FORM 10-Q

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S+wmNi7dfvSXhHyPA6ScpdQuesSiepkWoVXgFpw4+uaxzc8wBcICcnTsrvZdW+y7 tgPwnMl9Szo7iebjJ+y6UA== 0000927016-02-005550.txt : 20021114 0000927016-02-005550.hdr.sgml : 20021114 20021114121712 ACCESSION NUMBER: 0000927016-02-005550 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CURAGEN CORP CENTRAL INDEX KEY: 0001030653 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMMERCIAL PHYSICAL & BIOLOGICAL RESEARCH [8731] IRS NUMBER: 061331400 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23223 FILM NUMBER: 02823060 BUSINESS ADDRESS: STREET 1: 555 LONG WHARF DRIVE STREET 2: 11TH FL CITY: NEW HAVEN STATE: CT ZIP: 06511 BUSINESS PHONE: 2034013330 10-Q 1 d10q.htm FORM 10-Q FORM 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 0-23223

CURAGEN CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		06-1331400
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

555 Long Wharf Drive, 11th Floor, New Haven, Connecticut 06511

(Address of principal executive office) (Zip Code)

Registrant’s telephone number, including area code: (203) 401-3330

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 [ ]

The number of shares outstanding of the Registrant’s common stock as of October 31, 2002 was 49,297,106.

CURAGEN CORPORATION AND SUBSIDIARY

FORM 10-Q

INDEX

PART I. Financial Information			Page

	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets,September 30, 2002 (unaudited) and December 31, 2001	3

		Condensed Consolidated Statements of Operations,for the Three and Nine Months Ended September 30, 2002 and 2001 (unaudited)	4

		Condensed Consolidated Statements of Cash Flows,for the Nine Months Ended September 30, 2002 and 2001 (unaudited)	5

		Notes to Condensed Consolidated Financial Statements (unaudited)	6-7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	8-13

	Item 4.	Controls and Procedures	13

PART II. Other Information

	Item 6.	Exhibits and Reports on Form 8-K	15

Signatures			16

Certifications			17-18

Exhibit Index			19

CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)

	September 30, 2002			December 31, 2001
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	70,744		$	235,618
Short-term investments		231,020			272,731
Marketable securities		129,710			—

Cash and investments		431,474			508,349
Income taxes receivable		1,951			856
Accounts receivable		2,879			—
Other current assets		172			676
Prepaid expenses		2,579			2,810

Total current assets		439,055			512,691
Property and equipment, net		34,036			21,907
Notes receivable—related parties		140			190
Other assets		106			131
Intangible assets, net		3,198			3,782

Total assets	$	476,535		$	538,701

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	4,014		$	3,476
Accrued expenses		1,731			1,744
Accrued payroll and related items		2,273			1,924
Interest payable		1,500			3,750
Deferred revenue		3,133			2,025
Current portion of obligations under capital leases		2,072			2,800
Other current liabilities		797			841

Total current liabilities		15,520			16,560

Long-term liabilities:
Convertible subordinated debt		150,000			150,000
Obligations under capital leases, net of current portion		547			2,297

Total long-term liabilities		150,547			152,297

Commitments and contingencies
Minority interest in subsidiary		11,155			13,899
Stockholders' equity:
Common Stock; $.01 par value, issued and outstanding 49,278,967 shares at September 30, 2002, and 48,729,319 shares at December 31, 2001		493			487
Additional paid-in capital		483,491			480,050
Accumulated other comprehensive income		2,891			—
Accumulated deficit		(186,126	)		(124,592	)
Unamortized stock-based compensation		(1,436	)		—

Total stockholders' equity		299,313			355,945

Total liabilities and stockholders' equity	$	476,535		$	538,701

See accompanying notes to condensed consolidated financial statements

CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2002			2001			2002			2001
Revenue:
Collaboration revenue	$	6,019		$	6,084		$	14,490		$	17,986

Total revenue		6,019			6,084			14,490			17,986

Operating expenses:
Research and development		21,295			17,388			63,667			45,861
General and administrative		6,207			4,830			17,394			13,989

Total operating expenses		27,502			22,218			81,061			59,850

Loss from operations		(21,483	)		(16,134	)		(66,571	)		(41,864	)
Interest income, net		528			2,860			1,407			11,583

Loss before income taxes and minority interest in subsidiary loss		(20,955	)		(13,274	)		(65,164	)		(30,281	)
Income tax benefit (expense)		(28	)		1,750			857			2,550
Minority interest in subsidiary loss		1,101			407			2,773			982

Net loss	($	19,882	)	($	11,117	)	($	61,534	)	($	26,749	)

Basic and diluted net loss per share	$	(0.41	)	$	(0.23	)	$	(1.26	)	$	(0.56	)

Weighted average number of shares used in computing basic and diluted net loss per share		48,989			48,651			48,898			48,041

See accompanying notes to condensed consolidated financial statements

CURAGEN CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended
	September 30,
	2002			2001
Cash flows from operating activities:
Net loss	($	61,534	)	($	26,749	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		6,997			5,030
Non-monetary compensation		325			576
Stock-based 401(k) employer plan match		815			632
Minority interest		(2,773	)		(982	)
Changes in assets and liabilities:
Income taxes receivable		(1,095	)		(4,182	)
Accounts receivable		(2,879	)		(33	)
Other current assets		504			(916	)
Prepaid expenses		231			(580	)
Other assets		13			53
Accounts payable		538			(353	)
Accrued expenses		(13	)		1,632
Accrued payroll and related items		349			384
Interest payable		(2,250	)		(2,250	)
Deferred revenue		1,108			468
Other current liabilities		(44	)		121

Net cash used in operating activities		(59,708	)		(27,149	)

Cash flows from investing activities:
Acquisitions of property and equipment		(18,529	)		(9,239	)
Proceeds from sale of fixed assets		29			—
Payments for intangible assets		(18	)		(60	)
Repayments from related parties		50			137
Net inflows (outflows) from purchases and maturities of short-term investments		41,711			(37,272	)
Net outflows from purchases and maturities of marketable securities		(126,819	)		—

Net cash used in investing activities		(103,576	)		(46,434	)

Cash flows from financing activities:
Payments on capital lease obligations		(2,478	)		(2,681	)
Proceeds from sale-leaseback of equipment		—			901
Proceeds from issuance of Common Stock		—			85,000
Payments of stock issuance costs		—			(124	)
Payments of financing costs		(12	)		(12	)
Proceeds from exercise of stock options		897			782
Proceeds from exercise of warrants		—			62
Proceeds from issuance of Restricted Stock		3			—

Net cash (used in) provided by financing activities		(1,590	)		83,928

Net (decrease) increase in cash and cash equivalents		(164,874	)		10,345
Cash and cash equivalents, beginning of period		235,618			329,495

Cash and cash equivalents, end of period	$	70,744		$	339,840

Supplemental cash flow information:
Interest paid	$	9,334		$	9,608

Supplemental schedule of non-cash financing transactions:
Obligations under capital leases	$	0		$	901

See accompanying notes to condensed consolidated financial statements

CURAGEN CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of our management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting of only normal recurring accruals, necessary to present fairly our consolidated financial position, results of operations and cash flows. Interim results are not necessarily indicative of the results that may be expected for the entire year. The condensed consolidated financial statements include CuraGen Corporation and our majority-owned subsidiary, 454 Corporation (“the Company”), and accordingly, all material intercompany balances and transactions have been eliminated.

