-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cu2OBEfSmpCuF4psHgu/TyUWaEt/GKCX+GsjaD6y6wOV2tZdTodbhGeZ/YModQwm d+4Aatx+A4eKbsukp0JHtA== 0000950135-98-001994.txt : 19980331 0000950135-98-001994.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950135-98-001994 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: CREATIVE BIOMOLECULES INC CENTRAL INDEX KEY: 0000857121 STANDARD INDUSTRIAL CLASSIFICATION: BIOLOGICAL PRODUCTS (NO DIAGNOSTIC SUBSTANCES) [2836] IRS NUMBER: 942786743 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-19910 FILM NUMBER: 98578127 BUSINESS ADDRESS: STREET 1: 45 S STREET CITY: HOPKINTON STATE: MA ZIP: 01748 BUSINESS PHONE: (508) 782-1100 MAIL ADDRESS: STREET 1: 45 SOUTH ST CITY: HOPKINTON STATE: MA ZIP: 01748 10-K405 1 CREATIVE BIOMOLECULES, INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO Commission file number: 0-19910 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 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE PER SHARE (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the registrant's voting stock held by non-affiliates of the registrant (without admitting that any person whose shares are not included in such calculation is an affiliate) on February 27, 1998 was approximately $234 million, based on the last sale price as reported on The Nasdaq Stock Market. As of February 27, 1998, the registrant had 33,475,582 shares of common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference into the following parts of this Form 10-K: Certain information required in Part III of this Annual Report on Form 10-K is incorporated from the Registrant's Proxy Statement for the 1998 Annual Meeting of Stockholders. With the exception of the portions of the 1997 Proxy Statement expressly incorporated into this Form 10-K by reference, such document shall not be deemed filed as part of this Form 10-K. 2 PART I ITEM 1. BUSINESS OVERVIEW Creative BioMolecules, Inc. ("Creative BioMolecules" or the "Company") is developing products for the regeneration and restoration of human tissues and organs based on morphogenic proteins identified and characterized by the Company. The Company's lead morphogenic protein, OP-1, has been shown to induce formation or repair of several types of tissues including bone, cartilage, kidney, tooth and brain. For orthopaedic and dental applications of OP-1, the Company's corporate partner is Stryker Corporation ("Stryker"), a leading surgical and medical products company. Stryker has completed a pivotal trial to evaluate the use of an OP-1 device as a bone graft substitute for severe fractures. Stryker is conducting additional clinical trials in orthopaedic applications of OP-1 devices, as well as preclinical studies in cartilage regeneration. The Company's corporate partner in development of renal disease therapies is Biogen, Inc. ("Biogen"), a leading biopharmaceutical company with expertise in development and commercialization of protein therapies. Creative BioMolecules and Biogen are developing OP-1 products to treat acute and chronic renal failure. In addition to the Stryker and Biogen programs, Creative BioMolecules has proprietary programs in place to develop OP-1 product candidates for neurological disorders and osteoporosis. The Company has discovered a family of morphogenic proteins that initiate the cascade of cellular events responsible for tissue formation. One member of this family is OP-1, a naturally occurring morphogenic protein produced primarily in the kidney. OP-1 has the capacity to trigger the formation or repair of a variety of tissues by activating cells to respond to their specific environment. The activated cells then differentiate and form the type of tissue dictated by their environment. The Company believes that as a result of such action, OP-1 may be helpful in the treatment of defects and diseases involving a number of different types of human tissues and organs. OP-1 was first isolated and characterized by Creative BioMolecules' scientists and is the subject of issued patents covering the protein itself as well as OP-1 based products for certain applications. The Company's agreement with Stryker grants Stryker the exclusive right to develop, market and sell OP-1 based products for use in the repair or replacement of bone and joint tissue ("orthopaedic reconstruction") and for use as dental therapeutics. This agreement provides for the payment of royalties to the Company on such sales, grants the Company the exclusive right to supply Stryker's worldwide commercial requirements for such products and provides for research funding to the Company. The Company's agreement with Biogen grants Biogen the exclusive right to develop, manufacture, market and sell OP-1 based products for use in the treatment of renal disease. This agreement provides for payment of royalties to the Company on such sales and provides for milestone payments and research funding to the Company. The Company has retained commercial rights to OP-1 based products for all indications other than orthopaedic reconstruction, dental therapeutics and kidney disorders. The Company's retained applications include neurological disorders such as stroke and metabolic bone diseases such as osteoporosis. ORTHOPAEDIC RECONSTRUCTION AND DENTAL THERAPEUTICS. The availability of a bone graft material which can induce bone formation is important to successful repair in many orthopaedic applications including open fracture reductions of acute or non-healing fractures, spinal fusions, maxillofacial reconstructions, prosthetic fixations and gap filling procedures. Stryker has completed a pivotal study of an OP-1 bone regeneration product designed to induce new bone formation. This trial was conducted in 122 patients with non-union fractures of the tibia, the major bone of the lower leg. The objective of this trial was to demonstrate that treatment with the OP-1 device could repair non-union fractures of the tibia comparably to autograft, a procedure which involves removal of bone from the hip and implanting that bone at the fracture site to induce healing. The results of the trial, presented in March 1998, demonstrated that the OP-1 bone regeneration product had comparable clinical success to the autograft group without the need for a second invasive 1 3 procedure to harvest autograft bone. Based on the results of the trial, other clinical and preclinical data, and the Company's development of a commercial scale manufacturing process, Stryker is preparing the Pre-Market Approval ("PMA") application for this OP-1 bone regeneration product. The PMA application is Stryker's formal request to the United States Food and Drug Administration ("FDA") for approval to market the product. In addition to the pivotal trial in non-union fractures, the Company's corporate partner, Stryker, has initiated clinical studies in other bone graft indications, including a 200 patient clinical trial to evaluate use of the OP-1 device to treat acute fractures. Stryker and the company are also evaluating the possible role of OP-1 in the treatment of cartilage defects. The Company and Stryker are also developing an OP-1 product for the treatment of periodontal disease. Based on completed preclinical studies, the Company believes that an OP-1 product may restore the periodontal tissues necessary to maintain tooth attachment when used in conjunction with standard surgical treatments of periodontal disease. Stryker plans to initiate a pilot clinical trial to treat periodontal disease with an OP-1 device in 1998. KIDNEY DISORDERS. Acute renal failure involves the rapid loss of kidney function and is associated with a high mortality rate. Chronic renal failure, in contrast, is the slow progressive loss of kidney function ultimately resulting in the need for kidney transplantation or dialysis. The high risk of acute renal failure and the substantial costs associated with dialysis therapy represent areas of significant unmet medical and economic healthcare needs. Creative BioMolecules and its partner, Biogen, are developing OP-1 product candidates to treat both acute and chronic renal failure. The Company believes that there is a substantial commercial opportunity for renal therapies that could delay or eliminate the need for costly dialysis treatments. Preclinical studies have shown that OP-1 administration improves kidney function in animal models of both acute and chronic renal failure. NEUROLOGICAL DISORDERS. Creative BioMolecules is developing OP-1 product candidates for use in the treatment of stroke and other neurological disorders. Preclinical studies have shown that OP-1 enhances survival of neurons and can promote the establishment of new neuronal connections which aid recovery from brain injury or disease. In several preclinical studies presented in 1997, the Company demonstrated the ability of OP-1 to improve the recovery rate of motor function in an animal model of stroke. OTHER PROGRAMS. In addition to its work with the OP-1 protein, the Company has a program underway to develop small molecules that can stimulate the same regeneration results induced by morphogenic proteins via activation of various steps in the tissue formation cascade. Such small molecule agents may provide appropriate therapies for chronic renal failure, osteoporosis and chronic neurological diseases. The Company is also investigating the role in tissue formation of other related morphogenic proteins in its proprietary portfolio. The Company's principal offices are located at 45 South Street, Hopkinton, Massachusetts 01748, and its telephone number is (508) 782-1100. The Company is the successor to a California corporation of the same name organized in 1981. In 1987, the Company completed a corporate reorganization and became a Delaware corporation. RISKS ASSOCIATED WITH PRODUCT DEVELOPMENT AND COMMERCIALIZATION This Form 10-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 several applications of its products, which are controlled by 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 and commercialization efforts involve a high degree of risk. 2 4 SCIENTIFIC BACKGROUND As humans age, the body's capacity to form or regenerate tissue after injury diminishes substantially. Tissue formation begins when an activated stem cell responds to the program of cues produced in that cell's location and becomes committed to a cell type consistent with that particular set of information. Stem cells are found throughout the body in people of all ages and are the precursor cells from which all tissues and organs are derived. Once a stem cell is activated, its interactions with its surroundings determine the particular cell type (e.g., bone, cartilage, kidney, tooth and brain) into which it will differentiate. For example, an activated stem cell in a bone defect will produce bone because the information available to that cell from neighboring cells and the extracellular environment specifies a unique program of signal and response that results in that cell becoming a bone-forming cell. This process of cell interaction depends on morphogenic proteins which can activate stem cells to begin the process of differentiation and commitment, leading to tissue and organ formation. Diminished capacity to produce morphogenic proteins, due to aging or disease, is believed to be associated with reduced ability to form tissue in response to injury. The ability to reinitiate tissue formation processes with morphogenic proteins may provide the basis for novel therapeutics to treat tissue disorders. THE COMPANY'S TECHNOLOGY Creative BioMolecules has played a significant role in advancing scientific understanding of the process of tissue regeneration. The Company has established a technology platform based on the molecular and cellular events responsible for tissue and organ development. This platform provides the basis for development of the Company's proprietary therapeutic products. Creative BioMolecules was the first to identify and characterize certain morphogenic proteins that are key regulators of tissue and organ formation in humans. The Company's lead morphogenic protein, OP-1, is a naturally occurring substance produced primarily in the kidney. OP-1's role early in the cascade of events that leads to tissue and organ formation, prior to commitment of a stem cell to a particular cell type, has led the Company to believe that OP-1 is capable of inducing the formation or repair of many different types of tissues. Preclinical studies conducted by the Company have indicated a prominent role for OP-1 in the formation of bone, cartilage, kidney, tooth and brain. The illustration below depicts the cascade of molecular and cellular events involved in the tissue formation process. [GRAPHIC DEPICTING MORPHOGEN INDUCED TISSUE AND ORGAN FORMATION.] 3 5 In addition to identifying and characterizing the OP-1 protein and other morphogenic proteins, Creative BioMolecules also has identified the DNA sequences which regulate the expression of OP-1, has identified the cellular receptors to which OP-1 binds and through which it acts, and has determined the three-dimensional structure of OP-1. These discoveries have enabled Creative BioMolecules to initiate a small molecule program, the goal of which is to identify second generation, orally-active drug compounds that either promote morphogenic protein expression or mimic the biological activities of morphogenic proteins. BUSINESS STRATEGY Creative BioMolecules' objective is to lead the discovery and development of therapeutics for tissue regeneration. Key elements of the Company's continuing business strategy include: SECURING MARKETING APPROVAL FOR OP-1 IN ORTHOPAEDIC RECONSTRUCTION. The Company is supporting Stryker in obtaining marketing approval of the OP-1 bone regeneration product for use in the United States and foreign markets. The Company has focused its manufacturing, quality control and quality assurance efforts on generating the manufacturing related data for the PMA application to be filed by Stryker, and preparing the Company's manufacturing facility for FDA inspection and approval. Stryker is conducting clinical trials of the OP-1 bone regeneration product and will be responsible for worldwide marketing of this product if approved by regulatory authorities. There can be no assurance that such regulatory approvals will be obtained. DEVELOPING OP-1 AS A THERAPY FOR RENAL DISEASE. In late 1996, the Company established a worldwide partnership with Biogen to develop OP-1 as a therapy for acute and chronic renal disease. Preclinical results have demonstrated the promise of this molecule in protecting against kidney damage in acute conditions and in slowing kidney function decline in chronic disease. The Company and Biogen are working closely together in the development of a renal disease therapy based on these findings. The Company is conducting preclinical studies and supplying OP-1 for the initial development stages and Biogen is also conducting preclinical studies with the goal of conducting clinical trials of this therapy. GENERATING A BREADTH OF PRODUCT PROGRAMS. The Company has targeted a number of initial indications for its OP-1 products, including the treatment of bone, cartilage, kidney, tooth and brain disorders. The Company believes the potential for expansion of its product pipeline is extensive. In addition, the Company is investigating the role in tissue formation of related morphogenic proteins in its proprietary portfolio. ESTABLISHING CORPORATE COLLABORATIONS. The Company's strategy is to seek collaborations for several of its discovery and development programs. Through collaborations, the Company augments its financial resources and leverages its equity capital. Collaborations also allow the Company to broaden its pipeline of programs, to access complementary technologies and to gain significant development, manufacturing and commercialization expertise. DEVELOPING A SMALL MOLECULE PROGRAM. The Company believes it may be able to stimulate the same biological response induced by morphogenic proteins via activation of various steps in the cascade of tissue formation with small, orally-active compounds. The Company has been able to develop biochemical and cell-based screens that mimic discrete points within the tissue formation cascade to enable the identification of small molecule candidates. In connection with establishment of a partnership to develop a renal disease therapy, Biogen extended to the Company a $15 million line of credit to fund research in a small molecule discovery program. ACCESSING NEW TECHNOLOGIES/ESTABLISHING ACADEMIC COLLABORATIONS. The Company has utilized a large network of academic collaborators to gain knowledge of new technologies, to identify additional uses for 4 6 morphogenic proteins and to extend research on existing indications. These collaborators, who are located around the world, help leverage the Company's resources. CAPITALIZING ON PROCESS DEVELOPMENT AND MANUFACTURING CAPABILITIES. The Company has significant capabilities in process development and in manufacturing OP-1 for use in both the ongoing clinical trials and for future OP-1 indications. In addition, the Company's process development and protein manufacturing capabilities are transferable to the production of other proteins, enabling the Company to fill existing plant capacity and to generate additional revenues in the near-term. The manufacture of products in-house also allows the Company to increase its participation in corporate partnerships by deriving revenues from manufacturing as well as product sales. PRODUCT DEVELOPMENT AND RESEARCH PROGRAMS The Company is developing therapeutic products based on OP-1 for use in orthopaedic reconstruction, dental therapeutics, kidney disorders, neurological disorders and osteoporosis. The following table sets forth these programs: OP-1 PRODUCTS UNDER DEVELOPMENT
Commercial U.S. Regulatory Potential Application Rights Classification(1) Status(2) - --------------------- ---------- ----------------- --------- ORTHOPAEDIC RECONSTRUCTION: Stryker Device Non-Union Fractures - Tibia U.S. Pivotal Trial Completed Non-Union Fractures -- All long bones U.S. Treatment Study Other Bone Indications (3) European and Canadian Clinical Studies Cartilage Regeneration Preclinical Studies DENTAL THERAPEUTICS: Stryker Device Periodontal Disease Pilot Clinical Trial to be Initiated in 1998 Dentin Regeneration Pilot Clinical Trial Completed KIDNEY DISORDERS: Biogen Biologic Acute Renal Failure Preclinical Studies Chronic Renal Failure Preclinical Studies NEUROLOGICAL DISORDERS: Company Biologic Stroke Preclinical Studies Other Neurological Disorders Preclinical Studies OSTEOPOROSIS Company Drug Research
- ------------ (1) "Device" refers to products which will be reviewed by the FDA's Center for Devices and Radiological Health; "Biologic" refers to products which will be reviewed by the FDA's Center for Biologics Evaluation and Research; "Drug" refers to products which will be reviewed by the FDA's Center for Drug Evaluation and Research. The indicated regulatory classifications are either current (orthopaedic reconstruction and dentin regeneration) or anticipated (kidney disorders, periodontal disease, neurological disorders and osteoporosis). These regulatory classifications may be subject to change, as the FDA has the authority to regulate the Company's products under more than one regulatory classification. 5 7 (2) "Pivotal Clinical Trials" are investigations conducted under an Investigational Device Exemption ("IDE"), intended to be used as the primary supporting documentation for regulatory approval of a new medical device. "Treatment Study" denotes an open label study pursuant to a supplement to an IDE. "European Clinical Studies" are physician sponsored feasibility investigations conducted among a small number of patients. "Pilot Clinical Trials" are feasibility investigations conducted under an IDE, that are intended to assess the initial safety and/or efficacy of a new medical device. "Preclinical Studies" denotes the collection and analysis of data from multiple studies in animals relating to toxicity and/or efficacy in preparation for an Investigational New Drug ("IND") or IDE application filing. "Research" denotes all investigative activities with respect to product candidates prior to initiation of Preclinical Studies. See "- Regulatory Issues." (3) Stryker has indicated that it has initiated clinical studies for multiple orthopaedic reconstruction applications of OP-1. ORTHOPAEDIC RECONSTRUCTION PROGRAMS Creative BioMolecules believes there is a significant commercial opportunity for the use of OP-1 products to regenerate bone and cartilage tissue in orthopaedic reconstruction. The number of procedures for which the Company believes an OP-1 bone regeneration product could have been utilized exceeded 1.6 million in 1995 in the United States. These procedures included non-healing fractures (170,000), open fracture reductions (440,000), spinal fusions (200,000), maxillofacial reconstructions (220,000), prosthetic fixations (540,000), and gap fillings (30,000). In addition, in 1995 there were 570,000 cartilage-related injuries in the United States. For orthopaedic reconstruction applications, the Company's corporate partner is Stryker, a leader in surgical and medical products for orthopaedic reconstruction. The Company has also licensed to Stryker rights to OP-1 therapies for dental and periodontal repair. Pursuant to its agreement with Stryker, the Company receives funding to support research and development in orthopaedic reconstruction and dental therapeutics, has an exclusive right to supply OP-1 bone and cartilage regeneration products for Stryker's applications, and upon marketing, will also receive royalties on any sales of such OP-1 bone and cartilage regeneration products. See "- Collaborative and Licensing Agreements - Stryker Corporation." BONE. The Company has amassed a large body of evidence that OP-1 is a potent stimulator of cartilage and bone formation. The natural conversion of stem cells into cartilage is activated by morphogenic proteins such as OP-1. In a bone environment, cartilage tissue becomes permeated by blood vessels and mineralizes to become bone. Numerous studies in six different animal species have demonstrated that OP-1 is capable of inducing bone regeneration at a wide array of sites within the body in which bone is normally present. Bone formed in response to OP-1 is biochemically and biomechanically identical to normal bone. The most widely employed reconstruction procedure for the replacement of lost or damaged bone is bone grafting. Grafting involves surgical transplantation of bone or bone chips to the site of the defect facilitating new bone formation. Autograft, the currently preferred grafting approach, involves two surgical steps: one step to harvest the graft and a second step to implant the graft at the site of the defect or injury. In addition to the pain and cost associated with this two-step procedure, an estimated twenty-five percent of patients experience complications resulting from the graft harvesting step. Allograft procedures, a second approach, utilize bone grafts or demineralized bone powder taken from cadavers. The Company believes that its OP-1 bone regeneration product applied locally to the site of the defect could be used as an alternative to many bone graft procedures, providing more reliable healing, accelerating the rate of healing and obviating the need for graft harvesting with its associated complications. Stryker has completed a pivotal clinical trial under an IDE to evaluate the use of an OP-1 bone regeneration product as a bone graft substitute. The randomized prospective study included 122 patients at 18 different centers throughout the United States. Patients included in the study had tibial non-union fractures for 6 8 at least nine months following initial injury without demonstrating progress toward union for the previous three months. These fractures are usually caused by high-energy trauma, do not heal well, and generally require repeated surgical interventions. The study was designed to evaluate whether treatment with the OP-1 bone regeneration product is equivalent to autograft, the current standard of treatment. The OP-1 bone regeneration product used in this study consisted of a paste-like formulation that was applied locally at the site of injury. The results of the trial, presented in March 1998 at the American Academy of Orthopaedic Surgeons, demonstrated that the OP-1 bone regeneration product had comparable clinical success to the autograft group without the need for a second invasive procedure to harvest autograft bone from the hip. Based on the results of the trial, other clinical and preclinical data, and the Company's development of a commercial scale manufacturing process, Stryker is preparing the PMA application for this OP-1 bone regeneration product. The analysis of the data in this trial showed statistical equivalence between OP-1 and autograft with respect to the clinically important areas of weight-bearing and pain, and that there were comparable rates of re-operation for the two groups of patients. Eleven of the 61 autograft patients and ten of the 61 OP-1 patients have required re-operation to date. There was a significant reduction in blood loss for the OP-1 patients as compared to the autograft patients and the use of OP-1 eliminated other complications associated with the harvest of autograft. Radiographic evidence of healing did not meet the predicted target for either group and was approximately 10% higher for the autograft group during the long-term follow-up period. The Company and Stryker believe that the clinical evidence of weight-bearing, pain and re-operation rates demonstrates comparable overall clinical outcomes with autograft and the OP-1 bone regeneration device. In October 1995, the FDA approved a supplemental treatment arm (an "Open-Label Trial") of the pivotal trial, allowing Stryker to expand the study to test the OP-1 bone regeneration product for the treatment of all long bone non-union fractures. Stryker has completed accruing patients in this Open-Label Trial. In addition to the U.S. pivotal trial and its supplemental treatment arm, Stryker recently initiated a clinical study in Canada to evaluate the use of the OP-1 bone regeneration product for the treatment of acute fractures. Stryker has also initiated clinical studies in several European countries under physician sponsorship. Stryker is expected to initiate further clinical testing of OP-1 bone regeneration products in a number of countries for an increasing array of orthopaedic reconstruction indications. The Company believes that Stryker's goal is to market OP-1 bone regeneration products for a number of orthopaedic reconstruction indications in major markets around the world. CARTILAGE. Creative BioMolecules and Stryker are also engaged in research on the regeneration of cartilage. Cartilage tissue is found in different parts of the body and serves various purposes. The focus of the Company's collaboration is articular cartilage, a thin layer of tough opaque tissue that lines the opposing bone surfaces of all moving joints to provide almost frictionless movement. When articular cartilage tissue in a joint suffers more than superficial damage, it does not regenerate and may further deteriorate over time. In an initial series of animal experiments, Creative BioMolecules demonstrated that an OP-1 product induced the formation of articular cartilage in cartilage defect sites. Current techniques to repair cartilage damage are limited. Arthroscopic surgery is used to relieve pain and lessen the chance of further tissue damage but cannot repair defects or stop degeneration. Many patients need to undergo more than one treatment and often never achieve lasting pain relief. Another procedure has been used to treat patients with articular cartilage defects in the knee. In this procedure, a small portion of the patient's healthy knee cartilage tissue is surgically removed. The cells within the extracted tissue sample are multiplied over several weeks using cell culture techniques and then those cells are reimplanted in the patient's knee. This process is costly, time consuming and involves several surgical procedures at different times. 