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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 FOR THE PERIOD ENDED JUNE 30, 1999
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE
ACT OF 1934 COMMISSION FILE NUMBER 0-21379
CUBIST PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3192085
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
24 EMILY STREET
CAMBRIDGE, MASSACHUSETTS 02139
(Address of principal executive offices)
(617) 576-1999
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
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. Yes X No
-- --
As of August 12, 1999, there were 17,569,657 shares outstanding of
Cubist's common stock, $0.001 par value per share.
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CUBIST PHARMACEUTICALS, INC.
INDEX
ITEM PAGE
NUMBER NUMBER
- ------ ------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Unaudited Financial Statements
Condensed Balance Sheets as of June 30, 1999
and December 31, 1998............................................................... 3
Condensed Statements of Operations for the three months ended June 30, 1999
and 1998 and for the six months ended June 30, 1999 and 1998........................ 4
Condensed Statements of Cash Flows for the six months ended
June 30, 1999 and 1998.............................................................. 5
Notes to the Unaudited Condensed Financial Statements............................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................. 11
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................................... 11
Item 4. Submission of Matters to a Vote of Security Holders..................................... 11
Item 6. Exhibits and Reports on Form 8-K........................................................ 12
SIGNATURE............................................................................... 12
2
PART I -- FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CUBIST PHARMACEUTICALS, INC.
CONDENSED BALANCE SHEETS
JUNE 30, 1999 DECEMBER 31,
1998
----------------- ----------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents......................................... $8,423,702 $6,463,688
Short-term investments............................................ 3,341,248 8,692,514
Accounts receivable .............................................. 50,018 --
Prepaid expenses and other current assets......................... 648,285 231,409
----------------- ----------------
Total current assets.............................................. 12,463,253 15,387,611
Property and equipment ................................................ 8,009,927 7,727,821
Less: Accumulated depreciation and amortization.................. (4,514,364) (3,908,054)
----------------- ----------------
Property and equipment, net ...................................... 3,495,563 3,819,767
Long-term investments.................................................. 3,827,761 3,855,336
Other assets .......................................................... 57,801 74,238
----------------- ----------------
Total assets............................................. $19,844,378 $23,136,952
----------------- ----------------
----------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................. $448,076 $460,939
Accrued expenses.................................................. 1,613,924 572,562
Current portion of long-term debt................................. 58,806 83,957
Current portion of capital lease obligations ..................... 544,481 625,450
----------------- ----------------
Total current liabilities .............................. 2,665,287 1,742,908
Long-term debt, net of current portion................................. 787,694 16,109
Long-term capital lease obligation, net of current portion............. 1,042,876 1,292,165
----------------- ----------------
Total liabilities........................................ 4,495,857 3,051,182
----------------- ----------------
Commitments
Stockholders' Equity:
Common Stock - $.001 par value; authorized: 50,000,000 shares;
Issued and outstanding 1998 16,642,968 shares;
Issued and outstanding 1999 17,561,316 shares..................... 17,561 16,643
Additional paid-in capital............................................. 59,252,337 54,890,014
Accumulated deficit .................................................. (43,921,377) (34,820,887)
----------------- ----------------
Total stockholders' equity............................... 15,348,521 20,085,770
----------------- ----------------
Total liabilities and stockholders' equity............... $19,844,378 $23,136,952
----------------- ----------------
----------------- ----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONDENSED FINANCIAL
STATEMENTS.
3
CUBIST PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF OPERATIONS
UNAUDITED
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------- -------------------------------------
1999 1998 1999 1998
---- ---- ---- ----
----------------- ------------------ ------------------ -----------------
Sponsored research revenues $862,500 $373,550 $1,466,875 $887,100
Operating expenses:
Research and development 4,699,640 2,705,375 8,926,372 5,268,893
General and administrative 974,658 817,255 1,954,361 1,675,332
----------------- ------------------ ------------------ -----------------
Total operating expenses 5,674,298 3,522,630 10,880,733 6,944,225
Interest income 239,609 195,948 474,195 380,116
Interest expense (89,897) (90,508) (160,827) (183,521)
----------------- ------------------ ------------------ -----------------
Net loss ($4,662,086) ($3,043,640) ($9,100,490) ($5,860,530)
----------------- ------------------ ------------------ -----------------
----------------- ------------------ ------------------ -----------------
Basic and diluted net loss per common
share ($0.27) ($0.29) ($0.52) ($0.55)
----------------- ------------------ ------------------ -----------------
----------------- ------------------ ------------------ -----------------
Weighted average number of common shares
for basic and diluted net loss per
common share 17,548,337 10,580,920 17,362,780 10,580,986
----------------- ------------------ ------------------ -----------------
----------------- ------------------ ------------------ -----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONDENSED FINANCIAL
STATEMENTS.
