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 SEPTEMBER 30, 1999
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 principle 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 OCTOBER 28, 1999:
Common Stock, $.001 par value - 24,773,821 shares
CYGNUS, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Item 1: Financial Statements
Condensed Consolidated Statements of Operations for the three and nine
month periods ended September 30, 1999 and 1998 (unaudited).................................2
Condensed Consolidated Balance Sheets at September 30, 1999 (unaudited)
and December 31, 1998.......................................................................3
Condensed Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 1999 and 1998 (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......................................................................11
Item 3: Quantitative and Qualitative Disclosures About Market Risk....................................27
PART II. OTHER INFORMATION
Item 1: Legal Proceedings.............................................................................28
Item 4: Submission of Matters to a Vote of Security Holders...........................................28
Item 6: Exhibits and Reports on Form 8-K..............................................................28
SIGNATURES...................................................................................................32
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CYGNUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
1999 1998 1999 1998
----------- ----------- ------------ ------------
Product revenues $ ---- $ ---- $ ---- $ 587
Contract revenues 3,915 2,463 10,278 7,822
Royalty and other revenues 352 319 972 714
----------- ------------ ------------ -----------
TOTAL REVENUES 4,267 2,782 11,250 9,123
Costs and expenses:
Costs of products sold ---- 741 ---- 2,701
Research and development 5,848 7,859 19,297 22,665
Marketing, general and administrative 1,710 3,634 5,176 8,350
----------- ------------ ------------ -----------
TOTAL COSTS AND EXPENSES 7,558 12,234 24,473 33,716
LOSS FROM OPERATIONS (3,291) (9,452) (13,223) (24,593)
Interest income/(expense), net (831) (171) (2,707) (227)
----------- ------------ ------------ -----------
NET LOSS $ (4,122) $ (9,623) $ (15,930) $ (24,820)
=========== ============ ============ ===========
BASIC AND DILUTED NET LOSS PER SHARE $ (0.17) $ (0.48) $ (0.70) $ (1.23)
============ ============ ============ ===========
Shares used in computation of
basic and diluted net loss per share 24,196 20,241 22,854 20,107
=========== ============ ============ ==========
(See accompanying notes.)
2
CYGNUS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
SEPTEMBER 30, December 31,
1999 1998
(UNAUDITED)
--------------------------------------------
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents $ 18,125 $ 10,219
Restricted cash 871 ----
Short-term investments 3,757 14,982
Trade accounts receivable, net of allowance 1,424 876
Inventories ---- 771
Prepaid expenses and other current assets 847 695
--------------------- ---------------------
Total current assets 25,024 27,543
EQUIPMENT AND LEASEHOLD IMPROVEMENTS:
Equipment and leasehold improvements, at cost 21,751 19,541
Less accumulated depreciation and amortization (14,381) (13,077)
--------------------------------------------
Net equipment and improvements 7,370 6,464
Long-term investments ---- 3,622
Deferred compensation and other assets 1,011 5,825
Deferred financing cost 6,299 ----
--------------------------------------------
Total assets $ 39,704 $ 43,454
============================================
LIABILITIES AND NET CAPITAL DEFICIENCY:
CURRENT LIABILITIES:
Accounts payable $ 2,253 $ 4,459
Accrued compensation 3,299 4,593
Accrued professional services 606 729
Other accrued liabilities 910 943
Customer advances 27 207
Current portion of arbitration obligation 320 60
Current portion of deferred revenue 2,120 1,153
Current portion of long-term debt 3,387 3,415
Current portion of capital lease obligations 442 442
--------------------------------------------
Total current liabilities 13,364 16,001
Long-term portion of arbitration obligation 23,909 24,158
Long-term portion of debt 4,158 8,252
Long-term portion of capital lease obligations 254 581
Senior Subordinated Convertible Notes ---- 22,563
Convertible Debentures 17,000 ----
Deferred compensation and other long-term liabilities 416 4,666
STOCKHOLDERS' NET CAPITAL DEFICIENCY:
Common stock 25 21
Additional paid-in-capital 172,475 143,155
Accumulated deficit (191,885) (175,955)
Accumulated other comprehensive income/(loss) (12) 12
--------------------------------------------
Net capital deficiency (19,397) (32,767)
--------------------------------------------
Total liabilities and stockholders' net capital
deficiency $ 39,704 $ 43,454
--------------------------------------------
--------------------------------------------
Note: The condensed consolidated balance sheet at December 31, 1998 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
CYGNUS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase/(Decrease) in Cash and Cash Equivalents
(unaudited)
(In thousands)
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
------------------ -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (15,930) $ (24,820)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization 1,334 1,391
Decrease/(increase) in assets 5,014 1,726
Increase/(decrease) in liabilities (4,664) (421)
Increase/(decrease) in arbitration liability 12 (13,871)
------------------ -------------------
NET CASH USED IN OPERATING ACTIVITIES (14,234) (35,995)
------------------ -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,229) (2,590)
Purchases of investments (4,901) (45,292)
Maturity and sale of investments 19,574 23,235
------------------ -------------------
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES 12,444 (24,647)
------------------ -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common Stock, net 10,130 14,193
Principal payment of Senior Subordinated Convertible Notes (12,500) ----
Principal payments of long-term debt (4,122) (1,598)
Payment of capital lease obligations (326) (375)
Issuance of Convertible Debentures, net 16,514 ----
Issuance of long-term debt, net ---- 6,110
Net proceeds from the issuance of Senior Subordinated Convertible
Notes ---- 40,351
------------------ -------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,696 58,681
------------------ -------------------
NET INCREASE /(DECREASE) IN CASH AND CASH EQUIVALENTS 7,906 (1,961)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,219 20,669
================== ===================
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,125 $ 18,708
================== ===================
(See accompanying notes.)
4
Cygnus, Inc.
September 30, 1999
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements of Cygnus, Inc. (all
references to "we", "us", "our", the "Company" or "Cygnus" in this Report on
Form 10-Q mean Cygnus, Inc.) as of and for the nine month periods ended
September 30, 1999 and 1998 included herein are unaudited, but include all
adjustments (consisting only of normal recurring adjustments) which the
management of Cygnus believes are 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 consolidated
financial statements should be read in conjunction with the audited financial
statements and related notes for the year ended December 31, 1998 included in
the Company's 1998 Annual Report on Form 10-K.
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 and warrants outstanding are excluded from the diluted earnings
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"), which we adopted on January 1,
1998, requires unrealized gains and losses on the Company's
available-for-sale securities to be included in other comprehensive income or
loss. Unrealized gains or losses for the three and nine month periods ended
September 30, 1999 and September 30, 1998 were not material and total
comprehensive loss approximated net loss for each of these periods.
4. NEW ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("FAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"). FAS 133 requires
all derivative instruments to be recorded on the balance sheet at fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction, and, if so, the type
of hedge transaction. In June 1999, the FASB issued FAS No. 137, "Accounting
for Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133" ("FAS 137"), which amends FAS 133 to be
effective for all fiscal years beginning after June 15, 2000 or January 1,
2001 for Cygnus. Management does not currently expect that adoption of FAS
137 will have a material impact on our financial position or results of
operations.
5
Cygnus, Inc.
September 30, 1999
5. INVENTORIES
Net inventories of $0.8 million as of December 31, 1998 consisted of
raw materials related to our estrogen transdermal product (FemPatch -
Registered Trademark - Warner-Lambert Co., Morris Plains, NJ - system) and
were stated at the lower of cost (first-in, first-out method) or market,
after appropriate consideration was given to obsolescence and inventories in
excess of anticipated future demand.
Due to the termination of the Supply Agreement between
Warner-Lambert Company ("Warner-Lambert") and the Company, all related
inventory was sold or written off against prior reserves during the first
quarter of 1999.
6. DEBT RESTRUCTURING
In February 1998, we entered into Note Purchase Agreements with
certain institutional investors ("the Investors") to issue and sell
approximately $43.0 million of 4% Senior Subordinated Convertible Notes Due
in 2005 (the "Notes"). On October 28, 1998, we restructured the Notes. Key
provisions in the restructured Notes included the October 1998 repayment of
$18.5 million in principal (reducing the principal balance from $43.0 million
to $24.5 million), a delay in the convertibility of the majority of the Notes
to June 30, 1999 or after, modification of the conversion prices of the
Notes, the ability of the Company to redeem at par at any time all or part of
the new principal amount of the Notes, an increase in the interest rate to
5.5% paid annually on the new principal balance and a change in the final
maturity of the Notes to October 1, 2000.
