<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
XCYTE THERAPIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 2834 91-170-7622
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
1124 COLUMBIA STREET, SUITE 130
SEATTLE, WASHINGTON 98104
(206) 262-6200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
RONALD J. BERENSON, M.D.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
XCYTE THERAPIES, INC.
1124 COLUMBIA STREET, SUITE 130
SEATTLE, WASHINGTON 98104
(206) 262-6200
(NAME, ADDRESS INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
SONYA F. ERICKSON DANIELLE CARBONE
VENTURE LAW GROUP SHEARMAN & STERLING
A PROFESSIONAL CORPORATION 1550 EL CAMINO REAL, SUITE 100
4750 CARILLON POINT MENLO PARK, CA 94025
KIRKLAND, WA 98033 (650) 330-2200
(425) 739-8700
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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<S> <C> <C>
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
------------------------------------------------------------------------------------------------------------------------
Common Stock $0.001 par value............. $86,250,000 $22,770.00
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457(o) under the Securities Act of 1933.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED
PROSPECTUS
SHARES
[XCYTE LOGO]
COMMON STOCK
This is an initial public offering of shares of common stock of Xcyte
Therapies, Inc. Xcyte Therapies expects that the initial public offering price
will be between $ and $ per share.
We have applied for approval for trading and quotation of our common stock
on the Nasdaq National Market under the symbol "XCYT."
OUR BUSINESS INVOLVES SIGNIFICANT RISKS. THESE RISKS ARE DESCRIBED UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 5.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discounts and commissions...................... $ $
Proceeds, before expenses, to Xcyte Therapies............... $ $
</TABLE>
The underwriters may also purchase up to an additional shares of
common stock at the public offering price, less the underwriting discounts and
commissions, to cover over-allotments.
The underwriters expect to deliver the shares against payment in New York,
New York on , 2001.
-------------------------
SG COWEN U.S. BANCORP PIPER JAFFRAY
DAIN RAUSCHER WESSELS
FIRST SECURITY VAN KASPER
, 2001
<PAGE> 3
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
Special Note Regarding Forward-Looking
Statements.......................... 17
Use of Proceeds....................... 18
Dividend Policy....................... 18
Capitalization........................ 19
Dilution.............................. 20
Selected Financial Data............... 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Business.............................. 27
Management............................ 43
Certain Transactions.................. 54
Principal Stockholders................ 56
Description of Capital Stock.......... 59
Shares Eligible for Future Sale....... 63
Underwriting.......................... 65
Legal Matters......................... 67
Experts............................... 67
Where You Can Find Additional
Information......................... 68
Index to Financial Statements......... F-1
</TABLE>
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UNTIL , 2001, ALL DEALERS THAT EFFECT TRANSACTIONS IN
THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS REQUIREMENT IS IN ADDITION TO THE DEALERS'
OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
-------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. WE
ARE OFFERING TO SELL AND SEEKING OFFERS TO BUY SHARES OF OUR COMMON STOCK ONLY
IN JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED
IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS,
REGARDLESS OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR
COMMON STOCK.
-------------------------
WE HAVE FILED FOR TRADEMARK REGISTRATION OF XCYTE, XCYTE THERAPIES,
XCELLERATE AND THE XCYTE THERAPIES LOGO. THIS PROSPECTUS ALSO INCLUDES
TRADEMARKS AND TRADENAMES OF OTHER PARTIES.
<PAGE> 4
PROSPECTUS SUMMARY
You should carefully read the more detailed information contained in this
prospectus, including our financial statements and related notes included in
this prospectus. Unless otherwise noted, all information in this prospectus
assumes (1) the conversion of all outstanding shares of our preferred stock into
28,059,047 shares of common stock, (2) the issuance of 1,132,287 shares of
common stock upon the exercise of warrants to purchase common stock, which
warrants will expire at the closing of this offering, (3) the issuance of
380,725 shares of common stock upon the exercise of the warrants to purchase
preferred stock, which warrants will expire at the closing of this offering, and
the subsequent conversion of the preferred stock, (4) the conversion of
preferred stock warrants into common stock warrants for the purchase of 280,029
shares of common stock and (5) no exercise by the underwriters of the
over-allotment option. We also intend to effect a -for- reverse stock split
that would be effected prior to consummation of this offering. This prospectus
does not reflect this reverse split.
OUR COMPANY
We are utilizing novel technologies to develop therapeutic products that
generate effective immune responses to treat cancer and infectious diseases. We
use our proprietary technology, known as Xcellerate, to activate and grow T
cells. T cells are specialized cells of the immune system that play a central
role in fighting diseases and infections. Our Xcellerate Technology rapidly and
reproducibly activates a patient's own T cells outside of the body by mimicking
normal events of the immune system. T cells activated with our technology, known
as Xcellerated T Cells, may be administered to treat patients who have either
poorly functioning or low numbers of T cells. We believe we have developed an
efficient and commercially viable process to produce Xcellerated T Cells. Our
approach, known as Xcellerate Therapy, may allow us to treat a variety of
medical conditions, including:
- diseases characterized by poorly functioning immune systems, such as
cancer and HIV;
- conditions due to medical treatments, such as chemotherapy and the
administration of drugs following transplantation, that suppress the
immune system and cause patients to be vulnerable to infections; and
- congenital disorders and advanced age that result in weakened immune
systems.
In July 2000, we initiated a Phase I clinical trial of our Xcellerate
Therapy in patients with metastatic kidney cancer. We intend to enroll a total
of 25 patients to test the safety as well as provide preliminary data on the
therapeutic effects of our Xcellerate Therapy. In this clinical trial, patients
are treated with two infusions of our Xcellerated T Cells approximately four
weeks apart. As of December 15, 2000, 17 patients have received a total of 32
infusions of our Xcellerated T Cells. To date, there have been no significant
adverse effects related to the administration of our Xcellerated T Cells and we
have observed evidence of anti-tumor activity. We expect to complete this trial
in the third quarter of 2001.
Physicians have recently begun to recognize the important role that the
immune system may play in controlling cancer and improving the body's defenses
against infectious diseases. This has led to the development of a new
therapeutic approach to cancer known as immunotherapy, which uses natural
components of the immune system to fight disease. The American Cancer Society
estimates that in 2000, 1.2 million new cases of cancer will occur in the United
States. Surgery, radiation and chemotherapy are the primary approaches used to
treat cancer patients. Chemotherapy is used to treat patients with more advanced
forms of cancer, but has limited success and is associated with severe and
sometimes life-threatening side effects. Infectious diseases are caused by
viruses, bacteria and fungi and can be controlled in most people with
antibiotics or antiviral drugs. However, when a patient's immune system is
compromised, normally harmless microorganisms may cause potentially
life-threatening infections. We intend to evaluate our Xcellerate Therapy as a
potential treatment for a variety of cancers and infectious diseases.
1
<PAGE> 5
Benefits of Our Xcellerate Therapy
We provide a direct and reproducible method to activate T cells and we
believe our Xcellerate Therapy may be an effective treatment to fight disease.
We believe our Xcellerate Therapy has the following benefits:
- Activated Immune System. We have demonstrated in the laboratory that our
Xcellerated T Cells are highly responsive and generate potent immune
responses because we mimic the natural process required to activate both
helper T cells and killer T cells.
- Broad Clinical Applications. Our Xcellerate Therapy targets T cells,
which are important components of the immune system. We believe that our
Xcellerated T Cells may be useful to treat a variety of medical
conditions, including cancer and infectious diseases.
- Minimal Toxicity. Our Xcellerated T Cells are produced from T cells
originating from the patient. We believe that using a patient's own cells
results in a safer product.
- Easy Administration. Our Xcellerate Therapy can be administered in a
simple outpatient procedure in less than 30 minutes. This process uses a
standard intravenous procedure that is attractive to both physicians and
patients.
- Complementary to Other Technologies. The minimal toxicity associated with
our Xcellerate Therapy may make it feasible to use our product with
chemotherapy or antiviral drugs, as well as with other therapeutic
products that are being used to activate the immune system.
Benefits of Our Xcellerate Technology
We believe our proprietary Xcellerate Technology can be developed into a
commercially viable process. The benefits of our Xcellerate Technology are:
- Rapid and Reproducible Process. Our Xcellerate Technology can be used to
activate and grow T cells in eight days with minimal intervention. We
believe this length of time is sufficient to generate the number of T
cells necessary for a therapeutic effect. We use the same process and
components for every patient, eliminating the need for patient-specific
materials that must be obtained by surgery, such as samples of a
patient's tumor.
- Ex Vivo Process. Our Xcellerate Technology activates T cells outside of
the body, or ex vivo. Activating and growing T cells outside of the body
provides a more controlled environment away from tumor cells and
infectious agents that can otherwise inhibit the activation and growth of
T cells. In addition, therapeutic agents that are otherwise potentially
toxic or fatal if administered directly to the patient can be used to
improve the activity and growth of T cells.
- Standard and Cost-effective Manufacturing Process. Our Xcellerate
Technology incorporates primarily commercially available medical products
and standard blood bank procedures, which enables us to efficiently
manufacture our Xcellerated T Cells. We believe we are able to
manufacture our Xcellerated T Cells in facilities that can be
cost-effectively constructed, equipped and easily scaled.
Our goal is to be a leader in the field of T cell therapy. We intend to use
our expertise in T cell activation to develop and commercialize products to
treat cancer, HIV and other serious illnesses. Key elements of our strategy
include:
- commercializing our Xcellerate Therapy for cancer and HIV;
- expanding the Xcellerate Therapy to treat multiple diseases;
- leveraging complementary technologies and therapies;
- retaining key commercialization rights;
- evaluating collaboration opportunities for our products; and
- expanding our intellectual property.
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<PAGE> 6
THE OFFERING
Common stock we are offering............ shares
Common stock to be outstanding after
this offering........................... shares
Underwriters' over-allotment option..... shares
Use of proceeds......................... We intend to use the net proceeds
for clinical trials, research and
development activities, expansion
of our manufacturing capacity and
general corporate purposes and
working capital
Proposed Nasdaq National Market
symbol.................................. XCYT
The number of shares of our common stock to be outstanding immediately
after this offering is based on the number of shares outstanding on September
30, 2000. This number:
- includes 5,965,234 shares of our outstanding common stock;
- includes an aggregate of 28,059,047 shares of common stock issuable upon
the automatic conversion of all outstanding shares of preferred stock
upon the closing of this offering;
- includes 1,132,287 shares of common stock issuable upon the exercise of
warrants to purchase common stock at an exercise price of $0.30 per
share, which warrants will expire at the closing of this offering;
- includes 380,725 shares of common stock issuable upon the exercise of
warrants to purchase preferred stock at a weighted average exercise price
of $0.97, which warrants will expire at the closing of this offering, and
the subsequent conversion of the preferred stock;
- excludes 280,029 shares of common stock issuable upon the exercise of
warrants to purchase 280,029 shares of preferred stock which were assumed
to have been converted into warrants to purchase 280,029 shares of common
stock upon the closing of this offering;
- excludes 1,626,221 shares of common stock issuable upon the exercise of
stock options outstanding under our 1996 Stock Option Plan at a weighted
average exercise price of $0.24 per share;
- excludes 785,354 shares of common stock reserved for future grant under
our 1996 Stock Option Plan;
- excludes 2,100,000 shares of common stock reserved for future issuance
under our 2000 Stock Option Plan;
- excludes 600,000 shares of common stock reserved for future issuance
under our 2000 Employee Stock Purchase Plan;
- excludes 400,000 shares of common stock reserved for future issuance
under our 2000 Directors' Stock Option Plan;
- excludes 1,056,040 shares of common stock reserved for future issuance
under our Milestone Pool; and
- excludes 180,000 shares of common stock reserved for future issuance
under our licence agreement with ARCH Development Corporation.
OUR HISTORY
We were incorporated in Delaware as MolecuRx, Inc. in January 1996, changed
our name to CDR Therapeutics, Inc. in August 1996, and changed our name to Xcyte
Therapies, Inc. in October 1997. Our principal executive offices are located at
1124 Columbia Street, Suite 130, Seattle, Washington 98104. Our telephone number
at that location is (206) 262-6200. References in the prospectus to "we," "our,"
"us" and the "Company" refer to Xcyte Therapies. Information contained on our
Web site is not part of this prospectus.
3
<PAGE> 7
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary historical financial data has been derived from our
audited financial statements and unaudited interim financial statements and is
summary financial data of our business. You should read this information
together with the financial statements and the notes to those statements
appearing elsewhere in this prospectus and the information under "Selected
Financial Data" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." See notes 1 and 10 to our financial statements for
information regarding computation of net loss per share and pro forma net loss
per share.
<TABLE>
<CAPTION>
NINE MONTHS PERIOD FROM
ENDED INCEPTION
YEARS ENDED DECEMBER 31, SEPTEMBER 30, (AUGUST 27, 1996)
------------------------------------ ----------------- THROUGH
1997 1998 1999 1999 2000 SEPTEMBER 30, 2000
---------- ---------- ---------- ------- ------- ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenue............................ $ 100 $ -- $ 16 $ -- $ 44 $ 160
Operating expenses:
Research and development............... 2,397 4,311 5,413 3,573 7,176 19,625
General and administrative............. 1,148 1,427 1,619 1,158 1,061 5,569
Noncash stock and compensation
expense.............................. 4 6 93 3 557 662
------- ------- ------- ------- ------- --------
Total operating expenses................. 3,549 5,744 7,125 4,734 8,794 25,856
------- ------- ------- ------- ------- --------
Loss from operations..................... (3,449) (5,744) (7,109) (4,734) (8,750) (25,696)
Other income, net........................ 161 298 162 232 278 992
------- ------- ------- ------- ------- --------
Net loss............................... $(3,288) $(5,446) $(6,947) $(4,502) $(8,472) $(24,704)
======= ======= ======= ======= ======= ========
Basic net loss per share................. $ (0.69) $ (0.86) $ (1.15) $ (0.74) $ (1.42) $ (4.44)
======= ======= ======= ======= ======= ========
Shares used in basic loss per share
calculation............................ 4,741 6,355 6,050 6,086 5,962 5,564
======= ======= ======= ======= ======= ========
Pro forma net loss per share............. $ (0.29) $ (0.31) $ (1.27)
======= ======= ========
Shares used in pro forma per share
calculation............................ 23,999 27,159 19,514
======= ======= ========
</TABLE>
The following table contains a summary of our balance sheet at September
30, 2000:
- on an actual basis;
- on a pro forma basis to reflect the automatic conversion of all
outstanding shares of preferred stock into 28,059,047 shares of common
stock upon the closing of this offering, the issuance of 380,725
shares of common stock issuable upon the exercise of warrants to
purchase preferred stock at a weighted average exercise price of $0.97
per share, which warrants will expire at the closing of this offering,
and the subsequent conversion of the preferred stock, the issuance of
1,132,287 shares of common stock upon the exercise of warrants to
purchase common stock at an exercise price of $0.30 per share, which
warrants will expire at the closing of this offering and the
conversion of preferred stock warrants into common stock warrants for
the purchase of 280,029 shares of common stock; and
- on a pro forma, as adjusted basis, to reflect the sale of
shares of common stock that we are offering at an assumed initial
public offering price per share of $ after deducting
estimated underwriting discounts and offering expenses.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
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BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 27,257 $ 27,967
Working capital............................................. 26,393 27,103
Total assets................................................ 30,336 31,046
Long-term obligations....................................... 953 953 $ 953
Redeemable convertible preferred stock...................... 48,394 -- --
Redeemable convertible preferred stock warrants............. 557 -- --
Total stockholders' equity (deficit)........................ (21,228) 28,434
</TABLE>
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<PAGE> 8
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are those that
we currently believe may materially affect us. Additional risks and
uncertainties that we are unaware of or that we currently deem immaterial also
may become important factors that affect us.
RISKS RELATED TO US AND OUR BUSINESS
WE CANNOT ASSURE YOU THAT OUR XCELLERATE THERAPY WILL MEET REGULATORY
REQUIREMENTS FOR SAFETY AND EFFICACY. ANY FAILURE TO MEET THESE REQUIREMENTS
WOULD HARM OUR BUSINESS.
Before we can commercialize any cell therapy product, we must complete
clinical trials demonstrating that our Xcellerate Therapy is safe and effective.
We have limited clinical data to date. Future clinical trials may show that our
Xcellerate Therapy is not safe and effective. We do not have data on any
possible harmful long-term effects of our Xcellerate Therapy.
In June 2000, we initiated our first clinical trial of our Xcellerate
Therapy in patients with metastatic kidney cancer. We will not know the results
of our first Phase I clinical trial for metastatic kidney cancer until at least
the third quarter of 2001. Patients in this Phase I clinical trial receive low
doses of interleukin-2 with our Xcellerate Therapy. We cannot guarantee that any
beneficial data from this trial will be a result of our Xcellerate Therapy and
not attributable to interleukin-2. Therefore, we are unable to use the limited
data to support the efficacy of our Xcellerate Therapy. Following this Phase I
clinical trial, we will be required to conduct extensive additional clinical
trials to determine whether the data supports approval by the United States Food
and Drug Administration, or FDA, of our Xcellerate Therapy.
We have not initiated the clinical development of our Xcellerate Therapy
for any infectious disease, nor for any other types of cancer. Much of our data
is derived from third party clinical trials, including physician-sponsored
trials, performed with one of our scientific founders in which we have not
participated. Clinical data collected under non-commercial or
physician-sponsored investigational new drug applications, or INDs, do not
fulfill the criteria necessary to be used in the support of clinical efficacy in
marketing applications for commercialization by regulatory agencies. We will
need to conduct extensive additional research and testing prior to initiating
other clinical trials. Clinical testing is very expensive, can take many years,
and the outcome is uncertain. If we fail to adequately demonstrate safety and
efficacy in our clinical trials, regulatory approval would be delayed or
precluded, which could harm our business.
OUR BUSINESS IS DEPENDENT ON THE SUCCESSFUL COMMERCIALIZATION OF PRODUCTS BASED
ON OUR XCELLERATE TECHNOLOGY.
Our ability to successfully commercialize products based on our Xcellerate
Technology for a particular cancer type substantially depends on our ability to
activate T cells from the blood of patients with that type of cancer. In some
patients, it may not be possible to grow a sufficient number of T cells to
produce a therapeutic effect. Only a few cell-based immunotherapy products have
been commercialized. We may experience numerous unforeseen events during the
clinical development process that could delay or prevent commercialization of
our products, including the following:
- the results of laboratory studies may be inconclusive, or they may not be
indicative of results that will be obtained in clinical trials;
- after reviewing test results, we may abandon projects that we might
previously have believed to be promising;
- we or regulators may suspend or terminate clinical trials if the
participating subjects or patients are being exposed to unacceptable
health risks; and
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<PAGE> 9
- our potential products may not have the desired effects or may produce
undesirable side effects or other characteristics that may preclude
regulatory approval or limit their commercial use if approved.
We do not expect to receive regulatory approval for commercial sale of our
Xcellerate Therapy for several years. We cannot assure you that we will ever
commercialize products based on our Xcellerate Technology. Any delays or
difficulties we encounter in our clinical trials may harm our business.
WE MAY TAKE LONGER TO COMPLETE OUR CLINICAL TRIALS THAN WE EXPECT, OR WE MAY NOT
BE ABLE TO COMPLETE THEM AT ALL.
A number of factors may cause significant delays in our clinical trials,
including scheduling conflicts with participating clinicians and clinical
institutions and difficulties in identifying and enrolling patients who meet
eligibility criteria. As a result, we may not commence or complete clinical
trials involving any of our products as expected. We rely on academic
institutions or clinical research organizations to conduct, supervise or monitor
some or all aspects of clinical trials involving our products. We will have less
control over the timing and other aspects of these clinical trials than if we
conducted them entirely on our own. If we fail to commence or complete, or
experience delays in, any of our planned clinical trials, our ability to conduct
our business as currently planned would be harmed.
WE ARE SUBJECT TO EXTENSIVE REGULATION, WHICH CAN BE COSTLY, TIME CONSUMING AND
CAN CAUSE UNANTICIPATED DELAYS.
All of our potential cell therapy products, cell processing and
manufacturing activities, are subject to comprehensive regulation by the FDA and
by comparable authorities in other countries. The process of obtaining FDA and
other required regulatory approvals, including foreign approvals, is expensive,
often takes many years and can vary substantially based upon the type,
complexity and novelty of the products involved. Our Xcellerate Therapy is
novel, and therefore, regulatory agencies may lack experience in dealing with
this type of product. This may lengthen the regulatory review process, increase
our development costs and delay or prevent commercialization of our products. To
date, the FDA has approved only a few cell therapy products. We have had only
limited experience in filing and pursuing applications necessary to gain
regulatory approvals, which may impede our ability to obtain timely FDA
approvals, if at all. We will not be able to commercialize any of our potential
products until we obtain FDA approval, and so any delay in obtaining, or
inability to obtain, FDA approval would harm our business.
If we violate regulatory requirements at any stage, whether before or after
FDA approval is obtained, we may be fined, forced to remove a product from the
market or experience other adverse consequences that could harm our business.
Additionally, we may not be able to obtain the labeling claims necessary or
desirable for the promotion of our products. We may also be required to
undertake post-marketing trials. In addition, if we or others identify side
effects after any of our cell therapy products are on the market, or if
manufacturing problems occur, regulatory approval may be withdrawn and the FDA
may require reformulation of our cell therapy products, additional clinical
trials, changes in labeling or additional marketing applications.
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND MAY NOT BE ABLE TO MANUFACTURE OUR
XCELLERATED T CELLS ON A LARGE SCALE IN A COST EFFECTIVE MANNER; UNFORESEEN
CIRCUMSTANCES MAY CAUSE DELAYS OR DISRUPTIONS IN OUR MANUFACTURING PROCESS.
We have not demonstrated the ability to manufacture our Xcellerated T Cells
beyond quantities sufficient for research and development and limited clinical
activities. We have no experience manufacturing our Xcellerated T Cells at the
capacity that will be necessary to support large clinical trials or commercial
sales. Because our Xcellerate Therapy is an autologous, or patient-specific,
cell-based product, manufacturing of our Xcellerated T Cells is more
complicated. In addition, we may not be able to
6
<PAGE> 10
manufacture on a large-scale or cost-effectively. Our present manufacturing
process may not meet our initial expectations as to reproducibility, yield,
purity or other measurements of performance.
We are the only manufacturer of our Xcellerated T Cells. For the next
several years, we expect that we will conduct all of our manufacturing in our
own facilities. If the facilities or the equipment in our facilities are
significantly damaged or destroyed, we will not be able to quickly restore our
manufacturing capacity. We may also fail to secure any additional facilities or
hire qualified personnel that we may require to accommodate the expansion of our
operations and the manufacturing of our products.
WE WOULD NOT BE ABLE TO MANUFACTURE OUR PRODUCTS WITHOUT THE TECHNOLOGY WE
LICENSE FROM THIRD PARTIES.
Our Xcellerate Technology uses two important monoclonal antibodies,
anti-CD3 and anti-CD28, which are licensed from third parties. Both antibodies
are necessary components of our Xcellerate Technology. We license the anti-CD3
monoclonal antibody from the Fred Hutchinson Cancer Research Center in Seattle,
Washington. We license the anti-CD28 monoclonal antibody from Diaclone S.A. in
Besancon, France. The license agreement with the Fred Hutchinson Cancer Research
Center is effective for 15 years following first sale of a product based on the
license and may be terminated in the event of a material breach. The Diaclone
agreement is effective for 15 years from the date of the first FDA approval, or
its foreign equivalent, of a product based upon the license, and may be
terminated in the event of a material breach.
We are contractually obligated to purchase the anti-CD28 monoclonal
antibody from Diaclone until we begin Phase III clinical trials. Although we
believe the anti-CD3 antibody clone component is available from other sources,
few alternative suppliers of the anti-CD28 antibody clone component exist. If we
lose access to the anti-CD28 antibody clone or the anti-CD3 antibody clone, and
if we cannot find alternatives for these antibody clones, we will be unable to
continue the development of our product.
We license several T cell activation patents and patent applications from
Genetics Institute. Technology disclosed in several of these patent applications
is necessary for the development of our Xcellerate Technology. Of these patent
applications, the two that relate to the basic technology necessary for our
business have been pending in the U.S. Patent and Trademark Office for over five
years. We cannot predict when or if any patents will issue from these
applications, however, we believe there is a reasonable basis for patentability.
If these patents are not issued we may not be able to exclude our competitors
from using our technology.
The licenses from Genetics Institute terminate upon the expiration of the
last licensed patent and may also be terminated in the event of a material
breach. If patents issue covering our technology and we violate the terms of our
license or otherwise lose our right to license these patents and patent
applications, we would be unable to continue development of our Xcellerate
Technology.
WE ARE DEPENDENT ON A LIMITED NUMBER OF MANUFACTURERS AND SUPPLIERS OF SOME OF
THE KEY COMPONENTS IN OUR XCELLERATE TECHNOLOGY.
We currently depend on third party suppliers for key components used to
manufacture Xcellerated T Cells. We depend on Lonza Biologics PLC to develop and
manufacture the antibodies used in our Xcellerate Technology. There are, in
general, relatively few companies with the ability to manufacture clinical and
commercial grade antibodies. Our current agreement with Lonza only provides for
the manufacture of these antibodies for use in clinical trials. We are currently
negotiating an agreement with Lonza to manufacture the antibodies for commercial
use. If we are unable to renew our current contract with Lonza or unable to
procure a suitable alternative manufacturer in a timely manner or at all, we
would be unable to continue developing our Xcellerate Technology.
Our Xcellerate Technology also depends on the successful attachment of the
antibodies to magnetic beads. We currently use magnetic beads developed and
manufactured by Dynal S.A. in Oslo, Norway. Our contract with Dynal expires in
August 2009, and we are contractually obligated to obtain our beads from Dynal
as long as Dynal is able to fill our orders. If our contract with Dynal is
terminated or if Dynal
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discontinues manufacturing beads due to economic or other considerations, we may
be unable to find a suitable alternative manufacturer in a timely manner or at
all, which would limit our ability to develop and commercialize our product.
In addition, because Lonza and Dynal are located outside the United States
we are subject to foreign import laws and customs regulations, which
complicates, and could delay, shipment of components and the development and
production of our product. Any delay in the development or production of our
product would harm our business.
IF THIRD PARTIES FAIL TO PROVIDE SUFFICIENT AND TIMELY CAPACITY TO MANUFACTURE
OUR BEADS AND ANTIBODIES, OR DO NOT MAINTAIN HIGH STANDARDS OF MANUFACTURE, OUR
ABILITY TO DEVELOP AND COMMERCIALIZE OUR PRODUCTS COULD BE LIMITED OR DELAYED.
Although our current suppliers of antibody and bead components have
produced our components with acceptable quality, quantity and cost in the past,
they may be unable or unwilling to meet our future demands. Establishing
additional or replacement suppliers for these components would take a
substantial amount of time. In addition, we may have difficulty obtaining
similar FDA-approved components from other suppliers. If we have to switch to a
replacement supplier, we may face additional regulatory delays and the
manufacture and delivery of our product could be interrupted for an extended
period. Any such delay may harm our business.
We and any third party manufacturers that we may use must continually
adhere to current Good Manufacturing Practice, or GMP, regulations enforced by
the FDA through its facilities inspection program. If our facilities or the
facilities of these manufacturers cannot pass a pre-approval plant inspection,
the FDA pre-market approval of our Xcellerate Therapy will not be granted. In
complying with GMP and foreign regulatory requirements, we and any of our third
party manufacturers will be obligated to expend time, money and effort in
production, record-keeping and quality control to assure that each component of
our product meets applicable specifications and other requirements. In addition,
we may not be able to compel our third party manufacturers or suppliers to
comply with FDA standards and other regulatory requirements. If we or any of our
third party manufacturers fail to comply with these requirements, we may be
subject to regulatory action.
WE ARE CURRENTLY EXPANDING OUR MANUFACTURING CAPACITY AND WE MAY ENCOUNTER
DELAYS AND COST-OVERRUNS.
We currently manufacture our Xcellerated T Cells in our own facility. We
plan to expand our manufacturing facilities to support future research,
development and commercialization activities. We have little experience in
developing manufacturing facilities and may not be successful. We may encounter
difficulties in designing, constructing and operating our new manufacturing
facility, including:
- construction delays, including obtaining necessary governmental approvals
and permits;
- cost overruns;
- delays in design, shipment and installation of equipment for our
facility; and
- other unforeseeable factors inherent in the construction process.
THE EX VIVO NATURE OF OUR XCELLERATE THERAPY MAY ENHANCE OUR RISK OF PRODUCT
LIABILITY AND OTHER CLAIMS AGAINST US, WHICH MAY REDUCE DEMAND FOR OUR PRODUCTS
OR RESULT IN SUBSTANTIAL DAMAGES.
Our Xcellerate Therapy requires us to activate a patient's T cells ex vivo,
or outside of the body, using blood collected from patients. Blood is collected
through a process called leukapheresis, which may pose risks to the patient. If
the leukapheresis product is inadequate, we may require another leukapheresis,
or we may be unable to collect blood from the patient for our process. The
Xcellerated T Cells are later administered back to the patient intravenously in
an outpatient procedure. This procedure poses risks to the patient similar to
those occurring with transfusions of other cell products such as red blood cells
or white blood cells, including bleeding, blood clots, infection or mild to
severe allergic reactions.
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Blood collected in connection with our Xcellerate Therapy may contain
infectious diseases and may infect medical personnel or others who come into
contact with the blood. The ex vivo process also presents inherent risk that
human error may result in our Xcellerated T Cells being delivered to the
incorrect patient. Because patient samples are treated ex vivo after being
collected and delivered to us and then are redelivered to the patient, it is
possible that these samples could be inadvertently mixed up and delivered to the
wrong patient. If the Xcellerated T Cells are administered to the wrong patient,
the patient could suffer irreversible injury or death and sue us for liability
which would cause our reputation to suffer or may result in losses that could be
material.
In addition, we store our patients' cells in freezers at our manufacturing
facilities and the loss or malfunction of these freezers may destroy those
cells. In such case, our patients' treatments will be delayed if we need to
collect additional patient cells or we may be unable to collect more cells from
our patients.
We will face an even greater risk of product liability if we sell any of
our therapeutic products commercially. An individual may bring a product
liability claim against us if one of our cell therapy products causes, or merely
appears to have caused, an injury. Regardless of merit or eventual outcome,
product liability claims may result in:
- decreased demand for our cell therapy products;
- injury to our reputation;
- withdrawal of clinical trial volunteers;
- costs of related litigation; and
- substantial monetary awards to plaintiffs.
IF A SUFFICIENT NUMBER OF PHYSICIANS AND OTHER MEDICAL PROVIDERS DO NOT ACCEPT
OUR XCELLERATE THERAPY, OUR BUSINESS WILL BE SIGNIFICANTLY HARMED.
Our success will depend to a substantial extent on the willingness of
physicians and other medical providers to accept our Xcellerate Therapy. For
example, physicians and other medical providers will need to learn and adopt the
procedures necessary to properly administer our Xcellerated T Cells to patients.
In addition, we may improve our Xcellerate Therapy and the procedures necessary
to administer our Xcellerated T Cells to patients and physicians and other
medical providers may not agree with our changes. We cannot assure you that
physicians and medical providers will cooperate with us in this effort or be
willing to prescribe our Xcellerate Therapy as treatment for their patients. If
our Xcellerate Therapy does not achieve a high level of acceptance by physicians
and other medical providers, our business will be significantly harmed.
OUR XCELLERATE THERAPY MAY CAUSE UNKNOWN LONG TERM ADVERSE EFFECTS, WHICH MAY
LEAD TO PRODUCT LIABILITY CLAIMS.
We have not yet completed clinical testing of our Xcellerate Therapy. It is
possible that our products may cause unforeseen harmful side effects. For
example, if too many T cells are activated by our Xcellerate Therapy, it is
possible that a patient could have a severe allergic reaction or could develop
an autoimmune condition. In the future we may consider using cells from a
healthy donor. If these cells from a healthy person are given to a patient with
a weakened immune system, there is a possibility that the patient may contract
graft versus host disease, a disease in which the T cells attack tissue in the
body. In addition, we have not conducted studies on the long term effects
associated with the use of the growth media solution used in our Xcellerate
Technology. Any harmful effects from our products may result in product
liability claims.
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WE ARE EXPOSED TO POTENTIAL PRODUCT LIABILITY CLAIMS, AND INSURANCE AGAINST
THESE CLAIMS MAY NOT BE AVAILABLE TO US AT A REASONABLE RATE IN THE FUTURE.
Our business exposes us to potential product liability risks, which are
inherent in the testing, manufacturing, marketing and sale of pharmaceutical
products. We have clinical trial insurance coverage and we intend to obtain
product liability coverage in the future. However, insurance coverage may not be
available to us at an acceptable cost, if at all. We may not be able to obtain
insurance coverage that will be adequate to satisfy any liability that may
arise. Regardless of merit or eventual outcome and whether or not we are
insured, product liability claims may result in decreased demand for a product,
injury to our reputation, withdrawal of clinical trial volunteers and loss of
revenues.
WE HAVE A HISTORY OF OPERATING LOSSES; WE EXPECT TO CONTINUE TO INCUR LOSSES AND
WE MAY NEVER BE PROFITABLE.
We have incurred significant operating losses since we began operation in
1996. As of September 30, 2000, we had an accumulated deficit of $24.7 million.
These losses have resulted principally from costs incurred in our research and
development programs and from our general and administrative costs. We have
derived no revenues from product sales or royalties to date. We do not expect to
have any product sales or royalty revenue for a number of years, and are not
able to predict when we might do so. Our operating losses have been increasing
during the past several years and will continue to increase significantly in
subsequent years as we expand development and clinical trial activities.
