-----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, EcCRgrlbjiQ/g4KKNjJ0lEibnNEY5rd2oZsTFzxTvTdvXhmzjG5srhKWC1OAn7oo 4QlL7YqcHSbdSEHMu+tbPQ== 0000950135-99-005162.txt : 19991115 0000950135-99-005162.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950135-99-005162 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREATIVE BIOMOLECULES INC CENTRAL INDEX KEY: 0000857121 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 942786743 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19910 FILM NUMBER: 99747736 BUSINESS ADDRESS: STREET 1: 45 S STREET CITY: HOPKINTON STATE: MA ZIP: 01748 BUSINESS PHONE: 5087821100 MAIL ADDRESS: STREET 1: 45 SOUTH ST CITY: HOPKINTON STATE: MA ZIP: 01748 10-Q 1 CREATIVE BIOMOLECULES, INC. 1 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 SEPTEMBER 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 0-19910 --------------------- CREATIVE BIOMOLECULES, INC. (Exact name of registrant as specified in its charter) DELAWARE 94-2786743 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation or organization) 45 SOUTH STREET, HOPKINTON, MA 01748 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (508) 782-1100 --------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. As of October 29, 1999, the registrant had 36,132,466 shares of Common Stock outstanding. 2 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page Number Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1999 (unaudited) and December 31, 1998 3 Unaudited Consolidated Statements of Operations for the three months and nine months ended September 30, 1999 and 1998 4 Unaudited Consolidated Statements of Comprehensive Loss for the three months and nine months ended September 30, 1999 and 1998 4 Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 5 Notes to Unaudited Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7 Item 3. Quantitative and Qualitative Disclosures About Market Risk 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 2. Changes in Securities 13 Item 3. Defaults Upon Senior Securities 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 5. Other Information 13 Item 6. Exhibits and Reports on Form 8-K 13 SIGNATURES 14
3 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ================================================================================
September 30, December 31, 1999 1998 -------------- -------------- ASSETS (unaudited) - ------ CURRENT ASSETS: Cash and cash equivalents $ 2,195,302 $ 17,738,044 Marketable securities 21,272,748 40,197,407 Accounts receivable 122,158 669,232 Inventory 15,004 28,733 Prepaid expenses and other 184,130 272,168 ------------- ------------- Total current assets 23,789,342 58,905,584 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT - net 2,295,445 1,925,602 ------------- ------------- OTHER ASSETS: Notes receivable - officers -- 116,668 Patents and licensed technology - net 1,112,010 375,000 Deferred patent application costs - net 4,219,359 4,732,629 Deposits and other 108,574 108,574 ------------- ------------- Total other assets 5,439,943 5,332,871 ------------- ------------- TOTAL $ 31,524,730 $ 66,164,057 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: Lease obligations - current portion $ 336,906 $ 165,934 Accounts payable 308,183 1,621,417 Accrued liabilities 1,805,235 2,508,161 Accrued compensation 877,256 1,335,692 Deferred revenue 1,411,279 3,661,279 ------------- ------------- Total current liabilities 4,738,859 9,292,483 ------------- ------------- LEASE OBLIGATIONS 1,100,359 713,459 ------------- ------------- COMMITMENTS SERIES 1998/A PREFERRED STOCK, $.01 par value, 0 and 23,414 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively -- 23,052,787 ------------- ------------- STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 10,000,000 shares authorized, 0 and 23,414 issued and outstanding at September 30, 1999 and December 31, 1998, respectively Common Stock, $.01 par value, 100,000,000 shares authorized, 36,129,266 and 34,457,469 shares issued and outstanding at September 30, 1999 and December 31, 1998, respectively 361,293 344,575 Additional paid-in capital 146,826,858 143,127,113 Accumulated other comprehensive income (3,582) 105,461 Accumulated deficit (121,499,057) (110,471,821) ------------- ------------- Total stockholders' equity 25,685,512 33,105,328 ------------- ------------- TOTAL $ 31,524,730 $ 66,164,057 ============= =============
See notes to consolidated financial statements. 3 4 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS ================================================================================
Three Months Ended Nine Months Ended September 30 September 30 --------------------------------- ----------------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- (unaudited) (unaudited) REVENUES: Research and development contracts $ 823,573 $ 2,197,479 $ 2,405,760 $ 7,000,953 Interest and other 366,177 629,328 1,617,577 1,524,762 ------------ ------------ ------------ ------------ Total revenues 1,189,750 2,826,807 4,023,337 8,525,715 ------------ ------------ ------------ ------------ COSTS AND EXPENSES: Research and development 2,689,158 6,354,031 8,031,283 18,934,863 General and administrative 1,448,623 2,048,438 4,508,951 6,034,790 Interest 46,528 100,250 114,780 259,393 ------------ ------------ ------------ ------------ Total costs and expenses 4,184,309 8,502,719 12,655,014 25,229,046 ------------ ------------ ------------ ------------ NET LOSS (2,994,559) (5,675,912) (8,631,677) (16,703,331) ------------ ------------ ------------ ------------ ACCRETION AND REPURCHASE COSTS ON SERIES 1998/A PREFERRED STOCK -- (422,213) (2,395,559) (574,256) ------------ ------------ ------------ ------------ NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (2,994,559) $ (6,098,125) $(11,027,236) $(17,277,587) ============ ============ ============ ============ BASIC AND DILUTED LOSS PER COMMON SHARE $ (.08) $ (.18) $ (.31) $ (.52) COMMON SHARES FOR BASIC AND DILUTED LOSS COMPUTATION 35,993,359 33,620,764 35,395,653 33,523,588 ============ ============ ============ ============ CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS NET LOSS $ (2,994,559) $ (5,675,912) $ (8,631,677) $(16,703,331) UNREALIZED LOSS ON MARKETABLE SECURITIES (109,043) -- (109,043) -- ------------ ------------ ------------ ------------ COMPREHENSIVE LOSS $ (3,103,602) $ (5,675,912) $ (8,740,720) $(16,703,331) ============ ============ ============ ============
See notes to consolidated financial statements. 4 5 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS ================================================================================
Nine Months Ended September 30 --------------------------------- 1999 1998 ---- ---- (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (8,631,677) $(16,703,331) ------------ ------------ Adjustments to reconcile net loss to net cash used: Depreciation and amortization 736,761 1,981,409 Compensation expense 64,000 15,828 Deferred patent and application costs 128,104 -- Increase (decrease) in cash from: Accounts receivable 547,074 3,110,321 Inventory and prepaid expenses 101,767 (562,384) Accounts payable and accrued liabilities (2,372,684) 160,803 Deferred contract revenue (2,250,000) -- ------------ ------------ Total adjustments (3,044,978) 4,705,977 ------------ ------------ Net cash used for operating activities (11,676,655) (11,997,354) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (7,391,106) (23,190,611) Sale of marketable securities 26,208,936 16,053,731 Expenditures for property, plant and equipment (593,777) (2,365,189) Expenditures for patents (551,158) (892,887) Note receivable - officer -- (10,000) Repayment of note receivable - officer 116,668 116,667 Decrease (increase) in deposits and other -- 9,301 ------------ ------------ Net cash provided by (used for) investing activities 17,789,563 (10,278,988) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of equity: Series 1998/A Preferred Stock 25,000,000 Common Stock - other 674,464 653,183 Cost of raising equity -- (1,381,634) Repurchase of Series 1998/A Preferred Stock (22,470,347) -- Increase in obligations under capital leases 311,031 193,524 Repayments of obligations under capital leases (170,798) (150,568) ------------ ------------ Net cash provided by (used for) financing activities (21,655,650) 24,314,505 ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,542,742) 2,038,163 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,738,044 2,158,909 ------------ ------------ CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,195,302 $ 4,197,072 ============ ============ SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES: Property and equipment purchased under capital lease obligations $ 313,512 $ 1,089,164 ============ ============ Conversion of Series 1998/A Preferred Stock to Common Stock $ 2,978,000 $ 524,365 ============ ============
See notes to consolidated financial statements. 5 6 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ================================================================================ 1. OPINION OF MANAGEMENT - The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to interim periods. These statements are condensed and do not include all disclosures as required by generally accepted accounting principles. In the opinion of management, 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 September 30, 1999 and the results of operations and cash flows for the periods presented. The financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended December 31, 1998. Interim results are not necessarily indicative of results for a full year and such results are subject to year- end adjustments and independent audit. 2. SALE OF MANUFACTURING OPERATIONS - In November 1998, the Company sold certain of its Osteogenic Protein-l (OP-1) manufacturing rights and facilities to Stryker Corporation ("Stryker"). The transaction is expected to provide the Company with increased royalties on Stryker products, if approved for commercial sale, in lieu of the manufacturing revenue anticipated under the prior agreement. As a result of this transaction, the Company recorded a charge of $1,362,249 in the quarter ended December 31, 1998. Approximately $267,000 and $903,000 of accrued costs, principally representing future cash outlays for employee termination costs, remained to be paid at September 30, 1999 and December 31, 1998, respectively. 3. REPURCHASE OF SERIES 1998/A PREFERRED STOCK - On May 7, 1999, the Company repurchased 20,486 shares, which represented all of the outstanding Series 1998/A Preferred Stock following final conversions, for approximately $22,470,000 in cash. As a result of this transaction, the Series 1998/A Preferred Stock has been retired and there will be no subsequent conversions into Common Stock. Additionally, in the quarter ended June 30, 1999, the Company recorded a charge to the Accretion and Repurchase Costs on Series 1998/A Preferred Stock line in the Statement of Operations of approximately $1,867,000, which represented accretion of the Series 1998/A Preferred Stock up to its repurchase amount and accretion of the remaining unamortized issuance costs as of May 7, 1999. 