The restructured Notes, which totaled $24.5 million, were divided into
three tranches. The first tranche had an original principal amount of $6.0
million and was fully converted by January 1999 at $3.54 per share. The
second tranche also had an original principal amount of $6.0 million and was
fully converted on June 30, 1999 at $6.89 per share. The third tranche of the
restructured Notes had an original principal amount of $12.5 million and
could not have been converted into Common Stock until July 1, 1999, at a
conversion price that would have been determined based on market-based
pricing formulas which contained look-back provisions. Also, under the terms
of the restructured Notes, if we issued a call before July 1, 1999 for the
redemption of the third tranche, the Note Holders would not be entitled to
convert any portion of that tranche. On June 29, 1999, we issued redemption
notices with a redemption date of July 9, 1999 for the entire third tranche
and, accordingly, the Note Holders were not entitled to convert any portion
of that tranche. On July 9, 1999, we paid $12.5 million in principal and $0.4
million in accrued interest to redeem the third tranche.
In order to help finance the redemption of the third tranche
discussed above and to provide additional capital, we entered into two new
financing arrangements.
On June 29, 1999, we entered into a Convertible Debenture Agreement
with certain institutional Investors to issue and sell $14.0 million
principal amount of 8.5% Convertible Debentures Due June 29, 2004
("Convertible Debentures"). These Convertible Debentures are convertible into
shares of Common Stock at any time at a conversion price of $12.705 per
share. We received gross proceeds of $14.0 million from the issuance of the
Convertible Debentures
6
Cygnus, Inc.
September 30, 1999
and incurred debt issuance costs of $0.5 million. With the mutual agreement
of the Investors and the Company, or if certain trading volume, pricing and
other conditions are met, we and/or the Investors have the right before June
29, 2000 to require the sale of an additional $6.0 million in additional
aggregate principal amount of Convertible Debentures in two separate tranches
of $3.0 million each (each an "Additional Tranche"), provided that the second
Additional Tranche notice date may not be earlier than sixty days after the
first Additional Tranche notice date. The conversion price for each
Additional Tranche will be the average of the closing bid prices for the ten
trading days prior to and including the respective Additional Tranche notice
date and the ten trading days subsequent to the respective Additional Tranche
notice date ("Additional Closing Price") multiplied by 110% (see Convertible
Debenture and Warrant Purchase Agreement incorporated by reference as Exhibit
10.41 to Form 10-Q for period ended June 30, 1999).
On September 29, 1999 we notified the Investors of our intent to
cause the sale of the first Additional Tranche and we received $3.0 million
in gross proceeds from the issuance of Convertible Debentures due September
29, 2004 and incurred debt issuance costs of $0.1 million. These Convertible
Debentures are convertible into shares of our Common Stock at any time at a
conversion price of $11.8663 per share. The Company and/or the Investors may
still require a second Additional Tranche subject to the terms set forth
above any time after October 1999 and before June 29, 2000.
In conjunction with the issuance of Convertible Debentures in June
1999 and the first Additional Tranche in September 1999, we issued warrants
to purchase approximately 656 thousand shares and 139 thousand shares of
Common Stock at the exercise price of $13.86 per share and $16.18 per share
respectively with a term of five years from the respective date of grant. At
the respective 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. The amounts were recorded as deferred
financing cost and are being amortized as additional interest expense over
the life of the respective warrants. We have recorded amortization of $0.3
million for both the three months and the nine months ended September 30,
1999. We will be required to issue more warrants if a second Additional
Tranche of the Convertible Debentures is sold. Such warrants will be priced
at 150% of the Additional Closing Price. The number of additional warrants to
be issued would be determined by dividing 50% of the Additional Tranche by
the Additional Closing Price.
On June 30, 1999, we also entered into a Structured Equity Line
Flexible Financing Agreement ("Equity Line") with Cripple Creek Securities
LLC ("Cripple Creek"). The Equity Line is effective for two years
("Commitment Period") and allows us, at our sole discretion, to sell Common
Stock to Cripple Creek with a maximum aggregate issue price of up to $30.0
million over the Commitment Period. On June 30, 1999, we received a net of
approximately $3.8 million, after deducting the issuance costs, from the $4.0
million ("Initial Investment") in exchange for approximately 346 thousand
shares of Common Stock. Under the terms of the Equity Line, over a period of
eighty trading days following June 30, 1999 ("Initial Period"), Cripple Creek
is required to deliver purchase notices from time to time for the aggregate
amount of the Initial Investment ($4.0 million) to purchase shares of our
Common Stock. The per-share price for each such purchase notice equaled 98%
of the average of the two lowest daily trade prices during the six trading
days immediately prior to the respective purchase notice. The number of
shares originally issued was subject to an upward adjustment, if
7
Cygnus, Inc.
September 30, 1999
required, to match the aggregate number of shares covered by the $4.0 million
of purchase notices. On August 23, 1999, we issued an additional 92 thousand
shares to reflect such upward adjustment.
On September 29, 1999, we received $4.0 million ("Additional
Investment") from Cripple Creek pursuant to an amendment to the Equity Line
agreement (the "Equity Line Amendment") by which we issued an additional 361
thousand shares of Common Stock. The terms for this Additional Investment are
similar to those applied to the Initial Investment, and the number of shares
may be adjusted upwards at the end of a 110 trading day period following
September 29, 1999 (the "Additional Investment Period") pursuant to the same
adjustment mechanism as in the Initial Period. Thereafter, we are under no
obligation to sell any additional shares.
After the Additional Investment Period, on a monthly basis
("Investment Period"), we can elect, at our sole discretion, to sell up to
$1.5 million ("Company Election") in additional shares of Common Stock. If we
make a Company Election and upon our approval, Cripple Creek may also elect
to purchase an additional $1.0 million ("Investor Election") of Common Stock
in each Investment Period. In each Investment Period in which we elect to
sell additional shares, Cripple Creek will from time to time issue purchase
notices for the aggregate amount of the Company Election and the Investor
Election. The per-share price of Common Stock to be sold will equal 98% of
the average of the two daily low trade prices during the six trading days
immediately prior to the respective purchase notice. At the beginning of each
Investment Period, we can set a minimum sales price ("Floor Price") for our
Common Stock. Cripple Creek may limit the aggregate dollar amount of the
Company Election and Investor Election for any Investment Period based on
certain market trading volume guidelines (see Form 8-K filed July 2, 1999).
In conjunction with the Equity Line and the Equity Line Amendment,
we will issue five-year warrants to Cripple Creek to purchase shares of the
Common Stock. The price of the warrants will be determined each calendar year
and will equal 120% of the weighted average per-share sales price of all
shares of Common Stock sold pursuant to the Equity Line and the Equity Line
Amendment that year. The number of shares will equal 1% of the aggregate
proceeds received for all shares sold pursuant to the Equity Line and the
Equity Line Amendment during the year. Warrants to purchase a minimum of 120
thousand shares must be issued under the Equity Line and, if, as of June 30,
2001, warrants to purchase less than 120 thousand shares of Common Stock have
been issued, we must issue a warrant to purchase the number of shares equal
to the difference, at a price equal to 120% of the average exercise price of
all warrants previously issued pursuant to the Equity Line. To date, we have
not issued any warrants in conjunction with the Equity Line and Equity Line
amendment.
7. CERTIFICATE OF DEPOSIT FOR LETTER OF CREDIT
In June 1999, we opened a standby letter of credit ("LC") for $0.9
million in favor of our lessor to maintain compliance with our capital lease
agreement. To secure this standby LC, we pledged a certificate of deposit,
which is considered restricted cash, to the issuing bank. The certificate of
deposit earns interest at a rate yielding 4.19% per annum.
8
Cygnus, Inc.
September 30, 1999
8. STATEMENTS OF CASH FLOWS DATA
SEPTEMBER 30, SEPTEMBER 30,
1999 1998
----------------------------------
(in thousands)
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS INFORMATION
Interest paid $ 823 $ 794
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 Debentures $ 6,572 $ ----
Issuance of restricted Stock grants $ 2,019 $ ----
9. BUSINESS SEGMENTS
We operate in two business segments: diagnostics and drug delivery.
Both segments are engaged in development and manufacture, utilizing
proprietary technologies to satisfy unmet medical needs cost effectively. The
segments are strategic business units managed separately based on the
differences in the technologies of their respective product lines.
The diagnostics business' efforts are primarily focused on a
frequent, automatic and non- invasive glucose monitoring device, the
GlucoWatch -Registered Trademark - monitor. The GlucoWatch - Registered
Trademark - monitor is designed to take frequent measurements, thus providing
an abundance of glucose data to potentially better control fluctuating
glucose levels. We believe our proprietary extraction and sensing
technologies provide the potential to develop unique products for glucose
monitoring, which could lead to improved treatment for people with diabetes.
The drug delivery business' efforts are focused primarily on
transdermal drug delivery systems, which provide for the controlled release
of drugs directly into the bloodstream through intact skin. Cygnus'
transdermal technology is based on the objective of making transdermal
products less irritating, more comfortable and longer to wear for the
patient. We have a number of products in late-stage development, including
two hormone replacement therapy products and a contraceptive product.
There are no reconciling items between total segment revenues and
profit and loss and consolidated results. We utilize the following
information for the purpose of making decisions and assessing segment
performance.
9
Cygnus, Inc.
