPITAL DEFICIENCY:
Current liabilities:
Accounts payable $ 1,074 $ 2,002
Accrued compensation 1,666 2,919
Other accrued liabilities 705 640
Current portion of deferred revenue ----- 900
Current portion of long-term debt 4,291 3,243
---------------------- ---------------------
Total current liabilities 7,736 9,704
Long-term portion of arbitration obligation 23,000 23,000
Long-term portion of debt 437 3,088
Convertible Debentures, net of discount of $4,980 in 2000 13,456 12,084
and $5,595 in 1999
Other long-term liabilities 301 304
Stockholders' net capital deficiency:
Common stock 26 25
Additional paid-in-capital 186,729 177,576
Accumulated deficit (191,159) (178,790)
Accumulated other comprehensive income (19) (15)
---------------------- ---------------------
Net capital deficiency (4,423) (1,204)
---------------------- ---------------------
Total liabilities and stockholders' net capital
deficiency $ 40,507 $ 46,976
====================== =====================
</TABLE>
Note: The condensed consolidated balance sheet at December 31, 1999 has been
derived from the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements.
(See accompanying notes.)
3.
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CYGNUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(In thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
2000 1999
------------------ -------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (12,370) $ (11,808)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 558 927
Amortization of debt issuance and financing costs and
debt discount 718 1,088
Gain on sale of equipment (59) (1)
Stock based compensation 643 -----
Net (increase)/decrease in assets (345) 4,103
Net decrease in liabilities (2,273) (4,556)
------------------ -------------------
Net cash used in operating activities (13,128) (10,247)
------------------ -------------------
Cash flows from investing activities:
Capital expenditures (1,296) (2,153)
Purchases of investments (17,695) (4,901)
Proceeds from sale of equipment 350 1
Maturity and sale of investments 10,885 19,119
------------------ -------------------
Net cash (used in)/provided by investing activities (7,756) 12,066
------------------ -------------------
Cash flows from financing activities:
Issuance of Common Stock 8,511 7,191
Principal payments of long-term debt (1,603) (1,621)
Payment of capital lease obligations ---- (214)
Issuance of Convertible Debentures ---- 14,000
------------------ -------------------
Net cash provided by financing activities 6,908 19,356
------------------ -------------------
Net decrease in cash and cash equivalents (13,976) 21,175
Cash and cash equivalents at beginning of period 28,677 10,219
================== ===================
Cash and cash equivalents at end of period $ 14,701 $ 31,394
================== ===================
(See accompanying notes.)
</TABLE>
4.
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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Cygnus, Inc. (the
"Company," "Cygnus," "us," "we," "our," etc.) as of and for the three-month and
six-month periods ended June 30, 2000 and 1999 included herein are unaudited,
but they include all adjustments (consisting only of normal recurring
adjustments) that the management of Cygnus, Inc. believes necessary for a fair
presentation of the financial position as of the reported dates and the results
of operations for the respective periods presented. Interim financial results
are not necessarily indicative of results for a full year. The condensed
financial statements should be read in conjunction with the audited financial
statements and related notes for the year ended December 31, 1999 included in
our 1999 Annual Report on Form 10-K.
Effective June 28, 2000, we established Cygnus (UK) Limited, a wholly
owned subsidiary of Cygnus, Inc., in the United Kingdom. No material activities
or expenses have been incurred to date by the subsidiary.
2. NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the weighted
average number of shares of Common Stock outstanding. Shares issuable from stock
options, warrants and Convertible Debentures outstanding are excluded from the
diluted loss-per-share computation, as their effect is anti-dilutive.
3. COMPREHENSIVE INCOME
Comprehensive income includes all changes in stockholders' equity
during a period except those resulting from investments by owners and
distributions to owners. Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" (FAS 130), requires unrealized gains and losses
on our available-for-sale securities to be included in other comprehensive
income or loss. Unrealized gains or losses for the six-month periods ended June
30, 2000 and 1999 were not material and total comprehensive loss approximated
net loss for each of these periods.
