<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-----------------------
(Mark one)
[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
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-30347
----------------------------------
CURIS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3505116
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
61 MOULTON STREET, CAMBRIDGE, MA 02138
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 503-6500
---------------------------
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.
[x] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 31, 2000, there were 26,111,252 shares of the Registrant's Common
Stock, $0.01 par value per share, outstanding.
<PAGE>
CURIS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 3
Consolidated Statements of Operations for the three and nine months ended
September 30, 2000 and 1999 4
Consolidated Statements of Comprehensive Loss for the three
and nine months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
CURIS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 20,625,579 $ 2,751,069
Marketable securities 18,554,338 18,619,516
Marketable securities - restricted 4,988,831 -
Accounts receivable 100,430 60,296
Prepaid expenses and other 677,656 146,764
------------- -------------
Total current assets 44,946,834 21,577,645
PROPERTY, PLANT AND EQUIPMENT - net 7,437,337 2,130,158
NOTES RECEIVABLE FROM RELATED PARTIES 245,000 -
INTANGIBLE ASSETS (NOTE 4) 113,737,522 5,075,914
OTHER ASSETS 363,902 108,574
------------- -------------
TOTAL ASSETS $ 166,730,595 $ 28,892,291
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Debt and lease obligations - current portion $ 2,036,466 $ 347,323
Accounts payable 2,689,814 612,811
Accrued liabilities 4,547,209 2,556,913
Accrued compensation 824,636 944,270
------------- -------------
Total current liabilities 10,098,125 4,461,317
------------- -------------
DEBT AND LEASE OBLIGATIONS, net of current portion 3,500,798 1,009,388
------------- -------------
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 5,000,000 and 10,000,000
shares authorized at September 30, 2000 and December
31, 1999, respectively, none issued and outstanding - -
Common Stock, $0.01 par value, 125,000,000 and 15,000,000
shares authorized, 26,015,824 and 10,999,534 shares
issued and outstanding at September 30, 2000 and 260,158 109,995
December 31, 1999, respectively
Additional paid-in capital 619,675,656 144,937,416
Officer notes receivable (1,131,380) -
Deferred compensation (17,729,090) -
Accumulated other comprehensive income 4,921,987 -
Unrealized losses on marketable securities (44,876) (30,801)
Accumulated deficit (452,820,783) (121,595,024)
------------- --------------
Total stockholders' equity 153,131,672 23,421,586
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 166,730,595 $ 28,892,291
============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE>
CURIS, INC. AND SUBSIDIARY
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>
REVENUES:
Research and development revenues $ 65,955 $ 823,573 $ 743,813 $ 2,405,760
------------- ------------- ------------- -------------
COSTS AND EXPENSES (A):
Research and development 6,056,255 2,708,005 10,072,461 8,072,342
General and administrative 4,040,568 1,317,051 6,604,422 4,078,187
Stock-based compensation 9,356,112 - 12,495,590 64,000
Amortization of intangible assets 8,529,302 112,725 8,647,473 325,705
Loss on disposition of fixed assets 553,912 - 248,516 -
In-process research & development 294,800,000 - 294,800,000 -
------------- ------------- ------------- -------------
Total costs and expenses 323,336,149 4,137,781 332,868,462 12,540,234
------------- ------------- ------------- -------------
Net loss from operations (323,270,194) (3,314,208) (332,124,649) (10,134,474)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest and other income 580,706 366,177 1,164,252 1,617,577
Interest expense (179,747) (46,528) (265,362 (114,780)
------------- ------------- ------------- -------------
Total other income 400,959 319,649 898,890 1,502,797
------------- ------------- ------------- -------------
NET LOSS (322,869,235) (2,994,559) (331,225,759) (8,631,677)
ACCRETION AND REPURCHASE
COSTS ON SERIES 1998/A
PREFERRED STOCK - - - (2,395,559)
------------- ------------- ------------- -------------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS $(322,869,235) $(2,994,559) $(331,225,759) $(11,027,236)
============= ============= ============= =============
BASIC AND DILUTED NET LOSS
PER COMMON SHARE $ (15.19) $ (0.28) $ (22.59) $ (1.04)
============= ============= ============= =============
WEIGHTED AVERAGE COMMON
SHARES FOR BASIC AND
DILUTED NET LOSS
COMPUTATION 21,250,137 10,798,008 14,662,960 10,618,696
============= ============= ============= =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
NET LOSS $(322,869,235) $(2,994,559) $(331,225,759) $ (8,631,677)
UNREALIZED GAIN (LOSS) ON
MARKETABLE SECURITIES -
RESTRICTED (327,009) - 4,921,987 -
UNREALIZED GAIN (LOSS) ON
MARKETABLE SECURITIES 9,318 (109,043) (14,075) (109,043)
------------- ------------- ------------- -------------
COMPREHENSIVE LOSS $(323,186,926) $(3,103,602) $(326,317,847) $ (8,740,720)
============= ============= ============= =============
(A) The following summarizes the
departmental allocation of the stock-
based compensation charge:
Research and development $ 5,726,801 $ - $ 5,726,801 $ -
General and administration 3,629,311 - 6,768,789 64,000
------------- ------------- ------------- -------------
Total stock-based compensation $ 9,356,112 $ - $ 12,495,590 $ 64,000
============= ============= ============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE>
CURIS, INC. AND SUBSIDIARY
