QuickLinks -- Click here to rapidly navigate through this document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
Amendment No. 1 to
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2001
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
For the transition period from to
Commission File No. 0-18962
CYGNUS, INC.
(Exact name of Registrant as Specified in Its Charter)
Delaware | | 94-2978092 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
400 Penobscot Drive, Redwood City, California | | 94063 |
(Address of Principal Executive Offices) | | (Zip Code) |
(650) 369-4300 (Registrant's telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act:Common Stock, $ 0.001 par value
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 ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
The aggregate market value of the voting stock held by non-affiliates of the Registrant, based upon the March 18, 2002 closing price of $3.99 per share of the Registrant's common stock as reported on the Nasdaq National Market was $125,707,148. Shares of common stock held by each officer and director and person who owns 5% or more of the outstanding common stock have been excluded in that such persons may be deemed to be affiliates. Determination of affiliate status for this purpose is not a determination of affiliate status for any other purpose.
38,281,064
(Number of shares of common stock outstanding as of March 18, 2002)
Documents Incorporated by Reference
Portions of the Registrant's definitive Proxy Statement to be filed pursuant to Regulation 14A for its 2002 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
Explanatory Note
This Amendment No. 1 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 (the "Annual Report") is being filed pursuant to Rule 12b-15 to correct a typographical error in Item 7 of the Annual Report, "Management's Discussion and Analysis of Financial Condition and Results of Operation." On page 19 of the Annual Report, the sentence that originally read "We are obligated to spend a minimum of $8.0 million for promotional activities in 2001 under our agreement with Sankyo Pharma, Inc." now reads "We are obligated to spend a minimum of $8.0 million for promotional activities in 2002 under our agreement with Sankyo Pharma, Inc."
Except as noted herein, the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 remains as originally filed with the Securities Exchange Commission on March 27, 2002. All information in this Amendment No. 1 is as of December 31, 2001, and does not reflect any subsequent information or events other than the change referred to above.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Some of the statements in this report, 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 report, 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 manufacture and scale-up commercially the GlucoWatch biographer, plans for commercialization alliances, our ability to achieve market acceptance of the GlucoWatch biographer, and plans for enhancements and possible manufacturing changes through the regulatory 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 below in "Risk Factors" and elsewhere in this report, including in the documents incorporated by reference.
This information should be read in conjunction with our consolidated financial statements and accompanying notes thereto in the F-pages of this report.
General
We develop, manufacture and commercialize new and improved glucose monitoring devices. Our products are designed to provide more data to individuals and their physicians and enable them to make better-informed decisions on how to manage diabetes. Our first approved product, called the GlucoWatch Biographer, is the only product approved by the FDA that provides frequent, automatic and non-invasive measurement of glucose levels. We believe our product represents the most significant commercial technological advancement in self-monitoring of glucose levels since the advent, approximately 20 years ago, of finger-stick blood glucose measurement.
We began selling the GlucoWatch Biographer in the United Kingdom in first quarter 2001. The limited and controlled U.K. launch has served as a valuable lead market prior to our commercialization in the United States. We anticipate launching the GlucoWatch Biographer in the United States in second quarter 2002.
In November 2001, we entered into a U.S. co-promotion agreement with Sankyo Pharma, Inc. for our GlucoWatch Biographer and similar glucose monitoring products. Pursuant to the agreement, Sankyo is required to pay us $10.0 million for co-promotion rights, $5.0 million of which has been received and $5.0 million of which is expected to be received in second quarter 2002. The agreement calls for Sankyo to provide a specialty sales force of 50 people and for us to fund promotional activities. Sankyo may also provide broad market coverage with their 450 primary sales care representatives. Under the agreement, we have an obligation to spend a certain minimum amount in promotional funds each year to advertise and promote our products.
Critical Accounting Policies
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Actual results could differ materially from those estimates. Although there are numerous policies associated with the preparation of our financial statements, the following policies are currently considered critical because of the level of management's estimates and judgements required.
