SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 8-K
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
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(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
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ITEM 5. OTHER EVENTS.
Cubist Pharmaceuticals, Inc. is filing this Current Report on Form 8-K
for the purpose of disclosing (i) supplemental consolidated financial statements
of Cubist relating to the acquisition of TerraGen Discovery Inc. and (ii) a
press release relating to the signing of a licensing agreement with Gilead
Sciences, Inc.
On October 23, 2000 Cubist completed the acquisition of TerraGen
Discovery Inc. On November 7, 2000, Cubist filed with the SEC the requisite
Current Report on Form 8-K for the purpose of reporting the acquisition of
TerraGen. On January 8, 2001, Cubist filed with the SEC the requisite amendment
to the November 7, 2000 Current Report on Form 8-K/A for the purpose of
including financial statements and pro forma financial information required by
Item 7 of Form 8-K relating to the acquisition of TerraGen. Filed herewith are
supplemental consolidated financial statements of Cubist relating to the
acquisition of TerraGen in a transaction accounted for as a pooling of
interests.
On January 7, 2001 Cubist issued a joint press release announcing that it
signed a licensing agreement with Gilead Sciences, Inc. granting them the
exclusive right to commercialize Cubist's investigational antibacterial drug
Cidecin(TM) (daptomycin for injection) and an oral formulation of daptomycin in
16 European countries following regulatory approval. The press release has been
filed as an exhibit to this Current Report on Form 8-K, attached hereto as
Exhibit 99.1.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS OF CUBIST.
The supplemental consolidated balance sheets of Cubist for the years
ended December 31, 1998 and 1999 and the related supplemental consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1999, and the supplemental
condensed consolidated balance sheets of Cubist as of September 30, 2000 and
December 31, 1999 the related supplemental condensed consolidated statements
of operations and cash flows for the three and nine months ended September
30, 2000 and 1999, attached hereto as ATTACHMENT A.
EXHIBITS.
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of KPMG LLP
99.1 Press Release dated January 7, 2001
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 22, 2001
ATTACHMENT A
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The accompanying financial statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations contain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding Cubist's drug development programs,
clinical trials, receipt of regulatory approval, capital needs, collaborative
agreements, intellectual property, expectations and intentions.
Forward-looking statements may be identified or qualified by words such as
"likely", "will", "suggests", "may", "would", "could", "should", "expects",
"anticipates", "estimates", "plans", "projects", "believes", or similar
expressions and variants of those words or expressions.
Forward-looking statements necessarily involve risks and uncertainties,
and Cubist's actual results could differ materially from those anticipated in
the forward-looking statements due to a number of factors. The forward-looking
statements contained herein represent our judgment as of the date of this
prospectus. Cubist cautions readers not to place undue reliance on such
statements. We undertake no obligation to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future.
OVERVIEW
Since our incorporation on May 1, 1992 and commencement of operations
in February 1993, we have been engaged in the research, development and
commercialization of novel antimicrobial drugs to combat serious and
life-threatening bacterial and fungal infections, including those caused by
bacteria and fungi resistant to commercially available drugs. We have a
limited history of operations and have experienced significant net losses
since inception. We had an accumulated deficit of $90.8 million through
September 30, 2000. We expect to incur significant additional operating
losses over the next several years and expect cumulative losses to increase
due to expanded research and development efforts, preclinical testing and
clinical trials and the development of manufacturing, marketing and sales
capabilities.
On October 23, 2000, C&T Acquisition Corporation, a subsidiary of
Cubist, acquired TerraGen Discovery Inc., ("TerraGen") a natural products
discovery company with operations in Vancouver, Canada and Slough, England.
Following the acquisition, the name of TerraGen was changed to Cubist
Pharmaceuticals Inc. TerraGen conducts its Slough, England operations through
a wholly-owned subsidiary. With the acquisition, Cubist acquired proprietary
technologies and expertise in the area of small molecule drug discovery from
natural products. Pursuant to the acquisition, Cubist indirectly through C&T
Acquisition Corporation acquired all of the issued and outstanding common and
preferred shares of TerraGen, and assumed all of the outstanding options,
warrants and convertible debentures of TerraGen, by issuing 334,933 shares of
Cubist common stock and causing C&T Acquisition Corporation to issue 178,491
exchangeable shares. The exchangeable shares are exchangeable at any time at
the option of the holder, on a one-for-one basis, subject to certain
adjustments, for shares of Cubist common stock. All exchangeable shares that
remain outstanding will be automatically exchanged for shares of Cubist
common stock on October 23, 2002. The options, warrants and convertible
debentures of TerraGen assumed by Cubist pursuant to the acquisition are
exercisable or convertible for 94,605 shares of Cubist common stock. This
acquisition had been accounted for using the pooling-of-interests method of
accounting. This Management's Discussion and Analysis of Financial Condition
and Results of Operations and the accompanying Supplemental Consolidated
Financial Statements of Cubist have been restated to include the results and
balances of C&T Acquisition Corporation and TerraGen and its subsidiaries for
all periods presented.
1
In recent years we have enhanced our drug discovery and development
programs and funded a portion of our capital requirements, by entering into
collaborative agreements with pharmaceutical and biotechnology companies. We
have entered into collaborative agreements based specifically on our
aminoacyl-tRNA synthetase program with Merck and Bristol-Myers Squibb, and a
collaborative agreement with Novartis based on our VITA functional genomics
technology. Under these collaborative agreements, we have received sponsored
research payments and, if drug development milestones are achieved, we are
entitled to milestone payments. In addition, we will be entitled to receive
royalties on worldwide sales of any drug developed and commercialized from these
collaborations. We have received all of the sponsored research payments that we
were entitled to under our collaborative agreements with Merck and
Bristol-Meyers Squibb, although Merck and Bristol-Myers Squibb are still
required to make milestone payments and pay royalties to us for any drug
developed and commercialized from these collaborations.
On November 7, 1997, we entered into a license agreement with Eli
Lilly and Company, pursuant to which we acquired exclusive worldwide rights
to develop, manufacture and market Cidecin(TM) (daptomycin for injection). In
exchange for such license, we paid to Eli Lilly an upfront license fee in
cash, and if drug development milestones are achieved, have agreed to pay
milestone payments in cash or by issuing shares of our common stock to Eli
Lilly. In addition, we will be required to pay royalties to Eli Lilly on
worldwide sales of Cidecin. On February 19, 1999, we issued to Eli Lilly
56,948 shares of our common stock as a milestone payment which was due upon
commencement of Phase III clinical trials of Cidecin. The value of the common
stock issued was $250,000 and was recorded as research and development
expense.
On February 3, 1999, we entered into a collaborative research and license
agreement with Novartis Pharma AG to use our VITA functional genomics technology
to validate and develop assays for antimicrobial targets and to identify new
compounds for development as antimicrobial agents. In exchange for the license,
Novartis is making research payments and, if scientific and development
milestones are achieved, Novartis will make milestone payments to us. In
addition, Novartis will be required to pay royalties to us on worldwide sales of
any drug developed and commercialized from any products derived from this
collaboration. Upon the signing of the research and license agreement, Novartis
purchased, and we issued to Novartis, 797,448 shares of our common stock for a
total purchase price of $4.0 million in cash.
On March 17, 1999, we purchased the assets of ChromaXome Corporation
for $5.7 million, excluding acquisition costs, by paying $2 million in cash,
issuing notes payable of approximately $3 million and issuing 18,231 shares
of our common stock.
On April 8, 1999, we purchased the assets of Xenova Discovery Ltd. for
$5.2 million, excluding acquisition costs, by paying $400,000 in cash,
issuing notes payable of approximately $3.6 million and issuing 30,386 shares
of our common stock.
On November 18, 1999 we entered into a cross-license agreement with a
third party. Under the terms of the agreement, we granted a co-exclusive
world-wide non-royalty bearing license to certain patented technology,
subject to certain restrictions. The license may not be sublicensed, the
third party cannot use the macrodroplet screening technology for the term of
the agreement and the third party cannot use the anti-inflammatory or
immunosuppressive technology for a period of one year from the date of the
agreement. Under the agreement, the third party 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. We are required to repay the
license issue fee if we were to merge or be acquired prior to November 18,
2004 by a company whose primary business is DNA shuffling. No upfront license
issue fee revenue was recognized in 1999.
2
In April 2000, we entered into a development and supply agreement with
Abbott Laboratories (Abbott) pursuant to which Abbott has agreed to assist
Cubist in the development of daptomycin as a parenteral formulation and to
manufacture and sell exclusively to Cubist, daptomycin as a parenteral
formulation. Under the terms of this agreement, Cubist has agreed to make
certain milestone payments to Abbott for their development efforts and
assistance in obtaining an approved New Drug Application (NDA) for daptomycin.
Cubist has made payments totaling $325,000 to date. If the FDA approves the
daptomycin NDA, Cubist will purchase minimum annual quantities of drug product
from Abbott over a five year period beginning in 2001.
In June 2000, Cubist entered into a services agreement with
Gist-brocades Holding A.G. (DSM), an affiliated company of DSM Capua pursuant
to which DSM has agreed to provide supervisory and advisory services to
Cubist relating to the equipping of the manufacturing facility at DSM Capua.
Cubist has also entered into a manufacturing and supply agreement with DSM
Capua pursuant to which DSM Capua has agreed to manufacture and supply to
Cubist bulk daptomycin drug substance for commercial purposes. Under the
terms of the manufacturing and supply agreement, DSM Capua is required to
prepare its manufacturing facility in Italy to manufacture bulk daptomycin
drug substance in accordance with Good Manufacturing Practices standards.
Under the terms of the service agreements, Cubist will make a series of
scheduled payments to DSM over a five year period beginning in 2000 in order
to reimburse DSM for certain costs to be incurred by DSM Capua in connection
with the preparation, testing and validation of its manufacturing facility.
In February 2000, Cubist reimbursed $750,000 of these costs to DSM Capua. In
addition, in consideration for the implementation of the Cubist technology in
the facility by DSM Capua, Cubist has agreed to make milestone payments to
DSM if specific phases of the preparation of its manufacturing facility are
completed within specified periods of time. Cubist is accruing these
milestone payments on a quarterly basis. Upon completion of the preparation
of DSM Capua's manufacturing facility and a determination by the FDA that the
manufacturing facility complies with Good Manufacturing Practices standards,
Cubist will purchase minimum annual quantities of bulk daptomycin drug
substance from DSM over a five-year period beginning in 2002.
On September 8, 2000, Cubist announced the purchase of a new corporate
headquarters building in Lexington, Massachusetts. The new facility is 88,000
square feet, approximately 35,000 of which is constructed as laboratory
space. Cubist believes this should increase its operating efficiencies to
better meet its corporate goals and objectives and plans to relocate to the
facilities in the third quarter of 2001. To finance the purchase, Cubist
issued $39 million of convertible notes to John Hancock Life Insurance
Company. This financing covers the building purchase price of approximately
$34 million and includes $5 million for facility improvements. The five-year
notes carry a coupon rate of 8.5% and can be converted to Cubist common stock
at $63.8625 per share which represents a premium to the market price
determined at the time of commitment. Cubist retains the right to redeem
these notes after three years.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES. Total revenues in the three months ended September 30, 2000
were $1,314,000 compared to $3,367,000 in the three months ended September 30,
1999, a decrease of $2,053,000 or 61.0%. The revenue earned in the three months
ended September 30, 2000 consisted of research support funding from the Novartis
and other collaborations. The revenue earned in the three months ended September
30, 1999 consisted of $3,317,000 in research support funding from the Merck,
Novartis and other collaborations; and $50,000 in funding from SBIR grants. The
decrease was primarily due to decreased research support funding associated with
the Merck collaboration.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenses in the three months ended September 30, 2000 were $9,964,000
compared to $6,578,000 in the three months ended September 30, 1999, an
increase of $3,386,000 or 514.7%. The increase was largely due to increased
clinical trial and clinical material manufacturing costs related to
Cidecin(TM) development and the additional personnel and purchases required
by such development partially offset by a work force reduction in our Canada
and UK operations.
3
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
in the three months ended September 30, 2000 were $2,901,000 compared to
$1,566,000 in the three months ended September 30, 1999, an increase of
$1,335,000 or 85.2%. The increase was largely due to increased costs related to
personnel, recruiting and legal expenses.
INTEREST INCOME AND EXPENSE. Interest income in the three months ended
September 30, 2000 was $2,631,000 compared to $216,000 in three months ended
September 30, 1999, an increase of $2,415,000 or 1181.1%. The increase in
interest income was due primarily to a higher average cash, cash equivalent
and investment balances during the three months ended September 30, 2000 as
compared to the three months ended September 30, 1999. Interest expense in
the three months ended September 30, 2000 was $555,000 as compared to
$208,000 during the three months ended September 30, 1999 was primarily due
to the MM Venture financing and the issuance of convertible notes to John
Hancock.
INCOME TAX BENEFIT. Income tax benefit in the three months ended
September 30, 2000 was $0 compared to $115,000 in the three months ended
September 30, 1999, a decrease of 115,506 or 100%. The decrease was due to in
vestment tax dredits for the increased research and development expenditures
related to Cubist's Canadian operations during the three months ended
September 30, 1999 as compared to the three months ended September 30, 2000.
NET LOSS. The net loss during the three months ended September 30, 2000
was $9,474,000 compared to $4,654,000 during the three months ended September
30, 1999, an increase of $4,820,000 or 103.6%. The increase was primarily due to
additional expenses incurred associated with the development of Cidecin(TM).
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES. Total revenues in the nine months ended September 30, 2000
were $4,257,000 compared to $5,336,000 in the nine months ended September 30,
1999, a decrease of $1,079,000 or 20.2%. The revenue recognized in the nine
months ended September 30, 2000 consisted of $3,949,000 in research support
payments from the Novartis and other collaborations, $308,000 in SBIR grants.