The September 30, 2001 and December 31, 2001 condensed consolidated financial statements have been reclassified to conform to the classifications used in 2002. All dollar amounts are shown in thousands, except par value and per share data.

The accompanying condensed consolidated financial statements should be read in conjunction with the audited condensed consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2001.

2. Accumulated Other Comprehensive Income

Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” (“SFAS 130”) requires reporting and displaying of comprehensive income and its components. In accordance with SFAS 130, the accumulated balance of other comprehensive income is disclosed as a separate component of stockholders’ equity and is composed of unrealized gains and losses on marketable securities. For the three and nine months ended September 30, 2002, other comprehensive income was $1.9 million and $2.9 million, respectively, as compared to $0 for the corresponding periods. The Company adopted SFAS 130 during the second quarter of 2002.

3. Subsequent Event—Restructuring Plan

On November 7, 2002, the Company announced a restructuring plan intended to reduce costs and focus its resources on prioritizing, selecting and rapidly advancing its most promising drug candidates. As a result of the restructuring plan, the Company’s employee base was reduced by approximately 125 personnel, representing approximately 25% of its workforce. The reduction in personnel represented early-stage drug discovery and general and administrative positions.

In connection with this restructuring plan, a charge of approximately $11 million will be recorded in the fourth quarter of 2002, consisting of approximately $3 million related to employee separation costs and asset impairment costs related to equipment no longer in service. The employee separation costs will be recorded under FASB 146 (see Note 3) and include amounts to be paid for severance and related benefits.

The Company has included in the restructuring charge of approximately $11 million a write-off of approximately $8 million, consisting of costs previously incurred in conjunction with the planned construction of its campus facilities, including the company headquarters and protein production facility in Branford, Connecticut. At September 30, 2002, these costs were included in property and equipment, net. Plans to construct these facilities have been deferred indefinitely, pending improvements in the external financing environment, which might afford the Company the ability to finance the future construction costs.

4. Recently Enacted Pronouncements

In April 2002, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS 145”). SFAS 145 rescinds FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. SFAS 145 also rescinds FASB Statement No. 44, Accounting for Intangible Assets of Motor Carriers. SFAS 145 amends FASB Statement No. 13, Accounting for Leases, to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The provisions of SFAS 145 are effective for annual financial statements issued on or after May 15, 2002. The adoption of SFAS 145 is not expected to have a material effect on the Company’s financial statements.

In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at its fair market value when the liability is incurred, rather than at the date of an entity’s commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company intends to record the effect of the November 7, 2002 restructuring plan, as discussed in Note 2, under the early adoption provisions of SFAS 146.

CURAGEN CORPORATION AND SUBSIDIARY

MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis of Financial Condition and Results of Operations as of September 30, 2002 and for the three and nine month periods ended September 30, 2002 and 2001 should be read in conjunction with the sections of our audited condensed consolidated financial statements and notes thereto as well as our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that are included in our Annual Report on Form 10-K for the year ended December 31, 2001.

Overview

We are a genomics based pharmaceutical development company. We apply proprietary functional genomic technologies, bioinformatic systems, and disease expertise to discover genes and proteins, and to determine how these genes and proteins function in the context of disease. We use this information to develop protein, antibody, and small molecule therapeutics to treat metabolic diseases, cancer, inflammatory diseases, and central nervous system disorders. We are developing protein drugs on our own behalf, and have established alliances to develop antibody drugs across all disease areas, and to develop small molecule drugs to treat obesity and diabetes. We are currently pursuing additional collaborations to develop small molecule drugs across our remaining disease areas. We were incorporated in November 1991 and, until March 1993, were engaged primarily in organizational activities, research and development of our technology, grant preparation and obtaining financing. We have incurred losses since inception, principally as a result of research and development and general and administrative expenses in support of our operations. We anticipate incurring additional losses over the next several years as we expand our drug development operations. We expect that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial. Our ability to earn revenues and become profitable is dependent primarily on our ability to successfully develop and commercialize pharmaceutical products based upon our expertise in genomics, our technologies, and our drug discovery and development programs. Accomplishing this goal also depends in part on our ability to maintain our existing strategic alliances, and on our ability to establish new alliances to aid us in developing and commercializing small molecule therapeutics. We cannot guarantee that any such strategic alliances, either new or existing, will be successful. In June 2000, we established a majority-owned subsidiary, 454 Corporation (“454”), to develop novel technologies for rapidly and comprehensively analyzing entire genomes. We expect that 454 will commercialize these products upon their development, which may be a future source of revenues for us.

Our failure to successfully develop and market pharmaceutical products, or establish additional strategic alliances to aid us in this effort over the next several years would materially adversely affect our business, financial condition and results of operations. Royalties or other revenue generated for us from commercial sales of products developed through the application of our technologies and respective expertise are not expected for several years, if at all.

On November 7, 2002, we announced a restructuring plan intended to reduce costs and focus our resources on prioritizing, selecting and rapidly advancing our most promising drug candidates. As a result of the restructuring plan, our employee base was reduced by approximately 125 personnel, representing approximately 25% of our workforce. The reduction in personnel represented early-stage drug discovery and general and administrative positions.

Included in the restructuring charge of approximately $11 million is a write-off of approximately $8 million, consisting of costs previously incurred in conjunction with the planned construction of our campus facilities, including the company headquarters and protein production facility in Branford, Connecticut. At September 30, 2002, these costs were included in property and equipment, net. Plans to construct these facilities have been deferred indefinitely, pending improvements in the external financing environment, which might afford us the ability to finance the future construction costs.

We expect to substantially complete our restructuring plan by the end of 2002. If our restructuring program is implemented in the manner and on the timeline we intend, we expect to begin to realize the benefits of our restructuring plan by the end of the fourth quarter of 2002.

Critical Accounting Policies

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets and liabilities, revenues and expenses and as such, actual results may differ from these estimates under different assumptions or conditions.

Our critical accounting policies, which are more fully described in Note 1 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2001, include the following:

Revenue Recognition—We have entered into certain collaborative research agreements that provide for the partial or complete funding of specified projects in exchange for access to, and certain rights in, the data discovered under the related projects. Revenue is recognized based upon work performed or upon the attainment of certain benchmarks or milestones specified in the related agreements. We have also entered into a collaborative research exchange agreement in which services and technology access are exchanged between the collaborative partners. Revenues and expenses under this exchange agreement are based upon the fair value of the work performed by each collaborative partner. Deferred revenue arising from payments received from collaborative agreements is recognized as income when earned.

Cash and Investments—We consider investments readily convertible into cash, with an original maturity of three months or less, to be cash equivalents. Investments with an original maturity greater than three months but less than one year are considered short-term investments. The carrying amount of the investments approximates fair value due to their short maturity. Investments with an original maturity greater than one year are considered marketable securities and are classified as available-for-sale securities, and are carried at fair value with the unrealized gains and losses reported in stockholders’ equity under the caption “Accumulated Other Comprehensive Income”. The amortized cost of debt securities is adjusted for amortization of premiums and accretion of discounts to maturity. Interest on debt securities, amortization of premiums and accretion of discounts are included in interest income. The cost of securities sold, if any, is based on the specific identification method.

