<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 21, 1997
REGISTRATION NO. 333-20855
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------
CELL THERAPEUTICS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------
WASHINGTON 2384 91-1533912
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
-----------
201 ELLIOTT AVENUE WEST, SUITE 400
SEATTLE, WASHINGTON 98119
(206) 282-7100
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-----------
JAMES A. BIANCO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CELL THERAPEUTICS, INC.
201 ELLIOTT AVENUE WEST, SUITE 400
SEATTLE, WASHINGTON 98119
(206) 282-7100
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)
-----------
COPIES TO:
MICHAEL J. KENNEDY KAREN A. DEMPSEY
MICHAEL S. DORF MICHAEL D. LEE
SHEARMAN & STERLING PILLSBURY MADISON & SUTRO LLP
555 CALIFORNIA STREET, SUITE 2000 2700 SAND HILL ROAD
SAN FRANCISCO, CALIFORNIA 94104 MENLO PARK, CALIFORNIA 94025
(415) 616-1100 (415) 233-4500
-----------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
-----------
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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
-----------
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 THE 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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE>
CELL THERAPEUTICS, INC.
CROSS REFERENCE SHEET
------------
PURSUANT TO ITEM 501(b) OF REGULATION S-K
SHOWING THE LOCATION IN THE PROSPECTUS OF THE
INFORMATION REQUIRED BY PART I OF FORM S-1
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING IN FORM S-
1 REGISTRATION STATEMENT LOCATION IN PROSPECTUS
---------------------------------- ----------------------
<C> <S> <C>
1. Forepart of the Registration
Statement and Outside Front Forepart of the Registration Statement and
Cover Page of Prospectus..... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back
Cover Pages of Prospectus.... Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information, Risk
Factors, and Ratio of
Earnings to Fixed Charges.... Prospectus Summary; Risk Factors
4. Use of Proceeds............... Prospectus Summary; Use of Proceeds
5. Determination of Offering Outside Front Cover Page of Prospectus;
Price........................ Underwriting
6. Dilution...................... Risk Factors; Dilution
7. Selling Security Holders...... Not Applicable
8. Plan of Distribution.......... Outside Front Cover Page of Prospectus;
Underwriting
9. Description of Securities to Outside Front Cover Page of Prospectus;
be Registered................ Prospectus Summary; Description of Capital
Stock
10. Interests of Named Experts and
Counsel...................... Legal Matters
11. Information with Respect to Outside and Inside Front Cover Page of
the Registrant............... Prospectus; Prospectus Summary; Risk
Factors; Use of Proceeds; Dividend Policy;
Capitalization; Dilution; Selected
Financial Data; Management's Discussion
and Analysis of Financial Condition and
Results of Operations; Business;
Management; Certain Transactions;
Principal Shareholders; Description of
Capital Stock; Shares Eligible for Future
Sale; Consolidated Financial Statements
12. Disclosure of Commission
Position on Indemnification
for Securities Act
Liabilities.................. Not Applicable
</TABLE>
<PAGE>
PROSPECTUS
3,000,000 Shares
[LOGO OF CELL THERAPEUTICS, INC.]
Cell Therapeutics, Inc.
Common Stock
------------
All of the 3,000,000 shares of Common Stock offered hereby (the "Offering")
are being sold by Cell Therapeutics, Inc. ("cti" or the "Company"). Prior to
this Offering, there has been no public market for the Common Stock of the
Company. See "Underwriting" for a discussion of the factors to be considered
in determining the initial public offering price. The Common Stock has been
approved for quotation on the Nasdaq National Market under the symbol "CTIC,"
subject to official notice of issuance.
Johnson & Johnson Development Corporation, an existing shareholder and an
affiliate of one of the Company's collaborative partners, has agreed to
purchase a number of shares of Common Stock equal to ten percent of the shares
sold at the closing of this Offering directly from the Company (the "Johnson &
Johnson Stock Purchase") in a private placement at a per share price equal to
the initial public offering price. The Johnson & Johnson Stock Purchase will
not be registered in this Offering, and such shares will be purchased
concurrent with the closing of this Offering. See "Johnson & Johnson Stock
Purchase," "Business--Collaborations" and "Underwriting."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS," BEGINNING ON PAGE 6.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
- - -----------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------
<CAPTION>
Price to Underwriting Discounts Proceeds to
Public and Commissions(1) Company(2)
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............................. $10.00 $0.70 $9.30
- - -----------------------------------------------------------------------------------------------
Total(3).............................. $30,000,000 $2,100,000 $27,900,000
- - -----------------------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------------------
</TABLE>
1. For information regarding indemnification of the Underwriters, see
"Underwriting."
2. Before deducting expenses of the Offering payable by the Company, estimated
at $850,000.
3. The Company has granted the Underwriters an option, exercisable within 30
days from the date hereof, to purchase up to 450,000 additional shares of
Common Stock on the same terms as set forth above, solely to cover over-
allotments, if any. If such option is exercised in full, the total Price to
Public will be $34,500,000, the Underwriting Discounts and Commissions will
be $2,415,000 and the Proceeds to Company will be $32,085,000. Including
the Johnson & Johnson Stock Purchase, the total Proceeds to Company will be
$30,900,000, or $35,535,000 if the Underwriters' over-allotment option is
exercised in full at the initial closing of this Offering, and $35,085,000
if the Underwriters' over-allotment option is exercised in full subsequent
to the initial closing of this Offering. See "Underwriting."
------------
The shares of Common Stock offered by the Underwriters are subject to prior
sale, receipt and acceptance by them and subject to the right of the
Underwriters to reject any order in whole or in part and to certain other
conditions. It is expected that delivery of such shares will be made through
the offices of UBS Securities LLC, 299 Park Avenue, New York, New York on or
about March 26, 1997.
------------
UBS Securities
Montgomery Securities
Raymond James & Associates, Inc.
March 21, 1997
<PAGE>
[DIAGRAM DEPICTING THE DIFFERENT CELLULAR RESPONSES RESULTING FROM THE
ACTIVATION OF HOUSEKEEPING PATHWAYS AND STRESS-ACTIVATED PATHWAYS]
HOUSEKEEPING PATHWAYS STRESS-ACTIVATED PATHWAYS
The process by which growth These are also signal production
factors outside a cell transmit pathways termed "stress-activated
their chemical signals inside the pathways," or "SAPs," which are
cell is termed "signal part of the cellular response to
transduction." Certain signal injury following exposure to cell
transduction pathways, such as the damaging stimuli such as
mitogen-activated pathway ("MAP") radiation, chemotherapy or
are essential for normal day-to- oxidative injury. Activation of
day cellular processes such as the stress-activated pathways may lead
normal growth and replenishment of to inflammation and tissue injury.
cells in the body. These pathways
are often referred to as
"housekeeping pathways."
------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN
THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY
BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this Prospectus. This Prospectus contains forward-
looking statements which involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in these forward-
looking statements. Factors that might cause such a difference include, but are
not limited to, those discussed in "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." As used in this
Prospectus, unless otherwise indicated or the context otherwise requires, all
references to "cti" or the "Company" include Cell Therapeutics, Inc. and its
wholly-owned subsidiary, CTI Technologies, Inc., and all references to "Johnson
& Johnson" include Johnson & Johnson and its wholly-owned subsidiaries Ortho
Biotech, Inc., The R.W. Johnson Pharmaceutical Research Institute (a division
of Ortho Pharmaceutical Corporation) and Johnson & Johnson Development
Corporation, or any of such entities, but does not include any other subsidiary
of Johnson & Johnson.
THE COMPANY
Cell Therapeutics, Inc. ("cti" or the "Company") focuses on the discovery,
development and commercialization of small molecule drugs for the treatment of
cancer and inflammatory and immune diseases. The Company is conducting Phase
III clinical trials for its lead product candidate, Lisofylline, which is being
developed to prevent or reduce treatment-related toxicities, specifically
serious and fatal infections, mucositis and treatment-related mortality, among
cancer patients receiving high dose radiation and/or chemotherapy. In November
1996 cti entered into a Collaboration and License Agreement with Johnson &
Johnson for the joint development and commercialization of Lisofylline. The
Company has expended approximately $60.9 million from its inception to December
31, 1996 on research and development activities to build a unique drug
discovery platform based on its proprietary technology in phospholipid
chemistry.
Oncology
Cancer is the second leading cause of death in the United States, with
approximately 1.4 million new cases diagnosed each year. At some point in their
disease treatment, 70 percent of all cancer patients will receive radiation
therapy and 50 percent of all newly diagnosed cancer patients will receive
chemotherapy. Despite their benefits for treating cancer, there are significant
limitations of, and complications associated with, radiation and chemotherapy
which result in a high rate of treatment failure. The principal causes of
treatment failure include treatment-related toxicities, multidrug resistance
and tumor resistance to radiation. The Company is focusing its oncology
development efforts on a portfolio of drugs that it believes will address the
three principal causes of cancer treatment failure: (i) Lisofylline--a
supportive care agent being investigated to prevent or reduce the incidence of
serious and fatal infections, mucositis (damage to the epithelial cells lining
the mouth, stomach and intestinal tract) and treatment-related mortality among
cancer patients receiving high dose radiation and/or chemotherapy, (ii) CT-
2584--a novel anti-cancer drug under investigation for the treatment of
patients with multidrug resistant tumors and (iii) tumor sensitizing agents
being investigated to enhance sensitivity to radiation among tumors that have
deleted or mutated tumor suppression genes.
Lisofylline. Lisofylline is a synthetic small molecule drug in Phase III
clinical trials among cancer patients receiving high dose radiation and/or
chemotherapy. Unlike blood cell growth factors or chemotherapy protecting
agents, Lisofylline is being developed to prevent or reduce the incidence of
serious and fatal infections, mucositis and treatment-related mortality. More
than 400 people have participated in over 15 clinical trials of Lisofylline to
date. The Company has completed a Phase II trial in which Lisofylline resulted
in a statistically significant reduction in mortality and the incidence of
serious and fatal infections in cancer patients undergoing high dose radiation
and/or chemotherapy followed by bone marrow transplantation ("BMT"). Based on
the results of this trial, in the third quarter of 1996 the Company initiated a
pivotal Phase III trial to more fully assess the safety and effectiveness of
Lisofylline. The Company is also conducting Phase II and Phase III trials to
investigate the effects of Lisofylline on the incidence of infection and
mortality among patients with newly diagnosed acute myelogenous leukemia
("AML") undergoing high dose induction chemotherapy. Lisofylline is also being
developed to prevent or reduce severe mucositis, for which cti is planning to
commence a Phase II/III trial in the second half of 1997.
3
<PAGE>
CT-2584. CT-2584 is cti's novel small molecule drug under investigation for
the treatment of patients with multidrug resistant cancers, including sarcomas,
prostate, colon, lung and breast cancer. The Company initiated parallel Phase I
trials at the Christie Hospital in the United Kingdom in November 1995 and at
the Memorial Sloan Kettering Cancer Research Center in the United States in May
1996 for patients with advanced cancers. As of February 1, 1997, more than 25
patients have been treated with CT-2584 at five different dose levels without
exhibiting bone marrow or gastrointestinal toxicity. Based on preliminary
results from these trials, the Company currently anticipates starting disease-
specific Phase II trials in the United States in the second half of 1997.
Inflammatory Disease
The Company believes that, in addition to its oncology applications,
Lisofylline may be effective as an agent to prevent or reduce the incidence and
severity of acute lung injury ("ALI") and mortality among patients requiring
mechanical ventilation for respiratory failure following pneumonia, multiple
traumatic injuries or sepsis. The Company has completed a Phase II feasibility
study in patients suffering from septic shock. In January 1997 the National
Heart, Lung and Blood Institute notified the Company that it had selected
Lisofylline for investigation in a Phase II/III trial among patients
experiencing ALI. This trial is expected to begin in the second half of 1997.
Corporate Collaboration
In November 1996 the Company entered into a Collaboration and License
Agreement with Ortho Biotech, Inc. and The R.W. Johnson Pharmaceutical Research
Institute (a division of Ortho Pharmaceutical Corporation), each of which are
wholly-owned subsidiaries of Johnson & Johnson (collectively, "Johnson &
Johnson"), for the joint development and commercialization of Lisofylline.
Johnson & Johnson has committed to fund 60 percent of cti's budgeted
development expenses. For each of 1997 and 1998 Johnson & Johnson has agreed,
subject to certain termination rights, to fund up to $12.0 million of cti's
budgeted development expenses per year. The Company and Johnson & Johnson will
co-promote Lisofylline in the United States, and each will share equally in any
resulting operating profits and losses. Johnson & Johnson will make additional
payments to, and equity investments in, cti if certain milestones are achieved
in the development and commercialization of Lisofylline. Johnson & Johnson has
the exclusive right to develop and market Lisofylline, at its own expense, for
markets other than the United States and Canada, subject to specified royalty
payments to cti. Johnson & Johnson paid a $5.0 million license fee to and made
a $5.0 million equity investment in cti upon execution of the agreement, and
has agreed to purchase, concurrent with the closing of this Offering, a number
of shares of Common Stock equal to ten percent of the shares sold at the
closing of this Offering.
Cell Therapeutics, Inc. was incorporated in Washington in September 1991. The
Company has not received any revenue from the sale of products to date and does
not expect to receive revenues from the sale of products for at least the next
several years. The Company's executive offices are located at 201 Elliott
Avenue West, Seattle, Washington 98119, and its telephone number is (206) 282-
7100.
------------
Except as otherwise specified, all information in this Prospectus assumes (i)
no exercise of the Underwriters' over-allotment option, (ii) a 1-for-3 1/2
reverse stock split of the Common Stock which was effected in March 1997,
(iii) the sale of 300,000 shares of Common Stock to Johnson & Johnson
concurrent with the closing of this Offering a price of $10.00 per share, and
(iv) the automatic conversion of all of the outstanding shares of the Company's
Series A Convertible Preferred Stock and Series B Convertible Preferred Stock
(collectively, the "Convertible Preferred Stock") upon the closing of this
Offering into 4,784,966 shares of Common Stock (after giving effect to certain
anti-dilution adjustments that will occur as a result of the closing of this
Offering). See "Underwriting," "Johnson & Johnson Stock Purchase" and
"Description of Capital Stock."
cti(R) is a registered trademark of the Company. This Prospectus contains
trademarks and service marks of companies other than cti.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock Offered by the Company................. 3,000,000 shares
Johnson & Johnson Stock Purchase.................... 300,000 shares (1)
Common Stock Outstanding after this Offering........ 13,028,438 shares (2)
Use of Proceeds..................................... For clinical trials and other
research and development activities,
general corporate purposes and
working capital. See "Use of
Proceeds."
Proposed Nasdaq National Market Symbol.............. CTIC
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 4,
1991 (DATE OF
YEARS ENDED DECEMBER 31, INCORPORATION)
---------------------------- TO DECEMBER 31,
1994 1995 1996 1996
-------- -------- -------- ---------------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenues.................... $ -- $ 100 $ 9,121 $ 9,221
Research and development ex-
pense...................... 14,368 14,606 16,109 60,871
General and administrative
expense.................... 5,283 6,144 7,602 24,743
-------- -------- -------- --------
Total operating expenses.. 19,651 20,750 23,711 85,614
Loss from operations........ (19,651) (20,650) (14,590) (76,393)
Other income (expense)...... 152 658 662 2,321
-------- -------- -------- --------
Net loss.................... $(19,499) $(19,992) $(13,928) $(74,072)
======== ======== ======== ========
Pro forma net loss per
share(3)................... $ (1.69)
========
Shares used in computation
of pro forma net loss per
share...................... 8,228
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and securities available-for-
sale................................................. $30,987 $ 61,037
Working capital....................................... 26,300 56,350
Total assets.......................................... 37,002 67,052
Long-term obligations, less current portion........... 2,005 2,005
Deficit accumulated during development stage.......... (74,083) (74,083)
Total shareholders' equity............................ 30,054 60,104
</TABLE>
- - --------
(1) Johnson & Johnson has agreed to purchase a number of shares of Common Stock
equal to ten percent of the shares sold at the closing of this Offering
directly from the Company in a private placement that will occur concurrent
with the closing of this Offering (the "Johnson & Johnson Stock Purchase")
at a per share price equal to the initial per share price to public set
forth on the cover of this Prospectus. See "Johnson & Johnson Stock
Purchase."
(2) Excludes (i) 1,208,608 shares of Common Stock issuable upon exercise of
stock options outstanding as of December 31, 1996 at a weighted average
exercise price of $11.78 per share and (ii) 77,907 shares of Common Stock
issuable upon exercise of warrants outstanding as of December 31, 1996 at a
weighted average exercise price of $19.12 per share. See "Management--Stock
Option Plans" and "Description of Capital Stock."
(3) Computed on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
(4) As adjusted to reflect the net proceeds from the sale of the 3,000,000
shares of Common Stock offered hereby and receipt by the Company of the
estimated net proceeds therefrom, at the initial public offering price of
$10.00 per share and after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company. Also adjusted to
reflect the Johnson & Johnson Stock Purchase. See "Use of Proceeds" and
"Johnson & Johnson Stock Purchase."
5
<PAGE>
RISK FACTORS
Prospective investors in the shares of Common Stock offered hereby should
carefully consider the following risk factors, in addition to the other
information contained in this Prospectus. This Prospectus contains forward-
looking statements which involve risks and uncertainties. When used in this
Prospectus, the words "believes," "anticipates," "expects" and similar
expressions are intended to identify such forward-looking statements. The
Company's actual results may differ significantly from the results discussed
in the forward-looking statements. Factors that might cause such a difference
include, but are not limited to, those discussed below and in "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly release the results of any revisions to these forward-
looking statements which may be made to reflect events or circumstances after
the date hereof or to reflect the occurrence of unanticipated events.
Dependence on Single Drug Candidate. The Company's lead drug candidate is
Lisofylline. A Phase II clinical trial of Lisofylline in cancer patients
undergoing high dose radiation and/or chemotherapy followed by bone marrow
transplantation ("BMT") was completed in the first quarter of 1996, and the
Company initiated a pivotal Phase III trial of Lisofylline for BMT in the
third quarter of 1996. The Company is also conducting ongoing Phase II and
Phase III trials of Lisofylline among patients with newly diagnosed acute
myelogenous leukemia ("AML") undergoing high dose induction chemotherapy.
There can be no assurance that such Phase III trials will be successfully
completed, that further clinical studies will not be needed, or that any such
clinical trials will lead to FDA approval. Furthermore, there can be no
assurance that the Company will be successful in its efforts to develop
Lisofylline for other indications, including mucositis and inflammatory
disease. The remainder of the Company's drug candidates are still in research
and development, preclinical trials or early stage clinical trials. Any
additional product candidates will require significant research, development,
preclinical and clinical testing, regulatory approval and commitments of
resources prior to commercialization. The Company is, therefore, dependent on
the successful completion of its Phase III trials and filing for and obtaining
regulatory approval of Lisofylline to generate revenues while it continues the
research, development and regulatory approval processes for its other drug
candidates. Although the Company is currently seeking to develop other drug
candidates and to expand the number of drug candidates it has under
development, there can be no assurance that it will be successful in such
development or expansion. If Lisofylline does not successfully complete
clinical testing and meet applicable regulatory requirements, or is not
successfully manufactured or marketed, the Company may not have the financial
resources to continue research and development of other product candidates.
See "Risk Factors--No Assurance of FDA Approval; Comprehensive Government
Regulation," "Business--Products under Development" and "--Collaborations."
Technological Changes and Uncertainty. The Company currently relies
exclusively upon its lipid-based small molecule technology for the discovery,
development and commercialization of drugs for the treatment of cancer and
inflammatory and immune diseases. To date, the Company's resources have been
dedicated primarily to the research and development of potential
pharmaceutical products that the Company believes regulate the production
and/or degradation of phospholipids such as phosphatidic acids ("PAs") or
oxidized lipids such as hydroperoxyoctadecadienoic acids ("HPODEs"). The
physiology of cancer, inflammatory and immune disease is complex, and the role
of PAs and HPODEs, and the stress-activated pathways ("SAPs") which they
appear to activate, is not fully known. Although preclinical and clinical data
to date suggest that the species of PAs and HPODEs targeted by the Company's
products under development play an important role in the cellular inflammatory
and injurious response to cell-damaging stimuli such as radiation,
chemotherapy and oxidative injury, there can be no assurance that the
Company's therapeutic approaches are correct or that its drug candidates will
be proven safe or effective. The Company believes that the elevation and
production of PAs and HPODEs and the activation of SAPs do not appear to be
primarily utilized for normal cellular processes, and that the Company's drug
candidates will not substantially interfere with normal cellular processes at
therapeutically-relevant levels. There can be no assurance that the PAs or
HPODEs or the SAPs believed to be targeted by the Company's drug candidates do
not serve a currently unidentified beneficial purpose which might be adversely
affected by the mechanism of action of the Company's drug candidates. No
assurance can be given that unforeseen problems will not develop with the
Company's technologies or applications, or that commercially feasible products
will ultimately be developed by cti. There can be no assurance that research
and discoveries
6
<PAGE>
by others will not render some or all of cti's programs or products
noncompetitive or obsolete or that the Company will be able to keep pace with
technological developments or other market factors. Technological changes or
medical advancements could diminish or eliminate the commercial viability of
the Company's focus on cell membrane lipids in regulating cellular processes.
The failure to commercialize such products would have a material adverse
effect on the Company.
No Assurance of Successful Product Development; Uncertainties Related to
Clinical Trials. The Company has no products commercially available for sale
and does not expect to have any products commercially available for sale for
at least the next several years, if ever. The time frame for achievement of
market success for any potential product is long and uncertain. The Company's
lead product candidates, Lisofylline and CT-2584, are currently in clinical
trials for certain indications. However, the results obtained to date in
preclinical and clinical studies of Lisofylline and in preclinical studies and
preliminary clinical trials of CT-2584 are not necessarily indicative of
results that will be obtained during future clinical testing. A number of
companies in the pharmaceutical industry, including biotechnology companies,
have suffered significant setbacks in advanced clinical trials, even after
reporting promising results in earlier trials. In addition, data obtained from
clinical trials are susceptible to varying interpretations. For example, in
February 1996 the Company entered into an agreement with Schering AG
("Schering") for the development and commercialization of Lisofylline and CT-
2584. This agreement was contingent upon Schering finding the clinical trial
results and related data from the Company's Phase II BMT trial acceptable. In
April 1996, Schering informed the Company that it did not wish to activate the
agreement based on, among other factors, (i) its view that one of the
endpoints of the Phase II BMT trial, white blood cell recovery, was not met
and (ii) its view that the trial data regarding mortality rate and incidence
of serious and fatal infection were difficult to interpret and that, as a
result, Schering could not determine that the data was meaningful. See
"Business--Products under Development--Oncology" and Note 11 of Notes to
Consolidated Financial Statements. There can be no assurance that the Company
and its collaborators will agree on the interpretation of the Company's future
clinical trial results or that the Company's clinical trials will demonstrate
sufficient terms of safety and efficacy necessary to obtain the requisite
regulatory clearance or will result in marketable products.
The Company's research and development programs for products other than
Lisofylline and CT-2584 are at an early stage of development. Preclinical in
vitro and animal studies are not necessarily indicative of results that may be
obtained during human clinical testing. Many potential therapeutic products
indicate positive in vitro results which are not subsequently reproduced in
humans. Any additional product candidates will require significant research,
development, preclinical and clinical testing, regulatory approval and
commitments of resources prior to commercialization. There can be no assurance
that the Company's research will lead to the discovery of additional product
candidates or that Lisofylline, CT-2584 or any other products will be
successfully developed, prove to be safe and efficacious in clinical trials,
meet applicable regulatory standards, be capable of being produced in
commercial quantities at acceptable costs or be successfully or profitably
marketed. There can be no assurance as to the extent to which any products
developed by cti will be able to penetrate the potential market for a
particular therapy or indication or gain market acceptance among health care
providers, third-party payors or patients.
The rate of completion of the Company's clinical trials is dependent upon,
among other factors, the rate of patient enrollment. Patient enrollment is a
function of many factors, including the size of the patient population, the
nature of the protocol, the proximity of patients to clinical sites and the
eligibility criteria for the study. Delays in planned patient enrollment may
result in increased costs or in delays or termination of clinical trials,
which could have a material adverse effect on the Company's business,
financial condition and results of operations. There can be no assurance that
the Company will be able to submit a new drug application as scheduled if
clinical trials are completed, or that any such application will be reviewed
and cleared by the FDA in a timely manner, or at all.
There can be no assurance that unacceptable toxicities or side effects will
not occur at any dose level at any time in the course of toxicology studies or
clinical trials of the Company's potential products. The appearance of any
such unacceptable toxicities or side effects in toxicology studies or clinical
trials could cause the Company or regulatory authorities to interrupt, limit,
delay or abort the development of any of the Company's potential products and
could ultimately prevent their clearance by the FDA or foreign regulatory
authorities for any or all targeted indications. Even after being cleared by
the FDA or foreign regulatory authorities, a product may later
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be shown to be unsafe or to not have its purported effect, thereby preventing
widespread use or requiring withdrawal from the market. There can be no
assurance that any potential products under development by the Company will be
safe or effective when administered to patients.
History and Continuation of Losses; Early Stage of Development. The Company
commenced operations on February 1, 1992, and has not received any revenue
from the sale of products to date, nor does it expect to receive revenues from
the sale of products for at least the next several years. The Company has
incurred net losses since inception and had an accumulated deficit of
approximately $74.1 million as of December 31, 1996. These losses are
primarily attributable to research and development efforts, including
preclinical studies and clinical trials.
To date, the Company's operations have been funded primarily through the
sale of equity securities, which has raised aggregate net proceeds of
approximately $103.0 million. The Company expects that its revenue sources for
at least the next several years will consist primarily of future expense
reimbursements and milestone payments under its collaboration agreements with
Johnson & Johnson and with an affiliate of BioChem Pharma, Inc. ("BioChem
Pharma"), and of interest income.
The Company expects to continue to incur significant additional operating
losses over the next several years as its research, development and clinical
trial efforts expand. The Company is in the development stage and its
operations are subject to all of the risks inherent in the establishment of a
new business enterprise. The likelihood of the success of cti must be
considered in light of the problems, expenses and delays frequently
encountered in connection with the development of pharmaceutical products, the
utilization of unproven technology and the competitive environment in which
cti operates. The Company is working on a number of costly long-term
development projects which involve experimental and unproven technology and
may ultimately prove unsuccessful. There can be no assurance that cti will
have sufficient funds or be able to successfully complete its research and
development, obtain regulatory approval for, or manufacture or market any
products in the future. In addition, since cti does not currently have any
marketable products, it expects to incur substantial operating losses for a
number of years. The amount of net losses and the time required by the Company
to reach profitability are highly uncertain. There can be no assurance that
the Company will be able to develop additional revenue sources or that its
operations will ever become profitable. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Need for Substantial Additional Funds. The Company will require substantial
additional funds to conduct its existing and planned preclinical and clinical
trials, to establish manufacturing and marketing capabilities for any products
it may develop, and to continue research and development activities. The
Company expects that its existing capital resources, together with the net
proceeds of this Offering and the Johnson & Johnson Stock Purchase and the
interest earned thereon, combined with anticipated funding from Johnson &
Johnson under the Collaboration Agreement, will enable the Company to maintain
its current and planned operations at least through the end of 1998.
Furthermore, the Company will need to raise substantial additional capital to
fund its operations beyond such time. See "--Reliance on Relationship with
Johnson & Johnson," "Use of Proceeds," "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--
Collaborations."
The Company's future capital requirements will depend on, and could increase
as a result of, many factors, including the continuation of the Company's
collaboration with Johnson & Johnson; continued scientific progress in its
research and development programs; the magnitude of such programs; the
progress of preclinical and clinical testing; the time and costs involved in
obtaining regulatory approvals; the costs involved in preparing, filing,
prosecuting, maintaining, enforcing and defending patent claims; competing
technological and market developments; changes in collaborative relationships;
the terms of any additional collaborative arrangements that the Company may
enter into; the ability of the Company to establish research, development and
commercialization arrangements pertaining to products other than those covered
by existing collaborative arrangements; the cost of establishing manufacturing
facilities; the cost of commercialization activities and the demand for the
Company's products if and when approved.
The Company intends to raise additional funds through additional equity or
debt financings, research and development financings, collaborative
relationships, or otherwise. Because of these long-term capital
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requirements, cti may seek to access the public or private equity markets from
time to time, even if it does not have an immediate need for additional
capital at that time. There can be no assurance that any such additional
funding will be available to cti, or, if available, that it will be on
acceptable terms. If additional funds are raised by issuing equity securities,
further dilution to shareholders may result. If adequate funds are not
available, cti may be required to delay, reduce the scope of, or eliminate one
or more of its research, development and clinical activities. The Company may
also be required to seek to obtain funds through arrangements with
collaborative partners or others that may require cti to relinquish rights to
certain of its technologies, product candidates or products that the Company
would otherwise seek to develop or commercialize itself. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
Reliance on Relationship with Johnson & Johnson. The Company is dependent on
the future payments from Johnson & Johnson to continue the development and
commercialization of Lisofylline as presently planned. Under the terms of the
Collaboration and License Agreement (the "Collaboration Agreement") between
Johnson & Johnson and the Company, Johnson & Johnson has committed to fund 60
percent of cti's budgeted development expenses incurred in connection with
obtaining regulatory approval for Lisofylline in the United States. Johnson &
Johnson will be responsible for obtaining regulatory approval for Lisofylline
outside of the United States and Canada at its own expense. Although cti and
Johnson & Johnson will co-promote Lisofylline in the United States, Johnson &
Johnson will have primary responsibility for commercializing Lisofylline.
There can be no assurance that Johnson & Johnson will be able to establish
effective sales and distribution capabilities or will be successful in gaining
market acceptance for Lisofylline or that Johnson & Johnson will devote
sufficient resources to the commercialization of products under the
Collaboration Agreement.
Although Johnson & Johnson has committed to fund up to $12.0 million of
cti's budgeted development expenses for each of the calendar years 1997 and
1998, Johnson & Johnson may terminate the Collaboration Agreement at any time
based upon material safety or tolerability issues related to Lisofylline upon
30 days' notice, and for any reason after November 8, 1997, subject to a six
month notice period. Johnson & Johnson would have no further obligation to
fund cti's development expenses related to Lisofylline following such
termination. However, the financial and other obligations of Johnson & Johnson
(aside from Johnson & Johnson's obligation to make additional payments to, and
equity investments in, cti if certain development milestones are achieved)
would continue during such six month notice period. If Johnson & Johnson were
to terminate its participation in the Collaboration Agreement, the Company
would not be able to continue the development of Lisofylline as presently
planned, and the Company's financial condition would be materially and
adversely affected. If adequate funds were not then available from other
sources, the Company would be required to delay, reduce the scope of, or
eliminate one or more of its research, development and clinical activities or
seek to obtain funds through arrangements with collaborative partners or
others on terms which may be less favorable to cti than the Collaboration
Agreement. See "--Need for Substantial Additional Funds" and "Business--
Collaborations."
No Assurance of FDA Approval; Comprehensive Government
Regulation. Regulatory approval to market human therapeutics must be obtained
from the FDA and comparable health authorities in foreign countries. This
process requires lengthy and detailed laboratory and clinical testing and
other costly and time-consuming procedures, which must establish that such
therapeutics are safe and efficacious. Obtaining regulatory approval to market
drugs typically takes one or more years after the completion of clinical
trials and the filing of a New Drug Application ("NDA"), with no assurance
that such approval will ever be obtained. The time involved for regulatory
review varies substantially based upon the type, complexity and novelty of the
drug. In addition, delays or rejections may be encountered based upon existing
and changing policies of regulatory authorities for drug approval during the
period of drug development and regulatory review of each submitted NDA. The
results obtained in preclinical and early clinical studies are not necessarily
indicative of results that will be obtained during future clinical testing.
There can be no assurance that the results obtained by the Company to date
will continue as testing and trials progress or that the Company's products
will ever be approved for commercial sale by the FDA or other regulatory
authorities.
In addition to the substantial time commitment required, the regulatory
process, which includes preclinical testing and clinical trials of each
compound to establish its safety and efficacy, requires the expenditure of
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substantial resources. Preclinical studies must be conducted in conformity
with the FDA's current Good Laboratory Practices ("GLP"). Clinical trials must
meet requirements for institutional review board oversight and informed
consent, as well as FDA prior review and acceptance of Investigational New
Drug applications ("IND"), continued FDA oversight, and current Good Clinical
Practices ("GCP"). The Company's experience in conducting clinical trials is
limited. Data obtained from preclinical studies and clinical trials are
susceptible to varying interpretations which could delay, limit or prevent
regulatory approval. Furthermore, studies conducted with alternative designs
or alternative patient populations could produce results which vary from those
obtained by the Company. There can be no assurance that the Company's data or
its interpretation of its data will be accepted by governmental regulators,
the medical community or the Company's collaborators. See "--No Assurance of
Successful Product Development; Uncertainties Related to Clinical Trials."
Government regulation also affects the manufacture and marketing of
pharmaceutical drug products. Any future FDA or other governmental approval of
drug products developed by cti may entail significant limitations on the
indicated uses for which such products may be marketed. Approved drug products
will be subject to additional testing and surveillance programs required by
the regulatory agencies. In addition, product approvals may be withdrawn or
limited for noncompliance with regulatory standards or the occurrence of
unforeseen problems following initial marketing. Failure to comply with
applicable regulatory requirements can result in, among other things, fines,
suspensions of approvals, seizures or recalls of products, operating
restrictions or criminal proceedings. In the event that cti were to
manufacture therapeutic products, cti would be required to adhere to
applicable standards for current Good Manufacturing Practices ("GMP")
prescribed by the FDA, engage in extensive record keeping and reporting, and
submit its manufacturing facilities to periodic inspections by state and
federal agencies, including the FDA, and comparable agencies in other
countries.
The effect of government regulation may be to considerably delay or prevent
the marketing of any product that cti may develop and/or to impose costly
procedures upon cti's activities, the result of which may be to furnish an
advantage to its competitors. There can be no assurance that regulatory
approval for any products developed by cti will be granted on a timely basis
or at all. Any such delay in obtaining or failure to obtain such approvals
would adversely affect cti's ability to market the proposed products and earn
product revenue. The Company is unable to predict the extent and impact of
regulation resulting from future federal, state or local legislation or
administrative actions, or whether such government regulation may have a
material adverse effect on cti. See "Business--Government Regulation."
Outside the United States, the Company's ability to market a product is
contingent upon receiving marketing authorizations from the appropriate
regulatory authorities. The requirements governing the conduct of clinical
trials, marketing authorization, pricing and reimbursement vary widely from
country to country. At present, foreign marketing authorizations are applied
for at a national level, although within the European Union ("EU") certain
registration procedures are available to companies wishing to market a product
in more than one EU member state. This foreign regulatory approval process
includes all of the risks associated with FDA approval set forth above. See
"Business--Government Regulation."
Ability to Protect Intellectual Property. The Company's success will depend
in part on its ability to obtain patent protection for its products and
technologies in the United States and other countries, effectively preserve
its trade secrets, enforce its rights against third parties which may infringe
on its technology and operate without infringing on the proprietary rights of
third parties. The patent positions of biotechnology and pharmaceutical
companies can be highly uncertain and involve complex legal and factual
questions. The Company intends to file applications as appropriate for patents
covering both its products and processes. There can be no assurance that any
patents will issue from any present or future applications or, if patents do
issue, that such patents will be issued on a timely basis or that claims
allowed on issued patents will be sufficient to protect the Company's
technology. In addition, there can be no assurance that the patents issued to
cti will not be challenged, invalidated or circumvented or that the rights
granted thereunder will provide proprietary protection or commercial advantage
to the Company. With respect to such issued U.S. patents or any patents that
may issue in the future, there can be no assurance that they will effectively
protect the technology involved, foreclose the development of competitive
products by others or otherwise be commercially valuable.
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The commercial success of the Company will also depend in part on the
Company's neither infringing the patents or proprietary rights of third
parties nor breaching any technological licenses which relate to the Company's
technologies and potential products. In general, the development of
therapeutic products is intensely competitive and many pharmaceutical
companies, biotechnology companies, universities and research institutions
have filed and will continue to file patent applications and receive patents
in this field. If patents are issued to other entities that contain
competitive or conflicting claims with respect to technology pursued by cti
and such claims are ultimately determined to be valid, no assurance can be
given that cti will be able to obtain licenses to these patents at a
reasonable cost or develop or obtain alternative technology or compounds. In
such case, the Company could be precluded from using technology that is the
subject matter of such patents, which could have a material adverse effect on
the Company. In order to enforce any patents issued to the Company or
determine the scope and validity of other parties' proprietary rights, the
Company may have to engage in litigation, which would result in substantial
cost to, and diversion of efforts by, the Company. In addition, if the Company
elects or is required to participate in interference proceedings declared by
the U.S. Patent and Trademark Office, substantial cost to the Company could
result. There can be no assurance that third parties will not assert
infringement claims in the future with respect to the Company's current or
future products or that any such claims will not require the Company to enter
into license arrangements or result in litigation, regardless of the merits of
such claims. No assurance can be given that any necessary licenses can be
obtained on commercially reasonable terms, or at all. Should litigation with
respect to any such claims commence, such litigation could be extremely
expensive and time consuming and could have a material adverse effect on the
Company's business, financial condition and results of operations, regardless
of the outcome of such litigation.
The Company is aware of a patent belonging to third parties that could be
interpreted to compromise the Company's freedom to sell Lisofylline in the
United States for certain non-oncology applications. The Company believes,
upon the advice of its patent counsel, that any such interpretation is
relevant only in connection with the Company's use of Lisofylline in
preventing lung injury following traumatic injury or sepsis; and, irrespective
of such interpretation, that the Company's planned manufacture, sale or use of
Lisofylline as described in this Prospectus does not infringe any valid claim
of such third party patent. If such third party patent rights were interpreted
to limit the use of Lisofylline, the Company may be required to obtain a
license from such parties. There can be no assurance that any such license
would be available to the Company upon reasonably acceptable terms, if at all.
If the Company were so required to obtain a license from such parties, and if
the Company were unable to obtain such a license on reasonably acceptable
terms, the Company would be materially and adversely affected. The Company
could also face significant costs associated with any litigation relating to
such patent.
In order to protect its proprietary technology and processes, cti also
relies on confidentiality and material transfer agreements with its corporate
partners, employees, consultants, outside scientific collaborators and
sponsored researchers, and other advisors. There can be no assurance that
these agreements will not be breached, that the Company will have adequate
remedies for breach or that the Company's trade secrets will not otherwise
become known or independently discovered by competitors. See "Business--
Patents and Proprietary Rights."
Substantial Competition. The Company faces substantial competition from a
variety of sources, both direct and indirect. The Company faces direct
competition from many companies focusing on areas such as cell signal
transduction, surface receptor technology, transcription factors and gene
therapies. There are many companies, both public and private, including well-
known pharmaceutical companies, chemical companies and specialized
biotechnology companies, engaged more generally in developing synthetic
pharmaceutical and biotechnological products for the same therapeutic
applications as those which are the subject of the Company's research and
development efforts. In some instances, such products have already entered
clinical trials or received approval from the FDA. In addition, many of these
competitors have significantly greater experience than cti in undertaking
preclinical testing and clinical trials of new pharmaceutical products and
obtaining FDA and other regulatory approvals. The Company also competes with
companies that have substantially greater capital resources and research and
development, manufacturing, marketing and sales capabilities. Moreover,
certain academic institutions, governmental agencies and other public and
private research organizations are conducting research in areas in which the
Company is working. These institutions are becoming increasingly aware of the
commercial value of their findings and are becoming more active in seeking
patent protection and licensing
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arrangements to collect royalties for the use of technology that they have
developed. These institutions may also market competitive commercial products
on their own or through joint ventures and compete with the Company in
recruiting highly qualified scientific personnel. Other companies may succeed
in developing products that are more effective or less costly than any that
may be developed by cti and may also prove to be more successful than cti at
marketing such products. Competition may increase further as a result of the
potential advances in the commercial applicability of genetic engineering
technologies and organic chemistry. There can be no assurance that the
Company's competitors will not develop more effective or more affordable
products or achieve earlier patent protection or product commercialization
than cti. See "Business--Competition."
