<PAGE>
As filed with the Securities and Exchange Commission on November 29, 2000
Registration No. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
Curis, Inc.
(Exact name of Registrant as specified in its charter)
---------------
<TABLE>
<S> <C> <C>
Delaware 2836 04-3505116
(State or other
jurisdiction of
incorporation or (Primary Standard Industrial (I.R.S. Employer
organization) Classification Code Number) Identification Number)
</TABLE>
61 Moulton Street
Cambridge, Massachusetts 02138
(617) 503-6500
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------
Doros Platika, M.D.
Chief Executive Officer
61 Moulton Street
Cambridge, Massachusetts 02138
(617) 503-6500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
With copies to:
Steven D. Singer, Esq. James R. Tanenbaum, Esq.
Hale and Dorr LLP Anna T. Pinedo, Esq.
60 State Street Stroock & Stroock & Lavan LLP
Boston, Massachusetts 02109 180 Malden Lane
(617) 526-6000 New York, New York 10038
(212) 806-5400
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of
Securities Proposed Maximum
to Proposed Maximum Aggregate
be Amount to Offering Price Offering Amount of
Registered be Registered Per Share(1) Price(1) Registration Fee(1)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common
stock, par
value
$0.01 per
share..... 5,200,000 $10.07 $52,364,000 $13,825.00
---------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
(1)Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) of the Securities Act of 1933.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED NOVEMBER , 2000
[LOGO APPEARS HERE (CURIS)]
5,200,000 Shares
Common Stock
The selling stockholders intend to sell 5,200,000 shares of our common stock.
We will not receive any of the proceeds from the sale of shares by the selling
stockholders. The common stock is traded on the Nasdaq National Market under
the symbol "CRIS." The last reported sale price of the common stock on the
Nasdaq National Market on November 27, 2000 was $10.75 per share.
The selling stockholders have agreed to acquire the offered shares directly
from us in a private placement. The selling stockholders may sell the shares at
prices determined by the prevailing market price for the shares or in
negotiated transactions. The selling stockholders may also sell the shares to
or with the assistance of broker-dealers, who may receive compensation in
excess of their customary commissions.
Investing in our common stock involves significant risks.
See "Risk Factors" beginning on page 7.
-----------
Neither the Securities and Exchange Commission nor any state securities
regulators have 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.
-----------
The date of this Prospectus is , 2000.
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
which is contained in this prospectus. The selling stockholders are offering to
sell, and seeking offers to buy, shares of common stock only in jurisdictions
where offers and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus. In this
prospectus, the terms "company," "Curis," "Curis, Inc.," "we," "us," and "our"
refer to Curis, Inc., a Delaware corporation.
----------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY..................................................... 1
THE OFFERING........................................................... 5
SUMMARY FINANCIAL DATA................................................. 6
RISK FACTORS........................................................... 7
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS...................... 18
USE OF PROCEEDS........................................................ 19
MARKET PRICE AND DIVIDEND POLICY....................................... 19
DILUTION............................................................... 20
CAPITALIZATION......................................................... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS......................................................... 23
BUSINESS............................................................... 32
MANAGEMENT............................................................. 57
PRINCIPAL STOCKHOLDERS................................................. 68
SELLING STOCKHOLDERS................................................... 70
DESCRIPTION OF CAPITAL STOCK........................................... 72
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS................... 74
SHARES ELIGIBLE FOR FUTURE RESALE...................................... 74
PLAN OF DISTRIBUTION................................................... 75
LEGAL MATTERS.......................................................... 77
EXPERTS................................................................ 77
WHERE YOU CAN FIND MORE INFORMATION.................................... 78
INDEX TO FINANCIAL STATEMENTS.......................................... F-1
</TABLE>
----------------
Curis(TM), Chondrogel(TM), Neo-Bladder(TM), Vascugel(TM) and BABS(TM) are
trademarks of Curis. This prospectus also contains trademarks of third parties.
Each trademark of a third party appearing in this prospectus is the property of
its owner.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information you should consider before
buying shares of the common stock. You should read the entire prospectus
carefully.
OUR BUSINESS
We intend to be a leader in the emerging field of regenerative medicine,
which seeks to improve, restore or preserve the normal function of tissues and
organs. By applying our knowledge of how genes function (functional genomics)
and our knowledge of how cells form into specialized adult tissues
(developmental biology), we believe we will be able to:
. activate cellular development pathways to promote repair and normal
function; and
. inhibit abnormal growth pathways to treat certain types of cancer.
We began operations on July 31, 2000 upon the completion of the merger of
Creative BioMolecules, Inc., Ontogeny, Inc. and Reprogenesis, Inc. Each of the
three companies made important contributions to the combined strength of our
business and those contributions include the following:
<TABLE>
<C> <S>
Ontogeny: Validated developmental biology and functional
genomics discovery engine
Reprogenesis: Clinical development, cell therapy, biomaterials and
tissue engineering expertise
Creative BioMolecules: Product awaiting regulatory review and significant
antibody and developmental biology intellectual
property
</TABLE>
Our product development pipeline includes a product which is currently under
regulatory review in the United States, Europe and Australia; a product in
late-stage clinical development; multiple early clinical and advanced
preclinical products; and a discovery engine that combines functional genomics
and developmental biology across multiple medical indications. By harnessing
the body's inherent ability to repair damage caused by disease, trauma or age,
we believe the products in our product development pipeline have the potential
to change the way degenerative disease, cancer and other disorders associated
with loss of normal function are treated.
We have expertise and capabilities in the four major regenerative medicine
technologies which we believe are necessary to take advantage of the
opportunities created by the sequencing of the human genome and an expanding
understanding of developmental biology. These technologies are:
. Protein Factors: gene/protein identification, expression and functional
characterization, and the ability to develop therapies based on or
incorporating genes/proteins through protein biochemistry, protein
production and protein delivery. Examples include Osteogenic Protein-1
(OP-1) for treatment of bone disorders and Hedgehog protein-based
treatments of neurological disorders.
. Cell Therapies: the ability to culture, qualify, deliver and manage cells
for the development of therapies incorporating living cells for tissue
regeneration or normal physiological function. Examples include the
differentiation of stem cells in mature beta islet cells for treating
diabetes and Vascugel to prevent restenosis and thrombosis following
vascular injury, such as that following surgery.
. Tissue Engineering: matrix development and delivery expertise including
knowledge of biomaterials, synthetic materials and other scaffolds for
tissue formation and knowledge of cell/factor/matrix interactions in
tissue formation and repair. Examples include the Chondrogel and Neo-
Bladder products under development where the shape and structure of the
combined cells and biomaterials are used to repair the valve in the
bladder or grow an entire new bladder.
1
<PAGE>
. Small Molecules: cell-based assays, developmental biology expertise, high
throughput screening, combinatorial chemistry libraries and medicinal
chemistry. Examples include CUR-61414 for treatment of basal cell
carcinoma and a Hedgehog agonist to stimulate regrowth of hair follicles.
Two broad technological and social dynamics have paved the way for the
arrival of regenerative medicine. The first of these is technological. The
mapping of the human genome is providing for the first time a complete, widely
available database of genomic information that will help enable the development
of a new generation of treatments, preventions and cures. The second broad
dynamic is demographic. The aging of America and many other developed countries
is well underway, with the "old old" (those people older than 85) growing six-
fold and requiring twice the hospital care and 20 times the nursing home care
as those between 65 and 84 years old.
Set forth in the table below is a summary of our principal product
candidates under development:
PRODUCT DEVELOPMENT PIPELINE
<TABLE>
<CAPTION>
Product Indication Status
------- ---------- ------
<S> <C> <C>
OP-1 Implant(TM) product Multiple orthopaedic and At U.S., Europe & Australian
platform periodontal indications agencies for marketing approval
in first indication (non-union
fractures).
Chondrogel(TM) Pediatric urological disorder Pediatric urological disorder in
and nipple reconstruction Phase III pivotal trial. Nipple
reconstruction in Phase I trial.
Neo-Bladder(TM) Replacement or augmentation of Pre-clinical development with
compromised bladders Investigational New Drug (IND)
filing
in 2002.
Vascugel(TM) Inhibition of coronary IND filed. Phase I trial expected
restenosis to begin in late 2000.
Small molecule Cancer product (basal cell Pre-clinical development with IND
(CUR-61414) carcinoma and certain other filing in 2001 for basal cell
cancers) carcinoma.
</TABLE>
We have collaborated with Stryker Corporation, a specialty surgical and
medical products company, to develop and commercialize orthopaedic
reconstruction and dental therapy products consisting of a powder mixture of
OP-1 and a highly purified Type I collagen mixture. Stryker has exclusive
rights to develop, manufacture and commercialize OP-1 products in orthopaedic
reconstruction and dental therapy, and we will receive mid-teen percentage
royalties on commercial sales of OP-1 products in these fields.
As the chart above also indicates, we are developing several other lead
products, including:
. Chondrogel for the treatment of vesicoureteral reflux (backflow of urine
into the kidneys) in pediatric patients. We have completed patient
enrollment for a Phase III clinical trial of Chondrogel and, pending
evaluation of the data from this trial, we expect to submit a Biologics
License Application to the FDA in the first half of 2002;
. Neo-Bladder for the replacement or augmentation of compromised bladders
due to trauma, cancer or other reasons;
. Vascugel for the treatment of certain forms of restenosis (re-narrowing
of blood vessels following cardiovascular surgery) and thrombosis
(formation of blood clots following surgery); and
. CUR-61414 as a small molecule to treat basal cell carcinoma (a form of
skin cancer), bladder cancer, prostate cancer and medulloblastoma (a type
of brain tumor).
2
<PAGE>
We also have a validated functional genomics platform that has generated
additional potential product candidates over the last few years in various
stages of research or pre-clinical development. These opportunities include:
. a potential treatment of peripheral neuropathies (damaged nervous system
tissues) from research based on the Hedgehog proteins;
. a potential protein and small molecule-based treatment of hair loss from
research based on the Hedgehog proteins;
. a potential cell-based treatment derived from pancreatic cells for Type I
diabetes;
. molecules for the potential treatment of Type II diabetes; and
. a small molecule for the potential treatment of colon cancer.
Our strategy for the development of many of these products depends upon the
formation of collaborations and strategic alliances with third parties. To
date, we have entered into agreements with Stryker (OP-1 device for orthopaedic
reconstruction and dental applications) and Becton Dickinson (cell-based
treatment for diabetes). We expect to enter into collaborations with corporate
partners for product opportunities that are directed at large markets where
extensive sales and marketing infrastructure is required for successful product
introduction and market penetration. However, we currently expect to market by
ourselves products like Chondrogel and Neo-Bladder for smaller, niche markets.
There can be no assurance that we will be able to establish additional
collaborations necessary to develop and commercialize our products, that any
future arrangements will be on terms favorable to us or that the current or
future strategic alliances ultimately will be successful.
OUR HISTORY
On July 31, 2000, Creative BioMolecules, Inc., a Delaware corporation,
Ontogeny, Inc., a Delaware corporation, and Reprogenesis, Inc., a Texas
corporation, merged with and into us pursuant to an Agreement and Plan of
Merger dated as of February 14, 2000. On July 31, 2000, we assumed the rights
and obligations of Creative, Ontegeny and Reprogenesis.
Pursuant to the merger agreement, the following conversion ratios were
applied to the outstanding securities of Creative, Ontogeny and Reprogenesis:
. Creative's common stockholders received 0.3000 shares of our common stock
in exchange for each share of Creative stock that they owned;
. Ontogeny's capital stockholders received 0.2564 shares of our common
stock in exchange for each share of Ontogeny stock that they owned; and
. Reprogenesis' capital stockholders received and the holders of options or
warrants to acquire the capital stock of Reprogenesis are entitled, upon
exercise thereof, to receive an aggregate number of shares of our common
stock equal to 0.1956 multiplied by the total number of shares of
Reprogenesis capital stock outstanding or subject to options or warrants.
Immediately after the merger, we were owned approximately 43% by the former
stockholders of Creative, approximately 38% by the former stockholders of
Ontogeny and approximately 19% by the former stockholders of Reprogenesis.
To the extent that the outstanding stock options of Creative, Ontogeny and
Reprogenesis and the outstanding warrants to purchase Ontogeny and Reprogenesis
capital stock did not expire upon completion of the Merger, each of these
securities automatically converted into an equivalent right to acquire shares
of our common stock.
3
<PAGE>
Our principal executive offices are located at 61 Moulton Street, Cambridge,
Massachusetts 02138. Our telephone number is (617) 503-6500. Our principal
website is located at www.curis.com. Information contained on any of our
websites is not part of this prospectus.
SELLING STOCKHOLDERS
The selling stockholders entered into agreements to purchase the shares of
common stock covered by this prospectus in a private placement in November
2000, and purchased the shares on , 200 . We do not know when or in what
amounts the selling stockholders may offer their shares for resale.
4
<PAGE>
THE OFFERING
Selling stockholders................ The selling stockholders are
accredited investors which
purchased 5,200,000 shares of the
common stock in a private placement
pursuant to stock purchase
agreements that were executed as of
November 13, 2000.
Common stock offered by selling All of the 5,200,000 shares offered
stockholders........................ by this prospectus are being sold
by the selling stockholders.
Common stock to be outstanding
after the offering.................. 31,311,252 shares of common stock.
Use of Proceeds..................... We will not receive any of the
proceeds from the sale of shares by
the selling stockholders.
Nasdaq National Market Symbol....... CRIS.
The number of shares of common stock to be outstanding after this offering
is based upon the number of shares of common stock outstanding as of October
31, 2000, and does not include:
. 6,452,207 shares of common stock issuable upon the exercise of
outstanding stock options and warrants as of such date, of which options
and warrants to purchase 2,364,589 shares were then exercisable at a
weighted average exercise price of $10.28 per share; and
. 4,926,537 additional shares of common stock that we could issue under our
stock option and employee stock purchase plans as of October 31, 2000.
5
<PAGE>
Summary Financial Data
The following tables summarize the consolidated financial data of our
business. The pro forma as adjusted column reflects the consummation of the
sale of 5.2 million shares of common stock to the selling shareholders at a
price of $9.00 per share after deduction of the placement agent's fee and
estimated expenses payable by us in connection with such sale. The financial
data for periods prior to July 31, 2000, the effective date of the merger of
Creative, Ontogeny and Reprogenesis, reflects the historical financial data of
Creative, predecessor to Curis.
<TABLE>
<CAPTION>
Three Months Year Nine Months Ended
Years Ended December 31, Ended Ended September 30,
------------------------------------- December 31, September 30, -------------------
1999 1998 1997 1996 1995(1) 1995(1) 2000 1999
-------- -------- -------- ------- ------------ ------------- --------- --------
(in thousands, except per share data)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Total revenues.......... $ 3,212 $ 10,429 $ 13,087 $21,156 $ 1,743 $12,527 $ 744 $ 2,406
-------- -------- -------- ------- ------- ------- --------- --------
Costs and expenses:
Research and
development (A)....... 10,435 24,856 25,122 15,651 3,194 11,688 10,072 8,073
Cost of manufacturing
contracts............. -- -- 274 3,823 715 5,330 -- --
General and
administrative (A).... 5,524 6,946 5,827 4,374 1,132 3,537 6,643 4,078
Stock-based
compensation (A)...... 64 322 254 17 -- -- 12,496 64
Amortization of
intangible assets..... 808 207 392 510 122 67 8,647 326
Loss on disposition of
fixed assets.......... -- -- -- -- -- -- 249 --
In-process research and
development........... -- -- -- -- -- -- 294,800 --
1999 reorganization and
1998 sale of
manufacturing
operations............ 256 1,362 -- -- -- -- (38) --
-------- -------- -------- ------- ------- ------- --------- --------
Total costs and
expenses.............. 17,087 33,693 31,869 24,375 5,163 20,622 332,869 12,541
-------- -------- -------- ------- ------- ------- --------- --------
Loss from operations.... (13,875) (23,264) (18,782) (3,219) (3,420) (8,095) (332,125) (10,135)
Total other income...... 1,765 1,869 2,130 979 200 473 899 1,503
-------- -------- -------- ------- ------- ------- --------- --------
Net loss................ $(12,110) $(21,395) $(16,652) $(2,240) $(3,220) $(7,622) $(331,226) $ (8,632)
======== ======== ======== ======= ======= ======= ========= ========
Net loss applicable to
common stockholders.... $(14,505) $(22,382) $(16,652) $(2,240) $(3,220) $(7,622) $(331,226) $(11,027)
======== ======== ======== ======= ======= ======= ========= ========
Basic and diluted net
loss per common share.. $ (1.36) $ (2.22) $ (1.68) $ (0.25) $ (0.38) $ (1.24) $ (22.59) $ (1.04)
======== ======== ======== ======= ======= ======= ========= ========
Weighted average common
shares used for basic
and diluted net loss
computation............ 10,682 10,102 9,923 9,019 8,436 6,129 14,663 10,619
======== ======== ======== ======= ======= ======= ========= ========
(A)The following summarizes the departmental allocation of the stock-based
compensation charge:
Research and develop-
ment................... $ -- $ -- $ -- $ -- $ -- $ -- $ 5,727 $ --
General and administra-
tive................... 64 322 254 17 -- -- 6,769 64
-------- -------- -------- ------- ------- ------- --------- --------
Total stock-based com-
pensation.............. $ 64 $ 322 $ 254 $ 17 $ -- $ -- $ 12,496 $ 64
======== ======== ======== ======= ======= ======= ========= ========
</TABLE>
<TABLE>
<CAPTION>
September 30, 2000
---------------------
Pro Forma
Actual As adjusted
-------- -----------
<S> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and marketable securities........ $ 39,180 $ 82,930
Working capital......................................... 34,849 78,599
Total assets............................................ 166,731 210,481
Debt and lease obligations, net of current portion...... 3,501 3,501
Accumulated deficit..................................... (452,821) (452,821)
Total stockholders' equity.............................. 153,132 196,882
</TABLE>
-------
(1) In January 1996, Creative, predecessor to Curis, changed its fiscal year
end from September 30 to December 31, effective with the three month
period ended December 31, 1995.
6
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk. You should
carefully consider the following information about these risks, together with
the other information contained in this prospectus, before you decide to
purchase our common stock. If any of the following risks actually occur, our
business, results of operations and financial condition would likely suffer. In
these circumstances, the market price of our common stock could decline, and
you may lose all or part of your investment. Please read "Special Note
Regarding Forward-Looking Statements."
Risks Related to Our Business, Industry, Strategy and Operations
We will face challenges in integrating Creative, Ontogeny and Reprogenesis
and, as a result, may not realize the expected benefits of the merger.
Curis was formed by the merger of Creative, Ontogeny and Reprogenesis on
July 31, 2000. Integrating the operations and personnel of Creative, Ontogeny
and Reprogenesis is a complex process. Employees and management of the three
companies have played a key role in creating each business, and this, in turn
has been an important motivational factor. The successful integration of our
research, development, finance, legal, program management and human resources
into a single organization has altered these prior relationships and may
continue to affect productivity. In addition, it is likely to divert the
attention of our management from ongoing operations and could lead to a loss of
momentum in our operations, employee morale and our ability to retain some of
our key employees. The loss of certain employees could result in a delay or
disruption of one or more of the planned research and development programs of
Curis.
If we do not successfully integrate Creative, Ontogeny and Reprogenesis, or
the benefits of the merger do not meet the expectations of financial or
industry analysts, the market price of the common stock may decline.
We have not commercialized any products to date, and if we do not
commercialize any products we will not be profitable.
To date, we have not commercialized or received regulatory approval to
market the types of products that we or our collaborative partners are and will
be developing. These types of products may require additional research and
development, clinical trials and/or regulatory resources and/or expertise prior
to any commercial sale.
We currently have no products for sale by us or our collaborative partners.
If we or our collaborative partners are not successful in developing and
commercializing any products, we will not become profitable.
We are dependent on collaborative partners for the development and
commercialization of many of our products. Any failure or delay by these
partners in developing or commercializing our products could eliminate
significant portions of our anticipated product pipeline.
Our strategy for development and commercialization of many of our products
depends upon the formation of various collaborations and strategic alliances.
We have entered into strategic alliances with Stryker Corporation and other
companies, and plan to enter into additional alliances. However, we may not be
able to establish additional collaborations and strategic alliances necessary
to develop and commercialize products based upon our research efforts, or to
establish such arrangements on terms favorable to us. We do not control the
amount of resources or the schedule of product development in our
collaborations with strategic partners and may not be able to control the
efforts that any future strategic partners may devote to their respective
programs with us. The timing and amount of any future royalties and
manufacturing revenues with respect to product sales and product development
under such collaborative arrangements will therefore depend on the level of
commitment, timing and success of such collaborative partners' efforts.
Accordingly, we cannot predict the success of current or future strategic
alliances.
7
<PAGE>
We face substantial competition, which may result in others discovering,
developing or commercializing products before or more successfully than we do.
The products that we will be developing compete with existing and new
products being created by pharmaceutical, biopharmaceutical, biotechnology and
medical device companies, as well as universities and other research
institutions. Many of our competitors are substantially larger than we are and
have substantially greater capital resources, research and development staffs
and facilities than we have. Efforts by other biotechnology or pharmaceutical
companies could render our programs or products uneconomical or result in
therapies superior to any therapy we develop. Furthermore, many of our
competitors are more experienced in product development and commercialization,
obtaining regulatory approvals and product manufacturing. As a result, they may
develop competing products more rapidly and at a lower cost. These competitors
may discover, develop and commercialize products which render non-competitive
or obsolete the products that we or our collaborative partners are seeking to
develop and commercialize.
Other companies are engaged in the research and development of proteins for
various applications. We believe that other biopharmaceutical companies also
are developing proteins, primarily growth factors, for use in the local repair
of orthopaedic and skeletal defects and in other indications. In addition, a
number of other companies are pursuing traditional therapies that may compete
with our products, including bone grafts and electrical stimulation devices for
the repair of orthopaedic and other skeletal defects.
In the field of tissue engineering and the treatment of damaged or diseased
tissue, we compete with several companies that are developing various tissue
replacement products. In addition, a number of biotechnology, pharmaceutical
and medical device companies are developing other types of products as
alternatives to tissue replacement/augmentation for a variety of indications.
For example, vesicoureteral reflux is a pediatric disorder of the urinary
tract involving the backflow of urine from the bladder to the kidneys.
Vesicoureteral reflux is currently treated in the United States either by
surgery or with antibiotics; however, a number of other bulking agents, such as
bovine dermal collagen, a substance derived from the skin of cows, synthetic
materials and other biomaterials (such as dextranomer beads in a hydrogel), are
being evaluated for use in its treatment.
In the area of cardiovascular medicine, several approaches are currently
being developed by major medical device, pharmaceutical and biotechnology
companies to reduce restenosis or the re-narrowing of treated blood vessels,
associated with current cardiovascular therapies. These approaches include,
among others, local and systemic drug therapy, locally delivered radiation,
gene therapy, and improved stents and stenting techniques.
In addition, research in the field of developmental biology and genomics is
highly competitive. Our competitors in the field of developmental biology
include, among others, Amgen, Inc., Chiron Corporation, Exelixis, Inc.,
Genentech, Inc. and Geron Corporation, as well as other private companies and
major pharmaceutical companies. Competitors in the genomics area include, among
others, public companies such as Axys Pharmaceuticals, Inc., Genome
Therapeutics Corporation, Human Genome Sciences, Inc., Incyte Pharmaceuticals,
Inc., Millennium Pharmaceuticals, Inc. and Myriad Genetics, Inc., as well as
private companies and major pharmaceutical companies. We also compete with
universities and other research institutions, including those receiving funding
from the federally funded Human Genome Project. A number of entities are
attempting to identify and patent rapidly randomly sequenced genes and gene
fragments, typically without specific knowledge of the function of such genes
or gene fragments. In addition, we believe that certain entities are pursuing a
gene identification and characterization and product development strategy based
on positional cloning. Our competitors may discover, characterize and develop
important inducing molecules or genes in advance of us. We also face
competition from these and other entities in gaining access to DNA samples used
in our research and development projects. We expect competition to intensify in
genomics research and developmental biology as technical advances in the field
are made and become more widely known.
8
<PAGE>
We rely on our strategic partners for support in our disease research
programs and intend to rely on our strategic partners for preclinical
evaluation and clinical development of our potential products and manufacturing
and marketing of any products. Some of our strategic partners are conducting
multiple product development efforts within each disease area that is the
subject of our strategic alliance with them. Our strategic alliance agreements
may not restrict a strategic partner from pursuing competing internal
development efforts. Any of our product candidates, therefore, may be subject
to competition with a potential product under development by a strategic
partner.
The market may not be receptive to our products due to their use of new
technologies or cost. Such a lack of reception could limit our sales of these
and future products.
The commercial success of our products that are approved for marketing will
depend upon their acceptance by patients, the medical community and third-party
payors. The OP-1 device, a biological device being developed by our strategic
partner Stryker, is a new form of treatment for orthopaedic reconstruction, and
will require a change from the current standard of care. Chondrogel, currently
being developed for the vesicoureteral reflux indication, is based on the new
technology of tissue engineering. These products may never gain commercial
acceptance among physicians, patients and third-party payors, even if necessary
marketing approval is obtained. We believe that recommendations and
endorsements by physicians will be essential for market acceptance of our
products.
In addition, Chondrogel is an autologous cell-based product, meaning that a
patient's own cells are used to treat a medical condition. Chondrogel may be
more costly than other competitive bulking products because each cell batch
must be handled individually. Therefore, traditional scale-up technologies are
not applicable in our manufacturing process. We may not be able to manufacture
products that will be cost effective or, if we can, our products may not
receive commercial and market acceptance.
Our growth could be limited if we are unable to attract and retain key
personnel and consultants.
Our success is substantially dependent on our ability to attract and retain
qualified scientific and technical personnel for the research and development
activities we conduct or sponsor. If we lose one or more of the members of our
senior management or other key employees or consultants, our business and
operating results could be seriously harmed. Only a limited number of the
members of our senior management or other key employees, including Doros
Platika, M.D., our President and Chief Executive Officer, and Daniel Passeri,
our Senior Vice President, Corporate Development and Strategic Planning, have
entered into employment agreements that provide for severance payments if they
are terminated without cause.
Our anticipated growth and expansion into areas and activities requiring
additional resources or expertise, such as regulatory affairs, compliance,
manufacturing and marketing, will require the addition of new key personnel.
The pool of personnel with the skills that we require is limited. Competition
to hire from this limited pool is intense, and we may not be able to hire,
train, retain or motivate such additional personnel.
If we fail to obtain an adequate level of reimbursement for our future
products or services by third-party payors, there may be no commercially viable
markets for our products.
The availability of reimbursement by governmental and other third-party
payors affects the market for any pharmaceutical product. These third-party
payors continually attempt to contain or reduce the costs of healthcare by
challenging the prices charged for medical products. In some foreign countries,
particularly the countries of the European Union, the pricing of prescription
pharmaceuticals is subject to governmental control. We may not be able to sell
our products profitably if reimbursement is unavailable or limited in scope or
amount.
In both the United States and some foreign jurisdictions, there have been a
number of legislative and regulatory proposals to change the healthcare system.
Further proposals are likely. The potential for adoption of
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<PAGE>
some or all of these proposals affects or will affect our ability to raise
capital, obtain additional collaborative partners and market our products.
If we or our collaborative partners obtain marketing approval for our
products, we expect to experience pricing pressure due to the trend toward
managed health care, the increasing influence of health maintenance
organizations and additional legislative proposals.
We could be exposed to significant risk from liability claims if we are
unable to obtain insurance at acceptable costs or otherwise protect ourselves
against potential product liability claims.
We may be subjected to product liability claims that are inherent in the
testing, manufacturing, marketing and sale of human health care products. These
claims could expose us to significant liabilities that could prevent or
interfere with the development or commercialization of our products. Product
liability claims could require us to spend significant time and money in
litigation or to pay significant damages. Product liability insurance is
generally expensive for biopharmaceutical companies such as ours. Although we
maintain limited product liability insurance coverage for the clinical trials
of our products, it is possible that we will not be able to obtain further
product liability insurance on acceptable terms, if at all, and that our
present insurance levels and insurance subsequently obtained will not provide
adequate coverage against all potential claims.
Risks Relating to Financing
We have incurred substantial losses, we expect to continue to incur losses
and we may never achieve profitability.
We expect to incur substantial operating losses for the foreseeable future.
We currently have no material sources of revenue from product sales or license
fees. It is uncertain when, if ever, we will develop significant revenue
sources or become profitable, even if we are able to commercialize products. In
addition, because certain of our product candidates consist of living cells,
they may be more expensive to manufacture than conventional therapeutic
products.
We expect to increase our spending significantly as we continue to expand
our research and development programs, expand our clinical trials, apply for
regulatory approvals and begin commercialization activities. As a result, we
will need to generate significant revenues in order to achieve profitability.
We cannot be certain whether or when this will occur because of the significant
uncertainties that affect our business.
We may require additional financing, which may be difficult to obtain and
may dilute your ownership interest in us.
We will require substantial funds to continue our research and development
programs, including clinical trials of our product candidates, and to
manufacture and market any products that are approved for commercial sale. Our
future capital requirements will depend on many factors, including the
following:
. continued progress in our research and development programs, as well as
the magnitude of these programs;
. the resources required to initiate and then successfully complete our
clinical trials for Chondrogel, Vascugel, CUR-61414 and other product
candidates;
. the time and costs involved in obtaining regulatory approvals for
Chondrogel, Vascugel, CUR-61414 and other product candidates;
. the cost of manufacturing and commercialization activities;
. the cost of any additional facilities requirements;
. the timing, receipt and amount of milestone and other payments from
collaborative partners such as Stryker;
10
<PAGE>
. the timing, payment and amount of milestone payments, research funding
and royalties due to licensors of patent rights and technology used to
make, use and sell our product candidates;
. the timing, receipt and amount of sales revenues and royalties from our
potential products in the market; and
. the costs involved in preparing, filing, prosecuting, maintaining and
enforcing patent claims and other patent-related costs, including
litigation costs and the costs of obtaining any required licenses to
technologies.
We estimate that it will cost at least $90 million to fund our operations
until the end of 2002. At September 30, 2000, we had cash, cash equivalents and
marketable securities of approximately $44.1 million and with the closing of
the private placement, we believe we will have sufficient capital resources to
fund our operations into the fourth quarter of 2002. We may seek additional
funding through collaborative arrangements and public or private financings.
However, the biotechnology market is highly volatile and, depending on market
conditions and the state of our research, development and commercialization
programs, additional financing may not be available to us on acceptable terms
or at all. If we fail to obtain such additional financing, our ability to
continue all of our research, development, commercialization, manufacturing and
marketing activities may be significantly diminished.
If we raise additional funds by issuing equity securities, further dilution
to our then existing stockholders will result. In addition, the terms of the
financing may adversely affect the holdings or the rights of our stockholders.
If we are unable to obtain funding on a timely basis, we may be required to
significantly curtail one or more of our research or development programs. We
also could be required to seek funds through arrangements with collaborative
partners or others that may require us to relinquish rights to certain of our
technologies, product candidates or products which we would otherwise pursue
independently.
Risks Relating to Clinical and Regulatory Matters
If our clinical trials are not successful, we will not be able to complete
development and market or commercialize our products.
In order to obtain regulatory approval for the commercial sale of our
product candidates, we will be required to complete extensive preclinical
studies as well as clinical trials in humans to demonstrate the safety and
efficacy of our products. We have limited experience in conducting clinical
trials and rely at times on contract research organizations and collaborative
partners for their performance and management.
We cannot assure you that clinical trials of OP-1, Chondrogel or other
product candidates under development will be sufficient to obtain regulatory
approvals for the indications being studied. Furthermore, the timing and
completion of the current and planned clinical trials for Chondrogel, Stryker's
current and planned clinical trials of the OP-1 device, as well as clinical
trials of other products, depend on, among other factors, the numbers of
patients required for approval and the rate at which those patients are
enrolled. In our clinical trials, more than the anticipated number of patients
could be required and enrollment may not proceed at the predicted rate. Any
increase in the number of patients or decrease in recruitment rates may result
in increased costs, program delays or both. Also, these products may not be
effective in treating any of our targeted disorders or may prove to have
undesirable or unintended side effects, toxicities or other characteristics
that may prevent or limit their commercial use.
Progress in the area of orthopaedic reconstruction and dental applications
is within the sole control of Stryker. We could experience significant delays
if Stryker's is unable to expeditiously obtain regulatory approval for the
commercialization of OP-1. For example, Stryker has submitted a response to a
deficiency letter received from the FDA regarding the U.S. application for
marketing approval, or PMA, that focuses on the radiographic findings in the
pivotal study and certain other clinical data. Upon receipt of Stryker's
response, the FDA staff must make a determination whether to submit the PMA
application to a panel of industry and medical experts who would review it and
make a recommendation to the FDA. The FDA staff must also
11
<PAGE>
inspect Stryker's OP-1 manufacturing facilities. If the inspection is
acceptable and there is a positive recommendation by the panel, the FDA may
grant approval allowing the OP-1 device to be marketed in the United States for
certain defined uses. Further clinical testing and PMA filings would be
necessary to expand the approved uses of the product. The timing of the
regulatory process is unpredictable and it is uncertain whether or when
approvals will be obtained from the FDA or other regulatory agencies for any
use of the OP-1 device.
We could also experience delays in our preclinical trials of any of our
product candidates, unfavorable results in any development program, failure to
obtain regulatory approval for the commercialization of any of our products or
failure to achieve market acceptance of any approved products. Any of these
events would have a negative impact on our ability to market a product.
The development process necessary to obtain regulatory approval is complex,
costly and lengthy and we may not obtain necessary regulatory approvals.
We and our collaborative partners must obtain regulatory approval for
ongoing development activities and before marketing or selling any of our
products. We may not receive regulatory approvals to conduct clinical trials of
our products or to manufacture or market our products. In addition, regulatory
agencies may not grant approvals on a timely basis or may revoke or
significantly modify previously granted approvals. Any delay in obtaining, or
failure to obtain, approvals could adversely affect the marketing of our
products and our ability to generate product revenue.
The process of obtaining FDA and other required regulatory approvals is
lengthy and expensive. The time required for FDA and other clearances or
approvals is uncertain and typically takes a number of years, depending on the
complexity and novelty of the product. The process of obtaining FDA and other
required regulatory approvals for many of our products is further complicated
because some of these products use non-traditional or novel materials in non-
traditional or novel ways, and the regulatory officials have little precedent
to follow. We have only limited experience in filing and prosecuting
applications for the conduct of clinical studies and for obtaining marketing
approval. Any delay in obtaining or failure to obtain required clearance or
approvals would reduce our ability to generate revenues from the affected
product. We also plan to rely significantly on contract research organizations
and collaborative partners as we build internal capabilities.
Our analysis of data obtained from preclinical and clinical activities is
subject to confirmation and interpretation by regulatory authorities, which
could delay, limit or prevent regulatory approval. Any regulatory approval to
market a product may be subject to limitations on the indicated uses for which
we may market the product. These limitations may restrict the size of the
market for the product and affect reimbursement by third party payors.
We also are subject to numerous foreign regulatory requirements governing
the design and conduct of the clinical trials and the manufacturing and
marketing of our future products outside of the United States. The approval
procedure varies among countries and the time required to obtain foreign
approvals often differs from that required to obtain FDA approvals. Moreover,
approval by the FDA does not ensure approval by regulatory authorities in other
countries, and vice versa.
Our ability to conduct preclinical research is also subject to new and
evolving regulations governing the use of human and embryonic tissues for
isolating new growth factors and genes which may be useful in identifying and
developing new therapeutic product candidates. Our ability to conduct critical
research on which our future development activities are based could be
restricted or delayed depending on the outcome of pending rulemaking
proceedings governing the use of these tissues and the collection of related
genetic information.
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<PAGE>
Even if we obtain marketing approval, our products will be subject to
ongoing regulatory oversight which may affect our ability to successfully
commercialize any products we develop.
Even if we receive regulatory approval of a product, the approval may be
subject to limitations on the indicated uses for which the product is marketed
or contain requirements for costly post-marketing follow-up studies. After we
obtain marketing approval for any product, the manufacturer and the
manufacturing facilities for that product will be subject to continual review
and periodic inspections by the FDA and other regulatory authorities. The
subsequent discovery of previously unknown problems with the product, or with
the manufacturer or facility, may result in restrictions on the product or
manufacturer, including withdrawal of the product from the market.
If we fail to comply with applicable regulatory requirements, we may be
subject to fines, suspension or withdrawal of regulatory approvals, product
recalls, seizure of products, operating restrictions, and criminal prosecution.
We may not be able to comply with other governmental regulations, which
could subject us to penalties and otherwise result in the limitation of our
operations.
In addition to comprehensive regulation by the FDA, we are subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Research Conservation and
Recovery Act, regulations administered by the Nuclear Regulatory Commission,
national restrictions on technology transfer, import, export and customs
regulations and certain other local, state or federal regulation. From time to
time, other federal agencies and congressional committees have indicated an
interest in implementing further regulation of biotechnology applications. We
are not able to predict whether any such regulations will be adopted or
whether, if adopted, such regulations will apply to our business, or whether we
would be able to comply with any applicable regulations.
Our research and development activities involve the controlled use of
hazardous materials and chemicals. Although we believe that our safety
procedures for handling and dispersing of such materials comply with all
applicable laws and regulations, we cannot completely eliminate the risk of
accidental contamination or injury from these materials.
Risks Relating to Product Manufacturing, Marketing and Sales
We have limited manufacturing capabilities and may be unable to expand our
manufacturing capabilities as required to meet demand for our products.
We have limited experience or capabilities in large-scale commercial
manufacturing of any of our product candidates. Our current facilities and
staff are inadequate for commercial production and distribution of products.
Our marketing plan for Chondrogel may involve in-house manufacturing of this
product. We may not be able to attract, train and retain the required personnel
or to expand our manufacturing capability to manufacture commercial quantities
of Chondrogel or any of our other products in a timely manner. In addition, our
manufacturing scale-up efforts may not be successful, and we may not be able to
establish or maintain reliable, high-volume manufacturing capabilities at
commercially reasonable costs on a timely basis, or at all.
Delays in obtaining regulatory approval of our manufacturing facility and
disruptions in our manufacturing process may delay or disrupt our
commercialization efforts.
Before we can begin commercially manufacturing our product candidates, we
must obtain regulatory approval for our manufacturing facility and process.
Manufacturing of our product candidates must comply with the regulations of the
FDA and with foreign regulatory authorities, including current good
manufacturing practices (cGMP). The cGMP regulations provide a framework that
describe the minimum practices, facilities and controls to be used for the
manufacture, processing, packing and holding of a medicinal product to assure
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<PAGE>
that the product meets the established requirements for safety and
effectiveness and govern manufacturing methods, quality control and
documentation policies and procedures. In complying with cGMP and foreign
regulatory requirements, we will be obligated to expend time, money and effort
in production, record keeping and quality control to assure that the product
meets applicable specifications and other requirements. If we fail to comply
with these requirements, we would be subject to possible regulatory action and
may be limited in the jurisdictions in which we are permitted to sell our
product candidates.
We have no sales and marketing experience or infrastructure, which could
impair or delay our ability to commercialize our products.
We have no sales, marketing and distribution experience or infrastructure.
We plan to develop small specialty sales, marketing and distribution
capabilities for the sale, marketing and distribution of Chondrogel and other
specialty products. However, we may not be able to successfully develop this
sales, marketing and distribution capability. With respect to all of our other
products which address larger markets, we plan to rely significantly on sales,
marketing and distribution arrangements with third parties for the products
that we are developing until we are able to develop more significant internal
sales, marketing and distribution capabilities. We may have limited or no
control over the sales, marketing and distribution activities of our present or
future collaborative partners. Our future revenues may be materially dependent
upon the success of the efforts of these third parties.
In determining whether to perform sales, marketing and distribution
functions ourselves, we face a number of risks, including:
. not being able to attract and build a significant marketing staff or
sales force;
. the cost of establishing a marketing staff or sales force may not be
justifiable in light of any product revenues; and
. the failure of our direct sales and marketing efforts to be successful.
Risks Relating to Intellectual Property
We may not be able to obtain patent protection for our discoveries and we
may infringe patent rights of third parties.
The patent positions of pharmaceutical and biotechnology companies,
including us, are generally uncertain and involve complex legal, scientific and
factual questions.
Our success depends in significant part on our ability to:
. obtain patents;
. protect trade secrets;
. operate without infringing upon the proprietary rights of others; and
. prevent others from infringing on our proprietary rights.
Patents may not issue from any of the patent applications that we own or
license. If patents do issue, the allowed claims may not be sufficiently broad
to protect our technology. In addition, issued patents that we own or license
may be challenged, invalidated or circumvented. Our patents also may not afford
us protection against competitors with similar technology. Because patent
applications in the United States have been maintained in secrecy until patents
issue, third parties may have filed or maintained patent applications for
technology used by us or covered by our pending patent applications without our
being aware of these applications.
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<PAGE>
We may not hold proprietary rights to some patents related to our proposed
products. In some cases, these patents may be owned or controlled by third
parties. As a result, we or our collaborative partners may be required to
obtain licenses under third-party patents to develop and commercialize some of
our proposed products or services. If licenses are not available to us on
acceptable terms, we or our collaborative partners will not be able to develop
and commercialize these products or services.
If we are not able to keep our trade secrets confidential, our technology
and information may be used by others to compete against us.
We also rely significantly upon unpatented proprietary technology,
information, processes and know-how. We seek to protect this information
through confidentiality agreements with our employees, consultants and other
third-party contractors as well as through other security measures. These
confidentiality agreements may be breached, and we may not have adequate
remedies for any such breach. In addition, our trade secrets may otherwise
become known or be independently developed by competitors.
We may become involved in expensive patent litigation or other intellectual
property proceedings which could result in liability for damages or stop our
development and commercialization efforts.
There have been substantial litigation and other proceedings regarding the
complex patent and other intellectual property rights in the pharmaceutical and
biotechnology industries. We may become a party to patent litigation or other
proceedings regarding intellectual property rights.
Situations in which we may become involved in patent litigation or other
intellectual property proceedings include:
. initiation of litigation or other proceedings against third parties to
enforce our patent rights;
. initiation of litigation or other proceedings against third parties to
seek to invalidate the patents held by these third parties or to obtain a
judgment that our products or services do not infringe the third parties'
patents;
. participation in interference or opposition proceedings to determine the
priority of invention if our competitors file patent applications that
claim technology also claimed by us;
. initiation of litigation by third parties claiming that our processes or
products or the intended use of our products infringe their patent or
other intellectual property rights; and
. initiation of litigation by us or third parties seeking to enforce
contract rights relating to intellectual property which may be important
to our business.
The cost to us of any patent litigation or other proceeding, even if
resolved in our favor, could be substantial. Some of our competitors may be
able to sustain the cost of such litigation or proceedings more effectively
than we can because of their substantially greater financial resources. If a
patent litigation or other intellectual property proceeding is resolved
unfavorably to us, we or our collaborative partners may be enjoined from
manufacturing or selling our products and services without a license from the
other party and be held liable for significant damages. Moreover, we may not be
able to obtain required licenses on commercially acceptable terms or any terms
at all, and we could be liable for lost profits if we are found to infringe a
valid patent, and treble damages if we are found to have willfully infringed
such patent rights. Patent cases frequently involve highly complex scientific
matters, and each party has the right to seek a trial by jury. Accordingly,
litigation results are highly unpredictable and we or our collaborative
partners may not prevail in any patent proceeding.
Uncertainties resulting from the initiation and continuation of patent
litigation or other proceedings could damage our ability to compete in the
marketplace. Patent litigation and other proceedings may also absorb
significant management time and expense.
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<PAGE>
If we breach any of the agreements under which we license or acquire
intellectual property from others, we could lose intellectual property rights
that are important to our business.
We are a party to intellectual property licenses and agreements that are
important to our business and expect to enter into similar licenses and
agreements in the future. These licenses and agreements impose various
research, development, commercialization, sublicensing, royalty,
indemnification, insurance and other obligations on us. If we fail to comply
with these requirements, we could lose intellectual property rights that are
important to our business.
If licensees or assignees of our intellectual property rights breach any of
the agreements under which we have licensed or assigned our intellectual
property to them, we could be deprived of important intellectual property
rights and future revenue.
We are a party to intellectual property out-licenses, collaborations and
agreements that are important to our business and expect to enter into similar
agreements with third parties in the future. Under these agreements, we license
or transfer intellectual property to third parties and impose various research,
development, commercialization, sublicensing, royalty, indemnification,
insurance, and other obligations on them. If a third party fails to comply with
these requirements, we generally retain the right to terminate the agreement,
and to bring a legal action in court or in arbitration. With respect to the
agreement with Stryker regarding OP-1, the assignment of intellectual property
is irrevocable in the event of a breach of the agreement. Accordingly, it may
be more difficult to enforce our rights in the absence of litigation.
Risks Related to Our Common Stock
We expect that our stock price will fluctuate significantly.
Our common stock is listed on the Nasdaq National Market under the ticker
symbol "CRIS." The stock market, particularly in recent years, has experienced
significant volatility particularly with respect to biopharmaceutical and
biotechnology based stocks. The volatility of biopharmaceutical and
biotechnology based stocks often does not relate to the operating performance
of the companies represented by the stock. Factors that could cause such
volatility in the market price of the common stock include:
. announcements of the introduction of new products by us or our
competitors;
. market conditions in the biotechnology sectors;
. rumors relating to us or our competitors;
. litigation or public concern about the safety of our potential products;
. actual or anticipated variations in our quarterly operating results;
. deviations in our operating results from the estimates of securities
analysts;
. adverse results or delays in clinical trials;
. FDA or international regulatory actions; and
. general market conditions.
Future sales of shares may depress our stock price
If the selling stockholders sell a substantial number of shares of our
common stock in the public market, or investors become concerned that
substantial sales might occur, the market price of the common stock could
decrease. Such a decrease could make it difficult for us to raise capital by
selling stock or to pay for acquisitions using stock. To the extent outstanding
options or warrants are exercised or additional shares of capital stock are
issued, investors purchasing our stock may incur additional dilution.
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<PAGE>
If stockholders do not receive dividends, stockholders must rely on stock
appreciation for any return on their investment in us.
We have not declared or paid cash dividends on any of our capital stock. We
currently intend to retain earnings for future growth and therefore do not
anticipate paying cash dividends in the future. As a result, only appreciation
of the price of the common stock will provide a return to investors in this
offering.
We have antitakeover defenses that could delay or prevent an acquisition and
could adversely affect our stock price.
Provisions of our certificate of incorporation, our bylaws and Delaware law
may have the effect of deterring unsolicited takeovers or delaying or
preventing changes in control of our management, including transactions in
which our stockholders might otherwise receive a premium for their shares over
then current market prices. In addition, these provisions may limit the ability
of stockholders to approve transactions that they may deem to be in their best
interest. Our certificate of incorporation permits our board of directors to
issue preferred stock without stockholder approval. In addition to delaying or
preventing an acquisition, the issuance of a substantial number of preferred
shares could adversely affect the price of the common stock.
Our certificate of incorporation provides for staggered terms to be served
by the board of directors which makes it difficult for stockholders to change
the composition of the board of directors in any one year. In addition, our by-
laws restrict the ability of stockholders to call a special meeting of the
stockholders. These provisions may have the effect of preventing or delaying
changes in control of our management.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements concerning our business,
operations and financial condition. All statements, other than statements of
historical facts, included in this prospectus, plans and objectives of
management are forward-looking statements. You should read these statements
carefully because they discuss our expectations about our future performance,
contain projections of our future operating results or our future financial
condition, or state other "forward-looking" information. Forward-looking
statements include statements about the following subjects, among others:
<TABLE>
<S> <C>
. long-term operating and financial results . discovery and development of therapies
. position in field of regenerative medicine . funding of research and development of
and developmental biology products and technologies
. industrialization and systemization of . collaborative partnerships and strategic
scientific methods and practices of alliances
developmental biology
. regulatory approval and oversight of . protection of intellectual property
products
. treatment of disease . product development and marketing
. retention and recruitment of key employees
</TABLE>
Forward-looking statements in this prospectus are identifiable by use of the
following words and other similar expressions, among others (although not all
forward-looking statements contain these identifying words):
<TABLE>
<S> <C>
. ""expect'' . "forecast"
. ""anticipate'' . "may"
. ""intend'' . "might"
. ""plan'' . "predict"
. ""believe'' . "project"
. ""seek'' . "should"
. ""estimate'' . "will"
. ""budget'' . "would"
. ""could''
</TABLE>
Because these forward-looking statements involve significant risks and
uncertainties, actual results could differ materially from those expressed or
implied by these forward-looking statements for a number of important reasons,
including those discussed under "RISK FACTORS" and elsewhere in this
prospectus.
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<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of shares of the common stock
by the selling stockholders.
MARKET PRICE AND DIVIDEND POLICY
The common stock began trading on the Nasdaq National Market on August 1,
2000. Our trading symbol is "CRIS." The following table lists, for the periods
indicated, the high and low sales prices per share for the common stock as
reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
Curis
Common Stock
-------------
Fiscal Year 2000 High Low
---------------- ------ ------
<S> <C> <C>
Third Quarter (from August 1, 2000)........................... $27.25 $13.88
Fourth Quarter (through November 27, 2000).................... $19.94 $ 9.75
</TABLE>
On November 27, 2000, the last reported sale price for the common stock on
the Nasdaq National Market was $10.75 per share. As of November 1, 2000, there
were approximately 306 holders of record of the common stock.
We have never declared or paid dividends on the common stock. We anticipate
that we will retain all earnings, if any, to support our operations and to
finance future growth and development. Therefore, we do not expect to pay cash
dividends in the foreseeable future. Any future determination as to the payment
of dividends will be made at the sole discretion of the board of directors and
will depend on our financial condition, results of operations, capital
requirements and other factors that the board of directors deems relevant.
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DILUTION
This offering is for sales of common stock by the selling stockholders on a
continuous or delayed basis in the future. Sales of common stock by
stockholders will not result in a change to the net tangible book value per
share before and after the distribution of shares by the selling stockholders.
There will be no change in net tangible book value per share attributable to
cash payments made by purchasers of the shares being offered. Prospective
investors should be aware, however, that the price of shares of common stock
may not bear any rational relationship to net tangible book value per share of
the common stock.
CAPITALIZATION
The following table summarizes as of September 30, 2000:
. actual capitalization; and
. pro forma, as adjusted capitalization to reflect the consummation of the
sale of 5.2 million shares of common stock to the selling stockholders at
a price of $9.00 per share, after deduction of the placement agent's fee
and estimated expenses payable by us in connection with the private
placement.
<TABLE>
<CAPTION>
September 30, 2000
----------------------------
Pro Forma As
Actual Adjusted
------------- -------------
<S> <C> <C>
Long-term obligations, net of current portion.... $ 3,500,798 $ 3,500,798
------------- -------------
Stockholders' equity:
Preferred stock, $0.01 par value, 5,000,000
shares authorized; none issued and outstanding.. -- --
Common stock, $0.01 par value; 125,000,000 shares
authorized; 26,015,824 and 31,215,824 shares
issued and outstanding, and outstanding, pro
forma as adjusted............................... 260,158 312,158
Additional paid-in capital....................... 619,675,656 663,373,656
Officer notes receivable......................... (1,131,380) (1,131,380)
Deferred compensation............................ (17,729,090) (17,729,090)
Accumulated other comprehensive income........... 4,877,111 4,877,111
Accumulated deficit.............................. (452,820,783) (452,820,783)
------------- -------------
Total stockholders' equity..................... 153,131,672 196,881,672
------------- -------------
Total capitalization........................... $ 156,632,470 $ 200,382,470
============= =============
</TABLE>
The number of shares outstanding is based on the number of shares of the
common stock outstanding on September 30, 2000. The table above does not
include:
. 6,582,857 shares issuable on the exercise of stock options and warrants
outstanding as of such date, at a weighted average exercise price of
$12.12 per share; and
. 4,901,912 additional shares of common stock that we could issue under our
stock option and employee stock purchase plans as of such date.
The above table should be read with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and our financial statements and
accompanying notes appearing elsewhere in this prospectus.
20
<PAGE>
Selected Consolidated Financial Data
The selected consolidated financial data set forth below have been derived
with respect to the consolidated statements of operations for the years ended
December 31, 1999, 1998 and 1997, and with respect to the consolidated balance
sheets as of December 31, 1999 and 1998, from the consolidated financial
statements of Creative, predecessor to Curis, that have been audited by
Deloitte & Touche LLP, independent auditors. The consolidated financial
statements are included elsewhere in this prospectus. The consolidated
statements of operations data for the year ended December 31, 1996, for the
three months ended December 31, 1995 and the year ended September 30, 1995, and
the consolidated balance sheet data as of December 31, 1997, 1996 and 1995 are
derived from audited consolidated financial statements of Creative, predecessor
to Curis, not included in this prospectus. The consolidated statements of
operations data for the nine months ended September 30, 2000 and 1999 and the
consolidated balance sheet data as of September 30, 2000 are derived from
unaudited financial statements of Curis included elsewhere in this prospectus.
The unaudited consolidated financial statements have been prepared on the same
basis as our audited consolidated financial statements, and in our opinion,
include all adjustments, consisting only of normal recurring adjustments, which
we consider necessary for a fair presentation of our results of operations and
financial positions for these periods. These historical results are not
necessarily indicative of results to be expected for any future period. You
should read the data set forth below in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related Notes included in this
prospectus.
