<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 1999 or
[ ] 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: 0001066284
CELL PATHWAYS, INC.
(Exact name of registrant as specified in its charter)
Delaware 23-2969600
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
702 Electronic Drive
Horsham, Pennsylvania 19044
(Address of principal executive office, including zip code)
(215) 706-3800
(Registrant's telephone number, including area code)
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
--- ---
At April 30, 1999 there were 24,326,263 shares of Common Stock, par value $0.01
per share, outstanding.
<PAGE> 2
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PART 1 FINANCIAL INFORMATION (UNAUDITED) Page
----
<S> <C> <C>
Item 1 Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 1999 and
December 31, 1998................................................. 3
Condensed Consolidated Statements of Operations for the three
months ended March 31, 1999 and 1998 and for the period from
inception (August 10, 1990) to March 31, 1999..................... 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1999 and 1998 and for the period from
inception (August 10, 1990) to March 31, 1999..................... 5
Notes to Condensed Consolidated Financial Statements ............. 6 - 7
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 8 - 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk........ 11
PART II OTHER INFORMATION
Item 1 Legal Proceedings................................................. 12
Item 6 Exhibits and Reports on Form 8-K.................................. 12
Signatures........................................................ 13
</TABLE>
2
<PAGE> 3
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 31,477,396 $ 37,232,404
Prepaid expenses and other ..................................... 603,053 512,474
------------ ------------
Total current assets ..................................... 32,080,449 37,744,878
EQUIPMENT and FURNITURE, NET ..................................... 1,677,484 1,533,634
OTHER ASSETS ..................................................... 954,387 954,187
------------ ------------
$ 34,712,320 $ 40,232,699
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current installments of obligations under capital lease ........ $ 146,260 $ 146,260
Accounts payable ............................................... 406,382 601,988
Other accrued liabilities ...................................... 2,959,037 3,192,436
------------ ------------
Total current liabilities ................................ 3,511,679 3,940,684
------------ ------------
OBLIGATIONS UNDER CAPITAL LEASE, EXCLUDING CURRENT INSTALLMENTS .. 129,697 159,897
------------ ------------
STOCKHOLDERS' EQUITY :
Preferred Stock, $.01 par value, 5,000,000 shares authorized,
none issued and outstanding .................................... -- --
Common Stock $.01 par value, 70,000,000 shares authorized;
24,315,013 and 24,279,526 shares issued and outstanding ........ 243,150 242,796
Additional paid-in capital ....................................... 81,499,157 81,256,094
Stock subscription receivable from issuance of Common Stock ...... (37,000) (37,000)
Deficit accumulated during the development stage ................. (50,634,363) (45,329,772)
------------ ------------
Total stockholders' equity ............................... 31,070,944 36,132,118
------------ ------------
$ 34,712,320 $ 40,232,699
============ ============
</TABLE>
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
3
<PAGE> 4
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED PERIOD
MARCH 31, FROM INCEPTION
---------------------------- (AUGUST 10, 1990)
1999 1998 TO MARCH 31, 1999
------------ ------------ -----------------
<S> <C> <C> <C>
EXPENSES:
Research and development ............ $ 4,527,893 $ 3,545,830 $ 41,656,223
General and administrative .......... 1,144,544 1,315,623 9,953,589
Provision for redemption of the
Redeemable Preferred Stock ........ -- -- 1,017,000
------------ ------------ ------------
Total expenses .................... 5,672,437 4,861,453 52,626,812
INTEREST INCOME ........................ 367,846 83,446 1,992,449
------------ ------------ ------------
NET LOSS ............................... $ (5,304,591) $ (4,778,007) $(50,634,363)
============ ============ ============
Basic and diluted net loss per Common
Share .................................. $ (0.22) $ (1.60)
============ ============
Shares used in computing basic and
diluted net loss per Common Share... 24,309,333 2,990,095
============ ============
</TABLE>
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
4
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CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
THREE MONTHS ENDED (AUGUST 10,
MARCH 31, 1990) TO
---------------------------- MARCH 31,
1999 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss ...................................................... $ (5,304,591) $ (4,778,007) $(50,634,363)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation expense and amortization ......................... 134,368 68,720 522,385
Issuance of Common Stock for services rendered ................ -- -- 48,578
Issuance of Common Stock options for services rendered ........ -- -- 13,313
Provision for redemption of Redeemable Preferred Stock ........ -- -- 1,017,387
Write-off of deferred offering costs .......................... -- 469,515 469,515
Other ......................................................... -- -- 68,399
