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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X]Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1997
[_]Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period from to
COMMISSION FILE NUMBER 0-28386
CELL THERAPEUTICS, INC.
(Exact name of registrant as specified in its charter)
WASHINGTON 91-1533912
(State of Incorporation) (I.R.S. Employer Identification No.)
201 ELLIOTT AVENUE WEST, SUITE 400
SEATTLE, WASHINGTON 98119
(Address of principal executive offices)
Registrant's telephone number, including area code: (206) 282-7100
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Preferred Stock Purchase Rights
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(titles of classes)
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in the definitive proxy statement
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K.
On March 27, 1998, Cell Therapeutics, Inc. had 15,383,414 outstanding shares
of Common Stock. Of those, 9,398,749 shares of Common Stock were held by
nonaffiliates. The aggregate market value of such Common Stock held by
nonaffiliates, based on the closing price of such shares on the Nasdaq
National Market on March 27, 1998, was approximately $39,944,683. Shares of
Common Stock held by each executive officer and director and by each person
known to the Company who beneficially owns more than 5% of the outstanding
Common Stock have been excluded in that such persons may under certain
circumstances be deemed to be affiliates. This determination of executive
officer or affiliate status is not necessarily a conclusive determination for
other purposes.
Documents Incorporated by Reference: None
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This Report contains forward-looking statements which involve risks and
uncertainties. When used in this Report, 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
"Item 1--Business--Risk Factors" and "Item 7--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.
ITEM 1. BUSINESS
GENERAL
Cell Therapeutics, Inc. ("cti" or the "Company") focuses on the discovery,
development and commercialization of small molecule drugs that selectively
regulate the metabolism of oxidized lipids and phospholipids relevant to the
treatment of cancer and inflammatory and immune diseases. The Company's lead
product candidate, Lisofylline ("LSF"), 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 (the "Collaboration
Agreement") with Johnson & Johnson for the joint development and
commercialization of LSF to prevent or reduce the toxic side effects among
cancer patients receiving high dose radiation and/or chemotherapy followed by
bone marrow transplantation ("BMT"). In September 1997, Johnson & Johnson
exercised an option under the Collaboration Agreement to expand its
participation in the development of LSF for treatment of patients with newly
diagnosed acute myelogenous leukemia ("AML") undergoing high dose induction
chemotherapy. The Company is currently conducting two pivotal Phase III
clinical trials for LSF; the first among patients receiving high dose
radiation and/or chemotherapy followed by BMT from unrelated donors, and the
second among patients undergoing high dose induction chemotherapy for AML. On
March 25, 1998, the Company announced preliminary results of its 132 patient
Phase III clinical trial of LSF in cancer patients undergoing high dose
radiation and/or chemotherapy followed by BMT from related donors (siblings).
The primary endpoints of this trial, reduction in neutropenia-related
infections and reduction in BMT-treatment-related mortality, were not met. See
"--Recent Development."
In addition to its oncology applications, the Company is also investigating
LSF for use 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 for which it began a pivotal Phase II/III
trial in the first quarter of 1998. The Company is also developing CT-2584, a
novel small molecule drug for the treatment of patients with multidrug (e.g.,
chemotherapy) resistant cancers, including prostate cancer and sarcomas, for
which it expects to begin a Phase II clinical trial in the second quarter of
1998. The Company has devoted substantial resources to building a unique drug
discovery platform based on its proprietary technology in oxidized lipid and
phospholipid chemistry and believes it can leverage its enabling oxidized
lipid and phospholipid technologies to identify development opportunities in
other disease states, such as diabetes or cardiovascular disease, where
oxidized lipids may be implicated in the pathogenesis or manifestations of
such diseases.
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.
RISK FACTORS
Dependence on Single Drug Candidate. The Company is conducting two pivotal
Phase III clinical trials for its lead product candidate, LSF. There can be no
assurance that such Phase III trials will be successfully completed,
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that further clinical studies will not be needed or that any such clinical
trials will lead to product approval by the United States Food and Drug
Administration (the FDA). Furthermore, there can be no assurance that the
Company will be successful in its efforts to develop LSF for any indications.
The remainder of the Company's drug candidates are still in research and
development, preclinical trials or 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 pivotal Phase III trials and obtaining regulatory approval
of LSF 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 LSF
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. The failure to successfully develop, manufacture or market
LSF would have a material adverse effect on the Company's business, prospects,
financial condition, liquidity and results of operations. See "--Risk
Factors--No Assurance of FDA Approval; Comprehensive Government Regulation",
"--Products Under Development" and "--Recent Development."
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 introduction for any potential product is long and uncertain. Two of
the Company's product candidates, LSF and CT-2584, are currently in clinical
trials for certain indications. 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. 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 LSF
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 preclinical 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 LSF, 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, patients or
third-party payors.
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, delays or termination of clinical trials, which
could have a material adverse effect on the Company's business, prospects,
financial condition, liquidity and results of operations. There can be no
assurance that the Company will be able to submit a New Drug Application (NDA)
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.
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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 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.
Reliance on Relationship with Johnson & Johnson. The Company is dependent on
the future payments from Johnson & Johnson to continue the development and
commercialization of LSF as presently planned. Under the terms of the
Collaboration Agreement between Johnson & Johnson and the Company, Johnson &
Johnson has committed to fund 60 percent of cti's budgeted development
expenses in the United States incurred in connection with obtaining regulatory
approval for LSF for the prevention or reduction of the toxic side effects
among cancer patients receiving high dose radiation and/or chemotherapy
followed by BMT and the treatment of patients with newly diagnosed AML
undergoing high dose chemotherapy. Johnson & Johnson will be responsible for
obtaining regulatory approval for LSF outside of the United States and Canada
at its own expense. Although cti and Johnson & Johnson will co-promote LSF in
the United States, Johnson & Johnson will have primary responsibility for
commercializing LSF. 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 LSF or that Johnson & Johnson will
devote sufficient resources to the commercialization of products under the
Collaboration Agreement. If Johnson & Johnson did not continue its
participation in the development and commercialization of LSF, the Company
would not be able to continue the development of LSF as presently planned
which could have a material adverse effect on the Company's business,
prospects, financial condition, liquidity and results of operations.
Although Johnson & Johnson has committed to fund 60 percent of cti's
budgeted development expenses incurred with obtaining regulatory approval in
the United States for the BMT and AML indications, Johnson & Johnson may
terminate the Collaboration Agreement at any time based upon material safety
or tolerability issues related to LSF upon 30 days notice and for any reason
subject to a six-month notice period. Johnson & Johnson would have no further
obligation to fund cti's development expenses related to LSF 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
after the notice date) 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 LSF as
presently planned which could have a material adverse effect on the Company's
business, prospects, financial condition, liquidity and results of operations.
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 "--Risk
Factors--Need for Substantial Additional Funds."
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, and therefore the breadth of claims allowed in biotechnology or
pharmaceutical patents, or their enforceability, cannot be predicted. 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
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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. There can be no assurance that patents
issued to the Company currently or in the future 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 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's business, prospects, financial condition, liquidity and results
of operations. There has been significant litigation in the pharmaceutical and
biotechnology industry regarding patents and other proprietary rights, and
although the Company is not currently engaged in litigation regarding
intellectual property matters, from time to time the Company sends and
receives communications to and from third parties regarding such matters. In
order to enforce any patents issued to the Company or determine the scope,
validity or priority of other parties' proprietary rights, the Company may
have to engage in litigation or interference or other administrative
proceedings, which would result in substantial cost to, and diversion of
efforts by, the Company. 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 or interference or
other administrative proceedings, 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 or interference or
other administrative proceedings with respect to any such claims commence,
such litigation or interference or other administrative proceedings could be
extremely costly and time consuming and could have a material adverse effect
on the Company's business, prospects, financial condition, liquidity and
results of operations, regardless of the outcome of such litigation or
interference or other administrative proceedings.
As of March 27, 1998, the Company had twelve issued patents covering the
pharmaceutical composition, commercial manufacturing process and oncology and
anti-inflammatory uses of LSF in the United States. The Company is aware of a
patent belonging to third parties that could be interpreted to compromise the
Company's freedom to sell LSF 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 LSF in preventing lung injury following traumatic injury (such as acute
lung injury and Acute Respiratory Distress Syndrome) or sepsis and,
irrespective of such interpretation, that the Company's planned manufacture,
sale or use of LSF as described in this Form 10-K does not infringe any valid
claim of such third-party patent. If such third-party patent rights were
interpreted to limit the use of LSF, the Company could 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, the
inability of the Company to obtain such a license on reasonably acceptable
terms would have a material adverse effect on the Company's business,
prospects, financial condition, liquidity and results of operations. 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, consultants, outside scientific collaborators and sponsored
researchers, other advisors and, in most cases, employees. There can be no
assurance that these agreements will not be breached, that the Company will
have adequate remedies for such a breach or that the Company's trade secrets
will not otherwise become known or independently discovered by competitors.
See "--Patents and Proprietary Rights."
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Technological Uncertainty and Medical Advances. The Company currently relies
exclusively upon its lipid-based 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
oxidized lipids such as hydroperoxyoctadecadienoic acids (HPODEs) or
phospholipids such as phosphatidic acids (PAs). The physiology of cancer,
inflammatory and immune disease is complex, and the roles of HPODEs and PAs,
and the stress-activated pathways (SAPs) which they appear to activate, are
not fully known. Although preclinical and clinical data to date suggest that
the species of HPODEs and PAs 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 HPODEs
and PAs 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. See "--Scientific Overview." There can be no assurance that
the HPODEs, PAs or 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 commercial
products will ultimately be developed by cti. There can be no assurance that
research and discoveries 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's business, prospects,
financial condition, liquidity and results of operations.
History and Continuation of Losses; Development Stage Company. The Company
is a development stage company which currently has no sources of operating
revenues and has incurred net operating losses since its inception. As of
December 31, 1997, the Company had an accumulated deficit of approximately
$97.1 million. Such losses have resulted principally from costs incurred in
research, development, clinical trials and general and administrative costs
associated with the Company's operations. The Company expects that operating
losses will continue at increasing levels for at least the next several years
as its research, product development, clinical testing and marketing
activities expand, and does not expect to receive revenues from the sale of
products for at least the next several years, if ever. The Company is working
on a number of costly long-term development projects which involve
experimental and unproven technology and which may ultimately prove
unsuccessful. 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. To date, the Company's operations
have been funded primarily through the sale of equity securities, which has
raised aggregate net proceeds of approximately $167.6 million as of December
31, 1997. 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 interest
income. 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 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 1999. The Company will need to raise substantial
additional capital to fund its operations beyond such time. See
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"--Risk Factors--Reliance on Relationship with Johnson & Johnson," "--
Collaborations" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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 and scope of such programs;
the terms of any additional collaborative arrangements that the Company may
enter into; 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 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. The Company may engage in these capital raising
activities 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
existing 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. If the Company seeks to obtain
funds through arrangements with collaborative partners or others, such
partners 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."
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 and, to a lesser
extent, by state and local regulatory authorities in the United States. 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 an 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
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 "--Risk Factors--No
Assurance of Successful Product Development; Uncertainties Related to Clinical
Trials."
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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. For example, the Company will be obligated to report
certain adverse reactions, if any, to the FDA. 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. In the event that third parties were to manufacture cti's
therapeutic products, cti would be required to obtain FDA approval for such
manufacture (or any change in manufacturer), and those third-party
manufacturers would also be required to adhere to GMP requirements.
The effect of government regulation may be to delay considerably or prevent
entirely 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.
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.
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 arrangements to collect royalties for the use
of technologies 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
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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
"--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 one third party,
ChiRex, Ltd. (ChiRex), to manufacture LSF for preclinical testing and clinical
trials. The Company's manufacture and supply agreement with ChiRex provides
for the manufacture and supply of LSF 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 LSF for
development and commercialization purposes until November 8, 1999. Thereafter,
Johnson & Johnson will assume responsibility for the manufacture of LSF.
However, Johnson & Johnson may elect to assume responsibility for the
manufacture of LSF at any time prior to such date. LSF 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 has recently entered into an agreement
with a third-party vendor to furnish CT-2584 bulk drug substance for future
clinical studies. 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 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 "--
Competition."
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 LSF with Johnson & Johnson in the United States
while providing that Johnson & Johnson will have primary responsibility for
commercializing LSF. 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 any other third parties with whom the Company may enter
into any commercialization arrangements 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 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 "--Marketing."
8
<PAGE>
Management of Growth. The Company has recently experienced, and expects to
continue to experience, significant growth in the number of its employees and
the scope of its operations. This growth has placed, and may continue to
place, a significant strain on the Company's management and operations. The
Company's ability to manage effectively such growth will depend upon its
ability to broaden its management team and its ability to attract, hire and
retain skilled employees. The Company's success will also depend on the
ability of its officers and key employees to continue to implement and improve
its operational, management information and financial control 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. In addition, if cti
reaches the point where its activities require additional expertise in
clinical testing, in obtaining regulatory approvals, or in production and
marketing, there will be increased demands on cti's resources and
infrastructure. 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, prospects, financial condition,
liquidity and results of operations.
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. There is intense competition for qualified scientists and managerial
personnel from numerous pharmaceutical and biotechnology companies, as well as
from academic and government organizations, research institutions and other
entities. 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. 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, as well as
its business, prospects, financial condition, liquidity and results of
operations. 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 "--Human Resources," "--
Scientific Advisory Board" and "--Clinical Advisory Board."
Product Liability; Potential Difficulty of Obtaining 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. In addition, there can be no assurance
that any collaborators and licensees of the Company will agree to indemnify
the Company from, be adequately insured against or have a sufficient net worth
to protect the Company from product liability claims. A successful product
liability claim in excess of the Company's insurance coverage could have a
material adverse effect on the Company's business, prospects, financial
condition, liquidity and results of operations, and may prevent the Company
from obtaining adequate product liability insurance in the future on
commercially reasonable terms.
Uncertainty of Health Care Reform, Pharmaceutical Pricing and Reimbursement.
The business and financial condition of pharmaceutical and biotechnology
companies will continue to be affected by the efforts of
9
<PAGE>
governmental and third-party payors to contain or reduce the cost of health
care. In certain foreign markets, pricing or profitability of prescription
pharmaceuticals is subject to governmental control. In the United States there
have been, and the Company expects that there will continue to be, a number of
federal and state proposals to implement similar government control. In
addition, a heightened emphasis on managed care in the United States has
increased and will continue to increase the pressure on pharmaceutical
pricing. 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
health administration authorities, private insurance plans and managed care
organizations. Significant uncertainty exists as to the reimbursement status
of newly approved health care products. Government and other third-party
payors increasingly are attempting to contain health care costs by limiting
both coverage and the level of reimbursement for new medical products and
services and, in some cases, by refusing to provide any coverage of uses of
approved products for disease indications other than those for which the FDA
has granted marketing approval. For example, many managed health care
organizations are now controlling the pharmaceuticals that are on their
formulary lists. The resulting competition among pharmaceutical companies to
place their products on these formulary lists has created a trend of downward
pricing pressure in the industry. In addition, many managed care organizations
are pursuing various ways to reduce pharmaceutical costs and are considering
formulary contracts primarily with those pharmaceutical companies that can
offer a full line of products for a given therapy sector or disease state.
There can be no assurance that the Company's products will be included on the
formulary lists of managed care organizations or that downward pricing
pressure in the industry generally will not negatively impact the Company's
operations.
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, prospects,
financial condition, liquidity, and results of operations.
No Assurance of Market Acceptance. There can be no assurance that the
Company's drug candidates, if approved by the FDA and other regulatory
agencies, will achieve market acceptance. The degree of market acceptance will
depend on a number of factors, including the receipt and timing of regulatory
approvals, the availability of third-party reimbursement and the establishment
and demonstration in the medical community of the clinical safety, efficacy
and cost-effectiveness of the Company's drug candidates and their advantages
over existing technologies and therapeutics. There can be no assurance that
the Company will be able to manufacture and successfully market its drug
candidates even if they perform successfully in clinical applications.
Furthermore, there can be no assurance that physicians or the medical
community in general will accept and utilize any therapeutic products that may
be developed by the Company.
Impact of Year 2000. The Year 2000 Issue is the result of computer programs
being written using two digits rather than four to define the applicable year.
Any of the Company's computer programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
The Company is in the process of assessing its computer systems to determine
the extent of modifications required so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter, and
has also initiated formal communications with all of its significant suppliers
to determine the extent to which the Company's interface systems are
vulnerable to those third parties' failure to remedy their own Year 2000
Issues. The Company presently believes that with modifications to its existing
software and conversions to new software,
10
<PAGE>
expected to be completed not later than December 31, 1998, the Year 2000 Issue
will not pose significant operational problems for its computer systems. The
Company does not expect the cost to modify its existing software and convert
to new software to be material. However, if such modifications and conversions
are not made, or the systems of other companies on which the Company's systems
rely are not timely converted, the Year 2000 Issue could have a material
impact on the Company's business, prospects, financial condition, liquidity
and results of operations.
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 eliminated completely. In the event of
such an accident, the Company could be held liable for any damages that result
and any such liability not covered by insurance could exceed the resources of
the Company.
Concentration of Ownership. Directors and officers of cti, and their
affiliates, beneficially own in the aggregate 2,418,995 shares of the
Company's Common Stock (including shares of Common Stock subject to options or
warrants exercisable or convertible within 60 days of March 27, 1997),
representing approximately 15.72 percent of the voting power of the Company's
outstanding securities. Such concentration of ownership may have the effect of
delaying, deferring or preventing a change in control of the Company. See
"Item 14--Security Ownership of Certain Beneficial Owners and Management."
Possible Volatility of Stock Price. The market price for securities of
biopharmaceutical and biotechnology companies, including that of cti,
historically 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. Factors that may have a
significant impact on the market price and marketability of the Company's
Common Stock include: announcements of technological innovations or new
commercial therapeutic 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; adverse legislation; changes in
governmental regulation, third-party reimbursement policies, the status of the
Company's regulatory approvals or applications; changes in earnings; changes
in securities analysts' recommendations; changes in health care policies and
practices; economic and other external factors; period-to-period fluctuations
in financial results of the Company and general market conditions.
Fluctuations in the trading price or liquidity of the Company's Common Stock
may adversely effect the Company's ability to raise capital through future
equity financing.
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 shareholder rights plan that, along with
certain provisions of the Company's Restated Articles of Incorporation, may
have the effect of discouraging certain transactions involving a change of
control of the Company.
11
<PAGE>
RECENT DEVELOPMENT
On March 25, 1998, the Company announced preliminary results of its 132
patient Phase III clinical trial of LSF in cancer patients undergoing high
dose radiation and/or chemotherapy followed by BMT from related donors
(siblings). The primary endpoints of this trial, reduction in neutropenia-
related infections and reduction in BMT-treatment-related mortality, were not
met. Although a full analysis of the results is not expected to be available
until the second quarter of 1998, the Company believes that the results may
have been affected by unusually aggressive treatment regimens among patients
over the age of 40, who are at a higher risk for toxicity, who were randomized
to the LSF arm of the study. See "--Products Under Development--Oncology--
Lisofylline--Clinical Trials--Related Donor BMT." The Company intends to
continue its current development plans for LSF in unrelated donor BMT and AML
indications. However, the results of this Phase III trial will delay the
filing of an NDA for LSF which was previously planned for the fourth quarter
of 1998.
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
oxidized lipids such as hydroperoxyoctadecadienoic acids ("HPODEs") and
phospholipids termed phosphatidic acids ("PAs"). These oxidized lipids and
phospholipids 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 (i) the production of inflammatory cytokines and
the resulting activation of inflammatory and immune responses, (ii) the
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) cell
membrane damage leading to cell death.
Appearance of oxidized lipids, PA elevation 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 oxidized lipids or phospholipids
such as HPODEs and Pas 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 or physiologic pathways necessary for normal day-to-day cellular
function.
12
<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 DEVELOPMENT
PROGRAM THERAPEUTIC INDICATIONS STATUS(1) COLLABORATORS(2)
- -------------------------------------------------------------------------------------------
ONCOLOGY
- -------------------------------------------------------------------------------------------
<C> <C> <S> <C>
Lisofylline Prevent or reduce infection, Pivotal Phase III trial for Johnson & Johnson
mucositis and treatment- BMT-related donors BioChem Pharma
related mortality following (completed)
high dose radiation and/or
chemotherapy
Pivotal Phase III trial for Johnson & Johnson
BMT- unrelated donors BioChem Pharma
(ongoing)
Pivotal Phase III trial for Johnson & Johnson
AML (ongoing) BioChem
Pharma Phase II/III trial Johnson & Johnson
for mucositis (expected to BioChem Pharma
begin Q2 1998)
CT-2584 Anti-cancer agent targeting Phase I trials (ongoing) BioChem Pharma
multidrug
resistant tumors
Phase II trial for prostate BioChem Pharma
cancer
(expected to begin Q2 1998)
CT-2412 Tumor sensitizer Research lead --
- -------------------------------------------------------------------------------------------
INFLAMMATION
- -------------------------------------------------------------------------------------------
Lisofylline Prevent or reduce ALI and Pivotal Phase II/III trial Johnson & Johnson
mortality for ALI BioChem Pharma
among patients requiring (ongoing)
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. The Company will then be
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 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 three principal causes of treatment failure include treatment-
related toxicities, multidrug resistance and tumor resistance to radiation.
13
<PAGE>
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 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, or bone marrow
suppression of infection-fighting white blood cells ("WBCs"), and mucositis,
or 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 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
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 tumor suppressor 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 suppressor 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) LSFa 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-2584a novel anti-cancer
drug in clinical trials for the treatment of patients with multidrug resistant
tumors and (iii) tumor sensitizing agents including CT-2412a research lead
with the potential ability to enhance sensitivity to radiation among tumors
that have deleted or mutated tumor suppressor genes, which the Company
believes will increase the effectiveness of radiation treatment on such
tumors. Additionally, the Company may license or acquire agents from third
parties which, when used with other cti oncology products, may provide added
value to the integrated management of oncologic disease.
