<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
-----------------------
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-30347
----------------------------------
CURIS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3505116
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
61 MOULTON STREET, CAMBRIDGE, MA 02138
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 503-6500
---------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[x] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 31, 2000, there were 26,111,252 shares of the Registrant's Common
Stock, $0.01 par value per share, outstanding.
<PAGE>
CURIS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements (unaudited)
<S> <C>
Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 3
Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 2000 and 1999 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES 19
</TABLE>
2
<PAGE>
ITEM 1. FINANCIAL STATEMENTS
CURIS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
------------------ -----------------
<S> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 20,625,579 $ 2,751,069
Marketable securities 18,554,338 18,619,516
Marketable securities - restricted 4,988,831 -
Accounts receivable 100,430 60,296
Prepaid expenses and other current assets 677,656 146,764
------------- -------------
Total current assets 44,946,834 21,577,645
PROPERTY, PLANT AND EQUIPMENT - net 7,437,337 2,130,158
NOTES RECEIVABLE FROM RELATED PARTIES 245,000 -
INTANGIBLE ASSETS (NOTE 6) 113,737,522 5,075,914
DEPOSITS AND OTHER ASSETS 363,902 108,574
------------- -------------
TOTAL ASSETS $ 166,730,595 $ 28,892,291
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Debt and lease obligations - current portion $ 2,036,466 $ 347,323
Accounts payable 2,689,814 612,811
Accrued liabilities 4,547,209 1,895,634
Accrued compensation 824,636 944,270
Deferred Revenue - 661,279
------------- -------------
Total current liabilities 10,098,125 4,461,317
------------- -------------
DEBT AND LEASE OBLIGATIONS, net of current portion 3,500,798 1,009,388
------------- -------------
COMMITMENTS (Note 8)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 5,000,000 and 10,000,000
shares authorized at September 30, 2000 and December
31, 1999, respectively, none issued and outstanding - -
Common Stock, $0.01 par value, 125,000,000 and 15,000,000
shares authorized; 26,015,824 and 10,999,534 shares
issued and outstanding at September 30, 2000 and 260,158 109,995
December 31, 1999, respectively
Additional paid-in capital 619,675,656 144,937,416
Officer notes receivable (1,131,380) -
Deferred compensation (17,729,090) -
Accumulated deficit (452,820,783) (121,595,024)
Accumulated other comprehensive income (Loss) 4,877,111 (30,801)
------------- --------------
Total stockholders' equity 153,131,672 23,421,586
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 166,730,595 $ 28,892,291
============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
3
<PAGE>
CURIS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------- -------------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Research and development revenues $ 65,955 $ 823,573 $ 743,813 $ 2,405,760
------------- ------------- ------------- -------------
COSTS AND EXPENSES:
Research and development (A) 6,056,255 2,708,005 10,072,461 8,072,342
General and administrative (A) 4,040,568 1,317,051 6,642,813 4,078,187
Stock-based compensation (A) 9,356,112 - 12,495,590 64,000
Amortization of intangible assets 8,529,302 112,725 8,647,473 325,705
Loss on disposition of fixed assets 553,912 - 248,516 -
In-process research & development 294,800,000 - 294,800,000 -
1999 Reorganization - - (38,391) -
------------- ------------- ------------- -------------
Total costs and expenses 323,336,149 4,137,781 332,868,462 12,540,234
------------- ------------- ------------- -------------
Loss from operations (323,270,194) (3,314,208) (332,124,649) (10,134,474)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest and other income 580,706 366,177 1,164,252 1,617,577
Interest expense (179,747) (46,528) (265,362) (114,780)
------------- ------------- ------------- -------------
Total other income 400,959 319,649 898,890 1,502,797
------------- ------------- ------------- -------------
NET LOSS (322,869,235) (2,994,559) (331,225,759) (8,631,677)
Accretion and repurchase
Costs on series 1998/A
Preferred stock - - - (2,395,559)
------------- ------------- ------------- -------------
Net loss applicable to
Common stockholders $(322,869,235) $(2,994,559) $(331,225,759) $(11,027,236)
============= ============= ============= =============
Basic and diluted net loss
Per common share $ (15.19) $ (0.28) $ (22.59) $ (1.04)
============= ============= ============= =============
Weighted average common
Shares for basic and
Diluted net loss
Computation 21,250,137 10,798,008 14,662,960 10,618,696
============= ============= ============= =============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
