UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 000-30347
_________________________
CURIS, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-3505116
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
61 Moulton Street, Cambridge, MA 02138
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (617) 503-6500
_____________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [_] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of April 30, 2001, there were 31,525,293 shares of the Registrant's Common
Stock, $0.01 par value per share, outstanding.
CURIS, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of March 31, 2001 and December 31,
2000 3
Consolidated Statements of Operations and Comprehensive Loss for the three-
month periods ended March 31, 2001 and 2000 4
Consolidated Statements of Cash Flows for the three-month periods ended
March 31, 2001 and 2000 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 15
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
Item 1. Financial Statements
CURIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
March 31, December 31,
2001 2000
------------- -------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 47,646,372 $ 52,414,312
Marketable securities 18,600,055 22,654,393
Marketable securities - Restricted 465,398 729,905
Other current assets 976,985 1,278,873
------------- -------------
Total current assets 67,688,810 77,077,483
------------- -------------
PROPERTY, PLANT AND EQUIPMENT - net 8,189,196 7,866,591
------------- -------------
OTHER ASSETS:
Intangible assets, net (Note 4) 91,322,004 97,145,664
Other assets 774,227 592,252
------------- -------------
Total other assets 92,096,231 97,737,916
------------- -------------
$ 167,974,237 $ 182,681,990
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Debt and lease obligations, current portion $ 2,246,676 $ 1,971,609
Accounts payable 2,653,779 2,187,824
Accrued liabilities 5,700,273 5,553,641
------------- -------------
Total current liabilities 10,600,728 9,713,074
------------- -------------
DEBT AND LEASE OBLIGATIONS, net of current portion 4,011,394 4,155,150
------------- -------------
COMMITMENTS (Note 5)
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value, 5,000,000 - -
shares authorized, none issued and outstanding
Common stock, $0.01 par value, 125,000,000
shares authorized, 31,525,293 and 31,383,585 shares
issued and outstanding at March 31, 2001 and
December 31, 2000, respectively 315,253 313,836
Additional paid-in capital 661,543,449 662,339,492
Notes receivable (1,225,566) (1,204,596)
Deferred compensation (17,906,968) (22,893,619)
Accumulated deficit (489,752,877) (471,945,648)
Accumulated other comprehensive income 388,824 2,204,301
------------- -------------
Total stockholders' equity 153,362,115 168,813,766
------------- -------------
$ 167,974,237 $ 182,681,990
============= =============
See accompanying notes to unaudited consolidated financial statements
3
CURIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three-Month Period Ended
March 31,
-----------------------------
2001 2000
------------ -----------
REVENUES:
Research and development contracts and
government grants $ 220,101 $ 670,387
License fees and royalties 29,064 -
------------ -----------
Total revenues 249,165 670,387
------------ -----------
COSTS AND EXPENSES (A):
Research and development 8,108,708 2,073,338
General and administrative 2,582,391 1,551,010
Stock-based compensation 3,831,439 3,139,478
Amortization of intangible assets 5,823,660 41,761
1999 reorganization - (38,391)
------------ -----------
Total costs and expenses 20,346,198 6,767,196
------------ -----------
Loss from operations (20,097,033) (6,096,809)
------------ -----------
OTHER INCOME (EXPENSE):
Interest and other income 2,493,920 298,896
Interest expense (204,116) (43,635)
------------ -----------
Total other income 2,289,804 255,261
------------ -----------
NET LOSS $(17,807,229) $(5,841,548)
============ ===========
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.57) $ (0.16)
============ ===========
WEIGHTED AVERAGE COMMON SHARES FOR BASIC AND
DILUTED NET LOSS COMPUTATION 31,434,120 37,556,903
============ ===========
NET LOSS $(17,807,229) $(5,841,548)
UNREALIZED LOSS ON MARKETABLE SECURITIES (248,511) (3,257)
------------ -----------
COMPREHENSIVE LOSS $(18,055,740) $(5,844,805)
============ ===========
(A) The following summarizes the departmental allocation of the
stock-based compensation charge:
Research and development $ 2,407,366 $ -
General and administration 1,424,073 3,139,478
------------ -----------
Total stock-based compensation $ 3,831,439 $ 3,139,478
============ ===========