4
CUBIST PHARMACEUTICALS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
UNAUDITED
SIX MONTHS ENDED
JUNE 30,
----------------------------------------
1999 1998
---- ----
Cash flows used for operating activities:
Net loss...................................................... $(9,100,490) $(5,860,530)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............................... 632,116 676,669
Common stock issued for technology milestone................ 250,000 --
Cashless exercise of warrants............................... 17,496
Changes in assets and liabilities:
Accounts receivable.................................... (50,018) 53,333
Prepaid expenses and other current assets.............. (389,301) (44,762)
Other assets.......................................... 16,437 38,301
Accounts payable and accrued expenses.................. 1,028,499 157,140
----------------- -----------------
Total adjustments.................................... 1,505,229 880,681
----------------- -----------------
Net cash used for operating activities........................... (7,595,261) (4,979,849)
Cash flows from (for) investing activities:
Purchase of equipment......................................... (250,658) (834,355)
Leasehold improvements........................................ (31,448) (33,642)
Purchase of short-term investments............................ (754,638) --
Maturities of short-term investments.......................... 6,105,904 2,007,487
Purchase of long-term investments............................. -- --
Maturities of long-term investments........................... -- 4,636,996
----------------- -----------------
Net cash provided by investing activities........................ 5,069,160 5,776,486
----------------- -----------------
Cash flows from financing activities:
Issuance of stock............................................. 4,059,939 (5,249)
Proceeds from notes receivable................................ 10,000 10,000
Repayments of debt............................................ (41,066) (103,823)
Proceeds from equipment loan.................................. 787,500 690,080
Principal payments of capital lease obligations............... (330,258) (329,618)
----------------- -----------------
Net cash provided by financing activities........................ 4,486,115 261,390
----------------- -----------------
Net increase in cash and cash equivalents........................ 1,960,014 1,058,027
Cash and cash equivalents, beginning of period................... 6,463,688 2,837,600
----------------- -----------------
Cash and cash equivalents, end of period......................... $8,423,702 $3,895,627
----------------- -----------------
----------------- -----------------
Supplemental disclosures of cash flow information:
Cash paid during the year for interest........................ $160,827 $183,521
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE UNAUDITED CONDENSED FINANCIAL
STATEMENTS.
5
CUBIST PHARMACEUTICALS, INC.
NOTES TO THE UNAUDITED CONDENSED FINANCIAL STATEMENTS
A. NATURE OF BUSINESS
Cubist Pharmaceuticals, Inc. is a biopharmaceutical company founded in
May 1992 and is engaged in the research, development and commercialization of
novel classes of antiinfective drugs to combat serious life threatening bacteria
and fungi infections. Cubist has established multiple technology licenses and
collaborations and has established a network of advisors and collaborators.
Cubist is located in Cambridge, Massachusetts.
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 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, 1998
which are included in Cubist's Annual Report on Form 10-K. Such Annual Report on
Form 10-K was filed with the Securities and Exchange Commission on March 17,
1999.
NET LOSS PER COMMON SHARE
The net loss per common share is computed based upon the weighted
average number of common shares and common shares and common equivalent shares
(using the treasury stock method) outstanding after certain adjustments
described below. Common equivalent shares are not included in the per share
calculations where the effect of their inclusion would be anti-dilutive. At June
30, 1999, and 1998 the Company had 1,697,209 and 1,130,331 options outstanding,
respectively. At June 30, 1999, and 1998 the Company had 3,071,345; and 86,619
warrants outstanding, respectively.
