<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File number 0-19472
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CELLPRO, INCORPORATED
(exact name of registrant as specified in its charter)
Delaware 94-3087971
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
22215 - 26th Avenue, S.E., Bothell, Washington 98021
-------------------------------------------------------
(Zip Code)
(Address of registrant's
principal executive offices)
(425) 485-7644
(Registrant's telephone number, including area code)
Not Applicable
--------------
(Former name, former address, and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Outstanding at
July 31, 1998
Common Stock, $0.001 par value 14,633,985
Page 1 of 16
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets - June 30, 1998
and March 31, 1998...................................................................... 3
Consolidated Statements of Operations -
Three months ended June 30, 1998
and 1997............................................................................ 4
Condensed Consolidated Statements of Cash Flows -
Three months ended June 30, 1998 and 1997........................................... 5
Notes to Consolidated Financial Statements.............................................. 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations........................................... 7-15
PART II: OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 15
Item 6. Exhibits and Reports on Form 8-K........................................................ 15
All other items under Part II are inapplicable or have a
negative response and are therefore omitted.
SIGNATURES ........................................................................................ 16
</TABLE>
Page 2 of 16
<PAGE> 3
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CELLPRO, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998 AND MARCH 31, 1998
ASSETS
<TABLE>
<CAPTION>
June 30, March 31,
1998 1998
------------- -------------
(Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 8,141,847 $ 12,463,465
Securities available for sale 5,671,554 7,745,879
Trade receivables 2,857,129 2,711,342
Inventories 7,412,262 6,663,345
Other current assets 470,620 554,720
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Total current assets 24,553,412 30,138,751
Property and equipment, net 9,680,383 10,346,372
Restricted cash equivalents 9,977,085 9,220,296
Other assets 144,912 138,727
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Total assets $ 44,355,792 $ 49,844,146
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 127,950 $ 78,714
Accounts payable 532,394 744,565
Accrued liabilities 2,950,340 3,030,415
Accrual for litigation claim and costs 13,438,001 13,722,089
Other current liabilities 119,671 119,671
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Total current liabilities 17,168,356 17,695,454
Long-term debt, net of current portion 125,294 233,852
Other liabilities 1,412,039 1,409,844
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Total liabilities 18,705,689 19,339,150
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Stockholders' equity:
Common stock 14,633 14,602
Additional paid-in capital 169,908,254 169,813,574
Foreign currency translation (237,622) (258,308)
Net unrealized gain(loss) on securities available
for sale (9,681) (4,136)
Accumulated deficit (144,025,481) (139,060,736)
------------- -------------
Total stockholders' equity 25,650,103 30,504,996
------------- -------------
Total liabilities and stockholders' equity $ 44,355,792 $ 49,844,146
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3 of 16
<PAGE> 4
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
CELLPRO, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
June 30,
--------
1998 1997
---- ----
<S> <C> <C>
Product sales $ 2,492,829 $ 2,475,311
Contract revenue 95,443 77,608
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Total revenues 2,588,272 2,552,919
------------ ------------
Costs and expenses:
Cost of product sales 1,232,677 1,258,805
Other cost of sales 685,324 --
Research and development 2,841,057 3,490,195
Selling, general and administrative 3,191,709 3,536,590
------------ ------------
Total costs and expenses 7,950,767 8,285,590
------------ ------------
Loss from operations (5,362,495) (5,732,671)
------------ ------------
Other income (expense):
Interest income 349,808 658,896
Interest expense (6,174) (7,469)
Other, net 54,115 (701)
------------ ------------
Total other income 397,749 650,726
------------ ------------
Net loss $ (4,964,746) $ (5,081,945)
============ ============
Net loss per share - basic and diluted $ (0.34) $ (0.35)
============ ============
Weighted average number of common shares
outstanding during the period - basic and diluted 14,621,040 14,499,738
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
CELLPRO, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
June 30,
--------
1998 1997
---- ----
<S> <C> <C>
Net cash used in operating
activities $(5,591,887) $(6,206,392)
------------ ------------
Investing activities:
Purchase of property and equipment (37,311) (167,100)
Proceeds from sales and maturities
of securities available for sale 2,068,780 12,310,801
Purchase of securities available
for sale -- (3,299,398)
Purchase of restricted cash equivalents (756,789) --
Change in other assets (6,185) (60,580)
------------ ------------
Net cash provided by investing activities 1,268,495 8,783,723
------------ ------------
Financing activities:
Principal payments on
long-term debt (59,322) (3,062)
Issuance of Common Stock, net
of issuance costs 40,409 60,759
Other 20,687 (16,761)
------------ ------------
Net cash provided by financing activities 1,774 40,936
------------ ------------
Net (decrease) increase in cash and cash equivalents (4,321,618) 2,618,267
Cash and cash equivalents:
Beginning of period 12,463,465 15,052,804
------------ ------------
End of period $ 8,141,847 $ 17,671,071
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5 of 16
<PAGE> 6
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
CELLPRO, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
1. Basis of Presentation - The accompanying unaudited consolidated financial
statements should be read in conjunction with the audited financial
statements and notes thereto contained in the Company's Annual Report on
Form 10-K for the year ended March 31, 1998. In the opinion of management,
all adjustments necessary for a fair presentation of the interim operating
results are reflected herein. All such adjustments are normal and recurring
in nature. The consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has had
recurring negative cash flow from operating activities and has recently
suffered a significant legal setback related to its appeal of the patent
litigation discussed in "Investment Considerations - Legal Proceedings."
