SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-------------
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported):
OCTOBER 23, 2000
CUBIST PHARMACEUTICALS, INC.
(Exact Name of Registrant as Specified in Charter)
DELAWARE 0-21379 22-3192085
- -------------------------------------------------------------------------------
(State or Other Jurisdiction (Commission (IRS Employer
of Incorporation) File Number) Identification No.)
24 EMILY STREET, CAMBRIDGE, MASSACHUSETTS 02139
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (617) 576-1999
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On November 7, 2000, Cubist Pharmaceuticals, Inc. filed with the
Securities and Exchange Commission a Current Report on Form 8-K for the purpose
of reporting the acquisition of TerraGen Discovery Inc. on October 23, 2000.
This amendment is being filed for the purpose of including financial statements
and pro forma financial information required by Item 7 of Form 8-K and should be
read in conjunction with Cubist's Form 8-K.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS.
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
Audited financial statements of Cubist Pharmaceuticals Inc.
(formerly TerraGen Discovery Inc.) for the years ended December 31, 1999 and
1998.
Unaudited financial statements of Cubist Pharmaceuticals
Inc. (formerly TerraGen Discovery Inc.) for the nine months ended September
30, 2000 and 1999.
(B) PRO FORMA FINANCIAL INFORMATION.
Unaudited pro forma combined financial statements of Cubist
Pharmaceuticals, Inc. as of September 30, 2000 and the nine months ended
September 30, 2000 and the years ended December 31, 1999 and 1998.
(C) EXHIBITS
23.1 Consent of KPMG LLP
Consolidated Financial Statements of
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Cubist Pharmaceuticals Inc.
(formerly TerraGen Discovery Inc.)
We have audited the consolidated balance sheets of Cubist Pharmaceuticals
Inc. (formerly TerraGen Discovery Inc.) (the "Company") as at December 31,
1999 and 1998 and the consolidated statements of operations, stockholders'
equity and comprehensive income and cash flows for each of the years in the
three year period ended December 31, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1999
and 1998 and the results of its operations and cash flows for each of the years
in the three year period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared
assuming that Cubist Pharmaceuticals Inc. (formerly TerraGen Discovery
Inc.) (the "Company") will continue as a going concern. As discussed in note
1 to the consolidated financial statements, the Company has suffered
recurring losses from operations and negative cash flows from operations that
raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in note 1.
The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
Chartered Accountants
/s/ KPMG LLP
Vancouver, Canada
April 3, 2000, except as to
note 1 which is as of December 7, 2000
and note 13 which is as of
October 23, 2000
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Consolidated Balance Sheets
(Expressed in U.S. Dollars)
December 31, 1999 and 1998
1999 1998
---- ----
Assets
Current assets:
Cash and cash equivalents $ 677,647 $ 2,315,418
Accounts receivable, net of allowance for doubtful
accounts of $nil (1998 - $nil) 292,676 140,705
Investment tax credits receivable 926,699 169,348
Prepaid expenses 225,243 30,286
--------------- --------------
Total current assets 2,122,265 2,655,757
Fixed assets (note 4) 1,073,164 302,509
Intangible assets (note 5) 9,195,153 83,089
--------------- --------------
Total assets $ 12,390,582 $ 3,041,355
=============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 472,856 $ 79,764
Accrued liabilities 475,841 81,963
Current portion of long-term debt (note 6) 2,095,292 -
Current portion of obligations under capital lease (note 7) 185,734 92,877
--------------- --------------
Total current liabilities 3,229,723 254,604
Long-term debt (note 6) 2,192,082 -
Obligations under capital lease (note 7) 147,258 214,932
Deferred revenue 2,533,875 -
Stockholders' equity (note 8):
Common stock, without par value, authorized 30,000,000 shares; issued
2,925,000 at December 31, 1999
(1998 - 2,925,000) 754,197 754,197
Class B preferred shares, without par value, authorized
30,000,000 shares; issued 13,090,976 at December 31,
1999 (1998 - 6,812,612) 13,838,782 6,794,785
Additional paid-in capital 690,346 44,844
Deficit (11,247,059) (4,938,708)
Accumulated other comprehensive income 251,378 (83,299)
--------------- --------------
Total stockholders' equity 4,287,644 2,571,819
--------------- --------------
Commitments (notes 3 and 11)
Subsequent events (notes 1 and 13)
Total liabilities and stockholders' equity $ 12,390,582 $ 3,041,355
=============== ==============
See accompanying notes to consolidated financial statements.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Consolidated Statements of Operations
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Revenue:
Contract research $ 1,481,537 $ 39,953 $ 33,970
Licensing fee 11,468 - -
------------- ------------- -------------
1,493,005 39,953 33,970
Research and development expenses:
Salaries and benefits 1,894,530 899,441 684,456
Laboratory supplies 546,536 441,903 545,376
Occupancy 642,194 177,975 104,243
Write-off of acquired in-process research
and development (note 3) 752,304 - -
Depreciation and amortization 1,696,916 99,677 10,516
Scientific consulting 295,177 97,802 50,599
Travel and conference 170,480 - -
Recruitment 47,516 64,253 31,746
Other supplies and equipment 118,756 86,457 27,607
Other lab - - 3,338
Loss on disposal of fixed assets 22,926 - -
------------- ------------- -------------
6,187,335 1,867,508 1,457,881
General and administrative expenses:
Salaries and benefits 679,770 385,515 138,521
Occupancy 158,962 22,287 95,221
Depreciation and amortization 56,062 27,666 26,766
Advisory fees - - 24,587
Advertising 116,500 84,952 -
Consulting fees 373,957 108,593 -
Office supplies and equipment 138,378 40,499 23,307
Travel and conference 216,410 80,914 -
Miscellaneous 11,943 9,221 17,543
Professional fees 250,830 66,257 -
Recruitment 96,733 130,452 -
Foreign exchange (196,584) 1,080 -
------------- ------------- -------------
1,902,961 957,436 325,945
------------- ------------- -------------
Loss from operations 6,597,291 2,784,991 1,749,856
Other expense (income):
Interest income (91,140) (72,426) (59,454)
Interest expense 727,793 27,522 7,192
------------- ------------- -------------
636,653 (44,904) (52,262)
------------- ------------- -------------
Net Loss before income taxes 7,233,944 2,740,087 $ 1,697,594
Investment Tax Credit Recovery (925,593) (175,497) -
------------- ------------- -------------
Net Loss $ 6,308,351 $ 2,564,590 $ 1,697,594
============= ============= =============
See accompanying notes to consolidated financial statements.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Consolidated Statement of Stockholder's Equity and Comprehensive Income
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
Class B voting
Common shares Preferred shares Additional
-------------------- ------------------------ paid-in Accumulated
Shares Amount Shares Amount capital deficit
------ ------ ------ ------ -------- --------
BALANCE, DECEMBER 31, 1996 2,875,000 $ 721,201 - $ - $ 32,670 $ (676,524)
Issuance of 2,923,980 units,
consisting of preferred
shares and warrants, net
of issuance costs of
$41,664 (note 8(a)) - - 2,923,980 3,547,711 - -
Net loss - - - - (1,697,594)
Translation adjustment - - - - - -
--------- -------- --------- --------- --------- -----------
BALANCE, DECEMBER 31, 1997 2,875,000 721,201 2,923,980 3,547,711 32,670 (2,374,118)
Class B, Series 1 preferred
shares issued for cash
upon private placement,
net of issuance costs
of $3,901 (note 8(a)) - - 2,923,977 3,247,074 - -
Class B, Series 1 preferred
shares issued for exchange
of warrants (note 8(a)) - - 964,655 - - -
Common shares issued upon
exercise of stock options 50,000 32,996 - - (32,670) -
Options granted to non-
employees - - - - 44,844 -
Net loss - - - - - (2,564,590)
Translation adjustment - - - - - -
--------- -------- --------- --------- -------- ----------
Carryforward 2,925,000 754,197 6,812,612 6,794,785 44,844 (4,938,708)
Accumulated other
comprehensive
income
---------------
cumulative
translation Stockholders' Comprehensive
adjustment equity income
--------------- ------- -------
BALANCE, DECEMBER 31, 1996 $ (566) $ 76,781
Issuance of 2,923,980 units,
consisting of preferred
shares and warrants, net
of issuance costs of
$41,664 (note 8(a)) - 3,547,711
Net loss - (1,697,594) $(1,697,594)
Translation adjustment (43,784) (43,784) (43,784)
---------- ---------- -----------
BALANCE, DECEMBER 31, 1997 (44,350) 1,883,114 $(1,741,378)
============
Class B, Series 1 preferred
shares issued for cash
upon private placement,
net of issuance costs
of $3,901 (note 8(a)) - 3,247,074
Class B, Series 1 preferred
shares issued for exchange
of warrants (note 8(a)) - -
Common shares issued upon
exercise of stock options - 326
Options granted to non-
employees - 44,844
Net loss - (2,564,590) $(2,564,590)
Translation adjustment (38,949) (38,949) (38,949)
---------- ---------- -----------
Carryforward (83,299) 2,571,819 $(2,603,539)
===========
