<PAGE> 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 JUNE 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 July 30, 1999, the registrant had 35,968,579 shares of Common Stock
outstanding.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Number
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - June 30, 1999 (unaudited) and 3
December 31, 1998
Unaudited Consolidated Statements of Operations for the three months
and six months ended June 30, 1999 and 1998 4
Unaudited Consolidated Statements of Comprehensive Loss for the three
months and six months ended June 30, 1999 and 1998 4
Unaudited Consolidated Statements of Cash Flows for the six months
ended June 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 14
Item 6. Exhibits and Reports on Form 8-K 14
SIGNATURES
</TABLE>
<PAGE> 3
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,783,135 $ 17,738,044
Marketable securities 24,783,607 40,197,407
Accounts receivable 61,770 669,232
Inventory 15,004 28,733
Prepaid expenses and other 318,527 272,168
------------- -------------
Total current assets 26,962,043 58,905,584
------------- -------------
PROPERTY, PLANT AND EQUIPMENT - net 2,268,222 1,925,602
------------- -------------
OTHER ASSETS:
Notes receivable - officers 116,668 116,668
Patents and licensed technology - net 1,135,118 375,000
Deferred patent application costs - net 4,124,256 4,732,629
Deposits and other 108,574 108,574
------------- -------------
Total other assets 5,484,616 5,332,871
------------- -------------
TOTAL $ 34,714,881 $ 66,164,057
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lease obligations - current portion $ 292,979 $ 165,934
Accounts payable 468,868 1,621,417
Accrued liabilities 1,858,469 2,508,161
Accrued compensation 664,583 1,335,692
Deferred revenue 2,161,279 3,661,279
------------- -------------
Total current liabilities 5,446,178 9,292,483
------------- -------------
LEASE OBLIGATIONS 1,053,197 713,459
------------- -------------
COMMITMENTS
SERIES 1998/A PREFERRED STOCK, $.01 par value, 0 and 23,414 shares issued and
outstanding at June 30, 1999 and December 31, 1998, respectively, liquidation
preference of $0 and $24,113,598 at June 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 June 30, 1999 and December 31, 1998, respectively
Common Stock, $.01 par value, 100,000,000 shares authorized, 35,900,443 and
34,457,469 shares issued and outstanding at June 30, 1999 and
December 31, 1998, respectively 359,004 344,575
Additional paid-in capital 146,353,551 143,127,113
Accumulated other comprehensive income (4,864) 105,461
Accumulated deficit (118,492,185) (110,471,821)
------------- -------------
Total stockholders' equity 28,215,506 33,105,328
============= =============
TOTAL $ 34,714,881 $ 66,164,057
============= =============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Research and development contracts $ 757,542 $ 1,800,615 $ 1,582,187 $ 4,803,474
Interest and other 495,667 480,175 1,251,400 895,435
----------- ------------ ------------ ------------
Total revenues 1,253,209 2,280,790 2,833,587 5,698,909
----------- ------------ ------------ ------------
COSTS AND EXPENSES:
Research and development 2,613,208 6,130,923 5,342,125 12,428,790
General and administrative 1,530,690 2,171,785 3,060,328 4,138,395
Interest 35,591 86,633 68,252 159,143
----------- ------------ ------------ ------------
Total costs and expenses 4,179,489 8,389,341 8,470,705 16,726,328
----------- ------------ ------------ ------------
NET LOSS (2,926,280) (6,108,551) (5,637,118) (11,027,419)
----------- ------------ ------------ ------------
ACCRETION AND REPURCHASE COSTS ON
SERIES 1998/A
PREFERRED STOCK (2,006,391) (152,043) (2,395,559) (152,043)
----------- ------------ ------------ ------------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS $(4,932,671) $ (6,260,594) $ (8,032,677) $(11,179,462)
=========== ============ ============ ============
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (.14) $ (.19) $ (.23) $ (.33)
=========== ============ ============ ============
COMMON SHARES FOR BASIC AND DILUTED
LOSS COMPUTATION 35,512,694 33,507,137 35,091,833 33,474,918
=========== ============ ============ ============
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
NET LOSS APPLICABLE TO COMMON
STOCKHOLDERS $(4,932,671) $ (6,260,594) $ (8,032,677) $(11,179,462)
UNREALIZED LOSS ON MARKETABLE
SECURITIES (110,359) (110,325)
----------- ------------ ------------ ------------
COMPREHENSIVE LOSS $(5,043,030) $ (6,260,594) $ (8,143,002) $(11,179,462)
=========== ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------------
1999 1998
------------ ------------
(unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,637,118) $(11,027,419)
------------ ------------
Adjustments to reconcile net loss to net cash used:
Depreciation and amortization 466,549 1,285,577
Compensation expense 64,000 13,329
Deferred patent and application costs 88,104
Increase (decrease) in cash from:
Accounts receivable 607,462 3,229,152
Inventory and prepaid expenses (32,630) (380,113)
Accounts payable and accrued liabilities (2,359,125) (3,022)
Deferred contract revenue (1,500,000)
------------ ------------
Total adjustments (2,665,640) 4,144,923
------------ ------------
Net cash used for operating activities (8,302,758) (6,882,496)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (6,409,882) (22,938,601)
Sale of marketable securities 21,713,362 11,852,461
Expenditures for property, plant and equipment (411,258) (1,596,529)
Expenditures for patents (366,439) (673,361)
Decrease (increase) in deposits and other 32,351
------------ ------------
Net cash provided by (used for) investing activities 14,525,783 (13,323,679)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of equity:
Series 1998/A Preferred Stock 25,000,000
Common Stock - other 198,868 590,687
Cost of raising equity (1,281,750)
Repurchase of Series 1998/A Preferred Stock (22,470,347)
Increase in obligations under capital leases 186,900 193,524
Repayments of obligations under capital leases (93,355) (80,982)
------------ ------------
Net cash provided by (used for) financing activities (22,177,934) 24,421,479
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (15,954,909) 4,215,304
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 17,738,044 2,158,909
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,783,135 $ 6,374,213
============ ============
SUPPLEMENTAL DISCLOSURE OF NON CASH
INVESTING AND FINANCING ACTIVITIES:
Property and equipment purchased under capital lease obligations $ 271,321 $ 542,105
============ ============
Conversion of Series 1998/A Preferred Stock to Common Stock $ 2,978,000
============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 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 June 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 OP-1 manufacturing rights and facilities to 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 June 30,
1999 and December 31, 1998, respectively.