2
Product revenues are generated upon the sale of our GlucoWatch Biographer system and related accessories. The GlucoWatch Biographer system consists of two integrated parts: the durable Biographer and the disposable, single-use AutoSensor. After the initial sale of the complete system, revenues will continue to be recorded upon the sale of additional AutoSensors and accessories to support the installed base of Biographer users.
Product sales are recorded on shipment, when transfer of title has taken place, there is persuasive evidence of an agreement, the price is fixed and determinable, and collection is reasonably assured. We may, from time to time, institute programs that allow the customer to return products for credit. In such instances, until we have an adequate demonstrated history of returns, we will defer revenue until the allowed return period expires. We accrue for estimated warranty costs and other allowances when the revenues from product sales are recognized.
Our contract revenues may include up-front and/or interim milestone payments from development and co-promotion agreements. Milestone payments will be recorded as revenue based on the provisions of the underlying agreement and the estimated period of continuing obligations, generally the contract term. No revenue is recognized for such milestones if there is any potential that these milestones may have to be repaid. The $5.0 million up-front milestone received in December 2001 and the $5.0 million payment expected in second quarter 2002 pursuant to our co-promotion agreement with Sankyo Pharma, Inc. will be deferred for three years from the initial product launch date because, upon the occurrence of certain circumstances in the first three years resulting in the termination of our agreement, the milestone amounts may have to be repaid to Sankyo. Consequently, if the agreement runs its full term, the milestone amounts will be recognized as revenue beginning in 2005 and continuing over the remaining life of our 12-year co-promotion agreement.
Our contract revenues also include payments received pursuant to research grants. Revenue is recognized based on the performance requirements of the grant contract and as reimbursable expenses are incurred.
Inventories are stated at the lower of cost (first-in, first-out method) or market, after appropriate consideration is given to obsolescence and inventories in excess of anticipated future demand. However, due to the early stage of our product commercialization activities, the estimates required in inventory valuation, including production yields and normal capacity, labor costs incurred in the production of each unit and overhead costs applicable to manufacturing operations are inherently uncertain, thus actual results may differ from those estimates. We will continue to evaluate the estimates in our inventory valuation as our manufacturing operations become more stable and quantities reach more sustained levels. Adjustments to inventory for potential obsolescence or for inventories in excess of demand are also determined based on significant estimates, which could subsequently change.
Furthermore, prior to the approval by the FDA of our product and our commercial manufacturing processes, material was generally charged to research and development expenses upon receipt. Once material has been expensed, it will subsequently not be carried as inventory on the financial statements. Accordingly, year-end inventory values at December 31, 2001 and the cost of product revenues for the year ended December 31, 2001 do not include previously expensed material.
Results of Operations
Our results of operations have fluctuated from period to period and may continue to fluctuate in the future based upon the demand for our products, product revenues and our costs of product revenues, as well as the level of our expenses during any given period. Results of operations for any
3
period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative of future operating results. We are also subject to risks common to companies in our industry and at our stage of development, including risks inherent in our commercialization efforts, reliance upon our co-promotion partner, enforcement of our patents and proprietary rights, need for future capital, potential competition and uncertainty of regulatory approvals. We have incurred net losses each year since our inception and do not believe we will achieve profitability at least in 2002. At December 31, 2001, our accumulated deficit and stockholders' net capital deficiency were $255.0 million and $18.0 million, respectively.
The drug delivery business sold in 1999 has been accounted for as a discontinued operation. We did not generate any product revenues from our continuing operations prior to 2001. Results of operations for 2001 reflect the launch of our product in the United Kingdom.