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 $(331,225,759) $ (8,631,677)
------------- ------------
Adjustments to reconcile net loss to net cash used:
Depreciation and amortization 634,595 736,761
Stock-based compensation expense 12,495,590 64,000
Amortization of lease discount 28,734 -
Reorganization expense adjustment 39,141 -
Non-cash interest on notes payable 12,782
Loss on disposition of fixed assets 248,516 -
Amortization of intangible assets 8,647,473 128,104
Write off of in-process research and development 294,800,000 -
Increase (decrease) in assets and liabilities:
Accounts receivable 160,451 547,074
Prepaid expenses and other current assets 295,489 101,767
Notes receivable from related parties 15,000 -
Other assets 86,666 -
Accounts payable and accrued liabilities (385,058) (2,372,684)
Deferred contract revenue - (2,250,000)
------------- ------------
Total adjustments 317,079,379 (3,044,978)
------------- ------------
Net cash used for operating activities (14,146,380) (11,676,655)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of marketable securities, net 26,040,734 26,208,936
Purchase of marketable securities (8,226,957) (7,391,106)
Expenditures for property, plant and equipment (537,260) (593,777)
Proceeds from sale of fixed assets 675,000 -
Expenditures for patents (563,882) (551,158)
Repayment of note receivable - officer - 116,668
------------- ------------
Net cash provided by investing activities 17,387,635 17,789,563
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received from acquisition of Ontogeny & Reprogenesis, net
of acquisition costs 10,788,955 -
Issuance of common stock 4,208,860 674,464
Warrant exercises 307,561 -
Repurchase of Series 1998/A Preferred Stock - (22,470,347)
Increase in obligations under capital leases - 311,031
Repayments of obligations under capital leases (672,121) (170,798)
------------- ------------
Net cash provided by (used for) financing activities 14,633,255 (21,655,650)
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,874,510 (15,542,742)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,751,069 17,738,044
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,625,579 $ 2,195,302
============= ============
SUPPLEMENTAL DISCLOSURE OF NON CASH
INVESTING AND FINANCING ACTIVITIES:
Property and equipment purchased under capital lease obligations $ - $ 313,512
Officer notes payable for exercise of stock options $ 1,131,380 $ -
Conversion of Series 1998/A Preferred Stock to Common Stock $ - $ 2,978,000
============= ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
<PAGE>
CURIS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Operations - Curis, Inc. (the "Company"), incorporated on February 14, 2000
and formed to effect the merger discussed below in Note 2, focuses its
efforts in the area of regenerative medicine and uses its functional
genomics expertise on developmentally regulated pathways to (i) activate
cellular development pathways to promote repair and normal function and (ii)
inhibit abnormal growth pathways to treat certain types of cancer. The
Company has identified product leads from its experience in working with
protein factors, cell therapies, biomaterials, tissue engineering and small
molecules.
2. Merger - On July 31, 2000, Creative BioMolecules, Inc., a Delaware
corporation ("Creative"), Ontogeny, Inc., a Delaware corporation
("Ontogeny") and Reprogenesis, Inc., a Texas corporation ("Reprogenesis")
merged (the "Merger") with and into the Company, pursuant to an Agreement
and Plan of Merger dated as of February 14, 2000 (the "Merger Agreement").
On July 31, 2000, the Company, as the surviving company of the Merger,
assumed the rights and obligations of Creative, Ontogeny and Reprogenesis.
Immediately after the Merger, the Company was owned approximately 43% by the
former stockholders of Creative, 38% by the former stockholders of Ontogeny
and 19% by the former stockholders of Reprogenesis. Consequently, for
accounting purposes, the Company is deemed to be the successor to Creative,
and the historical financial statements of Creative have become the
historical financial statements of the Company. The Merger has been
accounted for as a purchase of Ontogeny and Reprogenesis in accordance with
Accounting Principles Board (APB) Opinion No. 16 and accordingly, Ontogeny's
and Reprogenesis' operating results since the Merger date are included in
the accompanying financial statements.
Pursuant to the Merger Agreement, the following conversion ratios were
applied to the outstanding securities of Creative, Ontogeny and
Reprogenesis:
o Creative's common stockholders and the holders of options or warrants to
acquire the common stock of Creative received or are entitled to
receive, upon the exercise of options or warrants, an aggregate number
of shares of the Company's common stock equal to 0.3000 multiplied by
the number of shares of Creative common stock outstanding or subject to
options or warrants;
o Ontogeny's capital stockholders and the holders of options or warrants
to acquire the capital stock of Ontogeny received or are entitled to
receive, upon the exercise of options or warrants, an aggregate number
of shares of the Company's common stock equal to 0.2564 multiplied by
the number of shares of Ontogeny capital stock outstanding or subject to
options or warrants; and
o Reprogenesis' capital stockholders and the holders of options or
warrants to acquire the capital stock of Reprogenesis received or are
entitled to receive, upon the exercise of options or warrants, an
aggregate number of shares of the Company's common stock equal to 0.1956
multiplied by the number of shares of Reprogenesis capital stock
outstanding or subject to options or warrants.