September 30, 1999
BUSINESS SEGMENTS
-------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30, 1999 DIAGNOSTICS DRUG DELIVERY CORPORATE TOTAL
------------------ ----------- ------------- ---------------
Revenue $ 913 $ 10,337 $ 11,250
Profit/(loss) $ (17,076) $ 1,146 $ (15,930)
NINE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
Revenue $ 457 $ 8,666 $ 9,123
Profit/(loss) $ (23,407) $ (1,413) $ (24,820)
THREE MONTHS ENDED
SEPTEMBER 30, 1999
------------------
Revenue $ 913 $ 3,354 $ 4,267
Profit/(loss) $ (4,112) $ (10) $ (4,122)
THREE MONTHS ENDED
SEPTEMBER 30, 1998
------------------
Revenue $ ---- $ 2,782 $ 2,782
Profit/(loss) $ (9,062) $ (561) $ (9,623)
BUSINESS SEGMENTS
-------------------------------------------------------
SEPTEMBER 30, 1999 DIAGNOSTICS DRUG DELIVERY CORPORATE TOTAL
------------------ ----------- ------------- ---------------
Identifiable assets $ 36,181 $ 3,523 $ 39,704
SEPTEMBER 30, 1998
------------------
Identifiable assets $ 67,343 $ 4,624 $ 71,967
There has been no significant change from December 31, 1998 in the
basis of measurement of segment revenues and profit or loss. The change in
identifiable assets from September 30, 1998 to September 30, 1999 is
primarily due to operating losses and the partial redemption of Senior
Subordinated Convertible Notes.
The majority of the segmental revenues have been generated in the
U.S., and we currently do not have any long-lived assets outside the U.S.
10. SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale are carried at fair value, based on
quoted market prices, and the unrealized gains and losses have been combined
with the accumulated deficit due to immateriality. Realized gains and losses
and declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income/expense. The cost of securities
10
Cygnus, Inc.
September 30, 1999
sold is based on the specific identification method. Interest and dividends
on securities classified as available-for-sale are also included in interest
income/expense.
We consider all highly liquid investments with a maturity from the
date of purchase of three months or less to be cash equivalents. We invest
our excess (to current demands) cash in short-term and long-term
high-credit-quality, highly-liquid instruments. These investments have
included, but are not limited to, Treasury Notes, Federal Agency Securities,
Auction Rate Certificates, Auction Rate Preferred Stock, and Commercial Paper.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THIS 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 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 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 THIS MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS AND ELSEWHERE IN
THIS REPORT ON FORM 10-Q.
GENERAL
We are engaged in the development and manufacture of diagnostic and
drug delivery systems, utilizing proprietary technologies to satisfy unmet
medical needs cost-effectively. Our efforts are primarily focused on two core
areas: a frequent, automatic and non-invasive glucose monitoring device (the
GlucoWatch - Registered Trademark - monitor) and transdermal drug delivery
systems. From time to time, we consider strategic transactions and
alternatives relating to our drug delivery business, with the goal of
providing additional funding for the development of the GlucoWatch -
Registered Trademark - monitor. These alternatives include, among others, the
divestiture of all or part of the drug delivery business. We will continue to
evaluate strategic transactions and alternatives which we believe may enhance
stockholder value.
On January 25, 1999 the Company submitted the first part of the
Pre-Market Approval Application ("PMA") for the GlucoWatch - Registered
Trademark - monitor to the FDA. This submission included a variety of
information, including manufacturing documentation. We submitted the
remainder of the PMA in June 1999, including analysis of a series of clinical
studies totaling more than 600 people which were completed in December 1998,
as well as two additional studies. The FDA notified the Company in July 1999
that the PMA for the GlucoWatch - Registered Trademark - monitor had been
deemed suitable for filing. The FDA also granted expedited review status to
the GlucoWatch -Registered Trademark - monitor and has since stated that the
GlucoWatch -Registered Trademark - monitor will be reviewed by the Clinical
Chemistry and Toxicology Devices Panel on December 6, 1999. Although we
believe its
11
Cygnus, Inc.
September 30, 1999
clinical results to date are encouraging, no assurance can be given that data
generated in the clinical studies to date will provide a sufficient basis for
the approval of the GlucoWatch - Registered Trademark - monitor by the FDA.
We are currently involved in discussions with a short list of
companies with regard to a collaboration for the marketing and distribution
of the GlucoWatch - Registered Trademark - monitor in the United States,
Europe and those territories not included in the agreement between us and
Tokyo-based Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi"). (For more on
the Yamanouchi agreement see "Contract Revenue," under Results of
Operations.) There can be no assurance that we will be able to enter into
such a collaboration agreement.
In 1998, Cygnus entered into long term agreements with E.I. du Pont
de Nemours & Company ("DuPont") for the development and supply of thick film
materials for Cygnus' GlucoWatch - Registered Trademark - monitor. A key
component of the GlucoWatch -Registered Trademark - monitor is the sensor,
which we developed with DuPont's materials. The agreements call for continued
cooperation for future sensor technology developments and continued supply of
materials.
On September 30, 1999, we entered into a Manufacturing and Supply
Agreement and Amendment thereto with LTS Lohmann Therapy Systems Corp. ("LTS
Corp"), wherein LTS Corp will manufacture the majority of the contraceptive
transdermal patch (the Evra -Trademark - Johnson & Johnson, New Brunswick,
New Jersey - System) that Cygnus is developing for Ortho-McNeil
Pharmaceutical, Inc., a Johnson & Johnson company. In addition to the
Manufacturing and Supply Agreement, Cygnus and LTS Corp entered into a Side
Letter to said Agreement of the same date that describes additional
manufacturing capacity needs, equipment costs and liabilities.
Our product development efforts have been and are expected to
continue to be either self-funded, funded by licensees or distributors, or
both. In general, our agreements provide that we will manufacture our
products and receive manufacturing revenues from sales of these products to
our licensees or distributors. We may also receive royalties based on certain
of our licensees' or distributors' product sales. In certain circumstances,
we may elect to license manufacturing rights for a product to our licensee in
exchange for a technology transfer fee and/or a higher royalty rate.
Our licensees and distributors generally have the right to abandon a
product development effort at any time for any reason without significant
penalty. Such cancellations may result in delays, suspension or abandonment of
clinical testing, the preparation and processing of regulatory filings, and
product development and commercialization efforts. Licensees have exercised this
right in the past, and there can be no assurance that current and future
licensees or distributors will not exercise this right in the future. If a
licensee or distributor were to cease funding one of our products, we would
either self-fund development efforts, identify and enter into an agreement with
an alternative licensee or distributor or suspend further development work on
the product. There can be no assurance that, if necessary, we would be able to
negotiate an agreement with an alternative licensee or distributor on acceptable
terms. Since all payments to us under our agreements are contingent on the
occurrence of future events or sales levels, and the agreements are terminable
by the licensee or distributor, no assurance can be given as to
12
Cygnus, Inc.
September 30, 1999
whether we will receive any particular payment thereunder or as to the amount
or timing of any such payment. In the past some of our licensees,
distributors and collaborators have approached us requesting modification of
the terms of existing agreements. We may choose to self-fund certain research
and development projects in order to exploit our technologies. Any increase
in Company-sponsored research and development activities will have an
immediate adverse effect on our results of operations. However, should such
Company-sponsored research and development activities result in a commercial
product, the long-term effect on our results of operations could be favorable.
To remain competitive, we will need to develop, in-license or
acquire new diagnostic products. Furthermore, our ability to develop and
commercialize products in the future will depend on our ability to enter into
collaboration arrangements with additional licensees on favorable terms.
There can be no assurance that we will be able to enter into new
collaboration arrangements on such terms, if at all.
Our results of operations vary significantly from year to year and
quarter to quarter and depend on, among other factors, the signing of new
product development agreements and the timing of recognizing payment amounts
specified thereunder, the timing of recognizing license or distribution fees
and cost reimbursement payments made by pharmaceutical licensees, and the
demand for such products. Up-front and interim milestone payments from
contracts are generally earned and recognized based on the percentage of
actual efforts expended compared to total expected efforts during the
development period for each contract. However, contract revenues are not
always aligned with the timing of related expenses. To date, our research and
development expenses have generally exceeded contract revenue in any
particular period and we expect the same situation to continue for the next
few years. In addition, the level of revenues in any given period is not
necessarily indicative of expected revenues in future periods. We have
incurred net losses each year since our inception and do not believe we will
achieve profitability in 1999. At September 30, 1999, our accumulated deficit
and net capital deficiency were approximately $191.9 million and $19.4
million, respectively.
RESULTS OF OPERATIONS:
COMPARISON FOR THE QUARTERS ENDED SEPTEMBER 30, 1999 AND 1998
PRODUCT REVENUES. There were no product revenues for the quarter and
nine months ended September 30, 1999 or for the quarter ended September 30,
1998. Product revenues for the nine months ended September 30, 1998 were $0.6
million. These revenues resulted from the shipments of the FemPatch -
Registered Trademark - (Warner-Lambert Co., Morris Plains, NJ) system during
the first half of 1998. The reduction in total product revenues is due to the
discontinuation of shipments of the FemPatch - Registered Trademark - system.