NET LOSS $(322,869,235) $(2,994,559) $(331,225,759) $ (8,631,677)
Unrealized gain (loss) on
Marketable securities -
Restricted (327,009) - 4,921,987 -
Unrealized gain (loss) on
Marketable securities 9,318 (109,043) (14,075) (109,043)
------------- ------------- ------------- -------------
COMPREHENSIVE LOSS $(323,186,926) $(3,103,602) $(326,317,847) $ (8,740,720)
============= ============= ============= =============
(A) The following summarizes the
departmental allocation of the stock-
based compensation charge:
Research and development $ 5,726,801 $ - $ 5,726,801 $ -
General and administration 3,629,311 - 6,768,789 64,000
------------- ------------- ------------- -------------
Total stock-based compensation $ 9,356,112 $ - $ 12,495,590 $ 64,000
============= ============= ============= =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
4
<PAGE>
CURIS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(331,225,759) $ (8,631,677)
------------- ------------
Adjustments to reconcile net loss to net cash used:
Depreciation and amortization 634,595 736,761
Stock-based compensation expense 12,495,590 64,000
Amortization of lease discount 28,734 -
Reorganization expense adjustment 39,141 -
Non-cash interest on notes payable 12,782
Loss on disposition of fixed assets 248,516 -
Amortization of intangible assets 8,647,473 128,104
Write off of in-process research and development 294,800,000 -
Increase (decrease) in assets and liabilities:
Accounts receivable 160,451 547,074
Prepaid expenses and other current assets 295,489 101,767
Notes receivable from related parties 15,000 -
Other assets 86,666 -
Accounts payable and accrued liabilities (385,058) (2,372,684)
Deferred contract revenue - (2,250,000)
------------- ------------
Total adjustments 317,079,379 (3,044,978)
------------- ------------
Net cash used for operating activities (14,146,380) (11,676,655)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales of marketable securities, 26,040,734 26,208,936
Purchase of marketable securities (8,226,957) (7,391,106)
Expenditures for property, plant and equipment (537,260) (593,777)
Proceeds from sale of fixed assets 675,000 -
Expenditures for patents (563,882) (551,158)
Repayment of note receivable from officer - 116,668
Cash received from acquisition of Ontogeny & Reprogenesis, net
of acquisition costs 10,788,955 -
------------- ------------
Net cash provided by investing activities 28,176,590 17,789,563
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 4,208,860 674,464
Proceeds from warrant exercises 307,561 -
Repurchase of Series 1998/A Preferred Stock - (22,470,347)
Increase in obligations under capital leases - 311,031
Repayments of obligations under capital leases (672,121) (170,798)
------------- ------------
Net cash provided by (used for) financing activities 3,844,300 (21,655,650)
------------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 17,874,510 (15,542,742)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,751,069 17,738,044
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 20,625,579 $ 2,195,302
============= ============
SUPPLEMENTAL DISCLOSURE OF NON CASH
INVESTING AND FINANCING ACTIVITIES:
Property and equipment purchased under capital lease obligations $ - $ 313,512
============= ============
Officer notes payable for exercise of stock options $ 1,131,380 $ -
============= ============
Conversion of Series 1998/A Preferred Stock to Common Stock $ - $ 2,977,999
============= ============
</TABLE>
See accompanying notes to unaudited consolidated financial statements
5
<PAGE>
CURIS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Operations - Curis, Inc. (the "Company"), incorporated on February 14, 2000
and formed to effect the merger discussed below in Note 2, focuses its
efforts in the area of regenerative medicine and uses its functional
genomics expertise on developmentally regulated pathways to (i) activate
cellular development pathways to promote repair and normal function and (ii)
inhibit abnormal growth pathways to treat certain types of cancer. The
Company has identified product leads from its experience in working with
protein factors, cell therapies, biomaterials, tissue engineering and small
molecules.
This Form 10Q/A is being filed on December 6, 2000 to conform the
disclosures and financial statement presentation in the Company's Form 10-Q
for the nine months ended September 30, 2000 and 1999 with those included in
the Company's Form S-1 filed on November 29, 2000.
2. Merger - On July 31, 2000, Creative BioMolecules, Inc., a Delaware
corporation ("Creative"), Ontogeny, Inc., a Delaware corporation
("Ontogeny") and Reprogenesis, Inc., a Texas corporation ("Reprogenesis")
merged (the "Merger") with and into the Company, pursuant to an Agreement
and Plan of Merger dated as of February 14, 2000 (the "Merger Agreement").
On July 31, 2000, the Company, as the surviving company of the Merger,
assumed the rights and obligations of Creative, Ontogeny and Reprogenesis.