(Increase) decrease in prepaid and other current assets ....... (90,579) 7,308 (284,427)
Increase in other assets ...................................... (200) -- (208,448)
Increase (decrease) in accounts payable and accrued
liabilities ................................................. (429,005) (257,682) 744,428
------------ ------------ ------------
Net cash flows used in operating activities ................. (5,690,007) (4,490,146) (48,243,233)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchase of equipment and leasehold improvements .............. (278,218) (1,008,343) (4,678,018)
Sale of leasehold improvements ................................ -- -- 3,000,000
Cash paid for deposits ........................................ -- (94,383) (34,767)
------------ ------------ ------------
Net cash flows used in investing activities ................ (278,218) (1,102,726) (1,712,785)
------------ ------------ ------------
FINANCING ACTIVITIES:
Proceeds from issuance of
Convertible Preferred Stock, net of related offering costs .... -- -- 47,185,046
Proceeds from the transaction with Tseng Labs, Inc. ............ -- -- 27,966,372
Proceeds from exercise of Series
E, F, and G warrants to purchase stock ........................ 4,876 -- 686,430
Decrease in shareholder receivable ............................. -- -- 23,626
Cash received for Common Stock options exercised ............... 238,541 -- 685,222
Redemption of Redeemable Preferred Stock ....................... -- -- (546,051)
Proceeds from bridge loan ...................................... -- -- 791,000
Partner cash contributions ..................................... -- -- 5,312,355
Increase in restricted cash .................................... -- (581) (611,172)
Principal payments under capital lease obligations ............. (30,200) -- (59,414)
Proceeds from borrowings ....................................... -- -- 150,000
Repayment of borrowings ........................................ -- (12,924) (150,000)
------------ ------------ ------------
Net cash flows provided by (used in) financing activities .. 213,217 (13,505) 81,433,414
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents ............. (5,755,008) (5,606,377) 31,477,396
CASH AND CASH EQUIVALENTS,
beginning of Period ............................................ 37,232,404 8,460,839 --
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period ......................... $ 31,477,396 $ 2,854,462 $ 31,477,396
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES:
Accrual of leasehold improvements payable ........................ $ -- $ -- $ 848,000
============ ============ ============
Accrual of deferred offering costs ............................... $ -- $ 441,375 $ 441,375
============ ============ ============
Conversion of partners' investment to Preferred Stock ............ $ -- $ -- $ 5,312,355
============ ============ ============
Conversion of bridge loan to Convertible Preferred Stock ......... $ -- $ -- $ 791,000
============ ============ ============
Conversion of Convertible Preferred Stock for Common Stock ....... $ -- $ -- $ 53,766,991
============ ============ ============
Issuance of Convertible Preferred Stock to investment advisors ... $ -- $ -- $ 540,742
============ ============ ============
Issuance of Common Stock as payment of management bonus .......... $ -- $ -- $ 59,200
============ ============ ============
Redemption of Redeemable Preferred Stock for Common Stock ........ $ -- $ -- $ 545,949
============ ============ ============
Sale of Common Stock in exchange for stock subscription
receivable...................................................... $ -- $ -- $ 37,000
============ ============ ============
Sale of Convertible Preferred Stock in exchange for stock
subscription receivable ........................................ $ -- $ -- $ 23,626
============ ============ ============
Issuance of Common Stock as payment for accounts payable ......... $ -- $ -- $ 48,578
============ ============ ============
</TABLE>
The accompanying notes to the condensed consolidated financial statements
are an integral part of these statements.
5
<PAGE> 6
CELL PATHWAYS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Organization
Cell Pathways, Inc. was incorporated in Delaware in July 1998 as a
subsidiary of, and as of November 3, 1998 successor to, a Delaware corporation
of the same name. As the context requires, "Company" is used herein to signify
the successor and/or the predecessor corporations.
The Company is a pharmaceutical company focused on the research,
development and future commercialization of products to prevent and treat
cancer. The Company is in the development stage and has not generated any
product revenues to date, nor is there any assurance of any future product
revenues. The Company's intended products are subject to long development cycles
and there is no assurance the Company will be able to successfully develop,
manufacture, obtain regulatory approval for or market its products. During the
period required to develop its products, the Company plans to continue to
finance operations through debt and equity financings, corporate alliances or
through combinations thereof. There is no assurance, however, that such
additional funding will be available on terms acceptable to the Company, if at
all. The Company will continue to be considered in the development stage until
such time as it generates significant revenues from its principal operations. As
of March 31, 1999, the Company had a deficit accumulated during the
developmental stage of $50,634,363.