In accordance with APB No. 16, the purchase price for Ontogeny and
Reprogenesis has been allocated to the assets and liabilities of Ontogeny
and Reprogenesis based on their fair values. The aggregate purchase price
based on the fair market value of Creative common stock was $300,731,000 and
$149,000,000 for Ontogeny and Reprogenesis, respectively, including the
value of the outstanding options and warrants exchanged for options and
warrants to purchase the Company's common stock and the transaction costs
related to the Merger.
The purchase price of Ontogeny and Reprogenesis was allocated to the assets
acquired based upon an independent appraisal which used proven valuation
tools and techniques. Significant portions of the purchase price were
identified as intangible assets which included in-process research and
development (IPR&D) of $294,800,000 and assembled workforce of $500,000. The
excess of the purchase price over the fair value of identified tangible and
intangible net assets of $105,477,000 has been allocated to goodwill.
Intangible assets are being amortized over their estimated useful lives of 4
to 5 years. The fair value of the IPR&D relating to current in-process
research and development projects was recorded as an expense as of the
Merger date.
6
<PAGE>
The acquired IPR&D consist of development work to date on 11 primary
projects and 6 primary projects, respectively, for Ontogeny and
Reprogenesis. The technology resulting from these development efforts offer
no alternative uses in the event that they prove not to be feasible. If a
technology fails to achieve FDA approval or was considered for an alternate
use, it would be subjected to the risk associated with another series of
clinical trials. The new use would also face regulatory risk associated with
the FDA approval process.
The aggregate purchase price of $449,731,000, including acquisition costs,
was allocated as follows:
<TABLE>
<S> <C>
Current assets $ 32,082,000
Property, plant and equipment 6,328,000
Assembled workforce 500,000
In-process research & development 294,800,000
Prepaid compensation 19,146,000
Other assets 542,000
Goodwill 105,477,000
Assumed liabilities (9,144,000)
------------
$449,731,000
============
</TABLE>
Unaudited pro forma operating results for the Company, assuming the Merger
occurred at the beginning of the periods presented are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,597,328 $ 2,047,765 $ 4,223,866 $10,061,972
Net Loss $32,398,866 $15,904,933 $71,244,607 $38,847,767
Net Loss per share $ (1.25) $ (0.69) $ (2.75) $ (1.85)
</TABLE>
For purposes of these pro forma operating results, the IPR&D was assumed to
have been written off prior to the proforma periods, so that the operating
results presented only include recurring costs.
3. Basis of Presentation - The accompanying consolidated financial statements
of the Company have been prepared in accordance with generally accepted
accounting principles applicable to interim periods. These statements,
however, are condensed and do not include all disclosures required by
generally accepted accounting principles for complete financial statements
and should be read in conjunction with the Company's joint proxy statement-
prospectus as filed with the Securities and Exchange Commission on June 19,
2000.
In the opinion of the Company, the unaudited financial statements contain
all adjustments (all of which were considered normal and recurring)
necessary to present fairly the Company's financial position at September
30, 2000 and the results of operations and cash flows for the three month
periods ended September 30, 2000 and 1999 and for the nine month periods
ended September 30, 2000 and 1999. The preparation of the Company's
consolidated financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts and disclosure of certain assets and
liabilities at the balance sheet date. Such estimates include the carrying
value of property and equipment and intangible assets and the value of
certain liabilities. Actual results may differ from such estimates.
These interim results are not necessarily indicative of results for a full
year and such results are subject to year-end adjustments and independent
audit.
7
<PAGE>
4. Intangible Assets -
Intangible assets consisted of the following at September 30, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
Goodwill $105,477,000 $ -
Patents 1,297,000 5,988,000
Assembled workforce 500,000 -
Prepaid compensation 19,146,000 -
------------- -------------
126,420,000 5,988,000
Less: accumulated amortization (12,682,000) (912,000)
-------------- -------------
$113,738,000 $5,076,000
============== =============
</TABLE>
Goodwill totaling $105,477,000 and assembled workforce of $500,000 are
being amortized over their estimated useful lives of 4 to 5 years.
Accumulated amortization as of September 30, 2000 was $3,863,000 and
$17,000 for goodwill and assembled workforce, respectively. The Company has
capitalized certain costs associated with the successful filing of patent
applications and has included them as a component of other assets in the
accompanying consolidated balance sheet. Patent costs of $1,297,000 are
being amortized over their estimated useful lives, not to exceed 17 years.
The Company applies the provision of Statements of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires that long-
lived assets be reviewed for impairment by comparing the fair value of the
assets with their carrying amount. Any write-downs are to be treated as
permanent reductions in the carrying amount of the assets. Accordingly, the
Company evaluates the possible impairment of goodwill and other assets at
each reporting period based on the projected cash flows of the related
asset. During the third quarter of 2000, the Company performed a review of
the cost of its capitalized patents. This review resulted in an impairment
charge of approximately $4,611,000 to reduce the carrying value of those
patents determined not expected to be beneficial or to be utilized in
future operations and which have no alternative future use. This amount has
been included under the heading "Amortization of intangibles" in the
accompanying consolidated statement of operations for the three and nine
months ended September 30, 2000.
