<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus supplement is not complete and may be +
+changed. A registration statement relating to these securities has been filed +
+with the Securities and Exchange Commission and has been declared effective. +
+This prospectus supplement and the accompanying prospectus are not an offer +
+to sell these securities and we are not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Filed pursuant to Rule 424(b)(5)
Registration No. 333-47600
PROSPECTUS SUPPLEMENT (Subject to Completion) Issued November 6, 2000
(To Prospectus Dated October 17, 2000)
4,000,000 Shares
[CuraGen Corporation logo]
COMMON STOCK
-----------
CuraGen is offering 4,000,000 shares of its common stock.
-----------
The common stock is listed on the Nasdaq National Market under the symbol
"CRGN." On November 3, 2000 the reported last sale price of the common stock on
the Nasdaq National Market was $64.875 per share.
-----------
Investing in the Common Stock involves risks. See "Risk Factors" beginning on
page 4 of the Prospectus.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Price Underwriting Proceeds
to Discounts and to
Public Commissions Company
------ ------------- --------
<S> <C> <C> <C>
Per share......................................... $ $ $
Total............................................. $ $ $
</TABLE>
CuraGen has granted the underwriters the right to purchase up to an additional
600,000 shares to cover over-allotments.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved of these securities, or determined if this prospectus
supplement or the accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Morgan Stanley & Co. Incorporated expects to deliver the shares against payment
on November , 2000.
-----------
Joint Lead Managers
MORGAN STANLEY DEAN WITTER LEHMAN BROTHERS
-----------
DAIN RAUSCHER WESSELS
BEAR, STEARNS & CO. INC.
PRUDENTIAL VECTOR HEALTHCARE
a unit of Prudential Securities
THOMAS WEISEL PARTNERS LLC
, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Supplement
Prospectus Supplement Summary.... S-3
The Offering..................... S-5
Special Note Regarding Forward-
Looking Statements ............. S-6
Use of Proceeds.................. S-7
Common Stock Price Range......... S-8
Dividend Policy.................. S-8
Capitalization................... S-9
Underwriters..................... S-10
Validity of Common Stock......... S-12
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus
About This Prospectus............ 2
Our Business..................... 2
Risk Factors..................... 4
Special Note Regarding Forward-
Looking Statements.............. 15
Use of Proceeds.................. 16
The Securities We May Offer...... 17
Description Of Capital Stock..... 17
Description Of Debt Securities... 22
Description Of Warrants.......... 27
Legal Ownership Of Securities.... 29
Plan Of Distribution............. 32
Legal Matters.................... 33
Experts.......................... 33
Where You Can Find More
Information..................... 33
Incorporation Of Documents by
Reference....................... 33
</TABLE>
ABOUT THIS PROSPECTUS SUPPLEMENT
You should read this prospectus supplement along with the accompanying
prospectus carefully before you invest. Both documents contain important
information you should consider when making your investment decision. This
prospectus supplement contains information about the common stock offered
hereby and the prospectus contains information about our securities generally.
This prospectus supplement may add, update or change information in the
prospectus. You should rely only on the information provided in this prospectus
supplement, the accompanying prospectus or incorporated by reference in the
accompanying prospectus. We have not authorized anyone to provide you with
different information.
S-2
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights information contained elsewhere or incorporated by
reference in this prospectus supplement and the accompanying prospectus. This
summary may not contain all of the information that you should consider before
deciding to invest in CuraGen stock. You should read this entire prospectus
supplement and the accompanying prospectus carefully, including the "Risk
Factors" section, the financial statements and the notes to those statements,
and the documents incorporated by reference in this prospectus supplement and
the accompanying prospectus. Unless otherwise indicated, all information in
this prospectus supplement assumes no exercise of the underwriters' over-
allotment option.
CuraGen Corporation
CuraGen is a drug discovery and development company that is using its
technologies and expertise in genomics to identify and develop the next
generation of pharmaceutical products to treat debilitating unmet medical
needs. Our business plan consists of three parts:
1) Develop leading technologies to discover genes and proteins, and to
determine how these function in relation to disease;
2) Continue deriving near term revenues by partnering these technologies
and small molecule drug targets with leading pharmaceutical, biotech,
and life science companies; and
3) Apply these technologies and related gene and protein information to
discover and develop proprietary therapeutics to treat unmet medical
needs.
To translate raw genomic data into information for making drugs, we have
created a fully integrated Internet-based platform of technologies that will
rapidly and efficiently:
. Discover genes, their sequences and variations within these genes (known
as "SNPs" or single nucleotide polymorphisms);
. Determine how these genes function within an organism;
. Identify the proteins encoded by these genes;
. Determine how these proteins interact within an organism; and
. Determine the way potential drugs affect gene expression and related
biological pathways.
We partner our technologies and selected drug targets by establishing
collaborations with large pharmaceutical, biotechnology and life science
companies to augment their efforts in discovering and developing potential
therapeutics based upon these drug targets, and in selecting which drug
candidates to enter into the clinical phases of development. These
collaborators have historically made equity investments in us and pay us for
research and development work conducted on their behalf. In addition, these
collaborators also provide milestone payments for reaching predetermined goals,
and provide us with the opportunity to receive royalties based upon
successfully commercializing products stemming from our collaborative research
efforts. We are also applying our base of genomic technologies to discover
small molecule drug targets. We intend to partner the development of these
targets with large biotechnology and pharmaceutical companies that have the
appropriate expertise in developing small molecule drugs. We have conducted
research for Abgenix, Inc., Biogen, Inc., COR Therapeutics, Inc.,
DuPont/Pioneer Hi-Bred International, Inc., Gemini Genomics plc, Genentech,
Inc., Glaxo-Wellcome, Inc., Hoffmann-La Roche Inc. and its affiliate, Roche
Vitamins, Inc., and Ono Pharmaceuticals.
Our scientists are using our Internet-based technology platform to discover
and assemble information on genes and proteins for use in discovering and
developing, and ultimately commercializing a proprietary line of
S-3
<PAGE>
protein and antibody therapeutic products. We have established internal
development programs to discover and develop therapeutic products to treat
obesity and diabetes, cancer, autoimmune and inflammatory diseases, and CNS
disorders.
To date, our discovery and development scientists have discovered and
characterized nearly 300 novel drug targets, including 50 potential protein
therapeutics, 96 antibody drug targets and 148 small molecule drug targets.
Over 60% of our potential protein therapeutics have been tested in animals.
Also, in conjunction with our collaborator, Abgenix, we have selected 30
antibody drug targets against which we intend to develop antibodies as
potential therapeutics for cancer, inflammation and autoimmune disease. Over a
five-year period, Abgenix and we intend to develop antibodies against 120 drug
targets, test their efficacy as human therapeutics in cell and animal models,
and develop the most promising candidates as human therapeutics.
We have made significant progress in our research and preclinical development
programs for novel protein and antibody therapeutics. We have observed in cell
and animal models promising results from a number of the proteins that we have
identified. We intend to develop a number of these proteins as potential
treatments for obesity, type II diabetes, hypercholesterolemia and inflammatory
bowel disease. We have also observed in cell and human blood serum promising
results from a novel, fully human antibody that we discovered and may
potentially develop as a treatment for various types of cancer. The development
of all of these potential therapeutics is at a very early stage. Significant
additional testing and development will be required before we can determine if
any of these candidates will progress to clinical testing.
We were incorporated in Delaware in 1991. Our principal executive offices are
located at 555 Long Wharf Drive, 11th Floor, New Haven, Connecticut 06511 and
our telephone number is (203) 401-3330. We maintain a web site at
http://www.curagen.com. The contents of our web site are not a part of this
prospectus supplement. Unless the context otherwise requires, the terms
"CuraGen," "we," "us," and "our," refer to CuraGen Corporation and its
subsidiaries.
Stock Split
On March 2, 2000, we approved a two-for-one stock split of our common stock,
payable in the form of a stock dividend. The stock dividend was paid on March
30, 2000, to holders of record as of the close of business on March 15, 2000.
We have adjusted all share and per share numbers in this prospectus supplement
to reflect the stock dividend except for the share and per share numbers in our
annual report on Form 10-K for fiscal year ended December 31, 1999.
We are offering to sell shares of common stock and seeking offers to buy
shares of common stock, only in jurisdictions where offers and sales are
permitted. The information in this prospectus supplement is accurate only as of
the date of this prospectus supplement, regardless of the time of delivery of
the prospectus supplement or the sale of any common stock.
S-4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common stock offered.......................................... 4,000,000 shares
Common stock to be outstanding after the offering............. 41,289,025 shares
Non-voting common stock to be outstanding after the offering.. 1,705,272 shares
Overallotment option.......................................... 600,000 shares
Use of proceeds............................................... For working capital and
other general corporate
purposes. See "Use of
Proceeds."
Dividend policy............................................... We have never declared
or paid any cash
dividends on our capital
stock. We intend to
retain any future
earnings to finance the
growth and development
of our business and do
not anticipate paying
any cash dividends in
the foreseeable future.
Nasdaq National Market symbol................................. CRGN
</TABLE>
The above information regarding shares to be outstanding after the offering
excludes 7,686,797 shares issuable upon exercise of our outstanding options and
warrants and conversion of our outstanding convertible notes.
S-5
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and the documents
incorporated by reference therein contain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act. These statements relate to future events or our future financial
performance. These statements include but are not limited to statements
regarding our intention to partner with biotechnology and pharmaceutical
companies to develop small molecule drug targets, and our intention to develop
the novel proteins and antibodies that we have discovered. In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "expects," "anticipates," "believes," "estimates," "predicts,"
"potential" or "continue" or the negative of such terms or other comparable
terminology. These statements are only predictions and involve known and
unknown risks, uncertainties and other factors, including the risks outlined
under "Risk Factors" beginning on page 4 of the prospectus, that may cause our
or our industry's actual results, levels of activity, performance or
achievements to differ from those expressed or implied by such forward-looking
statements. Before deciding to purchase our common stock you should carefully
consider the risks described in the "Risk Factors" section of the prospectus,
in addition to the other information set forth in this prospectus supplement,
the prospectus and in the documents incorporated by reference in the
prospectus.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We do not intend to update any of the
forward-looking statements after the date of this prospectus to conform such
statement to actual results except as required by law.
S-6
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds we will receive from this common stock
offering will be approximately $246,025,000, after deducting the underwriting
discount and estimated offering expenses and assuming a public offering price
of $64.875 per share. If the underwriters exercise their over-allotment option
in full, we estimate that the net proceeds will be approximately $283,003,750.
We intend to use the net proceeds from this offering for general corporate
purposes, including our internal discovery and development programs and the
development of new technologies, general working capital and possible future
acquisitions.
We have not determined the amounts we plan to spend on any of the areas
listed above or the timing of these expenditures. As a result, our management
will have broad discretion to allocate the net proceeds from this offering.
Pending application of the net proceeds as described above, we intend to invest
the net proceeds of the offering in short-term, investment-grade, interest-
bearing securities.
S-7
<PAGE>
COMMON STOCK PRICE RANGE
Since our initial public offering in March 1998, our common stock has traded
on the Nasdaq National Market under the symbol "CRGN." The last reported bid
price for our common stock on November 3, 2000 was $64.875 per share, and we
had approximately 152 stockholders of record. The table below sets forth the
high and low closing prices for our common stock during the periods indicated.
All price data have been adjusted to give effect to our two-for-one stock split
effected in the form of a stock dividend on March 30, 2000.
<TABLE>
<CAPTION>
Common Stock Price
------------------
High Low
--------- --------
<S> <C> <C>
Fiscal Year ended December 31, 1998:
Quarter Ended:
March 31, 1998 (from March 18, 1998)...................... $ 6.4690 $ 5.7500
June 30, 1998............................................. 6.2500 3.1250
September 30, 1998........................................ 4.0630 2.5000
December 31, 1998......................................... 4.2500 2.6875
Fiscal Year ended December 31, 1999:
Quarter Ended:
March 31, 1999............................................ $ 3.6250 $ 3.0000
June 30, 1999............................................. 4.0000 2.5315
September 30, 1999........................................ 9.2500 3.3750
December 31, 1999......................................... 34.8750 6.9375
Fiscal Year ended December 31, 2000:
Quarter Ended:
March 31, 2000............................................ $118.2500 $31.3130
June 30, 2000............................................. 46.3130 23.3750
September 30, 2000........................................ 53.2812 32.3906
December 31, 2000 (through November 3, 2000).............. 68.3125 37.0000
</TABLE>
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
intend to retain any future earnings to finance the growth and development of
our business and do not anticipate paying any cash dividends in the foreseeable
future.
S-8
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization:
. as of September 30, 2000; and
. pro forma to give effect to the issuance and sale of the common stock,
assuming a public offering price of $64.875, after deducting the
underwriters' discounts and commissions and estimated offering expenses
payable by us.
The table excludes the following shares:
. 763,036 shares subject to outstanding options we issued under our 1993
employee stock option plan, as of September 30, 2000 (we do not intend
to issue any additional options under this plan);
. 7,000,000 shares reserved for issuance under our 1997 employee stock
option plan, of which 3,655,923 shares are subject to outstanding
options, as of September 30, 2000;
. 967,500 shares subject to outstanding warrants, as of September 30,
2000; and
. 2,350,084 shares reserved for issuance upon conversion of our
$150,000,000 convertible subordinated debentures, as of September 30,
2000.
You should read this table with the financial statements and the notes
thereto incorporated by reference in the prospectus.
<TABLE>
<CAPTION>
September 30, 2000
--------------------------
Pro
Actual Forma
------------ ------------
<S> <C> <C>
Cash and cash equivalents.......................... $244,556,268 $490,581,268
============ ============
Long-term debt:
6.00% Convertible Subordinated Debentures due
2007............................................ 150,000,000 150,000,000
Obligations under capital leases, net of current
portion......................................... 5,601,411 5,601,411
------------ ------------
Total long-term debt........................... 155,601,411 155,601,411
------------ ------------
Minority interest.................................. 15,797,787 15,797,787
------------ ------------
Stockholders' equity:
Common stock, Voting, $.01 par value: 250,000,000
shares authorized; 37,232,623 shares issued and
outstanding actual; 41,232,623 shares issued and
outstanding pro forma........................... 372,326 412,326
Common stock, Non-Voting, $.01 par value:
3,000,000 shares authorized; 1,705,272 shares
issued and outstanding actual and pro forma..... 17,053 17,053
Additional paid-in capital....................... 156,060,509 402,045,509
Accumulated deficit.............................. (73,073,894) (73,073,894)
Unamortized stock-based compensation............. (196,910) (196,910)
------------ ------------
Total stockholders' equity..................... 83,179,084 329,204,084
------------ ------------
Total capitalization........................... $254,578,282 $500,603,282
============ ============
</TABLE>
S-9
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated , the underwriters named below, for whom Morgan Stanley &
Co. Incorporated, Lehman Brothers Inc., Dain Rauscher Incorporated, Bear,
Stearns & Co. Inc., Prudential Securities Incorporated and Thomas Weisel
Partners LLC are acting as representatives, have severally agreed to purchase,
and CuraGen has agreed to sell to the underwriters, severally, the respective
number of shares of our common stock indicated opposite the names of the
underwriters below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
Morgan Stanley & Co. Incorporated................................
Lehman Brothers Inc. ............................................
Dain Rauscher Incorporated.......................................
Bear, Stearns & Co. Inc..........................................
Prudential Securities Incorporated...............................
Thomas Weisel Partners LLC.......................................
---------
Total........................................................ 4,000,000
=========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from CuraGen and subject to prior sale. The
underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of common stock
offered by this prospectus are subject to the approval of certain legal matters
by their counsel and to certain other conditions. The underwriters are
obligated to take and pay for all of the shares of common stock offered by us
in this offering, other than those covered by the over-allotment option
described below, if any such shares are taken.
A prospectus in electronic format may be available on the web sites
maintained by one or more of the lead managers of this offering and may also be
made available on web sites maintained by other underwriters. The underwriters
may agree to allocate a number of shares to underwriters for sale to their
online brokerage account holders.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price listed on the cover
page of this prospectus and part to certain dealers at a price that represents
a concession not in excess of $ a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in excess
of $ a share to other underwriters or to certain dealers. After the initial
offering of the shares of common stock, the offering price and other selling
terms may from time to time be varied by the representatives.
CuraGen has granted to the underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to an aggregate of 600,000
additional shares of common stock at the public offering price listed on the
cover page of this prospectus, less underwriting discounts and commissions. The
underwriters may exercise this option solely for the purpose of covering over-
allotments, if any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the option is exercised,
each underwriter will become obligated, subject to certain conditions, to
purchase about the same percentage of the additional shares of common stock as
the number listed next to the underwriter's name in the preceding table bears
to the total number of shares of common stock listed next to the names of all
underwriters in the preceding table. If the underwriters' option is exercised
in full, the total price to the public would be $ , the total
underwriters' discounts and commissions would be $ and total proceeds
to CuraGen would be $ .
CuraGen's common stock is quoted on the Nasdaq National Market under the
symbol "CRGN."
S-10
<PAGE>
CuraGen, our directors and executive officers and certain other stockholders
have agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated on behalf of the underwriters, he, she or it will not, during the
period ending 90 days after the date of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock
whether any transaction described above is to be settled by delivery of common
stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
. the sale of shares to the underwriters;
. the issuance by CuraGen of shares of common stock upon the exercise of
an option or the conversion of a security outstanding on the date of
this prospectus of which the underwriters have been advised in writing;
. transactions by any person other than CuraGen relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares; and
. the issuance by CuraGen of shares of common stock or any securities that
are convertible into or exercisable for shares of our common stock
within 90 days after the date of this prospectus supplement under
certain circumstances in connection with mergers, acquisitions, other
business combinations or strategic alliances and pursuant to our
existing equity incentive plans.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common stock. Specifically, the underwriters may over-allot in
connection with the offering, creating a short position in the common stock
for their own account. In addition, to cover over-allotments or to stabilize
the price of the common stock, the underwriters may bid for, and purchase,
shares of common stock in the open market. Finally, the underwriting syndicate
may reclaim selling concessions allowed to an underwriter or a dealer for
distributing the common stock in the offering, if the syndicate repurchases
previously distributed common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. Any of these activities
may stabilize or maintain the market price of the common stock above
independent market levels. The underwriters are not required to engage in
these activities, and may end any of these activities at any time.
CuraGen and the underwriters have agreed to indemnify each other against
certain liabilities, including liabilities under the Securities Act.
The managing underwriters have provided, and continue to provide, investment
banking services to CuraGen.
Due to the fact that one of the underwriters was organized within the last
three years, we are providing you with the following information. Thomas
Weisel Partners LLC, one of the representatives of the underwriters, was
organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 148
completed transactions, and has acted as a syndicate member in an additional
130 public offerings of equity securities. Thomas Weisel Partners does not
have any material relationship with us or any of our officers, directors or
other controlling persons, except with respect to its contractual relationship
with us pursuant to the underwriting agreement entered into in connection with
this offering.
S-11
<PAGE>
VALIDITY OF COMMON STOCK
The validity of the shares of common stock we are offering will be passed
upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. of Boston,
Massachusetts, and for the underwriters by Ropes & Gray, of Boston,
Massachusetts. Mintz Levin owns an aggregate of 7,073 shares of common stock
and a warrant to purchase 6,000 shares of common stock. Attorneys of Mintz
Levin own an aggregate of approximately 28,526 shares of common stock and a
warrant to purchase 24,000 shares of common stock.
S-12
<PAGE>
PROSPECTUS
CURAGEN CORPORATION
$500,000,000
COMMON STOCK
PREFERRED STOCK
DEBT SECURITIES
WARRANTS
We may from time to time issue up to $500,000,000 aggregate principal amount
of common stock, preferred stock, debt securities and/or warrants. We will
specify in the accompanying prospectus supplement the terms of the securities.
We may sell these securities to or through underwriters and also to other
purchasers or through agents. We will set forth the names of any underwriters
or agents in the accompanying prospectus supplement.
----------------
INVESTING IN OUR SECURITIES INVOLVES RISKS.
SEE "RISK FACTORS" ON PAGE 4.
----------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This prospectus may not be used to consummate sales of securities unless it
is accompanied by a prospectus supplement.
The date of this prospectus is October 17, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ABOUT THIS PROSPECTUS...................................................... 2
OUR BUSINESS............................................................... 2
RISK FACTORS............................................................... 4
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.......................... 15
USE OF PROCEEDS............................................................ 16
THE SECURITIES WE MAY OFFER................................................ 17
DESCRIPTION OF CAPITAL STOCK............................................... 17
DESCRIPTION OF DEBT SECURITIES............................................. 22
DESCRIPTION OF WARRANTS.................................................... 27
LEGAL OWNERSHIP OF SECURITIES.............................................. 29
PLAN OF DISTRIBUTION....................................................... 32
LEGAL MATTERS.............................................................. 33
EXPERTS.................................................................... 33
WHERE YOU CAN FIND MORE INFORMATION........................................ 33
INCORPORATION OF DOCUMENTS BY REFERENCE.................................... 33
</TABLE>
<PAGE>
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission, or SEC, utilizing a "shelf" registration
process. Under this shelf process, we may sell any combination of the
securities described in this prospectus in one or more offerings up to a total
dollar amount of $500,000,000. We have provided to you in this prospectus a
general description of the securities we may offer. Each time we sell
securities, we will provide a prospectus supplement that will contain specific
information about the terms of that offering.
OUR BUSINESS
The following is only a summary. We urge you to read the entire prospectus,
including the more detailed financial statements, notes to the financial
statements and other information incorporated by reference from our other
filings with the SEC. Investing in our common stock involves risk. Therefore,
carefully consider the information provided under the heading "Risk Factors"
beginning on page 4.
We are a genomics based drug discovery and development company. We develop
and use technologies to discover genes and to understand how they function in
order to accelerate the discovery and development of products to improve human
health, animal health and to improve agricultural vitality. We conduct this
work in collaboration with other pharmaceutical and biotechnology companies and
on our own behalf through internal discovery and development programs.
We make our technologies, processes and information systems accessible over
the Internet, fully integrate them with one another to improve efficiency and
ease of use, and rapidly generate comprehensive information about the
following:
. gene sequence; the order in which nucleotides (the building blocks of
DNA) appear in a gene and control the function of the gene;
. variations in gene sequences;
. gene expression (the degree of gene activity);
. biological pathways (the pathways that proteins follow in carrying out
the biological functions of cells); and
. the way potential drugs affect gene expression and the related biological
pathways.
Our base of technologies has three primary systems which consist of:
proprietary technologies, automated processes, and software used to analyze and
organize our biological databases. Each of our technologies is fully
operational and has been commercialized:
. SeqCalling(TM) which identifies sequences and discovers variations in
gene sequences known as Single Nucleotide Polymorphisms, or SNPs;
. GeneCalling(R), a patented technology that discovers genes and measures
gene activity; and
. PathCalling(R), a patented technology that analyzes the function and
relationships between genes and the proteins these genes encode in
biological pathways.
In addition to accelerating the discovery of new drug candidates, we use our
GeneCalling technologies, related biological databases, and software analysis
tools to predict the potential efficacy and safety of drug candidates currently
in pharmaceutical development pipelines, and to review the performance and side
effects of drugs already being marketed. This approach, referred to as
pharmacogenomics, is helping pharmaceutical companies develop more effective
and safer drugs.
2
<PAGE>
We have unified our SeqCalling, GeneCalling and PathCalling technologies,
processes and databases through a computer operating software program we refer
to as GeneScape. GeneScape enables users to access our technologies over the
Internet and provides researchers at multiple sites simultaneous, real-time
access to our technologies, systems and databases, allowing them to collaborate
on discovery and development projects. We plan to continue enhancing and
building additional technologies that we will incorporate into the GeneScape
operating software program.
We market our technologies and gene information to pharmaceutical,
biotechnology, agricultural and animal health companies through research
collaborations. These collaborations typically provide current revenues,
milestone payments for successful projects, and royalty-based revenues from our
partners' drug development programs. We have conducted research for Abgenix,
Inc., Biogen, Inc., COR Therapeutics, Inc., DuPont/Pioneer Hi-Bred
International, Inc., Gemini Genomics plc, Genentech, Inc., Glaxo-Wellcome,
Inc., Hoffmann-La Roche Inc. and its affiliate, Roche Vitamins, Inc. and Ono
Pharmaceuticals.
We also apply our suite of genomics technologies on our own behalf to build
a broad portfolio of research programs that encompass drug discovery, drug
development and pharmacogenomics. We have established internal programs to
discover products to treat metabolic diseases, cancer, autoimmune and
inflammatory diseases and disorders of the central nervous system. During the
next five years, our objective is to systematically analyze the genetic basis
of many common diseases, study how many commonly prescribed drugs work and
identify their potentially adverse side effects, while building a proprietary
pipeline of therapeutic products.
We focus our efforts on research programs that address unmet medical needs
and that we believe have the potential to yield products that can be
commercialized in a relatively short time. At each stage, we plan to reevaluate
the relative merits of continuing such programs solely through internal efforts
or through research collaborations.
The goal of our drug development programs is to advance promising
therapeutic candidates into the FDA's clinical approval process. We currently
focus on two broad classes of therapeutics: secreted proteins and fully human
antibodies. We are currently evaluating the efficacy of a number of secreted
proteins as potential human therapeutics using animal models. Antibodies are
naturally occurring proteins used by the body's immune system to combat many
diseases. As therapeutic products, antibodies have several potential advantages
over other therapies such as reducing unwanted side effects that may occur with
other therapies. Fully human antibodies are desirable because they avoid the
risk of rejection present with mouse or partial mouse antibodies.
We file patent applications to protect our genomics technologies, gene-
related discoveries, products, information systems and proprietary databases,
software and other methods and technology. As of October 3, 2000, we had
approximately 435 patent applications pending with the United States Patent and
Trademark Office, and had filed numerous corresponding international and
foreign patent applications. As of October 3, 2000, the U.S. Patent Office has
issued us 11 patents for aspects of our technologies, discoveries and products.
We incorporated in Delaware in November 1991. Our principal executive
offices are located at 555 Long Wharf Drive, 11th Floor, New Haven, Connecticut
06511. Our telephone number is (203) 401-3330. We maintain a web site on the
Internet at http://www.curagen.com. We do not intend for the information in our
web site to be considered part of this prospectus.
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RISK FACTORS
Investing in our common stock is very risky. You should carefully consider
the following risk factors and all other information contained in this
prospectus and incorporated by reference before purchasing our securities. You
should be able to bear a complete loss of your investment. See "Special Note
Regarding Forward-Looking Statements."
We have a history of operating losses and expect to incur losses in the future
and we may never achieve or maintain profitability.
We have a limited operating history and we have experienced operating losses
since our inception and expect these losses to continue for the next several
years. We may never be profitable or achieve significant revenues. For example,
we experienced net losses of $25,762,760 in 1999, $18,936,920 in 1998 and
$7,290,434 in 1997. In order to develop our technologies, including expanding
our SeqCalling, GeneCalling and PathCalling database development efforts, we
expect to incur significant increases in our expenses over the next several
years. In addition, we expect significant increases in expenses in connection
with our internal research and product development programs. As a result, we
expect to incur operating losses at least through 2002. Our ability to achieve
significant revenues and profitability will depend upon obtaining additional
research collaborations and subscribers for our SeqCalling, GeneCalling and
PathCalling products, services and related databases and our internal
development programs. We may not be able to obtain any additional research
collaborations or enter into any additional subscription arrangements for
products, services, databases or our internal development programs. As a
result, we may never achieve or maintain profitability.
Our technologies and products are at an early stage of development and may
never be commercially viable or successful.
Our technologies and databases are still in the early stages of development
and we have just begun to incorporate our technologies into commercialized
products. Our products focus primarily on the development of diagnostic drugs
to treat a variety of complex human and animal diseases and agronomic traits.
There is limited scientific understanding generally relating to the role of
genes in these diseases and traits, and few products based on gene discoveries
have been developed and commercialized. Accordingly, even if we were successful
in identifying genes, biological pathways or drug candidates associated with
specific diseases or in identifying genes associated with certain agronomic
traits, we or our collaborators may not be able to develop or commercialize
products to improve human and animal health and the vitality of agriculture.
In addition, our SeqCalling, GeneCalling and PathCalling products and
services and the related databases are in the early stage of development. These
products systematically analyze the genetic information contained within a cell
to discover and develop novel therapeutic, agricultural and diagnostic
products. Their success will depend upon our ability to use software tools to
generate data concerning the following:
. gene sequences;
. gene variations;
. the level of gene activity;
. biological pathways; and
. drug candidates.
In addition, because of the complexity of such data, we may not be able to
detect any design defects or software errors in our existing or future
technologies and databases.
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Even if we or our collaborators develop products for commercial use, we may
not be able to develop products that:
. meet applicable regulatory standards, in a timely manner or at all;
. successfully compete with other technologies and products;
. avoid infringing the proprietary rights of others;
. can be manufactured in sufficient quantities or at reasonable cost; or
. can be marketed successfully.
Due to the specialized nature of our products, there are a limited number of
pharmaceutical, biotechnology and agricultural companies that are potential
customers for our products and services. Additional reasons why there may not
be a great demand for our products and services include:
. our potential collaborators and subscribers may determine to conduct in-
house gene research;
. our competitors may offer similar services at competitive prices;
. we may not be able to service satisfactorily our collaborators and
subscribers;
. others may publicly disclose or patent the proprietary information
contained in our databases (including information related to gene
expression, biological pathways or drug candidates); and
. technological innovations may be discovered that are more advanced than
those used by and available to us.
If there is not sufficient demand for our products we may never generate
enough revenues to become or stay profitable.
We may need to raise additional funding which may not be available on terms
acceptable to us, or at all, harming our ability to implement our business
plan.
We anticipate that our existing capital resources are not sufficient to fund
our future operating plans and we will need to raise significant additional
capital. We established a substantial scientific infrastructure to develop our
technologies and to add information to our databases. We used substantial
amounts of cash to establish this infrastructure and expect our capital and
operating expenses to increase over the next several years as we expand this
infrastructure and our research and development activities. The amount of
additional capital which we expect we will need to raise will depend on many
factors, including:
. the progress of our research programs;
. the number and breadth of our research programs;
. our ability to attract subscribers to our products and services;
. the achievement of the milestones under certain of our existing
collaborations;
. our ability to establish and maintain additional collaborations;
. the progress of our collaborators;
. our activities relating to the commercialization rights we have retained
in our collaborations;
. the costs incurred in enforcing and defending our patent claims and other
intellectual property rights; and
. the costs and timing of obtaining regulatory approvals for any of our
products to improve human and animal health and the vitality of
agriculture.
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We expect to raise the additional capital we require through public or
private equity offerings, debt financings or additional collaborations and
licensing arrangements. Additional financing may not be available to us when we
need it, or, if available, we may not be able to obtain such financing on terms
favorable to us or our stockholders. If we raise additional capital by issuing
equity securities, your ownership in us will be diluted. If we raise additional
funds through collaborations and licensing arrangements, we may be required to
relinquish rights to certain of our technologies or product candidates, or to
grant licenses on unfavorable terms. If we relinquish rights or grant licenses
on unfavorable terms our revenues could decrease. If adequate funds are not
available on terms acceptable to us, or at all, our business, financial
condition and results of operations would be materially adversely affected.
We rely significantly on our collaborative partners, and if our partners reduce
or stop funding our research efforts or terminate their collaborations with us
entirely we may not be able to develop or commercialize our products.