Lisofylline
LSF is a synthetic small molecule drug in two pivotal Phase III clinical
trials among cancer patients receiving high dose radiation and/or
chemotherapy. Unlike blood cell growth factors or chemotherapy protecting
agents, LSF
14
<PAGE>
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 LSF 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 LSF for the BMT
and AML indications. See "--Collaborations."
The Company's development strategy for LSF has been to target anti-cancer
treatment regimens which are accompanied by a high incidence of serious
neutropenic infections, mucositis and treatment-related mortality. The Company
is pursuing the development of LSF for the treatment of cancer patients
receiving high dose radiation and/or chemotherapy followed by BMT and for
patients with AML undergoing high dose induction chemotherapy for the
following reasons: (i) following BMT or induction chemotherapy for AML, up to
50 percent of patients may develop serious infections, and up to 50 percent of
those patients may die from the side effects of the high doses of radiation
and chemotherapy, (ii) in these patient groups there is a high unmet need for
agents which reduce serious and fatal infections, (iii) under recent FDA
initiatives, New Drug Applications ("NDAs") for serious, life threatening or
severely debilitating indications that provide a meaningful therapeutic
benefit to patients over existing treatments may be eligible to receive
accelerated review and approval and (iv) the Company believes that once
approved, agents which target life threatening side effects of cancer therapy
and improve patient outcomes will be adopted by health care providers,
patients and third-party payors. The FDA staff has indicated that priority
review status may be appropriate for the Company's BMT application; however,
there can be no assurance such priority review will be granted or, if granted,
will be successful.
In 1995, approximately 20,000 patients in the United States were treated
with ablative doses of chemotherapy requiring BMT or peripheral blood stem
cell 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. Despite this growth rate, only 25
percent of patients will find an acceptable family member bone marrow donor.
In 1986 the National Marrow Donor Program was established to provide bone
marrow from unrelated donors for patients who lacked a family member donor.
However, the high incidence of infection and mortality associated with this
type of treatment limits its more widespread potential application. In 1995,
in the United States, 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, 30 percent of whom are at risk to develop severe mucositis.
The Company is conducting a pivotal Phase III clinical trial of LSF in
patients who require BMT after receiving ablative, or bone marrow destroying,
doses of radiation and/or chemotherapy. In addition, the Company is conducting
an ongoing pivotal Phase III trial in patients with newly diagnosed AML who
receive high dose induction chemotherapy. Additionally, in the second quarter
of 1998, the Company intends to commence a Phase II/III clinical trial of LSF
in patients with solid tumors such as head and neck or breast cancers who
receive dose-intensive radiation and/or chemotherapy and who are at risk of
developing severe mucositis and neutropenic infection. 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.
Clinical Trials--Related Donor 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 LSF 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 LSF 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 LSF. 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
15
<PAGE>
LSF recipients compared to placebo recipients or patients randomized to
receive the lower dose of LSF. 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 LSF
were detected in this trial.
On March 25, 1998, the Company announced preliminary results of its multi-
center, double blind placebo controlled pivotal Phase III trial for LSF in 132
patients undergoing high dose radiation and/or chemotherapy followed by BMT
from related donors (siblings). This trial utilized a 3 mg/kg dose of LSF. The
primary endpoints of this trial, reduction in neutropenia-related infections
and reduction in BMT-treatment-related mortality, were not met. Although a
full analysis of the results is not expected to be available until the second
quarter of 1998, the Company believes that the results may have been affected
by unusually aggressive treatment regimens among patients over the age of 40,
who are at a higher risk for toxicity, who were randomized to the LSF arm of
the study. However, the results of this Phase III trial will delay the filing
of an NDA for LSF which was previously planned for the fourth quarter of 1998.
See "Recent Development."
Clinical Trials--Unrelated Donor BMT. In the first quarter of 1997, the
Company commenced a 100 patient pivotal Phase III trial which will examine the
effect of a 5 mg/kg dose of LSF on patients with cancer receiving high dose
radiation and/or chemotherapy followed by 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 treatment-related
deaths. This study will determine the effect of higher doses of LSF on serious
neutropenic infection and treatment-related mortality and will provide
supportive dosing and efficacy data for mucositis applications of LSF. If
effective, the Company believes that the use of LSF may increase the number of
patients who receive BMT from unrelated donors. The Company plans to amend
this ongoing Phase III BMT trial to increase enrollment to 154 patients. See
"--Risk Factors--No Assurance of Successful Product Development; Uncertainties
Related to Clinical Trials."
Clinical Trials--AML. In the third quarter of 1997, the Company reported the
preliminary results of its 70 patient, single center, double blind placebo
controlled Phase II trial of LSF (3 mg/kg) among patients with newly diagnosed
AML undergoing high dose induction chemotherapy. This trial examined the
effects of LSF on the incidence of neutropenic infections (serious and non-
serious), infection related deaths, overall mortality and complete remission.
On an intent to treat analysis at 60 days following AML, this study
demonstrated that the administration of 3 mg/kg of LSF resulted in a
statistically significant reduction of serious neutropenic infections
(p=0.043) and the incidence of fungal neutropenic infections (p=0.01), when
compared to placebo patients. In addition, there was a strong trend toward a
reduction in fatal infections (p=0.19) and a trend toward a reduction in all
(serious and non-serious) neutropenic-related infections (p=0.29). No serious
side effects attributable to LSF were detected in this trial.
In the fourth quarter of 1996, the Company initiated an 80 patient, multi-
center, double blind placebo controlled pivotal Phase III trial of LSF (3
mg/kg) among patients with newly diagnosed AML undergoing high dose induction
chemotherapy. The primary endpoint of this study is the reduction of the
incidence of serious neutropenic infections. In the fourth quarter of 1997,
the Company amended this ongoing Phase III AML trial to increase enrollment to
160 patients to provide adequate statistical power for this endpoint.
Clinical Trials--Mucositis. In the second quarter of 1998, the Company
intends to commence a 100 patient, multi-center, double blind placebo
controlled Phase II/III trial of LSF in patients with head and neck tumors
receiving dose-intensive radiation and/or chemotherapy who are at risk for
developing severe mucositis and neutropenic infections.
Mechanism of Action. Following exposure to radiation, chemotherapy or
oxidative injury, highly reactive oxygen free radicals 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 and lipid peroxides such as HPODEs. HPODEs are
elevated in hematological cancers such as AML or lymphoma and are further
elevated following induction chemotherapy or high dose radiation and
chemotherapy followed by
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<PAGE>
BMT. By comparison, elevated HPODE levels have not been detected among normal
volunteers. It has been shown that elevated HPODE levels statistically
correlate with the development of toxicity and mortality following high dose
radiation and/or chemotherapy followed by BMT. Oxidized lipids have also 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, lipid
peroxides such as HPODEs may contribute to the early breakdown in mucosal
barrier function observed following radiation, chemotherapy or oxidative
injury, allowing potentially pathogenic bacteria and fungi to gain access to
an otherwise sterile bloodstream and tissues. 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, resulting in further tissue
injury, inflammation and delayed healing.
While the biomolecular target for LSF is presently unknown, its therapeutic
activity appears to be due to the result of LSF's effect on oxidized lipids,
and the subsequent activation of SAPs. In the Phase II BMT clinical trial, LSF
decreased elevated HPODE levels present at study entry. In addition, LSF
blocked the rise or reduced the levels of such lipid peroxides following
exposure to radiation and/or chemotherapy when compared to the elevated levels
present among placebo recipients. In doing so, LSF appears to inhibit the
early, immediate effects of HPODEs on cell membranes, thereby reducing injury
to mucosal barriers such as the gastrointestinal tract. LSF also appears to
prevent the activation of SAPs, and the ensuing cellular inflammatory and
injurious response which contribute to the delay in tissue healing following
dose-intensive radiation and chemotherapy.
The Company believes that the effects of LSF on lipid peroxides and on the
activation of SAPs may represent a critical upstream point of intervention in
the initiation of the cellular stress and injury response. By modulating the
production of such oxidized lipids and the activation of SAPs, LSF 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 also susceptible to such oxidative injury, the Company
believes that LSF 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 oxidized lipid
and phospholipid technologies as a platform to investigate structure-function
relationships with respect to the LSF chemical moiety and its anti-lipid
oxidation effects. The Company is developing chemical analogs of LSF, such as
CT-2408R and other agents, which have 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 prostate cancer and sarcomas. 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 and (iii)
not susceptible to multidrug resistance.
The Company's development strategy for CT-2584 is to target multidrug
resistant cancers, such as hormone-refractory prostate cancer and sarcomas,
for which effective treatments are lacking and for which 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 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 has not
demonstrated the toxicities of conventional anti-cancer agents, the Company
believes that CT-2584 ultimately may be used both alongside conventional
chemotherapeutic agents and as a first line therapy for a variety of cancer
types.
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<PAGE>
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 prostate, sarcomas, brain,
colon, breast, lung and ovarian cancers, as well as certain leukemias and
lymphomas.
The Company has ongoing a Phase I trial, co-sponsored by the Cancer Research
Campaign, at the Christie Hospital in the United Kingdom, among patients with
advanced cancers, and 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 January 31, 1998, 43
patients had been treated with CT-2584 at six different dose levels without
exhibiting the bone marrow or gastrointestinal toxicities observed with
conventional high dose anti-cancer treatment regimens. To date, a maximum
tolerated dose level has not been achieved. The majority of patients enrolled
in this trial have tumor types which are known to express multidrug resistance
and have failed or were ineligible for conventional chemotherapy and surgery.
Among these 43 patients, 12 patients (28%) experienced disease stabilization
or disease regression following more than two cycles of CT-2584 therapy. As of
January 31, 1998, ten of these patients remain alive at an average of 14
months since initiating CT-2584 therapy (range 4-24 months). Each of the three
patients with endstage prostate cancer experienced stabilization of disease.
Four of 13 patients (28%) with advanced sarcomas experienced stabilization of
disease and clinical improvement. Based on the preliminary response rates
observed in this trial the Company anticipates initiating a Phase II trial in
advanced hormone refractory prostate cancer in the second quarter of 1998 and
a Phase II trial for sarcomas by the end of 1998. See "--Risk Factors--No
Assurance of Successful Product Development; Uncertainties Related to Clinical
Trials."
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 Pas. 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 further
activate tumor cell PC-PLD leading to tumor cell death. This enzyme may be one
of the biochemical targets responsible for 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 therapy. 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 oxidized 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 tumor
suppressor 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 respiratory failure. More than one million patients are at
risk each year in the United States for developing ALI. When severe, ALI can
be fatal in a substantial percentage of patients and can also lead to a
condition termed Acute Respiratory Distress Syndrome ("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.
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<PAGE>
In addition to its potential oncology applications, LSF 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. 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 LSF 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 (14-21 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 LSF in patients
suffering from septic shock randomized to receive a low dose (1.5 mg/kg) of
LSF or placebo. This study examined the safety and pharmacokinetics of LSF
given to critically ill patients. Of the 12 patients evaluable for endpoint
analysis, the improvement from baseline in median MOF scores experienced by
LSF recipients was 40 percentage points greater than the improvement
experienced by placebo recipients. All patients receiving LSF survived to day
28 compared to 67 percent of placebo recipients.
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 LSF for investigation in a multi-
center, double blind placebo controlled pivotal Phase II/III trial among
patients experiencing ALI. The ARDS Network was established by the NHLBI in
cooperation with the FDA and the National Institutes of Health to accelerate
the investigation and approval of novel therapies for ALI. The trial, which
began in the first quarter of 1998, will examine the effect of a 3 mg/kg dose
of LSF on early (day 28) mortality among 800 patients who develop ALI. After
each group of 200 patients enters the study, an independent data safety
monitoring board will recommend continuing the trial based on trends toward
efficacy, or stopping the trial for successful completion of study endpoint or
lack of efficacy or safety. The Company believes the design of this trial and
NHLBI sponsorship, including its provision for a majority of the direct
patient costs, provides a cost-effective investigation of LSF expansion into
this patient population.
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 leads to the production of oxidized lipids and
lipid peroxides such as HPODEs. See "--Oncology--LisofyllineMechanism 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, LSF 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, LSF decreased the pool of oxidized lipids and
decreased HPODE generation and the activation of SAPs and subsequent
production of multiple inflammatory cytokines. The Company believes that the
effects of LSF 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.
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<PAGE>
METABOLIC DISEASE
The Company believes it can leverage its enabling oxidized lipid and
phospholipid technologies to identify opportunities in other disease states
where elevated levels of oxidized lipids may play an important role in the
pathogenesis and clinical manifestations of disease. Oxidized lipids,
including HPODEs, have been reported to be elevated in a variety of metabolic
and cardiovascular diseases. In diabetes, oxidized lipids have been associated
with the destruction of pancreatic islet cells (the cells responsible for
insulin production) in Type I, juvenile onset diabetes, and are believed to be
responsible for development of resistance to insulin and its ability to lower
blood sugar in Type II, adult onset diabetes. In addition, oxidized lipids
have been linked to the glycosylation of proteins resulting in what are termed
advanced glycosylation end products, which are believed to contribute to the
blood vessel damage leading to heart disease, kidney disease and blindness
that accompanies diabetes.
In 1995, the Company established a research collaboration with City of Hope
Medical Center ("City of Hope"), a leading diabetes research and treatment
center, utilizing the Company's proprietary technologies and drug prototypes
to investigate the role of specific forms of oxidized lipids and phospholipids
in the development of diabetes and its complications. Company scientists and
their collaborators have demonstrated that agents like LSF, which reduce
oxidized lipids, can significantly restore blood sugar utilization by the body
and decrease blood sugar to normal levels in diabetic animal models. Based
upon the results of this collaboration, in January 1998, the Company entered
into an agreement with City of Hope to form a joint venture to discover and
develop a new class of drugs to treat diabetes and its complications. Under
the terms of the agreement, the Company will fund the first two years of the
venture and provide expertise in drug discovery and technology in oxidized
lipid chemistry. City of Hope will contribute its rights to technology for a
human enzyme, human leukocyte 12-Lipoxygenase (12-LO), which it has identified
and partially sequenced. The enzyme is believed to be responsible for
generating oxidized lipids that may be associated with the development of
vascular complications of diabetes. City of Hope will also provide expertise
and services in cellular analysis, animal models and clinical trials. The
Company will hold a 70% interest in the joint venture and City of Hope will
hold 30%.
PROPRIETARY DRUG DISCOVERY TECHNOLOGY
The Company's proprietary drug discovery technology consists of four
components: (i) analytical technology for quantitative measuring of specific
species of oxidized lipids and phospholipids, (ii) cloning of critical lipid
regulatory enzymes, (iii) using the cloned enzymes and drug candidate probes
to validate targets and to develop high throughput screens capable of
analyzing large chemical libraries, and (iv) development of novel linker
chemistry to develop directed mini-diversity 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, hormones, 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 oxidized lipids, such as HPODEs,
complex lipids and phospholipids such as PAs are time consuming and often
inadequate. 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 PAs 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 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.
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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 cloned several of the critical enzymes that produce or
metabolize (degrade) PAs. The following table lists some of the human enzymes
cloned by the Company, their biological effects in cancer and inflammatory
diseases:
<TABLE>
<CAPTION>
CLONED ENZYME BIOLOGICAL EFFECT
------------- -----------------
<C> <S>
PC-PLD (phosphatidylcholine-phospholipase-D) Cancerous transformation,
angiogenesis
LPAAT (lyso-PA acyl transferase) Stress activated protein
kinase ("SAPK") activation;
TNFa, Interleukin-6 release
CDS (cytidyl diphosphate-diacylgycerol synthase) SAPK activation; TNFa
Interleukin-6 release
PAP (phosphatidic acid phosphatase) Glycerolipid synthesis,
signal transduction
</TABLE>
The PA regulating enzyme, 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 its oxidized
lipid technologies and 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.
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 LSF to prevent or reduce the toxic side
effects among cancer patients receiving high dose radiation and/or
chemotherapy followed by BMT. Upon execution of the Collaboration Agreement,
Johnson & Johnson paid to cti a $5.0 million license fee. In September 1997,
Johnson & Johnson exercised an option under the Collaboration Agreement to
expand its participation to include the development of LSF to include the
treatment of patients with AML undergoing high dose chemotherapy, and made a
$1.0 million payment to cti in connection with this milestone. The Company has
recorded approximately $27.7 million in equity payments, license fees and
development cost reimbursements from Johnson & Johnson as of December 31,
1997. Under the Collaboration Agreement, cti is responsible for the
development of LSF 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 LSF in the United States for
the BMT and AML indications. 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 LSF for markets outside of the United States and
Canada at its own expense.
The Company and Johnson & Johnson will co-promote LSF in the United States,
and each will share equally in any resulting operating profits and losses.
Although cti and Johnson & Johnson will co-promote LSF in the United States,
Johnson & Johnson will have primary responsibility for commercializing LSF.
See""--Marketing." Johnson & Johnson has the exclusive right to develop and
market LSF, 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 LSF.
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<PAGE>
In addition to participating in the development of LSF for BMT and AML
indications, Johnson & Johnson also has certain options to expand the
collaboration to include the development of LSF for any other indication for
which LSF 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
LSF 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 LSF 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 LSF.
The Company is dependent on the future payments from Johnson & Johnson to
continue the development and commercialization of LSF as presently planned.
Johnson & Johnson may terminate the Collaboration Agreement at any time and
for any reason subject to a six-month notice period. Johnson & Johnson would
have no further obligation to fund cti's development expenses related to LSF
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 within the notice period) 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 LSF 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 LSF as presently planned, which could have a material
adverse effect on the Company's business, prospects, financial condition,
liquidity and results of operations. 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, JJDC made a $5.0 million equity
investment in cti upon execution of the Collaboration Agreement. Concurrent
with the closing of the Company's initial public offering in March 1997 and
follow-on offering in October 1997, JJDC made additional equity investments in
the Company of $3.0 million and $2.0 million, respectively. Pursuant to the
Stock Purchase Agreement, JJDC must make additional payments to, and equity
investments in, cti if certain milestones are achieved in the development and
commercialization of LSF.
BioChem Pharma
In March 1995, the Company entered into a collaboration agreement with
BioChem Pharma for the development and commercialization of LSF and CT-2584 in
Canada. Under this collaboration agreement, BioChem Pharma will be responsible
for obtaining regulatory approval for LSF 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 LSF and CT-2584 in Canada, subject to the payment of
royalties to cti. The Company will also receive payments under the
collaboration agreement if certain milestones are achieved. BioChem Pharma may
terminate this agreement with respect to any product at any time for any
reason upon 30 days' notice. In connection with the collaboration agreement,
BioChem Pharma made an equity investment in the Company of $2.5 million.
PATENTS AND PROPRIETARY RIGHTS
The Company has dedicated significant resources to protect its intellectual
property. In the United States, the Company had rights in 22 issued patents
and 75 allowed or pending patent applications as of March 27, 1998, including
divisional patent applications and continuations-in-part, covering a variety
of new chemical
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<PAGE>
entities, pharmaceutical compositions, synthetic processes, methods of use,
discovery research tools and diagnostics. Five of the issued patents in which
the Company has rights cover the pharmaceutical composition, commercial
manufacturing process steps and oncology and anti-inflammatory methods of use
for LSF, and five of the Company's allowed or pending patent applications
cover other methods of use for LSF. One issued patent 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 the Company's policy to file foreign
counterparts in countries with significant pharmaceutical markets and a patent
granting and enforcement infrastructure. As of March 27, 1998, the Company had
filed 62 foreign national patent applications in 18 countries and the European
Patent Office, including 20 counterparts of certain of its issued patents and
allowed or pending U.S. patent applications for LSF and 14 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 the Company 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 LSF 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 LSF in preventing lung injury following
traumatic injury (such as ALI and ARDS) or sepsis; and, irrespective of such
interpretation, that the Company's planned manufacture, sale or use of LSF as
described in this Form 10-K does not infringe any valid claim of such third-
party patent. If such third-party patent rights were interpreted to limit the
use of LSF, 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 or that the Company's trade
secrets will not otherwise become known or independently discovered by
competitors. The Company also has members of its Scientific Advisory Board and
Clinical Advisory Board, its consultants and, in most cases, its employees
enter into agreements requiring disclosure to cti of ideas, developments,
discoveries or inventions conceived during employment or during consulting and
assignment to
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cti of proprietary rights to such matters related to the business and
technology of cti. The extent to which efforts, including interference
proceedings, by others will result in patents and the effect on cti of the
issuance of such patents is unknown. There has been significant litigation in
the pharmaceutical and biotechnology industry regarding patents and other
proprietary rights, and although the Company is not currently engaged in
litigation regarding intellectual property matters, from time to time the
Company sends and receives communications to and from third parties regarding
such matters. To enforce any patents issued to the Company or determine the
scope, validity or priority of other parties' proprietary rights, the Company
may have to engage in litigation or interference or other administrative
proceedings, 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 in any litigation
or interference or other administrative proceeding 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's business, prospects, financial condition, liquidity and results of
operations.
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 will comply with GMPs and other regulatory standards, and LSF 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 LSF
and corresponding intermediate compounds. Under the terms of the agreement,
ChiRex will manufacture and supply LSF 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 LSF 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 LSF for development and commercialization purposes until
November 8, 1999. Thereafter, Johnson & Johnson will assume responsibility for
the manufacture of LSF. However, Johnson & Johnson may elect to assume
responsibility for the manufacture of LSF at any time prior to such date. The
Company currently uses ChiRex for the manufacture of LSF bulk drug and uses
three suppliers for clinical trial quantities of the finished drug product.
Following commercial launch of LSF, the Company expects that it will continue
to use ChiRex to manufacture LSF 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 comply with such procedures and regulations.
