<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
---------------------------------
Date of Report (Date of earliest event reported): DECEMBER 31, 1995
CREATIVE BIOMOLECULES, INC.
---------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-19910 94-2786743
-------- ------- ----------
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification No.)
incorporation)
45 SOUTH STREET, HOPKINTON, MASSACHUSETTS 01748
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (508) 435-9001
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ITEM 5. OTHER EVENTS.
In January 1996, the Board of Directors voted to change the
Registrant's fiscal year end from September 30 to December 31, effective with
the three months ended December 31, 1995. A Current Report on Form 8-K reporting
such change was filed with the Securities and Exchange Commission on January 26,
1996. As a result of this change, and in order to reflect on a more current
basis the audited financial statements of the Registrant, the Registrant has (i)
updated the discussion under "Item 6. Selected Financial Data" contained in the
Registrant's Annual Report on Form 10-K, (ii) updated the discussion under "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained in the Registrant's Annual Report on Form 10-K, and (iii)
updated the discussion under "Item 8. Financial Statements and Supplementary
Data" contained in the Registrant's Annual Report on Form 10-K. This updated
information is set forth below.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
The selected consolidated financial data set forth below with respect to
the Company's consolidated statements of operations for the three months ended
December 31, 1995 and for each of the three years in the period ended September
30, 1995, and with respect to the consolidated balance sheets as of December 31,
1995 and September 30, 1995 and 1994, are derived from the consolidated
financial statements that have been audited by Deloitte & Touche LLP,
independent auditors, which are included elsewhere in this Form 8-K. The
consolidated statement of operations data for the years ended September 30, 1992
and 1991, and the consolidated balance sheet data as of September 30, 1993, 1992
and 1991, are derived from audited consolidated financial statements not
included herein. The unaudited consolidated financial data for the three months
ended December 31, 1994 have been prepared on a basis consistent with the
audited consolidated financial statements and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the results of operations for the period presented.
The data set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related Notes included herein.
<CAPTION>
THREE MONTHS
ENDED
DECEMBER 31, YEARS ENDED SEPTEMBER 30,
---------------------- ----------------------------------------------------------
1995(1) 1994 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Unaudited)
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Revenues:
Research and development contracts .... $ 971 $ 2,373 $ 5,824 $ 3,652 $ 1,576 $ 4,469 $ 5,235
Manufacturing contracts ............... 770 559 6,159 1,411 461 -- --
License fees and royalties ............ 2 500 544 7 30 -- --
Product sales ......................... -- -- -- 16 35 56 77
Interest .............................. 261 93 649 580 549 472 80
Other ................................. -- 4 53 141 3 5 6
-------- -------- -------- -------- -------- -------- --------
Total revenues ...................... 2,004 3,529 13,229 5,807 2,654 5,002 5,398
-------- -------- -------- -------- -------- -------- --------
Cost and expenses:
Research and development .............. 3,194 3,823 11,688 17,680 12,898 7,489 5,805
Cost of manufacturing contracts ....... 715 537 5,330 1,389 439 -- --
Cost of product sales ................. -- -- -- 3 6 13 13
Marketing, general and administrative . 1,254 930 3,604 4,794 3,121 3,292 2,105
Interest .............................. 61 52 229 200 209 200 207
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses ............ 5,224 5,342 20,851 24,066 16,673 10,994 8,130
-------- -------- -------- -------- -------- -------- --------
Net loss ................................ $ (3,220) $ (1,813) $ (7,622) $(18,259) $(14,019) $ (5,992) $ (2,732)
======== ======== ======== ======== ======== ======== ========
Net loss per common share(2) ............ $ (0.11) $ (0.09) $ (0.37) $ (0.95) $ (0.94) $ (0.55) $ (0.41)
======== ======== ======== ======== ======== ======== ========
Weighted average number of
common shares outstanding(2) .......... 28,120 19,571 20,431 19,212 14,855 10,812 6,743
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, ----------------------------------------------------
1995(1) 1995 1994 1993 1992 1991
------------ ---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents
and marketable securities............... $ 20,002 $ 10,486 $ 5,423 $ 25,255 $ 6,739 $ 496
Working capital (deficiency)............. 21,743 11,651 4,927 23,940 5,015 (1,435)
Total assets............................. 41,341 32,192 27,470 45,326 12,235 4,542
Capital lease obligations,
less current portion.................... 1,711 1,713 1,750 1,798 216 764
Accumulated deficit...................... (69,198) (65,978) (58,356) (40,098) (26,079) (16,979)
Total stockholders' equity............... 37,829 28,269 22,807 40,675 9,676 1,365
<FN>
- ----------
(1) In January 1996, the Company changed its fiscal year end from September 30
to December 31, effective with the three month period ended December 31,
1995.
(2) See Note 1 of Notes to Consolidated Financial Statements for an explanation
of the computation of net loss per common share.
</TABLE>
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Consolidated Financial Statements and related Notes contained elsewhere in
this Form 8-K.
GENERAL
To date, most of the Company's revenues have been derived from research and
development payments and license fees under agreements with collaborative
partners. Beginning in the year ended September 30, 1995, a significant portion
of the Company's revenues also were derived from contract manufacturing. The
Company anticipates that over the next several years its revenues will be
derived primarily from such collaborative agreements and from contract
manufacturing. The Company has been unprofitable since its inception and expects
to incur additional operating losses over the next several years.
The Company's research agreements with collaborative partners have
typically provided for the partial or complete funding of research and
development for specified projects and royalties payable to the Company in
exchange for licenses to market the resulting products. The Company is presently
a party to one major research collaboration with Stryker Corporation
("Stryker") to develop products for orthopedic reconstruction. Under the
research portion of the collaboration with Stryker, the Company supplies an OP-1
product to Stryker for clinical trials and other uses and provides clinical
support and performs research work pursuant to work plans established
periodically by the two companies. The current work plan establishes research
objectives and funding through April 1996. The two companies are currently
negotiating the next phase of research objectives and funding. Although the
Company is seeking and in the future may seek to enter into collaborative
arrangements with respect to certain other projects, there can be no assurance
that the Company 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.
The Company's manufacturing contracts provide for technical collaboration
and manufacturing for third parties at the Company's manufacturing facility in
Lebanon, New Hampshire. The Company is presently a party to a manufacturing
contract with Biogen, Inc. ("Biogen") to produce several of Biogen's
protein-based therapeutic candidates through December 1997 for use in Biogen's
clinical trials. The Company agreed to provide Biogen with all available cell
culture and bacterial fermentation capacity within the manufacturing facility,
and Biogen agreed to pay the Company's costs associated with such capacity, for
approximately six months in each of the three years beginning in January 1995.
Although the Company is seeking additional manufacturing contracts for available
cell culture and bacterial fermentation capacity, there can be no assurance that
the Company will be able to obtain such contracts on acceptable terms.
Revenue is earned and recognized 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. The Company's results of operations vary significantly from year to
year and quarter to quarter and depend on, among other factors, the timing of
contract manufacturing activities and the timing of payments made by
collaborative partners. The timing of the Company's contract revenues may not
match the timing of the Company's 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 the Company's development
expenses for such product.