See accompanying notes to unaudited consolidated financial statements
4
CURIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Three-Month Period Ended
March 31,
------------------------------------
2001 2000
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(17,807,229) $(5,841,548)
------------ -----------
Adjustments to reconcile net loss to net cash used:
Depreciation and amortization 616,903 199,205
Stock-based compensation expense 3,831,439 3,139,478
Amortization of lease discount 6,088 -
Reorganization expense adjustment - 38,391
Issuance of common stock in lieu of cash for license fee 98,003 -
Non-cash interest on notes payable 8,913 -
Interest on notes receivable (20,970) -
Amortization of intangible assets 5,823,660 41,761
Changes in current assets and liabilities:
Other current assets 301,888 (314,393)
Deferred merger costs - (1,482,026)
Accounts payable and accrued liabilities 603,674 (216,978)
Deferred contract revenue - (661,279)
------------ -----------
Total adjustments 11,269,598 744,159
------------ -----------
Net cash used for operating activities (6,537,631) (5,097,389)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (5,858,959) -
Sale of marketable securities, net 8,362,327 9,234,371
Increase in other assets (181,975) -
Expenditures for property, plant and equipment (524,255) (16,463)
Expenditures for patents - (339,102)
------------ -----------
Net cash provided by investing activities 1,797,138 8,878,806
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock 262,583 4,103,841
Repayments of obligations under capital leases (290,030) (80,877)
------------ -----------
Net cash (used in) provided by financing activities (27,447) 4,022,964
------------ -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (4,767,940) 7,804,381
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 52,414,312 2,751,069
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 47,646,372 $10,555,450
============ ===========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Property and equipment purchased under line of credit $ 415,253 $ -
============ ===========
Notes payable for exercise of stock options $ - $ 1,131,380
============ ===========
See accompanying notes to unaudited consolidated financial statements
5
CURIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Operations -
----------
Curis, Inc. (the "Company"), incorporated on February 14, 2000 and formed to
effect the merger discussed below in Note 2, focuses its efforts in the area
of regenerative medicine and uses its functional genomics and developmental
biology expertise to (i) activate cellular development pathways to promote
repair and promote normal tissue and organ function and (ii) inhibit
abnormal growth pathways to treat certain types of cancer. The Company has
identified product leads from its experience in working with protein
factors, cell therapies, biomaterials, tissue engineering and small
molecules.
2. Merger -
------
On July 31, 2000, Creative BioMolecules, Inc., a Delaware corporation
("Creative"), Ontogeny, Inc., a Delaware corporation ("Ontogeny") and
Reprogenesis, Inc., a Texas corporation ("Reprogenesis") merged (the
"Merger") with and into the Company, pursuant to an Agreement and Plan of
Merger dated as of February 14, 2000 (the "Merger Agreement"). On July 31,
2000, the Company, as the surviving company of the Merger, assumed the
rights and obligations of Creative, Ontogeny and Reprogenesis. Immediately
after the Merger, the Company was owned approximately 43% by the former
stockholders of Creative, 38% by the former stockholders of Ontogeny and 19%
by the former stockholders of Reprogenesis. Consequently, for accounting
purposes, the Company is deemed to be the successor to Creative, and the
historical financial statements of Creative have become the historical
financial statements of the Company. The Merger has been accounted for as a
purchase of Ontogeny and Reprogenesis in accordance with Accounting
Principles Board (APB) Opinion No. 16, Accounting for Business Combinations,
and accordingly, Ontogeny's and Reprogenesis' operating results since the
Merger date are included in the accompanying financial statements.
In accordance with APB No. 16, the purchase price for Ontogeny and
Reprogenesis has been allocated to the assets and liabilities of Ontogeny
and Reprogenesis based on their fair values. The aggregate purchase price
based on the fair market value of Creative common stock was $300,731,000 and
$149,000,000 for Ontogeny and Reprogenesis, respectively, including the
value of the outstanding options and warrants exchanged for options and
warrants to purchase the Company's common stock and the transaction costs
related to the Merger.