We rely on collaborators for the preclinical study and clinical development
of therapeutics and for regulatory approval, manufacturing and marketing of
products resulting from the application of our technology. We also intend to
rely on certain collaborators for significant funding in support of our
research efforts. It is important, then, that we enter into research
collaborations and licensing arrangements with a variety of third parties so we
can implement our strategy to develop and commercialize products for the health
of humans and animals and the vitality of agriculture based upon our
discoveries.
Our agreements with collaborators typically allow them significant
discretion to elect whether to pursue such activities. We cannot control the
amount and timing of resources our collaborators devote to our programs or
potential products. In addition, our collaborators can terminate their
agreements with us any time the collaboration permits them to or if we
materially breach the contract. We may not be able to maintain or expand
existing collaborations or establish any additional research collaborations,
licensing or subscription arrangements. For instance, Biogen and DuPont/Pioneer
Hi-Bred, which together accounted for approximately 47% of our revenue in 1999
and 27% of our 2000 revenue through September 30, have opted not to renew the
research portions of their collaborations with us. In addition, the research
portions of our collaborations with Hoffmann-La Roche and COR Therapeutics are
up for renewal prior to January 2001. If any of our collaborators were to not
renew, breach or terminate its agreement with us or otherwise fail to conduct
collaborative activities successfully and in a timely manner, the preclinical
or clinical development or commercialization of product candidates or research
programs would be delayed or terminated. Moreover, if funding from one or more
of our collaborative programs were reduced or terminated, we would need to
devote additional internal resources to product development, scale back or
terminate certain research development programs or seek alternative
collaborators. Disputes may arise in the future with respect to the ownership
of rights to any technology developed with our collaborators. These and other
possible disagreements between collaborators and us could lead to delays in the
collaborative research, development or commercialization of certain
therapeutic, agricultural or diagnostic products, or could require or result in
litigation or arbitration to resolve. If our collaborative partners reduce or
stop funding our research efforts, or terminate their collaborations with us,
we may not be able to develop or commercialize our products. Such disputes
could materially adversely affect our business.
We face intense competition which is likely to increase and could result in
reduced acceptance and demand for our technologies and products.
We face, and will continue to face, intense competition from one or more of
the following entities:
. pharmaceutical companies;
. biotechnology companies;
. diagnostic companies;
. academic and research institutions; and
. government agencies.
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We are also subject to significant competition from organizations that are
pursuing technologies and products that are the same as or similar to our
technology and products. Many of the organizations competing with us have
greater capital resources, research and development staffs and facilities and
marketing capabilities. In addition, research in the field of genomics
generally is highly competitive. Our competitors in the genomics area include:
. Human Genome Sciences, Inc.;
. Millennium Pharmaceuticals, Inc.;
. Myriad Genetics, Inc.;
. major pharmaceutical companies; and
. universities and other research institutions (including those receiving
funding from the federally funded Human Genome Project).
We believe that our future success will depend in large part on our ability
to maintain a competitive position in the genomics field. Before we recover
development expenses for our products or technologies, such products or
technologies may become obsolete as a result of technological developments by
us or others. New technologies which are less expensive or more effective could
make our products obsolete. We may not be able to make the enhancements to our
technology necessary to compete successfully with newly emerging technologies.
A number of our competitors are attempting to rapidly identify and patent
genes and gene fragments sequenced at random, typically without specific
knowledge of the function of such genes or gene fragments. If our competitors
discover or characterize important genes or gene fragments before we do, it
could adversely affect any of our related disease research programs. We expect
that competition in genomics research will intensify as technical advances are
made and become more widely known. As a result, there may be reduced acceptance
and demand for our technologies and products.
If our patent applications do not result in issued patents, then our
competitors may obtain rights to commercialize our discoveries, which would
harm our competitive position.
Our business and competitive position depend upon our ability to protect our
SeqCalling, GeneCalling and PathCalling proprietary databases, proprietary
software and other proprietary methods and technology and related discoveries.
Our commercial success also depends in part on obtaining patent protection on
genes and proteins for which we or our collaborators or subscribers discover
utility and on products, methods and services based on such discoveries. We
have applied for patent protection on novel genes and proteins, novel mutants
of known genes and their uses, partial sequences of novel proteins and their
gene sequences and uses, and novel uses for previously identified genes
discovered by third parties. We also seek patent protection for our
therapeutic, diagnostic and drug screening methods and products. We have filed
patent applications for our proprietary methods and devices for gene expression
analysis, sequencing, discovery of biological pathways and for development. As
of October 3, 2000, we had approximately 435 patent applications pending
covering our technologies with the United States Patent and Trademark Office,
and had filed numerous corresponding international and foreign patent
applications. As of October 3, 2000, our patent applications have resulted in
11 issued patents with respect to aspects of our technology.
Patent law relating to the scope of claims in the technology fields in which
we operate is still evolving. The degree of future protection for our
proprietary rights is uncertain. Furthermore, third parties may independently
develop similar or alternative technologies, duplicate any of our technologies,
or, if patents are issued to us, design around the patented technologies
developed by us. We cannot predict whether our pending patent applications will
result in the issuance of valid patents. Litigation, which could result in
substantial cost to us, may be necessary to enforce our patent and proprietary
rights and/or to determine the scope and validity of others' proprietary
rights. We may participate in interference proceedings that may in the future
be declared
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by the United States Patent and Trademark Office to determine priority of
invention, which could result in substantial cost to us. The outcome of any
such litigation or interference proceeding might not be favorable to us. If our
patent applications do not result in issued patents, we may not be able to
compete effectively.
If the scope of our issued patents does not provide us with sufficient
protection of our intellectual property from our competitors we may not be able
to compete effectively.
The patent positions of pharmaceutical, biopharmaceutical and biotechnology
companies, including us, are uncertain and involve complex legal and factual
questions. The scope of our issued patents may not protect our technologies and
products because:
. our pending patent applications may not result in issued patents;
. additional proprietary technologies we develop, if any, may not be
patentable;
. patents issued to us or our collaborative customers may not provide a
basis for commercially viable products;
. patents issued to us or our collaborative customers may not provide us
with any competitive advantages;
. patents issued to us or our collaborative customers may be challenged or
circumvented or invalidated by third parties; and
. patents issued to others may have an adverse effect on our ability to do
business.
The public availability of expressed sequence tags, genomic sequence
information or other sequence information prior to the time we apply for patent
protection on a corresponding full-length or partial gene could adversely
affect our ability to obtain patent protection with respect to such gene or
gene sequences. We may not be able to obtain further patents for our products
or methods, or, if we are able to obtain further patents, these patents may not
provide us with substantial protection or be commercially beneficial. The
issuance of a patent is not conclusive as to its validity or enforceability,
nor does it provide the patent holder with freedom to operate without
infringing the patent rights of others. Third parties could initiate lawsuits
against us to challenge our patents and, if we lose, our competitors could be
free to use the subject matter covered by the patent, or we may license the
technology to others to settle such litigation. If a court invalidates key
patents that we own or license or the U.S. Patent Office does not approve our
pending patent applications we may not be able to compete effectively in the
marketplace.
If we infringe upon third parties' patents, those parties could sue us for
patent infringement or they could require us to pay licensing fees which could
increase our expenses.
Our competitors and other groups are attempting to rapidly identify and
characterize genes through the use of gene expression analysis and other
technologies. To the extent any patents issue to other parties on such partial
or full-length genes or uses for such genes, the risk increases that the sale
of potential products, including therapeutics, or processes developed by us or
our collaborators may give rise to claims of patent infringement. We have
sought and intend to continue seeking patent protection for novel uses for
genes and proteins which may have been patented by third parties. In such
cases, we would need a license from the holder of the patent with respect to
such gene or protein in order to make, use or sell such gene or protein for
such use. We may not be able to acquire such licenses on commercially
reasonable terms, if at all.
In addition, others may have filed and in the future are likely to file
patent applications covering genes or gene products that are similar or
identical to our products. Any such patent application may have priority over
our patent applications. Any legal action against us or our collaborators
claiming damages and seeking to enjoin commercial activities relating to the
affected products and processes could, in addition to subjecting us to
potential liability for damages, require us or our collaborators to obtain a
license in order to continue to manufacture or market the affected products and
processes or could enjoin us from continuing to manufacture or market the
affected products and processes. We or our collaborators might not prevail in
any such action or
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that any license required under any such patent would be made available on
commercially acceptable terms, if at all. We believe that there may be
significant litigation in the industry regarding patent and other intellectual
property rights. If we become involved in such litigation, it could consume a
substantial portion of our managerial and financial resources.
A third party has indicated to us that it believes at some time in the
future we may be required to obtain a license in order to perform certain
processes that we use in the conduct of our business. We believe that, if
required, such license would be available on commercially reasonable terms.
If our security measures do not protect our proprietary technologies, we may
not be able to protect our trade secrets harming our competitive position.
We rely upon trade secret protection for some of our confidential and
proprietary information that is not subject matter for which patent protection
is being sought. We believe that we have developed proprietary technology,
processes and information systems for use in gene expression, biological
pathway and molecular target discovery, including proprietary biological
protocols, instrumentation, robotics and automation, software and an integrated
bioinformatics system. In addition, we have developed databases of proprietary
gene expression patterns and sequencing, human genetic variations, biological
pathways and the effects of drugs on gene expression which we update on an
ongoing basis and which can be accessed over the Internet. We have taken
security measures to protect our proprietary technologies, processes,
information systems and data and continue to explore ways to enhance such
security. Such measures, however, may not provide adequate protection for our
trade secrets or other proprietary information. While we require employees,
academic collaborators and consultants to enter into confidentiality and/or
non- disclosure agreements where appropriate, any of the following could still
occur:
. third parties could disclose proprietary information about us;
. others may independently develop substantially equivalent proprietary
information and techniques or otherwise gain access to our trade secrets
or disclose such technology; or
. we may not be able to meaningfully protect our trade secrets.
If our competitors learn our trade secrets, we may not be able to compete
effectively in the market.
If we cannot retain commercialization rights for our technologies and products
we may not realize revenue from those technologies and products.
In our research collaborations, we seek to retain commercialization rights
for the development and marketing of certain products or services to improve
human and animal health and the vitality of agriculture. We may not be
successful in retaining such rights and we have not developed any
pharmaceutical, agricultural or diagnostic products or services to date. We may
seek to commercialize any future retained rights, as well as any products
developed in our internal development programs, directly or through
collaborations with others. The value of these rights and products, if any,
will be largely derived from our gene expression, biological pathway and drug
screening efforts, the success of which is also uncertain. Even if we identify
and label relevant disease-related genes, biological pathways and/or drug
candidates, we do not currently have sufficient infrastructure, including
manufacturing and marketing, to commercialize our retained rights. If we seek
to commercialize retained rights and products developed internally through
joint ventures or research collaborations, we may be required to relinquish
material rights on terms that may not be favorable to us. If we cannot retain
and develop commercialization rights for our technologies and products we may
not realize revenue from those technologies and products.
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If we, or our collaborators, do not comply with government regulations, we may
not be able to develop or sell our technologies and products.
Prior to the marketing of any new drug developed by us or our collaborative
customers, that new drug must undergo an extensive regulatory approval process
in the United States and other countries. This regulatory process includes
preclinical and clinical studies, as well as post-marketing surveillance to
establish a compound's safety and efficacy, and can take many years and require
substantial resources. Data obtained from such studies are susceptible to
varying interpretations that could delay, limit or prevent regulatory approval.
The rate of completion of clinical trials is dependent upon, among other
factors, the enrollment of patients. Patient accrual is a function of many
factors, including:
. the size of the patient population;
. the proximity of patients to clinical sites;
. the eligibility criteria for the study; and
. the existence of competitive clinical trials.
Delays in planned patient enrollment in clinical trials may result in
increased costs, program delays, or both. We may encounter delays or rejections
based upon changes in United States Food and Drug Administration policies for
drug approval during the period of product development and FDA regulatory
review of each submitted new drug application, in the case of new
pharmaceutical agents, or product license application in the case of biologics.
We may also encounter similar delays in the regulatory approval of any
diagnostic product and in obtaining regulatory approvals in foreign countries.
Under current guidelines, proposals to conduct clinical research involving gene
therapy at institutions supported by the National Institutes of Health must be
approved by the Recombinant DNA Advisory Committee and the National Institutes
of Health. Because some of the products that result from our disease research
programs involve new technologies and may be based upon a new therapeutic
approach, such products may be subject to substantial additional review by
various government regulatory authorities and, as a result, we may obtain
regulatory approvals more slowly than for products using more conventional
technologies.
Even if we obtain regulatory approval for and market a product, such product
and its manufacturer are subject to continuing review. We may be adversely
affected by the discovery of previously unknown problems with a product,
including withdrawal of the product from the market. We could incur various
adverse consequences as a result of any of the following events:
. violations of regulatory requirements at any stage, including preclinical
studies and clinical trials, the approval process or post- approval;
. the FDA's delay in approval or refusal to approve a product;
. withdrawal of an approved product from the market; or
. the imposition of criminal penalties against the manufacturer and new
drug application or product license application holder.
We have not submitted an investigational new drug application for any
product candidate of ours, and no product candidate has been approved for
commercialization in the United States or elsewhere. With respect to our
internal discovery and drug programs, we may rely on our collaborators to file
investigational new drug applications and generally direct the regulatory
approval process. We or any of our collaborators may not be able to conduct
clinical testing or obtain the necessary approvals from the FDA or other
regulatory authorities for any products. If we do not obtain required
governmental approvals we may delay or preclude our collaborators from
marketing drugs or diagnostic products developed by us or limit the commercial
use of such products.
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We use hazardous materials and chemicals in our business and any disputes
relating to improper handling, storage or disposal of these materials could be
time consuming and costly.
Our research and development activities involve the controlled use of
hazardous materials and chemicals. We are subject to federal, state and local
laws and regulations governing the use, storage, handling and disposal of such
materials and certain waste products. Although we believe that our safety
procedures for handling and disposing of such materials comply with the
standards prescribed by federal, state and local laws and regulations, the risk
of accidental contamination or injury from these materials cannot be completely
eliminated. In the event of such an accident, third parties could hold us
liable for any damages that result and any liability could exceed our
resources.
If we fail to retain our key personnel and hire, train and retrain qualified
employees, we may not be able to develop or commercialize our technologies.
We depend on the principal members of our management and scientific staff,
including Dr. Jonathan M. Rothberg, our Chief Executive Officer, President and
Chairman of the Board. We have not entered into employment agreements with any
of the principal members of our management or scientific staff that bind any of
them to a specific term of employment. We maintain key person life insurance on
the life of Dr. Rothberg in the amount of $2,000,000. Our future success also
will depend in part on the continued services of our key scientific and
management personnel and our ability to attract, hire and retain additional
personnel. There is intense competition for such qualified personnel and there
can be no assurance that we will be able to continue to attract and retain such
personnel. If we fail to retain our key personnel and hire, train and retrain
qualified employees, we may not be able to develop or commercialize our
technologies.
If we do not retain our current licensed technologies and acquire new ones, we
might not be able to pursue our research and development activities.
We have acquired or licensed certain components of our technologies from
third parties. If any third party changed or terminated their licensing
agreements with us, we may not be able to obtain the components we need to
develop our technologies In addition, some of our licenses impose an obligation
on us to market the licensed technology to third parties. If we breach any of
these licenses or fail to maintain rights to such technology we may not be able
to continue our research and development activities or begin new ones.
The government has certain rights to funded technologies and we may have to
provide some of our technology for free which could increase our expense
without a corresponding increase in revenue.
Under existing government grants and agreements, the government has a
statutory right to practice or have practiced and, under certain circumstances
(including inaction on our part or our licensees to achieve practical
application of the invention or a need to alleviate public health or safety
concerns not reasonably satisfied by us or our licensees), to grant to other
parties licenses under, any inventions first reduced to practice under the
government grants and agreements. If the government exercises its rights to
obtain our technologies for free we could experience an increase in expenses
without a corresponding increase in revenues.
If we fail to maintain our relationships with our academic collaborators and
scientific advisors, or acquire new relationships, we may not be able to
research or develop new technologies or products.
We have relationships with collaborators and consultants at academic and
other institutions who conduct research at our request. Such collaborators and
consultants are not our employees. Substantially all of our collaborators and
consultants are employed by employers other than us and may have commitments
to, or consulting or advisory contracts with, other entities that may limit
their availability to us. As a result, we have limited control over their
activities and, except as otherwise required by our collaboration and
consulting agreements, can expect only limited amounts of their time to be
dedicated to our activities. Our ability to discover genes and biological
pathways involved in human disease and commercialize products based on those
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discoveries may depend in part on continued collaborations with researchers at
academic and other institutions. We may not be able to negotiate additional
acceptable collaborations with collaborators or consultants at academic and
other institutions, which could hinder our ability to research and develop new
technologies and products.
Our academic collaborators, consultants and scientific advisors may have
relationships with other commercial entities, some of which could compete with
us. Our academic collaborators, consultants and scientific advisors sign
agreements which provide for confidentiality of our proprietary information and
of the results of studies. We may not be able to maintain the confidentiality
of our technology and other confidential information in connection with every
academic collaboration or advisory arrangement, and any unauthorized
dissemination of our confidential information could harm our competitive
position.
We have a lengthy sales cycle for our technologies and products that can
increase our expenses without a corresponding increase in revenue.
Our ability to obtain collaborators and subscribers for our products and
services depends in significant part upon the perception that such products and
services can help accelerate drug discovery and development efforts. Our sales
cycle is typically lengthy because we must educate our customers about our
products and sell the benefits of our products and services to a variety of
constituencies within potential collaborators and subscribers, including
research and development personnel and key management. In addition, each
subscription and collaboration involves the negotiation of agreements
containing terms that may be unique to each subscriber or collaborator. If we
decide to seek collaborators to assist us in our discovery and development
programs, the education, sales and negotiation efforts related to any such
collaborations may lengthen the sales cycle of our products. We may expend
substantial funds and management effort without generating a database
subscription or a collaboration. As a result, we would increase our expenses
without a corresponding increase in revenues.
We anticipate that our quarterly operating results will fluctuate which could
have an adverse effect on our stock price.
Our results of operations historically have fluctuated on a quarterly basis
and can be expected to continue to fluctuate. In fiscal year 2000 our net loss
per common share was $0.14 for the three month period ending on March 31, 2000
and $0.30 for the six month period ending on June 30, 2000. We expect that
losses will continue to fluctuate from quarter to quarter and that such
fluctuations may be substantial. Quarterly operating results can fluctuate as a
result of a number of factors, including the following:
. the level of investment in our discovery and development programs and
related databases;
. the commencement, delay, cancellation or completion of contracts;
. the timing of option, license and milestone payments under our
agreements;
. the mix of services provided by us;
. the timing of start-up expenses for new services and facilities; and
. the timing and integration of acquisitions and changes in regulations
related to our products and services.
We believe that quarterly comparisons of our financial results are not
necessarily meaningful and you should not rely on them as an indication of our
future performance. In addition, fluctuations in quarterly results could
adversely affect the market price of our common stock in a manner unrelated to
our long-term operating performance.
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If we produce our own pharmaceutical products in the future, we may not have
the resources to bring them to market.
Although we are not in clinical trials with our own pharmaceutical products,
any products we develop in the future will require significant research and
development and preclinical testing, and will require extensive clinical
testing prior to submission of any regulatory application for commercial use.
If we undertake these activities without the collaboration of others, we may
need to expend significant funds. Such potential pharmaceutical products will
be subject to the risks of failure inherent in the development of
pharmaceutical products based on new technologies. These risks include the
possibility that:
. the products will be unsafe or ineffective or otherwise fail to receive
necessary regulatory clearances;
. the products, if safe and effective, will be difficult to manufacture on
a large scale or be uneconomical to market;
. proprietary rights of third parties will preclude us or our partners from
marketing such products; or
. third parties will market superior or equivalent products.
As a result, we may not be able to develop any commercially viable products.
Clinical trials or marketing of any such potential pharmaceutical products may
expose us to liability claims from the use of such pharmaceutical products. We
may not be able to obtain product liability insurance or maintain sufficient
coverage at a reasonable cost. In addition, should we choose to develop
pharmaceutical products internally, we will have to make significant
investments in pharmaceutical product development, marketing, sales and
regulatory compliance resources, and we will have to establish or contract for
the manufacture of products under the Good Manufacturing Practices of the FDA.
We may not have the resources to develop or commercialize successfully any
potential pharmaceutical products.
The uncertainty associated with pharmaceutical pricing, reimbursement and
related matters may adversely affect our business.
The continuing efforts of government and third party payors to contain or
reduce the costs of health care through various means may materially adversely
affect our business, financial condition and results of operations. In certain
foreign markets, pricing and profitability of prescription pharmaceuticals are
subject to government control. In the United States, we expect that there will
continue to be a number of federal and state proposals to implement similar
government control. In addition, increasing emphasis on managed care in the
United States will continue to put pressure on the pricing of pharmaceutical
and diagnostic products. Cost control initiatives could decrease the price that
we or any of our subscribers and collaborators receive for any products in the
future and may have a material adverse effect on our revenues and results of
operations. Further, to the extent that cost control initiatives have a
material adverse effect on our subscribers or collaborators, our ability to
commercialize our products and to realize royalties could be adversely
affected.
Our ability and the ability of any of our subscribers or collaborative
customers to commercialize pharmaceutical or diagnostic products may depend in
part on the extent to which reimbursement for the products will be available
from government and health administration authorities, private health insurers
and other third party payors. Significant uncertainty exists as to the
reimbursement status of newly approved health care products. Third party
payors, including Medicare, increasingly are challenging the prices charged for
medical products and services. Government and other third party payors are
increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement for new pharmaceutical or diagnostic products
and by refusing in some cases to provide coverage for uses of approved products
for disease indications for which the FDA has not granted labeling approval.
Third party insurance coverage might not be available to patients for any
products discovered and developed by us or our subscribers or collaborators. If
adequate coverage and reimbursement levels are not provided by government and
other third party payors for our products, the market acceptance of these
products may be reduced. Any such reduction may have a material adverse effect
on our business, financial condition, results of operations and cash flows.
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Our stock price has been and may continue to be volatile and you could lose all
or part of your investment.
The market price of our common stock since our initial public offering in
March 1998 has been volatile. This volatility has been caused, and will in the
future continue to be caused by the following factors, some of which are beyond
our control:
. announcements of our results of research activities;
. our own publications;
. quarterly variations in our operating results;
. new collaborative agreements;
. technological innovations by ourselves and our competitors;
. announcements of new commercial products and initiatives by us,
collaborative partners or competitors;
. changes in government regulation or new regulatory actions;
. changes in patent laws;
. developments concerning proprietary rights;
. developments in litigation initiated by or against us; and
. fluctuations in the stock market price and volume of traded shares
generally, especially fluctuations in the traditionally volatile
technology and biotechnology sectors.
Our stock price could drop below the price you paid for your shares. As a
result, you could lose all or part of your investment.
We must sell a substantial number of additional shares of common stock, which
could adversely affect the trading price of our common stock.
We have a substantial number of shares of common stock subject to stock
options and warrants. We cannot predict the effect, if any, that future sales
of shares of common stock, or the availability of shares of common stock for
future sale, will have on the market price of our common stock. Sales of
substantial amounts of common stock (including shares issued upon the exercise
of stock options or warrants), or the perception that such sales could occur,
may adversely affect prevailing market prices for our common stock.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference herein contain
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. These statements relate to future
events or our future financial performance. These statements include but are
not limited to statements regarding (i) our plan to build additional
technologies and to enhance our GeneScape platform and to systematically
analyze the genetic basis of many common diseases, (ii) the expected
transformation of the pharmaceutical industry and our opportunity with respect
thereto, (iii) the likely success of our technologies, (iv) the expected
benefits of the linkage to be provided by our PathCalling systems, (v) the
expected benefits, effects, efficiency and performance of our services and
products, (vi) our ability (a) to overcome the limitations of competing
technologies, processes and databases by condensing key steps in gene-based
discovery and development, (b) to develop, through our products and services,
the next generation of therapeutic products for important complex diseases, (c)
to populate our databases, and (d) to develop, in a timely fashion, a broad
portfolio of research programs that encompass drug discovery, drug development
and pharmacogenomics, (vii) the capacity of our products to predict the
efficiency and safety of drugs already on the market, (viii) the suitability of
CuraGen discovered genes and proteins involved in diabetes, hypertension and
ischemic stroke as targets for small molecule drug development and (ix) the
expected future levels of losses, operating expenses and material commitments.
In some cases, you can identify forward-looking statements by terminology such
as "may," "will," "should," "expects," "anticipates," "believes," "estimates,"
"predicts," "potential" or "continue" or the negative of such terms or other
comparable terminology. These statements are only predictions and involve known
and unknown risks, uncertainties and other factors, including the risks
outlined under "Risk Factors" that may cause our or our industry's actual
results, levels of activity, performance or achievements to differ from those
expressed or implied by such forward-looking statements. Before deciding to
purchase our securities you should carefully consider the risks described in
the "Risk Factors" section, in addition to the other information set forth in
this prospectus and in the documents incorporated by reference herein.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We do not intend to update any of the
forward-looking statements after the date of this prospectus to conform such
statement to actual results except as required by law.
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USE OF PROCEEDS
We intend to use the net proceeds from this offering for general corporate
purposes, including our internal discovery and development programs and the
development of new technologies, general working capital and possible future
acquisitions.
We have not determined the amounts we plan to spend on any of the areas
listed above or the timing of these expenditures. As a result, our management
will have broad discretion to allocate the net proceeds from this offering.
Pending application of the net proceeds as described above, we intend to invest
the net proceeds of the offering in short-term, investment-grade, interest-
bearing securities.
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THE SECURITIES WE MAY OFFER
The descriptions of the securities contained in this prospectus, together
with the applicable prospectus supplements, summarize all the material terms
and provisions of the various types of securities that we may offer. We will
describe in the applicable prospectus supplement relating to any securities the
particular terms of the securities offered by that prospectus supplement. If we
indicate in the applicable prospectus supplement, the terms of the securities
may differ from the terms we have summarized below. We will also include in the
prospectus supplement information, where applicable, about material United
States federal income tax considerations relating to the securities, and the
securities exchange, if any, on which the securities will be listed.
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and certain provisions of our
certificate of incorporation and bylaws is a summary and are qualified in its
entirety by the provisions of our certificate of incorporation and bylaws.
Our authorized capital stock consists of 250,000,000 shares of common stock,
par value of $.01 per share, 3,000,000 shares of non-voting common stock, par
value of $.01 per share and 5,000,000 shares of preferred stock, par value of
$.01 per share.
Common Stock
Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. The holders of
our common stock are entitled to receive ratably such dividends as are declared
by the Board of Directors out of funds legally available therefore except that
(a) no cash dividends will be declared and paid on the common stock unless at
the same time an equal cash dividend is declared and paid, per share, on the
non-voting common stock, and (b) no dividend of property (including our capital
stock) will be declared and paid on the common stock unless a dividend of an
equal amount of the same property has also been declared and paid, per share,
on the non-voting common stock. We have never declared or paid any cash
dividends on our capital stock. In the event we liquidate, dissolve or wind up
the affairs of our business, holders of common stock and non-voting common
stock have the right (together as one class) to a ratable portion of assets
remaining after the payment of all debts and other liabilities. Holders of our
common stock have neither preemptive rights nor rights to convert their common
stock into any other securities and are not subject to future calls or
assessments. There are no redemption or sinking fund provisions applicable to
the common stock. All outstanding shares of common stock are, and the shares
issuable upon conversion of the securities will be, fully paid and non-
assessable. The rights, preferences and privileges of the holders of common
stock are subject to, and may be adversely affected by, the rights of the
holders of our shares of preferred stock that we may designate and issue in the
future.
Non-Voting Common Stock
Except as provided under the Delaware General Corporate Law, the holder of
our non-voting common stock are not entitled to vote on any matters submitted
to a vote of stockholder. The holder of our non-voting common stock are
entitled to receive ratably such dividends as are declared by the Board of
Directors out of funds legally available therefore, except that (a) no cash
dividends will be declared and paid on our non-voting common stock unless at
the same time an equal cash dividend is declared and paid, per share, on our
common stock, and (b) no dividend of property (including capital stock) will be
declared and paid on our non-voting
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common stock unless a dividend of an equal amount of the same property has also
been declared and paid, per share, on our common stock. We have never declared
or paid any cash dividends on our capital stock. In the event we liquidate,
dissolve or wind up the affairs of our business, holder of our non-voting
common stock and common stock have the right (together as one class) to a
ratable portion of assets remaining after the payment of all debts and other
liabilities. Holder of our non-voting common stock have the right, at any time,
to convert each share of non-voting common stock into shares of common stock at
the rate of one share of common stock for each share of non-voting common
stock. In addition, upon the transfer of beneficial ownership of any shares of
non-voting common stock, those shares will be automatically converted into
shares of common stock at the rate of one share of common stock for each share
of non-voting common stock. This automatic conversion will not apply if that
transfer is made to (1) a majority-owned subsidiary of Genentech, (2) a
corporation of which Genentech is a wholly-owned subsidiary ("Genentech
Parent"), or (3) a wholly owned subsidiary of the Genentech Parent; except that
if that transfer is made to a wholly-owned subsidiary of Genentech or the
Genentech Parent and that wholly-owned subsidiary ceases to be a wholly-owned
subsidiary of Genentech or the Genentech Parent, then those shares will be
automatically converted into shares of our common stock at the rate of one
share of common stock for each share of non-voting common stock. Holder of our
non-voting common stock do not have preemptive rights and are not subject to
future calls or assessments. There are no redemption or sinking fund provisions
applicable to our non-voting common stock. The rights, preferences and
privileges of the holder of our non-voting common stock are subject to, and may
be adversely affected by, the rights of the holders of shares of preferred
stock that we may designate and issue in the future.
Preferred Stock
Our charter authorizes our board of directors to issue preferred stock in
one or more series and to determine the voting rights, dividend rights,
liquidation preferences, conversion rights, redemption rights, including
sinking fund provisions and redemption prices, and other terms and rights of
each series of preferred stock. We will fix the rights, preferences, privileges
and restrictions of the preferred stock of each series in the certificate of
designation relating to that series. We will incorporate by reference as an
exhibit to the registration statement which includes this prospectus the form
of any certificate of designation which describes the terms of the series of
preferred stock we are offering before the issuance of the related series of
preferred stock. This description will include:
. the title and stated value;
. the number of shares we are offering;
. the liquidation preference per share;
. the purchase price;
. the dividend rate, period and payment date, and method of calculation for
dividends;
. whether dividends will be cumulative or non-cumulative and, if
cumulative, the date from which dividends will accumulate;
. the procedures for any auction and remarketing, if any;
. the provisions for a sinking fund, if any;
. the provisions for redemption or repurchase, if applicable, and any
restrictions on our ability to exercise those redemption and repurchase
rights;
. any listing of the preferred stock on any securities exchange or market;
. whether the preferred stock will be convertible into our common stock,
and, if applicable, the conversion price, or how it will be calculated,
and the conversion period;
. whether the preferred stock will be exchangeable into debt securities,
and, if applicable, the exchange price, or how it will be calculated, and
the exchange period;
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. voting rights, if any, of the preferred stock;
. preemption rights, if any;
. restrictions on transfer, sale or other assignment, if any;
. whether interests in the preferred stock will be represented by
depositary shares;
. a discussion of any material or special United States federal income tax
considerations applicable to the preferred stock;
. the relative ranking and preferences of the preferred stock as to
dividend rights and rights if we liquidate, dissolve or wind up our
affairs;
. any limitations on issuance of any class or series of preferred stock
ranking senior to or on a parity with the series of preferred stock as to
dividend rights and rights if we liquidate, dissolve or wind up our
affairs; and
. any other specific terms, preferences, rights or limitations of, or
restrictions on, the preferred stock.