In the nine months ended September 30, 1999, revenues consisted of $5,236,000
in research support funding from the Merck, Bristol-Myers Squibb and other
collaborations; and $100,000 in SBIR grants. The decrease of revenues was due
to the decrease of research support funding associated with the Merck and
Bristol Myers Squibb collaborations, offset by increased funding from SBIR
grants and revenues associated with other collaboration.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenses in the nine months ended September 30, 2000 were $29,449,000 compared
to $17,835,000 in the nine months ended September 30, 1999, an increase of
$11,614,000 or 65.1%. The increase was largely due to increased costs related to
the development of Cidecin(TM), and the additional personnel and purchases that
are required by such development.
WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT COSTS. The
write-off of acquired research and development costs in the nine months ended
September 30, 2000 was $0 compared to $752,304 for the nine months ended
September 30, 1999, a decrease of $752,304 or 100%. The decrease is due to a
write-off of acquired in-process research and development costs, related to
the acquisitions of ChromaXome and Xenova in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
in the nine months ended September 30, 2000 were $7,093,000 compared to
$4,036,000 in the nine months ended September 30, 1999, an increase of
$3,057,000 or 75.7%. The increase was primarily due to increased costs related
to personnel, recruiting and legal expenses.
INTEREST INCOME AND EXPENSE. Interest income in the nine months ended
September 30, 2000 was $6,002,000 compared to $751,000 in the nine months ended
September 30, 1999, an increase of $5,251,000 or 699.2%. The increase in
interest income was due primarily to a higher average cash, cash equivalent and
investment balances during the nine months ended September 30, 2000 as compared
to the nine months ended September 30, 1999. Interest expense in the nine months
ended September 30, 2000 was $1,117,000 as compared to $489,000 during the nine
months ended September 30, 1999 was primarily due to the MM Venture financing
and the issuance of convertible notes to John Hancock related to the purchase
of Cubist's new headquarters.
INCOME TAX BENEFIT. Income tax benefit in the nine months ended
September 30, 2000 was $491,000 compared to $349,000 in the nine months ended
September 30, 1999, an increase of $142,000 or 40.4%. The increase was due
to investment tax credits for increased research and development
expenditures related to Cubist's Canadian operations during the nine months
ended September 30, 2000 as compared to the nine months ended September 30,
1999.
NET LOSS. The net loss during the nine months ended September 30, 2000
was $26,909,000 compared to $16,676,000 for the nine months ended September
30, 1999, an increase of $10,233,000 or 61.4%. The increase was primarily due
to the additional expenses incurred to support the development of Cidecin(TM)
partially offset by a work force reduction in our Canadian and UK operations.
YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES. Total revenues in the year ended December 31, 1999 were $6,846,000
compared to $1,674,000 in the year ended December 31, 1998, an increase of
$5,172,000 or 309%. The revenues earned in the year ended December 31, 1999,
consisted of $6,535,000 in research support funding from the Bristol-Myers
Squibb, Merck, Novartis and other strategic collaborations; and $311,000 in
Small Business Innovation Research funding. The revenues earned in the year
ended December 31, 1998 consisted of $1,146,000 in research support funding
from the Bristol-Myers Squibb, Merck and other strategic collaborations; and
$528,000 in Small Business Innovation
4
Research funding. The increase in revenues in the year ended December 31, 1999
as compared to the year ended December 31, 1998 was primarily due to the
increase of milestone payments and research support funding from the Merck,
Novartis and other strategic collaborations during 1999.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development expenses in
the year ended December 31, 1999, were $24,786,000 compared to $12,357,000 in
the year ended December 31, 1998, an increase of $12,429,000 or 105.8%. The
increase was largely due to increased clinical and manufacturing costs
related to daptomycin development, the additional personnel and purchases
that were required by such development and the expanded research and
development activies after the acquisitions of ChromaXome and Xenova which
were accounted for under the purchase method of accounting.
IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES. The write-off of acquired
in-process research and development costs in the year ended December 31, 1999
was $752,304 compared to $0 in the year ended December 31, 1998, an increase
of $752,304. The increase was due to a write-off of acquired in-process
research and development costs related to the acquisitions of ChromaXome and
Xenova in 1999.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
the year ended December 31, 1999, were $6,201,000 compared to $4,453,000 in
the year ended December 31, 1998, an increase of $1,748,000 or 39.3%. The
increase was largely due to increased investor and public relations expenses,
increased legal and other professional services expenses and expanded
activities after the acquisitions of ChromaXome and Xenova which were
accounted for under the purchase method of accounting.
INTEREST INCOME AND EXPENSE. Interest income in the year ended December 31,
1999, was $905,000 compared to $931,000 in year ended December 31, 1998, a
decrease of $26,000 or 2.8%. The decrease in interest income was due primarily
to lower average cash, cash equivalent and investment balances during the year
ended December 31, 1999 as compared to the year ended December 31, 1998.
Interest expense in the year ended December 31, 1999 was $1,059,000 as compared
to $361,000 during the year ended December 31, 1998, an increase of $698,000 or
193.4%. The increase in interest expense was primarily due to the debt financing
of the ChromaXome and Xenova acquisitions and deemed discounts related to
convertible debentures.
INCOME TAX BENEFIT. Income tax benefit in the year ended December 31, 1999, was
$925,000 compared to $175,000 in year ended December 31, 1998, an increase of
$750,000 or 428.6%. The increase in income tax benefit was due to investment tax
credits for increased research and development expenditures related to Cubist's
Canadian operations during the year ended December 31, 1999 as compared to the
year ended December 31, 1998.
NET LOSS. Our net loss for the year ended December 31, 1999 was $24,122,000
compared to $14,390,000 during the year ended December 31, 1998, an increase
of $9,732,000 or 67.6%. The increase was primarily due to an increase in
expenses incurred associated with the development of daptomycin, increased
costs associated with our marketing and investor relations program and the
expanded operations after the acquisitions of ChromaXome and Xenova, which
were accounted for under the purchase method of accounting.
YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES. Total revenues in the year ended December 31, 1998, were $1,674,000
compared to $2,767,000 in the year ended December 31, 1997, a decrease of
$1,093,000 or 39.5%. The revenues earned in the year ended December 31, 1998
consisted of $1,146,000 in research support funding from the Bristol-Myers
Squibb, Merck and other strategic collaborations; and $528,000 in Small
Business Innovation Research funding. The revenues earned in the year ended
December 31, 1997, consisted of $2,059,000 in research support funding from
the Bristol-Myers Squibb, Merck and other strategic collaborations; a
$500,000 milestone payment from the Bristol-Myers Squibb collaboration; and
$208,000 in Small Business Innovation Research funding. The decrease in
revenues in the year ended December 31, 1998 as compared to the year ended
December 31, 1997 was primarily due to the decrease of research support
funding from Merck during 1998; the decrease of research support funding due
to the termination in 1997 of Cubist's collaboration with Pfizer, Inc.; and
the lack of milestone payments from the Bristol-Myers Squibb collaboration
during 1998.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development expenses in
the year ended December 31, 1998, were $12,357,000 compared to $10,799,000 in
the year ended December 31, 1997, an increase of $1,558,000 or 14.4%. The
increase was largely due to increased consulting and manufacturing costs
5
related to daptomycin development and the additional personnel and purchases
that are required by such development.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses in
the year ended December 31, 1998 were $4,453,000 compared to $3,618,000 in
the year ended December 31, 1997, an increase of $835,000 or 23.1%. The
increase was largely due to increases in personnel costs, marketing and
investor and public relations expenses, and consulting and license expenses.
INTEREST INCOME AND EXPENSE. Interest income in the year ended December 31, 1998
was $931,000 compared to $1,098,000 in year ended December 31, 1997, a decrease
of $167,000 or 15.2%. The decrease in interest income was due primarily to lower
average cash, cash and investment balances during the year ended December 31,
1998, as compared to the year ended December 31, 1997. Interest expense in the
year ended December 31, 1998 was $361,000 as compared to $244,000 during the
year ended December 31, 1997, an increase of $117,000 or 48%, due to additional
leasing arrangements during the year.
OTHER INCOME. Other income in the year ended December 31, 1997, was $1,833,000
and consisted entirely of gain on the sale of our equity position in Novalon
Pharmaceutical Corp.
INCOME TAX BENEFIT. Income tax benefit in the year ended December 31, 1998, was
$175,000 compared to $0 in year ended December 31, 1997, an increase of
$175,000. The increase in income tax benefit was due to investment tax credits
for increased research and development expenditures related to Cubist's Canadian
operations during the year ended December 31, 1998 as compared to the year ended
December 31, 1997.
NET LOSS. The net loss for the year ended December 31, 1998, was $14,390,000
compared to $8,963,000 during the year ended December 31, 1997, an increase
of $5,427,000 or 60.5%. The increase was primarily due to the decreased
revenues in 1998, an increase in expenses incurred associated with the
development of daptomycin, and increased costs associated with our marketing
and investor relations program.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through the sale of
equity securities, equipment financing, sponsored research revenues, license
revenues and interest earned on invested capital. Our total cash, cash
equivalent and investments balance at September 30, 2000 was $152,864,000
compared to $26,829,000 at December 31, 1999 and $21,327,000 at December 31,
1998.
From inception through September 30, 2000, we had invested an
aggregate of $46,707,000 (of which $36,501,000 was invested during the nine
months then ended) in property and equipment, primarily in building,
leasehold improvements and laboratory equipment under capital leases. The
obligations under capital leases at September 30, 2000 were $1,062,000.
Minimum annual principal payments due under capital leases total $891,327 in
2000. Principal payments are scheduled to decline each year thereafter until
expiration in 2003. We made principal payments under our capital lease
obligations of $551,000 in the nine months ended September 30, 2000.
On May 1, 1997, we completed a private placement financing with
investors and raised net proceeds of $3.5 million by issuing 88,848 shares of
our common stock, along with warrants exercisable for 44,424 shares of our
common stock.
On September 23, 1998, we completed a private placement financing with
investors and raised net proceeds of $12.7 million by issuing 6,065,560
shares of our common stock at $2.25 per share, along with 3,032,783 warrants
exercisable for our common stock at $2.25 per share. We have filed a
registration statement to register the resale of the 9,098,343 shares of our
common stock related to this financing.
During the twelve months ended December 31, 1999, we issued 285,644
shares of our common stock upon the exercise of 326,668 warrants issued in
connection with the private placement financing completed on September 23, 1998.
Such warrants are exercisable at $2.25 per share or pursuant to a standard
cashless net issue provision. Of the 285,644 shares issued, 160,000 shares were
issued for an aggregate purchase price of
6
$360,000 and 125,644 shares were issued upon cashless net issue exercise
pursuant to which the holders of such warrants surrendered the right to acquire
41,024 additional shares of our common stock.
On October 8, 1998, we completed a private placement financing with
investors and raised net proceeds of $3.2 million by issuing 88,848 shares of
our common stock, along with warrants exercisable for 44,424 shares of our
common stock.
On March 15, 1999, we completed a private placement financing with
investors and raised net proceeds of $5.2 million by issuing 142,157 shares of
our common stock.
Upon the signing of the research and license agreement with Novartis in
February 1999, we issued to Novartis, 797,448 shares of our common stock for a
total purchase price of $4.0 million in cash.
On March 17, 1999, we purchased the assets of ChromaXome Corporation
for $5.7 million, excluding acquisition costs, by paying approximately $2
million in cash, issuing notes payable of approximately $3 million and
issuing 18,231 shares of our common stock.
On April 8, 1999, we purchased the assets of Xenova Discovery Ltd. for
$5.2 million, excluding acquisition costs, by paying approximately $400,000
in cash, issuing notes payable of approximately $3.6 million and issuing
30,386 shares of our common stock.
During March 1999, we entered into a term loan agreement with a bank
under which we are able to borrow up to $1,500,000 to finance fixed asset
purchases. Advances under this facility are to be repaid over a 36-month
period, commencing on March 31, 2000. Interest on the borrowings is at the
bank's LIBOR rate (8.42% at December 31, 1999). Borrowings under the facility
are collateralized by all capital equipment purchased with the funds under
this term loan. At December 31, 1999, borrowings outstanding totaled
$1,139,578. In March 2000, we increased the term loan by an additional
$2,000,000 to finance leasehold improvements and fixed asset purchases.
On October 21, 1999, we completed a private placement financing with
investors and raised net proceeds of $17.5 million by issuing 2,503,333 shares
of our common stock at $7.50 per share. We have filed a registration statement
to register the resale of the 2,503,333 shares of our common stock issued in
this financing.
On November 16, 1999, Cubist issued $1.6M Cdn of convertible
debentures and warrants to purchase 16,458 shares of common stock. The
debentures bear interest at a rate of 12% and are payable on March 31, 2000.
Each debenture is convertible into 0.01777 shares of common stock. On March
31, 2000, the debentures and related interest were converted to 30,176 shares
of common stock.
On January 17, 2000, Cubist issued notes payable totaling $3,000,000
Cdn and warrants to purchase 22,790 shares of common stock. The notes payable
bear interest at 14.4% and are repayable in blended interest and principal
payments over 36 months to January 17, 2003.
On January 29, 2000, we completed a private placement financing with
investors and raised net proceeds of $52.0 million by issuing 2,200,000 shares
of our common stock at $25.00 per share. We have filed a registration statement
to register the resale of the 2,200,000 shares of our common stock issued in
this financing.