Reliance on Third Party Manufacturers; Manufacture of Products in Commercial
Quantities. The manufacturing of sufficient quantities of new drugs is a time
consuming, complex and unpredictable process. The Company currently has no
internal facilities for the manufacture of any of its products for clinical or
commercial production. The Company currently relies on third parties to
manufacture compounds for preclinical testing and clinical trials. The Company
has recently entered into a manufacture and supply agreement with ChiRex, Ltd.
("ChiRex") for the manufacture and supply of Lisofylline bulk drug and
corresponding intermediate compounds for the Company's requirements for
ongoing and future clinical trials and commercial requirements during product
launch and commercialization. Under the terms of the Collaboration Agreement
with Johnson & Johnson, the Company will be responsible for the manufacture of
Lisofylline for development and commercialization purposes until November 8,
1999. Thereafter, Johnson & Johnson will assume responsibility for the
manufacture of Lisofylline. However, Johnson & Johnson may elect to assume
responsibility for the manufacture of Lisofylline at any time prior to such
date. Lisofylline has never been manufactured on a commercial scale, and no
assurance can be given that the Company, together with Johnson & Johnson will
be able to make the transition to commercial production. The Company may need
to develop additional manufacturing resources, or may seek to enter into
collaborative arrangements with other parties which have established
manufacturing capabilities or may elect to have other third parties such as
ChiRex manufacture its products on a contract basis. All manufacturing
facilities must comply with applicable regulations of the FDA. The Company has
established a quality control and quality assurance program, including a set
of standard operating procedures and specifications, designed to ensure that
the Company's products are manufactured in accordance with current GMP and
other applicable domestic and foreign regulations. However, the Company is
dependent upon Johnson & Johnson and contract manufacturers including ChiRex
to comply with such procedures and regulations. There can be no assurance that
Johnson & Johnson or these contract manufacturers will meet the Company's
requirements for quality, quantity or timeliness. See "Business--
Manufacturing."
Absence of Sales and Marketing Organization. The Company has no experience
in marketing, sales or distribution. To directly market any of its potential
products, the Company must obtain access to marketing and sales forces with
technical expertise and with supporting distribution capability. To this end,
the Company has entered into a collaboration with Johnson & Johnson which
permits cti to co-promote Lisofylline with Johnson & Johnson in the United
States while providing that Johnson & Johnson will have primary responsibility
for commercializing Lisofylline. See "Business--Collaborations." If the
Company develops additional products with commercial potential outside of the
Johnson & Johnson collaboration, cti may need to develop marketing and
additional sales resources, may seek to enter into collaborative arrangements
with other parties which have established marketing and sales capabilities or
may choose to pursue the commercialization of such products on its own. There
can be no assurance that the Company, Johnson & Johnson or, to the extent the
Company enters into any commercialization arrangements with any other third
parties, such other third parties, will establish adequate sales and
distribution capabilities or be successful in gaining market acceptance for
the Company's products.
The successful commercialization of the Company's products in certain
markets will be dependent, among other things, on the establishment of
commercial arrangements with others in such markets. Such arrangements could
include the granting of marketing or other rights to third parties in exchange
for royalties, milestone development payments or other payments. There can be
no assurance that any such additional arrangements will be established. If the
Company is not able to establish such arrangements, it would encounter delays
in introducing its products into certain markets. While the Company believes
that parties to any such arrangements
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will have an economic motivation to succeed in performing their contractual
responsibilities, the amount and timing of resources they devote to these
activities will not be within the Company's control. There can be no assurance
that the Company will enter into any such arrangements on acceptable terms or
that any such parties will perform their obligations as expected or that any
revenue will be derived from such arrangements. See "Business--Marketing."
Management of Growth. The Company's success will depend in part on its
ability to expand its operations as the Company begins to commercialize its
potential drug products. Such growth is expected to place a significant strain
on the Company's managerial, operational and financial resources. The
Company's ability to manage growth effectively will require it to continue to
implement and improve its operational and financial systems and to expand,
train and manage its employee base. These demands are expected to require the
addition of new management personnel and the development of additional
expertise by existing management personnel. There can be no assurance that the
Company will be able to effectively manage the expansion of its operations,
that its systems, procedures or controls will be adequate to support the
Company's operations or that Company management will be able to exploit
opportunities for the Company's products or proprietary technology. There can
be no assurance that the Company will be successful in adding technical
personnel as needed to meet the staffing requirements of the Company's
collaboration with Johnson & Johnson or any additional collaborative
relationships into which the Company may enter. An inability to manage growth,
if any, could have a material adverse effect on the Company's business,
results of operations, financial condition and cash flow.
Attraction and Retention of Key Employees and Consultants. The Company is
highly dependent on the principal members of its scientific and management
staff, the loss of whose services might impede the achievement of research and
development objectives. Recruiting and retaining qualified scientific
personnel to perform research and development work are critical to cti's
success. Although cti believes it will be successful in attracting and
retaining skilled and experienced scientific and technical personnel, there
can be no assurance that cti will be able to attract and retain such personnel
on acceptable terms. In addition, if cti reaches the point where its
activities require additional expertise in clinical testing, in obtaining
regulatory approvals, and in production and marketing, there will be increased
demands on cti's resources and infrastructure. The inability to obtain
additional qualified personnel could materially and adversely affect the
prospects for cti's success. There is intense competition for qualified
scientists and managerial personnel from numerous pharmaceutical and
biotechnology companies, as well as academia, government organizations,
research institutions and other entities. There can be no assurance that cti
will be able to attract and retain the qualified personnel necessary for the
development of its business. Loss of the services of, or the failure to
recruit, key managerial and scientific and technical personnel could have a
material adverse effect on cti's research and product development programs. In
addition, cti relies on consultants and advisors, including its scientific and
clinical advisors, to assist the Company in formulating its research and
development strategy. All of cti's consultants and advisors are employed by
employers other than the Company, or are self-employed, and have commitments
to or consulting or advisory contracts with other entities that may limit
their availability to the Company. See "Business--Human Resources" and
"Management."
Product Liability; Insurance. The Company's business exposes it to potential
product liability risks which are inherent in the testing, manufacturing and
marketing of human pharmaceutical products. Although the Company is insured
against such risks up to a $20 million annual aggregate limit in connection
with human clinical trials, there can be no assurance that the Company's
present clinical trials liability insurance coverage is adequate or that the
Company will be able to maintain such insurance on acceptable terms. The
Company has no products commercially available for sale and has not procured
product liability insurance covering claims in connection with commercially
marketed products. There can be no assurance that the Company will be able to
obtain comparable insurance on commercially reasonable terms if and when it
commences the commercial marketing of any products or that such insurance will
provide adequate coverage against potential liabilities. A successful product
liability claim in excess of the Company's insurance coverage could have a
material adverse effect on the Company and may prevent the Company from
obtaining adequate product liability insurance in the future on commercially
reasonable terms.
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Uncertainty of Pharmaceutical Pricing and Reimbursement. Sales of cti's
proposed products will be dependent in part on the availability and extent of
reimbursement for the cost of such products and related treatments from third-
party health care payors, such as government and private insurance plans.
Significant uncertainty exists as to the reimbursement status of newly
approved health care products. Government and other third-party payors are
increasingly attempting to contain health care costs by limiting both coverage
and the level of reimbursement for new medical products and services and by
refusing, in some cases, to provide any coverage of uses of approved products
for disease indications other than those for which the FDA has granted
marketing approval. If cti succeeds in bringing any of its proposed products
to the market, there can be no assurance that any such products will be
considered cost-effective or that third-party reimbursement will be available
or will be sufficient to enable cti to sell its proposed products on a
competitive basis and to maintain price levels sufficient to realize an
appropriate return on its investment in product development. If adequate
coverage and reimbursement levels are not provided by government and other
third-party payors, the market acceptance of cti's products would be adversely
affected. In addition, legislation and regulations affecting the pricing of
pharmaceuticals may change in ways adverse to cti before or after any of the
Company's proposed products are approved for marketing. While cti cannot
predict whether any such legislative or regulatory proposals will be adopted,
the adoption of such proposals could have a material adverse effect on cti's
business, financial condition and prospects.
Use of Hazardous Materials. The Company's research and development involves
the controlled use of hazardous materials, chemicals and various radioactive
compounds. Although the Company believes that its safety procedures for
handling and disposing of such materials comply with the standards prescribed
by state and federal regulations, the risk of accidental contamination or
injury from these materials cannot be completely eliminated. In the event of
such accident, the Company could be held liable for any damages that result
and any such liability could exceed the resources of the Company.
Concentration of Ownership. After completion of the Offering, Directors and
officers of cti, and their affiliates, who beneficially own in the aggregate
1,913,207 shares of the Company's Common Stock (including shares of Common
Stock issuable upon conversion of the Company's Series A Convertible Preferred
Stock and shares of Common Stock subject to options or warrants exercisable or
convertible within 60 days of March 15, 1997), will own shares of Common Stock
representing approximately 14.44% of the voting power of the Company's
outstanding securities. Such percentage may increase to up to 16.70% of the
outstanding shares of Common Stock if certain affiliates of Directors of cti
purchase an aggregate of up to 300,000 shares of Common Stock which they have
advised the Company they may purchase in the Offering. Such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control of the Company. See "Principal Shareholders."
No Prior Public Market; Likely Volatility of Stock Price. Prior to the
Offering, there has been no public market for the Common Stock, and there can
be no assurance that a liquid trading market for the Common Stock will develop
or, if one develops, that it will be sustained after the Offering. The initial
public offering price of the Common Stock was determined by negotiations among
the Company and the representatives of the Underwriters and may not be
indicative of the prices that will prevail in the public market. See
"Underwriting." Future trading prices of the Common Stock will depend on many
factors, including, among other things, the Company's operating results and
the market for similar securities. The market prices for securities of
pharmaceutical and biotechnology companies have been highly volatile and the
market from time to time has experienced significant price and volume
fluctuations that are unrelated to the operating performance of such
companies. It is likely that the market price of the Common Stock will be
highly volatile. Factors such as announcements of technological innovations or
new commercial products by the Company, its collaborative partners or the
Company's present or potential competitors; announcements by the Company or
others of results of preclinical testing and clinical trials; developments or
disputes concerning patent or other proprietary rights; developments in the
Company's relationships with Johnson & Johnson or future collaborative
partners; acquisitions; litigation; changes in third-party reimbursement
policies; adverse legislation; regulatory decisions; releases of reports by
security analysts; public concern regarding the safety, efficacy or other
implications of the drugs sought to be developed by the Company, or of
biotechnology in general; economic and other external factors; as well as
period-to-period fluctuations in the Company's operating results and general
market conditions, may have a significant impact on the future price of the
Common Stock.
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Shares Eligible for Future Sale; Registration Rights; Possible Adverse
Effect on Future Market Price. Sales of a substantial number of shares of
Common Stock in the public market after this Offering could adversely affect
the market price of the shares of Common Stock. Of the 13,028,438 shares of
Common Stock to be outstanding upon the completion of this Offering and the
Johnson & Johnson Stock Purchase, the 3,000,000 shares offered hereby (plus
any additional shares sold upon exercise of the Underwriters' over-allotment
option) will be freely transferable without restriction under the Securities
Act of 1933, as amended (the "Securities Act"), unless they are held by
"affiliates" or "underwriters" of the Company, as these terms are used under
the Securities Act and the regulations promulgated thereunder. Taking into
consideration the amendments to Rule 144 under the Securities Act recently
adopted by the Securities and Exchange Commission described under "Shares
Eligible for Future Sale," and the effect of certain "lock-up" agreements
entered into by all officers, Directors and certain other shareholders of the
Company, 2,116,224 shares which have been held by non-affiliates for more than
two years will be eligible for immediate sale in the public market without
restriction pursuant to Rule 144(k) under the Securities Act as of the date of
this Prospectus (the "Effective Date"), and an additional 15,244 shares will
be eligible for sale subject to the provisions of Rules 144 and 701 under the
Securities Act as of the Effective Date. The officers, Directors and certain
other shareholders of the Company who beneficially own an aggregate of
approximately 7,888,918 shares of Common Stock have agreed, pursuant to
certain "lock-up" agreements, that they will not, without the prior written
consent of UBS Securities LLC, offer, sell or otherwise dispose of any shares
of Common Stock, options or warrants to acquire shares of Common Stock or
securities exchangeable for or convertible into shares of Common Stock owned
by them for a period of 180 days after the Effective Date. At the end of such
180-day period, approximately 2,693,444 shares of Common Stock will be
eligible for immediate sale in the public market without restriction under
Rule 144(k) or subject to Rules 144 and 701 upon the expiration of such lock-
up agreements. The remaining shares of Common Stock will have been held for
less than one year upon the expiration of such lock-up agreements and will
become eligible for sale under Rule 144 at various dates thereafter as the
holding period provisions of Rule 144 are satisfied. In addition, holders of
stock options and warrants exercisable for an aggregate of 1,101,991 shares of
Common Stock have entered into 180-day lock-up agreements. The Company intends
to file one or more registration statements under the Securities Act enabling
certain option holders to sell shares for which options are exercisable upon
the expiration of the lock-up agreements. The Company is obligated to register
approximately 5,653,076 shares of outstanding Common Stock and warrants to
purchase 77,907 shares of Common Stock for sale to the public beginning 180
days after the closing of this Offering. See "Management--Stock Option Plans,"
"Description of Capital Stock--Registration Rights," "Shares Eligible for
Future Sale" and "Underwriting."
Anti-Takeover Provisions; Possible Issuance of Preferred Stock; Rights
Plan. The Company's Restated Articles of Incorporation and Bylaws contain
provisions that may make it more difficult for a third party to acquire, or
may discourage acquisition bids for, cti. These provisions could limit the
price that certain investors might be willing to pay in the future for shares
of Common Stock. In addition, shares of the Company's preferred stock may be
issued in the future without further shareholder approval and upon such terms
and conditions, and having such rights, privileges and preferences, as the
Board of Directors may determine. The rights of the holders of Common Stock
will be subject to, and may be adversely affected by, the rights of any
holders of preferred stock that may be issued in the future. The 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 acquiring, a majority of the outstanding voting stock of cti.
The Company has no present plans to issue any shares of preferred stock. In
addition, the Company has adopted a Rights Agreement that, along with certain
provisions of the Company's Restated Articles of Incorporation, have the
effect of discouraging certain transactions involving a change of control of
the Company. See "Description of Capital Stock."
Dilution. There will be immediate, substantial dilution of the shares of
Common Stock purchased pursuant to this Offering. Based upon the initial
public offering price of $10.00 per share, new investors purchasing shares of
Common Stock pursuant to this Offering will experience immediate dilution of
$5.39 per share. See "Dilution."
15
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $27.1 million
($31.2 million if the Underwriters' over-allotment option is exercised in
full), at the initial public offering price of $10.00 per share and after
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company. In addition, the proceeds to the Company from
the Johnson & Johnson Stock Purchase will be approximately $3.0 million
($3.5 million if the Underwriters' over-allotment option is exercised in full
at the initial closing of this Offering). See "Johnson & Johnson Stock
Purchase." The combined net proceeds to the Company from this Offering and the
Johnson & Johnson Stock Purchase are estimated to be $30.1 million ($34.7
million if the Underwriters' over-allotment option is exercised in full at the
initial closing of this Offering, and $34.2 million if the Underwriters' over-
allotment option is exercised in full subsequent to the initial closing of
this Offering), after deducting estimated underwriting discounts and
commissions and estimated expenses payable by the Company.
The Company intends to use the substantial majority of the net proceeds of
this Offering and the Johnson & Johnson Stock Purchase to fund its research
and development activities with respect to the Company's Lisofylline and CT-
2584 programs, including preclinical testing, clinical trials and process
development activities, and to fund other research and development activities.
The amounts actually expended for research and development activities and the
timing of such expenditures will depend upon numerous factors, including the
progress of the Company's research and development programs, the results of
preclinical and clinical trials, the timing of regulatory submissions and
approvals, if any, technological advances, determinations as to the commercial
potential of the Company's compounds, and the status and timing of competitive
products. The amount of expenditures will also depend upon the continued
participation of Johnson & Johnson in the Collaboration Agreement, the timing
and availability of alternative methods of financing the Company's research
and development activities and preclinical and clinical trials, and the
establishment of collaborative agreements with other companies. In addition,
the Company's research and development expenditures will vary as product
development programs are added, expanded or discontinued. A variety of other
factors, some of which are beyond the Company's control, could also affect the
application of the proceeds.
The balance of the net proceeds of this Offering and the Johnson & Johnson
Stock Purchase is expected to be used to improve facilities, to purchase
capital equipment and for general corporate purposes. The Company has not
identified precisely the amount it plans to spend on these specific programs
or the timing of such expenditures. Pending such uses, the Company intends to
invest the net proceeds from this Offering and the Johnson & Johnson Stock
Purchase in U.S. government obligations and other highly rated liquid debt
instruments. The Company may also from time to time consider the acquisition
of other companies, technologies or products that complement the business of
the Company, although no agreements or understandings are in effect with
respect to any such transactions at this time. See "Risk Factors--Need for
Substantial Additional Funds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
JOHNSON & JOHNSON STOCK PURCHASE
In connection with the execution of the Collaboration Agreement, Johnson &
Johnson Development Corporation ("JJDC"), a wholly-owned subsidiary of Johnson
& Johnson, has granted to the Company an option (the "Johnson & Johnson
Option") to sell to JJDC a number of shares of Common Stock equal to not more
than ten percent of the number of shares of Common Stock sold by cti at the
initial closing of this Offering, at a price per share equal to the initial
per share price to public set forth on the cover of this Prospectus. The
Company has exercised the Johnson & Johnson Option in full, and JJDC is
committed to purchase, in a private placement that will occur concurrent with
the closing of this Offering, 300,000 shares of Common Stock at an aggregate
purchase price of $3.0 million, assuming the sale of 3,000,000 shares of
Common Stock at the initial closing of this Offering at the initial public
offering price of $10.00 per share. Upon the closing of this Offering and the
Johnson & Johnson Stock Purchase, JJDC will own approximately 5.70% of the
Common Stock. The closing of this Offering is not conditioned upon the closing
of the Johnson & Johnson Stock Purchase.
16
<PAGE>
DIVIDEND POLICY
The Company has not declared or paid any cash dividends on its capital stock
since its inception. The Company currently intends to retain all of its cash
and any future earnings to finance the growth and development of its business
and therefore does not anticipate paying any cash dividends in the foreseeable
future. Any future determination to pay cash dividends will be at the
discretion of the Board of Directors and will be dependent upon the Company's
financial condition, results of operations, capital requirements and such
other factors as the Board of Directors deems relevant.
CAPITALIZATION
The following table sets forth, at December 31, 1996, (i) the actual
capitalization of the Company; (ii) the pro forma capitalization of the
Company giving effect to the automatic conversion of all outstanding shares of
Convertible Preferred Stock at December 31, 1996 upon the closing of this
Offering into 4,784,966 shares of Common Stock (after giving effect to certain
anti-dilution adjustments that will occur as a result of the closing of this
Offering); and (iii) the pro forma capitalization of the Company as adjusted
to reflect the sale of 3,000,000 shares of Common Stock offered hereby and the
receipt by the Company of the estimated net proceeds therefrom (after
deducting underwriting discounts and commissions and estimated offering
expenses payable by the Company) and the sale of 300,000 shares of Common
Stock pursuant to the Johnson & Johnson Stock Purchase, in each case at the
initial public offering price of $10.00 per share:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Long-term obligations, less current portion.... $ 2,005 $ 2,005 $ 2,005
Shareholders' equity:
Preferred stock, 10,000,000 shares authorized
(of which 146,193.272 shares have been
designated as Series A Convertible Preferred
Stock, without par value, 14,925.373 shares
have been designated as Series B Convertible
Preferred Stock, without par value, and
100,000 shares have been designated as
Series C Preferred Stock, without par
value); 146,193.272 shares of Series A
Convertible Preferred Stock, 14,925.373
shares of Series B Convertible Preferred
Stock and no shares of Series C Convertible
Preferred Stock issued and outstanding,
actual; no shares of preferred stock issued
and outstanding, pro forma and pro forma as
adjusted.................................... 52,327 -- --
Common Stock, no par value, 100,000,000
shares authorized; 4,943,472 shares issued
and outstanding, actual; 9,728,438 shares
issued and outstanding, pro forma; and
13,028,438 shares issued and outstanding,
pro forma as adjusted (1)................... 51,810 104,137 134,187
Deficit accumulated during development
stage....................................... (74,083) (74,083) (74,083)
-------- -------- -------
Total shareholders' equity................. 30,054 30,054 60,104
-------- -------- -------
Total capitalization....................... $ 32,059 $ 32,059 $62,109
======== ======== =======
</TABLE>
- - --------
(1) Excludes (i) 1,208,608 shares of Common Stock issuable upon exercise of
stock options outstanding as of December 31, 1996 at a weighted average
exercise price of $11.78 per share and (ii) 77,907 shares of Common Stock
issuable upon exercise of warrants outstanding as of December 31, 1996 at
a weighted average exercise price of $19.12 per share. See "Management--
Stock Option Plans" and "Description of Capital Stock."
17
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of December 31,
1996, after giving effect to the Johnson & Johnson Stock Purchase, was
$33,053,720, or approximately $3.30 per share of Common Stock. "Pro forma net
tangible book value per share" represents the amount of the Company's total
tangible assets after giving effect to the Johnson & Johnson Stock Purchase,
less total liabilities, divided by the number of shares of Common Stock
outstanding plus the number of shares sold in the Johnson & Johnson Stock
Purchase and after giving effect to the automatic conversion of all
outstanding shares of Convertible Preferred Stock at December 31, 1996 upon
the closing of this Offering into 4,784,966 shares of Common Stock (after
giving effect to certain anti-dilution adjustments that will occur as a result
of the closing of this Offering). Net tangible book value dilution per share
represents the difference between the amount per share paid by purchasers of
shares of Common Stock in the Offering made hereby and the pro forma net
tangible book value per share of Common Stock immediately after completion of
the Offering. After giving effect to the sale by the Company of the 3,000,000
shares of Common Stock offered hereby (at the initial public offering price of
$10.00 per share and after deducting underwriting discounts and commissions
and estimated offering expenses payable by the Company), the pro forma net
tangible book value of the Company as of December 31, 1996 would have been
$60,103,720, or $4.61 per share of Common Stock. This represents an immediate
increase in net tangible book value per share of $1.31 to existing
shareholders and an immediate dilution in net tangible book value of $5.39 per
share to investors in this Offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price per share....................... $10.00
Pro forma net tangible book value per share as of December
31, 1996................................................... $3.30
Increase per share attributable to investors in this Offer-
ing........................................................ 1.31
-----
Pro forma net tangible book value per share after this Offer-
ing.......................................................... 4.61
------
Dilution per share to investors in this Offering.............. $ 5.39
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 31,
1996, the total consideration paid and the average price per share paid by
existing shareholders, by Johnson & Johnson pursuant to the Johnson & Johnson
Stock Purchase, and by investors purchasing shares offered hereby. The
calculations in the table with respect to shares of Common Stock purchased by
Johnson & Johnson and by investors in this Offering reflect the initial public
offering price of $10.00 per share (before deducting the underwriting
discounts and commissions and estimated offering expenses payable by the
Company).
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------ -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders .. 9,728,438 74.7% $110,816,851 77.1% $ 11.39
Johnson & Johnson Stock
Purchase............... 300,000 2.3 3,000,000 2.1 10.00
Investors in this Offer-
ing.................... 3,000,000 23.0 30,000,000 20.8 10.00
---------- ----- ------------ -----
Total................. 13,028,438 100.0% $143,816,851 100.0%
========== ===== ============ =====
</TABLE>
The preceding tables assume no exercise of (i) stock options outstanding as
of December 31, 1996 to purchase 1,208,608 shares of Common Stock at a
weighted average exercise price of $11.78 per share and (ii) warrants
outstanding as of December 31, 1996 to purchase 77,907 shares of Common Stock
at a weighted average exercise price of $19.12 per share. If all such options
and warrants were exercised in full, there would be an immediate increase in
pro forma net tangible book value per share after this Offering of $0.69 to
existing shareholders, and the dilution to investors in this Offering would be
$4.70 per share.
18
<PAGE>
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
consolidated statements of operations for each of the three years in the
period ended December 31, 1996 and for the period from September 4, 1991 (date
of incorporation) to December 31, 1996, and with respect to the consolidated
balance sheets at December 31, 1995 and 1996, are derived from the
consolidated financial statements of the Company included elsewhere in this
Prospectus that have been audited by Ernst & Young LLP, independent auditors,
and is qualified by reference to such financial statements and the notes
related thereto. The consolidated balance sheets data at December 31, 1992,
1993 and 1994 and the consolidated statements of operations data for the years
ended December 31, 1992 and 1993 are derived from audited financial statements
of the Company not included in this Prospectus. The data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 4,
1991 (DATE OF
YEARS ENDED DECEMBER 31, INCORPORATION)
----------------------------------------------- TO DECEMBER 31,
1992 1993 1994 1995 1996 1996
------- -------- -------- -------- -------- ---------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues:
Collaboration
agreements........... $ -- $ -- $ -- $ 100 $ 9,121 $ 9,221
Operating expenses:
Research and
development.......... 3,926 11,862 14,368 14,606 16,109 60,871
General and
administrative....... 1,661 4,052 5,283 6,144 7,602 24,743
------- -------- -------- -------- -------- --------
Total operating
expenses........... 5,587 15,914 19,651 20,750 23,711 85,614
------- -------- -------- -------- -------- --------
Loss from operations.... (5,587) (15,914) (19,651) (20,650) (14,590) (76,393)
Other income (expense):
Investment income..... 292 723 616 1,167 1,174 3,974
Interest expense...... (29) (137) (464) (509) (512) (1,653)
------- -------- -------- -------- -------- --------
Net loss................ $(5,324) $(15,328) $(19,499) $(19,992) $(13,928) $(74,072)
======= ======== ======== ======== ======== ========
Pro forma net loss per
share (1).............. $ (1.69)
========
Shares used in computa-
tion of pro forma net
loss per share......... 8,228
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1992 1993 1994 1995 1996
-------- -------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS
DATA:
Cash, cash equivalents and
securities available-for-
sale........................ $ 28,648 $ 27,452 $ 9,131 $ 21,906 $ 30,987
Working capital.............. 27,563 23,387 4,094 18,342 26,300
Total assets................. 33,422 35,230 17,278 28,048 37,002
Long-term obligations, less
current portion............. 319 3,635 2,620 2,606 2,005
Deficit accumulated during
development stage........... (5,324) (20,652) (40,151) (60,119) (74,083)
Total shareholders' equity... 31,851 28,848 10,051 21,858 30,054
</TABLE>
- - --------
(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the computation of pro forma net loss per share.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. When used in this Prospectus, the words "believes,"
"anticipates," "expects" and similar expressions are intended to identify such
forward-looking statements. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed below and in "Risk Factors." Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release
the results of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
OVERVIEW
Since commencement of operations in 1992, the Company has been engaged in
research and development activities, including conducting preclinical studies
and clinical trials, and recruiting its scientific and management personnel,
establishing laboratory facilities and raising capital. The Company has not
received any revenue from the sale of products to date and does not expect to
receive revenues from the sale of products for at least the next several
years.
In the fourth quarter of 1995 the Company began to receive revenue under a
collaboration agreement with BioChem Pharma, and in the fourth quarter of 1996
the Company began to receive revenue under the Collaboration Agreement with
Johnson & Johnson. The Company expects that its revenue sources for at least
the next several years will consist primarily of future expense reimbursements
and milestone payments under its collaboration agreements with Johnson &
Johnson and BioChem Pharma, and of interest income. The timing and amounts of
such revenues will likely fluctuate. The Company will be required to conduct
significant research, development and clinical activities during the next
several years to fulfill its obligations under the Collaboration Agreement
with Johnson & Johnson. There can be no assurance that Johnson & Johnson will
not terminate the Collaboration Agreement in accordance with its terms. See
"Business--Collaborations."
As of December 31, 1996 the Company had incurred aggregate net losses of
approximately $74.1 million since its inception. The Company expects to
continue to incur significant additional operating losses over the next
several years as its research, development and clinical trial efforts expand.
Operating losses may fluctuate from quarter to quarter as a result of
differences in the timing of expenses incurred and revenues recognized. To
date, the Company's operations have been funded primarily from the sale of
equity securities, which have raised aggregate net proceeds of approximately
$103.0 million.
RESULTS OF OPERATIONS
Years Ended December 31, 1996 and 1995
During the year ended December 31, 1996 the Company recorded a $5.0 million
license fee and $871,000 in development cost reimbursement from Johnson &
Johnson in connection with the Collaboration Agreement and a $250,000
milestone payment from BioChem Pharma in connection with a collaboration
agreement. The Company also received a $3.0 million non-refundable signing fee
from Schering AG in connection with a collaboration agreement which was
terminated by Schering AG in April 1996. See "Risk Factors--No Assurance of
Successful Product Development; Uncertainties Related to Clinical Trials" and
Note 11 of Notes to Consolidated Financial Statements. During the year ended
December 31, 1995, the Company received a milestone payment of $100,000 under
the collaboration agreement with BioChem Pharma. See "Business--
Collaborations."
Research and development expenses increased to approximately $16.1 million
for the year ended December 31, 1996 from approximately $14.6 million for the
year ended December 31, 1995. This increase was primarily due to expanded
manufacturing, preclinical and clinical-related development activities with
respect to Lisofylline, which increase was partially offset by costs of
approximately $1.2 million incurred in connection with the purchase of all
20
<PAGE>
the intellectual property of Lipomed Corporation in October 1995, which was
accounted for as in-process research and development expense. The Company
expects that research and development expenses will increase significantly in
future years as the Company expands its research and development programs and
undertakes additional clinical trials, including research, development and
clinical activities undertaken pursuant to the Collaboration Agreement with
Johnson & Johnson.
General and administrative expenses increased to approximately $7.6 million
for the year ended December 31, 1996 from approximately $6.1 million for the
year ended December 31, 1995. This increase was primarily due to transaction
costs associated with the collaboration agreement with Schering AG, which was
terminated by Schering AG in April 1996, transaction costs associated with the
Collaboration Agreement with Johnson & Johnson, offering costs associated with
the Company's withdrawn registration statement in 1996, and operating expenses
associated with supporting the Company's increased research, development and
clinical activities. General and administrative expenses are expected to
increase to support the Company's expected increase in research, development
and clinical trial efforts.
Investment income principally comprises interest income from investment of
the Company's cash reserves. Interest expense results primarily from the
financing of laboratory and other equipment. Investment income was
approximately $1.2 million for each of the years ended December 31, 1996 and
1995, as average cash balances and interest earned thereon was little changed
between years. Interest expense was approximately $500,000 for both the year
ended December 31, 1996 and 1995.
Years Ended December 31, 1995 and 1994
Revenue from the BioChem Pharma collaboration totalled $100,000 in 1995, all
of which was received in the third quarter of 1995. The Company did not have
any operating revenue during 1994.
Research and development expenses increased to approximately $14.6 million
in 1995 from approximately $14.4 million in 1994. This increase was primarily
due to costs of approximately $1.2 million incurred in connection with the
purchase of all the intellectual property of Lipomed Corporation in October
1995, which was accounted for as in-process research and development expense,
partially offset by a reduction in manufacturing costs associated with
Lisofylline.
General and administrative expenses increased to approximately $6.1 million
in 1995 from approximately $5.3 million in 1994. This increase was primarily
due to operating expenses associated with supporting the Company's increased
research, development and clinical activities, including business development,
marketing studies and recruitment of additional personnel.
Investment income net of interest expense increased to approximately
$658,000 in 1995 from approximately $152,000 in 1994. This increase was
associated with interest earnings on a higher average balance of cash reserves
resulting from a private placement of equity securities in 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
the sale of equity securities. As of December 31, 1996 the Company had raised
aggregate net proceeds of approximately $103.0 million from such financing
activities, including $30.5 million and $16.9 million from the sale of Series
A Convertible Preferred Stock in 1995 and 1996, respectively, $5.0 million
from the sale of Series B Convertible Preferred Stock to Johnson & Johnson in
1996, $49.3 million from the sale of Common Stock in 1992 and 1993, $850,000
from a bridge loan which was subsequently converted to equity, and
approximately $400,000 from the exercise of stock options and warrants. The
Company expensed approximately $320,000 in deferred offering costs related to
its withdrawn initial public offering in 1996. As of December 31, 1996 the
Company has recorded approximately $360,000 of deferred offering costs related
to its currently planned offering. In addition, the Company financed the
purchase of approximately $11.3 million of property and equipment through
financing agreements, of which approximately $2.8 million remained outstanding
as of December 31, 1996. In November 1996 Johnson & Johnson agreed to purchase
a number of shares of Common Stock equal to ten percent of the shares sold at
the closing of this Offering directly from the Company in a private placement
that will occur
21
<PAGE>
concurrent with the closing of this Offering at a per share price equal to the
initial public offering price of $10.00 per share. The Johnson & Johnson stock
purchase will result in proceeds to the Company of $3.0 million. See "Johnson
& Johnson Stock Purchase."
The Company's principal sources of liquidity are its cash balances, cash
equivalents and securities available-for-sale, which totaled approximately
$31.0 million as of December 31, 1996. The Company invests in U.S. government
obligations and other highly rated liquid debt instruments.
The Company expects that its capital requirements will increase as the
Company expands its research and development programs and undertakes
additional clinical trials. In connection with such expansion, the Company
expects to incur substantial expenditures for hiring additional management,
scientific and administrative personnel, for planned expansion of its
facilities, and for the purchase or lease of additional equipment. See "Risk
Factors--Management of Growth."
The Company does not expect to generate a positive cash flow from operations
for several years due to substantial additional research and development
costs, including costs related to drug discovery, preclinical testing,
clinical trials, manufacturing costs and operating expenses associated with
supporting such activities. The Company expects that its existing capital
resources, together with the net proceeds of this Offering and the Johnson &
Johnson Stock Purchase and the interest earned thereon, combined with
anticipated funding from Johnson & Johnson under the Collaboration Agreement,
will enable the Company to maintain its current and planned operations at
least through the end of 1998. In the event that Johnson & Johnson were to
terminate its participation in the Collaboration Agreement prior to such date,
cti expects that it would eliminate certain presently planned development
activities. Furthermore, the Company will need to raise substantial additional
capital to fund its operations beyond such time. The Company's future capital
requirements will depend on, and could increase as a result of, many factors,
including the continuation of the Company's collaboration with Johnson &
Johnson; continued scientific progress in its research and development
programs; the magnitude of such programs; the progress of preclinical testing
and clinical trials; the time and costs involved in obtaining regulatory
approvals; the costs involved in preparing, filing, prosecuting, maintaining,
enforcing and defending patent claims; competing technological and market
developments; changes in collaborative relationships; the terms of any
additional collaborative arrangements that the Company may enter into; the
ability of the Company to establish research, development and
commercialization arrangements pertaining to products other than those covered
by existing collaborative arrangements; the cost of establishing manufacturing
facilities; the cost of commercialization activities and the demand for the
Company's products if and when approved.
The Company intends to raise additional funds through additional equity or
debt financings, research and development financings, collaborative
relationships or otherwise. Because of these long-term capital requirements,
the Company may seek to access the public or private equity markets whenever
conditions are favorable, even if it does not have an immediate need for
additional capital at that time. There can be no assurance that additional
financing will be available to the Company, or, if available, that it will be
on acceptable terms. If additional funds are raised by issuing equity
securities, further dilution to shareholders may result. If adequate funds are
not available, the Company may be required to delay, reduce the scope of, or
eliminate one or more of its research, development and clinical activities.
The Company may also be required to seek to obtain funds through arrangements
with collaborative partners or others that may require the Company to
relinquish rights to certain of its technologies, product candidates or
products that the Company would otherwise seek to develop or commercialize
itself. See "Risk Factors--History and Continuation of Losses; Early Stage of
Development," "--Need for Substantial Additional Funds," "--Reliance on
Relationship with Johnson & Johnson" and "--Dilution."
As of December 31, 1996 the Company had available for Federal income tax
purposes net operating loss carryforwards of approximately $70 million and
research and development credit carryforwards of approximately $1.8 million.
These carryforwards begin to expire in 2007. The Company's ability to utilize
its net operating loss
and research and development credit carryforwards is subject to an annual
limitation in future periods pursuant to the "change in ownership" rates under
Section 382 of the Internal Revenue Code of 1986. See Note 10 of Notes to
Consolidated Financial Statements.
22
<PAGE>
BUSINESS
This Prospectus contains forward-looking statements which involve risks and
uncertainties. When used in this Prospectus, the words "believes,"
"anticipates," "expects" and similar expressions are intended to identify such
forward-looking statements. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed in "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Readers are cautioned not to
place undue reliance on these forward-looking statements, which speak only as
of the date hereof. The Company undertakes no obligation to publicly release
the results of any revisions to these forward-looking statements which may be
made to reflect events or circumstances after the date hereof or to reflect
the occurrence of unanticipated events.
GENERAL
The Company focuses on the discovery, development and commercialization of
small molecule drugs for the treatment of cancer and inflammatory and immune
diseases. The Company is conducting Phase III clinical trials for its lead
product candidate, Lisofylline, which is being developed to prevent or reduce
treatment-related toxicities, specifically serious and fatal infections,
mucositis and treatment-related mortality, among cancer patients receiving
high dose radiation and/or chemotherapy. In November 1996 cti entered into a
Collaboration and License Agreement with Johnson & Johnson for the joint
development and commercialization of Lisofylline. The Company is focusing its
oncology development efforts on a portfolio of drugs that it believes will
address the three principal causes of cancer treatment failure: (i)
Lisofylline--a supportive care agent being investigated to prevent or reduce
the incidence of serious and fatal infections, mucositis (damage to the
epithelial cells lining the mouth, stomach and intestinal tract) and
treatment-related mortality among cancer patients receiving high dose
radiation and/or chemotherapy, (ii) CT-2584--a novel anti-cancer drug under
investigation for the treatment of patients with multidrug resistant tumors
and (iii) tumor sensitizing agents being investigated to enhance sensitivity
to radiation among tumors that have deleted or mutated tumor suppression
genes. The Company believes that, in addition to its oncology applications,
Lisofylline may be effective as an agent to prevent or reduce the incidence
and severity of acute lung injury ("ALI") and mortality among patients
requiring mechanical ventilation for respiratory failure following pneumonia,
multiple traumatic injuries, or sepsis. The Company has expended approximately
$60.9 million from its inception to December 31, 1996 on research and
development activities to build a unique drug discovery platform based on its
proprietary technology in phospholipid chemistry.
SCIENTIFIC OVERVIEW
Cell communication occurs through a complex process that commences when
"first messengers" outside the cell, such as hormones, cytokines and growth
factors, recognize and bind to cellular receptors, some of which are embedded
in the cell membrane. The first messenger initiates a series of biochemical
events within the cell, known as signal transduction, which result in cellular
responses. In the 1970s scientists discovered that, in response to
extracellular binding of first messengers, certain molecules, including cell
membrane lipids, are chemically altered to form "second messengers" which
participate in transducing chemical information from the cell membrane to the
cell nucleus. Certain signal transduction pathways are essential for normal
day-to-day cellular processes, and are often referred to as "housekeeping
pathways" or "physiologic pathways." These housekeeping pathways are involved
in the normal growth and replenishment of cells in the body, such as blood
cells and the cells lining the intestinal tract. In contrast, there are also
signal transduction pathways, termed "stress-activated pathways" or "SAPs,"
which are part of the cellular response to injury following exposure to cell-
damaging stimuli such as radiation, chemotherapy or oxidative injury and which
are also activated in many disease states.