4. STOCK PLANS - In June 1999, the stockholders of the Company voted to amend the Company's 1992 Non-employee Director Non-qualified Stock Option Plan (the "Director Plan") to increase the aggregate number of shares of Common Stock authorized for issuance under the Director Plan by 200,000 from 300,000 to 500,000. 5. NEW ACCOUNTING STANDARDS - In June 1998, the Financial Accounting Standards Board (the "FASB") released Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," ("SFAS No. 133") which the Company will be required to adopt effective January 1, 2001. SFAS No. 133 establishes standards for reporting and accounting for derivative instruments, and conforms the requirements for treatment of hedging activities across the different types of exposures hedged. The Company has not yet completed its evaluation of SFAS No. 133 and is, therefore, unable to disclose the impact adoption will have on its consolidated financial position or results of operations. 6. SUBSEQUENT EVENT - On October 19, 1999, the Company announced that it had focused its operational and financial resources on the development of its morphogenic protein-based clinical candidates for the treatment of stroke and renal disease. This resulted in a reduction of the Company's employee headcount from 70 to 43. Approximately $650,000 of costs will be recorded in the fourth quarter of 1999 as a result of this reorganization. 6 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ================================================================================ GENERAL To date, we have derived most of our revenues from research and development payments and license fees under agreements with collaborative partners. We anticipate that over the next several years we will derive most of our revenues from agreements with collaborative partners, including possible royalty revenues from Stryker. We have never been profitable and expect to incur additional operating losses in the remainder of 1999 and in 2000. Results beyond 2000 will depend largely on the timing and magnitude of royalty payments from Stryker if the OP-1 device, currently manufactured by Stryker, is approved for commercial sale. We may incur continued losses in future years. Our research agreements with collaborative partners have typically obligated such collaborative partners to provide for the partial or complete funding of research and development for specified projects and pay royalties to us in exchange for licenses to market the resulting products. We have been a party to research collaborations with Stryker to develop products for orthopaedic reconstruction and dental therapeutics and with Biogen Inc. ("Biogen") to develop products for the treatment of renal disorders. Each of these research collaborations was restructured in 1998. Under the research portion of our collaboration with Stryker, prior to its restructuring in November 1998, we supplied OP-1 products to Stryker for clinical trials and other uses, provided manufacturing regulatory support and performed research work pursuant to work plans we both established periodically. In November 1998, we sold certain of our OP-1 manufacturing rights and facilities to Stryker. In fiscal 1999, we have focused internal research efforts on developing new tissue regeneration therapies in non-bone applications and do not anticipate significant revenue from Stryker in the remainder of 1999. In December 1996, we signed a Research Collaboration and License Agreement with Biogen (the "Biogen Research Agreement"). Under the Biogen Research Agreement, we performed research work pursuant to work plans we both established periodically. In 1998, we signed an Amendment Agreement (the "Biogen Amendment Agreement") with Biogen. Under this amendment, we have assumed primary responsibility for the development of OP-1 products for the treatment of renal disorders. Biogen has provided research funding to us through December 1999 and retains an option to resume development of OP-1 products for use in chronic renal failure during this period. In October 1999, the Company announced that it had focused its operational and financial resources on the development of its morphogenic protein-based clinical candidates for the treatment of stroke and renal disease. This resulted in a reduction of the Company's employee headcount from 70 to 43. Approximately $650,000 of costs will be recorded in the fourth quarter of 1999 as a result of this reorganization. Although we are seeking and in the future may seek to enter into collaborative arrangements with respect to certain other projects, there can be no assurance that we will be able to obtain such agreements on acceptable terms or that the costs required to complete the projects will not exceed the funding available for such projects from the collaborative partners. We earn and recognize revenue based upon work performed, upon the sale or licensing of product rights, upon shipment of product for use in preclinical and clinical testing or upon attainment of benchmarks specified in collaborative agreements. Our results of operations vary significantly from year to year and quarter to quarter and depend on, among other factors, the timing of payments made by collaborative partners. The timing of our contract revenues may not match the timing of our associated product development expenses. As a result, research and development expenses may exceed contract revenues in any particular period. Furthermore, aggregate research and development contract revenues for any product may not offset all of our development expenses for such product. 