3. 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.
4. 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.
5. 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 by 200,000 from 300,000 to 500,000 the
aggregate number of shares of Common Stock authorized for issuance under
the Director Plan.
6
<PAGE> 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 Corporation ("Stryker"). We have never been profitable and expect
to incur additional operating losses in the remainder of 1999. Results beyond
1999 will depend largely on the timing and magnitude of royalty payments from
Stryker if the OP-1 device 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 will focus 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.
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.
RESULTS OF OPERATIONS
THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998. Our total revenues for
the three and six month periods ended June 30, 1999 were $1,253,000 and
$2,834,000, respectively. Our total revenues for the three and six month periods
ended June 30, 1998 were $2,281,000 and $5,699,000, respectively. Research and
development contract revenues decreased 58% to $758,000 for the three month
period ended June 30, 1999
7
<PAGE> 8
from $1,801,000 for the three month period ended June 30, 1998 and decreased 67%
to $1,582,000 for the six month period ended June 30, 1999 from $4,803,000 for
the six month period ended June 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 remaining
quarters in 1999 will be substantially less than comparable periods in 1998
because we are no longer providing research services or supplying OP-1 to
Stryker.
Interest revenues increased 3% to $496,000 for the three month period ended June
30, 1999 from $480,000 for the three month period ended June 30, 1998 and
increased 40% to $1,251,000 for the six month period ended June 30, 1999 from
$895,000 for the six month period ended June 30, 1998 because we had higher
average balances of cash and marketable securities during the three and six
month periods ended June 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 50% to $4,179,000 for the three month
period ended June 30, 1999, from $8,389,000 for the three month period ended
June 30, 1998 and decreased 49% to $8,471,000 for the six month period ended
June 30, 1999 from $16,726,000 for the six month period ended June 30, 1998.
Research and development expenses decreased 57% to $2,613,000 for the three
month period ended June 30, 1999 from $6,131,000 for the three month period
ended June 30, 1998 and decreased 57% to $5,342,000 for the six month period
ended June 30, 1999 from $12,429,000 for the six month period ended June 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 remaining quarters of 1999 will be
substantially less than in the comparable periods of 1998. During the first half
of 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 30% to $1,531,000 for the three
month period ended June 30, 1999 from $2,172,000 for the three month period
ended June 30, 1998 and decreased 26% to $3,060,000 for the six month period
ended June 30, 1999 from $4,138,000 for the six month period ended June 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 second half of 1999 will continue at
amounts consistent with the six month period ended June 30, 1999 but at amounts
lower than the comparable periods in 1998.
Interest expense decreased 59% to $36,000 for the three month period ended June
30, 1999 from $87,000 for the three month period ended June 30, 1998 and
decreased 57% to $68,000 for the six month period ended June 30, 1999 from
$159,000 for the six month period ended June 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.
8
<PAGE> 9
As a result of the foregoing, we incurred a net loss of $2,926,000 and
$5,637,000 for the three month and six month periods ended June 30, 1999,
respectively, compared to a net loss of $6,109,000 and $11,027,000 for the three
and six month periods ended June 30, 1998.