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Consolidated Statement of Stockholder's Equity and Comprehensive Income, page 2
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
Class B voting
Common shares Preferred shares Additional
------------------- ----------------------- paid-in Accumulated
Shares Amount Shares Amount capital deficit
------ ------ ------ ------ -------- --------
BALANCE, DECEMBER 31, 1998 2,925,000 $754,197 6,812,612 $ 6,794,785 $ 44,844 $ (4,938,708)
Class B, Series 3 preferred
shares issued on the
acquisition of ChromaXome - - 600,000 673,405 - -
Class B, Series 4 preferred
shares issued on the
acquisition of Xenova - - 1,000,000 1,140,761 - -
Class B, Series 2 preferred
shares issued for cash upon
private placement, net of
issue costs of $9,200 - 4,678,364 5,229,831 - -
Options granted to non-
employees - - - - 58,202 -
Warrants issued in unit offering
(note 6) as financing cost - - - - 323,000 -
Beneficial conversion feature
on convertible debenture
(note 6) - - - - 264,300 -
Net loss - - - (6,308,351)
Translation adjustment - - - - - -
---------- -------- --------- ----------- --------- -------------
BALANCE, DECEMBER 31, 1999 2,925,000 $754,197 13,090,976 $13,838,782 $ 690,346 $(11,247,059)
========= ======== ========== =========== ========= =============
Accumulated other
comprehensive
income
---------------
cumulative
translation Stockholders' Comprehensive
adjustment equity income
--------------- ------- -------
BALANCE, DECEMBER 31, 1998 $ (83,299) $2,571,819
Class B, Series 3 preferred
shares issued on the
acquisition of ChromaXome - 673,405
Class B, Series 4 preferred
shares issued on the
acquisition of Xenova - 1,140,761
Class B, Series 2 preferred
shares issued for cash upon
private placement, net of
issue costs of $9,200 - 5,229,831
Options granted to non-
employees - 58,202
Warrants issued in unit offering
(note 6) as financing cost - 323,000
Beneficial conversion feature
on convertible debenture
(note 6) - 264,300
Net loss - (6,308,351) $(6,308,351)
Translation adjustment 334,677 334,677 334,677
--------- ---------- -----------
BALANCE, DECEMBER 31, 1999 $ 251,378 $4,287,644 $(5,973,674)
========= ========== ===========
See accompanying notes to consolidated financial statements.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Consolidated Statement of Cash Flows
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Cash provided by (used in):
Cash flows from operating activities:
Net loss $ (6,308,351) $ (2,564,590) $ (1,697,594)
Items not involving cash:
Write-off of acquired in-process research
and development 752,304 - -
Depreciation and amortization 1,752,978 127,343 37,282
Fair value of options granted to non-employees 58,202 44,844 -
Deemed discount amortization on convertible
debentures 372,300 - -
Unrealized foreign exchange gain, net (209,456) - -
Loss on disposal of assets 22,926 - -
Change in non-cash working capital relating to operations:
Accounts receivable (871,644) (263,221) (20,895)
Prepaid expenses (188,922) (5,900) (13,869)
Accounts payable 390,320 23,884 (38,642)
Accrued liabilities 182,442 54,461 (78,128)
Deferred revenue 2,477,626 - -
------------- ------------- -------------
Net cash used in operating activities (1,569,275) (2,583,179) (1,811,846)
Cash flows from investing activities:
Acquisition of Xenova Discovery (note 3(b)) (747,356) - -
Acquisition of ChromaXome Corporation
(note 3(a)) (2,315,432) - -
Purchase of fixed assets (57,780) (327,218) (93,610)
Purchase of intangible assets (131,679) (59,822) (20,969)
------------- ------------- -------------
Net cash used in investing activities (3,252,247) (387,040) (114,579)
Cash flows from financing activities:
Issue of long-term debt 1,092,683 - -
Repayment of long-term debt (3,208,664) - -
Increase in obligations under capital lease - - 333,550
Repayment of obligations under capital lease (88,743) (5,750) -
Proceeds on issuance of shares and warrants 5,229,831 3,247,400 3,547,711
------------- ------------- -------------
Net cash provided by financing activities 3,025,107 3,241,650 3,881,261
------------- ------------- -------------
Decrease (increase) in cash and cash equivalents (1,796,415) 271,431 1,954,836
Effect of changes in foreign exchange rates on cash
balances 158,644 (36,663) (51,506)
Cash and cash equivalents, beginning of year 2,315,418 2,080,650 177,320
------------- ------------- -------------
Cash and cash equivalents, end of year $ 677,647 $ 2,315,418 $ 2,080,650
============= ============= =============
See accompanying notes to consolidated financial statements.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Consolidated Statement of Cash Flows, page 2
(Expressed in U.S. Dollars)
Years ended December 31, 1999, 1998 and 1997
1999 1998 1997
---- ---- ----
Supplementary financial information
Cash paid for:
Interest expense $ 485,556 $ 27,522 $ 7,192
Income taxes - - -
Non-cash transactions:
Acquisitions (note 3):
Issuance of notes payable on acquisitions 6,632,757 - -
Issuance of shares on acquisitions 1,814,166 - -
Value assigned to warrants issued with
convertible debenture 323,000 - -
Value assigned to beneficial conversion
feature on convertible debenture 264,300 - -
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
1. LIQUIDITY AND FUTURE OPERATIONS:
TerraGen Discovery Inc. was incorporated under the Company Act of British
Columbia on April 23, 1996. The primary business purpose of the Company is
to research and develop bioactive compounds obtained from soil-borne
microorganisms and lichen. The Company commenced operations on May 1, 1996.
On December 7, 2000 TerraGen Discovery Inc. changed its name to Cubist
Pharmaceuticals Inc. (the "Company") subsequent to the completion of the
business combination transaction with Cubist Pharmaceuticals, Inc. (note
13(d)).
These consolidated financial statements have been prepared in accordance
with United States generally accepted accounting principles on a going
concern basis which assumes the realization of assets and the discharge of
liabilities and commitments in the normal course of business. The Company
has incurred losses of $6,308,351 during the year ended December 31, 1999
(1998 - $2,564,590; 1997 - $1,697,594). As at December 31, 1999, cash and
cash equivalents amounted to $677,647 and the Company had a working capital
deficiency of $1,107,458. In addition, the Company has had negative cash
flows from operations and will require significant additional expenditures
to develop its technology. The Company will require additional capital in
order to continue operations, fund its research and development activities,
and to create revenue sources to ensure recovery of the carrying value of
its assets. On October 23, 2000, the Company completed a business
combination transaction with Cubist Pharmaceuticals, Inc. ("Cubist"), a
United States incorporated public company. Ongoing financing of the
Company's business activities subsequent to the date of combination will be
under the control and direction of Cubist's management. These financial
statements do not include any adjustments to the amounts and classification
of assets, including the carrying amount of fixed assets, intellectual
property, methodology and patent rights, and liabilities that might be
necessary should the Company not be able to continue as a going concern.
2. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of consolidation:
These consolidated financial statements have been prepared in
accordance with generally accepted accounting principles in the United
States of America and include the accounts of the Company and its
wholly-owned subsidiaries, TerraGen Discovery Inc. ("Discovery US") and
TerraGen Discovery (UK) Ltd. ("Discovery UK"). All inter-company
balances and transactions have been eliminated.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements, page 2
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(b) Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could
differ from those estimates. Significant areas requiring the use of
management estimates relate to the valuation of fixed assets and
intangible assets, and the determination of their useful lives for
purposes of calculating depreciation and amortization.
(c) Foreign currency:
The functional currency of the Company and its subsidiaries is the
Canadian dollar. The translation of the foreign currency balances into
the Canadian dollar functional currency is performed as follows:
- Monetary items are translated at the rate of exchange in
effect at the balance sheet date;
- Non-monetary items are translated at historical exchange
rates; and
- Revenue and expense items are translated at the average
exchange rates prevailing in the period.
The resulting foreign exchange gains and losses are included in income
for the period.
The Company's Canadian dollar functional currency financial statements
are translated into the United States dollar reporting currency with
assets and liabilities translated at the exchange rate at the balance
sheet date and revenues and expenses translated into United States
dollars at average rates for the reporting period. Exchange gains and
losses resulting from this translation are excluded from the
determination of income and reported as other comprehensive income in
stockholders' equity.