These matters raise substantial doubt as to the Company's ability to
continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from this uncertainty.
2. Principles of Consolidation - The consolidated financial statements
include the accounts of CellPro, Incorporated (the "Company") and its
wholly owned subsidiaries. Intercompany transactions and balances have been
eliminated in consolidation.
3. Restricted Cash Equivalents - Restricted cash equivalents at June 30, 1998
consisted of (i) a $9 million deposit in a collateral account as part of
posting an appeal bond in response to a legal judgment and (ii) a $977,085
deposit in an escrow account related to a partial stay of the international
provisions of an injunction.
4. Inventories - Inventories consist of the following:
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
------------- --------------
<S> <C> <C>
Raw materials $1,461,312 $2,040,210
Work in process 198,217 719,894
Finished goods 5,752,733 3,903,241
---------- ----------
$7,412,262 $6,663,345
========== ==========
</TABLE>
5. Contingency - As more fully discussed in "Investment Considerations - Legal
Proceedings," the U.S. Court of Appeals for the Federal Circuit (the
"Appeals Court") has affirmed significant portions of a legal judgment
against the Company and a permanent injunction relating to the Company's
principal products. The legal judgment included an award of damages in the
amount of $7,239,833. In addition, the plaintiffs have petitioned for an
award of attorneys fees of approximately $8 million. The Company cannot
currently estimate the ultimate amount of loss related to this litigation.
Page 6 of 16
<PAGE> 7
The June 30, 1998 Balance Sheet includes an accrued liability of
$13,438,001 related to this contingency.
6. Supplemental Disclosures of Cash Flow Information - Cash paid for interest
was $6,174 for the three months ended June 30, 1998 and $7,469 for the
three months ended June 30, 1997. The Company had an unrealized loss on
securities available for sale of $5,545 for the three months ended June 30,
1998.
7. Net Loss Per Share - Presentation of basic earnings per share ("EPS") and
diluted EPS on the face of the consolidated statements of operations is
required for entities with complex capital structures. Basic EPS is based
on the weighted average number of common shares outstanding during the
period. Diluted EPS is based on the potential dilution that would occur on
exercise or conversion of securities into common stock using the treasury
stock method. However, potential common shares that are considered to be
anti-dilutive are excluded from the computation of diluted EPS. Since the
Company has a loss from continuing operations, inclusion of potential
common shares would be anti-dilutive. Accordingly, such potential common
shares have been excluded from the computation of diluted EPS resulting in
the same amount for both basic and diluted EPS. Specifically, options to
acquire 2.7 million and 2.5 million shares have been excluded from the
calculation of diluted EPS for the quarters ended June 30, 1998 and 1997,
respectively. Outstanding stock options could potentially dilute EPS in
future periods.
