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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 JUNE 30, 2002
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
of Incorporation or Organization) Identification No.)
61 Moulton Street, Cambridge, Massachusetts 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
As of July 31, 2002, there were 32,359,225 shares of the registrant's common
stock, $0.01 par value per share, and 1,000 shares of the registrant's Series A
convertible exchangeable preferred 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
Condensed Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 ............................................................ 3
Consolidated Statements of Operations and Comprehensive Loss for
the three- and six-month periods ended June 30, 2002 and 2001 .................... 4
Consolidated Statements of Cash Flows for the six-month periods
ended June 30, 2002 and 2001 ..................................................... 5
Notes to Condensed Consolidated Financial Statements ............................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and .................. 10
Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk ....................... 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders .............................. 19
Item 6. Exhibits and Reports on Form 8-K ................................................. 19
SIGNATURE .......................................................................................... 21
Item 1. Financial Statements
CURIS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
June 30, December 31,
2002 2001
--------------------------------------------
ASSETS
- ------
Current Assets:
Cash and cash equivalents ........................................ $ 18,240,540 $ 38,938,062
Cash and cash equivalents - restricted ........................... 4,694,804 -
Marketable securities ............................................ 12,389,278 12,278,916
Marketable securities - restricted ............................... - 890,350
Notes receivable - officer ....................................... 700,000 500,000
Due from joint venture ........................................... 1,332,494 957,798
Other current assets ............................................. 1,337,546 1,155,619
---------------- ----------------
Total current assets ....................................... 38,694,662 54,720,745
---------------- ----------------
Property and Equipment, net ......................................... 4,578,728 11,060,711
---------------- ----------------
Other Assets:
Notes receivable - officer ....................................... - 200,000
Goodwill, net .................................................... 8,982,000 73,080,344
Other intangible assets, net (Note 3) ............................ 605,971 726,781
Deposits and other assets ........................................ 5,401,491 4,967,636
---------------- ----------------
Total other assets ......................................... 14,989,462 78,974,761
---------------- ----------------
$ 58,262,852 $ 144,756,217
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Debt and lease obligations, current portion ...................... $ 2,366,946 $ 3,109,613
Accounts payable ................................................. 1,053,340 1,967,260
Accrued liabilities .............................................. 7,856,236 5,942,511
Deferred revenue, current portion ................................ 703,343 81,688
Due to joint venture ............................................. 1,084,724 772,097
---------------- ----------------
Total current liabilities .................................. 13,064,589 11,873,169
Debt and Lease Obligations, net of current portion .................. 4,507,010 4,951,324
---------------- ----------------
Convertible Notes Payable ........................................... 4,586,593 2,506,852
---------------- ----------------
Deferred Revenue, net of current portion (Note 4) ................... 11,299,562 12,063,845
---------------- ----------------
Preferred Stock, $0.01 par value, 5,000,000 shares authorized-
Series A convertible exchangeable preferred stock-1,426
shares authorized; 1,000 shares issued and outstanding at
June 30, 2002 and December 31, 2001 .............................. 12,703,833 12,341,381
---------------- ----------------
Commitments (Notes 4)
Stockholders' Equity:
Common stock, $0.01 par value-
Authorized-125,000,000 shares at June 30, 2002 and December 31,
2001; Issued and outstanding - 32,359,187 and 32,329,228 shares
at June 30, 2002 and December 31, 2001, respectively ........... 323,592 323,292
Additional paid-in capital ....................................... 659,768,715 664,889,578
Notes receivable ................................................. (1,337,561) (1,291,932)
Deferred compensation ............................................ (3,342,123) (9,616,795)
Accumulated deficit .............................................. (643,311,358) (554,135,679)
Accumulated other comprehensive income ........................... - 851,182
---------------- ----------------
Total stockholders' equity ................................. 12,101,265 101,019,646
---------------- ----------------
$ 58,262,852 $ 144,756,217
================ ================
See accompanying notes to unaudited consolidated financial statements
3
CURIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------- -------------------------------------
2002 2001 2002 2001
------------- ------------- ------------ --------------
REVENUES:
Royalty revenue ............................ $ 127,846 $ 29,063 $ 205,606 $ 30,164
Research and development contract revenue .. 61,757 173,575 142,629 421,639
------------- ------------- ------------ -------------
189,603 202,638 348,235 451,803
COSTS AND EXPENSES (A):
Research and development .................. 3,902,554 7,893,163 8,737,317 16,001,870
General and administrative ................ 1,829,752 2,672,291 4,541,091 5,254,682
Stock-based compensation .................. 427,433 3,667,670 1,124,895 7,499,109
Amortization of intangible assets ......... 60,405 5,823,660 120,810 11,647,321
Impairment of property and equipment ...... 164,842 - 5,336,785 -
Impairment of goodwill (Note 3) ........... 64,098,345 - 64,098,345 -
Realignment expenses (Note 2) ............. - - 3,490,000 -
------------- ------------- ------------ -------------
Total costs and expenses ..... 70,483,331 20,056,784 87,449,243 40,402,982
------------- ------------- ------------ -------------
Net loss from operations .................... (70,293,728) (19,854,146) (87,101,008) (39,951,179)
------------- ------------- ------------ -------------
Equity in loss of joint venture ............. (1,078,223) - (2,239,906) -
Other income, net ........................... 378,764 577,138 527,688 2,866,942
------------- ------------- ------------ -------------
NET LOSS .................................... $ (70,993,187) $ (19,277,008) $ (88,813,226) $ (37,084,237)
Accretion of preferred stock dividend ...... (180,225) - (362,453) -
Net loss applicable to common stockholders .. $ (71,173,412) $ (19,277,008) $ (89,175,679) $ (37,084,237)
------------- ------------- ------------ -------------
NET LOSS PER COMMON SHARE - BASIC AND
DILUTED .................................... $ (2.20) $ (0.61) $ (2.76) $ (1.18)
------------- ------------- ------------ -------------
WEIGHTED AVERAGE COMMON SHARES - BASIC AND
DILUTED .................................... 32,334,965 31,560,390 32,332,113 31,497,604
------------- ------------- ------------ -------------
NET LOSS ................................... $ (70,993,187) $ (19,277,008) $ (88,813,226) $ (37,084,237)
UNREALIZED GAIN (LOSS) ON MARKETABLE
SECURITIES ................................. - 608,004 (249,841) 359,493
------------- ------------- ------------ -------------
COMPREHENSIVE LOSS ........................ $ (70,993,187) $ (18,669,004) $ (89,063,067) $ (36,724,744)
------------- ------------- ------------ -------------
(A) The following summarizes the
departmental allocation of the stock-based
compensation charge:
Research and development ............. $ 311,323 $ 2,342,858 $ 649,790 $ 4,750,224
General and administrative ........... 116,110 1,324,812 475,105 2,748,885
------------- ------------- ------------ -------------
Total stock-based compensation .... $ 427,433 $ 3,667,670 $ 1,124,895 $ 7,499,109
============= ============= ============ =============
See accompanying notes to unaudited consolidated financial statements
4
CURIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
Six Months Ended
June 30,
---------------------------------------------
2002 2001
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................... $ (88,813,226) $ (37,084,237)
------------------ ------------------
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization .................................... 1,062,085 1,281,888
Stock-based compensation expense ................................. 1,125,395 7,499,109
Amortization of lease discount ................................... 35,183 12,244
Issuance of common stock in lieu of cash for license fee ......... - 98,003
Amortization of intangible assets ................................ 120,810 11,647,321
Non-cash interest on notes payable ............................... 125,826 10,831
Non-cash interest on notes receivable ............................ (45,630) (42,546)
Equity in loss from joint venture ................................ 2,239,906 -
Impairment of property and equipment ............................. 5,336,785 -
Impairment of goodwill ........................................... 64,098,345 -
Changes in operating assets and liabilities:
Other current assets .......................................... (181,927) (7,322,270)
Due from joint venture ........................................ (374,696) -
Accounts payable and accrued liabilities ...................... 999,805 31,155
Deferred contract revenue ..................................... (142,628) 12,145,534
------------------ ------------------
Total adjustments ........................................... 74,399,259 25,361,269
------------------ ------------------
Net cash used in operating activities ......................... (14,413,967) (11,722,968)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities .................................. (12,568,311) (13,650,051)
Sale of marketable securities, net ................................. 12,497,114 19,278,324
Investment in restricted cash ...................................... (4,694,804) -
Increase in other assets ........................................... (433,855) (4,313,853)
Dispositions of property and equipment ............................. 405,491 -
Purchases of property and equipment ................................ (322,378) (1,226,274)
------------------ ------------------
Net cash provided by (used in) investing activities .............. (5,116,743) 88,146
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock ........................................... 28,716 442,284
Issuance of notes payable .......................................... 4,696,804 2,000,000
Repayments of notes payable and capital leases ..................... (5,892,332) (794,823)
------------------ ------------------
Net cash provided by (used in) financing activities .............. (1,166,812) 1,647,461
------------------ ------------------
(20,697,522) (9,987,361)
NET DECREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ..................... 38,938,062 52,414,312
------------------ ------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........................... $ 18,240,540 $ 42,426,951
================== ==================
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Property and equipment purchased under line of credit .............. $ - $ 415,253
================== ==================
Issuance of convertible promissory note payable to Elan Pharma
International, Ltd. to fund the Company's 80.1% in joint venture
(Note 5) ........................................................... $ 1,927,279 $ -
================== ==================
See accompanying notes to unaudited consolidated financial statements
5
CURIS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
1. Basis of Presentation -
---------------------
The accompanying consolidated financial statements of Curis, Inc. (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, 2001, as filed with the Securities and Exchange
Commission on March 29, 2002.
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 June 30,
2002 and the results of operations for the three- and six-month periods
ended June 30, 2002 and 2001 and cash flows for the six-month periods
ended June 30, 2002 and 2001. 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 to be
expected for a full year or subsequent interim periods.
2. Corporate Realignment -
---------------------
In the first quarter of 2002, the Company announced a realignment (the
"Realignment") of its research and development programs and a re-focusing
of its resources on its proprietary signaling pathways and stem cell
technologies, including the Bone Morphogenic Protein (BMP) and the
Hedgehog (Hh) family of product candidates. Realignment expenses of
$3,490,000 were recorded in the three-month period ended March 31, 2002.
These charges related to: (i) costs of approximately $1,139,000
associated with workforce reductions of 46 people, including 4 officers,
(ii) costs of approximately $2,306,000 associated with the closing of
clinical programs and decommissioning of a manufacturing and development
facility and (iii) other costs of approximately $45,000.
As of June 30, 2002, the Company had spent approximately $3,343,000 of
the total estimated $3,490,000 Realignment expenses. The Company has
included the remaining Realignment liability of $147,000 in "Accrued
liabilities" on its Condensed Consolidated Balance Sheet as of June 30,
2002. The Company expects to spend the remaining $147,000 by the end of
the third quarter of 2002 and does not expect to incur additional
expenses related to the Realignment in future periods.
During the quarter ended June 30, 2002, the Company recorded impairment
charges of property and equipment assets of approximately $165,000. This
charge relates to impairment on assets at the Company's manufacturing and
development facility located at 21 Erie Street in Cambridge,
Massachusetts (the "Erie Street Facility"). Total impairment on property
and equipment expenses recorded through the six-month period ended June
30, 2002 was $5,337,000. $4,761,000 of the total impairment charge
relates to the write-off of tenant improvements made to the Erie Street
Facility since such improvements are affixed to the facility and
therefore cannot be sold separately from the facility. The remaining
$576,000 of impairment charge represents the Company's estimate of loss
on disposition of the furniture and equipment assets held at the Erie
Street Facility. The Company does not expect to incur additional
impairment on property and equipment expense related to the Realignment
in future periods.
6
3. Goodwill and Other Intangible Assets -
------------------------------------
Goodwill and other intangible assets consisted of approximately the
following as of June 30, 2002 and December 31, 2001:
June 30, December 31,
2002 2001
------------------ ------------------
Goodwill .......................... $ 8,982,000 $ 105,977,000
Patents ........................... 1,297,000 1,297,000
Less: accumulated amortization .... (691,000) (33,467,000)
------------------ ------------------
$ 9,588,000 $ 73,807,000
================== ==================
The changes in the carrying amounts of goodwill for the six-month period
ended June 30, 2002, are as follows:
Balance as of January 1, 2002 ........................ $ 73,080,000
Impairment losses .................................... (64,098,000)
----------------
Balance as of June 30, 2002 .......................... $ 8,982,000
================
Through December 31, 2001, goodwill totaling $105,477,000 and assembled
workforce of $500,000 were being amortized over their estimated useful lives of
four to five years. At January 1, 2002, net goodwill, including assembled
workforce was $73,080,000. Beginning January 1, 2002, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets and reclassified assembled workforce as goodwill and ceased
amortization of goodwill. Goodwill is subject in 2002 to both a transitional
goodwill impairment test as of January 1, 2002 and an annual assessment for
impairment based on fair value. The Company has determined that it consists of a
single reporting unit. In conjunction with the adoption of SFAS No.142, the
Company completed the transitional goodwill impairment test in the first quarter
of 2002 by comparing the Company's fair value to its net assets, including
goodwill. If the carrying value of the Company's net assets exceeds the
Company's fair value, then goodwill is impaired. The Company determined its fair
value based on quoted market prices adjusted to provide for a control premium.