(d) Cash and cash equivalents:
Cash and cash equivalents consist of cash and investments in highly
liquid securities that, on acquisition, have an initial term to
maturity of three months or less. Cash equivalents are valued at cost
and accrued interest which approximates market value.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements, page 3
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(e) Fixed assets:
Fixed assets are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives. The laboratory
equipment, database and office furniture and equipment are depreciated
over three to five years. Leasehold improvements are amortized over the
lesser of their estimated useful lives and the lease terms.
(f) Intangible assets:
Intellectual property and processes represents information databases,
and technological process information acquired through the Company's
business acquisitions. These assets are amortized on a straight-line
basis over their estimated useful life of four years.
Workforce represents the estimated cost savings or value of experienced
employees obtained through acquisitions and are amortized on a
straight-line basis over two years.
Patent costs include costs of obtaining patents directly or through an
acquisition transaction. Patent costs are amortized over the lesser of
the patent's remaining legal life and its useful life.
(g) Impairment of long-lived assets:
The Company reviews long-lived assets including identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset 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 future 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 assets exceed the fair value of the
assets generally measured as being equal to the estimated future
discounted net cash flows from the asset.
(h) Income taxes:
The Company follows the asset and liability method of accounting for
income taxes.
Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax basis and loss
and tax credit carry forwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period of
enactment. To the extent that it is not considered more likely than not
that a deferred tax asset will be realized, a valuation allowance is
provided.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements, page 4
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(i) Share issue costs:
The costs of issuing common shares are applied to reduce the value of
consideration assigned to such common shares.
(j) Deemed debt discounts:
As applicable, the consideration received on debt instruments issued is
allocated between the debt, the fair value of detachable warrants
issued with the debt and the intrinsic value of beneficial
(in-the-money) conversion options. In these consolidated financial
statements, the debt is disclosed net of deemed discounts. Discounts
attributable to detachable warrants are amortized to interest expense
over the term of the debt. Discounts attributable to a beneficial
conversion option are amortized over the period to the initial
conversion date. Amortization is calculated by the interest yield
method.
(k) Stock-based compensation:
The Company accounts for its employee stock-based compensation
arrangements in accordance with the provisions of Accounting Principles
Board (APB) Opinion No. 25 Accounting for Stock Issued to Employees,
and related interpretations. As such, compensation expense under the
Company's fixed stock option plans is recorded on the date of grant if
the market value of the underlying stock at the date of grant exceeds
the exercise price.
The Company recognizes compensation expense for stock options, common
stock and other instruments issued to non-employees for services
received based upon the fair value of the equity instruments issued.
Where the stock-based consideration has future performance requirements
to vest, no compensation is recognized until performance is complete
and the consideration is earned.
(l) Revenue recognition:
Revenue from collaborative arrangements typically includes initial
technology access or licensing fees and contract research payments
based on the achievement of specified milestones. Initial technology
access or licensing fees are recorded as deferred revenue upon receipt
and recognized as income on a systematic basis over the period that the
related products or services are delivered or obligations as defined in
the agreement are performed.
Contract research revenues consist of non-refundable research and
development funding under collaborative agreements. Contract research
funding generally compensates the Company for discovery expenses
related to the collaborative development programs for certain products
and product candidates of the Company, and is recognized as revenue at
the time research activities are performed under the terms of the
collaborative agreements.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements, page 5
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(m) Research and development expenditures:
Research and development costs are expressed as incurred. Equipment
used in research and development is capitalized only if it has an
alternative future use.
The portion of purchase price, if any, on any acquisition allocated to
in-process research and development is charged to expense upon
acquisition (note 3).
(n) Investment tax credits:
Investment tax credits for research and development expenditures are
recorded as a reduction of tax expense when collection is reasonably
assured under the flow-through method. Investment tax credits
receivable at December 31, 1999 were received in January 2000.
(o) Recent accounting pronouncements:
In June 1998, the Financial Accounting Standards Board issued
Statement of financial Accounting Standards No. 133 "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" (SFAS No. 133). SFAS
No. 133 establishes accounting and reporting standards requiring that
every derivative instrument be recorded on the balance sheet as either
an asset or liability measured at its fair value. SFAS No. 133, as
recently amended, is effective for fiscal years beginning after June
15, 2000. As to date, the Company has not entered into derivative
instruments, management believes the adoption of SFAS No. 133 will not
have a material effect on the Company's financial position or results
of operations.
The U.S. Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "REVENUE RECOGNITION IN FINANCIAL STATEMENTS" (SAB
101), on December 3, 1999. SAB 101 provides additional guidance on the
application of existing generally accepted accounting principles to
revenue recognition in financial statements and is effective for the
Company in the fourth quarter of fiscal 2000. The Company does not
expect the guidance of SAB 101 to have a material effect on its
financial statements upon adoption.
3. ACQUISITIONS:
(a) ChromaXome Corporation acquisition:
On March 17, 1999 the Company purchased substantially all of the assets
of ChromaXome Corporation under an asset purchase agreement dated March
12, 1999, among the Company, Trega Biosciences and ChromaXome
Corporation ("ChromaXome"). The consideration paid, excluding
acquisition costs, for the assets acquired consisted of approximately
$2 million in cash, notes payable of approximately $3 million and
600,000 Class B Series 3 voting preferred shares having an estimated
fair value of $673,405, convertible into Class A common shares of the
Company at the option of the holder. The value assigned to the
preferred shares was estimated by reference to the value of third
party share transactions near the acquisition date.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements, page 6
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
3. ACQUISITIONS:
(b) Xenova Discovery acquisition:
On April 8, 1999 the Company purchased substantially all of the assets
of Xenova Discovery Ltd. under an asset purchase agreement dated April
8, 1999, among the Company, Xenova Group PLC ("Xenova Group") and
Xenova Discovery Ltd. ("Xenova"). The consideration paid, excluding
acquisition costs, for the assets acquired consisted of L250,000
(being $402,250) in cash, notes payable of L2,250,000 (being
$3,619,663) and 1,000,000 Class B Series 4 voting preferred shares
having an estimated fair value of $1,140,761, which Class B shares are
convertible into Class A common shares of the Company at the option of
the holder for no additional consideration on a one-for-one basis. The
note payable is repayable at any time by the Company and may be
converted to equity of the Company at any time after 24 months from
the date of closing, at the option of either Xenova Group or the
Company.
At the date of acquisition, the vendors have entered into certain
agreements with third parties relating to the development, screening or
evaluation of specified compounds. If, during the 16 month period
subsequent to completion of the Xenova acquisition, the Company is able
to execute new agreements with the third parties for these services,
which agreements will replace and result in the termination of the
existing agreements, the Company is required to pay additional cash
consideration of L500,000 on an execution of each new agreement to
a maximum cumulative payment of L1,000,000.
Under the agreement, if any future financing agreement of the Company
results in the issue of additional equity shares of the Company at a
price per share lower than $1.71 Cdn, then the number of shares issued
pursuant to this acquisition will be retroactively adjusted to
effectively give Xenova Group the same number of shares as if they had
been issued at a lower price, with the lowest price under this
adjustment set at $1.50 Cdn.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements, page 7
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
3. ACQUISITIONS (CONTINUED):
(c) Summary of acquisitions:
The acquisitions have been accounted for by the purchase method with
results of operations of the acquired entities included in the
financial statements of the Company from the dates of acquisition.
ChromaXome Xenova Total
---------- ------ -----
Capital assets $ 22,806 $ 1,060,414 $ 1,083,220
Intangible assets 5,574,326 4,380,939 9,955,265
In-process research and development 407,310 344,994 752,304
Liabilities assumed (2,511) (278,567) (281,078)
------------- ------------- -------------
Net assets acquired 6,001,931 5,507,780 11,509,711
Consideration:
Notes payable (3,013,094) (3,619,663) (6,632,757)
Shares issued (673,405) (1,140,761) (1,814,166)
------------- ------------- -------------
Cash (including acquisition costs) $ 2,315,432 $ 747,356 $ 3,062,788
============= ============= =============
Acquired in-process research and development materially represents
acquired tangible assets having no alternative future use outside of
specified research and development activities.
The following table reflects, on an unaudited pro forma basis, the
combined results of the Company's operations acquired for the years
ended December 31, 1999 as if all such acquisitions had taken place
immediately prior to the beginning of the respective years presented.
Appropriate adjustments have been made to reflect the accounting basis
used in recording these acquisitions. No adjustments have been
recorded for nonrecurring charges arising on the acquisitions. This
pro forma information does not purport to be indicative of the results
of operations that would have resulted had the acquisitions been in
effect for the entire years presented, and is not intended to be a
projection of future results or trends.