The FemPatch - Registered Trademark - system, commercially launched
in 1997, is a low-dose, 7-day estrogen replacement transdermal patch for the
treatment of menopausal symptoms. Sanofi S.A. ("Sanofi"), our worldwide
licensee, had sublicensed U.S. marketing rights to Warner-Lambert. In
November 1998, Warner-Lambert terminated its agreement with Sanofi, which
also terminated the Supply Agreement between Warner-Lambert and Cygnus.
Consequently, the product is no longer being marketed.
13
Cygnus, Inc.
September 30, 1999
Due to the above factors and the uncertainty regarding when and if
additional products will obtain approval from the FDA and when and if
licensees will sell and market such products, we believe that the level of
product revenues experienced to date is not indicative of future results and
may fluctuate from period to period.
CONTRACT REVENUES for the quarter ended September 30, 1999 were $3.9
million compared to $2.5 million for the quarter ended September 30, 1998 and
were $10.3 million for the nine months ended September 30, 1999 compared to
$7.8 million for the nine months ended September 30, 1998. Contract revenues
primarily reflect labor and material cost reimbursements associated with the
development of certain transdermal delivery systems and the amortization of
milestone payments related to certain transdermal delivery systems and the
glucose monitoring device. The increase in contract revenues for the three
months ended September 30, 1999 is primarily due to the increased development
billings related to the contraception product we are developing with
Ortho-McNeil Pharmaceutical, Inc., a division of Johnson & Johnson and the
amortization of a previously capitalized milestone payment received from
Yamanouchi for the GlucoWatch(R) monitor. The increase in contract revenues
for the nine months ended September 30, 1999 is primarily due to the
acceleration of the amortization of a previously deferred milestone payment
of $1.8 million received from American Home Products Corporation ("AHP"),
acting through its Wyeth-Ayerst division. This acceleration resulted from
AHP's notification to us that AHP would not be exercising its option to
reacquire rights under the amendment to the Agreement discussed below.
Additional reasons for the increase in contract revenue for the nine months
ended September 30, 1999 were increased development billings related to the
contraception and nicotine patch products and the amortization of a milestone
payment received from Yamanouchi in July 1999, as mentioned below.
By way of background for the AHP agreement, in December 1998, a New
Drug Application ("NDA") was submitted to the FDA and the European Dossier
was submitted to the European authorities for our 7-day estrogen patch. In
July 1998, we were notified by AHP, the licensee for two of our transdermal
hormone replacement products, including our 7-day estrogen patch, that AHP
wanted to discuss the status of its agreements with us and that it intended
to exercise its right under the agreements to seek a sublicensee for the
products. In November 1998, we negotiated with AHP an amendment to the
agreements that provided us immediate ownership of the regulatory filing
packages for the two products and the right to co-promote the two products as
well. The amendment also provided that, if AHP was unable to sign an
agreement with a sublicensee or opted not to reacquire its rights within six
months, the rights to the two products would revert to Cygnus. However, AHP
would still be obligated to continue development activities for the two
products for an additional six months. In June 1999, AHP notified us that a
sublicense agreement was not signed and that AHP would not be exercising its
option to reacquire rights, but that it would support development activities
until mid-November 1999 pursuant to the amendment. In September 1999, our
7-day estrogen patch was cleared for marketing by the FDA. We have not
decided on any course of action with regard to these two products, and AHP's
support will cease on November 17, 1999.
Regarding our contraception product, in 1994, Cygnus entered into an
agreement with Ortho-McNeil Pharmaceutical Inc. ("Ortho"), a Johnson &
Johnson company, for the development of a 7-day contraceptive patch, the
EVRA(TM) (Johnson & Johnson, New Brunswick, NJ) system.
14
Cygnus, Inc.
September 30, 1999
Ortho has exclusive worldwide marketing rights to the product. Cygnus has
received up-front payments and will receive milestone payments as well as a
percentage of net sales, if and when the product is commercialized, and is
responsible for the development and manufacture of the product. Phase 3
clinical trials for this product have been completed.
Also, in July 1996, we entered into an agreement with Tokyo-based
Yamanouchi Pharmaceutical Co., Ltd. ("Yamanouchi") for the marketing and
distribution of the GlucoWatch - Registered Trademark - monitor. Under the
terms of this agreement, Yamanouchi has exclusive marketing and distribution
rights in Japan and Korea. We have primary responsibility for completing
product development and for manufacturing. In the third quarter of 1996, we
received an up-front, non-refundable payment from Yamanouchi. In July of
1999, we received a non-refundable milestone payment from Yamanouchi which is
being amortized, and we are eligible to receive further milestone payments as
well as a percentage of the product's future commercial sales.
Additionally, in 1998, we entered into an agreement with an
undisclosed company for the development, supply and commercialization of a
nicotine transdermal system, a smoking cessation patch being developed by
Cygnus. Under the terms of the agreement, the undisclosed company has
marketing and distribution rights in certain territories. We have exclusive
manufacturing and supply rights. The undisclosed company has primary
responsibility for obtaining regulatory approval and commercialization. We
have received payments for 1999 and 1998 manufacturing and development costs.
In September 1999, Cygnus was awarded a Phase I Small Business
Innovative Research (SBIR) grant for "High Performance Biosensor Electrode
Materials" from the National Institute of Diabetes and Digestive and Kidney
Diseases division of the National Institutes of Health (NIH).
Contract revenues are expected to fluctuate from quarter to quarter
and from year to year, and future contract revenues cannot reasonably be
predicted. The contributing factors to achieving contract revenues include,
but are not limited to, future successes in finalizing new collaboration
agreements, timely achievement of milestones under current contracts, and
strategic decisions on self-funding certain projects. We are unable to
predict to what extent the termination of existing contracts by current
partners or new collaboration agreements, if any, will impact overall
contract revenues in the remainder of 1999 and future periods.
ROYALTY AND OTHER REVENUES for the quarter ended September 30, 1999
were $0.4 million compared to $0.3 million for the quarter ended September
30, 1998 and were $1.0 million for the nine months ended September 30, 1999
compared to $0.7 million for the nine months ended September 30, 1998. The
amounts reflect royalties from worldwide sales by Pharmacia & Upjohn
("Pharmacia") of the Company's nicotine transdermal product, the Nicotrol -
Registered Trademark (Pharmacia AB, Stockholm, Sweden) - system.
The Company's Nicotrol - Registered Trademark - product was
initially introduced in the U.S. as a prescription product in 1992 and
subsequently approved for over-the-counter sale in the U.S. in 1996. The
Nicotrol -Registered Trademark - patch is currently marketed in North America
by Ortho-McNeil Pharmaceutical, Inc., a Johnson & Johnson company and in many
15
Cygnus, Inc.
September 30, 1999
European countries by Pharmacia. Cygnus receives royalties on the worldwide
sales of the Nicotrol - Registered Trademark - patch.
Royalty revenues will fluctuate from period to period, since they
are primarily based upon sales by our licensees. The level of royalty income
for a product also depends on various external factors, including the size of
the market for the product, product pricing levels and the ability of our
licensees to market the product. Therefore, the level of royalty revenues for
any given period is not indicative of the expected royalty revenues for
future periods.
COSTS OF PRODUCTS SOLD for the quarter ended September 30, 1999 were
$0.0 million compared to $0.7 million for the quarter ended September 30,
1998 and were $0.0 million for the nine months ended September 30, 1999
compared to $2.7 million for the nine months ended September 30, 1998. Costs
of products sold primarily include direct and indirect production, and
facility and personnel costs required to meet anticipated production levels.
The decrease in costs of products sold for the three and nine months ended
September 30, 1999 is due to the discontinuation of shipments of the FemPatch
- - Registered Trademark -system as a result of the termination of the FemPatch
- - Registered Trademark -system supply agreement. Cost of products sold for
the nine months ended September 30, 1998 include shipments of the FemPatch
Registered Trademark -system in the first half of 1998. We do not have any
product revenue or costs of products sold for the three and nine months ended
September 30, 1999 as a result of the aforementioned discontinuation, and we
experienced negative production margins for the three and nine months ended
September 30, 1998 due to low production volumes that prevented us from
absorbing all of our fixed manufacturing costs.
RESEARCH AND DEVELOPMENT EXPENSES for the quarter ended September
30, 1999 were $5.8 million compared to $7.9 million for the quarter ended
September 30, 1998 and were $19.3 million for the nine months ended September
30, 1999 compared to $22.7 million for the nine months ended September 30,
1998. The decrease in research and development expenses for the three and
nine months ended September 30, 1999 is primarily due to decreased costs of
clinical studies associated with the GlucoWatch - Registered Trademark -
monitor. Research and development and clinical activities primarily include
support and development for the glucose monitoring program, the contraceptive
product, and hormone replacement therapy products.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES for the quarter ended
September 30, 1999 were $1.7 million compared to $3.6 million for the quarter
ended September 30, 1998 and were $5.2 million for the nine months ended
September 30, 1999 compared to $8.4 million for the nine months ended
September 30, 1998. The decrease is primarily due to reduced legal and
compensation expenses.