The purchase price of Ontogeny and Reprogenesis was allocated to the assets
acquired based upon an independent appraisal which used proven valuation
tools and techniques. Significant portions of the purchase price were
identified as intangible assets which included in-process research and
development (IPR&D) of $294,800,000 and assembled workforce of $500,000. The
excess of the purchase price over the fair value of identified tangible and
intangible net assets of $105,477,000 has been allocated to goodwill.
Intangible assets are being amortized over their estimated useful lives of 4
to 5 years. The fair value of the IPR&D relating to current in-process
research and development projects was recorded as an expense as of the
Merger date.
Unaudited pro forma operating results for the Company, assuming the Merger
occurred at January 1, 2000 are approximately as follows:
Three Months Ended
(Actual) (Pro forma)
March 31, March 31,
2001 2000
-------------------------------
Revenues $ 249,000 $ 670,000
Net Loss $(17,807,000) $(19,293,000)
Net Loss per share $ (0.57) $ (0.75)
For purposes of these pro forma operating results, the IPR&D was assumed to
have been written off prior to the pro forma periods, so that the operating
results presented only include recurring costs.
6
3. Basis of Presentation -
---------------------
The accompanying consolidated financial statements of the Company have been
prepared in accordance with accounting principles generally accepted in the
United States applicable to interim periods. These statements, however, are
condensed and do not include all disclosures required by accounting
principles generally accepted in the United States for complete financial
statements and should be read in conjunction with the Company's Annual Report
on Form 10-K for the year ended December 31, 2000 as filed with the
Securities and Exchange Commission on March 30, 2001.
In the opinion of the Company, the unaudited financial statements contain all
adjustments (all of which were considered normal and recurring) necessary to
present fairly the Company's financial position at March 31, 2001 and the
results of operations and cash flows for the three-month periods ended March
31, 2001 and 2000. The preparation of the Company's consolidated financial
statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that
affect the reported amounts and disclosure of certain assets and liabilities
at the balance sheet date. Such estimates include the carrying value of
property and equipment and intangible assets and the value of certain
liabilities. Actual results may differ from such estimates.
These interim results are not necessarily indicative of results for a full
year and such results are subject to year-end adjustments and an independent
audit.
4. Intangible Assets -
------------------
Intangible assets consisted of approximately the following at March 31, 2001
and December 31, 2000:
March 31, December 31,
2001 2000
------------ ------------
Goodwill $105,477,000 $105,477,000
Patents 1,297,000 1,297,000
Assembled workforce 500,000 500,000
------------ ------------
107,274,000 107,274,000
Less: accumulated amortization (15,952,000) (10,128,000)
------------ ------------
$ 91,322,000 $ 97,146,000
============ ============
Goodwill totaling $105,477,000 and assembled workforce of $500,000 are
being amortized over their estimated useful lives of 4 to 5 years.
Accumulated amortization as of March 31, 2001 was $15,420,000 and $67,000
for goodwill and assembled workforce, respectively. The Company has
capitalized certain costs associated with the successful filing of patent
applications and has included them as a component of other assets in the
accompanying consolidated balance sheet. Patent costs of $1,297,000 are
being amortized over their estimated useful lives, not to exceed 17 years.