Immediately after the Merger, the Company was owned approximately 43% by the
former stockholders of Creative, 38% by the former stockholders of Ontogeny
and 19% by the former stockholders of Reprogenesis. Consequently, for
accounting purposes, the Company is deemed to be the successor to Creative,
and the historical financial statements of Creative have become the
historical financial statements of the Company. The Merger has been
accounted for as a purchase of Ontogeny and Reprogenesis in accordance with
Accounting Principles Board (APB) Opinion No. 16 and accordingly, Ontogeny's
and Reprogenesis' operating results since the Merger date are included in
the accompanying financial statements.
Pursuant to the Merger Agreement, the following conversion ratios were
applied to the outstanding securities of Creative, Ontogeny and
Reprogenesis:
o Creative's common stockholders and the holders of options or warrants to
acquire the common stock of Creative received or are entitled to
receive, upon the exercise of options or warrants, an aggregate number
of shares of the Company's common stock equal to 0.3000 multiplied by
the number of shares of Creative common stock outstanding or subject to
options or warrants;
o Ontogeny's capital stockholders and the holders of options or warrants
to acquire the capital stock of Ontogeny received or are entitled to
receive, upon the exercise of options or warrants, an aggregate number
of shares of the Company's common stock equal to 0.2564 multiplied by
the number of shares of Ontogeny capital stock outstanding or subject to
options or warrants; and
o Reprogenesis' capital stockholders and the holders of options or
warrants to acquire the capital stock of Reprogenesis received or are
entitled to receive, upon the exercise of options or warrants, an
aggregate number of shares of the Company's common stock equal to 0.1956
multiplied by the number of shares of Reprogenesis capital stock
outstanding or subject to options or warrants.
In 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.
In accordance with APB No. 16, the purchase price for Ontogeny and
Reprogenesis has been allocated to the assets and liabilities of Ontogeny
and Reprogenesis based on their fair values. The aggregate purchase price
based on the fair market value of Creative common stock was $300,731,000 and
$149,000,000 for Ontogeny and Reprogenesis, respectively, including the
value of the outstanding options and warrants exchanged for options and
warrants to purchase the Company's common stock and the transaction costs
related to the Merger.
The purchase price of Ontogeny and Reprogenesis was allocated to the assets
acquired based upon an independent appraisal which used proven valuation
tools and techniques. Significant portions of the purchase price were
identified as intangible assets which included in-process research and
development (IPR&D) of $294,800,000 and assembled workforce of $500,000. The
excess of the purchase price over the fair value of identified tangible and
intangible net assets of $105,477,000 has been allocated to goodwill.
Intangible assets are being amortized over their estimated useful lives of 4
to 5 years. The fair value of the IPR&D relating to current in-process
research and development projects was recorded as an expense as of the
Merger date.
6
<PAGE>
The acquired IPR&D consist of development work to date on 11 primary
projects and 6 primary projects, respectively, for Ontogeny and
Reprogenesis. The technology resulting from these development efforts offer
no alternative uses in the event that they prove not to be feasible. If a
technology fails to achieve FDA approval or was considered for an alternate
use, it would be subjected to the risk associated with another series of
clinical trials. The new use would also face regulatory risk associated with
the FDA approval process.
The aggregate purchase price of $449,731,000, including acquisition costs,
was allocated as follows:
<TABLE>
<S> <C>
Current assets $ 32,082,000
Property, plant and equipment 6,328,000
Assembled workforce 500,000
In-process research & development 294,800,000
Prepaid compensation 19,146,000
Other assets 542,000
Goodwill 105,477,000
Assumed liabilities (9,144,000)
------------
$449,731,000
============
</TABLE>
Unaudited pro forma operating results for the Company, assuming the Merger
occurred at the beginning of the periods presented are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
As Restated As Restated
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,597,328 $ 2,047,765 $ 4,206,877 $10,061,972
Net Loss $25,859,263 $18,540,991 $64,621,101 $54,214,366
Net Loss per share $ (1.00) $ (0.81) $ (2.49) $ (2.44)
</TABLE>
For purposes of these pro forma operating results, the IPR&D was assumed to
have been written off prior to the pro forma periods, so that the operating
results presented only include recurring costs.
3. Basis of Presentation - The accompanying condensed consolidated financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles applicable to interim periods. These
statements, however, are condensed and do not include all disclosures
required by generally accepted accounting principles for complete financial
statements and should be read in conjunction with the Company's joint proxy
statement-prospectus as filed with the Securities and Exchange Commission on
June 19, 2000 and Form S-1 filed on November 29, 2000.