1999 1998
---- ----
Revenues $ 1,493,005 $ 39,953
Net loss $ 8,037,736 $ 9,328,551
4. FIXED ASSETS:
Accumulated Net book
1999 Cost depreciation value
---- ------------- ------------ -------------
Laboratory equipment $ 1,149,515 $ 352,045 $ 797,470
Database 146,603 97,736 48,867
Office furniture and equipment 233,069 91,966 141,103
Leasehold improvements 106,733 21,009 85,724
------------ ------------ ------------
$ 1,635,920 $ 562,756 $ 1,073,164
============ ============ ============
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements, page 8
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
4. FIXED ASSETS (CONTINUED):
Accumulated Net book
1998 Cost depreciation Value
---- ------------ ------------ -------------
Laboratory equipment $ 77,800 $ 3,110 $ 74,690
Database 138,600 46,200 92,400
Office furniture and equipment 126,024 67,937 58,087
Leasehold improvements 97,007 19,675 77,332
------------ ------------ ------------
$ 439,431 $ 136,922 $ 302,509
============ ============ ============
Included in property and equipment are approximately $43,000 (1998 -
$45,000) in assets under capital leases with accumulated amortization in
the amount of approximately $29,000 (1998 - $10,000).
5. INTANGIBLE ASSETS:
Accumulated Net book
1999 Cost depreciation value
---- ------------- ------------ -------------
Patents (i) $ 4,917,196 $ 282,051 $ 4,635,145
Intellectual property and processes 5,038,240 882,010 4,156,230
Workforce 637,559 233,781 403,778
------------ ------------ ------------
$ 10,592,995 $ 1,397,842 $ 9,195,153
============ ============ ============
Accumulated Net book
1998 Cost depreciation value
---- ------------ ------------ -------------
Patents $ 87,738 $ 4,649 $ 83,089
============ ============ ============
(i) Patent cross-license:
The Company and Diversa Corp. ("Diversa") entered into a cross-license
with ("Diversa Agreement") dated November 18, 1999, pursuant to which
the Company granted to Diversa a co-exclusive world-wide non-royalty
bearing license to certain patented technology of the Company, subject
to certain restrictions. The license may not be sublicensed, Diversa
cannot use the macrodroplet screening technology for the term of the
agreement, and Diversa cannot use the anti-inflammatory or
immunosuppressive technology for a period of one year from the date of
the agreement.
Under the Diversa Agreement, Diversa paid an upfront license issue fee
of $2,500,000 and will pay annual license maintenance fees of $100,000
beginning in 2000, until the patents expire. The Company is required to
repay the license issue fee if they were to merge or be acquired prior
to November 18, 2004 by a company whose primary business is in vitro
DNA shuffling. No upfront license issue fee revenue was recognized
in 1999.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements, page 9
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
6. LONG-TERM DEBT:
1999 1998
---- ----
9.50% note payable issued March 16, 1999 maturing
the earlier of June 30, 2000 or upon completion of
a second financing. Interest is payable on maturity
and the principal of $1,000,000 note (note 3(b)) $ 1,000,000 $ -
LIBOR rate plus 1% note payable, issued April 8, 1999, maturing
on April 8, 2002. Interest is payable quarterly on March 31,
June 30, September 30, and December 31. The principal of
L1,500,000 is denominated in UK pounds
sterling (note 3(b)) 2,400,440 -
12% Convertible debentures issued November 16, 1999, to mature
March 31, 2000. The debentures are convertible at the
option of the holder into Class B preferred shares at a
price of $1.71 Cdn per share and interest is payable on
maturity. The principal of $1,625,000 is denominated in
Canadian dollars. The amount presented is
net of deemed discount (i) 886,934 -
------------ -----------
4,287,374 -
Less current portion (2,095,292) -
------------ -----------
$ 2,192,082 $ -
============ ===========
(i) 12% convertible debentures:
On November 16, 1999, the Company issued 1,625,000 units for cash
proceeds of $1,625,000 Cdn. Each unit entitles the holder to:
(a) one convertible debenture with a face value of $1 Cdn each,
bearing interest at 12%, secured by general security charge over
all present and after-acquired property of the Company, payable on
March 31, 2000. Each debenture is convertible into 0.5848 of a
Class B preferred share at the option of the holder; and
(b) one third of one share purchase warrant. Each whole share purchase
warrant entitles the holder to purchase one Class B preferred
share of the Company at $1.71 Cdn, until December 31, 1999 until
November 16, 2004.
The estimated value of the detachable share purchase warrants of
$323,000 was recorded as a discount on the convertible debenture and is
being amortized to interest expense over the term of the debt using the
effective yield method. At December 31, 1999, the unamortized discount
was $215,000.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements, page 10
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
6. LONG-TERM DEBT (CONTINUED):
(i) 12% convertible debentures (continued):
The convertible debenture has a beneficial conversion feature valued at
$264,300, equal to the aggregate excess market value of the underlying
common shares at the agreement date over the conversion rate. The
beneficial conversion feature was recorded as an addition to additional
paid-in capital and recognized on issuance as interest expense, as the
debenture being immediately convertible.
7. OBLIGATIONS UNDER CAPITAL LEASE
Future minimum payments under capital leases are as follows:
Year ended December 31,
2000 $ 205,481
2001 140,668
2002 11,127
2003 1,896
-----------
359,172
Interest portion (at rates ranging from 6.59% to 8.38%) (26,180)
------------
332,992
Less current portion (185,734)
-----------
$ 147,258
===========
8. SHARE CAPITAL:
Authorized:
30,000,000 Class A voting common shares without par value
30,000,000 Class B non-voting preferred shares without par value, of
which four series are designated as follows:
(i) 8,000,000 Class B voting preferred shares, Series 1;
(ii) 5,000,000 Class B voting preferred shares, Series 2;
(iii) 600,000 Class B voting preferred shares, Series 3;
and
(iv) 5,000,000 Class B voting preferred shares, Series 4.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements, page 11
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
8. SHARE CAPITAL (CONTINUED):
(a) Preferred share and warrant private placements:
By share purchase agreement (the "Agreement") dated May 1, 1997, the
Company issued 2,923,980 units at $1.71 Cdn per unit for total cash
proceeds of $3,547,711, net of issuance costs of $41,664. Each unit
consisted of one Class B, Series 1 preferred share without par value
and one-half of a share purchase warrant. Each warrant entitled the
holder to acquire one preferred share at an exercise price of $1.71 Cdn
per share. Pursuant to the Agreement, the investors agreed to subscribe
for $5,000,000 Cdn of additional units (the "Second Closing"). The
Second Closing occurred on October 8, 1998, resulting in the Company
issuing an additional 2,923,977 units at $1.71 Cdn per unit for total
cash proceeds of $3,247,074, net of issuance costs of $3,901. Each unit
consisted of one Class B, Series 1 preferred share without par value
and one-half of a share purchase warrant. Each warrant entitled the
holder to acquire one preferred share at an exercise price of $1.71 Cdn
per share.
If the Company issues additional shares at a price per share
which is lower than $1.71 Cdn (the "Floor Price"), including shares
issued pursuant to options, warrants or other securities convertible
into shares, but excluding shares issued to employees, directors,
consultants or strategic partners, or if a controlling block of the
shares of the Company are sold below the Floor Price, the number of
preferred shares issued pursuant to the Agreement will be adjusted
retroactively to reflect the lower price per share.
In December 1998, the shareholders of the Company authorized the
exchange of all of the then outstanding preferred share purchase
warrants for Class B, Series 1 preferred shares on a 3 for 1 basis, for
no additional consideration. Under these terms, 2,893,965 warrants were
exchanged, for no additional consideration, for 964,655 preferred
shares on December 31, 1998. The remaining preferred share purchase
warrants outstanding are non-transferable and entitle the holder to
purchase one preferred share without par value at a price of $1.71 Cdn
per share until May 1, 2001.
On March 4, 1999, the Company issued 4,678,364 Class B, Series 2
preferred shares at a price of $1.71 Cdn per share for gross proceeds
of $5,229,831, net of issuance costs of $9,200. Under the private
placement agreement, if any future financing agreement of the Company
issues any additional equity shares of the Company at a price per
share lower than $1.71 Cdn, or all of the equity shares of the Company
or a controlling block of equity shares of the Company is sold at a
price below $1.71 Cdn per share, the number of shares issued pursuant
to this private placement will be retroactively adjusted to
effectively give the purchasers the same price as those sold or issued
later at a lower price.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements, page 12
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
8. SHARE CAPITAL (CONTINUED):
(b) Preferred share purchase warrants:
As at December 31, 1999, there are 571,677 (1998 - 30,010) preferred
share purchase warrants outstanding to purchase preferred shares. A
total of 30,010 of the preferred share purchase warrants entitle the
holder to purchase one preferred share at a price of $1.71 Cdn per
share until May 1, 2001. The remaining 541,667 preferred share purchase
warrants entitle the holder to purchase one preferred share at a price
of $1.71 Cdn until November 16, 2004.