Property and Equipment—Property and equipment are recorded at cost. Equipment is depreciated over the estimated useful lives of the related assets, ranging from three to seven years, using the straight-line method. Equipment under capital leases is amortized over the shorter of the estimated useful life or the terms of the lease, using the straight-line method. Leasehold improvements are amortized over the shorter of the estimated life or the term of the lease, using the straight-line method. Equipment which is not yet placed in service, or buildings and leasehold improvements the construction of which is not yet completed, are classified as construction in progress and included in property and equipment. Under accounting principles generally accepted in the United States of America, land is not required to be depreciated.

Impairment of Long-Lived Assets—We regularly evaluate the recoverability of the net carrying value of our property, and intangible assets, when an indicator of impairment is present by comparing the carrying values to the estimated future undiscounted cash flows. A deficiency in these cash flows relative to the carrying amounts is an indication of the need for a write-down due to impairment. The impairment write-down would be the difference between the carrying amounts and the fair value of these assets as determined by using estimated future undiscounted cash flows. A loss on impairment would be recognized by a charge to earnings.

Patent Application Costs—Costs incurred in filing for patents are charged to operations, until such time as it is determined that the filing will be successful. When it becomes evident with reasonable certainty that an application will be successful, the costs incurred in filing for patents will begin to be capitalized. Capitalized costs related to successful patent applications will be amortized over a period not to exceed twenty years or the remaining life of the patent, whichever is shorter, using the straight-line method.

Stock-Based Compensation—In October 1995, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS 123”), which was effective for us beginning January 1, 1996. SFAS 123 requires expanded disclosures of stock-based compensation arrangements with employees and non-employees and encourages (but does not require) compensation cost to be measured based on the fair value of the equity instruments awarded to employees. Companies are permitted to continue to apply Accounting Principles Board (“APB”) No. 25, which recognizes compensation cost based on the intrinsic value of the equity instruments awarded. We will continue to apply APB No. 25 to our stock-based compensation awards to employees.

Results of Operations

Three and Nine Months Ended September 30, 2002 and 2001

Revenue. Collaboration revenue for the three and nine months ended September 30, 2002 was $6.0 million and $14.5 million, a decrease of $0.1 million and $3.5 million, or 1% and 19%, as compared to $6.1 million and $18.0 million for the corresponding periods in 2001. Revenues in the three month period ended September 30, 2002 were primarily a result of our collaborative research exchange arrangement with Abgenix, Inc. (“Abgenix”) and a milestone payment from Bayer AG (“Bayer”), while the same period in 2001 primarily included revenue from our collaborative research exchange arrangement with Abgenix and our collaborative research agreements with Bayer and GlaxoSmithKline, Inc. (“Glaxo”). Revenues recorded in the nine month period ended September 30, 2002 were primarily a result of our collaborative research exchange arrangement with Abgenix and included a milestone payment from Bayer while the same period in 2001 included revenue from our collaborative research exchange arrangement with Abgenix and our collaborative research agreements with Bayer, COR Therapeutics, Inc. (“COR”) and Glaxo. The decreases in revenue are primarily due to the completion of the research portion of the collaborative research agreements with COR in the first quarter of 2001 and Glaxo in the fourth quarter of 2001.

Further revenue growth will be dependent upon our ability to enter into additional collaborations and strategic alliances, maintain and expand current collaborations, receive royalties and milestone payments from products currently under development by our current and former collaborators and successfully develop and market products that may arise from our own internal drug development pipeline. We expect fourth quarter 2002 collaborative revenues to decrease slightly from corresponding 2001 levels, unless we enter into new agreements, or receive royalties and milestone payments from products currently under development by our current and former collaborative partners.

Operating Expenses. Research and development expenses for the three and nine months ended September 30, 2002 were $21.3 million and $63.7 million, compared to $17.4 million and $45.9 million for the same periods in 2001. The increases of $3.9 million and $17.8 million, or 22% and 39%, were primarily attributable to increased internal research efforts and our obligations to fulfill research requirements under existing collaborations and strategic alliances, which included payments for contractual services, increased equipment depreciation, and additional personnel costs. We expect that research and development expenses for the remainder of 2002 will increase in comparison to the third quarter of 2002, as we continue advancing our products toward clinical development, and as the operations of 454 continue to grow.

General and administrative expenses for the three and nine months ended September 30, 2002 increased $1.4 million and $3.4 million, or 29% and 24%, to $6.2 million and $17.4 million as compared to $4.8 million and $14.0 million for the three and nine months ended September 30, 2001. The increases were primarily attributable to higher personnel and payroll costs, increases in expenses in connection with upgrades and expansion of our facilities, as well as legal expenses in support of the development of our intellectual property portfolio. We anticipate reductions in general and administrative expenses, principally payroll and related personnel costs for the remainder of 2002 as compared to the third quarter of 2002, as we continue to closely monitor patent-related legal expenses and decrease the amount of facilities expansions.

Interest Income, Net. Net interest income for the three and nine months ended September 30, 2002 of $0.5 million and $1.4 million decreased $2.4 million and $10.2 million, or 83% and 88%, as compared to $2.9 million and $11.6 million for the same periods in 2001. Gross interest income for the three and nine months ended September 30, 2002 of $3.1 million and $9.1 million decreased $2.4 million and $10.4 million, or 44% and 53%, as compared to $5.5 million and $19.5 million for the same periods in 2001. The decreases in gross and net interest income were primarily due to lower cash and investment balances and declines in interest rates earned on our investments. Gross interest expense for the three and nine months ended September 30, 2002 of $2.5 million and $7.7 million represented a decrease of $0.1 million and $0.2 million, or 4% and 3%, as compared to $2.6 million and

$7.9 million for the three and nine months ended September 30, 2001. This decrease was primarily a result of declining interest payments on various expiring capital leases. We expect gross interest expense to increase slightly in the future in conjunction with anticipated equipment financing for capital expenditures.

Income Taxes. For the three and nine months ended September 30, 2002, we recorded a net Connecticut income tax expense of $0.02 million and a net income tax benefit of $0.9 million, respectively. The income tax benefit is a result of Connecticut legislation, which allows companies to obtain cash refunds from the State of Connecticut at a rate of 65% of their annual research and development expense credit, in exchange for foregoing carryforward of a research and development credit for state tax purposes. For the year ended December 31, 2002, we anticipate that the income tax benefit will be approximately $1.2 million, as we incur additional qualifying research and development costs.

As a result of Connecticut legislation passed in July 2002, effective for tax years beginning on or after January 1, 2002, companies are required to pay on an annual basis a minimum of 30% of the capital base component of their Connecticut corporation business tax, notwithstanding available tax credit carry-forwards. Therefore, for the nine months ended September 30, 2002, the net income tax benefit includes an accrual of approximately $0.2 million for the capital base tax liability.

Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which are uncertain. Accordingly, valuation allowances in amounts equal to the deferred income tax assets have been established to reflect these uncertainties in all periods presented.