<TABLE>
<CAPTION>
Three Months Year Nine Months Ended
Years Ended December 31, Ended Ended September 30,
------------------------------------- December 31, September 30, -------------------
1999 1998 1997 1996 1995(1) 1995(1) 2000 1999
-------- -------- -------- ------- ------------ ------------- --------- --------
(in thousands, except per share data)
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated
Statement of
Operations Data:
Revenues:
Research and
development
contracts...... $ 3,160 $ 10,419 $ 12,693 $ 5,548 $ 971 $ 5,824 $ 737 $ 2,406
Manufacturing
contracts...... -- -- 394 4,486 770 6,159 -- --
License fees and
royalties...... 52 10 -- 11,122 2 544 7 --
-------- -------- -------- ------- ------- ------- --------- --------
Total revenues.. 3,212 10,429 13,087 21,156 1,743 12,527 744 2,406
-------- -------- -------- ------- ------- ------- --------- --------
Costs and
expenses:
Research and
development(A).. 10,435 24,856 25,122 15,651 3,194 11,688 10,072 8,073
Cost of
manufacturing
contracts...... -- -- 274 3,823 715 5,330 -- --
General and
administrative(A).. 5,524 6,946 5,827 4,374 1,132 3,537 6,643 4,078
Stock-based
compensation(A).. 64 322 254 17 -- -- 12,496 64
Amortization of
intangible
assets......... 808 207 392 510 122 67 8,647 326
Loss on
disposition of
fixed assets... -- -- -- -- -- -- 249 --
In-process
research and
development.... -- -- -- -- -- -- 294,800 --
1999
reorganization
and 1998 sale
of
manufacturing
operations..... 256 1,362 -- -- -- -- -- --
-------- -------- -------- ------- ------- ------- --------- --------
Total costs and
expenses....... 17,087 33,693 31,869 24,375 5,163 20,622 332,869 12,541
-------- -------- -------- ------- ------- ------- --------- --------
Loss from
operations...... (13,875) (23,264) (18,782) (3,219) (3,420) (8,095) (332,125) (10,135)
Other
income/(expenses):
Interest income
and other
income......... 1,926 2,196 2,346 1,196 261 702 1,164 1,618
Interest
expense........ (161) (327) (216) (217) (61) (229) (265) (115)
-------- -------- -------- ------- ------- ------- --------- --------
Total other
income/(expenses).. 1,765 1,869 2,130 979 200 473 899 1,503
-------- -------- -------- ------- ------- ------- --------- --------
Net loss......... (12,110) (21,395) (16,652) (2,240) (3,220) (7,622) (331,226) (8,632)
Accretion and
repurchase costs
on Series 1998/A
Preferred
Stock........... (2,395) (987) -- -- -- -- -- (2,396)
-------- -------- -------- ------- ------- ------- --------- --------
Net loss
applicable to
common
stockholders.... $(14,505) $(22,382) $(16,652) $(2,240) $(3,220) $(7,622) $(331,226) $(11,027)
======== ======== ======== ======= ======= ======= ========= ========
Basic and diluted
net loss per
common share.... $ (1.36) $ (2.22) $ (1.68) $ (0.25) $ (0.38) $ (1.24) $ (22.59) $ (1.04)
======== ======== ======== ======= ======= ======= ========= ========
Weighted average
common shares
used for basic
and diluted net
loss
computation..... 10,682 10,102 9,923 9,019 8,436 6,129 14,663 10,619
======== ======== ======== ======= ======= ======= ========= ========
(A)The following summarizes the departmental allocation of the stock-based
compensation charge:
Research and de-
velopment....... $ -- $ -- $ -- $ -- $ -- $ -- $ 5,727 $ --
General and ad-
ministrative.... 64 322 254 17 -- -- 6,769 64
-------- -------- -------- ------- ------- ------- --------- --------
Total stock-based
compensation.... $ 64 $ 322 $ 254 $ 17 $ -- $ -- $ 12,496 $ 64
======== ======== ======== ======= ======= ======= ========= ========
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
December 31,
------------------------------------------------- September 30,
1999 1998 1997 1996 1995 2000
--------- --------- ------- -------- -------- -------------
(in thousands) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data:
Cash, cash equivalents
and marketable
securities............. $ 21,371 $ 57,935 $30,598 $ 50,075 $ 20,002 $ 39,180
Working capital......... 17,116 49,613 32,381 48,174 21,743 34,849
Total assets............ 28,892 66,164 59,038 73,819 41,341 166,731
Debt and lease
obligations, net of
current portion........ 1,009 713 2,005 1,651 1,711 3,501
Accumulated deficit..... (121,595) (109,485) (88,090) (71,438) (69,198) (452,821)
Total stockholders'
equity................. 23,422 33,105 52,709 67,261 37,829 153,132
</TABLE>
-------
(1) In January 1996, Creative, predecessor to Curis, changed its fiscal year
end from September 30 to December 31, effective with the three month
period ended December 31, 1995.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
On July 31, 2000, Creative BioMolecules, Inc., Ontogeny, Inc. and
Reprogenesis, Inc. merged with and into Curis, pursuant to an Agreement and
Plan of Merger dated as of February 14, 2000. 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.
The consolidated statement of operations data include only the results of
operations of Creative for all periods prior to the date of the merger. The
consolidated statement of operations data for the nine months ended September
30, 2000 include the operating results of Creative for the seven months ended
July 31, 2000 and the operating results of Curis, comprising the combined
operations of Creative, Ontogeny and Reprogenesis, for the two months ended
September 30, 2000. The consolidated balance sheet data for all periods prior
to the date of the merger reflect only the balance sheet of Creative. The
consolidated balance sheet data as of September 30, 2000 reflects the balance
sheet of Curis post merger.
To date, revenues from research and development contracts and license fees
have been generated from agreements between Creative and its collaborative
partners. Over the next several years, we will derive most of our revenues from
royalties from Stryker, from government grants and from additional
collaboration agreements which we may enter into during such period. We are not
currently receiving research and development payments under collaboration
agreements but intend to seek additional corporate collaborations under which
we may generate future revenues. We may not be able to enter into such
collaborations on acceptable terms and thereby may not generate future research
and development contract revenues.
Research agreements with collaborative partners have typically obligated
these collaborative partners to provide for the partial or complete funding of
research and development for specified projects and pay royalties to us in
exchange for licenses to market the resulting products. We have recognized
revenue under these collaborations based upon work performed, upon the sale or
licensing of product rights, upon shipment of product for use in preclinical
and clinical testing or upon attainment of milestones specified in
collaborative agreements. We have been a party to research collaborations with
Stryker to develop products for orthopaedic
23
<PAGE>
reconstruction and dental therapeutics and with Biogen to develop products for
the treatment of renal disorders. Each of these research collaborations was
restructured in 1998 and the Biogen collaboration was terminated in December
1999.
In November 1998, certain of the OP-1 manufacturing rights and facilities
were sold to Stryker. We do not anticipate significant revenue from Stryker
until the OP-1 device is approved for commercial sale when we will be entitled
to royalties. Stryker has filed for marketing approval for certain uses of OP-1
in the U.S., Europe and Australia and is waiting to hear from the various
regulatory agencies.
Creative was developing an OP-1 based therapy for chronic renal failure.
Biogen provided research funding to Creative through December 1999 pursuant to
an option to develop OP-1 as a therapy for chronic renal failure. As of
December 31, 1999, Biogen did not exercise its option and Creative assumed all
rights to OP-1 renal therapies. We have decided not to further fund this
program.
We have been awarded $4,000,000 of grants from the National Institute of
Standards and Technology (NIST). These grants are to be received over the
period ending on October 31, 2003, are cancelable at the discretion of NIST and
are subject to annual appropriation by the US government. We recognize grant
revenue as the services are provided and costs are incurred under the terms of
the grants.
Operating expenses for the nine months ended September 30, 2000 include the
operating expenses of Creative for the seven months ended July 31, 2000 and the
operating expenses for Curis, comprising the combined operations of Creative,
Ontogeny and Reprogenesis, for the period from August 1, 2000, to September 30,
2000. Operating expenses for the nine months ended September 30, 1999 include
only the operating expenses of Creative for such period. Accordingly,
comparisons of operating expenses between the 2000 and the 1999 periods may not
prove to be meaningful. Additionally, in the nine 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.
Upon consummation of the merger, we have reviewed the research and
development pipeline of the combined companies, and have determined that we
will allocate resources among the various research and development projects
based on their strategic fit and the availability of internal resources. Our
current plans anticipate spending of between $30 - $40 million in each of 2001
and 2002 on research and development.
Future operating results will depend largely on the timing and magnitude of
royalty payments from Stryker, if the OP-1 device currently under regulatory
review with the FDA is approved for commercial sale, and the outcome of other
products currently under development. We cannot be sure when those royalties
will be received, if at all. We have never been profitable and expect to incur
additional operating losses in the next several years. Our results of
operations will vary significantly from year to year and quarter to quarter and
depend on, among other factors, the timing of entering into collaboration
agreements and receiving payments from collaborative partners, the timing of
payments under government grants, the timing of the receipt of royalties and
the cost and outcome of clinical trials.
Results of Operations
Nine Months Ended September 30, 2000 and 1999
Research and development contract revenues 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 the NIST grant received in November 1999.
Research and development expenses 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
24
<PAGE>
primarily due to the impact of the merger which occurred on July 31, 2000.
Research and development expenses for the 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 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 other
employees totaling $251,000.
General and administrative expenses increased 63% to $6,643,000 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 nine months ended September 30, 2000 include
severance paid to former officers of Creative of $926,000 and severance
payments relating to the termination of approximately eight other employees
totaling $122,000.
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 was primarily due to $6,624,000 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, one-time non-cash charges of $3,487,000 was recorded
related to the acceleration of certain stock options and the extension of the
exercise period for options held by Creative's executive officers, outside
directors and employees. 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 related to these shares was
$1,623,000. Lastly, on August 18, 2000, we issued 3,473,006 options to our
employees as well as to nonemployees with an exercise price below fair market
value resulting in deferred compensation of $18,491,000. The deferred
compensation is being amortized over the four-year vesting period of the
underlying stock options for options granted to employees and as earned for
nonemployees in accordance with EITF 96-18. The total expense related to these
options is $762,000.
Amortization of intangible assets 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 incurred as a result of the merger. In addition, we incurred
an impairment charge of approximately $4,611,000 to reduce the carrying value
of certain capitalized patents determined not to be beneficial or expected to
be utilized in future operations and which have no alternative future use.
Patent impairment charges for the nine month period ended September 30, 1999
were approximately $128,000. Amortization of patent costs were $156,000 for the
nine month period ended September 30, 2000 as compared to $198,000 for the nine
month period ended September 30, 1999.
A fixed asset disposition charge of $249,000 was incurred during the nine
months ended September 30, 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 was identified
as in-process research and development. 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.
For the nine months ended September 30, 2000, interest and other income was
$1,164,000 as 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 resulted
primarily from a lower average available investment balance as compared to the
prior year.
25
<PAGE>
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 resulted primarily from
the consolidation into Curis of the outstanding lease obligations of the three
companies prior to the merger.
As a result of the foregoing, we incurred a net loss of $331,226,000 for the
nine month period ended September 30, 2000 as compared to a net loss of
$8,632,000 for the nine month period ended September 30, 1999.
Years Ended December 31, 1999 and 1998
Total revenues in the year ended December 31, 1999 were $3,212,000 as
compared to $10,429,000 in the year ended December 31, 1998. Research and
development contract revenues decreased 70% to $3,160,000 in 1999 from
$10,419,000 in 1998. The decrease in research and development contract revenues
from 1998 to 1999 was primarily the result of a decrease in research and
development contract revenues from Stryker as we were not providing research
services or supplying OP-1 to Stryker in 1999.
License fees and royalties revenues increased by $42,000 to $52,000 in 1999
from $10,000 in 1998. The increase in license fees and royalties revenue is
partially due to royalties from Stryker and partially due to an increase in
revenue from licensing patent rights and know-how associated with certain
protein technology which was not central to our business.
Total operating expenses decreased 49% to $17,086,000 in 1999 from
$33,693,000 in 1998. Research and development expenses decreased 58% to
$10,435,000 in 1999 from approximately $24,856,000 in 1998. The decrease was
primarily due to the sale of certain of our OP-1 manufacturing rights and
facilities to Stryker in November 1998 and the elimination of manufacturing and
facility-related expenses with respect thereto. We had previously reported the
costs associated with such production of OP-1 as research and development
expenses. During 1999, our research and development expenses were related to
renal disease therapy as part of the Biogen collaboration, neurological disease
therapies and other proprietary indications.
General and administrative expenses decreased 20% to $5,524,000 in 1999 from
$6,946,000 in 1998. The decrease was primarily due to a reduction in external
legal and other consulting costs and a reduction in personnel-related costs.
Stock-based compensation decreased 80% to $64,000 in 1999 from $322,000 in
1998. In 1999 and 1998, we recorded charges of $64,000 and $205,000,
respectively, related to changes in the exercise terms of stock option
agreements in connection with the sale of our manufacturing operations.
Amortization of intangible assets increased 292% to $808,000 in 1999 from
$207,000 in 1998. The increase was primarily due to an impairment charge of
$538,000 to reduce the carrying value of certain capitalized patents determined
not to be beneficial or expected to be utilized in future operations and which
have no alternative use. The remainder of the increase was due to an increase
in patent amortization of $64,000.
In October 1999, we reorganized to focus operations and financial resources
on the development of our morphogenic protein-based clinical candidates for the
treatment of stroke and renal disease. In connection with this reorganization,
we reduced our headcount from 70 to 43 employees and recorded approximately
$511,000 in operating expenses for salary termination costs. In addition, in
the fourth quarter of 1999 we determined that health insurance claims were less
than originally estimated, related to the 1998 sale of manufacturing
operations. This resulted in a reduction in the loss on sale of manufacturing
operations of approximately $255,000 in 1999. The combination of these two
items resulted in a $256,000 charge to operations.
Interest income decreased 12% to $1,924,000 in 1999 from $2,183,000 in 1998
due to lower average balances of cash and marketable securities and lower
interest rates in 1999, as compared to 1998. In May 1998, we sold 25,000 shares
of Series 1998/A Preferred Stock. Net proceeds after deducting fees and other
expenses of the offering, were approximately $23,618,000. In addition, we
received approximately $19,530,000 in the fourth quarter of 1998 from the sale
of our OP-1 manufacturing-related assets to Stryker. In May 1999, we
repurchased all of the outstanding Series 1998/A Preferred Stock for
approximately $22,470,000 in cash.
26
<PAGE>
Interest expense decreased approximately 51% to $161,000 in 1999 from
$327,000 in 1998. The decrease in interest expense was due to a decrease in our
obligations under capital leases. As part of the sale to Stryker of certain of
our manufacturing-related assets in November 1998, Stryker assumed $710,000 of
our obligations under equipment lease agreements and $1,727,000 of our
obligations under a facility capital lease.
As a result of the foregoing we incurred a net loss of $12,110,000 in 1999
compared to a net loss of $21,395,000 in 1998.
Accretion and repurchase costs on Series 1998/A Preferred Stock was
$2,395,000 for the year ended December 31, 1999, and included the following:
$385,000 calculated at the rate of 5% per annum of the stated value of the
outstanding Series 1998/A Preferred Stock; $144,000 of accretion of issuance
costs related to the sale of Series 1998/A Preferred Stock; and as a result of
the repurchase of the Series 1998/A Preferred Stock on May 7, 1999, a one-time
charge of approximately $1,867,000 recorded in the second quarter of 1999 which
represents accretion of the Series 1998/A Preferred Stock up to its repurchase
amount and accretion of all remaining issuance costs. Accretion on Series
1998/A Preferred Stock for the year ended December 31, 1998 was $987,000 and
includes $733,000, calculated at the rate of 5% per annum of the stated value
of the outstanding Series 1998/A Preferred Stock from May 27, 1998 and $254,000
of accretion of issuance costs related to the sale of Series 1998/A Preferred
Stock. As a result of the repurchase of the Series 1998/A Preferred Stock,
there will be no further charges relating to the Series 1998/A Preferred Stock.
In computing the net loss applicable to common stockholders for the years
ended December 31, 1999 and 1998, the accretion and repurchase costs of the
Series 1998/A Preferred Stock mentioned above are included.
Years Ended December 31, 1998 and 1997
Revenues in the year ended December 31, 1998 were $10,429,000 as compared to
$13,087,000 in the year ended December 31, 1997. Research and development
contract revenues decreased 18% from $12,693,000 in 1997 to $10,419,000 in 1998
primarily as a result of a decrease in our research activity under the research
collaboration with Biogen, partially offset by an increase in research and
development contract revenues from the supply of OP-1 to Stryker.
License fees and royalties revenues in the year ended December 31, 1998
included $10,000 in revenue from licensing patent rights and know-how
associated with certain protein technology which was not central to our
business.
Total costs and expenses increased approximately 6% from $31,869,000 in the
year ended December 31, 1997, to $33,693,000 in the year ended December 31,
1998. Research and development expenses decreased 1% from $25,122,000 in 1997
to $24,856,000 in 1998 primarily due to the sale of our OP-1 manufacturing
rights and facilities to Stryker in November 1998 and the elimination of
manufacturing and facility-related expenses.
General and administrative expenses increased 19% from $5,827,000 in 1997 to
$6,946,000 in 1998. The increase was primarily due to approximately $600,000 in
increased costs associated with additions to our legal and administrative staff
and from increases in external legal and other consulting costs.
Stock-based compensation increased 27% to $322,000 in 1998 from $254,000 in
1997. In 1998, we recorded a charge of $205,000 related to changes in the
exercise terms of stock option arrangements in connection with the sale of our
manufacturing operations. In 1997, we recorded a charge of $254,000 based on
the fair value of options issued to nonemployees.
Amortization of intangible assets decreased 47% to $207,000 in 1998 from
$392,000 in 1997. The decrease was primarily due to an impairment charge of
$172,000 in 1997 to reduce the carrying value of certain capitalized patents
determined not to be beneficial or expected to be utilized in future operations
and which have no alternative use.
27
<PAGE>
In November 1998, we sold certain of our OP-1 manufacturing rights and
facilities to Stryker. We expect that the sale will provide us with increased
royalties on Stryker products, if approved for commercial sale, in lieu of the
manufacturing revenue anticipated under the prior agreement. Proceeds and
expenses associated with this transaction included the following:
<TABLE>
<S> <C>
Total proceeds................................................. $19,530,000
Less:
Net book value of manufacturing related assets............... 18,929,000
Employee termination costs................................... 1,438,000
Legal, accounting consulting costs........................... 525,000
-----------
Loss on sale of manufacturing operations....................... $(1,362,000)
===========
</TABLE>
We recorded a charge of $1,362,000 in the quarter ended December 31, 1998,
in connection with this transaction.
Interest and other income decreased 7% from $2,346,000 in 1997 to $2,196,000
in 1998 as we had higher average balances in cash and marketable securities in
1997 as compared to 1998. In May 1998, we sold 25,000 shares of Series 1998/A
Preferred Stock. Net proceeds to us, after deducting fees and other expenses of
the offering, were approximately $23,618,000. In addition, we received
approximately $17,000,000 in the fourth quarter of 1998 from the sale of our
OP-1 manufacturing related assets to Stryker.
Interest expense increased 51% from $216,000 in 1997 to $327,000 in 1998
primarily due to an increase in our obligations under an equipment lease
agreement. As part of the sale to Stryker of the manufacturing related assets,
Stryker assumed $710,000 of our obligations under equipment lease agreements
and $1,727,000 of our obligations under a facility capital lease.
As a result of the foregoing, we incurred a net loss of $21,395,000 in the
year ended December 31, 1998, compared to a net loss of $16,652,000 in the year
ended December 31, 1997.
Accretion on Series 1998/A Preferred Stock for the year ended December 31,
1998, includes $733,000, calculated at the rate of 5% per annum of the stated
value of the outstanding Series 1998/A Preferred Stock from May 27, 1998 and
$254,000 of accretion of issuance costs related to the sale of Series 1998/A
Preferred Stock. We were accreting the Series 1998/A Preferred Stock up to its
conversion value.
In computing the net loss applicable to common stockholders for the year
ended December 31, 1998, accretion of the Series 1998/A Preferred Stock
mentioned above is included.
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 and government grants,
manufacturing contracts and the sale of certain of our OP-1 manufacturing
rights and facilities to Stryker. In November 2000, we entered into purchase
agreements relating to the private placement of 5,200,000 shares of common
stock at $9.00 per share for net proceeds (after deduction of commissions and
offering expenses) of approximately $43,750,000. The closing of the private
placement will occur immediately prior to the date of this prospectus.
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. Cash used for operating activities was $14,768,000 for the year
ended December 31, 1999 and $10,412,000 for the year ended December 31, 1998.
Our investment in property,
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<PAGE>
plant and equipment was $537,000 during the nine month period ended September
30, 2000 and $610,000 during the year ended December 31, 1999. 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. In the nine
months ended September 30, 2000 and the year ended December 31, 1999, we spent
$564,000 and $777,000, respectively, on capitalized patent costs.
We have been awarded two grants aggregating $4,000,000 from 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 and to support the development of our cardiovascular
products, including Vascugel. The period for the grants is from November 1,
1999 to October 31, 2003. The grants are cancelable at the discretion of NIST
and are subject to annual appropriation by the U.S. government.
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 financial statements 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.
Financing activities generated approximately $4.5 million of cash in the
nine months ended September 30, 2000 from the exercise of options and warrants.
Financing activities used cash of $20,493,000 in 1999 compared to the
$24,403,000 provided in 1998. On May 27, 1998, Creative completed a private
placement with three institutional investors for the sale of 25,000 shares of
Series 1998/A Preferred Stock, with a stated value of $1,000 per share
resulting in net proceeds of approximately $23,618,000 after expenses. Since
issuance of the Series 1998/A Preferred Stock, the holders converted a total of
4,514 shares of Series 1998/A Preferred Stock into 613,129 shares of common
stock through May 7, 1999. On May 7, 1999, we repurchased 20,486 shares which
represented all of the outstanding Series 1998/A Preferred Stock following
final conversions, for approximately $22,470,000 in cash. The Series 1998/A
Preferred Stock has been retired and there will be no subsequent conversions
into common stock.
In November 1998, certain OP-1 manufacturing rights and facilities were sold
to Stryker for total proceeds of approximately $19,530,000. We expect that
under the terms of the sale, we will receive royalties from Stryker products
and, if approved for commercial sale, royalties which would exceed expected
manufacturing revenues anticipated under the prior agreement.
We anticipate that our existing capital resources and the estimated net
proceeds of $43,750,000 from the private placement of 5,200,000 shares of
common stock at a price of $9.00 per share should enable us to maintain our
current and planned operations into the fourth quarter of 2002. Our existing
resources, excluding the net proceeds of $43,750,000, should enable us to
maintain our operations into the fourth quarter of 2001. Under the terms of the
private placement, the selling stockholders have agreed to purchase the shares
of common stock upon receipt by us of notification from the Securities and
Exchange Commission (the "Commission") of its willingness to declare the
registration statement effective. Under the following circumstances, the
selling stockholders are not obligated to close the private placement: failure
by the Commission to indicate its willingness to declare the registration
statement effective within 75 days of the initial filing; occurrence of an
event which has a material adverse effect on our position (financial or
otherwise), properties or results of operations taken as a whole; or breach by
us of any other material obligation under the purchase agreement.
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
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<PAGE>
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.
Quantitative 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 is 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 financial statements 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.
At September 30, 2000, we had approximately $5.5 million outstanding under
fixed rate capital leases which are not subject to fluctuations in interest
rates.
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. We do
not expect the adoption of SFAS No. 133 to have a material impact on our
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
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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 application of this interpretation resulted in
approximately $19,100,000 of prepaid compensation, for the value of unvested
stock options held by employees and consultants of Ontogeny. This amount is
being amortized over the one-year vesting period of the underlying stock
options. The adoption of this interpretation did not have a material effect on
our financial statements, except as otherwise discussed above.
Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition," was
issued in December 1999. SAB 101 requires companies to recognize certain up-
front non-refundable fees and milestone payments over the life of the related
alliances when such fees are received in conjunction with alliances that have
multiple elements. We are required to adopt this new accounting principle
through a cumulative charge to the statement of operations, in accordance with
Accounting Principles Board Opinion (APB) No. 20, "Accounting Changes," no
later than the fourth quarter of fiscal 2000. We believe that the adoption of
SAB 101 will not have a material impact on our reported operating results as it
relates to the contract revenues, upfront non-refundable payments and milestone
payments received in connection with collaborations.
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BUSINESS
Overview
We intend to be a leader in the emerging field of regenerative medicine,
which seeks to improve, restore or preserve the normal function of tissues and
organs. By applying our knowledge of how genes function (functional genomics)
and our knowledge of how cells form into specialized adult tissues
(developmental biology), we believe we will be able to:
. activate cellular development pathways to promote repair and normal
function; and
. inhibit abnormal growth pathways to treat certain types of cancer.
We began operations on July 31, 2000 upon the completion of the merger of
Creative BioMolecules, Inc., Ontogeny, Inc. and Reprogenesis, Inc. Each of the
three companies made important contributions to the combined strength of our
business. Those contributions include the following:
Ontogeny: Validated developmental biology and functional
genomic discovery engine
Reprogenesis: Clinical development, cell therapy, biomaterials and
tissue engineering expertise
Creative BioMolecules:Product awaiting regulatory review and significant
antibody and developmental biology intellectual
property
Our product development pipeline includes a product which is currently under
regulatory review in the United States, Europe and Australia; a product in
late-stage clinical development; multiple early clinical and advanced
preclinical products; and a discovery engine that combines functional genomics
and developmental biology across multiple medical indications. By harnessing
the body's inherent ability to repair damage caused by disease, trauma or age,
we believe the products in our product development pipeline have the potential
to change the way degenerative disease, cancer and other disorders associated
with loss of normal function are treated.
Since the merger, we have engaged in an extensive review of the research and
development pipeline of the combined companies, and have allocated resources
among the various research and development projects based on their strategic
fit and the availability of internal resources. To the extent a project
requires greater resources than are available internally, we may seek to enter
into academic and commercial collaborations to continue such projects to
address this need; however, we may not continue all of the research and
development projects in our pipeline.
Background
Regenerative Medicine Background
The aging of the population is creating a growing need for regenerative
medicine therapies. Chronic degenerative diseases result in deteriorating
quality of life and increasing cost of patient care. However, there are
insufficient or inadequate therapies currently available generally to address
the underlying loss of tissue function inherent in degenerative disorders. In
addition, malignancies, trauma (e.g. paralysis due to spinal cord damage),
auto-immune disorders and other conditions create the need for regenerative
medicine therapies.
One solution for the challenges posed by an aging population is to identify
therapeutics that can stimulate repair and regeneration of damaged tissues and
organ systems. There is mounting evidence that even elderly adults retain or
can regain the capacity to repair and rebuild tissues and organs. The
restoration of lost function would improve the independence and quality of life
of the individual while having the potential to decrease the financial burden
to society.
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Functional Genomics/Developmental Biology
With the completion of the initial sequencing of the human genome, a major
objective for biopharmaceutical companies will be to identify the key target
genes for drug discovery. A significant challenge will be to sort efficiently
through the over 100,000 genes in the human genome to identify these key target
genes. Understanding the function of genes in key biological processes has
become an important basis for creating new drug development screens and new
therapies.
Developmental biology is a powerful tool that can be used to identify
therapeutics relevant to tissue repair and regeneration. Developmental biology
is the study of the genetic events and biological processes that control cell
growth and differentiation in an organism from its beginning (fertilization)
through maturation. It is now understood that the same mechanisms that govern
embryonic development are active and required in adults for normal function,
regeneration and repair. Examples of these mechanisms include the body's normal
replenishing of the blood supply and maintenance of skin and hair growth.
Therefore, the control molecules discovered in the embryo may be used in the
treatment of adult diseases through cell re-population, regeneration or repair.
We are positioned to integrate genomics sequence data, bioinformatics,
chemoinformatics and knowledge of developmental biology to understand the
function of genes in tissue formation and repair. We believe creating high
throughput screening assays based on developmental biology discoveries will
enable us to accelerate the identification of new therapeutic product
candidates.
The Drug Discovery and Development Process
Historically, pharmaceutical products have been developed primarily through
the creation and screening of large collections of chemical compounds and
natural products. Compounds were identified as pharmaceutical candidates based
on their activity in simple tests believed to mimic aspects of human physiology
or biochemistry. Where significant activity was found in a test, the compound
was then examined in animal models believed to simulate human disease
conditions. The principal limitation of this approach has been that these tests
and animal models have not always predicted the candidate drug's safety and
efficacy in humans. In addition, the mechanisms by which these compounds acted
and the underlying causes of the disease generally have remained unknown.
Consequently, the resulting candidate drugs were often ineffective or only
ameliorated symptoms without addressing the root causes of the disease.
While offering a significant improvement over traditional large
pharmaceutical drug discovery methods, a traditional genetics approach to drug
development also has weaknesses compared to a developmental biology-based
approach. Traditional drug development relies on animal models and laboratory
studies using mature animals. This approach has serious limitations because the
biological processes of interest for treating disease are often inactive in the
healthy adult animal and relevant animal models of disease are difficult to
create and validate. The creation of an animal model has often been a
prerequisite and a limitation in the discovery of significant lead molecules.
We believe that examining developing tissues and organs in embryonic
development will provide a rich source of potentially relevant molecules or
targets for drug discovery and help to avoid these limitations. It is for these
reasons that developmental biology may be a more efficient way to improve drug
discovery and move product candidates into human clinical trials sooner.
Recent advances in developmental biology and genetics have the potential to
improve drug discovery and development significantly by enabling the
identification of the control molecules (e.g., secreted proteins) and cellular
mechanisms by which organisms develop. This identification is important because
these molecules and mechanisms are believed to be responsible for inducing
organ development. In contrast to traditional drug discovery and development
techniques, a developmental biology approach focuses first on the role of
molecules in early organ development. The use of developmental biology
approaches allows the discovery of relevant molecules and processes because
cell regeneration in adults often repeats the developmental processes. There
are several ways in which these lead molecules could lead to products. It is
possible that certain disease processes are caused by the lack of the
developmentally active molecules, and there is evidence that these
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molecules continue to be produced and needed for normal maintenance of tissues
during adult life. Thus, the secreted inducing proteins could be used directly
as drugs. In the case of diabetic neuropathy, for example, the addition of
these molecules might enhance and expedite the healing process. In addition,
the developmentally active molecules and/or their receptors and signaling
pathway components can be used as targets to discover small molecules which
regulate the activity of the regeneration (i.e., developmental) processes.
Therefore, we believe that a comprehensive commitment to understanding the
process of embryonic development is essential to realize the full value of a
developmental biology approach to drug discovery and development.
Our Regenerative Medicine Technologies
We have expertise and capabilities in the four major regenerative medicine
technologies which we believe are necessary to take advantage of the
opportunities created by the sequencing of the human genome and an expanding
understanding of developmental biology. These technologies are:
. Protein Factors: gene/protein identification, expression and functional
characterization, and the ability to develop therapies based on or
incorporating genes/proteins through protein biochemistry, protein
production and protein delivery. Examples include OP-1 for treatment of
bone disorders and Hedgehog protein-based treatments of neurological
disorders.
. Cell Therapies: the ability to culture, qualify, deliver and manage cells
for the development of therapies incorporating living cells for tissue
regeneration or normal physiological function. Examples include the
differentiation of stem cells in mature beta islet cells for treating
diabetes and Vascugel to prevent restenosis and thrombosis following
vascular injury, such as that following surgery.
. Tissue Engineering: matrix development and delivery expertise including
knowledge of biomaterials, synthetic materials and other scaffolds for
tissue formation and knowledge of cell/factor/matrix interactions in
tissue formation and repair. Examples include the Chondrogel and Neo-
Bladder products under development in which the shape and structure of
combined cells and biomaterials are utilized to repair the valve in the
bladder or grow an entire new bladder.
. Small Molecules: cell-based assays, developmental biology expertise, high
throughput screening, combinatorial chemistry libraries and medicinal
chemistry. Examples include CUR-61414 for treatment of basal cell
carcinoma and a Hedgehog agonist to stimulate regrowth of hair follicles.
Protein Factors
The role of morphogenic proteins in the formation, maintenance and repair of
many tissues has led us to believe that morphogenic proteins may provide
therapies to treat several types of acute injury or chronic disease. Our
research and that of our collaborators have indicated that morphogenic proteins
are significant in the formation of many tissues including bone, cartilage,
kidney, dental and brain tissues. OP-1, a morphogenic protein, has been
developed in a formulation with a collagen matrix to induce bone formation. In
human trials, OP-1 has demonstrated the ability to repair bone defects in
several hard-to-heal orthopaedic indications. Additional clinical trials are
currently underway by Stryker to evaluate OP-1 in other indications, including
the treatment of periodontal disease, fresh fractures and spinal fusion. We are
also exploring the role of several of the morphogenic proteins in tissues
throughout the body to identify new product opportunities for therapies based
on these proteins.
In addition to identifying and characterizing several morphogenic proteins,
including OP-1, we have identified with our collaborators the DNA sequences
which regulate the expression of OP-1. We have also discovered the cellular
receptors to which OP-1 and other morphogenic proteins bind and through which
they act as well as the three-dimensional structure of OP-1. These discoveries
have enabled us to initiate a small molecule program, the goal of which is to
identify second generation, orally-active drug compounds that either promote
morphogenic protein expression, mimic the biological activities of morphogenic
proteins or inhibit the biological activities of morphogenic proteins.
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Cell Therapies and Tissue Engineering
For decades, investigators sought to create new tissue in the body through
the transplantation of suspensions of viable cells. These cell suspensions
often did not remain viable for extended periods or support new tissue
formation. The genesis of our tissue engineering technology was a series of
observations made by investigators at Harvard University and Massachusetts
Institute of Technology. In preclinical models, these investigators combined a
suspension of cells with a fibrous biodegradable synthetic matrix material and
then implanted the cell/matrix combination into a host. This biodegradable
matrix imparts the structure that is often needed for the cells to organize
themselves to form tissue. The host incorporated the transplanted synthetic
matrix, and the creation of new tissue resulted from the net effect of this
process, combined with cell growth and the development of a natural matrix by
the transplanted cells. This approach allowed new solid structures to be
implanted into the body using conventional open surgical procedures for the
purpose of creating new solid tissue structures. The implantable technology
using fibrous matrices has been licensed in the areas of genitourinary (i.e.,
kidney, ureter, bladder, urethra and reproductive system) and breast
indications.
Separately, we and our collaborators developed tissue formation techniques
that could be delivered in a minimally invasive fashion. Toward this end, we
demonstrated in preclinical models that cells could be combined with viscous
hydrogels. If the hydrogels were biodegradable, the cell/hydrogel suspensions
could be delivered into the body in a minimally invasive procedure in both
peripheral and deep body structures to produce new tissue. Once delivered into
the body the cells would remain viable, propagate and synthesize natural matrix
materials with the net formation of new viable tissue. This hydrogel-based
technology has been licensed to us in all therapeutic fields of use.
Our technology has a number of advantages. It is straightforward to apply
and, for the injectable approach, can be delivered in a minimally invasive way
using standard endoscopic devices. Furthermore, it can be applied to many
tissue types. To date, we and our collaborators have shown that new cartilage,
muscle, and genitourinary tissue can be formed by either or both of the
approaches described above. Our goal is to create a variety of therapeutic
interventions to correct many tissue deficiencies.
Our technology has the potential to be applied using any source of cells
including autologous (i.e., from the specific patient to be treated),
allogeneic (i.e., from another human source) or xenogeneic (i.e., from another
animal species) sources. Each cell source has distinct advantages and
disadvantages associated with its use. Autologous tissue has the advantage of
reducing or eliminating the risks of infection coming from another source and
immune rejection but can only be obtained from the patient being treated.
Allogeneic cell-based products should be less expensive to produce and more
readily available to the patient than autologous products because they can be
sourced in advance. However, they have an inherent risk of infection
transmission and/or immune rejection. Xenogeneic cell based products should be
available in virtually unlimited supply. They also have an inherent risk of
infection transmission and a potentially greater risk of immune rejection. We
intend to seek to use the most advantageous source of cells for each of our
products. For example, for our Chondrogel product, where extended durability is
desired, autologous cell sources are being used. For our cardiovascular
product, Vascugel, where a physiological effect for a limited time frame is
believed to be necessary to achieve the desired clinical effect, an allogeneic
cell source is being used. In this latter case, the body is expected to clear
the product after its physiologic effect has been imparted to the patient. At
this time, we are not developing any xenogeneic products.
Since the formation of new tissue in the body often requires the combination
of a cell source with a polymer or other biomaterial to provide a three-
dimensional structure for the cellular construct or product, we maintain
expertise and scientific collaborations in the area of polymer chemistry and
biomaterial science. We actively pursue the development of new injectable and
implantable polymers that could support new tissue formation or delivery of
physiologically active substances. Toward this end, we have developed a number
of novel formulations and delivery techniques. For example, we have developed a
number of modifications of alginate, the polymer used as a matrix material for
the Chondrogel clinical product, in collaboration with an academic researcher.
Alginate is a viscous natural polymer purified from brown seaweed. It is
currently used as
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a thickening agent in various foodstuffs. This material has been chemically
modified in order to produce a series of polymers with controlled and
predictable rates of degradation in the body, thus allowing product
durabilities ranging from weeks to many months. Highly porous, non-fibrous
materials, which can be used as implantable matrix materials, have also been
developed. Such materials could be used to repair or restore the normal
function of diseased or damaged body structures or to deliver bioactive
substances.
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 a $2,000,000 grant from NIST to support
the development of our cardiovascular products, including Vascugel. The grant
period for the first NIST grant is from November 1, 1999 to October 31, 2002.
Small Molecules
A variety of approaches are being utilized by our scientists to study gene
expression patterns and to determine the function of developmentally
interesting proteins. Identifying the role that a gene and its protein play
during development is an essential element in determining its utility as a
basis for a therapeutic agent or screening target. The program employs the
following key elements:
. expression profiling of genes across different developmental stages of
organs and tissues to identify novel genes which may be important for
repair and regeneration of these tissues in adults;
. computer technology to categorize, characterize and help establish
proprietary positions for gene discoveries;
. a battery of assays to determine where and when genes and their products
become active using our developmental biology technologies to look at
expression patterns in the embryo;
. traditional and proprietary assays to rapidly determine the expression
patterns of genes during development and in adult organs; and
. small molecule screening through the use of functional assays, including
cell-based assays, that are amenable to screening both biological and
chemical libraries for active compounds.
Our system provides an efficient way to functionally screen the novel genes
and proteins which are being discovered through various human genome
identification initiatives, thereby meeting a major need in modern
pharmaceutical research. The Human Genome Project and computerized and
automated sequencing have combined to generate enormous amounts of genetic
sequence information. Access to the discoveries generated by the sequencing of
the human genome may expand greatly our internal discovery capacity. However,
without determining the function and clinical relevance of these genes, it is
difficult to determine which sequence is a potential candidate for drug
development. Our system compares complementary DNA libraries from relevant
stages of embryonic development. We believe that functional screening programs
are one answer to identifying the most promising drug development leads. We
believe that developmental biology-based functional screening programs provide
a powerful tool to identify the most significant genomic sequences that may
have the highest therapeutic potential. Follow-up assay development and high-
throughput screening produces proprietary lead compounds which can be optimized
through standard medicinal chemistry methods. Using this approach, we have also
generated additional potential product candidates:
. a potential treatment of peripheral neuropathies (damaged nervous system
tissues) from research based on the Hedgehog proteins;
. a potential protein and small molecule-based treatment of hair loss from
research based on the Hedgehog proteins;
. a potential cell-based treatment derived from pancreatic ductal cells for
Type I diabetes;
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. molecules for the potential treatment of Type II diabetes; and
. a small molecule for the potential treatment of colon cancer.
Curis Research and Product Development Programs
As a result of the merger of Creative, Ontogeny and Reprogenesis, we have
acquired the product portfolio of each of these companies. Set forth in the
chart below are the principal product candidates and research programs that we
are currently pursuing.
Curis Pipeline
<TABLE>
<CAPTION>
Product/
Therapeutic Pre- IND Regulatory
Approach Indication Research clinical Preparation Phase II/Pilot Phase III/Pivotal Review
----------- -------------------------- -------- -------- ----------- -------------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
OP-1 Non-Healing Fractures(/1/) ----------------------------------------------------------------------
OP-1 Fresh Fractures(/1/) --------------------------------------------------------
Chondrogel Vesicoureteral Reflux --------------------------------------------------------
OP-1 Periodontal Disease(/1/) -------------------------------------
OP-1 Spinal Fusion(/1/) -------------------------------------
Vascugel Coronary Artery Disease -------------------
CUR-61414 Basal Cell Carcinoma -------------------
Neo-Bladder Bladder Augmentation ------------
Hedgehog Neuropathies/CNS ---------
Hedgehog Hair Growth ---------
Growth Factors Diabetes Factors ----
Stem Cells Pancreatic Islets ----
</TABLE>
--------
(/1/Partnered)with Stryker.
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OP-1
Several therapeutic products based upon OP-1 are currently in development by
our commercial partner, Stryker. The following table sets forth the product
development programs relating to OP-1:
<TABLE>
<CAPTION>
Potential Application Development Status(1)
--------------------- ---------------------------------------------------------------------------
<C> <S>
Orthopaedic Reconstruction and Dental Applications
Non-Union Fractures, Tibia..................... U.S. Pivotal Trial Completed Regulatory Review Underway in the United
States, Europe and Australia
Non-Union Fractures, All Long Bones............ U.S. Treatment Study
Fresh Fractures................................ Canadian Clinical Study
Spinal Fusion.................................. U.S. Clinical Study
Other Bone Graft Indications(2)................ International Clinical Studies
Periodontal Disease............................ U.S. Clinical Study
Cartilage Regeneration......................... Preclinical
</TABLE>
--------
(1) "Pivotal Clinical Trials" are investigations conducted under an
Investigational Device Exemption (IDE) intended to be used as the primary
supporting documentation for regulatory approval of a new medical device.
"Treatment Study" denotes an open label study pursuant to a supplement to
an IDE. "Clinical Studies" vary in scope from a Canadian Clinical Trial in
200 patients with fresh fractures to several physician sponsored
feasibility investigations conducted among a small number of patients.
"Preclinical" denotes the collection and analysis of data from multiple
studies in animals relating to toxicity and/or efficacy in preparation for
an Investigational New Drug (IND) or IDE application filing. See
"Regulatory Matters." In any case where more than one product formulation
or composition may be developed, the status stated relates to the most
advanced product in that field.
(2) Stryker has announced that it has initiated clinical studies for several
orthopaedic reconstruction applications of OP-1. Preliminary data has been
reported from some of the ongoing studies.
Orthopaedic Reconstruction and Dental Applications
We have collaborated with Stryker, a leading specialty surgical and medical
products company, to develop and commercialize orthopaedic reconstruction and
dental therapy products using the OP-1 device, a powder mixture of OP-1 and a
highly purified Type I collagen matrix which is formed into a paste. Under the
terms of a collaboration agreement, Stryker has exclusive rights to develop,
manufacture and commercialize OP-1 products in orthopaedic reconstruction and
dental applications, and we will receive royalties on commercial sales of OP-1
products in this field. We have retained all rights to OP-1 for all uses other
than orthopaedic reconstruction and dental applications. See "--Collaborative
Alliances and License Agreements--Agreements Relating to OP-1 -- Stryker
Corporation."
Orthopaedic Reconstruction. Through our collaboration with Stryker, we have
generated substantial evidence that OP-1 is a potent stimulator of bone and
cartilage formation. Numerous studies in six different animal species have
demonstrated that OP-1 is capable of inducing bone regeneration at a wide array
of sites within the body in which bone is normally present. Bone formed in
response to OP-1 has been shown to be biochemically and biomechanically
identical to normal bone.
The most widely employed reconstruction procedure for the replacement of
lost or damaged bone is bone grafting. Grafting involves surgical
transplantation of bone or bone chips to the site of the defect to facilitate
new bone formation. Autograft, the currently preferred grafting approach,
involves two surgical steps: a first step to harvest the graft, and a second
step to implant the graft at the site of the defect or injury. In addition to
the pain and cost associated with this two-step procedure, many patients
experience complications resulting
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from the graft harvesting step. A second approach involving allograft
procedures utilizes bone grafts or demineralized bone taken from cadavers. We
believe that the OP-1 device applied locally to the site of the defect could be
used as an alternative to many bone graft procedures, and may provide reliable
healing without the need for graft harvesting with its associated
complications.
Under our agreement with Stryker, Stryker is solely responsible for clinical
development and commercialization of the OP-1 device in orthopaedic
reconstruction products. The following two paragraphs are based upon
information presented in Stryker's Annual Report on Form 10-K for the year
ended December 31, 1999, as well as statements made at Stryker's quarterly
analyst call held on October 17, 2000.
In 1991, Stryker received FDA approval to begin human clinical trials of its
OP-1 Bone Growth Device known as the OP-1 Implant, which was developed in
collaboration with one of our predecessors, Creative, as part of a long-term
research program funded by Stryker since 1985. This device is composed of OP-1
and a bioresorbable collagen matrix. OP-1 is naturally present in the human
body and directs a cascade of cellular events that results in bone growth. In
pre-clinical studies, OP-1 induced the formation of new bone when implanted
into defective bone sites. In addition, results from early-stage animal trials
of OP-1 suggest that it may also promote cartilage repair. The initial human
clinical study, which began in 1992, compares the efficacy of the OP-1 Implant
to autografts in the repair of non-union fractures of the tibia. The patients
involved in the trial all suffered tibial fractures that showed no evidence of
healing at least nine months from the initial injury and at least three months
after any prior surgical intervention. Patients received either the OP-1
Implant or autograft bone on a random basis. In 1995, the FDA allowed Stryker
to enlarge the scope of the clinical trials for expanded indications of non-
union fractures in all long bones. During 1996, the surgical procedures on the
122 patients in Stryker's tibial non-union clinical trial were completed and,
in 1997, Stryker began the collection and analysis of the data from the
clinical trial. The study demonstrated that the OP-1 Implant patients had
comparable clinical success to the autograft patients without the need for a
second invasive procedure to harvest autograft from the hip. There were three
prospectively determined clinical trial outcomes defined in the study: weight-
bearing; level of pain with weight-bearing; and radiographic assessment of the
bridging of the non-union defect. The study design predicted 80% success at
nine months post-surgery. Both the OP-1 Implant and autograft groups met this
prediction for the clinical outcomes of weight-bearing and pain and both groups
had comparable results. The blinded radiographic assessment by an independent
panel of radiologists showed that neither group achieved the 80% criterion for
bridging.
A Pre-Market Approval (PMA) application for the OP-1 Implant was filed and
accepted by the FDA in June 1999. We believe Stryker submitted a response in
the third quarter 2000 to a deficiency letter received from the FDA regarding
the PMA that focuses on the radiographic findings and certain other clinical
data. Upon receipt of Stryker's response, the FDA staff must make a
determination whether to submit the PMA application to a panel of industry and
medical experts who would review it and make a recommendation to the FDA. The
panel meeting was not scheduled as of Stryker's quarterly conference call on
October 17, 2000. The FDA staff must also inspect Stryker's OP-1 manufacturing
facilities, and the inspections were not scheduled as of the conference call.
If, after inspection, the facilities are found to be acceptable and there is a
positive recommendation by the panel, the FDA may grant approval allowing the
OP-1 Implant to be marketed in the United States for certain defined uses.
Further clinical testing and PMA filings would be necessary to expand the
approved uses of the product. As stated during its October 17, 2000 conference
call, Stryker also filed a Marketing Authorization Application with the
European Medicines Evaluation Agency (EMEA) for certain OP-1 uses, which was
accepted for filing in July 1999. The European authorities have conducted a
manufacturing inspection and Stryker received GMP status as a pharmaceutical
manufacturer following the inspection. As stated during its October 17, 2000
conference call, Stryker has responded to questions from the EMEA and a hearing
was scheduled for November 14, 2000 before the EMEA's Committee for Proprietary
Medicinal Products for consideration of Stryker's submisision. Stryker also
filed a New Drug Application with the Therapeutic Goods Administration in
Australia in 1999 that is under review at this time. Stryker is planning
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to make a presentation to Australian authorities in support of its submission
in the first quarter of 2001. Stryker has indicated that it cannot predict the
timing of the regulatory process and there can be no assurance that approvals
will be obtained from the FDA or other regulatory agencies for any use of the
OP-1 Implant.
The OP-1 Implant is in pivotal and other later stage trials for other bone
reconstruction indications including fresh fractures, spinal fusion and other
bone graft indications. Stryker has initiated a 200 patient Phase III clinical
study in Canada to evaluate the use of the OP-1 Implant for the treatment of
fresh fractures and a U.S. clinical study to evaluate the OP-1 Implant in
spinal fusion. Stryker has also initiated clinical studies in several European
countries. Stryker may initiate additional clinical trials to demonstrate the
utility of OP-1 based products in additional orthopaedic indications. Stryker
and Curis have also conducted preclinical studies indicating the potential
utility of OP-1 in the treatment of cartilage defects. We believe that
Stryker's goal is to market OP-1 products for a number of orthopaedic
reconstruction indications in major markets around the world.
Periodontal Tissue Repair. Periodontal disease is a bacterially induced
inflammatory disorder that results in the progressive destruction of the
periodontal tissues that hold teeth in place. Reliable and effective
restoration of periodontal tissue damaged or lost as a result of periodontal
disease is not possible with current therapies. Based on data from the most
recent American Dental Association Survey of Services Rendered, or ADA Survey,
in 1995 approximately four million patients underwent periodontal surgery in
the United States for severe periodontal disease. We believe that many of these
procedures would have been candidates for treatment with an OP-1 periodontal
product.
Stryker is conducting a clinical trial in the United States to test an OP-1
device in the treatment of periodontal disease. This trial follows preclinical
studies which demonstrated that an OP-1 device was capable of regenerating the
normal tissue structures surrounding the tooth root.
Research Programs
New Applications of Morphogenic Proteins. The morphogenic proteins to which
we have proprietary rights are involved in the development of several tissues
and mediate the activity of many cell types. We are exploring the biology and
activity of these proteins to identify new therapeutic applications. This
research will require significant development work to determine the therapeutic
potential of these possible future products.
Molecular Therapeutics. In addition to identifying and characterizing OP-1
and other morphogenic proteins, we have identified the DNA sequences which
regulate the expression of OP-1, identified the cellular receptors to which
morphogenic proteins bind and through which they act, and determined the three-
dimensional structure of OP-1. We are currently seeking to use this knowledge
to format assays for screening to identify orally-active drug compounds that
either promote endogenous morphogenic protein expression or mimic morphogenic
protein biological activities. In addition, the information that relates to the
three-dimensional structure of OP-1 can be used to aid the rational design or
modification of small molecule drug candidates. These assays and information
have enabled us to develop a molecular therapeutics program that seeks to
identify the next generation of drug development candidates based on
morphogenic protein biology.
Chondrogel for Vesicoureteral Reflux
Vesicoureteral Reflux
Under normal conditions, the orifice at the vesicoureteral junction (i.e.,
the junction at which the ureter enters the bladder) allows urine to enter the
bladder and prevents urine from flowing back into the ureter, particularly
during urination. In this way, the kidney is protected from high pressure in
the bladder and from contamination by infected urine. When the junction is
incompetent, urine in the bladder flows back into the ureters and, in many
cases, to the kidneys. Vesicoureteral reflux, a congenital condition, refers to
the retrograde flow (i.e., reflux) of urine from the bladder into the ureter(s)
and, often, to the kidney(s). Vesicoureteral reflux affects up to 3% of
children.
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Reflux and urinary tract infections (UTI's) are significant causes of
illness in children. Primary reflux results from a congenital incompetence of
the vesicoureteral junction. Retrograde flow of infected urine can result in
kidney damage and scarring. The incidence of urinary tract infections in normal
children is approximately 1%. Approximately 30-50% of all pediatric patients
with UTI's also have reflux.
Current Treatments/Limitations for Reflux
The accepted standard of care for reflux is dependent on the severity of the
condition and is designed to minimize or prevent kidney infections. Most
patients with low-grade reflux may initially be managed medically. Medical
management typically consists of administering antibiotics (for the maintenance
of sterile urine) until the condition resolves. Additionally, standard care
requires frequent urine cultures and invasive examinations to monitor the
condition. The inherent risks associated with long-term use of antibiotics
include the emergence of antibiotic resistant bacteria, allergic reactions, as
well as pulmonary and hematological risks. The treatment regimens generally
require the child to return regularly to the hospital or clinic for extensive
and invasive studies.
Open surgery is typically performed for those cases of severe reflux as well
as for those cases of low-grade reflux where medical management has failed. Due
to the inherent risks and invasiveness of surgery, there is a tendency for both
the physician and parents to seek to avoid open reflux surgery. Typically, open
reflux surgery is a two to three hour procedure, involves a two to five day
hospital stay, has a significant degree of associated discomfort, is expensive
and requires a four to six week recuperation.
As a result of the inherent risks and invasiveness of surgery, less invasive
approaches to treat reflux have been sought. In the early 1980's, the concept
of treating reflux using an endoscopically delivered bulking agent was
developed. The placement of a bulking agent at the ureteral junction prevents
backflow of urine from the bladder to the ureter and kidneys, thus preventing
reflux but not interfering with normal bladder function. This concept has been
embraced by medical practitioners worldwide, but its use has not come into
common practice in the United States due to the historic absence of a bulking
agent that is generally accepted as safe, effective and durable.
DeFlux(R), a synthetic bulking agent, is marketed in Europe for the
treatment of vesicouretoral reflux and incontinence. Recent data suggest it may
be able to compete with Chondrogel at a substantially lower cost, but its
durability is still uncertain. The minimally invasive injection of Teflon(R)
paste as a bulking agent has been used in Europe to correct reflux; however,
concern about particle migration has limited the use of Teflon(R) for this
indication in the United States. Bovine dermal collagen preparations, derived
from the skin of cows, and dextranomer beads in a hyaluronic acid have been
used. The implant volume in patients and preclinical models treated with the
latter materials in reflux and other indications has been reported to decrease
over time due to natural breakdown and absorption, which, in turn, could result
in eventual treatment failure.
Curis Approach
We have developed an autologous cellular product which we believe meets the
requirements for a desirable implant. Chondrogel can be implanted
endoscopically (i.e., in a minimally invasive surgical procedure) at the
defective vesicoureteral orifice, and is expected to reduce or eliminate the
need for open surgery in many patients. Chondrogel consists of autologous
cartilage cells in a calcium alginate gel. Cartilage cells are isolated from a
tissue biopsy from behind the subject's ear, expanded in tissue culture media,
and combined with sodium alginate which is then mixed with a calcium suspension
to form a calcium alginate gel. The gel is thought to serve as a substrate for
injectable delivery and aids in the creation and maintenance of cartilage
architecture in the body. The cells are thought to secrete a natural matrix
that replaces the space initially occupied by the gel mixture.