On April 3, 2000, Cubist completed a secondary public offering and raised
approximately $82.5 million (less financing costs of $4,957,275) by issuing
2,500,000 shares of common stock at $33.00 per share. In addition, on May 3,
2000, the underwriters exercised their option to purchase an additional 375,000
shares of common stock at $33.00 per share to cover over-allotments, raising an
additional $12.4 million (less financing costs of $680,625). Cubist intends to
use the net proceeds of this offering to fund its clinical trials and
commercialization of Cidecin(TM), its lipopeptide drug discovery program, the
continued development of its proprietary genomic target validation and assay
development VITA(TM) functional genomics and ChemInformatics technologies and
for general corporate and working capital purposes.
On September 8, 2000, Cubist announced the purchase of a new corporate
headquarters building in Lexington, Massachusetts. The new facility is 88,000
square feet, approximately 35,000 of which is constructed as laboratory space.
7
To finance the purchase, Cubist issued $39 million of convertible notes to
John Hancock Life Insurance Company. This financing covers the building
purchase price of approximately $34 million and includes $5 million for
facility improvements. The five-year notes carry a coupon rate of 8.5% and
can be converted to Cubist common stock at $63.8625 per share which
represents a premium to the market price determined at the time of
commitment. Cubist retains the right to redeem these notes after three years.
We believe that our existing cash resources, existing capital
resources, projected interest income and future revenues due under our
collaborative agreements, will be sufficient to fund our operating expenses
and capital requirements as currently planned through at least March 31,
2002. Our actual cash requirements may vary materially from those now planned
and will depend on numerous factors. We cannot be sure that our existing
cash, cash equivalents, other capital resources, interest income and future
revenues due under our collaborative agreements will be sufficient to fund
our operating expenses and capital requirements during that period.
RECENT PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities," which was amended by SFAS No. 137 and is effective for
fiscal years beginning after June 15, 2000. The statement establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Adoption of this standard is not expected to have a material impact on our
financial position or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements," as amended by SAB 101A and SAB
101B ("SAB 101") which is effective no later than the quarter ended December
31, 2000. SAB 101 clarifies the SEC's views related to revenue recognition
and disclosure. We are presently determining the effect SAB 101 will have on
our financial statements, but management does not believe the effect will be
material.
In March 2000, the Financial Accounting Standard 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 non-compensatory plan; the accounting consequence 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 is not expected to have a
material impact on the Company's financial position or results of operations.
8
CUBIST PHARMACEUTICALS, INC.
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND 1998
AND FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999
PAGE
----
Reports of Independent Accountants............................................................................... F-2
Supplemental Consolidated Balance Sheets as of December 31, 1998 and 1999........................................ F-4
Supplemental Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999.......... F-5
Supplemental Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999.......... F-6
Supplemental Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1997, 1998 and 1999 .............................................................................. F-7
Notes to Supplemental Consolidated Financial Statements.......................................................... F-8
F-1
REPORTS OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Cubist Pharmaceuticals, Inc.:
In our opinion, based upon our audits and the report of other
auditors, the accompanying supplemental consolidated balance sheets and the
related supplemental consolidated statements of operations, changes in
stockholders' equity and cash flows present fairly, in all material respects,
the financial position of Cubist Pharmaceuticals, Inc. and its subsidiaries
(the "Company") at December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States of America. These supplemental consolidated
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these supplemental consolidated
financial statements based on our audits. We did not audit the financial
statements of Cubist Pharmaceuticals Inc. (formerly TerraGen Discovery Inc.),
a wholly owned subsidiary, at December 31, 1998 and 1999, and for each of the
three years in the period ended December 31, 1999, which statements reflect
total assets constituting 11.6% and 29.1% of consolidated total assets as of
December 31, 1998 and 1999, respectively, and total revenue constituting
1.2%, 2.4% and 21.8% of consolidated total revenue for the years ended
December 31, 1997, 1998, and 1999, respectively. Those statements were
audited by other auditors whose report thereon have been furnished to us, and
our opinion expressed herein, insofar as it relates to the amounts included
for Cubist Pharmaceuticals Inc. (formerly TerraGen Discovery Inc.), is based
solely on the report of the other auditors. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits and the reports of other auditors provide a
reasonable basis for the opinion expressed above.
As described in Note A, on October 23, 2000, Cubist Pharmaceuticals,
Inc. acquired Cubist Pharmaceuticals Inc. (formerly TerraGen Discovery Inc.)
in a transaction accounted for as a pooling of interests. The accompanying
supplemental consolidated financial statements give retroactive effect to the
acquisition of Cubist Pharmaceuticals Inc. (formerly TerraGen Discovery Inc.)
by Cubist Pharmaceuticals, Inc. Accounting principles generally accepted in
the United States of America proscribe giving effect to a consummated
business combination accounted for by the pooling of interests method in
financial statements that do not include the date of consummation. These
financial statements do not extend through the date of consummation; however,
they will become the historical consolidated financial statements of Cubist
Pharmaceuticals, Inc. and subsidiaries after financial statements covering
the date of consummation of the Cubist Pharmaceuticals Inc. (formerly
TerraGen Discovery Inc.) business combination are issued.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
February 4, 2000, except as to the
pooling of interests described in
Note A which is as of October 23, 2000
and Note Q which is as of January 7, 2001
F-2
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.
Chartered Accountants
/s/ KPMG LLP
Vancouver, Canada
April 3, 2000, except as to
the acquisition of the Company described in
note A which is as of October 23, 2000
F-3
CUBIST PHARMACEUTICALS, INC.
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------
1998 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents ................................................................ $ 8,779,106 $ 12,248,607
Short-term investments ................................................................... 8,692,514 14,580,515
Accounts receivable ...................................................................... 140,705 380,107
Investment tax credits receivable ........................................................ 169,348 926,699
Prepaid expenses and other current assets ................................................ 261,695 564,324
------------ ------------
Total current assets .................................................................. 18,043,368 28,700,252
Property and equipment ...................................................................... 8,167,252 10,073,750
Less: Accumulated depreciation and amortization ............................................. (4,044,976) (5,553,699)
------------ ------------
Property and equipment, net .............................................................. 4,122,276 4,520,051
Intangible assets, net ...................................................................... 83,089 9,195,153
Long-term investments ....................................................................... 3,855,336 --
Other assets ................................................................................ 74,238 179,287
------------ ------------
Total assets .......................................................................... $ 26,178,307 $ 42,594,743
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................................................... $ 540,703 $ 1,771,995
Accrued expenses ......................................................................... 654,525 1,778,853
Current portion of long-term debt ........................................................ 83,957 2,490,231
Current portion of capital lease obligations ............................................. 718,327 720,807
------------ ------------
Total current liabilities ............................................................. 1,997,512 6,761,886
Deferred revenue ............................................................................ -- 2,533,875
Long-term debt, net of current portion ...................................................... 16,109 2,951,864
Long-term capital lease obligation, net of current portion .................................. 1,507,097 906,079
------------ ------------
Total liabilities ..................................................................... 3,520,718 13,153,704
Commitments (Notes H, L, M, and Q)
Stockholders' equity:
Preferred stock, non-cumulative; convertible, $.001 par value; authorized 5,000,000 shares
1998 and 1999; issued and outstanding 1998 and 1999 no shares.......................... -- --
Common stock, $.001 par value; authorized 50,000,000 shares; issued and outstanding 1998
16,912,346 shares; issued and outstanding 1999 20,983,510 shares ...................... 16,912 20,984
Additional paid-in capital ............................................................... 62,483,571 93,050,133
Accumulated deficit ...................................................................... (39,759,595) (63,881,456)
Accumulated other comprehensive income ................................................... (83,299) 251,378
------------ ------------
Total stockholders' equity ............................................................ 22,657,589 29,441,039
------------ ------------
Total liabilities and stockholders' equity .......................................... $ 26,178,307 $ 42,594,743
============ ============
The accompanying notes are an integral part of the supplemental
consolidated financial statements.
F-4
CUBIST PHARMACEUTICALS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
---- ---- ----
Sponsored research revenues ...................................... $ 2,767,053 $ 1,674,152 $ 6,846,384
Operating expenses:
Research and development ...................................... 10,798,809 12,356,766 24,786,363
Write-off of acquired in process research and development...... -- -- 752,304
General and administrative .................................... 3,618,186 4,451,620 6,397,268
---------------------------------------------
Total operating expenses ................................... 14,416,995 16,808,386 31,935,935
Interest income .................................................. 1,097,986 931,345 904,647
Interest expense ................................................. (244,311) (361,124) (1,059,134)
Other income ..................................................... 1,833,334 (1,080) 196,584
---------------------------------------------
Net loss before income taxes .................................. $ (8,962,933) $(14,565,093) $(25,047,454)
---------------------------------------------
Income tax benefit ............................................... -- 175,497 925,593
---------------------------------------------
Net loss ...................................................... ($ 8,962,933) ($14,389,596) ($24,121,861)
=============================================
Basic and diluted net loss per common share ...................... $(0.89) $(1.16) $(1.31)
=============================================
Weighted average number of common shares outstanding for basic and
diluted net loss per common share ............................. 10,115,416 12,395,003 18,455,568
=============================================
The accompanying notes are an integral part of the supplemental
consolidated financial statements.
F-5
CUBIST PHARMACEUTICALS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
---- ---- ----
Cash flows for operating activities:
Net loss ............................................................... $ (8,962,933) $(14,389,596) $(24,121,861)
Adjustments to reconcile net loss to net cash used in operating
activities:
Gain on sale of equity interest .................................. (1,833,334) -- --
Amortization of equity interest .................................. 833,334 -- --
Write-off of acquired in-process research and development......... -- -- 752,304
Depreciation and amortization .................................... 1,095,169 1,370,939 3,112,976
Loss on the sale of equipment .................................... -- -- 7,776
Common stock issued for technology milestone ..................... -- -- 250,000
Cashless exercise of warrants related to lease agreements ........ -- -- 38,330
Fair value of options granted to non-employees ................... -- 44,844 58,202
Deemed discount amortization on convertible debentures............ -- -- 372,300
Unrealized foreign exchange gain, net ............................ -- -- (209,456)
Changes in assets and liabilities:
Accounts receivable ............................................ 431,039 (209,888) (959,075)
Prepaid expenses and other current assets ...................... 130,138 (94,674) (296,594)
Other assets ................................................... (6,495) 106,056 (105,049)
Accounts payable and accrued expenses .......................... (575,347) 344,282 2,141,412
Deferred revenue ............................................... (126,900) -- 2,477,626
-------------------------------------------
Total adjustments ........................................... (52,396) 1,561,559 7,640,752
-------------------------------------------
Net cash used for operating activities ................................. (9,015,329) (12,828,037) (16,481,109)
Cash flows for (from) investing activities:
Acquisition of Xenova Discovery, net of cash on hand ................... -- -- (747,356)
Acquisition of ChromaXome Corporation, net of cash on hand ............. -- -- (2,315,432)
Purchase of equipment .................................................. (993,420) (2,122,503) (814,338)
Proceeds from the sale of equipment .................................... -- -- 15,150
Leasehold improvements ................................................. (94,753) (39,435) (85,350)
Purchase of intangible assets .......................................... (20,969) (59,822) (131,679)
Purchase of equity interest ............................................ (1,000,000) -- --
Proceeds from sale of equity interest .................................. 2,000,000 -- --
Purchases of short-term investments .................................... (22,686,443) (8,692,514) (15,192,711)
Maturities of short-term investments ................................... 15,976,820 6,709,623 9,304,710
Purchases of long-term investments ..................................... (8,569,107) (3,855,336) --
Maturities of long-term investments .................................... -- 8,569,107 3,855,336
-------------------------------------------
Net cash provided by (used for) investing activities ................... (15,387,872) 509,120 (6,111,670)
Cash flows from financing activities:
Issuance of stock and warrants, net .................................... 9,490,408 16,017,627 27,575,740
Proceeds from notes receivable ......................................... -- 30,000 101,686
Repayments of long-term debt ........................................... (189,943) (189,736) (3,293,587)
Proceeds from long term debt ........................................... 927,686 941,255 2,232,261
Increase of capital lease obligations .................................. 333,550 -- --
Principal payments of capital lease obligations ........................ (695,417) (582,710) (712,464)
-------------------------------------------
Net cash provided by financing activities .............................. 9,866,284 16,216,436 25,903,636
-------------------------------------------
Net increase (decrease) in cash and cash equivalents ................... (14,536,917) 3,897,519 3,310,857
Effect of changes in foreign exchange rates on cash balances ........... (51,506) (36,663) 158,644
Cash and cash equivalents at beginning of year ......................... 19,506,673 4,918,250 8,779,106
-------------------------------------------
Cash and cash equivalents at end of year ............................... $ 4,918,250 $ 8,779,106 $ 12,248,607
===========================================
Supplemental disclosures of cash flow information:
Cash paid during the year for interest .............................. $ 244,311 $ 361,124 $ 816,897
Supplemental non-cash investing and financing activities:
Cancellation of promissory note in connection ....................... --
with resignation of officer ......................................... -- $ 37,776 --
Issuance of restricted common stock in exchange for a promissory
note .............................................................. $ 80,000 -- $ 506,250
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
The accompanying notes are an integral part of the supplemental
consolidated financial statements.
F-6
CUBIST PHARMACEUTICALS, INC.