INTEREST INCOME/(EXPENSES), NET for the quarter ended September 30,
1999 were $(0.8) million compared to $(0.2) million for the quarter ended
September 30, 1998 and were $(2.7) million for the nine months ended
September 30, 1999 compared to $(0.2) million for the nine months ended
September 30, 1998. The increase in net interest expense is due primarily to
the 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 has decreased in
conjunction with the decrease in the cash and cash equivalents balance.
16
Cygnus, Inc.
September 30, 1999
LIQUIDITY AND CAPITAL RESOURCES
Through December 1998, we received net proceeds of approximately
$95.4 million from public offerings of our Common Stock.
Through December 1998, we financed approximately $11.1 million of
manufacturing and research equipment under capital loan and lease
arrangements. Borrowings under those arrangements are secured by specific
Company assets.
In April 1998, we consolidated our two outstanding bank loans into
an expanded credit facility with the same bank. An additional $4.7 million
was borrowed, increasing the total outstanding under the new agreement to
$10.0 million. In November of 1998, the April agreement was further amended
to modify the covenants. This balance will be repaid through November 2001,
with monthly interest-only payments through November 1998 and monthly
principal-and-interest installments thereafter. As of September 30, 1999
there was $6.3 million outstanding under this agreement. Borrowings under
this agreement are secured by specific Company assets.
In February 1998, we entered into Note Purchase Agreements with
certain institutional Investors to issue and sell approximately $43.0 million
of 4% Senior Subordinated Convertible Notes Due 2005 (the "Notes"). On
October 28, 1998, we restructured the Notes. Key provisions in the
restructured Notes include the October 1998 repayment of $18.5 million in
principal (reducing the principal balance from $43.0 million to $24.5
million), a delay in the convertibility of the majority of the Notes to
September 30, 1999, modification of conversion prices of the Notes, the
ability of the Company to redeem at par at any time all or part of the new
principal amount of the Notes, an increase in the interest rate to 5.5% paid
annually on the new principal balance and a change in the final maturity of
the Notes to October 1, 2000. Through June 30, 1999, $6.0 million was
converted into Common Stock at a price of $3.54 per share and $6.0 million
was converted into Common Stock at a price of $6.89 per share. The remaining
$12.5 million and accrued interest were redeemed in July 1999.
In June 1999, we entered into agreements with certain institutional
Investors to issue and sell up to $20 million aggregate principal amount of
8.5% Convertible Debentures Due September 29, 2004. On June 30, 1999 we also
entered into an Equity Line Agreement. The Equity Line is effective for two
years and allows us, at our sole discretion, to sell shares of Cygnus Common
Stock with a maximum aggregate sales price of up to $30.0 million. As of June
30, 1999, we received gross proceeds of $14.0 million from the issuance of
8.5% Convertible Debentures and $4.0 million from the sale of Common Stock
under the Equity Line. On September 29, 1999, we received $4.0 million
("Additional Investment") pursuant to an amendment to the Equity Line
agreement. We issued 361 thousand shares of Common Stock in exchange for the
Additional Investment subject to adjustment upwards at the end of 110 trading
days after September 29, 1999. Also on September 29, 1999, we received $3.0
million in gross proceeds from the issuance of the first Additional Tranche
due September 29, 2004 pursuant to the terms of the Convertible Debentures
purchase agreement. (See Note 6 to the financial statements contained in this
report.)
17
Cygnus, Inc.
September 30, 1999
In June 1999, we opened a standby letter of credit ("LC") for $0.9
million in favor of our lessor to maintain compliance with our capital lease
agreement. To secure this standby LC, we pledged a certificate of deposit,
which is considered restricted cash, to the issuing bank. The certificate of
deposit earns interest at a rate yielding 4.19% per annum.
In addition to the cash received from the public offerings, issuance
of the Notes, Equity Line, equipment lease and short-term working capital
financing, we have financed our operations primarily through revenues and
interest income.
Net cash used in operating activities for the nine months ended
September 30, 1999 was $14.2 million compared with net cash used of $36.0
million for the nine months ended September 30, 1998. Cash used in operating
activities during the nine months ended September 30, 1999 was primarily due
to our net loss of $15.9 million and decreases in provision for doubtful
accounts of $2.0 million, deferred compensation and other assets of $4.2
million and accountants payable and other accrued liabilities of $2.1
million, offset by decreases in notes receivable, prepaid expenses and other
current assets of $4.1 million, accounts receivable of $1.5 million and
inventories of $0.8 million and increases in depreciation and amortization of
$1.3 million, amortization of debt issuance cost of $1.1 million, deferred
revenue of $1.0 million and accrued compensation of $0.7 million. Cash used
in operating activities during the nine months ended September 30, 1998 was
primarily due to our net loss of $24.8 million and a $14.0 million cash
payment made in January 1998 to Sanofi under the terms of the arbitration
settlement, offset by an increase in accounts payable and other accrued
liabilities of $0.7 million, a decrease in notes receivable, prepaid expenses
and other current assets of $0.8 million and a decrease in accounts
receivable of $0.7 million.
The current level of cash used in operating activities is not
necessarily indicative of the level of future cash usage. We expect a
decrease in operating cash usage for 1999 compared to 1998 primarily due to
the $14.0 million payment in 1998 of the Sanofi arbitration liability, which
will not recur in 1999.
Net cash provided by investing activities of $12.4 million for the
nine months ended September 30, 1999 resulted primarily from net sales of
investments of $14.7 million, offset by capital expenditures of $2.2 million.
Net cash used in investing activities of $24.6 million for the nine months
ended September 30, 1998 resulted primarily from net purchases of short-term
investments of $22.0 million and capital expenditures of $2.6 million.
Net cash provided by financing activities of $9.7 million for the
nine months ended September 30, 1999 includes, as mentioned above, gross
proceeds of $17.0 million and $8.0 million from the June 1999 and September
1999 issuance of 8.5% Convertible Debentures and from the sale of Common
Stock under the Equity Line, respectively, and additional stock proceeds of
$2.5 million, offset by the July 1999 redemption of Senior Subordinated
Convertible Notes of $12.5 million, long-term debt of $4.1 million and
capital lease repayments of $0.3 million. Net cash provided by financing
activities of $58.7 million for the nine months ended September 30, 1998
includes net proceeds of $40.4 million and $13.3 million from the Company's
February 1998 issuance of Senior Subordinated Convertible Notes and from a
direct public offering of its Common Stock, respectively, additional stock
proceeds of $0.9 million and $6.1
18
Cygnus, Inc.
September 30, 1999
million from the issuance of long-term debt, offset by long-term debt and
capital lease repayments of $1.6 million and $0.4 million, respectively.
Our long-term capital expenditure requirements will depend upon
numerous factors, including the progress of our research and development
programs; the time required to obtain regulatory approvals; the resources
that we devote to the development of self-funded products, proprietary
manufacturing methods and advanced technologies; our ability to obtain
additional licensing arrangements and to manufacture products under those
arrangements; the additional expenditures to support the manufacture of new
products, if and when approved; and possible acquisitions of products,
technologies and companies. As we evaluate the progress of our development
projects, in particular the GlucoWatch - Registered Trademark monitor, 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 unrestricted cash,
cash equivalents and investments of $21.9 million as of September 30,
1999 -- when coupled with cash from revenues and other funding, such as from
potential product funding collaborations or from public financings (including
debt or equity financings) and earnings from investments -- will be
sufficient to meet our operating expenses, debt servicing and repayments and
capital expenditure requirements at least through September 30, 2000.
However, there can be no assurance that we will not require additional
financing, depending upon future business strategies, results of clinical
trials and management decisions to accelerate certain research and
development programs and other factors.
YEAR 2000 COMPLIANCE
We are preparing for the impact of the arrival of the Year 2000
("Y2K") on our business, as well as on the businesses of our customers,
suppliers and business partners. The "Y2K Issue" is a term used to describe
the problems created by systems that are unable to accurately interpret dates
after December 31, 1999. These problems are derived predominantly from the
fact that many software programs have historically categorized the "year" in
a two-digit format. The Y2K Issue creates potential risks for Cygnus,
including potential problems in our products as well as in the Information
Technology ("IT") and non-IT systems that we use in our business operations.
We may also be exposed to risks from third parties with whom we interact who
fail to adequately address their own Y2K Issues.
We began our Y2K efforts early in 1998 by forming a project office
chaired by the Senior Vice President of Finance. The Board of Directors is
advised periodically on the status of our Y2K compliance program.
The project team developed a five-phase approach to identifying and
remediating Y2K Issues. These phases are:
1. Awareness
19
Cygnus, Inc.