C. LICENSE AGREEMENT
On February 3, 1999, Cubist entered into a research and license
agreement with Novartis Pharma AG to use Cubist's proprietary VITA-TM-
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 pay research payments and, 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, 797,488 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-TM- technology.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THIS QUARTERLY
REPORT ON FORM 10-Q MAY 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, BUT NOT LIMITED TO, (I) STATEMENTS ABOUT THE
ADEQUACY OF CUBIST'S CASH, CASH EQUIVALENTS, OTHER CAPITAL RESOURCES, INTEREST
INCOME, OTHER INCOME AND FUTURE REVENUES DUE UNDER CUBIST'S COLLABORATIVE
AGREEMENTS TO FUND ITS OPERATING EXPENSES AND CAPITAL REQUIREMENTS AS CURRENTLY
PLANNED THROUGH 1999, (II) STATEMENTS ABOUT THE AMOUNT OF CAPITAL EXPENDITURES
THAT CUBIST EXPECTS TO INCUR IN 1999, AND (III) CERTAIN STATEMENTS 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 SUCH WORDS OR EXPRESSIONS).
YOU ARE CAUTIONED THAT FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN.
ACTUAL PERFORMANCE AND RESULTS OF OPERATIONS MAY DIFFER MATERIALLY FROM THOSE
PROJECTED OR SUGGESTED IN THE FORWARD-LOOKING STATEMENTS DUE TO CERTAIN RISKS
AND UNCERTAINTIES, INCLUDING, BUT NOT LIMITED TO, THE RISKS AND UNCERTAINTIES
DESCRIBED OR DISCUSSED IN THE SECTION "RISK FACTORS" IN CUBIST'S ANNUAL REPORT
ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998. THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN REPRESENT CUBIST'S JUDGMENT AS OF THE DATE OF THIS
QUARTERLY REPORT ON FORM 10-Q, AND CUBIST CAUTIONS READERS NOT TO PLACE UNDUE
RELIANCE ON SUCH STATEMENTS.
OVERVIEW
Since its incorporation on May 1, 1992 and commencement of operations
in February 1993, Cubist has been engaged in the research, development and
commercialization of novel antiinfective drugs to combat serious life
threatening bacteria and fungi infections. Cubist has a limited history of
operations and has experienced significant operating losses since inception. The
Company expects to incur significant additional operating losses over the next
several years and expects cumulative losses to increase substantially due to
expanded research and development efforts, pre-clinical and clinical trials and
development of manufacturing, marketing and sales capabilities.
A key element of Cubist's strategy is to enhance certain of its drug
discovery and development programs and to fund its capital requirements, in
part, by entering into collaborative agreements with major pharmaceutical
companies. Cubist is a party to collaborative agreements based specifically on
its aminoacyl-tRNA synthetase program with Bristol-Myers Squibb and Merck. Under
these collaborative agreements, Cubist is entitled to receive research support
payments and, if certain drug development milestones are achieved, milestone
payments. In addition, Cubist will be entitled to receive royalties on worldwide
sales of any drug developed and commercialized from these collaborations.
On February 3, 1999, Cubist entered into a research and license
agreement with Novartis Pharma AG to use Cubist's proprietary VITA-TM-
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 pay Cubist research payments and 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, 797,488 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-TM- technology. These
additional funds together with existing cash resources are expected to be used
to fund the Company's operations and capital requirements through 1999.
On November 7, 1997, Cubist entered into a license agreement with Eli
Lilly and Company, pursuant to which Cubist acquired exclusive worldwide rights
to develop, manufacture and market daptomycin. In exchange for such license,
Cubist has paid to Eli Lilly an upfront license fee in cash, and if certain drug
development milestones are achieved, has agreed to pay milestone payments in
cash or 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.
Daptomycin is a novel, natural product being developed for the treatment of
STAPHYLOCOCCUS AUREUS and enterococcus infections in humans. Cubist began
clinical trials of daptomycin in February of 1999.