Our ability to achieve profitability is dependent upon obtaining regulatory
approvals for our products and successfully commercializing our products alone
or with third parties. However, our operations may not be profitable even if we
are able to commercialize any of our products currently under development.
WE WILL REQUIRE ADDITIONAL FUNDING, AND OUR FUTURE ACCESS TO CAPITAL IS
UNCERTAIN.
It is expensive to develop products and conduct clinical trials for the
treatment of cancer and infectious diseases. We intend to conduct clinical
research and multiple clinical trials for many different therapies for cancer
and infectious diseases, which is costly.
We believe that the net proceeds of this offering, together with our cash
on hand, will be sufficient to meet our projected operating and capital
requirements for at least the next 18 months. However, we may need additional
financing within this timeframe depending on a number of factors, including:
- our degree of success in commercializing cell therapy products;
- the rate of progress and cost of our research and development and
clinical trial activities;
- the costs of preparing, filing, prosecuting, maintaining and enforcing
patent claims and other intellectual property rights;
- the need to access competing technologies;
- changes in or terminations of our licensing arrangements; and
- the cost of manufacturing scale-up.
We may not be able to obtain additional financing on favorable terms or at
all. If we are unable to raise additional funds when we need them, we may be
required to delay, reduce or eliminate some or all of our development programs
and some or all of our clinical trials. We also may be forced to license to
others technologies that we would prefer to develop internally. If we raise
additional funds by issuing equity securities, further dilution to stockholders
may result, and new investors could have rights superior to holders of shares
issued in this offering.
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IF WE ARE UNABLE TO SECURE FUTURE COLLABORATORS FOR RESEARCH, DEVELOPMENT,
MANUFACTURING AND MARKETING ACTIVITIES RELATING TO OUR XCELLERATE TECHNOLOGY,
OUR PRODUCT DEVELOPMENT AND POTENTIAL FOR PROFITABILITY MAY SUFFER.
We may need to enter into a commercial collaboration agreement for one or
more of the research, development, manufacturing, marketing and other
commercialization activities relating to our Xcellerate Technology in the
future. However, we may not be able to successfully negotiate any collaborative
arrangements. If established, these relationships may not be scientifically or
commercially successful. It is possible that our potential collaborators will
change their strategic focus, pursue alternative technologies or develop
alternative products, either on their own or in collaboration with others, as a
means for developing treatments for the diseases targeted by our collaborative
programs. The effectiveness of our potential collaborators in marketing our
products could also affect our potential revenues and earnings. Disputes may
arise between us and our potential collaborators, as to a variety of matters,
including financial or other obligations under our agreements. These disputes
may be both expensive and time-consuming and may result in delays in the
development and commercialization of our product.
IF WE ARE UNABLE TO PROTECT OUR PROPRIETARY RIGHTS, WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY.
Our success is dependent in part on obtaining, maintaining and enforcing
our patents and other proprietary rights and our ability to avoid infringing the
proprietary rights of others. The United States Patent and Trademark Office may
not issue patents from the patent applications owned by or licensed to us. Even
if issued, the patents may not give us an advantage over competitors with
similar technology.
As of December 1, 2000, we owned or held exclusive rights to two issued
patents and 21 pending U.S. patent applications in the fields of or directed to
ex vivo T cell stimulation. The two issued patents relate to a method of
stimulating T cells and an antibody, which we are not currently using. We cannot
assure you that any patent will issue from our pending or licensed patent
applications concerning the technologies we do use. The issuance of a patent is
not conclusive as to its validity or enforceability. It is uncertain how much
protection, if any, will be given to our patents if we attempt to enforce them
or if their validity is challenged in court. A third party may challenge the
validity or enforceability of a patent after its issuance by the Patent Office.
It is possible that a competitor may successfully challenge our patents or that
a challenge will result in limiting the coverage of our patents. If the outcome
of litigation is adverse to us, third parties may be able to use our patented
invention without payment to us.
In addition, it is possible that competitors may infringe our patents or
successfully avoid them through design innovation. The cost of litigation to
uphold the validity of our patents and to prevent infringement could be
substantial and the litigation may consume time and other resources. Some of our
competitors may be better able to sustain the costs of complex patent litigation
because they have substantially greater resources. Moreover, there is a risk
that a court would decide that our patents are not valid and that we do not have
the right to stop the other party from using our inventions. There is also the
risk that, even if the validity of our patents were upheld, a court would refuse
to stop the other party on the ground that its activities do not infringe our
patents. Policing unauthorized use of our intellectual property is difficult and
expensive, and we cannot assure you that we will be able to prevent
misappropriation of our proprietary rights.
In addition to the intellectual property rights described above, we also
rely on unpatented technology, trade secrets and confidential information.
Therefore, others may independently develop substantially equivalent information
and techniques or otherwise gain access to or disclose our technology. We may
not be able to effectively protect our rights in unpatented technology, trade
secrets and confidential information. We require each of our employees,
consultants and advisors to execute a confidentiality agreement at the
commencement of an employment or consulting relationship with us. However, these
agreements may not provide effective protection of our information or, in the
event of unauthorized use or disclosure, they may not provide adequate remedies.
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THE USE OF OUR TECHNOLOGIES COULD POTENTIALLY CONFLICT WITH THE RIGHTS OF
OTHERS.
Our competitors or others may have or acquire patent rights that they could
enforce against us. If they do so, then we may be required to alter our
Xcellerate Technology, pay licensing fees or cease activities. If our Xcellerate
Technology conflicts with patent rights of others, third parties could bring
legal action against us or our licensees, suppliers, customers or potential
collaborators, claiming damages and seeking to enjoin manufacturing and
marketing of the affected products. If these legal actions are successful, in
addition to any potential liability for damages, we could be required to obtain
a license in order to continue to manufacture or market the affected products.
We may not prevail in any legal action and a required license under the patent
may not be available on acceptable terms or at all.
Should third parties file patent applications, or be issued patents
claiming technology also claimed by us in pending applications, we may be
required to participate in interference proceedings in the United States Patent
and Trademark Office to determine priority of invention. We may be required to
participate in interference proceedings involving our issued patents or pending
applications. We may be required to cease using the technology or to license
rights from prevailing third parties as a result of an unfavorable outcome in an
interference proceeding. A prevailing party may not offer us a license on
commercially acceptable terms. Should third parties file oppositions in foreign
countries, we may also be required to participate in opposition proceedings in
foreign tribunals to defend the patentability of the filed patent applications.
COMPETITION IN OUR INDUSTRY IS INTENSE AND MANY OF OUR COMPETITORS HAVE
SUBSTANTIALLY GREATER MANAGERIAL AND FINANCIAL RESOURCES THAN WE HAVE.
If our products cannot compete effectively in the marketplace, we would
fail to become profitable and our financial position would suffer. Competition
in the cancer and infectious disease fields is intense. Even if our Xcellerate
Therapy proves successful, we might not be able to remain competitive because of
the rapid pace of technological development in the biotechnology field.
Several companies market immunotherapy products. We are currently aware of
a few companies in the early stages of developing ex vivo T cell activation as a
method of treating cancer and infectious diseases. Many of our potential
competitors have more financial and other resources, larger research and
development staffs, and more experienced capabilities in researching, developing
and testing products. Many of these companies also have more experience in
conducting clinical trials, obtaining FDA and other regulatory approvals, and in
manufacturing, marketing and distributing therapeutic products. Smaller
companies may successfully compete with us by establishing collaborative
relationships with larger pharmaceutical companies or academic institutions. Our
competitors may succeed in developing, obtaining patent protection for, or
commercializing their products more rapidly than us. A competing company
developing, or acquiring rights to, a more effective therapeutic product for the
same diseases targeted by us, or one that offers significantly lower costs of
treatment, could render our products noncompetitive or obsolete.
Our ability to commercialize our Xcellerate Therapy and compete effectively
will depend, in large part, on:
- our ability to advance our Xcellerate Therapy through clinical trials and
to successfully manufacture our products;
- the perception by physicians and other members of the health care
community of the safety, efficacy and benefits of activated T cell
treatments compared to those of competing products or therapies;
- the willingness of physicians to adopt a new treatment;
- the price of our Xcellerate Therapy relative to other products or
competing treatments;
- the effectiveness of our sales and marketing efforts and those of our
potential marketing partners;
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- our ability to protect our proprietary technology; and
- the impact of potential unfavorable publicity concerning
immunotherapeutic products.
IF WE DO NOT EFFECTIVELY MANAGE GROWTH, OUR ABILITY TO GENERATE REVENUES COULD
BE HARMED.
We are rapidly adding a significant number of new personnel and expanding
our capabilities, which may strain our existing managerial, operational,
financial and other resources. To compete effectively and manage our growth, we
must:
- train, manage and motivate a growing employee base;
- accurately forecast demand for our products; and
- expand existing operational, financial and management information
systems.
If we fail to manage our growth effectively, our product development and
commercialization efforts could be curtailed or delayed.
WE MAY BE UNABLE TO ESTABLISH SALES AND MARKETING CAPABILITIES NECESSARY TO
SUCCESSFULLY COMMERCIALIZE OUR POTENTIAL PRODUCTS.
We currently have no direct sales capabilities and only limited marketing
capabilities. If we decide to market our potential products through a direct
sales force, we would need to either hire a sales force with expertise in
pharmaceutical sales or contract with a third party to provide a sales force to
meet our needs. We may be unable to establish marketing, sales and distribution
capabilities necessary to commercialize and gain market acceptance for our
potential products. In addition, co-promotion or other marketing arrangements
with third parties to commercialize potential products could significantly limit
the revenues we derive from these potential products, and these third parties
may fail to commercialize our potential products successfully.
IF WE LOSE KEY MANAGEMENT AND SCIENTIFIC PERSONNEL OR CANNOT RECRUIT QUALIFIED
EMPLOYEES, OUR PRODUCT DEVELOPMENT PROGRAMS AND OUR RESEARCH AND DEVELOPMENT
EFFORTS WILL BE HARMED.
Our success depends, to a significant extent, upon the efforts and
abilities of Ronald J. Berenson, M.D., our president and chief executive
officer, and other members of senior management. The loss of the services of one
or more of our key employees could delay our product development programs and
our research and development efforts. We maintain key person life insurance on
Dr. Berenson, but do not maintain key person life insurance on any of our other
officers, employees or consultants.
Competition for qualified employees among companies in the biotechnology
and biopharmaceutical industry is intense. Our future success depends upon our
ability to attract, retain and motivate highly skilled employees. In order to
commercialize our products successfully, we may be required to substantially
expand our workforce, particularly in the areas of manufacturing, clinical
trials management, regulatory affairs, business development and sales and
marketing. We may require the addition of new personnel, including management,
and the development of additional expertise by existing management personnel. We
may be unsuccessful in recruiting and retaining sufficient, qualified personnel.
WE MAY INCUR SIGNIFICANT COSTS COMPLYING WITH ENVIRONMENTAL LAWS AND
REGULATIONS.
We use hazardous, infectious and radioactive materials that could be
dangerous to human health, safety or the environment. We currently contract with
a third party to store and dispose of these materials and various wastes
resulting from their use at our facility. We are subject to a variety of
federal, state and local laws and regulations governing the use, generation,
manufacture, storage, handling and disposal of these materials and wastes
resulting from their use. We may incur significant costs complying with both
existing and future environmental laws and regulations. We are unable to predict
whether our third party contractor will properly manage, store and dispose of
the wastes as required by law and protect us from liability. In addition, we are
subject to regulation by the Occupational Safety and Health Administration,
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or OSHA, and the Environmental Protection Agency, or EPA, and to regulation
under the Toxic Substances Control Act and the Resource Conservation and
Recovery Act. We are unable to predict whether any agency will adopt any
regulations, which could harm our business. Although we believe our safety
procedures for handling and disposing of these materials comply with federal,
state and local laws and regulations, we cannot entirely eliminate the risk of
accidental injury or contamination from these materials or the risk that our
third party contractor will not violate any applicable laws or regulations
governing the waste. In the event of an accident, we could be held liable for
any resulting damages, which could be substantial.
IF THIRD PARTY CARRIERS FAIL TO SHIP PATIENT SAMPLES AND OUR PRODUCTS IN A
CAREFUL AND TIMELY MANNER, WE MAY INCUR LIABILITY AND OUR REPUTATION WILL
SUFFER.
We depend on third party carriers to deliver patient-specific cells to us
and Xcellerated T Cells back to the patient in a timely manner. We have not yet
designed or tested a tracking system for our products once they have left our
manufacturing facility. We must process the patient's blood sample within 48
hours of collection. Currently, Xcellerated T Cells must be shipped in a cold
storage shipping container and the patient must receive them within 48 hours of
the completion of the manufacturing process. If the carriers fail to deliver the
shipment of Xcellerated T Cells in a timely manner or damage the Xcellerated T
Cells during shipment because, for example, the shipping containers fail to
maintain the necessary temperature of the Xcellerated T Cells, the treatment of
patients could be delayed or prevented.
IF WE FAIL TO OBTAIN ADEQUATE LEVELS OF REIMBURSEMENT FOR OUR CELL THERAPY
PRODUCTS FROM THIRD PARTY PAYERS, THE COMMERCIAL POTENTIAL OF OUR CELL THERAPY
PRODUCTS WILL BE SIGNIFICANTLY LIMITED.
Our profitability will depend on the extent to which government
administration authorities, private health insurance providers and other
organizations provide reimbursement for the cost of our products. Many patients
will not be capable of paying for our cell therapy products themselves. Large
private payers, managed care organizations, group purchasing organizations and
similar organizations may be unwilling to reimburse patients for newly approved
health care products such as ours. Even if they are willing to reimburse
patients, we must first obtain reimbursement codes for our products and
communicate these codes to the health care community until they are officially
published and generally available. Any delay in establishing reimbursement codes
for our products could delay acceptance of our products. Any measures that
adversely affect the pricing of cell therapy products and the amount of
reimbursement available from governmental agencies or other third party payers
could harm our business.
WE ARE SUBJECT TO CURRENCY FLUCTUATIONS AND WE MAY BE ADVERSELY AFFECTED BY
CHANGES IN THE VALUE OF THE BRITISH POUND RELATIVE TO THE U.S. DOLLAR.
Under our agreements with Lonza we are required to make payments
denominated in British pounds. As a result, we are exposed to currency exchange
risks. Assuming milestones are completed as scheduled, remaining payments under
the agreements will be $350,000 during the fourth quarter of the year ended
December 31, 2000 and $2.7 million during the year ended December 31, 2001. We
are not engaged in currency hedging and if the British pound strengthens against
the U.S. dollar, our payments to Lonza will increase in U.S. dollar terms.
RISKS RELATING TO THIS OFFERING
MARKET VOLATILITY MAY AFFECT OUR STOCK PRICE AND THE VALUE OF YOUR INVESTMENT
MAY BE SUBJECT TO SUDDEN DECREASES.
There is currently no public market for our common stock and an active
trading market may not develop or be sustained after this offering. The price at
which our common stock trades depends upon a number of factors, including our
historical and anticipated operating results and general market and economic
conditions, which are beyond our control. Factors such as fluctuations in our
financial and
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<PAGE> 18
operating results, the results of our research and clinical trials,
announcements of technological innovations or new commercial products by us or
our competitors, developments concerning proprietary rights and publicity
regarding actual or potential performance of products under development by us or
our competitors could also cause the market price of our common stock to
fluctuate substantially. In addition, the stock market has from time to time
experienced extreme price and volume fluctuations. These broad market
fluctuations may lower the market price of our common stock. During periods of
stock market price volatility, share prices of many biotechnology companies have
often fluctuated in a manner not necessarily related to the companies' operating
performance. Accordingly, our common stock may be subject to greater price
volatility than the stock market as a whole.
NEGATIVE EVALUATIONS BY RESEARCH ANALYSTS OR INVESTORS ABOUT OUR BUSINESS MAY
CAUSE THE PRICE OF OUR STOCK TO DECLINE.
The price of our stock may decline even if our business is doing well. If
our future quarterly operating results are below the expectations of research
analysts or investors, or if negative comments regarding our business and its
future prospects are publicly announced by research analysts or investors, the
price of our common stock would likely decline.
WE MAY ALLOCATE THE NET PROCEEDS FROM THIS OFFERING IN WAYS WHICH YOU AND OTHER
STOCKHOLDERS MAY NOT APPROVE.
We expect to use the net proceeds from this offering primarily for clinical
trials, research and development activities, increasing our manufacturing
capacity and the remainder for general corporate purposes and working capital.
We have significant flexibility in applying the net proceeds of this offering
and could use these proceeds for purposes other than those contemplated at the
time of the offering. You and other stockholders will not have the opportunity
to evaluate the economic, financial or other information that we may use to
determine how we use these proceeds.
FUTURE SALES OF OUR COMMON STOCK MAY LOWER THE MARKET PRICE OF OUR COMMON STOCK.
Sales of a substantial number of shares of our common stock in the public
market following this offering or the perception that such sales could occur
could cause the market price of our common stock to decline or limit our future
ability to raise capital through an offering of equity securities. The number of
shares of our common stock available for sale by our existing stockholders in
the public market is limited by restrictions under federal securities law and
under lock-up agreements that our stockholders entered into with the
underwriters in connection with our initial public offering. In connection with
this offering, our officers, directors and other stockholders owning
substantially all of our shares have agreed to enter into lock-up agreements
pursuant to which they agree not to offer or sell any shares of our common stock
or securities convertible into or exchangeable or exercisable for any shares of
our common stock for 180 days after the date of this prospectus without the
prior written consent of SG Cowen Securities Corporation on behalf of the
underwriters. In addition, stockholders who have not executed a lock-up
agreement are otherwise contractually restricted from selling or offering to
sell shares of our common stock for 180 days after the date of this prospectus.
Shares of our common stock, other than shares sold in this offering, will become
eligible for sale in the public market as follows:
<TABLE>
<S> <C>
At the effective date....................................... 0 shares
90 days after effective date................................ 0 shares
181 days after effective date............................... 24,572,195 shares
More than 181 days after effective date..................... 10,110,025 shares
</TABLE>
IF YOU PURCHASE OUR COMMON STOCK IN THIS OFFERING, YOU WILL INCUR IMMEDIATE AND
SUBSTANTIAL DILUTION IN THE BOOK VALUE OF YOUR SHARES.
You will experience an immediate and substantial dilution of $ per
share in the pro forma net tangible book value per share of our common stock
relative to the assumed public offering price of $
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per share. After giving effect to this offering, our pro forma net tangible book
value as of , 2000, would have been $ per share. In addition,
this dilution will be increased to the extent that holders of outstanding
options and warrants to purchase our common stock at prices below our net
tangible book value per share after this offering exercise those options or
warrants.
OUR EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS WILL CONTINUE TO
HAVE SUBSTANTIAL CONTROL OVER US AFTER THE OFFERING, WHICH COULD DELAY OR
PREVENT A CHANGE IN OUR CORPORATE CONTROL FAVORED BY OUR OTHER STOCKHOLDERS.
Following this offering, executive officers, directors and principal
stockholders will beneficially own % of our outstanding common stock, or
% if the underwriters' over-allotment option is exercised in full. If our
significant stockholders choose to act or vote together on other matters, they
will have the power to control the approval of any other action requiring the
approval of our stockholders, including any amendments to our certificate of
incorporation and mergers, acquisitions or sales of all of our assets. In
addition, without the consent of these stockholders, we could be prevented from
entering into transactions that could be beneficial to us. Also, third parties
could be discouraged from making a tender offer or bid to acquire our company at
a price per share that is above the then-prevailing market price.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND UNDER DELAWARE AND
WASHINGTON LAW COULD MAKE A CHANGE IN OUR CONTROL, WHICH MAY BE BENEFICIAL TO
OUR STOCKHOLDERS, MORE DIFFICULT.
Provisions of our certificate of incorporation and bylaws will make it more
difficult for a third party to acquire us on terms not approved by our board of
directors and may have the effect of deterring hostile takeover attempts. We are
also subject to provisions of Delaware and Washington law that could have the
effect of delaying, deferring or preventing a change in control of our company.
These and other impediments to a third party acquisition or change of control
could limit the price investors are willing to pay in the future for shares of
our common stock.
16
<PAGE> 20
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary," "Risk
Factors," "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and in other sections of this
prospectus that are forward-looking statements. You can identify these
statements by forward-looking words such as "may," "will," "expect," "intend,"
"anticipate," "believe," "estimate," "plan," "could," "should" and "continue" or
similar words. These forward-looking statements may also use different phrases.
We have based these forward-looking statements on our current expectations and
projections about future events. You should also consider carefully the
statements under "Risk Factors" and other sections of this prospectus, which
address factors that could cause our results to differ from those set forth in
the forward-looking statements.
17
<PAGE> 21
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the shares of
common stock offered by us at an assumed initial public offering price of
$ per share will be approximately $ million after deducting the
estimated underwriting discounts and estimated offering expenses payable by us.
If the underwriters exercise their over-allotment option in full, we estimate
that such net proceeds will be approximately $ million.
We expect to use the net proceeds from this offering primarily for clinical
trials, research and development activities, expansion of our manufacturing
capacity and the remainder for general corporate purposes and working capital.
Based upon the current status of our product development and
commercialization plans, we believe that the net proceeds of this offering,
together with our cash, cash equivalents and investments, will be adequate to
satisfy our capital needs through at least the next 18 months. Pending use of
the net proceeds of this offering, we intend to invest the net proceeds in
interest bearing, investment-grade non-government and U.S. government
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain all of our future earnings, if any, to finance
operations and we do not anticipate paying cash dividends in the foreseeable
future.
18
<PAGE> 22
CAPITALIZATION
The following table sets forth our capitalization at September 30, 2000:
- on an actual basis;
- on a pro forma basis to reflect the automatic conversion of all
outstanding shares of preferred stock into 28,059,047 shares of common
stock upon the closing of this offering, the issuance of 380,725 shares
of common stock issuable upon the exercise of warrants to purchase
preferred stock at a weighted average exercise price of $0.97 per share,
which warrants will expire at the closing of this offering, and the
subsequent conversion of the preferred stock, the issuance of 1,132,287
shares of common stock upon the exercise of warrants to purchase common
stock at an exercise price of $0.30 per share, which warrants will expire
at the closing of this offering, and the conversion of preferred stock
warrants into common stock warrants for the purchase of 280,029 shares of
common stock; and
- on a pro forma, as adjusted basis, to reflect the sale of
shares of common stock that we are offering at an assumed initial public
offering price per share of $ after deducting estimated
underwriting discounts and offering expenses.
You should read the following table in conjunction with our financial
statements and related notes included in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
------------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS EXCEPT SHARE AND
PER SHARE DATA)
<S> <C> <C> <C>
Long-term obligations....................................... $ 953 $ 953 $ 953
Redeemable convertible preferred stock: actual -- 28,909,976
authorized shares, 28,059,047 issued and outstanding; pro
forma and pro forma as adjusted -- none authorized and
none outstanding.......................................... 48,394 -- --
Redeemable convertible preferred stock warrants............. 557 -- --
Stockholders' equity (deficit):
Preferred stock, par value $0.001:
Actual -- 28,909,976 authorized and none outstanding,
all shares have been designated redeemable and
convertible; pro forma -- none authorized and none
outstanding; pro forma as adjusted -- 5,000,000
authorized shares, none outstanding.................... -- -- --
Common stock, par value $0.001:
Actual -- 60,000,000 authorized shares, 5,965,234 issued
and outstanding; pro forma -- 60,000,000 authorized
shares, 35,537,293 issued and outstanding; pro forma as
adjusted -- 100,000,000 authorized shares,
issued and outstanding;................................ 6 36
Additional paid-in capital................................ 5,090 54,722
Deferred stock compensation............................... (1,618) (1,618) (1,618)
Accumulated deficit....................................... (24,704) (24,704) (24,704)
Accumulated other comprehensive loss...................... (2) (2) (2)
-------- -------- --------
Total stockholders' equity (deficit)........................ (21,228) 28,434
-------- -------- --------
Total capitalization........................................ $ 28,676 $ 29,387 $
======== ======== ========
</TABLE>
The information in the table above does not include:
- 1,626,221 shares of common stock issuable upon the exercise of stock
options outstanding under our 1996 Stock Option Plan at a weighted
average exercise price of $0.24 per share;
- 280,029 shares of common stock issuable upon the exercise of warrants to
purchase 280,029 shares of preferred stock which were assumed to have
been converted into warrants to purchase 280,029 shares of common stock
upon the closing of this offering;
- 785,354 shares of common stock reserved for future grant under our 1996
Stock Option Plan;
- 2,100,000 shares of common stock reserved for future issuance under our
2000 Stock Option Plan;
- 600,000 shares of common stock reserved for future issuance under our
2000 Employee Stock Purchase Plan;
- 400,000 shares of common stock reserved for future issuance under our
2000 Directors' Stock Option Plan;
- 1,056,040 shares of common stock reserved for future issuance under our
Milestone Pool; and
- 180,000 shares of common stock reserved for future issuance under our
license with ARCH Development Corporation.
19
<PAGE> 23
DILUTION
Our pro forma net tangible book value as of September 30, 2000, was $28.2
million or $0.79 per share of common stock after giving effect to the conversion
of all outstanding shares of preferred stock into 28,059,047 shares of common
stock in connection with this offering, issuance of 380,725 shares of common
stock upon the exercise of warrants to purchase preferred stock, which warrants
will expire at the closing of this offering, and the subsequent conversion of
the preferred stock, issuance of 1,132,287 shares of common stock upon the
exercise of warrants to purchase common stock, which warrants will expire at the
closing of this offering and the conversion of preferred stock warrants into
common stock warrants for the purchase of 280,029 shares of common stock. Our
pro forma net tangible book value per share represents the amount of total
tangible assets less total liabilities, divided by the shares of common stock
outstanding as of September 30, 2000, assuming the conversion of all outstanding
shares of preferred stock and the exercise and the subsequent conversion of the
warrants to purchase preferred stock and the exercise of the warrants to
purchase common stock.
After giving effect to the sale of shares of common stock we are
offering hereby at an assumed price of $ per share and after deducting
estimated underwriting discounts and commissions and offering expenses, our net
tangible book value as of September 30, 2000, would have been approximately
$ or $ per share. This represents an immediate increase in net
tangible book value of $ per share to existing stockholders and an immediate
dilution of $ per share to the investors purchasing shares of common stock
in this offering. The following table illustrates this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before the
offering............................................... $0.79
Increase attributable to new investors....................
-----
Pro forma net tangible book value after the offering........
-----
Dilution per share to new investors......................... $
=====
</TABLE>
The following table summarizes, as of September 30, 2000, on the pro forma
basis described above, the number of shares of common stock purchased in this
offering, the aggregate cash consideration paid and the average price per share
paid by existing stockholders for common stock and by new investors purchasing
shares of common stock in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders........... 35,537,293 % $ 50,861,000 % $1.43
New Investors...................
---------- ----- ------------ ----- -----
Total...................... 100.0% $ 100.0%
========== ===== ============ =====
</TABLE>
This discussion and tables above assume no exercise of options outstanding
under our stock option plan. As of September 30, 2000, there were options
outstanding to purchase a total of 1,626,221 shares of common stock at a
weighted average exercise price of $0.24 per share and an aggregate of 3,885,354
shares available for future grant or issuance under our stock option plans or
stock purchase plan. The discussion and tables above also assume no exercise of
any outstanding warrants, other than those expected to be exercised due to their
termination at the time of this offering. As of September 30, 2000, there were
additional outstanding warrants to purchase 280,029 shares of our preferred
stock at a weighted average exercise price of $1.09 per share that were not
assumed to have been exercised in the discussion above. To the extent that any
of these options or warrants are exercised, there will be further dilution to
new investors.
20
<PAGE> 24
SELECTED FINANCIAL DATA
This section presents our historical financial data. You should read
carefully the financial statements included in this prospectus, including the
notes to the financial statements, and Management's Discussion and Analysis of
Financial Condition and Results of Operations. The statements of operations data
for the year ended December 31, 1999 and the balance sheet data as of December
31, 1999 have been derived from our financial statements that have been audited
by Ernst & Young LLP, independent auditors, and are included elsewhere in this
prospectus. The statement of operations data for the each of the years in the
two year period ended December 31, 1998, and the balance sheet data as of
December 31, 1998 have been derived from our financial statements that have been
audited by PricewaterhouseCoopers LLP, independent accountants, and are included
elsewhere in this prospectus. The balance sheet data as of December 31, 1997,
has been derived from our audited financial statements which are not included in
this prospectus. The statement of operations data for the nine months ended
September 30, 1999 and 2000, the period from inception (August 27, 1996) to
September 30, 2000, and the balance sheet data as of September 30, 2000 have
been derived from the unaudited financial statements included elsewhere in this
prospectus. The statement of operations data for the period from inception
(August 27, 1996) to December 31, 1996 and the balance sheet data as of December
31, 1996 have been derived from unaudited financial statements which are not
included in this prospectus. We have prepared the unaudited information on the
same basis as the audited financial statements and have included all
adjustments, consisting only of normal occurring adjustments that we consider
necessary for a fair presentation of our financial position and operating
results for these periods. Historical results are not necessarily indicative of
future results.
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(AUGUST 27, NINE MONTHS ENDED (AUGUST 27,
1996) TO YEARS ENDED DECEMBER 31, SEPTEMBER 30, 1996) TO
DECEMBER 31, ------------------------------------ --------------------- SEPTEMBER 30,
1996 1997 1998 1999 1999 2000 2000
------------ ---------- ---------- ---------- ------- ----------- -------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
License fee..................... $ -- $ 100 $ -- $ -- $ -- $ -- $ 100
Grants.......................... -- -- -- 16 -- 44 60
------- ------- ------- ------- ------- ------- --------
Total revenue................. -- 100 -- 16 -- 44 160
Operating expenses:
Research and development........ 328 2,397 4,311 5,413 3,573 7,176 19,625
General and administrative...... 314 1,148 1,427 1,619 1,158 1,061 5,569
Noncash stock compensation
expense....................... 2 4 6 93 3 557 662
------- ------- ------- ------- ------- ------- --------
Total operating expenses...... 644 3,549 5,744 7,125 4,734 8,794 25,856
------- ------- ------- ------- ------- ------- --------
Loss from operations.............. (644) (3,449) (5,744) (7,109) (4,734) (8,750) (25,696)
Other income, net................. 93 161 298 162 232 278 992
------- ------- ------- ------- ------- ------- --------
Net loss.......................... $ (551) $(3,288) $(5,446) $(6,947) $(4,502) $(8,472) $(24,704)
======= ======= ======= ======= ======= ======= ========
Basic net loss per share............ $ (0.41) $ (0.69) $ (0.86) $ (1.15) $ (0.74) $ (1.42) $ (4.44)
======= ======= ======= ======= ======= ======= ========
Shares used in basic loss per share
calculation....................... 1,350 4,741 6,355 6,050 6,086 5,962 5,564
======= ======= ======= ======= ======= ======= ========
Pro forma net loss per share........ $ (0.29) $ (0.31) $ (1.27)
======= ======= ========
Shares used in pro forma per share
calculation....................... 23,999 27,159 19,514
======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- SEPTEMBER 30,
1996 1997 1998 1999 2000
----------- ---------- ---------- ---------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $5,307 $ 6,514 $12,152 $ 7,363 $ 27,257
Working capital............................................. 4,966 6,102 11,589 6,100 26,393
Total assets................................................ 5,821 9,035 16,044 10,055 30,336
Long term obligations....................................... -- 937 941 854 953
Redeemable convertible preferred stock and warrants......... 6,018 11,123 23,390 23,405 48,394
Accumulated deficit......................................... (551) (3,839) (9,285) (16,232) (24,704)
Total stockholders' deficit................................. (546) (3,499) (8,939) (15,804) (21,228)
</TABLE>
21
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our financial
statements and related notes included in this prospectus. Please refer to
"Special Note Regarding Forward-Looking Statements" and "Risk Factors."
OVERVIEW
We are utilizing novel technologies to develop therapeutic products that
generate effective immune system responses to treat cancer and infectious
diseases. We use our proprietary technology, known as Xcellerate, to activate
and grow T cells. Our Xcellerate Technology rapidly and reproducibly activates a
patient's own T cells outside of the body by mimicking normal events of the
immune system. Our Xcellerate Technology forms the basis for our development of
our Xcellerate Therapy to fight cancer and infectious diseases.
Since our inception in 1996, our activities have been primarily associated
with the development of novel therapeutic products that target the immune system
for clinical applications in immunology, oncology, and infectious diseases. We
have incurred significant losses since our inception. As of September 30, 2000,
our accumulated deficit was $24.7 million. Our operating expenses consist of
research and development expenses and general and administrative expenses.
We have recognized revenues of approximately $160,000 since inception from
sublicense fees and income from a National Institutes of Health Phase I Small
Business Innovation Research grant in chronic lymphocytic leukemia. In the
second quarter of 2001, we intend to apply for a National Institutes of Health
Phase II Small Business Innovation Research grant in the same indication. We
intend to continue to apply for other grants in the future. We currently do not
market any products and will not for several years, if at all. Therefore, we do
not expect to have any product sales or royalty revenue for a number of years.
Our net losses are a result of research and development and general and
administrative expenses incurred to support our operations. We anticipate
incurring net losses over at least the next several years as we complete our
clinical trials, apply for regulatory approvals, continue development of our
technology and expand our operations.
To date, our research and development expenses have consisted primarily of
costs incurred for drug discovery and research, preclinical development,
clinical trials and regulatory activities. Research and development
activity-related costs include:
- payroll and personnel-related expenses;
- clinical trial and regulatory-related costs;
- laboratory supplies;
- contractual costs associated with developing our antibody and bead
technology;
- intellectual property related legal fees;
- rent and facility expenses for our laboratory and GMP manufacturing
areas; and
- scientific consulting fees.