In the opinion of the Company, the unaudited financial statements contain
all adjustments (all of which were considered normal and recurring)
necessary to present fairly the Company's financial position at September
30, 2000 and the results of operations and cash flows for the three months
ended September 30, 2000 and 1999 and for the nine months ended September
30, 2000 and 1999. The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts and disclosure of certain assets and liabilities at the
balance sheet date. Such estimates include the carrying value of property
and equipment and intangible assets and the value of certain liabilities.
Actual results may differ from such estimates.
These interim results are not necessarily indicative of results for a full
year and such results are subject to year-end adjustments and an independent
audit.
4. 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 consists of
stock options and warrants that are not included in diluted net loss per
common share was 6,582,800 at September 30, 2000.
7
<PAGE>
5. 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
$18,619,500 and $18,554,000 in corporate bonds and notes as of December 31, 1999
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 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 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 $3,361,612. The decline in
value of $1,366,140 will be reflected in the Company's statement of operations
for the period ending December 31, 2000. In addition, the Company holds a
warrant to purchase 53,571 shares of Exelixis, Inc. common stock at $1.00 per
share exercisable until January 27, 2005. The value of this warrant is included
in the Company's balance sheet as of September 30, 2000 under the category
"Marketable securities - restricted" with a fair market value of $1,627,219
representing the difference between the exercise price and the market value per
share of the underlying common stock at September 30, 2000.
6. Intangible Assets -
Intangible assets consisted of the following at September 30, 2000 and
December 31, 1999:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
-------------- --------------
<S> <C> <C>
Goodwill $105,477,000 $ -
Patents 1,297,000 5,988,000
Assembled workforce 500,000 -
Prepaid compensation 19,146,000 -
------------- -------------
126,420,000 5,988,000
Less: accumulated amortization (12,682,000) (912,000)
-------------- -------------
$113,738,000 $5,076,000
============== =============
</TABLE>
Goodwill totaling $105,477,000 and assembled workforce of $500,000 are
being amortized over their estimated useful lives of 4 to 5 years.
Accumulated amortization as of September 30, 2000 was $3,863,000 and
$17,000 for goodwill and assembled workforce, respectively. The Company
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 (see Note 2), 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.
The Company applies the provision of Statements of Financial Accounting
Standards (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 of 2000, the Company performed
a review of its capitalized patent costs as part of evaluating its post
merger strategy. This review resulted in an impairment charge of
approximately $4,611,000 to reduce the carrying value of those patents
determined not to be beneficial or not to be utilized in future operations
and which have no alternative future use. This amount has been included
under the heading "Amortization of intangibles" in the accompanying
consolidated statement of operations for the three and nine months ended
September 30, 2000.
8
<PAGE>
7. 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.
In connection with stock options granted to employees and non-employees
during the three 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 three and 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.
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. For the three and
nine months ended 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.
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. Additionally, in July, 2000 the
Company accelerated a portion of the remaining vesting and extended the exercise
period of 11,430 of options for certain employees terminated resulting in
non-cash compensation charge of $348,000 which was recorded in the three months
ended September 30, 2000.
8. 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.
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, Company amended one of
its Hopkinton, Massachusetts facility leases previously occupied by Creative
whereby the lease terminated on July 31, 2000.
(i) Long-term debt and capital lease obligations consisted of the following
at September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Notes payable to a financing agency for 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 3,368,000 1,357,000
------------- ------------
Less current portion 5,537,000 1,357,000
(2,036,000) (348,000)
- -
------------- ------------
Total long-term debt and capital lease obligations $ 3,501,000 $1,009,000
=========== ==========
</TABLE>
(ii) Future minimum operating lease payments for the respective periods
ended December 31, net of anticipated sublease revenues are as follows:
<TABLE>
<CAPTION>
Year Ending December 31, Operating 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>
9. 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.
10. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENTS
The Company has 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.
9
<PAGE>
11. New Accounting Standards - In June 1998, the Financial Accounting Standards
Board, or FASB, released SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes standards for
reporting and accounting for derivative instruments, including certain
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.
10
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Merger - On July 31, 2000, Creative BioMolecules, Inc., a Delaware corporation
("Creative"), Ontogeny, Inc., a Delaware corporation ("Ontogeny") and
Reprogenesis, Inc., a Texas corporation ("Reprogenesis") merged (the "Merger")
with and into Curis, pursuant to an Agreement and Plan of Merger dated as of
February 14, 2000 (the "Merger Agreement"). On July 31, 2000, Curis, as the
surviving company of the Merger, assumed the rights and obligations of Creative,
Ontogeny and Reprogenesis. Immediately after the Merger, Curis was owned
approximately 43% by the former stockholders of Creative, 38% by the former
stockholders of Ontogeny and 19% by the former stockholders of Reprogenesis.