As a result of the Merger (see Note 2), the Company recorded an asset of
$19,146,000 related to the value of unvested stock options held by
employees and consultants of Ontogeny. The Company is amortizing this
amount over the vesting period of the stock options ending on August 1,
2001. As of September 30, 2000, amortization related to these options
totaled $8,378,000.
8
<PAGE>
5. Long-Term Debt, Capital Lease Obligations and Operating Leases -
(i) Long-term debt and capital lease obligations consisted of the following
at September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Notes payable to a financing agency for fixed asset purchases $ 1,775,000 $ -
Notes payable to Genetics Institute for technology
purchases payable in the Company's common stock 394,000 -
Obligations under capital leases, net of $79,000 discount at 3,368,000 1,357,000
September 30, 2000 ------------- ------------
Less current portion 5,537,000 1,357,000
(2,036,000) (348,000)
Total long-term debt and capital lease obligations $ 3,501,000 $1,009,000
=========== ==========
</TABLE>
(ii) Future minimum operating lease payments for the respective periods
ended December 31 are as follows:
<TABLE>
<CAPTION>
Operating Leases
-----------------------------------------------------------------------------------------------------------
<S> <C>
Q4 2000 $ 561,000
2001 2,270,000
2002 1,709,000
2003 1,490,000
2004 1,474,000
After 2004 5,035,000
-----------
Minimum lease payments $12,539,000
===========
</TABLE>
6. Subsequent Events - On October 5, 2000, the Company announced the receipt of
a second $2,000,000 grant from the National Institute of Standards and
Technology (NIST) to support the development of a new class of biomaterials
designed to enable surgical procedures that augment, repair or regenerate
lost structural tissue or physiological function. The grant period is from
November 1, 2000 to October 31, 2003. Previously, the Company was awarded
another $2,000,000 grant from NIST to support the development of its
cardiovascular products, Vascugel and Vascuject. The grant period for the
first NIST grant is from November 1, 1999 to October 31, 2002.
On October 9, 2000, the Company sold 107,143 shares of Exelixis, Inc.
common stock at a price of $18.625 per share for total net proceeds of
$1,995,000. These securities are included on the Company's balance sheet
as of September 30, 2000 under the category "Marketable securities -
restricted." The fair market value of the shares as of September 30, 2000
was $3,362,000. The decline in value of $1,367,000 will be reflected in
the Company's statement of operations for the period ending December 31,
2000. In addition, the Company holds a warrant to purchase 53,571 shares
of Exelixis, Inc. common stock at a price of $1.00 per share exercisable
until January 27, 2005. The value of this warrant is included in the
Company's balance sheet as of September 30, 2000 under the category
"Marketable securities - restricted" with a fair market value of $1,627,000
representing the difference between the exercise price and the market value
per share of the underlying common stock at September 30, 2000.
9
<PAGE>
7. New Accounting Standards - In June 1998, the Financial Accounting Standards
Board, or FASB, released Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities". SFAS
No. 133 establishes standards for reporting and accounting for derivative
instruments, including derivative instruments embedded in other contracts,
and for hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in its balance sheet and measure
those instruments at fair value. Pursuant to SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133", SFAS No. 133 is effective for all quarters
of fiscal years beginning after June 15, 2000. SFAS No. 133 is not expected
to have a material impact on the Company's consolidated financial
statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation"- An Interpretation of
APB Opinion No. 25. The interpretation clarifies the application of APB
Opinion No. 25 in specified events, as defined. The interpretation is
effective July 1, 2000 but covers certain events occurring during the
period after December 15, 1998, but before the effective date. To the
extent that events covered by this interpretation occur during the period
after December 31, 1998, but before the effective date, the effects of
applying this interpretation would be recognized on a prospective basis
from the effective date. Accordingly, upon initial application of the
final interpretation, (i) no adjustments would be made to the financial
statements for periods before the effective date and (ii) no expense would
be recognized for any additional compensation cost measured that is
attributable to periods before the effective date. The Company does not
expect that the adoption of this interpretation will have any effect on the
Company's financial statements.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Merger - On July 31, 2000, Creative BioMolecules, Inc., a Delaware corporation
("Creative"), Ontogeny, Inc., a Delaware corporation ("Ontogeny") and
Reprogenesis, Inc., a Texas corporation ("Reprogenesis") merged (the "Merger")
with and into Curis, pursuant to an Agreement and Plan of Merger dated as of
February 14, 2000 (the "Merger Agreement"). On July 31, 2000, Curis, as the
surviving company of the Merger, assumed the rights and obligations of Creative,
Ontogeny and Reprogenesis. Immediately after the Merger, Curis was owned
approximately 43% by the former stockholders of Creative, 38% by the former
stockholders of Ontogeny and 19% by the former stockholders of Reprogenesis.