7 9 The Company believes that OP-1 can be used to stimulate the regeneration of articular cartilage. Initial animal studies show that OP-1 induces cartilage formation in surgically prepared defects. The Company and Stryker are expanding the preclinical program to evaluate locally applied OP-1 in the treatment of both cartilage defects and combination bone-cartilage defects in animal studies. KIDNEY DISORDERS Kidney disorders, particularly various types of renal failure, are a large and growing health care problem. Billions of dollars are spent annually in the United States on the treatment of renal failure patients. Despite these expenditures, mortality rates remain high and quality of life low. Recent research has indicated that kidneys which recover from acute renal failure may be doing so by repeating some of those morphogenic processes that were initially involved in kidney development. Studies conducted by the Company's scientists and its collaborators have shown that OP-1 is a key morphogenic signal that initiates kidney formation at the earliest stages of kidney development. The Company's corporate partner in development of a renal disease therapy is Biogen, a leading biopharmaceutical company with expertise in development and commercialization of protein based therapeutics. Creative BioMolecules and its partner, Biogen, are developing an OP-1 product to moderate or halt the progression of renal failure. See "- Collaborative and Licensing Agreements - Biogen, Inc." ACUTE RENAL FAILURE. Acute renal failure is the rapid and sudden loss of the kidneys' ability to perform their essential functions and is often associated with multiple organ failure and a high mortality rate. The primary causes of acute renal failure are interruptions of blood flow (often as a result of certain surgical procedures or cardiac arrest), trauma and certain medications with toxic side effects to the kidneys. Based on data from the National Center for Health Statistics and other sources, Creative BioMolecules estimates that there were 250,000 diagnosed cases of acute renal failure in the United States in 1995. Currently, therapies that prevent, improve recovery or reduce the extent of kidney injury from acute renal failure are limited. The Company believes that there is a substantial commercial opportunity for a therapy that could prevent, facilitate recovery or reduce the extent of kidney injury in acute renal failure. Animal studies have been conducted by the Company and its academic collaborators to determine if the rapid onset of acute renal failure injury can be moderated by systemic administration of OP-1. Results of these studies indicate that an OP-1 product can reduce the extent of injury to the kidneys in an animal model of acute renal failure. The Company and its partner, Biogen, currently have additional preclinical studies underway with the goal of initiating human clinical investigation of an OP-1 product for the treatment of acute renal failure. CHRONIC RENAL FAILURE. Unlike acute renal failure with its sudden and rapid onset, chronic renal failure is characterized by a gradual and progressive loss of kidney function. Chronic renal failure may take several years to manifest symptoms and to require therapeutic intervention. The most common conditions associated with onset of chronic renal failure are diabetes and high blood pressure. Chronic renal failure eventually results in end stage renal disease, a condition which requires dialysis or kidney transplantation. Aside from the substantial economic costs associated with dialysis, there are significant side effects and the average life expectancy of patients on dialysis is substantially diminished. Based on reports from the United States Renal Data System and epidemiology studies, Creative BioMolecules estimates that in 1995 there were more than 300,000 patients on dialysis and that the numbers are rising by 10% each year. In addition, the Company estimates that there were more than 700,000 patients with some degree of chronic renal failure in the United States in 1995. The Company believes that there is a significant commercial opportunity for a therapy that could reduce, delay or prevent the need for dialysis or that could halt the progression of chronic renal failure. The Company and Biogen have initiated a series of studies to investigate the potential of OP-1 to moderate the progression of chronic renal failure. Results indicate that systemic administration of OP-1 can retard the 8 10 progressive loss of kidney function in an animal model of chronic renal failure. The Company and Biogen are conducting additional preclinical studies with the goal of initiating human clinical investigation of an OP-1 product for the treatment of chronic renal failure. DENTAL THERAPEUTICS Dental medicine has few therapeutics to treat the hard and soft tissues which comprise the tooth and its associated attachment structures. Creative BioMolecules, in partnership with Stryker, is developing regenerative therapies to treat these tissues. The primary current focus of the dental therapeutics research is on development of an OP-1 device for periodontal tissue repair. PERIODONTAL TISSUE REPAIR. Periodontal disease is a bacterially induced inflammatory disorder that results in the progressive destruction of the periodontal tissues that hold teeth in place. Reliable and effective restoration of periodontal tissue damaged or lost as a result of periodontal disease is not possible with current therapies. The Company estimates based on data from the most recent American Dental Association Survey of Services Rendered ("ADA Survey") that in 1995 approximately four million patients underwent periodontal surgery in the United States for severe periodontal disease. The Company believes that most of these procedures would have been candidates for treatment with an OP-1 periodontal product. Stryker plans to initiate a pilot clinical trial to treat periodontal disease with an OP-1 device in 1998. DENTIN REGENERATION. Dentin is a hard, mineralized tissue that lies immediately beneath the enamel of the tooth, surrounding the dental pulp which contains the tooth's nerve and blood vessels. Dentin acts as a protective layer to the dental pulp. A pulp exposure occurs when a defect in the tooth penetrates through the enamel and dentin into the pulp chamber. Completed pilot clinical trials showed encouraging evidence of dentin formation upon treatment with an OP-1 product. The trials were conducted under an IDE and involved placement of an OP-1 product onto an exposed pulp which was then sealed with standard dental filling material. NEUROLOGICAL DISORDERS A number of neurological disorders, including stroke, Parkinson's Disease, brain trauma, Alzheimer's Disease, and Amyotrophic Lateral Sclerosis (Lou Gehrig's Disease), are characterized by the acute or progressive death of neurons. A major advance in neuroscience was the discovery of naturally occurring proteins that promote the survival of neurons. It is generally believed that application of such proteins to neurons could slow or halt neuronal degeneration and hence slow disease progression. Studies conducted by Creative BioMolecules and its academic collaborators have indicated that OP-1 can promote neuron survival. Addition of OP-1 to neurons in culture also produces a specific effect of enhanced dendrite formation on those neurons. Based on these effects, the Company has initiated preclinical investigation of OP-1 as a treatment for certain neurological disorders. STROKE. Strokes occur when blood flow to the brain is interrupted by a clogged or burst artery. The interruption deprives the brain of oxygen and nutrients, and causes neurons to die. Stroke is the third leading cause of death in the United States and the number one cause of adult disability. The National Stroke Association estimates that there are 550,000 strokes every year in the United States and that three million Americans are permanently disabled because of stroke. Therapeutics currently available to aid the recovery from stroke are limited. The Company believes that there is a substantial commercial opportunity for a therapeutic that could promote enhanced recovery from stroke. Recent research by Creative BioMolecules' academic collaborators has indicated that OP-1 can promote the development of dendrites on neurons and thereby enhance the ability of neurons to establish 9 11 connections with adjacent neurons. The Company therefore believes that treatment with OP-1 has the potential to enhance recovery after brain injury caused by stroke. In preclinical studies in an animal model of stroke conducted by one of the Company's collaborators, OP-1 treated animals showed a statistically significant improvement in the recovery of motor skills compared to untreated animals. Creative BioMolecules is continuing these studies with the goal of initiating human clinical investigation of OP-1 as a treatment to enhance recovery from stroke. OSTEOPOROSIS Creative BioMolecules is engaged in a research program to develop therapeutic products for use in osteoporosis and other metabolic bone diseases. Osteoporosis is a term used to describe a variety of disorders that are characterized by a reduction in the mass of bone per unit volume. Current therapies for osteoporosis are thought to work by inhibiting further loss of bone tissue rather than stimulating the formation of new bone. The Company believes that treatments that would stimulate bone formation may provide therapeutic advantages in some osteoporosis patients. The Company believes an OP-1 product, or a small molecule that triggers OP-1 production or mimics its action, may cause the body to rebuild the bone mass lost to osteoporosis or other metabolic bone diseases. SMALL MOLECULE PROGRAM In addition to identifying and characterizing the OP-1 protein, Creative BioMolecules also has identified the DNA sequences which regulate the expression of OP-1, has identified the cellular receptors to which OP-1 binds and through which it acts and has determined the three-dimensional structure of OP-1. The Company is seeking to use these recent discoveries to identify orally-active drug compounds that either promote endogenous morphogenic protein expression or mimic morphogenic protein biological activities. For instance, the DNA sequences that regulate OP-1 expression and the receptors which bind OP-1 are being formatted into assays to screen and identify small molecules that increase OP-1 synthesis or mimic OP-1 action. In addition, the information that relates to the three-dimensional structure of OP-1 can be used to aid the rational design or modification of small molecule drug candidates. These assays and information have enabled the Company to develop a small molecule program that seeks to identify the next generation of drug development candidates based on morphogenic protein biology. The Company may fund this small molecule research program in part through a $15 million line of credit from Biogen. This credit facility was established by the Company and Biogen in connection with the December 1996 partnership agreement for renal disease therapy. If the Company successfully identifies one or more small molecule candidates for clinical development, Biogen has a right to license such compounds for its renal disease program. 10 12 COLLABORATIVE AND LICENSING AGREEMENTS STRYKER CORPORATION. Creative BioMolecules entered into a collaboration with Stryker in 1985 to identify and develop bone-inducing proteins. OP-1 was first isolated and characterized by the Company's scientists through research funded by Stryker. The Company will receive royalty payments based on Stryker's worldwide commercial sales of OP-1 products for use in orthopaedic reconstruction and dental therapeutics, and manufacturing revenue for supply of Stryker's product requirements for such sales. The Company is currently supplying OP-1 bone regeneration products to Stryker for use in clinical trials as part of the research program. The Company is conducting research on additional indications for OP-1 in orthopaedic reconstruction including cartilage regeneration. In 1996, the Company and Stryker extended their collaboration to include dental therapeutics incorporating OP-1. The Company's agreement with Stryker provides for research funding to the Company for this work. The current work plan establishes research objectives and funding through April 30, 1998 at which time the two companies will negotiate whether and to what extent Stryker will continue to provide financial support for research collaborations. Stryker has exclusive rights to develop, market and sell products incorporating bone and cartilage-inducing proteins developed under the research program, including OP-1, for use in the field of orthopaedic reconstruction and dental therapeutics. The Company has also agreed not to undertake research to develop bone and cartilage-inducing proteins for use in orthopaedic reconstruction and dental therapeutics, on its own behalf or for third parties, for five years after conclusion of the research program. The Company has the exclusive and irrevocable right to develop, market and sell products incorporating morphogenic proteins developed under the research program, including OP-1, for all uses and applications other than orthopaedic and dental reconstruction such as renal failure, neurological diseases, metabolic bone disorders, and others. Both the Company and Stryker have the right to grant licenses to third parties in their respective fields, and each is obligated to pay royalties to the other on its sales of such products and to share royalties received from licensees. The Company has been responsible for preclinical studies of OP-1 products, and Stryker and the Company are each responsible for clinical studies in their respective fields. The Company has the exclusive right to supply OP-1 products to Stryker for worldwide commercial sales in the field of orthopaedic and dental reconstruction. See "-Patents and Proprietary Rights." BIOGEN, INC. In December 1996, the Company entered into a Research Collaboration and License Agreement with Biogen to collaborate on the development of novel therapeutics based on OP-1 for the treatment of renal disorders. The initial focus of the collaboration is on advancing the development of OP-1 for the treatment of acute and chronic renal failure. Under the agreement, the Company granted to Biogen exclusive worldwide rights to manufacture, market and sell OP-1 and OP-1 products developed through the collaboration for the treatment of renal disease. Biogen paid the Company a $10,000,000 license fee in 1996 and made an $18,000,000 equity investment in the Company. These financial transactions were recorded in the quarter ended December 31, 1996. In addition, the agreement provides for $10,500,000 in research funding over a three year period ending December 31, 1999. Biogen also will pay up to an additional $69,000,000 upon the attainment of certain milestones, and will make available a $15,000,000 line of credit. The agreement further provides for the payment of royalties to the Company based on product sales. The Company may draw upon the $15,000,000 line of credit over a three year period ending December 31, 1999 to fund the research and development of small molecule products based on OP-1. Biogen has an option to obtain an exclusive, worldwide license to OP-1 protein small molecule products for the treatment of renal disorders. In the event Biogen exercises its option, Biogen will forgive the lesser of $10,000,000 or the principal amount outstanding under the line of credit. The remaining principle, together with all accrued and unpaid interest, is due and payable five years from the date of the first advance and may be repaid, at the Company's option, in either cash, common stock or reduction of royalties due the Company from Biogen. 11 13 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 covered the period from January 1995 through December 1997. As part of the research collaboration, the two companies agreed to extend the manufacturing contract for two years through December 31, 1999, with Biogen having the option, but not the obligation, to use the manufacturing facility for a mutually agreeable number of months in one of the two extension years. To enable the Company to meet its obligations under the manufacturing contract, Biogen financed the construction of a 7,000 square foot addition to the present facility for production under current Good Manufacturing Practices as mandated by the FDA ("cGMP") using bacterial fermentation at an estimated total cost of $2,900,000. The Company agreed to reimburse Biogen for the construction costs and leasehold improvements at the end of the contract term, including the extension, at an amount equal to Biogen's construction costs less $300,000 and less all accumulated depreciation. The reimbursement to Biogen is estimated to be no more than $2,100,000. 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 $2,400,000, as provided in an equipment lease agreement. The Company has the option to purchase the equipment at the end of the extended lease term for an amount equal to its then fair market value or for such other amount as is negotiated by the two parties. GENETICS INSTITUTE. In July 1996 Creative BioMolecules, Stryker and Genetics Institute, Inc., now a wholly-owned subsidiary of American Home Products, ("Genetics Institute") cross-licensed their worldwide patent rights, royalty-free, in the bone morphogenetic/osteogenic protein family. The agreement allows the companies to commercialize their respective lead compounds, which are now in clinical trials for bone repair and regeneration, free of the risk of patent litigation among the parties. Under the agreement, which covers both issued patents and pending patent applications, Creative BioMolecules and Stryker have exclusive rights to OP-1, their lead compound under both their own and Genetics Institute's patents. Genetics Institute and Yamanouchi Pharmaceutical Company, Ltd., its partner in the worldwide development of Genetics Institute's bone growth factors, have exclusive rights to BMP-2, their lead compound under both their own and Creative BioMolecules/Stryker patents. In addition, the companies have granted each other royalty-free, non-exclusive cross-licenses to patents and patent applications covering certain other related morphogenic proteins. ACADEMIC COLLABORATIONS. The Company has relationships with a number of academic investigators which are focused on testing morphogenic proteins in tissue regeneration and restoration applications. In its collaborations, the Company seeks to expand the scientific knowledge concerning tissue formation as well as the activities and characteristics of various proteins under development by the Company. The academic collaborators are not employees of Creative BioMolecules. Hence, the Company has limited control over their activities and limited amounts of their time are dedicated to the Company's projects. The Company's collaborators may have relationships with other commercial entities, some of which compete with the Company. Although the precise nature of each relationship varies, the collaborators and their primary affiliated institutions generally sign agreements that provide for confidentiality of the Company's proprietary technology and results of studies. The Company seeks to obtain exclusive rights to license developments that may result from these studies. ENZON CROSS-LICENSING AGREEMENT. The Company owns a number of issued U.S. and foreign patents with broad claims on the composition of BABS(TM) (Biosynthetic Antibody Binding Sites) proteins and their interdomain linkers. BABS(TM) represents a separate technology developed by the Company, as to which the Company has retained rights, but is not currently being utilized in its OP-1 development programs. One important European patent in this family has been opposed. The opposition proceeding is in its early stages, and it is too early to predict its outcome. There can be no assurance that this European patent will not be narrowed or lost in the opposition. Some of the Company's BABS(TM) technology is also covered by patents held by Enzon Corporation ("Enzon"). In December 1993, the Company and Enzon signed cross-licensing and collaboration agreements which consolidate the two companies' intellectual property rights and know-how covering BABS(TM) proteins. The agreements allow each company, on a royalty-free basis, to develop and 12 14 manufacture products based on the combined technology. Each party is also free to market products based on the combined technology in collaboration with a limited number of third parties, subject to the payment of a royalty by such third party. The parties have also agreed to outlicense the technology to third parties on a non-exclusive basis in exchange for license, milestone and royalty payments. Enzon has been designated the exclusive marketing agent for such licenses. The Company believes that consolidation of the companies' respective positions relating to BABS(TM) proteins has created a strong position in the use and manufacture of these novel proteins. MANUFACTURING The Company has significant manufacturing experience in the scale-up and production of recombinant proteins, including its own OP-1 protein. This manufacturing experience prepares the Company to move forward with its OP-1 product programs. The Company has produced a number of protein candidates by bacterial fermentation as well as by mammalian cell culture techniques in the laboratory. The Company has scaled-up both of these production processes and has produced clinical grade recombinant proteins using each of them. In March 1993, the Company acquired a 47,000 square foot manufacturing facility in Lebanon, New Hampshire from Verax Corporation ("Verax") to scale-up the production of its proteins. The facility was designed to enable production for clinical research and commercial use in accordance with cGMPs. In September 1994, the Company signed a three year manufacturing contract with Biogen to produce several of Biogen's protein-based therapeutic candidates for Biogen's use in its clinical trials. To enable the Company to meet its obligations under the manufacturing contract, Biogen financed the construction of a 7,000 square foot addition to the facility in Lebanon, New Hampshire, to use large scale bacterial fermentation equipment and agreed to lease equipment to the Company for the operation of such portion of the facility. See "- Collaborative and Licensing Agreements - Biogen, Inc." The Company believes that the acquisition and expansion of this manufacturing facility will significantly enhance its ability to produce qualified products for clinical trials and commercialization of OP-1. COMPETITION The potential therapeutic products which Creative BioMolecules is developing will compete with existing and new products being developed by others for treatment of the same indications. Competition in the development of human therapeutics is particularly intense and includes many large pharmaceutical and biopharmaceutical companies, specialized biotechnology firms, universities and other research institutions. Certain of these companies have extensive financial, marketing and human resources which may result in significant competition. Many pharmaceutical companies have extensive experience in undertaking clinical trials, in obtaining regulatory approval to market products and in manufacturing on a large scale. Other biopharmaceutical companies may also have more resources and experience in these areas than the Company. Several pharmaceutical companies have entered or expanded their presence in the biotechnology field by acquiring specialized biotechnology companies, thus providing additional resources to the acquired companies which may allow them to become more competitive. The technology underlying the development of human therapeutic products is expected to continue to undergo rapid and significant advancement and change. In the future, the Company's technological and commercial success will be based on its ability to develop proprietary positions in key scientific areas and efficiently evaluate potential product opportunities. A number of companies are engaged in the research and development of morphogenic proteins for the repair of bone and cartilage. The Company is aware that Genetics Institute, acquired in 1997 by American Home Products, and its collaborative partners are pursuing the development of bone morphogenetic proteins and have initiated human clinical trials of a recombinant bone morphogenetic protein for the repair of orthopaedic and other skeletal defects. Genetics Institute has entered into relationships with Yamanouchi 13 15 Pharmaceuticals Co., Ltd. and Sofamor Danek Group, Inc. covering development and marketing of bone morphogenetic proteins. Other companies may attempt to develop products incorporating proteins purified from bone, which may include bone morphogenetic proteins, for orthopaedic applications. In addition, the Company believes that a number of biopharmaceutical companies are developing other recombinant human proteins, primarily growth factors, for use in the repair of bone and cartilage defects and in other indications. A number of other companies are pursuing traditional therapies, including autografts, allografts and electrical stimulation devices, as well as cell therapies for the repair of bone and cartilage defects that may compete with the Company's products. The Company's potential products for dental indications through its collaboration with Stryker will compete primarily with traditional therapies. The Company is aware that Genetics Institute is pursuing the development of bone morphogenetic proteins for the repair of periodontal tissue. The Company is aware of several biotechnology companies that are developing recombinant protein based products for the treatment of renal and neurological disorders. In the field of renal failure two different products are being evaluated in human clinical studies for acute renal failure and one of those products is also being evaluated preclinically for chronic renal failure. Creative BioMolecules is not aware of any companies developing morphogenic protein based products for either acute or chronic renal failure. In the field of neurological disorders, particularly in the area of recovery from stroke, there are several companies engaged in preclinical and clinical studies with recombinant protein based and more traditional small molecule products. A number of biotechnology and pharmaceutical companies are pursuing the development of other recombinant growth factors and hormones for the treatment of osteoporosis. The Company