Comparison for the Years Ended December 31, 2001 and 2000
Contract revenues for the year ended December 31, 2001 were $5.3 million, compared with the $1.1 million for the year ended December 31, 2000. In both years, contract revenues consisted primarily of milestone payments made by Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi") pursuant to our Product Supply and Distribution Agreement for Japan dated July 14, 1996. The increase in contract revenues was due to recognition of a $5.0 million milestone payment earned in March 2001 upon FDA approval of our GlucoWatch Biographer, compared with the remaining amortization during 2000 of a prior milestone payment received from Yamanouchi in 1999. Our agreement with Yamanouchi has been terminated and no further revenues are expected from them.
Revenues from our National Institutes of Health (NIH) two six-month Phase I Small Business Innovative Research (SBIR) contracts and our SBIR two-year grant are recognized as research services are performed. Total revenues recognized from such contract and grant amounted to $300,000 in 2001 and $52,000 in 2000, respectively.
Product revenues for the year ended December 31, 2001 were $489,000, compared with no product revenues for the year ended December 31, 2000. Product revenues resulted from sales of our GlucoWatch Biographer in the United Kingdom.
Costs of product revenues for the year ended December 31, 2001 were $271,000. Costs of product revenues consisted of material and other production costs associated with the manufacturing of the Biographer and AutoSensors in the United Kingdom. Costs of product revenues did not include certain material and other product costs previously written off as research and development expenses. If we were to include material and other product costs previously written off that were later used in the production of the Biographer and the AutoSensor, our costs of product revenues at current production levels would have been $547,000, which would have resulted in negative gross margins. Manufacturing costs included in the cost of each unit are greater at low unit volumes, such as have occurred in our controlled UK launch in 2001 and will occur through our initial U.S. launch. Overall, we expect our gross margin to vary from period to period due to the mix of products sold, e.g., Biographers and AutoSensors, and demand fluctuations in the utilization of our manufacturing facilities.
Research and development expenses include costs for scientific and product development personnel, material used in the development and validation of high capacity manufacturing processes, consultants, clinical trials, supplies, depreciation of equipment used in research and product development, and facilities allocations. Significant expenses have been incurred in our efforts to increase our manufacturing capacity of both the disposable AutoSensors and durable Biographer. We have devoted internal resources and conducted clinical trials to expand the indications of our products, specifically to the pediatric segment. We also have ongoing efforts to enhance features and the usability of our products, which may be incorporated in subsequent generations of our products. We do not separately track the research and development expenses incurred for various departmental activities. In the
4
coming year, our research and development focus will depend on the results of our product commercialization and any approvals received from the FDA. As timing and results of our development activities largely depend upon product review and approval by the FDA and are subject to significant risks and uncertainties, we are unable to estimate the amounts that will be spent in the above categories. Research and development expenses for the year ended December 31, 2001 were $27.4 million, compared with $21.2 million for the year ended December 31, 2000. The increase was primarily due to an increase in expenses incurred for development and testing of high capacity manufacturing processes, enhancements of our glucose monitoring products, and clinical trials. We anticipate that there will be a decrease in our overall research and development expenses in 2002 as we move into commercialization.
Marketing, general and administrative expenses for the year ended December 31, 2001 were $15.5 million, compared with $10.1 million for the year ended December 31, 2000. The increase was primarily due to marketing efforts to support the commercial launch programs in the United Kingdom ($2.1 million), implementation of the U.S. pilot marketing program, development of training programs for health care professionals and patients, and development of promotional programs in anticipation of a U.S. launch. We expect that marketing, general and administrative expenses will increase in 2002 as we conduct and fund co-promotional activities with Sankyo Pharma and commercialize our GlucoWatch Biographer in the United States. We are obligated to spend a minimum of $8.0 million for promotional activities in 2002 under our agreement with Sankyo Pharma, Inc.
Interest and other income for the year ended December 31, 2001 was $2.4 million, compared with $2.0 million for the year ended December 31, 2000. Included in the 2001 interest and other income is a gain of $1.1 million resulting from the sale of certain marketable equity securities. Excluding that gain, interest income decreased by $700,000 when compared to 2000. The decrease in interest and other income was primarily due to the higher year 2000 interest income earned in conjunction with the higher average year 2000 cash, cash equivalents and investment balances.