On November 3, 1998, the Company completed a financing through the
acquisition of Tseng Labs, Inc. ("Tseng") (a publicly held shell company) in
which the Company issued to Tseng stockholders approximately 5.5 million shares
of the Company's Common Stock and received net proceeds of approximately $26.4
million . The accompanying financial statements include the accounts from
inception (August 10, 1990) through March 31, 1999, (including the accounts of
Tseng after November 3, 1998).
Basis of Presentation
The unaudited condensed consolidated financial statements as of March 31,
1999 and for the three months ended March 31, 1999 and 1998, are unaudited but
include all adjustments (consisting only of normal recurring adjustments) which,
in the opinion of management, are necessary to state fairly the financial
information set forth therein in accordance with generally accepted accounting
principles. The interim results may not be indicative of the results that may be
expected for the year. These financial statements should be read in conjunction
with the audited consolidated financial statements for the year ended December
31, 1998 included in the Company's annual report on Form 10-K filed with the
Securities and Exchange Commission.
6
<PAGE> 7
2. BASIC AND DILUTED NET LOSS PER COMMON SHARE
Statement of Financial Accounting Standards No. 128, "Earnings per Share",
became effective at the end of 1997 and requires presentation of two
calculations of earnings per common share. "Basic" earnings per common share
equals net income divided by the weighted average common shares outstanding
during the period. "Diluted" earnings per common share equals net income divided
by the sum of the weighted average common shares outstanding during the period
plus common stock equivalents. The Company's basic and diluted per share amounts
are the same since the assumed exercise of stock options and warrants,
conversion of Convertible Preferred Stock, and the redemption of Redeemable
Preferred Stock are all anti-dilutive. The amount of Common Stock equivalents
excluded from the calculation are options and warrants to purchase 2,108,737 and
711,663 shares of Common Stock, Convertible Preferred Stock convertible into 0
and 10,968,387 shares of Common Stock, warrants to purchase 0 and 194,395 shares
of Convertible Preferred Stock convertible into the same number of shares of
Common Stock and 0 and 33,052 shares of Common Stock to be issued upon
redemption of the Redeemable Preferred Stock that were outstanding as of March
31, 1999 and 1998, respectively.
3. LITIGATION:
In February and March 1999, five purported stockholder class action
complaints were filed against the Company and certain of its officers and
directors in the United States District Court for the Eastern District of
Pennsylvania alleging that the Company had made false and misleading statements
about the efficacy and near-term commercialization of the Company's lead drug
candidate. The complaints seek unspecified damages on behalf of purported
classes of persons including former Tseng stockholders and persons who purchased
Company Common Stock from November 3 or November 11, 1998 through February 2,
1999, inclusive. The Company believes that the allegations of the complaints are
without merit and intends to vigorously contest the litigations
7
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cell Pathways, Inc. was incorporated in Delaware in July 1998 as a
subsidiary of, and, as of November 3, 1998, the successor to, a Delaware
corporation of the same name. As the context requires, the "Company" or "CPI" is
used herein to signify the successor and/or the predecessor corporations
Certain statements made herein, and oral statements made in respect
hereof, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are those
which express plan, anticipation, intent, contingency or future development
and/or otherwise are not statements of historical fact. These statements are
subject to risks and uncertainties, known and unknown, which could cause actual
results and developments to differ materially from those expressed or implied in
such statements. Such risks and uncertainties relate to, among other factors,
the absence of approved products; history of operating losses; early stage of
development; the costs, delays and uncertainties inherent in basic
pharmaceutical research, drug development and clinical trials, with respect to
both the Company's current product candidates and its future product candidates,
if any; dependence on development of exisulind; the limitations on, or absence
of, the predictive value of data obtained in laboratory tests, animal models and
human clinical trials when planning additional steps in product development; the
uncertainty of obtaining regulatory approval, and the timing and scope of any
approval received; acceptance by providers of healthcare reimbursement; the
validity, scope and enforceability of patents; the actions of competitors;
dependence upon third parties; product liability; the need for further
financing; and other risks detailed in Cell Pathways, Inc. reports filed from
time to time under the Securities Act of 1933 and/or the Securities Exchange Act
of 1934, including the sections entitled "Business" and "Risk Factors" in the
Company's report on Form 10-K for the year ended December 31, 1998. Given these
uncertainties, current and prospective investors are cautioned not to place
undue reliance on any such forward-looking statements. The Company undertakes no
obligation to update or revise the statements made herein or the factors which
may relate thereto.