believes that only a limited number of companies are seeking to develop morphogenic proteins for the treatment of osteoporosis. However, many major pharmaceutical companies are pursuing the development of traditional drug therapies for the treatment of osteoporosis. Certain therapies approved or in development for osteoporosis have demonstrated efficacy at slowing the loss of bone mineral density and improving clinical outcomes for patients. Such therapies provide alternatives to the treatment of osteoporosis that would compete with any osteoporosis products developed by the company. In addition to competing with pharmaceutical and biotechnology companies, the Company's products and technologies will also compete with those developed by academic institutions, government agencies and other public organizations conducting research that may discover new therapies, seek patent protection or establish collaborative arrangements for product research. The Company believes that in addition to a product's patent position, efficacy and price, the timing of a product's introduction may be a major factor in determining eventual commercial success and profitability. Early entry may have important advantages in gaining product acceptance and market share. Accordingly, the relative speed with which the Company can complete preclinical and clinical testing, obtain regulatory approvals, and supply commercial quantities of the product is expected to have an important impact on the Company's competitive position, both in the United States and abroad. Other companies may succeed in developing similar products that are introduced earlier, are more effective, or are produced and marketed more effectively. There can be no assurance that research and development by others will not render any of the Company's products obsolete or noncompetitive. PATENTS AND PROPRIETARY RIGHTS Creative BioMolecules pursues a policy of obtaining patent protection for patentable subject matter in its proprietary technology. As of March 14, 1998, the Company owned or had rights to 55 issued patents and 14 16 87 pending patent applications in the United States. The Company also owned or had rights to 51 issued foreign patents and 143 foreign patent applications pending in Australia, Canada, Europe, Japan and certain other countries. Many of these applications were filed through the Patent Cooperation Treaty and the European Patent Office seeking to preserve for the Company the right to file applications in various countries. Certain patents and patent applications relating to morphogenic proteins, including OP-1, are owned by Stryker and have been licensed exclusively to the Company for use in all indications other than orthopaedic reconstruction. See "- Collaborative and Licensing Agreements - Stryker Corporation." Certain other patents and patent applications are owned jointly with other collaborators. There can be no assurance, however, that any such patent applications will issue as patents, or that any patent now issued, or to be issued, will provide a preferred position with respect to the technology or products it covers. MORPHOGENIC PROTEIN TECHNOLOGY. Within the Company's patent estate, the Company owns or has rights to 30 issued U.S. patents, 30 granted foreign patents, 72 U.S. pending applications and 114 pending foreign applications. Of these, 20 U.S. patents, 21 foreign patents, 18 U.S. pending applications and 37 foreign applications pertain to composition of matter; 5 U.S. patents, 1 U.S. pending application, and 8 foreign applications pertain to methods of production; 1 U.S. patent, 1 foreign patent, 18 U.S. applications and 31 foreign applications pertain to the Company's small molecule program and 4 U.S. patents, 8 foreign patents, 35 U.S. pending applications and 38 foreign applications pertain to particular tissue applications, including renal, neural, bone, liver, periodontal, dentin, gastrointestinal tract and immune cell-mediated tissue applications. On July 15, 1996, Creative BioMolecules, Stryker and Genetics Institute entered into a cross-license agreement in which the parties granted world-wide, royalty-free, cross licenses to each other in the bone morphogenetic/osteogenetic protein family (see "- Collaborative and Licensing Agreements - Genetics Institute"). This cross-license, covering both issued patents and pending applications in the field of bone morphogenic proteins, eliminates the risk of patent litigation between the parties relating to the Companys individual and joint efforts with Stryker to commercialize OP-1. OTHER TECHNOLOGY. Within the Company's patent estate, the Company owns or has rights to 8 U.S. patents, 6 foreign patents, 8 U.S. applications and 17 foreign applications related to its BABS(TM) and interdomain linker technology. The Company also has patents issued in the United States and certain foreign countries, and applications pending in the United States and certain foreign countries on compositions of matter, methods of use and methods of production relating to other proprietary technology. The Company's success will depend in part on its ability to obtain marketing exclusivity for its products for a period of time sufficient to establish a market position and achieve an adequate return on its investment in product development. The Company believes that protection of its products and technology under United States and international patent laws and other intellectual property laws is an important factor in securing such market exclusivity. U.S. patents issued from applications filed prior to June 8, 1995 have a term of the longer of 17 years from patent grant or 20 years from the earliest filing date to which the application is entitled benefit. U.S. patents issued from applications filed on or after June 8, 1995 have a term of 20 years from the earliest filing date to which the application is entitled benefit. Patents in most foreign countries have a term of 20 years from the date of the filing of the patent application. In the United States and certain foreign countries, the exclusivity period provided by patents covering pharmaceutical products may be extended by a portion of the time required to obtain regulatory approval for a product. The Company's issued U.S. patents begin expiring in 2005, and issued foreign patents begin expiring in 2006. Although the Company pursues patent protection, significant legal issues remain as to the extent to which patent protection may be afforded in the field of biotechnology, in both the United States and foreign countries. Furthermore, the scope of protection has not yet been broadly tested. Therefore, the Company also relies upon trade secrets, know-how and continuing technological advancement to develop and maintain its 15 17 competitive position. Disclosure of the Company's know-how is generally protected under confidentiality agreements. There can be no assurance, however, that all confidentiality agreements will be honored, that third parties will not develop equivalent technology independently, that disputes will not arise as to the ownership of technical information or that wrongful disclosure of the Company's trade secrets will not occur. Certain products and processes important to Creative BioMolecules may be subject in the future to patent protection obtained by others. Biotechnology is developing rapidly. Because many patent applications have been filed in this field in recent years, the scope that courts will give to the claims of patents issued from such applications and the nature of these claims cannot be predicted. Several patent applications based on work done years ago have been issued to others with broad claims directed to the use of basic recombinant DNA technology. It is premature to predict what general trend, if any, will emerge as to the breadth of allowed claims for biotechnology products and related uses. The allowance of broader claims may increase the incidence and cost of interference proceedings at the United States Patent and Trademark Office and the risk of infringement litigation. A policy of allowing narrower claims, conversely, could limit the value of the Company's proprietary rights under its patents. It is possible that Patent and Trademark Office interference proceedings will occur with respect to a number of the Company's patent applications or issued patents. It is also likely that subject matter patented by others will be required by the Company to research, develop, or commercialize at least some of the Company's products. No assurance can be given that licenses under any such patent rights of others will be made available on acceptable terms. REGULATORY ISSUES Regulation by governmental agencies in the United States and other countries is a significant factor in the clinical evaluation and licensing of the Company's potential products as well as in the development and research of new products. All of the Company's products currently under development will require regulatory approval by the FDA under the Food, Drug, and Cosmetic Act ("FD&C Act"), as a drug or device, or under the Public Health Service Act as a biological, to be marketed in the United States. Regardless of the classification assigned to the Company's products, all human diagnostic and therapeutic products are subject to rigorous testing. Generally, considerable time and expense are required to clinically evaluate the safety and efficacy of a new product. Moreover, even after extensive preclinical testing, unanticipated side effects can arise during clinical trials that can halt or delay the regulatory process at any point. The Company believes that seeking and obtaining regulatory approval for a new therapeutic or diagnostic product is likely to take several years and require the expenditure of substantial resources. Products developed through genetic engineering, such as the Company's products, are relatively new, and state and local regulation may increase as genetically engineered products become more common. The federal government oversees certain recombinant DNA research activity through the National Institutes of Health Guidelines for Research Involving Recombinant DNA Molecules (the "NIH Guidelines"). The Company believes it complies with the NIH Guidelines, which prohibit or restrict certain recombinant experiments, set forth levels of biological and physical containment of recombinant DNA molecules to be met for various types of research, and require that institutional biosafety committees approve certain experiments before they are initiated. Compliance with the NIH Guidelines has not had, and the Company does not foresee that it will have, a material effect on the competitive position or cash flow of the Company. Discussions have been underway since 1996 between NIH and FDA regarding alternative models for regulation of recombinant DNA research and the products resulting from such research, and the appropriateness of any continued NIH role. It is not possible to predict the effect of such potential regulatory changes on the Company or its potential competitors. On November 21, 1997, the FDA Modernization Act of 1997 ("FDAMA") was enacted into law. In addition to reauthorizing the collection of user fees for prescription drugs, FDAMA changed the FD&C Act in numerous ways. Because some provisions of FDAMA require the FDA to develop further regulations, or are 16 18 unclear, it is not possible for the Company to predict the overall effect of FDAMA on the Company or its potential competitors. PHARMACEUTICAL AND BIOLOGICAL PRODUCTS. The Company expects that certain of its potential products will be regulated by the FDA as pharmaceuticals or biologicals. The regulatory approval of pharmaceutical and biological products in the United States intended for therapeutic use in humans involves many steps. The initial phase of the FDA approval process involves preclinical testing to demonstrate that the product would not be an unreasonable hazard in clinical studies with human subjects. Preclinical tests must typically meet the FDA's good laboratory practices regulations if they are to be used for the purpose of an application to the agency. Upon completion of preclinical testing, an IND application must be filed with the FDA. The application includes (i) information on the composition of the product including pharmacology and toxicology, (ii) chemistry, manufacturing, and control information, (iii) results of all the preclinical safety and efficacy investigations including in vivo and in vitro studies, (iv) information on any previous human experience with the product, (v) a clinical design and protocol, (vi) information on the investigators, (vii) the necessary agreements among parties involved in the testing and (viii) approval of an Institutional Review Board at the center(s) conducting the study or studies. If the application has not been denied or if additional information has not been requested by the FDA within 30 days of filing, the applicant may then begin clinical studies. Clinical testing usually occurs in three phases to demonstrate safety and efficacy of the product. Phase I clinical trials consist of testing for the safety and tolerance of the product with a small group of subjects and may also yield preliminary information about the efficacy and dosage levels of the product. Phase II clinical trials involve testing for efficacy, determination of optimal dosage and identification of possible side effects in a larger patient group. Phase III clinical trials consist of additional testing for efficacy and safety with an expanded patient group. Currently, FDA requires the filing of new information for each distinct clinical study. After product approval, FDA may request or require an additional phase (Phase IV) of clinical studies to provide additional information on safety and efficacy. Upon successful completion of Phase III testing, either a New Drug Application ("NDA") or Biologics License Application ("BLA") can be filed, depending upon whether the product is designated as a drug or a biological, respectively. The FDA normally requires at least two adequate and well-controlled clinical trials for product approval. All approval types require a detailed review of all data collected from clinical studies, the composition of the drug or biological, non-clinical pharmacology and toxicology data, environmental impact data, human pharmacokinetics and bioavailability data, patent information, certain case report data and forms, the labeling that will be used, information on chemistry, manufacturing, and controls, and samples of the product. After the FDA completes its review of the application, the product is typically reviewed by a panel of medical experts, and the applicant is required to answer questions on its safety and efficacy. The FDA considers the recommendation of the panel, and may in its own discretion approve an NDA or BLA. If so approved, the product may then be marketed. DEVICES. The Company expects that certain of its potential products will be regulated by the FDA as Class III devices. Preclinical evaluations of Class III devices are similar to those of pharmaceuticals and biologicals, with additional emphasis on implant persistence, implant sensitization, and carrier characterization and specifications. Upon completion of preclinical testing, an IDE application is filed with the Center for Devices and Radiological Health in the FDA. This application consists of (i) identifying information on the sponsor, (ii) complete reports of prior investigations of the device, (iii) a summary of the investigational plan (or the complete plan), (iv) a description of the methods, facilities, and controls used for manufacturing, processing, packing, storage, and installation of the device, (v) example investigator agreements, (vi) a list of investigators, (vii) certifications concerning investigators and Investigational Review Boards, (viii) copies of labeling and (ix) materials relating to environmental impact and informed consent. If the application has not been denied by the FDA within 30 days of filing, the applicant may then begin clinical studies. The FDA may approve the IDE before the end of the 30 day period, in which case the applicant may begin clinical studies immediately. 17 19 The clinical testing of a device may consist of a preliminary feasibility study leading to a much larger pivotal safety and effectiveness study, or it may consist of only one or more larger pivotal safety and effectiveness studies. Upon successful completion of the clinical testing and compilation of the data, a PMA application can be filed. This application consists of (i) indications for use, (ii) product description, (iii) discussion of alternatives to use of the device, (iv) marketing history (worldwide), (v) review of clinical studies and results, (vi) methods, facilities and controls (as in an IDE), (vii) non-clinical data, (viii) if only one clinical study is used, a justification of that approach, (ix) identification and bibliography of any information relevant to the safety and effectiveness of the device, (x) product samples, (xi) product labeling and (xii) certain environmental information. The FDA is required to respond to the PMA submission within 180 days, although the FDA may not adhere to this schedule and further review may take additional time. After the FDA completes its review of the application, the product is typically reviewed by a panel of medical experts, and the applicant is required to answer questions on its safety and effectiveness. At the recommendation of the panel, a PMA may be granted, and the product may then be marketed. TREATMENT IND STATUS. Before the completion of clinical trials for products, a company may file for Treatment IND status under provisions of the IND regulations. These regulations apply to products for patients with serious or life-threatening diseases and are intended to facilitate the availability of new products to desperately ill patients after clinical trials have shown convincing evidence of efficacy, but before general marketing approval has been granted by the FDA. Under these regulations, it may be possible for the Company to recover some of the costs of research, development and manufacture of its products before commercial marketing begins. The Company may seek Treatment IND status for qualified products, although the decision whether to grant such status lies with the FDA. FDAMA codifies many of the FDA's previous treatment IND regulations. In addition, it creates new authority for expanded access to investigational therapies for serious diseases, if the request is performed through a physician, the product shows sufficient evidence of safety and efficacy, and provision of the product would not interfere with ongoing clinical research. The FDA has also adopted regulations intending to accelerate the approval of therapeutic products for serious and life threatening diseases under certain circumstances. The Company may seek to utilize these regulations for qualified products. Approvals under these regulations may be conditioned on further studies by the Company, may include restrictions on marketing, may require prior submission of promotional materials, and may be subject to expedited withdrawal of approval. In addition to existing FDA regulations, FDAMA added new "fast track" authority allowing FDA to expedite the approval of drugs for serious or life-threatening conditions. Requirements for fast track drugs are similar to those for accelerated approving, including FDA authority to require post-clinical studies, presubmission of promotional materials, and enhanced NDA withdrawal authority. USER FEES. FDAMA amended existing laws to continue FDA authorization to charge user fees for prescription drug products. The purpose of the user fee provisions of FDAMA is to reduce the time that FDA takes to act on completed applications. Under an informal letter arrangement, FDA has committed to act on priority applications within 6 months, regular applications within 12 months (reducing to 10 months over the next 5 years), manufacturing supplements within 6 months (reducing to 4 months over the next 5 years), and resubmissions with relatively minor new information within 6 months (reducing to 2 months over the next 5 years). The user fee provisions of FDAMA contemplate that the fees will be used to fund additional resources at FDA to enable it to meet these informal review deadlines. However, the law itself does not impose an affirmative obligation on FDA to meet these deadlines or any overall approval goals. Some companies may receive an exemption from users fees, either because they qualify as small businesses, because their products are used for rare diseases or conditions, or because they meet other technical exceptions contained in the law. FDAMA continues FDA authority to grant waivers to protect the public health, if fees would exceed costs, on equitable grounds, or for small businesses. Because FDAMA changed the existing waiver provisions of the 18 20 previous user fee law, it is not clear whether existing FDA draft guidances on waiver criteria apply or will have to be redrafted. The Company may seek exceptions or waivers for its products as appropriate, although given the current uncertainty of the law there can be no assurance such exceptions or waivers will be granted. At present, the user fee provisions of the FD&C Act, as modified by FDAMA, do not apply to medical devices. FACILITIES INSPECTION. In addition to product approval prior to marketing, the Company must also obtain FDA approval of the facility in which its products will be manufactured. In the case of a pharmaceutical or a device, the Company must be in compliance with cGMP requirements; inspection of the Company's facilities to determine such compliance would be conducted as part of the overall NDA, BLA, or PMA approval. Since any NDA, BLA or PMA approved by the FDA is both site and process specific, any material change by the Company in its manufacturing process, equipment or location would necessitate additional FDA review and approval. Recently, the FDA promulgated new regulations concerning cGMPs for medical devices. These new regulations include elements drawn from existing international standards and a new emphasis on design of medical devices (in addition to the existing focus on manufacturing). Until these new regulations are better understood by industry, compliance with medical device cGMPs may prove more difficult than in the past, and may require the use of additional resources or even the redesign of some existing devices or facilities. FOREIGN REGULATIONS. Regulations concerning the marketing of human therapeutic and diagnostic products are generally imposed by foreign governments and may have an impact on the Company's anticipated operations. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursement levels vary widely from country to country. The Company attempts to conduct its development activities in a manner that would also support regulatory filings in selected foreign countries. OTHER. Amendments to the federal laws have loosened export restrictions on therapeutic products, including amendments permitting the export of products not yet approved in the United States but approved in certain foreign countries. The Company may choose to conduct such exports of its products prior to obtaining FDA marketing approval in the United States. In addition, the Company is subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Research Conservation and Recovery Act, regulations administered by the Nuclear Regulatory Commission, national restrictions on technology transfer, import, export and customs regulations and other present or possible future local, state or federal regulation. From time to time, other federal agencies and congressional committees have indicated an interest in implementing further regulation of biotechnology applications. The Company is not able to predict whether any such regulations will be adopted or whether, if adopted, such regulations will adversely affect the Company's business. EMPLOYEES As of February 27, 1998, the Company had 212 full-time employees, 32 of whom hold Ph.D., D.V.M., or M.D. degrees. The Company considers its relations with its employees to be good and has experienced a low rate of employee turnover. None of the Company's employees is covered by a collective bargaining agreement. The Company has entered into confidentiality agreements with all of its employees. 19 21 ITEM 2. DESCRIPTION OF PROPERTY The Company currently leases an aggregate of 69,000 square feet in two facilities in Hopkinton, Massachusetts. The location is approximately 30 miles west of Cambridge and Boston and 20 miles east of Worcester, all of which are major research centers in health care and biotechnology in Massachusetts. The Company's larger facility, encompassing 54,000 square feet of space, houses research and development laboratories and small scale production suites. The research and development laboratories are fully equipped for recombinant DNA synthesis, protein engineering, analytical chemistry, cell biology, and process development activities. The production suites are designed and equipped to produce clinical grade protein products. The smaller facility, with 15,000 square feet of space, houses its corporate offices. Both leases expire in 2001. The Company purchased a leasehold interest in, and an option to purchase, a 47,000 square foot manufacturing facility in Lebanon, New Hampshire on March 15, 1993. The location is approximately 130 miles north by northwest of Boston, Massachusetts and 90 miles southeast of Burlington, Vermont. This facility houses two cGMP production suites, quality assurance/quality control laboratories and support offices. The facility is fully equipped for cGMP production of recombinant proteins from mammalian cell culture and monoclonal antibodies from Hybridoma cultures. The lease expires in 2008. The Company has room for expansion within the site. The Company currently leases 9,000 square feet of office space in Boston, Massachusetts for administrative offices. The lease expires in 2002. In September 1994, the Company signed a three year manufacturing contract with Biogen to produce for clinical trials several of Biogen's protein-based therapeutic candidates in the manufacturing facility in Lebanon, New Hampshire. To enable the Company to meet its obligations under the manufacturing contract, Biogen financed the construction of a 7,000 square foot addition to the present facility for cGMP production using bacterial fermentation and agreed to lease equipment to the Company for the operation of such portion of the facility and for the cGMP production of bacterial fermentation products by the Company. The Company believes that its existing facilities are adequate for its near term needs. The Company expects that additional facilities may be required to meet the Company's future needs. ITEM 3. LEGAL PROCEEDINGS There are no material pending legal proceedings to which the Company is a party or of which any of its property is the subject. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the year ended December 31, 1997 to a vote of the Company's security holders. 20 22 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's common stock is traded on The Nasdaq Stock Market under the symbol CBMI. The following table presents quarterly information on the price range of the Company's common stock, indicating the high and low sale prices reported by The Nasdaq Stock Market.