The transitional goodwill impairment test indicated that no impairment of
goodwill had occurred as of January 1, 2002.
In addition to requiring transitional and annual assessments of goodwill
impairment, SFAS No. 142 requires that a goodwill impairment review be performed
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Because key employees were terminated and certain
development programs were suspended or terminated as part of the Realignment,
the Company determined that an impairment indicator had arisen during the
three-month period ending March 31, 2002 that required the Company to reevaluate
the carrying value of goodwill. The Company performed this reevaluation and
concluded that no goodwill impairment had occurred as of March 31, 2002.
Because the Company's market capitalization continued to decline during
three-month period ended June 30, 2002, the Company concluded that the decline
in market value served as an indication that the carrying value of its goodwill
asset may be impaired. Accordingly, the Company conducted an impairment review
as required under SFAS No. 142 as of June 30, 2002 and, concluded that goodwill
impairment had occurred as of June 30, 2002. To determine the amount of the
impairment charge, the Company calculated its implied goodwill as the difference
between the fair value of the Company as a whole and the fair value of the
Company's assets and liabilities. In calculating the impairment charge, the fair
value of the Company's intangible assets, principally consisting of completed
and in-process technology, was estimated using a discounted cash flow
methodology. The Company determined that its implied goodwill was $8,982,000
and, accordingly, recorded a non-cash charge of approximately $64,098,000 to
write-down its existing goodwill. This charge is included in operating costs and
expenses within the Company's statements of operations for both the three- and
six-month periods ended June 30, 2002.
7
4. Long-Term Debt, Capital Lease Obligations and Operating Leases -
----------------------------------------------------------------
On June 14, 2002, the Company entered into a loan agreement with
Boston Private Bank & Trust Company pursuant to which the Company
borrowed approximately $4,695,000. The Company used the proceeds of
this loan to pay off its existing credit facility with Fleet National
Bank. Under the terms of the loan agreement, the Company will (i) pay
interest monthly in arrears at a variable interest rate, currently
4.25%, and (ii) repay principal in equal quarterly installments over a
five-year term, beginning on September 1, 2002. This loan is fully
collateralized with a money market account maintained by the Company
at Boston Private Bank & Trust Company. The collateral is included in
"Cash and cash equivalents - restricted" at the Company's balance
sheet as of June 30, 2002.
Long-term debt and capital lease obligations consisted of the
following at June 30, 2002 and December 31, 2001:
June 30, December 31,
2002 2001
----------------- ------------------
Notes payable to financing agencies for capital purchases .......... $ 4,915,000 $ 5,450,000
Obligations under capital leases, net of $40,000 and $49,000
discount at June 30, 2002 and December 31, 2001,
respectively ................................................. 1,959,000 2,611,000
Convertible subordinated note payable to Becton Dickinson, net of
$213,000 and $240,000 discount, including $142,000 and
$72,000 of capitalized interest at June 30, 2002 and
December 31, 2001, respectively .............................. 1,929,000 1,832,000
Convertible promissory note agreement with Elan Pharma
International, Ltd., including $57,000 and $1,000 of accrued
interest at June 30, 2002 and December 31, 2001,
respectively ................................................. 2,658,000 675,000
----------------- ------------------
11,461,000 10,568,000
Less current portion ............................................... (2,367,000) (3,110,000)
----------------- ------------------
Total long-term debt and capital lease obligations ................. $ 9,094,000 $ 7,458,000
================= ==================
5. Curis Newco, Ltd. -
-----------------
In July 2001, the Company formed a joint venture, Curis Newco, Ltd.
("Curis Newco"), with affiliates of Elan Corporation, plc ("Elan") for
the purpose of researching and developing molecules that stimulate the
Hh signaling pathway. Curis Newco is focused upon the development of
therapeutics targeting a number of neurological disorders, including
Parkinson's Disease and Diabetic Neuropathy.
Curis Newco incurred expenses of approximately $1,346,000 during the
three months ended June 30, 2002. The Company incurred expenses of
approximately $1,332,000 on behalf of Curis Newco during the three
months ended June 30, 2002 and recorded a corresponding receivable from
Curis Newco at June 30, 2002. In addition, approximately $14,000 in
expenses was incurred directly by Neuralab Limited, an affiliate of
Elan, on behalf of Curis Newco. The Company's 80.1% share of Curis
Newco's aggregate expenses for the three-month period ended June 30,
2002 was approximately $1,078,000 and is presented as "Equity in loss
of joint venture" in the Company's statement of operations. In
addition, the Company is liable to Curis Newco for 80.1% of Curis
Newco's expenses until these expenses have been funded either by the
Company or by draw downs under a convertible promissory note agreement
("Note Agreement") with Elan Pharma International, Ltd. ("EPIL"). The
Company has funded its share of Curis Newco's expenses through March
31, 2002 by draw downs under the Note Agreement and intends to continue
to rely on credit available under the Note Agreement to fund its share
of Curis Newco's future expenses. Each draw down under the Note
Agreement is subject to EPIL's consent and proceeds are restricted to
the Company's development funding of Curis Newco. The Company has
recorded a payable to Curis Newco at June 30, 2002 of
8
approximately $1,084,000 representing the Company's 80.1% share of
Curis Newco's loss, net of $8,000 in 2002 Curis Newco expenses that
were funded in 2001.
The Company borrowed approximately $1,148,000 from EPIL under the Note
Agreement during the three-month period ended June 30, 2002. As of June
30, 2002, there was approximately $2,658,000, including approximately
$57,000 in capitalized interest, outstanding under the Note Agreement.
For the three-month period ended June 30, 2002, the Company recorded a
charge to accumulated deficit of $180,000 for the accretion of a
mandatory 6% dividend on the Series A convertible exchangeable
preferred stock issued to Elan International Service ("EIS"), an
affiliate of Elan. Such amounts are included in the net loss applicable
to common stockholders in the three- and six-month periods ended June
30, 2002.