September 30, 1999
2. Inventory
3. Assessment
4. Correction and Testing
5. Implementation
We completed the awareness phase of the project in the third quarter
of 1998. This phase consisted of meetings with our personnel to educate them
on the issues related to Y2K. The meetings focused on internal systems, both
IT and non-IT, as well as external systems and relationships.
We engaged the services of an outside Y2K consulting service to
perform a comprehensive inventory of internal IT and non-IT systems and
applications. The inventory was completed during the fourth quarter of 1998.
Concurrent with the inventory, our consultant performed an
assessment of the systems and applications documented in the inventory. The
result of this independent assessment showed that the majority of our
internal IT systems were compliant. This is due to the fact that we do not
rely on in-house-developed applications for our core business applications
and therefore do not have legacy code to review and test. Our core business
applications (Accounts Payable, Accounts Receivable, Sales Orders and
Inventory Control) are supported by an application that has been certified by
the supplier to be fully Y2K compliant and the compliance has been tested by
us. Additionally, we use a third party application for tracking our
Intellectual Property assets. This application has been certified by the
vendor to be fully compliant. The assessment did determine that the payroll
application in use was non-compliant. This was upgraded to a compliant
version in the first quarter of 1999.
Due to the regulatory requirements placed on the pharmaceutical and
medical device industry by the FDA, we have placed appropriate attention on
the non-IT systems. For us, this specifically covers all areas governed by
current Good Manufacturing Practice ("cGMP") guidelines and includes but is
not limited to environmental monitoring/control systems, laboratory
instrumentation and their sub-systems, production equipment, and materials
handling equipment. The assessment identified several of these non-IT systems
to be non-compliant. The majority of these non-compliant systems are
laboratory instrumentation and their sub-systems. These systems are assessed
to be non-mission critical. We fully expect that these systems will be
upgraded or replaced or have a contingency plan in place by January 1, 2000.
Concurrent with the inventory and assessment of internal systems and
applications, we identified several providers of products and services that
are critical to our operations. We are working with these providers to ensure
that these critical products and services are available for continued
operations after January 1, 2000. At this time we are not aware of any issues
relating to these providers.
The correction and testing, as well as the implementation phases of
our Y2K compliance programs are currently underway and are expected to be
completed prior to January 1, 2000.
The total cost associated with our Y2K remediation is not expected
to be material to our financial condition or results of operations.
20
Cygnus, Inc.
September 30, 1999
Through September 30, 1999 we have spent approximately $125,000 in connection
with Y2K Issues and we have substantially completed our remediation efforts.
The cost of implementing the replacement for our core business applications
has not been included in this figure since the replacement of the previous
applications was not accelerated due to Y2K Issues. All Y2K expenditures are
made from the respective departments' budgets.
Although we assess our Y2K Issue to be moderate to low, there can be
no assurance that we will be completely successful in our efforts to address
Y2K Issues.
Having reasonably determined that our own hardware and software
systems will be substantially Y2K compliant, management believes that the
worst case scenarios would most likely involve simultaneous Y2K-related
disruptions from our key customers, suppliers, service providers and/or other
business partners. For these worst case scenarios to have maximum adverse
impact on Cygnus, either the vendors in question would need to be sole-source
providers, or their peer companies, who would otherwise be potential
second-source suppliers, would also need to undergo similar Y2K-related
disruption. We believe that such simultaneous disruptions of the supply of
basic goods and services due to Y2K-related issues is unlikely to occur.
Although we have not yet completed a comprehensive contingency plan
to address situations that may result if we or any of the third parties upon
which we are dependent are unable to achieve Y2K readiness, our Y2K
compliance program is ongoing and its ultimate scope, as well as the
consideration of contingency plans, will continue to be evaluated as new
information becomes available.
The foregoing Y2K discussion contains forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements, including, without limitation, anticipated costs and the
dates by which we expect to complete certain actions, are based on
management's best current estimates, which were derived utilizing numerous
assumptions about future events, including the continued availability of
certain resources, representations received from third parties and other
factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the ability to identify and remediate all relevant IT and
non-IT systems; results of Year 2000 testing; adequate resolution of Y2K
Issues by businesses and other third parties who are service providers,
suppliers or customers of Cygnus; unanticipated system costs; the adequacy of
and ability to develop and implement contingency plans; and similar
uncertainties. The forward-looking statements made in the foregoing Y2K
discussion speak only as of the date on which such statements are made, and
we undertake no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statements are made or
to reflect the occurrence of unanticipated events.
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
CONSOLIDATED RESULTS FOR 1999, AND BEYOND, TO DIFFER MATERIALLY FROM THOSE
21
Cygnus, Inc.
September 30, 1999
EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS MADE BY US OR ON BEHALF OF US.
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 HAVE INCURRED SUBSTANTIAL LOSSES AND ANTICIPATE CONTINUING LOSSES.
We have a limited operating history to evaluate our prospects. You
should consider our prospects in light of the substantial risks, expenses and
difficulties encountered by companies entering into the medical device and
drug delivery industry. We reported a net loss of $5.0 million for the
quarter ended September 30, 1999 and have experienced annual operating losses
since our inception. We expect to continue to incur operating losses at least
until we have significant sales, if we ever do, of the GlucoWatch -
Registered Trademark - monitor or the contraceptive patch. We cannot assure
you that we will generate significant revenues or achieve profitability. We
have, and expect to continue to have, fluctuations in quarterly results based
on varying contract revenues and expenses associated with our contracts and
collaboration projects. Some of these fluctuations could be significant. To
date, we have generated limited revenues from product sales. We do not have
significant experience in manufacturing, marketing or selling our products.
Our future development efforts may not result in commercially viable
products. We may fail in our efforts to introduce our products or to obtain
required regulatory clearances. Our products may never gain market
acceptance, and we may never generate revenues or achieve profitability.
Our revenues to date have been derived primarily from:
- product development and licensing fees related to our products under
development, and
- manufacturing and royalty revenues from the Nicotrol - Registered
Trademark (Pharmacia AB, Stockholm, Sweden) nicotine patch and the
FemPatch - Registered Trademark (Warner-Lambert Co., Morris Plains,
NJ) - system.
In the future, we will no longer receive manufacturing revenue from
the Nicotrol - Registered Trademark - patch or the FemPatch - Registered
Trademark -system. We will, however, continue to receive royalty payments for
the Nicotrol Registered Trademark - patch. If we obtain regulatory approvals,
we expect that a substantial portion of our future revenues will be derived
from sales of the GlucoWatch - Registered Trademark - monitor and other
diagnostic products currently under development.
WE MAY NEED ADDITIONAL FINANCING AND IT MAY NOT BE AVAILABLE.
To continue the development of our products, we will require
substantial resources to conduct research and conduct preclinical development
and clinical trials necessary to bring our products to market and to
establish production and possibly marketing capabilities. We may seek
additional funding through public or private financings, including debt or
equity financings. We may also seek other arrangements, including
collaboration arrangements. Any additional equity financings may dilute the
holdings of current stockholders. Debt financing, if available, may
22
Cygnus, Inc.
September 30, 1999
restrict our ability to issue dividends and take other actions. We may not be
able to obtain adequate funds when we need them from financial markets or
arrangements with corporate partners or other sources. Even if funds are
available, they may not be on acceptable terms. If we cannot obtain
sufficient additional funds, we may have to delay, scale back or eliminate
some or all of our research and product development programs, or to license
or sell products or technologies that we would otherwise seek to develop
ourselves.
From time to time, we consider strategic transactions and
alternatives related to our drug delivery business, with the goal of
providing additional funding for the development of the GlucoWatch -
Registered Trademark - monitor. These alternatives include, among others, the
divestiture of all or part of the drug delivery business. We will continue to
evaluate strategic transactions and alternatives which we believe may enhance
stockholder value.
We believe that our existing cash, cash equivalents and investments,
plus cash from revenues; other fundings, such as potential product funding
collaborations or financings; and earnings from investments will suffice to
meet our operating expenses, debt servicing and repayments and capital
expenditure requirements at least through September 30, 2000. The amounts and
timing of future expenditures will depend on:
- - progress of ongoing research and development,
- - results of preclinical testing and clinical trials,
- - rates at which operating losses are incurred,
- - executing any development and licensing agreements with corporate
partners,
- - developing our products,
- - manufacturing scale-up for the GlucoWatch - Registered
Trademark - monitor;
- - the FDA regulatory process, and
- - other factors, many of which are beyond our control.
WE DEPEND ON LICENSEES, DISTRIBUTORS AND COLLABORATION ARRANGEMENTS.
Our strategy to develop, clinically test, obtain regulatory approval
for, manufacture and commercialize our products depends, in large part, upon
our ability to selectively enter into and maintain collaboration arrangements
with licensees and distributors. If we commercialize our GlucoWatch -
Registered Trademark - monitor, we will depend upon Yamanouchi Pharmaceutical
Co., Ltd. to market and distribute the GlucoWatch - Registered Trademark -
monitor in Japan and Korea. We do not have any marketing or distribution
agreements for the GlucoWatch - Registered Trademark - monitor other than the
Yamanouchi collaboration. However, we are currently involved in discussions
with a short list of companies about collaborating to market and distribute
the GlucoWatch -Registered Trademark - monitor in the U.S., Europe and
elsewhere outside Japan and Korea.