When we issue share of preferred stock under this prospectus, the shares
will fully be paid and nonassessable and will not have, or be subject to, any
preemptive or similar rights.
The General Corporation Law of Delaware provides that the holders of
preferred stock will have the right to vote separately as a class on any
proposal involving fundamental changes in the rights of holders of that
preferred stock. This right is in addition to any voting rights that may be
provided for in the applicable certificate of designation.
The preferred stock could have other rights, including economic rights
senior to our common stock, so that the issuance of the preferred stock could
adversely affect the market value of our common stock. The issuance of the
preferred stock may also have the effect of delaying, deferring or preventing a
change in control of us without any action by the stockholders.
Registration Rights
One of our stockholders has registration rights. After December 8, 2000,
Abgenix will have demand and piggyback registration rights with respect to
837,990 shares of common stock. Demand registration rights entitle the holder
to cause us to register its shares of common stock. Piggyback registration
rights allow the holder to include its shares of common stock in registration
statements that we file.
In connection with the exercise of registration demands by certain of our
stockholders, we have filed with the SEC two registration statements on Form S-
3, which were declared effective on March 8, 2000 and June 30, 2000,
respectively. These registration statements registered in the aggregate
8,242,856 shares of common stock, consisting of 1,955,272 shares of common
stock which we will issue to Genentech upon Genentech's conversion of that same
number of shares of non-voting common stock held by Genentech, 1,500,000 shares
held by Pequot Partners Fund, L.P., 1,500,000 shares held by Pequot
International Fund, Inc., 2,350,084 shares issuable upon conversion of our 6%
Convertible Subordinated Debentures due 2007, and 937,500 shares of common
stock which we will issue to holders of our warrants upon their exercise of
those warrants.
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Anti-Takeover Effects of Provisions of Our Charter and Bylaws
Our certificate of incorporation provides for our board of directors to be
divided into three classes, with staggered three-year terms. As a result, only
one class of directors will be elected at each annual meeting of stockholders,
with the other classes continuing for the remainder of their respective three-
year terms. Stockholders have no cumulative voting rights, and the stockholders
representing a majority of the shares of common stock outstanding are able to
elect all of the directors.
The stockholders may amend our bylaws or adopt new bylaws, only by the
affirmative vote of 66 2/3% the outstanding voting securities. A special
meeting of the stockholders may be called by the affirmative vote of a majority
of our Board of Directors. These provisions may have the effect of delaying,
deferring or preventing a change in control.
The classification of our board of directors and lack of cumulative voting
will make it more difficult for our existing stockholders to replace our board
of directors as well as for another party to obtain control of us by replacing
our board of directors. Since our board of directors has the power to retain
and discharge our officers, these provisions could also make it more difficult
for existing stockholders or another party to effect a change in management.
These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control or management. These provisions are
intended to enhance the likelihood of continued stability in the composition of
our board of directors and in the policies of our board of directors and to
discourage certain types of transactions that may involve an actual or
threatened change in control. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal. The provisions also are
intended to discourage certain tactics that may be used in proxy rights.
However, such provisions could have the effect of discouraging others from
making tender offers for our shares and, as a consequence, they also may
inhibit fluctuations in the market price of the our shares that could result
from actual or rumored takeover attempts. Such provisions also may have the
effect of preventing changes in our management.
Section 203 of the Delaware General Corporation Law
We are subject to Section 203 of the Delaware General Corporation Law,
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the time that such stockholder became an
interested stockholder, unless:
. prior to such time, the board of directors of the corporation approved
either the business combination or the transaction that resulted in the
stockholder becoming an interested holder;
. upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned (a) by persons who are
directors and also officers and (b) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or
. at or subsequent to such time, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
In general, Section 203 defines "business combination" to include the
following:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
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. subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock or any class or series of
the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits by or through
the corporation.
In general, Section 203 defines "interested stockholder" as an entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such entity or person.
Transfer Agent and Registrar
American Stock Transfer & Trust Company is the transfer agent and registrar
for our common stock.
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DESCRIPTION OF DEBT SECURITIES
The following description, together with the additional information we
include in any applicable prospectus supplements, summarizes the material terms
and provisions of the debt securities that we may offer under this prospectus.
While the terms we have summarized below will apply generally to any future
debt securities we may offer, we will describe the particular terms of any debt
securities that we may offer in more detail in the applicable prospectus
supplement. If we indicate in a prospectus supplement, the terms of any debt
securities we offer under that prospectus supplement may differ from the terms
we describe below.
We will issue the senior notes under the senior indenture which we will
enter into with a trustee to be named in the senior indenture. We will issue
the subordinated notes under the subordinated indenture which we will enter
into with a trustee to be named in the subordinated indenture. We have filed
forms of these documents as exhibits to the registration statement which
includes this prospectus. We use the term "indentures" to refer to both the
senior indenture and the subordinated indenture. The indentures will be
qualified under the Trust Indenture Act. We use the term "debenture trustee" to
refer to either the senior trustee or the subordinated trustee, as applicable.
The following summaries of material provisions of the senior notes, the
subordinated notes and the indentures are subject to, and qualified in their
entirety by reference to, all the provisions of the indenture applicable to a
particular series of debt securities. Except as we may otherwise indicate, the
terms of the senior indenture and the subordinated indenture are identical.
We conduct some of our operations through our subsidiaries. Our rights and
the rights of our creditors, including holders of debt securities, to the
assets of any subsidiary of ours upon that subsidiary's liquidation or
reorganization or otherwise would be subject to the prior claims of that
subsidiary's creditors, except to the extent that we may be a creditor with
recognized claims against the subsidiary. Our subsidiaries' creditors would
include trade creditors, debt holders, secured creditors and taxing
authorities. Except as we may provide in a prospectus supplement, neither the
debt securities nor the indentures restrict us or any of our subsidiaries from
incurring indebtedness.
General
We will describe in each prospectus supplement the following terms relating
to a series of notes:
. the title;
. any limit on the amount that may be issued;
. whether or not we will issue the series of notes in global form, the
terms and who the depository will be;
. the maturity date;
. the annual interest rate, which may be fixed or variable, or the method
for determining the rate and the date interest will begin to accrue, the
dates interest will be payable and the regular record dates for interest
payment dates or the method for determining such dates;
. whether or not the notes will be secured or unsecured, and the terms of
any secured debt;
. the terms of the subordination of any series of subordinated debt;
. the place where payments will be payable;
. our right, if any, to defer payment of interest and the maximum length of
any such deferral period;
. the date, if any, after which, and the price at which, we may, at our
option, redeem the series of notes pursuant to any optional redemption
provisions;
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. the date, if any, on which, and the price at which we are obligated,
pursuant to any mandatory sinking fund provisions or otherwise, to
redeem, or at the holder's option to purchase, the series of notes;
. whether the indenture will restrict our ability to pay dividends, or will
require us to maintain any asset ratios or reserves;
. whether we will be restricted from incurring any additional indebtedness;
. a discussion on any material or special United States federal income tax
considerations applicable to the notes;
. the denominations in which we will issue the series of notes, if other
than denominations of $1,000 and any integral multiple thereof; and
. any other specific terms, preferences, rights or limitations of, or
restrictions on, the debt securities.
Conversion or Exchange Rights
We will set forth in the prospectus supplement the terms on which a series
of notes may be convertible into or exchangeable for common stock or other
securities of ours. We will include provisions as to whether conversion or
exchange is mandatory, at the option of the holder or at our option. We may
include provisions pursuant to which the number of shares of common stock or
other securities of ours that the holders of the series of notes receive would
be subject to adjustment.
Consolidation, Merger or Sale
The indentures do not contain any covenant which restricts our ability to
merge or consolidate, or sell, convey, transfer or otherwise dispose of all or
substantially all of our assets. However, any successor to or acquirer of such
assets must assume all of our obligations under the indentures or the notes, as
appropriate.
Events of Default Under the Indenture
The following are events of default under the indentures with respect to any
series of notes that we may issue:
. if we fail to pay interest when due and our failure continues for 90 days
and the time for payment has not been extended or deferred;
. if we fail to pay the principal, or premium, if any, when due and the
time for payment has not been extended or delayed;
. if we fail to observe or perform any other covenant contained in the
notes or the indentures, other than a covenant specifically relating to
another series of notes, and our failure continues for 90 days after we
receive notice from the debenture trustee or holders of at least 25% in
aggregate principal amount of the outstanding notes of the applicable
series; and
. if specified events of bankruptcy, insolvency or reorganization occur as
to us.
If an event of default with respect to notes of any series occurs and is
continuing, the debenture trustee or the holders of at least 25% in aggregate
principal amount of the outstanding notes of that series, by notice to us in
writing, and to the debenture trustee if notice is given by such holders, may
declare the unpaid principal of, premium, if any, and accrued interest, if any,
due and payable immediately.
The holders of a majority in principal amount of the outstanding notes of an
affected series may waive any default or event of default with respect to the
series and its consequences, except defaults or events of default regarding
payment of principal, premium, if any, or interest, unless we have cured the
default or event of default in accordance with the indenture. Any waiver shall
cure the default or event of default.
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Subject to the terms of the indentures, if an event of default under an
indenture shall occur and be continuing, the debenture trustee will be under no
obligation to exercise any of its rights or powers under such indenture at the
request or direction of any of the holders of the applicable series of notes,
unless such holders have offered the debenture trustee reasonable indemnity.
The holders of a majority in principal amount of the outstanding notes of any
series will have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the debenture trustee, or exercising
any trust or power conferred on the debenture trustee, with respect to the
notes of that series, provided that:
. the direction so given by the holder is not in conflict with any law or
the applicable indenture; and
. subject to its duties under the Trust Indenture Act, the debenture
trustee need not take any action that might involve it in personal
liability or might be unduly prejudicial to the holders not involved in
the proceeding.
. A holder of the notes of any series will only have the right to institute
a proceeding under the indentures or to appoint a receiver or trustee, or
to seek other remedies if:
. the holder has given written notice to the debenture trustee of a
continuing event of default with respect to that series;
. the holders of at least 25% in aggregate principal amount of the
outstanding notes of that series have made written request, and such
holders have offered reasonable indemnity to the debenture trustee to
institute the proceeding as trustee; and
. the debenture trustee does not institute the proceeding, and does not
receive from the holders of a majority in aggregate principal amount of
the outstanding notes of that series other conflicting directions within
60 days after the notice, request and offer.
These limitations do not apply to a suit instituted by a holder of notes if
we default in the payment of the principal, premium, if any, or interest on,
the notes.
We will periodically file statements with the debenture trustee regarding
our compliance with specified covenants in the indentures.
Modification of Indenture; Waiver
We and the debenture trustee may change an indenture without the consent of
any holders with respect to specific matters, including:
. to fix any ambiguity, defect or inconsistency in the indenture; and
. to change anything that does not materially adversely affect the
interests of any holder of notes of any series.
In addition, under the indentures, the rights of holders of a series of
notes may be changed by us and the debenture trustee with the written consent
of the holders of at least a majority in aggregate principal amount of the
outstanding notes of each series that is affected. However, we and the
debenture trustee may only make the following changes with the consent of each
holder of any outstanding notes affected:
. extending the fixed maturity of the series of notes;
. reducing the principal amount, reducing the rate of or extending the time
of payment of interest, or any premium payable upon the redemption of any
notes; or
. reducing the percentage of notes, the holders of which are required to
consent to any amendment.
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Discharge
Each indenture provides that we can elect to be discharged from our
obligations with respect to one or more series of debt securities, except for
obligations to:
. register the transfer or exchange of debt securities of the series;
. replace stolen, lost or mutilated debt securities of the series;
. maintain paying agencies;
. hold monies for payment in trust;
. compensate and indemnify the trustee; and
. appoint any successor trustee.
In order to exercise our rights to be discharged, we must deposit with the
trustee money or government obligations sufficient to pay all the principal of,
any premium, if any, and interest on, the debt securities of the series on the
dates payments are due.
Form, Exchange, and Transfer
We will issue the notes of each series only in fully registered form without
coupons and, unless we otherwise specify in the applicable prospectus
supplement, in denominations of $1,000 and any integral multiple thereof. The
indentures provide that we may issue notes of a series in temporary or
permanent global form and as book-entry securities that will be deposited with,
or on behalf of, The Depository Trust Company or another depository named by us
and identified in a prospectus supplement with respect to that series. See
"Legal Ownership of Securities" for a further description of the terms relating
to any book-entry securities.
At the option of the holder, subject to the terms of the indentures and the
limitations applicable to global securities described in the applicable
prospectus supplement, the holder of the notes of any series can exchange the
notes for other notes of the same series, in any authorized denomination and of
like tenor and aggregate principal amount.
Subject to the terms of the indentures and the limitations applicable to
global securities set forth in the applicable prospectus supplement, holders of
the notes may present the notes for exchange or for registration of transfer,
duly endorsed or with the form of transfer endorsed thereon duly executed if so
required by us or the security registrar, at the office of the security
registrar or at the office of any transfer agent designated by us for this
purpose. Unless otherwise provided in the notes that the holder presents for
transfer or exchange, we will make no service charge for any registration of
transfer or exchange, but we may require payment of any taxes or other
governmental charges.
We will name in the applicable prospectus supplement the security registrar,
and any transfer agent in addition to the security registrar, that we initially
designate for any notes. We may at any time designate additional transfer
agents or rescind the designation of any transfer agent or approve a change in
the office through which any transfer agent acts, except that we will be
required to maintain a transfer agent in each place of payment for the notes of
each series.
If we elect to redeem the notes of any series, we will not be required to:
. issue, register the transfer of, or exchange any notes of that series
during a period beginning at the opening of business 15 days before the
day of mailing of a notice of redemption of any notes that may be
selected for redemption and ending at the close of business on the day of
the mailing; or
. register the transfer of or exchange any notes so selected for
redemption, in whole or in part, except the unredeemed portion of any
notes we are redeeming in part.
25
<PAGE>
Information Concerning the Debenture Trustee
The debenture trustee, other than during the occurrence and continuance of
an event of default under an indenture, undertakes to perform only those duties
as are specifically set forth in the applicable indenture. Upon an event of
default under an indenture, the debenture trustee must use the same degree of
care as a prudent person would exercise or use in the conduct of his or her own
affairs. Subject to this provision, the debenture trustee is under no
obligation to exercise any of the powers given it by the indentures at the
request of any holder of notes unless it is offered reasonable security and
indemnity against the costs, expenses and liabilities that it might incur.
Payment and Paying Agents
Unless we otherwise indicate in the applicable prospectus supplement, we
will make payment of the interest on any notes on any interest payment date to
the person in whose name the notes, or one or more predecessor securities, are
registered at the close of business on the regular record date for the
interest.
We will pay principal of and any premium and interest on the notes of a
particular series at the office of the paying agents designated by us, except
that unless we otherwise indicate in the applicable prospectus supplement, will
we make interest payments by check which we will mail to the holder. Unless we
otherwise indicate in a prospectus supplement, we will designate the corporate
trust office of the debenture trustee in the City of New York as our sole
paying agent for payments with respect to notes of each series. We will name in
the applicable prospectus supplement any other paying agents that we initially
designate for the notes of a particular series. We will maintain a paying agent
in each place of payment for the notes of a particular series.
All money we pay to a paying agent or the debenture trustee for the payment
of the principal of or any premium or interest on any notes which remains
unclaimed at the end of two years after such principal, premium or interest has
become due and payable will be repaid to us, and the holder of the security
thereafter may look only to us for payment thereof.
Governing Law
The indentures and the notes will be governed by and construed in accordance
with the laws of the State of New York, except to the extent that the Trust
Indenture Act is applicable.
Subordination of Subordinated Notes
The subordinated notes will be unsecured and will be subordinate and junior
in priority of payment to certain of our other indebtedness to the extent
described in a prospectus supplement. The subordinated indenture does not limit
the amount of subordinated notes which we may issue. It also does not limit us
from issuing any other secured or unsecured debt.
26
<PAGE>
DESCRIPTION OF WARRANTS
The following description, together with the additional information we may
include in any applicable prospectus supplements, summarizes the material
terms and provisions of the warrants that we may offer under this prospectus
and the related warrant agreements and warrant certificates. While the terms
summarized below will apply generally to any warrants that we may offer, we
will describe the particular terms of any series of warrants in more detail in
the applicable prospectus supplement. If we indicate in the prospectus
supplement, the terms of any warrants offered under that prospectus supplement
may differ from the terms described below. Specific warrant agreements will
contain additional important terms and provisions and will be incorporated by
reference as an exhibit to the registration statement which includes this
prospectus.
General
We may issue warrants for the purchase of common stock, preferred stock
and/or debt securities in one or more series. We may issue warrants
independently or together with common stock, preferred stock and/or debt
securities, and the warrants may be attached to or separate from these
securities.
We will evidence each series of warrants by warrant certificates that we
will issue under a separate agreement. We will enter into the warrant
agreement with a warrant agent. Each warrant agent will be a bank that we
select which has its principal office in the United States and a combined
capital and surplus of at least $50,000,000. We will indicate the name and
address of the warrant agent in the applicable prospectus supplement relating
to a particular series of warrants.
We will describe in the applicable prospectus supplement the terms of the
series of warrants, including:
. the offering price and aggregate number of warrants offered;
. the currency for which the warrants may be purchased;
. if applicable, the designation and terms of the securities with which the
warrants are issued and the number of warrants issued with each such
security or each principal amount of such security;
. if applicable, the date on and after which the warrants and the related
securities will be separately transferable;
. in the case of warrants to purchase debt securities, the principal amount
of debt securities purchasable upon exercise of one warrant and the price
at, and currency in which, this principal amount of debt securities may
be purchased upon such exercise;
. in the case of warrants to purchase common stock or preferred stock, the
number of shares of common stock or preferred stock, as the case may be,
purchasable upon the exercise of one warrant and the price at which these
shares may be purchased upon such exercise;
. the effect of any merger, consolidation, sale or other disposition of our
business on the warrant agreement and the warrants;
. the terms of any rights to redeem or call the warrants;
. any provisions for changes to or adjustments in the exercise price or
number of securities issuable upon exercise of the warrants;
. the dates on which the right to exercise the warrants will commence and
expire;
. the manner in which the warrant agreement and warrants may be modified;
. federal income tax consequences of holding or exercising the warrants;
. the terms of the securities issuable upon exercise of the warrants; and
. any other specific terms, preferences, rights or limitations of or
restrictions on the warrants.
27
<PAGE>
Before exercising their warrants, holders of warrants will not have any of
the rights of holders of the securities purchasable upon such exercise,
including:
. in the case of warrants to purchase debt securities, the right to receive
payments of principal of, or premium, if any, or interest on, the debt
securities purchasable upon exercise or to enforce covenants in the
applicable indenture; or
. in the case of warrants to purchase common stock or preferred stock, the
right to receive dividends, if any, or, payments upon our liquidation,
dissolution or winding up or to exercise voting rights, if any.
Exercise of Warrants
Each warrant will entitle the holder to purchase the securities that we
specify in the applicable prospectus supplement at the exercise price that we
describe in the applicable prospectus supplement. Unless we otherwise specify
in the applicable prospectus supplement, holders of the warrants may exercise
the warrants at any time up to 5:00 P.M. Boston, Massachusetts time on the
expiration date that we set forth in the applicable prospectus supplement.
After the close of business on the expiration date, unexercised warrants will
become void.
Holders of the warrants may exercise the warrants by delivering the warrant
certificate representing the warrants to be exercised together with specified
information, and paying the required amount to the warrant agent in immediately
available funds, as provided in the applicable prospectus supplement. We will
set forth on the reverse side of the warrant certificate and in the applicable
prospectus supplement the information that the holder of the warrant will be
required to deliver to the warrant agent.
Upon receipt of the required payment and the warrant certificate properly
completed and duly executed at the corporate trust office of the warrant agent
or any other office indicated in the applicable prospectus supplement, we will
issue and deliver the securities purchasable upon such exercise. If fewer than
all of the warrants represented by the warrant certificate are exercised, then
we will issue a new warrant certificate for the remaining amount of warrants.
If we so indicate in the applicable prospectus supplement, holders of the
warrants may surrender securities as all or part of the exercise price for
warrants.
Enforceability of Rights By Holders of Warrants
Each warrant agent will act solely as our agent under the applicable warrant
agreement and will not assume any obligation or relationship of agency or trust
with any holder of any warrant. A single bank or trust company may act as
warrant agent for more than one issue of warrants. A warrant agent will have no
duty or responsibility in case of any default by us under the applicable
warrant agreement or warrant, including any duty or responsibility to initiate
any proceedings at law or otherwise, or to make any demand upon us. Any holder
of a warrant may, without the consent of the related warrant agent or the
holder of any other warrant, enforce by appropriate legal action its right to
exercise, and receive the securities purchasable upon exercise of, its
warrants.
28
<PAGE>
LEGAL OWNERSHIP OF SECURITIES
We can issue securities in registered form or in the form of one or more
global securities. We describe global securities in greater detail below. We
refer to those persons who have securities registered in their own names on the
books that we or any applicable trustee maintain for this purpose as the
"holders" of those securities. These persons are the legal holders of the
securities. We refer to those persons who, indirectly through others, own
beneficial interests in securities that are not registered in their own names,
as "indirect holders" of those securities. As we discuss below, indirect
holders are not legal holders, and investors in securities issued in book-entry
form or in street name will be indirect holders.
Book-Entry Holders
We may issue securities in book-entry form only, as we will specify in the
applicable prospectus supplement. This means securities may be represented by
one or more global securities registered in the name of a financial institution
that holds them as depositary on behalf of other financial institutions that
participate in the depositary's book-entry system. These participating
institutions, which are referred to as participants, in turn, hold beneficial
interests in the securities on behalf of themselves or their customers.
Only the person in whose name a security is registered is recognized as the
holder of that security. Securities issued in global form will be registered in
the name of the depositary or its participants. Consequently, for securities
issued in global form, we will recognize only the depositary as the holder of
the securities, and we will make all payments on the securities to the
depositary. The depositary passes along the payments it receives to its
participants, which in turn pass the payments along to their customers who are
the beneficial owners. The depositary and its participants do so under
agreements they have made with one another or with their customers; they are
not obligated to do so under the terms of the securities.
As a result, investors in a book-entry security will not own securities
directly. Instead, they will own beneficial interests in a global security,
through a bank, broker or other financial institution that participates in the
depositary's book-entry system or holds an interest through a participant. As
long as the securities are issued in global form, investors will be indirect
holders, and not holders, of the securities.
Street Name Holders
We may terminate a global security or issue securities in non-global form.
In these cases, investors may choose to hold their securities in their own
names or in "street name." Securities held by an investor in street name would
be registered in the name of a bank, broker or other financial institution that
the investor chooses, and the investor would hold only a beneficial interest in
those securities through an account he or she maintains at that institution.
For securities held in street name, we will recognize only the intermediary
banks, brokers and other financial institutions in whose names the securities
are registered as the holders of those securities, and we will make all
payments on those securities to them. These institutions pass along the
payments they receive to their customers who are the beneficial owners, but
only because they agree to do so in their customer agreements or because they
are legally required to do so. Investors who hold securities in street name
will be indirect holders, not holders, of those securities.
Legal Holders
Our obligations, as well as the obligations of any applicable trustee and of
any third parties employed by us or a trustee, run only to the legal holders of
the securities. We do not have obligations to investors who hold beneficial
interests in global securities, in street name or by any other indirect means.
This will be the case whether an investor chooses to be an indirect holder of a
security or has no choice because we are issuing the securities only in global
form.
29
<PAGE>
For example, once we make a payment or give a notice to the holder, we have
no further responsibility for the payment or notice even if that holder is
required, under agreements with depositary participants or customers or by law,
to pass it along to the indirect holders but does not do so. Similarly, we may
want to obtain the approval of the holders to amend an indenture, to relieve us
of the consequences of a default or of our obligation to comply with a
particular provision of the indenture or for other purposes. In such an event,
we would seek approval only from the holders, and not the indirect holders, of
the securities. Whether and how the holders contact the indirect holders is up
to the holders.
Special Considerations for Indirect Holders
If you hold securities through a bank, broker or other financial
institution, either in book-entry form or in street name, you should check with
your own institution to find out:
. how it handles securities payments and notices;
. whether it imposes fees or charges;
. how it would handle a request for the holders' consent, if ever required;
. whether and how you can instruct it to send you securities registered in
your own name so you can be a holder, if that is permitted in the future;
. how it would exercise rights under the securities if there were a default
or other event triggering the need for holders to act to protect their
interests; and
. if the securities are in book-entry form, how the depositary's rules and
procedures will affect these matters.
Global Securities
A global security is a security held by a depositary which represents one or
any other number of individual securities. Generally, all securities
represented by the same global securities will have the same terms.
Each security issued in book-entry form will be represented by a global
security that we deposit with and register in the name of a financial
institution or its nominee that we select. The financial institution that we
select for this purpose is called the depositary. Unless we specify otherwise
in the applicable prospectus supplement, The Depository Trust Company, New
York, New York, known as DTC, will be the depositary for all securities issued
in book-entry form.
A global security may not be transferred to or registered in the name of
anyone other than the depositary, its nominee or a successor depositary, unless
special termination situations arise. We describe those situations below under
"--Special Situations When a Global Security Will Be Terminated." As a result
of these arrangements, the depositary, or its nominee, will be the sole
registered owner and holder of all securities represented by a global security,
and investors will be permitted to own only beneficial interests in a global
security. Beneficial interests must be held by means of an account with a
broker, bank or other financial institution that in turn has an account with
the depositary or with another institution that does. Thus, an investor whose
security is represented by a global security will not be a holder of the
security, but only an indirect holder of a beneficial interest in the global
security.
If the prospectus supplement for a particular security indicates that the
security will be issued in global form only, then the security will be
represented by a global security at all times unless and until the global
security is terminated. If termination occurs, we may issue the securities
through another book-entry clearing system or decide that the securities may no
longer be held through any book-entry clearing system.
30
<PAGE>
Special Considerations for Global Securities
As an indirect holder, an investor's rights relating to a global security
will be governed by the account rules of the investor's financial institution
and of the depositary, as well as general laws relating to securities
transfers. We do not recognize an indirect holder as a holder of securities
and instead deal only with the depositary that holds the global security.
If securities are issued only in the form of a global security, an investor
should be aware of the following:
. An investor cannot cause the securities to be registered in his or her
name, and cannot obtain non-global certificates for his or her interest
in the securities, except in the special situations we describe below;
. An investor will be an indirect holder and must look to his or her own
bank or broker for payments on the securities and protection of his or
her legal rights relating to the securities, as we describe under "--
Legal Ownership of Securities" above;
. An investor may not be able to sell interests in the securities to some
insurance companies and to other institutions that are required by law to
own their securities in non-book-entry form;
. An investor may not be able to pledge his or her interest in a global
security in circumstances where certificates representing the securities
must be delivered to the lender or other beneficiary of the pledge in
order for the pledge to be effective;
. The depositary's policies, which may change from time to time, will
govern payments, transfers, exchanges and other matters relating to an
investor's interest in a global security. We and any applicable trustee
have no responsibility for any aspect of the depositary's actions or for
its records of ownership interests in a global security. We and the
trustee also do not supervise the depositary in any way;
. The depositary may, and we understand that DTC will, require that those
who purchase and sell interests in a global security within its book-
entry system use immediately available funds, and your broker or bank may
require you to do so as well; and
. Financial institutions that participate in the depositary's book-entry
system, and through which an investor holds its interest in a global
security, may also have their own policies affecting payments, notices
and other matters relating to the securities. There may be more than one
financial intermediary in the chain of ownership for an investor. We do
not monitor and are not responsible for the actions of any of those
intermediaries.
Special Situations When a Global Security will be Terminated
In a few special situations described below, the global security will
terminate and interests in it will be exchanged for physical certificates
representing those interests. After that exchange, the choice of whether to
hold securities directly or in street name will be up to the investor.
Investors must consult their own banks or brokers to find out how to have
their interests in securities transferred to their own name, so that they will
be direct holders. We have described the rights of holders and street name
investors above.
The global security will terminate when the following special situations
occur:
. if the depositary notifies us that it is unwilling, unable or no longer
qualified to continue as depositary for that global security and we do
not appoint another institution to act as depositary within 90 days;
. if we notify any applicable trustee that we wish to terminate that global
security; or
. if an event of default has occurred with regard to securities represented
by that global security and has not been cured or waived.
The prospectus supplement may also list additional situations for
terminating a global security that would apply only to the particular series
of securities covered by the prospectus supplement. When a global security
terminates, the depositary, and not we or any applicable trustee, is
responsible for deciding the names of the institutions that will be the
initial direct holders.
31
<PAGE>
PLAN OF DISTRIBUTION
We may sell the securities being offered hereby in one or more of the
following ways from time to time:
. through dealers or agents to the public or to investors;
. to underwriters for resale to the public or to investors;
. directly to investors; or
. through a combination of such methods.
We will set forth in a prospectus supplement the terms of the offering of
securities, including:
. the name or names of any agents, dealers or underwriters;
. the purchase price of the securities being offered and the proceeds we
will receive from the sale;
. any over-allotment options under which underwriters may purchase
additional securities from us;
. any agency fees or underwriting discounts and other items constituting
agents' or underwriters' compensation;
. any discounts or concessions allowed or reallowed or paid to dealers; and
. any securities exchanges on which such securities may be listed.
32
<PAGE>
LEGAL MATTERS
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts,
will provide us with an opinion as to the legal matters in connection with the
securities we are offering.
EXPERTS
The financial statements incorporated in this Prospectus by reference from
the Company's Annual Report on Form 10-K for the year ended December 31, 1999
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report, which is incorporated herein by reference, and have been so
incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We are a public company and file annual, quarterly and special reports,
proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any document we file at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents by writing to the SEC and paying a fee for
the copying cost. Please call the SEC at 1-800-SEC-0330 for more information
about the operation of the public reference room. Our SEC filings are also
available to the public at the SEC's web site at "http://www.sec.gov." In
addition, our stock is listed for trading on the Nasdaq National Market. You
can read and copy reports and other information concerning us at the offices of
the National Association of Securities Dealers, Inc. located at 1735 K Street,
Washington, D.C. 20006.
This prospectus is only part of a Registration Statement on Form S-3 that we
have filed with the SEC under the Securities Act of 1933 and therefore omits
certain information contained in the Registration Statement. We have also filed
exhibits and schedules with the Registration Statement that are excluded from
this prospectus, and you should refer to the applicable exhibit or schedule for
a complete description of any statement referring to any contract or other
document. You may:
-- inspect a copy of the Registration Statement, including the exhibits and
schedules, without charge at the public reference room or,
-- obtain a copy from the SEC upon payment of the fees prescribed by the
SEC.