Net Loss. For the three and nine months ended September 30, 2002, we reported a net loss of $19.9 million and $61.5 million or $0.41 per share and $1.26 per share as compared to $11.1 million and $26.7 million or $0.23 per share and $0.56 per share for the same periods in 2001. The increases in net loss of $8.8 million and $34.8 million, or 79% and 130%, were primarily due to additional research and development and general and administrative expenses in support of the advancement of our drug discovery and development efforts, and declines in collaboration revenue and gross interest income. Since inception, we have incurred operating losses, and as of September 30, 2002, we had an accumulated deficit of $186.1 million. We have not paid any federal income taxes since inception.

Minority Interest in Subsidiary Loss. Minority interest in subsidiary loss for the three and nine months ended September 30, 2002, which is the portion of 454’s loss attributable to stockholders of 454 other than us, was $1.1 million and $2.8 million as compared to $0.4 million and $1.0 million for the same periods in 2001. The increases of $0.7 million and $1.8 million, or 175% and 180%, were primarily due to 454’s increased purchases of laboratory supplies, increased equipment depreciation, additional personnel costs and legal expenses in support of the development of their intellectual property portfolio. As the expected future level of 454’s loss increases, we anticipate recording an increased minority interest in subsidiary loss based upon the minority shareholders’ ownership percentage.

Liquidity and Capital Resources

As of September 30, 2002, we had $431.5 million in cash and investments as compared to $508.3 million as of December 31, 2001. The decrease in cash and investments during the first nine months of 2002 of $76.8 million was primarily a result of additional operating losses in support of our research and development activities, acquisitions of additional property and equipment and payment of interest to the holders of our convertible subordinated debt. We have financed our operations since inception primarily through public offerings, our convertible subordinated debt offering, revenues received under our collaborative research agreements, private placements of equity securities, government grants and capital leases. As of September 30, 2002, we had recognized $95.3 million of cumulative sponsored research revenues from collaborative research agreements and government grants. To date, inflation has not had a material effect on our business.

Our cash investing activities have consisted primarily of acquisitions of equipment and expenditures for leasehold improvements. At September 30, 2002, our gross investment in lab and office equipment, computers, land and leasehold improvements since inception was $57.4 million, including approximately $8 million associated with our campus facilities in Branford, Connecticut. At September 30, 2002, equipment with a gross book value of $10.0 million secured our equipment financing facilities. We had approximately $1.2 million in material commitments for capital expenditures at September 30, 2002.

Our cash requirements under the restructuring plan are anticipated to be approximately $1.5 million, of which we expect the majority to be paid to terminated employees prior to December 31, 2002. We expect to substantially complete our restructuring plan by the end of 2002. If our restructuring program is implemented in the manner and on the timeline we intend, we expect to begin to realize the benefits of our restructuring plan by the end of the fourth quarter of 2002.

In accordance with our investment policy, we are utilizing the following investment objectives for cash and investments: (1) investment decisions are made with the expectation of minimum risk of principal loss, even with a modest penalty in yield; (2) appropriate cash balances and related short-term funds are maintained for immediate liquidity needs, and appropriate liquidity is available for medium-term cash needs; and (3) maximum after-tax yield is achieved.

Cash Flows For The Nine Months Ended September 30, 2002

Operating Activities. Net cash used in operating activities was $59.7 million for the nine months ended September 30, 2002 and was primarily due to the net cash loss from operations of $56.2 million, increases in income taxes receivable of $1.1 million and accounts receivable of $2.9 million in addition to a decrease in interest payable of $2.3 million, offset by decreases in other current assets of $0.5 million and prepaid expenses of $0.2 million, and increases in accounts payable of $0.5 million, accrued payroll and related items of $0.3 million and deferred revenue of $1.1 million.

Investing Activities. Net cash used in investing activities was $103.6 million for the nine months ended September 30, 2002 and was primarily due to acquisitions of property and equipment of $18.5 million and net outflows from purchases and maturities of short-term investments and marketable securities of $85.1 million.

Financing Activities. Net cash used in financing activities was $1.6 million for the nine months ended September 30, 2002 and primarily included payments on capital lease obligations of $2.5 million, offset by proceeds from exercises of stock options in the amount of $0.9 million.

Future Liquidity

Sources of Liquidity. During the remainder of 2002, we expect to fund our operations through a combination of the following sources: cash and investment balances; collaboration revenue; gross interest income; and tax benefits from the State of Connecticut.

Uses of Liquidity. Through the end of 2002, we plan to continue making substantial investments in our emerging preclinical and clinical drug pipeline. We foresee the following as significant uses of liquidity: research and development expenses; general and administrative expenses; gross interest expense; facilities and equipment costs; and employee separation costs in relation to our restructuring plan announced in November 2002 (see Note 2).

We believe that our existing cash and investment balances and other sources of liquidity will be sufficient to meet our requirements through the end of 2003. We consider our expenditures to be crucial to our future success and by continuing to make strategic investments in research and development, we believe that we are building substantial value for our shareholders. While we will continue to explore alternate sources for financing our business activities, including the possibility of public and/or private offerings of our securities, we cannot assure that in the future these sources of liquidity will be available when needed or that our actual cash requirements will not be greater than anticipated. In appropriate strategic situations, we may seek financial assistance from other sources, including contributions by others to joint ventures and other collaborative or licensing agreements for the development and testing of products under development.

Minority Interest in Subsidiary

As of September 30, 2002, minority interest in subsidiary was $11.2 million. Minority interest in subsidiary is related to the establishment of 454, our majority-owned subsidiary, during 2000 and reflects the initial minority shareholders’ capitalization less a gain recognition of $3.9 million as a result of our contribution of technology to 454, and less the minority shareholders’ portion of losses and stock issuance costs incurred to date. The minority interest in subsidiary is expected to continue to decrease during the remainder of 2002 as 454 incurs expenditures associated with technology development.

Recently Enacted Pronouncements

In July 2002, the FASB issued Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS 146”). SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at its fair market value when the liability is incurred, rather than at the date of an entity’s commitment to an exit plan. The provisions of SFAS 146 are effective for exit or disposal activities that are initiated after December 31, 2002. We intend to record the effect of the November 7, 2002 restructuring plan, as discussed in Note 2, under the early adoption provisions of SFAS 146.

Item 4. Controls and Procedures

(a)

Evaluation of Disclosure Controls and Procedures

As of October 16, 2002 (a date within 90 days before the filing date of this Form 10-Q), an evaluation was performed by our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), with the participation of our management, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)). Based on that evaluation, the CEO and CFO have concluded that our disclosure controls and procedures were effective as of October 16, 2002.

(b)

Changes in Internal Controls

The CEO and CFO have indicated that there have been no significant changes in our internal controls or other factors that could significantly affect internal controls subsequent to October 16, 2002, including any corrective actions with regard to significant deficiencies and material weaknesses.