General and administrative expenses are costs associated with supporting
our operations including payroll and personnel-related expenses and professional
fees. In addition, rent and facility expenses for our administrative office area
and other general office support activities are also included in our general and
administrative expenses.
We have incurred operating losses since inception. Therefore, we have not
paid any income taxes and no provision for income taxes has been recorded for
the period from inception, beginning August 27, 1996 to September 30, 2000.
22
<PAGE> 26
RESULTS OF OPERATIONS
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
Revenue
Revenue was approximately $44,000 in the nine months ended September 30,
2000, and consisted of income from a National Institutes of Health Small
Business Innovation Research grant. We expect to recognize revenue from the
remainder of this grant, in the amount of $90,000, by December 31, 2000. We did
not recognize any revenue in the nine months ended September 30, 1999.
Operating Expenses
Research and Development. Research and development expenses increased 100%,
from $3.6 million in the nine months ended September 30, 1999 to $7.2 million in
the nine months ended September 30, 2000. The $3.6 million increase was
primarily due to contractual payments relating to developing our antibody and
bead technology, laboratory supplies, rent, and salaries and payroll related
expense. We anticipate that research and development expenses will continue to
increase in the foreseeable future as we expand our research, development and
clinical trial activities.
General and Administrative. General and administrative expenses did not
fluctuate significantly, from $1.2 million in the nine months ended September
30, 1999 to $1.1 million in the nine months ended September 30, 2000. We
anticipate that general and administrative expenses will increase in the
foreseeable future to support the general expansion of our operations.
Other Income (Expense), net. Other income (expense), net increased from
$232,000 in the nine months ended September 30, 1999 to $278,000 in the nine
months ended September 30, 2000. Interest income increased 24%, from $375,000 in
the nine months ended September 30, 1999 to $465,000 in the nine months ended
September 30, 2000 due to increased interest income earned on the cash proceeds
from our Series D preferred stock financing. Interest expense increased 31%,
from $143,000 in the nine months ended September 30, 1999 to $187,000 in the
nine months ended September 30, 2000, due to higher debt balances related to
equipment financings and amortization of warrants issued in conjunction with
these financings. We expect to continue to enter into equipment financing
contracts to support our future clinical and commercialization activities.
Noncash Stock Compensation
From our inception in August 1996 through September 30, 2000, we recorded
aggregate deferred stock compensation of approximately $2.3 million, of which
$662,000 was expensed in the period from inception (August 27, 1996) to
September 30, 2000. We recorded amortization of deferred stock-based
compensation of $4,000 in the year ended December 31, 1997, $6,000 in the year
ended December 31, 1998, $93,000 in the year ended December 31, 1999 and
$557,000 for the nine months ended September 30, 2000. We granted stock options
to certain of our officers, employees and consultants at prices subsequently
deemed to be below the fair value of the underlying stock on the date of grant
during the year ended December 31, 1999 and the nine months ended September 30,
2000. Additional deferred stock-based compensation of $86,000 and $526,000 were
recorded in the year ended December 31, 1999 and nine months ended September 30,
2000, respectively, based on the subsequently determined fair value of common
stock options granted during these periods. These expenses have no impact on our
cash flows. The remaining $1.6 million will be expensed in future periods over
what is generally a four-to-five year vesting period. We estimate that our
deferred stock compensation expense from options granted from our inception in
August 1996 through September 30, 2000 will be $293,000, $729,000, $340,000,
$179,000 and $74,000 for the remainder of fiscal 2000 and for the years ending
December 31, 2001, 2002, 2003 and 2004, respectively.
Subsequent to September 30, 2000, we have granted options that will result
in an additional $1.0 million of deferred stock compensation. We estimate that
our deferred stock compensation expense from options granted subsequent to
September 30, 2000 will be $161,000, $466,000, $208,000,
23
<PAGE> 27
$113,000 and $50,000 for the years ending December 31, 2000, 2001, 2002, 2003
and 2004, respectively, assuming no cancellations or additional stock options
grants below deemed fair value.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
Revenue
Revenue was approximately $16,000 in the year ended December 31, 1999 and
consisted of income from a National Institutes of Health Small Business
Innovation Research grant. We recognized no revenue in the year ended December
31, 1998.
Operating Expenses
Research and Development. Research and development expenses increased 26%,
from $4.3 million in the year ended December 31, 1998 to $5.4 million in the
year ended December 31, 1999. The $1.1 million increase was primarily due to
increased salary and personnel related expenses, consulting fees and outsourced
research and development services expenses as we expanded operations in support
of our preclinical activity. This increase was offset partially by decreases in
patent related expenses for a license that was terminated in 1999, sponsored
research studies and laboratory supplies.
General and Administrative. General and administrative expenses increased
13%, from $1.4 million in the year ended December 31, 1998 to $1.6 million in
the year ended December 31, 1999. The $200,000 increase was primarily due to
increased facilities-related expenses, expenses related to moving to new
headquarters and salary and other personnel related expenses as we expanded our
operations. This increase was offset partially by a decrease in professional
fees and travel expenses.
Other Income (Expense), net. Interest income was $476,000 in the year ended
December 31, 1999 and $476,000 in the year ended December 31, 1998. The amounts
were unchanged due to stable average yearly cash balances. Interest expense was
$206,000 in the year December 31, 1999 and was $178,000 in the year ended
December 31, 1998 and was relatively unchanged due to little change in debt
balances. For the year ended December 31, 1999, we recognized a loss of $108,000
on the sale of property and equipment.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
Revenue
Revenue in the year ended December 31, 1997 was $100,000 consisting of a
non-recurring fee generated from a sublicense agreement. We recognized no
revenue in the year ended December 31, 1998.
Operating Expenses
Research and Development. Research and development expenses increased 80%,
from $2.4 million in the year ended December 31, 1997 to $4.3 million in the
year ended December 31, 1998. The $1.9 million increase was due primarily to
increases in salary and other personnel related costs, patent expenses,
laboratory supplies, depreciation, consulting fees and amortization of
intangible assets as we expanded our business and preclinical activities.
General and Administrative. General and administrative expenses increased
24% from $1.1 million in the year ended December 31, 1997 to $1.4 million in the
year ended December 31, 1998. The $300,000 increase was due primarily to
increases in salary and personnel related expenses, expenses related to general
office facilities and fixtures, and other general office expenses in support of
our business and preclinical activities.
Other Income (Expense), net. Interest income increased 94%, from $245,000
in the year ended December 31, 1997 to $476,000 in the year ended December 31,
1998. This was attributable to higher average balances of cash, cash equivalents
and short-term investments. Interest expense increased 112%, from $84,000 in the
year ended December 31, 1997 to $178,000 in the year ended December 31, 1998.
24
<PAGE> 28
The increase was due to a higher debt balance as we entered into equipment
financing contracts to finance our expanding business and preclinical
activities.
INCOME TAXES
We have incurred a net operating loss since inception and consequently we
have not paid any federal, state or foreign income taxes. On December 31, 1999,
we had net operating loss carryforwards of approximately $14.2 million and
research and development tax credit carryforwards of $749,000. If not utilized,
the net operating loss and tax credit carryforwards will expire at various dates
beginning in 2011. If we do not achieve profitability, net operating loss
carryforwards may be lost. In addition, utilization of net operating loss and
tax credit carryforwards may be subject to a substantial annual limitation due
to the change in the ownership provisions of the Internal Revenue Code of 1986,
as amended. We are currently not subject to these limitations. However, any
future annual limitations may result in the expiration of net operating loss and
tax credit carryforwards before utilization.
LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and short-term investments were $9.7 million on
September 30, 1999 and $27.3 million on September 30, 2000. Cash, cash
equivalents and investments were $6.8 million on December 31, 1997, $13.9
million on December 31, 1998, and $7.4 million on December 31, 1999. We have
financed our operations since inception through private placements of equity
securities, grant revenue, fees from a sublicense agreement, equipment
financings and interest income earned on cash and cash equivalents and
investments. Since January 1, 2000, we received net proceeds of $28.0 million
from private financing activities. In 1999, we did not raise any funds from
private financing activities. In 1998, we received net proceeds of $12.0 million
from private financing activities. Since inception, a total of $50.2 million net
proceeds from private financing has been received. To date, inflation has not
had a material effect on our business.
Since our inception, investing activities, other than purchases and
maturities of investments, have consisted primarily of purchases of property and
equipment. On September 30, 2000, our investment in property and equipment was
$2.9 million.
Net cash used in operating activities for the nine months ended September
30, 2000 was $8.1 million. During the nine months ended September 30, 1999, we
used $4.1 million of net cash in our operating activities. During the years
ended December 31, 1997, 1998 and 1999 cash used in operating activities were
$3.2 million, $4.5 million, and $5.6 million respectively. Expenditures in these
periods were generally as a result of increased research and development
expenses and general and administrative expenses in support of our operations.
We have entered into agreements to develop bead and antibody technology
that require significant cash expenditures, including an agreement with Dynal
S.A. under which we have agreed to make payments totaling $3.0 million upon the
accomplishment of bead development activities. Additionally, we have two
agreements with Lonza Biologics PLC under which we have agreed to make payments
totaling $3.4 million to develop and produce Phase III GMP-grade antibodies. As
of September 30, 2000, we have paid $2.0 million to Dynal and $161,000 to Lonza.
We anticipate that the remaining payments under these agreements will be paid in
full by the end of December 2002. Under our license agreements with Genetics
Institute and ARCH Development Corporation, we are required to spend a total of
$2.0 million on research and development activities related to product
development under these agreements by June 2001.
Borrowings outstanding under our equipment financing agreements totaled
$1.7 million, and we had $530,000 available under our equipment financing
agreement, at September 30, 2000.
We anticipate that the net proceeds from this offering, along with our
existing cash balances will be sufficient to enable us to meet our anticipated
expenditures for at least the next 18 months. However, we may need additional
financing prior to that time to support our advancement into Phase III clinical
trials. Furthermore, we expect to require additional funding before we are able
to generate revenue, if at all, from our potential products. Additional
financing may not be available on favorable terms or at all. If we are
25
<PAGE> 29
unable to raise additional funds when we need them, we may be required to delay,
reduce or eliminate some or all of our development programs and some or all of
our clinical trials. We also may be forced to license technologies to others
that we would prefer to develop internally.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements," (SAB
101). SAB 101 is based upon existing accounting rules and provided specific
guidance on how those accounting rules should be applied and specifically
addresses revenue recognition for non-refundable technology access fees in the
biotechnology industry. SAB 101 is effective for fiscal years beginning after
December 15, 1999. The adoption of SAB 101 did not have an impact on our
financial position or results of operations; however, as the company generates
sales of products, SAB 101 may impact recognition of revenue.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which will be
effective for the year ending 2001. SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument, including
derivative instruments imbedded in other contracts, be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
also requires that changes in the derivative's fair value be recognized in
earnings unless specific hedge accounting criteria are met. We believe the
adoption of SFAS 133 will not have a material effect on our financial
statements, since we currently do not hold derivative instruments or engage in
hedging activities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2000, we had short-term investments of $1.5 million.
Our short-term investments will decline by an immaterial amount if market
interest rates increase, and therefore, our exposure to interest rate changes
has been immaterial. Declines of interest rates over time will, however, reduce
our interest income from our short-term investments and cash accounts. Interest
rates on capital lease obligations are fixed at the beginning of the repayment
term; therefore, exposure to changes in interest rates is limited to new
financings.
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BUSINESS
OVERVIEW
We are utilizing novel technologies to develop therapeutic products that
generate effective immune system responses to treat cancer and infectious
diseases. We use our proprietary technology, known as our Xcellerate, to
activate and grow T cells. Our Xcellerate Technology rapidly and reproducibly
activates a patient's own T cells outside of the body by mimicking normal events
of the immune system. Our approach, known as Xcellerate Therapy, may allow us to
treat a variety of medical conditions, including:
- diseases characterized by poorly functioning immune systems, such as
cancer and HIV;
- conditions due to medical treatments, such as chemotherapy and the
administration of drugs following transplantations, that suppress the
immune system and cause patients to be vulnerable to infections; and
- congenital conditions and advanced age that result in weakened immune
systems.
In July 2000, we initiated a Phase I clinical trial of our Xcellerate
Therapy in patients with metastatic kidney cancer. As of December 15, 2000, 17
patients have received a total of 32 infusions of our Xcellerated T Cells. To
date, there have been no significant adverse effects related to the
administration of our Xcellerated T Cells and we have observed evidence of
anti-tumor activity. We expect to complete this trial in the third quarter of
2001.
BACKGROUND
The human immune system is responsible for recognizing and eliminating
cancer and pathogens, such as viruses and bacteria, from the body. A normal
immune response occurs when disease-fighting white blood cells, called T cells,
are activated by two simultaneous signals. Once activated, T cells alert the
body to the presence of pathogens and cancer. The human body normally contains
billions of T cells that are categorized as either helper T cells or killer T
cells. Helper T cells are responsible for activating other cells of the immune
system. Killer T cells act directly to destroy pathogens, such as viruses, or
tumor cells. Both types of cells are required for an effective immune response.
Activation of T Cells
T cells remain in a resting state until they become activated and generate
an immune response. The immune response begins when cells of the immune system
known as antigen-presenting cells capture antigens, which are structural
components of microorganisms and tumor cells. Antigens are broken down into tiny
fragments by antigen-presenting cells and then presented on the cell surface to
T cells. Each T cell has a unique receptor on its surface that is capable of
recognizing a different antigenic fragment. This diversity of T cells makes it
possible for our immune system to recognize and respond to a wide variety of
different pathogens and cancers.
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<PAGE> 31
[GRAPHIC OF ACTIVATION OF T CELLS]
The diagram starts with an antigen-presenting cell labeled
"Antigen-presenting Cell" and shows antigens entering the cell. The antigens are
shown broken into tiny fragments and then presented on the cell surface of the
antigen-presenting cell.
To the right of the antigen-presenting cell is a resting T cell labeled
"Resting T Cell." a receptor on the resting T cell is shown to bind with the
antigen fragment presented on the surface of the antigen-presenting cell,
delivering Signal 1, labeled "Signal 1." Another receptor on the surface of the
antigen-presenting cell binds to a different receptor on the Resting T Cell
delivering Signal 2, labeled "Signal 2."
An arrow leads from the resting T cell to an activated T cell, labeled
"Activated T Cell." The graphic shows that the T cell is activated.
When the proper T cell receptor binds to the presented antigen, it
generates a signal, known as Signal 1, which is required to activate a T cell. A
second signal, known as Signal 2, occurs when an antigen-presenting cell binds
to another receptor on the surface of a T cell. Signal 1 is generated from a
receptor that is unique to the specific antigen. In contrast, each
antigen-presenting cell contains the same receptor that binds to a receptor of
each T cell to deliver Signal 2. Both Signal 1 and Signal 2 are required for T
cells to produce an effective immune response. If only Signal 1 is generated, T
cells are weakly activated and die quickly. If only Signal 2 is generated, no
immune response occurs at all. Only the simultaneous delivery of both Signal 1
and Signal 2 generates activated T cells that can function properly in the body.
Signal 1 and Signal 2 are responsible for activating both helper T cells and
killer T cells.
The Dangers of a Weakened Immune System
When the number of T cells decreases significantly, the human immune system
is less able to defend the body against infectious diseases and cancer.
Additionally, when T cells are not functioning properly, they may be incapable
of being activated, which also creates a greater risk of these illnesses. For
example, when T cells are damaged they may contain weakened or reduced numbers
of receptors that cannot generate Signal 1 or Signal 2. In most medical
conditions, deficits in both T cell numbers and function occur together. A
variety of illnesses as well as medical treatments for life-threatening
illnesses can cause T cell deficits. These include:
- diseases that attack or evade the immune system, such as HIV and cancer
as well as chronic illnesses, including diabetes and kidney failure;
- medical treatments that damage T cells such as chemotherapy,
immunosuppressive drugs and transplantation; and
- congenital immunodeficiencies and advanced age.
As a result of T cell deficits, patients are at increased risk of
developing serious and often life-threatening infections. Common and normally
benign viruses such as herpes and chicken pox can produce serious infections.
Life-threatening fungal and parasitic infections as well as some bacterial
infections, such as tuberculosis, also occur in patients with T cell deficits.
Patients with severe T cell deficits are also at high risk of developing some
types of cancer. For example, transplant patients on immunosuppressive drugs
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have a very high rate of non-Hodgkin's lymphoma, and patients with HIV can
suffer from both non-Hodgkin's lymphoma and Kaposi's sarcoma.
Current Approaches to Activate the Immune System and Their Limitations
Researchers have focused on developing methods to strengthen and activate a
patient's immune system to combat the problems associated with T cell deficits.
Current approaches include delivering therapeutic agents, such as cytokines,
directly into the body to stimulate T cell responses. Cytokines are chemical
messengers produced by cells of the immune system, many of which activate T
cells. Unfortunately, these cytokines often cause life-threatening or fatal side
effects when directly administered to patients. For example, when interleukin-2,
a cytokine approved by the FDA to treat some cancers, is administered at the
high doses demonstrated to be effective, it causes serious and life-threatening
toxicity that requires close medical supervision in a hospital intensive care
unit. The number of cytokines that can be used as therapeutics is limited
because only a few can be safely administered to patients. These cytokines
represent a very small portion of the many cytokines that are normally produced
during an immune response.
To overcome the limitations of activating T cells inside of the body,
researchers attempted to activate and grow patients' T cells ex vivo, or outside
of the body, before administering them for therapeutic applications. Initial
attempts were made to grow T cells outside of the body using interleukin-2. The
discovery of T cell receptors generated interest in developing compounds to bind
to these receptors to activate T cells. With the development of technology to
manufacture monoclonal antibodies, it became possible to reproduce these
antibodies in large amounts for clinical applications. Researchers developed
monoclonal antibodies that bind to these receptors to deliver Signal 1 to T
cells. These antibodies were used together with interleukin-2 to activate and
grow T cells outside of the body. However, this process generated only one of
the two signals required to activate T cells, which resulted in limited growth
of T cells. Once administered to patients, these cells generally survive for
only a few days. These ex vivo methods required more than a month to generate
sufficient numbers of T cells for clinical applications. These methods also
required frequent handling and monitoring procedures during the incubation
period. Furthermore, these approaches generated primarily killer T cells and
only small numbers of helper T cells, which limits immune response. The lengthy
and laborious procedures required to generate T cells together with their
minimal therapeutic activity has led to limited use of these approaches.
Scientists have recently begun to explore procedures that can be used to
deliver both Signal 1 and Signal 2 to improve the function, activation and
length of survival of T cells. One approach is to use a type of
antigen-presenting cell known as a dendritic cell. In healthy individuals,
dendritic cells are a natural and potent activator of T cells because they
deliver both Signal 1 and Signal 2. For most clinical applications, a patient's
own dendritic cells are grown outside of the body and then administered back to
the patient. Dendritic cells may prove to be effective therapeutic agents, but
they also have limitations. The ability to generate dendritic cells varies from
patient to patient. This variability may limit the ability of dendritic cells to
activate enough T cells to generate an effective immune response.
OUR SOLUTION
We have developed a proprietary technology known as Xcellerate, which can
reproducibly activate and grow T cells outside of the body in large numbers for
therapeutic applications. Our Xcellerate Technology employs microscopic magnetic
beads that mimic the natural function of antigen-presenting cells to deliver
Signal 1 and Signal 2. Each microscopic bead is densely packed with two
monoclonal antibodies, one for Signal 1 and one for Signal 2, to create
artificial antigen-presenting cells that are able to reproducibly and
consistently activate T cells. We have developed a proprietary technique that
allows optimal binding of antibody-coated beads to T cells, making it possible
for us to generate more potent and highly activated T cells in a shorter period
of time. In addition, we use a monoclonal antibody that directly interacts with
the signaling complex of the T cell receptor to bypass the specificity that is
normally required to activate Signal 1.
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Our Xcellerate Technology focuses on activating T cells that are universal
to the disease-fighting process. We believe this universal approach will allow
us to treat a variety of medical conditions. Our technology also enables us to
generate sufficient numbers of activated T cells rapidly, which may allow us to
apply our Xcellerate Therapy on a commercial scale. In our Phase I clinical
trial for metastatic kidney cancer, we successfully generated Xcellerated T
Cells from all patients to date. In this clinical trial, we produced large
numbers of T cells with high purity and activity levels. To date, all infusions
of Xcellerated T Cells in our first clinical trial have been delivered to
patients with no significant adverse effects and we have observed evidence of
anti-tumor activity.
Benefits of Our Xcellerate Therapy
By providing a consistent method to directly activate T cells, we believe
our Xcellerate Therapy may be an effective treatment for cancer and infectious
diseases. We believe the Xcellerate Therapy has the following potential
benefits:
- Activated Immune System. We have demonstrated in the laboratory that our
Xcellerated T Cells generate an effective immune response because we
deliver both Signal 1 and Signal 2 to activate both helper T cells and
killer T cells. Our laboratory studies have shown that Xcellerated T
Cells function properly by expressing a broad spectrum of cytokines to
activate other cells of the immune system. Independent clinical trials
have shown that T cells activated using our technology survive for up to
one year after administration into patients.
- Broad Clinical Applications. Our Xcellerate Technology targets T cells
that are required for an immune response. We believe that our Xcellerate
Therapy can be applied to a variety of medical conditions. We have
demonstrated in the laboratory that our Xcellerate Technology can be used
to activate T cells from patients with a variety of cancers. In addition,
third parties have conducted several clinical trials with one of our
scientific founders using our T cell activation technology to treat
patients with leukemia, lymphoma and HIV.
- Minimal Toxicity. Our Xcellerated T Cells are produced from T cells
originating from the patient. We believe that using a patient's own cells
may result in a safer product. Minimal side effects have been observed in
approximately 100 patients to date in clinical trials conducted by us or
third parties working with one of our scientific founders, using our T
cell activation technology.
- Easy Administration. Our Xcellerate Therapy can be administered in a
simple outpatient procedure in less than 30 minutes. This process uses a
routine intravenous procedure that is convenient for both physicians and
patients.
- Complementary To Other Technologies. The minimal toxicity associated with
our Xcellerate Therapy suggests it may be feasible to use our product
with chemotherapy drugs. We may also use Xcellerated T Cells with other
agents that are being used to activate the immune system, such as cancer
vaccines.
Benefits of Our Xcellerate Technology
We believe our proprietary Xcellerate Technology can be developed into a
commercially viable process. The benefits of our Xcellerate Technology are:
- Rapid and Reproducible Process. Our Xcellerate Technology can activate
and grow T cells in eight days with minimal laboratory effort. We believe
this length of time is sufficient to generate the number of T cells
necessary for a therapeutic effect. Our process optimizes the direct
interaction between T cells and our proprietary monoclonal
antibody-coated beads to produce consistent and strong signals that
result in more highly activated and potent T cells.
- Ex Vivo Process. Our Xcellerate Technology activates T cells ex vivo.
Activating and growing T cells outside of the body provides a more
controlled environment away from tumor cells and infectious agents, which
can otherwise inhibit the activation and growth of T cells. In addition,
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therapeutic agents that are otherwise potentially toxic or fatal if
administered directly to the patient can be used to improve the activity
and growth of T cells.
- Standard and Cost-effective Manufacturing Process. Our Xcellerate
Technology incorporates primarily commercially available medical products
and standard blood bank procedures, which enables us to efficiently
manufacture our Xcellerated T Cells. We use the same process and
components for every patient, eliminating the need for patient-specific
materials that must be obtained by surgery, such as samples of the
patient's tumor. We believe we will be able to manufacture our
Xcellerated T Cells in facilities that can be cost-effectively
constructed, equipped and easily scaled.
OUR STRATEGY
Our goal is to be a leader in the field of T cell therapy and to leverage
our expertise in T cell activation to develop and commercialize products to
treat cancer and infectious diseases, such as HIV. Key elements of our strategy
include:
- Commercializing Our Xcellerate Therapy. We will initially develop our
Xcellerate Therapy to treat life-threatening forms of cancer, which
currently have inadequate treatments. The FDA has adopted fast-track
approval and priority trial procedures for such therapies. In addition,
we will focus on qualifying for FDA orphan drug status for our Xcellerate
Therapy by treating cancers that are prevalent in less than 200,000
patients in the United States. This status may allow us to obtain a seven
year market exclusivity in similar products targeting the same patient
population. We believe this strategy will facilitate rapid entry into the
market for our Xcellerate Therapy.
- Expanding Our Xcellerate Therapy to Treat Multiple Diseases. We believe
our Xcellerate Therapy has potential applications in many medical
conditions. We intend to develop our Xcellerate Therapy to treat patients
with infectious diseases, chronic illnesses, HIV and other immune
deficiency conditions.
- Leveraging Complementary Technologies and Therapies. We believe our
Xcellerate Therapy can be used effectively in combination with current
treatments for cancer and infectious diseases, such as chemotherapy. We
intend to explore opportunities to combine complementary technologies and
therapies, such as cancer vaccines, with our Xcellerate Therapy to
improve and expand clinical applications.
- Retaining Key Commercialization Rights. We intend to retain marketing and
commercial rights in North America for products in concentrated markets,
such as cancer. We believe these markets can be addressed by a small,
targeted sales force that we can build and train internally.
- Evaluating Collaboration Opportunities for Our Products. We will evaluate
opportunities to collaborate with large pharmaceutical and biotechnology
companies to obtain development and marketing support for territories
outside North America, such as Europe and Japan. In addition, we may seek
development and marketing support for indications that have more diffuse
patient populations in North America.
- Expanding Our Intellectual Property. We will continue to improve our
Xcellerate Technology, including developing process improvements and
improving activity and specificity of T cells. We intend to file patents
to protect these improvements. In addition, we may supplement our
internal efforts by acquiring or in-licensing technologies and product
candidates that complement our existing capabilities.
CLINICAL APPLICATIONS
CANCER
The American Cancer Society estimates that in 2000, 1.2 million new cases
of cancer will occur in the United States. Surgery and radiation are the primary
approaches used to treat patients with localized
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disease. However, many cancers spread beyond the original site of disease. In
order to prevent or treat the spread of cancer, known as metastasis, many
patients are treated with chemotherapy drugs. Unfortunately, chemotherapy has
met with limited success in the treatment of most forms of cancer and is
associated with severe and sometimes life-threatening side effects. Physicians
have recently begun to recognize the important role that the immune system may
play in controlling cancer. This has led to the development of a new therapeutic
approach to cancer known as immunotherapy. Immunotherapy uses natural products
of the immune system such as monoclonal antibodies, cytokines and even whole
cells to treat cancer. This new form of therapy has been demonstrated to be
effective in some forms of cancer and has been generally associated with fewer
side effects than chemotherapy.
Solid Tumors
The American Cancer Society estimates that in 2000 in the United States,
there will be approximately 1.0 million new patients with solid tumors, which
are cancers that originate in organs of the body. The American Cancer Society
estimates that in 2000, more than 400,000 people will die from solid tumors,
such as breast, prostate, lung, liver and colon cancers. These cancers are
typically treated with surgery or radiation. Chemotherapy is used with limited
success in treating solid tumors such as breast cancer, but is generally
ineffective in curing patients once cancer has metastasized.
Kidney Cancer. The American Cancer Society estimates that in 2000,
approximately 31,200 patients will be diagnosed with kidney cancer in the United
States. Approximately half of the patients with kidney cancer will develop
metastatic disease. Once patients develop metastatic disease, they have a very
poor prognosis with an average survival of approximately one year. The five-year
survival for patients with metastatic kidney cancer is less than 5% and 11,900
deaths are expected to occur in the United States in 2000.
Chemotherapy has not been effective in treating kidney cancer. The only
therapy that has been approved by the FDA for treating metastatic kidney cancer
is a regimen of high-dose interleukin-2, a drug that activates T cells. The
overall response rate to high-dose interleukin-2 is approximately 15%. However,
less than 5% of patients experience complete disappearance of all detectable
cancer and achieve five-year survival. High-dose interleukin-2 therapy is
associated with severe and potentially life-threatening side effects that can
damage kidneys, liver, lungs and brain. Due to these risks, patients receiving
high-dose interleukin-2 require monitoring in hospital intensive care units for
several days. Additionally, many patients do not receive interleukin-2 because
the risk of side effects may outweigh its potential therapeutic benefit.
Recently, attempts have been made to reduce the doses of interleukin-2
administered to patients in order to decrease the side effects. Although adverse
effects appear to decrease with low-dose regimens, there are currently
insufficient data to determine whether low-dose interleukin-2 will prove to be
an effective treatment alternative.
In July 2000, we initiated a Phase I clinical trial of our Xcellerate
Therapy in patients with metastatic kidney cancer. We intend to enroll a total
of 25 patients to test the safety as well as to provide preliminary data on
therapeutic effects of our Xcellerate Therapy. In this clinical trial, patients
are treated with two infusions of our Xcellerate Therapy approximately four
weeks apart. After each infusion of our Xcellerated T Cells, patients are
treated with low doses of interleukin-2 for 10 consecutive days. As of December
15, 2000, 17 patients have received a total of 32 infusions of Xcellerated T
Cells. To date, there have been no significant adverse effects related to the
administration of our Xcellerated T Cells and we have observed evidence of
anti-tumor activity. We expect to complete this trial in the third quarter of
2001.
Hematological Malignancies
The American Cancer Society estimates that in 2000, there will be
approximately 106,700 new cases in the United States of hematological
malignancies, which are cancers of the blood or bone marrow. The American Cancer
Society estimates that 60,400 people will die in 2000 from hematological
malignancies in the United States. Hematological malignancies include leukemia,
non-Hodgkin's lymphoma, multiple
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myeloma and Hodgkin's disease. Hematological malignancies have usually spread
throughout the body by the time of diagnosis and therefore, require treatment
with chemotherapy drugs.
Physician-sponsored clinical trials are being conducted using our T cell
activation technology in patients with both non-Hodgkin's lymphoma and leukemia.
A physician-sponsored clinical trial was conducted at the University of Chicago
in with patients with advanced non-Hodgkin's lymphoma who were treated with
high-dose chemotherapy and a bone marrow transplant. After this treatment,
patients received a single infusion of T cells activated using our T cell
activation technology. Clinical data available on 17 patients from this clinical
trial showed that the average overall survival of patients in the study was
approximately two years following the infusion. Five-year survival in similar
groups of patients with advanced non-Hodgkin's lymphoma is usually less than
10%. We will continue to evaluate this data and may explore this indication in
our own clinical trials.
We also plan to evaluate the potential efficacy of Xcellerate Therapy in
patients with chronic lymphocytic leukemia, who have T cell deficits due to
treatments for their disease. We have completed a series of laboratory studies
to determine if we could generate activated T cells from the blood of these
patients, which contains very few T cells. Our laboratory studies demonstrate
that we can generate large numbers of activated T cells and overcome some of the
defects that have been documented in these patients' T cells. Based on these
results, we plan to initiate a clinical trial in the second half of 2001 to test
the safety and potential therapeutic activity of Xcellerate Therapy in patients
with chronic lymphocytic leukemia. This clinical trial will serve as the basis
for the first test of the safety and potential clinical activity of Xcellerate
Therapy in patients with severe T cell deficits.
INFECTIOUS DISEASES
We are evaluating the use of our Xcellerate Therapy in infectious disease
indications, such as HIV, chronic viral hepatitis C and tuberculosis. Infectious
diseases are illnesses caused by microorganisms such as viruses, fungi and
bacteria and can be controlled in most people with antibiotics or antiviral
agents. However, when patients' immune systems are compromised by infections,
drugs, chronic illnesses, or age, they are often unable to fight these
infections. A normally harmless virus can cause life-threatening infections or
virally-induced cancers in patients with weakened immune systems. We plan to
evaluate the potential efficacy of Xcellerate Therapy to increase T cell levels
in patients with infectious diseases.
Human Immunodeficiency Virus. There are over 400,000 individuals infected
with HIV in the United States. HIV patients are at high risk of infections and
cancer because they have low number of T cells that do not function properly.
Patients are currently treated with combinations of anti-viral drugs. Although
these drug combinations have been shown to be effective in delaying viral
relapse and the onset of acquired immunodeficiency syndrome, or AIDS, they do
not completely eliminate the virus or cure this disease. From 10% to 50% of
patients on these anti-viral drugs will relapse each year. Several third party
clinical trials have been conducted with one of our scientific founders using
our T cell activation technology to generate activated T cells to treat
HIV-positive patients. These clinical trials demonstrated that T cells could be
activated and genetically-modified and that these cells could be administered
safely and are able to target sites of HIV infection. It was observed that after
administration of genetically-modified T cells, there was an increase in T cell
counts in these patients and decrease in HIV in sites of infection. We intend to
conduct a Phase I clinical trial to assess the ability of genetically-modified
Xcellerated T Cells to delay viral relapse in HIV patients.
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POTENTIAL FUTURE INDICATIONS
Cancer
We are evaluating the use of our Xcellerate Therapy in the following cancer
indications:
<TABLE>
<CAPTION>
TYPE OF CANCER INCIDENCE (NEW CASES/YEAR)(1) DEATHS/YEAR(1)
-------------- ----------------------------- --------------
<S> <C> <C>
Liver(2)...................................... 15,000 13,000
Non-Hodgkin's Lymphoma........................ 55,000 26,000
Ovarian....................................... 23,000 14,000
Melanoma...................................... 48,000 8,000
Multiple Myeloma.............................. 14,000 11,000
Colorectal.................................... 130,000 56,000
Lung.......................................... 164,000 157,000
</TABLE>
-------------------------
(1) American Cancer Society estimated incidence and death rates for 2000 in the
United States.