There can be no assurance that Johnson & Johnson or these manufacturers
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will meet the Company's requirements for quality, quantity or timeliness. LSF
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. The Company has recently entered into another
such agreement with a third-party vendor to furnish CT-2584 bulk drug
substance for future clinical studies. 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 of 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 LSF. To assist in commercializing LSF for the BMT and AML
indications, 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 LSF for all other indications, cti will be permitted to
provide its own field sales force to co-promote LSF 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 parties, 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 such as 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 drug products. All of cti's products will require regulatory
approval by governmental agencies prior to commercialization. In particular,
new drugs 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 collaborators or licensees
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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 new drug 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, for non-biologic drugs, an 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 safety and efficacy requirements
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, which must become effective before clinical trials may begin, 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 have been conducted and those 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 a primary basis for determining whether there is "substantial
evidence" to support the claims of safety and effectiveness for new drugs and
forms a critical component of an NDA. Usually two well-controlled clinical
studies are required for approval of a new drug. The regulatory authority may
suspend clinical trials at any point in this process if it 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. Other information is also required in the
NDA, including manufacturing and labeling information. 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 authority to prevent or limit further marketing of a product based on
the results of these post-marketing programs. Any subsequent changes to the
product, labeling or manufacturing may require additional FDA approval.
Satisfaction of 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
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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 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 associated with cancer treatment may potentially qualify for review
under these accelerated procedures. The Company believes that LSF may qualify
for this accelerated review and approval process and has designed its pivotal
Phase III BMT trial with the objective of securing accelerated approval. The
FDA staff has indicated that priority review status may be appropriate for the
Company's planned NDA for LSF for BMT indications. However, significant
uncertainty exists as to the extent to which accelerated review and approval
will be granted. The FDA retains considerable discretion in determining
eligibility for accelerated review and approval. Accordingly, the FDA could
employ such discretion to deny eligibility of LSF as a candidate for
accelerated review or require additional clinical trials or other information
before approving LSF. 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 post-marketing 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 LSF 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 prescription drug
products, particularly those subject to accelerated approval, 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, that accelerated approval will apply 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 they conclude
that cti has not complied with applicable laws and regulations
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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 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 prospects,
financial condition, liquidity and results of operations. 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 United States' health care system could have a
material adverse effect on the Company's business prospects, financial
condition, liquidity and results of operations.
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
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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."
HUMAN RESOURCES
As of March 27, 1998, cti employed 179 individuals (including 54 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, in most cases, 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."
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.
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
phospholipid 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.
Lewis Cantley, Ph.D. is a noted authority in cellular biochemical signaling
pathways that employ phosphatidyl inositol and its metabolites and is the
discoverer of one of the most critical enzymes in those pathways, the PI3
Kinase. He is currently Professor of Cell Biology at Harvard Medical School
and Chief of the Division of Signal Transduction in the Department of
Medicine, Beth Israel Hospital, Boston and is the author of over 180
publications.
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.
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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.
L. Jackson Roberts, II, M.D. is an internationally recognized authority on
the oxidative metabolism of polyunsaturated fatty acids. He is known for
having identified PGD2 as the major mast cell lipid mediator and, more
recently, for having originated the field of studying non-enzymatically-
generated prostanoids, including the isprostanes and neuroprostanes. He is
currently Professor of Pharmacology and Medicine at Vanderbilt University and
is the author of over 170 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.
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 Fred Hutchinson Cancer Research Center. 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. 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. 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. 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.
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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; serves
as 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.
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 FDA's Panel on Generic Drugs. His research has focused on
gastrointestinal absorption of drugs and the development of stable
formulations for therapeutic compounds.
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, Multi-Organ Failure and Systemic
Inflammatory Response Syndrome 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 book chapters.
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
32
<PAGE>
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.
ITEM 2. PROPERTIES
The Company leases approximately 66,000 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.
Although the Company's existing and planned facilities are believed to be
adequate to meet its present requirements, the Company is presently planning
for additional office and laboratory space. Despite a decrease in local
vacancy rates for commercial space, the Company currently anticipates that
additional space will be available to it, when needed, on commercially
reasonable terms. See "Item 1.--Business--Manufacturing."
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
33
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock commenced trading on the Nasdaq National Market
under the symbol "CTIC" March 21, 1997. The following table sets forth, for
the periods indicated the high and low reported sales prices per share of the
Common Stock as reported on the Nasdaq National Market.
1997
<TABLE>
<CAPTION>
HIGH LOW
---- ----
<S> <C> <C>
Fourth Quarter.............................................. $18 3/4 $14 7/8
Third Quarter............................................... 16 1/4 10 5/8
Second Quarter.............................................. 13 5/8 7 5/8
First Quarter (commencing March 21, 1997)................... 10 7/8 10
1998
First Quarter (through March 27, 1998)...................... 16 3/4 4
</TABLE>
The last reported sale price of the Common Stock on the Nasdaq Market on
March 27, 1998 was $4 1/4 per share. At March 27, 1998, there were
approximately 393 shareholders of record and 15,383,414 outstanding shares of
Common Stock.
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.
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
The Company completed its initial public offering (the "IPO") in March 1997,
in which it issued and sold 3 million shares of Common Stock for aggregate
proceeds to the Company of $27.9 million. The effective date of the
Registration Statement (Commission File No. 333-2085) was March 18, 1997. The
managing underwriters for the IPO were: UBS Securities LLC, Montgomery
Securities (now as "NationsBanc Montgomery Securities, Inc.") and Raymond
James & Associates, Inc. Of the aggregate proceeds received in the IPO, $1.1
million were used to pay costs and expenses related to the IPO, resulting in
net proceeds of 26.8 million. As of December 31, 1997, of the net proceeds,
$1.9 million was used for repayment of long-term obligations and purchases of
equipment and furniture, and $20.1 million was used for research, development
and general and administrative activities. The remainder was invested in cash
equivalents and marketable securities.
34
<PAGE>
ITEM 6. 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, 1997 and for the period from September 4, 1991 (date
of incorporation) to December 31, 1997, and with respect to the consolidated
balance sheets at December 31, 1996 and 1997, are derived from the audited
consolidated financial statements of the company included elsewhere in this
Report, and is qualified by reference to such financial statements and the
notes related thereto. The consolidated balance sheets data at December 31,
1993, 1994 and 1995 and the consolidated statements of operations data for the
years ended December 31, 1993 and 1994 are derived from audited financial
statements of the Company not included in this Report. The data set forth
below should be read in conjunction with--Item 7."--Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Consolidated financial Statements and Notes thereto appearing at Item 8 of
this Report.
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 4,
1991 (DATE OF
YEAR ENDED DECEMBER 31, INCORPORATION)
------------------------------------------------------------ TO DECEMBER 31,
1993 1994 1995 1996 1997 1997
----------- ---------- ---------- ---------- ----------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS
OF OPERATIONS DATA:
Revenues:
Collaboration
agreements............ $ -- $ -- $ 100 $ 9,121 $ 11,831 $ 21,052
Operating expenses:
Research and
development........... 11,862 14,368 14,606 16,109 27,285 88,155
General and
administrative........ 4,052 5,283 6,144 7,602 10,090 34,833
----------- ---------- ---------- ---------- ----------- ---------
Total operating
expenses............ 15,914 19,651 20,750 23,711 37,375 122,988
=========== ========== ========== ========== =========== =========
Loss from operations.... (15,914) (19,651) (20,651) (14,590) (25,543) (101,936)
Other income (expense):
Investment income...... 723 616 1,167 1,174 2,895 6,867
Interest expense....... (137) (464) (509) (512) (378) (2,030)
----------- ---------- ---------- ---------- ----------- ---------
Net loss................ $ (15,328) $ (19,499) $ (19,992) $ (13,928) $ (23,026) $ (97,098)
=========== ========== ========== ========== =========== =========
Basic and diluted net
loss per share......... $ (1.00) $ (4.13) $ (4.19) $ (2.82) $ (1.98)
=========== ========== ========== ========== ===========
Shares used in
computation of basic
and diluted net loss
per share.............. 15,331,876 4,716,399 4,771,247 4,939,388 11,634,032
=========== ========== ========== ========== ===========
Pro forma basic and
diluted net loss per
share.................. $ (2.90) $ (1.69) $ (1.81)
Shares used in
computation of pro
forma basic and diluted
net loss per share..... 6,897,229 8,277,888 12,735,215
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS
DATA:
Cash, cash equivalents and
securities available-for-
sale....................... $ 27,452 $ 9,131 $ 21,906 $ 30,987 $ 70,444
Collaboration agreement
receivables................ -- -- -- -- 3,683
Working capital............. 23,387 4,094 18,342 26,300 67,602
Total assets................ 35,230 17,278 28,048 37,002 80,433
Long-term obligations, less
current portion............ 3,635 2,620 2,606 2,005 2,138
Deficit accumulated during
development stage.......... (20,652) (40,151) (60,119) (74,083) (97,133)
Total shareholders' equity.. 28,848 10,051 21,858 30,054 71,760
</TABLE>
35
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 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
"Item 1.--Business--Collaborations."
As of December 31, 1997, the Company had incurred aggregate net losses of
approximately $97.1 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
$167.6 million.
On March 26, 1997 the Company completed an initial public offering (the
"IPO") of 3 million shares of its common stock at an offering price of $10.00
per share, resulting in net proceeds of $26.8 million. Concurrent with the
closing of the Offering, the Company sold 300,000 shares of Common Stock to
Johnson & Johnson at a price of $10.00 per share, resulting in net proceeds of
$3.0 million. On October 27, 1997 the Company completed a follow-on public
offering (the "Follow-On Offering") of 2.3 million shares of its Common Stock
at an offering price of $16.00 per share, resulting in net proceeds of $34.3
million.
The Company could be impacted by the Year 2000 Issue which is the result of
computer programs being written using two digits rather than four to define
the applicable year. Any of the Company's computer programs that have time-
sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including, among other things, a temporary
inability to process transactions, send invoices, or engage in similar normal
business activities. The Company is in the process of assessing its computer
systems to determine the extent of modifications required so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter, and has also initiated formal communications with all of its
significant suppliers to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remedy their own
Year 2000 Issues. The Company presently believes that with modifications to
its existing software and conversions to new software, expected to be
completed not later than December 31, 1998, the Year 2000 Issue will not pose
significant operational problems for its computer systems. The Company does
not expect the cost to modify its existing software and convert to new
software to be material. However, if such modifications and conversions are
not made, or the systems of other companies on which the Company's systems
rely are not timely converted, the Year 2000 Issue could have a material
impact on the Company's business, prospects, financial condition, liquidity
and results of operations.
36
<PAGE>
RESULTS OF OPERATIONS
Years Ended December 31, 1997 and 1996
During the year ended December 31, 1997, the Company recorded approximately
$10.8 million of revenue for development cost reimbursements from Johnson &
Johnson in connection with the Collaboration Agreement and a $1.0 million
milestone payment in connection with Johnson & Johnson exercising its option
to expand its participation under the Collaboration Agreement to include the
development of Lisofylline ("LSF") for the treatment of patients with newly
diagnosed acute myelogenous leukemia ("AML") undergoing high dose induction
chemotherapy. During the year ended December 31, 1996 the Company recorded a
$5.0 million license fee and $871,000 in development cost reimbursements from
Johnson & Johnson in connection with the Collaboration Agreement, a $250,000
milestone payment from BioChem Pharma in connection with a collaboration
agreement and a $3.0 million signing fee from Schering AG ("Schering") in
connection with a collaboration agreement that was terminated by Schering in
April 1996. See Note 11 of Notes to Consolidated Financial Statements.
Research and development expenses increased to approximately $27.3 million
for the year ended December 31, 1997 from approximately $16.1 million for the
year ended December 31, 1996. This increase was primarily due to expanded
manufacturing, preclinical and clinical development activities, including the
ongoing funding of multiple Phase III clinical trials and the recruitment of
additional personnel, with respect to LSF and, to a lesser extent, expanded
manufacturing related development activities with respect to CT-2584, the
Company's novel small molecule drug under investigation for the treatment of
patients with multidrug (e.g., chemotherapy) resistant cancers. 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 $10.1 million
for the year ended December 31, 1997 from approximately $7.6 million for the
year ended December 31, 1996. This increase was primarily due to 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 increased to
approximately $2.9 million for the year ended December 31, 1997 from
approximately $1.2 million for the year ended December 31, 1996. The increase
was primarily associated with interest earnings on higher average cash
balances on hand during 1997 due to the proceeds from both the Company's IPO
and concurrent sale of common stock to Johnson & Johnson late in the first
quarter of 1997, and the Company's Follow-On Offering in the fourth quarter of
1997. Interest expense decreased to approximately $378,000 for the year ended
December 31, 1997 from approximately $512,000 for the year ended December 31,
1996. This decrease was primarily due to lower average balances of outstanding
long-term obligations.
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 reimbursements from Johnson &
Johnson in connection with the Collaboration Agreement, a $250,000 milestone
payment from BioChem Pharma in connection with a collaboration agreement and a
$3.0 million signing fee from Schering AG in connection with a collaboration
agreement that was terminated by Schering in April 1996. See 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 "Item 1.--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 due
37
<PAGE>
primarily to expanded manufacturing and preclinical and clinical development
activities with respect to LSF, which increase was partially offset by 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.
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 due primarily to transaction
costs associated with the collaboration agreement with Schering, 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 was approximately $1.2 million for each of the years ended
December 31, 1996 and 1995, as average cash balances and interest earned
thereon were substantially unchanged. Interest expense was approximately
$500,000 for both the years ended December 31, 1996 and 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations since inception primarily through
the sale of equity securities. As of December 31, 1997, the Company has raised
aggregate net proceeds of approximately $167.6 million from such financing
activities including public offerings of Common Stock, private placements of
Series A and B Convertible Stock and Common Stock, a bridge loan and the
exercise of stock options and warrants. In addition, the Company financed the
purchase of $13.1 million of property and equipment through financing
agreements of which approximately $3.2 million remained outstanding as of
December 31, 1997.
On March 26, 1997 the Company completed its IPO of 3 million shares of its
Common Stock at an offering price of $10.00 per share, resulting in net
proceeds of $26.8 million. Concurrent with the closing of the IPO, the Company
sold 300,000 shares of Common Stock to Johnson & Johnson (the "Johnson &
Johnson Stock Purchase") at a price of $10.00 per share, resulting in net
proceeds of $3.0 million. On October 27, 1997 the Company completed a Follow-
On Offering of 2.3 million shares of its Common Stock at an offering price of
$16.00 per share, resulting in net proceeds of approximately $34.3 million.
The Company intends to use the substantial majority of the net proceeds from
the IPO, the Johnson & Johnson Stock Purchase and the Follow-On Offering 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 the IPO, the Johnson & Johnson Stock
Purchase and the Follow-On Offering 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 the IPO, the Johnson & Johnson
Stock Purchase and the Follow-On Offering in U.S. government obligations and
other highly rated liquid debt instruments. The Company may also from time to
time consider the acquisition of
38
<PAGE>
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 "Item 1.--Business--Risk Factors--
Need for Substantial Additional Funds."
The Company's principal sources of liquidity are its cash balances, cash
equivalents and securities available-for-sale, which totaled approximately
$70.4 million as of December 31, 1997. 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 "Item
1.--Business--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 including the net proceeds from the IPO, Johnson & Johnson Stock
Purchases, and the Follow-On Offering, 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 1999. 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 terms of any additional collaborative
arrangements that the Company may enter into; 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 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 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 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. If the Company
seeks to obtain funds through arrangements with collaborative partners or
others, such partners 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 "Item 1.--Business--
Risk Factors--History and Continuation of Losses; Early State of Development,"
"--Need for Substantial Additional Funds" and "--Reliance on Relationship with
Johnson and Johnson."
As of December 31, 1997, the Company had available for Federal income tax
purposes net operating loss carryforwards of approximately $92.0 million and
research and development credit carryforwards of approximately $2.8 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" rules under Section 382 of the Internal Revenue Code of 1986. See
Note 10 of Notes to Consolidated Financial Statements.
39
<PAGE>
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors....................... 41
Consolidated Balance Sheets............................................. 42
Consolidated Statements of Operations................................... 43
Consolidated Statements of Shareholders' Equity......................... 44
Consolidated Statements of Cash Flows................................... 46
Notes to Consolidated Financial Statements.............................. 47
</TABLE>
40
<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, 1997 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, 1997 and for the period from September 4, 1991 (date of
incorporation) to December 31, 1997. 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, 1997 and 1996, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997 and for the period from September 4, 1991 (date of
incorporation) to December 31, 1997, in conformity with generally accepted
accounting principles.
Seattle, Washington Ernst & Young LLP
February 13, 1998
41
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 8,876,990 $ 5,483,515
Securities available for sale....................... 61,567,384 25,503,049
Collaboration agreement receivables................. 3,683,031 --
Prepaid expenses and other current assets........... 101,127 256,892
----------- -----------
Total current assets.................................. 74,228,582 31,243,456
Property and equipment, net........................... 5,905,100 5,117,936
Notes receivable from officers, less current portion.. 71,812 172,698
Other assets.......................................... 228,052 467,603
=========== ===========
Total assets.......................................... $80,433,496 $37,001,693
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 162,469 $ 651,130
Accrued expenses.................................... 4,712,232 3,065,297
Current portion of long-term obligations............ 1,660,226 1,226,971
----------- -----------
Total current liabilities............................. 6,534,927 4,943,398
Long term obligations, less current portion........... 2,138,265 2,004,575
Commitments
Shareholders equity:
Preferred Stock:
Authorized shares--10,000,000:
Series A Convertible Preferred Stock, no par value
Designated, issued and outstanding shares --
146,193.272 at December 31, 1996............... -- 47,366,204
Series B Convertible Preferred Stock, no par value
Designated, issued and outstanding shares --
14,925.373 at December 31, 1996................
-- 4,960,000
Common Stock, no par value:
Authorized shares--100,000,000.....................
Issued and outstanding shares--15,378,419 and
4,943,472 at December 31, 1997 and 1996
respectively...................................... 168,893,074 51,810,160
Deficit accumulated during development stage........ (97,132,770) (74,082,644)
----------- -----------
Total shareholders' equity............................ 71,760,304 30,053,720
----------- -----------
Total liabilities and shareholders' equity............ $80,433,496 $37,001,693
=========== ===========
</TABLE>
See accompanying notes.
42
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
SEPTEMBER 4,
1991 (DATE OF
YEARS ENDED DECEMBER 31, INCORPORATION) TO
---------------------------------------- DECEMBER 31,
1997 1996 1995 1997
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Revenues:
Collaboration
agreements........... $ 11,831,420 $ 9,120,806 $ 100,000 $ 21,052,226
Operating expenses:
Research and
development.......... 27,284,544 16,108,821 14,605,947 88,155,195
General and
administrative....... 10,090,253 7,601,796 6,144,650 34,833,532
------------ ------------ ------------ ------------
37,374,797 23,710,617 20,750,597 122,988,727
------------ ------------ ------------ ------------
Loss from operations:... (25,543,377) (14,589,811) (20,650,597) (101,936,501)
Other income (expense):
Investment income..... 2,894,627 1,174,219 1,167,369 6,868,386
============ ============ ============ ============
Interest expense...... (377,544) (512,597) (509,247) (2,030,006)
============ ============ ============ ============
Net loss:............... $(23,026,294) $(13,928,189) $(19,992,475) $(97,098,121)
============ ============ ============ ============
Basic and diluted net
loss per share....... $ (1.98) $ (2.82) $ (4.19)
============ ============ ============
Shares used in
computation of basic
and diluted net loss
per share............ 11,634,032 4,939,388 4,771,247
============ ============ ============
Pro forma basic and
diluted net loss per
share................ $ (1.81) $ (1.69) $ (2.90)
============ ============ ============
Shares used in
computation of pro
forma basic and
diluted net loss per
share................ 12,735,215 8,277,888 6,897,229
============ ============ ============
</TABLE>
See accompanying notes.