6. New Accounting Standards -
------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and
Other Intangible Assets. SFAS No. 141 requires that all business
combinations initiated after June 30, 2001 be accounted for using the
purchase method of accounting. SFAS No. 142 requires that goodwill and
certain other intangible assets existing at the date of adoption be
reviewed for possible impairment and that impairment tests be
periodically repeated, with impaired assets written down to fair value.
Additionally, existing goodwill and intangible assets must be assessed
and classified within the SFAS No. 142's criteria. Intangible assets
with finite useful lives will continue to be amortized over those
periods. Effective January 1, 2002, the Company adopted the provisions
of SFAS No. 142. and amortization of goodwill and intangible assets
with indeterminable lives ceased (See Note 3).
In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets, which supercedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. SFAS No. 144 further refines the
requirements of SFAS No. 121 that companies (1) recognize an impairment
loss only if the carrying amount of a long-lived asset is not
recoverable based on its undiscounted future cash flows and (2) measure
an impairment loss as the difference between the carrying amount and
fair value of the asset. In addition, SFAS No. 144 provides guidance on
accounting and disclosure issues surrounding long-lived assets to be
disposed of by sale. The Company was required to adopt SFAS No. 144 on
January 1, 2002. The adoption of SFAS 144 is not expected to have a
material impact on the Company's financial position or results of
operations.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
On July 31, 2000, Creative BioMolecules, Inc. ("Creative"), Ontogeny, Inc.
("Ontogeny") and Reprogenesis, Inc. ("Reprogenesis") merged with and into Curis,
Inc.("the Company") pursuant to an agreement and plan of merger dated as of
February 14, 2000 (the "Merger"). The Company is engaged in the discovery of
drug targets and the development of therapeutics based upon the pathways used by
the body which control cell proliferation and differentiation and, therefore,
tissue formation, maintenance and repair. The Company has identified key
regulators responsible for turning on the mechanisms for tissue repair in
response to trauma, injury or disease. The Company believes this approach has
been validated with the approval of OP-1 Implant(TM) for bone repair in four
major markets (United States Humanitarian Device Exemption, Europe, Australia
and Canada). Independently and in strategic alliances, the Company is focusing
its research efforts on identifying and elucidating key regulators of tissue
repair having application for diseases such as kidney disease, cancer and
neurological disorders, which represent large market opportunities that the
Company believes are underserved by current therapeutic alternatives.
In the first quarter of 2002, the Company announced a realignment (the
"Realignment") of its research and development programs and a re-focusing of its
resources on its proprietary signaling pathways and stem cell technologies,
including the Bone Morphogenic Protein (BMP) and the Hedgehog (Hh) family of
product candidates. The Company's remaining core technology platform and product
development pipeline is based on developmental biology, signaling pathways,
adult stem cells and cell-based therapies. The Company's research program is
conducted both internally and through strategic alliances, partnerships and
joint ventures with companies and organizations including Aegera Therapeutics
and McGill University, Montreal, Canada; Micromet AG, Munich, Germany
("Micromet"); and Elan Corporation plc, Dublin, Ireland ("Elan").
Critical Accounting Policies
In December 2001, the SEC requested that all registrants list their most
"critical accounting policies" in MD&A. The SEC indicated that a "critical
accounting policy" is one which is both important to the portrayal of the
company's financial condition and results and requires management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain.
Management believes that the following accounting policies fit this definition:
Valuation of Long-Lived Assets. The Company assesses the impairment of
identifiable intangibles, long-lived assets and goodwill whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. If it is determined that the carrying value of intangible,
long-lived assets and goodwill might not be recoverable based upon the existence
of one or more indicators of impairment, the Company would measure any
impairment based on a projected cash flow method. During the third quarter of
the year ended December 31, 2000, the Company recorded an impairment charge of
approximately $4,611,000 to reduce the carrying value of patents determined not
to be beneficial or not expected to be utilized in future operations and which
have no alternative future use.
As a result of the adoption of SFAS No. 142, effective January 1, 2002, the
Company ceased amortization of goodwill. In lieu of amortization, the Company
performed an initial assessment of impairment of its goodwill in 2002, and must
perform an impairment review annually thereafter or whenever events or changes
in circumstances indicate that the goodwill may be impaired. In accordance with
SFAS No. 142, the Company concluded that the decline in its market
capitalization during the three-month period ended June 30, 2002 indicated that
the carrying value of goodwill may be impaired. Accordingly, the Company
conducted an impairment review as required under SFAS No. 142 as of June 30,
2002 by comparing the Company's fair value to its net assets, including
goodwill. The Company determines its fair value based on quoted market prices
adjusted to provide for a control premium. Because the carrying value of the
Company's net assets exceeded the Company's fair value at June 30, 2002, the
goodwill was determined to be impaired. To determine the amount of the
impairment charge, the Company calculated its implied goodwill as the difference
between the fair value of the Company as a whole and the fair value of the
Company's assets and liabilities. The fair value of the Company's intangible
assets, principally consisting of completed and in-process technology, was
estimated using a discounted cash flow methodology. The Company determined that
its implied goodwill was $8,982,000 and, accordingly, recorded a non-cash charge
of approximately $64,098,000 to write-down its existing goodwill. This charge is
included in operating costs and expenses within the Company's statements of
operations for both the three- and six-month periods ended June 30, 2002.
The goodwill impairment analysis involves considerable judgment and the use of
several estimates including: control premium, discount rates, projected cash
flows of OP-1, and projected cash flows of the Company's in-process research and
development programs. The control premium used in determining the Company's fair
value was based on an analysis of control premiums involved in other
biotechnology and medical products acquisition. Most of our research and
development programs will not be completed for several years, if ever, and
therefore estimating the costs to complete these programs and the revenue to be
derived through collaborations and commercialization of the products involves
substantial judgment. The discount rates used to determine the net present value
of these cash flows was based on a consideration of the risks associated with
achieving these cash flow projections, including the risk of successfully
completing our in-process technology. All of these estimates involve a
significant amount of judgment by the Company's management. Although the
estimates used reflect management's best estimates based upon all available
evidence, the use of different estimates could have yielded different implied
goodwill and, therefore, could have resulted in a higher or lower goodwill
impairment charge.