7 8 RESULTS OF OPERATIONS THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998. Our total revenues for the three and nine month periods ended September 30, 1999 were approximately $1,190,000 and $4,023,000, respectively. Our total revenues for the three and nine month periods ended September 30, 1998 were approximately $2,827,000 and $8,526,000, respectively. Research and development contract revenues decreased 63% to approximately $824,000 for the three month period ended September 30, 1999 from approximately $2,197,000 for the three month period ended September 30, 1998 and decreased 66% to approximately $2,406,000 for the nine month period ended September 30, 1999 from approximately $7,001,000 for the nine month period ended September 30, 1998. The decrease in research and development contract revenues from 1998 to 1999 was primarily the result of a decrease in our research and development contract revenues from Stryker. We anticipate that research and development contract revenues in the last quarter in 1999 will be substantially less than the comparable period in 1998 because we are no longer providing research services or supplying OP-1 to Stryker. Interest revenues decreased 42% to approximately $366,000 for the three month period ended September 30, 1999 from $629,000 for the three month period ended September 30, 1998 because we had lower average balances of cash and marketable securities during the three month period ended September 30, 1999, as compared to the same period in 1998. Interest revenues increased 6% to approximately $1,618,000 for the nine month period ended September 30, 1999 from approximately $1,525,000 for the nine month period ended September 30, 1998 because we had higher average balances of cash and marketable securities during the nine month period ended September 30, 1999 as compared to the same periods of 1998. In May 1998, we sold 25,000 shares of Series 1998/A Preferred Stock. Net proceeds to us, after deducting fees and other expenses of the offering, were approximately $23,618,000. In addition, we received approximately $19,530,000 in the fourth quarter of 1998 from the sale of our OP-1 manufacturing-related assets to Stryker. As discussed further below, in May of 1999 we repurchased all of the outstanding Series 1998/A Preferred Stock for approximately $22,470,000 in cash. We therefore expect interest revenues for the second half of 1999 to be lower than interest revenues from the first half of 1999 and lower than comparable periods in 1998. Our total costs and expenses decreased 51% to approximately $4,184,000 for the three month period ended September 30, 1999, from approximately $8,503,000 for the three month period ended September 30, 1998 and decreased 50% to approximately $12,655,000 for the nine month period ended September 30, 1999 from approximately $25,229,000 for the nine month period ended September 30, 1998. Research and development expenses decreased 58% to approximately $2,689,000 for the three month period ended September 30, 1999 from approximately $6,354,000 for the three month period ended September 30, 1998 and decreased 58% to approximately $8,031,000 for the nine month period ended September 30, 1999 from approximately $18,935,000 for the nine month period ended September 30, 1998. The decrease in research and development expenses was primarily due to the sale of certain of our OP-1 manufacturing rights and facilities to Stryker in November 1998 and the elimination of manufacturing and facility-related expenses with respect thereto. We had previously reported the costs associated with such production of OP-1 as research and development expenses. We anticipate that research and development expenses in the last quarter of 1999 will be substantially less than in the comparable period of 1998. During 1999, our research and development expenses included research relating to a renal disease therapy as part of the Biogen collaboration and research relating to neurological disease therapies and other indications proprietary to us. Stryker initiated a modular PMA filing for the bone graft substitute product in 1998. In June 1999, Stryker stated that they had completed submission of the modular PMA to the FDA, and in July 1999 stated that the FDA has accepted the PMA for filing. Stryker has also submitted for European regulatory review the OP-1 bone graft substitute product. General and administrative expenses decreased 29% to approximately $1,449,000 for the three month period ended September 30, 1999 from approximately $2,048,000 for the three month period ended September 30, 1998 and decreased 25% to approximately $4,509,000 for the nine month period ended September 30, 1999 from approximately $6,035,000 for the nine month period ended September 30, 1998. The decrease was primarily due to a reduction in external legal and other consulting costs and a reduction in personnel-related costs. We anticipate that general and administrative expenses for the last quarter of 1999 will continue at amounts consistent with the nine-month period ended September 30, 1999 but at amounts lower than the comparable period in 1998. 