8. Comprehensive Income - In June 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" (SFAS 130). The Company implemented SFAS
130 during the quarter ended June 30, 1998. Comprehensive income includes
net loss as shown in the consolidated statement of operations adjusted by
certain amounts which are included in stockholders' equity accounts. Net
unrealized gains or losses on securities available for sale and foreign
currency translation adjustments resulting from the consolidation of
foreign operations are the only two adjustments to net loss to arrive at
the Company's comprehensive loss. The table below shows comprehensive loss
for the periods presented:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Net loss $(4,964,746) $(5,081,945)
Foreign currency translation 20,686 (16,761)
Net unrealized gain (loss) on securities available
for sale (5,545) 144,896
----------- -----------
Comprehensive loss $(4,949,605) $(4,953,810)
=========== ===========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for disclosures that report the Company's historical results, the
statements set forth in this section are forward-looking statements. Actual
results may differ materially from those projected in the forward-looking
statements. Additional information concerning factors that may cause actual
Page 7 of 16
<PAGE> 8
results to differ materially from those in the forward-looking statements are
set forth in the section entitled "Investment Considerations," below, in the
section entitled "Investment Considerations" in the Company's Annual Report on
Form 10-K for the fiscal year ended March 31, 1998, and in the Company's other
filings with the Securities and Exchange Commission. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company assumes no obligation to update any such
forward-looking statements or comment on the reasons why actual results may
differ therefrom.
Since the commencement of operations in 1989, the Company has primarily engaged
in developing, manufacturing and marketing proprietary continuous-flow,
cell-selection systems for use in a variety of therapeutic, diagnostic and
research applications. As a result of the recent unfavorable outcome of the
appeal of the patent litigation, the Company's ability to continue to market its
principal products in the U.S. and the rest of the world is in substantial
doubt. See "Investment Considerations - Legal Proceedings."
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
PRODUCT SALES
CellPro reported $2.5 million in product sales for the quarter ended June 30,
1998, unchanged from the $2.5 million in product sales for the quarter ended
June 30, 1997. Increased sales in the U.S. were offset by decreases in
international sales.
U.S. and export sales were $1.5 million in the quarter ended June 30, 1998
compared to $0.9 million for the quarter ended June 30, 1997. The increase is
due to U.S. sales of the CEPRATE(R) SC System which was launched in the U.S.
during January 1997. Export sales were lower in the quarter ended June 30, 1998
compared to the quarter ended June 30, 1997. The Company is operating under an
injunction which, among other things, prohibits the Company from selling the
CEPRATE(R) SC System to new commercial sites outside the U.S. See "Investment
Considerations - Legal Proceedings."
European sales were $1 million for the quarter ended June 30, 1998 compared to
$1.6 million for the quarter ended June 30, 1997. This decrease was due to
reduced European unit sales and lower average selling prices in the European
market. Unit sales have been negatively affected by the injunction discussed
above and also below in "Investment Considerations - Legal Proceedings." The
lower average selling prices have resulted from the continuing strength of the
U.S. dollar.
COST OF PRODUCT SALES
Cost of product sales was $1.2 million and $1.3 million for the quarters ended
June 30, 1998 and 1997, respectively. The Company's gross product margin
percentage was consistent in the two periods.
Page 8 of 16
<PAGE> 9
OTHER COST OF SALES
Other cost of sales amounted to $685,000 for the quarter ended June 30, 1998 and
represents the amount due to plaintiffs pursuant to a partial stay of the
injunction described in "Investment Considerations -- Legal Proceedings." The
amount is based on the quantity of product sold by the Company, and amounts to
$1,075 per CEPRATE(R) SC Disposable Kit sold commercially, $750 per CEPRATE(R)
SC Disposable Kit sold on a cost recovery basis and $5,000 for each instrument
installed at a new U.S. customer site. These costs will continue as long as the
Company continues to sell products pursuant to the partial stay of the
injunction.
RESEARCH AND DEVELOPMENT
Research and development expense totaled $2.8 million for the fiscal quarter
ended June 30, 1998 and $3.5 million for the fiscal quarter ended June 30, 1997.
The decrease was due to the recent termination of a research collaboration under
which the Company funded research during the quarter ended June 30, 1997 and the
delay or termination of other research programs as a result of restrictions on
the Company's ability to perform research and development in the U.S., pursuant
to the injunction. See "Investment Considerations - Legal Proceedings."
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses decreased to $3.2 million for the
quarter ended June 30, 1998, from $3.5 million for the quarter ended June 30,
1997. The decrease was due to lower administrative expenses related to
professional advisors in the 1998 quarter.