4. NEW ACCOUNTING PRONOUNCEMENT
In March 2000 the Financial Accounting Standards Board (FASB) issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation, Interpretation of APB Opinion No. 25." Interpretation No. 44
clarifies the application of Accounting Principle Board (APB) Opinion No. 25 to
certain issues including: (i) the definition of employee for purposes of
applying APB Opinion No. 25, (ii) the criteria for determining whether a plan
qualifies as a noncompensatory plan, (iii) the accounting consequences of
various modifications to the terms of a previously fixed stock option or award,
and (iv) the accounting for an exchange of stock compensation awards in a
business combination. In
5.
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general, Interpretation No. 44 is effective July 1, 2000. We do not expect
the adoption of Interpretation No. 44 to have a material effect on our
consolidated financial position or results of operations.
5. FINANCING INSTRUMENTS
In June 1999 we entered into two financing arrangements: a Convertible
Debenture and Warrant Purchase Agreement and a Structured Equity Line Flexible
Financing--Service Mark--Agreement. Under the Convertible Debenture and Warrant
Purchase Agreement, convertible debentures having a principal amount of $14.0
million were issued at a conversion price of $12.705 per share and a due date of
June 29, 2004. The Agreement also provided for an additional $6.0 million,
composed of two $3.0 million tranches and, in September 1999, we received $3.0
million in gross proceeds from the issuance of the first additional tranche
having a conversion price of $11.8663 and also due September 29, 2004. Thus, the
$3.0 million second additional tranche is available under this financing
instrument.
The second financing arrangement, the Structured Equity Line Flexible
Financing Agreement, originally had a maximum aggregate issue price of $30.0
million over a two-year commitment period and allows us, at our sole discretion,
to sell Common Stock over this period. In 1999 we received proceeds of
approximately $9.5 million from the original $30.0 million. In May 2000 the
Equity Line was amended to increase the maximum aggregate issue price by an
additional $30.0 million to a total of $60.0 million, to issue warrants to
purchase up to 600,000 shares of Common Stock, to replace the calculation used
to determine the per share price with a formula more favorable to the Company,
and to extend the Commitment Period. In the first quarter of 2000, we received
approximately $1.0 million and, in the second quarter of 2000, we received
approximately $5.5 million. These proceeds resulted from the sale of
approximately 59 thousand and 459 thousand shares of Common Stock pursuant to
the Equity Line in the above corresponding periods. Thus, to date we have
received $16.0 million and have $44.0 available under the amended Equity Line
agreement.
Five-year warrants have been issued under both of these financing
instruments. In conjunction with the Convertible Debenture, warrants to purchase
approximately 656 thousand shares of Common Stock at an exercise price of $13.86
per share and 139 shares of Common Stock at an exercise price of $16.18 per
share, respectively, were issued in 1999. At the dates of grant, the fair values
ascribed to these warrants were approximately $5.5 million and $1.1 million,
respectively, based on a Black-Scholes valuation model, and these amounts are
being amortized as additional interest expense over the term of the debt. We
recorded amortization of $0.3 million for the three months ended June 30, 2000
and $0.6 million for the six months ended June 30, 2000. As of June 30, 2000,
the unamortized fair value amounted to $5.3 million. In conjunction with the
Equity Line, in January 2000 we issued warrants to purchase 95 thousand shares
of Common Stock at $11.51 per share.
6.
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6. STATEMENTS OF CASH FLOWS DATA
<TABLE>
<CAPTION>
Six months ended
June 30, 2000 June 30, 1999
------------------------------------
(In thousands)
<S> <C> <C>
Supplemental disclosure of cash flows information
Foreign tax paid $ 100 $ ----
Supplemental schedule of non-cash investing and
financing activities
Conversion of principal and related interest of Senior
Subordinated Convertible Notes into Common Stock $ ---- $ 10,267
Fair value of the Common Stock Warrants issued to
certain Investors in connection with the Convertible
Debenture $ ---- $ 6,515
</TABLE>
7. DISCONTINUED OPERATIONS
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. The drug delivery business has been accounted for as
a discontinued operation and the prior periods' financial statements have been
restated to report only continuing operations.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS,
INCLUDING, BUT NOT LIMITED TO, THOSE SPECIFICALLY IDENTIFIED AS SUCH, THAT
INVOLVE RISKS AND UNCERTAINTIES. THE STATEMENTS CONTAINED IN THIS QUARTERLY
REPORT ON FORM 10-Q THAT ARE NOT PURELY HISTORICAL ARE FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION
21E OF THE EXCHANGE ACT, INCLUDING WITHOUT LIMITATION STATEMENTS REGARDING OUR
EXPECTATIONS, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE. ALL
FORWARD-LOOKING STATEMENTS INCLUDED IN THIS QUARTERLY REPORT ON FORM 10-Q ARE
BASED ON INFORMATION AVAILABLE TO US ON THE DATE HEREOF, AND WE ASSUME NO
OBLIGATION TO UPDATE ANY SUCH FORWARD-LOOKING STATEMENTS. OUR ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING, BUT NOT LIMITED TO,
THOSE SET FORTH IN THE "RISK FACTORS" CONTAINED IN THE MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND ELSEWHERE IN
THIS QUARTERLY REPORT ON FORM 10-Q.