43
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
DECEMBER 31, 1997
<TABLE>
<CAPTION>
DEFERRED
PREFERRED STOCK DEFICIT COMPENSATION
------------------------------------ ACCUMULATED AND
COMMON STOCK SERIES A SERIES B DURING THE TECHNOLOGY
---------------------- ---------------------- ------------- DEVELOPMENT LICENSING
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STAGE COSTS TOTAL
--------- ----------- ---------- ----------- ------ ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock to founders
for cash.......... 1,914,313 $ 87,612 -- $ -- -- $-- $ -- $ (7,612) $ 80,000
Cash proceeds
received from the
issuance of shares
and warrants to
chairman of the
Board of
Directors......... 178,572 2,004,000 -- -- -- -- -- -- 2,004,000
Net proceeds from
the issuance of
common stock via
private placement
equity offering,
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
Repurchase and
cancellation of
common stock...... (60,343) (2,522) -- -- -- -- -- -- (2,522)
Share
cancellation...... (1,072) -- -- -- -- -- -- -- --
Net proceeds from
the issuance of
common stock via
private placement
equity offering,
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 via
private placement
equity offering,
net of offering
costs of $85,823.. 25,001 701,677 -- -- -- -- -- -- 701,677
Proceeds from stock
options
exercised......... 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
via private
placement equity
offering, net of
offering costs of
$1,478,541........ -- -- 95,447.004 30,496,204 -- -- -- -- 30,496,204
Share
cancellation...... (179) -- -- -- -- -- -- -- --
Exchange of
warrants for
common stock...... 104,418 -- -- -- -- -- -- -- --
Issuance of common
stock for
purchased research
and development... 98,574 1,155,750 -- -- -- -- -- -- 1,155,750
December 1995
proceeds received
from issuance of
shares to a member
of the Board of
Directors......... 5,715 67,000 -- -- -- -- -- -- 67,000
Proceeds from stock
options
exercised......... 4,653 56,264 -- -- -- -- -- -- 56,264
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
--------- ----------- ---------- ----------- --- --- ------------ -------- ------------
</TABLE>
44
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY(CONTINUED)
DECEMBER 31, 1997
<TABLE>
<CAPTION>
DEFERRED
PREFERRED STOCK DEFICIT COMPENSATION
-------------------------------------------------- ACCUMULATED AND
COMMON STOCK SERIES A SERIES B DURING THE TECHNOLOGY
----------------------- ------------------------- ----------------------- DEVELOPMENT LICENSING
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT STAGE COSTS
---------- ------------ ------------ ----------- ----------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net proceeds
from the
issuance of
Series A
convertible
preferred stock
via private
placement
equity
offering, net
of offering
costs of
$130,000....... -- -- 50,746.268 16,870,000 -- -- -- --
Net proceeds
from the
issuance of
Series B
convertible
preferred stock
via private
placement
equity
offering, net
of offering
costs of
$40,000........ -- -- -- -- 14,925.373 4,960,000 -- --
Exchange of
warrants for
common stock... 151 -- -- -- -- -- -- --
Proceeds from
stock options
exercised...... 1,974 23,121 -- -- -- -- -- --
Proceeds from
common stock
warrants
exercised...... 7,937 305,558 -- -- -- -- -- --
Net loss for the
year ended
December 31,
1996........... -- -- -- -- -- -- (13,928,189) --
Unrealized
losses on
securities
available-for-
sale........... -- -- -- -- -- -- (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) --
Net proceeds
from the
issuance of
common stock
via initial
public
offering, net
of offering
costs of
$3,197,750..... 3,000,000 26,802,250 -- -- -- -- -- --
Net proceeds
from the
issuance of
common stock
via follow-on
public
offering, net
of offering
costs of
$2,538,000..... 2,300,000 34,262,000 -- -- -- -- -- --
Net proceeds
from the
issuance of
common stock
via private
placement
equity
offering....... 300,000 3,000,000 -- -- -- -- -- --
Conversion of
Preferred Stock
to Common
Stock.......... 4,784,902 52,326,204 (146,193.272) (47,366,204) (14,925.373) (4,960,000) -- --
Proceeds from
stock options
exercised and
stock awards... 50,045 592,274 -- -- -- -- -- --
Issuance of
stock options
to non-
employees...... -- 100,186 -- -- -- -- -- --
Net loss for the
period ended
December 31,
1997........... -- -- -- -- -- -- (23,026,294) --
Unrealized gains
on securities
available-for-
sale........... -- -- -- -- -- -- (23,832) --
---------- ------------ ------------ ----------- ----------- ---------- ------------ ---
BALANCE AT
DECEMBER 31,
1997........... 15,378,419 $168,893,074 -- $-- -- $-- $(97,132,770) $--
========== ============ ============ =========== =========== ========== ============ ===
<CAPTION>
TOTAL
-------------
<S> <C>
Net proceeds
from the
issuance of
Series A
convertible
preferred stock
via private
placement
equity
offering, net
of offering
costs of
$130,000....... 16,870,000
Net proceeds
from the
issuance of
Series B
convertible
preferred stock
via private
placement
equity
offering, net
of offering
costs of
$40,000........ 4,960,000
Exchange of
warrants for
common stock... --
Proceeds from
stock options
exercised...... 23,121
Proceeds from
common stock
warrants
exercised...... 305,558
Net loss for the
year ended
December 31,
1996........... (13,928,189)
Unrealized
losses on
securities
available-for-
sale........... (34,995)
-------------
BALANCE AT
DECEMBER 31,
1996........... 30,053,720
Net proceeds
from the
issuance of
common stock
via initial
public
offering, net
of offering
costs of
$3,197,750..... 26,802,250
Net proceeds
from the
issuance of
common stock
via follow-on
public
offering, net
of offering
costs of
$2,538,000..... 34,262,000
Net proceeds
from the
issuance of
common stock
via private
placement
equity
offering....... 3,000,000
Conversion of
Preferred Stock
to Common
Stock.......... --
Proceeds from
stock options
exercised and
stock awards... 592,274
Issuance of
stock options
to non-
employees...... 100,186
Net loss for the
period ended
December 31,
1997........... (23,026,294)
Unrealized gains
on securities
available-for-
sale........... (23,832)
-------------
BALANCE AT
DECEMBER 31,
1997........... $ 71,760,304
=============
</TABLE>
45
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 4,
1991 (DATE OF
TWELVE MONTHS ENDED DECEMBER 31, INCORPORATION)
---------------------------------------- TO DECEMBER 31,
1997 1996 1995 1997
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................ $(23,026,294) $(13,928,189) $(19,992,475) $(97,098,121)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization.......... 1,748,618 1,658,475 1,718,765 8,209,879
Noncash research and
development expense... -- -- 1,155,750 1,155,750
Noncash interest
expense............... -- -- -- 25,918
Noncash rent expense... 74,109 54,216 33,396 568,397
Non-cash compensation
expense............... 100,186 -- -- 100,186
Investment premium
(discount)
amortization.......... (177,947) 111,315 22,500 344,114
Changes in assets and
liabilities:
Collaboration
agreement
receivables......... (3,683,031) -- -- (3,683,031)
Prepaid expenses and
other current
assets.............. 155,765 (236,812) (2,789) (101,127)
Notes receivable from
officers............ 100,886 (46,200) (10,700) (167,036)
Other assets......... 239,551 (201,679) 9,208 (244,053)
Accounts payable..... (488,661) (406,298) 329,525 162,469
Accrued expenses..... 1,646,935 1,652,873 (245,376) 4,712,232
------------ ------------ ------------ ------------
Total adjustments:...... (283,589) 2,585,890 3,010,279 11,083,698
------------ ------------ ------------ ------------
Net cash used in
operating activities:.. (23,309,883) (11,342,299) (16,982,196) (86,014,423)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of
securities available-
for-sale.............. (85,765,759) (27,113,929) (13,165,743) (161,791,786)
Proceeds from sales of
securities available-
for-sale.............. 1,999,444 -- 3,856,167 16,889,757
Proceeds from
maturities of
securities available-
for-sale.............. 47,845,281 16,439,000 1,059,296 82,945,068
Purchase of property
and equipment......... (2,540,798) (1,046,640) (204,424) (13,875,734)
Dispositions of
property and
equipment............. 15,831 -- 36,476 167,300
------------ ------------ ------------ ------------
Net cash used in
investing activities... (38,446,001) (11,721,569) (8,418,228) (75,665,395)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES
Sales of common stock to
founders............... -- -- -- 80,000
Proceeds from borrowings
from shareholders...... -- -- -- 850,000
Sale of common stock via
initial public
offering, net of
offering costs......... 26,802,250 -- -- 26,802,250
Sale of common stock via
follow-on public
offering, net of
offering costs......... 34,262,000 -- -- 34,262,000
Sale of Series A
Preferred Stock via
private placement, net
of offering costs...... -- 16,870,000 30,496,204 47,366,204
Sale of Series B
Preferred Stock via
private placement, net
of offering costs...... -- 4,960,000 -- 4,960,000
Sale of Common Stock via
private placements, net
of offering costs...... 3,000,000 -- 67,000 52,307,084
Repurchase of common
stock.................. -- -- -- (2,522)
Proceeds from common
stock options
exercised.............. 592,274 23,121 56,264 673,034
Proceeds from common
stock warrants
exercised.............. -- 305,558 -- 305,558
Repayment of long-term
obligations............ (1,226,971) (1,159,188) (2,954,434) (9,698,240)
Change in deferred
offering costs......... -- -- 458,726 --
Proceeds from the
issuance of long-term
obligations............ 1,719,806 616,300 1,800,000 12,651,440
------------ ------------ ------------ ------------
Net cash provided by
financing activities... 65,149,359 21,615,791 29,923,760 170,556,808
------------ ------------ ------------ ------------
Net increase (decrease)
in cash and cash
equivalents............ 3,393,475 (1,448,077) 4,523,336 8,876,990
Cash and cash
equivalents at
beginning of period.... 5,483,515 6,931,592 2,408,256 --
------------ ------------ ------------ ------------
Cash and cash
equivalents at end of
period................. $ 8,876,990 $ 5,483,515 $ 6,931,592 $ 8,876,990
============ ============ ============ ============
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Acquisition of equipment
pursuant to capital
lease obligations...... -- $ $ 85,532 -- $ 362,425
============ ============ ============ ============
Conversion of
convertible debt and
related accrued
interest into common
stock.................. $ -- $ -- $ -- $ 875,918
============ ============ ============ ============
Conversion of preferred
stock into common
stock.................. $ 52,326,204 -- -- $ 52,326,204
============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION
Cash paid during the
period for interest
obligations............ $ 377,544 $ 514,534 $ 529,847 $ 2,003,569
============ ============ ============ ============
</TABLE>
See accompanying notes.
46
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 primarily 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. Revenue under
collaboration agreements represents reimbursement of development
47
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
costs, license fees, nonrefundable upfront fees and milestone payments.
Revenue from nonrefundable upfront fees are recognized upon satisfaction of
related obligations. Other revenue under collaboration agreements are
recognized as the earnings process is completed, based on the provisions of
each agreement.
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).
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 expensed over the lives of the respective
contracts.
Net Loss and Pro Forma Net Loss per Share
In 1997, the FASB issued Statement No. 128, "Earnings per Share." Statement
128 replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Basic earnings per share is based
on the weighted average number of common shares outstanding for the period and
excludes any dilutive effects of options, warrants and convertible securities.
Diluted earnings per share assumes the conversion of all dilutive securities,
such as options, warrants and convertible preferred stock.
As all preferred stock converted to common stock at the closing of the
Company's initial public offering, pro forma basic and diluted loss per share
is computed on the basis of the average number of common shares outstanding
plus the effect of preferred shares using the "if-converted" method.
Other Financial Instruments
At December 31, 1997 and 1996, the carrying value of financial instruments
such as receivables and payables approximated their fair values, based on the
short-term maturities of these instruments. Additionally, the carrying value
of long-term liabilities approximated fair values because the underlying
interest rates reflect market rates at the balance sheet dates.
Income Taxes
The Company accounts for income taxes using the liability method under
Statement of Accounting Standards No. 109, "Accounting for Income Taxes."
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.
48
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other Risks and Uncertainties
The Company is relying on a single contract manufacturer for the production
of LSF for preclinical and clinical trials and for the subsequent commercial
requirements. The responsibility for the manufacturing of LSF will convert to
Johnson & Johnson under terms of the Collaboration Agreement no later than
November 8, 1999, however, Johnson & Johnson may elect to assume
responsibility for the manufacture of LSF at any time prior to that date.
New Accounting Pronouncements
In 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which is required to be adopted for the fiscal years beginning after
December 15, 1997. The new Statement requires that companies report and
display comprehensive income and its components, as defined in Statement 130,
for all periods presented. Under the new requirements, comprehensive income
must be displayed with the same prominence as other financial statements. The
Company plans to adopt the new statement in 1998.
In 1997, the FASB issued Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is required to be adopted for
the fiscal years beginning after December 15, 1997. The new Statement
supersedes FASB Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise." Companies will be required to report each segment and
related information, as defined in Statement 131, in the Company's notes to
the financial statements. The Company plans to adopt the new Statement in
1998.
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>
1997
------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. government
obligations............. $32,410.180 $ 6,278 $(23,100) $32,393,358
Corporate obligations.... 29,191,849 2,863 (20,686) 29,174,026
----------- ------- -------- -----------
$61,602,029 $ 9,141 $(43,786) $61,567,384
=========== ======= ======== ===========
<CAPTION>
1996
------------------------------------------------
GROSS GROSS
UNREALIZED UNREALIZED
AMORTIZED COST GAINS LOSSES FAIR VALUE
-------------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
U.S. government
obligations............. $ 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>
49
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1997 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>
1997 1996
---------- ----------
<S> <C> <C>
Leasehold improvements................................ $4,722,563 $4,296,136
Lab equipment......................................... 4,303,332 3,642,378
Furniture and office equipment........................ 4,690,447 3,441,253
---------- ----------
13,716,342 11,379,767
Less: accumulated depreciation and amortization....... 7,811,242 6,261,831
---------- ----------
$5,905,100 $5,117,936
========== ==========
</TABLE>
As of December 31, 1997 and 1996, furniture and office equipment included
$232,585, and $362,425 respectively, of equipment acquired under capitalized
leases. Accumulated depreciation related to this equipment totaled $149,004
and $217,179 at December 31, 1997 and 1996, respectively. These leases are
secured by the underlying assets.
4. EQUITY OFFERINGS
In 1992, the Company completed its first private placement equity offering.
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.
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
50
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 had preferential rights to noncumulative dividends
and the right to vote with the common stock on an as-converted basis and,
voting as a separate class, were entitled to elect one director. Each share of
Series A Convertible Preferred Stock automatically converted into 29.6986
shares of common stock at an adjusted conversion price of $11.28 per share
upon the closing of the Company's initial public offering on March 26, 1997.
The shares of common stock issued upon conversion of the Series A Convertible
Preferred Stock have certain registration rights.
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 had the same rights,
preferences and conversion features as the Series A Convertible Preferred
Stock, but was 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. Each share of Series B Convertible Preferred
Stock automatically converted into 29.6986 shares of common stock at an as
adjusted conversion price of $11.28 per share upon the closing of the
Company's initial public offering on March 26, 1997.
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.
On March 26, 1997 the Company completed an initial public offering (the
"IPO") of 3 million shares of its common stock at an offering price of $10.00
per share, resulting in net proceeds of $26.8 million. Concurrent with the
closing of the IPO, the Company sold 300,000 shares of Common Stock to Johnson
& Johnson at a price of $10.00 per share, resulting in net proceeds of $3.0
million. In connection with the IPO, on March 3, 1997 the Company's
shareholders 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 became
effective when an amendment to the Company's Restated Articles of
Incorporation was filed with the Secretary of 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.
In addition, upon closing of the IPO, all of the outstanding shares of
Series A Convertible Preferred Stock automatically converted into 4,341,640
shares of common stock and all of the outstanding shares of Series B
Convertible Preferred Stock automatically converted to 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 IPO at
an initial public offering price below $11.725 per share).
51
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On October 27, 1997 the Company completed a follow-on offering of 2.3
million shares of its common stock at an offering price of $16 per share,
resulting in net proceeds of $34.3 million.
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
$694,000 in the aggregate as of December 31, 1997), minimum annual and cost-
of-living increases, and discretionary incentive bonus awards.
The Company's President and Chief Executive Officer has $162,079 outstanding
at December 31, 1997 under a loan made to him by the Company in 1993, which
accrues interest at 5.35%. The Company forgave and expensed $67,000 during
1997. The Company will forgive $67,000 on each of December 17, 1998 and 1999.
The portion of this loan which is to be forgiven in 1998 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 1994, the Company authorized a non-interest bearing loan of up to
$150,000 to its Executive Vice President, Product Development in connection
with his 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. $13,098 remains
outstanding at December 31, 1997.
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 forgave one half of the loan on April 18,
1997 and shall forgive the second half of the loan on April 8, 1998. The
portion of this loan to be forgiven in 1998 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.
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.
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
totaling $100,000
52
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
$1,144,290, $995,866, and $993,471 for the years ended December 31, 1997,
1996, and 1995, respectively. Future minimum annual rental payments under the
leases approximate the following for the years ended December 31:
<TABLE>
<CAPTION>
1998............................................................. $1,133,000
<S> <C>
1999............................................................. 1,143,000
2000............................................................. 1,143,000
2001............................................................. 1,143,000
2002............................................................. 1,143,000
Thereafter....................................................... 95,000
----------
$5,800,000
==========
</TABLE>
7. LONG-TERM OBLIGATIONS
Long-term obligations consisted of the following at December 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Master financing agreements:
Due December 31, 1998, monthly payments of $55,827,
including interest at 14.7%........................ $ 619,352 $1,154,281
Due December 31, 1998, monthly payments of $45,820,
including interest at 17.6%........................ 500,802 921,289
Due August 1999, monthly payments of $20,523,
including interest at 16.1%........................ 358,019 531,336
Due December 2001, monthly payments of $44,196,
including interest at 12.5%........................ 1,719,806 --
Capital Lease obligations............................ 32,115 130,352
Deferred rent........................................ 568,397 494,288
---------- ----------
$3,798,491 $3,231,546
Less current portion................................. 1,660,226 1,226,971
---------- ----------
$2,138,265 $2,004,575
========== ==========
</TABLE>
53
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In December 1994, the Company entered into a master financing agreement
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.
In December 1997, the Company entered into a master financing agreement with
another financing company, whereby the Company borrowed $1,806,961 over 48
months from the finance company. 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 1998 through 2001,
respectively, approximate $1,660,226, $529,168, $424,029 and $616,671.
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>
1997 1996
--------- ---------
<S> <C> <C>
Series A. Preferred Stock................................ -- 4,341,704
Stock Options............................................ 2,297,967 1,330,009
Series B Preferred Stock................................. -- 443,262
Employee Stock Purchase Plan............................. 285,714 285,714
Warrants................................................. -- 77,907
--------- ---------
2,583,681 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
54
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 1994 Plan also
provides for the automatic grant of nonstatutory options to nonemployee
directors.
As of December 31, 1997, the Company had reserved 2,279,967 shares of common
stock for issuance under the 1992 and 1994 Plans, of which 830,704 were
exercisable at an average price of $11.79 per share, and 463,325 were
available for future grants. At December 31, 1996 and 1995, 488,336 and
320,231 shares of common stock respectively, were exercisable.
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, the estimated
fair value of the underlying common stock at that time. 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 $143,707 and
$672,884 in 1996 and 1995, respectively, related to this option repricing.
A summary of the activity related to the 1992 and 1994 Plans follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE
UNDER PRICE
OPTION PER SHARE
--------- ---------
<S> <C> <C>
Balance January 1, 1995 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
---------
Granted................................................... 709,286 13.49
Canceled.................................................. (51,207) 11.78
Exercised................................................. (50,045) 11.835
---------
Balance December 31, 1997, unexercised..................... 1,816,642 $ 12.46
=========
</TABLE>
55
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
EXERCISABLE
OPTIONS OUTSTANDING
OPTIONS OUTSTANDING (WITHOUT RESTRICTION)
--------------------------------------------- -----------------------
WEIGHTED WEIGHTED
NUMBER AVERAGE WEIGHTED AVERAGE
OUTSTANDING REMAINING AVERAGE EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES 12/31/97 CONTRACTUAL LIFE PRICE VESTED PRICE
------------------------ ----------- ---------------- ---------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$ 8.3125--11.7250....... 1,287,452 7.4 Years $11.71 813,334 $ 11.70
$12.4375--17.50......... 529,190 9.5 Years $14.30 17,370 $ 16.09
--------- -----------
1,816,642 8.0 Years $12.46 830,704 $ 11.79
========= ===========
</TABLE>
The weighted average fair value of options granted during 1997, 1996, and
1995 was $8.93, $2.34, and $3.87, respectively.
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 a Black-
Scholes option pricing model that takes 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 6.7%, and 5.4% to 7.8%, during 1997 and 1996, respectively, over
the expected life of the options. The Company used a 1.6787 volatility rate in
1997. 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 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,
basic and diluted net loss and pro forma basic and diluted net loss per share
would have been adjusted (increased) as follows for the years ended December
31:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net loss
As reported....................... $(23,026,294) $(13,928,189) $(19,992,475)
Pro forma as adjusted............. (24,234,490) (14,536,137) (20,812,869)
Basic and diluted net loss per
share:
As reported....................... (1.98) (2.82) (4.19)
Pro forma as adjusted............. (2.08) (2.94) (4.36)
Pro forma basic and diluted net loss
per share:
As reported....................... (1.81) (1.68) (2.90)
Pro forma as adjusted............. (1.90) (1.76) (3.02)
</TABLE>
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, and were approved by
shareholders at the 1997 Annual Meeting of Shareholders. The Company records
compensation expense on the date of shareholder approval for the amount by
which fair market value at that date exceeds the exercise price.
56
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Basic and diluted loss per share is calculated using the average number of
common shares outstanding. Pro forma basic and diluted loss per share is
computed on the basis of the average number of common shares outstanding plus
the effect of convertible preferred shares using the if-converted method as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Net loss (A)........................ $(23,026,294) $(13,928,189) $(19,992,475)
============ ============ ============
Weighted average outstanding:
Common Stock (B)................... 11,634,032 4,939,388 4,771,247
Convertible preferred stock........ 1,101,183 3,288,500 2,125,982
------------ ------------ ------------
Total weighted average outstanding
(C)................................ $ 12,735,215 $ 8,227,888 $ 6,897,229
============ ============ ============
Loss per share:
Basic and diluted (A/B)............ $ (1.98) $ (2.82) $ (4.19)
============ ============ ============
Pro forma basic and diluted........ $ (1.81) $ (1.69) $ (2.90)
============ ============ ============
</TABLE>
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.
All warrants have expired as of December 31, 1997.
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 have been 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,
1997, no shares of the Company's common stock have been purchased under the
Purchase Plan.
10. INCOME TAXES
As of December 31, 1997, the Company had net operating tax loss
carryforwards of approximately $92 million and research and development credit
carryforwards of approximately $2.8 million. The carryforwards begin to expire
in the year 2007. Due to prior rounds of equity financing (see Note 4) and the
Company's public offerings of common stock, 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. 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.
57
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 $8,772,000, $4,785,000 and $6,928,000 during 1997, 1996
and 1995, respectively. Significant components of the Company's deferred tax
liabilities and assets as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards................. $31,538,000 $23,914,000
Research and development tax credit
carryforwards................................... 2,783,000 1,752,000
Accruals on financial statements in excess of tax
returns......................................... 463,000 444,000
Depreciation in financial statements in excess of
tax............................................. 425,000 327,000
----------- -----------
Net deferred tax assets............................ $35,209,000 $26,437,000
=========== ===========
Valuation allowance for deferred tax assets........ $35,209,000 $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 $250,000 and $100,000
under the BioChem Collaboration Agreement in 1996 and 1995, respectively. No
payments were received in 1997.
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 financing, research, development and
commercialization of Lisofylline ("LSF") 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
58
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 III
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.
Collaboration Agreement
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 LSF. 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 LSF in the United States. The Company will also be responsible
for the manufacture of LSF for development and commercialization purposes
until November 1999, and Johnson & Johnson will be responsible for the
manufacture of LSF 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 LSF 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 have the exclusive right to develop and market
LSF, at its own expense, for markets outside of the United States and Canada
subject to specified royalty payments 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
LSF.