Revenue recognition. The Company's revenue recognition policy is significant
because revenue is a key component of the Company's results of operations. The
Company follows detailed guidelines in measuring revenue; however, certain
judgments affect the application of its revenue policy. For example, the Company
has entered into purchase and sale, product development and target research
agreements with Micromet AG, under which the Company has recorded on its balance
sheet short- and long-term deferred revenue based on its best estimate of when
such revenue will be recognized. A portion of the consideration received from
this transaction with Micromet were equity securities and a convertible note.
The estimate of deferred revenue includes management's assessment of the value
attributable to the equity securities and realization of the convertible note.
Revenue for the upfront payments received from Micromet AG for the sale of
technology will be recognized as services are performed over the Company's
estimated performance period under the product development agreement.
Additionally, the Company records royalty revenue under its agreements with
Stryker. The Company records royalty revenues as Stryker reports sales to the
Company and collection of the resulting receivable is reasonably assured.
Revenue results are difficult to predict, and any shortfall in revenue or delay
in recognizing revenue could cause the Company's operating results to vary
significantly from quarter to quarter.
10
Results of Operations
Three-Month Periods Ended June 30, 2002 and June 30, 2001
Revenues
Total revenues decreased to $190,000 for the three-month period ended June 30,
2002 from $203,000 for the three-month period ended June 30, 2001. Total
revenues for the three-month period ended June 30, 2002 include $128,000 in
royalty revenues received from Stryker and $62,000 in revenue recognized under
the Company's strategic alliance with Micromet. Total revenues for the
three-month period ended June 30, 2001 were primarily derived from $174,000
received under two government grants, which were terminated in April 2002.
Operating Expenses
Research and development expenses decreased by $3,990,000, or 51%, to $3,903,000
for the three-month period ended June 30, 2002 from $7,893,000 for the
three-month period ended June 30, 2001. The decrease was primarily due to a
reduction in ongoing operating costs as a result of the Realignment and the
allocation to Curis Newco of $1,332,000 of research and development expenses for
the three months ended June 30, 2002 that were charged by the Company to Curis
Newco. The Company's 80.1% share of these costs is included in "Equity in loss
of joint venture" in the Company's consolidated statement of operations.
Research and development expenses for the three-month period ended June 30, 2002
include the cost of employees involved in research and development of
$1,132,000, external lab services including clinical trials, medicinal
chemistry, consulting and sponsored research collaborations of $797,000,
occupancy and depreciation charges of $445,000, lab and clinical trial
manufacturing supplies of $462,000 and legal fees associated with the Company's
intellectual property of $653,000.
Research and development expenses for the three-month period ended June 30, 2001
include the cost of employees involved in research and development of
$2,300,000, outside services including clinical trials, medicinal chemistry,
consulting and sponsored research collaborations of $2,419,000, occupancy and
depreciation charges of $1,079,000, lab and clinical trial manufacturing
supplies of $1,003,000 and legal fees associated with the Company's intellectual
property of $736,000.
General and administrative expenses decreased by $842,000, or 32%, to $1,830,000
for the three-month period ended June 30, 2002 from $2,672,000 for the
three-month period ended June 30, 2001. The decrease was primarily due to a
reduction in ongoing operating costs as a result of the Realignment. General and
administrative expenses for the three-month period ended June 30, 2002 include
the cost of employees of $774,000, occupancy and depreciation charges of
$220,000, professional service fees and other outside
11
services including legal costs and consultants of $463,000. General and
administrative expenses for the three-month period ended June 30, 2001 include
the cost of employees of $928,000, occupancy and depreciation charges of
$384,000, professional service fees and other outside services including legal
costs and consultants of $854,000, and asset-based corporate taxes of $115,000.
Stock-based compensation expense decreased by $3,241,000 to $427,000 for the
three-month period ended June 30, 2002 from $3,668,000 for the three-month
period ended June 30, 2001. The decrease was primarily attributable to the
Company's stock-based compensation expense related to deferred compensation
resulting from the Merger that was amortized over the vesting period of the
underlying options through August 1, 2001. Stock-based compensation related to
these options was approximately $2,631,000 for the three-month period ended June
30, 2001.
Amortization of intangible assets was $60,000 for the three-month period ended
June 30, 2002 as compared to $5,824,000 for the three-month period ended June
30, 2001. The decrease was primarily due to the adoption of SFAS 142, which
requires companies to stop amortizing goodwill and certain other intangible
assets. The Company is currently amortizing only capitalized patent and
technology costs. Amortization of goodwill totaling $5,778,000 was recorded for
the three-month period ended June 30, 2001.
Impairment charges of property and equipment assets for the three-month period
ended June 30, 2002 of approximately $165,000 relate to impairment of assets at
the Erie Street Facility. Such property and equipment assets were used to
support clinical programs that were suspended or terminated as part of the
Realignment and have been deemed to be unlikely to be used in the future
operations of the Company. The Company does not expect to incur additional
impairment on property and equipment related to the Realignment in future
periods.
Impairment of goodwill for the three-month period ended June 30, 2002 was
$64,098,000. The Company recorded no impairment charge for the three-month
period ended June 30, 2001. In accordance with SFAS No.142, the Company
concluded that the decline in its market capitalization during the three-month
period ended June 30, 2002 indicated that the carrying value of its goodwill may
be impaired. Accordingly, the Company conducted an impairment review as required
under SFAS No. 142 as of June 30, 2002 and determined that goodwill impairment
had occurred as of June 30, 2002. The value of the Company, as a single
reporting unit, was calculated using quoted market prices adjusted to provide
for a control premium. In calculating the impairment charge, the fair value of
the Company's intangible assets, principally consisting of completed an
in-process technology, was estimated using a discounted cash flow methodology.
Equity in Loss from Joint Venture
During the three-month period ended June 30, 2002, the Company incurred an
equity loss in Curis Newco of $1,078,000, which represented 80.1% of the total
net loss incurred by Curis Newco for the same period. The Company anticipates
financing its 80.1% share of the development funding of Curis Newco through July
18, 2003 with draw downs, which are subject to Elan's consent, under the Note
Agreement entered into between the Company and EPIL.
Other Income, Net
Interest and other income for the three-month period ended June 30, 2002 was
$379,000 compared to approximately $577,000 for the same period in 2001, a
decrease of $198,000. The decrease was mainly attributable to higher interest
income for the three-month period ended June 30, 2001 that resulted primarily
from a higher available investment balance as compared to the three-month period
ended June 30, 2002.
Interest expense for the three-month period ended June 30, 2002 was $248,000
compared to $160,000 for the same period in 2001, an increase of $88,000. The
increase was mainly attributable to an increase in the average debt outstanding
to approximately $11,461,000 as of June 30, 2002 from approximately $7,639,000
as of June 30, 2001.