7
5. Long-Term Debt, Capital Lease Obligations and Operating Leases -
--------------------------------------------------------------
(i) Long-term debt and capital lease obligations consisted of approximately
the following at March 31, 2001 and December 31, 2000:
March 31, December 31,
2001 2000
-------------------------------------
Notes payable to a financing agency for fixed asset purchases $ 2,292,000 $ 1,946,000
Notes payable to Genetics Institute for technology purchases
payable in the Company's common stock 394,000 394,000
Obligations under capital leases, net of $67,000 discount at
March 31, 2001 3,572,000 3,787,000
-------------------------------------
6,258,000 6,127,000
Less current portion (2,247,000) (1,972,000)
-------------------------------------
Total long-term debt and capital lease obligations $ 4,011,000 $ 4,155,000
=====================================
(ii)Future minimum operating lease payments for the respective periods
ended December 31 are approximately as follows:
Operating Leases
----------------------------------------- --------------------
Q2 - Q4 2001 $ 1,408,000
2002 1,956,000
2003 2,019,000
2004 2,004,000
2005 2,002,000
Thereafter 2,659,000
--------------------
Total minimum lease payments $ 12,048,000
====================
6. License Agreement -
-----------------
Effective January 5, 2001, the Company entered into a license and
collaboration agreement with Aegera Therapeutics Inc. ("Aegera") granting
the Company an exclusive worldwide license to Aegera's skin-derived, adult
stem cell technologies. The agreement also provides for a three-year
research collaboration in which the Company will fund 6 full-time
equivalent researchers per year at Aegera dedicated to the agreement. In
consideration for the technology license, the Company paid a $100,000 up-
front license fee, purchased 125,000 shares of Aegera common stock for a
total cost of $250,000 and issued 10,667 shares of the Company common
stock, which had a market value of approximately $98,000, to Aegera during
the first quarter of 2001. The Company recorded the $100,000 payment and
fair value of the Company common stock issued to Aegera as an expense in
the accompanying statement of operations. The estimated fair value of
125,000 shares of Aegera common stock purchased has been recorded as an
other asset in the accompanying balance sheet. In addition, under the terms
of the agreement, the Company will likely be required to make various
milestone and royalty related payments.
7. New Accounting Standards -
------------------------
In June 1998, the Financial Accounting Standards Board (FASB) released SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS
No. 133 establishes standards for reporting and accounting for derivative
instruments, including derivative instruments embedded in other contracts,
and for hedging activities. It requires an entity to recognize all
derivatives
8
as either assets or liabilities in its balance sheet and measure those
instruments at fair value. Pursuant to SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities -Deferral of the Effective
Date of FASB Statement No. 133, SFAS No.133 is effective for all quarters
of fiscal years beginning after June 15, 2000. The adoption of SFAS No. 133
in the first quarter of fiscal 2001 did not have any impact on the
Company's reported consolidated financial statements.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
Merger -
On July 31, 2000, Creative BioMolecules, Inc., a Delaware corporation
("Creative"), Ontogeny, Inc., a Delaware corporation ("Ontogeny") and
Reprogenesis, Inc., a Texas corporation ("Reprogenesis") merged (the "Merger")
with and into Curis, Inc. ("Curis" or "the Company"), pursuant to an Agreement
and Plan of Merger dated as of February 14, 2000 (the "Merger Agreement"). The
Company, as the surviving company of the Merger, assumed the rights and
obligations of Creative, Ontogeny and Reprogenesis. Immediately after the
Merger, Curis was owned approximately 43% by the former stockholders of
Creative, 38% by the former stockholders of Ontogeny and 19% by the former
stockholders of Reprogenesis. Consequently, for accounting purposes, Curis is
deemed to be the successor to Creative, and the historical financial statements
of Creative have become the historical financial statements of Curis. The Merger
has been accounted for as a purchase of Ontogeny and Reprogenesis in accordance
with Accounting Principles Board (APB) Opinion No. 16, Accounting for Business
Combinations, and accordingly, Ontogeny's and Reprogenesis' operating results
since the Merger date are included in the accompanying financial statements.
In accordance with APB No. 16, the purchase price for Ontogeny and Reprogenesis
has been allocated to the assets and liabilities of Ontogeny and Reprogenesis
based on their fair values. The aggregate purchase price based on the fair
market value of Creative common stock was $300,731,000 and $149,000,000 for
Ontogeny and Reprogenesis, respectively, including the value of the outstanding
options and warrants exchanged for options and warrants to purchase the common
stock of the Company and the transaction costs related to the Merger.
The purchase price of Ontogeny and Reprogenesis was allocated to the assets
acquired based upon an independent appraisal which used proven valuation tools
and techniques. Significant portions of the purchase price were identified as
intangible assets which included in-process research and development (IPR&D) of
$294,800,000 and assembled workforce of $500,000. The excess of the purchase
price over the fair value of identified tangible and intangible net assets of
$105,477,000 has been allocated to goodwill. Intangible assets are being
amortized over their estimated useful lives of 4 to 5 years. The fair value of
the IPR&D relating to current in-process research and development projects was
recorded as an expense as of the Merger date.