Consequently, for accounting purposes, Curis is deemed to be the successor to
Creative, and the historical financial statements of Creative have become the
historical financial statements of Curis. The Merger has been accounted for as
a purchase of Ontogeny and Reprogenesis in accordance with Accounting Principles
Board (APB) Opinion No. 16 and accordingly, Ontogeny's and Reprogenesis'
operating results since the Merger date are included in the accompanying
financial statements.
In accordance with APB No. 16, the purchase price for Ontogeny and Reprogenesis
has been allocated to the assets and liabilities of Ontogeny and Reprogenesis
based on their fair values. The aggregate purchase price based on the fair
market value of Creative common stock was $300,731,000 and $149,000,000 for
Ontogeny and Reprogenesis, respectively, including the value of the outstanding
options and warrants exchanged for options and warrants to purchase the common
stock of Curis and the transaction costs related to the Merger.
The purchase price of Ontogeny and Reprogenesis was allocated to the assets
acquired based upon an independent appraisal which used proven valuation tools
and techniques. Significant portions of the purchase price were identified as
intangible assets which included in-process research and development (IPR&D) of
$294,800,000 and assembled workforce of $500,000. The excess of the purchase
price over the fair value of identified tangible and intangible net assets of
$105,477,000 has been allocated to goodwill. Intangible assets are being
amortized over their estimated useful lives of 4 to 5 years. The fair value of
the IPR&D relating to current in-process research and development projects was
recorded as an expense as of the Merger date.
Unaudited pro forma operating results for Curis, assuming the Merger occurred at
the beginning of the periods presented are as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
As Restated As Restated
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------------------------------------ ------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,597,328 $ 2,047,765 $ 4,206,877 $10,061,972
Net Loss $25,859,263 $18,540,991 $64,621,101 $54,214,366
Net Loss per share $ (1.00) $ (0.81) $ (2.49) $ (2.44)
</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.
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 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 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 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 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 three and nine months ended September 30, 2000
include the operating expenses of Creative for the month and the seven months
ended July 31, 2000, respectively, and the operating expenses for Curis,
comprising the combined operations of Creative, Ontogeny and Reprogenisis, for
the period from August 1, 2000, to September 30, 2000. Operating expenses for
the three and nine months ended September 30, 1999 include only the operating
expenses of Creative for such periods. Accordingly, comparisons of operating
expenses between the 2000 and 1999 periods may not prove to be meaningful.
Additionally, in the three and 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 between $30 - $40 million in each of 2001 and 2002
for 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 the
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 royalties and the cost and outcome of clinical
trials.
11
<PAGE>
RESULTS OF OPERATIONS
REVENUES
Research and development contract revenues decreased 92% to $66,000 for the
three month period ended September 30, 2000 from $824,000 for the three month
period ended September 30, 1999 and decreased 69% to $744,000 for the nine month
period ended September 30, 2000 from $2,406,000 for the nine month period ended
September 30, 1999. The decrease in research and development contract revenues
from 1999 to 2000 was primarily the result of the termination of a research
agreement with Biogen, Inc. in 1999 partially offset by revenues of $56,000
earned under a National Institute of Standards and Technology (NIST) grant
received in November 1999.
OPERATING EXPENSES
Research and development expenses increased 124% to $6,056,000 for the three
month period ended September 30, 2000 from $2,708,000 for the three month period
ended September 30, 1999 and increased 25% to $10,072,000 for the nine month
period ended September 30, 2000 from $8,072,000 for the nine month period ended
September 30, 1999. The increase was primarily due to the impact of the Merger
which occurred on July 31, 2000. Research and development expenses for the
three and nine months ended September 30, 2000 include the costs incurred by the
combined companies for the period from August 1, 2000 to September 30, 2000.
These include the cost of 107 people involved in research and development of
$2,000,000, external lab services including clinical trials of $1,300,000, and
facility related costs of $500,000. In addition, research and development
expenses for the three and nine months ended September 30, 2000 include
severance paid to former officers of Creative totaling $656,000, and severance
payments relating to the termination of seven employees totaling $251,000. We
anticipate that research and development expenses for the fourth quarter of 2000
will be slightly lower than the three month period ended September 30, 2000 as a
result of efficiencies realized as a result of the merger which was completed on
July 31, 2000 and the severance incurred during the three months ended September
30, 2000.