Consequently, for accounting purposes, Curis is deemed to be the successor to
Creative, and the historical financial statements of Creative have become the
historical financial statements of Curis. The Merger has been accounted for as
a purchase of Ontogeny and Reprogenesis in accordance with Accounting Principles
Board (APB) Opinion No. 16 and accordingly, Ontogeny's and Reprogenesis'
operating results since the Merger date are included in the accompanying
financial statements.
In accordance with APB No. 16, the purchase price for Ontogeny and Reprogenesis
has been allocated to the assets and liabilities of Ontogeny and Reprogenesis
based on their fair values. The aggregate purchase price based on the fair
market value of Creative common stock was $300,731,000 and $149,000,000 for
Ontogeny and Reprogenesis, respectively, including the value of the outstanding
options and warrants exchanged for options and warrants to purchase the common
stock of Curis and the transaction costs related to the Merger.
The purchase price of Ontogeny and Reprogenesis was allocated to the assets
acquired based upon an independent appraisal which used proven valuation tools
and techniques. Significant portions of the purchase price were identified as
intangible assets which included in-process research and development (IPR&D) of
$294,800,000 and assembled workforce of $500,000. The excess of the purchase
price over the fair value of identified tangible and intangible net assets of
$105,477,000 has been allocated to goodwill. Intangible assets are being
amortized over their estimated useful lives of 4 to 5 years. The fair value of
the IPR&D relating to current in-process research and development projects was
recorded as an expense as of the Merger date.
Unaudited pro forma operating results for Curis, assuming the Merger occurred at
the beginning of the periods presented are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,597,328 $ 2,047,765 $ 4,223,866 $10,061,972
Net Loss $32,398,866 $15,904,933 $71,244,607 $38,847,767
Net Loss per share $ (1.25) $ (0.69) $ (2.75) $ (1.85)
</TABLE>
For purposes of these pro forma operating results, the IPR&D was assumed to have
been written off prior to the proforma periods, so that the operating results
presented only include recurring costs.
Operating expenses for the three and nine months ended September 30, 2000
include the operating expenses of Creative for the three and nine months then
ended and the operating expenses for Ontogeny and Reprogenesis for the period
from August 1, 2000, to September 30, 2000. Operating expenses for the three and
nine months ended September 30, 1999 include the operating expenses of Creative
for such periods. Accordingly, comparisons of operating expenses between the
2000 and the 1999 periods may not prove to be meaningful. Additionally, in the
three months ended September 30, 2000, there are several expenses incurred by
Curis which are a direct result of the Merger and may not be recurring.
11
<PAGE>
RESULTS OF OPERATIONS
REVENUES
Research and development contract revenues decreased 92% to $66,000 for the
three month period ended September 30, 2000 from $824,000 for the three month
period ended September 30, 1999 and decreased 69% to $744,000 for the nine month
period ended September 30, 2000 from $2,406,000 for the nine month period ended
September 30, 1999. The decrease in research and development contract revenues
from 1999 to 2000 was primarily the result of the termination of a research
agreement with Biogen, Inc. in 1999 partially offset by revenues of $56,000
earned under a National Institute of Standards and Technology (NIST) grant
received in November 1999.
OPERATING EXPENSES
Research and development expenses increased 124% to $6,056,000 for the three
month period ended September 30, 2000 from $2,708,000 for the three month period
ended September 30, 1999 and increased 25% to $10,072,000 for the nine month
period ended September 30, 2000 from $8,072,000 for the nine month period ended
September 30, 1999. The increase was primarily due to the impact of the Merger
which occurred on July 31, 2000. Research and development expenses for the
three and nine months ended September 30, 2000 include the costs incurred by the
combined companies for the period from August 1, 2000 to September 30, 2000.
These include the cost of 107 people involved in research and development of
$2,000,000, external lab services including clinical trials of $1,300,000, and
facility related costs of $500,000. In addition, research and development
expenses for the three and nine months ended September 30, 2000 include
severance paid to former officers of Creative totaling $656,000, and severance
payments relating to the termination of seven employees totaling $251,000. We
anticipate that research and development expenses for the fourth quarter of 2000
will be slightly lower than the three month period ended September 30, 2000 as a
result of efficiencies realized as a result of the Merger which was completed on
July 31, 2000 and the severance incurred during the three months ended September
30, 2000.
General and administrative expenses increased 207% to $4,041,000 for the three
month period ended September 30, 2000 from $1,317,000 for the three month period
ended September 30, 1999 and increased 62% to $6,604,000 for the nine month
period ended September 30, 2000 from $4,078,000 for the nine month period ended
September 30, 1999. The increase was primarily due to costs incurred by the
combined companies for the period from August 1, 2000 to September 30, 2000
which included personnel related costs of $500,000, legal and professional fees
of $785,000, and insurance expense of $400,000. In addition, general and
administrative expenses for the three and nine months ended September 30, 2000
includes severance paid to former officers of the acquiring entity of $926,000,
severance payments relating to the termination of approximately eight employees
totaling $122,000. We anticipate that general and administrative expenses for
the last quarter of 2000 will be slightly lower than the three month period
ended September 30, 2000 as a result of efficiencies realized as a result of the
Merger which was completed on July 31, 2000 and the severance incurred during
the three months ended September 30, 2000.