Chondrogel appears to be well tolerated, and has not exhibited evidence of
any particulate migration in human or animal studies. By endoscopically
implanting cells in a biodegradable hydrogel matrix, Chondrogel
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can correct reflux by augmenting, or bulking, tissue at the vesicoureteral
junction to prevent urine backflow without interfering with normal bladder
function. Based on our experience to date, which is incomplete, we believe
Chondrogel will allow children with reflux to be treated safely and effectively
with only minimally invasive outpatient procedures required for the cartilage
harvest and injection procedures.
Clinical Development of Chondrogel
In 1996, clinical testing of Chondrogel was initiated in a safety study. The
trial was conducted in 10 young adult volunteers and demonstrated that the
biopsy tissue could be obtained safely. In November 1997, enrollment of a
subsequent 29-patient Phase II open-label clinical trial was completed. This
trial was designed to evaluate the safety and preliminary efficacy of
Chondrogel in pediatric patients with vesicoureteral reflux. The primary
endpoint of this trial, which was conducted at two sites, was avoidance of
surgery in children with vesicoureteral reflux after one or more treatments.
Safety and efficacy measurements were made at three and twelve months post-
treatment. At three months after treatment, 22 of 29 (76%) patients were free
of reflux. At twelve months after treatment, 18 of 29 (62%) patients remained
free of reflux.
A Phase III clinical trial was initiated in May 1998. In September 1998, it
was determined in preclinical models that a superior quality product could be
created with relatively minor modifications to the existing formulation.
Enrollment in this Phase III trial was discontinued since it was expected that
this improvement would maximize the clinical outcome. Development studies
identified a formulation that would deliver an increased number of viable cells
at injection. This formulation was incorporated in a "ready-to-use" preparation
for injection. Formulation development studies were completed in February 1999,
and a regulatory amendment describing the new formulation was submitted to the
FDA. The FDA agreed to the use of the new formulation to treat patients in a
new open label Phase III safety and efficacy trial. Patient enrollment in the
trial began in July 1999, and was completed in September 2000. Data from this
trial is expected to be available in late 2001. Pending evaluation of data from
this trial, we expect to submit a Biologics License Application (BLA) to the
FDA in the first half of 2002.
The 61 patients enrolled in the Phase III trial are being treated to
determine the safety and effectiveness of the product being submitted for
licensure. Data from the patients in the earlier trials (original formulation)
will be used to demonstrate the safety of the product and the effectiveness of
a similar product. The current trial was conducted at eight clinical sites in
the United States. The primary efficacy outcome for this trial is the
resolution of reflux. In addition to the Phase III trial, the FDA has asked for
data to demonstrate the role of both cartilage cells and an alginate hydrogel
for product effectiveness (i.e., tissue bulking). Toward this end, a controlled
clinical trial was initiated in urinary stress incontinence (a condition in
which involuntary urination occurs during straining, coughing or sneezing),
comparing Chondrogel with crosslinked alginate hydrogel without cartilage
cells. This study is being conducted in up to ten centers in the United States
and will enroll up to 25 patients in the Chondrogel treatment group and up to
25 patients in the alginate hydrogel group. We will complete this trial prior
to a filing for FDA approval for the reflux indication. However, these trials
may not achieve the desired clinical endpoints. Separate from these studies
whose completion are required for licensure, we will also conduct a randomized,
controlled (antibiotic treatment) clinical trial evaluating Chondrogel for the
treatment of pediatric patients with less severe reflux than those enrolled in
the current trial.
Many of the biomaterials, cell types, and ingredients used in our products
and product candidates have not previously been used as components in medicinal
products. Historically, neither FDA nor other regulatory authorities have
determined the safety and effectiveness of these materials for pharmaceutical
or other medical use. Therefore, the acceptability or approvability of these
materials has not been demonstrated. Furthermore, any FDA approval of
Chondrogel has increased uncertainty because Chondrogel is our first product
using novel materials in a non-traditional manner to undergo FDA review.
We are currently evaluating the results of a Phase I study using Chondrogel
in nipple reconstruction. Nipple reconstruction is required in women who have
breast reconstruction post-mastectomy surgery. While there are several methods
available to plastic surgeons to perform breast reconstruction, there are no
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satisfactory ways to reconstruct a nipple. The Phase I study is being conducted
in normal volunteers who are undergoing elective abdominoplasty or breast
reduction surgery. Chondrogel is implanted in the tissue that is to be excised
during the surgical procedure.
Vascugel for the Inhibition of Restenosis and Thrombosis in Coronary and
Peripheral Vascular Procedures
Cardiovascular Biology
Vascular arterial disease is the most common cause of death in the United
States. Revascularization procedures such as coronary artery bypass graft
surgery and therapies such as angioplasty and stenting are the current standard
of care. However, a large number of these procedures fail after time due to
conditions known as restenosis and thrombosis. Restenosis is the re-narrowing
of the treated blood vessel following vessel wall injury resulting in decreased
blood flow. Thrombosis is the blockage of the blood vessel due to the formation
of blood clots.
Restenosis occurs in large part because cells (smooth muscle cells) in the
wall of the vessel proliferate after the vessel is damaged. This proliferation
occurs because the cells on the inside of the vessel (endothelial cells) which
normally control smooth muscle cell proliferation are damaged, and apparently
can no longer provide the physiological function of keeping the underlying
smooth muscle cells in a steady state. It is estimated that over 1.5 million
transcutaneous (i.e., balloon angioplasty and stenting) and peripheral and
coronary arterial (coronary artery bypass graft) bypass procedures are
performed each year and that a significant portion of these will fail within
months, requiring reintervention with added risk. Of the approximately 1.5
million procedures per year, 845,000 (1998 data from Medical Data
International) are angioplasty and stenting, 570,000 (1996 data from Medical
Data International) are coronary artery bypass procedures, and 100,000 (1996
National Hospital Discharge Survey) are peripheral artery bypass procedures.
Angioplasty and stenting procedures experience restenosis at a 15 to 50% rate
within six months (30 to 50% rate without stenting, 15 to 33% with stenting).
Coronary artery bypass grafts experience restenosis at a 12 to 20% rate after
one year, while peripheral artery bypass grafts experience restenosis at a 15
to 20% rate after one year.
Obstructive vascular problems also arise from the need for chronic access to
the blood stream. An example of such access is the arterial/venous (A/V) shunt
used by patients with end-stage renal disease who require kidney dialysis.
Typical failure rates of A/V shunts are 40-50% after 12 months.
Curis Approach
We are developing a product, Vascugel, which seeks to enhance the efficacy
of bypass surgery and chronic vascular access by reducing or eliminating
restenosis. Vascugel does not currently address angioplasty or stenting
procedures. Recognizing that the endothelial cells appear to regulate smooth
muscle cell overgrowth, Vascugel utilizes allogeneic endothelial cells in a
degradable matrix placed on the outside of injured vessels at the time of
surgery. Other researchers are attempting to deliver inhibitors of smooth
muscle cell proliferation to the lining of the artery to prevent the overgrowth
of smooth muscle cells. This is complicated by the presence of blood flow at
this site. In contrast, our approach seeks to recapture the control produced by
the endothelium by implanting endothelial cells in a protected area next to the
artery (i.e., on the outside where there is no blood flow.) When allogeneic
endothelial cells are dispersed within a polymer matrix, they remain viable and
exhibit normal behavior for extended periods. When the cell-matrix device is
"wrapped" around injured arteries or grafts, restenosis was inhibited in
preclinical studies. Moreover, we believe the cells prevent the overgrowth of
smooth muscle cells over a long period of time. However, the immune responses
of patients to these transplanted cells has not been characterized and the
effectiveness of this product in recipients sensitized to materials or donor
antigens by blood transfusion, pregnancy or organ transplantation is not known.
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Vascugel is under development to address a range of vascular diseases,
including diseases that occur in the coronary and peripheral vascular systems.
Different cell types, polymer formulations and device configurations are being
developed. In this way, the blood vessel narrowing or re-narrowing associated
with bypass surgery, organ transplantation and kidney dialysis may be
effectively treated with the potential to decrease the complexity, cost or time
of the required surgical procedure.
We have filed an IND to initiate a Phase I clinical study of Vascugel for
the inhibition of restenosis, and expect to begin this study in late 2000.
Leads from Functional Genomics and Developmental Biology Platform
We are developing several products identified through the use of a
developmental biology-based system for the identification of gene function and
the generation of drug development leads.
Basal Cell Carcinoma
Basal cell carcinoma, a form of skin cancer, is the most common human
cancer. Caucasians have a lifetime risk of developing basal cell carcinoma of
one quarter to one third that rises to one half in such high risk areas such as
Australia. We have characterized and validated several targets for small
molecule screening using our developmental biology approach. Patched1, a
membrane receptor molecule, is one example of a molecule characterized using
this approach. Patched1 plays a role in the onset of basal cell carcinoma.
We are studying the role of Patched1 for the development of treatments and
diagnostics for basal cell carcinoma. We have identified a family of small
molecules which block the pathway and have the potential to treat basal cell
carcinoma. We are evaluating several compounds in preclinical development for
preparation of an IND.
Nervous System Disorders
Desert and Sonic Hedgehog proteins are active in the induction and
maintenance of nervous system tissues. Our strategy is to use these inducing
molecules or small molecule agonists to repair damaged nervous system tissues.
We believe that many degenerative nerve diseases may be addressed by this
strategy. Our lead neurology program is for the treatment of peripheral
neuropathy. We are also evaluating these molecules for other central nervous
system disorders, including Parkinson's disease, Alzheimer's disease and acute
disorders (stroke and trauma).
Peripheral neuropathy is a frequent complication of diabetes resulting in
significant pain and disability resulting from a loss of nerve function in the
extremities of the body. The National Institutes of Health estimate that 60
percent of patients with diabetes have some form of neuropathy. With more than
10 million diabetics in the United States, treatment for diabetic peripheral
neuropathy represents a significant market opportunity. There is currently no
adequate treatment for this condition.
Parkinson's disease afflicts approximately 800,000 people in the United
States. Alzheimer's disease and stroke represent even larger markets, and the
unmet medical need is high for each of these conditions. Although these
specific diseases and other central nervous system-related disorders occur in
individuals for very different reasons, almost all of these disorders are
characterized by the loss of cellular function.
Having demonstrated the importance of Desert Hedgehog in normal peripheral
nerve cell function, our researchers are now examining the therapeutic effect
of Desert and Sonic Hedgehog, or derivative proteins or small molecule
agonists, in preclinical models of peripheral neuropathy for diabetes as well
as the dose-related side effect of chemotherapy. Based on the behavior of these
proteins in the central nervous system, preclinical studies are also being
conducted for chronic and acute degenerative nerve conditions.
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Hair Regrowth
Sonic Hedgehog is expressed in the normal development of embryonic hair
follicles. Our researchers have shown that administration of the Sonic Hedgehog
protein can induce or accelerate hair growth in adult mice. Furthermore,
disrupting Sonic Hedgehog activity prevents the appearance of normal hair. We
are using the Sonic Hedgehog signaling pathway as a basis for small molecule
screening assays focused on hair growth. The molecules discovered in these
assays will be tested in preclinical models of hair growth.
Diabetes
Insulin-Dependent Diabetes Mellitus, or Type I Diabetes, a condition where
the pancreas produces insufficient insulin, is prevalent and its treatment is
expensive. There are over one million Type I diabetics in the United States
alone, and its expense to society is thought to be second only to that of
Alzheimer's disease. Our diabetes program involves the search for the
developmental mechanisms, including factors and cells, which lead to production
of the insulin-producing cells of the pancreas called islet cells. These cells
would be useful for the treatment of insulin-dependent diabetic patients.
Factors which lead to the production of islet cells and/or protect islet cells
may also be useful as therapeutic agents.
One approach that we are taking to attempt to treat diabetes is exploring
the use of inducing molecules to produce pancreatic beta cells in the
laboratory, and then to transplant those cells back into patients. This
approach is being studied in collaboration with Becton Dickinson, our corporate
partner in the diabetes area. See "--Collaborative Alliances and License
Agreements--Becton Dickinson."
Clinical leaders believe that the central problem standing in the way of
widespread beta cell transplant is the lack of a reproducible source of pure
cells. Current techniques to isolate islets from animals or create other
sources of islets cannot generate pure reproducible cell populations. We have
important assets that we believe give us an advantage in identifying the
molecules and processes involved in cell production and cell maturation.
Important examples include two different growth factors which play important
roles in the proliferation and differentiation of pancreatic islet cells and
their precursors. These molecules were discovered by us and are the subject of
patent applications that we have filed.
Our short term goals in this area are to further characterize the molecules
and contexts required in order to make insulin positive human cells, to develop
the islet cell growth factor leads, and to use proprietary assays relevant to
islet cell development to find small molecules which play a role in islet cell
development and/or function.
Other Earlier-Stage Research Programs
In addition to the programs described above, we are working on other product
opportunities identified through the use of developmental biology and
functional genomics directed at a number of other indications in areas
including urology, oncology and tissue repair and regeneration.
Other Tissue Repair and Regeneration Product Opportunities
Bladder Augmentation
We are developing a tissue engineered autologous bladder product that would
address current treatment limitations for bladder augmentation. Up to 500,000
patients per year in the United States could benefit from augmentation or
replacement of the bladder due to congenital deficiencies, resections following
cancer, trauma, or other genitourinary conditions. The current therapy for
bladder augmentation is to transplant autologous segments of bowel to provide
the needed structure. The surgeries are complex and expensive and can lead to
significant complications such as metabolic problems, stone formation, mucous
production, bowel obstruction and a substantial increase in cancer of the
reconstructed bladder. The invasiveness, cost and complications of these
surgeries limit their use to only the most severe bladder deficiencies
(approximately 20,000 procedures per year in the United States). We believe
that a less invasive and more effective approach could potentially increase the
number of bladder augmentation surgeries.
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We and our collaborators are developing an approach which would replace the
transplanted bowel segments with an implant which consists of a biodegradable
polymer scaffold seeded on its internal surface with urothelial cells that
normally line the inside bladder wall and seeded on its outside surface with
the smooth muscle cells that normally line the outside bladder wall. The cells
consist of a combination of urothelial and muscle cells obtained from a biopsy
of the patient which are then seeded on the interior and exterior surfaces of
the substrate, respectively. Such a tissue engineered bladder could remove the
need for bowel resection and provide the patient with an implant created from
the patient's own bladder cells. This could result in a newly created bladder
section with many of the biological properties of the original bladder tissue.
These properties include biocompatibility with urine, impermeability to urine,
avoidance of stone formation compliance and long-term stability.
The results of published preclinical studies demonstrate that bladder dome
structure (i.e., capacity) and function (i.e., compliance) are maintained after
implantation. We believe that this technology demonstrates for the first time
in a preclinical model that tissue engineering can be employed for the creation
of functionally and anatomically normal bladders. We have obtained exclusive
license rights to patent application owned by Children's Hospital, Boston that
covers this invention.
Collaborative Alliances and License Agreements
Our strategy for development and commercialization of many of our products
depends upon the formation of collaborations and strategic alliances. These
alliances are designed to provide us with the requisite capital and development
and marketing capabilities to commercialize the results of our discovery
programs. It is our goal to have each alliance provide one or more of the
following:
. up-front payments in the form of license fees and equity investments;
. royalties and milestone payments;
. technology and patent rights; or
. scientific and development resources.
Our predecessors (Creative, Ontogeny and Reprogenesis) had strategic
alliances with Stryker, Becton Dickinson and others and, as a result of the
merger, Curis has succeeded to all rights and obligations under these
agreements. There can be no assurance that we will be able to establish
additional collaborations and strategic alliances necessary to develop and
commercialize our products, that any future arrangements will be on terms
favorable to us or that the current or future strategic alliances ultimately
will be successful.
Agreements Relating to OP-1
Stryker Corporation. We have a collaboration agreement with Stryker to
identify and develop bone-inducing proteins and to develop dental therapeutics.
OP-1 was first isolated and characterized by Creative scientists under this
collaboration. Under this agreement, in exchange for research funding, future
royalties and revenue from commercial manufacturing, Creative developed OP-1 as
a therapy for orthopaedic reconstruction and cartilage regeneration, and
supplied Stryker material for use in clinical trials. Creative restructured its
agreements with Stryker in November 1998 to provide Stryker with the exclusive
rights to manufacture OP-1 products in these fields. At that time, Stryker
acquired Creative's commercial manufacturing operations. As a result, Stryker
has the exclusive right to develop, market, manufacture and sell products based
on OP-1 proteins for use in orthopaedic reconstruction and dental therapies.
Under the agreement with Stryker, as amended, Stryker has exclusive rights
to develop, market and sell products incorporating bone and cartilage-inducing
proteins developed under the research program, including OP-1, for use in the
field of orthopaedic reconstruction and dental therapeutics. We have agreed not
to undertake any bone morphogenic protein (BMP)-related research, development
or commercialization of any products in the fields of orthopaedic
reconstruction and dental therapeutics, on our own behalf or for third
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parties, for the term of certain patents to the extent that the activities
utilize technology, patents or certain personnel acquired from Creative in the
merger. We have the exclusive and irrevocable right to develop, market and sell
products incorporating morphogenic proteins developed under the research
program, including OP-1, for all uses and applications other than orthopaedic
and dental reconstruction such as neurological diseases, osteoporosis, renal
failure and others. Subject to certain exceptions in connection with the
acquisition or merger of Stryker, Stryker has agreed not to undertake any
research, development or commercialization of any products in our field
(applications other than orthopaedic reconstruction and dental therapies), on
its own behalf or for third parties, for the term of those patents. Each
company has the right to grant licenses to third parties in their respective
fields, and each is obligated to pay royalties to the other on its sales of
such products and to share royalties received from licensees.
We maintain an exclusive license in our field under certain patents and
claims that were assigned to Stryker in November 1998 as part of the sale of
certain of Creative's manufacturing rights and assets to Stryker. In addition,
Stryker was granted an exclusive license under patents in Creative's morphogen
portfolio for use in the fields of orthopaedic reconstruction and dental
therapeutics.
Genetics Institute. We have a cross-license agreement with Stryker and
Genetics Institute, Inc., a wholly-owned subsidiary of American Home Products
Corporation. Each party to the agreement has cross-licensed certain of its
worldwide patent rights to each of the other parties, royalty-free, in the bone
morphogenic/osteogenic protein family. The agreement allows the companies to
commercialize their respective lead compounds, which are now in clinical trials
for bone repair and regeneration, free of the risk of patent litigation among
the parties. Under the agreement, which covers both then issued patents and
pending patent applications, we and Stryker have exclusive rights to OP-1,
under both our and Genetics Institute's patents. Genetics Institute and
Yamanouchi Pharmaceutical Company, Ltd., its collaborative partner in the
worldwide development of certain bone growth factors, have exclusive rights to
BMP-2, their lead compound, under both their own and each of our and Stryker's
patents. In addition, we and Stryker have granted each other royalty-free, non-
exclusive cross-licenses to patents and patent applications covering certain
other related morphogenic proteins.
Becton Dickinson
In January 1999, Ontogeny and Becton Dickinson entered into a two-year
research collaboration focusing on the application of cellular therapy and
human pancreatic beta islets in the treatment of diabetes. Under the terms of
the agreement, Becton will provide one advanced researcher to work full time at
one of our facilities throughout the period of the research collaboration. All
developments created by this researcher will be our property.
The agreement gives Becton the opportunity to negotiate exclusively with us
for three months to obtain exclusive worldwide rights to develop and
commercialize therapeutics comprising beta islet cells for the treatment of
diabetes. This commercialization option to negotiate must be exercised in
connection with the satisfaction of certain scientific milestones but no later
than expiration of the two-year research collaboration. Becton also has a right
of first offer to commercialize certain technologies jointly created during the
research collaboration for research reagents and diagnostic uses in the field
of diabetes, and certain technologies created solely by Becton during the
research collaboration for research reagents and diagnostic uses in all fields.
In the event Becton exercises either of these options, we will negotiate for
three months to obtain a mutually satisfactory commercialization agreement. If
such an agreement cannot be reached, we have the right to pursue independently
the development of such products, either on our own or in conjunction with
other research partners.
Affymetrix
In September 2000, we entered into a relationship with Affymetrix under
which we are able to purchase and use the Affymetrix gene expression probe
arrays. Gene expression probe arrays are automated assay
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devices that contain genetic information which allow biologists to identify
those genes which are active in tissues and cells. These devices enable us to
automate the process of identifying the genes and proteins that are active in
the biological pathways regulating tissue growth and development.
Oxford Assymetry International PLC
In May 2000, we renewed our contract services agreement with Oxford
Assymetry under which we are able to access the Oxford Assymetry chemical
library and utilize Oxford Assymetry to perform high throughput screening of
small molecules that regulate our proprietary developmental biology pathways.
Oxford Assymetry provides its services on a contract basis, and we own the
intellectual property relating to small molecules discovered through these
screening activities. The Oxford Assymetry contract activities have played an
important role in the identification of small molecules that regulate the
hedgehog protein biological pathway and other pathways that we are exploring.
Academic Collaborations
We have relationships with a number of academic institutions and
investigators who are focused on areas of interest to us, including morphogenic
proteins, tissue engineering and developmental biology. In these
collaborations, we seek to expand the scientific knowledge concerning internal
research programs as well as the activities and characteristics of various
proteins under development by our scientists. The academic collaborators are
not our employees. Hence, we have limited control over their activities and
limited amounts of their time are dedicated to our projects. From time to time,
academic collaborators have relationships with other commercial entities, some
of which may be our competitors. Although the precise nature of each
relationship varies, the collaborators and their primary affiliated
institutions generally sign agreements that provide for confidentiality of our
proprietary technology and results of studies. We seek to obtain exclusive
rights to license developments that may result from these studies; however,
there is no guarantee that such licenses can be obtained.
Enzon Cross-Licensing Agreement
We own a number of issued U.S. and foreign patents with broad claims on the
composition of Biosynthetic Antibody Binding Sites (BABS) proteins and their
interdomain linkers. BABS is a separate technology developed by Creative, and
to which we have retained rights, but which is not currently being utilized in
our morphogen development programs. In December 1993, Creative signed cross-
licensing and exclusive-marketing agreements with Enzon with regard to the two
companies' intellectual property rights and know-how covering BABS proteins.
The exclusive marketing agreement terminated in 1999, and cross-licenses enable
us and Enzon to practice the technology and to grant sublicenses to third
parties with the other party's consent.
Competition
The therapeutic products that we are developing will compete with existing
and new products being developed by others for treatment of the same
indications. Competition in the development of human therapeutics is
particularly intense and includes many large pharmaceutical and
biopharmaceutical companies, as well as specialized biotechnology and medical
device firms. Many of these companies have extensive financial, marketing and
human resources which may result in significant competition. Others have
extensive experience in undertaking clinical trials, in obtaining regulatory
approval to market products and in manufacturing on a large scale, which may
enhance their competitive position. In addition to competing with
pharmaceutical and biotechnology and medical device companies, our products and
technologies will also compete with those developed by academic and research
institutions, government agencies and other public organizations conducting
research. Any of these organizations may discover new therapies, seek patent
protection or establish collaborative arrangements for product research which
are competitive with our products and technologies.
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The technology underlying the development of human therapeutic products is
expected to continue to undergo rapid and significant advancement and change.
In the future, our technological and commercial success will be based on our
ability to develop proprietary positions in key scientific areas and
efficiently evaluate potential product opportunities.
In addition to a product's patent position, efficacy and price, the timing
of a product's introduction may be a major factor in determining eventual
commercial success and profitability. Early entry may have important advantages
in gaining product acceptance and market share. Accordingly, the relative speed
with which we or our collaborative partners can complete preclinical and
clinical testing, obtain regulatory approvals, and supply commercial quantities
of the product is expected to have an important impact on our competitive
position, both in the United States and abroad. Other companies may succeed in
developing similar products that are introduced earlier, are more effective, or
are produced and marketed more effectively. If any research and development by
others renders any of our products obsolete or noncompetitive, then our
potential for success and profitability may be limited.
We are aware of a number of companies that are engaged in the research and
development of morphogenic proteins for the repair of bone and cartilage.
Genetics Institute, acquired in 1996 by American Home Products Corporation, and
its collaborative partners are pursuing the development of bone morphogenetic
proteins and have initiated human clinical trials of a recombinant bone
morphogenetic protein for the repair of orthopaedic and other skeletal defects.
Genetics Institute has entered into relationships with Yamanouchi
Pharmaceuticals Co., Ltd. and Medtronic Sofamor Danek, Inc. covering
development and marketing of bone morphogenetic proteins. Other companies may
attempt to develop products incorporating proteins purified from bone, which
may include bone morphogenetic proteins, for orthopaedic applications. In
addition, we believe that a number of biopharmaceutical companies are
developing other recombinant human proteins, primarily growth factors, for use
in the repair of bone and cartilage defects and in other indications. A number
of other companies are pursuing traditional therapies, including autografts,
allografts and electrical stimulation devices, as well as cell and gene
therapies for the repair of bone and cartilage defects, that may compete with
our products.
We believe that potential dental or periodontal products that Stryker may
develop will compete primarily with traditional therapies and therapies
incorporating other morphogenic proteins or growth factors. Genetics Institute
is also pursuing the development of bone morphogenetic proteins for the repair
of dental and periodontal tissue.
Current competition for Chrondrogel for vesicoureteral reflux includes
medical management and surgical intervention (the so-called reimplantation
procedure). Additionally, particular bulking agents could gain acceptance for
the treatment of reflux. Bulking agents not yet on the market could become a
factor, and "cross-over" bulking agents (Contigen and Durasphere(TM), for
example, which are currently used to treat incontinence) and bulking agents
currently in use in Europe (Teflon, Deflux and Macroplastique(TM)) could also
compete with Chondrogel. On October 19, 2000, Q-Med AB presented its Deflux
product for vesicoureteral reflux to the Gastroeenterology and Urological
Devices Advisory Panel appointed by the FDA. Based on the data presented, the
Advisory Panel voted to recommend approval of the marketing application by the
FDA subject to Q-Med AB furnishing additional data and analysis, and conducting
a post-marketing study. This product is on the market in Europe and, if
approved and efficacious, could pose a significant competitive threat to
Chondrogel.
There are a variety of approaches to the prevention of restenosis following
standard revascularization procedures that are currently being examined. Some
of those approaches, in addition to Vascugel, are cell-based. For example,
other researchers are attempting to directly reconstruct the endothelial cell
lining of the artery in order to control the overgrowth of smooth muscle cells.
Many, if not most, of the approaches currently being examined are being
considered in conjunction with minimally invasive vascular procedures, such as
angioplasty and stenting. However, it is possible and even likely that some of
those approaches will also be examined for use in conjunction with the open
surgical procedures (e.g., coronary artery bypass graft, peripheral artery
bypass graft, A/V shunt) that are the initial clinical indications for
Vascugel. Those approaches include systemic drug delivery (e.g., heparin, ACE
inhibitors, antioxidants), radiation (e.g., catheter delivery
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system from Novoste), polymeric hydrogels delivered to the interior surface of
the blood vessel (e.g., photo-crosslinked PEG from Focal), local drug delivery
(e.g., heparin-coated stents from Medtronic, taxol-coated stents from Boston
Scientific), biologics/gene therapy (e.g., VEGF-1, VEGF-2, nitrous oxide), and
intravascular endothelial cells (e.g., endothelial cell paving of the interior
of the vessel).
Research in the field of developmental biology and genomics is highly
competitive. Competitors in the field of developmental biology include, among
others, Amgen, Inc., Chiron Corporation, Exelixis, Inc., Genentech, Inc., Geron
Corporation, and Regeneron Corporation, as well as other private companies and
major pharmaceutical companies. Competitors in the genomics area include, among
others, public companies such as Axys Pharmaceuticals, Inc., Genome
Therapeutics Corporation, Human Genome Sciences, Inc., Incyte Pharmaceuticals,
Inc., Millennium Pharmaceuticals, Inc. and Myriad Genetics, Inc., as well as
private companies and major pharmaceutical companies. We also compete with
universities and other research institutions, including those receiving funding
from the federally funded Human Genome Project. A number of entities are
attempting to identify and patent rapidly randomly sequenced genes and gene
fragments, typically without specific knowledge of the function of such genes
or gene fragments. In addition, we believe that certain entities are pursuing a
gene identification and characterization and product development strategy based
on positional cloning. Our competitors may discover, characterize and develop
important inducing molecules or genes in advance of us, which could have a
material adverse effect on any related Curis research program. We also face
competition from these and other entities in gaining access to DNA samples used
in its research and development projects. We expect competition to intensify in
genomics research as technical advances in the field are made and become more
widely known.
We rely on our strategic partners for support in our disease research
programs and intend to rely on our strategic partners for preclinical
evaluation and clinical development of our potential products and manufacturing
and marketing of any products. Some of our strategic partners are conducting
multiple product development efforts within each disease area that is the
subject of our strategic alliance with them. Our strategic alliance agreements
may not restrict the strategic partner from pursuing competing internal
development efforts. Any of our product candidates, therefore, may be subject
to competition with a potential product under development by a strategic
partner.
Patents and Proprietary Rights
Our ability to commercialize our products and compete effectively with other
companies will depend, in part, on our ability to maintain proprietary rights
to our products and technology. We currently own or have rights to 121 issued
and 167 pending patent applications in the United States and have foreign
counterpart patent filings for most of these patents and patent applications.
These patent applications are directed to compositions of matter, methods of
making and using these compositions, methods of repairing, replacing,
augmenting and creating tissue for multiple applications, methods for drug
screening and discovery, developmental biological processes, and patents
relating to our proprietary technologies. The patent positions of
pharmaceutical, biopharmaceutical, and biotechnology companies, including us,
are generally uncertain and involve complex legal and factual questions. There
can be no assurance that any of these pending patent applications will result
in issued patents, that we will develop additional proprietary technologies or
products that are patentable, that any of our patents or those of our
collaborative partners will provide a basis for commercially viable products or
will provide us with any competitive advantages or will not be challenged by
third parties, or that the patents of others will not have an adverse effect on
our ability to conduct our business.
Our success will depend in part on our ability to obtain marketing
exclusivity for our products for a period of time sufficient to establish a
market position and achieve an adequate return on our investment in product
development. We believe that protection of our products and technology under
United States and international patent laws and other intellectual property
laws is an important factor in securing such market exclusivity. U.S. patents
issued from applications filed prior to June 8, 1995 have a term of the longer
of 17 years from patent grant or 20 years from the earliest filing date. U.S.
patents issued from applications filed on or after June
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8, 1995, have a term of 20 years from the earliest filing date. Patents in most
foreign countries have a term of 20 years from the date of the filing of the
patent application. In the United States and certain foreign countries, the
exclusivity period provided by patents covering pharmaceutical products may be
extended by a portion of the time required to obtain regulatory approval for a
product.
Although we pursue patent protection for our technology, significant legal
issues remain as to the extent to which patent protection may be afforded in
the field of biotechnology, in both the United States and foreign countries.
Furthermore, the scope of protection has not yet been broadly tested.
Therefore, we also rely upon trade secrets, know-how and continuing
technological advancement to develop and maintain our competitive position.
Disclosure of our know-how is generally protected under confidentiality
agreements. We do not know, however, whether all of our confidentiality
agreements will be honored, that third parties will not develop equivalent
technology independently, that disputes will not arise as to the ownership of
technical information or that wrongful disclosure of our trade secrets will not
occur.
Our academic collaborators have certain rights to publish data and
information regarding their discoveries to which we have rights. While we
believe that the limitations on publication of data developed by our
collaborators pursuant to our collaboration agreements will be sufficient to
permit us to apply for patent protection in the areas in which we are
interested in pursuing further research, there is considerable pressure on
academic institutions to publish discoveries in the genetics and genomics
fields. Any such publication could affect our ability to obtain patent
protection in the areas in which we may have an interest.
We are party to various license agreements which give us rights to
commercialize various technologies and to use certain technologies in our
research and development processes. The consideration paid in exchange for
these licenses include up-front fees, issuances of shares of common stock,
annual royalties, milestone payments and running royalties on net sales by us
and our sublicensees. The licensors may terminate these agreements if we fail
to meet certain diligence requirements, fail to make payments or otherwise
commit a material breach that is not cured after notice.
Others may have filed, and in the future are likely to file, patent
applications covering molecules, genes or gene products that are similar or
identical to our technologies or products. These third party patent
applications may have priority over patent applications filed by us. Any legal
action against us or our strategic partners 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 strategic partners to obtain a license in order to continue to
manufacture or market the affected products and processes. There can be no
assurance that we or our strategic partners would prevail in any such action or
that any license required under any such patent would be made available upon
commercially acceptable terms, or at all. Litigation, which could result in
substantial costs to us, may be necessary to enforce any patents issued or
licensed to us or to determine the scope and validity of third party
proprietary rights. Some of our competitors have, or are affiliated with
companies having, substantially greater resources than we have, and such
competitors may be able to sustain the costs of complex patent litigation to a
greater degree and for longer periods of time than us. Uncertainties resulting
from the initiation and continuation of any patent or related litigation could
harm our business. An adverse outcome in connection with an infringement
proceeding brought by a third party could subject us to significant
liabilities, require disputed rights to be licensed from third parties or
require us to cease using the disputed technology. If our competitors prepare
and file patent applications in the United States that claim technology also
claimed by us, we may have to participate in interference proceedings declared
by the Patent and Trademark Office to determine priority of invention, which
could result in substantial costs to us even if the eventual outcome is
favorable to us.
There is uncertainty concerning whether human clinical data will be required
for issuance of patents for human therapeutics. If such data is required, our
ability to obtain patent protection could be delayed or otherwise adversely
affected. Although the USPTO issued new utility guidelines in July 1995 that
address the requirements for demonstrating utility for biotechnology
inventions, particularly for inventions relating to
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human therapeutics, USPTO examiners may not follow such guidelines and the
USPTO's position could change with respect to what is required to establish
utility for gene sequences and products and methods based on such sequences.
Manufacturing
We have limited experience and capabilities in large-scale commercial
manufacturing of protein, cell therapy, biomaterials or small molecule
products. Creative established manufacturing facilities to produce the OP-1
device which were sold to Stryker in 1998 and are being used to produce the OP-
1 device. We retain some of the personnel with skills needed for analytical
characterization and development of recombinant proteins. We have established a
manufacturing facility and staff to support clinical trials of Chondrogel and
Vascugel. We have in this group skills in the production and qualification of
cell therapy and biocompatible materials products. Our commercialization plan
for Chondrogel may involve in-house manufacturing of this product. We do not
currently have any commercial manufacturing operations and do not have a
qualified cGMP commercial manufacturing facility for Chondrogel or other
products that we may choose to develop. We or our collaborative partners will
need to establish commercial manufacturing capacity, either internally or
through third parties, for future products that we or our collaborative
partners may develop.
Sales and Marketing
We currently have no sales, marketing and distribution experience or
infrastructure. We plan to develop small specialty sales, marketing and
distribution capabilities for the sale, marketing and distribution of
Chondrogel and other specialty products. There are approximately 250 pediatric
urologists who treat reflux in the United States. These providers treat the
majority of cases of vesicoureteral reflux and can be addressed with a
relatively small sales force. By maintaining all rights and directly marketing
the Chondrogel product, we will retain a much greater portion of product sales
than would have been possible if it had entered into a corporate collaboration
with a marketing partner. However, we may not be able to successfully develop
this sales, marketing and distribution capability. With respect to products
which address larger markets, we plan to rely significantly on sales, marketing
and distribution arrangements with third parties until we develop broader
capabilities.
Regulatory Matters
Regulation by governmental agencies in the United States and other countries
is a significant factor in the clinical evaluation and licensing of our
potential products as well as in the development and research of new products.
All of our products currently under development will require regulatory
approval by the FDA under the Food, Drug, and Cosmetic Act, as drugs or
devices, or under the Public Health Service Act, as biologicals, to be marketed
in the United States and by similar governmental agencies outside the United
States. Regardless of the classification assigned to our products, all human
diagnostic and therapeutic products are subject to rigorous testing to
demonstrate their safety and efficacy. Generally, considerable time and expense
are required to demonstrate safety for use in humans, to design an acceptable
clinical trial to enroll patients and to clinically evaluate the safety and
efficacy of a new product. Moreover, even after extensive preclinical testing,
unanticipated side effects can arise during clinical trials and in the course
of related or unrelated research (within or outside our control) that can halt
or substantially delay the regulatory process at any point. Seeking and
obtaining regulatory approval for a new therapeutic or diagnostic product is
likely to take several years and will require the expenditure of substantial
resources. We cannot assure you that any product which enters preclinical or
clinical development will be approved for sale by the FDA or any other
regulatory authorities.
Products developed through genetic engineering, such as some of ours, are
relatively new, and state and local regulation may increase, as genetically
engineered products become more common. The federal government oversees certain
recombinant DNA research activity through the National Institutes of Health
Guidelines for Research Involving Recombinant DNA Molecules, known as the NIH
Guidelines. We believe that our activities comply with the NIH Guidelines,
which prohibit or restrict certain recombinant experiments,
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set forth levels of biological and physical containment of recombinant DNA
molecules to be met for various types of research, and require that
institutional biosafety committees approve certain experiments before they are
initiated. Compliance with the NIH Guidelines has not had, and we do not
foresee that it will have, a material effect on our competitive position or
cash flow. Discussions have been underway since 1996 between the NIH and the
FDA regarding alternative models for regulation of recombinant DNA research and
the products resulting from such research, and the appropriateness of any
continued NIH role. It is not possible to predict the effect of such potential
regulatory changes on us or our potential competitors.
Cellular and tissue-based (tissue engineering) medicinal products have been
even more recently developed than genetically engineered products. No
regulations and only minimal guidance (e.g., Proposed Approach to Regulation of
Cellular and Tissue-Based Products) have been published by the FDA specific to
products of this type. The FDA's Center for Biologics Evaluation and Review
(CBER) currently has the primary review responsibility for all cell therapy
products regardless of whether they are, according to established definitions,
considered to be biologicals, medical devices or combination products. The
relative inexperience of regulatory authorities with the review and approval of
tissue engineered products may lead to increased review times or to significant
changes in local, state and national requirements which could have a
significant impact on the progress of these programs.
Our ability to conduct preclinical research is also subject to new and
evolving regulations governing the use of human and embryonic tissues for
isolating new growth factors and genes which may be useful in identifying and
developing new therapeutic product candidates. Our ability to conduct critical
research on which our development activities are based could be restricted or
delayed depending on the outcome of pending rulemaking proceedings governing
the use of these tissues and the collection of related genetic information.
Pharmaceutical and Biological Products
We expect that certain of our potential products will be regulated by the
FDA or other regulatory authorities as pharmaceuticals or biologicals. The
regulatory approval of pharmaceutical and biological products in the United
States intended for therapeutic use in humans involves many steps and is
described as follows. Similar requirements are imposed by other regulatory
authorities in major market countries. The initial phase of the FDA approval
process involves preclinical testing to demonstrate that the product would not
be an unreasonable hazard in clinical studies with human subjects. Preclinical
tests must typically meet the FDA's good laboratory practices regulations if
they are to be used for the purpose of an application to the agency. Upon
completion of preclinical testing, an Investigational New Drug, or IND,
application must be filed with the FDA.
If the application has not been denied or if additional information has not
been requested by the FDA within 30 days of filing, the applicant may then
begin clinical studies. Clinical testing usually occurs in three phases to
demonstrate safety and efficacy of the product:
. Phase I clinical trials consist of testing for the safety and tolerance
of the product with a small group of subjects and may also yield
preliminary information about the efficacy and dosage levels of the
product;
. Phase II clinical trials involve testing for efficacy, determination of
optimal dosage and identification of possible side effects in a larger
patient group; and
. Phase III clinical trials consist of additional testing for efficacy and
safety with an expanded patient group.
Currently, the FDA requires the filing of new information for each distinct
clinical study. After product approval, the FDA may request or require an
additional phase (Phase IV) of clinical studies to provide additional
information on safety and/or efficacy.
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Upon successful completion of Phase III testing, either a New Drug
Application (NDA) or Biologics License Application (BLA) must be filed,
depending upon whether the product is designated as a drug or a biological,
respectively. The FDA generally requires at least two adequate and well-
controlled clinical trials for product approval. All approvals require a
detailed review of all data collected from clinical studies, the composition of
the drug or biological, non-clinical pharmacology and toxicology data,
environmental impact data, human pharmacokinetics and bioavailability data,
patient information, certain case report data and forms, the labeling that will
be used, information on chemistry, manufacturing, and controls, and samples of
the product as appropriate to the product type. After the FDA completes its
review of the application, the product is typically reviewed by a panel of
independent medical experts, and the applicant is required to answer questions
on the product's safety and efficacy. The FDA considers the recommendation of
the panel, and may at its own discretion approve an NDA or BLA. Based on the
data filed, the FDA regulates the indications or uses for which the product is
approved and the precautions, and warnings, if any, applicable to the product.
If so approved, the product may then be marketed for the indications set forth
in the FDA approved labeling.
Many of the biomaterials, cell types, and ingredients used in our products
and product candidates have not previously been used as components in medicinal
products. Historically, neither the FDA nor other regulatory authorities have
determined the safety and effectiveness of these materials for pharmaceutical
or other medical use. Therefore, the acceptability or approvability of these
materials has not been demonstrated.
Devices
We expect that certain of our potential products will be regulated by the
FDA as Class III devices and as regulated devices by other regulatory
authorities. Preclinical evaluations of Class III devices are similar to those
of pharmaceuticals and biologicals, with additional emphasis on implant
persistence, implant sensitization, and carrier characterization and
specifications. Upon completion of preclinical testing, an Investigational
Device Exemption (IDE) application is filed with the Center for Devices and
Radiological Health in the FDA. Similar requirements are imposed by other
regulatory authorities in major market countries.
Following the completion of clinical studies, under the IND, a company would
then file a pre-market approval application (PMA) with the FDA. The FDA is
required to respond to the PMA submission within 180 days, although the FDA may
not adhere to this schedule and further review may take additional time. After
the FDA completes its review of the application, the product is typically
reviewed by a panel of medical experts, and the applicant is required to answer
questions on the product's safety and effectiveness. Following the
recommendation of the panel, a PMA may be granted by the FDA based on the PMA
submission. Based on the data filed, the FDA regulates the indications or uses
for which the product is approved and the precautions and warnings, if any,
applicable to the product. If so approved, the product may then be marketed for
the indications set forth in the FDA approved labeling.
Treatment IND Status
Before the completion of clinical trials for a specific product, a company
may file for Treatment IND status with the FDA under provisions of the IND
regulations. These regulations apply to products for patients with serious or
life-threatening diseases and are intended to facilitate the availability of
new products to desperately ill patients after clinical trials have shown
convincing evidence of efficacy, but before general marketing approval has been
granted by the FDA. Under these regulations, it may be possible for us to
recover some of the costs of research, development and manufacture of qualified
products before commercial marketing begins. We may seek Treatment IND status
for qualified products, although the decision whether to grant such status lies
with the FDA. Similar regulations permitting compassionate use and treatment
investigational studies also exist under the regulations of other regulatory
authorities.
The FDA Modernization Act of 1997 (FDAMA) codifies many of the FDA's
previous treatment IND regulations. In addition, it creates new authority for
expanded access to investigational therapies for serious diseases, if the
request is performed through a physician, the product shows sufficient evidence
of safety and efficacy, and provision of the product would not interfere with
ongoing clinical research.
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The FDA has also adopted regulations intending to accelerate the approval of
therapeutic products for serious and life threatening diseases under certain
circumstances. We may seek to utilize these regulations for qualified products.
Approvals under these regulations may be conditioned on further studies, may
include restrictions on marketing, may require prior submission of promotional
materials, and may be subject to expedited withdrawal of approval.
In addition to existing FDA regulations, FDAMA added new "fast track"
authority allowing the FDA to expedite the approval of drugs for serious or
life-threatening conditions. Requirements for fast track drugs are similar to
those for accelerated approval, including FDA authority to require post-
approval studies, presubmission of promotional materials, and enhanced NDA
withdrawal authority.
Facilities Inspection
In addition to product approval prior to marketing, we must also obtain
approval of the facility in which our products will be manufactured from the
FDA and the other regulatory authorities. In the case of a pharmaceutical,
biological or a device, we must be in compliance with current cGMP
requirements. The FDA and other regulatory authorities may inspect our
facilities to determine such compliance as part of the overall NDA, BLA, or PMA
approval process. Since any NDA, BLA or PMA approved by the FDA or other
regulatory authority is both site and process specific, any material change in
our manufacturing process, equipment or location would necessitate additional
review and approval. Recently, the FDA promulgated new regulations concerning
cGMPs for medical devices. These new regulations include elements drawn from
existing international standards and a new emphasis on design control of
medical devices (in addition to the existing focus on manufacturing). Until
these new regulations are better understood by industry, compliance with
medical device cGMPs may prove more difficult than in the past, and may require
the use of additional resources or even the redesign of some existing devices
or facilities.
Other
Federal laws regulate the export of investigational and therapeutic products
and biological materials and technology. The laws have been amended to permit
the export of products not yet approved in the United States but approved by a
regulatory authority in certain foreign countries. We may choose to export our
products to certain countries prior to obtaining FDA marketing approval in the
United States.
In addition, we are subject to regulation under the Occupational Safety and
Health Act, the Environmental Protection Act, the Toxic Substances Control Act,
the Research Conservation and Recovery Act, regulations administered by the
Nuclear Regulatory Commission, national restrictions on technology transfer,
import, export and customs regulations and certain other local, state or
federal regulation. From time to time, other federal agencies and congressional
committees have indicated an interest in implementing further regulation of
biotechnology applications. We are not able to predict whether any such
regulations will be adopted or whether, if adopted, such regulations will
adversely affect our business.
Employees
We have approximately 132 full time employees, of whom 69 hold Ph.D. or
other advanced degrees.
Approximately 105 of these employees are currently involved in research,
development, engineering, production, clinical or regulatory affairs
activities. None of our employees is a party to a collective bargaining
agreement, and we consider our relations with employees to be good.
Facilities
We have three facilities located in Cambridge, Massachusetts. Two of the
facilities are located next to each other at 45 and 61 Moulton Street, with
approximately 34,000 and 18,000 square feet, respectively. 45 Moulton Street is
leased until mid-2006, and 61 Moulton Street is leased until November 2001. An
extension to the
55
<PAGE>
61 Moulton Street lease is being negotiated. The third facility is located at
21 Erie Street, with approximately 50,000 square feet. This site is leased
through the end of 2007. The Moulton Street buildings are used primarily by the
Research and Administration groups, and the Erie Street building is used
primarily by the Development and Manufacturing groups. We believe that these
facilities will be adequate for Curis at least through the end of 2001.
Legal Proceedings
We are not a party to any material legal proceedings.
56
<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and directors, their positions and ages as of
November 17, 2000, are listed below.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Doros Platika, M.D........... 47 Chief Executive Officer, President and
Class I Director
Lynn G. Baird, Ph.D.......... 53 Vice President of Regulatory Affairs,
QA/QC and Preclinical Development
William B. Boni.............. 48 Vice President, Corporate Communications
and Investor Relations
George A. Eldridge........... 37 Vice President, Chief Financial Officer
and Treasurer
Frank T. Gentile, Ph.D....... 38 Vice President, Program Management
Bruce J. Hudson.............. 58 Vice President, Human Resources and
Administration
Bruce A. Leicher*............ 44 Vice President, General Counsel and
Secretary
Daniel R. Passeri............ 40 Senior Vice President, Corporate
Development and Strategic Planning
Lee L. Rubin, Ph.D........... 50 Senior Vice President of Research and
Chief Scientific Officer
James S. Sigler.............. 40 Vice President, Manufacturing
James R. McNab, Jr........... 56 Class I Director
James R. Tobin(1)............ 56 Class I Director
Douglas A. Melton, Ph.D...... 47 Class II Director
Michael Rosenblatt, M.D.(1).. 52 Class II Director
Susan B. Bayh(2)............. 40 Class III Director
Martyn D. Greenacre(2)....... 58 Class III Director
Ruth B. Kunath(2)............ 48 Class III Director
</TABLE>
--------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
* Mr. Leicher has informed us of his intention to resign as Vice President,
General Counsel and Secretary, effective as of December 15, 2000.
Doros Platika, M.D. Dr. Platika has served as President and Chief
Executive Officer and as a director of Curis since
February 2000 and served in such positions at
Ontogeny since July 1996. From June 1993 to June
1996, Dr. Platika was employed by Progenitor,
Inc., a biotechnology company, most recently as
Executive Vice President responsible for research
and development. Dr. Platika completed residencies
in medicine and neurology at Massachusetts General
Hospital, where he became Chief Resident. He did
post-doctoral study at the Whitehead Institute,
Massachusetts Institute of Technology and at
Massachusetts General Hospital in association with
Harvard Medical School. Dr. Platika served on the
faculties of Harvard Medical School and Albert
Einstein College of Medicine, where he was the
head of gene therapy. Dr. Platika completed his
M.D. at the State University of
57
<PAGE>
New York at Stony Brook School of Medicine and
received his B.A. from Reed College.
Lynn G. Baird, Ph.D. Dr. Baird has served as Vice President of
Regulatory Affairs, QA/QC and Preclinical
Development of Curis since March 2000. She joined
Reprogenesis as Vice President of Regulatory
Affairs and Quality in June 1998. From June 1995
through June 1998, Dr. Baird was employed by
CytoTherapeutics, Inc., a biotechnology company
involved in the development of encapsulated
cellular therapeutics, most recently as Vice
President of Regulatory, Quality and Clinical
Development. Prior to that, Dr. Baird held
various positions in development and regulatory
affairs at R. W. Johnson Pharmaceutical Research
Institute, a Johnson & Johnson company, and in
regulatory affairs and technical management at
Creative. Dr. Baird directed basic research in
immunology at the Wistar Institute and
Massachusetts General Hospital prior to moving to
industry. She holds a Ph.D. in
microbiology/immunology from the Medical College
of Virginia, a M.S. in chemistry from Virginia
Polytechnic Institute and a B.S. in psychology
also from Virginia Polytechnic Institute.
William B. Boni Mr. Boni has served as Vice President, Corporate
Communications and Investor Relations of Curis
since July 2000. From January 1991 to July 2000,
Mr. Boni was employed at Interneuron
Pharmaceuticals, Inc., a biopharmaceutical
company, as Vice President, Corporate
Communications. Mr. Boni is a graduate of
Columbia University, with an M.F.A., and of Tufts
University with a B.A.
George A. Eldridge Mr. Eldridge has served as Vice President, Chief
Financial Officer and Treasurer of Curis since
March 2000. He joined Ontogeny in April 1996 as
Vice President of Finance. From April 1993 to
April 1996, Mr. Eldridge was employed by Boston
Life Sciences, Inc. where he was Vice President,
Corporate Development and Finance. Prior to that,
he worked with the investment banking firm,
Kidder, Peabody & Co., Incorporated for a total
of five years in their New York and Boston
offices. A graduate of Dartmouth College, Mr.
Eldridge received his M.B.A. from the University
of Chicago Graduate School of Business.
Frank T. Gentile, Ph.D. Dr. Gentile has served as Vice President, Program
Management of Curis since April 2000. He joined
Reprogenesis in July 1997 as Director of Program
Management and Polymer Science. From 1990 to July
1999, Dr. Gentile was employed by
CytoTherapeutics, Inc., where he was Staff
Scientist, Manager of Bioengineering, Senior
Program Manager and Associate Director of Program
Management. Dr. Gentile received a B.E. degree in
Chemical Engineering from The Cooper Union and a
Ph.D. in Chemical Engineering from MIT. Prior to
working in industry, he was a post-doctoral
fellow at the Swiss Federal Institute of
Technology (ETH) in Zurich, Switzerland. He is
also an Adjunct Assistant Professor of
Biomaterials at Brown University.
58
<PAGE>
Bruce J. Hudson Mr. Hudson has served as Vice President, Human
Resources and Administration of Curis since July
2000. From September 1991 to July 2000, Mr.
Hudson operated Hudson & Co., a human resources
and management consulting firm. From January 1990
to September 1991, Mr. Hudson served as a
Director of Staffing and Planning for Western
Digital Corporation. Mr. Hudson is a graduate of
Springfield College with a B.A. and M.S. degree.
Bruce A. Leicher Mr. Leicher has served as Vice President, General
Counsel and Secretary of Curis since March 2000.
He joined Ontogeny in January 2000 as Vice
President and General Counsel. Prior to joining
Ontogeny, he was employed by Genetics Institute,
Inc. for ten years in various legal positions,
and for the last two years as Vice President,
Law. Prior to that, Mr. Leicher served as General
Counsel to BBN Communications Corporation and in
several other legal positions prior to that at
its parent, Bolt, Beranek and Newman Inc. from
1984 to 1990. Prior to these corporate positions,
Mr. Leicher was associated with the law firms of
Hale and Dorr and Butler & Binion in Boston and
Washington, D.C., respectively. Mr. Leicher
received his J.D. from Georgetown University Law
Center following receipt of his bachelor's degree
in psychology from the University of Rochester.
Daniel R. Passeri Mr. Passeri has served as Senior Vice President,
Corporate Development and Strategic Planning of
Curis since November 2000. From March 1997 to
November 2000, Mr. Passeri was employed by
GeneLogic Inc., a biotechnology company, most
recently as Senior Vice President, Corporate
Development. From February 1995 to March 1997,
Mr. Passeri was employed by Boehringer Mannheim,
a pharmaceutical, biotechnology and diagnostic
company, as Director of Technology Management.
Mr. Passeri is a graduate of the National Law
Center at George Washington University, with a
J.D., of the Imperial College of Science,
Technology and Medicine at the University of
London, with a M.S. in biotechnology, and of
Northeastern University, with a B.S.
Lee L. Rubin, Ph.D. Dr. Rubin has served as Senior Vice President of
Research and Chief Scientific Officer of Curis
since September 2000 and prior to that as Vice
President of Research of Curis since March 2000.