High Low ---- --- 1997 4th Quarter............................ $11.63 $6.63 3rd Quarter............................ 11.13 5.88 2nd Quarter............................ 10.13 6.88 1st Quarter............................ 13.38 7.50 1996 4th Quarter............................ 12.75 6.50 3rd Quarter............................ 8.50 5.13 2nd Quarter............................ 10.88 7.56 1st Quarter............................ 13.00 6.88
STOCKHOLDERS As of February 27, 1998, there were approximately 352 stockholders of record of the Company's common stock. DIVIDENDS The Company has not paid any dividends on its common stock since its inception and does not intend to pay any dividends on its common stock in the foreseeable future. The Company intends to retain its earnings, if any, for the development of its business. RECENT SALES OF UNREGISTERED SECURITIES In October 1997, the Company issued a total of 78,685 shares of common stock to institutional investors, pursuant to the cashless exercise of warrants to purchase 100,628 shares of common stock at an exercise price of $2.385 per share. In November 1997, the Company issued a total of 17,600 shares of common stock to an equipment lessor, pursuant to the exercise of a warrant at an exercise price of $5.00 per share, for an aggregate purchase price of $88,000. 21 23 The Company issued these securities without registration in reliance upon the exemption provided by Section 4(2) of the Securities Act of 1933, since no public offering was involved. No underwriters were involved in the offer and sale of the securities. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below with respect to the Company's consolidated statements of operations for the years ended December 31, 1997 and 1996, the three months ended December 31, 1995 and for the year ended September 30, 1995, and with respect to the consolidated balance sheets as of December 31, 1997 and 1996, are derived from the consolidated financial statements that have been audited by Deloitte & Touche LLP, independent auditors, which are included elsewhere in this Form 10-K. The consolidated statements of operations data for the years ended September 30, 1994 and 1993, and the consolidated balance sheets data as of December 31, 1995, September 30, 1995, 1994 and 1993, are derived from audited consolidated financial statements not included herein. 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.
THREE YEARS ENDED MONTHS YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30, ----------------- DECEMBER ------------------------------ 1997 1996 31, 1995(1) 1995 1994 1993 ---- ---- ----------- ---- ---- ---- (In thousands, except per share amounts) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Revenues: Research and development contracts ..... $ 12,693 $ 5,548 $ 971 $ 5,824 $ 3,652 $ 1,576 Manufacturing contracts ................ 394 4,486 770 6,159 1,411 461 License fees and royalties ............. 11,122 2 544 7 30 Product sales .......................... 16 35 Interest ............................... 2,331 1,174 261 649 580 549 Other ................................. 15 22 53 141 3 -------- -------- -------- -------- -------- -------- Total revenues ...................... 15,433 22,352 2,004 13,229 5,807 2,654 -------- -------- -------- -------- -------- -------- Costs and expenses: Research and development .............. 25,122 15,651 3,194 11,688 17,680 12,898 Cost of manufacturing contracts ....... 274 3,823 715 5,330 1,389 439 Cost of product sales ................. 3 6 General and administrative ............ 6,473 4,901 1,254 3,604 4,794 3,121 Interest .............................. 216 217 61 229 200 209 -------- -------- -------- -------- -------- -------- Total costs and expenses ............ 32,085 24,592 5,224 20,851 24,066 16,673 -------- -------- -------- -------- -------- -------- Net loss ................................ $(16,652) $ (2,240) $ (3,220) $ (7,622) $(18,259) $(14,019) ======== ======== ======== ======== ======== ======== Basic and diluted loss per share(2) ..... $ (0.50) $ (0.07) $ (0.11) $ (0.37) $ (0.95) $ (0.94) ======== ======== ======== ======== ======== ======== Shares for basic and diluted(2) ......... 33,078 30,062 28,120 20,431 19,212 14,855 ======== ======== ======== ======== ======== ========
DECEMBER 31, SEPTEMBER 30, --------------------------------- -------------------------------- 1997 1996 1995 1995 1994 1993 ---- ---- ---- ---- ---- ---- CONSOLIDATED BALANCE SHEET DATA: (In thousands) Cash, cash equivalents and marketable securities ....................... $ 30,598 $ 50,075 $ 20,002 $ 10,486 $ 5,423 $ 25,255 Working capital .................................. 32,381 48,174 21,743 11,651 4,927 23,940 Total assets ..................................... 59,038 73,819 41,341 32,192 27,470 45,326 Capital lease obligations, less current portion . 2,005 1,651 1,711 1,713 1,750 1,798 Accumulated deficit .............................. (88,090) (71,438) (69,198) (65,978) (58,356) (40,098) Total stockholders' equity ....................... 52,709 67,261 37,829 28,269 22,807 40,675
- -------------------- (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 basic and diluted loss per common share. 22 24 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. In 1996 and 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 agreements with collaborative partners. 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 major research collaborations with Stryker to develop products for orthopedic reconstruction and with Biogen to develop products for the treatment of renal disorders. Under the research portion of the collaboration with Stryker, the Company supplies OP-1 products to Stryker for clinical trials and other uses, 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 1998. In December 1996, the Company signed a Research Collaboration and License Agreement with Biogen (the "Biogen Research Agreement"). Under the research collaboration, the Company performs research work through December 31, 1999 pursuant to work plans established periodically by the two companies, and supplies OP-1 to Biogen for preclinical and clinical uses. 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 and at the Company's research facility in Hopkinton, Massachusetts. The Company is presently a party to a manufacturing contract with Biogen (the "Manufacturing Contract") to produce several of Biogen's protein-based therapeutic candidates. The companies agreed that the supply of OP-1 to Biogen pursuant to the Biogen Research Agreement during 1997 satisfied Biogen's 1997 obligation under the Manufacturing Contract. The companies also agreed to extend the Manufacturing Contract for two years through 1999, with Biogen having the option, but not the obligation, to use the manufacturing facility for a mutually agreeable number of months in one of the two years. 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. 23 25 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 month period ended December 31, 1995. RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1997 AND 1996 AND SEPTEMBER 30, 1995. The Company's revenues in the fiscal years ended December 31, 1997, December 31, 1996 and September 30, 1995 were $15,433,000, $22,352,000 and $13,229,000, respectively. Research and development contract revenues decreased 5% from $5,824,000 in the year ended September 30, 1995 to $5,548,000 in the year ended December 31, 1996 and increased 129% to $12,693,000 in the year ended December 31, 1997. The decrease in research and development contract revenues from the year ended September 30, 1995 to the year ended December 31, 1996 primarily is due to fluctuations in research funding from Stryker. The increase in research and development contract revenues from the year ended December 31, 1996 to the year ended December 31, 1997 primarily is a result of research activity under the research collaboration with Biogen. Manufacturing contract revenues for the years ended December 31, 1996 and September 30, 1995 reflect manufacturing for Biogen, under the Manufacturing Contract, conducted at the Company's manufacturing facility in Lebanon, New Hampshire. Manufacturing contract revenues for the year ended December 31, 1997 reflect manufacturing for Biogen, under a Service Agreement separate from the Biogen Research Agreement and Manufacturing Contract, conducted at the Company's research facility in Hopkinton, Massachusetts. The Company does not anticipate significant manufacturing contract revenues during the year ending December 31, 1998. License fees and royalties revenues for the year ended December 31, 1996 include a $10,000,000 license fee from Biogen as part of the research collaboration with the Company to develop products for the treatment of renal disorders, $500,000 from Stryker for the Company's licensing to Stryker of patent rights and know-how in the dental field and $622,000 received for licensing patent rights and know-how associated with certain protein technology which is not central to the Company's business. License fees and royalties revenues for the year ended September 30, 1995 include revenue from licensing patent rights and know-how associated with certain protein technology which is not central to the Company's business. Interest revenues increased 81% from $649,000 in the year ended September 30, 1995 to $1,174,000 in the year ended December 31, 1996 and increased 99% to $2,331,000 in the year ended December 31, 1997. The increases are due to increases in the average funds of the Company available for investment. In July 1996, the Company completed an underwritten public offering of the Company's common stock. In December 1996, under the Biogen Research Agreement and a Restricted Stock Purchase Agreement, discussed further below, Biogen paid to the Company a $10,000,000 license fee and made an $18,000,000 equity investment in the Company's common stock. The Company's total costs and expenses, consisting primarily of research and development expenses, increased 18% from $20,851,000 in the year ended September 30, 1995 to $24,592,000 in the year ended December 31, 1996 and increased 30% to $32,085,000 in the year ended December 31, 1997. Research and development expenses increased 34% from $11,688,000 in the year ended September 30, 1995 to $15,651,000 in the year ended December 31, 1996 and increased 61% to $25,122,000 in the year ended December 31, 1997. The increase in research and development expenses from the year ended September 30, 1995 to the year ended December 31, 1996 is due in part to an increase in development activities by the Company at the manufacturing facility in Lebanon, New Hampshire. The facility operating costs related to such development activities are reported as research and development expenses for such periods. Also contributing to the increase were staff increases and a corresponding increase in purchases of laboratory supplies, services, recruiting and relocation expenses, and increased expenditures on academic collaborations and subcontracted research related to product and technology development. The increase in research and development expenses from the year ended December 31, 1996 to the year ended December 31, 1997 is due to expanded research and 24 26 development activities, including work in preparation for the planned filing of a PMA application by Stryker for the bone graft substitute product, renal disease therapy as part of the Biogen collaboration and research into neurological disease therapies and other indications proprietary to the Company. The Company used the manufacturing facility in Lebanon, New Hampshire for the year ended December 31, 1997 for the production of OP-1 for use by Stryker, Biogen and the Company. Costs associated with the production of OP-1 for use by Stryker, Biogen and the Company are reported as research and development expenses. The Company anticipates that research and development expenses will increase in the year ending December 31, 1998 from the year ended December 31, 1997 due to expanded research and development activities, including work in preparation for the planned filing of a PMA application by Stryker for the bone graft substitute product and research into neurological disease therapies and other indications proprietary to the Company. Cost of manufacturing contracts consists of the costs associated with the manufacturing for Biogen, discussed under manufacturing contract revenues above. General and administrative expenses increased 36% from $3,604,000 in the year ended September 30, 1995 to $4,901,000 in the year ended December 31, 1996 and increased 32% to $6,473,000 in the year ended December 31, 1997. The increase from the year ended September 30, 1995 to the year ended December 31, 1996 is due to increases in executive staff and recruiting and relocation costs, along with additional costs associated with the Biogen transaction. The increase from the year ended December 31, 1996 to the year ended December 31, 1997 is due to increases in executive staff and recruiting and relocation costs. Interest expense decreased 5% from $229,000 in the year ended September 30, 1995 to $217,000 in the year ended December 31, 1996 and decreased less than 1% to $216,000 in the year ended December 31, 1997. These decreases are due to the repayment of obligations under capital leases. The Company anticipates that interest expense will increase in the year ended December 31, 1998 due to an increase in obligations under capital leases. In October 1997, the Company entered into a master lease agreement for the sale and leaseback or lease of up to $2,000,000 of laboratory and office equipment, of which $1,518,000 is available at December 31, 1997. See discussion under "Liquity and Capital Resources" below. As a result of the foregoing, the Company incurred a net loss of $16,652,000 in the year ended December 31, 1997 compared to a net loss of $2,240,000 in the year ended December 31, 1996 and a net loss of $7,622,000 in the year ended September 30, 1995. LIQUIDITY AND CAPITAL RESOURCES At December 31, 1997, the Company's principal sources of liquidity consisted of cash, cash equivalents and marketable securities of $30,598,000, a $15,000,000 unsecured line of credit from Biogen and a $1,518,000 equipment lease line, as discussed further below. The Company has financed its operations primarily through placements of equity securities, revenues received under agreements with collaborative partners, and more recently, manufacturing contracts. Since inception, sales of equity securities have raised approximately $133,879,000 in gross proceeds and the Company has recorded approximately $95,093,000 in gross revenues. The Company increased its investment in property, plant and equipment to $31,378,000 at December 31, 1997 from $28,458,000 at December 31, 1996. The Company currently plans to spend approximately $7,000,000 in the year ended December 31, 1998 in leasehold improvements, equipment purchases and validation expenses required to obtain FDA approval of the manufacturing facility and to expand the Company's research, development and manufacturing capabilities. In October 1997, the Company entered into a master lease agreement for the sale and leaseback or lease of up to $2,000,000 of laboratory and office equipment. At December 31, 1997, $1,518,000 is available under this lease commitment. 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 25 27 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 1998 at which time the two companies will negotiate whether and to what extent Stryker will continue to provide financial support for research collaborations. In December 1996, the Company signed the Biogen Research Agreement to collaborate on the development of the Company's morphogenic protein, OP-1, for the treatment of renal disorders. Under the agreement, the Company granted to Biogen exclusive worldwide rights to manufacture, market and sell OP-1 for the treatment of renal disease. Biogen paid a $10,000,000 license fee in 1996 and made an $18,000,000 equity investment in common stock at a premium over the then-current market price per share. In addition, the agreement provides for $10,500,000 in research funding over a three year period ending December 31, 1999, of which $4,000,000 has been recognized through December 31, 1997. Biogen also will pay up to an additional $69,000,000 upon the attainment of certain milestones and make available a $15,000,000 line of credit. The Biogen Research Agreement further provides for the payment of royalties to the Company based on product sales. The Company may draw upon the $15,000,000 line of credit over the next two years to fund the research and development of small molecule products based on OP-1. Advances are limited to $10,000,000 in 1998 and the remaining balance in 1999. In exchange for the line of credit, Biogen received an exclusive option to obtain an exclusive, worldwide license to OP-1 based small molecule products for the treatment of renal disorders. In the event Biogen exercises its option, Biogen will forgive the lesser of $10,000,000 or the principal amount outstanding under the line of credit. The remaining principal, together with all accrued and unpaid interest is due and payable five years from the date of the first advance and may be repaid, at the Company's option, in either cash, common stock or reduction of royalties due the Company from Biogen. 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 covered the period from January 1995 through December 1997. As part of the research collaboration, the two companies agreed to extend the Manufacturing Contract for two years through December 31, 1999, with Biogen having the option, but not the obligation, to use the manufacturing facility for a mutually agreeable number of months in one of the two extension years. To enable the Company to meet its obligations under the Manufacturing Contract, Biogen financed the construction of a 7,000 square foot addition to the present facility for cGMP production using bacterial fermentation at an estimated total cost of $2,900,000. The Company agreed to reimburse Biogen for the construction costs and leasehold improvements at the end of the contract term, including the extension, at an amount equal to Biogen's construction costs less $300,000 and less all accumulated depreciation. The reimbursement to Biogen is estimated to be no more than $2,100,000. 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 $2,400,000, as provided in an equipment lease agreement. The Company has the option to purchase the equipment at the end of the extended lease term for an amount equal to its then fair market value or for such other amount as is negotiated by the two parties. The Company anticipates that its existing capital resources should enable it to maintain its current and planned operations through 1999. 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 1999 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 is seeking additional collaborative arrangements and also expects to raise funds through one or more financing transactions, as conditions permit. 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. 26 28 NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"), effective for fiscal years beginning after December 15, 1997. SFAS 130 establishes standards for reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purposes financial statements. SFAS 130 requires reclassification of earlier periods presented. The Company does not expect that the adoption of SFAS 130 will have a significant effect on the Company's business, results of operations or financial position for the year ending December 31, 1998. Also in June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), effective for fiscal years beginning after December 15, 1997. SFAS 131 establishes standards for reporting information about operating segments in annual financial statements and selected information about operating segments in interim financial reports issued to stockholders. The Company does not expect that the adoption of SFAS 131 will have a significant effect on the Company's financial statement disclosures. 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, in less than two years, computer systems and software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. The Company has conducted a review of its computer systems to identify those areas that could be affected by the Year 2000 issue. The Company will complete implementation of new financial accounting software in the first quarter of 1998 which has been designed by the vendor to properly process transactions which could be impacted by the Year 2000 problem. The Company presently believes that, with routine upgrades to other existing hardware and software systems, the Year 2000 problem will not pose significant operational problems and costs to complete this process are not material to its financial position or results of operations in any one year. The Company expects to complete these upgrades by mid-1999. The Company is in the process of contacting its major suppliers to determine the extent to which the Company may be vulnerable to those parties' failure to timely correct their own Year 2000 problems. To date, the Company is unaware of any situations of noncompliance that would materially adversely affect its operations or financial condition. There can be no assurance, however, that instances of noncompliance which could have a material adverse effect on the Company's operations or financial condition will be identified; that the systems of other companies with which the Company transacts business will be corrected on a timely basis; or that a failure by such entities to correct a Year 2000 problem or a correction which is incompatible with the Company's information systems would not have a material adverse effect on the Company's operations or financial condition. CAUTIONARY FACTORS WITH RESPECT TO FORWARD-LOOKING STATEMENTS This Form 10-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 27 29 reliance on its lead product candidate and the Company's lack of control over the clinical progress of several applications of its products, which are controlled by 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 and commercialization efforts involve a high degree of risk. 28 30 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Page Index to Consolidated Financial Statements Number - ------------------------------------------ ------ Creative BioMolecules, Inc. and Subsidiary: Financial Statements: Independent Auditors' Report................................. 30 Consolidated Balance Sheets.................................. 31 Consolidated Statements of Operations........................ 32 Consolidated Statements of Stockholders' Equity.............. 33 Consolidated Statements of Cash Flows........................ 34 Notes to Consolidated Financial Statements................... 35 29 31 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, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 1997 and 1996, the three month period ended December 31, 1995 and the year 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, 1997 and 1996, and the results of their operations and their cash flows for the years ended December 31, 1997 and 1996, the three month period ended December 31, 1995 and the year ended September 30, 1995 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Boston, Massachusetts March 5, 1998 30 32 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
December 31, ---------------------------------- 1997 1996 ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 2,158,909 $ 38,248,988 Marketable securities 28,438,841 11,826,266 Accounts receivable 4,572,518 1,454,696 Inventory 1,249,330 1,341,914 Prepaid expenses and other 284,649 208,886 ------------- ------------- Total current assets 36,704,247 53,080,750 ------------- ------------- PROPERTY, PLANT AND EQUIPMENT - net 17,245,338 16,224,376 ------------- ------------- OTHER ASSETS: Notes receivable - officers 273,334 350,000 Patents and licensed technology - net 417,070 401,629 Deferred patent application costs - net 4,220,080 3,471,169 Deposits and other 177,930 290,950 ------------- ------------- Total other assets 5,088,414 4,513,748 ------------- ------------- TOTAL $ 59,037,999 $ 73,818,874 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Lease obligations - current portion $ 124,575 $ 53,532 Accounts payable 2,311,710 2,830,356 Accrued liabilities 575,171 561,562 Accrued compensation 1,312,274 1,460,856 ------------- ------------- Total current liabilities 4,323,730 4,906,306 ------------- ------------- LEASE OBLIGATIONS 2,004,927 1,651,493 ------------- ------------- COMMITMENTS (Notes 6, 7 and 11) STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued Common stock, $.01 par value, 50,000,000 shares authorized, 33,392,582 shares and 32,769,553 shares issued and outstanding at December 31, 1997 and 1996, respectively 333,926 327,696 Additional paid-in capital 140,465,512 138,371,802 Accumulated deficit (88,090,096) (71,438,423) ------------- ------------- Total stockholders' equity 52,709,342 67,261,075 ------------- ------------- TOTAL $ 59,037,999 $ 73,818,874 ============= =============