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we file with
it, which means that we can disclose important information to you by referring
you to those documents. The information incorporated by reference is considered
to be part of this prospectus and information we file later with the SEC will
automatically update and supersede this information. We incorporate by
reference the documents listed below and any future filings made with the SEC
under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of
1934. The documents we are incorporating by reference are:
Annual Report on Form 10-K for the year ended December 31, 1999, filed
on March 7, 2000; Quarterly Report on Form 10-Q for the quarter ended March
31, 2000, filed on May 12, 2000; Quarterly Report on Form 10-Q for the
quarter ended June 30, 2000, filed on August 9, 2000; Definitive Proxy
Statement, filed on April 25, 2000; Current Report on Form 8-K, filed on
January 28, 2000; Current Report on Form 8-K, filed on February 15, 2000;
Current Report on Form 8-K, filed on March 2, 2000; Current Report on Form
8-K, filed on April 17, 2000; Current Report on Form 8-K, filed on June 7,
2000; Current Report on Form 8-K filed on October 10, 2000, and
33
<PAGE>
The description of the common stock contained in our Registration
Statement on Form S-1 filed with the SEC on October 16, 1997, including
any amendments or reports filed for the purpose of updating such
description.
You may request, orally or in writing, a copy of these documents, which
will be provided to you at no cost, by contacting:
Investor Relations CuraGen Corporation 555 Long Wharf Drive, 11th floor
New Haven, Connecticut 06511 Telephone: (203) 401-3330
34
<PAGE>
APPENDIX A
CURAGEN CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
The information contained in this report is as of the date of such report, and
it has not been revised or updated since it was filed with the SEC. This report
should be read in conjunction with the prospectus supplement and accompanying
prospectus to which it is attached.
A-1
<PAGE>
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UNITED STATES
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, 2000
[_]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 0-23223
CURAGEN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-1331400
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
555 Long Wharf Drive, 11th Floor, New Haven, 06511
Connecticut
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (203) 401-3330
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 [_]
The number of shares outstanding of the Registrant's voting common stock and
non-voting common stock as of October 30, 2000 was 37,259,375 and 1,705,272,
respectively.
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A-2
<PAGE>
CURAGEN CORPORATION
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
Page
-----------
PART I. Financial Information
<C> <S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets, September 30, 2000
(unaudited) and December 31, 1999........................ A-4
Condensed Consolidated Statements of Operations, for the
Three and Nine Months Ended September 30, 2000 and 1999
(unaudited).............................................. A-5
Condensed Consolidated Statements of Cash Flows, for the
Nine Months Ended September 30, 2000 and 1999
(unaudited).............................................. A-6
Notes to Condensed Consolidated Financial Statements
(unaudited).............................................. A-7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... A-8 to A-12
PART II. Other Information
Item 2. Changes in Securities and Use of Proceeds................. A-13
Item 6. Exhibits and Reports on Form 8-K.......................... A-13
Signatures......................................................... A-14
</TABLE>
A-3
<PAGE>
CURAGEN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September December 31,
30, 2000 1999
------------ ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $244,556,268 $ 76,374,571
Grants receivable................................ -- 25,019
Accounts receivable.............................. 247,942 767,606
Income tax receivable............................ 620,000 --
Other current assets............................. 127,478 73,752
Prepaid expenses................................. 1,211,451 1,135,248
------------ ------------
Total current assets........................... 246,763,139 78,376,196
------------ ------------
Property and equipment, net........................ 13,977,964 15,077,370
Notes receivable--related parties.................. 168,500 96,500
Other assets....................................... 334,320 246,049
Intangible assets, net............................. 4,812,595 98,161
------------ ------------
Total assets................................... $266,056,518 $ 93,894,276
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 2,437,360 $ 1,843,675
Accrued bonuses.................................. 417,750 335,000
Accrued expenses................................. 1,347,261 1,514,227
Interest payable, short-term..................... 1,500,000 --
Deferred revenue................................. 2,763,859 3,982,632
Deferred rent.................................... 66,721 77,726
Current portion of obligations under capital
leases.......................................... 2,878,392 2,732,393
------------ ------------
Total current liabilities...................... 11,411,343 10,485,653
------------ ------------
Long-term liabilities:
Deferred rent, net of current portion............ 66,893 110,152
Interest payable, long-term...................... -- 21,000
Convertible debt................................. 150,000,000 --
Obligations under capital leases, net of current
portion......................................... 5,601,411 8,278,842
------------ ------------
Total long-term liabilities.................... 155,668,304 8,409,994
------------ ------------
Commitments and contingencies
Minority interest.................................. 15,797,787 --
Stockholders' equity:
Common Stock--Voting; $.01 par value, issued and
outstanding 37,232,623 shares at September 30,
2000, and 16,421,538 shares at December 31,
1999............................................ 372,326 164,215
Common Stock--Non-Voting; $.01 par value, issued
and outstanding 1,705,272 shares at September
30, 2000, and 977,636 shares at December 31,
1999............................................ 17,053 9,776
Additional paid-in capital....................... 156,060,509 129,841,950
Accumulated deficit.............................. (73,073,894) (54,702,268)
Unamortized stock based compensation............. (196,910) (315,044)
------------ ------------
Total stockholders' equity..................... 83,179,084 74,998,629
------------ ------------
Total liabilities and stockholders' equity... $266,056,518 $ 93,894,276
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
A-4
<PAGE>
CURAGEN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ --------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue:
Grant revenue......... $ -- $ -- $ -- $ 636,980
Collaboration
revenue.............. 5,040,215 4,311,737 15,619,770 9,679,387
----------- ----------- ------------ ------------
Total revenue....... 5,040,215 4,311,737 15,619,770 10,316,367
----------- ----------- ------------ ------------
Operating expenses:
Grant research........ -- -- -- 417,386
Collaborative research
and development...... 9,943,850 7,256,589 27,702,643 21,935,283
General and
administrative....... 3,772,065 2,301,179 9,574,280 6,753,069
----------- ----------- ------------ ------------
Total operating
expenses........... 13,715,915 9,557,768 37,276,923 29,105,738
----------- ----------- ------------ ------------
Loss from operations.... (8,675,700) (5,246,031) (21,657,153) (18,789,371)
Interest income, net.... 1,400,893 98,638 2,729,995 509,908
----------- ----------- ------------ ------------
Net loss before income
taxes and minority
interest............... (7,274,807) (5,147,393) (18,927,158) (18,279,463)
Income tax benefit...... 270,000 -- 620,000 --
Minority interest....... (46,235) -- (64,470) --
----------- ----------- ------------ ------------
Net loss................ $(7,051,042) $(5,147,393) $(18,371,628) $(18,279,463)
=========== =========== ============ ============
Basic and diluted net
loss per share......... $ (0.18) $ (0.18) $ (0.49) $ (0.67)
=========== =========== ============ ============
Weighted average number
of shares used in
computing basic and
diluted net loss per
share.................. 38,743,862 27,996,724 37,749,099 27,229,670
=========== =========== ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
A-5
<PAGE>
CURAGEN CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(18,371,628) $(18,279,463)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 4,411,138 4,279,931
Asset impairment expense......................... 105,505 --
Non-monetary compensation........................ 788,517 420,343
Stock-based 401(k) Employer Plan Match........... 389,661 97,322
Minority interest................................ 64,470 --
Changes in assets and liabilities:
Grants receivable................................ 25,019 483,760
Accounts receivable.............................. 519,666 (2,202)
Income tax receivable............................ (620,000) --
Prepaid expenses................................. (76,203) 40,409
Other current assets............................. (53,725) (46,752)
Other assets..................................... (384,326) (56,222)
Assets held for sale............................. (126,328) --
Accounts payable................................. 593,686 (1,304,823)
Accrued bonuses.................................. 82,746 (230,513)
Accrued expenses................................. 249,365 344,508
Accrued payroll.................................. (416,327) (40,734)
Deferred revenue................................. (1,218,768) (1,059,389)
Deferred rent.................................... (54,266) (77,553)
Interest payable................................. 1,479,000 --
------------ ------------
Net cash used in operating activities............. (12,612,798) (15,431,378)
------------ ------------
Cash flows from investing activities:
Acquisitions of property and equipment........... (2,805,172) (5,179,339)
Loans to related parties......................... (72,000) (2,298)
Proceeds from sale of fixed assets............... 175,550 1,001
------------ ------------
Net cash used in investing activities............. (2,701,622) (5,180,636)
------------ ------------
Cash flows from financing activities:
Payments on capital lease obligations............ (2,543,602) (1,922,541)
Proceeds from issuance of Common Stock........... -- 15,000,000
Proceeds from issuance of preferred stock to
minority interest............................... 20,000,000 --
Proceeds from exercise of stock options.......... 3,063,256 979,463
Proceeds from exercise of warrants............... 6,464,341 --
Proceeds from issuance of warrants............... 12,500,000 --
Proceeds from issuance of convertible debt....... 150,000,000 --
Proceeds from sale-leaseback of equipment........ -- 4,253,535
Payments of stock issuance costs................. (908,207) (17,500)
Payments of financing costs...................... (5,079,671) --
------------ ------------
Net cash provided by financing activities......... 183,496,117 18,292,957
------------ ------------
Net increase (decrease) in cash and cash
equivalents...................................... 168,181,697 (2,319,057)
Cash and cash equivalents, beginning of period.... 76,374,571 43,293,995
------------ ------------
Cash and cash equivalents, end of period.......... $244,556,268 $ 40,974,938
============ ============
Supplemental cash flow information:
Interest paid..................................... $ 5,403,713 $ 860,361
============ ============
Supplemental schedule of non-cash financing
transactions:
Obligations under capital leases.................. $ -- $ 4,253,535
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
A-6
<PAGE>
CURAGEN CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of our management, the
accompanying unaudited condensed consolidated financial statements include all
adjustments, consisting of only normal recurring accruals, necessary to
present fairly the Company's consolidated financial position, results of
operations and cash flows. Interim results are not necessarily indicative of
the results that may be expected for the entire year. The condensed
consolidated financial statements include CuraGen Corporation and our
majority-owned subsidiary, 454 Corporation, and accordingly, all material
intercompany balances and transactions have been eliminated.
The 1999 condensed consolidated financial statements have been reclassified
to conform to the classifications used in 2000.
The accompanying condensed consolidated financial statements should be read
in conjunction with the audited financial statements and notes thereto
included in our Annual Report on Form 10-K for the year ended December 31,
1999.
2. Shelf Registration Filed
In October 2000, we filed a Form S-3 shelf registration statement with the
Securities and Exchange Commission for the sale of up to $500 million of
various types of securities. The registration statement was declared effective
by the SEC on October 17, 2000.
A-7
<PAGE>
CURAGEN CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results
of Operations as of September 30, 2000 and for the three and nine month
periods ended September 30, 2000 and 1999 should be read in conjunction with
the sections of our audited financial statements and notes thereto as well as
our "Management's Discussion and Analysis of Financial Condition and Results
of Operations" that are included in our Annual Report on Form 10-K for the
year ended December 31, 1999.
Overview
We are a biotechnology company focusing on the application of genomics to
the systematic discovery of genes, gene sequences, variations in gene
sequences, biological pathways and drug candidates in order to accelerate the
discovery and development of therapeutic, agricultural and diagnostic products
to improve human and animal health and the vitality of agriculture. We were
incorporated in November 1991 and, until March 1993, were engaged primarily in
organizational activities, research and development of our technology, grant
preparation and obtaining financing. We have incurred losses since inception,
principally as a result of research and development and general and
administrative expenses in support of our operations. As of September 30,
2000, we had an accumulated deficit of $73,073,894. We anticipate incurring
additional losses over at least the next several years as we expand our
collaborative gene discovery efforts and internal discovery and development to
discover genes, biological pathways and drug candidates, continue development
of our technology and expand our operations. We expect that losses will
fluctuate from quarter to quarter and that such fluctuations may be
substantial.
Results of Operations
Three and Nine Months Ended September 30, 2000 and 1999
Revenue. Collaboration revenue for the three and nine months ended September
30, 2000 was $5,040,215 and $15,619,770, respectively, an increase of $728,478
and $5,940,383, or 17% and 61%, respectively, as compared to $4,311,737 and
$9,679,387 for the corresponding periods in 1999. The increase for the three
months ended September 30, 2000 was largely due to revenue recorded under our
collaborative arrangements with Abgenix, Inc. ("Abgenix"), Genentech, Inc.
("Genentech"), and Ono Pharmaceutical Co., Ltd. ("Ono"). Revenues recorded for
the nine month period ended September 30, 2000 also increased under agreements
with Abgenix, Genentech, Glaxo Wellcome, Inc. ("Glaxo") and Ono. The revenue
we recognize under our collaborative arrangements is generally based upon work
performed on behalf of collaborators by our employees, or based upon our
attainment of certain benchmarks specified in the related agreements. Further
revenue growth will be dependent upon our ability to add additional
collaborations, expand current collaborations and garner revenues from
products currently under development by our collaborators.
Based on notification received from Pioneer dated July 31, 2000, informing
us of the termination of the research portion of our collaborative research
and license agreement, effective November 2000, we anticipate that our
collaboration revenue derived from the research portion of this collaboration
will be reduced in future quarters, as we have historically recorded up to $5
million of collaboration revenue from Pioneer on an annual basis. We are also
entitled to receive additional royalty payments for product development
stemming from the research portion of this collaboration. For the year ended
December 31, 1999 and the nine months ended September 30, 2000, we recorded
revenue of $5,000,000 and $3,416,804, related to this agreement, which
represented 33% and 22% of total revenue, respectively.
During October 2000, we announced that we have licensed five drug targets to
Biogen, marking the completion of the research portion of the discovery
collaboration. These targets were identified using our integrated platform of
functional genomic technologies and were delivered under the terms of and in
conjunction
A-8
<PAGE>
with the completion of the original collaborative agreement as of September
30, 2000. In the future, we are entitled to receive potential milestone
payments resulting from the advancement of these targets through clinical
trials and royalty payments if these targets are converted into marketed
drugs. We are also entitled to receive additional milestone and royalty
payments for other discoveries stemming from the research portion of this
collaboration. For the year ended December 31, 1999 and the nine months ended
September 30, 2000, we recorded revenue of $2,100,000 and $790,000, related to
this agreement, which represented 14% and 5% of total revenue, respectively.
Grant revenue for the nine months ended September 30, 2000 decreased
$636,980, or 100% compared to the same period in 1999, due to the completion
of two federal grants during the first and second quarters of 1999. As a
result of the completion of such federal grants, we foresee no additional
grant revenue in future periods, unless additional grant awards are received.
Operating Expenses. Collaborative research and development expenses for the
three and nine months ended September 30, 2000 were $9,943,850 and
$27,702,643, respectively, compared to $7,256,589 and $21,935,283 for the
three and nine months ended September 30, 1999, respectively. The increases of
$2,687,261 and $5,767,360 for the three and nine months ended September 30,
2000, respectively, or 37% and 26%, respectively, were primarily attributable
to internal research efforts and our obligations to fulfill research
requirements under new and existing collaborations, which resulted in
increased purchases of laboratory supplies, increased equipment depreciation
and facilities expenses, and additional personnel costs. Future collaborative
research and development expenses are expected to increase as additional
personnel are hired, research and development facilities are expanded to
accommodate our internal research and collaborations and as the operations of
454 Corporation are expanded, offset by a decrease in research and development
expenses due to the completion of the research portion of our collaborative
agreements with Pioneer and Biogen.
Grant research expenses for the nine months ended September 30, 2000 were $0
and represented a 100% decrease compared to $417,386 for the nine months ended
September 30, 1999. The decrease in grant research expenses was attributable
to the completion of our federal grants during the first and second quarters
of 1999. As a result of the completion of such federal grants, we foresee no
additional grant research expenses in future periods, unless additional grant
awards are received.
General and administrative expenses for the three months ended September 30,
2000 increased $1,470,886, or 64%, to $3,772,065 as compared to $2,301,179 for
the three months ended September 30, 1999. For the nine months ended September
30, 2000 and 1999, general and administrative expenses were $9,574,280 and
$6,753,069, respectively, an increase of $2,821,211 or 42%. The increases were
primarily attributable to higher recruiting, personnel, payroll and marketing
costs, upgrades to our administration facilities and related increased rent
expense, as well as legal expenses in support of the development of our
intellectual property portfolios. Over the next several years, we anticipate
that the percentage increases in general and administrative expenses will be
similar to percentage increases in collaborative research and development
expenses.
Interest Income, Net. Net interest income for the three and nine months
ended September 30, 2000 of $1,400,893 and $2,729,995 increased $1,302,254 and
$2,220,086, or 1320%, and 435%, compared to $98,638 and $509,908 for the same
periods in 1999. The increases were primarily due to higher cash and cash
equivalent balances as a result of funds we received from the completion of
our convertible debt offering in February 2000, our private placements during
1999 with Pequot Partners Fund, L.P. and Pequot International Fund, Inc.
(collectively, "Pequot") and Abgenix, the inclusion of cash raised in
conjunction with the formation of our newly formed subsidiary, 454
Corporation, and from the drawdown and simultaneous conversion of loans from
Biogen and Genentech during 1999, offset by the accrued interest expense
associated with the completion of our convertible debt offering in early 2000.
Subject to the completion of future financings pursuant to our recently filed
S-3, we anticipate that net interest income will begin to decrease as cash and
cash equivalent balances are utilized in the normal course of operations.
Gross interest expense for the three and nine months ended September 30, 2000
of $2,717,011 and $7,372,328 represented an increase of $2,396,970 and
$6,528,148, or 7489% and 7733%, compared to $320,041 and $844,180 for the
corresponding periods in 1999. This increase in
A-9
<PAGE>
gross interest expense was primarily attributable to accrued interest and
interest paid to the holders of our convertible debt.
Income Taxes. As of September 30, 2000, we have recorded a Connecticut
research and development income tax benefit of $620,000. We recorded this
income tax benefit as a result of recent Connecticut legislation, which allows
companies to obtain cash refunds from the State of Connecticut at a rate of
65% of their annual incremental research and development expense credit, in
exchange for foregoing carryforward of the research and development credit.
Since inception, we have incurred operating losses, and as of September 30,
2000, we had an accumulated deficit of $73,073,894 and therefore, have not
paid any federal income taxes. Realization of deferred tax assets is dependent
on future earnings, if any, the timing and amount of which are uncertain.
Accordingly, valuation allowances in amounts equal to the deferred income tax
assets have been established to reflect these uncertainties in all periods
presented.
Net Loss. For the three months ended September 30, 2000, we reported a net
loss of $7,051,042 or $0.18 per share as compared to $5,147,393 or $0.18 per
share for the third quarter of 1999.
Liquidity and Capital Resources
As of September 30, 2000, we had approximately $245 million in cash and cash
equivalents, compared to approximately $76 million as of December 31, 1999.
This increase represents the receipt of proceeds from our convertible debt
offering, proceeds from stock option and warrant exercises, interest income
and the inclusion of cash raised in conjunction with the formation of our
newly formed subsidiary, 454 Corporation. We have financed our operations
since inception primarily through our initial public offering of Common Stock,
collaborative research and development arrangements, private placements of
equity securities, government grants, capital leases and our convertible debt
offering. As of September 30, 2000, we had recognized $52,160,414 of
cumulative sponsored research revenues from government grants and
collaborative research agreements. To date, inflation has not had a material
effect on our business.
Our investing activities have consisted primarily of acquisitions of
equipment and expenditures for leasehold improvements. At September 30, 2000,
our gross investment in equipment, computers and leasehold improvements was
$23,893,318. At September 30, 2000, equipment with a gross book value of
$11,404,537 secures our equipment financing facility for equipment and tenant
improvements in support of the laboratory expansions at the New Haven and
Branford, Connecticut locations. We had material commitments for capital
expenditures of approximately $700,000 at September 30, 2000.
In accordance with our investment policy, we are utilizing the following
investment objectives for cash and cash equivalents: (1) investment decisions
are made with the expectation of minimum risk of principal loss, even with a
modest penalty in yield; (2) appropriate cash balances and related short-term
funds are maintained for immediate liquidity needs, and appropriate liquidity
is available for medium-term cash needs; and (3) maximum after-tax yield is
achieved.
Net cash used in operating activities was $12,612,798 for the nine months
ended September 30, 2000, compared to $15,431,378 for the same period ended
September 30, 1999. Net cash outflows for operating activities for the nine
months ended September 30, 2000 included payments of licensing fees, decreases
in accounts receivable, accrued payroll and deferred revenue, and increases in
income taxes receivable, accounts payable, accrued expenses and interest
payable. Cash used in investing activities during the nine months ended
September 30, 2000 primarily included acquisitions of property and equipment.
Cash outflows for financing activities during the nine months ended September
30, 2000 primarily included payments of financing costs and payments on
capital lease obligations, while cash inflows included proceeds from the
issuance of our convertible debt offering, the issuance of preferred stock and
warrants, and exercises of stock options and warrants.
We anticipate that we will need to raise significant additional capital to
fund our future operating plans. We expect to raise the additional capital we
require through public or private equity offerings, debt financings or
A-10
<PAGE>
additional collaborations and licensing arrangements. Toward this end, we have
filed, and the SEC has declared effective, a registration statement that will
allow us to raise up to $500 million through the sale of securities. However,
additional financing may not be available to us when we need it, or, if
available, we may not be able to obtain such financing on terms favorable to
us or to our stockholders. If we raise additional capital by issuing equity
securities, your ownership in us will be diluted. If we raise additional funds
through collaborations and licensing arrangements, we may be required to
relinquish rights to certain of our technologies or product candidates, or to
grant licenses on unfavorable terms. If we relinquish rights or grant licenses
on unfavorable terms our revenues could decrease.
In June 2000, we launched 454 Corporation, a majority owned subsidiary
established to develop novel technologies for use in drug discovery,
preclinical development, and pharmacogenetics. We sold to Soros Fund
Management, L.L.C., and Cooper Hill Partners, L.L.C. five year warrants to
purchase 937,500 shares of our common stock at $32.375 per share for an
aggregate purchase price of $12.5 million. Simultaneously, 454 Corporation
sold four million shares of series B preferred stock to Soros Fund Management
and Cooper Hill Partners and members of our senior management team and related
parties for an aggregate purchase price of $20 million.
In order to complete the funding of 454 Corporation and in exchange for 6
million shares of series A preferred stock, we contributed to 454 Corporation
$20 million in cash and certain technologies for conducting genomic analyses.
As a result of our contribution of technology to 454 Corporation, we
recognized a gain of $3,928,869 recorded in additional paid-in-capital.
As of September 30, 2000, we had federal and Connecticut net operating loss
carryforwards for income tax purposes of approximately $126,000,000 and
$113,000,000, respectively. Federal net operating loss carryforwards expire
beginning in 2008, and Connecticut net operating loss carryforwards began
expiring in 1998. We also had federal and Connecticut research and development
tax credit carryforwards for income tax purposes of approximately $4,200,000
and $3,000,000, respectively at September 30, 2000. As of September 30, 2000,
we also recorded a Connecticut research and development income tax benefit of
$620,000. We anticipate that this amount will be refunded during 2001.
As of September 30, 2000, minority interest was $15,797,787. Minority
interest is related to the recent establishment of 454 Corporation, a 60%
owned subsidiary, and reflects the initial minority shareholders'
capitalization and above mentioned gain recognition, less their portion of
various expenses incurred to date.
Recently Enacted Pronouncements
In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133") SFAS 133 modifies the
accounting for derivatives and hedging activities and is effective for the
fiscal years beginning after June 15, 2000. We do not currently anticipate
that SFAS 133 will have a material effect on our financial position and
results of operations.
In December 1999, the United States Securities and Exchange Commission
issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial
Statements" ("SAB 101"). SAB 101 provides the staff's views in applying
generally accepted accounting principles to selected revenue recognition
issues, as well as examples of how the staff applies revenue recognition
guidance to specific circumstances. We do not currently anticipate that SAB
101 will have a material effect on our financial position and results of
operations.
Certain Factors That May Affect Results of Operations
This report may contain forward-looking statements that are subject to
certain risks and uncertainties. These statements include statements with
respect to both CuraGen Corporation and 454 Corporation regarding the expected
future levels of losses, potential quarterly fluctuations in the levels of
losses, the expected future fluctuations in revenues, collaborative research
and development expenses, the expected future decrease in net
A-11
<PAGE>
interest income, the anticipated increases in general and administrative
expenses and our expectation that we will raise additional capital through
public or private equity offerings or collaboration and licensing
arrangements. Such statements are based on management's current expectations
and are subject to a number of factors and uncertainties that could cause
actual results to differ materially from those described in the forward-
looking statements. The Company cautions investors that there can be no
assurance that actual results or business conditions will not differ
materially from those projected or suggested in such forward-looking
statements as a result of various factors, including, but not limited to, the
following: both CuraGen Corporation's and 454 Corporation's early stage of
development, technological uncertainty and product development risks,
uncertainty of additional funding, reliance on research collaborations,
competition, both CuraGen Corporation's and 454 Corporation's ability to
protect its patents and proprietary rights and uncertainties relating to
commercialization rights. For further information, refer to the more specific
risks and uncertainties discussed throughout this report.
A-12
<PAGE>
Part II--Other Information
Item 2. Changes in Securities and Use of Proceeds
During September 2000, Genentech converted 250,000 shares of its Non-Voting
Common Stock into Voting Common Stock. In total, 1,955,272 shares of our Non-
Voting Common Stock were issued to Genentech in October 1999 after we
exercised our option under a certain Research and Option Agreement and
Promissory Note dated November 20, 1997 to prepay the entire outstanding
balance of the $16,000,000 loan facility in Non-Voting Common Stock.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 11--Computation of Net Loss Per Share
Exhibit 27--Financial Data Schedule
B. Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
September 30, 2000.
A-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 6, 2000 CuraGen Corporation
/s/ Jonathan M. Rothberg, Ph.D.
By: _________________________________
Jonathan M. Rothberg, Ph.D.
Chief Executive Officer,
President and Chairman of the
Board
/s/ David M. Wurzer
By: _________________________________
David M. Wurzer
Executive Vice-President,
Treasurer and Chief Financial
Officer, (principal financial and
accounting officer of the
registrant)
A-14
<PAGE>
APPENDIX B
CURAGEN CORPORATION
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
The information contained in this report is as of the date of such report, and
it has not been revised or updated since it was filed with the SEC. This report
should be read in conjunction with the prospectus supplement and accompanying
prospectus to which it is attached.
B-1
<PAGE>
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
---------------
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 0-23223
CURAGEN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 06-1331400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
555 Long Wharf Drive, 11th Floor, 06511
New Haven, Connecticut (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (203) 401-3330
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
(Title of Class)
---------------
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of voting common stock and non-voting common
stock held by non-affiliates of the registrant, (without admitting that any
person whose shares are not included in determining such value is an
affiliate) on February 29, 2000 was approximately $2,268,202,243.
The number of shares outstanding of the Registrant's voting common stock and
non-voting common stock as of February 29, 2000 was 17,272,432 and 977,636,
respectively.
Documents Incorporated by Reference
The registrant intends to file a definitive proxy statement pursuant to
Regulation 14A within 120 days of the end of the fiscal year ended December
31, 1999. Portions of such proxy statement are incorporated by reference into
Part III of this report.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
B-2
<PAGE>
CURAGEN CORPORATION
FORM 10-K
INDEX
<TABLE>
<CAPTION>
Page #
------
PART I
<C> <S> <C>
ITEM 1. BUSINESS.................................................... B-4
ITEM 2. PROPERTIES.................................................. B-16
ITEM 3. LEGAL PROCEEDINGS........................................... B-16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... B-16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... B-17
ITEM 6. SELECTED FINANCIAL DATA..................................... B-18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... B-19
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.. B-25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................. B-25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES................................... B-46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... B-46
ITEM 11. EXECUTIVE COMPENSATION...................................... B-46
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. B-46
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. B-46
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.................................................... B-46
SIGNATURES............................................................ B-49
</TABLE>
B-3
<PAGE>
PART I
Item 1. Business
The following Business Section contains forward-looking statements which
involve risks and uncertainties. The Registrant's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Certain Factors That May Affect
Results of Operations."
BUSINESS
General
We are a genomics based drug discovery and development company. We research,
develop and use technologies based on the discovery of genes and our
understanding of their functions and relationships, which we refer to as
"genomics technologies", to accelerate the discovery and development of
products to improve human and animal health and the vitality of agriculture,
in collaboration with other companies and through our own internal programs.
Our Internet-enabled genomics technologies, processes and information
systems are fully integrated with one another and rapidly generate
comprehensive information about the following:
. gene sequence, the order in which nucleotides (the building blocks of
DNA) appear in a gene and control the function of the gene;
. variations in gene sequences;
. gene expression, the degree of gene activity;
. biological pathways, the pathways that proteins follow in carrying out
the biological functions of cells; and
. the way potential drugs affect gene expression and the related
biological pathways.
Our genomics technology and information systems platform has three primary
systems (each consisting of proprietary technologies, automated processes,
related databases and bioinformatics analysis tools), each of which is fully
operational and has been commercialized:
. SeqCalling for gene sequencing and discovery of variations in gene
sequences;
. GeneCalling, a patented technology for gene discovery and comprehensive
gene expression analysis; and
. PathCalling for analyzing the function and relationships between genes
(and the proteins these genes encode) in biological pathways.
In addition to accelerating the discovery of new drug candidates, we are
also using our GeneCalling technology, automated process and related databases
and bioinformatics analysis tools to predict the efficacy and safety of drug
candidates currently in pharmaceutical development pipelines, and to review
the performance and side effects of drugs already being marketed. This
approach, referred to as pharmacogenomics, is aiding in the development of
more effective, safer drugs. Pharmacogenomics can also potentially be utilized
to identify more appropriate patient populations for use in clinical drug
studies.
Our SeqCalling system generates comprehensive sequence databases of
expressed genes from any species and is used to identify human genetic
variations known as Single Nucleotide Polymorphisms ("SNPs "). This system is
also biased towards identifying SNPs, which are located within the coding
regions of genes. SNPs are of increasing value in research because they are
believed to be useful markers in the identification of disease genes and
genetic differences, which may predispose a patient to disease or determine
the response of a patient to a specific drug treatment.
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We have unified our SeqCalling, GeneCalling and PathCalling technologies,
processes and databases under a computer program we refer to as GeneScape,
which tracks and analyzes data and integrates all aspects of process
management, data analysis and visualization. GeneScape is also a web-based
portal that provides simultaneous, real-time access to our technologies,
systems, databases and bioinformatics to researchers at multiple sites,
allowing them to work together on discovery and development projects. We plan
to continue enhancing and building additional technologies on our GeneScape
platform.
We market our genomics technologies and information to pharmaceutical,
biotechnology, agricultural and animal health companies through research
collaborations. These research collaborations involve the application of our
SeqCalling, GeneCalling and PathCalling technologies, systems and databases to
collaborative research projects, and include support services required to
characterize gene and target discoveries. These collaborations typically
provide current revenues, but also include milestone payments for successful
projects, and royalty- based revenues from products emerging from the drug
development programs of our partners. We currently have research
collaborations with Abgenix, Inc. ("Abgenix"), Biogen, Inc. ("Biogen"), COR
Therapeutics, Inc. ("COR"), Genentech, Inc. ("Genentech"), Glaxo-Wellcome,
Inc. ("Glaxo"), Hoffmann-La Roche Inc. ("Roche Pharma") and its affiliate,
Roche Vitamins, Inc. ("Roche Vitamins") and Pioneer Hi-Bred International,
Inc. ("Pioneer Hi-Bred").