He joined Ontogeny in October 1997 as vice
president of Research. Prior to joining Ontogeny,
Dr. Rubin spent six years at Eisai London
Laboratories at University College London, where
he was director and professor of neurobiology.
Prior to that, Dr. Rubin worked for four years
with Athena NeuroSciences, Inc. as senior
scientist and head of the blood-brain barrier
program. Dr. Rubin completed his Ph.D. at
Rockefeller University and his B.A. at Cornell
University.
James S. Sigler Mr. Sigler has served as Vice President of
Manufacturing of Curis since March 2000. He
joined Reprogenesis in May 1998, as Vice
President of Manufacturing. From April 1994 to
April 1998, Mr. Sigler was Director of
Manufacturing for Genzyme Tissue Repair, a
biotechnology company specializing in the
development and commercialization of cellular
therapies. Prior to coming to BioSurface
Technology, Inc., Genzyme Tissue Repair's
predecessor, in 1990, Mr. Sigler was an officer
in the US Navy serving as a nuclear
59
<PAGE>
propulsion plant watch officer on board USS
Enterprise, CVN 65. Mr. Sigler received his B.S.
from Cornell University, and his M.B.A. from
Harvard Business School.
James R. McNab, Jr. Mr. McNab has served as a Curis Director since
February 2000. He is a co-founder and served as
the chairman of the board of directors of
Reprogenesis until July 2000. In addition, Mr.
McNab is a co-founder of several additional
companies, including Parker Medical Associates, a
manufacturer and worldwide supplier of
orthopaedic and sports-related products which was
sold to Smith and Nephew, Inc. in 1995, Sontra
Medical, Inc., a drug delivery company, and eNOS
Pharmaceuticals, Inc., a drug discovery company
working in the field of stroke therapy. Mr. McNab
is chairman and chief executive officer of Sontra
Medical and eNOS. Mr. McNab completed a B.A. in
Economics from Davidson College and an M.B.A.
from the University of North Carolina.
James R. Tobin Mr. Tobin has served as a Curis Director since
February 2000. He was a member of the Creative
Board of Directors from January 1995 to July
2000. He is currently Chief Executive Officer and
President of Boston Scientific Corporation and
has served in these positions since 1999. He
served as President and Chief Executive Officer
from February 1997 to December 1998 and President
and Chief Operating Officer of Biogen from
February 1994 to February 1997. Prior to joining
Biogen, Mr. Tobin was with Baxter International
Inc., a health care products company, where he
served as President and Chief Operating Officer
from 1992 to 1994, as Executive Vice President
from 1988 to 1992 and in various management
positions prior to 1988. He also serves as a
director of Pathogenesis Corporation, Boston
Scientific Corporation and PE Corporation. Mr.
Tobin completed an A.B. from Harvard College and
an M.B.A. from Harvard Business School.
Douglas A. Melton, Ph.D. Dr. Melton has served as a Curis Director since
February 2000. He was the scientific founder of
Ontogeny and was a member of Ontogeny's board of
directors from August 1994 to July 2000.
Dr. Melton is the Thomas Dudley Cabot Professor
of Natural Sciences at Harvard University and an
Investigator of the Howard Hughes Medical
Institute. His work has focused on vertebrate
embryogenesis and the molecular biology of
embryonic induction. He holds an appointment as
biologist at the Massachusetts General Hospital.
His Ph.D. work was carried out at Trinity College
at Cambridge University and the Medical Research
Council Laboratory of Molecular Biology in
Cambridge, England. He completed a B.S. at the
University of Illinois and a B.A. at Cambridge
University.
Michael Rosenblatt, M.D. Dr. Rosenblatt has served as a Curis Director
since February 2000. He was a member of
Creative's board of directors from June 1993 to
July 2000. From 1992-1998, Dr. Rosenblatt served
as the Robert H. Ebert Professor of Molecular
Medicine at the Harvard Medical School and the
director of the Harvard-MIT Division of Health
Sciences and Technology. He has served since
1992, and currently serves as Chief of the
Division of Bone and Mineral Metabolism at Beth
Israel
60
<PAGE>
Deaconess Medical Center. Since 1993, he has also
been a faculty member in the department of
Biological Chemistry and Molecular Pharmacology,
Division of Medical Sciences at Harvard
University. From 1996-1999, he was the executive
director of the Carl J. Shapiro Institute for
Education and Research at Harvard Medical School
and Beth Israel Deaconess Medical Center. Since
1996, he has been Harvard faculty dean for
academic programs at the Beth Israel Deaconess
Medical Center. He is now the President (interim)
of Beth Israel Deaconess Medical Center and the
George R. Minot Professor of Medicine at Harvard
Medical School. Prior to 1992, Dr. Rosenblatt was
the Senior Vice President for Research at Merck
Research Laboratories, a pharmaceutical company.
He also serves as a director of ArQule, Inc. Dr.
Rosenblatt received a B.A. from Columbia
University and received his M.D. from Harvard
Medical School.
Susan B. Bayh Ms. Bayh has served as a Curis Director since
October 2000. Ms. Bayh has served as the
Commissioner of the International Commission
between the United States and Canada since 1994,
overseeing compliance with environmental and
water level treaties for the U.S.-Canadian
border. Since 1994, she has also served as
Distinguished Visiting Professor at the College
of Business Administration at Butler University.
From 1989 to 1994, Ms. Bayh served as an attorney
in the Pharmaceutical Division of Eli Lilly and
Company. Ms. Bayh has served as a director of
Corvas International, Inc. and Cubist
Pharmaceuticals, Inc., each biotechnology
companies, since June 2000, and a director of
Emmis Communications, Inc., a telecommunications
company, since June 1994. Ms. Bayh is a graduate
of the University of Southern California Law
Center, where she earned a J.D., and of the
University of California at Berkeley, with a B.A.
Martyn D. Greenacre Mr. Greenacre has served as a Curis Director
since February 2000. He was a member of
Creative's board of directors from June 1993 to
July 2000. He is currently Chief Executive
Officer and President of Delsys Pharmaceutical
Corporation, a drug formulation company. From
1993 to 1996, Mr. Greenacre was President and
Chief Executive Officer of Zynaxis, Inc., a
biopharmaceutical company. Prior to Zynaxis, from
1973 through 1992, he was with SmithKline Beecham
where he held several senior management
positions, most recently as chairman of European
operations. He also serves as a director of
Delsys Pharmaceutical Corp. and GENSET, S.A., a
genomics company. Mr. Greenacre received a B.A.
from Harvard University and an M.B.A. from
Harvard Business School.
Ruth B. Kunath Ms. Kunath has served as a Curis Director since
February 2000. She was a member of Ontogeny's
board of directors from December 1998 to July
2000. Ms. Kunath has been biotechnology portfolio
manager since 1992 for Vulcan Ventures,
Incorporated, a venture capital firm founded by
Paul G. Allen. Prior to her employment at Vulcan
Ventures, Ms. Kunath spent nine years managing
Seattle Capital Management Equity assets and
eight years as the Senior Portfolio
61
<PAGE>
Manager for the healthcare sector of Bank of
America Capital Management. Ms. Kunath has served
as a director of Vaxgen, Inc., a biotechnology
company, since June 1999, and Dendreon
Corporation, a biotechnology company, since
December 1999. Ms. Kunath received a B.A. from
DePauw University and is a Chartered Financial
Analyst.
In January 2000, Dr. Platika consented to a retroactive suspension beginning
in June 1999 of his license to practice medicine by the Massachusetts Board of
Registration in Medicine. Dr. Platika became eligible to apply for a stay of
the suspension in December 1999. The Massachusetts Board found that Dr. Platika
had violated various provisions of Massachusetts law by writing prescriptions
which "were not issued in the usual course of his professional practice and
without the appropriate Massachusetts registrations." Dr. Platika had undergone
back surgery with associated back pain, and had been supplementing
prescriptions written by his treating physician. In February 1999, related
charges were filed against Dr. Platika in Waltham District Court in
Massachusetts. In June 1999, Dr. Platika was placed on unsupervised pre-trial
probation. The charges were dismissed in June 2000.
Board Composition
We currently have eight directors. There are no family relationships among
any of our directors. The terms of office of the board of directors are three
years and directors are divided into three classes, each consisting of, as
nearly as possible, one-third of the total number of directors constituting the
entire board of directors. As a result, a portion of the board of directors
will be elected each year. The division of the three classes of directors and
their respective election dates are as follows:
. Class I directors are Doros Platika, James R. McNab, Jr. and James R.
Tobin, and their term will expire at the annual meeting of stockholders
to be held in 2003;
. Class II directors are Douglas A. Melton and Michael Rosenblatt, and
their term will expire at the annual meeting of stockholders to be held
in 2001; and
. Class III directors are, Susan B. Bayh, Martyn D. Greenacre and Ruth B.
Kunath, and their term will expire at the annual meeting of stockholders
to be held in 2002.
At each annual meeting of stockholders, the successors to directors whose
terms are to expire will be elected to serve from the time of election and
qualification until the third annual meeting following election. The authorized
number of directors may be changed only by resolution of the board of directors
or vote of the holders of at least 75% of the voting power of all our
outstanding stock amending our by-laws. This classification of the board of
directors may have the effect of delaying or preventing changes in control or
management of our company.
Executive Officers
Our executive officers are appointed by the board of directors and serve
until their successors are elected or appointed. There are no family
relationships among any of our executive officers.
Employment Agreements
On June 17, 1996, Ontogeny entered into an employment agreement with Dr.
Platika, its president and chief executive officer. The agreement entitles him
to severance equal to twelve months of his most recent salary and the
forgiveness of the then outstanding principal balance on a loan in the original
principal amount of $500,000 from Ontogeny to him in the event of his
termination without cause. Upon the merger, we assumed Ontogeny's obligations
under the agreement.
Compensation Committee Interlocks and Insider Participation
The Compensation Committee of the board of directors currently consists of
Dr. Rosenblatt and Mr. Tobin. No interlocking relationship exists between any
member of the board of directors or the Compensation Committee and any member
of the board of directors or Compensation Committee of any other company, and
no such interlocking relationship has existed in the past.
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<PAGE>
Board Committees
The board of directors has an audit committee and a compensation committee.
The following is a brief description of the board committees.
The audit committee reports to the board of directors regarding the
appointment of our independent auditors, the scope and results of our annual
audits, compliance with our accounting and financial policies and management's
procedures and policies relative to the adequacy of our internal accounting
control. The audit committee consists of Ms. Bayh, Mr. Greenacre and Ms.
Kunath.
The compensation committee reports to the board of directors regarding our
compensation policies and all forms of compensation to be provided to our
executive officers and directors. In addition, the compensation committee will
review bonus and stock compensation arrangements for all of our employees. The
compensation committee consists of Dr. Rosenblatt and Mr. Tobin.
Compensation of Directors
Under our by-laws, the board of directors has the authority to fix the
compensation of the directors. For their services, non-employee directors
receive cash compensation in the amount of an annual retainer of $10,000,
$1,000 for each board of directors meeting attended in person and $500 for each
telephonic meeting participated in by conference call. Non-employee directors
who are members of a committee of the board of directors receive cash
compensation in the amount of $1,000 for each committee meeting attended on a
day other than a day of a board of directors meeting. Employee directors will
not receive compensation for attendance at board of directors or committee
meetings. In addition, we will reimburse our directors for reasonable out-of-
pocket expenses incurred in attending meetings of the board of directors and
any meetings of the board committees. Non-employee directors are also eligible
to participate in our 2000 Director Stock Option Plan and the 2000 Stock Option
Plan. See "--Employee Benefit Plans--2000 Director Stock Option Plan."
Compensation of Executive Officers
The following summary compensation table sets forth the compensation paid to
our named executive officers, who are our Chief Executive Officer and each of
our four other most highly compensated executive officers, during the fiscal
years ended December 31, 1997, 1998 and 1999. Because we are a newly formed
corporation and have only paid compensation to the executive officers listed
below since August 1, 2000, the table reflects compensation paid to the
executive officers by Creative, Ontogeny and Reprogenesis, the three
constituent corporations which merged to form Curis.
In accordance with Securities and Exchange Commission rules, the
compensation set forth in the table below does not include medical, group life
or other benefits which are available to all of our salaried employees and
perquisites and other benefits, securities or property which do not exceed the
lesser of $50,000 or 10% of the person's salary and bonus shown in the table.
63
<PAGE>
The following table shows the compensation received by each person serving
as one of our executive officers as of October 31, 2000. Other than our
executive officers listed below, none of our executive officers received total
cash compensation in excess of $100,000 for the fiscal year ended December 31,
1999. The executive officers listed in the table below are referred to as the
named executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation Awards
-------------- -----------------
Shares Underlying All Other
Name and Principal Position Year Salary($) Options Compensation ($)
--------------------------- ---- --------- ----------------- ----------------
<S> <C> <C> <C> <C>
Doros Platika, M.D.......... 1999 300,000 25,640 333,927(1)
President and Chief 1998 280,000 -- 118,119(1)
Executive Officer 1997 265,000 38,460 184,654(1)
Lynn G. Baird, Ph.D......... 1999 170,598 4,706 --
Vice President of 1998 90,010(2) 14,118 31,074(3)
Regulatory Affairs, QA/QC
and Preclinical Development
George A. Eldridge.......... 1999 135,000 6,410 --
Vice President, Chief 1998 120,000 19,230 --
Financial Officer and 1997 100,000 15,384 --
Treasurer
Lee L. Rubin, Ph.D.......... 1999 210,000 25,640 --
Vice President of Research 1998 185,000 28,204 --
1997 37,000(4) 44,870 1,776(5)
James S. Sigler............. 1999 150,500 4,706 --
Vice President of 1998 96,667(6) 14,118 --
Manufacturing
</TABLE>
--------
(1) The amount of other compensation for Dr. Platika for 1999 includes
forgiveness of a loan made on June 17, 1996 and related interest in the
amount of $108,634 (interest of $8,634) and related tax reimbursement in
the amount of $91,909, as well as forgiveness of a loan made on June 17,
1996 and related interest in the amount of $71,634 (interest of $11,634)
and related tax reimbursement in the amount of $60,605. The amount of other
compensation for Dr. Platika for 1998 includes forgiveness of a loan made
on June 17, 1996 and related interest in the amount of $63,060 (interest of
$3,060) and related tax reimbursement in the amount of $53,351. The amount
of other compensation for Dr. Platika for 1997 includes forgiveness of a
loan made on June 17, 1996 and related interest in the amount of $99,296
(interest of $9,296) and related tax reimbursement in the amount of
$84,008. These amounts also include premiums of $1,145, $1,708 and $1,350
for 1999, 1998 and 1997, respectively, paid by Ontogeny on an additional
life insurance policy in the amount of $1 million with a beneficiary other
than Ontogeny or Curis.
(2) Dr. Baird joined Reprogenesis on June 15, 1998. Therefore, 1998 salary
represents the salary earned from that date forward.
(3) Represents a relocation allowance paid to Dr. Baird.
(4) Dr. Rubin joined Ontogeny on October 21, 1997. Therefore, 1997 salary
represents the salary earned from that date forward.
(5) Other income for Dr. Rubin for 1997 includes interest forgiven on a loan
originated in October 1997 in the principal amount of $68,000 and a loan
originated in December 1997, in the principal amount of $85,000 as well as
tax reimbursement related thereto. Both loans were repaid in full by Dr.
Rubin in December 1997.
(6) Mr. Sigler joined Reprogenesis on May 1, 1998. Accordingly, 1998 salary
represents the salary earned from that date forward.
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<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth grants of stock options to the named
executive officers during the year ended December 31, 1999. No stock
appreciation rights were granted during the year ended December 31, 1999.
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
-------------------------------------------------- Value at Assumed Annual
% of Total Rates of Stock Price
Options Appreciation for Option
Number of Granted to Term(1)
Options Employees in Exercise Price Expiration ----------------------------
Name Granted Fiscal Year Per Share Date 0% 5% 10%
---- --------- ------------ -------------- ---------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Doros Platika, M.D...... 25,640(2) 3.5% $3.90 12/01/09 -- $385,308 $672,771
Lynn G. Baird, Ph.D..... 4,758(3) * $0.53 07/01/09 $22,500(3) $ 38,222 $ 62,343
George A. Eldridge...... 6,410(2) * $3.90 12/01/09 -- $ 96,327 $168,193
Lee L. Rubin, Ph.D...... 25,640(2) 3.5% $3.90 12/01/09 -- $385,308 $672,771
James S. Sigler ........ 4,758(3) * $0.53 07/01/09 $22,500(3) $ 38,222 $ 62,343
</TABLE>
--------
* Less than 1%.
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 0%, 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. Actual gains, if any, on stock option exercises will
depend on the future performance of the common stock and the date on which
the options are exercised.
(2) Stock options were granted under the Ontogeny 1995 Stock Option Plan at an
exercise price equal to the fair market value of Ontogeny common stock on
the date of grant as determined by the board of directors. Options become
exercisable as to 20% of the shares covered on the first anniversary of the
date of grant and 5% per quarter thereafter. The Compensation Committee of
the board of directors decided at a meeting on June 20, 2000 to accelerate
the vesting of these options so that options granted prior to May 1, 2000
would be fully vested as of August 1, 2001.
(3) Stock options were granted under the Reprogenesis 1996 Long-Term Incentive
Plan at an exercise price below the fair market value of Reprogenesis
common stock, which was determined by the board of directors of
Reprogenesis to be $1.00 per share as of the date of grant (equivalent to
$5.25 per share of Curis common stock). All options became fully vested as
of the consummation of the merger.
Aggregated Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
The following table sets forth certain information regarding exercised stock
options during the fiscal year ended December 31, 1999, and unexercised options
held as of December 31, 1999, by each of the named executive officers:
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised in-
Options at Fiscal Year- the-Money Options at
Shares End Fiscal Year-End($)
Acquired Value ------------------------- -------------------------
Name on Exercise(#) Realized($) Exercisable Unexercisable Exercisable Unexercisable
---- -------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Doros Platika, M.D...... -- -- 90,808 144,224 260,153 336,481
Lynn G. Baird, Ph.D..... -- -- 5,709 13,322 -- 22,500
George A. Eldridge...... 3,525 27,225 7,435 30,063 -- 6,748
Lee L. Rubin, Ph.D...... -- -- 23,588 75,126 34,997 52,496
James S. Sigler......... -- -- 6,423 12,608 -- 22,500
</TABLE>
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2000 Stock Option Plan
Our 2000 Stock Option Plan (the "2000 Plan") will provide for the granting
to employees of incentive stock options within the meaning of Section 422 of
the Internal Revenue Code of 1986, as amended (the "Code"), and for the
granting to employees, directors and consultants of nonstatutory stock options.
Unless terminated sooner, the 2000 Plan will terminate automatically in 2010. A
total of 10 million shares of common stock will initially be reserved for
issuance pursuant to the 2000 Plan. Each year, the number of shares authorized
for issuance under the 2000 Plan will increase by the lesser of 1 million
shares or 4% of the total number of outstanding shares of common stock, except
that the total number of shares authorized cannot exceed the total number of
shares outstanding subject to the plan by more than 6 million.
The board of directors or a committee of the board of directors may serve as
administrator of the 2000 Plan. The administrator has the power to determine
the terms of the options granted, including the exercise price, the number of
shares subject to each option, the exercisability thereof, and the form of
consideration payable upon such exercise. The board of directors has the
authority to amend, suspend or terminate the 2000 Plan, except that no such
action may affect shares of common stock previously issued and sold or options
previously granted under the 2000 Plan.
Options granted under the 2000 Plan are not generally transferable by the
optionee, and each option is exercisable during the lifetime of the optionee
only by such optionee. Options granted under the 2000 Plan must generally be
exercised within three months of the optionee's separation of service from
Curis, or within twelve months after such optionee's termination by death or
disability, but in no event later than the expiration of the option's ten year
term. The exercise price of all incentive stock options granted under the 2000
Plan must be at least equal to the fair market value of the common stock on the
date of grant. The exercise price of all nonstatutory stock options granted
under the 2000 Plan is as determined by the board of directors. Under the 2000
Plan, the board of directors may grant options entitling the optionee to
acquire shares of the common stock subject to a right of repurchase held by
Curis.
The 2000 Plan provides that in the event of a merger of Curis with or into
another corporation in which Curis will own less than 50% of the combined
entity or a sale of substantially all of Curis' assets, 50% of the then
unvested options of each optionee shall vest and become immediately exercisable
and the remaining options shall be assumed or an equivalent option substituted
by the successor corporation. The outstanding options which are assumed or
substituted as described in the preceding sentence shall vest and become
immediately exercisable if, prior to the date which is one year after such
merger or sale, the optionee is terminated without cause.
2000 Employee Stock Purchase Plan
A total of 1 million shares of common stock have been reserved for issuance
under our 2000 Employee Stock Purchase Plan (the "2000 Purchase Plan").
The 2000 Purchase Plan, which is intended to qualify under Section 423 of
the Code, contains successive six-month offering periods. The offering periods
generally start on the first trading day on or after May 15 and November 15 of
each year, except for the first such offering period which commenced on August
15, 2000.
Employees are eligible to participate if they are customarily employed by
Curis or any participating subsidiary for at least twenty hours per week and
more than five months in any calendar year. However, any employee who: (1)
immediately after grant owns stock possessing 5% or more of the total combined
voting power or value of all classes of the capital stock of Curis, or (2)
whose rights to purchase stock under all employee stock purchase plans of Curis
accrues at a rate which exceeds $25,000 worth of stock for each calendar year
may be not be granted an option to purchase stock under the 2000 Purchase Plan.
The 2000 Purchase Plan permits participants to purchase common stock through
payroll deductions of up to 15% of the participant's compensation. Compensation
is defined as the participant's base straight time gross earnings,
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<PAGE>
commissions, incentive compensation and bonuses, but exclusive of payments for
overtime, profit sharing payments, shift premium payments and incentive
payments.
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the 2000 Purchase Plan is 85% of the lower of the fair market
value of the common stock at the beginning or end of the offering period.
Participants may end their participation at any time during an offering period,
and they will be paid their payroll deductions to date. Participation ends
automatically upon termination of employment with Curis.
Rights granted under the 2000 Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the 2000 Purchase Plan. The 2000 Purchase Plan
provides that, in the event of a merger of Curis with or into another
corporation or a sale of substantially all of Curis' assets, each outstanding
option may be assumed or substituted for by the successor corporation. The
board of directors has the authority to amend or terminate the 2000 Purchase
Plan, except that no such action may adversely affect any outstanding rights to
purchase stock under the 2000 Purchase Plan.
401(k) Retirement/Savings Plan
Our 401(k) plan covers full-time employees located in the United States. The
401(k) plan is intended to qualify under Section 401(k) of the Code.
Contributions to the 401(k) plan by employees or by Curis, and the investment
earnings thereon, are not taxable to employees until withdrawn from the 401(k)
plan. Further, contributions by Curis, if any, will be deductible by Curis when
made. Employees may elect to contribute up to 15% of their current compensation
to the 401(k) plan up to the statutorily prescribed annual limit, which is
$10,500 in 2000. The 401(k) plan permits, but does not require, additional
matching contributions to the 401(k) plan by Curis on behalf of all
participants in the 401(k) plan. To date, Curis has not made any contributions
to the 401(k) plan.
2000 Director Stock Option Plan
Under the 2000 Director Stock Option Plan (the "2000 Director Plan"),
directors who are not employees of Curis or one of its subsidiaries receive
options to purchase shares of common stock. A total of 500,000 shares of common
stock have been reserved for issuance under the 2000 Director Plan.
Pursuant to the 2000 Director Plan, each non-employee director who first
becomes a non-employee director after the closing of the merger will be granted
an option to purchase 25,000 shares of common stock on the date of his or her
initial election to Curis' board of directors which will vest ratably over four
years on each anniversary of the date of grant. In addition, each non-employee
director will receive an option to purchase 5,000 shares of common stock on the
date of each annual meeting of stockholders commencing with the 2001 Annual
Meeting of Stockholders (other than a director who was initially elected to the
board of directors at any such annual meeting or, if previously, at any time
after the prior year's annual meeting). The options granted annually vest
immediately upon the date of grant. The exercise price per share of all such
options will be the fair market value of a share of common stock on the date of
grant.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table presents information regarding the beneficial ownership
of the common stock as of October 31, 2000, and as adjusted to reflect the sale
of the common stock offered by this prospectus, by:
. each of the individuals listed in the "Summary Compensation Table" above;
. each of our directors;
. each person, or group of affiliated persons, who is known by us to own
beneficially five percent or more of the common stock; and
. all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the SEC
computing the number of shares beneficially owned by a person and the
percentage ownership of that person. Shares of common stock subject to options
currently exercisable or exercisable within 60 days after October 31, 2000 are
considered outstanding for the purpose of computing the percentage ownership of
the person holding such options, but are not considered outstanding when
computing the percentage ownership of each other person.
Except as indicated in the footnotes to this table and pursuant to state
community property laws, each stockholder named in the table has sole voting
and investment power for the shares shown as beneficially owned by them.
Percentage of ownership is based on 26,111,252 shares of common stock
outstanding on October 31, 2000. Unless otherwise indicated in the footnotes,
the address of each of the individuals named below is: c/o Curis, Inc., 61
Moulton Street, Cambridge, Massachusetts 02138.
<TABLE>
<CAPTION>
Name of Beneficial Owner Total %(1)
------------------------ --------- ----
<S> <C> <C>
5% Stockholders
Vulcan Ventures Inc.(2)
110 110th Avenue NE, Suite 550
Bellevue, WA 98004........................................... 1,568,663 6.0%
Directors:
Doros Platika(3).............................................. 213,612 *
Susan B. Bayh................................................. 1,000 *
Martyn D. Greenacre(4)........................................ 15,000 *
Ruth B. Kunath(4)............................................. 10,256 *
James R. McNab, Jr.(5)........................................ 608,441 2.3%
Douglas A. Melton(6).......................................... 170,506 *
Michael Rosenblatt(4)......................................... 18,000 *
James R. Tobin(4)............................................. 15,000 *
Officers:
Lynn G. Baird(4).............................................. 19,030 *
William B. Boni............................................... -- --
George A. Eldridge(7)......................................... 42,310 *
Frank T. Gentile(4)........................................... 11,418 *
Bruce J. Hudson............................................... -- --
Bruce A. Leicher(4)........................................... 10,769 *
Daniel R. Passeri............................................. -- --
Lee L. Rubin(4)............................................... 61,120 *
James S. Sigler(4)............................................ 19,030 *
--------- ---
All directors and executive officers as a group
(17 people)(8)............................................. 1,215,492 4.6%
========= ===
</TABLE>
--------
* Represents beneficial ownership of less than one percent of common
stock.
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<PAGE>
(1) Shares of Curis common stock subject to options that are exercisable as of
October 31, 2000 or exercisable within 60 days of such date are deemed
outstanding for purposes of computing the percentage ownership of such
person, but are not deemed outstanding for purposes of computing the
percentage ownership of any other person.
(2) Voting control of Vulcan Ventures Incorporated is held by Paul Allen.
(3) Includes 179,425 shares subject to stock options exercisable within 60 days
of October 31, 2000.
(4) Consists solely of shares subject to options exercisable within 60 days of
October 31, 2000.
(5) Includes 40,210 shares subject to options exercisable within 60 days of
October 31, 2000.
(6) Includes 92,304 shares subject to stock options exercisable within 60 days
of October 31, 2000.
(7) Includes 23,401 shares subject to stock options exercisable within 60 days
of October 31, 2000.
(8) Includes 514,963 shares subject to stock options exercisable within 60 days
of October 31, 2000.
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<PAGE>
SELLING STOCKHOLDERS
We are registering all 5.2 million shares covered by this prospectus on
behalf of the selling stockholders named in the table below. We issued all of
the shares to the selling stockholders in a private placement on 200 ,
pursuant to purchase agreements signed in November 2000. We have registered the
shares to permit the selling stockholders and their pledgees, donees,
transferees or other successors-in-interest that receive their shares from the
selling stockholders as a gift, partnership distribution or other non-sale
related transfer after the date of this prospectus to resell the shares when
they deem appropriate.
The following table sets forth the name of each of the selling stockholders,
the number of shares owned by each of the selling stockholders as of November
13, 2000, the number of shares that may be offered under this prospectus, and
the number of shares of common stock owned by each of the selling stockholders
after this offering is completed. Percentage of ownership is based on
26,111,252 shares of common stock outstanding on October 31, 2000 and
31,311,252 shares of common stock outstanding after completion of this
offering. The number of shares in the column "Number of Shares Being Offered"
represent all of the shares that each selling stockholder may offer under this
prospectus.
<TABLE>
<CAPTION>
Shares of Common Stock Shares of Common Stock to
Beneficially Owned Prior to be Beneficially Owned After
Offering Number of Shares Offering
-------------------------------- of Common --------------------------------
Name of Selling Stock Being
Stockholder Number Percentage Offered Number Percentage
--------------- ---------------- --------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Ashton Partners
L.L.C. ................ -- -- 25,000 25,000 *
BayStar Capital, LP..... -- -- 168,750 168,750 *
BayStar International,
LTD. .................. -- -- 56,250 56,250 *
Bridgewood Capital
Partners, LP........... -- -- 3,330 3,330 *
Carmignac Technologies
Fund................... -- -- 150,000 150,000 *
Crestwood Capital
International, Ltd. ... -- -- 12,220 12,220 *
Crestwood Capital
Partners, LP........... -- -- 22,230 22,230 *
Crestwood Capital
Partners II, LP........ -- -- 2,220 2,220 *
DAS Consulting Inc. .... -- -- 7,500 7,500 *
The DCF Life Sciences
Fund Limited........... -- -- 100,000 100,000 *
DCF Partners, L.P. ..... -- -- 300,000 300,000 *
Deephaven Private
Placement Trading,
Ltd. .................. -- -- 50,000 50,000 *
DWS Investment.......... -- -- 425,000 425,000 1.4%
Equity Portfolio, a
series of IDS Life
Series Fund, Inc. ..... -- -- 750,000 750,000 2.4%
Essex Global Life
Sciences Fund.......... 32,200 * 25,333 57,533 *
Essex Global Life
Sciences Fund II, LP... 15,900 * 12,667 28,567 *
Essex Woodlands Health
Ventures Fund IV,
L.P. .................. 745,085 2.4% 175,000 920,085 2.9%
The FMG Bio-Med Hedge
Fund, Ltd. ............ -- -- 1,200 1,200 *
Framlington Health
Fund................... -- -- 400,000 400,000 1.3%
James C. Kelly.......... -- -- 7,500 7,500 *
KCM Biomedical L.P. .... -- -- 90,200 90,200 *
KCM Biomedical Offshore
Fund, Ltd. ............ -- -- 8,600 8,600 *
Meriken Nominees Ltd. .. -- -- 12,500 12,500 *
Moore Global
Investments, Ltd. ..... -- -- 160,000 160,000 *
MRM Life Ltd. .......... -- -- 7,500 7,500 *
Munder Framlington
Health Fund............ -- -- 400,000 400,000 1.3%
Narragansett I, LP...... -- -- 117,000 117,000 *
Narragansett Offshore,
Ltd. .................. -- -- 183,000 183,000 *
Permal Essex Global
Healthcare Ltd. ....... 32,000 * 62,000 94,000 *
Remington Investment
Strategies, L.P. ...... -- -- 40,000 40,000 *
UBS O'Connor LLC f/b/o
UBS Global Arbitrage
Master Limited......... -- -- 400,000 400,000 1.3%
United Capital
Management, Inc. ...... -- -- 75,000 75,000 *
Veredus Market Neutral
Fund L.P. ............. -- -- 31,400 31,400 *
Veredus Partners L.P.... -- -- 93,600 93,600 *
Vulcan Ventures Inc. ... 1,568,663 6.0% 750,000 2,318,663 7.4%
Zeke, LP................ -- -- 75,000 75,000 *
</TABLE>
--------
* Less than one percent.
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<PAGE>
We do not know when or in what amounts a selling stockholder may offer
shares for sale. The selling stockholders may not sell any or all of the shares
offered by this prospectus. Because the selling stockholders may offer all or
some of the shares pursuant to this offering, and because there are currently
no agreements, arrangements or understandings with respect to the sale of any
of the shares, we cannot estimate the number of the shares that will be held by
the selling stockholders after completion of the offering. However, for
purposes of this table, we have assumed that, after completion of the offering,
none of the shares covered by this prospectus will be held by the selling
stockholders.
Except for Vulcan Ventures Inc., none of the selling stockholders named
above has held any position or office with, or has otherwise had a material
relationship with, us or any of our subsidiaries within the past three years.
Ms. Kunath, a director since February 2000, has served as biotechnology
portfolio manager for Vulcan Ventures since 1992.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
This section of the prospectus describes the material terms of our capital
stock. This section also summarizes relevant provisions of the Delaware General
Corporation Law, which we refer to as "Delaware law." The terms of the our
certificate of incorporation and by-laws, as well as the terms of Delaware law,
are more detailed than the general information provided below. You should
carefully consider the actual provisions of these documents.
Authorized Capital Stock
We are authorized to issue 125,000,000 shares of common stock, $0.01 par
value per share, and 5,000,000 shares of preferred stock, $0.01 par value per
share.
Common Stock
As of October 31, 2000, there were 26,111,252 shares of common stock
outstanding held of record by approximately 306 stockholders.
Under our certificate of incorporation, holders of common stock are entitled
to one vote for each share held on matters submitted to a vote of stockholders
and do not have cumulative voting rights. Accordingly, the holders of a
majority of the shares of common stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
shares of common stock are entitled to receive proportionately any dividends
that may be declared by the board of directors, subject to any preferential
dividend rights of outstanding preferred stock. Upon our liquidation,
dissolution or winding up, the holders of shares of common stock are entitled
to receive proportionately our net assets after the payment of all debts and
other liabilities and subject to the prior rights of any outstanding preferred
stock. Holders of shares of common stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of common stock are
fully paid and nonassessable. The rights, preferences and privileges of the
holders of shares of common stock are subject to, and may be adversely affected
by, the rights of the holders of shares of any series of preferred stock which
we may designate and issue in the future.
Undesignated Preferred Stock
Under our certificate of incorporation, the board of directors is authorized
to issue one or more series of preferred stock without stockholder approval.
The board of directors has the discretion to determine designations, rights,
preferences, privileges and restrictions, including voting rights, conversion
rights, redemption privileges and liquidation preferences of each series of
preferred stock, all to the fullest extent permissible under Delaware law and
subject to any limitations set forth in our certificate of incorporation.
The purpose of authorizing the board of directors to issue preferred stock
and to determine the rights and preferences applicable to such preferred stock
is to eliminate delays associated with a stockholder vote on specific
issuances. Although no shares of preferred stock are currently outstanding, and
we have no present intent to issue preferred stock, the issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or could discourage a third party
from acquiring, a majority of our outstanding voting stock.
Anti-Takeover Provisions Of Delaware Law And Charter Provisions
Delaware law and our certificate of incorporation and by-laws could make it
more difficult for another person to acquire us and to remove our current
officers and directors. These provisions, as well as our ability to issue
preferred stock, are intended to discourage coercive takeover practices and
inadequate takeover bids and to encourage persons seeking to acquire control of
us to first negotiate with us. We believe that benefits of protecting our
ability to negotiate with the proponent of an unfriendly or unsolicited
takeover proposal outweighs the disadvantages of discouraging a takeover
proposal because negotiation of a proposal could result in an improvement of
its terms.
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Section 203 Of The Delaware General Corporation Law
We are subject to Section 203 of the Delaware General Corporation Law, an
anti-takeover law. In general, Section 203 prohibits a publicly-held Delaware
corporation from engaging in a business combination with an interested
stockholder for a period of three years following the date the person became an
interested stockholder. Section 203 generally does not apply if the business
combination or the transaction in which the person became an interested
stockholder is approved in advance. Generally, a business combination includes
a merger, asset or stock sale or other transaction resulting in a financial
benefit to the interested stockholder. Generally, an interested stockholder is
a person who, with affiliates and associates, owns or, within three years
before the determination of interested stockholder status, did own 15% or more
of a corporation's voting stock. Section 203 may delay or prevent a change in
control of us without further action by the stockholders.
Certificate Of Incorporation And By-laws
The following is a list of provisions from our certificate of incorporation
and by-laws that may have the effect of deterring a hostile takeover or
delaying or preventing changes in control or management:
. stockholders must hold an annual or special meeting to take action and
may not act by written consent;
. special meetings of stockholders may be called only by a majority of our
board members then in office or by the chairman of the board or chief
executive officer;
. stockholders must provide advance notice of nominations of candidates for
election to the board of directors and proposals they intend to submit
for approval at stockholders meetings;
. our board of directors is divided into three classes, with each class
serving staggered three-year terms;
. action by our board of directors or the approval by the holders of at
least 75% of the voting power of all outstanding stock is required to
change the authorized number of directors; and
. the approval of holders of at least 75% of the voting power of all
outstanding stock is required to remove a director for cause.
For the purposes of our certificate of incorporation, a "continuing
director" means either a member of the board of directors prior to the time any
person acquires 25% or more of our voting power or any of our voting
securities, or an individual designated (before his or her election to our
board) as a "continuing director" by a majority of our then continuing
directors. Our certificate of incorporation also allows our board of directors
to issue preferred stock without stockholder approval as described under "-
Undesignated Preferred Stock" above.
Limitation of Liability of Directors
Our certificate of incorporation provides that no director shall be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director, except as required by law, as in effect from time
to time. Currently, Delaware law requires that liability be imposed for the
following:
. any breach of the director's duty of loyalty to our company or
stockholders;
. any act or omission not in good faith or which involves intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock, repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; and
. any transaction from which the director derived an improper personal
benefit.
Our by-laws provide that, to the fullest extent permitted by law, we will
indemnify any person made or threatened to be made a party to any action by
reason of the fact that the person is or was our director or officer, or served
at our request for any other enterprise as a director or officer. We will
reimburse the expenses, including attorneys' fees, incurred by a person
indemnified by this provision when we receive an undertaking to repay such
amounts if it is ultimately determined that the person is not entitled to be
indemnified by us. Amending this provision will not reduce our indemnification
obligations relating to actions taken before an amendment.
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<PAGE>
Transfer Agent and Registrar
The transfer agent and registrar for the shares of the common stock is
ChaseMellon Shareholder Services, LLC.
Listing
Our common stock is quoted on the Nasdaq National Market under the symbol
"CRIS."
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In 1996, Ontogeny loaned Dr. Platika $500,000. Under the terms of a loan
agreement, $300,000 of the $500,000 loan is to be forgiven over a five-year
period commencing in 1996, provided Dr. Platika continues to be employed by us.
The remaining $200,000 of the loan matures in 2003. Upon forgiveness, we have
committed to pay for any resulting income taxes to Dr. Platika.
SHARES ELIGIBLE FOR FUTURE RESALE
Future sales of substantial amounts of common stock in the public market, or
the possibility of such sales occurring, could adversely affect prevailing
market prices for the common stock or our future ability to raise capital
through an offering of equity securities.
Upon completion of this offering, we will have outstanding 31,311,252 shares
of common stock assuming no exercise of outstanding options and warrants after
the date hereof. Other than the shares discussed in the following paragraph,
substantially all of these shares will be freely tradable in the public market
without restriction under the Securities Act, unless these shares are held by
"affiliates" of our company, as that term is defined in Rule 144 under the
Securities Act.
As of October 31, 2000, 6,419,653 shares of common stock are issuable upon
the exercise of outstanding stock options and 32,554 shares are issuable upon
the exercise of outstanding warrants. As of such date, 2,332,035 of such
options and 32,554 of such warrants are exercisable.
In general, under Rule 144 as in effect at the closing of this offering, an
affiliate or a person, or persons whose shares are aggregated, who has
beneficially owned restricted shares for at least one year, including the
holding period of any prior owner who is not an affiliate, would be entitled to
sell, within any three-month period, a number of shares that does not exceed
the greater of 1% of the then-outstanding shares of common stock (approximately
300,000 shares immediately after this offering) or the average weekly trading
volume of the common stock during the four calendar weeks preceding the filing
of a Form 144 with respect to the sale. Sales under Rule 144 are also subject
to some manner of sale and notice requirements and to the availability of
current public information about us. In addition, our affiliates must comply
with the restrictions and requirements of Rule 144 other than the one-year
holding period requirement in order to sell shares of common stock which are
not restricted securities.
Under Rule 144(k), a person who is not deemed to have been an affiliate at
any time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner who is not an affiliate, is entitled to sell these shares
without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144.
In meeting the one and two-year holding periods described above, a holder of
shares can include the holding periods of a prior owner of the shares who was
not an affiliate. The one and two-year holding periods described above do not
begin to run until the full purchase price or other consideration is paid by
the person acquiring the shares from the issuer or an affiliate.
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<PAGE>
PLAN OF DISTRIBUTION
The selling stockholders may sell the shares from time to time. The selling
stockholders will act independently of us in making decisions regarding the
timing, manner and size of each sale. The sales may be made through the
automated quotation system of the Nasdaq National Market on the facilities of
any national exchanges on which the common stock is then traded or, at prices
and at terms then prevailing or at prices related to the then current market
price, or in privately negotiated transactions. The selling stockholders may
effect these transactions by selling the shares to or through broker-dealers.
The shares may be sold by one or more of, or a combination of, the following:
. a block trade in which the broker-dealer will attempt to sell the shares
as agent but may position and resell a portion of the block as principal
to facilitate the transaction;
. purchases by a broker-dealer as principal and resale by a broker-dealer
for its account under this prospectus;
. an exchange distribution in accordance with the rules of an exchange;
. ordinary brokerage transactions and transactions in which the broker
solicits purchasers; and
. in privately negotiated transactions.
To the extent required, this prospectus may be amended or supplemented from
time to time to describe a specific plan of distribution. If the plan of
distribution involves an arrangement with a broker-dealer for the sale of
shares through a block trade, special offering, exchange distribution or
secondary distribution or a purchase by a broker or dealer, the amendment or
supplement will disclose:
. the name of each selling stockholder and of the participating broker-
dealer(s);
. the number of shares involved;
. the price at which the shares were sold;
. the commissions paid or discounts or concessions allowed to the broker-
dealer(s), where applicable;
. that a broker-dealer(s) did not conduct any investigation to verify the
information set out or incorporated by reference in this prospectus; and
. other facts material to the transaction.
From time to time, a selling stockholder may transfer, pledge, donate or
assign its shares of common stock to lenders or others and each of such persons
will be deemed to be a "selling stockholder" for purposes of this prospectus.
The number of shares of common stock beneficially owned by the selling
stockholder will decrease as and when it takes such actions. The plan of
distribution for the selling stockholders' shares of common stock sold under
this prospectus will otherwise remain unchanged, except that the transferees,
pledgees, donees or other successors will be selling stockholders hereunder.
The selling stockholders may enter into hedging transactions with broker-
dealers in connection with distributions of the shares or otherwise. In these
transactions, broker-dealers may engage in short sales of the shares in the
course of hedging the positions they assume with selling stockholders. The
selling stockholders also may sell shares short and redeliver the shares to
close out short positions.
The selling stockholders may enter into option or other transactions with
broker-dealers which require the delivery to the broker-dealer of the shares.
The broker-dealer may then resell or otherwise transfer the shares under this
prospectus. The selling stockholders also may loan or pledge the shares to a
broker-dealer. The broker-dealer may sell the loaned shares, or upon a default
the broker-dealer may sell the pledged shares under this prospectus.
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<PAGE>
In effecting sales, broker-dealers engaged by the selling stockholders may
arrange for other broker-dealers to participate in the resales. Broker-dealers
or agents may receive compensation in the form of commissions, discounts or
concessions from selling stockholders. Broker-dealers or agents may also
receive compensation from the purchasers of the shares for whom they act as
agents or to whom they sell as principals, or both. Compensation as to a
particular broker-dealer might be in excess of customary commissions and will
be in amounts to be negotiated in connection with the sale. Broker-dealers or
agents and any other participating broker-dealers or the selling stockholders
may be deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act in connection with sales of the shares. Accordingly, any
commission, discount or concession received by them and any profit on the
resale of the shares purchased by them may be deemed to be underwriting
discounts or commissions under the Securities Act. Because selling stockholders
may be deemed to be "underwriters" within the meaning of Section 2(11) of the
Securities Act, the selling stockholders will be subject to the prospectus
delivery requirements of the Securities Act. In addition, any securities
covered by this prospectus that qualify for sale under Rule 144 promulgated
under the Securities Act may be sold under Rule 144 rather than under this
prospectus. The selling stockholders have advised us that they have not entered
into any agreements, understandings or arrangements with any underwriters or
broker-dealers regarding the sale of their securities. There is no underwriter
or coordinating broker acting in connection with the proposed sale of shares by
the selling stockholders.
The shares will be sold only through registered or licensed brokers or
dealers if required under applicable state securities laws. In addition, in
some states the shares may not be sold unless they have been registered or
qualified for sale in the applicable state or an exemption from the
registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act any person
engaged in the distribution of the shares may not simultaneously engage in
market making activities with respect to our common stock for a period of two
business days prior to the commencement of the distribution. In addition, each
selling stockholder will be subject to applicable provisions of the Exchange
Act and the associated rules and regulations under the Exchange Act, including
Regulation M, which provisions may limit the timing of purchases and sales of
shares of our common stock by the selling stockholders. We will make copies of
this prospectus available to the selling stockholders and have informed them of
the need to deliver copies of this prospectus to purchasers at or prior to the
time of any sale of the shares.
We will bear all costs, expenses and fees in connection with the
registration of the shares. The selling stockholders will bear all commissions
and discounts, if any, attributable to the sales of the shares. The selling
stockholders may agree to indemnify any broker-dealer or agent that
participates in transactions involving sales of the shares against specific
liabilities, including liabilities arising under the Securities Act. The
selling stockholders have agreed to indemnify specific persons, including
broker-dealers and agents, against specific liabilities in connection with the
offering of the shares, including liabilities arising under the Securities Act.
We have agreed to maintain the effectiveness of this registration statement
until the earlier of 24 months from the effective date or the date on which the
shares purchased in the private placement may be resold without registration by
reason of Rule 144(k) promulgated under the Securities Act. The selling
stockholders may sell all, part or none of the shares offered by this
prospectus.
76
<PAGE>
LEGAL MATTERS
The validity of the shares of the common stock offered by this prospectus
will be passed upon for us by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of Creative, predecessor to Curis, as
of December 31, 1999 and 1998 and for each of the three years in the period
ended December 31, 1999 included in this prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing in this prospectus (which report expresses an unqualified opinion and
includes an emphasis paragraph referring to the merger agreement with Ontogeny
and Reprogenesis to form Curis), and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of Ontegeny at December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in accounting and auditing.
The consolidated financial statements of Reprogenesis as of December 31,
1999 and 1998 and for each of the three years in the period ended December 31,
1999 included in this prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
On June 20, 2000, our board of directors appointed Arthur Andersen LLP as
our auditors.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, a Registration
Statement on Form S-1. This prospectus, which is a part of the registration
statement, does not contain all of the information included in the registration
statement. Certain information is omitted and you should refer to the
registration statement and its exhibits. With respect to references made in
this prospectus to any contract, agreement or other document of ours, such
references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document. You may review a copy of the registration
statement, including exhibits, at the Commission's public reference room at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or Seven World
Trade Center, 13th Floor, New York, New York 10048 or Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Please call the Commission
at 1-800-SEC-0330 for further information on the operation of the public
reference rooms.
We also file annual, quarterly and current reports, proxy statements and
other information with the Commission. You may read and copy any reports,
statements or other information on file at the public reference rooms. You can
also request copies of these documents, for a copying fee, by writing to the
Commission.
Our Commission filings and the registration statement can also be reviewed
by accessing the Commission's internet site at http://www.sec.gov, which
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
77
<PAGE>
INDEX TO FINANCIAL PAGES
<TABLE>
<S> <C>
Curis, Inc.
Independent Auditors' Report............................................ F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998 and
September 30, 2000 (unaudited)......................................... F-4
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997 and for the nine months ended September 30, 2000
and 1999 (unaudited)................................................... F-5
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997 and for the nine months ended
September 30, 2000 (unaudited)......................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997 and for the nine months ended September 30, 2000
and 1999 (unaudited) .................................................. F-7
Notes to Consolidated Financial Statements.............................. F-8
Ontogeny, Inc.
Report of Independent Accountants....................................... F-25
Balance Sheets as of December 31, 1999 and 1998 and June 30, 2000
(unaudited)............................................................ F-26
Statements of Operations for the years ended December 31, 1999, 1998 and
1997 and for the six months ended June 30, 2000 and 1999 (unaudited)... F-27
Statements of Stockholders' Deficit for the years ended December 31,
1999, 1998, 1997 and 1996 and for the six months ended June 30, 2000
(unaudited)............................................................ F-28
Statements of Cash Flows for the years ended December 31, 1999, 1998 and
1997 and for the six months ended June 30, 2000 and 1999 (unaudited)... F-29
Notes to Financial Statements........................................... F-30
Reprogenesis, Inc.
Report of Independent Public Accountants................................ F-43
Consolidated Balance Sheets as of December 31, 1999 and 1998 and June
30, 2000 (unaudited)................................................... F-44
Consolidated Statements of Operations for the years ended December 31,
1999, 1998 and 1997 and for the six months ended June 30, 2000 and 1999
(unaudited)............................................................ F-45
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1999, 1998 and 1997 and for the six months ended
June 30, 2000 (unaudited).............................................. F-46
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997 and for the six months ended June 30, 2000 and 1999
(unaudited)............................................................ F-47
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Notes to the Consolidated Financial Statements.......................... F-48
Unaudited Pro Forma Combined Condensed Financial Statements
Unaudited Pro Forma Combined Condensed Financial Statements............. F-63
Unaudited Pro Forma Combined Condensed Statement of Operations for the
nine months ended September 30, 2000................................... F-66
Unaudited Pro Forma Combined Condensed Statement of Operations for the
year ended December 31, 1999........................................... F-67
Notes to Unaudited Pro Forma Combined Condensed Financial Information... F-68
</TABLE>
F-2
<PAGE>
CURIS, INC.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Curis, Inc.
We have audited the accompanying consolidated balance sheets of Curis, Inc.
(f.k.a. Creative BioMolecules, Inc.) and its subsidiary as of December 31, 1999
and 1998, and the related consolidated statements of operations, comprehensive
loss, stockholders' equity, 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, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and its subsidiary
at December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999,
in conformity with generally accepted accounting principles.
As discussed in Note 1 to the Consolidated Financial Statements, on February
14, 2000, the Company entered into a merger agreement with Ontogeny, Inc. and
Reprogenesis, Inc. to form Curis, Inc.