INTEREST INCOME
Interest income totaled $350,000 for the fiscal quarter ended June 30, 1998
compared to $659,000 for the quarter ended June 30, 1997. The decrease was due
to lower average cash balances available for investment in the 1998 quarter.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date field. Beginning in the year 2000,
these date code fields will need to accept four digit entries to distinguish
21st century dates from 20th century dates. While uncertainty exists concerning
the potential effects associated with such compliance, the Company currently
does not believe that year 2000 compliance will result in a material adverse
effect on its business, financial condition or results of operations. However,
there can be no assurance that the Company will not be materially adversely
affected as a result of the year 2000 compliance measures or the failure of any
such measures.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through the
sale of Common Stock and Preferred Stock and generation of interest income.
Through June 30, 1998, the Company has raised $73.3 million through two public
offerings, $79.7 million through two private offerings of Common Stock, and $9.7
million from the sale of Preferred Stock. The Company has also generated
Page 9 of 16
<PAGE> 10
$19.2 million in interest income. As shown in the Condensed Consolidated
Statement of Cash Flows, the Company used $5.6 million of its cash, cash
equivalents and securities available for sale in operations in the quarter ended
June 30, 1998.
At June 30, 1998, the Company had $13.8 million in cash, cash equivalents and
securities available for sale with which to fund continuing operations. As a
result of the recent unfavorable decision in its patent litigation, the Company
does not expect to be able to raise additional capital. The Company has
projected that these resources will be exhausted in the very near future and may
be exhausted prior to September 30, 1998.
The Company is operating under a partial stay of an injunction issued by the
U.S. District Court for the District of Delaware (the "District Court") and
modified by the Appeals Court. This litigation and the injunction have had a
material adverse effect on the Company's financial condition and prospects,
results of operation and cash flows.
During August 1997, the Company placed $9 million in a collateral account as
part of posting an appeals bond. This cash is not available to the Company and
is included in restricted cash equivalents at June 30, 1998.
In addition, the Company must deposit revenues from international sales of its
principal product in an escrow account, pursuant to a stay of certain provisions
of the injunction granted by the Appeals Court. Approximately $1 million is
included in restricted cash equivalents at June 30, 1998 pursuant to this
requirement. This cash is not currently available to the Company.
The injunction also requires that the Company pay a substantial portion of its
revenues to plaintiffs in the litigation described below in "Investment
Considerations - Legal Proceedings." As of June 30, 1998, approximately $3.7
million had been paid or accrued as a liability as a result of this requirement.
The preceding forward-looking statements are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
projected. In particular, any future requirement to segregate significant
additional amounts in connection with on-going patent litigation would have a
material impact on this projection. In addition, the amount and timing of
working capital resources consumed will depend on the nature of the Company's
on-going operations, if any.
INVESTMENT CONSIDERATIONS
The Company desires to take advantage of certain provisions of the Private
Securities Litigation Reform Act of 1995, enacted in December 1995 (the "Reform
Act") that provided a "safe harbor" for forward-looking statements made by or on
behalf of the Company. The Company hereby cautions stockholders, prospective
investors in the Company and other readers that certain important factors in
some cases have affected, and in the future could affect, the Company's stock
price or cause the Company's actual results for the fiscal year ending March 31,
1999, and for future fiscal years and quarters to differ materially from those
expressed in any forward-looking statements, oral or
Page 10 of 16
<PAGE> 11
written, made by or on behalf of the Company. Stockholders, prospective
investors and other readers should also refer to the more extensive discussion
of investment considerations set forth in the Company's Annual Report on Form
10-K for the year ended March 31, 1998 in the section titled "Investment
Considerations." Particular attention should be given to the Investment
Considerations labeled "Legal Proceedings," "Patents and Proprietary
Technology," "Future Capital Needs; Potential Inability to Access Capital
Markets; Possible Insolvency" and "Dependence on CEPRATE(R) SC System" in
CellPro's annual report.
RISK OF INSOLVENCY
The Company requires substantial working capital to fund its business and
operating losses. The Company has experienced negative cash flow from operations
since inception and expects to continue to experience negative cash flow from
operations for the near-term future. As noted above in "Management's Discussion
and Analysis of Financial Condition and Results of Operation - Liquidity and
Capital Resources," the Company's current capital resources are not sufficient
to continue to fund the Company's operations through March 31, 1999. If the
plaintiffs in the patent litigation described below under "Investment
Considerations - Legal Proceedings" prevail on their earlier filed motions to
require the Company to pay attorneys fees currently estimated at $8 million, the
Company's current capital resources would not be sufficient to fund the
Company's operations, as currently conducted, through September 30, 1998. There
is no way to predict how the District Court will proceed in respect thereof. It
is unlikely that additional financing will be available to the Company,
particularly in light of the recent Appeals Court rulings with respect to the
patent litigation and the permanent injunction discussed below under "Investment
Considerations - Legal Proceedings." Absent a reasonable license from the
plaintiffs, or another alternative which may or may not be available, the
Company will likely find it necessary to file for protection under the United
States Bankruptcy laws.