Unaudited pro forma operating results for the Company, assuming the Merger
occurred at January 1, 2000 are approximately as follows:
Three Months Ended
(Actual) (Pro forma)
March 31, March 31,
2001 2000
-------------------------------------------
Revenues $ 249,000 $ 670,000
Net Loss $(17,807,000) $(19,293,000)
Net Loss per share $ (0.57) $ (0.75)
For purposes of these pro forma operating results, the IPR&D was assumed to have
been written off prior to the pro forma periods, so that the operating results
presented only include recurring costs.
Operating expenses for the three-month period ended March 31, 2001 include the
operating expenses of the Company which includes operating costs of the combined
companies as a result of the Merger. Operating expenses for the three-month
period ended March 31, 2000 include the operating expenses of Creative for such
periods. Accordingly, comparisons of operating expenses between the 2001 and
the 2000 periods may not prove to be meaningful.
10
Results of Operations
Revenues
Total revenues for the three-month period ended March 31, 2001 were $249,000
compared to $670,000 for the three-month period ended March 31, 2000, a decrease
of $421,000 or 63%. The decrease in revenues was primarily the result of
deferred contract revenue of $661,000 from Stryker Corporation recognized
during the three-month period ended March 31, 2000 offset in part by revenues of
$220,000 earned during the three-month period ended March 31, 2001 under two
National Institute of Standards and Technology (NIST) grants.
Operating Expenses
Research and development expenses increased 291% to $8,109,000 for the three-
month period ended March 31, 2001 from $2,073,000 for the three-month period
ended March 31, 2000. The increase was primarily a result of additional costs
associated with the consolidation of the three companies in the Merger.
Research and development expenses for the three-month period ended March 31,
2001 include the costs incurred by the three combined companies formed as a
result of the Merger. These costs include research and development personnel
costs for 112 persons of $2,300,000, external lab services including clinical
trials of $2,700,000, and facility related costs of $639,000. Research and
development expenses for the three-month period ended March 31, 2000 include
only the costs incurred by Creative. We anticipate that research and development
expenses for the next three quarters of 2001 will be reasonably consistent with
the three-month period ended March 31, 2001.
General and administrative expenses increased 66% to $2,582,000 for the three-
month period ended March 31, 2001 from $1,551,000 for the three-month period
ended March 31, 2000. The increase was primarily a result of additional costs
associated with the consolidation of the three companies in the Merger. General
and administrative expenses for the three-month period ended March 31, 2001
include the costs incurred by the three combined companies including personnel
related costs of $925,000, legal and professional fees of $557,000, and facility
related costs of $285,000. We anticipate that general and administrative
expenses for the next three quarters of 2001 will be reasonably consistent with
the three-month period ended March 31, 2001.
Stock-based compensation was $3,831,000 for the three-month period ended March
31, 2001 compared to $3,139,000 for the three-month period ended March 31, 2000.
During 2001, stock-based compensation consisted of $2,813,000 of amortization
expense related to prepaid compensation resulting from the Merger which is being
amortized over the vesting period of the underlying options. In addition, on
August 18, 2000, we issued options to purchase 3,089,756 shares of common stock,
net of cancellations, to the Company's employees with an exercise price below
market value resulting in deferred compensation of $16,221,000 which is being
amortized over the four-year vesting period of the shares beginning in August
2000. The total expense included in the three-month period ending March 31, 2001
related to these options is $1,018,000. Stock-based compensation for the three-
month period ended March 31, 2000 consisted of a one-time non-cash charge of
$3,139,000, recorded on February 8, 2000 related to the acceleration of certain
stock options and the extension of the exercise period for options held by
Creative's executive officers and outside directors.
Amortization of intangible assets was $5,824,000 for the three-month period
ended March 31, 2001 as compared to $42,000 for the three-month period ended
March 31, 2000. The increase was primarily due to the amortization of goodwill
totaling $5,778,000 incurred as a result of the Merger.
Other Income (Expenses)
Interest and other income for the three-month period ended March 31, 2001 was
$2,494,000 compared to $299,000 for the same period in 2000, an increase of
$2,195,000. The increase was primarily due to a gain of $1,466,000 resulting
from the sale of marketable securities during the first quarter of 2001 and
increased income on investments due to a higher investable cash balance as a
result of the Merger which was completed in July 2000 and a private placement of
the Company's equity securities which was completed in December 2000.