8 9 Interest expense decreased 54% to approximately $47,000 for the three month period ended September 30, 1999 from approximately $100,000 for the three month period ended September 30, 1998 and decreased 56% to approximately $115,000 for the nine month period ended September 30, 1999 from approximately $259,000 for the nine month period ended September 30, 1998. The decrease in interest expense was due to a decrease in our obligations under capital leases. As part of the sale to Stryker of certain of our manufacturing-related assets in November 1998, Stryker assumed $710,000 of our obligations under equipment lease agreements and $1,727,000 of our obligations under a facility capital lease. As a result of the foregoing, we incurred a net loss of $2,995,000 and $8,632,000 for the three month and nine month periods ended September 30, 1999, respectively, compared to a net loss of $5,676,000 and $16,703,000 for the three and nine month periods ended September 30, 1998. Accretion and Repurchase Costs on Series 1998/A Preferred Stock was $2,396,000 for the nine month period ended September 30, 1999, and included the following: $385,000 calculated at the rate of 5% per annum of the stated value of the outstanding Series 1998/A Preferred Stock; $144,000 of accretion of issuance costs related to the sale of Series 1998/A Preferred Stock; and as a result of the repurchase of the Series 1998/A Preferred Stock on May 7, 1999 (see discussion in "Liquidity and Capital Resources" below), a one-time charge of approximately $1,867,000 recorded in the second quarter of 1999 which represents accretion of the Series 1998/A Preferred Stock up to its repurchase amount and accretion of all remaining issuance costs. Accretion and Repurchase Costs on Series 1998/A Preferred Stock was $422,000 and $574,000 for the three and nine month periods ended September 30, 1998, respectively, and included the following: $315,000 and $431,000, respectively, calculated at a rate of 5% per annum of the stated value of the outstanding Series 1998/A Preferred Stock and $107,000 and $143,000, respectively, of accretion of issuance costs related to the sale of the Series 1998/A Preferred Stock. As a result of the repurchase of the Series 1998/A Preferred Stock, there will be no further charges relating to the Series 1998/A Preferred Stock. In computing the net loss applicable to common stockholders for the three and nine month periods ended September 30, 1999 and 1998, accretion and repurchase costs of the Series 1998/A Preferred Stock mentioned above is included. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1999, our principal sources of liquidity consisted of cash, cash equivalents and marketable securities of $23,468,000 and $203,000 remaining on an equipment lease line as discussed below. We have financed our operations primarily through placements of equity securities, revenues received under agreements with collaborative partners, and more recently, manufacturing contracts and the sale of certain of our OP-1 manufacturing rights and facilities to Stryker. We increased our investment in property, plant and equipment to $8,609,000 at September 30, 1999 from $7,702,000 at December 31, 1998. We currently plan to spend approximately $150,000 during the last quarter of 1999 on leasehold improvements and equipment purchases to upgrade our research and development capabilities. In May of 1999, we extended a master lease agreement, which was originally entered into in October 1997, that provides for the sale and leaseback or lease of up to $750,000 of laboratory and office equipment and expires on December 31, 1999. At September 30, 1999, $203,000 was available under this lease agreement. On May 27, 1998, we completed a private placement with three institutional investors for the sale of 25,000 shares of Series 1998/A Preferred Stock, with a stated value of $1,000 per share resulting in net proceeds of approximately $23,618,000 after expenses. Since issuance of the Series 1998/A Preferred Stock, the holders converted a total of 4,514 shares of Series 1998/A Preferred Stock into 2,043,765 shares of Common Stock through May 7, 1999. On May 7, 1999, we repurchased 20,486 shares, which represented all of the outstanding Series 1998/A Preferred Stock following final conversions, for approximately $22,470,000 in cash. As a result of this transaction, the Series 1998/A Preferred Stock has been retired and there will be no subsequent conversions into Common Stock. 