We are also applying our suite of genomics technologies on our own behalf to
a broad portfolio of research programs that encompass drug discovery, drug
development and pharmacogenomics. We have established internal programs to
develop products to treat metabolic diseases, cancer, autoimmune diseases and
disorders of the central nervous system. During the next five years, our
objective is to analyze systematically the genetic basis of many common
diseases as well as the mechanisms of action and adverse side effects of many
commonly prescribed drugs. We are focusing our efforts on programs that
address unmet medical needs and that we believe have the potential to yield
products that can be commercialized in a relatively short time. In particular,
we select human diseases and animal models of human diseases based on their
potential to yield protein drugs, antibody drugs or novel small molecule drug
targets for common diseases that lack effective treatments or to aid rational
development or marketing of existing drugs. At each stage, we plan to
reevaluate the relative merits of continuing such programs solely through
internal efforts or through research collaborations.
The goal of our drug development programs is to advance promising
therapeutic candidates into the clinic. We believe that we are leveraging the
entire human genome to do this more systematically than ever possible before.
We are focusing on two broad classes of therapeutics, secreted proteins and
fully human monoclonal antibodies raised against membrane-bound or secreted
proteins. In order to determine the therapeutic potential of genes encoding
secreted proteins, we have implemented high-throughput protocols for the
production, purification and testing of these proteins. We have established
high-throughput cell-based assays for characterizing the therapeutic potential
of secreted proteins. We are currently evaluating the efficacy of a number of
secreted proteins as potential human therapeutics using animal models. We are
also employing a genomics based approach for the development of monoclonal
antibody therapeutics. These proteins will be used to make fully human
monoclonal antibodies. Antibodies are naturally occurring proteins used by the
body's immune system to combat many diseases. As therapeutic products,
antibodies have several potential advantages over other therapies. The highly
specific interaction between an antibody and its target may, for example,
reduce unwanted side effects that may occur with other therapies. Fully human
antibodies are desirable because they avoid the risk of rejection present with
mouse or partial mouse antibodies.
Our business and competitive position are dependent upon our ability to
protect our genomics technologies, gene sequences, products, information
systems and proprietary databases, software and other methods and technology.
We have filed patent applications for our proprietary methods and devices for
sequencing, gene expression analysis, for discovery of biological pathways and
for drug screening and development. As of the date of this report, we had
approximately 190 patent applications pending covering our technology,
discoveries and products with the United States Patent and Trademark Office
(PTO), and had filed numerous corresponding international and foreign patent
applications. As of the date of this report, we have been issued nine patents
with respect to aspects of our technologies, discoveries and products.
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On December 27, 1999, the PTO issued Revised Interim Utility Guidelines and
Revised Interim Written Description Guidelines reflecting the Office's current
understanding regarding statutory written description and utility requirements
for patentability. Should the PTO finalize these guidelines and make them
effective, the implementation of these guidelines may impact the issuance of
our pending U.S. patent applications.
Overview
Complex diseases often arise through a combination of genetic and
environmental factors. The successful treatment of such diseases often depends
upon an understanding of how the body uses its genetic information, how
disruptions in this information can lead to disease and, in turn, how drugs
can arrest or reverse disease progression. Metabolic diseases, cancer,
autoimmune diseases and disorders of the central nervous system are examples
of such complex diseases. As scientific advances improve our understanding of
the genetic basis of many diseases, we believe that the methods the
pharmaceutical industry uses to develop new drugs will undergo a fundamental
transformation. We believe that if we can develop and apply new genomics
technologies to address this transformation, we will have a unique opportunity
to develop the next generation of therapeutic products for important complex
diseases.
In recent years, scientists have begun to analyze large portions of the
genetic information contained within the human genome, which is a complete set
of human genetic information. The most prominent of these projects being the
publicly funded Human Genome Project. This discipline is termed genomics.
Through genomics, scientists seek to understand the genetic basis of disease
and to develop more effective treatments. However, to date, the
pharmaceutical, animal health and agricultural industries have not used
genomics extensively to develop new product opportunities primarily because:
. genomics technologies have been inadequate;
. discovery processes used by these industries have caused them to
underestimate the influence of genetic and environmental factors upon
disease; and
. uniform information systems necessary to drive genomics technologies
have been unavailable.
The treatment of complex diseases remains a major technological challenge
and will require an integrated set of genomics technologies, processes and
information systems. We believe that increased information about gene
sequences, variations in gene sequences, gene expression, biological pathways
and the proteins affecting these pathways, and about their interplay with
drugs and the environment, coupled with information systems that enable the
comprehensive understanding of this information, will accelerate drug
discovery and development. We have developed our technologies, processes and
information systems to generate this information and enable this
understanding.
We were incorporated in Delaware in November 1991. Our principal executive
offices are located at 555 Long Wharf Drive, 11th Floor, New Haven,
Connecticut 06511. Our telephone number is (203) 401-3330. We maintain a web
site on the Internet at http://www.curagen.com.
GeneScape(R), GeneCalling(R), Niagara(R), QEA(R), OGI(R), SeqCalling(TM),
PathCalling(TM), HitCalling(TM), GeneTools(TM), CuraShop(TM), (mu)Niagara(TM),
MicroNiagara(TM), NanoNiagara(TM), CuraGen(TM), CuraMode(TM), CuraTools(TM),
CuraMap(TM), CuraSelect(TM), CuraToxT(TM) and GeneScape Portal(TM) and other
trademarks of CuraGen Corporation mentioned in this report are the property of
CuraGen Corporation. All other trademarks or trade names referred to herein
are the property of their respective owners.
Our Approach to Genomic Based Drug Discovery
Our integrated genomics technologies, processes and information systems are
designed to overcome significant technological limitations present in existing
gene-based drug discovery and development methods. Our technology platform
rapidly generates comprehensive information about gene sequences, variations
in gene
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sequences, gene expression, biological pathways and the proteins affecting
these pathways, and about their interplay with drugs and the environment. Our
technology platform has been used by our collaborators and ourselves to
analyze many diseases and has led to the discovery of a number of disease-
related genes, drug targets and potential drugs.
Gene Discovery (Our SeqCalling and GeneCalling Technologies)
Our SeqCalling technology generates comprehensive sequence databases of
expressed genes from any species. Our GeneCalling technology measures
substantially all of the differences in gene expression levels between
biological samples in order to discover disease-related genes. Specifically,
we designed our GeneCalling technologies to:
. comprehensively measure the expression levels of 95% of the genes
expressed in any species; and
. be integrated into an efficient, automated, high-throughput process.
The combination of these traits enables us rapidly to generate large
databases of gene expression profiles. These technologies also permit us to
pursue research programs for many disease systems and process many samples in
parallel. As a result, we are able to discover and seek patent protection for
many commercially valuable disease-related genes and gene products.
Target Identification (Our GeneCalling and PathCalling Technologies)
We have developed our proprietary PathCalling technologies to reduce the
time and cost associated with the identification and functional understanding
of targets for therapeutic intervention. Our PathCalling system is an
automated, high-throughput process that tests for interactions between
combinations of proteins and assembles these protein-protein interactions into
our PathCalling database. By identifying such protein-protein interactions and
comparing them with known pathways within the PathCalling database, we can
determine the role of these proteins within a given biological pathway. We
have designed our PathCalling technologies to permit disease-related genes to
be linked rapidly to specific biological pathways, providing valuable
information which can lead to the discovery of new genes and additional
targets for therapeutic intervention.
Pharmacogenomics (Our SeqCalling, GeneCalling and PathCalling Technologies)
Our SeqCalling, GeneCalling and PathCalling technologies can also be used in
preclinical and clinical trials to predict which drugs are more likely to be
effective by analyzing gene expression changes induced by drug treatment in
humans and animal models. We have generated our GeneCalling databases for
numerous drugs already on the market to accelerate the development of an
improved generation of drugs with fewer side effects and to assist in the
selection of appropriate patient populations. By correlating gene expression
levels and the activities of biological pathways following treatment with
specific drugs, we may be able to minimize the side effects of drugs, to
identify appropriate patient populations for existing drugs and to aid in the
development of safer, more effective drugs. In addition we use our SeqCalling
database to identify variations SNPs in genes that respond to drugs, and can
use these variations for identifying the most appropriate patients for a
specific drug treatment.
Technology Integration and Information Systems (Our GeneScape Platform)
We have integrated our SeqCalling, GeneCalling, and PathCalling technologies
under a single bioinformatics operating system we refer to as our GeneScape
platform. This system unifies all aspects of process management, data analysis
and visualization used in our technologies. Our goal is to establish our fully
integrated technologies and GeneScape operating system as the preferred
platform for genomics, as well as drug discovery, drug development and
pharmacogenomics.
We designed GeneScape to meet the needs of researchers for a single
operating system which integrates research requests, project management,
database access and data analysis and visualization. GeneScape provides
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the user with a web-based standardized interface to our processes and
databases, operating over the Internet on any computer platform that supports
a standard web browser. By providing simultaneous, real-time access to our
technologies, systems and databases to researchers at multiple sites,
GeneScape is a powerful tool that permits researchers to work together on
discovery and development projects. As GeneScape is modular and may be
expanded to incorporate other technologies, systems and databases, we intend
to continually enhance this technology platform.
Products and Services
We are marketing our genomics technologies and genetic information derived
from our technologies by establishing research collaborations with
pharmaceutical, biotechnology, agricultural, animal health and other life
science companies. Our research collaborations involve the application of our
SeqCalling, GeneCalling, and PathCalling technologies to a collaborator's
projects. These technologies can be used in discovery efforts as well as
preclinical and clinical trials to predict which drugs are more likely to
succeed by analyzing gene expression changes induced by drug treatment in
humans and animal models. We may also provide certain support services
necessary to characterize gene and target discoveries, subscriptions to our
databases and integration with a collaborator's existing development pipeline
of products. We use our GeneScape software platform in such collaborations to
manage our processes and provide access to our databases.
SeqCalling and GeneCalling Systems: Gene Sequencing and Gene Expression
Services and Databases
We developed our proprietary SeqCalling and GeneCalling technologies to
overcome significant limitations of competing gene and gene sequence discovery
methods currently in use. Our GeneCalling system generates and analyzes gene
expression profiles and stores differences in gene expression profiles to
identify disease-related genes. The system permits sensitive detection of
genes that can control biological pathways when expressed at very low levels.
Unlike methods that use expressed-sequence tags, known as EST's, our
GeneCalling system does not require repetitive sequencing to measure gene
expression. Our technology is comprehensive in detecting genes with novel
sequences and is therefore applicable universally to humans, animals, plants,
and pathogens. In comparison, hybridization-based methods are primarily
limited to known genes and do not readily discriminate between the many genes
that share closely related DNA sequences.
Our SeqCalling system generates comprehensive sequence databases of
expressed genes from any species and is used to identify new genes and human
genetic variations known as SNPs. This system may also be used to identify
SNPs, which are located within the coding regions of genes. SNPs are of
increasing value in research because they are believed to be useful markers in
the identification of disease genes and genetic differences, which may
determine the response of a patient to disease and to drug treatment. Our
GeneCalling system measures expression levels and determines gene expression
differences between biological samples (such as diseased and normal human
tissues) and enhances the ability to discover disease-related genes. Samples
are usually processed within a month of receipt, and profiles of gene
expression levels are available immediately thereafter for inspection and
analysis.
PathCalling Systems: Pathway Analysis Services and Database
Once genes involved in a disease have been identified using our SeqCalling
and GeneCalling systems, it is important to be able to determine how the
proteins that these genes encode interact in the complex biological pathways
involved in the disease. A particular disease-related protein might not always
be the best candidate for treatment or as a target for drug development.
However, increased knowledge of the other proteins in the same pathway may
lead to promising protein drug or target candidates. Our PathCalling
technologies were developed to provide a link between disease-related proteins
and their biological pathways to aid in the identification and validation of
appropriate targets following the discovery of a disease-related gene.
Our PathCalling system consists of proprietary automated, high-throughput
biological operations that simultaneously test for interactions between pairs
of proteins. Our PathCalling system then assembles discovered
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protein-protein interactions into connected biological pathways, including
pathways discovered previously by us or previously described in the scientific
literature. Our objective is to continue to build our PathCalling database to
contain protein-protein interactions that constitute the pathways that are
relevant to disease. Our PathCalling bioinformatics tools permit the graphical
display of all pathways contained in the database involving any particular
protein and allow these pathways to be queried for information in much the
same way gene sequence databases are queried today. We believe that this will
allow disease-related genes to be linked to specific biological pathways. We
believe the linkage will provide for crucial biological context for gene
discoveries, which may lead to the identification of potential targets for
therapeutic intervention.
We seek patent protection on the utility of specific proteins or protein-
protein interactions as drug targets based on information provided by
PathCalling, in addition to composition of matter claims based on the
sequences of novel and non-obvious proteins and the genes encoding them.
CuraShop
We also offer services to our collaborators that will complement our
proprietary SeqCalling, GeneCalling, and PathCalling technologies. Our
CuraShop technologies can provide high-throughput, efficient and essential
research services, including confirmation of gene expression differences, gene
sequencing, delivery of full-length clones of genes, gene mapping and mutation
detection. These services and materials can all be requested, for a fee,
directly through our GeneScape software platform.
Our GeneScape Bioinformatics Platform
We designed GeneScape to meet the needs of researchers for a single
operating system which integrates research requests, project management,
database access and data analysis and visualization. GeneScape provides the
user with a web-based standardized interface to our processes and databases,
operating over the Internet on any computer platform that supports a standard
web browser. GeneScape is modular and may be expanded to incorporate other
processes. GeneScape currently consists of three components: Discovery, Study
Management and CuraTools.
Discovery. The Discovery component of our GeneScape system manages queries
to our SeqCalling, GeneCalling, and PathCalling databases. GeneScape provides
data analysis and visualization through a flexible, easy-to-use point-and-
click interface organized in three sections corresponding to the SeqCalling,
GeneCalling, and PathCalling databases. The GeneScape system provides the
answers to queries in visual format, organized according to the following
preferences set by the end user:
. differential gene expression;
. expression in particular samples, tissues, or disease stages;
. participation in metabolic or signal transduction pathways;
. map position;
. functional role;
. interactions with proteins or small molecules; or
. other custom criteria.
Study Management. Our collaborators can manage processes and resources over
the Internet to meet their individual research needs. Separate links on the
Study Management page of our GeneScape software platform provide direct, up-
to-the-minute status reports for projects, individual processes within
projects, and resource allocation among projects and processes. The Study
Management component of the GeneScape software platform automates the
operation of every station in the SeqCalling, GeneCalling, and PathCalling
systems and monitors quality control at each processing step.
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CuraTools. GeneScape also includes CuraTools, an easy-to-use, unified
bioinformatics software package which provides the following information:
. DNA and protein sequence analysis;
. sequence similarity to known genes, protein drugs and protein targets;
. three-dimensional structure prediction;
. identification of proteins participating in biological pathways; and
. custom literature searches.
CuraTools also provides users with access to publicly available sequence,
mapping and expression databases that we have imported, assembled, and
annotated for enhanced value. In addition, we have assembled proprietary
sequence and mapping databases for portions of the corn, mouse, rat and human
genomes. Collaborators can elect to have us link their own proprietary or
third party sequence databases into GeneScape and CuraTools for their own
exclusive use.
GeneScape Portal
GeneScape is also the name of our Internet portal that makes available a
subset of our bioinformatics analysis tools (known as CuraTools) and non-
proprietary gene sequence and expression data to non-collaborators, primarily
the academic research community. We believe the GeneScape Portal enhances our
standing among this influential group, aiding our employee recruitment effort
and generating referrals for future collaborations. The GeneScape Portal also
serves as a vehicle to aggregate all the public information on the Human
Genome Project with our internal efforts. In addition, we will use the
GeneScape Portal to release selected additional information on genes, sequence
variations, and biological pathways to current and future users.
Research Collaborations
As part of our business strategy, we establish research collaborations with
pharmaceutical, biotechnology, agricultural, animal health and other life
science companies. Our collaborations generally provide revenues in the form
of fees for work performed by our employees in the generation of gene
sequences, gene expression, or biological pathway data from samples provided
by a collaborator. The collaborator has the ability to control how resources
are allocated to generate SeqCalling, GeneCalling and PathCalling databases
and to perform additional research services through our CuraShop technologies,
including the sequencing of gene fragments and the generation of full-length
clones. Collaborators typically have the right to license, for an up-front
fee, discoveries arising from a collaboration, including rights to novel
genes, novel uses of previously identified genes, protein drugs, antibody
targets, small molecule drug targets, as well as markers for prioritizing
drugs and markers for selecting patient populations. Collaborations typically
include possible milestone payments to us based on objectives achieved and
potential royalty payments to us on sales of products developed using
discoveries made through the use of our technology.
We also seek to enter into research collaborations that provide us access to
complementary technologies to accelerate our own internal discovery and
development projects. To date, we have entered into significant collaborations
with Abgenix, Biogen, COR, Genentech, Glaxo, Pioneer Hi-Bred, Roche Pharma and
its affiliate, Roche Vitamins.
Genentech
In June 1996, we entered into a pilot research services and evaluation
agreement with Genentech. The pilot collaboration was superseded by the
evaluation agreement, signed and effective December 1996, pursuant to which we
performed additional research services during 1997. We completed the research
within four months of
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the receipt of tissue samples from Genentech as required by the evaluation
agreement. In connection with the execution of the evaluation agreement,
Genentech made a $1,800,000 equity investment in us.
In November 1997, we entered into a research collaboration and database
subscription arrangement with Genentech to discover novel genes and
therapeutics across a range of Genentech-specified disease programs. Genentech
has the right to terminate the research collaboration, upon a breach by us of
any material obligation under the Genentech Agreement or on or after November
2000, on one month's prior notice. Genentech has an option to acquire licenses
to certain discoveries arising from the collaboration. Pursuant to the
agreement, Genentech also purchased $5,000,000 of our common stock in a
private placement concurrent with our initial public offering at the initial
public offering price of $11.50 per share. Genentech also agreed to provide us
with an interest-bearing loan facility. On October 15, 1999, we made a
drawdown of $16,000,000 under this facility and simultaneously converted the
loan into 977,636 shares of our non-voting common stock, par value $.01 per
share. The nonvoting common stock is convertible into common stock (a) at any
time, at Genentech's option or (b) automatically upon the sale or transfer of
the nonvoting common stock to a non-affiliated party.
Pioneer Hi-Bred
Effective in June 1997, we entered into a collaborative research and license
agreement with Pioneer Hi-Bred whereby we agreed to perform research funded by
Pioneer Hi-Bred for the selection, identification and development of improved
crops. In conjunction with the execution of this agreement, Pioneer Hi-Bred
made a $7,500,000 equity investment in us. Under the terms of the agreement,
we receive research funding and royalty payments if any products emerge from
this collaboration. Pioneer Hi-Bred has the right to terminate the research
program at any time upon a breach by us and at any time after May 2000 on
three months' written notice.
Biogen
In June 1997, we entered into a stock purchase agreement with Biogen,
pursuant to which Biogen made a $1,000,000 equity investment in us in
anticipation of evaluating the application of our technology to a particular
program of interest to Biogen.
In October 1997, we entered into a research collaboration and database
subscription arrangement with Biogen to discover novel genes and therapeutics
across a range of Biogen-specified disease programs. We also expect to conduct
pharmacogenomic analysis of selected products and product candidates in
Biogen's portfolio. The collaboration, which calls for payments by Biogen for
up to five years, provides Biogen with access to our proprietary genomics
technologies, including the GeneScape bioinformatics software platform in
order to generate GeneCalling and PathCalling databases from Biogen-specified
disease systems. Biogen has an option to acquire exclusive licenses to certain
discoveries arising from the collaboration. Biogen has the right to terminate
the research collaboration upon any breach by us of any material obligation
under the Biogen agreement or at any time after October 1999, on 30 days'
written notice. Work performed and work that will be performed through June
30, 2000 for Biogen under the arrangement has been and will be recognized as
revenue on a per employee basis. Beginning July 1, 2000, work performed for
Biogen by us under the arrangement will be recognized on a per project basis.
In addition, pursuant to the agreement, Biogen purchased $5,000,000 of our
common stock in a private placement concurrent with our initial public
offering at the initial public offering price of $11.50 per share, and agreed
to provide a $10,000,000 interest-bearing loan facility. On October 15, 1999,
we made a draw of $10,000,000 under this facility and simultaneously converted
the loan into 611,022 shares of our common stock.
Glaxo
In November 1998, we entered into a drug discovery collaboration with Glaxo
to use our integrated genomics processes for the study and selection of Glaxo
compounds for clinical development. This discovery and pharmacogenomics
collaboration, up to five years in duration, is intended to enable Glaxo to
select drug candidates with the highest likelihood of success in clinical
trials. Specifically, we evaluate numerous compounds
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across Glaxo therapeutic programs, identifying gene responses associated with
compound efficacy and toxicity. Under the terms of the agreement, we receive
research funding and may receive additional milestone and royalty payments if
any drugs emerge from this collaboration. Either party may terminate the
collaboration without cause at its sole discretion upon three months prior
written notice to the other party, however neither party may terminate the
collaboration prior to fifteen months after the effective date of the
agreement.
Roche Pharma and Roche Vitamins
In March 1999, we signed a life sciences target discovery and
pharmacogenomics collaboration retroactively effective as of January 1, 1999
with F. Hoffmann-La Roche Ltd., Roche Pharma and Roche Vitamins. This
agreement outlines strategic partnerships with F. Hoffmann-La Roche Ltd. and
its affiliates and is designed to discover new drug targets, evaluate existing
product candidates and facilitate the development of drugs and diagnostic
tests for the purposes of improving human and animal health. Under the terms
of this agreement, we receive research funding and may receive additional
milestone and royalty payments if any products emerge from this collaboration.
The agreement is for an initial term of two years and includes an option to
extend for three additional one-year terms.
COR
In May 1999, we signed a product discovery and pharmacogenomics agreement
with COR. Under the terms of this agreement, we apply our SeqCalling,
GeneCalling, and PathCalling technologies, related services, and
pharmacogenomics expertise to identify new drug targets and develop novel
cardiovascular drugs. This collaboration is for an initial term of eighteen
months with an option to extend the collaboration for three additional 12-
month terms. We receive research funding, and may receive milestone payments
and royalty payments for products developed by COR as a result of this
collaboration.
Abgenix
In December 1999, we entered into a collaboration agreement with Abgenix to
develop and commercialize genomics-based antibody drugs using Abgenix'
XenoMouse(TM) technology. This five-year alliance was established to identify
up to 120 fully human antibody drug candidates intended for treating a broad
range of complex diseases including cancer and autoimmune disorders.
Antibodies determined to have commercial product potential will be allocated
between the parties for further development. Abgenix and we will receive
reciprocating milestone payments and royalty payments for products resulting
from this drug development alliance. In addition, under the agreement Abgenix
purchased 418,995 shares of our common stock for $15,000,021.
CuraGen Internal Programs
We also use our integrated genomics technologies on our own behalf to pursue
a broad portfolio of research programs that encompass drug discovery,
pharmacogenomics and drug development. During the next five years, our
objective is to analyze systematically the genetic basis of many common
diseases as well as the mechanisms of action and adverse side effects of many
commonly prescribed drugs. We are focusing our efforts on programs that
address unmet medical needs and programs that we believe have the potential to
yield products that can be commercialized in a relatively short time. In
particular, we select human diseases and animal models of human diseases based
on their potential to yield protein drugs and antibody drugs, to identify
novel small molecule drugs for common diseases that lack effective treatments
or to aid rational development or marketing of existing drugs.
We have also developed an innovative approach to discover genes associated
with inherited diseases we call positional expression cloning. We combine our
proprietary analyses concerning gene expression with existing gene mapping
techniques to identify candidate genes that both show altered expression and
can be "mapped" to the chromosomal locations known to contain underlying
disease genes. Our positional expression cloning approach is particularly
effective in identifying and characterizing genes indicating susceptibility to
and
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genes providing protection against many common complex diseases. In addition,
we use systematic studies of existing drugs and our large-scale databases of
sequences, sequence variation, gene expression profiles, and pathways to
identify disease-related targets.
We use our technologies to pursue research programs for many disease systems
in parallel. Each of these programs has the potential to rapidly identify a
large number of commercially valuable disease-related genes and potential drug
targets. As part of our internal programs, we also seek patent protection for
newly discovered disease-related genes and proteins, as well as for novel uses
of known genes and the proteins they encode.
Drug Discovery Programs
Our internal programs apply our integrated genomics technology platform to
drug discovery and drug development. The discovery programs focus on human
diseases that have the potential to yield protein therapeutics, monoclonal
antibodies and small molecule targets and seek to uncover variations of genes
that may predispose or protect individuals from susceptibility, onset or
progression of disease. Pharmacogenomics studies are also used to find
additional drug targets, to understand how current drugs work, and to
prioritize the development of our own drugs.
Metabolic Diseases. Within the field of metabolic diseases, we are analyzing
a variety of primary human disease tissues and genetic and cell-based models
relating to specific metabolic diseases, including obesity, adult onset
diabetes, and hypertension. We believe that our technology platform is well
suited to identifying the genes and pathways involved in these diseases, which
are known to involve errors in signal transduction and the regulation of
metabolic pathways. To date, we have used SeqCalling and GeneCalling to
discover genes associated with these diseases and have used PathCalling to
identify disease-related pathways and additional targets for drug discovery.
Cancer. Cancer encompasses disease processes of almost every organ system
and involves the loss of control of multiple, diverse mechanisms of signal
transduction and pathway regulation. We are applying SeqCalling, GeneCalling
and PathCalling to identify the genes and pathways involved in the early
development of cancer and its step-wise progression to metastatic disease. We
have analyzed a number of models of cancer and have identified pathways
incorporating proteins common to many of the models. Genes specifically
upregulated in cancerous tissue may be excellent targets for the development
of monoclonal antibody drugs.
Auto-Immune and Inflammatory Diseases. Although diseases of the immune
system, such as systemic lupus erythematosus and rheumatoid arthritis, are
among the most common and chronic, existing drugs for autoimmune diseases have
exhibited limited efficacy and debilitating side effects. We have filed for
patent protection related to potential drug targets in this area.
Disorders of the Central Nervous System. We are currently examining both
psychiatric and neurological disorders in order to identify potential targets
in these areas. Our efforts combine the understanding of currently marketed
drugs with the best human and animal models of the disease. To date we have
studied over 40 drugs with specific action in the central nervous system and
uncovered a number of novel genes, pathways and potential targets.
Pharmacogenomics
Using our GeneCalling technologies, the tissues targeted by a drug, as well
as the organs that might exhibit side effects, including heart, liver and
kidney, can be studied in animal models thought to be indicative of human
response. We believe that this information may help pharmaceutical companies
select and optimize drug candidates based on improved efficacy and reduced
side effects. We further believe that this information will help the
pharmaceutical industry to significantly reduce the time and cost of drug
development.
In addition to reducing the time and cost of developing drugs, we believe
that the understanding generated by our technologies may strengthen FDA
applications. For drugs already on the market, an understanding of the
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mechanism of action through pharmacogenomics can help identify appropriate
patient populations and lead to an improved second generation of drugs.
We have analyzed drugs whose commercial viability or clinical indications
are threatened either by a lack of understanding of mechanism of action or by
severe side effects. Our goal is to continue to generate databases (CuraTox
and CuraMode) to provide pharmacology and toxicology information, to
understand the mechanism of drug action, to identify patient populations that
are likely to respond favorably to a particular medication and, potentially,
to identify new indications or more optimal targets.
Using this approach, we have identified candidate genes predictive of drug
efficacy and toxicity in model systems. Currently, we are studying over 140
marketed drugs, preclinical candidates and non-pharmaceutical toxins to
identify putative predictive markers of drug efficacy and toxicity that can be
prospectively used by us and our pharmaceutical collaborators to effectively
and efficiently triage novel drugs.
In addition to understanding the genes that respond to drug treatment we are
linking these genes to our database of over 120,000 SNPs. The discovery of
SNPs predicting efficacy or toxicity may be of tremendous value in
personalizing medicine at the genetic level: expediting compounds through
clinical trials, reducing toxicity by segmenting patient populations, and
giving the right drug to the right patient. To date we have identified over
5,000 SNPs in potential drug targets, and drug response genes.
Drug Development Programs
The goal of our drug development programs is to advance promising
therapeutic candidates into the clinic. We are focusing on two broad classes
of therapeutics, secreted proteins and fully human monoclonal antibodies
raised against membrane-bound or secreted proteins. The therapeutic candidates
that show superior efficacy will be further evaluated with our
pharmacogenomics technology.
Therapeutic Proteins. In order to determine the therapeutic potential of
genes encoding secreted proteins, we have implemented high-throughput
protocols for the production, purification and testing of these proteins. We
have established high-throughput cell-based assays for characterizing the
therapeutic potential of secreted proteins. We are currently evaluating the
efficacy of a number of secreted proteins as potential human therapeutics
using animal models. Protein candidates that have excellent efficacy and
favorable toxicity profiles will be selected as clinical candidates.
Therapeutic Antibodies. We are also employing a genomics based approach for
the development of monoclonal antibody therapeutics. We have identified genes
that make suitable targets for monoclonal antibody therapy, may be associated
with disease, and on which we potentially have a good intellectual property
position. These proteins will be used to make fully human monoclonal
antibodies. Antibodies are naturally occurring proteins used by the body's
immune system to combat many diseases. As therapeutic products, antibodies
have several potential advantages over other therapies. The highly specific
interaction between an antibody and its target may, for example, reduce
unwanted side effects that may occur with other therapies. Fully human
antibodies are desirable because they avoid the risk of rejection present with
mouse or partial mouse antibodies. The scale of our efforts in human
monoclonal antibodies is unprecedented. We will be systematically testing
human monoclonal antibodies for efficacy in human cell and animal models of
disease. Monoclonal antibodies that demonstrate excellent efficacy combined
with a favorable toxicity profile will be selected as clinical candidates for
the treatment of disorders.
Competition
We face, and will continue to face, intense competition from one or more of
the following entities:
. pharmaceutical companies;
. biotechnology companies;
. diagnostic companies;
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. academic and research instructions; and
. government agencies.
We are also subject to significant competition from organizations that are
pursuing technologies and products that are the same as or similar to our
technology and products. Many of the organizations competing with us have
greater capital resources, research and development staffs and facilities and
marketing capabilities. In addition, research in the field of genomics
generally is highly competitve. Our competitors in the genomics area include:
. Affymetrix, Inc.;
. Celera Genomics Group;
. Human Genome Sciences, Inc.;
. Incyte Pharmaceuticals, Inc.;
. Millennium Pharmaceuticals, Inc.;
. major pharmaceutical companies; and
. universities and other research institutions (including those receiving
funding from the federally funded Human Genome Project).
A number of our competitors are attempting to rapidly identify and patent
genes and gene fragments sequenced at random, typically without specific
knowledge of the function of such genes or gene fragments. If our competitors
discover or characterize important genes or gene fragments before we do, it
could adversely affect any of our related disease research programs. We expect
that competition in genomics research will intensify as technical advances are
made and become more widely known.
Intellectual Property
Our business and competitive position are dependent upon our ability to
protect our SeqCalling, GeneCalling and PathCalling proprietary databases,
proprietary software and other proprietary methods and technology. We have
filed patent applications for our proprietary methods and devices for gene
expression analysis, sequencing, discovery of biological pathways and drug
development. As of the date of this report, we had approximately 190 patent
applications pending covering our technology with the PTO, and had filed
numerous corresponding international and foreign patent applications. As of
the date of this report, we have been issued nine patents with respect to our
technologies, discoveries and products.