See notes to consolidated financial statements 31 33 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Years Ended December 31, Ended Year Ended ------------------------ December 31, September 30, 1997 1996 1995 1995 ---- ---- ------------ ------------- REVENUES: Research and development contracts $ 12,692,475 $ 5,547,976 $ 970,806 $ 5,824,344 Manufacturing contracts 393,926 4,485,531 770,133 6,158,574 License fees and royalties 11,122,584 2,157 544,000 Interest 2,330,743 1,174,219 260,953 648,602 Other 15,615 21,900 349 53,470 ------------ ------------ ------------ ------------ Total revenues 15,432,759 22,352,210 2,004,398 13,228,990 ------------ ------------ ------------ ------------ COSTS AND EXPENSES: Research and development 25,122,039 15,650,986 3,193,979 11,687,847 Cost of manufacturing contracts 273,757 3,823,442 715,171 5,329,779 General and administrative 6,472,821 4,900,823 1,254,566 3,603,954 Interest 215,815 216,906 60,784 229,477 ------------ ------------ ------------ ------------ Total costs and expenses 32,084,432 24,592,157 5,224,500 20,851,057 ------------ ------------ ------------ ------------ NET LOSS $(16,651,673) $ (2,239,947) $ (3,220,102) $ (7,622,067) ============ ============ ============ ============ BASIC AND DILUTED LOSS PER SHARE $ (0.50) $ (0.07) $ (0.11) $ (0.37) ============ ============ ============ ============ SHARES FOR BASIC AND DILUTED 33,078,120 30,062,334 28,120,190 20,430,900 ============ ============ ============ ============
See notes to consolidated financial statements. 32 34 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Convertible Preferred Stock Common Stock --------------- ------------ Shares Amount Shares Amount ------ ------ ----- ------ BALANCE, OCTOBER 1, 1994 0 $ 0 19,534,818 $ 195,348 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 Other issuances of common stock 186,675 1,867 Net loss ----------- ------------ ----------- ------------ BALANCE, SEPTEMBER 30, 1995 0 0 25,832,654 258,327 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 Other issuances of common stock 62,342 623 Net loss ----------- ------------ ----------- ------------ BALANCE, DECEMBER 31, 1995 0 0 28,894,996 288,950 Reclassification of equity consideration in connection with asset purchase Issuance of common stock in connection with underwritten public offering of common stock (net of costs of $1,283,236) 2,000,000 20,000 Issuance of common stock in connection with research collaboration 1,542,680 15,427 Stock based compensation Other issuances of common stock 331,877 3,319 Net loss ----------- ------------ ----------- ------------ BALANCE, DECEMBER 31, 1996 0 0 32,769,553 327,696 Stock based compensation Other issuances of common stock 623,029 6,230 Net loss ----------- ------------ ----------- ------------ BALANCE, DECEMBER 31, 1997 0 $ 0 33,392,582 $ 333,926 =========== ============ =========== ============
Common Additional Stock Paid-In Accumulated Payable Capital Deficit ------- ---------- ------------ BALANCE, OCTOBER 1, 1994 $ 1,736,586 $ 81,038,434 $(58,356,307) Forgiveness of notes receivable Issuance of common stock for note receivable 69,358 Repayment of notes receivable 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) Other issuances of common stock 245,097 Net loss (7,622,067) ----------- ------------ ------------ BALANCE, SEPTEMBER 30, 1995 1,736,586 92,252,751 (65,978,374) Issuance of common stock in connection with self-managed public offering of common stock (net of costs of $108,026) 12,611,974 Other issuances of common stock 136,900 Net loss (3,220,102) ----------- ------------ ------------ BALANCE, DECEMBER 31, 1995 1,736,586 105,001,625 (69,198,476) Reclassification of equity consideration in connection with asset purchase (1,736,586) 1,736,586 Issuance of common stock in connection with underwritten public offering of common stock (net of costs of $1,283,236) 12,696,744 Issuance of common stock in connection with research collaboration 17,984,573 Stock based compensation 17,000 Other issuances of common stock 935,274 Net loss (2,239,947) ----------- ------------ ------------ BALANCE, DECEMBER 31, 1996 0 138,371,802 (71,438,423) Stock based compensation 254,350 Other issuances of common stock 1,839,360 Net loss (16,651,673) ----------- ------------ ------------ BALANCE, DECEMBER 31, 1997 $ 0 $140,465,512 $(88,090,096) =========== ============ ============
Stockholders' Notes Receivable Total ------------- ----- BALANCE, OCTOBER 1, 1994 $(1,807,440) $22,806,621 Forgiveness of notes receivable 44,154 44,154 Issuance of common stock for note receivable (70,021) Repayment of notes receivable 1,833,307 1,833,307 Issuance of Series 1994/A Preferred Stock in connection with private placement (net of costs $269,064) 10,960,311 Issuance of common stock in connection with asset purchase Conversion of Series 1994/A Preferred Stock into common stock Other issuances of common stock 246,964 Net loss (7,622,067) ----------- ----------- BALANCE, SEPTEMBER 30, 1995 0 28,269,290 Issuance of common stock in connection with self-managed public offering of common stock (net of costs of $108,026) 12,641,974 Other issuances of common stock 137,523 Net loss (3,220,102) ----------- ----------- BALANCE, DECEMBER 31, 1995 0 37,828,685 Reclassification of equity consideration in connection with asset purchase Issuance of common stock in connection with underwritten public offering of common stock (net of costs of $1,283,236) 12,716,744 Issuance of common stock in connection with research collaboration 18,000,000 Stock based compensation 17,000 Other issuances of common stock 938,593 Net loss (2,239,947) ----------- ----------- BALANCE, DECEMBER 31, 1996 0 67,261,075 Stock based compensation 254,350 Other issuances of common stock 1,845,590 Net loss (16,651,673) ----------- ----------- BALANCE, DECEMBER 31, 1997 $ 0 $52,709,342 =========== ===========
See notes to consolidated financial statements 33 35 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Years Ended December 31, Ended Year Ended ------------------------ December September 30, 1997 1996 31, 1995 1995 ---- ---- -------- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(16,651,673) $ (2,239,947) $ (3,220,102) $ (7,622,067) ------------ ------------ ------------ ------------ Adjustments to reconcile net loss to net cash used: Depreciation and amortization 2,103,906 2,423,002 758,544 2,471,184 Compensation expense 254,350 35,249 29,750 107,002 Deferred patent and application costs 188,055 92,426 Increase (decrease) in cash from: Accounts receivable (3,117,822) 1,345,673 (255,691) (1,101,169) Inventory and prepaid expenses 16,821 (839,405) 87,655 142,375 Accounts payable and accrued liabilities (653,619) 3,151,969 (417,120) (477,274) Deferred contract revenue (147,920) ------------ ------------ ------------ ------------ Total adjustments (1,208,309) 6,116,488 203,138 1,086,624 ------------ ------------ ------------ ------------ Net cash provided by (used for) operating activities (17,859,982) 3,876,541 (3,016,964) (6,535,443) ------------ ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities (28,254,756) (17,362,723) (4,735,565) (12,701,607) Sale of marketable securities 11,642,181 13,620,727 2,710,190 9,407,869 Expenditures for property, plant and equipment (2,810,611) (3,778,278) (47,495) (445,082) Expenditures for patents (1,131,303) (1,191,591) (175,902) (832,552) Note receivable from officer (40,000) (350,000) Repayment of note receivable from officer 116,666 Decrease (increase) in deposits and other 113,020 (32,477) (27,679) ------------ ------------ ------------ ------------ Net cash used for investing activities (20,364,803) (9,094,342) (2,248,772) (4,599,051) ------------ ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of equity: Public placement of common stock 14,000,000 12,750,000 Private placement of common stock 18,000,000 Series 1994/A Preferred Stock 11,229,375 Common stock - other 1,880,590 880,698 137,523 239,465 Costs of raising equity (35,000) (1,283,236) (108,026) (269,064) Decrease in stockholders' notes receivable 1,833,307 Increase in obligations under capital leases 346,766 Repayments of obligations under capital leases (57,650) (48,452) (23,211) (128,776) ------------ ------------ ------------ ------------ Net cash provided by financing activities 2,134,706 31,549,010 12,756,286 12,904,307 ------------ ------------ ------------ ------------ NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (36,090,079) 26,331,209 7,490,550 1,769,813 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 38,248,988 11,917,779 4,427,229 2,657,416 ------------ ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,158,909 $ 38,248,988 $ 11,917,779 $ 4,427,229 ============ ============ ============ ============ SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: Property and equipment purchased under capital lease obligations $ 135,361 ============
See notes to consolidated financial statements. 34 36 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. is a discovery and development company focused on proprietary protein-based therapeutics for human tissue regeneration and restoration. The Company's therapeutics are based on proteins that act as signals in initiating and regulating the cellular events involved in tissue regeneration and organ formation. 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 month period 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. 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. 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. During the years ended December 31, 1997 and 1996, the three months ended December 31, 1995 and the year ended September 30, 1995, total revenues from major customers as a percent of total revenues of the Company were as follows:
Years Ended Three Months December 31, Ended Year Ended ------------- December September 30, Customer 1997 1996 31, 1995 1995 -------- ---- ---- ------------ ------------- Biogen, Inc. 50% 65% 37% 46% Stryker Corporation 34% 27% 48% 35%
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. 35 37 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. As of December 31, 1997 and 1996, the Company classified its marketable securities as available-for-sale and had approximately $3,024,000 and $5,678,000 in United States government and agency instruments, respectively, and $25,415,000 and $6,148,000 in corporate bonds and notes, respectively, all with maturities ranging from one to twenty-nine months. For the years ended December 31, 1997 and 1996, 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, 1997 and 1996, gross unrealized gains and losses were not material. Fair Value of Financial Instruments - 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 approximates fair value due to the short-term nature of these instruments. The fair value of marketable securities is based on current market values. The carrying amounts of the Company's lease obligations approximate fair value (Note 6). Inventory - Inventory consists principally of raw materials and laboratory supplies. Inventories are stated at the lower of cost 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 twenty-five years) or the remaining terms of the leases. Effective January 1, 1997, the Company revised its estimate of the useful life of its manufacturing facility in Lebanon, New Hampshire from sixteen years to twenty-five years. The effect of this change in estimate was a $320,000 reduction in amortization expense for the year ended December 31, 1997. The Company believes that the revised life more closely reflects the number of years of economic benefit expected to be received from this facility. 36 38 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 $493,000 and $358,000 at December 31, 1997 and 1996, respectively. 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. Basic and Diluted Loss Per Common Share - In December 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 supersedes Accounting Principles Board Opinion No. 15 ("APB 15") and replaces "primary" and "fully diluted" earnings per share ("EPS") under ABP 15 with "basic" and "diluted" EPS. Unlike primary EPS, basic EPS excludes the dilutive effects of options, warrants and other convertible securities. Diluted EPS reflects the potential dilution of securities that could share in the earnings of the Company, similar to fully diluted EPS. The adoption of SFAS 128 did not have any effect on the Company's net loss per common share for the prior years presented. Options and warrants are excluded from the computation as their effect is antidilutive. Stock-Based Compensation - The Company's stock options and purchase plans are accounted for under APB No. 25 ("APB 25"), "Accounting for Stock Issued to Employees" (Note 8). New Accounting Standards - In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income" and SFAS 131, "Disclosures about Segments of an Enterprise and Related Information". SFAS 130 establishes standards for reporting comprehensive income and its components in the consolidated financial statements. SFAS 131 establishes standards for reporting information on operating segments in interim and annual financial statements. SFAS 130 and SFAS 131 will become effective for the Company beginning in 1998. The Company does not expect that the adoption of SFAS 130 will have a significant effect on the Company's business, results of operations or financial position for the year ended December 31, 1998 or that SFAS 131 will have a significant effect on the Company's financial statement disclosures. 37 39 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. COLLABORATIVE RESEARCH AND DEVELOPMENT AGREEMENT In December 1996, the Company entered into a Research Collaboration and License Agreement with Biogen to collaborate on the development of novel therapeutics based on OP-1 for the treatment of renal disorders. The initial focus of the collaboration is on advancing the development of the Company's morphogenic protein, OP-1, for the treatment of acute and chronic renal failure. Under the agreement, the Company granted to Biogen exclusive worldwide rights to manufacture, market and sell OP-1 and OP-1 products developed through the collaboration for the treatment of renal disease. Biogen paid the Company a $10,000,000 license fee in 1996 and made an $18,000,000 equity investment (Note 9) which were recorded in the quarter ended December 31, 1996. The agreement provides for $10,500,000 in research funding over a three year period ending December 31, 1999, of which $4,000,000 has been recognized through December 31, 1997. Biogen also will pay up to an additional $69,000,000 upon the attainment of certain milestones and will make available a $15,000,000 line of credit. The agreement further provides for the payment of royalties to the Company based on product sales. The Company may draw upon the $15,000,000 line of credit over a three year period ending December 31, 1999 to fund the research and development of small molecule products based on OP-1. Advances are limited to up to $10,000,000 in 1998 and the balance in 1999. As of December 31, 1997 the Company has not drawn any amounts under the line of credit. In exchange for the line of credit, Biogen received an exclusive option to obtain an exclusive, worldwide license to OP-1 based small molecule products for the treatment of renal disorders. In the event Biogen exercises its option, Biogen will forgive the lesser of $10,000,000 or the principal amount outstanding under the line of credit. The remaining principal, together with all accrued and unpaid interest, is due and payable five years from the date of the first advance and may be repaid, at the Company's option, in either cash, common stock or reduction of royalties due the Company from Biogen. 3. NOTES RECEIVABLE - OFFICERS In July 1997, the Company loaned $40,000 to an officer of the Company. The loan is evidenced by a fully secured promissory note bearing interest at the annual rate of 6.65%. Twenty-five percent of the principal and accrued interest will be forgiven on February 7, 1998, and then an equal portion of the principal sum and accrued interest will be forgiven monthly over a remaining term of thirty-six months, provided the officer is employed by the Company. In September 1996, the Company loaned $350,000 to an officer of the Company. The loan is evidenced by a fully secured promissory note bearing interest at the annual rate of 6.02% and payable in three equal annual installments, plus accrued interest. 4. 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. 38 40 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment consisted of the following:
December 31, -------------------------------- 1997 1996 ---- ---- Land $ 352,000 $ 352,000 Building 1,500,000 1,500,000 Laboratory equipment and furniture 8,978,922 7,684,195 Leasehold improvements 17,553,847 16,403,420 Office furniture and equipment 2,992,847 2,495,095 Construction in progress 23,760 ------------ ------------ Total 31,377,616 28,458,470 Less accumulated depreciation and amortization (14,132,278) (12,234,094) ------------ ------------ Total $ 17,245,338 $ 16,224,376 ============ ============
Amounts included in property, plant and equipment applicable to capital leases were as follows:
December 31, ------------------------------ 1997 1996 ---- ---- Land $ 352,000 $ 352,000 Building 1,500,000 1,500,000 Laboratory equipment and furniture 393,767 47,000 Office furniture and equipment 135,361 ----------- ----------- Total 2,381,128 1,899,000 Less accumulated amortization (506,671) (397,960) ----------- ----------- Total $ 1,874,457 $ 1,501,040 =========== ===========
6. LEASE OBLIGATIONS As part of the acquisition of certain assets of Verax (Note 4), 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 9.75% to 10% at December 31, 1997 and are due monthly through the year 2008. In October 1997, the Company entered into a master lease agreement for the sale and leaseback or lease of up to $2,000,000 of laboratory and office equipment. At December 31, 1997, approximately $1,518,000 is available under this lease commitment. 39 41 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. LEASE OBLIGATIONS (CONTINUED) The Company has noncancelable operating lease agreements for office and laboratory space and certain office and laboratory equipment. Rent expense for all operating leases was approximately $775,000, $566,000, $150,000 and $597,000 for the years ended December 31, 1997 and 1996, the three months ended December 31, 1995 and the year ended September 30, 1995, respectively. Future minimum lease obligations at December 31, 1997 were as follows:
Year Ending December 31 Capital Operating ----------------------- ------- --------- 1998 $ 390,269 $ 919,308 1999 386,904 921,390 2000 386,904 912,526 2001 386,904 627,343 2002 357,602 242,443 Thereafter 2,148,027 ---------- ---------- Total minimum lease payments 4,056,610 $3,623,010 ========== Less amount representing interest 1,927,108 ---------- Present value of net minimum lease payments 2,129,502 Less current portion 124,575 ---------- Long-term obligations under capital leases $2,004,927 ==========
Under a security requirement of a lease agreement with a leasing company, the Company purchased and pledged as collateral a letter of credit totaling $31,152, which expired on February 27, 1998. 7. COMMITMENTS 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 covered the period from January 1995 through December 1997. As part of the research collaboration (Note 2), the companies agreed to extend the Manufacturing Contract for two years through December 31, 1999, with Biogen having the option, but not the obligation, to use the manufacturing facility for a mutually agreeable number of months in one of the two years. To enable the Company to meet its obligations under the Manufacturing Contract, Biogen financed the construction of a 7,000 square foot addition to the present facility for cGMP production using bacterial fermentation at an estimated total cost of $2,900,000. The Company agreed to reimburse Biogen for the construction costs and leasehold improvements at the end of the contract term at an amount equal to Biogen's construction costs less $300,000 and less all accumulated depreciation. The reimbursement to Biogen is expected to be no more than $2,100,000. 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 $2,400,000, as provided in an equipment lease agreement. The Company has the option to purchase the equipment at the end of the extended lease term for an amount equal to its then fair market value or for such other amount as negotiated by the parties. 40 42 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. COMMITMENTS (CONTINUED) 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, 1997 of $13,315,000. 8. 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 6,800,000 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 years ended December 31, 1997 and 1996, the three months ended December 31, 1995 and the year 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. 41 43 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. STOCK PLANS (CONTINUED) Activity under the plans is summarized as follows:
Weighted Average Number Exercise Price of Shares Per Share --------- ---------------- Outstanding, October 1, 1994 1,357,879 $ 4.25 Granted 2,816,441 2.42 Exercised (106,471) .90 Canceled (320,086) 4.04 --------- Outstanding, September 30, 1995 3,747,763 2.99 (1,014,897 exercisable at a weighted average price of $2.89 per share) Granted 13,000 6.00 Exercised (9,477) .82 Canceled (37,129) 4.28 --------- Outstanding, December 31, 1995 3,714,157 3.00 (1,431,824 exercisable at a weighted average price of $3.11 per share) Granted 1,063,700 7.86 Exercised (276,178) 2.12 Canceled (139,535) 4.43 --------- Outstanding, December 31, 1996 4,362,144 4.16 (1,904,110 exercisable at a weighted average price of $3.47 per share) Granted 889,500 8.69 Exercised (293,676) 3.29 Canceled (136,384) 6.60 --------- Outstanding, December 31, 1997 4,821,584 $ 5.00 (2,520,030 exercisable at a weighted average price of $3.92 per share) =========
The table below summarizes options outstanding and exercisable at December 31, 1997:
Options Outstanding Options Exercisable -------------------------------------- ----------------------------- Weighted Average Weighted Exercisable Weighted Remaining Average As of Average Range of Number of Contractual Exercise December 31, Exercise Exercise Price Options Life Price 1997 Price -------------- ---------- ------------ --------- ------------ ---------- $0.00 - $2.25 1,322,952 5.6 $1.84 1,057,795 $1.80 $2.26 - $4.50 1,325,538 7.4 $2.86 774,465 $2.85 $4.51 - $6.75 452,750 8.0 $5.53 124,696 $5.43 $6.76 - $9.00 641,094 8.4 $7.94 129,719 $7.43 Over $9.00 1,079,250 8.2 $9.52 433,355 $9.56 --------- ----- ----- --------- ----- Total 4,821,584 7.3 $5.00 2,520,030 $3.92 ========= ===== ===== ========= =====