(2) The worldwide incidence for liver cancer is estimated at 1,000,000 (source:
DeVita, V.T., Principles and Practice of Oncology, 1997).
Clinical trials conducted by third parties have demonstrated that
therapeutic products that activate the immune system, including activated T
cells, may be used to treat these types of cancer. For example:
- 150 patients were evaluated in a randomized Phase III clinical trial
conducted by the National Cancer Center of Japan that demonstrated that
activated T cells can reduce the risk of tumor recurrence of patients
undergoing surgical removal of cancerous tumor tissue in the liver. In
this clinical trial, patients who received activated T cells had a 41%
decrease in tumor recurrence and demonstrated a statistically significant
improvement in tumor-free survival compared to patients who did not
receive activated T cells. This trial used T cells that were activated
using monoclonal antibodies that target Signal 1 alone. Xcellerated T
Cells are activated using monoclonal antibodies that deliver both Signal
1 and Signal 2 and may be a more effective therapeutic alternative.
- a physician-sponsored clinical trial was conducted at the University of
Chicago with patients with advanced non-Hodgkin's lymphoma who were
treated with high-dose chemotherapy and a bone marrow transplant. After
this treatment, patients received a single infusion of T cells activated
using our T cell activation technology. Clinical data available on 17
patients from this clinical trial showed that the average overall
survival of patients in the study was approximately two years following
the infusion.
- a randomized Phase III clinical trial was conducted in 148 patients with
ovarian cancer by several academic centers in Europe. These patients
received a cytokine, known as interferon-gamma, which improved tumor-free
survival from 17 months to 48 months in patients who were treated with
standard chemotherapy. We have shown in the laboratory that our
Xcellerated T Cells produce large amounts of interferon-gamma.
- interleukin-2, a drug that activates T cells, is approved by the FDA to
treat metastatic melanoma.
- we have successfully completed laboratory studies using our Xcellerate
Technology to activate and grow T cells from patients with melanoma and
multiple myeloma.
We plan to further evaluate the use of our Xcellerate Technology to
activate T cells in patients with many of these cancers. Based on these
preclinical studies, in addition to ongoing clinical trials being conducted by
our scientific founders and their collaborators, we plan to initiate a clinical
trial in one or more of these types of cancer.
OUR XCELLERATE TECHNOLOGY
Our Xcellerate Technology uses our novel proprietary process to activate
and grow both helper T cells and killer T cells by delivering both Signal 1 and
Signal 2. In our process, T cells are stimulated, and
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increase in number outside of the body, using microscopic magnetic beads densely
coated with two monoclonal antibodies that deliver Signal 1 and Signal 2. Signal
1 is delivered by a monoclonal antibody that binds to and activates the CD3
complex, which is part of the T cell receptor complex, and is expressed on every
T cell. Signal 2 is delivered by another monoclonal antibody, which binds to the
CD28 receptor on T cells. Both of these antibodies are attached to the surface
of the magnetic beads. When T cells bind to the monoclonal antibodies on these
magnetic beads, they become activated and increase in number.
Our Xcellerate Technology requires that a patient's white blood cells be
collected in an outpatient clinical setting using a standard procedure called
leukapheresis. These cells are then sent to our manufacturing facility, where
trained specialists process the patient's blood in a closed system without
exposing the cells to the outside environment, which reduces the risk of
microbial contamination during the process. In this process, the patient's white
blood cells are placed in sterile, disposable plastic bags containing a solution
of nutrients and a low level of interleukin-2 that sustains the growth of the T
cells. We then add our proprietary microscopic magnetic beads coated with
anti-CD3 and anti-CD28 monoclonal antibodies to activate T cells. The beads bind
to the T cells in the bag and mimic the normal process of T cell activation that
takes place inside the human body. The activated T cells in the bag are
maintained at the same temperature as the human body for approximately eight
days. During this eight day period, we monitor the T cells to ensure consistent
and adequate levels of their growth and activity. At the end of our process, the
antibody-coated magnetic beads are removed from the activated T cells using a
commercially available magnetic device. The activated T cells are then
formulated in a standard clinical infusion solution for administration to the
patient.
[GRAPHIC OF XCELLERATE TECHNOLOGY]
The circle diagram is set up as a circle of five graphics. Beginning at the
top, the first graphic shows a female figure as the patient. From the patient,
there is an arrow to the left leading to the second graphic of a sterile bag
containing blood cells collected from the patient. A tube connects the female
patient to the sterile bag. The text above the sterile bag states "Collect
Blood."
From the second graphic, a downward arrow leads to the third graphic of a
sterile bag containing a mixture of the patient's blood cells and a vial of our
antibody-coated beads. This graphic also contains another arrow from the vial to
the bag indicating that the vial of antibody-coating beads is being added to the
sterile bag with the patient's blood cells. In this sterile bag, beads are shown
binding to a T cell, causing activation of the T cell. To the right of the vial
of antibody-coated beads, the text states "Add Antibody-coated Beads."
From the third graphic is an arrow to the right leading to the fourth
graphic. Below the arrow, the text states "Activate and Expand T Cells." The
fourth graphic is a sterile bag filled with an increased number of successfully
activated T cells, our Xcellerated T Cells. In addition, the graphic shows the
beads being removed and collected to the right of the sterile bag. Above the
fourth graphic is text stating "Remove Beads."
Next, an upward arrow leads from the fourth graphic to the fifth graphic,
which is a sterile bag filled with Xcellerated T Cells. Text above this fifth
graphic states "Infuse Xcellerated T Cells." An arrow from this fifth graphic
leads back to the first graphic of the female figure, which shows the tube from
the sterile bag to the female patient, illustrating the infusion of the
activated T cells into the female patient.
We have established procedures to track patients' cells during the
manufacture and shipment of Xcellerated T Cells. Each patient receives a unique
identifying number that also contains a code for the site at which they are
being treated. This unique identifying number is used to track, monitor and
record all documentation, labels and materials relating to the production of our
Xcellerated T Cells from blood collection through to re-infusion of the final
product. Before we release the shipment to the clinical site, we conduct quality
control procedures in our laboratory to assure that our Xcellerated T Cells meet
strict acceptance criteria. These quality control tests include:
- Purity -- substantially free of other cell types;
- Identity -- a T cell product as determined by characteristics unique to T
cells;
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- Dose -- a defined number of viable T cells;
- Potency -- T cells that have biological function relevant to proposed
therapeutic effect; and
- Safety and Sterility -- free from microorganisms and residual components.
RESEARCH AND DEVELOPMENT
Our current Xcellerate Technology is based on a prototype version developed
by two of our scientific founders, Drs. Carl June and Craig Thompson, who are
leaders in the field of immunology. We have made several improvements to this
technology. We use monoclonal antibodies that are more reproducible and thus are
easier to manufacture. In addition, we manufacture large batches of sterile
antibody-coated magnetic beads and have reduced the overall process time from an
average of 14 days to an average of 8 days. We use a closed system in a sterile
environment, which reduces the chances of contamination by microorganisms. We
believe these modifications are essential to developing a product that can be
commercialized. We intend to continuously evaluate and improve our technology
and will file patents on our advancements. For example, we have recently filed a
patent application to cover a novel method that both further simplifies our
Xcellerate Technology and also generates T cells with greater activity. The
simplification of our process reduces labor and materials and lowers the costs
associated with the production of Xcellerated T Cells. We are completing
development of our improved Xcellerate Technology and plan to introduce it into
clinical trials in the first half of 2001.
Our scientific founders continue to conduct physician-sponsored clinical
trials using our T cell activation technology. These studies are conducted
independently with our scientific founders' own procedures using our T cell
activation technology. We will continue to assess these data together with our
own laboratory and clinical results to determine the best clinical opportunities
for Xcellerate Therapy.
We are focusing our research and development efforts on increasing the
activity of T cells in our Xcellerate Therapy. We are currently evaluating
whether other molecules of the immune system or genes could be used to improve
the therapeutic activity of the activated T cells. We are also considering the
therapeutic potential of using our Xcellerate Therapy in cancer patients to
improve the effectiveness of cancer vaccines. We are working with several groups
to evaluate the use of recently discovered antigens with our Xcellerate
Technology to activate and expand T cells with specificity toward cancer and
infectious disease targets. Previous approaches to activate and grow
antigen-specific T cells have involved complicated and laborious procedures,
which have had limited commercial feasibility. We have conducted laboratory
studies demonstrating that we can use our Xcellerate Technology to generate
large numbers of antigen-specific T cells with anti-tumor activity in several
forms of cancer including melanoma and lung cancer.
MANUFACTURING
We have designed, built, and are operating a modern GMP pilot plant
facility in Seattle, Washington to manufacture our Xcellerated T Cells for
initial clinical trials. We have also recently leased an additional 40,500
square foot facility that we intend to develop to manufacture our Xcellerated T
Cells for our future large-scale clinical trials and initial commercialization.
We expect to complete initial modifications and begin manufacturing our
Xcellerated T Cells at this facility by the second half of 2001.
We are currently improving the process by which we manufacture our
Xcellerated T Cells. For example, we plan to develop more streamlined processing
procedures that reduce labor and provide more uniform activation and process
efficiency. Except for our proprietary anti-CD3 and anti-CD28 antibody-coated
beads, all of the components including tissue culture media, nutrients,
disposable bags, tubing sets and processing equipment that are required for our
Xcellerate Technology are standard laboratory or clinical supplies that are
readily available from commercial vendors.
In June 2000, we entered into two service agreements with Lonza Biologics
PLC, for the GMP manufacture of anti-CD3 and anti-CD28 monoclonal antibodies for
uses in clinical trials. We retain all
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proprietary rights to our intellectual property that is used by Lonza under
these agreements. These agreements may be terminated at will by either party for
a material breach.
In August 1999, we entered into a contract with Dynal S.A., for the GMP
manufacture of our proprietary antibody-coated magnetic beads for clinical and
commercial uses. We retain all proprietary rights to our intellectual property
that is used by Dynal under this agreement. The agreement will terminate in
August 2009 or earlier upon breach by either party. The term may be extended for
an additional five year term by either party.
COMPETITION
The biotechnology and pharmaceutical industries are characterized by
rapidly advancing technologies, intense competition and a strong emphasis on
proprietary products. Many entities, including pharmaceutical and biotechnology
companies, academic institutions and other research organizations are actively
engaged in the discovery, research and development of products that could
compete with our products under development. They may also compete with us in
recruiting and retaining skilled scientific talent.
Several companies market immunotherapy products. We are currently aware of
a few companies in the early stages of developing ex vivo T cell activation
products as a method of treating cancer and infectious diseases. However, even
if our Xcellerate Technology proves successful, we might not be able to remain
competitive in this rapidly advancing area of technology. Many of our potential
competitors have more financial and other resources, larger research and
development staffs, and more experienced capabilities in researching, developing
and testing products. Many of these companies also have more experience in
conducting clinical trials, obtaining FDA and other regulatory approvals, and in
manufacturing, marketing and distributing of medical products. Smaller companies
may successfully compete with us by establishing collaborative relationships
with larger pharmaceutical companies or academic institutions. Our competitors
may succeed in developing, obtaining patent protection for, or commercializing
their products more rapidly than us. A competing company developing, or
acquiring rights to, a more effective therapeutic product for the same diseases
targeted by us, or one that offers significantly lower costs of treatment, could
render our products noncompetitive or obsolete.
Our ability to commercialize our Xcellerate Therapy and compete effectively
will depend, in large part, on:
- our ability to advance our Xcellerate Therapy through clinical trials and
to successfully manufacture our products;
- the perception by physicians and other members of the health care
community of the safety, efficacy and benefits of activated T cell
treatments compared to those of competing products or therapies;
- the willingness of physicians to adopt a new treatment;
- the price of our Xcellerate Therapy relative to other products or
competing treatments;
- the effectiveness of our sales and marketing efforts and those of our
potential marketing partners; and
- our ability to protect our proprietary technology.
INTELLECTUAL PROPERTY
We rely on a combination of patent, trademark, copyright and trade secret
laws to protect our proprietary technologies and products. We aggressively seek
U.S. and international patent protection to further our business strategy and
for major components of our Xcellerate Technology, including important antibody
clone components and methods of T cell activation. We also rely upon trade
secret protection for our confidential and proprietary information, and we enter
into licenses to technologies we view as necessary to pursue our corporate
goals.
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As of December 1, 2000, we owned or held exclusive rights to two issued
patents and 21 pending U.S. patent applications in the fields of or directed to
ex vivo T cell stimulation. The two issued patents relate to a method of
stimulating T cells and an antibody, which we are not currently using. We also
have 34 currently pending foreign patent applications corresponding to T cell
stimulation technology.
In general, we apply for patent protection of methods and products relating
to immunotherapy for treatment of cancer and infectious diseases. With respect
to proprietary know-how that is not patentable, we have chosen to rely on trade
secret protection and confidentiality agreements to protect our interests. We
have taken security measures to protect our proprietary know-how, technologies
and confidential data and continue to explore further methods of protection.
We require all employees, consultants and collaborators to enter into
confidentiality agreements, and all employees and most consultants enter into
invention assignment agreements with us. The confidentiality agreements
generally provide that all confidential information developed or made known to
the individual during the course of such relationship will be kept confidential
and not disclosed to third parties, except in specified circumstances. These
invention agreements generally provide that all inventions conceived by the
individual in the course of rendering services to us shall be our exclusive
property. There can be no assurance, however, that these agreements will provide
meaningful protection or adequate remedies for any breach, or that our trade
secrets will not otherwise become known or be independently discovered by our
competitors. Any of these events could adversely affect our competitive position
in the marketplace.
In the case of a strategic partnership or other collaborative arrangement
which requires the sharing of data, our policy is to disclose to our partner
only such data as are relevant to the partnership or arrangement, under
controlled circumstances and only during the contractual term of the strategic
partnership or collaborative arrangement, subject to a duty of confidentiality
on the part of our partner or collaborator. Disputes may arise as to the
inventorship and corresponding rights in know-how and inventions resulting from
research by us and our future corporate partners, licensors, scientific
collaborators and consultants. There can be no assurance that we will be able to
maintain our proprietary position, or that third parties will not circumvent any
proprietary protection we have. Our failure to maintain exclusive or other
rights to such technologies could harm our competitive position.
To continue developing and commercializing our current and future products,
we may license intellectual property from commercial or academic entities to
obtain the rights to technology that is required for our discovery, research,
development and commercialization activities.
In anticipation of the commercial distribution of our products and
services, we have filed a number of trademark applications.
TECHNOLOGY LICENSES
Where consistent with our strategy, we seek to obtain technologies that
complement and expand our existing technology base. We have licensed and will
continue to license technology from selected research and academic institutions,
as well as other organizations. Under these license agreements, we generally
seek to obtain unrestricted sublicense rights. We are generally obligated under
these agreements to pursue product development, make development milestone
payments and pay royalties on any product sales. In addition to license
agreements, we seek relationships with other entities that may benefit us and
support our business goals.
ARCH Development Corporation
In June 1999, we entered into an exclusive license agreement with ARCH
Development Corporation, an Illinois not-for-profit corporation, for rights to a
pending patent application that lists Dr. Carl June, one of our scientific
founders, as an inventor. This agreement assisted in consolidating our patent
protection in the field of therapies based on ex vivo activation of T cells.
Under the license agreement, ARCH granted us an exclusive, worldwide
license to make, sell, use and import products until expiration of any patents
that might be issued from our licensed patent
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applications. In consideration for the license, we issued shares of our common
stock to ARCH and agreed to pay an annual usage royalty upon commercialization
of a product for the remainder of the license term.
Diaclone S.A.
In October 1999, we entered into a license agreement with Diaclone S.A., a
French corporation. Under the agreement, Diaclone granted us an exclusive,
worldwide license to the anti-CD28 antibody and the cell line which produces the
antibody, for the development and commercialization of the anti-CD28 antibody
for all ex vivo uses. We are currently obligated to purchase all our anti-CD28
antibody requirements from Diaclone until we enter into Phase III clinical
trials.
This agreement has a term of 15 years from the date of first approval by
FDA or its foreign equivalent, of a product based upon the licensed patent. We
currently do not have FDA approval of any products based upon the licensed
patent. At the end of the term, we will have a perpetual, irrevocable,
royalty-free exclusive license. We paid an initial license fee to Diaclone and
are required to pay royalties if our product is approved and commercialized.
Fred Hutchinson Cancer Research Center
In October 1999, we entered into a license agreement with the Fred
Hutchinson Cancer Research Center. Under the agreement, the Fred Hutchinson
Cancer Research Center granted us a non-exclusive, worldwide license to make,
use and sell the anti-CD3 antibody for any ex vivo use involving therapeutic and
research applications.
We paid upfront licensing fees to the Fred Hutchinson Cancer Research
Center and we are obligated to pay the Fred Hutchinson Cancer Research Center an
annual royalty fee when our product is commercialized. On December 1, 2000, we
amended this license agreement to broaden the field of use in exchange for an
additional upfront fee and issuance of additional shares of our common stock to
the Fred Hutchinson Cancer Research Center. Based on this license, this
agreement will remain in effect for 15 years following commercialization of our
product based on this agreement.
Genetics Institute, Inc.
In July 1998, we entered into a license agreement with Genetics Institute,
Inc. Under the agreement, Genetics Institute granted us an exclusive license for
methods of ex vivo activation or expansion of human T cells for treatment and
prevention of infectious diseases, cancer and immunodeficiency.
The term of the Genetics Institute license runs until the end of the
enforceable term of any patents issued for the methods licensed. To date, one
patent, whose term expires in 2016, has been issued for the methods licensed. In
consideration of the license, we paid Genetics Institute an upfront license fee,
issued shares of our preferred stock to Genetics Institute, and issued a warrant
under which, if one of three milestones is reached, Genetics Institute will have
the right to purchase additional shares of our preferred stock. We are also
obligated to pay royalties to Genetics Institute on sales of products covered by
the patents licensed to us under the agreement.
GOVERNMENTAL REGULATION
Governmental authorities in the United States and other countries
extensively regulate the preclinical and clinical testing, manufacturing,
labeling, storage, record-keeping, advertising, promotion, export, marketing and
distribution, among other things, of immunotherapeutics. In the United States,
the FDA under the Federal Food, Drug, and Cosmetic Act, the Public Health
Service Act and other federal statutes and regulations subjects pharmaceutical
products to rigorous review. If we do not comply with applicable requirements,
we may be fined, our products may be recalled or seized, our production may be
totally or partially suspended, the government may refuse to approve our
marketing applications or allow us to distribute our products, and we may be
criminally prosecuted. The FDA also has the authority to revoke previously
granted marketing authorizations.
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In order to obtain approval of a new product from the FDA, we must, among
other requirements, submit proof of safety and efficacy as well as detailed
information on the manufacture and composition of the product, also know as an
investigational new drug applications. In most cases, this proof entails
extensive laboratory tests, and preclinical and clinical trials. This testing,
the preparation of necessary applications, the processing of those applications
by the FDA and review of the application by an advisory panel of outside experts
are expensive and typically take several years to complete. The FDA may not act
quickly or favorably in reviewing these applications, and we may encounter
significant difficulties or costs in our efforts to obtain FDA approvals that
could delay or preclude us from marketing any products we may develop. The FDA
may also require post-marketing testing and surveillance to monitor the effects
of approved products or place conditions on any approvals that could restrict
the commercial applications of these products. Regulatory authorities may
withdraw product approvals if we fail to comply with regulatory standards or if
we encounter problems following initial marketing. With respect to patented
products or technologies, delays imposed by the governmental approval process
may materially reduce the period during which we will have the exclusive right
to exploit the products or technologies.
There are two types of investigational new drug applications. The first is
a commercial investigational new drug application intended to collect data on
the safety and efficacy of a new drug prior to submitting an application for
marketing approval. The second type of investigational new drug application is
the non-commercial or physician-sponsored investigational new drug application
which allows physicians to gain an initial understanding of the compound without
going through the rigors of an investigational new drug application development
program in support of commercial approval. Data from physician-sponsored trials
can be used to support the safety but not the efficacy of a product.
After an investigational new drug application becomes effective, a sponsor
may commence human clinical trials. The sponsor typically conducts human
clinical trials in three sequential phases, but the phases may overlap. In Phase
I clinical trials, the product is tested in a small number of patients or
healthy volunteers, primarily for safety at one or more doses. In Phase II, in
addition to safety, the sponsor evaluates the efficacy of the product in a
patient population somewhat larger than Phase I clinical trials. Phase III
clinical trials typically involve additional testing for safety and clinical
efficacy in an expanded population at geographically dispersed test sites. The
sponsor must submit to the FDA a clinical plan, or "protocol," accompanied by
the approval of the institution participating in the trials, prior to
commencement of each clinical trial. The FDA may order the temporary or
permanent discontinuation of a clinical trial at any time.
The sponsor must submit to the FDA the results of the preclinical and
clinical trials, together with, among other things, detailed information on the
manufacture and composition of the product, in the form of a new drug
application or, in the case of a biologic, a biologics license application. The
FDA is regulating our therapeutic immunotherapy products as biologics and,
therefore, we will be submitting biologics license applications to the FDA to
obtain approval of our products. A biologics license application requires data
showing the safety, purity and potency of the product. In a process which
generally takes several years, the FDA reviews this application and, when and if
it decides that adequate data is available to show that the new compound is both
safe and effective and that other applicable requirements have been met,
approves the drug or biologic for marketing. The amount of time taken for this
approval process is a function of a number of variables, including the quality
of the submission and studies presented, the potential contribution that the
compound will make in improving the treatment of the disease in question, and
the workload at the FDA. It is possible that our Xcellerate Therapy will not
successfully proceed through this approval process or that the FDA will not
approve them in any specific period of time, or at all.
Congress enacted the Food and Drug Administration Modernization Act of
1997, in part, to ensure the availability of safe and effective drugs, biologics
and medical devices by expediting the FDA review process for new products. The
Modernization Act establishes a statutory program for the approval of fast track
products, including biologics. A fast track product is defined as a new drug or
biologic intended for the treatment of a serious or life-threatening condition
that demonstrates the potential to address unmet medical needs for this
condition. Under the fast track program, the sponsor of a new drug or biologic
may
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request the FDA to designate the drug or biologic as a fast track product at any
time during the clinical development of the product.
The Modernization Act specifies that the FDA must determine if the product
qualifies for fast track designation within 60 days of receipt of the sponsor's
request. The FDA can base approval of a marketing application for a fast track
product on an effect on a clinical endpoint or on another endpoint that is
reasonably likely to predict clinical benefit. The FDA may subject approval of
an application for a fast track product to post-approval studies to validate the
surrogate endpoint or confirm the effect on the clinical endpoint and prior
review of all promotional materials. In addition, the FDA may withdraw its
approval of a fast track product on an expedited basis on a number of grounds,
including the sponsor's failure to conduct any required post-approval study with
due diligence.
If the FDA's preliminary review of clinical data suggests that a fast track
product may be effective, the agency may initiate review of sections of a
marketing application for a fast track product before the sponsor completes the
application. This rolling review is available if the applicant provides a
schedule for submission of remaining information and pays applicable user fees.
However, the time periods specified under the Prescription Drug User Fee Act
concerning timing goals to which the FDA has committed in reviewing an
application, do not begin until the sponsor submits the entire application.
We may request fast track designation and orphan drug status for our
Xcellerate Therapy. Orphan drug designation may be granted to those products
developed to treat diseases or conditions that affect fewer than 200,000 persons
in the United States. We believe that some of our target cancer patient
populations meet these criteria. Under the law, the developer of an orphan drug
may be entitled to seven years of market exclusivity following the approval of
the product by the FDA, exemption from user fee payments to the FDA, and a 50%
tax credit for the amount of money spent on human clinical trials. We cannot
predict whether the FDA will grant these designations, or whether our products
will ultimately receive approval or orphan drug exclusivity nor can we predict
the ultimate impact, if any, of the fast track process on the timing or
likelihood of FDA approval of our immunotherapeutics.
The FDA may, during its review of a new drug application or biologics
license application, ask for additional test data. If the FDA does ultimately
approve the product, it may require post-marketing testing, including
potentially expensive Phase IV studies, and surveillance to monitor the safety
and effectiveness of the drug. In addition, the FDA may in some circumstances
impose restrictions on the use of the drug, which may be difficult and expensive
to administer, and may require prior approval of promotional materials.
Before approving a new drug application or biologics license application,
the FDA will also inspect the facilities at which the product is manufactured
and will not approve the product unless the manufacturing facilities are in
compliance with current Good Manufacturing Practices. In addition, the
manufacture, holding, and distribution of a product must be in compliance with
current Good Manufacturing Practices. Manufacturers must continue to expend
time, money and effort in the area of production and quality control and record
keeping and reporting to ensure full compliance with those requirements. The
labeling, advertising, promotion, marketing and distribution of a drug or
biologic product must be in compliance with FDA regulatory requirements. In
addition, manufacturers are required to report adverse events, and errors and
accidents in the manufacturing process. Changes to an approved product, or
changes to the manufacturing process, may require the filing of a supplemental
application for FDA review and approval. Failure to comply with applicable
requirements can lead to the FDA demanding that production and shipment cease,
and, in some cases, that the manufacturer recall products, or to FDA enforcement
actions that can include seizures, injunctions and criminal prosecution. These
failures can also lead to FDA withdrawal of approval to market the product.
We are also subject to regulation by the Occupational Safety and Health
Administration and the Environmental Protection Agency and to regulation under
the Toxic Substances Control Act, the Resource Conservation and Recovery Act and
other regulatory statutes, and may in the future be subject to other federal,
state or local regulations. Either or both of OSHA or the EPA may promulgate
regulations that
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may affect our research and development programs. We are unable to predict
whether any agency will adopt any regulation which could limit or impede on our
operations.
Sales of pharmaceutical products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country.
Whether or not we have obtained FDA approval, we must obtain approval of a
product by comparable regulatory authorities of foreign countries prior to the
commencement of marketing the product in those countries. The time required to
obtain this approval may be longer or shorter than that required for FDA
approval. The foreign regulatory approval process includes all the risks
associated with FDA regulation set forth above, as well as country-specific
regulations.
LEGAL PROCEEDINGS
We are not party to any material legal proceedings.
EMPLOYEES
As of November 30, 2000, we had 64 employees, 27 of these employees are
directly involved in research and development, and 15 employees are involved in
manufacturing operations. We consider our relations with our employees to be
good.
FACILITIES
We currently occupy a total of 61,069 square feet of space at two
facilities, one in Seattle, Washington and one in Bothell, Washington. We have a
total of 20,659 square feet of office, laboratory space and a pilot cell
manufacturing facility in Seattle. This pilot plant facility is compliant with
FDA guidelines and proposals for the GMP manufacture of cell-based therapeutic
products for initial clinical trials. The lease on this space expires in October
1, 2006, and we have options to renew for two additional five-year terms.
We have also leased 40,500 square feet of space in Bothell and we intend to
initially renovate approximately 15,000 square feet of space for manufacturing
to support large-scale clinical trials and initial commercialization of any
approved products. The initial lease term on this space expires on December 1,
2010 and we have options to renew until December 1, 2020. Under the terms of the
lease, we also have rights to negotiate for further expansion space in the
building.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table sets forth certain information regarding our executive
officers, key employees and directors as of November 30, 2000:
<TABLE>
<CAPTION>
NAME(1) AGE POSITION
------- --- --------
<S> <C> <C>
Ronald J. Berenson, M.D.(4)............... 48 Chief Executive Officer, President and
Director
Stewart Craig, Ph.D....................... 39 Chief Operating Officer and Vice President
Kathi L. Cordova.......................... 40 Vice President, Finance
Dawn M. McCracken......................... 33 Vice President, Regulatory and Clinical
Affairs
Mark L. Bonyhadi, Ph.D.................... 46 Director of Biological Research
Robert E. Curry, Ph.D.(2)(3)(4)........... 54 Director
Jean Deleage, Ph.D.(2).................... 60 Director
Peter Langecker, M.D., Ph.D............... 49 Director
Robert T. Nelsen(2)(3)(4)................. 37 Director
Michael Steinmetz, Ph.D.(2)............... 53 Director
Robert M. Williams, Ph.D.................. 47 Director
</TABLE>
-------------------------
(1) David J. Maki resigned from our board of directors, effective December 19,
2000.
(2) Member of Audit Committee
(3) Member of Compensation Committee
(4) Member of Milestone Committee
RONALD J. BERENSON, M.D., our founder, has served as President and Chief
Executive Officer and a director since our inception. From April 1989 until
February 1995, Dr. Berenson held several positions at CellPro, Inc., a stem cell
therapy company that he founded, with his last positions being as Executive Vice
President and Chief Medical and Scientific Officer as well as serving on the
Board of Directors. From July 1984 to March 1989, Dr. Berenson was a faculty
member at the Fred Hutchinson Cancer Research Center, where he last held the
position of Assistant Member. He is a board-certified internist and medical
oncologist, who completed his medical oncology fellowship training at Stanford
Medical Center. Dr. Berenson received a B.S. in biology from Stanford University
and an M.D. from Yale Medical School.
STEWART CRAIG, PH.D., our Chief Operating Officer and Vice President,
joined us in October 1999. Prior to joining us, he served as Vice President of
Development and Operations at Osiris Therapeutics, Inc., a stem cell therapy
company, from July 1996 to September 1999. From January 1994 to June 1996, Dr.
Craig served as Vice President of Product and Process Development at SyStemix
Inc., a stem cell and gene therapy company. From June 1987 to December 1993, Dr.
Craig held the positions of Group Leader and Senior Scientist at British
Biotech, a cancer treatment development company. Dr. Stewart received a B.Sc. in
biochemistry and a Ph.D. in physical biochemistry from the University of
Newcastle upon Tyne, U.K.
KATHI L. CORDOVA, C.P.A., Vice President of Finance, joined us in March
1997. Prior to joining us, Ms. Cordova held the positions of Assistant
Controller and Controller in a joint venture between American Life Insurance
Company, an insurance company, and Italy's Confederazione Italiana Sindicati dei
Lavoratori, an insurance company, from February 1994 to February 1997. From
August 1991 to January 1994, Ms. Cordova served as Management Associate with the
Life Division of American International Group. Ms. Cordova received a B.A. in
international relations from Stanford University and an M.A. in international
relations from The Johns Hopkins University.
DAWN M. MCCRACKEN, Vice President of Regulatory and Clinical Affairs,
joined us in November 1998. Prior to joining us, Ms. McCracken held the position
of Senior Manager of Regulatory and Clinical Affairs at Neopath, Inc. a medical
device company, from November 1996 to October 1998. From April 1996 to November
1996, Ms. McCracken served as Contract Consultant of Regulatory and Clinical
Affairs
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with Bartels, Inc., an immunotherapy development company, and Sonus
Pharmaceuticals, Inc., a drug delivery product company. From January 1995 to
March 1996, Ms. McCracken served as Manager of the West Coast Region for Novum,
Inc., a contract consulting company. Ms. McCracken received a B.S. in zoology
from the University of Washington.
MARK L. BONYHADI, PH.D., our Director of Biological Research, joined us in
October 1997. Prior to joining us, Dr. Bonyhadi served as Senior Scientist with
SyStemix, Inc., a stem cell and gene therapy company, from 1990 to 1997. Dr.
Bonyhadi received a B.A. in biology from Reed College and a Ph.D. in immunology
from the University of California at Berkeley.
ROBERT E. CURRY, PH.D. has served as one of our directors since May 2000.
Dr. Curry has been a general partner of Sprout Group, a venture capital firm,
since May 1991 and currently serves as Vice President. He is a director of Allos
Therapeutics, Inc., a cancer therapy company and Tripath Imaging, Inc., a cancer
therapy company. Dr. Curry received a B.S. in physics from the University of
Illinois and an M.S. and Ph.D. in chemistry from Purdue University.
JEAN DELEAGE, PH.D. has served as one of our directors since August 1996.
Dr. Deleage is a founder and managing director of Alta Partners, a venture
capital firm. Dr. Deleage serves as a director of ACLARA BioSciences, Inc., a
genomics company, BioMedicines, Inc., a pharmaceutical company, Neurogenetics,
Inc., a biopharmaceutical company, and Rigel Pharmaceuticals, Inc., a
pharmaceutical company, as well as several private company boards. Dr. Deleage
received an M.S. in electrical engineering from the Ecole Superieure
d'Electricite and a Ph.D. in economics from the Sorbonne.
PETER LANGECKER, M.D., PH.D. has served as one of our directors since
January 2000. Dr. Langecker has served as Chief Medical Officer and Vice
President of Clinical Affairs of BioMedicines, Inc., a pharmaceutical company
since October 1999. From July 1997 to September 1999, Dr. Langecker served as
Vice President of Clinical Affairs of Sugen, Inc., a biotechnology company. From
July 1995 to July 1997, Dr. Langecker served as Vice President of Clinical
Research of Coulter Pharmaceutical, Inc., a biotechnology company. Dr. Langecker
received an M.D. and a Ph.D. in medical sciences from Ludwig Maximilians
University in Munich.
ROBERT T. NELSEN has served as one of our directors since August 1996.
Since 1992, Mr. Nelsen has served as director of ARCH Venture Corporation, a
venture capital firm. Mr. Nelsen serves as a director of Adolor Corporation, an
analgesics development company, Caliper Technologies Corporation, a biochip
company, Genomica Corporation, a pharmacogenomics software company, and Illumina
Corporation, a biotechnology company. Mr. Nelsen received a B.S. in biology and
economics from the University of Puget Sound and an M.B.A. from the University
of Chicago.