General
We are engaged in the development and manufacture of diagnostic medical
devices, utilizing proprietary technologies to satisfy unmet medical needs cost
effectively. Our current efforts are primarily focused on the
GlucoWatch--Registered Trademark--system and enhancements thereto. The
GlucoWatch system is a frequent, automatic and non-invasive
7.
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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 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 a glucose
monitoring system.
In mid-1998 we established product specifications and manufacturing
processes for the GlucoWatch system that the United States Food and Drug
Administration (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. Certain of these product and manufacturing
enhancements will be submitted to the FDA in the form of one or more supplements
to our existing premarket approval (PMA) application shortly after PMA approval,
assuming the FDA approves our existing PMA. Future supplements will include
enhancements such as increasing product performance, increasing user
convenience, increasing manufacturing capacity, and lowering manufacturing
costs. We are in the early developmental stages for a future telemetric product
that allows 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; however, 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, and 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 that the FDA believes it will approve the application,
pending specific final conditions. The conditions stated relate to
manufacturing, final printed labeling materials, and post-market evaluations of
certain aspects of product performance.
After FDA approval, we anticipate introducing the GlucoWatch biographer
initially on a limited basis to 100-200 patients selected by 10-15 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 the GlucoWatch biographer can be made broadly available,
our large-scale production equipment and facility must be qualified and
validated, then submitted to the FDA for approval. For this product category, it
is a common sequence to seek approval for commercial-scale manufacturing after a
PMA application is approved. We anticipate an FDA approval decision for our
large-scale manufacturing in the first part of 2001. Also, 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. Our GlucoWatch system is a
revolutionary product, and its commercialization will
8.
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depend on successful implementation of manufacturing, sales, marketing and
reimbursement plans.
In March 2000 we entered into a Supply Agreement with Sanmina Medical
Products Division, a division of Sanmina Corporation, for the manufacture of our
GlucoWatch biographer.
In June 2000 we entered into a Supply Agreement with E.I. du Pont de
Nemours and Company ("DuPont") for the supply of thick film materials for our
GlucoWatch biographer. A key component of the GlucoWatch biographer is the
sensor, which Cygnus developed with DuPont's materials. This new agreement
replaces and supercedes both the Detection of Analytes Product Development and
License Agreement and the separate Supply Agreement previously entered into
between the parties on June 19, 1998.
In June 2000 the Board of Directors of the Company adopted a formal
written Audit Committee Charter specifying the scope of its Audit Committee's
responsibilities and the means by which it carries out those responsibilities.
The Charter was adopted in accordance with the new applicable Securities and
Exchange Commission regulations and Nasdaq Marketplace Rules that require
companies to adopt a formal written charter.
In June 2000 we established Cygnus (UK) Limited, a wholly owned
subsidiary of Cygnus, Inc., in the United Kingdom for the potential introduction
of the GlucoWatch biographer into the United Kingdom and other European
countries.
On December 15, 1999, we completed the sale of substantially all of our
drug delivery business segment assets to Ortho-McNeil Pharmaceutical, Inc.