General and administrative expenses increased 207% to $4,041,000 for the three
month period ended September 30, 2000 from $1,317,000 for the three month period
ended September 30, 1999 and increased 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 three and nine months ended September 30, 2000
includes 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. We anticipate that general and administrative expenses for
the last quarter of 2000 will be slightly lower than the three month period
ended September 30, 2000 as a result of efficiencies realized as a result of the
Merger which was completed on July 31, 2000 and the severance incurred during
the three months ended September 30, 2000.
Stock-based compensation was $9,356,000 for the three month period ended
September 30, 2000. There was no stock-based compensation for the three month
period ended September 30, 1999. Stock-based compensation increased to
$12,496,000 for the nine month period ended September 30, 2000 from $64,000 for
the nine month period ended September 30, 1999. The increase in both the three
and nine month periods was primarily due to $6,624,000 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 were 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 included in
both the three and nine month periods 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 market value resulting in deferred compensation of
$18,491,000. The defined 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
included in both the three and nine month periods related to these options is
$762,000.
12
<PAGE>
Amortization of intangible assets was $8,529,000 for three month period ended
September 30, 2000 as compared to $113,000 for the three month period ended
September 30, 1999 and was $8,647,000 for the nine months ended September 30,
2000, as compared to $326,000 for the nine month period ended September 30,
1999. The increase was partially due to the amortization of goodwill totaling
$3,863,000 and the amortization of assembled workforce totaling $17,000 in both
the three and nine months ended September 30, 2000 incurred as a result of the
Merger. In addition, during the three and nine months ended September 30, 2000,
we incurred an impairment charge of approximately $4,611,000 to reduce the
carrying value of 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 three and nine month periods ended
September 30, 1999 were approximately $40,000 and $128,000, respectively.
Amortization of patent cost were $38,000 and $156,000 for the three and nine
months ended September 30, 2000, respectively as compared to $73,000 and
$198,000 for the three and nine months ended september 30, 1999,
respectively.
A fixed asset disposition charge of $249,000 was incurred during the third
quarter of 2000 for the book value of equipment disposed of as a result of the
Merger.
A charge of $294,800,000 was incurred on July 31, 2000 resulting from that
portion of the purchase price of Ontogeny and Reprogenesis that was identified
as IPR&D. The purchase price of Ontogeny and Reprogenesis was allocated to the
assets acquired, including IPR&D, based upon an independent appraisal which used
proven valuation tools and techniques.
OTHER INCOME (EXPENSES)
Interest income for the three months ended September 30, 2000 was approximately
$581,000 compared to approximately $366,000 for the same period in 1999, an
increase of $215,000 or 59%. The increase in interest income for the three month
period resulted primarily from a higher available investment balance as compared
to the prior year as a result of the Merger. For the nine months ended September
30, 2000, interest 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 for the nine month period resulted primarily from a
lower average available investment balance as compared to the prior year.
Interest expense for the three months ended September 30, 2000 was $180,000
compared to $47,000 for the same period in 1999, an increase of $133,000 or
283%. For the nine months ended September 30, 2000, interest expense was
$265,000 compared to $115,000 for the nine months ended September 30, 1999, an
increase of $150,000 or 130%. The increase in interest expense for both the
three and nine month periods resulted primarily from the consolidation into
Curis of the outstanding lease obligations of the three companies prior to the
Merger.
NET LOSS
As a result of the foregoing, we incurred a net loss of $322,869,000 and
$331,226,000 for the three and nine month periods ended September 30, 2000,
respectively, as compared to a net loss of $2,995,000 and $8,632,000 for the
three and nine month periods ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, our principal sources of liquidity consisted of cash,
cash equivalents and marketable securities of $44,169,000. We have financed our
operations primarily through placements of equity securities, revenues received
under agreements with collaborative partners 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 following the declaration of effectiveness of the
prospectus by the SEC.
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.
Our investment in property, plant and equipment was $537,000 during the nine
months and ended September 30, 2000 as compared to $594,000 during the nine
months ended September 30, 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 1999, we
spent $564,000 and 551,000, respectively, on capitalized patent costs.
13
<PAGE>
On October 5, 2000, we announced the receipt of a second $2,000,000 grant from
the National Institute of Standards and Technology (NIST) to support the
development of a new class of biomaterials designed to enable surgical
procedures that augment, repair or regenerate lost structural tissue or
physiological function. The grant period is from November 1, 2000 to October 31,
2003. Previously, we were awarded another $2,000,000 grant from NIST to support
the development of our cardiovascular products, Vascugel and Vascuject. The
grant period for the first NIST grant is from November 1, 1999 to October 31,
2002.