12
Accretion of Preferred Stock Dividend
During the three-month period ended June 30, 2002, the Company recorded a
$180,000 charge to accumulated deficit for the accretion of a mandatory dividend
on convertible exchangeable preferred stock issued to EIS. The amount is
included in the net loss applicable to common stockholders in the three-month
period ended June 30, 2002.
Net Loss Applicable to Common Stockholders
As a result of the foregoing, the Company incurred a net loss attributable to
common stockholders of $71,173,000 for the three-month period ended June 30,
2002 compared to a net loss attributable to common stockholders of $19,277,000
for the three-month period ended June 30, 2001.
Six-Month Periods Ended June 30, 2002 and June 30, 2001
Revenues
Total revenues decreased to $348,000 for the six-month period ended June 30,
2002 from $452,000 for the six-month period ended June 30, 2001. Total revenues
for the six-month period ended June 30, 2002 include $206,000 in royalty
revenues received from Stryker and $142,000 in revenue recognized under the
Company's strategic alliance with Micromet. Total revenues for the six-month
period ended June 30, 2001 were primarily derived from $448,000 received under
two government grants, which were terminated in April 2002.
Operating Expenses
Research and development expenses decreased by $7,265,000, or 45%, to $8,737,000
for the six-month period ended June 30, 2002 from $16,002,000 for the six-month
period ended June 30, 2001. The decrease was primarily due to a reduction in
ongoing operating costs as a result of the Realignment and the allocation to
Curis Newco of $2,753,000 of research and development expenses for the six
months ended June 30, 2002 that were charged by the Company to Curis Newco. The
Company's 80.1% share of these costs is included in "Equity in loss of joint
venture" in the Company's consolidated statement of operations.
Research and development expenses for the six-month period ended June 30, 2002
include the cost of employees involved in research and development of
$2,560,000, external lab services including clinical trials, medicinal
chemistry, consulting and sponsored research collaborations of $1,874,000,
occupancy and depreciation charges of $1,273,000, lab supplies of $1,010,000 and
legal fees associated with the Company's intellectual property of $1,228,000.
Research and development expenses for the six-month period ended June 30, 2001
include the cost of employees involved in research and development of
$4,600,000, outside services including clinical trials, medicinal chemistry,
consultants and sponsored research collaborations of $5,500,000, occupancy and
depreciation charges of $2,198,000, lab and clinical trial manufacturing
supplies of $1,876,000 and legal fees associated with the Company's intellectual
property of $1,085,000.
General and administrative expenses decreased by $714,000, or 14%, to $4,541,000
for the six-month period ended June 30, 2002 from $5,255,000 for the six-month
period ended June 30, 2001. General and administrative expenses for the
six-month period ended June 30, 2002 include the cost of employees of
$1,597,000, occupancy and depreciation charges of $549,000, legal and
professional fees of $1,026,000 and consulting expense of $185,000. General and
administrative expenses for the six-month period ended June 30, 2001 include the
cost of employees of $1,854,000, occupancy and depreciation charges of $752,000,
professional fees including legal and consulting costs of $679,000, and
asset-based corporate taxes of $254,000.
Stock-based compensation decreased by $6,374,000 to $1,125,000 for the six-month
period ended June 30, 2002 from $7,499,000 for the six-month period ended June
30, 2001. The decrease was primarily attributable to the Company's stock-based
compensation expense related to deferred compensation resulting from the Merger
that was amortized over the vesting period of the underlying options through
August 1, 2001. Stock-based compensation related to these options was
approximately $5,444,000 for six-month period ended June 30, 2001.
13
Amortization of intangible assets was $121,000 for six-month period ended June
30, 2002 as compared to $11,647,000 for the six-month period ended June 30,
2001. The decrease was primarily due to the adoption of SFAS 142, which requires
companies to stop amortizing goodwill and certain other intangible assets. The
Company is currently amortizing only capitalized patent and technology costs.
Amortization of goodwill totaling $11,557,000 was recorded for the six-month
period ended June 30, 2001.
Impairment charges of property and equipment assets for the six-month period
ended June 30, 2002 of approximately $5,337,000 relate to impairment on assets
at the Erie Street Facility. Total carrying value of assets at the Erie Street
Facility before the impairment charge was approximately $5,652,000. The property
and equipment assets at the Erie Street Facility were used to support clinical
programs that were suspended or terminated as part of the Realignment and have
been deemed to be unlikely to be used in the future operations of the Company.
$4,761,000 of the impairment charge relates to the write-off of tenant
improvements made to the Erie Street Facility since such improvements are
affixed to the facility and therefore cannot be sold separately from the
facility. The remaining $576,000 of impairment charge represents the Company's
estimate of loss on disposition of the furniture and equipment assets held at
the Erie Street Facility. The Company does not expect to incur additional
impairment on property and equipment related to the realignment in future
periods.
Impairment of goodwill for the six-month period ended June 30, 2002 was
$64,098,000. The Company recorded no impairment charge for the six-month period
ended June 30, 2001. In accordance with SFAS No. 142, the Company concluded that
the decline in its market capitalization during the three-month period ended
June 30, 2002 indicated that the carrying value of its goodwill may be impaired.
Accordingly, the Company conducted an impairment review as required under SFAS
No. 142 as of June 30, 2002 and determined that goodwill impairment had occurred
as of June 30, 2002. The value of the Company, as a single reporting unit, was
calculated using quoted market prices adjusted to provide for a control premium.
In calculating the impairment charge, the fair value of the Company's intangible
assets, principally consisting of completed an in-process technology, was
estimated using a discounted cash flow methodology.
Realignment expenses of $3,490,000 were recorded in the six-month period ended
June 30, 2002. These charges relate to: (i) costs of approximately $1,139,000
associated with workforce reductions of 46 people, including 4 officers, (ii)
costs of approximately $2,306,000 associated with the closing of clinical
programs and decommissioning of a manufacturing and development facility and
(iii) other costs of approximately $45,000. As of June 30, 2002, the Company had
spent approximately $3,343,000 of the $3,490,000 projected Realignment expense.
The Company has included the remaining Realignment liability of $147,000 in
"Accrued liabilities" on its balance sheet as of June 30, 2002. The Company
expects to settle the remaining Realignment liability of $147,000 by end of the
third quarter of 2002 and does not expect to incur additional expense related to
the Realignment in future periods.