9 10 In November 1998, we sold certain of our OP-1 manufacturing rights and facilities to Stryker for total proceeds of approximately $19,530,000. We expect that under the terms of the sale, we will receive increased royalties on Stryker products, if approved for commercial sale, in lieu of the manufacturing revenues anticipated under the prior agreement. Approximately $267,000 of accrued costs associated with such sale remain to be paid at September 30, 1999. These accruals principally represent future cash outlays for employee termination costs. In prior years, we had received significant revenue from Stryker for research support and the supply of OP-1. As a result of the sale of certain of our OP-1 manufacturing rights and facilities to Stryker, we have received significantly reduced research funding and manufacturing revenue during 1999. In December 1998, we signed the Biogen Amendment Agreement. Under the amended agreement, Biogen paid $3,000,000 to fund our research in 1999 for development of OP-1 as a therapy for chronic renal failure. Biogen retains an option through December 1999 to resume responsibility for development of OP-1 as a therapy for chronic renal failure. If Biogen chooses not to exercise its option or the option lapses, Biogen has no further obligation to provide funds to us. We anticipate that our existing capital resources should enable us to maintain our current and planned operations through the end of fiscal year 2000. We expect to incur substantial additional research and development and other costs, including costs related to preclinical studies and clinical trials. Our ability to continue funding planned operations is dependent upon our ability to generate sufficient cash flow from royalties on Stryker products, if approved for commercial sale, from collaborative arrangements and from additional funds through equity or debt financings, or from other sources of financing, as may be required. We are seeking additional collaborative arrangements and also expect to raise funds through one or more financing transactions, if conditions permit. Over the longer term, because of our significant long-term capital requirements, we intend to raise funds when conditions are favorable, even if we do not have an immediate need for additional capital at such time. If Stryker products are not approved for commercial sale and we do not receive royalties from Stryker and/or if substantial additional funding is not available, our business will be materially and adversely affected. NEW ACCOUNTING STANDARDS In June 1998, the FASB released SFAS No. 133, which the Company will be required to adopt effective January 1, 2001. SFAS No. 133 establishes standards for reporting and accounting for derivative instruments, and conforms the requirements for treatment of hedging activities across the different types of exposures hedged. The Company has not yet completed its evaluation of SFAS No. 133, and is therefore unable to disclose the impact adoption will have on its consolidated financial position or results of operations. YEAR 2000 COMPLIANCE Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. Beginning in the Year 2000, these date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, by the end of 1999, computer systems and/or software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. If they are not, it may result in system failure or miscalculations causing disruption of operations. We have developed a plan to address the Year 2000 issues. In 1998, we conducted a review of our computer systems to identify those areas that could be affected by the Year 2000 issue. We also completed implementation of a new financial accounting system that the vendor designed to properly process transactions which could be impacted by the Year 2000 problem. We presently believe that, with the completed upgrades to existing hardware and software systems, the Year 2000 problem will not pose significant operational problems. We have also communicated with our significant suppliers and customers to determine the progress such suppliers and customers are making in remediating their own Year 2000 issues. We are requiring that such significant suppliers and customers certify that those products and services that are used in our operations are Year 2000 compliant. If such upgrades are not made, are not completed timely, or if any of our suppliers or customers do not successfully deal with the Year 2000 issue, the Year 2000 issue could have a material impact on our operations. We could experience delays in receiving or sending our material and products that 10 11 would increase our costs and that could cause us to lose research data and certain other business and even customers and collaborators could subject us to claims for damages. Problems with the Year 2000 issue could also result in delays in invoicing our collaborators, partners and customers or in us receiving payments from them. In addition, our research and development efforts, which rely on the storage and retrieval of electronic information, could be interrupted resulting in the loss of current collaborations or inventory storage, and the impairment of our ability to enter into new collaborations and vendor agreements. The severity of these possible problems would depend on the nature of the problem and how quickly it could be corrected or an alternative implemented, which is unknown at this time. In the extreme, such problems could bring our operations to a standstill. While management has not specifically determined the costs associated with our Year 2000 readiness efforts, monitoring and managing the Year 2000 issue will result in additional direct and indirect costs to us. Direct costs include potential charges by third-party software vendors for product enhancements, costs involved in testing software products for Year 2000 compliance and any resulting costs for developing and implementing contingency plans for critical software products which are not enhanced. Indirect costs will principally consist of the time devoted by existing employees in monitoring software vendor progress, testing enhanced software products and implementing