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
$ ADDITIONAL PAID-IN CAPITAL
--------------------------------------------------------
BENEFICIAL
# OF SHARES $ ISSUANCE OF NOTES DEFERRED CONVERSION
COMMON COMMON SHARES RECEIVABLE COMPENSATION FEATURE
- -----------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996, as
previously reported 9,544,373 $ 9,544 $ 36,253,818 ($154,459) ($79,751)
Acquisition of pooled entity 61,304 61 753,810
------------------------------------------------------------------------------------
Balance at December 31, 1996, as
restated 9,605,677 9,605 37,007,628 (154,459) (79,751)
Exercise of stock options 57,981 58 119,320
Repurchase of common stock (1,390) (1) (519)
Issuance of common stock and
warrants, net of offering costs 1,068,439 1,069 9,450,481 (80,000)
Amortization of deferred
compensation 20,000 43,924
Forgiveness of promissory notes 22,774
Net loss
Translation adjustments
------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 10,730,707 10,731 46,576,910 (191,685) (35,827)
Exercise of stock options 3,642 4 4,465
Shares issued in connection with
employee stock purchase plan 6,341 6 20,553
Repurchase of common stock (2,064) (2) (786)
Issuance of common stock, net of
offering costs 6,183,720 6,183 16,021,767
Amortization of deferred
compensation 2,255 22,223 (11,158)
Repayment of promissory notes 30,000
Cancellation of promissory note in
connection with resignation of
officer (10,000) (10) (37,766) 37,776
Options granted to non-employees 44,844
Net loss
Translation adjustments
------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 16,912,346 16,912 62,632,242 (101,686) (46,985)
Exercise of stock options and
warrants 432,626 433 810,983
Shares issued in connection with
employee stock purchase plan
and 401(k) plan 40,035 40 144,644
Issuance of common stock, net of
offering costs 3,549,886 3,550 27,410,670 (506,250)
Issuance of common stock in
connection with acquisitions,
net of offering costs 48,617 49 1,814,117
Issuance of warrants for services 77,107 (77,107)
Deferred compensation related to
grant of stock options 707,797 (703,125)
Amortization of deferred
compensation 140,538
Repayment of promissory notes 101,686
Options granted to non-employees 58,202
Warrants issued in convertible
debenture offering as
financing cost 323,000
Beneficial conversion feature on
convertible debenture $264,300
Net loss
Translation adjustments
------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 20,983,510 $ 20,984 $ 93,978,762 ($506,250) ($686,679) $264,300
====================================================================================
$ $ $ $
ACCUMULATED ACCUMULATED OTHER STOCKHOLDERS' COMPREHENSIVE
DEFICIT COMPREHENSIVE EQUITY LOSS
INCOME
Balance at December 31, 1996,
as previously reported ($15,730,542) $ 20,298,610
Acquisition of pooled entity (676,524) $(566) 76,781
------------------------------------------------------------------
Balance at December 31, 1996,
as restated ($16,407,066) (566) 20,375,391
Exercise of stock options 119,378
Repurchase of common stock (520)
Issuance of common stock and
warrants, net of offering costs 9,371,550
Amortization of deferred
compensation 63,924
Forgiveness of promissory notes 22,774
Net loss (8,962,933) (8,962,933) $(8,962,933)
Translation adjustments (43,784) (43,784) (43,784)
------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 (25,369,999) (44,350) 20,945,780 (9,006,717)
Exercise of stock options 4,469
Shares issued in connection with
employee stock purchase plan 20,559
Repurchase of common stock (788)
Issuance of common stock, net of
offering costs 16,027,950
Amortization of deferred
compensation 13,320
Repayment of promissory notes 30,000
Cancellation of promissory note in
connection with resignation of
officer
Options granted to non-employees 44,844
Net loss (14,389,596) (14,389,596) (14,389,596)
Translation adjustments (38,949) (38,949) (38,949)
------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 (39,759,595) (83,299) 22,657,589 (14,428,545)
Exercise of stock options and
warrants 811,416
Shares issued in connection with
employee stock purchase plan
and 401(k) plan 144,684
Issuance of common stock, net of
offering costs 26,907,970
Issuance of common stock in
connection with acquisitions,
net of offering costs 1,814,166
Issuance of warrants for services
Deferred compensation related to
grant of stock options 4,672
Amortization of deferred
compensation 140,538
Repayment of promissory notes 101,686
Options granted to non-employees 58,202
Warrants issued in convertible
debenture offering as
financing cost 323,000
Beneficial conversion feature on
convertible debenture 264,300
Net loss (24,121,861) (24,121,861) (24,121,861)
Translation adjustments 334,677 334,677 334,677
------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1999 ($63,881,456) $ 251,378 $ 29,441,039 $(23,787,184)
==================================================================
The accompanying notes are an integral part of the supplemental
consolidated financial statements.
F-7
CUBIST PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Cubist Pharmaceuticals, Inc. ("Cubist") is a specialty pharmaceutical
company founded in May 1992 and is focused on the research, development and
commercialization of novel antimicrobial drugs to combat serious and
life-threatening bacterial and fungal infections, including those caused by
bacteria and fungi resistant to commercially available drugs. Cubist has
established multiple technology licenses and collaborations and has established
a network of advisors and collaborators. Cubist is located in Cambridge,
Massachusetts and operates in one business segment.
On October 23, 2000, C&T Acquisition Corporation, a subsidiary of
Cubist, acquired TerraGen Discovery Inc., ("TerraGen") a natural products
discovery company with operations in Vancouver, Canada and Slough, England.
Following the acquisition, the name of TerraGen was changed to Cubist
Pharmaceuticals Inc. TerraGen conducts its Slough, England operations through
a wholly-owned subsidiary. With the acquisition, Cubist acquired proprietary
technologies and expertise in the area of small molecule drug discovery from
natural products. This transaction was accounted for using the
pooling-of-interests method of accounting. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that
do not include the date of consummation. These financials statements do not
extend through the date of consummation; however, they will become the
historical consolidated financial statements of Cubist after financial
statements covering the date of consummation of the business combination are
issued. The accompanying Supplemental Consolidated Financial Statements of
Cubist have been restated to include the results and balances of C&T
Acquisition Corporation and TerraGen and its subsidiaries for all periods
presented.
Cubist is subject to risks common to companies in the industry including,
but not limited to, uncertainty of product development and commercialization,
lack of marketing and sales history, dependence on key personnel, market
acceptance of products, product liability, protection of proprietary technology,
ability to raise additional financing, and compliance with FDA and other
governmental regulations.
Cubist has a limited history of operations and has experienced
significant net losses since inception. At December 31, 1999, Cubist has an
accumulated deficit of $63.9 million. Cubist expects to incur significant
additional net losses over the next several years and expects cumulative losses
to increase due to expanded research and development efforts, preclinical
testing and clinical trials and the development of manufacturing, marketing and
sales capabilities. As a result, Cubist's business plan indicates that
additional financing will be required to support its planned expenditures.
Cubist believes that the funds currently available and future revenues due under
its collaborative agreements (Note G) will be sufficient to fund operations
through at least the next twelve months.
B. ACCOUNTING POLICIES
BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying financial statements are stated on an accrual basis.
The accompanying Supplemental Consolidated Financial Statements include
the accounts of Cubist and its wholly-owned subsidiaries. All significant
intercompany amounts and transactions have been eliminated.
F-8
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of short-term interest-bearing instruments with
original maturities of three months or less. These investments are carried at
cost which approximates market value.
Cubist invests its cash and cash equivalents primarily in deposits, U.S.
Government treasuries and money market funds with financial institutions. Cubist
has not recorded any losses to date on its invested cash and cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments, with an original maturity of more than three
months and less than one year when purchased, consisted of certificates of
deposit and investment-grade commercial paper at December 31, 1998 and 1999.
Short-term investments, all of which are held to maturity, are stated at
amortized cost plus accrued interest, which approximates market value.
LONG-TERM INVESTMENTS
Long-term investments, with maturity of more than twelve months when
purchased, consisted of investment-grade corporate debt at December 31, 1998.
Long-term investments, all of which are held to maturity, are stated at
amortized cost plus accrued interest, which approximates market value. Cubist
does not hold any long-term investments at December 31, 1999.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is provided
using the straight-line method over the estimated useful lives of the related
assets, generally three years for computer equipment and five years for
laboratory equipment and furniture and fixtures. Leasehold improvements are
stated at cost and are amortized over the lesser of the life of the lease or
their estimated useful lives. Maintenance and repairs are charged to expense as
incurred, while major betterments are capitalized. When assets are retired or
otherwise disposed of, the assets and related allowances for depreciation and
amortization are eliminated from the accounts and any resulting gain or loss is
reflected in income.
INTANGIBLE ASSETS
Intellectual property and processes represents information databases, and
technological process information acquired through Cubist'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.
F-9
IMPAIRMENT OF LONG-LIVED ASSETS
Cubist 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.
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
Cubist has entered into various collaborative agreements with
pharmaceutical and biotechnology companies. 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. Any revenue related to milestones and royalties is
recognized as earned.
Contract research funding generally compensates Cubist for discovery
expenses related to the collaborative development programs for certain products
and product candidates of Cubist, and is recognized as revenue at the time
research activities are performed under the terms of the collaborative
agreements.
Revenue from Small Business Innovation Research ("SBIR") government
grants to conduct research and development is recognized as eligible costs are
incurred up to the funding limit. Eligible grant-related costs, which have been
incurred in advance of cash receipts, are recorded as receivables.
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred. The portion
of purchase price, if any, on any acquisition allocated to in-process research
and development is charged to expense upon acquisition (Note C).
INCOME TAXES
Cubist accounts for income taxes under the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted rates in effect for the year in which those temporary differences
are expected to be recovered or settled. A deferred tax asset is established for
the expected future benefit of net operating loss and credit carryforwards. A
valuation reserve against net deferred tax assets is required if, based upon
available evidence, it is more likely than not that some or all of the deferred
tax assets will not be realized.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of Cubist's financial instruments, which include
cash and cash equivalents, investments, accounts receivable, accounts payable,
and accrued expenses 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
F-10
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.
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.
FOREIGN CURRENCY AND INTEREST RATE RISK
Cubist 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, Cubist has
not entered into foreign currency hedging arrangements.
NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number
of shares of common stock outstanding. Diluted net loss per share does not
differ from basic net loss per share since potential common shares from stock
options, warrants, convertible debentures and notes payable are
antidilutive for all periods presented and are therefore excluded from the
calculation. During the years ended December 31, 1997, 1998 and 1999, options
to purchase 809,910, 1,535,810, and 2,006,829 shares of common stock,
respectively, warrants for 131,043, 3,120,314, and 2,793,239 shares of common
stock, respectively, and convertible debentures and notes payable convertible
into 0, 0, and 87,158 shares of common stock, respectively, were not included
in the computation of diluted net loss per share since their inclusion would
be antidilutive.
OTHER COMPREHENSIVE INCOME
Comprehensive loss consists of net loss and foreign currency translation
adjustments and is presented in the Statement of Stockholders' Equity.
FOREIGN CURRENCY
The functional currency of Cubist's subsidiaries, which are located in
Canada and United Kingdom, is the Canadian dollar. The remeasurement of the
foreign currency balances into the Canadian dollar functional currency is
performed as follows:
- Monetary items are remeasured at the rate of exchange in effect at
the balance sheet date;
- Non-monetary items are remeasured at historical exchange rates; and
- Revenue and expense items are remeasured at the average exchange
rate prevailing in the period.
The resulting foreign exchange gains (losses) of $0, ($1,080) and $196,584 in
the years ended December 31, 1997, 1998 and 1999 are included in the net loss
for the period.
The translation of the Canadian functional currency financial statements into
the U.S. dollar is performed as follows:
- Assets and liabilities are translated at period end exchange rates;
and
- Revenues and expenses are translated using the average rates
prevailing in the period.
The effects of foreign currency translation adjustments have been accumulated
and are included as other comprehensive income in the statement of stockholders'
equity.
F-11
In conjunction with the pooling of interests transaction between Cubist and
TerraGen the functional currency for all of Cubist's subsidiaries was changed to
the U.S. dollar, effective October 1, 2000. This will be accounted for
prospectively.
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.
DERIVATIVE INSTRUMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities", which was amended by SFAS No. 137 and is effective for
fiscal years beginning after June 15, 2000. The statement establishes accounting
and reporting standards requiring that every derivative instrument be recorded
in the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133 also requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Adoption of this standard is not expected to have a material impact on the
financial position or results of operations of Cubist.
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements,"
as amended by SAB 101A and SAB 101B ("SAB 101") which is effective no later
than the quarter ended December 31, 2000. SAB 101 clarifies the Securities
and Exchange Commission's views related to revenue recognition and
disclosure. We are presently determining the effect SAB 101 will have on
Cubist's financial statements, but management does not believe the effect
will be material.
In March 2000, the Financial Accounting Standard 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 non-compensatory plan; the accounting consequence 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 is not expected to have a
material impact on the Company's financial position or results of operations.
F-12
C. BUSINESS COMBINATIONS
TERRAGEN
On October 23, 2000, Cubist indirectly through its subsidiary C&T
Acquisition Corporation acquired all of the issued and outstanding common and
preferred shares of TerraGen, and assumed all of the outstanding options,
warrants and convertible debentures of TerraGen, by issuing 334,933 shares of
Cubist common stock and causing C&T Acquisition Corporation to issue 178,491
exchangeable shares. Each common share of TerraGen was exchanged, at the
election of the holder, for either 0.021323 exchangeable shares or 0.021323
shares of Cubist common stock and each preferred share was exchanged, at the
election of the holder, for either 0.030386 exchangeable shares or 0.030386
shares of Cubist common stock. The exchangeable shares are exchangeable at
any time at the option of the holder, on a one-for-one basis, for shares of
Cubist common stock. All exchangeable shares that remain outstanding will be
automatically exchanged for Cubist common stock on October 23, 2002. The
options, warrants and convertible debentures of TerraGen assumed by Cubist
pursuant to the acquisition are exercisable for 94,605 shares of Cubist
common stock. This acquisition had been accounted for using the
pooling-of-interests method of accounting. The balances as at December 31,
1998 and 1999 and the results for the three years ended December 31, 1997,
1998, and 1999 have been restated to include the balances and results of C&T
Acquisition Corporation and TerraGen and its subsidiaries. Results on a
stand-alone basis were as follows:
YEAR ENDED COMBINED
DECEMBER 31, 1997 CUBIST TERRAGEN RESTATED
- ---------------------------- ------------------- ------------------- --------------------
Revenues $2,733,083 $33,970 $2,767,053
Operating loss (9,900,086) (1,749,856) (11,649,942)
Net loss (7,265,339) (1,697,594) (8,962,933)
Net loss per share (0.73) (14.06) (0.89)
YEAR ENDED COMBINED
DECEMBER 31, 1998 CUBIST TERRAGEN RESTATED
- ---------------------------- ------------------- ------------------- --------------------
Revenues $1,634,199 $39,953 $1,674,152
Operating loss (12,350,323) (2,784,991) (15,135,314)
Net loss (11,825,006) (2,564,590) (14,389,596)
Net loss per share (0.97) (15.03) (1.16)
YEAR ENDED COMBINED
DECEMBER 31, 1999 CUBIST TERRAGEN RESTATED
- ---------------------------- ------------------- ------------------- --------------------
Revenues $5,353,379 $1,493,005 $6,846,384
Operating loss (18,295,676) (6,597,291) (24,892,967)
Net loss (17,813,510) (6,308,351) (24,121,861)
Net loss per share (0.99) (15.21) (1.31)
There were no intercompany transactions between the two companies prior to
consummation of the transaction.