The collaboration with Johnson & Johnson initially covers the development of
LSF 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. In September 1997, Johnson & Johnson
exercised an option under the collaboration agreement to expand its
participation to include the development of LSF to include the treatment of
patients with acute myelogenous leukemia ("AML") undergoing high-dose
chemotherapy. In connection with this milestone, Johnson & Johnson made a $1.0
million payment to cti, and under the expanded terms of the collaboration
agreement, will pay 60% of all AML development costs. Johnson & Johnson also
has certain options to expand the collaboration to include the development of
LSF for any other indication for which LSF 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 LSF 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
59
<PAGE>
CELL THERAPEUTICS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
exercise such option with respect to any such indication, the Company would be
free to develop LSF 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.
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 LSF and corresponding
intermediate compounds. Under the terms of the agreement, ChiRex will
manufacture and supply LSF 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.
12. SUBSEQUENT EVENTS
In January 1998, the Company entered into an agreement with City of Hope
National Medical Center to form a joint venture to discover and develop a new
class of drugs to treat diabetes and its complications. Under the terms of the
agreement, the Company will fund the first two years of the venture and
provide expertise in drug discovery and technology in oxidized lipid
chemistry. City of Hope will contribute its rights to technology for a human
enzyme, human leukocyte 12-Lipoxygenase (12-LO), which it has identified and
partially sequenced. The enzyme is believed to be responsible for generating
oxidized lipids that may be associated with the development of vascular
complications of diabetes. City of Hope will also provide expertise and
services in cellular analysis, animal models and clinical trials. The Company
will hold a 70% interest in the joint venture and City of Hope will hold 30%.
60
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ITEM 9. CHANGES IN DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
directors and executive officers of cti as of March 27, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Max E. Link, Ph.D.(1).... 57 Chairman of the Board of Directors
James A. Bianco,
M.D.(1)................. 41 President, Chief Executive Officer, and Director
Jack W. Singer, M.D...... 55 Executive Vice President, Research Program
Chairman, and Director
Louis A. Bianco.......... 45 Executive Vice President, Finance and
Administration
Maurice J. Schwarz,
Ph.D.................... 58 Executive Vice President, Product Development
Robert A. Lewis, M.D..... 53 Executive Vice President, Chief Scientific
Officer
Susan O. Moore........... 49 Executive Vice President, Human Resource
Development
Jack M. Anthony.......... 52 Executive Vice President, Marketing and Business
Development
Jack L. Bowman(2)........ 65 Director
Jeremy L. Curnock
Cook(1)(2).............. 48 Director
Wilfred E. Jaeger,
M.D.(2)(3).............. 42 Director
Terrence M.
Morris(2)(3)............ 51 Director
Mary O'Neil Mundinger,
D.P.H................... 60 Director
Phillip M. Nudelman,
Ph.D.(1)(3)............. 62 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 1987 until
April 1992, and Chairman from April 1992 until May 1993. Dr. Link currently
serves on the boards of directors of Alexion Pharmaceutical, Inc., Human
Genome Sciences, Inc., Procept, Inc., Protein Design Labs, Inc., Sulzer Medica
Ltd. and CytRx Corporation. 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
transplantation center. From 1990 to 1992, Dr. Bianco was the director of the
BMT 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, 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
61
<PAGE>
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 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 where he authored 150 publications on mast
cell biology and oxidized lipids. 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 in March 1993, 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, a
cell and gene therapy concern. From 1973 to 1989, Mr. Anthony held various
executive management positions at Baxter Healthcare Corporation, most recently
as Vice President, Blood Therapy Group.
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, Cellegy Pharmaceuticals, Inc., Targeted
Genetics Corp., Osiris Therapeutics, Inc. and Vaxcel, 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,
and Vanguard Medica Group plc and Cantab Pharmaceuticals plc. He also serves
on the boards of directors of
62
<PAGE>
Creative Biomolecules, Inc., Targeted Genetics, Corp., Sugen Inc. and Ribozyme
Pharmaceuticals, Inc. in the United States and Inflazyme Pharmaceuticals Inc.
in Canada.
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 and is the Secretary and Chief Financial
Officer of Radiant Medical, Inc., a medical device company. 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 is also a director of Intensiva Healthcare Corporation and several
privately held companies. 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.
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. Mundinger has been a Director of cti since April 1997. Since 1986, she
has been a Dean and Professor at the School of Nursing, and an Associate Dean
on the Faculty of Medicine at Columbia University. Dr. Mundinger is a
Commissioner on the Commonwealth Fund Commission on Women's Health and also
serves on the Board of Health Care Services, Institute of Medicine of the
National Academy of Science and United Healthcare. Dr. Mundinger also serves
on the editorial board of National Health Publishing Company, Inc. Dr.
Mundinger is a cum laude graduate of the University of Michigan and received
her Doctorate of Public Health from Columbia's School of Public Health.
Dr. Nudelman has been a Director of cti since March 1994. He is the
President and Chairman of the Board of Kaiser/Group Health. From 1991 to 1997,
Dr. Nudelman was the President and Chief Executive Officer of Group Health
Cooperative of Puget Sound, a health maintenance organization. Dr. Nudelman
serves on the boards of directors of the American Association of Health Plans,
ATL Ultrasound, SpaceLabs Medical, Inc., Cytran Ltd., the United Way and
Intensiva Healthcare Corporation. 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.
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
Dr. Nudelman and Messrs. Bowman and Curnock Cook expire in 1998; the current
terms of Drs. Link and Jaeger and Mr. Morris expire in 1999; and the current
terms of Drs. Bianco, Singer and Mundinger expire in 2000. 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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's officers and Directors, and persons who own more than ten
percent of a registered class of the Company's equity securities, to file with
the Securities and Exchange Commission (the SEC) reports of ownership and
changes in ownership of common stock and other equity securities of the
Company. Officers, Directors and greater than ten percent shareholders are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file. The Company does prepare Section 16(a) forms on behalf
of its officers and Directors based on the information provided by them.
63
<PAGE>
Based solely on review of this information, or written representations from
reporting persons that no other reports were required, the Company believes
that, during the 1997 fiscal year, all Section 16(a) filing requirements
applicable to its officer, Directors and greater than ten percent beneficial
owners were complied with, other than the reporting of transaction by Max E.
Link, a Director, that should have been filed on Form 4 in September 1997 but
instead was filed on Form 5 in February 1998.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation paid for the years ended
December 31, 1996 and 1997 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, 1997 (collectively, the Named Executive
Officers):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------- -------------------
OTHER ANNUAL SECURITIES ALL OTHER
SALARY BONUS COMPENSATION UNDERLYING OPTIONS/ COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) SARS (#) ($)
- --------------------------- ---- ------- ------- ------------ ------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
James A. Bianco, M.D.... 1997 393,840 120,000 88,426(2) 80,000 294,319(3)
President and Chief
Executive 1996 358,032 50,000 -- 85,714 72,223(4)
Officer 1995 315,984 27,475 -- 137,955(5) 7,402(6)
Jack W. Singer, M.D..... 1997 251,898 60,000 3,821(7) 27,500 11,655(8)
Executive Vice
President, Research 1996 248,976 15,000 -- 28,571 10,524(8)
Program Chairman 1995 248,976 -- -- 20,957(5) 9,762(6)
Louis A. Bianco......... 1997 300,120 -- 3,639(7) 15,000 96,109(9)
Executive Vice
President, 1996 263,088 -- -- 21,428 55,367(4)
Finance and
Administration 1995 232,195 10,000 -- 55,098(5) 6,772(6)
Maurice J. Schwarz,
Ph.D................... 1997 187,500 35,000 3,221(7) 15,000 49,429(10)
Executive Vice
President, Product 1996 187,500 58,993 -- 28,571 65,619(10)
Development 1995 187,500 12,936 8,200(11) 28,571(5) 45,802(10)
Robert A. Lewis, M.D.... 1997 262,032 40,000 2,741(7) 20,000 --
Executive Vice
President, Chief 1996 181,512 -- -- 67,142 26,144(12)
Scientific Officer
</TABLE>
- --------
(1) 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.
(2) Other annual compensation for Dr. Bianco includes payments totaling
$86,366 to cover Dr. Bianco's estimated tax liabilities with respect to
certain perquisites as well as each of the life insurance premium payment
and loan forgiveness described in Note 4.
(3) All other compensation for Dr. Bianco includes the following: (i) payments
aggregating $164,636 for unused sick and vacation leave accrued by Dr.
Bianco between 1992 and 1996, pursuant to the terms of his employment
agreement then in effect, (ii) reimbursement of long-term disability
insurance premiums of $8,737, (iii) a premium payment of $40,000 for life
insurance required by the terms of Dr. Bianco's employment contract, and
(iv) loan forgiveness of $80,946 pursuant to the terms of Dr. Bianco's
current employment agreement. See "Employment Agreements."
(4) All other compensation includes payment of unused sick leave for Dr.
Bianco and Mr. Bianco accrued during 1992, 1993 and 1994, aggregating
$64,526 and $47,415, respectively, and reimbursement for long-term
disability insurance premiums of $7,697 and $7,952, respectively.
(5) 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.
(6) Represents reimbursement for long-term disability insurance premiums.
(7) Other annual compensation includes payments to cover estimated tax
liabilities with respect to certain perquisites, and, in the case of Mr.
Bianco, the life insurance premium described in Note 10.
(8) All other compensation for Dr. Singer includes reimbursement for long-term
disability insurance premiums of $10,524 and $11,655 in 1996 and 1997,
respectively.
(9) All other compensation for Mr. Bianco includes the following: (i) payments
aggregating $86,210 for unused vacation leave for Mr. Bianco accrued
between 1992 and 1996, pursuant to the terms of his employment agreement
then in effect, (ii) reimbursement for long-term disability insurance
premiums of $8,474, and (iii) a premium payment of $1,425 for life
insurance.
(10) All other compensation for Dr. Schwarz includes loan forgiveness of
$42,210, $60,789, and $49,429 in 1995, 1996 and 1997, respectively, and
$3,592 and $4,830 of relocation expenses in 1995 and 1996, respectively,
all in connection with Dr. Schwarz's relocation to the Seattle area in
1996. See "Employment Agreements."
(11) Includes payments to cover Dr. Lewis' estimated tax liabilities with
respect to the relocation expense reimbursements described in Note 12
hereto.
(12) Includes reimbursement of Dr. Lewis' relocation expenses.
64
<PAGE>
The following table sets forth for each of the Named Executive Officers the
number of options granted during the year ended December 31, 1997 and the
potential realizable value of such grants:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------ POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES EXERCISE OPTION TERM (3)
OPTIONS IN FISCAL PRICE EXPIRATION -----------------------
NAME GRANTED(1) YEAR (%) ($/SH)(2) DATE 5% ($) 10% ($)
- ---- ---------- ---------- --------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
James A. Bianco, M.D.... 80,000 17.1% $16.0625 12/09/07 $808,130 $2,047,959
Jack W. Singer, M.D..... 27,500 5.8% 16.0625 12/09/07 277,795 703,986
Louis A. Bianco......... 15,000 3.2% 16.0625 12/09/07 151,524 383,992
Maurice J. Schwarz,
Ph.D................... 15,000 3.2% 16.0625 12/09/07 151,524 383,992
Robert A. Lewis, M.D.... 20,000 4.2% 16.0625 12/09/07 202,032 511,990
</TABLE>
OPTIONS GRANTED IN LAST FISCAL YEAR
- --------
* Less than one percent.
(1) Options were granted under the 1994 Equity Incentive Plan (the "1994
Plan").
(2) Stock options were granted at an exercise price equal to 100% of the
estimated fair value of the Common Stock, as determined by the Board of
Directors on the date of grant.
(3) Potential realizable value is based on the assumption that the Common
Stock appreciates at the annual rates shown (compounded annually) from the
date of grant until the expiration of the option term. These assumed rates
of appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
the future Common Stock price. There can be no assurance that any of the
values reflected in this table will be achieved.
The following table sets forth for each of the Named Executive Officers, the
fiscal year-end number and value of unexercised options. No options were
exercised by any of the Named Executive Officers during 1997.
AGGREGATED OPTION EXERCISES IN LATEST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY OPTIONS
UNDERLYING UNEXERCISED AT FISCAL YEAR-END
OPTIONS AT FISCAL YEAREND (#) 1997 ($)(1)
-------------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
James A. Bianco, M.D.... 140,337 163,335 $740,278 $514,592
Jack W. Singer, M.D..... 28,102 48,929 148,238 138,819
Louis A. Bianco......... 56,530 35,001 298,196 119,568
Maurice J. Schwarz,
Ph.D................... 34,286 37,858 180,859 134,638
Robert A. Lewis, M.D.... 10,001 77,144 52,755 320,185
</TABLE>
- --------
(1) This amount is the aggregate number of in-the-money options multiplied by
the difference between the last reported sale price of the common Stock on
the Nasdaq National Market on December 31, 1997 and the exercise price for
that option.
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, in fiscal year
1997 each non-employee Director received a fully-vested option grant for 1,905
shares pursuant to the Automatic Option Grant Program in effect for them under
the 1994 Plan. Each such option has an exercise price equal to 100% of the
fair market value on the grant date and a term of 10 years measured from such
grant date.
65
<PAGE>
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 $393,840 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 "Item 13. Certain Relationships and
Related 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 Administration, entered into a
three-year employment agreement with cti, effective February 1, 1992, which
agreement was extended for an additional three-year period by a letter
agreement dated May 27, 1994, and which expired on January 31, 1998. Effective
January 1, 1997, cti's Board of Directors increased Mr. Bianco's annual base
salary to $300,120. His employment agreement provided that this base salary
was 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 might determine. The agreement provided that, in the event
that cti terminated Mr. Bianco's employment without cause or Mr. Bianco
terminated his employment for cause, cti would have paid at such time 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
was greater, and would continue to provide certain benefits through the term
of the agreement. The agreement also provided that Mr. Bianco was entitled to
four weeks of paid vacation per year and that any unused vacation time and
sick leave would 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 was
renewable automatically for successive one-year terms subject to certain
termination provisions contained in the agreement and expired on May 1, 1997.
The agreement provided 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 would pay Dr.
Schwarz such amounts owing for the remaining term of the agreement. The
agreement further provided 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 would 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.
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 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.
66
<PAGE>
Each of Jack W. Singer, Louis A. Bianco and Maurice J. Schwarz have entered
into a one-year severance agreement with cti effective September 23, 1997,
February 1, 1998 and May 2, 1997, respectively. The agreements provide that,
in the event any of the foregoing Named Executive Officers is terminated by
cti without cause or resigns for good reason, cti shall pay his base salary
for one year from the severance date and shall pay accrued but unused vacation
through the severance date. If any of the foregoing Named Executive Officers
is terminated by cti without cause or resigns for good reason, cti shall also
continue to pay his benefits.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the last completed fiscal year, the Compensation Committee consisted
of Dr. Jaeger and Messrs. Curnock Cook, Bowman and Morris. 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. At the 1997 Annual Meeting
of Shareholders, Dr. Jaeger and Mr. Curnock Cook were elected as Directors by
the holders of the outstanding shares of Common Stock. In March 1997,
Biotechnology Investments Limited, which is an affiliate of Mr. Curnock Cook,
purchased 250,000 shares of Common Stock in the Company's initial public
offering for an aggregate purchase price of $2.5 million. See Item "13.--
Certain Relationships and Related Transactions."
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Board of Directors (the "Committee") is
composed of Directors who are not employees of the Company. The Committee is
responsible for establishing and administering the Company's executive
compensation arrangements, including the compensation of the Chief Executive
Officer and the other executive officers and key employees of the Company,
subject to ratification by the Board. The Committee also administers the 1994
Plan and the Purchase Plan and makes all stock option grants under such plans
to the Company's executive officers.
GENERAL COMPENSATION POLICY
The Company operates in the extremely competitive and rapidly changing
biotechnology industry. The Committee believes that the compensation programs
for executive officers of the Company should be designed to attract, motivate,
and retain talented executives responsible for the success of the Company and
should be determined within a competitive framework and based on the
achievement of strategic corporate objectives and individual performance and
teamwork. Within this overall philosophy, the Committee's objectives are to:
. Offer a total compensation program that takes into consideration the
compensation practices of a specifically identified peer group of
companies with which the Company competes for executive talent.
. Integrate each officer's compensation package with annual and long-term
corporate objectives and focus the officer's attention on the attainment
of those objectives.
. Encourage the creation of shareholder value through the achievement of
strategic corporate objectives.
. Provide annual variable incentive awards that take into account the
Company's performance relative to corporate objectives and the
individual officer's contributions.
. Align the financial interests of executive officers with those of
shareholders by providing significant equity-based, long-term
incentives.
67
<PAGE>
COMPENSATION COMPONENTS AND PROCESS
The Committee has developed a compensation policy which is designed to
attract and retain qualified key executive officers critical to the Company's
success. In developing this policy, the Committee has concluded that it is not
appropriate to base a significant percentage of the compensation payable to
the executive officers upon traditional financial targets, such as profit
levels and return on equity. This is primarily because the Company's products
are still in either development or clinical testing phases, and the Company
has not yet realized any significant revenues or product sales. In addition,
the Company's stock price performance may often reflect larger market forces
than the Company's actual performance. For these reasons, it is difficult to
tie the Company's compensation programs to financial performance. Instead, the
Committee bases its decisions upon the attainment of corporate-wide, team and
individual performance. Such performance is evaluated in terms of the
achievement of strategic and business plan goals, including long-term goals
tied to the expansion of the Company's core technology and innovative product
development, the discovery of new drug candidates and the development of the
Company's organizational infrastructure.
In establishing the compensation package of the Company's executive
officers, the Committee has adopted a "total pay" philosophy which includes
three major components: (i) base salary set at levels which are commensurate
with those of comparable positions at other biotechnology companies, (ii)
annual bonuses and stock option grants tied to the achievement of strategic
corporate and team objectives and individual performance and (iii) long-term,
stock-based incentive awards intended to strengthen the mutuality of interests
between the executive officers and the Company's shareholders.
The Committee determines the compensation levels for the executive officers
with the assistance of an independent consulting firm that furnishes the
Committee with executive compensation data drawn from several nationally
recognized surveys of companies within the biotechnology and pharmaceutical
industries. On the basis of those surveys, the Committee has identified a peer
group of companies with which the Company competes for executive talent and
which have a total capitalization and head count similar to the Company's and
are at approximately the same development stage (the "Peer Companies").
The positions of the Company's Chief Executive Officer and the other
executive officers were compared with those of their counterparts at the Peer
Companies, and the market compensation levels for comparable positions were
examined to determine base salary, target incentives, and total cash
compensation. In addition, the practices of the Peer Companies concerning
stock option grants were also reviewed and compared.
Base Salary. The base salary for each executive officer is set at a level
considered appropriate for comparable positions at the Peer Companies. The
Committee's policy is to target base salary levels at the market average level
of base salary in effect for comparable positions at the Peer Companies.
Executive officers who attain the core competencies required of their
positions are paid at that level. The Committee makes its base salary
determinations in accordance with the market average level in effect for
comparable positions at the Peer Companies, competitive market forces and the
evaluation of performance and core competency provided for each executive
officer by the Chief Executive Officer.
Variable Incentive Awards. To reinforce the attainment of Company goals, the
Committee believes that a substantial portion of the annual compensation of
each executive officer should be in the form of variable incentive pay. The
annual incentive payment for each executive officer is determined on the basis
of the achievement of the corporate objectives established for the fiscal year
and the Committee's evaluation of the officer's performance both on an
individual and team basis. For the 1997 fiscal year, the corporate performance
objectives were tied to the following measures of financial success: (i) the
completion of a successful initial public offering which raised net proceeds
of $26.8 million, (ii) an enhanced corporate communications program including
internal infrastructure and shareholder and investor relations, (iii) a
strengthened collaborative relationship with Johnson & Johnson, (iv) the
advancement of cti's two lead development compounds (LSF and CT2584), and (v)
a strengthened discovery research program.
68
<PAGE>
Based on the surveys of the short-term incentive programs of the Peer
Companies, the bonuses awarded to the executive officers for the 1997 fiscal
year was below the mid-range of the bonus levels in effect for comparable
positions at the Peer Companies and were on average equal to 18% of base
salary for the year.
Long-Term, Equity-Based Incentive Awards. The goal of the Company's long-
term equity-based incentive awards is to align the interests of executive
officers with the shareholders and to provide each executive-officer with a
significant incentive to manage the Company from the perspective of an owner
with an equity stake in the business. Such incentive is provided through stock
option grants made under the 1994 Plan. The size of the option grant to each
executive officer is set at a level which the Committee feels is appropriate
to create a meaningful opportunity for stock ownership based upon the
executive officer's current position with the Company, internal comparability
with stock option grants made to other Company executives, the executive
officer's current level of performance and his or her potential for future
responsibility and promotion over the option term. The Committee also takes
into account comparable equity incentives provided to individuals in similar
positions in the biotechnology and pharmaceutical industries, as reflected in
external surveys, and the number of unvested options held by the executive
officer at the time of the new grant. The Committee has established certain
general guidelines by which the Committee seeks to target a fixed number of
unvested option shares for each executive officer based upon his or her
current position with the Company and his or her potential for growth within
the Company, i.e., future responsibilities and possible promotions over the
option term. However, the Committee does not strictly adhere to these
guidelines in making stock option grants, and the relative weight which is
given to the various factors varies from individual to individual, as the
circumstances warrant.