Certain Factors That May Affect Results of Operations

This report contains forward-looking statements that are subject to certain risks and uncertainties. These include statements regarding: (i) our expectation that SFAS 145 will not have a material effect on our financial statements, (ii) our intention to record the effect of the November 7, 2002 restructuring plan under the early adoption provisions of SFAS 146, (iii) our ability to apply proprietary functional genomic technologies, bioinformatic systems, and disease expertise to discover genes and proteins, and to determine how these genes and proteins function in the context of disease, (iv) our expectation that losses will fluctuate from quarter to quarter and that such fluctuations may be substantial, (v) the ability of our subsidiary, 454 Corporation, to commercialize products upon their development and create a future source of revenues for us, (vi) our expectation that our restructuring plan will be substantially complete and that we will begin to realize the benefits of the plan by the end of 2002, (vii) our expectation that 2002 collaborative revenues will decrease slightly from 2001 levels, (viii) the expectation that gross interest expense will remain relatively constant in the near future, (ix) our income tax benefit which will be approximately $1.2 million in 2002, as we incur additional qualifying research and development costs, (x) our ability to fund our operations through a combination of sources during 2002 and to make substantial investments in our emerging preclinical and clinical drug pipeline, (xi) our belief that our sources of liquidity will be sufficient to meet our requirements through the end of 2003, and (xii) the increased loss attributed to our minority ownership in 454 during 2002 as it increases expenditures associated with technology development. Such statements are based on our management’s current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. We caution investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the following: our ability to successfully complete our restructuring plan announced on November 7, 2002, our stage of development as a genomics based pharmaceutical company, uncertainties of clinical trials, government regulation and healthcare reform, technological uncertainty and product development risks, product liability exposure, uncertainty of additional funding, our history of incurring losses and the uncertainty of achieving profitability, reliance on research collaborations and strategic alliances, competition, our ability to protect our patents and proprietary rights, and uncertainties relating to commercialization rights. Please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2001 for a more detailed description of these risks. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law.

Part II—Other Information

Item 6. Exhibits and Reports on Form 8-K

A.		Exhibits

		Exhibit 10.1—Employment Agreement, dated September 9, 2002, between the Registrant and Timothy M. Shannon

		Exhibit 99.1—Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

B. Reports on Form 8-K

On July 25, 2002 we filed a report on Form 8-K under Item 5 “Other Events and Regulation FD Disclosure” announcing financial results for the quarter ended June 30, 2002.

On September 18, 2002 we filed a report on Form 8-K under Item 5 “Other Events and Regulation FD Disclosure” announcing that in collaboration with Bayer AG’s toxicologists, we have developed an innovative technology capable of predicting a drug compound’s potential for toxicity. In addition, we received a milestone payment of $2.9 million from Bayer for successfully developing this technology and industrializing it into a high-throughput format.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: November 14, 2002		CuraGen Corporation

		By: /s/ Jonathan M. Rothberg, Ph.D.
		Jonathan M. Rothberg, Ph.D.
		Chief Executive Officer, President and
		Chairman of the Board

		By: /s/ David M. Wurzer
		David M. Wurzer
		Executive Vice-President, Chief Financial Officer
		and Treasurer (principal financial and accounting
		officer of the registrant)

CERTIFICATIONS

I, Jonathan M. Rothberg, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CuraGen Corporation;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

/s/ Jonathan M. Rothberg, Ph.D.

Jonathan M. Rothberg, Ph.D.

Chief Executive Officer, President and

Chairman of the Board

CERTIFICATIONS

I, David M. Wurzer, certify that:

1. I have reviewed this quarterly report on Form 10-Q of CuraGen Corporation;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Date: November 14, 2002

/s/ David M. Wurzer

David M. Wurzer

Executive Vice-President, Chief Financial Officer

and Treasurer (principal financial and accounting officer of the registrant)

CURAGEN CORPORATION

EXHIBIT INDEX

No.
Exhibit 10.1		Employment Agreement, dated September 9, 2002, between the Registrant and Timothy M. Shannon
Exhibit 99.1		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

EX-10.1 3 dex101.htm EMPLOYMENT AGREEMENT TIMOTHY SHANNON EMPLOYMENT AGREEMENT TIMOTHY SHANNON

Exhibit 10.1

THIS EMPLOYMENT AGREEMENT (“Agreement”) is made and entered into as of September 9, 2002 between CuraGen Corporation, a corporation organized under the laws of the State of Delaware, with its principal place of business at 555 Long Wharf Drive, New Haven, Connecticut (the “Company”), and Timothy M. Shannon, M.D. (“Executive”).

WHEREAS, the Executive desires to be employed by the Company, subject to the terms and conditions of this Agreement; and the Company desires to retain the Executive’s services, subject to the terms and conditions of this Agreement.

THEREFORE, the Company and the Executive, intending to be legally bound, hereby agree as follows:

1. Employment; Duties and Responsibilities

A) The Company shall employ the Executive, and the Executive shall serve the Company, as Senior Vice President of Research and Development and Chief Medical Officer, with such duties and responsibilities as may be assigned to the Executive by the Chief Executive Officer (“CEO”) of the Company and are typically associated with a position of that nature.

B) The Executive shall devote his best efforts and all of his business time to the performance of his duties under this Agreement and shall perform them faithfully, diligently and competently in a manner consistent with the policies and goals of the Company as determined from time to time by the CEO or an officer of the Company.

C) The Executive shall report to the CEO of the Company, or identified member of the Executive Committee.

D) The Executive shall not engage in any activities outside the scope of his employment that would detract from, or interfere with, the fulfillment of his responsibilities or duties under this Agreement.

E) The Executive shall not serve as a director (or the equivalent position) of any company or entity and shall not render services of a business, professional or commercial nature to any other person or firm, except for not-for-profit entities, without prior written consent of the CEO. Such consent shall not be unreasonably withheld.

F) The Executive shall not receive fees or other remuneration for work performed either within or outside the scope of his employment without prior written consent of the CEO. Such consent shall not be unreasonably withheld.

2. Term of Employment

A) The Executive’s employment by the Company under this Agreement shall commence on the date of this Agreement and, subject to the earlier termination pursuant to section 10 shall terminate on December 31, 2003; provided, however, that commencing on January 1, 2004 and each January 1 thereafter the term of this Agreement shall be extended for one (1) additional year unless, not later than October 31 of the preceding year, the Company or the Executive shall have given notice that the Company or the Executive does not wish to extend this Agreement.

B) Notwithstanding any such notice by the Company, if a Change of Control occurs during the original, or extended term of this Agreement, or after this Agreement has been terminated, but within twelve (12) months after such notice to terminate the Agreement was given by the Company, the termination shall be deemed ineffective and the Agreement shall continue in effect. In any event, the term of this Agreement shall expire on the second (2nd) anniversary of the date of the Change of Control.

3. Compensation

As full compensation for all services rendered by the Executive to the Company under this Agreement, the Company shall pay the Executive the compensation set forth in Schedule A attached and incorporated into this Agreement. This schedule may be amended from time to time in writing by the Company and the Executive.

4. Fringe Benefits

A) The Executive shall be entitled to participate in all health and welfare benefit plans provided by the Company to its employees.

B) The Executive shall be entitled to participate in all pension plans provided by the Company to its employees.

C) The Company may, at its sole option, devise a benefit plan for its executives or senior managers. The Executive shall be entitled to participate in benefit plans provided by the Company to its executives or senior managers.

D) The Executive shall be entitled to a minimum of four (4) weeks paid vacation time annually, to be taken at times selected by him, with the prior approval of the person to whom the Executive is to report.

5. Expenses

The Company shall reimburse the Executive for all reasonable and necessary expenses incurred by him in connection with the performance of his services for the Company in accordance with the Company’s policies, upon submission of appropriate expense reports and documentation in accordance with the Company’s policies and procedures.