CHROMAXOME CORPORATION
On March 17, 1999 Cubist purchased substantially all of the assets of
ChromaXome Corporation under an asset purchase agreement dated March 12, 1999,
among Cubist, 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 18,231 shares of common stock having an estimated fair value of
$673,405. The value assigned to the common shares was estimated by reference to
the value of third party share transactions near the acquisition date.
F-13
XENOVA DISCOVERY
On April 8, 1999 Cubist purchased substantially all of the assets of
Xenova Discovery Ltd. under an asset purchase agreement dated April 8, 1999,
among Cubist, 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 30,386 shares of common stock having an
estimated fair value of $1,140,761. The note payable is repayable at any time by
Cubist and may be converted to equity of Cubist at any time after 24 months from
the date of closing, at the option of either Xenova Group or Cubist.
The acquisitions of ChromaXome and Xenova have been accounted for by the
purchase method with results of operations of the acquired entities included in
the financial statements of Cubist 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 Cubist's operations for the years ended December 31, 1998
and 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.
F-14
1998 1999
Revenues $1,674,152 $6,846,384
Net loss $21,153,557 $25,851,246
Net loss per share $(1.70) $(1.40)
D. PROPERTY AND EQUIPMENT
At December 31, property and equipment consisted of:
1998 1999
---- ----
Leasehold improvements ....................... $ 2,720,931 $ 2,816,007
Laboratory equipment ......................... 4,125,091 5,740,898
Furniture and fixtures ....................... 445,269 575,520
Computer equipment ........................... 875,961 941,325
-----------------------------
8,167,252 10,073,750
Less accumulated depreciation and amortization (4,044,976) (5,553,699)
-----------------------------
Property and equipment, net .................. $ 4,122,276 $ 4,520,051
=============================
Depreciation and amortization expense was $981,705, $1,295,390, and
$2,911,704 in 1997, 1998 and 1999, respectively.
E. INTANGIBLE ASSETS
At December 31, intangible assets consisted of:
1998 1999
---- ----
Patents ...................................... $ 87,738 $ 4,917,196
Intellectual property and processes .......... -- 5,038,240
Workforce .................................... -- 637,559
--------------------------
$ 87,738 $ 10,592,995
Less accumulated depreciation ................ (4,649) (1,397,842)
--------------------------
Intangible assets, net ....................... $ 83,089 $ 9,195,153
==========================
F-15
F. ACCRUED EXPENSES
At December 31, accrued expenses consisted of:
1998 1999
---- ----
Payroll and benefits ......................... $361,868 $ 559,181
Professional services ........................ 95,289 146,110
Annual report ................................ 50,000 100,008
Drug development ............................. 86,820 525,128
Interest ..................................... -- 240,997
Miscellaneous ................................ 60,548 207,429
----------------------
Total accrued expenses ....................... $654,525 $1,778,853
======================
G. COLLABORATIVE RESEARCH AGREEMENTS
On December 15, 1995, Cubist entered into a collaborative research
agreement with Pfizer Inc. Under the terms of the agreement, Pfizer paid Cubist
a technology licensing fee upon execution and research support payments. In
addition, Pfizer reimbursed Cubist for expenses related to the screening of
Pfizer compounds against Cubist's targets and made certain milestone payments.
These reimbursement payments were recognized as revenue as the work was
completed. Cubist recorded sponsored research revenues of $150,000 in 1997, in
accordance with the agreement. On June 20, 1997, Cubist's collaborative
agreement with Pfizer expired pursuant to its own terms. Prior to such
expiration, Cubist had received all of the research support payments and
technology licensing fees that Cubist was entitled to receive under that
collaborative agreement.
In June 1996, Cubist entered into a collaborative research agreement with
Bristol-Myers Squibb Company ("Bristol-Myers Squibb"). Under the terms of the
agreement, Bristol-Myers Squibb purchased from Cubist $4,000,000 of Cubist's
preferred stock upon execution of the agreement, and has agreed to make payments
to Cubist upon the achievement of certain milestones. In addition, Bristol-Myers
Squibb reimbursed Cubist a fixed amount for research and development expenses
relating to the production of certain targets and also for expenses relating to
the screening of Bristol-Myers Squibb compounds against Cubist's targets over
three years. These reimbursements were paid at the beginning of each calendar
quarter in accordance with the agreement. Cubist recorded sponsored research
revenues of $500,000 in milestone payments in 1997 and $1,000,000, $1,000,000
and $500,000 in 1997, 1998 and 1999, respectively, for certain research and
development revenues in accordance with the agreement. Bristol-Myers Squibb's
exclusive research period ended in January 2000. Following January 7, 2000,
Bristol-Myers Squibb's rights to continue screening and research and development
with respect to Cubist's targets under the collaboration agreement continue on a
non-exclusive basis.
In June 1996, Cubist entered into a collaborative research agreement with
Merck & Co., Inc. ("Merck"). Under the terms of the agreement, Merck paid Cubist
a technology licensing fee upon execution and will pay certain milestone
payments if earned. In addition, Merck has reimbursed Cubist for research and
development expenses relating to the production of certain targets; for expenses
relating to the screening of Merck compounds against Cubist's targets; and for
expenses relating to compound optimization. These payments are recognized as
revenue as the work is completed. Cubist recorded sponsored research revenues of
$875,233, $106,667 and $2,500,000 in 1997, 1998 and 1999, respectively, for
certain research and development revenues and milestone payments, in accordance
with the agreement.
In May 1997, Cubist acquired 333,333 shares of Series B Convertible
Preferred Stock of Novalon Pharmaceutical Corporation ("Novalon"), together with
an option to purchase all of the capital stock of
F-16
Novalon. The aggregate purchase price for such shares and such option was $1.0
million. Cubist allocated all of the $1.0 million aggregate purchase price to
the option based on management's estimates of the relative fair values of the
option and the shares of Series B Convertible Preferred Stock acquired. The
value of the option was amortized over the option period resulting in an
$833,333 research and development expense in 1997. On September 29, 1997, Cubist
agreed to terminate its option to acquire Novalon and sold its existing equity
position back to Novalon for $2.0 million resulting in a gain of $1,833,333
included in other income. Cubist will pay Novalon a percent of revenues received
by Cubist that relates to the use of the technology.
On February 3, 1999, Cubist entered into a research and license agreement
with Novartis Pharma AG to use Cubist's proprietary VITA functional genomics
technology to validate and develop assays for antiinfective targets and to
identify new compounds for development as antiinfective agents. In exchange for
the license, Novartis will fund a research program for a period of three years
unless terminated earlier by Novartis. Cubist recorded $2,041,875 of sponsored
research revenues in 1999 related to this agreement. Further, if certain
scientific and development milestones are achieved, Novartis will make milestone
payments. In addition, Novartis will be required to pay royalties to Cubist on
worldwide sales of any drug developed and commercialized from any products
derived from this collaboration. Upon the signing of the research and license
agreement, Novartis purchased, and Cubist issued to Novartis, 797,448 shares of
Common Stock for a total purchase price of $4.0 million in cash. The proceeds
from the sale of these shares will be primarily used to fund the clinical
development of daptomycin and development of its VITA functional genomics
technology.
Cubist was a party to various other collaborative research agreements
which resulted in revenues of $34,000, $40,000 and $1,493,000 for the years
ended December 31, 1997, 1998 and 1999, respectively.
H. LICENSE AGREEMENT
On November 7, 1997, Cubist entered into a license agreement with Eli
Lilly and Company ("Eli Lilly") pursuant to which Cubist acquired exclusive
worldwide rights to develop, manufacture and market daptomycin. In exchange for
such license, Cubist has paid an upfront license fee in cash and, if certain
drug development milestones are achieved, has agreed to pay milestone payments
by issuing shares of common stock to Eli Lilly. In addition, Cubist will be
required to pay royalties to Eli Lilly on worldwide sales of daptomycin. On
February 19, 1999 Cubist issued to Eli Lilly 56,948 shares of Cubist common
stock as a milestone payment pursuant to, and in accordance with, the terms of
the agreement. The value of the common stock was $250,000 and was recorded as
research and development expense.
Cubist and a third party entered into a cross-license ("Cross-license
Agreement") dated November 18, 1999, pursuant to which Cubist granted a
co-exclusive world-wide non-royalty bearing license to certain patented
technology of Cubist, subject to certain restrictions. The license may not be
sublicensed and the third party cannot use the macrodroplet screening
technology for the term of the agreement or immunosuppressive technology for
a period of one year from the date of the agreement.
Under the Cross-license Agreement, the third party paid an upfront
license fee of $2,500,000 and will pay annual license maintenance fees, until
the patents expire. Cubist 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 DNA shuffling. No upfront license issue fee revenue was
recognized in 1999.
I. FINANCINGS
On May 1, 1997, Cubist completed a private placement financing with
investors and raised net proceeds of $3.5 million, net of issuing costs of
$41,664, by issuing 88,848 shares of Cubist common stock, along with 44,424
warrants exercisable for our common stock at $56.28 CDN per share. Pursuant
to the Agreement, the investors agreed to subscribe for an additional $5
million CDN (the "Second Closing"). The Second Closing
F-17
occurred on October 8, 1998, resulting in the Company raising an additional
$3.2 million by issuing 88,848 shares of Cubist common stock, along with
44,424 warrants exercisable for Cubist common stock at $56.28 CDN per share.
In connection with the pooling-of-interests transaction consummated on
October 23, 2000 between Cubist and TerraGen, the exercise price for all
warrants outstanding as of that date was set at a US dollar equivalent of
$37.25 per share.
In December 1998, the shareholders of the Company authorized the
exchange of all the then outstanding common share warrants for common shares
on a 3 for 1 basis, for no additional consideration. Under these terms,
87,936 warrants were exchanged, for no additional consideration, for 29,312
common shares on December 31, 1998.
On July 18, 1997, Cubist completed a private equity financing in which
Cubist raised $6.0 million before offering expenses of $96,161 by issuing
979,591 common shares at $6.125 per share. These shares were subsequently
registered with the Securities and Exchange Commission.
On September 23, 1998, Cubist completed a private placement financing
with investors and raised approximately $13.6 million (less financing costs of
approximately $901,000) by issuing 6,065,560 shares of common stock at $2.25 per
share, along with 3,032,783 warrants exercisable for common stock at $2.25 per
share. The warrants are exercisable at any time until September 23, 2003. The
values of the warrants and common stock in excess of par value have been
reflected in additional paid-in-capital. Cubist has filed a registration
statement to register 9,098,343 shares of common stock related to this
financing. The proceeds of this private offering were used primarily to fund its
clinical trials of daptomycin and the development of its proprietary genomic
target validation and assay development VITA functional genomics technology.
On March 15, 1999, Cubist completed a private placement financing with
investors and raised net proceeds of $5.2 million, net of issuance costs of
$9,200, by issuing 142,157 shares of our common stock.
On October 21, 1999, Cubist completed a private placement financing with
investors and raised approximately $18.8 million (less financing costs of
$1,328,892) by issuing 2,503,333 shares of common stock at $7.50 per share.
Cubist has filed a registration statement to register the resale of the
2,503,333 shares of common stock issued in this financing. The proceeds of this
private offering are being used primarily to fund its clinical trials of
daptomycin and the development of its proprietary genomic target validation and
assay development VITA functional genomics technology.
J. STOCKHOLDERS' EQUITY
WARRANTS
Total warrants outstanding at December 31, 1999 were 2,793,239 (2,706,115
warrants relate to the September 23, 1998 financing described in footnote G).
In February 1999, Cubist issued to Bridge Technology Group a warrant
exercisable for 25,000 shares common stock at $4.31 per share. The value of the
warrants using the Black-Scholes option-pricing model is
F-18
$77,107. The value is being amortized to general and administrative expense over
a one-year period, and the warrants are due to expire February 2004.
NOTES RECEIVABLE FROM RELATED PARTIES
Cubist has accepted a promissory note from the Chief Executive Officer in
consideration for the preferred stock issued to him. In 1997, the term of this
note was extended to fall due in equal quarterly installments of $10,000
commencing on March 31, 1998. On October 14, 1999 the principal amount of this
note was paid in full.
Cubist has accepted a promissory note from a Senior Vice President in
consideration for 50,000 shares of restricted common stock issued to him. The
aggregate principal amount of this note at December 31, 1999 is $506,250 and is
reflected in stockholders' equity as a reduction to paid-in-capital. This note
has an annual interest rate of 4% and falls due on September 25, 2002. The note
will be forgiven in three equal annual installments, contingent upon the Senior
Vice President's continued employment, until September 2002.