In May 1997, the Company's stockholders approved an increase in the number of shares of common stock authorized for issuance under the 1987 Plan from 5,150,000 to 6,800,000. At December 31, 1997, 981,908 shares were available for grant under the 1987 Plan. Employee Stock Purchase Plan - The Employee Stock Purchase Plan permits eligible employees to purchase common stock of the Company up to an aggregate of 500,000 shares. During the year ended December 31, 1997, 62,950 shares were issued under this Plan at prices of $6.08 and $5.84 per share; during the year ended December 31, 1996, 45,049 shares were issued under this Plan at prices of $6.11 and $7.01 per share; during the three months ended December 31, 1995, 55,515 shares were issued under this Plan at a price of $2.34 per share and during the year ended September 30, 1995, 143,475 shares were issued under this Plan at a price of $1.49 per share. 42 44 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. STOCK PLANS (CONTINUED) Director Plan - The 1992 Non-Employee Director Non-Qualified Stock Option Plan provides for the granting of options to purchase up to an aggregate of 300,000 shares of common stock to non-employee directors. During the year ended December 31, 1997, options to purchase 55,000 shares were granted at a weighted average exercise price of $8.76 per share; during the year ended December 31, 1996, options to purchase 70,000 shares were granted at a price of $9.34 per share; during the three months ended December 31, 1995 no options were granted and during the year ended September 30, 1995, options to purchase 20,000 shares were granted at a weighted average exercise price of $2.75 per share. During the year ended December 31, 1997, options to purchase 7,500 shares were exercised at an exercise price of $8.50 per share. During the year ended December 31, 1996, options to purchase 12,500 shares were canceled at a weighted average exercise price of $9.18 per share. At December 31, 1997, options to purchase 65,000 shares were exercisable at a weighted average exercise price of $7.66 per share. Stock-Based Compensation - As discussed in Note 1, the Company continues to account for its stock-based awards using the intrinsic value method in accordance with APB 25 and its related interpretations. Accordingly, no compensation expense has been recognized in the consolidated financial statements for employee stock arrangements. SFAS 123, "Accounting for Stock-Based Compensation", requires the disclosure of pro forma net income and earnings per share had the Company adopted the fair value method as of January 1, 1995. Under SFAS 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. These models also require subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values. The Company's calculations were made using the Black-Scholes option pricing model with the following assumptions: expected life, six months following total vesting; stock volatility, 71% in 1997, 84% in 1996 and 82% in 1995; risk free interest rates, 5.4% in 1997 and 5% in 1996 and 1995; and no dividends during the expected term. The Company's calculations are based on a multiple option valuation approach and forfeitures for broad-based grants are estimated at 2% per year and adjusted to actual as they occur. Forfeitures for grants to executives are recognized as they occur. If the computed fair values of the 1997, 1996 and 1995 awards had been amortized to expense over the vesting period of the awards, pro forma net loss would have been $19,892,000 or a net loss of $0.60 per share (Basic and Diluted) for the year ended December 31, 1997, $3,811,000 or a net loss of $0.13 per share (Basic and Diluted) for the year ended December 31, 1996, $3,378,000 or a net loss of $0.12 per share (Basic and Diluted) for the three months ended December 31, 1995, and $7,822,000 or a net loss of $0.38 per share (Basic and Diluted) for the year ended September 30, 1995. Because the SFAS 123 method of accounting has not been applied to options granted prior to January 1, 1995, the resulting pro forma compensation cost may not be representative of that to be expected in future years. 43 45 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. STOCK PLANS (CONTINUED) These amounts are based on calculated values for options awards in 1997, 1996 and 1995 aggregating $12,574,000. Had the assumptions regarding expected term and volatility been reduced by six months and 10% or increased by six months and 10%, total calculated value would have decreased by $1,644,000 or increased by $1,491,000, respectively. The Company also granted stock options to non-employee consultants in 1997 and 1996. These options were valued based on the fair value of the services received. Total compensation expense recognized related to these options was $254,000 and $17,000 in 1997 and 1996, respectively. 9. STOCKHOLDERS' EQUITY 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 was convertible, at the option of the holder, into five shares of common stock. Each share of the Series Preferred Stock automatically converted into five shares of common stock after twenty consecutive trading days on which the closing price of the Company's common stock exceeded $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 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. At December 31, 1997, warrants to purchase 866,753 shares of common stock are outstanding. 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. In July 1996, the Company sold 2,000,000 shares of common stock in a public offering at a price of $7.00 per share. Net proceeds to the Company, after deducting fees and other expenses of the offering, were approximately $12,717,000. In December 1996, as part of a research collaboration (Note 2), the Company sold to Biogen 1,542,680 shares of common stock at a premium to the then-current market price of the common stock. Proceeds to the Company were $18,000,000. 44 46 CREATIVE BIOMOLECULES, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. STOCKHOLDERS' EQUITY (CONTINUED) 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. 10. 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, 1997, the Company had available net operating loss carryforwards of approximately $79,800,000 for income tax purposes. In addition, the Company had approximately $1,500,000 of unused investment and research and development tax credits. These net operating loss and tax credit carryforwards will expire at various dates between 1998 and 2013. 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, 1997 and 1996 were primarily deferred tax assets of approximately $27,100,000 and $21,900,000, respectively, of net operating loss carryforwards and approximately $1,500,000 at both dates of investment and research and development tax credits. The Company has not yet achieved profitable operations. Accordingly, management believes that the tax benefits as of December 31, 1997 and 1996 do not satisfy the realization criteria set forth in SFAS 109 and has recorded a valuation allowance for the entire net asset. 11. 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 $37,000, $25,000, $5,000 and $21,000 for the years ended December 31, 1997 and 1996, the three months ended December 31, 1995 and the year ended September 30, 1995, respectively. 12. 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. The Board of Directors authorized matching contributions up to 3% of participants' salaries amounting to approximately $250,000, $202,000, $53,000 and $180,000 for the years ended December 31, 1997 and 1996, the three months ended December 31, 1995 and the year ended September 30, 1995, respectively. 45 47 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. PART III ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT The response to this item is incorporated by reference from the discussions responsive thereto under the captions "Information Concerning Current Directors, Nominees and Executive Officers" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement relating to the 1998 Annual Meeting of Stockholders. ITEM 11. EXECUTIVE COMPENSATION The response to this item is incorporated by reference from the discussion responsive thereto under the caption "Compensation of Directors and Executive Officers" in the Company's Proxy Statement relating to the 1998 Annual Meeting of Stockholders. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The response to this item is incorporated herein by reference from the discussion responsive thereto under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement relating to the 1998 Annual Meeting of Stockholders. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The response to this item is incorporated herein by reference from the discussion responsive thereto under the captions "Certain Transactions" and "Compensation of Directors and Executive Officers -- Employment Agreements" in the Company's Proxy Statement relating to the 1998 Annual Meeting of Stockholders. 46 48 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K Item 14(a) The following documents are filed as part of this Annual Report on Form 10-K. 14(a)(1) Financial Statements See "Index to Consolidated Financial Statements" at Item 8 in this Annual Report on Form 10-K. 14(a)(2) Financial Statement Schedules and Other Financial Statements - See 14(d) below. 14(a)(3) Exhibits - See 14 (c) below. Item 14(b) Reports on Form 8-K Current report on Form 8-K filed October 10, 1997. In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Registrant filed cautionary statements identifying important factors that could cause the Registrant's actual results to differ materially from those projected in forward-looking statements of the Registrant made by or on behalf of the Registrant. Item 14 (c) Exhibits The following is a list of exhibits filed as part of this Annual Report on Form 10-K: 3.1 Restated Certificate of Incorporation, as amended, of the Registrant. (Filed as Exhibit 3.1 to Registrant's Annual Report on Form 10-K for the period ended September 30, 1995 (File No. 0-19910), and incorporated herein by reference.) 3.2 Restated By-Laws of the Registrant. (Filed as Exhibit 3.4 to Form S-1 Registration Statement (Registration No. 33-46200), or amendments thereto, and incorporated herein by reference.) 4.1 Article FOURTH of the Restated Certificate of Incorporation of the Registrant, as amended (see Exhibit 3.1). 10.1 Second Amended and Restated Registration Rights Agreement, dated as of January 31, 1992. (Filed as Exhibit 10.4 to Form S-1 Registration Statement (Registration No. 33-46200), or amendments thereto, and incorporated herein by reference.) 47 49 10.2 Amendment No. 1 to Second Amended and Restated Registration Rights Agreement, dated as of December 23, 1994, by and between the Registrant and certain of its Stockholders, and Instruments of Adherence to the Second Amended and Restated Registration Rights Agreement. (Filed as Exhibit 10.51 to Registrant's Quarterly Report on Form 10-Q for the Period Ended December 31, 1994 (File No. 0-19910), and incorporated herein by reference.) 10.3 Amendment No. 2 to Second Amended and Restated Registration Rights Agreement, dated as of May 24, 1996, by and between the Registrant and certain of its Stockholders. (Filed as Exhibit 10.1 to Form S-3 Registration Statement (Registration No. 333-5477), and incorporated herein by reference.) 10.4 Amendment No. 3 to Second Amended and Restated Registration Rights Agreement, dated as of December 9, 1996, by and between the Registrant and certain of its Stockholders. (Filed as Exhibit 10.4 to Registrant's Annual Report on Form 10-K for the period ended December 31, 1996 (File No. 0-19910), and incorporated herein by reference.) #10.5 Second Amended and Restated Research, Development and Supply Agreement, As Amended, dated as of May 17, 1991, between Stryker Corporation and the Registrant ("Stryker Development Agreement"). (Filed as Exhibit 10.5 to Form S-1 Registration Statement (Registration No. 33-42159), or amendments thereto, and incorporated herein by reference.) #10.6 Amendment Agreement, dated October 23, 1991, between the Registrant and Stryker Corporation. (Filed as Exhibit 10.6 to Form S-1 Registration Statement (Registration No. 33-46200), or amendments thereto, and incorporated herein by reference.) 10.7 Amendment Agreement, dated May 13, 1994, between the Registrant and Stryker Corporation. (Filed as Exhibit 99.2 to Registrant's Report on Form 8-K for the May 9, 1996 Event (File No. 0-19910), and incorporated herein by reference.) 10.8 Amendment Agreement, dated April 30, 1996, between the Registrant and Stryker Corporation. (Filed as Exhibit 99.3 to Registrant's Report on Form 8-K for the May 9, 1996 Event (File No. 0-19910), and incorporated herein by reference.) #10.9 Amendment Agreement, dated October 31, 1996, between the Registrant and Stryker Corporation. (Filed as Exhibit 10.11 to Registrant's Annual Report on Form 10-K for the period ended December 31, 1996 (File No. 0-19910), and incorporated herein by reference.) 10.10 Irrevocable License Agreement, dated May 17, 1991, between Stryker Corporation and the Registrant. (Filed as Exhibit 10.7 to Form S-1 Registration Statement (Registration No. 33-42159), or amendments thereto, and incorporated herein by reference.) 48 50 10.11 Common Stock Purchase Warrant, dated June 1, 1987, issued by the Registrant to Phoenix Leasing Incorporated. (Filed as Exhibit 10.24 to Form S-1 Registration Statement (Registration No. 33-42159), or amendments thereto, and incorporated herein by reference.) 10.12 Real Estate Standard Form Industrial Lease, dated as of October 24, 1988, as amended September 17, 1991, between WRC Properties, Inc. and the Registrant. (Filed as Exhibit 10.26 to Form S-1 Registration Statement (Registration No. 33-42159), or amendments thereto, and incorporated herein by reference.) 10.13 Second Amendment, dated January 28, 1994, to Standard Form Industrial Lease dated October 24, 1988, as amended September 17, 1991, by and between the Registrant and WRC Properties, Inc. (Filed as Exhibit 10.15 to Registrant's Annual Report on Form 10-K for the period Ended September 30, 1994 (File No. 0-19910), and incorporated herein by reference.) 10.14 Third Amendment, dated September 20, 1994, to Standard Form Industrial Lease dated October 24, 1988, as amended September 17, 1991 and January 28, 1994, by and between the Registrant and WRC Properties, Inc. (Filed as Exhibit 10.16 to Registrant's Annual Report on Form 10-K for the period Ended September 30, 1994 (File No. 0-19910), and incorporated herein by reference.) 10.15 Fourth Amendment, dated April 10, 1997, to Standard Form Industrial Lease dated October 24, 1998, as amended September 17, 1991, January 28, 1994 and September 20, 1994, by and between the Registrant and WRC Properties, Inc. (Filed as Exhibit 10.53 to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 0-19910), and incorporated herein by reference.) 10.16 Standard Form Industrial Lease, dated February 25, 1992, by and between the Registrant and WRC Properties, Inc. (Filed as Exhibit 10.52 to Form S-1 Registration Statement (Registration No. 33-46200), or amendments thereto, and incorporated herein by reference.) 10.17 First Amendment, dated February 28, 1994, to Standard Form Industrial Lease dated February 25, 1992 by and between the Registrant and WRC Properties, Inc. (Filed as Exhibit 10.32 to Registrant's Annual Report on Form 10-K for the period ended September 30, 1995 (File No. 0-19910), and incorporated herein by reference.) 10.18 Second Amendment, dated September 20, 1994, to Standard Form Industrial Lease dated February 25, 1992, as amended February 28, 1994, by and between the Registrant and WRC Properties, Inc. (Filed as Exhibit 10.33 to Registrant's Annual Report on Form 10-K for the period ended September 30, 1995 (File No. 0-19910), and incorporated herein by reference.) 49 51 10.19 Third Amendment, dated April 10, 1997, to Standard Form Industrial Lease dated February 25, 1992, as amended February 28, 1994 and September 20, 1994, by and between the Registrant and WRC Properties, Inc. (Filed as Exhibit 10.54 to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 0-19910), and incorporated herein by reference.) 10.20 Asset Purchase Agreement, dated March 4, 1993, by and between the Registrant and Verax Corporation (the "Asset Purchase Agreement"), including Exhibits thereto and List of Schedules to Asset Purchase Agreement and to Exhibit A thereto. Any of such Schedules will be supplied upon request by the Commission. (Filed as Exhibit 2.1 and 2.2 to the Registrant's Report on Form 8-K for March 15, 1993 Event (File No. 0-19910), and incorporated herein by reference.) 10.21 Assumption Agreement, dated March 15, 1993, by and between the Registrant and Verax Corporation including Exhibits hereto. (Filed as Exhibit 10.56 to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1993 (File No. 0-19910), and incorporated herein by reference.) 10.22 Indenture of Lease between Wilton L. Buskey and Carol Buskey and Verax Corporation, dated September 7, 1988 as amended through September 25, 1992, (assumed by Registrant pursuant to Assumption Agreement, dated March 15, 1993, by and between the Registrant and Verax Corporation -- see Exhibit 10.23 above). (Filed as Exhibit 10.57 to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1993 (File No. 0-19910), and incorporated herein by reference.) 10.23 Non-Disturbance and Attornment Agreement, dated as of September 7, 1988, by and between Verax Corporation and First NH Bank [successor to First NH Bank of Lebanon] (assumed by Registrant pursuant to Assumption Agreement, dated March 15, 1993, by and between the registrant and Verax Corporation -- see Exhibit 10.23 above.) (Filed as Exhibit 10.58 to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1993 (File No. 0-19910), and incorporated herein by reference.) 10.24 Loan Agreement, dated as of September 7, 1988, by and between Verax Corporation and First NH Bank [successor to First NH Bank of Lebanon] (assumed by Registrant pursuant to Assumption Agreement, dated March 15, 1993, by and between the Registrant and Verax Corporation -- see Exhibit 10.23 above.) (Filed as Exhibit 10.59 to the Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1993 (File No. 0-19910), and incorporated herein by reference.) #10.25 CBM Cross-License Agreement, dated as of November 26, 1993, between Enzon, Inc. and the Registrant. (Filed as Exhibit 10.42 to Registrant's Quarterly Report on Form 10-Q for the period ended December 31, 1993 (File No. 0-19910), and incorporated herein by reference.) #10.26 Enzon Cross-License Agreement, dated as of November 26, 1993, between Enzon, Inc. and the Registrant. (Filed as Exhibit 10.43 to Registrant's Quarterly Report on Form 10-Q for the period ended December 31, 1993 (File No. 0-19910), and incorporated herein by reference.) 50 52 #10.27 Exclusive Marketing Agreement, dated as of November 26, 1993, between Enzon, Inc. and the Registrant. (Filed as Exhibit 10.44 to Registrant's Quarterly Report on Form 10-Q for the period ended December 31, 1993 (Filed No. 0-19910), and incorporated herein by reference.) #10.28 Manufacturing Agreement, dated as of September 28, 1994, between Biogen, Inc. and the Registrant. (Filed as Exhibit 99.1 to Registrant's Report on Form 8-K for the September 30, 1994 Event (File No. 0-19910), and incorporated herein by reference.) #10.29 Equipment Lease Agreement, dated as of September 28, 1994, between Biogen, Inc. and the Registrant. (Filed as Exhibit 99.2 to Registrant's Report on Form 8-K for the September 30, 1994 Event (File No. 0-19910), and incorporated herein by reference.) 10.30 Security Agreement, dated as of September 28, 1994, between Biogen, Inc. and the Registrant. (Filed as Exhibit 99.3 to Registrant's Report on Form 8-K for the September 30, 1994 Event (File No. 0-19910), and incorporated herein by reference.) 10.31 Form of Preferred Stock and Warrant Purchase Agreement, with Exhibits thereto, signed by the Registrant and the persons listed on the Schedule attached at the end of the Form of Preferred Stock and Warrant Purchase Agreement. (Filed as Exhibit 10.52 to Registrant's Quarterly Report on Form 10-Q for the Period Ended December 31, 1994 (File No. 0-19910), and incorporated herein by reference.) 10.32 Form of Warrant issued by the Registrant to the persons listed on the Schedule attached at the end of the Form of Warrant on various dates between December 23, 1994 and January 25, 1995. (Filed as Exhibit 10.53 to Registrant's Quarterly Report on Form 10-Q for the Period Ended December 31, 1994 (File No. 0-19910), and incorporated herein by reference.) #10.33 Cross-License Agreement, dated as of July 15, 1996, between the Registrant, Genetics Institute, Inc. and Stryker Corporation. (Filed as Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 of Genetics Institute, Inc. (File No.0-14587), filed with the Securities and Exchange Commission on November 6, 1996 and incorporated herein by reference.) 10.34 Underwriting Agreement dated July 2, 1996 between the Registrant and Hambrecht & Quist LLP and Cowen & Company. (Filed as Exhibit 1.1 to Form S-3 Registration Statement (Registration No. 333-5477), or amendments thereto, and incorporated herein by reference.) #10.35 Research Collaboration and License Agreement, dated December 9, 1996, between the Registrant and Biogen, Inc. (Filed as Exhibit 10.37 to Registrant's Annual Report on Form 10-K for the period ended December 31, 1996 (File No. 0-19910), and incorporated herein by reference.) 10.36 Restricted Stock Purchase Agreement, dated December 9, 1996, between the Registrant and Biogen, Inc. (Filed as Exhibit 10.38 to Registrant's Annual Report on Form 10-K for the period ended December 31, 1996 (File No. 0-19910), and incorporated herein by reference.) 10.37 Lease, dated April 10, 1997, by and between the Registrant and The Prudential Insurance Company of America. (Filed as Exhibit 10.55 to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 0-19910), and incorporated herein by reference.) 51 53 10.38 Master Lease Agreement, dated October 6, 1997, by and between the Registrant and FINOVA Technology Finance, Inc. *10.39 1983 Incentive Stock Option Plan, amended as of September 11, 1984. (Filed as Exhibit 10.34 to Form S-1 Registration Statement (Registration No. 33-42159), or amendments thereto, and incorporated herein by reference.) *10.40 1987 Stock Plan, as amended on May 20, 1997. (Filed as Exhibit to Registrant's Quarterly Report on Form 10-Q for the period ended June 30, 1997 (File No. 0-19910), and incorporated herein by reference.) *10.41 Employee Stock Purchase Plan, as amended on December 7, 1994. (Filed as Exhibit to Registrant's Preliminary Proxy Statement for 1995 Annual Meeting of Stockholders (File No. 0-19910), and incorporated herein by reference.) *10.42 1992 Non-Employee Director Non-Qualified Stock Option Plan, as amended on March 20, 1996. (Filed as Exhibit 10.25 to Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1996 (File No. 0-19910), and incorporated herein by reference.) *10.43 Form of Employment Agreement with confidentiality provisions. (Filed as Exhibit 10.31 to Form S-1 Registration Statement (Registration No. 33-42159), or amendments thereto, and incorporated herein by reference.) *10.44 Employment Agreement, dated as of January 2, 1992, between Charles Cohen, Ph.D. and the Registrant. (Filed as Exhibit 10.47 to Form S-1 Registration Statement (Registration No. 33-46200), or amendments thereto, and incorporated herein by reference.) *10.45 Employment Agreement, dated February 25, 1992, between Wayne E. Mayhew III and the Registrant. (Filed as Exhibit 10.51 to Form S-1 Registration Statement (Registration No. 33-46200), or amendments thereto, and incorporated herein by reference.) *10.46 Executive Severance Agreement, dated December 1, 1993, between Gregory Liposky and the Registrant (assumed as part of the Registrant's acquisition of the manufacturing facility from Verax Corporation). (Filed as Exhibit 10.51 to Registrant's Annual Report on Form 10-K for the period ended September 30, 1995 (File No. 0-19910), and incorporated herein by reference.) *10.47 Employment Agreement, dated July 17, 1995, between Michael M. Tarnow and the Registrant. (Filed as Exhibit 99.1 to Registrant's Report on Form 8-K for the August 31, 1995 Event (File No. 0-19910), and incorporated herein by reference.) *10.48 Employment Agreement, dated May 21, 1996, between Thomas J. Facklam, Ph.D. and the Registrant. (Filed as Exhibit 99.2 to Registrant's Report on Form 8-K for the June 3, 1996 Event (File No. 0-19910), and incorporated herein by reference.) 52 54 *10.49 $350,000 Promissory Note, dated September 6, 1996, from Michael Tarnow to the Registrant. (Filed as Exhibit 10.56 to Registrant's Quarterly Report on Form 10-Q for the period ended September 30, 1997 (File No. 0-19910), and incorporated herein by reference.) *10.50 Employment Agreement, dated January 13, 1997, between Cheryl K. Lawton and the Registrant. (Filed as Exhibit 10.50 to Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997 (File No. 0-19910), and incorporated herein by reference.) *10.51 Employment Agreement, dated February 18, 1997, between Steven L. Basta and the Registrant. (Filed as Exhibit 10.51 to Registrant's Quarterly Report on Form 10-Q for the period ended March 31, 1997 (File No. 0-19910), and incorporated herein by reference.) *10.52 $40,000 Promissory Note, dated July 11, 1997, from Gregory F. Liposky to the Registrant. *10.53 Employment Agreement, dated September 17, 1997 between Carl M. Cohen, Ph.D., and the Registrant. 21 Subsidiaries of the Registrant. (Filed as Exhibit 22 to Form S-1 Registration Statement (Registration No. 33-42159), or amendments thereto, and incorporated herein by reference.) 23.1 Independent Auditors' Consent. 27 Financial Data Schedule. The Registrant will supply the Commission, upon request, with copies of all exhibits and schedules to exhibits listed above, as to which such exhibits and schedules have not been included herein. * Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. # Documents with certain confidential information deleted. Item 14(d) Financial Statement Schedules and Other Financial Statements Financial statement schedules have not been included because they are not applicable or the information is included in the financial statements or notes thereto. 53 55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 March 30, 1998. CREATIVE BIOMOLECULES, INC. By: /s/ Wayne E. Mayhew III ----------------------------------------------- Wayne E. Mayhew III Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated below on date indicated.