("Ortho-McNeil"), 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 certain milestones. The contingent payments relate to the
achievement of certain technical, regulatory and commercialization milestones
related to the EVRA--Trademark--(Johnson & Johnson, New Brunswick, New Jersey)
transdermal contraceptive patch. Because the initial milestone was not
achieved, we are now eligible to receive up to $50 million in these contingent
milestones between 2000 and 2006; however, because the achievement of these
milestones is not within our control, we cannot predict the likelihood or timing
of these contingent payments.
Our results of operations vary significantly from year to year, and
from quarter to quarter, and in the past have depended on, among other
factors, the nature of activities pursued and the level of expenses incurred,
and the signing of new agreements and the timing of recognizing payment
amounts specified thereunder. The level of revenues in any given period is
not necessarily indicative of expected revenues for future periods. We have
incurred net losses each year since our inception and do not believe we will
achieve profitability in 2000. At June 30, 2000 our accumulated deficit and
net capital deficiency were approximately $191.1 million and $4.4 million,
respectively.
9.
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RESULTS OF OPERATIONS
COMPARISON FOR THE QUARTERS ENDED JUNE 30, 2000 AND 1999
NO CONTRACT REVENUES were recorded for the quarters ended June 30, 2000
and June 30, 1999. Contract revenues were $1.0 million for the six months ended
June 30, 2000, compared to $0.0 million for the six months ended June 30, 1999.
The increase in contract revenues for the six months ended June 30, 2000 was
primarily due to the amortization of a milestone payment received in 1999 under
our collaboration agreement with Yamanouchi Pharmaceutical Co., Ltd. for the
commercialization of the GlucoWatch system in Japan. Under the Yamanouchi
agreement, we are eligible to receive additional milestone payments prior to
commercialization and to receive a percentage of the product's future commercial
success in Japan.
Contract revenues, if any, are expected to fluctuate from quarter to
quarter and from year to year, and future contract revenues, if any, cannot be
reasonably predicted. The contributing factors to achieving contract revenues
include, but are not limited to, strategic decisions on self-funding certain
projects, future successes, if any, in finalizing new collaborative agreements
and achievement of milestones under our current contract. We are unable to
predict to what extent a termination of our existing contract or new
collaborative agreements, if any, would impact overall contract revenues in 2000
and future periods.
RESEARCH AND DEVELOPMENT EXPENSES for the quarter ended June 30, 2000
were $4.6 million compared to $3.2 million for the quarter ended June 30, 1999
and were $8.4 million for the six months ended June 30, 2000, compared to $8.8
million for the six months ended June 30, 1999. This increase in research and
development expenses for the quarter ended June 30, 2000 is primarily due to an
increase in research activities in connection with the development and testing
of a higher capacity manufacturing process for the consumable AutoSensor.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES for the quarter ended
June 30, 2000 were $2.2 million, compared to $1.5 million for the quarter ended
June 30, 1999 and were $4.1 million for the six months ended June 30, 2000,
compared to $2.6 million for the six months ended June 30, 1999. The increase is
primarily due to expenses incurred for pre-commercialization and other general
support activities, and non-cash, stock-based compensation.
INTEREST INCOME/(EXPENSE), NET for the quarter ended June 30, 2000 were
$(0.5) million compared to $(1.5) million for the quarter ended June 30, 1999
and were $(0.8) million for the six months ended June 30, 2000, compared to
$(1.8) million for the six months ended June 30, 1999. The decrease in net
interest expense is due primarily to the June 1999 write-down of the remaining
unamortized debt issuance costs associated with the Senior Subordinated
Convertible Notes Agreement entered into in February 1998. In addition, interest
income earned for the quarter and six months ended June 30, 2000 increased in
conjunction with the higher average year 2000 cash, cash equivalents and
investment balances.
10.
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LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and investment balances as of June 30, 2000
totaled $31.8 million. Through June 2000 we have received net proceeds of
approximately $111.4 million from public offerings of our Common Stock, and we
have financed approximately $11.1 million of manufacturing and research
equipment under capital loan and lease arrangements. Borrowings under those
arrangements are secured by specific Cygnus assets. We have an outstanding bank
loan agreement with Silicon Valley Bank that requires monthly principal and
interest payments through November 2001, in addition to compliance with various
financial covenants. As of June 30, 2000, there was $4.4 million outstanding
under this agreement, and borrowings are secured by specific Cygnus assets.