The Company believes that such cell-damaging stimuli cause a number of their
toxic effects by altering the chemical composition of certain cell membrane
lipids and phospholipids, resulting in the production of biologically reactive
phospholipids termed phosphatidic acids ("PAs") and oxidized lipids termed
hydroperoxyoctadecadienoic acids ("HPODEs"). These phospholipids and oxidized
lipids in turn activate stress-related signaling pathways within the cell
which carry the cell-damaging message to the cell nucleus, resulting in the
activation of transcription factors. The activation of these transcription
factors may in turn lead to the (i) production of inflammatory cytokines and
the resulting activation of inflammatory and immune responses, (ii) production
of cytokines which inhibit the growth and renewal of the stem cells in the
bone marrow and of the cells lining the intestinal tract and (iii) promotion
of cell membrane damage leading to cell death.
23
<PAGE>
PA elevation, appearance of HPODEs and activation of SAPs are associated
with many disease states and do not appear to be primarily utilized for normal
cellular processes. The Company believes that therapeutics which regulate the
production and/or degradation of phospholipids or oxidized lipids such as PAs
and HPODEs and which regulate the activation of SAPs may offer greater
specificity and safety profiles for the treatment of oncologic, inflammatory
and immune diseases than pharmaceuticals that modulate the housekeeping
pathways necessary for normal day-to-day cellular function.
The diagram below demonstrates the different cellular responses resulting
from the activation of housekeeping pathways and stress-activated pathways:
[DIAGRAM DEPICTING THE DIFFERENT CELLULAR RESPONSES RESULTING FROM THE
ACTIVATION OF HOUSEKEEPING PATHWAYS AND STRESS-ACTIVATED PATHWAYS]
HOUSEKEEPING PATHWAYS STRESS-ACTIVATED PATHWAYS
The process by which growth These are also signal production
factors outside a cell transmit pathways termed "stress-activated
their chemical signals inside the pathways," or "SAPs," which are
cell is termed "signal part of the cellular response to
transduction." Certain signal injury following exposure to cell
transduction pathways, such as the damaging stimuli such as
mitogen-activated pathway ("MAP") radiation, chemotherapy or
are essential for normal day-to- oxidative injury. Activation of
day cellular processes such as the stress-activated pathways may lead
normal growth and replenishment of to inflammation and tissue injury.
cells in the body. These pathways
are often referred to as
"housekeeping pathways."
24
<PAGE>
PRODUCTS UNDER DEVELOPMENT
The following table summarizes the potential therapeutic indications,
current development status and current collaborators for the Company's
products under development:
<TABLE>
<CAPTION>
DEVELOPMENT POTENTIAL
PROGRAM THERAPEUTIC INDICATIONS DEVELOPMENT STATUS(1) COLLABORATORS(2)
- - -----------------------------------------------------------------------------------------------
<C> <S> <C> <C>
ONCOLOGY
Lisofylline Prevent or reduce infection, Pivotal Phase III trial for BMT Johnson & Johnson
mucositis and treatment- ongoing BioChem Pharma
related mortality following Phase II trial for AML ongoing
high dose radiation and/or Pivotal Phase III trial for
chemotherapy AML ongoing
CT-2584 Anti-cancer agent targeting Phase I trials ongoing BioChem Pharma
multidrug resistant tumors
CT-2412 Tumor sensitizer Research lead --
- - -----------------------------------------------------------------------------------------------
INFLAMMATION
Lisofylline Prevent or reduce acute lung Phase II trial completed Johnson & Johnson
injury and mortality among BioChem Pharma
patients requiring
mechanical ventilation for
respiratory failure
- - -----------------------------------------------------------------------------------------------
IMMUNOLOGY
CT-3578 Treatment of acute organ Research lead --
transplant rejection
- - -----------------------------------------------------------------------------------------------
</TABLE>
(1) Research lead refers to a compound that exhibits pharmacological
properties which are evaluated in vitro and in animal models prior to
the commencement of the additional pharmacology and toxicology studies,
formulation work and manufacturing scale-up required to submit an IND.
See "--Government Regulation" for a description of the phases of human
clinical trials.
(2) See "--Collaborations" for a description of cti's collaboration
agreements and commercial rights to such products.
ONCOLOGY
Overview
Cancer is the second leading cause of death in the United States, resulting
in over 550,000 deaths annually. The National Cancer Advisory Board reports
that more than eight million people in the United States have cancer, and
projects that cancer will surpass heart disease as the leading cause of death
in the United States by the end of the decade. Approximately 1.4 million new
cases of cancer are diagnosed each year in the United States. The most
commonly used methods for treating cancer patients include surgery, radiation
and drug chemotherapy. A cancer patient often receives a combination of these
treatment modalities depending upon the type and extent of the disease. At
some point in their disease treatment, 70 percent of all cancer patients will
receive radiation therapy and 50 percent of all newly diagnosed cancer
patients will receive chemotherapy. Despite their benefits for treating
cancer, there are significant limitations of, and complications associated
with, radiation and chemotherapy which result in a high rate of treatment
failure. For example, only ten percent of patients treated with chemotherapy
are cured. The principal causes of treatment failure include treatment-related
toxicities, multidrug resistance and tumor resistance to radiation.
Treatment-Related Toxicities. Despite their benefits for treating cancer,
radiation and chemotherapy treatment result in toxicities that limit the use
of potentially more effective doses. These treatment-related toxicities are
directly responsible for placing patients at risk for serious and often life-
threatening infections and other undesirable side effects. Radiation and
chemotherapy are toxic to rapidly dividing cells, which include not only
cancer cells but also certain normal cells such as bone marrow cells, hair
follicle cells and the epithelial
25
<PAGE>
cells lining the mouth, stomach and intestinal tract. The most common and
problematic of the severe side effects attributable to radiation and
chemotherapy are neutropenia--bone marrow suppression of infection-fighting
white blood cells ("WBCs") and mucositis--damage to the epithelial cells
lining the mouth, stomach and intestinal tract. Epithelial cells form an
important barrier, preventing potentially lethal bacterial, fungal and viral
organisms which reside in the intestinal tract from entering the sterile blood
stream and organs. Damage from radiation or chemotherapy to intestinal
epithelial cells disrupts this important barrier, allowing infectious
pathogens to gain access to the systemic blood circulation. When neutropenia
and mucositis occur together, patients are at high risk for serious and fatal
infections. Patients often require supportive care agents as an adjunct to the
primary therapy in order to lessen the toxicities associated with radiation
and chemotherapy.
Approximately 575,000 patients receive chemotherapy each year in the United
States, with more than 20 percent developing severe neutropenia and/or
mucositis. WBC growth factors such as Neupogen(R) (G-CSF), marketed by Amgen
Inc., target the fever and neutropenia (two surrogate markers that indicate
risk for developing infection) induced by radiation and chemotherapy, but in
most studies have failed to prevent serious or fatal infections, have had no
impact on survival, and have failed to treat other acute toxicities of cancer
treatment such as mucositis. Despite these limitations, Neupogen generated
worldwide sales in excess of $1 billion in 1996. There are currently no
supportive-care measures that adequately treat or prevent mucositis.
Multidrug Resistance. Multidrug resistance to conventional chemotherapeutic
agents is a major impediment to the effective treatment of certain cancers.
Approximately 90 percent of all cancer patients undergoing chemotherapy (40
percent to 45 percent of all new cancer cases) express or will develop
multidrug resistance. Because most chemotherapeutic agents share a similar
mechanism of action, once a tumor develops resistance to a single therapeutic
agent, it becomes resistant to a broad range of chemotherapeutic drugs.
Tumor Resistance to Radiation. Radiation therapy kills tumor cells by
generating highly reactive and toxic oxygen free radicals, resulting in damage
to cell replication machinery (e.g., DNA). Tumors are classified as being
sensitive (e.g., lymphomas) or resistant (e.g., colon or skin cancers) to
radiation therapy. Almost 50 percent of certain cancer cell types, such as
prostate and lung cancer, are resistant to radiation therapy at the time of
diagnosis. Mechanisms by which tumor cells develop resistance to radiation
include mutations or deletions in so-called tumor suppression genes (e.g.,
p53) that control cell replication, abnormal regulation of proteins which
inhibit programmed cell death, such as bcl-2, or mechanisms by which DNA is
repaired during cell replication. The p53 tumor suppression gene is mutated or
deleted in approximately 50 percent of newly diagnosed cancers and is a major
contributor to the failure of radiation therapy among such malignancies.
The Company is focusing its oncology development efforts on a portfolio of
drugs that it believes will address the three principal causes of cancer
treatment failure. These include (i) Lisofylline--a supportive care agent
being investigated to prevent or reduce the incidence of serious and fatal
infections, mucositis and treatment-related mortality among patients receiving
high doses of radiation and/or chemotherapy, (ii) CT-2584--a novel anti-cancer
drug being investigated for the treatment of patients with multidrug resistant
tumors and (iii) tumor sensitizing agents including CT-2412--a research lead
with the potential ability to enhance sensitivity to radiation among tumors
that have deleted or mutated p53 tumor suppression genes, which the Company
believes will increase the effectiveness of radiation treatment on such
tumors.
Lisofylline
Lisofylline is a synthetic small molecule drug in Phase III clinical trials
among cancer patients receiving high dose radiation and/or chemotherapy.
Unlike blood cell growth factors or chemotherapy protecting agents,
Lisofylline is being developed to prevent or reduce the incidence of serious
and fatal infections, mucositis and treatment-related mortality. The Company
believes that the use of Lisofylline may permit the safer delivery of higher,
potentially more effective doses of radiation and chemotherapy. The Company is
collaborating with Johnson & Johnson to jointly develop and commercialize
Lisofylline. See "--Collaborations."
The Company's development strategy for Lisofylline is to initially target
life threatening situations where Lisofylline might be used and where no
comparable treatment alternatives exist. The Company is conducting or
26
<PAGE>
plans to conduct pivotal Phase III clinical trials of Lisofylline in patients
who require BMT after receiving ablative, or bone marrow destroying, doses of
chemotherapy, patients with newly diagnosed AML who receive standard high dose
induction chemotherapy and patients with solid tumors such as head and neck or
breast cancers who receive dose-intensive radiation and/or chemotherapy.
Common to each of these three categories of anti-cancer treatment (ablative,
induction and dose-intensive) is the occurrence of neutropenia and the
breakdown of the epithelial barrier cells lining the mouth, stomach and
intestinal tract, placing patients at a high risk of life threatening
infections, severe mucositis and mortality.
For BMT and AML, the Company intends to pursue approval under FDA
initiatives intended to provide accelerated review and approval of therapies
intended to treat patients suffering from serious, life-threatening or
severely debilitating diseases and that provide a meaningful therapeutic
benefit to patients over existing treatments. The Company believes that this
strategy may shorten the time to market, accelerate product adoption by
oncologists and provide a platform for product line extensions in less urgent,
but clinically meaningful applications such as mucositis. However, there can
be no assurance that Lisofylline will be evaluated for regulatory approval on
such accelerated basis. See "--Government Regulation."
In 1995 more than 20,000 patients in the United States were treated with
ablative doses of chemotherapy requiring BMT or peripheral blood stem cell
("PBSC") replacement. This type of chemotherapy regimen is one of the fastest
growing types of cancer treatments in the United States, with an estimated
annual growth rate of 15 to 20 percent. In 1995 in the United States
approximately 75,000 patients received induction-type chemotherapy regimens
for the treatment of leukemias, such as AML, and lymphomas, and almost 200,000
patients received dose-intensive chemotherapy for a variety of solid tumor
types.
Clinical Trials--BMT. In the first quarter of 1996 the Company completed a
60 patient, multi-center, double blind placebo controlled Phase II trial which
investigated the effect of two different doses (2 mg/kg and 3 mg/kg) of
Lisofylline on the rate of blood cell recovery and the incidences of fever,
infection, toxicity and mortality in cancer patients undergoing high dose
radiation and/or chemotherapy followed by BMT. On an intent to treat analysis
at 100 days following BMT, this study demonstrated that administration of 3
mg/kg of Lisofylline resulted in a statistically significant reduction in
mortality (p = 0.022), the incidence of serious and fatal infections
(p = 0.005), and the duration of absolute neutropenia (p = 0.046) (defined as
the number of days following BMT with fewer than 100 neutrophils per
microliter of blood) when compared to placebo recipients or patients
randomized to receive 2 mg/kg of Lisofylline. In addition, there was a strong
trend toward a reduction in the overall incidence of mucositis (p = 0.08) and
in the incidence of severe mucositis (p = 0.104) among higher dose Lisofylline
recipients compared to placebo recipients or patients randomized to receive
the lower dose of Lisofylline. Certain endpoints of the trial regarding
neutrophil and platelet recovery, the duration of fever and transfusion
requirements were not met. No serious adverse side effects attributable to
Lisofylline were detected in this trial.
The table below summarizes those results of the Phase II BMT trial of
Lisofylline in patients 100 days after receiving high dose radiation and/or
chemotherapy followed by BMT which the Company plans to more fully assess in
its Phase III clinical trials:
<TABLE>
<CAPTION>
LISOFYLLINE
3MG/KG(1) PLACEBO P VALUE(2)
----------- ------- ----------
<S> <C> <C> <C>
Mortality rate........................... 11% 44% 0.022
Incidence of serious and fatal infec-
tions................................... 0% 39% 0.005
Duration of absolute neutropenia (3)..... 3 days 6 days 0.046
Incidence of severe mucositis............ 26% 44% 0.104
</TABLE>
- - --------
(1) Patients receiving a 2mg/kg dose of Lisofylline did not demonstrate
statistically significant results when compared with placebo
recipients.
(2) A p value of less than or equal to 0.05 is considered statistically
significant. A p value of less than or equal to 0.15 demonstrates a
trend toward statistical significance.
(3) Duration of absolute neutropenia is defined as the number of days
following BMT with fewer than 100 neutrophils per microliter of blood.
27
<PAGE>
In the third quarter of 1996 the Company initiated a 106 patient, multi-
center, double blind placebo controlled pivotal Phase III trial for
Lisofylline in patients undergoing high dose radiation and/or chemotherapy
followed by BMT. This trial utilizes a 3 mg/kg dose of Lisofylline. The
primary endpoints of this study are neutropenia-related infection and
mortality. Based on the Company's discussions with the FDA, if the endpoints
of this study are met with statistical significance, the Company believes that
the results of this trial, together with the results of the completed Phase II
BMT trial and the safety data from the ongoing Phase II AML trial, would be
adequate to provide a basis for an NDA for Lisofylline for BMT indications. In
the first quarter of 1997, the Company commenced an 80 patient Phase III trial
which will examine the effect of a 5 mg/kg dose of Lisofylline on patients
with cancer receiving BMT from unrelated donors. In addition to being at high
risk for serious and fatal infections, these patients have a high incidence of
severe mucositis and cancer treatment-related deaths. This study will
determine the effect of higher doses of Lisofylline on infection and mucositis
and provide supportive dosing and efficacy data for mucositis applications of
Lisofylline. If effective, the Company believes that the use of Lisofylline
may increase the number of patients who are eligible to receive BMT from
unrelated donors. See "Risk Factors--No Assurance of Successful Product
Development; Uncertainties Related to Clinical Trials."
Clinical Trials--AML. The Company has ongoing a 75 patient, single center,
double blind placebo controlled Phase II trial of Lisofylline (3mg/kg) among
patients with newly diagnosed AML undergoing standard high dose induction
chemotherapy. This trial, which is being conducted in the United States at the
M.D. Anderson Cancer Center, will examine the effects of Lisofylline on the
incidence of infection and mortality, both of which are serious side effects
of induction chemotherapy in AML. Sixty-six patients have been enrolled to
date.
In the fourth quarter of 1996 the Company initiated an 80 patient, multi-
center, double blind placebo controlled pivotal Phase III trial of Lisofylline
among patients with newly-diagnosed AML undergoing standard high dose
induction chemotherapy. This trial will examine the effect of a 3mg/kg dose of
Lisofylline on the incidence of infection and mortality among such patients.
The Company believes that if the Phase II AML trial demonstrates that
Lisofylline reduces infection and mortality with statistical significance, the
results of the Phase II AML trial, together with the results of the completed
Phase II BMT trial and, if positive, the ongoing Phase III BMT trial, may be
adequate to provide a basis for a supplemental NDA for Lisofylline for AML
indications.
Clinical Trials--Mucositis. The Company intends to commence in the second
half of 1997 a 100 patient, multi-center, double blind placebo controlled
Phase II/III trial comparing a 3mg/kg dose of Lisofylline administered four
times daily to a 6mg/kg dose Lisofylline administered two times daily and to
placebo among patients with solid tumors receiving dose-intensive radiation
and/or chemotherapy at risk for developing severe mucositis and infection.
Mechanism of Action. Following exposure to radiation, chemotherapy or
oxidative injury, oxygen free radicals (a highly reactive form of oxygen) are
generated. These oxygen free radicals are "soaked up" both in the blood stream
and in cell membranes by a pool of lipids termed "oxidizable lipids" to
produce highly reactive oxidized lipids such as HPODEs. These oxidized lipids
have been shown to have immediate effects on cell membranes, resulting in
membrane perturbation or disruption which may lead to cell damage or cell
death among the barrier cells lining the intestine or respiratory tract. As
such, HPODEs may contribute to the early breakdown in barrier function
observed following radiation, chemotherapy or oxidative injury. In addition to
the direct effects that HPODEs may have on cell membranes, they may also lead
to the activation of a number of SAPs within the cell.
While the biomolecular target for Lisofylline is presently unknown, its
therapeutic activity appears to be due to the result of Lisofylline's effect
on oxidizable lipids, including those in the cell membrane, and on the
activation of SAPs. Lisofylline decreases the pool of oxidizable lipids, while
increasing neutral, less oxidizable lipid pools, and decreases the production
of HPODEs and other oxidized lipids in a dose dependent manner following
radiation or chemotherapy. In doing so, Lisofylline appears to inhibit the
early, immediate effects of HPODEs on cell membranes and appears to prevent
the activation of SAPs and the ensuing cellular inflammatory and injurious
response.
28
<PAGE>
The Company believes that the effects of Lisofylline on oxidizable lipids
and on the activation of SAPs may represent a critical upstream point of
intervention in the initiation of the cellular stress response. By modulating
the production of such oxidized lipids and phospholipids and the activation of
SAPs, Lisofylline may be able to prevent the early and late damage to the
epithelial barrier cells lining the mouth, stomach and intestinal tract,
resulting in a reduction in infection, mucositis and mortality following high
dose anti-cancer treatment. Because epithelial barrier cells also line the
lung tissue in the respiratory tract, cells which are susceptible to oxidative
injury, the Company believes that Lisofylline may also be effective for
preventing or reducing ALI in patients requiring mechanical ventilation for
respiratory failure. See "--Inflammatory Disease."
The Company is utilizing its proprietary lipid technology as a platform to
investigate structure-function relationships with respect to the Lisofylline
chemical moiety. The Company is developing chemical analogs of Lisofylline,
such as CT-2408R, which has the potential to be administered orally.
CT-2584
CT-2584 is the Company's novel small molecule drug under investigation for
the treatment of patients with multidrug (e.g., chemotherapy) resistant
cancers, including sarcomas, prostate, colon, lung and breast cancer. The
Company believes that CT-2584 has a unique mechanism of action which may allow
the drug to be (i) toxic to cancers which have multidrug resistance to
conventional chemotherapeutic agents, (ii) more toxic to cancer cells than to
non-cancerous cells, (iii) not susceptible to multidrug resistance and (iv)
anti-angiogenic.
The Company's development strategy for CT-2584 is to initially target
multidrug resistant cancers, such as sarcomas, for which first line treatments
are lacking or ineffective and where such applications may qualify for
accelerated regulatory approval. The Company believes that targeting
therapeutic applications of the drug where alternative treatments are lacking
or ineffective may also accelerate market acceptance. The Company intends to
pursue line extensions of CT-2584 to be used as a second line therapy for
cancers such as prostate, colon, lung and breast cancers which frequently
express or acquire multidrug resistance to conventional first line
chemotherapeutic agents, resulting in treatment failure. Because CT-2584's
mechanism for tumor cell killing appears to be unique, and because it does not
possess the toxicities of conventional anti-cancer agents, the Company
believes that CT-2584 may ultimately be used alongside conventional
chemotherapeutic agents as a first line therapy for a variety of cancer types.
Preclinical and Clinical Trials. In preclinical testing, CT-2584
demonstrated toxicity to all tumor cell lines tested and to human tumor biopsy
samples. These cell lines and samples included sarcomas, prostate, brain,
colon, breast, lung and ovarian cancers, as well as certain leukemias and
lymphomas. Tumors that were multidrug resistant to high levels of conventional
chemotherapeutic agents were rendered more sensitive to those agents in the
presence of low concentrations of CT-2584. CT-2584 also significantly
inhibited cancer cell-induced new blood vessel formation (angiogenesis) at
drug levels below which cancer cell killing is observed.
In November 1995 the Company initiated a Phase I trial, co-sponsored by the
Cancer Research Campaign, at the Christie Hospital in the United Kingdom among
patients with advanced cancers including colon cancer. In May 1996 the Company
initiated a parallel Phase I trial at the Memorial Sloan Kettering Cancer
Research Center in the United States for patients with advanced cancers
including prostate and ovarian cancer. As of February 1, 1997, more than 25
patients have been treated with CT-2584 at five different dose levels without
exhibiting the bone marrow or gastrointestinal toxicities observed with
conventional high dose anti-cancer treatment regimens. A maximum tolerated
dose level has not been achieved to date. The majority of patients enrolled in
this trial have tumor types which are known to express multidrug resistance.
As of February 1, 1997, seven patients with refractory cancers have
experienced disease stabilization or disease regression following more than
two cycles of CT-2584 therapy. Based on these preliminary results, the Company
anticipates starting disease-specific Phase II trials in the United States in
the second half of 1997.
29
<PAGE>
Mechanism of Action. CT-2584's unique mechanism of action of tumor cell
killing is believed to result from the effects it has on tumor cell
phospholipids such as PA. Unlike normal growing cells, such as bone marrow
cells, tumor cells overproduce PAs through the activation of an enzyme called
phosphatidylcholine phospholipase-D ("PC-PLD"). CT-2584 appears to
overactivate tumor cell PC-PLD, and this enzyme may be its biochemical target
in effecting tumor cell killing. Because of its unique mechanism of action,
CT-2584 appears to inactivate or bypass multidrug resistance mechanisms and
does not appear to be susceptible to multidrug resistance. Company scientists
have cloned PC-PLD, and the Company intends to establish high throughput
assays based on PC-PLD and its other proprietary technologies to discover more
potent or selective analogs of CT-2584.
Tumor Sensitizing Agents
The Company has recently focused a drug discovery effort on the development
of agents which would enhance the effectiveness of radiation. The Company
believes that its drug discovery and core technology platform may provide a
novel approach to the development of tumor sensitizing agents. The Company is
investigating the role of cell membrane lipids and phospholipids and their
contribution to the mechanisms by which tumors express or develop resistance
to radiation. The Company has identified compounds, including CT-2412, which
have the potential ability to enhance sensitivity to radiation in certain
resistant cancers, including those which have deleted or mutated p53 tumor
suppression genes.
INFLAMMATORY DISEASE
Acute lung injury ("ALI") may be caused by or associated with many diseases
or conditions, but is most frequently observed following mechanical
ventilation for pneumonia, multiple traumatic injuries and sepsis. More than
one million patients are at risk each year in the United States for developing
ALI. ALI, when severe, leads to a condition termed Acute Respiratory Distress
Syndrome ("ARDS"). ALI can be fatal in a substantial percentage of the
patients who develop ARDS. There are no specific therapies to prevent or treat
the estimated 150,000 new cases of ARDS diagnosed each year. ALI results from
oxidative injury to the epithelial barrier cells which line the respiratory
tract following exposure to high levels of oxygen in connection with
mechanical ventilation and/or following resuscitation with blood transfusions
after multiple traumatic injury. In each setting, oxidative injury to the
epithelial cell membranes lining the lung causes a breakdown in the normal
barrier function, leading to the inability to provide adequate oxygen to the
blood stream and organs and resulting in multiorgan failure ("MOF") and death.
In addition to its potential oncology applications, Lisofylline is also
under investigation by cti as an agent to prevent or reduce the incidence and
severity of ALI and mortality among patients requiring mechanical ventilation
for respiratory failure following pneumonia, multiple traumatic injuries or
sepsis. The mechanisms underlying the toxicity to gastrointestinal barrier
cells observed in the oncology setting may also operate to cause the toxicity
to respiratory barrier cells observed in the critical care setting. The
Company's development strategy for Lisofylline in critical-care applications
is to target patient populations at high risk for developing ALI, where early
intervention is feasible and clinically meaningful endpoints can be assessed
after relatively short (14-28 days) duration of drug treatment.
Clinical Trials. The Company has completed a 13 patient, multi-center,
double blind placebo controlled Phase II feasibility study of Lisofylline in
patients suffering from septic shock randomized to receive a low dose
(1.5mg/kg) of Lisofylline or placebo. This study examined the safety and
pharmacokinetics of Lisofylline given to critically ill patients. Of the 12
patients evaluable for endpoint analysis, Lisofylline recipients experienced a
40 percent improvement from baseline in median MOF scores compared to placebo
recipients. All patients receiving Lisofylline survived to day 28 compared to
67 percent of placebo recipients.
In January 1997 the National Heart, Lung and Blood Institute (the "NHLBI"),
through its ARDS Network, notified the Company that, after reviewing the
preclinical and clinical data to date, it had selected Lisofylline for
investigation in a multi-center, double blind placebo controlled Phase II/III
trial among patients experiencing
30
<PAGE>
ALI. The ARDS Network was established by the NHLBI in cooperation with the FDA
to accelerate the investigation and approval of novel therapies for lung
injury. This trial is expected to begin in the second half of 1997. The trial
will examine the effect of a 3mg/kg dose of Lisofylline on the duration of
mechanical ventilation and early mortality among patients who develop ALI.
Mechanism of Action. The Company believes that following exposure to high
levels of inspired oxygen by mechanical ventilation or following blood
transfusion resuscitation after multiple traumatic injury, the generation of
reactive oxygen free radicals converts oxidizable lipids to oxidized lipids
such as HPODEs. See""--Oncology--Lisofylline--Mechanism of Action." These
HPODEs exert their damaging effects on cell membrane lipids and phospholipids
which may lead to the activation of SAPs, resulting in cellular inflammation
and injury. In addition, HPODEs may also cause an immediate disturbance in the
integrity of the cells lining the respiratory tract, allowing the undesired
movement of proteins and fluids into the lung air spaces, and decreasing the
ability of oxygen in the lung to cross into the bloodstream and reach the
tissues.
In animal studies, Lisofylline prevented the occurrence of lung injury
and/or mortality following exposure to high levels of inspired oxygen,
resuscitation following blood loss and shock, and following severe systemic
bacterial infections. In clinical studies, Lisofylline decreased the pool of
oxidizable lipids and decreased HPODE generation and the activation of SAPs
and subsequent production of multiple inflammatory cytokines. The Company
believes that the effects of Lisofylline on such lipids and on the activation
of SAPs may represent a critical upstream point of intervention in the
initiation of the complex biochemical cascade that leads to cellular and
systemic inflammation, cell injury and cell death.
IMMUNE DISEASE
The Company is investigating a class of novel compounds which inhibit the PA
regulating enzyme diacylglycerol kinase ("DAG Kinase"), and which have been
identified for potential use in the prevention of organ transplant rejection
and in the treatment of immune diseases. Early in vitro testing suggests that
one of these compounds, CT-3578, unlike currently used immunosuppressives
including cyclosporine A, leads to non-responsiveness of the immune system to
specific foreign antigens. The Company believes that such a compound could
induce tolerance to a specific foreign antigen and thus allow patients to
accept organ transplants from genetically different donors without the need
for long-term immunosuppressive therapy.
PROPRIETARY DRUG DISCOVERY TECHNOLOGY
The Company's proprietary drug discovery technology consists of three
components: (i) technology for quantitative measuring of specific species of
lipids and phospholipids; (ii) cloning of critical lipid regulatory enzymes;
and (iii) using the cloned enzymes to validate targets and to develop high
throughput screens capable of analyzing large chemical libraries.
The Company has developed proprietary technology that enables it to
determine the effects of a variety of physical and chemical stimuli (such as
radiation and chemotherapy), growth factors, cytokines and oncogene-induced
events on the production of oxidized lipids such as HPODEs, various species of
PAs and the enzymes which control their production and degradation. Standard
industry techniques for measuring lipid second messengers and structural lipid
membrane components are time consuming and often inadequate for measuring
lipids and phospholipids like HPODEs and PAs, which are produced in relatively
small quantities following stimulation and are degraded rapidly after their
production. Moreover, separation of specific species of oxidized lipids and
PAs is difficult. The Company possesses several proprietary lipid analytical
technologies which can identify different oxidized lipids and different
species of PA produced in response to a variety of stimuli in various cell
types. These technologies provide a qualitative and quantitative methodology
to examine the effects of cti compounds on a variety of such lipids and
phospholipids that are involved in normal and/or pathological functions in
certain cells.
The Company believes that PAs have different functions within cells,
depending on how they are made and their biochemical species. In order to
further investigate the role of these phospholipids in cellular response
mechanisms and to provide a platform to develop novel targets for drug
development, Company scientists have
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cloned several of the critical enzymes that produce or metabolize (degrade)
PAs. The following table lists the human enzymes cloned by the Company, their
biological effects and implied areas of indication:
<TABLE>
<CAPTION>
CLONED ENZYME BIOLOGICAL EFFECT DISEASE AREA
------------- ----------------- ------------
<C> <S> <C>
PC-PLD (phosphatidylcholine- Cancerous transformation, Cancer
phospholipase-D) angiogenesis
LPAAT (lyso-PA acyl transferase) Stress activated protein Inflammation
kinase ("SAPK") activation;
TNFa, Interleukin-6 ("IL-6")
release
CDS (cytidyl diphosphate- SAPK activation; TNFa, IL-6 Inflammation
diacylgycerol synthase) release
</TABLE>
An additional PA regulating enzyme, diacylglycerol kinase ("DAG-Kinase"),
has been identified as a target enzyme for modifying the immune response and
is inhibited by cti's lead immunosuppressive compound, CT-3578.
Through application of genetic, molecular and biochemical techniques, the
Company may be able to determine the relationship between the PA species
controlled by these enzymes and abnormal cellular functions which are thought
to be related to disease processes. The Company believes that PA modulating
enzymes, when coupled with high throughput screens and combinatorial diversity
libraries, may provide it with unique therapeutic targets for drug development
for oncological, inflammatory and immune diseases.
The Company has also developed certain proprietary technologies that permit
the qualitative and quantitative analysis of a variety of complex lipids for
their content of oxidizable and oxidized lipid components such as HPODEs. The
Company believes that such technologies may be utilized in conjunction with
its chemical libraries and novel cloned enzymes to elucidate the relationship
of such complex oxidized lipids to conditions such as cancer, inflammatory and
immune disease. From these studies, the Company intends to identify additional
novel targets for future drug development.
STRATEGY
The key elements of the Company's business strategy are to:
Target large markets which are not adequately served by existing
therapeutics. The Company focuses its drug development activities on cancer
and inflammatory and immune diseases--three therapeutic areas that represent
large market opportunities not adequately served by existing therapeutics. The
Company intends to develop its oncology product portfolio by integrating its
understanding of cancer disease management with novel products derived from
its internal research and discovery efforts. The Company's two potential
cancer drugs in clinical trials, Lisofylline and CT-2584, target the toxic
side effects of current cancer treatment modalities and multidrug resistant
cancer cells, respectively. Lisofylline is also in clinical trials as an agent
for the prevention or reduction of ALI and mortality among patients requiring
mechanical ventilation for respiratory failure, conditions for which no
effective therapies currently exist. The Company believes that these agents,
if effective, may provide additional treatment options and opportunities which
are not presently available to health care providers and their patients. The
Company intends to further develop its product portfolio to exploit these
potential opportunities through internal research and discovery efforts,
inlicensing or product acquisitions.
Maximize product opportunities by entering into late-stage collaborative
relationships. The Company believes that by developing its products through
mid- to late-stage clinical development before seeking potential development
and/or commercialization partners, the Company is better positioned to
(i) assess the potential value of its products, (ii) evaluate the
commercialization requirements for such products and (iii) if advantageous,
choose a suitable collaborative partner on more favorable terms than would be
available if the Company were to enter into collaborative relationships for
products in early-stage clinical or preclinical development. The Company is
collaborating with Johnson & Johnson for the worldwide (excluding Canada)
development and commercialization of Lisofylline and with BioChem Pharma for
the development and commercialization of Lisofylline and CT-2584 in Canada.
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Accelerate regulatory approval, market penetration and acceptance. The
Company intends initially to launch its products for life threatening or
potentially life saving indications, followed by product line extensions to
less urgent indications. The Company believes that this strategy will
accelerate the regulatory review and approval of its products and facilitate
their acceptance for use and adoption by health care providers and third party
payors. The Company intends to initially pursue approval for Lisofylline for
BMT and AML, and CT-2584 for sarcomas, under FDA initiatives intended to
provide accelerated review and approval of therapies intended to treat
patients suffering from serious, life-threatening or severely debilitating
diseases and that provide a meaningful therapeutic benefit to patients over
existing treatments. Once approval has been obtained for the initial
indication, cti will seek to extend the use of Lisofylline in less urgent, but
clinically meaningful applications such as mucositis. However, there can be no
assurance that any of the Company's products will be evaluated for regulatory
approval on such an accelerated basis.
Focused sales and marketing efforts. The Company intends to develop its own
sales and marketing infrastructure in the United States to co-promote
Lisofylline with Johnson & Johnson as permitted under the Collaboration
Agreement and to launch and commercialize its portfolio of other potential
oncology products, either on its own or jointly with Johnson & Johnson or
other collaborators. With respect to the commercialization of its oncology
products outside the United States, and with respect to the worldwide
commercialization of its portfolio of products for inflammatory and immune
diseases, the Company's strategy is to pursue commercialization arrangements
with collaborators, including Johnson & Johnson.
Apply and protect proprietary technology to create a unique drug discovery
platform for new product opportunities. The Company is leveraging its
proprietary technology to create a unique platform for future drug
discoveries. The Company believes that PA modulating enzymes, when coupled
with high throughput screens and combinatorial diversity libraries, may
provide the Company with unique therapeutic targets for drug development for
cancer and inflammatory and immune diseases.
COLLABORATIONS
Johnson & Johnson
In November 1996 the Company entered into a Collaboration and License
Agreement (the "Collaboration Agreement") with Ortho Biotech, Inc. and The
R.W. Johnson Pharmaceutical Research Institute (a division of Ortho
Pharmaceutical Corporation), each of which are wholly-owned subsidiaries of
Johnson & Johnson (collectively, "Johnson & Johnson"), for the joint
development and commercialization of Lisofylline. Upon execution of the
Collaboration Agreement, Johnson & Johnson paid to cti a $5.0 million license
fee. Under the Collaboration Agreement, cti is responsible for the development
of Lisofylline in the United States, and Johnson & Johnson has committed to
fund 60 percent of cti's budgeted development expenses incurred in connection
with obtaining regulatory approval for Lisofylline in the United States. For
each of 1997 and 1998 Johnson & Johnson has agreed, subject to certain
termination rights, to fund up to $12.0 million of cti's budgeted development
expenses per year. Any development expenses in excess of such currently
budgeted agreed upon amounts will be funded solely by cti unless otherwise
mutually agreed. Johnson & Johnson will be responsible for obtaining
regulatory approval for Lisofylline for markets outside of the United States
and Canada at its own expense.
The Company and Johnson & Johnson will co-promote Lisofylline in the United
States, and each will share equally in any resulting operating profits and
losses. Although cti and Johnson & Johnson will co-promote Lisofylline in the
United States, Johnson & Johnson will have primary responsibility for
commercializing Lisofylline. See "--Marketing." Johnson & Johnson has the
exclusive right to develop and market Lisofylline, at its own expense, for
markets other than the United States and Canada, subject to specified royalty
payments to cti. Johnson & Johnson will make additional payments to, and
equity investments in, cti if certain milestones are achieved in the
development and commercialization of Lisofylline.
The collaboration with Johnson & Johnson initially covers the development of
Lisofylline to prevent or reduce the toxic side effects among cancer patients
receiving high dose radiation and/or chemotherapy followed by BMT (the "BMT
Indication") through December 31, 1998. The collaboration also covers the
development
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of Lisofylline for the treatment of patients with AML undergoing high dose
chemotherapy (the "AML Indication") through June 30, 1997. Johnson & Johnson
has an option to continue to participate in the development of Lisofylline for
the AML Indication following the completion of cti's ongoing Phase II AML
trial. Johnson & Johnson also has certain options to expand the collaboration
to include the development of Lisofylline for any other indication for which
Lisofylline is being developed by cti. In the event that Johnson & Johnson
exercises any such option, it would be required to fund 60 percent of cti's
budgeted development expenses incurred in connection with the development of
Lisofylline for such indication, including expenses incurred prior to the
exercise of such option, and would also be required to pay additional license
fees and milestone payments to cti. Thereafter, any development expenses in
excess of the then agreed upon budgeted amounts for any such additional
indication would be funded solely by Johnson & Johnson unless otherwise
mutually agreed. If Johnson & Johnson does not exercise such option with
respect to any such indication, cti would be free to develop Lisofylline for
such indication either on its own or in collaboration with third parties.
Johnson & Johnson also has the option to sponsor research at cti with respect
to discovering compounds structurally related to Lisofylline.
The Company is dependent on the future payments from Johnson & Johnson to
continue the development and commercialization of Lisofylline as presently
planned. Johnson & Johnson may terminate the Collaboration Agreement at any
time and for any reason after November 8, 1997, subject to a six month notice
period. Johnson & Johnson would have no further obligation to fund cti's
development expenses related to Lisofylline following such termination.
However, the financial and other obligations of Johnson & Johnson (aside from
Johnson & Johnson's obligation to make additional payments to, and equity
investments in, cti if certain development milestones are achieved) would
continue during such six month notice period. In addition, Johnson & Johnson
has the right to terminate the Collaboration Agreement at any time based on
material safety or tolerability issues related to Lisofylline upon 30 days'
notice. In the event of a termination of the Collaboration Agreement by
Johnson & Johnson, cti would regain all development and commercialization
rights. Without Johnson & Johnson's continued collaborative support, cti would
not be able to continue the development of Lisofylline as presently planned,
and the Company's financial condition would be materially and adversely
affected. See "Risk Factors--Reliance on Relationship with Johnson & Johnson."
In accordance with the terms of a Stock Purchase Agreement entered into
between the Company and Johnson & Johnson Development Corporation ("JJDC"), a
wholly-owned subsidiary of Johnson & Johnson, in connection with the
Collaboration Agreement, JJDC purchased shares of cti's Series B Convertible
Preferred Stock for an aggregate purchase price of $5.0 million. Pursuant to
the Stock Purchase Agreement, cti is entitled to require JJDC to purchase
additional shares of Common Stock upon the closing of this Offering and,
subsequent to the offering, upon achievement of certain milestones. JJDC has
agreed to purchase a number of shares of Common Stock equal to ten percent of
the shares sold at the closing of this Offering directly from the Company in a
private placement that will occur concurrent with the closing of this Offering
at a per share price equal to the initial public offering price. See "Johnson
& Johnson Stock Purchase" and "Certain Transactions."