Stock-based compensation was $9,356,000 for the three month period ended
September 30, 2000. There was no stock-based compensation for the three month
period ended September 30, 1999. Stock-based compensation increased to
$12,496,000 for the nine month period ended September 30, 2000 from $64,000 for
the nine month period ended September 30, 1999. The increase in both the three
and nine month periods was primarily due to $6,623,000 of amortization expense
related to prepaid compensation resulting from the Merger which is being
amortized over the vesting period of the underlying options through August 1,
2001. Additionally, a one-time non-cash charge of $3,139,000 was recorded on
February 8, 2000 related to the acceleration of certain stock options and the
extension of the exercise period for options held by Creative's executive
officers and outside directors. Also, 57,094 shares of restricted common stock
granted to a former Reprogenesis executive officer became fully vested as
unrestricted common stock upon the Merger. Total expense included in both the
three and nine month periods related to these shares was $1,623,000. Lastly, on
August 18, 2000, we issued 3,474,006 options to employees of Curis with an
exercise price below market value resulting in deferred compensation of
$18,233,000 which is being amortized over the four-year vesting period of the
shares beginning on August 1, 2000. The total expense included in both the
three and nine month periods related to these options is $749,000.
12
<PAGE>
Amortization of intangible assets was $8,529,000 for three month period ended
September 30, 2000 as compared to $113,000 for the three month period ended
September 30, 1999 and was $8,647,000 for the nine months ended September 30,
2000, as compared to $326,000 for the nine month period ended September 30,
1999. The increase was partially due to the amortization of goodwill totaling
$3,863,000 and the amortization of assembled workforce totaling $17,000 in both
the three and nine months ended September 30, 2000 incurred as a result of the
Merger. In addition, during the three and nine months ended September 30, 2000,
we incurred an impairment charge of approximately $4,611,000 to reduce the
carrying value of capitalized patents determined not to be beneficial or to be
utilized in future operations and which have no alternative future use. Patent
impairment charges for the three and nine month periods ended September 30, 1999
were approximately $40,000 and $128,000, respectively.
A fixed asset disposition charge of $554,000 was incurred during the third
quarter of 2000 for the book value of equipment disposed of as a result of the
Merger.
A charge of $294,800,000 was incurred on July 31, 2000 resulting from that
portion of the purchase price of Ontogeny and Reprogenesis that were identified
as IPR&D. The purchase price of Ontogeny and Reprogenesis was allocated to the
assets acquired, including IPR&D, based upon an independent appraisal which used
proven valuation tools and techniques.
OTHER INCOME (EXPENSES)
Interest income for the three months ended September 30, 2000 was approximately
$581,000 compared to approximately $366,000 for the same period in 1999, an
increase of $215,000 or 59%. The increase in interest income for the three
month period resulted primarily from a higher available investment balance as
compared to the prior year as a result of the Merger. For the nine months ended
September 30, 2000, interest income was $1,164,000 compared to $1,618,000 for
the nine months ended September 30, 1999, a decrease of $454,000 or 28%. The
decrease in interest income for the nine month period resulted primarily from a
lower average available investment balance as compared to the prior year.
Interest expense for the three months ended September 30, 2000 was $180,000
compared to $47,000 for the same period in 1999, an increase of $133,000 or
283%. For the nine months ended September 30, 2000, interest expense was
$265,000 compared to $115,000 for the nine months ended September 30, 1999, an
increase of $150,000 or 130%. The increase in interest expense for both the
three and nine month periods resulted primarily from the consolidation into
Curis of the outstanding lease obligations of the three companies prior to the
merger.
NET LOSS
As a result of the foregoing, we incurred a net loss of $322,869,000 and
$331,226,000 for the three and nine month periods ended September 30, 2000,
respectively, compared to a net loss of $2,995,000 and $11,027,000 for the three
and nine month periods ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, our principal sources of liquidity consisted of cash,
cash equivalents and marketable securities of $44,169,000. We have financed our
operations primarily through placements of equity securities, revenues received
under agreements with collaborative partners, manufacturing contracts and the
sale of certain of our OP-1 manufacturing rights and facilities to Stryker.
Net cash used in operating activities was $14,146,000 for the nine month period
ended September 30, 2000 compared to $11,677,000 for the nine month period ended
September 30, 1999. The increase was primarily due to the impact of the Merger.
We increased our investment in property, plant and equipment to $7,437,000 at
September 30, 2000 from $2,130,000 at December 31, 1999. The increase resulted
primarily from assets obtained as a result of the Merger. We currently plan to
spend approximately $2,500,000 during the last quarter of 2000 and approximately
$6,000,000 in 2001 on leasehold improvements and equipment purchases to upgrade
our research and development facilities.
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<PAGE>
On October 5, 2000, we announced the receipt of a second $2,000,000 grant from
the National Institute of Standards and Technology (NIST) to support the
development of a new class of biomaterials designed to enable surgical
procedures that augment, repair or regenerate lost structural tissue or
physiological function. The grant period is from November 1, 2000 to October 31,
2003. Previously, we were awarded another $2,000,000 grant from NIST to support
the development of our cardiovascular products, Vascugel and Vascuject. The
grant period for the first NIST grant is from November 1, 1999 to October 31,
2002.