LEGAL PROCEEDINGS
The Company has been engaged in litigation with The Johns Hopkins University
("Hopkins"), Becton Dickinson & Company ("BD") and Baxter Healthcare Corporation
("Baxter") concerning certain U.S. patents. There have been two jury trials in
the case. On August 4, 1995, following the first trial, a unanimous seven-member
jury in the District Court, rendered a verdict wholly favorable to the Company
relating to the four U.S. patents then in suit, i.e., Patent Nos. 4,714,680,
4,965,204, 5,035,994 and 5,130,144 (hereinafter the '680, '204, '994 and '144
patents), which had been assigned to Hopkins, licensed to BD and sublicensed to
Baxter. The '680 patent purports to cover certain suspensions of stem cells in
isolation from a mixed cell population; the '204 patent purports to cover
hybridomas that produce monoclonal antibodies having certain characteristics
relating to stem cells, and to cover such antibodies themselves; the '994 patent
purports to cover a method of stem cell isolation using such antibodies; and the
'144 patent purports to cover a method of transplanting stem cells in a human
patient.
The jury in the first trial determined that the Company did not literally
infringe any of these four patents; that all claims of all four patents were
invalid for obviousness under 35 U.S.C. Section 103; and that, with the
exception of
Page 11 of 16
<PAGE> 12
two claims of the '204 patent, all claims of all four patents were invalid on
the additional ground of failure to enable under 35 U.S.C. Section 112. The two
claims of the '204 patent as to which the jury did not render a verdict of
"nonenablement" invalidity under 35 U.S.C. Section 112 are limited in their
literal scope to the My-10 antibody and its accompanying hybridoma, an antibody
and hybridoma which are not employed by the Company.
Following the first jury verdict, plaintiffs filed post-trial motions and, on
July 1, 1996, the District Court, per Judge Roderick R. McKelvie, partially
granted plaintiffs' motion for judgment as a matter of law as to the issues of
infringement, inducement of infringement and enablement with respect to the '680
patent, as well as the issue of induced infringement with respect to the '144
patent. The District Court ordered a new trial on remaining liability and
infringement issues.
In a series of decisions subsequent to the July 1, 1996 order, the District
Court granted plaintiffs' summary judgment motion to dismiss the Company's
remaining liability and infringement defenses with respect to two of the patents
at issue. Plaintiffs moved to withdraw the other two patents (the '994 and '144
patents) from suit, which motion was granted upon plaintiffs' undertaking that
they would not accuse any present product of CellPro of infringing those
patents.
A second jury trial was held in March 1997, at which the jury was instructed to
the effect that the Court had already determined that CellPro infringed the two
patents remaining in the suit, that its defenses had been dismissed, and that
the jury was bound by those determinations. Hence, the jury at the second trial
heard evidence and arguments only as to the amount of damages to be awarded, and
as to whether CellPro's conduct had been willful. On March 11, 1997, the jury
reached a verdict finding willfulness and awarding approximately $2.3 million in
damages to plaintiffs.
After the second jury's verdict the following motions were filed and resolved:
(1) Plaintiffs' motion for enhanced damages, whereby they asked the Court
to treble the jury's damage award, was granted, and on July 24, 1997, final
judgment was entered against the Company for $6,961,479.
(2) Plaintiffs' motion for attorney fees, whereby they seek a determination
that the Company is liable to reimburse them for approximately $7 million
in attorney fees and related litigation costs, was, at the discretion of
the District Court, held in abeyance.
(3) Plaintiffs' motion for a permanent injunction was granted on July 24,
1997, and such injunction grants relief to plaintiffs (subject to a partial
stay), as further described below.
The District Court also dismissed the Company's defense that the patents are
unenforceable for misuse by reason of an attempt by the plaintiffs to extend the
reach of the patents beyond the territory of the U.S.