Equity in Loss from Joint Venture
During the six-month period ended June 30, 2002, the Company incurred an equity
loss in Curis Newco of $2,240,000, which represented 80.1% of the total net loss
incurred by Curis Newco for the same period. The Company anticipates financing
its 80.1% share of the development funding of Curis Newco through July 18, 2003
with drawdowns, which are subject to Elan's consent, under the Note Agreement
entered into between the Company and EPIL.
Other Income, Net
Interest and other income for the six-month period ended June 30, 2002 was
$528,000 compared to approximately $2,867,000 for the same period in 2001, a
decrease of $2,339,000. The decrease was mainly attributed to a gain of
$1,466,000 resulting from the sale of marketable securities during the first
quarter of 2001 and higher interest income for the six-month period ended June
30, 2001 that resulted primarily from a higher available investment balance as
compared to six-month period ended June 30, 2002.
14
Interest expense for six-month period ended June 30, 2002 was $458,000 compared
to $364,000 for the same period in 2001, an increase of $94,000 or 26%. Interest
expense increased due to an increase in the average debt outstanding to
approximately $11,461,000 as of June 30, 2002 from approximately $7,639,000 as
of June 30, 2001.
Accretion of Preferred Stock Dividend
During the six-month period ended June 30, 2002, the Company recorded a $362,000
charge to accumulated deficit for the accretion of a mandatory dividend on
convertible exchangeable preferred stock issued to EIS. The amount is included
in the net loss applicable to common stockholders in the six-month period ended
June 30, 2002.
Net Loss Applicable to Common Stockholders
As a result of the foregoing, the Company incurred a net loss applicable to
common stockholders of $89,176,000 for the six-month period ended June 30, 2002
compared to a net loss applicable to common stockholders of $37,084,000 for the
six-month period ended June 30, 2001.
Liquidity and Capital Resources
At June 30, 2002, the Company's principal sources of liquidity consisted of
cash, cash equivalents and marketable securities of $35,325,000, including
restricted cash and cash equivalents of $4,695,000. The Company has financed its
operations primarily through placements of equity securities, payments received
under agreements with collaborative partners and government grants, amounts
received under debt and capital lease agreements, manufacturing contracts and
the sale of certain OP-1 manufacturing rights and facilities to Stryker.
Net cash used in operating activities was $14,414,000 for the six-month period
ended June 30, 2002 as compared to $11,723,000 for the six-month period ended
June 30, 2001. Net cash used in operating activities during the six-month period
ended June 30, 2002 was primarily the result of the Company's net loss for the
period of $88,813,000 partially offset by $71,859,000 in non-cash charges
including impairment charges on the Company's intangible and tangible assets,
stock-based compensation, depreciation, amortization and non-cash interest
income and expense. The Company's net loss was further offset by the Company's
equity in loss of Curis Newco of $2,240,000 and an increase in operating cash of
$301,000 as a result of changes in current assets and liabilities. Net cash used
in operating activities during the six-month period ended June 30, 2001 was
primarily the result of the Company's net loss for the period of $37,084,000
partially offset by $20,507,000 in non-cash charges including stock-based
compensation, depreciation, amortization and non-cash interest income and
expense. The Company's net loss was further offset by an increase in operating
cash of $4,854,000 as a result of changes in current assets and liabilities.
Net cash used in investing activities was $5,117,000 for the six-month period
ended June 30, 2002 as compared to $88,000 in net cash provided by investing
activities for the six-month period ended June 30, 2001. Cash used in investing
activities during the six-month period ended June 30, 2002 was primarily the
result of net purchases of marketable securities and investment in restricted
cash accounts totaling $4,766,000. Cash provided by investing activities during
the six-month period ended June 30, 2001 was primarily the result of net
proceeds from the sale of marketable securities totaling $5,628,000, partially
offset by an increase in other long-term assets of $4,314,000 and expenditures
for property and equipment totaling $1,226,000.
Cash used in financing activities was $1,167,000 for the six-month period ended
June 30, 2002. The cash used in financing activities for the six-month period
ended June 30, 2002 was primarily due to repayments of obligations under capital
lease and debt arrangements. Cash provided by financing activities was
$1,647,000 for the six-month period ended June 30, 2001. The cash provided by
financing activities for the six-month period ended June 30, 2001 was due to the
issuance of a $2,000,000 convertible subordinated note payable and $442,000
received under the issuance of shares from the exercise of options, partially
offset by $795,000 in repayments of obligations under capital lease and debt
arrangements.
15
On June 14, 2002, the Company entered into a loan agreement with Boston Private
Bank & Trust Company pursuant to which the Company borrowed approximately
$4,695,000. The Company used the proceeds of this loan to pay off its existing
credit facility with Fleet National Bank. Under the terms of the loan agreement,
the Company will (i) pay interest monthly in arrears at a variable interest
rate, currently 4.25%, and (ii) repay principal in equal quarterly installments
over a five-year term, beginning on September 1, 2002. This loan is fully
collateralized with a money market account maintained by the Company at Boston
Private Bank & Trust Company. The collateral is included in "Cash and cash
equivalents - restricted" at the Company's balance sheet as of June 30, 2002.
On June 4, 2002 the Company borrowed approximately $1,148,000 from EPIL under
the Note Agreement. These funds represented the Company's funding of its 80.1%
portion of Curis Newco expenses in the first quarter of 2002. The Company has
drawn down a total of $2,601,000 under the Note Agreement and plans to draw down
the remaining $5,409,000 to fund its share of Curis Newco expenses through July
2003. Each draw down by the Company under the Note Agreement is subject to
EPIL's consent and proceeds are restricted to the Company's development funding
of Curis Newco.
As of June 30, 2002, the Company had future payments required under contractual
obligations and other commitments approximately as follows:
Remainder of
Total 2002 2003-2004 2005-2007
---------------- ------------ ------------- -------------
Long-term debt .................................. $ 4,904,000 $ 679,000 $ 1,878,000 $ 2,347,000
Convertible subordinated long-term debt (1) ..... 6,610,000 - - 6,610,000
Capital lease obligations ....................... 1,988,000 705,000 1,283,000 -
Operating lease obligations ..................... 3,025,000 412,000 1,585,000 1,028,000
Sponsored research obligations .................. 2,828,000 1,568,000 1,260,000 -
Licensing obligations ........................... 450,000 225,000 225,000 -
---------------- ------------ ------------- -------------
Total future obligations ............. $ 19,805,000 $ 3,589,000 $ 6,231,000 $ 9,985,000
================ ============= ============ =============
(1) - convertible subordinated debt is
convertible into either shares of the Company's
common stock or cash at the Company's option.