OVERVIEW
CPI is a development stage pharmaceutical company focused on the
research, development and commercialization of products to prevent and treat
cancer. From the inception of the Company's business in 1990, operating
activities have related primarily to conducting research and development,
raising capital and recruiting personnel. The Company's initial investigational
new drug application ("IND") was filed with the Food and Drug Administration
("FDA") in December 1993 for human clinical trials of the Company's first
product candidate, exisulind. The Company filed an IND for its second product
candidate, CP 461, in December 1998.
Phase I clinical trials for exisulind to treat adenomatous polyposis
coli ("APC"), an FDA designated orphan drug indication, began in February 1994;
a Phase I/II clinical trial began in August 1995; and a Phase III clinical trial
was initiated in the second quarter of 1997 and concluded in January 1999.
Patients that participated in the Phase III clinical trial have been allowed to
enter an extension trial for exisulind in APC. In December 1997, CPI initiated
Phase II/III clinical trials of exisulind for the treatment of sporadic
adenomatous colonic polyps (patient enrollment completed in April 1999) and for
the prevention of prostate cancer recurrence (patient enrollment completed in
the third quarter of 1998 with the extension phase initiated in February 1999)
as well as a pilot clinical trial of exisulind for the treatment of lung cancer.
In addition, a Phase II/III clinical trial of exisulind for prevention of breast
cancer recurrence (patient enrollment continuing) was initiated in February
1998; a Phase I clinical trial of exisulind in pediatric patients for APC was
initiated in June 1998 and completed in April 1999; a Phase II clinical trial of
exisulind in pediatric patients for APC was initiated in April 1999 (patient
enrollment continuing); and a Phase II clinical trial of exisulind for the
treatment of Barrett's esophagus was initiated in January 1999 (patient
enrollment continuing). A Phase I clinical trial of CP 461 was initiated in the
second quarter of 1999 (patient enrollment continuing).
On November 3, 1998, CPI completed a financing through the acquisition
of Tseng Labs, Inc. ("Tseng")(a publicly-held company with no continuing
operations which, subsequent to the transaction, became a subsidiary of CPI), in
which CPI issued to Tseng stockholders approximately 5.5 million shares of CPI
Common Stock and received net proceeds of approximately $26.4 million.
8
<PAGE> 9
In January 1999, CPI completed a pivotal Phase III clinical trial of
exisulind for the indication of familial polyposis coli or APC. Preliminary
evaluation of the unblinded data from this clinical trial suggested that the
trial did not achieve statistical significance. Accordingly, the Company
announced that it anticipated a delay in the filing of a new drug application
("NDA") with the FDA for this indication and that the Company would be
evaluating the data in a process which was expected to continue for some time.
As of April 30, 1999, CPI had not completed its evaluation of the data from the
Phase III clinical trial. Until completion of its analysis, the Company will not
know the extent of delay. There can be no assurance that the Company will file
an NDA for the APC indication, or, if an NDA is filed, that exisulind will
receive marketing approval by the FDA.
The Company has not received any revenue from the sale of products, and
no product candidate of CPI has been approved for marketing. CPI's income has
been limited to interest income from investments, and CPI's primary source of
capital has been the sale of its equity securities and the transaction with
Tseng. As of March 31, 1999 and December 31, 1998 CPI's accumulated deficit was
$50,634,363 and $45,329,772, respectively, and the unrestricted cash and cash
equivalents for the same periods were $31,477,396 and $37,232,404, respectively.
The Company anticipates that it will continue to incur additional operating
losses for the next several years. There can be no assurance that any of the
Company's product candidates will be approved for marketing, that the Company
will attain profitability or, if profitability is achieved, that the Company
will remain profitable on a quarterly or annual basis in the future. CPI's
operating results will fluctuate from quarter to quarter. Some of these
fluctuations may be significant and, therefore, quarter to quarter comparisons
may not be meaningful.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared with Three Months Ended
March 31, 1998. Total expenses for the three months ended March 31, 1999 were
$5,672,437, an increase of $810,984 or 16.7% from the same period in 1998.