BioChem Pharma
In March 1995 the Company entered into a collaboration agreement with
BioChem Pharma for the development and commercialization of Lisofylline and
CT-2584 in Canada. Under the collaboration agreement (the "BioChem
Collaboration Agreement"), BioChem Pharma will be responsible for obtaining
regulatory approval for Lisofylline and CT-2584 in Canada. Although BioChem
Pharma will have no obligation to conduct any research and development
activities, it will have the right to have cti perform clinical trials in
Canada at BioChem Pharma's expense. BioChem Pharma will have the exclusive
right to commercialize Lisofylline and CT-2584 in Canada, subject to the
payment of royalties to cti. The Company will also receive payments under the
BioChem Collaboration Agreement if certain milestones are achieved. BioChem
Pharma may terminate the BioChem Collaboration Agreement with respect to any
product at any time for any reason upon 30 days' notice. In connection with
the BioChem Collaboration Agreement, BioChem Pharma agreed to purchase shares
of Series A Convertible Preferred Stock in the Company's 1995 Private
Placement for an aggregate purchase price of $2.5 million.
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<PAGE>
PATENTS AND PROPRIETARY RIGHTS
The Company has dedicated significant resources to protect its intellectual
property. In the United States, the Company has 10 issued patents and 68
allowed or pending patent applications, including divisional patent
applications and continuations-in-part, covering a variety of new chemical
entities, pharmaceutical compositions, synthetic processes, methods of use,
discovery, research tools and diagnostics. Three of the Company's issued
patents cover the oncology and anti-inflammatory methods of use for
Lisofylline, and nine of the Company's allowed or pending patent applications
cover the pharmaceutical composition, commercial synthetic manufacturing
process and other methods of use for Lisofylline. One allowed patent
application covers the chemical compounds and pharmaceutical compositions of
CT-2584 and CT-3578. The Company intends to file additional patent
applications, when appropriate, with respect to improvements in its core
technology and to specific products and processes that it develops. Generally
it is cti's policy to file foreign counterparts in countries with significant
pharmaceutical markets and a patent granting and enforcement infrastructure.
The Company has filed 51 foreign national patent applications in 14 countries
and the European Patent Office, including 18 counterparts of certain of its
issued patents and allowed or pending U.S. patent applications for Lisofylline
and 13 counterparts of certain of its issued patents and allowed or pending
U.S. patent applications for CT-2584 and CT-3578. There can be no assurance
that any patents will issue from any present or future applications or, if
patents do issue, that such patents will be issued on a timely basis or that
claims allowed on issued patents will be sufficient to protect the Company's
technology. In addition, there can be no assurance that the patents issued to
cti will not be challenged, invalidated or circumvented or that the rights
granted thereunder will provide proprietary protection or commercial advantage
to the Company. With respect to such issued U.S. patents or any patents that
may issue in the future, there can be no assurance that they will effectively
protect the technology involved, foreclose the development of competitive
products by others or otherwise be commercially valuable.
The commercial success of the Company will also depend in part on the
Company's neither infringing patents or proprietary rights of third parties
nor breaching any technology licenses which relate to the Company's
technologies and potential products. In general, the development of
therapeutic products is intensely competitive and many pharmaceutical
companies, biotechnology companies, universities and research institutions
have filed and will continue to file patent applications and receive patents
in this field. If patents are issued to other entities that contain
competitive or conflicting claims with respect to the technology and compounds
pursued by cti and such claims are ultimately determined to be valid, no
assurance can be given that cti would be able to obtain licenses to these
patents at a reasonable cost or develop or obtain alternative technology or
compounds.
The Company is aware of a patent belonging to third parties that could be
interpreted to compromise the Company's freedom to sell Lisofylline in the
United States for certain non-oncology applications. The Company believes,
upon advice of its patent counsel, that any such interpretation is relevant
only in connection with the Company's use of Lisofylline in preventing lung
injury following traumatic injury or sepsis; and, irrespective of such
interpretation, that the Company's planned manufacture, sale or use of
Lisofylline as described in this Prospectus does not infringe any valid claim
of such third party patent. If such third party patent rights were interpreted
to limit the use of Lisofylline, the Company may be required to obtain a
license from such parties. There can be no assurance that any such license
would be available to the Company upon reasonably acceptable terms, if at all.
The Company could also face significant costs associated with any litigation
relating to such patent. See "Risk Factors--Ability to Protect Intellectual
Property."
The Company has sought and intends to aggressively seek patent protection in
the United States, Europe and Japan to protect any products that it may
develop. The Company also intends to seek patent protection or rely upon trade
secrets to protect certain of its enabling technologies that will be used in
discovering and evaluating new drugs which could become marketable products.
However, there can be no assurance that such steps will effectively protect
the technology involved. To protect any such trade secrets and other
proprietary information, cti relies on confidentiality and material transfer
agreements with its corporate partners, employees, consultants, outside
scientific collaborators and sponsored researchers and other advisors. There
can be no assurance that these agreements will not be breached, that the
Company will have adequate remedies for breach
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<PAGE>
or that the Company's trade secrets will not otherwise become known or
independently discovered by competitors. The Company also has its employees,
members of its Scientific Advisory Board and Clinical Advisory Board, and its
consultants enter into agreements requiring disclosure to cti of ideas,
developments, discoveries or inventions conceived during employment or during
consulting and assignment to cti of proprietary rights to such matters related
to the business and technology of cti. The extent to which efforts by others
will result in patents and the effect on cti of the issuance of such patents
is unknown. Further, to enforce any patents issued to the Company or determine
the scope and validity of other parties' proprietary rights, the Company may
have to engage in litigation, which would result in substantial cost to, and
diversion of efforts by, the Company. There can be no assurance that the
Company's issued or licensed patents would be held valid. An adverse outcome
could subject the Company to significant liabilities to third parties, require
disputed rights to be licensed from third parties or require the Company to
cease or modify its use of such technology, any of which could have a material
adverse effect on the Company. If the Company elects or is required to
participate in interference proceedings declared by the U.S. Patent and
Trademark Office to determine priority of invention, substantial cost to the
Company could result even if the eventual outcome is favorable to the Company.
There can be no assurance that others will not independently develop
substantially equivalent proprietary information or otherwise obtain access to
cti's know-how or that others will not be issued patents which may prevent the
sale of Company products or require licensing and the payment of significant
fees or royalties by cti for the pursuit of its business. Trade secrets and
other unpatented proprietary information of cti may be difficult to protect,
notwithstanding confidentiality agreements with cti's employees and
consultants. See "Risk Factors--Ability to Protect Intellectual Property."
MANUFACTURING
The Company currently does not have the internal facilities to manufacture
products under current Good Manufacturing Practices ("GMP") prescribed by the
FDA. The Company seeks to develop such capacity through manufacturing
relationships. The Company has qualified and selected manufacturers which it
believes comply with GMPs and other regulatory standards, and Lisofylline is
currently being manufactured by third party vendors on a fee for service
basis. In January 1997 the Company entered into a supply agreement with
ChiRex, Ltd. ("ChiRex"), a British manufacturer of pharmaceutical
intermediates and active ingredients, for the manufacture and supply of
Lisofylline and corresponding intermediate compounds. Under the terms of the
agreement, ChiRex will manufacture and supply Lisofylline bulk drug and a key
intermediate compound in sufficient quantities to meet the Company's
requirements for ongoing and future clinical trials and commercial
requirements during product launch and commercialization. ChiRex is obligated
to comply with all regulatory requirements and policies concerning GMPs for
all phases of production. The agreement will expire on December 31, 2001, but
may be terminated by cti upon 12 months written notice prior to such date.
The Company believes it has developed a process for manufacturing
Lisofylline in its own laboratories and those of external manufacturers that
would enable its manufacture in commercial quantities. Under the terms of the
Collaboration Agreement with Johnson & Johnson, the Company will be
responsible for the manufacture of Lisofylline for development and
commercialization purposes until November 8, 1999. Thereafter, Johnson &
Johnson will assume responsibility for the manufacture of Lisofylline.
However, Johnson & Johnson may elect to assume responsibility for the
manufacture of Lisofylline at any time prior to such date. The Company
currently uses ChiRex for the manufacture of Lisofylline bulk drug and uses
three suppliers for clinical trial quantities of the finished drug product.
Following commercial launch of Lisofylline, the Company expects that it will
continue to use ChiRex to manufacture Lisofylline bulk drug and expects that
OMJ Pharmaceuticals, Inc., an affiliate of Johnson & Johnson, will be the
Company's primary supplier for the finished drug product pursuant to the
Collaboration Agreement.
The Company has established a quality control and quality assurance program,
including a set of standard operating procedures and specifications, designed
to ensure that the Company's products are manufactured in accordance with GMPs
and other applicable domestic and foreign regulations. However, the Company is
and expects to continue to be dependent upon Johnson & Johnson and contract
manufacturers such as ChiRex to
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<PAGE>
comply with such procedures and regulations. There can be no assurance that
Johnson & Johnson or these manufacturers will meet the Company's requirements
for quality, quantity or timeliness. Lisofylline has never been manufactured
on a commercial scale, and no assurance can be given that the Company,
together with Johnson & Johnson or such other third party contract
manufacturers, will be able to make the transition to commercial production.
If the Company develops other products with commercial potential outside of
the Johnson & Johnson collaboration, cti will need to develop additional
manufacturing resources, and may seek to enter into additional collaborative
arrangements with other parties which have established manufacturing
capabilities or may elect to have a third party such as ChiRex manufacture its
products on a contract basis. If cti is unable to enter into collaborative
relationships or to obtain or retain third party manufacturing on commercially
acceptable terms, it may be delayed in its ability to commercialize its
products or may not be able to commercialize its products as planned. The
Company will be dependent upon such collaborators or third parties to supply
it in a timely manner with products manufactured in compliance with GMPs or
similar standards imposed by foreign regulators. Collaborators and contract
manufacturers may violate GMPs, and the FDA has intensified its oversight of
drug manufacturers. There can be no assurance that the FDA would not take
action against a collaborator or a contract manufacturer who violates current
GMPs. Such actions may include requiring such collaborator or contract
manufacturer to cease manufacturing activities. See "Risk Factors--Reliance on
Third Party Manufacturers; Manufacture of Products in Commercial Quantities."
MARKETING
The Company intends to develop its own sales and marketing infrastructure in
the United States to commercialize its portfolio of oncology products,
including the oncology products that the Company plans to co-promote with
Johnson & Johnson pursuant to the Collaboration Agreement and any other
oncology products that the Company may commercialize, either on its own or, to
the extent the Company enters into any commercialization arrangements, with
collaborators. With respect to the commercialization of its oncology products
outside the United States, and with respect to the worldwide commercialization
of its portfolio of products for inflammatory and immune disease, the
Company's strategy is to pursue commercialization arrangements with
collaborators, including Johnson & Johnson.
The Company has no experience in marketing, sales or distribution. The
Company believes, however, that the United States oncology market is
accessible by a limited marketing staff due to the concentrated market of
prescribing physicians. Approximately 5,000 oncologists control the vast
majority of prescriptions for cancer therapeutics. Under the Collaboration
Agreement, Johnson & Johnson will have primary responsibility for
commercializing Lisofylline. To assist in commercializing Lisofylline for the
BMT Indication, cti will employ medical affairs and marketing personnel who
will work with Johnson & Johnson's sales force to provide various medical and
marketing support functions. In connection with the launch and
commercialization of Lisofylline for all other indications, cti will be
permitted to provide its own field sales force to co-promote Lisofylline under
the direction and control of Johnson & Johnson. See "--Collaborations."
If the Company develops additional products with commercial potential
outside of the Johnson & Johnson collaboration, cti may need to develop
marketing and additional sales resources, and may seek to enter into
collaborative arrangements with third parties which have established marketing
and sales capabilities or may choose to pursue the commercialization of such
products on its own. There can be no assurance that the Company, Johnson &
Johnson or, to the extent the Company enters into any commercialization
arrangements with any other third partries, such other third parties, will
establish adequate sales and distribution capabilities or be successful in
gaining market acceptance for products. There can be no assurance that cti
will enter into any such alliances or that the terms of any such alliances
will be favorable to cti. See "Risk Factors--Absence of Sales and Marketing
Organization."
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COMPETITION
Competition in the pharmaceutical and biotechnology industries is intense.
The Company faces competition from a variety of sources, both direct and
indirect. The Company believes there may be several pharmaceutical or
biotechnology companies that focus on cell membrane lipids in regulating
cellular processes. Many other companies compete indirectly with cti for the
same therapeutic indications but with different approaches by focusing, for
example, on signal transduction, cell receptor technology, transcription
factors and gene therapies. The Company also competes with other large
pharmaceutical companies that produce and market synthetic compounds and with
other specialized biotechnology firms in the United States, Japan, Europe and
elsewhere. Many of the Company's existing or potential competitors have
substantially greater financial, technical and human resources than the
Company and may be better equipped to develop, manufacture and market
products. Smaller companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and
established biotechnology companies. Many of these competitors have
significant products that have been approved or are in development and operate
large, well funded research and development programs.
The Company expects to encounter significant competition for the principal
pharmaceutical products it plans to develop. Companies that complete clinical
trials, obtain required regulatory approvals and commence commercial sales of
their products before their competitors may achieve a significant competitive
advantage. Accordingly, the relative speed with which the Company and Johnson
& Johnson or any future collaborators can develop products, complete
preclinical testing and clinical trials and approval processes, and supply
commercial quantities of the products to the market are expected to be
important competitive factors. A number of biotechnology and pharmaceutical
companies are developing new products for the treatment of the same diseases
being targeted by cti. In some instances, such products have already entered
late-stage clinical trials or received FDA approval.
Significant levels of research in biotechnology, medicinal chemistry and
pharmacology occur in academic institutions, governmental agencies and other
public and private research institutions. These entities have become
increasingly active in seeking patent protection and licensing revenues for
their research results. They also compete with cti in recruiting and retaining
skilled scientific talent.
The Company believes that its ability to compete successfully will be based
on its ability to create and maintain scientifically advanced technology,
develop proprietary products, attract and retain scientific personnel, obtain
patent or other protection for its products, obtain required regulatory
approvals and manufacture and successfully market its products either alone or
through outside parties. Many of cti's competitors have substantially greater
financial, marketing and human resources than cti. The Company will continue
to seek licenses with respect to technology related to its field of interest
and may face competition with respect to such efforts. There can be no
assurance that the Company's competitors will not develop more effective or
more affordable products, or achieve earlier patent protection or product
commercialization than the Company. See "Risk Factors--No Assurance of
Successful Product Development; Uncertainties Related to Clinical Trials," "--
Substantial Competition" and "--Ability to Protect Intellectual Property."
GOVERNMENT REGULATION
Drug Approval Process
Regulation by governmental authorities in the United States and other
countries is a significant factor in the development, production and marketing
of cti's proposed products. All of cti's products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
human therapeutic products are subject to rigorous preclinical and clinical
testing and other approval procedures in the United States by the FDA and
similar health authorities in foreign countries. Various federal statutes and
regulations also govern or influence the testing, manufacturing, quality
control, safety, labeling, storage, record-keeping and marketing of such
products. The process of obtaining these approvals and the subsequent
compliance with appropriate federal and foreign statutes and regulations
require the expenditure of substantial resources. Any failure by cti or its
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collaborators or licensees to obtain, or any delay in obtaining, regulatory
approval could adversely affect the marketing of any product that cti may hope
to develop and its ability to receive revenues therefrom. The Company has
neither applied for nor received regulatory approval to market any products.
The steps required before a pharmaceutical agent may be marketed in the
United States include (i) preclinical laboratory, in vivo and formulation
studies, (ii) the submission to the FDA of an Investigational New Drug
application ("IND"), which must become effective before human clinical trials
may commence, (iii) adequate and well-controlled human clinical trials to
establish the safety and efficacy of the proposed drug in its intended
indication, (iv) the submission of a New Drug Application ("NDA") to the FDA,
and (v) the FDA approval of the NDA.
In order to clinically test, produce and market products for diagnostic or
therapeutic use, a company must comply with mandatory procedures and safety
standards established by the FDA and comparable agencies in foreign countries.
Before beginning human clinical testing of a potential new drug, a company
must file an IND and receive clearance from the FDA. The IND is a summary of
the preclinical studies which were carried out to characterize the drug,
including toxicity and safety studies, as well as an in-depth discussion of
the human clinical studies which are being proposed. Approval of a local
institutional review board ("IRB") and informed consent of trial subjects is
also required.
Human clinical trials are typically conducted in three sequential phases
which may overlap. Phase I involves the initial introduction of the drug into
healthy human subjects or patients where the product is tested for safety,
dosage tolerance, absorption, metabolism, distribution and excretion. Phase II
involves studies in a limited patient population to (i) identify possible
adverse effects and safety risks, (ii) determine the efficacy of the product
for specific, targeted indications, and (iii) determine dosage tolerance and
optimal dosage. When Phase II evaluation demonstrates that the product may be
effective and has an acceptable safety profile, Phase III trials are
undertaken to further evaluate dosage and clinical efficacy and to further
test for safety in an expanded patient population at multiple clinical study
sites. A pivotal Phase III trial is an adequate and well-controlled study
which provides the primary basis for determining whether there is "substantial
evidence" to support the claims of effectiveness for new drugs and forms the
basis for an NDA. The regulatory authority or the sponsor may suspend clinical
trials at any point in this process if either entity concludes that clinical
subjects are being exposed to an unacceptable health risk, that the study is
not being conducted in compliance with applicable regulatory requirements, or
for other reasons. See "Risk Factors--No Assurance of Successful Product
Development; Uncertainties Related to Clinical Trials."
The results of product development, preclinical studies and clinical studies
are submitted to the FDA as part of an NDA for approval of the marketing and
commercial shipment of the product. The FDA may deny approval of an NDA if
applicable regulatory criteria are not satisfied, or may require additional
data. Even if such data is submitted, the FDA may ultimately decide that the
NDA does not satisfy the criteria for approval. Once issued, a product
approval may be withdrawn if compliance with regulatory standards is not
maintained or if problems occur after the product reaches the market. In
addition, the FDA may require testing and surveillance programs to monitor the
effect of approved products which have been commercialized, and it has the
power to prevent or limit further marketing of a product based on the results
of these post-marketing programs.
Satisfaction of these FDA requirements, or similar requirements by foreign
regulatory agencies, typically takes several years and the time needed to
satisfy them may vary substantially, based upon the type, complexity and
novelty of the drug product. The effect of government regulation may be to
delay or to prevent marketing of potential products for a considerable period
of time and to impose costly procedures upon the Company's activities. There
can be no assurance that the FDA or any other regulatory agency will grant
approval for any products being developed by the Company on a timely basis, or
at all. Success in preclinical or early stage clinical trials does not assure
success in later stage clinical trials. Data obtained from preclinical and
clinical activities are susceptible to varying interpretations which could
delay, limit or prevent regulatory approval. If regulatory approval of a
product is granted, such approval may impose limitations on the indicated uses
for which a product may be marketed. Further, even if regulatory approval is
obtained, later discovery of previously
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unknown problems with a product may result in restrictions on the product,
including withdrawal of the product from the market. Delay in obtaining or
failure to obtain regulatory approvals would have a material adverse affect on
the Company's business. Marketing the Company's products abroad will require
similar regulatory approvals and is subject to similar risks. In addition, the
Company is unable to predict the extent of adverse government regulations that
might arise from future United States or foreign governmental action. See
"Risk Factors--No Assurance of FDA Approval; Comprehensive Government
Regulation."
The FDA has implemented accelerated review and approval procedures for
certain pharmaceutical agents that have been studied for their safety and
effectiveness in treating serious, life-threatening or severely debilitating
diseases, and that provide a meaningful therapeutic benefit to patients over
existing treatments. Products intended to remove a serious or life-threatening
toxicity of cancer treatment may potentially qualify for review under these
procedures. The Company believes that Lisofylline may qualify for this
accelerated review and approval process and designed its pivotal Phase III BMT
trial with the objective of securing accelerated approval. The FDA has granted
the Company priority review status for its planned NDA for Lisofylline for BMT
indications. However, significant uncertainty exists as to the extent to which
these will result in accelerated review and approval. Further, the FDA retains
considerable discretion in determining eligibility for accelerated review and
approval and is not bound by discussions that an applicant may have with FDA
staff. Accordingly, the FDA could employ such discretion to deny eligibility
of Lisofylline as a candidate for accelerated review or require additional
clinical trials or other information before approving Lisofylline. In
addition, the approval of a product under the accelerated approval procedures
is subject to various conditions, including the requirement to verify clinical
benefit in postmarketing studies and the authority on the part of the FDA to
withdraw approval under streamlined procedures if such studies do not verify
clinical benefit or under various other circumstances. The Company cannot
predict the ultimate impact, if any, of the accelerated approval process on
the timing or likelihood of FDA approval of Lisofylline or any of its other
potential products.
Facilities and manufacturing procedures used for the manufacture of products
for clinical use or for sale must be operated in conformity with current GMP
regulations, the FDA regulations governing the production of pharmaceutical
products. The Company intends to operate its facilities or to arrange for the
manufacture of products at facilities which are operated, as required, in
accordance with GMPs where necessary; however, no assurance can be provided
that such manufacture will successfully comply with GMPs. In addition, the FDA
also regulates promotion, marketing and distribution of drug products, and
inspects drug manufacturers to evaluate compliance with regulatory
requirements. Among other things, the FDA evaluates truthfulness and accuracy
of materials submitted to it, or otherwise prepared by a drug manufacturer,
and may take legal or regulatory action against companies or their products if
such materials contain any untrue statement of a material fact.
Before the Company's products can be marketed outside of the United States,
they are subject to regulatory approval similar to that required in the United
States, although the requirements governing the conduct of clinical trials,
product licensing, pricing and reimbursement vary widely from country to
country. No action can be taken to market any product in a country until an
appropriate application has been approved by the regulatory authorities in
that country. The current approval process varies from country to country, and
the time spent in gaining approval varies from that required for FDA approval.
In certain countries, the sales price of a product must also be approved. The
pricing review period often begins after market approval is granted. No
assurance can be given that, even if a product is approved by a regulatory
authority, satisfactory prices will be approved for such product.
No assurance can be provided that the Company's INDs or NDAs will be
successfully reviewed by the FDA, or that similar applications will be
successfully reviewed by foreign regulatory authorities. Further, the FDA and
foreign authorities may at any time take legal or regulatory action against a
product or the Company if it concludes that cti has not complied with
applicable laws and regulations or that earlier evaluations of a product's
safety or effectiveness may not have been adequate or appropriate. Such action
may include, but is not limited to, restrictions on manufacture and shipment
of products, seizure of products, injunctions and civil and criminal
penalties. The FDA's policies may change and additional government regulations
may be promulgated
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which could prevent or delay regulatory approval of the Company's potential
products. Moreover, increased attention to the containment of health care
costs in the United States and in foreign markets could result in new
government regulations which could have a material adverse effect on the
Company's business. The Company is unable to predict the likelihood of adverse
governmental regulation which might arise from future legislative or
administrative action, either in the United States or abroad.
Third Party Reimbursement and Health Care Reform
The commercial success of the Company's products under development will be
substantially dependent upon the availability of government or private third-
party reimbursement for the use of such products. There can be no assurance
that Medicare, Medicaid, health maintenance organizations and other third-
party payors will authorize or otherwise budget such reimbursement. Such
governmental and third party payors are increasingly challenging the prices
charged for medical products and services. If the Company succeeds in bringing
one or more products to market, there can be no assurance that such products
will be viewed as cost-effective or that reimbursement will be available to
consumers or will be sufficient to allow the Company's products to be marketed
on a competitive basis. Furthermore, federal and state regulations govern or
influence the reimbursement to health care providers of fees and capital
equipment costs in connection with medical treatment of certain patients. In
response to concerns about the rising costs of advanced medical technologies,
the current administration of the federal government has publicly stated its
desire to reform health care, including the possibility of price controls and
revised reimbursement policies. There can be no assurance that actions taken
by the administration, if any, with regard to health care reform will not have
a material adverse effect on the Company. If any actions are taken by the
administration, such actions could adversely affect the prospects for future
sales of the Company's products. Further, to the extent that these or other
proposals or reforms have a material adverse effect on the Company's ability
to secure funding for its development or on the business, financial condition
and profitability of other companies that are prospective collaborators for
certain of the Company's product candidates, the Company's ability to develop
or commercialize its product candidates may be adversely affected. See "Risk
Factors--Uncertainty of Pharmaceutical Pricing and Reimbursement."
Given recent government initiatives directed at lowering the total cost of
health care throughout the United States, it is likely that the United States
Congress and state legislatures will continue to focus on health care reform
and the cost of prescription pharmaceuticals and on the reform of the Medicare
and Medicaid systems. The Company cannot predict the likelihood of passage of
federal and state legislation related to health care reform or lowering
pharmaceutical costs. In certain foreign markets pricing of prescription
pharmaceuticals is already subject to government control. Continued
significant changes in the nation's health care system could have a material
adverse effect on the Company's business.
Environmental Regulation
In connection with its research and development activities and its
manufacturing materials and products, the Company is subject to federal, state
and local laws, rules, regulations and policies governing the use, generation,
manufacture, storage, air emission, effluent discharge, handling and disposal
of certain materials, biological specimens, and wastes. Although the Company
believes that it has complied with these laws, regulations and policies in all
material respects and has not been required to take any significant action to
correct any noncompliance, there can be no assurance that the Company will not
be required to incur significant costs to comply with environmental and health
and safety regulations in the future. The Company's research and development
involves the controlled use of hazardous materials, including but not limited
to certain hazardous chemicals and radioactive materials. Although the Company
believes that its safety procedures for handling and disposing of such
materials comply with the standards prescribed by state and federal
regulations, the risk of accidental contamination or injury from these
materials cannot be eliminated. In the event of such an accident, the Company
could be held liable for any damages that result and any such liability could
exceed the resources of the Company. See "Risk Factors--Use of Hazardous
Materials."
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FACILITIES
The Company leases approximately 65,000 square feet of space at 201 Elliott
Avenue West in Seattle, Washington for its executive office, laboratory and
administrative operations. The lease expires January 31, 2003, with two
consecutive five-year renewal options at the then prevailing market rent. The
Company's existing and planned facilities are believed to be adequate to meet
its present requirements, and the Company currently believes that suitable
additional space will be available to it, when needed, on commercially
reasonable terms. See "--Manufacturing."
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
HUMAN RESOURCES
As of February 28, 1997 cti employed 118 individuals full-time (including 40
holding doctoral or other advanced degrees). In recruiting additional staff
members, cti expects to receive continued input from its consultants and
members of its Scientific Advisory Board and Clinical Advisory Board.
The Company's policy is to have each employee and consultant enter into an
agreement which contains provisions prohibiting the disclosure of confidential
information to anyone outside cti and requires disclosure to cti of ideas,
developments, discoveries or inventions conceived during employment and
assignment to cti of proprietary rights to such matters related to the
business and technology of cti. The extent to which this policy will
effectively protect cti's proprietary technology and trade secrets is unknown.
See "--Patents and Proprietary Rights."
The Company has assembled a Scientific Advisory Board ("SAB") composed of
leaders in the fields of immunology, cell and molecular biology, and synthetic
and medicinal chemistry, and a Clinical Advisory Board ("CAB") composed of
leaders in the fields of hematology, oncology, immunology, cell and molecular
biology, critical care and medicinal chemistry. The SAB assists cti in
identifying scientific and product development opportunities, reviewing with
management the progress of cti's specific projects, and recruiting and
evaluating cti's scientific staff. The CAB assists cti in determining clinical
regulatory strategy, interpreting clinical trial data and identifying optimal
indications for cti's products. Although cti expects to receive guidance from
the members of its SAB and CAB, all of such members are employed on a full-
time basis by others and, accordingly, are not likely to devote more than a
small portion of their time to cti. See "Management--Scientific Advisory
Board," and "Management--Clinical Advisory Board."
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information with respect to the
directors and executive officers of cti as of January 31, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Max E. Link, Ph.D.(1)............. 56 Chairman of the Board of Directors
James A. Bianco, M.D.(1).......... 40 President, Chief Executive Officer and
Director
Jack W. Singer, M.D............... 54 Executive Vice President, Research
Program Chairman and Director
Louis A. Bianco................... 44 Executive Vice President, Finance and
Administration
Maurice J. Schwarz, Ph.D.......... 57 Executive Vice President, Product
Development
Robert A. Lewis, M.D. ............ 51 Executive Vice President, Chief
Scientific Officer
Susan O. Moore.................... 48 Executive Vice President, Human
Resource Development
Jack M. Anthony................... 50 Executive Vice President, Marketing and
Business Development
Dalton W. Weekley................. 54 Managing Director, Project Planning and
Controls
Jack L. Bowman(2)................. 64 Director
Jeremy L. Curnock Cook(1)(2)...... 47 Director
Wilfred E. Jaeger, M.D.(2)(3)..... 41 Director
David W. Martin, Jr., M.D......... 56 Director
Terrence M. Morris(2)(3).......... 49 Director
Phillip M. Nudelman, Ph.D.(1)(3).. 61 Director
</TABLE>
- - --------
(1)Member of the Executive Committee.
(2)Member of the Compensation Committee.
(3)Member of the Audit Committee.
Dr. Link joined the Board of Directors in July 1995 as its Vice Chairman and
has served as Chairman of the Board of Directors since January 1996. In
addition, Dr. Link has held a number of executive positions with
pharmaceutical and healthcare companies. Most recently, he served as Chief
Executive Officer of Corange, Limited ("Corange"), from May 1993 until June
1994. Prior to joining Corange, Dr. Link served in a number of positions
within Sandoz Pharma Ltd., including Chief Executive Officer from 1990 until
April 1992, and Chairman from April 1992 until May 1993. Dr. Link currently
serves on the boards of directors of Alexion Pharmaceuticals, Inc., Human
Genome Sciences, Inc., Procept, Inc. and Protein Design Labs, Inc. Dr. Link
received his Ph.D. in Economics from the University of St. Gallen.
Dr. Bianco is the principal founder of cti and has been cti's President and
Chief Executive Officer since February 1992 and a Director of cti since the
Company's inception in September 1991. Prior to joining cti, Dr. Bianco was an
Assistant Professor of Medicine at the University of Washington, Seattle, and
an Assistant Member in the clinical research division of the Fred Hutchinson
Cancer Research Center ("FHCRC"), the world's largest bone marrow transplant
center. From 1990 to 1992, Dr. Bianco was the director of the Bone Marrow
Transplant Program at the Veterans Administration Medical Center in Seattle.
Dr. Bianco received his B.S. degree in Biology and Physics from New York
University and his M.D. from Mount Sinai School of Medicine.
Dr. Singer is a founder and Director of cti and currently serves as cti's
Executive Vice President, Research Program Chairman. Dr. Singer has been a
Director of cti since the Company's inception in September 1991. From April
1992 to July 1995, Dr. Singer was cti's Executive Vice President, Research and
Development. Prior to joining cti, Dr. Singer was Professor of Medicine at the
University of Washington and full Member of the FHCRC. From 1975 to 1992, he
was the Chief of Medical Oncology at the Veterans Administration Medical
Center in Seattle. In addition, from 1978 to 1992, he served as director for
the National Transplant Board for the Veterans Administration. Dr. Singer has
authored approximately 220 scientific publications in the areas of cell
biology, hematopoiesis and BMT. Prior to joining cti, he headed the Growth
Factor Research Program at the
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FHCRC. Dr. Singer received his B.A. degree in Mathematics from Columbia
College and his M.D. from State University of New York, Downstate Medical
College. His clinical training was performed at the University of Chicago and
at the University of Washington.
Mr. Bianco is a founder of cti and has been cti's Executive Vice President,
Finance and Administration since February 1, 1992, and a Director of cti from
the Company's inception in September 1991 to April 1992 and from April 1993 to
April 1995. From January 1989 through January 1992, Mr. Bianco was a Vice
President at Deutsche Bank Capital Corporation in charge of risk management.
Mr. Bianco is a Certified Public Accountant and received his M.B.A. from New
York University.
Dr. Schwarz has been cti's Executive Vice President, Product Development
since May 1994. Dr. Schwarz held a variety of product development positions at
Ciba-Geigy for 26 years prior to joining cti, most recently as Vice President
of Pharmaceutical and Analytical Development and Chairman of the Development
Operations Board at Ciba-Geigy Pharmaceuticals Division. Dr. Schwarz received
his B.A. and Ph.D. degrees in chemistry from the University of Oregon.
Dr. Lewis has been cti's Executive Vice President, Chief Scientific Officer
since April 1996. From September 1994 to May 1995, Dr. Lewis was Senior Vice
President and Director, Preclinical Research and Development at Syntex-Roche
("Syntex"). From February 1992 to September 1994, he was President, Discovery
Research at Syntex. From February 1986 to February 1992, he held various
Senior and Executive Vice Presidential offices at Syntex. While at Syntex, he
held associate professorships at Stanford University and at the University of
California, San Francisco, where he also held an adjunct professorship from
1992 to 1994. Prior to joining Syntex, Dr. Lewis was an Associate Professor of
Medicine at Harvard Medical School. Dr. Lewis received his M.D. from the
University of Rochester and B.S. degree in chemistry from Yale University.
Ms. Moore has been cti's Executive Vice President, Human Resource
Development since July 1995. From March 1993 to July 1995, Ms. Moore was cti's
Vice President of Human Resources. Prior to joining cti, Ms. Moore was self-
employed as a compensation consultant. From 1991 to December 1992, Ms. Moore
was the Director of Human Resources of ICOS Corporation, a biotechnology
company.
Mr. Anthony has been cti's Executive Vice President, Marketing and Business
Development since January 1997. From April 1996 to January 1997, Mr. Anthony
was cti's Vice President of Marketing and Business Development. Prior to
joining cti, Mr. Anthony was Vice President of Marketing and Business
Development at Inhale Therapeutic Systems, a drug delivery company, from
October 1994 to April 1996. From August 1989 to October 1994, he was Vice
President of Marketing and Business Development of Applied Immune Sciences
(AIS), a cell and gene therapy concern. From 1973 to 1989, Mr. Anthony held
various executive management positions at Baxter Healthcare Corporation,
lastly as Vice President, Blood Therapy Group.
Mr. Weekley has been cti's Managing Director, Project Planning and Controls
since July 1995. From April 1994 to July 1995, Mr. Weekley was cti's Director
of Planning Support Services. Prior to joining cti, he was an Executive
Director/Senior Consultant of Milestone Computing, Inc., a management
consulting firm.
Mr. Bowman has been a Director of cti since April 1995. From 1987 until
January 1994, Mr. Bowman was a company group chairman at Johnson & Johnson,
having primary responsibility for a group of companies in the diagnostic,
blood glucose monitoring and pharmaceutical businesses. From 1980 to 1987, Mr.
Bowman held various positions at American Cyanamid Company, most recently as
Executive Vice President. Mr. Bowman was a member of the Board of Trustees of
The Johns Hopkins University and serves on the Board of Directors of NeoRx
Corporation, CytRx Corporation, PharmaGenics, Inc. and Cellegy
Pharmaceuticals, Inc.
Mr. Curnock Cook has been a Director of cti since March 1995. Mr. Curnock
Cook has been a director of the Bioscience Unit of Rothschild Asset Management
Limited since 1987. He is a director of several British companies, including
The International Biotechnology Trust, plc, Biocompatibles International, plc,
Therexsys, Ltd. and Vanguard Medica Group, plc. He also serves on the Boards
of Directors of Creative Biomolecules, Inc., Targeted Genetics, Corp., Sugen
Inc. and Ribozyme Pharmaceuticals, Inc. in the United States.
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Dr. Jaeger has been a Director of cti since September 1992. Dr. Jaeger is a
founding general partner of Three Arch Partners, a venture capital firm which
focuses on health care investments. Prior to joining Three Arch Partners in
1993, he was a partner at Schroder Venture Advisers (presently named Collinson
Howe Venture Partners) and The Phoenix Partners. Dr. Jaeger received his M.D.
from the University of British Columbia in Vancouver, B.C., Canada, in 1981.
He practiced medicine for six years before earning an M.B.A. from Stanford
University. Dr. Jaeger is also a director of Intensiva Healthcare Corporation
and several privately held companies.
Dr. Martin has been a Director of cti since July 1995. From April 1995 to
November 1996, Dr. Martin was President and a director, and from January 1996
to November 1996 he was also Chief Executive Officer, of Lynx Therapeutics,
Inc. From January 1994 to April 1995, he was President of Chiron Therapeutics
and a Senior Vice President of Chiron Corporation. From 1991 through 1993, he
was an Executive Vice President of the DuPont Merck Pharmaceutical Company.
From 1982 to 1990, Dr. Martin held various positions at Genentech, Inc., most
recently as Senior Vice President Research and Development. He is currently a
director of Varian Associates, Inc.
Mr. Morris has been a Director of cti since July 1995. He is the Chief
Executive Officer of T. Morris & Company (d/b/a Morningside Ventures), which
advises Kummell Investments Limited, an international investment concern based
in Hong Kong, on its private venture capital portfolio. Mr. Morris has served
as Chief Executive Officer of Morningside Ventures since 1991. His previous
positions include product line manager at Baxter Healthcare Corporation and
strategy consultant with the Boston Consulting Group. Mr. Morris is a director
of several privately held companies.
Dr. Nudelman has been a Director of cti since March 1994. Since 1990 Dr.
Nudelman has been the President and Chief Executive Officer of Group Health
Cooperative of Puget Sound, a health maintenance organization. Dr. Nudelman
received his B.S. degree in Microbiology, Zoology and Pharmacy from the
University of Washington, and holds an M.B.A. and a Ph.D. in Health Systems
Management from Pacific Western University. Dr. Nudelman is a member of the
American Hospital Association House of Delegates, Regional Policy Board, and
chairs the Governing Counsel for Health Care Systems. Dr. Nudelman serves on
the Boards of Directors of Advanced Technology Laboratories, Inc., SpaceLabs
Medical, Inc., Cytran Ltd. and Intensiva Healthcare Corporation.
The Board of Directors of cti is divided into three approximately equal
classes of Directors serving staggered three-year terms and until their
successors are elected and qualified. As a result, approximately one-third of
the total number of Directors will be elected every year. The current terms of
Drs. Bianco, Singer and Jaeger expire in 1997; the current terms of Dr.
Nudelman and Mr. Bowman expire in 1998; the current term of Mr. Curnock Cook
expires in 1998 or, if earlier, the first annual meeting following the
conversion of the Series A Convertible Preferred Stock in accordance with its
terms; and the current terms of Drs. Link and Martin and Mr. Morris expire in
1999. Executive Officers of cti serve at the discretion of the Board of
Directors. Under cti's Bylaws, the number of Directors constituting the entire
Board of Directors may be decreased or increased by majority action of either
the Board of Directors or the shareholders, but no decrease in the number of
Directors may have the effect of shortening the term of any incumbent
Director. Currently, the Board of Directors has fixed the number of Directors
at nine. James A. Bianco and Louis A. Bianco are brothers. Mr. Curnock Cook
was elected as a Director by the holders of the Series A Convertible Preferred
Stock, who are entitled to vote as a separate class to elect one Director to
the Board of Directors. See "Certain Transactions."
SCIENTIFIC ADVISORY BOARD
The Company has a Scientific Advisory Board and plans to make arrangements
from time to time with other scientists to work with cti's management and the
Scientific Advisory Board. The Scientific Advisory Board is chaired by Dr.