Signature Capacity Date --------- -------- ---- /s/ Brian H. Dovey Chairman of the Board and Director March 30, 1998 - --------------------------------- Brian H. Dovey /s/ Michael M. Tarnow President and Chief Executive Officer March 30, 1998 - --------------------------------- and Director (principal executive officer) Michael M. Tarnow /s/ Charles Cohen, Ph.D. Chief Scientific Officer and Director March 30, 1998 - --------------------------------- Charles Cohen, Ph.D. /s/ Wayne E. Mayhew III Vice President and Chief Financial Officer, March 30, 1998 - --------------------------------- Treasurer and Secretary (principal financial officer) Wayne E. Mayhew III /s/ Susan B. Blanton Controller (principal accounting officer) March 30, 1998 - --------------------------------- Susan B. Blanton /s/ Jeremy L. Curnock Cook Director March 30, 1998 - --------------------------------- Jeremy L. Curnock Cook /s/ Martyn D. Greenacre Director March 30, 1998 - --------------------------------- Martyn D. Greenacre /s/ Arthur J. Hale, M.D. Director March 30, 1998 - --------------------------------- Arthur J. Hale, M.D. /s/ Suzanne D. Jaffe Director March 30, 1998 - --------------------------------- Suzanne D. Jaffe /s/ Michael Rosenblatt, M.D. Director March 30, 1998 - --------------------------------- Michael Rosenblatt, M.D. /s/ James R. Tobin Director March 30, 1998 - --------------------------------- James R. Tobin
EX-10.38 2 MASTER LEASE AGREEMENT 1 Exhibit 10.38 FINOVA TECHNOLOGY FINANCE, INC. MASTER LEASE AGREEMENT DATED OCTOBER 6, 1997 Lessor: FINOVA Technology Finance, Inc. Lessee: Creative BioMolecules, Inc. 10 Waterside Drive 45 South Street Farmington, CT 06032 Hopkinton, MA 01748 1. LEASE. Lessor agrees to lease to Lessee and Lessee agrees to lease from Lessor the personal property including intangibles (the "Equipment") described in one or more Rental Schedules (herein called "Schedule(s)") to this Master Lease Agreement. Each such Schedule incorporates by this reference, the terms and conditions set forth in this Master Lease Agreement and constitutes a separate lease (the "Lease"). The lease of Equipment under each Lease shall be for such term and such rents as may be agreed to by execution of the Schedules and this Master Lease Agreement shall control and be effective as to all such Schedules, the same as though set forth herein unless expressly amended or modified in writing for particular Schedules. The term "Equipment" as used in this Master Lease Agreement shall refer to items leased under all Schedules and the terms hereof, unless expressly amended or modified in writing, shall apply equally to all such Equipment. 2. TERM AND RENT. The Initial Term for each item of Equipment shall be for the period specified in the Schedules, and Lessee shall pay Lessor, throughout the Initial Term for the use of the Equipment, the Rent specified in the Schedules. The Initial Term and Rent with respect to each item of Equipment shall commence as set out in the applicable Schedule. 3. LATE CHARGES. Time is of the essence in this Lease. If any Rent or other amount due hereunder are not paid within five (5) days after the due date thereof, Lessor shall have the right to add and collect and Lessee agrees to pay (a) a late charge on, and in addition to, such unpaid Rent or other charges, equal to five percent (5%) of such unpaid Rent or a lesser amount if established by any state of federal statute applicable thereto, (b) interest on such Rent or other charges from, the due date until paid at the highest contract rate enforceable against Lessee under applicable law, (c) a collection fee of $500 for additional administrative costs. 4. DISCLAIMER OF WARRANTIES. Lessee acknowledges that Lessor is not the manufacturer of the Equipment, nor manufacturer's agent, and Lessee represents that Lessee has selected the Equipment leased hereunder based upon Lessee's judgment prior to having requested Lessor to purchase the same for leasing to Lessee, and Lessee agrees that as between Lessor and Lessee, the Equipment leased hereunder is of a design, size, fitness and capacity selected by Lessee and that Lessee is satisfied that the same is suitable and fit for its intended purposes. LESSEE FURTHER AGREES THAT LESSOR HAS MADE AND MAKES NO REPRESENTATIONS OR WARRANTIES OF WHATSOEVER NATURE, DIRECTLY OR INDIRECTLY, EXPRESSED OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY REPRESENTATIONS OR WARRANTIES WITH RESPECT TO SUITABILITY, DURABILITY, FITNESS FOR USE AND MERCHANTABILITY OF ANY SUCH EQUIPMENT, THE PURPOSES AND USES OF THE LESSEE THE CHARACTERIZATION OF THE LEASE FOR TAX, ACCOUNTING OR OTHER PURPOSES, COMPLIANCE OF THE EQUIPMENT WITH APPLICABLE GOVERNMENTAL REQUIREMENTS, OR OTHERWISE. Lessee specifically waives all rights to make claim against Lessor herein for breach of any warranty of any kind whatsoever. Notwithstanding the foregoing, Lessee shall be entitled to the benefit of any applicable manufacturer's warranties received by Lessor and to the extent assignable, such warranties are hereby assigned by Lessor to Lessee for the term of the applicable Schedules. Lessor shall not be liable to Lessee for any loss, damage or expense of any kind or nature caused directly or indirectly by any Equipment leased hereunder or for the use or maintenance thereof, or for the failure of operations thereof, or for the repairs, service or adjustment thereto, or by any delay or failure to provide any thereof, or by any interruption of service or loss of use thereof or for any loss of business or any other damage 1 2 whatsoever and howsoever caused. No defect or unfitness of the Equipment shall relieve Lessee of the obligation to pay Rent, or to perform any other obligation under this Lease. 5. USE, OPERATION AND MAINTENANCE. Lessee shall use the Equipment in the manner for which it was designed and intended, solely for Lessee's business purposes, in accordance with all manufacturer manuals and instructions and in compliance with all applicable laws, regulations and orders. Lessee, at Lessee's own cost and expense, shall keep the Equipment in good repair, condition and working order, ordinary wear and tear excepted, and shall furnish all parts, mechanisms, devices and servicing required therefor and necessary to comply with all applicable health and safety standards. If commercially available, Lessee shall maintain in force a maintenance agreement with respect to the Equipment with the manufacturer thereof or such other party as may be acceptable to Lessor, and the Equipment, upon return to Lessor, shall qualify for such program without additional expense. All replacement parts and repairs at any time made to or placed upon the Equipment shall become the property of Lessor. Lessee may, with Lessor's prior written consent, make such alterations, modifications or additions to the Equipment as Lessee may deem desirable in the conduct of its business; provided the same shall not diminish the value or utility of the Equipment, or cause the loss of any warranty thereon or any certification necessary for the maintenance thereof, and shall be readily removable without causing damage to the Equipment. Upon return to Lessor the Equipment as to which such alterations, modifications or additions have been made, Lessee, if requested to do so by Lessor, shall remove the same and restore the Equipment to its original condition, reasonable wear and tear only being excepted, and, if not so removed, title thereto shall automatically vest in Lessor. Lessee shall keep the Equipment free and clear from all liens, charges, encumbrances, legal process and claims. Lessee shall not assign, sublet, hypothecate, sell, transfer or part with possession of the Equipment or any interest in this Lease, and any attempt to do so shall be null and void and shall constitute a default hereunder. Lessee shall not move the Equipment from the location noted in the Schedules without the prior written consent of Lessor, which consent shall not be unreasonably withheld. Neither this Lease nor any interest in the Equipment is assignable or transferable by Lessee by operation of law. Lessee agrees not to waive its right to use and possess the Equipment in favor of any party other than Lessor and further agrees not to abandon the Equipment to any party other than Lessor. So long as Lessee faithfully performs and meets each and every term and condition to be performed or met by Lessee under this Lease, Lessee's quiet and peaceful possession of the Equipment will not be disturbed by Lessor or anyone claiming by, through or on behalf of Lessor. 6. TITLE. The Equipment is and at all times shall remain the sole and exclusive personal property of Lessor (subject to Section 18 hereof). No right, title or interest in the Equipment shall pass to Lessee other than the right to maintain possession and use of the Equipment for the full lease term, conditioned upon Lessee's compliance with the terms and conditions of this Lease. If requested by Lessor, Lessee shall affix to or place on the Equipment plates or markings indicating Lessor's ownership. Lessee covenants and agrees that the Equipment is, and will at all times, remain the personal property of Lessor (subject to Section 18 hereof). If requested by Lessor, Lessee will obtain a waiver, in recordable form, from all persons with a real property interest in the premises wherein the Equipment may be located, waiving any claim with respect thereto. Lessor shall have the right from time to time during normal business hours to enter upon Lessee's premises or elsewhere for the purpose of confirming the existence, condition, and proper maintenance of the Equipment or for any other reasonable business purpose. 7. RENT ADJUSTMENT. The Effective Lease Rate will remain fixed for the duration of the Initial Term. Prior to the funding date, the date that Lessor pays the Purchase Price of the Equipment as set forth in the Schedule, Lessor may adjust the Rent in order to maintain its originally anticipated rate of return if; (i) there is a change in the yield on the U.S. Treasury Securities, as quoted in The Wall Street Journal, from the current defined Base Yield specified in the Schedules; (ii) the Rental Commencement Date as set forth in the Schedules, is not on or before the Commitment Expiration Date specified on the Schedules; (iii) Lessee fails to deliver documentation as requested by Lessor; or (iv) the Equipment cannot be acquired by Lessor at a cost equal to the invoice cost specified on the Schedules. 2 3 8. TAXES. Lessee shall promptly reimburse Lessor for, or shall pay directly if so requested by Lessor, as additional Rent, all taxes, charges and fees which may now or hereafter be imposed or levied by any governmental body or agency upon or in connection with the purchase, ownership, lease, possession, use or location of the Equipment or otherwise in connection with the transactions contemplated by the Lease, excluding, however, all taxes on or measured by the net income of Lessor, and shall keep the Equipment free and clear of all levies, liens or encumbrances arising therefrom. Lessor shall file, as owner and party responsible for payment of tax, personal property tax return relating to the Equipment unless otherwise provided in writing. Lessee shall promptly reimburse Lessor for all property taxes levied on or assessed against the Equipment during the Initial Term and all renewals or extensions, without any proration whatsoever. Failure of Lessee to promptly pay amounts due hereunder shall be the same as failure to pay any installment of Rent. If Lessee is requested by Lessor to file any returns or remit payments directly to any governmental body or agency as provided for hereunder, Lessee shall provide proof of said filing or payment to Lessor upon request. 9. LOSS OR DAMAGE OF EQUIPMENT. Lessee hereby assumes and shall bear the risk of loss for destruction of or damage to the Equipment from any and every cause whatsoever, whether or not insured, until the Equipment is returned to Lessor. No such loss or damage shall impair any obligation of Lessee under this Lease which shall continue in full force and effect. In event of damage to or theft, loss or destruction of the Equipment (or any item thereof), Lessee shall promptly notify Lessor in writing of such fact and of all details with respect thereto, and shall, within thirty (30) days of such event, at Lessor's option, (a) place the same in good repair, condition and working order or, (b) replace the Equipment (or any item thereof) with like personal property in good repair, condition and working order and transfer clear title to such replacement property to Lessor whereupon such property shall be subject to this Lease and be deemed the Equipment for purposes hereof; or, (c) pay Lessor an amount equal to the sum of (i) all Rent accrued to the date of such payment, plus (ii) the "Stipulated Loss Value" as set forth in the Schedules, whereupon this Lease shall terminate, except for Lessee's duties under Section 11 hereof, solely with respect to the Equipment (or any item thereof) for which such payment is received by Lessor. Upon payment of the amount set forth in (c), the Rent for such Schedules shall be reduced proportionately. Any insurance proceeds received with respect to the Equipment (or any item thereof) shall be applied, in the event option (c) is elected, in reduction of the then unpaid obligations, including the Stipulated Loss Value, of Lessee to Lessor, if not already paid by Lessee, or, if already paid by Lessee, to reimburse Lessee for such payment, or, in the event option (a) or (b) is elected, to reimburse Lessee for the costs of repairing, restoring or replacing the Equipment (or any item thereof) upon receipt by Lessor of evidence, satisfactory to Lessor, that such repair, restoration or replacement has been completed, and an invoice therefor. 10. INSURANCE. Lessee shall keep the Equipment insured against theft and all risks of loss or damage from every cause whatsoever for not less than the greater of the replacement cost, new, or the Stipulated Loss Value of the Equipment and shall carry public liability insurance, both personal injury and property damage, covering the Equipment and Lessee shall be liable for all deductible portions of all required insurance. All said insurance shall be in form and amount and with companies satisfactory to Lessor. All insurance for theft, loss or damage shall provide that losses, if any, shall be payable to Lessor, and all such liability insurance shall name Lessor (or Lessor's assignee as appropriate) as additional insured and shall be endorsed to state that it shall be primary insurance as to Lessor. Any other insurance obtained by or available to Lessor shall be secondary insurance. Lessee shall pay the premiums therefor and deliver to Lessor a certificate of insurance or other evidence satisfactory to Lessor that such insurance coverage is in effect; provided, however, that Lessor shall be under no duty either to ascertain the existence of or to examine such insurance policies or to advise Lessee in the event such insurance coverage shall not comply with the requirements hereof. Each insurer shall agree by endorsement upon the policy or policies issued by it or by independent instrument furnished to Lessor, that it will give Lessor thirty (30) days written notice prior to the effective date of any alteration or cancellation of such policy. The proceeds of such insurance payable as a result of loss of or damage to the Equipment shall be applied as set out in Section 9 hereof. Lessee hereby irrevocably appoints Lessor as Lessee's attorney-in-fact to make claim for, receive payment of, and execute and endorse all documents, checks or drafts received in payment for loss or damage under any said insurance policies. 3 4 In case of the failure of Lessee to procure or maintain said insurance or to comply with any other provision of this Lease, Lessor shall have the right but shall not be obligated, to effect such insurance or compliance on behalf of Lessee. In that event, all monies spent by and expenses of Lessor in effecting such insurance or compliance shall be deemed to be additional Rent, and shall be paid by Lessee to Lessor upon demand. 11. LESSEE INDEMNITY. Lessee assumes liability for and shall indemnify, save, hold harmless (and, if requested by Lessor, defend) Lessor, it's officers, directors, employees, agents or assignees from and against any and all claims, actions, suites or proceedings of any kind and nature whatsoever, including all damages, liabilities, penalties, costs, expenses and legal fees (hereinafter "Claim(s)") based on, arising out of, connected with or resulting from this Lease of the Equipment, including without limitation the manufacture, selection, purchase, delivery, acceptance, rejection, possession, use, operation, ownership, return or disposition of the Equipment, and including without limitation Claims arising in contract or tort (including negligence, strict liability or otherwise), arising out of latent defects (regardless of whether the same are discoverable by Lessor or Lessee) or arising out of any trademark, patent or copyright infringement. If any Claim is made against Lessee or Lessor, the party receiving notice of such Claim shall promptly notify the other, but the failure of such person receiving notice so to notify the other shall not relieve Lessee of any obligation hereunder. 12. TAX INDEMNITY. Lessee acknowledges that (1) Lessor intends to claim and take the accelerated cost recovery deductions available in the manner and as provided by section 168 and related sections of the Internal Revenue Code of 1986, as amended, and regulations adopted thereunder (the "Code") as in effect on the date hereof (such deductions being referred to hereinafter as "Tax Benefits") and (2) the Rent payable hereunder has been computed upon the assumption that such Tax Benefits shall be available to Lessor. Lessee represents and warrants to Lessor that Lessor shall be entitled to take such Tax Benefits and that all of the Equipment is, at and after the time of delivery of the Equipment to the location set forth in the Schedules, new, unless designated otherwise on the Schedules. Lessee further represents and warrants that it has not, and will not, at any time from such delivery through the term of this Lease take any action or omit to take any action (whether or not the same is permitted or required hereunder) which will result in the loss by Lessor of all or any part of the Tax Benefits. If as a result of any act, omission or misrepresentation of Lessee, the Tax Benefits are lost, disallowed, eliminated, reduced, recaptured, compromised or are otherwise unavailable to Lessor (any of the foregoing being a "Loss"), Lessee shall promptly pay to Lessor on demand, as additional Rent, an amount which will, after deduction therefrom of all taxes required to be paid in respect of the receipt thereof, enable Lessor to receive the same rate of return that Lessor would have realized had such Loss not occurred, together with any interest, penalties or additions to tax. Upon payment of such amount by Lessee, such act, omission or misrepresentation of Lessee which resulted in a Loss shall not be deemed a default hereunder. Any event which by the term of this Lease requires payment by Lessee to Lessor of the Stipulated Loss Value of the Equipment, shall not constitute the act, omission or misrepresentation of Lessee for purposes of the foregoing sentence. Lessor hereby agrees to exercise in good faith its best efforts (determined in the sole discretion of Tax Counsel of Lessor to be reasonable, proper and consistent with the overall tax interest of Lessor) to avoid requiring Lessee to pay the tax indemnity referred to in this Section 12; provided, however, Lessor shall have the sole discretion to determine whether or not to undertake judicial or administrative proceedings beyond the level of an Internal Revenue Service auditing agent; and provided further, that Lessor shall not be required to take any action pursuant to this sentence unless and until Lessee shall have agreed to indemnify Lessor for any and all expenses (including attorney's fees), liabilities or losses which Lessor may incur as a result of taking such action. For purposes of this Section 12, the term "Lessor" shall include the entity or entities, if any, with which Lessor consolidates its tax return. 13. RETURN OF EQUIPMENT. Upon termination pursuant to the terms of this Lease or Section 15 of this Lease, Lessee shall immediately return the Equipment and all related accessories, to such place within the continental United States as is designated by Lessor. The Equipment shall, at Lessee's sole expense, be crated and shipped in accordance with the manufacturer's specifications, freight prepaid and properly insured. If the Equipment, upon its return, is not in good repair, condition and working order, ordinary wear and tear excepted, and has not been maintained in accordance with Section 4 5 5 hereof, Lessee shall promptly reimburse Lessor for all reasonable costs incurred to place the Equipment in such condition. 14. Section left intentionally blank. 15. DEFAULT AND REMEDIES. (a) Lessee shall be in default hereunder if (i) Lessee fails to pay Rent or any other payment required hereunder within five (5) days of the due date thereof, (ii) Lessee fails to observe, keep or perform any other term or condition of this Lease and such failure continues for twenty (20) days following receipt of written notice thereof from Lessor, (iii) any representation or warranty made by Lessee herein or in any document delivered to Lessor in connection herewith shall prove to be false or misleading, (iv) Lessee defaults under any other obligation to Lessor, or (v) at any time there shall occur under (A) any lease between Lessee and a party other than Lessor as lessor or (B) under any lease wholly or partially guaranteed by Lessee, the exercise by the lessor of its possessory remedies or commencement of legal proceedings by the lessor for default under the lease; provided that the aggregate future payments remaining to be made or guaranteed by Lessee exceed $25,000, and that under a lease described in (B) above within ten days of notice to Lessee of such exercise of remedies and demand for payment by Lessee any such amount guaranteed by Lessee remains unpaid. (b) If Lessee is in default, Lessor shall have the right to take any one or more of the following actions: (i) proceed by appropriate court action or actions at law or in equity to enforce performance by Lessee of the term and conditions of this Lease and/or recover damages for the breach thereof; and/or (ii) by written notice to Lessee, which notice shall apply to all Schedules hereunder except as specifically excluded therefrom by Lessor, declare due and payable, and Lessee shall without further demand, forthwith pay to Lessor an amount equal to any unpaid Rent then due as of the date of such notice plus, as liquidated damages or loss of the bargain and not as a penalty, an amount equal to the Stipulated Loss Value as set forth in the Schedules, and Lessee shall return the Equipment to Lessor as provided in Section 13. Should Lessee fail to return the Equipment within five (5) days of receipt of such notice, Lessor may, personally, or by its agents, and with or without notice of legal process, enter upon the premises where the Equipment is located, without liability for trespass or other damages, and repossess the Equipment free from all claims by Lessee. Return or repossession of the Equipment shall not constitute a termination of this Lease unless Lessor so notifies Lessee in writing. With respect to Equipment returned to or repossessed by Lessor, if Lessor has not terminated this Lease, Lessor will, in such manner and upon such terms as Lessor may determine in its sole discretion, either sell such Equipment at one of more public or private sales or re-lease the Equipment. The proceeds of sale or re-lease shall be applied in the following order or priority: (i) to pay all Lessor's fees, costs and expenses for which Lessee is obligated pursuant to (c), below; (ii) to the extent not previously paid by Lessee, to pay Lessor its liquidated damages hereunder and all other sums then remaining unpaid hereunder; and (iii) to reimburse Lessee for any sums previously paid by Lessee to Lessor as liquidated damages; and (iv) any surplus shall be retained by Lessor. In the event the proceeds of sale or re-lease are less than the sum of the amounts payable under (i) and (ii), Lessee shall pay Lessor such deficiency, forthwith. The Proceeds of a credit sale or re-lease shall be discounted to their present value at the prime rate in effect at the inception of the Schedules plus four hundred (400) basis points (4%). (c) Lessee shall be liable for all legal and collection fees, costs and expenses arising from Lessee's default and the exercise of Lessor's remedies hereunder, including costs of repossessions, storage, repairs, reconditioning and sale or re-leasing of the Equipment. (d) In the event that any court of competent jurisdiction determines that any provision of this Section 15 is invalid or unenforceable in whole or in part, such determination shall not prohibit Lessor from establishing its damages sustained as a result of any breach of this Lease in any action or proceeding in which Lessor seeks to recover such damages. Any repossession of sale or re-lease of the Equipment shall not bar an action for damages for breach of this Lease, as hereinabove provided, and the bringing of an action or the entry of judgment against Lessee shall not bar Lessor's right to repossess the Equipment. No express or implied waiver by Lessor of any default shall in any way be, or be construed to be, a continuing waiver or a waiver of any future or subsequent default. 