During fiscal 1997, the Committee awarded the executive officers stock
options for an aggregate of 200,000 shares of Common Stock. Each grant allows
the officer to acquire the shares underlying the stock option at a fixed price
per share (the market price on the grant date) over a specified period of
time. Specifically, the option vests in periodic installments over a three-
year period, contingent upon the executive officer's continued employment with
the Company. Accordingly, the option will provide a return only if the officer
remains with the Company and then only if the market price appreciates over
the option term.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
The base salary of the Company's Chief Executive Officer, James A. Bianco,
M.D., is reviewed annually by the Committee and was set at $393,840 for the
1997 fiscal year. Such salary level was established on the basis of the
employment agreement then in effect between the Company and Dr. Bianco and the
base salary levels in effect for chief executive officers at the other
biotechnology and pharmaceutical companies comprising the Peer Companies. The
1997 salary level for Dr. Bianco brought him to 13% above the average of the
salary levels then in effect for the chief executive officers of the Peer
Companies.
The incentive compensation awarded to Dr. Bianco for the 1997 fiscal year
was equal to 30% of his base salary for the year and was based on the
attainment of the following corporate developments: (i) the completion of a
successful initial public offering which raised net proceeds of $26.8 million,
(ii) a strengthened collaborative relationship with Johnson & Johnson, (iii)
completion of a successful follow-on offering which raised net proceeds of
$34.3 million, and (iv) the initiation of an additional collaborative
relationship for diabetes research with the City of Hope National Medical
Center. See Note 12 of Notes to Financial Statements. Dr. Bianco was also
awarded stock options for 80,000 shares of Common Stock at an exercise price
of $16.0625 per share. The grant reflected the Committee's continuing policy
to maintain his option holdings at a level consistent with that for other
chief executive officers of comparable development-stage companies in the
pharmaceutical industry and to subject a portion of his overall compensation
each year to the market performance of the Company's Common Stock.
Accordingly, the stock option grants will be of no value to Dr. Bianco unless
there is appreciation in the value of the Company's Common Stock over the
option term.
69
<PAGE>
COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 162(M)
As a result of Section 162(m) of the Internal Revenue Code, which was
enacted into law in 1993, the Company will not be allowed a Federal income tax
deduction for compensation paid to certain officers, to the extent that
compensation exceeds one (1) million dollars per officer in any one year. This
limitation will apply to all compensation which is not considered to be
performance based. Compensation which does qualify as performance-based
compensation will not have to be taken into account for purposes of this
limitation. The Company's 1994 Plan has been structured so any compensation
deemed paid in connection with the exercise of stock options granted under
that plan with an exercise price equal to the market price of the option
shares on the grant date will qualify as performance-based compensation.
The cash compensation paid to the Company's executive officers during fiscal
1997 did not exceed the one (1) million dollar limit per officer, nor is the
cash compensation to be paid to the Company's executive officers for the 1998
fiscal year expected to reach that level. Because it is unlikely that the cash
compensation payable to any of the Company's executive officers in the
foreseeable future will approach the one (1) million dollar limitation, the
Committee has decided not to take any action at this time to limit or
restructure the elements of cash compensation payable to the Company's
executive officers. The Committee will reconsider this decision should the
individual compensation of any executive officer ever approach the one (1)
million dollar level.
COMPENSATION COMMITTEE
Jack L. Bowman
Jeremy L. Curnock Cook
Wilfred E. Jaeger, M.D.
Terrence M. Morris
70
<PAGE>
STOCK PERFORMANCE GRAPH
[LINE GRAPH APPEAS HERE]
<TABLE>
<CAPTION>
3/21/97 3/31/97 6/30/97 9/30/97 12/31/97
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
Cell Therapeutics, Inc................. $100.00 $97.56 $108.54 $145.12 165.85
Nasdaq Stock Index (U.S.).............. $100.00 $97.51 $115.39 $134.90 $126.52
Nasdaq Pharmaceutical Index............ $100.00 $93.51 $100.95 $113.25 $101.75
</TABLE>
The stock performance graph depicts the cumulative total return on the
Company's common stock compared to the current total return for the Nasdaq
Stock Index (U.S.) and the Nasdaq Pharmaceutical Index. The graph assumes an
investment of $100 on March 21, 1997, when the Company's stock was first
traded in a public market. Reinvestment of dividends, if any, is assumed in
all cases.
71
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of March 27, 1998, by (i) all shareholders 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 Named
Executive Officers and (iii) all Directors and executive officers as a group:
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OWNERSHIP(1)
- ------------------------------------ -------------------- -----------
<S> <C> <C>
LGT Capital................................ 1,881,700 12.24%
50 California Street 27th Floor
San Francisco CA 94104
The International Biotechnology
Trust plc(2)............................. 1,316,098 8.56
c/o Rothschild Asset Management Limited
Five Arrows House
St. Swithin's Lane
London, England EC4N 8NR
Kummell Investments Limited(3)............. 1,287,456 8.37
922 Europort
Gibraltar
Johnson & Johnson Development
Corporation.............................. 868,262 5.65
One Johnson & Johnson Plaza
New Brunswick, NJ 08933
James A. Bianco, M.D.**(4)................. 416,225 2.68
Jack L. Bowman**(5)........................ 26,668 *
Jeremy L. Curnock Cook**(6)................ 1,337,051 8.68
Wilfred E. Jaeger, M.D.**(7)............... 22,667 *
Max E. Link, Ph.D.**....................... 40,952 *
Terrence M. Morris**(8).................... 20,953 *
Mary O'Neil Mundinger, D.P.H.**(9)......... 2,858 *
Phillip M. Nudelman, Ph.D.**(10)........... 26,096 *
Jack W. Singer, M.D.**(11)................. 228,851 1.49
Louis A. Bianco(12)........................ 160,040 1.04
Robert A. Lewis, M.D.(13).................. 38,586 *
Maurice J. Schwarz, Ph.D.(14).............. 34,286 *
All Directors and executive officers as a
group (14 persons)(15).................... 2,418,995 15.26
</TABLE>
- --------
* Less than 1%
** Denotes Director of the Company
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission (the "Commission") and generally
includes voting or investment power with respect to securities. This table
is based upon information supplied by officers, directors and principal
shareholders and Schedules 13D and 13G filed with the Commission. Shares
of Common Stock subject to options or warrants currently exercisable or
convertible, or exercisable or convertible within 60 days of March 27,
1998, 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) Consists of 1,066,098 shares of Common Stock beneficially owned by The
International Biotechnology Trust plc, a company formed under the laws of
England ("IBT") and 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.
Rothschild is advisor to Biotechnology Investment Limited ("BIL") and to
Rothschild Asset Management (C.I.) Limited, which is the manager of BIL.
See footnote (6) below.
72
<PAGE>
(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 (8) below.
(4) Includes 140,337 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 27, 1998.
Does not include 163,335 shares issuable upon exercise of options not yet
vested. 26,191 of such options vest on December 5, 1998, 57,144 of such
options vest in equal installments on November 19, 1998 and 1999 and
80,000 of such options vest in equal installments on December 9, 1998,
1999 and 2000.
(5) Consists of 26,668 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 27, 1997.
(6) Includes 1,066,098 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 20,953 shares
of Common Stock. Mr. Curnock Cook is a shareholder, but is not an officer
or director, of BIL. See footnote (2) above.
(7) Consists of 22,667 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 27, 1998.
Does not include 12,858 shares issuable upon exercise of options
beneficially owned by affiliates of Collinson Howe Venture Partners
("CHVP") pursuant to an agreement with Dr. Jaeger. Dr. Jaeger, a director
of the Company, is a former partner at CHVP.
(8) Consists of an immediately exercisable option to purchase 20,953 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.
(9) Includes an immediately exercisable option to purchase 2,208 shares of
Common Stock.
(10) Consists of 26,096 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 27, 1998.
(11) Includes 28,102 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 27, 1997.
Does not include 48,929 shares issuable upon exercise of options not yet
vested. 2,381 of such options vest on December 5, 1998, 19,048 of such
options vest in equal installments on November 7, 1998 and 1999 and
27,500 shares vest in equal installments on December 12, 1998, 1999 and
2000.
(12) Includes 56,530 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 27, 1998.
Does not include 35,001 shares issuable upon exercise of options not yet
vested. 5,715 of such options vest on December 5, 1998, 14,286 of such
options vest in equal installments on November 7, 1998 and 1999 and
15,000 of such options vest in equal installments on December 9, 1998,
1999 and 2000.
(13) Consists of an immediately exercisable option to purchase 38,586 shares
of Common Stock. Does not include 48,559 shares issuable upon exercise of
options not yet vested. 14,273 of such options vest on April 1, 1999,
14,286 of such options vest in equal installments on November 7, 1998,
and 1999 and 20,000 of such options vest in equal installments on
December 12, 1998, 1999 and 2000.
(14) Includes 34,286 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of March 27, 1997.
Does not include 37,858 shares issuable upon exercise of options not yet
vested. 3,810 of such options vest on December 5, 1998, 19,048 of such
options vest in equal installments on November 7, 1998 and 1999 and
15,000 of such options vest in equal installments on December 12, 1998,
1999 and 2000.
(15) Includes an aggregate of 417,386 shares of Common Stock issuable upon
exercise of options that are currently exercisable or exercisable within
60 days of March 27, 1997. See footnotes (4) through (14).
73
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 "Item 11.--
Executive Compensation--Employment Agreements." The loan is secured by a
pledge of 5,715 shares of Common Stock owned by Dr. Bianco.
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 March 1997, Biotechnology
Investments Limited, which is an affiliate of Mr. Curnock Cook, purchased
250,000 shares of Common Stock in the Company's initial public offering for an
aggregate purchase price of $2.5 million. See Item 12Security Ownership of
Certain Beneficial Owners and Management.
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. Johnson
& Johnson also purchased an additional 300,000 shares of Common Stock in March
1997 concurrent with the closing of the Company's initial public offering for
an aggregate purchase price of $3.0 million and an additional 125,000 shares
of Common Stock in October 1997 in the Company's follow-on public offering for
an aggregate purchase price of $2.0 million. Pursuant to the Stock Purchase
Agreement, cti is entitled to require JJDC to purchase additional shares of
Common Stock upon the achievement of certain milestones. See "Item 1.--
Business--Collaborations."
74
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
(i)Financial Statements
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(ii)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.
(b) Reports on Form 8-K.
None
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
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(2) Registrant's Articles of Amendment to Restated Articles of
Incorporation Reducing the Number of Authorized Shares of Series A
Convertible Preferred Stock
3.4(2) Registrant's Articles of Amendment to Restated Articles of
Incorporation Establishing a Series of Preferred Stock (Series B
Convertible Preferred Stock)
3.5(2) Registrant's Articles of Amendment to Restated Articles of
Incorporation Establishing a Series of Preferred Stock (Series C
Preferred Stock)
3.6(2) Registrant's Articles of Amendment to Restated Articles of
Incorporation of Cell Therapeutics, Inc. Effecting a Reverse Stock
Split.
3.7(3) Registrant's Articles of Amendment to Restated Articles of
Incorporation of Undesignating Series A and Series B Preferred Stock.
3.7(4) Registrant's Restated Bylaws
4.1(5) 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
10.1(6) 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(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(2) Letter Agreement between David A. Sabey, Sandra L. Sabey and the
Registrant, dated as of September 6, 1996, amending the Assignment of
Lease.
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.5(2) Employment Agreement between the Registrant and James A. Bianco,
dated as of December 17, 1996
10.6(6) 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 Employment Agreement between the Registrant and Jack W. Singer,
dated September 23, 1997.
10.9(1) Severance Agreement between the Registrant and Robert A. Lewis,
dated April 1, 1996
10.10(2) Form of Strategic Management Team Severance Agreement.
10.11(1) Promissory Note between James A. Bianco, M.D. and the Registrant,
dated December 23, 1993
10.12(1) Stock Pledge Agreement between James A. Bianco, M.D. and the
Registrant, dated December 23, 1993
10.13(1) 1994 Equity Incentive Plan, as amended
10.14(1) 1992 Stock Option Plan, as amended
10.15(1) 1996 Employee Stock Purchase Plan
10.16(1) Form of Sales Agent Warrant for the 1992 Private Placement
10.17(1) Warrant, dated November 25, 1992, between the Registrant and David
H. Smith, M.D.
10.18(1) Registration Agreement between the Registrant and the other parties
included therein, dated as of November 23, 1993
10.19(1) Form of Sales Agent Warrant for the 1993 Private Placement
10.20(1) Subscription Agreement between the Registrant and the other parties
included therein, dated as of March 21, 1995
10.21(1) Registration Rights Agreement between the Registrant and the other
parties included therein, dated as of March 21, 1995
10.22(4) 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.
10.23(4) Letter Agreement between the Company and Kummell Investments
Limited, dated September 17, 1996.
10.24+(6) Collaboration Agreement by and between BioChem Therapeutic Inc. and
the Registrant, dated March 7, 1995, as amended November 30, 1995
and December 6, 1995
10.25+(6) Supply Agreement by and between BioChem Therapeutic Inc. and the
Registrant, dated March 7, 1995
10.26+(2) Supply Agreement by and between ChiRex, Ltd. and the Registrant,
dated January 21, 1997
10.27+(2) 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
10.28(2) Stock Purchase Agreement, dated as of November 8, 1996, by and
between the Registrant and Johnson & Johnson Development Corporation
10.29(1) Master Lease Agreement, dated as of December 28, 1994 between the
Registrant and Aberlyn Capital Management Limited Partnership
10.30(1) Common Stock Purchase Warrant, dated December 28, 1994 between the
Registrant and Aberlyn Capital Management Limited Partnership
10.31(1) Loan and Security Agreement, dated as of May 30, 1995, between the
Registrant and Financing for Science International, Inc.
10.32(7) Loan and Security Agreement, dated as of June 28, 1996, between the
Registrant and Financing for Science International, Inc.
10.33(1) Asset Purchase Agreement, dated of October 17, 1995, between Lipomed
Corporation, its Stockholders and the Registrant, as amended
10.34(6) Form of Scientific Advisory Board Consulting Agreement
10.35(6) Form of Clinical Advisory Board Consulting Agreement
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.36 Master Loan and Security Agreement between the Company and the
Transamerica Business Credit Corporation, dated as of December 9, 1997
22.1 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young, LLP, independent auditors
27.1 Financial Data Schedule
</TABLE>
- --------
+ Portions of these exhibits have been omitted pursuant to a request for
confidential treatment.
(1) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form S-1 (No. 33-4154).
(2) Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (No. 333-20855).
(3) Incorporated by reference to the Registrant's Registration Statement on
Form S-3 (No. 333-36603).
(4) Incorporated by reference to exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996.
(5) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form 8-A.
(6) Incorporated by reference to exhibits to the Registrant's Registration
Statement on Form 10.
(7) Incorporated by reference to exhibits to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1996.
77
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Seattle, State of Washington, on March 31, 1998.
Company Name
By /s/ James A. Bianco
------------------------------------
JAMES A. BIANCO, M.D. PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities and on the
dates indicated.
SIGNATURES TITLE DATE
/s/ Max E. Link Chairman of the March 31, 1998
- ------------------------------------- Board and Director
MAX E. LINK, PH.D.
/s/ James A. Bianco President, Chief March 31, 1998
- ------------------------------------- Executive Officer
JAMES A. BIANCO, M.D. and Director
(Principal
Executive Officer)
/s/ Louis A. Bianco Executive Vice March 31, 1998
- ------------------------------------- President, Finance
LOUIS A. BIANCO and Administration
(Principal
Financial Officer
and Principal
Accounting Officer)
/s/ Jack W. Singer Director March 31, 1998
- -------------------------------------
JACK W. SINGER, M.D.
/s/ Jack L. Bowman Director March 31, 1998
- -------------------------------------
JACK L. BOWMAN
78
<PAGE>
/s/ Jeremy L. Curnock Cook Director March 31, 1998
- -------------------------------------
JEREMY L. CURNOCK COOK
/s/ Wilfred E. Jaeger Director March 31, 1998
- -------------------------------------
WILFRED E. JAEGER, M.D.
/s/ Terrence M. Morris Director March 31, 1998
- -------------------------------------
TERRENCE M. MORRIS
/s/ Mary O'Neil Mundinger Director March 31, 1998
- -------------------------------------
MARY O'NEIL MUNDINGER, D.P.H.
/s/ Phillip M. Nudelman Director March 31, 1998
- -------------------------------------
PHILLIP M. NUDELMAN, PH.D.
79
<PAGE>
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (the "Agreement") is dated the 23 day of
-----
September , 1997, by and between JACK W. SINGER, M.D. ("Employee") and CELL
- ----------
THERAPEUTICS, INC., a Washington corporation ("cti"). In consideration of the
mutual covenants and conditions set forth herein, the parties hereby agree as
follows:
1. Scope of Employment. Cti employs Employee to serve as its Executive
-------------------
Vice President, Research Program Chairman, and Employee hereby accepts such
employment. Employee's employment is subject to: i) the terms and conditions
herein; and ii) Employee's obligations under the standard cti Employee Agreement
executed contemporaneously herewith by Employee. The Employee Agreement is
attached hereto and incorporated herein by reference in its entirety. To the
extent the terms of the Employee Agreement conflict with the terms hereof, the
terms of this Agreement shall govern. All terms used herein, but not defined,
shall have the meanings set forth in the Employee Agreement.
The Employee's responsibilities will include but not be limited to
preparing research and development strategies in oncology from discovery through
clinical development; participating in corporate related activities; supporting
business development and product commercialization activities; having regulatory
responsibilities in the clinical operating unit; establishing budgets for
research programs; and performing such other duties during the term hereof as
the Chief Executive Officer of cti shall, from time to time, reasonably direct.
2. Term. Unless earlier terminated pursuant to the provisions of
----
paragraph 6 below, Employee's employment hereunder shall be for a period of one
(1) year commencing September 23, 1997.
3. Compensation. For all services rendered by Employee under this
------------
Agreement, Employee shall receive a salary at an annual rate of $260,000 ("Base
Salary"), or such higher annual rate as the cti Board of Directors may from time
to time establish in its sole discretion, payable semi-monthly, in accordance
with cti's payroll schedule. In addition, Employee shall receive such bonuses
as may be declared from time to time by the Board of Directors in its sole
discretion and shall be eligible for consideration for participation in stock
option or stock purchase plans adopted by the cti Board of Directors, consistent
with the terms of such plans and applicable law.
4. Executive Benefit Plan. During the term of Employee's employment
----------------------
hereunder, Employee shall be entitled to participate fully in all benefit plans
made available generally to executive officers of cti.
5. Termination. Employment hereunder shall be employment at will. If
-----------
Employee is terminated for any reason (other than for Cause), then Employee
shall receive any unpaid Base Salary through September 23, 1998 plus accrued and
unpaid vacation through the date of termination. Should Employee resign other
than for Good Reason or Employee dies or is
<PAGE>
disabled prior to the termination of this Agreement, Employee shall be entitled
to receive only that pro rata portion of Base Salary payable, and pay for all
vacation time accrued and not taken through, the Employee's resignation date or
death. If Employee is the beneficiary of any agreement(s) providing for
severance or separation payments from cti, upon the cessation of employment with
cti, Employee shall, upon such cessation, receive the greater of the benefits
then available under this Agreement or the other agreement(s), but not both.
Termination for "Cause" shall mean termination of the Executive's
employment by cti because of the Executive's: (A) conviction for, or guilty
plea to, a felony or a crime involving moral turpitude, which shall include
independently verified unremedied substance abuse involving drugs or alcohol;
(B) action or inaction, which in the reasonable judgment of a majority of the
Board of Directors of cti, constitutes willful dishonesty, larceny, fraud or
gross negligence by Executive in the performance of Executive's duties to cti;
(C) material failure to comply with the provisions of the parties' Employee
Agreement; and (D) willful and repeated failure, after 10 business days notice,
to materially follow the written policies of cti.
Resignation for "Good Reason" shall mean the resignation of the Executive
after the following: (A) notice in writing is given to Executive of Executive's
relocation, without the Executive's consent, to a place of business outside the
Greater Puget Sound area; or (B) a substantial diminution of the Executive's
responsibilities and compensation from those responsibilities in effect on the
date hereof.
6. Entire Agreement; Modification. The provisions contained herein
------------------------------
constitute the entire Agreement between the parties with respect to the subject
matter hereof and any waiver, alteration or modification of any provisions of
this Agreement, or the replacement of this Agreement, shall not be valid unless
in writing and signed by all the parties signing hereunder.
7. Governing Law. This Agreement shall be governed and construed in
-------------
accordance with the laws of the State of Washington.
8. Agreement Not Assignable. Employee may not assign any of his rights or
------------------------
delegate any of his duties hereunder. cti may assign this Agreement and
delegate its duties hereunder to any of its Affiliates at any time owned by,
owning or under common ownership with the cti. In the event of such an
assignment by cti, such affiliates shall be deemed substituted for cti at each
place where "cti" appears herein. Subject to the foregoing, this Agreement
shall bind the parties and their respective heirs, successors, assigns and
personal representatives.
9. Attorneys' Fees. In any action to enforce its rights hereunder the
---------------
prevailing party shall be reimbursed by the other for its costs of enforcement,
including without limitation reasonable attorneys' fees.
10. Jurisdiction and Venue. The parties each irrevocably consent and
----------------------
submit to the personal jurisdiction of the State and Federal courts sitting in
King County, Washington, and agree that any action, suit or proceeding in
connection with this Agreement shall be brought in
-2-
<PAGE>
such courts to the exclusion of all other courts, other than actions to enforce
judgments or orders entered in such courts sitting in King County.
11. Notices. All notices required or permitted hereunder shall be given
-------
in writing and delivered in person, transmitted by facsimile, or sent by
registered or certified mail, postage prepaid, or reliable courier service to
the parties at the respective addresses set forth on the signature page hereof,
or such other address as a party may specify by notice for all subsequent
notices to it hereunder. Notices will be effective upon the earlier of receipt
or the second business day after mailing.
12. No Waiver. No waiver or modification of any of the terms or
---------
provisions hereof shall be valid unless in writing signed by the party against
which the enforcement of such waiver or modification is sought, nor shall any
waiver or failure to enforce any right hereunder be deemed to be a waiver of the
same or any other right in any other instance.
IN WITNESS WHEREOF, this Agreement has been executed by a duly authorized
officer of cti and by the Employee in the Employee's individual capacity as of
the date indicated below.