We have the second Additional Tranche of $3.0 million available under
our 1999 Convertible Debenture and Warrant Purchase Agreement, and we have $44.0
million available under our amended 1999 Structured Equity Line Flexible
Financing Agreement.
Net cash used in operating activities for the six months ended June 30,
2000 was $13.1 million, compared with net cash used of $10.2 million for the six
months ended June 30, 1999. Cash used in operating activities during the six
months ended June 30, 2000 was primarily due to the net loss of $12.4 million
from continuing operations.
The current level of cash used in operating activities is not
necessarily indicative of the level of future cash usage. We expect an increase
in operating cash usage for 2000.
Net cash used in investing activities of $7.8 million for the six
months ended June 30, 2000 resulted primarily from net purchases of investments
of $6.8 million and capital expenditures of $0.9 million. Net cash provided by
investing activities of $12.1 million for the six months ended June 30, 1999
resulted primarily from net sales of investments of $14.2 million, offset by
capital expenditures of $2.1 million.
Net cash provided by financing activities totalled $6.9 million for
the six months ended June 30, 2000 and included net proceeds of $6.3 million
from the sales of Common Stock under our 1999 Structured Equity Line Flexible
Financing Agreement and additional stock proceeds of $2.2 million, offset by
long-term debt repayments of $1.6 million. Net cash provided by financing
activities of $19.4 million for the six months ended June 30, 1999 included
gross proceeds of $14.0 million and $4.0 million from the June 1999 issuance
of 8.5% Convertible Debentures and from the sale of Common Stock under the
Equity Line, respectively, and additional stock proceeds of $3.2 million,
offset by long-term debt and capital lease repayments of $1.6 million and
$0.2 million, respectively.
Our long-term capital expenditure requirements will depend upon
numerous factors, including, but not limited to: (i) the progress of our
research and development programs, (ii) the time required to obtain regulatory
approvals, (iii) the resources that we devote to the development of self-funded
products, proprietary manufacturing methods and advanced technologies, (iv) our
ability to obtain any additional collaborative agreements, (v) the additional
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expenditures to support the manufacture of new products, if and when approved,
and (vii) possible acquisitions of products and technologies. As we evaluate the
progress of our development projects (in particular the GlucoWatch system and
our enhanced glucose monitoring products in development), our commercialization
plans and the lead time to set up manufacturing capabilities, we may commence
long-term planning for another manufacturing site. Nevertheless, we believe that
such long-term planning will not result in any material impact on cash flows and
liquidity for the next twelve months.
Based upon current expectations for operating losses and projected
short-term capital expenditures, we believe that existing cash, cash equivalents
and investments of $31.8 million as of June 30, 2000--when coupled with cash
available from public financings (including debt or equity financings), any
potential collaborations and earnings from investments--will be sufficient to
meet our operating expenses, debt servicing and repayments and capital
expenditure requirements at least for the next twelve months. However, there can
be no assurance that we will not require additional financing, depending upon
future business strategies, manufacturing and commercialization efforts, results
of clinical trials, management decisions to accelerate certain research and
development programs, and other factors.
RISK FACTORS
WE WISH TO CAUTION STOCKHOLDERS AND INVESTORS THAT THE FOLLOWING
IMPORTANT FACTORS, AMONG OTHERS, IN SOME CASES HAVE AFFECTED, AND IN THE FUTURE
COULD AFFECT, OUR ACTUAL RESULTS AND COULD CAUSE OUR ACTUAL RESULTS FOR 2000 AND
BEYOND TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN ANY FORWARD-LOOKING
STATEMENTS MADE BY OR ON BEHALF OF CYGNUS. THE STATEMENTS UNDER THIS CAPTION ARE
INTENDED TO SERVE AS CAUTIONARY STATEMENTS WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995. THE FOLLOWING INFORMATION IS NOT
INTENDED TO LIMIT IN ANY WAY THE CHARACTERIZATION OF OTHER STATEMENTS OR
INFORMATION UNDER OTHER CAPTIONS AS CAUTIONARY STATEMENTS FOR SUCH PURPOSE.