On December 27, 1999, the PTO issued Revised Interim Utility Guidelines and
Revised Interim Written Description Guidelines reflecting the Office's current
understanding regarding statutory written description and utility requirements
for patentability. Should the PTO finalize these guidelines and make them
effective, the implementation of these guidelines may impact the issuance of
our pending U.S. patent applications.
Government Regulation
Prior to the marketing of any new drug developed by us or our collaborative
customers, that new drug must undergo an extensive regulatory approval process
in the United States and other countries. This regulatory process, which
includes preclinical and clinical studies, as well as post-marketing
surveillance to establish a compound's safety and efficacy, can take many
years and require the expenditure of substantial resources. Data obtained from
such studies are susceptible to varying interpretations that could delay,
limit or prevent regulatory approval. The rate of completion of clinical
trials is dependent upon, among other factors, the enrollment of patients.
Patient accrual is a function of many factors, including:
. the size of the patient population;
. the proximity of patients to clinical sites;
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<PAGE>
. the eligibility criteria for the study; and
. the existence of competitive clinical trials.
We have not submitted an investigational new drug application for any
product candidate, and no product candidate has been approved for
commercialization in the United States or elsewhere. We or any of our
collaborators may not be able to conduct clinical testing or obtain the
necessary approvals from the FDA or other regulatory authorities for any
products. Failure by us or our collaborators to obtain required governmental
approvals will delay or preclude our collaborators from marketing drugs or
diagnostic products developed with us or limit the commercial use of such
products and could have a material adverse effect on our business, financial
condition and results of operations.
Our research and development activities involve the controlled use of
hazardous materials and chemicals. We are subject to federal, state and local
laws and regulations governing the use, storage, handling and disposal of such
materials and certain waste products.
Employees
As of December 31, 1999, we had 288 full and part-time employees, 81 of whom
hold Ph.D., M.D. or J.D. degrees. The employee group includes engineers,
physicians, molecular biologists, chemists and computer scientists. We believe
that we maintain good relationships with our employees. We believe that our
future success will depend in large part on our ability to attract and retain
experienced and skilled employees.
Item 2. Properties
We maintain our principal administrative offices along with research
facilities in New Haven, Connecticut and additional research facilities in
Branford, Connecticut. We lease a total of 82,000 square feet at both
locations. The leases are generally for terms of two to five years, and
usually provide renewal options for terms of up to one year. We believe that
our facilities are adequate for our operations and that suitable additional
space will be available as needed.
Item 3. Legal Proceedings
We are not a party to any legal proceedings which would materially adversely
affect our business, results of operations or financial condition.
Item 4. Submission Of Matters To A Vote Of Security Holders
No matters were submitted to a vote of our security holders during the
quarter ended December 31, 1999.
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<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
Our voting common stock is traded on the Nasdaq National Market under the
symbol "CRGN". There is no established public trading market for our non-
voting common stock. The following table sets forth, for the periods
indicated, the low and high closing prices per share for our voting common
stock, as reported by the Nasdaq National Market since the voting common stock
commenced public trading on March 18, 1998:
<TABLE>
<CAPTION>
1998
------------
Low High
---- ----
<S> <C> <C>
Quarter Ended March 31, 1998 (from March 18, 1998)........ $11 1/2 $12 15/16
Quarter Ended June 30, 1998............................... 6 1/4 12 1/2
Quarter Ended September 30, 1998.......................... 5 8 1/8
Quarter Ended December 31, 1998........................... 5 3/8 8 1/2
</TABLE>
<TABLE>
<CAPTION>
1999
-------------
Low High
---- ----
<S> <C> <C>
Quarter Ended March 31, 1999............................... $ 6 $ 7 1/4
Quarter Ended June 30, 1999................................ 5 1/16 8
Quarter Ended September 30, 1999........................... 6 3/4 18 1/2
Quarter Ended December 31, 1999............................ 13 7/8 69 3/4
</TABLE>
Stockholders
As of February 29, 2000, there were approximately 113 shareholders of record
of our voting common stock and, according to our estimates, 1,976 beneficial
owners of common stock. All of our non-voting common stock is held by
Genentech.
Dividends
We have never paid cash dividends on our common stock and do not anticipate
declaring any cash dividends in the foreseeable future. We currently intend to
retain earnings, if any, to finance the development of our business.
Stock Split
On March 2, 2000, we announced a two-for-one split on both our voting common
stock and our non-voting common stock, each payable to our stockholders in the
form of a stock dividend. On March 30, 2000, our stockholders of record will
receive one additional share of our voting common stock for every share of
common stock and one additional share of non-voting common stock for every
share of non-voting common stock each stockholder owns at the close of
business on March 15, 2000.
Use of IPO Proceeds
In connection with our initial public offering, we sold 3,275,000 shares of
our common stock and received net offering proceeds of $33,160,350. On March
17, 1998, the Securities and Exchange Commission declared our Registration
Statement on Form S-1 (File No. 333-38051) effective.
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<PAGE>
The following table sets forth our cumulative use of net offering proceeds
as of December 31, 1999:
<TABLE>
<S> <C>
Construction of plant, building and facilities.................. $ 602,200
Purchase and installation of machinery and equipment............ 7,182,374
Purchase of Real Estate......................................... 0
Acquisition of other businesses................................. 0
Repayment of indebtedness....................................... 1,967,631
Working Capital................................................. 23,408,145
Temporary Investments:
Cash and cash equivalents..................................... 0
All other purposes............................................ 0
</TABLE>
The foregoing use of net offering proceeds does not represent a material
change in the use of proceeds described in the Registration Statement.
Private Placement
On December 8, 1999, we sold an aggregate of 418,995 shares of our common
stock, in a private placement, to Abgenix for an aggregate purchase price of
$15,000,021. We sold these shares at the same time we entered into a
collaboration agreement with Abgenix. No underwriters were involved in this
offering and sale of these shares. We offered and sold these shares in
reliance on an exemption from the registration provisions of the Securities
Act of 1933, as amended, set forth in Section 4(2) of the Securities Act. The
offer and sale was made only to "accredited investors" as that term is defined
in Regulation D under the Securities Act and we did not engage in a general
solicitation or advertisement of the offer and sale of the shares. The shares
issued to Abgenix are restricted securities under the Securities Act. Abgenix
has agreed not to dispose of its shares prior to December 8, 2000. After
December 8, 2000, Abgenix has demand and piggyback registration rights.
Item 6. Selected Financial Data
The selected financial data set forth below for each of the three years in
the period ended December 31, 1999 are derived from our balance sheets as of
December 31, 1998 and 1999 and the related statements of operations, of
stockholders' equity (deficiency) and of cash flows for the three years ended
December 31, 1997, 1998 and 1999 and notes thereto as audited by Deloitte &
Touche LLP, independent auditors, which are included elsewhere in this report.
The selected financial data as of December 31, 1995, 1996 and 1997 and for the
three years in the period ended December 31, 1997 have been derived from our
related financial statements, and are not included in this report. The
selected financial data set forth below should be read in conjunction with,
and are qualified by reference to, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our audited financial
statements.
B-18
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996(1) 1995
------------ ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenue......... $ 15,103,517 $ 9,257,025 $ 5,896,543 $4,422,947 $ 1,581,175
Net loss attributable
to common
stockholders......... $(25,762,760) $(18,936,920) $(7,290,434) $ (606,241) $(1,088,605)
Net loss per share
attributable to
common stockholders.. $ (1.79) $ (1.55) $ (0.92) $ (0.12) $ (0.22)
Weighted average
number of common
shares outstanding... 14,400,992 12,201,006 7,888,383 5,097,073 4,915,087
<CAPTION>
December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Total assets.......... $ 93,894,276 $ 60,804,501 $26,519,029 $5,653,391 $ 1,006,816
Total long-term
liabilities.......... $ 8,409,994 $ 6,983,927 $ 4,375,125 $1,908,915 $ 897,691
Cash and cash
equivalents.......... $ 76,374,571 $ 43,293,995 $17,417,161 $3,298,642 $ 9,129
Cash dividends
declared per common
share................ None None None None None
</TABLE>
--------
(1) During the year ended December 31, 1996, we completed our development
stage activities with the signing of our first collaborative research
agreement and commenced our planned principal operations.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
We are a biotechnology company focusing on the application of genomics to
the systematic discovery of genes, gene sequences, variations in gene
sequences, biological pathways and drug candidates in order to accelerate the
discovery and development of the therapeutic, agricultural and diagnostic
products to improve human and animal health and the vitality of agriculture.
We were incorporated in November 1991 and, until March 1993, were engaged
primarily in organizational activities, research and development of our
technology, grant preparation and obtaining financing. We have incurred losses
since inception, principally as a result of research and development and
general and administrative expenses in support of our operations. We
anticipate incurring additional losses over at least the next several years as
we expand our collaborative gene discovery efforts and internal discovery and
development to discover genes, biological pathways and drug candidates,
continue development of our technology and expand our operations. We expect
that losses will fluctuate from quarter to quarter and that such fluctuations
may be substantial.
On February 2, 2000, we completed an offering for $125,000,000 of 6%
convertible subordinated debentures due 2007 and received net proceeds of
approximately $121,250,000. In addition, on February 16, 2000, the initial
purchasers exercised their option to purchase an additional $25,000,000 of 6%
convertible subordinated debentures due 2007, providing us with additional net
proceeds of approximately $24,308,000. The debentures may be resold by the
initial purchasers to qualified institutional buyers under Rule 144A of the
Securities Act and to non-U.S. persons outside the United States under
Regulation S under the Securities Act. The debentures are convertible into our
common stock. In addition, prior to February 2, 2003, if our common stock
price reaches specified levels, we have the right to redeem the debentures at
a premium by converting the debentures into common stock. If the price of our
common stock reaches $217.01 for 20 of 30 consecutive trading days prior to
February 2, 2003, we may redeem all of the debentures by converting them into
common stock. If we were to convert the debentures prior to February 2, 2003,
in addition to the interest accrued and unpaid, we would make an interest
make-whole payment equal to the present value of the aggregate amount of the
interest that would otherwise have accrued from the provisional redemption
date through February 2, 2003.
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<PAGE>
We have agreed to file a registration statement with the SEC for the resale of
any shares issued as a result of the conversion of the debentures. We are
required to file the registration statement by May 2000.
We anticipate that collaborations will continue to be an important element
of our future revenues. We do not expect that government grant revenues, which
were a significant source of our revenues through 1998, will in future years
be significant, either in actual dollar amounts or as a percentage of
revenues. Therefore, the loss of revenues from existing collaborations would
materially adversely affect our business, financial condition and results of
operations. Our ability to generate revenue growth and become profitable is
dependent, in part, on our ability to enter into additional collaborative
arrangements, and on our ability and the ability of our collaborative partners
to successfully commercialize products incorporating, or based on, our
technologies (which are our solutions to enable discovery of drug products)
and to predict the efficacy and safety of drug products. We cannot guarantee
that we will be able to maintain or expand existing collaborations, or enter
into future collaborations to develop applications of our SeqCalling,
GeneCalling or PathCalling technologies on terms satisfactory to us, if at
all, and, if entered into, we cannot guarantee that any such collaborative
arrangements will be successful.
Our failure to successfully develop and market additional products over the
next several years, or to realize existing product revenues, would materially
adversely affect our business, financial condition and results of operations.
Royalties or other revenue generated for us from commercial sales of products
developed by using our technologies are not expected for at least several
years, if at all.
Results of Operations
Years Ended December 31, 1999 and 1998
Revenue. Our revenue for the year ended December 31, 1999 was $15,103,517,
representing an increase of $5,846,492, or 63%, compared to our revenue of
$9,257,025 in 1998. This increase was largely due to an increase in
collaboration revenue recorded under our arrangements with Glaxo, Roche
Pharma, Roche Vitamins, and COR. The increase was offset by a decrease in
grant revenue due to the completion of all of our federal grants during the
1999 calendar year. As a result of the completion of such federal grants, we
foresee no additional grant revenue in future periods, unless additional grant
awards are received. The revenue we recognized under our collaborative
arrangements is generally based upon work performed on behalf of collaborators
by our employees, or based upon our attainment of certain benchmarks specified
in the related agreements. We expect that collaboration revenues will continue
to increase as we add additional collaborations.
Operating Expenses. Grant research expenses for the year ended December 31,
1999 were $417,386, representing a decrease of $1,441,116, or 78%, compared to
$1,858,502 in 1998. The decrease in grant research expenses was attributable
to the completion of our federal grants during the first and second quarters
of 1999. As a result of the completion of such federal grants, we foresee no
additional grant research expenses in future periods, unless additional grant
awards are received.
Collaborative research and development expenses for the year ended December
31, 1999 were $25,794,421, representing an increase of $7,663,528, or 42%,
compared to $18,130,893 for the year ended December 31, 1998. The increase in
such expenses was primarily attributable to our obligations to fulfill
research requirements under new and existing collaborations, in addition to
internal research efforts, which resulted in increased purchases of laboratory
supplies, increased equipment depreciation and facilities expenses, and
additional personnel costs. We expect our future collaborative research and
development expenses to increase as we hire additional personnel and expand
our research and development facilities in support of our collaborations and
internal research.
During the fourth quarter of 1999, we undertook an upgrade of scientific
technologies and related lab equipment and signed an agreement with Comdisco,
Inc. ("Comdisco") for the acquisition of certain lab equipment with a fair
market value of approximately $2,400,000. As a part of this transaction, we
also purchased other lab equipment recorded as a capital lease for
approximately $3,600,000 from Transamerica Business Credit Corporation
("TBCC"). The Comdisco agreement calls for the exchange of the TBCC equipment
for the
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<PAGE>
Comdisco equipment. As a result of the exchange of the TBCC equipment for the
Comdisco equipment, we recognized an asset impairment expense of approximately
$2,700,000 in the fourth quarter of 1999 (see further discussion in "Liquidity
and Capital Resources" section).
General and administrative expenses for the year ended December 31, 1999
increased $3,956,147, or 43%, to $13,084,852 as compared to $9,128,705 for the
year ended December 31, 1998. The increase was primarily attributable to the
expansion of administration facilities, increasing payroll costs and the
incurrence of related depreciation expense and legal expenses in support of
developing our intellectual property portfolios. Over the next several years,
we anticipate that the percentage increases in general and administrative
expenses will be proportionate to percentage increases in collaborative
research and development expenses.
Interest Income, Net. Net interest income for the year ended December 31,
1999 of $1,087,400 decreased $345,190, or 24%, compared to $1,432,590 for
1998. The decrease was primarily due to the lower balances held in our cash
and cash equivalent accounts, and the additional interest expense we paid on
capital lease obligations. We anticipate that net interest income will
increase in the future, due to higher cash and cash equivalent balances as a
result of funds received from the completion of our convertible debt offering,
our recent private placements with Pequot Partners Fund, L.P. and Pequot
International Fund, Inc. (collectively "Pequot") and Abgenix, and from the
drawdown and simultaneous conversion of loans from Biogen and Genentech,
offset by the interest expense associated with the completion of our
convertible debt offering and the expected increase in capital lease
obligations. Gross interest expense for the year ended December 31, 1999 of
$1,191,891 represented an increase of $197,087, or 20%, compared to $994,804
for 1998. This increase in gross interest expense was primarily attributable
to additional capital lease obligations for equipment entered into during the
last twelve months, which enabled us to support our research and development
activities.
Net Loss Attributable to Common Stockholders. For the year ended December
31, 1999, we reported a net loss attributable to common stockholders of
$25,762,760, or ($1.79) per share as compared to $18,936,920, or ($1.55) per
share in 1998. Since inception, we have incurred operating losses, and as of
December 31, 1999 had an accumulated deficit of $54,702,268 and therefore,
have not paid any federal income taxes. Realization of deferred tax assets is
dependent on future earnings, if any, the timing and amount of which are
uncertain. Accordingly, valuation allowances in amounts equal to the deferred
income tax assets have been established to reflect these uncertainties in all
periods presented.
Years Ended December 31, 1998 and 1997
Revenue. Revenue for the year ended December 31, 1998 was $9,257,025,
representing an increase of $3,360,482, or 57%, compared to $5,896,543 in
1997. This increase was largely due to an increase in collaboration revenue
due to additional revenue recorded under our arrangements with Pioneer Hi-Bred
and Biogen, offset by a decrease in revenue received from Genentech under the
Evaluation Agreement. See Note 4 of Notes to Financial Statements. In April
1998, Pioneer Hi-Bred doubled its annual collaboration funding to us to a
minimum of $5,000,000. The increase in total revenue was also due to
additional grant revenue recorded as a result of timing issues in connection
with grant expenses incurred.
Operating Expenses. Grant research expenses for the year ended December 31,
1998 were $1,858,502, representing a decrease of $2,757,384, or 60%, compared
to $4,615,886 in 1997. The decrease in grant research expenses was primarily
attributable to the completion of two federal grants during the first quarter
of 1998, thereby decreasing the costs incurred by us in support of these
grants.
Collaborative research and development expenses for the year ended December
31, 1998 were $18,130,893, representing an increase of $13,004,233, or 254%,
compared to $5,126,660 for the year ended December 31, 1997. The increase in
collaborative research and development expenses was primarily attributable to
increased expenses as we hired additional research and development personnel,
increased purchases of laboratory supplies, increased equipment depreciation
and increased facilities expenses in connection with the expansion of our
collaborative research efforts and our internal discovery and development
programs.
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<PAGE>
General and administrative expenses for the year ended December 31, 1998
increased $5,647,454, or 162%, to $9,128,705 as compared to $3,481,251 for the
year ended December 31, 1997. This increase was primarily attributable to the
expansion of administration facilities, the incurrence of related depreciation
expense, payment of legal fees, compensation related expenses in connection
with a separation agreement, amortization of stock-based compensation and
hiring of additional personnel to support our future growth.
Interest Income, Net. Net interest income for the year ended December 31,
1998 of $1,432,590 increased $1,327,346 compared to $105,244 for 1997. This
increase was primarily gross interest received on larger cash and cash
equivalent balances we held as a result of our receipt of proceeds from our
initial public offering and concurrent private placements of securities. Gross
interest expense for the year ended December 31, 1998 of $994,804 represented
an increase of $310,267, or 45%, compared to $684,537 for 1997. This increase
in gross interest expense was primarily attributable to additional capital
lease obligations for equipment entered into in 1998 in support of our
research and development activities.
Net Loss Attributable to Common Stockholders. For the year ended December
31, 1998, we reported a net loss attributable to common stockholders of
$18,936,920, or ($1.55) per share as compared to $7,290,434, or ($0.92) per
share in 1997. Since inception, we have incurred operating losses, and as of
December 31, 1998 had an accumulated deficit of $28,939,508 and therefore, we
have not paid any federal income taxes.
Liquidity and Capital Resources
As of December 31, 1999, we had $76,374,571 in cash and cash equivalents,
compared to $43,293,995 as of December 31, 1998. This increase was primarily a
result of our receipt of combined net proceeds of approximately $56,000,000
from our private placements with Pequot and Abgenix, and from the drawdown and
simultaneous conversion of loans from Biogen and Genentech, offset by
operating losses in support of our research and development activities. We
have financed our operations since inception primarily through our initial
public offering, revenues received under our collaborative research and
development arrangements, private placements of equity securities, government
grants, and capital leases. As of December 31, 1999, we had recognized
$36,540,646 of cumulative sponsored research revenues from collaborative
research agreements and government grants. To date, inflation has not had a
material effect on our business.
In September 1999, we completed a private placement of 1,500,000 shares of
unregistered common stock for an aggregate purchase price of $15,000,000 to
Pequot.
In October 1999, we exercised our right under existing collaborative
agreements with Biogen and Genentech to borrow an aggregate of $26,000,000 to
support on-going operating activities. Simultaneously with these drawdowns, we
converted the loan from Biogen into 611,022 shares of our common stock, and
converted the loan from Genentech into 977,636 shares of our non-voting common
stock. On November 4, 1999, we filed a registration statement registering the
resale of the 611,022 shares of common stock issued to Biogen and the 977,636
shares of common stock that are issuable upon the conversion of the 977,636
shares of non-voting common stock issued to Genentech. The registration of
such shares is required under the collaborative agreements with Biogen and
Genentech. In addition, we included in such registration statement 21,111
shares of our common stock issuable to Transamerica Business Credit
Corporation and 25,597 shares of our common stock issuable to Casdin Life
Services Partners LP upon exercise of warrants purchased from us in a private
placement. Pursuant to the terms of such private placement, each party had the
right to participate in such registration. On February 23, 2000, we filed an
amendment to the registration statement for the above shares to, in part,
include in such registration statement 341,297 shares of our common stock
issuable to Quantum Industrial Partners LDC ("Quantum") upon exercise of
warrants purchased by Quantum from us in a private placement. We expect the
SEC to declare the registration statement effective shortly.
In December 1999, we completed a private placement of 418,995 shares of
unregistered common stock for an aggregate purchase price of $15,000,000 to
Abgenix.
B-22
<PAGE>
During the fourth quarter of 1999, we undertook an upgrade of scientific
technologies and related lab equipment. Accordingly, on November 7, 1999, we
signed an agreement with Comdisco, for the acquisition of certain lab
equipment with a fair market value of approximately $2,400,000. As a part of
this transaction, we also purchased other lab equipment recorded as a capital
lease for approximately $3,600,000 from TBCC. The Comdisco agreement calls for
the exchange of the TBCC equipment for the Comdisco Equipment. As a result of
the exchange of the TBCC equipment for the Comdisco equipment, we recognized
an asset impairment expense of approximately $2,700,000 in the fourth quarter
of 1999 in order to properly reflect our estimate of the fair market value of
the retired lab equipment in accordance with Statement of Financial Accounting
Standards No. 121 (Accounting for the Impairment of Long-Lived Assets and for
Long-lived Assets to Be Disposed Of). The newly-acquired Comdisco equipment
will be treated as a capital lease in the amount of $4,128,243.
On February 2, 2000, we completed an offering for $125,000,000 of 6%
convertible subordinated debentures due 2007 and received net proceeds of
approximately $121,250,000. In addition, on February 16, 2000, the initial
purchasers exercised their option to purchase an additional $25,000,000 of 6%
convertible subordinated debentures due 2007, providing us with additional net
proceeds of approximately $24,308,000. The debentures may be resold by the
initial purchasers to qualified institutional buyers under Rule 144A of the
Securities Act and to non-U.S. Persons outside the United States under
Regulation S under the Securities Act. The debentures are convertible into our
common stock. In addition, prior to February 2, 2003, if our common stock
price reaches specified levels, we have the right to redeem the debentures at
a premium by converting the debentures into common stock. If the price of our
common stock reaches $217.01 for 20 of 30 consecutive trading days at any time
prior to February 2, 2003, we may redeem all of the debentures by converting
them into common stock. If we were to convert the debentures prior to February
2, 2003, in addition to the interest accrued and unpaid, we would make an
interest make-whole payment equal to the present value of the aggregate amount
of the interest that would otherwise have accrued from the provisional
redemption date through February 2, 2003. We have agreed to file a
registration statement with the SEC for the resale of any shares issued as a
result of the conversion of the debentures. We are required to file the
registration statement by May 2000.
On March 2, 2000, we announced a two-for-one split on both our voting common
stock and our non-voting common stock, each payable to our stockholders in the
form of a stock dividend. On March 30, 2000, our stockholders of record will
receive one additional share of our voting common stock for every share of
voting common stock and one additional share of non-voting common stock for
every share of non-voting common stock each stockholder owns at the close of
business on March 15, 2000.
Our investing activities have consisted primarily of acquisitions of
equipment and expenditures for leasehold improvements. At December 31, 1999,
our gross investment in equipment, computers and leasehold improvements since
inception was $22,415,972. At December 31, 1999, equipment with a gross book
value of $12,609,660 secures our equipment financing facility. We anticipate
that net proceeds of approximately $6,000,000 from our available lease line
will be utilized for capital expenditures over the next several years,
primarily for the purchase of additional equipment and improvements at our
laboratories. We had approximately $365,000 in material commitments for
capital expenditures at December 31, 1999.
In accordance with our investment policy, we are utilizing the following
investment objectives for cash and cash equivalents: (1) investment decisions
are made with the expectation of minimum risk of principal loss, even with a
modest penalty in yield; (2) appropriate cash balances and related short-term
funds are maintained for immediate liquidity needs, and appropriate liquidity
is available for medium-term cash needs; and (3) maximum after-tax yield is
achieved.
Net cash used in operating activities was $19,470,656 for the year ended
December 31, 1999, compared to $9,184,466 for the year ended December 31,
1998. The increase of $10,286,190 can be attributed to an increase in our net
loss and accrued expenses, primarily offset by decreases in accounts payable,
accrued bonuses, deferred revenue, and the asset impairment charge as well as
depreciation and amortization costs.
B-23
<PAGE>
As of December 31, 1999, we had federal and Connecticut net operating loss
carryforwards for income tax purposes of approximately $56,000,000 and
$51,000,000, respectively. Federal net operating loss carryforwards expire
beginning in 2008, and Connecticut net operating loss carryforwards began
expiring in 1998. We also had federal and Connecticut research and development
tax credit carryforwards for income tax purposes of approximately $3,000,000
and $3,200,000, respectively at December 31, 1999.
Year 2000 Compliance
The "Year 2000 Problem" arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer
programs may recognize a year ending in "00" as the Year 1900 rather than the
Year 2000, which could result in a significant disruption of operations and an
inability to process certain transactions. Early in 1998, we assessed our
internal computer systems and our non-information technology systems and
determined that, because our computer applications use four digits to identify
a year in the field date, we were internally compliant with Year 2000
requirements. With respect to material non-information technology systems, we
determined that substantially all of these systems were provided by third
parties. We developed a strategic plan to estimate the potential risks related
to third parties with which we have significant relationships and concluded
that Year 2000 issues would not materially affect the continuation of our
normal daily operations. To date, our operations have suffered no significant
disruption from Year 2000 problems. We incurred no material historical costs
relating to Year 2000 compliance, and we have not incurred any material costs
in resolving the Year 2000 problems of third parties with whom we interact. We
intend, however, to continue monitoring our internal computer systems and
those of third parties for Year 2000 problems. Year 2000 problems that are as
yet undiscovered may arise in the future and could have a significant impact
on our operations.
Recently Enacted Pronouncements
The Financial Accounting Standards Board ("FASB") issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information"
effective for fiscal years beginning after December 15, 1997. At December 31,
1999 we had one reportable segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 modifies the accounting for
derivatives and hedging activities and is effective for the quarterly periods
beginning after June 15, 2000. We have not determined the effects, if any,
that SFAS No. 133 will have on our financial statements.
The AICPA has issued Statement of Position ("SOP") 98-1, "Accounting for
Costs of Computer Software Developed or Planned for Internal Use." This SOP
provides guidance on accounting for the costs of computer software developed
or obtained for internal use. This SOP requires that the following costs be
capitalized: (1) external direct costs of materials and services incurred in
developing or obtaining internal-use computer software; (2) payroll and
payroll-related costs for employees who are directly associated with and
devote time to the internal-use software project (to the extent of time spent
directly on the project); and (3) interest costs. Computer software costs that
are research and development should be expensed as incurred. In addition,
training costs should be expensed as incurred. This statement is effective for
financial statements for fiscal years beginning after December 15, 1998,
however, earlier application is encouraged. We adopted SOP 98-1 in 1999.
Certain Factors That May Affect Results of Operations
This report may contain forward-looking statements that are subject to
certain risks and uncertainties. These statements include statements regarding
(i) our plan to build additional technologies and to enhance our GeneScape
platform and to systematically analyze the genetic basis of many common
diseases, (ii) the expected transformation of the pharmaceutical industry and
our opportunity with respect thereto, (iii) the likely success of our
technologies, (iv) the expected benefits of the linkage to be provided by our
PathCalling systems, (v) the expected benefits, effects, efficiency and
performance of our services and products, (vi) our ability (a) to
B-24
<PAGE>
overcome the limitations of competing technologies, processes and databases by
condensing key steps in gene-based discovery and development, (b) to develop,
through our products and services, the next generation of therapeutic products
for important complex diseases, (c) to populate our databases, and (d) to
develop, in a timely fashion, a broad portfolio of research programs that
encompass drug discovery, drug development and pharmacogenomics, (vii) the
capacity of our products to predict the efficiency and safety of drugs already
on the market, (viii) the suitability of Company discovered genes and proteins
involved in diabetes, hypertension and ischemic stroke as targets for small
molecule drug development and (ix) the expected future levels of losses,
operating expenses and material commitments. Such statements are based on our
management's current expectations and are subject to a number of factors and
uncertainties that could cause actual results to differ materially from those
described in the forward-looking statements. We caution investors that there
can be no assurance that actual results or business conditions will not differ
materially from those projected or suggested in such forward-looking
statements as a result of various factors, including, but not limited to, the
following: our early stage of development, technological uncertainty and
product development risks, uncertainty of additional funding, reliance on
research collaborations, competition, our ability to protect our patents and
proprietary rights and uncertainties relating to commercialization rights. For
further information, refer to the more specific risk and uncertainties
discussed throughout this discussion and analysis.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We have reviewed the provisions of Regulation S-X Item 305. At December 31,
1999, we did not hold any derivative financial instruments, commodity-based
instruments or other long- term debt obligations.