Research and development expenses for the three months ended March 31, 1999 were
$4,527,893, an increase of $982,063 or 27.7%, from the three months ended March
31, 1998. Such increase was primarily due to the procurement of raw materials of
exisulind for on-going and planned clinical trials and in preparation for the
potential commercialization of exisulind, an increase in clinical study related
expenses and additional personnel to support research and product development
activities. General and administrative ("G&A") expenses were $1,144,544 for the
three months ended March 31, 1999, a decrease of $171,079 or 13.0%, from the
same period in 1998. In the three months ended March 31, 1998 the Company
recorded a one-time charge of approximately $715,000 related to expenses for an
initial public offering that was not completed. Partially offsetting the
decrease in G&A expenses resulting from this one-time charge were increases in
personnel and personnel related expenses, facility expenses and marketing
expenses related to commercialization preparations for exisulind.
Interest income was $367,846 in the three months ended March 31, 1999,
an increase of $284,400 or 340.8% from the same period of 1998 due to higher
average cash balances which resulted from a private equity financing and the
acquisition of Tseng which occurred in the second and fourth quarters of 1998,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
CPI has financed its operations since inception primarily with the net
proceeds received from private placements of equity securities and the
transaction with Tseng. Financing activities have generated net proceeds of
$81,433,414 from inception through March 31, 1999.
At March 31, 1999, the Company had cash and cash equivalents of
$31,477,396. The Company's cash position decreased by $5,755,008 for the three
months ended March 31, 1999 primarily due to the net operating loss in the three
months ended March 31, 1999 of $5,304,591 and the addition of $278,218 in
laboratory and computer equipment. CPI invests its excess cash primarily in low
risk, highly liquid money market funds and U.S. government treasuries. CPI had
$611,172 in a restricted account pledged as security for a letter of credit for
a security deposit under the lease of its Horsham, Pennsylvania facility, and as
security to a letter of credit for a portion of a software lease commitment.
9
<PAGE> 10
CPI leases approximately 40,000 square feet of laboratory and office
space in Horsham, Pennsylvania under a ten - year lease which expires in 2008
and which contains two five - year renewal options. The Company has a lease
expiring in June 1999 on its 7,900 square feet facility in Aurora, Colorado
which was vacated at the end of July 1998. All remaining lease payments
associated with the Aurora facility were recorded in 1998 operations. The
Company believes its facilities will be adequate for the foreseeable future.
CPI anticipates that quarterly and annual expenditures for preclinical
studies, clinical trials, product development, research, selling, marketing and
administrative expenses will increase significantly in future periods. In
anticipation of possible FDA approval for the marketing of exisulind, in 1998
the Company began to make preparations and incurred expenses for the
commercialization of CPI's first product. Such expenses were expected to be
significant in 1999. As indicated in the Company's February 1999 announcement of
the preliminary evaluation of the data from the APC Phase III clinical trial,
the Company anticipates a delay in the filing of an NDA. Accordingly, the
Company has revised its operating plan and anticipated expenditures. There can
be no assurance that CPI will be able to successfully complete the clinical
development of exisulind for APC or any other indication, that the FDA will
grant approval within the time frame expected, if at all, that the other
developments or expansions in CPI's research, development and commercialization
programs will not require additional funding or encounter delays or that, in
light of these or other circumstances, CPI will be able to achieve anticipated
levels of revenue, expense and cash flow.
CPI expects that it will require additional financing to continue its
research and development programs. CPI plans to finance its anticipated growth
and development largely through equity or debt financings and/or strategic
alliances with corporate partners. CPI believes, based on its current operating
plans, that its existing cash and cash equivalents balance of approximately
$31.5 million as of March 31, 1999, together with interest earned on the
Company's excess cash balances will provide sufficient working capital to
sustain operations into the fourth quarter of 2000. However, there can be no
assurance the Company will not require additional funding prior to that time, as
the Company must adapt to changing circumstances arising from within the
Company's programs or from outside the Company. There can be no assurance that
additional equity or debt financing or corporate collaborations will be
available on terms acceptable to the Company, if at all. Any additional equity
financing would be dilutive to stockholders. Debt financing, if available, may
include restrictive covenants. Corporate alliances could require the Company to
give up certain marketing rights or other rights to its potential products and
technology. If additional funds should be needed but are not available, the
Company may be required to modify its operations significantly or to obtain
funds by entering into collaborative arrangements or other arrangements on
unfavorable terms. The failure by the Company to raise capital on acceptable
terms if and when needed would have a material adverse effect on the Company's
business, financial condition and results of operations.
INFLATION
The Company does not believe that inflation has had any significant
impact on its business to date.