11
Interest expense for the three-month period ended March 31, 2001 was $204,000
compared to $44,000 for the same period in 2000, an increase of $160,000. The
increase in interest expense resulted primarily from the consolidation into the
Company of the outstanding lease obligations of the three constituent companies.
Net Loss
As a result of the foregoing, the Company incurred a net loss of $17,807,000 or
$0.57 per share for the three-month period ended March 31, 2001, compared to a
net loss of $5,842,000 or $0.16 per share for the three-month period ended March
31, 2000.
Liquidity and Capital Resources
At March 31, 2001, the Company's principal sources of liquidity consisted of
cash, cash equivalents and marketable securities of $66,712,000. The Company
has financed its operations primarily through a private placement of its equity
securities, revenues received under agreements with collaborative partners,
manufacturing contracts and the sale by Creative of certain of its OP-1
manufacturing rights and facilities to Stryker.
Net cash used in operating activities was $6,538,000 for the three-month period
ended March 31, 2001 compared to $5,097,000 for the three-month period ended
March 31, 2000. The increase was primarily due to additional costs associated
with the consolidation of the three companies in the Merger offset by deferred
merger costs of $1,482,000 incurred during the first quarter of 2000. The
Company increased its investment in property, plant and equipment to $14,832,000
at March 31, 2001 from $13,893,000 at December 31, 2000. The increase resulted
primarily from leasehold improvements incurred to upgrade the Company's research
and development facilities. The Company currently plans to spend approximately
$5,000,000 during the remaining three quarters of 2001 on leasehold improvements
and equipment purchases to upgrade its research and development facilities.
On October 5, 2000, the Company announced the receipt of a second $2,000,000
grant from NIST to support the development of a new class of biomaterials
designed to enable surgical procedures that augment, repair or regenerate lost
structural tissue or physiological function. The grant period is from January 1,
2001 to December 31, 2003. Previously, Reprogenesis had been awarded another
$2,000,000 grant from NIST to support the development of its cardiovascular
products, Vascugel and Vascuject. The grant period for the first NIST grant is
from November 1, 1999 to October 31, 2002.
As of March 31, 2001, the Company held 53,571 shares of Exelixis, Inc. common
stock with a fair market value as of that date of approximately $465,000,
included in the Company's balance sheet as of March 31, 2001 under the category
"Marketable securities - Restricted." These shares are restricted under a
warrant agreement between the Company and Exelixis and will not be available for
sale until the one-year holding period has been satisfied on March 13, 2002. The
value of these shares could fluctuate based on the price of Exelixis common
stock and market conditions.
We anticipate that our existing capital resources should enable us to maintain
our current and planned operations into the fourth quarter of 2002. Beyond the
fourth quarter of 2002, we expect to incur substantial additional research and
development and other costs, including costs related to preclinical studies and
clinical trials. The Company's ability to continue funding planned operations is
dependent upon its ability to generate sufficient cash flow from royalties on
Stryker products, if approved for commercial sale, from collaborative
arrangements and from additional funds through equity or debt financings, or
from other sources of financing, as may be required. We are seeking additional
collaborative arrangements and also expect to raise funds through one or more
financing transactions, if conditions permit. Over the longer term, because of
the Company's significant long-term capital requirements, we intend to raise
funds through the sale of debt or equity securities when conditions are
favorable, even if the Company does not have an immediate need for additional
capital at such time. There can
12
be no assurance that additional financing will be available or that, if
available, it would be available on favorable terms. In addition, the sale of
additional debt or equity securities could result in dilution to the Company's
stockholders. If Stryker products are not approved for commercial sale and the
Company does not receive royalties from Stryker and/or if substantial additional
funding is not available, the Company's business will be materially and
adversely affected.
New Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB) released SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes standards for reporting and accounting for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. It requires an entity to recognize all derivatives as
either assets or liabilities in its balance sheet and measure those instruments
at fair value. Pursuant to SFAS No. 137, Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133, SFAS No.133 is effective for all quarters of fiscal years beginning after
June 15, 2000. The Company adopted this new accounting standard in the first
quarter of fiscal 2001. The adoption of SFAS No. 133 did not have any impact on
the Company's reported consolidated financial statements.