On October 9, 2000, we sold 107,143 shares of Exelixis, Inc. common stock at
a price of $18.625 per share for total net proceeds of $1,995,472. 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 $3,361,612. The decline in value of
$1,366,140 will be reflected in our statement of operations for the period
ending December 31, 2000. In addition, we hold a warrant to purchase 53,571
shares of Exelixis, Inc. common stock at a price of $1.00 per share exercisable
until January 27, 2005. The value of this warrant is included in our balance
sheet as of September 30, 2000 under the category "Marketable securities -
restricted" with a fair market value of $1,627,219.
Financing activities generated approximately $4.5 million of cash in the nine
months ended September 30, 2000 from the exercise of options and warrants.
In November 1998, we sold certain of our OP-1 manufacturing rights and
facilities to Stryker for total proceeds of approximately $19,530,000. We
expect that under the terms of the sale, we will receive royalties 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
to raise funds through one or more financing transactions, if conditions permit.
Over the longer term, because of our significant long-term capital requirements,
we intend to raise funds through the sale of debt or equity securities when
conditions are favorable, even if we do not have an immediate need for
additional capital at such time. There can be no assurance that additional
financing will be available or that, if available, it would be available on
favorable terms. In addition, the sale of additional debt or equity securities
could result in dilution to our stockholders. If Stryker products are not
approved for commercial sale and we do not receive royalties from Stryker and/or
if substantial additional funding is not available, our business will be
materially and adversely affected.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board, or FASB, released
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes standards for
reporting and accounting for derivative instruments, including certain
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 Curis' consolidated financial statements.
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for
Certain Transactions involving Stock Compensation"- An Interpretation of APB
Opinion No. 25. The interpretation clarifies the application of APB Opinion No.
25 in specified events, as defined. The interpretation is effective July 1,
2000 but covers certain events occurring during the period after December 15,
1998, but before the effective date. To the extent that events covered by this
interpretation occur during the period after December 31, 1998, but before the
effective date, the effects of applying this interpretation would be recognized
on a prospective basis from the effective date. Accordingly, upon initial
application of the final interpretation, (i) no adjustments would be made to the
financial statements for periods before the effective date and (ii) no expense
would be recognized
14
<PAGE>
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.
CAUTIONARY FACTORS WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements
concerning our business, operations and financial conditions. All our
statements, other than statements on of historical facts, included in this
Report, including plans and objectives are forward-looking statements. These
statements reflect our expectations about our future performance, contain
projections of our future operating results and future financial condition, or
other forward-looking" information.
We caution investors that investing in our common stock involves a high degree
of risk. There is no guarantee that our actual results or actual business
conditions will not differ materially from those forward-looking statements made
in this Report. The risks and uncertainties may also impair our business
operations. If any of the following risks actually occur, our business,
financial condition or results of operations would likely suffer.
o RISKS RELATED TO THE MERGER - We began operations on July 31, 2000 following
the approval of the merger of Creative Biomolecules, Ontogeny, and
Reprogenesis into Curis on July 31, 2000 (the "merger"). Prior to the merger,
there was no public market for the common stock. Because the market for the
common stock is new, the stock price may be volatile and may lead to losses
by investors and result in securities litigation. In addition, we are apt to
face challenges in integrating Creative, Ontogeny and Reprogenesis, retaining
and recruiting key personnel and management. If we are unable to effectively
manage these integration issues, we may not realize the expected benefits of
the merger.
o RISKS RELATED TO OPERATIONS -
o We have not developed or commercialized any products to date, and if we or
our collaborative partners do not complete development of and
commercialize any products, we may not be profitable.
o We are dependent on current and future collaborative partners to provide
staffing, funds and other resources for research and development and to
commercialize many of our products. Any failure or delay by these partners
in financing, developing or commercializing our products could eliminate
significant portions of our anticipated product pipeline. Development,
registration and marketing of the OP-1 Device, in particular, is entirely
dependent on Stryker.
o We face substantial competition because many of the products in our
research and development portfolio compete with existing and future
products being created by pharmaceutical, biopharmaceutical, and
biotechnology companies as well as academic research institutions. Many of
these competitors have substantially greater capital resources, research
and development staffs and facilities than we have. In particular, there
is intense competition related to the research and development of
morphogenic and other proteins for various applications and therapies.
o The development process necessary to obtain regulatory approval is
complex, costly and lengthy, and we may not obtain the regulatory
approvals necessary to develop, test and market our products. Accordingly,
estimates of development milestones and regulatory approvals are
inherently uncertain.
o Our substantial number of programs in pre-clinical development and early
stage research coupled with the many technical challenges and hurdles
which need to be overcome to enter into clinical trials makes it highly
uncertain which programs will succeed and when they will succeed.
o Even if a project proceeds into clinical trials, it may not be successful
because the product is not effective in treating the targeted disorder or
may prove to have undesirable or unintended side effects, toxicities or
other characteristics that may prevent or limit their commercial use.