INCOME TAXES
As of March 31, 1999, CPI has net operating loss carryforwards ("NOLs")
for income tax purposes available to offset future federal income tax, subject
to limitations for alternative minimum tax. In addition, the Company has other
significant deferred tax assets that will also offset future income tax. As the
Company has not yet achieved profitable operations, management believes the tax
assets do not satisfy the realization criteria of Statement of Financial
Accounting Standards ("SFAS") No. 109 "Accounting for Income Taxes" and
therefore the Company has recorded a valuation allowance for the entire amount
of its net tax asset as of March 31, 1999. (Also see the Company's annual report
on Form 10-K, note 11 of notes to consolidated financial statements.)
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<PAGE> 11
The Tax Reform Act of 1986 contains provisions that may limit the NOLs
available to be used in any given year upon the occurrence of certain events,
including significant changes in ownership interest. A change in ownership of a
company of greater than 50% within a three-year period results in an annual
limitation on CPI's ability to utilize its NOLs from tax periods prior to the
ownership change. The Company believes that the transaction with Tseng triggered
such limitation. However, the Company does not expect such limitation to have a
significant impact on its operations.
RISKS ASSOCIATED WITH THE YEAR 2000
The Year 2000 issue is the result of computer programs being written
using two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of operations, including, among others, a temporary
inability to process transactions and information, send invoices, or engage in
similar normal business activities.
The Company does not believe that it has material exposure to the Year
2000 issue with respect to its own information systems. The Company has reviewed
its existing systems and believes that they correctly define the Year 2000.
Non-information technology systems that utilize embedded technology, such as
microcontrollers, HVAC, and security may also face Year 2000 issues. However,
the Company believes that it does not have significant Year 2000 issues related
to non-information technology systems and is currently reviewing these systems.
This review will be completed in 1999.
In addition, CPI is conducting an analysis to determine the extent to
which its major suppliers', third-party researchers' and clinical trial sites'
systems (insofar as they relate to CPI's business) are subject to the Year 2000
issue. This review will be completed in 1999. CPI is currently unable to predict
the extent to which it would be vulnerable to its third parties failure to
remediate any Year 2000 issues on a timely basis. The failure of a major third
party subject to the Year 2000 issue to convert its systems on a timely basis or
a conversion that is incompatible with CPI's systems could have a material
adverse effect on CPI. However, CPI's activities to date have related primarily
to conducting research and development activities and therefore are not
significantly dependent on external third-party systems. All new contractual
arrangements with third parties require assurance that the third party is Year
2000 compliant.
To date CPI has not made any contingency plans to address third-party
Year 2000 risks. CPI plans to formulate contingency plans to the extent
necessary in 1999. Historical costs directly related to Year 2000 issue
remediation have been immaterial as CPI's past infrastructure has been built
with Year 2000 issues in mind and to minimize these issues. Based on information
now known to CPI, the Company does not expect to incur material costs in the
future to address the Year 2000 issue, nor does the Company believe that it will
be required to make material capital expenditures to fix Year 2000 issues other
than system upgrades on a normal replacement schedule with only immaterial
opportunity costs of CPI personnel to ensure new systems and third parties are
Year 2000 compliant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
The Company's exposure to market risk for changes in interest rates
primarily relates to the Company's investment portfolio. The Company is averse
to principal loss and seeks to limit default risk, market risk and reinvestment
risk. In particular, the Company does not use derivative financial instruments
in its investment portfolio, places its investments with high quality issuers
and, except for investments with the U.S. Government, limits the amount of
credit exposure to any one issuer. The Company mitigates default risk by
investing in only the safest and highest credit quality securities,
predominantly those of the U.S. Government, and by positioning its portfolio to
respond appropriately to a significant reduction in a credit rating of any
investment issuer, guarantor or depository. The portfolio includes only
marketable securities with active secondary or resale markets to ensure
portfolio liquidity and has historically been invested in securities which have
original maturities of less than three months to ensure principal preservation.
As of March 31, 1999, the Company was invested in U.S. Government securities and
money market funds, which were classified as cash equivalents in the Company's
financial statements. The investments had principal (or notional) amounts of
$31,824,446 which were equal to their fair value, an average interest rate of 5%
and mature in less than three months.
11
<PAGE> 12
Part II. Other Information
Item 1. Legal Proceedings
In February and March 1999, five purported stockholder class action
complaints were filed against the Company and certain of its officers and
directors in the United States District Court for the Eastern District of
Pennsylvania alleging that the Company had made false and misleading statements
about the efficacy and near-term commercialization of the Company's lead drug
candidate. The complaints seek unspecified damages on behalf of purported
classes of persons including former Tseng stockholders and persons who purchased
Company Common Stock from November 3 or November 11, 1998 through February 2,
1999, inclusive. The Company believes that the allegations of the complaints are
without merit and intends to vigorously contest the litigations
Item 6. Exhibits and Reports on Form 8-K
(a) The following is a list of exhibits filed as part of the Form 10-Q.