Cautionary Factors with Respect to Forward-Looking Statements
Readers are cautioned that certain statements contained in this Management's
Discussion and Analysis of Financial Condition and Results of Operations that
are not related to historical results are "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Statements
that are predictive, that depend upon or refer to future events or conditions,
or that include words such as "expects," "anticipates," "intends," "plans,"
"believes," "estimates," "hopes," and similar expressions constitute forward-
looking statements. In addition, any statements concerning future financial
performance (including future revenues, earnings or growth rates), ongoing
business strategies or prospects, and possible future Company actions are also
forward-looking statements.
Forward-looking statements are based on current expectations, projections and
assumption regarding future events that may not prove to be accurate. Actual
results may differ materially from those projected or implied in the forward-
looking statements. Factors that could cause or contribute to such differences
include, but are not limited to, dependence on significant collaborative
partners failure or delay in obtaining necessary regulatory approvals, the
ability to protect the Company's intellectual property rights, the ability to
manage future indebtedness and liquidity and the ability to compete effectively.
For a discussion of these and certain other factors, please refer to Item 1.
"Business-Risk Factors" contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 2000 filed with the Securities and Exchange
Commission on March 30, 2001. Please also refer to the Company's other filings
with the Securities and Exchange Commission.
13
Item 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company invests cash balances in excess of operating requirements in short-
term marketable securities, generally corporate debt and government securities
with an average maturity of less than one year. All marketable securities are
considered available for sale. At March 31, 2001, the fair market value of these
securities amounted to approximately $18,600,000 with net unrealized gains of
approximately $31,000 included as a component of stockholders' equity. Because
of the quality of the investment portfolio and the short-term nature of the
marketable securities, the Company does not believe that interest rate
fluctuations would impair the principal amount of the securities. The Company's
investments are investment grade securities and deposits are with investment
grade financial institutions. The Company believes that the realization of
losses due to changes in credit spreads is unlikely as the Company expects to
hold the debt to maturity.
As of March 31, 2001, in addition to the marketable securities discussed above,
the Company held 53,571 shares of Exelixis common stock with a fair market value
as of that date of approximately $465,000. These shares are restricted under
the terms of a warrant agreement between the Company and Exelixis and will not
be available for sale until the one-year holding period has been satisfied on
March 13, 2002. The value of these shares could fluctuate based on the price of
Exelixis common stock and market conditions.
At March 31, 2001, we had approximately $2.5 million outstanding under fixed-
rate capital leases and term notes which are not subject to fluctuations in
interest rates and approximately $1.5 million outstanding under a term loan
agreement with an adjustable rate equal to prime.
14
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
As of January 5, 2001, the Company agreed to issue 10,667 shares of
common stock to Aegera Therapeutics Inc. as part of the consideration for a
license and collaboration agreement between the Company and Aegera. Under the
agreement, the shares were issued to Aegera on March 31, 2001 in exchange for
services and property valued at $150,000 or $14.06 per share. The shares of
common stock were exempt from registration under Section 4(2) of the Securities
Act of 1933, as amended, because there was no public offering of the common
stock issued. No underwriters were involved in the sale of these securities.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
Exhibit
Number Description
------ -----------
10.01 Severance Agreement, effective November 20, 2000, between
the Company and Andrew C. G. Uprichard.
10.02 Severance Agreement, effective November 1, 2000, between
the Company and Daniel R. Passeri.
(b) Reports on Form 8-K.
(i) Current Report on Form 8-K dated January 31, 2001.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this Quarterly Report on Form 10-Q to be signed
on its behalf by the undersigned, thereunto duly authorized.
CURIS, INC.
Date: May 10, 2001 By: /s/ George A. Eldridge
----------------------
Vice President, Finance and
Chief Financial Officer
16
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
10.01 Severance Agreement, effective November 20, 2000, between the Company
and Andrew C. G. Uprichard.
10.02 Severance Agreement, effective November 1, 2000, between the Company
and Daniel R. Passeri.
17