Michael R. Hanley. Scientific Advisory Board members are expected to meet as a
board with management and key scientific employees of cti on a semi-annual
basis and in smaller groups or individually from time to time on an informal
basis. The Scientific Advisory Board members assist cti in identifying
scientific and product development opportunities, reviewing with management
the progress of cti's specific projects, and recruiting and evaluating cti's
scientific staff. Members of cti's Scientific Advisory Board are leaders in
the fields of immunology, cell and molecular biology, and synthetic and
medicinal chemistry.
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<PAGE>
Current Members of cti's Scientific Advisory Board include:
Michael R. Hanley, Ph.D. is the Chairman of cti's Scientific Advisory Board.
He is a Professor, Department of Biological Chemistry, at the University of
California, Davis School of Medicine. He is a noted authority in cell
communication processes and proto-oncogenes, as well as an expert in
phosopholipid signaling mechanisms in the central nervous system focusing on
regulation of neurotransmitter receptors. Dr. Hanley has authored over 80
manuscripts and has served as an editorial member for several journals,
including Molecular and Cellular Neurobiology and Nature.
Irwin M. Arias, M.D. is a Professor and Chairman of the Department of
Physiology at Tufts University School of Medicine. He is a noted authority in
the physiology of multidrug resistance proteins. He is the recipient of
numerous awards and honors.
Bruce Beutler, M.D. is an Associate Professor of Medicine at the University
of Texas Southwestern Medical Center and an Associate Investigator at the
Howard Hughes Medical Institute. He is internationally recognized for his work
on Tumor Necrosis Factor ("TNF") and has authored over 95 manuscripts, reviews
and books on TNF, its characterization, signaling, mechanisms of action and
activity in a variety of preclinical and clinical settings. Dr. Beutler serves
as the President of the International Congress on TNF and Related Cytokines
and Consulting editor for Journal of Clinical Investigation.
Edward A. Dennis, Ph.D. is the Vice Chair of Medical Biochemistry at the
University of California, San Diego. He is a noted authority on
phospholipases, cell signaling, and phospholipid metabolism. Dr. Dennis serves
on the Scientific Advisory Board and Management Committee of, and chairs the
Management Executive Board of, the Keystone Symposia. He sits on the Editorial
Board of the Journal of Cellular Biochemistry and on the Publications
Committee of the American Society for Biochemistry and Molecular Biology. He
has authored over 185 manuscripts.
Edwin Krebs, M.D. is a Professor Emeritus, Department of Pharmacology and
Biochemistry, at the University of Washington in Seattle and a Senior
Investigator Emeritus at the Howard Hughes Medical Institute. He is a
recognized authority on the mechanisms of action of second messengers,
including protein kinases and phosphorylation reactions. He is the recipient
of numerous awards and honors and has authored 297 manuscripts. In 1992, Dr.
Krebs was awarded the Nobel Prize in Physiology of Medicine for his work on
second messenger pathways.
Wouter H. Moolenaar, Ph.D. is the Head of the Division of Cellular
Biochemistry at the Netherlands Cancer Institute. He is an expert in
phospholipid signal transduction, focusing on their role in responses to
growth factors and in cell differentiation. He has authored over 60
manuscripts and several chapters pertaining to the role of phosphatidic acid
in cell signaling.
Klaus Resch, M.D. is a noted authority in membrane phospholipid
biochemistry, their role in immune system activation and inflammation. He is a
Professor and the Head of the Institute for Molecular Pharmacology of the
Hanover Medical School, Medizinische Hochschule Hannover, and a former Vice
President of the German Society for Pharmacology and Toxicology. He has
authored over 250 scientific publications.
The Company has entered into consulting agreements with each member of the
Scientific Advisory Board. These agreements generally have a three-year term
and may be terminated by either party upon 30 days' written notice. These
agreements generally restrict the consultant from competing with cti during
the term of the agreement. These agreements contain provisions prohibiting the
disclosure of confidential information to anyone outside of cti and require
disclosure to cti of ideas, developments, discoveries or inventions conceived
during consulting and assignment to cti of proprietary rights to such matters
related to the business and technology of cti. Each consultant is required to
serve on cti's Scientific Advisory Board and provide such other consulting
services as cti may reasonably request. Each Scientific Advisory Board member
is paid an annual fee and is granted an option to purchase Common Stock.
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CLINICAL ADVISORY BOARD
The Company has a Clinical Advisory Board which meets with cti's management
and the Scientific Advisory Board not less than three times per year and in
smaller groups or individually from time to time on an informal basis. The
Clinical Advisory Board members assist cti in determining its clinical
regulatory strategy, interpreting clinical trial data and identifying optimal
indications for its products. Members of cti's Clinical Advisory Board are
leaders in the fields of hematology, oncology, immunology, cell and molecular
biology, critical care and medicinal chemistry.
Current members of cti's Clinical Advisory Board include:
E. Donnall Thomas, M.D. is the Chairman of cti's Clinical Advisory Board. He
is the former Associate Director of Clinical Research and presently a
Professor Emeritus at the FHCRC. Dr. Thomas was a founding Member of the
FHCRC. His research has spanned a wide array of fields from radiation biology
to developmental immunology, and from cancer causing genes to gene transfer
therapies. For his pioneering work in BMT, Dr. Thomas was awarded the Nobel
Prize for Medicine in 1990. His work demonstrated the feasibility and clinical
effectiveness of marrow transplant therapy, and he has contributed to the
training of a significant majority of the physicians now performing BMTs
worldwide. Among the other honors awarded to Dr. Thomas in recognition of his
medical research are the American Cancer Society Award for Distinguished
Service in Basic Research and the Kettering Prize of the General Motors Cancer
Research Foundation. He is a member of the U.S. National Academy of Sciences.
Karen H. Antman, M.D. is the Chief of the Division of Medical Oncology,
College of Physicians & Surgeons of Columbia University. Dr. Antman is an
expert in emerging treatment strategies for solid tumors, notably breast
cancer and sarcomas. From 1994 to 1995 she served as President of the American
Society of Clinical Oncology (ASCO). Since 1993 Dr. Antman has served on the
Sarcoma Committee of the Southwest Oncology Group, and has been its
chairperson since 1995. From 1993 to 1994 she was program committee chair of
the American Association for Cancer Research (AACR). She is on the editorial
board of several prestigious journals, including Associate Editor of The New
England Journal of Medicine. She has authored over 100 manuscripts and
textbooks.
Frederick Appelbaum, M.D. is the Director of Clinical Research and Senior
Vice President of the FHCRC. He is a recognized authority in the treatment of
patients with leukemia and lymphoma. He serves on several editorial boards and
national committees, including the FDA Advisory Committee on Biologics; is
Chairman of the Southwest Oncology Group Leukemia Committee; and serves on the
Board of Directors of the American Society for Blood and Marrow
Transplantation. He has authored more than 450 manuscripts.
H. Franklin Bunn, M.D. is the Director of the Hematology Division of the
Brigham and Women's Hospital and Professor of Medicine at Harvard Medical
School. His research interest focuses on blood cell production and regulation.
He is the recipient of numerous awards and honors and is Chairman of the
Advisory Committee of the American Society of Hematology.
O. Michael Colvin, M.D. is the Director of the Duke Comprehensive Cancer
Center at Duke University Medical Center. Dr. Colvin is an expert in
therapeutic drug modeling and rational drug design. His work led to the
discovery of several chemotherapeutic agents. He was previously Chief of the
Division of Pharmacology and Experimental Therapeutics at The Johns Hopkins
Oncology Center. He has authored over 100 manuscripts.
Milo Gibaldi, Ph.D. is the Gibaldi Endowed Professor of Pharmaceutics of the
School of Pharmacy at the University of Washington, with past faculty
appointments at Columbia University and the State University of New York at
Buffalo. His expertise in drug metabolism has led to consultantships with such
pharmaceutical firms as Hoffman-LaRoche, Ciba-Geigy and Glaxo. Dr. Gibaldi has
also served on the U.S. Food and Drug Administration's Panel on Generic Drugs.
His research has focused on gastrointestinal absorption of drugs and the
development of stable formulations for therapeutic compounds.
47
<PAGE>
William P. Peters, M.D., Ph.D. is a Director of the Meyer L. Prentis
Comprehensive Cancer Center of Metropolitan Detroit and the President and
Chief Executive Officer of the Karmanos Cancer Institute. He is a recognized
leader in the use of dose-intensive chemotherapy regimens with peripheral
blood stem cell support as a cost-effective approach to the treatment of
cancer. He has published extensively and is the recipient of many honors and
awards, among them the American Cancer Society Clinical Fellowship Award and
the R. Wayne Rundles Award for Excellence in Cancer Research.
Thomas A. Raffin, M.D. is the Chief of the Division of Pulmonary and
Critical Care Medicine of the Stanford University Medical Center. He is a
recognized authority on mechanisms of ALI, MOF and Systemic Inflammatory
Response Syndrome ("SIRS") among critically ill patients. He serves on
numerous editorial boards and societies, including the Editorial Board of
Chest and Critical Care Medicine, the American Thoracic Society and the
Society of Critical Care Medicine. He has authored more than 175 manuscripts
and 60 chapters.
Merle A. Sande, M.D. is a Professor and the Chairman of the Department of
Medicine at the University of Utah, School of Internal Medicine. He is a noted
authority in infectious disease and serves on the editorial boards of several
journals, including Journal of Infectious Disease and Infection and Immunity.
He is a member of the AIDS Task Force and is the Chairman of the AIDS
Subcommittee of the Infectious Disease Society of America.
Thomas E. Starzl, M.D., Ph.D. is the Director of the Transplantation
Institute of the University of Pittsburgh. He is a noted expert in the field
of immunology and solid organ transplantation. He is the recipient of numerous
awards and was founding President of several prestigious societies, including
the American Society of Transplant Surgeons. He has authored approximately
1,400 manuscripts and more than 160 book chapters.
The Company has entered into consulting agreements with each member of the
Clinical Advisory Board. These agreements generally have a three-year term and
may be terminated by either party upon 30 days' written notice. These
agreements generally restrict the consultant from competing with cti during
the term of the agreement. These agreements contain provisions prohibiting the
disclosure of confidential information to anyone outside of cti and require
disclosure to cti of ideas, developments, discoveries or inventions conceived
during consulting and assignment to cti of proprietary rights to such matters
related to the business and technology of cti. Each consultant is required to
serve on cti's Clinical Advisory Board and provide such other consulting
services as cti may reasonably request. Each Clinical Advisory Board Member is
paid an annual fee and is granted an option to purchase Common Stock.
48
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth all compensation paid for the years ended
December 31, 1995 and 1996 to the Company's Chief Executive Officer and the
four other most highly compensated executive officers who were serving as
executive officers at December 31, 1996 (collectively, the "Named Executive
Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS(1)
---------------------------------- ------------
OTHER SECURITIES ALL
ANNUAL UNDERLYING OTHER
NAME AND COMPEN- OPTIONS/ COMPEN-
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) SATION ($)(2) SARS (#) SATION ($)
- - ------------------ ---- ---------- --------- ------------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
James A. Bianco, M.D............ 1996 358,032 27,475 -- 85,714 72,223(4)
President and Chief 1995 315,984 -- -- 137,955(3) 7,402(5)
Executive Officer
Jack W. Singer, M.D. ........... 1996 248,976 -- -- 28,571 10,524(5)
Executive Vice President, 1995 248,976 -- -- 20,957(3) 9,762(5)
Research Program Chairman
Louis A. Bianco................. 1996 263,088 10,000 -- 21,428 55,367(4)
Executive Vice President, 1995 232,195 -- -- 55,098(3) 6,772(5)
Finance and Administration
Maurice J. Schwarz, Ph.D........ 1996 187,500 12,936 -- 28,571 65,619(6)
Executive Vice President, 1995 187,500 -- 8,200(6) 28,571(3) 45,802(6)
Product Development
Robert A. Lewis, M.D............ 1996(7) 181,512 -- 6,964(7) 67,142 26,144(7)
Executive Vice President,
Chief Scientific Officer
</TABLE>
- - --------
(1) The Company did not make any long-term incentive plan payments to any of
the Named Executive Officers in 1995 and 1996.
(2) Other annual compensation in the form of perquisites and other personal
benefits has been omitted where the aggregate amount of such perquisites
and other personal benefits constituted the lesser of $50,000 or 10% of
the total annual salary and bonus for the Named Executive Officer for the
applicable year.
(3) In April 1995, the Board of Directors approved the repricing of
outstanding options to $11.725 per share by exchanging such outstanding
options for a fewer number of options pursuant to a Black-Scholes formula.
All other terms and conditions of the options remained unchanged. Grants
for the year ended December 31, 1995 include options which were initially
granted in prior years and have been repriced and exchanged for a fewer
number of options in 1995 as follows: Dr. Bianco, 64,285 options were
repriced and exchanged for 57,857 options; Dr. Singer, 14,285 options were
repriced and exchanged for 12,857 options; Mr. Bianco, 42,857 options were
repriced and exchanged for 36,428 options; and Dr. Schwarz, 21,428 options
were repriced and exchanged for 17,142 options.
(4) All other compensation represents payment of unused sick leave for Dr.
Bianco and Mr. Bianco accrued during 1992, 1993 and 1994, pursuant to the
terms of their employment agreements then in effect, aggregating $64,526
and $47,415, respectively, and reimbursement for long-term disability
insurance premiums of $7,697 and $7,952, respectively.
(5) Represents reimbursement for long-term disability insurance premiums.
(6) All other compensation includes the amount of loan principal and interest
forgiven in 1995 and 1996 of $42,210 and $60,789, respectively, in
connection with Dr. Schwarz's relocation to the Seattle area and $3,592
and $4,830 of relocation expenses which were reimbursed in 1995 and 1996,
respectively. Other annual compensation represents amounts reimbursed for
the payment of income taxes on the reimbursement of Dr. Schwarz's
relocation expenses in 1994. See "--Employment Agreements."
(7) Includes compensation for employment beginning on April 1, 1996, the date
on which Dr. Lewis joined the Company as Executive Vice President, Chief
Scientific Officer. All other compensation represents reimbursement of
relocation expenses. Other annual compensation represents amounts
reimbursed for the payment of income taxes on the reimbursement of Dr.
Lewis' relocation expenses.
49
<PAGE>
The following table sets forth for each of the Named Executive Officers the
number of options granted during the year ended December 31, 1996 and the
potential realizable value of such grants:
OPTIONS GRANTED IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
-------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES
NUMBER OF OPTIONS OF STOCK PRICE
SECURITIES GRANTED TO APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM(3)
OPTIONS IN FISCAL PRICE EXPIRATION ---------------------
NAME GRANTED (1) YEAR (%) ($/SH) (2) DATE 5% ($) 10% ($)
- - ---- ----------- ---------- ---------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
James A. Bianco, M.D.... 85,714 18.1% $11.725 11/19/06 $ 632,141 $ 1,601,995
Jack W. Singer, M.D..... 28,571 6.0% 11.725 11/07/06 210,711 533,992
Louis A. Bianco......... 21,428 4.5% 11.725 11/07/06 158,032 400,489
Maurice J. Schwarz,
Ph.D................... 28,571 6.0% 11.725 11/07/06 210,711 533,992
Robert A. Lewis, M.D.... 2,857 * 11.725 03/29/06 21,070 53,397
42,857 9.0% 11.725 04/01/06 316,070 800,997
21,428 4.5% 11.725 11/07/06 158,032 400,489
</TABLE>
- - --------
* Less than one percent.
(1) Options were granted under the 1994 Equity Incentive Plan (the "1994
Plan").
(2) Stock options were granted at an exercise price equal to 100% of the
estimated fair value of the Common Stock, as determined by the Board of
Directors on the date of grant.
(3) Potential realizable value is based on the assumption that the Common
Stock appreciates at the annual rates shown (compounded annually) from the
date of grant until the expiration of the option term. These assumed rates
of appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
the future Common Stock price. There can be no assurance that any of the
values reflected in this table will be achieved.
The following table sets forth for each of the Named Executive Officers, the
fiscal year-end number and value of unexercised options. No options were
exercised by any of the Named Executive Officers during 1996.
AGGREGATED OPTION EXERCISES IN LATEST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING IN-THE-MONEY OPTIONS
UNEXERCISED OPTIONS AT AT FISCAL YEAR-END
FISCAL YEAR-END (#) 1996 ($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James A. Bianco, M.D.... 85,574 138,095 $ 0 $ 0
Jack W. Singer, M.D..... 16,195 33,333 0 0
Louis A. Bianco......... 43,669 32,857 0 0
Maurice J. Schwarz,
Ph.D................... 15,238 41,904 0 0
Robert A. Lewis, M.D.... 2,857 64,285 0 0
</TABLE>
- - --------
(1) Based on the estimated fair value of the underlying securities at December
31, 1996, the fiscal year end, no options were "in-the-money."
COMPENSATION OF DIRECTORS
Directors who are also employees of the Company are not paid an annual
retainer nor compensated for serving on the Board. Non-employee Directors are
paid $2,000 per meeting of the Board or committees, up to a maximum of $10,000
per Director each calendar year. All Directors are reimbursed for their
expenses incurred in attending Board meetings. In addition, each non-employee
Director is entitled to certain automatic option grants under the 1994 Plan.
See "--Stock Option Plans."
50
<PAGE>
In December 1996, the Board approved the grant to each non-employee Director
of a 10-year, fully-vested nonstatutory stock option to purchase 14,285 shares
of Common Stock, other than Dr. Link, who was granted a 10-year, fully-vested
nonstatutory stock option to purchase 28,570 shares of Common Stock. Such
option grants will not be effective until approved by the shareholders at the
1997 Annual Meeting of Shareholders. The exercise price of such options is
$11.725. The Board also formally eliminated a $10,000 annual cash retainer for
non-employee Directors which had been previous company policy. See Note 9 of
Notes to Consolidated Financial Statements.
EMPLOYMENT AGREEMENTS
Dr. Bianco, President and Chief Executive Officer, entered into an
employment agreement with cti, effective December 17, 1996 which agreement
will expire on December 31, 1999. The agreement provides that Dr. Bianco would
receive a base salary at an annual rate of $393,835 in 1997 or such greater
amount as the Board of Directors shall determine. The agreement provides that,
in the event that cti terminates Dr. Bianco's employment without cause or Dr.
Bianco terminates his employment for cause, cti shall at such time pay
Dr. Bianco an amount equal to twenty-four months' base salary, all of Dr.
Bianco's stock options in cti shall immediately become vested and cti shall
continue to provide certain benefits through the term of the agreement. The
agreement also provides for the forgiveness over the term of the agreement of
certain indebtedness of Dr. Bianco to cti. See "Certain Transactions." In
addition, the agreement provides that Dr. Bianco is entitled to four weeks of
paid vacation per year and that any unused vacation time shall be paid in cash
upon the termination of Dr. Bianco's employment for any reason or at such
earlier time as required to avoid forfeiture of accrued but unused vacation
time. The employment agreement restricts Dr. Bianco from competing with cti
for the term of the agreement and for two years after termination of his
employment with cti, unless cti shall have terminated Dr. Bianco's employment
without cause or Dr. Bianco shall have terminated his employment for cause.
The agreement also provides that, in the event a "Change in Ownership" (as
defined in Dr. Bianco's employment contract) occurs, then all stock options of
Dr. Bianco shall immediately become vested.
Mr. Bianco, Executive Vice President, Finance and Administration, entered
into a three-year employment agreement with cti, effective February 1, 1992,
which agreement was extended for an additional three-year period to expire on
January 31, 1998 by a letter agreement dated May 27, 1994. Effective January
1, 1997, cti's Board of Directors increased Mr. Bianco's annual base salary to
$298,080. His employment agreement provides that this base salary is subject
to annual increases in proportion to increases in the CPI, plus 10% of the
CPI-adjusted annual base salary, or such greater amount as the Board of
Directors shall determine. The agreement provides that, in the event that cti
terminates Mr. Bianco's employment without cause or Mr. Bianco terminates his
employment for cause, cti shall at such time pay Mr. Bianco an amount equal to
the total base salary otherwise payable through the expiration of the term of
the agreement or six months' base salary, whichever is greater, and shall
continue to provide certain benefits through the term of the agreement. The
agreement also provides that Mr. Bianco is entitled to four weeks of paid
vacation per year and that any unused vacation time and sick leave shall be
paid in cash upon the termination of Mr. Bianco's employment for any reason.
Dr. Schwarz, Executive Vice President, Product Development, entered into a
two-year employment agreement with cti effective May 2, 1994, which is
renewable automatically for successive one-year terms subject to certain
termination provisions contained in the agreement. The agreement provides that
Dr. Schwarz initially would receive an annual base salary of $187,500, subject
to periodic increases based on performance. In the event cti terminates Dr.
Schwarz's employment without cause, cti shall pay Dr. Schwarz such amounts
owing for the remaining term of the agreement. The agreement further provides
that in connection with his relocation to the Seattle area, Dr. Schwarz be
reimbursed for capital loss on the sale of his former residence in the form of
a forgivable loan in an amount not to exceed $150,000. The loan shall be
forgiven in three annual installments, subject to Dr. Schwarz's continued
employment with cti, with any unforgiven portion becoming immediately due and
payable within three months of any termination of Dr. Schwarz's employment.
See "Certain Transactions."
Dr. Lewis, Executive Vice President, Chief Scientific Officer, has a two-
year severance agreement with cti, effective April 1, 1996. The agreement
provides that, in the event that Dr. Lewis is terminated by cti without cause
or that Dr. Lewis terminates his employment for good reason, cti shall
continue to pay Dr. Lewis his monthly base
51
<PAGE>
salary and benefits through the expiration of the term of the agreement. The
inventions and proprietary information agreement restricts Dr. Lewis from
competing with cti for two years after his termination of employment with cti.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the last completed fiscal year, the Compensation Committee consisted
of Dr. Jaeger and Messrs. Curnock Cook and Bowman. None of these individuals
was at any time during the last completed fiscal year, or at any other time,
an officer or employee of the Company. In March 1995 The International
Biotechnology Trust plc ("IBT"), which is an affiliate of Mr. Curnock Cook and
Rothschild Asset Management Limited, purchased 22,388.061 shares of
Convertible Preferred Stock for an aggregate purchase price of $7.5 million in
the Company's 1995 Private Placement. The holders of the outstanding shares of
Convertible Preferred Stock voting as a separate class are entitled to elect
one Director to the Board of Directors. At the 1996 Annual Meeting of
Shareholders Mr. Curnock Cook was elected as a Director by the holders of the
outstanding shares of Convertible Preferred Stock voting as a separate class.
In September 1996 IBT purchased an additional 14,925.373 shares of Series A
Convertible Preferred Stock for an aggregate purchase price of $5.0 million.
See "Certain Transactions."
STOCK OPTION PLANS
In January 1994 the Board of Directors adopted, and in February 1994 the
shareholders of the Company approved, the Company's 1994 Equity Incentive Plan
(the "1994 Plan"). A total of 582,685 shares of Common Stock were initially
reserved for issuance under the 1994 Plan and a predecessor plan, the
Company's 1992 Stock Option Plan (the "1992 Plan"). In May 1995 and April 1996
the shareholders of the Company approved the adoption of amendments to the
1994 Plan to increase the aggregate number of shares authorized for issuance
thereunder by 246,887 shares and 507,143 shares, respectively, bringing the
total number of shares reserved under the 1994 Plan to 1,336,715 shares of
Common Stock. As of December 31, 1996, 6,706 options have been exercised, 10-
year options to purchase 1,208,608 shares were granted and outstanding, and
options to purchase 121,401 shares of Common Stock remained available for
future grants under the 1994 Plan.
The 1994 Plan provides for (i) the grant of incentive stock options
("ISOs"), nonstatutory stock options ("NSOs") and stock appreciation rights
("SARs"), (ii) the award of stock bonuses (iii) the sale of stock, and (iv)
any other equity-based or equity-related awards which the plan administrator
determines to be consistent with the purpose of the 1994 Plan and the
interests of the Company to employees (including officers) and independent
consultants. The 1994 Plan also provides for the automatic grant of NSOs to
non-employee Directors pursuant to the formula described below. The 1994 Plan
supersedes the 1992 Plan, pursuant to which the Board of Directors was
authorized to issue ISOs and NSOs upon terms and conditions similar to the
1994 Plan. Options granted under the 1992 Plan remain valid under the terms of
the 1992 Plan. The number of shares available for future grants under the 1994
Plan will be increased by the number of shares for which options granted under
the 1992 Plan expire, terminate or are canceled.
The 1994 Plan is administered by the Compensation Committee of the Board of
Directors (the "Committee"). The Committee determines the persons to whom
awards will be made, the exercise or purchase price of each award, the number
of shares to be covered by each option, the term of each option, the times at
which each award may be exercised, and whether each option granted under the
1994 Plan is an ISO or a NSO. The exercise price of ISOs and NSOs granted by
the Committee must be at least 100% of the fair market value of the underlying
shares on the date of the grant, except that the exercise price of ISOs
granted to an optionee holding more than 10% of the combined voting power of
all classes of the Company's stock ("10% Shareholders") must be at least 110%
of the fair market value of the underlying shares on the date of the grant.
The Committee sets the vesting schedule for and the term of options granted
under the 1994 Plan, subject to the limitations that (i) options granted to
directors and officers of the Company may not be exercised within six months
after the grant thereof, (ii) the term of ISOs may not exceed 10 years and
(iii) the term of ISOs granted to 10% Shareholders may not exceed five years.
The Committee may also advance the lapse of any waiting period, accelerate any
exercise date, waive or modify any restriction with respect to an award or
give an employee an election to surrender an existing award in exchange for
the grant of a new award.
52
<PAGE>
Options granted under the 1994 Plan are nontransferable. In the event of the
death or other termination of an optionee's employment with the Company, the
1994 Plan provides that the optionee's options may be exercised for a period
of three months to one year thereafter. The 1994 Plan also provides that upon
any termination of employment, the Committee may extend the exercise period
for any period up to the expiration date of the option and may increase the
portion of the option that is exercisable.
The purchase price for shares of Common Stock purchased on exercise of
options granted under the 1994 Plan must be paid in cash, including cash that
may be the proceeds of a loan from the Company or, with the consent of the
Committee, in whole or in part in shares of Common Stock of the Company. With
the consent of the Committee, an optionee may request the Company to apply the
shares to be received on exercise of a portion of an option to satisfy the
exercise price for additional portions of the option.
Under the 1994 Plan, each non-employee Director is automatically granted a
10-year, fully vested nonstatutory stock option to purchase 2,857 shares of
Common Stock upon his or her election to the Board of Directors for the first
time. In addition, each non-employee Director is automatically granted a 10-
year, fully vested nonstatutory stock option to purchase 1,904 shares of
Common Stock on each anniversary of his or her immediately preceding election
to the Board of Directors. The exercise price of such options is 100% of the
fair market value of the shares of Common Stock on the date of grant.
The Committee may grant SARs either alone or in connection with a stock
option. An SAR entitles the holder to payment from the Company of an amount
equal to the excess, on the date of exercise, of the fair market value of one
share over its fair market value on the date of grant (or, if granted in
connection with an option, the exercise price per share under the option to
which the SAR relates), multiplied by the number of shares covered by the
portion of the SAR or option that is surrendered. The Committee may also award
stock bonuses or issue shares for consideration subject to such terms,
conditions and restrictions as the Committee may determine, including
restrictions concerning transferability and forfeiture of the shares awarded.
No cash consideration will be paid in connection with SARs and stock bonuses
other than tax withholding amounts. Where shares are issued for consideration,
such consideration may not be less than 75% of the fair market value of the
shares on the date of issuance.
The 1994 Plan provides for automatic acceleration of the vesting of options
and SARs granted under the 1994 Plan if a merger, consolidation,
reorganization, plan of exchange or liquidation results in the Company's
shareholders receiving cash, stock or other property in exchange for their
shares, except as specified below. Option holders will have the right during
the 30-day period immediately prior to any such event to exercise their
options or SARs without any limitation on exercisability. The 1994 Plan
requires the purchase of options and SARs granted to officers or Directors
following the expiration of the required six-month holding period. The 1994
Plan provides that, if the Company's shareholders receive stock of another
corporation in exchange for shares of the Company in any merger,
consolidation, reorganization or plan of exchange, all options granted under
the 1994 Plan will be converted into options to purchase shares of the stock
of the other corporation and all SARs will be converted into SARs measured by
the stock of the other corporation. The 1994 Plan also allows the Committee to
accelerate the vesting of the options and SARs granted under the 1994 Plan and
to grant the option holders a 30 day period prior to such event to exercise
their options or SARs, as provided above.
The 1994 Plan also allows the Committee to accelerate the vesting of all
options and SARs granted thereunder (including options and SARs granted to
officers and Directors in the six months prior to such event) upon the
occurrence of a "Change in Control." A "Change in Control" is defined as (a)
the acquisition, directly or indirectly, by any individual, entity or group of
beneficial ownership of securities representing 50.1% or more of either the
then outstanding shares of Common Stock or the combined voting power in the
election of Directors of then outstanding voting securities of the Company,
(b) individuals who, as of the effective date of the 1994 Plan, constitute the
Board of Directors (the "Incumbent Board") (including any individual whose
subsequent election or nomination was approved by a vote of at least a
majority of the Directors then comprising the Incumbent Board) cease for any
reason to constitute at least a majority of the Board of Directors or (c)
approval by the shareholders of the Company of certain reorganizations,
mergers or consolidations, or of certain liquidations, dissolutions or
dispositions of all or substantially all of the assets of the Company.
53
<PAGE>
The Committee may make awards under the 1994 Plan that have terms and
conditions that vary from those specified in the 1994 Plan when such awards
are granted in substitution for, or in connection with the assumption of,
existing awards made by another corporation and assumed or otherwise agreed to
be provided for by the Company in connection with a corporate merger or other
similar transaction to which the Company or an affiliated company is a party.
The Committee may also specify the terms and provisions of other equity-based
or equity-related awards not described in the 1994 Plan which the Committee
determines to be consistent with the purpose of the 1994 and the interests of
the Company.
The 1994 Plan may be amended by the Board of Directors at any time and will
terminate on January 1, 2004 unless terminated earlier by the Board of
Directors. No options may be granted after the termination of the 1994 Plan.
However, options granted under the 1994 Plan will remain valid under the 1994
Plan until their respective expiration dates.
As of December 31, 1996, the 10-year options to purchase 1,208,608 shares of
Common Stock which are outstanding pursuant to the 1992 Plan and the 1994 Plan
were granted to 144 employees (excluding executive officers), consultants and
Directors, and generally vest in equal annual installments on the first three
or four anniversaries of the date of grant. In April 1995 the Board of
Directors approved the repricing of outstanding options to $11.725 per share
by offering to exchange such outstanding options for a fewer number of options
pursuant to a Black-Scholes formula. Subsequently, options for 434,664 shares,
with initial exercise prices of $17.50 and $31.50 per share, were exchanged
for 377,121 options with a price of $11.725 per share. All other terms and
conditions of the options remained unchanged.
EMPLOYEE STOCK PURCHASE PLAN
In March 1996 the Board of Directors adopted, and in April 1996 the
shareholders of the Company approved, the Company's 1996 Employee Stock
Purchase Plan (the "Purchase Plan"). The Purchase Plan is intended to
encourage ownership of the Company's Common Stock by employees of the Company
and to provide additional incentive for the employees to promote the success
of the business of the Company. A maximum of 285,714 shares of Common Stock
have been reserved for purchase under the Purchase Plan. As of December 31,
1996, no options to purchase shares of Common Stock have been granted and no
shares of Common Stock have been purchased under the Purchase Plan.
Employees of the Company or any of its subsidiaries who customarily work
more than twenty hours per week and more than five months per calendar year,
and who have been employed by the Company or any of its subsidiaries for at
least one year may participate in the Purchase Plan. The Purchase Plan is
administered by the Compensation Committee of the Board of Directors (the
"Committee"). The Purchase Plan provides for the automatic grant of options to
purchase shares of Common Stock ("Options"). The Options are granted on the
first day of an offering period, which lasts approximately six months. Payroll
deductions are accumulated in an account for each participant, based on the
amounts specified by the participant in an enrollment form. At the end of the
offering period, the participant's account balance is used to purchase shares
of Common Stock pursuant to the Option. The purchase price of shares of Common
Stock under an Option will equal 85% of the average of the fair market value
of the shares at the beginning and at the end of the offering period. Options
may not be assigned or transferred. No participant may purchase shares having
a fair market value exceeding $25,000 in any calendar year. A participant may
withdraw from an offering period at any time without affecting his or her
eligibility to participate in future offering periods.
There are no tax consequences to either the participant or the Company when
the Option is issued. When shares are issued upon the exercise of the Option,
there are no tax consequences to the participant (except to the extent any
excess in the fair market value of the Common Stock over the exercise price
constitutes a tax preference item which requires payment of the alternative
minimum tax) or the Company. A participant's Option will terminate and his or
her accumulated account balance will be returned if such participant ceases to
be employed by the Company.
54
<PAGE>
If a participant disposes of shares purchased under the Purchase Plan at
least two years after the first day of the applicable offering period and at
least one year after the date of purchase, the participants will recognize
ordinary income in the year of disposition equal to the amount of the
discount. The amount of ordinary income recognized by a participant will be
added to the participant's basis in the shares. Any additional gain recognized
upon the disposition will be long-term capital gain. The Company will not
generally be entitled to a deduction if the participant complies with these
holding periods.
If a participant disposes of shares purchased under the Purchase Plan within
two years from the first day of the applicable offering period or within one
year from the date of purchase (a "disqualifying disposition"), the
participant will recognize ordinary income in the year of such disposition
equal to the amount by which the fair market value of the shares on the date
the shares were purchased exceeded the purchase price. The amount of ordinary
income will be added to the participant's basis in the shares, and any
additional gain or resulting loss recognized on the disposition of the shares
will be a capital gain or loss. The Company will be entitled to a deduction in
the year of the disqualifying disposition equal to the amount of ordinary
income recognized by the participant as a result of the disposition.
The Purchase Plan provides that in the event of a "Change in Control," the
Committee will either provide for the immediate exercise of the Options to the
extent of accumulated payroll balances or provide for a successor to adopt the
Purchase Plan. For purposes of the Purchase Plan, events constituting a
"Change in Control" are (i) the direct or indirect sale or exchange by the
shareholders of the Company of all or substantially all of the shares of
Common Stock of the Company where the shareholders of the Company before the
sale or exchange do not retain, directly or indirectly, at least a majority of
the beneficial interest in the voting stock of the Company, (ii) a merger in
which the shareholders of the Company before such merger do not retain,
directly or indirectly, at least a majority of the beneficial interest in the
voting stock of the Company or (iii) the sale, exchange or transfer of all or
substantially all of the Company's assets. The Board of Directors may
terminate or amend the Purchase Plan at any time. No termination of or
amendment to the Purchase Plan may materially adversely affect the rights of a
participant in the Purchase Plan without such participant's consent.
In the event any change is made to the stock issuable under the Purchase
Plan by reason of any stock split, stock dividend, combination of shares or
recapitalization, appropriate adjustment will be made to the share reserve of
the Purchase Plan and the number of shares that a participant may purchase
with respect to an Option.
55
<PAGE>
CERTAIN TRANSACTIONS
In December 1993 cti loaned Dr. Bianco $200,000 at 5.35% annual interest.
The promissory note originally provided for a single payment of principal and
interest on the earlier of July 1, 1997 or the third anniversary of the
effective date of the initial underwritten public offering of cti's Common
Stock. In December 1996 Dr. Bianco entered into an employment agreement with
the Company which amended the note to provide for the forgiveness of one-third
of the loan on each anniversary of the agreement. The unpaid portion of the
loan will accelerate and become due and payable in the event that cti
terminates Dr. Bianco's employment for cause or Dr. Bianco terminates his
employment without cause. The unpaid portion of the loan will be forgiven in
the event that cti terminates Dr. Bianco's employment without cause, Dr.
Bianco terminates his employment for cause, dies or becomes disabled, a
"Change in Ownership" (as defined in Dr. Bianco's employment agreement) occurs
or cti's public market capitalization equals or exceeds $500 million. See
"Management--Employment Agreements." The loan is secured by a pledge of 5,715
shares of Common Stock owned by Dr. Bianco.
In May 1994 cti entered into an employment agreement with Dr. Schwarz. The
agreement provides that in connection with his relocation to the Seattle area,
Dr. Schwarz be reimbursed for capital loss on the sale of his former residence
in the form of a forgivable loan in an amount not to exceed $150,000. The loan
shall be forgiven in three annual installments, subject to Dr. Schwarz's
continued employment with cti, with any unforgiven portion becoming
immediately due and payable within three months of any termination of Dr.
Schwarz's employment. As of December 31, 1996, the outstanding principal
balance of the loan was $48,471. See "Management--Employment Agreements."
In March 1995 The International Biotechnology Trust plc ("IBT"), which is an
affiliate of Mr. Curnock Cook and Rothschild Asset Management Limited,
purchased 22,388.061 shares of Series A Convertible Preferred Stock, for an
aggregate purchase price of $7.5 million, in the Company's 1995 Private
Placement. The holders of the outstanding shares of Series A Convertible
Preferred Stock voting as a separate class are entitled to elect one Director
to the Board of Directors. At the 1996 Annual Meeting of Shareholders Mr.
Curnock Cook was elected as a Director by the holders of the outstanding
shares of Series A Convertible Preferred Stock voting as a separate class. In
September 1996 IBT purchased an additional 14,925.373 shares of Series A
Convertible Preferred Stock for an aggregate purchase price of $5.0 million.
In March 1995 Kummell Investments Limited ("Kummell") purchased 14,925.374
shares of Series A Convertible Preferred Stock, for an aggregate purchase
price of $5.0 million, in the 1995 Private Placement. In June 1995 Kummell
purchased an additional 12,686.5672 shares of Series A Convertible Preferred
Stock for an aggregate purchase price of $4.25 million. In connection with the
June 1995 transaction, the Company agreed that it would take all necessary
action to nominate a designee of Kummell to serve as a Director until the 1996
Annual Meeting of Stockholders. In July 1995 the Company nominated Mr. Morris,
as a designee of Kummell, to the Board of Directors to serve until the 1996
Annual Meeting of Stockholders. Mr. Morris is the Chief Executive Officer of
Morningside Ventures, which advises Kummell on its private venture capital
portfolio. In September 1996 Kummell purchased an additional 14,925.373 shares
of Series A Convertible Preferred Stock for an aggregate purchase price of
$5.0 million. In connection with the September 1996 transaction, the Company
agreed that (i) it will take all necessary action to nominate a designee of
Kummell at the 1999 Annual Meeting of Stockholders to serve as a Director
until the 2002 Annual Meeting of Stockholders, and (ii) if prior to the 1999
Annual Meeting of Stockholders Mr. Morris shall cease to be a Director, it
will take all necessary action to nominate a designee of Kummell as a Director
to fill the vacancy created by Mr. Morris' termination. Such agreement will
terminate upon the closing of this Offering.
In December 1995 Dr. Link purchased 5,714 shares of Common Stock for an
aggregate purchase price of $67,000.
In November 1996 Johnson & Johnson Development Corporation ("JJDC"), a
wholly-owned subsidiary of Johnson & Johnson, purchased 14,925.373 shares of
Series B Convertible Preferred Stock, for an aggregate purchase price of $5.0
million, pursuant to a Stock Purchase Agreement entered into between cti and
JJDC in connection with the execution of the Collaboration Agreement. Pursuant
to the Stock Purchase Agreement, cti is entitled to require JJDC to purchase
additional shares of Common Stock upon the closing of this Offering and,
56
<PAGE>
subsequent to the offering, upon achievement of certain milestones. JJDC has
also agreed to purchase a number of shares of Common Stock equal to ten
percent of the shares sold at the closing of this Offering directly from the
Company in a private placement that will occur concurrent with the closing of
this Offering at a per share price equal to the initial public offering price.