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o Our lack of development, commercial manufacturing, marketing and sales
experience and the risk that any of the products that we develop may not
be able to be marketed at acceptable prices or receive commercial
acceptance in the markets that we expect to target.
o Uncertainty as to the extent of future government regulation of our
business.
o Uncertainty as to whether there will exist adequate reimbursement for our
products from governments, private health insurers and other
organizations.
o RISKS RELATING TO FINANCING
o We have expended and expect to continue to expend significant resources on
research and development. Accordingly, we have incurred substantial
losses, we expect to continue to incur losses and it is uncertain when, if
ever, we will develop significant sources of revenues in order to achieve
profitability.
o We may require additional financing to fund our operations, which may be
difficult to obtain and may dilute your ownership interest in us.
o RISKS RELATED TO INTELLECTUAL PROPERTY
o Patents are important to our business and we may not be able to obtain
patent protection for our discoveries.
o Third parties may hold or acquire patent rights that are important to our
business and may, in the absence of a license, preclude us from pursuing
certain research, development and commercialization activities.
o We may become involved in expensive patent litigation that could result in
liability for damages or force us to discontinue certain research,
development and commercialization efforts.
o If we breach any of the agreements under which we license or acquire
intellectual property rights, we could be deprived of the benefit of the
license rights under that agreement.
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ITEM 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We invest cash balances in excess of operating requirements in short-term
marketable securities, generally corporate debt and government securities with
an average maturity of less than one year. All marketable securities are
considered available for sale. At September 30, 2000, the fair market value of
these securities amounted to $34,889,000 with net unrealized losses of $45,000
included as a component of stockholders' equity. Because of the quality of the
investment portfolio and the short term nature of the marketable securities, we
do not believe that interest rate fluctuations would impair the principal amount
of the securities. To estimate the potential interest rate changes, we performed
a sensitivity analysis for a one-day horizon. In order to estimate the
potential loss, we used an increase in market rates of 100 basis points,
an increase that is reasonably possible in the near term. On this basis, we
estimate the potential loss in fair value from this change in interest
rates to be approximately $85,000. Our investments are investment grade
securities and deposits are with investment grade financial institutions. We
believe that the realization of losses due to changes in credit spreads in
unlikely as we expect to hold our debt to maturity.
As of September 30, 2000, in addition to the marketable securities discussed
above, we held 107,143 shares of Exelixis, Inc. common stock with a fair market
value as of September 30 of $3,362,000. On October 9, 2000, we sold these
shares for total net proceeds of $1,995,000. The decline in value of $1,367,000
will be reflected in our statement of operations for the period ending December
31, 2000. In addition, we hold a warrant to purchase 53,571 shares of Exelixis,
Inc. common stock at a price of $1.00 per share exercisable until January 27,
2005. The value of this warrant of $1,627,000 as of September 30, 2000 could
fluctuate based on market conditions.
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.
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
10.01 Third Amendment to Lease between Curis, Inc. and 21 Erie
Street Trust dated July 31, 2000.
10.02+ Amendment to License Agreement between Curis, Inc. and
Presidents and Fellows of Harvard College dated
September 11, 2000.
27.1 Financial Data Schedule for the nine months ended September
30, 2000.
27.2 Financial Data Schedule for the three months ended September
30, 2000.
</TABLE>
+ Confidential treatment requested as to certain portions, which
portions have been separately filed with the Securities and
Exchange Commission.
(b) Reports on Form 8-K.
(i) Current Report on Form 8-K dated August 10, 2000.
(ii) Current Report on Form 8-K/A dated August 15, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed
on its behalf by the undersigned, thereunto duly authorized.
CURIS, INC.
Date: December 6, 2000 By: /s/ George A. Eldridge
---------------------------
Vice President, Finance and
Chief Financial Officer
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
-------- -----------
<S> <C>
10.01 Third Amendment to Lease between Curis, Inc. and 21 Erie Street Trust dated July 31, 2000.
10.02+ Amendment to License Agreement between Curis, Inc. and Presidents and Fellows of Harvard
College dated September 11, 2000.
27.1 Financial Data Schedule for the nine months ended September 30, 2000.
27.2 Financial Data Schedule for the three months ended September 30, 2000.
</TABLE>
+ Confidential treatment requested as to certain portions, which portions
have been separately filed with the Securities and Exchange Commission.
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