The Company anticipates that existing capital resources, royalties to be
received from Stryker for the sale of OP-1, and amounts to be borrowed under the
Note Agreement with EPIL should enable the Company to maintain current and
planned operations into the fourth quarter of 2003. In the fourth quarter of
2003 and beyond, the Company expects 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 flows from
its royalty arrangements with Stryker, the success of its collaboration with
Elan and its other collaborative arrangements and its ability to raise
additional funds through equity or debt financings, or from other sources of
financing. With respect to the Stryker royalty arrangements, as with the
Company's other collaborative arrangements, the Company's ability to generate
sufficient cash flows depends on a number of factors, including the ability to
obtain regulatory approval to market and commercialize products to treat
additional indications in major commercial markets. The Company is seeking
additional collaborative arrangements and may seek 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, it intends 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 be no assurance that additional financing will
be available or that, if available, it will 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 OP-1 is not approved for commercial
sale in the United States beyond its limited approval under the Humanitarian
Device Exemption provision and the Company does not receive significant
royalties from Stryker for product sales and/or if substantial additional
funding is not available, the Company's ability to fund research and development
and other operations will be significantly affected and, accordingly, the
Company's business will be materially and adversely affected.
16
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," "seeks," "intends,"
"plans," "believes," "estimates," "hopes," and similar expressions constitute
forward-looking statements. In addition, any statements concerning future
financial performance (including future revenues, cash flows, earnings, funding
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
assumptions 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, changes in or an inability to execute on the Company's
realigned business strategy, uncertainties related to the Company's ability to
raise additional capital, 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," of the Annual Report on Form 10-K of
the Company for the year ended December 31, 2001 (File No. 0-30347) filed with
the Securities and Exchange Commission on March 29, 2002. Please also refer to
the Company's other filings with the Securities and Exchange Commission.
17
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, government
securities, insurance annuity contracts or money market funds with an average
maturity of less than one year. All marketable securities are considered
available for sale. At June 30, 2002, the fair market value of these securities
amounted to approximately $12,389,000. At June 30, 2002, there were no net
unrealized gains on these investments. 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 believes that the realization of losses
due to changes in credit spreads is unlikely as the Company expects to hold the
debt to maturity. The Company's investments are primarily investment grade
securities and deposits are with investment grade financial institutions. As of
June 30, 2002, the Company holds $1,825,000 as an investment in a fixed income
mutual fund that holds a small percentage of fund assets in high-yield bonds.
The Company does not believe that this provides a material risk of loss of
principal since the fund is primarily invested in U.S. Government-backed
securities and investment-grade bonds.
As of June 30, 2002, the Company held assets denominated in EUROS on its balance
sheet totaling $4,032,000. The underlying assets are expected to a have holding
period in excess of one year. The value of these assets could fluctuate based on
changes in the exchange rate between the dollar and EURO. The Company has not
entered into any hedging agreements relating to this risk.
As of June 30, 2002, the Company had approximately $2,169,000 outstanding under
fixed-rate capital leases and term notes which are not subject to fluctuations
in interest rates and approximately $4,695,000 outstanding under a term loan
agreement with a variable interest rate, currently equal to 4.25%. In addition,
approximately $2,142,000, including accrued interest of $142,000, was
outstanding under a convertible subordinated note payable to Becton Dickinson.
Lastly, approximately $2,658,000, including accrued interest of $57,000, was
outstanding under the Note Agreement with EPIL.
18
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the annual meeting of stockholders of the Company (the "Annual Meeting") held
on June 12, 2002, the following matters were acted upon by the stockholders of
the Company:
1. The election of three Class III directors for the ensuing three years;
and
2. The ratification and appointment of PricewaterhouseCoopers LLP as the
Company's independent public accountants for the current fiscal year.
The number of shares of common stock present or represented by proxy
and entitled to vote at the Annual Meeting was 24,647,671. The other
directors of the Company, whose terms of office as directors continued
after the annual meeting, are James R. McNab, Douglas A. Melton, Ph.D.,
Daniel R. Passeri and James R. Tobin. The results of the votes on each of
the matters presented to the stockholders at the Annual Meeting are set
forth below:
Votes Votes Broker
Matter Votes for Withheld Against Abstentions Non-Votes
------ --------- ---------- --------- ----------- ---------
Election of Directors:
Susan B. Bayh 24,252,216 395,455 237,676 - -
Martyn D. Greenacre 24,258,092 389,579 231,800 - -
Ruth B. Kunath 22,522,623 2,125,048 1,967,269 - -
Ratification of
PricewaterhouseCoopers LLP 24,580,713 - 39,043 27,915 -
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Exhibit
Number Description
------- -----------
Loan Agreement dated June 14, 2002 between the Company and Boston Private
10.1* Bank & Trust Company.
Secured Term Note dated June 14, 2002 made by the Company to Boston
10.2* Private Bank & Trust Company.
Security Agreement dated June 14, 2002 from the Company to Boston Private
10.3* Bank & Trust Company.
99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted to Section 906
of the Sarbanes - Oxley Act of 2002.
* Previously filed with the SEC as an Exhibit to the Current Report of the
Company (filed June 14, 2002 (File No. 0-30347)), and incorporated herein
by reference.
(b) Reports on Form 8-K.
(i) On April 30, 2002, the Company filed a Current Report
on Form 8-K to report under Item 5 (Other Events)
that the Company had dismissed Arthur Andersen LLP
and appointed PricewaterhouseCoopers LLP as its
independent accountants. No financial statements were
required to be filed with this Report.
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(ii) On May 10, 2002, the Company filed an amendment on
Form 8-K/A to the Current Report previously filed on
April 30, 2002 in order to include an additional
exhibit. No financial statements were required to be
filed with this Report.
(iii) On May 16, 2002, the Company filed a second amendment
on Form 8-K/A to the Current Report previously filed
on April 30, 2002 in order to include an additional
exhibit. No financial statements were required to be
filed with this Report.
(iv) On June 17, 2002, the Company filed a Current Report
on Form 8-K to report under Item 5 (Other Events)
that the Company had entered into a loan agreement
with Boston Private Bank & Trust Company to replace
a loan agreement with Fleet National Bank. No
financial statements were required to be filed with
this Report.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CURIS, INC.
Date: August 14, 2002 By: /s/ Daniel R. Passeri
----------------- ---------------------------
President and Chief Executive Officer
(principal financial and
accounting officer)
21