See "Johnson & Johnson Stock Purchase" and "Business--Collaborations."
57
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock, as of March 15, 1997 (after giving effect to the
automatic conversion of all outstanding shares of Convertible Preferred Stock
at March 15, 1997 into Common Stock upon the closing of this Offering,
including certain anti-dilution adjustments that will occur as a result of the
closing of this Offering), by (i) certain principal shareholders of the
Company, including each shareholder known by the Company to be the beneficial
owner of more than 5% of its outstanding shares of Common Stock, (ii) each of
the Company's Directors and the Named Executive Officers and (iii) all
Directors and executive officers as a group:
<TABLE>
<CAPTION>
PERCENTAGE
OWNERSHIP (1)
---------------------
NAME AND ADDRESS NUMBER OF SHARES BEFORE AFTER
OF BENEFICIAL OWNER BENEFICIALLY OWNED (1) OFFERING OFFERING (2)
- - ------------------- ---------------------- -------- ------------
<S> <C> <C> <C>
Kummell Investments Lim- 1,287,456 13.23% 9.88%
ited (3)...............
922 Europort
Gibraltar
The International 1,108,156 11.39 8.51
Biotechnology Trust plc
(4) ...................
c/o Rothschild Asset
Management Limited
Five Arrows House
St. Swithen's Lane
London, England EC4N
8NR
Collinson Howe Venture 948,800 9.74 7.28
Partners (5)...........
1055 Washington Boule-
vard
Stamford, CT 06901
Biotechnology Investment 815,755 8.39 6.26
Group, L.L.C. (6)......
c/o Collinson Howe Ven-
ture Partners
1055 Washington Boule-
vard
Stamford, CT 06901
Johnson & Johnson Devel- 443,262(Before Offering) 4.56
opment Corporation
(7)....................
One Johnson & Johnson 743,262(After Offering) 5.70
Plaza
New Brunswick, NJ 08933
The Phoenix Partners 424,592 4.36 3.26
(8)....................
James A. Bianco, M.D.** 359,232 3.66 2.74
(9)....................
Jack L. Bowman** (10)... 6,666 * *
Jeremy L. Curnock Cook** 1,112,918 11.43 8.54
(11)...................
Wilfred E. Jaeger, 6,476 * *
M.D.** (12)............
Max E. Link, Ph.D.** 10,476 * *
(13)...................
David W. Martin Jr., 4,762 * *
M.D.** (14)............
Terrence M. Morris** 4,762 * *
(15)...................
Phillip M. Nudelman, 6,095 * *
Ph.D.** (16)...........
Jack W. Singer, M.D.** 215,944 2.22 1.66
(17)...................
Louis A. Bianco (18).... 146,179 1.50 1.12
Maurice J. Schwarz, 15,238 * *
Ph.D. (19).............
Robert A. Lewis, M.D. 2,857 * *
(20)...................
All Directors and
Executive Officers as a
group
(15 persons) (21)...... 1,913,207 19.23 14.44
</TABLE>
58
<PAGE>
- - --------
* Less than 1%
** Denotes Director of the Company
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities. Shares of Common Stock
subject to options or warrants currently exercisable or convertible, or
exercisable or convertible within 60 days of March 15, 1997, are deemed
outstanding for computing the percentage of the person holding such
option or warrant but are not deemed outstanding for computing the
percentage of any other person. Except as indicated in the footnotes to
this table and pursuant to applicable community property laws, the
persons named in the table have sole voting and investment power with
respect to all shares of Common Stock beneficially owned.
(2) Percentage of beneficial ownership after the Offering also gives effect
to the Johnson & Johnson Stock Purchase. See "Johnson & Johnson Stock
Purchase."
(3) Mr. Morris is the Chief Executive Officer of Morningside Ventures, which
advises Kummell Investments Limited ("Kummell") on its private venture
capital portfolio. Mr. Morris does not have or share voting or investment
power with respect to the shares held by Kummell. See footnote (15)
below.
(4) Consists of 1,108,156 shares of Common Stock beneficially owned by The
International Biotechnology Trust plc, a company formed under the laws of
England ("IBT") managed by Rothschild Asset Management Limited
("Rothschild"). Rothschild has or shares voting and investment power with
respect to the shares held by IBT and may be deemed to be the beneficial
owner of such shares. Mr. Curnock Cook is a director of IBT and
Rothschild, and may be deemed to be the beneficial owner of any shares
beneficially owned by each of IBT and Rothschild. Mr. Curnock Cook
disclaims beneficial ownership of shares beneficially owned by IBT and
Rothschild except to the extent of his proportionate interest therein.
Does not include any of up to 300,000 shares of Common Stock which
Biotechnology Investments Limited ("BIL") may purchase in the Offering.
Rothschild is advisor to BIL and to Rothschild Asset Management (C.I.)
Limited, which is the manager of BIL. See footnote (11) below and
"Underwriting".
(5) Collinson Howe Venture Partners ("CHVP") is a venture capital investment
management firm which is the managing member of Biotechnology Investment
Group, L.L.C., a Delaware limited liability company ("BIG"), and is the
investment advisor to Schroder Ventures Limited Partnership ("SVLP"),
Schroder Ventures U.S. Trust ("SVUST") and Schroders Incorporated ("SI").
As such, CHVP has or shares voting and investment power with respect to
the shares held by BIG, SVLP, SVUST and SI and may be deemed to be the
beneficial owner of such shares. The shares listed above consist of (i)
815,755 shares of Common Stock held by BIG, 66,991 shares of Common Stock
held by SVLP, 16,748 shares of Common Stock held by SVUST and 36,449
shares of Common Stock held by SI, and (ii) an additional 8,229, 2,057
and 2,571 shares of Common Stock issuable upon exercise of options
beneficially owned by SVLP, SVUST and SI, respectively, pursuant to an
agreement with Dr. Jaeger. See footnotes (6) and (12) below.
(6) BIG is a limited liability company which was created to acquire, hold,
protect, manage and dispose of equity, debt and derivative securities of
biotechnology and other companies. 771,429 of the shares of Common Stock
held by BIG were acquired in January 1995 from The Edward Blech Trust
("EBT"). The sole beneficiary of EBT is the minor child of David Blech, a
founder, former director and shareholder of the Company. The present
members of BIG are (i) the managing member, CHVP, an investment
management firm of which Jeffrey J. Collinson is President, sole director
and majority shareholder, (ii) EBT, and (iii) Wilmington Trust Company
("WTC"), as voting trustee under a voting trust agreement (the "Voting
Trust Agreement") among WTC, BIG and BIO Holdings L.L.C. ("Holdings").
The managing member of BIG is CHVP. The members of BIG share voting and
investment power with respect to all shares held of record by BIG. All of
the shares held of record by BIG have been pledged as collateral to
Citibank, N.A. ("Citibank") to secure indebtedness owed to such bank.
Each of Citibank and Holdings has the right pursuant to the Voting Trust
Agreement to direct certain actions of WTC as a member of BIG. WTC, as
the member holding a majority interest in Holdings, has the right to
direct the actions of Holdings under the Voting Trust Agreement.
Citibank, pursuant to a separate voting trust agreement among WTC, David
Blech and Holdings, has the right to direct the actions of WTC as a
member of Holdings with respect to the rights of Holdings under the
Voting Trust Agreement. By virtue of their status as members of BIG, each
of CHVP and EBT may be deemed to be the beneficial owner of all shares
held of record by BIG. By virtue of his status as the majority owner and
controlling person of CHVP, Jeffrey J. Collinson may also be deemed the
beneficial owner of all shares held of record by BIG. Each of CHVP, EBT
and Mr. Collinson disclaims beneficial ownership of shares held by BIG
except to the extent of such person's proportionate interest therein.
(7) Number of shares beneficially owned after the Offering includes 300,000
shares of Common Stock purchased by JJDC concurrent with the closing of
this Offering. See "Johnson & Johnson Stock Purchase."
(8) Consists of 190,133 shares of Common Stock held by The Phoenix Partners
II Limited Partnership ("PPII"), and 234,459 shares of Common Stock held
by The Phoenix Partners III Limited Partnership ("PPIII"). Stuart C.
Johnston is the Managing General Partner of The Phoenix Management
Partners II, which is the General Partner of PPII,and is the Managing
General Partner of The Phoenix Management Partners III, which is the
General Partner of PPIII. As such, Mr. Johnston has voting and investment
power with respect to the shares held by PPII and PPIII and may be deemed
to be the beneficial owner of such shares. Mr. Johnston disclaims
beneficial ownership of shares held by PPII
59
<PAGE>
and PPIII, except to the extent of his proportionate partnership interest
therein. Does not include any of up to 350,000 shares of Common Stock
which Mr. Johnston or entities affiliated with The Phoenix Partners may
purchase in the Offering. See "Underwriting."
(9) Includes 85,574 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 15, 1997.
Does not include 138,095 shares issuable upon exercise of options not yet
vested. 52,381 of such options vest in equal installments on December 5,
1997 and 1998, and 85,714 of such options vest in equal installments on
November 19, 1997, 1998 and 1999.
(10) Consists of 6,666 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 15, 1997.
Does not include 3,809 shares issuable upon exercise of options not yet
vested. Such options vest in equal installments on May 22, 1997 and 1998.
(11) Includes 1,108,156 shares of Common Stock beneficially owned by IBT. IBT
is managed by Rothschild and Rothschild has or shares voting and
investment power with respect to the shares held by IBT and may be deemed
to be the beneficial owner of such shares. Mr. Curnock Cook is a director
of IBT and Rothschild and may be deemed to be the beneficial owner of any
shares beneficially owned by each of IBT and Rothschild. Mr. Curnock Cook
disclaims beneficial ownership of shares beneficially owned by IBT and
Rothschild except to the extent of his proportionate interest therein.
Also includes an immediately exercisable option to purchase 4,762 shares
of Common Stock. Does not include any of up to 300,000 shares of Common
Stock which BIL may purchase in the Offering. Mr. Curnock Cook is a
shareholder, but is not an officer or director, of BIL. See footnote (4)
above, "Certain Transactions" and "Underwriting."
(12) Consists of 6,476 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 15, 1997.
Does not include 12,857 shares issuable upon exercise of options
beneficially owned by affiliates of CHVP pursuant to an agreement with
Dr. Jaeger. Dr. Jaeger, a director of the Company, is a former partner at
CHVP. Dr. Jaeger disclaims beneficial ownership of shares of Common Stock
beneficially owned by affiliates of CHVP. See footnote (5) above.
(13) Includes an immediately exercisable option to purchase 1,904 shares of
Common Stock.
(14) Consists of an immediately exercisable option to purchase 4,762 shares of
Common Stock.
(15) Consists of an immediately exercisable option to purchase 4,762 shares of
Common Stock. Mr. Morris is the Chief Executive Officer of Morningside
Ventures, which advises Kummell on its private venture capital portfolio.
Mr. Morris does not have or share voting or investment power with respect
to the shares held by Kummell. See footnote (3) above.
(16) Consists of 6,095 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 15, 1997.
Does not include 3,809 shares issuable upon exercise of options not yet
vested. Such options vest in equal installments on May 22, 1997 and 1998.
(17) Includes 16,195 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 15, 1997.
Does not include 33,333 shares issuable upon exercise of options not yet
vested. 4,762 of such options vest in equal installments on December 5,
1997 and 1998, and 28,571 of such options vest in equal installments on
November 7, 1997, 1998 and 1999.
(18) Includes 43,669 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 15, 1997.
Does not include 32,857 shares issuable upon exercise of options not yet
vested. 11,429 of such options vest in equal installments on December 5,
1997 and 1998, and 21,428 of such options vest in equal installments on
November 7, 1997, 1998 and 1999.
(19) Consists of 15,238 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 15, 1997.
Does not include 41,904 shares issuable upon exercise of options not yet
vested. 5,714 of such options vest on June 1, 1997, 7,619 of such options
vest in equal installments on December 5, 1997 and 1998, and 28,571 of
such options vest in equal installments on November 7, 1997, 1998 and
1999.
(20) Consists of an immediately exercisable option to purchase 2,857 shares of
Common Stock. Does not include 64,285 shares issuable upon exercise of
options not yet vested. 28,585 of such options vest on April 1, 1998,
14,271 of such options vest on April 1, 1999, and 21,429 of such options
vest in equal installments on November 7, 1997, 1998, and 1999.
(21) Includes an aggregate of 220,562 shares of Common Stock issuable upon
exercise of options that are currently exercisable or exercisable within
60 days of March 15, 1997. See footnotes (9) through (20). Excludes, with
respect to each of Mr. Bowman, Mr. Curnock Cook, Dr. Jaeger, Dr. Martin,
Mr. Morris and Dr. Nudelman, 14,285 shares of Common Stock, and with
respect to Dr. Link, 28,570 shares of Common Stock, which will become
issuable upon exercise of outstanding options following the approval of
such option grants by the Company's shareholders at the 1997 Annual
Meeting of Shareholders. See Note 9 of Notes to Consolidated Financial
Statements.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this Offering, the authorized capital stock of the
Company will consist of 100,000,000 shares of Common Stock, no par value, and
10,000,000 shares of Preferred Stock, 100,000 of which have been designated as
Series C Preferred Stock ("Series C Preferred"), and 9,900,000 of which are
undesignated.
COMMON STOCK
Each holder of Common Stock is entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. In all matters
other than the election of Directors or as otherwise required by law, when a
quorum is present at any shareholders' meeting, the affirmative vote of the
majority of shares present in person or represented by proxy shall decide any
question before such meeting. Directors are elected by a plurality of the
votes of the shares present in person or represented by proxy at a
shareholders' meeting. The Board of Directors of cti is divided into three
approximately equal classes of Directors serving staggered three-year terms.
As a result, approximately one-third of the total number of Directors will be
elected every year. See "Management--Executive Officers and Directors." The
holders of Common Stock are not entitled to cumulative voting rights with
respect to the election of Directors, and, as a consequence, minority
shareholders will not be able to elect Directors on the basis of their votes
alone. Subject to preferences that may be applicable to any then outstanding
shares of Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors out of
funds legally available therefor. See "Dividend Policy." In the event of a
liquidation, dissolution or winding up of the Company, holders of the Common
Stock would be entitled to share ratably in all assets remaining after payment
of liabilities and the satisfaction of any liquidation preference of any then
outstanding series of Preferred Stock. Holders of Common Stock have no
preemptive rights and no right to convert their Common Stock into any other
securities. There are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and all shares
of Common Stock to be outstanding upon completion of this Offering will be,
fully paid and nonassessable.
As of December 31, 1996, there were outstanding 10,028,438 shares of Common
Stock (after giving effect to (i) the automatic conversion of all outstanding
shares of Convertible Preferred Stock into 4,784,966 shares of Common Stock
upon the closing of this Offering and (ii) the sale of 300,000 shares of
Common Stock to Johnson & Johnson concurrent with the closing of this
Offering), held of record by approximately 584 shareholders, outstanding
options to purchase an aggregate of 1,208,608 shares of Common Stock and
outstanding warrants to purchase an aggregate of 77,907 shares of Common
Stock. See "Management--Stock Option Plans."
PREFERRED STOCK
The Board of Directors has the authority, without further vote or action by
the shareholders, to issue up to 10,000,000 shares of Preferred Stock (less
any shares of Preferred Stock then outstanding or reserved for issuance) in
one or more series and to fix the designations and powers, preferences and
rights, if any, and qualifications, limitations or other restrictions thereof,
including, without limitation, the dividend rate (and whether dividends are
cumulative), conversion rights, if any, voting rights, rights and terms of
redemption (including sinking fund provisions, if any), redemption price and
liquidation preferences of any wholly unissued series of Preferred Stock and
the number of shares constituting any such series and the designation thereof.
Although the Company has no current plans to issue any shares of Preferred
Stock, the issuance of Preferred Stock or of rights to purchase Preferred
Stock could be used to delay or discourage an unsolicited acquisition
proposal. In addition, the possible issuance of Preferred Stock could
discourage a proxy contest, make more difficult the acquisition of a
substantial block of the Company's Common Stock or limit the price that
investors might be willing to pay in the future for shares of the Company's
Common Stock.
The Company believes that the Preferred Stock will provide the Company with
increased flexibility in structuring possible future financings and
acquisitions and in meeting other corporate needs that might arise. Having
such authorized shares available for issuance will allow the Company to issue
shares of Preferred Stock
61
<PAGE>
without the expense and delay of a special shareholders' meeting. The
authorized shares of Preferred Stock, as well as shares of Common Stock, will
be available for issuance without further action by shareholders, unless such
action is required by applicable law, the terms of any series of Preferred
Stock then outstanding or the rules of any stock exchange or market on which
the Company's securities may then be listed.
Immediately prior to the closing of this Offering, there will be outstanding
161,118.6453 shares of Convertible Preferred Stock. Upon the closing of this
Offering, each share of Convertible Preferred Stock will automatically convert
into 29.6986 shares of Common Stock for a total of 4,784,966 shares of Common
Stock (after giving effect to certain anti-dilution adjustments that will
occur as a result of the closing of this Offering at an initial public
offering price below $11.725 per share). An additional 100,000 shares of
Preferred Stock are designated as Series C Preferred and are reserved for
issuance pursuant to the Company's Rights Agreement. See "--Antitakeover
Restrictions--Rights Agreement." There are no shares of Series C Preferred
outstanding as of the date of this Prospectus.
WARRANTS
In September 1995 cti completed an exchange offer (the "Warrant Exchange")
to exchange shares of its Common Stock for its outstanding warrants to
purchase shares of Common Stock. In connection with the Warrant Exchange, the
Company issued (i) 5,612 shares of Common Stock in exchange for warrants to
purchase 190,992 shares at an exercise price of $38.50 per share which were
issued to purchasers in the 1993 Private Placement (the "Unit Warrants"); (ii)
68,871 shares of Common Stock in exchange for warrants to purchase 182,786
shares at exercise prices ranging from $17.50 to $31.50 per share which were
issued to sales agents in connection with the 1992 Private Placement and the
1993 Private Placement (the "Sales Agent Warrants"); (iii) 22,858 shares of
Common Stock in exchange for warrants to purchase 57,143 shares at an exercise
price of $17.50 per share which were issued to David H. Smith, M.D., a former
Chairman of the Board of Directors of the Company (the "Smith Warrants"); and
(iv) 7,228 shares of Common Stock in exchange for warrants to purchase 12,432
shares at an exercise price of $12.8975 per share which were issued to Aberlyn
Capital Management Limited Partnership at an initial exercise price of $15.40
per share in connection with an equipment leasing transaction (the "Lease
Warrants").
As of December 31, 1996, there were outstanding Sales Agent Warrants to
purchase 68,901 shares of Common Stock at an exercise price of $17.50 per
share and Sales Agent Warrants to purchase 9,006 shares of Common Stock at an
exercise price of $31.50 per share. The Sales Agent Warrants will expire
between August 11, 1997 and February 7, 1999. The exercise prices of the Sales
Agent Warrants are subject to proportional adjustment in the event of stock
splits and stock dividends.
REGISTRATION RIGHTS
After this Offering, the holders of 5,653,076 shares of Common Stock and the
holders of warrants to purchase 77,907 shares of Common Stock (collectively,
the "Registrable Securities") or their respective transferees will be entitled
to certain registration rights with respect to such shares of Common Stock
under the Securities Act.
Pursuant to a registration agreement entered into in connection with the
1993 Private Placement (the "1993 Registration Agreement"), the holders of
469,153 shares of Common Stock, including 5,612 shares of Common Stock issued
in exchange for Unit Warrants to purchase 190,992 shares of Common Stock in
connection with the Warrant Exchange (collectively, the "1993 Registrable
Securities"), are entitled to certain registration rights with respect to the
1993 Registrable Securities. Pursuant to the 1993 Registration Agreement, the
Company will be required to use its best efforts to effect the registration of
the 1993 Registrable Securities under the Securities Act not later than six
months after the final closing date of this Offering (the "IPO Closing Date")
and to keep such registration effective pursuant to Rule 415 under the
Securities Act until May 31, 1999.
Pursuant to the Sales Agent Warrants and the Smith Warrants, the holders of
such warrants have certain demand and piggyback registration rights with
respect to such warrants and the shares of Common Stock issuable
62
<PAGE>
upon exercise of such warrants, including the shares of Common Stock issued in
exchange for such warrants in connection with the Warrant Exchange
(collectively, the "Warrant Securities"). The holders of the Warrant
Securities hold 91,729 shares of Common Stock and warrants to purchase 77,907
shares of Common Stock. The holders of the Warrant Securities may, beginning
six months to one year following the completion of an initial public offering
of the Company's Common Stock, require the Company to file up to an aggregate
of three registration statements permitting the sale of the Warrant Securities
and to maintain the effectiveness of such registration statements for at least
nine months. In addition, the Company is required to file a registration
statement on Form S-3 with respect to the Warrant Securities at such time as
it is eligible to do so, and to use its best efforts to effect such
registration and maintain the effectiveness of such registration statement for
a specified period of time, subject to certain conditions and limitations.
Further, if the Company shall register any of its securities under the
Securities Act, the holders of the Warrant Securities are entitled to notice
of and inclusion in such registration, subject to the right of the managing
underwriters to limit the number of shares to be included in such
registration.
Pursuant to the Lease Warrants, the holder of the 7,228 shares of Common
Stock issued in exchange for the Lease Warrants in connection with the Warrant
Exchange has certain demand registration rights with respect to such shares of
Common Stock (the "Lease Warrant Securities"). The holder of the Lease Warrant
Securities may, beginning one year following the completion of an initial
public offering of the Company's Common Stock, require the Company to file one
registration statement permitting the sale of the Lease Warrant Securities and
to maintain the effectiveness of such registration statement for at least nine
months.
Pursuant to registration agreements entered into with the holders of the
Series A Convertible Preferred Stock (the "Series A Registration Rights
Agreements"), the holders of 146,193.2723 shares of Series A Convertible
Preferred Stock that will automatically convert into an aggregate of 4,341,704
shares of Common Stock upon the closing of this Offering (such shares of
Common Stock being referred to herein as the "Series A Registrable
Securities") are entitled to certain registration rights with respect to the
Series A Registrable Securities. Pursuant to the Series A Registration
Agreements, the Company will be required to use its best efforts to effect the
registration of the Series A Registrable Securities under the Securities Act
not later than six months after the IPO Closing Date and to keep such
registration effective pursuant to Rule 415 under the Securities Act until
March 22, 1998, in the case of 2,834,613 Series A Registrable Securities
issuable upon conversion of the 95,447.004 shares of Series A Convertible
Preferred Stock issued in 1995 (the "1995 Registrable Securities"), and until
September 17, 1999, in the case of the 1,507,091 Series A Registrable
Securities issuable upon conversion of the 50,746.2683 shares of Series A
Convertible Preferred Stock issued in 1996 (the "1996 Registrable
Securities"). In addition, pursuant to the Series A Registration Agreements,
if the Company shall not have effected the registration of all 1995
Registrable Securities by March 31, 1997, the holders of a majority in
interest of 1995 Registrable Securities shall have the right (but only once)
to make a written request to the Company for registration of all 1995
Registrable Securities, and if the Company shall not have effected the
registration of all 1996 Registrable Securities by September 17, 1999, the
holders of a majority in interest of 1996 Registrable Securities shall have
the right (but only once) to make a written request to the Company for
registration of all 1996 Registrable Securities.
Pursuant to a Stock Purchase Agreement entered into with Johnson & Johnson
Development Corporation ("JJDC"), a wholly-owned subsidiary of Johnson &
Johnson, in connection with the Collaboration Agreement (the "Johnson &
Johnson Stock Purchase Agreement"), JJDC is entitled to certain registration
rights with respect to the 300,000 shares of Common Stock to be purchased by
JJDC concurrent with the closing of this Offering pursuant to the Johnson &
Johnson Stock Purchase, the 443,262 shares of Common Stock issuable upon the
automatic conversion of the Series B Convertible Preferred Stock, and any
additional shares of Common Stock that cti may require JJDC to purchase upon
the achievement of certain milestones (collectively, the "Johnson & Johnson
Registrable Securities"). Pursuant to the Johnson & Johnson Stock Purchase
Agreement, the Company will be required to use its best efforts to effect the
registration of the Johnson & Johnson Registrable Securities under the
Securities Act not later than the first to occur of twelve months after the
IPO Closing Date, September 30, 1998 or the registration of any Series A
Registrable Securities, and to keep such registration statement effective
pursuant to Rule 415 under the Securities Act for the longer of 120 days after
the
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date of actual purchase by JJDC of Johnson & Johnson Registrable Securities,
120 days after the expiration of the "lock-up" agreement to which JJDC is a
party (see "Underwriting") and any period during which the Company shall keep
any registration statement effective pursuant to any of the agreements
referred to above. Further, if at any time subsequent to the twelfth month
after the IPO Closing Date the Company shall register any of its securities
under the Securities Act, JJDC is entitled to notice of and inclusion in such
registration, subject to the right of the managing underwriters to limit the
number of shares to be included in such registration.
Subject to certain limitations, the Company is required to bear all
expenses, other than underwriting discounts and commissions, incurred in
connection with the registration of the 1993 Registrable Securities, the
Warrant Securities, the Lease Warrant Securities, the Series A Registrable
Securities and the Johnson & Johnson Registrable Securities (collectively, the
"Registrable Securities") pursuant to the agreements described above. The
Company and the holders of the Registrable Securities have agreed to indemnify
each other for certain liabilities arising out of material misstatements and
omissions made by the other party in any registration statement covering
Registrable Securities.
If shareholders, by exercising their registration rights, cause a large
number of shares to be sold in the public market, such sales may have an
adverse effect on any future market price for the Common Stock. In addition,
the existence of such registration rights and the existence of an effective
registration statement over an extended period of time may have an adverse
effect on the Company's efforts to raise needed capital.
ANTITAKEOVER RESTRICTIONS
Statutory and Charter Provisions
Washington law contains certain provisions that may have the effect of
delaying, deterring or preventing a change in control of the Company. Chapter
23B.17 of the Washington Business Corporation Act (the "WBCA") prohibits,
subject to certain exceptions, a merger, sale of assets or liquidation of the
Company involving an "interested shareholder" (defined as a person or group of
affiliated persons who own beneficially 20% or more of the Company's voting
securities) unless the transaction is determined to be at a "fair price" or
otherwise approved by a majority of the Company's disinterested Directors or
is approved by holders of two-thirds of the Company's outstanding voting
securities, other than those held by the interested shareholder. A Washington
corporation may, in its articles of incorporation, exempt itself from coverage
of this provision, but the Company has not done so. In addition, Chapter
23B.19 of the WBCA prohibits the Company, with certain exceptions, from
engaging in certain significant business transactions with an "acquiring
person" (defined as a person or group of persons who acquire 10% or more of
the Company's voting securities without the prior approval of the Company's
Board of Directors) for a period of five years following the acquiring
person's share acquisition date. The prohibited transactions include, among
others, a merger or consolidation with, disposition of assets to, or issuance
or redemption of stock to or from, the acquiring person, or otherwise allowing
the acquiring person to receive any disproportionate benefit as a shareholder.
The Company may not exempt itself from coverage of this statute. These
statutory provisions may have the effect of delaying, deterring or preventing
a change in control of the Company.
The Company's Board of Directors is divided into three approximately equal
classes of Directors serving staggered three-year terms. In addition, the
Company's Restated Articles of Incorporation provide that Directors may be
removed from office only at a meeting of shareholders called expressly for
that purpose and only for cause. The Company's Restated Articles of
Incorporation limit "cause" to willful misfeasance having a material adverse
effect on the Company or conviction of a felony, provided that any action by a
Director shall not constitute "cause" if, in good faith, the Director believed
the action to be in or not opposed to the best interests of the Company or if
the Director is entitled to be indemnified with respect to such action under
applicable law, the Company's Restated Articles of Incorporation or Bylaws, or
a contract with the Company. Further, the Company's Bylaws require a
shareholder to provide notice to the Company of such shareholder's intent to
nominate a person or persons for election as Directors not later than 90 days
prior to the date one year from the date of the immediately preceding annual
meeting of shareholders or, in the case of an election to be held at a special
meeting of shareholders for the election of Directors, the close of business
on the tenth day following the
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date on which notice of such meeting is first given to shareholders. A
shareholder must also provide the Company with notice of such shareholder's
intent to make any proposal at an annual meeting of shareholders not later
than 90 days prior to the date one year from the date of the immediately
preceding annual meeting of shareholders. These provisions may have the effect
of deterring hostile takeovers or delaying changes in control or management of
cti.
RIGHTS AGREEMENT
On November 11, 1996, the Company's Board of Directors declared a
distribution of one Preferred Stock Purchase Right (a "Right") for each
outstanding share of Common Stock to shareholders of record as of the close of
business November 21, 1996 and for each share of Common Stock issued
thereafter pursuant to a Rights Agreement between the Company and Harris Trust
Company of California, as Rights Agent (the "Rights Agreement"). One Right
will be issued for each share of Common Stock issued in connection with the
Offering. Each Right entitles the registered holder thereof, subject to the
terms of the Rights Agreement, to purchase from the Company one one-thousandth
of a share (a "Unit") of Series C Preferred, at a price of $175.00 per Unit,
subject to adjustment under certain circumstances set forth in the Rights
Agreement. Initially, the Rights will attach to all certificates representing
shares of outstanding Common Stock, and no separate Rights certificates will
be distributed. The Rights will separate from the Common Stock (such date
being the "Distribution Date") upon the earlier of (i) 10 business days
following a public announcement of the acquisition of 15 percent of the then
outstanding shares of Common Stock, and (ii) 10 business days (or such later
date as may be determined by action of the Board of Directors) following the
commencement of a tender offer or exchange offer that would result in the
acquisition of 15 percent or more of the then outstanding shares of Common
Stock. The Rights are not exercisable until the Distribution Date and will
expire at the close of business on the tenth anniversary of the Rights
Agreement unless earlier redeemed by the Company.
Upon the occurrence of certain events generally associated with an
unsolicited attempt to take over cti, each holder of a Right (except for
Rights held by an "Acquiring Person" (as defined in the Rights Agreement))
will thereafter have the right to receive, upon exercise, Units of Series C
Preferred (or, in certain circumstances, Common Stock, cash, property or other
securities of the Company) having a value equal to two times the exercise
price of the Right or, in the event of a merger of cti into an Acquiring
Person, common stock of the Acquiring Person having a value equal to two times
the exercise price of the Right. Under certain conditions, cti may elect to
redeem the Rights for a nominal amount or to exchange the Rights not held by
an Acquiring Person for Units of Series C Preferred on a one-for-one basis.
The Rights are designed to protect and maximize the value of the outstanding
equity interests of the Company in the event of an unsolicited attempt by an
acquiror to take over cti in a manner not approved by the Company's Board of
Directors. Takeover attempts frequently include coercive tactics to deprive a
corporation's board of directors and its shareholders of any real opportunity
to determine the destiny of the corporation. The Rights have been declared by
the Company's Board of Directors in order to deter such tactics. The Rights
are not intended to prevent a takeover of cti and will not do so.
Nevertheless, the Rights may have the effect of discouraging or rendering more
difficult an acquisition of cti deemed undesirable by the Company's Board of
Directors. The Rights may cause substantial dilution to a person or group that
attempts to acquire the Company on terms or in a manner not approved by the
Company's Board of Directors, except pursuant to an offer conditioned upon the
negation, purchase or redemption of the Rights.
In connection with its adoption of the Rights Agreement, the Company
reserved for issuance 100,000 shares of Series C Preferred. The Series C
Preferred will only be issued in the event Rights issued pursuant to the
Rights
Agreement are exercised for Units of Series C Preferred. The Units of Series C
Preferred that may be acquired upon exercise of the Rights will be
nonredeemable and subordinate to any other series of Preferred Stock that may
be issued by the Company. Each Unit of Series C Preferred will have a minimum
preferential quarterly dividend rate of $1.00 per Unit but will, in any event,
be entitled to a dividend equal to the per share dividend declared on the
Common Stock. In the event of liquidation, the holder of a Unit of Series C
Preferred will receive a preferred
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liquidation payment equal to the greater of $1.00 per Unit and the per share
amount paid in respect of a share of Common Stock. Each Unit of Series C
Preferred will have one vote, voting together with the Common Stock. The
holders of Units of Series C Preferred, voting as a separate class, shall be
entitled to elect two directors if dividends on the Series C Preferred are in
arrears for six fiscal quarters. In the event of any merger, consolidation or
other transaction in which shares of Common Stock are exchanged, each Unit of
Series C Preferred will be entitled to receive the per share amount paid in
respect of each share of Common Stock. The rights of holders of the Series C
Preferred to dividends, liquidation and voting, and in the event of mergers
and consolidation, are protected by customary antidilution provisions. The
issuance of Series C Preferred could adversely affect the voting power of
holders of Common Stock and could have the effect of delaying, deferring or
preventing a change in control of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for cti's Common Stock is Harris Trust
Company of California.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering and the Johnson & Johnson Stock Purchase,
the Company will have 13,028,438 shares of Common Stock outstanding, assuming
no exercise of the Underwriters' over-allotment option and no exercise of
outstanding options and warrants. Of these shares, the 3,000,000 shares of
Common Stock sold in this Offering will be freely transferable without
restriction under the Securities Act unless they are held by "affiliates" or
"underwriters" of the Company, as these terms are used under the Securities
Act and the regulations promulgated thereunder. The remaining 10,028,438
shares of Common Stock are "restricted securities" as the term is defined by
Rule 144 promulgated under the Securities Act (the "Restricted Shares") and
may not be sold publicly unless they are registered under the Securities Act
or are sold pursuant to Rule 144 or another exemption from registration.
The following discussion takes into consideration the Securities and
Exchange Commission's amendments to Rule 144 described below that will become
effective on or about April 29, 1997. Of the Restricted Shares, 3,831,645
shares are held by affiliates and are subject to "lock-up" agreements (as
described below under "Underwriting") expiring 180 days following the date of
this Prospectus. Of the 2,139,520 Restricted Shares held by non-affiliates who
are not subject to lock-up agreements, 2,116,224 shares will have been held
for more than two years and will be eligible for immediate sale in the public
market without restriction pursuant to Rule 144(k) under the Securities Act
(as described below) as of the date of this Prospectus (the "Effective Date"),
and an additional 15,244 shares will be eligible for sale subject to the
provisions of Rules 144 and 701 under the Securities Act (as described below)
as of the Effective Date. Of the 4,057,272 Restricted Shares held by non-
affiliates who are subject to lock-up agreements, 2,693,444 shares will be
eligible for immediate sale in the public market without restriction under
Rule 144(k) or subject to Rules 144 and 701 upon the expiration of such lock-
up agreements. The remaining Restricted Shares will have been held for less
than one year upon the expiration of such lock-up agreements and will become
eligible for sale under Rule 144 at various dates thereafter as the holding
period provisions of Rule 144 are satisfied. In addition, holders of stock
options and warrants exercisable for an aggregate of 1,101,991 shares of
Common Stock have entered into 180-day lock-up agreements.
In general, under Rule 144 as amended effective on or about April 29, 1997,
a person (or persons whose shares are aggregated), including an affiliate, who
has beneficially owned shares for at least one year is entitled to sell,
within any three-month period, a number of shares (including both restricted
and unrestricted shares held by affiliates) that does not exceed the greater
of (i) one percent (1%) of the then outstanding Common Stock (approximately
130,284 shares immediately after this Offering) or (ii) the average weekly
trading volume in the Common Stock during the four calendar weeks preceding
such sale, subject to certain limitations and restrictions. In addition, a
person who is not deemed to have been an affiliate of the Company at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, would be entitled to sell
such shares under Rule 144(k) without regard to the volume limitations
described above
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or certain other restrictions of Rule 144. In addition, the Securities and
Exchange Commission has recently proposed further revisions to the holding
periods and volume limitations contained in Rule 144. The adoption of
amendments effecting such proposed revisions may result in resales of
restricted securities sooner than would be the case under Rules 144 and 144(k)
as currently amended and in effect. However, there can be no assurance of when,
if ever, such amendments will be proposed or adopted.
Under Rule 701, any employee, officer or Director of or consultant to the
Company who purchased shares of Common Stock pursuant to a written compensatory
plan or contract, including the 1992 Plan and the 1994 Plan, before the Company
became subject to the reporting requirements of the Securities Exchange Act of
1934, who is not an affiliate of the Company, is entitled to sell such shares
in reliance on Rule 144 without having to comply with the public information,
holding period, volume limitation or notice provisions of Rule 144, and
affiliates are permitted to sell such shares in reliance on Rule 144 without
having to comply with the holding period restrictions of Rule 144.
The Company intends to file one or more registration statements under the
Securities Act to register Common Stock to be issued pursuant to the exercise
of options, including options granted or to be granted under the 1992 Plan, the
1994 Plan and the Purchase Plan, thus permitting the resale of such shares by
non-affiliates in the public market without restriction under the Securities
Act. Such registration statement will become effective immediately upon filing.
At December 31, 1996, options to purchase an aggregate of 1,208,608 shares of
Common Stock were outstanding under the 1992 Plan and the 1994 Plan, and no
options to purchase Common Stock were outstanding under the Purchase Plan. See
"Management--Stock Option Plans."
The holders of 5,563,076 shares of Common Stock upon the closing of this
Offering and warrants to purchase 77,907 shares of Common Stock and their
permitted transferees are entitled to certain registration rights for their
shares. See "Description of Capital Stock--Registration Rights."
Prior to this Offering, there has been no public market for the securities of
the Company. No predictions can be made of the effect, if any, that the sale or
availability for sale of shares of additional Common Stock will have on the
market price of the Common Stock. Nevertheless, sales of a substantial number
of such shares by existing shareholders or by shareholders purchasing in this
Offering could have a negative impact on the market price of the Common Stock.
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below (the "Underwriters"), for whom UBS Securities LLC,
Montgomery Securities and Raymond James & Associates, Inc. are acting as
representatives (the "Representatives"), have agreed to purchase from the
Company the following respective numbers of shares of Common Stock:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
UBS Securities LLC................................................. 967,500
Montgomery Securities.............................................. 967,500
Raymond James & Associates, Inc. .................................. 315,000
Bear, Stearns & Co. Inc. .......................................... 72,000
Cowen & Company.................................................... 72,000
Dillon, Read & Co. Inc. ........................................... 72,000
Donaldson, Lufkin & Jenrette Securities Corporation................ 72,000
Goldman, Sachs & Co. .............................................. 72,000
Hambrecht & Quist LLC.............................................. 72,000
Oppenheimer & Co., Inc. ........................................... 72,000
Dain Bosworth Incorporated......................................... 41,000
Pacific Crest Securities Inc. ..................................... 41,000
Pacific Growth Equities, Inc. ..................................... 41,000
Piper Jaffray Inc. ................................................ 41,000
Ragen MacKenzie Incorporated....................................... 41,000
H.C. Wainwright & Co., Inc. ....................................... 41,000
---------
Total.......................................................... 3,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, including the absence of any
material adverse change in the Company's business and the receipt of certain
certificates, opinions and letters from the Company and its counsel. The
nature of the Underwriters' obligation is such that they are committed to
purchase all shares of Common Stock offered hereby if any of such shares are
purchased. The Underwriting Agreement contains certain provisions whereby if
any Underwriter defaults in its obligation to purchase shares, and the
aggregate obligations of the Underwriters so defaulting do not exceed 10% of
the shares offered hereby, the remaining Underwriters, or some of them, must
assume such obligations.