K. STOCK OPTIONS
Under the Cubist 1993 Amended and Restated Stock Option Plan, options to
purchase 3,000,000 shares of common stock may be granted to employees,
directors, officers or consultants. The options are generally granted at fair
market value on the date of the grant as determined by the Board of Directors,
vest ratably over a four-year period and expire ten years from the date of
grant. At December 31, 1999 there were 342,340 shares available for future
grant.
Under the TerraGen Discovery Inc. Employee Stock Option Plan,
incentive and non-qualified stock options may be granted to United Kingdom
and Canadian employees, directors and consultants. Options typically vest
ratably over a maximum four-year period and expire ten years from the date of
grant. In connection with the acquisition by Cubist, Cubist assumed the
TerraGen plan and all of the TerraGen options were converted at the
acquisition exchange ratio of 0.021323 per common share into options to
acquire common stock of Cubist. The assumed options are exercisable upon the
same terms and conditions as provided in the TerraGen plan except that the
assumed options are exercisable for shares of Cubist common stock upon
payment of the revised exercise price in U.S. dollars.
During 1994 and 1995, Cubist allowed employees and consultants to
exercise their full grants to take advantage of certain favorable tax benefits.
Cubist reserved the right to repurchase any unearned shares at the original
purchase price if the employee or consultant does not fulfill the vesting
requirement. 1,390 and 2,064 shares of previously exercised options were
repurchased in 1997 and 1998, respectively, because vesting schedules were not
fulfilled. The remaining shares are fully vested at December 31, 1999.
Cubist adopted the disclosure provisions of SFAS 123, Accounting for
Stock Based Compensation, in 1996 and has applied APB Opinion 25 and related
Interpretations in accounting for its plans. Had compensation costs for Cubist's
stock-based compensation plan been determined based on the fair value at the
grant dates as calculated in accordance with SFAS 123, Cubist's net loss and
loss per share for the years ended December 31, 1997, 1998 and 1999 would have
been increased to the pro forma amounts indicated below:
F-19
1997 1998 1999
---- ---- ----
NET LOSS BASIC AND NET LOSS BASIC AND NET LOSS BASIC AND
DILUTED LOSS DILUTED LOSS DILUTED LOSS
PER SHARE PER SHARE PER SHARE
As Reported............... $(8,962,933) $(0.89) $(14,389,596) $(1.16) $(24,121,861) $(1.31)
Pro forma................. $(9,575,118) $(0.95) $(15,656,293) $(1.26) $(26,713,559) $(1.45)
The fair value of each stock option was estimated on the date of grant
using the Black-Scholes option-pricing model. The following weighted-average
assumptions were used for fiscal 1997:
Cubist TerraGen
Expected stock price volatility 87% 108%
Risk free interest rate 6.36% 5.24%
Expected annual dividend yield per share 0% 0%
Expected life of options 4 years 3 years
The following weighted-average assumptions were used for fiscal 1998:
Cubist TerraGen
Expected stock price volatility 97% 113%
Risk free interest rate 4.7% 5.01%
Expected annual dividend yield per share 0% 0%
Expected life of options 4 years 4 years
The following weighted-average assumptions were used for fiscal 1999:
Cubist TerraGen
Expected stock price volatility 74% 102%
Risk free interest rate 5.3% 5.10%
Expected annual dividend yield per share 0% 0%
Expected life of options 7 years 4 years
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. Additional awards in future years are anticipated.
A summary of the status of Cubist's stock option plan as of December 31,
1997, 1998 and 1999, and changes during each of the years then ended, is
presented below:
F-20
1997 1998 1999
---- ---- ----
WAEP* WAEP* WAEP*
NUMBER PER SHARE NUMBER PER SHARE NUMBER PER SHARE
------ --------- ------ --------- ------ ---------
Balance at January 1 ......... 502,418 $ 1.96 809,910 $ 4.98 1,535,810 $ 4.01
Granted ...................... 444,494 7.54 1,010,484 4.10 887,866 6.57
Exercised .................... (56,591) (2.06) (3,642) (1.23) (140,420) (2.94)
Canceled ..................... (80,411) (2.32) (280,942) (7.20) (276,427) (3.97)
---------------------------------------------------------------------
Balance at December 31 ....... 809,910 $ 4.98 1,535,810 $ 4.01 2,006,829 $ 5.11
=====================================================================
Weighted average grant-date
fair value of options granted
during the year:
Exercise price greater than
grant date stock fair
value...................... $13.35 $20.18 $22.66
Exercise price equals grant
date stock fair value...... $ 5.41 $ 2.42 $ 3.72
Exercise price less than
grant date stock fair
value...................... -- -- $ 7.94
- -----------
* Weighted-average exercise price
The following table summarizes information about stock options
outstanding at December 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ------------------- ---------------- ----------- ----------------
$.007--$1.96........... 248,355 5.5 years $1.60 224,429 $1.56
$2.25--$5.00........... 1,054,337 9.0 years 3.24 197,618 3.06
$5.25--$7.00........... 419,659 7.9 years 5.69 201,911 5.73
$8.00--$11.625......... 256,182 9.6 years 10.20 18,740 9.74
$31.04--$51.08......... 28,296 8.2 years 50.95 10,823 50.90
------------------------------------------------------------------------------------------------------------
2,006,829 8.3 years $5.11 653,521 $4.35
============================================================================================================
L. LEASE COMMITMENTS
Cubist leases its facilities under operating lease agreements, which
extend through 2003. Certain of these leases contain renewal options for an
additional five-year period and provisions that adjust the base payment based
upon changes in the consumer price index and require Cubist to pay operating
costs, including property taxes, insurance and maintenance. Cubist provided a
security deposit of $100,000 upon execution of a lease. The security deposit
bears interest in a segregated account, and was partially refunded ($79,000 plus
interest) on the fifth anniversary, and is fully refundable plus interest within
thirty days after the expiration of the lease, provided no event of default has
occurred. In 1995, Cubist entered into an agreement with the landlord under
which the landlord provided financing of $345,500 to Cubist for expansion of the
facility, which is payable in equal monthly installments of $7,685 over five
years with an annual interest rate of 12% through February 2000. No additional
security deposit was required. At December 31, 1999, the outstanding principal
balance was $15,143.
Cubist leases certain equipment under long-term capital leases. The cost
of this equipment included in fixed assets was approximately $4,632,000, with
associated accumulated depreciation of approximately
F-21
$3,311,000, at December 31, 1999. Cubist intends to purchase all of the leased
equipment at a price to be negotiated at lease end. Future lease payments for
non-cancelable leases for the respective years ended December 31 are as follows:
OPERATING LEASES CAPITAL LEASES
---------------- --------------
2000 .................................. $ 702,268 $ 891,327
2001 .................................. 608,998 704,878
2002 .................................. 559,123 341,217
2003 .................................. 498,545 1,896
2004 and thereafter ................... -- --
--------------------------------
Total minimum lease payments ............. $ 2,368,934 $1,939,318
--------------------------------
Less amount representing interest
payments................................. (312,432)
--------------
Present value of minimum lease payments... 1,626,886
Less current portion...................... (720,807)
--------------
Long-term obligation...................... $906,079
==============
Lease payments under operating leases were $348,570, $459,481 and
$763,503 in 1997, 1998 and 1999, respectively.
M. LONG TERM DEBT
1999 1998
---- ----
9.5% 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 C) ......... $ 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 C) ................................. 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 shares of common stock 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
LIBOR rate term loan agreement ................................... 1,139,578
Other ............................................................ 15,193 $ 100,066
--------------------------
5,442,145 100,066
--------------------------
Less current portion ............................................. (2,490,231) (83,957)
--------------------------
Long-term obligation ............................................. $ 2,951,864 $ 16,109
==========================
On November 16, 1999, Cubist issued 1,625,000 units for cash proceeds of
$1,625,000 CDN. Each unit entitles the holder to:
- one convertible debenture with a face value of $1 Cdn each, bearing
interest at 12%, collateralized by all present and after-acquired
property of TerraGen, payable on March 31, 2000. Each debenture is
convertible into 0.01777 of common stock at the option of the
holder; and
F-22
- one third of one share purchase warrant. Each whole share purchase
warrant entitles the holder to purchase 0.030386 shares of common
stock of Cubist at $37.25, from 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.
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.
During March 1999, Cubist entered into a term loan agreement with a bank
under which Cubist is able to borrow up to $1,500,000 to finance fixed asset
purchases. Advances under this facility are to be repaid over a 36-month period,
commencing on March 31, 2000. Interest on the borrowings is at the bank's LIBOR
rate (8.42% at December 31, 1999). Borrowings under the facility are
collateralized by all capital equipment purchased with the funds under this term
loan. At December 31, 1999, borrowings outstanding totaled $1,139,578.
At December 31, 1999, payments of principal and interest on existing debt
were due as follows:
Fiscal year ending December 31,
2000........................................................................... $2,937,561
2001........................................................................... 678,194
2002........................................................................... 3,078,633
----------
Total payments................................................................. 6,694,388
Less amounts representing interest............................................. (1,252,293)
----------
Total debt..................................................................... $5,442,095
Less current portion........................................................... (2,490,231)
----------
$2,951,864
===========
N. EMPLOYEE BENEFITS
Cubist maintains a 401(k) savings plan in which substantially all of its
permanent employees are eligible to participate. Participants may contribute up
to 15% of their annual compensation to the plan, subject to certain limitations.
Prior to January 1, 1998, Cubist contributed a matching amount of up to 1.5% of
a participant's total compensation or $500 annually, whichever is less.
Effective January 1, 1998, participants were granted a matching option in cash
or Cubist common stock. Cubist will match in common stock up to 4.5% of a
participant's total compensation or 75% of a participant's total contribution
annually, whichever is less. Matches distributed in common stock have immediate
vesting. Cubist contributed $20,165, $6,160 and $5,853 during 1997, 1998 and
1999, respectively. Additionally, in 1999, Cubist issued 28,420 shares of common
stock pursuant to this plan. No shares were issued prior to 1999.
Cubist instituted an employee stock purchase plan in 1998, in which
substantially all of its permanent employees are eligible to participate.
Participants may contribute up to 15% of their annual compensation to the plan,
subject to certain limitations. The plan allows participants to purchase Cubist
common stock, after a pre-determined six-month period, through payroll
deductions at a price 15% less than the lower of the closing price for the
beginning or ending date of the purchase period. The plan allows for the
issuance of 250,000 shares of common stock to eligible employees. During 1998
and 1999, Cubist issued 6,341 and 11,615 shares of common stock, respectively,
pursuant to this plan.
F-23
In Canada, Cubist maintains a Group Registered Retirement Savings Plan
("RRSP"), independent to each employee, through a nationally recognized funds
manager. Substantially all of the permanent employees are eligible to
participate. Participants may contribute up to 18% of their previous years
earned income to a maximum of $13,500 CDN to the plan. Cubist will make a
matching contribution up to 3% of an employee's salary. Cubist contributed
$19,137, $27,639 and $33,704 during 1997, 1998 and 1999, respectively.
In the United Kingdom, Cubist maintains a Contracted In Money Purchase
Scheme for all employees. Participants many contribute up to 10% of their annual
compensation to the scheme. Cubist matches contributions at a level up to 10% of
an employee's salary. Cubist contributed $0, $0 and $42,083 during 1997, 1998
and 1999, respectively.
O. INCOME TAXES
Based on Cubist's current financial status, realization of Cubist's
deferred tax assets does not meet the "more likely than not" criteria under SFAS
No. 109 and, accordingly, a valuation allowance for the entire deferred tax
asset amount has been recorded. The components of the net deferred tax asset and
the related valuation allowance are as follows:
1998 1999
---- ----
Deferred income tax assets:
Net operating loss carryforwards..................................... $11,501,958 $18,654,488
Research and development costs....................................... 4,001,161 3,754,689
Tax credit carryforwards............................................. 1,938,000 2,786,000
Deferred revenues.................................................... -- 997,630
Other, net........................................................... 430,384 1,041,085
-----------------------------------------
Total deferred tax assets............................................ 17,871,503 27,233,892
Valuation allowance.................................................. (17,871,503) (27,233,892)
-----------------------------------------
Net deferred tax assets.............................................. $ -- $ --
=========================================
Cubist's federal effective tax rates were 0%, 1.2% and 3.7%,
respectively, for 1997, 1998 and 1999. The effective tax rate differed from
statutory rate of 34% tax rate for 1997 due to a net operating loss and the
non-recognition of any deferred tax assets. The effective tax rate differed from
the statutory rate of 34% in 1998 and 1999 due to net operating losses, the
non-recognition of any deferred tax assets and tax benefits of $175,497 and
$925,593, respectively, which were due to Canadian investment tax credits for
which a cash refund was received.
At December 31, 1999, Cubist has federal net operating loss carryforwards
of approximately $45.4 million, which begins to expire in 2007, state net
operating loss carryforwards of $37.5 million, which begins to expire in 2000,
and $3,100,000 CDN of foreign net operating loss carryforwards which begin to
expire in 2004. Cubist also has federal, state and foreign credit carryforwards
of $1,765,000, $1,546,000, and $170,000, respectively, which begin to expire in
2006.
Ownership changes resulting from the issuance of capital stock may limit
the amount of net operating loss and tax credit carryforwards that can be
utilized annually to offset future taxable income. The amount of the annual
limitation is determined based on Cubist's value immediately prior to the
ownership change. Subsequent significant changes in ownership could further
affect the limitation in future years.
F-24
P. RELATED PARTY TRANSACTION
Cubist leases certain laboratory and computer equipment from a founding
shareholder of TerraGen. The term of the agreement is for a period of ten years
commencing May 1, 1996. Cubist is required to pay $1 per annum, which is
substantially below what would be charged to a non-related party.