Item 8. Financial Statements and Supplementary Data
B-25
<PAGE>
CURAGEN CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 43,293,995 $ 76,374,571
Grants receivable................................ 600,241 25,019
Accounts receivable.............................. 10,400 767,606
Other current assets............................. 1,150 73,752
Prepaid expenses................................. 505,203 1,135,248
------------ ------------
Total current assets........................... 44,410,989 78,376,196
------------ ------------
Property and equipment, net........................ 15,900,281 15,077,370
Notes receivable--related parties.................. 93,500 96,500
Other assets....................................... 399,731 344,210
------------ ------------
Total assets................................... $ 60,804,501 $ 93,894,276
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................. $ 2,778,000 $ 1,843,675
Accrued bonuses.................................. 841,386 335,000
Accrued expenses................................. 480,450 1,014,198
Accrued payroll.................................. 324,924 500,029
Deferred revenue................................. 4,875,000 3,982,632
Deferred rent.................................... 103,406 77,726
Current portion of obligations under capital
leases.......................................... 1,942,215 2,732,393
------------ ------------
Total current liabilities...................... 11,345,381 10,485,653
------------ ------------
Long-term liabilities:
Deferred rent, net of current portion............ 196,494 110,152
Interest payable................................. 21,000 21,000
Obligations under capital leases, net of current
portion......................................... 6,766,433 8,278,842
------------ ------------
Total long-term liabilities.................... 6,983,927 8,409,994
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common Stock-Voting; $.01 par value, issued and
outstanding 13,316,757 shares at December 31,
1998, and 16,421,538 shares at December 31,
1999............................................ 133,168 164,215
Common Stock-Non-Voting; $.01 par value, issued
and outstanding 977,636 shares at December 31,
1999............................................ -- 9,776
Additional paid-in capital....................... 72,050,465 129,841,950
Accumulated deficit.............................. (28,939,508) (54,702,268)
Unamortized stock-based compensation............. (768,932) (315,044)
------------ ------------
Total stockholders' equity..................... 42,475,193 74,998,629
------------ ------------
Total liabilities and stockholders' equity..... $ 60,804,501 $ 93,894,276
============ ============
</TABLE>
See accompanying notes to financial statements
B-26
<PAGE>
CURAGEN CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Revenue:
Grant revenue....................... $ 3,079,994 $ 3,182,025 $ 636,980
Collaboration revenue............... 2,816,549 6,075,000 14,466,537
----------- ------------ ------------
Total revenue..................... 5,896,543 9,257,025 15,103,517
----------- ------------ ------------
Operating expenses:
Grant research...................... 4,615,886 1,858,502 417,386
Collaborative research and
development........................ 5,126,660 18,130,893 25,794,421
Asset impairment expense............ -- -- 2,657,018
General and administrative.......... 3,481,251 9,128,705 13,084,852
----------- ------------ ------------
Total operating expenses.......... 13,223,797 29,118,100 41,953,677
----------- ------------ ------------
Loss from operations.................. (7,327,254) (19,861,075) (26,850,160)
Interest income, net.................. 105,244 1,432,590 1,087,400
----------- ------------ ------------
Net loss.............................. (7,222,010) (18,428,485) (25,762,760)
Preferred dividends................... (68,424) (508,435) --
----------- ------------ ------------
Net loss attributable to common
stockholders......................... $(7,290,434) $(18,936,920) $(25,762,760)
=========== ============ ============
Basic and diluted net loss per share
attributable to common stockholders.. $ (0.92) $ (1.55) $ (1.79)
=========== ============ ============
Weighted average number of shares used
in computing basic and diluted net
loss per share attributable to common
stockholders......................... 7,888,383 12,201,006 14,400,992
----------- ------------ ------------
Proforma basic and diluted net loss
per share attributable to common
stockholders (See Note 9)............ $ (0.46) $ (0.78) $ (0.89)
=========== ============ ============
Weighted average number of shares used
in computing proforma basic and
diluted net loss per share
attributable to common stockholders
(See Note 9)......................... 15,776,766 24,402,012 28,801,984
=========== ============ ============
</TABLE>
See accompanying notes to financial statements
B-27
<PAGE>
CURAGEN CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
Year Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
Voting
Common Non-Voting
Stock Common
($.01 Number Stock Additional Unamortized
Number of Par of ($.01 Par Number of Preferred Paid-in Accumulated Stock-Based
Shares value) Shares value) Shares Stock Capital Deficit Compensation
---------- -------- ------- ---------- ---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January 1,
1997............ 5,121,731 $ 51,218 -- $ -- 482,167 $ 3,190,772 $ 2,164,824 $ (3,289,013) --
Issuance of
Common Stock.... 39,746 397 -- -- -- -- 162,561 -- --
Issuance of
Preferred Stock
with warrants--
Series C........ -- -- -- -- 2,011,468 11,787,202 -- -- --
Issuance of
Preferred
Stock--Series
D............... -- -- -- -- 1,000,000 7,500,000 -- -- --
Issuance of
Preferred
Stock--Series
E............... -- -- -- -- 100,000 1,000,001 -- -- --
Issuance of
options to non-
employees....... -- -- -- -- -- -- 736,781 -- --
Unamortized
stock-based
compensation.... -- -- -- -- -- -- 1,213,464 -- (1,213,464)
Issuance of
warrants--
capital lease
obligations..... -- -- -- -- -- -- 59,520 -- --
Amortization of
warrants--
capital lease
obligations..... -- -- -- -- -- -- (5,410) -- --
Preferred
dividends....... -- -- -- -- -- 68,424 (68,424) -- --
Adjustment of
Redeemable
Common Stock.... -- -- -- -- -- -- (2,454,668) -- --
Adjustment to
reflect
automatic
conversion of
Preferred
Stock........... 3,418,635 34,186 -- -- (3,418,635) (22,087,203) 22,053,017 -- --
Net loss........ -- -- -- -- -- -- -- (7,222,010) --
---------- -------- ------- ------ ---------- ----------- ------------ ------------ ----------
December 31,
1997............ 8,580,112 85,801 -- -- 175,000 1,459,196 23,861,665 (10,511,023) (1,213,464)
Issuance of
Common Stock.... 4,231,520 42,315 -- -- -- -- 48,620,165 -- --
Conversion of
Redeemable
Common Stock.... 291,875 2,919 -- -- -- -- 3,937,393 -- --
Redemption of
Preferred
Stock--Series
B............... -- -- -- -- (175,000) (1,750,000) -- -- --
Stock issuance
costs........... -- -- -- -- -- -- (4,509,612) -- --
Amortization of
stock-based
compensation.... -- -- -- -- -- -- -- -- 444,532
Amortization of
warrants--
capital lease
obligations..... -- -- -- -- -- -- (16,232) -- --
Preferred
dividends....... -- -- -- -- -- 290,804 (508,435) -- --
Exercise of
employee stock
options......... 213,250 2,133 -- -- -- -- 375,767 -- --
Issuance of
options to non-
employees....... -- -- -- -- -- -- 289,754 -- --
Net loss........ -- -- -- -- -- -- -- (18,428,485) --
---------- -------- ------- ------ ---------- ----------- ------------ ------------ ----------
December 31,
1998............ 13,316,757 133,168 -- -- -- -- 72,050,465 (28,939,508) (768,932)
Issuance of
Common Stock.... 2,530,017 25,300 977,636 9,776 -- -- 55,964,920 -- --
Stock issuance
costs........... -- -- -- -- -- -- (118,264) -- --
Amortization and
write-off of
stock-based
compensation.... -- -- -- -- -- -- (192,729) -- 453,888
Amortization of
warrants--
capital lease
obligations..... -- -- -- -- -- -- (16,233) -- --
Exercise of
employee stock
options......... 92,419 924 -- -- -- -- 662,225 -- --
Exercise of non-
employee stock
options......... 456,000 4,560 -- -- -- -- 996,750 -- --
Issuance of
options to non-
employees....... -- -- -- -- -- -- 103,655 -- --
Stock-based
401(k) employer
plan match...... 26,345 263 -- -- -- -- 306,722 -- --
Other........... -- -- -- -- -- -- 84,439 -- --
Net loss........ -- -- -- -- -- -- -- (25,762,760) --
---------- -------- ------- ------ ---------- ----------- ------------ ------------ ----------
December 31,
1999............ 16,421,538 $164,215 977,636 $9,776 -- -- $129,841,950 $(54,702,268) $ (315,044)
========== ======== ======= ====== ========== =========== ============ ============ ==========
<CAPTION>
Total
------------
<S> <C>
January 1,
1997............ $ 2,117,801
Issuance of
Common Stock.... 162,958
Issuance of
Preferred Stock
with warrants--
Series C........ 11,787,202
Issuance of
Preferred
Stock--Series
D............... 7,500,000
Issuance of
Preferred
Stock--Series
E............... 1,000,001
Issuance of
options to non-
employees....... 736,781
Unamortized
stock-based
compensation.... --
Issuance of
warrants--
capital lease
obligations..... 59,520
Amortization of
warrants--
capital lease
obligations..... (5,410)
Preferred
dividends....... --
Adjustment of
Redeemable
Common Stock.... (2,454,668)
Adjustment to
reflect
automatic
conversion of
Preferred
Stock........... --
Net loss........ (7,222,010)
------------
December 31,
1997............ 13,682,175
Issuance of
Common Stock.... 48,662,480
Conversion of
Redeemable
Common Stock.... 3,940,312
Redemption of
Preferred
Stock--Series
B............... (1,750,000)
Stock issuance
costs........... (4,509,612)
Amortization of
stock-based
compensation.... 444,532
Amortization of
warrants--
capital lease
obligations..... (16,232)
Preferred
dividends....... (217,631)
Exercise of
employee stock
options......... 377,900
Issuance of
options to non-
employees....... 289,754
Net loss........ (18,428,485)
------------
December 31,
1998............ 42,475,193
Issuance of
Common Stock.... 55,999,996
Stock issuance
costs........... (118,264)
Amortization and
write-off of
stock-based
compensation.... 261,159
Amortization of
warrants--
capital lease
obligations..... (16,233)
Exercise of
employee stock
options......... 663,149
Exercise of non-
employee stock
options......... 1,001,310
Issuance of
options to non-
employees....... 103,655
Stock-based
401(k) employer
plan match...... 306,985
Other........... 84,439
Net loss........ (25,762,760)
------------
December 31,
1999............ $74,998,629
============
</TABLE>
See accompanying notes to financial statements
B-28
<PAGE>
CURAGEN CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................ $(7,222,010) $(18,428,485) $(25,762,760)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Asset impairment expense............ -- -- 2,657,018
Depreciation and amortization....... 1,226,696 2,668,142 5,554,019
Non-monetary compensation........... 736,781 894,286 364,814
Stock-based 401(k) employer plan
match.............................. -- -- 306,985
Changes in assets and liabilities:
Grants receivable................... 44,525 (178,677) 575,225
Accounts receivable................. 33,250 156,350 (756,409)
Other current assets................ (852) 12,733 (60,836)
Prepaid expenses.................... (134,529) (347,723) (641,812)
Other assets........................ (180,225) (198,259) 29,351
Accounts payable.................... 754,137 1,671,866 (934,324)
Accrued payroll-related party....... -- (308,125) --
Accrued bonuses..................... -- 841,386 (506,387)
Accrued expenses.................... 933,590 (864,812) 533,747
Accrued payroll..................... -- 324,924 175,104
Deferred revenue.................... 375,000 4,500,000 (892,370)
Deferred rent....................... 227,972 71,928 (112,021)
Interest payable.................... 259,316 -- --
----------- ------------ ------------
Net cash used in operating
activities....................... (2,946,349) (9,184,466) (19,470,656)
=========== ============ ============
Cash flows from investing activities:
Acquisitions of property and
equipment.......................... (2,486,760) (11,560,246) (8,625,520)
Loans to related parties............ (100,000) (153,500) (3,798)
----------- ------------ ------------
Net cash used in investing
activities....................... (2,586,760) (11,713,746) (8,629,318)
=========== ============ ============
Cash flows from financing activities:
Payments on capital lease
obligations........................ (879,594) (1,872,001) (3,020,177)
Proceeds from issuance of Common
Stock.............................. -- 48,662,480 55,999,996
Proceeds from issuance of Preferred
Stock.............................. 20,387,203 -- --
Proceeds from sale-leaseback of
equipment.......................... 1,227,270 5,000,659 6,654,536
Payments of stock issuance costs.... (1,083,251) (3,426,361) (118,264)
Proceeds from exercise of stock
options............................ -- 377,900 1,664,459
Redemption of Series B Preferred
Stock.............................. -- (1,967,631) --
----------- ------------ ------------
Net cash provided by financing
activities....................... 19,651,628 46,775,046 61,180,550
=========== ============ ============
Net increase in cash and cash
equivalents.......................... 14,118,519 25,876,834 33,080,576
Cash and cash equivalents, beginning
of year.............................. 3,298,642 17,417,161 43,293,995
----------- ------------ ------------
Cash and cash equivalents, end of
year................................. $17,417,161 $ 43,293,995 $ 76,374,571
=========== ============ ============
Supplemental cash flow information:
Interest paid....................... $ 423,655 $ 988,533 $ 1,040,560
Noncash financing transactions:
Reduction of note and related
interest payable upon exercise of
Common Stock warrants.............. $ 1,485,644 -- --
Reduction of accrued expenses upon
issuance of Common Stock........... 162,958 -- --
Obligations under capital leases.... 5,302,666 $ 5,051,378 $ 8,381,778
Adjustment of Redeemable Common
Stock.............................. 2,454,668 -- --
</TABLE>
See accompanying notes to financial statements
B-29
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization--CuraGen Corporation (the "Company" or "CuraGen") is a
biotechnology company focusing on the application of genomics to the
systematic discovery of genes, gene sequences, variations in gene sequences,
biological pathways and drug candidates in order to accelerate the discovery
and development of the therapeutic, agricultural and diagnostic products to
improve human and animal health and the vitality of agriculture. The Company
was incorporated in November 1991 and, until March 1993, was engaged primarily
in organizational activities, research and development of the Company's
technology, grant preparation and obtaining financing.
Revenue Recognition--The Company has entered into certain collaborative
research agreements which provide for the partial or complete funding of
specified projects in exchange for access to and certain rights in the
resultant data discovered under the related project. Revenue is recognized
based upon work performed or upon the attainment of certain benchmarks
specified in the related agreements (see Note 4). Grant revenue is recognized
as related costs qualifying under the terms of the grants are incurred. Grant
revenue is derived solely from federal and Connecticut agencies (see Note 8).
Deferred revenue arising from payments received from collaborative agreements
is recognized as income when earned.
Cash and Cash Equivalents--The Company considers investments readily
convertible into cash with a maturity of three months or less at the date of
purchase to be cash equivalents.
Property and Equipment--Property and equipment are recorded at cost.
Equipment under capital leases is recorded at the lower of the net present
value of the minimum lease payments required over the term of the lease or the
fair value of the assets at the inception of the lease. Additions, renewals
and betterments that significantly extend the life of an asset are
capitalized. Minor replacements, maintenance and repairs are charged to
operations as incurred. Equipment is depreciated over the estimated useful
lives of the related assets, ranging from three to seven years, using the
straight-line method. Equipment under capital leases is amortized over the
shorter of the estimated useful life or the terms of the lease, using the
straight-line method. Leasehold improvements are amortized over the shorter of
the estimated life or the term of the lease, using the straight-line method.
When assets are retired or otherwise disposed of, the assets and related
accumulated depreciation or amortization are eliminated from the accounts and
any resulting gain or loss is reflected in income.
Impairment of Long-Lived Assets--The Company regularly evaluates the
recoverability of the net carrying value of its property, and intangible
assets by comparing the carrying values to the estimated future undiscounted
cash flows. A deficiency in these cash flows relative to the carrying amounts
is an indication of the need for a write-down due to impairment. The
impairment write-down would be the difference between the carrying amounts and
the fair value of these assets as determined by using estimated future
undiscounted cash flows. A loss of impairment would be recognized by a charge
to earnings.
Deferred Real Estate Commissions--Deferred real estate commissions were paid
in 1997 in connection with the signing of the operating lease in New Haven,
Connecticut (see Note 3). These costs, which are included in Other assets, are
amortized over the remaining life of the lease as of the date of occupancy, 69
months, using the straight-line method. Accumulated amortization aggregated
$20,984 and $32,975, respectively, as of December 31, 1998 and 1999. Related
amortization expense was $11,991 for each of the years ended December 31, 1998
and 1999.
Licensing Fees--Licensing fees for various research and development purposes
were paid during 1998 and 1999. The costs, which are included in Other assets,
are amortized over the various lives of the licenses. Accumulated amortization
aggregated $30,288 and $127,503, respectively, as of December 31, 1998 and
1999. Related amortization expense was $30,288 and $97,215, respectively, for
the years ended December 31, 1998 and 1999.
B-30
<PAGE>
Patent Application Costs--Costs incurred in filing for patents are charged
to operations, until such time as it is determined that the filing will be
successful. When it becomes evident with reasonable certainty that an
application will be successful, the costs incurred in filing for patents will
begin to be capitalized. Capitalized costs related to successful patent
applications will be amortized over a period not to exceed twenty years or the
remaining life of the patent, whichever is shorter, using the straight-line
method. During 1998 and 1999, all patent application costs have been charged
to operations.
Research and Development Costs--Research and development costs are charged
to operations as incurred. Grant research expenses include all direct research
and development costs incurred related to specific grant awards and programs.
All remaining research and development costs are incurred for the development
and maintenance of current and future research collaboration agreements, and
accordingly, have been classified as collaborative research and development
expenses.
Stock-Based Compensation--In October 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"), which was effective
for the Company beginning January 1, 1996. SFAS 123 requires expanded
disclosures of stock-based compensation arrangements with employees and non-
employees and encourages (but does not require) compensation cost to be
measured based on the fair value of the equity instruments awarded to
employees. Companies are permitted to continue to apply Accounting Principles
Board ("APB") No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instruments awarded. The Company will continue
to apply APB No. 25 to its stock-based compensation awards to employees. For
equity instruments awarded to non-employees, the Company records the
transactions based upon the consideration received for such awards or the fair
value of the equity instruments issued, whichever is more reliably measurable.
The Company recorded stock-based compensation expense attributable to non-
employees totaling $277,247, $289,754 and $103,655 for the years ended
December 31, 1997, 1998 and 1999, respectively. For options issued to
employees, the Company records the transactions based upon the difference
between the option strike price and the estimated fair market value as of the
date of issuance. Stock-based compensation associated with options granted to
employees during 1997 amounted to $1,672,998 and is being expensed by the
Company over the vesting period of the underlying options. During 1998 and
1999, no stock-based compensation in connection with options granted to
employees was recorded as all options granted were issued at the estimated
fair market value as of the date of issuance. The Company recorded
amortization of stock-based compensation expense for options issued to
employees of $444,532 and $453,888 for the years ended December 31, 1998 and
1999, respectively.
Income Taxes--Income taxes are provided for as required under Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). This Statement requires the use of the asset and liability method in
determining the tax effect on future years of the "temporary differences"
between the tax basis of assets and liabilities and their financial reporting
amounts.
Loss Per Share--Basic earnings per share ( "EPS") is computed by dividing
net loss by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. Due to the loss from operations, stock options
and warrants granted but not yet exercised under the Company's stock option
plans are antidilutive and therefore not considered for the diluted EPS
calculations. Under the assumption that stock options and warrants were not
antidilutive, the denominator for diluted loss per share would be 7,888,383,
13,024,973, and 15,394,706 at December 31, 1997, 1998 and 1999, respectively.
Fair Value of Financial Instruments--Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments" (
"SFAS 107"), requires the disclosure of fair value information for certain
assets and liabilities, whether or not recorded in the balance sheets, for
which it is practical to estimate that value. The Company has the following
financial instruments: cash, receivables, accounts payable and accrued
expenses, and certain liabilities. The Company considers the carrying amount
of these items to approximate fair value.
B-31
<PAGE>
Conversion of Preferred Stock--The accompanying financial statements
retroactively reflect the conversion of all outstanding shares of Series A, C,
D and E Preferred Stock (Convertible Preferred Stock) to Common Stock on a one
for one basis. The above conversion has been presented since the Company
amended its Certificate of Incorporation in December 1997 to provide that the
Series A, C, D and E Preferred Stock would be automatically converted into
shares of Common Stock upon the closing of a firm commitment underwritten
public offering of the Common Stock. In March 1998, upon the closing of the
Company's initial public offering, the foregoing conversion was completed.
Recently Enacted Pronouncements--The Financial Accounting Standards Board
("FASB") issued SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information" effective for fiscal years beginning after December 15,
1997. The Company had one reportable segment as of December 31, 1999.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 modifies the accounting for
derivatives and hedging activities and is effective for the quarterly periods
beginning after June 15, 1999. The Company has not determined the effects, if
any, that SFAS No. 133 will have on its financial statements.
The AICPA has issued Statement of Position ("SOP") 98-1, "Accounting for
Costs of Computer Software Developed or Planned for Internal Use". This SOP
provides guidance on accounting for the costs of computer software developed
or obtained for internal use. This SOP requires that the following costs be
capitalized: 1) external direct costs of materials and services incurred in
developing or obtaining internal-use computer software; 2) payroll and
payroll-related costs for employees who are directly associated with and
devote time to the internal-use software project (to the extent of time spent
directly on the project); and 3) interest costs. Computer software costs that
are research and development should be expensed as incurred. In addition,
training costs should be expensed as incurred. This statement is effective for
financial statements for fiscal years beginning after December 15, 1998,
however, earlier application is encouraged. The Company adopted SOP 98-1 in
1999.
Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
----------- -----------
<S> <C> <C>
Laboratory equipment................................ $ 6,570,300 $ 5,966,192
Leased equipment.................................... 11,091,434 12,609,660
Leasehold improvements.............................. 904,254 1,165,598
Office equipment.................................... 1,534,415 2,674,522
----------- -----------
Total property and equipment...................... 20,100,403 22,415,972
Less accumulated depreciation and amortization...... 4,200,122 7,338,602
----------- -----------
Total property and equipment, net................. $15,900,281 $15,077,370
=========== ===========
</TABLE>
Depreciation and amortization expense was $2,580,400, and $5,441,172 for the
years ended December 31, 1998 and 1999, respectively.
B-32
<PAGE>
3. Leases
Capital Leases
In April 1997, the Company signed a lease-financing commitment to receive
$4,000,000 to purchase equipment and expand its facilities. The lease
commitment provides for a payment term of 48 months per individual lease
schedule. In addition, the commitment provides for the issuance to the lessor
of two warrants (the "First Warrant" and the "Second Warrant") to purchase
shares of the Common Stock. The First Warrant was issued in April 1997 and
entitles the lessor to purchase 11,111 shares of Common Stock at an exercise
price of $9.00 per share. The Second Warrant was issued in September 1997 when
the Company's aggregate equipment cost under the agreement exceeded
$2,000,000. The Second Warrant entitles the lessor to purchase 10,000 shares
of Common Stock at an exercise price of $10.00 per share. The value ascribed
to the warrants was $59,520. In June 1998, the Company signed a lease-
financing commitment to receive $10,000,000 to purchase various laboratory,
office and computer equipment. The lease commitment provides for payment terms
of 60 months per individual lease schedule. In November 1999, the Company
signed an agreement with Comdisco, Inc. ("Comdisco") for the acquisition of
certain lab equipment of $2,400,000. The agreement provides for payment terms
of 12 quarterly installments.
The Company has also entered into other capital lease agreements to finance
the purchase of equipment. Leased equipment under all such agreements
consisted of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
----------- -----------
<S> <C> <C>
Leased equipment.................................... $11,091,434 $12,609,660
Less accumulated amortization....................... 3,037,429 3,787,225
----------- -----------
Total Leased equipment, net....................... $ 8,054,005 $ 8,822,435
=========== ===========
</TABLE>
The Company financed leased assets with costs of $5,302,666, $5,051,378 and
$8,381,778 for the years ended December 31, 1997, 1998 and 1999, respectively.
These arrangements have terms of three to five years with interest rates
ranging from approximately 9% to 20%, however, of the remaining total minimum
lease payments of approximately $13,000,000, 97% of those arrangements have
interest rates ranging from approximately 9% to 15%. At the end of the
respective lease terms, the Company has the right to either return the
equipment to the lessor or purchase the equipment at between $1 and 15% of the
then fair market value of the equipment.
The future minimum lease payments under capital lease obligations at
December 31, 1999 were as follows:
<TABLE>
<S> <C>
Within 1 year................................................... $ 3,725,902
Within 1 to 2 years............................................. 4,263,164
Within 2 to 3 years............................................. 3,771,172
Within 3 to 4 years............................................. 1,422,100
Within 4 to 5 years............................................. 97,309
-----------
Total minimum lease payments.................................... 13,279,647
Less amounts representing interest.............................. 2,268,412
-----------
Present value of future minimum lease payments.................. 11,011,235
Less current portion of obligations............................. 2,732,393
-----------
Obligations under capital leases, net of current portion........ $ 8,278,842
===========
</TABLE>
Operating Leases
In December 1996, the Company entered into a six-year lease agreement for
26,000 square feet to house its principal administrative and research
facilities at 555 Long Wharf Drive, New Haven, Connecticut. In October
B-33
<PAGE>
1997 and August 1998, the Company amended that lease to increase its leased
space to a total of 31,000 and 36,000 square feet, respectively. The Company
may renew the lease for two additional terms of five years each. In May 1998,
the Company entered into a lease agreement, expiring in May 2000, for its
32,000 square foot research facility in Branford, Connecticut. The lease
agreement may be renewed for three additional terms of two years each. In
November 1999, the Company exercised its option to renew the Branford lease
for a two year term which will expire in May 2002, and amended the lease to
increase its leased space to 46,000 square feet. An additional 12,000 square
feet at the Company's third research location in Alachua, Florida is also
leased under an agreement due to expire in July 2000.
Total rent expense under all operating leases for 1997, 1998 and 1999 was
approximately $487,300, $1,016,050 and $1,335,350 respectively.
The future minimum rental payments for all operating leases are as follows
as of December 31, 1999:
<TABLE>
<CAPTION>
Year
----
<S> <C>
2000.............................................................. $1,494,238
2001.............................................................. 1,441,909
2002.............................................................. 1,066,492
----------
Total........................................................... $4,002,639
==========
</TABLE>
4. Collaborations
Genentech, Inc.
In June 1996, the Company entered into a Pilot Research Services and
Evaluation Agreement with Genentech, Inc. ("Genentech") pursuant to which the
Company performed certain research services for a $200,000 fee. The pilot
collaboration was superseded by the Evaluation Agreement, signed and effective
December 27, 1996. In connection with the execution of the Evaluation
Agreement, Genentech made an equity investment of $1,800,000 in the form of
307,167 shares of Series A Convertible Preferred Stock (see Note 6).
In November 1997, CuraGen and Genentech entered into a research
collaboration and database subscription arrangement to discover novel genes
and therapeutics. Pursuant to the agreement, Genentech purchased $5,000,000 of
Common Stock in a private placement concurrent with the Company's initial
public offering at the initial public offering price. Genentech also agreed to
provide CuraGen with an interest-bearing loan facility which could in the
aggregate reach $26,000,000 if the research program continues beyond its
initial three year term. The loan facility contains annual borrowing limits
and the outstanding principal and interest under the loan facility are payable
five years from the date of the agreement. Subject to certain limitations,
during the term of the agreement, and after the end of the first year, the
drawn-down portion of the loan is convertible at CuraGen's option into CuraGen
Non-Voting Common Stock, par value $.01 per share (the "Non-Voting Common
Stock") based upon a formula that approximates the prevailing market price of
the Company's Common Stock. On October 15, 1999, the Company made a drawdown
of $16,000,000 under this facility and simultaneously converted the loan into
977,636 shares of its Non-Voting Common Stock, par value $.01 per share. The
Non-Voting Common Stock is convertible into Common Stock (a) at any time, at
Genentech's option or (b) automatically upon the sale or transfer of the Non-
Voting Common Stock to a non-affiliated party.
Pioneer Hi-Bred International, Inc.
Effective June 1, 1997, the Company entered into a Collaborative Research
and License Agreement with Pioneer Hi-Bred International, Inc. ("Pioneer Hi-
Bred") whereby the Company is to perform research that will be funded by
Pioneer Hi-Bred. In conjunction with the execution of this agreement, Pioneer
Hi-Bred made an equity investment of $7,500,000 in the form of 1,000,000
shares of Series D Convertible Preferred Stock (see Note 6). In addition,
Pioneer Hi-Bred paid the Company $2,500,000 per year, for the first 10 months,
in quarterly
B-34
<PAGE>
installments with the first payment prorated. In March of 1998, Pioneer Hi-
Bred increased the minimum annual research funding to $5,000,000 per year.
Pioneer Hi-Bred has the right to terminate the research program at any time
upon a breach by the Company and on three months' written notice at any time
after May 2000.
The $5,000,000 per year fee is based upon an established number of CuraGen
employees whom will be devoted to the Pioneer Hi-Bred research. In accordance
with the Company's revenue recognition policy as described in Note 1, revenue
has been recorded based upon work performed. For the years ended December 31,
1998 and 1999, the Company recorded revenue of $4,375,000 and $5,000,000
related to this agreement, which represented 47% and 33% of total revenue,
respectively. In addition, $1,250,000 has been received from Pioneer Hi-Bred
for which the related services have not been performed and, therefore, such
amount is recorded as deferred revenue at December 31, 1999.
Biogen, Inc.
In October 1997, the Company entered into a research collaboration and
database subscription arrangement with Biogen, Inc. ("Biogen") to discover
novel genes and therapeutics across a range of Biogen-specified disease
programs. The parties also expect to conduct pharmacogenomic analysis of
selected products and product candidates in Biogen's portfolio. The
collaboration, which calls for payments by Biogen for up to five years,
provides Biogen with access to the Company's proprietary genomics
technologies, including the GeneScape bioinformatics software platform in
order to generate GeneCalling and PathCalling databases from Biogen-specified
disease systems. Biogen has an option to acquire exclusive licenses to certain
discoveries arising from the collaboration. Biogen has the right to terminate
the research collaboration upon any breach by the Company of any material
obligation under the Biogen agreement or at any time after October 1999, on 30
days' written notice. Work performed and work that will be performed through
June 30, 2000 for Biogen under the arrangement has been and will be recognized
as revenue on a per employee basis. Beginning July 1, 2000, work performed for
Biogen by the Company under the arrangement will be recognized on a per
project basis. In addition, pursuant to the agreement, Biogen purchased
$5,000,000 of the Company's Common Stock in a private placement concurrent
with the Company's initial public offering at the initial public offering
price of $11.50 per share, and agreed to provide a $10,000,000 interest-
bearing loan facility. On October 15, 1999, the Company made a drawdown of
$10,000,000 under this facility and simultaneously converted the loan into
611,022 shares of its Common Stock.
For the years ended December 31, 1998 and 1999, the Company recorded revenue
of $1,500,000 and $2,100,000 related to this agreement which represented 16%
and 14% of total revenue, respectively.
Glaxo-Wellcome, Inc.
In November 1998, CuraGen and Glaxo-Wellcome, Inc. ("Glaxo") announced a
drug discovery collaboration to utilize CuraGen's integrated genomics
processes for the study and selection of Glaxo compounds for clinical
development. This pharmacogenomics collaboration, up to five years in
duration, is intended to enable Glaxo to select drug candidates with the
highest likelihood of success in clinical trials. Specifically, CuraGen will
evaluate numerous compounds across Glaxo therapeutic programs, identifying
gene responses associated with compound efficacy and toxicity.
For the year ended December 31, 1999, the Company recorded revenue of
$2,407,918 related to this agreement which represents 16% of total revenue.
However, $2,177,082 has been received from Glaxo for which the related
services have not been performed and, therefore, such amount is recorded as
deferred revenue at December 31, 1999.
Hoffman-La Roche Inc. and Roche Vitamins, Inc.
In March 1999, the Company signed a life sciences target discovery and
pharmacogenomics collaboration retroactively effective as of January 1, 1999
with Hoffmann-La Roche Inc. ("Roche Pharma") and its affiliate,
B-35
<PAGE>
Roche Vitamins, Inc. ("Roche Vitamins"). This agreement outlines strategic
partnerships with F. Hoffmann-La Roche Ltd. and its affiliates and is designed
to discover new drug targets, evaluate existing product candidates and
facilitate the development of drugs and diagnostic tests for the purposes of
improving human and animal health. Under the terms of this agreement, the
Company will receive research funding and may receive additional milestone and
royalty payments if any products emerge from this collaboration. The agreement
is for an initial term of two years and includes an option to extend for three
additional one-year terms.
For the year ended December 31, 1999, the Company recorded revenue of
$3,736,396 related to this agreement which represents 25% of total revenue.
However, $111,628 and $186,977 has been received from Roche Pharma and Roche
Vitamins, respectively, for which the related services have not been performed
and, therefore, such amounts are recorded as deferred revenue at December 31,
1999.
COR Therapeutics, Inc.
In May 1999, the Company signed a product discovery and pharmacogenomics
agreement with COR Therapeutics, Inc. ("COR"). Under the terms of this
agreement, CuraGen will apply its SeqCalling, GeneCalling, and PathCalling
technologies, related services, and pharmacogenomics expertise to identify new
drug targets and develop novel cardiovascular drugs. This collaboration is for
an initial term of eighteen months with an option to extend the collaboration
for three additional twelve-month terms. The Company may receive research
funding, milestone payments and royalty payments for products developed by COR
as a result of this collaboration.
Abgenix, Inc.