MICHAEL STEINMETZ, PH.D. has served as one of our directors since August
2000. Since 1997, Dr. Steinmetz has been a general partner of MPM Asset
Management LLC, a venture capital firm. From 1986 to 1997, Dr. Steinmetz headed
the Biology Department in Basel, Switzerland as well as the Biotechnology
Department and the Preclinical Research and Development Department in Nutley,
New Jersey at Hoffmann-La Roche Inc., a developer of diagnostic systems. Dr.
Steinmetz serves as a director of Caliper Technologies, a lab processing
company, Arena Pharmaceuticals, a biopharmaceutical company, and GPC Biotech, a
pharmaceutical company, as well as several private company boards. Dr. Steinmetz
received a Diploma in chemistry from the University of Hamburg and a Ph.D. in
biochemistry and molecular biology from the University of Munich.
ROBERT M. WILLIAMS, PH.D. has served as one of our directors since November
1996. Since September 1980, Dr. Williams has served as a Professor of Chemistry
at Colorado State University. From 1988 to present, Dr. Williams has also
provided consulting services to several biotechnology and pharmaceutical
companies, including Cubist Pharmaceutical Company, Microcide Pharmaceuticals,
Hoffman-La Roche, G.D. Searle and EPIX Medical, Inc. Dr. Williams received a
B.A. in chemistry from Syracuse University and a Ph.D. in organic chemistry from
the Massachusetts Institute of Technology. Following graduate school, Dr.
Williams served as a postdoctoral fellow at Harvard University.
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<PAGE> 48
SCIENTIFIC ADVISORY BOARD
The Scientific Advisory Board is our network of medical, scientific and
clinical advisors and collaborators who consult with our scientists. In
addition, our Scientific Advisory Board members advise us regarding our research
and development programs, the design of our clinical trials as well as other
medical and scientific matters relating to our business. One of our Scientific
Advisory Board members, E. Donnall Thomas, was awarded the 1990 Nobel Prize in
Medicine. Our Scientific Advisory Board members are:
<TABLE>
<CAPTION>
NAME POSITION AFFILIATION
---- -------- -----------
<S> <C> <C>
Joseph Bertino, M.D. .............. Chairman of Molecular Memorial Sloan-Kettering
Pharmacology and Therapeutics Cancer Center
Program
Jeffrey Bluestone, Ph.D., Professor and Director of the University of California, San
Founder.......................... UCSF Diabetes Center Francisco
Edward Clark, Ph.D. ............... Professor and Program Department of Microbiology,
Director University of Washington
John Hansen, M.D. ................. Member and former Director of Fred Hutchinson Cancer
Clinical Research Research Center
Carl June, M.D., Founder........... Vice Chairman of the University of Pennsylvania
Department of Molecular and
Cellular Engineering
Ronald Levy, M.D. ................. Chairman of the Division of Stanford Medical Center
Medical Oncology
Gerald Nepom, M.D., Ph.D. ......... Director Virginia Mason Research Center
E. Donnall Thomas, M.D. ........... Member and former Director of Fred Hutchinson Cancer
Clinical Research Research Center
Craig Thompson, M.D., Founder...... Scientific Director, Abramson University of Pennsylvania
Cancer Research Institute
Robert Williams, Ph.D. ............ Professor of Chemistry Colorado State University
</TABLE>
BOARD COMPOSITION
Our board is currently comprised of seven directors and one vacancy. Our
board of directors is divided into three classes, with each director serving a
three-year term and one class being elected at each year's annual meeting of
stockholders. Director Robert Williams will be in the class of directors whose
initial term expires at the 2001 annual meeting of stockholders. Directors Jean
Deleage, Peter Langecker and Michael Steinmetz will be in the class of directors
whose initial term expires at the 2002 annual meeting of the stockholders.
Directors Ronald J. Berenson, Robert E. Curry and Robert T. Nelsen will be in
the class of directors whose initial term expires at the 2003 annual meeting of
stockholders.
BOARD COMMITTEES
Our board of directors has established an audit committee, a compensation
committee and a milestone committee.
Audit Committee
The audit committee is composed of Robert Curry, Robert Nelsen and Michael
Steinmetz. It is responsible for assuring the integrity of our financial
control, audit and reporting functions. It reviews with our management and our
independent auditors the effectiveness of our financial controls, accounting and
reporting practices and procedures. In addition, the audit committee reviews the
qualifications of our independent auditors, makes recommendations to the board
of directors regarding the selection of our
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<PAGE> 49
auditors, reviews the scope, fees and results of activities related to audit and
non-audit services. Prior to December 2000, the audit committee responsibilities
were conducted by the full board of directors, which met annually with
representatives of our independent auditors, including executive sessions from
which members of management were excused.
Compensation Committee
The compensation committee is composed of Robert E. Curry, Jean Deleage,
and Robert T. Nelsen. Its principal responsibility is to administer our stock
plans and to set the salary and incentive compensation, including stock option
grants, for the Chief Executive Officer and senior staff members.
Milestone Committee
The milestone committee is composed of Ronald J. Berenson, Robert E. Curry
and Robert T. Nelsen. In connection with our acquisition of CellGenEx, Inc., we
initially reserved an aggregate of 1,582,340 shares of our common stock in a
Milestone Pool, for issuance to our scientific founders upon the achievement of
specific milestones determined by the milestone committee. Several of these
milestones have expired and to date, 1,056,040 shares remain available for
issuance.
DIRECTOR COMPENSATION
Our six outside directors serve without cash compensation. In November
1996, Jean Deleage and Robert Williams were each awarded non-statutory options
for 30,000 shares of our common stock. In November 1999, Peter Langecker was
awarded a non-statutory option for 30,000 shares of our common stock. These
shares vest over a four-year period at a rate of 25% of the total number of
shares subject to the option one year after the date of grant and 1/48th of the
total number of shares subject to the option vesting each month thereafter.
Directors who are our employees are eligible to participate in our 1996 stock
option plan and, beginning in 2000, they will also be eligible to participate in
our 2000 stock option plan and 2000 employee stock purchase plan. Beginning in
2001, directors who are not our employees will be eligible to participate in our
2000 directors' stock option plan as well as our 2000 stock option plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more of its executive
officers serving as a member of our board of directors or compensation
committee.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our Amended and Restated Certificate of Incorporation limits the liability
of directors to the maximum extent permitted by Delaware law. Delaware law
provides that directors of a corporation will not be personally liable for
monetary damages for breach of their fiduciary duties as directors, except
liability for:
- breach of their duty of loyalty to the corporation or its stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; and
- any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal or state securities laws and does not affect the availability of
equitable remedies such as injunctive relief or rescission. Our bylaws provide
that we will indemnify our directors, officers, employees and other agents to
the fullest extent permitted by the Delaware General Corporation Law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit
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<PAGE> 50
us to secure insurance on behalf of any officer, director, employee or other
agent for any liability arising out of his or her actions in such capacity,
regardless of whether the bylaws would permit such indemnification.
We have obtained directors and officers' insurance providing
indemnification for all of our directors, officers and employees for certain
liabilities. Prior to the closing of this offering we will enter into agreements
to indemnify our directors and executive officers in addition to the
indemnification provided for in our bylaws. These agreements, among other
things, will indemnify our directors and executive officers for expenses,
including attorneys' fees, judgments, fines and settlement amounts incurred by
any such person in any action or proceeding, out of such person's services as a
director, officer, employee, agent or fiduciary of ours, any subsidiary of ours
or any other company or enterprise to which the person provides services at our
request. We believe that these provisions and agreements are necessary to
attract and retain qualified persons as directors and executive officers. At
present, there is no litigation or proceeding involving any of our directors or
officers in which indemnification is required or permitted, and we are not aware
of any threatened litigation or proceeding that may result in a claim for
indemnification.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid to or earned during
the year ended December 31, 1999, by our Chief Executive Officer and our other
most highly compensated executive officers whose total salary and bonus exceeded
$100,000 for services rendered to us in all capacities during 1999. The
executive officers listed in the table below are referred to as named executive
officers.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS(#) COMPENSATION
--------------------------- --------- -------- ------------ ------------
<S> <C> <C> <C> <C>
Ronald J. Berenson, M.D........................ $196,352 $15,000 150,000 --
President and Chief Executive Officer
Jeffrey Ledbetter, Ph.D.(1).................... 44,978 -- -- $121,265(2)
Former Chief Scientific Officer
Mark Murray, Ph.D.(3).......................... 157,940 -- -- --
Former Vice President, Business Development
Dawn M. McCracken.............................. 98,028 10,000 40,000 --
Vice President, Regulatory and Clinical
Affairs
Alan R. Hardwick, Ph.D.(4)..................... 102,000 -- -- --
Former Director, Cell Processing Systems
</TABLE>
-------------------------
(1) Dr. Ledbetter resigned in March 1999.
(2) Constitutes severance payment.
(3) Dr. Murray resigned in December 1999.
(4) Dr. Hardwick resigned in December 2000.
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<PAGE> 51
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1999
The following table sets forth information concerning the individual grants
of stock options to each of the named executive officers during the fiscal year
ended December 31, 1999. The exercise price per share was valued by our board of
directors on the date of grant and were issued at estimated fair market value on
the date of grant based upon the assumed offering price and the purchase price
paid by investors for shares of our preferred stock, taking into account the
liquidation preferences and other rights, privileges and preferences associated
with such preferred stock.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED
NUMBER OF PERCENT OF ANNUAL RATES OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME GRANTED(#) FISCAL YEAR(1) PER SHARE DATE 5% 10%
---- ---------- -------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Ronald J. Berenson, M.D...... 150,000(3) 24.1% $0.167 11/16/09 $15,754 $39,923
Jeffrey Ledbetter, Ph.D...... -- -- -- -- -- --
Mark Murray, Ph.D............ -- -- -- -- -- --
Dawn M. McCracken............ 40,000(4) 6.4% 0.167 10/18/09 4,201 10,646
Alan R. Hardwick, Ph.D....... -- -- -- -- -- --
</TABLE>
-------------------------
(1) In the last fiscal year, we granted options to employees to purchase an
aggregate of 639,748 shares.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term based on the
ten-year term of the option at the time of grant. These gains are based on
assumed rates of stock price appreciation of 5% and 10% compounded annually
from the date the respective options were granted to their expiration date.
These assumptions are not intended to forecast future appreciation of our
stock price. The potential realizable value computation does not take into
account federal or state income tax consequences of option exercises or
sales of appreciated stock. The price to the public in this offering is
higher than the estimated fair market value on the date of grant. Therefore,
the potential realizable value of the option grants would be significantly
higher than the calculations shown above.
(3) This option was granted under our 1996 Stock Option Plan and vests over a
five-year period at a rate of 20% of the total number of shares subject to
the option one year after the date of grant and 1/60th of the total number
of shares subject to the option vesting each month thereafter.
(4) This option was granted under our 1996 Stock Option Plan and vests over a
four-year period at a rate of 25% of the total number of shares subject to
the option one year after the date of grant and 1/48th of the total number
of shares subject to the option vesting each month thereafter.
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<PAGE> 52
AGGREGATE OPTION EXERCISES IN 1999
AND 1999 YEAR-END OPTION VALUES
The following table provides summary information concerning stock options
granted under our 1996 Stock Option Plan during the year ended December 31,
1999, and exercised options subject to repurchase held as of December 31, 1999,
by each of the named executive officers. The exercise price for the options
granted in 1999 is $0.167 per share. Generally, these stock options are
immediately exercisable. We have the right to repurchase all unvested shares at
the original exercise price within three months of the date on which the
optionee's service terminates. Each of the options has a ten-year term, subject
to earlier termination if the optionee's service terminates. Our named executive
officers did not exercise any options during the fiscal year ended December 31,
1999.
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES VALUE OF SHARES
ACQUIRED ON VALUE SUBJECT TO REPURCHASE SUBJECT TO REPURCHASE
NAME EXERCISE REALIZED DECEMBER 31, 1999(#) DECEMBER 31, 1999($)(1)
---- ----------- -------- --------------------- -----------------------
<S> <C> <C> <C> <C>
Ronald J. Berenson, M.D............. -- -- -- --
Jeffrey Ledbetter, Ph.D............. -- -- -- --
Mark Murray, Ph.D................... -- -- -- --
Dawn M. McCracken................... -- -- -- --
Alan R. Hardwick, Ph.D.............. -- -- -- --
</TABLE>
-------------------------
(1) There was no public trading market for our common stock as of December 31,
1999. Accordingly, the value of unexercised in-the-money options as of that
date was calculated on the basis of an assumed initial public offering price
of $ per share, less the aggregate exercise price of the options. The
securities subject to repurchase are all unvested options purchased under
early exercise stock purchase agreements.
EMPLOYEE BENEFIT PLANS
2000 Stock Option Plan
Our 2000 stock option plan provides for the grant of incentive stock
options to employees (including employee directors) and nonstatutory stock
options to employees, directors and consultants. The purposes of the 2000 plan
are to attract and retain the best available personnel, to provide additional
incentives to our employees and consultants and to promote the success of our
business. The 2000 plan was adopted by our board of directors in December 2000
and will be submitted for approval by our stockholders prior to the completion
of this offering. A total of 2,100,000 shares of common stock has been reserved
for issuance under the 2000 plan. The number of shares reserved for issuance
under the 2000 plan will be subject to an automatic annual increase on the first
day of each of our fiscal years beginning in 2002 and ending in 2008 equal to
the lesser of 500,000 shares, 3% of our outstanding common stock on the last day
of the immediately preceding fiscal year, or such lesser number of shares as the
board of directors determines.
The 2000 plan may be administered by the board of directors or a committee
of the board, each known as the administrator. The administrator determines the
terms of options and stock purchase rights granted under the 2000 plan,
including the number of shares subject to the award, the exercise or purchase
price, and the vesting and/or exercisability of the award and any other
conditions to which the award is subject. In no event, however, may an employee
receive awards for more than 1,000,000 shares under the 2000 plan in any fiscal
year. Incentive stock options granted under the 2000 plan must have an exercise
price of at least 100% of the fair market value of the common stock on the date
of grant, and not less than 110% of the fair market value in the case of
incentive stock options granted to an employee who holds more than 10% of the
total voting power of all classes of our stock or any parent or subsidiary's
stock. After the date of this offering, the exercise price of nonstatutory stock
options and the purchase price of stock purchase rights will be the price
determined by the administrator, although nonstatutory stock options and stock
purchase rights granted to our chief executive officer and our four other most
highly compensated officers will generally equal at least 10% of the grant date
fair market value if we intend that
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<PAGE> 53
the awards to those individuals will qualify as performance-based compensation
under applicable tax law. Payment of the exercise or purchase price may be made
in cash or such other consideration determined by the administrator.
With respect to options granted under the 2000 plan, the administrator
determines the term of options, which may not exceed 10 years, or 5 years in the
case of an incentive stock option granted to a holder of more than 10% of the
total voting power of all classes of our stock or a parent or subsidiary's
stock. Generally, an option granted under the 2000 plan is nontransferable other
than by will or the laws of descent or distribution and may be exercised during
the lifetime of the optionee only by such optionee. However, the administrator
may, in its discretion, provide for the limited transferability of nonstatutory
stock options granted under the 2000 plan. Stock issued pursuant to stock
purchase rights granted under the 2000 plan is generally subject to a repurchase
right at the purchaser's original purchase price exercisable by us upon the
termination of the holder's employment or consulting relationship with us for
any reason, including death or disability. This repurchase right will lapse at
such rate as the administrator may determine.
If we sell all or substantially all of our assets or if we are acquired by
another corporation each outstanding option and stock purchase right may be
assumed or an equivalent award substituted by the successor corporation, with
appropriate adjustments made to both the price and number of shares subject to
the option or purchase right. If the successor does assume outstanding options
and purchase rights, 25% of the shares subject to an option or initially subject
to repurchase will vest on the closing of the transaction, and if the holder is
involuntarily terminated within one year after the closing another 25% of the
shares subject to such option or initially subject to repurchase will vest on
termination. If the successor corporation does not assume options and purchase
rights or substitute equivalent options or purchase rights, then vesting of all
shares subject to options will accelerate fully and all repurchase rights will
lapse immediately prior to the closing of the transaction, and options and
purchase rights will terminate as of the closing of the transaction.
The administrator has authority to amend or terminate the 2000 plan, but no
action may be taken that impairs the rights of any holder of an outstanding
option or stock purchase right without the holder's consent. In addition, we
must obtain stockholder approval of amendments to the plan as required by
applicable law. Unless terminated earlier by the board of directors, the 2000
plan will terminate in 2010.
1996 Stock Option Plan
Our 1996 stock option plan was originally adopted by our board of directors
in September 1996 and approved by our stockholders in August 1997. As of
November 30, 2000, an aggregate of 2,500,000 shares was reserved for issuance
under the 1996 stock option plan, 1,218,686 were issuable upon exercise of
outstanding options granted under the 1996 stock option plan at a weighted
average exercise price of $0.22, 743,335 shares of common stock have been issued
upon exercise of options at purchase prices ranging between $0.10 and $0.40, and
537,979 shares of common stock remain available for future grants under the 1996
stock option plan.
The terms of the options under the 1996 stock option plan are generally the
same as those that may be issued under the 2000 stock plan, except for the
following features. Only options could be granted under the 1996 stock option
plan and nonstatutory stock options granted under the 1996 stock option plan are
nontransferable in all cases. The 1996 stock option plan does not impose a
limitation on the number of shares subject to options that may be issued to any
individual employee.
If we sell all or substantially all of our assets or if we are acquired by
another corporation, each outstanding option may be assumed or an equivalent
award substituted by the successor corporation, with appropriate adjustments
made to both the price and number of shares subject to the option. If the
successor does assume outstanding options, 25% of the shares subject to an
option that are unvested immediately prior to the consummation of the
transaction will vest on the closing of the transaction. If the successor
corporation does not assume options or substitute equivalent options, then
vesting of all shares
50
<PAGE> 54
subject to options will accelerate fully immediately prior to the closing of the
transaction, and options will terminate as of the closing of the transaction.
2000 Employee Stock Purchase Plan
Our 2000 employee stock purchase plan was adopted by the board of directors
in December 2000 and will be submitted for approval by our stockholders prior to
completion of this offering. A total of 600,000 shares of common stock has been
reserved for issuance under the 2000 purchase plan, none of which have been
issued as of the date of this offering. The number of shares reserved for
issuance under the 2000 purchase plan will be subject to an automatic annual
increase on the first day of each of our fiscal years beginning in 2002 and
ending in 2008 and equal to the lesser of:
- 300,000 shares;
- 1% of our outstanding common stock on the last day of the immediately
preceding fiscal year;
- or such lesser number of shares as the board of directors determines.
The 2000 purchase plan becomes effective upon the date of this offering.
Unless terminated earlier by the board of directors, the 2000 purchase plan
shall terminate in 2010.
The 2000 purchase plan, which is intended to qualify under Section 423 of
the Internal Revenue Code, will be implemented by a series of offering periods
of approximately 6 months duration, with new offering periods, other than the
first offering period, commencing generally on February 1 and August 1 of each
year. Each offering period will consist of a single purchase period of
approximately six months duration. At the end of each purchase period an
automatic purchase will be made for participants. The initial offering period
and purchase period is expected to commence on the date of this offering and end
on July 31, 2001. Each eligible employee will be granted an option on the
effective date of this offering to purchase shares in the initial offering
period in an amount equal to the maximum number of shares that an individual can
purchase under the terms of the 2000 purchase plan.
The 2000 purchase plan will be administered by the board of directors or by
a committee appointed by the board. Our employees, including officers and
employee directors, or employees of any majority-owned subsidiary designated by
the board, are eligible to participate in the 2000 purchase plan if they are
employed by us or any such subsidiary for at least 20 hours per week and more
than five months per year. The 2000 purchase plan permits eligible employees to
purchase common stock through payroll deductions, which in any event may not
exceed 15% of an employee's eligible cash compensation. The purchase price is
equal to the lower of 85% of the fair market value of the common stock at the
beginning of each offering period or at the end of each purchase period.
Employees may end their participation in the 2000 purchase plan at any time
during an offering period, and participation ends automatically on termination
of employment.
An employee cannot be granted an option under the 2000 purchase plan if
immediately after the grant such employee would own stock and/or hold
outstanding options to purchase stock equaling 5% or more of the total voting
power or value of all classes of our stock or stock of our subsidiaries, or if
such option would permit an employee's rights to purchase stock under the 2000
purchase plan at a rate that exceeds $25,000 of fair market value of such stock
for each calendar year in which the option is outstanding. In addition, no
employee may purchase more than 2,500 shares of common stock under the 2000
purchase plan in any one purchase period.
If we merge or consolidate with or into another corporation or sell all or
substantially all of our assets, each right to purchase stock under the 2000
purchase plan may be assumed or an equivalent right substituted by the successor
corporation. However, in the event that the successor corporation refuses to
assume each purchase right or to substitute an equivalent right, the board of
directors will shorten any ongoing offering period so that employees' rights to
purchase stock under the 2000 purchase plan are exercised prior to the
transaction. Outstanding options will be adjusted if we effect a stock split,
stock dividend or similar change in our capital structure. The board of
directors may extend future offering
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<PAGE> 55
periods to up to 27 months duration, consisting of consecutive purchase periods
of approximately six months duration, and may increase the maximum contribution
rate up to 20% of an employee's eligible cash compensation. The board of
directors has the power to amend or terminate the 2000 purchase plan as long as
the action does not adversely affect any outstanding rights to purchase stock
under the plan. However, the board of directors may amend or terminate the 2000
purchase plan or an offering period even if it would adversely affect
outstanding options in order to avoid our incurring adverse accounting charges
or if the board of directors determines that termination of the plan or offering
period is in our best interests and the best interests of our stockholders. We
must obtain stockholder approval for any amendment to the purchase plan to the
extent required by law.
2000 Directors' Stock Option Plan
The 2000 directors' stock option plan was adopted by the board of directors
in December 2000 and will be submitted for approval by our stockholders prior to
completion of this offering. It will become effective upon the date of this
offering. A total of 400,000 shares of common stock have been reserved for
issuance under the 2000 directors' plan, all of which remain available for
future grants. The directors' plan is designed to work automatically without
administration; however, to the extent administration is necessary, it will be
performed by the board of directors. To the extend they arise, it is expected
that conflicts of interest will be addressed by abstention of any interested
director from both deliberations and voting regarding matters in which such
director has a personal interest. Unless terminated earlier by the board of
directors, the directors' plan will terminate in 2010.
The directors' plan provides that each person who becomes a non-employee
director after the completion of this offering will be granted a nonstatutory
stock option to purchase 25,000 shares of common stock on the date on which such
individual first becomes a member of our board of directors. On first day of
each fiscal year, each of our nonemployee directors will be granted an option to
purchase 5,000 shares of common stock if, on such date, the director has served
on our board of directors for at least 6 months. The directors' plan provides
that each option granted to a new director shall vest at the rate of 1/3rd of
the total number of shares subject to such option twelve months after the date
of grant with the remaining shares vesting thereafter in equal monthly
installments over the next 2 years so that the option will be fully vested after
3 years, and each annual option granted to a director shall vest in full at the
end of one year.
All options granted under the directors' plan will have a term of 10 years
and an exercise price equal to the fair market value on the date of grant. If a
non-employee director ceases to serve as a director for any reason other than
death or disability, he or she may, but only within 90 days after the date he or
she ceases to be a director, exercise options granted under the directors' plan.
If he or she does not exercise the option within such 90-day period, the option
shall terminate. If a directors' service terminates as a result of his or her
disability or death, or if a director dies within 3 months following
termination, the director or his or her estate will have twelve months after the
date of termination or death, as applicable, to exercise options that were
vested as of the date of termination. Options granted under the directors' plan
are generally non-transferable by the option holder other than by will or the
laws of descent or distribution, pursuant to a qualified domestic relations
order or to family members or family trusts or foundations, and each option is
exercisable, during the lifetime of the option holder, only by that option
holder or a permitted transferee.
If we are acquired by another corporation, each option outstanding under
the directors' plan will be assumed or equivalent options substituted by our
acquirer, unless our acquirer does not agree to such assumption or substitution,
in which case the options will terminate upon consummation of the transaction to
the extent not previously exercised. In connection with an acquisition, each
director holding options under the directors' plan will have the right to
exercise his or her options immediately before the consummation of the merger as
to all shares underlying the options. Outstanding options will be adjusted if we
effect a stock split, stock dividend, or other similar change in our capital
structure. Our board of directors may amend or terminate the directors' plan as
long as such action does not adversely affect any
52
<PAGE> 56
outstanding option and we obtain stockholder approval for any amendment to the
extend required by applicable law.
401(k)Plan
We have established a tax-qualified employee savings and retirement plan,
or 401(k) plan, which covers all of our employees. Under the 401(k) plan,
eligible employees may defer up to 15% of their pre-tax earnings, subject to the
Internal Revenue Service's annual contribution limits, which deferral
contributions are fully vested at all times. The 401(k) plan permits
discretionary matching contributions by such percentage amount as may be
determined annually by the board of directors, and additional discretionary
contributions by us on behalf of all participants in the 401(k) plan, which
additional company contributions vest 25% per year of service with full vesting
after 4 years of service. The 401(k) plan is intended to qualify under Section
401 of the Internal Revenue Code so that contributions by us to the 401(k) plan,
if any, will be deductible by us when made. The trustee under the 401(k) plan
invests an employee's account balance under the plan in accordance with an
employee's written direction. To the extent an employee directs the investment
of his or her account balance under the plan, ERISA relieves the trustee from
liability for any loss resulting from employee direction of the investment.
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<PAGE> 57
CERTAIN TRANSACTIONS
We have issued since our inception through November 30, 2000, in private
placement transactions shares of common and preferred stock as follows: an
aggregate of 6,334,212 shares of Series A preferred stock at $0.95 per share in
January and August 1996, an aggregate of 3,757,205 shares of Series B preferred
stock at $1.10 per share in August 1997, an aggregate of 7,185,630 shares of
Series C preferred stock at $1.67 per share in July 1998, an aggregate of
10,109,825 shares of Series D preferred stock at $2.78 per share in May and
August 2000. In addition, an aggregate of 2,999,910 shares of common stock and
526,300 shares of Series A preferred stock were issued in August 1997 in
exchange for all of the outstanding capital stock of CellGenEx, Inc. Also,
145,875 shares of Series B preferred stock and 20,000 shares of common stock
were issued in July 1998 and June 1999, respectively, in connection with license
agreements. In addition, as of November 30, 2000, an aggregate of 660,754
warrants to purchase shares of preferred stock issued between 1996 and 2000
remained outstanding and an aggregate of 1,132,287 warrants to purchase shares
of common stock issued in August 2000 remained outstanding.
Each share of preferred stock is convertible, without payment of additional
consideration, into one share of common stock. All of the currently outstanding
shares of preferred stock will be converted into 28,059,047 shares of common
stock upon closing of this offering.
The following table summarizes the shares of preferred stock purchased by
our greater than 5% stockholders, our directors and our executive officers in
private placement transactions:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C SERIES D
COMMON PREFERRED PREFERRED PREFERRED PREFERRED
INVESTOR(1) STOCK STOCK STOCK STOCK STOCK
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Directors and Executive Officers
Ronald J. Berenson, M.D.(2)......... 2,373,256 57,895 -- -- --
Robert M. Williams, Ph.D. .......... 200,000 -- -- -- --
Entities Affiliated with Directors
Alta Partners(3).................... -- 1,894,737 805,281 971,331 584,547
ARCH Venture Corporation(4)......... -- 789,469 2,045,454 1,119,265 1,321,942
Sprout Group(5)..................... -- 2,631,579 545,454 1,142,937 323,741
MPM Asset Management LLC(6)......... -- -- -- -- 4,316,547
5% Stockholders
Ronald J. Berenson, M.D.(2)......... 2,373,256 57,895 -- -- --
Alta Partners(3).................... -- 1,894,737 805,281 971,331 584,547
ARCH Venture Corporation(4)......... -- 789,469 2,045,454 1,119,265 1,321,942
Sprout Group(5)..................... -- 2,631,579 545,454 1,142,937 323,741
MPM Asset Management LLC(6)......... -- -- -- -- 4,316,547
Tredegar Investments................ -- -- -- 1,976,051 286,022
</TABLE>
-------------------------
(1) See "Principal Stockholders" for more detail on shares held by these
purchasers.
(2) Includes shares held in trust.
(3) Jean Deleage, Ph.D., a director, is managing director of Alta Partners.
(4) Robert T. Nelsen, a director, is director of ARCH Venture Corporation.
Excludes shares held by ARCH Development Corporation, which was previously
affiliated with ARCH Venture Corporation.
(5) Robert E. Curry, Ph.D., a director, is vice president of Sprout Group.
(6) Michael Steinmetz, Ph.D., a director, is a general partner of MPM Asset
Management LLC.
In connection with our acquisition of all the outstanding capital stock of
CellGenEx, we issued warrants to purchase 368,410 shares of Series A preferred
stock at $0.95 per share in August 1997. In addition, in connection with our
Series D preferred stock private placement, we issued warrants to purchase
1,132,287 shares of common stock at $0.30 per share in August 2000. The
following table
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<PAGE> 58
summarizes the number of shares of common stock and preferred stock issuable
pursuant to warrants granted to greater than 5% stockholders, directors,
executive officers and entities affiliated with our executive officers and
directors in private placement transactions:
<TABLE>
<CAPTION>
COMMON SERIES A
WARRANT WARRANT
INVESTOR(1) SHARES SHARES
----------- ------- --------
<S> <C> <C>
Alta Partners............................................ 65,468 --
ARCH Venture Corporation................................. 148,056 276,307
Sprout Group............................................. 36,257 --
MPM Asset Management LLC................................. 483,453 --
Tredegar Investments..................................... 32,034 --
</TABLE>
-------------------------
(1) See "Principal Stockholders" for more detail on shares held by these
purchasers.
In connection with the resignation in March 1999 of Dr. Jeffrey Ledbetter,
our former Chief Scientific Officer, we entered into an agreement with Dr.
Ledbetter providing for a severance payment of $121,265. See
"Management -- Executive Compensation."
In July 1999, we entered into a License Agreement with Genecraft LLC of
which Dr. Ledbetter is a principal founder. Under this agreement, we granted an
exclusive sublicense to Genecraft for the rights to several pending patent
applications in the field of in vivo activation of T cells.
We have entered into a consulting agreement with Dr. James Berenson who is
the brother of Dr. Ronald J. Berenson, our President and Chief Executive
Officer. In connection with this consulting agreement, Dr. James Berenson will
serve as a consultant, will be available for consultation up to five days per
year and will be paid up to a maximum of $7,500 per year.
We have entered into indemnification agreements with our officers and
directors containing provisions which may require us, among other things, to
indemnify our officers and directors against liabilities that may arise by
reason of their status or service as officers or directors (other than
liabilities arising from willful misconduct of a culpable nature) and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified. See "Management -- Limitation of Liability and
Indemnification Matters."
We maintain key man life insurance, under which we are the beneficiary, on
Dr. Ronald J. Berenson, our President and Chief Executive Officer, in the amount
of $2,000,000 of which we are the beneficiary.
In June 1999, we entered into an exclusive license agreement with ARCH
Development Corporation to obtain rights to a pending patent application in the
field of therapies based on ex vivo activation of T cells. In consideration for
the license, we issued shares of our common stock to ARCH Development
Corporation. Dr. Carl June, one of our founders, was previously affiliated with
ARCH Development Corporation and is listed as an inventor on the patent
application licensed from ARCH Development Corporation. ARCH Development
Corporation was previously affiliated with ARCH Venture Corporation, one of our
principal stockholders.
In connection with our acquisition of all of the outstanding capital stock
of CellGenEx, Inc., we reserved an aggregate of 1,582,340 shares of our common
stock in a Milestone Pool, for issuance to our scientific founders, Drs. Jeffrey
Bluestone, Carl June, Jeffrey Ledbetter and Craig Thompson, upon the achievement
of scientific milestones determined by the Milestone Committee. Several of these
milestones have expired and to date, 1,056,040 shares remain available for
issuance.
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<PAGE> 59
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of November 30, 2000, and as adjusted to
reflect the sale of common stock offered hereby for:
- each person known by us to own beneficially more than 5% of our common
stock;
- each of our directors;
- our chief executive officer and our other most highly compensated
executive officer; and
- our executive officers and directors as a group.
Except as otherwise noted, the address of each person listed in the table
is c/o Xcyte Therapies, Inc., 1124 Columbia Street, Suite 130, Seattle, WA
98104. The table includes all shares of common stock issuable within 60 days of
November 30, 2000, upon the exercise of options and warrants beneficially owned
by the indicated stockholders on that date based on options and warrants
outstanding as of November 30, 2000. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission and includes
voting and investment power with respect to shares. To our knowledge, except
under applicable community property laws or as otherwise indicated, the persons
named in the table have sole voting and sole investment control with respect to
all shares beneficially owned. The applicable percentage of ownership for each
stockholder is based on 34,682,220 shares of common stock outstanding as of
November 30, 2000, in each case together with applicable options and warrants
for that stockholder. Shares of common stock issuable upon exercise of options
and warrants beneficially owned are deemed outstanding for the purpose of
computing the percentage of ownership of the person holding those options and
warrants, but are not deemed outstanding for computing the percentage ownership
of any other person.