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 such supplements will be
approved or that one or more new PMAs will not need to be filed. The timing
for approval of PMA supplements could result in substantial delays in the
introduction of product enhancements and our ability to manufacture large
quantities of AutoSensors at reduced cost. Even if we receive the necessary
regulatory approvals for the GlucoWatch system, there can be no assurance
that unforeseen problems will not occur in product manufacturing, commercial
scale-up, marketing or product distribution. Any such occurrence could
significantly delay the commercialization of the GlucoWatch system or prevent
its market introduction entirely. The regulatory requirements and procedures
vary on a country-by-country basis, and we may not be able to obtain
regulatory approval in certain countries. Furthermore, even if the GlucoWatch
system is successfully developed, the commercial success of the GlucoWatch
system will depend on its acceptance in the market.
12.
<PAGE>
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 the
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.
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 a more extensive
capability for marketing, distributing, manufacturing and sales or enter into
arrangements with third parties to market, distribute, manufacture and sell
our products. We cannot assure you that we will be able to successfully
develop more extensive marketing, distributing, manufacturing and sales
capabilities on our own or that we will enter into acceptable marketing,
distributing, manufacturing and sales agreements with third parties. If we
maintain our own marketing, distributing, manufacturing and sales
capabilities, we will compete with other companies that have experienced and
well-funded marketing, distributing, manufacturing and sales operations. If
we enter into a marketing arrangement with a third party, any revenues we
receive will depend on the third party, and we will likely have to pay a
sales commission or similar amount to the third party. In summary, we may be
unable to successfully commercialize our products after FDA approval or may
experience delays in commercialization.
WE MAY NOT BE ABLE TO ENTER INTO AGREEMENTS NECESSARY FOR COMMERCIALIZATION
OF PRODUCTS.
One of our priorities is to establish an alliance or alliances for
the commercialization of the GlucoWatch system in North America and Europe.
We do not have any marketing or distribution agreements for the GlucoWatch
system other than the Yamanouchi collaboration in Japan. The purpose of
necessary alliances is for us to secure certain commercialization functions,
such as distribution, sales and customer service. We are in discussions with
several companies regarding this objective. Some of the companies are
international in scope and would provide the requisite commercialization
functions worldwide; however, even if a worldwide commercialization partner
is obtained, this may not occur until after our large-scale manufacturing
process is approved by the FDA. There can be no assurance that we will enter
into an agreement with a worldwide commercialization partner. Other companies
focus on certain geographies and/or certain commercialization functions. We
are evaluating out-sourced capabilities for launch without a worldwide
commercialization alliance. There can be no assurance that we will be able to
out-source certain commercialization capabilities for launch. We cannot
assure you that third parties performing such out-sourced capabilities will
not, for competitive reasons, support, directly or indirectly, a company or
product that competes with one of our products. Furthermore, any dispute
between us and such a third party might require us to initiate or defend
against expensive litigation or arbitration proceedings. If such 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. We cannot assure you that we would be able to reach
agreement with a replacement 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 would increase substantially.
Additionally, we may choose to self-fund certain research and development
projects in order to exploit our technologies. If these activities result in
a commercial product, they will help our long-term operating results but will
negatively affect our short-term operating results. Furthermore, as discussed
above, we lack marketing, manufacturing, distribution and sales experience in
the medical device field.
THIRD PARTIES MAY NOT REIMBURSE PATIENTS, HOSPITALS AND PHYSICIANS FOR THE COSTS
OF MEDICAL DEVICES.
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 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 certain countries
until eligibility for reimbursement is established. This could potentially
harm our business, financial condition and results of operations.
WE CANNOT PREDICT THE MARKET ACCEPTANCE OF OUR PRODUCTS.
We are focusing our efforts predominantly on a line of frequent,
automatic, and non-invasive glucose monitoring devices. No one can predict
market acceptance or penetration of such products, given that they are entirely
different from any glucose diagnostic 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 they will be accepted. 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. Furthermore, market
acceptance is also influenced by the level of reimbursement, if any.
13.
<PAGE>
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. Furthermore, we cannot assure you that our
competitors will not succeed in developing, 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. 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 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 materially
adversely affect us.
WE DEPEND ON THIRD-PARTY SUPPLIERS.