6. Disability or Death

A) If, as the result of any physical or mental disability, the Executive shall have failed or is unable to perform his duties for a period of ninety (90) consecutive days, the Company may, by notice to the Executive, terminate his employment under this Agreement as of the date of the notice without any further payment or the furnishing of any benefit by the Company under this Agreement (other than accrued and unpaid base salary and expenses and benefits which have accrued pursuant to any plan or by law).

B) The term of the Executive’s employment under this Agreement shall terminate upon his death without any further payment or the furnishing of any benefit by the Company under this Agreement (other than accrued and unpaid base salary and commission and expenses and benefits which have accrued pursuant to any plan or by law). This provision shall not be read to change the terms of any other agreement between the Executive and the Company, including any stock option plans, which shall be governed by its terms. Unless expressly provided for in such agreements, the death of the Executive shall not terminate such agreements.

7. Patents, Copyrights and Intellectual Property

A) The Executive shall promptly disclose to the Company all Inventions. Inventions shall mean, for purposes of this paragraph, inventions, discoveries, developments, methods and processes (whether or not patenable or copyrightable or constituting trade secrets) conceived, made or discovered by the Executive (whether alone or with others) while employed by the Company that relate, directly or indirectly, to the past, present, or future business activities, research, product design or development, personnel, and business opportunities of the Company, or result from tasks assigned to the Executive by the Company or done by the Executive for or on behalf of the Company. The Executive hereby assigns and agrees to assign to the Company

(or as otherwise directed by the Company) his full right, title and interest in and to all Inventions. The Executive agrees to execute any and all applications for domestic and foreign patents, copyrights or other proprietary rights and to do such other acts (including, among others, the execution and delivery of instruments of further assurance or confirmation) requested by the Company to assign the Inventions to the Company and to permit the Company to file, obtain and enforce any patents, copyrights or other proprietary rights in the Inventions. The Executive agrees to make and maintain adequate and current records of all Inventions, in the form of notes, sketches, drawings, or reports relating thereto, which records shall be and remain the property of and available to the Company at all times.

B) All designs, ideas, inventions, improvements, and other creations made or owned by the Executive before becoming an employee of the Company and which the Executive desires to exempt from this Agreement are listed on Attachment A hereof and authorized for exclusion by the signature of an Officer of the Company. (If the Executive does not have any such designs, ideas, inventions, improvements, or other creations write “none” on this line: none .)

C) The Executive agrees to notify the Company in writing before the Executive makes any disclosure or performs or causes to be performed any work for or on behalf of the Company, which appears to threaten or conflict with (a) rights the Executive claims in any invention or idea conceived by the Executive or others (i) prior to the Executive’s employment, or (ii) otherwise outside the scope of this Agreement; or (b) rights of others arising out of obligations incurred by the Executive (i) prior to this Agreement, or (ii) otherwise outside the scope of this Agreement. In the event of the Executive’s failure to give notice under the circumstances specified, the Company may assume that no such conflicting invention or idea exists and the Executive agrees that the Executive will make no claim against the Company with

respect to the use of any such invention or idea in any work which the Executive performs or causes to be performed for or on behalf of the Company.

8. Proprietary and Trade Secret Information

A) The Executive agrees that he will keep confidential and will not make any unauthorized use or disclosure, or use for his own benefit or the benefit of others, during or subsequent to his employment of any research, development, engineering and manufacturing data, plans, designs, formulae, processes, specifications, techniques, trade secrets, financial information, customer or supplier lists or other information that becomes known to him as a result of his employment with the Company which is the property of the Company or any of its clients, customers, consultants, licensors, licensees, or affiliates, provided nothing herein shall be construed to prevent the Executive from using his general knowledge and skill after termination of his employment whether acquired prior to or during his employment by the Company.

B) Proprietary information subject to paragraph 8(A) does not include information that: (i) is or later becomes available to the public through no breach of this Agreement by the Employee; (ii) is obtained by the Executive from a third party who had the legal right to disclose the information to the Executive; or (iii) is required to be disclosed by law, government regulation, or court order.

C) During the course of his employment with the Company, the Executive will not accept information from sources outside of the Company, which is designated as “Confidential,” or “Proprietary,” or “Trade Secret” without prior written permission from the Company or its attorneys. The Executive is not expected to and is expressly forbidden by the Company policy from disclosing to the Company a “Trade Secret” or “Confidential” or “Proprietary” information from a former employer.

D) During his employment, or upon leaving the employment of the Company, the Executive will not remove from the Company premises, either directly or indirectly, any drawings, writings, prints, any documents or anything containing, embodying, or disclosing any confidential or proprietary information or any of the Company’s trade secrets unless express written permission is given by the Company management. Upon termination of his employment, the Executive shall return to the Company any and all documents and materials that are the property of the Company or its customers, licensees, licensors or affiliates or which contain information that is the property of the Company.

9. Covenant Not to Compete

A) While in the employ of the Company and for a period of one year or the maximum period permitted by applicable law (whichever is shorter) following termination of his employment with the Company, the Executive shall not, without the approval of the Company, alone or as a partner, officer, director, consultant, employee, stockholder or otherwise, engage in any employment, consulting or business activity or occupation that is or is intended to be directly competitive with the business of the Company, as being considered, researched, developed, marketed and/or sold at the time of termination; provided, however, that the holding by the Executive of any investment in any security shall not be deemed to be a violation of this section if such investment does not constitute over one percent (1%) of the outstanding issue of such security. The restriction shall run for a period of one year after said termination, and if there shall be any violation hereof during said period, then for a period of one year after cessation of such violation.

B) While in the employ of the Company, the Executive shall promptly notify the Company, if the Executive, alone or as a partner, officer, director, consultant, employee,

stockholder or otherwise, engages in any employment, consulting or business activity or occupation outside his employment by the Company.

C) The Executive shall not, directly or indirectly, either during the term of the Executive’s employment under this Agreement or for a period of one (1) year thereafter, solicit, directly or indirectly, the services of any person who was a full-time employee of the Company, its subsidiaries, divisions or affiliates, or solicit the business of any person who was a client or customer of the Company, its subsidiaries, divisions or affiliates, in each case at any time during the last year of the term of the Executive’s employment under this Agreement. The Executive shall not, directly or indirectly, either during the term of the Executive’s employment under this Agreement or for a period of one (1) year thereafter, employ, directly or indirectly, the services of any person who was a full-time employee of the Company, its subsidiaries, divisions or affiliates, or solicit the business of any person who was a client or customer of the Company, its subsidiaries, divisions or affiliates, in each case at any time during the last year of the term of the Executive’s employment under this Agreement. For purposes of this Agreement, the term “person” shall include natural persons, corporations, business trusts, associations, sole proprietorships, unincorporated organizations, partnerships, joint ventures and governments or any agencies, instrumentalities or political subdivisions thereof.

D) The Executive acknowledges and agrees that the covenants in this section are necessary for the protection of the legitimate business interests of the Company and that the covenants are reasonable in all respects. The Executive further acknowledges and agrees that, if his employment by the Company is terminated, his experience and capabilities are such that he is both qualified and willing to seek and obtain employment involving business activities which

will not violate any covenant on his part to be observed hereunder and that a court decree enjoining any such violation will not prevent him from earning a reasonable livelihood.

E) Just compensation for the duties under this paragraph is included in the salary and benefits provided herein.