Interest and other expenses for the year ended December 31, 2001 were $3.7 million, compared with $3.7 million for the year ended December 31, 2000. Included in both 2001 and 2000 interest and other expenses are the interest accrued on our convertible debentures and capital lease financing arrangements, and the amortization of the value of the warrants issued in connection with our financing agreements.
Provision for taxes for the year ended December 31, 2001 was $527,000 compared with $100,000 for the year ended December 31, 2000. Provision for taxes primarily relates to foreign tax withholding applicable to the Yamanouchi milestone revenue recorded in the first quarter of 2001 and in the first quarter of 2000, and it also includes provisions for taxes paid in the United Kingdom.
Comparison for the Years Ended December 31, 2000 and 1999
Contract revenues for the year ended December 31, 2000 were $1.1 million, compared with $2.1 million for the year ended December 31, 1999. Contract revenues consisted primarily of the amortization of a milestone payment associated with the GlucoWatch Biographer received from Yamanouchi in 1999. The majority of this milestone payment was amortized in 1999, which resulted in decreased 2000 contract revenues when compared to 1999 contract revenues.
Revenues from the two six-month NIH Phase I SBIR contracts in the aggregate amount of $200,000 are recognized as research services are performed in 2000.
Research and development expenses for the year ended December 31, 2000 were $21.2 million, compared with $15.7 million for the year ended December 31, 1999. The increase is primarily due to an increase in expenses incurred to develop and test large-scale manufacturing processes for the
5
AutoSensor. Research, development and clinical activities primarily included support and development for our glucose monitoring products.
Marketing, general and administrative expenses for the year ended December 31, 2000 were $10.1 million, compared with $4.8 million for the year ended December 31, 1999. This increase is primarily due to our increased marketing efforts (including the establishment of a subsidiary and infrastructure in preparation for a commercial launch in the United Kingdom and the development and preparation of sales and marketing materials) and non-cash, stock-based compensation.
Interest and other income for the year ended December 31, 2000 was $2.0 million, compared with $200,000 for the year ended December 31, 1999. The increase in interest and other income was primarily due to interest income earned in conjunction with the higher average year 2000 cash, cash equivalents and investment balances.
Interest and other expenses for the year ended December 31, 2000 were $3.7 million, compared with $3.7 million for the year ended December 31, 1999.
Provision for taxes was $100,000 for the year ended December 31, 2000 and $200,000 for the year ended December 31, 1999.
Cumulative effect of a change in accounting principle. In June 1999 and September 1999, we issued convertible debentures of $14.0 million and $3.0 million, at conversion prices of $12.705 and $11.8663, respectively. The debentures were immediately convertible into shares of common stock and have a coupon rate of 8.5%. In connection with the issuance of these debentures, we also issued to debenture holders warrants to purchase an aggregate of 745,000 shares of common stock. At the time of the issuance of convertible debentures, we determined that, based on the fair value of common stock and specified conversion prices and in accordance with the then applicable accounting pronouncements, these debentures did not contain embedded beneficial conversion features.
In November 2000, the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) reached a consensus on Issue 00-27, Application of EITF Issue 98-5, "Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios to Certain Convertible Instruments," and concluded that an issuer should calculate the intrinsic value of a conversion option using the effective conversion price based on the proceeds received for or allocated to the convertible instrument instead of the specified conversion price in the instrument. The EITF required companies to apply the prescribed methodology for computing the beneficial conversion feature of convertible securities through a cumulative catch-up accounting change in the quarter that includes November 2000 for any such security issued after May 20, 1999, the effective date of EITF 98-5. Accordingly, we recorded a one-time, non-cash charge of $5.0 million in the fourth quarter of 2000 to record the cumulative effect of a change in accounting principle as required by the EITF.