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the offering
price set forth on the cover of this Prospectus, and to certain dealers at
such price less a concession not in excess of $.42 per share. The Underwriters
may allow and such dealers may reallow a concession not in excess of $.10 per
share to certain other dealers. After the public offering of the shares of
Common Stock, the offering price and other selling terms may be changed by the
Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to 450,000
additional shares of Common Stock to cover over-allotments, if any, at the
public offering price set forth on the cover page of this Prospectus, less the
underwriting discounts and commissions. To the extent that the Underwriters
exercise this option, each of the Underwriters will have a firm commitment to
purchase approximately the same percentage thereof which the number of shares
of Common Stock to be purchased by it shown in the above table bears to the
total number of shares of Common stock offered hereby. The Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters to
the extent the option is exercised.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act.
The officers, Directors and certain other shareholders of the Company, who
beneficially own an aggregate of approximately 7,888,918 shares of Common
Stock (including 4,784,966 shares of Common stock issuable
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upon the automatic conversion of all outstanding shares of Convertible
Preferred Stock upon the closing of this Offering and 300,000 shares of Common
Stock to be purchased by Johnson & Johnson concurrent with the closing of this
Offering) and stock options and warrants exercisable for an aggregate of
1,101,991 shares of Common Stock, have agreed, pursuant to certain "lock-up"
agreements, that they will not, without the prior written consent of UBS
Securities LLC, offer, sell or otherwise dispose of any shares of Common Stock,
options or warrants to acquire shares of Common Stock or securities
exchangeable for or convertible into shares of Common Stock owned by them for a
period of 180 days after the Effective Date. The Company has agreed that it
will not, without the prior written consent of UBS Securities LLC, offer, sell
or otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock or securities exchangeable for or convertible
into shares of Common Stock for a period of 180 days after the date of this
Prospectus.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Johnson & Johnson Development Corporation ("JJDC"), a wholly-owned subsidiary
of Johnson & Johnson, has granted to the Company an option (the "Johnson &
Johnson Option") to sell to JJDC a number of shares of Common Stock equal to
not more than ten percent of the number of shares of Common Stock sold by cti
at the initial closing of this Offering at a price per share equal to the
public offering price. The Company has exercised the Johnson & Johnson Option
in full, and JJDC is committed to purchase, in a private placement that will
occur concurrent with the closing of this Offering, 300,000 shares of Common
Stock at an aggregate purchase price of $3.0 million. The Johnson & Johnson
Stock Purchase will not be registered in this Offering or be covered by the
Underwriting Agreement, and the Underwriters will not receive any fee in
connection with the sale of such shares. See "Johnson & Johnson Stock
Purchase."
The Company has been advised that affiliates of The International
Biotechnology Trust plc and The Phoenix Partners may purchase an aggregate of
up to 650,000 shares of Common Stock in the Offering. See "Principal
Shareholders."
Prior to this Offering, there has been no public market for the Common Stock.
The initial public offering price was negotiated among the Company and the
Representatives. Among the factors considered in determining the initial public
offering price of the Common Stock, in addition to prevailing market and
economic conditions, were certain financial information of the Company; the
history of, and the prospects for, the Company and the industry in which it
competes; an assessment of the Company's management; its past and present
operations; the prospects for, and timing of, future revenues of the Company;
the present stage of the Company's development; and the above factors in
relation to market values and various valuation measures of other companies
engaged in activities similar to the Company. The initial public offering price
set forth on the cover page of this Prospectus should not, however, be
considered an indication of the actual value of the Common Stock. The price of
the Common Stock is subject to change as a result of market conditions and
other factors. There can be no assurance that an active trading market will
develop for the Common Stock or that the Common Stock will trade in the public
market subsequent to this Offering at or above the initial offering price.
Certain persons participating in this Offering may overallot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the
open market, including by entering stabilizing bids, effecting syndicate
covering transctions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting of any purchase, for the purpose of pegging,
fixing or maintaining the price of the Common Stock. A syndicate covering
transaction means the placing of any bid on behalf of the underwriting
syndicate or the effecting of any purchase to reduce a short position created
in connection with the Offering. A penalty bid means an arrangement that
permits the Underwriters to reclaim a selling concession from a syndicate
member in connection with the Offering when shares of Common Stock sold by the
syndicate member are purchased in syndicate covering transactions. Such
transactions may be effected on the Nasdaq National Market, in the over-the-
counter market, or otherwise. Such stabilizing, if commenced, may be
discontinued at any time.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "CTIC," subject to official notice of issuance.
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LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Davis Wright Tremaine LLP, Seattle, Washington.
Certain legal matters related to the sale of the shares of Common Stock
offered hereby will be passed upon for the Company by Shearman & Sterling, San
Francisco, California. Certain legal matters with respect to information
contained in this Prospectus under the captions "Risk Factors--Ability to
Protect Intellectual Property" and "Business--Patents and Proprietary Rights"
will be passed upon by Foley & Lardner, Washington, D.C., patent counsel to
the Company. Pillsbury Madison & Sutro LLP, Menlo Park, California is acting
as counsel for the Underwriters in connection with certain legal matters
relating to the shares of Common Stock offered hereby. Michael J. Kennedy, a
partner of Shearman & Sterling, is Secretary of the Company.
EXPERTS
The consolidated financial statements of Cell Therapeutics, Inc. at December
31, 1995 and 1996, and for each of the three years in the period ended
December 31, 1996 and for the period from September 4, 1991 (date of
inception) to December 31, 1996, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). This Registration
Statement, including exhibits thereto, and such reports, proxy statements and
other information filed by the Company with the Commission can be inspected
and copied at the public reference facilities maintained by the Commission at
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and
at its Regional Offices located at Seven World Trade Center, Suite 1300, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661-2511. Copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549. The Commission maintains a World
Wide Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The address of the site is http://www.sec.gov.
The Company has filed with the Commission a registration statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to
the shares of the Common Stock of the Company being offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all the information set forth in the Registration Statement, certain
items of which are contained in schedules and exhibits to the Registration
Statement as permitted by the rules and regulations of the Commission.
Statements made in this Prospectus concerning the contents of any documents
referred to herein are not necessarily complete. With respect to each such
document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description,
and each such statement shall be deemed qualified in its entirety by such
reference.
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CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors.......................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Shareholders' Equity............................ F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Cell Therapeutics, Inc.
We have audited the accompanying consolidated balance sheets of Cell
Therapeutics, Inc. (a development stage company) as of December 31, 1995 and
1996, and the related consolidated statements of operations, shareholders'
equity, and cash flows for each of the three years in the period ended
December 31, 1996 and for the period from September 4, 1991 (date of
incorporation) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cell Therapeutics, Inc. (a
development stage company) at December 31, 1995 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1996 and for the period from September 4, 1991 (date of
incorporation) to December 31, 1996, in conformity with generally accepted
accounting principles.
Seattle, Washington
January 24, 1997, except for paragraphs 2 and 3 of Note 12, as to which the
date is March 21, 1997
Ernst & Young LLP
F-2
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
EQUITY AT
DECEMBER 31, DECEMBER 31,
-------------------------- 1996
1995 1996 (NOTE 12)
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......... $ 6,931,592 $ 5,483,515
Securities available-for-sale...... 14,974,430 25,503,049
Prepaid expenses and other current
assets............................ 20,080 256,892
------------ ------------
Total current assets................. 21,926,102 31,243,456
Property and equipment, net.......... 5,713,227 5,117,936
Notes receivable from officers, less
current portion..................... 221,722 172,698
Other assets......................... 187,244 467,603
------------ ------------
Total assets......................... $ 28,048,295 $ 37,001,693
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................... $ 1,057,428 $ 651,130
Accrued expenses................... 1,412,424 3,065,297
Current portion of long-term obli-
gations........................... 1,114,520 1,226,971
------------ ------------
Total current liabilities............ 3,584,372 4,943,398
Long-term obligations, less current
portion............................. 2,605,698 2,004,575
Commitments -- --
Shareholders' equity:
Preferred Stock:
Authorized shares--10,000,000:
Series A Convertible Preferred
Stock, no par value:
Designated shares--150,000 and
146,193.272 at December 31,
1995 and 1996, respectively
Issued and outstanding shares--
95,447.004 and 146,193.272 at
December 31, 1995 and 1996,
respectively (no shares pro
forma) (liquidation preference
$335 per share aggregating
$48,974,746 at December 31,
1996)......................... 30,496,204 47,366,204 $ --
Series B Convertible Preferred
Stock, no par value:
Designated shares--14,925.373
Issued and outstanding shares--
14,925.373 at December 31,
1996 (no shares pro forma)
(liquidation preference $335
per share aggregating
$5,000,000 at December 31,
1996)......................... -- 4,960,000 --
Series C Preferred Stock, no par
value:
Designated shares--100,000
No shares issued and
outstanding (liquidation
preference $1,000 per share).. -- -- --
Common Stock, no par value:
Authorized shares--100,000,000
Issued and outstanding shares--
4,933,410 and 4,943,472 at
December 31, 1995 and 1996,
respectively (9,728,438 shares
pro forma)...................... 51,481,481 51,810,160 104,136,364
Deficit accumulated during develop-
ment stage........................ (60,119,460) (74,082,644) (74,082,644)
------------ ------------ ------------
Total shareholders' equity........... 21,858,225 30,053,720 $ 30,053,720
------------ ------------ ============
Total liabilities and shareholders'
equity.............................. $ 28,048,295 $ 37,001,693
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 4,
1991 (DATE OF
YEAR ENDED DECEMBER 31, INCORPORATION)
---------------------------------------- TO DECEMBER 31,
1994 1995 1996 1996
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
Revenues:
Collaboration
agreements........... $ -- $ 100,000 $ 9,120,806 $ 9,220,806
Operating expenses:
Research and
development.......... 14,368,089 14,605,947 16,108,821 60,870,651
General and
administrative....... 5,283,263 6,144,650 7,601,796 24,743,279
------------ ------------ ------------ ------------
19,651,352 20,750,597 23,710,617 85,613,930
------------ ------------ ------------ ------------
Loss from operations.... (19,651,352) (20,650,597) (14,589,811) (76,393,124)
Other income (expense):
Investment income..... 616,223 1,167,369 1,174,219 3,973,759
Interest expense...... (464,154) (509,247) (512,597) (1,652,462)
------------ ------------ ------------ ------------
Net loss................ $(19,499,283) $(19,992,475) $(13,928,189) $(74,071,827)
============ ============ ============ ============
Pro forma (unaudited):
Net loss per share.... $ (1.69)
============
Shares used in
computation of net
loss per share....... 8,277,888
</TABLE>
See accompanying notes.
F-4
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK DEFICIT DEFERRED
--------------------------------------------- ACCUMULATED COMPENSATION
COMMON STOCK SERIES A SERIES B DURING AND TECHNOLOGY
---------------------- ----------------------- --------------------- DEVELOPMENT LICENSING
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STAGE COSTS TOTAL
--------- ----------- ----------- ----------- ---------- ---------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
December 1991
issuance of
common stock to
founders at
$0.04179 per
share (including
182,143 shares
contributed by
founders for
compensation and
technology)...... 1,914,313 $ 87,612 -- $ -- -- $ -- $ -- $(7,612) $ 80,000
April 1992
proceeds
received from
issuance of
shares at $11.20
per share and
57,143 warrants
at $0.07 each to
the chairman of
the Board of
Directors....... 178,572 2,004,000 -- -- -- -- -- -- 2,004,000
Net proceeds
from the
issuance of
common stock in
August through
December 1992
via private
placement equity
offering at
$17.50 per
share, net of
offering costs
of $3,467,352... 2,225,139 35,083,440 -- -- -- -- -- -- 35,083,440
Net loss for the
year ended
December 31,
1992............ -- -- -- -- -- -- (5,323,737) -- (5,323,737)
Fair value of
stock
contributed by
founders for
compensation and
technology...... -- -- -- -- -- -- -- 7,612 7,612
--------- ----------- ----------- ----------- ---------- ---------- ------------ ---------- ------------
Balance at
December 31,
1992............. 4,318,024 37,175,052 -- -- -- -- (5,323,737) -- 31,851,315
August 1993
Repurchase of
common stock at
$0.04179 per
share and July
1993
cancellation of
1,072 shares.... (61,415) (2,522) -- -- -- -- -- -- (2,522)
Net proceeds
from the
issuance of
common stock and
warrants in
October and
November 1993
via private
placement equity
offering at
$31.50 per unit,
net of offering
costs of
$1,486,383...... 438,540 12,326,885 -- -- -- -- -- -- 12,326,885
Net loss for the
year ended
December 31,
1993............ -- -- -- -- -- -- (15,328,143) -- (15,328,143)
--------- ----------- ----------- ----------- ---------- ---------- ------------ ---------- ------------
Balance at
December 31,
1993............. 4,695,149 49,499,415 -- -- -- -- (20,651,880) -- 28,847,535
Net proceeds
from the
issuance of
common stock and
warrants in
February 1994
via private
placement equity
offering at
$31.50 per unit,
net of offering
costs of
$85,823......... 25,001 701,677 -- -- -- -- -- -- 701,677
Proceeds from
stock options
exercised in
July 1994 at
$17.50 per
share........... 79 1,375 -- -- -- -- -- -- 1,375
Net loss for the
year ended
December 31,
1994............ -- -- -- -- -- -- (19,499,283) -- (19,499,283)
--------- ----------- ----------- ----------- ---------- ---------- ------------ ---------- ------------
Balance at
December 31,
1994............. 4,720,229 50,202,467 -- -- -- -- (40,151,163) -- 10,051,304
Net proceeds
from the
issuance of
Series A
convertible
preferred stock
in March through
June 1995 via
private
placement equity
offering at
$335.00 per
share, net of
offering costs
of $1,478,541... -- -- 95,447.004 30,496,204 -- -- -- -- 30,496,204
Exchange of
warrants for
common stock in
September 1995
valued at
$11.725 per
share........... 104,418 -- -- -- -- -- -- -- --
Issuance of
common stock for
purchased
research and
development in
October 1995 at
$11.725 per
share........... 98,574 1,155,750 -- -- -- -- -- -- 1,155,750
Proceeds from
issuance of
stock and stock
options
exercised in
February through
December 1995 at
$11.725 and
$17.50 per
share........... 10,189 123,264 -- -- -- -- -- -- 123,264
Net loss for the
year ended
December 31,
1995............ -- -- -- -- -- -- (19,992,475) -- (19,992,475)
Unrealized gains
on securities
available-for-
sale............ -- -- -- -- -- -- 24,178 -- 24,178
--------- ----------- ----------- ----------- ---------- ---------- ------------ ---------- ------------
Balance at
December 31,
1995............. 4,933,410 51,481,481 95,447.004 30,496,204 -- -- (60,119,460) -- 21,858,225
Net proceeds
from the
issuance of
Series A
convertible
preferred stock
in September and
October 1996 via
private
placement equity
offering at
$335.00 per
share, net of
offering costs
of $130,000..... -- -- 50,746.268 16,870,000 -- -- -- -- 16,870,000
Net proceeds
from the
issuance of
Series B
convertible
preferred stock
in November 1996
via private
placement equity
offering at
$335.00 per
share, net of
offering costs
of $40,000...... -- -- -- -- 14,925.373 4,960,000 -- -- 4,960,000
Exchange of
warrants for
common stock in
February 1996
valued at
$11.725 per
share........... 151 -- -- -- -- -- -- -- --
Proceeds from
stock options
exercised in
January through
November 1996 at
$11.725 per
share........... 1,974 23,121 -- -- -- -- -- -- 23,121
Proceeds from
common stock
warrants
exercised in May
1996 at $38.50
per share....... 7,937 305,558 -- -- -- -- -- -- 305,558
Net loss for the
year ended
December 31,
1996............ -- -- -- -- -- -- (13,928,189) -- (13,928,189)
Unrealized
losses on
securities
available-for-
sale............ -- -- -- -- -- -- (34,995) -- (34,995)
--------- ----------- ----------- ----------- ---------- ---------- ------------ ---------- ------------
Balance at
December 31,
1996............ 4,943,472 $51,810,160 146,193.272 $47,366,204 14,925.373 $4,960,000 $(74,082,644) $ -- $ 30,053,720
========= =========== =========== =========== ========== ========== ============ ========== ============
</TABLE>
See accompanying notes.
F-5
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 4,
1991 (DATE OF
YEAR ENDED DECEMBER 31, INCORPORATION)
---------------------------------------- TO DECEMBER 31,
1994 1995 1996 1996
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................ $(19,499,283) $(19,992,475) $(13,928,189) $(74,071,827)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and amor-
tization.............. 1,617,438 1,718,765 1,658,475 6,461,261
Noncash research and
development expense... -- 1,155,750 -- 1,155,750
Noncash interest ex-
pense................. -- -- -- 25,918
Noncash rent expense... 33,396 33,396 54,216 494,288
Investment premium am-
ortization............ 119,110 22,500 111,315 522,061
Changes in assets and
liabilities:
Prepaid expenses....... 166,123 (2,789) (236,812) (256,892)
Notes receivable from
officers.............. (11,022) (10,700) (46,200) (267,922)
Other assets........... (143,476) 9,208 (201,679) (483,604)
Accounts payable....... 330,197 329,525 (406,298) 651,130
Accrued expenses....... 906,428 (245,376) 1,652,873 3,065,297
------------ ------------ ------------ ------------
Total adjustments....... 3,018,194 3,010,279 2,585,890 11,367,287
------------ ------------ ------------ ------------
Net cash used in operat-
ing activities......... (16,481,089) (16,982,196) (11,342,299) (62,704,540)
INVESTING ACTIVITIES
Purchases of securities
available-for-sale..... (7,555,482) (13,165,743) (27,113,929) (76,026,027)
Proceeds from sales of
securities available-
for-sale............... 11,034,146 3,856,167 -- 14,890,313
Proceeds from maturities
of securities avail-
able-for-sale.......... 2,048,016 1,059,296 16,439,000 35,099,787
Purchase of property and
equipment.............. (1,654,517) (204,424) (1,046,640) (11,334,936)
Dispositions of property
and equipment.......... 114,993 36,476 -- 151,469
------------ ------------ ------------ ------------
Net cash provided by
(used in) investing ac-
tivities............... 3,987,156 (8,418,228) (11,721,569) (37,219,394)
FINANCING ACTIVITIES
Sales of common stock to
founders............... -- -- -- 80,000
Proceeds from borrowings
from shareholder....... -- -- -- 850,000
Sale of Series A Pre-
ferred Stock via pri-
vate placement, net of
offering costs......... -- 30,496,204 16,870,000 47,366,204
Sale of Series B Pre-
ferred Stock via pri-
vate placement, net of
offering costs......... -- -- 4,960,000 4,960,000
Sale of common stock via
private placements, net
of offering costs...... 701,677 67,000 -- 49,307,084
Repurchase of common
stock.................. -- -- -- (2,522)
Proceeds from common
stock options exer-
cised.................. 1,375 56,264 23,121 80,760
Proceeds from common
stock warrants exer-
cised.................. -- -- 305,558 305,558
Repayment of long-term
obligations............ (3,940,830) (2,954,434) (1,159,188) (8,471,269)
Change in deferred of-
fering costs........... (458,726) 458,726 -- --
Proceeds from the issu-
ance of long-term obli-
gations................ 3,515,334 1,800,000 616,300 10,931,634
------------ ------------ ------------ ------------
Net cash provided by
(used in) financing ac-
tivities............... (181,170) 29,923,760 21,615,791 105,407,449
------------ ------------ ------------ ------------
Net increase (decrease)
in cash and cash equiv-
alents................. (12,675,103) 4,523,336 (1,448,077) 5,483,515
Cash and cash equiva-
lents at beginning of
period................. 15,083,359 2,408,256 6,931,592 --
------------ ------------ ------------ ------------
Cash and cash equiva-
lents at end of peri-
od..................... $ 2,408,256 $ 6,931,592 $ 5,483,515 $ 5,483,515
============ ============ ============ ============
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of equipment
pursuant to capital
lease obligations...... $ -- $ -- $ 85,532 $ 362,425
============ ============ ============ ============
Conversion of convert-
ible debt and related
accrued interest into
common stock........... $ -- $ -- $ -- $ 875,918
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION
Cash paid during the pe-
riod for interest...... $ 476,845 $ 529,847 $ 514,534 $ 1,626,025
============ ============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Cell Therapeutics, Inc. (the "Company") focuses on the discovery,
development, and commercialization of small molecule drugs for the treatment
of cancer and inflammatory and immune diseases. The Company's principal
business strategy is to focus its development activities on therapeutic areas
that represent large market opportunities which are not adequately served by
existing therapies. The Company incorporated on September 4, 1991, but did not
commence operations until February 1992.
The Company operates in a highly regulated and competitive environment. The
manufacturing and marketing of pharmaceutical products require approval from
and are subject to ongoing oversight by the Food and Drug Administration in
the United States and by comparable agencies in other countries. Obtaining
approval for a new therapeutic product is never certain and may take several
years and involve expenditure of substantial resources. Competition in
researching, developing, and marketing pharmaceutical products is intense. Any
of the technologies covering the Company's existing products under development
could become obsolete or diminished in value by discoveries and developments
of other organizations.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary. All intercompany transactions and balances
are eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with maturities of
three months or less at the time acquired to be cash equivalents. Cash
equivalents represent short-term investments consisting of investment-grade
corporate and government obligations, carried at cost, which approximates
market value.
Securities Available-for-Sale
Management determines the appropriate classification of debt securities at
the time of purchase. Management currently classifies its investment portfolio
as available-for-sale and carries the securities at fair value based on quoted
market prices with unrealized gains and losses included within the deficit
accumulated during development stage. The amortized cost of debt securities in
this category is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization and accretion are included in
investment income. Realized gains and losses and declines in value judged to
be other than temporary on available-for-sale securities are included in
investment income. The cost of securities sold is based on the specific
identification method. Interest on securities classified as available-for-sale
is included in investment income.
Management of Credit Risk
The Company is subject to concentration of credit risk from its cash
investments. Under the Company's investment guidelines, credit risk is managed
by diversification of the investment portfolio and by the purchase of
investment-grade securities.
Collaboration Agreement Receivables and Revenues
Collaboration agreement receivables represent amounts earned, but not yet
collected, under collaboration and license agreements. Collaboration agreement
revenues are recognized as the earnings process is completed, based on the
provisions of each agreement.
F-7
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Property and Equipment
Property and equipment, including assets pledged as security in financing
agreements, are carried at cost, less accumulated depreciation and
amortization. Leasehold improvements are amortized over the lesser of the
useful life or the term of the applicable lease using the straight-line
method. Depreciation commences at the time assets are placed in service and is
computed using the straight-line method over the estimated useful lives of the
assets (three to five years).
Deferred Offering Costs
The Company records legal and other issuance costs related to its offerings
of stock as deferred offering costs until the offerings are completed and the
costs are netted against gross proceeds.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its employee stock options. Generally, stock compensation, if
any, is measured as the difference between the exercise price of a stock
option and the fair market value of the Company's stock at the date of grant,
which is then amortized over the related vesting period. The value of stock
options granted to consultants is recorded as an expense and amortized over
the lives of the respective contracts.
Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common stock equivalents from preferred stock,
stock options, and warrants are excluded from the computation as their effect
is antidilutive. Net loss per share for the years ended December 31, 1994,
1995 and 1996, and the number of shares used in the computation of the net
loss per share, are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net loss per share..................... $ (4.13) $ (4.19) $ (2.82)
========= ========= =========
Shares used in computation of net loss
per share............................. 4,716,399 4,771,247 4,939,388
========= ========= =========
</TABLE>
Pro Forma Net Loss Per Share
Unaudited pro forma net loss per share is computed based on the weighted
average number of shares of common stock outstanding plus the number of common
shares issuable upon conversion of all outstanding shares of Series A and
Series B Convertible Preferred Stock upon the closing of the Offering after
giving effect to certain anti-dilution adjustments discussed in Note 12.
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.
F-8
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications
Certain prior year items have been reclassified to conform to the current
year presentation.
2. SECURITIES AVAILABLE-FOR-SALE
Securities available-for-sale consist of the following as of December 31:
<TABLE>
<CAPTION>
1995
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government obliga-
tions...................... $ 2,026,138 $ 272 $ -- $ 2,026,410
Corporate obligations....... 12,924,114 29,639 (5,733) 12,948,020
----------- ------- ------- -----------
$14,950,252 $29,911 $(5,733) $14,974,430
=========== ======= ======= ===========
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES FAIR VALUE
----------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. Government obliga-
tions...................... $ 920,704 $ 1,214 $ -- $ 921,918
Corporate obligations....... 24,593,162 25,577 (37,608) 24,581,131
----------- ------- -------- -----------
$25,513,866 $26,791 $(37,608) $25,503,049
=========== ======= ======== ===========
</TABLE>
As of December 31, 1995 and 1996, the securities available-for-sale had
contractual maturities of less than one year. Expected maturities will differ
from contractual maturities because issuers of the securities may have the
right to prepay obligations without prepayment penalties.
3. PROPERTY AND EQUIPMENT
Property and equipment are composed of the following as of December 31:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Leasehold improvements.............................. $ 4,288,000 $ 4,296,136
Lab equipment....................................... 3,468,103 3,642,378
Furniture and office equipment...................... 2,577,024 3,441,253
----------- -----------
10,333,127 11,379,767
Less accumulated depreciation and amortization...... 4,619,900 6,261,831
----------- -----------
$ 5,713,227 $ 5,117,936
=========== ===========
</TABLE>
As of December 31, 1995 and 1996, furniture and office equipment included
$276,893 and $362,425, respectively, of equipment acquired under capitalized
leases. Accumulated depreciation related to this equipment totaled $147,545
and $217,179 at December 31, 1995 and 1996, respectively. Annual maturities of
the capital lease obligations for 1997 and 1998, respectively, approximate
$96,000 and $35,000.
4. EQUITY OFFERINGS
In 1992, the Company completed its first private placement equity offering.
Total gross proceeds amounted to $38,550,792, representing 2,225,139 shares of
the Company's common stock, including the required conversion of amounts
advanced (principal and interest of $850,000 and $25,918, respectively) from a
principal shareholder aggregating 50,053 shares.
F-9
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. EQUITY OFFERINGS (CONTINUED)
In 1993, the Company concluded a second round of equity financing through a
private offering of common stock and warrants at $31.50 per unit. Each unit
consisted of one share of common stock and a warrant to purchase one-half
share of common stock. The warrants had an exercise price of $38.50 per share
and expired in 1996. Total gross proceeds of the second round of equity
financing amounted to $13,813,268, representing 438,540 shares of common stock
and warrants to purchase 219,258 shares of common stock, including 21,256
shares of common stock and warrants to purchase 10,627 shares of common stock
sold to the sales agents and their affiliates (including an affiliated sales
agent, whose chief executive officer was a principal shareholder of the
Company).
Offering costs related to the first and second offerings included $2,052,268
and $228,982, respectively, paid to the affiliated sales agent. In connection
with the offerings, the sales agents received warrants to purchase 215,769
shares of common stock at $17.50 per share, expiring in 1997 (including
warrants to purchase 167,800
shares of common stock issued to the affiliated sales agent) and warrants to
purchase 42,423 shares of common stock at $31.50 per share, expiring in 1998
(including warrants to purchase 7,538 shares of common stock issued to the
affiliated sales agent).
In 1994, the Company sold additional units of common stock and warrants
under terms equivalent to those of the second round of equity financing. The
Company received gross proceeds of $787,500, representing 25,001 shares of
common stock and warrants to purchase 12,500 shares of common stock at $38.50
per share, which expired in 1996. Offering costs included $28,613 paid to the
affiliated sales agent. In addition, the sales agents received warrants to
purchase 2,500 shares of common stock at $31.50 per share, expiring in 1999
(including warrants to purchase 1,071 shares of common stock issued to the
affiliated sales agent).
In 1995, the Company concluded a third round of equity financing through a
private offering of Series A Convertible Preferred Stock at $335 per share.
Total gross proceeds of the offering amounted to $31,974,745, representing
95,447.004 shares of Series A Convertible Preferred Stock. In 1996, the
Company concluded a fourth round of equity financing through a private
offering of Series A Convertible Preferred Stock at $335 per share. Total
gross proceeds of the offering amounted to $17,000,000, representing
50,746.268 shares of Series A Convertible Preferred Stock. Holders of Series A
Convertible Preferred Stock have preferential rights to noncumulative
dividends ($33.50 per share per annum) when and if declared by the Board of
Directors, and a liquidation preference of $335 per share. Each share of
Series A Convertible Preferred Stock is convertible into 29.6986 shares of
common stock at an adjusted conversion price of $11.28 per share (the
"Conversion Price"), and is automatically converted into common stock upon the
occurrence of certain events, including the closing of an initial public
offering of the Company's common stock at a price per share of not less than
$17.50 and an aggregate offering price of not less than $20 million. The
shares of common stock issuable upon conversion of the Series A Convertible
Preferred Stock have certain registration rights. The Series A Convertible
Preferred Stock has the right to vote with the common stock on an as-converted
basis and, voting as a separate class, is entitled to elect one director. As
of December 31, 1996, the Company had reserved 4,341,704 shares of common
stock for issuance upon the conversion of the Series A Convertible Preferred
Stock. See Note 12.
In 1996, the Company sold 14,925.373 shares of Series B Convertible
Preferred Stock to Johnson & Johnson Development Corporation at $335 per share
in a private placement. Total gross proceeds of the sale amounted to
$5,000,000. The Series B Convertible Preferred Stock has the same rights,
preferences and conversion features as the Series A Convertible Preferred
Stock, but is subordinate to it with respect to payment of dividends and
liquidation preference. The shares of common stock issuable upon conversion of
the Series B Convertible Preferred Stock have certain registration rights. The
Series B Convertible Preferred Stock has the right to vote with the common
stock on an as-converted basis. As of December 31, 1996, the Company had
reserved 443,262 shares of common stock for issuance upon conversion of the
Series B Convertible Preferred Stock. See Notes 11 and 12.
F-10
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. EQUITY OFFERINGS (CONTINUED)
In November 1996, the Board of Directors approved a shareholder rights plan
whereby a Right attaches to each share of common stock. Upon the occurrence of
certain acquisition related events, each Right entitles the holder of each
outstanding share of common stock to purchase one one-thousandth of a share (a
"Unit") of Series C Preferred Stock at $175 per Unit, subject to adjustment.
Upon exercise, each holder of a Right will have the right to receive value
equal to two times the exercise price of the Right. A total of 100,000 shares
of Series C Preferred Stock are reserved for issuance upon exercise of the
Rights.
5. CONSULTING AND EMPLOYMENT AGREEMENTS
Directors, Officers, and Employees
The Company has employment agreements with its President and Chief Executive
Officer and one other founding officer. The agreements expire in 1999 and
1998, respectively, and provide for annual base salaries (approximately
$692,000 in the aggregate as of December 31, 1996), minimum annual and cost-
of-living increases, and discretionary incentive bonus awards.
In December 1993, the Board of Directors authorized a loan of $200,000 to
the Company's President and Chief Executive Officer. The loan accrues interest
at 5.35%. On each of December 17, 1997, 1998, and 1999, the Company shall
forgive one-third of the principal amount of the loan together with accrued
interest. The portion of this loan which is to be forgiven in 1997 is included
in other current assets. Forgiveness of amounts remaining due under the loan
will be forfeited upon certain termination-related circumstances and will be
accelerated upon certain events, including a change in ownership of the
Company, or upon the Company's attaining a minimum public market
capitalization. The loan is secured by 5,715 shares of common stock.
In 1992, the Company granted its then chairman warrants to purchase 57,143
shares of common stock at $17.50 per share.
In 1994, the Company authorized a non-interest bearing loan of up to
$150,000 to its Executive Vice President, Product Development in connection
with relocation. In 1995 and 1996, $145,000 was advanced under the terms of
the loan, of which $40,000 and $57,000 was forgiven and treated as
compensation expense in 1995 and 1996, respectively.
In 1996, the Company advanced a $35,000 non-interest bearing loan to its
Executive Vice President, Marketing and Business Development in connection
with his relocation. The Company shall forgive one-half of the loan on each of
April 8, 1997 and 1998. The portion of this loan to be forgiven in 1997 is
included in other current assets.
The Company has also entered into severance agreements with certain of its
officers having terms of one or two years.
In addition to the employment and severance agreements with the corporate
officers discussed above, the Company has entered into employment agreements
with certain employees, whose employment agreement terms generally range from
three to four years. The employment agreements can be terminated with cause,
as defined in the agreements, upon 30 days' notice.
Advisory Boards
The Company has entered into consulting agreements with the members of its
Scientific and Clinical Advisory Boards ("Advisory Boards") providing for
aggregate annual fees of approximately $108,000, the issuance of 22,860 shares
of common stock (a component of the 296,429 pool shares discussed in Note 8)
and options to purchase 88,571 shares of common stock at $11.725 to $17.50 per
share, all of which vest ratably over two to three years from the date of
appointment. The consulting agreements with members of the Advisory Boards are
cancelable upon 30 days' notice.
F-11
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. CONTRACTUAL ARRANGEMENTS AND COMMITMENTS
Licensed Technology
In March 1992, the Company entered into agreements with the Fred Hutchinson
Cancer Research Center ("FHCRC") under the terms of which the Company has
received worldwide licenses and options to technology, or technology claimed,
for five U.S. patent applications. The Company paid initial license fees
totalling $100,000 and issued 76,572 shares of common stock valued at $3,200
to the FHCRC for such technology. The initial license fee and value of the
stock granted to the FHCRC were expensed as in-process research and
development. The Company is obligated to pay royalties on revenues resulting
from future sales of products employing the technology and on revenues
received from sublicenses for the technology, with minimum annual royalties of
$50,000 prior to, and $100,000 after, the first commercial sale of such
products. The agreements are for a term equal to the later of 15 years or the
expiration of the last issued patent included within the licensed technology,
unless terminated earlier for certain specified events, including the failure
of the Company to take reasonable efforts to engage in research and
development with respect to the licensed technology.
Facilities Lease
The Company has executed noncancelable operating leases for office and
laboratory space that generally expire the first quarter of 2003, with two
five-year renewal options at the then-current market rates. The lessor
provided $450,000 for leasehold improvements and rent concessions, which is
being amortized over the initial lease term. Rent expense amounted to
$977,778, $993,471, and $995,866 for the years ended December 31, 1994, 1995,
and 1996, respectively.
Future minimum annual rental payments under the leases approximate the
following for the years ended December 31:
<TABLE>
<S> <C>
1997.......................... $1,014,000
1998.......................... 1,133,000
1999.......................... 1,143,000
2000.......................... 1,143,000
2001.......................... 1,143,000
Thereafter.................... 1,239,000
----------
$6,815,000
==========
</TABLE>
7. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Master financing agreements:
Due December 1998, monthly payments of $55,827,
including interest at 14.7%....................... $1,616,295 $1,154,281
Due December 1998, monthly payments of $45,820,
including interest at 17.6%....................... 1,274,342 921,289
Due December 1996, monthly payments of $21,944,
including interest at 17.6%....................... 239,847 --
Due August 1999, monthly payments of $20,523,
including
interest at 16.1%................................. -- 531,336
Capital lease obligations............................ 149,667 130,352
Deferred rent........................................ 440,067 494,288
---------- ----------
3,720,218 3,231,546
Less current portion................................. 1,114,520 1,226,971
---------- ----------
$2,605,698 $2,004,575
========== ==========
</TABLE>
F-12
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LONG-TERM OBLIGATIONS (CONTINUED)
In December 1994, the Company entered into a master financing agreement with
a financing company, whereby the Company borrowed $2,015,334 in exchange for
granting the lessor a security interest in approximately the same net book
value of specific fixed assets and warrants to purchase 12,432 shares of
common stock at $12.8975 per share.
In July 1995, the Company entered into master financing agreements with
another finance company, whereby the Company borrowed $1,450,000 over 42
months and $350,000 over 18 months. In June 1996, the Company borrowed an
additional $616,300 over 38 months from this finance company. For each
borrowing, the Company granted the lessor a security interest in approximately
the same net book value of specified fixed assets.
Annual maturities of the master financing agreements for 1997 through 1999,
respectively, approximate $1,128,000, $1,323,000, and $155,000.
8. CAPITAL STOCK
In connection with the formation of the Company, certain shareholders
contributed 296,429 shares of common stock to a pool to be issued to the
FHCRC, the Scientific Advisory Board ("SAB"), and key employees. (Refer to
Notes 5 and 6 with regards to the stock issued to the SAB and the FHCRC.) From
this pool, 76,572, 22,860, 49,282, and 114,286 shares were distributed to the
FHCRC, SAB, key employees and its former chairman of the Board of Directors,
respectively. As of December 31, 1992, 33,429 undistributed shares reverted
back to the contributing shareholders. The shares issued to key employees were
subject to forfeiture and cancellation in the event such individuals'
employment agreements were terminated. The restrictions on the stock expired
in 1996.
In August 1993, the Company repurchased 60,343 shares of common stock at
$0.04179 per share from one of its founders pursuant to a stock repurchase
agreement.
Common Stock Reserved
A summary of common stock reserved for issuance is as follows as of December
31:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Series A Preferred Stock.......................... 2,727,023 4,341,704
Stock Options..................................... 824,840 1,330,009
Series B Preferred Stock.......................... -- 443,262
Employee Stock Purchase Plan...................... -- 285,714
Warrants.......................................... 119,050 77,907
--------- ---------
3,670,913 6,478,596
========= =========
</TABLE>
9. STOCK OPTIONS AND WARRANTS
Stock Options
In 1994, shareholders approved the 1994 Equity Incentive Plan (the "1994
Plan") in replacement of the 1992 Stock Option Plan (the "1992 Plan"). The
1994 Plan provides for (a) the grant of incentive stock options (with terms
not to exceed ten years), nonstatutory stock options and stock appreciation
rights, (b) the award of stock bonuses, (c) the sale of stock, and (d) any
other equity-based or equity-related awards which the Plan Administrator
determines to be consistent with the purpose of the 1994 Plan and the
interests of the Company. Option-vesting schedules are specified by the Plan
Administrator. The number of shares available for future grant
F-13
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
under the 1994 Plan is the number of shares of common stock available for
issuance under the 1992 Plan at the time of approval of the 1994 Plan
(177,993), plus such shares for which options previously granted under the
1992 Plan may expire, terminate, or be canceled. The 1994 Plan also provides
for the automatic grant of nonstatutory options to nonemployee directors.
In May 1995 and April 1996, shareholders approved share increases of 246,887
and 507,143, respectively, in the number of shares reserved for issuance under
the 1994 Plan. As of December 31, 1996, the Company had reserved 1,330,009
shares of common stock for issuance under the 1992 and 1994 Plans, of which
488,336 were exercisable at an average price of $11.85 per share, and 121,401
were available for future grant.
In April 1995, the Board of Directors approved the repricing of outstanding
options to $11.725 per share by exchanging such outstanding options for a
fewer number of options pursuant to a Black-Scholes formula. Subsequently,
options for 434,664 shares, with prices of $17.50 and $31.50 per share, were
exchanged for 377,121 options with a price of $11.725 per share. All other
terms and conditions of the options remained unchanged. These amounts have
been included as granted and canceled options in the summary activity table as
shown below. The pro forma net loss under SFAS 123 noted below includes
$672,884 and $143,707 in 1995 and 1996, respectively, related to this option
repricing.
A summary of the activity related to the 1992 and 1994 Plans follows:
<TABLE>
<CAPTION>
SHARES AVERAGE
UNDER EXERCISE PRICE
OPTION PER SHARE
--------- --------------
<S> <C> <C>
Balance December 31, 1993, unexercised............. 404,692 $20.37
Granted.......................................... 61,970 31.50
Canceled......................................... (10,923) 23.14
Exercised........................................ (79) 17.50
---------
Balance December 31, 1994, unexercised............. 455,660 21.84
Granted.......................................... 815,086 11.725
Canceled......................................... (504,499) 21.42
Exercised........................................ (4,653) 12.11
---------
Balance December 31, 1995, unexercised............. 761,594 11.81
Granted.......................................... 505,923 11.725
Canceled......................................... (56,935) 11.83
Exercised........................................ (1,974) 11.725
---------
Balance December 31, 1996, unexercised............. 1,208,608 11.78
=========
</TABLE>
The weighted average fair value of options granted during 1996 was $2.34.