F) If the Executive is terminated as a result of a Change of Control, as defined in this Agreement, this Section, titled “Covenant Not to Compete,” shall not be applicable.

10. Termination

A) The Company shall have the right to terminate this Agreement and the Executive’s employment with the Company for performance reasons or cause. For purposes of this Agreement, the term “performance reasons” shall mean termination of the Executive’s employment upon the assessment of the Chief Executive Officer, or the Board of Directors, or a Committee of the Board of Directors that the Executive has failed to satisfactorily perform the essential functions of the Executive’s position. Such a determination shall be made using acceptable business practices and sound management principles and shall not be made in bad faith or arbitrarily.

B) For purposes of this Agreement, the term “for cause” shall mean the Executive’s willfully engaging in conduct demonstrably and materially injurious to the Company, monetarily or otherwise, provided that the Executive receives a copy of a resolution duly adopted by the unanimous affirmative vote of the entire membership of the Board of Directors of the Company at a meeting of the Board of the Company called and held for such purpose after the Executive has been given reasonable notice of such meeting and has been given an opportunity, together with his counsel, to be heard by the Board of the Company, finding that in the good faith opinion

of the Board of the Company the Executive was guilty of the conduct set forth and specifying the particulars thereof in detail.

C) The Executive’s act, or failure to act, shall be deemed “willful” if the Executive was not acting in good faith or acting without reasonable belief that the Executive’s action or omission was in the best interests of the Company. Any act or failure to act based on authority given pursuant to a resolution duly adopted by the Board of the Company, or based upon the advice of counsel for the Company shall be conclusively presumed to have been done by the Executive in good faith and in the best interests of the Company.

D) If the Executive is terminated for cause, the Company shall not be obligated to make any further payment to the Executive (other than accrued and unpaid base salary and expenses to the date of termination), or continue to provide any benefit (other than benefits which have accrued pursuant to any plan or by law) to the Executive under this Agreement.

E) If the Executive is terminated for performance reasons, the Executive shall be entitled to certain benefits. The benefits shall consist of (i) salary continuation at the salary the Executive was receiving at the time of termination and (ii) the Executive’s continued participation in any employee health and welfare benefit plan to which the Executive was a participant prior to his termination on the same basis as the Executive had participated as an employee. The salary continuation and continued participation in any health and welfare benefit plan shall be for twelve (12) months.

11. Change of Control

A) “Change in Control” of CuraGen Corporation means the occurrence of any one of the following events:

(i) individuals who, on January 1, 2002, constituted the Board (the “Incumbent Directors”) cease for any reason to constitute at least a majority of the Board, provided that any person becoming a director subsequent to January 1, 2002, whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Directors then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director, without objection to such nomination) shall be an Incumbent Director; provided, however, that no individual elected or nominated as a director of the Company initially as a result of an actual or threatened election contest with respect to directors or any other actual or threatened solicitation of proxies (or consents) by or on behalf of any person other than the Board shall be deemed an Incumbent Director;

(ii) any “person” (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 [the “Exchange Act”] and as used in Section 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes a “beneficial owner” (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of the Company’s then outstanding securities eligible to vote for the election of the Board (the “Company Voting Securities”); provided, however, that the event described in this paragraph (ii) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (A) by the Company or any Subsidiary; (B) by any employee benefit plan sponsored or maintained by the

Company or Subsidiary; or (C) by any underwriter temporarily holding securities pursuant to an offering of such securities;

(iii) the consummation of a merger, consolidation, statutory share exchange or similar form of corporate transaction involving the Company or any of its Subsidiaries that requires the approval of the Company’s stockholders, whether for such transaction or the issuance of securities in the transaction (a “Business Combination”), unless immediately following such Business Combination: (A) more than 50% of the total voting power of (x) the corporation resulting from such Business Combination (the “Surviving Corporation”), or (y) if applicable, the ultimate parent corporation that directly or indirectly has beneficial ownership of 100% of the voting securities eligible to elect directors of the Surviving Corporation (the “Parent Corporation”), is represented by Company Voting Securities that were outstanding immediately prior to such Business Combination (or, if applicable, shares into which such Company Voting Securities were converted pursuant to such Business Combination), and such voting power among the holders thereof is in substantially the same proportion as the voting power of such Company Voting Securities among the holders thereof immediately prior to the Business Combination; (B) no person (other than any employee benefit plan sponsored or maintained by the Surviving Corporation or the Parent Corporation), is or becomes the beneficial owner, directly or indirectly, of 20% or more of the total voting power of the outstanding voting securities eligible to elect directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation); (C) ;at least a majority of the members

of the board of directors of the Parent Corporation (or, if there is no Parent Corporation, the Surviving Corporation) were incumbent Directors at the time of the Board’s approval of the execution of the initial agreement providing for such Business Combination (any Business Combination which satisfies all of the criteria specified in (A), (B) and (C) above shall be deemed to be a “Non-Qualifying Transaction”); or

(iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or a sale or disposition of all or substantially all of the Company’s assets.

B) Notwithstanding the foregoing, a Change in Control of the Company shall not be deemed to occur solely because any person acquires beneficial ownership of more than 25% of the Company Voting Securities as a result of the acquisition of Company Voting Securities by the Company which reduces the number of Company Voting Securities outstanding; provided, that if after such acquisition by the Company such person becomes the beneficial owner of additional Company Voting Securities that increases the percentage of outstanding Company Voting Securities beneficially owned by such person, a Change in Control of the Company shall then occur.

12. Benefits Upon Termination

A) If the Executive is terminated by the Company for any reason other than for cause, performance reasons, retirement, total disability or death, or if this Agreement is not renewed by the Company, pursuant to Section 2.A., the Executive shall be entitled certain benefits. The benefits shall consist of (i) salary continuation at the salary the Executive was receiving at the time of termination and (ii) the Executive’s continued participation in any

employee health and welfare benefit plan to which the Executive was a participant prior to his termination on the same basis as the Executive had participated as an employee. The salary continuation and continued participation in any health and welfare benefit plan shall be for twelve (12) months.

B) However, if the Executive is terminated by the Company within twelve (12) months of a Change of Control as defined in this Agreement, the Executive shall be entitled to an additional twelve (12) months of salary continuation and continued participation in any health and welfare benefit plan for a total of twenty-four (24) months salary continuation and participation in the health and welfare benefit plan.