<TABLE>
<CAPTION>
PERCENT BENEFICIALLY
OWNED(1)
SHARES --------------------
BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED OFFERING OFFERING
---------------- ------------ -------- --------
<S> <C> <C> <C>
Robert T. Nelsen(2)......................................... 5,700,493 16.2%
ARCH Venture Corporation 1000 Second Avenue, Suite 3710
Seattle, WA 98104-1053
Michael Steinmetz(3)........................................ 4,800,000 13.7%
MPM Asset Management LLC One Cambridge Center Cambridge,
MA 02142
Robert E. Curry(4).......................................... 4,679,968 13.5%
Sprout Group 3000 Sand Hill Road Building 1, Suite 170
Menlo Park, CA 94025
Jean Deleage(5)............................................. 4,346,676 12.4%
Alta Partners One Embarcadero Center, Suite 4050 San
Francisco, CA 94111
Ronald J. Berenson(6)....................................... 2,581,151 7.4%
Tredegar Investments(7)..................................... 2,294,107 6.6%
6501 Columbia Center 701 Fifth Avenue Seattle, WA 98104
Jeffrey A. Ledbetter(8)..................................... 631,560 1.8%
Robert M. Williams(9)....................................... 225,312 *
Dawn M. McCracken(10)....................................... 80,000 *
Alan R. Hardwick(11)........................................ 30,000 *
Peter Langecker(12)......................................... 7,000 *
Mark Murray................................................. -- *
All directors and officers as a group (14 persons)(13)...... 25,737,933 70.8%
</TABLE>
-------------------------
* less than one percent of outstanding shares
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<PAGE> 60
(1) Assumes total conversion of preferred stock into common stock and includes
all shares of common stock issuable (within 60 days of September 30, 2000)
upon the exercise of outstanding options (including unvested options) held
by the above listed stockholders and upon the exercise of outstanding
warrants held by the above listed stockholders. Except as otherwise noted,
the persons named in the table have sole voting and investment power with
respect to all shares of common stock owned by them, subject to community
property laws where applicable.
(2) Includes 631,579 shares of Series A preferred stock and 363,636 shares of
Series B preferred stock held by ARCH Venture Fund II, L.P. Includes
157,890 shares of Series A preferred stock, 1,681,818 shares of Series B
preferred stock, 1,119,265 shares of Series C preferred stock, 1,321,942
shares of Series D preferred stock held by ARCH Venture Fund III, L.P. and
includes 276,307 shares of Series A preferred stock and 148,056 shares of
common stock issuable upon the exercise of immediately exercisable warrants
held by ARCH Venture Fund III, L.P. Excludes shares held by ARCH
Development Corporation, which was previously affiliated with ARCH Venture
Corporation. Robert T. Nelsen, one of our directors, is a general partner
of both of these partnerships, shares voting and dispositive power with
respect to the shares held by each such entity and disclaims beneficial
ownership of such shares in which he has no pecuniary interest.
(3) Includes 66,906 shares of Series D preferred stock held by MPM Asset
Management Investors and 7,494 shares of common stock issuable upon the
exercise of immediately exercisable warrants held by MPM Asset Management
Investors. Includes 1,023,022 shares of Series D preferred stock held by
MPM Bioventures GMBH & Co. Parallel-Beteiligungs KG and 114,578 shares of
common stock issuable upon the exercise of immediately exercisable warrants
held by MPM Bioventures GMBH & Co. Parallel-Beteiligungs KG. Includes
320,719 shares of Series D preferred stock held by MPM Bioventures II, L.P.
and 35,921 shares of common stock issuable upon the exercise of immediately
exercisable warrants held by MPM Bioventures II, L.P. Includes 2,905,900
shares of Series D preferred stock held by MPM Bioventures II-Q, L.P. and
325,460 shares of common stock issuable upon the exercise of immediately
exercisable warrants held by MPM Bioventures II-Q, L.P. Michael Steinmetz,
Ph.D., one of our directors, is a general partner of each of these
partnerships, shares voting and dispositive power with respect to the
shares held by each such entity and disclaims beneficial ownership of such
shares in which he has no pecuniary interest.
(4) Includes 52,632 shares of Series A preferred stock, 10,909 shares of Series
B preferred stock, 22,859 shares of Series C preferred stock, 6,475 shares
of shares of Series D preferred stock held by DLJ Capital Corporation and
includes 725 shares of common stock issuable upon the exercise of
immediately exercisable warrants held by DLJ Capital Corporation. Includes
263,158 shares of Series A preferred stock, 54,545 shares of Series B
preferred stock, 114,294 shares of Series C preferred stock, 32,374 shares
of shares of Series D preferred stock held by DLJ First ESC, L.P. and
includes 3,625 shares of common stock issuable upon the exercise of
immediately exercisable warrants held by DLJ First ESC, L.P. Includes
2,289,197 shares of Series A preferred stock, 474,488 shares of Series B
preferred stock, 994,235 shares of Series C preferred stock, 281,622 shares
of shares of Series D preferred stock held by Sprout Capital VII, L.P. and
includes 31,541 shares of common stock issuable upon the exercise of
immediately exercisable warrants held by Sprout Capital VII, L.P. Includes
26,592 shares of Series A preferred stock, 5,512 shares of Series B
preferred stock, 11,549 shares of Series C preferred stock, 3,270 shares of
shares of Series D preferred stock held by the Sprout CEO Fund, L.P. and
includes 366 shares of common stock issuable upon the exercise of
immediately exercisable warrants held by the Sprout CEO Fund, L.P. Robert
E. Curry, Ph.D., one of our directors, is a general partner of each of
these partnerships, shares voting and dispositive power with respect to the
shares held by each such entity and disclaims beneficial ownership of such
shares in which he has no pecuniary interest.
(5) Includes 1,840,086 shares of Series A preferred stock, 787,294 shares of
Series B preferred stock, 949,635 shares of Series C preferred stock,
571,491 shares of shares of Series D preferred stock held by Alta
California Partners, L.P. and includes 64,006 shares of common stock
issuable upon the exercise of immediately exercisable warrants held by Alta
California Partners, L.P. Includes 54,651
57
<PAGE> 61
shares of Series A preferred stock, 17,987 shares of Series B preferred
stock, 21,696 shares of Series C preferred stock, 13,056 shares of shares
of Series D preferred stock held by Alta Embarcadero Partners, L.L.C. and
includes 1,462 shares of common stock issuable upon the exercise of
immediately exercisable warrants held by Alta Embarcadero Partners, L.L.C.
Includes 24,375 shares issuable upon the exercise of immediately
exercisable options held by Dr. Deleage within 60 days of November 30,
2000, none of which are subject to a repurchase right. Jean Deleage, Ph.D.,
one of our directors, is a general partner of each of these partnerships,
shares voting and dispositive power with respect to the shares held by each
such entity and disclaims beneficial ownership of such shares in which he
has no pecuniary interest.
(6) Includes 2,162,282 shares of common stock and 57,895 shares of Series A
preferred stock held by Dr. Berenson. Includes 150,000 shares issuable upon
the exercise of immediately exercisable options held by Dr. Berenson within
60 days of November 30, 2000, 580,941 of which are subject to a repurchase
right that lapses over the vesting of Dr. Berenson's option. Includes
210,974 shares of common stock held by the "Irrevocable Intervivos Trust
Agreement of Ronald J. Berenson and Cheryl L. Berenson."
(7) Includes 1,796,410 shares of Series C preferred stock and 286,022 shares of
Series D preferred stock held by TGI Fund II, L.C., 32,034 shares of common
stock issuable upon the exercise of immediately exercisable warrants held
by TGI Fund II, L.C. and 179,641 shares of Series C preferred stock held by
Vengott L.C.
(8) Includes 473,670 shares of common stock and 157,890 shares of Series A
preferred stock held by Dr. Ledbetter.
(9) Includes 200,000 shares of common stock held by Dr. Williams and 24,375
shares issuable upon the exercise of immediately exercisable options held
by Dr. Williams within 60 days of November 30, 2000, none of which are
subject to a repurchase right.
(10) Includes 51,667 shares of common stock and 28,333 shares issuable upon the
exercise of immediately exercisable options held by Ms. McCracken within 60
days of November 30, 2000, 47,917 of which are subject to a repurchase
right that lapses over the vesting of Ms. McCracken's option.
(11) Includes 30,000 shares issuable upon the exercise of immediately
exercisable options held by Dr. Hardwick within 60 days of November 30,
2000, 19,688 of which are subject to a repurchase right that lapses over
the vesting of Dr. Hardwick's option.
(12) Includes 7,000 shares issuable upon the exercise of immediately exercisable
options held by Dr. Langecker within 60 days of November 30, 2000, none of
which are subject to a repurchase right.
(13) Includes shares referred to in footnotes (1) - (12), 75,000 shares of
common stock and 305,000 shares issuable upon exercise of immediately
exercisable options held by other officers within 60 days of November 30,
2000, 243,088 of which are subject to a repurchase right that lapses over
time.
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<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
GENERAL
Our Amended and Restated Certificate of Incorporation, which will become
effective upon the closing of this offering, authorizes the issuance of up to
100,000,000 shares of common stock, par value $0.001 per share, and 5,000,000
shares of preferred stock, par value $0.001 per share, the rights and
preferences of which may be established from time to time by our board of
directors. As of November 30, 2000, 6,623,173 shares of common stock were issued
and outstanding and 28,059,047 shares of preferred stock convertible into
28,059,047 shares of common stock upon the completion of this offering were
issued and outstanding. As of November 30, 2000, we had 50 common stockholders
of record and 80 preferred stockholders of record.
Immediately after the closing of this offering, we will have
shares of common stock outstanding, assuming no exercise of options to acquire
1,218,686 additional shares of common stock or warrants to purchase 280,029
shares of preferred stock convertible into 280,029 shares of common stock that
are outstanding as of the date of this prospectus.
The description below gives effect to the filing of the certificate of
incorporation and the adoption of the amended and restated bylaws. The following
summary is qualified in its entirety by reference to our certificate and amended
and restated bylaws, copies of which are filed as exhibits to the registration
statement of which this prospectus is a part.
COMMON STOCK
Each holder of common stock is entitled to one vote for each share on all
matters to be voted upon by the stockholders and there are no cumulative voting
rights. Subject to preferences to which holders of preferred stock issued after
the sale of the common stock offered hereby may be entitled, holders of common
stock are entitled to receive ratably such dividends, if any, as may be declared
from time to time by the board of directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of us,
holders of common stock would be entitled to share in our assets remaining after
the payment of liabilities and the satisfaction of any liquidation preference
granted the holders of any outstanding shares of preferred stock. Holders of
common stock have no preemptive or conversion rights or other subscription
rights and there are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are, and the shares of
common stock offered by us in this offering, when issued and paid for will be,
fully paid and nonassessable. The rights, preferences and privileges of the
holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock which we may
designate in the future.
PREFERRED STOCK
Upon the closing of this offering, our board of directors will be
authorized, subject to any limitations prescribed by law, without stockholder
approval, to issue from time to time up to an aggregate of 5,000,000 shares of
preferred stock, in one or more series, each of such series to have such rights
and preferences, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences as shall be determined by the
board of directors. The rights for the holders of common stock will be subject
to, and may be adversely affected by, the rights of holders of any preferred
stock that may be issued in the future. Issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from attempting to
acquire, a majority of our outstanding voting stock. We have no present plans to
issue any shares of preferred stock.
WARRANTS
As of November 30, 2000, we have issued and outstanding warrants to
purchase an aggregate of 280,029 shares of our preferred stock convertible into
280,029 shares of common stock upon the closing of
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<PAGE> 63
this offering that expire between March 2003 and January 2007, warrants to
purchase an aggregate of 380,725 shares of our preferred stock that will expire
upon the closing of this offering and warrants to purchase an aggregate of
1,132,287 shares of our common stock that will expire upon the closing of this
offering.
REGISTRATION RIGHTS
The holders of preferred stock, certain holders of warrants to purchase
preferred stock and certain holders of our common stock are parties with us to
an investor rights agreement, dated May 25, 2000, as amended August 8, 2000 and
October 18, 2000, pursuant to which those holders have customary demand and
piggyback registration rights with respect to the shares of common stock held or
to be issued upon conversion or exercise of their preferred stock and warrants,
respectively. In addition, the holders of Preferred Stock are entitled to
receive quarterly and annual financial statements, subject to certain conditions
and limitations.
Demand Registration
According to the terms of the investor rights agreement, beginning six
months after the closing of this offering, the holders of 28,059,047 shares of
common stock shall have the right to require us to register their shares with
the Securities and Exchange Commission so that those shares may be resold to the
public. To demand such a registration, holders who hold together an aggregate of
at least 50% of the shares having registration rights must request that the
registration statement register shares for an aggregate offering price of at
least $10,000,000, net of underwriting discounts and commissions. We are not
required to effect more than two demand registrations. We may defer the filing
of a demand registration for a period of up to 90 days once in any 12-month
period.
Piggyback Registration
If we register in a public offering any of our securities, other than a
registration relating solely to employee benefit plans or a registration
relating solely to a Rule 145 transaction, the holders of demand registration
rights will have the right to include their shares in the registration
statement.
Form S-3 Registration
At any time after we become eligible to file a registration statement on
Form S-3, holders of shares of common stock having demand and piggyback
registration rights may require us to file a Form S-3 registration. We are
obligated to file only one Form S-3 registration statement in any 12-month
period. We are also not obligated to file a Form S-3 within 180 days after any
registered offering by us, except for a registration relating solely to employee
benefit plans or a registration relating solely to a Rule 145 transaction.
Further, the aggregate offering proceeds of the requested Form S-3 registration,
before deduction of underwriting discounts and expenses, must be at least
$500,000. We may defer one registration request in any 12-month period for 120
days.
The registration rights are subject to certain conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares of common stock to be included in the registration. We are generally
required to bear the expenses of all registrations, except underwriting
discounts and commissions. However, we will not pay for any expenses of any
demand registration if the request is subsequently withdrawn by the holders
requesting the demand registration. The investors rights agreement also contains
our commitment to indemnify the holders of registration rights for losses
attributable to statements or omissions by us incurred with registrations under
the agreement. The registration rights terminate five years from the closing of
this offering.
DELAWARE AND WASHINGTON ANTI-TAKEOVER LAW AND CHARTER AND BYLAW PROVISIONS
Provisions of our amended and restated certificate of incorporation and
bylaws, which will become effective upon the closing of this offering, may have
the effect of making it more difficult for a third party
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<PAGE> 64
to acquire, or of discouraging a third party from attempting to acquire, control
of us. Such provisions could limit the price that investors might be willing to
pay in the future for shares of our common stock. Our Bylaws eliminate the right
of stockholders to call special meetings of stockholders or to act by written
consent without a meeting and require advance notice for stockholder proposals
and director nominations, which may preclude stockholders from bringing matters
before an annual meeting of stockholders or from making nominations for
directors at an annual meeting of stockholders. The authorization of
undesignated preferred stock makes it possible for the board of directors to
issue preferred stock with voting or other rights or preferences that could
impede the success of any attempt to change control of us. These and other
provisions may have the effect of deferring hostile takeovers or delaying
changes in control or management of us. In addition, we are subject to Section
203 of the Delaware General Corporation which, subject to certain exceptions,
prohibits a Delaware corporation from engaging in any business combination with
any interested stockholder, unless:
- prior to such date, our board of directors approved either the business
combination or the transaction which resulted in the stockholder becoming
an interested stockholder;
- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding (a) shares owned by persons who are directors and also
officers, and (b) shares owned by employee stock plans in which employee
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
- on or subsequent to such date, the business combination is approved by
our board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.
The laws of the State of Washington, where our principal executive offices
are located, impose restrictions on certain transactions between certain foreign
corporations and significant stockholders. Chapter 23B.19 of the Washington
Business Corporation Act, or the WBCA, prohibits a target corporation, with
certain exceptions, from engaging in certain significant business transactions
with a person or group of persons who beneficially own 10% or more of the voting
securities of the target corporation, an acquiring person, for a period of five
years after such acquisition, unless the transaction or acquisition of such
shares is approved by a majority of the members of the target corporation's
board of directors prior to the time of acquisition. Such prohibited
transactions include, among other things, a merger or consolidation with,
disposition of assets to, or issuance or redemption of stock to or from, the
acquiring person, termination of 5% or more of the employees of the target
corporation as a result of the acquiring person's acquisition of 10% or more of
the shares or allowing the acquiring person to receive disproportionate benefit
as a stockholder. After the five-year period, a significant business transaction
may take place as long as it complies with certain fair price provisions of the
statute. A target corporation includes a foreign corporation if:
- the corporation has a class of voting stock registered pursuant to
Section 12 or 15 of the Exchange Act,
- the corporation's principal executive office is located in Washington,
and
- any of (a) more than 10% of the corporation's stockholders of record are
Washington residents, (b) more than 10% of its shares are owned of record
by Washington residents, (c) 1,000 or more of its stockholders of record
are Washington residents, (d) a majority of the corporation's employees
are Washington residents or more than 1,000 Washington residents are
employees of the corporation, or (e) a majority of the corporation's
tangible assets are located in Washington or the corporation has more
than $50.0 million of tangible assets located in Washington.
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<PAGE> 65
A corporation may not opt out of this statute and, therefore, we anticipate
this statute will apply to us. Depending upon whether we meet the definition of
a target corporation, Chapter 23B.19 of the WBCA may have the effect of
delaying, deferring or preventing a change in control of us.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is Computershare
Investor Services, 515 S. Figueroa Street, Suite 1020, Los Angeles, CA 90071,
(213) 362-4910.
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<PAGE> 66
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for the common stock will
develop or be sustained after this offering. Future sales of substantial amounts
of common stock, including shares issued upon exercise of outstanding options
and warrants, in the public market following this offering could adversely
affect market prices prevailing from time to time and could impair our ability
to raise capital through the sale of our equity securities. As described below,
no shares currently outstanding will be available for sale immediately after
this offering.
SALES OF RESTRICTED SECURITIES
Upon completion of the offering, we will have outstanding an aggregate of
shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or outstanding
warrants after November 30, 2000. Of these outstanding shares, the
shares sold in the offering will be freely tradable without
restriction or further registration under the Securities Act of 1933, unless
purchased by our affiliates as that term is defined in Rule 144 under the
Securities Act of 1933. The remaining 34,682,220 shares of common stock
outstanding upon completion of the offering and held by existing stockholders
will be restricted securities as that term is defined in Rule 144 under the
Securities Act of 1933. Restricted shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under Rules
144, 144(k) or 701 promulgated under the Securities Act of 1933, which rules are
summarized below, or another exemption. Sales of the restricted shares in the
public market, or the availability of such shares for sale, could adversely
affect the market price of the common stock. All officers, directors and certain
other holders of common stock have entered into contractual lock-up agreements
providing that they will not offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of shares of common stock owned by them or that
could be purchased by them through the exercise of options or warrants for a
period of 180 days after the date of this prospectus without the prior written
consent of SG Cowen Securities Corporation. As a result of these contractual
restrictions, notwithstanding possible earlier eligibility for sale under the
provisions of Rules 144, 144(k) and 701, additional shares will be eligible for
sale beginning 181 days after the effective date of the offering, subject in
some cases to volume limitations.
ELIGIBILITY OF RESTRICTED SHARES FOR SALE IN THE PUBLIC MARKET
<TABLE>
<S> <C>
At the effective date....................................... 0 shares
90 days after effective date................................ 0 shares
181 days after effective date............................... 24,572,195 shares
More than 181 days after effective date..................... 10,110,025 shares
</TABLE>
Rule 144
In general, under Rule 144 as currently in effect, beginning 91 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who has beneficially owned restricted shares for at least one year, including
persons who may be deemed to be our affiliates, would be entitled to sell within
any three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately shares immediately after the offering; or
- the average weekly trading volume of the common stock as reported through
the Nasdaq National Market during the four calendar weeks preceding the
filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned for
at least two years the restricted shares proposed to be sold, including the
holding period of any prior owner
63
<PAGE> 67
except an affiliate, is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.
Rule 701
Subject to limitations on the aggregate offering price of a transaction and
other conditions, Rule 701 permits resales of shares issued prior to the date
the issuer becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, pursuant to certain compensatory benefit plans and
contracts commencing 90 days after the issuer becomes subject to the reporting
requirements of the Securities and Exchange Act of 1933, in reliance upon Rule
144 but without compliance with certain restrictions, including the holding
period requirements. In addition, the Securities and Exchange Commission has
indicated that Rule 701 will apply to typical stock options granted by an issuer
before it becomes subject to the reporting requirements of the Securities
Exchange Act of 1934, along with the shares acquired upon exercise of such
options, including exercises after the date the issuer becomes so subject.
Securities issued in reliance on Rule 701 are restricted securities and, subject
to the contractual restrictions described above, beginning 91 days after the
date of this prospectus, may be sold by persons other than affiliates subject
only to the manner of sale provisions of Rule 144 and by affiliates under Rule
144 without compliance with its one-year minimum holding period requirements.
LOCK-UP AGREEMENTS
The directors and executive officers, and substantially all of our other
stockholders, have entered into lock-up agreements under which they have agreed
not to sell or otherwise dispose of any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock, or enter into
any swap or similar agreement that transfers, in whole or in part, the economic
risk of ownership of the common stock, for a period of 180 days after the date
of this prospectus. SG Cowen may, in its sole discretion, at any time without
notice, release all or any portion of the shares subject to the lock-up
agreements, which would result in more shares being available for sale in the
public market at an earlier date.
We intend to file a registration statement under the Securities Act of 1933
covering the shares of common stock subject to outstanding options or reserved
for issuance under the 1996 stock option plan, the 2000 stock option plan, the
2000 directors stock option plan and the 2000 employee stock purchase plan. We
expect to file this registration statement within 90 days of effectiveness of
the registration statement covering the shares of common stock in this offering
and it will automatically become effective upon filing. Accordingly, shares
registered under such registration statement will, subject to Rule 144 volume
limitations applicable to affiliates and the expiration of a 180-day lock-up
period, be available for sale in the open market, except to the extent that such
shares are subject to our vesting restrictions or the contractual restrictions
described above.
64
<PAGE> 68
UNDERWRITING
Pursuant to the terms of an underwriting agreement dated , 2001,
which is filed as an exhibit to the registration statement relating to this
prospectus, the underwriters of the offering named below, for whom SG Cowen
Securities Corporation, U. S. Bancorp Piper Jaffray Inc., Dain Rauscher
Incorporated and First Security Van Kasper, Inc. are acting as representatives,
have severally agreed to purchase from us the respective number of shares of
common stock set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
SG Cowen Securities Corporation.............................
U.S. Bancorp Piper Jaffray Inc. ............................
Dain Rauscher Incorporated..................................
First Security Van Kasper, Inc. ............................
--------
Total.....................................................
========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of common
stock are purchased by the underwriters under the underwriting agreement, then
all of the shares of common stock which the underwriters have agreed to purchase
under the underwriting agreement must be purchased. The conditions contained in
the underwriting agreement include the requirement that the representations and
warranties made by us to the underwriters are true, that there is no material
change in the financial markets and that we deliver to the underwriters
customary closing documents.
We have granted to the underwriters an option to purchase up to an
aggregate of additional shares of common stock, exercisable
solely to cover over-allotments, if any, at the public offering price less the
underwriting discounts and commissions shown on the cover page of this
prospectus. The underwriters may exercise this option at any time until 30 days
after the date of the underwriting agreement. If this option is exercised, each
underwriter will be committed, so long as the conditions of the underwriting
agreement are satisfied, to purchase a number of additional shares of common
stock proportionate to the underwriter's initial commitment as indicated in the
preceding table and we will be obligated, under the over-allotment option, to
sell the shares of common stock to the underwriters.
The underwriters propose to offer the common stock directly to the public
at the public offering price set forth on the cover page of this prospectus. The
underwriters may offer the common stock to securities dealers at that price less
a concession not in excess of $ per share. Securities dealers may reallow a
concession not in excess of $ per share to other dealers. After the shares
of common stock are released for sale to the public, the underwriters may vary
the offering price and other selling terms from time to time.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by us. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares described below.
<TABLE>
<CAPTION>
WITHOUT
PER SHARE OPTION WITH OPTION
--------- -------- -----------
<S> <C> <C> <C>
Public offering price.................................
Underwriting discount.................................
Proceeds, before expenses, to Xcyte...................
</TABLE>
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $1.3 million.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act of 1933 and liabilities arising from
breaches of the representations and warranties contained
65
<PAGE> 69
in the underwriting agreement, and to contribute to payments that the
underwriters may be required to make for these liabilities.
We, our executive officers and directors and substantially all of our other
stockholders, have agreed not to directly or indirectly do any of the following,
whether any transaction described in clause (1) or (2) below is to be settled by
delivery of common stock or other securities, in cash or otherwise, in each case
without the prior written consent of SG Cowen Securities Corporation on behalf
of the underwriters, for a period of 180 days after the date of this prospectus:
(1) offer, sell or otherwise dispose of, or enter into any transaction or
arrangement which is designed or could be expected to, result in the
disposition or purchase by any person at any time in the future of, any
shares of common stock or securities convertible into or exchangeable
for common stock or substantially similar securities, other than any of
the following:
- the common stock sold under this prospectus
- shares of common stock we issue under employee benefit plans,
qualified stock option plans or other employee compensation plans
existing on the date of this prospectus or under currently
outstanding options, warrants or rights
(2) sell or grant options, rights or warrants with respect to any shares of
our common stock or securities convertible into or exchangeable for our
common stock or substantially similar securities, other than the grant
of options under option plans existing on the date hereof.
The underwriters have informed us that they do not intend to confirm sales
to discretionary accounts that exceed five percent of the total number of shares
of common stock offered by them.
We have applied for inclusion of our common stock on the Nasdaq National
Market under the symbol XCYT, subject to official notice of issuance.
Prior to the offering, there has been no public market for the shares of
our common stock. The initial public offering price will be negotiated between
the representatives and us. In determining the initial public offering price of
the common stock, the representatives will consider, among other things and in
addition to prevailing market conditions, our historical performance and capital
structure, estimates of our business potential and earnings prospects, an
overall assessment of our management and the consideration of the above factors
in relation to market valuation of companies in related businesses.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of common stock.
The representatives may engage in over-allotment, open market purchases,
stabilizing transactions and penalty bids in accordance with Regulation M under
the Securities Exchange Act of 1934. In connection with this offering, the
underwriters may make short sales by selling more shares than they are obligated
to purchase under the underwriting agreement. Covered short sales are sales made
in an amount not greater than the number of shares available for purchase by the
underwriters under the over-allotment option. The underwriters may close out a
covered short sale by exercising their over-allotment option or purchasing
shares in the open market. In determining the source of shares to close out a
covered short sale, the underwriters will consider, among other things, the
price of shares in the open market compared to the price at which they may
purchase shares under the over-allotment option. Naked short sales are sales
made in an amount in excess of the number of shares available under the
over-allotment option. The underwriters must close out any naked short sale by
purchasing shares in the open market. A naked short position is more likely to
be created if the underwriters are concerned that there may be downward pressure
on the price of the common stock in the open market after pricing that could
adversely affect investors who purchase in this offering. Stabilizing
transactions permit bids to purchase the underlying security so long as the
stabilizing bids do not exceed a specified maximum. Penalty bids permit the
66
<PAGE> 70
representatives to reclaim a selling concession from a syndicate member when the
common stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. Any of these
activities may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
At our request, the underwriters have reserved up to % shares of the
common stock offered by this prospectus for sale to our directors and to our
business associates at the initial public offering price set forth on the cover
page of this prospectus. These persons must commit to purchase no later than the
close of business on the day following the date of this prospectus. The number
of shares available for sale to the general public will be reduced to the extent
these persons purchase the reserved shares.
LEGAL MATTERS
The validity of the common stock offered hereby will be passed upon for us
by Venture Law Group, A Professional Corporation, Kirkland, Washington. Certain
legal matters in connection with this offering will be passed upon for the
underwriters by Shearman & Sterling, Menlo Park, California. Investment
partnerships associated with Venture Law Group and individual attorneys of
Venture Law Group beneficially own an aggregate of 16,188 shares of our Series D
Preferred Stock and warrants to purchase 1,812 shares of our common stock.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1999, and for the year then ended and for the period
from inception (August 27, 1996) to December 31, 1999, as set forth in their
report, which as to the period from inception (August 27, 1996) to December 31,
1998 is based on the report of PricewaterhouseCoopers LLP, independent
accountants. We have included these financial statements in the prospectus and
elsewhere in the registration statement in reliance upon such reports, given on
the authority of these firms as experts in accounting and auditing.
The financial statements as of December 31, 1998 and for the years ended
December 31, 1997 and 1998 included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
CHANGE IN INDEPENDENT PUBLIC ACCOUNTANTS
Effective January 12, 2000, Ernst & Young LLP was engaged as our
independent auditors and replaced other auditors who were dismissed as our
independent accountants on the same date. The decision to change auditors was
approved by our board of directors.
Prior to January 12, 2000, our former auditors issued reports on our
financial statements for the period from inception to December 31, 1998 and for
each of the two years in the period ended December 31, 1998. These reports of
our former auditors did not contain any adverse opinion or disclaimer of opinion
nor were such reports qualified or modified as to audit scope or accounting
principle. In connection with the audits for the periods from inception to
December 31, 1998, there were no disagreements with our former auditors on any
matter of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of our former auditors, would have caused them to make reference
thereto in their reports.
Prior to January 12, 2000, we had not consulted with Ernst & Young LLP on
items that involved our accounting principles or the form of audit opinion to be
issued on our financial statements. We have requested that our former auditors
furnish us with a letter addressed to the SEC stating whether or not they agree
with the above statements. A copy of this letter is filed as an exhibit to the
registration statement of which this prospectus forms a part.
67
<PAGE> 71
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act, and the rules and regulations promulgated thereunder, with
respect to the shares of common stock offered by this prospectus. This
prospectus, which constitutes part of the registration statement, does not
contain all of the information set forth in the registration statement and the
exhibits thereto. Statements contained in this prospectus as to the contents of
any contract or other document that is filed as an exhibit to the registration
statement are not necessarily complete and each such statement is qualified in
all respects by reference to the full text of such contract or document.
You may read and copy all or any portion of the registration statement and
the exhibits at the SEC's public reference room at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the regional offices of the SEC located at Seven
World Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You can request
copies of these documents, upon payment of a duplication fee, by writing to the
SEC. Please call the SEC at 1-800-SEC-0330 for further information on the
operation of the SEC's public reference rooms. Also, the SEC maintains a World
Wide Web site on the Internet at http://www.sec.gov that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the SEC.
As a result of this offering, we will become subject to the information and
periodic reporting requirements of the Securities Exchange Act of 1934 and, in
accordance therewith, will file periodic reports, proxy and information
statements and other information with the SEC. These periodic reports, proxy and
information statements and other information will be available for inspection
and copying at the public reference facilities, regional offices and SEC's Web
site referred to above.
68
<PAGE> 72
XCYTE THERAPIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-2
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................... F-3
Balance Sheets.............................................. F-4
Statements of Operations.................................... F-5
Statements of Changes in Stockholders' Deficit.............. F-6
Statements of Cash Flows.................................... F-7
Notes to Financial Statements............................... F-8
</TABLE>
F-1
<PAGE> 73
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Xcyte Therapies, Inc.
We have audited the accompanying balance sheet of Xcyte Therapies, Inc. (a
development stage enterprise) (the Company) as of December 31, 1999, and the
related statements of operations, stockholders' deficit, and cash flows for the
year then ended and for the period from inception (August 27, 1996) to December
31, 1999. 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 audit. The financial statements of the Company for each
of the years in the two year period ended December 31, 1998 and for the period
from inception (August 27, 1996) to December 31, 1998 were audited by other
auditors whose report, dated September 1, 1999, expressed an unqualified opinion
on those financial statements. The financial statements for the period from
inception (August 27, 1996) to December 31, 1998 include total revenues and net
loss of $100,000 and $9,285,000, respectively. Our opinion on the statements of
operations, stockholders' deficit, and cash flows for the period from inception
(August 27, 1996) to December 31, 1999, insofar as it relates to amounts for
prior periods through December 31, 1998, is based solely on the report of other
auditors whose report indicates that the financial statements for each of the
years in the two year period ended December 31, 1998 and for the period from
inception (August 27, 1996) to December 31, 1998 have been restated.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. 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 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 audit and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of Xcyte Therapies, Inc. (a development stage enterprise)
at December 31, 1999, and the results of its operations and its cash flows for
the year then ended, and for the period from inception (August 27, 1996) to
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
As described in Note 1, the financial statements referred to in the above
paragraph have been restated.
Ernst & Young LLP
/s/ Ernst & Young LLP
Seattle, Washington
June 25, 2000, except for paragraph 2 of Note 5,
as to which the date is August 14, 2000,
paragraph 1 of Note 12, as to which the date is November 7, 2000
and the last paragraph of Note 1, as to which
the date is December 20, 2000.
F-2
<PAGE> 74
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Stockholders of
Xcyte Therapies, Inc.
In our opinion, the accompanying December 31, 1998 balance sheet and the
related statements of operations, of changes in stockholders' deficit and of
cash flows present fairly, in all material respects, the financial position of
Xcyte Therapies, Inc. (the Company) at December 31, 1998, and the results of its
operations and its cash flows for the years ended December 31, 1997 and 1998 and
for the period from inception (August 27, 1996) to December 31, 1998 (not
presented herein), in conformity with accounting principles generally accepted
in the United States of America. 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 of these statements in accordance with auditing standards generally
accepted in the United States of America, which 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 and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As described in Note 1, the financial statements referred to in the above
paragraph have been restated.