In January 1996, the Board of Directors voted to change the Company's
fiscal year end from September 30 to December 31, effective the three months
ended December 31, 1995.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1995 AND 1994. The Company's total revenues
for the three month periods ended December 31, 1995 and 1994 were $2,004,000 and
$3,529,000, respectively. Research and development contract revenues decreased
59% to $971,000 for the three month period ended December 31, 1995 from
$2,373,000 for the three month period ended December 31, 1994. This decrease is
primarily due to fluctuations in research activities for Stryker, as well as
decreased funding for other research initiatives of the Company. Manufacturing
contract revenues reflect manufacturing principally for Biogen conducted at the
Company's manufacturing facility in Lebanon, New Hampshire. License fees and
royalties include revenue from licensing patent rights and know-how associated
with certain protein technology which is not central to the Company's business.
Interest revenue increased 181% to $261,000 for the three month period ended
December 31, 1995 from $93,000 for the three month period ended December 31,
1994. The increase is due to an increase in average funds available for
investment resulting from a self-managed public offering in October 1995 of
3,000,000 shares of common stock at a price of $4.25 per share.
The Company's total costs and expenses for the three month periods ended
December 31, 1995 and 1994 were $5,224,000 and $5,342,000, respectively.
Research and development expenses decreased 16% to $3,194,000 for the three
month period ended December 31, 1995 from $3,823,000 for the three month period
ended December 31, 1994. In September 1995, the Company commenced a second pilot
clinical trial to further evaluate an OP-1 product for dentin regeneration. The
costs of such trial began to be incurred in September 1995 and are expected to
continue through the nine months ending September 30, 1996. This increase in
costs is offset by a decrease in research and development expenses at the
Company's manufacturing facility in Lebanon, New Hampshire. From the date of
acquisition of the manufacturing facility on March 15, 1993 through December 31,
1994, the facility was primarily used for development activities of the Company;
therefore, facility operating costs related to development activities were
reported as research and development expenses.
Cost of manufacturing contracts includes the costs associated with
third-party manufacturing conducted at the manufacturing facility in Lebanon,
New Hampshire. Cost of manufacturing contracts increased 33% to $715,000 for the
three month period ended December 31, 1995 from $537,000 for the three month
period ended December 31, 1994. The increase is primarily due to contract
manufacturing for Biogen. The Company began production for Biogen in January
1995.
Marketing, general and administrative expense increased 35% to $1,254,000
for the three month period ended December 31, 1995 from $930,000 for the three
month period ended December 31, 1994. The increase is primarily due to executive
relocation costs.
As a result of the foregoing, the Company's net loss increased 78% to
$3,220,000 for the three months ended December 31, 1995 from $1,813,000 for the
three months ended December 31, 1994.
YEARS ENDED SEPTEMBER 30, 1995, 1994 AND 1993. The Company's revenues in
the years ended September 30, 1995, 1994 and 1993 were $13,229,000, $5,807,000
and $2,654,000, respectively. Research and development contract revenues
increased 132% from $1,576,000 in the year ended September 30, 1993 to
$3,652,000 in the year ended September 30, 1994 and increased 59% to $5,824,000
in the year ended September 30, 1995. These increases are primarily due to
greater research funding from Stryker. Manufacturing contract revenues reflect
manufacturing, principally for Biogen beginning in the year ended September 30,
1995, performed at the Company's manufacturing facility in Lebanon, New
Hampshire. Product sales are sales of proteins to the research market. The
Company does not anticipate significant product sales, if any, in fiscal 1996.
License fees and royalties revenue include revenue from licensing patent rights
and know-how associated with certain protein technology which is not central to
the Company's business. Interest increased 6% from $549,000 in the year ended
September 30, 1993 to $580,000 in the year ended September 30, 1994 and
increased 12% to $649,000 in the year ended September 30, 1995. The increase
from the year ended September 30, 1993 to the year ended September 30, 1994 was
due to the increased cash balances resulting from a private placement of the
Company's Common Stock in
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September 1993 and interest from a $1,763,286 stockholder note receivable. The
increase from the year ended September 30, 1994 to the year ended September 30,
1995 was due to increased cash balances resulting from a private placement of
the Company's Series Preferred Stock during the year ended September 30, 1995.
Other revenue is primarily non-recurring gains from the sale of certain
manufacturing equipment.
The Company's total costs and expenses, consisting primarily of research
and development expenses, increased 44% from $16,673,000 in the year ended
September 30, 1993 to $24,066,000 in the year ended September 30, 1994 and
decreased 13% to $20,851,000 in the year ended September 30, 1995.
Research and development expenses increased 37% from $12,898,000 in the
year ended September 30, 1993 to $17,680,000 in the year ended September 30,
1994 and decreased 34% to $11,688,000 in the year ended September 30, 1995.
Research and development expenses for the year ended September 30, 1993 included
$2,267,000 of operating expenses of the manufacturing facility from the date of
acquisition of the facility in March 1993. In addition, in mid-1993, the Company
received approval from the FDA to initiate human clinical investigation for the
OP-1 dentin regeneration product. The expenses related to the initial pilot
clinical trial began in the fourth quarter of the year ended September 30, 1993
and were completed in the year ended September 30, 1994. Research and
development expenses for the year ended September 30, 1994 included $4,813,000
of operating expenses of the manufacturing facility. The increase from the year
ended September 30, 1993 to the year ended September 30, 1994 also was due to
increases in staffing and recruiting costs as the Company continued to expand
its research, product development, manufacturing and quality control/quality
assurance staffs. Increased purchases of laboratory supplies and services, as
well as the Company's expenditures on academic collaborations and subcontracted
research related to technology and product development, also contributed to the
increase in expenses.
Substantially all of the cost of operating the manufacturing facility from
January 1995 through mid-September 1995 is reported as cost of contract
manufacturing, contributing to the decrease in research and development expenses
from the year ended September 30, 1994 to the year ended September 30, 1995.
From the date of acquisition of the manufacturing facility in March 1993 through
December 1994, the facility was primarily used for development activities by the
Company and therefore the facility operating costs related to such development
activities were reported as research and development expenses for such periods.
As discussed below, commencing in January 1995, facility operating costs were
recorded as cost of manufacturing contracts. The decrease in research and
development expenses from the year ended September 30, 1994 to the year ended
September 30, 1995 also was due to a 20% staff reduction in the Company's
Massachusetts operations implemented in September 1994 and a corresponding
reduction in purchases of laboratory supplies and services.
Cost of manufacturing contracts includes the costs associated with the
manufacturing for third parties conducted at the Company's manufacturing
facility in Lebanon, New Hampshire. Cost of manufacturing contracts increased
significantly in the year ended September 30, 1995, as the Company began
production for Biogen in January 1995.