Exercise prices for options outstanding at December 31, 1996 range from
$11.725 to $17.50 per share, with an average remaining maximum term of
approximately 8.5 years.
In 1996, the Company adopted the accounting provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). SFAS 123 encourages, but does not require, entities
to adopt the fair value of accounting for their stock-based compensation
plans. Under this method, compensation cost for stock-based compensation plans
is measured at the grant date based on the fair value of the award and is
recognized over the vesting period. Fair value is determined using minimum
value option pricing models that take into account (1) the stock price at the
grant date, (2) the exercise price, (3) a four-year expected life of the
options, (4) no expected dividends, and (5) risk free interest rates ranging
from 5.4% to 7.8%, and 5.2%
F-14
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
to 6.2%, during 1995 and 1996, respectively, over the expected life of the
options. In accordance with the provisions of SFAS 123, the Company applies
Accounting Principles Board Opinion No. 25 and related interpretations in
accounting for its stock option plans and, accordingly, does not recognize
compensation cost for options granted with exercise prices equal to or greater
than fair value. Although not reflective of the effects of reported net income
in future years until the rules of SFAS 123 are applied to all outstanding non
vested options, if the Company elected to recognize compensation cost based on
the fair value of the options granted at grant date as prescribed by SFAS 123,
net loss and pro forma net loss per share would have been increased as follows
for the years ended December 31:
<TABLE>
<CAPTION>
1995 1996
-------------------------- --------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss................ $(19,992,475) $(20,812,869) $(13,928,189) $(14,536,137)
Historical net loss per
share.................. $ (4.19) $ (4.36) $ (2.82) $ (2.94)
</TABLE>
Historical net loss per share is computed as described in Note 1.
In December 1996, the Board of Directors approved the grant of an aggregate
of 114,280 ten year fully vested nonstatutory options to non employee
directors at an exercise price of $11.725 per share, subject to approval by
shareholders at the 1997 Annual Meeting of Shareholders. These options will be
recorded as granted upon shareholder approval. The Company will record
compensation expense on the date of shareholder approval for the amount by
which fair market value at that date exceeds the exercise price.
Warrants
During 1995, the Company offered to exchange shares of common stock for
outstanding warrants to purchase common stock, issuing 104,569 shares of
common stock in exchange for warrants to purchase 443,353 shares of common
stock. During 1996, the Company concluded its offer to exchange shares of
common stock for outstanding warrants of common stock, issuing 151 shares of
common stock in exchange for warrants to purchase 377 shares of common stock.
A summary of the warrants to purchase common stock which remain outstanding
(and for which common stock is reserved for issuance) is as follows as of
December 31, 1996:
<TABLE>
<CAPTION>
SHARES OF
COMMON PRICE PER SHARE OF
STOCK COMMON STOCK EXPIRATION
--------- ------------------ ----------
<S> <C> <C>
68,901 $17.50 1997
7,935 31.50 1998
1,071 31.50 1999
------
77,907
======
</TABLE>
Employee Stock Purchase Plan
In April 1996 the shareholders approved the adoption of the 1996 Employee
Stock Purchase Plan (the "Purchase Plan"). A maximum of 285,714 shares of the
Company's common stock will be reserved for purchase under the Purchase Plan,
under which eligible employees may purchase a limited number of shares of the
Company's common stock at 85% of fair market value. As of December 31, 1996,
no shares of the Company's common stock have been purchased under the Purchase
Plan.
F-15
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires an asset and liability approach
for financial accounting and reporting for income taxes. The standard requires
that deferred tax liabilities and assets be adjusted currently for effects of
changes in tax laws or rates.
As of December 31, 1996, the Company had net operating tax loss
carryforwards of approximately $70 million and research and development credit
carryforwards of approximately $1.8 million. The carryforwards begin to expire
in the year 2007. Due to prior rounds of equity financing (see Note 4) and the
Company's proposed initial public offering of common stock (see Note 12), the
Company has incurred and will incur "ownership changes" pursuant to applicable
regulations in effect under the Internal Revenue Code of 1986, as amended.
Accordingly, the Company's use of losses incurred through the date of these
ownership changes will be limited during the carryforward period. The Company
estimates that use of the loss carryforwards would be limited to approximately
$8 million per year. To the extent that any single year loss is not utilized
to the full amount of the limitation, such unused loss is carried over to
subsequent years until the earlier of its utilization or the expiration of the
relevant carryforward period.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The Company has
recognized a valuation allowance equal to the deferred tax assets due to the
uncertainty of realizing the benefits of the assets. The Company's valuation
allowance increased $7,332,000, $6,928,000 and $4,785,000 during 1994, 1995
and 1996, respectively. Significant components of the Company's deferred tax
liabilities and assets as of December 31 are as follows:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards................. $19,535,000 $23,914,000
Research and development tax credit
carryforwards................................... 1,667,000 1,752,000
Accruals on financial statements in excess of tax
returns......................................... 301,000 444,000
Depreciation in financial statements in excess of
tax returns..................................... 149,000 327,000
----------- -----------
Net deferred tax assets............................ $21,652,000 $26,437,000
=========== ===========
Valuation allowance for deferred tax assets........ $21,652,000 $26,437,000
=========== ===========
</TABLE>
11. SIGNIFICANT AGREEMENTS
On March 7, 1995, the Company and BioChem Therapeutic Inc. ("BioChem"), a
wholly owned subsidiary of BioChem Pharma, Inc., signed collaboration and
supply agreements (the "BioChem Collaboration Agreement" and the "BioChem
Supply Agreement", respectively). The BioChem Collaboration Agreement grants
an exclusive license to enable BioChem to seek Canadian regulatory approval
for, and to use and sell, the Company's Lisofylline and/or CT-2584 compounds
(and compositions thereof) (collectively, the "CTI Compounds") in Canada.
Under the BioChem Collaboration Agreement, BioChem purchased 7,462.687
shares of Series A Convertible Preferred Stock for $2,500,000 in the Company's
third private equity offering. See Note 4. In addition, the Company is
entitled to receive payments for each of the CTI Compounds upon the
satisfaction of specified product development milestones and royalties on all
sales, if any. The BioChem Collaboration Agreement terminates upon the
expiration of the last to expire patents covering the CTI Compounds or, absent
a patent, upon the tenth anniversary of the first commercial sale of such CTI
Compound. The Company recorded milestone payments of $100,000 and $250,000
under the BioChem Collaboration Agreement in 1995 and 1996, respectively.
F-16
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SIGNIFICANT AGREEMENTS (CONTINUED)
Under the BioChem Supply Agreement, the Company is to supply to BioChem the
CTI Compounds at a percentage mark-up above cost. The BioChem Supply Agreement
terminates 20 years from the date of termination of the BioChem Collaboration
Agreement with respect to each of the CTI Compounds.
In October 1995, the Company purchased all of the intellectual property of
Lipomed Corporation ("Lipomed") from its shareholders and expensed the
purchase price as in-process research and development expense. The purchase
price was $1,155,750 consisting of 98,574 shares of common stock. The
agreement also provides for a possible future payment to Lipomed of $100,000
upon the occurrence of certain events.
In February 1996, the Company entered into an agreement with Schering AG
("Schering") pursuant to which, among other things, the Company and Schering
would collaborate in the funding, research, development and commercialization
of Lisofylline and CT-2584 on the terms and conditions specified therein. Upon
execution of the agreement, Schering paid the Company a $3,000,000
nonrefundable signing fee. The remainder of the agreement was contingent upon
Schering finding the clinical trial results and related data from the
Company's Phase II bone marrow transplantation ("BMT") trial acceptable within
thirty days after its receipt. The Company furnished Schering with this data
in late February 1996. On April 2, 1996, after a mutual extension of the
thirty-day review period, Schering informed the Company that it did not wish
to activate the agreement based on, among other factors, (i) its view that one
of the endpoints of the Phase II BMT trial, white blood cell recovery, was not
met and (ii) its view that the trial data regarding mortality rate and
incidence of serious and fatal infection were difficult to interpret and that,
as a result, Schering could not determine that the data was meaningful.
In November 1996, the Company entered into a collaboration and license
agreement with Ortho Biotech Inc. and the R.W. Johnson Pharmaceutical Research
Institute (a division of Ortho Pharmaceutical Corporation) each of which are
wholly-owned subsidiaries of Johnson & Johnson (collectively, "Johnson &
Johnson") for the joint development and commercialization of Lisofylline. Upon
execution of the collaboration agreement, Johnson & Johnson paid to the
Company a $5,000,000 nonrefundable license fee. In addition, Johnson & Johnson
Development Corporation ("JJDC"), a wholly-owned subsidiary of Johnson &
Johnson, purchased 14,925.373 shares of the Company's newly issued Series B
Convertible Preferred Stock at $335 per share for an aggregate purchase price
of $5,000,000. See Note 4.
Under the collaboration agreement, the Company will be responsible for
development of Lisofylline in the United States. The Company will also be
responsible for the manufacture of Lisofylline for development and
commercialization purposes until November 1999, and Johnson & Johnson will be
responsible for the manufacture of Lisofylline thereafter, unless Johnson &
Johnson elects to assume such responsibility prior to such date. Johnson &
Johnson has agreed to fund 60% of the Company's budgeted development expenses
incurred in connection with obtaining regulatory approval for Lisofylline in
the United States. For each of 1997 and 1998 Johnson & Johnson has agreed,
subject to certain termination rights, to fund up to $12,000,000 of the
Company's budgeted development expenses per year. Any development expenses in
excess of such currently budgeted agreed upon amounts will be funded solely by
the Company unless otherwise mutually agreed. Johnson & Johnson will be
responsible for obtaining regulatory approval for Lisofylline for markets
outside of the United States and Canada at its own expense. The Company
recorded $870,806 of collaboration agreement revenues related to the
reimbursement of development expenses by Johnson & Johnson in 1996.
The Company and Johnson & Johnson will co-promote Lisofylline in the United
States and each will share equally in any resulting operating profits and
losses. Although the Company and Johnson & Johnson will co-promote Lisofylline
in the United States, Johnson & Johnson will have primary responsibility for
commercializing Lisofylline. Johnson & Johnson will have the exclusive right
to develop and market Lisofylline, at its own expense, for markets outside of
the United States and Canada, subject to specified royalty payments
F-17
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SIGNIFICANT AGREEMENTS (CONTINUED)
to the Company. The Company will receive additional equity, license, milestone
and similar payments under the agreement if certain milestones are achieved in
the development and commercialization of Lisofylline.
The collaboration with Johnson & Johnson initially covers the development of
Lisofylline to prevent or reduce the toxic side effects among cancer patients
receiving high dose radiation and/or chemotherapy followed by BMT (the "BMT
Indication") through December 31, 1998. The collaboration also covers the
development of Lisofylline for the treatment of patients with acute
myelogeneous leukemia ("AML") undergoing high dose chemotherapy (the "AML
Indication") through June 30, 1997. Johnson & Johnson has an option to
continue to participate in the development of Lisofylline for the AML
Indication following the completion of the Company's ongoing Phase II AML
trial. Johnson & Johnson also has certain options to expand the collaboration
to include the development of Lisofylline for any other indication for which
Lisofylline is being developed by the Company. In the event that Johnson &
Johnson exercises any such option, it would be required to fund 60% of the
Company's budgeted development expenses incurred in connection with the
development of Lisofylline for such indication, including expenses incurred
prior to the exercise of such option, and would also be required to pay
additional license fees and milestone payments to the Company. Thereafter, any
development expenses in excess of the then agreed-upon budgeted amounts for
any such additional indication would be funded solely by Johnson & Johnson
unless otherwise mutually agreed. If Johnson & Johnson does not exercise such
option with respect to any such indication, the Company would be free to
develop Lisofylline for such indication either on its own or in collaboration
with third parties. Johnson & Johnson also has the option to sponsor research
at the Company with respect to discovering compounds structurally related to
Lisofylline.
In connection with the execution of the collaboration agreement, JJDC, a
wholly-owned subsidiary of Johnson & Johnson, has granted to the Company an
option (the "Johnson & Johnson Option") to sell to JJDC a number of shares of
common stock equal to not more than ten percent of the number of shares of
common stock sold by the Company at the initial closing of its currently
proposed initial public offering, at a price per share equal to the initial
public offering price in such proposed offering. See Note 12.
12. SUBSEQUENT EVENTS
Supply Agreement
In January 1997, the Company entered into a supply agreement with ChiRex,
Ltd. ("ChiRex"), a British manufacturer of pharmaceutical intermediates and
active ingredients, for the manufacture and supply of Lisofylline and
corresponding intermediate compounds. Under the terms of the agreement, ChiRex
will manufacture and supply Lisofylline bulk drug product and a key
intermediate compound in sufficient quantities to meet the Company's
requirements for ongoing and future clinical trials and commercial
requirements during launch and commercialization. The agreement will expire on
December 31, 2001, but may be terminated by the Company upon 12 months'
written notice prior to such date.
Initial Public Offering and Related Events
On January 23, 1997, 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 initial public offering of its common
stock (the "Offering"). In connection with the Offering, the Company's Board
of Directors approved a reverse stock split of the outstanding shares of
common stock on the basis of one new share of common stock for every three and
one-half outstanding shares of common stock. The reverse stock split was
approved by the shareholders on March 3, 1997, and became effective when an
amendment to the Company's Restated Articles of Incorporation was filed with
the Secretary of State of the State of Washington on March 14, 1997. All
outstanding common and common equivalent shares and per-share amounts in the
accompanying financial statements and related notes to financial statements
have been retroactively adjusted to give effect to the reverse stock split.
F-18
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. SUBSEQUENT EVENTS (CONTINUED)
In addition, in connection with the Offering the Company received the
consent of the holders of the Convertible Preferred Stock to the automatic
conversion of all of the outstanding shares of Convertible Preferred Stock
upon the closing of the Offering. Upon the closing of Offering, all of the
outstanding shares of Series A Convertible Preferred Stock will automatically
convert into 4,341,704 shares of common stock and all of the outstanding
shares of Series B Convertible Preferred Stock will automatically convert into
443,262 shares of common stock (in each case after giving effect to certain
anti-dilution adjustments of the conversion price as a result of the closing
of the Offering at an initial public offering price below $11.725 per share).
Unaudited pro forma shareholders' equity at December 31, 1996, as adjusted for
the assumed conversion of the Series A and Series B Convertible Preferred
Stock, is set forth in the accompanying balance sheet.
On January 23, 1997, the Company's Board of Directors authorized the Company
to exercise the Johnson & Johnson Option in full. Upon the exercise of the
Johnson & Johnson Option, JJDC will be committed to purchase, in a private
placement that will occur concurrent with the closing of the Offering, 300,000
shares of common stock at an aggregate purchase price of $3.0 million,
assuming the sale of 3,000,000 shares of common stock at the closing of the
Offering at an initial public offering price of $10.00 per share. See Note 11.
F-19
<PAGE>
================================================================================
No dealer, salesperson or any other person has been authorized to give any
information or make any representation not contained in this Prospectus in
connection with the offer made by this Prospectus and, if given or made, such
information or representation must not be relied upon as having been
authorized by the Company or the Underwriters. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any of the
securities offered hereby by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation. Neither the delivery of this Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that the information herein is correct as of any time subsequent to the date
of this Prospectus or that there has been no change in the affairs of the
Company since such date.
------------
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 6
Use of Proceeds.......................................................... 16
Johnson & Johnson Stock Purchase......................................... 16
Dividend Policy.......................................................... 17
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Financial Data.................................................. 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 23
Management............................................................... 43
Certain Transactions..................................................... 56
Principal Shareholders................................................... 58
Description of Capital Stock............................................. 61
Shares Eligible for Future Sale.......................................... 66
Underwriting............................................................. 68
Legal Matters............................................................ 70
Experts.................................................................. 70
Available Information.................................................... 70
Index to Consolidated Financial Statements............................... F-1
</TABLE>
================================================================================
================================================================================
3,000,000 Shares
[LOGO OF CELL THERAPEUTICS, INC.]
Cell Therapeutics, Inc.
Common Stock
-----------------------
PROSPECTUS
March 21, 1997
-----------------------
UBS Securities
Montgomery Securities
Raymond James & Associates, Inc.
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the
sale of the Common Stock being registered. All the amounts shown are estimates
except for the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee............................................ $ 16,728
NASD Filing Fee................................................. 6,020
Nasdaq National Market Listing Fee.............................. 50,000
Transfer Agent and Registrar Fees and Expenses.................. 12,500
Legal Fees and Expenses......................................... 415,000
Printing and Engraving Expenses................................. 175,000
Accounting Fees and Expenses.................................... 125,000
Blue Sky Fees and Expenses...................................... 7,500
Miscellaneous Expenses.......................................... 42,252
--------
TOTAL......................................................... $850,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 23B.08.500 through 23B.08.600 of the Washington Business
Corporation Act (the "WBCA") authorize a court to award, or a corporation's
board of directors to grant, indemnification to directors and officers on
terms sufficiently broad to permit indemnification under certain circumstances
for liabilities arising under the Securities Act of 1933, as amended (the
"Securities Act"). Article IX of the Registrant's Restated Bylaws (Exhibit 3.7
hereto) provides for indemnification of the Registrant's directors, officers,
employees and agents to the maximum extent permitted by Washington law. The
directors and officers of the Registrant also may be indemnified against
liability they may incur for serving in such capacity pursuant to a liability
insurance policy maintained by the Company for such purpose.
Section 23B.08.320 of the WBCA authorizes a corporation to limit a
director's liability to the corporation or its shareholders for monetary
damages for acts or omissions as a director, except in certain circumstances
involving intentional misconduct, knowing violations of law or illegal
corporate losses or distributions, or any transaction from which the director
personally receives a benefit in money, property or services to which the
director is not legally entitled. Article VI of the Registrant's Restated
Articles of Incorporation (Exhibit 3.1 hereto) contains provisions
implementing, to the fullest extent permitted by Washington law, such
limitations on a director's liability to the Registrant and its shareholders.
The Registrant has entered into an indemnification agreement with each of
its executive officers and directors in which the Registrant agrees to hold
harmless and indemnify the officer or director to the fullest extent permitted
by Washington law. The Registrant agrees to indemnify the officer or director
against any and all losses, claims, damages, liabilities or expenses incurred
in connection with any actual, pending or threatened action, suit, claimor
proceeding, whether civil, criminal, administrative or investigative and
whether formal or informal, in which the officer or director is, was or
becomes involved by reason of the fact that the officer or director is or was
a director, officer, employee, trustee or agent of the Registrant or any
related company, partnership or enterprise, including service with respect to
an employee benefit plan, whether the basis of such proceeding is alleged
action (or inaction) by the officer or director in an official capacity and
any action, suit, claim or proceeding instructed by or at the direction of the
officer or director unless such action, suit, claim or proceeding is or was
authorized by the Registrant's Board of Directors. No indemnity pursuant to
the indemnification agreements shall be provided by the Registrant on account
of any suit in which a final, unappealable judgment is rendered against the
officer or director for an accounting of profits made from the
II-1
<PAGE>
purchase or sale by the officer or director of securities of the Registrant in
violation of the provisions of Section 16(b) of the Securities Exchange Act of
1934, as amended, and amendments thereto, or for damages that have been paid
directly to the officer or director by an insurance carrier under a policy of
directors' and officers' liability insurance maintained by the Registrant.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant
and its officers and directors, and by the Registrant of the Underwriters, for
certain liabilities arising under the Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth below is certain information as to all securities issued by the
Company since March 1, 1994 which were not registered under the Securities
Act. As to all such securities except those issued in connection with stock
splits, conversions and exchanges (as to which there was no "sale" within the
meaning of the Securities Act), exemption was claimed under Section 4(2) of
the Securities Act, or Regulation D promulgated thereunder, as transactions by
an issuer not involving a public offering. 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. The information below
gives effect to a 1-for-2 reverse stock split effected in February 1994 and a
1-for-3 1/2 reverse stock split which was effected in March 1997.
(1) In December 1994 the Registrant issued warrants to purchase 12,432
shares of Common Stock at an initial exercise price of $15.40 per share to
Aberlyn Capital Management Limited Partnership in connection with an
equipment lease transaction. The exercise price of such warrants was
subsequently reduced to $12.8975 per share. Such warrants were subsequently
exchanged for 7,228 shares of Common Stock in the transaction described in
paragraph (4) below.
(2) Between March 1995 and April 1995 the Registrant sold an aggregate of
76,789.5116 shares of Series A Convertible Preferred Stock to a group of
accredited investors for cash in the aggregate of $25,724,485. Each share
of Series A Convertible Preferred Stock will automatically convert into
28.5714 shares of Common Stock upon the closing of this Offering.
(3) In June 1995 the Registrant sold an aggregate of 18,657.4924 shares
of Series A Convertible Preferred Stock to a group of accredited investors
consisting of Kummell Investments Limited, The Phoenix Partners II Limited
Partnership and The Phoenix Partners III Limited Partnership, for cash in
the aggregate of $6,250,260. Each share of Series A Convertible Preferred
Stock will automatically convert into 28.5714 shares of Common Stock upon
the closing of this Offering.
(4) In September 1995 the Registrant issued (i) 5,612 shares of Common
Stock in exchange for warrants to purchase 190,992 shares of Common Stock
at an exercise price of $38.50 per share which were issued to purchasers in
a private placement transaction between October 1993 and February 1994;
(ii) 68,720 shares of Common Stock in exchange for warrants to purchase
182,409 shares of Common Stock at exercise prices ranging from $17.50 to
$31.50 per share which were issued to sales agents in connection with
certain private placement transactions between August and December 1992 and
between October 1993 and February 1994; (iii) 22,858 shares of Common Stock
in exchange for warrants to purchase 57,143 shares of Common Stock at an
exercise price of $17.50 per share which were issued to David H. Smith,
M.D., a former Chairman of the Board of Directors of the Registrant; and
(iv) 7,228 shares of Common Stock in exchange for the warrants described in
paragraph (1) above. In February 1996 the registrant issued an additional
151 shares of Common Stock in exchange for warrants to purchase 377 shares
of Common Stock at an exercise price of $17.50 per share which were issued
to sales agents in connection with certain private placement transactions,
including a private placement transaction between October 1993 and February
1994.
II-2
<PAGE>
(5) In October 1995 the Registrant issued an aggregate of 98,574 shares
of Common Stock to six shareholders of Lipomed Corporation ("Lipomed") as
consideration for all of the intellectual property of Lipomed.
(6) In December 1995 the Registrant sold 5,715 shares of Common Stock to
Max E. Link, Ph.D. for $67,000 in cash.
(7) In May 1996 the Company sold 7,937 shares of Common Stock to a
warrant holder for $305,558 in cash upon exercise of warrants to purchase
shares of Common Stock at an exercise price of $38.50 per share.
(8) Between September 1996 and October 1996 the Registrant sold an
aggregate of 50,746.2683 shares of Series A Convertible Preferred Stock to
a group of accredited investors consisting of Kummell Investments Limited,
The International Biotechnology Trust plc, W.R. Smith II, Vulcan Ventures
Inc., The Phoenix Partners III Limited Partnership and New York Life
Insurance Company for cash in the aggregate of $17,000,000. Each share of
Series A Convertible Preferred Stock will automatically convert into
29.6986 shares of Common Stock upon the closing of this Offering.
(9) In November 1996 the Registrant sold 14,925.373 shares of Series B
Convertible Preferred Stock to Johnson & Johnson Development Corporation
for $5,000,000 in cash. Each share of Series B Convertible Preferred Stock
will automatically convert into 29.6986 shares of Common Stock upon the
closing of this Offering.
(10) As of December 31, 1996 the Registrant had granted incentive stock
options and non-statutory stock options to employees, directors and
consultants under its 1992 Stock Option Plan (the "1992 Plan") and 1994
Equity Incentive Plan (the "1994 Plan"), covering an aggregate of 1,208,608
shares of Common Stock, at an average exercise price of approximately
$11.78 per share. The Registrant has sold an aggregate of 6,706 shares of
its Common Stock to employees, directors and consultants of the Registrant
for aggregate consideration of $80,760 pursuant to the exercise of stock
options under the 1992 Plan and the 1994 Plan.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S>
1.1* Form of Underwriting Agreement between UBS Securities LLC,
Montgomery Securities, Raymond James & Associates, Inc., and
the Registrant
3.1(1) Registrant's Restated Articles of Incorporation
3.2(1) Registrant's Articles of Amendment to Restated Articles of
Incorporation Establishing a Series of Preferred Stock (Series
A Convertible Preferred Stock)
3.3* Registrant's Articles of Amendment to Restated Articles of
Incorporation Reducing the Number of Authorized Shares of
Series A Convertible Preferred Stock
3.4* Registrant's Articles of Amendment to Restated Articles of
Incorporation Establishing a Series of Preferred Stock (Series
B Convertible Preferred Stock)
3.5* Registrant's Articles of Amendment to Restated Articles of
Incorporation Establishing a Series of Preferred Stock (Series
C Preferred Stock)
3.6* Registrant's Articles of Amendment to Restated Articles of
Incorporation of Cell Therapeutics, Inc. Effecting a Reverse
Stock Split.
3.7(5) Registrant's Restated Bylaws
4.1(2) Specimen Common Stock Certificate
4.2(3) Form of Rights Agreement dated as of November 11, 1996, between
the Registrant and Harris Trust Company of California, which
includes the Form of Rights Certificate as Exhibit A, the
Summary of Rights to Purchase Preferred Stock as Exhibit B and
the Form of Certificate of Designation of the Series C
Preferred Stock as Exhibit C
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- -----------
<C> <S>
5.1* Opinion of Davis Wright Tremaine LLP
10.1(2) Lease Agreement between David A. Sabey and Sandra L. Sabey and the
Registrant, dated March 27, 1992, as amended March 31, 1993 and
October 13, 1993
10.2* Third Amendment to Lease Agreement between David A. Sabey and Sandra
L. Sabey and the Registrant, dated as of September 10, 1996.
10.3(1) Assignment of Lease between Manlove Travel and the Registrant, dated
April 23, 1993
10.4* Letter Agreement between David A. Sabey, Sandra L. Sabey and the
Registrant, dated as of September 6, 1996, amending the Assignment
of Lease.
10.5* Employment Agreement between the Registrant and James A. Bianco,
dated as of December 17, 1996
10.6(2) Employment Agreement between the Registrant and Louis A. Bianco,
dated as of February 1, 1992, as amended May 27, 1994
10.7(1) Employment Agreement between the Registrant and Maurice J. Schwarz,
dated May 2, 1994
10.8(1) Severance Agreement between the Registrant and Robert A. Lewis,
dated April 1, 1996
10.9* Form of Strategic Management Team Severance Agreement.
10.10(1) Promissory Note between James A. Bianco, M.D. and the Registrant,
dated December 23, 1993
10.11(1) Stock Pledge Agreement between James A. Bianco, M.D. and the
Registrant, dated December 23, 1993
10.12(1) 1994 Equity Incentive Plan, as amended
10.13(1) 1992 Stock Option Plan, as amended
10.14(1) 1996 Employee Stock Purchase Plan
10.15(1) Form of Sales Agent Warrant for the 1992 Private Placement
10.16(1) Warrant, dated November 25, 1992, between the Registrant and David
H. Smith, M.D.
10.17(1) Registration Agreement between the Registrant and the other parties
included therein, dated as of November 23, 1993
10.18(1) Form of Sales Agent Warrant for the 1993 Private Placement
10.19(1) Subscription Agreement between the Registrant and the other parties
included therein, dated as of March 21, 1995
10.20(1) Registration Rights Agreement between the Registrant and the other
parties included therein, dated as of March 21, 1995
10.21(5) Registration Rights Agreement between the Company and the other
parties included therein, dated as of September 17, 1996, as
amended by Amendment No. 1 thereto dated as of October 11, 1996.
10.22(5) Letter Agreement between the Company and Kummell Investments
Limited, dated September 17, 1996.
10.23+(2) Collaboration Agreement by and between BioChem Therapeutic Inc. and
the Registrant, dated March 7, 1995, as amended November 30, 1995
and December 6, 1995
10.24+(2) Supply Agreement by and between BioChem Therapeutic Inc. and the
Registrant, dated March 7, 1995
10.25+* Supply Agreement by and between ChiRex, Ltd. and the Registrant,
dated January 21, 1997
10.26+* Collaboration and License Agreement, dated as of November 8, 1996,
by and between the Registrant and Ortho Biotech Inc. and The R.W.
Johnson Pharmaceutical Research Institute, a division of Ortho
Pharmaceutical Corporation
10.27* Stock Purchase Agreement, dated as of November 8, 1996, by and
between the Registrant and Johnson & Johnson Development
Corporation
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
-------- -----------
<C> <S>
10.28(1) Master Lease Agreement, dated as of December 28, 1994 between the
Registrant and Aberlyn Capital Management Limited Partnership
10.29(1) Common Stock Purchase Warrant, dated December 28, 1994 between the
Registrant and Aberlyn Capital Management Limited Partnership
10.30(1) Loan and Security Agreement, dated as of May 30, 1995, between the
Registrant and Financing for Science International, Inc.
10.31(4) Loan and Security Agreement, dated as of June 28, 1996, between the
Registrant and Financing for Science International, Inc.
10.32(1) Asset Purchase Agreement, dated of October 17, 1995, between Lipomed
Corporation, its Stockholders and the Registrant, as amended
10.33(2) Form of Scientific Advisory Board Consulting Agreement
10.34(2) Form of Clinical Advisory Board Consulting Agreement
11.1 Computation of net loss and pro forma net loss per share
22.1* Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, independent auditors (included on page
II-9 of this Registration Statement)
23.2* Consent of Davis Wright Tremaine LLP (included in its opinion filed
as Exhibit 5.1)
23.3* Consent of Foley & Lardner
24.1* Powers of Attorney
27.1* Financial Data Schedule
</TABLE>
- - --------
*Previously filed.
+Confidential treatment requested.
(1) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form S-1 (No. 33-4154).
(2) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form 10.
(3) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form 8-A.
(4) Incorporated by reference to exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996.
(5) Incorporated by reference to exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
(b) Financial Statement Schedules
None.
All schedules have been omitted since they are either not required, are
not applicable, or the required information is shown in the financial
statements or related notes.
ITEM 17. UNDERTAKINGS
1. 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 Act and
will be governed by the final adjudication of such issue.
II-5
<PAGE>
2. 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 the
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-6
<PAGE>
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 MARCH 21, 1997.
Cell Therapeutics, Inc.
/s/ James A. Bianco, M.D.
By: _________________________________
JAMES A. BIANCO, M.D. PRESIDENT
AND CHIEF EXECUTIVE OFFICER
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>
* Chairman of the March 21, 1997
- - ------------------------------------- Board and Director
MAX E. LINK, PH.D
/s/ James A. Bianco, M.D. President, Chief March 21, 1997
- - ------------------------------------- Executive Officer
JAMES A. BIANCO, M.D. and Director
(Principal
Executive Officer)
/s/ Louis A. Bianco Executive Vice March 21, 1997
- - ------------------------------------- President, Finance
LOUIS A. BIANCO and Administration
(Principal
Financial Officer
and Principal
Accounting Officer)
/s/ Jack W. Singer, M.D. Director March 21, 1997
- - -------------------------------------
JACK W. SINGER, M.D.
Director March 21, 1997
*
- - -------------------------------------
JACK L. BOWMAN
* Director March 21, 1997
- - -------------------------------------
JEREMY L. CURNOCK COOK
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director March 21, 1997
- - -------------------------------------
WILFRED E. JAEGER, M.D.
* Director March 21, 1997
- - -------------------------------------
DAVID W. MARTIN, JR., M.D.
* Director March 21, 1997
- - -------------------------------------
TERRENCE M. MORRIS
* Director March 21, 1997
- - -------------------------------------
PHILLIP M. NUDELMAN, PH.D.
*By: /s/ James A. Bianco
----------------------------------
JAMES A. BIANCO
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Financial Data" and "Experts" and to the use of our report dated January 24,
1997, except for paragraphs 2 and 3 of Note 12, as to which the date is March
21, 1997, in the Registration Statement (Form S-1 No. 333-20855) and related
Prospectus of Cell Therapeutics, Inc. for the registration of 3,450,000 shares
of its Common Stock.
Seattle, Washington
March 21, 1997
Ernst & Young LLP
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
-------- -------------------- ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement between UBS Securities
LLC, Montgomery Securities, Raymond James &
Associates, Inc., and the Registrant
3.1(1) Registrant's Restated Articles of Incorporation
3.2(1) Registrant's Articles of Amendment to Restated
Articles of Incorporation Establishing a Series of
Preferred Stock (Series A Convertible Preferred
Stock)
3.3* Registrant's Articles of Amendment to Restated
Articles of Incorporation Reducing the Number of
Authorized Shares of Series A Convertible Preferred
Stock
3.4* Registrant's Articles of Amendment to Restated
Articles of Incorporation Establishing a Series of
Preferred Stock (Series B Convertible Preferred
Stock)
3.5* Registrant's Articles of Amendment to Restated
Articles of Incorporation Establishing a Series of
Preferred Stock (Series C Preferred Stock)
3.6* Registrant's Articles of Amendment to Restated
Articles of Incorporation of Cell Therapeutics, Inc.
Effecting a Reverse Stock Split.
3.7(5) Registrant's Restated Bylaws
4.1(2) Specimen Common Stock Certificate
4.2(3) Form of Rights Agreement dated as of November 11,
1996, between the Registrant and Harris Trust Company
of California, which includes the Form of Rights
Certificate as Exhibit A, the Summary of Rights to
Purchase Preferred Stock as Exhibit B and the Form of
Certificate of Designation of the Series C Preferred
Stock as Exhibit C
5.1* Opinion of Davis Wright Tremaine LLP
10.1(2) Lease Agreement between David A. Sabey and Sandra L.
Sabey and the Registrant, dated March 27, 1992, as
amended March 31, 1993 and October 13, 1993
10.2* Third Amendment to Lease Agreement between David A.
Sabey and Sandra L. Sabey and the Registrant, dated
as of September 10, 1996.
10.3(1) Assignment of Lease between Manlove Travel and the
Registrant, dated April 23, 1993
10.4* Letter Agreement between David A. Sabey, Sandra L.
Sabey and the Registrant, dated as of September 6,
1996, amending the Assignment of Lease.
10.5* Employment Agreement between the Registrant and James
A. Bianco, dated as of December 17, 1996
10.6(2) Employment Agreement between the Registrant and Louis
A. Bianco, dated as of February 1, 1992, as amended
May 27, 1994
10.7(1) Employment Agreement between the Registrant and
Maurice J. Schwarz, dated May 2, 1994
10.8(1) Severance Agreement between the Registrant and Robert
A. Lewis, dated April 1, 1996
10.9* Form of Strategic Management Team Severance Agreement.
10.10(1) Promissory Note between James A. Bianco, M.D. and the
Registrant, dated December 23, 1993
10.11(1) Stock Pledge Agreement between James A. Bianco, M.D.
and the Registrant, dated December 23, 1993
10.12(1) 1994 Equity Incentive Plan, as amended
10.13(1) 1992 Stock Option Plan, as amended
10.14(1) 1996 Employee Stock Purchase Plan
10.15(1) Form of Sales Agent Warrant for the 1992 Private
Placement
10.16(1) Warrant, dated November 25, 1992, between the
Registrant and David H. Smith, M.D.
10.17(1) Registration Agreement between the Registrant and the
other parties included therein, dated as of November
23, 1993
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DOCUMENT DESCRIPTION PAGE
--------- -------------------- ------------
<C> <S> <C>
10.18(1) Form of Sales Agent Warrant for the 1993 Private
Placement
10.19(1) Subscription Agreement between the Registrant and
the other parties included therein, dated as of
March 21, 1995
10.20(1) Registration Rights Agreement between the
Registrant and the other parties included
therein, dated as of March 21, 1995
10.21(5) Registration Rights Agreement between the Company
and the other parties included therein, dated as
of September 17, 1996, as amended by Amendment
No. 1 thereto dated as of October 11, 1996.
10.22(5) Letter Agreement between the Company and Kummell
Investments Limited, dated September 17, 1996.
10.23+(2) Collaboration Agreement by and between BioChem
Therapeutic Inc. and the Registrant, dated March
7, 1995, as amended November 30, 1995, and
December 6, 1995
10.24+(2) Supply Agreement by and between BioChem
Therapeutic Inc. and the Registrant, dated
March 7, 1995
10.25+* Supply Agreement by and between ChiRex, Ltd. and
the Registrant, dated January 21, 1997
10.26+* Collaboration and License Agreement, dated as of
November 8, 1996, by and between the Registrant
and Ortho Biotech Inc. and The R.W. Johnson
Pharmaceutical Research Institute, a division of
Ortho Pharmaceutical Corporation
10.27* Stock Purchase Agreement, dated as of November 8,
1996, by and between the Registrant and Johnson
& Johnson Development Corporation
10.28(1) Master Lease Agreement, dated as of December 28,
1994 between the Registrant and Aberlyn Capital
Management Limited Partnership
10.29(1) Common Stock Purchase Warrant, dated December 28,
1994 between the Registrant and Aberlyn Capital
Management Limited Partnership
10.30(1) Loan and Security Agreement, dated as of May 30,
1995, between the Registrant and Financing for
Science International, Inc.
10.31(4) Loan and Security Agreement, dated as of June 28,
1996, between the Registrant and Financing for
Science International, Inc.
10.32(1) Asset Purchase Agreement, dated of October 17,
1995, between Lipomed Corporation, its
Stockholders and the Registrant, as amended
10.33(2) Form of Scientific Advisory Board Consulting
Agreement
10.34(2) Form of Clinical Advisory Board Consulting
Agreement
11.1 Computation of net loss and pro forma net loss
per share
22.1* Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP, independent
auditors (included on page II-9 of this
Registration Statement)
23.2* Consent of Davis Wright Tremaine LLP (included in
its opinion filed as Exhibit 5.1)
23.3* Consent of Foley & Lardner
24.1* Powers of Attorney
27.1* Financial Data Schedule
</TABLE>
- - --------
* Previously filed.
+ Confidential treatment requested.
(1) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form S-1 (No. 333-4154).
(2) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form 10.
(3) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form 8-A.
(4) Incorporated by reference to exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996.
(5) Incorporated by reference to exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
<PAGE>
EXHIBIT 11.1
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
COMPUTATION OF NET LOSS AND PRO FORMA NET LOSS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net loss............................ $(19,499,283) $(19,992,475) $(13,928,189)
============ ============ ============
Net loss per share
Shares used in calculating pro forma
net loss per share:
Weighted average common shares
outstanding...................... 4,716,399 4,771,247 4,939,388
------------ ------------ ------------
Total............................ 4,716,399 4,771,247 4,939,388
============ ============ ============
Net loss per share.................. $ (4.13) $ (4.19) $ (2.82)
============ ============ ============
Net loss...................................................... $(13,928,189)
============
</TABLE>
<TABLE>
<S> <C>
Pro forma net loss per share
Shares used in calculating pro forma net loss per share:
Weighted average common shares outstanding..................... 4,939,388
Weighted average common shares giving effect to conversion of
convertible preferred stock to common stock at the time of
preferred stock issuance...................................... 3,288,500
------------
Total......................................................... 8,227,888
============
Pro forma net loss per share..................................... $ (1.69)
============
</TABLE>