Discontinued operations. No revenues or net income were recognized on the discontinued operations for the year ended December 31, 2000 as a result of the 1999 sale of our drug delivery business. Total revenues and net income on the discontinued operations were $12.3 million and $3.0 million, respectively, for the year ended December 31, 1999. In 1999, we also recorded a gain of $16.3 million on the disposal of our drug delivery business.
Financing Instruments
In June 1999, we entered into two financing arrangements: a Convertible Debenture and Warrant Purchase Agreement ("Convertible Debenture") and a Structured Equity Line Flexible FinancingSM Agreement ("Equity Line"). As of December 31, 2001, we had $3.0 million available under the Convertible Debenture and $31.4 million available under our Equity Lines.
6
Under the Convertible Debenture, convertible debentures having a principal amount of $14.0 million were issued at a conversion price of $12.705 per share. The principal is due June 29, 2004. The Convertible Debenture also provided for an additional $6.0 million financing 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 due September 29, 2004. The second additional tranche of $3.0 million is still available under this financing instrument.
The Equity Line originally had a maximum aggregate issue price of $30.0 million over a two-year commitment period and allowed us, at our sole discretion, to sell common stock over this period. 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 provide for the issuance of 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 to June 30, 2003. In March 2001, we terminated our amended Equity Line agreement after receiving a total of $26.1 million, and entered into a second Equity Line agreement for a maximum aggregate issue price of $33.0 million with the same investors. The terms and conditions of this second Equity Line agreement are substantially the same as the prior amended Equity Line agreement, and the commitment period ends June 30, 2003. Under the second Equity Line, we have received $30.6 million through December 31, 2001. On October 1, 2001, we entered into our third Equity Line agreement with the same Investors for a maximum aggregate issue price of $29.0 million. The terms and conditions of this third Equity Line agreement are substantially the same as the prior Equity Line agreements, and the commitment period ends December 31, 2004. We have not utilized this third Equity Line. We have received a total of $56.7 million pursuant to the Equity Lines resulting from the sale of 7,592,312 shares of common stock and, as of December 31, 2001, we still have $31.4 million available under the second and third Equity Lines.
Five-year warrants have been issued under our financing instruments. In conjunction with the Convertible Debenture, warrants to purchase 656,000 shares of common stock at an exercise price of $13.86 per share and 139,000 shares of common stock at an exercise price of $16.18 per share were issued in 1999. At the dates of grant, the fair values ascribed to these warrants were $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 $1.3 million for the year ended December 31, 2001. As of December 31, 2001, the unamortized fair value amounted to $3.3 million. In conjunction with the Equity Lines, in January 2000 we issued five-year warrants to purchase up to 95,000 shares of common stock at $11.51 per share and, in May 2001, we issued five-year warrants to purchase up to 141,541 shares of common stock at exercise prices ranging from $6.00 to $20.40 per share and a five-year warrant to purchase up to 11,178 shares of common stock at an exercise price of $9.85 per share. These warrants have an aggregate fair value of $8.6 million based on a Black-Scholes valuation model, of which $2.0 million has been reflected as additional costs of financing and additional paid-in capital, resulting in no impact on our financial statements. In January 2002 we issued warrants to purchase up to 24,168 shares, 470,617 shares and 49,914 shares of common stock at exercise prices of $6.99, $9.76 and $7.74 per share, respectively.
Liquidity and Capital Resources
Cash, cash equivalents and investment balances as of December 31, 2001 totaled $23.7 million. We have received net proceeds of $151.6 million from public offerings of our common stock through December 31, 2001.