Marketing, general and administrative expenses increased 54% from
$3,121,000 in the year ended September 30, 1993 to $4,794,000 in the year ended
September 30, 1994 and decreased 25% to $3,604,000 in the year ended September
30, 1995. The increase from the year ended September 30, 1993 to the year ended
September 30, 1994 was primarily due to increases in staffing and recruiting
costs as the Company built its administrative and corporate development
organization. Increased purchases of supplies and services contributed to the
increase in expenses. The increase also was due to costs incurred in marketing
the Company's contract manufacturing services and costs incurred to meet the
Company's reporting and other obligations as a public company. The decrease from
the year ended September 30, 1994 to the year ended September 30, 1995 was due
to a 20% staff reduction in the Company's Massachusetts operations implemented
in September 1994 and a corresponding reduction in purchases of supplies and
services and a reduction in recruiting and relocation expenses.
Interest expense decreased 4% from $209,000 in the year ended September 30,
1993 to $200,000 in the year ended September 30, 1994 and increased 15% to
$229,000 in the year ended September 30, 1995. The decrease
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from the year ended September 30, 1993 to the year ended September 30, 1994 was
due to the repayment of obligations under capital leases. The increase from the
year ended September 30, 1994 to the year ended September 30, 1995 was due to an
increase in interest rates on capital lease obligations, partially offset by the
repayment of obligations under capital leases.
As a result of the foregoing, the Company incurred a net loss of $7,622,000
in the year ended September 30, 1995 compared to a net loss of $18,259,000 in
the year ended September 30, 1994 and a net loss of $14,019,000 in the year
ended September 30, 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations primarily through placements of
equity securities and revenues received under agreements with collaborative
partners. Since inception, sales of equity securities have raised approximately
$99,197,000 in gross proceeds, including approximately $12,750,000 in a
self-managed public offering completed in October 1995, and the Company has
earned approximately $57,308,000 in gross revenues.
The Company increased its investment in property, plant and equipment to
$24,680,000 at December 31, 1995 from $24,633,000 at September 30, 1995 and
$24,187,000 at September 30, 1994. The Company plans to spend approximately $3.2
million in the year ended December 31, 1996 in leasehold improvements and
equipment purchases to increase the capacity and flexibility in operating the
manufacturing facility and approximately $1.0 million in equipment purchases and
leasehold improvements to expand the Company's research, development and
manufacturing capabilities. In addition, as part of a manufacturing contract
with Biogen, Biogen is financing the construction of leasehold improvements to
the Company's manufacturing facility at an estimated total cost of $2.5 million
and is installing and financing for the Company certain equipment with an
estimated total cost of $1.5 million, as discussed further below.
The Company's collaborative agreements with Stryker provide for research
payments to the Company and royalty payments to the nonseller from sales of any
OP-1 products. The Company also has the exclusive right to supply Stryker's
worldwide commercial requirements for OP-1 products for use in orthopedic
reconstruction. Under the research portion of the collaboration, the Company
supplies OP-1 products to Stryker for clinical trials and other uses and
provides clinical support and performs research work pursuant to work plans
established periodically by the two companies. The current work plan establishes
research objectives and funding through April 1996. The two companies are
currently negotiating the next phase of research objectives and funding. In
January 1996, Stryker completed target patient accrual in its pivotal clinical
trial to evaluate the use of an OP-1 bone regeneration product candidate as a
bone graft substitute. This pivotal clinical trial focused on regeneration of
bone tissue in non-union fractures of the tibia. In October 1995, the FDA
approved a supplemental treatment arm of the pivotal trial, allowing Stryker to
expand the study to test the Company's OP-1 bone regeneration product candidate
for the treatment of all long bone non-union fractures. In addition to the U.S.
pivotal trial, Stryker initiated European clinical studies in several countries
under physician sponsorship in acute fractures, talocalcaneal fractures and
fibula defects. Treatment in these European studies is expected to be completed
in 1996. Stryker is expected to initiate further clinical testing of OP-1 bone
regeneration products in a number of countries for an increasing array of
orthopedic reconstruction indications.
In September 1994, the Company signed a three-year manufacturing contract
with Biogen to produce in the Company's manufacturing facility in Lebanon, New
Hampshire several of Biogen's protein-based therapeutic candidates for use in
Biogen's clinical trials. The contract covers the period from January 1995
through December 1997. The Company expects to realize up to $18 million in
contract manufacturing revenue from Biogen during the three-year period, of
which approximately $6.8 million had been recognized through December 1995. To
enable the Company to meet its obligations under the manufacturing contract,
Biogen is financing and constructing a 7,000 square foot addition to the present
facility for cGMP production using bacterial fermentation at an estimated total
cost of $2.5 million. The Company agreed to reimburse Biogen for the
construction costs and leasehold improvements at the end of the lease term at an
amount equal to Biogen's construction costs less $300,000 and less
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all accumulated depreciation. Biogen also agreed to lease equipment to the
Company for the operation of such portion of the facility and for cGMP
production using bacterial fermentation by the Company at an estimated total
cost of $1.5 million, as provided in an equipment lease agreement. The Company
has the option to purchase the equipment at the end of the lease term for an
amount equal to its then fair market value. The Company anticipates that
construction of the building addition and leasehold improvements will be
completed by mid-1996.
The Company anticipates that its existing capital resources should enable
it to maintain its current and planned operations through late 1997. The Company
expects to incur substantial additional research and development and other
costs, including costs related to preclinical studies and clinical trials. The
Company's ability to continue funding its planned operations beyond late 1997 is
dependent upon its ability to generate sufficient cash flow from collaborative
arrangements and manufacturing contracts, and to obtain additional funds through
equity or debt financings, or from other sources of financing, as may be
required. The Company also is seeking additional collaborative arrangements. It
also expects to raise funds through one or more financing transactions, as
conditions permit, and is investigating the feasibility of raising capital
through the sale/leaseback or debt financing of some of its capital assets. Over
the longer term, because of the Company's significant long-term capital
requirements, the Company intends to raise funds when conditions are favorable,
even if it does not have an immediate need for additional capital at such time.
If substantial additional funding is not available, the Company's business will
be materially and adversely affected.
CHANGE IN ACCOUNTING PRINCIPLES
The Company plans to adopt Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-lived Assets and
Long-lived Assets to Be Disposed Of" in 1996. The Company does not expect that
SFAS No. 121 will have a significant effect on the Company's consolidated
financial statements when adopted in 1996.
The Company also plans to adopt SFAS No. 123, "Accounting for Stock-Based
Compensation" in 1996. The Company has not yet determined the effect, if any,
SFAS No. 123 will have on the Company's consolidated financial statements when
adopted in 1996.