3.1 Certificate of Incorporation as amended December 15, 1998 (to
reflect typographical corrections).
27.1 Financial Data Schedule, which is submitted electronically to
the Securities and Exchange Commission for information only,
and not filed.
(b) There were no reports on Form 8-K filed during the quarter ended March
31, 1999.
12
<PAGE> 13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CELL PATHWAYS, INC.
Dated: May 7, 1999 By: /s/ Robert J. Towarnicki
--------------------------------------------------
Robert J. Towarnicki
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: May 7, 1999 By: /s/ Brian J. Hayden
--------------------------------------------------
Brian J. Hayden
Chief Financial Officer; Vice President - Finance;
Treasurer (Principal Financial and Accounting
Officer)
13
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
CELL PATHWAYS, INC.
I.
The name of the corporation is Cell Pathways, Inc. (the "Corporation").
II.
The address of the registered office of the Corporation in the State of
Delaware is 1013 Centre Road, City of Wilmington, County of New Castle, and the
name of the registered agent of the Corporation in the State of Delaware at such
address is Corporation Service Company.
III.
The purpose of the Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of the State of Delaware.
IV.
A. The Corporation shall be authorized to issue two classes of stock to be
designated, respectively, "Common Stock" and "Preferred Stock". The total number
of shares that the Corporation shall be authorized to issue is seventy-five
million (75,000,000) shares. Seventy million (70,000,000) shares shall be Common
Stock, each having a par value of One Cent ($.01). Five million (5,000,000)
shares shall be Preferred Stock, each having a par value of One Cent ($.01).
B. The Preferred Stock may be issued from time to time in one or more series.
The Board of Directors is hereby authorized, by filing a certificate (a
"Preferred Stock Designation") pursuant to the Delaware General Corporation Law,
to provide for such issuance, and to fix or alter from time to time the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions of any wholly unissued
series of Preferred Stock, and to establish from time to time the number of
shares constituting any such series or any of them; and to increase or decrease
the number of shares of any series subsequent to the issuance of shares of that
series, but not below the number of shares of such series then outstanding. In
case the number of shares of any series shall be decreased in accordance with
the foregoing sentence, the shares constituting such decrease shall resume the
status that they had prior to the adoption of the resolution originally fixing
the number of shares of such series.
<PAGE> 2
C. Subject to the rights of any Preferred Stock then outstanding, each issued
and outstanding share of Common Stock shall entitle the Holder thereof to
receive such dividends as may be declared from time to time by the Board of
Directors of the Corporation out of funds legally available therefor, and shall
entitle the Holder thereof to share ratably with other Holders of Common Stock
in all assets available for distribution in the event of any liquidation,
dissolution or winding up of the Corporation. Each issued and outstanding share
of Common Stock shall be identical to all other shares of that class, and shall
entitle the Holder thereof to cast one vote on each matter submitted to a vote
of the Corporation's stockholders. No Holder of Common Stock shall be entitled
to any cumulative voting rights or to any preemptive rights upon the issuance or
sale of any Securities.
V.
For the management of the business and for the conduct of the affairs
of the Corporation, and in further definition, limitation and regulation of the
powers of the Corporation, of its directors and of its stockholders or any class
thereof, as the case may be, it is further provided that:
A. 1. The business and affairs of the Corporation shall be managed by or under
the direction of the Board of Directors. The number of directors that shall
constitute the whole Board of Directors shall be fixed exclusively by one or
more resolutions adopted by the Board of Directors.
2. Subject to the rights of the holders of any series of Preferred
Stock to elect additional directors under specified circumstances, the directors
shall be divided into three classes designated as Class I, Class II and Class
III, respectively. Directors shall be assigned to each class in accordance with
a resolution or resolutions adopted by the Board of Directors. At the first
annual meeting of stockholders following the filing of this Certificate of
Incorporation, the term of office of the Class I directors shall expire and
Class I directors shall be elected for a full term of three years. At the second
annual meeting of stockholders following the filing of this Certificate of
Incorporation, the term of office of the Class II directors shall expire and
Class II directors shall be elected for a full term of three years. At the third
annual meeting of stockholders following the filing of this Certificate of
Incorporation, the term of office of the Class III directors shall expire and
Class III directors shall be elected for a full term of three years. At each
succeeding annual meeting of stockholders, directors shall be elected for a full
term of three years to succeed the directors of the class whose terms expire at
such annual meeting. Each director shall serve beyond the term specified until
his successor is duly elected and qualified or until his death, resignation or
removal. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
3. Subject to the rights of the holders of any series of Preferred
Stock, a director
<PAGE> 3
may be removed only for cause and only by the affirmative vote of the holders of
a majority of the voting power of all the then-outstanding shares of voting
stock of the Corporation, entitled to vote at an election of directors (the
"Voting Stock").