CELL THERAPEUTICS, INC.
By: /s/ James A. Bianco By: /s/ Jack W. Singer
------------------- ------------------
James A. Bianco, MD Jack W. Singer, MD
Title: President and CEO
-----------------
-----------------
-----------------
Date: September 23, 1997 Date: September 23, 1997
------------------ ------------------
Address: 201 Elliott Avenue West, Address: 201 Elliott Avenue West,
------------------------ ------------------------
Suite 400 Suite 400
--------- ---------
Seattle, WA 98119 Seattle, WA 98119
------------------ -----------------
-3-
<PAGE>
EXHIBIT 10.36
MASTER LOAN AND SECURITY AGREEMENT
THIS AGREEMENT dated as of December 9, 1997, is made by Cell
Therapeutics, Inc. (the "Borrower"), a Washington corporation having its
principal place of business and chief executive office at 201 Elliott Ave. W.
#400, Seattle, WA, 98119 in favor of Transamerica Business Credit Corporation, a
Delaware corporation (the "Lender"), having its principal office at Riverway II,
West Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018.
WHEREAS, the Borrower has requested that the Lender make Loans to it
from time to time; and
WHEREAS, the Lender has agreed to make such Loans on the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and to induce the
Lender to extend credit, the Borrower hereby agrees with the Lender as follows:
SECTION 1. DEFINITIONS.
-----------
As used herein, the following terms shall have the following meanings,
and shall be equally applicable to both the singular and plural forms of the
terms defined:
Agreement shall mean this Master Loan and Security Agreement together with all
- ---------
schedules and exhibits hereto, as amended, supplemented, or otherwise modified
from time to time.
Applicable Law shall mean the laws of the State of Illinois (or any other
- --------------
jurisdiction whose laws are mandatorily applicable notwithstanding the parties'
choice of Illinois law) or the laws of the United States of America, whichever
laws allow the greater interest, as such laws now exist or may be changed or
amended or come into effect in the future.
Business Day shall mean any day other than a Saturday, Sunday, or public holiday
- ------------
or the equivalent for banks in New York City.
Code shall have the meaning specified in Section 8(d).
- ----
Collateral shall have the meaning specified in Section 2.
- ----------
Collateral Access Agreement shall mean any landlord waiver, mortgagee waiver,
- ---------------------------
bailee letter, or similar acknowledgement of any warehouseman or processor in
possession of any Equipment, in each case substantially in the form of Exhibit
A.
Effective Date shall mean the date on which all of the conditions specified in
- --------------
Section 3.3 shall have been satisfied.
Entity shall mean any proprietorship, partnership, limited liability
- ------
partnership, joint venture, trust, unincorporated organization, association,
corporation, limited liability company, institution, entity, party, or
government (including any division, agency, or department thereof), and the
successors and assigns of each.
Equipment shall have the meaning specified in Section 2.
- ---------
Event of Default shall mean any event specified in Section 7.
- ----------------
Financial Statements shall have the meaning specified in Section 6.1.
- --------------------
<PAGE>
GAAP shall mean generally accepted accounting principles in the United States of
- ----
America, as in effect from time to time.
Loans shall mean the loans and financial accommodations made by the Lender to
- -----
the Borrower in accordance with the terms of this Agreement and the Notes.
Loan Documents shall mean, collectively, this Agreement, the Notes, and all
- --------------
other documents, agreements, certificates, instruments, and opinions executed
and delivered in connection herewith and therewith, as the same may be modified,
extended, restated, or supplemented from time to time.
Material Adverse Change shall mean, with respect to any Entity, a material
- -----------------------
adverse change in the business, prospects, operations, results of operations,
assets, liabilities, or condition (financial or otherwise) of such Entity taken
as a whole.
Material Adverse Effect shall mean, with respect to any Entity, a material
- -----------------------
adverse effect on the business, prospects, operations, results of operations,
assets, liabilities, or condition (financial or otherwise) of such Entity taken
as a whole.
Note shall mean each Promissory Note made by the Borrower in favor of the
- ----
Lender, as amended, supplemented, or otherwise modified from time to time, in
each case substantially in the form of Exhibit B.
Obligations shall mean all indebtedness, obligations, and liabilities of the
- -----------
Borrower under the Notes and under this Agreement, whether on account of
principal, interest, indemnities, fees (including, without limitation,
attorneys' fees, remarketing fees, origination fees, collection fees, and all
other professionals' fees), costs, expenses, taxes, or otherwise.
Permitted Liens shall mean such of the following as to which no enforcement,
- ---------------
collection, execution, levy, or foreclosure proceeding shall have been
commenced: (a) liens for taxes, assessments, and other governmental charges or
levies or the claims or demands of landlords, carriers, warehousemen, mechanics,
laborers, materialmen, and other like Persons arising by operation of law in the
ordinary course of business for sums which are not yet due and payable, or liens
which are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves are maintained to the
extent required by GAAP; (b) deposits or pledges to secure the payment of
worker's compensation, unemployment insurance, or other social security benefits
or obligations, public or statutory obligations, surety or appeal bonds, bid or
performance bonds, or other obligations of a like nature incurred in the
ordinary course of business; (c) licenses, restrictions, or covenants for or on
the use of the Equipment which do not materially impair either the use of the
Equipment in the operation of the business of the Borrower or the value of the
Equipment; and (d) attachment or judgment liens that do not constitute an Event
of Default.
Person shall mean any individual, sole proprietorship, partnership, limited
- ------
liability partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, entity, party,
or government (including any division, agency, or department thereof), and the
successors, heirs, and assigns of each.
Schedule shall mean each Schedule in the form of Schedule A hereto delivered by
- --------
the Borrower to the Lender from time to time.
Solvent means, with respect to any Person, that as of the date as to which such
- -------
Person's solvency is measured:
(a) the fair saleable value of its assets is in excess of the total
amount of its liabilities (including contingent liabilities as valued in
accordance with GAAP) as they become absolute and matured;
(b) it has sufficient capital to conduct its business; and
2
<PAGE>
(c) it is able generally to meet its debts as they mature.
Taxes shall have the meaning specified in Section 5.5.
- -----
SECTION 2. CREATION OF SECURITY INTEREST; COLLATERAL. The Borrower
-----------------------------------------
hereby assigns and grants to the Lender a continuing general, first priority
lien on, and security interest in, all the Borrower's right, title, and interest
in and to the collateral described in the next sentence (the "Collateral") to
secure the payment and performance of all the Obligations. The Collateral
consists of all equipment set forth on all the Schedules delivered from time to
time under the terms of this Agreement (the "Equipment"), together with all
present and future additions, parts, accessories, attachments, substitutions,
repairs, improvements, and replacements thereof or thereto, and any and all
proceeds thereof, including, without limitation, proceeds of insurance and all
manuals, blueprints, know-how, warranties, and records in connection therewith,
all rights against suppliers, warrantors, manufacturers, sellers, or others in
connection therewith, and together with all substitutes for any of the
foregoing.
SECTION 3. THE CREDIT FACILITY.
-------------------
SECTION 3.1. BORROWINGS. Each Loan shall be in an amount not less
than $50,000, and in no event shall the sum of the aggregate Loans made exceed
the amount of the Lender's written commitment to the Borrower in effect from
time to time. Notwithstanding anything herein to the contrary, the Lender shall
be obligated to make the initial Loan and each other Loan only after the Lender,
in its sole discretion, determines that the applicable conditions for borrowing
contained in Sections 3.3 and 3.4 are satisfied. The timing and financial scope
of Lender's obligation to make Loans hereunder are limited as set forth in a
commitment letter executed by Lender and Borrower, dated as of November 18, 1997
and attached hereto as Exhibit C (the "Commitment Letter").
SECTION 3.2. APPLICATION OF PROCEEDS. The Borrower shall not
directly or indirectly use any proceeds of the Loans, or cause, assist, suffer,
or permit the use of any proceeds of the Loans, for any purpose other than for
the purchase, acquisition, installation, or upgrading of Equipment or the
reimbursement of the Borrower for its purchase, acquisition, installation, or
upgrading of Equipment.
SECTION 3.3. CONDITIONS TO INITIAL LOAN.
(a) The obligation of the Lender to make the initial Loan is subject
to the Lender's receipt of the following, each dated the date of the initial
Loan or as of an earlier date acceptable to the Lender, in form and substance
satisfactory to the Lender and its counsel:
(i) completed requests for information (Form UCC-11) listing all
effective Uniform Commercial Code financing statements naming the
Borrower as debtor and all tax lien, judgment, and litigation searches
for the Borrower as the Lender shall deem necessary or desirable;
(ii) Uniform Commercial Code financing statements (Form UCC-1)
duly executed by the Borrower (naming the Lender as secured party and
the Borrower as debtor and in form acceptable for filing in all
jurisdictions that the Lender deems necessary or desirable to perfect
the security interests granted to it hereunder) and, if applicable,
termination statements or other releases duly filed in all
jurisdictions that the Lender deems necessary or desirable to perfect
and protect the priority of the security interests granted to it
hereunder in the Equipment related to such initial Loan;
(iii) a Note duly executed by the Borrower evidencing the amount
of such initial Loan;
(iv) a Collateral Access Agreement duly executed by the lessor or
mortgagee, as the case may be, of each premises where the Equipment is
located;
3
<PAGE>
(v) certificates of insurance required under Section 5.4 of this
Agreement together with loss payee endorsements for all such policies
naming the Lender as lender loss payee and as an additional insured;
(vi) a copy of the resolutions of the Board of Directors of the
Borrower (or a unanimous consent of directors in lieu thereof)
authorizing the execution, delivery, and performance of this
Agreement, the other Loan Documents, and the transactions contemplated
hereby and thereby, attached to which is a certificate of the
Secretary or an Assistant Secretary of the Borrower certifying (A)
that the copy of the resolutions is true, complete, and accurate, that
such resolutions have not been amended or modified since the date of
such certification and are in full force and effect and (B) the
incumbency, names, and true signatures of the officers of the Borrower
authorized to sign the Loan Documents to which it is a party;
(vii) the opinion of counsel for the Borrower covering such
matters incident to the transactions contemplated by this Agreement as
the Lender may reasonably require; and
(viii) such other agreements and instruments as the Lender deems
necessary in its sole and absolute discretion in connection with the
transactions contemplated hereby.
(b) There shall be no pending or, to the knowledge of the Borrower
after due inquiry, threatened litigation, proceeding, inquiry, or other action
(i) seeking an injunction or other restraining order, damages, or other relief
with respect to the transactions contemplated by this Agreement or the other
Loan Documents or thereby or (ii) which affects or could affect the business,
prospects, operations, assets, liabilities, or condition (financial or
otherwise) of the Borrower, except, in the case of clause (ii), where such
litigation, proceeding, inquiry, or other action could not be expected to have a
Material Adverse Effect in the judgment of the Lender.
(c) The Borrower shall have paid all fees and expenses required to be
paid by it to the Lender as of such date.
(d) The security interests in the Equipment related to the initial
Loan granted in favor of the Lender under this Agreement shall have been duly
perfected and shall constitute first priority liens.
SECTION 3.4. CONDITIONS PRECEDENT TO EACH LOAN. The obligation of
the Lender to make each Loan is subject to the satisfaction of the following
conditions precedent:
(a) the Lender shall have received the documents, agreements, and
instruments set forth in Section 3.3(a)(i) through (v) applicable to such Loan,
each in form and substance satisfactory to the Lender and its counsel and each
dated the date of such Loan or as of an earlier date acceptable to the Lender;
(b) the Lender shall have received a Schedule of the Equipment related
to such Loan, in form and substance satisfactory to the Lender and its counsel,
and the security interests in such Equipment related to such Loan granted in
favor of the Lender under this Agreement shall have been duly perfected and
shall constitute first priority liens;
(c) all representations and warranties contained in this Agreement and
the other Loan Documents shall be true and correct on and as of the date of such
Loan as if then made, other than representations and warranties that expressly
relate solely to an earlier date, in which case they shall have been true and
correct as of such earlier date;
(d) no Event of Default or event which with the giving of notice or
the passage of time, or both, would constitute an Event of Default shall have
occurred and be continuing or would result from the making of the requested Loan
as of the date of such request; and
4
<PAGE>
(e) the Borrower shall be deemed to have hereby reaffirmed and
ratified all security interests, liens, and other encumbrances heretofore
granted by the Borrower to the Lender.
SECTION 4. THE BORROWER'S REPRESENTATIONS AND WARRANTIES.
---------------------------------------------
SECTION 4.1. GOOD STANDING; QUALIFIED TO DO BUSINESS. The
Borrower (a) is duly organized, validly existing, and in good standing under the
laws of the State of its organization, (b) has the power and authority to own
its properties and assets and to transact the businesses in which it is
presently, or proposes to be, engaged, and (c) is duly qualified and authorized
to do business and is in good standing in every jurisdiction in which the
failure to be so qualified could have a Material Adverse Effect on (i) the
Borrower, (ii) the Borrower's ability to perform its obligations under the Loan
Documents, or (iii) the rights of the Lender hereunder.
SECTION 4.2. DUE EXECUTION, ETC. The execution, delivery, and
performance by the Borrower of each of the Loan Documents to which it is a party
are within the powers of the Borrower, do not contravene the organizational
documents, if any, of the Borrower, and do not (a) violate any law or
regulation, or any order or decree of any court or governmental authority, (b)
conflict with or result in a breach of, or constitute a default under, any
material indenture, mortgage, or deed of trust or any material lease, agreement,
or other instrument binding on the Borrower or any of its properties, or (c)
require the consent, authorization by, or approval of or notice to or filing or
registration with any governmental authority or other Person. This Agreement
is, and each of the other Loan Documents to which the Borrower is or will be a
party, when delivered hereunder or thereunder, will be, the legal, valid, and
binding obligation of the Borrower enforceable against the Borrower in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, or similar laws affecting creditors' rights generally
and by general principles of equity.
SECTION 4.3. SOLVENCY; NO LIENS. The Borrower is Solvent and will
be Solvent upon the completion of all transactions contemplated to occur
hereunder (including, without limitation, the Loan to be made on the Effective
Date); the security interests granted herein constitute and shall at all times
constitute the first and only liens on the Collateral other than Permitted
Liens; and the Borrower is, or will be at the time additional Collateral is
acquired by it, the absolute owner of the Collateral with full right to pledge,
sell, consign, transfer, and create a security interest therein, free and clear
of any and all claims or liens in favor of any other Person other than Permitted
Liens.
SECTION 4.4. NO JUDGMENTS, LITIGATION. No judgments are
outstanding against the Borrower nor is there now pending or, to the best of the
Borrower's knowledge after diligent inquiry, threatened any litigation,
contested claim, or governmental proceeding by or against the Borrower except
judgments and pending or threatened litigation, contested claims, and
governmental proceedings which would not, in the aggregate, have a Material
Adverse Effect on the Borrower.
SECTION 4.5. NO DEFAULTS. The Borrower is not in default or has
not received a notice of default under any material contract, lease, or
commitment to which it is a party or by which it is bound. The Borrower knows
of no dispute regarding any contract, lease, or commitment which could have a
Material Adverse Effect on the Borrower.
SECTION 4.6. COLLATERAL LOCATIONS. On the date hereof, each item
of the Collateral is located at the place of business specified in the
applicable Schedule.
SECTION 4.7. NO EVENTS OF DEFAULT. No Event of Default has
occurred and is continuing nor has any event occurred which, with the giving of
notice or the passage of time, or both, would constitute an Event of Default.
SECTION 4.8. NO LIMITATION ON LENDER'S RIGHTS. Except as
permitted herein, none of the Collateral is subject to contractual obligations
that may restrict or inhibit the Lender's rights or abilities to sell or dispose
of the Collateral or any part thereof after the occurrence of an Event of
Default.
5
<PAGE>
SECTION 4.9. PERFECTION AND PRIORITY OF SECURITY INTEREST. This
Agreement creates a valid and, upon completion of all required filings of
financing statements, perfected first priority and exclusive security interest
in the Collateral, securing the payment of all the Obligations.
SECTION 4.10. MODEL AND SERIAL NUMBERS. The Schedules set forth
the true and correct model number and serial number of each item of Equipment
that constitutes Collateral.
SECTION 4.11. ACCURACY AND COMPLETENESS OF INFORMATION. All data,
reports, and information heretofore, contemporaneously, or hereafter furnished
by or on behalf of the Borrower in writing to the Lender or for purposes of or
in connection with this Agreement or any other Loan Document, or any transaction
contemplated hereby or thereby, are or will be true and accurate in all material
respects on the date as of which such data, reports, and information are dated
or certified and not incomplete by omitting to state any material fact necessary
to make such data, reports, and information not misleading at such time. There
are no facts now known to the Borrower which individually or in the aggregate
would reasonably be expected to have a Material Adverse Effect and which have
not been specified herein, in the Financial Statements, or in any certificate,
opinion, or other written statement previously furnished by the Borrower to the
Lender.
SECTION 4.12. PRICE OF EQUIPMENT. The cost of each item of
Equipment does not exceed the fair and usual price for such type of equipment
purchased in like quantity and reflects all discounts, rebates and allowances
for the Equipment (including, without limitation, discounts for advertising,
prompt payment, testing, or other services) given to the Borrower by the
manufacturer, supplier, or any other person.
SECTION 5. COVENANTS OF THE BORROWER.
-------------------------
SECTION 5.1. EXISTENCE, ETC. The Borrower shall: (a) retain its
existence and its current yearly accounting cycle, (b) maintain in full force
and effect all licenses, bonds, franchises, leases, trademarks, patents,
contracts, and other rights necessary or desirable to the profitable conduct of
its business unless the failure to do so could not reasonably be expected to
have a Material Adverse Effect on the Borrower, (c) continue in, and limit its
operations to, the same general lines of business as those presently conducted
by it, and (d) comply with all applicable laws and regulations of any federal,
state, or local governmental authority, except for such laws and regulations the
violations of which would not, in the aggregate, have a Material Adverse Effect
on the Borrower.
SECTION 5.2. NOTICE TO THE LENDER. As soon as possible, and in
any event within five days after the Borrower learns of the following, the
Borrower will give written notice to the Lender of (a) any proceeding instituted
or threatened to be instituted by or against the Borrower in any federal, state,
local, or foreign court or before any commission or other regulatory body
(federal, state, local, or foreign) involving a sum, together with the sum
involved in all other similar proceedings, in excess of $250,000 in the
aggregate, (b) any contract that is terminated or amended and which has had or
could reasonably be expected to have a Material Adverse Effect on the Borrower,
(c) the occurrence of any Material Adverse Change with respect to the Borrower,
and (d) the occurrence of any Event of Default or event or condition which, with
notice or lapse of time or both, would constitute an Event of Default, together
with a statement of the action which the Borrower has taken or proposes to take
with respect thereto.
SECTION 5.3. MAINTENANCE OF BOOKS AND RECORDS. The Borrower will
maintain books and records pertaining to the Collateral in such detail, form,
and scope as the Lender shall require in its commercially reasonable judgment.
The Borrower agrees that the Lender or its agents may enter upon the Borrower's
premises at any time and from time to time during normal business hours upon
reasonable notice, and at any time upon the occurrence and continuance of an
Event of Default, for the purpose of inspecting the Collateral and any and all
records pertaining thereto.
SECTION 5.4. INSURANCE. The Borrower will maintain insurance on
the Collateral under such policies of insurance, with such insurance companies,
in such amounts, and covering such risks as are at all times satisfactory to the
Lender. All such policies shall be made payable to the Lender, in case of loss,
under a
6
<PAGE>
standard non-contributory "lender" or "secured party" clause and are to contain
such other provisions as the Lender may reasonably require to protect the
Lender's interests in the Collateral and to any payments to be made under such
policies. Certificates of insurance policies are to be delivered to the Lender,
premium prepaid, with the loss payable endorsement in the Lender's favor, and
shall provide for not less than thirty days' prior written notice to the Lender,
of any alteration or cancellation of coverage. If the Borrower fails to maintain
such insurance, the Lender may arrange for (at the Borrower's expense and
without any responsibility on the Lender's part for) obtaining the insurance.
Unless the Lender shall otherwise agree with the Borrower in writing, the Lender
shall have the sole right, in the name of the Lender or the Borrower, to file
claims under any insurance policies, to receive and give acquittance for any
payments that may be payable thereunder, and to execute any endorsements,
receipts, releases, assignments, reassignments, or other documents that may be
necessary to effect the collection, compromise, or settlement of any claims
under any such insurance policies.
SECTION 5.5. TAXES. The Borrower will pay, when due, all taxes,
assessments, claims, and other charges ("Taxes") lawfully levied or assessed
against the Borrower or the Collateral other than taxes that are being
diligently contested in good faith by the Borrower by appropriate proceedings
promptly instituted and for which an adequate reserve is being maintained by the
Borrower in accordance with GAAP. If any Taxes remain unpaid after the date
fixed for the payment thereof, or if any lien shall be claimed therefor, then,
without notice to the Borrower, but on the Borrower's behalf, the Lender may pay
such Taxes, and the amount thereof shall be included in the Obligations.
SECTION 5.6. BORROWER TO DEFEND COLLATERAL AGAINST CLAIMS; FEES ON
COLLATERAL. The Borrower will defend the Collateral against all claims and
demands of all Persons at any time claiming the same or any interest therein.
The Borrower will not permit any notice creating or otherwise relating to liens
on the Collateral or any portion thereof to exist or be on file in any public
office other than Permitted Liens. The Borrower shall promptly pay, when
payable, all transportation, storage, and warehousing charges and license fees,
registration fees, assessments, charges, permit fees, and taxes (municipal,
state, and federal) which may now or hereafter be imposed upon the ownership,
leasing, renting, possession, sale, or use of the Collateral, other than taxes
on or measured by the Lender's income and fees, assessments, charges, and taxes
which are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves are maintained to the
extent required by GAAP.