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 have a material effect on our business, financial
condition and results of operations.
14.
<PAGE>
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.
15.
<PAGE>
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 materially adversely affect
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, to sell
all or a portion of our assets, or to sell equity securities. There is no
assurance that we could successfully refinance, sell our assets or sell equity
securities, or, if we could, we cannot give any assurance as to the amount of
proceeds we could realize. In the event of insolvency, bankruptcy, liquidation,
reorganization, dissolution or winding-up of our business or upon default or
acceleration relating to our debt obligations, our assets will first be
available to pay the amounts due under our debt obligations. Holders of Common
Stock would only receive the assets remaining, if any, after payment of all
indebtedness and Preferred Stock, 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, 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.
16.
<PAGE>
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 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, financial condition and results of operations could be materially
adversely affected.
WE MAY NOT BE ABLE TO RETAIN OR HIRE KEY PERSONNEL.
Our ability to operate successfully and manage our potential future
growth significantly depends upon retaining key scientific, technical, 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 adversely affect our
business, financial condition and operating results.
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 have a material
adverse effect on our business, financial condition and operating results.
17.
<PAGE>
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: (i) 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, (ii)
permit the remaining directors (but not the stockholders, unless the directors
so resolve) to fill vacancies and newly created directorships on the Board,
(iii) eliminate the ability of stockholders to act by written consent and (iv)
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 in (i) through (iv). Such 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 the 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to Part II, Item 7A, Quantitative and Qualitative
Disclosures About Market Risk, in our Annual Report on Form 10-K for the year
ended December 31, 1999.
18.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 9, 2000 our Annual Meeting of Stockholders was held. The
following Directors were re-elected at this meeting:
<TABLE>
<CAPTION>
DIRECTORS IN FAVOR WITHHELD
<S> <C> <C>
Frank T. Cary 21,806,078 700,743
John C Hodgman 21,878,722 628,099
Andre F. Marion 21,886,006 620,815
Richard G. Rogers 21,840,408 666,413
Walter B. Wriston 21,809,673 697,148
</TABLE>
Other matters voted upon:
<TABLE>
<CAPTION>
VOTES
--------------------------------------------------------------------
BROKER
AFFIRMATIVE NEGATIVE ABSTAIN NON-VOTES
<S> <C> <C> <C> <C>
To approve an amendment to the 1991 Employee
Stock Purchase Plan to increase the number of
shares of Common Stock authorized for 11,322,813 1,424,635 124,116 9,635,257
issuance over the term of the Purchase Plan
by 700,000 shares.
To approve an amendment to the 1999 Stock
Incentive Plan to increase the number of 6,973,359 5,748,326 149,879 9,635,257
shares of Common Stock authorized for
issuance thereunder by an additional
2,000,000 shares.
To re-appoint Ernst & Young LLP to serve as 22,389,161 66,389 51,271 0
the Company's independent auditors.
</TABLE>
19.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
The following exhibits are filed herewith or incorporated by reference:
3.01 Bylaws of Cygnus, Inc., as amended, incorporated by reference
to Exhibit 3.01 of our Form 10-Q for the quarter ended March
31, 2000.
3.02 Restated Certificate of Incorporation of Cygnus, Inc., as
amended to date, incorporated by reference to Exhibit 3.02 of
our Form 10-Q for the quarter ended March 31, 2000.
4.01 Specimen of Common Stock certificate of Cygnus, Inc.,
incorporated by reference to Exhibit 4.1 of our Registration
Statement Form S-1 No. 33-38363.
4.02 Form of Senior Indenture incorporated herein by reference to
Exhibit 4.1 filed with our Registration Statement on Form S-3
(File No. 33-39275) declared effective by the Securities and
Exchange Commission on November 12, 1997 (the "November 1997
Form S-3").
4.03 Form of Subordinated Indenture incorporated herein by
reference to Exhibit 4.2 filed with our November 1997 Form
S-3.
4.04 Form of Senior Debt Security (included in Exhibit 4.1)
incorporated herein by reference to Exhibit 4.3 filed with our
November 1997 Form S-3.