Q. SUBSEQUENT EVENTS
On January 17, 2000, Cubist issued notes payable totaling $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, TerraGen's assets, including its patents, were pledged as
collateral for the loan. In addition, MM received 22,790 warrants entitling
MM to purchase common stock at a price of $56.28 CDN per share. Under the
terms of the Warrant Agreement, the exercise price per share is reduced to
$39.49 CDN per share if 50% or more of TerraGen's outstanding shares or
substantially all of its assets, rights or properties are acquired through a
business combination transaction. The 22,790 warrants were exercised on
October 23, 2000 for gross proceeds of $900,000 Cdn upon the subsequent
completion of a business combination between Cubist and TerraGen. The
exercise of warrants at $39.49 CDN per share reduced the conversion price of
the Xenova note to $26.14 per share.
On January 29, 2000, Cubist completed a private placement financing
with investors and raised approximately $55.0 million (less estimated
financing costs of $3,039,000) by issuing 2,200,000 shares of common stock at
$25.00 per share. Cubist filed a registration statement to register the
resale of the 2,200,000 shares of common stock issued in this financing.
In March 2000, Cubist increased its term loan by an additional
$2,000,000 to finance leasehold improvements and fixed asset purchases.
As per the terms of the acquisition of ChromaXome, Cubist issued a
$1,000,000 note payable to Trega due June 2000 or 15 days after the completion
of a second financing. As Cubist completed a financing in November 1999 and the
MM Venture loan in January 2000, the note became payable in February 2000.
Cubist 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 were repaid on April 15, 2000.
On April 3, 2000, Cubist completed a secondary public offering and
raised approximately $82.5 million (less financing costs of $4,957,275) by
issuing 2,500,000 shares of common stock at $33.00 per share. In addition, on
May 3, 2000, the underwriters exercised their option to purchase an
additional 375,000 shares of common stock at $33.00 per share to cover
over-allotments, raising an additional $12.4 million (less financing costs of
$680,625).
In June 2000, Cubist entered into a services agreement with
Gist-brocades Holding A.G. (DSM), an affiliated company of DSM Capua pursuant
to which DSM has agreed to provide supervisory and advisory services to
Cubist relating to the equipping of the manufacturing facility at DSM Capua.
Cubist has also entered into a manufacturing and supply agreement with DSM
Capua pursuant to which DSM Capua has agreed to manufacture and supply to
Cubist bulk daptomycin drug substance for commercial purposes. Under the
terms of the manufacturing and supply agreement, DSM Capua is required to
prepare its manufacturing facility in Italy to manufacture bulk daptomycin
drug substance in accordance with Good Manufacturing Practices standards.
Under the terms of the service agreements, Cubist will make a series of
scheduled payments to DSM over a five year period beginning in 2000 in order
to reimburse DSM for certain costs to be incurred by DSM Capua in connection
with the preparation, testing and validation of its manufacturing facility.
In February 2000, Cubist reimbursed $750,000 of these costs to DSM Capua. In
addition, in consideration for the implementation of the Cubist technology in
the facility by DSM Capua, Cubist has agreed to make milestone payments to
DSM if specific phases of the preparation of its manufacturing facility are
completed within specified periods of time. Cubist is accruing these
estimated milestone payments on a quarterly basis. Upon completion of the
preparation of DSM Capua's manufacturing facility and a determination by the
FDA that the manufacturing facility complies with Good Manufacturing
Practices standards, Cubist will purchase minimum annual quantities of bulk
daptomycin drug substance from DSM over a five-year period beginning in 2002.
Cubist issued convertible debentures totaling $1,625,000 CDN in November
1999, due on March 1, 2000. As of April 3, 2000, Cubist had not paid back the
notes and none of the investors had converted the
F-25
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. On March 31, 2000,
Cubist issued 30,176 shares of common stock on conversion of the convertible
debentures and related interest.
In April 2000, Cubist entered into a development and supply agreement
with Abbott Laboratories (Abbott) pursuant to which Abbott has agreed to
assist Cubist in the development of daptomycin as a parenteral formulation
and to manufacture and sell exclusively to Cubist, daptomycin as a parenteral
formulation. Under the terms of this agreement, Cubist has agreed to make
certain milestone payments to Abbott for their development efforts and
assistance in obtaining an approved New Drug Application (NDA) for
daptomycin. Cubist has made payments in 2000 totaling $325,000. If the FDA
approves the daptomycin NDA, Cubist will purchase minimum annual quantities
of drug product from Abbott over a five year period beginning in 2001.
On September 18, 2000, Cubist accepted a promissory note from the Chief
Executive Officer. The aggregate principal amount of this note at September 30,
2000 is $250,000. This note has an annual interest rate of 6.15% and falls due
March 31, 2002.
On November 6, 2000, Cubist and Emisphere Technologies, Inc. signed a
research and development collaboration to utilize Emisphere's oral drug delivery
technology for Cubist's late-stage development product Cidecin(TM) (daptomycin
for injection) and other lipopeptides. Under the terms of the agreement, Cubist
could pay fees, research funding and milestone payments totaling $30 million
should a product be successfully commercialized. Cubist would also pay a royalty
on sales of any product resulting from the collaboration and would be
responsible for drug development and would receive exclusive worldwide
commercialization rights to any oral products.
On September 8, 2000, Cubist announced the purchase of a new corporate
headquarters building in Lexington, Massachusetts. The new facility is 88,000
square feet, approximately 35,000 of which is constructed as laboratory
space. To finance the purchase, Cubist issued $39 million of convertible
notes to John Hancock Life Insurance Company. This financing covers the
building purchase price of approximately $34 million and includes $5 million
for facility improvements. The five-year notes carry a coupon rate of 8.5%
and can be converted to Cubist common stock at $63.8625 per share, which
represents a premium to the market price, determined at the time of
commitment. Cubist retains the right to redeem these notes after three years.
On January 7, 2001, Cubist and Gilead Sciences, Inc. signed a licensing
agreement for the exclusive rights to commercialize Cubist's investigational
antibacterial drug Cidecin(TM) (daptomycin for injection) and an oral
formulation of daptomycin in 16 European countries following regulatory
approval. Gilead has agreed to pay Cubist an up-front licensing fee of $13
million, and Cubist is entitled to receive additional cash payments of up to $31
million upon achievement of certain clinical and regulatory milestones. Gilead
will also pay Cubist a fixed royalty on net sales. Cubist will continue to be
responsible for worldwide clinical development of Cidecin, while Gilead will be
responsible for any regulatory filings in the covered territories. Gilead's
sales force will market the products in Europe.
F-26
CUBIST PHARMACEUTICALS, INC.
INDEX TO SUPPLEMENTAL CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
AND FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2000 AND 1999
PAGE
----
Supplemental Condensed Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999................ F-29
Supplemental Condensed Consolidated Statements of Operations for the three
months and nine months ended September 30, 2000 and 1999....................................................... F-30
Supplemental Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999.............................................................................. F-31
Notes to Supplemental Unaudited Condensed Consolidated Financial Statements...................................... F-33
F-27
CUBIST PHARMACEUTICALS, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 80,577,638 $ 12,248,607
Short-term investments ...................................... -- 14,580,515
Accounts receivable ......................................... 841,798 380,107
Investment tax credits receivable ........................... -- 926,699
Prepaid expenses and other current assets ................... 2,090,374 564,324
------------- -------------
Total current assets ........................................ 83,509,810 28,700,252
Property and equipment, net ...................................... 39,723,960 4,520,051
Intangible assets ................................................ 7,555,012 9,195,153
Long-term investments ............................................ 72,286,408 --
Other assets ..................................................... 2,078,528 179,287
------------- -------------
Total assets ....................................... $ 205,153,718 $ 42,594,743
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................ $ 2,714,201 $ 1,771,995
Accrued expenses ............................................ 4,860,995 1,778,853
Current portion of long-term debt ........................... 1,195,804 2,490,231
Current portion of capital lease obligations ................ 667,028 720,807
------------- -------------
Total current liabilities .......................... 9,438,028 6,761,886
------------- -------------
Deferred revenue ................................................. 2,443,343 2,533,875
Long-term debt, net of current portion ........................... 43,830,222 2,951,864
Long-term capital lease obligation, net of current portion ....... 395,462 906,079
------------- -------------
Total liabilities .................................. 56,107,055 13,153,704
------------- -------------
Commitments (Notes H & K)
Stockholders' equity:
Preferred stock, non-cumulative; convertible, $.001 par value;
authorized 5,000,000 shares 1998 and 1999; issued and
outstanding 1998 and 1999 no shares ......................... -- --
Common stock - $.001 par value; authorized: 50,000,000 shares;
27,691,659 and 20,983,510 shares issued and outstanding as of
September 30, 2000 and December 31, 1999, respectively ...... 27,691 20,984
Additional paid-in capital .................................... 239,731,252 93,050,133
Accumulated deficit ........................................... (90,790,237) (63,881,456)
Accumulated other comprehensive income ........................ 77,957 251,378
------------- -------------
Total stockholders' equity ........................ 149,046,663 29,441,039
------------- -------------
Total liabilities and stockholders' equity ......... $ 205,153,718 $ 42,594,743
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE SUPPLEMENTAL UNAUDITED
CONDENSED FINANCIAL STATEMENTS.
F-28
CUBIST PHARMACEUTICALS, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ----------- -------------
Sponsored research revenues .................. $ 1,314,390 $ 3,366,986 $ 4,256,820 $ 5,335,980
Operating expenses:
Research and development ............ 9,964,299 6,578,182 29,448,554 17,835,064
Write-off of acquired in-process
research and development ............ - - - 752,304
General and administrative .......... 2,916,199 1,605,728 7,139,846 4,155,254
------------ ------------ ------------ ------------
Total operating expenses ........ 12,880,498 8,183,910 36,558,400 22,742,622
Interest income .............................. 2,631,425 215,990 6,001,676 751,090
Interest expense ............................. (554,647) (208,376) (1,117,440) (488,887)
Other income.................................. 15,683 39,815 47,051 119,446
------------ ------------ ------------ ------------
Net loss before income taxes ................. ($ 9,473,647) ($ 4,769,495) ($27,400,293) ($17,024,993)
------------ ------------ ------------ ------------
Income taxes benefit ......................... - 115,506 491,512 348,596
------------ ------------ ------------ ------------
Net loss ..................................... ($ 9,473,647) ($ 4,653,989) ($26,908,781) ($16,676,397)
============ ============ ============ ============
Basic and diluted net loss per common
share ........................................ ($0.34) ($0.26) ($1.04) ($0.93)
============ ============ ============ ============
Weighted average number of common shares for
basic and diluted net loss per common
share ........................................ 27,635,686 18,065,123 25,953,738 17,843,827
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE SUPPLEMENTAL UNAUDITED
CONDENSED FINANCIAL STATEMENTS.
F-29
CUBIST PHARMACEUTICALS, INC.
SUPPLEMENTAL CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
2000 1999
---- ----
Cash flows for operating activities:
Net loss ................................................................ $ (26,908,781) $ (16,676,397)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write-off of acquired in-process research and development ............. -- 752,304
Depreciation and amortization ......................................... 3,157,642 2,048,595
Gain on the sale of equipment ......................................... (8,600) 23,528
Common stock issued for technology milestone .......................... -- 250,000
Cashless exercise of warrants ......................................... -- 38,330
Stock based compensation .............................................. 36,600 43,650
Discounts on long-term debt ........................................... 298,723 --
Foreign exchange ...................................................... (47,051) (119,446)
Changes in assets and liabilities:
Accounts receivable ............................................... 452,101 (423,173)
Investment tax credits receivable ................................. -- 169,348
Prepaid expenses and other current assets ......................... (1,279,921) (930,502)
Other assets ...................................................... (873,366) 23,980
Accounts payable and accrued expenses ............................. 4,083,796 2,302,289
------------- -------------
Total adjustments .............................................. 5,819,924 4,178,903
------------- -------------
Net cash used for operating activities ..................................... (21,088,857) (12,497,494)
Cash flows for (from) investing activities:
Acquisition of Xenova Discovery, net of cash on-hand .................... -- (747,365)
Acquisition of ChromaXome Corporation, net of cash on-hand .............. -- (2,315,432)
Purchase of building and equipment ...................................... (35,443,209) (508,338)
Proceeds from the sale of equipment ..................................... 8,600 --
Leasehold improvements .................................................. (1,058,003) (85,350)
Purchase of intangible assets ........................................... (160,438) --
Purchase of short-term investments ...................................... (7,857,440) (754,638)
Maturities of short-term investments .................................... 22,437,955 8,940,222
Purchase of long-term investments ....................................... (72,286,408) --
------------- -------------
Net cash provided by (used for) investing activities ....................... (94,358,943) 4,529,099
------------- -------------
Cash flows from financing activities:
Issuance of common stock and warrants, net .............................. 144,396,010 9,606,500
Costs associated with issuance of convertible notes ..................... (1,302,240) --
Proceeds from notes receivable .......................................... -- 30,000
Repayments of long term debt ............................................ (1,734,755) (62,571)
Proceeds from long term debt ............................................ 42,865,948 787,500
Principal payments of capital lease obligations ......................... (551,122) (553,993)
------------- -------------
Net cash provided by financing activities .................................. 183,673,841 9,807,436
------------- -------------
Net increase(decrease) in cash and cash equivalents ........................ 68,226,041 1,839,041
Effect of changes in foreign exchange rates on cash balances ............... 102,990 145,894
F-30
Cash and cash equivalents, beginning of period ............................. 12,248,607 8,779,106
------------- -------------
Cash and cash equivalents, end of period ................................... $ 80,577,638 $ 10,764,041
------------- -------------
Supplemental non-cash investing and financing activities:
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 ............... $ 657,128 --
Value assigned to beneficial conversion feature on convertible debenture.... 1,112,097 --
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE SUPPLEMENTAL UNAUDITED
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
F-31
CUBIST PHARMACEUTICALS, INC.