On July 24, 1997, a permanent injunction was entered by the District Court. The
injunction is complex in form, but it generally prohibits the Company (subject
to a stay hereinafter described) from making, using and selling
Page 12 of 16
<PAGE> 13
products in the U.S. which utilize the anti-stem-cell monoclonal antibody that
is essential to the Company's principal products as they are presently
constituted, and from conducting certain research activities in the U.S. during
the term of the patents. In the U.S., the injunction is subject to a partial
stay which by its terms permits the Company to continue selling its principal
product (CEPRATE(R) SC disposable kits) until such time as another stem cell
immunoseparation product manufactured and sold under a license to the patents in
dispute gains approval from the FDA, an event which plaintiffs had contended
would probably occur before the end of 1997 but which has not yet occurred and
may take significantly longer. Thereafter, the Company would have to phase out
sales of the CEPRATE(R) SC System over a three-month period, except that the
Company would be permitted to continue supplying product to support certain U.S.
clinical trials commenced before the time an alternative device wins FDA
approval. Outside the U.S., the partial stay allowed by the District Court
required the Company to phase out over a one-year period its exports of
disposable kits containing U.S. sourced antibody found to infringe plaintiffs'
patents and to prohibit sales of such kits to new customers. The Company filed a
motion for stay of the permanent injunction with the Appeals Court seeking,
among other things, to eliminate certain restrictions on sales outside the U.S.
On January 30, 1998, the Appeals Court granted a stay of the international
phase-out pending review of the case on appeal. Under the partial stay as
modified by order of the District Court dated February 27, 1998, commercial
sales and cost recovery sales of disposable kits sold under the partial stay are
subject to a requirement that the Company pay plaintiffs $1,075 and $750 per
kit, respectively, and $5,000 per CEPRATE(R) SC Instrument System sold or
installed at a new commercial site after March 11, 1997. Subsequent to January
30, 1998, the further stay issued by the Appeals Court requires that net
revenues from international sales be deposited into an escrow account pending
further action by the Appeals Court. The injunction has forced the Company to
terminate substantially all sales of the CEPRATE(R) LC34 Laboratory Cell
Selection System.
On June 16, 1998, plaintiffs filed a motion in the District Court which sought
to require the Company to escrow or otherwise restrict additional cash to secure
a possible award of attorneys fees which plaintiffs increased their estimation
of to $8 million. On July 29, 1998, in connection with such motion, the District
Court decided to enjoin the Company from engaging in any transactions outside
the ordinary course of business subject to permitted exceptions which include,
without limitation, additional equity financings.
On August 11, 1998, the Appeals Court issued its decision on CellPro's appeals
from the District Court rulings in the patent litigation. The Appeals Court
affirmed the District Court's construction of the claims of the '204 patent,
finding that the '204 patent covers all monoclonal antibodies that specifically
bind to "the CD34 antigen." As a result, the Appeals Court affirmed the District
Court's summary judgment ruling that CellPro's manufacture, use and sale of the
12.8 antibody in the U.S. infringed the '204 patent. The Appeals Court also
rejected CellPro's arguments that the District Court had erred in granting
summary judgment to plaintiffs regarding the validity of the '204 patent.
As to the other patent in dispute, the '680 patent, the Appeals Court affirmed
the District Court's construction of the patent claims, agreeing that the patent
covers suspensions of human stem cells containing no more than 10%
Page 13 of 16
<PAGE> 14
mature lymphoid and myeloid cells. Based on this construction, the Appeals Court
also affirmed the District Court's judgment as a matter of law that CellPro had
infringed the '680 patent. The Appeals Court decided, however, that the District
Court erred in refusing to consider certain evidence submitted by CellPro when
it ruled on summary judgment that the '680 patent was valid. The Appeals Court
therefore vacated the District Court's grant of summary judgment on this issue
and remanded the question whether the '680 patent is valid to the District Court
for further proceedings. This decision allows CellPro to pursue its argument in
the District Court that the '680 patent is invalid as anticipated or obvious
using certain evidence that the District Court improperly excluded. The Appeals
Court, however, took no position on whether it would be proper for the District
Court to grant summary judgment of validity on remand even in light of the
evidence it previously excluded.
The Appeals Court further decided that the District Court did not commit any
reversible error when it upheld the second jury's finding that CellPro willfully
infringed the '204 and '680 patents. The Appeals Court found that there was
substantial evidence to support the willfulness finding. The Appeals Court also
upheld the District Court's decision to award treble damages against CellPro,
finding that the District Court adequately justified that award.