/s/ Deloitte & Touche LLP
-------------------------------------
Boston, Massachusetts
February 15, 2000
F-3
<PAGE>
CURIS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------- September 30,
1999 1998 2000
------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 2,751,069 $ 17,738,044 $ 20,625,579
Marketable securities........... 18,619,516 40,197,407 18,554,338
Marketable securities--
restricted..................... -- -- 4,988,831
Accounts receivable............. 60,296 669,232 100,430
Inventory....................... -- 28,733 --
Prepaid expenses and other
current assets................. 146,764 272,168 677,656
------------- ------------- -------------
Total current assets.......... 21,577,645 58,905,584 44,946,834
------------- ------------- -------------
PROPERTY AND EQUIPMENT--net....... 2,130,158 1,925,602 7,437,337
------------- ------------- -------------
OTHER ASSETS:
Notes receivable--officers
assets......................... -- 116,668 245,000
Goodwill........................ -- -- 101,614,000
Prepaid compensation............ -- -- 10,768,000
Patents and other intangible
assets......................... 5,075,914 5,107,629 1,355,522
Deposits and other assets....... 108,574 108,574 363,902
------------- ------------- -------------
Total other assets............ 5,184,488 5,332,871 114,346,424
------------- ------------- -------------
$ 28,892,291 $ 66,164,057 $ 166,730,595
============= ============= =============
LIABILITIES AND STOCKHOLDERS'
EQUITY
CURRENT LIABILITIES:
Debt and lease obligations--
current portion................ $ 347,323 $ 165,934 $ 2,036,466
Accounts payable................ 612,811 1,621,417 2,689,814
Accrued liabilities............. 1,895,634 2,508,161 4,547,209
Accrued compensation............ 944,270 1,335,692 824,636
Deferred revenue................ 661,279 3,661,279 --
------------- ------------- -------------
Total current liabilities..... 4,461,317 9,292,483 10,098,125
------------- ------------- -------------
DEBT AND LEASE OBLIGATIONS, net of
current portion.................. 1,009,388 713,459 3,500,798
------------- ------------- -------------
COMMITMENTS (Notes 6 and 15)
SERIES 1998/A PREFERRED STOCK,
$.01 par value 23,414 shares
issued and outstanding at
December 31, 1998................ -- 23,052,787 --
------------- ------------- -------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
10,000,000 shares authorized at
December 31, 1999 and 1998, and
5,000,000 authorized at
September 30, 2000; none issued
and outstanding................ -- -- --
Common Stock, $.01 par value,
15,000,000 shares authorized at
December 31, 1999 and 1998 and
125,000,000 shares authorized
at September 30, 2000;
10,999,534 shares and
10,337,241 shares issued and
outstanding at December 31,
1999 and 1998 and 26,015,824
shares issued and outstanding
at September 30, 2000.......... 190,995 103,372 260,158
Additional paid-in capital...... 144,937,416 142,381,729 619,675,656
Officer notes receivable........ -- -- (1,131,380)
Deferred compensation........... -- -- (17,729,090)
Accumulated deficit............. (121,595,024) (109,485,234) (452,820,783)
Accumulated other comprehensive
income (loss).................. (30,801) 105,461 4,877,111
------------- ------------- -------------
Total stockholders' equity.... 23,421,586 33,105,328 153,131,672
------------- ------------- -------------
$ 28,892,291 $ 66,164,057 $ 166,730,595
============= ============= =============
</TABLE>
See notes to consolidated financial statements
F-4
<PAGE>
CURIS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
---------------------------------------- ---------------------------
1999 1998 1997 2000 1999
------------ ------------ ------------ ------------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
REVENUES:
Research and
development
contracts............ $ 3,159,460 $ 10,419,071 $ 12,692,475 $ 736,585 $ 2,392,160
Manufacturing
contracts............ -- -- 393,926 -- --
License fees and
royalties............ 52,400 10,000 -- 7,228 13,600
------------ ------------ ------------ ------------- ------------
Total revenues...... 3,211,860 10,429,071 13,086,401 743,813 2,405,760
------------ ------------ ------------ ------------- ------------
COSTS AND EXPENSES:
Research and
development (A)...... 10,434,560 24,856,147 25,122,039 10,072,461 8,072,342
Cost of manufacturing
contracts............ -- -- 273,757 -- --
General and
administrative (A)... 5,524,077 6,946,012 5,826,518 6,642,813 4,078,187
Stock-based
compensation (A)..... 64,000 322,000 254,350 12,495,590 64,000
Amortization of
intangible assets.... 808,017 206,360 391,953 8,647,473 325,705
Loss on disposition of
fixed assets......... -- -- -- 248,516 --
In-process research
and development...... -- -- -- 294,800,000 --
1999 reorganization
and 1998 sale of
manufacturing
operations........... 255,701 1,362,249 -- (38,391) --
------------ ------------ ------------ ------------- ------------
Total costs and
expenses........... 17,086,355 33,692,768 31,868,617 332,868,462 12,540,234
------------ ------------ ------------ ------------- ------------
LOSS FROM OPERATIONS.... (13,874,495) (23,263,697) (18,782,216) (332,124,649) (10,134,474)
------------ ------------ ------------ ------------- ------------
OTHER INCOME (EXPENSES):
Interest income....... 1,924,313 2,183,472 2,330,743 1,159,052 1,617,577
Other income.......... 1,777 12,391 15,615 5,200 --
Interest expense...... (161,385) (327,304) (215,815) (265,362) (114,780)
------------ ------------ ------------ ------------- ------------
Total other income.. 1,764,705 1,868,559 2,130,543 898,890 1,502,797
------------ ------------ ------------ ------------- ------------
NET LOSS................ (12,109,790) (21,395,138) (16,651,673) (331,225,759) (8,631,677)
Accretion and repurchase
costs on Series 1998/A
preferred stock........ (2,395,559) (986,587) -- -- (2,395,559)
------------ ------------ ------------ ------------- ------------
Net loss applicable to
common stockholders.... $(14,505,349) $(22,381,725) $(16,651,673) $(331,225,759) $(11,027,236)
============ ============ ============ ============= ============
Basic and diluted net
loss per common share.. $ (1.36) $ (2.22) $ (1.68) $ (22.59) $ (1.04)
============ ============ ============ ============= ============
Weighted average common
shares for basic and
diluted net loss
computation............ 10,681,547 10,101,632 9,923,436 14,662,960 10,618,696
============ ============ ============ ============= ============
Net loss................ $(12,109,790) $(21,395,138) $(16,651,673) $(331,225,759) $ (8,631,677)
Unrealized gain/(loss)
on marketable
securities............. (136,262) 105,461 -- (14,075) (109,043)
Unrealized gain on
marketable securities-
restricted............. -- -- -- 4,921,987 --
------------ ------------ ------------ ------------- ------------
Comprehensive loss...... $(12,246,052) $(21,289,677) $(16,651,673) $(326,317,847) $ (8,740,720)
============ ============ ============ ============= ============
Research and
development............ $ -- $ -- $ -- $ 5,726,801 $ --
General and
administrative......... 64,000 322,000 254,350 6,768,789 64,000
------------ ------------ ------------ ------------- ------------
Total stock-based
compensation........... $ 64,000 $ 322,000 $ 254,350 $ 12,495,590 $ 64,000
============ ============ ============ ============= ============
</TABLE>
-------
(A) The following summarizes the departmental allocation of the stock-based
compensation charge:
See notes to consolidated financial statements
F-5
<PAGE>
CURIS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Officer Other
------------------- Paid-In Notes Deferred Accumulated Comprehensive
Shares Amount Capital Receivable Compensation Deficit Income/(Loss) Total
---------- -------- ------------ ----------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1997.. 9,830,866 $ 98,309 $138,601,189 $ -- $ -- $ (71,438,423) $ -- $ 67,261,075
Stock based
compensation... -- -- 254,350 -- -- -- -- 254,350
Other issuances
of Common
Stock.......... 186,909 1,869 1,843,721 -- -- -- -- 1,845,590
Net loss........ -- -- -- -- -- (16,651,673) -- (16,651,673)
---------- -------- ------------ ----------- ------------ ------------- ---------- -------------
BALANCE,
DECEMBER 31, 1997.. 10,017,775 100,178 140,699,260 -- -- (88,090,096) -- 52,709,342
Conversions of
Series 1998/A
Preferred Stock
into Common
Stock.......... 219,711 2,197 1,549,969 -- -- -- -- 1,552,166
Stock based
compensation... 14,400 144 321,856 -- -- -- -- 322,000
Other issuances
of Common
Stock.......... 85,355 853 797,231 -- -- -- -- 798,084
Unrealized gain
on marketable
securities..... -- -- -- -- -- -- 105,461 105,461
Accretion on
Series 1998/A
Preferred
Stock.......... -- -- (986,587) -- -- -- -- (986,587)
Net loss........ -- -- -- -- -- (21,395,138) -- (21,395,138)
---------- -------- ------------ ----------- ------------ ------------- ---------- -------------
BALANCE,
DECEMBER 31, 1998.. 10,337,241 103,372 142,381,729 -- -- (109,485,234) 105,461 33,105,328
Conversions of
Series 1998/A
Preferred Stock
into Common
Stock.......... 393,418 3,934 2,974,065 -- -- -- -- 2,977,999
Warrant
exercises into
Common Stock... 119,198 1,192 946,430 -- -- -- -- 947,622
Other issuances
of Common
Stock.......... 149,677 1,497 966,751 -- -- -- -- 968,248
Stock based
compensation... -- -- 64,000 -- -- -- -- 64,000
Unrealized loss
on marketable
securities..... -- -- -- -- -- -- (136,262) (136,262)
Accretion and
repurchase
costs on Series
1998/A
Preferred
Stock.......... -- -- (2,395,559) -- -- -- -- (2,395,559)
Net loss........ -- -- -- -- -- (12,109,790) -- (12,109,790)
---------- -------- ------------ ----------- ------------ ------------- ---------- -------------
BALANCE,
DECEMBER 31, 1999.. 10,999,534 109,995 144,937,416 -- -- (121,595,024) (30,801) 23,421,586
Issuance of
common stock
related to the
acquisition of
Ontogeny and
Reprogenesis
(unaudited).... 14,452,913 144,529 447,249,424 -- -- -- -- 447,393,953
Warrant
exercises into
Common Stock
(unaudited).... 74,194 742 306,819 -- -- -- -- 307,561
Other issuances
of Common Stock
(unaudited).... 349,477 3,495 4,205,365 -- -- -- -- 4,208,860
Officer notes
receivable
(unaudited).... 139,706 1,397 1,129,983 (1,131,380) -- -- -- --
Stock-based
compensation
(unaudited).... -- -- 3,487,100 -- -- -- -- 3,487,100
Deferred
compensation
related to
common stock
options
(unaudited).... -- -- 18,491,075 -- (18,491,075) -- -- --
Amortization of
deferred
compensation
(unaudited).... -- -- -- -- 761,985 -- -- 761,985
Compensation
expense related
to vesting of
restricted
stock
(unaudited).... -- -- 1,623,000 -- -- -- -- 1,623,000
Reversal of
prepaid
compensation
related to
terminated
employees
(unaudited).... -- -- (1,754,526) -- -- -- -- (1,754,526)
Net unrealized
gain on
marketable
securities
(unaudited).... -- -- -- -- -- -- 4,907,912 4,907,912
Net loss
(unaudited).... -- -- -- -- -- (331,225,759) -- (331,225,759)
---------- -------- ------------ ----------- ------------ ------------- ---------- -------------
BALANCE,
SEPTEMBER 30, 2000
(unaudited).... 26,015,824 $260,158 $619,675,656 $(1,131,380) $(17,729,090) $(452,820,783) $4,877,111 $ 153,131,672
========== ======== ============ =========== ============ ============= ========== =============
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE>
CURIS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
Years Ended December 31, September 30,
---------------------------------------- --------------------------
1999 1998 1997 2000 1999
------------ ------------ ------------ ------------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net loss................ $(12,109,790) $(21,395,138) $(16,651,673) $(331,225,759) $(8,631,677)
------------ ------------ ------------ ------------- -----------
Adjustments to reconcile
net loss to net cash
used:
Loss on sale of
manufacturing
operations............ -- 1,362,249 -- -- --
Depreciation and
amortization.......... 989,490 2,485,753 2,103,906 4,699,541 736,761
Stock-based
compensation
expense............... 64,000 371,999 254,350 12,495,590 64,000
Reorganization expense
adjustment............ -- -- -- 39,141 --
Noncash interest on
notes payable......... -- -- -- 12,782 --
Impairment costs of
patents............... -- -- -- 4,611,261 --
Loss on disposition of
fixed assets.......... -- -- -- 248,516 --
Write-off of in-
process research and
development........... -- -- -- 294,800,000 --
Deferred patent and
application costs..... 537,781 -- 188,055 -- 128,104
Increase (decrease) in
operating assets and
liabilities:
Accounts receivable.. 608,936 3,903,286 (3,117,822) 160,451 547,074
Prepaid expenses and
other current
assets.............. 154,137 (104,428) 16,821 295,489 101,767
Notes receivable from
related parties..... -- -- -- 15,000 --
Other assets......... -- -- -- 86,666 --
Accounts payable and
accrued
liabilities......... (2,012,555) (696,973) (653,619) (385,058) (2,372,684)
Deferred contract
revenue............. (3,000,000) 3,661,279 -- -- (2,250,000)
------------ ------------ ------------ ------------- -----------
Total adjustments.. (2,658,211) 10,983,165 (1,208,309) 317,079,379 (3,044,978)
------------ ------------ ------------ ------------- -----------
Net cash used for
operating
activities.......... (14,768,001) (10,411,973) (17,859,982) (14,146,380) (11,676,655)
------------ ------------ ------------ ------------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Purchase of marketable
securities............. (9,359,549) (30,021,298) (28,254,756) (8,226,957) (7,391,106)
Sale of marketable
securities............. 30,903,094 18,368,193 11,642,181 26,040,734 26,208,936
Expenditures for
property and
equipment.............. (610,013) (2,849,288) (2,810,611) (537,260) (593,777)
Proceeds from sale of
assets................. -- -- -- 675,000 --
Expenditures for
patents................ (776,586) (1,120,609) (1,131,303) (563,882) (551,158)
Note receivable from
officer................ -- (10,000) (40,000) -- --
Repayment of note
receivable from
officer................ 116,668 116,667 116,666 -- 116,668
Decrease in deposits and
other.................. -- 12,549 113,020 -- --
Proceeds from sale of
manufacturing related
assets................. -- 17,092,322 -- -- --
Cash received from
acquisition of Ontogeny
and Reprogenesis, net.. -- -- -- 10,788,955 --
------------ ------------ ------------ ------------- -----------
Net cash provided by
(used for) for
investing
activities.......... 20,273,614 1,588,536 (20,364,803) 28,176,590 17,789,563
------------ ------------ ------------ ------------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from warrant
exercises.............. 947,622 -- -- 307,561 --
Proceeds from issuance
of common stock........ 968,248 798,084 1,880,590 4,208,860 674,464
Proceeds from redeemable
Series 1998/A Preferred
Stock.................. -- 25,000,000 -- -- --
Costs of raising
equity................. -- (1,381,634) (35,000) -- --
Repurchase of Series
1998/A Preferred
Stock.................. (22,470,347) -- -- -- (22,470,347)
Increase in obligations
under capital leases... 311,031 193,524 346,766 -- 311,031
Repayments of
obligations under
capital leases......... (249,142) (207,402) (57,650) (672,121) (170,798)
------------ ------------ ------------ ------------- -----------
Net cash provided by
(used for) financing
activities............. (20,492,588) 24,402,572 2,134,706 3,844,300 (21,655,650)
------------ ------------ ------------ ------------- -----------
NET INCREASE (DECREASE)
IN CASH AND CASH
EQUIVALENTS............ (14,986,975) 15,579,135 (36,090,079) 17,874,510 (15,542,742)
CASH AND CASH
EQUIVALENTS, BEGINNING
OF PERIOD.............. 17,738,044 2,158,909 38,248,988 2,751,069 17,738,044
------------ ------------ ------------ ------------- -----------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................. $ 2,751,069 $ 17,738,044 $ 2,158,909 $ 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 $ 1,089,164 $ 135,361 $ -- $ 313,512
============ ============ ============ ============= ===========
Capital leases assumed
by buyer in connection
with sale of
manufacturing
operations............. $ -- $ 2,437,802 $ -- $ -- --
============ ============ ============ ============= ===========
Conversion of Series
1998/A Preferred
Stock.................. $ 2,977,999 $ 1,552,166 $ -- $ -- $ 2,977,999
============ ============ ============ ============= ===========
Officer notes payable
for exercise of stock
options................ $ -- $ -- $ -- $ 1,131,380 $ --
============ ============ ============ ============= ===========
</TABLE>
See notes to consolidated financial statements
F-7
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(including data applicable to unaudited periods)
1. OPERATIONS
On February 14, 2000, Creative BioMolecules, Inc. ("Creative") announced
that it would merge with Ontogeny, Inc. ("Ontogeny") and Reprogenesis, Inc.
("Reprogenesis") to form a public company named Curis, Inc. ("Curis" or the
"Company"). Curis, the successor to Creative, will record the merger as a
purchase of Reprogenesis and Ontogeny.
The Company focuses its efforts in the area of regenerative medicine and
uses its functional genomics expertise on developmentally regulated pathways to
(i) activate pathways to promote repair and normal function and (ii) inhibit
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. The Company operates in
one segment.
2. MERGER (Unaudited - Events Subsequent to the Date of the Independent
Auditors' Report)
Curis, Inc. (the "Company") was incorporated on February 14, 2000 and was
formed on July 31, 2000. Creative, a Delaware corporation, Ontogeny, a Delaware
corporation and Reprogenesis, a Texas corporation 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:
. 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;
. 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
. 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 connection with the Merger, the Company approved a 0.30-for-1 stock split
of the Company's common stock. All share and per share amounts of common stock
for all periods have been retroactively adjusted to reflect the stock split. In
addition, the Company's certificate of incorporation was amended and restated
among other things, to change its authorized capital stock to 125,000,000
shares of $0.01 par value common stock and 5,000,000 shares of $0.01 par value
preferred stock.
F-8
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited periods)
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.
The acquired IPR&D consists 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>
Nine Months Ended
Year Ended September 30,
December 31, --------------------------
1999 2000 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues......................... $ 9,966,730 $ 4,206,877 $ 10,061,972
Net loss......................... $(74,393,085) $(64,621,101) $(38,847,767)
Net loss per share............... $ (3.40) $ (2.49) $ (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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
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
F-9
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited periods)
and disclosure of certain assets and liabilities at the balance sheet date.
Such estimates include the collectability of receivables, the carrying value of
property and equipment and intangible assets and the value of certain
liabilities. Actual results may differ from such estimates.
(b) Reclassifications
Certain amounts in prior years have been reclassified to conform to the
current year presentation.
(c) Consolidation
The accompanying consolidated financial statements include the Company and
its wholly owned subsidiaries. Intercompany balances are eliminated in
consolidation.
(d) Revenue Recognition
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition, was issued
in December 1999. SAB 101 requires companies to recognize certain up-front non-
refundable fees and milestone payments over the life of the related alliances
when such fees are received in conjunction with alliances that have multiple
elements. The Company is required to adopt this new accounting principle
through a cumulative charge to the statement of operations, in accordance with
Accounting Principles Board Opinion (APB) No. 20, Accounting Changes, no later
than the fourth quarter of fiscal 2000. The Company believes that the adoption
of SAB 101 will not have a material impact on its reported operating results as
it relates to the contract revenues, upfront non-refundable payments and
milestone payments received in connection with collaborations.
Research and development contract revenues consist of non-refundable
research and development funding under collaborative agreements with various
strategic partners. Research and development contract revenue is recognized at
the time the research and development activities are performed under the terms
of the related agreements, when the strategic partner is obligated to pay and
when no future obligations exist. Revenue is recognized under government grants
as the services are provided and payment is assured under the terms of the
grant.
Fees for the sale or licensing of product rights are recorded as deferred
revenue upon receipt and recognized as income on a systematic basis (based upon
the timing and level of work performed or on a straight-line basis if not
otherwise determinable) over the period that the related products or services
are delivered or obligations as defined in the agreement are performed.
Revenue from milestone or other contingent payments is recognized as earned
in accordance with the terms of the related agreement. Royalties are recognized
as earned under the Company's royalty agreements when amounts are determinable
and payment is reasonably assured. The Company's manufacturing contracts
provided for technical collaboration and manufacturing for third parties.
Revenue was earned and recognized based upon work performed. The Company sold
its manufacturing facilities to Stryker Corporation in November 1998 (see Note
10).
As of September 30, 2000, the Company was not providing research and
development services under corporate collaboration agreements.
During the years ended December 31, 1999, 1998 and 1997 and nine months
ended September 30, 2000, total revenues from major customers as a percent of
total revenues of the Company were as follows:
<TABLE>
<CAPTION>
Years Ended
December 31, Nine Months Ended
-------------- September
Customer 1999 1998 1997 2000
-------- ---- ---- ---- -----------------
<S> <C> <C> <C> <C>
Biogen, Inc............................... 95% 28% 50% -- %
Stryker Corporation....................... 3% 55% 34% 92%
</TABLE>
F-10
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited periods)
(e) Research and Development
Research and development costs are charged to operations as incurred.
Certain research and development projects are partially funded by research and
development contracts, and the expenses related to these activities are
included in research and development costs.
(f) Cash Equivalents and Marketable Securities
Cash equivalents consist of short-term, highly liquid investments purchased
with remaining maturities of three months or less. All other liquid investments
are classified as marketable securities. Marketable securities have been
designated as "available for sale" and are stated at market value with any
unrealized holding gains or losses included as a component of stockholders'
equity.
The Company's marketable securities portfolio included approximately
$18,620,000 and $40,197,000 and $18,554,000 in corporate bonds and notes as of
December 31, 1999 and 1998 and September 30, 2000, respectively, all with
maturities ranging from one to twelve months as of September 30, 2000.
For the years ended December 31, 1999, 1998 and 1997 and nine months ended
September 30, 2000 and 1999, gross realized gains and losses were not material.
In computing gross realized gains and losses, the Company computes the cost of
its investments on a specific identification basis. Such cost includes the
direct cost to acquire the securities, adjusted for the amortization of
premiums or accretion of discounts. At December 31, 1999, gross unrealized
losses were $30,801. At December 31, 1998, gross unrealized gains and losses
were $126,000 and $21,000, respectively. At September 30, 2000, net unrealized
gains and losses were $4,877,111. These amounts are included as a separate
component of stockholders' equity.
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 $1,995,472.
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 approximately
$3,361,612. The decline in value of approximately $1,366,140 will be reflected
in the Company's financial statements 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 $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 approximately $1,627,219 which represents the difference
between the exercise price and the market value per share of the underlying
common stock at September 30, 2000.
(g) Fair Value of Financial Instruments
The estimated fair value of financial instruments has been determined by the
Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting data
to develop the estimates of fair value.
The estimated fair value of cash, accounts and notes receivable and accounts
payable approximates fair value due to the short-term nature of these
instruments. The fair value of marketable securities is based on current market
values. The carrying amounts of the Company's lease obligations also
approximate fair value (Note 6).
(h) Inventory
Inventory consists principally of raw materials and laboratory supplies.
Inventories are stated at the lower of cost or market on a first-in-first-out
basis.
F-11
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited periods)
(i) Plant and Equipment
Purchased equipment is recorded at cost. Leased equipment is recorded at the
lesser of cost or the present value of the minimum lease payments. Depreciation
and amortization are provided on the straight-line method over the estimated
useful lives of the related assets (three to twenty-five years) or the
remaining terms of the leases.
(j) Patents and Licensed Technology
The Company has filed applications for United States and foreign patents
covering aspects of its technology. Costs related to pending patent
applications have been deferred. Costs related to successful patent
applications and costs related to pending applications from which the Company
is currently deriving economic benefit, are amortized over the estimated useful
life of the patent, generally 16 to 20 years, using the straight-line method.
Costs related to licensed technology also have been deferred and are amortized
over the estimated useful life of the underlying technology, generally 10 to 17
years, using the straight-line method. Accumulated amortization was
approximately $912,000, $669,000 and $425,100 at December 31, 1999 and 1998 and
September 30, 2000, respectively. During the nine months ended September 30,
2000 the Company recognized an impairment charge of approximately $4,611,000 to
reduce the carrying value of certain patents, see Note 4.
(k) Long-lived Assets
The Company evaluates its long-lived assets for impairment whenever events
or changes in circumstances indicate that carrying amount of such assets may
not be recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to the future undiscounted net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of are reported at the lower of the carrying amount of
fair value, less cost to sell, see Note 4.
(l) Basic and Diluted Loss Per Common Share
The company applies Statement of Financial Standards (SFAS) No. 128,
Earnings per Share, which establishes standards for computing and presenting
earnings per share. Basic and diluted net loss per share were determined by
dividing net loss, after giving effect to accretion and repurchase costs on
Series 1998/A Preferred Stock, by the weighted average common shares
outstanding during the period. Diluted loss per share is the same as basic loss
per share for all periods presented, as the effect of the potential common
stock is antidilutive. Antidilutive securities which consist of stock options
and warrants that are not included in diluted net loss per common share were
1,327,800, 2,521,200, 757,500, and 6,582,800 at December 31, 1999, 1998 and
1997 and September 30, 2000 respectively.
(m) Stock-Based Compensation
Stock options issued to employees under the Company's stock option and
purchase plans are accounted for under APB No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees" (see Note 11). All stock-based awards to non-
employees are accounted for at their fair value in accordance with SFAS No. 123
and Emerging Issues Task Force ("EITF") Issue No. 96-18 "Accounting for Equity
Instruments that are Issued to Other than Employees."
(n) Interim Financial Information
The financial statements of the Company as of September 30, 2000 and for the
nine months ended September 30, 2000 and 1999 are unaudited. All adjustments
(consisting only of normal recurring adjustments) have been made, which in the
opinion of management, are necessary for a fair presentation. Results of
operations for the nine months ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the year ending December 31,
2000 or for any other future period.
F-12
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited periods)
(o) 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. The
Company does not anticipate the adoption of SFAS No. 133 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 application of this
interpretation resulted in approximately $19,100,000 of prepaid compensation
for the value of unvested stock options held by employees and consultants of
Ontogeny. This amount is being amortized over the vesting period of the
underlying options. The adoption of this interpretation did not have a material
impact on the Company's consolidated financial statements, except as otherwise
discussed above.
4. INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31, December 31, September
1999 1998 30, 2000
------------ ------------ ------------
<S> <C> <C> <C>
Goodwill............................ $ -- $ -- $105,477,000
Patents............................. 5,988,000 5,777,000 1,297,000
Assembled workforce................. -- -- 500,000
Prepaid compensation................ -- -- 19,146,000
---------- ---------- ------------
5,988,000 5,777,000 126,420,000
Less: accumulated amortization...... (912,000) (669,000) (12,682,000)
---------- ---------- ------------
$5,076,000 $5,108,000 $113,738,000
========== ========== ============
</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 capitalizes all significant
costs associated with the successful filing of a patent application as a
component of other assets in the accompanying consolidated balance sheet.
Patent costs are being amortized over their estimated useful lives, not to
exceed 17 years.
As a result of the Merger, the Company recorded an intangible asset of
$19,146,000 related to the value of unvested stock options held by employees
and consultants primarily of Ontogeny. The Company is amortizing this amount
over the one-year vesting period of the stock options. As of September 30,
2000, amortization related to these options totaled $6,632,000. Additionally,
$1,746,000 of this intangible asset was reversed in the period ended September
30, 2000 due to the forfeiture of unvested stock options upon the termination
of certain employees.
F-13
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited periods)
The Company applies the provision of SFAS 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, the Company performed a review of
its capitalized patent costs as part of evaluating its post merger strategy.
This review resulted in the impairment charge of approximately $4,611,000 to
reduce the carrying value of those patents determined not to be beneficial or
not expected to be utilized in future operations and which have no alternative
future use. This amount has been included under "amortization of intangibles"
in the accompanying consolidated statement of operations for the nine months
ended September 30, 2000.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------ September 30,
1999 1998 2000
----------- ----------- -------------
<S> <C> <C> <C>
Laboratory equipment and
furniture....................... $ 5,564,575 $ 4,954,427 $8,376,734
Leasehold improvements........... 764,021 572,319 3,920,079
Office furniture and equipment... 2,296,666 2,174,991 559,892
----------- ----------- ----------
8,625,262 7,701,737 12,856,705
Less accumulated depreciation and
amortization.................... (6,495,104) (5,776,135) (5,419,368)
----------- ----------- ----------
Total........................ $ 2,130,158 $ 1,925,602 $7,437,337
=========== =========== ==========
</TABLE>
Amounts included in property and equipment applicable to capital leases are
as follows:
<TABLE>
<CAPTION>
December 31,
---------------------- September 30,
1999 1998 2000
---------- ---------- -------------
<S> <C> <C> <C>
Laboratory equipment and
furniture........................ $1,471,454 $ 913,176 $5,966,475
Office furniture and equipment.... 374,683 312,024 136,640
---------- ---------- ----------
1,846,137 1,225,200 6,103,115
Less accumulated amortization..... (519,766) (201,094) (2,395,878)
---------- ---------- ----------
Total......................... $1,326,371 $1,024,106 $3,707,237
========== ========== ==========
</TABLE>
6. LONG-TERM DEBT, CAPITAL LEASE OBLIGATIONS AND OPERATING LEASES
In October 1997, the Company entered into a master lease agreement to
provide for the lease financing for up to $2,000,000 of laboratory and office
equipment. In May 1999, the Company extended the master lease agreement, that
provides for the sale and leaseback or lease of up to $750,000 of laboratory
and office equipment. The lease agreements expire in 2002 and in 2003. The
lease commitment expired on December 31, 1999.
The Company has noncancelable operating lease agreements for office and
laboratory space and certain office and laboratory equipment. Rent expense for
all operating leases was approximately $841,000, $1,037,000, $775,000, $891,000
and $604,000 for the years ended December 31, 1999, 1998 and 1997 and nine
months ended September 30, 2000 and 1999, respectively.
F-14
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited periods)
In March 2000, the Company entered into a sublease for its Boston,
Massachusetts facility previously occupied by Creative, commencing on July 1,
2000. The sublease terminates on July 31, 2002, also the termination date of
the Company's original lease on this facility. In April 2000, the Company
amended one of its Hopkinton, Massachusetts facility leases previously occupied
by Creative whereby the lease terminated on July 31, 2000.
Long-term debt and capital lease obligations consist of the following at
December 31, 1999 and September 30, 2000:
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
------------ -------------
<S> <C> <C>
Notes payable to a financing agency for capital
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 September 30, 2000..................... 1,357,000 3,368,000
---------- -----------
1,357,000 5,537,000
Less current portion................................ (348,000) (2,036,000)
---------- -----------
Total long-term debt and capital lease obligations.. $1,009,000 $ 3,501,000
========== ===========
</TABLE>
Future minimum lease obligations at September 30, 2000, for the periods
ending December 31, net of anticipated sublease revenues are as follows:
<TABLE>
<CAPTION>
Operating
Year Ending December 31, Leases
------------------------ -----------
<S> <C>
Fourth quarter of 2000........................................ $ 561,000
2001.......................................................... 2,270,000
2002.......................................................... 1,709,000
2003.......................................................... 1,490,000
2004.......................................................... 1,474,000
After 2004.................................................... 5,035,000
-----------
Total minimum lease payments.................................. $12,539,000
===========
</TABLE>
7. GOVERNMENT GRANTS
Effective November 1, 1999, Reprogenesis received a grant award for its
cardiovascular project from the advanced technology program of the National
Institute of Standards and Technology (NIST) to support the development of the
Company's cardiovascular products, Vascugel and Vascujet. This award has been
assumed by the Company in conjunction with the Merger. Under the terms of the
grant award, the Company will receive $2,000,000 in cost reimbursement funding
to be paid at a rate of approximately $666,000 annually over a three-year
period. On October 5, 2000, the Company announced the receipt of a second
$2,000,000 grant from 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. Funding under the NIST grants is
contingent on the Company meeting minimum cost sharing and other requirements,
as defined in the financial assistance award and annual government
appropriations for the awards. The Company recognized approximately $56,000
under these awards for the nine month period ended September 30, 2000.
F-15
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited periods)
8. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
The Company had an original agreement with Stryker to identify and develop
bone-inducing proteins and to develop dental therapeutics. In exchange for
research funding, future royalties and revenue from commercial manufacturing,
Creative developed OP-1 as a therapy for orthopaedic reconstruction and
cartilage regeneration, and supplied Stryker material for use in clinical
trials. Creative restructured its agreements with Stryker in November 1998 to
provide Stryker with the exclusive rights to manufacture OP-1 products in these
fields. At that time, Stryker acquired Creative's commercial manufacturing
operations. As a result, Stryker has the exclusive right to develop, market,
manufacture and sell products based on OP-1 proteins for use in orthopaedic
reconstruction and dental therapies and is required to pay the Company
royalties on such commercial sales.
Under the agreement with Stryker, as amended, Stryker has exclusive rights
to develop, market and sell products incorporating bone and cartilage-inducing
proteins developed under the research program, including OP-1, for use in the
field of orthopaedic reconstruction and dental therapeutics. The Company has
agreed not to undertake any bone morphogenic protein (BMP)-related research,
development or commercialization of any products in the fields of orthopaedic
reconstruction and dental therapeutics, on our own behalf or for third parties,
for the term of certain patents to the extent that the activities utilize
technology, patents or certain personnel acquired from Creative in the merger.
The Company has the exclusive and irrevocable right to develop, market and sell
products incorporating morphogenic proteins developed under the research
program, including OP-1, for all uses and applications other than orthopaedic
and dental reconstruction such as neurological diseases, osteoporosis, renal
failure and others. Subject to certain exceptions in connection with the
acquisition or merger of Stryker, Stryker has agreed not to undertake any
research, development or commercialization of any products in our field
(applications other than orthopaedic reconstruction and dental therapies), on
its own behalf or for third parties, for the term of those patents. Each
company has the right to grant licenses to third parties in their respective
fields, and each is obligated to pay royalties to the other on its sales of
such products and to share royalties received from licensees.
The Company maintains an exclusive license in our field under certain
patents and claims that were assigned to Stryker in November 1998 as part of
the sale of certain of Creative's manufacturing rights and assets to Stryker.
In addition, Stryker was granted an exclusive license under patents in
Creative's morphogen portfolio for use in the fields of orthopaedic
reconstruction and dental therapeutics.
In December 1996, Creative entered into a Research Collaboration and License
Agreement with Biogen to collaborate on the development of novel therapeutics
based on OP-1 for the treatment of renal disorders. The initial focus of the
collaboration was on advancing the development of Creative's morphogenic
protein, OP-1, for the treatment of acute and chronic renal failure. Under the
agreement, Creative granted to Biogen exclusive worldwide rights to
manufacture, market and sell OP-1 and OP-1 products developed through the
collaboration for the treatment of renal disease. The agreement provided for
$10,500,000 in research funding over a three-year period ending December 31,
1999, of which $7,500,000 had been recognized through December 31, 1998. In
December 1998, Biogen and Creative signed an Amendment Agreement and Biogen
paid $3,000,000 in research support for the year ending December 31, 1999. The
$3,000,000 has been recognized through December 31, 1999. Under the Biogen
Amendment, Creative assumed primary responsibility for the development of OP-1
for the treatment of renal disorders and Biogen retained an option through 1999
to resume responsibility for development of OP-1 as a therapy for chronic renal
failure. Biogen did not exercise its option by December 31, 1999 and Curis has
assumed all rights to OP-1 renal therapies.
F-16
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited periods)
9. NOTES RECEIVABLE--OFFICERS
In July 1997, Creative loaned $40,000 to an officer of Creative. The loan
was evidenced by a fully secured promissory note bearing interest at the annual
rate of 6.65%. Twenty-five percent of the principal and accrued interest was
forgiven on February 7, 1998 and then an equal portion of the principal sum and
accrued interest was to have been forgiven monthly over the remaining term of
thirty-six months, provided the officer was employed by Creative. In July 1998,
Creative loaned an additional $10,000 to the officer. In December 1998, as part
of a severance agreement, Creative agreed to forgive the remaining principal of
$31,700 plus accrued interest and recorded was a charge of approximately
$39,000 in the 1998 statement of operations.
On February 8, 2000, Creative loaned to two executive officers an aggregate
of $1,131,380, which was equal to the aggregate exercise price of incentive
stock options exercised by them on the same date. The officers immediately used
these funds to pay Creative the exercise price of such incentive stock options.
These full recourse, non-prepayable loans each bear interest at an annual rate
of 7.0% and the principal is due and payable on the earlier of May 8, 2002 or
30 days following the sale of the stock purchased with these funds.
In 1996, Creative loaned $350,000 to an officer of Creative. The loan was
evidenced by a fully secured promissory note bearing interest at the annual
rate of 6.02% and payable in three equal annual installments, plus accrued
interest. At December 31, 1999, the loan has been paid in full.
In 1996, Ontogeny loaned an officer $500,000. $300,000 is being forgiven
over a five-year period commencing in 1996, contingent on the respective
officers' continued employment with the Company. The remaining $200,000 of the
$500,000 loan matures in 2003. Upon forgiveness, the Company has committed to
pay for any resulting income taxes to the officer. The Company is recording
compensation expense to amortize the total of these loans over a period of five
to seven years and to accrue the related taxes. The outstanding balance at
September 30, 2000 is $245,000 and accrued taxes related to this commitment of
approximately $200,000 are included in accrued expenses.
10. SALE OF MANUFACTURING OPERATIONS AND REORGANIZATION CHARGES
In November 1998, the Company sold certain of its OP-1 manufacturing rights
and facilities to Stryker. In addition to cash consideration in exchange for
the manufacturing facility, the transaction is expected to provide the Company
with increased royalties on Stryker products, if approved for commercial sale,
in lieu of the manufacturing revenue anticipated under the prior agreement.
Proceeds and expenses associated with this transaction include the following:
<TABLE>
<S> <C>
Total proceeds (including capital leases assumed by the
buyer of $2,438,000)...................................... $19,530,000
Less:
Net book value of manufacturing related assets........... 18,929,000
Employee termination costs............................... 1,438,000
Legal, accounting and consulting costs................... 525,000
-----------
Loss on sale of manufacturing operations................... $(1,362,000)
===========
</TABLE>
As a result of this transaction, the Company recorded a charge to operations
of $1,362,000 in the quarter ended December 31, 1998. The charge included
$885,000 related primarily to employee termination benefits and $548,000
related to estimated health insurance claims on the terminated employees, which
$903,000 remained to be paid as of December 31, 1998. During the quarter ended
December 31, 1999, the Company determined that health insurance claims were
less than originally estimated. This resulted in a reduction in the loss on
sale of manufacturing operations and the related accrual of approximately
$255,000.
F-17
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited periods)
In addition, the Company recorded a charge of $64,000 and $205,000 related
to a change in the exercise terms of stock option agreements in connection
with the sale of manufacturing operations for the years ended December 31,
1999 and 1998, respectively.
Effective October 19, 1999, the Company was reorganized and the Board
approved a plan in order to focus its operations and financial resources on
the development of its morphogenic protein-based clinical candidates for the
treatment of stroke and renal disease. The reorganization charge included
$511,000 related primarily to termination benefits in the reduction of
employees from 70 to 43. Salaries and termination benefits, either in the form
of one-time or periodic payments, were made when the employee ceased
employment. These employees were in management, research and development and
administrative support. As of December 31, 1999, there was approximately
$95,503 of accrued costs, principally representing future cash outlays for
employee termination costs.
<TABLE>
<CAPTION>
1999 1998 Sale of
Reorganization Manufacturing
Charges Operations
-------------- -------------
<S> <C> <C>
Expensed..................................... $1,362,000
Paid......................................... (459,000)
----------
Accrued at December 31, 1998................. 903,000
Expensed..................................... $ 511,000
Paid......................................... (415,000) $ (648,000)
Reversed..................................... (255,000)
--------- ----------
Accrued at December 31, 1999................. 96,000 $ --
==========
Paid......................................... (58,000)
Reversed..................................... (38,000)
---------
Accrued at September 30, 2000 (unaudited).... $ --
=========
</TABLE>
The following table summarizes the effect to the income statement for
reorganization charges and sale of manufacturing operations for the year ended
December 31, 1999:
<TABLE>
<S> <C>
Salaries and termination benefits............................. $ 511,000
Salaries and termination benefits settled for amounts less
than anticipated............................................. (255,000)
---------
Total..................................................... $ 256,000
=========
</TABLE>
11. SERIES 1998/A PREFERRED STOCK
On May 27, 1998 (the "Issue Date"), Creative completed a private placement
with three institutional investors (the "Investors") for the sale of 25,000
shares of Series 1998/A Preferred Stock, $.01 par value per share (the "Series
1998/A Preferred Stock"), with a stated value of $1,000 per share resulting in
gross proceeds of $25,000,000. Issuance costs totaled approximately $1,382,000
(offset against the Series 1998/A Preferred Stock proceeds in the accompanying
balance sheet at December 31, 1998), resulting in net proceeds of
approximately $23,618,000. Accretion on Series 1998/A Preferred Stock for the
year ended December 31, 1998 was $987,000 and includes $733,000, calculated at
the rate of 5% per annum of the stated value of the outstanding Series 1998/A
Preferred Stock from May 27, 1998 and $254,000 of accretion of issuance costs
related to the sale of Series 1998/A Preferred Stock.
Through May 7, 1999 the holders converted a total of 4,514 shares of Series
1998/A Preferred Stock into 613,129 shares of Common Stock. On May 7, 1999, we
repurchased 20,486 shares, which represented all of the then outstanding
Series 1998/A Preferred Stock following final conversions, for approximately
$22,470,000 in
F-18
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited periods)
cash. Accretion and Repurchase Costs on Series 1998/A Preferred Stock was
$21,396,000 for the year ended December 31, 1999, and included the following:
$385,000 calculated at the rate of 5% per annum of the stated value of the
outstanding Series 1998/A Preferred Stock; $144,000 of accretion of issuance
costs related to the sales of Series 1998/A Preferred Stock; and as a result of
the repurchase of the Series 1998/A Preferred Stock on May 7, 1999, a one-time
charge of approximately $1,867,000 recorded in the second quarter of 1999 which
represents accretion of the Series 1998/A Preferred Stock up to its repurchase
amount and accretion of all remaining issuance costs. As a result of this
transaction, the Series 1998/A Preferred Stock has been retired and there will
be no subsequent conversions into Common Stock.
12. WARRANTS
In connection with a private placement offering in 1994 and 1995, the
Company sold 339,000 warrants, each to purchase one share of Common Stock. Each
warrant is exercisable for a period of five years from the date of issuance at
an exercise price of $7.95. During the year ended December 31, 1999 and nine
months ended September 30, 2000, 119,198 and 74,194 warrants were exercised.
Proceeds to the Company were approximately $948,000 and $308,000, respectively.
At December 31, 1999, warrants to purchase 124,281 shares of Common Stock are
outstanding, while 9,000 warrants expired unexercised in 1999. As of September
30, 2000, all unexercised options had expired.
In connection with the Merger, the Company assumed 71,089 warrants. The
exercise price of these options ranges from $3.40 to $19.51.
13. STOCK PLANS
Stock Option Plans--In May 1987, the Company established the 1987 Stock Plan
("1987 Plan") and terminated the 1983 Incentive Stock Option Plan ("1983 Plan")
such that no further grants of options could be made thereunder. The 1987 Plan
was subsequently amended to increase the number of shares of Common Stock
authorized for issuance thereunder. A total of 2,040,000 shares of Common Stock
(after retroactive adjustment to give effect to the 0.30-for-1 stock split) had
been reserved for issuance under the 1987 Plan upon the exercise of options or
in connection with awards or direct purchases of stock. On June 30, 1999, the
1987 Plan expired. At December 31, 1999 and September 30, 2000, there were no
shares available for grant under the 1987 Plan.
In April 1998, the Board of Directors adopted and in June 1998, the
stockholders of the Company approved the 1998 Stock Plan ("1998 Plan") which
permits the granting of incentive and non-qualified stock options. The number
of shares of Common Stock subject to issuance under the 1998 Plan is 900,000.
At December 31, 1999 and September 30, 2000, 495,390 shares and no shares are
available for grant under the 1998 Plan, respectively.
In March 2000, the Board of Directors adopted and in June 2000 the
stockholders approved, the 2000 Stock Incentive Plan (the 2000 Plan) which
permits granting of incentive and non-qualified stock options as well as the
issuance of restricted shares. The number of shares of Common Stock subject to
issuance under the 2000 Plan is 10,000,000. At September 30, 2000, 3,401,912
shares are available for grant under the 2000 Plan.
The 1987 Plan, the 1998 Plan and the 2000 Plan permit the granting of
incentive and nonqualified stock options to consultants, employees or officers
of the Company and its subsidiaries at prices determined by the Board of
Directors. Awards of stock may be made to consultants, employees or officers of
the Company and its subsidiaries, and direct purchases of stock may be made by
such individuals also at prices determined by the Board of Directors. Options
become exercisable as determined by the Board of Directors and expire up to ten
years from the date of grant.
F-19
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited periods)
The 1992 Non-Employee Director Non-Qualified Stock Option Plan ("Director
Plan") provides for the granting of options to non-employee directors. The
Director Plan was amended and approved by the stockholders of the Company in
June 1999 increasing the number of shares of Common Stock authorized for
issuance under the Plan from 90,000 to 150,000 shares (after retroactive
adjustment to give effect to the 0.30-for-1 stock split). At December 31, 1999
and September 30, 2000, 78,000 shares and no shares are available for grant
under the Director Plan, respectively.
On February 8, 2000, the Board of Directors approved the immediate
acceleration of vesting of unvested stock options held by the Company's
executive officers and outside directors and the extension of the exercise
period for one year. Vesting for approximately 397,200 options was accelerated
and the exercise period for approximately 708,300 vested options was extended,
resulting in a non-cash compensation charge of $3,139,000 which was recorded in
the nine month period ended September 30, 2000.
In March 2000, the 2000 Director Stock Option Plan (2000 Director Plan) was
adopted by the Board of Directors and approved by the stockholders in June
2000. The 2000 Director Plan provides for the granting of options to non-
employee directors. The number of shares of common stock subject to issuance
under the 2000 Director Plan is 500,000 all of which are available for grant at
September 30, 2000.
Activity under all the stock option plans is summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number Exercise Price
of Shares Per Share
--------- --------------
<S> <C> <C>
Outstanding, January 1, 1997................... 1,347,122 $14.30
Granted........................................ 289,350 29.07
Exercised...................................... (90,353) 11.40
Canceled....................................... (41,215) 22.03
---------
Outstanding, December 31, 1997 (778,169
exercisable at a weighted average price of
$13.47 per share)............................. 1,504,904 17.10
Granted........................................ 417,503 15.67
Exercised...................................... (63,577) 6.80
Canceled....................................... (129,388) 25.93
---------
Outstanding, December 31, 1998 (1,051,768
exercisable at a weighted average price of
$15.10 per share)............................. 1,729,442 16.47
Granted........................................ 348,435 10.23
Exercised...................................... (130,141) 6.00
Canceled....................................... (237,504) 22.60
---------
Outstanding, December 31, 1999 (1,060,589
exercisable at a weighted average price of
$15.47 per share)............................. 1,710,232 15.13
Granted........................................ 3,645,006 14.53
Exchange of Ontogeny and Reprogenesis options
for Curis options............................. 1,772,054 4.57
Exercised...................................... (489,183) 11.03
Canceled....................................... (126,341) 9.23
--------- ------
Outstanding, September 30, 2000 (2,413,505
exercisable at weighted average price of
$10.40 per share)............................. 6,511,768 $12.18
========= ======
</TABLE>
F-20
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited periods)
The table below summarizes options outstanding and exercisable at September
30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------ --------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number of Contractual Exercise Exercise
Range of Exercise Price Options Life Price Exercisable Price
----------------------- --------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 0.39-$ 0.59............... 236,703 5.99 $ 0.58 198,760 $ 0.57
$ 1.17-$ 1.56............... 96,072 5.37 $ 1.55 87,296 $ 1.55
$ 1.95...................... 102,149 6.88 $ 1.95 63,281 $ 1.95
$ 3.90-$ 5.26............... 1,107,159 7.67 $ 4.25 719,122 $ 4.44
$ 6.77-$10.00............... 592,653 6.11 $ 9.14 566,928 $ 9.22
$10.21-$14.69............... 3,799,599 9.81 $14.31 284,200 $12.53
$15.42-$20.00............... 226,090 7.40 $17.75 154,311 $17.99
$23.76-$33.55............... 351,343 6.20 $29.31 339,607 $29.39
--------- ---- ------ --------- ------
Total..................... 6,511,768 8.58 $12.18 2,413,505 $10.40
========= ==== ====== ========= ======
</TABLE>
Employee Stock Purchase Plan--The Employee Stock Purchase Plan permits
eligible employees to purchase Common Stock of the Company up to an aggregate
of 225,000 shares. During the year ended December 31, 1999, 19,536 shares were
issued under this plan at the fair market value prices of $9.47 and $9.83 per
share; during the year ended December 31, 1998, 31,745 shares were issued under
this plan at prices of $13.00 and $9.67 per share and during the year ended
December 31, 1997, 18,885 shares were issued under this plan at prices of
$20.27 and $19.47 per share. In June 1998, the stockholders of the Company
voted to amend the Employee Stock Purchase Plan to increase by 75,000 from
150,000 to 225,000 the aggregate number of shares of Common Stock which may be
purchased by eligible employees.
In March 2000, the Board of Directors adopted and in June 2000 the
stockholders approved the 2000 Employee Stock purchase plan (2000 ESPP). The
2000 ESPP permits eligible employees to purchase common stock of Company up to
an aggregate 1,000,000 shares. As of September 30, 2000 no shares have been
issued under the 2000 ESPP.
Stock-Based Compensation--The Company accounts for its stock-based awards
using the intrinsic value method in accordance with APB 25 and its related
interpretations. Accordingly, no compensation expense has been recognized in
the consolidated financial statements at the date of grant for employee stock
option arrangements for which the exercise price is equal to the fair market
value of the underlying shares at that date. The Company recorded a charge of
$64,000 and $205,000 related to a change in the exercise terms of stock option
agreements in connection with the sale of manufacturing operations for the
years ended December 31, 1999 and 1998, respectively.
In connection with stock options granted to employees and non-employees
during the nine months ended September 30, 2000, the Company recorded deferred
compensation of approximately $18,491,000 which represents the aggregate
difference between the option exercise price and the fair market value of the
common stock on the grant date. The deferred compensation will be recognized as
an expense on a straight line basis over the vesting period, generally 4 years,
of the underlying stock options for options granted to employees and as earned
for non-employees in accordance with EITF 96-18. The Company recorded
compensation expense of approximately $762,000 for the nine months ended
September 30, 2000, respectively, related to these options.
On February 14, 2000, Reprogenesis issued 300,000 shares of restricted
stock. These shares of restricted stock were fully vested upon the effective
date of the Merger. Upon the Merger date, the Company recorded approximately
$1,623,000 of compensation expense representing the fair market value of the
shares on that date.
F-21
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited periods)
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 primarily of Ontogeny which were exchanged for options to
acquire Curis' common stock. The Company is amortizing this amount over the
one-year vesting period of the stock options ending on August 1, 2001. As of
September 30, 2000, compensation expense related to these options totaled
$6,623,500. The Company also reversed $1,754,500 of unamortized compensation
for options which were forfeited by terminated employees.
Under SFAS 123, "Accounting for Stock-Based Compensation," the fair value of
stock-based awards to employees is calculated through the use of option pricing
models, even though such models were developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option pricing model
with the following assumptions: expected life, six months following total
vesting; stock volatility, 94% in 1999 and 1998, and 71% in 1997; risk free
interest rates, 6.4% in 1999, 4.7% in 1998 and 5.4% in 1997; and no dividends
during the expected term. The Company's calculations are based on a multiple
option valuation approach and forfeitures for broad-based grants are estimated
at 2% per year and adjusted to actual as they occur. Forfeitures for grants to
executives are recognized as they occur. The weighted average fair value of
options granted was $2.26, $3.49 and $5.11 in 1999, 1998 and 1997 respectively.
If the computed fair values of the 1999, 1998 and 1997 awards had been
amortized to expense over the vesting period of the awards, pro forma net loss
would have been $14,804,644 or a net loss of $1.39 per share (basic and
diluted) for the year ended December 31, 1999, $25,466,000 or a net loss of
$2.52 per share (basic and diluted) for the year ended December 31, 1998 and
$19,892,000 or a net loss of $2.00 per share (basic and diluted) for the year
ended December 31, 1997.
The Company also granted stock options to non-employee consultants in 1997.
These options were valued based on the fair value of the options granted. Total
compensation expense recognized related to these options was $254,000 in 1997.
The Company did not grant stock options to non-employee consultants in 1998 and
in 1999.
14. INCOME TAXES
No income tax provision or benefit has been provided for federal income tax
purposes as the Company has incurred losses since inception. As of December 31,
1999, the Company had available federal and state net operating loss
carryforwards of approximately $81,700,000 for income tax purposes. In
addition, the Company had approximately $1,837,000 of unused investment and
research and development tax credits. These net operating loss and tax credit
carryforwards will expire at various dates between 2000 and 2020.
The components of deferred income taxes at December 31, 1999 and 1998
consisted primarily of the following:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforwards............. $ 32,916,000 $ 30,600,000
Investment credit and research and Develop-
ment tax credit carryforwards............... 1,837,000 1,600,000
Research and development expenditures........ 11,929,000 9,800,000
Other........................................ 124,000
------------ ------------
Total........................................ $ 46,806,000 $ 42,000,000
Valuation allowance.......................... (46,806,000) (42,000,000)
------------ ------------
Net deferred tax assets...................... $ -- $ --
============ ============
</TABLE>
F-22
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited periods)
The Company has not yet achieved profitable operations. In addition, the
future availability of the Company's tax benefits may be significantly limited
under Section 382 of the Internal Revenue Code. Section 382 limits the use of
net operating loss carryforwards, credit carryforwards and certain other tax
attributes as a result of changes in a company's ownership. The Merger has
caused a change in control under Section 382 of the Internal Revenue Code and
accordingly the Company's ability to utilize the net operating loss
carryforwards will be limited. The amount of the limitation has not yet been
determined. Accordingly, management believes that the tax benefits as of
December 31, 1999 and 1998 do not satisfy the realization criteria set forth in
SFAS No. 109 and has recorded a valuation allowance for the entire net asset.
In addition, as a result of the Merger, the historical net operating loss
carryforwards of Ontogeny and Reprogenesis are available to Curis but are
limited due to the provisions of Section 382 of the Internal Revenue Code. The
amount and availability of the net operating loss carryforwards of Ontogeny and
Reprogenesis have not been determined.
15. ROYALTY AGREEMENTS
The Company has entered into various license agreements which require the
Company to pay royalties based upon a set percentage of certain product sales
and license fee revenue subject, in some cases, to certain minimum amounts.
Total royalty expense approximated $23,000 for the years ended December 31,
1999 and 1998 and $37,000 for the year ended December 31, 1997.
Effective September 19, 1996, Reprogenesis entered into an exclusive license
agreement (the UMASS License Agreement) and a sponsored research agreement (the
UMASS Research Agreement) with the University of Massachusetts (UMASS). The
UMASS License Agreement grants Reprogenesis the rights to certain existing and
future UMASS patents (the Patents) that relate to the use of cartilage paint
technology. This license has been assigned to Curis. Under the UMASS Research
Agreement, the Company will provide funding of $125,000 in 2000 to UMASS
related to orthopedic research and the development of certain plastic and
reconstructive surgery and cartilage paint products.
Future milestone payments totaling a maximum of $1,280,000 may be made to
UMASS based on reaching certain events, as defined in the UMASS License
Agreement. Payments were made by Reprogenesis related to the UMASS Research
Agreement of approximately $250,000, $250,000 and $200,000 in 1999, 1998 and
1997, respectively and $188,000 for the nine months ended September 30, 2000.
UMASS is entitled to a royalty of 3% of net sales of products or services
licensed under the UMASS License Agreement (as defined). Minimum royalties of
$25,000 and $50,000 for primary field and secondary field products, as defined,
respectively, beginning in 1999 and 2001, respectively, are payable to UMASS.
The UMASS License Agreement is cancelable by the Company upon 90 days written
notice and will remain in force until the earlier of the expiration of all
issued patents or September 2006.
Reprogenesis had entered into a collaborative agreement with another party.
Under this agreement, the Company is required to make milestone payments of
$3,500,000 contingent upon regulatory approval/ notification and
commercialization of the reflux and incontinence products, as defined. The
milestone payment due will decrease by $1,250,000 if the incontinence product
is discontinued.
16. RETIREMENT SAVINGS PLAN
The Company has a 401(k) retirement savings plan covering substantially all
of the Company's employees. Matching Company contributions are at the
discretion of the Board of Directors. The Board of
F-23
<PAGE>
CURIS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data applicable to unaudited periods)
Directors authorized matching contributions up to 3% of participants' salaries
amounting to approximately $160,000, $286,000 and $250,000 for the years ended
December 31, 1999, 1998 and 1997, respectively. No payments were made during
the nine months ended September 30, 2000.
17. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------- September 30,
1999 1998 2000
---------- ---------- -------------
<S> <C> <C> <C>
Research collaboration costs................ $1,469,473 $1,332,291 $2,255,170
Severance and related costs................. 95,503 903,330 --
Other....................................... 330,658 272,540 2,292,039
---------- ---------- ----------
Total................................... $1,895,634 $2,508,161 $4,547,209
========== ========== ==========
</TABLE>
F-24
<PAGE>
ONTOGENY, INC. FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Ontogeny, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' deficit and cash flows present fairly, in all
material respects, the financial position of Ontogeny, Inc. at December 31,
1999 and 1998, 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
accounting principles generally accepted in the United States. 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 of these statements in accordance with
auditing standards generally accepted in the United States which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 15, 2000
F-25
<PAGE>
ONTOGENY, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------- June 30,
1999 1998 2000
ASSETS ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents.......... $ 7,159,520 $ 35,492,881 $ 12,182,615
Marketable securities.............. 36,140,987 13,803,562 20,711,167
Prepaid expenses and other current
assets............................ 1,089,722 454,252 625,872
Notes receivable from related
parties........................... 65,000 178,317 65,000
------------ ------------ ------------
Total current assets............... 44,455,229 49,929,012 33,584,654
Fixed assets, net................... 4,691,215 3,748,771 4,829,878
Notes receivable from related
parties............................ 230,000 301,610 200,000
Other assets........................ 234,475 156,895 239,164
------------ ------------ ------------
Total assets....................... $ 49,610,919 $ 54,136,288 $ 38,853,696
============ ============ ============
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS'
DEFICIT
<S> <C> <C> <C>
Current liabilities:
Current portion of capital lease
obligations....................... $ 1,022,824 $ 1,140,280 $ 865,639
Current portion of notes payable... 295,000 -- --
Accounts payable................... 1,002,983 399,485 3,279,864
Accrued expenses and other......... 1,562,044 903,577 1,501,388
Deferred revenue................... 997,268 883,333 --
------------ ------------ ------------
Total current liabilities.......... 4,880,119 3,326,675 5,646,891
------------ ------------ ------------
Capital lease obligations........... 2,441,495 1,612,849 2,441,970
Notes payable....................... 2,599,003 6,894,003 394,000
Redeemable convertible preferred
stock, $.01 par value: 32,922,299
shares authorized at June 30, 2000
and December 31, 1999 and
22,922,299 shares authorized at
December 31, 1998, 30,680,150
shares issued and outstanding at
June 30, 2000 and December 31, 1999
and 30,024,412 shares issued and
outstanding at December 31, 1998
(liquidation preference $63,195,521
at June 30, 2000 and December 31,
1999).............................. 62,395,647 60,201,089 62,492,792
------------ ------------ ------------
Commitments and contingencies (Note
13)
Stockholders' deficit:
Convertible preferred stock, $.01
par value: 2,200,000, 2,200,000
and 1,000,000 shares authorized,
issued and outstanding at June 30,
2000, December 31, 1999 and 1998,
respectively (liquidation
preference $8,500,000 at June 30,
2000 and December 31, 1999)....... 8,738,123 2,500,000 8,738,123
Preferred stock, 3,800,000 shares
authorized at June 30, 2000 and
December 31, 1999 and 5,000,000
shares authorized at December 31,
1998; no shares issued or
outstanding.......................
Common stock, $.01 par value;
50,000,000 shares authorized at
June 30, 2000, December 31, 1999
and 1998; 3,917,913, 2,858,515 and
2,689,435 shares issued at June
30, 2000 and December 31, 1999 and
1998; 3,649,813, 2,590,415 and
2,421,935 shares outstanding at
June 30, 2000 and December 31,
1999 and 1998, respectively....... 28,585 26,894 39,179
Additional paid-in capital......... 15,294,112 8,022,143 24,376,234
Accumulated deficit................ (35,391,245) (21,991,775) (51,647,174)
Unrealized gains (losses) on
marketable securities............. (69,391) 29,639 (61,647)
Treasury stock, 268,100 shares at
cost at June 30, 2000 and
December 31, 1999 and 267,500
shares at cost at December 31,
1998.............................. (2,681) (2,675) (2,681)
Deferred compensation.............. (11,302,848) (6,482,554) (13,563,991)
------------ ------------ ------------
Total stockholders' deficit........ (22,705,345) (17,898,328) (32,121,957)
------------ ------------ ------------
Total liabilities, redeemable
preferred stock and stockholders'
deficit........................... $ 49,610,919 $ 54,136,288 $ 38,853,696
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
ONTOGENY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended
For the Years Ended December 31, June 30,
----------------------------------------- -------------------------
1999 1998 1997 2000 1999
------------ ------------- ------------ ------------ -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue................. $ 4,469,399 $ 4,708,333 $ 3,416,677 $ 1,497,269 $ 2,493,841
------------ ------------- ------------ ------------ -----------
Costs and expenses:
Research and
development.......... 14,891,995 12,417,688 6,325,750 12,251,741 7,180,995
General and
administrative....... 4,520,456 3,387,659 2,560,962 6,335,761 2,113,575
------------ ------------- ------------ ------------ -----------
19,412,451 15,805,347 8,886,712 18,587,502 9,294,570
------------ ------------- ------------ ------------ -----------
Loss from operations.... (14,943,052) (11,097,014) (5,470,035) (17,090,233) (6,800,729)
------------ ------------- ------------ ------------ -----------
Other income (expense):
Interest income....... 2,474,734 1,537,369 1,472,958 1,136,350 1,253,894
Interest expense...... (931,152) (439,080) (216,892) (302,046) (560,598)
------------ ------------- ------------ ------------ -----------
1,543,582 1,098,289 1,256,066 834,304 693,296
------------ ------------- ------------ ------------ -----------
Net loss............ $(13,399,470) $ (9,998,725) $ (4,213,969) $(16,255,929) $(6,107,433)
============ ============= ============ ============ ===========
Accretion of preferred
stock issuance costs... (194,557) (126,730) (92,697) (97,145) (97,278)
------------ ------------- ------------ ------------ -----------
Net loss available to
common stockholders.... $(13,594,027) $ (10,125,455) $ (4,306,666) $(16,353,074) $(6,204,711)
============ ============= ============ ============ ===========
Net loss available to
common stockholders per
share
(basic and diluted).... $ (5.25) $ (4.44) $ (2.27) $ (4.66) $ (2.44)
============ ============= ============ ============ ===========
Weighted average shares
outstanding (basic and
diluted)............... 2,591,735 2,278,870 1,896,355 3,512,150 2,544,318
============ ============= ============ ============ ===========
Comprehensive loss:
Net loss.............. $(13,399,470) $ (9,998,725) $ (4,213,969) $(16,255,929) $(6,107,433)
Unrealized holding
gain (loss) on
available for sale
securities........... (99,030) 2,927 26,712 7,744 89,978
------------ ------------- ------------ ------------ -----------
Comprehensive loss...... $(13,498,500) $ (9,995,798) $ (4,187,257) $(16,248,185) $(6,017,455)
============ ============= ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
ONTOGENY, INC.
Statements of Stockholders' Deficit
For the Years Ended December 31, 1999, 1998 and 1997 and for the six months
ended June 30, 2000
<TABLE>
<CAPTION>
Unrealized
Convertible gain
preferred stock Common stock Additional Treasury stock (loss) on
-------------------- ------------------- paid-in Accumulated --------------- marketable Deferred
Shares Amount Shares Par value capital deficit Shares Amount securities compensation
--------- ---------- --------- --------- ----------- ------------ ------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1996............ 1,000,000 $2,500,000 2,495,335 $24,953 $ 182,421 $ (7,779,081) 57,500 $ (575) $ (15,946)
Accretion of
Series E
redeemable
convertible
preferred stock
to redemption
value........... (92,697)
Issuance of
common stock.... 85,000 850 30,650
Issuance of
warrants to
purchase common
stock........... 36,430
Exercise of
stock options... 62,850 629 9,107
Repurchase of
common stock.... 175,000 (1,750)
Compensation
related to the
grant of common
stock options... 3,469,144 (3,469,144)
Amortization of
deferred
compensation.... 244,330
Unrealized
holding gain on
marketable
securities...... $ 26,712
Net loss........ (4,213,969)
--------- ---------- --------- ------- ----------- ------------ ------- ------- -------- ------------
Balance at
December 31,
1997............ 1,000,000 2,500,000 2,643,185 26,432 3,635,055 (11,993,050) 232,500 (2,325) 26,712 (3,240,760)
Accretion of
Series E and
Series F
redeemable
convertible
preferred stock
to redemption
value........... (126,730)
Exercise of
stock options... 46,250 462 18,379
Repurchase of
common stock.... 35,000 (350)
Compensation
related to the
grant of common
stock options... 4,495,439 (4,495,439)
Amortization of
deferred
compensation.... 1,253,645
Unrealized gain
on marketable
securities...... 2,927
Net loss........ (9,998,725)
--------- ---------- --------- ------- ----------- ------------ ------- ------- -------- ------------
Balance at
December 31,
1998............ 1,000,000 2,500,000 2,689,435 26,894 8,022,143 (21,991,775) 267,500 (2,675) 29,639 (6,482,554)
Issuance of
Series C1
convertible
preferred
stock........... 800,000 4,131,756
Issuance of
Series G
convertible
preferred
stock........... 400,000 2,106,367
Accretion of
Series E and
Series F
redeemable
convertible
preferred stock
to redemption
value........... (194,557)
Exercise of
stock options... 169,080 1,691 69,312
Issuance of
warrants........ 116,500
Repurchase of
common stock.... 600 (6)
Compensation
related to the
grant of common
stock options... 7,280,714 (7,280,714)
Amortization of
deferred
compensation.... 2,460,420
Unrealized loss
on marketable
securities...... (99,030)
Net loss........ (13,399,470)
--------- ---------- --------- ------- ----------- ------------ ------- ------- -------- ------------
Balance at
December 31,
1999............ 2,200,000 8,738,123 2,858,515 28,585 15,294,112 (35,391,245) 268,100 (2,681) (69,391) (11,302,848)
Conversion of
note payable.... 819,673 8,197 2,738,252
Accretion of
Series E and
Series F
redeemable
convertible
preferred stock
to redemption
value........... (97,145)
Exercise of
stock options... 239,725 2,397 170,877
Compensation
related to the
grant of common
stock options... 6,270,138 (6,270,138)
Amortization of
deferred
compensation.... 4,008,995
Unrealized gain
on marketable
securities...... 7,744
Net loss........ (16,255,929)
--------- ---------- --------- ------- ----------- ------------ ------- ------- -------- ------------
Balance at June
30, 2000
(unaudited)..... 2,200,000 $8,738,123 3,917,913 $39,179 $24,376,234 $(51,647,174) 268,100 $(2,681) $(61,647) $(13,563,991)
========= ========== ========= ======= =========== ============ ======= ======= ======== ============
<CAPTION>
Total
-------------
<S> <C>
Balance at
December 31,
1996............ $(5,088,228)
Accretion of
Series E
redeemable
convertible
preferred stock
to redemption
value........... (92,697)
Issuance of
common stock.... 31,500
Issuance of
warrants to
purchase common
stock........... 36,430
Exercise of
stock options... 9,736
Repurchase of
common stock.... (1,750)
Compensation
related to the
grant of common
stock options... --
Amortization of
deferred
compensation.... 244,330
Unrealized
holding gain on
marketable
securities...... 26,712
Net loss........ (4,213,969)
-------------
Balance at
December 31,
1997............ (9,047,936)
Accretion of
Series E and
Series F
redeemable
convertible
preferred stock
to redemption
value........... (126,730)
Exercise of
stock options... 18,841
Repurchase of
common stock.... (350)
Compensation
related to the
grant of common
stock options... --
Amortization of
deferred
compensation.... 1,253,645
Unrealized gain
on marketable
securities...... 2,927
Net loss........ (9,998,725)
-------------
Balance at
December 31,
1998............ (17,898,328)
Issuance of
Series C1
convertible
preferred
stock........... 4,131,756
Issuance of
Series G
convertible
preferred
stock........... 2,106,367
Accretion of
Series E and
Series F
redeemable
convertible
preferred stock
to redemption
value........... (194,557)
Exercise of
stock options... 71,003
Issuance of
warrants........ 116,500
Repurchase of
common stock.... (6)
Compensation
related to the
grant of common
stock options... --
Amortization of
deferred
compensation.... 2,460,420
Unrealized loss
on marketable
securities...... (99,030)
Net loss........ (13,399,470)
-------------
Balance at
December 31,
1999............ (22,705,345)
Conversion of
note payable.... 2,746,449
Accretion of
Series E and
Series F
redeemable
convertible
preferred stock
to redemption
value........... (97,145)
Exercise of
stock options... 173,274
Compensation
related to the
grant of common
stock options... --
Amortization of
deferred
compensation.... 4,008,995
Unrealized gain
on marketable
securities...... 7,744
Net loss........ (16,255,929)
-------------
Balance at June
30, 2000
(unaudited)..... $(32,121,957)
=============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
ONTOGENY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Six Months Ended
For the Years Ended December 31, June 30,
----------------------------------------- --------------------------
1999 1998 1997 2000 1999
------------- ------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss................ $ (13,399,470) $ (9,998,725) $ (4,213,969) $(16,255,929) $ (6,107,433)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization.......... 1,105,872 742,187 508,843 706,611 510,257
Amortization of lease
discount.............. 36,281 38,139 31,214 14,316 9,685
Noncash compensation
expense............... 2,640,664 1,333,645 324,330 4,008,995 1,250,236
Amortization of
premiums and discounts
on marketable
securities............ (837,318) 147,580 175,495 (532,426) (296,397)
Stock issued in lieu of
license fees and other
expenses.............. -- -- 18,000 -- --
Notes payable issued in
lieu of license fees.. -- 99,000 295,000 -- --
Loss on disposal of
fixed asset........... 2,776 -- -- -- --
Accrued interest on
long-term debt........ 237,410 -- -- 183,904
Changes in assets and
liabilities:
Prepaid expenses and
other current assets.. (635,470) (335,118) 28,145 463,850 254,474
Notes receivable from
related parties....... 4,683 (18,317) -- 30,000 30,000
Other assets........... (77,580) (16,041) (60,139) (4,689) (12,080)
Accounts payable....... 603,498 249,983 73,987 2,276,881 109,714
Accrued expenses and
other................. 659,180 276,240 (135,107) 185,793 219,892
Deferred revenue....... 113,935 883,333 (666,667) (997,268) (410,508)
------------- ------------ ------------ ------------ ------------
Net cash used in
operating activities... (9,545,539) (6,598,094) (3,620,868) (10,103,866) (4,258,256)
------------- ------------ ------------ ------------ ------------
Cash flows from
investing activities:
Purchases of fixed
assets................. (2,051,092) (947,058) (1,747,255) (837,533) (1,337,891)
Purchases of marketable
securities............. (178,694,944) (10,483,447) (33,533,551) (46,648,204) (103,745,070)
Proceeds from maturities
of marketable
securities............. 157,095,807 20,550,000 9,370,000 62,610,450 81,958,244
------------- ------------ ------------ ------------ ------------
Net cash provided by
(used in) investing
activities............. (23,650,229) 9,119,495 (25,910,806) 15,124,713 (23,124,717)
------------- ------------ ------------ ------------ ------------
Cash flows from
financing activities:
Proceeds from issuance
of notes payable....... 2,000,000 6,500,003 -- -- 2,000,000
Proceeds from sale
leaseback transaction.. 1,805,203 1,476,552 423,906 518,039 --
Principal payments on
capital lease
obligations............ (1,013,794) (728,319) (715,917) (689,065) (452,352)
Proceeds from issuance
of common stock........ 71,003 18,841 23,236 173,274 19,975
Repurchase of common
stock.................. (6) (350) (1,750) -- --
Proceeds from issuance
of preferred stock,
net.................... 2,000,001 23,184,799 24,218,737 -- 2,000,001
------------- ------------ ------------ ------------ ------------
Net cash provided by
financing activities... 4,862,407 30,451,526 23,948,212 2,248 3,567,624
------------- ------------ ------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents............ (28,333,361) 32,972,927 (5,583,462) 5,023,095 (23,815,349)
Cash and cash
equivalents at
beginning of period.... 35,492,881 2,519,954 8,103,416 7,159,520 35,492,881
------------- ------------ ------------ ------------ ------------
Cash and cash
equivalents at end of
period................. $ 7,159,520 $ 35,492,881 $ 2,519,954 $ 12,182,615 $ 11,677,532
============= ============ ============ ============ ============
</TABLE>
Supplemental disclosure of noncash investing and financing activities:
During 1997, the Company entered into capital lease obligations to purchase
fixed assets amounting to $65,000.
During 1999, the Company converted $6,238,123 of notes payable and accrued
interest into 1,200,000 shares of convertible preferred stock.
During the six months ended June 30, 2000, $2,746,449 of principal and
accrued interest on a note payable was converted into 819,673 shares of common
stock.
Supplemental disclosure of cash flow information:
During 1999, 1998 and 1997, the Company paid approximately $407,000,
$172,000 and $180,000 of interest, respectively.
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
ONTOGENY, INC.
NOTES TO FINANCIAL STATEMENTS
(the information presented relating to the six months ended June 30, 2000 and
1999 is unaudited)
1. Nature of Operations and Basis of Presentation
Ontogeny, Inc. (the "Company") was incorporated in Delaware on May 31, 1994
and is focused on translating developmental biology insights into regenerative
medicine therapies that will significantly improve the quality of life by
activating the body's ability to repair and regenerate, or to specifically
control abnormal and malignant growth. The Company is developing therapeutics
for neurological diseases including Parkinson's and Alzheimer's diseases,
diabetes and dermatoligical disorders including skin cancer and hair growth.
The Company has incurred net losses since inception and expects to incur
substantial and increasing losses for at least the next several years as
research and development activities are expanded. To date, the Company has
funded operations primarily through the sale of equity securities, revenue and
license payments from collaborators and interest income earned on cash
invested.
The Company is subject to risks common to companies in the biotechnology
industry, including, but not limited to, development by the Company or its
competitors of new technological innovations, raising additional capital,
dependence on key personnel, protection of proprietary technology and
compliance with government regulations.
2. Summary of Significant Accounting Policies
Significant accounting policies followed by the Company in the preparation
of its financial statements are as follows:
Cash, Cash Equivalents and Marketable Securities
The Company considers all highly liquid investments with an original
purchase maturity of three months or less to be cash equivalents. The Company
maintains its cash and cash equivalents and marketable securities with three
high quality financial institutions. Excess cash is invested primarily in
corporate debt securities and money market instruments which have strong credit
ratings. The Company classifies these securities as "available-for-sale." All
available-for-sale securities are recorded at fair value based on quoted market
prices and unrealized gains and losses are included in stockholders' deficit,
net of related tax effects.
Fixed Assets
Fixed assets are stated at cost, less accumulated depreciation. Depreciation
is provided using the straight-line method over the estimated useful lives.
Repair and maintenance costs are expensed as incurred. Leasehold improvements
are amortized over the shorter of the lease life or the estimated useful life
of the asset.
Accounting for Stock-Based Compensation
Stock options issued to employees under the Company's stock option plan are
accounted for in accordance with Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, no compensation expense is recorded for options issued to
employees in fixed amounts and with fixed exercise prices at least equal to the
fair market value of the Company's common stock at the date of grant. The
Company applies the provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," through disclosure
only (Note 10). All stock-based awards to nonemployees are accounted for at
their fair value in accordance with SFAS No. 123 and Emerging Issues Task Force
("EITF") Issue No. 96-18, "Accounting for Equity Instrument that are Issued to
Other than Employees".
F-30
<PAGE>
ONTOGENY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the six months ended June 30, 2000 and
1999 is unaudited)
Revenue Recognition
Revenue relates to license and research payments made pursuant to
collaborative agreements (Note 5). License and research payments received under
the agreements prior to the work being performed are recorded as deferred
revenue and recognized during the project period in accordance with SEC Staff
Accounting Bulletin (SAB) No. 101. The Company records the revenue according to
the level of effort over the project period. When the level of effort is
relatively constant over the project period, the revenue is recorded on a
straight-line basis.
The Company recognizes revenue only on payments that are nonrefundable, and
defers revenue recognition until performance obligations have been completed.
None of the strategic alliances require scientific achievement as a performance
obligation.
Research and Development
Research and development costs are charged to operations as incurred.
Certain research and development projects are partially funded by research and
development contracts, and the expenses related to these activities are
included in research and development costs.
Comprehensive Income
The Company applies SFAS No. 130, "Reporting Comprehensive Income." SFAS No.
130 requires that a full set of general-purpose financial statements be
expanded to include the reporting of "comprehensive income." Comprehensive
income is comprised of two components, net income and other comprehensive
income which is comprised solely of unrealized gains/(losses) on available for
sale securities.
Financial Instruments
The carrying amount of the Company's cash and cash equivalents and accounts
payable approximates their fair value at the balance sheet dates based on the
short-term nature of these accounts. Based on interest rates available to the
Company, the carrying amount of the Company's notes payable also approximates
their fair value at the balance sheet date.
Business Segments
The Company operates as a single business segment as defined in SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information."
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, the
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 these estimates.
New Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities." This
F-31
<PAGE>
ONTOGENY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the six months ended June 30, 2000 and
1999 is unaudited)
statement requires companies to record derivatives on the balance sheet as
assets or liabilities, measured at fair value. Gains or losses resulting from
changes in the values of those derivatives would be accounted for depending on
the use of the derivative and whether it qualifies for hedging accounting. SFAS
133 will be effective for the Company's year ending December 31, 2001. The
Company believes the adoption of SFAS No. 133 will not have a material effect
on the financial statements.
Reclassifications
Certain reclassifications have been made to prior years' financial
statements to conform to current year presentation.
Interim Financial Information
The financial statements of the Company as of June 30, 2000 and for the six
months ended June 30, 2000 and 1999 are unaudited. All adjustments (consisting
only of normal recurring adjustments) have been made which, in the opinion of
management, are necessary for a fair presentation. Results of operations for
the six months ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000 or for any
other future period.
3. Net Loss per Share
Net loss per share is computed under SFAS No. 128, "Earnings Per Share."
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. Diluted loss per share does not differ from
basic loss per share since potential common shares are antidilutive for all
periods presented and therefore are excluded from the calculation of diluted
loss per share.
The following potentially dilutive common shares were excluded because their
effect was antidilutive:
<TABLE>
<CAPTION>
Six Months Ended June
Year Ended December 31, 30,
----------------------------------- ----------------------
1999 1998 1997 2000 1999
----------- ----------- ----------- ---------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Subordinated convertible
note................... 819,673 819,673 -- -- 819,673
Redeemable convertible
preferred stock........ 30,680,150 30,024,412 22,300,557 30,680,150 30,680,150
Convertible preferred
stock.................. 2,200,000 1,000,000 1,000,000 2,200,000 1,000,000
Stock options........... 5,721,115 4,878,065 3,301,715 5,423,765 4,810,465
Warrants................ 261,187 236,187 236,187 261,187 236,187
Unvested restricted
stock.................. 59,500 289,000 556,000 37,113 141,834
</TABLE>
F-32
<PAGE>
ONTOGENY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the six months ended June 30, 2000 and
1999 is unaudited)
4. Cash Equivalents and Marketable Securities
The following is a summary of available-for-sale securities:
<TABLE>
<CAPTION>
Unrealized
Fair --------------- Amortized
Value Gains Losses Cost
----------- ------- ------- -----------
<S> <C> <C> <C> <C>
December 31, 1999
Money market instruments......... $ 4,162,929 $ -- $ -- $ 4,162,929
Corporate debt securities........ 28,551,348 2,807 54,829 28,603,370
Government securities............ 8,614,681 375 17,744 8,632,050
----------- ------- ------- -----------
$41,328,958 $ 3,182 $72,573 $41,398,349
=========== ======= ======= ===========
Amounts included in cash and cash
equivalents....................... $ 5,187,971
===========
December 31, 1998
Money market instruments......... $ 8,275,670 $ -- $ -- $ 8,275,670
Corporate debt securities........ 13,898,757 37,181 7,542 13,869,118
----------- ------- ------- -----------
$22,174,427 $37,181 $ 7,542 $22,144,788
=========== ======= ======= ===========
Amounts included in cash and cash
equivalents....................... $ 8,370,865
===========
</TABLE>
The fair value of the Company's investment in debt and governmental
securities at December 31, 1999 was comprised of $36,269,631 due in one year or
less and $758,074 due in one to two years. The Company did not realize any
gains or losses on the sale of available-for-sale securities as the securities
have been held to maturity.
5. Significant Agreements
Collaboration Agreements
In July 1996, the Company and Biogen entered into an 18-month strategic
alliance to evaluate the applicability of certain of the Company's technology
as drug candidates. Under the terms of the agreement, Biogen was committed for
the initial 18-month period of the alliance to pay the Company a combination of
research support of $3.0 million, a research licensing fee of $1.0 million and
an equity investment of $1.0 million for Series C Preferred stock. In January
1998, Biogen exercised an option to extend the committed period of research
funding for an additional six months until July 1998 by making a one-time,
nonrefundable payment of $1 million which was recognized over the six month
extension period. The agreement was also amended to (i) increase the annual
funding level to $3.0 million; (ii) extend the date to initiate the
Commercialization Phase until July 1, 2000; (iii) extend the funding commitment
until June 2001, provided, however, that if Biogen does not initiate
commercialization of at least one program by July 1, 2000, the Research Phase
will terminate and Biogen will owe the Company a $1.5 million termination fee;
and (iv) expand the area of collaboration to include gene therapy in addition
to Biogen's exclusive rights to develop and commercialize certain of the
Company's proteins for all nervous system disorders and certain other
therapeutic indications, other than in the area of musculo-skeletal
applications.
In addition to and in connection with the 1998 amendment to the Biogen
Agreement, the Company issued a convertible subordinated note, bearing interest
at the rate of 6.5% per annum, to Biogen for proceeds of $4.0 million. The note
and any accrued interest could have been paid by the Company in whole any time
prior to the conversion date without penalty. In June 1999, in accordance with
the automatic conversion features in the agreement, total principal and accrued
interest of $131,756 converted into 800,000 shares of Series C-1 preferred
stock.
F-33
<PAGE>
ONTOGENY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the six months ended June 30, 2000 and
1999 is unaudited)
Total revenues recorded under this agreement and related amendments and
extensions were approximately $3 million, $3 million and $2.7 million in 1999,
1998 and 1997, respectively.
Upon exercise of the Commercialization Phase option, Biogen will be
committed, depending on the number of development programs initiated, to (i)
purchase $3.0 to $9.0 million of preferred stock at the then-current fair
market value of the stock, (ii) make a nonrefundable development fee payment of
$3.0 to $9.0 million and (iii) provide a $4.0 to $12.0 million line of credit.
Biogen will also be required to make certain payments during the
Commercialization Phase for research funding, for the achievement of milestones
and for royalties on sales of products resulting from the Agreement.
Also, in 1996, the Company and Roche, formerly Boehringer--Manheim GmbH,
entered into a research and commercialization agreement (the "Agreement") in
certain technology fields. The initial Research Phase of the Agreement was
eighteen months for which Roche paid the Company $1.1 million of research
funding. Roche also made an equity investment of $1.5 million for Series D
Preferred Stock.
In December 1997, the Roche Agreement was amended to extend the term of the
initial Research Phase from March 1998 to September 1999 for additional
research funding. Under the agreement and the extension, the Company recorded
revenue of approximately $1.5 million, $1.7 million and $750,000 in 1999, 1998
and 1997, respectively. The Research Phase ended in 1999 and Roche has no
further commitment to the Company.
On January 13, 1999, the Company entered into a research collaboration
agreement ("BD Agreement") with Becton Dickinson ("BD") to further advance the
Company's research in the area of diabetes. The BD Agreement provides for BD to
have the right, until January 2001, to exclusively negotiate with the Company a
license for certain of the Company's diabetes-related assets. In connection
with the BD Agreement, the Company issued a subordinated note (the "BD Note"),
bearing interest at a rate of 6.5% per annum and convertible into 400,000
shares of newly designated Series G Convertible Preferred Stock, for aggregate
proceeds of $2.0 million. The BD Note, including all accrued interest of
$106,367 converted automatically on October 31, 1999. Under the terms of the BD
Agreement, BD is also obligated to purchase, at the earlier of January 2001 or
the Company achieving a certain preclinical milestone, an additional $2 million
of preferred stock at $10.00 per share with substantially similar terms as
provided in the Series G Preferred Stock. Should BD decide not to license any
of the Company's diabetes-related assets prior to January 2001, all rights
under the agreement return to the Company. The BD Agreement can be terminated
by BD upon three months notice to the Company.
OntoScreen Agreement and Notes Payable
During 1996, the Company entered into an agreement with Genetics Institute
("GI") for the Company's OntoScreen program pursuant to which the Company has
the right to screen certain protein libraries provided by GI. In addition, the
Company has the right to exclusively license certain proteins it selects and to
develop these proteins either on its own or, at the option of GI, on a co-
development basis with GI. During 1998 and 1997, the Company purchased plates
with an aggregate cost of $99,000 and $139,500, respectively, of which $194,000
was financed by GI with notes payable bearing interest at the prime lending
rate (8.5% at December 31, 1999). During 1997, the Company also exercised its
right to obtain an option to exclusively license a protein for a fee of
$250,000 of which $200,000 was financed by the Licensor with a note payable
bearing interest at the prime lending rate (8.5% at December 31, 1999). These
notes payable mature $295,000 in 2000 and $99,000 in 2001 and are payable at
any time at the election of the Company with either cash or common stock of the
Company discounted by 25%. Accrued interest, which totaled $87,210 at December
31, 1999, is payable upon maturity of the related note.
F-34
<PAGE>
ONTOGENY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the six months ended June 30, 2000 and
1999 is unaudited)
Note Payable
On December 29, 1998, the Company entered into a Common Stock Purchase
Agreement ("Purchase Agreement") with an unrelated party ("Lender") that
includes a provision for (i) the Company to issue to the Lender 819,673 shares
of common stock upon the earlier of December 29, 2001 or the occurrence of
certain defined events and (ii) the Company and the Lender to enter into a
subordinated convertible note for which the Company received proceeds of
$2,500,003. The note is non-interest bearing and the principal and all accrued
interest are forgiven upon the Company issuing to the Lender the 819,673 shares
of common stock as required under the Purchase Agreement. The Company is
imputing interest on the note at a rate of 8% per annum which totaled $208,283
and $1,099 at December 31, 1999 and 1998, respectively. In March 2000, the
Lender converted principal and accrued interest of $2,738,252 into 819,673
shares of common stock.
6. Fixed Assets
Fixed assets consist of the following:
<TABLE>
<CAPTION>
Useful December 31,
life ---------------------
in years 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Laboratory equipment.................... 5 $3,220,761 $1,945,584
Furniture and fixtures.................. 5 113,073 113,073
Computer equipment...................... 3 438,582 298,034
Leasehold improvements.................. Lease term 3,637,647 3,005,989
---------- ----------
7,410,063 5,362,680
Less--Accumulated depreciation and
amortization........................... 2,718,848 1,613,909
---------- ----------
$4,691,215 $3,748,771
========== ==========
</TABLE>
Property and equipment held under capital leases at December 31, 1999 and
1998 totaled approximately $3,809,000 and $4,407,000, respectively.
Amortization expense related to these assets is included in depreciation and
amortization expense.
7. Accrued Expenses and Other
Accrued expenses and other consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------
1999 1998
---------- --------
<S> <C> <C>
Sponsored research................................... $ 368,676 $ 93,592
Compensation......................................... 311,120 240,778
Interest............................................. 306,669 57,154
Other accrued expenses............................... 575,579 512,053
---------- --------
$1,562,044 $903,577
========== ========
</TABLE>
F-35
<PAGE>
ONTOGENY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the six months ended June 30, 2000 and
1999 is unaudited)
8. Preferred Stock
Redeemable convertible preferred stock consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Series A: 4,922,299 shares authorized, 4,853,334
shares issued and outstanding at December 31, 1999
and 1998, stated at redemption value (liquidation
preference $4,222,400)............................ $ 4,200,000 $ 4,200,000
Series B: 8,000,000 shares authorized, 7,447,223
shares issued and outstanding at December 31, 1999
and 1998, stated at redemption value (liquidation
preference $8,415,362)............................ 8,378,126 8,378,126
Series E: 10,000,000 shares authorized, issued and
outstanding at December 31, 1999 and 1998, stated
at issuance cost plus accumulated accretion of
$330,706 and $212,714 at December 31, 1999 and
1998, respectively (liquidation preference
$25,000,000)...................................... 24,549,443 24,431,451
Series F: 10,000,000 shares authorized, 8,379,593
and 7,723,855 shares issued and outstanding at
December 31, 1999 and 1998, respectively, stated
at issuance cost plus accumulated accretion of
$83,278 and $6,713 at December 31, 1999 and 1998,
respectively (liquidation preference of
$25,557,759 and $23,557,758 at December 31, 1999
and 1998, respectively)........................... 25,268,078 23,191,512
----------- -----------
$62,395,647 $60,201,089
=========== ===========
</TABLE>
Convertible preferred stock consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Series C: 400,000 shares authorized, issued and
outstanding at December 31, 1999 and 1998, stated
at issuance cost (liquidation preference
$1,000,000)....................................... $1,000,000 $1,000,000
Series C-1: 800,000 and 0 shares authorized, issued
and outstanding at December 31, 1999 and 1998,
respectively, stated at issuance cost (liquidation
preference $4,000,000)............................ 4,131,756 --
Series D: 600,000 shares authorized, issued and
outstanding at December 31, 1999 and 1998, stated
at issuance cost (liquidation preference
$1,500,000)....................................... 1,500,000 1,500,000
Series G: 400,000 and 0 shares authorized, issued
and outstanding at December 31, 1999 and 1998,
respectively, stated at issuance cost (liquidation
preference $2,000,000)............................ 2,106,367 --
---------- ----------
$8,738,123 $2,500,000
========== ==========
</TABLE>
The preferred stock has the following characteristics:
Conversion
Each share of preferred stock is convertible into common stock at the option
of the holder based on a formula which currently would result in a 1-for-1
exchange. The preferred stock will automatically convert to common stock upon
the closing of a public offering of the Company's common stock in which gross
proceeds
F-36
<PAGE>
ONTOGENY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the six months ended June 30, 2000 and
1999 is unaudited)
equal or exceed $10,000,000 and the per share price equals or exceeds $5.00. At
December 31, 1999, 32,880,150 shares of common stock have been reserved for
issuance upon conversion of the outstanding preferred stock.
Dividends
The holders of the Series A, Series B, Series E and Series F preferred stock
are entitled to receive dividends at a per annum rate of $0.07 per share, $0.09
per share, $0.20 per share and $0.24 per share, respectively, adjusted for
stock dividends or splits, when and if declared by the Board of Directors. The
holders of the Series C, Series C-1, Series D and Series G preferred stock may
receive dividends when and if declared by the Board of Directors, subject to
any preferential dividend rights of the Series A, B, E and F preferred stock.
The Series G preferred stock is junior to the Series C, Series C-1 and Series D
preferred stock in regard to dividends. Dividends on the preferred stock are
not cumulative. No dividend may be paid on the common stock until all dividends
on the preferred stock have been paid in full. Through December 31, 1999, no
dividends have been declared or paid.
Redemption
The Company is required to redeem from each holder of Series A, Series B,
Series E and Series F preferred stock up to one-third of, one-half of and the
entire then outstanding shares of preferred stock in three annual installments
beginning on December 1, 2002 at a price equal to $0.87, $1.13, $2.50 and $3.05
per share, respectively, plus any declared but unpaid dividends. The Series C,
Series C-1, Series D and Series G preferred stock is not redeemable.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the affairs of
the Company, the holders of the Series A, Series B, Series E and Series F
preferred stock are entitled to receive, prior to and in preference to the
holders of Series C, Series C-1, Series D and Series G preferred stock and the
holders of common stock, an amount equal to $0.87, $1.13, $2.50 and $3.05 per
share, respectively, plus any declared but unpaid dividends. After all such
payments have been made, the holders of the outstanding Series C, Series C-1,
Series D and Series G preferred stock are entitled to receive, prior to and in
preference to the holders of common stock, an amount equal to $2.50, $5.00,
$2.50 and $5.00 per share, respectively, plus any declared but unpaid dividend.
The Series G preferred stock is junior to the Series C, Series C-1 and Series D
preferred stock in regard to liquidation.
Voting Rights
Each preferred stockholder is entitled to a number of votes equal to the
number of shares of common stock into which such holder's shares are
convertible. These votes are counted together with the common stockholders'
votes as a single class on all matters.
Warrants
In January 1996 and November 1994 and in connection with capital lease
agreements, warrants to purchase 142,222 and 68,965 shares of the Company's
Series B and Series A preferred stock were issued to the lessors, at an
exercise price of $1.13 and $0.87 per share, respectively, subject to certain
anti-dilution adjustments. During 1999 and 1997 and in connection with capital
lease agreements, warrants to purchase
F-37
<PAGE>
ONTOGENY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the six months ended June 30, 2000 and
1999 is unaudited)
25,000 and 25,000 shares of the Company's common stock were issued to the
lessors, at an exercise price of $5.00 and $2.50 per share, respectively,
subject to certain anti-dilution adjustments. The warrant to purchase shares of
Series B preferred stock may be exercised at any time through the earlier of
the closing of an initial public offering or January 28, 2006. The warrant to
purchase shares of Series A preferred stock may be exercised at any time
through November 2, 2004. The warrants to purchase shares of common stock may
be exercised at any time and expire at the earlier of the closing of an initial
public offering or during the period from November 2002 through December 2009.
At December 31, 1999, 68,965 and 142,222 shares of Series A and Series B
preferred stock, respectively, and 261,187 shares of common stock are reserved
for issuance upon exercise of the warrants and conversion of the related
preferred stock. The Company has accounted for the value of the warrants,
totaling approximately $258,000, as a discount on the leases. Such discount is
being amortized as interest expense over the lives of the leases.
9. Common Stock
The Company has executed stock restriction agreements with certain of its
employees. Each agreement gives the Company the right to purchase, at the
original issuance price, a certain number of shares held by each individual if
the respective stockholder ceases to be a director, employee or consultant of
the Company. The purchase option rights lapse at various dates through July 25,
2001. At December 31, 1999 59,500 shares of the Company's outstanding common
stock were subject to these purchase options.
10. Stock Option Plan
During 1995, the Company adopted the 1995 Stock Option Plan (the "Plan").
The Plan provides for the granting of incentive and non-qualified stock options
to employees, directors, consultants and advisors of the Company. The
Stockholders approved an increase to the total number of shares of common stock
issuable under the plan from 4,000,000 to 5,500,000 in 1998 and then to
7,500,000 in 1999. Incentive stock options may not be granted at an exercise
price less than the fair market value of the Company's common stock at the date
of grant as determined by the Board of Directors and for a term not to the
exceed ten years. For holders of more than 10% of the Company's total combined
voting power of all classes of stock, incentive stock options may not be
granted at less than 110% of the fair market value of the Company's common
stock at the date of grant and for a term not to exceed five years. The
exercise price under each non-qualified stock option may be granted at less
than fair market value but shall in no case be less than the par value of the
underlying common stock. Upon the exercise of an option, certain restrictions
are placed on the transfer or sale of such shares. Options generally vest over
a five year period.
On December 11, 1997, the Board of Directors, with the approval of
stockholders on March 12, 1998, adopted the 1997 Non-Employee Director Stock
Option Plan (the "Director Plan"). The Director Plan provides for the grant of
non-qualified stock options for the purchase of up to 300,000 shares of common
stock of the Company, at an exercise price that is not less than the fair
market value of the Company's common stock at the date of grant.
The Company recorded compensation expense of $1,569,490, $913,139 and
$188,663 in 1999, 1998 and 1997, respectively relating to options granted to
employees with exercise prices less than the fair value of the common stock at
the grant date (fair value of the common stock as subsequently determined for
financial reporting purposes). Had compensation cost been determined based on
the fair value of all options granted to employees at the grant date consistent
with the provisions of SFAS No. 123, the effect on the Company's net loss for
1999, 1998 and 1997 would have been as follows:
F-38
<PAGE>
ONTOGENY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the six months ended June 30, 2000 and
1999 is unaudited)
<TABLE>
<CAPTION>
Net loss
available per
common
share--basic
Net loss and diluted
------------- -------------
<S> <C> <C>
As reported:
1999....................................... $(13,399,470) $(5.25)
1998....................................... (9,998,725) (4.44)
1997....................................... (4,213,969) (2.27)
Pro forma:
1999....................................... $(13,515,076) $(5.29)
1998....................................... (10,077,850) (4.48)
1997....................................... (4,247,255) (2.29)
</TABLE>
Since options vest over several years and additional option grants are
expected to be made in future years, the above pro forma results are not
representative of pro forma results for future years.
For the purposes of pro forma disclosure, the fair value of each employee
option grant is estimated on the date of grant using the minimum valued method
with the following assumptions for grants in 1999, 1998 and 1997: no dividend
yield; risk-free interest rates of 6% for 1999 grants, 5% for 1998 grants and
6% for 1997 grants; and an expected life of 5 years for all options granted.
The weighted average fair value of options granted to employees during 1999,
1998 and 1997, was $3.97, $2.36 and $1.77, respectively. For financial
reporting purposes, all options granted in 1999, 1998 and 1997 were deemed to
be granted at less than fair value.
During 1999, 1998 and 1997, the Company granted options in the amount of
143,000, 213,000 and 174,500, respectively, to consultants and advisors under
the Plan. The Company applies EITF No. 96-18 to non-employee grants. Under EITF
96-18, the expense that will ultimately be recognized for certain of the
options issued to nonemployees will be the fair value at the vesting dates of
the underlying options. As these options vest over periods of one to five
years, the Company will be required to remeasure the fair value of these
options at each reporting period prior to vesting and then finally at the
vesting date of the option. Changes in the estimated fair value of these
options will be recognized as deferred compensation and related amortization of
compensation expense in the period of the change. Accordingly, the Company
recognized $890,930, $340,506, and $55,667 of expense relating to these options
in 1999, 1998 and 1997, respectively. At December 31, 1999, the Company has
$984,701 of deferred compensation relating to these options.
Deferred Compensation (Unaudited)
During the six months ended June 30, 2000, the Company granted stock options
to employees to purchase 230,500 shares of common stock at an exercise price of
$4.00 per share. The Company recorded deferred compensation relating to these
options totaling $3,388,350, representing the aggregate difference between the
estimated fair market value of Ontogeny's common stock on the date of grant and
the exercise price of each option. This deferred compensation is being
amortized over the five-year vesting period. Compensation expense for the six
months ended June 30, 2000 for these options was $284,864. The Company recorded
compensation expense of $1,282,452 and $2,441,679 during the six months ended
June 30, 2000 for options previously granted to employees and non-employees,
respectively. At June 30, 2000, the Company has $12,139,811 and $1,424,180 of
deferred compensation relating to employee and non-employee grants,
respectively. The deferred compensation for employee stock option grants is
amortized on a straight-line basis over the vesting period of the related
option.
F-39
<PAGE>
ONTOGENY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the six months ended June 30, 2000 and
1999 is unaudited)
A summary of the status of the Company's stock option plans as of December
31, 1999, 1998 and 1997 and changes during the years then ended is presented
below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 4,878,065 $0.70 3,301,715 $0.54 1,340,665 $0.20
Granted below fair
value................ 1,617,000 0.99 1,777,000 1.00 2,052,000 0.74
Exercised............. (169,080) 0.42 (46,250) 0.41 (62,850) 0.15
Cancelled............. (604,870) 0.88 (154,400) 0.64 (28,100) 0.17
--------- ----- --------- ----- --------- -----
Outstanding at end of
year................... 5,721,115 $0.78 4,878,065 $0.70 3,301,715 $0.54
========= ========= =========
Options exercisable at
end of year............ 1,786,186 $0.63 1,030,163 $0.51 360,530 $0.29
========= ========= =========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Outstanding
Options Outstanding Exercisable
------------------------------------- ------------------------
Weighted-
average Weighted- Weighted-
Range of remaining average Number of average
exercise Number contractual exercise options exercise
price of options life price exercisable price
---------- ---------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.01-0.50 1,842,315 6.9 $0.31 956,261 $0.31
$1.00 3,878,800 9.0 1.00 829,925 1.00
---------- --------- --- ----- --------- -----
$.01-$1.00 5,721,115 8.3 $0.78 1,786,186 $0.63
========== ========= === ===== ========= =====
</TABLE>
At December 31, 1999, there are 1,789,905 options available for future
grant.
11. Income Taxes
Deferred tax assets consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
------------ -----------
<S> <C> <C>
Net operating loss carryforwards............... $ 11,664,000 $ 7,893,000
Tax credit carryforwards....................... 1,427,000 987,000
Other temporary differences.................... 1,606,000 231,000
------------ -----------
Gross deferred tax assets...................... 14,697,000 9,111,000
Valuation allowance............................ (14,697,000) (9,111,000)
------------ -----------
$ -- $ --
============ ===========
</TABLE>
The Company has generated taxable losses from operations since inception
and, accordingly, has no taxable income available to offset the carryback of
net operating losses. Based upon the weight of all available evidence, the
Company has provided a full valuation allowance for its deferred tax assets
since, in the opinion of management, realization of these future benefits is
not sufficiently assured (defined as a likelihood of more than 50 percent).
As of December 31, 1999, the Company has U.S. Federal net operating loss
carryforwards of approximately $28,700,000 and tax credit carryforwards of
$890,000 which may be used to offset future
F-40
<PAGE>
ONTOGENY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the six months ended June 30, 2000 and
1999 is unaudited)
liabilities and expire at various times from 2009 through 2019. The Company
also has state research and development credits of approximately $700,000 which
expire at various times from 2010 through 2014.
Under the Internal Revenue Code, certain substantial changes in the
Company's ownership could result in an annual limitation on the amount of net
operating loss and tax credit carryforwards which can be utilized in future
years.
12. Related Party Transactions
Notes Receivable from Related Parties
In 1996 and 1994, the Company loaned two officers $500,000 and $100,000,
respectively. The $100,000 loan was forgiven over a five-year period commencing
in 1994 and $300,000 of the $500,000 loan will be forgiven over a five-year
period commencing in 1996, contingent on the respective officers' continued
employment with the Company. The remaining $200,000 of the $500,000 loan
matures in 2003. Upon forgiveness, the Company has committed to pay for any
resulting income taxes to the officers. The Company is recording compensation
expense to amortize the total of these loans over a period of five to seven
years and to accrue the related taxes. At December 31, 1999 and 1998, accrued
taxes related to this commitment totaled approximately $129,000 and $117,000,
respectively, and are included in accrued expenses and other liabilities.
In 1996, the Company also loaned an officer $100,000. During 1998, the
maturity date of this note was extended from March 31, 1998 to March 31, 2000.
In March 1999, the Company agreed to forgive all principal and accrued interest
outstanding on the loan as of January 1, 1999 and recorded such amounts as
compensation expense in 1999. The Company also agreed to pay for any resulting
income taxes to the officer associated with the forgiveness.
13. Commitments and Contingencies
Consulting Agreements
The Company has consulting agreements with terms of up to one year. Total
cash consulting expense incurred by the Company during 1999, 1998 and 1997 was
approximately $371,000, $303,000 and $336,000, respectively. Two of these
agreements provide for stock option grants for services rendered (See Note 10).
License Agreements
The Company is a party to license agreements for certain technologies.
Pursuant to these agreements, the Company has incurred license fee expense of
approximately $306,000, $820,000 and $171,000 in 1999, 1998 and 1997,
respectively, and upon the execution of these agreements has issued an
aggregate of 647,000 shares of common stock. The agreements generally require
the Company to reimburse the licensor for all patent-related costs and contain
various provisions requiring additional payments, including annual payments
ranging in the aggregate from $162,000 to $237,000 per year for terms ranging
from two years to the life of the last licensed patent to expire, royalty
payments based on a certain percentage of net sales of products developed from
the licensed technology and milestone payments ranging from $10,000 to
$5,000,000 upon the occurrence of certain events ranging from the date of
filing of a patent application on the licensed technology to the achievement of
$100 million of sales of a product related to the licensed technology. The
license agreements are cancelable upon notice by Ontogeny
F-41
<PAGE>
ONTOGENY, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(the information presented relating to the six months ended June 30, 2000 and
1999 is unaudited)
Leases
The Company leases office space under a noncancelable operating lease which
expires in March 2006. Total rent expense (net of sublease income of $130,000,
$130,000 and $97,850 for 1999, 1998, and 1997, respectively) was approximately
$565,000, $130,000 and $162,200 for 1999, 1998 and 1997, respectively. Future
minimum lease payments under the facilities lease and under capital lease
agreements (Note 6) as of December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Operating Capital
lease lease
---------- ----------
<S> <C> <C>
Year ending December 31,
2000............................................. $ 751,107 $1,450,007
2001............................................. 715,137 1,179,417
2002............................................. 312,055 1,087,203
2003............................................. 310,575 762,840
2004............................................. 310,575 --
Thereafter....................................... 388,218 --
---------- ----------
Total.......................................... $2,787,667 4,479,467
==========
Less--Amount representing interest................. 1,015,148
----------
Present value of future minimum lease payments..... $3,464,319
==========
</TABLE>
14. Employee Benefit Plans
The Company has a defined Contribution 401(k) Plan in which all qualified
employees of the Company may contribute up to 15% of compensation through
salary withholdings. Company matching contributions are discretionary and to
date, there have been no matching contributions.
15. Proposed Merger
On February 15, 2000, the Company announced an agreement to merge with
Creative BioMolecules, Inc. and Reprogenesis, Inc. in a tax-free exchange of
stock to form Curis, Inc. Upon consummation of the merger on July 31, 2000,
Curis was owned approximately 43% by the stockholders of Creative BioMolecules,
approximately 38% by the stockholders of Ontogeny and approximately 19% by the
stockholders of Reprogenesis. The separate corporate existence of each of
Creative, Ontogeny and Reprogenesis shall cease and Curis shall, as the
surviving corporation in the merger, continue its existence under the
provisions of the Delaware General Corporation Law.
F-42
<PAGE>
REPROGENESIS, INC.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of
Reprogenesis, Inc.:
We have audited the accompanying consolidated balance sheets of
Reprogenesis, Inc. (a Texas corporation) and subsidiary as of December 31, 1999
and 1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the three years in the period ended
December 31, 1999. These financial statements are the responsibility of
Reprogenesis, Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 Reprogenesis, Inc. and
subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 4, 2000 (except for matters discussed in Notes 1 and 8 as to which the
date is February 14, 2000)
F-43
<PAGE>
REPROGENESIS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
------------------------- June 30,
1999 1998 2000
------------ ----------- ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........... $ 6,492,341 $ 1,692,219 $ 2,561,562
Accounts receivable................. 213,023 1,149,869 418,315
Prepaid expenses and other current
assets............................. 163,012 108,062 187,931
------------ ----------- ------------
Total current assets.............. 6,868,376 2,950,150 3,167,808
Property and Equipment, at cost:
Leasehold improvements.............. 1,360,201 1,356,427 1,360,201
Furniture and equipment............. 903,722 842,555 963,902
------------ ----------- ------------
2,263,923 2,198,982 2,324,103
Less--Accumulated depreciation...... (673,245) (299,952) (827,916)
------------ ----------- ------------
1,590,678 1,899,030 1,496,187
Other Assets.......................... 36,658 36,658 58,010
------------ ----------- ------------
$ 8,495,712 $ 4,885,838 $ 4,722,005
============ =========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued
expenses........................... $ 918,527 $ 854,528 $ 1,739,764
Deferred revenue.................... -- 1,767,857 --
Current portion of notes payable.... 353,508 341,263 486,815
------------ ----------- ------------
Total current liabilities......... 1,272,035 2,963,648 2,226,579
Note Payable, net of current portion.. 885,961 1,239,470 674,969
Commitments and Contingencies (Notes
3, 4, 5 and 6)
Minority Interest..................... -- (54,052) --
Shareholders' Equity:
Series A convertible preferred
stock, $0.01 par value--
Authorized, issued and
outstanding--2,702,702 shares as
of June 30, 2000 (liquidation
preference of $6,000,000 as of
June 30, 2000 (unaudited))....... 27,027 27,027 27,027
Series B convertible preferred
stock, $0.01 par value--
Authorized--5,044,451 shares;
issued and outstanding--4,729,134
shares as of June 30, 2000
(liquidation preference of
$10,498,677 as of June 30, 2000
(unaudited))..................... 47,291 -- 47,291
Common stock, $0.01 par value--
Authorized--30,084,501 shares;
issued and outstanding--
10,897,660, 10,397,660 and
18,372,196 shares as of December
31, 1999, 1998, and June 30, 2000
(unaudited), respectively........ 108,977 103,977 183,722
Additional paid-in capital............ 19,470,631 7,579,785 39,565,772
Accumulated deficit................... (12,945,512) (6,407,917) (35,047,537)
Deferred compensation................. (370,698) (566,100) (2,955,818)
------------ ----------- ------------
Total shareholders' equity...... 6,337,716 736,772 1,820,457
------------ ----------- ------------
$ 8,495,712 $ 4,885,838 $ 4,722,005
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-44
<PAGE>
REPROGENESIS, INC.