4. Subject to the rights of the holders of any series of Preferred
Stock, any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal or other causes and any newly created
directorships resulting from any increase in the number of directors, shall,
unless the Board of Directors determines by resolution that any such vacancies
or newly created directorships shall be filled by the stockholders, be filled
only by the affirmative vote of a majority of the directors then in office, even
though less than a quorum of the Board of Directors, and not by the
stockholders. Any director elected in accordance with the preceding sentence
shall hold office for the remainder of the full term of the director for which
the vacancy was created or occurred and until such director's successor shall
have been elected and qualified.
5. The Board of Directors shall designate and empower committees of the
Board of Directors, shall elect and empower the officers of the Corporation, may
appoint and empower other officers and agents of the Corporation, and shall
determine the time, place and notice of Board meetings, quorum and voting
requirements, and the manner of taking Board action. Subject to the other
provisions of this Article V, the Board of Directors shall determine the rights,
powers, duties, rules and procedures that shall affect the directors' power to
manage and direct the business and affairs of the Corporation. Notwithstanding
any other provision of this Certificate of Incorporation, the powers specified
in this Article V shall be exercised only by or under the direction of the Board
of Directors and may be exercised or expressed in the form of resolution, Bylaw
or other form of determination or exercise; and the form of the exercise of the
power shall not derogate the status of the power exercised or imply that such
exercise by the Board of Directors may be altered or superseded by any person,
group or entity other than the Board of Directors.
B. 1. Subject to paragraph (h) of Section 43 of the Bylaws, the Bylaws may be
altered or amended or new Bylaws adopted by the affirmative vote of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of the Voting Stock. The Board of Directors shall also
have the power to adopt, amend, or repeal Bylaws.
2. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
3. No action shall be taken by the stockholders of the Corporation
except at an annual or special meeting of stockholders called in accordance with
the Bylaws or by unanimous written consent of the stockholders.
4. Special meetings of the stockholders of the Corporation may be
called, for any
<PAGE> 4
purpose or purposes, by (i) the Chairman of the Board of Directors, (ii) the
Chief Executive Officer, or (iii) the Board of Directors pursuant to a
resolution adopted by a majority of the total number of authorized directors
(whether or not there exist any vacancies in previously authorized directorships
at the time any such resolution is presented to the Board of Directors for
adoption), and shall be held at such place, on such date, and at such time as
the Board of Directors shall fix.
5. Advance notice of stockholder nominations for the election of
directors and of business to be brought by stockholders before any meeting of
the stockholders of the Corporation shall be given in the manner provided in the
Bylaws of the Corporation.
VI.
A. A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or that involve intentional misconduct or a knowing
violation of law (iii) under Section 174 of the Delaware General Corporation
Law, or (iv) for any transaction from which the director derived an improper
personal benefit. If the Delaware General Corporation Law is amended after
approval by the stockholders of this Article to authorize corporate action
further eliminating or limiting the personal liability of directors, then the
liability of a director shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
B. Any repeal or modification of this Article VI shall be prospective and shall
not affect the rights under this Article VI in effect at the time of the alleged
occurrence of any act or omission to act giving rise to liability or
indemnification.
VII.
A. The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, except as provided in Section B of this Article
VII, and all rights conferred upon the stockholders herein are granted subject
to this reservation.
B. Notwithstanding any other provisions of this Certificate of Incorporation or
any provision of law that might otherwise permit a lesser vote or no vote, but
in addition to any affirmative vote of the holders of any particular class or
series of the Voting Stock required by law, this Certificate of Incorporation or
any Preferred Stock Designation, the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the
then-outstanding shares of the Voting Stock, voting together as a single class,
shall be required to alter, amend or repeal Articles V, VI and VII.
<PAGE> 5
AS AMENDED by a Certificate of Amendment subscribed to the 15th day of
December, 1998.
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