In reviewing the scope of the permanent injunction entered by the District Court
against CellPro, the Appeals Court agreed with CellPro's argument that the
District Court abused its discretion in ordering CellPro to repatriate to the
U.S. and then destroy vials of 12.8 hybridoma that CellPro had exported to
Canada for use and sale outside the U.S. Accordingly, the Appeals Court vacated
those portions of the permanent injunction.
As a result of the Appeals Court decision, CellPro will be free to continue to
build its business and operations outside the U.S. using 12.8 antibody produced
from the hybridoma that was previously repatriated. But CellPro's U.S.
operations are still subject to the terms of the permanent injunction as
discussed above. As a result, the Company will ultimately be prohibited from
selling its principal products as presently constituted in the U.S.
The Company plans to petition the Appeals Court for reconsideration of the
willfulness finding and will also seek clarification of various points within
the Appeals Court ruling. One of the clarifications requested will be the amount
of damages, since the damages awarded in the District Court include a
substantial amount related to foreign operations held to be outside the reach of
the patents in question.
Plaintiffs will likely renew their petition in the District Court for an award
of approximately $8 million of attorney's fees.
The ultimate amount of damages in this case is not currently estimable. However,
the damages could exceed $15 million. This litigation has had and will continue
to have a material adverse effect on the Company's results of operations and
financial condition and prospects.
CellPro's Board of Directors and management are evaluating all legal and
business alternatives in light of the Appeals Court decision, including
Page 14 of 16
<PAGE> 15
seeking a commercially reasonable license under the patents at issue from
plaintiffs or certain third party licensees. Attempts to negotiate licenses with
plaintiffs have not been successful to date, however, and no assurance can be
given that plaintiffs would license the patents to CellPro on commercially
reasonable terms that would permit commercialization of CellPro's stem cell
separation technology, or at all.
CLASS ACTION LAWSUIT
On March 16, 1998, a lawsuit was filed in the U.S. District Court for the
Western District of Washington against the Company, certain of the Company's
officers and directors, and a law firm that issued certain legal opinions in
respect of the patents which are the subject of the legal proceedings described
above (together "defendants"). The lawsuit, which purports to be brought on
behalf of persons who purchased shares of the Company's Common Stock between
March 10, 1995 and July 28, 1997, alleges the defendants violated Sections 10(b)
(including Rule 10b-5) and 20(a) of the Securities Exchange Act as well as
certain provisions of Washington state and common law. On March 27, 1998,
plaintiffs filed a virtually identical complaint in the same district. On May
12, 1998, the court granted a motion consolidating the two cases before the same
judge. The consolidated case is captioned In re: CellPro, Inc. Securities
Litigation. Master File No. C98-298Z (the "Class Action").
On May 8, 1998, a group of plaintiffs moved to be appointed lead plaintiffs and
are awaiting the court's decision on that motion. Plaintiffs and defendants have
stipulated to a schedule for filing and responding to a consolidated amended
complaint and for filing a motion for class certification.
On July 16, 1998, the Florida State Board of Administration filed a lawsuit
against the Company in the U.S. District Court for the Western District of
Washington containing the same allegations asserted in the Class Action.
The course of litigation is inherently uncertain and there can be no assurance
of a favorable outcome.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See discussion under "Investment Considerations - Legal Proceedings" in Part I,
Item 2, above.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 27 - Financial Data Schedule
(b) A current report on Form 8-K was filed as of June 8, 1998.
Page 15 of 16
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CELLPRO, INCORPORATED
(Registrant)
Date: August 21, 1998
/s/ Richard D. Murdock
------------------------------------
Richard D. Murdock
President,
Chief Executive Officer,
and Director
/s/ David M. Bishop
------------------------------------
David M. Bishop
Vice President of Finance
(Principal Financial and
Accounting Officer)
Page 16 of 16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
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<FISCAL-YEAR-END> MAR-31-1999
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<PERIOD-END> JUN-30-1998
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<SECURITIES> 5,672
<RECEIVABLES> 2,857
<ALLOWANCES> 0
<INVENTORY> 7,412
<CURRENT-ASSETS> 24,553
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<DEPRECIATION> (13,913)
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<INTEREST-EXPENSE> 6
<INCOME-PRETAX> (4,965)
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