On February 19, 1999 Cubist issued to Eli Lilly and Co. 56,948 shares
of Cubist Common Stock as consideration for the licensing of daptomycin to
Cubist pursuant to, and in accordance with, the terms of the
7
agreements with Eli Lilly dated November 7, 1997. The issuance of shares was
incident to the initiation of Phase III clinical testing of daptomycin.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. Total revenues in the three months ended June 30, 1999 were
$863,000 compared to $374,000 in the three months ended June 30, 1998, an
increase of $489,000 or 130.7%. The revenue earned in the three months ended
June 30, 1999 consisted of $563,000 in research support funding from the
Novartis collaboration and $250,000 in research support funding from the
Bristol-Myers Squibb collaboration; and $50,000 in funding from SBIR grants. In
the three months ended June 30, 1998, total revenues consisted of research
support funding from the Bristol-Myers Squibb collaboration; and funding from
SBIR grants. The increase was due to revenues associated with the Novartis
collaboration.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenses in the three months ended June 30, 1999 were $4,700,000 compared to
$2,705,000 in the three months ended June 30, 1998, an increase of $1,995,000 or
73.8%. The increase was largely due to increased consulting and manufacturing
costs related to daptomycin development, and the additional personnel and
purchases required by such development; and milestone expenses related to the
initiation of Phase III clinical trials.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses in the three months ended June 30, 1999 were $975,000 compared to
$817,000 in the three months ended June 30, 1998, an increase of $158,000 or
19.3%. The increase was largely due to increased costs related to personnel and
increased investor and public relations expenses.
INTEREST INCOME AND EXPENSE. Interest income in the three months ended
June 30, 1999 was $240,000 compared to $196,000 in the three months ended June
30, 1998, an increase of $44,000 or 22.5%. The increase in interest income was
due primarily to a higher average cash, cash equivalent and investment balances
during the three months ended June 30, 1999 as compared to the three months
ended June 30, 1998 due to the Novartis collaboration. Interest expense in the
three months ended June 30, 1999 was $90,000 as compared to $91,000 during the
three months ended June 30, 1998.
NET LOSS. The net loss during the three months ended June 30, 1999 was
$4,662,000 compared to $3,044,000 during the three months ended June 30, 1998,
an increase of $1,618,000 or 53.2%. The increase was primarily due to additional
expenses incurred associated with the development of daptomycin.
SIX MONTHS ENDED JUNE 30, 1999 AND 1998
REVENUES. Total revenues in the six months ended June 30, 1999 were
$1,467,000 compared to $887,000 in the six months ended June 30, 1998, an
increase of $580,000 or 65.4%. The revenue recognized in the six months ended
June 30, 1999 consisted of $1,417,000 in research support payments from the
Bristol-Myers Squibb and Novartis collaborations; and $50,000 in SBIR grants. In
the six months ended June 30, 1998, revenues consisted of research support
payments from the Bristol-Myers Squibb and Merck collaborations; and in SBIR
grants. The increase was due to revenues associated with the Novartis research &
license agreement.
RESEARCH AND DEVELOPMENT EXPENSES. Total research and development
expenses in the six months ended June 30, 1999 were $8,926,000 compared to
$5,269,000 in the six months ended June 30, 1998, an increase of $3,657,000 or
69.4%. The increase was largely due to increased costs 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 six months ended June 30, 1999 were $1,954,000 compared to
$1,675,000 in the six months ended June 30, 1998, an increase of $279,000 or
8
16.6%. The increase was primarily due to increased costs related to investor and
public relations, and increased legal expenses.
INTEREST INCOME AND EXPENSE. Interest income in the six months ended
June 30, 1999 was $474,000 compared to $380,000 in the six months ended June 30,
1998, an increase of $94,000 or 24.7%. The increase in interest income was due
primarily to a higher average cash, cash equivalent and investment balances
during the six months ended June 30, 1999 as compared to the six months ended
June 30, 1998. Interest expense in the six months ended June 30, 1999 was
$161,000 as compared to $184,000 during the six months ended June 30, 1998 due
to decreased capital lease activity.
NET LOSS. The net loss during the six months ended June 30, 1999 was
$9,100,000 compared to $5,861,000, an increase of $3,239,000 or 55.2%. The
increase was primarily due to the additional expenses incurred to support the
advancement of the Company's internal research and development programs as well
as increased revenue from such stage of research support funding.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Cubist has financed its operations through the sale of
equity securities, equipment financing, sponsored research revenues, license
revenues and interest earned on invested capital. The total cash, cash
equivalent and investments balance at June 30, 1999 was $15,593,000 compared to
$19,012,000 at December 31, 1998.