(c) Incentive stock options:
NON-EMPLOYEES:
During the year ended December 31, 1999, the Company granted 50,000
(1998 - 50,000; 1997 - 125,000) common stock options to advisory board
members for their services. The estimated fair value of these options
of $52,948 (1998 - $44,654; 1997 - $89,688) was determined using an
option pricing model with the following assumptions:
1999 1998 1997
---- ---- ----
Risk-free interest rate 5.10% 5.01% 5.24%
Dividend yield rate 0% 0% 0%
Price volatility 102% 113% 108%
Weighted average term of option 10 10 10
EMPLOYEES:
The Company has a separate fixed stock option plan for its United
Kingdom and Canadian employees which enable the Company to grant
options to employees, directors and consultants. Each participant
enters into an option agreement which sets forth, among other things,
the number of options granted, the exercise price and the vesting
conditions of the options. Options typically vest over four years and
have a contracted life of 10 years.
At December 31, 1999, the Company has granted 1,327,014 (1998 -
783,950) incentive stock options to employees, directors and
consultants to purchase common shares at exercise prices ranging from
$1.00 to $1.71 Cdn per share expiring on dates ranging to
January 31, 2009.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements, page 13
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
8. SHARE CAPITAL (CONTINUED):
(c) Incentive stock options (continued):
A summary of the status of the Company's fixed stock option plan is as
follows:
Outstanding options
-------------------
Number Average
of shares exercise price
------------- --------------
Cdn
Balance, December 31, 1996 77,750 $ 0.36
Options granted 275,750 1.39
Options exercised - -
Options cancelled (4,500) 1.00
------------- ------
Balance, December 31, 1997 349,000 1.31
Options granted 498,950 1.71
Options exercised (50,000) 0.01
Options cancelled (14,000) 1.00
------------- ------
Balance, December 31, 1998 783,950 1.59
Options granted 623,000 1.71
Options exercised - -
Options cancelled (79,936) 1.66
------------- ------
Balance, December 31, 1999 1,327,014 $ 1.64
============= ======
The following table summarizes information about fixed stock options
outstanding at December 31, 1999:
Options outstanding Options exercisable
--------------------------------------------- -----------------------------
Weighted
Number average Weighted Number
outstanding at remaining average exercisable at Weighted
Range of December 31, contractual exercise December 31, average
Exercise prices 1999 life price 1999 exercise price
--------------- ------------- ----------- ----------- ------------- --------------
$1.00 128,063 6.70 years $ 1.00 123,376 $ 1.00
$1.71 1,198,951 8.33 years $ 1.71 384,193 $ 1.71
---------
1,327,014 $ 1.64
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements, page 14
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
8. SHARE CAPITAL (CONTINUED):
(d) Proforma compensation expense information:
The Company has elected under Statement of Financial Accounting
Standards No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION" ("SFAS
123") to continue to apply the intrinsic value based method of
accounting for stock-based compensation plans under APB 25, "ACCOUNTING
FOR STOCK ISSUED TO EMPLOYEES". Under the intrinsic value method, stock
compensation is the excess, if any, of the quoted market value of the
stock at the date of grant over the exercise price the optionee must
pay to acquire the stock. There was no compensation expense recognized
under APB 25 for the years ended December 31, 1999, 1998, or 1997.
The Company follows the disclosure provisions of FAS 123 for its
employee stock-based compensation. Had compensation cost been
determined based on fair value of at the grant dates, consistent with
the measurement provision of FAS 123, net income (loss) would have
been:
1999 1998 1997
---- ---- ----
Net loss as reported $ 6,308,351 $ 2,564,590 $ 1,697,594
Additional compensation for fair value to options 16,925 927 886
-------------- ------------- -------------
Pro forma net loss $ 6,325,276 $ 2,565,517 $ 1,698,480
============== ============= =============
The following assumptions were used to estimate the fair value of
options:
1999 1998 1997
---- ---- ----
Risk-free interest rate 5.10% 5.01% 5.24%
Dividend yield rate 0% 0% 0%
Price volatility 0% 0% 0%
Weighted average expected life of options 3.82 years 3.65 years 2.84 years
The weighted average fair value per option granted in 1999 was $0.21
(1998 - $0.24; 1997 - $0.40).
9. FINANCIAL INSTRUMENTS:
(a) Fair value:
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximates their fair value
due to the short-term nature of the items. The estimated fair value of
long-term debt and capital lease obligations approximates their
carrying value. The estimated fair value of long-term debt and capital
lease obligation has been determined using current interest rates for
similar instruments.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements, page 15
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
9. FINANCIAL INSTRUMENTS (CONTINUED):
(a) Fair value (continued):
In evaluating the fair value information, considerable judgment is
required to interpret the market data used to develop the estimates.
The use of different market assumptions and/or different valuation
techniques may have a material effect on the estimated fair value
amounts. Accordingly, the estimates of fair value presented herein may
not be indicative of the amounts that could be realized in a current
market exchange.
(b) Foreign currency and interest rate risk:
The Company operates internationally, which gives rise to a risk that
earnings and cash flows may be negatively impacted by fluctuations in
interest and foreign exchange rates. To the date of these financial
statements, the Company has not entered into foreign currency hedging
arrangements.
10. INCOME TAXES:
The components of the deferred income tax assets and liabilities are as
follows:
1999 1998
---- ----
Deferred income tax assets:
Loss carry forwards $ 973,488 $ 786,958
Intangible property 211,153 -
Property and equipment 253,788 -
Accrued liabilities 2,848 -
Share issue costs 24,767 13,853
Research and development costs 1,744,689 1,651,161
Deferred revenue 997,630 -
------------- -------------
4,208,363 2,451,972
Less valuation allowance (4,096,892) (2,259,503)
-------------- --------------
111,471 192,469
Deferred income tax liabilities:
Intangible property (12,332) (137,905)
Property and equipment (99,139) (54,564)
------------- -------------
$ - $ -
============= =============
At December 31, 1999, the Company has net operating loss carry forwards for
income tax purposes of approximately $3,100,000 Cdn which are available to
offset future taxable income. The Company also has approximately $170,000
of investment tax credits expiring between 2006 and 2009 which are
available to offset future Federal income taxes payable.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements, page 16
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
11. COMMITMENTS:
The Company has an operating lease agreement for office and laboratory
premises and office equipment. Future minimum annual lease payments in each
of the next five fiscal years under these operating leases are
approximately $149,356.
12. RELATED PARTY TRANSACTIONS:
The Company and MDS Discovery, a shareholder with representation on the
Board of Directors of the Company, entered into a consulting agreement
during the year for which consulting fees were paid by the Company totaling
$58,552.
The Company leases certain laboratory and computer equipment from a
founding shareholder. The term of the agreement is for a period of ten
years commencing May 1, 1996. The Company is required to pay $1 per annum,
which is substantially below what would be charged to a non-related party.
13. SUBSEQUENT EVENTS:
(a) MM Venture Loan:
On January 17, 2000, the Company issued notes payable totalling
$3,000,000 Cdn to the MM Venture Finance Partnership ("MM"). The notes
payable bear interest at 14.4%, and are repayable in blended interest
and principal payments over 36 months up to January 17, 2003. Under the
terms of the financing, the Company's assets, including its patents,
were pledged as security for the loan. In addition, MM received 750,000
warrants entitling MM to purchase Class B Preferred Shares of the
Company at a price of $1.71 Cdn per share. Under the terms of the
Warrant Agreement, the exercise price per share is reduced to
$1.20 Cdn per share if 50% or more of the Company's outstanding
shares or substantially all of its assets, rights or properties are
acquired through a business combination transaction. The 750,000
warrants were exercised on October 23, 2000 for gross proceeds of
$900,000 Cdn, or $1.20 Cdn per share upon the subsequent completion of
a business combination (note 13(d)). The exercise of warrants at
$1.20 Cdn per share reduced the conversion price of the Xenova note
to $1.20 Cdn per share (note 3(b)).
(b) Trega note payable:
As per the terms of the acquisition of ChromaXome (note 3(a)), TerraGen
issued a $1,000,000 note payable to Trega due June 2000 or 15 days
after the completion of a second financing. As TerraGen completed a
financing in November 1999 and the MM Venture loan in January 2000 (see
above), the note became payable in February 2000. The Company
negotiated with Trega to extend the repayment date until April 15,
2000. The $1,000,000 note payable and the related interest to
April 15, 2000 of $103,000, was repaid on April 15, 2000.
(c) Maturity of convertible debentures:
The Company issued convertible debentures totalling $1,625,000 Cdn in
November 1999, due on March 31, 2000. As of April 3, 2000, the Company
had not paid back the notes and none of the investors had converted
the convertible debentures into equity. Under the terms of the
agreement, if the debentures are not repaid before maturity the
investors have the right to convert the convertible debentures to
preferred shares. Prior to entering into the acquisition agreement
with Cubist on August 5, 2000 (note 13(d)), the Company issued 950,293
Class B voting preferred shares on conversion of the convertible
debentures totalling $1,625,000 Cdn. In addition, 42,801 Class B
voting preferred shares were issued to repay outstanding interest
owed on the convertible debentures to March 31, 2000 of $73,190 Cdn.