PricewaterhouseCoopers LLP
/s/ PricewaterhouseCoopers LLP
September 1, 1999,
except as to the last paragraph of Note 1,
which is as of December 20, 2000
Portland, Oregon
F-3
<PAGE> 75
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
STOCKHOLDERS'
DECEMBER 31, EQUITY AT
------------------------ SEPTEMBER 30, SEPTEMBER 30,
1998 1999 2000 2000
---------- ---------- ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 1,265 $ 124 $ 25,761
Receivable from lessor.................................... -- 232 --
Employee receivables...................................... -- 5 5
Short-term investments.................................... 10,887 7,239 1,496
Prepaid research and development expenses................. -- -- 527
Prepaid expenses and other current assets................. 89 100 264
------- -------- --------
Total current assets.................................... 12,241 7,700 28,053
Property and equipment, net................................. 1,506 1,824 1,931
Long-term investments....................................... 1,701 -- --
Intangible assets, net...................................... 534 334 184
Deposits and other assets................................... 62 197 168
------- -------- --------
Total assets............................................ $16,044 $ 10,055 $ 30,336
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 233 $ 1,005 $ 691
Accrued vacation.......................................... 57 94 117
Other accrued liabilities................................. 13 13 41
Current portion of equipment financings................... 349 488 811
------- -------- --------
Total current liabilities............................... 652 1,600 1,660
Equipment financings, less current portion.................. 941 839 896
Other liabilities........................................... -- 15 57
Commitments (Notes 8, 11, and 12)
Redeemable convertible preferred stock:
Issued and outstanding shares -- 17,949,222 at December
31, 1998 and 1999 and 28,059,047 at September 30, 2000
(aggregate preference of $22,810 and $50,915 at
September 30, 2000 and December 31, 1999, respectively)
(none pro forma)........................................ 22,866 22,866 48,394
Redeemable convertible preferred stock warrants (none pro
forma).................................................... 524 539 557
Stockholders' equity (deficit):
Preferred stock, par value $.001:
Authorized and designated as redeemable and convertible
shares -- 19,383,209 at December 31, 1998 and 1999 and
28,909,976 at September 30, 2000 (no shares
outstanding pro forma)................................ -- -- -- $ --
Common stock, par value $.001:
Authorized shares -- 40,000,000 at December 1998 and
1999 and 60,000,000 at September 30, 2000; issued and
outstanding shares -- 6,269,809 and 5,943,579 at
December 31, 1998 and 1999, respectively, and
5,965,234 at September 30, 2000 (34,024,281 shares
outstanding pro forma)................................ 6 6 6 34
Additional paid-in capital................................ 352 1,079 5,090 54,013
Deferred stock compensation............................... (12) (639) (1,618) (1,618)
Accumulated deficit....................................... (9,285) (16,232) (24,704) (24,704)
Accumulated other comprehensive loss...................... -- (18) (2) (2)
------- -------- -------- -------
Total stockholders' equity (deficit)............... (8,939) (15,804) (21,228) $27,723
------- -------- -------- =======
Total liabilities and stockholders' equity
(deficit)........................................ $16,044 $ 10,055 $ 30,336
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 76
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION INCEPTION
(AUGUST 27, NINE MONTHS ENDED (AUGUST 27,
YEARS ENDED DECEMBER 31, 1996) TO SEPTEMBER 30, 1996) TO
------------------------------------ DECEMBER 31, ----------------------- SEPTEMBER 30,
1997 1998 1999 1999 1999 2000 2000
---------- ---------- ---------- ------------ ---------- ---------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
License fee............ $ 100 $ -- $ -- $ 100 $ -- $ -- $ 100
Government grant....... -- -- 16 16 -- 44 60
---------- ---------- ---------- ------ ---------- ---------- ------
Total revenue....... 100 -- 16 116 -- 44 160
Operating expense:
Research and
development......... 2,397 4,311 5,413 12,449 3,573 7,176 19,625
General and
administrative...... 1,148 1,427 1,619 4,508 1,158 1,061 5,569
Noncash stock
compensation
expense............. 4 6 93 105 3 557 662
---------- ---------- ---------- ------ ---------- ---------- ------
Total operating
expense................ 3,549 5,744 7,125 17,062 4,734 8,794 25,856
---------- ---------- ---------- ------ ---------- ---------- ------
Loss from operations..... (3,449) (5,744) (7,109) (16,946) (4,734) (8,750) (25,696)
Other income (expense):
Loss on sale of
property and
equipment........... -- -- (108) (108) -- -- (108)
Interest income........ 245 476 476 1,290 375 465 1,755
Interest expense....... (84) (178) (206) (468) (143) (187) (655)
---------- ---------- ---------- ------ ---------- ---------- ------
Other income, net... 161 298 162 714 232 278 992
---------- ---------- ---------- ------ ---------- ---------- ------
Net loss................. $ (3,288) $ (5,446) $ (6,947) ($16,232) $ (4,502) $ (8,472) ($24,704)
========== ========== ========== ====== ========== ========== ======
Basic and diluted net
loss per share......... $ (0.69) $ (0.86) $ (1.15) $ (0.74) $ (1.42)
========== ========== ========== ========== ==========
Shares used in
computation of basic
and diluted net loss
per share.............. 4,740,629 6,355,442 6,050,042 6,085,919 5,961,946
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 77
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK ADDITIONAL DEFERRED OTHER
------------------ PAID-IN STOCK ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL COMPENSATION DEFICIT LOSS TOTAL
--------- ------ ---------- ------------ ----------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock issued upon
incorporation....................... 3,374,634 $ 3 $ -- $ -- $ -- $ -- $ 3
Deferred stock-based compensation..... -- 7 (7) -- -- --
Amortization of deferred
compensation........................ -- -- 2 -- -- 2
Common stock issued for technology
license............................. 198,609 -- -- -- -- -- --
Net loss.............................. -- -- -- (551) -- (551)
--------- --- ------ ------- -------- ---- --------
Balance at December 31, 1996............ 3,573,243 3 7 (5) (551) -- (546)
Common stock repurchased.............. (635,000) (1) -- -- -- -- (1)
Common stock issued in acquisition.... 2,999,910 3 327 -- -- -- 330
Deferred stock-based compensation..... -- -- 9 (9) -- -- --
Amortization of deferred
compensation........................ -- -- -- 4 -- -- 4
Common stock issued for technology
license............................. 407,198 1 -- -- -- -- 1
Stock options exercised............... 12,750 -- 1 -- -- -- 1
Net loss.............................. -- -- -- -- (3,288) -- (3,288)
--------- --- ------ ------- -------- ---- --------
Balance at December 31, 1997............ 6,358,101 6 344 (10) (3,839) -- (3,499)
Repurchase of founder's stock......... (88,542) -- -- -- -- -- --
Stock options exercised............... 250 -- -- -- -- -- --
Deferred stock-based compensation..... -- -- 8 (8) -- -- --
Amortization of deferred
compensation........................ -- -- -- 6 -- -- 6
Net loss.............................. -- -- -- -- (5,446) -- (5,446)
--------- --- ------ ------- -------- ---- --------
Balance at December 31, 1998............ 6,269,809 6 352 (12) (9,285) -- (8,939)
Common stock returned for technology
license termination................. (400,000) -- -- -- -- -- --
Common stock issued for technology
license............................. 20,000 -- 2 -- -- -- 2
Deferred stock-based compensation..... -- -- 720 (720) -- -- --
Amortization of deferred
compensation........................ -- -- -- 93 -- -- 93
Stock options exercised............... 53,770 -- 5 -- -- -- 5
Change in unrealized loss on
investments......................... -- -- -- -- -- (18) (18)
Net loss.............................. -- -- -- -- (6,947) -- (6,947)
--------
Comprehensive loss.................... (6,965)
--------- --- ------ ------- -------- ---- --------
Balance at December 31, 1999............ 5,943,579 6 1,079 (639) (16,232) (18) (15,804)
Issuance of common stock warrants
(unaudited)......................... -- -- 2,717 -- -- -- 2,717
Deferred stock-based compensation
(unaudited)......................... -- -- 1,536 (1,536) -- -- --
Amortization of deferred compensation
(unaudited)......................... -- -- -- 557 -- -- 557
Stock options exercised (unaudited)... 21,655 3 -- -- -- 3
Accretion of redeemable convertible
preferred stock (unaudited)......... -- -- (245) -- -- -- (245)
Change in unrealized loss on
investments (unaudited)............. -- -- -- -- -- 16 16
Net loss (unaudited).................. -- -- -- -- (8,472) -- (8,472)
--------
Comprehensive loss (unaudited)........ (8,456)
--------- --- ------ ------- -------- ---- --------
Balance at September 30, 2000
(unaudited)........................... 5,965,234 $ 6 $5,090 $(1,618) $(24,704) $ (2) $(21,228)
========= === ====== ======= ======== ==== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 78
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
INCEPTION NINE MONTHS INCEPTION
(AUGUST 27, ENDED (AUGUST 27,
YEARS ENDED DECEMBER 31, 1996) TO SEPTEMBER 30, 1996) TO
------------------------------------ DECEMBER 31, ----------------- SEPTEMBER 30,
1997 1998 1999 1999 1999 2000 2000
---------- ---------- ---------- ------------ ------- ------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................ $(3,288) $(5,446) $(6,947) $(16,232) $(4,502) $(8,472) $(24,704)
Adjustments to reconcile net loss to net
cash used in operating activities:
Non-cash research and development
expense............................. -- 291 2 293 -- -- 293
Non-cash stock based compensation
expense............................. 4 6 93 105 3 557 662
Non-cash interest expense............. 12 16 18 18 14 18 36
Depreciation and amortization......... 268 609 717 1,592 538 492 2,084
Loss on sale of property and
equipment........................... -- -- 108 108 -- -- 108
Changes in assets and liabilities:
(Increase) decrease in receivable
from lessor....................... -- -- (232) (232) -- 232 --
Increase in employee receivables.... -- -- (5) (5) -- -- (5)
Prepaid expenses and other current
assets............................ -- (27) (11) (38) -- (691) (729)
(Increase) decrease in deposits and
other assets...................... (53) (5) (135) (269) (157) 29 (240)
Increase (decrease) in accounts
payable........................... (234) 170 771 1,005 (27) (314) 691
Increase (decrease) in accrued
liabilities....................... 110 (92) 52 122 39 93 215
------- ------- ------- -------- ------- ------- --------
Net cash used in operating activities... (3,181) (4,478) (5,569) (13,533) (4,092) (8,056) (21,589)
------- ------- ------- -------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment...... (1,100) (566) (976) (3,091) (150) (449) (3,540)
Proceeds from sale of property and
equipment............................. -- -- 33 33 -- -- 33
Net cash acquired in acquisition........ 437 -- -- 437 -- -- 437
Purchases of investments
available-for-sale.................... -- -- (5,816) (5,816) -- -- (5,816)
Purchases of investments
held-to-maturity...................... (1,794) (15,939) -- (17,732) -- -- (17,732)
Proceeds from sales and maturities of
investments available-for-sale........ -- -- 11,147 11,147 6,929 5,760 16,907
Proceeds from sales and maturities of
investments held-to-maturity.......... -- 5,145 -- 5,145 -- -- 5,145
------- ------- ------- -------- ------- ------- --------
Net cash provided by (used in) investing
activities............................ (2,457) (11,360) 4,388 (9,877) 6,779 5,311 (4,566)
------- ------- ------- -------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred and
common stock.......................... 4,134 11,975 6 22,148 5 28,003 50,151
Common stock repurchased................ (1) -- -- (1) -- -- (1)
Proceeds from equipment financings...... 1,237 362 451 2,151 421 865 3,016
Principal payments on equipment
financings............................ -- (273) (417) (764) (304) (486) (1,250)
------- ------- ------- -------- ------- ------- --------
Net cash provided by financing
activities............................ 5,370 12,064 40 23,534 122 28,382 51,916
------- ------- ------- -------- ------- ------- --------
Net increase (decrease) in cash......... (268) (3,774) (1,141) 124 2,809 25,637 25,761
Cash at beginning of period............. 5,307 5,039 1,265 -- 1,265 124 --
------- ------- ------- -------- ------- ------- --------
Cash at end of period................... $ 5,039 $ 1,265 $ 124 $ 124 $ 4,074 $25,761 $ 25,761
======= ======= ======= ======== ======= ======= ========
SUPPLEMENTAL CASH FLOW AND NONCASH
ACTIVITY INFORMATION:
Interest paid....................... $ 72 $ 193 $ 207 $ 472 $ 143 $ 189 $ 661
Issuance of common stock warrants... -- -- -- -- -- 2,717 2,717
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE> 79
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Xcyte Therapies, Inc., a development stage enterprise, was incorporated on
January 5, 1996 as MolecuRx, Inc. under the laws of the state of Delaware,
changed its name to CDR Therapeutics, Inc. upon commencement of operations on
August 27, 1996, and changed its name to Xcyte Therapies, Inc. (the Company) in
October 1997. The Company operates in one business segment developing products
based on T cell activation to treat cancer and infectious disease. As a
development stage company, substantially all efforts of the Company have been
devoted to conducting research and experimentation, developing and acquiring
intellectual properties, raising capital, and recruiting and training personnel.
The Company has incurred operating losses and negative operating cash flows
since inception. Management expects to incur operating losses for the
foreseeable future as the Company executes its business plans. In August 2000,
the Company completed a $28.0 million private placement of preferred stock, net
of offering costs (see Note 5). Management believes that the additional cash
from the private placement, combined with existing cash, provides the Company
with the financing necessary for it to execute its business plans and to
continue operations through at least the year ended December 31, 2001.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information as of September 30, 2000 and for the nine months
ended September 30, 1999 and 2000, and the period from inception (August 27,
1996) to September 30, 2000 is unaudited. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the nine
months ended September 30, 2000 are not necessarily indicative of results that
may be expected for the entire year. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC).
CASH, CASH EQUIVALENTS, AND INVESTMENTS
Cash equivalents include highly liquid investments with an original
maturity of three months or less. The Company's cash equivalents consist of
money market securities.
Held-to-maturity securities are stated at amortized cost, adjusted for
amortization of premiums and accretion of discounts to maturity. Such
amortization is included in investment income. Interest on securities classified
as held-to-maturity is included in interest income. Securities not classified as
held-to-maturity are classified as available-for-sale. Available-for-sale
securities are carried at fair value, with the unrealized gains and losses
reported in a separate component of stockholders' equity. Amortization,
accretion, interest and dividends, realized gains and losses, and declines in
value judged to be other-than-temporary on available-for-sale securities are
included in interest income. The cost of securities sold is based on the
specific identification method. Investments in securities with maturities of
less than one year or whose management's intent is to use the investments to
fund current operations are classified as short-term investments.
F-8
<PAGE> 80
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and is depreciated using the
straight-line method over the assets' useful lives, which range from three to
six years. Leasehold improvements are amortized over the lesser of their
estimated useful lives or the term of the lease.
INTANGIBLE ASSETS
Intangible assets represent the excess of the purchase price of acquiring
CellGenEx, Inc. (see Note 11) over identifiable net assets acquired. Intangible
assets are being amortized using the straight-line method over four years.
Accumulated amortization at December 31, 1998, 1999 and September 30, 2000
totaled $268,000, $468,000, and $618,000, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the discounted future cash flows expected to be
generated by such assets.
REVENUE RECOGNITION
To date, the Company has generated no revenues from sales of products.
Revenues relate to fees received for licensed technology and a Small Business
Innovation Research grant awarded to the Company by the National Institutes of
Health. Revenue from license fee income is recognized when the Company no longer
has any obligation to provide significant services to the licensee. Revenue from
government grants is recognized once the conditions of a grant have been
satisfied.
OTHER COMPREHENSIVE INCOME
Other comprehensive income (loss) includes certain changes in equity that
are excluded from net income (loss). The Company's only component of other
comprehensive income (loss) is unrealized loss on investments. There were no
components of other comprehensive income (loss) prior to 1999.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred. The
Company records up-front payments related to the funding milestone payments
under development agreements as prepaid research and development expenses and
amortizes the amount into expense over the period that the development work is
performed. The Company's policy is to expense the payments for beads used in
research in the period the beads are delivered by the suppliers.
SEGMENTS
The Company has adopted Statement of Financial Accounting Standards No.
131, "Disclosure about Segments of an Enterprise and Related Information" (SFAS
131) and related disclosures about its products, services, geographic areas and
major customers. The Company has determined that it operates in
F-9
<PAGE> 81
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
only one segment. Accordingly, the adoption of SFAS 131 had no impact on the
Company's financial statements.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of Financial
Accounting Standards Board (FASB) Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), and applies
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), and related interpretations in accounting for stock
options. Stock options granted to nonemployees are recorded using the fair value
approach in accordance with SFAS 123 and Emerging Issues Task Force Consensus
(EITF) Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services" (EITF 96-18). The options to nonemployees are subject to periodic
revaluation over their vesting terms.
Deferred stock-based compensation includes amounts recorded when the
exercise price of an option is lower than the deemed fair value of the
underlying common stock on the date of grant. Deferred stock-based compensation
is amortized over the vesting period of the underlying option using the graded
vesting method.
NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted
average number of common shares outstanding for the period. Diluted net loss per
share reflects the dilutive effect of common stock equivalents, if any. Other
common stock equivalents, including redeemable convertible preferred stock,
stock options and warrants, are excluded from the computation as their effect is
anti-dilutive. For the periods presented, there is no difference between the
basic and diluted net loss per share.
FINANCIAL INSTRUMENTS
Financial instruments, including cash and cash equivalents and payables,
are recorded at cost which approximates fair values based on the short-term
maturities of these instruments. The fair value of investments is determined
based on quoted market prices. Refer to Note 2 for further information on the
fair value of investments. The carrying value of equipment financing
arrangements approximates fair value because the underlying interest rates
approximate market rates at the balance sheet dates.
CONCENTRATIONS OF CREDIT
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
investments, and receivables. The Company generally invests its excess cash in
money market funds, and obligations issued by or fully collateralized by the
U.S. government or federal agencies. While cash and cash equivalents held by
financial institutions at times exceed federally insured limits, management
believes that no credit or market risk exposure exists due to the high quality
of the institutions. The Company places its investments with high-credit quality
counterparties. The Company does not require collateral or other security
related to receivables.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivatives and Hedging Activities" (SFAS 133), which
establishes accounting and reporting standards
F-10
<PAGE> 82
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as "derivatives") and for hedging
activities. SFAS 133 (as deferred by SFAS 137) is effective for fiscal years
beginning after June 15, 2000, and will be adopted by the Company during the
year beginning January 1, 2001. As the Company does not currently hold
derivatives or engage in hedging transactions, the Company anticipates that
there will be no impact on the Company's results of operations, financial
position, or cash flows upon the adoption of SFAS 133.
In December 1999 the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition" (SAB 101), which provides guidance on the recognition, presentation
and disclosure of revenue in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. The Company
has recognized revenue and made disclosures in accordance with SAB 101. The
adoption of SAB 101 did not have any impact on the Company's financial position
or results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current year presentation.
RESTATEMENT
In December 2000, the Company determined that it was necessary to revise
its 1997 and 1998 financial statements. The restatement was required because of
incorrect purchase accounting applied to the Company's 1997 merger with
CellGenEx, Inc. (see Note 11). The Company's initial purchase accounting
included a write-off in 1997 of all of the intangible assets acquired in the
merger amounting to $802,000. The 1997 and 1998 financial statements have been
restated to reverse the effect of the write-off of the intangible assets and to
record amortization expense relative to the intangible assets acquired over a
four year period. The Company also determined that it was necessary to revise
its 1999 financial statements for the purchase accounting issue mentioned above,
as well as to record additional stock compensation in the amount of $86,000
related to common stock options issued during the year ended December 31, 1999
which had been subsequently determined to have been issued at less than fair
value (see Note 6). The following table sets forth the effect of the restatement
on the Company's financial statements (in thousands except per share data):
<TABLE>
<CAPTION>
PERIOD
FROM INCEPTION
YEARS ENDED DECEMBER 31, (AUGUST 27, 1996)
--------------------------- TO
1997 1998 1999 DECEMBER 31, 1999
------- ------- ------- -----------------
<S> <C> <C> <C> <C>
Net loss
As restated...................................... $(3,288) $(5,446) $(6,947) $(16,232)
As previously reported........................... (4,023) (5,245) (6,661) (16,481)
Basic and diluted net loss per share
As restated...................................... $ (0.69) $ (0.86) $ (1.15) $(2.96)
As previously reported........................... (0.85) (0.83) (1.10) (3.01)
</TABLE>
F-11
<PAGE> 83
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
2. INVESTMENTS
A summary of investments follows (in thousands):
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1998
U.S. treasury securities...................... $ 9,513 $-- $(14) $ 9,499
Federal agency obligations.................... 3,075 -- (7) 3,068
------- --- ---- -------
$12,588 $-- $(21) $12,567
======= === ==== =======
December 31, 1999
U.S. treasury securities...................... $ 6,174 $-- $(18) $ 6,156
Federal agency obligations.................... 1,083 -- -- 1,083
------- --- ---- -------
$ 7,257 $-- $(18) $ 7,239
======= === ==== =======
September 30, 2000
U.S. treasury securities...................... $ 1,498 $-- $ (2) $ 1,496
======= === ==== =======
</TABLE>
The Company uses the services of a third party investment broker to manage
its investment portfolio. Management intends to purchase securities whose
maturities correspond to the Company's budgeted cash flow needs. Accordingly,
management classified investments as held-to-maturity since the Company's
inception. During the year ended December 31, 1998, the Company's investment
broker did not comply with management's instructions and as a result, the
Company was forced to sell a portion of its investment portfolio before
maturity. Securities with an amortized cost of $2.6 million were sold, prior to
maturity, for a net realized gain of $59,000. All remaining investment
securities held at December 31, 1998 were held through their maturity date. At
December 31, 1999 and September 30, 2000, management has classified all
investments as available-for-sale. There were no gross realized gains or losses
on sales of available-for-sale securities in the year ended December 31, 1999.
Gross realized gains and losses on sales of available-for-sale securities during
the nine months ended September 30, 2000 were $0 and $3,000, respectively.
F-12
<PAGE> 84
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
The available-for-sale securities as of December 31, 1999 and September 31,
2000 have contractual maturities of one year or less. Expected maturities will
differ from contractual maturities because the issuers of the securities may
have the right to repay obligations without prepayment penalties.
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1998 1999 2000
------ ------ -------------
<S> <C> <C> <C>
Equipment............................................ $1,100 $1,495 $1,829
Furniture and fixtures............................... 131 133 161
Leasehold improvements............................... 620 507 530
Computer equipment................................... 264 292 356
------ ------ ------
2,115 2,427 2,876
Less accumulated amortization and depreciation....... (609) (603) (945)
------ ------ ------
$1,506 $1,824 $1,931
====== ====== ======
</TABLE>
Depreciation expense totaled $201,000, $408,000, and $517,000 during the
years ended December 31, 1997, 1998 and 1999, respectively, and $342,000 during
the nine months ended September 30, 2000.
4. SIGNIFICANT AGREEMENTS
TECHNOLOGY LICENSES
At inception, the Company entered into a license agreement with the
Trustees of the University of Pennsylvania whereby the Company was granted use
of certain intellectual property. In exchange, the Company granted 605,807
shares of common stock at par value during the period from inception to December
31, 1997. In May 1999, the Company terminated the agreement. The terms of the
cancellation included the retirement of 400,000 shares of common stock at par
value.
In July 1998, the Company entered into a license agreement with Genetics
Institute, Inc., under which the Company was granted the use of several patents
for intellectual property in exchange for the payment of a nonrefundable fee of
$53,000, 145,875 shares of Series B preferred stock, and warrants to purchase
194,500 shares of Series B preferred stock at $1.10 per share (see Note 5). The
nonrefundable fee was expensed when paid. The Company, or sublicensee, is
required to spend no less than $500,000 annually on research and development
activities related to product development until the first commercial sale of the
product.
In June 1999, the Company entered into a license agreement with ARCH
Development Corporation in exchange for 200,000 shares of common stock. 20,000
of those shares were issued upon execution of the agreement and valued based on
the estimated fair market value of the common stock of $2,000. The remaining
shares are issuable upon the completion of various terms and conditions as
stated in the stock purchase agreement. The Company, or its affiliate or
sublicensee, is required to expend at least $2.0 million on the development of
licensed products during the first 24 months of the agreement.
In October 1999, the Company entered into a license and supply agreement
with Diaclone S.A. In consideration for the license, the Company paid and
expensed a $75,000 nonrefundable fee. The Company also entered into a license
agreement with the Fred Hutchinson Cancer Research Center. In consideration
F-13
<PAGE> 85
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
for the license, the Company paid and expensed a $25,000 nonrefundable fee. In
December 2000, the Company amended the agreement (see Note 12).
All license agreements require the payment of royalties by the Company
based on sales and services. No royalty payments have been required or paid
through September 30, 2000.
MANUFACTURING AND SUPPLY CONTRACTS
In August 1999, the Company entered into a development and supply agreement
with Dynal S.A. The Company has agreed to make payments upon the accomplishment
of certain development activities by Dynal S.A. totaling $3.0 million. During
the year ended December 31, 1999 and the nine months ended September 30, 2000,
the Company made payments totaling $100,000 and $1.9 million, respectively,
under the agreement. In accordance with the Company's accounting policy, the
$100,000 payment in the year ended December 31, 1999 was expensed when paid and
$1.4 million of the payments made during the nine months ended September 30,
2000 were expensed with the remaining amounts recorded as prepaid research and
development expenses. The Company's remaining payments of $1.0 million are
estimated to be payable during the year ended December 31, 2002 based on
development work plans. Remaining payments are subject to the completion of the
milestone activities and regulatory approvals as specified in the agreement.
Under the terms of the supply agreement, the Company is required to buy a
minimum $250,000 of beads in the first 12 months after the development phase
ends and $500,000 of beads annually thereafter over the remaining term of the
agreement.
In June 2000, the Company entered into agreements with Lonza Biologics PLC.
Under the terms of the agreements, the Company is obligated to pay milestone
payments. Milestone payments are settled in the functional currency of Lonza
Biologics PLC (pounds) under the agreement. Exchange rate gains and losses have
been insignificant to date. The Company paid $161,000 as required under the
agreements during the nine months ended September 30, 2000. In accordance with
the Company's accounting policy, $134,000 of the payment made during the nine
months ended September 30, 2000 was expensed with the remaining amount recorded
as prepaid research and development expenses. Remaining payments under the
agreement, assuming milestones are completed as scheduled, will be $350,000
during the year ending December 31, 2000 and $2.7 million during the year ending
December 31, 2001.
5. REDEEMABLE CONVERTIBLE PREFERRED STOCK AND WARRANTS
PREFERRED STOCK
A summary of redeemable convertible preferred stock follows (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1998 AND 1999 SEPTEMBER 30, 2000
---------------------------------------- ----------------------------------------
AGGREGATE AGGREGATE
SHARES REDEMPTION SHARES REDEMPTION
AUTHORIZED ISSUED AND AND AUTHORIZED ISSUED AND AND
AND OUTSTANDING LIQUIDATION AND OUTSTANDING LIQUIDATION
DESIGNATED SHARES PREFERENCE DESIGNATED SHARES PREFERENCE
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Series A............. 8,000,000 6,860,512 $ 6,517 7,300,080 6,860,512 $ 6,517
Series B............. 4,097,580 3,903,080 4,293 4,097,580 3,903,080 4,293
Series C............. 7,285,629 7,185,630 12,000 7,212,316 7,185,630 12,000
Series D............. -- -- -- 10,300,000 10,109,825 28,105
---------- ---------- ------- ---------- ---------- -------
19,383,209 17,949,222 $22,810 28,909,976 28,059,047 $50,915
========== ========== ======= ========== ========== =======
</TABLE>
F-14
<PAGE> 86
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
The Company issued 6,334,212 shares of Series A preferred stock at $0.95
per share during the year ended December 31, 1996 for proceeds of $6.0 million,
3,757,205 shares of Series B preferred stock at $1.10 per share during the year
ended December 31, 1997 for proceeds of $4.1 million, and 7,185,630 shares of
Series C preferred stock at $1.67 per share during the year ended December 31,
1998 for proceeds of $12.0 million. There were no significant costs associated
with the Series A, B and C offerings. During 1997 the Company issued an
additional 526,300 shares of Series A preferred stock in conjunction with the
merger with CellGenEx, Inc. (see note 11). The value of the Series A preferred
stock of $579,000 was included in the determination of the purchase price of
CellGenEx, Inc. During 1998, the Company also issued 145,875 shares of Series B
preferred stock to acquire technology licenses (see note 4). These shares were
valued at $1.10 per share for an aggregate amount of $160,000. In May 2000, the
Company amended and restated its Certificate of Incorporation to change the
number of designated Series A and C preferred shares and to designate Series D
preferred shares.
In August 2000, Company completed a private placement of 10,109,825 shares
at $2.78 per share of Series D redeemable preferred stock for $28.0 million, net
of offering costs of $105,000. In connection with the offering, holders of the
Series D preferred stock received 1,132,287 warrants to purchase shares of
common stock at an exercise price of $0.30 per share. The warrants were valued
at $2.7 million using the Black-Scholes method. The warrants expire in August
2005 or upon the completion of an initial public offering (IPO). Of the total
net proceeds of $28.0 million, $2.7 million has been recorded as paid in capital
and $25.3 million had been recorded as redeemable convertible preferred stock.
The Series D preferred stock includes redemption rights commencing on June 30,
2002 at $2.78 per share or $28.1 million. The difference between the recorded
value of the Series D preferred stock and the redemption value is being accreted
ratably through June 30, 2002. For the nine months ended September 30, 2000, the
Company recorded accretion of the preferred stock redemption value of $245,000
through a charge to additional paid in capital and a credit to preferred stock.
Holders of Series A, B, C, and D preferred stock have preferential rights
to noncumulative dividends at a rate of $0.076, $0.088, $0.1336, and $.2224 per
share, respectively, when and if declared by the Board of Directors. The holders
are entitled to the number of votes equal to the number of shares of common
stock into which the preferred stock could be converted. In the event of
liquidation, the holders of Series A, B, C, and D have preferential right to
liquidation payments of $0.95, $1.10, $1.67, and $2.78 per share, respectively,
plus any accrued but unpaid dividends.
The preferred stock can be converted, at the option of the holder,
one-for-one into common stock subject to adjustment for antidilutive events. The
conversion price for Series A, B, C, and D preferred stock is $0.95, $1.10,
$1.67, and $2.78, respectively. Each share of the preferred stock shall
automatically be converted into shares of common stock upon the closing of a
firmly underwritten IPO, provided that the price per share is not less than
$4.00 and the aggregate gross proceeds to the Company are not less than $20.0
million. In addition, the Company has granted registration rights and preemptive
rights to Series A, B, C, and D holders.
The preferred stock is redeemable at the option of the holder of a majority
of the outstanding shares of preferred stock at any time after June 30, 2002.
The Series A, B, C, and D redemption price is $0.95, $1.10, $1.67, and $2.78 per
share, respectively. Since the redemption price is equal to the price originally
paid for the shares, no accretion has been recorded on Series A, B, and C
preferred stock.
In addition, the Company has granted registration rights and rights of
first offer to the Series A, B, C, and D holders, and is precluded from carrying
out certain actions without the approval of the majority of the Series A, B, C,
and D holders voting as a group.
F-15
<PAGE> 87
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
WARRANTS
Warrants to purchase 368,410 shares of Series A preferred stock were issued
in connection with the CellGenEx, Inc. business acquisition (see Note 11) at an
exercise price of $0.95 per share during the year ended December 31, 1997. The
value of the warrants of $330,000 was included in the determination of the
purchase price of CellGenEx, Inc. In addition, warrants to purchase 71,158
shares of Series A preferred stock at $0.95 per share were issued in connection
with equipment financing for the year ended December 31, 1997. The estimated
fair value of the warrants issued of $64,000 was recorded as an additional
financing cost and is being amortized over the term of the loan as interest
expense.
During the year ended December 31, 1998, the Company issued warrants to
purchase 194,500 shares of Series B preferred stock as partial consideration for
the Genetics Institute, Inc. license (see Note 4). The warrants were issued at
an exercise price of $1.10 per share. The estimated fair value of the warrants
of $131,000 was charged to research and development expense in 1998.
During the year ended December 31, 1999, the Company issued warrants to
purchase 12,315 shares of Series C preferred stock at an exercise price of $1.67
per share in connection with equipment financing. The estimated fair value of
the warrants issued of $15,000 was recorded as additional financing cost and is
being amortized over the term of the loan as interest expense.
In January 2000, the Company issued a warrant to purchase 14,371 shares of
Series C preferred stock at an exercise price of $1.67 per share in connection
with equipment financing. The estimated fair value of the warrants issued of
$18,000 was recorded as additional financing cost and is being amortized over
the term of the loan as interest expense.
In December 2000, the Company issued an additional Series D preferred stock
warrant for 80,000 shares of Series D preferred stock, in connection with a
lease for a manufacturing facility (see Note 12).
Warrants expire at various dates from March 2003 to January 2007, including
380,725 warrants outstanding at September 30, 2000 which would expire earlier
upon the completion of an IPO. All remaining preferred stock warrants which do
not expire upon the completion of an IPO, upon consent from the warrant holders,
will convert to common stock warrants upon the consummation of an IPO. The
Company has valued the warrants issued during the years ended December 31, 1997,
1998, and 1999 and the nine months ended September 30, 2000 using the
Black-Scholes method with the following assumptions: no dividend yields,
expected life of 5 years to 10 years, risk-free interest rates of 5.42% to 6.90%
and volatility of 68% to 75%.
6. STOCKHOLDERS' DEFICIT
1996 STOCK OPTION PLAN
Under the Company's 1996 Stock Option Plan (1996 Plan), 2.5 million shares
of common stock have been reserved for grants to employees, directors, and
consultants, as of December 31, 1999. The term of the 1996 Plan is ten years
unless terminated earlier by the Board of Directors. Options granted under the
1996 Plan may be designated as incentive or nonqualified at the discretion of
the plan administrator. The vesting period, exercise price, and expiration
period of options are also established at the discretion of the plan
administrator. Vesting periods are typically four or five years, and incentive
stock options are exercisable at no less than the fair market value at the date
of grant, and nonqualified stock options are
F-16
<PAGE> 88
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
exercisable at prices determined by the 1996 Plan administrator. In no event
shall the term of any incentive stock option exceed ten years.