16. FURTHER ASSURANCES. Lessee agrees, at the request of Lessor, to execute and deliver to Lessor any financing statements, fixture filings or other instruments necessary for expedient filing, recording or perfecting the interest and title of Lessor in this Lease and the Equipment, agrees that a copy of this Lease and any Schedule may be so filed, and agrees that all 5 6 costs incurred in connection therewith (including, without limitation, filing fees and taxes) shall be paid by Lessee, and agrees to promptly, at Lessee's expense, deliver such other documents and assurances, and take such further action as Lessor may request, in order to effectively carry out the intent and purpose of this Lease and Schedules. Additionally, Lessee agrees that where permitted by law, a copy of the financing statement may be filed in lieu of the original. Lessee shall, as soon as practicable, deliver to Lessor, Lessee's future quarterly and annual reports of financial condition, prepared in accordance with generally accepted accounting principles, in a manner consistently applied; which reports Lessee represents and warrants shall fully and fairly present the true financial condition of Lessee. Lessee's covenants, representations, warranties and indemnities contained in Section 8, 11, 12 and 19 are made for the benefit of Lessor and shall survive, remain in full force and effect and be enforceable after the expiration or termination of this Lease for any reason. 17. ACCEPTANCE OF EQUIPMENT: NON CANCELLABLE. Lessee's acceptance of the Equipment shall be conclusively and irrevocably evidenced by Lessee signing the Certificate of Acceptance in the form of Annex A to the Schedules and upon acceptance, the Schedules shall be noncancelable for the Initial Term thereof. If Lessee cancels or terminates the Schedules after its execution and prior to delivery of the Equipment or if Lessee fails or refuses to sign the Certificate of Acceptance as to all or any part of the Equipment within a reasonable time, not to exceed five (5) days, after the Equipment has been delivered, in which event Lessee will be deemed to have canceled the Schedule, Lessee shall automatically assume all of Lessor's purchase obligations for the Equipment and Lessee agrees to indemnify and defend Lessor from any claims, including any demand for payment of the purchase price for the Equipment, by the manufacturer or seller of the Equipment. In addition thereto, Lessee shall pay Lessor (a) all of Lessor's out-of-pocket expenses and (b) a sum equal to one percent (1%) of the total rents for the lease term as liquidated damages, the exact sum of which would be extremely difficult to determine and is reasonably estimated hereby, to reasonably compensate Lessor for credit review, document preparation, ordering equipment and other administrative expenses. Lessor may apply any advance Rent payments to sums due from Lessee under (a) and (b) above. 18. ASSIGNMENT. Lessee acknowledges and agrees that Lessor may, at any time, without notice to or consent of Lessee, assign its rights but not its obligations under this Lease and/or mortgage, or pledge or sell the Equipment. Such assignee or mortgagee may re-assign this Lease and/or mortgage without notice to Lessee. Any such assignee or mortgagee shall have and be entitled to exercise any and all rights and powers of Lessor under this Lease, but such assignee or mortgagee shall not be obligated to perform any of the obligations of Lessor hereunder other than Lessor's obligation not to disturb Lessee' quiet and peaceful possession of the Equipment and unrestricted use thereof for its intended purpose during the term thereof and for as long as Lessee is not in default of any of the provisions hereof. Without limiting the foregoing, Lessee further acknowledges and agrees that in the event Lessee receives written notice of an assignment from Lessor, Lessee will pay all Rent and any and all other amounts payable by Lessee under any Schedule to such assignee or mortgagee or as instructed by Lessor, notwithstanding any defense or claim of whatever nature, whether by reason of breach of such Schedule or otherwise which it may now or hereafter have as against Lessor (Lessee reserving its right to make claims directly against Lessor). Lessee agrees to confirm in writing receipt of notice of assignment as may be reasonably requested by assignee or mortgagee. 19. REPRESENTATIONS AND WARRANTIES. Lessee represents and warrants to Lessor that: (i) the making of this Lease and any Schedule thereto executed by Lessee are duly authorized on the part of Lessee and upon execution thereof by Lessee and Lessor they shall constitute valid obligations binding upon, and enforceable against, Lessee ; (ii) neither the making of this Lease or such Schedule, nor the due performance thereof by Lessee, including the commitment and payment of the Rent, shall result in any breach of, or constitute a default under, or violation of, Lessee's certificate of incorporation, by-laws, or any agreement to which Lessee is a party or by which Lessee is bound; (iii) Lessee is in good standing in its state of incorporation and in any jurisdiction where the Equipment is located, and is entitled to own properties and to carry on business therein; and (iv) no approval, consent or withholding of objection is required from any governmental authority or entity with respect to the entering into, or performance of this Lease or such Schedules by Lessee. 6 7 Lessee shall provide Lessor a Certified Copy of it's Corporate Resolutions and Certificate of Incumbency substantially in the form of Annex B hereto. 20. NOTICES. Any notice required or given hereunder shall be deemed properly given (i) three (3) business days after mailed first class, or certified mail, return receipt requested, postage prepaid, addressed to the designated recipient at its address set forth at the heading hereof or such other address as such party may advise by notice given in accordance with this provision or (ii) upon receipt by the party to whom addressed if given in writing by personal delivery, commercial courier service, telecopy or other means which provides a permanent record of the delivery of such notice. 21. LESSEE'S OBLIGATIONS UNCONDITIONAL: NO OFFSET. This Lease is a net lease and except as expressly provided for herein, the Lessee shall not be entitled to any abatement or reduction of rent and Lessee hereby agrees that Lessee's obligation to pay all rent and other amounts hereunder shall be absolute and unconditional under all circumstances. 22. COUNTERPARTS. Each Schedule may be executed in one or more counterparts, each of which shall be deemed an original as between the parties thereto, but there shall be a single executed original of each Schedule which shall be marked "Counterpart No. 1"; all other counterparts shall be marked with other counterpart numbers. To the extent, if any, that a Lease constitutes chattel paper (as such term is defined in the Uniform Commercial Code) no-security interest in the Schedule may be created through the transfer or possession of any counterpart other than Counterpart No. 1. The Master Lease Agreement is incorporated by reference in each of the Schedules and shall not be chattel paper by itself. 23. SPECIAL TERMS. Lessee agrees that if Lessee hereafter desires to lease additional equipment and receives a bona fide commitment to lease such equipment from a third party, then Lessor shall have the right in its sole discretion, to lease such equipment to Lessee upon the same terms and conditions as are contained in such commitment. 24. GOVERNING LAW. This Lease and any Schedules thereto are entered into, under and shall be construed in accordance with, and governed by, the laws of the State of Arizona without giving effect to its conflicts of laws principles. The State of Arizona shall have exclusive jurisdiction over any action or proceeding brought to enforce or interpret this Lease or otherwise in connection therewith. 25. WAIVER OF JURY. LESSOR AND LESSEE EACH HEREBY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATED TO, THIS LEASE, THE SCHEDULES THERETO OR ANY CONDUCT, ACTS OR OMISSIONS BY LESSOR OR LESSEE OR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, AGENTS OR ATTORNEYS; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE. 26. PURCHASE OBLIGATION. Lessee shall be obligated to purchase all items of the Equipment then subject to a Schedule at the expiration of the Initial Term for such items of the Equipment for a purchase price, payable in immediately available funds, equal to the Fair Market Value of such items which Fair Market Value shall be equal to 10% of the original Purchase Price of the Equipment, plus any applicable sales, excise or other taxes imposed as a result of such sale (other than net income taxes attributable to such sale). Lessor's sale of any items of Equipment shall be on an "as is", "where-is" basis, without any representation or warranty by or recourse to Lessor, as provided by the provisions of the Lease on disclaimer of warranties, and shall be subject to such additional terms and conditions as may be specified in the Schedule. 27. MISCELLANEOUS. For purposes of this Lease, the term "Rent" as used herein shall mean and include all amounts payable by Lessee to Lessor hereunder. The captions of this Lease are for convenience only and shall not be read to define or limit the intent of the provision which follows such captions. This Lease contains the entire agreement and understanding between Lessor and Lessee relating to the subject matter hereof. Any variation or modification hereof and any waiver of any of the provisions or conditions hereof shall not be valid unless in writing signed by an authorized representative of the 7 8 parties hereto. Any provision of this Lease which is unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Lessor's failure at any time to require strict performance by Lessee or any of the provisions hereof shall not waive or diminish Lessor's right thereafter to demand strict compliance therewith or with any other provision. The term "Lessee" as used herein shall mean and include any and all Lessees who have signed this Lease, each of whom shall be jointly and severally bound thereby. THIS LEASE IS A NON-CANCELLABLE LEASE. THIS LEASE IS SUBJECT TO THE TERMS AND CONDITIONS WRITTEN ABOVE WHICH LESSEE ACKNOWLEDGES HAVING READ. THIS LEASE SHALL BE EFFECTIVE UPON EXECUTION BY LESSEE AND LESSOR. LESSOR: LESSEE: FINOVA Technology Finance, Inc. Creative BioMolecules, Inc. By: /s/Linda A. Moschitto By: /s/Wayne E. Mayhew III -------------------------------- ----------------------------------- Title: Director, Contract Admin. Title: VP & Chief Financial Officer ----------------------------- -------------------------------- Date Accepted: 10/31/97 Date Accepted: 10/22/97 --------------------- ------------------------ 8 EX-10.52 3 PROMISSORY NOTE 1 Exhibit 10.52 PROMISSORY NOTE HOPKINTON, MASSACHUSETTS JULY 11, 1997 FOR VALUE RECEIVED, I, Gregory F. Liposky (the "Borrower"), unconditionally promise to pay to Creative BioMolecules, Inc., a Delaware corporation, having offices at 45 South Street, Hopkinton, Massachusetts (the "Lender"), or order, the Principal Sum of Forty Thousand Dollars ($40,000.00), with interest at the rate of 6.65% per annum ("Interest"), payable in arrears, as follows: (a) Provided Borrower is employed by the Lender or its affiliates, an equal portion of the Principal Sum and accrued Interest shall be forgiven annually over the first period of twelve (12) months, commencing on February 7, 1997, and then an equal portion of the Principal Sum and accrued Interest shall be forgiven monthly over the remaining term of thirty-six (36) months commencing on February 7, 1998, provided Borrower is employed by the Lender or its affiliates. (b) Following the date of termination for any reason whatsoever of Borrower's employment, any unpaid balance of the Principal Sum, shall be due and payable with all unpaid or unforgiven Interest as hereinabove set forth, on or before the date twenty-four (24) months after the date of termination for any reason whatsoever of the Borrower's employment with the Lender and its affiliates. For purposes hereof, an "affiliate" means Creative BioMolecules, Inc. and any of its 100% owned subsidiaries and any of its or their successors in business. The undersigned agrees to pay all costs and expenses, including an attorney fee, for the collection of this note upon default, and to pay interest on all amounts not paid when due (pursuant to the terms hereof, by acceleration, or otherwise) at the rate of one and one-half (1 1/2%) percent per month until paid in full. The undersigned further agrees that if this note is not paid in full when due, the balance due, including interest, may be offset against and withheld from any amounts, including salary, due to the undersigned from the holder. All payments shall be made at the office of the holder at 45 South Street, Hopkinton, Massachusetts, or at such other place as the holder hereof may from time to time designate in writing. At the option of the holder, this note shall become immediately due and payable without notice or demand upon the occurrence at any time of any of the following events: (1) default in any payment of principal or interest due hereunder or in the performance or observance if the terms of conditions of any mortgage, security agreement, or other instrument or agreement (including amendments and extensions thereof) securing this note; 2 (2) default in the payment or performance of any other liability or obligation of the undersigned or of any endorser or guarantor of any liability or obligation of the undersigned to holder; or (3) if any party liable hereon, whether as maker, endorser, guarantor, surety or otherwise shall die, make an assignment for benefit of creditors, or if a receiver of any such party's property shall be appointed, or if a petition in bankruptcy or other similar proceeding under any law for relief of debtors shall be filed by or against any such party. Each and every party liable hereon, either as maker, endorser, guarantor, surety or otherwise, hereby (1) waives presentment, demand, protest and notice of every kind and description, and all suretyship defenses and defenses in the nature thereof; (2) waives any defenses based upon, and specifically assents to, any and all extensions and postponements of the time of payment and all other indulgences and forbearances which may be granted by the holder to any party hereon; (3) agrees to any substitution, exchange, release, surrender or other delivery of any collateral held hereunder and to the addition or release of any other party or person primarily or secondarily liable; and (4) agrees to be bound by all the terms contained in this note and agrees that the obligations and agreements of all such parties shall be joint and several. No delay or omission on the part of the holder in exercising any right hereunder shall operate as waiver of such right or of any other right of such holder, nor shall any delay, omission or waiver on any one occasion be deemed a bar to or waiver of the alteration or modification of the terms of this note and only to the extent therein set forth. Any default under the note or in the performance and observance of the provisions of any mortgage, security agreement or other agreement pertaining thereto shall be deemed a default on all other notes, obligations and liabilities of all parties liable hereon to the holder, whether now existing or hereafter arising, and any default on any other note, obligation or liability of any party liable hereon to the holder, whether now existing or hereafter arising, shall also be deemed a default under this note. No single or partial exercise of any power hereunder or under any mortgage or security agreement securing this note shall preclude other or future exercise thereof or the exercise of any other power. The holder thereof shall at all times have the right to proceed against any portion of the security held herefore in such order and in such manner as the holder may see fit, without waiving any rights with respect to any other security. All times of payment of principal, interest or any other monies due under or in respect of this note shall be of the strict essence, provided, however, that all indebtedness evidenced by this note may be prepaid in whole or in part at any time without penalty. 3 If any term or provision of this note, or any portion of any such term or provision, shall be held invalid or against public policy, or if the application of the same to any person or circumstance is held invalid or against public policy, then the remainder of this note (or the remainder of such term or provision) and the application thereof to other persons or circumstances shall not be affected thereby and shall remain valid and in full force and effect to the fullest extent permitted by the law. All rights and obligations hereunder shall be governed by the laws of the Commonwealth of Massachusetts and this note is executed as and shall have the effect of a sealed instrument. Notwithstanding any provision herein or in any instrument now or hereafter securing this note, the total liability for payments in the nature of interest shall not exceed the limitations now imposed by the applicable laws of the state whose laws are controlling on the subject as shall be determined by final order of a court of competent jurisdiction. EXECUTED as an instrument under seal as of MARCH 3, 1998 , and the instrument shall be effective as of July 11, 1997. Signed in the presence of: /s/Cheryl K. Lawton /s/Gregory F. Liposky - ---------------------------- -------------------------------- Gregory F. Liposky EX-10.53 4 EMPLOYMENT AGREEMENT FOR CARL COHEN PHD 1 Exhibit 10.53 September 17, 1997 Carl M. Cohen, Ph.D. 15 Magnolia Avenue Newton, MA 02158 Dear Carl, It is with pleasure that I extend to you an offer to join Creative BioMolecules, Inc. The terms of this offer are summarized below. Title and Duties: Vice President of Research, reporting to President and CEO. Your duties will be determined by the President, consistent with your position. Term: Commencing on November 3, 1997, and continuing thereafter until terminated by either you or the Company under the provisions of this letter agreement. Salary: Base salary of $14,666.67 per month, which is an annualized salary of $176,000.00 payable in accordance with the Company's standard payroll practices. You will be eligible for your first merit increase in January 1999 for the fourteen month period November 1997 - December 1998. Sign-on Bonus: You will be eligible for a $10,000 sign-on bonus, payable after the completion of 30 days starting with your commencement of employment ("Commencement Date"). Bonus: You will be eligible for a first year bonus up to 20% of your base salary. The payment of a bonus will reflect substantial completion of reasonable goals and objectives which we will mutually determine. A bonus will not be paid even if objectives have been achieved, if the Company decides not to pay Company bonuses in a given year. Future bonus arrangements will be determined on an annual basis by mutual agreement. 2 Carl M. Cohen, Ph. D. September 17, 1997 Page Two Equity Participation: Subject to the approval of the Board of Directors, you will be granted stock options under the Company's 1987 Stock Plan to purchase an aggregate of 100,000 shares of Common Stock, with the exercise price to be the fair market value of the Common Stock on the date of grant as determined by the Board of Directors. The options will vest annually over a four year period and will be subject to the other terms and conditions of the option agreement(s) to be entered into between you and the Company. Such agreement(s) will include a provision permitting exercise of the options with payment made by you through a loan from the Company. The agreement(s) will also include a provision for acceleration of the vesting of the options, substantially as follows: "In case of (i) any consolidation or merger of the Company with or into any other corporation or corporations (other than a merger with a wholly-owned subsidiary or a merger in which stockholders of the Company have beneficial ownership of more than 50% of the share capital of the surviving company, (ii) a sale of all or substantially all of the assets of the Company or (iii) the acquisition by a third party (together with its affiliates or persons acting in concert with) of beneficial ownership of more than fifty percent (50%) of the share capital of the Company, then immediately prior to the consummation of any such transaction this option shall become fully exercisable." Benefits: Benefits to include: -group health and dental insurance -group life and AD&D insurance -group short and long term disability insurance -401(k) savings plan -3 weeks vacation, under the Company's standard policy 3 Carl M. Cohen, Ph. D. September 17, 1997 Page Three The Company will also reimburse you for any reasonable out-of-pocket business expenses you incur in the course of your employment, subject to documentation in accordance with Company policies. Severance Package: If your employment with the Company is terminated at any time during the 12-month period after the Commencement Date, for any reason other than your resignation or termination by the Company for "cause" (as defined below), the Company will continue to pay your base salary and provide you with health, dental, and life insurance benefits for 6 months after the effective date of such employment termination. As used in this letter agreement, "cause" shall mean (i) illegal, dishonest or negligent conduct which constitutes a breach of your obligations under this agreement, or which involves an improper use of the funds or assets of the Company, or (ii) any conduct which is likely to have a material adverse impact on the goodwill, reputation or business of the Company. In addition, upon acceleration of the vesting of your stock options as set forth in this letter agreement, the Company will pay you a severance package which is consistent with severance paid to other officers of the Company. Confidentiality and Inventions Assignment: You agree to be bound by the terms of the Company's confidentiality and inventions assignment provisions, pursuant to a separate agreement to be signed by the Company prior to the Commencement Date. You also hereby represent and warrant that you have no commitments or obligations inconsistent with this agreement, including such confidentiality and inventions assignment provisions, and you hereby agree to indemnify and hold the Company harmless against any claim based upon circumstances alleged to be inconsistent with such representation and warranty. 4 Carl M. Cohen, Ph. D. September 17, 1997 Page Four Governing Law and Miscellaneous Provisions: This agreement shall be governed by and construed under the laws of the Commonwealth of Massachusetts, without application of the conflicts of law provisions thereof. This agreement, including the above-referenced stock option agreement and the confidentiality and inventions assignment agreement, embodies the entire agreement and understanding between you and the Company regarding the subject matter hereof. This agreement shall not be modified or amended except by an instrument in writing signed by you and the Company. The Company may assign its rights and obligations under this agreement to any person or entity who succeeds to all of the Company's business or that aspect of the Company's business in which you are principally involved. Your rights and obligations under this agreement may not be assigned without the prior written consent of the Company. Subject to the foregoing, this agreement shall be binding upon and inure of the benefit of the Company and any parent, subsidiary or other affiliate, and their respective successors and assigns and shall be binding upon and inure to the benefit of you and your heirs, executors, administrators and assigns. This agreement may be executed in one or more counterparts each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. Should you wish to discuss any aspect of this employment offer, please feel free to contact me. If the terms of employment are acceptable, please sign this letter (a copy for your files is enclosed) and return it to me by Monday, September 22, 1997. We believe that Creative BioMolecules will provide an exciting and stimulating work environment, and look forward to your arrival. Sincerely, Agreed to: /s/ Michael Tarnow Michael M. Tarnow /s/ Carl M. Cohen - ------------------------------- ------------------------------- President & CEO Carl M. Cohen, Ph. D. Enclosure EX-23.1 5 CONSENT OF DELOITTE & TOUCHE LLP 1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement Nos. 33-68084, 33-83276 and 33-91150 on Form S-3 and Registration Statement Nos. 33-56706, 33-61884, 33-80945, 333-36171 and 333-36175 on Form S-8 of Creative BioMolecules, Inc. of our report dated March 5, 1998, appearing in the Annual Report on Form 10-K of Creative BioMolecules, Inc. for the year ended December 31, 1997. /s/ Deloitte & Touche LLP Boston, Massachsuetts March 27, 1998 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1997 AND FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 U.S. DOLLARS YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 1 2,158,909 28,438,841 4,572,518 0 1,249,330 36,704,247 31,377,616 (14,132,278) 59,037,999 4,323,730 2,004,927 0 0 333,926 52,375,416 59,037,999 0 15,432,759 0 273,757 25,122,039 0 215,815 (16,651,673) 0 (16,651,673) 0 0 0 (16,651,673) (.50) (.50)
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