CAUTIONARY FACTORS WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This Form 8-K contains forward-looking statements which are based on
management's current expectations and which involve risks and uncertainties. The
Company's actual results may differ significantly from the results discussed in
the forward-looking statements. The Company cautions investors that there can be
no assurance 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:
uncertainty as to timing of and the Company's ability to commercialize its
products; the Company's reliance on its lead product candidate and the Company's
lack of control over the clinical progress of one of its primary applications
for such products, which is controlled by one of the Company's collaborative
partners; the Company's reliance on current and prospective collaborative
partners to supply funds for research and development and to commercialize its
products; 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 the Company may not be able
to gain rights with respect to, the technology necessary to commercialize its
products; the Company's lack of experience in commercial manufacturing and
unproven ability to manufacture products on a large scale; the Company's lack of
marketing and sales experience and the risk that any products that the Company
develops may not be able to be marketed at acceptable prices or receive
commercial acceptance in the markets that the Company expects to target;
uncertainty as to whether there will exist adequate reimbursement for the
Company's products from government, private health insurers and other
organizations; and uncertainties as to the extent of future government
regulation of the Company's business. As a result, the Company's future
development efforts involve a high degree of risk.
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CREATIVE BIOMOLECULES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Independent Auditors' Report.......................................... 10
Consolidated Balance Sheets........................................... 11
Consolidated Statements of Operations................................. 12
Consolidated Statements of Stockholders' Equity....................... 13
Consolidated Statements of Cash Flows................................. 14
Notes to Consolidated Financial Statements............................ 15
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INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Creative BioMolecules, Inc.
We have audited the accompanying consolidated balance sheets of Creative
BioMolecules, Inc. and subsidiary as of December 31, 1995 and September 30, 1995
and 1994, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the three month period ended December 31, 1995 and
for each of the three years in the period ended September 30, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts used and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company and its subsidiary at
December 31, 1995 and September 30, 1995 and 1994, and the results of their
operations and their cash flows for the three month period ended December 31,
1995 and for each of the three years in the period ended September 30, 1995 in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 3, 1996
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CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
- ---------------------------
<TABLE>
CONSOLIDATED BALANCE SHEETS
- ---------------------------
<CAPTION>
December 31, September 30,
------------------------------
ASSETS 1995 1995 1994
- ------ ------------- ---- ----
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 11,917,779 $ 4,427,229 $ 2,657,416
Marketable securities 8,084,269 6,058,894 2,765,156
Accounts receivable 2,818,618 2,562,927 1,463,981
Inventory 562,290 586,095 699,218
Prepaid expenses and other 149,105 212,955 242,207
------------ ------------ ------------
Total current assets 23,532,061 13,848,100 7,827,978
------------ ------------ ------------
PROPERTY, PLANT AND EQUIPMENT - net 14,736,306 15,273,710 17,205,807
------------ ------------ ------------
OTHER ASSETS:
Patents and licensed technology - net 382,703 496,500 540,434
Deferred patent application costs - net 2,431,298 2,315,244 1,625,189
Deposits and other 258,473 258,473 270,794
------------ ------------ ------------
Total other assets 3,072,474 3,070,217 2,436,417
------------ ------------ ------------
TOTAL $ 41,340,841 $ 32,192,027 $ 27,470,202
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Lease obligations - current portion $ 42,567 $ 63,519 $ 155,744
Accounts payable 738,100 722,954 1,436,908
Accrued liabilities 512,446 488,484 428,506
Accrued compensation 495,633 922,111 732,284
Deferred contract revenue 147,920
------------ ------------ ------------
Total current liabilities 1,788,746 2,197,068 2,901,362
------------ ------------ ------------
LEASE OBLIGATIONS 1,710,910 1,713,169 1,749,719
------------ ------------ ------------
DEFERRED COMPENSATION - Officers 12,500 12,500 12,500
------------ ------------ ------------
COMMITMENTS (Notes 4, 5 and 9)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value,
10,000,000 shares authorized, none issued
Common stock, $.01 par value, 50,000,000 shares
authorized, 28,894,996 shares, 25,832,654 shares
and 19,534,818 shares issued and outstanding 288,950 258,327 195,348
Common stock payable 1,736,586 1,736,586 1,736,586
Additional paid-in capital 105,001,625 92,252,751 81,038,434
Accumulated deficit (69,198,476) (65,978,374) (58,356,307)
Less stockholders' notes receivable (1,807,440)
------------ ------------ ------------
Total stockholders' equity 37,828,685 28,269,290 22,806,621
------------ ------------ ------------
TOTAL $ 41,340,841 $ 32,192,027 $ 27,470,202
============ ============ ============
</TABLE>
See notes to consolidated financial statements
11
<PAGE> 12
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
- ---------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
- -------------------------------------
<CAPTION>
Three Months
Ended Year Ended September 30,
December 31, ---------------------------------------------
1995 1995 1994 1993
------------ ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Research and development contracts $ 970,806 $ 5,824,344 $ 3,651,949 $ 1,576,174
Manufacturing contracts 770,133 6,158,574 1,411,262 460,515
License fees and royalties 2,157 544,000 7,500 30,000
Product sales 15,600 34,537
Interest 260,953 648,602 580,160 549,007
Other 349 53,470 140,757 3,472
------------ ------------ ------------ ------------
Total revenues 2,004,398 13,228,990 5,807,228 2,653,705
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Research and development 3,193,979 11,687,847 17,679,692 12,898,203
Cost of manufacturing contracts 715,171 5,329,779 1,388,577 438,910
Cost of product sales 3,494 5,874
Marketing, general and administrative 1,254,566 3,603,954 4,793,508 3,120,957
Interest 60,784 229,477 200,563 208,573
------------ ------------ ------------ ------------
Total costs and expenses 5,224,500 20,851,057 24,065,834 16,672,517
------------ ------------ ------------ ------------
NET LOSS $ (3,220,102) $ (7,622,067) $(18,258,606) $(14,018,812)
============ ============ ============ ============
NET LOSS PER COMMON SHARE $ (0.11) $ (0.37) $ (0.95) $ (0.94)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER
OF COMMON AND
COMMON EQUIVALENT
SHARES OUTSTANDING 28,120,190 20,430,900 19,212,477 14,855,368
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
12
<PAGE> 13
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
- ------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- -----------------------------------------------
<CAPTION>
Dividends
Convertible Payable on
Preferred Stock Convertible Common Stock Common
------------------ Preferred ------------------ Stock
Shares Amount Stock Shares Amount Payable
------ ------ ----------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1992 9,426,738 $ 94,267 $ 2,728,930 1,792,279 $ 17,923
Dividends paid (2,728,930) 545,786 5,458
Conversion of preferred stock (9,426,738) (94,267) 9,426,738 94,267