In August 2000, the Board of Directors amended the 1996 Plan to allow
options granted to certain executives to become exercisable immediately. Shares
issued upon exercise of options that are unvested are restricted and subject to
repurchase by the Company upon termination of employment and such restrictions
lapse over the original vesting schedule. At September 30, 2000, there were no
shares of restricted common stock issued and subject to repurchase.
A summary of stock option activity and related information follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------------------------------------ SEPTEMBER 30,
1997 1998 1999 2000
-------------------- ------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- --------- ------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
period..................... 278,000 $0.10 720,116 $0.10 955,553 $0.12 1,222,125 $0.14
Granted at fair value.... 554,866 0.10 261,500 0.16 -- -- -- --
Granted at less than fair
value.................. -- -- -- -- 639,748 0.17 715,844 0.37
Canceled................. (100,000) 0.11 (25,813) 0.10 (319,406) 0.13 (290,093) 0.14
Exercised................ (12,750) 0.10 (250) 0.10 (53,770) 0.10 (21,655) 0.13
-------- ------- --------- ---------
Outstanding at end of
period..................... 720,116 $0.10 955,553 $0.12 1,222,125 $0.14 1,626,221 $0.24
======== ======= ========= =========
</TABLE>
The following summarizes information about stock options outstanding and
exercisable at September 30, 2000:
<TABLE>
<CAPTION>
OUTSTANDING
------------------------------------ EXERCISABLE
WEIGHTED ----------------------
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER OF CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OPTIONS LIFE (YEARS) PRICE OF OPTIONS PRICE
------------ --------- ------------ --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
$0.10 - 0.17 997,717 8.20 $0.15 594,992 $0.14
0.30 - 0.40 628,504 9.87 0.39 505,233 0.40
--------- ---------
1,626,221 8.85 0.24 1,100,225 0.24
========= =========
</TABLE>
The number of options exercisable at December 31, 1997, 1998 and 1999 and
September 30, 2000 was 45,428, 252,485, 458,688, and 1,100,225, respectively.
The weighted-average exercise price of options vested and exercisable at
December 31, 1997, 1998 and 1999 and September 30, 2000 was $0.10, $0.10, $0.12,
and $0.24, respectively. The weighted-average fair value of options granted
during the years ended December 31, 1997, 1998 and 1999 and the nine months
ended September 30, 2000 was $0.03, $0.06, $1.29, and $2.33, respectively. The
weighted-average remaining contractual life of outstanding options at December
31, 1999 was 8.78 years.
Pro forma information regarding net loss required by SFAS 123 has been
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS 123. The
F-17
<PAGE> 89
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
fair value for these options was estimated at the date of grant under the
Black-Scholes method for the years ended 1997 and 1998 and the minimum value
method for the year ended December 31, 1999 and the nine months ended September
30, 2000. The following weighted-average assumptions for the years ended
December 31, 1997, 1998, and 1999 and the nine months ended September 30, 2000:
option life of 5 years, 5 years, 3.4 years, and 3.7 years, respectively;
risk-free interest rate of 5.98%, 4.89%, 6.11%, and 5.80%, respectively; and no
dividend yield. Pro forma net loss information follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED
----------------------------- SEPTEMBER 30,
1997 1998 1999 2000
------- ------- ------- -----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net loss:
As reported............................... $(3,288) $(5,446) $(6,947) $(8,472)
Pro forma................................. (3,290) (5,452) (7,035) (9,010)
Basic and diluted net loss per share:
As reported............................... $ (0.69) $ (0.86) $ (1.15) $ (1.42)
Pro forma................................. (0.69) (0.86) (1.16) (1.51)
</TABLE>
The Company granted 102,500 common stock options to consultants in exchange
for services performed in the year ended December 31, 1998. No options were
granted to consultants for the year ended December 31, 1999. During the nine
months ended September 30, 2000, the Company granted a total of 20,000 common
stock options to a consultant for services to be performed through August 2001.
In accordance with SFAS 123 and EITF 96-18, options granted to consultants are
periodically revalued as they vest.
During the year ended December 31, 1999 and the nine months ended September
30, 2000 in connection with the grant of certain options to employees, the
Company recorded deferred stock-based compensation of $720,000 and $1.5 million,
respectively, representing the difference between the exercise price and the
subsequently determined deemed fair value of the Company's common stock on the
date such stock options were granted. The subsequently determined deemed fair
value of the Company's common stock ranged from $0.50 to $1.68 during the year
ended December 31, 1999, and $1.73 to $3.20 during the nine months ended
September 30, 2000. Deferred stock-based compensation is being amortized on a
graded vesting method. During the years ended December 31, 1997, 1998 and 1999,
and the nine months ended September 30, 2000, the Company recorded noncash
deferred stock-based compensation expense of $4,000, $6,000, $93,000 and
$557,000, respectively.
COMMON STOCK
In August 2000, the Company amended and restated its Certificate of
Incorporation to increase the number of shares designated as common stock from
40 million to 60 million.
F-18
<PAGE> 90
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
Common stock reserved for future issuance follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
<S> <C> <C>
Stock options...................................... 2,433,230 2,411,575
Series A preferred stock........................... 8,000,000 7,300,080
Series B preferred stock........................... 4,097,580 4,097,580
Series C preferred stock........................... 7,285,629 7,212,316
Series D preferred stock........................... -- 10,300,000
Preferred stock warrants........................... 646,383 660,754
Common stock warrants.............................. -- 1,132,287
License and technology agreements.................. 1,236,040 1,236,040
---------- ----------
23,698,862 34,350,632
========== ==========
</TABLE>
COMMON STOCK WARRANTS
In August 2000, the Company issued 1,132,287 common stock warrants to
private investors in connection with the issuance of Series D preferred stock
(see Note 5).
COMMON STOCK REPURCHASES
During the years ended December 31, 1997 and 1998, the Company repurchased
635,000 and 88,542 shares, respectively, of common stock from founders at par
value. The shares were subsequently canceled by the Company.
7. INCOME TAXES
At December 31, 1999, the Company had net operating loss carryforwards of
approximately $14.2 million and research and development tax credit
carryforwards of $749,000 for federal income tax reporting purposes. The net
operating losses and tax credits will expire beginning in 2011 if not previously
utilized. In certain circumstances, as specified in the Internal Revenue Code,
due to ownership changes, the Company's ability to utilize its net operating
loss carryforwards may be limited.
F-19
<PAGE> 91
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
Deferred income taxes reflect the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. The significant components of
deferred taxes follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 2,774 $ 4,812
Research and development tax credit.................... 533 749
License agreements..................................... 99 162
Other.................................................. 37 59
------- -------
3,443 5,782
Less valuation allowance............................... (3,406) (5,745)
------- -------
Net deferred tax assets.................................. 37 37
Deferred tax liabilities:
Fixed assets........................................... (37) (37)
------- -------
Net deferred taxes....................................... $ 0 $ 0
======= =======
</TABLE>
A valuation allowance has been recorded for deferred tax assets because
realization is primarily dependent on generating sufficient taxable income prior
to the expiration of net operating loss carryforwards. The valuation allowance
for deferred tax assets increased $2.1 million during the year ended December
31, 1998 and $2.3 million during the year ended December 31, 1999, principally
due to net operating losses recorded during those periods. There have been no
offsets or other deductions to the valuation allowance in any period since the
Company's inception.
8. LEASE COMMITMENTS AND EQUIPMENT FINANCINGS
The Company has commitments for noncancelable operating leases principally
for building space and office equipment that require minimum rental payments.
The building lease requires payment of a pro rata share of property operating
expenses and includes rent escalation clauses (3% annually) and has two five-
year renewal options. Subsequent to December 31, 2000, the Company entered into
an additional lease for its manufacturing facility (see Note 12).
Borrowings outstanding under equipment financing agreements totaled $1.3
million at December 31, 1998 and 1999, and $1.7 million at September 30, 2000.
The loans are secured by the related assets, and require monthly principal and
interest payments. The loans mature at various dates through the year ended
December 31, 2004. The interest rates applicable to the obligations range from
12.85% to 13.71% at December 31, 1998 and 1999 and 12.85% to 14.12% at September
30, 2000. The weighted average interest rate was 13.28% and 13.75% during the
year ended December 31, 1998 and 1999, respectively, and 13.36% for the nine
months ended September 30, 2000. At September 30, 2000, the Company has $530,000
available to it for equipment financings under its outstanding $1.0 million
equipment financing agreement. The outstanding equipment financing agreement
expires in April 2003, and requires the Company to comply with certain
non-financial covenants. The Company also issued preferred stock warrants (see
Note 5) in connection with equipment financings. At September 30, 2000, the net
book value of equipment which secures the outstanding borrowings totals $1.7
million.
F-20
<PAGE> 92
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
Future minimum payments under operating leases and equipment financings
arrangements at December 31, 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
EQUIPMENT
FINANCINGS OPERATING
ARRANGEMENTS LEASES
------------ ---------
<S> <C> <C>
Year Ended December 31,
2000................................................ $ 490 $ 502
2001................................................ 570 517
2002................................................ 229 532
2003................................................ 70 539
2004................................................ -- 543
Thereafter.......................................... -- 941
------ ------
1,359 $3,574
======
Less unamortized discount............................. (32)
Less current portion.................................. (488)
------
Long-term equipment obligations....................... $ 839
======
</TABLE>
Rent expense totaled $147,000, $271,000, and $453,000 during the years
ended December 31, 1997, 1998 and 1999, respectively, and $391,000 for the nine
months ended September 30, 2000.
9. 401(K) PLAN
The Company sponsors a 401(k) plan for the benefit of its employees. The
Company does not presently match employee contributions to the plan.
10. NET LOSS PER SHARE
The calculation of basic and diluted loss per share and pro forma basic and
diluted loss per share follows (in thousands, except share and per share data):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ------------------------
1997 1998 1999 1999 2000
---------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net loss(A)........................... $ (3,288) $ (5,446) $ (6,947) $ (4,502) $ (8,472)
========== ========== =========== ========== ===========
Weighted average outstanding
common stock(B)..................... 4,740,629 6,355,442 6,050,042 6,085,919 5,961,946
========== ========== =========== ========== ===========
Basic and diluted net loss per share
(A/B)............................... $ (0.69) $ (0.86) $ (1.15) $ (0.74) $ (1.42)
========== ========== =========== ========== ===========
Pro forma (unaudited):
Weighted average shares used above.... 6,050,042 5,961,946
Pro forma adjustment to reflect
weighted effect of assumed
conversion of redeemable convertible
preferred stock..................... 17,949,222 21,196,590
----------- -----------
Pro forma weighted average shares
outstanding(C)...................... 23,999,264 27,158,536
=========== ===========
Pro forma net loss per share (A/C).... $ (0.29) $ (0.31)
=========== ===========
</TABLE>
F-21
<PAGE> 93
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
Pro forma loss per share (unaudited) is computed by dividing net loss by
the weighted average number of shares of common stock outstanding and the
weighted average number of shares of convertible and redeemable preferred stock
outstanding as if such shares were converted to common stock at the time of
issuance.
11. BUSINESS ACQUISITION
On August 27, 1997, the Company acquired all of the outstanding stock of
CellGenEx, Inc. for 2,999,910 shares of common stock, 526,300 shares of
preferred Series A stock, and warrants to purchase 368,410 shares of Series A
preferred stock of the Company (see Note 5) which were collectively valued at
$1.2 million. Pursuant to an acquisition agreement between the Company and
CellGenEx, Inc., the Company reserved 1,582,340 shares of common stock
(Milestone Pool) for the Company's possible acquisition of new technology from
the scientific founders of CellGenEx, Inc. This Milestone Pool will terminate if
not used by December 31, 2003. The Company has determined that since the
acquisition, 526,300 shares reserved under this agreement will not be issued
because the related milestone requirements cannot be attained. At September 30,
2000, 1,056,040 shares of common stock remain in the Milestone Pool.
CellGenEx, Inc. was a development stage company focusing on treatment of
human disease through activation of a patient's suppressed immune system. Upon
its acquisition CellGenEx, Inc. was merged into the Company. The acquisition was
accounted for using the purchase method of accounting. The purchase price was
allocated as follows (in thousands):
<TABLE>
<S> <C>
Cash acquired............................................... $ 437
Intangible assets........................................... 802
------
$1,239
======
</TABLE>
Management determined that all of the excess purchase price over tangible
net assets acquired was attributable to intangible assets consisting mostly of a
scientific team of four immunologists with significant experience and reputation
in the field of immunology. The intangible assets are being amortized to expense
on a straight-line basis over the estimated useful life of four years. Related
amortization expense totaled $67,000, $201,000 and $200,000 during the years
ended December 31, 1997, 1998, and 1999, respectively, and $150,000 during the
nine months ended September 30, 2000.
The results of operations of CellGenEx, Inc. are included in the results of
operations of the Company from the date of acquisition. The pro forma unaudited
results of operations for the year ended December 31, 1997, assuming the
purchase of CellGenEx, Inc. had been consummated as of January 1, 1997 follows
(in thousands, except per share data):
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
<S> <C>
Revenues.................................................... $ 0
Net loss.................................................... $(3,361)
Basic and diluted net loss per share........................ $ (0.50)
</TABLE>
F-22
<PAGE> 94
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
12. SUBSEQUENT EVENTS (UNAUDITED)
INITIAL PUBLIC OFFERING
In December 2000, the Company's Board of Directors authorized the Company
to file a Registration Statement with the Securities and Exchange Commission to
permit the Company to proceed with an IPO of its common stock (the Offering). If
the Company's Offering is consummated, all of the outstanding redeemable
convertible preferred stock will be automatically converted into common stock.
The unaudited pro forma stockholders' equity at September 30, 2000 has been
adjusted for the conversion of outstanding redeemable convertible preferred
stock and preferred stock warrants based on the outstanding number of shares of
redeemable convertible preferred stock and preferred stock warrants at September
30, 2000.
SIGNIFICANT AGREEMENTS
In December 2000, the Company and the Fred Hutchinson Cancer Research
Center amended the license agreement whereby the Company agreed to pay an
additional $25,000 nonrefundable one-time license fee and to issue 150,000
shares of common stock to the Fred Hutchinson Cancer Research Center.
RESTATED CERTIFICATE OF INCORPORATION
Upon the completion of the IPO, the Company will amend and restate its
Certificate of Incorporation to authorize the issuance of up to 100 million
shares of common stock, par value $0.001 per share, and five million shares of
preferred stock, par value $0.001 per share, the rights and preferences of which
may be established from time to time by the Board of Directors.
MANUFACTURING FACILITY LEASE
In December 2000, the Company entered into an operating lease for its
future manufacturing facility. The initial lease term expires in December 2010.
The lease contains annual rent escalations of 4.5% and an option to renew the
lease for two additional five-year periods. In addition to base rent, the
Company is required to pay a pro rata share of the operating costs related to
the leased space. Future minimum lease payments under the lease will be as
follows (in thousands):
<TABLE>
<S> <C>
Year Ended December 31,
2001...................................................... $ 810
2002...................................................... 846
2003...................................................... 885
2004...................................................... 924
2005...................................................... 965
Thereafter................................................ 5,500
------
$9,930
======
</TABLE>
The Company is required to provide additional security under the lease
agreement totaling $435,000 in the form of cash. The Company also issued a
warrant, with an expiration date of either the close of the IPO or December 7,
2005, to the lessor to purchase 80,000 shares of Series D preferred stock at an
exercise price of $2.78 in connection with this lease.
F-23
<PAGE> 95
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
1996 STOCK OPTION PLAN
Subsequent to September 30, 2000, the Company issued an additional 249,500
options at an exercise price of $0.40 per share and 29,500 options at an
exercise price of $1.00 per share. The terms of the options were consistent with
prior issuances. In November and December 2000, three executives elected to
early exercise stock options for 513,819 shares of restricted common stock.
2000 STOCK OPTION PLAN
The 2000 Stock Option Plan (2000 Plan) provides for the grant of incentive
stock options to employees (including employee directors) and nonstatutory stock
options to employees, directors and consultants. The 2000 Plan was adopted by
the Board of Directors in December 2000 and will be submitted for approval by
the stockholders prior to the completion of the IPO. A total of 2.1 million
shares of common stock has been reserved for issuance under the 2000 Plan. The
number of shares reserved for issuance under the 2000 Plan will be subject to an
automatic annual increase on the first day of each fiscal year beginning in 2002
and ending in 2008 equal to the lesser of 500,000 shares, 3% of our outstanding
common stock on the last day of the immediately preceding fiscal year, or such
lesser number of shares as the Board of Directors determines. With respect to
options granted under the 2000 Plan, the plan administrator will determine the
term of options, which may not exceed 10 years (or 5 years in the case of an
incentive stock option granted to a holder of more than 10% of the total voting
power of all classes of stock or a parent in a subsidiary's stock). In no event,
may an employee receive awards for more than 1 million shares under the 2000
Plan in any fiscal year. Incentive stock options granted under the 2000 Plan
must have an exercise price of at least 100% of the fair market value of the
common stock on the date of grant, and not less that 110% of the fair market
value in the case of incentive stock options granted to an employee who holds
more that 10% of the total voting power of all classes of stock or any parent or
subsidiary's stock.
2000 DIRECTOR'S STOCK OPTION PLAN
The 2000 Director's Stock Option Plan (2000 Directors' Plan) was adopted by
the Board of Directors in December 2000 and will be submitted to the
stockholders for approval prior to the closing of the IPO. A total of 400,000
shares of common stock has been reserved for issuance under the 2000 Directors'
Plan. Under the 2000 Directors' Plan, each non-employee director who first
becomes a non-employee director after the effective date of the plan will
receive an automatic initial grant of an option to purchase 25,000 shares of
common stock upon becoming a member of the Board of Directors. On the first day
of each fiscal year, nonemployee directors will be granted an option to purchase
5,000 shares of common stock if, on such a date, the director has served on the
Board of Directors for at least six months. The 2000 Directors' Plan provides
that each option granted to a new director shall vest at the rate of 1/3 of the
total number of shares subject to such option twelve months after the date of
grant with the remaining shares vesting thereafter in equal monthly installments
over the next two years so that the option will be fully vested after three
years, and each annual option granted to a director shall vest in full at the
end of one year. All options granted under the 2000 Directors' Plan will have a
term of 10 years and an exercise price equal to the fair market value on the
date of the grant.
2000 EMPLOYEE STOCK PURCHASE PLAN
The 2000 Employee Stock Purchase Plan (2000 Employee Plan) was adopted by
the Board of Directors in December 2000 and will be submitted to the
stockholders for approval prior to the closing of
F-24
<PAGE> 96
XCYTE THERAPIES, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF SEPTEMBER 30, 2000 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
the IPO. A total of 600,000 shares of common stock has been reserved for
issuance under the 2000 Employee Plan, none of which have been issued. The
number of shares reserved for issuance under the 2000 Employee Plan will be
increased on the first day of each of the fiscal years in 2002 to 2008 by the
lesser of 300,000 shares; 1% of our outstanding common stock on the last day of
the immediately preceding fiscal year; or the number of shares determined by the
Board of Directors. Unless terminated earlier by the Board of Directors, the
2000 Employee Plan will terminate in December 2010.
F-25
<PAGE> 97
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARES
[XCYTE LOGO]
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
SG COWEN
U.S. BANCORP PIPER JAFFRAY
DAIN RAUSCHER WESSELS
FIRST SECURITY VAN KASPER
, 2001
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 98
>PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by us in connection with the
sale of common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fee and the Nasdaq National Market listing
fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 22,770
NASD filing fee............................................. 9,125
Nasdaq National Market listing fee.......................... 1,000
Printing and engraving expenses............................. 175,000
Legal fees and expenses..................................... 400,000
Accounting fees and expenses................................ 425,000
Blue Sky qualification fees and expenses.................... 5,000
Transfer Agent and Registrar fees........................... 15,000
Miscellaneous fees and expenses............................. 247,105
----------
Total..................................................... $1,300,000
==========
</TABLE>
-------------------------
* To be filed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's Board of Directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities, including reimbursement for expenses
incurred, arising under the Securities Act of 1933, as amended. Article nine of
our certificate of incorporation, Exhibit 3.2, and Article VI of our bylaws,
Exhibit 3.3, provide for indemnification of our directors, officers, employees
and other agents to the maximum extent permitted under the laws of Delaware.
Delaware law provides that directors of a corporation will not be personally
liable for monetary damages for breach of their fiduciary duties as directors,
except liability for:
- breach of their duty of loyalty to the corporation or its stockholders;
- acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
- unlawful payments of dividends or unlawful stock repurchases or
redemptions; and
- any transaction from which the director derived an improper personal
benefit.
In addition, we have entered into indemnification agreements, Exhibit 10.1, with
our officers and directors. The underwriting agreement, Exhibit 1.1, also
provides for cross-indemnification among us, and the underwriters with respect
to certain matters, including matters arising under the Securities Act. We
maintain directors' and officers' liability insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since December 1, 1997, we have sold and issued the following securities:
1. As of November 30, 2000, we granted and issued options to purchase
1,218,686 shares of our common stock with a weighted average price of $0.20
to a number of our employees, directors and
II-1
<PAGE> 99
consultants pursuant to our 1996 stock incentive compensation plan. Among
those receiving options were Ronald J. Berenson, Mark Bonyhadi, Kathi
Cordova, Stewart Craig, Jean Deleage, Peter Langecker, Dawn McCracken and
Robert Williams.
2. As of November 30, 2000, we have issued an aggregate of 743,335
shares of our common stock to executive officers, directors and employees
upon the exercise of stock options granted pursuant to our 1996 stock
incentive compensation plan with an aggregate exercise price of $230,143.
Among those that we have issued shares to were Ronald J. Berenson, Kathi
Cordova and Dawn McCracken.
3. In July 1998, we granted and issued a warrant with an expiration
date of July 8, 2003, to purchase 194,500 shares of Series B Preferred
Stock at an exercise price of $1.10 per share to Genetics Institute, Inc.
in connection with a license agreement.
4. In July 1998, we issued 7,185,630 shares of Series C Preferred
Stock to investors, including but not limited to Alta Partners, ARCH
Venture Corporation, entities affiliated with Sprout Group and entities
affiliated with Tredegar Investments for an aggregate cash consideration of
$12,000,000.
5. In July 1999, we granted and issued a warrant with an expiration
date of either the closing of this offering or July 1, 2006, to purchase
12,315 shares of Series C Preferred Stock at an exercise price of $1.67 per
share to Phoenix Leasing Incorporated and Robert Kingsbrook, in connection
with an equipment lease line.
6. In January 2000, we granted and issued a warrant with an expiration
date of January 10, 2007, to purchase 14,371 shares of Series C Preferred
Stock at an exercise price of $1.67 per share to General Electric Capital
Corporation, in connection with an equipment lease line.
7. In May and August 2000, we issued 10,109,825 shares of our Series D
Preferred Stock to investors, including but not limited to Alta Partners,
ARCH Venture Corporation, MPM Asset Management LLC, entities affiliated
with Sprout Group and Tredegar Investments for an aggregate cash
consideration of $28,105,314.
8. In August 2000, we granted and issued warrants with an expiration
date of either the closing of this offering or August 8, 2005, to purchase
an aggregate of 1,132,287 shares of common stock at an exercise price of
$0.30 per share to our Series D investors, in connection with our Series D
financing.
9. In December 2000, we granted and issued a warrant with an
expiration date of either the closing of this offering or December 7, 2005,
to purchase 80,000 shares of Series D Preferred Stock at an exercise price
of $2.78 to Hibbs/Woodinville Associates, LLC in connection with a lease.
10. In December 2000, we issued 150,000 shares of our common stock to
the Fred Hutchinson Cancer Research Center in connection with a license
agreement.
The issuances of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) or Regulation
D, or other applicable exemption of such Securities Act as transactions by an
issuer not involving any public offering. In addition, certain issuances
described in Items 1 and 2 were deemed exempt from registration under the
Securities Act in reliance upon Rule 701 promulgated under the Securities Act.
The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and warrants issued in such transactions.
All recipients had adequate access, through their relationships with us, to
information about us.
II-2
<PAGE> 100
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of Xcyte
Therapies, Inc.
3.2 Form of Amended and Restated Certificate of Incorporation of
Xcyte Therapies, Inc. to be filed and effective upon
completion of this offering.
3.3 Amended and Restated Bylaws of Xcyte Therapies, Inc.
4.1* Form of Xcyte Therapies, Inc. Stock Certificate.
5.1* Opinion of Venture Law Group, A Professional Corporation.
10.1 Form of Indemnification Agreement between Xcyte Therapies
and each of its Officers and Directors.
10.2 Series D Preferred Stock Purchase Agreement dated May 25,
2000.
10.3 Addendum to Series D Preferred Stock Purchase Agreement and
Omnibus Amendment to Series D Financing Agreements dated
August 8, 2000.
10.4 Second Addendum to Series D Preferred Stock Purchase
Agreement dated August 14, 2000.
10.5 Amended and Restated Investor Rights Agreement dated May 25,
2000.
10.6 Amendment to Amended and Restated Investor Rights Agreement
dated October 18, 2000.
10.7 Form of Warrant to purchase Common Stock issued by Xcyte
Therapies, Inc.
10.8 Form of Warrant to purchase Series C Preferred Stock issued
by Xcyte Therapies, Inc.
10.9 Warrant to Series C Preferred Stock dated January 10, 2000
issued by Xcyte Therapies, Inc. in favor of General Electric
Capital Corporation.
10.10 Warrant to purchase Series D Preferred Stock dated December
7, 2000 issued by Xcyte Therapies, Inc. in favor of
Hibbs/Woodinville Associates, LLC.
10.11 Senior Loan and Security Agreement dated July 1, 1999
between Xcyte Therapies, Inc. and Phoenix Leasing
Incorporated.
10.12 Master Security Agreement dated January 15, 2000 between
Xcyte Therapies, Inc. and General Electric Capital
Corporation.
10.13 Facility Lease dated June 21, 1999 between Xcyte Therapies,
Inc. and Alexandria Real Estate Equities, Inc.
10.14 Facility Lease dated December 7, 2000 between Xcyte
Therapies, Inc. and Hibbs/Woodinville Associates, LLC.
10.15 Amended and Restated 1996 Stock Option Plan.
10.16 2000 Stock Option Plan.
10.17 2000 Employee Stock Purchase Plan.
10.18 2000 Directors' Stock Option Plan.
10.19+ License Agreement dated June 28, 1999 between Xcyte
Therapies, Inc. and ARCH Development Corporation.
10.20+ License and Supply Agreement dated October 15, 1999 between
Xcyte Therapies, Inc. and Diaclone S.A., as amended.
10.21+ Development and Supply Agreement dated August 1, 1999
between Xcyte Therapies, Inc. and Dynal S.A.
10.22+ License Agreement dated July 8, 1998 between Xcyte
Therapies, Inc., and Genetics Institute, Inc.
10.23+ Non-Exclusive License Agreement dated October 20, 1999
between Xcyte Therapies, Inc. and the Fred Hutchinson Cancer
Research Center, as amended.
10.24+ Services Agreement dated June 6, 2000 between Xcyte
Therapies, Inc. and Lonza Biologics PLC.
10.25+ Services Agreement dated June 6, 2000 between Xcyte
Therapies, Inc. and Lonza Biologics PLC.
10.26+ License Agreement dated July 30, 1999 between Xcyte
Therapies, Inc. and Genecraft LLC.
16.1 Letter from PricewaterhouseCoopers LLP Regarding Change in
Accountants.
</TABLE>
II-3
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
23.1 Consent of Ernst & Young LLP Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
23.3* Consent of Venture Law Group (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-4).
27.1 Financial Data Schedule.
</TABLE>
-------------------------
* To be supplied by amendment.
+ Certain information in these exhibits has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.406.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 102
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the city of Seattle, State of
Washington on December 22, 2000.
XCYTE THERAPIES, INC.
By: /s/ RONALD. J. BERENSON
------------------------------------
Ronald J. Berenson, M.D.
President and Chief Executive
Officer
II-5
<PAGE> 103
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints, jointly and severally, Ronald J.
Berenson and Kathi L. Cordova, and each of them, as his attorney-in-fact, with
full power of substitution, for him in any and all capacities, to sign any and
all amendments to this Registration Statement (including post-effective
amendments), and any and all Registration Statements filed pursuant to Rule 462
under the Securities Act of 1933, as amended, in connection with or related to
the offering contemplated by this Registration Statement and its amendments, if
any, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorney to any and all amendments to said Registration Statement.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ RONALD J. BERENSON President and Chief Executive December 22, 2000
------------------------------------------------ Officer (Principal Executive
Ronald J. Berenson, M.D. Officer)
/s/ KATHI L. CORDOVA Vice President of Finance December 22, 2000
------------------------------------------------ (Principal Financial and
Kathi L. Cordova Accounting Officer)
/s/ ROBERT E. CURRY Director December 22, 2000
------------------------------------------------
Robert E. Curry, Ph.D.
/s/ JEAN DELEAGE Director December 22, 2000
------------------------------------------------
Jean Deleage, Ph.D.
/s/ PETER LANGECKER Director December 22, 2000
------------------------------------------------
Peter Langecker, M.D., Ph.D.
/s/ ROBERT T. NELSEN Director December 22, 2000
------------------------------------------------
Robert T. Nelsen
/s/ MICHAEL STEINMETZ Director December 22, 2000
------------------------------------------------
Michael Steinmetz, Ph.D.
/s/ ROBERT M. WILLIAMS Director December 22, 2000
------------------------------------------------
Robert M. Williams, Ph.D.
</TABLE>
II-6
<PAGE> 104
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of Xcyte
Therapies, Inc.
3.2 Form of Amended and Restated Certificate of Incorporation of
Xcyte Therapies, Inc. to be filed and effective upon
completion of this offering.
3.3 Amended and Restated Bylaws of Xcyte Therapies, Inc.
4.1* Form of Xcyte Therapies, Inc. Stock Certificate.
5.1* Opinion of Venture Law Group, A Professional Corporation.
10.1 Form of Indemnification Agreement between Xcyte Therapies
and each of its Officers and Directors.
10.2 Series D Preferred Stock Purchase Agreement dated May 25,
2000.
10.3 Addendum to Series D Preferred Stock Purchase Agreement and
Omnibus Amendment to Series D Financing Agreements dated
August 8, 2000.
10.4 Second Addendum to Series D Preferred Stock Purchase
Agreement dated August 14, 2000.
10.5 Amended and Restated Investor Rights Agreement dated May 25,
2000.
10.6 Amendment to Amended and Restated Investor Rights Agreement
dated October 18, 2000.
10.7 Form of Warrant to purchase Common Stock issued by Xcyte
Therapies, Inc.
10.8 Form of Warrant to purchase Series C Preferred Stock issued
by Xcyte Therapies, Inc.
10.9 Warrant to Series C Preferred Stock dated January 10, 2000
issued by Xcyte Therapies, Inc. in favor of General Electric
Capital Corporation.
10.10 Warrant to purchase Series D Preferred Stock dated December
7, 2000 issued by Xcyte Therapies, Inc. in favor of
Hibbs/Woodinville Associates, LLC.
10.11 Senior Loan and Security Agreement dated July 1, 1999
between Xcyte Therapies, Inc. and Phoenix Leasing
Incorporated.
10.12 Master Security Agreement dated January 15, 2000 between
Xcyte Therapies, Inc. and General Electric Capital
Corporation.
10.13 Facility Lease dated June 21, 1999 between Xcyte Therapies,
Inc. and Alexandria Real Estate Equities, Inc.
10.14 Facility Lease dated December 7, 2000 between Xcyte
Therapies, Inc. and Hibbs/Woodinville Associates, LLC.
10.15 Amended and Restated 1996 Stock Option Plan.
10.16 2000 Stock Option Plan.
10.17 2000 Employee Stock Purchase Plan.
10.18 2000 Directors' Stock Option Plan.
10.19+ License Agreement dated June 28, 1999 between Xcyte
Therapies, Inc. and ARCH Development Corporation.
10.20+ License and Supply Agreement dated October 15, 1999 between
Xcyte Therapies, Inc. and Diaclone S.A., as amended.
10.21+ Development and Supply Agreement dated August 1, 1999
between Xcyte Therapies, Inc. and Dynal S.A.
10.22+ License Agreement dated July 8, between Xcyte Therapies,
Inc., and Genetics Institute, Inc.
10.23+ Non-Exclusive License Agreement dated October 20, 1999
between Xcyte Therapies, Inc. and the Fred Hutchinson Cancer
Research Center, as amended.
10.24+ Services Agreement dated June 6, 2000 between Xcyte
Therapies, Inc. and Lonza Biologics PLC.
10.25+ Services Agreement dated June 6, 2000 between Xcyte
Therapies, Inc. and Lonza Biologics PLC.
10.26+ License Agreement dated July 30, 1999 between Xcyte
Therapies, Inc. and Genecraft LLC.
16.1 Letter from PricewaterhouseCoopers LLP Regarding Change in
Accountants.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
23.2 Consent of PricewaterhouseCoopers LLP, Independent
Accountants.
</TABLE>
<PAGE> 105
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
23.3* Consent of Venture Law Group (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-4).
27.1 Financial Data Schedule.
</TABLE>
-------------------------
* To be supplied by amendment.
+ Certain information in these exhibits has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. Sections 200.80(b)(4), 200.83 and 230.406..