Since inception through June 30, 1999, Cubist had invested an aggregate
of $8,100,000 (of which $259,000 was invested during the three months then
ended) in property and equipment, primarily in laboratory equipment under
capital leases. The obligations under capital leases at June 30, 1999 were
$1,587,000. Minimum annual principal payments due under capital leases total
$843,000 in 1999. Principal payments are scheduled to decline each year
thereafter until expiration in 2002. Cubist made principal payments under its
capital lease obligations of $330,000 in the six months ended on June 30, 1999.
Cubist expects its capital expenditures in 1999 to be approximately $800,000
consisting of laboratory and other equipment purchases.
On February 3, 1999, Cubist entered into a research and license
agreement with Novartis Pharma AG to use Cubist's proprietary VITA-TM-
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 pay Cubist research payments and 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, 797,488 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-TM- technology.
The additional funds from the sale of shares to Novartis, together with
existing cash resources and its existing capital resources, interest income and
future revenues due under the Novartis, Bristol-Myers Squibb and Merck
collaborative agreements will be sufficient to fund its operating expenses and
capital requirements as currently planned through 1999. The actual cash
requirements of Cubist may vary materially from those now planned and will
depend on numerous factors. There can be no assurance that it's existing cash,
cash equivalents, other capital resources, interest income and future revenues
due under the Novartis, Bristol-Myers Squibb and Merck collaborative agreements
will be sufficient to fund Cubist's operating expenses and capital requirements
during that period. Cubist will need to raise substantial additional capital to
fund its operations from and after January 1, 2000 and intends to seek such
additional funding through public or private financing or collaborative or other
arrangements with corporate partners.
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 is effective for fiscal years beginning after June
15, 1999. The statement establishes accounting and reporting standards requiring
that every derivative
9
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.
YEAR 2000 READINESS
The "Year 2000" issue generally describes the various problems which
may result from the improper processing of dates and date-sensitive
calculations. Computers and other equipment containing computer-related
components (such as programmable logic controllers and other embedded systems)
using two digits to identify the year in a date may not be able to distinguish
between dates in the 20th century versus the 21st century. Because computer and
microprocessor use is so widespread, the issue has become a societal concern,
the impact of which is not yet known.
Cubist has completed the assessment of its critical computer systems
and embedded systems and believes them to be Year 2000 compliant. Although
Cubist believes its critical systems are Year 2000 compliant, there can be no
assurances that other defects will not be discovered in the future. Cubist
believes that any failure of it's non-critical systems to be Year 2000 compliant
will not have a material adverse effect on it.
In addition to Cubist's critical systems, Cubist relies on third party
service providers and suppliers (i.e., payroll services company,
telecommunications companies, banks and utility companies and contract
manufacturers) in the conduct of its business, and it recognizes that there may
be potential exposure to Year 2000-related business disruptions as a result.
Cubist has contacted its significant service providers and contract
manufacturers and has obtained assurances from some that they are addressing
Year 2000 issues in a prudent fashion. Others have not replied in any fashion,
but none have informed Cubist of material Year 2000 issues. Cubist is unable to
control whether the firms and suppliers it does business with currently, and in
the future, will have systems which are Year 2000 compliant. Cubist's operations
could be adversely affected to the extent that firms and suppliers would be
unable to provide services, materials or products.
To the extent that Year 2000 compliance assurances are not given by its
third party service providers and suppliers, Cubist intends to devise
contingency plans to address any potential negative effects in the event of the
unavailability of services, materials or products. If necessary, Cubist may
increase inventory levels of materials and products prior to December 1999 as a
contingency against possible disruption of supply. Nevertheless, a contingency
plan devised by Cubist may not prevent a business interruption caused by one or
more of its third party service providers or suppliers, and the failure of any
such contingency plan to do so may have a material adverse effect on Cubist.
Expenditures to date have not been material and have consisted solely
of the time of certain company personnel. Cubist does not currently expect that
future costs of completing the assessment will be material.
10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Cubist owns financial instruments that are sensitive to market risks as
part of its investment portfolio. The investment portfolio is used to preserve
Cubist's capital until it is required to fund operations, including it's
research and development activities. None of these market-risk sensitive
instruments are held for trading purposes. Cubist does not own derivative
financial instruments in its investment portfolio. The investment portfolio
contains instruments that are subject to the risk of a decline in interest
rates.