CUBIST PHARMACEUTICALS INC.
(Formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements, page 17
(Expressed in U.S. Dollars)
Years ended December 31, 1999 and 1998
- --------------------------------------------------------------------------------
13. SUBSEQUENT EVENTS (CONTINUED):
(d) Business combination:
On August 5, 2000, Cubist Pharmaceuticals, Inc. ("Cubist"), a Delaware
corporation, and the Company entered into a definitive agreement for
Cubist to acquire 100% of the issued and outstanding Class A
common shares and Class B preferred shares of the Company. The
agreement became effective on October 23, 2000. Each issued and
outstanding common share of the Company was exchanged for 0.021323
exchangeable shares or common shares of Cubist. Each issued and
outstanding preferred share of the Company was exchanged for 0.030386
exchangeable shares or common shares of Cubist. The exchangeable
shares are exchangeable at any time at the option of the holder, on a
one-for-one basis, for Cubist common shares. All outstanding options,
warrants and convertible debentures of the Company were converted into
options, warrants and convertible debentures of Cubist, exercisable
for or convertible into Cubist common shares. The number of options,
warrants and the number of shares underlying the convertible
debentures and the related exercise or conversion prices are adjusted
to give effect to the Class A common and preferred share exchange
ratios. The transaction has been accounted for by Cubist as a pooling
of interests.
CUBIST PHARMACEUTICALS INC.
(formerly TerraGen Discovery Inc.)
Consolidated Financial Statements
As at SEPTEMBER 30, 2000 and for the
nine months ended September 30, 2000 and 1999.
(Unaudited)
(expressed in U.S. dollars)
CUBIST PHARMACEUTICALS INC.
(formerly TerraGen Discovery Inc.)
Consolidated Balance Sheets
(UNAUDITED) AS AT SEPTEMBER 30, 2000 and December 31, 1999
- --------------------------------------------------------------------------------
(expressed in U.S. dollars)
September 30, December 31,
2000 1999
------------- -------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 471,894 $ 677,647
Accounts receivable - net of allowance for doubtful accounts of $NIL (1999-$NIL) 341,798 292,676
-------------
Investment tax credits receivable - 926,699
Prepaid expenses 178,745 225,243
------------- -------------
Total current assets 992,437 2,122,265
FIXED ASSETS 881,590 1,073,164
INTANGIBLE ASSETS 7,555,012 9,195,153
------------- -------------
Total Assets $ 9,429,039 $ 12,390,582
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 927,600 $ 472,856
Accrued liabilities 309,357 475,841
Current portion of long-term debt 451,656 2,095,292
Current portion of obligations under capital lease 121,546 185,734
------------- -------------
Total current liabilities 1,810,159 3,229,723
LONG-TERM DEBT 2,930,728 2,192,082
OBLIGATIONS UNDER CAPITAL LEASE 62,513 147,258
DEFERRED REVENUE 2,443,343 2,533,875
------------- -------------
Total Liabilities 7,246,743 8,102,938
------------- -------------
STOCKHOLDERS' EQUITY
Authorized
30,000,000 common shares, without par value
30,000,000 Class B preferred shares, without par value
Issued
2,925,000 (1999-2,925,000) common shares 754,197 754,197
14,084,070 (1999-13,090,976) Class B preferred shares 14,950,879 13,838,782
ADDITIONAL PAID-IN CAPITAL 1,384,074 690,346
DEFICIT (14,984,811) (11,247,059)
ACCUMULATED OTHER COMPREHENSIVE INCOME 77,957 251,378
------------- -------------
Total stockholders' equity 2,182,296 4,287,644
------------- -------------
Total stockholders' equity and liabilities $ 9,429,039 $ 12,390,582
============= =============
See accompanying notes to consolidated financial statements
CUBIST PHARMACEUTICALS INC.
(formerly TerraGen Discovery Inc.)
Consolidated Statements of Operations
(UNAUDITED) FOR THE PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
- --------------------------------------------------------------------------------
(expressed in U.S. dollars)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-----------------------------------------------------------------------------------------
2000 1999 2000 1999
REVENUE $ 251,890 $ 254,483 $1,760,573 $ 756,602
-----------------------------------------------------------------------------------------
OPERATING EXPENSES
Research and development 1,230,930 1,712,735 3,856,128 4,043,245
Write-off of acquired in-process
research and development -- -- -- 752,304
General and administrative 234,184 618,816 1,494,203 1,134,350
-----------------------------------------------------------------------------------------
1,465,114 2,331,551 5,350,331 5,929,899
INTEREST INCOME (13,944) (23,273) (42,203) (84,178)
INTEREST EXPENSE 265,216 109,653 681,709 229,337
-----------------------------------------------------------------------------------------
251,272 86,380 639,506 145,159
-----------------------------------------------------------------------------------------
INVESTMENT TAX CREDIT RECOVERY (166,577) (115,506) (491,512) (348,596)
-----------------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $1,297,919 $2,047,942 $3,737,752 $4,969,860
=========================================================================================
See accompanying notes to consolidated financial statements
CUBIST PHARMACEUTICALS INC.
(formerly TerraGen Discovery Inc.)
Consolidated Statements of Cash Flows
(UNAUDITED) FOR THE PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
- --------------------------------------------------------------------------------
(expressed in U.S. dollars)
2000 1999
CASH FLOWS FROM OPERATIONS
Net loss for the period $(3,737,752) $(4,969,860)
Items not involving cash
Write-off of acquired in-process research and development -- 752,304
Depreciation and amortization 1,529,291 1,105,767
Stock based compensation 36,600 43,650
Discounts on long-term debt 298,723 --
Foreign exchange (47,051) (119,446)
Loss on disposal of fixed assets -- 23,528
Changes in non-cash working capital relating to operations
Accounts receivable 864,670 (423,173)
Investment tax credits receivable -- 169,348
Prepaid expenses 32,179 (175,486)
Accounts payable and accrued liabilities 347,408 550,504
-------------------------------------------
(675,932) (3,042,864)
-------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Xenova assets -- (747,365)
Acquisition of ChromaXome assets -- (2,315,432)
Purchase of fixed assets (28,945) (54,833)
Purchase of intangible assets (160,438) --
-------------------------------------------
(189,383) (3,117,630)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issue of long-term debt 2,035,416 --
Repayment of long-term debt (1,392,844) --
Repayment of obligations under capital lease (135,659) (71,301)
Proceeds from issuance of shares and warrants 49,659 5,229,831
-------------------------------------------
556,572 5,158,530
-------------------------------------------
DECREASE IN CASH AND CASH EQUIVALENTS (308,743) (1,001,964)
EFFECT OF CHANGES IN FOREIGN EXCHANGE RATES ON CASH BALANCES 102,990 145,894
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 677,647 2,315,418
-------------------------------------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 471,894 $ 1,459,348
===========================================
SUPPLEMENTARY FINANCIAL INFORMATION
Non-cash transactions
Acquisitions
Issuance of notes payable on acquisitions -- 6,632,757
Issuance of shares on acquisitions -- 1,814,166
Value assigned to warrants issued with long-term debt $ 657,128 --
Conversion of long-term debt to equity $ 1,112,097 --
See accompanying notes to consolidated financial statements
CUBIST PHARMACEUTICALS INC.
(formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements
(UNAUDITED) AS AT SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2000 AND 1999
- --------------------------------------------------------------------------------
(expressed in U.S. dollars)
1 NATURE OF BUSINESS
TerraGen Discovery Inc. ("the Company") was incorporated under the Company
Act of British Columbia on April 23, 1996. The primary business purpose of
the Company is to research and develop bioactive compounds obtained from
soil-borne micro-organisms and lichen. The Company commenced operations on
May 1, 1996. On December 7, 2000, the Company changed its name to Cubist
Pharmaceuticals Inc. subsequent to the completion of the business
combination transaction with Cubist Pharmaceuticals, Inc. ("Cubist")(note
6).
2 SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION
These consolidated financial statements have been prepared in accordance
with generally accepted accounting principles in the United States and
include the accounts of the Company and its wholly-owned subsidiaries,
TerraGen Discovery Inc. and TerraGen Discovery (UK) Ltd. All significant
inter-company balances and transactions have been eliminated.
BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments,
in the opinion of management, which are necessary to present fairly the
financial information set forth therein. Certain information and note
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Results of operations for the three
and nine-month periods ended September 30, 2000 and 1999 are not
necessarily indicative of future financial results.
The Company's Canadian dollar functional currency financial statements
are translated into the United States dollar reporting currency with
assets and liabilities translated at the exchange rate at the balance
sheet date and revenues and expenses translated into United States
dollars at average rates for the reporting period. Exchange gains and
losses resulting from this translation are excluded from the
determination of income and reported as other comprehensive income in
stockholders' equity.