Accretion and Repurchase Costs on Series 1998/A Preferred Stock was $2,006,000
and $2,396,000 for the three and six month periods ended June 30, 1999,
respectively, and included the following: $102,000 and $385,000, respectively,
calculated at the rate of 5% per annum of the stated value of the outstanding
Series 1998/A Preferred Stock; $38,000 and $144,000, respectively, 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 Preferred Stock for the three and six month periods ended June
30, 1998 included $116,000 calculated at a rate of 5% per annum of the stated
value of the outstanding Series 1998/A Preferred Stock and $36,000 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
six month periods ended June 30, 1999 and 1998, accretion and repurchase costs
of the Series 1998/A Preferred Stock mentioned above is included.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, our principal sources of liquidity consisted of cash, cash
equivalents and marketable securities of $26,567,000 and $366,000 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 $8,384,000 at
June 30, 1999 from $7,702,000 at December 31, 1998. We currently plan to spend
approximately $800,000 during the remaining quarters 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 June 30, 1999 $366,000 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.
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. We will pay approximately $267,000 of
accrued costs associated with such sale in the remaining quarters of 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 anticipate
significantly reduced research funding and manufacturing revenue in the year
ending December 31, 1999.
9
<PAGE> 10
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 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 Financial Accounting Standards Board ("FASB") released
Statement of Financial Accounting Standards ("SFAS") 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.
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
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
10
<PAGE> 11
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 and 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;
- - 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
<PAGE> 12
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
================================================================================
The Company's market risk disclosures set forth in the 1998 Form 10-K have not
changed significantly through the quarter ended June 30, 1999.
12
<PAGE> 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 2. CHANGES IN SECURITIES.
(a) Not Applicable.
(b) Not Applicable.
(c) (1) Securities sold. During the second fiscal quarter of 1999,
the Company issued a total of 976,322 shares (the
"Conversion Shares") of its Common Stock.
(2) Underwriters and other purchasers. No underwriters were
involved in the transaction. The Company issued the
Conversion Shares in connection with the conversion of
2,142 shares (the "Preferred Shares") of Series 1998/A
Convertible Preferred Stock by the holders thereof.
(3) Consideration. The Conversion Shares were issued at
conversion prices ranging from $2.11 to $2.37 per share for
an aggregate cost of $2,241,560.
(4) Exemption from registration claimed. The Conversion Shares
were issued in reliance upon Section 4(2) of the Securities
Act of 1933, as amended, because the transaction did not
involve any public offering by the Company.
(5) Terms of conversion exercise. Not Applicable.
(d) Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of the Company was held on June 8,
1999. The following actions were voted upon by the stockholders at
the Annual Meeting:
1. The following persons were elected as Directors of the Company
and the number of votes cast for and withheld for each nominee
for Director is set forth below:
<TABLE>
<CAPTION>
NAME VOTES FOR VOTES WITHHELD
---- --------------- --------
<S> <C> <C>
Martyn D. Greenacre (term expiring in 2002) 26,242,039 210,579
Michael Rosenblatt, M.D. (term expiring in 2002) 26,247,239 205,379
James R. Tobin (term expiring in 2002) 26,243,239 209,379
</TABLE>
The terms of office of the following persons as Directors of the
Company continued after the meeting:
Charles Cohen, Ph.D. (term expiring in 2000)
Jeremy Curnock Cook (term expiring in 2000)
Suzanne Denbo Jaffe (term expiring in 2000)
Brian H. Dovey (term expiring in 2001)
Michael M. Tarnow (term expiring in 2001)
Arthur J. Hale, M.D. (term expiring in 2001)
13
<PAGE> 14
2. 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 by 200,000 from 300,000 to 500,000
the aggregate number of shares authorized for issuance under the
Director Plan. The record votes cast by the holders of shares of
Common Stock of the Company entitled to vote for or against, as
well as the number of abstentions, broker no votes and shares
not voted were as follows: 24,028,166 shares FOR, 2,060,418
shares AGAINST, 60,167 shares ABSTAINED, 303,867 BROKER NO VOTES
and 8,409,391 shares NOT VOTED.
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.
On May 14, 1999, the Company filed a Current Report on Form 8-K,
dated May 10, 1999, to report the repurchase of all the
Company's outstanding Series 1998/A Preferred Stock for
$22,470,000 in cash.
14
<PAGE> 15
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 August
10, 1999.
CREATIVE BIOMOLECULES, INC.
By: /s/ Steven L. Basta
------------------------------------------
Vice President, Business Development,
Finance and Interim Director of Accounting
15
<PAGE> 16
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
27 Financial Data Schedule
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1999 AND FOR THE SIX
MONTH PERIOD ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 1,783,135
<SECURITIES> 24,783,607
<RECEIVABLES> 61,770
<ALLOWANCES> 0
<INVENTORY> 15,004
<CURRENT-ASSETS> 26,962,043
<PP&E> 8,384,314
<DEPRECIATION> (6,116,092)
<TOTAL-ASSETS> 34,714,881
<CURRENT-LIABILITIES> 5,446,178
<BONDS> 1,053,197
0
0
<COMMON> 359,004
<OTHER-SE> 27,856,502
<TOTAL-LIABILITY-AND-EQUITY> 34,714,881
<SALES> 0
<TOTAL-REVENUES> 2,833,587
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,342,125
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 68,252
<INCOME-PRETAX> (5,637,118)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,637,118)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,637,118)
<EPS-BASIC> (.23)
<EPS-DILUTED> (.23)
</TABLE>