C) Termination by the Executive of his employment for “good reason” shall mean termination based on:

(i) subsequent to a Change in Control of the Company, and without the Executive’s express written consent, the assignment to Executive of any duties inconsistent with those duties prior to a Change in Control, or a change in the Executive’s reporting responsibilities, titles or offices as in effect immediately prior to a Change in Control, or any removal of the Executive from, or any failure to re-elect the Executive, to any of such positions, except in connection with the termination of the Executive’s employment for Cause, Disability or Retirement or as a result of the Executive’s death or by the Executive other than for good reason;

(ii) subsequent to a Change in Control of the Company, a reduction by the Company in the Executive’s base salary as in effect on the date hereof or as the same may be increased from time to time;

(iii) subsequent to a Change in Control of the Company, a failure by the Company to continue any bonus plans in which the Executive is presently entitled to participate (the “Bonus Plans”) as the same may be modified from time to time but substantially in the form currently in effect, or a failure by the Company to continue the Executive as a participant in the Bonus Plans on at least the same basis as the Executive presently participates in accordance with the Bonus Plans;

(iv) subsequent to a Change in Control of the Company and without the Executive’s express written consent, the Company’s requiring the Executive to be based anywhere other than within fifty (50) miles of the Executive’s present office location, except for required travel on the Company’s business to an extent substantially consistent with the Executive’s present business travel obligations;

(v) subsequent to a Change in Control of the Company, the failure by the Company to continue in effect any benefit or compensation plan, stock ownership plan, stock purchase plan, stock option plan, life insurance plan, health-and-accident plan or disability plan in which the Executive is participating at the time of a Change in Control of the Company (or plans providing the Executive with substantially similar benefits), the taking of any action by the Company which would adversely affect the Executive’s participation in or materially reduce the Executive’s benefits under any of such plans or deprive the Executive of any material fringe benefit enjoyed by the Executive at the time of the Change in Control, or the failure by the Company to provide the Executive with the number of paid vacation days to which the Executive is then entitled in

accordance with the Company’s normal vacation policy in effect on the date hereof;

(vi) subsequent to a Change in Control of the Company, the failure by the Company to obtain the assumption of this Agreement by any successor; or

(vii) subsequent to a Change in Control of the Company, any purported termination of the Executive’s employment which is not effected pursuant to the terms of this Agreement. No such purported termination shall be effective.

D) If the Executive terminates his employment for a “good reason,” the Executive shall be entitled to the same benefits as provided in paragraph B of this section.

E) Upon a Change of Control, notwithstanding any other agreement, all stock, restricted stock, stock options or restricted stock options of the Executive shall become fully vested to 100%.

13. Arbitration

A) Any dispute under this Agreement, including any dispute as to cause or good reason for termination, shall be submitted to binding arbitration subject to the rules of the American Arbitration Association. EACH OF THE PARTIES IRREVOCABLY AND UNCONDITIONALLY WAIVES THE RIGHT TO A TRIAL BY JURY IN ANY SUCH ACTIONS, SUIT OR PROCEEDING. The Company shall bear all costs associated with the Arbitration, including filing fees and any stipend for the arbitrator. The Company and the Executive shall each bear its own attorneys’ fees. However, if the Executive prevails in a challenge to the Company’s determination for cause, the Executive shall be entitled to be reimbursed for all attorney fees.

B) Nothing in this section shall be read to preclude the Company seeking injunctive relief for the Executive’s breach of Section 8, Proprietary and Trade Secret Information or Section 9, Covenant Not to Compete.

14. Injunctive Relief

A) The Executive acknowledges that the services rendered by him under this Agreement are of a special, unique and extraordinary character and, in connection with such services, he will have access to confidential information concerning the Company’s business. By reason of this access to confidential information, the Executive consents and agrees that if he violates any of the provisions of this Agreement with respect to Proprietary and Trade Secret Information or the Covenant Not to Compete, the Company would sustain irreparable harm and, therefore, in addition to any other remedies which the Company may have under this Agreement or otherwise, the Company shall be entitled to an injunction to be issued by any court of competent jurisdiction restraining the Executive from committing or continuing to commit any such violation of this Agreement.

15. Miscellaneous

A) This Agreement shall be governed by and construed in accordance with the laws of the State of Connecticut, applicable to agreements made and to be performed in Connecticut, and shall be construed without regard to any presumption or other rule requiring construction against the party causing the Agreement to be drafted.

B) This Agreement contains a complete statement of all the arrangements between the Company and the Executive with respect to its subject matter, supersedes all previous agreements, written or oral, among them relating to its subject matter and cannot be modified,

amended or terminated orally. Amendments may be made to this Agreement at any time if mutually agreed upon in writing.

C) Any amendment, notice or other communication under this Agreement shall be in writing and shall be considered given when received and shall be delivered personally or mailed by Certified Mail, Return Receipt Requested, to the parties at their respective addresses set forth in this Agreement, or at such other address as a party may specify by written notice to the other.

D) The failure of a party to insist upon strict adherence to any term of this Agreement on any occasion shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing.

E) Each of the parties irrevocably submits to the exclusive jurisdiction of any court of the State of Connecticut or the Federal District Court of Connecticut over any action, suit or proceeding relating to or arising out of this Agreement and the transactions contemplated hereby. Each party hereby irrevocably waives any objections, including, without limitation, any objection to the laying of venue or based on the grounds of forum non conveniens which such party may now or hereafter have to the bringing of any such actions, suit or proceeding in any such court and irrevocably agrees that process in any such actions, suit or proceeding may be served upon that party personally or by Certified or Registered Mail, Return Receipt Requested.

F) The invalidity or unenforceability of any term or provision of this Agreement shall not affect the validity or enforceability of the remaining terms or provisions of this Agreement which shall remain in full force and effect and any such invalid or unenforceable term or provision shall be given full effect as is legally permissible. If any term or provision of

this Agreement is invalid or unenforceable in one jurisdiction, it shall not affect the validity or enforceability of that term or provision in any other jurisdiction.

G) This Agreement is not assignable by either party except that it shall inure to the benefit of and be binding upon any successor to the Company by merger or consolidation or the acquisition of all or substantially all of the Company’s assets, provided such successor assumes all of the obligations of the Company, and shall inure to the benefit of the heirs and legal representatives of the Executive.



By:	/s/ JONATHAN ROTHBERG PHD.	By:	/s/ TIM SHANNON, M.D.
	Chief Executive Officer		Tim Shannon, M.D. Senior Vice President of Research and Development and Chief Medical Officer
	Date 24 Oct 2002		Date 24 Oct 2002
	CuraGen Corporation 555 Long Wharf Drive 11th Floor New Haven, CT 06511 (“the Company”)		CuraGen Corporation 555 Long Wharf Drive 11th Floor NewHaven, CT 06511 (“the Executive”)

SCHEDULE A

Compensation

The Executive shall receive the following compensation for services during the initial term of employment:

1) The Executive’s base salary shall be $285,000 per year, payable in bi-weekly installments, subject to increases by the Board of Directors, which shall review the salary periodically.

2) The Executive, if otherwise eligible, shall participate in any incentive compensation plan, pension, profit sharing, stock purchase or stock option plan, annuity, or group insurance plan, medical plan and other benefits, maintained by the Company for its employees.

3) The Executive shall be eligible to receive performance-based bonuses on the attainment of certain goals set by the CEO.

EX-99.1 4 dex991.htm CERTIFICATION PERSUANT TO SECTION 906 CERTIFICATION PERSUANT TO SECTION 906

EXHIBIT 99.1

Certification

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of CuraGen Corporation, a Delaware corporation (the “Company”), does hereby certify, to such officer’s knowledge, that:

The Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 (the “Form 10-Q”) of the Company fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 14, 2002		By: /s/ Jonathan M. Rothberg, Ph.D.
		Jonathan M. Rothberg, Ph.D.
		Chief Executive Officer, President and
		Chairman of the Board
		(principal executive officer)

Dated: November 14, 2002		By: /s/ David M. Wurzer
		David M. Wurzer
		Executive Vice-President, Treasurer
		and Chief Financial Officer
		(principal financial and accounting officer)

The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 189, United States Code) and is not being filed as part of a separate disclosure document.

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