Issuance of common stock in connection with underwritten
public offering (net of costs of $2,572,058) 3,450,000 34,500
Forgiveness of notes receivable
Issuance of common stock and common stock payable in
connection with asset purchase 394,890 3,949 $ 5,785,131
Issuance of common stock in connection with private
placement (net of costs of $1,239,867) 2,900,000 29,000
Issuance of common stock 66,273 663
Net loss
--------- -------- ----------- ---------- --------- -----------
BALANCE, SEPTEMBER 30, 1993 0 0 0 18,575,966 185,760 5,785,131
Repayment of notes receivable
Forgiveness of notes receivable
Issuance of common stock in connection with asset purchase 394,890 3,949 (4,048,545)
Issuance of common stock for note receivable 467,715 4,677
Issuance of common stock 96,247 962
Net loss
--------- -------- ----------- ---------- --------- -----------
BALANCE, SEPTEMBER 30, 1994 0 0 0 19,534,818 195,348 1,736,586
Forgiveness of notes receivable
Issuance of common stock for note receivable 66,271 663
Repayment of notes receivable
Issuance of Series 1994/A Preferred Stock in connection
with private placement (net of costs $269,064) 1,130,000 11,300
Issuance of common stock in connection with asset purchase 394,890 3,949
Conversion of Series 1994/A Preferred Stock into
common stock (1,130,000) (11,300) 5,650,000 56,500
Issuance of common stock 186,675 1,867
Net loss
--------- -------- ----------- ---------- --------- -----------
BALANCE, SEPTEMBER 30, 1995 0 0 0 25,832,654 258,327 1,736,586
Issuance of common stock in connection with self-managed
public offering of common stock (net of costs
of $108,026) 3,000,000 30,000
Issuance of common stock 62,342 623
Net loss
--------- -------- ----------- ---------- --------- -----------
BALANCE, DECEMBER 31, 1995 $ 0 $ 0 0 28,894,996 288,950 $ 1,736,586
========= ======== =========== ========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Additional Stockholders'
Paid-In Accumulated Notes
Capital Deficit Receivable
------- ------- -------------
<S> <C> <C> <C>
BALANCE, SEPTEMBER 30, 1992 $ 33,070,134 $(26,078,889) $ (156,646)
Dividends paid 2,723,472
Conversion of preferred stock
Issuance of common stock in connection with underwritten
public offering (net of costs of $2,572,058) 21,543,442
Forgiveness of notes receivable 44,155
Issuance of common stock and common stock payable in
connection with asset purchase 2,710,920
Issuance of common stock in connection with private
placement (net of costs of $1,239,867) 14,681,133
Issuance of common stock 184,955
Net loss (14,018,812)
------------ ------------ ----------
BALANCE, SEPTEMBER 30, 1993 74,914,056 (40,097,701) (112,491)
Repayment of notes receivable 24,183
Forgiveness of notes receivable 44,154
Issuance of common stock in connection with asset purchase 4,044,596
Issuance of common stock for note receivable 1,763,286 (1,763,286)
Issuance of common stock 316,496
Net loss (18,258,606)
------------ ------------ ----------
BALANCE, SEPTEMBER 30, 1994 81,038,434 (58,356,307) (1,807,440)
Forgiveness of notes receivable 44,154
Issuance of common stock for note receivable 69,358 (70,021)
Repayment of notes receivable 1,833,307
Issuance of Series 1994/A Preferred Stock in connection
with private placement (net of costs $269,064) 10,949,011
Issuance of common stock in connection with asset purchase (3,949)
Conversion of Series 1994/A Preferred Stock into
common stock (45,200)
Issuance of common stock 245,097
Net loss (7,622,067)
------------ ------------ ----------
BALANCE, SEPTEMBER 30, 1995 92,252,751 (65,978,374) 0
Issuance of common stock in connection with self-managed
public offering of common stock (net of costs
of $108,026) 12,611,974
Issuance of common stock 136,900
Net loss (3,220,102)
------------ ------------ -----------
BALANCE, DECEMBER 31, 1995 $105,001,625 $(69,198,476) $ 0
============ ============ ===========
</TABLE>
See notes to consolidated financial statements
13
<PAGE> 14
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
- ------------------------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -------------------------------------
<CAPTION>
Three Months
Ended Year Ended September 30,
December -----------------------------------------
31, 1995 1995 1994 1993
-------------- ---- ---- ----
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,220,102) $( 7,622,067) $(18,258,606) $(14,018,812)
------------ ------------ ------------ ------------
Adjustments to reconcile net loss to net cash used:
Depreciation and amortization 758,544 2,471,184 2,347,602 1,521,886
Compensation expense 29,750 107,002 78,967 69,654
Deferred patent and application costs 92,426 137,474 183,086
Bad debt expense 232,671
Increase (decrease) in cash from:
Accounts receivable (255,691) (1,101,169) (1,020,377) (494,970)
Inventory and prepaid expenses 87,655 142,375 (146,662) (61,022)
Accounts payable and accrued liabilities (417,120) (477,274) 66,282 565,409
Deferred contract revenue (147,920) 147,920
------------ ------------ ------------ ------------
Total adjustments 203,138 1,086,624 1,843,877 1,784,043
------------ ------------ ------------ ------------
Net cash used for operating activities (3,016,964) (6,535,443) (16,414,729) (12,234,769)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (4,735,565) (12,701,607) (16,740,819) (16,380,725)
Sale of marketable securities 2,710,190 9,407,869 22,208,504 14,151,306
Expenditures for property, plant and equipment (47,495) (445,082) (2,949,005) (5,022,755)
Expenditures for patents (175,902) (832,552) (644,879) (541,300)
Decrease (increase) in deposits and other (27,679) 12,233 (251,127)
------------ ------------ ------------ ------------
Net cash provided by (used for) investing
activities (2,248,772) (4,599,051) 1,886,034 (8,044,601)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of equity:
Public placement of common stock 12,750,000 24,150,000
Private placement of common stock 15,950,000
Series 1994/A Preferred Stock 11,229,375
Common stock - other 137,523 239,465 322,135 160,118
Costs of raising equity (108,026) (269,064) (3,479,611)
Decrease in stockholders' notes receivable 1,833,307 24,183
Repayments of obligations under capital leases (23,211) (128,776) (182,472) (214,556)
------------ ------------ ------------ ------------
Net cash provided by financing activities 12,756,286 12,904,307 163,846 36,565,951
------------ ------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 7,490,550 1,769,813 (14,364,849) 16,286,581
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 4,427,229 2,657,416 17,022,265 735,684
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS,
END OF YEAR $ 11,917,779 $ 4,427,229 $ 2,657,416 $ 17,022,265
============ ============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 60,784 $ 229,477 $ 200,563 $ 208,573
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
14
<PAGE> 15
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
- ---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Creative BioMolecules, Inc. (the "Company") is
developing products for the regeneration and restoration of human tissues
and organs. The Company's products in development are based on OP-1, a
morphogenic protein identified and characterized by the Company. OP-1 has
been shown to induce formation of several tissues including bone,
cartilage, kidney, brain and tooth.
CHANGE IN YEAR END - In January 1996, the Board of Directors voted to
change the Company's fiscal year end from September 30 to December 31,
effective with the three months ended December 31, 1995.
USE OF ESTIMATES - The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts and disclosure of certain assets and liabilities at the
balance sheet date. Actual results may differ from such estimates.
RECLASSIFICATIONS - Certain reclassifications have been made to amounts at
September 30, 1994 and 1995 to conform to the presentation at December 31,
1995.
CONSOLIDATION - The accompanying consolidated financial statements include
the Company and its wholly owned subsidiary, California Medicinal Chemistry
Corporation (the "Subsidiary"). Intercompany balances are eliminated in
consolidation. The Subsidiary has been inactive since 1985.