23
Cygnus, Inc.
September 30, 1999
Our licensees and distributors generally have the right to terminate
product development at any time before we are granted regulatory approval,
for any reason and without significant penalty. These cancellations may cause
us to delay, suspend or abandon our clinical testing, regulatory filings and
product development and commercialization efforts. Licensees have exercised
this right in the past, and we cannot assure you that current and future
licensees or distributors will not exercise this right in the future. All
payments to us under our licensing and distribution agreements depend on
future events or sales levels, and the licensee or distributor may terminate
these agreements. As a result, we cannot assure you when or if we will
receive any particular payment. In the past, some of our licensees,
distributors and collaborators have asked us to modify the terms of existing
agreements. If a licensee or distributor stopped funding one of our products,
we would either fund development efforts ourselves, enter into an agreement
with an alternative licensee or distributor, or suspend further development
work on the product. We cannot assure you that we would be able to negotiate
an acceptable agreement with an alternative licensee or distributor.
Additionally, we may choose to self-fund certain research and
development projects in order to exploit our technologies. If these
activities result in a commercial product, they will help our long-term
operating results. However, any increase in self-sponsored research and
development or sales and marketing activities will negatively affect our
short-term operating results. Furthermore, we cannot control the resources
and attention a licensee or distributor devotes to a product. As a result, we
may experience delays in clinical testing, regulatory filings and
commercialization efforts conducted by our licensees or distributors. We
cannot assure you that our licensees or distributors will not, for
competitive reasons, support, directly or indirectly, a company or product
that competes with one of our products that is the subject of their license
or distribution agreement with us. Furthermore, any dispute between us and
one of our licensees or distributors might require us to initiate or defend
against expensive litigation or arbitration proceedings. If one of our
licensees or distributors terminates an arrangement, cannot fund or otherwise
satisfy its obligations under its arrangements, or significantly disputes or
breaches a contractual commitment, then we would likely be required to seek
an alternative licensee or distributor. We cannot assure you that we would be
able to reach agreement with a replacement licensee or distributor. If we
were unable to find a replacement licensee or distributor, we might not be
able to perform or fund the activities of the current licensee or
distributor. Even if we were able to perform and fund these activities, our
capital requirements would increase substantially. In addition, the further
development and the clinical testing, regulatory approval process, marketing,
distribution and sale of the product covered by such licensee or distributor
would be significantly delayed. (See "Risk Factors - We Have Limited
Marketing and Sales Experience.")
For us to be competitive, we will need to develop, license or
acquire new diagnostic products. Furthermore, our ability to develop and
commercialize products in the future will depend, in part, on our ability to
enter into collaboration arrangements with additional licensees on favorable
terms. We cannot assure you that we will be able to enter into new
collaboration arrangements on favorable terms, if at all, or that existing or
future collaboration arrangements will succeed.
WE DEPEND ON LICENSED PATENTS AND APPLICATIONS AND PROPRIETARY TECHNOLOGY.
24
Cygnus, Inc.
September 30, 1999
Our success depends in large part on our ability to obtain patent
protection for our products, preserve our trade secrets and operate without
infringing the proprietary rights of others, both in the U.S. and abroad.
Since patent applications in the U.S. are secret until issuance, and
publication of discoveries in the scientific or patent literature tends to
lag behind actual discovery by several months, we cannot be certain that we
were the first to file our patent applications or that we will not infringe
upon third party patents. We cannot assure you that any patents will be
issued with respect to any of our patent applications or that any patents
will provide competitive advantages for our products or will not be
challenged or circumvented by our competitors.
We also rely on trade secrets and proprietary know-how that we seek
to protect, in part, by confidentiality agreements with our licensees,
employees and consultants. We cannot assure you that these agreements will
not be breached, that we would have adequate remedies for any breach or that
our trade secrets will not otherwise become known or be independently
developed by our competitors. Any litigation, in the U.S. or abroad, as well
as foreign opposition and/or domestic interference proceedings, could result
in substantial expense to us and significant diversion of effort by our
technical and management personnel. We may resort to litigation to enforce
our patents or protect trade secrets or know-how as well as to defend against
infringement charges. A negative determination in such proceedings could
subject us to significant liabilities or require us to seek licenses from
third parties. Although patent and intellectual property disputes in the
pharmaceutical product area have often been settled through licensing or
similar arrangements, costs associated with such arrangements may be
substantial and could include ongoing royalties. Furthermore, we cannot
assure you that necessary licenses would be available to us on satisfactory
terms, if at all. Accordingly, an adverse determination in a judicial or
administrative proceeding or failure to obtain necessary licenses could
prevent us from manufacturing and selling certain of our products, and could
materially adversely affect us.
WE ARE HIGHLY LEVERAGED AND MAY BE UNABLE TO SERVICE OUR DEBT.
As of September 30, 1999, we had indebtedness of $51.6 million,
$23.0 million of which can be converted to Common Stock. The degree to which
we are leveraged could materially and adversely affect our ability to obtain
financing for working capital, acquisitions or other purposes and could make
us more vulnerable to industry downturns and competitive pressures. Our
ability to meet our debt service obligations depends upon our future
performance, which will depend upon financial, business and other factors,
many of which are beyond our control. Although we believe our cash flows will
be adequate to meet our interest payments, we cannot assure you that we will
continue to generate cash flows in the future sufficient to cover our fixed
charges or to permit us to satisfy any redemption obligations pursuant to 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
related to our debt obligations, our assets will
25
Cygnus, Inc.
September 30, 1999
first be available to pay the amounts due under our debt obligations. Holders
of Common Stock would only receive the assets remaining, if any, after
payment of all indebtedness and preferred stock. Although we do not currently
conduct operations through subsidiaries, we may elect to do so as products
become commercialized. In such event, our cash flow and our ability to
service debt would partially depend upon the earnings of our subsidiaries and
the distribution, loaning or other payments of funds by those subsidiaries to
us. The payment of dividends and the making of loans and advances to us by
our subsidiaries would be subject to statutory or contractual restrictions,
would depend upon the earnings of those subsidiaries and would be subject to
various business considerations. Our right to receive assets of any of our
subsidiaries upon their liquidation or reorganization would be effectively
subordinated to the claims of our subsidiaries' creditors, except to the
extent that we are recognized as a creditor of such subsidiary, in which case
our claims would still be subordinate to any security interests in the assets
of such subsidiary and any senior indebtedness.
WE HAVE LIMITED MARKETING AND SALES EXPERIENCE.
We have limited experience marketing or selling medical device
products. To successfully market and sell the GlucoWatch - Registered
Trademark - monitor or our other products under development, we must either
develop a more extensive marketing and sales force or enter into arrangements
with third parties to market and sell our products. We cannot assure you that
we could successfully develop a more extensive marketing and sales force or
that we could enter into acceptable marketing and sales agreements with third
parties. If we maintain our own marketing and sales capabilities, we will
compete with other companies that have experienced and well-funded marketing
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 fee.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS.
The design, development, manufacture and use of our products involve
an inherent risk of product liability claims and associated adverse
publicity. Producers of medical products may face substantial liability for
damages in the event of product failure or allegations that the product
caused harm. We currently maintain product liability insurance, but it is
expensive and difficult to obtain and may not be available in the future on
acceptable terms. We cannot assure you that we will not be subject to product
liability claims, that our current insurance would cover any claims, or that
adequate insurance will continue to be available on acceptable terms in the
future. In the event we are held liable for damages in excess of the limits
of our insurance coverage, or if any claim or product recall creates
significant adverse publicity, our business, financial condition and results
of operations could be materially and adversely affected.
WE MAY NOT BE ABLE TO RETAIN OR HIRE KEY PERSONNEL.
Our ability to operate successfully and manage our potential future
growth significantly depends upon retaining key scientific, technical,
managerial and financial personnel, and attracting and retaining additional
highly qualified scientific, technical, managerial and financial personnel.
We face intense competition for qualified personnel in these areas, and we
cannot assure you that we will be able to attract and retain qualified
personnel. The loss of key personnel
26
Cygnus, Inc.
September 30, 1999
or our inability to hire and retain additional qualified personnel in the
future could adversely affect our business, financial condition and operating
results.
OUR STOCK PRICE IS VOLATILE.
The trading price of our Common Stock substantially fluctuates in
response to factors such as:
- - announcements by us or our competitors of results of regulatory
approval filings or clinical trials or testing,
- - developments or disputes governing proprietary rights,
- - technological innovations or new commercial products, government
regulatory action, and general conditions in the medical technology
industry,
- - changes in securities analysts' recommendations, or
- - other events or factors, many of which are beyond our control.