NOTES TO SUPPLEMENTAL UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Cubist Pharmaceuticals, Inc. is a specialty pharmaceutical company
founded in May 1992 and is focused on the research, development and
commercialization of novel antimicrobial drugs to combat serious and
life-threatening bacterial and fungal infections, including those caused by
bacteria and fungi resistant to commercially available drugs. Cubist has
established multiple technology licenses and collaborations and has established
a network of advisors and
On October 23, 2000, C&T Acquisition Corporation, a subsidiary of
Cubist, acquired TerraGen Discovery Inc., ("TerraGen") a natural products
discovery company with operations in Vancouver, Canada and Slough, England.
Following the acquisition, the name of TerraGen was changed to Cubist
Pharmaceuticals Inc. TerraGen conducts its Slough, England operations through
a wholly-owned subsidiary. With the acquisition, Cubist acquired proprietary
technologies and expertise in the area of small molecule drug discovery from
natural products. This transaction was accounted for using the
pooling-of-interest method of accounting. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling-of-interests method in financial statements that
do not include the date of consummation. These financials statements do not
extend through the date of consummation; however, they will become the
historical consolidated financial statements of Cubist after financial
statements covering the date of consummation of the business combination are
issued. The accompanying Supplemental Consolidated Financial Statements of
Cubist have been restated to include the results and balances of C&T
Acquisition Corporation and TerraGen and its subsidiaries for all periods
presented.
B. ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements reflect all
adjustments, consisting of normal recurring adjustments, which are necessary,
in the opinion of management, for a fair presentation of the results of the
interim periods presented. Interim results are not necessarily indicative of
results for a full year. These unaudited condensed consolidated financial
statements do not include all information and footnote disclosures required
by generally accepted accounting principles and therefore should be read in
conjunction with Cubist's audited financial statements and related footnotes
for the year ended December 31, 1999 which are included in Cubist's Annual
Report on Form 10-K/A and Cubist's supplemental consolidated financial
statements which are included elsewhere in this document.
NET LOSS PER COMMON SHARE
Basic net loss per share is computed using the weighted average number of
shares of common stock outstanding. Diluted net loss per share does not differ
from basic net loss per share since potential common shares from stock options
and warrants are antidilutive for all periods presented and are therefore
excluded from the calculation. At September 30, 2000 and 1999 options to
purchase 2,779,659 and 2,064,069 shares of common stock, respectively, and
warrants for 1,606,748, and 2,932,892 shares of common stock, respectively, were
not included in the computation of diluted net loss per share since their
inclusion would be antidilutive.
C. VENDOR AGREEMENTS
In April 2000, Cubist entered into a development and supply agreement
with Abbott Laboratories (Abbott) pursuant to which Abbott has agreed to assist
Cubist in the development of daptomycin as a parenteral formulation and to
manufacture and sell exclusively to Cubist, daptomycin as a parenteral
formulation. Under the terms of this agreement, Cubist has agreed to make
certain milestone payments to Abbott for their development efforts and
assistance in obtaining an approved New Drug Application (NDA) for daptomycin.
Cubist has made payments totaling $325,000 to date. If the FDA approves the
daptomycin NDA, Cubist will purchase minimum annual quantities of drug product
from Abbott over a five year period beginning in 2001.
F-32
In June 2000, Cubist entered into a services agreement with Gist-brocades
Holding A.G. (DSM), an affiliated company of DSM Capua pursuant to which DSM has
agreed to provide supervisory and advisory services to Cubist relating to the
equipping of the manufacturing facility at DSM Capua. Cubist has also entered
into a manufacturing and supply agreement with DSM Capua pursuant to which DSM
Capua has agreed to manufacture and supply to Cubist bulk daptomycin drug
substance for commercial purposes. Under the terms of the manufacturing and
supply agreement, DSM Capua is required to prepare its manufacturing facility in
Italy to manufacture bulk daptomycin drug substance in accordance with Good
Manufacturing Practices standards. Under the terms of the service agreements,
Cubist will make a series of scheduled payments to DSM over a five year period
beginning in 2000 in order to reimburse DSM for certain costs to be incurred by
DSM Capua in connection with the preparation, testing and validation of its
manufacturing facility. In February 2000, Cubist reimbursed $750,000 of these
costs to DSM Capua. In addition, in consideration for the implementation of the
Cubist technology in the facility by DSM Capua, Cubist has agreed to make
milestone payments to DSM if specific phases of the preparation of its
manufacturing facility are completed within specified periods of time. Cubist
has accrued a portion of these estimated milestone payments during this quarter.
Upon completion of the preparation of DSM Capua's manufacturing facility and a
determination by the FDA that the manufacturing facility complies with Good
Manufacturing Practices standards, Cubist will purchase minimum annual
quantities of bulk daptomycin drug substance from DSM over a five-year period
beginning in 2002.
D. EQUITY FINANCINGS
On January 29, 2000, Cubist completed a private placement financing with
investors and raised approximately $55.0 million (less financing costs of
$3,214,500) by issuing 2,200,000 shares of common stock at $25.00 per share.
Cubist filed a registration statement to register the resale of the 2,200,000
shares of common stock issued in this financing. Cubist plans to use the
proceeds of the private placement to fund its clinical trials of Cidecin(TM)
(daptomycin for injection), its lipopeptide drug discovery program and the
development of its proprietary genomic target validation and assay development
VITA functional genomics technology.
On April 3, 2000, Cubist completed a secondary public offering and raised
approximately $82.5 million (less financing costs of $4,957,275) by issuing
2,500,000 shares of common stock at $33.00 per share. In addition, on May 3,
2000, the underwriters exercised their option to purchase an additional 375,000
shares of common stock at $33.00 per share to cover over-allotments, raising an
additional $12.4 million (less financing costs of $680,625). Cubist intends to
use the net proceeds of this offering to fund its clinical trials and
commercialization of Cidecin(TM), its lipopeptide drug discovery program, the
continued development of its proprietary genomic target validation and assay
development VITA(TM) functional genomics and ChemInformatics technologies and
for general corporate and working capital purposes.
E. TERRAGEN ACQUISITION
On October 23, 2000, Cubist acquired indirectly through its subsidiary
C&T Acquisition Corporation all of the issued and outstanding common and
preferred shares of TerraGen, and assumed all of the outstanding options,
warrants and convertible debentures of TerraGen, by issuing 334,933 shares of
Cubist common stock and causing C&T Acquisition Corporation to issue 178,491
exchangeable shares. Each common share of TerraGen was exchanged, at the
election of the holder, for either 0.021323 exchangeable shares or 0.021323
shares of Cubist common stock and each preferred share was exchanged, at the
election of the holder, for either 0.030386 exchangeable shares or 0.030386
shares of Cubist common stock. The exchangeable shares are exchangeable at
any time at the option of the holder, on a one-for-one basis, for shares of
Cubist common stock. All exchangeable shares that remain outstanding will be
automatically exchanged for shares of Cubist common stock on October 23,
2002. The options, warrants and convertible debentures of TerraGen assumed by
Cubist pursuant to the acquisition are exercisable for 94,605 shares of
Cubist common stock. This acquisition had been accounted for using the
pooling-of interest method of accounting. The balances as at September 30,
2000 and December 31, 1999 and for the nine months ended September 30, 2000
and December 31, 1999 and for the nine months ended September 30, 2000 and
1999 have been restated to include the balances and results of C&T
Acquisition Corporation and TerraGen and its subsidiaries. Results on a
stand-alone basis were as follows:
F-33
NINE MONTHS ENDED COMBINED
SEPTEMBER 30, 1999 CUBIST TERRAGEN RESTATED
- ---------------------------- ------------------- ------------------- --------------------
Revenues $4,579,378 $756,602 $5,335,980
Operating loss (12,113,899) (5,173,297) (17,287,196)
Net loss (11,706,537) (4,969,860) (16,676,397)
Net loss per share (0.67) (12.44) (0.93)
NINE MONTHS ENDED COMBINED
SEPTEMBER 30, 2000 CUBIST TERRAGEN RESTATED
- ---------------------------- ------------------- ------------------- --------------------
Revenues $2,496,247 $1,760,573 $4,256,820
Operating loss (28,694,771) (3,589,758) (32,284,529)
Net loss (23,171,029) (3,737,752) (26,908,781)
Net loss per share (0.91) (7.78) (1.04)
There were no intercompany transactions between the two companies prior to
consummation of the transaction.
F. RELATED PARTY TRANSACTIONS
In September 1999, Cubist accepted a promissory note from a Senior Vice
President in consideration for 50,000 shares of restricted common stock issued
to him. The aggregate principal amount of this note at September 30, 2000 is
$337,500 and is reflected in stockholders' equity as a reduction to
paid-in-capital. This note has an annual interest rate of 4% and falls due on
September 25, 2002. The note will be forgiven in three equal annual
installments, contingent upon the Senior Vice President's continued employment,
until September 2002.
On September 18, 2000, Cubist accepted a promissory note from the Chief
Executive Officer. The aggregate principal amount of this note at September 30,
2000 is $250,000. This note has an annual interest rate of 6.15% and falls due
March 31, 2002.
F-34
G. LONG-TERM DEBT
During March 1999, Cubist entered into a term loan agreement with a
bank under which Cubist is able to borrow up to $1,500,000 to finance fixed
asset purchases. In March 2000, Cubist increased the term loan by an
additional $2,000,000 to finance leasehold improvements and fixed aset
purchases. Advances under this facility are to be repaid over a 36-month
period, commencing on March 31, 2000. Interest on the borrowings is at the
bank's LIBOR rate (9.23% at September 30, 2000). Borrowings under this
facility are collateralized by all capital equipment purchased with the funds
under this term loan. At September 30, 2000, borrowings outstanding totaled
$2,643,642.
On March 16, 1999, Cubist issued notes payable to Trega Biosciences,
Inc. to partially finance the acquisition of ChromaXome Corporation. The
$1,000,000 note payable and related interest to April 15, 2000 of $103,000
were repaid on April 15, 2000.
On January 17, 2000, Cubist issued notes payable to MM Venture Finance
Partnership ("MM") totaling $3,000,000 Cdn. The notes payable bear interest
at 14.4% and are repayable in blended interest and principal payments over 36
months to January 17, 2003. Cubist's assets, including its patents, were
pledged as collateral for the loan. In addition, MM received 22,790 warrants
entitling MM to purchase Cubist common stock at $56.28 Cdn per share. Under
the terms of the Warrant Agreement, the exercise price per share is reduced
to $39.49 Cdn per share if 50% or more of Cubist's outstanding shares or
substantially all of its assets, rights or properties are acquired through a
business combination transaction. At September 30, 2000, the note payable
balance was $1,163,790.
Cubist issued convertible debentures totaling $1,625,000 Cdn in
November 1999, due on March 1, 2000. As of April 3, 2000, Cubist 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. On March 31, 2000 Cubist issued
30,175 shares of common stock on conversion of the convertible debentures and
related interest.
On September 8, 2000, Cubist issued $39 million of convertible notes
to John Hancock Life Insurance Company to finance the purchase of a new
corporate headquarters building in Lexington, Massachusetts. The five year
notes carry a coupon rate of 8.5% and can be converted to Cubist's common
stock at $63.8625 per share which represents a premium to the market price
determined at the time of commitment. Cubist retains the right to redeem
these notes after three years.
F-35
H. LICENSE AGREEMENT
The Company and a third party entered into a cross license agreement
(the "Cross-license Agreement") dated November 18, 1999, pursuant to which
the Company granted to the third party 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, the third party
cannot use the macrodroplet screening technology for the term of the
agreement, and the third-party cannot use the anti-inflammatory or
immunosuppressive technology for a period of one year from the date of the
agreement.
Under the Cross-license Agreement, the third party 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 DNA shuffling. No upfront license fee revenue has been
recognized in 2000 or 1999.
I. COMPREHENSIVE LOSS
Comprehensive loss includes foreign currency translation adjustments and
net loss.
Nine months ended September 30
------------------------------
2000 1999
---------- -----------
Net loss ......................... $ 26,908,781 $ 16,676,397
Other comprehensive loss:
Foreign currency translation 173,421 (152,746)
------------ ------------
Comprehensive loss ............... $ 27,082,202 $ 16,523,651
============ ============
J. SUBSEQUENT EVENTS
On October 23, 2000, MM Venture Finance Partnership exercised warrants
to purchase 22,790 shares of common stock for gross proceeds of $900,000 CDN
upon the subsequent completion of a business combination between Cubist and
TerraGen. The exercise of warrants at $39.49 CDN per share reduced the
conversion price of the Xenova note to $26.14 per share.
On November 6, 2000, Cubist and Emisphere Technologies, Inc. signed a
research and development collaboration to utilize Emisphere's oral drug delivery
technology for Cubist's late-stage development product Cidecin(TM) (daptomycin
for injection) and other lipopeptides. Under the terms of the agreement, Cubist
could pay fees, research funding and milestone
F-36
payments totaling $30 million should a product be successfully commercialized.
Cubist would also pay a royalty on sales of any product resulting from the
collaboration and would be responsible for drug development and would receive
exclusive worldwide commercialization rights to any oral products.
On January 7, 2001, Cubist and Gilead Sciences, Inc. signed a licensing
agreement for the exclusive rights to commercialize Cubist's investigational
antibacterial drug Cidecin(TM) (daptomycin for injection) and an oral
formulation of daptomycin in 16 European countries following regulatory
approval. Gilead has agreed to pay Cubist an up-front licensing fee of $13
million, and Cubist is entitled to receive additional cash payments of up to $31
million upon achievement of certain clinical and regulatory milestones. Gilead
will also pay Cubist a fixed royalty on net sales. Cubist will continue to be
responsible for worldwide clinical development of Cidecin, while Gilead will be
responsible for any regulatory filings in the covered territories. Gilead's
sales force will market the products in Europe.
F-37