In December 1999, CuraGen entered into a collaboration agreement with
Abgenix, Inc. ("Abgenix") to develop and commercialize genomics-based antibody
drugs using Abgenix' XenoMouse(TM) technology. This five-year alliance has
been established to identify up to 120 fully human antibody drug candidates
intended for treating a broad range of complex diseases including cancer and
autoimmune disorders. Antibodies determined to have commercial product
potential will be allocated between the parties for further development.
Abgenix and the Company will receive reciprocating milestone payments and
royalty payments for products resulting from this drug development alliance.
In addition, under the agreement Abgenix purchased 418,995 shares of the
Company's Common Stock for $15,000,000.
5. Asset Impairment
During the fourth quarter of 1999, the Company undertook an upgrade of
scientific technologies and related lab equipment. Accordingly, on November 7,
1999, the Company signed an agreement with Comdisco for the acquisition of
certain lab equipment with a fair market value of approximately $2,400,000. As
a part of this transaction, the Company also purchased other lab equipment
recorded as a capital lease for approximately $3,600,000 from Transamerica
Business Credit Corporation ("TBCC"). The Comdisco agreement calls for the
exchange of the TBCC equipment for the Comdisco equipment. As a result of the
exchange of the TBCC equipment for the Comdisco equipment, the Company
recognized an asset impairment expense of approximately $2,700,000 in the
fourth quarter of 1999 in order to properly reflect our estimate of the fair
market value of the retired lab equipment in accordance with Statement of
Financial Accounting Standards No. 121 (Accounting for the Impairment of Long-
Lived Assets and for Long-lived Assets to be Disposed of). The newly acquired
Comdisco equipment will be treated as a capital lease in the amount of
$4,128,243.
6. Stockholders' Equity
Authorized Capital Stock
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value of $.01 per share ("Common Stock"), 5,000,000 shares
of Preferred Stock, par value of $.01 per share ("Preferred Stock") and
3,000,000 shares of Nonvoting Common Stock. In March 2000, the Board of
Directors of the
B-36
<PAGE>
Company unanimously approved an amendment to the Articles of Incorporation to
increase the number of authorized shares of Common Stock from 50,000,000 to
250,000,000 and to submit the proposed amendment to shareholders at the next
Annual Meeting of the Shareholders of the Company.
At December 31, 1997, the Company had reserved 1,583,666 shares of Common
Stock pursuant to outstanding warrants, 1,500,000 shares of Common Stock for
issuance pursuant to the 1993 Stock Option and Incentive Award Plan (the "1993
Stock Plan"), 1,500,000 shares of Common Stock for issuance pursuant to the
1997 Employee, Director and Consultant Stock Plan (the "1997 Stock Plan") and
570,000 shares of Common Stock for issuance pursuant to non-qualified stock
options. At December 31, 1998, the Company had reserved 1,583,666 shares of
Common Stock pursuant to outstanding warrants, 871,883 shares of Common Stock
for issuance pursuant to the 1993 Stock Plan, 1,500,000 shares of Common Stock
for issuance pursuant to the 1997 Stock Plan and 453,750 shares of Common
Stock for issuance pursuant to non-qualified stock options. At the May 1999
Annual Meeting of the Shareholders of the Company, the holders of shares of
the Corporation's Common Stock approved an amendment to and restatement of the
1997 Stock Option Plan to increase the number of shares of Common Stock
reserved for issuance of options granted pursuant to such Plan from 1,500,000
to 3,500,000. At December 31, 1999, the Company had reserved 1,583,666 shares
of Common Stock pursuant to outstanding warrants, 654,183 shares of Common
Stock for issuance pursuant to the 1993 Stock Plan, 3,500,000 shares of Common
Stock for issuance pursuant to the 1997 Stock Plan and 8,250 shares of Common
Stock for issuance pursuant to non-plan stock options.
Common Stock
In March 1998, the Company completed its initial public offering of
3,000,000 shares of its Common Stock and received net proceeds of $30,200,000.
Concurrently with completion of the initial public offering, the Company
privately placed an aggregate of 956,520 shares of Common Stock and received
net proceeds of $5,000,000 each from Biogen and Genentech, two of the
Company's collaborative partners and existing stockholders, and $1,000,000
from the University of Florida Research Foundation, Inc. Accordingly, the
combined net proceeds raised by the Company from the offering and the
concurrent private placements were $41,200,000. In addition, in April 1998,
the Company's underwriters exercised their option to purchase an additional
275,000 shares of Common Stock at a price of $11.50 per share to cover over-
allotments, providing CuraGen with additional net proceeds of $2,900,000.
In September 1999, the Company completed a private placement of 1,500,000
shares of unregistered Common Stock for an aggregate purchase price of
$15,000,000 to Pequot Partners Fund, L.P. and Pequot International Fund, Inc.
In October 1999, the Company drew down the $10,000,000 loan facility made
available to it under a certain Research and Option Agreement and Promissory
Note by and between the Company and Biogen each dated October 1, 1997
(collectively, the "Agreement"). The Company also exercised its option under
the Agreement to prepay the entire outstanding balance of $10,000,000 in
CuraGen Corporation Voting Common Stock. At the date of notice to Biogen, the
"Fair Market Value" of the Company's Common Stock (as defined in the
Agreement) was $16.366 per share. Accordingly, the Company issued Biogen
611,022 shares of its Voting Common Stock and $13.95 (representing .8522
fractional shares) in full satisfaction of the outstanding balance.
Also in October 1999, the Company drew down the $16,000,000 loan facility
made available to it under a certain Research and Option Agreement and
Promissory Note by and between the Company and Genentech each dated November
20, 1997 (collectively, the "Agreement "). The Company also exercised its
option under the Agreement to prepay the entire outstanding balance of
$16,000,000 in CuraGen Corporation Convertible Non-Voting Common Stock. At the
date of notice to Genentech, the "Fair Market Value" of the Company's Common
Stock (as defined in the Agreement) was $16.366 per share. Accordingly, the
Company issued Genentech 977,636 shares of its Convertible Non-Voting Common
Stock and $9.22 (representing .5636 fractional shares) in full satisfaction of
the outstanding balance.
B-37
<PAGE>
In December 1999, the Company completed a private placement of 418,995
shares of unregistered Common Stock for an aggregate purchase price of
$15,000,000 to Abgenix (see Note 4).
Stock Options
The Company's 1993 Stock Plan was adopted by the Company Board of Directors
and stockholders in December 1993 and subsequently amended by the Board of
Directors in May 1997. The 1993 Stock Plan provides for the issuance of stock
options and stock awards to officers, directors, advisors, employees, and
affiliates of the Company. Of the 1,500,000 shares of Common Stock which were
reserved for issuance under the 1993 Stock Plan, options to purchase 871,883
and 654,183 shares were granted and outstanding as of December 31, 1998 and
1999, respectively. The Company does not intend to grant any additional
options or awards under the 1993 Stock Plan.
A summary of all stock option activity under the 1993 Stock Plan during the
years ended December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Weighted
Number Average
of Shares Exercise Price
--------- --------------
<S> <C> <C>
Outstanding January 1, 1997........................... 541,550 $2.67
Granted............................................. 518,583 6.83
Canceled or lapsed.................................. (31,249) 3.29
---------
Outstanding December 31, 1997......................... 1,028,884 4.75
Granted............................................. -- --
Exercised........................................... (97,001) 2.5
Canceled or lapsed.................................. (60,000) 4.37
---------
Outstanding December 31, 1998......................... 871,883 5.02
Granted............................................. -- --
Exercised........................................... (109,900) 4.35
Canceled or lapsed.................................. (107,800) 7.08
---------
Outstanding December 31, 1999......................... 654,183 4.8
---------
Exercisable December 31, 1997......................... 347,611 3.32
---------
Exercisable December 31, 1998......................... 458,584 4.23
---------
Exercisable December 31, 1999......................... 449,461 4.11
---------
</TABLE>
B-38
<PAGE>
The following table summarizes information about stock options under the
1993 Stock Plan at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Average
Weighted Exercise
Number of Average Weighted Number of Price
Range of Options Contractual Average Options of Options
Exercise Prices Outstanding Life Exercise Price Exercisable Exercisable
--------------- ----------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$1.00-$2.50 162,700 5.3 years $2.11 156,100 $2.09
2.51- 4.10 242,550 6.7 years 3.47 173,228 3.44
4.11- 7.50 205,733 7.6 years 7.40 106,933 7.43
7.51-10.09 43,200 7.7 years 10.00 13,200 10.00
------- -------
654,183 6.7 years 4.80 449,461 4.11
======= =======
</TABLE>
In addition to the options granted under the 1993 Stock Plan, the Company
has granted non-plan options to purchase shares of Common Stock pursuant to
individual agreements with Company employees and consultants. As of December
31, 1998 and 1999, there were 453,750 and 8,250 options, respectively,
outstanding which are not part of a specific plan. These options incorporate
the provisions of the 1993 Stock Plan to the extent such provisions are not
inconsistent with the terms of those options.
A summary of all non-plan stock option activity during the years ended
December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Number Weighted
of Average
Shares Exercise Price
-------- --------------
<S> <C> <C>
Outstanding January 1, 1997............................ 456,000 $1.40
Granted.............................................. 114,000 4.10
Canceled or lapsed................................... -- --
--------
Outstanding December 31, 1997.......................... 570,000 1.94
Granted.............................................. -- --
Exercised............................................ (116,250) 1.17
Canceled or lapsed................................... -- --
--------
Outstanding December 31, 1998.......................... 453,750 2.14
Granted.............................................. -- --
Exercised............................................ (388,500) 1.88
Canceled or lapsed................................... (57,000) 4.1
--------
Outstanding December 31, 1999.......................... 8,250 1.00
--------
Exercisable December 31, 1997.......................... 349,500 1.31
--------
Exercisable December 31, 1998.......................... 315,000 1.68
--------
Exercisable December 31, 1999.......................... 8,250 1.00
--------
</TABLE>
B-39
<PAGE>
The following table summarizes information about non-plan stock options at
December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Number of Average Weighted
Range of Options Contractual Average
Exercise Prices Outstanding Life Excercise Price
--------------- ----------- -------------- ---------------
<S> <C> <C> <C>
$1.00-$2.50 8,250 4.0 Years $1.00
-----
<CAPTION>
Weighted
Average
Number of Exercise Price
Range of Options of Options
Exercise Prices Exercisable Exercisable
--------------- ----------- --------------
<S> <C> <C> <C>
$1.00-$2.50 8,250 $1.00
-----
</TABLE>
The Company's 1997 Stock Plan was approved by the Company's Board of
Directors and stockholders in October 1997. The 1997 Stock Plan provides for
the issuance of stock options and stock grants ("Stock Rights") to employees,
directors and consultants of the Company. A total of 1,500,000 shares of
Common Stock have been reserved for issuance under the 1997 Stock Plan. At the
May 1999 Annual Meeting of the Shareholders of the Company, the holders of
shares of the Corporation's Common Stock approved an amendment to and
restatement of the 1997 Stock Option Plan to increase the number of shares of
Common Stock reserved for issuance of options granted pursuant to such Plan
from 1,500,000 to 3,500,000. The 1997 Stock Plan is administered by the
Compensation Committee of the Board of Directors. The Compensation Committee
has the authority to administer the provisions of the 1997 Stock Plan and to
determine the persons to whom Stock Rights will be granted, the number of
shares to be covered by each Stock Right and the terms and conditions upon
which a Stock Right may be granted. At December 31, 1997, the Company had
65,000 options outstanding under the 1997 Stock Plan and an additional
1,435,000 available for grant. At December 31, 1998, the Company had 1,276,100
options outstanding under the 1997 Stock Plan and an additional 223,900
available for grant. As of December 31, 1999, the Company had 1,488,833
options outstanding under the 1997 Stock Plan and an additional 2,011,167
available for grant. In addition, 50,019 stock options have been exercised
under the 1997 Stock Plan as of December 31, 1999.
A summary of all stock option activity under the 1997 Stock Plan during the
years ended December 31, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Weighted
Number Average
of Shares Exercise Price
--------- --------------
<S> <C> <C>
Outstanding January 1, 1997........................... 65,000 11.50
Granted............................................. 1,306,100 8.73
Exercised........................................... -- --
Canceled or lapsed.................................. (95,000) 11.33
---------
Outstanding December 31, 1998......................... 1,276,100 8.68
Granted............................................. 599,500 9.66
Exercised........................................... (50,019) 9.14
Canceled or lapsed.................................. (336,748) 8.88
---------
Outstanding December 31, 1999......................... 1,488,833 9.02
---------
Exercisable December 31, 1997......................... 21,668 11.50
---------
Exercisable December 31, 1998......................... 70,383 10.98
---------
Exercisable December 31, 1999......................... 314,306 8.51
---------
</TABLE>
B-40
<PAGE>
The following table summarizes information about stock options under the
1997 Stock Plan at December 31, 1999:
<TABLE>
<CAPTION>
Weighted
Number of Average Weighted
Range of Options Contractual Average
Exercise Prices Outstanding Life Exercise Price
--------------- ----------- -------------- --------------
<S> <C> <C> <C>
$4.11-$7.50 596,933 8.4 years $ 6.60
7.51-10.00 360,000 9.5 years 7.75
10.01-11.94 373,900 8.1 years 11.37
11.95-16.81 158,000 9.7 years 15.51
---------
1,488,833 8.7 years 9.02
=========
<CAPTION>
Weighted
Average
Number of Exercise Price
Range of Options of Options
Exercise Prices Exercisable Exercisable
--------------- ----------- --------------
<S> <C> <C> <C>
$4.11-$7.50 183,940 $ 6.43
7.51-10.00 1,666 7.94
10.01-11.94 128,700 11.49
11.95-16.81 -- --
---------
314,306 8.51
=========
</TABLE>
Had compensation cost for the Company's stock option plans been determined
in accordance with SFAS 123, the Company's net loss attributable to common
stockholders and net loss per share attributable to common stockholders would
have approximated the pro forma amounts shown below for each of the years
ended December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------
1997 1998 1999
------------------------ -------------------------- --------------------------
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net loss attributable to
common stockholders.... $(7,290,434) $(7,891,326) $(18,936,960) $(20,095,345) $(25,762,760) $(28,452,852)
Net loss per share
attributable to common
stockholders........... $ (0.92) $ (1.00) $ (1.55) $ (1.65) $ (1.79) $ (1.98)
</TABLE>
The assumptions utilized by the Company in deriving the pro forma amounts
for the years ended December 31, 1997 are as follows: 1) 0% dividend yield, 2)
.1% expected volatility, 3) risk-free interest rate of approximately 6%, and
4) expected life of the options of 10 years. The assumptions utilized by the
Company in deriving the pro forma amounts for the year ended December 31, 1998
are as follows: 1) 0% dividend yield, 2) 50% expected volatility, 3) risk-free
interest rate of approximately 5.25%, and 4) expected life of the options of
10 years. The assumptions utilized by the Company in deriving the pro forma
amounts for the year ended December 31, 1999 are as follows: 1) 0% dividend
yield, 2) 102% expected volatility, 3) risk-free interest rate of
approximately 5.25%, and 4) expected lives of the options between 5.2 and 8.7
years. The weighted average grant date fair value of options granted during
the years ended December 31, 1997, 1998, and 1999 was approximately $6.14 per
share, $5.77 per share and $6.46 per share, respectively.
B-41
<PAGE>
Preferred Stock
The Company received aggregate consideration of $1,750,000 from five
investors as subscriptions for the purchase of 175,000 shares of Series B
Preferred Stock. In September 1996, October 1996 and January 1997, the Company
received proceeds of $1,600,000, $50,000 and $100,000, respectively. The
Series B Preferred Stock was non-convertible and accrued dividends at the
prime rate. Dividends were payable when declared by the Board of Directors.
Dividends in arrears at December 31, 1997 were $181,563. Upon completing a
qualified equity financing, as defined in the Series B Preferred Stock
Agreement, the Company was entitled to redeem all of the shares of the Series
B Preferred Stock. The completion of the Company's initial public offering
satisfied such requirement, and accordingly, in March 1998, the Company
redeemed all of such Series B Preferred Stock for an aggregate redemption
price of $1,750,000, plus accrued dividends and dividends in arrears.
In addition, holders of the Series B Preferred Stock received 5 year
warrants to purchase an aggregate of 358,361 shares of Common Stock at $5.86
per share, which warrants expire on March 27, 2002. Such warrants were valued
at $376,334. The value of such warrants was accreted over the warrant period
and such accretion was classified as preferred dividends. For the years ended
December 31, 1997 and 1998, such accretion amounted to $68,424 and $17,106,
respectively.
In December 1996, in connection with the Genentech Evaluation Agreement (see
Note 4), Genentech purchased 307,167 shares of Series A Preferred Stock for
$1,800,000, or $5.86 per share. In March 1997, the Company issued 2,011,468
shares of convertible Series C Preferred Stock for an aggregate purchase price
of $11,787,202. In addition, three year warrants were issued to certain
purchasers of the Series C Preferred Stock to purchase an aggregate of 366,894
shares of Common Stock at an exercise price of $9.00 per share. Such warrants
were valued at $0 upon issuance. In May 1997, as a result of the Pioneer Hi-
Bred Agreement (see Note 4), the Company issued 1,000,000 shares of Series D
Convertible Preferred Stock, for an aggregate purchase price of $7,500,000. In
June 1997, the Company issued 100,000 shares of Series E Convertible Preferred
Stock for an aggregate purchase price of $1,000,001.
In March 1998, upon the closing of the initial public offering of its Common
Stock, the Company automatically converted the Series A, C, D and E Preferred
Stock into shares of Common Stock on a 1 for 1 basis.
7. Income Taxes
The net deferred income tax assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Total deferred income tax assets................. $ 15,400,000 $ 30,200,000
Valuation allowance.............................. (15,400,000) (30,200,000)
------------ ------------
Total.......................................... $ 0 $ 0
============ ============
</TABLE>
The deferred income tax assets are primarily a result of the federal and
Connecticut net operating loss and research and development credit
carryforwards and timing differences relating to accrued payroll and
depreciation and amortization. As the Company has no prior earnings history, a
valuation allowance has been established due to the Company's uncertainty in
its ability to benefit from the federal and Connecticut net operating loss
carryforwards. The change in the valuation allowance was $4,068,000,
$9,470,000 and $14,800,000 for the years ended December 31, 1997, 1998 and
1999, respectively.
At December 31, 1999, the Company had federal and Connecticut net operating
loss carryforwards for income tax purposes of approximately $56,000,000 and
$51,000,000, respectively. Federal net operating loss carryforwards expire
beginning in 2008, and Connecticut net operating loss carryforwards began
expiring in 1998. The Company also had federal and Connecticut research and
development tax credit carryforwards for income tax purposes of approximately
$3,000,000 and $3,200,000, respectively at December 31, 1999.
B-42
<PAGE>
8. Grants
The Company has received federal grants for specific purposes that are
subject to review and audit by the grantor agencies. Such audits could lead to
requests for reimbursement by the grantor agency for any expenditures
disallowed under the terms of the grant. Additionally, any noncompliance with
the terms of the grant could lead to loss of current or future awards.
During 1995, the Company received two grants from CII in the amounts of
$450,000 and $237,500. The term of the $450,000 grant is January 4, 1995 to
December 31, 2004, and the term of the $237,500 grant is February 1, 1995 to
January 31, 2005. The Company could be required to repay 100% of these amounts
if during the terms of the respective grants (i) the Company breaches and
fails to cure a material covenant, (ii) a material representation or warranty
of the Company becomes untrue and is not cured, (iii) the Company becomes
bankrupt or insolvent or liquidates its assets, or (iv) the Company is
required to repay the federal grants to which the CII grants relate. In
addition, the Company could be required to repay up to 200% of the amounts of
the CII grants if the Company ceases to have a "Connecticut presence," during
the terms of the respective grants.
9. Subsequent Events
Convertible Debt Offering
On February 2, 2000, the Company completed an offering for $125,000,000 of
6% convertible subordinated debentures due 2007 and received net proceeds of
approximately $121,250,000. In addition, on February 16, 2000, the initial
purchasers exercised their option to purchase an additional $25,000,000 of 6%
convertible subordinated debentures due 2007, providing the Company with
additional net proceeds of approximately $24,308,000. The debentures may be
resold by the initial purchasers to qualified institutional buyers under Rule
144A of the Securities Act and to non-U.S. persons outside the United States
under Regulation S under the Securities Act. The debentures are convertible
into the Company's Common Stock. In addition, prior to February 2, 2003, if
the Company's Common Stock price reaches specified levels, it has the right to
redeem the debentures at a premium by converting the debentures into Common
Stock. If the price of the Company's Common Stock reaches $217.01 for 20 of 30
consecutive trading days prior to February 2, 2003, it may redeem all of the
debentures by converting them into Common Stock. If the Company was to convert
the debentures prior to February 2, 2003, in addition to the interest accrued
and unpaid, the Company would make an interest make-whole payment equal to the
present value of the aggregate amount of the interest that would otherwise
have accrued from the provisional redemption date through February 2, 2003.
The Company has agreed to file a registration statement with the SEC for the
resale of any shares issued as a result of the conversion of the debentures by
May 2000.
Stock Split
On March 2, 2000 the Company announced a two-for-one split of its Voting and
Non-Voting Common Stock payable to its stockholders in the form of a stock
dividend. On March 30, 2000, the Company's stockholders of record will receive
one additional share of its Voting Common Stock for every share of Voting
Common Stock and one additional share of Non-Voting Common Stock for every
share of Non-Voting Common Stock each stockholder owns at the close of
business on March 15, 2000.
As a result of this announcement, a proforma presentation of basic and
diluted net loss per share attributable to the Company's common stockholders
for the years ended December 31, 1997, 1998 and 1999 has been included on the
accompanying "Statements of Operations" (See Item 8. Financial Statements and
Supplementary Data).
B-43
<PAGE>
10. Supplemental Disclosure
Summary Selected Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1999:
Total revenues........... $ 2,671,943 $ 3,332,687 $ 4,311,737 $ 4,787,150
Total operating
expenses................ 10,181,137 9,366,833 9,557,768 12,847,939
Net loss attributable to
common stockholders..... (7,206,927) (5,925,143) (5,147,393) (7,483,297)
Net loss per common
share................... (0.54) (0.44) (0.37) (0.44)
1998:
Total revenues........... $ 1,989,572 $ 2,715,626 $ 2,308,015 $ 2,243,812
Total operating
expenses................ 5,193,696 5,785,697 7,329,895 10,808,811
Net loss attributable to
common stockholders..... (3,675,948) (2,499,017) (4,511,685) (8,250,270)
Net loss per common
share................... (0.4) (0.19) (0.34) (0.62)
</TABLE>
B-44
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
of CuraGen Corporation
New Haven, Connecticut
We have audited the accompanying balance sheets of CuraGen Corporation (the
"Company") as of December 31, 1998 and 1999, and the related statements of
operations, changes in stockholders' equity (deficiency) and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company at December
31, 1998 and 1999, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Hartford, Connecticut
January 19, 2000
(except as to Footnote 9, as to which the date is February 16, 2000 with
respect to the Convertible Debt Offering and March 2, 2000 with respect to the
Stock Split.)
B-45
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
The response to this item is incorporated by reference from the discussion
responsive thereto under the captions "Management" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in our Proxy Statement for the 2000
Annual Meeting of Stockholders.
Item 11. Executive Compensation
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Executive Compensation" in our Proxy
Statement for the 2000 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The response to this item is incorporated by reference from the discussion
responsive thereto under the caption "Security Ownership of Certain Beneficial
Owners and Management" in our Proxy Statement for the 2000 Annual Meeting of
Stockholders.
Item 13. Certain Relationships and Related Transactions
The response to this item is incorporated by reference from the discussion
responsive thereto under the captions "Executive Compensation-Employment
Agreements and Other Termination of Employment Agreements" and "Related
Transactions" in our Proxy Statement for the 2000 Annual Meeting of
Stockholders.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
Item 14 (a)(1) Financial Statements.
The following Financial Statements are included in Item 8:
Balance Sheets as of December 31, 1998 and 1999
Statements of Operations for the Year Ended December 31, 1997, 1998 and 1999
Statements of Changes in Stockholders' Equity (Deficiency) for the Year
Ended December 31, 1997, 1998 and 1999
Statements of Cash Flows for the Year Ended December 31, 1997, 1998 and 1999
Notes to Financial Statements
Independent Auditors' Report
Item 14 (a)(2) Financial Statement Schedules.
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
B-46
<PAGE>
Item 14 (a)(3) Exhibits.
The following is a list of exhibits filed as part of this Annual Report on
Form 10-K.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
@3.1 Amended and Restated Certificate of Incorporation of the
Registrant (Filed as Exhibit 3.3)
@3.2 Amended and Restated Bylaws of the Registrant (Filed as Exhibit
3.5)
@4.1 Article Fourth of the Amended and Restated Certificate of
Incorporation of the Registrant (Filed as Exhibit 4.1)
@4.2 Form of Common Stock Certificate (Filed as Exhibit 4.2)
%10.1 Memorandum of Lease Agreements dated December 23, 1996, October
27, 1997 and August 31, 1998 (New Haven) between the Registrant
and Fusco Harbour Associates, LLC (Filed as Exhibit 10.1)
#10.2 Lease, dated May 29, 1998, (Branford) by and between T.K.J.
Associates, LLC and the Registrant (Filed as Exhibit 10.1)
@10.3 Sid Martin Biotechnology Development Institute Incubator License
Agreement, dated July 15, 1997, between the Registrant and the
University of Florida Research Foundation, Inc. (Filed as
Exhibit 10.3)
10.4 1997 Employee, Director and Consultant Stock Plan, as amended and
restated through May 12, 1999 (Filed as Exhibit 10.4)
@10.5 1993 Stock Option and Incentive Award Plan (Filed as Exhibit 10.5)
@10.6 Amendment to 1993 Stock Option and Incentive Plan, dated May 12,
1997 (Filed as Exhibit 10.6)
$10.7 Form of Non-Qualified Stock Option Agreement with respect to
options to purchase an aggregate of 570,000 shares of Common
Stock (Filed as Exhibit 99.3)
+!10.8 Agreement, dated March 1999, by and among the Registrant, F.
Hoffmann-LaRoche Ltd., Roche Vitamins, Inc. and Hoffmann-
LaRoche, Inc. (Filed as Exhibit 10.1)
@10.9 Employment Letter, dated July 18, 1997, between the Registrant
and David M. Wurzer (Filed as Exhibit 10.8)
@10.10 Employment Letter, dated August 21, 1997, between the Registrant
and Peter A. Fuller, Ph.D. (Filed as Exhibit 10.9)
[email protected] Option and Exclusive License Agreement, dated October 4, 1996,
between the Registrant and Wisconsin Alumni Research Foundation
(Filed as Exhibit 10.11)
[email protected] Standard Non-Exclusive License Agreement--Brumley, dated July 1,
1996, between the Registrant and Wisconsin Alumni Research
Foundation (Filed as Exhibit 10.12)
[email protected] Collaborative Research and License Agreement, dated May 16, 1997,
between the Registrant and Pioneer Hi-Bred International, Inc.
(Filed as Exhibit 10.13)
[email protected] Research and Option Agreement, dated October 1, 1997, between the
Registrant and Biogen, Inc. (Filed as Exhibit 10.14)
[email protected] Research and Option Agreement, dated November 20, 1997, between
the Registrant and Genentech, Inc. (Filed as Exhibit 10.15)
[email protected] Notice of Grant Award and Grant Application to Department of
Health and Human Services for Automated Sequencing System for
Human Genome Project, dated March 25, 1995 (Filed as Exhibit
10.16)
@10.17 ATP Agreement for Integrated Microfabricated DNA Analysis Device
for Diagnosis of Complex Genetic Disorders, dated February 1995
(Filed as Exhibit 10.17)
@10.18 ATP Agreement for Molecular Recognition Technology for Precise
Design of Protein-Specific Drugs, dated March 2, 1995 (Filed as
Exhibit 10.18)
@10.19 ATP Agreement for Programmable Nanoscale Engines for Molecular
Separation, dated May 6, 1997 (Filed as Exhibit 10.19)
@10.20 Material Transfer and Screening Agreement, dated January 15,
1998, between the Registrant and ArQule, Inc. (Filed as Exhibit
10.20)
</TABLE>
B-47
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
+%10.21 Pharmacogenomics Research and License Agreement, dated November
18, 1998, by and between Glaxo Wellcome, Inc. and the Registrant
(Filed as Exhibit 10.21)
+&10.22 Agreement between COR Therapeutics, Inc. and the Registrant dated
May 1, 1999 (Filed as Exhibit 10.1)
10.23 Letter Agreement with Pequot Partners Fund, L.P. and Pequot
International Fund, Inc. (Filed as Exhibit 10.1)
*11.1 Schedule of Computation of Net Loss Per Share
*21.1 Subsidiaries of the Registrant
*23.1 Consent of Deloitte & Touche LLP
*27.1 Financial Data Schedule
</TABLE>
--------
* Filed herewith
@ Previously filed with the Commission as Exhibits to, and incorporated
herein by reference from, the Registrant's Registration Statement filed on
Form S-1, File No. 333-38051.
# Previously filed with the Commission and incorporated herein by reference
from the Form 10-Q, File No. 000-23223, for the period ending June 30,
1998.
% Previously filed with the Commission and incorporated herein by reference
from the Form 10-K, File No. 000-23223, for the year ended December 31,
1998.
! Previously filed with the Commission and incorporated herein by reference
from the Form 10-K, File No. 000-23223, for the year ended March 31, 1999.
& Previously filed with the Commission and incorporated herein by reference
from the Form 10-Q, File No. 000-23223, for the period ending June 30,
1999.
/ Previously filed with the Commission and incorporated herein by reference
from the Form 10-Q, File No. 000-23223, for the period ending September 30,
1999.
$ Previously filed as Exhibit 99.3 to the Company's Registration Statement on
Form S-8, File No. 333-56829, and incorporated herein by reference.
= Previously filed as Exhibit 99.1 to the Company's Registration Statement on
Form S-8, File No. 333-89465, and incorporated herein by reference.
+ Confidential Treatment has been granted by the Commission as to certain
portions.
Where a document is incorporated by reference from a previous filing, the
Exhibit number of the document in that previous filing is indicated in
parentheses after the description of such document.
Item 14 (b) Reports on Form 8-K
The following Reports on Form 8-K were filed by the Company during the
quarter ended December 31, 1999:
September 8, 1999--Item 5, Other Events--private placement of 1,500,000
shares of common stock to Pequot Capital Management, Inc.
December 20, 1999--Item 5, Other Events--private placement of 418,995 shares
of common stock to, and strategic alliance with, Abgenix, Inc.
B-48
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CuraGen Corporation
/s/ David M. Wurzer
Dated: March 7, 2000 By: _________________________________
David M. Wurzer
Executive Vice-President,
Treasurer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of Registrant
and in the capacities indicated on March 7, 2000.
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Jonathan M. Rothberg Chief Executive Officer, Chairman
______________________________________ of the Board of Directors and
Jonathan M. Rothberg President (principal executive
officer and director)
/s/ David M. Wurzer Executive Vice-President,
______________________________________ Treasurer and Chief Financial
David M. Wurzer Officer (principal financial and
accounting officer)
/s/ Richard H. Booth Director
______________________________________
Richard H. Booth
/s/ Vincent T. DeVita, Jr. Director
______________________________________
Vincent T. DeVita, Jr
/s/ Robert E. Patricelli Director
______________________________________
Robert E. Patricelli
/s/ Randy Thurman Director
______________________________________
Randy Thurman
</TABLE>
B-49
<PAGE>
[Logo of CuraGen Corporation]