Net cash used in operating activities for the year ended December 31, 2001 was $28.2 million, compared with net cash used of $28.3 million for the year ended December 31, 2000. Cash used in operating activities during the year ended December 31, 2001 was primarily due to the net loss from operations of $39.2 million and a build-up in inventory of $1.9 million, partially reduced by a net
7
increase in liabilities of $4.2 million and deferred revenue of $5.0 million and after adjusting for non-cash stock-based compensation of $2.1 million. Cash used in operating activities during the year ended December 31, 2000 was primarily due to the net loss from operations of $37.0 million, adjusted for the recognition of a non-cash beneficial conversion feature related to the convertible debenture of $5.0 million, an increase in amortization of debt issuance and financing cost and debt discount of $1.4 million, depreciation expense of $1.3 million and stock-based compensation of $1.1 million.
Net cash provided by investing activities of $6.6 million for the year ended December 31, 2001 resulted primarily from net sales and maturities of investments of $9.1 million, offset by capital expenditures of $2.6 million. Net cash used in investing activities of $6.4 million for the year ended December 31, 2000 resulted primarily from net purchases of investments of $4.2 million and capital expenditures of $2.6 million.
Net cash provided by financing activities totaled $30.7 million for the year ended December 31, 2001 and included net proceeds of $32.5 million from the sale of common stock under our Equity Lines and additional stock proceeds of $1.3 million, partially offset by long-term debt repayments of $3.1 million. Net cash provided by financing activities totaled $14.0 million for the year ended December 31, 2000 and included net proceeds of $13.8 million from the sale of common stock under our original Equity Line and additional stock proceeds of $3.5 million, offset by long-term debt repayments of $3.2 million.
On February 20, 2002, we closed a round of financing wherein we offered 4.0 million shares of our common stock to investors and granted an over-allotment option of 600,000 shares to the underwriters, CIBC World Markets Corp. and Robertson Stephens, Inc., which they exercised on February 28, 2002. From this offering we received gross proceeds in the amount of $16.1 million, out of which we paid $910,000 as an underwriting discount and we estimated our other offering expenses amounted to $250,000.
The level of cash used in operating activities during 2001 is not necessarily indicative of the level of future cash usage. Our long-term capital expenditure requirements will depend upon numerous factors, including, but not limited to, (i) the resources that we devote to distribution, marketing and sale of our products, (ii) costs associated with high capacity manufacturing to meet market demand, (iii) the time required to obtain regulatory approvals, (iv) the additional expenditures to support the manufacture of new products, if and when approved, (v) the progress of our research and development programs and (vi) possible acquisitions of products and technologies.
At December 31, 2001 our contractual obligations for the next five years and thereafter are as follows:
Contractual Obligations(1)
| | Principal Payments Due By Period (In thousands)
|
---|
| | Total
| | Less than 1 year
| | 1-3 years
| | 4-5 years
| | After 5 years
|
---|
Convertible debentures(2) | | $ | 17,000 | | $ | — | | $ | 17,000 | | $ | — | | $ | — |
Capital lease obligations | | | 220 | | | 69 | | | 77 | | | 74 | | | — |
Operating leases(3) | | | 3,979 | | | 2,018 | | | 1,961 | | | — | | | — |
Arbitration obligations | | | 23,390 | | | 8,390 | | | 7,000 | | | 8,000 | | | |
Fixed asset purchase obligations | | | 280 | | | 280 | | | — | | | — | | | — |
| |
| |
| |
| |
| |
|
Total contractual cash obligations | | $ | 44,869 | | $ | 10,757 | | $ | 26,038 | | $ | 8,074 | | $ | — |
| |
| |
| |
| |
| |
|
- (1)
- Under our co-promotion agreement with Sankyo Pharma, Inc., we are required to spend a minimum of $8.0 million in promotional funds for each of the first two years to advertise and
8
promote our GlucoWatch Biographer products. Thereafter, we will fund this amount as appropriate. Such amounts are not included in the table above.
- (2)
- Our convertible debentures may be converted to common stock prior to their maturity date at the option of the parties under certain circumstances, therefore these debentures may not require use of our capital resources.
- (3)
- Future minimum lease payments under our operating leases, exclusive of sublease income.