Consolidated Statements of Operations
For the Years Ended December 31, 1999, 1998 and 1997
and for the Six Months Ended June 30, 2000 and 1999 (unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998 1997 2000 1999
----------- ----------- ----------- ------------ -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Research and
development contracts
and government
grants............... $ 2,285,471 $ 4,548,642 $ 6,251,271 $ 434,423 $ 2,072,448
----------- ----------- ----------- ------------ -----------
Costs and Expenses:
Research and
development.......... 7,625,147 6,453,383 5,755,474 5,027,491 3,759,363
General and
administrative....... 1,369,660 1,880,219 705,463 2,495,809 749,760
----------- ----------- ----------- ------------ -----------
Total costs and
expenses........... 8,994,807 8,333,602 6,460,937 7,523,300 4,509,123
----------- ----------- ----------- ------------ -----------
Loss from operations.... (6,709,336) (3,784,960) (209,666) (7,088,877) (2,436,675)
Other income
(expense), net....... 1,502,182 -- -- (21,091) 1,578,590
Interest income....... 274,042 170,949 201,241 123,443 70,934
Interest expense...... (1,229,483) (107,430) (3,057) (76,797) (929,708)
----------- ----------- ----------- ------------ -----------
Loss before minority
interest in (income)
losses of CTDP......... (6,162,595) (3,721,441) (11,482) (7,063,322) (1,716,859)
Minority interest in
(income) losses of
CTDP................... (375,000) 98,174 58,378 -- (375,000)
----------- ----------- ----------- ------------ -----------
Net (loss) income....... (6,537,595) (3,623,267) 46,896 (7,063,322) (2,091,859)
Common stock dividend to
Series B preferred
stockholders (Note 9).. -- -- -- (15,038,703) --
----------- ----------- ----------- ------------ -----------
Net (loss) income
attributable to common
stockholders........... $(6,537,595) $(3,623,267) $ 46,896 $(22,102,025) $(2,091,859)
=========== =========== =========== ============ ===========
Net (loss) income per
common share:
Basic and diluted..... $ (0.60) $ (0.35) $ -- $ (1.45) $ (0.19)
=========== =========== =========== ============ ===========
Weighted average common
shares outstanding:
Basic and diluted..... 10,897,660 10,397,660 10,397,660 15,201,993 10,897,660
=========== =========== =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-45
<PAGE>
REPROGENESIS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
and for the Six Months Ended June 30, 2000 (unaudited)
<TABLE>
<CAPTION>
Preferred Stock Common Stock
------------------- -------------------- Additional
Number of Number Paid-in Accumulated Deferred
Shares Par Value of Shares Par Value Capital Deficit Compensation Total
--------- --------- ---------- --------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996................... -- $ -- 10,397,660 $103,977 $ 688,682 $ (2,831,546) $ -- $(2,038,887)
Sale of Series A
preferred stock, net
of issuance costs of
approximately
$75,000............... 2,702,702 27,027 -- -- 5,897,603 -- -- 5,924,630
Deferred compensation
related to common
stock options......... -- -- -- -- 631,500 -- (631,500) --
Amortization of
deferred
compensation.......... -- -- -- -- -- -- 126,600 126,600
Net income............. -- -- -- -- -- 46,896 -- 46,896
--------- ------- ---------- -------- ----------- ------------ ----------- -----------
Balance, December 31,
1997................... 2,702,702 27,027 10,397,660 103,977 7,217,785 (2,784,650) (504,900) 4,059,239
Deferred compensation
related to stock
options............... -- -- -- -- 362,000 -- (362,000) --
Amortization of
deferred
compensation.......... -- -- -- -- -- -- 300,800 300,800
Net loss............... -- -- -- -- -- (3,623,267) -- (3,623,267)
--------- ------- ---------- -------- ----------- ------------ ----------- -----------
Balance, December 31,
1998................... 2,702,702 27,027 10,397,660 103,977 7,579,785 (6,407,917) (566,100) 736,772
Issuance of common
stock, ............... -- -- 500,000 5,000 495,000 -- -- 500,000
Issuance of stock
options to
nonemployees.......... -- -- -- -- 12,299 -- -- 12,299
Sale of Series B
preferred stock, net
of issuance costs of
approximately
$113,000.............. 4,729,134 47,291 -- -- 10,338,393 -- -- 10,385,684
Adjustment for interest
expense in connection
with Series A warrant
repricing (see Note
9).................... -- -- -- -- 924,356 -- -- 924,356
Deferred compensation
related to common
stock options......... -- -- -- -- 120,798 -- (120,798) --
Amortization of
deferred
compensation.......... -- -- -- -- -- -- 316,200 316,200
Net loss............... -- -- -- -- -- (6,537,595) -- (6,537,595)
--------- ------- ---------- -------- ----------- ------------ ----------- -----------
Balance, December 31,
1999................... 7,431,836 74,318 10,897,660 108,977 19,470,631 (12,945,512) (370,698) 6,337,716
Issuance of common
stock dividend to the
holders of Series B
preferred stock....... -- -- 3,546,864 35,469 15,003,234 (15,038,703) -- --
Issuance of restricted
stock................. -- -- 300,000 3,000 1,898,952 -- (1,901,952) --
Deferred compensation
related to common
stock options......... -- -- -- -- 313,362 -- (92,739) 220,623
Deferred compensation
related to restricted
stock................. -- -- -- -- 772,000 -- (772,000) --
Amortization of
deferred
compensation.......... -- -- -- -- -- -- 181,571 181,571
Issuance of stock
options to non-
employees ............ -- -- -- -- 106,000 -- -- 106,000
Compensation expense
related to repriced
common stock options.. -- -- -- -- 474,800 -- -- 474,800
Exercise of common
stock warrants and
options............... -- -- 3,627,672 36,276 1,526,793 -- -- 1,563,069
Net loss .............. -- -- -- -- -- (7,063,322) -- (7,063,322)
--------- ------- ---------- -------- ----------- ------------ ----------- -----------
Balance, June 30, 2000
(unaudited)............ 7,431,836 $74,318 18,372,196 $183,722 $39,565,772 $(35,047,537) $(2,955,818) $ 1,820,457
========= ======= ========== ======== =========== ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-46
<PAGE>
REPROGENESIS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
and for the Six Months Ended June 30, 2000 and 1999 (unaudited)
<TABLE>
<CAPTION>
June 30,
------------------------
1999 1998 1997 2000 1999
----------- ----------- ----------- ----------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows from
Operating Activities:
Net (loss) income...... $(6,537,595) $(3,623,267) $ 46,896 $(7,063,322) $(2,091,859)
Adjustments to reconcile
net (loss) income to
net cash used in
operating activities--
Depreciation and
amortization......... 373,293 284,767 6,386 154,671 182,941
Minority interest in
income (losses) of
CTDP................. 375,000 (98,174) (58,378) -- 375,000
Write off of acquired
in-process research
and development...... 125,000 -- -- -- 125,000
Non-cash interest
expense.............. 1,042,559 -- -- -- 830,860
Compensation related
to issuance of common
stock options........ 328,499 300,800 126,600 508,194 150,553
Compensation related
to variable
accounting treatment
of repriced stock
options.............. -- -- -- 474,800 --
Changes in current
assets and
liabilities--
Accounts receivable.. 936,846 80,889 235,045 (205,292) 1,112,995
Interest receivable.. -- 64,688 (64,688) -- --
Prepaid expenses and
other current
assets.............. (54,950) (97,082) (9,095) (24,919) 1,958
Accounts payable and
accrued expenses.... 63,999 715,827 (781,545) -- (135,491)
Deferred revenue..... (1,767,857) (294,643) (294,643) 821,237 (1,767,857)
----------- ----------- ----------- ----------- -----------
Net cash used in
operating
activities......... (5,115,206) (2,666,195) (793,422) (5,334,631) (1,215,900)
----------- ----------- ----------- ----------- -----------
Cash Flows from
Investing Activities:
Purchase of property
and equipment......... (64,941) (2,045,455) (121,601) (60,180) (46,822)
Reimbursements from
minority interest .... 54,052 -- -- -- --
Increase in other
assets................ -- (18,368) (17,415) (21,352) (216)
Decrease (increase) in
short-term
investments........... -- 2,500,000 (2,500,000) -- --
----------- ----------- ----------- ----------- -----------
Net cash (used in)
provided by
investing
activities......... (10,889) 436,177 (2,639,016) (81,532) (47,038)
----------- ----------- ----------- ----------- -----------
Cash Flows from
Financing Activities:
Proceeds from issuance
of term note payable.. -- 1,771,548 -- -- --
Proceeds from issuance
of demand note
payable............... -- -- -- 110,000 --
Repayments of term note
payable............... (341,264) (190,815) -- (187,685) (136,918)
Net proceeds from
issuance of bridge
loan.................. 2,950,000 -- -- -- 2,950,000
Net proceeds from
issuance of Series B
convertible preferred
stock................. 7,317,481 -- -- -- --
Net proceeds from
issuance of Series A
convertible preferred
stock................. -- -- 5,924,630 -- --
Proceeds from common
stock options and
warrants.............. -- -- -- 1,563,069 --
Borrowings under line
of credit............. -- -- 157,000 -- --
Repayments under line
of credit............. -- -- (383,000) -- --
Minority interest's
capital
contributions......... -- -- 57,224 -- --
----------- ----------- ----------- ----------- -----------
Net cash provided by
financing
activities......... 9,926,217 1,580,733 5,755,854 1,485,384 2,813,082
----------- ----------- ----------- ----------- -----------
Net increase
(decrease) in cash
and cash
equivalents........ 4,800,122 (649,285) 2,323,416 (3,930,779) 1,550,144
Cash and Cash
Equivalents, beginning
of period.............. 1,692,219 2,341,504 18,088 6,492,341 1,692,219
----------- ----------- ----------- ----------- -----------
Cash and Cash
Equivalents, end of
period................. $ 6,492,341 $ 1,692,219 $ 2,341,504 $ 2,561,562 $ 3,242,363
=========== =========== =========== =========== ===========
Supplemental Disclosure
of Cash Flow
Information:
Cash paid for
interest.............. $ 186,923 $ 99,243 $ 3,057 $ 74,602 $ 97,101
=========== =========== =========== =========== ===========
Supplemental Disclosure
of Noncash Flow
Information:
Conversion of bridge
loan and accrued
interest into
Series B preferred
stock................. $ 3,068,203 $ -- $ -- $ -- $ --
=========== =========== =========== =========== ===========
Issuance of 500,000
shares of common stock
for minority interest
of CTDP, net of
issuance costs........ $ 500,000 $ -- $ -- $ -- $ 500,000
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-47
<PAGE>
REPROGENESIS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
(Including data applicable to unaudited periods)
(1) ORGANIZATION
Reprogenesis, Inc. (the Company) is developing rapid-to-market cell-based
products for minimally invasive, in vivo tissue augmentation/repair. The
Company's proprietary and broadly applicable tissue formation technology serves
as a platform for a broad range of potential products addressing significant
clinical needs in multiple markets. The Company is developing its technology in
three specific areas: (i) the creation of structural tissue to augment or
correct an anatomical defect; (ii) the repair or restoration of a physiological
function; and, (iii) the repair or restoration of anatomical organs.
The Company's most advanced product is in the area of urology: an autologous
tissue product to treat a pediatric urologic disorder (vesicoureteral reflux)
that is currently in a Phase III clinical trial. The Company also has a number
of potential products in the areas of urology, cardiovascular biology and
plastic and reconstructive surgery.
The Company is subject to a number of risks, including dependence on key
individuals, competition from substitute products, the need to develop
commercially usable products and obtain regulatory approval for products under
development, the ability to obtain adequate financing and the market conditions
of the biotechnology industry as a whole.
The Company has substantially funded its operations through equity issuances
and funding under a research and development agreement. As discussed in Note
3(b), this agreement was terminated in 1999. In the event the merger discussed
below is not consummated, the Company intends to explore financing
alternatives. The Company has obtained a commitment from two of its
shareholders to provide funding which will be sufficient to fund operations for
2000 when combined with existing resources.
On February 14, 2000, the Company entered into an Agreement and Plan of
Merger with Creative BioMolecules, Inc. and Ontogeny, Inc. which became
effective on July 31, 2000. The new company, Curis, Inc. combines the resources
and product pipelines of each of the merging companies to form a publicly
traded regenerative medicine company. Under the terms of the agreement, the
Company's shareholders received approximately 19% of the initial outstanding
capital stock of Curis, Inc.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application
of certain significant accounting policies, as described in this note and
elsewhere in the accompanying consolidated financial statements and notes.
(a) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and Carolina Tissue Development Partners (CTDP), a partnership in
which the Company had a 75% interest until January 1, 1999, at which time the
Company purchased the 25% minority interest (see Note 3(f)). The effects of all
significant intercompany transactions have been eliminated in consolidation.
(b) 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
F-48
<PAGE>
REPROGENESIS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(Including data applicable to unaudited periods)
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 reported periods. Actual results could differ from those estimates.
(c) Interim Financial Information
The financial information as of June 30, 2000, and for the six months ended
June 30, 2000 and 1999 is unaudited but includes all adjustments, consisting of
only normal recurring adjustments, that in the opinion of management are
necessary for a fair presentation of Reprogenesis' financial position,
operating results, and cash flows for such periods. Operating results for the
six month period ended June 30, 2000 are not necessarily indicative of results
to be expected for the full year of 2000 or any future period.
(d) Cash and Cash Equivalents
Cash and cash equivalents consist of deposits in banks and cash invested
temporarily in various instruments with maturities of 90 days or less at time
of purchase.
The Company accounts for cash equivalents in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain
Instruments in Debt and Equity Securities. At June 30, 2000, December 31, 1999
and 1998, the Company's cash equivalents consisted of money market funds.
(e) Accounts Receivable
The accounts receivable balance at December 31, 1998 represents costs
incurred by the Company under a research and development agreement for which
the Company will be reimbursed (see Note 3(b)). Accounts receivable as of June
30, 2000 and December 31, 1999 represents amounts payable to the Company for
cost reimbursement under the terms of government awards (See Notes 3(d) and
(e)). As of December 31, 1998, 1999 and June 30, 2000 the Company's accounts
receivable balance included unbilled amounts of $1,149,869, $213,023 and
$205,511, respectively.
(f) Property and Equipment
Furniture and equipment is recorded at cost and depreciated using an
accelerated method over the estimated economic life (five to ten years) of the
respective assets. Leasehold improvements are recorded at cost and depreciated
on a straight-line basis over the remaining lease term.
In accordance with SFAS No. 121, Accounting for Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of, the Company reviews its
long-lived assets (which consists of property and equipment) for impairment as
events and circumstances indicate the carrying amount of an asset may not be
recoverable. The Company evaluates the realizability of its long-lived assets
based on profitability and cash flow expectations for the related asset.
Management believes that, as of each of the balance sheet dates presented, none
of the Company's long-lived assets were impaired.
(g) Financial Instruments
SFAS No. 107, Disclosures about Fair Value of Financial Instruments,
requires disclosure about fair value of financial instruments. Financial
instruments consist of cash equivalents, marketable securities, accounts
payable and debt. The estimated fair value of these financial instruments
approximates their carrying value.
F-49
<PAGE>
REPROGENESIS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(Including data applicable to unaudited periods)
(h) Revenue Recognition
Revenues from research and development agreements and government grants are
recognized as earned under the terms of the agreement or grant. Under the
research and development agreement discussed in Note 3(b), research and
development funding was recognized as revenue as the research and development
services were performed and costs were incurred by the Company. Research and
development funding recognized as revenue by the Company under this agreement
was approximately $305,000 in 1999, $4,254,000 in 1998 and $4,582,000 in 1997.
These payments were nonrefundable.
The Company also received a nonrefundable license fee of $2,750,000 in 1995
upon entering into the agreement discussed in Note 3(b) and was entitled to
receive milestone payments. The license fee received in 1995 was recognized as
revenue ratably over the ten year period of the research and development
agreement until its termination on January 26, 1999 at which time the amount
deferred of $1,767,857 was recognized.The company received a milestone payment
of $1,375,000 in 1997 which was nonrefundable and was recognized as revenue
upon receipt. This research and development agreement in Note 3(b) was
terminatedon January 26, 1999.
The Company also receives funding under US Government grants and recognizes
such funding as revenue as the services are performed and costs are incurred by
the Company. Amounts recognized as revenue under US Government grants was
$213,000 in 1999 and $434,423 in the six-month period ended June 30, 2000.
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition, was issued
in December 1999.SAB 101 requires companies to recognize certain upfront non-
refundable fees and milestone payments over the life of the related research
and development agreements when such fees are received in conjunction with
agreements which have multiple elements. The Company has adopted SAB 101 and
applied the pronouncement to all periods as discussed above.
(i) Research and Development Costs
Expenditures relating to research and development of new products and
processes are expensed as incurred.
(j) Income Taxes
The Company applies SFAS No. 109, Accounting for Income Taxes (Note 7).
Under SFAS No. 109, deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences, tax
credit carryforwards and operating loss carryforwards, and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
(k) Concentration of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance
F-50
<PAGE>
REPROGENESIS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(Including data applicable to unaudited periods)
sheet and credit risk concentration. The Company has no significant off-
balance-sheet or concentration of credit risk, such as foreign exchange
contracts or other hedging agreements. Financial instruments that subject the
Company to credit risk consist of cash and cash equivalents and marketable
securities.
The Company's research and development contract revenue for the years ended
December 31, 1998 and 1997 and the six months ending June 30, 2000 was derived
entirely from its collaboration with American Medical Systems, Inc. (see Note
3(b)). Approximately 59% and 41% of the Company's research and development
contract revenue for the year ended December 31, 1999 was derived from American
Medical Systems, Inc. and government financial assistance awards, respectively.
All of the Company's research and development contract revenue for the six
month period ended June 30, 2000 was derived from government financial
assistance awards.
As of December 31, 1998 American Medical Systems, Inc. accounted for 100% of
accounts receivable. As of December 31, 1999 and June 30, 2000, the National
Institute of Standards and Technology accounted for approximately 64% and 82%
while the Department of Health and Human Services accounted for approximately
36% and 18% of accounts receivable, respectively.
(l) New Accounting Standards
In June 1999, the Financial Accounting Standards Board (FASB) issued SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133, which defers the effective
date of SFAS No. 133 to all fiscal quarters of all fiscal years beginning after
June 15, 2000. SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, issued in June 1998, establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. The Company
does not anticipate the adoption of this statement will have a material impact
on its financial position or results of operations.
In March 1999, the FASB issued a proposed interpretation, Accounting for
Certain Transactions Involving Stock Compensation--An Interpretation of APB
Opinion No. 25. The proposed interpretation would clarify the application of
Opinion 25 in certain situations, as defined. The proposed interpretation would
be effective upon issuance (expected to be early 2000) but would cover certain
events having occurred after December 15, 1998. To the extent that events
covered by this proposed interpretation occur during the period after December
15, 1998, but before issuance of the final Interpretation, the effects of
applying this proposed interpretation would be recognized on a prospective
basis from the effective date. Accordingly, upon initial application of the
final Interpretation, (a) no adjustments would be made to financial statements
for periods before the effective date and (b) no expense would be recognized
for any additional compensation cost measured that is attributable to periods
before the effective date. The Company expects that the adoption of this
Interpretation would not have any effect on the accompanying financial
statements for stock options repriced during fiscal year 1999 (see Note 8),
however, it will affect financial statements of future periods.
(m) Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on
an annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events
F-51
<PAGE>
REPROGENESIS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(Including data applicable to unaudited periods)
and circumstances from non-owner sources. For the years ended December 31,
1999, 1998 and 1997 and the six months ended June 30, 2000 and 1999, the
Company does not have any items of comprehensive income or loss other than net
loss.
(n) Net Loss per Share
Basic and diluted net loss per share are presented in conformity with SFAS
No. 128, Earnings per Share for all periods presented. In accordance with SFAS
No. 128, basic and diluted net loss per share has been computed by dividing
the weighted average number of common shares outstanding during the period
into the net loss attributable to common stockholders. Net loss is equal to
the net loss attributable to common stockholders for all periods presented
except for the six months ended June 30, 2000 which includes the value
attributable to the common stock dividend to the Series B shareholders (see
Note 9).
Options, warrants and shares to be issued upon conversion of convertible
preferred stock for a total of 13,075,953, 5,805,941, 5,336,054, 9,507,306 and
5,899,729 common shares have not been included in the computation of dilutive
EPS for the years ended December 31, 1999, 1998 and 1997 and for the six month
periods ended June 30, 2000 and 1999, respectively. These shares are
considered antidilutive for all periods presented.
(o) Segment Information
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. As of December 31, 1999, the Company
operates solely in one segment, the development and marketing of cell-based
products for minimally invasive, in vivo tissue augmentation and repair and,
therefore, there is no impact to the Company's financial statements of
adopting SFAS No. 131.
(p) Reclassifications
Certain prior-period amounts have been reclassified to conform with the
current year's presentation.
(3) AGREEMENTS AND CONTRACTS
(a) Massachusetts Institute of Technology
Effective December 23, 1993, the Company entered into a license agreement
with Massachusetts Institute of Technology (MIT) that grants the Company the
rights to certain existing and future MIT and Children's Hospital of Boston
(Children's Hospital) patents that relate to tissue engineering and polymer
science with specific applications to the breast tissue and urological fields.
In 1996, this agreement was amended to include rights to certain patents
related to a second generation technology of polymer science for all fields.
MIT has retained the right to sublicense these patent rights under certain
conditions. The Company has rights to receive fees if MIT sublicenses these
patent rights. During 1996, in consideration for the rights, privileges and
license granted, the Company granted MIT 519,883 shares of common stock and
paid MIT a license issue fee of $100,000. The 519,883 shares of common stock
were valued at $1.00 per share which represented the Company's estimate of
fair value at such time. The Company is obligated to pay MIT an annual license
maintenance fee of $60,000. This license maintenance fee is payable on an
annual basis until such time as the license agreement is terminated. This
license agreement may be terminated by either the Company or MIT upon 90 days
prior written notice.
F-52
<PAGE>
REPROGENESIS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(Including data applicable to unaudited periods)
In addition, the Company is obligated to pay MIT royalties equal to 3% of
net sales of products using tissue engineering applications in the breast
tissue and urological fields (the Licensed Products) sold directly by and/or
for the Company. Royalties due on Licensed Product sales for any given year
will be credited against the license maintenance fee paid during that year.
License maintenance fees paid in excess of royalties cannot be credited against
royalties due in future years. The Company is responsible for all patent
application costs and maintenance fees related to inventions under the license
agreement. During 1999, 1998 and 1997, the Company paid MIT approximately
$66,000, $49,000 and $124,000, respectively, in patent application costs and
maintenance fees. For the six months ended June 30, 2000 and 1999, the Company
paid MIT approximately $87,000 and $37,000, respectively, in patent application
costs and maintenance fees.
Effective November 5, 1996, the Company entered into a license agreement
with MIT relating to certain cardiovascular patents. Under the terms of the
agreement, the Company will use its best effort to bring licensed products to
market through its development program. In the three month period ending March
31, 2000, the Company paid MIT a patent issue fee of $35,000 which was due upon
the issuance of the first patent claim. Commencing on January 1, 1999, the
Company is also obligated to pay license maintenance fees of $15,000 annually
until issuance of the first patent claim and $25,000 thereafter. Costs relating
to the filing and maintenance of the aforementioned patents are the
responsibility of the Company. Patent application costs and maintenance fees
incurred during the years ended December 31, 1999, 1998 and 1997 and during the
six months ended June 30, 2000 and 1999, were approximately $3,400, $25,000,
$6,000, $13,000, and $2,000, respectively.
In addition, the Company is obligated to pay royalties to MIT of 3% of net
sales of the products, to be reduced to 0.5% if the Company is obligated to pay
royalties under the December 23, 1993 agreement for the same products. No
royalties were paid in the years ended December 31, 1999, 1998, 1997 and in the
six months ending June 30, 2000 and 1999.
(b) American Medical Systems
In 1995, the Company entered into a Research and Development Agreement (R&D
Agreement) and a Supply and Marketing Agreement with American Medical Systems
(AMS). Under the R&D Agreement, as amended effective April 15, 1998, AMS
provided research and development funding of approximately $305,000, $4,254,000
and $4,582,000 during the years ended December 31, 1999, 1998 and 1997,
respectively and approximately $305,000 during the six month period ended June
30, 1999. AMS provided such funding to support the Company's research and
development of products for the treatment of vesicoureteral reflux and urinary
incontinence (the Reflux and Incontinence Products).
Under the R&D Agreement, AMS was obligated to pay the Company milestone
payments of up to $9,750,000 upon reaching certain events in the Reflux and
Incontinence Products' life cycles, as defined in the R&D Agreement. Through
December 31, 1998, the Company received $4,125,000 in milestone payments; it
received none in 1999. In consideration for the above-mentioned funding, the
Company granted AMS the exclusive rights to market the Reflux and Incontinence
Products developed under the R&D Agreement at an agreed-upon price structure
that included certain royalties payable to the Company.
Effective January 26, 1999, the R&D Agreement and the Supply and Marketing
Agreement were mutually terminated by AMS and the Company. AMS reimbursed the
Company for approximately $305,000 of its actual research and development costs
for the period of January 1, 1999 through January 26, 1999. In connection with
the termination, AMS will not reimburse the Company for its research and
development expenses beyond January 26, 1999.
F-53
<PAGE>
REPROGENESIS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(Including data applicable to unaudited periods)
Pursuant to the termination agreement, the Company will pay AMS up to an
aggregate of $4 million upon the attainment of certain specific events. In
April 1999, the first payment of $500,000 became due and was paid upon the
initial treatment of a patient in the Company's clinical trials. This amount
has been recorded as a component of research and development expense. The
remaining $3,500,000 payment is contingent upon, and due only after, regulatory
approval/notification and commercialization of the Reflux and Incontinence
Products. The Company does not currently intend to pursue regulatory approval
and commercialization of its Incontinence Product. The payment due AMS will
decrease by $1,250,000 if the Incontinence Productis discontinued.
The Company maintains the entire right, title and interest in and to all its
technology, including such technology developed by or for the Company pursuant
to the R&D Agreement with AMS.
(c) University of Massachusetts
Effective September 19, 1996, the Company entered into an exclusive license
agreement (the UMASS License Agreement) and a sponsored research agreement (the
UMASS Research Agreement) with the University of Massachusetts (UMASS). The
UMASS License Agreement grants the Company the rights to certain existing and
future UMASS patents (the Patents) that relate to the use of cartilage paint
technology. Under the UMASS Research Agreement, the Company will provide
funding of $125,000 in 2000 to UMASS related to orthopedic research and the
development of certain plastic and reconstructive surgery and cartilage paint
products.
Future milestone payments totaling a maximum of $1,280,000 may be made to
UMASS based on reaching certain events, as defined in the UMASS License
Agreement. The Company made payments related to the UMASS Research Agreement of
approximately $250,000, $250,000 and $200,000 in 1999, 1998 and 1997,
respectively. The Company made payments related to the UMASS Research Agreement
of $125,000 for the six months ended June 30, 2000 and 1999.
The Company will pay UMASS a royalty of 3% of net sales of products or
services licensed under the UMASS License Agreement (as defined). Minimum
royalties of $25,000 and $50,000 for primary field and secondary field
products, as defined, respectively, beginning in 1999 and 2001, respectively,
are payable to UMASS. The UMASS License Agreement is cancelable by the Company
upon 90 days written notice and will remain in force until the earlier of the
expiration of all issued patents or September 2006. During 1999, the Company
paid UMASS $25,000 under the terms of the UMASS License Agreement. No payments
were made for the years ended December 31, 1998 or 1997 or for the six month
period ended June 30, 2000.
(d) National Institute of Standards and Technology
Effective November 1, 1999, the Company received a grant award for its
cardiovascular project from the Advanced Technology Program of the National
Institute of Standards and Technology. Under the terms of the grant award, the
Company will receive $2,000,000 in cost reimbursement funding to be paid at a
rate of approximately $666,000 annually over a three-year period. Funding is
contingent on the Company meeting minimum cost sharing and other requirements,
as defined in the financial assistance award and annual government
appropriations for the award. The Company recognized approximately $137,000 and
$373,000 under this award for the year ended December 31, 1999 and for the six
month period ended June 30, 2000, respectively.
F-54
<PAGE>
REPROGENESIS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(Including data applicable to unaudited periods)
(e) Department of Health and Human Services
Effective September 30, 1998, the Company received a grant award for its
vesicoureteral reflux product under the Orphan Drug Program of the Department
of Health and Human Services. This grant award provides for cost reimbursement
funding of approximately $221,000 for certain patient costs associated with a
vesicoureteral reflux Phase III clinical trial. During the year ended December
31, 1999 and the six month period ended June 30, 2000, the Company earned
approximately $76,000 and $61,000 under this grant award, respectively. No
amounts were earned in 1998.
(f) Carolina Tissue Development Partners
Carolina Tissue Development Partners (CTDP) was formed in 1994 as a general
partnership between the Company (as Managing Partner) and a certain foundation
(the Foundation) to perform basic research and development relating to human
tissue engineering processes and products in the breast tissue field. Pursuant
to the partnership agreement, the Company contributed certain intellectual
property rights and was obligated to provide funding for the development of
synthetic polymers, not to exceed $250,000 annually or $1,000,000 in the
aggregate. The Foundation was obligated to provide up to $5,000,000 of direct
and indirect research and development resources, as described below. All
income, losses and distributions, if any, of CTDP were allocated 75% to the
Company and 25% to the Foundation.
Effective October 21, 1994, CTDP entered into a five-year collaborative
research and development agreement (Facilities, Research and Development
Agreement) with the Charlotte-Mecklenburg Hospital Authority (the Authority),
an affiliate of the Foundation, wherein the Authority provided resources in
order to assist CTDP in the development of processes and products for human
tissue engineering with specific application to breast tissue that was
conducted by an affiliated research center (the Research Center). Under the
Facilities, Research and Development Agreement, the Authority was obligated to
reimburse the Research Center up to $5,000,000 for direct and indirect costs
and expenses of performing the related research and development.
On January 1, 1999, the Company and the Foundation decided to dissolve CTDP.
In connection with this dissolution, the Authority paid CTDP $1,500,000 to
settle all outstanding obligations under the Facilities, Research and
Development Agreement and the agreement was terminated. The Company then
purchased the Foundation's general partnership interest in CTDP for 500,000
shares of the Company's common stock and CTDP was dissolved. Upon the
dissolution, the $1,500,000 paid by the Authority reverted to the Company. The
Company recorded the 500,000 common shares issued to the Foundation at their
fair value of $500,000 and recorded the $1,500,000 as other income. The
Foundation's 25% interest in the termination fee is recorded as the $375,000
minority interest in the consolidated statements of operations for the year
ended December 31, 1999. The Company utilized purchase accounting for the
purchase of the 25% minority interest in CTDP. The excess of the purchase price
of $500,000 over the book value of the minority interest of $375,000 was
charged to research and develop expenses as in process research and
development. The Company also issued an option to purchase a total of 20,000
shares of common stock to two consultants at an exercise price of $1.00 that
vest over a 42-month period. The Company recorded compensation expense for
these options of approximately $12,000 for the year ended December 31, 1999.
In connection with the dissolution of CTDP, the Company entered into an
agreement with the Authority to license certain patents that are used by the
Company in the areas of soft tissue engineering and breast reconstruction
product development. The Company and the Authority share equally in all patent-
related costs and in any future license fees earned from patents created at the
Research Center.
F-55
<PAGE>
REPROGENESIS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(Including data applicable to unaudited periods)
Additionally, in connection with the dissolution of CTDP, the Company
entered into an 18-month sponsored research agreement with the Authority to
continue the development of products used in the areas of soft tissue
engineering and breast reconstruction that was previously conducted by CTDP
(Sponsored Research Agreement). The Sponsored Research Agreement specifies that
the Company shall pay to the Authority approximately $516,000 and $246,000 in
1999 and 2000, respectively. However, if certain development milestones were
not achieved by December 31, 1999, the Company had the option to terminate the
Sponsored Research Agreement without penalty. In 1999, the Company paid the
Authority approximately $516,000 in connection with the Sponsored Research
Agreement.
(4) ACCRUED EXPENSES
Accrued expenses at December 31, 1999 and 1998 and June 30, 2000 consist of
the following:
<TABLE>
<CAPTION>
December 31,
----------------- June 30,
1999 1998 2000
-------- -------- ----------
<S> <C> <C> <C>
Accrued scientific research and consulting
costs.................................... $396,225 $440,302 $ 381,943
Trade accounts payable.................... 340,799 154,184 53,610
Transaction expenses...................... -- -- 1,075,748
Other accrued expenses.................... 181,503 260,042 228,463
-------- -------- ----------
$918,527 $854,528 $1,739,764
======== ======== ==========
</TABLE>
(5) COMMITMENTS
(a) Equipment Loan Agreement
In June 1998, the Company entered into an equipment loan agreement with a
maximum borrowing capacity of $2,000,000. The principal and interest on any
borrowings are to be repaid over 48 equal monthly installments. This amount is
secured by substantially all of the Company's tangible assets.
Future minimum payments under this agreement as of December 31, 1999 are as
follows:
<TABLE>
<S> <C>
Fiscal Year--
2000....................................................... $ 480,859
2001....................................................... 524,574
2002....................................................... 474,873
----------
Total payments........................................... 1,480,306
Less--Amount representing interest......................... 240,837
----------
Present value of minimum payments........................ 1,239,469
Less--Current portion...................................... 353,508
----------
$ 885,961
==========
</TABLE>
Additionally, in connection with the Equipment Loan Agreement, the Company
issued warrants for the purchase of 21,667 shares of common stock at $3.00 per
share. In accordance with SFAS No. 123, Accounting for Stock-Based
Compensation, the Company computed the fair value of the warrants using the
Black-Scholes option pricing model. The value of these warrants was not
material to the financial statements.
F-56
<PAGE>
REPROGENESIS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(Including data applicable to unaudited periods)
(b) Operating Leases
The Company has entered into lease agreements for laboratory equipment and
facilities, office space and computer equipment. The Company's operating leases
are primarily for the Company's research and development facility in Cambridge,
Massachusetts, and expire in December 2007. Future minimum lease payments under
operating leases with initial or remaining terms of one year or more are
approximately as follows:
<TABLE>
<CAPTION>
Year Amount
---- ----------
<S> <C>
2000........................................ $ 693,134
2001........................................ 683,000
2002........................................ 679,390
2003........................................ 677,700
2004........................................ 661,361
Thereafter.................................. 1,979,627
----------
$5,374,212
==========
</TABLE>
The Company's rent expense under operating leases was approximately
$725,000, $654,000, $923,000, $394,000 and $339,245 during the years ended
December 31, 1999, 1998 and 1997 and for the six months ended June 30, 2000 and
1999, respectively, net of facility sublease income of approximately $178,000
and $41,000 in 1999 and 1998, respectively. Facility sublease income
approximated $109,000 and 90,000 for the six months ended June 30, 2000 and
1999, respectively. No facility sublease income was recorded in 1997.
(6) RELATED PARTY TRANSACTIONS
The Company has consulting agreements with nine members of its Scientific
Advisory Board (SAB) and one member of its board of directors. Payments to
these members under these agreements amounted to $335,834, $324,000, $290,000,
$147,000 and $205,000 during the years ended December 31, 1999, 1998 and 1997
and for the six months ended June 30, 2000 and 1999, respectively. Future
obligations under the consulting agreements are approximately $108,000 and
$80,000 in 2000 and 2001, respectively.
(7) DEFERRED TAXES
At December 31, 1999, the Company has net operating loss carryforwards for
federal income tax purposes of approximately $13,658,000, which expire through
2019. The Company also has certain tax credits available to offset future
federal and state income taxes, if any. Net operating loss carryforwards and
credits are subject to review and possible adjustments by the Internal Revenue
Service and they may be limited by the occurrence of certain events, including
significant changes in ownership interests.
The Company's total deferred tax assets and corresponding valuation
allowances at December 31, 1999 and 1998 are approximately as follows:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Net operating loss carryforwards................. $5,463,000 $1,815,000
Research and development tax credits............. 648,000 280,000
Other............................................ 18,000 (17,000)
---------- ----------
6,129,000 2,078,000
Less--Valuation allowance for deferred tax
assets.......................................... (6,129,000) (2,078,000)
---------- ----------
$ -- $ --
========== ==========
</TABLE>
F-57
<PAGE>
REPROGENESIS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(Including data applicable to unaudited periods)
SFAS No. 109 requires that a valuation allowance be recorded against tax
assets when it is more likely than not that the deferred tax assets will not be
realized. Since their ultimate realization based upon past performance and
expiration dates is uncertain, the Company has established a full valuation
allowance against these carryforward benefits and will recognize the benefits
only as reassessment demonstrates they are realizable. Realization is entirely
dependent upon future earnings in specific tax jurisdictions. The need for this
valuation allowance is subject to periodic review. If the allowance is reduced,
the tax benefits of the carryforwards will be recorded in future operations as
a reduction of the Company's income tax expense. No income tax payments were
made during 1999 and 1998.
(8) STOCK OPTIONS
The Company's 1996 Long-Term Incentive Plan (the Plan) provides for the
grant of non-qualified and incentive stock options and shares of restricted
stock to employees, consultants, independent members of the Board of Directors
and members of the SAB. The Plan terminates on June 30, 2006, subject to
earlier termination by the Board of Directors. Under the Plan, as amended July
30, 1999, 2,500,000 shares of common stock have been reserved for issuance.
Information with respect to the Plan is as follows:
<TABLE>
<CAPTION>
Weighted-
Exercise Average
Number of Price per Exercise
Shares Share Price
--------- ----------- ---------
<S> <C> <C> <C>
Outstanding at December 31, 1996.......... 853,400 $ 0.25-1.00 $0.97
Granted................................. 493,600 1.00-2.50 1.06
Expired or canceled..................... (60,000) 1.00 1.00
--------- ----------- -----
Outstanding at December 31, 1997.......... 1,287,000 0.25-2.50 1.00
Granted................................. 454,170 1.00-3.00 1.47
Expired or canceled..................... (5,950) 1.00 1.00
--------- ----------- -----
Outstanding at December 31, 1998.......... 1,735,220 0.25-3.00 1.16
Granted................................. 243,220 0.10-1.00 0.50
Expired or canceled..................... (67,879) 1.00 1.00
--------- ----------- -----
Outstanding at December 31, 1999.......... 1,910,561 0.10-3.00 1.05
Granted................................. 110,000 1.00-2.70 1.39
Exercised............................... (30,000) 1.00 1.00
--------- ----------- -----
Outstanding at June 30, 2000.............. 1,990,561 $0.10-$3.00 $1.04
========= =========== =====
Vested at June 30, 2000................... 1,604,425 $0.25-$3.00 $1.09
========= =========== =====
Vested at December 31, 1999............... 1,416,721 $0.25-$3.00 $1.05
========= =========== =====
Vested at December 31, 1998............... 888,513 $0.25-$2.50 $1.10
========= =========== =====
Vested at December 31, 1997............... 525,895 $0.25-$2.50 $1.10
========= =========== =====
</TABLE>
F-58
<PAGE>
REPROGENESIS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(Including data applicable to unaudited periods)
The following table presents weighted-average price and life information
about significant option groups outstanding at June 30, 2000:
<TABLE>
<CAPTION>
Weighted-
Average Weighted-
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
-------- ----------- ----------- ---------
<S> <C> <C> <C>
$0.10-1.00 1,843,061 6.87 $0.90
$2.50-3.00 147,500 7.99 $2.54
---------
1,990,561
=========
</TABLE>
Options granted to employees and certain options granted to members of the
SAB generally vest over a 42-month period, but they may not be exercised before
a registration of the Company's common stock pursuant to the provisions of the
Securities Exchange Act of 1933 or nine years and six months following the date
of grant, whichever is sooner.
In connection with stock options granted to employees and non-employees
during the years ended December 31, 1997, 1998, 1999 and the six months ended
June 30, 2000, the Company recorded an aggregate deferred compensation of
approximately $1,200,000 which represents the aggregate difference between the
option exercise price and the deemed fair market value of the common stock
determined for financial reporting purposes for grants to employees and the
fair market value of the options for the non-employees. The deferred
compensation will be recognized as an expense on a straight line basis over the
vesting period, generally 3.5 years, of the underlying stock options for
options granted to employees and as earned for non-employees in accordance with
EITF 96-18. The Company recorded compensation expense of approximately
$126,600, $300,800, $316,200 and $402,000 during the years ended December 31,
1997, 1998, 1999 and for the six months ended June 30, 2000, respectively,
related to these options. Based on the grant of stock options through June 30,
2000, the Company expects to record approximately $123,000, $121,000 and
$50,000 of compensation expense during the six months ended June 30, 2000, and
the years ended December 31, 2001 and 2002, respectively.
During 1999, the Company repriced 70,000 options to purchase common stock
issued to certain members of its board of directors. Under APB No. 25,
Accounting for Stock Issued to Employees, the Company is required to follow
variable accounting for these options. As of December 31, 1999, there was no
difference between the fair market value of the Company's common stock and the
exercise price of these options; accordingly, there was no income statement
impact related to these options in 1999. As of June 30, 2000 the difference
between the exercise price and the fair value of the Company's common stock was
approximately $474,800; the full amount was expensed in the six month period as
these options are fully vested. In accordance with APB No. 25, these options
will be accounted for as variable plan options until the options are exercised
or terminated.
On February 14, 2000, the Company issued 300,000 shares of restricted stock.
These shares of restricted stock will be fully vested upon the effective date
of the merger of the Company with Ontogeny, Inc. and Creative BioMolecules,
Inc. If the effective date has not occurred prior to September 30, 2000, the
restricted stock will be forfeited. As of June 30, 2000 the Company has
recorded approximately $1,900,000 of deferred compensation related to these
shares. The deferred compensation balance and any increase in the value of such
shares will be recognized on the date the shares vest; accordingly no amounts
have been expensed during the six months ended June 30, 2000.
F-59
<PAGE>
REPROGENESIS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(Including data applicable to unaudited periods)
SFAS No. 123 requires the measurement of the fair value of stock options or
warrants to be included in the statement of operations or disclosed in the
notes to consolidated financial statements. The Company has determined that it
will continue to account for stock-based compensation for employees under APB
No. 25 and elect the disclosure-only alternative under SFAS No. 123.
Had compensation cost for the Company's options been measured in accordance
with SFAS No. 123, the Company's net loss would have been as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Net (loss) income--
As reported............................. $(6,537,595) $(3,623,267) $ 46,896
Pro forma............................... (6,887,851) (3,906,106) (198,050)
Under SFAS No. 123, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option pricing model with the following
assumptions:
<CAPTION>
Years Ended December 31,
-----------------------------------
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Dividend yield............................ 0.0% 0.0% 0.0%
Risk-free interest rate................... 4.8%-6.33% 5.5%-5.7% 7.0%
Volatility................................ 70% 70% 70%
Weighted-average expected option term..... 7.0 years 7.0 years 7.0 years
</TABLE>
The weighted fair market value per share at the date of grant during the
years ended December 31, 1999, 1998, 1997 was approximately $0.84, $0.56, and
$0.73, respectively.
(9) PREFERRED STOCK
In August 1999, the Company increased its number of authorized shares of
common and preferred stock to 30,084,501 and 7,747,153 shares, respectively.
Also in 1999, the Company issued 4,729,134 shares of Series B convertible
preferred stock (Series B) with a par value of $0.01 and warrants for the
purchase of 2,364,562 shares of the Company's common stock at $.50 per share in
exchange for an aggregate purchase price of approximately $10,500,000. The
purchase price consisted of approximately $7,430,000 in cash and the conversion
of $2,950,000 of bridge notes and $118,000 of accrued interest thereon (see
Note 10). In 1997, the Company issued 2,702,702 shares of Series A convertible
preferred stock (Series A) with a par value of $0.01 and warrants for the
purchase of 1,351,352 shares of the Company's common stock at $3.00 per share
in exchange for an aggregate purchase price of approximately $6,000,000 in
cash.
CONVERSION
Each share of Series A and Series B preferred stock, at the option of the
holder, may be converted at any time into one share of common stock of the
Company. The Series A and Series B preferred stock is automatically converted
into shares of common stock of the Company at any time upon the affirmative
election by the holders of a majority of the outstanding preferred stock or
upon the closing of an initial public offering of the Company's common stock
having an offering price of at least $5.00 per share and aggregate gross
proceeds of $20,000,000.
F-60
<PAGE>
REPROGENESIS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(Including data applicable to unaudited periods)
DIVIDENDS
Dividends are payable on the Series A and Series B preferred shares pro rata
on an as-converted basis with dividends on the common stock. In addition, on
January 20, 2000, under the terms of the Series B preferred stock purchase
agreement, a special common stock dividend of three-quarters of one share of
common stock per share of Series B preferred stock, for a total of 3,546,864
common shares, was paid to the Series B shareholders pursuant to the terms of
the Company's Articles of Incorporation, as amended. The fair value of the
common shares issued for this dividend of approximately $14,400,000 was charged
to accumulated deficit upon issuance.
Each holder of Series A and Series B preferred shares has voting rights
equal to the number of common stock shares into which such preferred shares of
the holder are convertible. The consent of the holders of a majority of the
Series A and Series B preferred shares is required for validating certain
actions by the Company.
LIQUIDATION PREFERENCE
The holders of the Series A preferred shares are entitled to a liquidation
preference equal to $2.22 per share plus any declared but unpaid dividends on
such shares in the event of the Company's liquidation, dissolution or winding-
up. After such payment is made, then:
(1) If (a) the liquidating event occurs prior to January 1, 2002 and, on
a pro forma basis, the Series B shareholders would received an amount per
share of Series B preferred in excess of $3.30 plus all declared and unpaid
dividends had all the assets of the Company legally available for
distribution (excluding those assets distributed to satisfy the liquidation
preference of the Series A preferred shares) been distributed ratably to
the holders of the Company's common stock, the Series A preferred stock and
the Series B preferred stock on an as-if-converted-to-common-stock basis or
(b) the liquidating event occurs and all shareholders of the Company are
entitled to receive securities as a result of such liquidating event, then
all remaining assets of the Company shall be distributed ratably to the
holders of the Company's common stock and the Series A preferred and the
Series B preferred on an as-if-converted-to-common-stock basis.
(2) In all other cases, the remaining assets will be distributed to
Series A and Series B shareholders on a basis whereby the Series B
shareholders will receive that portion of the total assets equal to (x) the
total number of shares of Company common stock that would be outstanding if
the outstanding shares of series B preferred stock were converted into
shares of Company common stock divided by (y) the total number of shares of
Company common stock that would be outstanding if the outstanding shares of
both Series A preferred stock and Series B preferred stock were converted
into Company common stock (the Total Shares), and Series A shareholders
will receive that portion of the total assets equal to (x) the total number
of shares of Company common stock into which the outstanding shares of
Series A preferred stock are then convertible divided by (y) the Total
Shares; with such distribution to be made until the holders of the Series B
preferred stock receive an amount per share of Series B equal to $2.22 plus
all declared and unpaid dividends. Any remaining assets will then be
distributed on a pro rata basis to all shareholders.
WARRANTS
The holders of the 1,351,352 warrants issued with the Series A preferred
stock are entitled to purchase shares of common stock of the Company for a cash
price of $3.00 per share. In connection with the January 1999 bridge loans, the
Company repriced 1,328,828 of these warrants from $3.00 to $0.30 per share (see
Note 10).
F-61
<PAGE>
REPROGENESIS, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 1999
(Including data applicable to unaudited periods)
The warrants issued with the Series A preferred stock are fully exercisable
and expire on the earlier of (i) the closing of an initial public offering of
the Company's common stock having an offering price of at least $5.00 per share
and aggregate gross proceeds of $20,000,000, (ii) April 25, 2000 or (iii) any
reorganization, reclassification, consolidation, merger or sale, if the value
of the stock or other assets payable with respect to the Reprogenesis common
stock is in excess of the stock purchase price (as defined in the warrant), and
the stock received, if any, is publicly traded.
The holders of the 2,364,562 warrants issued with the Series B preferred
stock are entitled to purchase shares of common stock of the Company at an
exercise price of $0.50 per share. The warrants are fully exercisable and
expire on the earlier of (i) the closing of an initial public offering of the
Company's common stock having an offering price of at least $5.00 per share and
aggregate gross proceeds of $20,000,000, (ii) July 30, 2004 or (iii) any
reorganization, reclassification, consolidation, merger or sale, if the value
of the stock or other assets payable with respect to the Reprogenesis common
stock is in excess of the stock purchase price (as defined in the warrant), and
the stock received, if any, is publicly traded. During the six month period
ended June 30, 2000, 3,597,672 warrants were converted into shares of the
Company's common stock.
(10) BRIDGE LOAN AGREEMENTS
In January 1999, the Company entered into bridge loan agreements (the Notes)
with certain Series A stockholders for a total of $2,950,000. The Notes were
secured by certain intellectual property of the Company and accrued interest at
the rate of 8% per annum until maturity. In August 1999, under the terms of the
Notes, the Notes and approximately $118,000 of accrued interest were converted
into Series B preferred stock (see Note 9).
In connection with the Notes, the Company reduced the exercise price of
warrants to purchase 1,328,828 shares of common stock issued in connection with
the Series A preferred stock from $3.00 to $0.30 (see Note 9). The Company
estimated the value of this repricing under the Black-Scholes option pricing
model to be approximately $0.72 per share. This value was accounted for as
interest expense over the term of the Notes.
(11) RETIREMENT PLAN
Effective January 1, 1999, the Company began sponsoring a defined
contribution plan (the Plan) that covers substantially all of the Company's
employees, subject to minimum age and experience requirements, pursuant to
which employees may defer compensation for income tax purposes under Section
401(k) of the Internal Revenue Code. Participants may contribute up to 15% of
their annual compensation to the Plan, subject to certain limitations.
F-62
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
The following unaudited pro forma combined financial information gives
effect to the merger using the purchase method of accounting, after giving
effect to the pro forma adjustments described in the accompanying notes. The
unaudited pro forma combined financial information should be read in
conjunction with the audited historical financial statements and related notes
of Creative, Ontogeny and Reprogenesis, which appear elsewhere in this
registration statement.
On July 31, 2000, Curis, as the surviving company of the Merger, assumed the
rights and obligations of Creative, Onogeny 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, 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.
Pursuant to the Merger Agreement, the following conversion ratios were
applied to the outstanding securities of Creative, Ontogeny and Reprogenesis:
. 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 Creative common stock outstanding or subject to options or
warrants;
. 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 Ontogeny capital stock outstanding or subject to options
or warrants; and
. 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 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 price of Curis' common stock
issued for Ontogeny's and Reprogenesis' common and preferred stock was based on
the value of Ontogeny and Reprogenesis equity using the average market price of
Creative's common stock, adjusted for conversion, of $7.142 and $5.348,
respectively. The average market price of Creative's common stock of $8.357 was
determined based on a reasonable period (February 11, 2000 through February 16,
2000) before and after the date the terms of the merger were agreed to and
announced. 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 unaudited pro forma financial information does not give effect to any
cost savings and other synergies that may result from the merger. Curis is
developing its plans for integration of the business has not made final
decisions with regards to integration.
With the assistance of our valuation advisors, all the intangible assets
that are part of the purchase of Ontogeny and Reprogenesis were identified. It
was determined that only the technology assets and workforce had value. The
other identifiable intangible assets identified included patents both owned and
licensed. The owned patents of Ontogeny and Reprogenesis were not being used in
any of the current development efforts of
F-63
<PAGE>
the firms and it was concluded that their value was not material. Both
companies have rights to certain technology that they license and pay a royalty
and/or license fees. The royalties and license fees have been negotiated at
arms-length and they currently represent fair market royalty rates. As such, it
was determined that no favorable license right existed at Ontogeny or
Reprogenesis. With respect to core technology, the current technology of
Ontogeny and Reprogenesis is not based on previously developed technology.
Neither Company possesses developed technology that can be leveraged into its
"in-process" products. The trademarks/names were not valued because the names
of the companies will not survive the acquisition.
The acquired in-process research and development ("IPR&D") consists of
development work to date on the projects described below. The technology
resulting from these development efforts offers no alternative use in the event
that they prove to be not feasible. If the technology failed to achieve FDA
approval and was proposed for an alternate indication, it would be subjected to
the risk associated with another series of clinical trials. The new indication
would also face regulatory risks associated with FDA approval process.
Most remaining development spending associated with the projects concern not
only their technical completion but also principally the cost of completing
clinical trials required for ultimate FDA approval. All of these remaining
costs would be incurred in full should the projects fail and need to return to
the laboratory for further development. The development effort for the acquired
IPR&D does not possess alternative future use for either Ontogeny or
Reprogenesis under the terms of SFAS No. 2.
An independent third party appraisal company conducted a valuation of
Ontogeny intangible assets. These intangibles include in-process research and
development and the in-place workforce. The valuation of intangibles included
$186,200,000 for in-process research and development and $400,000 for the
workforce. The excess of the purchase price over the fair value of identifiable
tangible and intangibles net assets of $65,111,000 will be allocated to
goodwill. Intangible assets are being amortized over 5 years. The fair value of
the in-process research and development, which relates to Ontogeny's current
in-process development projects, was recorded as an expense in the period in
which the Merger was completed.
The valuation of the in-process research and development was determined
using the income method. Revenue and expense projections as well as technology
assumptions were prepared through 2010 based on information provided by
Ontogeny management. Revenue projections for each in-process development
project were identified as follows: (i) revenue derived from products relying
on current technology, if any, and (ii) revenue derived from projects relying
on a new in-process research and development project. Expense projections
including cost of goods and operating expenses varied depending on the in-
process development project. The projected cash flows were discounted using a
25% to 40% rate depending on the in-process development project. The fair value
of in-process research and development was determined separately from all other
acquired assets using the percentage of completion method. The percentage of
completion ratio was estimated based on the complexity factors for each in-
process development project to achieve technological feasibility. The in-
process research and development projects' stage of completion ranged from 30%
to 50% complete. The in-process development projects are not expected to reach
technological feasibility until the 2004-2006 timeframe. Management is
responsible for the estimates of the fair value of the in-process research and
development.
F-64
<PAGE>
The following table summarizes the nature, timing and estimated cost to
complete for each Ontogeny IPR&D project.
<TABLE>
<CAPTION>
Estimated
Cost to
Description of Project Expected Release Date Complete
---------------------- ---------------------- -------------
<S> <C> <C>
Basal cell carcinoma treatment........... first quarter of 2004 $ 8.0 million
Basal cell carcinoma prevention.......... first quarter of 2005 12.0 million
Peripheral neuropathy diabetes........... fourth quarter of 2006 25.0 million
Peripheral neuropathy chemotherapy....... fourth quarter of 2005 12.0 million
Peripheral neuropathy Parkinson's
disease................................. fourth quarter of 2005 12.0 million
Cartilage trauma repair.................. fourth quarter of 2005 15.0 million
Cartilage repair caused by rheumatoid
arthritis............................... fourth quarter of 2005 18.0 million
Cartilage repair for treatment of
osteoarthritis.......................... second quarter of 2006 17.0 million
Type I diabetes and Type II treatment.... second quarter of 2006 25.0 million
Hair re-growth........................... fourth quarter of 2005 15.0 million
</TABLE>
An independent third party appraisal company conducted a valuation of
Reprogenesis intangible assets. These intangibles include in-process research
and development and the in-place workforce. The valuation of intangibles
included $108,600,000 for in-process research and development and $100,000 for
the workforce. The excess of the purchase price over the fair value of
identifiable tangible and intangible net assets of $40,366,000 was allocated to
goodwill. Intangible assets are being amortized over 5 years for in-place
workforce and 4 years for goodwill. The fair value of the in-process research
and development, which relates to Reprogenesis' current in-process development
projects, was recorded as an expense in the period in which the merger is
completed.