These unaudited interim consolidated financial statements should be read
in conjunction with the Company's audited financial statements and notes
thereto included elsewhere in this Form 8-K/A.
CUBIST PHARMACEUTICALS INC.
(formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements
(UNAUDITED) AS AT SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2000 AND 1999
- --------------------------------------------------------------------------------
(expressed in U.S. dollars)
RECENT ACCOUNTING PRONOUNCEMENTS
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving
Stock Compensation, an interpretation of APB Opinion No. 25" ("FIN
44"). FIN 44 clarifies the application of APB Opinion No. 25 and among
other issues clarifies the following: the definition of an employee
for purposes of applying APB Opinion No. 25; the criteria for
determining whether a plan qualifies as a noncompensatory plan; the
accounting consequences of various modifications to the terms of
previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44
is effective July 1, 2000, but certain conclusions in FIN 44 cover
specific events that occurred after either December 15, 1998 or January
12, 2000. The application of FIN 44 did not have a material effect on
the Company's financial statements.
The U.S. Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), subsequently amended by SAB101A and SAB101B, on December 3, 1999.
SAB 101 provides additional guidance on the application of existing
generally accepted accounting principles to revenue recognition in
financial statements and is effective for the Company in the fourth
quarter of fiscal 2000. The Company does not expect the guidance of SAB
101 to have a material effect on its financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument be recorded on the balance sheet as either an asset
or liability measured at its fair value. SFAS No. 133, as recently
amended, is effective for fiscal years beginning after June 15, 2000. As
to date, the Company has not entered into derivative instruments and
management believes the adoption of SFAS No. 133 will not have a material
effect on the Company's financial statements.
CUBIST PHARMACEUTICALS INC.
(formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements
(UNAUDITED) AS AT SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2000 AND 1999
- --------------------------------------------------------------------------------
(expressed in U.S. dollars)
3 LONG-TERM DEBT
SEPTEMBER 30, DECEMBER 31,
2000 1999
LIBOR rate plus 1% note payable, issued April 8, 1999, and maturing on April
8, 2002. Interest is payable quarterly on March 31, June 30,
September 30, and December 31. The principal of L1,500,000 is
denominated in UK pounds sterling. The note is convertible to equity
anytime after April 8, 2001 at the option of the Company or the
lender. $2,218,594 $2,400,440
14.4% note payable issued to MM Venture Finance Partnership January 21,
2000 maturing on January 31, 2003. Blended principal plus interest is
payable on the last day of each month over 36 months to January 17,
2003. The principal of $3,000,000 is denominated in Cdn.
dollars. The amount presented is net of deemed discount. 1,163,790 -
9.50% note payable issued March 16, 1999. - 1,000,000
12% Convertible debentures issued November 16, 1999 maturing March 31,
2000. The debentures were convertible at the option of the holder
into Class B preferred shares at a price of Cdn. $1.71 per share and
interest is payable on maturity. The principal of $1,625,000 is
denominated in Canadian dollars. The amount presented is net of
deemed discount. - 886,934
-----------------------------------------
3,382,384 4,287,374
Less: Current portion (451,656) (2,095,292)
-----------------------------------------
$2,930,728 $ 2,192,082
=========================================
MM VENTURE FINANCE PARTNERSHIP NOTE
Under the terms of the financing, the Company's assets, including its
patents, were pledged as security for the note. In addition, MM Venture
Finance Partnership ("MM") received 750,000 warrants entitling MM to
purchase Class B preferred shares of the Company. The warrants entitle
MM to purchase preferred shares at an exercise price of Cdn. $1.71
per share. However, if certain conditions arise, the exercise price may
be reduced to Cdn. $1.20 or Cdn. $1.00 per share (Note 6).
9.5% NOTE PAYABLE
As per the terms of the acquisition of ChromaXome, the Company
issued a $1,000,000 note payable due June 2000 or 15 days after the
completion of a second financing. As the Company completed subsequent
financings in November 1999 and January 2000, the note became payable
in February 2000. The Company negotiated to extend the repayment
date until April 15, 2000. The $1,000,000 note payable and the related
interest of $103,000, was repaid on April 15, 2000.
12% CONVERTIBLE DEBENTURES
On November 16, 1999, the Company issued 1,625,000 units for cash
proceeds of $1,625,000. Each unit entitled the holder to:
CUBIST PHARMACEUTICALS INC.
(formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements
(UNAUDITED) AS AT SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2000 AND 1999
- --------------------------------------------------------------------------------
(expressed in U.S. dollars)
a) one convertible debenture with a face value of Cdn. $1.00 each,
bearing interest at 12% per annum and payable on March 31, 2000. A
general security charge over all present and after-acquired property
of the Company was provided as security. Each debenture was
convertible into 0.5848 of a Class B preferred shares at the option
of the holder; and
b) one-third of one share purchase warrant. Each whole share purchase
warrant entitled the holder to purchase one Class B preferred share
of the Company at Cdn. $1.71 after December 31, 1999 until November
16, 2004.
These debentures and related accrued interest, amounting to $1,112,097,
were converted to 993,094 Class B preferred shares on March 31, 2000.
4 DEFERRED REVENUE
The Company and Diversa Corp. ("Diversa") entered into a cross license
agreement (the "Diversa Agreement") dated November 18, 1999, pursuant to
which the Company granted to Diversa a co-exclusive world-wide non-royalty
bearing license to certain patented technology of the Company, subject to
certain restrictions. The license may not be sublicensed, Diversa cannot
use the macrodroplet screening technology for the term of the agreement,
and Diversa cannot use the anti-inflammatory or immunosuppressive
technology for a period of one year from the date of the agreement.
Under the Diversa Agreement, Diversa paid an upfront license issue fee of
U.S. $2,500,000 and will pay annual license maintenance fees of
U.S. $100,000 beginning in December 2000, until the patents expire.
The Company is required to repay the upfront license issue fee if they
were to merge or be acquired prior to November 18, 2004 by a company
whose primary business is in vitro DNA shuffling. No upfront license fee
revenue has been recognized in 2000 or 1999.
5 COMPREHENSIVE LOSS
Comprehensive loss includes foreign currency translation adjustments and
net loss.
Nine months ended September 30
------------------------------
2000 1999
---------- -----------
Net loss $3,737,752 $4,969,860
Other comprehensive loss:
Foreign currency translation 173,421 (152,746)
---------- -----------
Comprehensive loss $3,911,173 $4,817,114
========== ===========
CUBIST PHARMACEUTICALS INC.
(formerly TerraGen Discovery Inc.)
Notes to Consolidated Financial Statements
(UNAUDITED) AS AT SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2000 AND 1999
- --------------------------------------------------------------------------------
(expressed in U.S. dollars)
6 SUBSEQUENT EVENTS
On August 5, 2000, Cubist, a Delaware corporation, and the Company entered
into a definitive agreement for Cubist to acquire the Company. The
agreement became effective on October 23, 2000 after certain conditions
were satisfied. Each issued and outstanding common share of the Company
was exchanged for 0.021323 shares of Cubist common stock. Each issued and
outstanding preferred share of the Company was exchanged for 0.021323
shares of Cubist common stock. All outstanding options, warrants and
convertible debentures of the Company were converted into options,
warrants and convertible debentures of Cubist. The transaction has
been accounted for as a pooling of interests by Cubist.
Subsequent to September 30, 2000, 760,101 preferred share purchase
warrants were exercised for net proceeds of Cdn. $912,121 (Note 3).
CUBIST PHARMACEUTICALS, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial
statements assume a business combination consummated on October 23, 2000
between Cubist Pharmaceuticals, Inc., referred to herein as "Cubist," and
Cubist Pharmaceuticals Inc. (formerly TerraGen Discovery Inc.), referred to
herein as "TerraGen," accounted for using the pooling-of-interests method and
are based upon the respective historical financial statements and the notes
thereto of Cubist, as well as the historical consolidated financial
statements and the notes thereto of TerraGen.
The pro forma condensed combined financial statements reflect the pro
forma financial position of the combining entities as of September 30, 2000
and the pro forma results of operations for the nine months ended September
30, 2000 and the years ended December 31, 1998 and 1999.
The pro forma condensed combined financial statements are presented for
illustrative purposes only and are not necessarily indicative of the
financial position or operating results that would have been achieved if the
merger had been consummated as of the beginning of the periods presented, nor
are they necessarily indicative of the future financial position or operating
results of Cubist.
Cubist expects to incur merger related charges for the transaction costs
of the merger, and for other related costs, principally in the quarter in
which the merger is consummated. Such transaction charges are currently
estimated to be $1.3 million and will include the direct transaction costs of
the merger, including primarily fees to financial advisors, legal counsel
and independent accountants.