REVENUE RECOGNITION - The Company's research agreements with collaborative
partners have typically provided for the partial or complete funding of
research and development for specified projects and royalties payable to
the Company in exchange for licenses to market resulting products. These
research agreements are generally cancelable on short-term notice by the
collaborative partner. In certain of these agreements, the Company retains
the right to manufacture and supply the active ingredient. Revenue is
earned and recognized 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 the related
agreements.
The Company's manufacturing contracts provide for technical collaboration
and manufacturing for third parties. Revenue is earned and recognized based
upon work performed.
<TABLE>
During the three months ended December 31, 1995 and the years ended
September 30, 1995, 1994 and 1993, major customers of the Company were as
follows:
<CAPTION>
Three Months
Ended Year Ended September 30,
December ---------------------------------------
Customer 31, 1995 1995 1994 1993
- -------- ----------------- ---- ---- ----
<S> <C> <C> <C> <C>
Customer A 48% 35% 49% 36%
Customer B 2% 11% 18%
Customer C 11% 2%
Customer D 37% 46% 2%
</TABLE>
15
<PAGE> 16
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
- ---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RESEARCH AND DEVELOPMENT - Research and development costs are charged to
operations as incurred. Certain research and development projects are
partially funded with research and development contracts, and the expenses
related to these activities are included in research and development costs.
CASH EQUIVALENTS AND MARKETABLE SECURITIES - Cash equivalents consist of
short-term, highly liquid investments purchased with remaining maturities
of three months or less. All other liquid investments are classified as
marketable securities. Marketable securities are stated at market value
which approximates amortized cost plus accrued interest.
Effective October 1, 1994, the Company adopted the provisions of Statement
of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", which requires that securities
be classified as "available-for-sale", "held to maturity" or "trading". As
of December 31, 1995 and September 30, 1995, the Company classified its
marketable securities as available-for-sale and had approximately
$5,251,000 and $4,980,000 in United States government and agency
instruments, respectively, and $2,833,000 and $1,079,000 in corporate bonds
and notes, respectively, all with maturities of less than one year.
The adoption of SFAS No. 115, which has not been applied retroactively to
the prior year financial statements, had no material effect on the
Company's accumulated deficit or stockholders' equity because fair value
approximated the investments' amortized cost. For the three months ended
December 31, 1995 and the year ended September 30, 1995, gross realized
gains and losses were not material. In computing realized gains and losses,
the Company computes the cost of its investments on a specific
identification basis. Such cost includes the direct costs to acquire the
securities, adjusted for the amortization of any discount or premium. At
December 31, 1995 and September 30, 1995, gross unrealized gains and losses
were not material.
INVENTORy - Inventory consists principally of raw materials and laboratory
supplies. Inventories are stated at the lower of cost (average cost method)
or market.
PROPERTY, PLANT AND EQUIPMENT - Purchased property, plant and equipment is
recorded at cost. Leased property, plant and equipment is recorded at the
lesser of cost or the present value of the minimum lease payments.
Depreciation and amortization are provided on the straight-line method over
the estimated useful lives of the related assets (three to fifteen years)
or the remaining terms of the leases, whichever is shorter.
PATENTS AND LICENSED TECHNOLOGY - The Company has filed applications for
United States and foreign patents covering aspects of its technology. Costs
related to pending patent applications have been deferred. Costs related to
successful patent applications and costs related to pending applications
from which the Company is currently deriving economic benefit, are
amortized over the estimated useful life of the patent, generally 16 to 20
years, using the straight-line method. Costs related to licensed technology
also have been deferred and are amortized over the estimated useful life of
the underlying technology, generally 10 to 17 years, using the
straight-line method. Accumulated amortization was approximately $225,000,
$429,000 and $346,000 at December 31, 1995 and September 30, 1995 and 1994,
respectively.
16
<PAGE> 17
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
- ---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Accumulated costs related to issued patents, pending patent applications
and licensed technology are evaluated periodically and, if considered to
have limited future value, are charged to expense.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The Company adopted SFAS No. 107,
"Disclosures About Fair Value of Financial Instruments." The provisions of
SFAS No. 107 require disclosure of the fair value of financial instruments
and the significant methods and assumptions used to estimate the fair
value.
The estimated fair value of financial instruments has been determined by
the Company using available market information and appropriate valuation
methodologies. However, considerable judgment is required in interpreting
data to develop the estimates of fair value.
The estimated fair value of cash, accounts receivable and accounts payable
approximate fair value due to the short-term nature of these instruments.
The fair value of marketable securities is based on current market values.
Lease obligations generally bear interest at a floating annual rate,
subject to market conditions. Accordingly, fair value approximates market
value.
NET LOSS PER COMMON SHARE - Net loss per common share is computed based on
the weighted average number of shares of common stock outstanding during
each year. Pursuant to the policy of the staff of the Securities and
Exchange Commission ("SEC"), the Company's preferred stock, which converted
in the year ended September 30, 1993 into common stock at the consummation
of the underwritten public offering (Note 7), is treated as if these shares
were converted to common stock on their respective original dates of
issuance. Pursuant to the requirements of the SEC, common stock issued,
stock options granted and dividends issued as common stock within one year
prior to the registered offering of Senior B Stock (using the treasury
stock method and the estimated fair value of the Company's common shares
registered in the offering of Senior B Stock) have been included in the
calculation of common and common equivalent shares as if these shares were
outstanding for all periods presented. Except for the foregoing, common
equivalent shares from stock options and warrants are excluded from the
computation as their effect is antidilutive.
OTHER - The Company plans to adopt SFAS No. 121, "Accounting for the
Impairment of Long-lived Assets and Long-lived Assets to Be Disposed Of" in
1996. The Company does not expect that SFAS No. 121 will have a significant
effect on the Company's consolidated financial statements when adopted in
1996.
The Company plans to adopt SFAS No. 123, "Accounting for Stock-Based
Compensation" in 1996. The Company does not expect that SFAS No. 123 will
have a significant effect on the Company's consolidated financial
statements when adopted in 1996.
17
<PAGE> 18
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
- ---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
2. ACQUISITION OF ASSETS
On March 15, 1993, the Company acquired certain assets of Verax consisting
principally of a leased manufacturing facility and equipment. The total
purchase price of approximately $13,700,000 consisted of approximately
$3,100,000 in cash, assumption of certain liabilities of Verax totaling
approximately $2,000,000, acquisition costs of approximately $160,000 and
an equity consideration valued at $8,500,000. The equity consideration
consisted of 1,184,670 shares of the Company's common stock issued in
annual installments from March 1993 through March 1995.
3. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
Property, plant and equipment consisted of the following:
<CAPTION>
September 30,
December 31, ---------------------
1995 1995 1994
------------ ---- ----
<S> <C> <C> <C>
Land $ 352,000 $ 352,000 $ 352,000
Building 1,500,000 1,500,000 1,500,000
Laboratory equipment and furniture 8,358,045 8,343,238 8,086,628
Leasehold improvements 12,335,738 12,332,185 12,232,738
Office furniture and equipment 1,970,138 1,936,876 1,859,524
Construction in progress 164,270 168,397 156,465
------------ ------------ ------------
Total 24,680,191 24,632,696 24,187,355
Less accumulated depreciation and
amortization (9,943,885) (9,358,986) (6,981,548)
------------ ------------ ------------
Total $ 14,736,306 $ 15,273,710 $ 17,205,807
============ ============ ============
</TABLE>
<TABLE>
Amounts included in property, plant and equipment applicable to capital leases
were as follows:
<CAPTION>
September 30,
December 31, -------------------
1995 1995 1994
------------ ---- ----
<S> <C> <C> <C>
Land $ 352,000 $ 352,000 $ 352,000
Building 1,500,000 1,500,000 1,500,000
Laboratory equipment and furniture 47,000 598,313 598,313
Office furniture and equipment 233,889 233,889
----------- ----------- -----------
Total 1,899,000 2,684,202 2,684,202
Less accumulated amortization (293,463) (1,018,412) (857,965)
----------- ----------- -----------
Total $ 1,605,537 $ 1,665,790 $ 1,826,237
=========== =========== ===========
</TABLE>
18
<PAGE> 19
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
- ---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. LEASE OBLIGATIONS
As part of the acquisition of certain assets of Verax (Note 2), the Company
assumed certain liabilities consisting principally of obligations under
capital leases totaling $1,852,000. These obligations bear interest at
variable rates based on the prime rate ranging from 9.25 % to 10.5 % at
December 31, 1995 and are due monthly through the year 2008.
In addition, the Company has an agreement to lease certain laboratory
equipment for a period of five years, with an effective interest rate of
15%.
The Company has noncancelable operating lease agreements for office and
laboratory space and certain laboratory equipment. Rent expense for all
operating leases was approximately $150,000, $597,000, $478,000 and
$413,000 for the three months ended December 31, 1995 and the years ended
September 30, 1995, 1994 and 1993, respectively.
<TABLE>
Future minimum lease obligations at December 31, 1995 were as follows:
<CAPTION>
Year Ending December 31 Capital Operating
- ----------------------- ------- ---------
<S> <C> <C>
1996 $ 264,971 $ 516,179
1997 264,971 511,888
1998 254,877 236,143
1999 251,513
2000 and thereafter 2,877,904
---------- ----------
Total minimum lease payments 3,914,236 $1,264,210
==========
Less amount representing interest 2,160,759
----------
Present value of net minimum lease payments 1,753,477
Less current portion 42,567
----------
Long-term obligations under capital leases $1,710,910
==========
</TABLE>
Under a security requirement of a capital lease agreement with a leasing
company, the Company purchased and pledged as collateral a letter of credit
totaling $187,500, which expired on December 1, 1995.
5. COMMITMENTS
On September 28, 1994, the Company signed a three-year manufacturing
contract with Biogen to produce in the Company's manufacturing facility
several of Biogen's protein-based therapeutic candidates for use in
Biogen's clinical trials. To enable the Company to meet its obligations
under the manufacturing contract, Biogen is (i) constructing a building
addition and leasehold improvements to the Company's manufacturing facility
and (ii) financing the costs of the construction work at an estimated total
cost of $2,500,000. The Company agreed to reimburse Biogen for the costs of
the addition and improvements at the end of the lease term at an amount
equal to Biogen's construction costs less $300,000 and less all accumulated
depreciation.
19
<PAGE> 20
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
- ---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. COMMITMENTS (CONTINUED)
Biogen also is installing and financing certain equipment with an estimated
total cost of $1,500,000, as provided in an equipment lease agreement.
Under the terms of the equipment lease agreement, the Company agrees to pay
Biogen $25,000 per month, commencing when the equipment is placed in
service and ending December 31, 1997. The Company has the option to
purchase the equipment at the end of the lease term for an amount equal to
its then fair market value. At December 31, 1995, construction of the
building and leasehold improvements and installation of the equipment are
not complete.
As security for its obligations under the manufacturing contract and the
equipment lease agreement, the Company granted to Biogen a security
interest in the manufacturing facility and certain of its equipment and
furniture at the manufacturing facility and any applicable inventory or
other assets related to the operation of the manufacturing facility with a
total net book value at December 31, 1995 of $12,568,000.
6. STOCK PLANS
STOCK OPTION PLANS - In May 1987, the Company established the 1987 Stock
Plan ("1987 Plan") and terminated the 1983 Incentive Stock Option Plan
("1983 Plan") such that no further grants of options could be made
thereunder. The 1987 Plan was subsequently amended to increase the number
of shares of common stock authorized for issuance thereunder. A total of
5,150,000 shares of common stock have been reserved for issuance under the
1987 Plan upon the exercise of options or in connection with awards or
direct purchases of stock.
The 1987 Plan permits the granting of incentive and nonqualified stock
options to consultants, employees or officers of the Company and its
subsidiaries at prices determined by the Board of Directors. All options
granted in the three month period ended December 31, 1995 and the three
year period ended September 30, 1995 were granted at fair market value.
Awards of stock may be made to consultants, employees or officers of the
Company and its subsidiaries, and direct purchases of stock may be made by
such individuals also at prices determined by the Board of Directors.
Options become exercisable as determined by the Board of Directors and
expire up to ten years from the date of grant.
<TABLE>
Activity under the plans is summarized as follows:
<CAPTION>
Three Months
Ended Years Ended September 30,
December 31, ---------------------------------------
1995 1995 1994 1993
------------ ---- ---- ----
<S> <C> <C> <C> <C>
Outstanding, beginning of period 3,747,763 1,357,879 1,180,739 989,864
Granted ($2.03 - $10.00) 13,000 2,816,441 281,400 248,750
Exercised ($0.35 - $2.81) (9,477) (106,471) (18,740) (34,302)
Canceled ($0.50 - $10.00) (37,229) (320,086) (85,520) (23,573)
--------- --------- --------- ---------
Outstanding, end of period ($0.35 - $10.00) 3,714,057 3,747,763 1,357,879 1,180,739
========= ========= ========= =========
</TABLE>
At December 31, 1995, 1,017,290 shares were available for grant under the
1987 Plan and options for 1,409,983 and 24,960 shares under the 1987 Plan
and the 1983 Plan, respectively, were exercisable.
20
<PAGE> 21
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
- ---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
6. STOCK PLANS (CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN - In November 1993, the Company adopted an
Employee Stock Purchase Plan which permits eligible employees to purchase
common stock of the Company up to an aggregate of 250,000 shares. This Plan
was subsequently amended to increase to 500,000 the number of shares of
common stock authorized for issuance thereunder. During the three months
ended December 31, 1995, 55,515 shares were issued under this Plan at a
price of $2.34 per share; during the year ended September 30, 1995, 143,475
shares were issued under this Plan at a price of $1.4875 per share; during
the year ended September 30, 1994, 77,507 shares were issued under this
Plan at prices of $7.4375 and $2.75 per share; and during the year ended
September 30, 1993, 16,182 shares were issued under this Plan at a price of
$6.80 per share.