In addition, the stock market in general has experienced extreme
price and volume fluctuations in recent years that have particularly affected
the market prices of many medical technology companies, unrelated to the
operating performance of these companies. Fluctuations or decreases in the
trading price of our Common Stock may adversely affect the market for our
Common Stock. In the past, following periods of volatility in the market
price for a company's securities, securities class action litigation often
has been instituted. Such litigation could result in substantial costs and a
diversion of management attention and resources, which could have a material
adverse effect on our business, financial condition and operating results.
WE DO NOT PAY DIVIDENDS.
We have never declared or paid cash dividends on our Common Stock.
Our current bank term loan precludes us from paying dividends to
stockholders. We currently intend to retain any earnings for use in our
business and therefore do not anticipate paying any dividends in the future.
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 the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998.
27
Cygnus, Inc.
September 30, 1999
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
The following exhibits are filed herewith or incorporated by reference:
3.1 Bylaws of the Registrant, as amended, incorporated by reference to
Exhibit 3.3 of the Registrant's Registration Statement Form S-1 No.
33-38363.
3.2 Restated Articles of Incorporation of the Registrant, as amended and
filled with the Office of the Secretary of State of Delaware on May
21, 1999.
4.1 Specimen of Common Stock certificate of the Registrant, incorporated
by reference to Exhibit 4.1 of the Registrant's Registration Statement
Form S-1 No. 33-38363.
4.2 Rights Agreement dated September 21, 1993 between the Company and
Chemical Trust Bank of California (the "Transfer Agent"), which
includes the Certificate of Determination for the Series A Junior
Participating Preferred Stock as Exhibit A, the Form of Right
Certificate as Exhibit B and the Summary of Rights to purchase
Preferred Shares as Exhibit C, incorporated by reference to Exhibit I
of the Registrant's Form 8-A filed on October 21, 1993, Registration
No. 0-18962.
4.3 Form of Senior Indenture incorporated herein by reference to Exhibit
4.1 filed with the Company's 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").
4.4 Form of Subordinated Indenture incorporated herein by reference to
Exhibit 4.2 filed with the Company's November 1997 Form S-3.
4.5 Form of Senior Debt Security (included in Exhibit 4.1) incorporated
herein by reference to Exhibit 4.3 filed with the Company's November
1997 Form S-3.
4.6 Form of Subordinated Debt Security (included in Exhibit 4.2)
incorporated herein by reference to Exhibit 4.4 filed with the
Company's November 1997 Form S-3.
28
Cygnus, Inc.
September 30, 1999
4.7 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 the
Company's Form 8-K dated February 4, 1998.
4.8 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 the Company's Form 8-K
filed on October 30, 1998.
4.9 First Amendment to the Rights Agreement dated October 26, 1998 between
he Company and ChaseMellon Shareholder Services, L.L.C. (the "Rights
Agent" successor to Chemical Trust), incorporated by reference to
Exhibit 99.1 of the Registrant's Form 8-A/A filed on December 14,
1998, Registration No. 0-18962.
4.10 Amended and Restated Rights Agreement dated October 27, 1998 between
the Company and ChaseMellon Shareholder Services, L.L.C. (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 Right Certificate as Exhibit B and the Summary
of Rights to purchase Preferred Shares as Exhibit C, incorporated by
reference to Exhibit 99.2 of the Registrant's Form 8A/A filed on
December 14, 1998, Registration No. 0-19962.
4.11 Registration Rights Agreement dated June 30, 1999 between the
Registrant and Cripple Creek Securities, LLC., incorporated by
reference to Exhibit 4.11 of the Registrant's Form 10-Q for the
quarter ended June 30, 1999.
4.12 Registration Rights Agreement dated June 29, 1999 between the
Registrant and the listed investors on Schedule I thereto,
incorporated by reference to Exhibit 4.12 of the Registrant's Form
10-Q for the quarter ended June 30, 1999.
10.39 Sublease Agreement dated February 19, 1999 between the Registrant and
The 3DO Company, incorporated by reference to Exhibit 10.39 of the
Registrant's Form 10-Q for the period ending March 31, 1999, filed
April 27, 1999.
10.40 Structured Equity Line Flexible Financing Agreement, dated June 30,
1999 between the Registrant and Cripple Creek Securities, LLC,
incorporated by referenced to Exhibit 1 of the Registrant's Form 8-K
filed on July 2, 1999.
10.41 Convertible Debenture and Warrant Purchase Agreement dated June 29,
1999 between the Registrant and the listed investors on Schedule I
thereto, incorporated by reference to Exhibit 10.41 of the
Registrant's Form 10-Q for the quarter ended June 30, 1999.
10.42 Form of 8.5% Convertible Debenture Due June 29, 2004, incorporated by
reference to Exhibit 10.42 of the Registrant's Form 10-Q for the
quarter ended June 30, 1999.
29
Cygnus, Inc.
September 30, 1999
10.43 Form of Common Stock Purchase Warrant, incorporated by reference to
Exhibit 10.43 of the Registrant's Form 10-Q for the quarter ended June
30, 1999.
10.44 Amendment No. 4 Lease Extension to Lease Agreement dated as of October
15, 1991 between the Registrant and Lincoln Menlo Associates Limited,
a California Limited Partnership, dated July 20, 1999.
10.45 1999 Stock Incentive Plan.
10.46 Amendment No. 1 to Structured Equity Line Flexible Financing
Agreement, dated September 29, 1999 between the Registrant and Cripple
Creek Securities, LLC, incorporated by reference to Exhibit 1.1 of the
Registrant's Form 8-K filed on October 7, 1999.
*10.47 Manufacturing and Supply Agreement and Amendment thereto; and Side
Letter dated September 30, 1999 between the Registrant and LTS Lohmann
Therapy Systems Corp.
10.48 Amended 1991 Employee Stock Purchase Plan (As Amended and Restated as
of October 1, 1999), incorporated by reference to Exhibit 99.1 of the
Company's Form S-8 Registration Statement No. 333-89377, filed October
20, 1999.
27 Financial Data Schedule
*A confidential treatment request has been applied for or granted with
respect to a portion of this document.
30
Cygnus, Inc.
September 30, 1999
B) REPORTS ON FORM 8-K
Cygnus filed one Report on Form 8-K for the quarter ended September
30, 1999.
On October 7, 1999, Cygnus filed a Current Report on Form 8-K,
reporting under Item 5:
On September 22, 1999, Cygnus, Inc. issued a press release, the text
of which is attached hereto as Exhibit 99.1, announcing that its 7-day
estrogen transdermal hormone replacement therapy patch was cleared for
marketing by the United States Food and Drug Administration (FDA).
On September 28, 1999, Cygnus, Inc. issued a press release, the text
of which is attached hereto as Exhibit 99.2, announcing that it had been
awarded a Phase I Small Business Innovative Research (SBIR) grant for "High
Performance Biosensor Electrode Materials" from the National Institute of
Diabetes and Digestive and Kidney Diseases division of the National
Institutes of Health (NIH).
On September 29, 1999, Cygnus, Inc. issued 361,174 shares of its
Common Stock for $4 million to Cripple Creek Securities, LLC ("Cripple
Creek"), pursuant to its Structured Equity Line Flexible Financing Agreement
with Cripple Creek, dated as of June 30, 1999, as amended by Amendment No. 1
to Structured Equity Line Flexible Financing Agreement dated as of September
29, 1999, attached hereto as Exhibit 1.1, the contents of which are
incorporated herein by reference. The number of shares issued to Cripple
Creek may be increased in accordance with the terms of such agreement.
Also on September 29, 1999, Cygnus, Inc. received $3 million for the
issuance of a $3 million aggregate principal amount of its Convertible
Debentures and five-year Warrants to purchase approximately 135,624 shares of
its Common Stock (subject to adjustment).
31
Cygnus, Inc.
September 30, 1999
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.
Date: NOVEMBER 5, 1999 By: /S/ JOHN C. HODGMAN
------------------------------- -------------------------------
John C. Hodgman
Chairman, President and
Chief Executive Officer
(Principal Executive Officer)
Date: NOVEMBER 5, 1999 By: /S/ CRAIG W. CARLSON
------------------------------- -------------------------------
Craig W. Carlson
Senior Vice President, Finance and
Chief Financial Officer
(Principal Accounting Officer)
32
Cygnus, Inc.
September 30, 1999
INDEX OF EXHIBITS
The following exhibits are included herein:
Exhibit 10.44 Amendment No. 4 Lease Extension to Lease Agreement dated as of
October 15, 1991 between the Registrant and Lincoln Menlo
Associates Limited, a California Limited Partnership, dated
July 20, 1999.
Exhibit 10.45 1999 Stock Incentive Plan.
Exhibit *10.47 Manufacturing and Supply Agreement and Amendment thereto; and
Side Letter dated September 30, 1999 between the Registrant
and LTS Lohmann Therapy Systems Corp.
Exhibit 27 Financial Data Schedule
*A confidential treatment request has been applied for or granted with
respect to a portion of this document.