On October 9, 2000, we sold 107,143 shares of Exelixis, Inc. common stock at
a price of $18.625 per share for total net proceeds of $1,995,000. These
securities are included on our balance sheet as of September 30, 2000 under
the category "Marketable securities - restricted". The fair market value of the
shares as of September 30, 2000 was $3,362,000. The decline in value of
$1,367,000 will be reflected in our statement of operations for the period
ending December 31, 2000. In addition, we hold a warrant to purchase 53,571
shares of Exelixis, Inc. common stock at a price of $1.00 per share exercisable
until January 27, 2005. The value of this warrant is included in our balance
sheet as of September 30, 2000 under the category "Marketable securities -
restricted" with a fair market value of $1,627,000 representing the difference
between the exercise price and the market value per share of the underlying
common stock at September 30, 2000.
In November 1998, we sold certain of our OP-1 manufacturing rights and
facilities to Stryker for total proceeds of approximately $19,530,000. We
expect that under the terms of the sale, we will receive royalties in excess of
the current minimum royalties received from Stryker products, if approved for
commercial sale.
We anticipate that our existing capital resources should enable us to maintain
our current and planned operations into the fourth quarter of 2001. We expect
to incur substantial additional research and development and other costs,
including costs related to preclinical studies and clinical trials. Our ability
to continue funding planned operations is dependent upon our ability to generate
sufficient cash flow from royalties on Stryker products, if approved for
commercial sale, from collaborative arrangements and from additional funds
through equity or debt financings, or from other sources of financing, as may be
required. We are seeking additional collaborative arrangements and also expect
to raise funds through one or more financing transactions, if conditions permit.
Over the longer term, because of our significant long-term capital requirements,
we intend to raise funds through the sale of debt or equity securities when
conditions are favorable, even if we do not have an immediate need for
additional capital at such time. There can be no assurance that additional
financing will be available or that, if available, it would be available on
favorable terms. In addition, the sale of additional debt or equity securities
could result in dilution to our stockholders. If Stryker products are not
approved for commercial sale and we do not receive royalties from Stryker and/or
if substantial additional funding is not available, our business will be
materially and adversely affected.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board, or FASB, released
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes standards for
reporting and accounting for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. It
requires an entity to recognize all derivatives as either assets or liabilities
in its balance sheet and measure those instruments at fair value. Pursuant to
SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133", SFAS No. 133 is
effective for all quarters of fiscal years beginning after June 15, 2000. SFAS
No. 133 is not expected to have a material impact on Curis' consolidated
financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation"- An Interpretation of APB
Opinion No. 25. The interpretation clarifies the application of APB Opinion No.
25 in specified events, as defined. The interpretation is effective July 1,
2000 but covers certain events occurring during the period after December 15,
1998, but before the effective date. To the extent that events covered by this
interpretation occur during the period after December 31, 1998, but before the
effective date, the effects of applying this interpretation would be recognized
on a prospective basis from the effective date. Accordingly, upon initial
application of the final interpretation, (i) no adjustments would be made to the
financial statements for periods before the effective date and (ii) no expense
would be recognized
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<PAGE>
for any additional compensation cost measured that is attributable to periods
before the effective date. We do not believe that the adoption of this
interpretation will have any effect on our financial statements.
CAUTIONARY FACTORS WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
concerning our business, operations and financial conditions. All our
statements, other than statements on of historical facts, included in this
Report, including plans and objectives are forward-looking statements. These
statements reflect our expectations about our future performance, contain
projections of our future operating results and future financial condition, or
other forward-looking" information.
We caution investors that investing in our common stock involves a high degree
of risk. There is no guarantee that our actual results or actual business
conditions will not differ materially from those forward-looking statements made
in this Report. The risks and uncertainties may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations would likely suffer.
o RISKS RELATED TO THE MERGER - We began operations on July 31, 2000 following
the approval of the merger of Creative Biomolecules, Ontogeny, and
Reprogenesis into Curis on July 31, 2000 (the "merger"). Prior to the merger,
there was no public market for the common stock. Because the market for the
common stock is new, the stock price may be volatile and may lead to losses
by investors and result in securities litigation. In addition, we are apt to
face challenges in integrating Creative, Ontogeny and Reprogenesis, retaining
and recruiting key personnel and management. If we are unable to effectively
manage these integration issues, we may not realize the expected benefits of
the merger.
o RISKS RELATED TO OPERATIONS -
o We have not developed or commercialized any products to date, and if we or
our collaborative partners do not complete development of and
commercialize any products, we may not be profitable.
o We are dependent on current and future collaborative partners to provide
staffing, funds and other resources for research and development and to
commercialize many of our products. Any failure or delay by these partners
in financing, developing or commercializing our products could eliminate
significant portions of our anticipated product pipeline. Development,
registration and marketing of the OP-1 Device, in particular, is entirely
dependent on Stryker.
o We face substantial competition because many of the products in our
research and development portfolio compete with existing and future
products being created by pharmaceutical, biopharmaceutical, and
biotechnology companies as well as academic research institutions. Many of
these competitors have substantially greater capital resources, research
and development staffs and facilities than we have. In particular, there
is intense competition related to the research and development of
morphogenic and other proteins for various applications and therapies.