Based upon current expectations for operating losses and projected short-term capital expenditures, we believe that existing cash, cash equivalents, and investments of $23.7 million, and the $31.4 million available from our Equity Lines as of December 31, 2001 will be sufficient to meet our existing operating expenses, debt servicing and repayments and capital expenditure requirements at least for the next 12 months. However, to support our commercialization activities in the United States, we will need additional funding, and such funding may include contract milestone payments, equity financing, debt issuance and the like. In addition, there can be no assurance that we will not require further financing, depending upon future business strategies, management decisions to accelerate certain research and development programs, and other factors.
Income Taxes
At December 31, 2001, we had federal net operating loss and research and development tax credit carryforwards of $229.0 million and $6.0 million, respectively. We had state net operating loss and tax credit carryforwards of $64.0 million and $4.2 million, respectively. These carryforwards expire at various dates beginning in 2001 and running through 2021. Because of the "change in ownership" provisions of the Internal Revenue Code, a substantial portion of our net operating loss and tax credit carryforwards may be subject to annual limitations. The annual limitations may result in the expiration of the net operating losses and tax credits before utilization.
Arbitration Obligation
We accrued an aggregate liability of $23.0 million in 1997 relating to an arbitration settlement agreement with Sanofi~Synthelabo. We have issued to Sanofi~Synthelabo a convertible promissory note in the principal amount of $6.0 million. This note was paid in full in cash in January 2002. Additionally, we paid $2.0 million in cash in February 2002 and are obligated to make payments of $3.0 million, $4.0 million, $4.0 million and $4.0 million in the first quarters of 2003 through 2006, respectively.
Contract Manufacturing Arrangements
In 1997, we entered into a Product Supply Agreement with Contract Manufacturing, Inc. (CMI), now Corium International ("Corium") to manufacture our AutoSensors. During 2001, 2000 and 1999, we paid Corium $4.9 million, $1.5 million, and $1.3 million, respectively. We also buy certain of our capital manufacturing equipment for the AutoSensors from a company previously under the control of the owner of Corium. During 2001, 2000 and 1999, we paid this latter company $1.8 million, $1.3 million and $2.0 million, respectively.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 141, "Business Combinations" (FAS 141). FAS 141 supersedes Accounting Principle Board Opinion No. 16, "Business Combinations" (APB 16) and Statement of Financial Accounting Standard No. 38, "Accounting for Preacquisition Contingencies of Purchased Enterprises" (FAS 38). FAS 141 requires the purchase method of accounting for all business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. We do not expect the adoption of FAS 141 to have a material effect on our financial condition or results of operations.
9
In July 2001, FASB issued Statement of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets" (FAS 142). FAS 142 supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets" (APB 17), and requires the discontinuance of goodwill amortization. In addition, FAS 142 includes provisions regarding the reclassification of certain existing recognized intangibles as goodwill, reassessment of the useful lives of existing recognized intangibles, reclassification of certain intangibles out of previously reported goodwill and the testing for impairment of existing goodwill and other intangibles. FAS 142 is required to be applied for fiscal years beginning after December 15, 2001, with certain early adoption permitted. We do not expect the adoption of FAS 142 to have a material effect on our financial condition or results of operations.
In October 2001, FASB issued Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (FAS 144), which supersedes Statement of Financial Accounting Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" (FAS 121). FAS 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. However, FAS 144 retains the fundamental provisions of FAS 121 for: (1) recognition and measurement of the impairment of long-lived assets to be held and used; and (2) measurement of long-lived assets to be disposed of by sale. FAS 144 is effective for fiscal years beginning after December 15, 2001. We do not expect the adoption of FAS 144 to have a material effect on our financial condition or results of operations.
10
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 2nd day of April, 2002.
| | CYGNUS, INC. |
| | By: | | /s/ JOHN C HODGMAN John C Hodgman Chairman, President and Chief Executive Officer (Principal Executive Officer) |
QuickLinks
Explanatory NoteSIGNATURES