any necessary contingency plans. Such costs have not been material to date. Both direct and indirect costs of addressing the Year 2000 issue will be charged to earnings as incurred. To date, our Year 2000 remediation costs have not been material to our financial position or results of operations and we believe that future costs to complete such remediation will not be material to our financial position or results of operations. We have substantially completed the remediation of our Year 2000 issues and have developed a contingency plan to address any unresolved Year 2000 issues. Some risks of the Year 2000 issue, however, are beyond our control and the control of our suppliers and customers. For example, no preparations or contingency plan will protect us from a downturn in economic activity caused by the possible ripple effect throughout the entire economy caused by the Year 2000 issue. CAUTIONARY FACTORS WITH RESPECT TO FORWARD-LOOKING STATEMENTS This Form 10-Q contains forward-looking statements which are based on management's current expectations and which involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements. We caution investors that there is no guarantee that the 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 reliance on current and prospective collaborative partners to supply funds for research and development and to commercialize our products; - - Uncertainty as to timing of and our ability to commercialize our products; - - Our reliance on our lead product candidate; - - Our lack of control over the clinical or regulatory progress of several applications for our products, which are controlled by our collaborative partners; - - Our reliance on programs in various stages of preclinical development and early stage research; - - Our reliance on key management personnel; - - Intense competition related to the research and development of morphogenic and other proteins for various applications and therapies and the possibility that others may discover or develop, and we may not be able to gain rights with respect to, the technology necessary to commercialize our products; - - Our lack of development, commercial manufacturing, marketing and sales experience and the risk that any products that we develop may not be able to be marketed at acceptable prices or receive commercial acceptance in the markets that we expect to target; - - Uncertainty regarding the effect on our operations of the Year 2000 issue; - - Uncertainty related to market conditions affecting the biotechnology industry; - - Uncertainty as to the extent of future government regulation of our business; - - Our lack of control over governmental approvals on our lead product; - - Uncertainty as to whether there will exist adequate reimbursement for our products from governments, private health insurers and other organizations. As a result, our future development and commercialization efforts involve a high degree of risk. 11 12 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ================================================================================ We invest cash balances in excess of operating requirements in short-term marketable securities, generally corporate bonds and notes with minimum rating of A and United States Government and agency instruments. The maturities of these instruments range from one to twenty-nine months, with a weighted average maturity of less than one year. All marketable securities are considered available for sale. At December 31, 1998, the fair market value of these securities amounted to $40,197,000, with unrealized gains of $105,000 included as a component of stockholders' equity. If interest rates were to increase rapidly by 5%, an event we consider unlikely, the carrying value of the securities portfolio could decline by approximately $1,400,000. However, because of the quality of the investment portfolio and the short term nature of the marketable securities, we do not believe that the principal amount of the securities would be impaired and, therefore, no loss would be ultimately recognized in the statement of operations. 12 13 PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Not Applicable. ITEM 2. CHANGES IN SECURITIES. (a) Not Applicable. (b) Not Applicable. (c) Not Applicable. (d) Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not Applicable. ITEM 5. OTHER INFORMATION. Not Applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits.
Exhibit Number Description ------- ----------- 27 Financial Data Schedule.
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the three month period ended September 30, 1999. 13 14 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, in Hopkinton, Massachusetts, on November 10, 1999. CREATIVE BIOMOLECULES, INC. By: /s/ STEVEN L. BASTA -------------------------------- Steven L. Basta Vice President Finance and Business Development 14 15 EXHIBIT INDEX
Exhibit Number Description ------- ----------- 27 Financial Data Schedule
15 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1999 AND FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999. 1 U.S. DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1 2,195,302 21,272,748 122,158 0 15,004 23,789,342 8,609,027 (6,313,582) 31,524,730 4,738,859 1,100,359 0 0 361,293 25,324,219 31,524,730 0 4,023,337 0 0 12,540,234 0 114,780 (8,631,677) 0 (8,631,677) 0 0 0 (8,631,677) (0.31) (0.31)
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