These pro forma condensed combined financial statements are based on,
and should be read in conjunction with the historical financial statements
and the related notes thereto of Cubist, as filed in Cubist's Form 10K for
the year ended December 31, 1999 and in Cubist's Form 10Q for the nine months
ended September 30, 2000 as well as the historical consolidated financial
statements of TerraGen included in this Form 8K/A.
CUBIST PHARMACEUTICALS, INC.
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2000
(UNAUDITED)
Historical Pro Forma Pro Forma
Cubist TerraGen Adjustments Combined
--------------- ----------------------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $80,105,744 $471,894 -- $80,577,638
Accounts receivable 500,000 341,798 841,798
Prepaid expenses and other current assets 1,911,629 178,745 2,090,374
--------------- ----------------------------- ---------------
Total current assets 82,517,373 992,437 -- 83,509,810
Property and equipment, net 38,842,370 881,590 -- 39,723,960
Goodwill and other intangible assets, net -- 7,555,012 -- 7,555,012
Long-term investments 72,286,408 -- -- 72,286,408
Other assets 2,078,528 -- -- 2,078,528
--------------- -------------- ----------- ---------------
Total assets $195,724,679 $9,429,039 $ -- $205,153,718
=============== ============== =========== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $6,338,239 $1,236,957 1,282,000(2b) $8,857,196
Current portion of long-term debt 744,148 451,656 -- 1,195,804
Current portion of capital lease obligations 545,482 121,546 -- 667,028
--------------- -------------- ----------- ---------------
Total current liabilities 7,627,869 1,810,159 1,282,000 10,720,028
Long-term debt, net of current portion 40,899,494 2,930,728 -- 43,830,222
Long-term capital lease obligation, net of current 332,949 62,513 -- 395,462
portion
Deferred revenue -- 2,443,343 -- 2,443,343
--------------- -------------- ----------- ---------------
Total liabilities 48,860,312 7,246,743 1,282,000 57,389,055
Total stockholders' equity 146,864,367 2,182,296 (1,282,000)(2b) 147,764,663
--------------- -------------- ----------- ---------------
Total liabilities and stockholders' equity $195,724,679 $9,429,039 $ -- $205,153,718
=============== ============== =========== ===============
CUBIST PHARMACEUTICALS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(UNAUDITED)
Historical Pro Forma Pro Forma
Cubist TerraGen Adjustments Combined
--------------- ------------- ------------------------------
Revenues $2,496,247 $1,760,573 -- $ 4,256,820
Operating expenses:
Research and development 25,592,426 3,856,128 -- 29,448,554
General and administrative 5,598,592 1,494,203 -- 7,092,795
--------------- ------------- ------------- --------------
Total operating expenses 31,191,018 5,350,331 -- 36,541,349
Operating Loss (28,694,771) (3,589,758) -- (32,284,529)
Interest income 5,959,473 42,203 -- 6,001,676
Interest expense (435,731) (681,709) -- (1,117,440)
--------------- ------------- ------------- --------------
Loss before income taxes (23,171,029) (4,229,264) -- (27,400,293)
Income tax benefit -- 491,512 491,512
Net loss $(23,171,029) $(3,737,752) $ -- $(26,908,781)
=============== ============= ============= ==============
Basic and diluted net loss per common share $(0.91) $(1.28) $(1.05)
Weighted average number of common shares for
basic and diluted net loss per common share 25,473,432 2,925,000 25,535,802
CUBIST PHARMACEUTICALS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(UNAUDITED)
Historical Pro Forma Pro Forma
Cubist TerraGen Adjustments Combined
----------------- --------------- -------------------------------
Revenues $5,353,379 1,493,005 -- $6,846,384
Operating expenses:
Research and development 19,351,332 6,187,335 -- 25,538,667
General and administrative 4,297,723 1,902,961 -- 6,200,684
----------------- --------------- ------------- --------------
Total operating expenses 23,649,055 8,090,296 -- 31,739,351
Operating Loss (18,295,676) (6,597,291) -- (24,892,967)
Interest income 813,507 91,140 -- 904,647
Interest expense (331,341) (727,793) -- (1,059,134)
----------------- --------------- ------------- ---------------
Loss Before Income Taxes (17,813,510) (7,233,944) -- (25,047,454)
Income tax benefit -- 925,593 -- 925,593
----------------- --------------- ------------- ---------------
Net loss $(17,813,510) $(6,308,351) -- $(24,121,861)
================= =============== ============= ===============
Basic and diluted net loss per common share $(0.99) $(2.16) $(1.33)
Weighted average number of common shares outstanding 18,040,815 2,925,000 18,103,185
for basic and diluted net loss per common share
CUBIST PHARMACEUTICALS, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
UNAUDITED
Historical Pro Forma Pro Forma
Cubist TerraGen Adjustments Combined
--------------- --------------- ---------------------------
Revenues $1,634,199 $39,953 -- $1,674,152
Operating expenses:
Research and development 10,489,258 1,867,508 -- 12,356,766
General and administrative 3,495,264 957,436 -- 4,452,700
--------------- --------------- ------------ -------------
Total operating expenses 13,984,522 2,824,944 -- 16,809,466
Operating Loss (12,350,323) (2,784,991) -- (15,135,314)
Interest income 858,919 72,426 -- 931,345
Interest expense (333,602) (27,522) -- (361,124)
--------------- --------------- ------------ -------------
Loss Before Income Taxes (11,825,006) (2,740,087) -- (14,565,093)
Income tax benefit -- 175,497 -- 175,497
--------------- --------------- ------------ -------------
Net loss $(11,825,006) $(2,564,590) $ -- $(14,389,596)
=============== =============== ============ =============
Basic and diluted net loss per common share $(0.97) $(0.89) $(1.17)
Weighted average number of common shares outstanding 12,224,404 2,887,465 12,285,973
for basic and diluted net loss per common share
CUBIST PHARMACEUTICALS, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited pro forma condensed combined financial statements assume
a business combination consummated on October 23, 2000 between Cubist
Pharmaceuticals, Inc., referred to herein as "Cubist," and Cubist
Pharmaceuticals Inc. (formerly TerraGen Discovery Inc.), referred to
herein as "TerraGen," accounted for using the pooling-of-interests
method and are based upon the respective historical financial
statements and the notes thereto of Cubist, as well as the historical
consolidated financial statements of TerraGen.
Pursuant to the merger agreement, Cubist will issue .021323 shares
(the "exchange ratio") of Cubist Common Stock (the "Cubist Shares")
in exchange for each outstanding share of TerraGen common stock and
.030386 Cubist Shares in exchange for each outstanding share of TerraGen
preferred stock.
The pro forma condensed combined statements of operations for the nine
months ended September 30, 2000 and the years ended December 31, 1998
and 1999 set forth the pro forma results of operations of Cubist
and TerraGen as if the merger of Cubist and TerraGen had occurred at the
beginning of that nine month period and each of those years, respectively.
The pro forma condensed combined financial statements are unaudited,
are intended for informational purposes and are not necessarily
indicative of the financial position or results of operations of the
combined entity which would have been reported had the merger of Cubist
and TerraGen occurred at the beginning of the periods presented, nor are
they necessarily indicative of the future financial position or results
of operations of the combined entity upon consummation of the merger.
These pro forma condensed combined financial statements should be read in
conjunction with Cubist's financial statements included in Cubist's
Quarterly Report on Form 10-Q for the quarterly period ended
September 30, 2000 and Cubist's Annual Report on Form 10-K for the
year ended December 31, 1999 and TerraGen's consolidated financial
statements for the years ended December 31, 1999 and 1998 and for the
nine months ended September 30, 2000 included in this form 8K-A.
The unaudited pro forma condensed combined balance sheet as of
September 30, 2000 includes the impact of all transactions, whether of
a recurring or nonrecurring nature, that can be reasonably estimated
and should be reflected as of that date.
CUBIST PHARMACEUTICALS, INC.
NOTES TO PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
2. PRO FORMA ADJUSTMENTS
(a) Intercompany Transactions - There were no intercompany transactions
that required elimination from the unaudited pro forma condensed
combined statements of operations or balance sheet.
(b) Accrued Expenses - The pro forma adjustment to current liabilities
and stockholders' equity in the amount of $1.3 million reflects
accruals in connection with the estimated transaction costs related to
the merger. These estimated transaction costs consist primarily of fees
to financial advisors, legal counsel and independent accountants. These
costs are not considered in the unaudited pro forma condensed combined
statements of operations. These estimated transaction costs will be
charged against the results of operations during the fourth quarter of
2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CUBIST PHARMACEUTICALS, INC.
By: /s/ Thomas A. Shea
----------------------------------
Thomas A. Shea,
Vice President, Treasurer and
Chief Financial Officer
Dated: January 8, 2001