Interest Rate Risk - Cubist's investment portfolio includes investment
grade debt instruments. These bonds are subject to interest rate risk, and could
decline in value if interest rates fluctuate. Due to the short duration and
conservative nature of these instruments, Cubist does not believe that it has a
material exposure to interest rate risk.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Cubist's Registration Statement on Form S-1 (Reg. No. 333-6795) in
connection with it's initial public offering of Common Stock was declared
effective by the Securities and Exchange Commission on October 25, 1996. On
October 25, 1996, Cubist also filed another Registration Statement on Form S-1
(Reg. No. 333-5880) with the SEC pursuant to Rule 462 (b) promulgated under the
Securities Act of 1933, as amended. For ease of reference and clarity, the two
registration statements referred to in this paragraph and referred to in the
following paragraphs collectively as the "IPO Registration Statement" registered
2,875,000 shares of Cubist's Common Stock under the Securities Act.
The aggregate initial public offering proceeds for all 2,875,000 shares
of Common Stock registered by the IPO Registration Statement was $17,250,000.
The net proceeds to Cubist from such issuance and distribution, after deducting
the aggregate amount of related expenses (including underwriting discounts and
commissions) paid by Cubist were $15,153,000.
Through June 30, 1999 Cubist spent $9,928,000 of the $15,153,000 net
proceeds received for the following uses and in the following amounts per use:
$373,000 in construction of plant, building and facilities; $2,174,000 for
repayment of indebtedness; $7,381,000 for working capital. All amounts spent by
Cubist for such uses, other than payment of salaries to directors and officers
of Cubist, consisted of direct payments to persons or entities, none of which
was a director or officer of Cubist, holder of 10 percent or more of any class
of equity securities of Cubist or other affiliate of Cubist. Cubist holds the
remaining $5,225,000 of the net proceeds in cash, cash equivalents, and
investments.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Cubist's Stockholders was held on June 1,
1999.
(b) The Annual Meeting was held to consider and vote upon (i) electing
three individuals to serve as Class III directors on the Cubist Board of
Directors for a three year term and until their successors have been duly
elected and qualified to replace them, and (ii) approving an amendment to
Cubist's Restated Certificate of Incorporation to increase the number of shares
of Common Stock authorized for issuance by Cubist from 25,000,000 to
50,000,000;.
(c) The votes cast with respect to each Director are summarized as
follows:
DIRECTOR NAME FOR WITHHELD TOTAL VOTES
------------- --- -------- -----------
Scott M. Rocklage, Ph.D. 14,336,555 24,880 14,361,435
Paul R. Schimmel, Ph.D. 14,334,345 27,090 14,361,435
John K. Clarke 14,347,590 13,845 14,361,435
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The Cubist Board of Directors as of the date of this Quarterly Report consists
of Scott M. Rocklage, Ph.D., Paul R. Schimmel, Ph.D., John K. Clarke, Barry
Bloom, Ph.D., Geroge Conrades, David W. Martin, Jr., M.D., Walter Maupay, Trudie
Resch and John Zabriskie, Ph.D.
The votes cast for approval of the amendment to the Restated
Certificate of Incorporation are summarized as follows:
FOR AGAINST ABSTAIN BROKER NON-VOTES
---------- ------- ------- ----------------
14,201,678 147,807 11,950 -0-
A copy of the Restated Certificate of Incorporation of Cubist as amended and in
effect as of the date of this Quarterly Report is filed with this Quarterly
Report as Exhibit 3.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3 -- Restated Certificate of Incorporation as amended and
in effect as of the date of this Quarterly Report.
27 -- Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed by Cubist on June 29, 1999, to file a
press release announcing the appointment of Walter Maupay, Trudie Resch and John
Zabriskie, Ph.D. to the Cubist Board of Directors.
SIGNATURE
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, THEREUNTO DULY AUTHORIZED.
CUBIST PHARMACEUTICALS, INC.
August 12, 1999 By: /s/ THOMAS A. SHEA
--------------------------------------
Thomas A. Shea,
Chief Financial Officer
(AUTHORIZED OFFICER AND PRINCIPAL
FINANCE AND ACCOUNTING OFFICER)
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