The valuation of the in-process research and development was determined
using the income method. Revenue and expense projections as well as technology
assumptions were prepared through 2010 based on information provided by
Reprogenesis management. Revenue projections for each in-process development
project were identified as follows: (i) revenue derived from products relying
on current technology, if any, and (ii) revenue derived from projects relying
on a new in-process research and development project. Expense projections
including cost of goods and operating varied depending on the in-process
development project. The projected cash flows were discounted using a 40% to
60% rate depending on the in-process development project. The fair value of the
in-process research and development was determined separately from all other
acquired assets using the percentage of completion method. The percentage of
completion ratio was estimated based on the complexity factors for each in-
process research and development project to achieve technological feasibility.
The in-process research and development projects' stage of completion ranged
from 40% to 80% complete. The in-process development projects are not expected
to reach technological feasibility until the 2002-2005 timeframe. Management is
responsible for the estimates of the fair value of the in-process research and
development.
The following table summarizes the nature, timing and estimated cost to
complete for each Reprogenesis IPR&D project:
<TABLE>
<CAPTION>
Estimated
Cost to
Description of Project Expected Release Date Complete
---------------------- ---------------------- -------------
<S> <C> <C>
Chondrogel, treatment of vesicoureteral
reflux.................................. first quarter of 2003 $ 3.0 million
Vascugel, used to prevent restenosis
(CABG).................................. first quarter of 2004 17.0 million
Vascugel, used to prevent restenosis
(PVD)................................... first quarter of 2005 15.0 million
Vascugel, delivered by a noninvasive
means................................... first quarter of 2005 17.0 million
Algin XL, treatment of urinary
incontinence............................ second quarter of 2004 2.5 million
Uraugment, bladder augmentation.......... first quarter of 2004 25.0 million
Uropair.................................. first quarter of 2002 2.5 million
</TABLE>
The unaudited pro-forma financial information does not purport to represent
what the consolidated financial position or results of operations actually
would have been upon closing of July 31, 2000 or at the beginning of the
periods presented or to project the consolidated financial position or results
of operations as of any future date or any future period. This information
should be read in conjunction with the historical consolidated financial
statements of Curis, Ontogeny and Reprogenesis, including the related notes and
other financial information include in this registration statement.
F-65
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 2000
<TABLE>
<CAPTION>
Historical (Unaudited)
--------------------------------------------
Curis Pro Forma Pro Forma
(f.k.a. Creative) Ontogeny Reprogenesis Adjustments Combined
----------------- ------------ ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Total revenues.......... $ 743,813 $ 2,997,268 $ 465,796 $ -- $ 4,206,877
------------ ------------ ----------- ----------- ------------
Costs and expenses:
Research and
development........... 10,072,461 10,524,057 5,566,323 -- 26,162,841
General and
administrative........ 6,642,813 6,321,694 3,086,195 (5,187,436)(B) 10,863,266
Stock-based
compensation.......... 12,495,590 4,418,492 1,054,739 (6,623,506)(C) 11,345,315
Loss on sale of fixed
assets................ 248,516 -- -- -- 248,516
Amortization of
intangible assets..... 8,647,473 -- -- 13,482,775 (A) 22,130,248
1999 reorganization.... (38,391) -- -- -- (38,391)
------------ ------------ ----------- ----------- ------------
Total costs and
expenses............. 38,068,462 21,264,243 9,707,257 1,671,832 70,711,795
------------ ------------ ----------- ----------- ------------
Loss from operations.... (37,324,649) (18,266,975) (9,241,461) (1,671,832) (66,504,918)
------------ ------------ ----------- ----------- ------------
Total other income...... 898,890 961,205 23,722 -- 1,883,818
------------ ------------ ----------- ----------- ------------
Net loss................ $(36,425,759) $(17,305,770) $(9,217,739) $(1,671,832) $(64,621,101)
============ ============ =========== =========== ============
Basic and diluted loss
per common share....... $ (3.16) $ (4.38) $ (0.50) $ (2.49)
============ ============ =========== ============
Common shares for basic
and diluted loss
computation............ 11,510,131 3,955,213 18,467,914 25,963,044
============ ============ =========== ============
</TABLE>
See notes to Unaudited to Pro Forma Combined Condensed Financial Information.
F-66
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
Year Ended December 31, 1999
<TABLE>
<CAPTION>
Historical
---------------------------------------- Pro Forma Pro Forma
Creative Ontogeny Reprogenesis Adjustments Combined
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total revenues.......... $ 3,211,860 $ 4,469,399 $ 2,285,471 $ -- $ 9,966,730
------------ ------------ ----------- ------------ ------------
Costs and expenses: --
Research and
development........... 10,434,560 12,911,497 7,460,394 -- 30,806,451
General and
administrative........ 5,524,077 3,860,290 1,205,914 -- 10,590,281
Stock-based
compensation.......... 64,000 2,640,664 328,499 19,146,230(F) 22,179,393
1999 reorganization and
1998 sale of
manufacturing
operations............ 255,701 -- -- -- 255,701
Amortization of
intangible assets..... 808,017 -- -- 23,200,000(D) 24,008,017
------------ ------------ ----------- ------------ ------------
Total costs and
expenses............. 17,086,355 19,412,451 8,994,807 42,346,230 87,839,843
------------ ------------ ----------- ------------ ------------
Loss from operations.... (13,874,495) (14,943,052) (6,709,336) (42,346,230) (77,873,113)
Total other income...... 1,764,705 1,543,582 546,741 -- 3,855,028
Minority interest....... -- -- (375,000) -- (375,000)
------------ ------------ ----------- ------------ ------------
Net loss................ (12,109,790) (13,399,470) (6,537,595) (42,346,230) (74,393,085)
Accretion of preferred
stock.................. (2,395,559) (194,557) -- 194,557(E) (2,395,559)
------------ ------------ ----------- ------------ ------------
Net loss applicable to
common stockholders.... $(14,505,349) $(13,594,027) $(6,537,595) $(42,151,673) $(76,788,085)
============ ============ =========== ============ ============
Basic and diluted loss
per common share....... $ (1.36) $ (5.25) $ (0.60) $ (3.40)
============ ============ =========== ============
Common shares for basic
and diluted loss
computation............ 10,681,547 2,591,735 10,897,660 22,577,388
============ ============ =========== ============
</TABLE>
See notes to Unaudited Pro Forma Combined Condensed Financial Information
F-67
<PAGE>
Notes to Unaudited Pro Forma Combined Condensed Financial Information
Note 1. Basis of Presentation
The unaudited pro forma combined condensed statement of operations for the
nine months ended September 30, 2000 and the year ended December 31, 1999 gives
effect to the merger as if the transaction had occurred at the beginning of the
period presented. The unaudited pro forma combined condensed statement of
operations for the nine months ended September 30, 2000 includes the operating
results of Curis for the entire period and the operating results of Ontogeny
and Reprogenesis through the date of the Merger.
Below is a table of the number of Curis shares issued upon completion of the
merger:
<TABLE>
<CAPTION>
Origin Ontogeny Reprogenesis
------ ---------- ------------
<S> <C> <C>
Common stock......................................... 3,687,113 18,467,914
Preferred stock...................................... 32,880,150 7,431,836
---------- ----------
36,567,263 25,899,750
Conversion ratio..................................... 0.2564 0.1956
---------- ----------
Curis shares issued.................................. 9,375,846 5,077,067
========== ==========
</TABLE>
The total number of Curis common shares outstanding upon the completion of
the merger was 25,930,130.
Below is a table of the purchase price:
<TABLE>
<CAPTION>
Ontogeny Reprogenesis Total
------------ ------------ ------------
<S> <C> <C> <C>
Estimated purchase price:
Common stock....................... $261,163,392 $138,511,863 $399,675,255
Fair value of Curis' outstanding
options and warrants exchanged for
Ontogeny and Reprogenesis options
and warrants ..................... 38,098,248 9,670,421 47,718,669
Merger-related fees and expenses... 1,519,578 818,231 2,337,809
------------ ------------ ------------
Total estimated purchase price... $300,731,218 $149,000,515 $449,731,733
============ ============ ============
</TABLE>
Below is a table of the purchase price allocation which reflects further
refinement of the valuations of Ontogeny and Reprogenesis.
<TABLE>
<CAPTION>
Ontogeny Reprogenesis Total
------------ ------------ ------------
<S> <C> <C> <C>
Purchase price allocation:
Tangible net assets (deficit)
acquired........................ $ 30,121,334 $ (312,833) $ 29,808,501
Assembled workforce.............. 400,000 100,000 500,000
In-process research and
development..................... 186,200,000 108,600,000 294,800,000
Prepaid compensation related to
unvested options................ 18,898,705 247,525 19,146,230
Goodwill......................... 65,111,179 40,365,823 105,477,002
------------ ------------ ------------
Total.......................... $300,731,218 $149,000,515 $449,731,733
============ ============ ============
</TABLE>
Curis' outstanding options and warrants exchanged for Ontogeny and
Reprogenesis options and warrants were valued by an independent appraiser using
a Black-Scholes Option Pricing Model with the following assumptions:
<TABLE>
<S> <C>
Life of options.................... 6 months to 4 years
Risk-free interest rate............ 5.43% to 6.56%
Volatility......................... calculated based on Creative's volatility
for a reasonable period prior to February
15, 2000, 115%
Dividend rate...................... 0%
</TABLE>
F-68
<PAGE>
The market value utilized for the stock options and warrants was $7.142 and
$5.348 for Ontogeny and Reprogenesis, respectively, based on Creative's market
value of $8.357, adjusted for conversion.
Tangible net assets of Ontogeny and Reprogenesis acquired principally
include cash and cash equivalents, marketable securities, property and
equipment, accounts payable, accrued liabilities, deferred revenues and notes
payable.
Note 2. Pro Forma Adjustments
Adjustments to record amortization of assembled workforce and goodwill in
the unaudited pro forma combined condensed statements of operation for the nine
months ended September 30, 2000:
<TABLE>
<S> <C>
(A)Amortization of assembled workforce...................... $ 75,000
Amortization of goodwill.................................... 13,407,775
-----------
Total....................................................... $13,482,775
===========
(B)To reverse the acquirees' merger related expenses
(Ontogeny-- $2,813,006 and Reprogenesis--$2,374,430....... $ 5,187,436
===========
(C) To reverse stock-based compensation expense related
primarily to Ontogeny unvested stock options............ $ 6,623,506
===========
</TABLE>
Adjustments to record amortization of assembled workforce and goodwill in
the unaudited pro forma combined condensed statements of operation for the year
ended December 31, 1999:
<TABLE>
<S> <C>
(D)Amortization of assembled workforce...................... $ 100,000
Amortization of goodwill.................................... 23,100,000
-----------
Total....................................................... $23,200,000
===========
(E) To eliminate accretion on Ontogeny preferred stock
assumed to be converted................................. $ 194,557
===========
(F) To record compensation expense related primarily to
Ontogeny unvested stock options......................... $19,146,230
===========
</TABLE>
(E) As required by Article 11 of Regulation S-X, the unaudited pro forma
combined condensed statement of operations excludes material non-recurring
charges which result directly from the merger and which will be recorded within
twelve months following the merger. The following schedule shows the effect of
the write-off of in-process research and development of $294,800,000, and, for
the nine months ended September 30, 2000, Ontogeny and Reprogenesis merger
expenses of $5,187,436. The integration costs related primarily to termination
benefits in the reduction of Curis employees. Termination benefits include
anticipated one-time or periodic payments from the date the Curis employee will
cease employment.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
Net loss............................ $(364,608,536) $(371,588,644)
Basic and diluted loss per common
share.............................. $ (14.04) $ (16.46)
</TABLE>
Note 3. Pro Forma Net Loss Per Share
The unaudited pro forma basic and diluted net loss per share is based on the
weighted average number of shares of Creative, Ontogeny and Reprogenesis common
shares outstanding on an exchange ratio of one share for 0.30, 0.2564 and
0.1956 (subject to adjustment to account for the priority of the Reprogenesis
series A
F-69
<PAGE>
preferred stockholders), respectively, of a Curis common share during the
period and the weighted average number of Ontogeny and Reprogenesis preferred
shares and certain of Reprogenesis warrants on an as-converted basis using the
respective exchange ratio for Curis common shares. Options and warrants
outstanding have not been included in the computation of pro forma diluted net
loss per share for the periods reported because their effect would be
antidilutive.
Pro forma weighted average shares outstanding were computed as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30, 2000
----------------------------------------
Curis
(f.k.a Creative) Ontogeny Reprogenesis Total
---------------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Weighted average common
shares outstanding..... 11,510,131(1) 3,687,113 18,467,914
Weighted average
preferred stock
converted to common
shares in merger....... -- 32,880,150 7,431,836
---------- ---------- ----------
Total................... 11,510,131 36,567,263 25,899,750
Conversion ratio........ -- 0.2564 0.1956
---------- ---------- ----------
Pro forma weighted
average shares
outstanding............ 11,510,131 9,375,846 5,077,067 25,963,044
========== ========== ========== ==========
<CAPTION>
Year Ended December 31, 1999
----------------------------------------
Creative Ontogeny Reprogenesis Total
---------------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Weighted average common
shares outstanding..... 10,681,547(1) 2,591,735 10,897,660
Weighted average
preferred stock
converted to common
shares in merger....... -- 32,015,151 4,555,486
---------- ---------- ----------
Total................... 10,681,547 34,606,886 15,453,146
Conversion ratio........ -- 0.2564 0.1956
---------- ---------- ----------
Pro forma weighted
average shares
outstanding............ 10,681,547 8,873,206 3,022,635 22,577,388
========== ========== ========== ==========
</TABLE>
--------
(1) Reflects the 0.30 for one stock split effected on July 31, 2000.
F-70
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses to be incurred in
connection with the sale and distribution of the securities being registered
hereby, all of which will be borne by the Registrant (except any commissions
and expenses incurred by the selling stockholders for brokerage, accounting,
tax or legal services or any other expenses incurred by the selling
stockholders in disposing of the shares). All amounts shown are estimates
except the Securities and Exchange Commission registration fee.
<TABLE>
<S> <C>
Filing Fee--Securities and Exchange Commission.................. $ 13,825.00
Legal fees and expenses......................................... 100,000.00
Accounting fees and expenses.................................... 65,000.00
Printing, EDGAR formatting and mailing expenses................. 50,000.00
Miscellaneous expenses.......................................... 10,610.00
-----------
Total expenses................................................ $242,000.00
===========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Article SIXTH of the Registrant's Certificate of Incorporation provides, in
general, that no director shall be personally liable to the Registrant or to
any of its stockholders for monetary damages arising out of such director's
breach of fiduciary duty as a director of the registrant, except to the extent
that the elimination or limitation of such liability is not permitted by the
General Corporation Law of the State of Delaware ("Delaware Corporation Law"),
as the same exists or may hereafter be amended.
Article EIGHTH of the Registrant's Certificate of Incorporation provides, in
general, that the Registrant shall indemnify each person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the registrant), by
reason of the fact that such person is or was, or has agreed to become, a
director or officer of the registrant, or is or was serving or has agreed to
serve, at the request of the Registrant, as a director, officer or trustee of,
or in a similar capacity with, another corporation (including any partially or
wholly owned subsidiary of the registrant), partnership, joint venture, trust
or other enterprise (including any employee benefit plan), against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with any such action, suit or
proceeding to the maximum extent permitted by the Delaware Corporation Law and
further provides that the foregoing right of indemnification shall in no way be
exclusive of any other rights of indemnification to which any such director or
officer may be entitled, under any by-law, agreement, vote of directors or
stockholders or otherwise.
Section 145(a) of the Delaware Corporation Law provides, in general, that a
corporation shall have the power to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation),
because the person is or was a director or officer of the corporation. Such
indemnity may be against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred by the person
in connection with such action, suit or proceeding, if the person acted in good
faith and in a manner the person reasonably believed to be in or not opposed to
the best interests of the corporation and if, with respect to any criminal
action or proceeding, the person did not have reasonable cause to believe the
person's conduct was unlawful.
Section 145(b) of the Delaware Corporation Law provides, in general, that a
corporation shall have the power to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment in
its favor
II-1
<PAGE>
because the person is or was a director or officer of the corporation, against
any expenses (including attorneys' fees) actually and reasonably incurred by
the person in connection with the defense or settlement of such action or suit
if the person acted in good faith and in a manner the person reasonably
believed to be in or not opposed to the best interests of the corporation.
Section 145(g) of the Delaware Corporation Law provides, in general, that a
corporation shall have the power to purchase and maintain insurance on behalf
of any person who is or was a director or officer of the corporation against
any liability asserted against the person in any such capacity, or arising out
of the person's status as such, whether or not the corporation would have the
power to indemnify the person against such liability under the provisions of
the law.
Item 15. Recent Sales of Unregistered Shares.
As of November 13, 2000, the Registrant entered into purchase agreements to
sell 5.2 million shares of its common stock, par value $0.01 per share, for an
aggregate offering price of $46.8 million, which included approximately $2.8
million in commissions paid to the placement agent. The sale of the shares will
be consummated immediately prior to the effectiveness of this registration
statement.
The offering was made pursuant to the exemption provided by Section 4(2) of
the Securities Act and certain rules and regulations promulgated under that
section. The offering of shares was made only to "accredited investors"
purchasing in the ordinary course of their business for their own account for
investment and not with a view to, or in connection with any arrangements or
understandings regarding, any subsequent distributions. An "accredited
investor," is a person defined as an "accredited investor" under Rule 501(a)
under the Securities Act.
Prudential Vector Healthcare Group, a unit of Prudential Securities
Incorporated acted as the placement agent for this offering.
The Registrant expects to use the net proceeds of this offering to fund:
. the expansion of internal research and product development activities and
external contract activities to advance our product candidate pipeline;
. the continuation and initiation of clinical trials;
. capital expenditures, including the construction and expansion of
manufacturing and research facilities;
. the creation of distribution, sales and marketing capabilities for
commercialization of our late-stage products;
. the acquisition of key technology and licenses and potential strategic
alliances; and
. working capital for general corporate purposes.
The Registrant may also use a portion of the net proceeds for the
acquisition of businesses and products that will complement and enhance its
product pipeline. The Registrant is not currently negotiating any acquisitions,
and has not allocated any portion of the net proceeds for any specific
acquisition.
Pending such uses, the Registrant intends to invest the net proceeds in
interest-bearing, investment-grade securities.
In addition, the Registrant as of October 31, 2000 has issued an aggregate
of 3,645,006 stock options to various individuals pursuant to its stock option
plans (excluding warrants and options re-issued to individuals associated with
the predecessor entities).
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith or incorporated herein by
reference:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant.
(Previously filed with the SEC as Exhibit 3.3 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on June 19, 2000
and incorporated herein by reference.)
3.2 Amended and Restated By-laws of the Registrant.
4 Form of the Registrant's Common Stock Certificate. (Previously
filed with the SEC as Exhibit 4.1 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on May 5, 2000, and
incorporated herein by reference.)
*5 Form of Opinion of Hale and Dorr LLP regarding legality of
securities being registered.
++10.1 Master Restructuring Agreement, dated as of October 15, 1998, by
and between the Registrant and Stryker Corporation. (Previously
filed as Exhibit 10.10 to the Creative BioMolecules, Inc.
("Creative") Annual Report on Form 10-K for the period ended
December 31, 1998 (File No. 0-19910), and incorporated herein by
reference.)
++10.2 Asset Purchase Agreement, dated as of October 15, 1998, by and
between the Registrant and Stryker Corporation. (Previously filed
as Exhibit 10.11 to Creative's Annual Report on Form 10-K for the
period ended December 31, 1998 (File No. 0-19910), and
incorporated herein by reference.)
10.3 Irrevocable License Agreement dated November 20, 1998, by and
between the Registrant and Stryker Corporation. (Previously filed
as Exhibit 10.7 to Creative's Annual Report on Form 10-K for the
period ended December 31, 1999 (File No. 0-19910), and
incorporated herein by reference.)
10.4 Stryker Irrevocable License Agreement dated November 20, 1998, by
and between Stryker Corporation and the Registrant. (Previously
filed as Exhibit 10.8 to Creative's Annual Report on Form 10-K for
the period ended December 31, 1999 (File No. 0-19910), and
incorporated herein by reference.)
10.5 Assignment from the Registrant to Stryker dated November 20, 1998.
(Previously filed as Exhibit 10.9 to Creative's Annual Report on
Form 10-K for the period ended December 31, 1999
(File No. 0-19910), and incorporated herein by reference.)
++10.6 CBM Cross-License Agreement, dated as of November 26, 1993, by and
between Enzon, Inc. and the Registrant. (Previously filed with the
SEC as Exhibit 10.42 to Creative's Quarterly Report on Form 10-Q
for the period ended December 31, 1993 (File No. 0-19910), and
incorporated herein by reference.)
++10.7 Enzon Cross-License Agreement, dated as of November 26, 1993, by
and between Enzon, Inc. and the Registrant. (Previously filed with
the SEC as Exhibit 10.43 to Creative's Quarterly Report on Form
10-Q for the period ended December 31, 1993 (File No. 0-19910),
and incorporated herein by reference.)
++10.8 Cross-License Agreement, dated as of July 15, 1996, by and between
the Registrant, Genetics Institute, Inc. and Stryker Corporation.)
(Previously filed with the SEC as Exhibit 10.1 to the Quarterly
Report on Form 10-Q for the period ended September 30, 1996 of
Genetics Institute, Inc. (File No. 0-14587), filed with the
Securities and Exchange Commission on November 6, 1996 and
incorporated herein by reference.)
10.9 Lease, dated June 16, 1997, by and between the Registrant and The
Prudential Insurance Company of America. (Previously filed with
the SEC as Exhibit 10.55 to Creative's Quarterly Report on Form
10-Q for the period ended June 30, 1997 (File No. 0-19910), and
incorporated herein by reference. )
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.10 First Amendment, dated August 10, 1998, to Lease dated April 10,
1997, by and between the Registrant and The Prudential Insurance
Company of America. (Previously filed with the SEC as Exhibit
10.56 to Creative's Quarterly Report on Form 10-Q for the period
ended September 30, 1998 (File No. 0-19910), and incorporated
herein by reference.)
10.11 Sublease dated March 15, 2000, by the Registrant to BP III
Huntington Ave. LLC. (Previously filed with the SEC as Exhibit
10.1 to Creative's Quarterly Report on Form 10-Q for the period
ended March 31, 2000 (File No. 0-19910), and incorporated herein
by reference).
10.12 Master Lease Agreement, dated October 6, 1997, by and between the
Registrant and FINOVA Technology Finance, Inc. (Previously filed
with the SEC as Exhibit 10.38 to Creative's Annual Report on Form
10-K for the period ended December 31, 1997 (File No. 0-19910),
and incorporated herein by reference.)
++10.13 License Agreement, dated November 30, 1997, by and between the
Registrant and the Regents of the University of Michigan, as
amended by the Amendment to License Agreement dated August 11,
1999. (Previously filed with the SEC as Exhibit 10.32 to the Joint
Proxy Statement-Prospectus on Form S-4 of Curis, Inc. on April 3,
2000, and incorporated herein by reference.)
++10.14 Amended and Restated License Agreement (Exclusive), dated July 1,
1996, by and between the Registrant and the Massachusetts
Institute of Technology, as amended by the First Amendment to
Restated License Agreement dated February 22, 2000. (Previously
filed with the SEC as Exhibit 10.33 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on June 2, 2000, and
incorporated herein by reference.)
++10.15 Patent License Agreement (Exclusive), dated October 30, 1996, by
and between the Registrant and the Massachusetts Institute of
Technology. (Previously filed with the SEC as Exhibit 10.34 to the
Joint Proxy Statement-Prospectus on June 2, 2000, and incorporated
herein by reference.)
++10.16 Exclusive License Agreement, dated February 20, 2000, by and
between the Registrant and Children's Medical Center Corporation.
(Previously filed with the SEC as Exhibit 10.35 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on April 3, 2000,
and incorporated herein by reference.)
10.17 Lease, dated September 25, 1997, with respect to real property
located at 21 Erie Street, Cambridge, Massachusetts, as amended by
the First Amendment to Lease, dated October 1, 1998, by and
between the Registrant and 21 Erie Realty Trust. (Previously filed
with the SEC as Exhibit 10.36 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on June 2, 2000, and
incorporated herein by reference.)
10.17(a) Second Amendment to Lease between Reprogenesis, Inc. and 21 Erie
Street Trust dated June 29, 2000. (Previously filed with the SEC
as Exhibit 10.1 to Curis' Quarterly Report on Form 10-Q for the
period ended June 30, 2000 (File No. 0-30347), and incorporated
herein by reference.)
10.17(b) Agreement of Sublease between Ontogeny, Inc. and Reprogenesis,
Inc. dated June 29, 2000. (Previously filed with the SEC as
Exhibit 10.2 to Curis' Quarterly Report on Form 10-Q for the
period ended June 30, 2000 (File No. 0-30347), and incorporated
herein by reference.)
10.17(c) Third Amendment to Lease between the Registrant and 21 Erie Street
Trust dated July 31, 2000. (Previously filed with the SEC as
Exhibit 10.29 to Curis' Quarterly Report on Form 10-Q for the
period ended September 30, 2000 (File No. 0-30347), and
incorporated herein by reference.)
10.18 Termination and Release Agreement dated January 27, 1999, by and
between the Registrant and American Medical Systems, Inc.
(Previously filed with the SEC as Exhibit 10.37 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on June 2, 2000,
and incorporated herein by reference.)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.19 Financial Assistance Award (Development of Perivascular
Endothelial Cell Implants), dated November 1, 1999, by and between
the Registrant and the National Institute of Standards and
Technology, Advanced Technology Program. (Previously filed with
the SEC as Exhibit 10.38 to the Joint Proxy Statement-Prospectus
on Form S-4 of Curis, Inc. on March 14, 2000, and incorporated
herein by reference.)
10.20 Stock Subscription Warrant dated July 2, 1998, by and between the
Registrant and TBCC Funding Trust II. (Previously filed with the
SEC as Exhibit 10.39 to the Joint Proxy Statement-Prospectus on
Form S-4 of Curis, Inc. on March 14, 2000, and incorporated herein
by reference.)
10.21 Lease, dated as of November 16, 1995, as amended, by and between
the Registrant and Moulton Realty Corp. (Previously filed with the
SEC as Exhibit 10.42 to the Joint Proxy Statement-Prospectus on
Form S-4 of Curis, Inc. on March 14, 2000, and incorporated herein
by reference.)
++10.22 License Agreement, dated as of February 12, 1996, by and between
the Registrant and Leland Stanford Junior University. (Previously
filed with the SEC as Exhibit 10.43 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on June 2, 2000, and
incorporated herein by reference.)
++10.23 License Agreement, dated as of September 26, 1996 and amended
January 15, 1997, by and among the Registrant, The Johns Hopkins
University and University of Washington School of Medicine.
(Previously filed with the SEC as Exhibit 10.44 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on June 2, 2000,
and incorporated herein by reference.)
++10.24 License Agreement, dated as of January 1, 1995, and as amended
July 19, 1995 and August 30, 1996, by and between the Registrant
and The Trustees of Columbia University in the City of New York.
(Previously filed with the SEC as Exhibit 10.45 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on April 3, 2000,
and incorporated herein by reference.)
++10.25 License Agreement, dated as of February 9, 1995 and as amended
(January 1, 1997), by and between the Registrant and the President
and Fellows of Harvard University. (Previously filed with the SEC
as Exhibit 10.46 to the Joint Proxy Statement-Prospectus on Form
S-4 of Curis, Inc. on June 2, 2000, and incorporated herein by
reference.)
+10.26 Amendment to License Agreement between the Registrant and
Presidents and Fellows of Harvard College dated September 11,
2000. (Previously filed with the SEC as Exhibit 10.2 to Curis'
Quarterly Report on Form 10-Q for the period ended September 30,
2000 (File No. 0-30347), and incorporated herein by reference.)
10.27 Warrant Agreement, dated as of November 2, 1994, by and between
the Registrant and Comdisco, Inc. (Previously filed with the SEC
as Exhibit 10.53 to the Joint Proxy Statement-Prospectus on Form
S-4 of Curis, Inc. on March 14, 2000, and incorporated herein by
reference.)
10.28 Warrant Agreement, dated as of December 8, 1997, by and between
the Registrant and Comdisco, Inc. (Previously filed with the SEC
as Exhibit 10.55 to the Joint Proxy Statement-Prospectus on Form
S-4 of Curis, Inc. on March 14, 2000, and incorporated herein by
reference.)
10.29 Warrant Agreement, dated as of October 1, 1997, by and between the
Registrant and Lighthouse Capital Partners, L.P. (Previously filed
with the SEC as Exhibit 10.56 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on March 14, 2000,
and incorporated herein by reference.)
10.30 Warrant Agreement, dated as of December 17, 1999, by and between
the Registrant and Lighthouse Capital III, L.P. (Previously filed
with the SEC as Exhibit 10.61 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on March 14, 2000,
and incorporated herein by reference).
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.31 Stock Subscription Warrant, dated as of November 21, 1997, by and
between the Registrant and MM Ventures. (Previously filed with the
SEC as Exhibit 10.57 to the Joint Proxy Statement-Prospectus on
Form S-4 of Curis, Inc. on March 14, 2000, and incorporated herein
by reference.)
10.32 Warrant Agreement, dated as of September 1, 1999, by and between
the Registrant and Comdisco, Inc. (Previously filed with the SEC
as Exhibit 10.59 to the Joint Proxy Statement-Prospectus on Form
S-4 of Curis, Inc. on March 14, 2000, and incorporated herein by
reference.)
10.33 Stock Subscription Warrant, dated as of November 21, 1999, by and
between the Registrant and Transamerica Business Credit Corp
("TBCC Funding Trust 1"). (Previously filed with the SEC as
Exhibit 10.57 to the Joint Proxy Statement-Prospectus on Form S-4
of Curis, Inc. on March 14, 2000, and incorporated herein by
reference.)
10.34 Stock Subscription Warrant No. 2, dated as of November 15, 1999 by
and between the Registrant and TBCC Funding Trust 1. (Previously
filed with the SEC as Exhibit 10.60 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on March 14, 2000, and
incorporated herein by reference.)
++10.35 Research Collaboration and Option Agreement by and between the
Registrant and Becton, Dickinson and Company, dated January 13,
1999. (Previously filed with the SEC as Exhibit 10.62 to the Joint
Proxy Statement-Prospectus on Form S-4 of Curis, Inc. on June 2,
2000, and incorporated herein by reference.)
10.36 Secured Promissory Note dated June 17, 1996, by and between the
Registrant and Dr. Platika in the original principal amount of
$500,000, as amended by that First Amendment to Secured Promissory
Note dated as of August 31, 1998 and that Second Amendment to
Secured Promissory Note dated as of December 15, 1999. (Previously
filed with the SEC as Exhibit 10.63 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on May 31, 2000, and
incorporated herein by reference.)
10.37 Pledge Agreement dated June 17, 1996, by and between the
Registrant and Dr. Platika. (Previously filed with the SEC as
Exhibit 10.64 to the Joint Proxy Statement-Prospectus on Form S-4
of Curis, Inc. on March 14, 2000, and incorporated herein by
reference.)
++10.38 Exclusive License Agreement, dated as of November 2, 1998, by and
among the Registrant and the Board of Trustees of Leland Stanford
Junior University and Johns Hopkins University. (Previously filed
with the SEC as Exhibit 10.65 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on June 2, 2000, and
incorporated herein by reference.)
++10.39 License Agreement, dated as of November 20, 1997, by and between
the Registrant and the Board of Trustees of Leland Stanford Junior
University. (Previously filed with the SEC as Exhibit 10.66 to the
Joint Proxy Statement-Prospectus on Form S-4 of Curis, Inc. on
April 3, 2000, and incorporated herein by reference.)
++10.40 License Agreement, dated as of November 30, 1998, by and between
the Registrant and the Board of Trustees of Leland Stanford Junior
University. (Previously filed with the SEC as Exhibit 10.67 to the
Joint Proxy Statement-Prospectus on Form S-4 of Curis, Inc. on
June 2, 2000, and incorporated herein by reference.)
++10.41 License Agreement, dated as of June 13, 1996, by and between the
Registrant and the President and Fellows of Harvard College.
(Previously filed with the SEC as Exhibit 10.68 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on June 2, 2000,
and incorporated herein by reference.)
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
++10.42 License Agreement, dated as of February 1, 1997, by and between
the Registrant and the President and Fellows of Harvard College.
(Previously filed with the SEC as Exhibit 10.69 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on April 3, 2000,
and incorporated herein by reference.)
10.43 Mortgage dated December 15, 1999, by and between the Registrant
and Dr. and Patricia C. Platika. (Previously filed with the SEC as
Exhibit 10.70 to the Joint Proxy Statement-Prospectus on Form S-4
of Curis, Inc. on May 31, 2000, and incorporated herein by
reference.)
10.44 Curis, Inc. 2000 Stock Incentive Plan. (Previously filed with the
SEC as Exhibit 10.71 to the Joint Proxy Statement-Prospectus on
Form S-4 of Curis, Inc. on May 31, 2000, and incorporated herein
by reference.)
10.45 Curis, Inc. 2000 Stock Incentive Plan. (Previously filed with the
SEC as Exhibit 10.71 to the Joint Proxy Statement-Prospectus on
Form S-4 of Curis, Inc. on May 31, 2000, and incorporated herein
by reference.)
10.46 Curis, Inc. 2000 Director Stock Option Plan. (Previously filed
with the SEC as Exhibit 10.72 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on May 31, 2000, and
incorporated herein by reference.)
10.47 Curis, Inc. 2000 Employee Stock Purchase Plan. (Previously filed
with the SEC as Exhibit 10.73 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on May 31, 2000, and
incorporated herein by reference.)
10.48 Form of Stock Purchase Agreement by and among the Registrant and
the purchaser named thereon.
21.1 Subsidiary of the Registrant. (Previously filed with the SEC as
Exhibit 22 to Creative's Registration Statement on Form S-1 (File
No. 33-42159), and incorporated herein by reference.)
*23.1 Consent of Hale and Dorr LLP (included as part of its opinion
filed as Exhibit 5 and incorporated herein by reference.)
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney (included on the signature page of this Form S-1
and incorporated herein by reference.)
27.1 Curis, Inc. Financial Data Schedule.
27.2 Curis, Inc. Financial Data Schedule for the nine months ended
September 30, 2000. (Previously filed with the SEC as Exhibit 27.2
to Curis' Quarterly Report on Form 10-Q for the period ended
September 30, 2000 (File No. 0-30347), and incorporated herein by
reference.)
27.3 Reprogenesis, Inc. Financial Data Schedule.
27.4 Ontogeny, Inc. Financial Data Schedule.
</TABLE>
--------
+ Confidential treatment has been requested as to certain portions of this
exhibit.
++ Confidential treatment has been granted as to certain portions of this
exhibit.
* To be filed by amendment.
The Registrant hereby agrees to furnish supplementally any schedules that
have been omitted from this exhibit list to the Securities and Exchange
Commission upon its request.
II-7
<PAGE>
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Act, and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form or prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
change in volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(4) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(5) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Cambridge,
Commonwealth of Massachusetts, on November 28, 2000.
Curis, Inc.
/s/ Doros Platika
By: _________________________________
Name: Doros Platika
Title: President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears
below constitutes and appoints Doros Platika and George A. Eldridge, his or her
true and lawful attorneys-in-fact and agents with full power of substitution
and resubstitution, for him or her and in his or her name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this registration statement and to file the same with
all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or his or their substitute or
substitutes, may lawfully do or cause to be done by virtue hereof. This power
of attorney may be executed in counterparts.
II-9
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Doros Platika Chief Executive Officer November 28, 2000
______________________________________ (principal executive
Doros Platika officer)
and Director
/s/ George A. Eldridge Vice President and Chief November 28, 2000
______________________________________ Financial Officer
George A. Eldridge (principal financial and
accounting officer)
/s/ Susan B. Bayh Director November 28, 2000
______________________________________
Susan B. Bayh
/s/ Martyn D. Greenacre Director November 28, 2000
______________________________________
Martyn D. Greenacre
/s/ Ruth B. Kunath Director November 28, 2000
______________________________________
Ruth B. Kunath
/s/ James R. McNab, Jr. Director November 28, 2000
______________________________________
James R. McNab, Jr.
/s/ Douglas A. Melton Director November 28, 2000
______________________________________
Douglas A. Melton
/s/ Michael Rosenblatt Director November 28, 2000
______________________________________
Michael Rosenblatt
/s/ James R. Tobin Director November 28, 2000
______________________________________
James R. Tobin
</TABLE>
II-10
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.1 Restated Certificate of Incorporation of the Registrant.
(Previously filed with the SEC as Exhibit 3.3 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on June 19, 2000
and incorporated herein by reference.)
3.2 Amended and Restated By-laws of the Registrant.
4 Form of the Registrant's Common Stock Certificate. (Previously
filed with the SEC as Exhibit 4.1 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on May 5, 2000, and
incorporated herein by reference.)
5 Form of Opinion of Hale and Dorr LLP regarding legality of
securities being registered.
++10.1 Master Restructuring Agreement, dated as of October 15, 1998, by
and between the Registrant and Stryker Corporation. (Previously
filed as Exhibit 10.10 to the Creative BioMolecules, Inc.
("Creative") Annual Report on Form 10-K for the period ended
December 31, 1998 (File No. 0-19910), and incorporated herein by
reference.)
++10.2 Asset Purchase Agreement, dated as of October 15, 1998, by and
between the Registrant and Stryker Corporation. (Previously filed
as Exhibit 10.11 to Creative's Annual Report on Form 10-K for the
period ended December 31, 1998 (File No. 0-19910), and
incorporated herein by reference.)
10.3 Irrevocable License Agreement dated November 20, 1998, by and
between the Registrant and Stryker Corporation. (Previously filed
as Exhibit 10.7 to Creative's Annual Report on Form 10-K for the
period ended December 31, 1999 (File No. 0-19910), and
incorporated herein by reference.)
10.4 Stryker Irrevocable License Agreement dated November 20, 1998, by
and between Stryker Corporation and the Registrant. (Previously
filed as Exhibit 10.8 to Creative's Annual Report on Form 10-K for
the period ended December 31, 1999 (File No. 0-19910), and
incorporated herein by reference.)
10.5 Assignment from the Registrant to Stryker dated November 20, 1998.
(Previously filed as Exhibit 10.9 to Creative's Annual Report on
Form 10-K for the period ended December 31, 1999
(File No. 0-19910), and incorporated herein by reference.)
++10.6 CBM Cross-License Agreement, dated as of November 26, 1993, by and
between Enzon, Inc. and the Registrant. (Previously filed with the
SEC as Exhibit 10.42 to Creative's Quarterly Report on Form 10-Q
for the period ended December 31, 1993 (File No. 0-19910), and
incorporated herein by reference.)
++10.7 Enzon Cross-License Agreement, dated as of November 26, 1993, by
and between Enzon, Inc. and the Registrant. (Previously filed with
the SEC as Exhibit 10.43 to Creative's Quarterly Report on Form
10-Q for the period ended December 31, 1993 (File No. 0-19910),
and incorporated herein by reference.)
++10.8 Cross-License Agreement, dated as of July 15, 1996, by and between
the Registrant, Genetics Institute, Inc. and Stryker Corporation.)
(Previously filed with the SEC as Exhibit 10.1 to the Quarterly
Report on Form 10-Q for the period ended September 30, 1996 of
Genetics Institute, Inc. (File No. 0-14587), filed with the
Securities and Exchange Commission on November 6, 1996 and
incorporated herein by reference.)
10.9 Lease, dated June 16, 1997, by and between the Registrant and The
Prudential Insurance Company of America. (Previously filed with
the SEC as Exhibit 10.55 to Creative's Quarterly Report on Form
10-Q for the period ended June 30, 1997 (File No. 0-19910), and
incorporated herein by reference. )
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.10 First Amendment, dated August 10, 1998, to Lease dated April 10,
1997, by and between the Registrant and The Prudential Insurance
Company of America. (Previously filed with the SEC as Exhibit
10.56 to Creative's Quarterly Report on Form 10-Q for the period
ended September 30, 1998 (File No. 0-19910), and incorporated
herein by reference.)
10.11 Sublease dated March 15, 2000, by the Registrant to BP III
Huntington Ave. LLC. (Previously filed with the SEC as Exhibit
10.1 to Creative's Quarterly Report on Form 10-Q for the period
ended March 31, 2000 (File No. 0-19910), and incorporated herein
by reference).
10.12 Master Lease Agreement, dated October 6, 1997, by and between the
Registrant and FINOVA Technology Finance, Inc. (Previously filed
with the SEC as Exhibit 10.38 to Creative's Annual Report on Form
10-K for the period ended December 31, 1997 (File No. 0-19910),
and incorporated herein by reference.)
++10.13 License Agreement, dated November 30, 1997, by and between the
Registrant and the Regents of the University of Michigan, as
amended by the Amendment to License Agreement dated August 11,
1999. (Previously filed with the SEC as Exhibit 10.32 to the Joint
Proxy Statement-Prospectus on Form S-4 of Curis, Inc. on April 3,
2000, and incorporated herein by reference.)
++10.14 Amended and Restated License Agreement (Exclusive), dated July 1,
1996, by and between the Registrant and the Massachusetts
Institute of Technology, as amended by the First Amendment to
Restated License Agreement dated February 22, 2000. (Previously
filed with the SEC as Exhibit 10.33 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on June 2, 2000, and
incorporated herein by reference.)
++10.15 Patent License Agreement (Exclusive), dated October 30, 1996, by
and between the Registrant and the Massachusetts Institute of
Technology. (Previously filed with the SEC as Exhibit 10.34 to the
Joint Proxy Statement-Prospectus on June 2, 2000, and incorporated
herein by reference.)
++10.16 Exclusive License Agreement, dated February 20, 2000, by and
between the Registrant and Children's Medical Center Corporation.
(Previously filed with the SEC as Exhibit 10.35 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on April 3, 2000,
and incorporated herein by reference.)
10.17 Lease, dated September 25, 1997, with respect to real property
located at 21 Erie Street, Cambridge, Massachusetts, as amended by
the First Amendment to Lease, dated October 1, 1998, by and
between the Registrant and 21 Erie Realty Trust. (Previously filed
with the SEC as Exhibit 10.36 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on June 2, 2000, and
incorporated herein by reference.)
10.17(a) Second Amendment to Lease between Reprogenesis, Inc. and 21 Erie
Street Trust dated June 29, 2000. (Previously filed with the SEC
as Exhibit 10.1 to Curis' Quarterly Report on Form 10-Q for the
period ended June 30, 2000 (File No. 0-30347), and incorporated
herein by reference.)
10.17(b) Agreement of Sublease between Ontogeny, Inc. and Reprogenesis,
Inc. dated June 29, 2000. (Previously filed with the SEC as
Exhibit 10.2 to Curis' Quarterly Report on Form 10-Q for the
period ended June 30, 2000 (File No. 0-30347), and incorporated
herein by reference.)
10.17(c) Third Amendment to Lease between the Registrant and 21 Erie Street
Trust dated July 31, 2000. (Previously filed with the SEC as
Exhibit 10.29 to Curis' Quarterly Report on Form 10-Q for the
period ended September 30, 2000 (File No. 0-30347), and
incorporated herein by reference.
10.18 Termination and Release Agreement dated January 27, 1999, by and
between the Registrant and American Medical Systems, Inc.
(Previously filed with the SEC as Exhibit 10.37 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on June 2, 2000,
and incorporated herein by reference.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.19 Financial Assistance Award (Development of Perivascular
Endothelial Cell Implants), dated November 1, 1999, by and between
the Registrant and the National Institute of Standards and
Technology, Advanced Technology Program. (Previously filed with
the SEC as Exhibit 10.38 to the Joint Proxy Statement-Prospectus
on Form S-4 of Curis, Inc. on March 14, 2000, and incorporated
herein by reference.)
10.20 Stock Subscription Warrant dated July 2, 1998, by and between the
Registrant and TBCC Funding Trust II. (Previously filed with the
SEC as Exhibit 10.39 to the Joint Proxy Statement-Prospectus on
Form S-4 of Curis, Inc. on March 14, 2000, and incorporated herein
by reference.)
10.21 Lease, dated as of November 16, 1995, as amended, by and between
the Registrant and Moulton Realty Corp. (Previously filed with the
SEC as Exhibit 10.42 to the Joint Proxy Statement-Prospectus on
Form S-4 of Curis, Inc. on March 14, 2000, and incorporated herein
by reference.)
++10.22 License Agreement, dated as of February 12, 1996, by and between
the Registrant and Leland Stanford Junior University. (Previously
filed with the SEC as Exhibit 10.43 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on June 2, 2000, and
incorporated herein by reference.)
++10.23 License Agreement, dated as of September 26, 1996 and amended
January 15, 1997, by and among the Registrant, The Johns Hopkins
University and University of Washington School of Medicine.
(Previously filed with the SEC as Exhibit 10.44 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on June 2, 2000,
and incorporated herein by reference.)
++10.24 License Agreement, dated as of January 1, 1995, and as amended
July 19, 1995 and August 30, 1996, by and between the Registrant
and The Trustees of Columbia University in the City of New York.
(Previously filed with the SEC as Exhibit 10.45 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on April 3, 2000,
and incorporated herein by reference.)
++10.25 License Agreement, dated as of February 9, 1995 and as amended
(January 1, 1997), by and between the Registrant and the President
and Fellows of Harvard University. (Previously filed with the SEC
as Exhibit 10.46 to the Joint Proxy Statement-Prospectus on Form
S-4 of Curis, Inc. on June 2, 2000, and incorporated herein by
reference.)
+10.26 Amendment to License Agreement between the Registrant and
Presidents and Fellows of Harvard College dated September 11,
2000. (Previously filed with the SEC as Exhibit 10.2 to Curis'
Quarterly Report on Form 10-Q for the period ended September 30,
2000 (File No. 0-30347), and incorporated herein by reference.)
10.27 Warrant Agreement, dated as of November 2, 1994, by and between
the Registrant and Comdisco, Inc. (Previously filed with the SEC
as Exhibit 10.53 to the Joint Proxy Statement-Prospectus on Form
S-4 of Curis, Inc. on March 14, 2000, and incorporated herein by
reference.)
10.28 Warrant Agreement, dated as of December 8, 1997, by and between
the Registrant and Comdisco, Inc. (Previously filed with the SEC
as Exhibit 10.55 to the Joint Proxy Statement-Prospectus on Form
S-4 of Curis, Inc. on March 14, 2000, and incorporated herein by
reference.)
10.29 Warrant Agreement, dated as of October 1, 1997, by and between the
Registrant and Lighthouse Capital Partners, L.P. (Previously filed
with the SEC as Exhibit 10.56 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on March 14, 2000,
and incorporated herein by reference.)
10.30 Warrant Agreement, dated as of December 17, 1999, by and between
the Registrant and Lighthouse Capital III, L.P. (Previously filed
with the SEC as Exhibit 10.61 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on March 14, 2000,
and incorporated herein by reference).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.31 Stock Subscription Warrant, dated as of November 21, 1997, by and
between the Registrant and MM Ventures. (Previously filed with the
SEC as Exhibit 10.57 to the Joint Proxy Statement-Prospectus on
Form S-4 of Curis, Inc. on March 14, 2000, and incorporated herein
by reference.)
10.32 Warrant Agreement, dated as of September 1, 1999, by and between
the Registrant and Comdisco, Inc. (Previously filed with the SEC
as Exhibit 10.59 to the Joint Proxy Statement-Prospectus on Form
S-4 of Curis, Inc. on March 14, 2000, and incorporated herein by
reference.)
10.33 Stock Subscription Warrant, dated as of November 21, 1999, by and
between the Registrant and Transamerica Business Credit Corp
("TBCC Funding Trust 1"). (Previously filed with the SEC as
Exhibit 10.57 to the Joint Proxy Statement-Prospectus on Form S-4
of Curis, Inc. on March 14, 2000, and incorporated herein by
reference.)
10.34 Stock Subscription Warrant No. 2, dated as of November 15, 1999 by
and between the Registrant and TBCC Funding Trust 1. (Previously
filed with the SEC as Exhibit 10.60 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on March 14, 2000, and
incorporated herein by reference.)
++10.35 Research Collaboration and Option Agreement by and between the
Registrant and Becton, Dickinson and Company, dated January 13,
1999. (Previously filed with the SEC as Exhibit 10.62 to the Joint
Proxy Statement-Prospectus on Form S-4 of Curis, Inc. on June 2,
2000, and incorporated herein by reference.)
10.36 Secured Promissory Note dated June 17, 1996, by and between the
Registrant and Dr. Platika in the original principal amount of
$500,000, as amended by that First Amendment to Secured Promissory
Note dated as of August 31, 1998 and that Second Amendment to
Secured Promissory Note dated as of December 15, 1999. (Previously
filed with the SEC as Exhibit 10.63 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on May 31, 2000, and
incorporated herein by reference.)
10.37 Pledge Agreement dated June 17, 1996, by and between the
Registrant and Dr. Platika. (Previously filed with the SEC as
Exhibit 10.64 to the Joint Proxy Statement-Prospectus on Form S-4
of Curis, Inc. on March 14, 2000, and incorporated herein by
reference.)
++10.38 Exclusive License Agreement, dated as of November 2, 1998, by and
among the Registrant and the Board of Trustees of Leland Stanford
Junior University and Johns Hopkins University. (Previously filed
with the SEC as Exhibit 10.65 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on June 2, 2000, and
incorporated herein by reference.)
++10.39 License Agreement, dated as of November 20, 1997, by and between
the Registrant and the Board of Trustees of Leland Stanford Junior
University. (Previously filed with the SEC as Exhibit 10.66 to the
Joint Proxy Statement-Prospectus on Form S-4 of Curis, Inc. on
April 3, 2000, and incorporated herein by reference.)
++10.40 License Agreement, dated as of November 30, 1998, by and between
the Registrant and the Board of Trustees of Leland Stanford Junior
University. (Previously filed with the SEC as Exhibit 10.67 to the
Joint Proxy Statement-Prospectus on Form S-4 of Curis, Inc. on
June 2, 2000, and incorporated herein by reference.)
++10.41 License Agreement, dated as of June 13, 1996, by and between the
Registrant and the President and Fellows of Harvard College.
(Previously filed with the SEC as Exhibit 10.68 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on June 2, 2000,
and incorporated herein by reference.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
++10.42 License Agreement, dated as of February 1, 1997, by and between
the Registrant and the President and Fellows of Harvard College.
(Previously filed with the SEC as Exhibit 10.69 to the Joint Proxy
Statement-Prospectus on Form S-4 of Curis, Inc. on April 3, 2000,
and incorporated herein by reference.)
10.43 Mortgage dated December 15, 1999, by and between the Registrant
and Dr. and Patricia C. Platika. (Previously filed with the SEC as
Exhibit 10.70 to the Joint Proxy Statement-Prospectus on Form S-4
of Curis, Inc. on May 31, 2000, and incorporated herein by
reference.)
10.44 Curis, Inc. 2000 Stock Incentive Plan. (Previously filed with the
SEC as Exhibit 10.71 to the Joint Proxy Statement-Prospectus on
Form S-4 of Curis, Inc. on May 31, 2000, and incorporated herein
by reference.)
10.45 Curis, Inc. 2000 Stock Incentive Plan. (Previously filed with the
SEC as Exhibit 10.71 to the Joint Proxy Statement-Prospectus on
Form S-4 of Curis, Inc. on May 31, 2000, and incorporated herein
by reference.)
10.46 Curis, Inc. 2000 Director Stock Option Plan. (Previously filed
with the SEC as Exhibit 10.72 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on May 31, 2000, and
incorporated herein by reference.)
10.47 Curis, Inc. 2000 Employee Stock Purchase Plan. (Previously filed
with the SEC as Exhibit 10.73 to the Joint Proxy Statement-
Prospectus on Form S-4 of Curis, Inc. on May 31, 2000, and
incorporated herein by reference.)
10.48 Form of Stock Purchase Agreement by and among the Registrant and
the purchaser named thereon.
21.1 Subsidiary of the Registrant. (Previously filed with the SEC as
Exhibit 22 to Creative's Registration Statement on Form S-1 (File
No. 33-42159), and incorporated herein by reference.)
23.1 Consent of Hale and Dorr LLP (included as part of its opinion
filed as Exhibit 5 and incorporated herein by reference.)
23.2 Consent of Arthur Andersen LLP.
23.3 Consent of Deloitte & Touche LLP.
23.4 Consent of PricewaterhouseCoopers LLP.
24 Power of Attorney (included on the signature page of this Form S-1
and incorporated herein by reference.)
27.1 Curis, Inc. Financial Data Schedule.
27.2 Curis, Inc. Financial Data Schedule for the nine months ended
September 30, 2000. (Previously filed with the SEC as Exhibit 27.2
to Curis' Quarterly Report on Form 10-Q for the period ended
September 30, 2000 (File No. 0-30347), and incorporated herein by
reference.)
27.3 Reprogenesis, Inc. Financial Data Schedule.
27.4 Ontogeny, Inc. Financial Data Schedule.
</TABLE>
--------
+ Confidential treatment has been requested as to certain portions of this
exhibit.
++ Confidential treatment has been granted as to certain portions of this
exhibit.
The Registrant hereby agrees to furnish supplementally any schedules that
have been omitted from this exhibit list to the Securities and Exchange
Commission upon its request.