DIRECTOR PLAN - In November 1993, the Company adopted the 1992 Non-Employee
Director Non-Qualified Stock Option Plan which provides for the granting of
options to purchase up to an aggregate of 100,000 shares of common stock to
non-employee directors. During the three months ended December 31, 1995 no
options were granted; during the year ended September 30, 1995, options to
purchase 20,000 shares were granted at exercise prices of $2.625 to $2.875
per share; during the year ended September 30, 1994 no options were
granted; and during the year ended September 30, 1993, options to purchase
80,000 shares were granted at exercise prices of $8.00 to $8.50 per share.
During the year ended September 30, 1994, options to purchase 30,000 shares
were canceled at exercise prices of $8.50 per share. At December 31, 1995,
options to purchase 35,000 shares were exercisable.
In March 1996, the Company's stockholders approved an increase in the
number of shares of common stock authorized for issuance under the 1992
Non-Employee Director Non-Qualified Stock Option Plan from 100,000 shares
to 300,000 shares.
7. STOCKHOLDERS' EQUITY
On December 24, 1992, the Company sold to the public 3,000,000 shares of
common stock at a price of $7.00 per share. Net proceeds to the Company,
after deducting underwriting commissions and other expenses of the
offering, were approximately $18,678,000. All classes of previously
authorized and issued preferred stock were automatically converted into
common stock upon the closing of the underwritten public offering. The
Company granted the underwriters of the offering a 30-day option to
purchase up to an additional 450,000 shares of common stock to cover
overallotments. In January 1993, the underwriters exercised the
overallotment option and purchased an additional 450,000 shares of common
stock, with net proceeds to the Company of approximately $2,900,000.
On September 30, 1993, the Company sold, in a private placement offering,
2,900,000 shares of common stock at a price of $5.50 per share. Net
proceeds to the Company, after deducting fees and other expenses of the
offering, were approximately $14,710,000. The shares sold in this offering
were subsequently registered for resale to the public by the private
placement purchasers.
21
<PAGE> 22
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
- ---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
7. STOCKHOLDERS' EQUITY (CONTINUED)
In December 1994, the Board of Directors designated a series of preferred
stock of the Company consisting of 1,500,000 shares of the authorized and
unissued preferred stock, as Series 1994/A Convertible Preferred Stock (the
"Series Preferred Stock"). Each share of the Series Preferred Stock is
convertible, at the option of the holder, into five shares of common stock.
Each share of the Series Preferred Stock will automatically convert into
five shares of common stock after twenty consecutive trading days on which
the closing price of the Company's common stock exceeds $3.975 per share.
In December 1994 and January 1995, the Company sold in a private placement,
1,130,000 units (the "Units"), consisting of one share of Series Preferred
Stock and one warrant to purchase one share of the Company's common stock.
Each warrant is exercisable for a period of five years from the date of
issuance at an exercise price of $2.385. Net proceeds to the Company, after
deducting fees and other expenses of the offering, were approximately
$11,000,000.
In March 1995, the Company's stockholders approved an increase in the
number of authorized shares of common stock from 28,000,000 shares to
50,000,000 shares and an increase in the number of authorized shares of
preferred stock from 5,000,000 shares to 10,000,000 shares.
In June 1995, holders of 30,000 shares of Series Preferred Stock elected to
convert their Series Preferred Stock into 150,000 shares of common stock.
In August 1995, holders of 40,251 shares of Series Preferred Stock elected
to convert their Series Preferred Stock into 201,255 shares of common
stock. On August 31, 1995, after twenty consecutive trading days on which
the closing price of the Company's common stock exceeded $3.975 per share,
the remaining 1,059,749 shares of Series Preferred Stock automatically
converted into 5,298,745 shares of common stock.
In October 1995, the Company sold in a self-managed public offering
3,000,000 shares of common stock at a price of $4.25 per share. Net
proceeds to the Company, after deducting fees and other expenses of the
offering, were approximately $12,650,000.
COMMON STOCK WARRANTS - The Company issued in 1987 a warrant to purchase
17,600 shares of common stock at $5.00 per share to an equipment lessor.
The warrant is fully exercisable and expires in December 1997.
STOCKHOLDERS' NOTES RECEIVABLE - In connection with a research and
development contract, the Company in 1986 sold to a partnership, for a
purchase price of $25,100, warrants for the purchase of 467,715 shares of
common stock at an initial exercise price of $5.00 per share (subsequently
adjusted to $3.78 per share). The warrants were exercised on December 22,
1993 by payment of $4,677 in cash and delivery of a secured full recourse
promissory note for $1,763,286 bearing interest at prime plus 1%. The note
was repaid in full in February 1995.
22
<PAGE> 23
CREATIVE BIOMOLECULES, INC.
AND SUBSIDIARY
- ---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
8. INCOME TAXES
No income tax provision or benefit has been provided for federal income tax
purposes as the Company has incurred losses since inception. As of December
31, 1995, the Company had available net operating loss carryforwards of
approximately $62,200,000 for income tax purposes. In addition, the Company
had approximately $1,300,000 of unused investment and research and
development tax credits. These net operating loss and tax credit
carryforwards will expire at various dates between 1997 and 2010.
Because of the change in ownership, as defined in the Internal Revenue
Code, which occurred in July 1989, the net operating loss and tax credit
carryforwards are subject to annual limitations regarding their
utilization.
The components of deferred income taxes at December 31, 1995 and September
30, 1995 and 1994 were primarily deferred tax assets of approximately
$21,100,000, $20,100,000 and $17,700,000, respectively, of net operating
loss carryforwards and approximately $1,300,000 of investment and research
and development tax credits at each of such dates. The Company has not yet
achieved profitable operations. Accordingly, management believes that the
tax benefits as of December 31, 1995 do not satisfy the realization
criteria set forth in SFAS No. 109 and has recorded a valuation allowance
for the entire net asset.
9. ROYALTY AGREEMENTS
The Company has entered into various license agreements which require the
Company to pay royalties based upon a set percentage of certain product
sales and license fee revenue subject, in some cases, to certain minimum
amounts. Total royalty expense approximated $5,000, $21,000, $22,000 and
$54,000 for the three months ended December 31, 1995 and the years ended
September 30, 1995, 1994 and 1993, respectively.
10. RETIREMENT SAVINGS PLAN
The Company has a 401(k) retirement savings plan covering substantially all
of the Company's employees. Matching Company contributions are at the
discretion of the Board of Directors. Effective January 1, 1993, the Board
of Directors authorized matching contributions up to 3% of participants'
salaries amounting to approximately $53,000, $180,000, $175,000 and
$124,000 for the three months ended December 31, 1995 and the years ended
September 30, 1995, 1994 and 1993, respectively.
23
<PAGE> 24
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 hereunto duly authorized.
Creative BioMolecules, Inc.
---------------------------
(Registrant)
Date: May 14, 1996 /s/ Wayne E. Mayhew III
-----------------------
Wayne E. Mayhew III
Vice President, Chief Financial
Officer, Treasurer and Secretary
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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THE YEAR ENDED SEPTEMBER 30, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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<MULTIPLIER> 1
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<S> <C>
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