SECTION 5.7. NO CHANGE OF LOCATION, STRUCTURE, OR IDENTITY. The
Borrower will not (a) change the location of its chief executive office or
establish any place of business other than those specified herein or (b) move or
permit the movement of any item of Collateral from the location specified in the
applicable Schedule, except that the Borrower may change its chief executive
office and keep Collateral at other locations within the United States provided
that the Borrower has delivered to the Lender (i) written notice thereof and
(ii) duly executed financing statements and other agreements and instruments
(all in form and substance satisfactory to the Lender) necessary or, in the
opinion of the Lender, desirable to perfect and maintain in favor of the Lender
a first priority security interest in the Collateral. Notwithstanding anything
to the contrary in the immediately preceding sentence, the Borrower may keep any
Collateral consisting of motor vehicles or rolling stock at any location in the
United States provided that the Lender's security interest in any such
Collateral is conspicuously marked on the certificate of title thereof and the
Borrower has complied with the provisions of Section 5.9.
SECTION 5.8. USE OF COLLATERAL; LICENSES; REPAIR. The Collateral
shall be operated by competent, qualified personnel in connection with the
Borrower's business purposes, for the purpose for which the Collateral was
designed and in accordance with applicable operating instructions, laws, and
government regulations, and the Borrower shall use every reasonable precaution
to prevent loss or damage to the Collateral from fire and other hazards. The
Collateral shall not be used or operated for personal, family, or household
purposes. The Borrower shall procure and maintain in effect all orders,
licenses, certificates, permits, approvals, and consents required by federal,
state, or local laws or by any governmental body, agency, or authority in
connection with the delivery, installation, use, and operation of the
Collateral. The Borrower shall keep all of the Equipment in a satisfactory
state of repair and satisfactory operating condition in accordance with industry
standards, and will make all repairs and replacements when and where necessary
and practical. The Borrower will not waste or destroy the Equipment or any part
thereof, and will not be negligent in the care or use thereof. The Equipment
shall not be
7
<PAGE>
annexed or affixed to or become part of any realty without the Lender's prior
written consent.
SECTION 5.9. FURTHER ASSURANCES. The Borrower will, promptly upon
request by the Lender, execute and deliver or use its best efforts to obtain any
document required by the Lender (including, without limitation, warehouseman or
processor disclaimers, mortgagee waivers, landlord disclaimers, or subordination
agreements with respect to the Obligations and the Collateral), give any
notices, execute and file any financing statements, mortgages, or other
documents (all in form and substance satisfactory to the Lender), mark any
chattel paper, deliver any chattel paper or instruments to the Lender, and take
any other actions that are necessary or, in the opinion of the Lender, desirable
to perfect or continue the perfection and the first priority of the Lender's
security interest in the Collateral, to protect the Collateral against the
rights, claims, or interests of any Persons, or to effect the purposes of this
Agreement. The Borrower hereby authorizes the Lender to file one or more
financing or continuation statements, and amendments thereto, relating to all or
any part of the Collateral without the signature of the Borrower where permitted
by law. A carbon, photographic, or other reproduction of this Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law. To the extent
required under this Agreement, the Borrower will pay all costs incurred in
connection with any of the foregoing.
SECTION 5.10. NO DISPOSITION OF COLLATERAL. The Borrower will not
in any way hypothecate or create or permit to exist any lien, security interest,
charge, or encumbrance on or other interest in any of the Collateral, except for
the lien and security interest granted hereby and Permitted Liens which are
junior to the lien and security interest of the Lender, and the Borrower will
not sell, transfer, assign, pledge, collaterally assign, exchange, or otherwise
dispose of any of the Collateral. In the event the Collateral, or any part
thereof, is sold, transferred, assigned, exchanged, or otherwise disposed of in
violation of these provisions, the security interest of the Lender shall
continue in such Collateral or part thereof notwithstanding such sale, transfer,
assignment, exchange, or other disposition, and the Borrower will hold the
proceeds thereof in a separate account for the benefit of the Lender. Following
such a sale, the Borrower will transfer such proceeds to the Lender in kind,
which proceeds will be credited against the Obligations.
SECTION 5.11. NO LIMITATION ON LENDER'S RIGHTS. The Borrower will
not enter into any contractual obligations which may restrict or inhibit the
Lender's rights or ability to sell or otherwise dispose of the Collateral or any
part thereof.
SECTION 5.12. PROTECTION OF COLLATERAL. Upon notice to the
Borrower (provided that if an Event of Default has occurred and is continuing
the Lender need not give any notice), the Lender shall have the right at any
time to make any payments and do any other acts the Lender may deem necessary to
protect its security interests in the Collateral, including, without limitation,
the rights to satisfy, purchase, contest, or compromise any encumbrance, charge,
or lien which, in the reasonable judgment of the Lender, appears to be prior to
or superior to the security interests granted hereunder, and appear in, and
defend any action or proceeding purporting to affect its security interests in,
or the value of, any of the Collateral. The Borrower hereby agrees to reimburse
the Lender for all payments made and expenses incurred under this Section
including fees, expenses, and disbursements of attorneys and paralegals
(including the allocated costs of in-house counsel) acting for the Lender,
including any of the foregoing payments under, or acts taken to protect its
security interests in, any of the Collateral, which amounts shall be secured
under this Agreement, and agrees it shall be bound by any payment made or act
taken by the Lender hereunder absent the Lender's gross negligence or willful
misconduct. The Lender shall have no obligation to make any of the foregoing
payments or perform any of the foregoing acts.
SECTION 5.13. DELIVERY OF ITEMS. The Borrower will (a) promptly
(but in no event later than five Business Days) after its receipt thereof,
deliver to the Lender any documents or certificates of title issued with respect
to any property included in the Collateral, and any promissory notes, letters of
credit or instruments related to or otherwise in connection with any property
included in the Collateral, which in any such case come into the possession of
the Borrower, or shall cause the issuer thereof to deliver any of the same
directly to the Lender, in each case with any necessary endorsements in favor of
the Lender and (b) deliver to the Lender as soon as available copies of any and
all press releases and other similar communications issued by the Borrower.
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<PAGE>
SECTION 5.14. SOLVENCY. The Borrower shall be and remain
Solvent at all times.
SECTION 5.15. FUNDAMENTAL CHANGES. The Borrower shall not (a)
amend or modify its name, unless the Borrower delivers to the Lender thirty days
prior to any such proposed amendment or modification written notice of such
amendment or modification and within ten days before such amendment or
modification delivers executed Uniform Commercial Code financing statements (in
form and substance satisfactory to the Lender) or (b) merge or consolidate with
any other entity or make any material change in its capital structure, in each
case without the Lender's prior written consent which shall not be unreasonably
withheld.
SECTION 5.16. ADDITIONAL REQUIREMENTS. The Borrower shall take all
such further actions and execute all such further documents and instruments as
the Lender may reasonably request.
SECTION 6. FINANCIAL STATEMENTS. Until the payment and satisfaction
--------------------
in full of all Obligations, the Borrower shall deliver to the Lender the
following financial information:
SECTION 6.1. ANNUAL FINANCIAL STATEMENTS. As soon as available,
but not later than 120 days after the end of each fiscal year of the Borrower
and its consolidated subsidiaries, the consolidated balance sheet, income
statement, and statements of cash flows and shareholders equity for the Borrower
and its consolidated subsidiaries (the "Financial Statements") for such year,
reported on by independent certified public accountants without an adverse
qualification; and
SECTION 6.2. QUARTERLY FINANCIAL STATEMENTS. As soon as
available, but not later than 60 days after the end of each of the first three
fiscal quarters in any fiscal year of the Borrower and its consolidated
subsidiaries, the Financial Statements for such fiscal quarter, together with a
certification duly executed by a responsible officer of the Borrower that such
Financial Statements have been prepared in accordance with GAAP and are fairly
stated in all material respects (subject to normal year-end audit adjustments).
SECTION 7. EVENTS OF DEFAULT. The occurrence of any of the
-----------------
following events shall constitute an Event of Default hereunder:
(a) the Borrower shall fail to pay within two days after notice of
failure to pay when due any amount required to be paid by the Borrower under or
in connection with any Note and this Agreement;
(b) any representation or warranty made or deemed made by the Borrower
under or in connection with any Loan Document or any Financial Statement shall
prove to have been made false or incorrect in any material respect;
(c) the Borrower shall fail to perform or observe (i) any of the
terms, covenants or agreements contained in Sections 5.4, 5.7, 5.10, 5.14, or
5.15 hereof or (ii) any other term, covenant, or agreement contained in any Loan
Document (other than the other Events of Default specified in this Section 7)
and such failure remains unremedied for the earlier of fifteen days from (A) the
date on which the Lender has given the Borrower written notice of such failure
and (B) the date on which the Borrower knew or should have known of such
failure;
(d) any provision of any Loan Document to which the Borrower is a
party shall for any reason cease to be valid and binding on the Borrower, or the
Borrower shall so state;
(e) dissolution, liquidation, winding up, or cessation of the
Borrower's business, failure of the Borrower generally to pay its debts as they
mature, admission in writing by the Borrower of its inability generally to pay
its debts as they mature, or calling of a meeting of the Borrower's creditors
for purposes of compromising any of the Borrower's debts;
(f) the commencement by or against the Borrower of any bankruptcy,
insolvency, arrangement, reorganization, receivership, or similar proceedings
under any federal or state law and, in the case of any such involuntary
proceeding, such proceeding remains undismissed or unstayed for forty-five days
following
9
<PAGE>
the commencement thereof, or any action by the Borrower is taken authorizing any
such proceedings;
(g) an assignment for the benefit of creditors is made by the
Borrower, whether voluntary or involuntary, the appointment of a trustee,
custodian, receiver, or similar official for the Borrower or for any substantial
property of the Borrower, or any action by the Borrower authorizing any such
proceeding;
(h) the Borrower shall default in (i) the payment of principal or
interest on any indebtedness in excess of $50,000 (other than the Obligations)
beyond the period of grace, if any, provided in the instrument or agreement
under which such indebtedness was created; or (ii) the observance or performance
of any other agreement or condition relating to any such indebtedness or
contained in any instrument or agreement relating thereto, or any other event
shall occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders of such indebtedness
to cause, with the giving of notice if required, such indebtedness to become due
prior to its stated maturity;
(i) any tax lien, other than a Permitted Lien, is filed of record
against the Borrower and is not bonded or discharged within five Business Days;
(j) any judgment shall have been entered against the Borrower in an
amount greater than $250,000 and such judgment shall not be stayed, appealed,
vacated, bonded, or discharged within sixty days;
(k) any material covenant, agreement, or obligation, as determined in
the sole discretion of the Lender, made by the Borrower and contained in or
evidenced by any of the Loan Documents shall cease to be enforceable, or shall
be determined to be unenforceable, in accordance with its terms; the Borrower
shall deny or disaffirm the Obligations under any of the Loan Documents or any
liens granted in connection therewith; or any liens granted on any of the
Collateral in favor of the Lender shall be determined to be void, voidable, or
invalid, or shall not be given the priority contemplated by this Agreement; or
(l) there is a change in more than 35% of the ownership of any equity
interests of the Borrower on the date hereof or more than 35% of such interests
become subject to any contractual, judicial, or statutory lien, charge, security
interest, or encumbrance.
SECTION 8. REMEDIES. If any Event of Default shall have occurred
--------
and be continuing:
(a) The Lender may, without prejudice to any of its other rights under
any Loan Document or Applicable Law, declare all Obligations to be immediately
due and payable (except with respect to any Event of Default set forth in
Section 7(f) hereof, in which case all Obligations shall automatically become
immediately due and payable without necessity of any declaration) without
presentment, representation, demand of payment, or protest, which are hereby
expressly waived.
(b) The Lender may take possession of the Collateral and, for that
purpose may enter, with the aid and assistance of any person or persons, any
premises where the Collateral or any part hereof is, or may be placed, and
remove the same.
(c) The obligation of the Lender, if any, to make additional Loans or
financial accommodations of any kind to the Borrower shall immediately
terminate.
(d) The Lender may exercise in respect of the Collateral, in addition
to other rights and remedies provided for herein (or in any Loan Document) or
otherwise available to it, all the rights and remedies of a secured party under
the applicable Uniform Commercial Code (the "Code") whether or not the Code
applies to the affected Collateral and also may (i) require the Borrower to, and
the Borrower hereby agrees that it will at its expense and upon request of the
Lender forthwith, assemble all or part of the Collateral as directed by the
Lender and make it available to the Lender at a place to be designated by the
Lender that is reasonably convenient to both parties and (ii) without notice
except as specified below, sell the Collateral or any part thereof in one or
more parcels at public or private sale, at any of the Lender's offices or
elsewhere, for cash, on credit, or for future
10
<PAGE>
delivery, and upon such other terms as the Lender may deem commercially
reasonable. The Borrower agrees that, to the extent notice of sale shall be
required by law, at least ten days' notice to the Borrower of the time and place
of any public sale or the time after which any private sale is to be made shall
constitute reasonable notification. The Lender shall not be obligated to make
any sale of Collateral regardless of notice of sale having been given. The
Lender may adjourn any public or private sale from time to time by announcement
at the time and place fixed therefor, and such sale may, without further notice,
be made at the time and place to which it was so adjourned.
(e) All cash proceeds received by the Lender in respect of any sale
of, collection from, or other realization upon all or any part of the Collateral
may, in the discretion of the Lender, be held by the Lender as collateral for,
or then or at any time thereafter applied in whole or in part by the Lender
against, all or any part of the Obligations in such order as the Lender shall
elect. Any surplus of such cash or cash proceeds held by the Lender and
remaining after the full and final payment of all the Obligations shall be paid
over to the Borrower or to such other Person to which the Lender may be required
under applicable law, or directed by a court of competent jurisdiction, to make
payment of such surplus.
SECTION 9. MISCELLANEOUS PROVISIONS.
------------------------
SECTION 9.1. NOTICES. Except as otherwise provided herein, all
notices, approvals, consents, correspondence, or other communications required
or desired to be given hereunder shall be given in writing and shall be
delivered by overnight courier, hand delivery, certified or registered mail,
postage prepaid, or transmited via fax, if to the Lender, then to Transamerica
Technology Finance Division, 76 Batterson Park Road, Farmington, Connecticut
06032, fax 860-677-6766, Attention: Assistant Vice President, Lease
Administration, with a copy to the Lender at Riverway II, West Office Tower,
9399 West Higgins Road, Rosemont, Illinois 60018, fax 847-685-1143 Attention:
Legal Department, and if to the Borrower, then to Cell Therapeutics, Inc., 201
Elliott Ave. W. #400, , Seattle, WA 98119, fax 206-284-6206, Attention:
Executive Vice President - Finance & Administration or such other address as
shall be designated by the Borrower or the Lender to the other party in
accordance herewith. All such notices and correspondence shall be effective
when received.
SECTION 9.2. HEADINGS. The headings in this Agreement are for
purposes of reference only and shall not affect the meaning or construction of
any provision of this Agreement.
SECTION 9.3. ASSIGNMENTS. The Borrower shall not have the right
to assign any Note or this Agreement or any interest therein unless the Lender
shall have given the Borrower prior written consent and the Borrower and its
assignee shall have delivered assignment documentation in form and substance
satisfactory to the Lender in its sole discretion. The Lender may assign its
rights and delegate its obligations under any Note or this Agreement.
SECTION 9.4. AMENDMENTS, WAIVERS, AND CONSENTS. Any amendment or
waiver of any provision of this Agreement and any consent to any departure by
the Borrower from any provision of this Agreement shall be effective only by a
writing signed by the Lender and shall bind and benefit the Borrower and the
Lender and their respective successors and assigns, subject, in the case of the
Borrower, to the first sentence of Section 9.3.
SECTION 9.5. INTERPRETATION OF AGREEMENT. Time is of the essence
in each provision of this Agreement of which time is an element. All terms not
defined herein or in a Note shall have the meaning set forth in the applicable
Code, except where the context otherwise requires. To the extent a term or
provision of this Agreement conflicts with any Note, or any term or provision
thereof, and is not dealt with herein with more specificity, this Agreement
shall control with respect to the subject matter of such term or provision.
Acceptance of or acquiescence in a course of performance rendered under this
Agreement shall not be relevant in determining the meaning of this Agreement
even though the accepting or acquiescing party had knowledge of the nature of
the performance and opportunity for objection.
SECTION 9.6. CONTINUING SECURITY INTEREST. This Agreement shall
create a continuing security interest in the Collateral and shall (i) remain in
full force and effect until the indefeasible
11
<PAGE>
payment in full of the Obligations, (ii) be binding upon the Borrower and its
successors and assigns and (iii) inure, together with the rights and remedies of
the Lender hereunder, to the benefit of the Lender and its successors,
transferees, and assigns.
SECTION 9.7. REINSTATEMENT. To the extent permitted by law, this
Agreement and the rights and powers granted to the Lender hereunder and under
the Loan Documents shall continue to be effective or be reinstated if at any
time any amount received by the Lender in respect of the Obligations is
rescinded or must otherwise be restored or returned by the Lender upon the
insolvency, bankruptcy, dissolution, liquidation, or reorganization of the
Borrower or upon the appointment of any receiver, intervenor, conservator,
trustee, or similar official for the Borrower or any substantial part of its
assets, or otherwise, all as though such payments had not been made.
SECTION 9.8. SURVIVAL OF PROVISIONS. All representations,
warranties, and covenants of the Borrower contained herein shall survive the
execution and delivery of this Agreement, and shall terminate only upon the full
and final payment and performance by the Borrower of the Obligations secured
hereby.
SECTION 9.9. INDEMNIFICATION. The Borrower agrees to indemnify
and hold harmless the Lender and its directors, officers, agents, employees, and
counsel from and against any and all costs, expenses, claims, or liability
incurred by the Lender or such Person arising hereunder and under any other Loan
Document or in connection herewith or therewith, unless such claim or liability
shall be due to willful misconduct or gross negligence on the part of the Lender
or such Person.
SECTION 9.10. COUNTERPARTS; TELECOPIED SIGNATURES. This Agreement
may be executed in counterparts, each of which when so executed and delivered
shall be an original, but both of which shall together constitute one and the
same instrument. This Agreement and each of the other Loan Documents and any
notices given in connection herewith or therewith may be executed and delivered
by telecopier or other facsimile transmission all with the same force and effect
as if the same was a fully executed and delivered original manual counterpart.
SECTION 9.11. SEVERABILITY. In case any provision in or obligation
under this Agreement or any Note or any other Loan Document shall be invalid,
illegal, or unenforceable in any jurisdiction, the validity, legality, and
enforceability of the remaining provisions or obligations, or of such provision
or obligation in any other jurisdiction, shall not in any way be affected or
impaired thereby.
SECTION 9.12. DELAYS; PARTIAL EXERCISE OF REMEDIES. No delay or
omission of the Lender to exercise any right or remedy hereunder, whether before
or after the happening of any Event of Default, shall impair any such right or
shall operate as a waiver thereof or as a waiver of any such Event of Default.
No single or partial exercise by the Lender of any right or remedy shall
preclude any other or further exercise thereof, or preclude any other right or
remedy.
SECTION 9.13. ENTIRE AGREEMENT. The Borrower and the Lender agree
that this Agreement, the Schedule hereto, and the Commitment Letter are the
complete and exclusive statement and agreement between the parties with respect
to the subject matter hereof, superseding all proposals and prior agreements,
oral or written, and all other communications between the parties with respect
to the subject matter hereof. Should there exist any inconsistency between the
terms of the Commitment Letter and this Agreement, the terms of this Agreement
shall prevail.
SECTION 9.14. SETOFF. In addition to and not in limitation of all
rights of offset that the Lender may have under Applicable Law upon prior demand
by the Lender, the Lender shall have the right to appropriate and apply to the
payment of the Obligations of the Borrower all deposits and other obligations
then or thereafter owing by the Lender to or for the credit or the account of
the Borrower.
SECTION 9.15. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER
IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR
12
<PAGE>
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN
DOCUMENT, OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
SECTION 9.16. GOVERNING LAW. THE VALIDITY, INTERPRETATION, AND
ENFORCEMENT OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF
LAW PRINCIPLES THEREOF.
SECTION 9.17. VENUE; SERVICE OF PROCESS. ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE
BROUGHT IN THE COURTS OF THE STATE OF ILLINOIS SITUATED IN COOK COUNTY, OR OF
THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR ITSELF
AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION
OF THE AFORESAID COURTS. THE BORROWER HEREBY IRREVOCABLY WAIVES, IN CONNECTION
WITH ANY SUCH ACTION OR PROCEEDING, ANY OBJECTION, INCLUDING, WITHOUT
LIMITATION, ANY OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF
FORUM NON CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY
SUCH ACTION OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS. THE BORROWER
IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED
COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT THE ADDRESS
FOR IT SPECIFIED IN SECTION 9.1 HEREOF.
13
<PAGE>
IN WITNESS WHEREOF, the undersigned Borrower has caused this Agreement
to be duly executed and delivered by its proper and duly authorized officer as
of the date first set forth above.
CELL THERAPEUTICS, INC.
By:
-------------------------------------
Name:
Title:
Federal Tax ID:
Accepted as of the
____ day of ________, 199_
TRANSAMERICA BUSINESS CREDIT CORPORATION
By:
---------------------------------
Name:
Title:
Form16
14
<PAGE>
EXHIBIT 22.1
SUBSIDIARIES OF CELL THERAPEUTICS, INC.
CTI Technologies, Inc., A Nevada Corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-35919) pertaining to the Cell Therapeutics, Inc. 1994 Equity
Incentive Plan and the Cell Therapeutics, Inc. 1996 Employee Stock Purchase
Plan and to the incorporation by reference in the Registration Statement (Form
S-3 No. 333-39385) of Cell Therapeutics, Inc. and in the related Prospectus of
our report dated February 13, 1998, with respect to the financial statements
of Cell Therapeutics, Inc. included in the Annual Report (Form 10-K) for the
year ended December 31, 1997.
Ernst & Young LLP
Seattle, Washington
March 31, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THE CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
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0
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