4.05 Form of Subordinated Debt Security (included in Exhibit 4.2)
incorporated herein by reference to Exhibit 4.4 filed with our
November 1997 Form S-3.
4.06 First Supplemental Indenture, dated as of February 2, 1998 by
and between Cygnus, Inc. and State Street Bank and Trust
Company of California, N.A. incorporated by reference to
Exhibit 4.5 of our Form 8-K dated February 4, 1998.
4.07 Second Supplemental Indenture, dated as of October 28, 1998,
by and between Cygnus, Inc. and State Street Bank and Trust
Company of California, N.A. to the Indenture dated as of
February 3, 1998 and the First Supplemental Indenture dated as
of February 3, 1998, incorporated by reference to Exhibit 4.8
of our Form 8-K filed on October 30, 1998.
4.08 Amended and Restated Rights Agreement dated October 27, 1998
between Cygnus, Inc. and ChaseMellon Shareholder Services, LLC
(the "Rights Agent" successor to Chemical Trust), which
includes the Certificate of Determination for the Series A
Junior Participating Preferred Stock as Exhibit A, the form of
Rights Certificate as Exhibit B and the Summary of Rights to
Purchase Preferred Shares as Exhibit C, incorporated by
reference to Exhibit 99.2 of our Form 8A/A filed on December
14, 1998, Registration No. 0-19962.
20.
<PAGE>
4.09 Registration Rights Agreement dated June 30, 1999 between
Cygnus, Inc. and Cripple Creek Securities, LLC, incorporated
by reference to Exhibit 4.11 of our Form 10-Q for the quarter
ended June 30, 1999.
4.10 Registration Rights Agreement dated June 29, 1999 between
Cygnus, Inc. and the listed investors on Schedule I thereto,
incorporated by reference to Exhibit 4.12 of our Form 10-Q for
the quarter ended June 30, 1999.
10.109 Amendment No. 2 to Structured Equity Line Flexible Financing
Agreement between Cygnus, Inc. and Cripple Creek Securities,
LLC, dated March 27, 2000, incorporated by reference to
Exhibit 10.109 of our Form 10-Q for the quarter ended March
31, 2000.
10.110 Amendment No. 3 to our Structured Equity Line Flexible
Financing Agreement between Cygnus, Inc. and Cripple Creek
Securities, LLC, dated May 9, 2000.
*10.207 Supply Agreement between Cygnus, Inc. and Sanmina Medical
Products Division, a division of Sanmina Corporation, dated
March 1, 2000.
*10.208 Supply Agreement between Cygnus, Inc. and E.I. du Pont de
Nemours and Company, dated June 23, 2000.
27.0 Financial Data Schedule
-----------------
*A confidential treatment request has been applied for or granted with respect
to a portion of this document.
b) REPORTS ON FORM 8-K
We filed one Report on Form 8-K during the quarter ended June 30, 2000.
On May 17, 2000, we filed a Current Report on Form 8-K reporting under
Item 5 that we received an approvable letter on May 8, 2000 from the
FDA for Cygnus' GlucoWatch biographer. We also announced that pending
FDA approval, we anticipate introducing the GlucoWatch biographer on a
limited basis.
21.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CYGNUS, INC.
<TABLE>
<S> <C>
Date: JULY 27, 2000 By: /S/ JOHN C HODGMAN
---------------------- -----------------------------------
John C Hodgman
Chairman, President and Chief Executive Officer
(Principal Executive Officer)
Date: JULY 27, 2000 By: /S/ CRAIG W. CARLSON
---------------------- -------------------------------------
Craig W. Carlson
Chief Financial Officer
(Principal Accounting Officer)
</TABLE>
22.
<PAGE>
INDEX OF EXHIBITS
The following exhibits are included herein:
Exhibit 10.110 Amendment No. 3 to the Structured Equity Line
Flexible Financing Agreement between Cygnus, Inc. and
Cripple Creek Securities, LLC.
Exhibit 10.207 Supply Agreement between Cygnus, Inc. and Sanmina
Medical Products Division, a division of Sanmina
Corporation.
Exhibit 10.208 Supply Agreement between Cygnus, Inc. and E.I. du
Pont de Nemours and Company.
Exhibit 27 Financial Data Schedule.
23.