o The development process necessary to obtain regulatory approval is
complex, costly and lengthy, and we may not obtain the regulatory
approvals necessary to develop, test and market our products. Accordingly,
estimates of development milestones and regulatory approvals are
inherently uncertain.
o Our substantial number of programs in pre-clinical development and early
stage research coupled with the many technical challenges and hurdles
which need to be overcome to enter into clinical trials makes it highly
uncertain which programs will succeed and when they will succeed.
o Even if a project proceeds into clinical trials, it may not be successful
because the product is not effective in treating the targeted disorder or
may prove to have undesirable or unintended side effects, toxicities or
other characteristics that may prevent or limit their commercial use.
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<PAGE>
o Our lack of development, commercial manufacturing, marketing and sales
experience and the risk that any of the products that we develop may not
be able to be marketed at acceptable prices or receive commercial
acceptance in the markets that we expect to target.
o Uncertainty as to the extent of future government regulation of our
business.
o Uncertainty as to whether there will exist adequate reimbursement for our
products from governments, private health insurers and other
organizations.
o RISKS RELATING TO FINANCING
o We have expended and expect to continue to expend significant resources on
research and development. Accordingly, we have incurred substantial
losses, we expect to continue to incur losses and it is uncertain when, if
ever, we will develop significant sources of revenues in order to achieve
profitability.
o We may require additional financing to fund our operations, which may be
difficult to obtain and may dilute your ownership interest in us.
o RISKS RELATED TO INTELLECTUAL PROPERTY
o Patents are important to our business and we may not be able to obtain
patent protection for our discoveries.
o Third parties may hold or acquire patent rights that are important to our
business and may, in the absence of a license, preclude us from pursuing
certain research, development and commercialization activities.
o We may become involved in expensive patent litigation that could result in
liability for damages or force us to discontinue certain research,
development and commercialization efforts.
o If we breach any of the agreements under which we license or acquire
intellectual property rights, we could be deprived of the benefit of the
license rights under that agreement.
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<PAGE>
ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest cash balances in excess of operating requirements in short-term
marketable securities, generally corporate debt and government securities with
an average maturity of less than one year. All marketable securities are
considered available for sale. At September 30, 2000, the fair market value of
these securities amounted to $34,889,000 with net unrealized losses of $45,000
included as a component of stockholders' equity. Because of the quality of the
investment portfolio and the short term nature of the marketable securities, we
do not believe that interest rate fluctuations would impair the principal amount
of the securities. To estimate the potential interest rate changes, we performed
a sensitivity analysis for a one-day horizon. In order to estimate the
potential loss, we used an increase in market rates of 100 basis points,
an increase that is reasonably possible in the near term. On this basis, we
estimate the potential loss in fair value from this change in interest
rates to be approximately $85,000. Our investments are investment grade
securities and deposits are with investment grade financial institutions. We
believe that the realization of losses due to changes in credit spreads in
unlikely as we expect to hold our debt to maturity.
As of September 30, 2000, in addition to the marketable securities discussed
above, we held 107,143 shares of Exelixis, Inc. common stock with a fair market
value as of September 30 of $3,362,000. On October 9, 2000, we sold these
shares for total net proceeds of $1,995,000. The decline in value of $1,367,000
will be reflected in our statement of operations for the period ending December
31, 2000. In addition, we hold a warrant to purchase 53,571 shares of Exelixis,
Inc. common stock at a price of $1.00 per share exercisable until January 27,
2005. The value of this warrant of $1,627,000 as of September 30, 2000 could
fluctuate based on market conditions.
17
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C> <C>
10.01 Third Amendment to Lease between Curis, Inc. and 21 Erie
Street Trust dated July 31, 2000.
10.02+ Amendment to License Agreement between Curis, Inc. and
Presidents and Fellows of Harvard College dated
September 11, 2000.
27.1 Financial Data Schedule for the nine months ended September
30, 2000.
27.2 Financial Data Schedule for the three months ended September
30, 2000.
</TABLE>
+ Confidential treatment requested as to certain portions, which
portions have been separately filed with the Securities and
Exchange Commission.
(b) Reports on Form 8-K.
(i) Current Report on Form 8-K dated August 10, 2000.
(ii) Current Report on Form 8-K/A dated August 15, 2000.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed
on its behalf by the undersigned, thereunto duly authorized.
CURIS, INC.
Date: November 14, 2000 By: /s/ George A. Eldridge
---------------------------
Vice President, Finance and
Chief Financial Officer
19
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<S> <C>
10.01 Third Amendment to Lease between Curis, Inc. and 21 Erie Street Trust dated July 31, 2000.
10.02+ Amendment to License Agreement between Curis, Inc. and Presidents and Fellows of Harvard
College dated September 11, 2000.
27.1 Financial Data Schedule for the nine months ended September 30, 2000.
27.2 Financial Data Schedule for the three months ended September 30, 2000.
</TABLE>
+ Confidential treatment requested as to certain portions, which portions
have been separately filed with the Securities and Exchange Commission.
20
